Q2 2023 Cano Health Inc Earnings Call

Participants

Brian D. Koppy; CFO; Cano Health, Inc.

Mark Kent; Interim CEO; Cano Health, Inc.

Albert J. William Rice; Research Analyst; Crédit Suisse AG, Research Division

Andrew Mok; Analyst; UBS Investment Bank, Research Division

Gary Paul Taylor; MD & Senior Equity Research Analyst; TD Cowen, Research Division

Jessica Elizabeth Tassan; VP & Senior Research Analyst; Piper Sandler & Co., Research Division

Joshua Richard Raskin; Research Analyst; Nephron Research LLC

Parker Snure; Research Associate; Raymond James & Associates, Inc., Research Division

Presentation

Operator

Good afternoon, and welcome to Cano Health's Second Quarter 2023 Earnings Call. (Operator Instructions) Please be advised that today's conference is being recorded. Joining us on today's call will be Mark Kent, Interim Chief Executive Officer; and Brian Koppy, Chief Financial Officer. The Cano Health press release, webcast link and other related materials are available on the Investor Relations section of Cano Health's website. As a reminder, this call contains forward-looking statements regarding future events and financial performance. Investors are cautioned not to unduly rely on forward-looking statements, and such statements should not be read or understood as a guarantee of future performance or results. We intend these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act and Section 21E of the Securities Exchange Act.

We caution you that the forward-looking statements reflect our best judgment as of today based on factors that are currently known to us, and such statements are subject to risks, uncertainties and assumptions that could cause actual future events or results to differ materially from those discussed as a result of various factors, including, but not limited to, risks and uncertainties discussed in our SEC filings. We do not undertake or intend to update any forward-looking statements after this call or as a result of new information, except as may be required by law. During the call, we will also discuss certain financial measures that are not prepared in accordance with GAAP. A reconciliation of the GAAP and non-GAAP results is provided in today's press release and on the Investor Relations section of our website. With that, I'll turn the call over to Mark Kent, Interim CEO of Cantel Health. Please go ahead.

Mark Kent

Thank you, and good evening, everyone. I appreciate you joining us to hear how Cano Health is turning the page to create a sustainable business for all our stakeholders. We are accelerating our strategy to enhance operational efficiency and executing our plan to improve the management of our medical costs to realize the embedded value within our business. Since becoming Interim CEO in June, I have worked with the team to conduct a thorough review of all aspects of our business. While our mission and vision remain the same, the strategy and tactics needed to realize the profitability embedded in our business requires a refreshed approach built upon a stronger operational foundation. By now, you may have seen our press release and know that today, we announced Cano Health is pursuing a comprehensive process to identify and evaluate interest in a sale of the company or all or substantially all of our assets.

We have already been working with advisers and are encouraged with the progress made so far. And while there is no timetable for a conclusion of this process, we expect to share more information at a later date and time when necessary. As a note, we will not be commenting further on this process during our Q&A session after our finished remarks. This step is important for Cano Health's success. Joining with the right strategic partner is an opportunity to accelerate the value generated from producing favorable health outcomes for our patients and reducing medical costs within our communities. In the rest of my prepared remarks today, I plan to walk through the progress we have made in just a few short weeks to refocus our strategy on Medicare Advantage and ACO reach and to accelerate decisions and actions designed to support the organization's long-term success.

I'll discuss key dynamics impacting our business and how we will address some of these headwinds. First and foremost, our core operating strategy is now focused on providing primary care services for Medicare Advantage and ACO reach members in our core Florida market through both our medical centers and our affiliated networks. Our evolving management team has a long and proven track record of operating successful primary care facilities and affiliate networks in Florida that improve health outcomes for Medicare Advantage and Medicare ACO reach populations.

The team has a long-standing solid relationships with our payer partners. We are leveraging their experience, technical knowledge and relationships to streamline and improve our performance across the enterprise. We are now implementing a new plan to flatten our operational structure, rigorously prioritized projects in our Florida operations to improve the speed and quality of the care we deliver and create a smaller brick-and-mortar footprint to optimize our core Medicare Advantage assets.

This new smaller footprint and more focused business required us to realign and reduce the size of our workforce, which we did just last week. While it is difficult to see team members go, the reduction was necessary to allow us to align with this new strategy. We thank those employees who are leaving us for their dedication and service. In order to focus on Medicare Advantage and ACO reach operations in Florida, we launched processes to divest certain noncore assets. While we cannot ensure investors that a transaction will be consummated, we have received second round bids to divest the majority of our Florida Medicaid operations. While valuable, the Medicaid business diverted critical physician capacity and care management resources within our existing medical centers away from our core Medicare Advantage business. We found it was inefficient for our care management teams to serve both the Medicare Advantage and Medicaid members who have very different needs.

We also made important strategic decisions for our markets outside of Florida. By the fall of 2023, we expect to fully exit our operations in California, New Mexico and Illinois by selling or closing in those markets. We began notifying members, physicians, employees and our payer partners about our decisions over a month ago. This decision impacts approximately 5,000 total members across 17 medical centers. We also expect to fully exit operations in Puerto Rico by January 1, 2024, which currently has approximately 8,000 members cared for by our affiliates. Cono Health remains committed to supporting our members as they transition to new providers to ensure they receive the highest possible quality of care.

In addition to exiting operations in those states, we are consolidating medical centers in Texas and Nevada, while simultaneously evaluating offers, allowing us to divest these assets. The consolidation plan is intended to improve the economics of these markets, whether they remain part of Cano Health or are divested. We plan to reduce our footprint in Texas and Nevada by closing about half of our centers in those markets to improve their profitability and cash flow. With such actions, our Texas and Nevada medical centers will be highly attractive with the capacity to efficiently and effectively serve the growing Medicare Advantage population. Further, we review taking actions on other non-Medicare lines of business in Cano Health, such as Medicaid, behavioral health, pharmacy operations and occupational health.

Each of these lines of business is attractive on a stand-alone basis. We have received interest from multiple parties for these assets are engaging in active discussions. And of course, we cannot assure investors that any particular transaction will be consummated. Our exit from California, New Mexico, Illinois and Puerto Rico, coupled with the consolidations in Texas and Nevada and the potential divestiture of Medicaid will allow the organization to be laser-focused on delivering high quality, high access and high member engagement for our Medicare Advantage and ACO reach members.

Now moving on to the current business environment and the trends we are seeing. First and foremost, we are in the care management business. The quality of care that we deliver remains market-leading and a source of pride for all of us. Unfortunately, we have had several emerging process issues that have affected our ability to project our performance. However, these issues can and are being remedy. In our core Medicare Advantage business, capitated revenue in the second quarter of 2023 was well below our expectations. This was primarily due to a shortfall in the Medicare risk adjustment revenue, or MRA collected versus what was expected and accrued for in prior periods. As the second quarter of 2023 close, we received the quarterly service funds from our health plan partners, which reflected their reconciliations of the actual and estimated MRA revenue from CMS for our members. These reconciliations resulted in a reduction to our final 2022 and midyear 2023 estimates during the second quarter.

Upon stepping into the Chief Strategy Officer role in April of 2023, I asked our team to perform a cross-functional review and audit of our clinical documentation, billing and coding and estimation methodologies and to suggest ways to enhance our practices. Our review found that while our clinical documentation, billing and coding followed nearly all internal policies, we have clear opportunities to implement simpler, scalable and more effective protocols designed to enhance our performance. The largest gap we found was attributable to back-end processes and the ways that data from those processes inform our MRA estimates. The prior processes were overly manual, and our back testing analysis demonstrated that they provided limited predictive power.

During my time at Humana and during my time operating independent value-based care primary facilities and a hospital, I learned that the value-based care model succeeds best when physicians have every tool necessary to make informed decisions. And so to enhance our data capture, this quarter, we quickly began revising our approach to limit data variability and to ensure we close gaps in real-time data reporting. I believe our estimates going forward will reflect a more accurate view of these MRA projections that will result in a higher realized and appropriate MRA revenue. We were also impacted by higher utilization than expected in the quarter. This was primarily due to the utilization of health plan supplemental benefits such as OTC FlexCards and higher utilization across outpatient and pharmacy services.

As you recall from our first quarter earnings call, we received information from payers about higher utilization of OTC FlexCards very late in the quarter. Prior to receiving actual card utilization data, we assume that the trend would be in line with historical patterns. The new payer information made it clear that in the second quarter, utilization of the cards was significantly higher than in prior years. And in several cases, we realized that service fund OTC FlexCard impact in 2023, which were not present in 2022. We Moreover, health plan data received in the second quarter of 2023 included retroactive adjustments for OTC FlexCard claims dating back to January 1, 2023. As a result, not only do we experience higher OTC Flex card utilization in the second quarter of 2023, but we also received unfavorable prior period development from the first quarter of 2023.

These OTC FlexCards became more prevalent in the 2023 annual enrollment period among health plans, particularly in Florida. While they provide an enhanced benefit for our members, at-risk value-based providers like Cano Health are unable to influence or manage these costs, which we recognize in our third-party medical costs. Given these unsustainable unsustainable burden OTC FlexCards placed on our third-party medical costs, we are intensely negotiating with several payers to mitigate these costs in 2023 and making reduced OTC FlexCard cost a top priority in our negotiations for 2024.

In the second quarter of 2023, we also saw higher-than-expected utilization partially attributable pent-up demand for outpatient procedures. Pharmacy utilization was also higher than expected in the quarter and remained elevated due to higher branded drug costs, primarily related to certain diabetes medications. We expect this to continue in the second half of 2023 and are closely monitoring the claims data we received. To mitigate these costs, we have a number of action items that are underway, and I will discuss these momentarily. Clearly, these headwinds mean it's imperative that we position ourselves to better facilitate, manage and influence care delivery in our medical centers and affiliate networks. Focusing on Medicare Advantage and ACO reach provides Cano Health with the opportunity to rebuild its foundation in a market we understand very well. It also allows us to implement and scale critical operational changes across our footprint, giving us greater leverage over time.

Now let me highlight a few actions we've already taken to simplify our operations and refocus our core capabilities. First, we have successfully rightsized our payer agreements to reflect the size, scale and impact of our organization to position Cano Health as a true partner with our payers. Actions taken include developing broader master agreements with payers to replace multiple complex agreements with the same payer. This is intended to allow us to manage our payer relationships more effectively and to yield the best economic impact for our enterprise, not just in a particular region or for a single plan.

Second, we are using our scale to negotiate with specialists and hospital systems, which should enable us to reduce our third-party medical costs and support our ability to focus on improving the overall health outcomes of our patients. Third, as part of our restructuring, our Cano At Home program relaunched with a renewed focus on increasing engagement with high-risk patients. The goal is to improve our delivery of primary care in the home setting to avoid costly ER visits and hospital admissions.

We previously mentioned that this program can generate a 5% to 10% reduction in preventable ER visits and increase our ability to treat high-risk patients outside of the hospital. Simultaneously, our member engagement teams have increased contact with high-risk patients to control adverse medical outcomes. For example, in the first half of 2022, we engaged with approximately 800 high-cost members. In the first half of 2023, as part of the action plans that have been implemented, we have engaged with nearly 49,000 high-cost members. Clearly, this level of engagement will have multiple benefits for the organization, including the recognition of higher MRA scores and lower medical costs as we engage and manage these members and better member engagement and better increased member satisfaction.

Fourth, we are making operating enhancements to improve our insight into and influence over our medical costs moving forward. This includes reorganizing certain functional areas and adding new positions to strengthen core capabilities. To that end, we have added a leader of value-based care optimization who is responsible for evaluating the various patient touch points along the patient care continuum to ensure that our physicians, specialists, pharmacy services, Cano At Home and care management teams are all seamlessly connected. In addition, we are implementing several new predictive services to improve our ability to provide proactive reporting and analysis of value-based care. Utilizing integrated data about our care touch points will ensure that we have the means to quickly assess and identify gaps in care, while caring for our patients.

Fifth, we have thoroughly reviewed and strategically aligned our referral network to ensure that we have the right referral partnerships with a focus on patient health outcomes and offering the right care in the right setting at the right time. Sixth, we have a number of initiatives to identify and leverage our patient population data to determine where generic alternatives represent the greatest opportunity. This includes identifying whether prescriptions are prescribed by our own Cano Health physicians or originate with outside specialists. This insight will help us make quick and appropriate actions to reduce our pharmacy costs without sacrificing the quality of care or efficacy of medications prescribed.

And finally, we remain committed to operating as efficiently as possible and reducing our SG&A expense. As I mentioned, to adapt to new business footprint, we made the difficult decision to realign and modify the size of our workforce to improve our cost structure. It goes without saying that these initiatives are critical for our success and for our future as a value-based care company. Redirecting Cano Health strategy to focus on the highly profitable and scalable Florida Medicare Advantage market and the capital-light ACO Reach business will put Cano Health on a path towards improving our profitability and cash flow.

There is still a significant amount of operational work to be done in our medical centers and our corporate functions, but we are encouraged by the potential and the great progress we've seen so far: systems, initiatives, partnerships and relationships all need to work and communicate in unison to maximize value from each decision we make. In the coming months, our organization will demonstrate its focus on optimizing our operations to generate greater efficiency, build better relationships with our payers and improved health care outcomes for our Medicare Advantage and ACO reach members to ensure the organization's long-term success. And now I'll turn the call over to Brian Koppy, our Chief Financial Officer, to take you through the financials.

Brian D. Koppy

Thank you, Mark, and thanks, everyone, for joining us today. It certainly has been a challenging and disappointing quarter for us and our various stakeholders. We are working relentlessly to execute the initiatives Mark has laid out and to accelerate the organization's path to significantly improve financial performance. Starting with the results of the quarter. Total membership increased 35% year-over-year to approximately 381,000 members in the second quarter of 2023. This represents an increase of approximately 100,000 members from the second quarter of 2022. Total Medicare Advantage membership grew approximately 14% versus the prior year, but was about flat sequentially as continued membership growth in our medical centers was partly offset by planned terminations of our affiliates.

Membership also declined sequentially in ACA and Medicaid, which were impacted by contractual changes and redeterminations, respectively. Total revenue for the second quarter of 2023 was approximately $767 million, up from approximately $689 million a year ago. Total capitated revenue in the quarter was approximately $743 million, an increase from $655 million in the second quarter of 2022. However, in the second quarter of 2023, capitated revenue was lower than expected, primarily driven by Medicare Risk Adjustment, or MRA revenue, which is approximately $58 million lower than previously estimated in our most recent full year 2023 guidance. This lower MRA revenue reflects our updated view of the final 2022 and midyear 2023 MRA revenue estimates.

Of the approximate $58 million shortfall versus our expectations, approximately $44 million was out of period or related to services provided in 2022 in the first quarter of 2023. The Medicare Advantage revenue PMPM was $1,027 in the second quarter of 2023, down 13% sequentially from the first quarter of 2023, primarily driven by the lower-than-expected MRA revenue. The Medicare ACO reach revenue PMPM was $1,309 down 12% sequentially from the first quarter of 2023, and also lower than expected and was primarily driven by revised benchmark data we received from CMS related to the 2022 and 2023 performance years. Additional information about our membership mix and our PMPM is available in our second quarter earnings release and second quarter financial supplement posted on our website.

Our Medical Cost Ratio or MCR in the second quarter of 2023 was 103.5% compared to 82.6% in the second quarter of 2022. Excluding ACO REIT, the MCR was approximately 108.6% in the second quarter of 2023 compared to approximately 81.8% in the second quarter of 2022. This increase was primarily driven by an increase in our Medicare Advantage MCR. The year-over-year increase in the MCR was primarily driven by lower capitated revenue due to the reduction in MRA revenue discussed previously and higher third-party medical costs due to higher utilization and higher costs associated with OTC FlexCards offered by our health plan partners. The higher utilization contributed to unfavorable prior period development of third-party medical costs during the quarter of approximately $44 million, primarily related to medical service utilization of approximately $26 million and OTC FlexCards of $18 million. The higher utilization of OTC FlexCards occurred across nearly all our health plan partners.

In the first quarter of 2023, Cano Health recognized approximately $13 million of OTC FlexCard costs. While the second quarter of 2023 recognized approximately $51 million, of which approximately $18 million was unfavorable prior period development from the first quarter of 2023. What we see now is the aggregate cost from these OTC FlexCards was approximately $33 million per quarter in the first half of 2023. This compares to approximately $12 million per quarter in the first half of 2022. As a result, greater use of OTC FlexCards by our Medicare Advantage members is projected to add $84 million of third-party medical costs in the full year 2023 compared to the full year 2022.Direct patient expense in the second quarter of 2023 was 7.4% of our total revenue, below the 7.6% in the second quarter of 2022.

SG&A expense in the second quarter of 2023 was approximately $99 million, down approximately $6 million compared to the second quarter of 2022. The total SG&A expense as a percentage of revenue was approximately 13%, which was above our expectations, primarily due to lower capitated revenue and headwinds to our cost reduction initiatives related to higher professional and legal fees. Net loss in the second quarter of 2023 was approximately $271 million compared to a net loss of approximately $15 million in the prior year, primarily driven by a higher operating loss, the change in fair value of warrant liabilities and higher interest expense. Operating results in the second quarter of 2023 also included a $62 million increase in the reserve within other long-term assets on our balance sheet, resulting from the full write-down of MSP recovery Class A common stock.

Adjusted EBITDA in the second quarter of 2023 was negative approximately $150 million compared to positive approximately $10 million in the prior year. This was primarily driven by higher medical costs and lower MRA revenue, as I previously described. It's important to note that we recognized $88 million from 2 large out-of-period items that are not expected to recur in the back half of the year. To summarize, the $88 million of out-of-period items. First, MRA revenue was $58 million lower than expected and included $44 million unfavorable out-of-period adjustment for lower MRA revenue, while approximately $14 million is expected to recur in each of the third and fourth quarter of 2023.

Second, as I mentioned previously, there was $44 million of unfavorable prior period development related to utilization of third-party medical services and OTC FlexCard. We are withdrawing our full year 2023 guidance provided on May 9, 2023, as our management team continues to evaluate strategic interest, assess the divestiture of noncore assets and accelerate changes to Cano Health's operating structure. These factors are dynamic and outcomes very widely, while we expect to continue to provide you with updates to our outlook as warranted. However, there are some factors to consider as you think about the remainder of the year.

First, as I mentioned, we recognized $88 million of out-of-period items and unfavorable prior period development in the second quarter of 2023. As such, this amount is not expected to recur in future periods. Second, we still expect our financial performance to improve in the second half of 2023, despite higher utilization of OTC Flex Cards and medical services through the end of the year. The improvements in the second half of the year are driven by operational activities, which Mark highlighted, benefits from third-party medical cost recovery, such as stop loss and Part D rebates and traditional seasonality, which typically benefit results in the second half of the year.

Third, we recently made the decision to reduce our workforce by approximately 700 people or 17% during the quarter. About 20% of these reductions due to exiting operations in California, New Mexico and Illinois, with another 20% due to consolidations in Texas and Nevada and the remainder attributed to other operational functions. These actions are expected to yield approximately $50 million of annualized cost reduction initiatives beginning in the third quarter of 2023 and through the end of 2024, partially offset by an approximate $4 million restructuring charge that we expect to record in the third quarter of 2023.

Fourth, we currently expect to reduce our medical center footprint from 169 as of June 30, 2023, to approximately 136 medical centers by year-end. After our market exits and consolidations are completed. The remaining centers will include approximately 123 centers in Florida and 13 centers in Texas and Nevada. It is important to note there are approximately 23 centers in Florida predominantly related to our Medicaid operations. Fifth, the California, New Mexico and Illinois markets we are exiting have year-to-date adjusted EBITDA losses of approximately $14 million as of June 30, 2023. For these markets, there will be costs remaining for 2024, which are primarily related to certain leases that we have yet to sublease are fully exit of approximately $7 million. In regard to Puerto Rico, which we are exiting effective January 1, 2024, the year-to-date adjusted EBITDA losses were approximately $9 million.

Now let me turn to our cash flow and liquidity. At the end of the second quarter of 2023, cash used in operating activities was approximately $45 million year-to-date and was primarily due to unfavorable operating results. Cash used in operations was also impacted by the change in working capital, which reflects lower accounts receivables, including lower estimates for MRA revenue compared to prior periods. We ended the second quarter of 2023 with approximately $15 million in unrestricted cash and $110 million of capacity remaining in our revolving credit facility, providing us with approximately $125 million in total liquidity at such time.

However, for the test period ended June 30, 2023, the company was not in compliance with its financial maintenance covenant under the sidecar credit agreement, which relates to the 2023 term loan we closed earlier this year and requires our first lien net leverage ratio to be tested quarterly. At such date, the company's first lien net leverage ratio exceeded the maximum limit of 5.8:1 primarily due to the lower capitated revenue and higher third-party medical costs. We have successfully negotiated with our creditors and on August 10, 2023, the company has obtained a waiver and amendment of the Side-Car Agreement through September 30, 2024. The company's current liquidity as of August 9, 23 was approximately $101 million, which consists of unrestricted cash and reflects the full draw of the Credit Suisse revolving line of credit. Our expectation that having secured the 2023 Side-Car Amendment, we will repay a significant portion of the CS revolving line of credit. The full draw was prudent capital management while we negotiated the Side-Car agreement.

Furthermore, as the company achieves its various divestiture objectives, the immediate use of those proceeds will be to repay the revolving line of credit. And then within 18 months, the intent is to use the net proceeds to reinvest back into the business with the balance being used to repay debt. Given the operational headwinds we're facing in 2023 and the fact that the company's current liquidity is not expected to be sufficient to cover our operating, investing and financing uses for the next 12 months, management has concluded that there is substantial doubt about Cano Health's ability to continue as a going concern within 1 year. That is why the company is pursuing a comprehensive process to identify and evaluate interest in the sale of the company are all or substantially all of its assets. While pursuing multiple initiatives to streamline and simplify the organization to improve efficiency and reduce costs.

These initiatives accelerate our shift to focus on our core assets in Florida to improve profitability and cash flow. And we expect our focus on Medicare Advantage and ACO reach to result in more efficient operations and lower medical costs while helping our patients live their healthiest lives. In conclusion, the company is committed to strengthen our financial footing and implementing our operational and strategic initiatives to improve patient health and deliver for stakeholders. Now I'd like to turn it back to Mark for a few closing comments.

Mark Kent

Thanks, Brian. In conclusion, as Brian and I have just walked through, the company is committed to strengthening its financial footing and implementing operational and strategic initiatives to improve patient health and deliver value for our stakeholders. As discussed, the company is working with its financial advisers to evaluate and develop the inbound inquiries we have already received as well as to engage with other potential buyers. We have a good company and a strong plan to address the headwinds facing the company. And there is, and we believe will continue to be strong interest in this company. As you would expect, we will not get further into the details of our strategic review process, but we are laser-focused on achieving a value-maximizing transaction for our stakeholders, and we expect that our current liquidity and available options are sufficient to complete such a process. With that in mind, we ask that you focus your questions on the substance of our second quarter 2023 financial results. And so I will ask now the operator to open the call to your questions. Operator?

Question and Answer Session

Operator

Your first question comes from the line of A.J. Rice with Credit Suisse.

Albert J. William Rice

First of all, on the liquidity comment, you said that August 19, $101 million of liquidity. You had fully drawn down on the credit line at that point. You got to waiver the next day, and you expect to pay that credit line, which I guess is about $110 million substantively back by end of September. Would that amount of money still be completely available to you? Or will that limit to $101 million to some lower amount once you pay that back?

Mark Kent

No, that's right. The revolving line of credit is still available, and we'll access it as needed. And now that we've kind of cleared certain hurdles, we'll repay that back and kind of use that as needed throughout the quarter.

Albert J. William Rice

And I think you said you were negotiated on the sidebar agreement through September 30, we then revert out of compliance again post September 30? Or will you be still okay?

Brian D. Koppy

Are you talking about September 30, 2024.

Albert J. William Rice

I had the September 30, is that in 24 that you've extended Okay. Yes. All right. Okay, that's good. Just one other area I asked a question about. So the stop loss agreements have traditionally built up to the point where in the back half of the year, they gave you some help, obviously, with where you guys are running year-to-date, I would assume that, that would be a factor in thinking about the back half that those stop loss agreements might be kicking in quicker? And how have you factored that into your thinking about the back half. And obviously, there's prior period adjustments you're making, do you have the ability to go back and say, "Hey, that should have triggered some of these stop losses coverage from prior periods, and we should have some recovery there." And if you've been able to do that, any sense of the size of that?

Brian D. Koppy

No, it's a great question, and that's part of the assessment that we're doing given the higher first half utilization, you're right. You're going to expect a certain level of increased stop loss on that. And that is factoring into the comment that, yes, we not only will have the traditional recoveries from stop-loss in the third primary fourth quarters. But now we would expect that number to be a little bit higher than it's historically been. We're not providing specific guidance on that, but you're right on in the thinking. And that's part of how we're thinking about it, too. And as we look forward, we're not being taking any of those items in advance. We're not going to pull those if that information -- that those recoveries forward, we're going to let them play out as they happen in the back half of the year.

Operator

Your next question comes from the line of Josh Raskin with Nephron Research.

Joshua Richard Raskin

I've got a couple, so I apologize upfront. But just first, just on membership, how many members do you have left? Do you expect in the centers that you have left, so Nevada, Texas and Florida. That's the first part of the membership question. And then how many are core Medicare Advantage or reach in Florida?

Brian D. Koppy

I would say a majority -- I'll start with the ACO reach. The majority of the members and so reach are in Florida, that's pretty standard. And then from a membership perspective, what we say, there's -- in total, there's about 5,000 members in California, New Mexico, and Illinois that we're exiting.

Joshua Richard Raskin

Okay. We can figure out the rest. And then I know we've gone through this before because you've had the issue in prior years, but can you just remind us the process on recording risk adjusters for MA lives and how you record the revenue seemingly before confirmation from CMS or even your health plan partners? Are you giving data to your health plan partner saying this is what we think the MRA is, and this is what we're going to record? Or is there some confirmation from the plan? I'm curious how this is now the second time you guys be off by a large amount in this process?

Brian D. Koppy

Yes. A majority of the MRA change was due to the final 2022 MRA. So this is when it comes in at the final, and this comes from the health plan, so it's their final reconciliation. And then now given that we're midyear in the year, you start getting your first insights into the midyear 2023. So the prior year -- the prior adjustments I referenced was due to the final 2022, which we started that in 2022. So that's why that pulls forward from prior year where the midyear is starting with the 2023 numbers.

Joshua Richard Raskin

I guess my question is, are you looking at a specific member and saying, we think there's 2 specific risk codes that are going to get tripped? We think it's an incremental $600 per member per month, and that's what we start accruing as revenue, all based on internal Cano decisions? Or are you relying on the health plan to say, hey, the totality of that member in terms of other sites of care and prescription drugs and all that sort of stuff and the health plan is giving you that data.

Mark Kent

Yes. Let me jump in here. This is Mark. So historically, I'll put it this way, it was a very tedious and manual process. And as you can imagine, that process can be front with all kinds of errors. The new process is one based upon where we are predicting based upon the data submissions. We are correlating and corroborating that information with respect to what is received by the health plan and what is received by CMS. And then we are then a sign in overall score to that with a probability predictive analysis to it. So this is what is now in place is a very automated process where prior to, it was extremely manual. And so as you just alluded to in prior periods and in prior years, that's what causes the miss.Being able to predict that going into next year as we approach planning for 2024, we have a much more reliable process, and we've already begun testing that and we back tested it. And we have successfully been able to do that for the month of May 2023 and successfully for the month of June of 2023. So we are very confident of how we move forward. The issue is that all of this transpired in setting this budget and setting this guidance last year in 2022.

Joshua Richard Raskin

That's perfect. That's perfect. And then just the last one I want to ask about the specific of the comprehensive process of the sale of the company. But I'm curious about the feedback. It sounds like you've made notifications in the market of your change in strategy in some of the exited markets, et cetera, and then I guess in summer Florida. I'm curious, the feedback from your largest health plans, are they worried about care for their patients and continuity? Have they started to look for alternatives to delegate their members to other value-based care companies? Or are they -- or is that all part of the inbound strategic interest in sort of creating a catalyst for you?

Mark Kent

Yes. The awesome thing -- we have great -- this is Mark again. We have really followed and sound relationships with our health plan payer partners, such that they recognize the extreme value and the way in which we wrap ourselves around our patients and our members add tremendous value in the market. I think you can either as even then, I think the Secretary of Health and Human Services was in our Nevada market very recently commending us on the care that we provide. And so we are very thankful for that recognition. We work hand-in-hand with them, especially during this, I would say, this concerning time, if you will, whereby we are exiting markets and divesting. So we are working through the process where we are selling in many places with the buyer in these areas. But the health plans understand and we signaled with them and have been working hand-in-hand to ensure that their members are patient there is no lack, no gap in the continuity of care and/or the level of care in which they're receiving through this process. So there hasn't been any concerns there. And so we've been working very closely with them.

Operator

Your next question comes from the line of Andrew Mok with UBS.

Andrew Mok

Can you help us understand these FlexCard benefits a bit more? What's the typical dollar spend by member and the spending patterns associated with these cards? And how exactly does the accounting treatment work for them when are they expense on your income statement?

Mark Kent

So it's really interesting. And so each health plan, this is Mark again, each health plan administers it a bit differently. And the dollar amount, depending upon the plan is also very different. And so we're seeing swings anywhere from $250 per month up to $1,000 in a quarter. And so part of the problem with this, as you can imagine, was that in 2022, most of the health plans did not put that in the service fund. And then in 2023, there were a few blips in what we would call maybe settled data around about the March time frame. But when you're looking back historically in March and you compare it to the prior year, you're like, well, maybe this is a blip, don't necessarily know what we're seeing, but come May of 2023, not only did you see it fully, but it retroed all the way back to January. And so that caught us very flat footed as you could imagine because there were several plans who did not offer it in 2022, but offer it fully at an increased rate in 2023, and that is -- and so that's what caused a lot of that noise. So I'll allow Brian to address the...

Brian D. Koppy

Yes. And I'll just add to that comment is our payers use a third-party vendor to reconcile it on their end, and then that comes through in the service funds. So we recognize it as it comes through each month within those service funds, which we received from the payers. And as Mark said, a lot of them were catching up their activity in the second quarter service funds that we received. And as a result, that's where we realized that $18 million, what we're calling prior period development on just these FlexCards. So it drove the significant impact in the quarter of around $33 million. So pretty substantial.

Andrew Mok

Got it. So this is a supplemental benefit that's essentially priced by the health plan in their bids, but then you wind up taking the risk on it. So I guess how do you ensure that something like this is priced correctly in the future?

Brian D. Koppy

Yes. I mean, you got it right. I think Mark mentioned, this is part of the negotiations that we're undertaking right now for 2024. And given our market size, our membership scale in certain geographies now knowing fully how these plans benefits are rolling through. We're negotiating hard. And a number of these payers won't be in our lineup, so to speak, if there's not changes to the, I'll call it, reimbursements are the service funds that we receive in 2024.

Mark Kent

Yes. I'll add a little more color. We really expected the economics in the filings so that it -- to bear themselves out, meaning you're providing this benefit and so you would actuarially adjust your benefits to account for that. But what we are seeing is it hit our service firm. So it's causing a or has called us to renegotiate the economics of our agreement and in some places to terminate some plans.

Andrew Mok

Got it. Okay. And then just wanted to follow up on the Medicare risk adjustment. It sounds like you're pinning the issue on a very manual process previously. But when I hear that, it sounds like that it would just take longer to arrive at that MRA estimate, but that doesn't necessarily explain why that estimate was so off. So was it an underlying issue in the data itself? Or was it a shortcoming in the manual estimation process?

Brian D. Koppy

Yes. I think I would say it's a combination of factors that you would -- you can refer back to kind of how things work. There's some operational. And I would say then it ties into how does that information flow into making the estimate. So it's -- they're both related to the estimates, but the estimate has to be based on kind of your view of the new information that's coming in? And is it up to date? Is it the latest scoring or latest MRA related to the engagement of those members and the charts that are being looked at. And that's where there's been a significant look back as to, I'll call it, the root cause analysis on some of that information that's being corrected going forward.

Andrew Mok

Got it. And does that data flow through the Panorama system?

Brian D. Koppy

Yes, it's all data enhancements and information that is being reviewed in reports that are being looked at to make sure that, as Mark said, there's Unison and information flow and communication of activity. So all the various departments are aware of the activities of the members.

Operator

Your next question comes from the line of Parker Snure near with Raymond James. T

Parker Snure

This is Parker Snure on for John Ransom with Raymond James. I appreciate some of the detail you gave on the noncore markets EBITDA year-to-date. I was just hoping you could give some detail or just an update on the -- maybe the year-to-date performance from the kind of core Florida Medicare Advantage assets that you plan to maintain? Just trying to get a sense of, hey, what could this business look like if you guys get on the other end of getting shedding some of these non-core assets that you wish to get rid of?

Mark Kent

Yes. I mean I think the easiest way is to kind of take the markets that we talked about, that underperformance. And we've talked in the past about the rest of the non-Florida markets, which would really be the Texas and Nevada, and then you also have Puerto Rico and D.C. in there. But if you look at Texas and Nevada, they're clearly -- they're pressured this year, and that is why we're undergoing the consolidation, and that's going to help improve that performance and that asset going forward. But clearly, when you look at Florida, Florida is the biggest operating market. It has a disproportion of the pressure that we're seeing in the quarter and year-to-date.

When you think about looking forward, a lot of those -- you kind of take those one timers out, you look at the improvement on the cost reduction efforts just on the SG&A, but then you get the enhancements from the operational activities around reducing medical costs we believe there's substantial upside of just the core Florida market -- core Florida Medicare and ACO reach business. And that's really the long-term view and structure that we're putting together around how we want to think of this business going forward in terms of our scale, density and position within the market, particularly the high-value Florida market, where we continue to believe that, that asset alone is going to be highly profitable as we go into '24 and beyond.

Parker Snure

Okay. And if I can just get one more follow-up. I mean, just going back on one of the prior questions in my OTC FlexCards, I mean, what kind of leverage do you have in those negotiations where you're able to kind of insulate yourself from some of the upstream plan design? Are you just at the whim of whatever kind of members you get in whatever plans and certain plan design that they're in? Or are you able to carve out certain areas and certain kind of sites of care that you make that you don't want to be exposed to? And outside of the OTC FlexCard. Are there other areas that you would wish to kind of insulate yourself from? I know you called out higher pharmacy costs. Maybe just talk about kind of your ability and your leverage in those negotiations.

Brian D. Koppy

Yes. I'll start a little bit, and Mark can add any color if I'll hit it cool. But I would say the supplemental benefits are being looked at across the board from the payer side as they go into 2024 in general,just given the new rates for 2024. So I think all payers are pulling back on those broadly. What we're doing is having discussions specifically on the ones that we see predominantly in the South Florida market here as well, where we can influence that and find those payers that are reasonable. We understand the supplemental benefits are attractive to members, and we want to work collaboratively with the payers to grow membership. So it's -- there is a mutual beneficial discussion to be had because they need us to help them grow their membership, but we also need them to ensure that it's a, I'll call it, a favorable financial terms as we serve those members. So that's kind of how we're looking at the supplemental benefits for particular plans that we're negotiating with.

Operator

Your next question comes from the line of Gary Taylor with Cowen.

Gary Paul Taylor

I had a couple of questions. One, on the revenue that you expect to exit Medicaid -- I guess we know the Medicaid revenue, assuming that's mostly in Florida, but California, New Mexico, Illinois, Puerto Rico, half of Texas and Nevada, can you give us some sense of what the revenue -- annualized revenue is on that block of business that you will look to exit?

Brian D. Koppy

Yes. So Illinois, you're talking about Illinois, California, New Mexico, year-to-date, maybe, I'm going to say, $9 million, $10 million of revenue.

Gary Paul Taylor

And that's -- most of that's still fee-for-service. It's not -- most of that is not capitated yet or some of it is.

Brian D. Koppy

Some of it is, yes, it's a small portion of it.

Gary Paul Taylor

The Puerto Rico loss is similar, is the revenue similar on the revenue there?

Brian D. Koppy

Yes. Puerto Rico has got pretty decent revenues relative. We've been in that market for a while. We said about 8,000 members, you're up to, call it, $35 million, $40 million of revenue year-to-date.

Gary Paul Taylor

Okay. And then on the MRA revenue, 58% at 44 out of period. Some of that's '22, some of that's first quarter of '23. Do you have you have that hand like what it was for first quarter of '23, if we're just trying to somehow build like a normalized first half of '23.

Mark Kent

I'm trying to -- I would say the way you think about it is kind of $14 million a quarter or so, is the way it kind of normalizes out from that perspective.

Gary Paul Taylor

And the $44 million of prior period expense development negative, is that truly PID as in prior year related '22? Or are some of that also related to the first quarter?

Brian D. Koppy

Yes, significant majority, almost all of it is related to first quarter.

Gary Paul Taylor

Well, first quarter. Okay. And then last one...

Brian D. Koppy

I'm sorry, Gary, I just don't mean to cut you off. I just want to -- like I said, we talked about $18 million of that is from FlexCard, so that's all first quarter. And then the balance of $26 million of that $44 million, most of that is still first quarter as well.

Gary Paul Taylor

Okay. And then last one, I saw on the EBITDA add backs $52 million reserve for other assets. I'm wondering, is that writing down that MSP receivable? Or what is that?

Brian D. Koppy

Yes, yes, yes. Okay. I was going to look to see what you're looking at. But yes, you'll see that as a call a line that we called out.

Gary Paul Taylor

So it's written down to 0 apparently?

Brian D. Koppy

That's correct. That's correct. You think about -- I think you're very familiar with the MSP. But as we looked at it, there's been a number of unfavorable developments related to MSP since our last earnings call, we did a complete review of that, and we used a third-party specialist to review that valuation and decided to write that down.

Operator

Your next question comes from the line of Jessica Tassan with Piper Sandler.

Jessica Elizabeth Tassan

I think, Brian, you suggested that you guys expect about $100 million of total 2023 claims expenses related to the OTC card. I just want to make sure that we got that correctly. And then that implies like about $500 of expense for every single capitated MA member. Is that accurate?

Brian D. Koppy

Yes, I think I was -- I think I said around $84 million is the full year impact. And it varies by plan. I'd have to -- but some plans are 500, some are 250, some are 350. So it does -- so if I take your $100 million down $84, you're going to get below 500, probably on average. So it's a very rich benefit for sure.

Jessica Elizabeth Tassan

Okay. Got it. And then I guess, I was -- the way I understood it was $84 million of incremental expense in 2023, but that is $82 million of total expense in 23 million related to these benefits?

Brian D. Koppy

Okay. So yes, so if you're looking for -- yes, that's right. The incremental was that -- let me just make sure. But yes, if you look at the expectations for 2023, yes, you're going to be, what, $33 million a quarter. So yes.

Jessica Elizabeth Tassan

Okay. So the $84 million is incremental or total?

Brian D. Koppy

Increment , yes. Yes, what we thought in 2022, if we -- the 2022 was about $12 million a quarter, now we're up to $33 million a quarter.

Jessica Elizabeth Tassan

Got it. That's pretty helpful. So then just in terms of 2 more. In terms of the MSD recovery, is that your primary vendor of top-loss insurance? And then I guess just given the write-down year-to-date, is there any change in the terms or extent of your stop-lock coverage in '23 relative to 2022?

Brian D. Koppy

Yes. No, just to be clear, I need to be super clear, there are nothing to do with our stop loss at all. They were just -- they traditionally handle third-party recoveries related to other types of benefits that you may have if there's an accident, whether it's workers' comp or some other benefits. So it's completely separate from our stop loss.

Jessica Elizabeth Tassan

Got it. And so then was that $40 million in 2022 related to medical costs? Or was that below the gross margin line?

Brian D. Koppy

I just want to make sure we answer properly. What can you refer...

Jessica Elizabeth Tassan

Was just the expense benefit related to MSP? Did that hit at the medical claims expense line? Or was that below the gross profit?

Brian D. Koppy

Yes, it was the medical expense line.

Jessica Elizabeth Tassan

Got it. And then just last question is, to what do you attribute the kind of inability to scale in California, New Mexico, Illinois and Puerto Rico? And just what we see all confident that you can consolidate Nevada and Texas and still succeed in those markets. And I appreciate the question.

Mark Kent

Yes. Thanks, Jess. I would say it's not a function of we don't believe we can scale in those markets. It's a determination as to our, I'll call it, our financial liquidity position that we don't have the luxury waiting for those centers in those markets to fully mature. And we had to make the difficult decision to exit those markets now before they can fully mature. So that's the way I would view it. And that's -- so now I'll get to the second half of your question, which was, what do we do in Texas, Nevada? Well, all we're doing at Texas, Nevada is consolidating to enhance the profitability of that market to ramp faster because we do believe they're on the right trajectory. We're just going to give them a boost and reduce the cost structure, consolidate the membership into the, I'll call it, the highest return centers that we have there, which will then get more members in those centers, and that J-curve will significantly ramp.

Operator

Ladies and gentlemen, that will conclude today's conference call. We thank you all for joining, and you may now disconnect.