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agilon health, inc (AGL) Q3 2021 Earnings Call Transcript

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AGL earnings call for the period ending September 30, 2021.

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agilon health, inc (AGL -2.48%)
Q3 2021 Earnings Call
Oct 29, 2021, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello, everyone, and welcome to today's agilon health Third Quarter 2021 Earnings Conference Call. My name is Emily and I'll be coordinating the call today. [Operator Instructions]

I will now hand you over to our host Matthew Gillmor, Vice President of Investor Relations. Matthew, please go ahead.

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Matthew Dale Gillmor -- Vice President of Investor Relations

Thank you, operator. Good morning and welcome to our third quarter conference call. With me this morning is our CEO, Steve Sell; and our CFO, Tim Bensley. Following prepared remarks from Steve and Tim, we'll conduct a Q&A session.

Before we begin, I'd like to remind you that our remarks and responses to questions may include forward-looking statements. Actual results may differ materially from those stated or implied by forward-looking statements, due to risks and uncertainties associated with our business. These risks and uncertainties are discussed in our SEC filings. Please note that we assume no obligation to update any forward-looking statements.

Additionally, certain financial measures we will discuss on this call are non-GAAP financial measures. We believe that providing these measures helps investors gain a better and more complete understanding of our financial results and is consistent with how management views our financial results. A reconciliation of these non-GAAP measures to the most comparable GAAP measure is available in the earnings press release and Form 8-K filed with the SEC.

With that, I'll turn things over to Steve.

Steven Jackson Sell -- President Chief Executive Officer and Director

Thanks, Matt. Good morning and thank you for joining us. We're hosting today's call from Pittsburgh. Before I get to the details of the quarter, I'd like to take a minute to discuss the positive results from our partnership with a leading independent physician group in this community Preferred Primary Care Physicians, which has served the greater Pittsburgh area for nearly three decades.

In 2019, we collectively established the Preferred Senior Care Advantage line of business and moved all of the group's Medicare Advantage patients into a total care model, in which the primary care physician is responsible for a senior patient's total health. In just two years, Pittsburgh has become one of agilon's most successful markets and speaks to our ability to serve diverse geographies.

Pittsburgh is a unique market in several ways. Medicare Advantage is the predominant product with a penetration north of 60% and the majority of coverage in specialty care is delivered through two regional health plans with integrated provider capabilities.

Against this backdrop, our partnership with Preferred has yielded impressive quality, experience and cost results. 80% of Preferred's MA patients receive recommended cancer screenings and 90% are adherent to medications for cholesterol, blood pressure and diabetes. Both indicators are in line with five-star level care.

Our concentrated scale in this geography and Preferred's long history in this community have enabled us to do creative things, like execute on a Preferred skilled nursing facility strategy that drives length-of-stay reductions and improves hospital readmission rates.

In April 2021, we further strengthened our local scale and partnership through the Direct Contracting Program. Now all of Preferred's senior patients are supported by agilon's total care model. The high-touch, high-visibility model used by Preferred has delivered world-class patient and physician Net Promoter Scores of 80-plus-percent and a medical cost structure well below the community benchmark average.

As a result, MA growth has been 3 times that of the overall market and medical margin has accelerated faster than we have seen in prior year two markets. Our success in Pittsburgh reflects the power of the agilon platform and partnership model to get smarter, drive accelerated success in our newer markets and export these learnings to diverse markets across the country.

Now to the focus of our call. I will cover four areas in my prepared remarks. First, highlights from our third quarter results; second, our 2022 membership outlook; third, an update on our pipeline for the class of 2023; and fourth, an update on Direct Contracting in the broader federal policy environment.

Starting with a few highlights from the quarter. We were again pleased with our performance, both in terms of growth and medical margin. Our results were especially encouraging, given broader dynamics around medical costs and the Delta variant.

Total members live on the platform increased 83% to 237,000, including 184,000 Medicare Advantage members and 53,000 Direct Contracting beneficiaries. Our consolidated Medicare Advantage membership increased 43%, including 15% growth within same geographies. Same geography growth was again broad-based and continues to benefit from our ability to be a first-mover and purposely deploy a focused strategy in geographies that are earlier in their MA penetration life cycle.

The growth in our MA membership, translated into 47% year-over-year growth in total revenue. Medical margin was $43 million in the third quarter or 9.5% of revenue, reflecting a year-to-date medical margin PMPM of $93.

We were pleased with this performance, which was slightly ahead of our expectations and consistent with the leading operational indicators we use to help manage the business.

We did observe an increase in COVID costs, due to the Delta variant surge in numerous geographies. This was offset across the agilon network by lower non-COVID costs, including lower utilization of inpatient and skilled nursing facilities.

Our ability to drive medical margin improvements and predictable quality outcomes, despite macro volatility is a function of our platform and physician-centric partnership model.

Our partnership model with existing physician groups creates a unique level of proximity to a primary care physician, leverages an established relationship between patient and doctor, syncs practice economics with patient outcomes and provides a level of scale and history in a local geography to influence the healthcare system locally.

Our platform is uniquely developed and leveraged through these partnerships to impact multiple levers that are central to the success of operating a value-based Medicare model. We continue to increase our focus on how we influence the way patients access the healthcare system, beyond the primary care physician's office.

Through the agilon platform, we leverage algorithms to better identify specific cohorts of patients or physicians, stratify where care should optimally be delivered within that network and deploy the clinical support alongside our partners to drive sustainably lower cost and improved quality.

Two recent examples where our investments in, connecting data to clinical process is translating to changes in how care is delivered differently. First, in Buffalo and Columbus we have implemented a palliative care program for patients at end of life to improve the experience for the patient and the family while avoiding an in-personal and costly healthcare stay in the hospital.

And second, in multiple markets across multiple specialties we have redefined the specialist network, to tier providers based on quality and meaningful improvements in the use of our highest tier network.

Turning to our preliminary 2022 membership outlook, we project total members live on the platform including Medicare Advantage and Direct Contracting will increase more than 45% in 2022. Tim will provide details in a few moments, but I did want to call out some key drivers of that growth in both MA and Direct Contracting.

First, in Medicare Advantage, we now anticipate higher membership in our new geographies, reflecting progress with our implementation work and better visibility with health plan contracting. Additionally, we see continued strong momentum in same-geography growth. This is driven in part by a growing and powerful local network effect.

Community-based physician groups in our existing geographies are choosing to join the agilon platform. Our role in introducing risk for the first time in these markets provides a first-mover advantage, that along with the success of our partners is attracting more groups to the agilon network.

We believe more physicians joining the platform in our same geographies will be an important growth driver over the next several years. Second, as it relates to Direct Contracting more of our partners are seeing the benefits of operating a single, Medicare line of business encompassing MA and Direct Contracting.

This creates a single experience for the physician and allows our partnership to maximize the scale advantage we have within a market, allowing us to proactively shape the senior patient's healthcare journey and effectively manage cost, quality and experience across both programs.

Partners in four additional markets will join the Direct Contracting program in 2022, bringing us to a total of 10 of 17 markets with both Medicare Advantage and Direct Contracting.

Moving to the 2023 new geography partner pipeline. We continue to make great progress and the structural interest in high-value primary care has never been stronger among providers. On the back of growing MA penetration demographic changes that challenge physician practice economics and the adoption of value-based care models like Direct Contracting, we are seeing broad-based interest in our partnership model from a diverse set of geographies and a diverse group of partner organizations.

We have now signed definitive agreements and letters of intent for groups in new and existing states. We have begun implementation work for several of these new partners, which will help us drive strong performance out of the gate. We will enter new states in 2023 and will immediately apply our hub-and-spoke model to unlock additional markets within those states.

In Ohio, it took us just three years to expand from Columbus to four other cities. We think there is potential to move even faster within some of our newer states given our successful track record and growing network. Overall, we are very confident in our ability to execute against our new market growth objectives for 2023 and look forward to providing details during our next earnings call and this corresponding Analyst Day.

Let me close with an update on Direct Contracting performance and the broader policy environment. We are encouraged by the early results in this new program. We are seeing the leverage and scale benefit from operating a single consistent approach across all senior patients sooner than we had expected.

In Q4, we will receive interim updates on two critical elements specific to the program; the retroactive trend adjustment and the coding intensity factor. We have incorporated a reserving estimate for these elements within our Q3 results, but continue to work with the innovation center on improving the visibility and predictability of these annual program components that will not be finalized until mid-2022. As a result our Q4 forecast has a cautious outlook on the program's expected financial performance in 2021, but we do foresee the potential for Direct Contracting to be a larger contributor to our long-term financial performance.

On the broader policy front, it has been a productive last quarter in advocating for the funding and expansion of high-value primary care and we have seen positive movement in both near and long-term commentary from key policymakers. On October 20, the Medicare Innovation Center released its refresh strategy for the next decade, which embraces total cost-of-care models and centrally positions accountable care and advanced primary care as core elements of innovation.

With this release, CMMI embraced a recent National Academy of Medicine report that declared high-quality primary care as the foundation of a high-functioning health system and the key to improving population health, improving the experience of patients and core care teams and reducing costs. This language has been a centerpiece of our work as part of the Primary Care for America coalition. While the strategy itself does not speak to the future of the Direct Contracting model, we have been encouraged to hear the agency staff speak publicly about plans for expanding the program with a potential 2023 cohort and their willingness to consider economic adjustments that will improve long-term financial stability for participants.

With that I'll now turn the call over to Tim.

Timothy S. Bensley -- Chief Financial Officer

Thanks Steve and good morning, everyone. I'll review some highlights from our financial statements and provide some additional details on our updated guidance for 2021 and our membership outlook for 2022. Starting with our membership growth rate for the third quarter. Total members live on the agilon platform increased 83% on a year-over-year basis to 237,000 including both Medicare Advantage and Direct Contracting.

Our consolidated Medicare Advantage membership increased 43% to 184,000; and Direct Contracting members ended the quarter at 52,000. While our Direct Contracting members are not consolidated in our financial results, we wanted to provide a clearer view of the total members on the agilon platform as this better reflects our growth and scale.

For our Medicare Advantage membership, our growth rate was driven by two factors. First, the impact of three new geographies that went live in January, Hartford, Buffalo and Toledo, which now have approximately 36,000 members; second, strong growth within our same geographies, which was 15% for the quarter. Revenues increased 47% on a year-over-year basis to $459 million. Year-to-date revenues increased 53% to $1.37 billion. Revenue growth was primarily driven by membership gains in new and existing geographies. On a per member per month basis or PMPM, revenues increased 2% during the third quarter.

Medical margin was $43 million during the third quarter compared to $51 million in the prior year. On a year-to-date basis medical margin was $151 million compared to $165 million during the same period last year. The year-over-year change in medical margin primarily reflects the lower utilization experienced in 2020 due to the COVID pandemic.

On a PMPM basis, medical margin was $79 or 9.5% of revenue. Utilization during the third quarter of this year was in line with our expectations with higher COVID costs offset by lower utilization of inpatient and skilled nursing services. Our COVID costs peaked in August and early September, but remained below levels from early 2021. COVID costs subsequently moderated during the second half of September and into early October.

Network contribution, which is medical margin after surplus sharing with our physician partners, was $17 million during the quarter compared to $26 million in the prior year. On a year-to-date basis network contribution was $72 million compared to $90 million last year. The year-over-year decline in network contribution reflects the impact COVID had on our prior year medical margin, as well as the relative contribution of medical margin across our geographies.

Platform support costs, which includes market and enterprise level G&A, increased 32% to $34 million. On a year-to-date basis platform support costs increased 25% to $93 million. The growth in our platform support cost remains well below our revenue growth and continues to highlight the light overhead structure of our model. As a percent of revenue platform support was 7.3% during the third quarter, down from 8.1% in the prior year.

Adjusted EBITDA for the quarter was negative $14 million versus positive $2 million in the prior year. On a year-to-date basis, adjusted EBITDA was negative $12 million compared to positive $18 million last year. Adjusted EBITDA for the quarter includes $1.5 million in net contribution from our Direct Contracting entities. The margin performance for Direct Contracting continues to run ahead of our expectations, reflecting modest favorability to revenue and better visibility into costs. While we continue to expect margins for Direct Contracting will be below Medicare Advantage over the long term, we have been encouraged with our performance to date.

We ended the quarter with a strong balance sheet position and we remain well capitalized. As of September 30, we had $1.1 billion of cash on hand and $50 million in outstanding debt, which is essentially unchanged from the second quarter. Cash flow from operations was negative $19 million for the quarter, which was in line with our expectations.

Turning now to our guidance for 2021 and our membership outlook for 2022. For the full year 2021, we have increased our Medicare Advantage membership outlook to a range of 185,000 to 186,000 and our revenue outlook to a range of $1.82 billion to $1.825 billion. We have also increased our adjusted EBITDA outlook and now expect a loss of $40 million to $37 million. We continue to expect utilization will approach pre-COVID levels as we close the year.

As Steve mentioned, we expect another strong year of growth in 2022. We project total members live on the platform, including Medicare Advantage and Direct Contracting will increase over 45% by year-end 2022. We expect our consolidated Medicare Advantage membership will increase more than 40% and Direct Contracting membership will increase by 60%. Based on our 2021 membership outlook, we expect total members live on the platform will increase to over 340,000 in 2022.

For Medicare Advantage, our 40% growth outlook assumes 50,000 members from new geographies and low to mid-teens membership growth within same geographies. For new geographies, we anticipate onboarding approximately 49,000 members in the first quarter and this should build to over 50,000 as the year progresses due to attribution-working commercial agents.

For same geographies, we expect to benefit as more physician groups join the agilon network through our anchor partners. In aggregate, we would expect to end 2022 with more than 260,000 Medicare Advantage members. For Direct Contracting in 2022, we are now able to share that approximately 30,000 to 35,000 attributed beneficiaries from seven partners will join the program in January. This will bring our total Direct Contracting members to 80,000 to 85,000 entering 2022. For Direct Contracting, we would anticipate some moderation in our membership as we move through the course of the year.

With that we're now ready for your questions. Operator?

Questions and Answers:

Operator

Thank you very much. [Operator Instructions] Our first question comes from Lisa Gill from JPMorgan. Lisa, Your line is open.

Lisa Christine Gill -- JPMorgan Chase -- Analyst

Thanks very much and good morning. I just wanted to go back to the comments around utilization and just make sure that I understand your expectation for both the fourth quarter as well as going into 2022. Tim I heard you talk about the fact that you expect to go back to pre-COVID, as we close out the year. Can you just remind us what that would mean from a utilization perspective? And then you talked about COVID offsetting non-COVID during the quarter. Do you see any pent-up demand that will flow through to 2022?

Steven Jackson Sell -- President Chief Executive Officer and Director

Yes. Thanks, Lisa. So composite utilization was in line with our expectations in the quarter as we said. That was despite this COVID surge that Tim and I talked about in August and September, and we saw that across the majority of our geographies. There was this non-COVID offset most significantly in terms of inpatient and SNF reductions.

Outpatients is back up to that 2019 baseline and we did see elective procedures up in the third quarter. As we look toward Q4, we expect that that baseline is going to return in that composite utilization toward the 2019 trend overall, and will continue into next year. So that's how we're looking at it. Tim?

Timothy S. Bensley -- Chief Financial Officer

No I think that's right, Steve. I mean I think if you -- if you just think about exactly what Steve said, we did see COVID utilization jump up. Although that as I said in my prepared remarks, that's really moderated quite a bit in the second half of September and now into October from what we're seeing. And again that was more than offset by non-COVID kind of acute utilization.

In terms of how much pent-up demand. I mean perhaps the increase that we're seeing in elective outpatient procedures might be an indication of some of that catching up now. Although, again, overall the composite utilization we've seen, although increasing in Q3 is still below 2019 baseline. We are seeing that number increasing though. And so we just want to be clear that as we move into the fourth quarter we are expecting the composite utilization to continue to approach and move back to 2019 baseline and that's reflected in our Q4 guidance.

Lisa Christine Gill -- JPMorgan Chase -- Analyst

Okay. Great. And if I can just sneak one more in. You talked about Direct Contracting now in 10 of the 17 regions that you're in. Is the goal over time to have Direct Contracting in all of the regions that you have physician membership?

Steven Jackson Sell -- President Chief Executive Officer and Director

Well, Lisa, we certainly see the benefit and our partners are seeing the benefit of operating a single line of business for their over 65 senior Medicare population. And it gives us tremendous leverage and scale benefit, when we're able to do that both within the primary care practice. And then in terms of downstream costs, in terms of specialty care, in terms of palliative care. And so that is certainly something that we're driving toward.

I think as we think about 2023, we believe you'll see a similar pattern to what we talked about in terms of the class of 2022, in that some of our existing geographies that are in MA but don't currently have Direct Contracting will add that. And then some of the new entrants and new geographies for 2023 will start with both MA and Direct Contracting on day one and year one.

So our goal is to get more geographies to have MA and Direct Contracting side by side. And I think it just gives us those benefits in terms of experience in terms of predictability. It really leverages our partnership model. And so that's what we're working hard on. And what I tried to called out in my prepared remarks is we're seeing a lot of interest from groups around the country in doing both of those side by side.

Lisa Christine Gill -- JPMorgan Chase -- Analyst

Great. Thank you for the comments and congratulations on a great quarter.

Steven Jackson Sell -- President Chief Executive Officer and Director

Thank you.

Timothy S. Bensley -- Chief Financial Officer

Thanks, Lisa.

Operator

Our next question comes from Justin Lake from Wolfe Research. Justin, please go ahead.

Justin Lake -- Wolfe Research -- Analyst

Thanks. Wanted the first follow-up on Direct Contracting. It sounds like you booked a return there or positive results in the second quarter and the third quarter. What are you -- what is kind of in your guidance in terms of assumption for the fourth? Is it kind of to return to breakeven so kind of losses in the fourth quarter?

And then I'm curious you mentioned the true-ups in the fourth quarter around risk adjustment especially. I'm curious with those true-ups how close is the risk scoring of a -- in the revenue of a DCE patient to a Medicare Advantage patient in terms of -- effectively how close do you get from a risk scoring perspective to kind of with that maximum revenue that you're able to get out of a Medicare Advantage pace? Because I know that was a big question as we went through DCE.

Steven Jackson Sell -- President Chief Executive Officer and Director

Yes. I mean there's a lot in that question Justin. First let me start by saying we are encouraged right? We are seeing results in the first two quarters with the program that went live in April that are ahead of our expectations. The back half of your question there is a natural cap on the risk adjustment factor in the Direct Contracting program. And so most of the better-than-expected performance is based on lower medical costs.

There's two factors that we are awaiting updates on. One is the retro trend factor which is a relationship between your local trend in the six markets that we're in right now versus a national trend. And so if your local trend is lower than the national trend when everything is rolled together at the end there will be an adjustment in your revenue. That is separate from the second factor which is the coding intensity or RAF factor that you talked about.

Both of those will get resolved in the middle of next year. We will get interim updates on it. I think as we said we're encouraged by what we've seen, but we really need to go through a full cycle with this program to be definitive around that. And then you want to talk about guidance for Q4?

Timothy S. Bensley -- Chief Financial Officer

Yes. Good morning, Justin. Yes, I think, that's all right, Steven. And kind of just follow-up on the end of that and then I'll talk about the first half of your question. I mean, we are of course constantly looking at our numbers examining them. We stay in contact with CMMI and we're trying to stay as close as possible to where we think those adjustments might come out and of course bake that into our results. But as Steve said we won't really know the final numbers until sometime into mid next year.

In terms of performance yes, exactly right. I mean we booked about $4 million of positive EBITDA contribution from Direct Contracting so far this year $1.5 million of that in Q3. I'm very obviously encouraged by the results particularly as we get better visibility to claims. We're seeing better overall cost performance in Direct Contracting. And with that rather than kind of an overall impression of Direct Contracting being in the breakeven area for the full year and we would expect Direct Contracting to be most likely around breakeven for the fourth quarter now.

Justin Lake -- Wolfe Research -- Analyst

Got it. That's helpful. And if I could squeeze in one more. The I know you've talked about I believe giving us an update on the kind of the maturity curve of your markets over time. And I think you said you'd try to do that by the fourth quarter. I was -- without getting specific I was curious just what should we expect there? Is there going to be is there -- has there been variability? Or do you feel like there's been a pretty consistent curve so that when we see that it's following that archetype model that we've heard about during the IPO process?

Steven Jackson Sell -- President Chief Executive Officer and Director

Yes. No, Justin thanks for the question. I mean I think we're seeing a cohort maturation and improvement in our partner markets, particularly in our earlier markets we're sitting here with the Pittsburgh team in a year two market, but the class of 2021, the class of 2020, class of 2019 are all accelerating at rates faster than what we had sort of initially projected as we look at that.

And I think that portends well as we move into 2022. We will give that update on the Analyst Day that will immediately follow our Q4 call and kind of walk through that. And then we're looking at making investments in our non-partner market of Hawaii to get that to see the similar sort of trajectory that we're seeing in these partner markets. So, that's sort of the way that that mix is kind of coming together.

But I think the power in this partnership model and then the scale benefit that we're getting with adding Direct Contracting more the ability to be able to invest in the programs that are the biggest cost drivers in the over 65 Medicare population like end of life and the examples that we gave like the skilled nursing facility program we've got here in Pittsburgh can really impact that.

Justin Lake -- Wolfe Research -- Analyst

Great. Thanks for the color.

Operator

Our next question is from Ryan Daniels from William Blair. Ryan, please go ahead.

Ryan Scott Daniels -- William Blair -- Analyst

Yes. I wanted to ask a bit of a follow-up question to Gary's. Looking at the cohort models and the advancements you've seen there number one. And the fact that it appears that once you're in a market, you really get a first-mover advantage, meaning both same-store growth and adding new groups and physicians and then the additional value with Direct Contracting.

I'm curious philosophically how that changes your intermediate or longer term thoughts on new market ramp, meaning that markets are probably more valuable and doing better than they were just a few years ago. So, how do you balance kind of the consistent growth work versus the ability to get a first-mover advantage in a market?

Steven Jackson Sell -- President Chief Executive Officer and Director

Well, we like being that first mover Ryan. Thanks for the question. And I think as we -- with the class of 2022 and as we look at the class of 2023, we're seeing more interest from diverse geographies and diverse partners where we could be that first mover.

So, we are full speed on that. Our business development team is making great progress on that as I talked about it. But I do think that part of our update to you on 2022 membership really reinforces the power of the same geography growth. The critical scale that we're starting to reach in these communities 15%, 20%, 25% of the adult primary care capacity in these markets, the ability to leverage across a practice's commercial business doesn't run through our P&L. But when we start to do referral programs like the specialists can impact that is super powerful.

And that is what we believe is driving some of the acceleration. Our platform is getting smarter. The Pittsburgh team in year two, the Pinehurst team that's implementing for January 2020 to go live are benefiting from the learnings that have gone along the way.

So, it's a balance, but we're pushing hard on both fronts. This local network effect that I talked about within the same geographies is something that's accelerating. I think it's driving 2022 growth. I think it's going to drive our growth for a long time in addition to landing in new geographies as a first mover.

Ryan Scott Daniels -- William Blair -- Analyst

Okay, that's very helpful. And then as a follow-up a little bit different question. Thinking about the investment opportunity for the company in two regards; one you're sitting on more than $1 billion in net cash; and number two, there's probably an ability to advance internal technologies and infrastructure. So, I'm curious if you could just speak a little bit to kind of capital use both internally and maybe through non-organic investments. Thanks guys.

Steven Jackson Sell -- President Chief Executive Officer and Director

Yes, sure Ryan. So, capital use, first, its growth, right? Our partners sit in these geographies and they have the ability to add additional physicians and improve access within those communities and that's part of what's fueling that growth. So, that will be a use of capital for us going forward. The investments in the platform will be another critical area for us both from a technology perspective. Once you've got this partnership and you've got this great patient physician relationship and a partner like Preferred, who understands the market, the ability to provide them with actionable information around patient data, physician data, where care should be delivered is extremely powerful.

So we'll be investing more in technology and then clinical, right? As we're getting to scale what are the clinical investments we want to be making around palliative around skilled nursing facility partnerships, etc, that can really drive that. So those are all the areas that we're looking at right now. M&A is a possibility for us. There's nothing that we're prepared to talk about right now.

Operator

Our next question comes from Kevin Fischbeck from Bank of America. Kevin, your line is open.

Kevin Mark Fischbeck -- BofA Securities -- Analyst

Great. Thanks. I was wondering, if you could talk about the competitive environment a little bit. It seems like more and more companies have gone public this year raked a lot of cash. Obviously, the managed care companies rolling this out. It sounds like you're having a lot of success in hiring new doctor groups, but can you just talk a little bit about the competition for those groups? If you don't win a group, what is it that they're looking for that you're not able to get? And then beyond just hiring these anchor or getting these anchor groups on board the competition for these local physician groups adding in. Any color there? Thanks.

Steven Jackson Sell -- President Chief Executive Officer and Director

Yeah. No thanks for the question, Kevin. I mean, I think the momentum that we're seeing with this local network effect with the success of our partners locally and nationally is fueling the acceleration the same geography growth that we talked about and the interest in the new geographies.

From a competition perspective, we are not finding ourselves in a lot of competitive situations. We do have the top of the funnel with more and more groups talking to us about an interest in making this move, because of the macro factors that I talked about are really tailwinds toward the move toward value. So I think that, the biggest competition we typically face is inertia, and probably not going to make that decision this year. But even that is shortening Kevin based on those macro factors I talked about, and the power of what we've been able to demonstrate with our network and that sort of reference capability.

Kevin Mark Fischbeck -- BofA Securities -- Analyst

That's helpful. I guess to that, inertia point, I mean, would you expect a bolus of these new additions to be really the next kind of three to five years? Because it seems like there's a lot of momentum behind moving to these types of payment models. And I wonder, what would cause the physician group to make that decision in 10 years rather than the next three to five?

Steven Jackson Sell -- President Chief Executive Officer and Director

Yeah. I mean the delays are typically a year, right? We do this on an annual cycle, right? And so you would join on January 1st. It's a year maybe two years. But I would agree with your thesis that, I think you're going to see a tremendous acceleration in same geography over that three to five year period. And I think you're going to see us in many more new geographies over that period of time.

Kevin Mark Fischbeck -- BofA Securities -- Analyst

All right. Great. Thanks.

Operator

Our next question comes from Stephen Baxter from Wells Fargo. Stephen, please go ahead.

Stephen C. Baxter -- Wells Fargo -- Analyst

Yeah. Hi. Thanks. I was hoping you could talk a little bit more about the same geography outlook you provided for 2022. It feels like it should look more like this year than sort of the overall MA growth rate of 10%. I was wondering, how we should think about how much visibility you have into that growth rate at this stage? How much of it is coming from physician recruiting? How much of it comes from MA conversions from fee-for-service? How much of it is just coming from the growth of the market? I'd love to understand that a little bit better.

Steven Jackson Sell -- President Chief Executive Officer and Director

Yeah. So, I mean, 15% same geography growth year-to-date in 2021. Super pleased with that, the components that drive that, Stephen. Obviously, the organic growth in which existing patients in these practices that are turning age 65 choose Medicare Advantage or fee-for-service folks that move over. That's kind of the bread and butter. And we tend to do a little bit better than the local growth rate, just on that component alone. Given the shop-and-compare program we've got the retention rates that we're able to get the multi-payer experience. What's becoming a growing piece of this, is this improvement in access and other physicians joining locally. That's the biggest part of that 20% to 40-plus percent growth in MA and 45% growth overall in terms of membership is really the visibility.

We know who those groups are that are joining in January. We know those groups are who are joining further out in the year. The timing might slide a quarter one way or other but we have those groups are effectively in an implementation period of their own right now. And so that visibility forward to 2022 and even into 2023 is really pretty strong around that. And that will be a continued driver of same geography growth. That's why we've talked about, low to mid-teens same geo growth on a kind of sustainable basis.

Stephen C. Baxter -- Wells Fargo -- Analyst

Got it. And then just a question on DCE. I guess would love to just know a little bit more about like what's the decision point for physicians about whether they're going to participate there. I mean they're clearly bought into the model on the Medicare Advantage side. So I guess, what is it if they're not participating in DCE like what's giving them holdup? And then just can you confirm again like if it's not a downside protection question it sounds like that's still provided. I guess what would keep them from wanting to take risk on that population as well?

Steven Jackson Sell -- President Chief Executive Officer and Director

Yes. I mean it's kind of a couple of factors that could have a group make a decision not to go. So we had two groups that did not go live in April, existing MA groups that went live in January. And in one case they were below a member threshold. You have to have 5,000 within a Direct Contracting Entity. And so they were too low. And so by January they were up above that. So that's just kind of a technical thing that affects that. In other situations, we've had people sitting with an ACO with local systems and others.

And so they want to get to a point at, which they could make the move beyond that. All of our partners have had their patients in an ACO and they're making the move into Direct Contracting. So by definition you're making that move over and some of those local dynamics could affect that. But I said sort of earlier, to Lisa's question, in 2023 I think we'll see more of the seven current markets that are in MA but not in DCE make that move into Direct Contracting. And then I think we'll have new geographies that will come on with both.

Stephen C. Baxter -- Wells Fargo -- Analyst

Got it. And just one last follow-up on that topic. Would love to just -- could you remind us why does it you can't consolidate those results today but you obviously can consolidate the Medicare Advantage results? And do you think this is something that could change at some point down the road? Thank you.

Timothy S. Bensley -- Chief Financial Officer

Yes it's something that we could certainly consider in the future. I mean at this point, we specifically set up the governance and the structure of the DCEs to not consolidate part of it. As we talked about earlier in the year, it was just around an abundance of caution of hey this is a new program. We're not sure exactly where it's going and we thought it made more sense to do it in an unconsolidated governance structure. And so that is specifically the way that we set it up. Is it something that we could revisit in the future? I mean, yes once -- if the program stabilize and out in future years we could certainly revisit that decision.

Steven Jackson Sell -- President Chief Executive Officer and Director

Yes. I think getting through a full turn in the annual program is going to give all of us a lot of visibility to all of these components and how this plays through. We're encouraged for all the reasons we've talked about but we need to learn more.

Operator

Our next question comes from Gary Taylor from Cowen. Gary, please go ahead.

Gary Paul Taylor -- Cowen and Company -- Analyst

Hi. Good morning. Three quick questions. As I look at your 2022 membership guidance it's a little ahead of our expectations which is great. But I want to make sure I just understand the implications of that. When we think about the modeling and newer cohorts coming in at higher medical service expense to the extent you're guiding above expectations on membership we should think percentage medical service expense in a vacuum higher but dollars of medical margin in a vacuum higher. Am I thinking about that, correctly?

Steven Jackson Sell -- President Chief Executive Officer and Director

I think that's correct right? So we will have higher 2022 membership. There is a dilutive effect of these members coming on. So they come on at a lower medical margin. They historically have come on at a loss to breakeven from an EBITDA perspective. And so we would expect some of that dilution. So as a percent of revenue, you are correct in the way you characterize that. In terms of total dollars, you are right that medical margin dollars would be higher as a result of that.

Gary Paul Taylor -- Cowen and Company -- Analyst

Got it. And then my other question was I think Tim said a $1.5 million Direct Contracting contribution to adjusted EBITDA this quarter. And I'm just trying to understand that versus the 10-Q disclosure that shows a touch worse than breakeven. So are there just -- is the difference just new geography adjustment for DCE?

Timothy S. Bensley -- Chief Financial Officer

It is. And so if you look at the disclosure you're looking at Note 4 that has a slight loss on a net income basis and then you just refer back to the back of the Q where it shows the net income to adjusted EBITDA walk, you'll see a line on there for those entities. And you can see that we've got geographic entry costs for the new ones coming in. That basically bridged that gap.

Gary Paul Taylor -- Cowen and Company -- Analyst

Okay. Last question. Can you remind us over what trailing period is a surplus to a physician group calculated? So, obviously, this week, this month, there was a surplus. I'm sure that doesn't get paid out, I mean. But what's sort of the trailing period where you calculate that surplus before it's paid to the groups?

Steven Jackson Sell -- President Chief Executive Officer and Director

So we have a pretty structured

Timothy S. Bensley -- Chief Financial Officer

Or is it just quarterly?

Steven Jackson Sell -- President Chief Executive Officer and Director

Yes. No we have a very structured quarterly payment to make it predictable, but there is an annual true-up that's done on the lag. And there is sort of this holdback component Gary similar to how you'd see in other sorts of programs for that final true-up with it. So if there is significant retroactivity that is ultimately flowed through in terms of those payments. But we really -- a big part of our partnership is really being predictable with our partners. And so we've set up a structure that allows us to do that and sort of calculate our final results.

Gary Paul Taylor -- Cowen and Company -- Analyst

Is that a 4Q annual true-up across the platform? Or is that practice-specific dates? I'm just trying to think about, do we have to think about like at the end of the year in the 4Q if there was something that's when we'd see a bolus of this? Or is it really more practice-specific in terms of timing?

Steven Jackson Sell -- President Chief Executive Officer and Director

No. I mean, I don't think there would be a material move in Q4 with that. I mean, there is a true-up that occurs on the composite level, but it's a function of those practice-level specifics Gary if that's what you're asking.

Timothy S. Bensley -- Chief Financial Officer

Yes. I mean, I guess to the extent that there was some wild deviation as we flowed into next year with run out it could drive something. But I mean generally speaking, we're pretty close on it. So we're keeping that -- we're estimating obviously those -- we're reporting those out on a quarter-to-quarter basis. And I wouldn't expect that at -- the true-up for the fourth quarter or year-end would be any large number versus what it is every other quarter.

Gary Paul Taylor -- Cowen and Company -- Analyst

Okay. Thank you.

Operator

Our next question comes from Brian Tanquilut from Jefferies. Brian, please go ahead.

Jack Garner Slevin -- Jefferies LLC -- Analyst

Hey, good morning. This is Jack Slevin on for Brian. Thanks for all the color thus far and wanted to continue on with that Pittsburgh case study a little bit. Two questions there. One, can you give us at least in a rough sense what the percentage of your members in that market are coming from UPMC or Highmark plans?

And then two, as we think about portability of the model and sort of the maturation curve on medical margin, when we look at a market with that profile sort of dominant health systems, is it possible that those are going to skew to a quicker maturation toward sort of like the mature medical margin you've talked about? Or should we think about a lag there? I guess trying to work through whether or not having that help system the ability to coordinate across it should help maturation? Or if there's a little bit of give maybe related to hindrances and inpatient spend? Thanks.

Steven Jackson Sell -- President Chief Executive Officer and Director

There's a lot of that question. So first part of it roughly two-thirds of the membership comes through the two plan/systems that you talked about. As we highlighted, Pittsburgh is accelerating faster than we've seen in other markets. The skilled nursing facility program really leverages the strength of our partnership and the relationship that people have with their primary care physician. And given the data and insights from our technology, we've been able to really work with a local partner here that's trusted. We're seeing a higher enrollment into these preferred skilled nursing facilities. And what we see is when the primary care partners here in Pittsburgh see patients in those preferred skilled nursing facilities, there's a significant reduction in terms of the overall MLR really driven by much lower readmission rates.

And so that's the power of this partnership and platform coming together. I can't imagine operating in a market like Pittsburgh without the strength of a partner like Preferred. Their credibility, their history here, their knowledge of the ecosystem combined with the alignment we've got through the partnership and the insights from the platform allows us to drive those sorts of success. So I don't know that a multi health system market says we're going to see slower progression on medical margin. I think our ability to serve diverse geographies like Pittsburgh doing it through a partnership model and with our platform is the key to that. And so we can go to a lot of places build around that right partner and have success.

Jack Garner Slevin -- Jefferies LLC -- Analyst

Awesome. Great color. Thanks, and congrats on the quarter.

Steven Jackson Sell -- President Chief Executive Officer and Director

Thank you.

Timothy S. Bensley -- Chief Financial Officer

Thanks, Jack.

Operator

Next question comes from Whit Mayo from SVB Leerink. Whit, please go ahead.

Benjamin Whitman Mayo -- SVB Leerink -- Analyst

Thanks. Just a couple ones here. Maybe you answered this, but it wasn't clear to me. To Gary's question, is there anything about the characteristics of these new groups in 2022 that's different when I look at either the PPO, HMO mix? Anything about the composition of their panel that looks different than your legacy partners? I don't know inpatient days per thousand, MA versus fee-for-service? Just anything when you sort of lay them side by side versus your legacy groups you would say this is different which makes us more or less confident in the implementation this year?

Steven Jackson Sell -- President Chief Executive Officer and Director

Yeah. I mean, I think we've got a diverse set of new geographies coming on in 2022. And the implementations have been going really quite well. When we look at the things like structured annual wellness visits that are going on we're feeling very good about where we're at. But to those -- to your question about kind of how they lay out, we've got primary care-only groups. We've got multi-specialty groups. We've got single-10 groups. We do have one multi-10 group with kind of an organizing entity across all of that in Answer Health up in Michigan that is just leads the state in terms of quality and is an exceptional partner for us. And so those differences don't lead us to different expectations in terms of maturation around medical margins. Now they started different places with.

And so as we've said all along, we're comfortable starting with groups that start at different places, great leader in their community, great credibility, good alignment with us. And with our platform we're going to be able -- and the partnership we're going to be able to drive that. So PPO versus HMO mix for the class of 2022 is roughly in line. We're still about 50-50 overall. PPO continues to be the fastest-growing product and growing faster than HMO. And so my guess is that will skew toward a more significant majority over time. But we feel really comfortable about our ability to manage full risk in a broad PPO market because of our focus around those big spend areas, those value areas within Medicare Advantage.

Benjamin Whitman Mayo -- SVB Leerink -- Analyst

Okay. So when you sort of average everything together, they look reasonably in line with the groups that you've onboarded in prior years is I think what I'm hearing.

Steven Jackson Sell -- President Chief Executive Officer and Director

Yeah, I think that's correct.

Benjamin Whitman Mayo -- SVB Leerink -- Analyst

Yeah. And can we just go just

Matthew Dale Gillmor -- Vice President of Investor Relations

One thing I'd add here where the state -- the class of 2022 and some of the LOIs and DAs for 2023, the enrollment growth in these markets is a touch higher and that will bring our overall average up.

Steven Jackson Sell -- President Chief Executive Officer and Director

So, yeah. As a composite they are in lower MA-penetrated markets. It's a good point Matt. And so we would expect that market growth will be higher and then our multiple on top of that will drive strong same geography growth.

Benjamin Whitman Mayo -- SVB Leerink -- Analyst

Okay. And one quick last one, I just want to make sure I get this. I want to unpack this just for a second because you've referenced palliative care and maybe redefined specialist networks a few times. And I'm not exactly clear. Are these -- I mean, are you giving your physicians more tools and resources to manage this downstream risk? I thought, I heard something around maybe a narrowed or tiered network. I'm just trying to understand exactly what's changing here. And maybe just remind us on the specialist side what your medical cost spend is?

Steven Jackson Sell -- President Chief Executive Officer and Director

Yeah. So I mean two areas, right. So palliative and specialty. What we're doing with is we're leveraging the heck out of that partnership and that patient physician relationship and their scale and history. They understand the players within the market. We're better identifying in palliative as an example, patients who are most likely to pass away in the next 12 months. We're enabling that primary care physician to have a better quality conversation with that senior patient about what they'd like to do over this next year and what the options are available to them. And historically that's a difficult conversation for primary care physicians to have.

In our markets 25% to 40% of our costs sit in end of life. I mean that's the range that you see within that. And so the ability to have a better identification of those most likely to pass away, the ability to have a better conversation means you get a higher enrollment rate. And then the ability to have a partner, local partner that you can refer those people into and the primary care physicians can feel really good about is very important.

In Buffalo, we've seen almost a 90% reduction in terms of hospital deaths based on the pre and post in terms of rolling out that palliative care program. I mean that is substantial. It's substantial from a cost reduction perspective, but we're also seeing patient and physician satisfaction go up with this. This is an area of healthcare that's really underserved and difficult to deal with. And so that's where this partnership and platform together can really affect it.

And then specialist costs follow a similar thing. We tier the specialists to better identify them. Our referrals go through a centralized referral entity, which means you end up with a higher pull-through of people getting to that top-tier specialist. The specialist doesn't have to do that on their own. And then there's a better outcome. Those top-tier specialists, the cardiology example that we've given on our previous call it's like $100 PMPM better for people being referred to top-tier specialists. So hopefully that gives you color.

Benjamin Whitman Mayo -- SVB Leerink -- Analyst

Yeah. Thanks a lot guys.

Operator

Thank you everyone for your questions. Unfortunately that is all the time we have for questions today. So I will now hand back to the management team for any closing comments.

Steven Jackson Sell -- President Chief Executive Officer and Director

Thank you everybody for being on our call. I mean, I think we're just really encouraged about our ability to drive predictable quality outcomes in a volatile market. I think we're excited about the scale that we're building locally in our communities and nationally. And we're really bullish on our future. So talk to everyone soon. Take care.

Operator

[Operator Closing Remarks]

Duration: 60 minutes

Call participants:

Matthew Dale Gillmor -- Vice President of Investor Relations

Steven Jackson Sell -- President Chief Executive Officer and Director

Timothy S. Bensley -- Chief Financial Officer

Lisa Christine Gill -- JPMorgan Chase -- Analyst

Justin Lake -- Wolfe Research -- Analyst

Ryan Scott Daniels -- William Blair -- Analyst

Kevin Mark Fischbeck -- BofA Securities -- Analyst

Stephen C. Baxter -- Wells Fargo -- Analyst

Gary Paul Taylor -- Cowen and Company -- Analyst

Jack Garner Slevin -- Jefferies LLC -- Analyst

Benjamin Whitman Mayo -- SVB Leerink -- Analyst

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