Business Overview and History
P3 Health Partners Inc. (PIII) is a leading population health management company committed to transforming healthcare by improving the lives of both patients and providers. Founded in 2017 and based in Henderson, Nevada, P3 has rapidly grown to become a major player in the rapidly evolving Medicare Advantage (MA) market.
P3 was founded in 2017 with the mission of providing patient-centered, physician-led population health management services. The company's core business model revolves around entering into capitated contracts with major health plans to manage the healthcare needs of MA members. Under these arrangements, P3 receives a fixed monthly payment per member in exchange for providing comprehensive care coordination and medical services.
P3 entered its first at-risk contract that became effective on January 1, 2018, marking the beginning of its operational journey. The company quickly demonstrated an ability to rapidly scale, primarily entering markets with its affiliate physician model. This approach allowed P3 to expand its network efficiently, reaching approximately 2,900 physicians across 27 markets and 5 states by September 2023.
In December 2021, P3 achieved a significant milestone by completing a series of business combinations with Foresight Acquisition Corp., which resulted in P3 becoming a publicly traded company. This move allowed P3 to access the public markets to support its continued growth and expansion efforts.
Despite its rapid growth, P3 has faced financial challenges since its inception. The company has reported substantial net losses, including $117.3 million for the nine months ended September 30, 2023, and $181.2 million for the same period in 2024. These losses were primarily attributed to costs incurred in adding new members and adverse claims experience, partly driven by general market conditions for MA plans.
Additionally, P3 has identified material weaknesses in its internal controls over financial reporting, which it has been actively working to remediate. These challenges underscore the complexities of managing a rapidly growing healthcare organization in the dynamic MA market.
P3 operates in the $944 billion Medicare market, with a focus on the Medicare Advantage (MA) market, which makes up approximately 51% of the overall Medicare market. The company enters into capitated contracts with health plans to provide holistic, comprehensive healthcare to MA members. As of September 30, 2024, the company's provider network served approximately 128,900 at-risk members.
Financial Performance and Metrics
P3's financial performance has exhibited strong top-line growth in recent years, driven by rapid expansion of its at-risk member base. In 2023, the company reported total revenue of $919.5 million, up 23% year-over-year. Capitated revenue, which accounts for the vast majority of P3's top line, grew 23% to $909.5 million over the same period.
However, P3's bottom-line results have been more challenged, with the company reporting a net loss of $117.3 million in 2023. This was largely due to elevated medical expenses, which increased 33% year-over-year to $867.1 million. The company's medical cost ratio (MCR), a key profitability metric, stood at 94% in 2023, up from 91% in the prior year.
As of September 30, 2024, P3 had 128,900 at-risk members, representing a 22% increase from the prior year period. The company's medical margin, which reflects the difference between capitated revenue and medical expenses, was $78.2 million or $78 per member per month (PMPM) for the first nine months of 2024.
In the most recent quarter, P3 reported revenue of $362,124,000, representing a 26% year-over-year growth. This growth was primarily driven by the 22% increase in at-risk members, from 105,600 at September 30, 2023 to 128,900 at September 30, 2024, due to an increase of nine counties under contract with the company's health plans, effective January 1, 2024. However, the company reported a net loss of $46,512,000 for the quarter.
P3's primary source of revenue is capitated revenue, which represented 98.8% of total operating revenue for the three months ended September 30, 2024. Capitated revenue increased 25% to $357.71 million for the three months ended September 30, 2024, compared to $285.15 million for the same period in 2023. For the nine months ended September 30, 2024, capitated revenue increased 23% to $1.12 billion, up from $909.47 million in the prior year period.
Other patient service revenue, which includes clinical fees, insurance revenue, care coordination management fees, and incentive fees, represented 1.2% of total operating revenue for the three months ended September 30, 2024. This revenue stream increased 38% to $4.42 million for the three months ended September 30, 2024, compared to $3.20 million in the prior year period.
Medical expense, P3's largest operating expense, represented 111% of total operating revenue for the three months ended September 30, 2024. It increased 44% to $401.92 million for the three months ended September 30, 2024, compared to $279.22 million in the prior year period. This increase was driven by the growth in the company's at-risk membership and elevated medical costs.
P3 recorded a premium deficiency reserve (PDR) expense of $18.17 million for the three months ended September 30, 2024, an increase from $12.49 million in the prior year period. This increase was due to management's assessment that increased medical expense is expected to increase future losses on certain contracts.
Corporate, general and administrative expenses decreased 18% to $27.22 million for the three months ended September 30, 2024, compared to $33.06 million in the prior year period. This decrease was primarily driven by a reduction in headcount and a gain recognized on the settlement and write-off of contingent consideration related to a prior acquisition, partially offset by increases in professional fees and non-income based taxes.
Financials
P3 ended the third quarter of 2024 with $63 million in cash and cash equivalents on its balance sheet. However, the company reported negative operating cash flow of $52.9 million for the first nine months of the year, reflecting the ongoing challenges in managing medical costs.
For the most recent quarter, P3 reported operating cash flow (OCF) of -$22,618,000 and free cash flow (FCF) of -$22,618,000. The company's debt-to-equity ratio stood at 1.20, with $62,960,000 in cash and a current ratio and quick ratio of 0.53.
P3 has a term loan facility with $65,000,000 outstanding. The remaining availability under the facility ended upon termination of the commitment period on February 28, 2022.
Liquidity
P3's third quarter 2024 results were impacted by a combination of factors, including lower-than-expected risk adjustment revenue, higher medical expenses, and retroactive adjustments. The company reported an adjusted EBITDA loss of $71 million for the quarter, driven by an incremental $5-10 million in medical claims costs and approximately $35 million in retroactive adjustments.
Navigating Headwinds and Executing on Initiatives
In response to these headwinds, P3 has outlined a series of strategic initiatives aimed at improving its financial performance and moving towards profitability. These efforts span four key areas:
1. Contracts: The company is enhancing its payer and provider network terms to strengthen collaboration and expand opportunities. This includes rationalizing its payer network by 20% and trimming 63 underperforming provider tax ID numbers.
2. Operating Model: P3 is elevating operational discipline and enhancing visibility to drive better outcomes, quality documentation, and utilization management. This includes deploying new programs to increase palliative and hospice care enrollment.
3. Operating Efficiency: The company is implementing measures to enhance service delivery while reducing operating costs. This includes a more measured approach to geographic expansion, focusing on increasing density in existing markets.
4. Data and Analytics: P3 is advancing its data and analytics capabilities to better support decision-making and outcomes. This includes the implementation of Innovaccer's healthcare AI platform to aggregate and unify disparate health plan data.
Management expects these initiatives to unlock over $130 million in EBITDA improvement opportunities, with approximately 60% related to enhanced evaluation of chronic disease burden, 25% from payer and provider network rationalization, and the remaining 15% from operating efficiencies.
While 2024 has presented significant challenges, P3 is confident that these actions, combined with anticipated benefit design changes and CMS repricing in 2025, will position the company for improved financial performance and a path to profitability.
Risks and Outlook
P3 faces several key risks, including its ability to effectively manage medical costs, retain and expand its payer and provider networks, and navigate the evolving regulatory landscape in the MA market. The company's reliance on a small number of large health plan customers also represents a concentration risk.
Additionally, P3 has identified material weaknesses in its internal control over financial reporting, which it is actively working to remediate. Failure to address these issues could expose the company to additional risks and regulatory scrutiny.
Looking ahead, P3 is not providing a formal outlook for 2025 at this time. However, the company has provided some directional comments on its expectations. P3 sees several favorable dynamics for 2025, including the Medicare Advantage repricing cycle and benefit design changes, which are expected to serve as a catalyst for profitability. Many of P3's health plan partners have taken actions during the 2025 bid process to target margin recapture, including less robust plan benefits in 2025, which is expected to result in decreased utilization.
P3 expects the increased medical cost drivers to continue through the end of 2024. However, the company believes the adjusted EBITDA step-off point for the business is closer to an annualized quarterly $30 million loss run rate, versus the $70 million reported in Q3, before the impact of their strategic initiatives.
The company is currently building its detailed 2025 financial operating plan and will share that in early 2025. P3 is focused on executing initiatives that they have identified to capture over $130 million of incremental opportunity, with approximately 60% related to enhanced evaluation of chronic disease burden, 25% from payer and provider network rationalization, and 15% from operating efficiencies.
Conclusion
P3 Health Partners is a rapidly growing population health management company that is navigating a challenging operating environment. While the company's financial performance has been impacted by elevated medical costs and other headwinds, P3's leadership team has outlined a comprehensive plan to drive improved profitability and cash flow generation.
By strengthening its payer and provider relationships, enhancing operational discipline, and leveraging data-driven insights, P3 aims to unlock the full potential of its value-based care platform and position the company for long-term success. Investors will want to closely monitor the company's progress in executing on these initiatives and its ability to adapt to the evolving MA market dynamics.