OSH (2020 - Q4)

Good morning, and welcome to the Oak Street Health Fiscal Fourth Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. Hosting today's call are Mike Pykosz, Chief Executive Officer; and Tim Cook, Chief Financial Officer. The Oak Street press release, webcast link and other related materials are available on the Investor Relations section of the Oak Street website. These statements are made as of March 10, 2021, and reflect management's views and expectations at this time and are subject to various risks, uncertainties and assumptions. Mike Pyk

Thank you, operator, and thank you to everyone that is joining us this morning. Joining me on today’s call is Tim Cook, our Chief Financial Officer. Before we dive into our fourth quarter results, I would like to thank our team at Oak Street for their extraordinary dedication to and support for the patients and communities we serve. Our teams adapted to an excel in challenging circumstances over the course of the year to continue to provide outstanding care. When the COVID pandemic hit the U.S. a year ago, we knew it was imperative for Oak Street to continue to be there for our patients and our communities. Over the course of the last 12 months, our telehealth offerings and providing 90% of our business virtually last spring to ensure our patients continue access to primary care. It meant leveraging our green vans to deliver shelf-stable yield to patients based including security. And then standing of community testing sites in the fall to help communities navigate the surge in cases, all while continue to run Oak Street care model and providing outstanding care quality and patient experience.

Thank you, Mike and good morning everyone. We are pleased with our fourth quarter results with our key metrics coming in ahead of the guidance we communicated in November. In terms of our membership, total patients grew roughly 23% year-over-year, while our at-risk patient base which drives our financial performance grew by 34% to 64,500 patients. At the end of 2020, we operated 79 centers an increase of 28 centers compared to the December 31, 2019. Note that our year end 2020 total will now include our three Walmart locations. Capitated revenue of $234.9 million for the year grew 39% year-over-year driven by the growth in our at-risk patient base. Total revenue grew 43% year-over-year to $248.7 million. I’d note that in the fourth quarter, we recognized capitated revenue of $3 million from one-time events related to settlements with health plans and $9 million from capitated revenue that was booked in the fourth quarter, but related to full year performance. Additionally, we recognized approximately $4.2 million of other revenue from one-time events, of which approximately $2.2 million was related to HHS Provider Relief Funds. And we recognized $2.4 million of other revenue that was booked in the fourth quarter, but related to full year performance. Even when adjusting for these amounts, we still finished Q4 comfortably ahead of the guidance provided in November. Our medical claims expense for fourth quarter 2020 of $175.5 million representing growth of 39% compared to fourth quarter 2019. Fourth quarter medical claims expense included $6.5 million and one-time medical claims expenses associated with settlements with health plans and a potential reserve against potential incurred, but not reported COVID-19 claims relating to 2020 dates of service. Our cost of care, excluding depreciation and amortization was $61 million for the fourth quarter, an increase of 36% versus the prior due to the growth in the number of centers we operated as well as growth in our patient panel. Sales and marketing expense was $26.8 million during the fourth quarter, representing an increase of 88% year-over-year. We saw the benefit of a greater investment in sales and marketing in 2020, be greater at-risk patients at year end and greater expectations for Q1 2020 membership, which I'll discuss in a moment.

Robert Jones with Goldman Sachs, your line is open.

Great. Good morning, Mike and Tim. I guess, just to go to the headwinds in a lot of detail. That was very helpful. I guess the sizing of the COVID had been to MLRs in the 8-K was really helpful, and Tim, you just touched on some of this again. But I was wondering if you could break down or give us any sense of the size of the impact specifically to treatment testing – treatment and testing related to COVID. And then just as we think about the rollout of the vaccine, how variable is that estimate to the overall headwind that you're sizing to EBITDA in 2021?

So, on the first one as far as increases in third-party med costs related to COVID, the testing et cetera is pretty minimal as you know, in the big scheme of things from a cost perspective. But the largest cost setting for us is key hospitalizations. And obviously to the extent that our patient population is catching COVID, they're obviously at a much, much higher likelihood to go to hospitals because of it. So where COVID impact us financially is really on the hospitalizations. So we saw that to some extent in Q4, the data is still preliminary, but as the resurge is across most of the country and certainly most of the markets we were in, we did see that play out in our financials and our third-party med costs. So I think that's where you see the biggest impact from COVID. The cost of vaccinations or the cost of COVID testing is de minimis when it comes to the third-party med costs. So we are hopeful. We are optimistic that with the combination of lower case rates and our efforts to vaccinate our patients in our communities that we won't see another surge of hospitalizations. That said, we're obviously watching the new variant very closely, like everyone in the country is. And there's a lot of unknowns. We haven't come down from a 100-year pandemic in 100 years. So, yes, there's a lot of error bars around there. So I think to your last question around kind of how much we know and how certain we are, I mean, the answer is we're not on the third-party med cost front. So if everything goes well and we don't see another surge in COVID, and we don't see any hospitalizations, I think we can certainly perform better than probably in our estimates, but this is – COVID proved anything is unpredictable. So we want to make sure we are being thoughtful as well.

Got it. So on the treatment side, clearly taking more of a conservative approach in the initial guidance, it sounds?

We hope so. But again, hopefully we'll talk to you guys in a couple of quarters and life will be back to normal, and you can remind us of this.

Yes, we can hope. I guess, just one second question on the accelerated center rollout. Any sense you can give us on the split between existing versus new geographies? And then just given the decision to accelerate the rollout, any motivated – motivating factors there? Was it related to just opportunity? Increased competition? Just curious what sparked the decision to accelerate the rollout of the centers?

Yes, I don't have the breakdown of new versus existing at my fingertips. It's going to be roughly proportional between the two, depending on how you find a new market. Obviously, the markets like New York city are technically existing markets in 2021 because we were there in 2020, but obviously we're just at the start of building them out versus places like Chicago, and we'll also continue to grow in 2021 as we've been there for a while. So it'll certainly be a combination. And then obviously we've announced multiple new markets as well. And I think we'll continue to announce more on top of what we've announced over the next month or two. As far as the decision, honestly it has nothing to do with competitors and it has everything to do with – we see it's just a absolutely massive market opportunity, a very open market regardless of what your competitors are doing, and really strong performance historically that really leads us to feel like it's the right decision to invest. I shared this a little bit in my earlier remarks, but if you look at the unit level ramp of Oak Street centers is absolutely phenomenal, it’s incredibly unique to capital and incredibly strong return. And so the question we asked ourselves is, do we feel like we have the kind of internal capacity to put more centers up, and what has happened historically to ramps over time? And I think we opened up two centers per week during a surge in the pandemic not too long ago, so we feel very good about our capacity to put more centers up in full year of 2021. Along the same lines, the performance isn't eroding. It’s actually the opposite, performance over time is improving. So when you're seeing those factors, you're seeing such a huge open market, we need to grow more. Frankly right now, the limiting factor to our growth is not market opportunity. We could put up an order of magnitude more centers in 2021 and still be scratching the surface of the overall market opportunity, really comes down to us having the appropriate level of confidence in our ability to execute. And I think we will see it, what I call, titrate up the number of centers every year to make sure that everything is going smoothly and we are continuing to see the same kind of trajectory of improvements of our vintages. As long as we're seeing that, we'll put up more centers the next year and repeat, but again, we're really, really excited about the future opportunity and putting up more centers was a pretty easy decision because the market could support 10,000 Oak Street centers. So we are a long way from making intent in that market, and we feel a huge need to put up more centers because we also feel like the quality of care we are providing is just differentially better, and so we want to bring some more people.

All makes sense. Thanks, Mike.

Sean Wieland with Piper Sandler, your line is open.

Hi, thank you. Good morning. So you called out a $20 million investment to manage medical claims expense. Can you give us a little bit more specifics on what this entails exactly? And also just describe how managing medical claims expense in the Direct Contracting program is different than that in the MA program?

Yes. And to your first question, there's a number of programs embedded in that number. Partly we want to call it out – generally, we will implement a series of new med costs and care model programs every year. And for any time you're developing a new program, there's the cost to develop the program, there's the cost to pilot the program, there's the cost to build out the kind of technology and training to roll it out more broadly, there's the implementation costs of going out more broadly. And then obviously we wouldn't be developing it further if we can have a strong conviction of that program, and ultimately lead to better health outcomes for our patients and therefore lower medical costs overall, and obviously have strong ROI on that program. But there's a period of time where you're rolling out the program and not getting that return, number one. And number two, when we think about budgeting and guidance, we don't bake in a lot of the benefit right away, we do bake in all of the costs. And so in this case, the number of programs under that number, the biggest one is a program focused on our end-stage renal disease patients. We're not offering dialysis, obviously we'll work with partners on that, but actually the majority of cost for a patient with a disease is not dialysis is actually all the other kind of acute episodes that occur. If you go onto dialysis for the most part, you’ll have a number of chronic conditions that have caused you to have end-stage renal disease. And so we feel like it's a huge opportunity to really improve the quality of care for these complex patients. It's right in line with what we've proven with other parts of our care model. And now that we are getting bigger and we have that critical mass of those patients, we can really make that investment. And so that's the biggest one. There’s a couple of other ones underneath there are some more care in the home components and transitions components and things. So we really believe strongly these programs will pay off over time and kind of latter part of this year, and really more in 2022, we'll see a pretty big benefit from the programs. But you have that upfront investment. And this year is kind of a unique year because I think we'll have more of those investments than they otherwise would have out because a lot of the things we were going to rollout in 2020 didn't happen, right, because the same teams that would have rolled those out were focused on infection control protocols and testing, and COVID care programs now vaccinations, et cetera. So again, that's kind of what’s in those numbers. And we hope – we are confident that there'll be a return on those investments, not too long from now.

Okay. And then just more broadly, what's different about managing medical claims expense in the Direct Contracting program versus members enrolled in MA?

Well, I think it's actually one of the reasons why Oak Street is variable situated for the Direct Contracting program. If you think about the program overall, you don't have the kind of traditional managed care levers in Direct Contracting, right? So you don't have networks, it's just – it's open access like a traditional Medicare. You don't have prior authorizations or kind of the gatekeeper model. So I think some of the more traditional kind of, call them, kind of MSO-type models I think are going to harder to implement in Direct Contracting, and that’s now what Oak Street does. And so from our perspective, the focus of our care model and our approach is really provide a phenomenal experience for our patients so they come to us voluntarily, really focusing on how do we ensure, we understand all of our patient's conditions really well, and we're leveraging data technology in our model to get ahead of any essential episodes and keep patients healthier out of the hospital. If we do that, we will generate a lot of savings. And so nothing – and what I just said will change within Direct Contracting, like we are already taking care of these patients, we believe strongly we're already lowering the emissions and keeping these patients healthier and improving their outcomes. And so really what it becomes is a financial mechanism where we'll be paid differently and I think that allows to capture the savings we're generating. So I don't look at it for Oak Street is very different, although I think that depends on what is your model and your approach that factors in a lot of how different the approach will be for those patients.

All right. Thanks. Can I slide in one quick one? Of the 38 to 42 de novos this year, how many of those are going to be under Walmart?

None.

I thought you said that that your forecast includes Walmart?

No, sorry. I was saying the 117 to 121 I mentioned would include – included those three Walmart centers we opened in 2020. We are – Walmart is going well thus far. Still, obviously very early to be making any final confirmation as we can continue to talk to Walmart about how we can work together beyond those three centers. But at this point, as we think about 2021 in the 38 to 42 centers that we're going to open, none of those would be in Walmart. So, sorry, if that wasn't clear, but…

All right. Thanks for the clarification. Thank you.

Yes, thanks, Sean.

Ricky Goldwasser with Morgan Stanley, your line is open.

Yes. Hi, good morning. First question on patient acquisition. With the vaccine rollout, are you starting to see traditional patient acquisition channels already returning? And what are kind of like your expectation to when you will be able to host these events, community events and start-up again? And how should we think about the cadence of those costs throughout the year?

So from a – start from the back of the question. From a cost perspective, we are bearing the costs right now of our community marketing team. They all – it's really a FTE focused. We have the teams, they're all at their centers. Right now they're doing the best thing like jobs, all things considered engaging people they've met in the community telephonically and working with different community groups and doing what they can do. But obviously it's more limited without kind of the more traditional event based in-person activities that, that we kind of built the team for. But we made a decision to keep the team in place and keep investing in the team because we are confident that that will pay off relatively soon. We are not – despite I think early success we've had of getting our patients in our community vaccinated, one, we're still early in doing that. Number two, society hasn't changed, even CDC gave guidance recently. So I think we're not in a place now where in our markets and what we're promoting that. My group of 15, 20 older adults are doing a Zumba class in an indoor community center, right. And so we really haven't turned those channels back on yet. I'm hopeful, optimistic, maybe in the summertime we'll see that. Again, it's going to be – when you start seeing society returning more normal, then I think that'll kind of come along with it, right? I mean, both from a safety perspective, like the last thing you want to do is rush those things and cause infection spread in an at-risk population. And number two, people have to be willing to do it as well. The only thing I'll say to that, it's the one thing we've kind of seen as a proxy for that, but it's been pretty exciting is as we vaccinate people in our communities, in some ways we've kind of had the first – the closest thing to a community that we've had in over a year because we are having a lot of people that aren't Oak Street patients coming to our community centers to get their vaccines and they're seeing Oak Street for their first time. And I think a lot of them have been – we've been very impressed by the centers, the team, the operations, the customers, everything going, especially if you know – the horror stories, other places of weights and confusion. And so we're really excited about the number of people we're able to make a really strong impression on. And historically that was one of our biggest goals of our community marketing models to get people to come to our center and meet our team, see it, because we knew that they would be very likely to schedule afterward. So we're hopeful this will kind of be the beginning of that. Obviously, that's not the goal of the vaccine campaign, but hope it would be a nice side benefit of just getting more people introduced at one point.

And my second question is on the cost. I mean, Tim, you went through sort of the list of the incremental costs that we're seeing in 2021. So just to clarify what do you expect to revert in 2022 as we think ahead versus what part of these cost is now more kind of structural to the model? And we should kind of update our 2022 and beyond models to adjust for that?

Sure. So the $50 million that we will invest in new centers between new center ramps as well as sales and marketing, sports and synergy and G&A, I would say that's all consistent with how we would – how folks would be modeling center growth. So I don't know how everyone has developed their own forecast, but I'm assuming that as centers grow, they’re greater investment, sales and marketing is a great investment in G&A. So I'd say, look, as we roll forward, as we expand to 25 to 40 centers, and from last year the incremental six centers we opened, we are running the same math on those centers as we would in the other centers. So that in my mind, isn't necessarily a headwind to 2022, and just we'll have more centers in 2022 that'll probably increase the losses in 2022 as those centers continue to ramp to breakeven. But I would say that's business as usual, right? It's just more of the same more centers than we otherwise had – than we had earlier anticipated. On the care programs investments, assuming those work, we would continue to make – we would – I would expect to continue to see those dollars in the P&L. So I think that's a new baseline for those expenses for 2021, 2022 and beyond. Obviously, you said that we're not seeing the returns that we mentioned, we would dial those back. We're very optimistic that we will given the opportunity that is presented by those programs. So what I'd hope to see in 2022 is some offset to medical claims expense from the benefit of those investments. Obviously, again, we did not incorporate any of that in 2021, but as they look forward to 2022, I hope to see that. And then finally, on the patient contribution dynamics, I mentioned, we'd expect – to the extent that those are meaningful, right? We think the RAP issue will be real based upon what we're hearing in the marketplace. We expect all of those to reverse out in 2022. Obviously, that assumes that COVID, as we know it fades out of existence, I'm sure that won't be entirely the case, but at least from a medical cost perspective will be less of a phenomenon. I think we've got every reason that we can manage our patients from a documentation and a risk score perspective. The harder question to answer is what will happen to medical costs, but again, I think perhaps optimistically speaking, but sitting here early March, I feel as though we can be hopeful that by the end of the year. As we look forward to 2022 medical costs that COVID won't be much of an impact there. So I'd expect all of the patient contribution impacts, whatever that might be in 2021 to not be a headwind in 2022 and beyond. Sorry. Ricky in summary, I don't think any of it is really an impact to future periods from a sort of change to the profitability profile of the business. Again, more growth would require more investment. And as you roll your model out to 2023, 2024, 2025, you'll see greater profitability because of those new centers. And we'll see a nice – we expect to see a nice return on our care programs investment. So hopefully that gives you a sense.

Justin Lake with Wolfe Research, your lines open.

Thanks. Good morning. First question around churn. I know that's a number you haven't historically provided, but one of your peers hold an Analyst Day, talked about churn in their – in one of their specific markets and the business being about 30%, which has extended the pie to a lot of people. So just curious if you can't share your churn number or just any thoughts around that 30%, if you think that's kind of an industry average, then we're all kind of learning about this business as we go.

Yes, you’re right, Justin. We have not historically shared our churn numbers. I don't have the exact numbers right in front of me. They’re certainly not 30%. So I think that that number feels high to us as well. So I can't – I don't know which company you're referring to or what release, so hard for me to comment upon the number other than to say that's something not been our experience.

Got it. And then a question on Direct Contracting, I have a couple questions. One, B2B, so you're going to get the 10,000 to 13,000 members, curious if you could tell us whether you're – what percentage of your kind of DC eligible patients that makes up meaning kind of what's your penetration rate there. And then I know you’ve said that you expect to do better on voluntarily aligned patients. Maybe you can give us the mix there out of 10 to 13, how many are voluntary versus claims? Thanks.

Yes, I‘ll take it in reverse order. And again, I say all of these with the caveat that, we're working off the preliminary reports and our analysis on those reports in a program that is brand new. So I just want to caveat everything I say with those. As far as claims line versus volunteer line, we think initially less than half of our Direct Contracting patients will be claims line and that we don't think the claims line number kind of by definition will grow much at all over the next year or so. And so all the growth from there will be voluntary line or the vast majority of the growth. So I think it will be kind of less than half to start on claim lines and obviously shrinking from there as we keep adding more patients. So that's the latter question. And the percentage of eligible, it's a hard question to answer because we're still trying to determine kind of who's eligible and all the different kind of eligibility requirements and reasons people wouldn't be in, right? So we get a report and we'll be surprised this set of patients were previously aligned to an ACO because their former doctor was part of a health system that was in a Medicare Shared Savings Program ACO. And therefore, looking back at the preponderance of their claims over 2018, 2019, 2020, they got aligned to the system’s ACO. And in 2021, for example, because this program starting in April and the ACO program started in the beginning of the year, like they always do, the CMI decided that claims alignment to a MSSP ACO with Trump Direct Contracting. Actually that's going to change in 2022. But again, we didn't – like there was no way for us to know which of these patients happened to have a former doctor who was part of the house system that was part of an ACO. And so we kind of find a lot of these things out kind of as we go. So it's hard to ask the question, what percentage of our eligible patients, because I think we're still trying to understand exactly who are eligible patients are, and even that definition is changing over time with the program. So again, what I think our goal is to really understand where every patient is, make sure every patient does follow the voluntary alignment form. And then if they don't flow through, understand why they didn't follow through and see what we can do to change that, right? That's always our goal. And the other thing that always moves right is, as patients are engaging those to help, a lot of them will choose Medicare manage. And so people who come in, solve the form, provide some Medicare, they end up choosing on a MA plan, which obviously we're very happy with it they do, then they won't be part of the program as well. So there's a lot of moving pieces that change over time and we're obviously continuing to add patients. So it's just a little harder number to pin down. I understand what you're asking for, but I can't answer it now.

Ryan Daniels with William Blair, your line is open.

Yes. Good morning, thanks for taking the questions. In my opinion, perhaps one of the more important data points fundamentally is the improvement in the ramp of your stores. And I'm curious if you could go a little bit more into the centers and what the key factor or factors are driving that? Meaning, is it faster member ramp? Is it revenue per member, medical cost management? I'm sure it's certainly an element of all of that, but in your mind is there any key to that metric that's giving you that increased comfort? Thanks.

Yes. You know, it's a combination, right? So if you go back to – 2015 vintage is always the baseline vintage and Ryan, I remember our conversations in the early IPO days when we shared that as kind of an example of vintage and all the questions we got were, okay was that your best message ever and have your economics eroded over time. So we were excited to share with the group more data points around that. Actually the options happened to have gotten better over time. If you go back to 2015, I'm proud of our performance and the team then, but we are really significantly more sophisticated organization today than we were then. So I think a lot of the change has been the technology, building out our Canopy wasn't a thing in 2015. So we built out our Canopy Application that has really locked in workflows and gave teams better access to the data they need to drive our care model kind of real time within our care model. And that's something that's not stopping where we are rolling out more Canaopy modules in every quarter this year. And those modules are a lot, I think it'll continue to drive better performance, better consistency of forms and better kind of top line outcomes from our care model. That's the only part of it. Similarly on the outreach side, we pilot new things, we try new things and we learn ways to engage people and bring on more, and if things work we hardwire and continue them. So we're constantly innovating there. 2020 was a little bit of a strange year on that front because, as we talked about a lot, we had to stop a lot of the things that work really well and develop a whole bunch of new things. And so again, we can't be more excited for the back half of this year and in 2022. We can kind of take all the new things we figured out that worked with all the things that we knew worked in the past and do them all at the same time. So we're excited – we're really excited about that. So it’s really sort of one thing, it's really just kind of incremental improvement across all the levers of our model and that drives better patient outcomes, that drive more patients and you put those two things together and drive better performance messages. Tim, if you can quantify, but you use the numbers and I kind of did quantification of improvements in 2015.

Yes, if we look at our 2020 performance for the centers that we opened from 2016 through 2019, those centers in aggregate generated about $400 million in revenue in about 36 centers and about $9 million of central profit. We compare that to the 2015 cohort, what would these centers have done if they had performed similar to the 2015 cohort, 2020 revenue would have been up $355 million in property then about $4 million. So we're 13% ahead of revenue, 140% ahead on profitability albeit on a small number, but one is we're seeing a really nice ramps in our earlier vintages relative to that 2015 baseline vintage.

Okay. That's very helpful. And then Tim one for you, if we think of the headwind from COVID-19 into the current fiscal year how much of that relates to newer patients, I assume the bulk of it is somewhat related to that. Meaning that one, the risk scores on newer patients are probably going to be a lot lower than what you've been able to do with your consistent customer base? And then number two, is they're more concerned about medical claims among that group, because perhaps people entering didn't get the appropriate preventive care versus your patients, and therefore might have higher institutional costs this year versus your core group? Thanks.

Sure. So as we think about the potential impact to patient contribution related to COVID, I would say new patients are part of it. I would say they're more – it's easier to draw the distinction we think about revenue line of our existing patients. We did a great job engaging them in 2020, our ability to document them and their risk scores look consistent what we've seen historically. So as we think about 2021 is really the uncertainty around what will new patients look like. And from what we've heard from others, we'd probably expect that – again we'd expect those risk scores to be lower, to the extent they're not, the question could be well if they're higher are you getting patients that are sicker and therefore admitting costs to be higher. So we haven't made any specific assumptions around newer patients being more costly than existing patients due to COVID-19. Candidly, we're probably not that sophisticated in how we're thinking about our new patients at this point. But so as we think on med costs, it's less a function of new patients and more a function of uncertainty around the entire population.

Kevin Fischbeck with Bank of America. Your line is open.

Great. Thanks. Wanted to ask the question about Direct Contracting profitability? It sounds like you guys expect it to actually be additive this year as you're already being incurring a lot of the costs. But can you talk about the ramp of profitability in that business over time? And if you're already incurring the costs, shouldn't this already come in at max profitability in year one, what would cause the improvement?

Thanks, Kevin. This is Tim. The random profitability for Direct Contracting patients, we think about it in two different buckets versus what are the economics in the underlying patient. And then, what are the costs to manage that patient from our cost of care perspective. We expect relatively very minimal of any incremental cost to manage those patients. So we're really talking about what are the revenues, what are the medical expenses for these patients. And that what I say is, similar to what we experienced in our MA book of business, we see an improvement in patient economics over time as a function of both better understanding of the disease burden of those patients and documentation, and therefore a better calibration of our care model to better manage the medical costs of those patients. So we see nice improvements, I think as folks know over years, two, three and four patients being on our platform. We expect something similar for Direct Contracting patients and to Mike’s earlier comments, our goal is to hasten that ramp every year, but the reality is that it does exist somewhat a function of how Medicare Advantage works through the annual cycles of the program. So given the fact that Direct Contracting is essentially drafting off that program, I expect to see a similar ramp over time where we see more modest profitability in year one for these patients. And then as you know, as they become on the platform for years, two and three, we expect to see a nice ramp and profitability. So along the way of saying the 2021 contribution from those patients, those Direct Contracting patients, won't be all that meaningful because again they're in their first year with Oak Street and I'd expect the patient level probably be lower than it would be for a patient that's more tenured.

Okay. That makes sense. And then just maybe to ask a question or follow-on question someone else asked earlier about the consistency of some of the costs that you're including in your guidance today. I guess if we were to – how do you think about the boost in clinics? I mean is this number that you're adding this year now kind of the new way to think about new clinic growth going forward? So we should kind of be thinking about 50 million of cost next year, as you add a similar number of sites or was this kind of one-time seizing of an opportunity?

I don't expect us to lower the number of new centers we put up in a subsequent year. I think if we're performing to the level we performed it's or we will keep increasing that number. And obviously, better than I do, but if you think about the financial results of Oak Street Health, right there's – it's really driven by how many mature centers you have and how many immature centers you have. And when you get a high enough portion of your centers mature, that can cover up all of your new center growth and beyond, right. And so if you think about today the 79 centers we have today, actually half of those centers are within the first two years of being open, right. So when it was the money and as we put-up 40 more centers this year give or take, right, and we have 120 centers at the end of this year, give or take, more than half of those right, the 28 we put up in 2020 plus the 40 we put up this year. So it's 68 of 120 will not be in their first few years. So we're actually – we accelerate the pace of centre ramp, we are increasing the number of immature centers related to mature centers. As I shared with you earlier, right, our centers that are nearing capacity are contributing $9 million give or take each. And so you can offset a lot of new centers with kind of a couple mature centers. But obviously, as we kind of look to accelerate our growth into this huge market opportunity that's the investment period and so we're definitely in 2021, I expect 2022 to kind of be in this investment period where we are putting on more centers, obviously feeling very confident in our ability to operate and to keep that number of centers, we are putting out more centers to meet what is just a massive market demand. And in a couple of years as those centers, I shared before just the center we put up this year, we expect to be 1.3 billion in revenue, 250 million of center contribution in five years. And so again, the model is really strong, but again we feel like the right thing to do is to invest against playing out more centers. And so, what are kind of the – the extra 50 million can be described, it’s really kind of how much more than the baseline of 25 centers would it take to put up 40. And again, so if your baseline is still 25 in future years, you'll incur extra costs, but obviously pretty soon, right, that cost will be offset by the investment we made in prior years.

Kevin, one thing I’d add is. It is relatively formulaic for us, right. And new center has a ramp. We see that ramp over time. So from our perspective it's just – the number I gave you is just – that I provide is just a function of, if we have more center what would the cost be, nothing more than that.

David Larsen with BTIG, your line is open.

Hi, the cost of care increased by about 50% sequentially and obviously that the medical claims expense was up about 20 million sequentially. Can you talk about what drove that and how much of that was related to like say inpatient admissions tied to COVID if any? Thanks.

Sure. So on the cost of care, the largest driver there is just a function of the number of centers reopened in Q4 relative to Q3. So just to remind folks, we held off on opening new centers during the depths of the pandemic if that was – if that's the right term for Q2 early Q3 of last year. We really started reopening centers in August, so you're seeing in Q4, a bunch of new centers coming along as well as a full quarter of the centers reopened in Q3. So that's going to lead to a greater cost of care. In addition to all the other costs that we have to manage a growing patient base, on medical costs for the quarter we did see an increase in COVID related to the surge in cases between kind of call it mid-November to the end of the year, I think consistent with what the broader market had seen. As we close the books for 2020 in early January or even as we wrapped up our audit in mid-February, it's still hard to know exactly what claims you'll get in December related to COVID. So we did make an estimate from my comments of potential costs related to COVID in Q4, above and beyond what we'd received. It was about $9 million. So you're seeing that in those numbers, in that Q4 number too. So that's going to be unexpected sequential increase from Q3 to Q4, David just given the seasonality of our business, but also you're seeing an incremental step up, because we did take a reserve against potential COVID costs that we might incur in Q4, that we hadn't received, but we felt this proved to do so versus having negative development in Q1 or Q2 of 2021 related to 2020.

Okay, great. And just one more quick one under MA, I think you're getting about $12,000 a year per patient in revenue. What is it under Direct Contracting, please?

Yes. So in MA it’s probably closer to the average patient, probably closer to $14,000 or $1,200 per member per month, so about closer to $14,000 to $15,000 per year. Direct Contracting, we don't know, it’s a simple answer yet, we'll know shortly in a couple of weeks, but what we would tell you is that for a voluntary aligned patient, we would expect their revenue to be greater than that because CMS is – the withhold from CMS is 2% versus what we typically experience with the health plan which is closer to 15%. That being said, we expect the medical costs also be greater because, traditional Medicare is more of an open access product versus MA product, most of our patients are on HMO which is more restrictive. You tend to see higher medical costs to the extent that plan design is more open. So we expect higher revenue from those Direct Contracting patients, higher medical costs, the net of those two, we expect to be about the same. I’d say that's predominantly for voluntary aligned patients. There are some programs differences between voluntary aligned and claims aligned. We expect the claims aligned patients should probably be a little bit inferior to what we expect in the voluntary aligned, but again a lot for us to learn over the coming months, as we get more data from CMS as to what patients were actually – what specific patients are aligned to us and what the underlying economics of each individual patients are.

Richard Close with Canaccord Genuity. Your line is open.

Yes. Thanks for the questions. Maybe to go back to Ryan's question on the core cohorts performing better. I was just curious if you could maybe give some description of the different markets or geographies. Are you seeing any major differences in the performance of centers based on certain States or whatnot, new and existing markets?

No. And I think that's one of the reasons we have so much confidence in our ability to expand. We really see little to no variation between markets. Actually we see more variation within vintage between centers in the same market. And so what we see is the kind of the needs of our patient demographic are similar across markets, both from a patient experience perspective, how we can offer something that is much more compelling than a traditional doctor's office and from a care perspective, how we can generate much better outcomes. I think, while a lot of markets are kind of different organizations of how healthcare systems organize and how primary care fits within hospital systems, et cetera, kind of from a patient perspective there's not a lot of differences and we're able to make a big difference. And so what you really see, there's a lot of – one we were incredibly consistent across our centers. All of our early centers are profitable. We've never had closed the center, et cetera, et cetera. But I think even when you look at the variations between centers it's usually driven by things like kind of the leadership in the center or the specific team in the center. And it's pretty, actually, I won't say easy, but it requires focus and management, but the levers to turn around are pretty similar. If you follow the Oak Street care model with fidelity, you'll get great results. And we have all the technology tools, reporting dashboards, et cetera to kind of monitor that. And so again, we see a lot of consistency across all of our different markets, whether it's Dallas or North Carolina or Philadelphia or Flint, Michigan or Youngstown, Ohio or kind of they're all very different places. And all see very similar results.

Okay. That's helpful. And then Tim, just on the Direct Contracting and Mike's comments on six to seven for the year and then two to three per quarter going forward. It sounded based on your comments that there was some opportunity for that number to come in ahead of the targets you just stated is that am I looking at that correctly or no?

Yes. So I'd say look – there's a lot of movement between 13,500 to – kind of take them in for the range 6,500. And so our best guess is we end up between 6,000 and 7,000 based upon all of the sort of inferential math we're doing, is it possible that’s higher, I guess it's going to be lower to right, those are possible. I mean, we're pretty close at this point. So we hope we're making – we're being our math is well – I know the math is right, but the assumptions that are aligned to math are accurate, but we'll obviously know more. I'd say, yes, there is the potential that we could do better of course, either through faster patient growth or through some of those patients that were excluded rolling in over the course of the year. I think it depends on what you see in Richard, so I mean, if you were only to assume 2,000 per quarter maybe you have upside, is there upside above and beyond 3000? Yes, theoretically, so there's a lot to learn. So yes, it is possible to simply answer, we'll know more as we continue to progress throughout the year.

Gary Taylor with JP Morgan. Your line is open.

Hi, good morning. I wanted to check on a few things with Direct Contracting. So just listening to the conversation about your expectation around the per-member per-month, the accounting is finalized on that, that you'll have the pro-step revenue per-member, per-month in your net revenue that's how the revenue recognition will work?

Hey, Gary, it's Tim. It is not final. We have had conversations with our auditors. We went through one or two rounds. We are working on getting the final determination, candidly which has been more focused on getting through our last follow-on offering as well as through this earnings period. Obviously we need to have that determination made here, certainly because we're going to close our books for – start our accounting for Q2. When the program goes live, no changes to our expectations based on those conversations that it'll be treated the same as our MA book of business, where we would recognize the full premium as revenue. And obviously the full medical cost as medical expense.

And if you're around this 1, 200 per-member, per-month with voluntary a little above a line, a little below I'm sort of ballparking about 60 million of revenue contribution for the year, just given sort of the phased enrollment, is that about what you have embedded in your 2021 revenue guidance?

Yes, I'd say it's you're within the ballpark, it's probably a little bit higher. I'd say, we would expect – remember we expect voluntary at 1,200 is what MA is. We expect voluntary to be above that, right. Given the differences in the discounts with MA plan versus the CMS, so from a revenue perspective it's probably a little bit more than what you've mentioned just given that dynamic, but you're doing your math, right.

John Ransom with Raymond James. Your line is open.

Hey, good morning. You're rolling out this diabetes solution, how do you feel philosophically? At last count they were exactly 8 million, 412 point solutions out there. How do you think about kind of the build versus buy when you integrate point solution into your top health, top management?

Yes. So I mean, we do have a very comprehensive diabetes approach as well. The program we're talking about is end stage renal disease dialysis, but regardless for any program you think about, look we always want to push ourselves and say, is there something we can get on the market that is going to be as effective or more effective that we can build ourselves, because there's no reason to reinvent the wheel or put a lot of our energy into building something. So we're always looking at it like, what are the solutions out there. And also how important is it to integrate that solution into our overall care. And I think one reason why we have been so successful at Oak Street Health, we are not an aggregation of dozens of point solution programs that are all siloed but everything we do is integrated together. So our behavioral health program is more successful and impactful, because it is completely integrated with our disease management programs and with our transitions programs, and with our in-home care and telehealth program, et cetera, et cetera, et cetera. So I do think it's something where your whole is much greater than the sum of the parts. I think that's a mistake that healthcare make generally is having a lot of parts, but those parts don't ethically talk. And a lot of times the same people, right, that have the worst outcomes and drive all the cost and really need the most help, have multiple of these problems. And they all exasperate each other. So I think that's a really important aspect of why it's successful and how we can do our programs, how we integrate. So, I mean the extreme example I'll give you, I don't ever expect to have an MRI at Oaks Street Health MRI machine, because there are more MRIs in Chicago than the entire country of Canada, we can get great access to them. And, reading an MRI image does not need to be integrated to our care model, right, so like well, I’d say plenty of radiology sales people call on Oak Street over the years and tell us how much money we can be making by capturing the radiology volume on our patient base, that is something we'll never do, because there's plenty of it. And we only have more costs to the system. But what we did do was we built to be a route for really leveraging social worker that's based in that program, not reimbursable like fee for service, not something you see a lot in the community, but actually then you can make a huge difference to your patients. And that difference is magnified when it's closely integrated with the disease management programs in the overall longitudinal primary care. So it's a long answer to your question, but how we think about it always assessing, is there a better solution we can buy and kind of integrate with our model and if we feel like we can do it really well ourselves, and it's incredibly important that it's integrated, that's when we go out and go and build it ourselves. Tim has given me the look that we are already running over time, but I think at this point we probably need to end the questions. Really appreciate all the engagement. We're really excited about the fourth quarter and more importantly, we're really excited about 2021 beyond Oak Street because I think we've really demonstrated the scalability, portability and effectiveness of our model. But we are not even starting to scratch the surface on kind of the demand and need for what we do. And so we're really excited to continue to invest, to bring more people and very confident we can kind of continue to keep improving our results while really expanding in a big way. So everyone on the Oak Street team is excited. Hopefully that time will share. So thank you everyone.

This concludes the Oak Street Health’s fiscal fourth quarter 2020 earnings call. We thank you for your participation. You may now disconnect.