P3 Health Partners

Moat: 2.5/5

Understandability: 3/5

Balance Sheet Health: 2/5

P3 Health Partners is a physician-led population health management company focusing on improving health outcomes and reducing costs for at-risk and Medicare Advantage patients through a technology-enabled care model.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: P3 Health Partners operates within the complex and rapidly evolving healthcare landscape, specifically targeting the value-based care segment. They do not provide healthcare directly but instead partner with medical groups, health systems and providers in order to give them more value and tools to serve the customer better. The company focuses on at-risk, value-based care arrangements, where reimbursement is tied to patient outcomes and cost efficiency, rather than the traditional fee-for-service model. A substantial portion of their revenue comes from Medicare Advantage (MA) plans, a government-sponsored program where insurance companies are paid a fixed amount by the government per person per year, regardless of what services are used by customers, which creates incentives for cost management and outcome improvement. In addition to their primary focus on Medicare Advantage, P3 is expanding its reach into the Medicaid market. P3 emphasizes technology-enabled care models, including analytics, care coordination tools, and telehealth, to improve patient engagement and outcomes. The key revenue driver is revenue from Medicare Advantage contracts, but they are also expanding into Medicaid.

P3 Health Partners is not a traditional healthcare provider. They act more like a technology and management partner for existing healthcare entities (medical groups, insurance companies), providing the technology, tools, and management advice for those entities to manage patients in a more efficient and value based way. They also take on the financial risk by getting paid based on the results, not a standard fee-for-service model.

Revenue Distribution:

Primarily, revenues are generated from per-member, per-month (PMPM) payments from Medicare Advantage plans. These payments are based on the number of patients they manage and are dependent on the risk profile of those patients.
In their core Medicare Advantage business, they generally are at full risk for the medical expenses of the plan’s beneficiaries. This means that they get the PMPM regardless of health costs and have to bear any extra cost.
The company generates a small part of revenue from Medicaid managed care plans and care-related services.

Industry Trends: * A shift toward value-based care is reshaping the healthcare sector. This includes a push to move away from a fee-for-service reimbursement model and towards payments that depend on the quality of care and cost efficiency. This trend benefits companies that can drive efficiencies and improve patient health. * A growing adoption of Medicare Advantage plans by Medicare beneficiaries, which has increased the addressable market for companies like P3. As more baby boomers age into Medicare eligibility, they are preferring MA plans, which can offer extra benefits like dental, vision and gym memberships. * Increasing focus on preventative care, care coordination, and technology in order to improve patient outcomes and reduce hospitalizations. * There has been a consolidation in the primary care market, but P3’s management believes this creates additional opportunities for partnership. * Growing importance of at home care, and telehealth. This requires more technology to manage.

Competitive Landscape:

The healthcare industry is highly competitive, with large and established players like Optum, Humana and Clover Health. These companies are larger and have greater market access.
- The competitive landscape also includes some other smaller, newer companies that focus on value-based care.
P3 differentiates itself by its physician-led approach, proprietary technology and analytics, but these advantages may be easily replicated by well-capitalized peers.
A big competitive advantage for P3 could come from having more accurate and better analytics, better tools and better execution than its competitors to retain and attract medical practices and customers.

What Makes P3 Different: * Physician-Led Model: P3 emphasizes that it is a physician-led company, and it is intended to align incentives for physicians and improve care quality. This approach is focused on building long-term relationships with the doctors and a more collaborative approach. * Proprietary Technology and Data Analytics: They have spent time, money and effort to create their own proprietary tech. These include care management tools and data analytics that the company uses to identify high-risk patients and drive outcomes. * Focus on At-Risk Populations: A focus on at-risk and Medicare Advantage populations allows the company to benefit from the rising popularity of value-based care.

While the tech may look like a competitive advantage, many of P3’s competitors are also investing in technology and data analysis. The key to having a sustainable competitive advantage is to make sure that the tech that is being developed has a great impact and is used very well to achieve meaningful results.

Financials (In-Depth):

Revenues: P3’s revenue model is very dependent on Medicare Advantage membership and their ability to collect fees.
Gross Margins: P3’s gross margins are in line with peers. They are subject to changes with increasing healthcare costs and pricing pressures.
Operating Expenses: P3’s operating expenses mainly consist of salaries, administration and general costs. They are growing, and they need to figure out ways to reduce it.
Cash Flow: The company is not cash flow positive yet, but they hope to be in the next few years. They are focusing on a growth first mentality.
Debt: The company carries a fair amount of debt, although it is still manageable, however, this is something investors will keep an eye on. As the company transitions to focus on profitability, their leverage may become a problem.
Profitability: Currently not profitable, a problem they plan to address in the next few years. P3 has struggled to reduce medical care costs. They also reported that due to their new structure, where the medical groups take on more financial risk, they expect a significant decrease in medical expenses in the coming years.
Recent Earnings: Their Q3 2024 results showed that the loss per share was slightly larger than predicted. Their revenue grew 23% vs last year, but medical expenses also grew by 22.4%.

They have very volatile earnings and losses. Management is working to improve those. The management is currently pivoting from a growth-at-all-cost approach to a more sustainable and profitable business model. They are focusing on reducing costs and improving patient outcomes, so they can get better returns for their efforts.

Recent Concerns and Problems

Profitability: Historically, the company has struggled to become profitable due to high expenses relative to revenue and high medical expenses. The focus of management is to streamline costs and improve financial performance.
Losses and Cash Flow: The company still has large losses and negative operating cash flow. This could become a problem in the long term. They rely on the market for funding.
Dilution: A risk for current investors is the company is raising money via equity offerings, diluting current shareholders.
- Their Q3 report showed that cash used for financing was $76 million, almost matching the cash burn of operations of $84 million, a high burn rate that must be addressed.
Dependence on Medicare Advantage: A large part of their revenue is tied to government programs, meaning they face regulatory risks and changes in reimbursements.
Competition: The industry has a lot of competitors. Even though P3 has a somewhat unique offering, they must prove that they can perform better than other competitors.

Moat Analysis:

Rating: 2.5/5: P3 Health Partners has some potential to build a moat, but it is not clear yet if they have a competitive advantage that will create and maintain value in the long term.
Intangible Assets: P3 has a proprietary tech that serves as its “operating system.” While tech can be an advantage, there is nothing stopping a competitor from replicating a similar system. They have also built proprietary data analytics, but the value of data analytics depends on data quality and usefulness, so it’s difficult to quantify how well they do in this part.
Switching Costs: Customers face switching costs because they rely on the P3 system to manage their operations, but those switching costs are likely very small and might not deter a medical group from leaving.
Network Effects: P3’s network effects are not obvious. It doesn’t seem that customers get better value if more customers use P3.
Cost Advantages: While scale can potentially give P3 a cost advantage, they are not yet large enough to have that, and we are not seeing any evidence of structural advantages in their operational model. Their management needs to show they can be effective at that.

Understandability:

Rating: 3/5: The business model is moderately complex due to the interplay of healthcare, insurance, and technology. The core idea of value-based care may be easy to understand, but the specific components of P3’s model can require some effort to understand fully. The details on how they acquire clients, how their model performs in real life and the financial impact may require further exploration. Investors need to understand the technical aspects and complexities of the healthcare market, and how P3’s approach fits in that market.

Balance Sheet Health:

Rating: 2/5: P3’s balance sheet is not the strongest, with high debt and lack of profitability. While their debt is not unmanageable, it is very high and could become a problem. They also are relying on the market to continue funding them, which is not ideal. Their cash position must increase and stabilize over time.

P3 Health Partners

company name (ticker symbol) | Moat: 2.5 / 5 | Understandability: 3 / 5 | Balance Sheet Health: 2 / 5