イノベージ（INNV）2027年度第1四半期決算説明会：EBITDAは75%超増加

イノブエイジ・ホールディング（NASDAQ: INNV）は、売上高、利用者数、収益性がすべて前年同期比で増加し、2027年度の好調なスタートを発表しました。経営陣は通期見通しを再確認する一方、診療報酬、利用率、労務コストの季節的パターンにより、第1四半期は例年同社にとって最も業績が好調な四半期の1つになると注意を促しました。

主要なポイント

• 2027年度第1四半期の売上高は、加入月数の6.7%増とメディケアおよびメディケイドのカピテーション（定額支払い）レート引き上げに支えられ、前年同期比12.1%増の2億6,480万ドルとなりました。
• 調整後EBITDAは75%以上増加して3,130万ドルとなりました。調整後EBITDAマージンは前年同期の7.5%から11.8%へと拡大しました。
• 20拠点の期末利用者数は前年同期比6.7%増の8,420名に達しました。カリフォルニア州、コロラド州、フロリダ州の拠点が増加を牽引しました。
• 拠点レベルの貢献利益は6,360万ドル（売上高比24.0%）に増加し、2026年度第1四半期の5,140万ドル（同21.8%）から拡大しました。
• 経営陣は、2027年度の売上高見通しを10億5,000万ドル〜10億8,500万ドル、調整後EBITDA見通しを1億500万ドル〜1億1,500万ドルとし、従来の見通しを据え置きました。
• イノブエイジは、2027年度の見通しには見込まれるV28メディケア・リスク調整の影響が既に織り込まれていると述べました。経営陣は引き続き、1月1日付けでメディケアの支払率が1.5%〜2%引き上げられると予想しています。

主要財務実績

イノブエイジの当四半期末時点の現金および現金同等物は1億1,930万ドル、短期投資は4,370万ドル、有利子負債総額は6,140万ドルでした。

事業および営業業績

売上高の増加は、加入者数の拡大と年次のカピテーション・レート引き上げの双方を反映しています。カリフォルニア州、コロラド州、フロリダ州が加入月数の増加に主に寄与しました。

外部プロバイダー費用の増加ペースは売上高の伸びを下回りました。利用者当たりコストは、主に高齢者向け住宅（アシステッド・リビング）や恒常的な介護施設の利用減少、ならびに薬剤費の削減により低下しました。ただし、入院利用率の上昇や高齢者向け住宅・介護施設サービスの単価上昇により、これらの増益効果の一部は相殺されました。

経営陣は、利用率改善の要因として、プロバイダー・ネットワークの強化、イノブエイジの拠点外におけるケアチームの関与拡大、院内専門医の選択的活用、時間外看護への継続的投資を挙げました。また、数年前に調剤機能を内製化したことによる追加的な利益も報告されました。

ケアコストが増加したのは、加入者の増加、人員数および賃金率の上昇、構造改革費用、調剤内製化サービスに関連するサードパーティ費用、外部委託サービス、車両関連費用の増加によるものです。

同社は「InnovAge 3.0」戦略のもと、Epic、データ分析、臨床生産性、利用者オンボーディング、収益会計、受給資格確認業務に投資しています。また、経営陣は臨床判断の支援や事務作業の削減につながる人工知能（AI）の導入も検討していますが、ケアの質向上とコスト削減が見込まれる用途のみを追求すると述べました。

既存拠点の利用者数成長が引き続き最優先課題です。イノブエイジは買収、パートナーシップ、隣接分野のケアモデル、新規PACE拠点の検討も行っていますが、経営陣は短期的な取引の実行よりも機会の開拓に現在は注力していると述べました。

業績見通し（ガイダンス）

イノブエイジは2027年度の以下の見通しを再確認しました：

経営陣は、第1四半期が歴史的に最も業績が良好な四半期の1つであり、そのまま年換算すべきではないと強調しました。第2四半期は通常、メディケア・リスクスコアの低下、季節性呼吸器疾患の発生、医療費の上昇、年次昇給の本格化により減速する傾向があります。

第3四半期には、1月のメディケア郡別レートおよびリスクスコアの改定、カリフォルニア州とペンシルベニア州におけるメディケイド・レートの改定、ならびにV22とV28モデルの適用比率の90%:10%から50%:50%への移行が含まれます。また、暦年の初めには給与税および健康保険費用もリセットされます。経営陣は、第4四半期には加入者数と医療費の動向が正常化し始めると見込んでいます。

リスクおよび注視点

• V28への移行によりリスクスコアのウエイトが変更されるため、メディケアの診療報酬が圧迫される可能性があります。経営陣は、利用者の診断ミックスと正確な診療実績データの提出が重要になると述べました。
• 高リスクで在籍期間の長い利用者が退会し、平均リスクスコアの低い新規利用者に置き換わるため、イノブエイジは季節的なリスクスコアの低下を見込んでいます。
• 冬場のインフルエンザや呼吸器疾患により医療利用率が上昇する可能性があるほか、年次の診療報酬体系、賃金、福利厚生費の増加が費用を圧迫する可能性があります。
• 決算説明会の時点では、カリフォルニア州のメディケイド・レートはまだ提示されていませんでした。経営陣は、州とのレート協議は予想通り進展しており、業績見通しは保守的に策定されていると説明しました。
• 既存拠点エリア外での成長機会については引き続き検討中であり、今回の電話会議では具体的な取引や新市場参入に関する発表は行われませんでした。

アナリスト質疑応答の要点

V28のリスク露出： 経営陣は、イノブエイジの要介護認定レベルの虚弱な利用者層において、V28下でも引き続き認識される重篤な疾患の罹患率が高いと述べました。重症度の低い、つまり「比較的軽度な」診断コードはウエイトが大きく引き下げられています。また、同社はPACEの虚弱係数の恩恵も受けており、メディケアは全売上高の45%を占めています。予想されるV28の影響は2027年度見通しに織り込まれています。

医療費管理： イノブエイジは、高齢者向け住宅および介護施設の利用率低下の要因として、プロバイダー・ネットワークの関与強化、外部施設での回診増加、拠点内での専門医へのアクセス、24時間365日の看護サポート体制などを挙げました。経営陣は、これらの改善を継続的な傾向とみなすにはまだ時期尚早であると述べました。

今後の成長チャネル： 同社は、PACE事業者の買収、新規開設（デノボ）市場、およびまだPACEの受給資格を満たしていない人々に向けたケアモデルの検討を行っています。また、自社のケアモデルを民間医療保険組織（MCO）の下流で提供できるかどうかも検討しています。経営陣は、投資決定にあたっては品質、オペレーションモデル、リターンの各基準を満たす必要があると強調しました。

マージン見通し： 経営陣は、持続可能な調整後EBITDAマージンは10%台以上の水準にあるとの見解を維持しました。「InnovAge 3.0」の取り組みは、さらなるマージン改善の上限を設けるものではなく、効率性とレジリエンス（回復力）の向上を目的としています。

決算説明会トランスクリプト全文

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決算説明会の完全なトランスクリプト

経営陣による説明

Operator

Good day, and thank you for standing by. Welcome to the InnovAge First Quarter 2027 Earnings 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.

Ryan Kubota

Thank you, operator. Good afternoon, and thank you all for joining the InnovAge 2027 Fiscal First Quarter Earnings Call.

With me today are 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 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 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 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 and other investments in technology and artificial intelligence, 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 and other expectations.

Listeners are cautioned that 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?

Patrick Blair

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 support.

Our results reflect the hard work of our teams across the organization and their commitment to delivering high-quality coordinated care to some of our nation's most vulnerable seniors.

We're pleased with our first quarter results and the strong start to fiscal 2027. For the quarter, we reported revenue of $264.8 million, center-level contribution margin of $63.6 million, and adjusted EBITDA of $31.3 million.

Compared with the first quarter of last year, revenue increased 12.1%, adjusted EBITDA grew more than 75%, and our ending census reached 8,420, an increase of 6.7%.

What is particularly encouraging is that the census and profitability are both growing, and that's the combination we want.

Our performance reflects the benefits of the investments we've made over the past several years, along with continued discipline in how we manage our operations and the cost of care.

And importantly, we believe this quarter is another indication of the consistency and durability of the progress we've made. One quarter doesn't make a trend, and rate timing and utilization move results around, but the general direction has been the same for 13 quarters now.

We're entering fiscal 2027 with good momentum, a strong foundation, and confidence in our ability to execute against the priorities we've established for the year.

With that backdrop, I'd like to spend a few minutes discussing how we plan to continue building on this foundation to support our long-term growth ambitions.

Last quarter, we introduced the next chapter of the company's evolution, which we refer to as InnovAge 3.0. At its core, this is about building on the progress we've made over the last several years and continuing to develop the capabilities needed to support our long-term strategy.

This chapter is focused on building the capabilities, leadership, and infrastructure needed to support our growth ambitions and to enable the company to operate successfully on a larger scale.

We've made substantial investments in our clinical operations, technology, compliance infrastructure and management systems. We believe the business is steadier for it, and there's more to build on.

These investments have established a strong foundation for the business, and our focus now is on building upon that foundation to support the next stage of growth. Our priorities are focused on a few key areas.

First, we're continuing to enhance our clinical and operational capabilities, including how we leverage Epic, data, and analytics to support our care teams, improve productivity, and drive greater consistency and performance across our centers.

Second, we're investing in the systems and processes that support census growth by expanding referral partnerships, improving the onboarding of new participants, and strengthening our end-to-end revenue accounting and eligibility operations.

These capabilities become increasingly important as we serve more seniors through our existing centers and pursue additional growth opportunities. Third, we're early on AI.

We're looking at where we can help clinicians make decisions and take administrative work off our teams, and we'll only pursue what we believe helps improve quality of care and decreases cost.

An important part of this work is continuing to strengthen our center-led approach to care delivery. Our center leadership teams already run their centers well and are accountable for delivering high-quality care, maintaining compliance, and achieving strong clinical and financial performance.

As we grow, our focus is on better aligning our enterprise capabilities, including people, process, technology, and clinical expertise, to equip these leaders to deliver even stronger performance.

Ultimately, this is about continuing to build on what's working well today while developing the capabilities needed for tomorrow.

By better aligning our enterprise resources with the needs of our centers, we believe we can support strong performance, greater consistency, and the ability to serve more participants as we grow.

As we look ahead, we are also increasingly focused on the opportunities to extend our growth beyond existing centers. Growing census within our footprint remains the priority.

We believe there is meaningful opportunity to serve more participants through our existing infrastructure, and we continue to invest in the capabilities needed to support that growth.

At the same time, the progress we've made in strengthening our business puts us in a position to spend more time on partnerships and acquisitions, adjacent opportunities that fit our model and new PACE centers.

We believe the company has several advantages as we evaluate these opportunities, including our scale, operating experience across multiple states, established clinical and administrative infrastructure, and experience working with health systems and government partners.

We'll be selective. Any opportunities must align with what we already do well, meet our quality and operating model standards, and earn an attractive return.

Most of this is still being evaluated, and we don't want to get ahead of ourselves. But over time, we think it can become a bigger part of our growth.

We believe these investments will not only help us deliver better care and stronger performance within our existing centers, but also position us to expand more efficiently and effectively into new markets and growth opportunities.

I'd also like to address a topic that has come up frequently in our recent conversations with investors: the transition to the V28 Medicare risk adjustment model and what it means for the company.

The transition to V28 has created meaningful reimbursement pressure for many Medicare Advantage plans, and investors understandably want to know whether PACE will experience similar challenges.

We believe there are several important differences worth understanding. First, every PACE participant meets their state's nursing home level of care criteria.

This is a different population than Medicare Advantage plans serve, which cover individuals across a broad range of health conditions and medical needs.

Our participants have more chronic conditions, significantly greater medical complexity, and substantially more functional limitations compared to typical MA members.

This distinction matters because V28 changes how certain diagnoses contribute to Medicare risk scores. Some conditions receive less weight or no longer contribute to the calculation, while others, including certain serious conditions, receive greater recognition.

For example, consider a relatively healthy Medicare Advantage member whose risk score is driven by just a few chronic conditions. If one of those conditions is removed or receives less weight under V28, the impact on the individual's risk score could be significant.

Now consider a typical PACE participant living with multiple serious medical conditions, potentially including dementia, heart disease, and other complex diagnoses.

While V28 may reduce the weight assigned to certain conditions, others continue to be recognized, and some may receive greater weight. The impact ultimately depends on the participant-specific combination of diagnoses.

Second, PACE has a distinct payment methodology known as a frailty factor that recognizes the functional frailty of the population we serve.

Two individuals may have similar medical diagnoses, but one may live independently while the other requires assistance with bathing, dressing, mobility, and other daily activities.

PACE's Medicare payment methodology includes a separate frailty adjustment designed to recognize these additional care needs beyond what diagnosis-based risk scores alone capture.

The short version is V28 matters, but PACE isn't Medicare Advantage, and our fiscal 2027 guidance already reflects the expected impact of the V28 phase-in.

We continue to expect a 1.5% to 2% increase in our Medicare rates effective January 1, reflecting our assessment of the various factors affecting reimbursement, including V28.

So while V28 represents an important change in Medicare reimbursement, we believe its impact on the company needs to be evaluated in the context of the unique population we serve and the distinct PACE payment model.

Before I close, I'd like to briefly highlight another important milestone for the company: the successful completion of our recent secondary offering.

The transaction included the sale of 11.5 million shares by our affiliated shareholders, TCO Group Holdings, the investment vehicle controlled by Welsh Carson and Apax, including the full exercise of the underwriters' overallotment option.

No new shares were issued or sold by the company, and the company did not receive any proceeds from the offering.

While we're pleased with the successful execution of the offering and the resulting increase in our public float and trading liquidity, we believe the offering signifies more than the shares involved in the transaction.

Over the past several months, we've had the opportunity to engage with a broad range of institutional investors, many of whom were learning about InnovAge and the PACE model for the first time.

What we found particularly encouraging was the level of interest in the PACE model itself, its ability to deliver comprehensive coordinated care to frail seniors, the value it creates for government payers, and the significant opportunity to expand access to this model of care.

To us, the successful offering is a signal that investors are starting to see the progress we've made and what PACE can be, and the opportunity for our company to extend its reach through both organic growth and additional growth channels over time.

We appreciate the continued support of Welsh Carson and Apex as well as the confidence of our new and existing investors. To close, it was a strong start to fiscal 2027.

Our first quarter results reflect continued execution across the business and reinforce our confidence in the direction we're heading. We have a solid base, a more capable organization, and room to grow in our existing footprint while we pursue new markets selectively.

And most importantly, we believe the opportunity ahead of us remains substantial. As the nation's aging population continues to grow, so does the need for innovative, cost-effective models of care that allow frail seniors to remain in their homes and communities.

We believe PACE is uniquely positioned to meet that need, and InnovAge is well positioned to play a leading role in expanding access to this important model of care.

We're encouraged by our momentum, confident in our strategy, and remain focused on disciplined execution, all while creating sustainable long-term value for our participants, government partners, and shareholders.

With that, I'll turn the call over to Ben to discuss our financial results in greater detail.

Benjamin Adams

Thank you, Patrick. Today, I will provide some highlights from our first quarter fiscal year 2027 financial performance, insight into some of the trends we saw during the quarter, and expectations as we look out across the rest of the year.

Starting with census. We served approximately 8,420 participants across 20 centers as of September 30, 2026, which represents growth of 6.7% compared to the first quarter of fiscal year 2026.

We reported 25,070 member months in the first quarter, an increase of approximately 6.7% compared to the first quarter of fiscal year 2026.

Our census growth in the first quarter was generally in line with our expectations and reflects a strong start to the fiscal year.

Total revenues of $264.8 million increased 12.1% compared to $236.1 million in the first quarter of fiscal year 2026, driven by growth in member months and higher capitation rates.

The increase in member months was primarily driven by growth in our California, Colorado, and Florida centers, while the capitation rate increase reflects annual Medicaid and Medicare rate increases compared to the prior period.

We incurred $115.7 million of external provider costs in the first quarter of fiscal year 2027, representing an increase of 6.3% compared to the first quarter of fiscal year 2026.

The year-over-year increase was driven by growth in member months, partially offset by a reduction in the cost per participant.

Lower cost per participant was primarily attributable to a decrease in assisted living and permanent nursing facility utilization and a decrease in pharmacy expense.

These improvements were partially offset by an increase in inpatient utilization and an increase in assisted living and permanent nursing facility unit cost.

Cost of care, excluding depreciation and amortization, was $85.5 million in the first quarter, an increase of 12.7% compared to the first quarter of fiscal year 2026.

The year-over-year increase reflects growth in member months and higher cost per participant.

The overall increase in cost of care was primarily driven by a net increase in salaries, wages, and benefits due to an increase in headcount, higher wage rates, and costs associated with organizational restructuring.

Higher third-party fees associated with in-house pharmacy services, higher contract services, 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 $63.6 million for the quarter compared to $51.4 million for the first quarter of fiscal year 2026.

As a percentage of revenue, center-level contribution margin of 24% increased by approximately 230 basis points in the quarter compared to 21.8% in the first quarter of fiscal year 2026.

Sales and marketing expenses of approximately $8.6 million increased 13.5% compared to the first quarter of fiscal year 2026, primarily driven by higher wage rates and increased marketing spend to support growth.

Corporate, general and administrative expenses of $29.1 million decreased 3.7% compared to the first quarter of fiscal year 2026, primarily driven by a decrease in salaries, wages and benefits associated with lower headcount.

Net income was $20.9 million for the quarter compared to net income of $7.7 million in the first quarter of fiscal year 2026.

We reported net income per share of $0.14 on both a basic and diluted basis, and our weighted average share count was approximately 137.1 million shares for the quarter on a fully diluted basis.

Adjusted EBITDA was $31.3 million for the quarter compared to $17.6 million in the first quarter of fiscal year 2026. Our adjusted EBITDA margin was 11.8% for the quarter compared to 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.

Accordingly, this quarter's de novo losses do not include our Tampa, Orlando, or Crrenhaw centers as they have progressed beyond the initial 24-month de novo period.

For the first quarter, de novo losses were $0.1 million, primarily related to our Bakersfield center, which is not yet operational. This compares to $4.3 million of de novo losses in the first quarter of fiscal year 2026.

Turning to our balance sheet. We ended the quarter with $119.3 million in cash and cash equivalents plus $43.7 million in short-term investments.

We had $61.4 million in total debt on the balance sheet, representing debt under our senior secured term loan, revolving credit facility, and finance leases.

For the first quarter, we recorded positive cash flow from operations of $28.7 million and had $3 million of capital expenditures. Based on information available today, we are reaffirming our fiscal 2027 guidance.

We expect 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 for fiscal year 2027 in the range of $1.05 billion to $1.085 billion. Adjusted EBITDA is projected to be in the range of $105 million to $115 million, and we anticipate de novo losses to be in the range of $0.4 million to $0.8 million.

We are pleased with the progress we made during the first quarter of fiscal 2027. It's also important to provide some context around the quarterly seasonality we experienced in PACE and how that informs our outlook for the balance of the year.

Historically, the first quarter has been our strongest. The second quarter has tended to moderate. The third quarter has reflected the January rate resets and other offsetting factors. And in the fourth quarter, we generally see stabilization.

Seasonality is an inherent characteristic of our business, and it is the reason we do not annualize our first quarter results in calculating our full-year guidance.

It is worth walking through the key factors that we expect to see affect our results throughout the year, one quarter at a time. The first quarter is typically among the strongest quarters of the year.

We historically benefited from Medicaid rate updates in Colorado, our largest market, as well as in Florida, New Mexico, and Virginia. On the Medicare side, risk scores are adjusted in July, which typically increases our average risk score and the payment we receive for each participant.

On the expense side, our annual merit increases take effect late in the first quarter, which means we don't feel the full run rate impact of higher salaries, wages, and benefits until the second fiscal quarter.

In the second quarter, we have typically experienced Medicare risk score decay as longer-tenured participants with higher risk scores exit the program and are replaced by new participants with lower-than-average risk scores.

Medical costs have also tended to increase in the latter half of the quarter as flu and other respiratory illnesses become more prevalent, and annual Medicare fee schedule increases take effect in October.

Due to these seasonal factors, our second quarter results have typically moderated relative to the first quarter, assuming all other factors remain the same.

The third quarter brings several changes at once. Historically, Medicare's open enrollment period puts pressure on our top-line enrollment growth during the quarter.

We also received Medicaid rate updates in California, our second-largest market, and Pennsylvania. On the Medicare side, county rates and risk scores are updated in January, which typically increases the amount per participant we receive.

We expect this pattern in Medicare rate updates to be impacted in the third quarter of fiscal 2027 due to the continuing transition from V22 to V28, with risk scores scheduled to transition from a 90-10 blend of the 2 models, respectively, to a 50-50 blend.

While seasonal medical costs typically begin to moderate as we move out of the winter months, salaries, wages, and benefits increase due to the annual reset of payroll taxes and health insurance benefit costs at the beginning of the calendar year.

Generally, by the fourth quarter, we've seen many of these factors begin to normalize. Historically, we have seen enrollment growth return to the pattern we see in the first and second quarters and medical costs stabilize as we exit cold and flu season.

On the Medicare side, we have typically experienced risk score decay similar to the second quarter. I hope this discussion provides some insight into how we think about the cadence of the business.

We continue to expect this quarterly seasonality for fiscal 2027, which is why we are reaffirming our fiscal 2027 guidance today, and we remain confident in our outlook for the year.

In closing, our first quarter results reflect the progress we have made over the last several years and represent a strong start to fiscal 2027.

The guidance we are reaffirming today reflects both our execution to date and a measured view of the seasonal rate and cost dynamics we expect over the balance of the year.

We remain focused on disciplined execution, advancing towards our long-term sustainable margin targets and continuing to invest in the capabilities that support our center teams as we grow.

We believe we are well positioned to create long-term value for our shareholders. Operator, that concludes our prepared remarks. Please open the call for questions.

Operator

[Operator Instructions]

Our first question comes from the line of Benjamin Rossi of JPMorgan.

質疑応答

Benjamin Rossi

Just wanted to follow up on the V28 discussion. I appreciate your comments. I know it's early here as you're making some of the transition.

But when you discuss some of the conditions and weighting changes, are there any particularly controversial changes that operators are flagging as these changes are digested?

And then anything to look out for with Medicare rate changes as that switch jumps up to 50-50 in January?

Patrick Blair

I'll start and let Ben share any thoughts. I don't think there's anything that's particularly surprising. I think the point that we tried to make on the call is that our participants are all nursing home certifiable and frail.

So their risk scores really lean on high-severity conditions that V28 has largely kept intact. So think CHF and COPD and ESRD, and the list goes on.

I think where the more uncertainty lies for us is what's happened to what is sometimes referred to as the softer codes, where you have less severe examples around heart disease or vascular disease, certain types of stable angina, et cetera; these are all areas where the weighting of the code really dropped.

And so in some ways, the mix matters more than the count of the codes. But as we look at our population, we feel like we've taken this into account.

We are dealing with patients in our book that have a very long list, frankly, of high-severity codes, which the models have really kept in place. And so for us, it boils down more to making sure that we're getting our encounter data in, that there aren't any gaps in the data that we're submitting.

Ultimately, the complexity of our population offers some cushion against the impact of V28 that the Medicare Advantage plans are feeling more acutely, and we factored that into our guidance.

And then lastly, I would just say, always recall that Medicare represents only 35% of our overall revenue. And so that also, sorry. 45%. Please, always feel free to correct me if I'm a public audience like this. 45%.

So that distinction also plays a role in sort of how we factor in the impact. I hope that's helpful.

Benjamin Rossi

Yes. I guess as a follow-up, thanks for the details on the rate update timing. I know it's only been a couple of months since we last spoke, but how are Medicaid rates developing versus your initial expectations?

And an update on where your conversations stand with your state partners, particularly in California and Colorado?

Patrick Blair

Our rate negotiations with the state are evolving as we expected. Really nothing has changed from what we talked about a couple of months ago. We haven't yet gotten rates from California.

We'll probably get them in 3 weeks' time. Is that about right, Shannon? Yes, probably in about 3 weeks' time. As we talked about before, we've been a little bit on the conservative side as we've built our budgets and built our guidance.

But nothing has changed since we had our last earnings release in terms of our expectations about state rates.

Operator

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

Matthew Gillmor

On the external cost PMPM, it seemed like there was some favorability there. I was curious sort of how that lined up with your expectations.

And then can you connect for us some of the actions and the investments that you've talked about and how that's impacting your cost PMPM trend?

Patrick Blair

Yes. Well, I think our cost of care evolved kind of as we expected it would this quarter. This quarter actually just generally came out quite similar to what we originally expected when we built the budget and when we put out guidance.

Are you talking about the initiatives we're doing around 3.0 as it relates to this? Or what specifically you're talking about in terms of...

Matthew Gillmor

Yes, I guess I thought you said the external cost per care was down on a per-participant basis. And I think you mentioned decreases in assisted living costs. And I was just curious if there was more to share around those trends and some of the investments you've talked about on the 3.0 and how that's impacting cost trends. But if I misheard you, please.

Patrick Blair

No, no, I think you heard them right. It is great to see the assisted living and nursing facility PMPMs come down because it really does tie to a couple of things.

One, we've done a lot of work on our network to ensure that we've got the highest quality, most engaged providers in our network. People who are in assisted living or in a long-term care institution make our job tougher because, in some ways, we are responsible for that individual's care 24/7.

And so we've had a couple of markets where we've actually invested in some of our providers to round in those facilities. So I think that's a newer development, as we've been able to make investments into some of the ideas that our local leaders have identified.

This notion of having a stronger presence outside the center within our network has really helped. And I think we're starting to see examples of that.

A second thing that I'd point to is that we've also brought some specialists in-house. I am trying to remember what location it is, but I think at San Bernardino, we've actually brought in a cardiologist to the center to rotate a few days a week, and then we build a schedule around that.

Again, it's one of those examples of the local teams being creative in how we can support the population better. So bringing some specialist care inside has allowed us to get in front of some conditions like cardiovascular care a little more proactively.

And it is things like that, that stop the hospital visit that then stop the discharge to a skilled nursing facility, which then stop the long-term care and a long-term nursing facility.

And so I just think that our interdisciplinary teams are starting to identify ways to keep more care in our centers.

And when we have network providers that are accountable for care, making sure we've got the most engaged network providers that are sharing information with us, all of that allows us to keep people in their homes, and that allows us to save our government partners money and create higher quality care for our population in their homes.

So it's too early to call it a trend, but those are a couple of initiatives that I think are proving to be very helpful. I'm missing others. There's some after-hours nursing that we've continued to invest in that makes 24/7 nursing care available by phone and sometimes in the home.

And all of those things go a long way to impact those ratios and costs.

Benjamin Adams

The other thing we're seeing is slightly better utilization on the A side and on the permanent side, and also slightly better results on the pharmacy side as well.

And again, that relates to us in-sourcing our pharmacy business a couple of years ago, and we're just continuing to improve on that over time.

Matthew Gillmor

And then on the sort of topic of growth, Patrick had mentioned you're in a position now to explore partnerships and adjacencies that would fit the model.

I was curious, maybe it's too soon, but if you could just give us some parameters in terms of adjacencies that may make sense for InnovAge.

Patrick Blair

Yes. Let me make sure I hit that, but maybe just expand on some of my scripted remarks. We continue to see a lot of growth opportunity in our existing footprint, and we've got some meaningful capacity that allows us to grow in a very capital-efficient way, and we're very focused on that.

At the same time, our financial performance over the last several quarters and the capabilities that we're building and we have built over the last few years, I think it put us in a position to look at growth channels outside of same-store growth with a lot more focus and attention.

And we've done a lot of work evaluating the PACE landscape and identifying potential acquisition candidates and assessing new markets for de novo development and, to your question, exploring some of the adjacent opportunities where we think we could create value.

We certainly see opportunities in each of these areas, but I would characterize our work today as more focused on cultivating the opportunities rather than executing on any near-term transactions.

From an M&A perspective, we've identified organizations that we believe could be strategically attractive, and we're focused on building relationships and positioning ourselves for the right opportunities.

Similarly with de novo, we've identified attractive markets. I think Florida, if you just look at how Florida has evolved, I think it becomes a standard for us in terms of a benchmark for what it would take for us to invest in a de novo opportunity.

So we're going to be very disciplined. We don't feel any pressure to pursue transactions simply for the sake of growth. But when we have an attractive opportunity in front of us, we're going to act on that.

As it relates to adjacencies, I think I've talked about this notion before: that we see a real opportunity to apply the PACE model of care to a population that isn't yet eligible for PACE.

They're just upstream of PACE eligibility. And I think we're becoming more convinced that there's real opportunity there. There's value there for our government partners.

There's value there for families that struggle with an integrated model of coordinated care for their loved ones. And we think that that CMMI and HHS and others see the same opportunity.

Does it actually become a material opportunity? I think it's too early to tell. But I think that when we think of adjacencies, I think that's what we think of.

We also think a lot about the notion of whether we create the PACE model of care downstream from a managed care organization. So in a model where a large managed care organization is serving someone from a Medicare perspective and also serving that individual from a Medicaid managed long-term care perspective, those 2 programs together equate to a premium that is pretty close to PACE.

And is there an opportunity for us to create a solution for that adjacency? I think what we want investors to take away is that we're becoming much more intentional about building these additional growth channels.

We believe over time, they could be meaningful contributors to the company over time. And we're putting the work in right now to really understand each of those opportunities.

So no specific transactions or new market announcements to share, but we're encouraged by the landscape and the opportunity ahead.

Operator

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

Jared Haase

I wanted to go back to the discussion around how you're managing relationships with external providers and the networks there.

And I'm curious if there's anything incremental that you're doing in terms of, I guess, creating incentives with those partners to share data and provide the high-quality care that you're looking for.

So whether that's gain sharing or elements like that? Or is it more so about just InnovAge having more data and being able to leverage that to have a feel for who the high-quality external partners are that align with your goals for your members?

Patrick Blair

Thanks for the question. Honestly, I think it's probably more of the latter rather than linking economic incentives. But I hope you take away from that, that we see that as an opportunity, too, also.

And it's yet another example of how becoming a better payer and not just a better provider- we see that as a significant value capture opportunity going forward that we're just now beginning to lean into.

But where there are incentives is that by sharing data and by having a stronger presence, we're able to take some administrative burden off of those network providers.

We're a phone call away rather than an ambulance. And if someone's in assisted living or someone's in a nursing facility and something goes bump in the night on a Friday at 5:00, oftentimes, that's a call to the hospital to an ambulance.

And through our engagement with these providers, I think more and more, we are getting that call. And that gives us an opportunity to engage with our care team, and that can have a real impact to costs and cost trends.

And so while we haven't linked economic incentives through a more traditional value-based care arrangement, I think there's big opportunity. I think we are aligning incentives that are probably more aligned to patient quality and participant experience, which impact downstream medical cost, which is good for the system.

It's good for the government and our payers, et cetera.

Jared Haase

And then just as a follow-up, I appreciate all the detailed commentary on the fiscal '27 affirmation of guidance. So I hear you on kind of the sequential build for the rest of the year.

I guess if I look at bridging from what you did in Q1 to the midpoint of guidance, it implies a pretty healthy step down both in EBITDA growth for quarters 2 through 4 for the rest of the year and a pretty healthy step down in margin on a year-over-year basis.

And so I just wanted to understand, when you talk through kind of the puts and takes on the sequential build for the rest of the year, is there anything you'd call out in regards to the year-over-year comparison that we should keep in mind over the balance of the year?

Is it largely a function of building in some conservatism around the V28 transition that you'll have here on January 1? Or just any other puts and takes again on the year-over-year comparison that we should keep in mind?

Patrick Blair

Yes. I mean, I guess I'd start by saying the description I gave about how to think about the quarters for the remainder of the year was pretty intentional because we don't want people to look at the very strong performance we had in Q4 and just say, multiply it by 4.

If you come back and look at what's happened in the last couple of years, we've had a real step-up in terms of EBITDA and EBITDA margin over the last 3 years.

And during what I think of as kind of acceleration or recapture of margin over time, it obscured the natural seasonality that exists in the business. So now that we're getting back to what we always consider the long-term sustainable margin, which is that sort of 10% plus range.

And if you look at the midpoint of guidance, that's what's implied. It's more important to steer people towards how the individual quarters will develop so you can understand how they'll roll in over the course of the year.

So the comments that we gave in terms of when rates get reset, when risk scores get reset, how to think about risk score decay during the interim periods and those sorts of things should give you an understanding of how it's going to evolve going forward.

The other thing, too, is we've given some sort of specific guidance on what we think the Medicare increase is going to be of 1.5% to 2% in the last 6 months of the year, and that obviously factors in V28.

So the language there is designed to help you understand the progression of the quarters. And the reason we're not changing guidance is because those quarters a high first quarter and the other quarters are all factored into that guidance range that we give for the full year since we don't guide on a quarterly basis.

And that year-end guidance suggests margins in the mid-10% range, which is what we've said now for several years is the long-term sustainable margin for this business.

Benjamin Adams

I Maybe I'll just add. We've consistently said that we believe that the adjusted margin is in that 10% plus range.

But that doesn't mean we're going to stop looking for opportunities to improve performance once we reach that level.

I think a lot of the 3.0 areas of focus that we talked about, whether it be clinical productivity or better management of medical cost or leveraging technology and AI, one way to think about those improvements we're going to be making, even though that we're already running, let's call it, close to target margins is that, that creates a greater resilience for us in the business.

As you're listening and you hear about the seasonality, we operate in an environment where reimbursement, medical cost, labor cost, other factors create headwinds quarter-to-quarter or 1 year to the next year.

I think what we're aiming for right now in 3.0 is really to become more effective, more efficient, which better positions us to absorb the pressures while continuing to deliver strong financial performance.

And then maybe even more importantly, back to my comments on growth, where we have improvement, it creates our capacity to reinvest in people, the participant experience as well as future growth.

So we're not managing the business to a ceiling where we just stop improving once we reach a certain margin. This is all about building a business where the underlying quality, participant experience and earnings give us a lot of flexibility to grow the business as the environment changes.

That's how we think about this. So I appreciate your patience to let me tie that up for you.

Operator

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