Good morning, everybody, and welcome to today's Oak Street Health 2Q 2022 Earnings Conference Call. My name is Drew, and I'll be coordinating your call today. If you would like to ask a question during the presentation, you may do so by pressing star followed by one on your telephone keypad. If you change your mind, please press star followed by two. We do ask that you please just ask one question and one follow-up. I'm now going to hand over to Sarah Cluck, Head of Investor Relations, to begin. Please go ahead. Good morning, and thank you for joining us today. With me today are Michael Pykosz, Chief Executive Officer, and Timothy Cook, Chief Financial Officer. Please be advised that today's conference call is being recorded and that the Oak Street Health press release, webcast link, and the other related materials are available on the Investor Relations section of Oak Street Health's website. Today's statements are made as of August 3rd, reflect management's view and expectation at this time, and are subject to various risks, uncertainties, and assumptions. In addition to historical information, certain statements made during today's call are forward-looking statements. Please refer to our 2021 annual report on Form 10-K and other periodic reports filed with the Securities and Exchange Commission, where you will see a discussion of certain risks, uncertainties, and other important factors that could cause the company's actual results to differ materially from these statements. Certain statements made during this call include non-GAAP financial measures. These non-GAAP financial measures are in addition to and not a substitute or superior to measures of financial performance prepared in accordance with GAAP. Please refer to the appendix of our earnings release for a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures. With that, I'll turn the call over to our CEO, Michael Pykosz. Mike? Thank you, Sarah. Thank you everyone for joining us this morning. Joining me on today's call, in addition to Sarah, is Timothy Cook, our Chief Financial Officer. I want to first thank our team for the impact they make every day for our patients. I am wowed daily by the stories of our team members literally saving Oak Street Health patients' lives. We continue to be pleased with our performance in 2022, with Q2 performance above the top end of guidance range for revenue, at-risk patients, and Adjusted EBITDA. It remains a difficult operating environment in healthcare more broadly, and is a testament to our team that we're able to continue to drive strong results. A key enabler of our success at Oak Street Health is how the components of our model reinforce each other, creating a platform where the whole is much greater than the sum of the parts. For example, our unmatched patient experience enables our B2C patient acquisition model. In other words, patients join Oak Street because we offer them concierge-level patient experience at no additional cost. We are able to offer a differentiated patient experience because of the investment we make in our patients' care, giving patients more time and easier access with their care teams while providing support navigating the healthcare system more broadly. We're able to make this investment in primary care because our care model keeps patients healthier, significantly improving health outcomes and lowering medical costs, leading to savings which we retain through our value-based contracts. We're able to execute our care model because our focused de novo go-to-market approach, which enables us to consistently run a model specializing on older adults with operations, staffing, and custom-built technology to meet our patients' needs. We're able to successfully execute our de novo go-to-market approach because our consumer-focused outreach model allows us to add patients without having to rely on buying or partnering with existing physician groups. The reinforcing nature of our model provides a barrier to entry and a durable competitive advantage. Traditional primary care providers are not able to provide a differentiated care model or patient experience we do at Oak Street because they are operating off an undifferentiated and less effective fee-for-service chassis. The components of our model also form the basis of our focus at Oak Street. As we've discussed previously, we have four key objectives at Oak Street as we execute on our mission to rebuild healthcare as it should be. First, provide the best care anywhere. Second, deliver an unmatched patient experience. Third, grow the number of patients we serve. Fourth, be the best place to work in healthcare. As we are of our success to date, we also know that we can continue to improve on all of these dimensions. As we continue to invest in our model, we'll further our differentiation compared to traditional primary care and improve our center level economics. While COVID is obviously still with us, over the last quarter, it has continued to recede from the dominant challenge to navigate to a persistent but manageable part of our everyday approach. This has allowed us to continue to focus on executing on all of our objectives. Prior to the pandemic, we had a consistent track record of improving our performance against all of our objectives, which led to a corresponding improvement in our unit economics. We're excited to be in a stretch where our focus is consistently on the drivers of our long-term success, as opposed to dealing with the day-to-day changes in our operating environment caused by the onset of the pandemic. We're optimistic we'll be able to retain the focus on the drivers of our impact and center economics going forward. The operating environment in Q2 remained challenging across a number of dimensions. It is a very challenging labor market. We continue to navigate this environment, and our center opening plans remain on track. We are not expecting to be impacted by labor shortages. We are pleased with our performance in both the first half of the year overall and in the second quarter in particular. In the second quarter, we generated record revenue of $523.7 million in the quarter, exceeding the high end of our guidance range. Our revenue growth continues to be driven by our organic B2C marketing approach. Medical claims expense trended in line with our expectations in the second quarter. Additionally, prior periods have developed favorably, positively contributing to Q2 EBITDA. Cost of care, which includes care team labor, marketing, corporate costs, were all in line with expectations. These factors all contribute to an Adjusted EBITDA loss of $53.1 million for the quarter, which is $9.4 million favorable to the top end of our Q2 guidance. We achieved these results despite continued headwinds from direct costs from COVID hospitalizations and a negative retrospective trend adjustment by CMS to our direct contracting revenue. We believe this speaks to the effectiveness of our care model in driving improved patient outcomes and thereby significantly lowering third-party medical costs for our patients. Tim will cover the specifics around our medical costs and other trends shortly. Our performance in the first half of the year continues to be in line with the projected center ramps for 2022 by cohort we shared earlier this year. As a reminder, our guidance this year is based on center-level performance within that range. Performing favorably to our guidance for the first half of the year means we are achieving the center-level performance we set out. Continuing performing along these center ramps going forward will create an outstanding financial return on the capital invested in new center development. We are pleased with our performance in the first half of the year and what it means for our center-level results. We are optimistic about the investments we are making to continue to improve our platform and excited to continue on our journey to transform healthcare. With that, I'll turn it over to Tim to cover some more of the details regarding our financial performance in the second quarter. Thank you, Mike, and good morning. As Mike shared, we were pleased with our second quarter as we delivered results above the high end of the guidance for at-risk patients, revenue, and Adjusted EBITDA. In terms of membership, our at-risk patient base, the key driver of our financial performance, grew by 51% to 134,000 patients, driven by our B2C marketing model and growth in the number of our centers. At the end of the first quarter, we operated 144 centers, an increase of 49 centers or 51% versus the 95 centers we operated at the end of the second quarter of 2021. Capitated revenue of $516.1 million grew 49% year-over-year, driven by growth in our at-risk patient base. Capitated revenue in the second quarter of 2022 included a $3.7 million reduction related to prior periods due to the retrospective trend adjustments made by CMS as part of the Direct Contracting program, which were partially offset by favorable developments in Medicare Advantage. Adjusting for prior period impacts in 2022 and 2021, capitated revenue grew 56% year-over-year in the second quarter. Total revenue grew 48% year-over-year to $523.7 million. Adjusting for prior period changes, total revenue grew 56% year-over-year in the second quarter. Our medical claims expense for the second quarter of 2022 was $391.6 million, representing growth of 39% compared to the second quarter of 2021. Medical claims expense in the second quarter of 2022 was lower by $10.9 million related to a reduction in prior period medical claims expense as the cost for Q1 2022 have developed more favorably than our expectations. When adjusting for prior period changes in 2022 and 2021, medical claims expense grew 53% year-over-year in the second quarter, 200 basis points slower than our comparable capitated revenue growth. COVID continues to impact our medical costs. We estimate that COVID represented $18 million in year-to-date medical claims expense. For new patient economics, we continue to see risk scores that are more consistent with historical periods, albeit not at pre-pandemic levels. We will have a more complete sense of the user's risk scores when we receive the mid-year updates later this quarter. At this point, new patient medical costs appear better than 2021 levels, but also not at pre-pandemic levels. Given our performance to date, the impact of both COVID costs and new patient economics are consistent with our expectations included in our full year guidance. Our cost of care, excluding depreciation and amortization, was $98.9 million for the second quarter, an increase of 48% versus the prior year, driven by growth in the number of centers we operate and the number of team members supporting our significantly larger patient base. Sales and marketing expense was $42.6 million during the second quarter, representing an increase of 65% year-over-year as we continue to invest in this area to support patient growth and a much larger footprint of centers. Corporate, general, and administrative expense was $94.9 million in the second quarter, an increase of 28% year over year. Excluding stock-based compensation, which is partially inflated due to the treatment of our pre-IPO management equity plan, corporate, general, and administrative expense grew 38% year over year. The majority of this year-over-year increase is related to an increase in head count to support our growth. When factoring into prior period changes in revenue, we improved our corporate, general, and administrative expense, excluding stock-based compensation as a percent of total revenue by approximately 110 basis points in Q2 2022 compared to Q2 2021, continuing our expected trend of declining corporate costs as a percent of revenue. I will now discuss three non-GAAP financial metrics that we find useful in evaluating our financial performance. Patient Contribution, which we define as capitated revenue less medical claims expense, grew 91% year-over-year to $124.5 million during the second quarter. Excluding the impact of prior period revenue and medical costs, Patient Contribution grew approximately 71% year-over-year. Platform Contribution, which we define as total revenue less the sum of medical claims expense and cost of care, excluding depreciation and amortization and stock-based compensation, was $34.1 million, an increase of 580% year-over-year. Excluding the impact of prior period revenue and medical costs, Platform Contribution grew approximately 230% year-over-year. As an individual center matures, we would expect both Platform Contribution dollars and margins to expand as we leverage the fixed costs associated with our centers, as well as improving our per-patient economics over time. Adjusted EBITDA, which we calculate by adding depreciation and amortization, transaction and operating-related costs, one-time litigation costs, and stock-based compensation by excluding other income to net loss, was a loss of $53.1 million in the second quarter of 2022, compared to a loss of $53.5 million in the second quarter of 2021. Adjusted EBITDA benefited from the net prior period favorability in the quarter due to favorable development on Q1 medical costs. We finished the second quarter with significant liquidity in the business, in line with our internal expectations. As of June thirtieth, we held approximately $550 million in unrestricted cash and marketable securities. For the six months ended June 30, cash used by operating activities was $179 million, while our capital expenditures were $40 million, both of which are in line with our expectations. We expect over the course of the year that our Adjusted EBITDA loss will approximate our uses of operating cash flow. While those figures diverge in the first half of the year due to working capital seasonality, we expect them to converge over the second half of the year. Moving along to our 2022 financial outlook. We are increasing our full year guidance for at-risk patients and total revenue. We now expect year-end at-risk patients in the range of 155,000-158,500 patients, and a total year... Full year total revenue range of $2.125 billion-$2.145 billion. We are reiterating our full year 2022 guidance for centers in Adjusted EBITDA. While we are encouraged by our year-to-date performance, I'd highlight two factors impacting our Adjusted EBITDA. The first is COVID, which remains an uncertainty, particularly in light of the case surges and the resulting medical costs experienced in Q4 of 2020 and Q4 of 2021, and in most recent rise in cases. The second factor is the retrospective trend adjustment related to Direct Contracting mentioned earlier that negatively impacted revenue for year-to-date 2022. We assume this adjustment, which reduced Direct Contracting revenue for all participants by approximately 7.5% and flowed entirely through to our adjusted EBITDA, will continue for the remainder of the year. To provide more context, CMS set direct contracting PMPM rates for Q1 2022 based upon an estimated cost trend for direct contracting eligible patients. In May, CMS revised those PMPM rates based upon actual cost trend from Q1 2019 compared to Q1 2022. The actual cost trend was significantly lower than the estimated cost trend, resulting in the reduction in the PMPM rates CMS pays. This reduction was retroactively applied to January 1st, 2022 for all direct contracting participants. CMS will revise their calculation each quarter, and if the actual cost trend varies meaningfully from the estimated cost trend, CMS will adjust rates higher or lower as appropriate. Thus, as I said, while we are pleased with our first half results, medical cost development in particular, we have reiterated our Adjusted EBITDA range out of prudence in light of these exogenous uncertainties. For the third quarter of 2022, we are forecasting revenue in a range of $535 million-$540 million and an Adjusted EBITDA loss of $90 million-$95 million. We anticipate having 158-159 centers and an at-risk patient count of 143,500-144,500, including Direct Contracting patients at September 30, 2022. We remain optimistic about the momentum and the underlying trends we are seeing in the business. With that, we will now open the call to questions. Operator? Thank you. We will now start today's Q&A session. If you would like to ask a question, please press star followed by one on your telephone keypad now, and if you change your mind, please press star followed by two. We ask that you please ask just one question and one follow-up, and when preparing to ask your question, please ensure your phone is unmuted locally. Our first question today comes from Lisa Gill from J.P. Morgan. Lisa, your line is now open. Thanks very much. Good morning, and thank you for all the detail. I just wanna go back to, you know, thinking about higher patient volumes and the impact on revenue and in EBITDA. One of the things that stuck out to me is that you talked about the fact that risk scores are still not at pre-pandemic levels. While maintaining EBITDA and increasing revenue, I'm just curious as to how those, the profitability of those new patients look, and then how much of this is being offset, you know, based on your comment around OpEx. Yeah. Thank you for the question. You know, yeah, Tim said. This is Mike to put voices and names. As Tim said, you know, we're between where we were in 2019 and where we were last year on new patient economics. We're pleased to see them returning more to the normal side than from where they were before and feel comfortable with this level of economics. I think that, again, to your point, with our business, there's always puts and takes around, new patients and existing patients and different trends. I think we were pleased with the performance in the first half of the year that without new patients coming in kind of to the same level that in 2019, we were still, you know, ahead of the high end of our ranges on EBITDA. That speaks to the kinda overall performance of our care model across all of our patients. Mike, you know, as we think about the cost side, you know, you made the comment that you weren't having issues with hiring people for new facilities. Are you seeing an elevated cost when we think about labor costs or even on the supply side as we've seen inflationary, you know, costs across the board? You know, you're one company that didn't call that out specifically. I'm just curious if you're seeing an impact there. Yeah. It's still, as I talked about a little bit, a very tight labor market. You know, labor is a relatively small portion of our total cost structure. We spend a little over 10% of our revenue on Our care team labor. It's, you know, very different than a big hospital system or a home health company, one of those companies that are, you know, obviously north of 50%. You know, selectively, you know, we'll revisit compensation for roles. We've always done that, and we'll continue to do that, to make sure that we're competitive and attracting great people to our team and retaining great people on our team. Because labor is a relatively small part of our cost structure and we think any investments we make in our team will be able to offset with kind of over performance other places. You know, there's nothing better in our mind than investing in our team and paying for those investments by keeping our patients healthy out of the hospital. Great. Thanks for the comments. Our next question today comes from Ryan Daniels. Your line is now open, Ryan. Oh, sorry. Apologies. From William Blair. Your line is now open. Yeah, thanks for taking the questions. Mike, maybe a big picture one for you, just in regards to the M&A activity we've seen in the space. I'm curious if Walmart as a retail partner has amplified, you know, their desire to expand clinics, and wanted to get an update from you about the performance of your Walmart clinics, which have been in operation now. Yeah, thanks for the question, Ryan. You know, we certainly see the same headlines. You know, from our perspective, one thing we really love about our model and the market we're in is it's just an absolutely massive market opportunity for us to grow into. We talked about this before, but we look at where we are successful today with the demographic of patients and the type of markets we're successful today, and that creates a market opportunity of 30 million Medicare patients, which would require 10,000 centers. We have, you know, a fraction of that today. What that means is we can like keep doing what we do over and over again without having to look for adjacencies or new opportunities and drive, you know, sustained growth for a decade and beyond. Again, we really feel like we're in a fortunate place of having a very proven profitable model and a huge growth trajectory. That said, as we talked about when we did the partnership, we were intrigued by the partnership with Walmart because we can run the same care model inside a Walmart center versus just inside an Oak Street Center. We should be able to generate the same patient economics. The other key driver of results, right, is how many patients we're serving. The reality is, in most Walmart, you know, a huge percentage of people in the community, including older adults are shopping at Walmart. It tends to be a similar demographic to what we serve. We thought that was a great way to kind of be in a convenient location and get to know a lot of people. I would say the results are still TBD on the pilot. I know it's been around for a bit of time, but again, the bar is not, do they perform like an Oak Street Center, right? We can open up as many Oak Street Centers as we want. What the bar is, are they performing significantly better than an Oak Street center, to kind of support, you know, a partnership, which obviously always more complicated than doing it yourself. In hindsight, it was not an ideal time to try that type of partnership out. If you remember, we opened those centers up really in the height of the pandemic and, you know, people weren't necessarily excited about someone walking up to them when they walked into the store and, you know, starting up a conversation with them, right? Generally the mindset was, you know, "Stay out of my bubble." I think that, you know, we would still wanna see the results play out a bit longer to, from our perspective, decide, hey, is this something that, you know, will make a meaningful enough difference? I still think the kind of rationale behind it still has a lot of merit. Again, one of the key drivers is bringing in patients and we, you know, we've seen over and over again, the more people we meet, the more people we can kind of show our centers to, the more we'll join as patients. I think the logic behind it still makes sense from our perspective. I think it's just seeing that logic actually play out in the results. You know, kind of TBD. Okay. That's very helpful. Then going into another partnership and maybe a broader question, wanted to get an update on AARP and then more broadly just your marketing initiatives and kind of how you've settled in on a digital versus community outreach model now that we've effectively returned to normalcy. You know, have you been able to balance the cadence of spending and what kind of returns are you seeing from the various media channels for customer acquisition? Thanks, guys. Yeah, Ryan, thanks for the question on that one. We definitely settled into an all-the-above approach on patient acquisition. The way we think about it is how can we bring patients in under kind of our cost per acquisition target and generate that CAC/ LTV ratio that we wanna generate, which is, you know, as we've shared before, kind of north of what you would see in most tech recurring revenue businesses. We really love the return on the investment we're getting in our marketing. Something like, you know, digital and Facebook and Google and those types of channels, as long as, you know, we're continuing to generate leads below our kind of bid numbers, which we have done, we know that we'll bring on patients at a really strong cost per acquisition, and we'll keep doing that, right? At the same time, as long as our field-based teams are bringing in a you know a minimal number of patients per kind of outreach executive on average, right? That'll generate the cost per acquisition we need. We'll continue to look for opportunities to optimize both of those channels, right? To the extent we can increase productivity of our field team, that'll just bring in more patients at a very similar cost, which again, would both improve our CAC, but also more importantly, improve our unit economics and the same thing on the central channels. For us, it's not about kind of finding balance between the channels. For us, it's about kind of maximizing the number of patients within each channel under our CAC threshold. I think there's opportunities to do both. As to AARP specifically, I think AARP, I think is an enabler and I think will be a long-term tailwind on both of those mentions, right? Because it is the most trusted brand for older adults. You know, it's incredibly well-known brand. We've definitely identified one of our challenges is, you know, people are taught in life, if something is too good to be true, then it is, right? No one has added a corollary or something is too good to be true than it is, except for Oak Street Health, which is actually real. It doesn't roll off the tongue quite as much. Our goal with AARP is to have a partner that is very trusted, that kind of, you know, works with us and it's exclusive, obviously, nationally with Oak Street. We feel like that'll be a long-term competitive advantage. As to your point, as we continue to ramp up more marketing channels and continue to get more and more word out about what we do, the more and more people hear about AARP, the more benefit we'll get from that brand. Our next question comes from Justin Lake from Wolfe Research. Your line is now open. Thanks. Good morning. Wanted to follow up, Tim, on your comments around Direct Contracting. Just wanna make sure I heard that right. You know, you said a 7.5% change in cost trend in terms of what CMS is reimbursing on. First, is that correct? Second, you know, given the economics, I think you were saying we're gonna be, you know, break even, give or take, this year, maybe slightly profitable. What does that do to the economics in your mind, to DCE and from a margin perspective this year? Yeah. Thanks, Justin. You did hear me correct that, the change in revenue was 7.5%. Just to give you some more context there, coming into Q1 of this year, CMS estimated that the total trend from 2019 to 2022 would be 16%. Not annualized of course, just 16%. What they calculated based upon Q1 expenditures, and again, it's just one quarter's worth of data, was only 7%. It's not as simple as subtracting those. You actually take the ratio of them, and when you do that math, you get to about 7.5% reduction. You know, we will see as the year rolls on whether or not Q1 was indicative of full year medical costs. Said another way, Q1 costs may have been lower for a variety of reasons, which impacted that calculus for Q1. As we see claims data for Q2 and Q3, we will see how that does or does not change that the retrospective trend adjustment. On the impact to our patient base, you know, the good news theoretically is if you're getting paid less on a revenue perspective, that should mean your costs are lower. We did see, you know, you could tell from our release in Q1, we did see some benefit both from the MA book and Direct Contracting book for medical costs, and we still run a good margin on those patients. Our Direct Contracting patients are better than break even. We do generate economics more consistent with our MA book. I know it's different than other participants, but just as, again, a difference in our approach to caring for patients than I think that others have. It obviously impacts our expectations on full year economics. We will see how costs trend for Direct Contracting patients and all of our patients, frankly, for the remainder of the year, and that will be obviously a key driver in where we end up in the range. Okay. Just to be clear, in the first quarter, even with that 7.5% reduction, you're saying that, you know, given what you know about claims, you were still, you know, slightly profitable on those members? Yeah, Justin. Not slightly. I mean, our Direct Contracting performance is, as we shared before, pretty consistent with our MA performance. You know, yes, obviously we have a 7.5% reduction in what you thought revenue was gonna be. That does impact the profitability, though. To Tim's point, you know, at least for Q1, you know, med costs are coming in favorably as well, which helps offset it. You know, we're not assuming that favor really continues into Q2, from a med cost perspective. You know, obviously, we hope it does. Again, I think, I would reiterate, this. It is a, again, it is a profitable book for us. You know, it wasn't just slightly profitable. I think, you know, others who had less success in the program, we've seen similar levels of profitability to MA in the program. Even with this revenue reduction, if it continues throughout the year, you know, we feel good about our participation in the program. I think I wanna reiterate what Tim said. I mean, Medicare saw, you know, much lower trend than they expected Q1 over Q1. You know, we're assuming that continues. They said it doesn't continue, right? They revise it retrospectively every quarter, right? You know, there's still three quarters left of more data. I wanna make sure that's clear that, you know, we feel like we're managing it appropriately. A lot of you all to play out. Our next question comes from Jamie Perse from Goldman Sachs. Go ahead, Jamie. Hey. Good morning, guys. I wanted to spend a minute just on the guidance. Your range this year to start the year is built around two key variables, COVID trends and the new patient economics. Can you give us a sense of where you are in the range for those two variables and what you're assuming in the updated guidance, for the second half? Jamie, for COVID costs, as I mentioned. This is Tim. Thanks for the question. We were $18 million year to date. You know, last year our total COVID costs were roughly about $40 million. It'd probably better to think about it on a PMPM basis. Last year, it was about $40 PMPM 'cause we had about 1 million member months. This year, I don't think that we've disclosed member months, but you know, it's much lower obviously, just given we're you know. If you take it ratably, you know that we've grown our patients a fair bit. We are seeing lower COVID costs all in. That being said, if you remember from our guidance, we had the low end of our guidance was consistent with 2021 performance, which would have been the $40 PMPM. High end was sort of halfway between 2021 and 2019, so call it $20 PMPM. We're trending in the range of that on COVID costs. On new patient economics, I would say that it's pretty comparable on the COVID side, obviously unrelated, but just from a you know general direction perspective, kinda in line with the midpoint. You know, as you can tell, given our performance thus far, right? Midpoint, the upper half of our range. Okay. In the second quarter, you guys beat your internal EBITDA expectations, adjusting for, you know, some of the out of period changes. You mentioned that MLRs were in line with expectations, so it sounds like some of that beat came from items further down the P&L. Can you just give us a sense of where that occurred, if it's sustainable, if you're, you know, getting leverage somewhere faster than expected, or if it was more about timing? Sure. There obviously was the benefit of the Q1 medical costs. It's, you know, Q2 in line with our expectations to your point. The incremental benefit above and beyond that is just conservatism within our cost forecasting. You know, the biggest cost we have is labor. In these markets, obviously, it can be. As we discussed, we're not immune to the labor challenges. We are more than sufficiently staffed in our business, but, you know, we probably haven't ramped hiring as much as we otherwise would in a normal year, just given the competitive dynamics of the marketplace. There's probably a little bit of tailwind there, frankly, not tremendous, but some benefit there. Timing of new centers is obviously going to impact that. Just really a combination of those two dynamics. Our next question comes from Gary Taylor from Cowen. Your line is now open, Gary. Hey, good morning. Just wanted to go back to Direct Contracting for a second, make sure I understand everything. If we take the $3.7 million, I think you said, divide that by 7.5%, it's like $49 million. So did you say it would imply like $49 million of revenue. Did you say this went all the way back to the beginning of Direct Contracting back in April of 2021, so the trailing twelve that adjustment impacted this quarter? Gary, it's Tim. Two things on that. No, it goes back to January 1st of this year. They'll revise it in May for Q1. We'll get another notice here at some point late in August that will, if to the extent that their updated math suggests that there's a further deviation, they will also revise it all the way back to January first. You know, Direct Contracting's a bit different than MA. In MA, they set rates to the rate notice. Those rates are set in stone for the following year. There is a similar component or dynamic within Direct Contracting where they do that, but then they during the course of the year they retrospectively look back and assess that rate, which is not ideal from our perspective because it can create the volatility we're talking about, but that's just the realities of the program. On the $3.7 million, remember, that is the out-of-period component, so that would be one quarter. I think you're thinking about it roughly correct. There was some offset from our MA book. You know, the actual impact was probably a little bit larger than that on Direct Contracting, but from a net basis, you're thinking about it correct. Okay. When do you reconcile the first full year of Direct Contracting? I just think that's in the 3Q. I just wanted to understand when I think you're carrying both receivables and payables related to Direct Contracting. My thought is when you reconcile, both of those dollar amounts come down. I just wanted to maybe sort of front run for the street a little bit how that might look like so people aren't surprised or confused when we see that 3Q balance sheet. Sure. Gary, we will settle 2021 in Q3 of this year. I think we have already received the, I don't know if it's the final statement, but sort of the 2021 readout, and cash gets settled in Q3. You know, our working capital follows cash settlement, and to your point. In Q3, we would expect the receivables related to 2021 Direct Contracting and the payables on the medical cost side to both release from the balance sheet. Obviously, you know, the net margin's the difference. Then we'll have an incremental accrual for Q3, right, as you'd expect. There will be an impact because you're releasing nine- months and you're accruing one. Or excuse me. Yeah, nine months in, accruing an incremental three for Q3. Our next question comes from Jessica Tassan from Piper Sandler. Your line is now open. Thanks so much for taking the question. I was just hoping to follow up on two things. First off, on marketing, can you just discuss kind of the extent to which B2C marketing has recovered? Where were events at a baseline pre-pandemic, and just to what extent have the cadence of those events recovered at each of your centers? Yeah, thanks for the question, Jess. We are still between, you know, where we were last year and where we were in 2019 as far as the number of events per center. You know, we keep ramping that up. Again, all of our marketing really is, or the vast majority is really B2C. We always think about central channels such as, you know, digital marketing and kind of more traditional marketing approaches. That is ongoing and something that we've, you know, have been having increasing success with since the pandemic and really developed those capabilities. Then obviously, we have our kind of more traditional community-based outreach model. You know, we are ramping up the activities in the community. We were really clicking on all cylinders in 2019 and, you know, a lot of our relationships, you know, took years to develop. The reality is for a lot of groups that, you know, host seniors, they stopped doing it in 2020. They didn't do it in 2021. Some senior living facilities haven't hired back their, you know, event coordinator that they had prior. There's a lot of changes to work through. Then when they hire those people back, we need to go form that relationship and educate the, you know, the group about Oak Street and then get access and run events. You know, yeah, we feel like we're moving in the right direction. You know, we're still, you know, guardedly optimistic that we'll get the community outreach back to where it was in 2019 over time. But it's never gonna be a kind of, you know, step function up because it really is about kind of every center and every team member, you know, forming relationships, rebuilding relationships, getting the event set up. Then once you have the event set up, you meet people. It takes multiple interactions, generally for someone to schedule a visit, and then, you know, a month or two after the visit, they'll finally flow through to our at-risk membership. Again, it's about building the pipelines and kinda keep taking incremental steps forward, which again, we're guardedly optimistic about and, we're kind of performing from an outreach perspective, you know, where we expected to coming into the year. I think we still feel there's a lot of upside from where we're performing today. We gotta execute to get that upside. It won't happen overnight. Got it. That's helpful. Thank you. Just on Direct Contracting, do you guys feel like you're effectively kind of confined to a certain medical cost ratio just due to the quarterly reconciliation? Is there anything about ACO REACH that would make that program more attractive or just have more margin or margin potential relative to Direct Contracting? Thanks again. Sure. Sarah, Jessica, I'm sorry. I was just trying to remind myself not to call you Sarah after I met last week, Jessica, so I apologize. I'm looking at Sarah again, so I gotta disassociate you two. Sorry, Jessica. It's Tim. On the MLR front for Direct Contracting patients, no, I'd say the way that revenue is reset is based upon overall cost trends in the broader market. We hope given, or we expect, given the strength of our platform, that we should be able to manage trend better than the overall market. We should still be able to expand margins and, you know, I mean, obviously there's going to be an impact to profitability, but we still feel as though we can manage these patients to a better MLR than the market at large. That would be point one on that component. Sorry, could you just, Jessica, ask your second question again? Oh, sorry. ACO REACH and the dynamics there. The simple answer is, we believe that the changes as part of ACO REACH will be neutral or favorable to Oak Street. There's a lot to learn about changes they'll make to the risk score cap and a few other dynamics. From what we do know, which, the changes to the discount applied to the program in the outer years is favorable. You know, previously that discount would grow 5% over time. Now it will, I think cap out at 3.5%. That's favorable relative to where it was before. I believe there may have been some adjustment to the quality withhold. That being so, those are net positive. We will see what changes, if any, happen on the risk score cap, and how that may or may not impact us. A lot to learn. Those changes are to come in, I wanna say, 2024 and 2025. We've got some time before they're a reality, one. Two, you know, we'll just need to see some more information before we can better assess what the impact's gonna be to our business. Our next question comes from Elizabeth Anderson from Evercore ISI. Your line is now open. Hi, guys. Thanks so much for the question. I was wondering if you could talk about some of the drivers in cost of care. You know, obviously that's come in a little bit better than our expectations so far this year, but the implied guidance in the back half of the year has a bit of a step up. I mean, I know your patients are ramping and you're opening more centers, but if you could talk about the puts and takes on that line, that would be super helpful. I mean, cost of care is honestly pretty straightforward from a budgeting perspective from us. When we open a center, we have a standard staffing that a new center has. As a center ramps patients, you know, between a brand new center with no patients all the way to a center that is full, you know, we have a standard ramp of when we add certain team members, right? You add your second care team at a certain time and your third care team, your fourth care team based on patients. Really the two drivers of our direct cost of care is one, you know, rent and kinda everything associated with center outside of labor and labor. We add labor at a you know the same ratio across all of our centers. Those ratios and kinda how we hire really hasn't changed from the first half year to the second half of the year. You know, so to the extent we're growing faster, we'll add care team members faster, but obviously that's a good thing for the business overall. The opposite is true, and we really do it at a center level, not at a company level. Got it. That makes sense. Thank you. Our next question comes from Michael Ha from Morgan Stanley. Your line is now open. Hi. Yeah, this is Michael Ha. Thanks for the question. Just wanted to revisit Gary Taylor's question on cash flow and working cap. I know Tim Cook mentioned net working cap should converge in the back half of the year. With Direct Contracting, there seems to be some new balance sheet dynamics at play for 3Q. Just taking a step back, looks like net working cap historically in 2Q is positive, but this quarter it's down $50 million. Year to date, it's down $100 million. Can you talk about what's driving this unusual negative net working cap? Is it DC related or maybe some other payer timing related dynamic? Will it even out in the back half? Yeah. Thanks, Mike. This is Tim. You're correct. Direct Contracting is a big contributor there, just given that we continue to carry all the 2021 profitability related to the program on the balance sheet. We would expect that to release in Q3, as I mentioned, and that would be one of the tailwinds to cash flow or operating cash flow in the second half of the year. The other is related to the timing of full year and mid-year payments. Again, you know, because we cut the quarter off at June 30, you know, the timing of those things in our full year, mid-year and just general plan settlements, those timings, as we discussed, can fall either pre or post a quarter and obviously because the balance sheet at June 30. There's nothing abnormal from our minds. We will see how things develop in the second half of the year. As we've said, generally speaking, Adjusted EBITDA and operating cash flow move pretty consistently together and for the full year, and we would expect to see that converge in the latter half of the year. You know, one thing I'd just remind folks is, you know, the mid-year payments come in in Q3. That is a relatively large source of cash that we don't have in the first half of the year. That's another, you know, big tailwind in the second half of the year and one of the things that drives the Adjusted EBITDA loss to mirror operating use of operating cash flow. I mean, just build on that. If you look at 2020, 2021, and then obviously our years before being public, generally EBITDA has been a good approximation of operating capital. Actually EBITDA or operating capital has been slightly more favorable in prior years than EBITDA. We had the same dynamics in the first half of year, second half of year in those years. We don't feel like there's anything different this year. Keep in mind, in 2021, you know, EBITDA and operating cash flows still had that same dynamic. We, you know, carried the 2021 EBITDA. We haven't got the cash yet, right? I think that, you know, there's no differences in timing that we see. I think it's just a question of, always the first half of the year is worse from a cash flow perspective. The second half of the year is better and it nets out. We expect that dynamic to continue. There's nothing abnormal so far about this year that we've seen. Got it. Thank you for that. Just one more on my end and a bit of a higher level one. As I think about kind of future upside leverage for Oak Street, and I understand in the past you've communicated that your centers at maturity could see at-risk patient occupancy around 70%-75%. I think that was before Direct Contracting, before the new patient outreach playbook you implemented. Just looking forward, how should we think about your at-risk patient occupancy levels ramping up in your centers? Yeah, I mean, I think that stat you're referencing was we shared in January, I believe, that centers that were nearing capacity were making $8 million in kind of four wall contribution. Those centers kind of aggregate are, I think, on average about 75% full, right? That was. You know, those centers are still growing, right? We'll keep filling them up. You know, theoretically over time, all of our centers will get to 100% full of at-risk patients. You know, we recognize that that is a kind of a ceiling, right? Because we're never gonna put more patients onto a care team, because we don't wanna lower the experience or quality of care. We can't add more care teams in our exam rooms for them to work out of. That kinda becomes your maximum, right? You know, we have a couple centers there, but others will get there, but you know, we'll keep adding patients till we do get there. I don't know. I think certainly there's upside to the extent that if we keep performing the same level on a Patient Contribution perspective and fill all of our centers up, then we'll obviously have more opportunity to improve the kind of mature four wall margins of our centers. Obviously one of our, I think our biggest opportunities for kinda upside is filling our centers up faster, right? Instead of taking kinda six-seven years to get to those levels, let's get there in, you know, a couple of years, right? That is why I think we are so focused on the sales and marketing approach. And again, we feel like there's a number of levers to pull, including getting our community marketing back to where it was in 2019, continuing to improve our brand, leveraging the AARP partnership, et cetera. We feel like that's a, you know, huge opportunity for us both to get a handful of centers that are kind of near capacity to full capacity, but also get the rest of our centers to get there faster. Our next question comes from Sandy Draper from Guggenheim. Your line is now open. Thanks very much. Most of my questions have been asked and answered, so I really appreciate all the detail. Just one quick question and then a follow-up on ACO REACH. Can you just remind me, and I apologize, this is, you've gone over this multiple times, just what the exposure is to DC, whether we think about it in terms of lives, revenue, EBITDA, but just trying to think about that. If I heard you correctly on ACO REACH, is it too early to call whether the same type of quarterly revision is gonna happen under that model, or is it we just don't know the exact details? Thanks. Yeah. Sandy, thanks for the question. On your first one, you know, we haven't released a breakdown between Direct Contracting MA risk lives. The only thing we have shared is the, you know, the majority, actually the vast majority of our at-risk lives are Medicare Advantage, right? That's just based on the demographic of patients we serve and the plan choice they make. Most of them have chosen Medicare Advantage. There's also some dynamics where not all of our traditional Medicare patients flow through to Direct Contracting right away, keeping that number a bit lower. So, you know, still the, you know, Medicare Advantage is the big driver of our at-risk business. Although you know obviously we are as we shared earlier we really like the economics of the Direct Contracting the ACO REACH program. In our understanding obviously Tim said earlier they're still releasing all the details on ACO REACH but we don't expect any change to this quarterly process. What I wanna make sure we're pointing out and 'cause obviously this is a you know a big factor in new to the market. It's not a situation where they do one quarterly reconciliation and it changes right? What's always going to happen is you're gonna have the least data for what the actual trend's gonna be after Q1 because you have one quarter over one quarter. They're comparing first quarter of 2019 to first quarter of 2022. Obviously in their analysis, which, keep in mind, Q1 actually still isn't fully complete for CMS when they did estimate what Q1 2022 will be. There's a lot of estimates going on there. In that estimate, trend did come in significantly lower than they expected, and frankly, significantly lower than we see medical costs trend historically, right? That would be a historically low Medicare trend. If it persists, and we are assuming in our financials both how we book the first half of the year and then how we're thinking about guidance that it does persist. If it persists, there is lower revenue for the program. As we said, we'll still be profitable in the program even with that lower revenue. You know, in Q1 we did see lower medical costs across the board in Q1. You know, we're not necessarily assuming that continues in Q2 as we book Q2, nor are we assuming that continues in the back half of the year. They will double the data points that they base that trend off of when they release the update in a couple weeks. Then they will update it again after Q3, and they'll update it again after the end of the year. When they actually release the final, they'll have quadrupled the number of data points they have today. Again, we wanna make sure we're being prudent and, you know, assuming that this revenue decrease maintains, and not necessarily taking also the corresponding benefit in medical cost reduction. It would be a very low annualized trend in Medicare, is it possible? It is, and it's certainly possible that it persists for the year. It's also possible it goes back. In a lot of ways it is a more accurate way than what they do for Medicare Advantage. For Medicare Advantage, it is easier as a public company, the way they do Medicare Advantage because you know what your rates are gonna be coming into the year. But if it ends up being a higher trend year, then you eat it, and if it's a lower trend year, you get a benefit, right? This way actually, what happens in reality, is kinda how you're graded. In some ways it's actually a more accurate way to do it, albeit after one quarter over one quarter of data. You know, I think it creates a little bit more variability and given this is the first time we're all doing it, I think we wanna be, you know, prudent in how we think about that variability. Thank you. Our next question comes from Whit Mayo from SVB Securities. Your line is now open. Thanks. You know, reflecting back on 2020, 2021, I think you guys have certainly indicated that there have been a lot of distractions with COVID that has, you know, precluded you from perhaps ramping and investing into all of the care delivery initiatives that you would want to. You had to stand up a bunch of vaccination distribution support. There was telehealth, just a lot of things I don't think you're supporting today. Is there anything that you can point to this year in terms of some of these new initiatives that you're doing that you haven't been able to do with the distractions? Anything beyond marketing and community outreach, anything more care delivery focused things? Yeah, absolutely. I'd probably say there's really three main improvements that we're focused on this year for care delivery and things that I think, you know, all seem equal, we would've pulled forward without the pandemic. One, we talked about this in our last call, but it's the continual integration of Rubicon. We're very excited about kind of having a fully integrated virtual specialty platform. We think that's gonna really continue to improve patient experience, lower specialist costs, and most importantly, really drive better quality care by just having that kind of integrated specialist approach. That's something that, as we discussed, you know, we really expect to kind of hit its stride sometime in the fourth quarter and kinda be fully implemented going into 2023. We're optimistic about the process and approach and the savings it's gonna generate. That's one. You know, number two is I think there's a set of improvements to Canopy. One thing we love about our technology approach is we continue to bring in more and more decision support, more and more clinical protocols, and really take off more and more kind of the base decision-making from our providers, and leverage but allow the team to execute that. That frees up more and more provider bandwidth to focus on the more challenging patients and things you can't protocolize, right? We call our most challenging patients our VIP patients. We take those patients, there's a number of factors. You can generally have multiple chronic illnesses, social factors, behavior factors, et cetera, that is impacting those patients, and that's what creates such a high risk of them going to the hospital. You never have a protocol, right? Or a check-the-box type of activity that's gonna manage those patients well. You need the expertise of the entire team working together and really, for lack of a better term, obsessing about how we keep that patient out of the hospital. The more you can free up the bandwidth to do that, by taking some of the base stuff, like just checking the boxes on, did people get their preventive screenings and use metrics, the more that can be driven by protocol technology, the better, right? We continue taking steps forward on the technology to enable that. I think we're past now what I would call the kind of more check the box around kind of HEDIS screens, colonoscopies, mammograms, et cetera. Now we're moving on to more decision support around kind of the disease management. With these types of conditions, here are the recommended drug regimens, et cetera. Again, it's not that our doctors don't know those things, but it reduces variability, ensures that every doctor, every day, every patient is practicing evidence-based standards, always ensures they have the best standards updated, and then takes a lot of that pressure off our doctors to remember all of those things. We're really excited about that effort. That's kind of number two. Then number three is software. It's just more the bandwidth, right? It's more the focus, right? And again, to the point I made before, if you can really be focused on how do I create an unmatched patient experience? How do I greet everyone, delight every patient every day? And how do I make sure that I'm really proactively planning how to keep my patient out of the hospital. If I'm doing that, you'll generate great results, right? It's harder to do that, when you're trying to navigate infection control protocols and seeing to staffing, and you're trying to learn new telehealth protocols, et cetera, et cetera, et cetera, right? I think there's just that final component really does make a difference. Thanks, guys. Our next question comes from Kevin Fischbeck from Bank of America. Your line is now open, Kevin. Great, thanks. I was wondering if you could talk a little bit more about cost trend in the quarter. It looked like or it sounded like you guys were saying that the quarter came in largely in line with your expectations. I guess, when we look around and listen to other managed care companies, they seem to be talking about core volume not coming back, you know, the way they would have thought in the quarter. A lot of the providers had weak volumes, relatively speaking. Just a little more color about kind of what you were expecting and what you saw, as far as utilization in the quarter. Hi, Kevin, it's Tim. Thanks for the question. Yeah, you track others better than I do, so it's always hard to know what they were expecting versus what we were expecting, and therefore how actual results played out relative to expectations. You know, we did see, generally speaking, lower as Q1 developed, obviously a lot of COVID costs, as we mentioned, with the Omicron spike in January and February. I think January was our highest COVID month in the history of the company, somewhat aided by the fact that we've grown our patient population a lot, but still a lot of COVID dollars. We saw non-COVID utilization a little lower in Q1, and that's the release that we saw in Q2. You know, as we took our approach to Q2 from an accrual perspective was similar to Q1. We will see how Q2 ultimately plays out. I will say, you know, utilization looked a little more normal for us in the quarter. As you can imagine, given the growth of our business, the error bars around normal are probably wider than they would be for a larger plan with a relatively steady patient population. I'd say, you know, look, we're optimistic, but we'll see how Q2 develops just as we saw Q1 develop. Kevin, the only thing I'd add to that, I think when we think about this at Oak Street, or certainly when I think about it, you know, different than maybe a health plan, we look at medical costs as something we control, right? Yes, we don't control all of them. We don't control COVID surges. But, you know, everything our care model is structured to do is to manage chronic illness, keep our patients out of the hospital. You know, we are actively seeing our patients and changing the trajectory of their care. I think we're doing it at two levels of depth that obviously just as a health plan, that's not in their capability set. That's not in their permission space. That's not what they do. You know, we talk about medical costs. Certainly internally, we never talk about, oh, you know, this is what the trend happened to us. We talk about, you know, we drive medical costs lower by lowering hospitalizations. When we, you know, are generating strong results, low ADK, and which corresponds to strong MLRs, like, you know, we high-five our team. When those are going up, you know, we talk to our team about how do we kind of double down and, you know, what to the question I answered before about the care model, how do we improve our care model results. I just want to make sure we, you know, point that out. When you hear me talk about trend, I'm less thinking about what's happening in the macro market and more thinking about how are we executing our model and how is that driving great results. I think that is, you know, what we do and what we're very proud of is I think we have, you know, we think we have the, you know, the best care model anywhere for older adults with chronic illnesses and that makes a big difference in their care, right? We think that, you know, can kind of overshadow any kind of smaller macro trends, which is kind of, again, different than what a health plan is looking at. Sorry, that's helpful. Tim, I guess you guys gave a number of numbers. Sometimes it looked like you were giving them on a gross basis, sometimes on a net basis. Like, I think you said that the favorable development was actually $10 million versus the $7 million you talked about in the press release, and it sounded like you were kind of netting that against Direct Contracting. When you mentioned Direct Contracting of $3 million, it sounded like you were saying that number was even net of some favorable number, maybe on the MA side. Is it possible to kind of give, like, the gross numbers on all of these things and help me understand kind of what exactly or how exactly to think about these out of period numbers? Kevin, you're right. The $7.2 million in the press release is the net of the $3.7 million of revenue headwind and the $10.9 million of med cost favorability. We are not breaking out the components of each of those. I mean, the reality is there's always gonna be interplay between MA and Direct Contracting. In this quarter, it was pronounced because of the retro trend adjustment. You know, I just wanted to highlight if folks are doing the math and trying to do some, I think Gary was trying to do some of this, some implied math around Direct Contracting or dollars or impact, that it would be larger than just the $3.7 million on its face. Our next question comes from David Larsen from BTIG. Your line is now open, David. Hi. What are you looking at for June volumes and then also July volumes? It's my understanding that in June, volumes are up a lot in hospitals. Are you seeing that? Is that continuing through July? How are you thinking about the BA.5 variant? When do you expect to reach EBITDA break even, please? Thanks a lot. Yeah, thanks for the question. You know, to the point I made a second ago, when we think about hospitalizations for our patients, again, I don't necessarily think the macro trends of what's happening in the broader market, including commercial and Medicaid, et cetera, and just even healthier Medicare apply to us. You know, when we look at what's happening with hospitalizations for Oak Street patients, and again, to Tim's point, when there's massive COVID waves, obviously we are impacted by that. When we look at our hospitalizations ADK, you know, we look at that as an indicator of our performance. All of our providers and our center team members, you know, are bonused based on their performance against admissions per thousand, right? That's one of the key metrics of Oak Street Health. We keep our patients healthy out of the hospital, and we mean it. We feel like that's what our care model does. Again, I don't, you know, we're so not gonna share, you know, July results already, but again, I don't think that necessarily reading into what's happening with hospital volumes more broadly always translates to what's happening with Oak Street and our patient population and our care model results. To the COVID question, you know, we obviously do our best to make sure our patients are vaccinated and make sure our patients are boosted. Our patients do get COVID, that they get the therapeutics like Paxlovid that can make a big difference in their health trajectory. I like to think that we're making a difference there. But you know, that said, when you look at kind of the COVID rates of populations for Oak Street, you know, we're in 20 states, a little bit more weighted towards the, you know, the Great Lakes and, Mid-Atlantic region, just given historically where we opened up first. You know, generally, kind of our COVID costs are gonna be, you know, in relative proportion to what is the hospitalization rates in those communities, that we have patients today. You know, as we shared, we will be breakeven 2025 or prior. Okay, great. Thanks very much. Appreciate it. Our next question comes from Craig Jones from Stifel. Your line is now open, Craig. Hey, thank you. I think originally you had said for platform contribution margin this year around $68 million. You've done $74 so far. Is $68 still a good number or has that gone up? Can you hear me? No, this is Tim. No, I'd say our expectations for the year are unchanged on that. Okay, great. Thank you. I think we are over time, so I wanna be respectful of the schedule and others' time, and I think we should end the conference call. Yeah, sorry. Yeah. We do need to hop, unfortunately, we're past the hour. Craig, hopefully that takes any of your questions and appreciate everyone's time this morning and look forward to connecting soon. Thank you everybody. That does conclude today's Q&A session and the end of today's conference call. Thank you for joining the Oak Street Health 2Q 2022 Earnings Conference Call. You may now disconnect your line. Everyone else has left the call.