InnovAge Holding: Wait For Audit Overhang To Go Earlier than Investing (NASDAQ:INNV)

Thesis spotlight

InnovAge Holding (NASDAQ:INNV) has 16% upside. I consider INNV has discovered its area of interest in concentrating on probably the most advanced a part of the healthcare system – twin eligible seniors, they usually have actually gained a powerful first mover benefit. I anticipate INNV to proceed rising because the US faces a powerful ageing inhabitants forward.

On the opposite arms, I believe it’s safer to put money into INNV when the continuing audit overhang is cleared. Whereas administration is assured that they are going to cross the audit and have already put in place vital actions, it’s nonetheless a threat that may affect the inventory’s narrative.

Firm overview

With a give attention to high-cost, dual-eligible seniors, INNV is a complete healthcare supply platform that provides capitated take care of all their medical wants. Every participant’s healthcare is coordinated and paid for by INNV. And somewhat than utilizing different intermediaries, it enters into direct contracts with authorities payors.

Rising healthcare value

In 2020, healthcare spending in US reached $4.1 trillion, or 19.7 % of GDP, a staggering increase from previous years. I believe that is only the start, and that because the inhabitants ages, healthcare prices will rise at a good quicker clip. As well as, I anticipate the federal government’s share (through Medicare and Medicaid) to extend within the coming years as a direct results of the spending enhance.

An asymmetrical quantity of the cash spent on healthcare within the US goes to people who find themselves “twin eligible,” a gaggle that features individuals who obtain advantages from each Medicare and Medicaid. A dual-eligible senior is estimated to value Medicare and Medicaid 3x as a lot per capita as a Medicare-only senior, in accordance with administration estimates included within the S-1. Consequently, I believe a method to slowdown the fast enhance in healthcare spend is by bettering care administration for seniors who’re dual-eligible.

Fragmented healthcare system

Because of the complexity and disjointed nature of the American healthcare system, sufferers usually obtain care from a patchwork of various suppliers who usually have a restricted understanding of their medical historical past. As well as, due to this dynamic, sufferers usually discover it difficult to seek out their method across the healthcare system. I believe it is vital for all care suppliers to collaborate collectively with a purpose to higher handle a affected person’s care. And but, regardless of the clear advantages of working collectively, they persist in sustaining separate departments. This disjointed strategy to affected person care can result in incorrect or inaccurate diagnoses, additional prices, and damaging outcomes.

These issues originate from the truth that seniors who’re dually eligible are particularly weak to being missed by the US healthcare system. Few government-sponsored packages, exterior of PACE, combine these people’ Medicare and Medicaid advantages, which additional complicates efforts to supply complete healthcare. Sufferers who’re eligible for each Medicare and Medicaid sometimes have a number of continual circumstances and use healthcare providers often. Given the excessive prevalence of continual illness and different well being issues on this inhabitants, poor communication between healthcare suppliers can have disastrous outcomes.

The InnovAge Platform addresses the wants of dual-eligible seniors

Based on S-1, greater than 90% of INNV members are dual-eligible seniors, and the InnovAge Platform was developed by INNV particularly to supply such seniors with complete value-based care [VBC]. With its major give attention to PACE, it has resulted in INNV’s having probably the most members of any within the nation. Given its measurement and historical past of success in several areas, I consider INNV is in a very good place to make the most of a large market potential offering care to seniors who’re dually eligible.

The INNV care mannequin was developed with the intention of catering to probably the most weak and complicated members of the dual-eligible aged inhabitants. It provides choice to high-population-density cities and suburbs which might be house to many aged people who find themselves each frail and eligible for the INNV program. By leveraging the InnovAge Platform, INNV is ready to present seniors with complete healthcare that helps their need to stay within the consolation of their very own houses and neighborhoods.

Win-win-win scenario for stakeholders within the ecosystem

In my view, the InnovAge Platform has allowed INNV to develop a healthcare system through which everybody advantages. Because of this, I consider a strong virtuous cycle favoring development and driving INNV’s monetary outcomes will emerge.

1. For members: INNV makes use of its distinctive strategy to boost the wellbeing of its members and cut back the necessity for pricey medical interventions like hospitalizations and nursing house stays. For members, INNV means they will age in place with out having to maneuver out of their houses. Not like some care fashions, INNV caters to the person necessities of every affected person. In my view, this technique leads to blissful, engaged members.
2. For households: Caregiving obligations are tremendously lightened because of INNV. Transit to and from scientific and heart visits, help with actions of day by day dwelling, and the event of social shops to fight social isolation are all taken care of below the INNV mannequin. Most significantly, I believe INNV provides members’ family members the peace of mind that their advanced wants can be met.
3. For suppliers: The scientific and administrative help provided by INNV permits them to focus on affected person care. By incentivizing excellence somewhat than amount of care, INNV relieves the burden of maximizing the variety of affected person visits.
4. For presidency payors: By way of capitated fee preparations, INNV is ready to cut back the general value of take care of dual-eligible seniors.

First mover benefit

Limitations to entry are excessive in INNV’s business because of the complexity of rules, the complexity of working fashions, and the capital required for opening a brand new centre. Moreover, regulators generally restrict the variety of suppliers allowed to serve a given MSA to a single entity. I believe this construction generates substantial benefit for the primary participant that enters in new markets. Due to this, INNV has put forth appreciable effort into growing partnerships with native, state, and federal governments with a purpose to increase its operations into new territories. In my view, INNV’s aggressive edge improves with each new program it creates due to the economies of scale it achieves.

Observe file of scaling enterprise mannequin nationwide

The success of INNV’s central operations in a wide range of markets is proof of the corporate’s capability to scale its enterprise mannequin internationally. The prospectus discloses that, throughout all INNV markets, not too long ago opened mature facilities have achieved optimistic unit-level Contribution Margins in a matter of months. These outcomes display the reliability of the INNV mannequin, they usually give me religion that INNV will be capable of perform its enlargement plans.

Audit / Validation course of

The 1Q replace was encouraging for INNV because it continues to give attention to the trail to sanctions reduction. Through the quarter, the corporate attested to CMS and state regulators that it was ready for validation audits in Sacramento and Colorado as a result of it had achieved 95% or extra compliance with key efficiency measures utilizing an inner tracker. Since INNV has already requested the ultimate assessment and validation and is acting at a 95%+ threshold in opposition to standards set out by the CMS, I consider they’re fairly assured of their capability to cross the audits. Profitable completion of the audit would consequence within the lifting of sanctions in about half of the corporate’s markets. Nevertheless, I’ll reserve judgment till the freezes are lifted formally and a plan for resuming the census is established.

Operational enchancment plans are effectively in progress

Administration’s progress on the operational initiatives they outlined stays regular, and it seems that they are going to end these enhancements by the tip of the yr as initially deliberate. INNV has additionally sped up hiring by 76% by eliminating vacancies in key positions. Curiously, administration has determined to extend employees in Colorado and Sacramento forward of time to soak up capability in these markets as soon as the sanctions are lifted, even though the inhabitants in these areas is definitely lowering. They’re preparing for this by standardizing their care mannequin and implementing Epic software program at their Virginia facilities; they plan to do that in any respect of their facilities inside the subsequent yr. Administration can be spending cash on compliance processes like a routine inner audit. The dedication to operations enchancment is inspiring, and it’s apparent that it’s driving measurable growth.

Valuation

My mannequin means that INNV is price $8.80 in FY24. The core a part of my thesis is INNV can proceed to seize share on this advanced, giant, and area of interest market inside the US healthcare business. On condition that it has already established a big presence with a confirmed playbook for achievement, I consider there must be no points. The plain hurdle right here is the audit course of, ought to it fail, then there’ll vital near-term headwinds when it comes to efficiency and expectations.

Suppose administration manages to cross the audit and proceed to develop, utilizing consensus estimates, INNV ought to generate round $950 million in income in FY25. Attaching the present income a number of of 1.4x in FY24 would translate to $1.2 billion in market cap, or $8.80 per share.

Dangers

Ongoing audit

Because of the audits, CMS has put a maintain on some operations on the Sacramento heart, and this maintain will stay in place till the problems are fastened. An prolonged interval of freezing temperatures might disrupt enterprise actions.

Low penetration charge regardless of many years of operations

PACE has been round for about 30 years, however solely a minority of people who find themselves eligible for each Medicare and Medicaid are enrolled in it. This makes me nervous about this system’s capability to increase and appeal to extra members sooner or later. As well as, the healthcare system as a complete could also be hesitant because of the lack of motion from the most important insurers.

Conclusion

I believe INNV has discovered its candy spot by going after probably the most convoluted a part of the healthcare system (twin eligible seniors), they usually’ve actually gained a major head begin in consequence. Contemplating the huge enhance within the US’s aged inhabitants, I consider INNV can proceed to develop.

If the present audit cloud may be lifted, nonetheless, I consider INNV can be a safer funding. Regardless of administration’s assurance that they are going to cross the audit and their having taken all applicable measures, that is nonetheless a possible threat that might have an effect on the inventory’s story.