Executive Summary / Key Takeaways

• Margin Inflection Is Materializing: After 18 months of stabilization and 18 months of foundation building, InnovAge has achieved its first positive net income since IPO, with center-level contribution margins expanding 500 basis points year-over-year to 21.8% in Q1 FY2026, demonstrating clear operational leverage.

• Scale Advantage Drives Cost Discipline: As the largest PACE provider with 7,890 participants across 20 centers, InnovAge is leveraging its footprint to insource critical services like pharmacy, resulting in external provider costs growing just 1.5% while revenue increased 15.1%, creating a structural cost advantage over fragmented competitors.

• Regulatory Overhang Largely Resolved: The company has moved from DOJ and Colorado Attorney General investigations to reporting "no material compliance deficiencies" by June 2025, with the $27 million shareholder lawsuit settlement behind it, clearing the path for strategic focus on profitable growth.

• Valuation Reflects Turnaround Discount: Trading at 0.78x enterprise value to revenue and 26x EBITDA, InnovAge trades at a significant discount to its operational improvement trajectory, with management targeting 8-9% EBITDA margins over the next few years versus 7.5% achieved in Q1 FY2026.

Setting the Scene: The PACE Model and InnovAge's Position

InnovAge Holding Corp. was founded in Denver, Colorado in 1989 with a mission to keep frail seniors living independently in their communities through the Program of All-Inclusive Care for the Elderly (PACE). This is not traditional home health care or Medicare Advantage. PACE is a fully capitated model where InnovAge assumes 100% of healthcare costs for predominantly dual-eligible seniors, receiving fixed monthly payments from Medicare and Medicaid regardless of utilization. In return, participants receive comprehensive services: primary care, therapy, dental, mental health, meals, transportation, and pharmacy—all with zero out-of-pocket costs.

This model creates a fundamentally different economic engine than traditional fee-for-service or even managed care. InnovAge's revenue visibility is exceptional, with 95% coming from government capitation. The real value creation lies in managing utilization. When the company controls costs effectively, every dollar saved flows directly to the bottom line. This is why the recent margin expansion matters so deeply.

As of September 30, 2025, InnovAge serves approximately 7,890 participants across 20 centers in six states, making it the largest PACE provider in the United States. The market remains highly fragmented, with roughly 195 programs serving 88,000 participants nationwide. This fragmentation creates a clear consolidation opportunity for a scaled operator with proven systems.

The competitive landscape reveals InnovAge's unique positioning. UnitedHealth Group (UNH), Humana (HUM), and Elevance Health (ELV) operate PACE programs as part of vast insurance conglomerates, but their focus remains on Medicare Advantage scale rather than PACE specialization. BrightSpring Health Services (BTSG) provides home-based care but lacks the integrated medical model. InnovAge's pure-play focus on the frailest, highest-acuity seniors—those who would otherwise cost the system $60,000-$80,000 annually in hospital and nursing home costs—creates a defensible niche. The average participant tenure of 3.2 years and voluntary disenrollment rate of just 7% demonstrate the model's stickiness.

The company's history explains its current opportunity. After going public in March 2021, InnovAge faced civil investigative demands from the Colorado Attorney General and Department of Justice starting in July 2021, related to Medicaid billing and enrollment practices. This triggered a 30-month period of stabilization and foundation building, during which management strengthened compliance, rebuilt government partner trust, and invested in core systems. By June 2025, the company reported zero material compliance deficiencies, effectively closing the regulatory chapter.

Technology and Strategic Differentiation: Building a Scalable Platform

InnovAge's transformation hinges on technology and operational standardization that competitors cannot easily replicate. The enterprise rollout of Epic EMR and Oracle financial platforms, combined with Salesforce integration, creates a unified data environment across all centers. This matters because it enables the company to standardize clinical protocols, track outcomes, and identify cost variation across a growing footprint. Management estimates they are only 50% through optimizing clinical value initiatives, suggesting significant runway remains.

The January 2025 acquisition of pharmacy assets from Tabula Rasa HealthCare for $4.8 million exemplifies the scale advantage in action. By insourcing pharmaceutical distribution and packaging, InnovAge has completed the transition to in-house pharmacy services. This shift shows up in the financials as a $4.9 million increase in third-party fees and shipping costs within cost of care, but the strategic benefit is a $9 million reduction in external provider costs from higher rebates and better utilization management. The net effect is improved medication adherence, enhanced participant outcomes, and a permanent reduction in per-participant pharmacy expense.

Clinical Value Initiatives (CVIs) represent another layer of differentiation. These programs optimize hospital discharges, improve skilled nursing facility contracts, and reduce readmissions through proactive center visits and high vaccination rates (77% versus 47% national average). The result: inpatient admissions, ER visits, and short-stay nursing facility utilization have all improved, driving the 7.6% year-over-year decline in per-participant external provider costs despite a 9.9% increase in member months.

The joint venture strategy with health systems like Orlando Health and Tampa General Hospital de-risks de novo center expansion while leveraging partner brand recognition and referral networks. This approach contrasts with competitors' acquisition-heavy strategies, allowing InnovAge to maintain operational control and standardize its model from day one.

Financial Performance: Evidence of Operational Leverage

Q1 FY2026 results provide the clearest evidence that InnovAge's transformation is working. Total revenue grew 15.1% to $235.8 million, driven by a 9.9% increase in member months and a 4.7% increase in capitation rates. The Medicaid rate increase of 7.9% more than offset the 3.7% Medicare increase, reflecting the company's strategic focus on dual-eligible participants.

The margin story is more compelling. Center-level contribution margin expanded 48.8% to $51.3 million, with margin improving 500 basis points to 21.8%.

This expansion came from two sources: revenue growth and disciplined cost management. External provider costs rose just 1.5% to $108.9 million, meaning InnovAge captured 94.8% of its revenue growth as incremental margin on the provider side.

Cost of care excluding depreciation and amortization increased 19.7% to $75.7 million, but this includes $4.9 million in one-time pharmacy transition costs. Adjusted for this, underlying cost growth moderates significantly when adjusted for these one-time costs, demonstrating that the company is not sacrificing care quality for margins. The 8.9% increase in per-participant cost reflects higher salaries and benefits from merit increases and staffing investments, but these are necessary to support growth and compliance.

The bottom line shows the inflection: net income of $8.0 million versus $4.9 million in the prior year, the first positive result since 2021.

Adjusted EBITDA more than doubled to $17.6 million, with margin expanding from 3.2% to 7.5%. De novo losses improved to $3.9 million from $4.1 million, indicating that new centers in Florida are ramping toward breakeven.

Balance sheet strength supports the growth trajectory. With $109.4 million in cash and short-term investments against $60.1 million in debt, InnovAge has a net cash position of $49.3 million. The August 2025 refinancing extended debt maturities to 2028 and provides $85.4 million in undrawn revolver capacity, giving management flexibility to fund expansion without equity dilution.

Outlook and Guidance: Path to 8-9% EBITDA Margins

Management's FY2026 guidance reflects confidence in the transformation narrative. Revenue of $900-950 million implies 5-11% growth, a modest deceleration that reflects strategic decisions around Medicaid redeterminations. The company is intentionally disenrolling participants who have lost Medicaid eligibility more quickly, which pressures top-line growth but provides a "big boost on the EBITDA line" by removing unprofitable census.

Adjusted EBITDA guidance of $56-65 million implies a margin range of approximately 5.9% to 7.2% based on the revenue guidance, representing a meaningful step-up from the 4.0% achieved in FY2025. Management expects profitability to build through the year, with a higher run rate exiting FY2026. This progression will be lumpy in the first half due to seasonal flu utilization, merit increase timing, and Medicare risk score decay.

The V28 Medicare Advantage payment model transition, effective January 2026 and phased through 2029, is expected to be a headwind but is already factored into guidance. The 90/10 split in year one means a 10% impact on Medicare rates, but InnovAge's diversified payer mix and Medicaid rate strength should offset this.

Long-term, management remains committed to 8-9% EBITDA margins, driven by three factors: continued medical cost management through CVIs, operational value initiatives reducing agency staffing reliance, and pharmacy insourcing benefits. The company is about 50% through optimizing clinical processes, suggesting substantial efficiency gains remain.

Risks and Asymmetries: What Could Break the Thesis

The One Big Beautiful Bill Act (OBBBA), adopted in July 2025, poses the most significant policy risk. The legislation mandates substantial federal Medicaid spending reductions, new work requirements for beneficiaries aged 19-64, and cost-sharing measures. While PACE participants are exempt from work requirements, state budget pressure could lead to rate cuts or enrollment freezes. Management acknowledges this indirect risk, noting that while PACE is not a direct target, FMAP reductions and provider tax changes could pressure state budgets.

The V28 payment model transition represents a known headwind, but execution risk remains. If CMS accelerates the phase-in timeline or modifies risk adjustment methodologies, InnovAge could face larger-than-expected Medicare revenue pressure. The company's 2.43 average risk adjustment factor provides some cushion, but any reduction in RAF scores would directly impact capitation.

Regulatory overhang persists despite compliance improvements. The DOJ and Colorado Attorney General investigations remain open, with potential losses unquantifiable. While management has cooperated and implemented comprehensive remediation, any adverse finding could trigger fines, enrollment suspensions, or reputational damage that reverses the progress made.

Labor market pressures threaten both cost structure and capacity. The healthcare sector faces acute shortages in geriatrics, primary care, and direct support roles. InnovAge's wage and benefit inflation is running ahead of rate increases, compressing margins if not offset by productivity gains. The company's ability to reduce agency staffing through operational value initiatives will be critical to maintaining cost discipline.

De novo center execution remains a swing factor. Florida joint ventures with Orlando Health and Tampa General represent growth bets that require $13.4-15.4 million in losses during FY2026 before achieving profitability. If ramp timelines extend or enrollment falls short, these losses could persist longer than expected, delaying margin expansion.

Valuation Context: Turnaround Discount to Improving Fundamentals

At $5.15 per share, InnovAge trades at an enterprise value of $687.4 million, representing 0.78x trailing revenue of $853.7 million. This multiple sits below UnitedHealth (0.80x) and BrightSpring (0.72x), but above Humana (0.17x) and Elevance (0.37x). The discount to large-cap peers reflects InnovAge's smaller scale and recent regulatory history, but the gap should narrow as margins improve.

The EV/EBITDA multiple of 26.0x appears elevated versus peers: UNH at 11.9x, HUM at 5.6x, ELV at 8.1x, and BTSG at 13.7x. However, this reflects InnovAge's early-stage margin recovery. If management achieves the 8-9% EBITDA target on $950 million revenue, forward EBITDA would be $76-86 million, implying a more reasonable 8-9x multiple at current valuation.

Balance sheet metrics support a constructive view. The debt-to-equity ratio of 0.36x is conservative, and the current ratio of 1.17x provides adequate liquidity.

With no dividend and a completed share repurchase program, management is retaining all capital for growth, appropriate for a company in expansion mode.

The absence of a meaningful P/E ratio on a trailing twelve-month basis reflects the recent turn to profitability. Using Q1 annualized net income of $32 million suggests a P/E of approximately 20x, in line with healthcare services peers. As quarterly profits build through FY2026, this metric will become more relevant for valuation.

Conclusion: Execution at Scale Will Determine Premium Valuation

InnovAge has emerged from regulatory crisis into a phase of measurable margin expansion and operational leverage. The 500 basis point improvement in center-level contribution margin, first positive net income since IPO, and clear path to 8-9% EBITDA margins demonstrate that the PACE model's economics work at scale. The company's position as the largest provider creates network effects in data, purchasing power, and best-practice sharing that fragmented competitors cannot match.

The investment case hinges on two variables: Medicaid policy stability and execution of the de novo center ramp. If OBBBA implementation proves less draconian than feared and Florida centers achieve breakeven by late FY2026, InnovAge will have proven its ability to scale profitably. The stock's discount to peers reflects skepticism that is dissipating with each quarter of margin improvement.

For investors, the asymmetry is favorable: downside is limited by a net cash position and essential healthcare services demand, while upside depends on achieving management's margin targets. The transformation from compliance-focused turnaround to growth-oriented platform company is underway, and the next 12 months will determine whether InnovAge commands a premium valuation commensurate with its market leadership.