InnovAge Holding Corp. Price & Performance (INNV)

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For those listening to rebroadcast of this call, we remind you that the remarks made herein are as of today. Tuesday, February 4, 2025, and have not been updated subsequent to this call. During our call, will refer to certain non GAAP measures. Reconciliation of these measures the most directly comparable GAAP measures can be found in our earnings press release posted on our website. We will also be making forward looking statements including statements related to our 2025 fiscal year projections and guidance, future growth prospects and growth strategy, our clinical and operational value initiatives, Medicare rate increases since its headwinds the status of current and future Radios reactions, and other expectations, Listeners are cautioned that all of our forward looking statements involve certain assumptions that are inherently subject to risks and uncertainties, which can cause our actual results to differ materially from our current expectations. We advise listeners to review the risk factors discussed in our annual report on 10 ks for fiscal year 2024 and any subsequent reports filed with the SEC. Including our most recently quarterly report on Form 10Q. After the completion of our prepared remarks, we will open the call for questions. I will now turn the call over to our CEO, Patrick Blair.

Patrick?

Thank you, Ryan, and good afternoon, everyone. I'd like to start by expressing my sincere appreciation to our colleagues, participants, government partners and the investor community for their continued support of InnovAge. Your commitment and collaboration remain essential to our mission and we value the trust you place in us. The company's 2nd quarter results were in line with our expectations and we're reaffirming our fiscal 2025 guidance set in September. We continue to make meaningful progress in strengthening the business. Driving top line growth and margin improvement in alignment with the multi year roadmap we outlined at Investor last year. This quarter included some one time adjustments which while not unusual for a company of our size, impacted our financials. Given our scale and ongoing transformation, some quarter to quarter variability is expected as we true up revenue and Vin will provide further detail on these adjustments in his remarks. Looking ahead, we enter calendar year 2025 with positive momentum. On the reimbursement front, we were pleased to see Medicaid rate increases California and Pennsylvania for 2025 that appropriately reflected cost Additionally, our core medical cost trends remain in line with expectations. Driven by the success of our clinical initiatives.

As our more mature clinical value initiatives reach full impact, in the back half of the fiscal year, we see potential for additional financial upside. Taking a step back, we continue to see strong momentum in the PACE industry with steady growth in demand for services that enable seniors to remain safely in their homes rather than transitioning to institutional care. PACE remains a proven high value community based integrated care solution for seniors with complex care needs and we're encouraged by the continued expansion of the model nationwide.

Over the past 3 years, approximately 50 new PACE centers have opened across [indiscernible] a 16% increase from the roughly 300 centers operating in January of [indiscernible] We believe this sustained growth reflects the increasing recognition of PACE's value among policymakers, healthcare providers, and the communities we serve. Importantly, PACE has long enjoyed bipartisan support. And we believe the incoming administration will continue to champion its role in high cost senior care. As an industry leader, we remain actively engaged with our National Association [indiscernible] to shape policies that further enable PACE expansion. Ensuring more seniors can benefit from this model of care. Turning to our quarterly financials, we reported revenue of $209,000,000 for the quarter.

A 2% increase compared to the Q1. Center level contribution came in at $37,100,000 representing a 17.7% margin and a 7% sequential improvement. Adjusted EBITDA was $5,900,000 and census grew to 7,480. Reflecting approximately 4% quarter over quarter census increase. Our results demonstrate continued progress across key areas including top line growth, medical cost management, center level staffing cost, and SG and A, but for one time adjustments, which Ben will touch on in his section. This performance reflects the inherent seasonality of our business and as we continue to recapture margin, I'll remind everyone that our fiscal year guidance remains somewhat back end weighted. Overall, we are executing on our strategy and remain pleased with the trajectory of our business as we move through the second half of the fiscal year. I recently marked my 3rd anniversary of Benev H and it's been a moment of reflection on both how far we've come and the important work that still lies ahead. In many ways, the 1st 18 months were about stabilization aligning the organization around urgent priorities addressing critical compliance gaps, strengthening our quality and regulatory functions and restoring trust with our government partners. It was a challenging and intense period but we emerged stronger.

The following 18 months ending this past calendar year, we're focused on foundation building and optimization reinforcing core business processes elevating talent in key roles, enhancing financial discipline, and positioning the company for long term success.

This wasn't just about fixing the past, was about rediscovering our identity as a great company and proving that we could operate with consistency, excellence and confidence. Today, InnovAge is in the strongest position it has been in years. But we are not content with simply maintaining progress. The next 18 months will be about transformation, setting a bold vision for the future, challenging ourselves to work smarter, collaborate more effectively and scale in ways that drive sustainable profitable growth. This is about reimagining how we operate how we deliver value and how we fulfill our mission to provide exceptional care to seniors who rely on us every day. On the organic front, we continue to see steady progress. Our census increased to approximately 7,480 participants representing over 10% year over year growth compared to the second quarter of fiscal 2024. Our sales and marketing teams are strengthening workflows to better identify and engage prospective participants, while also expanding referral channels. To enhance the durability and predictability of future growth. This year, we've invested in technology to track and manage lead submissions in real time. Providing greater visibility into our pipeline. Additionally, we've developed new tools that improve the accuracy, and efficiency of assessing financial eligibility helping to streamline the enrollment process.

Regarding our de novo centers, our Tampa and Orlando centers continue to grow monthly enrollment, and we are encouraged by the shared mission of our exclusive joint venture partner in Orlando Orlando Health. And in Crenshaw, we eclipsed 100 participants this month. A significant increase from the 20 participants at the time of the acquisition a year ago. While still early in its growth trajectory, Crenshaw is an example of our ability to success transition them to our operating model and scale them effectively. That said, as I've mentioned in prior calls, state driven enrollment processing delays both for new enrollments and Medicaid redeterminations continue to impact certain markets. These delays can affect both our gross enrollment when applications are stalled and our net enrollment when Medicaid disenrollments and redeterminations take longer than expected, In California this quarter, these delays led to higher allowances against accounts receivable and corresponding write offs. The state has been a good partner and we're making every effort to reduce future exposure. We remain confident in our ability to drive sustainable census growth while managing variability in our financial results. A brief note on regulatory compliance activities. In California, the state audit processes remain open in Sacramento and San Bernardino.

We intend to provide updates as they become available. Operationally, our new President and COO, Michael Scarborough, has hit the ground running, bringing fresh thinking and a heightened level of rigor to our operations. His leadership is already driving momentum and I strongly believe his approach will translate into stronger operating and financial performance Michael's arrival has reinforced our confidence in the next phase of our transformation. Enabling us to take on higher impact initiatives over the next 12 to 18 months. Specifically, he's been evaluating ways to reimagine key operational areas through a technology first mindset. Such as sales and marketing, call center management, appointment scheduling and transportation. By leveraging innovative tools and empowering our staff, we aim to create a fully integrated ecosystem that connects participants, staff and providers more effectively across these functions. While we have not yet fully quantified the impact, we expect to incorporate these improvements into our fiscal 2026 guidance. As we continue optimizing our operating model, we are thoughtfully evaluating which capabilities to in source and where it makes sense to leverage partners Great companies strike the right balance. Owning mission critical functions that drive quality and efficiency while leveraging third party expertise in areas that are not core to their strategic value proposition.

In line with this approach, we recently acquired a small pharmacy in the Denver area marking an important step in bringing critical capabilities in house. By assuming direct control over pharmaceutical packaging and distribution, we believe we can enhance compliance, improve participant outcomes and increase satisfaction. While also reducing costs previously paid to third parties. Over time, we expect to unlock further value by integrating pharmacy services more seamlessly into our clinical care model creating an integrated end to end system from prescribing to last mile delivery Another key area of focus is provider network management. Where we have recently added an experienced dedicated leader to drive external network development and optimization. While we directly manage approximately 35% of our healthcare spend within our more than $400,000,000 in fiscal 2024 is spent on care and services outside our centers. Given the scale of the spend, see opportunity to improve quality, enhance care coordination and reduce costs by becoming a more sophisticated data driven partner to our providers. Beyond these specific initiatives, we remain laser focused on cost discipline across the organization. We see additional opportunities to drive efficiencies in standardization within our centers, while better leveraging our corporate G and A infrastructure as we scale.

Ultimately, all these efforts contribute to building a differentiated and highly scalable platform in the PACE market.

One that will not only strengthen our ability to grow organically, but also enhance our competitive position for future M and A opportunities. With PACE continuing to expand nationwide, we believe there will be compelling acquisition opportunities over time. Our goal is to position Innovage as the strategic partner or buyer of choice leveraging our platform to accelerate growth, enhance compliance improve participant experience drive incremental contribution margin. Turning to clinical performance, we continue to demonstrate strong management of external provider Compared to the Q1, external provider cost increased by 0.7% which was driven by an increase in member months and importantly a decrease in cost per participant. Given the seasonal pressures of flu, localized COVID resurgences in select communities, and persistently high utilization across the broader healthcare system our ability to contain cost growth reflects the strength of our proactive individualized care model.

By staying ahead of these challenges, we are effectively mitigating cost variability while ensuring high quality care for our participants.

I'm pleased with the steady progress we've made and the momentum we continue to build quarter over quarter. As we enter this next phase of our journey, we are not just fine tuning the business. You're fundamentally elevating it. You will challenge old ways of thinking, sharpen our execution and push ourselves to operate at a higher level Our vision is clear to build the leading PACE platform one defined by best in class people, processes and technology We're committed to delivering meaningful value to our participants, caregivers, regulatory partners and investors and we will execute relentlessly to achieve our full potential. With that, I'll turn it over to Ben to walk through our quarterly financial performance.

Thank you, Patrick.

Today, I will provide some highlights from our 2nd quarter fiscal year 2025 financial performance an insight into some of the trends we are seeing in the current quarter.

Starting with Sensus, we served approximately 7,480 participants across 20 centers as of December 31, 2024, which represents annual growth of 10.3% from the Q2 of fiscal year 2024. And sequential quarter growth of 3.7%. We reported 22,200 member months in the 2nd quarter, an increase of approximately 10.3 percent compared to the Q2 of fiscal year 2024. And an increase of approximately 3.8% over the Q1.

Total revenues of $209,000,000 increased 10.6% compared to $188,900,000 in the Q2 of fiscal year 2024.

Primarily driven by an increase in member months largely due to growth in our existing California and Colorado centers, and to a lesser extent the addition of our 2 de novo centers in Florida and the Crenshaw Center acquired from Concerto, in California.

Rates increased slightly when compared to the Q2 of fiscal year 2024, due primarily to the annual increase in Medicaid capitation rate. This was partially offset by an out of cycle Medicare Part C risk or TRU UP payment received in the prior year coupled with a change to our reporting methodology, which we previously disclosed in the Q4 of fiscal year 2024, We're effective July 1, a portion of what was recorded as bad debt in previous years is now recorded as revenue reserve.

Compared to the Q1 of fiscal year 2025, Total revenues increased 1.9% primarily due to the sequential increase in member months. Partially offset by a decrease in Medicare rates associated with decreasing risk scores as new patients are entering PACE with lower risk scores and disenrolling participants are leaving pace with higher risk scores. We also continue to experience delays and increased gas in eligibility with enrollment and redetermination applications particularly in the state of California, as a result of state and county agency processing delays and other enrollment and redetermination procedures. While these delays have not had a material impact on our financial results or operations, during the 1st 2 quarters of fiscal 2025. We continue to assess the situation. Despite these continued delays, We are pleased with our results for the first half of fiscal year twenty twenty five.

We incurred 100 and $7,900,000 of external provider costs during the Q2 of fiscal year 2025, an increase of approximately 6.8% compared to the Q2 of fiscal year 2024. The increase was primarily driven by an increase in member months. Partially offset by a decrease in cost per participant. The decrease in cost per participant was primarily driven by a decrease in inpatient assisted living permanent nursing facility and short stay skilled nursing facility utilization. Coupled with a decrease in external hospice care associated with the transition of this function to internal clinical resources. This was partially offset by an increase in inpatient unit cost an annual increase in pharmacy cost, and an annual increase in assisted living and permanent nursing facility unit cost. Compared to the Q1, external provider costs increased 0.7% The sequential increase was primarily driven by the increase in member months partially offset by a decrease in cost per participant. The decrease in cost per participant was due to pharmacy expense timing, coupled with lower utilization in permanent nursing facilities short stay skilled nursing facilities and assisted living facilities. Cost of care excluding depreciation and amortization, was $64,100,000 an increase of 17.9% compared to the Q2 of fiscal year 2024.

The increase was primarily due to an increase in member months coupled with an increase in cost per participant. The increase in expense was primarily driven by higher salaries, wages and benefits associated with increased headcount and higher wage rates, increased software license fees an increase in contract provider expense California associated with growth and de novo occupancy and administrative expense associated with opening centers in Florida and the 2 centers acquired from Concerto in California. Cost of care, excluding depreciation and amortization increased 1.1% compared to the 1st quarter. The increase was primarily due to an increase in headcount to support growth including contract providers in California, partially offset by lower recruiting costs supplies and administrative expense. This was partially offset by a decrease in cost per participant. Central level contribution margin which we define as total revenues less external provider costs and cost of care excluding depreciation and amortization, includes all medical and pharmacy costs, was $37,100,000 for the quarter, compared to $34,500,000 for the Q1 of fiscal year 2025. As a percentage of revenue, central level contribution margin of 17.7% increased by approximately 90 basis points in the quarter compared to 16.8% in the 1st quarter of fiscal year 2025.

Sales and marketing expenses of approximately $7,700,000 increased 31.5 percent compared to the Q2 of fiscal year 2024, primarily due to increased headcount and marketing to support growth. Sales and marketing expenses increased by approximately 18.7% compared to the Q1 of 2025 as a result of increased media investment, the introduction of a new retention focused direct mail campaign during the open enrollment period and additional spending to support growth. Corporate, general and administrative expenses of $28,100,000 increased 11.3% compared to the Q2 of fiscal year 2024. The increase was primarily due to an increase in employee compensation and benefits as a result of greater headcount and wage rates to bolster organizational capabilities, an increase in consulting expense primarily in support of the pharmacy acquisition an increase in fees associated with claims payment integrity audits an increase in software license fees and higher recruiting costs.

These costs were partially offset by a decrease in consulting expense Associated with improving organizational capabilities, including the transition to a new electronic medical record system, and a reduction in insurance expense. Corporate, general and administrative expenses increased by approximately 2.1% compared to the Q1. The increase was primarily associated with recruiting, consulting [indiscernible] and administrative expenses. Net loss was 13 $500,000 compared to a net loss of $3,800,000 in the Q2 of fiscal year 20 [indiscernible] We reported a net loss per share of $0.10 on both the basic and diluted basis, and our weighted average share count was approximately 135,400,000 shares for the quarter, on both the basic and fully diluted basis. Additionally, as we've called out in the earnings release, and construction in progress of approximately $8,500,000 related to halting development on our previously planned de novo center in Louisville, Kentucky, that we are no longer pursuing. It is important to note that this, combined with the previously disclosed one time Medicare true up payment in the fiscal Q2 of 2024 heavily impact current and prior period net loss comparisons. Adjusted EBITDA calculated per our previously described methodology was $5,900,000,000 for the quarter compared to $6,900,000 in the Q2 of fiscal year of 2024.

Our adjusted EBITDA margin was 2.8% for the 2nd quarter compared to 3.2% in the Q1 of fiscal year 2025. We do not add back losses incurred by our de novo centers in the calculation of adjusted EBITDA. De novo center losses are defined as net losses related to preopening and startup ramp through the 1st 24 months of de novo operations. For the Q2, de novo losses were $4,000,000 and are primarily related to our Baker's Field and Crenshaw Centers acquired from Concerto in fiscal year 2024, and our Tampa and Orlando centers in Florida. This compares to $2,200,000 of de novo losses in the Q2 of fiscal year 2024 and $4,100,000 of de novo losses in the 1st quarter. Turning to our balance sheet. We ended the quarter with $46,100,000 in cash and cash equivalents. Plus $40,800,000 in short term investments. We had $78,300,000 in total debt on the balance representing debt under our senior secured term loan convertible term loan and finance leases, For the Q2, we recorded negative cash flow from and have $1,300,000 of capital expenditures, We repurchased approximately 200,000 shares of our common stock for an aggregate of approximately $1,100,000 under the company's share repurchase plan.

During the quarter. We are reaffirming our fiscal year 2025 guidance we laid out back in September. Based on the information as of today, we expect our ending census for fiscal year 2025 to be between 7,300 and 7,750 participants. And member months to be in the range of 86,000 to 89,000 dollars We are projecting total revenue in the range of $815,000,000 to $865,000,000 and adjusted EBITDA in the range of $24,000,000 to $31,000,000 And we anticipate de novo losses for fiscal 2025 will be in the $18,000,000 to $20,000,000 range. Regarding the trends we are observing in the business, as we head into the second half of the fiscal year, First, we received calendar year Medicaid rate increases in California and Pennsylvania in the mid to high single digits. That went into effect January 1st. We are pleased with the results of the rate setting process this year and with the engagement of our respective state partners. 2nd, while still early, we are optimistic that our new retention focused efforts for the Medicare open enrollment period will prove beneficial and reduce patient churn as we continue into the fiscal Q3. Finally, we are continuing to assess the enrollment and redetermination delays we are experiencing in California, that we mentioned previously And we are closely monitoring this situation as it develops through the remainder of the fiscal year.

In closing, we are pleased with our results for the first half of fiscal year 2025. We remain focused on day to day operational execution and are mindful our participants are at the core of our work. We believe that the comprehensive and personalized model of care PACE requires positions us to provide a level of service that is unmatched in traditional Medicare Advantage and enables us to have greater visibility and consistency in medical cost trends despite the level of frailty, in the population we serve, Operator, that concludes our prepared remarks.

Please open the call for questions.

Our first question comes from the line of Jamie Purce from Goldman Sachs. Hey, thank you. Good afternoon.

Patrick, you mentioned in your prepared remarks that the next 18 months would be about transformation. You've obviously gone through the bulk of the regulatory matters. But no major updates there. You've opened the Florida facility, started down the road on M and A both facilities and support facilities on the pharmacy side. So what are you alluding to in terms of the transformation? Is it more of more of opening of facilities and building these capabilities and M and A or is there something beyond that that you're thinking about as as you go through this transformation process over the next 18 months?

Yes. Well, thanks for the question, Jamie. What I would say is it really begins with kind of reimagining how we do what we do. It isn't about it's not going to be about kind of optimizing kind of the traditional way of delivering services, as both a provider and a payer. One specific example would be we've got now have Epic in across all of our markets. It's a very powerful tool with AI capabilities as well as some more sophisticated operational capabilities. And so [indiscernible] greater productivity and efficiency in every aspect of our business is a big part of that. I would say, there are a handful of foundational business processes that really make up the core of what we do. And there are things like Placing orders for services. Scheduling those orders, transportation, customer service, These are all areas within the company that we've addressed regulatory deficiencies in them, but now we see an upper [indiscernible] really to integrate them, strengthen the participant satisfaction with each of them [indiscernible] drive operating efficiency in the company and therefore pushing for margin expansion through these things. Another area which you probably heard me talk about in the past, this notion of higher capabilities.

It's constantly reinforced in my mind that we're both a care delivery organization in a payer like Any other managed care organization. And there are certain tape capabilities that we've got opportunity around. And Michael Scarborough, who has a deep background in both provider and payer, is already identified opportunities in areas like our network management. Whether that is optimizing the network itself, optimizing unit cost, optimizing the data that we're sharing in order to provide more efficient services How we pay claims how we ensure we're not paying for anything that we shouldn't be, we're not being billed for anything that we shouldn't be. In some ways, it really is reimagining what the company has done in the past across all these key areas not just sort of fortifying and removing deficient in kind of older traditional processes. And as I said in opening remarks, it was not an overstatement With Michael's arrival, I think the confidence in our ability to take these things on is very high. And so we're going to going to kind of put our shoulder into it and we're going to spend the better part of the next few months really thinking through what are those opportunities, what's the value capture associated with them, what's what's the investment we would make, what's the return on that investment, talent we need to pull it off.

And we think all those things are really going to lead to us being an even stronger and better company over the next 18 months.

Okay, great. That's helpful color. And maybe one just on the funding model. I wanted to get a better sense of within the revenue per member per month, how much is funded by Medicare and Medicaid and what's driven growth historically between those two components And then within Medicaid, can you remind us the the funding mechanisms, just how much is funded by states versus federal matches? And you mentioned the favorable backdrop you've been in in with rate growth and it sounds like the PACE program growing overall across the country. You alluded to that continuing under the new administration. Is there something specific you can point to that gives you confidence in that? Or how are you assessing the new environment we're in?

Well, there's a lot there. I think I'll let Ben hit on his thoughts in terms of the mix between how we're paid But roughly speaking, I'd say, you're looking at probably a 3 to 1 Medicare excuse me, dollars 3,000 Medicare Part C, maybe $1,000 Medicare Part D, and then about $5,000 for Medicaid. That kind of gets you to that $9,000 per member per month mix. I don't know that I can speak to the federal match because it for the 5,000 because it varies by state, the match does itself.

But let's just say fifty-fifty is sort of a baseline and it can be maybe more or less by state. But I think that's sort of the mix there. As it relates to the broader market, I think that we've made some investments in sort of the government affairs function within the organization. We brought on John Kern, who's going to deep background in government programs and government relations. And as we engage with states, as we engage with the federal government, as we frankly begin to foreshadow the leadership in the new administration, we're consistently hearing the question Can pace serve more people?

Is there more that can be done to support PACE growth? And fundamentally, what we talk about without giving you like kind of the specifics, make it easier for pace to grow and expand into new markets, make it easier for individuals to enroll in PACE, make it as easy to enroll in PACE as it is Medicare Advantage. Remove that disparity that exists today between those two programs, for example, Rate adequacy, I wouldn't describe the rate environment overall as [indiscernible] 3 years that I've been here. But I would say this rate in the cycle, I think, the team and the industry have done a nice job getting the states to really understand what's driving our cost and ensure that we're receiving financially suitable rates to cover our cost of care and to cover the delivery of that care. So those are some of the things that I would say, I think it's just a real I think enthusiasm about KACE and where it can fit into the continuum of care. I think some of the maybe the the headwinds in the Medicare Advantage world, I think, have probably catalyzed some of those discussions. About can PACE be more of a solution than it is today And InnovAge isn't the only PACE program doing a great job demonstrating the value of the program.

Ben, do you think you want to come back and add right side of things? No, I think you pretty much hit it all. I would just say on the Medicare, Medicaid breakout, it's disclosed in the Q. If you take a look at Page 12 and 13 of the Q, it'll give you the breakout. It doesn't get into the math, but it gives you the breakout.

Okay, great. Appreciate the perspective.

Thank you. One moment for our next question. Our next question comes from the line of Jay Yes. Hey guys. Thanks for taking the questions. Maybe I'll ask one on the Medicare Advantage environment. Just thinking about all the disruption there as plans kind of scale back their offer and supplemental benefits. Just curious if anything changed in terms of guess, your messaging strategy in the market and how you communicate the value proposition of PACE services kind of relative to a lot of that disruption?

Yes. Thanks for the question. I wouldn't say anything has fundamentally changed as a result of the [indiscernible] in somehow advantaging pace as a result. I mean, the reality is Medicare Advantage Organizations have a lot of levers to pull to deal with headwinds. They have a variety of planned designs that they can adjust and pull back on. They have a variety of participant or patient caution sharing that they can adjust. They operate in various counties and jurisdictions and they can make slight adjustments there in terms of which plans are offered in which jurisdictions. Which can help them address headwinds.

I think last year, one of the fundamental headwinds that we faced was the notion of these cash value or cash benefit cards that Medicare Advantage Plans were offering that allowed participants to have access to funds to pay for a variety of services. That became a real challenge in our sales cycle last year And I'd say probably caught us a little off guard. This year, while those offerings are very much still in the market, and in pockets very much at the levels they were before, I'd say there has been some reduction in what we're seeing in the market. But we were very proactive prepared remarks that we had some marketing and advertising spend that was really intended to do what you said, which was get out into the market very early, well in advance of annual election period, begin educating our prospects and people that we had sort of in our pipeline and funnel on how PACE is different. What are the unique services we offer, how not to confuse them with similarly sort of labeled or characterized services within the Medicare Advantage market. And we think that helped us. I think that was a good investment.

I think it put us in a strong position going into it. We've seen Slightly stronger retention this year during AEP of existing participants. As well as I think laudable improvements in our enrollment itself through that period. So I think those were kind of the the primary Medicare Advantage I think dynamics at play.

Okay, great. I appreciate all the context there.

Maybe I'll ask one follow-up. Just on the impairment with the [indiscernible] sort of a market specific dynamic going on there or just a matter of reprioritizing to other opportunities in the pipeline?

Yes. Thanks for the question. What I would say is if you recall, InnovAge was awarded a New Mexico or excuse me, a Louisville opportunity I think in 2020. So it's been out there for a very long time. And then as a result of sanctions, our geography in Louisville was awarded to another PACE program. So another PACE program has been operating in that territory for over a year now. And as we begin working with the states to find a path into the market, we of course looked at at Louisville and would they be willing to allow competition in Louisville And we looked at other markets that they were interested in having a PACE provider participate. And ultimately, we determined there wasn't a viable path. To enter reenter the market after our slot was awarded. We naturally then explored opportunities for joint ventures We looked at opportunities to sell the assets that we had in the market And then ultimately, we decided that the best thing to do was to to exit it and to take the charge on the lease that we had there. And it's really, I think, cleaning up a legacy a legacy issue for the company going forward.

We still think Kentucky is a very attractive market. And we'll continue to look for opportunities, but we just don't see one in the short term. Anything you would add technically on that? No, I don't think so. I mean, Patrick said, we looked at a lot of different alternatives for the asset. All those things kind of wrapped up towards the end of the last quarter. At that point, the decision was made to write it off. Okay. Makes sense. That's very helpful. Thank you.

Our next question comes from the line of Matthew Gillmor from KeyBanc.

Hey, thanks for the question. Maybe asking about the out of period risk adjustment true up that you mentioned. I appreciate there can always be some puts and takes there on your accrual as you get more close things out. I was hoping you could maybe size it up just so we could understand how that impacted your revenue and EBITDA in the quarter?

Yes, you're talking about the year over year comparison because the out of period adjustment you're talking about happened last year. I think it was in October of last year. And that was actually really an out of period adjustment related to 2022. And it was effectively a Part C true up where we had an additional opportunity post COVID to go back and resubmit, which we did, which gave us a big one time benefit in Q2 of 2020 fiscal 2024. And we didn't disclose it at the time. So we're not disclosing that because we don't we have so many puts and takes on the risk score side that we don't go through the process of disclosing them. But if you look at the progression Quarter over quarter, if you were to take that out of the prior period adjusted EBITDA, you'd see a nice progression. Year over year. I think you can get a better sense of what the trend is if you take a look at the 6 month comparison numbers. Period over period. And again, the 6 month numbers from last year still include that final, final 2022 risk score true up. Will give you a better sense of the forward trend in EBITDA.

Got it. Fair enough. Thank you. And then on the on the pharmacy operations, I think you mentioned that you made an acquisition there and you had mentioned last call that you were assessing some opportunities was just hoping you could unpack that a little and give us a sense for sort of the the prior approach to pharmacy and how this acquisition will change things going forward and the benefit you might expect over time.

Yes. Maybe just to kind of set the context a bit, I would say that this notion of looking at our vendors and suppliers across our business, And determining whether These are services that we have the capabilities to do in house as well as a third party can do it for us has been an important part of what we've been doing over the last, I'd say, year plus. We've done this successfully with hospice, We've done this successfully with fleet management within our transportation We've done this with behavioral health, This has been done in the past with dentistry. So there's a lot of examples. This wasn't sort of a one off, but the reality is we got to a place where we said, let's take a hard look at kind of the division of responsibilities that exist between us and 3rd parties and said, with pharmacy in particular, we said that there is an opportunity here for us to take on on the day to day fulfillment oversight the packaging and distribution [indiscernible] [indiscernible] in some of the other logistics that go along with that, we felt confident that we could take that on and do it well.

If we were to identify the right asset, to pick up and we've done that. We're still in the transition period. So we're just now beginning to move our participants onto the new platform. There remains a set of services that are still provided by a third party and there are things that we think frankly they're best suited to do the call center inventory management, the pharmacy network management, Those are some things that we're very comfortable with 3rd party doing on our behalf. And we think as a result of this, we're going to improve the participant experience, We're going to have more control over the means of production as it were to support our compliance efforts. And [indiscernible] favorable economics associated with this as well. And over time, we'll have a better sense of what those could be. But this in some way is a little bit of foreshadowing the kinds of bolder moves we want to make. To really build our platform.

Got it. Thanks a lot.

Thank you. One moment for our next question. Our last question comes from the line of Benjamin Rossi from JPMorgan.

Hi.

Thanks for taking my question here. So first one here just on the back half EBITDA progression. So just in the context of your year to date adjusted EBITDA performance, my math here would imply a pretty strong back half EBITDA ramp at about maybe 60 bps at the midpoint presumably as your clinical and operating value initiatives contribute from lift. Can you just walk us through how you're thinking about EBITDA progression for the rest of Yes. I mean, I guess a couple of things.

I guess I would say in general, when you think about our EBITDA progression, It should be pretty linear throughout the course of the year. With one exception as we talked about in some of the prior calls, which is that the Q3 often has some seasonal softness to it. And that's related to the fact that we often have slower enrollment in the Q3 because of the competition for Medicare Advantage and other things in the open enrollment period. And then the other thing too is we had some have some seasonal softness too from increased utilization related to cold and flu season.

But if you think of just in general about our quarters is kind of steadily over the course of the year, probably a reasonable way to do the models. The CVIs, as you mentioned, they do start the year at 0. This year, we as you know, we have OBIs in the operational side as well as CBIs in clinical side. Those tend to build pretty steadily through the course of the year, but obviously, they're more impactful in the back half of the year. Than the first half of the year. We don't really break those out and size them specifically. If you sort of look at where we're running for the first half of the year, look at the guidance range that we put out there, you can sort of and some of the comments I made before about how the quarters progressed, you can sort of back into how we think that rest of the year might shake out Gotcha. Just as a follow-up on the Pharmacy appreciate the additional details as you build out that pharmacy platform. But just thinking about drug utilization within your Medicare populations, the Part D out of pocket maximum now down to $2,000 a year.

How are you thinking about the potential impact here to pharmacy costs as you roll out this new model?

I'm not sure about can't claim that I've got the answer all hand on that one. I think that one might be one we need to get back to you. But let me ask Rich if he just has any broader thoughts about our pharmacy management program in that context. Yes.

Thanks, Patrick.

Look, we're really excited about having even better integration between our care teams in our centers and the pharmacy.

Our prior pharmacy experience was solid, but the more we can integrate, the more we can look for opportunities to improve service, satisfaction, quality and also savings because there are plenty of opportunities where we can look to to choose more cost effective medications And we're looking at that across the board, whether it's part of Part D or even medications that roll into Part C. So there's opportunity on the horizon. We're discovering more each and every day. We haven't really sized all of it yet.

And so there'll be more opportunity as time goes by.

Got it.

To get back with you on that answer. I just we're fully capitated for our pharmacy benefit. Some of the typical stacking of corridors and things like that on Part D don't apply.

Got it. Sounds great.

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