Skylight Health Group, Inc. (NASDAQ:SLHG) Q2 2022 Earnings Conference Call August 16, 2022 8:00 AM ET
Company Participants
Pradyum Sekar – CEO
Farooq Akhter – Interim CFO
Conference Call Participants
Rob Goff – Echelon
Mike Freeman – Raymond James
Operator
Thank you, everyone, for standing by. This is the conference operator. We would like to welcome you to the Skylight Health’s Second Quarter 2022 Financial Results Conference Call. As a — the results are for the period ending June 30, 2022. As a reminder, all participants are in listen-only mode. After today’s speakers conclude the presentation portion of the call, should time permit, they will move to a question-and-answer period. [Operator Instructions].
As always, I would like to remind you that listeners are cautioned that today’s call and the responses to any questions may contain forward-looking statements, including certain statements, which concern long-term earnings objectives. These should be considered in conjunction with the cautionary statement contained in the Skylight Health earnings release and in the Company’s MD&A and other filings.
Forward-looking statements are subject to risks and uncertainties and assumptions. Accordingly, actual performance could differ materially and undue reliance should not be placed on such statements. Skylight Health does not undertake to update any forward-looking statements except as required.
All currencies discussed on this call will be in Canadian dollars unless otherwise stated. This conference call is being recorded today, Tuesday, August 16, 2022, at 8:00 a.m. and will be posted to the Skylight Health’s website within 24 hours at the conclusion of the call.
I would now like to turn the meeting over to Skylight Health’s Chief Executive Officer, Mr. Pradyum Sekar. Please go ahead.
Pradyum Sekar
Thank you, Ariel, and a good morning to everyone, and thank you for joining us today for our second quarter conference call for the period ending June 30, 2022.
With me this morning, I would like to introduce our new Interim Chief Financial Officer, Farooq Akhter. I have worked with Farooq for over four years at Skylight. I can say since his appointment, we’ve seen a dramatic improvement to the way finance integrates with operations. And the direct result of that has been a strong quarter where we have realized a number of cost saving initiatives while maintaining revenue growth. We are glad to have Farooq in this role. I’ll pass the baton on to him in a few minutes to review our financials in more detail.
Skylight Health is a primary care focused organization that is committed to changing how healthcare works in the U.S. We operate a multi-state primary care health network comprised of practices providing a range of services from primary care, sub-specialty, allied health and laboratory diagnostic testing.
Our business model is focused on solving two major issues in U.S. healthcare. First, providing a white knight solution to small and independent primary care practices looking to consolidate within a highly fragmented market; and second, we aim to realign the reimbursement models within these practices to value-based care from traditional fee-for-services only. Under these models, focusing on populations including Medicare, it allows us to receive the full healthcare dollar, putting the patient first and allocating expenses accordingly. Value-based care models are designed to manage the growing cost of care, while improving on patient health outcomes.
I am more than pleased with our performance in the second quarter and proud of what our team has been able to accomplish year-to-date. This is no doubt a market with significant headwinds. In light of this, our teams have been able to focus, heads down on operations, and as a result, we have made significant improvements to our cost basis, which will continue to reflect in improved adjusted EBITDA performance over the next two quarters.
We continue committed to our goal of adjusted EBITDA breakeven by exit 2022. We have already begin — we’ve already been able to reduce our annual cost basis by over $10 million and expect further operational efficiencies to realize our path to breakeven over the next two quarters.
With the acquisition of Neighbor MD and our partnership with CHS, we’ve been able to accelerate our path to value-based care by three years. This is a massive step forward for the company.
Moving ahead, we see the opportunity for growth in Medicare and Medicare Advantage. As part of this, we are now including a new reporting line called capitation revenue. This is a business where we as a provider group receive a global capitated fee per member paid on a monthly basis. Currently, that is about a US$1,000 on average per member per month or US$12,000 per member per year. From this, we include medical expenses all areas of healthcare, including hospital visits, emergency rooms, clinical and pharmacy prescriptions. These are typically included in the cost of sales, which is why the gross margins are lower in capitation than fee-for-service.
Given that, this is going to be a significant area of growth for us. I’d like to take a few minutes here to use the slides presented to be able to explain a little bit more about the Medicare opportunity and more specifically, the economics behind Medicare and Medicare Advantage.
So switching to the slides, for those on the call, I’ll do my best to narrate through the slides, but of course, this is being recorded for later access. So just a quick definition of what Medicare is. Medicare is a federally funded healthcare program that is designed to provide care to seniors aged 65 years and older. When you turn 65 in the U.S., you become eligible for Medicare to either one of two streams: traditional Medicare directly with the federal government program or Medicare Advantage, which is effectively the program similar to traditional Medicare, but administered through one of the private health payers. Medicare is usually divided into three parts, Part A, Part B, and Part D. Each of these represent a cost across Medicare for each member. Part A covers hospital expenses, Part B covers clinical expenses, and Part D covers pharmacy drugs and prescriptions. Every Medicare patient in the U.S. is required to sign-up on an annual basis and re-enroll on an annual basis into a Medicare program. We call this the annual enrollment period, which typically happens over a eight-week period between October and December. The Medicare member can elect to join a traditional Medicare program or can elect to join one or change an existing Medicare Advantage program with a healthcare payer.
Using some of the terminology you’re going to see during the course of this presentation and moving forward, we’re going to cover some quick glossary of terms.
Capitation. Capitation in our presentation refers to a fixed fee paid on a per member basis to cover the cost of healthcare. In a global capitated fee, the capitation fee we receive generally includes the cost that will be falling within all three parts of Medicare. We’ll define capitation either as a per member per month, a PMPM, or a per member per year or a PMPY.
In fee-for-service, we’re talking about traditional Medicare payments where providers are, I’m not sure if the slides are passing through, but just in case are not, I’m going to narrate through it either way. Fee-for-service again as we talk about is traditional fee-for-service, where each encounter is paid for on a per visit basis.
We’re also going to use two definitions called the medical loss ratio and the Medicare risk adjustment. The medical loss ratio MLR represents the proportion of gross revenues spent on medical care for a patient. In this case, medical expenses will include all three parts of Medicare, hospital, clinical, and pharmacy, drugs and prescriptions.
The Medicare risk adjusted score refers to the payment methodology that is used to adjust a payment on a per member per month or per member per year basis. The MRA is dictated by the diagnosis of the patient, the higher an MRA, typically the higher the per member per year, which then increases the funding we receive to provide care for that member.
We’ll spend a couple of minutes here talking about the Medicare Advantage economics. As I think it’s relevant to those to explain, especially as we put context about how we’re now setting a new benchmark for our gross profit margins. As we look on the left, you’ll see a Medicare Advantage capitation model on the right; you’ll see a fee-for-service model. In revenue in Medicare Advantage, as I mentioned earlier, we receive the global capitation revenue, which amounts on average to roughly US$12,000 per year. Compared to fee-for-service on a per visit basis, we typically see an annual value of the Medicare patient at $400 per year. So we’re already talking about values that are roughly 30 times greater in Medicare Advantage compared to fee-for-service.
The cost of sales as I described includes medical expenses across all three parts, which is typically not included in the cost of sales for fee-for-service. Cost of sales in fee-for-service is usually just a four-wall economics of the practice. Hence, you’ll see a larger cost to sales attached to Medicare Advantage, 85% to 90% versus 50% for fee-for-service.
The gross profit does reflect that change at about 10% to 15% in a Medicare Advantage capitation plan versus 50% in fee-for-service. The 10% to 15% falls well within industry benchmarks. This difference however is in the dollar amount, as you can see in the bottom, in the gross profit contribution. Although, you’re recognizing a lower gross profit in Medicare Advantage, the 10% to 15% on US$12,000 a year generates roughly $1,200 to gross profit contribution per member per year. As opposed to fee-for-service, we’re at 50% on $400 a year; we’re generating $200 to the gross profit margin. This significant increase in gross profit allows us as an organization to look at better investments in healthcare for the patient, but also accelerates the bottom line as a result of the increased contribution to both revenue and gross profit.
So as we present the slides further, you’ll start to — and as Farooq reviews his financial performance, again, we believe, our performance here is in line with our peers and that we have opportunities to grow this margin with improvements in the way that we manage and coordinate care for our members.
Adjusted EBITDA improved to $5.4 million loss compared to $6.8 million loss in Q1. As part of the acquisition, there were several readjustments made and the transition of contracting from Neighbor MD to Skylight, where Neighbor MD recognized historically larger EBITDA loss in the quarter. Excluding this, the adjusted EBITDA loss for Skylight would’ve been $4.9 million. This improvement is consistent with what we have previously communicated as part of our efforts to drive towards adjusted EBITDA breakeven this year.
As consistent with our efforts to focus on where value is being placed today, we made the difficult yet conscious decision to de-list Skylight shares in the NASDAQ. We uplisted on the NASDAQ a little over one year ago, with the hope and expectation of a very different market than what we have today. While we delivered on M&A and growth, we unfortunately were not met with the expectations we had. The market we entered is not the market that exists today across the Board.
Reward versus cost does not justify the continued listing for a company of our size at this time. Annual costs required to be a NASDAQ company can exceed $2 million annually. While not large for some companies, we believe it is very relevant for us. Further, the value we see is not what we believe is required for future growth.
As we expect to get to casual positivity in the coming quarters, our need for external capital decreases, allowing us to use our own cash flow for growth in M&A. We believe the cost savings we realize are better spent on growing the business. We see this as a positive step forward for the company and ultimately one that will result in stronger fundamentals to drive valuation and shareholder value.
So with that, I’ll turn it over to Farooq to review the financials in more detail, and I’ll be back with what’s ahead for the rest of 2022, and upcoming 2023.
Farooq Akhter
Thanks, Prad, and a good morning, everyone.
I’m glad to be here in this role with the company working alongside the two co-founders. As Prad mentioned, we are very pleased with the company’s achievements during the quarter. I will start off with a review of the income statement. Please note that my comparisons will mainly be with the prior quarter of Q1 2022.
Revenue for the quarter came in at just over $16 million, which is more than double compared to $7.7 million for the previous quarter. Before explaining the increase, I would like to explain the alignment of company’s financial statement presentation of revenue, which has earlier presentation on fee-for-service and capitated revenue.
Until last quarter, the company reported the revenue in three line items, clinic revenue, which was fee-for-service revenue and the primary source of revenue at that time. And two smaller revenue streams of contract research solutions and software. During the current quarter, these revenue streams have been consolidated and reported under one line item fee-for-service and other revenue.
During the current quarter, the company’s revenue sources have been diversified with the acquisition of NMD. Acquisition not only brought more volume to our fee-for-service revenue, but also added a new source of revenue called capitated revenue. Capitated revenue includes capitation at risk and capitation not at risk.
As explained by Prad earlier, revenue rates and cost of services associated with capitation at risk are significantly higher as compared to the fee-for-service model. Capitated revenue is the second line item of revenue in the income statement. With the revenue line item explained, let me explain the increase.
Fee-for-service and other revenues during the quarter were $8.7 million, compared to $7.7 million in the last quarter, an increase of 13% out of which 4% is due to organic growth. Capitated revenue during the quarter was $7.4 million, which is solely contributed by the acquisition of NMD in May 2022 incorporating two months of revenue during the quarter. It is pertinent to mention here that we are investing significant efforts to increase capitated revenue and majority of future growth will be achieved in this segment. Our teams are working diligently to improve increased memberships from both Medicare and Medicare Advantage program. Prad will explain these growth opportunities in more detail in his presentation.
The cost of sales and related gross profit margin percentage for the quarter was $12.1 million and 25% respectively, compared to $4.3 million and 44% respectively in the last quarter. Again, leveraging the explanations already provided by Prad, I would build some context here. Cost of sales for fee-for-service and other revenue, mainly comprises of service fees, paid to doctors and nurse practitioners, medical billing costs, and medical supplies consumed at the time of service. While the cost of sales of capitated revenue comprises of all the costs associated with the medical care of the members, irrespective of who provided the service. Therefore, services provided to the members, external parties, outside of the Skylight clinics are also recognized as cost of sales. Due to this, the cost of capitated services are significantly higher compared to the fee-for-service and other revenue.
The margins in Q2 2022 were lower due to the introduction of capitated revenue. The company believes that gross profit margins are in line with the industry standards and will establish a new baseline, as the capitated revenue segment is expected to contribute significantly to growth in the future. Although, the gross profit margin percentage is lower, but the gross margin dollar contribution is significantly greater in capitation.
To further improve the margins, the company has identified three major cost control areas where the company can achieve cost savings and reduce the medical loss ratio, the MLR. First, being hospital admissions, then medical utilization of services and high cost pharmacy subscriptions.
The company also expects to see further improvements in this gross profit margin through increased marketing efforts to increase members and also accurate medical coding for its life at risk to improve the MRA and pulling all three major levers to further improve the results.
Moving on to net loss. Net loss from continuing operations during the quarter of $5.2 million compared to $8.3 million for the last quarter. The significant improvement in Q2 2022 was primarily due to cost rationalization initiatives of the company further discussed with adjusted EBITDA analysis, which is next.
Adjusted EBITDA was a loss of $5.4 million, compared to a loss of $6.7 million for the prior quarter, an improvement of 19%. Normalizing the Q2 adjusted EBITDA by taking out the impact of NMD acquisition; loss for the quarter was $4.4 million, an improvement of 33%. All of this was achieved due to extensive cost rationalization efforts across the company which will be fully realized by the end of Q3.
When we acquired NMD, we identified significant opportunities to rationalize the cost and take advantage of synergies. These opportunities are being actively tacked. However, these initiatives take around 90 days to fully materialize, and these will be fully realized in Q3. We anticipate our operating cost to decrease in the coming quarters considering the cost rationalization initiatives being implemented and expected improvements to revenue organically through MA contracting and other efforts. The company continues working towards adjusted EBITDA profitability by the end of 2022.
Moving onto the balance sheet and cash flow now. We closed the quarter with a cash balance of $2.3 million, compared to $11.7 million last year. Main changes were $10 million cash was used in operations during the first half of the year. Cash used in operations for only quarter two is $3.5 million, which is a significant improvement in the operating cash flow, compared to prior quarter.
Operating cash was also used in the quarter to pay for work done cost and one-off charges related to cost rationalization initiative. The revenue collections also improved significantly during the quarter due to revenue cycle improvement initiative. $9.9 million cash was used in investing activities primarily on the acquisition of NMD. $11.6 million net was drawn from the FLC debt facility slightly offset by $1.5 million paid for the principal and interest on lease and dividends paid on preferred shares. The company is in the process of raising financing by issuance of convertible debentures to improve the short-term cash position. At the same time, cash conversion is a top priority.
With that, I’ll turn it back to Prad.
Pradyum Sekar
Thanks, Farooq.
As discussed Medicare Advantage in full risk can be complicated, but can also be easily explained in three key performance indicators that we expect to be able to use going forward. These are, as Farooq mentioned, one, membership count. The total number of attributed members in each health plan. Second, the Medicare risk adjustment, and finally the Medicare loss ratio. So going forward, we will begin to report on these three KPIs that we use internally to track and measure progress as an organization. These values are not linear, and there are periods of time where any of these three values will go up or down on a given quarter. It is important to note that we should see these on an annual basis adjusting out for seasonality and potential health risks, such as COVID or most recently Monkeypox that can affect the normal course of care.
Moving on to our expected growth in Medicare Advantage. Within Medicare Advantage, we have already begun expanding our current CarePlus and Humana plans to Jacksonville. These were plans that were brought on as a result of the acquisition of NMD. This will expand to the four primary care practices that we have existing within Skylight. We expect that enrollment can begin in time for the annual enrollment period AEP this year. Further, we are working with our Humana partners in Florida to expand the current contract to Central Florida, where we can expect a strong opportunity to grow new members within our three practices and a strong team of experienced managed care providers and support staff.
Further, we are in active conversations and have received multiple contracts and proposals for new Medicare Advantage plans for our Florida practices, including WellCare, a Centene Medicare Advantage product, thanks to our JV partner CHS. These new plans, as well as an expansion of plans to our current markets, means that we will be able to provide our medical population — Medicare population options that can better suit their healthcare needs.
We are also bolstering our relationships in brokers in areas that we operate to further educate and present more plan options for members. With AEP scheduled for Q4 this year, we have already begun laying out our strategy for membership education and marketing to new members. With the joint venture with CHS, we expect to be able to begin participation in the 2023 ACO Reach Program pending all final approvals. This is a major step forward for the company. This joint venture, as we previously communicated, not only accelerates our entry to risk, but also supports us in the advancement of capabilities and capacity. We expect that with the participation next year, we will be at risk with our traditional Medicare lives shifting from a fee-for-service model to an at risk capitated model. This emulates similar economics and structure as our current Medicare Advantage plans.
This also means that the growth and revenue and expected EBITDA contribution will lead to improved services, investment in care for our traditional Medicare members. Based on current attribution, we expect an organic growth in revenue of 25% in 2023 based on current traditional Medicare lives. With this growth in revenue, we forecast a 10% EBITDA contribution based on the current data we have on our membership annual spending patterns. In 2023, with this transition, this will grow further the new capitated revenue segments.
With a large traditional Medicare population of over 10,000 patients nationally today, we are actively working to improve attribution this year and further increase our 2023 member count. Our goal is to give these members a chance to choose for more beneficial Medicare and Medicare Advantage plans in the coming years. This will switch current members from fee-for-service to Medicare Advantage economics driving our bottom line and allowing these members to enjoy greater benefits and services from us. We are excited to be able to expand our care management and service capabilities to both Medicare and Medicare Advantage equally.
We spent 2021 building in infrastructure to enter value-based care. Now, we’re focused in 2022 on scaling costs, realizing economies of scale, getting to adjusted EBITDA breakeven, and securing more value-based care contracts. 2023 and beyond will be focused on membership growth and care coordination to maximize both revenue and profitability. Positive cash flow will allow us to continue strategic investment such as M&A without relying on external market conditions. We believe the groundwork we have laid and continued to implement will result in improved care overall for patients and realization in shareholder value.
So with that, I think it’s time to open the call for any questions. Ariel, please go ahead.
Question-and-Answer Session
Operator
Thank you. We will begin the question-and-answer session. [Operator Instructions].
Our first question comes from Rob Goff of Echelon. Please go ahead.
Rob Goff
Congratulations on the results. I can appreciate that they would be very hard one given the associated cost reductions. On — on that note, could you talk to the incremental cost reductions that you see as you progress through the year? And I just want to confirm when you said that you are looking for an exit revenue run rate of $70 million that would imply a $17.5 million revenue figure for the fourth quarter and against that you are looking for EBITDA to be positive exiting the quarter. What sort of incremental cost reductions are embedded within that assumption? Thanks.
Pradyum Sekar
Yes. Thanks, Rob. I’ll take the first stab at this and then Farooq, I’ll hand it over to you if you want to add anything further.
So Rob, I mean, the efforts that we’ve done have really sort of begun at the start of this year. As we’ve communicated Q1 for us is really the largest expense quarter for us with regards to the implementation of systems and programs from a overall management perspective for both operational as well as nationalizing a bunch — a number of services. As we started to see the implementation of those and we start to see the exit of those, we realized two things, one, the ability for us to now generate economies of scale based on these systems in place, which means that we’re now able to standardize local costs as well as national costs, where in many cases you’ve got duplicate expenses across multiple organizations, especially from an acquisition standpoint.
So many of these include services programs as well as opportunities to consolidate where you can reduce the overhead cost while still maintaining the opportunity to keep services available and capacity available to patients. A lot of these services take anywhere from 30 to 60 to 90 days in order to run down. And so most of what we’ve implemented at the start of Q2, we started to see an impact across each month following.
We believe that the majority of these costs will really come off by sometime around the end of Q3 early Q4, which is where we then be — we can then look to start to anticipate a much stronger adjusted EBITDA against also increases in revenue from investments that we’ve made in areas such as our contact center. Farooq, I don’t know if you want to add anything further to that.
Farooq Akhter
Yes. So just a little bit without going to specifics. So when top-line guidance is around $70 million, like around run rate and then targeting EBITDA profitability, gross margin looks slightly reduced, as — as explained in my presentation because of the addition of capitated revenue. Moving on to the bottom line EBITDA positivity target by end of the year, you can just — you can get an idea or sense of what are we targeting in terms of operating expenses during the year, by end of this year.
Pradyum Sekar
Yes. Rob, just one more point to add onto that again, Q2 revenues included only a two-month contribution from our latest acquisition of Neighbor MD. So again, we anticipate Q3 to be a full quarter representation of all acquisitions consolidated. As well as what we’re setting up this year in terms for annual enrollment period, the opportunity for us to see our traditional Medicare lives move under an at risk model through the ACO reach in 2023, most of what we do with attribution in patients in the calendar year reflects in the following calendar year. Thus, we believe that exiting this year with a much stronger cost basis and operational structure allows us to really then benefit from the growth that we’re setting up for 2023, both with the Medicare Advantage and the traditional Medicare program, but this also includes the increase from our fee-for-service revenue that we expect to start to see as a result of the investments we’ve made in areas like marketing and the contact center.
Rob Goff
And perhaps if I could jump on to the fee-for-service QoQ growth of 4% was encouraging. I know Q1 was a tough quarter, but could you talk to the 4% QoQ?
Pradyum Sekar
Yes. I think what we saw on Q1 Rob was a normalized — was a little bit more of a normalized well, at least a reduced patient visit count primarily as a result of two things, one, the implementation of our EHR system, which of course tends to slowdown capacity as everyone is learning a new system. But then also we saw dramatic drop-off in terms of COVID-19 patient visits that was typically higher in Q4 and Q3 of the previous year.
What we’ve seen since though is a normalization of that patient count visit, where we started to see the patient count visits become more consistent month-on-month. We’re actually seeing an increase in patient visits. Again, we result that to the ability for us to see our contact center materially improving our ability to schedule patients as opposed to schedules that we’re not able to attend to prior to the contact center being implemented.
But at the same time, we’re also seeing higher acuity in visits. So where patients are now looking like they’re starting to come back for visits that they were typically avoiding due to COVID-19, and that also has an impact on the per visit fee-for-service rate attached to it.
Rob Goff
Okay. Thank you. And one more if I may, when you’re looking at value-based care, is there a seasonality to the margins where Q4 sees lower margins as you push for the annual enrollment and then stronger margins as you progress the — into the New Year?
Pradyum Sekar
That’s a good question. I think some of this is going to have to be something that we explore through now the participation in Medicare Advantage. What I will say though with regards to the margins itself is the margins are less impacted necessarily by seasonality. They could be impacted more dramatically by larger health issues that occur.
So for example, a COVID-19 year might be more costly with regards to cost of care, depending on the higher acuity and diagnosis of the patient population you have in your membership panel. It’s important to note that of course part of care coordination also requires us to be constantly managing our at risk population even within the Medicare Advantage population and that’s where we’re really now starting to spend time, identify opportunities to set targets using MLR as really a gauge, a better managed patient should technically have a lower MLR, but a better managed patient should also be aware of the types of services they’re getting, which includes accurate diagnosing of their conditions, which will then affect their healthcare premium benchmark or the per member per year value.
So they’re both tied together. The Medicare Advantage business is not a complicated business when discussing, it’s really three key levers, it’s membership count per member per year, driven by the appropriate diagnosing of the patient’s condition and the medical expenses, which affects the gross profit margin. So these are the three variables that we’re going to be keeping in front of us. And of course, any seasonality in there, we’re expecting that we’re going to be able to continue at least maintaining the same level of care for our patients.
Rob Goff
Very good. Thank you very much and thank you for putting out the 2023 targets and I look forward to being wrong in 2023.
Pradyum Sekar
Thanks, Rob. I appreciate the questions.
Operator
[Operator Instructions].
Our next question comes from Rahul Sarugaser of Raymond James. Please go ahead.
Mike Freeman
Hey, Prad and welcome to the seat Farooq. This is Mike on for Rahul today. I wonder if you could describe or can you give us an update on sort of progress with your JV with CHS and Centene. And if you could give us a little overview of sort of how economics will work within that JV as things get up and running and you did, and they do begin assisting with conversion or I guess protecting downside risk as it relates to full risk contracts. Yes. Thanks very much.
Pradyum Sekar
Yes. Thanks, Mike for that. So the joint venture with CHS taking it back to the original communication of what the joint venture would be able to do and where we are today. What I will say is that we very much have ramped up our working relationship and are probably now in multiple meetings a week, if not more amongst different team members, including in-person meetings that we have quite frequently.
The nature of the joint venture was really designed around accelerating Skylight’s entry into full risk through both the capabilities to mitigate some of the downside risk protection through capital. According with our downside in this case, it’s a 75%, 25% downside, so 25% coverage from CHS on any downside performance.
In the case of the actual value-add from CHS, of course, they’ve had plenty of years in successful participation in the traditional Medicare ACO programs; the familiarity with cost and care management, as well as accurate diagnosing brings a lot of insight to our team. They’ve also got significant experience in growing membership populations, which again is something that our teams are leveraging as well. I think it’s a very hands on working relationship. We work together as a committee, as a team there’s different groups from operations to marketing, to care coordination, to clinical that are coordinating on a weekly basis.
The intent of the relationship now is really to drive two-fold, both the traditional Medicare population growth, as well as the Medicare Advantage growth. In a lot of historical circumstances, traditional Medicare never had the same economics as Medicare Advantage, which is why you see a number of our peers mostly focusing on the conversion of traditional Medicare to Medicare Advantage plan.
While sometimes we could be argued that economics might still be better under Medicare Advantage. Now, with the participation at the ACO Reach with our — with CHS and Centene, we’re effectively now at risk with our Medicare population globally. The reason we took this step forward is again we had some insight into past year membership cost basis with our existing traditional lives, which showed us that we would actually be in a positive surplus given our current care coordination efforts.
Now, of course, with the injection of the capacity from CHS, as well as the capabilities brought on from the team of Neighbor MD, we can only hope to accelerate and improve that going forward. So with the at risk performance in traditional Medicare, that dramatically changes our economics on traditional Medicare and it’s not just about conversion to Medicare Advantage. It’s really now about the growth of Medicare population overall, so that we can maximize the care and services that we can offer to them.
So we’re obviously very excited. There’s a lot of work to do but again, we believe now the work is less about proving the model now that we have all the right systems and tools and contracts and practices in place. It’s really now about membership growth and the management and care of those members.
Mike Freeman
Okay. That’s excellent. Thanks very much. That’s very helpful and a great segue to my next question. What — when we’re thinking about the enrollment period beginning in mid-October what — I guess what mechanically will Skylight and its partners be doing as they’re enrolling patients like what is that interaction like with other patients or your practices, and then what can we be watching for during that period as waypoints on how enrollment is going?
Pradyum Sekar
That’s a good question. I mean I think that there’s internal KPIs that we use that will most likely report on a quarterly basis, Mike. The activities related to annual enrollment period, I mean, there’s a lot of standard activities that are necessary. Education is a very big component of this. There are still the vast majority of Medicare in the U.S. that are still under traditional Medicare and not under Medicare Advantage. Although Medicare Advantage is fast growing the benefits to a lot of members are still not fully explained. It can be a relatively challenging process to understand and quite a lot and overwhelming for Medicare members looking to continue on an annual basis.
And there’s a lot of services available to them from brokers to Medicare plan to resources that are also funded to be able to support Medicare members. So our ability to work with these resources to educate them on the services we provide to explain what we can do for those members to ultimately help improve the care for those members is instrumental. That education goes directly to not just current Medicare members. It also goes to potential new Medicare members. This may involve other community activities, but it also goes to our internal team, our providers, our support staff, so that they understand the benefits as they’re in the front line, they’re the ones dealing with our patients on a daily basis and their ability to identify members that could benefit from say a specific plan versus another plan will go a long way in providing that level of customer service to our patients, our members but of course, prospective new members looking to join as well.
So there’s a number of activities that go into the annual enrollment period. It really is a team effort across the Board. But as attribution looks to grow from there and from traditional Medicare, and that’s the other part as well, as in traditional Medicare, we do have a very large population of Medicare members, but as you can see the ability for us to take those members and include them, say in a membership count for the ACO, a lot of these members have not historically been managed as effectively. They haven’t come in as frequently as they need to. And so that’s another area that we’re focused on is really looking at the health determines of our patients, looking at various screenings that are required, making sure that we close the gaps on care on those lives, because all of that will also lead to increased attribution, not just on the Medicare Advantage, but also on the traditional Medicare side, which is really an open enrollment year. It’s not really limited to just the annual enrollment period at the end of the year.
Mike Freeman
Okay. Thank you very much. I’ll jump back in the queue now.
Pradyum Sekar
Thanks Mike.
Operator
This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Sekar for any closing remarks.
Pradyum Sekar
Thank you for participating in today’s call. I know it’s a little longer than we typically gone, but again, hoping the slides presented a little bit of an explanation of a very new business line segment that we’ve committed to getting to. We’re glad that we’re here and we’re looking forward to really growing within this segment in the coming quarters. I invite you to visit our website skylighthealthgroup.com where you can find out more about our company and contact details, should you wish to reach out to us. Thank you, and have a great day.
Operator
This concludes today’s conference call. You may disconnect your lines. Thanks for participating, and have a pleasant day.
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