InnovAge First Quarter 2027 Earnings Conference Call - INNOVAGE HOLDING CORP

Explicit Guidance:

• Fiscal Year 2027 Ending Census: Reaffirmed range of 8,625 to 8,850 participants.
• Fiscal Year 2027 Member Months: Projected range of 101,000 to 102,500.
• Fiscal Year 2027 Revenue: Guidance reaffirmed at $1.05 billion to $1.085 billion.
• Fiscal Year 2027 Adjusted EBITDA: Guidance reaffirmed at $105 million to $115 million (implying a mid-to-high single-digit margin target of 10%+).
• Fiscal Year 2027 De Novo Losses: Expected range of $0.4 million to $0.8 million.
• Medicare Rate Increase: Expects a 1.5% to 2.0% increase in Medicare rates effective January 1, 2027, reflecting the V-28 phase-in.

Business-Segment Outlook:

• Geographic Growth Drivers: Q1 growth attributed primarily to member month expansion in California, Colorado, and Florida; Q2 moderation expected to follow Q1 strength.
• De Novo Centers: Current de novo losses driven by Bakersfield Center (not yet operational); Tampa, Orlando, and Crenshaw centers have exited the 24-month de novo loss period.
• Cost Management Trends: Anticipated reduction in cost per participant driven by decreased assisted living and nursing facility utilization; however, inpatient utilization and unit costs are expected to rise.
• Operational Efficiency: Focus on center-led accountability with strengthened enterprise support (Epic, data, analytics) to improve consistency as scale increases.

Market and Competitive Outlook:

• V-28 Risk Adjustment Model: PACE population (nursing home-certifiable, high complexity) expected to be less impacted by V-28 than Medicare Advantage due to "frailty factor" payment methodology and weighting of high-severity conditions (CHF, COPD, ESRD) remaining intact; potential headwinds from reduced weighting of "softer codes" (stable angina, less severe heart disease).
• Medicare Risk Score Dynamics: Expect Q2 risk score decay as higher-risk tenured members exit and are replaced; Q3 expected to see risk score reset (50-50 blend of V22/V28) and Medicare rate increases in January; Q4 expected to normalize with stabilized costs and potential enrollment growth.
• Payer Mix: Medicare represents 45% of overall revenue; remaining 55% is Medicaid.

Macro / Industry Outlook:

• Rate Negotiations: Medicaid rate updates expected in California in approximately three weeks; no changes in expectations from previous conservative budgeting.
• V-28 Transition Impact: Phase-in to 50-50 blend occurring in Q3 FY2027; guidance assumes full integration of V-28 impacts.
• Seasonality: Q1 historically strongest due to Medicaid rate updates (CO, FL, NM, VA) and annual merit increases taking effect late in the quarter; Q2 and Q4 typically moderate; Q3 sees rate resets and open enrollment pressures.
• Demographics: Aging population growth expected to drive increased demand for innovative, cost-effective care models for frail seniors.

Strategic Initiatives:

• "Innovate 3.0" Strategy: Shift focused on scaling capabilities, infrastructure, and management systems to support larger scale operations.
• Technology & AI: Exploring AI applications to assist clinician decision-making and reduce administrative burden; commitment to pursue only what improves quality and decreases cost.
• Clinical Model Expansion:
  • Upstream Adjacencies: Evaluating application of PACE model to populations "upstream" of current eligibility.
  • Downstream Adjacencies: Assessing opportunities to create PACE-like models for Managed Care Organizations serving dual-eligible populations.
• M&A and New Markets: Selective evaluation of acquisitions and new PACE centers; Florida identified as a benchmark market for de novo expansion; no specific transactions announced, focus on relationship building and cultivation.
• Network Investments: Increased investment in external provider networks (e.g., in-house cardiologists in San Bernardino, after-hours nursing) to keep care in-home and reduce skilled nursing facility utilization.

Risks and Headwinds to Outlook:

• Risk Score Decay: Anticipated Q2 erosion of risk scores as newer, lower-risk participants replace higher-risk ones.
• Medical Cost Inflation: Higher inpatient utilization and increased unit costs in assisted living/nursing facilities; annual Medicare fee schedule increases taking effect in October.
• V-28 Uncertainty: Potential for variance in impact based on the mix of "softer codes" vs. high-severity conditions in the specific participant portfolio.
• Regulatory Changes: Ongoing transition from V-22 to V-28 models creating complexity in risk score calculations and potential reimbursement volatility.
• Labor Costs: Annual reset of payroll taxes and health insurance benefit costs expected to increase Q3 expenses; merit increases impacting run rates in Q2.

Management Tone on the Future:

• Confidence: High confidence in execution and ability to achieve long-term sustainable margins (10%+); described as a "strong start" with "good momentum."
• Discipline: Emphasis on not guiding on quarterly results to avoid annualizing strong Q1 performance; focus on "disciplined execution" rather than growth at any cost.
• Capacity for Improvement: No intention to treat 10% margin as a ceiling; investing in efficiency (AI, clinical productivity) to build resilience against headwinds and fund future growth.
• Investor Sentiment: Positive reception from secondary offering participants regarding the PACE model and growth potential.

Miscellaneous:

• Secondary Offering: Completed sale of 11.5 million shares by affiliated shareholders (TCO Group, Welsh Carson, Apex); no new shares issued by company, no proceeds received.
• Cash Position: Ended quarter with $119.3 billion in cash and cash equivalents (Note: Text likely typo for $119.3 million given context of balance sheet scale; confirmed by debt of $61.4 million).
• Share Count: Weighted average fully diluted share count of 137.1 million for Q1.
• De Novo Definition: Losses included only for pre-opening and first 24 months of operations; de novo losses for Q1 were $0.1 million.