Privia Health Group, Inc. (PRVA) Q3 2021 Earnings Report, Transcript and Summary

Good morning, and welcome, everyone, to the Privia Health 2021 Third Quarter Conference Call. All lines have been placed on mute to prevent any background noise. There will be a question-and-answer session. [Operator Instructions]. Now, I would like to turn the call over to our first presenter for today, Mr. Robert Borchert, SVP of Investor and Corporate Communications. Sir, you may begin the conference.

Thank you, Henry, and good morning, everyone. Joining me on today's call are Shawn Morris, our Chief Executive Officer; Parth Mehrotra, President and Chief Operating Officer; and David Mountcastle, our Chief Financial Officer. This call is being webcast and can be accessed through the Investor Relations section of priviahealth.com. Today's press release highlighting our financial and operating performance as well as the slide presentation accompanying our formal remarks are posted on our IR website pages. Following Shawn and Parth's opening comments, we will open the line for questions. We ask that you please limit yourself to one question and one follow-up, so we can get through the full queue in a timely fashion. The financial results reported today and in the press release are preliminary and are not final until our Form 10-Q for the third quarter ended September 30, 2021 is filed with the Securities and Exchange Commission. Some of the statements we will make today are forward-looking in nature based on our current expectations and our view of our business as of November 8, 2021. Such statements, including those related to our future financial and operating performance and future business plans and objectives, are subject to risks and uncertainties that may cause actual results to differ materially. As a result, these statements should be considered in conjunction with the cautionary statement in today's press release and the risk factors described in our company's most recent SEC filings. Finally, we may refer to certain non-GAAP financial measures on the call. And reconciliations of these measures to comparable GAAP measures are included in our press release and the accompanying slide presentation posted on our website. Now, I'll turn the call over to Shawn.

Thank you, Robert, and good morning, everyone. This past weekend, I had the privilege of spending time with more than 60 of our physician leaders from around the country. They came together to learn and share ideas with 1 another. They were all engaged and invigorated by their mutual desire for autonomy and to truly align with a partner that helps them deliver cost-effective, high-quality care to all their patients. Our Privia platform rewards them with this great care they deliver no matter the reimbursement structure, and I am honored to be a small part of the opportunity. Today, I'll provide an update on our combined business momentum and summarize our recent financial performance. Then Parth will offer an in-depth review of our Value-Based Care strategy and framework and close with an update on our financial outlook for the remainder of 2021 before we take your questions. We continue to see tremendous growth and momentum in our business. We delivered better-than-expected performance in our third quarter and year-to-date and are raising guidance on all key metrics for the year 2021. We've also set new records for signed providers this year, both in existing markets and new markets. As Parth will discuss later, our updated guidance for implemented providers at year-end implies a year-over-year growth rate of approximately 30%, driven by these new additions. This is a leading indicator of an acceleration of our top line as we implement these providers in the coming months. We are also seeing record high provider retention year-to-date as we continue to demonstrate our ability to optimize workflow, reduce administrative burden, successfully transition to Value-Based Care and increased profitability for our physician partners. This supported our strong same-store growth in the third quarter, which was driven by the strength in ambulatory utilization across all our markets. On a seasonally adjusted basis, in-person visits were at or above our pre-COVID baseline, and virtual visits were approximately 10% of total visits. This volume as well as an increase in both implemented providers and value-based attributed lives helped deliver top line performance and solid margin expansion ahead of expectations this quarter. Ambulatory access utilization is also a critical component in managing patient outcomes and driving success across our Value-Based Care platform. Our balance and revenue diversity is a valuable attribute to our model. Another key component of our growth strategy is our active business development pipeline in which we are in advanced discussions with many provider groups and health systems. In mid-October, we entered California with one of the San Francisco Bay Area's leading health care multi-specialty groups. BASS Medical Group has more than 400 providers, spanning 42 specialties in over 125 locations. We are very excited about our opportunity in California, a state with more than 28,000 primary care physicians and over 115,000 specialists. Our affiliation with BASS highlights Privia's ability to replicate our operating model in uniquely differentiated markets as we look to build scaled, high-performing provider networks nationwide. We also expanded our footprint in Texas through a partnership with the Abilene Diagnostic Clinic, a multi-specialty group with more than 30 providers. With the launch of Privia Medical Group West Texas, we now have a presence across the state, including our established markets in North and South Texas, which comprise over 600 providers today. Parth will dive deeper into our Value-Based Care programs. But I wanted to highlight our proven Value-Based Care model continues to deliver excellent performance and results. With approximately 760,000 attributed lives and more than 70 at-risk contracts across all types of programs, the Privia network is one of the largest Value-Based Care platforms in our sector today. Over the last 7 years, we successfully built a care delivery network with deep clinical operations capabilities in partnership with physicians to maintain a high degree of influence of our Value-Based Care operations at scale. This gives us confidence that we will continue to be able to move providers and lives into at-risk contracts profitably for Privia as well as for our physician partners. We are also excited to share that Privia Care Partners were formally launched on January 1, 2022, with more than 25,000 attributed lives. This is in partnership with over 300 providers in about 100 care center locations. Privia Care Partners increases our total addressable market as we now have a flexible and scaled solutions for health systems, IPAs, other independent providers and ACOs as well as clinically integrated networks who wish to remain on their existing EHR for the time being. This is exclusively a Value-Based Care option for providers who will be supported by our integrated technology solution and clinical operation capabilities as they successfully transition to at-risk arrangements. Moving on to our third quarter performance. Our operating momentum has continued to drive strong results. Our growth in newly implemented providers and value-based attributed lives, combined with ambulatory patient volumes, led to an 18.1% increase in practice collections compared to the third quarter a year ago. Care margin was up 31.5%. And our top line outperformance and operating leverage drove margin expansion with adjusted EBITDA growth of almost 52% in the third quarter compared to the same period a year ago. On a year-to-date basis, practice collections was up more than 17%, care margin increased 24.5% and adjusted EBITDA grew almost 46% over the first 9 months of 2020. Our strong year-to-date performance and provider metrics position Privia Health very well for the remainder of the year and into 2022 as we work to capture a larger share of the almost $2 trillion physician market and growing Value-Based Care opportunity. This momentum also gives us that confidence Privia's partnership model continues to gain traction as a clear alternative for providers across the country looking to maintain autonomy and be able to improve outcomes for their entire patient populations. We intend to continue to drive growth and profitability by increasing same-store growth in attribution and risk-based contracts, adding new providers, opening new markets and identifying opportunities to expand our platform. Now, I ask Parth to provide a Value-Based Care update as well as details on the outlook for the remainder of 2021.

Thank you. As Shawn noted, Privia Health has one of the largest and highest-performing platforms in our sector today across commercial, Medicare Shared Savings and Medicare Advantage programs. The Privia Medical Group and ACO are the center of our Value-Based Care operating structure. Our ACOs are the risk-bearing entities that hold Value-Based Care contracts, while our physician-led governance drives decisions for the Medical Group on a local, market and national level. The Privia platform provides our technology solution, payer contracting and actuarial analytics among other core clinical operations capabilities. Our providers enter into professional service agreements in which we agreed to share both upside benefits and downside risk in performance-based arrangements typically 60% to the providers and 40% to Privia. Our next-generation care delivery network is structured such that alongside our physician partners, we have substantial influence over outcomes despite not owning the individual care centers or employing the primary care physician. The single tax ID medical group and contracting ACO entity align around a common risk pool. Once a practice is implemented on our technology solution, we manage all works flows, data and drive insights to help improve care protocols and outcomes. Furthermore, the operations of the practice integrate with our comprehensive suite of clinical operations capabilities and our staff, which I will elaborate on shortly. An important element of our model is our clear financial alignment with our physician partners. It is critical for us to share both upside and downside risk with our providers, and our providers are incentivized to learn and perform Value-Based Care at the highest level and profitably across their entire patient panel. As a result, we believe the Privia model is highly differentiated in its structure to achieve success at scale across the spectrum of value-based arrangements and across different geographic markets. Our physician partners ultimately want to provide cost-effective, high-quality care across their entire patient panel no matter what the reimbursement structure is. The first 2 boxes on this slide are the foundational elements we believe all physician practices need to do well regardless of the reimbursement method. As we progress towards the right and our providers move deeper into value-based programs, Privia supports them with a broader suite of clinical operations capabilities and correlates with the level of risk we are taking. We continue to invest heavily in our clinical operations and have already developed capabilities for supporting all types of risk arrangements. For practices just starting out in Value-Based Care, we want them to engage with our physician-led governance structure and to become fluent in clinical documentation, quality metrics and performance reporting. As they move into more extensive at-risk arrangements, they are able to leverage our comprehensive capabilities for care coordination, various disease-specific clinical programs and network management. And finally, in an advanced Value-Based Care model that takes capitated risk, care coordination and network management takes on greater importance with additional network capabilities. We have an extensive clinical operations team behind all capabilities that I just laid out, supporting every physician practice to succeed in Value-Based Care. Our platform is deeply integrated and is driving the everyday workflows of the practices, whether it's helping to see patients off hours, building practice level, same-store growth plans and driving execution or providing data analytics support on how to improve performance. So when a practice joins Privia, they are joining a larger medical group and participate in governance that revolutionizes the way they operate, grow their practice and succeed in value-based arrangements. This is why we are confident in our ability to influence Value-Based Care outcomes with our providers while preserving their autonomy and ownership structure. With 760,000 attributed lives, Privia Health truly has a unique platform that allows us to be successful across all cohorts of patients. We have proven over the past 7 years that we can succeed in more than 70 at-risk value-based contracts across commercial, the Medicare Shared Savings Program, Medicare Advantage and Medicaid with the support and expertise of our clinical operation structure and deep value-based capabilities. This proven success across multiple types of value-based programs is a highly differentiated value proposition being sought by both providers and payers today. Privia already successfully manages downside risk in many of our value-based arrangements today. We will continue to take a deliberate approach to enabling our providers to transition profitably into increased risk and expect this to include capitated arrangements in Medicare Advantage over time. An example of our success is the Medicare Shared Savings Program where we take significant downside risk today. In 2020, across our ACOs in 4 markets, the publicly available results on the right show that we lowered utilization and cost significantly below that of peer ACOs. This performance was even better when compared to fee-for-service Medicare all while achieving a quality score of 97% or greater across all of our ACOs. In the Mid-Atlantic region, we operate one of the country's largest ACOs with 69,000 patient lives in the MSSP enhanced track where we shared significant downside risk with CMS and our physician partners we delivered over 9% in savings, the highest rate of the largest 100 ACOs in the country. Our performance over the last 7 years is key to our collaboration with CMS as well as with other payers that offer value-based arrangements across commercial, Medicare and Medicaid programs. It is important to understand that Privia Health recognizes only our share of shared savings in our top line today. This will change meaningfully when we begin to move lives into capitated risk contracts. In this illustrative example using MSSP performance data for 2020, Privia Health's ACOs managed more than 121,000 lives, representing over $1.1 billion in medical spend. However, we only recognized our share of the gross shared savings in our practice collections and GAAP revenue, which was approximately $56 million. If our MSSP lives were converted into a capitation arrangement, then our top line would capture the underlying spend rather than just our share of the savings. This example illustrates the breadth of our at-risk arrangements today under various Value-Based Care contracts given the large medical spend underlying these arrangements. This also highlights how our current revenue recognition significantly understates the scale, performance and capability of Privia's Value-Based Care platform. In summary, our Value-Based Care platform has delivered proven results across 70-plus contracts and all payer entities with very large pools of attributed lives, and we have generated more than $576 million in shared savings since 2014. Privia Health is uniquely positioned to enter into value-based arrangements across the risk spectrum based on market dynamics in each state and more importantly, a proven ability to influence outcomes in partnership with physicians to generate results. We see a significant opportunity to increase our top line as we move into capitated arrangements in Medicare Advantage over time as part of our thoughtful, deliberate and sustainable approach to transition to increased risk. Turning to our financial update for full year 2021. We are very pleased to see the progression of our guidance during the course of this year. This quarter, you can see we are meaningfully increasing our guidance across all of our operational and financial metrics. In fact, if you exclude the impact of our new market entries into California and West Texas, then each metric is expected to be above the high end of our previous guidance ranges with implemented providers near the high end. This reflects our better-than-expected performance in existing markets. It is also important to note that our full year adjusted EBITDA guidance includes new market entry and development costs in the third and fourth quarters. We expect to enter new markets as part of our ongoing operations and do not add back these costs to arrive at adjusted EBITDA. Capital expenditures are expected to be less than $1 million for the full year. And with our strong positive cash flow, cash of approximately $330 million and outstanding debt of $33.5 million at the end of the third quarter, we have sufficient capital and liquidity to invest in our business and pursue our growth initiatives. In closing, Privia Health is a next-generation physician organization, partnering with independent providers, health systems and health plans with the large-scale medical groups and delivery networks in each state. Our proven model supports all providers and all patients across all reimbursement models, and we are directly aligned with providers' financial success while facilitating their autonomy and ownership structure. We believe Privia is highly differentiated with accelerating growth, expanding margins, strong positive cash flow and a scalable integrated care delivery model with deep Value-Based Care capabilities. With that, operator, we're now ready for the first question.

[Operator Instructions]. Your first question comes from Jailendra Singh of Credit Suisse.

Parth, following up on your last comment about 2021 guidance going up even after excluding these new markets, but when I look at the implied 4Q outlook across various metrics, if I'm doing my math right, it seems like your guidance reflects some step-down from 3Q to 4Q. I understand you called out some incremental market entry costs. But anything else we should be aware of from puts and takes for 4Q versus 3Q?

Yes. Thanks, Jailendra. I appreciate the question. So I think there are 2 or 3 key elements. As you noted, number one, we are increasing full year guidance on adjusted EBITDA to $39 million to $41 million. At the high end, that implies a $7 million Q4, and I think there are 2 or 3 key components. One is, as we noted, there are new market development costs that we're not adding back. So if we were to add those back, implicitly, what we are saying is the guidance would have been higher than that $39 million to $41 million number range. Secondly, there were some -- if you look at the -- where the difference is in Q3 and the extent of the beat, it's mainly in the Value-Based Care line. There were some dollars in certain of the programs that move up from Q4 to Q3 from just a recognition perspective as we got the data, so there was a little bit of that movement from Q4 to Q3. And then finally, I would say, still utilization and performance in some of the remaining value-based programs, we'll see how we close out the year. It's tough to predict utilization. But again, if the trend continues the way we are seeing, we should see some tailwinds

Okay. And then my follow-up on the Privia Care Partners. You called out in slide deck 25,000 attributed lives in VBC programs effective January 1. Can you provide some more details there? Is this one provider group or a multiple? And can you remind us how should we think about VBC PMPM and margins on this book of business compared to your traditional VBC PMPM margins? Any color there would be helpful.

Jailendra, this is Shawn. I'll kick it off and let Parth kind of touch on that last part of the question. We're not providing details on the breakout of specific states or payers at this time. We expect to be in new states as we grow this. And really, the initial lives as we spoke in our prepared remarks, 300 providers, and it's balanced over commercial and kind of government beneficiaries, primarily scale skewed towards the Medicare Shared Savings Program. And obviously, then just like our other business, we'll move into higher levels of risk as we get to know these providers, organize them, build in the foundational services, get our tech implemented. Parth, do you want to address the last part?

Yes. And Jailendra, these are, to be clear, separate provider groups. So this is not one big group with 300 providers. These are independent multiple groups. And then on your last part, the economics to Privia would be the same. So it's going to be the 60-40 shared savings split that we have in our Privia Medical Group value-based programs.

How about margins? Especially when you think about they're not using your tech stack platform, are they any better than your traditional margins?

Yes. They'll progress over time. So they'll be implemented on a version of our tech stack, data analytics capabilities, operations, clinical operations capability. So there'll be a layer. The underlying EMR might be different. But over time, as we perform in these contracts, as we've seen with our existing book of business, this is a multiyear journey. The mix of payer contracts, types of arrangements, the markets we are in, that all of that influences our ability to increase risk over time. As we work with these providers, also increases the ability to get higher shared savings, both on a percentage and an absolute basis. And then obviously, we are accruing a big part of that. So you'll expect to see margins increase over time, and over time, get to the same level.

Your next question comes from Ryan Daniels of William Blair.

Parth, maybe one for you. You spent a lot of time in your comments talking about the Privia Value-Based Care platform. And there's a lot of differentiators here, whether it's the broad coverage across different payer types, whether it's the recognition revenue, the different partnership models, et cetera. So I'm curious if there's one thing as you talk to investors as a newer company that you think is kind of misunderappreciated or maybe the one big differentiator that you'd point out versus your peers given kind of all the nuances you laid out earlier?

Ryan, thanks for the question. Appreciate it. I think there are 3 key interrelated aspects that may be slightly underappreciated and as the education process continues with a lot of the young public companies in our space. First is fundamentally our operating structure. I think we are very unique in that we have a medical group, a risk-bearing entity and a tech-enabled clinical and operations platform all as part of one entity here at Privia. I think that combination is the special sauce and allows us to have real influence on outcomes and generate the results that we've proven to generate over the last many years. And I think a lot of folks might just focus on the last component but not the first 2 and the interrelationship. The second element I would say is the sheer scale of the Value-Based Care book of business that we have is probably underappreciated. There's a lot of focus on full cap MA. We think that's an important part of the market. It's a small segment, but growing and important part with the highest per capita spend. But payers and providers are really looking for us to provide a solution across the patient panel and move a lot of those patients into value-based arrangements. And I think our book of business is spread across, as we've stated, between commercial, MSSP, MA and Medicaid. We don't think anybody else is just to an extent that we do. And then lastly, I think more from a peer company comparison perspective, the revenue recognition becomes important as we highlighted pretty clearly with an example here. If you're comparing top line for a lot of these companies, the underestimation of our top line is pretty key and stark given what the GAAP financials project today.

Okay. That's super helpful. And then my question to follow up is a little bit different. But if we think about the market entry in both Texas and California, I think another unique nuance is, those are multi-specialty groups versus just a pure focus on PCP. So can you talk a bit about some of the advantages that gives you by latching on to multispecialty. And does that allow you to go and find more PCP groups and then define referral networks more effectively? Just talk a little bit about the uniqueness of that market entry.

Ryan, thanks for the question. This is Shawn. Just from day 1 -- I'll speak first to BASS. When I met Inez 1 day, I mean, just -- it was just glaringly apparent that we had a highly aligned vision from that very first discussion, and they were going to be a great partner to kind of launch in the State of California. Their desire for -- to have a seamless patient experience and not -- along with their providers, just really kind of aligned just with the way kind of organized providers, find that anchor, organize the providers, bring those foundational services and then really kind of move into value in a very succinct, profitable manner. And I'd say the same thing with West Texas. I mean Dr. Heads from there, highly engaged, really wants to build a scaled medical group across West Texas and using the Abilene clinic. We're really excited about those 2. So as you mentioned, they're plenty of -- they’re multispecialty but really engaging with primary care and looking to align with a very similar strategy that we've done in our other markets.

Your next question comes from Josh Raskin of Nephron Research.

I guess the first question is just on implemented providers and how much of that was sort of timing, sort of closing those partnerships earlier than expected? And maybe how much of that was just the increasing interest in Privia and the conversations you guys are having?

Josh, it's Parth. So obviously, there are 2 components to implemented providers, the existing markets and the new markets we entered. And as we stated in our prepared remarks, we would have been at the high end of our previous guidance range, which is about 2,900 implemented providers in our existing markets. So that obviously reflects the record sales and implementation that we saw in our existing markets, a lot of momentum and just organically growing the medical groups that we have today. And then I think for California and West Texas, these were ahead of our expectations from a timing perspective. As we stated before, we did not expect to enter any new markets this year. So that's a significant step up from a timing perspective and helps accelerate that growth. And I think that reflects the broader momentum we are seeing in our business development pipeline, discussions with medical groups, health systems, payers to launch the Privia model in many states here.

Got you. And then maybe could you speak specifically to BASS in California, right, sort of one of the bigger groups out there. I guess I'm interested just in terms of timing as you talk about this pipeline growing, like when did the conversation start? How long does it take to implement? What really resonated with them? It sounds like everything moved a little bit faster than you expected.

Yes, sure. So number one is the structure of our arrangement in California is no different than other markets. We'll have the medical group entity single tax ID. We have the risk-bearing entity there and the management services entity that provides the platform. So from that perspective, it's pretty similar. Shawn talked about the alignment of interests and the meeting of the minds there with the BASS Group, a great set of physician leaders. INS is a great operating leader. And I think when you get that, and they had a vision to grow that medical group and have done that in the past few years from a pretty small size to 400 plus and they wanted to go statewide, we obviously see a big opportunity in California. And I think when that alignment happens, the beauty of our model is, things can move pretty quickly. It's very capital efficient. Getting a relationship off the ground and launching the market does not take much time. But in general, with these deals, it can take anywhere from 6 to 12 to 18 months. It just depends on the nature of the relationship, size of the markets and again, alignment of interest. This one came -- did come pretty quickly.

Next question comes from Lisa Gill of JPMorgan.

Parth, I want to go back to your comments around utilization where you talked about utilization being at pre-pandemic levels and virtual still being roughly 10% of visits. Can you talk about what your expectations are going into the fourth quarter of this year? Do you feel like that concern around pent-up demand, you're just not seeing that in your practices? Is it where you are from a geography perspective didn't have a big impact of the delta variant would be my first question.

Lisa, thanks for the question. So obviously, it's difficult to predict utilization as many companies have stated. We are seeing the trend continue into October. Schools are open. Businesses are open. And it's across the board. All our markets -- and as you know, we are in Florida, Texas, so some of the states, Georgia, some of the states where you had a higher incidence of the delta variant. The one key aspect is our utilization is ambulatory utilization in the -- within the community physicians. And I think you're seeing that everyone is much more comfortable to get that access, go see their doctor. I think protocols are in place today. And so I think irrespective of the variant of what might happen with the pandemic, I think that aspect of the health care ecosystem is working well. We continue to see a good pent-up demand. I think people are going to visit their physicians. And we're pushing that from an access standpoint, both for the fee-for-service book as well as for the value-based book, I think it's important. And we're seeing it across the board, so no specific state issues.

Lisa, this is Shawn. Let me just add. I mean -- and I would think all on the phone agree that increase in ambulatory utilization is its access. And access is the very first and one of the more critical components to managing at the highest levels of Value-Based Care contracts, getting people in, building that relationship with them, meeting them where they are, the patient, and getting that access. And our doctors -- and as I know, they spent, gosh, Friday afternoon, Friday evening, where there were 60 of them, and I mean it is that integrated model, meeting that patient where they are, virtually getting them in, and then just building that relationship. They feel really good about that as we're managing risk and then growing deeper into capitated arrangements. But it's one of the most critical attributes of a value-based care model that's going to succeed.

Great. And then just my follow-up, Shawn, would be as we think about geographies going forward and we think about this big group BASS that you have now in California, does it change your outlook at all as far as how you're thinking about geographies going forward? Do you now look at California and say, hey, we have an anchor here and kind of look to expand there? Or we have what we want in California and we're going to look for other geographies? How do we think about that on a go-forward basis?

Yes. I mean, Lisa, I think about California, a brand-new state for us. We all know how important California is just for our economy generally. But 28,000 primary care physicians, 115,000 specialists, think about the model. We get an anchor. We organized multiple doctors around there, building one of the largest medical groups in every state, put the foundational services, move to risk. Now move to West Texas, an expansion of an existing state into a market that we didn't have access into. So it's -- and then we've got our existing groups, same-store growth and growing Value-Based Care recurring arrangements, adding providers, moving into value, and then using our capital and resources to move into expanding into a national footprint.

So I think, Lisa, just to add this on. The whole country is open for us. The uniqueness of our model is, we don’t need to wait for the right dynamics to happen, given our focus across the patient cohorts. And I think that’s probably underappreciated if you are focused on just one segment of the population, you may want higher MA penetration, high density of duals and things like that, if that's our only focus. I think the beauty of the Privia model is we can work with all kinds of providers, all kinds of patients. And really, I don't think any state is out of bounds. It's literally the density of the population and the size of the state that we prioritize, obviously, but then any state is open. You need health care everywhere.

Next question comes from Richard Close of Canaccord Genuity.

So obviously, with the updated guidance, we have a good start in -- as we look to 2022. I know you're not providing any formal guidance here. But can you give some high-level thoughts on how we should be thinking about '22? You essentially pulled forward the new market you discussed you would do in 2022 into this year.

Richard, thanks for the question. So obviously, as we stated, implemented provider growth year-end 2020 to '21 will be now about 30%. I think this gives us a lot of momentum. You should see acceleration of our top line. You'll see acceleration on practice collections. California is a corporate practice state, so we don't own the medical group, but it will be reflected in practice collections there. And I think more importantly, you'll see growth down the P&L, care margin all the way through EBITDA. And I think that's a key attribute of our business. You're getting an entity that is growing top line very meaningfully and then having real positive EBITDA, positive cash flow that is also growing, and we're pretty excited about that. So we'll provide an update with Q4, trying to close out the year really strong, see a lot of momentum across all our building blocks, as Shawn stated, existing markets, new markets, attributed lives, increasing the level of risk we are taking in these contracts. So I think all of that, hopefully, will culminate into a pretty strong 2022. We look forward to giving you the update.

Okay. And as a follow-up, maybe flipping Ryan's question a little bit towards the physician practice side of things and the pipeline and competitive market. So as you're out there having discussions, how noisy is the market with these new upstart companies in terms of the education process, talking with the practices, explaining them what you do and how you're different than some of these other models?

Yes. I'll start, and then Shawn will add. Look, I think we do time to time come across some of the other companies. But really, you have to realize our customer here, the physicians and the physician practices, are fairly sophisticated. They've seen over the last 20, 30 years, some of these groups have been around that long, all versions of alignment. They know what works. They know what doesn't work. There's a lot of self-selection. The beauty of our business model is it preserves their autonomy and ownership structure, whether they are independent, they're small, they're large, single specialty, multispecialty, affiliated with a health system. I think that very -- there's probably nobody else that compares to us in terms of the flexibility that we can provide for a solution across their book of business. I think there are other entities that are going and focusing just on one segment of the population of one book of business. The uniqueness that comes with aligning with Privia to grow the practice holistically across their entire panel, I think, is very differentiated to us.

Yes. Parth, that's just right on, right? Where I've gone was the ability to exceed all patients, have the tools to manage them and very cost effective and high quality and improving that experience for the patient as well as the provider. I mean that's -- these guys are sophisticated, and they're self-selecting into a model such as Privia.

Your next question comes from Whit Mayo of SVB Leerink.

First question, just the new groups that you're onboarding in '22, are you standing an ACO up for them? And maybe just an update on views around any new ACOs that you plan on introducing and launching in '22?

Whit, thanks for the question. So we established the ACO, the risk-bearing entity in every state. So similar to other markets in California, we'll establish our risk-bearing entities. There are some attributed lives that BASS has already that will start in some value-based programs starting 1/1/22. And we continue to enter as part of our existing ACOs and all our markets new value-based arrangements. So you have some of them which may be new, some of them which we are moving towards the right in terms of spectrum of risk. And it may be an existing program, but we are fundamentally changing the structure to take on more risk. So our objective is to establish an ACO entity in every state and transition as many lives into value-based arrangements and increase that attribution across our book.

Okay. So do you plan on launching? Are you going to have more than 4 ACOs next year? It sounds like there are -- when you said there are some attributed lives with BASS, is that intended to suggest they're already participating ….?

Yes, that's right. So, yes, I misunderstood the question. So if you are referring to the MSSP program, we have 4 existing ACOs that participate in that program. You will see us participate in more than 4 ACOs in 2022. And that covers California, Florida and other markets.

Got it. And I guess sort of the follow-up question is just as you have conversations with your affiliated physicians today and the desire to think about more risk in the context of the enhanced track, do you believe we'll see of the 4 legacy ACOs, will any of those transition towards the enhanced track?

Yes. We'll give an update on Q4, but we will have more than 1 enhanced track. Today, it's only in Mid-Atlantic, and you'll see more of our other markets progress. And that's fundamentally our strategy, not only in the MSSP program, but in commercial, in MA, where we usually start with upside only. We move towards increased downside. And once we understand the attribution and these programs mature and we have more confidence that with increased risk, there's a probability to get increased return and not lose money. We will -- you will see us move towards the right on the risk spectrum across all these programs. So you'll see us take enhanced track in MSSP, commercial downside risk. And in MA over time, you'll see us do capitated arrangements as well.

Got it. And just a follow-up on that. Just remind me the final share rate on a enhanced track versus kind of a non-enhanced track model?

Whit, this is Shawn. It's 75% to 25%, 75% coming to the party that takes the significant risk such as Privia. And then obviously, we're working up way up the spectrum on those from A, B, C to enhanced.

Next question comes from Sean Wieland of Piper Sandler.

A couple of questions about the California market entry. Thanks for the 5:00 AM earnings call, by the way, out here. Where does the Knox-Keene license sit in all of this?

Sean, thanks for the question. Apologies. We'll try and do an afternoon one next time, maybe. Yes, you would expect us to take the Knox-Keene license, and we're working towards all that as we look to take risk in California. So we'll establish a risk-bearing entity and go through that process in the state.

So you don't have a Knox-Keene license in California yet. Does BASS? They must.

Not today.

Not today. I was going to say, think about our model, we enter, we organize the doctors we understand -- get to understand where they are and we move from -- to increasing levels of risk across the market. So the Knox-Keene license should come into play as we would move across that continuum.

Yes. And the one other important element, Sean, is it doesn't preclude us from having lives in the MSSP program. There's an ability to add lives in California through an ACO that might -- that doesn't require a Knox-Keene. So you'll see us enter that program with attributed lives 1/1/22.

Okay. And so will you have the Knox-Keene license by 1/1/22?

No, you don't need it for the MSSP program to our understanding.

Okay. So my question is when will you have the Knox-Keene license?

Sean, just as it becomes apparently as we need it as we move to higher levels of risk, we'll move into doing that.

Okay. And I guess my follow-up, California is -- as you said, is a massive market and an anchor tenant in the East Bay, is a pretty long ways away from a dock in San Diego. So you said that your strategy in California is similar to that of other markets, but maybe could you articulate a little bit some of the differences of rolling out a strategy in California?

That's a good question. The best corollary is our Mid-Atlantic market, Virginia, Maryland, D.C. And look, our strategy spans over 7, 10 years here, how we develop a market. We started with 4 providers in Western Virginia, and it's over 1,200 today across those 3 Maryland, D.C. and Virginia. And each of the micro geographies are different there, much similar to the example you're giving about California. And what we see as these markets develop is we get one anchor group in one part of the state. There are other large groups that might be present in the southern part of the state where you can enter into arrangements in the Privia model, and they can join the medical group. You have the opportunity to carve out specific areas in the market where dynamics are very different, payer dynamics, physician dynamics, affiliations and so forth. So the flexibility allows us to go statewide and run the plays we need to do to expand. I think BASS is at 4 plus 100 providers. We have a shared vision. In the near term, trying to take it to 1,000 and then grow from there. So again, this is a multiyear journey, and it just doesn't happen overnight.

Your next question comes from Gary Taylor of Cowen.

I had a question just about the development costs you were talking about for the fourth quarter. Appreciate the fact that you're absorbing those in your guidance when most of the new companies exclude all kinds of things. So certainly recognize that. But can you give us a sense on -- even if it's -- ideally for the fourth quarter, what you think you're absorbing that. I'm thinking more about of 2022, how do we think about whether accelerating your market entry, which is what we want you to do, how much that might weigh on EBITDA just in the interim, just really for modeling purposes.

Gary, it's Parth. Thanks for the question. Good question. Look, I think our model is very capital-light. So generally speaking, the spend isn't huge. It varies by the market, by the opportunity. Usually, you should think about this as low single-digit million spend. Again, depends on how accelerated we are going. We've become profitable fairly quickly, in some cases, day 1. So while it would have a slight impact on EBITDA as we rightly spend that money to grow, I think that's one of the uniqueness of our model. We have pretty significant positive EBITDA. We intend to increase and grow EBITDA year-over-year. And if there's a good rationale, we'll be pretty transparent about it. But you'll see us accelerate top line growth and grow EBITDA in absolute dollars and hopefully on a margin basis as well. And if there are some puts and takes as we develop our plan for next year, we'll obviously communicate that. But you should expect us to increase both EBITDA and practice collections next year.

And does the -- do the new market entry cost on the P&L, do those primarily show up in sales and marketing or split between sales and marketing and G&A? How do we think about that?

Yes, that will be split between sales and marketing, G&A, also some of the operations spend. We spend ahead of signing and getting new providers lives, so you need the capabilities on the ground to implement -- to manage performance and so forth. So I think, obviously, sales is the leading spend indicator, and then we'll have some in the operations cost line and then some in G&A.

One other question. Parth, earlier, you had talked about how net revenue would change as you took more capitation versus how revenue is recognized in the ACO. And I just want to make sure I understood your point. I certainly understand how your ACO spend under management is not grossed up into revenue. So, on the capitation example, were you just suggesting as an example, that's another case where significantly more revenue or medical spend under management? Are you actually implying, there will be an accounting change that as you move into capitated arrangements, unlike ACO, those will actually be recognized on a grossed up basis?

Thanks, Gary. That's a great question. So you'll see both. On a PMPM basis, in that example that we gave on Slide 13, you'll see the benchmark is about $9,360. If you do full capitation, in MSSP, it just covers -- in that example, Part A, Part B, doesn't include Part D, doesn't include some of the admin spend of the health plan. So the PMPM per life obviously goes up in a capitation arrangement, whether it's direct contracting with CMS in that example with that program or with another national payer on MA. The actual dollars per life per month would go up. And then obviously, you then start to recognize that full amount, the 10,000-plus per life per month in your top line number. So that's a 20x differential versus what you're just recognizing in shared savings today.

There are no further questions at this time. Now, I would like to turn the call back to Mr. Morris. Sir, please go ahead.

I'd like to thank each one of you for listening to the call today. Privia, it's a proven model that supports all providers and all patients across all reimbursement models, are scalable, capital-light, highly integrated care delivery model in combination with the business momentum you're seeing positions our company for accelerated growth in 2022. We appreciate your continued interest and support of our company and look forward to speaking to you again. Have a great rest of the day. Thanks.

This concludes today's conference. Thank you all for joining, and have a great day.