P3 Health Partners reports flat medical cost trends and revises 2025 EBITDA guidance to reflect operational improvements and future profitability potential.

Good day and welcome to the P3 Health third quarter 2025 earnings call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the Star key followed by zero. After today's presentation there will be an opportunity to ask questions. To ask a question, you may press Star then one on a touchtone phone. To withdraw your question, please press Star then two. Please note this event is being recorded. I would now like to turn the call over to Gabby Gabel of Investor Relations. Please go ahead.

Thank you operator and thank you for joining us today. Before we proceed with the call, I would like to remind everyone that certain statements made during this call are forward looking statements under the US Federal SECurities laws, including statements regarding our financial outlook and long term target. These forward looking statements are only predictions and are based largely on our current expectations and projections about future events and financial trends that we believe may affect our business financial condition and results of operations. These statements are subject to risks and uncertainties that could cause actual results to differ materially from historical experience or present expectations. Additional information concerning factors that could cause actual results to differ from statements made on this call is contained in our periodic reports filed with the SEC. The forward looking statements made during this call speak only as of the date hereof and the Company undertakes no obligation to update or revise these forward looking statements. We will refer to certain non GAAP financial measures on this call including adjusted operating expenses, adjusted ebitda, adjusted EBITDA per member per month, normalized adjusted ebitda, medical margin, medical margin per member per month, and cash flow. These non GAAP financial measures are in addition to and not a substitute for superior to the 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. Please refer to the appendix of our earnings release for a reconciliation of these non GAAP financial measures to the most directly comparable GAAP measures. Information presented on this call is contained in the press release that we issued today and in our SEC filings, which may be accessed from the Investors page of the P3 Health Partners website. I will now turn the call over to Eric Kaufman, CEO of P3 Health Partners.

Thanks Gabby, Good morning and thank you for joining us today. As we discuss our third quarter results, I want to begin by framing where we are in the evolution of the business. This continues to be a transitional year, one focused on improving stability, strengthening operating discipline and maturing the clinical foundation of the organization. Throughout this period we have remained focused on execution in our core markets, deeper provider alignment and consistent delivery of our care enablement model. There are several positive indicators that reinforce the progress we are making. First, our capitated revenue is up roughly 6% and normalized medical cost trend has remained flat year over year even as cost trends across the industry have risen, demonstrating the impact of our clinical programs and utilization management efforts. Second, the operational improvement plan communicated last year is now embedded in the business, achieving over $100 million in EBITDA improvement year over year. Third, as discussed last quarter, we are moving forward with a strategic joint venture that will add approximately 13,000 fully accretive Accountable Care Organization (ACO) members, improving profitability and cash flow and providing a more stable membership mix. As we previously discussed, we have an additional 25,000 Medicare Advantage lives in the pipeline for 2026. Lastly, we are intentionally rationalizing our provider network to improve margin performance. This includes exiting groups that do not align clinically or economically and growing where our care enablement model consistently delivers strong outcomes. Taken together, these elements strengthen the foundation of the business and position us for meaningful profitability in 2026. With that context, I'll provide a brief overview of our quarterly results before Laith walks through the financials in more detail. For the quarter, membership was approximately 116,000 members in line with expectations. Adjusted EBITDA loss for the quarter was $45.9 million and year to date adjusted EBITDA loss was $85.2 million. Adjusting for prior year items normalized adjusted EBITDA year to date was a loss of approximately $70 million, which we believe provides a clear reflection of the underlying performance of the business. As we discussed on our last call, there are 120 to $170 million of EBITDA opportunities over the next five quarters, which we will cover in more detail. Despite the numbers for the quarter, we have addressed and strengthened the processes that support visibility and predictability, the core business continues to show positive signs of stabilization across medical management, quality performance and alignment to population burden of illness. Given this, we are revising our full year adjusted EBITDA guidance to a range of minus 110 million to minus 95 million, which we believe accurately reflects our current expectation for the year. With that reset in place, I want to speak to the underlying performance of the business. The progress we are seeing in the core business is being driven by the Care Enablement Model which embeds clinical support and data driven workflows directly into provider practices. This approach is improving documentation accuracy, quality performance and care coordination. We have strengthened utilization management and care management capabilities, improving predictability across inpatient, post acute and specialty staff. We are also deepening provider alignment with a growing share of lives attributed to Tier one providers who consistently outperform lower engagement groups on both cost and quality Metrics. For example, Tier 1 providers performed 17.4% higher in STAR's HEDIS gap closures compared to non Tier 1 providers in the first half of this year. In addition, we are advancing payment integrity and contract hygiene efforts to ensure that terms are aligned with the value being delivered. This includes targeted renegotiations, standardization across payers, and clearer accountability for execution. Together, these initiatives are building a more stable, consistent and scalable operating platform and reinforcing the earnings durability of the model as we move into 2026. As we look ahead, we are positioned to translate the operational progress we've made this year into meaningful earnings expansion in 2026. We continue to execute against the $120 to $170 million EBITDA expansion opportunity driven by improved alignment with our population's burden of illness representing roughly 40% of the total opportunity scaling of clinical and operational programs that are delivering measurable impact, which represents roughly 30% of the opportunity contractual improvements both secured and in progress, which represents roughly 20% of the opportunity and the remaining portion made up of product and benefit environment stabilization which we've seen from our partners going into 2026. The work underway to strengthen provider alignment, embed the care enablement model and standardized clinical and financial workflows is laying the foundation for earnings expansion in 26 and a model is becoming more stable and scalable over time. With that, I'll turn it over to Dr. Amir Baakus to discuss our clinical performance in more depth.

Thank you, Eric. At the clinical level, our focus remains on consistent execution of the care enablement model. This model embeds care coordination, utilization management and quality support directly into our highest engaged provider practices, enabling clinicians to proactively identify and manage their high risk patients. This remains a key driver of the stable medical cost trend we are seeing in the business. We are also continuing to deepen alignment with Tier 1 providers and the share of lives attributed to these higher performing practices continues to increase. These providers consistently demonstrate stronger documentation accuracy, higher quality performance and more effective management. Of chronic and complex patients. In addition, our clinical programs in post acute management, chronic care management and specialty utilization continue to operate consistently across market. These programs are designed to ensure appropriate care transitions and avoid unnecessary inpatient stays improve chronic condition stability through longitudinal care engagement and provide clear pathways and oversight for high cost specialty treatment. Looking ahead, our focus is on expanding Tier 1 participation, continuing to standardize these clinical workflows across market and further integrating data and clinical insights into day to day provider practice support. With that, I'll turn the call over to Laith to discuss our Q3 results.

Thank you Amir. I want to start by providing context on the quarter and then walk through our financial performance liquidity and our 2025 full year outlook. As Eric noted, this remains a transitional year focused on strengthening the operating foundation of the business, improving clinical and financial execution, deepening provider alignment and supporting long term scalability. We are aligning our cost structure to the scale of our model and we are encouraged by the stable medical cost trend and the impact our care enablement model is having across the core business. With that, I'll walk through the financial performance for the period. Total capitated revenue for the quarter was 341.6 million, or approximately 982 per member per month. The quarter reflects the recognition of unfavorable mid year settlement adjustments, reconciling previously estimated accruals to actual settlements received. We have reviewed the drivers of the variance and strengthened both our teams and our process to support greater visibility and predictability in future settlement recognition. These improvements are now in place and are embedded in our current operating On a normalized basis adjusted for prior year items, capitated revenue per member per month (PMPM) is approximately 6.4% above the 2024 full year average, reflecting continued improvement in burden of illness documentation and impact of our improved contract terms. Medical margin for the quarter was 4.4 million or $13per member per month (PMPM) compared to 500,000 or $1per member per month (PMPM) in the prior period. The reported results this quarter reflect the impact of the mid year settlement adjustments recognized in capitated revenue. Excluding this effect, underlying medical cost trend normalized for prior year adjustments remained stable consistent with the pattern we have seen throughout the year. On a year to date basis, medical margin was 52.2 million or $50 per member per month (PMPM). On a normalized basis, adjusted proprietary items year to date, medical margin was 80.8 million or 78 per member per month. Importantly, as Eric touched on in his opening remarks, normalized medical cost trend has remained essentially flat year over year, reflecting the progress we are making in clinical execution and cost management discipline. Operating expense for the quarter was 21.1 million compared to 31.6 million in the prior year period, an improvement of 10.4 million or 33%. This improvement reflects targeted reductions in core administrative headcount and support cost as we continue to align our cost structure with the operating model and scale of the business. At the same time, we have reinvested in market operations, provider support, utilization management and care coordination roles that directly influence clinical performance and medical cost trend stability. The result is a more focused and efficient operating model with resources concentrated on the areas that drive performance, predictability and long term sustainability. Adjusted EBITDA for the quarter was A loss of 45.9 million and year to date adjusted EBITDA loss was 85.2 million. On a normalized basis adjusting for prior year items year to date adjusted EBITDA loss was approximately 70.1 million. We believe this normalized view provides a clearer reflection of the underlying operational performance and the progress made throughout the year. This normalized trajectory reflects stable underlying medical cost trend, continued maturation of clinical and utilization management programs and ongoing alignment of our provider network towards higher performing Tier one practices. Taken together, these elements provide a sound starting point as we move into 2026 and continue to execute against our plan. From a balance sheet perspective, we ended the quarter with $37.7 million of cash. We are maintaining a disciplined approach to working capital management and resource allocation as we execute through the remainder of the year. Given the year to date performance and the normalization adjustments discussed, we are revising our full year adjusted EBITDA guidance to a range of $110 million loss to a $95 million loss. This range more accurately reflects our current run rate performance and incorporates the improved controls now embedded in our operating cadence. It provides a clear, durable baseline from which to execute going forward. Stepping back, it's important to look at our performance and trajectory over a multi year horizon. In 2024, the business operated at a normalized adjusted EBITDA loss of approximately $191 million. Reflecting structural challenges and prior year dynamics, 2025 has been a year of reinforcing the operating foundation, positioning the business to scale more effectively. As our efforts mature, we continue to execute against the 120 to 170 million in adjusted EBITDA opportunities for 2026. We have line of sight to achieving meaningful profitability next year. With that, I'll turn it back to Eric for closing remarks.

Thanks Leif. Before we open it up for questions, I want to leave you with three key takeaways that reinforce our confidence in the opportunity ahead. First, our core operating model is working. We have seen stable medical cost trend throughout the year driven by consistent execution of our care enablement model, stronger Tier one provider alignment and disciplined clinical program delivery. This stability is foundational and it is what allows us to scale effectively. Second, we see favorable macro tailwinds heading into 2026. Payers have already signaled a shift towards more sustainable benefit designs and we expect to benefit from the improved rate environment communicated by cms. Together, these trends support more rational competitive landscape and improved economics for value based care models like ours. Third, and most importantly, as we've highlighted earlier on an apples to apples year over year comparison, we have demonstrated the ability to improve EBITDA over $100 million from 2024 to 2025 and have identified 120 to 170 million in EBITDA expansion opportunities from 25 to 2026 that we are actively executing against today. In short, the foundation is in place. 2025 has been about disciplined execution, aligning the network, reworking our contracts, maturing the CARE enablement model, and establishing a disciplined operating cadence. This work positions us to deliver meaningful profitability in 2026 and support a more durable business going forward. With that, let's open it up for your questions.

We will now begin the question and answer session. To ask a question, you may press Star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw the question, please press Star then two. At this time we will pause momentarily to assemble our roster. Our first question comes from Josh Raskin with Nephron Research. Please go ahead.

Hi, thanks. Good morning guys. Wanted to start on the renegotiation efforts and I know you talked about this last quarter and having made some good progress. But I guess, you know, the question that sort of I keep coming up with is, you know, what convinces the plans to sort of seed margin in their MA books, especially when they're trying to increase their margins for 2026. And you know, now that you can see the benefits for all the plans for 2026, do you think the changes they made were consistent with the conversations when you guys were going through that recontracting process?

Hey Josh, thanks for the question. This is Eric. Yeah, I think so. And there's differences across each geography in terms of how they approach benefit design. And there is a mix across the markets, but it meets our expectations in terms of what they did to the benefit designs in those geographies. And then when I think about, like why on the renegotiations, like what is the motivation for the payers? You know, there's a lot of investment that happens from our business into their membership. And they need the help especially on things around high risk patients med expense reduction as well as stars and quality. And so those are the things that I think are really driving those conversations.

Okay, and then maybe just a quick follow up on that. Have you made an attempt to sort of have the plans have more skin in the game, you know, sort of participate in, you know, a potential surplus that you can create, you know, or all of your contracts for 20, 26 full capitation?

So the. It's a good question. And I think, I think one of the things that we're doing in terms of them having skin in the game, you know, we take the risk from the payers, they get their administrative margin and then we have a percent of premium that we use to run our business. So in terms of the skin in the game for them, it's really around the execution on the business that may be outside of our business. And then they also have to hit the things that drive star's performance that are plan related.

On their side. Okay, yeah, yeah, I'm just thinking like, yeah, I'm just thinking like how do you align, you know, the incentive around medical management and making sure that they're doing everything that they can. It just seems like we keep getting some of these prior year things that are prior period things and you know, the payers keep coming back with updated data. I just know if there was a way to sort of think about getting them to pay more attention. But you still think just taking 100% cap, that's the model and that's been working, right? That's your idea?

Yeah, that's correct.

Okay, thanks. And I agree with you.

I mean, I think that the partnership that we have and that we're developing with the payers on a go forward basis, there's bilateral accountability for outcomes on the things that we're supposed to be doing and we've increased the cadence that we're doing those meetings. We have a lot more visibility and we've set probably different levels of expectations for them moving forward. If that's helpful.

Yep, that's helpful.

Thank you. You're welcome.

Again, if you have a question, please press star then one. Our next question comes from Ryan Langston. Excuse me, Ryan Langston with TD Cowan, please. Go ahead.

Hi, good morning. Thanks. I think in the last one or two calls you've talked about some of the issues being sort of targeted at a single payer, single market kind of dragging on performance. Was the guidance reduction sort of driven by that payer by that market or is it sort of more broad based?

It was a little more broad based, Ryan. It's a good question really. The guidance reduction was primarily related to two things. One is the mid year settlements came in less than expected. And so as we talked about, we've got new structural controls put in place around the process, both with how we're coordinated between our MRA function and our finance function moving forward. In addition, that was one of the last areas that we restructured in early 2025. So our expectations going into 25 were based upon some old processes that we feel like we have corrected moving forward at this point in time. And then a smaller portion of the guidance reduction was related to our back half assumptions on some of our medical cost initiatives just got pushed out and that will flow into 2026. And so that was a smaller piece of the reduction as well.

Okay, and then just on that, I think you also called out last quarter some non core assets dragging on the performance. Yeah, I'm sure that's intermixed with that one market, one payer. But any sense on how those particular assets are performing and I guess is there an opportunity to just maybe shed some of those into 26 or maybe even into 27?

Thanks. Yeah, it's another good follow up question. So appreciate that we are still experiencing in 2025 headwinds associated with one of our markets. And as part of our expectation for 2026 in the 120 to 170 EBITDA opportunities that Eric outlined, part of that expansion of EBITDA is related to contractual adjustments related to that market.

Okay, thank you so much.

Our next question comes from David Larson with btig. Please go ahead.

I'm sorry, can you please repeat what the prior period dollar amount was in the third quarter? And I thought I saw some language about settlement in the third quarter. How much was that either favorable or unfavorable.

So the prior period amount net in. Our P and L David was a $3 million decrement. So we had $3 million of actual headwind in the quarter. And part of. And when we say prior period, our prior period for the definition of what we're talking about here is 2024 related, not anything 2025 related. The mid year true up was a. $21 million impact to Q3 specifically. And that is effectively the fact that Q1 and Q2 were running at a higher revenue rate based on expectations than what materialized in Q3. And thus we took the adjustment in Q3. So it was a total 24 million unfavorable impact in 3Q.

Yeah, okay, that's helpful. And then I guess it's great to hear that the trend is normal is how you described it. I guess my question is what are the odds of another sort of I guess prior period adjustment in 2026 related to 2025 claims? I guess. Why wasn't, why weren't those. Claims expenses booked in 2024? I guess what caused the lack of visibility, I guess. Thank you.

Yes, some of this is the fact that we do have non delegated plans and we get data later than expected. And so some of that is just materialization of how that data comes through our P and L. The expectation for 2026 would be that we will have a more consistent method of how we are booking our expenses and our revenue. That should preclude that normalization from having to happen. And why we're normalizing to a large degree is because we want to compare our 2025 results to 2024 and 2024 was effective, was really, really lumpy. It was very back half loaded to how expenses hit the P and L. And then in Q1 we had a material cost adjustment on the medic side that related to 2024. My expectation moving forward is that you will have normal fluctuation of how IBNR settles out and runs out, but that. We won't have these material swings moving forward.

And just to add that, just, you. Know, based on Josh's question about how, you know, the relationship with the payers and how that's working through, this is. Another element there where, you know, with. Our improved JOC that we're having with the payers and us laying down a different set of expectations and having some, you know, some new people too that are doing some of this work, you know, we're going to be able to eliminate some of those miscommunications or late communications from what you've seen previously.

Okay. And then just in terms of like PMPM revenue growth expectations in 26, what percent increase would you expect to see based on number one, improved coding and then number two rate increases which I would assume would flow through from the favorable MA rates the plans are going to get.

Yeah, this is Eric, I'll take the first wing. And so we've, we've done a pretty. Deep look at the rate changes that are coming through and as you know that's it varies by county in terms of how that works out. So if you look at the whole country, the aggregate is about a 5% net improvement in premium and it turns out that in our four markets, that's exactly where we land in aggregate is a 5% improvement in premium in terms of those overall dollars. You know what we've talked talked through with the expectations for the burden of illness operations. You know, we are seeing improvements year over year in those numbers, David. We will have full guidance on the impact for that until we get into the next quarter.

Okay, so the 5% includes coding improvement and also the premium.

No, 5% is just the base rate improvement. And then, and then as we look at the coding improvement, we'll have better line of sight into that as we get into the next quarter. But we are happy with the progress. Same year over year.

Okay, and just one more quick one. What was the PMPM cost trend in the quarter? Did I hear it was flat or normal? What was the percentage?

So when we compare, when we say. Our part A and our part B. Costs, David, are flat. When we say normalized 2025 year to date versus full year normalized 2024, that is the flat trend.

Okay, so if that continues, you should see at least 500 basis points of gross margin expansion in theory. In 26.

Yes.

Correct. Okay, thanks very much. I'll hop back in the queue.

Thanks.

Again. If you have a question, please press star then one. At this time, there are no more questions. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.