Oak Street Health, Inc. (NYSE:OSH) Q2 2020 Results Conference Call September 17, 2020 8:00 AM ET

Company Participants

Mike Pykosz – Chairman & CEO

Geoff Price – COO & Director

Tim Cook – CFO

Conference Call Participants

Gary Taylor – JPMorgan

Robert Jones – Goldman Sachs

Sean Weiland – Piper Sandler

Matthew Gillmor – Baird

Ryan Daniels – William Blair

Ricky Goldwasser – Morgan Stanley

Steve Tanal – SVB Leerink


Good morning and welcome to the Oak Street Health, Inc. Fiscal Second Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded.

Hosting today’s call are Mike Pykosz, Chief Executive Officer; Tim Cook, Chief Financial Officer; and Geoff Price, Chief Operating Officer. The Oak Street press release, webcast link, and other related materials are available on the Investor Relations section of Oak Street’s website. These statements are made as of September 17, 2020 and reflects management’s views and expectations at this time and are subject to various risks, uncertainties and assumptions.

This call contains forward-looking statements, that is statements related to future, not past events. In this context, forward-looking statements often address expected future business and fiscal performance and financial conditions, and often contain words such as anticipate, believe, contemplate, continue, could, estimate, expect, intend, may, plan, potential, predict, project, should, target, will or would, or similar expressions. Forward-looking statements by their nature address matters that are to different degrees uncertain. Please refer to Oak Street’s IPO prospectus dated August 5, 2020, and its quarterly report for the quarter ended June 30, 2020 filed on Form 10-Q and filed with the Securities and Exchange Commission where you will see a discussion of factors that could cause the company’s actual results to differ materially from those — these statements. For Oak Street, particular uncertainties that could cause the company’s actual results to differ materially than those expressed in its forward-looking statements include: the company’s ability to achieve or maintain profitability, the reliance on a limited number of customers for a substantial portion of the company’s revenue, the company’s expectation and management of future growth, the company’s market opportunity and the company’s ability to estimate the size of its target market, the effects of increased competition as well as innovations by new and existing competitors in the company’s target market, and the company’s ability to retain its existing customers and to increase its number of customers.

This call includes non-GAAP financial measures. These non-GAAP financial measures are in addition to, and not as a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP. There are a number of limitations related to the use of these non-GAAP financial measures. For example, other companies may calculate similarly titled non-GAAP financial measures differently. Refer to the appendix for a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures.

With that, I’ll turn it over to Mike Pykosz, CEO of Oak Street. Mike?

Mike Pykosz

Thank you, operator. And thank you to everyone that is joining us on today’s call, our first call as a company public, in order to discuss our second quarter results. Joining me on today’s call are Tim Cook, our Chief Financial Officer; and Geoff Price, our Co-Founder and Chief Operating Officer.

Many of you joining us today’s call are somewhat familiar with Oak Street’s approach, transforming care for older adults, as a result of participating in our recently completed IPO. For those of you that are new to our story, Oak Street has fast growing network of primary care centers, focused on delivering exceptional care for adults on Medicare. Older adults with complex chronic conditions represent the highest cost burden on the U.S. healthcare system. We believe traditional primary care models are not structured to serve this population effectively, as providers are burdened by having to see a diverse array of patients in a one size fits all fee-for-service reimbursement model. This model incentivizes providers to drive volume through the healthcare system instead of incentivizing improvements in health outcomes. Ineffective engagement at the primary care level can lead to poor clinical and financial outcomes for both patient and payer. We founded Oak Street in 2012 to address these dynamics.

Our mission is to rebuild healthcare it should be and our vision is to provide measurably better health outcomes in all communities. We’ve built our model from the ground up, combining innovative purpose-built and technology-enabled platform, with our focus, personalized and proactive approach to patient engagement. Our model allows providers to spend more time with their patients and see them more frequently, at an average of approximately 8 times per year than in the traditional fee for service primary care setting. And we limit the size of our patient panel so that each provider can spend more time per visit with their patients. We take the time to listen to our patients in order to form meaningful relationships with them and address their concerns. There’s a large and expanding market opportunity for Oak Street’s platform.

We estimate the size of our target market as 27 million Medicare eligible beneficiaries with moderate to low income living in suburban and urban areas. These 27 million lives translate into a $325 billion annual market opportunity. At the end of the second quarter, we cared for up to 85,000 of these lives which represent approximately 5% of the addressable Medicare population in the markets we currently operate within and even tinier fraction of the overall market opportunity. Therefore, we believe we have substantial amount of room within which we continue to grow.

Approximately two-thirds of our patient base is comprised of seniors enrolled in Medicare Advantage plan, which allows us to engage with payers in a value-based contractual relationship, where we assume financial and clinical responsibility for the patient’s care. We care for our patients, 86% of which have two or more chronic conditions, through in-person visits at our 66 primary care centers, as well as through telehealth and home-based primary care. We believe our singular focus on chronically ill older adults, over 40% of whom are dual eligible, and approximately half of them struggle with one or more social risk factors such as isolation and lack of access to food and housing, has helped us generate strong outcomes.

Additionally, a key to Oak Street’s success is that our model provides value to stakeholders across the healthcare spectrum. Our patients receive significantly higher quality care, where hospitalization is reduced by over 50% and a significantly improved patient experience with Oak Street’s Net Promoter Score of 90 as described in our IPO prospectus compared to the average provider Net Promoter Score of 3. Our model enables our providers to do what they enter medicine to do, focus on keeping patients healthy. We provide them with the resources and support they need to care for their patients and pay bonuses on quality of care metrics, not visit volume as is the norm for primary care.

At a time when burnout is a massive problem for primary care doctors, we offer them a sustainable model that they overwhelmingly feel let them do their best work, but over 90% of our providers are saying they’ll recommend Oak Street as a great place to work. We help our payer partners across multiple key dimensions as well. Our outreached model helps grow membership for plans that we usually contract. Because of our strong performance on quality metrics, we help drive higher per patient revenue. And because we take full responsibility for all of our patients’ medical costs, we lock in our payer partners profit margins. When our patients, providers and payer burns win, Oak Street wins. Improving the health outcomes of the growing number of patients drive the economic results of the business.

We believe our greatest strength is the depth and commitment of our entire team at Oak Street Health, who we call Oakies. The last 6 months have created unimaginable and historical challenges for our organization and healthcare system due to the effect of COVID-19. I can’t thank all Oakies enough for the work they have done over the last 6 months in the face of difficult circumstances to keep our patients and all Americans safe in the face of the COVID-19 pandemic.

I want to highlight a number of steps our team took in response to COVID-19 because I believe this rapid transformation speak to the capabilities and agility of our team as well as the strength, resiliency and superiority of our model. During Q2 2020, we made the following changes:

We transitioned our predominantly in-person care model to be 90% telehealth, while increasing the number of patient visits by 12%, all within a month. We completed tens of thousands of wellness checks and social work consoles to educate our patients on COVID-19, help and navigate health challenges and remove barriers and team them on taking steps to mitigate the risks in the face of the pandemic. We redeployed our fleet of over 100 green vans, which typically provide patient transportation for our patients to get to and from our centers, to deliver meals from food pantries to our patients who like to secure or save access to food. We made over 8,000 deliveries of shelf-stable meals in Q2. And we created a COVID Care program, which was published in the catalyst publication of the New England Journal of Medicine to actively monitor our patients for suspected COVID-19 infections with the goal of managing those symptoms to keep our patients safely out of the hospital unless and until necessary due to the potential risks in the hospital environment.

We were able to quickly exhibit in the face of pandemic. We continue to invest in our patients’ care because 97% of Oak Street’s revenue comes from recurring monthly payments and are not based on visit volumes. While many traditional fee-for-service practices had significant negative impact to their revenue due to lower volume, we grew our revenue 69% compared to our first 6 months of 2019, as Tim will discuss in a minute. Oak Street’s recurring revenue provides us the financial flexibility to continue to be there for our patients and provide them with the support they need to stay healthy and avoid preventable acute events.

During Q2, we also took steps to ensure the safety of our team members and communities, including temporarily stopping outreach events and delaying the opening of new centers. We have since restarted our growth efforts both on the community marketing front to increase the number of patients we serve and the opening of additional centers in new and existing markets.

I’ll now turn the call over to Tim Cook, our CFO, who will provide you with a more detailed recap of our quarter from a financial perspective, and some color on our expectations for the remainder of 2020. Tim?

Tim Cook

Thank you, Mike, and good morning, everyone. We were pleased with our second quarter 2020 financial results, which were within the preliminary estimates we provided in our IPO prospectus and included record revenue despite the challenges of the COVID-19 pandemic. To level set on growth, we expand our platform in two important ways. First, we seek to drive patient growth in our existing centers; and second, we strive to expand our network of centers across both existing and new markets.

In terms of membership, total patients grew 36% year-over-year, while our at-risk patient base grew by 42%. At the end of the second quarter, we operated 54 centers, an increase of 10 centers from the second quarter of 2019, but flat compared to Q1 2020 as we temporarily deferred new center openings due to COVID-19. The increase in patients served to drive a 69% year-over-year growth in total revenue in Q2 to $214.4 million.

Our Q2 revenue benefited from risk adjustment payments in excess of our estimates of $5.9 million. As a reminder, due to our value-based contracting model, over 97% of our total revenues are recurring as our model is based upon receiving fixed per patient per month payments from payers. We believe this model drives strong financial visibility for Oak Street, our payer partners and for our shareholders.

Our medical claims expense for Q2 2020 of $155.5 million, representing growth of 84% compared to Q2 2020, outpacing our revenue growth on its pace. However, $15.9 million or 10% of our second quarter medical claims expense represented prior period development related to claims with 2019 or Q1 2020 dates of service. Excluding these costs, our growth in medical claims would have been more in line with our revenue growth rate for the period. I want to provide incremental detail on the medical costs prior period development. At the end of each period, we make estimates with respect to claims that we will receive in the future for dates that have already occurred. These estimates reside on our balance sheet and liability for unpaid claims. Given it is impossible to estimate these with a 100% certainty, we aim at book these expenses as accurately as we can with some margin of air such that to the extent there is any prior period development, it is favorable. That was not the case in this instance. And at some point in the future, that may be the case again, despite our efforts to mitigate the potential occurrence.

Regarding this specific instance, there were two primary drivers. First, approximately two-thirds of these amounts were related to data challenges with a few health plans, which we were unable to remedy until late June, due in part to the planned deprioritization of our date issues amidst COVID-19. We have since resolved those data challenges and revised our medical cost estimates. The remaining one-third was due to greater claims runout than we had initially estimated. It is unclear if all these costs will materialize and whether they will persist. COVID-19 has impacted typical claims processing, both with respect to the speed with which providers submit claims and the intensity of health plan’s payment integrity work. For the sake of conservatism, we assume these costs are real and will persist.

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Our Q2 balance sheet as well as our guidance for the remainder of the year reflects the carryforward effect of these costs. Fundamentally, our medical claims expenses are still in line with our expectations. Even excluding these prior period adjustments and unlike many of our health plan partners, we did not book significant savings in our Q2 financials due to lower healthcare utilization stemming from COVID-19 restrictions, which limited access to healthcare facilities during the period. While we have seen some early indications of lower utilization in Q2, there are a few key factors that distinguish our patient base with repeatable results and different medical claims experience. First, our patients are generally quite sick. As Mike said, over 85% of our patients have multiple chronic illnesses. Therefore, while access to care was limited during Q2, our patient base was a segment of the population that was likely able to access the healthcare system despite local restrictions. Second, our patient base has a lower prevalence of elective procedures, particularly compared to commercial health plans. The avoidance or deferral of those electric procedures was a key driver of lower Q2 utilization for many health plans.

We are continuing to monitor our key performance indicators and our medical claims, but believe it will be several quarters before we are able to accurately assess the impact, positive or negative for medical claims expense related to COVID-19. Our cost of care, excluding depreciation and amortization, was $39.5 million for the second quarter, an increase of 26% versus the prior year due to the growth in the number of centers we operated as well as growth in our total patients, offset by some benefit due to lower patient volumes in our centers as we transition to telehealth.

Sales and marketing expense was $10.1 million during the second quarter, representing a decrease of 10% year-over-year as we temporarily suspended community average activity due to COVID-19. These activities have since resumed, as Mike previously mentioned.

Corporate, general and administrative expense was $31 million in the second quarter, an increase of 93% year-over-year. The increase was primarily driven by increased headcount, stock-based compensation expense in particular, and higher legal and professional fees to support the growth of our business.

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 36% year-over-year to $52.5 million. We expect our per patient, patient contribution to improve the longer hour patients are part of the Oak Street platform. Platform contribution, which we define as total revenue less the sum of medical claims expense and cost of care, excluding depreciation and amortization, was $19.4 million, an increase of 81% year-over-year. As the center’s patient base increases, we would expect both platform contribution dollars and margins to expand given our improving per patient economics and the leverage we generate on our center operating expenses.

Adjusted EBITDA, which we calculate by adding depreciation and amortization and stock-based compensation, but excluding other income to net loss, was a loss of $17.6 million in the second quarter of 2020, compared to a loss of $16 million in the second quarter of 2019.

Note that our patient contribution, platform contribution and adjusted EBITDA in Q2 2020, and therefore, our growth compared to 2019, were all negatively impacted by the aforementioned prior period net expenses of $10 million.

We finished the second quarter with $185.5 million in cash and $82.1 million in debt. Cash used by operating activities totaled $43.2 million in the first 6 months of 2020. Our capital expenditures totaled $8 million in the first 6 months of 2020 as we deferred new center openings as a result of COVID-19.

Through our IPO in August, we raised approximately $352 million in net proceeds. We used approximately $86 million of these net proceeds to repay outstanding borrowings and associated interest and prepayment fees. Given the massive opportunity we see for de novo expansion, we expect to use the majority of the remaining proceeds towards the continued growth of our network.

I’d now talk about our outlook for the balance of 2020. For the third quarter of 2020, we are forecasting total revenue of between $210 million to $214 million, and an adjusted EBITDA loss of between $35 million and $30 million. We anticipate having 66 to 67 standalone centers by September 30th and between 58,500 and 59,000 at-risk patients. For the calendar year 2020, we are forecasting total revenue of between $843 million and $853 million and an adjusted EBITDA loss of between $110 million and $100 million. We expect to have 72 to 74 standalone centers opened by December 31st, and between 61,000 and 63,000 at-risk patients. The midpoint of our full year revenue guidance represents 52% growth over 2019.

I’d note that our projected center openings do not include the smaller clinics associated with our recently-announced pilot collaboration with Walmart. For modeling purposes, we would contemplate approximately 249 million weighted average diluted shares in the fourth quarter giving effect of the $15 million options issued as part of the IPO.

This being our first conference call as a public company, I’d like to highlight two dynamics that occur as we scale. First, as we open new centers, this can pressure our near-term profitability since our centers operate in a loss for a period of time as their profitability ramps. As a general statement, we’d expect our adjusted EBITDA to arrive towards the lower end of our outlook as we deliver new center growth at the higher end of our forecast. Over time, as our patient base at these centers grows and our underlying unit economics take hold, we would expect these incremental centers to result in greater corporate profitability, all else equal, in the future. Second, I would emphasize that we, today, capture a very small piece of a very large addressable market, and we will continue to invest in sales and marketing to the degree that our model continues to produce a compelling center and patient economics we have generated since our inception.

In closing, I’d like to define some of the medium and long-term targets for our business.

First, as I noted earlier, we are forecasting approximately 52% growth in revenue in 2020. Our expectation is for average revenue growth of approximately 40% over the near to medium term. Second, we believe the platform contribution margin for our mature centers can reach 25% as they reach capacity. And third, we expect to open approximately 25 to 30 new centers annually over the next several years.

I’d now like to turn the call over to Jeff Price, our Chief Operating Officer. Geoff?

Geoff Price

Thanks, Tim. I’d like to give some updates on development since our IPO. Since our IPO on August 6th, we have kept busy. In the last 6 weeks alone, we have opened 12 new Oak Street Health centers across both new and existing markets, including expanding into Dallas-Fort Worth, Dayton, Ohio and Winston-Salem, North Carolina. Today, we are operating 66 centers compared to 54 on our IPO date.

It has been exciting for our team to bring our model to new communities after all the challenges we navigated earlier this year. We have also transitioned most of our care delivery back to in-person care to better align with our patients’ preferences and needs.

Additionally, as Tim alluded to earlier, our team finalized the collaboration with Walmart, which we announced on September 1st. Our collaboration is initially focused on opening sites in three Walmart locations in Texas. In the context of the 66 standalone centers we have open today, this represents a small part of our business. We are excited about extending our platform into a more rural and suburban setting where Walmart is a convenient hub for the types of patients that we target. And we believe that foot traffic Walmart provides will complement our typical outreach focused growth model. Our plan is to operate the same patient engagement model at these sites and continue to grow our at-risk Medicare Advantage patient base. These are simply Oak Street Health centers that happen to be in a Walmart.

Oak Street Health will retain the same economics in these centers as we do in any of our centers. We will be seeing all patient types, not only Medicare. This is similar to a JV partnership we have with an independent group outside of Chicago. We look forward to updating you on our progress on all of this work.

I will now pass it back to Mike for concluding remarks.

Mike Pykosz

Thanks, Geoff. I want to conclude by saying how excited our team is to continue to execute against our mission of rebuilding healthcare it should be. At a time when health disparities are in the spotlight, we are proud of the impact we are making for patients and communities that are far too often underserved by the existing healthcare system. That said, we also note that we are just scratching the surface of what we can, will and need to accomplish. And we are excited to continue on our journey.

That concludes our prepared remarks. We will now take your questions. Operator?

Question-and-Answer Session


[Operator Instructions] Gary Taylor with JPMorgan, your line is open.

Gary Taylor

I just want to ask a little bit about some of your initiatives around telehealth. I know that during the COVID crisis, when a lot of things were shut down, you guys moved pretty quickly to sort of develop your own capability to stay in touch with your patients. I’m just wondering, is there any incremental cost in the quarter to call out that’s recurring or nonrecurring, what percent of your visits are sort of back to normal in-person visits now? And then just any thoughts around changing your clinical model or protocols at all? Have you found this tool to be something that might be a recurring portion of the clinical model?

Mike Pykosz

Thanks, Gary. Yes. Happy to talk about that a bit. So to take a few pieces of that question. So today, over 80% of our visits are back in-person care with the remainder at telehealth. That compares to 90-plus percent growth in the spring being telehealth. So we’ve shifted largely back to in-person. We do think that telehealth will be a part of our model going forward. We believe that the patient base we take care of is most suited for in-person care in most instances. However, they are both clinical and patient preference situations where telehealth is appropriate.

In terms of costs in the quarter, the telehealth costs from the platform we use were not material and probably not worth calling out specifically. We have made some investments that will allow us to move to our proprietary telehealth platform over the next quarter or two. We’re currently piloting that. So we’re — we think that, that will integrate well with the overall Oak Street platform effectively, and we’re excited that, that can make the experience even more seamless for our patients. So I think a lot more to come here, but we do think it’s part of our go forward.


Robert Jones with Goldman Sachs, your line is open.

Robert Jones

Thanks for the questions and welcome to the public markets. I guess for the first one, Tim, just to follow-on to Gary’s question, but thinking about the back half guidance, what’s assumed as far as that dynamic between in-person versus tele? And then maybe just relatedly, how are you thinking about utilization cost trend in the back half as it relates to the full year guidance?

Mike Pykosz

Yes. Thanks, Bob. So with respect to what we have in the guidance, as it pertains to telehealth, largely, it is still our providers providing the same service. It’s obviously a different modality, doing it via telehealth, means versus doing it in-person. And so as Geoff mentioned, there wasn’t a significant impact to our cost. So as we think about the remainder of the year, there isn’t really much — there wouldn’t be much change regardless of whether telehealth was 50% or 30% of the total care we delivered. Over the longer-term to the extent that we can deploy telehealth more meaningfully and leverage that, meaning to either expanding capacity or see more patients, there might be a benefit. But I’d say for 2020, I wouldn’t expect any benefit and our guidance doesn’t assume any benefit. And sorry, Bob, can you just repeat your second question?

Robert Jones

No, just as far as what’s assumed underlyingly in the guidance related to just utilization, medical cost trend in the back half?

Mike Pykosz

Yes. Yes, thanks. So as I mentioned, clearly, we were — we did not expect the negative $16 million development that we had in Q2. And we have now booked expenses — we’ve now got our balance sheet to the point where we feel as though we’re appropriately reserved against any future development related to those periods of time. So for the back half of the year, we have assumed a business more or less as usual, as we had discussed with folks during the roadshow and for some of the comments I made today, I don’t think our experience with respect to COVID will be the same where there was a significant decrease in Q2 MLR and a significant increase in later period MLRs. And therefore, from our perspective, we’d like to manage the business as usual until we have better data to understand what the effects of COVID will be. So right now, as we sit here today, I think we feel very good about where we’re reserved relative to what we’ve seen in the data, but we’ll continue to monitor that as the year rolls on here.


Sean Weiland with Piper Sandler, your line is open.

Sean Wieland

Just at a high level, I want to just have you touch on, what do you think some of the aspects are of your model that allow you to drive the better outcomes, lower cost? And why do you think you’ve been able to figure this out when a lot of other people in healthcare haven’t?

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Mike Pykosz

Thanks, Sean. Appreciate the question. I think one of the big things that differentiates Oak Street and our model, and I think what makes it difficult for others to achieve the same level results, it’s just the focus and the comprehensive nature of the model. On the focus aspect, we’re only caring for older adults on Medicare. And that really allows us to fine-tune the model for a more clinically homogenous population. And the model we run would be very inefficient and unnecessary for healthy commercial population, for example, but works well for our population. So from staffing ratios, technology, clinical protocols, training, et cetera, can all be optimized against one population. So I think that focus is a big enabler of our success.

And then I think the second point that enables our success is really the extent and breadth of our offerings. And so, there’s no silver bullet, right? People will ask, what are the one or two things you do that really makes the biggest impact on your reduction in admissions? And as you know, we reduced hospitalizations about over half. But I think what allows us to do that is really doing a great job gathering and analyzing a huge amount of data on our patients, leveraging Canopy our technology platform to get the insights from that data to the proverbial bed side, and doing it the same way every time for every patient based on their clinical needs. And then we can combine that with behavioral health, longer primary care visits, transportation, 24/7 call center support, home-based primary care for patients that need it and a host of other programs. And so you get a situation where the whole is much greater than some of the parts. And you’re applying all those parts in a very consistent manner and a very coordinated manner because you have the technology interface.

Sean Wieland

That’s helpful. And then so as it pertains to Walmart and the patient mix, what percent here are going to be Medicare? And more specifically, what percent will be Medicare Advantage? And how does that translate to your prior statement around focus at the enabler?

Mike Pykosz

Yes. That’s really a big piece that we’re going to be testing in the initial sites is what the mix will look like. The catchments that we are in where the Walmarts are located, look very similar to Oak Street Health catchments that we would traditionally choose. So there certainly are many Medicare patients of a kind of a socioeconomic background that we typically serve. We don’t — and we generally know that they’re shopping at Walmart because just about everyone shops at Walmart. The — I think the thing that we don’t know is what will the mix be in the centers that we serve. And so that’s really why we are thinking about this as a pilot collaboration, so that we can prove out that model because we will need to be focused on that.

The final thing I’d say on that is, from a focus standpoint, we will run the Oak Street model on the Medicare patients, and we will — and this is quite similar to a practice that we’ve partnered with outside Chicago that sees all types of patients. But we really focus on running the Oak Street care model in Medicare patients and then just delivering a good experience for everyone else, which, again, is, I think, important for us to be able to do.

Sean Wieland

Okay. If I could just squeeze one more quick one in. On the third-party medical claims expense, what is — you said a third is due of the — is due to the claims run out. What do you mean by claims run out?

Mike Pykosz

Sure, Sean. As we look at today at the claims experience for 2019 — I’ll just focus on 2019 for now. We made estimates to the end of 2019 that we would have — we would receive X million dollars of claims in 2020 or related to dates of service that occurred in 2019. Essentially, between the claims that we’ve received thus far in 2020 and our estimate of future claims that we might receive for 2019, that number is in excess of the number we estimated at the end of last year. And so when I say run out, I just mean the sort of the runout of claims or the claims that we’ve received relative to the estimated number of claims from a dollar perspective that we thought we’d receive when we closed out the year.


Matthew Gillmor with Baird, your line is open.

Matthew Gillmor

I wanted to ask about the marketing efforts. You had mentioned, obviously, the resumption of some of the community outreach programs. Can you give us a flavor for what that looks like in a COVID environment versus pre-COVID? And also, do you have any sense of, if these new approaches will have the same effectiveness? Or is it too early to really know?

Mike Pykosz

Yes. I mean, if you go back to a year ago at this time, we still operated a multichannel marketing approach. And so we have — what we generally call central marketing channel, such as digitals, direct response TV, et cetera. We also have our community-based field marketing channels. A year ago today, a fair amount of that was driven by events in our centers and events out of the center. Obviously, fast forward to today, we’re not doing big events with older adults in the community for obvious reasons. And so we’ve kind of really figure out over the course of the last 6 months, how do we deploy our community marketing team in a way that can still be part of the community, still liaison with older adults who can benefit from Oak Street’s care model.

So we educate people about the importance of primary care and why Oak Street Health is a great place to get that primary care. And so what we’ve done is really deployed and redeployed our field force against working with groups in the community. But instead of working with them through set of events, which is what we did a lot in the past, working with them to understand who in their constituents could benefit mostly, help and find alternative ways to educate them about Oak Street. So a really tangible example is working with faith-based organizations instead of hosting a senior brunch after services on Sunday, we’re going to work with the pastor to have him directly introduce us to his seniors or send them in order to make an announcement after services, right, et cetera, et cetera. So we get the same results and the same benefit. Just a little different mechanism to get people educated and familiar with what Oak Street does.

And so — and obviously, so that part has changed. Obviously, the central things around digital around, around direct response TV, et cetera, that’s very similar. What we have seen, it’s still relatively early to have a final result. What we have seen early is that I think because COVID has really put a spotlight on chronic illnesses as risk factors to COVID. And I think as COVID really put a spotlight on what can happen to access to primary care, I think there’s a lot of doctors’ offices shut down during the second quarter. I think it really has further differentiated Oak Street Health and further called out the importance of what we do. So I certainly think we’re seeing a huge amount of interest from older adults in the communities learning about Oak Street Health, whether that be interest that’s generated by our central channels or interest generated by our field channels. I think over the course of the year as we kind of fully ramp back to the new normal on the patient acquisition front, I think we’re optimistic we’re going to achieve strong results, but I think it’s too early to report back what those results are.

Matthew Gillmor

Got it. Fair enough. And let me ask one follow-up on the Walmart partnership. I know you’ve said that obviously a small piece of the much bigger operation. How long do you think it will take to really assess some of the factors you talked about in terms of understanding the mix and the unit economics before you’d be in a position to make a decision about whether to expand it or not, just kind of curious what that time frame looks like?

Mike Pykosz

Yes. I think in the relatively quick time frame. I don’t think we need to wait years to assess longitudinal data. I think we feel very confident we can run our clinical model effectively. And given the consistency of results that our platform generates on clinical metrics across all of our geographies and all of our locations, we’re confident we can do that. So I don’t think we feel the need to wait months or years to see the clinical results. So really, it becomes a question, I think, as Geoff alluded to, around how faster are we growing patients. And it’s a good location to engage over adults, educate them about Oak Street. Are we able to provide them the same experience as well as the rest of Walmart shopper is a phenomenal experience? And if we’re doing that, the experience is very strong, and then we’re able to engage people, which again, our hypothesis is they’re going to Walmart a lot of times every week, anyways, to shop. So we’re excited about it. I think we can understand how it’s working relatively quickly, and we’ll see this here.


Ryan Daniels with William Blair, your line is open.

Ryan Daniels

Mike, I was hoping to get any comments you might have on direct contracting and any more details or thoughts you have there regarding the opportunity for 2021?

Mike Pykosz

Yes. Thanks, Ryan. I appreciate the question. We’re excited about the direct contracting program. For those that are less familiar with it, it’s a new pilot program from CMMI to allow groups like Oak Street Health to essentially take risk on their traditional Medicare patients. And obviously, why that’s exciting for us is we have a number of traditional Medicare patients, really differentiate our care model. So we’re providing them the same really high-quality care. And as you can see from our prospectus, when you invest the dollars in the care model that we do, but our paying fee-for-service, the economics don’t work in this money. So we believe we’re actually generating a lot of cost savings from those patients because of our care model, we’re just not capturing that. So I think it’s a really big opportunity for us to capture some of those savings.

And so the program is set to begin April 1st, the enrollment period where people can kind of start actively enrolling their patients in the program begins October 1st. So a couple of weeks from now. Our plan is to begin enrolling patients at that time if they come in for their visits, just kind of a normal course of operations. And really, the final piece of the puzzle that we don’t know is around some of the economics. CMMI release some information about that yesterday evening, it’s about 8 PDFs, of a lot of pages. I’ll be honest, I have not had a chance to read through and digest it all and figure out the implications for Oak Street. So excited to do that. But again, I think we’re excited about the program, but I think we don’t know enough about it. It’s a new program in now, so we’re certainly not making any quantitative projections at this point.

Ryan Daniels

Okay. That’s helpful. We’ll stay tuned. And then just another follow-up, I guess, tactically on the Walgreens — I’m sorry, the Walmart relationship. I think the one deviation probably between your centers and your current partnerships is Walmart also has a large pharmacy operation. So can you just speak to how that will integrate? Is it going to be kind of a warm handoff to their pharmacists for things like medication adherence? Are you actually going to bring that in-house, too?

Mike Pykosz

Thanks, Brian. We, at this point, if not we don’t have any plans operationally on the pharmacy side tactically. This is really from our standpoint, and I believe Walmart would agree about primary care services. And so that’s really the place that we’re focused on, and that’s what we do well. And so we’re really just focused on delivering great primary care. .


Ricky Goldwasser with Morgan Stanley, your line is open.

Ricky Goldwasser

A question here on the market expansion, can you talk a little bit about how you’re thinking about the cadence of market expansion, given just kind of like the COVID-related delays, when do you think that you’re going to catch up with that? And maybe also some detail on the criteria that you look for as you’re expanding to new markets, whether it’s payer relationship or the specific population?

Mike Pykosz

Thanks, Ricky. As far as the number of centers, just so level of expectations, I know we opened up 12 centers in a little over a month. I wouldn’t expect 12 centers a month here on out, ongoing. So I want to make sure we’re appropriately setting expectations. I don’t expect 12 a month ongoing. But I think one of the reasons we did open so many is we did delay some of the Q2 openings. So we had some sites that were right open as soon as we felt comfortable doing that. And I think the rest of the year, you’ll see a more measured monthly opening of centers. I think, Tim provided guidance on the overall number for the end of the year. And then I think we’ll see, again, a step-up at again a measured pace kind of spreading out the center openings throughout next year.

I think one thing that we did learn over the last month or so, is that operationally, I think we can open up a lot of centers very quickly. So I was incredibly proud of our teams. We opened up 12 new locations. There’s still a pandemic as everyone knows ongoing. So hard circumstances. We were able to fill every provider role. We were able to fill every team roll on day 1 from a hiring standpoint. Centers all opened on time, no big glitches. So huge shout out to our expansion teams, our recruiting team, and all of them, really appreciate all their hard works to make that happen. So I think that is a good validation for us that we have the ability to open up a lot of centers. And so as we continue to progress, we can see results, I think we have the ability to step that up if we feel it’s prudent. That’s kind of piece one.

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On the second question around how do we select markets. I think about that in two pieces. Piece number one is the market itself we’re going to. And then I think probably just it’s probably more important actually is the neighborhood in the market. And so I think on a positive Oak Street’s growth trajectory, probably less so positive for health care overall but there’s a huge number of markets that really need Oak Street help and really need the type of model we can provide. And we felt a huge opportunity for older adults.

So I think we can make good decisions in the markets we’re in today. I also feel that we could have picked a completely different set of 15 or so markets and had a very similar level of success because we do see really similar success across all the geographies we’re in, and we see similar demographics across most geographies.

And really, when we talk about large cities, there’s not a huge difference in the kind of overall makeup of those cities, demographically. What’s really important, though, is picking the right kind of neighborhood and community to serve within the market. And that’s where, over the years, we fully refined our approach, we actually have predictive algorithms that look at a host of factors and kind of assess the neighborhood and predicted Oak Street score for how attractive that neighborhood is for our model. And so as we go to market, we’ll look at those and other data, and we’ll try to figure out, okay, where is the portfolio of centers that will cover all the neighborhoods we think really can benefit from Oak Street Health and really can be successful. And we’ll over — over years depending on how good the market is kind of get good coverage over those neighborhoods.

And then as the market progresses, the center starts to fill up, we’ll put more infill centers in to build more capacity. So I think there’s a very long list of markets we’re very excited about. And obviously, we won’t be able to look at all of them next year, but over the next couple of years, I think there’s just a huge opportunity to expand in new markets. I think the big opportunity to grow centers in existing markets. And we feel very good about our ability to put up centers in locations where we can really make a big impact to be very successful.

Ricky Goldwasser

And then my second question here is the Global Healthcare conference this week. One thing that was very striking is that appetite for partnerships across the different equity stakeholder, so you entered into this partnership with Walmart. But where else do you see opportunity — similar opportunities to expand into? How should — how do you think about that?

Mike Pykosz

Well, first and foremost, we are really excited about the results of our de novo model. And whether it’s looking historically at how our vintages have performed, whether it’s looking at how recent vintages performed and how that’s improved compared to earlier vintages. Again, we have a lot of confidence in our ability, both to continue to put up more centers, continue to see great economics from those centers. We think the market for our de novo site is massive. .

And so I think there’s a huge bar for us to do anything that is kind of outside that core because the core is working so well and because there’s such a huge opportunity to continue to grow the core over the next decade. And that said, obviously, we have the Walmart partnership, we are willing to pilot things and try things outside the core. Because we also want to find ways to continue to accelerate our growth even more than we already are and find ways to continue to serve more older adults.

And so obviously, as Geoff alluded to, the Walmart partnership cleared that bar as a pilot because we feel like we can expand to geography that are slightly more rural and suburban than generally the kind of the core intercity markets we generally focus on, as well as the fact that, frankly, there’s nothing like Walmart as far as the breadth and percentage of the population that use Walmart on a regular basis. I mean, I’m sure you’ve all seen all the staff that’s amazing.

So we are really, really excited about that partnership and it cleared the bar. We’ll obviously always be looking for other partnership opportunities and other ways to continue to leverage our core strength and accelerate our model. But it’s a high bar. And I think our focus will definitely remain on the de novo model because there’s such a huge opportunity to grow that in a meaningful way.


[Operator Instructions]. Steve Tanal with SVB Leerink, your line is open.

Steve Tanal

Congrats on the IPO. I have a few, but mostly to follow-up on others that have been asked. I guess the one, Mike, you sort of mentioned that you’re getting the same results and the same benefit with respect to sort of the outreach efforts through community organizations and such. I was a little surprised to hear that pleasantly. So I was going to ask you, have you guys tried to think about how much of an impact COVID is having on those outreach efforts and if that’s limiting growth in total patients in any way? Or you just really think that it’s pretty much the same?

Mike Pykosz

Steve, one thing that we take a lot of pride in at Oak Street is continue to innovate and continue to improve. So our outreach model is certainly not static. And in an alternative universe without COVID, I certainly don’t think that model would have been static. We would have I think made some of the same strategic investments around training our teams and really building more of an account executive function on the community outreach side that we ended up making for COVID.

And so what I don’t have is the alternative universe, right, to see how outreach would have performed, if there wasn’t COVID, we continue to make those investments. And so yes, we’re missing a key part of what our model was last year, which is community-based events, whether it’s in our center or outside the center.

And again, it’s too early to tell you exactly how we’re going to perform year-over-year on patients per center per day type metrics because, again, we really start ramping up over the last couple of months, rebuilding our pipeline, getting back in the community. So it takes a little time for the pipeline to fill up and kind of get people scheduled and all the way through.

So I’m optimistic. I think our team is phenomenal in the field. I think they’ve put a ton of work into designing a model that can be successful in a COVID world. I also am optimistic that in the medium term, as the world returns to more normalcy, as hopefully we get a vaccine sometime next year, I mean you’ll see — we’ll see how that plays out.

But if that happens and [indiscernible] community, we can add that back in, while also keeping all the things we’ve expanded, such as our digital marketing, direct response TV, some of the account-based deals — fields. So I think maybe a summary would be, we are — we did lose parts of our model and excited to bring those parts of the model back, but we also feel like we’ve innovated and tried new things that are showing good results. And so we can be successful in this environment, bringing on patients and hopefully, even more successful in the future years. And really continue to drive results forward.

Steve Tanal

Got it. Alright. That’s great to hear. And then maybe just for my last question here on direct contract and follow-up on some of the comments there. I guess could you tell us a little bit more around specifics? I guess what I’m really trying to get to ultimately is an understanding of what governs the number or percent of your fee-for-service patients that could ultimately move into global cap once this program is well underway. And so maybe if you could give us some color around that context on have you applied for the professional model or just global capitation. And I guess, maybe in your minds, what governs that, right, the number of fee-for-service patients that you could move to global cap under the program as it’s structured today.

Mike Pykosz

So we did apply for the global model. And obviously, the focus of our care model is keeping patients healthy out of hospitals. So kind of being able to share in the savings from the reduction in hospitalization is important to make our economics work. .

On the kind of membership attribution side, there’s two ways from our understanding that they’re going to do membership attribution. One is passive. And so we’ll look at past claims and determine where the member is getting the predominance of their care and with an algorithm that’s a little bit of black box assigned them to providers.

That is, for example, the way the Medicare Shared Savings Program, ACO works. The other way they’re doing it, which is more relevant for Oak Street, is active attribution. So essentially, whether there’s an online portal or just a paper form, patients are allowed to [indiscernible] yes, this is my provider. I’d like to be aligned with them in this program. And if those are submitted to CMS, they will align the beneficiary to the program.

And so we think this plays well into our operational strength at Oak Street Health because that is very similar to what we have to do on the managed care side. So if a new patient joins us who has a Medicare Advantage plan today, we need to contact the Medical Advantage plan where the patient — how the patient change their primary care doctor Oak Streeth Health. So we’re going to approach this in a very similar way, where patients that were on traditional Medicare, will go through the same process. And so we [indiscernible] ordinary course of business when those patients come into our center for their visits, we’ll work with them to align.

And there’s no reason why a patient wouldn’t say yes to it, but I understand, I mean the benefit is the same. There’s no network. There’s really no changes for the patient how they access Medicare, they can consult any doctor they want any time.

So from that standpoint, I don’t think there’s any really downside for patients not to do it. But this is new. We’ve never done it before. So I can’t tell you today that what percentage of patients who are on attritional Medicare that come in for visit will agree to sign up or not. We’re hopeful it’s a good portion of them.

And then the last piece around it is, there’s a number of exclusions that, again, it’s hard to really quantify the impact of exclusions because no one’s ever done this program before. So for example, if a patient, my understanding has been on Medicare Advantage for, call it, 1 month of the year, right, then dropped out on our attritional Medicare, they can’t align on this program until the following calendar year.

So to the extent that there’s kind of troughing out of Medicare Advantage, which you do see with a dual outpatient who is SEC eligible, I think that can have an impact, addressable number of attritional Medicare patients.

There’s a couple more exclusions around — they’re align with a different program, some of these other CMMI demonstration programs. If they’re already aligned with an MSSP ACO or other ACOs and it’s mid-year and you meet the patients, they can’t again change that alignment within the year. So it’s not like every single one of our patients will be eligible day 1, and we can go do a bulk sign up, it’s going to be a process and it’s a process, obviously, we think fits very closely two processes we run every day, so we feel good about that. But it’s new. And the other thing, just to make sure if I didn’t already say this, we have been accepted to the program we’ll be in and it will be beginning the enrollment on October 1.


There are no further questions at this time. I would now like to turn it back over to the Oak Street Health team for closing remarks.

Mike Pykosz

Great. Thank you. Well, appreciate all the questions from everyone. And I’ll just end with kind of how I ended the prepared remarks. Our team, and I can speak for Geoff and Tim, but also other broader Oakies, could not be more excited about our opportunity to invest in our patient’s care, to invest in the experience they have. And we really believe there’s such a huge opportunity to transform health care and really make a difference for patients who really need it. And we’re excited to be on this journey. It’s been an exciting time for Oak Street. But in our view, it’s just a milepost in a much broader journey, and we are just getting started what we can accomplish. So thank you, guys, for the time, and we’re excited to be doing this for a long period of time.


This concludes today’s call. We thank you for your participation. You may now disconnect.

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