Oncology Institute (TOI) Q3 2025: Pharmacy Revenue Jumps 57% as Capitation Model Scales

2025-11-13 | By EarningsIQ Research

TOI’s third quarter showcased the accelerating impact of its delegated capitation model and pharmacy scale, with pharmacy revenue surging and operational leverage materializing in EBITDA improvement. The company’s AI-driven cost controls and payer partnerships are reshaping its margin profile, while a new Florida pharmacy and expanded MSO network signal a deepening moat. Management’s guidance raise and first month of adjusted EBITDA profitability mark a strategic inflection, but operational risks and payer dynamics remain critical watchpoints heading into 2026.

Summary

  • Pharmacy Scale Redefines Margin Structure: Record pharmacy growth and script attachment are driving improved profitability and operational leverage.
  • Delegated Capitation Expands TAM: Florida partnership and new contracts double MA lives under management, broadening TOI’s value-based care reach.
  • AI-Driven Efficiencies Take Hold: Early wins in authorization automation point to material OPEX savings and a scalable care delivery model.

Performance Analysis

The Oncology Institute’s Q3 results highlight robust top-line growth across all major business lines, underpinned by a 57% surge in pharmacy revenue and solid expansion in both fee-for-service and capitation segments. The pharmacy business, now 56% of total revenue, is benefiting from higher prescription volumes and improved script attachment, a key operational lever that reduces revenue leakage and increases recurring margin contribution. Patient services, encompassing capitation and fee-for-service, delivered 21% growth, with capitation revenue up 39% year-over-year, evidencing the traction of TOI’s risk-based contracting model.

Gross margin normalized to 15.2% after a one-time $1.8 million reserve for potential future bad debt in fee-for-service, reflecting a prudent shift in revenue recognition as the business scales. SG&A fell by over 8 percentage points as a share of revenue, signaling operating leverage from technology investments and disciplined cost control. Adjusted EBITDA loss narrowed sharply, and the company notched its first month of adjusted EBITDA profitability in September, a milestone that supports management’s confidence in achieving break-even for Q4 and positive free cash flow in 2026.

  • Pharmacy Growth Outpaces Expectations: Dispensing revenue rose 57%, now the majority of TOI’s top line, as script attachment and network integration improved.
  • Capitation Model Drives Recurring Revenue: Delegated and narrow network contracts combined for over $50 million in annualized revenue, with delegated contracts expanding rapidly in Florida.
  • Margin Inflection Emerges: Operating leverage from AI enablement and cost discipline resulted in the first adjusted EBITDA positive month, with SG&A as a percentage of revenue dropping meaningfully year-over-year.

TOI’s results reflect a business model in transition, with pharmacy and capitation scale creating a more durable, margin-accretive revenue base. However, gross margin remains sensitive to contract mix and the ramp of new delegated lives, while the company’s ability to sustain pharmacy growth rates and manage payer dynamics will be tested as it scales into new markets.

Executive Commentary

"During the third quarter, we were able to build on momentum from the first half of this year, delivering strong results across all areas of the business, including proving out MLR performance on our expanding delegated capitation model in Florida, in addition to other significant pipeline wins, continuing to set records in our pharmacy business, and hitting a big milestone as we achieved adjusted EBITDA profitability for our first month as a public company in September."

Dan Vernick, Chief Executive Officer

"SG&A, excluding depreciation and amortization, was $25.3 million, or 18.5% of revenue, compared to 26.7% of revenue, a reduction of approximately 820 basis points versus a year ago. The decrease reflects continued cost discipline, operating leverage inherent in our model, and technology efficiencies realized across our administrative and support functions."

Rob Carter, Chief Financial Officer

Strategic Positioning

1. Delegated Capitation Model Expansion

TOI’s delegated capitation, a model where the company manages the entire oncology benefit for health plans, is emerging as the growth engine. The Florida partnership with Elevance Health more than doubled Medicare Advantage (MA) lives under management in less than a year. This model allows for greater scale, faster network expansion (via MSO, or management services organization, partners), and access to a larger total addressable market (TAM), albeit with initially lower margins as new contracts ramp.

2. Pharmacy Business as Core Profit Driver

The pharmacy segment, which includes both Part B and specialty Part D drug dispensing, now accounts for the majority of company revenue. TOI’s strategy of increasing script attachment—ensuring more prescriptions are filled in-network—has sharply reduced leakage and lifted gross profit dollars. The opening of a dedicated Florida pharmacy further supports this vertical integration, enabling better cost control and improved patient experience.

3. AI Enablement and Cost Structure Transformation

TOI is deploying agentic AI models in revenue cycle management and prior authorizations, slashing manual submission times from 18 minutes to five seconds and projecting over $2 million in annual OPEX savings. This technology unlocks labor efficiencies and positions TOI for scalable growth, freeing staff for higher-value patient care and compressing SG&A as a percentage of revenue.

4. Multi-Payer, Multi-State Diversification

By expanding with both employed and affiliated provider networks, TOI is reducing payer and geographic concentration risk. New contracts in Florida and continued pipeline wins point to a diversified growth trajectory, while value-based care partnerships with major payers like Elevance provide recurring revenue visibility.

Key Considerations

TOI’s Q3 results reflect a disciplined pivot toward scalable, value-based care, but the sustainability of margin expansion and pharmacy growth will depend on continued payer alignment and operational execution. Investors should weigh:

  • Contract Mix and MLR Maturation: New delegated contracts typically start at lower medical loss ratios (MLR, the share of premium spent on care) but are expected to mature to target margins as patient onboarding and care pathway adherence improve.
  • Pharmacy Attachment and Leakage Reduction: Continued gains in script attachment are critical for sustaining pharmacy revenue growth and maximizing margin capture.
  • AI-Driven Efficiency Realization: The full benefit of AI automation in administrative functions will be realized as these initiatives scale company-wide into 2026.
  • Balance Sheet and Cash Flow Trajectory: Cash burn improved but remains negative; positive free cash flow is expected mid-2026, with recent equity raises providing interim flexibility.

Risks

TOI faces key risks in payer reimbursement trends, evolving regulatory policy (including CMS changes to prior authorizations and drug reimbursement), and the operational complexity of scaling delegated capitation across diverse markets. Pharmacy growth may normalize as script attachment approaches saturation, and new market entry brings execution and integration risk. Cybersecurity incidents, as experienced this quarter with a key billing vendor, can disrupt collections and cash flow timing, though management reports no material patient impact.

Forward Outlook

For Q4 2025, TOI guided to:

  • Adjusted EBITDA between break-even and positive $2 million
  • Continued revenue growth from new capitation contracts and pharmacy scale

For full-year 2025, management raised guidance:

  • Revenue of $495 to $505 million (up from prior $460 to $480 million)
  • Adjusted EBITDA loss improved to negative $13 to negative $11 million

Management emphasized ongoing margin improvement, full-year adjusted EBITDA profitability in 2026, and free cash flow positivity by mid-2026. Key drivers include delegated contract ramp, pharmacy expansion, and AI-enabled cost control.

  • Pipeline of new contracts and payer partnerships remains robust
  • Capitation revenue expected to accelerate as new lives are onboarded

Takeaways

TOI’s Q3 marked a strategic inflection, with pharmacy growth and delegated capitation scale driving operational leverage and setting the stage for sustainable profitability.

  • Margin Expansion Now in Sight: First month of adjusted EBITDA profitability and SG&A leverage signal that the business model is approaching self-sustaining scale.
  • Value-Based Care Model Proves Out: Stable MLRs and payer expansion in Florida validate the delegated capitation strategy, but continued execution on onboarding and care pathway adherence will be critical.
  • AI and Integration as Future Growth Catalysts: Automation in administrative workflows is freeing resources and compressing costs, with further upside as these initiatives expand in 2026.

Conclusion

TOI’s Q3 results underscore a business reaching operational maturity, with pharmacy and delegated capitation scale creating a more predictable, margin-accretive revenue base. The company’s ability to sustain pharmacy growth, manage payer complexity, and execute on AI-driven efficiency will determine its long-term trajectory as a differentiated oncology value-based care platform.

Industry Read-Through

TOI’s results signal a broader shift in oncology and specialty care toward delegated risk models and pharmacy integration, with value-based contracting and technology-driven cost control emerging as critical differentiators. The rapid adoption of agentic AI in administrative functions points to a future where labor-intensive processes are automated, unlocking operational leverage for providers. For payers, TOI’s stable MLRs and network integration may serve as a template for managing high-cost populations. Other specialty care platforms and MSOs should watch TOI’s pharmacy attachment and delegated capitation ramp as leading indicators of where the industry is heading.

TOI Healthcare Oncology Value-based care Pharmacy Capitation AI Delegated risk