Q2 2024 InnovAge Holding Corp Earnings Call

Participants

Jamie Perse; Analyst; Goldman Sachs Group, Inc

Presentation

Operator

Good day and thank you for standing by, and welcome to innovate Second Quarter 2024 earnings conference call. At this time, all participants are in a listen only mode after the speakers' presentation, there will be a question and answer session to ask a question. During the session, you will need to press star one on your telephone, your linear and unlimited message raising your hand is raised. To withdraw your question, please press star one again. Please be advised that today's conference is being recorded. I will now turn the conference over to your first speaker today, Ryan Kubota, Director of Investor Relations, please.

Yes, thank you, operator. Good afternoon, and thank you all for joining the Inivata fiscal 2024 second quarter earnings call with me today is Patrick Blair, President, CEO, and then Adam CFO, Dr. Rich Fifer, Chief Medical Officer, will also be joining the Q&A portion of the call today after the market closed. We issued a press release containing detailed information on our quarterly results for our fiscal second quarter 2024. You may access the release on our Investor Relations sections of our company website, innovates.com.
For those listening to the rebroadcast of this call, I remind you that the remarks made herein are as of today, Tuesday, February sixth, 2024 and have not been updated subsequent to this call. During our call, we will refer to certain non-GAAP measures for a reconciliation of these measures to the most directly comparable GAAP measures can be found in our earnings press release posted on our website. We will also be making forward-looking statements, including statements related to our full fiscal year projections, future growth prospects, Florida, denovo centers, our acquisition of Concerto care, our payer capabilities and clinical value initiatives, the status of current and future regulatory actions and other expectations. Listeners are cautioned that all of our forward-looking statements involve certain assumptions and are inherently subject to risks and uncertainties that can cause our actual results to differ materially from our current expectations. We advise listeners to review the risk factors discussed in our Form 10 K annual report for fiscal year 2023, and our subsequent reports filed with the SEC, including our most recent quarterly report on Form 10 Q. After the completion of our prepared remarks, we will open the call for questions.
I will now turn the call over to our President and CEO, Patrick Blair.

Patrick. Thank you, Ryan, and good afternoon, everyone. I want to begin by expressing my continued appreciation to our colleagues, participants, government partners and the investor community who support innovation. The company's second quarter results were consistent with our expectations and highlighting ongoing performance improvement across the business. It further demonstrates incremental progress in our broader transformation plan to accelerate responsible growth while restoring operating margin lost during the regulatory sanction period. We reported revenue of $189 million for the quarter, an increase of approximately 3.5% compared to the first quarter in center level contribution margin of $34 million, which represents a 17.8% margin. Adjusted EBITDA was $7.8 million for the quarter, which represents a significant improvement compared to the first quarter, which was approximately $2.2 million. Census increased to 6,780 which represents a quarter-over-quarter improvement of 3% Now a few highlights participant.
Net enrollment growth for the quarter was solid at 195, which continues to strengthen our confidence in the value proposition. We are delivering our clinical value initiatives, CVRD's as we refer to them, which focus on unnecessary utilization and lowering medical cost trends are maturing in line with our expectations and beginning to translate into enhanced quality and greater operational efficiency as evidenced by a quarter-over-quarter decrease in our participant expense PMPM of 0.7%. We are still in the early innings of this work but we're pleased with the progress we're making. We are managing their non-Cerner costs effectively in our enterprise service functions, resulting in a sequential decrease in general and administrative expenses as a percentage of revenue from 15.9% to 13.4%, and we completed the implementation of the new Epic EMR in all locations. On December first, we acquired Concerto care PACE, which added two new centers in the highly strategic Southern California market. On January first, we officially opened our new center in Tampa and are now operational in six states Colorado, California, Pennsylvania, New Mexico, Virginia and Florida. With half our fiscal year behind us, we're pleased with our progress and remain laser focused on exiting fiscal 24 with solid earnings momentum. While we have demonstrated strong sequential quarter over quarter progress, significant work remains to achieve our financial goals for the second half of fiscal 24 and to create a glide path for a successful fiscal 25. As I mentioned last quarter, we have a great team confidence in our plan and it continues to come down to consistent execution. We remain focused on the levers that drive near-term performance while continuing to build a long-term foundation of compliance and operational excellence. Simply put, we believe we're on track to unlocking the full potential of the organization at an intentional pace, which will take perseverance and time.
Before turning to our quarterly performance, I want to take a moment to address the California regulatory update. Included in our 10-Q. As you'll recall, we were released from enrollment sanctions in our Sacramento center by CMS in November of 2022 and by the California Department of Health Care Services in May of 2023. Underpinning that release was validation from both agencies that corrective actions had been resolved to their satisfaction and that there were no remaining systemic concerns in October of 2023, CMS and DHCS. conducted the final annual routine audit of our Sacramento center as required for all new centers during their first three years of operations. Following that audit, CMS approved our corrective actions in accordance with their findings. DHCS. notified us two weeks ago that it had identified deficiencies last week, they shared the specific findings with us after careful review of the findings, which are similar to the CMS findings, which we are in the process of remediating. We are confident that we have in place the policies, processes and systems to correct the identified issues. DHCS. also communicated that it will be conducting a targeted medical review of our San Bernardino center. DHCS. has suspended its data test stations in support of our planned de novo centers in downtown Bakersfield, which were scheduled to open this summer. But has indicated it will evaluate lifting the suspension upon resolution of the matter. We remain confident that we will successfully address any issues to the full satisfaction of DCS. and upon satisfactory remediation, the DHCS. will reinstate the attestations. We also remain confident with regard to our expansion plans. This is a highly regulated area rightfully so audits and corrective actions are normal course for all PACE organizations. Given the populations we serve, we have seen the benefits of the foundational changes we've made in every center over the last two years to provide high-quality care. We work closely with our regulators on their audits and conduct our own audits in each center every month. And we've consistently seen a clear positive trend line when opportunities for improvement at one center are identified, we make them quickly and then cascade learnings across the organization.
I want to be clear, compliance has been my North Star since I joined the company two years ago, and that will always be the case. Our leaders share my commitment to transparency and embrace the opportunity to collaborate with state and federal regulators to continuously improve our business. I felt it was important to share this context and draw the critical distinction of where we are today relative to 2.5 years ago, now I'll turn to details about our recent performance. Starting with existing center growth. New participant monthly enrollment continues above pre-recession levels for the second consecutive quarter, consistent with our expectations as I mentioned at the outset, we enrolled 195 participants in the quarter and have enrolled more than 375 participants in the first half of the fiscal year. As we approach the third fiscal quarter, we anticipate some modest seasonality related to the Medicare annual enrollment period. This organic growth contributes to two key objectives efficiently utilizing excess capacity in our centers and new growth, especially in Colorado, helps rebalance the overall mix of our participant risk pool. We're pleased to see that our new participants reflect an appropriate balance of individuals living independently in the community and those that may require some level of support of housing. We continue to see strong demand for our integrated solutions that allow seniors to stay in their homes and communities out of nursing homes. This demand is most evident in the sequential increase in total sales qualified leads, which is up approximately 11% from the prior quarter. Last quarter, we touched on enrollment as a joint effort between innovation and our state partners. While we were seeing aggregate enrollment consistent with our expectations, we continue to observe challenges in select markets, which have resulted in enrollment processing delays in part due to Medicaid redetermination. The barriers we're experiencing include state enrollment, resource constraints post public health emergency policy changes that now require in-person level of care assessments versus telephonic and new state vendors who are still ramping up to targeted service. Recall that this does not affect the eligibility of potential participants, but rather the speed to which we can get them enrolled into pace. However, literally delays can result in prospects evaluating other options and can translate into missed enrollment opportunities our state partners remain active and committed to resolving these issues with us as rapidly as possible to state the positive. We're finding more eligible participants interested in joining innovate than we're currently enrolling today.
On the de novo front, we're pleased to announce that were operational at our new campus center. Recall this state-of-the-art center is approximately 42,000 square feet and is expected to serve approximately 1,300 participants at maturity. Enrollment efforts are underway and job number one is to begin expanding access to the many deserving eligible participants in the community we believe Florida is an attractive six state given the number of eligible individuals and a lack of integrated solutions for the frail dual-eligible population. We're also in the final push of prelaunch activities for our Orlando Center like Tampa. It's comparably sized and represents our latest best practices in terms of building design, technology enablement and operating. We anticipate Orlando Center will be ready to accept new participants in the fourth quarter, barring any unforeseen delays.
On December first, we completed the acquisition of two PACE centers in Southern California from Concerto. We consider this transaction more of a hybrid between an acquisition and a denovo as it included a recently opened center in the crucial neighborhood of Los Angeles with minimal census data center in the final stages of the application for licensure in Bakersfield, we have been evaluating several alternatives to continue responsible growth in this market in these centers facilitating faster and more cost effective expansion compared to building the centers from scratch while enabling us to implement our operating model from day one of note, we anticipate these centers will add modest operating losses to our fully consolidated EBITDA near term as we work through the maturity curve. Taken together, we believe these new centers, along with our pending denovo Center in downtown, demonstrate our ability to augment existing center growth with cost effective expansions. We are excited for the opportunity to serve more seniors and more geographies over the next several months, while also increasing our overall portfolio capacity by approximately 30% once all of these centers are open, which we believe will be a meaningful driver of growth in the near term and represents significant uplift in embedded earnings long-term You'll recall that we measure drive accountability for results through our five pillar performance framework, which includes people, service, quality growth and financial KPIs. We measure these at every center every month we continue to see strong results across our people, service and quality pillars, and we'll continue to invest in the people and resources necessary to further strengthen quality and compliance in each of our centers Separately, we continue to see improvements in reducing external provider costs as our portfolio of clinical value initiatives mature. In the aggregate, we're trending ahead of internal targets on most initiatives fiscal year to date with strong progress in areas such as inpatient admissions and skilled short-stay utilization. We've also observed meaningful improvement this quarter in areas such as reduced end-of-life costs and contract transportation costs.
One new area of focus in the last quarter is ensuring we have the highest performing supportive housing network from a quality compliance and cost perspective. We're continually learning and improving as we go through compliance and quality.
One of our key learnings is how dependent our quality compliance and financial performance is on the quality of nursing facilities. And assisted living facilities in our network, given we have ultimate accountability for the care that is provided and administered in the setting. With this in mind, we have increased our focus on the quality and value of our supportive housing network by ranking our providers on the dimensions of quality of care compliance cost in cooperation in by narrowing our network around higher performing facilities, we're able to ensure all participants have access to the highest performing providers in their treated. We're seeing similar progress in the management of our general administrative expenses this quarter we saw a sequential decrease in G&A of approximately $3.6 million. Importantly, ongoing growth will help to rightsize our overall cost structure as we continue to expand revenue through existing center enrollment and new center development.
Lastly, we're pleased to report that we're now operational across our entire portfolio with the first-ever PACE specific instances. As we've discussed previously, this was a significant investment in dollars in time for the organization. And we view our new EMR as a chief enabler of increased operational productivity, efficiency, compliance and clinical staff satisfaction going forward, while it will take some time to achieve full adoption and the expected benefits in our newer markets. We're already seeing early wins in terms of operational and clinical efficiencies.
In summary, we believe we are improving the business every quarter. And I again want to thank my 2,100 innovative colleagues nationally, who are working tirelessly to make this wonderful program. A reality for participants every single day. We remain focused on the actions that are unlocking both near term and long-term value and believe it will translate into both enhanced competitive differentiation in the marketplace as well as improved financial profile.
Finally, I want to remind the audience that we're excited to be hosting our first Investor Day on February 27 in New York, where we will provide more details on the journey we are on.
And with that, I'll turn it over to Ben to walk through our quarterly financial performance.

Thank you, Badree. Today, I will provide some highlights from our second quarter fiscal year 2024 financial performance, a reaffirmation of our fiscal 2024 guidance and some insight into some of the trends we are seeing heading into the spring. While it is still early in our margin improvement initiatives, we continue to track to our internal targets and are pleased with the progress we have made so far this fiscal year, starting with Ventas. We ended the second quarter of fiscal year 2024 with 18 centers and approximately 6,780 participants as of December 31, 2023. We also reported 20,130 member months in the second quarter, a 3% increase to both ending census and member months compared to the first quarter, total revenue increased by3.5% to $188.9 million in the second quarter compared to the first quarter due primarily to an increase in member months, coupled with an increase in capitation rates, primarily due to a one-time Medicare tool outside the regular payment cycle reported in the second quarter. We incurred $101 million of external provider costs during the second quarter of fiscal 2020 for a 1.6% increase compared to the first quarter the sequential increase was driven by an increase in member months, partially offset by a decrease in cost per participant. The cost per participant decrease was driven by lower permanent nursing facility utilization, partially offset by the increase in inpatient utilization, which is not uncommon in the winter months. Cost of Care, excluding depreciation and amortization of $54.3 million, decreased 1.7% compared to the first quarter. The decrease was due to lower cost per participant, partially offset by the increase in member months. Cost per participant decrease was driven by a reduction in fleet expense, including contract transportation, fuel costs and vehicle repairs and maintenance, as well as a reduction in supplies expense. This was partially offset by an increase in FTEs and annual wage rate increase. Central level contribution margin, which we define as total revenue, less external provider costs and cost of care, excluding depreciation and amortization, was $33.6 million for the quarter compared to $27.9 million in the first quarter. As a percentage of revenue center level, contribution margin increased to 17.8% compared to 15.3% in the first quarter, reflecting an improvement in the quality of our earnings in our centers. Sales and marketing expense was $5.9 million, an increase of approximately $500,000 compared to the prior quarter. The increase was primarily due to increased marketing spend as we launched our new marketing campaign in November and increased head count corporate, general and administrative expense declined to $25.2 million, a $3.7 million decrease compared to the first quarter. The decrease was primarily due to a reduction in third party costs related to legal, consulting and financial reporting and decreased implementation costs associated with FX. The decrease was partially offset by an increase in IT license fees, inclusive of FX and bad debt. Net loss was $3.8 million compared to net loss of $11 million in the first quarter. We reported a net loss per share of $0.03 on both a basic and diluted basis. And our weighted average share count was approximately $135.9 million shares for the quarter on both the basic and fully diluted base adjusted EBITDA, which we calculate by adding interest expense, taxes, depreciation and amortization, M&A and de novo center development expenses and other nonrecurring or exceptional costs to net loss was $7.8 million for the quarter compared to $2.2 million in the first quarter. Our adjusted EBITDA margin was 4.1% for the second quarter compared to 1.2% in the first call. Denovo losses for the second quarter were $2.2 million related to our acquisition of Concerto pace, which occurred on December first in our centers in Florida. This compares to $1.6 billion of de novo losses in the first quarter.
Turning to our balance sheet, we ended the quarter with $54.1 million in cash and cash equivalents plus $44.7 million in short-term investments. We had $83.7 million in total debt on the balance sheet, representing debt under our senior secured term loan plus finance, lease obligations and other commitments. For the second quarter, we recorded negative cash flow from operations of $9.3 million, and we had $1.6 million of capital expenditures. Excluding the purchase price have Concerto pay, we are reaffirming our fiscal 2024 guidance, which now includes the Concerto PACE acquisition. Based on the information as of today, we expect our ending census for fiscal year 2024 to be between 6,800 and 7,400 participants and member months to be in the range of 79,000 to 83,000. We are projecting total revenue in the range of $725 million to $775 million and adjusted EBITDA in the range of $12 million to $18 million. Finally, we anticipate that de novo losses for fiscal 2024 will be in the $10 million to $12 million range, which again is inclusive of our recent acquisition.
I can share it. Okay. In closing, I want to reiterate Patrick's comments as we believe we are continuing to make improvements to the business every quarter. We remain focused on all aspects of the business to drive near-term and longer-term value. And we look forward to providing more details at our upcoming Investor Day on the 27 of February. We will provide details on the event later this week. Operator, that concludes our prepared remarks.
Please open the call for questions.

Question and Answer Session

Operator

Thank you. And at this time we will conduct a question and answer session. And as a reminder, to ask a question, you may press star one on your telephone and wait for your name to be announced. To withdraw your question, please press star one again. Please stand by while we compile the Q&A roster. One moment for our first question. Our first question will come from line of Jason to Sola from Citi. Your line is open.

Great. Thanks for taking my questions on that. He noted a Medicare true-up in the quarter. Apologies if I missed this, but can you help size that trough? And I guess in that context, you've previously discussed or suggested a strong kind of back half EBITDA ramp as the fruits of your clinical value initiatives come to fruition. But your prepared remarks, you talked about seasonality related to the open enrollment period and other nuances maybe in all of that, can you just walk through how you're thinking about EBITDA progression for the rest of 2024 as well?

Sure, sure. And a nice to hear your voice. So a couple of things are embedded in that question on Turner. The first is sorry, the first is that we are on track for our guidance that we issued earlier in the year. So we're reaffirming our guidance, I'd say over the course of the year and not unexpectedly, there are some puts and takes that get us there. So we had a final final adjustment, which was the rate of rate true up related to 2022. And I had to do with the fact that CMS gave us unless your time in terms of submitting that. And it was it COVID relief factor that came through in the second quarter, and that was a sort of meaningful increase to what we received in terms of Medicare rates in that quarter.
We haven't disclosed or broken out the numbers specifically in part because there are a number of factors that go into the course of the year. We just chose not to broke break out individual ones, but that gave us a good boost going into the back half of the year.
Another factor that came into play here was a reduction in rates in California, which we're going to see in the back half of the year. That was an unexpected reduction versus a modest increase that we had in the forecast or in the budget going forward in those two items to a large extent, sort of offset each other. And so that puts us on a path towards getting to guidance for the back of the year.
A couple of other things I would say about enrollment. There is a seasonal component to enrollment. And Patrick, I know you want to comment on that a little bit further, but that affects us as we go into the first quarter of the year. But by and large, all of these things together as we look at the components together, end up with us reaffirming guidance and ending up with us being where we think we're going to come out. But as we indicated earlier, in the year. We're quite confident on the destination towards which we're heading. But you know, at any one particular quarter or will have slightly different factors that get us to that destination.

Hey, Jason, good to hear from you. Just two things we've I may add to what Ben said is, does it relates to risk adjustment accuracy? You probably recall us highlighting that as what are the core sort of pillars of building out our payer capabilities. And CMS had extended the deadline for submission of 2022 calendar year 2022 risk scores. And so it gave us some extra time and we were probably a little conservative on giving it was the first time we've gone through it really as a team an initiative like that, a bit conservative on our accrual. I think we're dialing that in and get a better sense of that. And we've got some third parties helping us to produce better estimates of risk score accuracy changes. I think in the future, I'm hoping that it's going to optimize our forecasting as well and will be up. We'll just do a better job of understanding what period things are going to hit and how does it compare to our accrual on the renewables point related to seasonality, this was up fairly sort of loud and frenetic Medicare Advantage or there was there were some more direct to consumer marketing than I think we've ever seen in our markets. And I think what's been hitting on is we really like to get a full fiscal year under our belt to see all the cycles to see all the seasonality that that's so relevant to our business. And I think for those reasons, some of what's coming from that kind of annual election period doesn't hit us in two Q3, and we're starting to trying to understand what that means and does doesn't have any impact on our growth, et cetera.
On and the CDI. delays, I can I'll call out a specific, but for example, we had a nice opportunity that we saw when we were paying significantly above market rates for some ancillary services. And we were very successful in negotiating the contract. We're probably under club the implementation complexity to get that rolled out on the time line that we fight it as a result that CDI. impact is delayed later in the year. And I think that's the kind of thing that builds hitting on by suggesting we're going to sort of stick with our guidance because there's a lot of puts and takes.

Yes. And I think that one CBI. point. It's important to recognize that we're going to get the targeted amount of dollar savings that we always intended to get. But the contract really just started a couple of months later because it took a little longer to implement and negotiate.

Okay. All very helpful. Appreciate it. Maybe on the point on California, I wanted to ask just broadly around the PMPM rate development backdrop and how should we think about the moving pieces on the Medicaid side right off? Perhaps if you expect, are there any other material changes to kind of mid calendar year rate development, how rate discussions with state partners developing now that the enhanced SNAP is winding down? And then just on the MA component, right, the proposed 2025 rate would suggest another sort of kind of tough year on that front. I guess I'm curious on how you're thinking about the MA side of the rate equation for the second half of this fiscal year and moving into 2025 would be helpful.

I'll start and be very cleanly up. You know, I think we're probably more focused on Medicaid rates. It's still probably a bit too early to know what that's going to look like in the next fiscal year. I think what Bill pointed out is in California, we came in below what we had targeted. I would qualify that by saying that you'll see that as an industry impact in terms of pace and not a innovate specific impact, lots of moving parts, but one notable part notable driver would be the periods of time that stage using the rate buildup in the more in the with the passage of time, the further we get from COVID, the more reflective of actual experiences predicting future experience from a claims perspective, there's still a lot of noise, if you will, in the US on GFT in the rate-setting process that I think is a little bit of the lingering impacts of the dataset related to COVID. So California. So I think where we stand on the fiscal year. So it's having an unexpected impact in the back half of this fiscal year being good at now?

I think it's absolutely right.

Okay, understood. Thanks. If I could squeeze in one last one. I just wanted to quickly follow up on cash flow. It looks like there's a $25 million headwind on deferred revenue year to date. Can you just help reconcile what that was related to if there's any color there?

Yes. The deferred revenue really relates to Medicare as it relates to how the first day of a month falls relative to a weekend. So what happens is if you come if the first of the month falls on like a Sunday, if you will, well, Medicare payments reimbursements are due in the first of the month. What happens is we receive it on the Friday before and so essentially up in the prior month, if you will, by a couple of days. So when that occurs, we set up a deferred revenue account to adjust for that when all of a sudden the first of the month falls on a weekday that gets cleaned up in the following quarter. So when you think about that deferred revenue payments, think about it is just the first of the month for the weekend or not. And how does that impact the timing of the Medicare bid.

Okay, fair. Thank you very much.

Operator

Thank you. One moment for our next question. And our next question will come from the line of Jarrod Hayes from William Blair. Your line is open.

Yes. Hey, guys. Good afternoon and thanks for taking the questions. The first one from us, we're just hoping to dig into the de novo ramp a little bit. Congrats on getting the Tampa facility open. Could you maybe just walk through or remind us a little bit on sort of what the expectations are in terms of how both census and profitability ramp for a denovo facility? And I think a related question here, obviously with the Surgical acquisition in mind, maybe you could talk a little bit about your how and that sort of profitability ramp kind of forms the equation in terms of your perception of sort of a build versus buy opportunity in terms of future growth.

Yes, sure. Why don't I I'll start it off here and then Patrick will jump in with some comments here. First of all, thanks for the congrats. It was a great transaction for us. We're really excited about it. If you were to think about the Concerto acquisition, I guess really think of it as two facilities. There's one which is in Crenshaw, which is up and running, but it's a very small census. So think of that as almost like a de-risked denovo because our sense is in the, call it 2020 folks. And then think about the Bakersfield one, which is a center that's essentially fully constructed, basically awaiting approval to open, right? So when we look at that acquisition, we think of it as a basically de-risked de novo. But generally, the way we think about denovos is that it will take us on the order of six quarters probably to fill them up to the point where we get to a positive center level contribution margin. And then it'll take us some time beyond that before they hit maturity. But really it's in that first six quarters that we really watch the cash flow impact, especially carefully because we obviously want to get them up to be contributors as quickly as possible. And so when we do our forecasting and we go through our strategic analysis about do we want to denovos or we want to do acquisitions or in this case, kind of a hybrid denovo that's the way we model out the business.

Yes, I'll just I'll just add. You know, initially the Investor Day on February 27, one of our goals at Investor Day is to is to bring more clarity to the de novo ramp up and the equity is sort of the unit economics of the business. So we'll do that either in terms of what to expect with the denovo. Each market is different, different density. There's different managed care landscape, different alternatives. But I would say that Sacramento is probably not a bad proxy for what we think we can accomplish in, say example, awarded land, though, I know it's a big market, there's a lot of opportunity and we feel pretty good about our offering. And we've got what a great team on the ground. And we got a grand opening scheduled, I think, on March third suite fourth, excuse me. And so we've got a great opportunity just to introduce that product to the community, and we're feeling really good about it. And we're also feeling good about Sacramento growth. I'm just as well. It's not a new market in terms of a time line, it was it was, as you know, sanctioned not long after it was operational. So in many ways, Sacramento is a new market as we think about the ramp and up, we're really pleased with how the team is doing there.

Okay. That's super helpful. Thank you for that. And then I wanted to follow up and I think this theme of some administrative delays kind of at the state level that's maybe creating a little bit of a headwind for enrollment trends. I think that's come up in recent quarters. As curious, is there anything that you guys are able to do internally in terms of once you've identified in eligible potential participants, sort of working with them working with their families maybe helping them get through that process and maybe speed up some of that time. Is that something that you have any control over? Is it largely out of?

Well, it is a great question. And I tend to ask the team the same question as well. When there are delays that are sort of outside of our locus of control, are there things we can do to, you know, still help the family, see the end of the see the end of the process and feel confident that this is going to be the right solution and it's kind of worth the wait. So we certainly do engage with individuals and their family and make them aware of administrative processing delays and set their expectations of when we think enrollment will occur and more times than not, we're certainly able to achieve that and keep that individual in the funnel and get them access to the services that they need. At the same time, we're dealing with a very vulnerable population. And most of the individuals that are looking to access pace are in need of rather immediate services. And so delays with the processing of applications at the state can and do result in people making alternative choices. Sometimes it's going back into the state fee-for-service program. Sometimes it could be fields in California could be with a competitor in the same territory or they could pursue maybe Medicare Advantage and the belief that there's an option there. But and it is definitely something we do our best to manage. We're working very closely with our states audit. The states have been great partners. It's just the reality that they often use subcontractors for this work and that adds a layer of complexity for us to manage.

Okay. That makes sense. And I appreciate the context there. And maybe I'll just sneak in one more question. It sounded like you launched a new marketing campaign during the quarter. Would love to just hear any specifics in terms of anything that's maybe unique or has changed from prior years in terms of just how you're sort of communicating the message about innovative services?

Yes, another another great question. Tom will be sharing some of our latest creative, if you will, at our Investor Day. And so people get a better sense for if they haven't seen at least our broadcast TV at work. I think one of the things that we are trying to do is to dispel that, you know, PACE is only for the absolute most vulnerable. There are a lot of individuals that qualify for PACE on that same pace as a place to enjoy socialization. You don't meet new friends on address nutritional deficits, and that's a large, a large senior population. And so I think we've tried to use our creative to drive the message home that PACE is a real resource to a broad segment of the kind of the frail senior community.
I think maybe a second thing that's new is we're trying to appeal more directly to family members. You know, I think in many cases, family members find pace as much as solution for them as they do for their loved one. And I think our messaging is starting to appeal to the oldest daughter Keno. Our data will tell us that that's a big decision makers and examples. And so I think we're just trying to appeal to a broader set of market segments. And I think we did successful that we've got a lot of great feedback on the creative.

Perfect makes a lot of sense I'll go ahead and leave it there and hop back in the queue.

Operator

Thank you. And you can as a reminder, that's star one for questions. Star one One moment for our next question. Our next question comes from line of Jamie Pierce from Goldman Sachs. Your line is open.

Jamie Perse

Hey, thanks, and good afternoon on it. Maybe just starting with the Colorado and enrollment trends. Can you provide a little more detail on just the census rebuild there and patient mix that you're getting? I think you mentioned some balance between community versus facility patients broadly, but any any surprises there just in terms of the patient mix them and the broader trends on Colorado census rebuild?

Yes, Jamie, I think I would say that everything's going as we expected and hoped in Colorado, I think we're on the other side of what might have been some pent-up demand. And you know, and I would say that that pent-up demand was maybe less reflective of a traditional participant mix. I think we're on the other side of that on at the same time, I think that at least our gross enrollments on our back to sort of the best period in the Company's history. So coming out of sanctions, we set a goal for ourselves at least near term. So let's get the Company back on kind of the track. It was sort of doing all the right things. And I think we're seeing that. And at the same time, you know, it's some example of a market where demand is probably a bit larger than what's getting processed through the funnel. And we are working closely, you know, on that issue some, but still you know, it's leading to responsible growth in Colorado, and we're feeling really good about it.

Jamie Perse

Okay. Thanks for that. And then just on the seasonality comments, you talked about inpatient in the quarter. I guess any way to put numbers to badges in terms of how that impacted external provider costs in the quarter? And then as we think about the your third fiscal quarter. How should we be modeling out that rolling off? What's what's typical from a seasonality perspective as some of those inpatient costs come down?

Well, first, I would say the seasonality and the relevance of a seasonality consideration is probably more appropriate through the lens of the third quarter versus second quarter because people are some people are going through the annual election period. And it's really going to hit us if people decided to leave pace for Medicare Advantage on ITO. We're just now kind of seeing that in the numbers. I don't think we actually have a good read yet on what's the right seasonality? Are you sort of cycle for the business on one day?
We will see information that does, you know, I think gives us confidence that the seasonality can be muted in the next day. We see some something to the contrary. And so I think we're still trying to figure out exactly what's the right guidance around seasonality and on, it's going to take it's going to take some experience, real-time data to offer that Bill, anything you would add in terms.

Know, I think the second part of your question, which I think was really geared towards how do I think about census in member months for the back half of the year. And I guess I would tell you that we're not really providing any guidance on a quarter-by-quarter basis. You've got the data now on enrollment and member months for Q1 and Q2. If there's any seasonality in enrollment, it's really probably related to the third quarter, which tends to be a little bit lower for the reasons that Patrick just articulated. But then if you think about where we are in terms of our guidance targets being unchanged from where we were originally, I think you can take those three pieces of information and put it together and come up with a reasonable expectation for how we might perform over the back half of the year.

Jamie Perse

Okay. And then last quick one for me. Just on maybe longer term gross margin progression. You've talked in the past about rebuilding that that I'm going to maybe with different building blocks between the COGS lines. How are you feeling broadly about that margin recovery or any areas you'd flag as being ahead or behind of your expectations and and level of confidence in rebuilding that over the next 12 to 18 months?

Yes. Great question. I'll start. Let been we and I would when I think about margin, I think we're beginning to think about it across two dimensions in the business. I think the first priority is to get our overall center level contribution margin above 20%. And we want to do that across the portfolio. And that's inclusive the investments we've made to fortify quality and compliance technology over the last year over the last year. And then I think is sort of the next consideration is more around this adjusted EBITDA target yet we believe we can substantially achieve a high single digit, low double-digit adjusted EBITDA. But as we've talked about before, we have a little different composition. You know how it's achieved because we're running a little heavier on the salaries, wages and benefits in the market, not only because of higher and more staff in fortifying our operating model. But there's national shipping natural inflationary factors that are, you know, a part of that as well that we and other health care organizations are dealing with and, you know, the more the long term margin targets, I think we think of those inclusive of additional scale over time because as we grow, we're going to continue to leverage our corporate G&A, our Epic investment, et cetera. So at this stage, I think we're feeling confident, but we're very focused on the CLCM. is sort of that leading indicator of what's achievable further down on the P&L been in India yes, I think you captured it.

Jamie Perse

Appreciate it. Thank you.

Operator

If I'm not showing any further questions at this time, I would now like to turn it back, Patrick Blair for any closing remarks.

Well, I appreciate those of you took the time to dial in and hear more about our progress. I think I'll close with how I opened up. We're improving the business every quarter on delivering on that commitment is extremely important to myself and into the team. And I think the second is just transparency.
You know, we're trying to provide as much information as possible to help you really understand how the business is operating and you can count on us to be as transparent as possible with the with everything that we face as we transform the Company. And then I just would like to encourage everyone to join us, whether that's in person or through a recorded call, our Investor Day on February 27th. And the goal there is to sort of reintroduce you to the company with a bit more detail than we're able to provide here on these calls and to answer your questions and give you just a deeper look at the business, introduce you to what I think is a fantastic leadership team that can run a much larger company and we're excited to share the story with you.

Operator

Thank you for your participation in today's conference. That does conclude the program. You may now disconnect, and everyone have a great day.