Astrana Health Q2 2025 Earnings Call Transcript

Quartr
Provided by Quartr
August 7, 2025

Key Takeaways

  • Positive Sentiment: Q2 financial performance: total revenue of $654.8 million (up 35% YoY) and adjusted EBITDA of $48.1 million were both at the higher end of guidance, with 78% of revenue from full-risk contracts.
  • Positive Sentiment: Medical cost trends remained well controlled at just under 4.5% overall, with Medicare Advantage and commercial below target and Medicaid improving sequentially, supporting the reaffirmed full-year outlook.
  • Positive Sentiment: Closed the Prospect Health acquisition on improved terms, reducing pro forma net debt to adjusted EBITDA leverage to 2.7x and targeting $12 million–$15 million in synergies through integration.
  • Positive Sentiment: Reiterated 2025 guidance for $3.1 billion–$3.3 billion in revenue and $215 million–$225 million in adjusted EBITDA, with expectations of further EBITDA expansion in 2026 as full-risk cohorts mature.
  • Neutral Sentiment: Anticipated Medicaid and health insurance exchange policy changes are viewed as manageable headwinds, with worst-case modeling indicating limited impact on EBITDA.
AI Generated. May Contain Errors.
Earnings Conference Call
Astrana Health Q2 2025
00:00 / 00:00

There are 8 speakers on the call.

Speaker 7

Good day everyone and welcome to today's Astrana Health second quarter 2025 earnings call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question and answer session, and instructions will be provided at that time. Today's speakers will be Brandon Sim, President and Chief Executive Officer of Astrana Health, and Chandan Basho, Chief Operating and Financial Officer. The press release announcing Astrana Health Inc.'s results for the second quarter ended March 31, 2025 is available at the Investors section of the company's website at www.astranahealth.com. The company will discuss certain non-GAAP measures during this call. Reconciliations to the most comparable GAAP measures are included in the press release. To provide some additional background on its results, the company has made a supplemental deck available on its website.

Speaker 7

A replay of this broadcast will also be made available at Astrana Health's website after the conclusion of this call. Before we get started, I would like to remind everyone that this conference call and any accompanying information discussed herein contain certain forward-looking statements within the meaning of the safe harbor provision of the Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terms such as anticipate, believe, expect, future, plan, outlook, and will, and include, among other things, statements regarding the company's guidance for the year ending December 31, 2025, continued growth, acquisition strategy, ability to deliver sustainable long-term value, ability to respond to the changing environment, liquidity, operational focus, strategic growth plans, and acquisition integration efforts.

Speaker 7

Although the company believes that the expectations reflected in its forward-looking statements are reasonable, as of today those statements are subject to risks and uncertainties that could cause the actual results to differ materially from those projected. There can be no assurance that those expectations will prove to be correct. Information about the risks associated with investing in Astrana Health is included in its filings with the Securities and Exchange Commission, which we encourage you to review before making an investment decision. The company does not assume any obligation to update any forward-looking statements as a result of new information, future events, changes in market conditions, or otherwise, except as required by law. Regarding the disclaimer language, I would also like to refer you to slide two of the conference call presentation for further information.

Speaker 7

With that, I'll turn the call over to Astrana Health President and Chief Executive Officer Mr. Brandon Sim. Thank you sir. Please go ahead.

Speaker 4

Good afternoon and thank you for joining us on Astrana Health's second quarter 2025 earnings call. We're pleased to report another quarter of strong financial results and disciplined execution as we advance our strategy to build the nation's leading patient-centered, physician-focused healthcare platform. We have held a decades-long belief that the future of healthcare in America depends on building a high-performing network of entrepreneurial physicians and providers, empowering them with purpose-built clinical and technological capabilities, and operating as a delegated pseudo single payer that collaborates with all payer partners. That long-held conviction and the infrastructure we've built around it has created a durable and unique moat, one which has only been amplified as short-term tactics like risk adjustment, gamesmanship, contract arbitrage, and financial engineering disappear across the industry.

Speaker 4

For the second quarter of 2025, we delivered strong performance across the business with total revenues of $654.8 million and adjusted EBITDA of $48.1 million, both at the higher end of our guidance ranges. Revenue grew 35% year over year, driven primarily by continued growth in our Care Partners segment. As our payer partners continue to turn to us for high-quality, coordinated care for their members, we also made disciplined progress in transitioning our membership into more strategically aligned full-risk arrangements. Approximately 78% of revenue now comes from full-risk contracts, up from 60% a year ago and 75% last quarter. Our adjusted EBITDA performance continues to reflect the balanced approach we've taken by responsibly growing our risk-bearing membership while also managing cost trends effectively. While we continue to invest in growth, integration, and technology, we sustained strong profitability and cash flow generation.

Speaker 4

We expect further EBITDA expansion in 2026 as our full-risk cohorts mature and synergies from the Prospect Health integration ramp. Medical cost trends remained well controlled in the quarter, coming in slightly below our full-year expectation of 4.5% on a weighted basis. Both Medicare Advantage and commercial lines of business came in below 4.5%, while Medicaid ran slightly above, although improved sequentially from the first quarter as flu-related utilization declined. Based on our performance year to date and forward visibility, we are reaffirming our 4.5% trend outlook for the year and remain confident that and our ability to continue delivering industry leading outcomes. I'm often asked how Astrana Health can consistently deliver such differentiated cost trend results. The answer is simple. It's the power of our fully delegated, well-coordinated care model enabled by a proprietary technology platform and data infrastructure purpose built for scale.

Speaker 4

Because we operate end to end as a single payer across hundreds of plan line of business combinations, we're able to build deep longitudinal relationships with patients, driving real behavior change and ultimately better outcomes. Our delegated model gives us real time visibility into utilization and claims, allowing for earlier, more coordinated interventions, not episodic reactive care. Shifting next to Prospect, on July 1, we officially closed our Prospect Health acquisition and are now actively deploying the Astrana Playbook to ensure a smooth and value accretive integration. Prospect Health performed in line with our expectations in the second quarter and over the coming months and quarters, our focus will be on standardizing workflows, accelerating technology integration, aligning clinical operations, and executing against the synergy targets we've previously outlined.

Speaker 4

I'm encouraged by the early progress already underway and look forward to the positive impact our combined organizations will continue to make for the over 1.6 million patients that we now collectively serve. Additionally, I wanted to reiterate a few transaction dynamics that we also announced last month. We acquired Prospect Health for $708 million, down from the $745 million we originally anticipated. This purchase price reduction, which in no way related to the performance of the business, as well as the substantial amount of balance sheet cash that we also received, allowed us to close the acquisition at an approximately 2.7 times net debt to pro forma adjusted EBITDA leverage ratio compared to our original estimate of 3.4 times, putting us in a materially better leverage position.

Speaker 4

With that said, however, we will continue to focus on deleveraging our balance sheet to below 2.5 times over the coming 12 to 18 months and will remain laser focused on ensuring a successful integration. With the close of Prospect Health and our confidence in its integration, we updated our full year 2025 total revenue and adjusted EBITDA guidance upward to between $3.1 to $3.3 billion in revenue and between $215 and $225 million in adjusted EBITDA. We are reiterating that guidance today and Chandan Basho will provide additional color later in the call. Lastly, provide some commentary on industry developments. First on Medicaid. While HR1 introduces significant changes to funding and eligibility, we continue to view this as a manageable headwind.

Speaker 4

The full impact will depend on how states implement the new requirements, but we're actively engaging with our state and payer partners to preserve coverage and support continuity of care. Given our scale, diversified footprint, and extensive experience operating through policy transitions over three decades while maintaining growth and profitability, we believe we're well positioned to navigate the uncertainty ahead. On health insurance exchanges, our exposure remains limited at under 5% of membership. While the marketplace faces pressure from elevated acuity and potential subsidy changes after 2025, the impact to Astrana Health has and would be manageable. Finally, on risk adjustment, we continue to see no negative impact from the continued phase-in of the V28 risk model. Astrana Health has always taken a principled approach to value-based care, focusing on improving outcomes and quality, not gaming reimbursement mechanics.

Speaker 4

Our Medicare Advantage RAF remains stable at approximately 1.02, around the same as a year ago despite the continued V28 phasing, which will further widen our lead on those who are more overextended. As it relates to Part D risk, it's worth reiterating that we have minimal exposure with fewer than 2% of members carrying any amount of Part D risk. Looking ahead to 2026, we remain optimistic about Medicare Advantage supported by a favorable final rate notice, increased scale from the Prospect Health acquisition, and a utilization environment that we're continuing to manage. To conclude, I'm proud of the strong and consistent execution our team delivered this quarter. With that, I will now hand it over to Chandan Basho to discuss our financials in more detail.

Speaker 2

Thank you, Brandon, and thank you all for joining today. Turning to our second quarter results, I'm pleased to report that Astrana Health delivered another strong quarter of financial performance at the higher end of our expectations. Revenue for the quarter was $654.8 million, representing a year-over-year increase of 35%. This growth was primarily driven by strong organic growth in our core business, Collaborative Health Systems, and the continued transition of our revenues into full-risk arrangements. Adjusted EBITDA came in at $48.1 million. Net income attributable to Astrana Health for the quarter was $9.4 million, and EPS was $0.19 per share.

Speaker 4

Looking at the balance sheet, we closed.

Speaker 2

The quarter with $342 million in cash and cash equivalents. As Brandon Sim mentioned, pro forma net debt is approximately $700 million and our pro forma net leverage ratio is currently 2.7 times, excluding a few notable timing-related items that benefited the quarter. Free cash flow was approximately $20 million in the second quarter, representing 40% of adjusted EBITDA. We continue to expect full year free cash flow conversion to be between 40% to 45% of adjusted EBITDA. This would correlate to $90 to $100 million of free cash flow for the full year at the midpoint of our adjusted EBITDA guidance. This is based on an assumed full year tax rate of approximately 35%.

Speaker 2

As Brandon Sim mentioned, in conjunction with the close of Prospect Health, we updated our full year 2025 guidance to a total revenue range of $3.1 billion to $3.3 billion and an adjusted EBITDA range of $215 million to $225 million, which we are reiterating again today. For the third quarter, we expect to generate revenue between $925 million to $965 million and adjusted EBITDA between $65 to $70 million. As it relates to seasonality between the third and fourth quarters, we expect both quarters to be approximately similar in terms of adjusted EBITDA contribution. This represents a departure from our usual seasonal trends, primarily due to the impact of Prospect Health. Finally, we want to reiterate our previously stated medium-term adjusted EBITDA guidance of at least $350 million in 2020.

Speaker 2

Despite the dynamic operating environment, we remain confident in our ability to continue to execute and drive sustainable, profitable growth.

Speaker 4

With that, I'll turn it back to you.

Speaker 2

Brandon for closing remarks.

Speaker 4

Thanks, John. To wrap up, we're proud of our strong execution in Q2 and excited to welcome so many new physicians, providers, and teammates to Astrana Health. Our consistent, predictable, and resilient performance, even in a volatile environment, reflects the strength of our model and the moat that we've built. We're confident that this foundation will continue to drive long-term value for our patients, providers, partners, and shareholders. With that, we'll now open it up for questions. Operator.

Speaker 7

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press Star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press Star two to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. We ask that you please limit yourself to one question and one follow up, and if you have additional questions, to please re queue. One moment please while we poll for questions, and the first question comes from the line of Hua Ha with Baird. Please proceed with your question.

Speaker 7

Great. Thank you.

Speaker 7

With Prospect Health closing now more than a month ago, in line with your expectations, much better deal terms. Congrats on that. Now that you have full visibility on their updated financials, it's reassuring to see 3Q the guide and your full year guide unchanged reflects I guess exactly roughly half of your expected deal accretion, $81 million annualized. Curious, how have their numbers been year to date over the first half of the year? Also, anything notable or different than you expected since closing on the deal? Are you more or less optimistic on synergies, possibly new synergy opportunities? Just wanted to confirm you've now executed a number of large deals over the past couple of years. Wanted to hear your updated thoughts on capital deployment priorities going forward.

Speaker 7

Is M&A now officially moving down your priority list and now it's all about integrating all your new pieces, or are you still looking at assets in the market?

Speaker 7

Hey Michael, this is Brandon. Thanks for the question. We are very excited to close on the Prospect Health deal as you mentioned, on slightly better terms than before. We continue to see strong performance on the Prospect Health business in the first half of the year, even though that won't be reported in our Q3 or Q4 financials. We did see continued strength in the Prospect Health business as expected when we were doing diligence on the Prospect Health assets. Going forward, we've embarked on our integration process. Chandan, Dr. Kumar and I have been.

Speaker 4

Meeting with key providers and provider groups.

Speaker 4

We've seen great retention on the provider side as well as on the member side, and we'll continue to work through integration over the first 12 to 18 months. We are continuing to reiterate the $12 to $15 million synergy target over that.

Speaker 4

12 to 18 month period, but we.

Speaker 4

Do believe that over time there may be upside to that number as we continue to integrate into the business.

Speaker 4

Find opportunities going forward. We continue to be excited about the.

Speaker 4

Potential for Prospect Health in 2026, especially in light of the Medicare rate notice and other tailwinds for the business. Great, thank you.

Speaker 4

Just quick, actually a long follow-up question, but with all the upcoming changes from the One Big Beautiful Bill Act, Medicaid, Exchange Marketplace, I was wondering, I know you sound confident, but I was wondering if you could break out what your view is on sort of worst case scenario for both Medicaid, Exchange. I think you mentioned Exchange is only 5% of your revenue, which not much real risk there. Medicaid, bigger piece, 30% of your revenue, but probably lowest margin book to business. I was wondering if you could perhaps dimension.

Speaker 4

It for us what that would look like.

Speaker 4

Like, how if at all that could impact your 2027 EBITDA target of $350 million. Also, specifically as we think about the Medicaid policy changes into 2027, in our conversations with state actuaries, it feels like there could be some pretty notable acuity mix shifts from expansion, members dropping off, just given out there, typically higher PMPMs, lower utilizers than like a typical Medicaid adult or child. If it does drive mix shift and further widen that rate and acuity mismatch, is this something you're also considering? By 2027, basically all of your, I think your locked rate contracts will be up for renewal by then. As you see, conversation you're sort of preemptively having with your Care Partners to unlock those contracts, help provide some protection into 2027.

Speaker 4

Thank you.

Speaker 4

Sure.

Speaker 4

To answer the second part of the question from the last time, we will be pausing on large scale M&A capital deployment until we meet our leverage targets of 2.5 times or below 2.5 times within the first 12 to 18 months. We continue to believe we have a.

Speaker 4

Very straightforward path to accomplish that.

Speaker 4

Ultimately get to the around 2.0 or below range over time based on the growth of the EBITDA of the combined business as well as the cash flow generated by the business. No more large scale capital deployment. Opportunistically, if there are small items that make a lot of sense for the business, we will evaluate those on a case by case basis on Medicaid.

Speaker 4

We.

Speaker 4

We think that the headwinds from the One Big Beautiful Bill Act are manageable. As I mentioned in the prepared remarks, there are obviously a number of headwinds to the Medicaid program that will phase in over some number of years, many of them starting in 2027. That being said, we do believe that these headwinds are manageable given our exposure. To help you size that impact, Michael, the pro forma business will generate around $3.6 billion of revenue in 2025. Around 28% of that revenue pro forma will be from Medicaid. We're talking about $1 billion of Medicaid revenue from both businesses for this year. Even if you assume a very conservative 20% to 25% decline in Medicaid enrollment, that's hyper conservative here. You're talking about a $200 million to $250 million revenue headwind and we're running a mid single digit EBITDA margin on that book of business.

Speaker 4

We're talking about $200 million to $250 million of revenue and maybe $10 million to $15 million of EBITDA conservatively. Again, in context of the broader business, we do view this as a manageable headwind and we'll be doing our best to work with our state and payer partners to make sure that Medicaid is in a good place going forward. In terms of the acuity mix shift that you may have mentioned, obviously again, we're still speculating on this as this has not yet taken effect. Broadly, I would mention that we have different pricing in PMPM by acuity band and these are conversations we're working through with our Medicaid payer partners at the moment. Thanks, Michael.

Speaker 7

The next question comes from the line of Ryan M. Langston with TD Cowen. Please proceed with your question.

Speaker 7

Hi, good afternoon.

Speaker 4

On the 4.5% blended utilization, I appreciate the insights on sort of the trend by payer, but maybe if you could give us a sense on that number on sort of a geographic level maybe.

Speaker 4

In terms of California versus non-California markets, hey Ryan, thanks for the question. We're not breaking out per geography trend at the moment since the vast majority of our revenue comes from California. However, what I will say is that in both the Care Partners segment for Nevada, which we have in four-wall EBITDA profitable in this quarter, and same for the risk-bearing entity in Nevada. As for Texas, we continue to track towards run rate break-even this year as previously guided. The right trends are in our ex-California business. Got it. Just last thing, when you talk.

Speaker 4

About the RAF scores at 1.02, I think you said those are sort of flat year over year, which is good.

Speaker 4

Do you have that number?

Speaker 4

I don't know if Prospect Health actually affects that number or if that included Prospect Health or didn't include Prospect Health. I'm just trying to think how that, you know, might.

Speaker 4

Trend into 2026, even just directionally, if.

Speaker 4

You expect that to be flat or down. Thanks. Sure.

Speaker 4

Ryan, those numbers, the 1.02 did not include Prospect Health since that was a Q2 number. Prospect Health's RAF scores are in line with that. We're not baking in increases in RAF going forward into 2027, but we believe we are insulated and the gap between us and those who are more overextended on RAF will continue to grow. Got it. Thank you very much.

Speaker 7

The next question comes from the line of Craig Jones with Bank of America. Please proceed with your question.

Speaker 7

Great, thanks for the question, guys.

Speaker 4

Maybe to ask back on Medicaid.

Speaker 4

It's great to hear that it's improving, the trend improving 1Q to 2Q. You did have a mismatch last.

Speaker 4

Year of the rate versus trend.

Speaker 4

The rate was not high enough to match the trend. How have the rates trended so far in 2025, and then how long do you think it may take to get that Medicaid back to where you.

Speaker 4

Cardio margin should be?

Speaker 4

Thanks.

Speaker 4

Thanks for the question, obviously Medicaid is still in a very volatile place at the moment. We are sifting through how each state will handle the One Big Beautiful Bill Act at the moment. In California, where a lot of our Medicaid patients are, there has not yet been a rate update, although we have been, as I mentioned before, in active negotiations with the payers in terms of how to resolve some of the rate acuity mismatch. We haven't accounted for any of the resolution of those negotiations in our guidance or in our 2027 bridge. All I would say at this point is that a fairly conservative view has been baked in, and we look forward to concluding those negotiations to hopefully close that gap. Okay, great. Thank you.

Speaker 4

Thanks.

Speaker 7

The next question comes from the line of Jailendra P. Singh with Truist Securities. Please proceed with your question.

Speaker 7

Thank you, and thanks for taking my questions.

Speaker 7

Actually, first I want to confirm your expected cost trend for 2025 is still 4.5% with the Prospect Health deal now closed. Related to that, considering your public exchange exposure, I want to double click on your comments about the changes happening there. Are you expecting any kind of utilization rush in the guidance of your second half as individuals now might lose coverage, subsidies going away, so they might try to push for more utilization? Just any color there on what you're assuming in your guidance for the second half.

Speaker 7

Thanks for the question. First, on Prospect Health, we aren't commenting on specific Prospect Health trend numbers at the moment, but I would say that we've actually baked in a higher trend for the second half Prospect Health business than the 4.5% that we assumed in the legacy Astrana Health business. On a blended basis, which we'll give more updates on in Q3, you will probably see a higher trend for the overall business. Not a large amount higher, but slightly higher. That is baked into the numbers already in terms of our projection for the second half and for Q3 guidance that we just gave. In terms of exchange, it's possible that there will be some rush to utilize at the end of the year. Again, we're being fairly conservative here and it's a small part of the revenue. We continue to believe that this is a manageable dynamic.

Speaker 7

If anything changes on that topic, we will certainly inform the markets. Great.

Speaker 7

You called out that this $12 to $15 million synergy guidance, you clearly see some opportunity there that you might upsize, that you might beat those numbers. Can you talk about what levers you can pull to achieve kind of upside to that numbers? We have seen some reports around kind of headcount reductions at Prospect Health. Just trying to understand, is that already helping you in terms of labor efficiencies, in terms of productivity? Just give us a little more flavor. Upside drivers and what you're seeing right now from synergies point of view.

Speaker 7

I think a big part of the question, a big part of the synergies, to answer your question, are going to be driven not just by operational G&A improvements, which we certainly anticipate to make as we integrate into a unified data infrastructure and get Prospect onto our technology systems, but also in terms of the benefits for our patients and our communities in consolidating and streamlining our clinical processes, in terms of our operational ability to better coordinate care for our members and over time, hopefully that our payer partners will start to value the increased care coordination, the higher quality that we're providing on a consolidated basis.

Speaker 7

On that note, for example, we have already spoken to every one of Prospect's payer customers and they've all been very excited about our combined scale, our stability that we now bring to the combined business, and our capabilities to continue to serve their beneficiaries with a well-managed cost trend, especially in the backdrop of a very volatile cost trend environment, which some of you have already noted on this Q&A session. I think it's really going to be those items on the operational. On the G&A side, our proprietary data infrastructure and our technology platform is built in-house, which I mentioned before, but because of that it gives us the flexibility and the speed to quickly scale up and down, to integrate in a more flexible and scalable way, and really to integrate and adopt AI more rapidly than, you know, relying on a patchwork of vendors might.

Speaker 7

I think those are going to be the large items and over time we'll start to see that really pay off, you know, certainly to the $12 million to $15 million mark, but perhaps with upside to that number as well.

Speaker 7

Great, thanks a lot.

Speaker 7

The next question comes from the line of Jack Garner Slevin with Jefferies. Please proceed with your question.

Speaker 7

Hey, good afternoon. Thanks for taking the question.

Speaker 4

I just want to ask on what.

Speaker 4

You've really seen in your markets, more specifically from the managed care companies, most notably in the MA space on bids for 2026. I know we've gotten sort of a smattering of commentary across the public sphere, but would love to hear sort of if it looks like those in California especially are sort of playing things a little more cool, which I would say is the general tenor in the public space. Just any commentary you have on that would be helpful.

Speaker 4

Thanks for the question. I think broadly it's a bit too early, frankly, to weigh in on bids or plan design at this juncture. We certainly plan to share more as the year progresses, but as you're well aware, somewhat others, I think folks are playing things close to the vest at this point in time. Bigger picture, I think we're very bullish still on Medicare Advantage. We think with our ecosystem and the longitudinal relationships we develop with patients, even sometimes before they even qualify for Medicare Advantage, will really continue to serve us well, which you can see in terms of our trend numbers and the continued profitability and growth of the business, especially going into 2026 as rates continue to improve and because of the combined scale of Prospect Health, which also has a large portion of its revenue coming from Medicare Advantage.

Speaker 4

We really think that over time margins will continue to improve in that line of business from where they are today. I do think it's a bit early to comment on bids at this point in time and we will have more to say on that topic in coming quarters.

Speaker 4

Okay, got it.

Speaker 4

That's helpful.

Speaker 4

Maybe just one more piece in a separate area. I guess probably too much focus is being put on the exchange business, but humor me here. California is a very different exchange market than the rest of the country, so I think some of the dynamics that some folks might be extrapolating do not necessarily apply. I'd just be curious to get your take, Brandon, on given the stability and membership you see there, what do you think is happening at the market level heading into next year? Assuming these subsidies do expire, is there a big pullback in membership, or is that not necessarily the same thing that you might see in some other markets?

Speaker 4

Does it seem like the plans that are active in Southern California or California broadly have bid things up in a manner that there would not be a big hit even if you do see a loss of membership? Just curious to think about things at.

Speaker 4

A little bit of a higher level there.

Speaker 4

Sure.

Speaker 4

Speaking broadly, I think California is a bit of a unique market. It is an expansion state. There has, again anecdotally, been fraud found in some of the non-expansion states. A lot of folks on exchange perhaps don't even know they're on an exchange plan, people who have 0 MLRs, a lot of that going away, which we completely support in terms of CMS and CMI's attempts to reduce fraud, waste, and abuse in the exchange product. That's going to make the rest of.

Speaker 4

The pool looks riskier.

Speaker 4

We've seen a lot of that in terms of the sum risk pool givebacks and the changes in those givebacks relative to accruals and expected accruals, perhaps that were done before some of that fraud was discovered. California is a state-based exchange. Way less fraud, we think. We don't see a lot of the MLR members. There are folks who are using their actual genuine members that qualify for exchange. We don't think we're going to be hit as badly on that front. That being said, if the subsidies go away, depending on how the states react in terms of funding, certainly we do expect there to be some sort of headwind. At less than 5% of members in revenue, we do feel this is a manageable business.

Speaker 4

Both in terms of our diversity of our business as well as the states that we operate in, we are feeling like this is a manageable headwind given the strength of the rest of the business. Awesome. Appreciate all the color.

Speaker 4

Congrats on the quarter and on getting.

Speaker 4

Prospect across the finish line.

Speaker 4

Thanks.

Speaker 4

Thank you.

Speaker 7

The next question comes from the line of Ryan M. Langston with William Blair. Please proceed with your question.

Speaker 7

Hey, this is Matthew Mardula on for Ryan Daniels. Thank you for taking my question. Given your exposure to Medicaid in California, how do you anticipate the recent state legislation that passed at the end of June prohibiting new enrollment of undocumented individuals in Medicaid? How would that impact your Medicaid book going forward? Are you expecting any material effects on enrollment trends or revenue from this change in the future?

Speaker 7

Thanks for the question. We have tried to model out our exposure to the U.S. undocumented immigrant population. We do believe that there is some exposure. That's why earlier when I sized the impact conservatively, we said there could be up to a 20% to 25% enrollment drop in rules. We think that potentially we're talking about a high single-digit, low, low teens type percentage number. Again, that's hard for us to verify, but we do. We are pricing this in pretty conservatively in terms of the percentage that might drop off the rules or that growth might slow as enrollment is frozen or as there are costs passed down to those members in order to stay enrolled. That is an assumption that's already baked into the scenario analysis I provided earlier. Great.

Speaker 7

Thank you for that. Just one quick follow-up. Any updates on the hospital and the pharmacy unit that Prospect Health has? I know the hospital has a large Medicaid exposure, so maybe any plans or any strategies on how to deal with that? Any color to those two units would be great to hear about.

Speaker 7

Yeah.

Speaker 4

On the pharmacy, first, we continue to.

Speaker 4

Believe that's a value added unit for us. As the industry has commented, there are lots of costs associated, especially in part B, that we believe we can work through with our pharmacy now that that's an added capability in house. We're excited about the potential for synergy there and we're just beginning to explore that, frankly, at this moment. We do think there could be something in terms of improving the care and speed that we can get drugs to our patient population. On the hospital side, we're using that again primarily as a care delivery site for our Prospect Health members in a value based integrated environment. We are probably less exposed to fee for service, Medicaid trends, or reimbursement than we might otherwise be because a large part of its revenue and earnings come from these integrated value based arrangements.

Speaker 4

That being said, we're continuing to actively evaluate our portfolio of assets, and if something were to change in terms of our non core businesses, we would certainly inform the market when that happens. Great.

Speaker 4

Thank you so much for the color, and good luck for the rest of the year.

Speaker 7

The next question comes from the line of Andrew Mok with Barclays. Please proceed with your question.

Speaker 7

Hi, good evening. There's been a lot of discussion around value-based care recontracting across the industry. We'd love to hear your view on whether you think you need to make meaningful changes here. Can you help frame how the tone from payers has evolved in recent months in response to emerging pressures?

Speaker 4

Thanks.

Speaker 4

Sure thing. I think one of the biggest differences between us and some of the other players in the space is that we've been very consistent and partner oriented in our discussions with our payer partners. What that means is that when things have gotten hard, we haven't tried to terminate contracts, we haven't tried to pull out of regions that we committed to helping payers out with. What that means also going forward in a more difficult environment is that the payers recognize, especially given our scale now, they recognize the criticality we have, the role that we play in the delivery fabric of the communities that we serve. They recognize the outcomes that we're able to achieve for their beneficiaries and they actually recognize that we.

Speaker 4

Are the cheaper option for them, without.

Speaker 4

Us helping to manage the care, serve in a fully delegated environment, take care of the operating as well as the clinical costs, and improve quality for them. The MCOs will actually incur a higher MLR probably than the cost that they're paying us. They start to realize that value that we're adding. We've been consistently there for them, we haven't tried to terminate in rough times, and we'll continue to be there for them in good and bad times. Because of that, the conversations are quite. As I mentioned earlier, we've had conversations with all of the payer partners that Prospect Health has. Many of them, a vast majority of them, are overlapped with the payer partners that the legacy Astrana Health business has had, and those conversations are going very smoothly.

Speaker 4

Of course, there are going to be differences as everyone weathers through a more difficult environment, but we believe that with our partnership lens, we'll come to an agreement and a common ground going forward.

Speaker 4

Got it. Let me just ask a quick follow up on the acquisition and deal flows. It looks like the add backs to EBITDA increased from about $30 million pre-deal to $55 million post-deal. Can you provide a little bit more detail on the drivers of the increase and help us understand the non-recurring portion within that? I would love to just hear your thoughts on the pace of synergies we could expect for the balance of the year.

Speaker 4

Thanks for the question. A vast majority of the add backs are related to one-time transaction fees associated with the transaction. It was a fairly large transaction, so legal fees, M&A advisory fees, accounting fees, etc. are related to the transaction itself. I will note that on a net income, on a GAAP net income and EPS basis, we continue to be profitable. On a cash flow basis, we continue to be profitable, even including some of these dynamics, which we believe is unique in our industry. On the timing of synergies, as I mentioned before, $12 to $15 million of synergies over the first year, year and a half, 12 to 18 months is what we've currently guided to and reiterated this quarter. We certainly will be racing towards hopefully the higher end of that range and the shorter end of that range.

Speaker 4

We'll provide more updates as we get a little further into the integration process here. Great.

Speaker 4

Thank you.

Speaker 7

The next question comes from the line of Matthew Dale Gillmor with KeyBanc Capital Markets. Please proceed with your question.

Speaker 7

Hey, thanks for the question. I know it's been a month, but congrats on the Prospect Health close nonetheless.

Speaker 4

Sean had mentioned there were some timing.

Speaker 4

Issues that benefited cash flow in the.

Speaker 4

Quarter, if I heard that correctly.

Speaker 4

Can you just give us some details on what those were, and should we expect those to normalize as we move?

Speaker 4

Into the third quarter?

Speaker 4

Hi.

Speaker 2

Yeah, just to reiterate, our cash flow for this quarter was much higher than what was shared in the call. That was mainly due to the ACO REACH payments as well as income taxes. Both of those items are items where you'll see them kind of revert in Q4. I want to reiterate on a full year basis we are very confident in terms of our guidance in that $90 to $100 million number.

Speaker 4

Great, I wanted to follow up.

Speaker 4

On the performance outside of California.

Speaker 4

Brandon, you and I have talked.

Speaker 4

The past about the importance of getting.

Speaker 4

Delegated for claims in states like Texas. I just wanted to see if.

Speaker 4

Is there any update in terms of your ability to get claims delegation in that market, and how you're feeling about the performance in Texas through the first?

Speaker 4

Half of the year.

Speaker 4

Yeah, we're continuing to see progress and openness from payer partners. Not all of them as mentioned before, but certainly on some of our contracts to move towards fully delegated contracts. There are contracts turning on in that fashion starting in Q1 of 2026 in Texas and in Nevada, a couple turning on then, but also some that were already in, in terms of Nevada. There continues to be progress on working towards that delegated environment that we're used to in California. As I mentioned earlier, the path towards profitability continues to be on track in terms of our expectations for both of those states.

Speaker 4

Great.

Speaker 4

Thanks a lot.

Speaker 7

The next question comes from the line of David Michael Larsen with BTIG. Please proceed with your question.

Speaker 7

Hey, congratulations on the good quarter. Can you maybe just talk a little bit about the robustness of your data collection? There have been some value based care organizations that had all kinds of adjustments this quarter. Some plans did as well. There were unfavorable prior period adjustments. There were risk score adjustments to the revenue, I guess like number one in terms of coding for each member, making sure that you're getting the right proper revenue for each member. Can you maybe just talk about that process in home evaluations? And then number two, the completeness of the data. What is the risk of an unfair, unfavorable prior period development sort of chart as we progress through the year?

Speaker 7

Thank you. Thanks for the question, Dave. Our business model is completely different from the rest of the industry. I think our results are completely different, which is what you're seeing as we continue to have stability, predictability, and growth in our numbers, even at what others have been calling a uniquely difficult time for the industry. As a reminder, we operate as a single payer. We're delegated in almost all of our business. What that means is that we, across.

Speaker 4

All of our payers and across all.

Speaker 4

Of our lines of business perform credentialing, we perform prior auths, we pay claims, we handle grievances and appeals, we handle care management and care coordination and quality and risk adjustment. Most importantly, two of those items, OS and claims, means that we have the ability to better project cost and have real-time visibility into the health and status of our patients. That also means it makes it easier for our actuarial team to model what that looks like. We can do that across all payer types and all lines of business. What that results in is that you aren't seeing the same massive negative prior period developments that perhaps have been reported by others in the value-based care space. We act as both the provider and that single or pseudo single payer entity in terms of processing claims.

Speaker 4

In fact, on that book of business, we would actually receive the awesome the.

Speaker 4

Claims before our payer partners would.

Speaker 4

We would actually process that first, then forward that across to our payer.

Speaker 4

Partners afterwards once those are adjudicated by our systems.

Speaker 4

We've built our data infrastructure and technology layer fully in house. Of course, we rely on infrastructural vendors like Amazon and whatnot, but the rest of this stack is completely built in house. We have that flexibility. We have the unified data architecture that frankly no one else does across the industry. That allows us to operate at a pace and with results that the rest of the industry can't match in tough times. You'll continue to see us extend our lead over the industry because of that dynamic and because of the business model in which we operate.

Speaker 4

Okay, in terms of the accuracy of the coding and the revenue that you're receiving per member, if you could just touch on that briefly, that'd be great.

Speaker 4

We have our in-house RAF modeling program as well as an NCQA-certified HEDIS program. We review all of the charts internally. We obviously submit those records to the plan and ultimately to CMS, and we do audits regularly on that data. We believe that our risk adjustment is very accurate. There are probably some opportunities in terms of risk adjustment that I've talked about before, but again at 1.02 and consistency in risk adjustment, even as V28 continues to phase in, we feel very comfortable with our risk adjustment practices.

Speaker 4

Okay, what was the % trend in the quarter? Sorry, last question.

Speaker 4

Percent trend in the quarter overall for the legacy Astrana Health business, which is what was reported in Q2, it was just under 4.5% with MA and commercial slightly below Medicaid. Slightly above, Medicaid came in sequentially better than Q1 and we are reiterating the 4.5% trend for the full year. Thank you. Thanks, Dave.

Speaker 7

Thank you. There are no further questions at this time, and I would like to turn the floor back over to Brandon Sim for any closing remarks.

Speaker 7

Thank you all for continuing to follow our story. We look forward to connecting with many of you at upcoming conferences in the months ahead. In the meantime, please don't hesitate to reach out to us or our investor relations team with any further questions. Thank you again and see you all soon. Thank you.

Speaker 7

This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time.

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