Hello, everyone, and welcome to the agilon health Second Quarter 2021 Earnings Conference Call. My name is Brika, and I'll be the moderator for today's event. [Operator Instructions]. And I will now hand over to Matthew Gillmor to start. Sir Matthew, please go ahead when you're ready.

Thank you, Brika. Good morning, and welcome to our second quarter conference call. With me this morning is our CEO, Steve Sell; and our CFO, Tim Bensley. Following prepared remarks from Steve and Tim, we will conduct a Q&A session. Before we begin, I'd like to remind you that our remarks and responses to questions may include forward-looking statements. Actual results may differ materially from those stated or implied by forward-looking statements due to risks and uncertainties associated with our business. These risks and uncertainties are discussed in our SEC filings. Please note that we assume no obligation to update any forward-looking statements. Additionally, certain financial measures we will discuss in this call are non-GAAP financial measures. We believe that providing these measures helps investors gain a better and more complete understanding of our financial results and is consistent with how management views our financial results. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measure is available in the earnings press release and Form 8-K filed with the SEC. With that, I'll turn the call over to Steve. Steve?

Thanks, Matt. Good morning, everyone, and thank you for joining us. We're hosting today's call from Austin, Texas. Before I get to the details of our quarter, I'd like to take a minute and talk about our experience in this important market and how it demonstrates the power about what agilon has built with our physician partners. In 2018, agilon entered the Austin market in partnership with Austin Regional Clinic, the largest independent multi-specialty group, and Premier Family Physicians, the second largest independent primary care group in the region. In 3.5 years, our partnership has expanded access to top quality care in Austin by adding physicians, increasing clinical team-based support and analytics and opening previously closed primary care panels to new senior patients. Our Austin membership has expanded at a compounded annual rate nearly double the local growth in the Medicare Advantage program, all while dramatically improving quality and generating world-class patient experience scores. Last year, we expanded with 2 new anchor partners in East Texas that are currently in the implementation and will go live in 2022. Our Austin experience of local and now statewide growth in independent primary care and the resulting benefits in terms of senior patient care, quality and access is an experience that we can see replicated further in Texas and in numerous communities and states across the country. Now with the focus of our call. I will cover 4 areas in my prepared remarks. First, some highlights from our second quarter results; second, our collaboration and recently launching Primary Care for America; third, an update on our progress in driving growth for new markets in 2022 and 2023; and finally, I'll wrap up with some comments on Direct Contracting. Starting with a few highlights from the second quarter. We were pleased with our performance…

Thanks, Steve, and good morning, everyone. I'll review some highlights from our financial statements and provide some additional details on our guidance for the third quarter and full year 2021, starting with membership. Membership increased by 45% on a year-over-year basis during the second quarter to approximately 182,000. Membership growth was driven by a combination of same geography growth and the impact in 3 new geographies that went live in January. Same geography membership growth was 17% for the second quarter. Similar to last quarter, same geography growth was broad-based across markets with all of our Same Geographies growing at or above the national growth rate for Medicare Advantage enrollment. Average membership was approximately 194,000 during the quarter, which was up 57% from last year. It's important to keep in mind that our average membership metric includes 13,000 retroactive members attributed to the first quarter. This retro impact reflects the large group contract we mentioned on the last call. Additionally, as Steve referenced, average membership benefited from faster member attribution during the quarter, which drove some additional retro impact. Revenues increased 70% on a year-over-year basis to $499 million. Year-to-date revenues increased 56% to $912 million. Second quarter results include $35 million in retro revenue associated with the first quarter. Excluding this, revenue growth would have been 58% in the quarter. Revenue growth was primarily driven by membership gains from new geographies and Same Geographies. On a per member per month basis, or PMPM, revenue increased 8.5% during the second quarter. The increase to revenue PMPM was primarily driven by updates to CMS county benchmarks, changes in member acuity or burden of illness and 1 extra month of sequestration suspension relative to prior year. Additionally, revenue PMPM was also impacted by a few year-to-date true-ups and the mix impact from…

[Operator Instructions]. The first question we have comes from Stuart Hill from Deutsche Bank.

And that's George Hill from Deutsche Bank. I guess, could you talk a little bit more about attribution as a driver of the strong membership number in Q2? And then a quick kind of follow-up question would be, the other medical expense kind of came in a little higher than we expected. I know it's kind of a small number, but would just love any incremental color that you can provide around that.

Sure. Thanks, George. I'll take the first one, Tim, and you can take the second one. So George, I think we're really pleased with our strong growth in the quarter. Attribution, I think, is something that we do really well and is a distinctive part of our model. It allows us to work very closely with health plans and get more members attributed to our partners. We are making investments in technology and working on operations with our health plan partners to do that. And so the biggest driver of the step-up from the 15% same geography growth to the 17% that you saw in Q2 really was around attribution. These are members that typically we might have expected to bring on the platform in the back half of the year. But by getting a better process and the technologies, we were able to pull them into the first half of the year. And as Tim shared in his remarks, they are retroactive to January 1 of this year. I think that was about 3,100 of the members that you see within the retro activity. So area of strength, one that we think we're getting better at all the time. Disproportionate amount of those numbers are PPO, which is an area of strength for us. So hopefully, that gives you context.

Yes. Thanks, George. And overall, the medical margin number on a PMPM basis that were reported in the quarter of $95, and as Steve said, the overall medical margin PMPM year-to-date of $100 is pretty much in line with where we expected it to be. And that $100 obviously is down versus prior year because of the...

Mention the other medical expense.

Other medical -- oh, I'm sorry, I thought we were talking about -- other medical expense were up. Well, overall, other medical expenses essentially are -- include our AWV incentives that we pay to our physician partners. That can be kind of lumpy on a quarter-to-quarter basis depending on when those AWVs happen and when we pay those incentives. So when the number is up, it means that we're -- as Steve was talking about, we're actually in really good shape so far in getting our AWVs completed earlier in the year and then paying those incentives out. And I can talk more about the medical margin year-over-year if you want to, too, George.

Thank you. The next question comes from Kevin Fischbeck of Bank of America.

This is actually Adam on for Kevin. But back to your comment about medical costs. It seems like you beat EBITDA in the quarter -- and you don't guide to MLR, but it came in a little higher than what we were estimating, and I guess, consensus. But then you also reiterated EBITDA for the year, even though you beat. So I was just kind of wondering thoughts on medical cost utilization patterns. And by reiterating EBITDA, are you're basically expecting higher costs in the back half?

Yes. So I can start, and Tim can chime in. Let me first say, I think we're pleased by where we're at for medical margin. I think the biggest effect of medical margin coming in where it did is the dilution effect of the new members coming on the platform, right? There's been incredible growth. 53,000 of our members or 30% of our June 30 membership has come on since January 1 of this year. And those members -- obviously, new members always will come in at lower medical margins than more mature cohorts over time. And as we look internally at that progression, Adam, I think we're really encouraged by the improvement that we're seeing in our earlier patient cohort groups as we said in our prepared remarks. So that's kind of commentary on medical margin. You've asked about EBITDA guidance in the back half of the year. I think to paraphrase, that we're keeping our EBITDA guidance in line even though we beat in Q2, and we're reflecting higher revenues. I mean, I think the biggest parts of that -- there's a few facts, the 2 I'd really call out is, one is what Tim talked about around Direct Contracting, right? So we're -- even though we were higher than expected, than we had initially expected in Q2, we're not changing our full year outlook on that new government program. And so we're just -- we're taking that approach as we'll get more information over the next couple of months. And then the second part is just the dilutive effect of those new members coming on. So, Tim anything to add?

Yes. And if I can just quickly quantify the impact of that first Direct Contracting impact, it's -- Direct Contracting contributed about $2.5 million to our adjusted EBITDA in the quarter. And as Steve said and for the factors he talked about, we expect that on the full year to migrate back to our original expectation of around breakeven for the full year. So we're not flowing that $2.5 million through in the second half guidance.

We now have the next question from Justin Lake of Wolfe Research.

This is Harrison on for Justin. Just thinking about one question mechanically on Direct Contracting. For kind of a, I guess, forward year Direct Contracting view, would you normally expect entry year adds from the program? I know most of its claims aligned, and so I see that mostly come in at the beginning of the year, but would you expect any intra-year adds from maybe the other alignment method? And then -- or would people expiring kind of contribute to a general decline throughout the year?

I think that we might see sort of modest adds throughout the year through the voluntary attribution process that you talked about, Harrison. The vast majority of our members are coming through that claims-based approach that you talked about. I think there will be kind of a progression that looks a little bit like Medicare Advantage throughout the year. And so I think, we think if the -- it's growth will be relatively modest throughout the year for Direct Contracting, but it's early, and we're going to see sort of how it plays through.

[Operator Instructions]. And we now have a question from Ryan Daniels of William Blair.

Congrats on the quarter. Another one on Direct Contracting, obviously, the nice contribution for a short period relative to what you expected. And I'm curious other than conservatism, what could actually bring the EBITDA down to breakeven for the full year? So kind of turn that into a loss in the second half of the year. Are there investments or changes?

Yes. I think, Ryan, what we've got is early information from a claims and revenue perspective. We're going to be getting a lot more information here in the next month or 2. So I think it's really sort of better visibility on that, which would be the biggest driver that would drive it there. And then I think there's also just this seasonal progression that Tim talked about in his remarks, in which Direct Contracting will sort of follow the same path as MA, in which you see lower medical margin and therefore, obviously, lower overall EBITDA in the back half of the year.

And just to tack on to that. And like in the MA business, we do expect that utilization is going to increase in the back half of the year versus what we saw in Q2. So we would expect that the profitability on Direct Contracting would -- that would contribute to the lower profitability in the second half of the year also.

Okay. That makes sense. And then you mentioned in your pipeline conversations with new provider groups that they're looking for more integrated Medicare solutions with both MA and DC. Is that giving you an advantage given that you're already in the DC program, 1 of 3 dozen or so, such that those that want that integrated solution have a more limited set of potential partners, given that those that aren't already in can't go into it next year?

Yes. Thanks, Ryan. I think it does give us an advantage. We have 5 active DCEs and 4 more that can come online in 2022. We have the ability to add new physician groups in underneath those. And so the ability to have this integrated full Medicare line of business is very attractive to these groups, and different MA penetration rates in different markets as you look at the -- as we look at new states. So we see it as a real advantage.

We have had no further questions, so I'll hand it back to Matthew.

Well, great. We appreciate your interest in the company. We look forward to speaking with you at future calls and future events. So thank you.

Thanks, everyone.

Ladies and gentlemen, that does conclude today's call. Thank you all again for joining. You may now disconnect your lines.