PRVA - Privia Health Group: Promising Outlook Ahead

2023-03-31 07:06:21 ET

Summary

• Medicare represents a significant growth opportunity for PRVA's business model, particularly as Commercial members move into Medicare and MSSPs or fully capitated arrangements.
• The formation of new partnerships in four new markets in 2023 could be a strong catalyst for PRVA's growth and stock re-rating.
• With a more diversified portfolio of businesses, PRVA is less vulnerable to MA reimbursement risk.

Thesis

I reiterate my buy rating in Privia Health Group ( PRVA ) after reviewing its strong 4Q22 results and their 2023 guidance. I believe there is room for improvement despite the fact that their forecasts were slightly above market expectations. This is largely based on my belief that management tends to be conservative (as can be seen from their performance vs consensus historically). This quarter's results brought attention to two aspects of PRVA's story that were not fully appreciated before: the company's flexible strategy as it gets ready to expand into four new markets next year using two different business models, and the significant growth potential as Commercial members move into Medicare.

Results

The fourth quarter for PRVA was strong, with revenue that surpassed consensus estimates and also helped to drive EBITDA leverage that was slightly higher than consensus estimate. I believe a lot of attention was paid to the FY23 guidance as well, which is in line with or slightly stronger than previous projections. Despite spending between $8.1 and $10.4 million on expansion into new markets, the company is projecting EBITDA of $70-$74 million for the year. In general, I am encouraged by the company's 4Q results and future guidance. With the growing recognition of VBC shared savings resulting in robust operating leverage in 2023 and beyond, I anticipate exciting times ahead.

Medicare

In my opinion, PRVA's business model has a lot of untapped potential thanks to Medicare, but the market isn't giving it enough credit. A large portion of their value-based attributed lives may be Commercial members at the moment, but I anticipate substantial revenue growth as these patients move into Medicare and MSSPs or fully capitated arrangements. There is obviously higher risk associated, but the rewards are higher fees for care management and the shared savings opportunities. Management believes PRVA can save 10% on MSSP costs and forecasts a 38% year-over-year increase in fully capitated lives alongside rising profits by 2023. This is an improvement over their previous comments of being barely profitable by 2022. To put this into perspective, approximately 35% of PRVA's approximately 135k MA members are enrolled in global capitation, while 71% of PRVA's approximately 198K MSSP lives are in two-way risk models. With an aging Commercial population and promising new provider partnerships, I anticipate a rise in the number of insured people and a deeper adoption of two-way risk models in the not-too-distant future.

Scale is key

I believe the catalyst to pay attention to is the new partnerships. The formation of these partnerships is could be a strong catalyst that cause the stock to re-rate. Connecticut, Delaware, North Carolina, and Ohio are the four new markets PRVA will be entering in 2023. I would note some near-term volatility in the expense line throughout the year due to start-up costs (management expects $8 million to $10 million in start-up costs). The scale that PRVA could achieve with the help of these partnerships is a major differentiator. By entering four new markets, PRVA was able to increase its total number of attributed lives by 26% year-over-year, from 856K to about 1.1 million. PRVA has one of the largest numbers of VB-attributed lives, despite the fact that its value-based arrangements are not exclusively MA-focused. As PRVA places a premium on expanding into existing and untapped markets, I expect this to contribute to their bottom line in a meaningful way. With only 41,000 lives currently in capitation, there is room to increase revenue and EBITDA.

Pipeline

Although new market entrants are only expected to contribute marginally in FY23, I expect each state to contribute significantly in the long run. Management has projected 400-500 providers per state, which would represent a sizable increase in the number of states where PRVA is actually in use. The equity alignment agreement with Novant Health is encouraging, as is the formalization of the strategic partnership with OhioHealth, and I expect both to contribute to successful provider recruitment. It seems likely that after FY24, PRVA's partnerships will contribute significantly more to the company's bottom line as a result of the company's efforts to encourage provider conversion from Privia Care Partners and organic growth in existing markets.

Derisk

With a more diversified portfolio of businesses, PRVA should be less vulnerable to the MA reimbursement risk. When compared to VB players with a larger proportion of Medicare Advantage lives, I believe PRVA's mix of VB-attributed lives will help mitigate their relative exposure to MA reimbursement risk in light of recent concerns over CMS' proposed MA rates for 2024. PRVA will feel the effects if the proposed changes are implemented, but their current MA penetration of around 135 thousand lives means that the reduction shouldn't have a major effect on their consolidated business. Negative effects from a potential decrease in MA reimbursement should also be mitigated by strength in shared savings and care management, as well as by effective cost management.

Conclusion

Based on the strong 4Q22 results and promising 2023 guidance, I reiterate my buy rating in PRVA. With the growing recognition of VBC shared savings resulting in robust operating leverage in 2023 and beyond, I anticipate exciting times ahead. I am also encouraged by the untapped potential that Medicare offers for PRVA's business model, particularly as Commercial members move into Medicare and MSSPs or fully capitated arrangements. The new partnerships that PRVA is forming are also a strong catalyst that could cause the stock to re-rate. Overall, I believe PRVA has a lot of potential for growth and am optimistic about their future prospects.

For further details see: