InnovAge Holding Corp Stock

Thank you for standing by, and welcome to the InnovAge Fourth Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, today's program is being recorded.

And now I'd like to introduce your host for today's program, Ryan Kubota, Director of Investor Relations. Please go ahead.

Thank you, operator. Good afternoon, and thank you all for joining the InnovAge 2026 Fourth Quarter and Fiscal Year-end Earnings Call. With me today is Patrick Blair, CEO; and Ben Adams, CFO. Jen Browne, President and COO, will also be joining the Q&A portion of the call.

Today, after the market closed, we issued an earnings press release containing detailed information on our 2026 fiscal fourth quarter and year-end results. You may access the release on the Investor Relations section of our company website, innovage.com. For those listening to the rebroadcast of this call, we remind you that the remarks made herein are as of today, Tuesday, September 8, 2026, and have not been updated subsequent to this call.

During our call, we will refer to certain non-GAAP measures. A reconciliation of these measures to the most directly comparable GAAP measures can be found in our earnings press release posted on our website. We may also make statements that are considered forward-looking, including those related to our 2027 fiscal year projections and guidance, future growth prospects and growth strategy, our clinical and operational value initiatives, the impact of ongoing macroeconomic, geopolitical and industry-related challenges, reductions in PACE reimbursement rates and changes in risk adjustment methodologies, legal proceedings, enforcement actions and litigation and disputes, including civil investigative demands and other expectations.

Listeners are cautioned that all of our forward-looking statements involve certain assumptions that are inherently subject to risks and uncertainties that can cause our actual results to differ materially from our current expectations. We advise listeners to review the risk factors discussed in our annual report on Form 10-K for fiscal year 2026 and any subsequent reports filed with the SEC. After the completion of our prepared remarks, we will open the call for questions.

I will now turn the call over to our CEO, Patrick Blair. Patrick?

Thank you, Ryan, and good afternoon, everyone. I'd like to begin by thanking our InnovAge colleagues, our participants and their families, our government partners and our shareholders for their continued trust and support. As we close fiscal 2026 and begin fiscal 2027, I want to spend a little more time than usual today putting our results and our outlook into a broader context.

Fiscal 2026 was an exceptional year for InnovAge and a key milestone in the transformation of the company. We entered the year with clear objectives: deliver high-quality care for our participants, grow census, continue strengthening the operating foundation of the business, maintain a strong culture of compliance and translate the investments we've made over the last several years into improved financial performance. We delivered against those objectives. Adjusted EBITDA increased approximately 175% compared with fiscal 2025, and we believe we are ahead of schedule to achieve our 10-plus percent long-term adjusted EBITDA margin target.

Importantly, we would have generated strong net income for the year, which was ultimately impacted by onetime legal accruals. The rate environment also developed somewhat more favorably than we anticipated during the year, which contributed to our performance. But the larger story of fiscal 2026 is the continued improvement and growing durability in the underlying business. We're operating with stronger leadership, better technology and data and substantially more discipline around how we manage medical costs, operating costs and performance.

I've said for some time that the best measure for the health of our company is when employee engagement, participant satisfaction, quality outcomes, census growth and financial performance, our 5 pillars, all improve together. We believe they can and fiscal 2026 provides evidence of that. I'm incredibly proud of what our team accomplished, but I'm even more focused on what the progress of the last several years now enables us to achieve.

Internally, we have begun describing the evolution of the company in 3 chapters. InnovAge 1.0 was about building the platform. The organization transitioned from its not-for-profit roots to become a for-profit and ultimately a publicly traded company. We expanded geographically, opened and acquired centers, invested significant capital and established a national PACE platform capable of serving thousands of seniors. InnovAge 2.0 was about strengthening that platform. It began during a difficult period for the company when operational compliance needed to be strengthened.

Over the last 4 years, we have worked to address those issues, executed operational improvement opportunities, improved relationships with our regulatory partners, strengthened clinical and operational leadership, implemented a PACE-specific Epic EMR across the enterprise, standardized processes, invested in our people and infrastructure and developed substantially greater visibility into the performance of the business. At the same time, we returned to growth and significantly improved our financial performance. Much of that progress occurred faster and created more value in a shorter period than we anticipated when we began the work.

We're now entering what we think of as InnovAge 3.0. If 1.0 is about building the platform and 2.0 is about strengthening it, 3.0 is about scaling its capabilities and capitalizing on the opportunity in front of us. Our objective is to build an increasingly sophisticated value-based care platform capable of serving meaningfully more seniors while delivering strong, sustainable performance that allows us to reinvest in the business and earn an appropriate return.

This starts with our core PACE business. There remains considerable opportunity to grow census within our existing footprint, expand the capacity of our centers and diversify the channels through which eligible seniors learn about and access PACE. But 3.0 also means looking across a longer time horizon. We're strengthening our capabilities as both a payer and a provider so that we can better manage quality, total cost of care and participant outcomes. We're investing in technology and AI to improve clinical decision-making, productivity and the participant experience. We're evaluating opportunities to increase the physical and operating capacity of our existing centers.

We're beginning to more actively evaluate de novo markets, M&A opportunities, joint ventures and other partnership models that could expand our reach over time. And we intend to remain energetically engaged with policymakers as they consider ways to expand PACE and potentially apply some of the capabilities of the model more broadly. Not every opportunity we evaluate will become part of our strategy, and we will continue to be disciplined about where we invest our time and capital. What has changed is our ability to look further ahead at a broader set of opportunities while continuing to execute within the core business.

There's an essential point I want to emphasize as we talk about this next chapter. Our ambitions for InnovAge 3.0 do not change the foundation on which we operate. Quality of care and compliance remain nonnegotiable. PACE participants are among the most medically and socially complex individuals in the health care system. Our participants, their families, CMS and other state partners place extraordinary trust in us. We take this responsibility very seriously. The lessons of the last several years are deeply embedded in how we operate the company today.

As we grow, we intend to continue investing in operations and clinical leadership, compliance infrastructure, data and monitoring and the systems necessary to identify risk and variation earlier. We will not compromise those standards. An important part of preparing for this next chapter was strengthening the operating leadership of the company. Earlier this summer, Jen Browne joined us as President and Chief Operating Officer. Jen brings significant experience leading complex multisite health care and value-based care organizations, including senior leadership roles at Optum and Strive Health. She has experience across clinical operations, quality, growth and performance improvement and understands what it takes to build scalable operating systems.

Although Jen has only been with us for a few months, she has moved quickly to understand our centers, our people, our opportunities and the areas where we can continue to improve. Her addition gives us significantly greater leadership capacity at precisely the time we're asking the organization to take another step forward. Her immediate priorities include driving greater consistency across centers, strengthening center-level accountability, improving our use of Epic across the entire interdisciplinary care team, improving the participant experience and building the operating and analytical capabilities necessary to support our next phase of growth.

There are several investments underway in fiscal 2027 that illustrate how we're thinking about InnovAge 3.0. Let's start with participant experience. We're investing in a more connected participant experience across the entire journey, including how participants and families communicate with us, receive information, schedule care and understand what to expect. Our participant 360 and voice of the customer initiatives, along with investments in omnichannel communication technology, enhanced integration of inbound calls, scheduling and transportation are aimed at creating a more consistent and seamless experience across our centers.

Next, our technology and data infrastructure. Over the last few years, we've made substantial investments in systems, including Epic, Oracle and Salesforce. The opportunity is to make those systems work more effectively together and make the information they contain more useful to the people delivering care. At the center of the PACE model is the interdisciplinary care team. These teams continuously evaluate participants and identify opportunities for small proactive interventions that can prevent much larger clinical events. We have an opportunity to surface better information and insights directly into their workflows so our teams can make more informed decisions earlier.

We also have an opportunity to get significantly more value from Epic. During fiscal 2027, we're working to expand and standardize scheduling, visit types and documentation across interdisciplinary teams. This should give us greater visibility into capacity, productivity and care delivery patterns while also strengthening the clinical and compliance oversight. The third area is artificial intelligence. We're approaching AI pragmatically and with discipline, with appropriate human oversight and accountability built into how these tools are developed, tested and used.

Every use case must answer a basic question: can it help us improve care, improve the participant experience, reduce administrative burden or help operate our centers more efficiently. If it can, we test it, we measure it. And if the results justify it, we scale it. We're particularly encouraged about the potential for AI-enabled physician decision support. We recently completed pilots of 2 capabilities designed to give our clinicians better information and insights directly within their existing workflows while keeping clinical judgment and decision-making firmly with the provider.

The first is an AI-enabled consultation agent designed specifically around the complexities of frailty and geriatric care. It is intended to provide our primary care physicians with on-demand clinical information and specialist-level perspectives to inform thexpect our eir evaluation of a participant. In our pilot, the tool helped physicians manage a broader range of clinical needs within the interdisciplinary care team and was associated with fewer external specialist referrals.

We also piloted a medication optimization agent that reviews a participant's medication regimen in the context of their broader clinical information and surfaces potential opportunities for medication and dosing optimization for the clinician to consider. Both pilots demonstrated the concepts in a controlled environment, and we are now beginning to scale these capabilities more broadly across the organization. It's still too early to quantify their impact on quality, utilization or economics, but we're encouraged by what we've seen to date. We also have several additional AI use cases in development that we expect to pilot over time. Scheduling and transportation are other good examples.

Transportation is fundamental to PACE and extraordinarily complex operationally. We coordinate thousands of trips for participants with different clinical needs across large geographic areas while simultaneously coordinating center schedules, outside medical appointments and care team capacity. We believe AI and better analytics can help us anticipate demand, improve routing and scheduling, reduce cancellations and make better use of the capacity we already have.

Taken together, we expect these investments to translate into measurable improvements in the performance of the business, not just new capabilities. A better and more consistent participant experience should improve satisfaction and retention, reduce voluntary disenrollment and support stronger net census growth. Better data, analytics and clinical decision support should help our care teams intervene earlier, limit unnecessary utilization and more effectively manage the total cost of care.

There's also something occurring outside of InnovAge that I believe is valuable to the long-term story. The level of federal interest in PACE feels as strong as it has been at any point in recent years. We see this developing along 2 parallel tracks. The first is the existing PACE program. There is meaningful work underway with CMS, CMMI, the National PACE Association and PACE organizations to better understand the barriers that have historically limited the growth and adoption of PACE and could responsibly allow the existing program to serve more seniors. We believe this is an important conversation.

PACE has demonstrated that a fully integrated full risk model can produce strong outcomes for highly complex seniors while helping them remain safe in their homes and communities? Yet PACE continues to serve only a small portion of the population that could potentially benefit from the program. So understanding barriers to growth, whether they involve awareness, enrollment, eligibility, program requirements, development time lines or other structural issues, is essential if the country wants more seniors to have access to the model.

The second track is more exploratory. There are productive conversations occurring with CMS and CMMI, both directly with individual PACE organizations and through the National PACE Association about whether some of the capabilities and attributes that make PACE successful could potentially be applied to additional senior populations. These conversations are still early. We don't know where they will lead, whether they will result in a new model or on what time line. We're, therefore, being appropriately measured about it, but we're honored to be a part of the dialogue and to provide our experience, ideas and feedback. And I think the 2 tracks should be considered together. The first question is how we strengthen the existing PACE program and responsibly remove barriers that prevent it from serving more eligible seniors today.

The second question is whether elements of PACE's core model could extend to other populations. Both reflect a broader question facing the U.S. health care system. How do we care for a rapidly growing senior population with increasingly complex medical and social needs in a way that produces better outcomes and allows more people to remain in their homes and communities. Our view is that PACE organizations have an important role to play in that conversation.

Earlier this year, HHS' Office of the Assistant Secretary for Planning and Evaluation released a study examining outcomes across integrated care models for individuals eligible for both Medicare and Medicaid. Among its findings, PACE participants experienced fewer hospitalizations and emergency department visits and lower mortality than comparable beneficiaries in non-integrated Medicare Advantage plans.

We also had the privilege of hosting HHS Secretary, Robert F. Kennedy, Jr., at our Thornton, Colorado center, where he was able to see firsthand how an interdisciplinary team brings medical care, long-term services and supports, transportation, nutrition and social services together around the participants. We don't know where any policy discussions may lead, and our outlook does not assume any changes to the PACE program or future opportunities. But the combination of growing evidence supporting the model, an aging population, increasing pressure on institutional care and a high level of engagement from federal policymakers makes this a key moment for PACE.

Let me now turn to fiscal 2027. We're targeting ending census of approximately 8,625 to 8,850 participants, representing census growth of approximately 5% to 7.5%, total revenue of approximately $1.05 billion to $1.085 billion, and adjusted EBITDA of approximately $105 million to $115 million. I think it's important to put this guidance in context. On our last call, we discussed our expectation that the fiscal 2027 rate environment would be more tempered than we experienced during fiscal 2026. We now have better visibility, and overall, the rate environment has continued to trend better than we expected when we gave initial guidance. This provides some additional support to our top line outlook.

Like many states across the country, some of our state government partners are navigating meaningful fiscal pressures and the implications of our rates are not yet fully known. California and Colorado are 2 markets where we have worked with our state partners in the PACE rate setting processes, which have yet to conclude. We've incorporated what we believe are responsible assumptions into our fiscal 2027 outlook based on the information available to us today, while recognizing that the ultimate rate outcomes are not yet final. Together, California and Colorado represent approximately 70% of our census.

On Medicare, we currently expect our county rate increases adjusted for the continuing transition of the V28 risk adjustment model to result in a net rate increase of approximately 1.5% to 2.0%. Ben will provide more detail on the components of our guidance. From my perspective, the main point is that fiscal 2027 gives us an opportunity to demonstrate the increasing durability of the business. We will not have all the same rate increases that contributed to fiscal 2026.

Our ability to continue growing earnings in fiscal 2027 will, therefore, depend increasingly on execution. That means growing enrollment and improving retention, tightening our management of utilization and total cost of care, reducing variation across our centers and using technology and AI with the goal of operating the company more efficiently and effectively.

Before I turn the call over to Ben, I want to recognize the approximately 2,500 InnovAge colleagues who made fiscal 2026 possible. Behind every metric we report is a participant whose life is affected by the care we provide. It's a senior who can remain living in his or her home and community. It's a family with greater peace of mind. It's a caregiver who knows there is an interdisciplinary team managing the complexity of their loved one's care. That is our purpose. Today, we're operating from a very different position than we were 4 years ago.

We have a stronger organization, a stronger leadership team, a more capable operating platform, greater financial capacity and considerably better visibility into the business. We have demonstrated an ability to execute consistently over several years. And throughout it all, quality, compliance and the well-being of our participants remain the foundation of everything we do. We're excited about fiscal 2027 and increasingly confident in the longer-term opportunity ahead of the company.

With that, I'll turn it over to Ben for more detail on the financials.

Thank you, Patrick. We are pleased with our fiscal 2026 performance. Building on Patrick's comments, I'll focus on the financial results that demonstrate the progress we've made across the business. Starting off our fiscal 2026 highlights with census. We served approximately 8,230 participants across 20 centers as of June 30, 2026, which represents annual growth of 6.3% and sequential quarter growth of 2.2%. We reported 24,520 member months in the fourth quarter, an increase of approximately 6.6% compared to the fourth quarter of fiscal year 2025 and an increase of approximately 1.9% over the third quarter of fiscal year 2026.

Total revenues increased by 15.9% to $989.7 million for fiscal year 2026. The increase was primarily driven by an increase in member months coupled with an increase in capitation rate. The increase in capitation rates includes rate increases for both Medicare and Medicaid, and the increase in member months was primarily due to growth in our California, Colorado and Florida centers. Compared to the third quarter, total revenues increased by 4.0% to $262.0 million in the fourth quarter, primarily driven by growth in member months and higher capitation rates.

The capitation rate increase was largely attributable to Medicare risk adjustment reconciliation and a full year Colorado Medicaid rate true-up, both recognized in the fourth quarter. We incurred $449.8 million of external provider costs during the fiscal year, a 4.3% increase compared to fiscal year 2025. The increase was driven by an increase in member months, partially offset by a decrease in cost per participant. The decrease in cost per participant was primarily driven by a decrease in permanent nursing facility and short-stay nursing facility utilization and a decrease in pharmacy expenses associated with the transition to in-house pharmacy services.

The decrease in external provider cost per participant was partially offset by an annual increase in assisted living and permanent nursing facility unit costs and an increase in assisted living utilization. During the fourth quarter, we incurred $115.7 million of external provider costs, an increase of 2.2% compared to the third quarter of fiscal year 2026. The increase was primarily driven by an increase in member months. Cost of care, excluding depreciation and amortization, was $312.1 million, an increase of 16.1% compared to fiscal year 2025. The increase was due to an increase in member months coupled with an increase in cost per participant.

The overall increase was driven by higher salaries, wages and benefits associated with higher wage rates, an increase in third-party fees and shipping costs associated with in-house pharmacy services, an increase in contract services, an increase in supplies and administrative costs and higher fleet costs, inclusive of contract transportation. For the fourth quarter, cost of care, excluding depreciation and amortization, increased 7.7% compared to the third quarter. The overall increase was primarily due to an increase in fleet costs, including contract transportation, an increase in supplies and administrative costs and salaries, wages and benefits due to higher wage rates.

Center-level contribution margin, which we define as total revenues less external provider costs and cost of care, excluding depreciation and amortization, which includes all medical and pharmacy costs, increased 48.2% to $227.8 million in fiscal year 2026 compared to $153.6 million in fiscal year 2025. As a percentage of revenue, center-level contribution margin increased 500 basis points to 23.0% compared to 18.0% in fiscal year 2025. For the fourth quarter, center-level contribution margin was $62.6 million compared to $61.0 million for the third quarter of fiscal year 2026, an increase of 2.5%.

As a percentage of revenue, center-level contribution margin of 23.9% decreased by approximately 30 basis points compared to 24.2% in the third quarter of fiscal year 2026. Sales and marketing expenses of $34.4 million increased 21.8% compared to fiscal year 2025, primarily due to increased headcount, wage rates and marketing spend to support growth. For the fourth quarter, sales and marketing expenses increased by 13.6% compared to the third quarter of 2026 as a result of additional marketing spend and consulting services.

Corporate, general and administrative expenses increased 36.4% to $166.5 million compared to fiscal year 2025. The increase was primarily due to the $36.8 million net increase in our litigation and settlement expenses, primarily related to the accrual for various legal matters, higher employee compensation and benefits expense as a result of organizational restructuring activities, executive severance, increased headcount and higher wage rates, partially offset by lower variable compensation, the year-over-year increase of consulting services expense and software license fees.

For the fourth quarter, corporate general and administrative expenses decreased 56.8% to $33.1 million compared to the third quarter of fiscal year 2026. The decrease was primarily due to litigation costs and settlements recorded in the third quarter. Net loss was $0.7 million compared to a net loss of $35.3 million in fiscal year 2025. We reported a net loss per share of $0.02 compared to a net loss per share of $0.22, each on both a basic and diluted basis. Our weighted average share count was approximately 135.7 million shares for the fiscal year on both a basic and fully diluted basis.

For the fourth quarter, we reported net income of $9.8 million compared to a net loss of $29.9 million in the third quarter and net income per share of $0.06, each on both a basic and diluted basis. Adjusted EBITDA was $94.6 million for fiscal 2026 compared to $34.5 million in fiscal 2025 and $24.3 million for the quarter compared to $30.5 million in the third quarter of fiscal year 2026. Our adjusted EBITDA margin was 9.6% for fiscal 2026 and 9.3% for the fourth quarter. We do not add back losses incurred by our de novo centers in the calculation of adjusted EBITDA. We define de novo center losses as net losses related to preopening and start-up ramp through the first 24 months of de novo operations.

Accordingly, de novo losses have decreased in fiscal year 2026 as our Tampa, Orlando and Crenshaw centers have progressed beyond the initial 24-month de novo period. We incurred $10.6 million of de novo losses in fiscal year 2026. This compares to $15.3 million in fiscal year 2025. For the fourth quarter, de novo losses were $0.3 million associated with our planned centers in California. This compares to $3.9 million of de novo losses in the third quarter of fiscal year 2026. Turning to our balance sheet. We ended the quarter with $97.9 million in cash and cash equivalents plus $43.4 million in short-term investments. We had $63.3 million in total debt on the balance sheet, representing debt under our senior secured term loan and finance lease obligations.

Turning to fiscal 2027 guidance, which we included in today's press release and based on information as of today, we expect our ending census for fiscal year 2027 to be between 8,625 and 8,850 participants and member months to be in the range of 101,000 to 102,500. We are projecting total revenue in the range of $1.05 billion to $1.085 billion and adjusted EBITDA in the range of $105 million to $115 million. And we anticipate that de novo losses for fiscal 2027 will be in the range of $0.4 million to $0.8 million.

I will also provide some additional color on a few of the components that comprise our guidance assumptions. Starting with revenue. As we highlighted last quarter, we are expecting a Medicare rate increase of 1.5% to 2% and low single-digit rate increases for Medicaid. As a reminder, Medicare rates are based on county-specific rates established by CMS and updated each January as well as prospective risk score adjustments that occur in January and July. Effective January 1, we will move to a 50-50 blend of the V22 and V28 payment models as part of CMS' ongoing transition to V28. The anticipated impact of this change is reflected in the guidance we are providing today.

We expect fiscal 2027 to be a year focused on preserving and expanding upon the progress we've made while navigating a more challenging rate environment and making disciplined margin management a key priority. Importantly, our focus on margin discipline is intended to ensure we have the flexibility to invest in future growth opportunities while maintaining the strong operating foundation Patrick described. To support this effort, we will continue to build on our clinical and operational value initiatives while pursuing additional efficiencies across the organization, while we remain committed to delivering high-quality care and outcomes for our participants.

I also want to quickly mention that our 2 Florida centers and our Crenshaw center in California have transitioned out of their de novo status. And as a result, will not be included in the calculation of de novo losses in fiscal 2027. De novo losses in the upcoming fiscal year are primarily related to Bakersfield. Overall, we believe our guidance reflects a balanced outlook that is designed to protect margins, maintain quality and support continued sustainable growth across the business.

In closing, fiscal 2026 marked a meaningful step forward for InnovAge. We improved profitability, strengthened center-level performance and ended the year with a strong balance sheet. Looking ahead to fiscal 2027, our focus will be on disciplined execution. While the rate environment is expected to be more moderated than fiscal 2026, we believe continued progress in utilization management, operating efficiency and enrollment growth could position us to preserve margins and continue building shareholder value.

Operator, that concludes our prepared remarks. Please open the call for questions.

And our first question for today comes from the line of Benjamin Rossi from JPMorgan.

When we think about PMPM trends for next year, you mentioned net rates being up 1.5% to 2%, Medicare up in a similar range and then Medicaid in the low single digits. Can you just walk us through some of the variables going into your PMPM assumptions and how you're factoring things like county level rates, risk adjustments and other puts and takes? And then with the potential policy-driven areas, you mentioned the V28 shift? How are you factoring those changes into your assumptions regarding risk adjustment calculations?

Yes, sure. Ben, so we can -- let me give you some highlights. So we obviously look at -- we get the Medicare county rates, and then they're adjusted for the phase-in of V28. This year, we're 10% -- well, excuse me, 10% V28, 90% the old model. Next year, it's going to be 50-50, and I believe it kicks off in January when it phases in. So we get basically half a year of the 50-50 phasing. So we've gone through and looked at the calculation about how that's going to affect us. And obviously, for PACE plans, we're impacted differently than MA plans.

One of the things that we've spoken about before is what happens with dementia coding, which obviously is treated favorably under V28. And so we get a boost there because of the high prevalence of dementia among our participants. So all of that sort of factors in together to go to that 1.5% to 2% increase in the Medicare side that we've talked about. On the state rates, it's been -- it's a little bit more complicated because 2 of our states, California and Colorado, are very important to us. And the rates of California don't get finalized until a little bit later in the year. And we've got some working assumptions internally about how we think about those that factored into our budget and into our guidance.

Same thing for Colorado, where really we're waiting for the final public policy adjustments there to know what the net impact is going to be like. So we've rolled all of that into our assumption about rates going forward for next year. And we think based on what we've seen so far and all the intelligence that we have today that, obviously, the rates aren't going to be as robust as they were last year. But if you think about the rate environment we're going to have this year, we think it's one that we can operate within effectively. So we look at it as being sort of a manageable rate environment for 2027, if not as robust as it was last year.

Super helpful. And I guess as a follow-up, Patrick, I appreciate your commentary on the 3 chapters for InnovAge and some of the scaling efforts as part of this third chapter. When we think about strategic growth priorities as you head into 2027, at a high level, how are you prioritizing efforts to fill and add to existing centers versus adding new centers via M&A, de novos or JV partnerships? And can you just give us an update on how you're thinking about your M&A pipeline as well?

Yes. Thanks a lot for the question. I think our focus continues to be the capacity in our existing centers. We certainly have capacity, and we're working hard to explore ways to create more operational capacity in our existing centers as well. I think when we think about de novos, I think in general, we are establishing a pretty high bar for what's an effective and appropriate de novo for us. I think -- we think the right acquisitions over a 3- to 5-year period could deliver a better return on invested capital than de novos. We certainly have a couple of markets that over the next few years, we'd like to enter.

But we're also coming off a period where we had a pretty heavy de novo thrust with both centers in Florida. The Crenshaw market was essentially a de novo in many ways and then our Sacramento center. So I think we've got a pretty high bar for de novos. On the M&A side, I think that's probably where we'd be more interested in finding the right opportunity. I think we -- I think Crenshaw is a good example of buying a business that was sort of in the early stages of its growth and sort of wasn't meeting expectations. And by virtue of sort of connecting it to our platform, we've been able to control -- excuse me, grow the market significantly, and the business is performing real well. And so I think there's more there.

The team is proactively approaching and reviewing everything coming to market. I'd like to believe that when a PACE program is considering a sale, we're a likely call -- as Ben mentioned, the business now is producing strong cash flows and cash conversion, and we've got a lot of opportunity on the balance sheet. But at the same time, we're going to keep a pretty high bar related to M&A as well, just given the strength of our core business and the business that we see there. So we're going to be very disciplined.

But we're looking at all of the avenues as it relates to growth. And I think that's one of the things that distinguishes sort of this next chapter from the last 2 is we have the capacity, the time, the leadership expertise and capacity to really start looking more aggressively into sort of the growth side of the equation. And the better the platform, the more of a competitive advantage that, that should provide us as we explore new opportunities.

And our next question comes from the line of Matthew Gillmor from KeyBanc.

Maybe following up on the 2027 guidance discussion and particularly in the margin expansion. I think the guidance implies 10.3% adjusted EBITDA margins versus the 9.6% you reported for fiscal '26. So nice expansion there even with some of the investments you mentioned. Ben had mentioned sort of a disciplined approach towards margin management as a priority. I was hoping you could give us some flavor for what that entails. And ultimately, what is driving the margin upside in 2027, even on top of some of the investments that you've highlighted for us?

Yes. Matt, I think -- well, sort of going back to philosophically how we're approaching it, we said a couple of years ago at our Investor Day that we really thought that sort of 10% plus was what we think of as the long-term sustainable margin. And when we think what that means, it really means that, first of all, it allows our state and federal partners to get good value for the dollars that they are investing in the PACE program and it allows us to earn a good margin and give our shareholders a very good return on their investment.

And most importantly, it provides more than enough funds for us to invest in the quality of our participant care and ensuring that our participants really have a top-notch experience with us. And so that philosophy that we really laid out 2.5 years ago has remained unchanged. And so when we think about what we're seeing this year, without commenting specifically on margins because the guidance sort of is what the guidance is, I think we've sort of looked at the business and said, going forward, we're getting some efficiencies out of third-party care by being mindful of what our utilization rates are. In terms of our internal cost of care, we are getting some efficiencies out of that business. And Jen Browne, who joined us recently, is really spearheading the effort to put a lot of data analytics down into the centers so we can really monitor closely the utilization and the efficiency that comes out of that area.

And so we think that's going to be very beneficial to margins this year going forward. And then also, you've probably seen over the last 3 years or so, us becoming more efficient on the general and administrative line item, and we expect that trend will continue this year as well. So when you sort of think about the goal of defending to slightly improving margins and getting towards that long-term sustainable margin, it's really all 3 of those components working in concert together that will get us there.

Great. Very helpful. And then on the policy discussions that you mentioned with CMS, I think there was 2 areas that sort of stood out to me. One was reducing barriers and then also looking at adjacent populations. I appreciate these discussions sound pretty early, but I was hoping you could give us some flavor for where the opportunities are from where you stand, for example. So what are the barriers that could be removed that would make a big difference? What are the types of adjacent populations that would benefit from PACE, that sort of thing? Any details would be helpful.

Yes. Thanks for the question. I think the second part first, which is sort of the barriers to PACE. Most of the barriers center around making it easier to enroll in PACE as well as making it easier to expand and enter new markets. Those are sort of at its core, those are the -- there's variations of specific regulations that we provided feedback on that we think could be very helpful. But it's really about making it easier to enroll in PACE, building awareness of PACE, making it easier to market and build awareness to the program as well as the ability to apply and expand into new territories much more easily. So that's sort of the core.

When you think about sort of the market adjacencies, I think there's just a recognition that there's a large and growing population of Medicare-only adults. So they're not dual eligible. They're Medicare only. Many of them are adults with functional impairment, and they sit upstream of PACE today. And they're not yet eligible for Medicaid, but they're already on kind of this measurable trajectory toward institutional care. And if you think about many of the models today, they're not really designed for the population that sort of sits upstream of PACE, the Medicare beneficiaries. They're not designed to manage this combination of functional needs and clinical needs in a really coordinated way.

And I think what we believe and what other PACE programs believe that what is missing at sort of at scale is a model that can consistently deliver that center-based care supported by an interdisciplinary team that's accountable for outcomes, that's seeing the patients with high frequency. There's a lot of in-person engagement. So the conversations that are happening at various nodes in the policymaking and regulatory market are really asking sort of this overarching question, is there a population upstream of PACE where one could test whether an earlier center-based interdisciplinary model for these Medicare beneficiaries with functional limitations, could you change the trajectory of that functional decline, reduce acute and post-acute utilization, which benefits Medicare, reduce long-term nursing facility care, which would reduce -- would benefit Medicaid would lower the total cost of care, could slow the spin down of these populations to Medicaid, which saves both the federal government and the state government money based on how the program would be funded.

So as I said, these are early conversations. We're not privy to or involved in all of the conversations that we understand are occurring. But we think there's real interest and curiosity among the policymakers about how could the PACE model of care serve a population upstream of PACE. And so we're just kind of honored to be a part of it and honored to be able to share our thoughts and ideas, but there's also great work being done by the National PACE Association and other PACE organizations on the same topics. So it is kind of an exciting time to be thinking about how the PACE model could be used to serve new populations.

And our final question for today comes from the line of Jared Haase from William Blair.

It's Christine Rains on for Jared. I'm hoping you can give some color on the pacing of census and revenues contemplated in your guidance?

I'm sorry, you broke up a little bit there, part of the question. If you wouldn't mind repeating it again.

I apologize. Just about the cadence of census and revenues that is contemplated in your 2027 guidance.

Yes. Yes. So got it, the cadence. Okay. So I guess what I would say is the thing about the business, I think we've seen over the last 2 or 3 years is when you think about census, it's become relatively predictable for us. If you go back and you take a look at the census increase over the last couple of years and you go back and make an adjustment for some of the [ LOMI ] issues we discussed last year in the first 6 months of the year, you'll see a pretty steady increase in census kind of quarter-by-quarter. And just to remind everybody, when we go through the census build or the enrollment build over the course of the year, we usually have a very good first quarter, which for us is kind of like the September quarter.

The second quarter is usually pretty good. It's the third quarter where we typically see some softness, and that's related to some of the competition associated with open enrollment during that period of time. And then we sort of return to a more normalized rate of enrollment in Q4. So the way I think about it is, if I were you guys building a model or things like that, I would go back and look at the last few years, make a little bit of an adjustment for the first 6 months of last year related to the [ LOMI ] issue that we've talked about and then think about 3 quarters of relatively steady growth with a pause in the middle during our third quarter.

Got it. That makes a lot of sense. And then you've previously talked about seeing some cost benefit this year from bringing in-house certain functionalities like pharmacy. So wondering if you can put any numbers to this incremental benefit? And also if you see any other areas of care that you think it would make sense to bring in-house as of now?

We don't break out specific dollars associated with those initiatives. But I think what you've seen is you've seen a general step-up in margins in the business over the last couple of years, and that really reflects the fact that we've brought in-house things like DME and palliative care and behavioral and other things as well as our own in-house pharmacy. So I think all of those have done a couple of things for us.

First of all, and probably most importantly, they've given us much more operational control over the business. So we can ensure much higher quality for our participants, and we have much more control over our operations than if we were to delegate some of those activities to contracted third parties. And then obviously, the benefit to us is we recapture some of the margin that we would have otherwise ceded to folks. So it's really showed up for us in 2 different ways.

I think going forward, I think a lot of the core activities that we wanted to in-house, we probably in-house at this point. And Patrick talked about in his comments the fact that in this 3.0 version, we're sort of a little bit more of a forward-leaning organization. So we're going to be looking towards growth opportunities in the future, recognizing that a lot of the turnaround or the turnaround is complete, a lot of the operational things that we have to do, we've really satisfied over the last 8 quarters or so.

I might add to that, Ben, just the notion of we do feel that AI is one of the tools that we feel can help us get more out of the platform that we already have. So all the areas Ben mentioned, the opportunity now that we're approaching very pragmatically with a lot of discipline is how can we use AI, not for the sake of saying we're doing AI, but really through the lens of solving specific problems where we believe that technology can improve care, can improve the participant experience or just make us more efficient.

And I think the clinical side of the business, all of the clinical disciplines that go into an interdisciplinary team, we're seeing a real opportunity to address variation that you can find from a distributed multisite business. There's lots of variation on what services are provided, how much of those services are authorized and ordered by our providers. And so using AI in sort of this world of clinical decision support where we're developing tools that can bring -- I think about it as sort of a specialist level of insights directly into the physician workflow and creating the opportunity to help our physicians manage more conditions within the interdisciplinary team.

And when a specialist is needed, make a more precise referral to the right provider. I mean these are tools that we think could be particularly powerful in helping us manage the total cost of care. And Ben mentioned pharmacy. We've already implemented a pilot that uses AI to help identify polypharmacy issues, drug interactions and participants who might benefit from having the pharmacist more engaged. We're talking about scheduling and transportation back to the comment about growth, how can we create additional capacity inside our core business, so that we can achieve our growth targets without needing to be reliant on a de novo market entry or M&A.

And we see using AI to help us in our scheduling and transportation in particular, that is going to be a big opportunity for us. So I'll just add that on a lot of what we're trying to do, what we've done in the past around bringing third-party clinical disciplines into our portfolio. Now we're going to go back behind those and ask the question, how can AI create more value? And that's sort of the path we're on right now.

This does conclude the question-and-answer session as well as today's program. Thank you, ladies and gentlemen, for your participation. You may now disconnect. Good day.

Good day, and thank you for standing by. Welcome to the InnovAge 2026 Fiscal Third Quarter Earnings Call. [Operator Instructions] Please be advised today's conference is being recorded.

I would like to hand the conference over to your speaker today, Ryan Kubota. Please go ahead.

Thank you, operator. Good afternoon, and thank you all for joining the InnovAge 2026 Fiscal Third Quarter Earnings Call. With me today is Patrick Blair, CEO; and Ben Adams, CFO. Today, after the market closed, we issued an earnings press release containing detailed information on our fiscal third quarter results. You may access the release on the Investor Relations section of our company website, innovage.com. For those listening to the rebroadcast of this call, we remind you that the remarks made herein are as of today, Tuesday, May 5, 2026, and have not been updated subsequent to this call.

During our call, we will refer to certain non-GAAP measures. A reconciliation of these measures to the most directly comparable GAAP measures can be found in our earnings press release posted on our website. We will also make statements that are considered forward-looking, including those related to our 2026 fiscal year projections and guidance, future growth prospects and growth strategy, our clinical and operational value initiatives, the effects of recent legislation and federal budget cuts, including Medicare and Medicaid rate pressures, seasonality of cost trends, the status of current and future legal proceedings and regulatory actions and other expectations.

Listeners are cautioned that all of our forward-looking statements involve certain assumptions that are inherently subject to risks and uncertainties that can cause our actual results to differ materially from our current expectations. We advise listeners to review the risk factors and other discussions included in our annual report on Form 10-K for fiscal year 2025 and any subsequent reports filed with the SEC, including our most recent quarterly report on Form 10-Q. After the completion of our prepared remarks, we will open the call for questions.

I will now turn the call over to our CEO, Patrick Blair. Patrick?

Thank you, Ryan, and good afternoon, everyone. I'd like to begin by thanking our InnovAge colleagues, our participants and their families, our government partners and our investor community for your continued trust and support. The work our teams do every day to care for a very complex and vulnerable population is what drives our performance, and I'm proud of the progress we're making and the consistency we're beginning to demonstrate as an organization.

We delivered a solid third quarter and continue to see steady momentum across the business. These results reflect stronger operating execution and the benefits of the investments we've made over the past few years to strengthen the platform. For the quarter, we reported approximately $252 million in total revenue, center-level contribution margin of $61 million and adjusted EBITDA of $30 million. We ended the quarter serving approximately 8,050 participants in 6 states across 20 centers. Based on our year-to-date operating trends and financial performance, we are once again raising our fiscal year 2026 guidance for revenue and adjusted EBITDA. We now expect revenue in the range of $950 million to $975 million and adjusted EBITDA in the range of $85 million to $90 million.

Overall, our performance continues to show steady year-over-year improvement across key operational and clinical metrics. Our performance this year has been supported by several in-year factors that came in more favorably than we expected, including better-than-expected Medicaid rates and favorable Medicare risk scores and continued discipline across medical management. So as we think about our momentum, we believe it is real and increasingly durable, but we are also being thoughtful about our assumptions as we look ahead to fiscal 2027. Just as importantly, we view our improving financial performance as an enabler, not an endpoint. The progress we're making is allowing us to reinvest in the business in ways that we believe directly benefit participants and strengthen the model over the long term.

That includes continued investment in our clinical teams and interdisciplinary model, advancing our technology platform, including early and closely monitored applications of AI to improve care coordination and participant experience and strengthening how we measure and manage quality. We are also investing in growth, including our new centers in Florida, which are still maturing from an operations and financial perspective.

Given the complexity of the PACE population we serve, these long-term investments are essential. Our goal is to deliver strong, sustainable performance while continuing to invest in the model and be a responsible partner to states and the federal government. In the PACE model, financial performance and quality are not separate. They are directly linked. When we improve quality, we see better participant outcomes, more consistent engagement, lower unnecessary utilization and ultimately better fiscal management for our state and federal partners. We track a wide range of required quality and utilization metrics, and these remain an important part of how we manage the business day-to-day. But we also recognize that many of these measures, while necessary, don't fully capture what matters most to our participants or to the full value of the model.

At its core, our focus is helping participants maintain their independence, remain in the community for as long as possible and receive care that is individualized and aligned with their goals. This includes supporting caregivers, coordinating care across the continuum and intervening early before issues escalate. Over the past several years, we have made meaningful investments in our clinical teams, our care model and our operational infrastructure to strengthen our ability to deliver on those outcomes. More recently, we have begun to invest more intentionally in how we measure them.

We are in the early stages of developing a more comprehensive set of outcome-oriented measures focused on areas like functional trajectory, the ability of participants to remain in the community and further aligning care with participant goals. These are areas where we believe the PACE model delivers meaningful value. Our initial focus is on building the data, processes and operational consistency required to measure these outcomes reliably. As the capabilities mature, we expect to incorporate them more formally into how we manage the business. We believe this is an important step, not only in demonstrating the full value of the PACE model, but also in ensuring that our continued financial progress is clearly aligned with better outcomes for the participants we serve and the partners we support.

AI is another area in which we are investing more heavily. When we think about the objectives we share with our regulators, improving participant experience, enhancing outcomes for a complex population and doing so in a cost-effective way, we believe AI with the appropriate oversight has the potential to be a meaningful enabler. While still early, the work we've done over the past several months increases our confidence that these capabilities can have a real impact on both the quality and efficiency of our model.

Much of our clinical AI work is being led by Dr. Paul Taheri. Although Paul has only been with us a short time, he has quickly stepped in to help shape our approach, bring a strong focus on practical application, clinical rigor and ensuring these tools are designed to support, not replace clinical judgment. We're piloting a range of use cases designed to support our clinicians and to streamline operations. In our clinical workflows, we're piloting AI tools to help synthesize information across the participant record to support care planning and to identify potential risks such as medication interactions or avoidable acute events.

The goal is to increase the quality of the care we provide for our participants and enable our teams to operate more effectively at the top of their license. We are also applying these capabilities to operational areas such as scheduling, transportation and care coordination, where we see meaningful opportunity to reduce friction, improve the participant experience and better utilize our existing capacity. One area we are particularly focused on is how we schedule and deliver services across our centers. Today, there are structural inefficiencies that can lead to cancellations, unused capacity and administrative burden.

We believe AI-enabled scheduling and coordination can help address these challenges, allowing us to improve the experience, to serve more participants within our existing footprint and to increase capacity over time. Importantly, we're approaching this work with discipline. We're testing, learning and measuring impact before scaling. And we're focused on use cases where we see clear alignment between improved outcomes, better participant experience and more efficient operations. Over time, we believe these investments will further strengthen our platform and expand our ability to deliver high-quality coordinated care at scale.

Stepping back, one of the things these results and the progress we've made over the past several years now allow us to do is to take a more forward-looking view on growth. Over the last 4 years, our focus has been on stabilizing and strengthening the platform. And as a result of that work, we're now beginning to generate more consistent earnings and cash flow, which gives us greater strategic flexibility as we look ahead. That flexibility allows us to take a more proactive and thoughtful approach to growth. First, we continue to see meaningful opportunity within our existing footprint by filling our current centers, strengthening our sales capabilities and expanding our reach through new channels and partnerships.

At the same time, we're beginning to evaluate a broader set of potential growth alternatives that could allow us to expand our model to more seniors over time. These may include acquisitions, joint ventures, partnerships or participation in new programs and demonstration models that align with our capabilities. Overall, we're entering the next phase as an organization, one that positions us well to expand access to our model and to serve more seniors who can benefit from it.

Before I conclude, I'd like to spend a few minutes on the rate environment. As we know, this is an important area of focus for everyone. Ben will provide more detailed visibility into our fiscal 2027 outlook, including rates on our fourth quarter and fiscal year earnings call in early September. But given where we sit today, we thought it would be helpful to share some early perspective on how we're thinking about the environment, recognizing that our visibility is still evolving.

Starting with Medicare. The final 2027 rate notice came in more favorable than initially proposed, particularly for Medicare Advantage plans. That improvement was driven in part by deferred changes to the V28 risk model transition, which had a more meaningful impact on MA than on PACE. For PACE, our rate setting framework and transition time line are different. And given the complexity of the population we serve, the benefit from the deferred changes to V28 is more limited. The net result is that we expect Medicare rates to increase approximately 1.5% to 2% in fiscal year 2027, which is more modest and increase than what will likely be experienced by MA plans.

On the Medicaid side, we're beginning to see early indications from our state partners that budget pressures are increasing. That said, it's important to step back and view Medicaid rates in PACE over a longer horizon. This has always been a program with some degree of year-to-year variability. There are periods where rates run ahead of cost trend and margins expand and periods like the one we're planning for where cost trends may outpace rate growth and margins can tighten without other offsetting improvements.

Over time, these dynamics tend to balance out. Rates have kept pace with the underlying cost of caring for this population and have supported appropriate and sustainable margins for operators who execute well at scale. We believe we're seeing normal cycle variability, not a change in the underlying economics of the model. Importantly, this is where the strength of our model matters because we are fully accountable for both the clinical and cost side of the equation, we can manage through periods like this and protect performance over time.

So while we have benefited from a more favorable rate environment in fiscal 2026 and are planning for a more tempered environment in fiscal 2027, we remain confident in the durability of the model and our ability to execute through the cycle. As we approach the end of the fiscal year, we believe InnovAge is operating from a position of strength. The work we've done over the past several years is translating into more consistent performance and a more disciplined integrated operating model. We're focused on continuing to deliver strong, sustainable performance while investing in the model, supporting our participants and being a responsible partner to the states and the federal government.

With that, I'll turn it over to Ben to walk through our financial performance in more detail.

Thank you, Patrick. Today, I will provide some highlights from our third quarter fiscal year 2026 financial performance and insight into some of the trends we saw during the fiscal third quarter.

Starting with census. We served approximately 8,050 participants across 20 centers as of March 31, 2026, which represents growth of 6.9% compared to the third quarter of fiscal year 2025 and sequential quarter growth of 0.5%. We reported 24,060 member months in the third quarter, an increase of approximately 6.7% compared to the third quarter of fiscal year 2025 and an increase of approximately 0.4% over the second quarter of fiscal year 2026. Our third quarter census increase reflects normal seasonal growth resulting from the Medicare Advantage open enrollment period.

Total revenues of $251.9 million increased 15.5% compared to $218.1 million in the third quarter of fiscal year 2025, driven by higher capitation rates and growth in member months. The capitation rate increase reflects annual Medicaid and Medicare rate increases and a lower revenue reserve, while member month growth was driven by enrollment expansion across our California, Colorado and Florida centers. Compared to the second quarter of fiscal year 2026, total revenues increased 5.1%, primarily due to higher capitation rates driven by annual rate increases in California and Medicare, both effective January 1, 2026.

We incurred $113.2 million of external provider costs in the third quarter of fiscal year 2026, representing an increase of 5% compared to the third quarter of fiscal year 2025. The year-over-year increase was driven by growth in member months, partially offset by a reduction in cost per participant. Lower cost per participant was primarily attributable to reduced permanent nursing facility utilization and lower pharmacy expense following the transition to in-house pharmacy services. These improvements were partially offset by annual rate increases for assisted living and permanent nursing facility services as well as higher assisted living utilization.

Compared to the second quarter of fiscal year 2026, external provider costs increased 1.1%, driven by modest growth in member months and a slight increase in cost per participant related to seasonal growth in the volume and cost of inpatient admissions. Cost of care, excluding depreciation and amortization, was $77.7 million in the third quarter, an increase of 11.8% compared to the third quarter of fiscal year 2025. The year-over-year increase reflects growth in member months and higher cost per participant. The increase was primarily driven by a net increase in salaries, wages and benefits due to higher wage rates, partially offset by reduced headcount, higher third-party fees and shipping costs associated with in-house pharmacy services and higher contract services and fleet costs, inclusive of contract transportation.

Cost of care, excluding depreciation and amortization, increased 3.7% compared to the second quarter of fiscal year 2026, driven by higher salaries, wages and benefits associated with the annual reset of employee benefits and payroll taxes as well as an increase in consulting expense, partially offset by lower contract transportation. Center-level contribution margin, which we define as total revenues less external provider costs and cost of care, excluding depreciation and amortization, which includes all medical and pharmacy costs was $61 million for the quarter compared to $40.7 million for the third quarter of fiscal year 2025. As a percentage of revenue, center level contribution margin of 24.2% increased by approximately 550 basis points in the quarter compared to 18.7% in the third quarter of fiscal year 2025.

Compared to the second quarter of fiscal year 2026, center level contribution margin increased 15.5% from $52.8 million and as a percentage of revenue increased 220 basis points compared to 22% over the same period. Sales and marketing expenses of approximately $8.7 million increased 26.3% compared to the third quarter of fiscal year 2025, primarily driven by higher wage rates and increased marketing spend to support growth. Sales and marketing expenses increased by approximately 8.2% compared to the second quarter of fiscal year 2026, driven by sales compensation and marketing spend timing.

Corporate general and administrative expenses of $76.5 million increased 98.3% compared to the third quarter of fiscal year 2025, primarily driven by an increase in litigation liability. Corporate general and administrative expenses increased 187.6% compared to the second quarter of fiscal year 2026, primarily due to the litigation liability. Net loss was $29.9 million for the quarter compared to net loss of $11.1 million in the third quarter of fiscal year 2025. We reported a net loss of $0.22 per share, and our weighted average share count was approximately 135.7 million shares for the quarter on a fully diluted basis.

Adjusted EBITDA was $30.5 million for the quarter compared to $10.8 million in the third quarter of fiscal year 2025 and $22.2 million in the second quarter of 2026. Our adjusted EBITDA margin was 12.1% for the quarter compared to 4.9% in the third quarter of fiscal year 2025 and 9.2% in the second quarter of fiscal year 2026. We do not add back losses incurred by our de novo centers in the calculation of adjusted EBITDA. De novo center losses are defined as net losses related to preopening and start-up ramp through the first 24 months of de novo operations. Accordingly, this quarter's de novo losses do not include our Tampa and Crenshaw centers as both have progressed beyond the initial 24-month de novo period. For the third quarter, de novo losses were $1.8 million, primarily related to our Orlando, Florida center. This compares to $3.5 million of de novo losses in the third quarter of fiscal year 2025 and $4.7 million of de novo losses in the second quarter of fiscal year 2026.

Turning to our balance sheet. We ended the quarter with $95.5 million in cash and cash equivalents, plus $43.1 million in short-term investments. We had $69.4 million in total debt on the balance sheet, representing debt under our senior secured term loan, revolving credit facility and finance leases. For the third quarter, we recorded positive cash flow from operations of $18.1 million and had $3.6 million of capital expenditures. Building on the strong performance we delivered through the first 9 months of fiscal 2026 and based on information available today, we are updating our full year revenue and adjusted EBITDA outlook. All other guidance metrics remained unchanged.

We expect our ending census for fiscal year 2026 to be between 7,900 and 8,100 participants and member months to be in the range of 92,900 to 95,700. We are now projecting total revenue for fiscal 2026 in the range of $950 million to $975 million. Adjusted EBITDA is now projected to be in the range of $85 million to $90 million, and we anticipate that de novo losses for fiscal year 2026 will be in the $11.5 million to $13.5 million range.

As we enter the final quarter of fiscal 2026 and begin planning for fiscal 2027, I'd like to share a few observations on where we stand today and how we're thinking about the year ahead. First, the business is performing well overall. Our sustained focus on quality, compliance and operational discipline has created a stronger and more resilient foundation. Over the past several years, we have meaningfully improved the consistency and predictability of the business, and we now have better data and insight to inform care delivery and operational decision-making.

Second, as Patrick mentioned, we are beginning to see rate pressures emerge as we engage with our state Medicaid partners. While it remains early in the rate setting process, initial indications suggest rate increases in fiscal 2027 may be lower than what we have experienced historically. If this persists and when combined with a more modest Medicare rate environment, it could create top line pressure in fiscal 2027. That said, we view this as a near-term dynamic rather than as a structural shift. Currently, we do not believe these conditions represent a new long-term run rate, and we expect the rate environment to normalize over time. Importantly, our improved cost discipline, operating visibility and focus on execution position us to manage through this period.

In closing, we are pleased with the strong performance we delivered this quarter and year-to-date. The business is operating from a position of strength, and our updated guidance reflects both our execution to date and our current assessment of the operating environment. As we continue to refine our operations, we are placing greater emphasis on the full participant experience and evaluating opportunities to enhance care, delivery, efficiency and outcomes over time. We remain committed to disciplined execution as we close out fiscal 2026, and we believe we are positioned to manage near-term headwinds and to build long-term value.

Operator, that concludes our prepared remarks. Please open the line for questions.

[Operator Instructions] Our first question comes from Matthew Gillmor with KeyBanc.

I guess I wanted to first follow up on the comments around 2027. Could you maybe first help frame up sort of the change in the Medicaid rate increases that you've seen on a go-forward basis versus maybe the rearview just so we get a sense for the change in that dynamic? And then as a follow-up to that, one of the things we've been particularly encouraged by has been your ability to keep cost growth sort of almost flat for the last 2 years. So as you're thinking about the go forward, I was just curious about your confidence in able to maintain your cost growth at those levels, which presumably would help the dynamic for 2027 and maybe what you're doing to prepare the organization for what you think may be a more challenging rate environment next year?

Matt, it's Patrick. Thanks for the question. Overall, I'd say we don't have rates for fiscal year '27 yet. We're just, I think, navigating along with the states what is a pretty complex fiscal backdrop. I mean, states are seeing a combination of factors with sort of post-pandemic funding and broader budget pressures and they're having to rebalance across various health care priorities. So I think what we're doing is just trying to be transparent that it's going to be a different environment for rates than we have seen in the past.

I mean this is pretty typical of operating in a state partnered model. It's not new or unexpected. I think our approach has been and is currently as we sort of head into the '27 rate setting is just to stay very closely aligned with our state partners and continue to focus on delivering high-quality care and outcomes and operate as efficiently as we can. One of the things we do hear consistently with every state is just the belief in the PACE value proposition and how well aligned it is to what the states are trying to achieve and caring for this really high needs population is something they take very seriously. So we're -- I think just overall, we still know very little about '27. So I wanted to just make sure I shared that. But I think that's sort of how we view it.

So in summary, we're kind of mindful of the broader environment, but we think we have the ability to navigate it just like we have in the past. Now that kind of probably takes me to your second point about our ability to manage sort of cost trends in an inflationary environment. We're still feeling very confident about that. And as I shared in my remarks, we have a lot of work underway right now that's AI supported. So I mentioned in some of the opening remarks, some of the clinical work we're doing. But we believe there is a lot of opportunity across our care model to really empower our providers to better information to help them avoid unnecessary specialist referrals, avoid ER visits, unnecessary services, in some ways, providing as much care as possible in our centers.

I mentioned, I think, scheduling. It's another area where we're using AI to really understand the throughput of our centers and understand something as straightforward as the impact the cancellations have on our transportation, on our staffing. And we're learning a lot about our business and the drivers and AI is really supporting that. And we think there's a lot of prep capacity. We think there's manual workflows that we can work around. We think there's augmentations to our staffing models that we can pursue that will make us more efficient and deliver a better participant experience.

So that's a long way of sort of saying that the rate environment is one where we're used to navigating it. We'll do that successfully, and we're working hard to define next year's OVIs, operational value initiatives like the scheduling example and clinical value initiatives that we're doing to take clinical variation out of the system, we think there's real opportunity to operate more efficiency, improve the patient experience, deliver better clinical outcomes and do all of that in a very complex sort of fiscal backdrop for states. Ben, anything to add?

I actually don't have anything to add. I think that was exactly where we think of it.

Okay. Great. That was really helpful. I appreciate it. And then as a follow-up, I did want to ask about revenue performance on the quarter. It's obviously a very strong quarter overall. But on the top line, you had mentioned better Medicaid rates and also some favorability with RAF. I was hoping you could discuss the details of that a little bit better. And one point I wanted to get at or one thing I wanted to ask about was just the sustainability of the revenue upside you saw in the quarter. I guess I normally would think of RAF and Medicaid rates as sustainable in future quarters, but I just wanted to get your perspective on that dynamic.

Yes. I guess, well, you're right, we did start seeing in the back half of the year, a step-up in rates on the Medicaid side and a step-up in risk scores, right? So both of those things were positive starting in January, and they rolled through the second half of the year. If you think about sort of which states sort of kick in with their rates on January 1, California is an important one for us. And we had a pretty good rate environment in California this year following on some difficult years in California. So that benefited us in the second half of the year.

If you think about the risk scores, you're right, I think of those, assuming we don't have a mix -- a change in the mix of enrollment or some other mix in our population, that improvement in risk scores ought to be durable going forward in the future. But obviously, you kind of got to watch it every -- as you go into the future because they might -- they do change a little bit, but we're hoping for some durability there. And I think Patrick commented on the rate outlook a moment ago as it relates to Medicaid. So you can sort of factor some of those comments into how we're thinking about California for next year, which would be the next time it would renew in January.

Our next question comes from Jared Haase with William Blair.

I appreciate all the color thus far. Patrick, I think you talked a little bit about sort of emphasizing the flexibility that you have now just based on the stable profile that you've reached here with the model in terms of the go-forward growth strategy, and I think you outlined a couple of different levers, whether that's M&A, joint ventures, partnerships. And then I think you even alluded to potentially some new programs or demonstrations. And so I was wondering if we could just dig into your thinking there a little bit further, maybe force rank some of those different options that are -- that you have available to you as to what might be more realistic over the next handful of quarters. And I'd also love to press on the new programs or demonstration models, how you guys are thinking about that and what programs seem interesting to you?

Well, thanks for the question. I would start by just reminding folks that in many ways, we think of ourselves as having kind of come out of the turnaround at the beginning of the calendar year. And now we're in a place where we're feeling and seeing a lot stronger operational, financial and sort of compliance positioning and performance. And so we're beginning to devote more time to evaluating a range of options that we could pursue. M&A is clearly one of them. There are a lot of PACE programs across the country. Many of them are very successful. Some are not. And we've learned from an acquisition we did in California about 18 months ago that we have the ability to bolt on and smaller PACE programs that were maybe struggling to grow, putting them on our platform, on our staffing model in sort of our sales model. It really, in some ways, allows us to pursue a derisked de novo without the longer return on capital that a pure de novo can take.

So understanding where those opportunities exist is something that we're spending a little time on. It's hard to handicap this early in the process where that exists. Obviously, some states are -- have more attractive environments than others. And so that's also a layer that we put on that. Partnerships, you've seen some of the partnerships we've done in Florida and in California. We think there's -- those are hospital partnerships. We are seeing kind of the proof of concept play out in a positive way. There's still calibration that has to be done so that both entities are sort of -- and participants are all sort of benefiting in the appropriate ways, but we do see more opportunities to do hospital joint ventures that really help us extend our place in the community.

When it comes to PACE in general, I wouldn't want to overlook the opportunity from just basic policy modernization. There are opportunities that are not radical changes to sort of the regulatory contours of the program, more like practical evolutions of the program that would allow us to expand faster, something like simplifying enrollment, making it easier for seniors and families to choose PACE. We're working closely with our industry peers and our industry association to articulate those policy modernization opportunities that we see that could help the PACE program serve more seniors over time. And we're really pleased, I think, with the level of interest and curiosity that we see from CMS and CMMI and their openness to listen to what are the things that could change to really help PACE serve more seniors. So that's sort of the policy horizon.

Then I think maybe the last element to your question was the notion of sort of these PACE-inspired adjacencies. We are a big believer that the PACE model can be adapted to serve seniors who are not eligible for PACE today, but could be eligible in the future. These are -- there are opportunities that we see there some via demonstration, some just kind of de novo adjacent new product development that we could pursue. Our focus still is very much on growing our core PACE business. But as we are able to experience better operating performance and a more consistent model, we really believe strongly that PACE can serve a broader segment of the population. And we're kind of doing everything sort of in our power and working with our industry peers to make that case. And so over time, we're hopeful that opportunities that are inspired by our core business and very close to our core business could present themselves, and we'd love to pursue it.

Okay. That's really helpful. And then as a follow-up, I really appreciate all the details you guys provided just regarding rate development and your current view for 2027. If I take a step back from a strategic perspective, if we do find ourselves in an environment where rates are lagging medical cost trend, do you have a bias as it relates to striking the balance between maintaining your current growth levels versus maintaining profitability? I realize from your comments, there are a number of initiatives in place that can sort of drive efficiencies. So maybe there isn't really a trade-off in that way. But I guess I'd just be curious if you do a year like this with a more muted rate environment, how you think about that in one direction or the other?

I'll ask Ben to maybe share some initial thoughts and then I'll follow.

Yes, I'm sorry, I missed some of the question coming through. I couldn't figure it. What exactly is the question? Are you talking about -- are we talking about mitigants in a challenging rate environment?

Exactly. Yes. My thought was just as we think about potentially moving into this more challenging rate environment for 2027, obviously, you outlined a number of initiatives in place. But just kind of philosophically, do you approach your strategy with the mindset of pursuing growth as a priority or maintaining profitability?

Yes. Yes. Well, it's really interesting. Patrick talked a lot about quality in his prepared remarks. And I think where we are right now is we've gotten to a point where we're -- we've got some nice margins. We're generating cash flow. And we think one of the best things that we can do in a market that begins to slow down is not aside from looking at strategic things that Patrick talked about, is invest very heavily in quality in our business, in our centers. And I think we all feel really strongly that the better experience we give to our participants, the more likely it is going to drive growth and good financial outcomes for us. So I think what you'll see going into this year is we'll spend a lot of time on improving the patient experience on efficiencies in our center in ways that we can be more intentional in our strategies going forward.

So aside from the growth metrics that Patrick talked about before, this sort of reinvest into the business and the quality business, I think, is going to be very important for the coming year. I don't know if that really answered your question. There are other specific areas we'll look at in terms of operational value initiatives and clinical value initiatives like Patrick talked about, but it's sort of a mindset. It's very much driven towards quality as one of the drivers of growth.

Ben, I might just add that I do feel that we still have opportunity to enhance our sort of sales and marketing model. We made great strides in the last couple of years. But under Matt Huray, our leader of the sales and marketing function, we're really continuing to test and learn and try new things. We are adding new members to the team. We're exploring new channel partnerships. And so setting aside sort of rate, we really are focused on as much new census gross enrollment as we can attract. And there's a lot of great work that's going on in that area.

Ben mentioned the participant experience. we are now at a place where we're spending a lot of time to really understand when people leave us, why do they leave us? Did they have a particular encounter that was frustrating. Was there some friction or abrasion in their time with us? Were we slow to recover on a service issue? We're really digging into why people choose to leave. And that's another opportunity to drive growth is to reduce the number of people that decide to leave us. Some of the people, it's voluntary and they're making a conscious decision, but there's also involuntary disenrollment. So we are very focused on sort of the sales and enrollment side of the growth equation as well as the participant experience, keeping people with us longer, basically increasing tenure. I think that's a real bias of ours.

And on the margin side, in some ways, we've pulled forward into 2 years what we thought was going to take 3 years from a margin perspective. And now that we're at a place where we're achieving what we set out to and communicated in our Investor Day a few years ago, I think investing in growth while maintaining a consistent margin is probably more of a priority than expanding margins at this point, if that's helpful.

Our next question comes from Benjamin Rossi with JPMorgan.

So following up on your 2027 commentary, I appreciate that you're planning to provide more details next quarter. But as you think about initial enrollment growth, what are your initial thoughts on your aggregate patient risk scores and new member acuity mix? It sounds as though based on your Medicare rate assumptions, you're assuming acuity decline somewhat year-over-year. Is that a fair read?

No, I don't -- I wouldn't read too much into it. I think we're going through the budgeting process right now. And our fiscal year ends June 30, so we're really getting into the meat of the budgeting process. I don't think we expect a material change in mix shift, either in terms of our population, independent assisted living or folks in nursing facilities or a significant change in risk score mix. But we're sort of getting into that process right now. We'll have more to talk about it when we get through the budget process and we issue guidance in September.

Okay. Understood on that. And just as a follow-up on your updated outlook implies 4Q top line growth will decelerate a bit sequentially, while EBIT growth will remain elevated. What do you assume gets better quarter-over-quarter as we go into the next quarter, either across PMPM trend or cost design? And is there anything discrete across revenue or cost that you'd call out within your progression during fiscal 4Q?

No, I don't think so. I think that we've generally benefited, as we said before, from better rates in the back half of the year and also better risk scores. And I would expect those trends would kind of continue going into Q4. If you think about how sort of the pattern of gross enrollment works and you can go back and look over the last couple of years, we usually have a pretty good, pretty steady Q4 in terms of gross enrollment growth. And I would think that we probably experienced something not too different from what we've seen in prior years.

And I'm not showing any further questions at this time. And as such, this does conclude today's presentation. We thank you for your participation. You may now disconnect, and have a wonderful day.

Good day, and thank you for standing by. Welcome to the InnovAge Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Ryan Kubota, Director of Investor Relations.

Thank you, operator. Good afternoon and thank you all for joining the InnovAge 2026 Fiscal Second Quarter Earnings Call. With me today is Patrick Blair, CEO; and Ben Adams, CFO.

Today, after the market closed, we issued an earnings press release containing detailed information on our fiscal second quarter results. You may access the release on the Investor Relations section of our company website, innovage.com.

For those listening to the rebroadcast of this call, we remind you that the remarks made herein are as of today, Tuesday, February 3, 2026, and have not been updated subsequent to this call. During our call, we will refer to certain non-GAAP measures. A reconciliation of these measures to the most directly comparable GAAP measures can be found in our earnings press release posted on our website.

We will also make statements that are considered forward-looking, including those related to our 2026 fiscal year projections and guidance, future growth prospects and growth strategy, our clinical and operational values, Medicare and Medicaid rate increases, the effects of recent legislation and federal budget cuts, enrollment and redetermination processing delays, seasonality of cost trends, the status of current and future regulatory actions and other expectations. Listeners are cautioned that all of our forward-looking statements involve certain assumptions that are inherently subject to risks and uncertainties that can cause our actual results to differ materially from our current expectations. We advise listeners to review the risk factors and other discussions included in our annual report on Form 10-K for fiscal year 2025 and any subsequent reports filed with the SEC, including our most recent quarterly report on Form 10-Q. After the completion of our prepared remarks, we will open the call for questions.

I will now turn the call over to our CEO, Patrick Blair. Patrick?

Thank you, Ryan, and good afternoon, everyone. I'd like to start by thanking our colleagues, our participants and their families, our government partners and our investors for joining us today and for their continued support. We appreciate the opportunity to share an update on our fiscal 2026 second quarter results and the progress we're making against our strategic priorities.

Our second quarter results reflect continued momentum across the business and disciplined execution across our clinical, operational and financial initiatives. For the quarter, we reported total revenues of $239.7 million, center-level contribution margin of $52.8 million, adjusted EBITDA of $22.2 million and net income of $11.8 million.

To put those results in context, we generated $39.8 million of adjusted EBITDA in the first half of the fiscal year, exceeding our full year fiscal 2025 adjusted EBITDA of $34.5 million. Two years ago, at our Investor Day, we outlined an intermediate-term adjusted EBITDA margin target of 8% to 9% over a 2- to 4-year horizon. This quarter, for the first time, we achieved that target, delivering an adjusted EBITDA margin of 9.2%.

It's important to emphasize that this level of margin is consistent with what's required to sustainably operate a full risk, investment-intensive, highly regulated healthcare delivery model and to continue reinvesting in our people, infrastructure and the quality of care we provide to our participants.

As we talk about the strength of our first half results, I want to be clear about how we think about this performance and what's driving it. Over the past several years, InnovAge operated from a very different financial position as we work through operational, compliance and organizational challenges.

The progress we're seeing today reflects a deliberate effort to rebuild and strengthen the foundation of the business across every dimension, our talent, clinical model, service delivery, operational discipline, compliance capabilities and growth engine.

Importantly, our financial performance is not the result of any single action or short-term lever. It's the natural outcome of delivering higher quality, more consistent care to a highly complex population, improving day-to-day utilization management and operating with greater rigor and accountability. When the model works as intended, quality improves, outcomes improve, costs are better managed and financial results follow.

This progress also reflects our commitment to being a strong, reliable partner to our federal and state regulators. As we strengthen our financial position, we're better able to invest in our people, our centers and our participants and to serve more seniors in a model of care that improves quality while lowering total cost to the system.

When InnovAge performs well, our government partners benefit as well because more vulnerable seniors are cared for in a setting that delivers better outcomes and better value for taxpayers. We see this quarter as further evidence that we're delivering on the commitments we've made to participants, government partners and investors and that the model is increasingly operating as designed.

Let me spend a few minutes on what drove our second quarter performance and why we exceeded expectations. First, we made meaningful progress strengthening revenue integrity, particularly around Medicaid eligibility and redeterminations. As discussed on prior calls, we encountered challenges last year that led to elevated revenue reserves and write-offs. Over the past few quarters, we've taken a comprehensive approach, investing in people, improving workflows, strengthening data and reporting and upgrading technology.

As a result, we've improved timeliness and accuracy, reduced reserves and reinstated coverage for a number of participants where outcomes have been previously less certain. While there's more work to do, we're encouraged by the progress and the visibility we now have.

Second, we continue to demonstrate strong medical cost management in an environment where many healthcare organizations are under pressure. This reflects the strength of the PACE model and the daily decisions made by our interdisciplinary teams. We saw particular strength in managing inpatient and skilled nursing utilization through proactive care coordination, earlier interventions, better length of stay management and appropriate site of care decisions. It's about delivering the right care at the right time in the right setting.

Third, we're operating our centers more efficiently as the platform matures. We've improved consistency in staffing models, scheduling and throughput while maintaining a strong focus on quality, service and participant experience. These gains come from standardizing best practices, better leveraging Epic and strengthening local execution, not from onetime actions.

Fourth, our SG&A performance reflects the structural work we've done to simplify the organization and improve accountability. The spans and layers work over the past year clarified roles, streamlined decision-making and reduced unnecessary complexity. We're now seeing the benefit in a cost structure that better supports frontline care delivery.

Stepping back, I want to touch briefly on the rate environment across both Medicaid and Medicare. On the Medicaid side, we're experiencing a slightly more favorable blended rate environment this fiscal year relative to our initial assumptions. This reflects state-specific dynamics and timing and is consistent with our conservative approach to forecasting, which assumes variability rather than relying on rate upside.

On the Medicare side, I want to address the CMS advanced notice for calendar year 2027 Medicare Advantage rates released last week. PACE is subject to the same core Medicare payment mechanics as Medicare Advantage, including counting rates, risk adjustment changes, coding intensity adjustments, fee-for-service normalization and underlying cost trends. As a result, changes to Medicare Advantage policy do affect PACE.

At the same time, PACE includes unique elements, most notably the frailty adjuster based on activities of daily living, which recognizes that diagnosis-based risk adjustment alone does not fully predict costs for a highly frail population. CMS has also proposed a blended risk score for calendar year 2027 using 50% of the 2017 CMS HCC model and 50% of the proposed 2027 model, accelerating the transition relative to the prior time line.

As we look ahead, we continue to have a robust portfolio of clinical and operational value initiatives that we believe can unlock additional value across participant experience, quality, compliance, efficiency and revenue. One key area is participant experience. We're working to more clearly define the InnovAge participant experience end-to-end from enrollment and onboarding through ongoing care with a focus on early engagement, systematic feedback, consistent service recovery and continuous improvement. We believe a more intentional experience will drive higher satisfaction, stronger engagement and better retention over time.

Another significant opportunity is reducing unwarranted variation in provider practice patterns. Physician decision-making sits at the center of the PACE model, influencing nearly every aspect of care delivery. While this has always been actively managed, we see an opportunity to further improve consistency and appropriateness across the platform. This work will take time and thoughtful change management, but we believe advances in AI can increasingly support physicians with peer benchmarks and evidence-based guidance, augmenting, not replacing clinical judgment.

We've also stabilized our pharmacy in-sourcing and are now positioned to pursue additional opportunities across pharmacy distribution, utilization management and care coordination. With greater visibility and control, we believe pharmacy can continue to improve outcomes, efficiency and total cost of care.

Finally, we see continued opportunity to optimize center productivity, capacity and care delivery while strengthening participant retention. We're exploring the application of advanced analytics and AI to scheduling and transportation, areas central to the PACE operating model. This work is early, but our confidence is increasing that there is meaningful value to pursue. Taken together, these initiatives reinforce our belief that there is still substantial opportunity ahead. The progress we've made gives us confidence, not complacency.

With that context, I want to briefly touch on how our governance is evolving to support the next phase of execution and oversight. As we've strengthened the operating, clinical and compliance foundations of the company, we've continued to evolve our governance to support the next phase of execution. As part of that evolution, Tom Scully returned to the role of Chairman of the Board and Pavithra Mahesh and Sean Traynor rejoined the Board effective January 28.

I also want to recognize Jim Carlson for his leadership as Chairman since June 2022. Jim provided steady, thoughtful guidance during a very critical period, helping InnovAge navigate operational, compliance and strategic change. We're grateful for Jim's leadership and pleased that he'll continue to serve as an independent director. Together, this governance structure strengthens oversight, reinforces alignment and positions the company well to continue delivering for participants, regulators and shareholders.

Before turning to guidance, I want to briefly share how we think about pacing and expectations. As a full risk value-based care organization, quarter-to-quarter results can be influenced by timing, rate dynamics and the maturation of initiatives. We, therefore, focus less on any single period and more on sustained trends across multiple quarters.

With that context, the results we've delivered through the first half of the fiscal year give us increased confidence in our outlook for the remainder of fiscal 2026. We believe the platform is increasingly operating as designed while still recognizing inherent variability in the model.

As a result, we are raising our full year fiscal 2026 guidance. We now expect member months between 92,900 and 95,700. Total revenue between $925 million and $950 million. And adjusted EBITDA between $70 million and $75 million.

To close, we're encouraged by the progress we're making and proud of how the organization is performing. These results reflect the company executing with greater consistency, accountability and purpose in service of a highly complex senior population. We've strengthened the foundation of the business and are seeing the benefits across quality, compliance, participant experience and financial performance. We remain grounded in the realities of a full risk, highly regulated model and committed to managing the business with a long-term mindset.

InnovAge is better positioned today than at any point in recent years, not because the work is finished, but because the platform is working as designed. We're committed to executing responsibly, investing thoughtfully and aligning the interest of participants, government partners and shareholders.

With that, I'll turn it over to Ben for more detail on the financials.

Thank you, Patrick. Today, I will provide some highlights from our second quarter fiscal year 2026 financial performance and insight into some of the trends we are seeing in the current quarter.

Starting with census. We served approximately 8,010 participants across 20 centers as of December 31, 2025, which represents growth of 7.1% compared to the second quarter of fiscal year 2025 and sequential quarter growth of 1.5%. We reported 23,960 member months in the second quarter, an increase of approximately 7.9% compared to the second quarter of fiscal year 2025 and an increase of approximately 2% over the first quarter of fiscal year 2026. Our second quarter census growth exceeded expectations, driven primarily by our continued success in reinstating participants who had previously lost Medicaid coverage.

Total revenues of $239.7 million increased 14.7% compared to $209 million in the second quarter of fiscal year 2025, driven by an increase in member months and capitation rates. The increase in member months was primarily due to growth in our existing California, Florida and Colorado centers. The increase in capitation rates was primarily due to an annual increase in Medicaid and Medicare capitation rates, partially offset by revenue reserve. Compared to the first quarter of fiscal year 2026, total revenues increased 1.5% due to an increase in member months.

We incurred $112 million of external provider costs during the second quarter of fiscal year 2026, an increase of 3.8% compared to the second quarter of fiscal year 2025. The increase was driven by an increase in member months, partially offset by a decrease in cost per participant. The decrease in cost per participant was primarily driven by a decrease in permanent nursing facility utilization and a decrease in pharmacy expense associated with the transition to in-house pharmacy services.

This decrease in cost per participant was partially offset by an annual increase in assisted living and permanent nursing facility unit cost, an increase in assisted living utilization and an increase in inpatient unit costs. Compared to the first quarter of fiscal year 2026, external provider costs increased 2.9%. The increase was primarily driven by the increase in member months and a modest increase in cost per participant due to seasonal growth in inpatient admissions.

Cost of care, excluding depreciation and amortization, was $74.9 million, an increase of 16.9% compared to the second quarter of fiscal year 2025. The increase was due to an increase in cost per participant, coupled with an increase in member months. The total increase in cost was primarily driven by a net increase in salaries, wages and benefits due to higher wage rates and costs associated with organizational restructure, partially offset by a reduction in headcount, higher third-party fees and shipping costs associated with in-house pharmacy services and higher fleet costs, inclusive of contract transportation.

Cost of care, excluding depreciation and amortization, decreased 1.3% compared to the first quarter of fiscal year 2026. The decrease was primarily driven by reduced headcount associated with organizational restructuring and the timing of benefits and supply expense, partially offset by higher contract transportation costs.

Center-level contribution margin, which we define as total revenues less external provider costs and cost of care, excluding depreciation and amortization, which includes all medical and pharmacy costs was $52.8 million in the quarter compared to $37.1 million for the second quarter of fiscal year 2025.

As a percentage of revenue, center level contribution margin of 22% increased approximately 430 basis points in the quarter compared to 17.7% in the second quarter of fiscal year 2025. Compared to the first quarter of fiscal year 2026, center-level contribution margin increased 2.7% from $51.4 million and as a percentage of revenue increased 20 basis points compared to 21.8% in the same period.

Sales and marketing expenses of approximately $8.1 million increased 4.9% compared to the second quarter of fiscal year 2025 due to higher wage rates. Sales and marketing expenses increased by approximately 6.2% compared to the first quarter of fiscal year 2026, driven by marketing spend timing.

Corporate, general and administrative expenses of $26.6 million decreased 5.3% compared to the second quarter of fiscal year 2025. The decrease was primarily due to a decrease in legal and consulting fees. Corporate, general and administrative expenses decreased 12.1% compared to the first quarter of fiscal year 2026, primarily due to reduced headcount associated with organizational restructuring, lower contracts and consulting costs, decreased legal expenses and the timing of software license fees.

Net income was $11.8 million for the quarter compared to net loss of $13.5 million in the second quarter of fiscal year 2025. We reported net income per share of $0.08, and our weighted average share count was approximately 136.4 million shares for the quarter on a fully diluted basis.

Adjusted EBITDA was $22.2 million for the quarter compared to $5.9 million in the second quarter of fiscal year 2025 and $17.6 million in the first quarter of 2026.

Our adjusted EBITDA margin was 9.2% for the quarter compared to 2.8% in the second quarter of fiscal year 2025 and 7.5% in the first quarter of fiscal year 2026.

We do not add back losses incurred by our de novo centers in the calculation of adjusted EBITDA. De novo center losses are defined as net losses related to preopening and start-up ramp through the first 24 months of de novo operations. For the second quarter, de novo losses were $4.7 million, primarily related to our Tampa and Orlando centers in Florida. This compares to $4 million of de novo losses in the second quarter of fiscal year 2025 and $3.9 million of de novo losses in the first quarter of fiscal year 2026.

Turning to our balance sheet. We ended the quarter with $83.2 million in cash and cash equivalents, plus $42.8 million in short-term investments. We had $69.9 million in total debt on the balance sheet, representing debt under our senior secured term loan revolving credit facility and finance leases. For the second quarter, we recorded positive cash flow from operations of $21.4 million and had $2.4 million of capital expenditure.

Building on the strength we saw in the first half of fiscal 2026, I would now like to walk through our updated fiscal year 2026 guidance. Based on information as of today, we are revising our fiscal year outlook from the guidance we shared in September, except for our ending census, which remains unchanged.

We expect our ending census for fiscal year 2026 to be between 7,900 and 8,100 participants and member months to be in the range of 92,900 to 95,700. We are projecting total revenue for fiscal year 2026 in the range of $925 million to $950 million and adjusted EBITDA in the range of $70 million to $75 million. And finally, we anticipate that de novo losses for fiscal year 2026 will be in the $11.5 million to $13.5 million range.

As we look toward the second half of fiscal 2026, we have increased our guidance based on the following factors. First and foremost, we are seeing continued improvement in the operations of the business each quarter as our operational and clinical value initiatives produce results.

Second, we have had success in reinstating participants who previously lost Medicaid coverage, which reduced the impact on member months and top-line revenue relative to our original expectations.

Third, Medicaid rates for the fiscal year are higher than our original estimates.

And fourth, Medicare risk scores were less affected than we originally anticipated due to the phased-in implementation of risk adjustment model version 28 effective January 1.

Overall, these factors contribute to improved visibility and give us more confidence in our performance for the remainder of fiscal year 2026.

In closing, we remain focused on disciplined execution for the remainder of the fiscal year. We believe our updated guidance more closely reflects our stronger-than-expected performance to date and our current view of the operating environment.

Operator, that concludes our prepared remarks. Please open the call for questions.

[Operator Instructions] Our first question comes from Benjamin Rossi with JPMorgan.

So just on the back half EBITDA progression following the raise in context of your year-to-date adjusted EBITDA margin coming in north of about 8%, my math here kind of suggests back half margins are coming maybe closer to a mid-7% EBITDA margin as you move forward with these restructured operating costs. Can you just walk through some of the variables going into those margin expectations and maybe how you're thinking about margin progression for the remainder of the year?

Yes. Ben, it's Ben Adams. Yes, what I would say is, remember that the third quarter for us is always the soft quarter. And there are probably a couple of things going on there. One is when we go through open enrollment period at the end of the year, we often have slower enrollment gains in the first couple of months of the third quarter. You've seen that happen over the last several years. And I think our expectation is you'll probably see something similar like that evolve this year.

The other thing I think to be mindful of is the flu season, which has been particularly bad this year. We were talking earlier about the fact that the vaccine was only partially effective against the flu, and we saw a relatively high incidence of the flu going into year-end and through January. And so our expectation is we may see a little additional pressure on that side in Q3. It's all preliminary at this point because the data is just coming in. But because of that, I think what you'll see is sort of the softer third quarter that we typically exhibit and then you'll see a return to a more normalized Q4 growth rate that you've seen. So that will just play through to margins just naturally.

Ben, I might add to that, just the continued work we're doing on the Medicaid redeterminations. As I shared in my prepared comments, we made a tremendous amount of progress and some aspects of that work has worked out better than expected, but it's still a work in progress, still a continued effort to ensure that our enrollment in our enrollment applications are being processed in a timely fashion. And so I think we were also cognizant of that as we put the guidance forward.

Great. I appreciate that. And I just kind of flipping over to the shift in V28 beginning earlier this year. I know you're only a month in, but just hoping to better understand your thinking on the impact to maybe your raw risk scores and how that might flow through to subsequent RASS scoring for some of your members. I appreciate there's a lot of variables in here with some of the changes to the HCCs for conditions like dementia and CKD and you might have the frailty score come in there. Just following the guidance raise, could you just maybe help us understand how any of the back half guidance factors those changes flowing through? I know it's only 10% at this point, but just trying to get an idea of how that maybe impacts your rates or how that could be impacted maybe overall by rates and whatnot on the other side of the variables.

Yes. I mean I'll start with more of kind of a macro view and then let Ben talk about the flow-through to actual risk scores.

I think the first point is we share more in common with the Medicare rate adjustment model than we share differences. You pointed out a couple differences. But I also just remind folks that only about 45% of our total per member month premium is actually Medicare. And so for that reason and the fact that V28 is a phase-in for PACE, it has moved from a 5-year phase-in to a 3-year phase-in, but it still is a phase-in. So we're sort of structurally less exposed to V28 when comparing to other MA plans.

And when you think about the frailty adjustment, that is not inconsequential as it were. It is one of the -- some of the beauty of the system for PACE is that it captures the disability and functional status that wouldn't otherwise be reflected in a diagnosis alone. Someone can have a severe set of functional disabilities that relates to bathing, dressing, eating, using the toilet, walking, without necessarily having a dramatically different diagnosis than someone that say, has fewer diagnoses. So there is a real opportunity for us as it relates to the differences that exist And there actually is a floor on that frailty adjuster of, I think it's 0.129.

So I just want to point out that we do share a lot of the same challenges that the rate notice revealed, preliminary rate notice revealed last week. But at the same time, there are some notable differences. And I'll let Ben maybe share through how he thinks about the flow-through.

Yes. I think that Patrick pretty much hit it. I think the one thing I would say is that when we went through and did a reforecast of the business, we factored in our latest thinking about what the impact is going to be over the next 2 quarters until we get to the end of our fiscal year. And we think we've kind of captured it appropriately in the guidance.

Our next question comes from Matthew Gillmor with KeyBanc.

I guess I wanted to start off on the census growth. It was, I think, a bit stronger than at least we expected, and there was some commentary around being better in terms of the work you've done on Medicaid redeterminations and improving your processes. I thought I might just ask sort of where you're seeing more success? Is that on your side and your processes? Or has there been some success in terms of just the processes at the state level and getting approvals through?

Thank you. I'll let Ben kind of clean me up here. But I think there's a couple of ways to break this apart. You can think about the processes for which we sort of have complete control of. And that involves a very sort of rigorous, let's call it, kind of a patient accounting system where we can really match someone's eligibility to the premium that we receive, and we can reconcile that and we can track that throughout the company. And in some ways, think of it as sort of a workflow management process as well, where we're constantly sharing data between our finance organization, our enrollment organization and our local centers on where follow-up is needed, et cetera. I think our progress in the first half -- first couple of quarters of the year has been on what we control.

The other part of this is, at some point, we're essentially handing files off, enrollment files off to the state. And depending on the state, there can be different levels of work that's required on their end. I think going forward, I think our caution is not to be overly confident about what we've accomplished internally, but we have to be mindful of where the states are and the resource challenges they're grappling with and how do we ensure that we're being as sort of collaborative as we can, timely as we can and producing very high-quality data that allows them to do their job very effectively. That's kind of how we break it up. I'll let Ben kind of.

Sure. Yes. No, I think Patrick hit it pretty well. I guess what I'd say, you may remember from our prior earnings calls that we had a number of cases at the end of the fiscal year where people had lost their Medicaid coverage. And we had assumed that there'd be some attrition in our census over the first 6 months of this year as that happened. As we said, I think, before, we ended up getting a lot more of those folks reestablished on Medicaid than we originally anticipated, right? So that provided us a little bit of an enrollment cushion in the first 6 months of the year.

The other thing that's nice about it is because a lot of them got reestablished relatively early, you kind of got that compounding effect of the member months. So that gave us a little bit of a member month cushion going in. We're through most of that now as of the end of the fiscal year. And now we're on what I think of as our regular glide path of enrollments. And so we're seeing gross enrollments that are doing pretty well coming in generally in line with what we'd expect. We're probably seeing a little bit more in disenrollments that be -- that we'd like. And so we're spending a lot of time on that. But as we said in the beginning of the year, there are a lot of factors that are kind of coming into play into the enrollment numbers this year because of the washing through of some of the changes I talked about before. But I think we seem to be tracking okay.

Got it. That's very helpful. And then just as a quick follow-up, how does that influence the reduction in -- you mentioned there's a reduction in revenue write-offs. Any sense for the magnitude of that? And was there some -- was there any sort of onetime pick up? Or is that just a better go forward as you think about some of the improvement in these processes?

Yes. I mean I can tell you sort of conceptually how it all works, which is we go through a process that's pretty rigorous on the revenue write-offs where we look at individual participants where they are in the redetermination process or even the enrollment process in some cases. And we come up and we look at historical write-off patterns. And then we also go through and risk score them depending on where they are in the process. And we compare those 2 results to figure out how we actually set our revenue reserves.

The good news is we built a new system we didn't have last year, so we can actually do this in a much more methodical fashion than we could in the past. And that was the patient accounting system, which Patrick referenced before, which is built in Salesforce for us, been a great tool for us. So we can track those people going through a lot more easily than we could before.

So it's a much tighter process. So when we go through and set our monthly revenue reserves, we can be much more precise in the way they play out. And we can put in what I would think of as sort of an appropriate level of conservatism in them without being overly conservative. So I think the process has worked really well for us in the last 6 or 7 months. And I think we're pleased with the way it's going.

I'm not sure we'd be ready to draw any conclusions yet about how far ahead we are in revenue reserves because those patterns tend to adjust month by month. But right now, I would say we're tracking to expectations.

[Operator Instructions] And our last question comes from Jared Haase with William Blair & Company.

Congrats on the results. Maybe just to unpack a little bit more, and I guess this is a little bit related to the question that Matt just asked. But the comment, Patrick, that you made on participant experience, I'm curious if you could unpack just a little bit more some of the specific areas within that patient journey that you believe could be the most impactful.

And then I guess a related question, you sort of alluded to the potential improvement in patient retention. I'm wondering if there's any way to contextualize just where you sit today from a retention standpoint and where that might go as you implement some of these initiatives?

Yes. Let me just maybe start with just kind of giving you order of magnitude when we talk about kind of voluntary disenrollment, it's about 6% annualized on an annualized basis. So it just gives you a sense of kind of what we're -- the magnitude of sort of what we're faced with as our -- as the denominator, our census grows. And so where we see some of the opportunities, you might expect, not unlike other service providers, we're very interested to understand how -- what people expect when they enroll, how does that line up to what they experience once they come to the center and experience sort of the day in a life of a PACE member.

And as we dig into data like that process, it sort of covers everything from the sales process through sort of onboarding communications to onboarding them physically in the center. And we've identified there are examples where people will disenroll within a short period of time. So there could be a misalignment between what they expected and what they experienced.

And so tackling that end-to-end onboarding experience, really isolating the moments of that experience that matter most and then understanding where there may be misalignment or opportunity and then sort of defining that and determined if we can't build kind of the InnovAge way, one single way that if you walked into any center in the country, you get the exact same sales experience, you get the exact same onboarding experience, et cetera. And so you could take onboarding as a part of that.

You could go further to think about grievances. In the world of PACE, grievance means something very different than a typical, say, managed care or health plan model. Grievances are kind of our eyes and ears on where participants are satisfied or dissatisfied. As we dig in, have better data, we're able to profile and trend grievances and identify specific opportunities for improvement that exist. And so using grievance data to define how do we create a better experience to avoid that in the future could be another great example. Service recovery. If something goes bump in the night, how do we respond to it? How quickly do we respond to it? Do delays in response can they impact disenrollment.

So think about it as we're sort of analytically breaking down that entire experience all the way through to the point that one of our participants is approached with another offering say, a Medicare Advantage offering, a special needs plan offering. How do we -- if we lose people there, what kind of an experience can we create so that we don't lose as many people.

So it's a big opportunity for us to get our arms around it. I think everything we're doing today to improve the core operations of the business, better execution, better accountability allows us to now tackle that. And so as we look forward to where is the potential value unlocks for the company, we think participant experience is one. And this notion of, I'll call it, ordering variation, practice pattern variation. That's another where the data clearly shows us meaningful variation in ordering patterns, intensity, duration of services across clinicians, across markets. Some of that variation is clinically appropriate. Some of it's not adding value to the participant.

So in terms of magnitude, that and participant experience, these are not onetime levers and it's not a small one. we think of it as an opportunity to create more durable multiyear opportunity within our model, and we're now ready as a business to take on those bigger challenges. And so as we look forward, those are some of the opportunities we see for the company.

Got it. I really appreciate all the detail. That's super helpful. As I think about sort of the implications of, let's say, retention and patient experience, one follow-up that comes to mind. I assume you typically see sort of MLR improve as patient cohorts mature over time. So are you kind of explicitly thinking about this as if we can drive that retention better by whatever number, 50 basis points, 100 basis points, whatever number, that kind of directly flows to MLR by just further increasing the mix towards those more tenured patients. Is that fair to say?

It is fair to say it's an astute question, and Ben and team are spending a lot of time right now really trying to understand those cohorts. In our model, we kind of roughly say tenure in PACE is like high school. We have freshman, sophomores, juniors and seniors. And we're starting to look at each of those cohorts and the resources they consume, the needs they have and really trying to understand back to this notion of kind of elevating our consumer centricity model, understanding each of those cohorts, their needs and their contribution financially is something that we're really digging into.

And so to your point, for many members, there is a period of time as they progress from a freshman to a senior, there is points in time where contribution is greater. There's also points in time where, let's say, an assisted living facility may become the most appropriate solution for that person, you might see an impact to contribution. And so we're really starting to dig into that data and see some really interesting opportunities to create a much more informed participant experience that's dialed into the needs of specific cohorts at the same time, trying to understand how the mix of those cohorts can impact the company going forward. And that's where there's a lot of work.

Ben, anything to add?

No, I think that encapsulated it really well. The nice thing about PACE rates, obviously, is they're set to basically take care of a portfolio of participants who are at all different places along their journey, right? So as long as you maintain the right proportions in your mix, the rates work very effectively. And so as we see steady enrollment growth over periods of time, the mix is much more predictable and it more closely aligns with what goes on, on the rate side.

And probably the only thing I'd add to disenrollments is -- the interesting thing about voluntary disenrollments is they really happen in the first 6 months of a participant's experience with us. So when we're going through and developing programs to make sure that we minimize those voluntary disenrollments, there's really a discrete period of time because we know once people have been with us for 6 or 9 months, they're sort of stable in the program and they like the program and they stay. It's during that first 6 months or so when they're getting comfortable with the PACE program, getting used to how to use it in a slightly different set of expectations versus they had before, that's the period that we really need to focus on.

And today, we've got roughly probably 10% to 12% of voluntary disenrollments over the course of the year. If we can bring that down a couple of points through a bunch of these initiatives, it's very beneficial to the health of the organization.

Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.

All right. Thank you so much. First and foremost, thank you for all of us joining us and here in-person in the room, and for those who are joining us via webcast. My name is Ben Rossi, and I'm the health care facilities analyst here at JPMorgan. We're excited to be welcoming InnovAge back to the stage this morning. With us here today are CEO, Patrick Blair and CFO, Ben Adams. Thank you both for being here.

Thank you, Ben, and I'll just reinforce Ben's remarks. Thank you for the folks who have joined us in-person and for everyone who is listening. I'm Patrick Blair. As Ben said, I'm the CEO of the company, and we really appreciate the chance today to walk you through InnovAge, how the business has evolved over the last several years, why we believe we have a strong investment thesis, how we're different from other value-based care models, why now is a unique inflection point in our company's history, given the internal transformation over the last few years and where we see it going from here.

As you know, the health care environment has been challenging, particularly for Medicare and Medicaid value-based care models, our goal today is to show you a platform that has done the hard work to stabilize, rebuild and outperform. So I'll take about 20 minutes to walk us through the slides, and then I'm going to look forward to some Q&A.

At a high level, InnovAge is a scaled, vertically integrated payer provider platform, delivering personalized value-based care to medically and socially complex dual eligibles primarily. Our mission is very simple, and it's very focused. We help frail seniors to live independently while delivering better care and support and meaningful savings and cost predictability to our state and federal partners. And importantly, we do this by taking full financial accountability for outcomes and costs across the full scope of Medicare and Medicaid services that these populations desperately need. This is what differentiates InnovAge and what underpins the rest of the story.

Before going further, I do want to briefly level set on what we do since we don't spend a lot of time in the presentation explaining PACE, but we deliver comprehensive personalized interdisciplinary care for high-cost primarily dual eligibles through a center-based model. And we're supported by a network of contracted hospitals, specialists and ancillary providers. These individuals have significant medical and social needs and they're often at risk of entering an institution. And many of these individuals require a much different level of care than other Medicare and Medicaid programs can actually provide. It's our belief that there are no other value-based care models that control more than the health care premium dollar than PACE. We're at full risk for all of Medicare services plus all of Medicaid long-term care services and our premium average is about $9,500 per participant per month.

So this puts us in a very unique position to truly impact cost and quality along the full continuum of health care for these seniors. Today, we operate 20 centers in 6 states with 2 additional centers under development, and our 2,400 employees serve nearly 8,000 participants. The bottom row of metrics on this slide underscore -- this is not a theoretical model. It's a scaled platform, delivering consistent revenue growth, expanding margins and positive cash flow.

This slide captures the multiyear journey the company has been on. The last few years, we're about strengthening the foundation. We invested heavily in scalable technology and operating infrastructure. We built payer grade utilization management capabilities, and we deepened regulatory and stakeholder relationships. We also developed a repeatable enrollment in growth playbook and in-sourced critical clinical services to improve quality and cost. Now as we look forward, the focus is on optimizing the platform. That means driving responsible growth, expanding margins, leveraging fixed cost and using data and technology to proactively manage risk and outcomes, all in the most compliant way possible.

Lastly, we're really excited about the level of activity at CMS and the Center for Medicare and Medicaid Innovation, related to new innovative models aimed at these mostly clinically complex and costly populations. We're starting to see a real curiosity and a genuine desire to learn more about PACE and its core capabilities and how they can be used to serve new populations. The key point is that today's results and tomorrow's opportunities are the product of deliberate long-term execution.

You can see this operational discipline is translating into tangible financial results. Census and revenue growth have become more consistent and adjusted EBITDA has improved meaningfully over time. This is not driven by one market or one lever. It reflects broad-based improvement across the entire portfolio as our centers have matured and operations have standardized. The progression gives us confidence in the durability of this performance.

One of the most important differentiators for InnovAge is that the payer and the provider are the same entity. There's a single operating model with unified economics and no delegated risk or coordination layer. In contrast, many other models rely on delegated risk or arm's length coordination, which fragments accountability. Our model is fully integrated, not delegated. That distinction matters enormously when managing complex populations.

Our care model is designed for depth and outcomes. It's not about maximizing throughput. We intentionally maintain very small panel sizes, allowing our physicians and care teams to spend meaningful time with participants. Often more than 7 hours per month with each participant. Primary care is deeply integrated with nursing, behavioral health, therapy, rehab, social services and home care. And the structure incentivizes our clinicians to take the time required to optimize care quality rather than maximize volume.

The population we serve is meaningfully more complex than the average Medicare beneficiary or Medicare Advantage member. Our participants typically have multiple chronic conditions. They require assistance with activities of daily living, and they interact with our care teams on a very frequent basis. But despite this complexity, over 90% of our participants can remain living independently, not in institutional settings. That outcome is central to the value that we create.

Even while serving a more complex population, we deliver superior outcomes. We see lower inpatient admissions, lower readmission rates, lower voluntary dis-enrollment compared to Medicare Advantage. These outcomes are not accidental. The result of proactive care, daily engagement and tight coordination across the continuum of care. Bottom line is that participants can age safely in their homes and in the community and not in a nursing facility. Government payers can rebalance long-term care to a community-based approach rather than toward nursing facilities, and they benefit from the fiscal predictability of the capitated program.

Now this slide is, in some ways, kind of the load-bearing slide of the presentation. It gets at the core of why InnovAge model works economically. We're at full risk for the entire spectrum of Medicare and Medicaid services. This includes primary care, acute care, long-term services and supports and supportive housing when needed. And there are no carve-outs. There's no delegated risk. That matters because control beats influence. A meaningful share of our model is the health care costs are controlled. In many other models, providers influence spend through trying to change referral patterns, prior authorization rules, very distant case management. The payer remains separate and risk is fragmented across the multiple entities, a meaningful share, more than 40% of the total cost of care is delivered by InnovAge employees inside our centers through an interdisciplinary team that sees patients frequently and longitudinally.

This gives us real-time visibility and hands-on control overutilization and gives us control over those utilization decisions as they're being made. When care does occur outside the center, it's tightly directed. Orders are very narrow, they're intentional, and they're informed by deep knowledge of the participant. That is a very different than retrospective utilization management after costs have been incurred.

The result is fewer unnecessary hospitalizations, fewer skilled nursing days and better alignment between clinical decisions and financial outcomes. This is why we believe PACE is the one and only model that truly controls a meaningful share of care for this population and why it has structural advantages when it comes to cost control, utilization appropriateness and margin durability.

And the market opportunity for PACE remains significant and underpenetrated. It's growing bipartisan recognition of the value that PACE delivers, particularly around dual eligibles. Policymakers increasingly view PACE as the most fully integrated care model available for the population, which helps reduce the long-term programmatic regulatory risk. These tailwinds have supported sustained growth of PACE programs, as you can see in the upper right-hand corner, for the last few years, and it's expected to continue into the future.

InnovAge is highly differentiated, even within PACE programs. The market is largely made up of subscale single-state operators, more than half of all PACE programs have fewer than 250 patients. InnovAge is the only PACE organization with meaningful scale, geographic diversification and access to both the public and private markets. The scale enables growth pathways and makes us a partner of choice for not only PACE programs, but health systems and communities.

Speaking of health systems, joint ventures are also a very important part of our growth strategy. These partnerships align missions with trusted local health systems, combining their community presence with our PACE operating expertise. They strengthened referral pathways, improve care coordination and expand access for seniors who benefit most from the model. The quotes on the bottom of the slide reflect how our partners view the value of these collaborations.

Now turning to financial performance. Operational improvements have expanded margins and driven accelerating profitability. In the first quarter of fiscal year 2026, we delivered a 7.5% adjusted EBITDA margin and generated positive operating cash flow on a trailing 12-month basis. Importantly, there remains meaningful embedded earnings opportunities as we continue to leverage excess capacity in our centers, fixed overhead and our technology investments.

I'll hit this slide quickly since we've covered it in our Investor Day, but the slide illustrates how value is created in our model. We receive a risk-adjusted capitation payment for Medicare and Medicaid each month. We reimbursed for care that's delivered by our contracted providers. We refer to them as external provider costs. And then we back out what we refer to as cost of care, which reflects the total cost of care delivered in our centers. Contribution margin is what's left over after you subtracted external provider costs and internal center cost from the premium revenue. And corporate costs are largely fixed, which creates operating leverage as census grows. So over time, this supports intermediate-term adjusted EBITDA margins in the high single digits, with long-term potential around 10%.

This slide pulls together the momentum you're seeing across revenue, census, margins, contribution margins. The consistency across these metrics reinforces our confidence in the trajectory of the business. This is execution-driven performance, supported by a platform that is now operating in the way it was designed to.

For fiscal year '26, we provided guidance that reflects continued growth and margin expansion. The guidance assumes disciplined execution, responsible growth and a continued focus on quality and regulatory excellence. We believe this outlook is achievable based on what we're seeing today, and we're excited about the future.

So I'll just close -- this is a slide, but I'll just close a few key comments. InnovAge is a structurally differentiated full risk payer provider platform with deep care delivery capabilities. The PACE model is built for purpose for the most complex seniors, where other value-based care models struggle to operate economically. Multiyear investments are translating into consistent growth, margin expansion and positive cash flow. And we operate in a large underpenetrated market with strong policy support and multiple paths to durable value creation.

With that, I think I'll turn it back to Ben, and we'll start our Q&A.

Perfect. Well, really appreciate that commentary and the thorough background. I think I had a couple of questions here in the industry to start it out here. You talked about that under penetration. PACE has been around for about 30 years, still relatively low penetration among your dual eligibles at this point, like low single digits. Can you just talk about why you think the market still remains so underpenetrated and just how the competitive landscape in PACE has evolved over the past few years?

Yes. It's a great question, Ben. I think people forget because PACE is getting so much attention now. I think people forget that for-profit organizations have only been allowed to participate in PACE for a decade. So it's still a very new population. It takes capital to expand. A lot of the not-for-profit smaller organizations have not had the access to capital to pursue a scaled strategy. I think that's a factor. There's probably a period over the last 15 years where states have focused a lot on managed Medicaid long-term care, mandatory programs at various states. And I think that's taken up a lot of the state's time. I think they're now developing some experience with those managed long-term care programs. They're understanding who they work for, who they don't. And I think the time is right for states and CMS to begin focusing on PACE.

And if you look at one of the charts on the slide, you can see over the last few years, the number of PACE programs that have grown. And you add to that the interest that CMS and CMMI are showing in pace and how the program can be used to serve broader populations. I think it suggests that while it's only been a decade of for-profit participation, I think all PACE programs, not-for-profit or for-profit, are standing in a very good position to see the program grow over the next decade.

Got it. I think you mentioned some of the tailwinds you're seeing on the regulatory side from CMS and CMMI. How do you evaluate the potential for a Medicare-only PACE option? And how do you think about the potential opportunity for InnovAge within that?

I think we may have mentioned that in the earnings call before. Today, someone with just Medicare, a non-dual eligible that has Medicare can join PACE, but they have to pay for the long-term care services. And that's a huge barrier for that population. So it's not a large population.

When we think about a Medicare-only product and the kinds of conversations we've been trying to have with regulators and with CMS is the notion that we think about 1/3 of the Medicare population -- actually, the Medicare Advantage population has the need for support with at least one activity of daily living. If you think about the Medicaid long-term care programs, it's generally two activities of daily living or four activities of day living that you become eligible. But there's a lot of seniors today, a lot of Medicare beneficiaries that need more than the current models actually offer.

And there's a lot of capacity in PACE programs in our centers. And so when we think about a Medicare-only option, in some ways, we're thinking about sort of a light version of PACE, where we would participate alongside Medicare Advantage Special Needs Plans, Medicare Advantage Chronic Plans. And we would use the unique attributes of our center-based model to serve that population. We think that could save the federal government money, and we think it could delay institutionalization, which would save states money. So we think it's a really interesting expansion opportunity. So when we talk about Medicare only, that's kind of the lens we're looking at that opportunity.

Great. As part of your multiyear journey now on the operational side, can you just go through some of the major operational changes implemented during 2025, such as the Epic EMR and Oracle financial platform rollouts and maybe how you're thinking about their impact on areas like quality, compliance and efficiency? And then any way we can kind of think about how this is going to flow through the P&L as well within that?

Well, you hit on a few of them. We've made a lot of investments in best-in-class technology solutions, the Oracle platform, supporting a lot of our financial operations and eligibility and payment operations. We use Salesforce not only in our sales organization, but also to support our compliance organization, workflow automation. You mentioned EPIC, which is our EMR platform, which allows us to have one single operating platform that all of our business is on. And we see that as a real opportunity to help continue to drive productivity in the organization.

We've in-sourced a number of key clinical functions. We in-sourced hospice care. We've in-sourced our pharmacy program with a partner. And all of those investments really have put us in a position, I think, to deliver better quality of care, more efficiency. And now you've got the undercurrent of AI, which is we're being very thoughtful about where can we make use of AI. But one of the areas that we're focused a lot on, as you can imagine, we've got 100-plus providers across the U.S. they all order care, they order specialist referrals, they order DME, they order nursing home care, they order assisted living, they order skilled nursing days. The list goes on and on. We see a lot of variation in ordering. We're now seeing the opportunity to leverage AI to help us better understand that variation, help us with our referring strategies and help educate us.

So we've made a lot of investments, Ben, over the last couple of years. And I think we're now at the point we're starting to feel like we've got a platform and we're starting to see the margin expansion. And as we start to fill our centers, there's a lot of marginal profitability on that. And we still see a lot of opportunity, whether it's using AI to reduce labor costs or to help us with staffing ratios or to improve our clinical decision-making, all those areas that we have invested and continue to invest in.

Great. Nice segue into existing center capacity there, too. So with available capacity in states like Florida, California and Pennsylvania, can you just bring us up to speed on the current occupancy trends for those markets and maybe your pathway towards bringing this existing capacity online?

Well, I think one of the benefits we have is a lot of capacity. We've built centers or acquired centers that have capacity for a lot of growth. So we have a lot of opportunity for growth within our existing centers. I'd say all the centers that you mentioned are still in the early stages of growth. We're very pleased that we're sort of, I'll say, tracking according to our internal plans. The partnerships that we've developed with various health systems have really helped accelerate our growth in those markets. We see a lot of opportunity to further grow those markets as we move forward. And I'd say they're all tracking according to plan, and we see a lot of potential without having to build new centers.

And then I guess as you think about your member mix within that, how are you balancing your enrollment growth with your acuity mix? And then how do you think about the implications on things like risk scores and revenue?

Well, in our business, if you think about mix, you can think about it simply as some portion of our participants live at home in the community, some of them live in assisted living facilities, and some of them live in nursing facilities. And it's that mix that becomes critical to making sure that our risk reflects the risk of the market and that there isn't some imbalance in the risk that we hold.

And so I think one of the things we've done a really nice job of over the last couple of years is really with the clinical decision-making that's required to maintain that risk. I think the company had more individuals in nursing homes than was appropriate and more individuals in assisted living than was appropriate. And as we started to grow again over the last couple of years, we've been able to really bring that mix and rebalance that mix in a really, I think, effective way, and that creates a lot of leverage for the model. And so we always do what's right for the participant, but the longer we can keep someone in their home, it is good economics for InnovAge, for our states and for our federal partners.

Great. Just thinking again on the organic side, contemplating how you balance your de novo growth between -- balancing between de novos and M&A. I guess, how do you evaluate the relative attractiveness of your de novo center development versus some of the bolt-on acquisitions? And what's your current pipeline for each?

In terms of how we balance it, I would say each strategy, de novo and bolt-on kind of has its own district strategy and advantages for us. When we think about a new de novo market, our primary focus is on the market size. There needs to be a large and growing senior population for our model to make economic sense and have potential. We look closely at how states handle and ensure rate adequacy with its managed care partners. And with -- if there's PACE programs there today, the rate history. Does the state have robust pace growth plans? We want to know the states committed to sort of multiregional pace growth. We look a lot at traffic patterns and service areas, which could all affect how efficient our centers are.

So de novo, if it's a market that meets those criteria, it's a market that we're interested in. We spent the last couple of years really focused on filling the centers that we have. Really leveraging the occupancy that we have today, but we always have a list of markets that we find attractive. And that meet those characteristics. So I would say, yes, we have a pipeline. It's just trying to balance the investments that we make in de novos. And I think you could -- if you look back 2 years, we probably weren't in a financial position to allow de novos to play a vital role in our growth strategy as opposed to the marginal filling of our centers. I think we're now in a position from a financial perspective where de novos is becoming an increasingly interesting part of where we see the opportunity.

On the bolt-ons, as we kind of showed the slide, there's a lot of subscale PACE programs out there. The market is very fragmented. There were a lot of new entrants into pace, as you saw from the chart. The last 5 years, there's just almost been a doubling of the number of PACE programs. We're starting to see examples of where PACE programs haven't achieved the appropriate scale and maybe aren't meeting the expectation of the investors. And so we see more opportunities to do things like we did with Concerto's business, which was really a derisked acquisition. It was a derisked de novo because they had just started the business, had about 16 employees, had a couple of participants. And we've taken that business in the last 18 months. We've been able to, I think, grow revenue by 5x. We've been able to become contribution margin positive in the last sort of 18 months. We've grown census by 4x.

So we feel like we've got a platform now we feel the business is generating cash flow and strong earnings. And so we really do feel that now is the time to be giving de novos and bolt-ons more thought, and there's clearly a market out there for it.

Got it. Can you share any lessons from some of your recent de novo center launches in Florida and California specifically and maybe how these inform your approach towards your future growth? And then I think within the slide show, you discussed some of the JVs, how are you thinking about your JV partners within that kind of construct?

Yes. Let me start with like de novo lessons learned. The first would be health systems really do have the potential to be great partners. They know these communities better than anyone. Many of these health systems have been there for decades upon decades. And they have deep community influence and connections. And when I think about lessons learned for de novos, I think about the importance of building strong relationships. It doesn't need to be a joint venture. It can be any type of joint endeavor. But I think that the lesson learned is health systems can be very powerful for a partner in a de novo market.

I think service area, there's a natural inclination to sort of take every service area that a state will allow you to operate in. We've learned that if someone has to be picked up at home and ride the bus a little longer than they'd like to get to the center that, that could lead to dissatisfaction. And so really being thoughtful about the service area you serve is a critical lesson learned from us. It drives our scheduling, it drives our transportation, it drives our center operating model. And so I think a lesson learned is, we'll spend a lot of time on that during future expansions to make sure we've got the patient experience kind of at the top of our list in terms of how we operate.

I think deep community relationships and referral partnerships is something that's really important. You've got to spend time on the ground, understanding the natural community advocacy ecosystem, know how you fit into it, make sure that you've build trusting relationships with those organizations, building PACE awareness is -- you hear a lot about PACE and kind of the world that this conference operates in, but there are still a lot of individuals in our communities that don't know what PACE is or why it could be a great solution for them or their families. And so taking that time on a de novo opportunity to really promote and build awareness of PACE that can be, I think, a really incredible important lesson learned.

I think Concerto, the integration of a business in California, I think I touched on there, it was a business that had just received its license. I think it had robust expectations for how it would grow and the economics of the business. And the reality was that it was sort of struggling to achieve, I think, the expectations for its stakeholders. And so it became an opportunity for us to instead of doing a de novo to, in some ways, find a very appropriately sized organization that we could plug into our platform day 1.

So what I think we've learned is that if we can find an early-stage PACE organization, there's a real ability to sort of connect it to our people model, our process model, our quality model, our compliance model, our sales strategy, our financial systems. And everything we've invested in over the last few years has created the ability to offer that service in some ways to offer that to an organization that's interested in pursuing something other than PACE.

And so that opportunity to plug in some of these smaller PACE organizations for the benefit of those stakeholders and for the benefit of InnovAge and for the benefit of the community and the patients to offer a larger scale program is something we've learned, and I think we'd like to do more of it, and we'll continue to look for those opportunities.

Thanks for that color. Just flipping over to the rate side. I can appreciate with Jan 1 coming, you've had maybe some updates on where states land. Can you just give us a general update on rate development for both Medicare and Medicaid? And maybe how recent rate actions compared to your expectations?

As I said in the presentation, PACE does enjoy a great deal of bipartisan support, which is very relevant to Medicare rates. Medicare Advantage is a very strong advocate for actuarially sound rates. And I think Medicare has a long track record of ensuring actuarially sound county rates. There's certainly been changes to risk adjustment and the use of brokers and other things that can impact the economics for Medicare Advantage plan. But when you look at the county rates, they've been very adequate for what we do. And we've made our business model work within that rate envelope from a Medicare perspective.

On the Medicaid side, there's clearly a lot of concern about maybe kind of the knock-on effects of Medicaid rates as a result of some of the new federal changes to programs that impact the budgets of states. What we've seen is states really value their PACE programs. They know by definition that they're serving the most vulnerable Americans. And we're seeing some durability to the Medicaid rate environment.

Now there is a reality that it's still early to sort of predict exactly what sort of pressure states are going to feel from the changes they have to make related to their budgets. But we feel like that PACE is a program with a lot of support. We think that helps with regulatory rate risk. And we feel like we're providing a lot of value to states by keeping individuals out of higher-cost nursing homes.

So we feel pretty good about the rate environment. But it's always a risk, it's always something we're trying to mitigate risk, and there's no sure things. But we think our model is well respected and states really want to hold onto it.

With V28 coming through, I guess, on the Medicare side, how are you preparing for the phase implementation here within PACE? And then what do you think are some of the operational clinical changes that might be required in order to optimize your risk adjustment under this new model?

Well, we've been working hard to prepare for it. I can probably only say that I think the magnitude of the impact of PACE programs will be different than the magnitude of Medicare Advantage programs because we serve a much more acute complex population by its nature, has a profile and a mix of diagnosis codes that are very different than MA. We've done analysis internally. We're currently working with some third parties to kind of triangulate perspectives on PACE risk for V28. In all of our guidance and our internal forecast, we're being very judicious and prudent and conservative about the risks of that. We think the phase-in will help us and allow us to kind of recalibrate as we learn more, but we have a lot of work going on in the company right now to help us ensure that we understand the new regulations that were making any business process changes that are needed to our clinical workflows to make sure we're capturing accurate diagnosis codes. And then we're making sure we've got a really strong program to sort of submit and reconcile those diagnosis codes with CMS.

But I think overall, we're taking a very conservative approach. And it's one -- it's just one thing that we'll have to manage over the next couple of years.

Great. Last couple of here as we kind of get to the end of time. Just on your new market entry, as you're evaluating RFPs in new states that are either adopting or expanding PACE, can you just give us a sense for what states you're looking at and maybe any potential time lines for submitting a bid?

I'll stop short of identifying any specific states and time lines. But I would say there are a number of states that are thinking very seriously about PACE expansion. We're engaged appropriately in understanding those opportunities and what it could mean for us and how we would want to deploy capital or not on those opportunities. As I mentioned, there's a very thoughtful process we go through to determine whether a state is attractive as it were related to market size and growth rate of senior population and rate history of the state and managed care penetration of other programs.

So I think it's something we're always looking at. There are a number of states that are interested that we see a pipeline, if you will, over the next few years, and we'll be looking at all those opportunities very closely.

Okay. And just as one final one, as a 1-year forward outlook, what will investors appreciate about InnovAge 1 year from now that they currently don't today?

I think they will appreciate that the investments we've made and the strong execution that's taking place within our company with our 2,400 associates has built a very strong operating model and platform that gives us a lot of flexibility to pursue a lot of opportunities for growth, and will allow us to continue to deliver great quality care, perform well from a compliance perspective. So in many ways, I see it as we're now ready to allow the platform to do what it was designed to do, and that is to keep people out of nursing homes, create real value for patients, their families, the federal government and our state partners, and we're well positioned to do that.

Excellent. Well, thank you all for your commentary here, and thanks for those who listened in, that's all the time we have. Thank you to Patrick and Ben for joining us on stage today.

Thank you all.

Good day and thank you for standing by. Welcome to the InnovAge First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your first speaker today, Ryan Kubota, Director of Investor Relations. Please go ahead.

Thank you, operator. Good afternoon and thank you all for joining the InnovAge 2026 fiscal first quarter earnings call. With me today is Patrick Blair, CEO; and Ben Adams, CFO.

Today, after the market closed, we issued an earnings press release containing detailed information on our fiscal first quarter results. You may access the release on the Investor Relations section of our company website, InnovAge.com.

For those listening to the rebroadcast of this call, we remind you that the remarks made herein are as of today, Tuesday, November 4, 2025, and have not been updated subsequent to this call.

During our call we will refer to certain non-GAAP measures. A reconciliation of these measures to the most directly comparable GAAP measures can be found in our earnings press release posted on our website.

We may also make statements that are considered forward-looking, including those related to our 2026 fiscal year projections and guidance, future growth prospects and growth strategy, our clinical and operational value initiatives, Medicare and Medicaid rate increases, the effects of recent legislation and federal budget cuts, enrollment and redetermination processing delays, seasonality of cost trends, the status of current and future regulatory actions, and other expectations.

Listeners are cautioned that all of our forward-looking statements involve certain assumptions and are inherently subject to risks and uncertainties that can cause our actual results to differ materially from our current expectations. We advise listeners to review the risk factors and other discussions included in our annual report on Form 10-K for fiscal year 2025 and any subsequent reports filed with the SEC, including our most recent quarterly report on Form 10-Q.

After the completion of our prepared remarks, we will open the call for questions. I will now turn the call over to our CEO, Patrick Blair. Patrick?

Thank you, Ryan, and good afternoon, everyone. I know it feels like we just held our fourth quarter results and full year earnings call, and we did. The first quarter reporting cycle always comes quickly due to SEC requirements and companies needing more time to complete and audit their year-end financial results.

As a result, we're meeting about 6 weeks after our last call. So today, I'll spend less time on new headline numbers and more on the progress we're making against our strategic priorities, the continued strength of our model and the momentum that we expect to carry us through fiscal year 2026.

This afternoon, we reported total revenue of $236.1 million, center-level contribution margin of $51.4 million and adjusted EBITDA of $17.6 million. Compared with the first quarter of fiscal 2025, total revenue increased 15% and adjusted EBITDA more than doubled. Census grew to an all-time high of 7,890 participants, up nearly 2% quarter-over-quarter.

These results reflect continued strong medical cost management and better-than-expected census growth as the Medicaid redetermination cleanup is progressing well in the first 90 days. The quarter also reflects positive momentum in our new Florida centers, particularly in Tampa where our partnership with Tampa General is off to a strong start.

The operating environment for many value-based care models remains challenging. Medicare Advantage and Medicaid managed long-term supports and services are experiencing lower or declining reimbursement levels, higher-than-expected medical service utilization and growing regulatory scrutiny around risk adjustment and quality measures.

In contrast, InnovAge and the PACE model have remained resilient. While many plans are retreating from markets or reporting financial strain from escalating medical costs, PACE offers a fundamentally different approach, one built on direct accountability for every aspect of participant care.

At InnovAge, our providers not only deliver care within our centers, but also oversee, approve and coordinate nearly all healthcare services that occur outside our walls. This closed-loop model gives us a high degree of visibility and control over cost trends, allowing us to manage participant needs more responsibly than reacting well after the fact.

These differences are showing up in the numbers. While many managed care organizations are reporting higher-than-expected medical cost trends this calendar year, our total participant expense per month declined sequentially relative to the fourth quarter of fiscal 2025.

What we see in our business is also supported by independent research. In its recent report to Congress, MACPAC identified PACE as the most fully integrated care model available to dual eligibles. The study found that PACE participants, though typically older, frailer and facing more comorbidities, are generally less likely to be hospitalized, less likely to visit the emergency department, less likely to require institutional care and without increased mortality rates.

Simply put, PACE works. Our job is to continue educating policymakers and payers about its value so we can expand access and unlock the program's full potential. And within the PACE sector, InnovAge is the largest provider by census in the country, serving nearly 8,000 participants across 20 centers in 6 states. That scale not only gives us operating leverage, but also unique insight to what drives consistent outcomes for frail seniors.

As I approach my fourth anniversary as CEO, I've been reflecting on how much has changed. Over the last 11 quarters, we've delivered steady revenue growth, more than doubled adjusted EBITDA over the last 2 fiscal years and achieved positive net income this quarter for the first time since 2021.

These results stem from disciplined execution, executing a multipronged growth strategy across markets, including existing center growth, joint ventures, M&A and de novo centers; cleaned up the balance sheet through the divestiture of multiple noncore assets and investments; upgrading systems and processes to strengthen quality, compliance and financial performance; strategically in-sourcing key services such as pharmacy and hospice to tighten cost control and improve coordination; improving center-level staffing and reducing operating model variation, supported by the enterprise rollout of the Epic EMR, the Oracle financial platform and rigorously managing corporate overhead to improve efficiency and productivity. These efforts have reshaped both the culture and the economics of InnovAge, which I believe has positioned us for sustained success.

Before turning to our outlook, I want to touch on recent leadership changes. Over the past several years, we've built a strong leadership bench capable of stepping up when changes occur.

Leadership transitions, some planned, some unplanned, are inevitable in a multiyear transformation, but they have not disrupted our momentum. We've made several important additions and adjustments.

Dr. Paul Taheri, a widely respected clinical leader, joined this week as our new Chief Medical Officer. Meredith Delk recently joined as Chief Administrative Officer, leading pharmacy, home care, behavioral health and government affairs. Matt Huray has expanded his role to include sales in addition to his strategy and corporate development responsibilities as our Chief Growth Officer.

Additionally, last week, we announced that Michael Scarbrough, our President and COO, will be leaving at the end of the month for personal reasons. Michael has done an excellent job strengthening our operations and positioning InnovAge for long-term success. He leaves behind a capable team and a strong foundation.

These moves underscore the depth of our leadership and the growing appeal of InnovAge as a destination for top talent in the industry. Leadership change creates opportunities for internal advancement and professional growth among our next generation of leaders.

At the same time, we've taken proactive steps to strengthen how the organization operates. We recently completed a spans and layers review, a structured evaluation of the size and shape of our corporate organization. This initiative focused on our shared services teams, which support our centers but do not deliver care directly to participants.

Through that process, we identified opportunities to reduce management layers and streamline support functions, resulting in a smaller, more focused shared services workforce. We expect these changes to improve decision-making speed, enhance accountability and more closely align our cost structure with best-in-class benchmarks. It's a tangible example of our cost discipline and the operational maturity we continue to build across the company.

Taken together, we expect that these leadership and organizational changes strengthen rather than distract from our progress. They demonstrate that InnovAge has both the talent and the structure to execute consistently through change.

At its core, InnovAge exists to help seniors live safely and independently at home for as long as possible. Our integrated model reduces the burden on state and federal partners, and brings peace of mind to families.

Our recent participant satisfaction survey tells that story clearly. 90% overall satisfaction and 97% of participants said they would choose InnovAge over a nursing home.

Before I close, I want to share a recent testimonial from one of our participant's daughters that reminds us of our mission at InnovAge, our value proposition to families and the integrated PACE model in action.

For my mom, InnovAge has been such a reassurance. At her age, if she wakes up feeling not quite right, it used to spiral into worry and that worry could turn into something worse. Now everything she needs is right there in the center: her doctor, her physical therapist, her dentist, even her eye care. Her care team shares her chart in real-time, so there is no guessing, no repeating, no gaps in her care. It's all connected. That kind of coordination gives her confidence and gives me peace of mind. It's just amazing.

Stories like this remind us why our work matters and why we're so focused on execution. Behind every number we report is a person whose life and family's life is better because of this model.

So, in closing, we're off to a strong start to the fiscal year. Our Q1 results were ahead of expectations, but I want to caution against annualizing them. Due to the relatively small scale of our business, the timing of Medicaid redeterminations, and the inherent seasonality of certain cost trends, first quarter results should not be indicative of full-year performance.

We'll continue to execute with discipline, invest in talent and technology, and build on the foundation we've created. Continuous improvement has become part of our DNA. We remain confident in our strategy, proud of our progress, and committed to delivering sustainable growth and superior outcomes for the seniors and families we serve.

With that, I'll turn it over to Ben for more detail on the financials.

Thank you, Patrick. Today, I will provide some highlights from our first quarter fiscal year 2026 financial performance and insight into some of the trends we are seeing in the current quarter.

Starting with census, we served approximately 7,890 participants across 20 centers as of September 30, 2025, which represents growth of 9.4% compared to the first quarter of fiscal year 2025 and sequential quarter growth of 1.9%. We reported 23,500 member months in the first quarter, an increase of approximately 9.9% compared to the first quarter of fiscal year 2025 and an increase of approximately 2.2% over the fourth quarter.

Our first quarter census growth was modestly better than expected and was primarily driven by our ability to reinstate more participants that had lost Medicaid coverage than expected and timing delays associated with disenrolling participants that have lost coverage and have not been able to regain eligibility in a few markets.

Total revenues of $236.1 million increased 15.1% compared to $205.1 million in the first quarter of fiscal year 2025, driven by an increase in member months and capitation rates. The increase in member months was primarily due to growth in our existing California, Florida and Colorado centers. The increase in capitation rates was primarily due to an annual increase in Medicaid and Medicare capitation rates, partially offset by revenue reserve.

Compared to the fourth quarter of fiscal year 2025, total revenues increased 6.6% due to an increase in member months and capitation rates. The increase in capitation rates was driven by annual rate increases in Colorado, New Mexico and Virginia, and an annual Medicare rate increase, all effective July 1, 2025.

We incurred $108.9 million of external provider costs during the first quarter of fiscal year 2026, an increase of 1.5% compared to the first quarter of fiscal year 2025. The increase was driven by an increase in member months, partially offset by a decrease in cost per participant. The decrease in cost per participant was primarily driven by a decrease in permanent nursing facility and short-stay skilled nursing facility utilization and a decrease in pharmacy expense associated with higher rebates and the transition to in-house pharmacy services. This decrease in cost per participant was partially offset by an increase in assisted living and permanent nursing facility unit costs.

Compared to the fourth quarter, external provider costs increased 0.6%. The increase was primarily driven by the increase in member months, partially offset by a decrease in cost per participant. The decrease in cost per participant was due to lower short-stay utilization, partially offset by higher assisted living utilization and an increase in assisted living and nursing facility unit costs.

Cost of care, excluding depreciation and amortization, was $75.9 million, an increase of 19.7% compared to the first quarter of fiscal year 2025. The increase was due to an increase in member months coupled with an increase in cost per participant. The increase in cost per participant was primarily driven by higher salaries, wages and benefits associated with increased headcount and higher wage rates, higher third-party fees and shipping costs associated with in-house pharmacy services, and fleet costs inclusive of contract transportation.

Cost of care, excluding depreciation and amortization, increased 5.5% compared to the fourth quarter. The increase was due to an increase in cost per participant, coupled with an increase in member months. The increase in cost per participant was primarily driven by higher wage rates and fleet costs, including contract transportation.

Center-level contribution margin, which we define as total revenues less external provider costs and cost of care, excluding depreciation and amortization, which includes all medical and pharmacy costs was $51.4 million for the quarter compared to $41.3 million for the fourth quarter of fiscal year 2025.

As a percentage of revenue, center-level contribution margin of 21.8% increased by approximately 320 basis points in the quarter compared to 18.6% in the fourth quarter of fiscal year 2025.

Sales and marketing expenses of approximately $7.6 million increased 17.1% compared to the first quarter of fiscal year 2025 due to an increased headcount and wage rates to support growth, coupled with increased marketing spend.

Sales and marketing expenses increased by approximately 7.1% compared to the fourth quarter of 2025 due to an increase in headcount and wage rates and increased marketing spend.

Corporate, general and administrative expenses of $30.3 million increased 9.9% compared to the first quarter of fiscal year 2025. The increase was primarily due to an increase in employee compensation and benefits as a result of greater headcount and an increase in wage rates to support compliance and bolster organizational capabilities, software license fees, and contract and professional services. These increases were partially offset by a decrease in legal fees.

Corporate, general and administrative expenses increased 8.8% compared to the fourth quarter of 2025, primarily due to higher wage rates and an increase in contract and professional services.

Net income was $7.7 million compared to net loss of $5.7 million in the first quarter of fiscal year 2025. We reported net income per share of $0.06, and our weighted average share count was approximately 136.8 million shares for the quarter on a fully diluted basis.

Adjusted EBITDA was $17.6 million for the quarter compared to $6.5 million in the first quarter of fiscal year 2025 and $11.3 million in the fourth quarter of fiscal year 2025. Our adjusted EBITDA margin was 7.5% for the quarter compared to 3.2% in the first quarter of fiscal year 2025 and 5.1% in the fourth quarter of fiscal year 2025.

We do not add back losses incurred by our de novo centers in the calculation of adjusted EBITDA. De novo center losses are defined as net losses related to preopening and start-up ramp through the first 24 months of de novo operations.

For the first quarter, de novo losses were $3.9 million, primarily related to our Tampa and Orlando centers in Florida. This compares to $4.1 million of de novo losses in the first quarter of fiscal year 2025 and $3.8 million of de novo losses in the fourth quarter of fiscal year 2025.

Turning to our balance sheet. We ended the quarter with $67.1 million in cash and equivalents plus $42.3 million in short-term investments. We had $71.5 million in total debt on the balance sheet, representing debt under our senior secured term loan revolving credit facility and finance leases.

For the first quarter, we recorded positive cash flow from operations of $3.9 million and had $4.1 million of capital expenditures.

We are reaffirming our fiscal year 2026 guidance, which we laid out in September. Based on information as of today, we expect our ending census for the fiscal year 2026 to be between 7,900 and 8,100 participants, and member months to be in the range of 91,600 to 94,400.

We are projecting total revenue in the range of $900 million to $950 million and adjusted EBITDA in the range of $56 million to $65 million, and we anticipate that de novo losses for fiscal year 2026 will be in the $13.4 million to $15.4 million range.

In closing, we are pleased with our first quarter results and believe we are off to a strong start to fiscal 2026. We are closely monitoring our census in light of the eligibility and enrollment system redesign due to state Medicaid redetermination that we spoke about on the last earnings call, and we look forward to providing an update on our second quarter call in February.

Operator, that concludes our prepared remarks. Please open the call for questions.

[Operator Instructions] Our first question comes from the line of Benjamin Rossi with JPMorgan.

So you've previously mentioned that the calendar 3Q is typically one of your softer margin quarters as a result of open enrollment. I guess just under your reaffirmed guidance setup, how are you thinking about margin progression for the remainder of the year?

And then just curious if you could walk us through some of your assumptions for the remainder of the year and how you're thinking about impact from things like the aforementioned Medicaid eligibility changes, your cost savings initiatives and then some of the broader shift into the MA V28 model.

Yes. Ben, it's Ben Adams, and I'm here with Patrick and the rest of the team. We don't give quarterly guidance. So what I would probably say is there are a couple of things that are causing a little bit of noise in the progression this year. And why don't I walk through a couple of them just so you understand what's going on.

You may remember in the last call, we talked about the fact that we had a number of folks who were what we call [ LOMI ] status, people lost their Medicaid eligibility, and we were either working to reestablish it or to help them find a program that better fit their needs. That process has been ongoing. I think it probably went a little bit better in the first quarter of the year than we anticipated, but we also think it may drag on a little bit longer than we thought. So that's something that's influenced us a little bit in the first quarter.

In the second quarter, there are kind of a couple of things that happened in the second quarter. We have the October Medicare fee schedule increases. We have some risk score decay, which incurs in the second quarter where the risk scores get reset on July 1.

We will, again, have sort of a full quarter of our merit increases, which were implemented in the back half of Q1. And we'll probably have a little bit higher utilization as we roll into sort of cold and flu season. So we'll have those factors to deal with in Q2.

And then in Q3 is really where we start to see usually a little flattening in what happens with our net enrollments because some of that is sort of a byproduct of going through the open enrollment period. And then we sort of return to kind of a more normalized Q4. So those are some of the factors that are going on.

This year, because of what's happening with our population around Medicaid eligibility in the first quarter and working through some of the issues there, probably is going to make a little bit more lumpiness in the front half of the year than in the past. But we're still good where we are with guidance. So hopefully, that provides a little color on how to think about the quarters.

Really, yes, I appreciate the color there. I guess just as a follow-up, just taking a step back as we're making our way through open enrollment and Medicare Advantage. There's just been some commentary from brokers regarding an uptick in Special Needs plans offerings as some of the traditional MA plans are generally pared back. I appreciate that PACE possesses unique eligibility and processing requirements relative to those SNFs. But just curious how you describe maybe the competitive dynamics of this cycle and whether you've maybe seen any spillover into how you're thinking about your risk pool going into this upcoming year.

This is Patrick. I'll get to start and maybe hand off to Matt. I think what we're experiencing is a market that still remains pretty competitive. I certainly see some of the extraction of certain Medicare Advantage plans. But to your point, the Special Needs Plans still remain a strong presence.

I think in terms of how we're responding to that, I think we got out there very early into the market, working with our referral channels and working with our participants just to make sure that people were aware of the strength of our offering, how our offer differentiates between a Medicare Advantage set of benefits, how much more comprehensive we are and integrated we are.

And I think for the most part, I think we're feeling good about our position in the market. I think it's taken a few years, but people are, I think, gaining a better understanding of PACE as it relates and compares to any sort of Medicare Advantage plan, whether that be a Special Needs Plan or a traditional Medicare Advantage plan.

And I think that distinction, we're getting better at articulating that value proposition in all of our markets. And so I think we're feeling pretty good about our relative positioning in the markets. I think it is still very competitive, but I think we're getting much better at telling the PACE story, and that's certainly helping. But Matt Huray is here with us today, and I'll ask him to add any of his thoughts.

Thanks Patrick. Patrick articulated it well. I would start with just the difference in the models themselves. PACE is a vertically integrated offering. It's a comprehensive set of services and there's 0 out of cost. And so we're focused on making sure that folks for whom either is an alternative. And you'll recall, within the dual eligible population, only a small subset would be PACE eligible based on clinical frailty. But when we find folks who that overlaps, we make sure to hit those differentiated points. And year-to-date, it's early days, but it's going well.

Our next question comes from the line of Matthew Gillmor with KeyBanc.

I wanted to ask about some of the cost trends that you reported. And I think we tend to look at sort of total cost PMPM because it normalizes for the in-sourcing you've done on pharmacy and hospice, but really impressive results again this quarter. I wanted to see if there was any lingering benefit as the acuity of the population has normalized or if that's fully behind you. And then just what would you attribute the lower SNF utilization to in terms of your clinical efforts in the market?

This is Patrick. I'll start. Ben did have some thoughts he wants to share. On your last point about sort of post-acute, we put a lot of work into optimizing our discharges from the hospital into the appropriate level of care with skilled nursing and have put a lot of work into the contracts themselves to ensure that we're optimizing the unit cost side of things as well as the level of care and care coordination side.

I think we've gotten a lot better in that area as well of doing sort of our version of prior authorization, just making sure that the individual does, in fact, need to go to a SNF versus go back home. Really one of PACE's strengths is our ability to build a support structure around the home through our resources and family members, et cetera, to help people get back home when in many other programs, they're going to go to a SNF.

And so I think that's a big part of it. And then just trying to align incentives as well with our network partners, that's really helped us a great deal with our SNF. But overall, each year, we've got a portfolio of what we call clinical value initiatives and OVIs, our operating value initiatives.

And so in addition to the work we've done in SNF, we've done a lot of work on inpatient hospitalizations as well, conversions of short-stay inpatient stays into observations. We're doing a really tight management of readmission of our patients; our doctors play a big role. We've put work into our audits of hospital claims and are working with top-tier organizations to make sure we're not paying any more than we should.

Lots of work around the ER as well. Pharmacy is one. I think Ben has mentioned it in the past, we brought pharmacy in-house. But that's allowed us to work with a lot of different elements of the cost structure there, not only how we fulfill the care, but how we fulfill the drugs, how we distribute the drugs, how we package the drugs, the care management that we put around the prescribing patterns.

There's just a lot of work in that sort of CDI bucket that touches on all these areas. And we sort of build a plan at the beginning of the year. Some of those are successful. Some of them maybe aren't as successful. Some of them we get to the value quicker. Some of them, it takes longer to get to the value. And I think that we've done a really nice job on executing on those.

And I think the more we get into the why, you probably saw some of it in my opening remarks about just this unique model where we control -- our doctors really control so much of the care that gets delivered. And we're really leaning into that and delivering great high-quality care, care with very high satisfaction.

But I think our risk portfolio more broadly, I think we've got modestly better in terms of our mix. And so if you think about our mix, we've talked about independent living, assisted living and then people that are in a permanent nursing home. Because we're now enrolling people post sanction, we're enrolling a lot of individuals that are independent and living in the community.

And so that's helping a bit with our mix. And I think that overall, the team is just doing a really outstanding job. And Ben, anything you want to add?

Yes. I mean, I guess the only thing I'd add to that is if you're looking at trend in kind of a Q-over-Q fashion, one thing that's probably worth being aware is that with the in-housing of pharmacy, it's moved a few expenses around in terms of the geography of the income statement. And we don't break it out, although there's some discussion of it in the 10-Q itself.

But let me just give you a little guidance to think about it. If you think about our external provider costs, they went up Q-over-Q by 1.5%. Obviously we had a 9.9%, almost a 10% increase in member months. And so we had an offsetting amount to get there. And some of it had to do with improved utilization. Some of it also had to do with slightly better rebates on the pharmacy side and also the benefits of what our in-house pharmacy does to our external provider cost trend. So think about that is there's a little bit of a model transition when you do the Q-over-Q comparison.

Similarly, if you look at the cost of care line item for us, it looks like it went up 19.7%, which is huge in comparison to the increase in member month. But if you sort of get behind it, you'll see in some of the description, we talk about the fact that there's an increase in SWB that's pretty large. And there's also a $4.9 million increase in consulting fees and shipping costs related to the in-housing of our pharmacy.

So if you were to sort of realign things back geographically, which you really don't have all the pieces to do, but it will become more apparent as we get further through the course of the year and things begin to annualize out, you'll see the cost trends sort of make more intuitive sense as opposed to what the real Q-over-Q numbers would suggest.

Yes. No, I appreciate that. We tend to look at the external provider costs and the cost of care together right now just because of that geography. Let me ask kind of one follow-up. Patrick, I was curious as you're thinking about these clinical value initiatives just how far along the path do you think you are in terms of standardizing some of these processes like working with the discharge planners at the hospitals to try to get people home. How much runway is there to go? I assume it's a long runway, but just wanted to get your sense in terms of the degree of maturity for these programs as you roll them out across your markets.

Thank you. It's a great question and one that we sort of think a lot about. And what I would say, if I had to sort of put it into percentage terms, I'd say we're about 50% there. And our 100%, I don't put on sort of the caliber of your best MA plans, for example. So just -- but what are we capable of? I'd say we're about 50% there.

And you're right, as we go through, as I go through inpatient and I think about what we're doing there, when I go through emergency room services or PTOT, dermal medical equipment, labs, those are post-acute that we talked about.

You think about for all of those, what we've done is tightened coordination, tighten communication, leveraged our new Epic EMR to the fullest, got under the cover on unit costs and renegotiated where we could on unit cost. What's left -- and this is where you kind of go from good to great. What's left is really ordering behavior.

The point about we control so much of the healthcare dollar, it means we also are responsible for deciding what we're going to do and what we're not going to do. So where do I think there's more opportunity in that back half? It's things like very thoughtful technology-based clinical guidelines and utilization review guidelines.

So what we find is across our 20 centers, you could find variations in ordering patterns and variations in decision-making on when does someone go to assisted living. When do we make the decision for someone to go into a nursing home? How much of the specialist care that's recommended is supported with clinical guidelines.

So it's that sort of reducing variation of care across our system and using clinical guidelines to help direct us and help guide us there. And so this intersects with -- you saw -- I think it was yesterday, we announced Paul Taheri is joining us. And if you think about Paul's leadership, he brings tremendous experience with sort of systems thinking. He brings tremendous experience leading physicians through this sort of transformation, understanding the unique dynamics and culture of our providers and how they make decisions and how to address resistance, frankly, to change.

And then he just has a great collaborative leadership style and he's just an all-around great guy. So he's here to help us address that next 50%. And we think there's value there. It takes time to get to. It doesn't happen in a quarter or 2 quarters. But over the next couple of years, we feel really good about our ability to deliver high-quality, cost-effective care.

I'm showing no further questions at this time. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

Thank you for standing by, and welcome to the InnovAge Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions]. And now I'd like -- as a reminder, today's program is being recorded.

And now I'd like to introduce your host for today's program, Ryan Kubota, Director of Investor Relations. Please go ahead, sir.

Thank you, operator. Good afternoon, and thank you all for joining the InnovAge's 2025 Fourth Quarter and Fiscal Year-end Earnings Call. With me today is Patrick Blair, CEO; Ben Adams, CFO. Michael Scarborough, President and COO, will also be joining the Q&A of the call.

Today, after the market closed, we issued an earnings press release containing detailed information on our 2025 fiscal fourth quarter and year-end results. You may access the release on the Investor Relations section of our company website, innovate.com. For those listening to the rebroadcast of this call, we remind you that the remarks made herein are as of today, Tuesday, September 9, 2025, and have not been updated subsequent to this call.

During our call, we will refer to certain non-GAAP measures. A reconciliation of these measures to the most directly comparable GAAP measures can be found in our earnings press release and in our website.

We may also make statements that are considered forward looking, including those related to our 2026 fiscal year projections and guidance, future growth prospects and growth strategy, our clinical and operational value initiatives, Medicare and Medicaid rate increases, the effects of recent legislation and federal logic cuts, enrollment processing delays, the status of current and future regulatory actions and other expectations.

Listeners are cautioned that all of our forward-looking statements involve certain assumptions that are inherently subject to risks and uncertainties that can cause our actual results to differ materially from our current expectations. We advise listeners to review the risk factors discussed in our annual report on Form 10-K for fiscal year 2025 and any subsequent reports filed with the SEC. After the completion of our prepared remarks, we will open the call for questions.

I will now turn call over to our CEO, Patrick Blair. Patrick?

Thank you, Ryan, and good afternoon, everyone. I'll give the gratitude to our colleagues across Innovate, to our participants and families to our state federal partners and to our investors. Thank you for your continued support and trust.

Fiscal 2025 was a year of delivery. We made clear commitments and we follow through. In many cases, we exceeded both our internal goals and external expectations. And importantly, we finished the year with strong momentum heading into fiscal 2026. Today, I will cover fourth quarter and full year results for fiscal 2025, guidance for fiscal 2026 and progress we're making to position Innovates for long-term success. Our fourth quarter kept a strong year of consistent execution. Revenue was $221.4 million, up 11% from Q4 last year. Center level contribution margin was $41.3 million, representing an 18.6% contribution margin. Adjusted EBITDA more than doubled year-over-year to $11.3 million, representing a 5.1% margin. We ended the year with a census of approximately 7,740 participants. These results reflect disciplined cost management strong medical utilization performance and continued census growth.

Now turning to the full year. Total revenue was $853.7 million, up nearly [ 1% ] year-over-year. Center level contribution was $153.6 million, with contribution margin expanding to approximately 18%, up 70 basis points for FY '24. Adjusted EBITDA was $34.5 million, above the high end of our FY '25 guidance of $31 million. Adjusted EBITDA margin nearly doubled from 2.2% in FY '24 to approximately 4% in FY '25. These numbers matter not just in isolation, but in the context of what we committed at our Investor Day in February 2024. We committed to expanding margins and we delivered. Center level contribution margin improved 17.3% in FY '24 to 18% in FY '25 with further progress expected in FY '26.

We committed to improve clinical outcomes, and we delivered key internal utilization measures such as inpatient admissions, ER visits and short-stay nursing facility visits all improved through execution of our clinical value initiatives. We committed to driving revenue growth and delivered. Revenue grew at greater than 10% compound annual growth rate from FY '23 to FY '25. We committed to improving operating leverage and delivered G&A as a percentage of revenue declined steadily from FY '23 to FY '25. We committed to return sustained positive adjusted EBITDA and deliver with year-over-year improvements and results above expectations. And critically, we closed the year with no material compliance deficiencies. This combination of responsible growth, financial discipline clinical performance and compliance execution is what gives us confidence in the durability of our progress.

We're operating in a complex environment. Recent legislation has created uncertainty for many value-based care models. Particularly Medicare Advantage and Medicaid long-term care programs. Stage partners are facing fiscal pressures, which can translate into budgetary and operational stream. Pace is different. The strength of our model lies in the integration and coordination of care. Our interdisciplinary teams personalized care for every participant.

Today, approximately 40% of our total cost of care is delivered directly in our centers by our employees under one roof. Through regular center attendance, we seek to maintain an active line of sight into each participant's health status. Allowing us to intervene earlier and prevent avoidable hospitalizations in our business. For the remaining 60%, our providers individually order or prescribe virtually all other nonemergent care. This integrated high-touch model gives us a real advantage in managing cost and utilization, and we believe this sets innovator part in inflationary medical cost trend environment.

Looking ahead, we're advocating with the new administration and legislators to broaden the role PACE can play in addressing America's senior care challenges. While today PACE primarily serves a subset of dual eligible seniors, we see meaningful opportunity to expand access to those who could be in the fit earlier in their care journey. We're advocating for new pathways such as a Medicare-only option. That would give more seniors access to the coordination and support services that make PACE unique. With more than 5 decades of public investment in PACE centers across the country. We believe this is the right time to leverage that infrastructure more fully.

Done right, this could both improve quality of life for seniors and generate savings by delaying Medicaid enrollment and prolonging nursing home placement. Importantly, it could also create a natural growth channel for the company as participants needs increase and they transition into full pay sellability.

Looking ahead, our guidance for FY '26 reflects both continued momentum and the realities of our environment. We project census of 7,900 to 8,100, in member months of 91,600 to 94,400 total revenue of $900 million to $950 million, adjusted EBITDA of $56 million to $65 million. De novo losses of $13.4 million to $15.4 million. We expect profitability to build the year exiting FY '26 with a higher run rate, and we remain on track to achieve adjusted EBITDA margins of 8% to 9% over the next few years. Ben will take you through the details of this.

On growth, Census increased 10% year-over-year in FY '25. We strengthened the foundations of our enrollment strategies and processes while also testing and scaling new channels that are beginning to pay off. We're also strong partnerships. Last year, we formed a joint venture with Orlando Health. And this past quarter, we announced a similar partnership with [ Capital ] Hospital. These partnerships extend our reach, strengthen our provider networks and create new pathways to connect eligible seniors with PACE. We continue to work closely with our state partners on enrollment processing, while we have experienced delays in some states and are monitoring the impact of budget constraints in Medicaid eligibility terminations, these dynamics are incorporated into our FY '26 guidance. Demand for PACE remains robust and we expect healthy top line growth as we move through the year.

Beyond the numbers, we're enhancing our transformation agenda. We're investing in talent, technology and tools to make innovate a more disciplined, efficient and scalable organization. Approximately 40% of our total cost of care occurs within our 4 walls of our -- senders where we are uniquely positioned as both a payer and a provider to capture efficiencies and improve outcomes. This transformation is not just about tightening operations. It's about reimagining the model for the future. Positioning InnovAge as a partner of choice for states, payers, providers and communities looking to create a more sustainable continuum of senior care.

In closing, fiscal 2025 was a strong year. We delivered on our commitments, exceeded expectations and ended the year with momentum. Fiscal 2026 will be another important step forward on that we expect to further advance our financial performance, strengthen our model and bring us closer to achieving our long-term ambitions.

I want to thank all our colleagues who make this possible. Every day, they bring both the -- heart and an owner's mindset to serving our participants. They are the reason we've been able to execute consistently and they will be critical to our success in the years ahead.

With that, I'll turn it over to Ben for more detail on the financials.

Thank you, Patrick. Today, I will provide some highlights from our fourth quarter and fiscal year-end 2025 financial performance, followed by our fiscal year 2026 guidance. I am pleased with our overall performance and strong finish to the year. As Patrick mentioned, we really started to feel the impact of our clinical value initiatives throughout this year, and we expect those to carry through into fiscal 2026. We are also pleased with the progress of our new operational improvement initiatives this year and expect them to continue building throughout the next fiscal year.

Starting off our fiscal 2025 highlights with census we served approximately 7,740 participants across 20 centers as of June 30, 2025, which represents annual growth of 10.3% and sequential quarter growth of 2.8%. We reported 23,000 member months in the fourth quarter, an increase of approximately 10.5% compared to the fourth quarter of fiscal year 2024 and an increase of approximately 2% over the third quarter of fiscal year 2025.

Total revenues increased by 11.8% to $853.7 million for fiscal year 2025. The increase was primarily driven by an increase in member months coupled with an increase in capitation rates. The increase in capitation rates includes rate increases for both Medicare and Medicaid, partially offset by revenue reserves and an out-of-cycle risk or true-up payment received in fiscal 2024. Compared to the third quarter, total revenues increased by 1.5% to $221.4 million in the fourth quarter, primarily due to a sequential increase in member months, partially offset by a decrease in Medicare rates associated with decreasing risk score as new participants are entering pace with lower risk scores and disenrolling participants are leaving pace with higher risk scores. We incurred $431.2 million of external provider costs during the fiscal year. A 7% increase compared to fiscal year 2024. The increase was primarily driven by an increase in member months, partially offset by a decrease in cost per participant. The decrease in cost per participant was primarily driven by a decrease in inpatient assisted living, permanent nursing facility and short-stay nursing facility utilization. A decrease in external hospice care associated with the transition of this function to internal clinical resources and a decrease in pharmacy expenses due to the transition to in-house pharmacy services. The decrease in external provider cost per participant was partially offset by an increase in inpatient unit costs and an annual increase in assisted living and permanent nursing facility unit cost.

During the fourth quarter, we incurred $108.2 million of external provider costs. And when compared to the third quarter of fiscal year 2025, external provider costs were essentially flat. The stable cost were the result of higher costs associated with an increase in member month, offset by a decrease in cost per participant. The decrease in external cost per participant was primarily driven by a decrease in inpatient and permanent nursing facility utilization and a decrease in pharmacy expense associated with the transition to in-house pharmacy services, partially offset by an increase in short stay nursing facility and assisted living facilitization.

Cost of care, excluding depreciation and amortization, was $268.9 million, an increase of 17.5% compared to fiscal year 2024. The increase was due to an increase in member months coupled with an increase in cost per participant. The overall increase was driven by higher salaries, wages and benefits associated with increased headcount and higher wage rates, an increase in software license fees increase in de novo occupancy and administrative expenses associated with opening centers in Florida and the acquisition of the ConcertoCare Center, an increase in contract provider expenses in California associated with growth, consulting fees and shipping costs associated with in-house pharmacy services and fleet costs, inclusive of contract transfer.

For the fourth quarter, cost of care, excluding depreciation and amortization, increased 3.5% compared to the third quarter. The increase was primarily due to an increase in consulting fees and shipping costs associated with increased volume of in-house pharmacy services. Center level contribution margin which we define as total revenues less external provider costs and cost of care, excluding depreciation and amortization, which includes all nickel and pharmacy costs was $153.6 million for fiscal year 2025 compared to $132.1 million, a 16.3% increase for fiscal year 2024.

As a percentage of revenue, center level contribution margin of 18.0% increased approximately 70 basis points compared to 17.3% in fiscal year 2024. For the fourth quarter, central level contribution margin was $41.3 million compared to $40.7 million for the third quarter of fiscal year 2025, an increase of 1.3%. As a percentage of revenue, center level contribution margin of 18.6% decreased by approximately 10 basis points compared to 18.7% in the third quarter of fiscal year 2025. Sales and marketing expenses of $28.2 million increased 13.1% compared to fiscal year 2024 primarily due to increased headcount and wage rates to support growth.

For the fourth quarter, sales and marketing expenses increased by 2.6% compared to the third quarter of 2025 as a result of additional marketing support and project timing in the fourth quarter. Corporate and administrative expenses increased [ 9.6% ] and to $122.1 million compared to fiscal year 2024. The increase was primarily due to the $10.1 million accrual of the potential settlement of the securities class action lawsuit and an increase in employee compensation and benefits as a result of greater headcount and increased wage rates to support compliance and bolster organizational capabilities. These increases were partially offset by a reduction in consulting and insurance expenses.

For the fourth quarter, corporate general and administrative expenses decreased 27.9% to $27.8 million compared to the third quarter of fiscal year 2025. The decrease was primarily due to the potential settlement of the securities class action lawsuit referenced earlier that was recorded in the third quarter.

Net loss was $35.3 million compared to a net loss of $23.2 million in fiscal year 2024. We reported a net loss per share of $0.22 compared to a net loss per share of $0.16, each on both a basic and diluted basis. Our weighted average share count was approximately 135.4 million shares for the fiscal year on both a basic and fully diluted basis.

For the fourth quarter, we reported a net loss of $5.0 million compared to a net loss of $11.1 million in the third quarter and a net loss per share of $0.01 each on both a basic and diluted basis. Adjusted EBITDA was $34.5 million for fiscal year 2025 compared to $16.5 million in fiscal year 2024 and $11.3 million for the quarter compared to $10.8 million in the third quarter of fiscal year 2025. Our adjusted EBITDA margin was 4.0% for fiscal year 2025 and 5.1% for the fourth quarter.

We do not add back losses incurred by our de novo centers in the calculation of adjusted EBITDA. We define de novo center losses as net losses related to preopening and start-up ramp through the first 24 months of de novo operations. We incurred $15.4 million of de novo losses in fiscal year 2025. This compares to $12 million in fiscal year 2024. For the fourth quarter, de novo losses were $3.9 million, primarily related to our Tampa and Orlando centers in Florida. This compares to $3.5 million of de novo losses in the third quarter of fiscal year 2025.

Turning to our balance sheet. We ended the quarter with $64.1 million in cash and equivalents plus $41.8 million in short-term investments. We had $72.8 million in total debt on the balance sheet representing debt under our senior secured term loan and finance lease obligations. We also refinanced our term loan facility in the fourth quarter with a $50.7 million term loan renewed our revolving credit facility commitments and extended the maturity of both to August 8, 2028 from March 8, 2026. For the fourth quarter, we reported positive cash flow from operations of $9 million and had minimal cash capital expenditures of $0.2 million, primarily due to timing. We completed the share repurchase program that we launched back in June of 2024, acquiring approximately 1,426,000 shares of common stock for an aggregate of $7.3 million during the entirety of the program. During the fourth quarter, we acquired approximately 101,800 shares of our common stock for an aggregate of approximately $300,000.

Turning to fiscal 2026 guidance, which we included in today's press release and based on information as of today, we expect our ending census for fiscal year 2026 to be between 7,900 and 8,100 participants. In member months to be in the range of 91,600 to 94,400. We are projecting total revenue in the range of $900 million to $950 million and adjusted EBITDA in the range of $56 million to $65 million, and we anticipate that de novo losses for fiscal 2026 will be in the $13.4 million to $15.4 million range.

I will also provide some additional color on a few of the components that comprise our guidance assumptions. Our census and member months reflect the redesign of our eligibility enrollment system due to state Medicaid redetermination. We expect that this will result in more rapid disenrollments in the first half of the fiscal year for those participants who have lost Medicaid coverage and have not been able to regain eligibility.

Regarding revenue, we are expecting a low single-digit Medicare rate increase and a mid-single-digit increase for Medicaid. As a reminder, our Medicare rates are based on county-specific rates that are adjusted by CMS in January, coupled with prospective risk or adjustments in January and July.

Effective January 1, CMS will begin to transition PACE organizations onto the B-28 Medicare Advantage payment model from our current B-22 payment model. The process is scheduled to begin on January 1, 2026, and be phased in annually through 2029, starting with a 90-10 split of B-22 and B-28 respectively, and has been factored into our guidance.

Regarding cost of care, external provider costs and overall center level contribution margins, we have continued to make measurable progress since we returned to issuing guidance in September 2023. In 2024, we introduced clinical value initiatives followed by operational value initiatives in 2025. This upcoming fiscal year, while we continue our focus on quality, we are also pushing ourselves to stretch operationally by continuing to reimagine and further refine what we do and how we do it in order to continue growing our adjusted EBITDA margin.

As an example, the ramp-up of our new internal pharmacy initiative is going well and is expected to give us more control over pharmaceutical fulfillment allow us to improve medication adherence enhanced participant outcomes and streamline logistics. We are also excited to see that the business is reducing costs and is expected to continue generating overall cost savings into the future.

In closing, we are pleased with our 2025 results. We continue to push ourselves toward improving and optimizing the business as we set to be the provider of choice for participants as well as our federal and state partners. We remain focused on quality and we believe in the value that the PACE program can bring to eligible seniors with complex needs. We look forward to the trajectory of the business and toward the year ahead.

Operator, that concludes our prepared remarks. Please open the call for questions.

And our first question today comes from the line of Matt Gillmor form from KeyBanc.

I wanted to ask about member mix and how that's impacting margins and cost trends. If I recall, I think the acuity of the membership is in the process of normalizing with your census growth that had been resuming starting last fiscal year. How far along are you on that process? Is there still more room to go in terms of acuity normalizing? And is there any way to think about the impact that that's been having on margins or some of the utilization metrics you've been sharing?

Matt, it's Patrick. Great question. I'd say largely, we've sort of seen the mix rebalancing that we would expect since the sanctions were lifted. We've grown well. We've got a very balanced pool of enrollments. It relates to people living in the community and living in assisted living facilities. And I think we've done a really nice job of ensuring there are solution to keep people in the community rather than to go into nursing homes. And as a result, the mix of our population, the age, the acuity has, I think, progressed much as we anticipated. And I'd say we're largely at a point where we feel like we're achieving our targets. And all of our work going forward is about sort of continuing to grow and maintaining an appropriate mix.

It does negatively impact our risk score. So we have to be kind of alluded to that. So we do need to just being mindful with that shift can come some revenue impacts. But generally, we've got the right mix of healthier folks and with the right clinical model wrapped around them, they can be appropriately a contributing factor to the company's growth and margin expansion. Ben, anything to add?

No, I think you really covered it. I mean, if you think about the average tenure of a PACE participant is 3 years or so, we've been going through a normal enrollment process for about 2 years now. So the mix is pretty much normalized if things have washed through the system.

Okay. Great. That's helpful. And then as a follow-up, I wanted to ask about B-28. I heard Ben's comments about the phase-in starting next year. Should we think about that as being a slight headwind to your revenue growth? Or is that a slight tailwind. Just wanted to sort of understand how that might play out, both in 2026 and then, of course, beyond that as well.

Well, as I think Ben said in his remarks, we're just sort of entering into this phase where we're starting to see a phase-in of the B-28 relative to the B-22. It's going to take multiple years for that to pay out, play out. And as you probably know, there are a lot of variables with the PACE population and sort of how all this will work out, and it included in our guidance. And I just want to make sure that's clear well at been just see...

No, I think you pretty much hit it. It will be -- we expect to be a headwind over the next couple of years. We only provide 1 year guidance, so it's all factored in for this year. But obviously, it's something we're spending a lot of time to think about for future years.

And our next question comes from the line of Jared Haase from William Blair.

Maybe I'll ask on the outlook for EBITDA margins and congrats on all the progress that you've made there. I know you kind of reinforce the expectation that you're on track for the 8% to 9% target over the next few years. I think the guidance implies about 250 basis points of margin expansion. I guess, number one, should we think of that as a reasonable cadence in terms of margin expansion continuing for the next few years on that pathway to the high single-digit target. And then I'd also be curious if you could just unpack, even though the initiatives and progress you've made, where you think the balance is in terms of the bigger opportunities to leverage between center level margin and the operating leverage?

I'll let Ben pick up. But I would just sort of start with. I do think a lot of our margin improvement over the last, but just a couple of years has been a combination of factors. I think being able to reinstitute sort of growth for the company and growing that sort of double digits. We've had a variety of transformation efforts that focus on a lot of clinical value initiatives. So we've sort of done our best to predict when that value will sort of flow through, we've talked about sort of the latency between execution of an initiative and when we start to see the impact flow through the P&L we're doing our best to predict that, but it's kind of hard to hit on a quarter-by-quarter basis, but I'll say we're very pleased with the work by our clinical teams to address medical cost. I think that is a nice driver of this.

As I said in my opening remarks, one of the things that I think we're really developing a strong appreciation for, especially since we've brought pharmacy in-house that over 40% of the total cost of care we're delivering with our team, our employees in our centers. And then this notion that for the remaining 60%, we're ordering that care. We're ordering the specialist visits and specialist services, and that gives us a lot of control. So I do think medical costs are an area we've been very successful and we've got a great team, and we continue to move there. And then the operating leverage, we continue as we grow our centers, we're getting operating leverage at the center level. pharmacy insourcing is an area where the real value to that is medical pharmacy integration. That's given us more control of the total cost of care when we have pharmacy integrated more closely with our medical.

And so I think overall, I think we're pretty pleased with margin growth. And I think it is fair to say that over the next couple of years, sort of the growth we've seen in the last 2 probably translates over the next couple -- what you said.

Yes, and I mean I think Patrick pretty much covered it. I would say that the guidance we put out about the long-term margin opportunity when we met with everybody back in 2 years ago in February, I think that sort of outlook we put out there probably holds true today. And I think probably today, more than ever, we've always been convinced that we get to the right margin structure. It was always just a question of when we would get there. So it wasn't if, it was a win. And I think we feel very confident with the vision we put out a couple of years ago. And I think this year shows us that we're kind of halfway there.

Got it. That's helpful. I appreciate that. And then maybe as a follow-up, I'll switch gears a little bit. But I'm curious, you obviously have the partnership with Epic or your electronic health record, and they've been in the news recently rolling out a number of new AI or automation related features. I'm not sure if you're able to benefit from any of that at all. I know you probably have some specific modules and implementations related to PACE. But just curious, anything specific to Epic or even more broadly, areas where you make opportunities for automation and continue to take cost out of the cost structure?

Yes. I'll flip that to Michael, but I'll say it's a great question. It's something we're spending a lot of time on. really trying to figure out how do we leverage the latest AI-driven tools just to make us a better company and help us with cost efficiencies and quality of care and outcomes, et cetera. I think given the size of our company, we certainly have the capability of the ambitions of a much larger manager organization as an example.

So to that point, you're correct in that we're working very closely with a broad range of technology partners that we have within the company today that, of course, Epic, and I'll let Michael say a little bit about some of the work there, then whether it's an analytical partner or it's a claim system partner or sort of our clinical programs each of those companies have a really robust AI agenda in hours is really -- to figure out how do we leverage what our partners are developing and then connect that to how we operate as a PACE program. And I think we're off to a good start, but it's certainly early days, Michael, please say more.

Yes. Thanks, Patrick. And so I would just add, I think as we have continued to invest in our technology capabilities and platforms, we're really with a kind of a best-in-class strategy and doing so tools like Epic and others provide us a number of out-of-the-box capabilities and out-of-the-box solutions that we're finding a lot of applicability within our business, everything from how we provide clinical care and former clinicians highlight for them information about our participants, which might not be otherwise easily discernible from all of the information in Epic through our Oracle implementation and the ability to use tools like that. just continue to look for opportunities within our business where we have processes that can be optimized and generate not just efficiency, but also greater accuracy of the work that we do. And so I think we're very much working as the whole industry is around just looking for opportunities where AI can be a lever to move the output of our business.

I'd probably highlight Salesforce is another partner who we're doing some really interesting work with more focused on sort of efficiency and accuracy of business processes, both in compliance as well as in sort of the enrolled processing space. So Salesforce has been a great partner as we sort of dip our toe in sort of the AI space.

[Operator Instructions]. Our next question comes from the line of Jamie Perse from Goldman Sachs.

I wanted to start with one quick clarification, which relates to my first question. I know you talked about the Medicaid redeterminations and that being a headwind to census and member progression through the year. You mentioned that being a headwind in the first part of the year. Is that a January type of headwind? Or are you referring more to the start of the fiscal year, so impacting the first quarter?

Well, I think if you think about redeterminations, they go on, obviously, throughout the course of the year. And I think what you've seen with us is, we've changed a lot of our internal processes because as we've tried to partner with the states and make that whole eligibility enrollment redetermination process more efficient, we basically put in new processes and made it easier for us to identify people who are going to lose Medicaid coverage potentially. And if we think they're going to lose it and not recoverable, we can get them gets enrolled more quickly, right?

So as those new processes roll in and we begin to disenroll people who will never regain Medicaid eligibility more quickly, it will put a little bit of a headwind on growth both in terms of census and in terms of member months. And you'll see that really happening in the first half of fiscal year 2026. And then we think it will have washed through the system by the time we hit January.

And the other thing I would say, it's not really changing the rate of growth for us. our trends around gross enrollment growth per month are really going to be the same. So it's not changing the slope of the line. It's really just shifting the line down slightly as we work through these implementation of this new eligibility process.

Okay. That's helpful. And I think you partially answered my first question here, but I just want to make sure I'm clear. Obviously, you had really strong census growth in fiscal '25. The guidance is kind of, call it, low maybe mid-single-digit growth this year on a net basis, I hear your comments on the redetermination piece. Are you assuming that the gross enrollment trajectory that you had in fiscal '25 continues? And maybe just any updates from a capacity standpoint, anything that might change that enrollment trajectory?

Yes, you're right. The gross enrollment trends are going to remain the same, we think, this year. What you're seeing in terms of slightly lower census and member months growth is basically the work through the new eligibility process. And we kind of went through an intentional strategic decision this year where we said, look, there were people that were probably on our -- we were carrying too long to try to reestablish Medicaid eligibility as opposed to moving them off of our system into a more appropriate place for them. Once we knew that they weren't going to get their Medicaid eligibility renewed.

By moving people out of the system more efficiently when we know, they no longer qualify for PACE. It slows us down on the top line, but it actually gives us a big boost on the EBITDA line, right? So you think of this as kind of a year where we're using the enrollment mechanism to strategically reposition the business we're going to give up a little census growth, but not the growth in gross enrollment trends, but we're going to get a big pickup in EBITDA from it.

Okay. All right. That's really helpful. My second question, I know there are some earlier ones on just kind of connecting your guidance to the long-term targets you've laid out. Looking back at those targets, you're kind of a little bit ahead on external provider costs. There may be some room to continue seeing some progression on cost of care? And then certainly, on G&A, there's more room relative to the prior financial targets you laid out. Are those 2 buckets just the cost of care and G&A operating leverage. Are those the primary areas we should expect, can you margin performance or improvement in fiscal '26 specifically?

Yes, it's a good question. When I think about -- when you go back and you look at the presentation we gave back in February '23 about -- '24, sorry. -- and we gave that presentation about what the long-term margin potential was. You probably remember, went through sort of breaking out the DIF components. They were sort of the third-party provider care where we had some efficiencies. But then there was the cost of care, which was provided in our centers we get a lot of efficiency out of that number, not only because we can -- as Patrick spoke about before we can control and coordinate that care more closely, but there's also an administrative component there as well where we get some margin lift as the business scales. So we get some out of that item. And then when you think about the G&A, obviously, we had some activities in the past related to compliance and other things that we've been able to scale down going forward. So we're investing in G&A really today is around improving operations. And if we start to look at that G&A line item as a percentage of revenue or even on a PMPM basis, we think you'll continue to see improvement in the next couple of years in that line item. So I'll really focus more on the EBITDA percentage target than anything else. But those are probably the 2 lines where we'll get the biggest lift.

And this does conclude the question-and-answer session of today's program as well as today's program. Thank you, ladies and gentlemen, for your participation. You may now disconnect. Good day.