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Kevin O'Leary

agilon's 2022 Analyst Day review

March 14, 2022
Company Research

TL;DR: agilon has built a really nice core business that should continue to perform well as it helps a group of practices manage risk-based contracts. It does a nice job telling a growth story, but the growth story glosses over the complexity of scaling this model, which feels more akin to a change management consulting playbook than to a high tech data analytics SaaS platform. That complexity certainly creates some risk as it enters new relationships like Maine Health that might make it challenging to manage medical PMPMs as agilon has with its current set of partners. Assuming they can navigate those risks successfully, the dynamics in the MA market create a lot of room for agilon to continue scaling a solid underlying business.

agilon provided a lot of good detail on its business throughout the session - here are a few of the key takeaways we heard:

Overarching Perspective

If you watch a replay of the session, you get a sense that management (and analysts) are very bullish on agilon’s growth over the next several years. If anything, it seems that analysts believe agilon is understating where it should be by 2026.

There is a narrative throughout that every primary care delivery organizations will be looking for their partner over the next several years as they seek to move to a more financially viable value-based care payment model in Medicare. As you’d expect, agilon sees itself as a better partner than payors or health systems for providers that are looking to retain independence while benefitting from the improved financials of value-based contracts.

agilon also spends a lot of time driving the narrative around the scalability of its platform - chalking up a lot of the nuances of each individual PCP relationship to the ability of the platform to flex. They also made a really smart move in having physician leadership from three of their partner practices come in to discuss the model and speak glowingly about the opportunity that agilon has afforded them. It drives home the strength of those relationships. But it also highlighted how the model seems like less of a tech platform and more of a change management consulting business for a handful of primary care practices paid for via a new value-based care contract. The contracting approach seems scalable, but actually getting practices to succeed under those contracts seems very manual. agilon describes its approach as being flexible to meet the needs of PCPs, which is a really good way of saying every situation and opportunity is unique.

That complexity of navigating each relationship with a practice seems like agilon’s biggest risk moving forward. It has shown success with these initial practices. But it’s also starting to undertake new relationships, like that with MaineHealth, and it’s unclear that agilon’s current success will lead to repeatable success in these new relationships as it scales. agilon’s previous struggles in California underscore how challenging this can be at times.

Even with that risk, it does appear there’s a lot to be bullish on for agilon. It’s targeted approach to relationships with Medicare Advantage payors and deep relationships with providers who have a very real financial incentive to perform in these contracts creates a nice wedge for agilon over the duration of those contracts. It is worth taking a step back and revisiting agilon's S-1 to provide some context on where the organization is at today. Here is a snippet of our bull / bear scenarios from our review of the S-1. It appears the Bull case is winning out over the Bear case at the moment, but you can see the points underlying each position are largely the same as they are today.

agilon is bullish on the growth opportunity ahead of it, laying out new growth targets

agilon set out two new key growth targets for the organization over the next several years in terms of adding providers to the platform:

  1. agilon’s platform will be supporting ~2,200 primary care providers in 2023 with a target of 3,800+ by 2026.
  2. They’ve also set a long term goal of reaching 10,000 primary care providers, which would put it at at about 5% of the PCP workforce in this country on the agilon platform.

Throughout the presentation, there’s a sense that the FFS model for Medicare patients within primary care is untenable and that every primary care practice is going to be looking for a partner to help them execute on value-based contracts. agilon is betting that it is a better partner than health systems or payors for those practices by partnering with them to provide independence moving forward. It’s a smart play, and clearly one they are seeing success in running currently.

It also brings up a few questions from analysts on the competition in the space and long term viability of this approach. agilon notes they aren’t seeing a ton of competition at the moment as they’re looking at entering new geographies, which is curious given the imminence fo the change. It seems like there are still only a handful of MSOs pursuing this model - in addition you agilon you have Privia and Aledade out there, but not a ton else. You’d think that will change relatively quickly as more folks see the opportunity to support PCPs in making this transition.

It also raised the question of where growth comes from after this period of transition. If you believe the notion that all practices are going to need to decide on a partner within the next few years, where does agilon find growth after practices have made their decisions? agilon’s answer to that question from an analyst wasn’t exactly clear.

agilon is expanding TAM by launching health system partnerships via a deal with MaineHealth

agilon shared during the session that it has signed a partnership with MaineHealth, and is expanding its view of potential customers to include health systems from here. MaineHealth, the a leading integrated health system with 12 hospitals, 1,700 employed / affiliated physicians, including 215 primary care physicians, is finalizing its partnership with agilon and will be included in the 2023 class of providers.

It’s a confusing time to launch health systems as an avenue given the success agilon appears to be having with independent PCPs. Yes, it certainly helps grow the total addressable market, but it also comes fraught with challenges. The slide above makes health systems see like a natural extension of the model - but it leaves out the fact that health systems generally have hospitals, as MaineHealth has twelve. And even in the most forward-thinking of health systems, the financials of those hospitals are generally not aligned with performing well in value-based contracts.

As we’ll get into below, a lot of agilon’s success appears to come from implementing a change management playbook in primary care practices. Yet navigating that complex political landscape is a very different beast than aligning a primary care practice to performing in a value-based contract, and will naturally call into question whether agilon really knows the playbook for this segment of the market. The performance of hospital-led ACOs do not provide much confidence that health systems can drive savings in these models, and agilon's experience in California pre-IPO demonstrates the magnitude of losses a bad relationship can generate - from our review of agilon's S-1, it lost $190 million on the California relationship in 2019 alone.

The team rightfully acknowledged that not every system will be the right partner for them in this journey, and are focused on working with systems that have invested in ambulatory assets to unlock Medicare business in a more profitable manner. agilon is viewing this as a learning opportunity, but are also talking to other health systems about continuing to grow with this segment. It’s a logical approach to working with health systems, certainly.

Some of the analyst questions were good ones about how the MaineHealth hospitals view this agilon partnership. While agilon gives the right answer related to MaineHealth viewing Medicare patients as loss-generating systemwide, it’d be quite interesting to hear from MaineHealth hospital leaders and if they agree. If agilon can execute here, it seems as though this relationship could open a lot of doors. But if this struggles, it also opens up the agilon model to a lot of risk. The timing of it doesn’t make a lot of sense to me.

agilon has a really clear narrative for Medicare Advantage payors that seems to be resonating well.

It’s impressive how clearly and succinctly agilon can describe its payor strategy in the investor day. They describe it briefly around 2hrs 42min into the presentation. It has honed in on a specific model that still makes it applicable for a massive market - targeting PPO products in overlooked MA markets. agilon shared it is signing deals for about 85% of premium, giving payors clear visibility into profitability, and it has a defined attribution playbook that helps make life easier in the PPO model.

When you look at the map above of the markets they’re in - it’s the exact opposite of what you see from most other MA players who are building a care delivery presence primarily in Florida, California, and Texas using an HMO model. This approach, coupled with its strategy above of partnering with a scaled provider in each market, gives it strong negotiating leverage with payors.

As demonstrated in the slide below, agilon also notes it is growing at 1.5x - 2x the rate of the markets that they are in, making for another compelling value proposition for payors in terms of driving membership growth. Given this approach, it’s not surprising to see them winning over payors.

These payor relationships seem like a key part of the scalability of the agilon playbook across various markets. The ability to contract with national payors and then subsequently use those contracts to move into new markets creates a stronger value prop for all parties:

  • Payors are able to enter and gain share in markets where they otherwise wouldn’t have a strong presence
  • agilon is able to manage economics and demonstrate value to new PCP partners
  • PCPs are able to diversify value-based contracts quickly and benefit from more patients under value-based deals

agilon understands the value of getting to scale in local markets

agilon’s appears to understand the benefits of getting to scale in a local market quite well. As this slide demonstrates, it is focused on working with PCP groups that have a substantial portion of PCPs in a local market. The slide above looks at both agilon’s core original markets in OH and TX, and as well as new markets in NY and NC and how it enters those markets with scale immediately. The practice they’ve partnered with is at least double the size of the next largest PCP organization in a market, and it controls a substantial portion of the market (ranging from 18% to almost 50% of PCPs). This is very different from how many of the other Medicare Advantage primary care players enter markets, opening a few clinics with a handful of providers (who are generally new to those markets).

It’s an interesting approach, in part, because it drives key benefits across three core constituents in the primary care landscape:

  • Patients. agilon is not needing to build net new relationships between provider and patients, but rather is partnering with the trusted provider in markets
  • Health systems. By partnering with the largest independent PCP group in the market, it gives agilon more ability to build relationships and impact referrals with local health systems. At one point during the session, agilon describes markets where hospital EDs are happy to have agilon nurses staffed in the ED, which provides a meaningful opportunity for agilon. As every care delivery org would tell you, scale helps drive relevance, which leads us to...
  • Payors. Scale for a care delivery org provides better contracting leverage with the payor. We of course see this playing out throughout the system - if you aggregate the provider supply in a market, it gives you a significant advantage in negotiating with the payor in that market. Particularly when you’re aggregating supply of the leading independent provider group in markets, which can be a hedge for payors against higher prices charge by health systems

agilon’s biggest strength is its deep relationships with a handful of PCP groups

In a show of the strength of its relationships with its PCP partners, agilon had three physician leaders from its partner organization join them on stage for a Q&A session. It was a smart move by them, as its one of the few times I’ve heard from real clinicians who are talking about the impact of any of the new crop of public primary care companies, outside of canned promo videos. And it’s very much worth watching that section to hear how PCPs process the partnership with agilon (it starts around 2 hrs 1 min in).

As you’d expect, there’s not a bad word to be said about agilon during the Q&A session, but even with the rose-colored tint it still provides a lot of interesting context. As an example, check out this quote from one of the physician leaders:

Physicians are always suspicious of partnerships because partnerships with specialists and health plans generally end poorly, but our relationship has been as pure as a partnership can be.

This rings very true as a common sentiment amongst clinicians. Many of these providers have been practicing for decades and have seen their fair share of partnerships come and go, including the physician practice management craze in the 1990s. agilon isn’t a stranger to that either to the challenges of partnerships that end poorly, either, as it’s pre-IPO exit from the California market demonstrated. So, while the relationships today are by all accounts going very well, it is worth keeping an eye on how these relationships change over time. agilon signs its deals with providers for twenty years, which is a long time for any partnership.

The depth of these existing relationships is the biggest strength for agilon at the moment. It is worth watching both how these relationships mature over time, and how consistently agilon is able to enter into new relationships like these.

Will the next set of physician relationships look similar to these?

We’ve already discussed above the potential challenges agilon faces in expanding relationships to other client types with health systems and MaineHealth. But even within primary care organizations, it is going to be interesting to see how successfully it can continue to scale to provider organizations beyond its initial set.

agilon’s growth to date has been centered around a handful of groups, most notably COPC, which was its founding partner. The benefit of this shows during investor day - a handful of very committed providers. But it also raises questions for the next generation of organizations as the pitch to join will naturally need to evolve from something along the lines of “co-create this VBC platform with us” to “here’s this VBC platform we’ve created”. While it might seem like a minor nuance, it is worth watching to see how physicians perceive this partnership over time. If you listen to the physicians talk in the Q&A, they have actively been building new programs in partnership with agilon - things like palliative care programs, which are important clinical foundations to succeeding in value-based care.

But once those models are built, they also don’t need to be recreated. So practices that will join in the future presumably won’t have the same opportunity to create their own model. And that creates issues when working with providers who want to do exactly that. Look at this quote from one of the agilon practices on stage at investor day describing how a palliative care program has been created:

Buffalo and Akron were working on palliative care, now we have a palliative care / end of life approach that all of us are studying across all of the markets. So there’s an actual what does the staffing look like, what is the model, what are the touch points, what is the conversation need to be in the room to get patients to be willing to have that kind of discussion that feels dignified and not scaring them into saying they’re about to die. Down to that level of detail, that’s all codified now. So when another market wants to say hey, so you not only have it from our product team that can project manage it and run the playbook in the market for our patients. I can pick up the phone and call Frank and say Frank what were the issues that you had, how did your physicians respond, how do we move this over the finish line.

For the providers who have had an active voice in this process and are bought into the program, this is a really great approach. Those providers now have a cohort of other providers to turn to. Yet it is more challenging when you’re working with providers who have already thought about their approach to palliative care, and don’t necessarily want to assimilate to the approach. It will be more challenging to get a similar level of buy-in from those practices.

As discussed, these deep relationships are complex, challenging to build, and riddled with mistrust. This mistrust is often fostered by the generally conflicting incentives of care delivery and financial returns. As agilon continues to grow the pool of providers it works with, it will naturally face more challenges with managing the expectations of providers who want to implement their own versions of care delivery pathways. agilon’s ability to continue to build these deep, trusting relationships with providers will be critical to agilon’s success.

agilon’s core competency: a change management playbook for provider practices

agilon spends a lot of time throughout the session talking about how it is a scalable platform. And understandably so - the story for Wall Street is much better if you buy that the agilon model can be stamped out repeatedly across various geographies (although interestingly, the story for provider practices is actually likely better as a more customized, bespoke offering). But my impression from watching the session is that it’s much more a playbook-driven change management consulting business than it is a scalable tech-centric platform business. agilon is creating a reusable playbook that it can implement with each new client it on-boards through “reusable integration patterns,” as called out on the slide above.

“Reusable integration patterns” sounds like consultant-speak

Now, there isn’t anything wrong with running a consulting-style change management playbook, particularly when that playbook is tied to an economic engine such as value-based MA contracts. As agilon continues to demonstrate, it’s a really good business to be in. Many primary care practices have not been operated like businesses previously, and don’t have the discipline that can be applied with some smart consulting-style thinking. Use dashboards and KPIs to inform leaders of things to improve upon. One of agilon’s providers highlighted this need for basic blocking-and-tackling support to succeed financially:

"There are some things that aren’t very “aha” that we needed to do better. Dana and Girish bring us things like you need to see your sickest 15% of patients 5, 6, 7 times a year. You’re busy physicians and you can’t get them on the schedule, so how do you operationalize that? So the best practices was less about what kind of innovative clinical care and it was more around how do you operationalize that. Back to we have different types of partners, different sizes, and different locales. I can always go find someone who looks and feels just like me and we can compare notes on the operations side...
This business is a lot about execution more than I ever realized as a doctor than it is necessarily about innovative care so that is one thing that we’re learning. So to be data driven, look at the KPIs, drive towards those, have doctors understand why something that feels so business like is actually so important to the health of your patient is one big thing."

This provider highlights well that many of the changes needed to succeed in value-based contracts are not innovative models of care delivery, but rather basic functions like understanding you need to see your sicker patients more often, and aligning incentives that allow you to do so. It isn’t rocket science, but that doesn’t mean it’s easy, either.

It does raises questions as to how meaningful of a growth flywheel there is like this, and thus how scalable the model actually is. The challenge of implementing a standard operational playbook can be seen well in this quote from one of the other providers at agilon’s investor day:

“The nice thing about the agilon partnership... we, in conjunction with agilon, have been able to create models of care that we direct and we change. And so we create a model, create a care management program, we roll it out, and if we as physicians don’t like it, or we don’t think it’s achieving the goals that we want, we just reinvent it because we own it and we’re responsible for it. We’re arrogant enough to believe that we’re primary care physicians, we know we think what is best for our patients and so our ability to change the model on the fly to make sure that we’re meeting the needs of our patients was a critical decision for us in the partnership with agilon.”

When you’re partnering with primary care practices who generally have the mindset of “we know what’s best and are going to change the model as we want,” it makes it rather challenging to rollout a consistent playbook across those practices. Managing the variations of those practices through this playbook-driven approach will be a key part of agilon’s growth in the future.

agilon’s technology & clinical innovation slides drive home it’s competency as a change management playbook, not a tech platform

The technology & clinical slides do the typical song and dance we’ve all come to expect from next generation providers, i.e. talking about how valuable the data platform already is and will continue to become leveraging AI and pixie dust (ok, agilon didn’t mention the pixie dust part). But as the provider quotes above seem to indicate, this opportunity is less about AI and more about having some intelligent KPIs and accessible data to help providers understand the changes they need to make.

agilon has identified a really smart business opportunity - helping primary care practices getting paid more by succeeding in value based care contracts. As one of the providers highlighted above, there are some basic blocking and tackling needs to enable this. But in large part, there isn’t a massive investment in advanced analytics needed, there’s some very basic KPI dashboards that are needed to manage a practice more like a business. And by the way, this is probably actually a good thing for agilon in a world where everyone else is burning through hundreds of millions of dollars of capital to build tech platforms.

For instance, look at this dashboard example highlighted by agilon’s National Medical Director:

agilon's data platform at work

How many of you can see the insight here by looking at the slide? agilon was able to show this practice that it had high ED utilization on Mondays (see the upper right chart). agilon then worked with the practice to find out that they were short staffed on Mondays, and so patients who called in on Mondays were being put on hold, and they were going to the ED instead. So agilon helped the practice hire additional staff to keep people out of the ED. And this highlights the beauty of the agilon model. That’s not an advanced machine learning algorithm, that’s a good consulting team funded by a payment model that can support meaningful changes in a practice.

The intervention here is not some magical AI algorithm, rather it is having well thought out KPIs, and a team that is going to help hire more staff on Monday’s to pick up the phone. It’s amazing how much of success in value-based care models is creating an environment with an appropriate level of staffing and a clear set of KPIs.

Lets look at the other examples of success of the data platform that agilon highlights during the session:

Certainly all of the problems outlined here are identified by using data, and the platform is providing value in terms of unearthing those problems. But notice that the interventions are all still highly manual, people-driven interventions. You’re hiring more team members, you’re driving different provider behaviors, you’re negotiating different contracts. The need for an advanced data platform, beyond some basic KPI tracking, is not entirely clear.

If the goal of this session was to provide convincing proof that agilon’s tech platform is one of the key driving elements of its growth, it failed to provide that from my perspective. That said, it maybe actually be a proof point, that “tech” does not need to be one of the key growth drivers for agilon to find success, but rather simply an enabler of it. Having simple, thought-out dashboards with KPIs that enable teams to make appropriate interventions clearly is a high-value activity. It’s also a relatively low-cost activity, which in this world of other primary care and insurance platforms burning through cash to build advanced tech platforms, might be one of agilon’s biggest advantages.

agilon’s medical margin PMPM creates solid financial footing

agilon does a nice job articulating the performance of its cohorts over time and how it looks at those various cohorts. It’s impressive to see agilon’s ability and willingness to share data across these cohorts. While each year follows its own distinct pattern, generally speaking agilon is finding additional margin in each cohort over time. It’s 2021 cohort, which is the largest in terms of members (~52,000) and markets (10) is dragging down margin a bit as it is in its first year and generating Medical Margin of only $51 PMPM, but that should follow a similar growth trajectory to other cohorts. agilon projects that it will reach a PMPM Medical Margin of around $160 by 2026.

The bounciness of the PMPMs across various cohorts in various years is interesting to observe. For instance, look how some markets start off Year 1 with ~$50 PMPM Medical Margin, while others start with >$100 PMPM Medical Margin. It highlights the points made above about the uniqueness of each of these partnerships and local markets, and how agilon’s playbook needs to flex to meet the needs of those various markets.

agilon mentions that they’re planning to hit an Adjusted EBITDA of $0 - $10 million in 2023, growing to ~$600 million of Adjutsed EBITDA in 2026. It's worth noting that this Adjusted EBITDA number excludes a lot of numbers related to new market entry, and agilon actually had a positive Adjusted EBITDA number in 2020 while it was going public before going negative again in 2021. It’s not hard to imagine agilon growing substantially faster than the projections laid out here, as mentioned by a few analysts during the presentation, which would be good for top line revenue but might compress Medical Margin and Adjusted EBITDA. Direct Contracting alone seems to have meaningful opportunity to grow beyond the 110,000 members laid out, as agilon had 52k members in 2021 and expects ~83k in 2022.

Other Jottings:

  • agilon mentioned that it sent over 1 million pieces of mail to potential members during Open Enrollment, and the mail it sends comes addressed from its provider partners. It seems like a huge marketing advantage in Open Enrollment to have someones’ trusted PCP telling them to sign up for a plan, versus the incumbent insurer. You can imagine why they’re driving faster growth than their market comps
  • agilon is optimistic about Direct Contracting (now ACO REACH). It’s Year 1 experience has been a largely unmanaged population with high medical claims expense. Medical margin expectations are very low in year 1 at only $26 PMPM, they think they can drive more savings over time. It also has the added benefit of increasing local market scale by 30% - 70%, which should make agilon’s value prop that much more compelling to providers.
  • One of the things that was missing from the day was any visibility into the pipeline of what potential partners look like for 2024+. Given the lead time discussed above, I’d imagine they’re already deep in conversations with 2024 partners, and should have good line of sight into what the funnel looks like for 2025+. It’s odd to not see any detail of that pipeline in here.
  • agilon highlighted an impressive >12:1 CAC / LTV ratio. It makes a big investment in markets upon entry and then has relatively low costs from there, and then very little patient churn on top of that.
  • agilon was very clear they won’t be acquiring any practices any time soon. This partnership approach is their model and they’re sticking to it. We might see them make some acquisitions that are capability extensions for agilon, but that’s it.
  • agilon mentions that there’s an implementation period of 6 - 12 months for each of its provider partners, which makes sense when you think about how much visibility they already have into 2023 numbers.