Alignment Healthcare Inc. Q1 2023 Earnings Call

May 4, 2023

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Yeah.

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Good day and thank you for standing by welcome to the alignment healthcare first quarter 2023 earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your tech.

You will then hear an automated message advising you that your hand, just raised to withdraw your question. Please press star. One again. Please be advised today's conference is being recorded I would now like to hand, the conference over to your speaker today CEO John <unk>. Please go ahead.

Yeah.

Hello, and thank you for joining us on our first quarter earnings conference call.

We are pleased to announce a strong start to the year delivering consistent operating performance and beating all of our key performance indicators.

For the first quarter 2023, our total revenue of $439 2 million represented 27% growth year over year.

We ended the quarter with health plan membership of 109700 members growing 16, 5% year over year. Adjusted gross profit was $45 4 million producing an MBR of 89, 7%.

Meanwhile, our adjusted EBITDA was negative $5 2 million.

Our MBR and profitability outperformance resulted from significant efforts by our care anywhere team and continued improvements to April .

Our ongoing enhancements to allow us to improve both the identification and engagement of our care anywhere eligible members and it's been core to keeping our Q1 utilization stable.

We continue to believe that Eva clinical innovation at our political culture serve as the foundation of what differentiates alignment.

More than ever we believe we are executing Medicare advantage done right.

CMS has taken actions that reinforce it standards for Medicare advantage that adhere to its vision of maximizing value to the seniors through high quality outcomes at an affordable cost.

We believe the following changes will create a competitive tailwind for alignment over the next several years beginning in 2024.

First star ratings are once again differentiating between high and low performance for the 2023 rating year, CMS and the Covid disaster provisions, which artificially inflated star scores.

We maintained our high stars in the 2023 rating cycle. Despite these changes with over 90% of our members in four star or above plans.

In addition, CMS announced that the weighting of caps measures will be reduced by half for 2026 star ratings shifting the weightings back toward heated scores, which measure clinical outcomes.

This has been a strength of ours.

Second third party marketing standards are being modified to increase consumer protections cms's liberating aggressive marketing practices by third party marketing organizations that have become increasingly pervasive over the last few years. We are supportive of cms's efforts to protect seniors and believe this will be additive.

So our retention goals.

And last risk model changes are being implemented in 2024.

As many of you well know CMS recently announced the final rate notice for 2024 phasing in the V 28 risk model changes over three years.

Since the company's inception, we predicated our operating philosophy on achieving high quality at low cost, we have always approached risk adjustment as part of our clinical care and quality initiatives.

As a reminder, our current RAF score today of $1 one three.

<unk>, 30% duly eligible members.

This approach has served us well in places in a solid position as we assess the moving parts within the new risk model.

After conducting a full review of the final notice we believe the net change in <unk> revenue will be neutral to positive 1% in 2024 ton.

Thomas will share more details during his financial discussion.

Most importantly, as we assess the competitive dynamics in each of our markets. We believe we will be advantaged under the new risk models relative to many of our local competitors, particularly in California.

As a reminder, 85% of our new members. So historically come from plants switchers as opposed to agents were conversions from traditional Medicare.

We believe this is a reflection of consumers finding greater value of our products versus our competitors.

This is how we've grown at more than four times, the California market growth rate over the past five years.

As a result, we believe our RAF scores relative to competitors, our star rating tailwind and our growth predominantly coming from plant switchers.

All help position us for strong growth in 2024 and beyond.

Looking toward the 2020 for AEP, we are focused on driving deeper share within our existing states to develop a larger market presence and significant local scale of economies.

As part of this strategy, we will double down on brokers, who have delivered for us while also adding more captive and employed agents in markets where needed.

In addition to this we are also taking a focused approach to member retention.

While we have noted in the past that we have better retention metrics than the industry. We continue to strive towards a five star retention rates under Cms's definition, which has always been our north star.

A few of the actions we've already taken today include employing a more rigorous supplemental benefit vendor management program enhancing customer service by leveraging our newly deployed CRM application with the labor and in sourcing member call Center functions.

The early results we've seen in these activities give us confidence that we strive towards five stars.

It's an exciting time at our company as we move forward into the next phase of our operating maturity having.

Having achieved impressive repeated clinical results both within and outside of California. We are now investing in operating scale initiatives, which will support the growth in each of our markets.

In conclusion, our clinical objectives and retention goals are showing solid progress our operating scale initiatives are taking root and we are excited about how many of the broader Medicare advantage changes position us competitively over the next several years.

Now I'll turn the call over to Thomas to cover the financial results for the quarter Thomas.

Thanks, Sean turning to the first quarter results. We are pleased to deliver a strong start to the year in which we exceeded the high end of our outlook ranges across each of our four kpis for.

For the quarter ending March 2023, our health plan membership of 109700 members increased 16, 5% compared to a year ago, our first quarter revenue of $439 2 billion represented 27% growth year over year.

<unk> outperformance was primarily a function of both higher health plan membership as well as growth of our <unk> revenue.

Our adjusted gross profit in the quarter was $45 4 million, representing an MBR of 89, 7% with our clinical operations continuing to produce results across markets.

Utilization rate generally in line with expectations at approximately 160 inpatient admissions per thousand inclusive of January seasonality, which tends to be a higher utilization months due to the flu season.

As a reminder of the year over year comparison of MBR includes a full return of sequestration as well as the impact of faster growth in our ECR reach population.

SG&A in the quarter was $70 4 million, excluding equity based compensation expense or SG&A was $51 million, an increase of three 2% year over year.

Excluding equity based compensation expense as a percentage of revenue decreased by approximately 270 basis points year over year, which represents solid progress towards our goal of improving our operating leverage by 150 basis points for full year 2023 relative to 2022 as we.

Continue to scale the business note that our SG&A in the quarter it was slightly lower than expectations in part due to timing and we anticipate some of that to reverse over the next nine months of the year.

Lastly, our adjusted EBITDA was negative $5 2 million well ahead of our initial expectations.

Moving to the balance sheet, we exited the quarter in a strong capital position with $488 million in cash and investments our cash balance at the end of the quarter included an early second quarter payment from CMS of approximately $141 million. We recorded the early payment as deferred premium revenue in Q1, and we will recognize it as revenue in Q2.

Importantly, this does not have any impact on our income statement metrics cash and investments excluding the early payment for $347 million.

Turning to our guidance for the second quarter, we expect health plan membership to be between 111201 hundred 11400 members.

You have to be in the range of $433 million and $438 million adjusted.

Adjusted gross profit to be between $47 million and $50 million.

And adjusted EBITDA to be in the range of a loss of $13 million to a loss of $10 million.

For the full year 2023, we expect health plan membership to be between a 113000 and 115000 members.

Revenue to be in the range of $1 710, 1 billion and $1 $73 5 billion.

Adjusted gross profit to be between $205 million and $217 million.

And adjusted EBITDA to be in the range of a loss of $34 million to a loss of $20 million yes.

In summary, we are largely reiterating our full year 2023 guidance, while raising our revenue guidance given the outperformance in the first quarter and our visibility towards our full year revenue.

Given that it's still early we remain mindful of potential variations in utilization as we progress throughout the year that said our initial look at April utilization continued to run in line with our seasonal expectations and we are pleased with how our first quarter results position us to achieve our full year expectations. As we've said before it's a strategic imperative of ours to.

We need to balance our short term profitability objectives with our longer term growth objectives, and we look forward to updating you on our results as we progress through the year.

Before we close I'd like to spend a moment on the final dose as John noted earlier, we believe the net change in <unk> revenue will be neutral to positive 1% in 2020 for this.

This consists of all known moving pieces to our current population, including benchmark changes fee for service normalization stars that are May 28 risk model impact and our ongoing operational initiatives.

As it relates specifically to the V 28 risk model and our operating initiative components within that range, we expect the PM TM revenue impact to be negative 0.8 positive 0.2%.

This reflects the phased in risk model impact of approximately negative one 3% and offsetting operating initiatives of approximately positive <unk>, 5% to positive one 5% annually over the next three years.

Expanding on our operational initiatives, we have identified opportunities to close known risks CT gas under the current risk model, given our historically prudent risk scoring position.

Additionally, we are deploying training and engagement programs with our employed clinicians and provider network to ensure a smooth transition into the new risk model. We expect these initiatives to amount to a total of one 5% to four 5% of revenue upside over the next three years.

Taken together, we expect the impact of the risk model changes will be mostly or entirely offset by the operating initiatives. Both in 2024 and over the course of the full phasing.

Altogether, we continue to believe the impact of the model changes are highly manageable and in fact are excited by how this positions us competitively both in 2024 and over the course of the phased in impact with that.

Let's open the call to questions operator.

Thank you if you have a question at this time. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again one moment please.

Please first question.

Our first question comes from the line of Ryan Daniels with William Blair. Your line is open. Please go ahead.

Hey, guys. Thank you for taking the questions and congrats on the strong start to the year Thomas perhaps one for you.

Talk a little bit about SG&A declining nicely year over year that probably drove a lot of the big EBITDA beat relative to guidance, but it looks like the Q2 EBITDA is below expectations. So can you provide a little bit more color on kind of what timing issues led to that big upside in the period and then number two how we.

Should expect some of those costs to come back into the income statement over the next few quarters. So we can calibrate our EBITDA expectations.

Yeah, Hey, Ryan Thanks for the question I'll speak to both the SG&A question and then maybe a couple of comments more broadly about the earnings cadence over the course of 2023 that we anticipate so in terms of your question on SG&A.

You are right. We mentioned that we had a few million dollars of favorability in the first quarter that we would attribute to sort of just timing or temporary favorability based on when certain expenses hit the P&L and that probably isn't the neighborhood of $3 million to $4 million that we would anticipate to reverse over the course of second third and fourth.

Quarter and a lot of that just has to do with ramping up of new hires to support the membership growth ongoing sales and marketing expenditures and things of that nature.

In general, though we feel pretty good about our ability to manage to our overall SG&A target that we had outlined in our initial guidance about 60 days ago.

And then in terms of your kind of broader comment about the earnings cadence for the year relative to I think consensus expectations, which is in part modeled on prior year performance about 'twenty, one and 2022 I think earnings seasonality. We would note is that obviously 'twenty, one and 'twenty two had a bit more I'd say a typical variability.

Just due to the impact of Covid on things like our risk adjustment scores are sweeps and our IV in our quarter to quarter and so I think a little bit of what you are alluding to is.

The kind of just lack of a true comparable in the prior year as compared to the current year.

And I think the second thing we would note is that from an MLR standpoint the.

The second quarter of last year, I think was an outperformer primarily due to the suites that we see typically in the second quarter of each year. As a reminder, we don't typically accrue for those on a very aggressive basis in particular for our new members and so as a result, we tend to approach our guidance slightly more conservatively, which may lead.

Upside for the second quarter relative to our current guidance we.

We don't rely on it and it's not something we bank on as we think about all the moving pieces with respect to our full year outlook, but I think thats one element of seasonality that you might CNR historically that you don't see in our guidance today.

Okay very helpful color and then John maybe one for you I noticed you hired two pretty senior new marketing executives one in the kind of MCA, Texas market and another in Nevada, and the core Northern California can you speak to maybe some of the goals and objectives of bring in that talent and how that ties to.

Some of your commentary about investing in sales and marketing to drive membership growth going forward.

Yeah, Hey, Ryan absolutely.

Well I think we're speaking specifically about Tim Morehead and Lisa Ferrari and they are senior people. They know the respective markets of which they are they are leading we're excited to have them they've been integrated wonderfully.

They share the same culture and vision that we have and I'm very excited about that.

When I say, we're going to be investing in network resources and when I say, we're going to be investing in.

Distribution member acquisition resources I'm serious about it.

We're deepening the bench, we're adding talent.

And we're doing that with an eye towards scaling.

And you can you can see that I think.

Throughout the year as we head into the 2020 for AEP.

And I'm just very excited about.

I think I think it starts with the team and the people that we have the people, we're adding how we get them on boarded.

And.

Kind of how they.

Fit into the whole culture of what we're trying to do so I'm very excited about that.

Okay very helpful color and then a quick housekeeping for Thomas I know last quarter in your guidance I'm, assuming this hasnt changed but want to confirm you talked about the MBR impact from a few nuances I think.

Reach was like 60 basis points hit sequestration 15, and new members, maybe 50 60 bps is that is it.

Still kind of the.

Algorithm as we think about the year over year bridge and the MBR.

Yeah, exactly I think you said it well when we think about the 23 overall outlook as compared to 2022 I think those three elements that you just described which were the the ACO reached incremental growth impact on consolidated NPR sequestration year over year impact and some of the lower new member RAF score as we saw in our January .

Payment file I think those three things are still very much the way, we think about that year over year bridge.

I think that being said the key to all of it is that our shared risk MLR, which is really the core economic driver of the business remains quite strong and in fact, we're really pleased that we started the year once again with our overall inpatient utilization running right around 160 admissions per thousand they're not only the first quarter, but also through April .

So kind of all of that together gives us a lot of confidence to continue to invest in growth.

Continue to drive economies of scale on the SG&A side, along with that growth.

Got it very helpful. Thanks, again, congrats guys.

Okay.

Thank you and one moment for our next question.

And our next question is going to come from the line of Michael <unk> with Morgan Stanley . Your line is open. Please go ahead.

Hey, Thank you just a quick one on mid year streak.

Last year second quarter did you accrue anything for it I think it drove almost 200 bps better MLR.

If I remember correctly, just trying to get a sense of magnitude and how much we could potentially benefit next quarter.

Yes, So I think Directionally you are correct that was about a 200 basis point pick up in the second quarter of 2022 relative to.

What we had previously been accruing and guiding to up until that point.

I would say last year, we probably over the course of the full year saw slightly higher.

Kind of outperformance that we have seen in other historical periods again, just due to the impact of Covid and the timing of when encountered are being submitted by some of the downstream providers.

But that being said I think generally speaking it tends to be a.

A positive item. It is certainly something that we are keen to see how we.

We see those come through over the next 60 days as a reminder, these relate specifically to the new members in particular, and that's where we book to what we're being paid just given that the payment for this year is ultimately dependent upon the encounters for that population last year, we're not obviously, we're not with alignment.

Typically where we kind of start more conservative and then reevaluate over the course of the year.

Got it that makes sense. Thank you and maybe just switching to our looking into 'twenty tour in terms of just modulating benefit I understand for MAA plan. There are TBC rules that don't allow plans to reduce benefits in any given year by more than 20%, but my understanding this doesn't apply to dismiss and.

While 30 around 30% of your members electrical I think only about 4000 of Denmark and actual D. SNP plans and if I'm not mistaken I think it caused with me because California, Hasnt accepted new D. SNP licenses in recent years, but with that context, given youre, making some decent plan offerings and heading into the 'twenty four rate environment, where.

Plans are probably going to toggle down benefit how do you view your ability to modulate benefit.

Margins next year.

So I think in terms of how we think about benefits, we probably won't go into too much specificity just from a competitive standpoint, but.

Just to your kind of broader statement I think the reason folks are talking about benefit modulation into 2024 is a reflection of what John described in his prepared remarks, both in terms of some of the star ratings headwinds that some of our competitor space.

The impact of risk adjustment would be 28 days and I think some of our competitors disproportionately faced relative to us.

And just given the fact that while the benchmarks are going up in 2024, but not quite going up at the same rate that they have over the past several years and so we can take all those factors into account I think thats why youre hearing folks in the industry talk a little bit more about potential benefit modulation and clearly we're going to be very mindful and continue to be disciplined about growth versus profitability at the same way.

<unk> seen from us over the last two years since IPO, but.

I think we're also going to make sure that we're continuing to invest in growth and because we don't see star rating headwind and we think we are very well positioned to navigate the b 28, Beijing I think that presents an opportunity to.

We continue to invest in growth accordingly.

Michael its John just to.

To remind everybody I mean, just.

And we've talked about this before but we did a really good job.

Last year on the D SNP lookalike.

Crosswalk it to other products I mean, I don't think we lost anybody actually through that process and so we're very proud of that.

And I think that with respect to the 24 benefits to Thomas' point, we're deep into the product design and bid process right now.

We will share more on the Q2 call, but I feel very.

Very very comfortable with that whole process.

Great. Thank you guys.

Thank you and one moment for our next question.

Our next question comes from the line of Whit Mayo with SBB. Your line is open. Please go ahead.

Hey, Thanks, Good afternoon, Thomas just back to utilization in the quarter can you maybe just comment visibility on on outpatient and since you provided the.

Inpatient days per thousand of $1 60.

In the quarter, what did that compare to last year.

Yeah happy to take that question. So in terms of the performance this quarter as compared to the first quarter of last year.

Last year was very similar I want to say it was in the high 100 <unk>.

So I would sort of view the whenever that is two years or three difference as kind of just normal course variability given population changes year over year, So very very much in line with our seasonal expectations as well as our performance in the prior year.

And then in terms of your question about outpatient trends. So if I kind of go back to when Covid first had a more significant impact on utilization in 2020, I think we first start.

Experience and increase our return of some of the outpatient utilization in 'twenty, one and then we more holistically solve that I think more full <unk> return in 2022, and so as we stand here today, and we kind of look back on 2022 claims experience now with the benefit of fairly significant run out I think our overall outpatient utilization today looks similar to that of pre.

Covid and I think that would be kind of our expectation on a go forward basis.

Okay.

Looking at the membership that you tracked a little bit ahead of your first quarter guidance I presume you just picked up maybe a few more lives and OUP just not sure if there are anymore.

Details to share and then maybe more specifically.

Talk about some of the newer products and plans that you saw resonate either better or worse relative to the expectations. You guys have a lot of very tailored specific plans relative to some of the other companies we cover.

Yes, hey, with its John Yes.

I think.

We're getting some more.

Mix tailwind with respect to what we just talked about in terms of the D. SNP.

And kind of the.

Just for everybody's benefit they kind of eliminated this decent lookalike product.

So we had to crosswalk a lot of these members over.

Into other products last year.

And so.

That created a little bit of a.

MBR headwind.

On that product, but as we are actually seeing resulting from OUP, we're getting a bit of a tailwind because we're we're we're.

Getting growth from pure D. SNP members into that product design, and so thats something that we are.

We're pretty optimistic about.

Okay. Thanks.

Thank you and one moment our next question.

And our next question comes from the line of Kevin Fischbeck with Bank of America. Your line is open. Please go ahead.

Hey, guys. Thanks for the question. This is Adam <unk> on for Kevin.

I think I'd want to focus my questions around.

Model revision changes and what you think.

What levers do you think you have at your disposal to offset it. So first if you could go into more detail about what specific.

Mitigation steps youre, taking to get to that 115% to four 5% rate lift over the next couple of years is that all just re coding and why is it such a wide range.

Yes. So I think this is Thomas speaking thanks Adam.

I think in terms of the range itself.

The range, partially reflects the full opportunity, but also impacts just reflects the timing of when we anticipate to realize these results and I think we feel pretty good that the upper bound of the opportunities that four 5% I think we're maybe being a little conservative with the pace of us achieving that opportunity, hence the range youre seeing for us in terms.

The 2024 bookings in.

Terms of the actual operational initiatives a lot of it is kind of I'd say basic blocking and tackling and ensuring things like we haven't high of a success rate are engaged right as possible on annual wellness visits ensuring that the chronic recapture is it as high as possible and making sure that as many of our members as being seen by both our clinical resources.

As well as our network of Tcp's again as is possible I think over the last several years just given the pace of overall growth.

Have done good on each of those different aspects of the overall wellness visit activities. However, we haven't been perfect and I think we are recognizing that and thats something opportunity. We see to ensure that there is a great offset relative to the <unk> 28 impact coming down the pipeline.

So would that would that explain why you think you would see less of an impact than others because you haven't been in.

Engaging members in.

Many wellness visits.

They would have lower ramp than they should.

I would say, maybe a little bit differently I would say our engagement has been quite good and I think over 80% of our members have had an annual wellness visits between us or our PCP, which I think is a pretty solid industry standard benchmark.

I think what we're saying is we can do a better job with the efficacy of each of those visits I think we can do a better job of increasing the overall completion rate above and beyond our historical trends and I think for a market like California.

And it's probably similar in other markets like Florida, and Texas, but in markets that are generally a bit more mature around Medicare advantage and value based care I suspect that many of our competitors.

We've been a little more focused on risk adjustment in the past and we have where so much of our emphasis for the past several years has been this notion of.

High quality low cost I E. We've been very focused on the clinical model, putting that care anywhere team at the center of the member experience and ensuring that our improved health outcomes translate to improve cost outcomes, we haven't necessarily viewed the risk adjustment model as much as revenue cycle management I think some others have which is why we think that maybe some of them.

Not have quite be.

The mitigating factors that we see in front of us.

Yes, Adam it's John Okay. We noted that there are overall consolidated Rev is like 113.

And.

But I would say any standards.

Very much in the same zone, and we continue to want to be in the safe. So.

But we've run the business off of.

Our revenue in Rab for one three and we've done that from the very beginning because we've known from the beginning of that Youre going to have some kind of.

Adjustments to reimbursement.

We've been around this business long enough. So that we still remember 2012, and what happened there with HCA.

Normalization.

So now that we have clarity I mean, these kind of changes come around.

Every five years or so over five to 10 years actually.

And so we feel very good about that.

And kind of the predictability of that.

We feel very good about just to pivot a little bit on where the stars is going.

So we kind of know what the rules are and I think that to Thomas' point, we've got some opportunity.

Two.

To grow in those areas.

Oh, Great and then my last question around this is.

You're in California, you have a relatively high capitation rate in terms of like how many percentage of your members that are picking back up to the doctors in theory, those doctors are seeing a bigger headwind than what youre seeing.

And so if you cut benefits or adjust.

Cost structure to offset some of the rate headwind.

In theory, they're getting a bigger rate headwinds or are they going to turn around and ask you for a higher competition rate or are they going to just see.

Net margin headwinds and sort of have to absorb it.

Yes.

Youre going to have to support them in any way yes.

Yes.

That's something we've been saying from the beginning from the IPO, meaning.

We have about a third of our business that's globally captives and about two thirds that is not global to compensate it.

And what we would call a shared risk.

And it's it's it's a contracting environment, where we.

Make sure that we are aligned with the providers and that we are managing those institutional risk pools, those hospital risk pools, with Eva and with share anywhere et cetera.

And so it in fact is going to help us again relatively speaking because to your point.

The preponderance of the plans that are globally capping.

I think and we've seen this this is why we haven't built the company on just having.

80% plus global cap.

This way you also see I think the industry going toward more more call. It.

Vertical at or virtually vertical integration.

And I think the folks that are going to be depending on global cap kinds of arrangements are in fact going to feel that squeezed that you just mentioned and frankly, we've seen that occur.

As of June 30 years, Cynthia in California.

It's literally I think the reason why we built the company the way we did why we built Ava while we build January is we think we can beat that most efficient delivery model and do so.

Supporting the individual doctors not the intermediary groups per se.

We also do think that allow the integrators ipas that we work with are actually doing a better job delivering stars delivering GAAP closures on sheet is et cetera.

But the beauty of it is.

As our chair anywhere team is there to make sure that we have the control to ensure that we get those outcomes.

And.

I think I think to your exact point theres going to be more and more pressure.

On on those that are just relying fully on global gap.

Awesome. Thank you so much you got it.

Thank you and one moment for our next question.

Okay.

Our next question comes from the line of Nathan <unk> with Raymond James Your line is open. Please go ahead.

Hey, this is <unk> stepping in for John Ransom, just on your expansion efforts in new markets. I'm wondering if you can comment on what youre seeing in terms of membership growth there, especially maybe in Florida, and Texas and then anything incrementally you can provide on learnings as you continue to expand in those states.

Yeah, Hey, Hey, how are you doing it's John Yeah, I think we are.

So I'm very very comfortable we're going to be able to shoot or exceed our growth rates without relying heavily on Florida, and Texas I do think we're making great progress on network on distribution.

One <unk>.

Stars, which is something we've mentioned in the past where the focus on working with the provider delivery partners that we have just taken a little bit of a playbook out of North Carolina.

Motto, which is get to the five stars move toward five stars have really good products have good operational support.

The problem, we had last year as you recall as we had we have defined the right distribution partners and.

<unk> got solutions for that so I'm feeling really good about that.

Im optimistic about both markets.

But on the other hand, we're not.

Going to just be entirely dependent on those two four.

For the material growth that I expect heading into 2024.

Yes, that's helpful and then just.

Kind of following up on Starz anything you can provide on.

Membership satisfaction or maybe some other internal data that you might have access to and how that will translate.

2024 star ratings.

Yes, NPS is still very good.

It's still in the $60. So I think it's 62, we've kind of bounced around between 60 and 68 historically for the whole membership.

R R.

Our care anywhere membership has kind of been around between 75% to 85 and I think the last I saw was 78. So I think those triggers are in fact very good.

I think with respect to.

Caps and the weighting that CMS put on caps.

Think you guys know that they're changing the weightings back down.

Four rating your 2026 I think it is.

And theyre going to re emphasize heat us.

The other thing I would note is with respect to cap So just member satisfaction.

We're spending a lot of time on and we alluded to this in the remarks, but we're spending a lot of time on.

I'd say supplemental vendor management, making sure that the contracted vendors that we work with but I won't name any of them, but but are delivering on the promise.

And their service levels to us and to our members.

And so I'm very confident that that's going to be dealt with this year heading into 2024.

But that was a source of abrasion for us for much of the pure stars perspective.

Great and Thats all I had thanks, so much you got it.

Thank you and one moment for our next question.

Okay.

Our next question comes from the line Gary Taylor with Cowen. Please go ahead.

Hey, Good evening guys two quick numbers questions and then a theoretical question on the numbers.

I understand.

The seasonality around the EBITDA the MLR from now a year.

Year ago in the suite.

But.

The midpoint of the <unk> revenue guide is down a little bit.

<unk> I was wondering if that does that imply there is anything else retro in the <unk> or that's just your typical conservatism Thomas or anything on that piece.

Okay.

Hey, Gary Yes.

Terms of the second quarter revenue I think the sort of two offsetting factors that drive the guidance are obviously, we guided today continued.

Paid membership growth in the second quarter as compared to the first quarter.

And then on the other hand, what we typically see from a revenue <unk> standpoint is that the revenue <unk> goes down.

Sequentially as we both grow new members, which come on at lower revenue the MTS and we see.

Involuntary just enrollment of our older typically sicker and higher revenue.

So just a mix of those two things over the course of the year.

And then to your point, obviously, what I mentioned earlier is that we do expect to see the sweeps and CMS this quarter and that could be an area of opportunity based on our historical experience.

Yes.

And then looking at the days claims payable down sequentially in.

Year to year and from the queue.

The bulk of that year to year and sequentially, it's really coming out of the year incurred but not paid.

Bucket is there some color you can help us with.

Why those.

That dollar reserve is at floating higher with the with the medical expense.

Yes. So this has been one of our initiatives ongoing now for the last.

Six months to nine months.

In terms of how we can continue to invest in and increase the productivity of our overall claims department.

The benefit of that obviously is.

Earlier visibility to emerging claims trends and so this is something we've been actively investing in in terms of.

Just more more examiners in kind of different automation tools. Accordingly, so I think youre starting to see a little bit of the benefit of some of those efforts in the first quarter.

Which we're very pleased to see I think more broadly speaking, we're continuing to think about how we scale. The overall business and so investing in things like the claims system on a go forward basis will be I think areas of opportunity for us to continue to drive down that SG&A as a percentage of revenue over time. So that's really the primary driver.

<unk>.

The days payable question you had.

In terms of the first quarter actuals.

But was there a P&L impact from <unk>.

Due to Covid claims.

But that pace that you are seeing as well gotcha.

No no.

And in fact, we actually had some slight favorability on <unk> in the first quarter from 2022, it wasn't a significant number but a couple of few million dollars.

Last one for me.

Just give us a quick update on how youre thinking about the alzheimers drove heading into.

24.

CMS put nothing in the benchmark form you get that existing NCD requiring trial or.

Registry, but there's chatter now with.

Latest slowly drug that maybe the NCD will get reexamined et cetera, and I guess in theory.

You can just rely on CMS.

Due to the significant cost calculation and flip it to pass through it if it's going to be a material uptake of patient, but you head into your June did just.

Assuming CMS will protect you on that or do you feel like you have to protect yourself in the bid process.

Hey, Gary John here.

That's one.

Specific variable thats of many that I think youre going to impact part D, resulting from the whole IRR initiative I think I think that.

Is it going to be a pretty important component of our bid strategy.

Heading into any into 2024.

Generally speaking I think for your specific question I do think we're going to rely and we've said this in the past also that we can rely on kind of the CMS factoring that into the whole benchmarks and the whole calculus, but I will say that.

Part D specific part D drug strategies as it relates to the bids or are going to be a very important part of <unk>.

The product design heading into 2004.

Okay. Thank you.

Hey, Gary.

Yes.

Yeah, just one other thing just just to Thomas' point on Q2 suites, we are.

We don't know so we're relatively conservative, but I think as you know for the last I don't know.

Since we started the business, we've always said some.

Positive pickup.

And in the.

Q2 suite numbers.

I will say for 2022 they were.

Usually good.

Because of the whole timing issues associated with Covid, if you remember that.

So we're just being very disciplined about that.

Got you, Tim <unk> seen that in that playbook, so nothing wrong with that.

Thanks.

Thank you and one moment for our next question.

Our next.

<unk> comes from the line of Jessica Tan.

Piper Sandler your line is open. Please go ahead.

Alright. Thank you guys. So much for taking my question and congrats on the corner.

Can you just remind us what the current criteria for the care anywhere program are and just are those criteria changing in 2024 as you move to adopt.

The 28 risk adjustment model.

Yes, so I would sort of entirely separate RAF and B 28 from Kerr anywhere so those two things are.

Other words, so someone's risk score under the current model or the new model has no impact whatsoever on how we think about share anywhere criteria.

The way we've evolved this overtime as.

Basically using a variety of machine learning algorithms and more recently, some AI tools that allow us to take all the data we have on members, including pharmacy data lab data demographic data and counter data emission discharge transfer data and a variety of other sources that allow us to basically try to pinpoint who the people are.

It would be most likely to have an acute event in the next 30 days as well as those who have a much higher or greater.

Chronic set of factors and then the average population or the average senior and so all of those things kind of go into how we think about our eligibility criteria and then that gets routed automatically to our outbound call team into our provider engagement resources. So that we can try to get these members enrolled in the program.

On average I would say our carrying population in terms of ages in the high <unk>. It typically have five or six chronic conditions if not more.

And then kind of things of that nature. So.

I don't anticipate any change in how we approach our care anywhere engagement or criteria.

Other than just continuing to ensure we get everyone engaged to the extent, we can yes, we got to get closer to that 80% engagement level.

The identified Karen you were eligible members.

But.

We're going to take care of these people that need the care irrespective of <unk>, we have to do that and we're going to continue doing that.

And.

Yes.

I think Tom is exactly right.

Okay got it. Thank you and then just.

I wanted to just ask your kind of level of comfort with the 24, adjusted EBITDA breakeven target and how you think about the balance between potentially accelerating membership gains in.

In 24 versus <unk> versus the <unk>.

Persistence at that target and that's it for me. Thanks.

Got it yes. This is John I feel good about it predominantly because of the care anywhere in either investments that we continue to make the.

<unk>.

Loyal shared risk.

<unk> in the company are still very very good.

And we've got a lot of innovation on the clinical side that we're going to be being.

Putting into production.

And several of our markets, we've got a bunch of ideas that we're going to be testing out that I think are going to.

Kind of create some tailwind for us on the MBR basis.

And I think the initiatives that we've got just kind of from a core operational scale perspective to kind of do blocking and tackling on retention.

I think it's just a very good opportunity for us.

For like we said before vendor management, making sure that our vendors are going to be doing what they say they're going to do these are things that I just have a high degree of confidence that we'll roll out some more efficiency in our back office operations.

Having said all of that.

I think that if the market opportunity.

<unk> itself.

And we find ourselves from a product design perspective.

Kind of growing.

Yes, I do think that.

<unk>.

I think if we would.

<unk>.

Said differently.

Youll see a little bit of an uptick in <unk>, because we are growing a lot, resulting from a lot of new members.

I think I would make that trade.

And and.

That's not backing off any of the core MLR, that's not backing off.

Our confidence of getting to profitability, but if you've got a disproportionate share of your your membership base.

B new members combined with the fact youre going to pick up just raw scale economies because of that growth.

I think thats something we got to do.

So.

With that little provides though I still I still feel good.

Good about it.

And.

We'll keep everybody posted on how these initiatives actually get operationalized.

Great. Thank you very much.

Got it.

Thank you and one moment for our next question.

Our next question comes from the line of Catherine.

J P. Morgan Your line is open. Please go ahead.

Yes, thanks for the question.

I have a follow up for the last one.

Just curious how youre thinking about some of the opportunities in your markets next year, just given that it sounds like you guys are going to be a bit advantage relative to some others, where there could be a little bit more volatility.

Just curious if youre looking at that's changed your thinking to revisiting potential M&A within that area markets.

Okay.

Yeah that was good.

Let me, let me answer the first one.

The way we look at is this way.

I think I think it's not a secret the last three years have had.

Headwinds in a macro industry perspective, I think people have.

<unk> been aggressive on benefits, resulting from.

Technical.

Kind of loopholes on Starz I think people have been aggressive on risk adjustment I think people have been.

Yield on distribution.

And what we love is the fact that CMS is kind of just close all of that down and refocused on the way Medicare advantage was designed.

And so I think youre going to have some of our competitors to be impacted by starz, you're going to have some of our competitors impacted by risk adjustment I think everybody is going to have more of a playing field on the distribution side with the brokers, although I think it can be even more done there.

So I do feel pretty good about that.

<unk>.

I think that.

The fact that we've proven we can take share from the bigger competitors over the years and in fact, 85%.

Our growth is coming from switches also is a factor because I do think those folks have been able to maintain their stars, we'll see what happens with respect to the risk adjustments, though.

And particularly in California that is.

So I.

I feel really pretty good about that with respect to M&A.

I think the notion of.

Okay.

Just being very careful to be very careful very very thoughtful about.

Kind of what.

What kind of risks are incremental that you would incur because I think we've got a very solid well run business right now we've got to be we got to keep that in mind with the trade off of just getting scale.

I think I think getting scale is going to be.

Important in the overall mix of things.

Just to accelerate.

It accelerates our scale economies on the back office in particular number one and number two taking Ava and care anywhere just applying it over more memberships.

I think thats just.

Those two kind of.

The magic synergies I think has caused we got we got to look at stuff.

If you look at stuff seriously, but having said that we've got a good thing going and we got to make sure we don't.

Good setup.

Got it thanks John .

Thank you and one moment for our next question.

Our next question comes from the line of Nathan Rich with Goldman Sachs. Your line is open. Please go ahead.

Hey, good afternoon.

Thomas Thanks for the questions.

Maybe kind of.

Following on the last question just when we think about the 2024 <unk> in the flat to up one.

For a market like California, I guess, how would you compare where you are relative to the market averages and in those counties that you're in and.

Is it really the delta between flat and plus one the ability to offset some of the risk model changes and if so what kind of pushes you to the higher low end of those ranges just sort of what you need to do to make sure you execute on that.

Those offsets.

Yes, so in terms of the.

The ability to get to the high end of the range versus the low end to the range I think it's a matter of ensuring that we're continuing to ramp up our our staffing and resources as well as our training and our engagement in a very timely fashion. So this has been a priority of ours now really.

Really for the last 60 days and we're starting to see some solid traction and I anticipate that to continue over the course of the second quarter.

I think just the timing in other words is probably the key thing that would put us at the low end or the high end for 24, which is why I still think that the overall opportunity is pretty sizeable though over the course of a full three year phase in where.

You don't have to necessarily have it all in year one.

I think in terms of the competitive backdrop relative to our outlook.

Yes, I think I suspect at least that some of our competitors may not have the opportunity to offset some of the headwinds that the industry collectively faces.

But I think Furthermore, just based on what we know about California, and some of the historical CMS data available from CMS going back several years ago. I think we have a sense of some of the risk adjustment scores of some of our competitors.

I'd anticipate that.

There could be some headwinds for certain of those competitors.

And a more significant way or more adverse way than what we are facing.

I think it's a little bit of both but that being said this is a competitive market and as we said before.

I'm sure everyone will be working on different forms of offsets and while we feel quite good about how we're positioned we'll see how others.

We continue to navigate the environment over the next couple of quarters and next couple of years.

Okay, great and sorry to go back to the topic of utilization, but.

Hospitals have talked about increasing kind of capacity and demand is kind of driving their outlooks for the balance of the year I guess could you maybe give us your view on how you see inpatient volumes trending over the course of the year and.

If we do see a pick up.

That's kind of contemplated within the range of expectations that you have for MLR.

In your guidance.

Yes, yes so.

I do think that.

Our ability to kind of maintain our historical performance is quite strong and so as a reminder, when we talk about 160 or so admissions per thousand.

That would compare to for our markets around 250 admissions per thousand for traditional Medicare and the difference between 160 and 250, it's about 14 percentage points of MBR. So it's a pretty significant driver of our core performance over the course of the year.

In terms of the consistency factor, we have run between 155 and 165.

Each year for the last six years and then obviously for the first four months of this year as I mentioned in other words on track to continue to achieve that I think for the seventh year in a row.

The important part about that is not just the consistency, but its the consistency in light of the growth and so as a reminder, seven years ago. We were significantly smaller than we are today, we are only in seven or eight counties seven years ago, and so given the fact that we've expanded to six states 52 counties and grown the membership by a factor of probably <unk>.

<unk> over that period of time, I think we've generated a lot of.

Kind of performance and replica Billety up the care model, which is what gives us confidence that we will be able to continue to perform on that key metric of ours. The inpatient admissions per thousand in light of some of these evolving utilization patterns that youre, describing on a more national basis.

Thank you.

Thank you and this does conclude today's question and answer session, Ladies and gentlemen. This also does conclude today's conference call. Thank you for participating you may now disconnect.

Okay.

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An automated message advising you that your hand is right to withdraw your question. Please press star. One again. Please be advised today's conference is being recorded I would now like to hand, the conference over to your speaker today CEO John Kao. Please go ahead.

Yeah.

Hello, and thank you for joining us on our first quarter earnings conference call.

We are pleased to announce a strong start to the year delivering consistent operating performance and beating all of our key performance indicators.

For the first quarter 2023, our total revenue of $439 2 million represented 27% growth year over year.

We ended the quarter with health plan membership of 109700 members growing 16, 5% year over year adjusted gross.

Profit was $45 4 million producing an MBR of 89, 7%.

Meanwhile, our adjusted EBITDA was negative $5 2 million.

Our MBR and profitability outperformance resulted in significant efforts by our care anywhere team and continued improvements to April .

Our ongoing enhancements to allow us to improve both the identification and engagement of our care anywhere eligible members and it's been core to keeping our Q1 utilization stable.

We continue to believe that Eva clinical innovation at our political culture serve as the foundation of what differentiates alignment.

More than ever we believe we are executing Medicare advantage done right.

CMS has taken actions that reinforce that standards for Medicare advantage that adhere to its vision of maximizing value to the seniors through high quality outcomes at an affordable cost.

We believe the following changes will create competitive tailwind for alignment over the next several years beginning in 2024.

First star ratings are once again differentiating between high and low performance for the 2023 rating year, CMS and the Covid disaster provisions, which artificially inflated star scores.

We maintained our high stars in the 2023 rating cycle. Despite these changes with over 90% of our members in four star or above plans in.

In addition, CMS announced that the weighting of caps measures will be reduced by half for 2026 star ratings shifting the weightings back toward heated scores, which measure clinical outcomes.

This has been a strength of ours.

So our retention goals.

Our last risk model changes are being implemented in 2024.

As many of you well know CMS recently announced the final rate notice for 2024 phasing in the V 28 risk model changes over three years.

As a reminder, our current RAF score today of $1 one three.

<unk>, 30% duly eligible members.

This approach has served us well in places in a solid position as we assess the moving parts within the new risk model.

Thomas will share more details during his financial discussion.

Importantly, as we assess the competitive dynamics in each of our markets. We believe we will be advantaged under the new risk model relative to many of our local competitors, particularly in California.

As a reminder, 85% of our new members have historically come from plants switchers as opposed to agents were conversions from traditional Medicare.

We believe this is a reflection of consumers finding greater value in our products versus our competitors.

This is how we've grown at more than four times, the California market growth rate over the past five years.

As a result, we believe by RAF scores relative to competitors, our star rating tailwind and our growth predominantly coming from plant switchers.

All helped position us for strong growth in 2024 and beyond.

Looking towards 2020 for AEP, we are focused on driving deeper share within our existing states to develop a larger market presence and significant local scale economies.

As part of this strategy, we will double down on brokers, who have delivered for us.

So, adding more captive and employed agents in markets where needed.

In addition to this we are also taking a focused approach to member retention.

While we have noted in the past that we have better retention metrics in the industry. We continue to strive towards a five star retention rate under Cms's definition, which has always been our north star.

A few of the actions we've already taken today include employing a more rigorous supplemental benefit vendor management program enhancing customer service by leveraging our newly deployed CRM application with an Eva and in sourcing member call Center functions.

The early results we've seen in these activities give us confidence that we strive towards five stars.

It's an exciting time at our company as we move forward into the next phase of our operating maturity.

Having achieved impressive repeated clinical results both within and outside of California. We are now investing in operating scale initiatives, which will support the growth in each of our markets.

Now I'll turn the call over to Thomas to cover the financial results for the quarter.

Thomas.

Thanks, Sean turning to the first quarter results. We are pleased to deliver a strong start to the year in which we exceeded the high end of our outlook ranges across each of our four kpis.

For the quarter ending March 2023, our health plan membership of 109700 members increased 16, 5% compared to a year ago. Our first quarter revenue of $439 2 billion represented 27% growth year over year. The top line outperformance was primarily a function of both higher helped by a membership.

As well as growth of our <unk> revenue.

Our adjusted gross profit in the quarter was $45 4 million, representing an MBR of 89, 7% with our critical operations continuing to produce results across markets utilization.

As a reminder of the year over year comparison of MBR includes a full return of sequestration as well as the impact of faster growth in our ECR reach population.

SG&A in the quarter was $70 4 million, excluding equity based compensation expense or SG&A was $51 million, an increase of three 2% year over year.

G&A, excluding equity based compensation expense as a percentage of revenue decreased by approximately 270 basis points year over year, which represents solid progress towards our goal of improving our operating leverage by 150 basis points for full year 2023 relative to 2022 as we.

We continue to scale the business.

Note that our SG&A in the quarter was slightly lower than expectations in part due to timing and we anticipate some of that to reverse over the next nine months of the year.

Lastly, our adjusted EBITDA was negative $5 2 million well ahead of our initial expectations.

Fortunately this does not have any impact on our income statement metrics cash and investments excluding the early payment for $347 million.

Turning to our guidance for the second quarter, we expect health plan membership to be between 111201 hundred 11400, <unk> revenue to be in the range of $433 million and $438 million.

Adjusted gross profit to be between $47 million and $50 million.

And adjusted EBITDA to be in the range of a loss of $13 million to a loss of $10 million.

For the full year 2023, we expect health plan membership to be between a 113000 and 115000 members.

Revenue to be in the range of $1 710, 1 billion and $1 $73 5 billion.

Adjusted gross profit to be between $205 million and $217 million and adjusted EBITDA to be in the range of a loss of 34 million to a loss of $20 million.

In summary, we are largely reiterating our full year 2023 guidance, while raising our revenue guidance given the outperformance in the first quarter and our visibility towards our full year revenue of the MTM.

Given that it is still early we remain mindful of potential variations in utilization as we progress throughout the year that said our initial look at April utilization continued to run in line with our seasonal expectations and we're pleased with how our first quarter results position us to achieve our full year expectations. As we've said before is a strategic imperative of ours to continue.

To balance our short term profitability objectives with our longer term growth objectives, and we look forward to updating you on our results as we progress through the year.

Before we close I'd like to spend a moment on the final notice as John noted earlier, we believe the net change in <unk> revenue will be neutral to positive 1%. In 2024. This consists of all known moving pieces to our current population, including benchmark changes fee for service normalization stars.

<unk> risk model impact and our ongoing operational initiatives.

As it relates specifically to the V 28 risk model and our operating initiative components within that range. We expect the <unk> revenue impact to be negative 0.8 to positive 0.2%.

Expanding on our operational initiatives, we have identified opportunities to close known risk score gaps under the current risk model, given our historically prudent risk scoring position.

Taken together, we expect the impact of the risk model changes will be mostly or entirely offset by the operating initiatives. Both in 2024 and over the course of a full phase it.

Let's open the call to questions operator.

Thank you if you have a question at this time. Please press star one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.

On that front. Please first question.

Our first question comes from the line of Ryan Daniels with William Blair. Your line is open. Please go ahead.

Hey, guys. Thank you for taking the questions and congrats on the strong start to the year Thomas perhaps one for you you talked a little bit about SG&A declining nicely year over year that probably drove a lot of the big EBITDA beat relative to guidance, but it looks like the Q2 EBITDA is below expectations. So can you provide a little bit more.

Color on kind of what timing issues led to that big upside in the period and then number two how we should expect some of those costs to come back into the income statement over the next few quarters. So we can calibrate our EBITDA expectations.

Yeah, Hey, Ryan Thanks for the question.

I'll speak to both the SG&A question and then maybe a couple of comments more broadly about the earnings cadence over the course of 2023 that we anticipate so in terms of your question on SG&A I think you.

You're right. We mentioned that we had a few million dollars of favorability in the first quarter that we would.

Just sort of just timing or temporary favorability based on when certain expenses hit P&L and that probably is in that neighborhood of $3 million to $4 million that we would anticipate to reverse over the course of second third and fourth quarter and a lot of that just has to do with ramping up of new hires to support the membership growth ongoing.

Sales and marketing expenditures and things of that nature.

Generally, though we feel pretty good about our ability to manage to our overall SG&A target that we had outlined in our initial guidance about 60 days ago.

And then in terms of your kind of broader comment about the earnings cadence for the year relative to I think consensus expectations, which is in part modeled on prior year performance about 'twenty, one and 2022 earnings seasonality. While we would note is that obviously 'twenty, one and 'twenty two at a bit more I'd say a typical variability.

Just due to the impact of Covid on things like our risk adjustment scores are sweeps and our IV in our quarter to quarter and so I think a little bit of what you are alluding to is.

The the kind of just lack of a true comparable in the prior year as compared to the current year.

The second thing we would note is that from an MLR standpoint, the second quarter of last year. I think was an outperformer primarily due to the suites that we see typically in the second quarter of each year. As a reminder, we don't typically accrue for those on a very aggressive basis, and particularly for our new members and so as a.

We tend to approach our guidance slightly more conservatively, which may lead to upside for the second quarter relative to our current guidance.

We don't rely on it and it's not something we banked on as we think about all the moving pieces with respect to our full year outlook, but I think thats one element of seasonality that you might see in our historical is that you don't see in our guidance today.

Okay very helpful color and then John maybe one for you I noticed you hired two pretty senior new market executives one in the kind of MCA, the Texas market and another in Nevada, and the core Northern California can you speak to maybe some of the goals and objectives of bring in that talent and how that ties to.

Some of your commentary about investing in sales and marketing to drive membership growth going forward.

Hey, Ryan absolutely.

They share the same culture and vision that we have and I'm very excited about that.

When I say, we're going to be investing in network resources and when I say, we're going to be investing in.

Distribution member acquisition resources I'm serious about it.

We're deepening the bench, we're adding talent.

And we're doing that with an eye towards scaling.

And you can you can see that I think.

Throughout the year as we head into the 2020 for AEP.

And I'm just very excited about.

I think I think it starts with the team and the people that we have the people, we're adding how we get them on boarded.

And.

And kind of how they.

Fit into the whole culture of what we're trying to do so I'm very excited about that.

Reach was like 60 basis points hit sequestration 15, and new members, maybe 50 60 bps does that is it still kind of the algae.

Algorithm as we think about the year over year bridge and the MBR.

Yes, exactly I think you said it well when we think about the 23 overall outlook as compared to 2022 I think those three elements that you just described which were the the ACO reached incremental growth impact on consolidated NPR, the sequestration year over year impact and in some of the lower new member RAF scores, we saw in our January .

Payment file I think those three things are still very much the way, we think about that year over year bridge.

I think that being said the key to all of it is that our shared risk MLR, which is really the core economic driver of the business remains quite strong and in fact, we're really pleased that we started the year once again with our overall inpatient utilization running right around 160 admissions per thousand did not only the first quarter, but also through April .

So kind of all of that together gives us a lot of confidence to continue to invest in growth.

Can you drive economies of scale on the SG&A side, along with that growth.

Got it very helpful. Thanks, again, congrats guys.

Okay.

Thank you and one moment for our next question.

And our next question is going to come from the line of Michael <unk> with Morgan Stanley . Your line is open. Please go ahead.

Hey, Thank you just a quick one on mid year suite.

Last year second quarter did you accrue anything for it I think it drove almost 200 bps better MLR.

If I remember correctly, just trying to get a sense of magnitude and how much could potentially benefit next quarter.

Yes, So I think Directionally you are correct that was about a 200 basis point pickup in the second quarter of 2022 relative to.

What we had previously been accruing and guide each of it to that point.

I would say last year, we probably over the course of the full year saw slightly higher.

Kind of outperformance that we have seen in other historical periods again, just due to the impact of Covid and the timing of when encountered are being submitted by some of the downstream providers.

But that being said I think generally speaking it tends to be a.

A positive item. It is certainly something that we are keen to see how we.

Typically where we kind of start more conservative and then reevaluate over the course of the year.

Got it that makes sense. Thank you and maybe just switching to our looking into 'twenty four in terms of just modulating benefit I understand for M&A plan. There are <unk> rules that don't allow plans to reduce benefits in any given year by more than 20%, but my understanding this doesn't apply to dismiss and.

While 30 around 30% of your members are dual eligible I think only about 4000 of Denmark, and actual DC plans and if I'm not mistaken I think it surprised with me because California, Hasnt accepted new <unk> licenses in recent years, but with that context, given youre, making a decent plan offerings and heading into the 24 rate environment. We're in.

Plans are probably going to toggle down benefit how do you view your ability to modulate benefit.

Margins next year.

So I think in terms of how we think about benefits, we probably won't go into too much specificity just from a competitive standpoint, but.

The impact of risk adjustment would be 28 days and I think some of our competitors disproportionately faced relative to us.

<unk> seen from us over the last two years since IPO, but I think we're also going to make sure that we're continuing to invest in growth and because we don't see star rating headwind and we think we are very well positioned to navigate the b 28 days and I think that presents an opportunity to.

We continue to invest in growth accordingly.

Michael its John just to.

To remind everybody I mean, just.

And we've talked about this before but we did a really good job.

Last year on the <unk> of look alike.

Crosswalk it to other products I mean, I don't think we lost anybody actually through that process and so we're very proud of that.

And I think that with respect to the 24 benefits to Thomas' point, we're deep into the product design and bid process right now.

We will share more on the Q2 call, but I feel very.

Very comfortable with that whole process.

Great. Thank you guys.

Thank you and one moment for our next question.

Our next question comes from the line of Whit Mayo with SBB. Your line is open. Please go ahead.

Hey, Thanks, Good afternoon, Thomas just back to utilization in the quarter can you maybe just comment visibility on on outpatient and since you provided the inpatient days per thousand of 160.

In the quarter, what did that compare to last year.

Yeah happy to take that question with so in terms of the performance this quarter as compared to the first quarter of last year.

Last year was very similar I want to say it was in the high 100 <unk>.

So I would sort of view the whatever that is two years or three difference as kind of just normal course variability given population changes year over year, So very very much in line with our seasonal expectations as well as our performance in the prior year.

And in terms of your question about outpatient trends. So if I kind of go back to when Covid first had a more significant impact on utilization in 2020, I think we first start.

<unk> increased our churn of some of the outpatient utilization in 'twenty, one and then we more holistically solve that I think more full <unk> return in 2022, and so as we stand here today, and we kind of look back on 2022 claims experience now with the benefit of fairly significant run out I think our overall outpatient utilization today looks similar to that of <unk>.

Covid and I think that would be kind of our expectation on a go forward basis.

Okay.

Looking at the membership that you attract a little bit ahead of your first quarter guidance I presume you just picked up maybe a few more lives and OUP just not sure if there are anymore.

Details to share and then maybe more specifically.

Yes, hey, with its John Yes.

I think.

We're getting some more.

Mix tailwind with respect to what we just talked about in terms of the D. SNP.

It kind of the.

For everybody's benefit kind of eliminated this <unk> lookalike product.

So we had to crosswalk a lot of these members over.

Into other products last year.

And so that created a little bit of a.

MBR headwind.

On that product, but as we are actually seeing resulting from OUP, we're getting a bit of a tailwind because we are we are.

We're.

Getting growth from pure D. SNP members into that product design, and so thats something that we are.

We're pretty optimistic about.

Okay. Thanks.

Thank you and one moment our next question.

And our next question comes from the line of Kevin Fischbeck with Bank of America. Your line is open. Please go ahead.

Hey, guys. Thanks for the question. This is Adam <unk> on for Kevin.

I think I'd want to focus my questions around.

Model revision changes and what you think.

What levers do you think you have at your disposal to offset it. So first if you could go into more detail about what specific.

Mitigation steps youre, taking to get to that 115 to four 5% rate lift over the next couple of years is that all just re coding and why is it such a wide range.

Yes. So I think this is Thomas speaking thanks Adam.

I think in terms of the range itself.

The range, partially reflects the full opportunity, but also impacts just reflects the timing of when we anticipate to realize these results and I think we feel pretty good that the upper bound of the opportunity is at four 5% I think we're maybe being a little conservative with the pace of us achieving that opportunity, hence the range youre seeing for us in terms.

The 2024 bookings.

In terms of the actual operational initiatives.

Lot of it is kind of I'd say basic blocking and tackling and ensuring things like we haven't height of a success rate or engaged right as possible on annual wellness visits ensuring that the chronic recapture is it as high as possible and making sure that as many of our members as being seen by both our clinical resources as well as our network of PCP.

Again as is possible I think over the last several years just given the pace of overall growth we have done good.

On each of those different aspects of the overall <unk>.

This visit activities. However, we haven't been perfect and I think we are recognizing that.

Big opportunity, we see to ensure that there is a great offset.

<unk> to the <unk> 28 impact coming down the pipeline.

So would that would that explain why you think you would see less of an impact than others, because you haven't been engaging members.

Many wellness visits from.

Would have lower ramp than they should.

I would say, maybe a little bit differently I would say our engagement has been quite good.

Over 80% of our members have had an annual wellness visits between us or our Pcp's, which I think is a pretty solid industry standard benchmark I think what we're saying is we can do a better job with the efficacy of each of those visits I think we can do a better job at increasing the overall completion rate above and beyond our historical trends.

And I think for a market like California.

We've been a little more focused on risk adjustment in the past and we have so much of our emphasis for the past several years has been this notion of <unk>.

High quality low cost I E. We've been very focused on the clinical model putting back here anywhere team at the center of the member experience and ensuring that our improved health outcomes translate to improved cost outcomes, we haven't necessarily viewed the risk adjustment model as much as revenue cycle management I think some others have which is why we think that maybe some of them might.

Not have quite be.

The mitigating factors that we see in front of us.

Yes, Adam it's John Okay. We noted that there are overall consolidated Rev is like 113.

And.

I'd say any standards.

Very much in the safe zone, and we continue to want to be in the safe. So.

But we've run the business off of.

Revenue in wrath of $1 <unk> III and we've done that from the very beginning because we've known from the beginning of that Youre going to have some kind of a.

Adjustments to reimbursement.

We've been around this business long enough. So that we still remember 2012, and what happens there with HCA.

Normalization.

Now that we have clarity I mean, these kind of changes come around.

Every five years or so over five to 10 years actually.

And so we feel very good about that.

And kind of the predictability of that.

We feel very good about just to pivot a little bit on where the stars is going.

So we kind of know what the rules are and I think that to Thomas' point, we've got some opportunity.

Two.

Yes.

To grow in those areas.

Great and then my last question around this is.

And so if you cut benefits or just youre stuck with you.

Cost structure to offset some of these rate headwind.

In theory, they're getting a bigger rate headwinds or are they going to turnaround in Q4 are higher capitation rate or are they going to just see.

Net margin headwinds and.

Sort of have to absorb it.

Yes, youre going to have to support them in any way yes.

Yes.

That's something we've been saying from the beginning from the IPO, meaning.

We have about a third of our business that's globally kept it at about two thirds that is not global to compensate it.

And then what we would call a shared risk.

And it's it's it's a contracting environment, where we.

Make sure that we are aligned with the providers and that we are managing those institutional risk pools, those hospital risk pools, with Eva and with share anywhere et cetera.

And so it in fact is going to help us again relatively speaking.

Because to your point.

The preponderance of the plans are globally capping.

I think and we've seen this this is why we haven't built the company on just having.

80% plus global cap.

That's why you also see I think the industry going toward more and more call. It.

Vertical at or virtually vertical integration.

And I think the folks that are going to be depending on global cap kinds of arrangements are in fact going to feel that squeezed that you just mentioned and frankly, we've seen that occur.

As drove 30 years, Cynthia in California, I mean, it's literally I think the reason why we built the company. The way we did why we built Ava why we've built January is we think we can beat that most efficient delivery model and do so is supporting the individual doctors not.

The intermediary groups per se.

I also do think that a lot of integrators ipas that we work with.

Are actually doing a better job delivering stars delivering GAAP closures on heaters et cetera.

But the beauty of it is.

As our chair anywhere team is there to make sure that we have the control to ensure that we get those outcomes.

And.

I think I think to your exact point theres going to be more and more pressure.

On those that are just relying fully on global cap.

Awesome. Thank you so much we got it.

Thank you and one moment for our next question.

Okay.

Our next question comes from the line of Matt <unk> with Raymond James Your line is open. Please go ahead.

Hey, this is maybe for John Ransom just on your expansion efforts in new markets. I'm wondering if you can comment on what youre seeing in terms of membership growth there, especially maybe in Florida, and Texas and then anything incremental you can provide on learnings as you continue to expand in those states.

Yeah, Hey, Hey, how are you doing it's John Yeah, I think I'm, feeling very very comfortable we're going to be able to shoot or exceed our growth rates.

Without relying.

Heavily on.

Florida, and Texas, I do think we're making great progress on network on distribution.

One <unk>.

Stars, which is something we've mentioned in the past where the focus on working with the provider delivery partners that we have just taken a little bit of a playbook out of the North Carolina.

Motto, which is get to the five stars move toward five stars have really good products have good operational support.

The problem, we had last year as you recall as we had we have defined the right distribution partners and <unk>.

<unk> got solutions for that so I'm feeling really good about that.

Im optimistic about both markets.

But on the other hand, we're not.

Going to just be entirely dependent on those two four.

For the material growth that I expect heading into 2024.

Yes, that's helpful and then just.

Kind of following up on Starz anything you can provide on <unk>.

Membership membership satisfaction or maybe some other internal data that you might have access to and how that will translate.

For 2024 Star ratings.

Yes, NPS is still very good.

It's still in the $60. So I think it's 62, we've kind of bounced around between 60 and 68 historically for the whole membership.

Our care anywhere membership has kind of been around between 75% to 85 and I think the last I saw was <unk> 78. So I think those triggers are in fact very good.

I think with respect to.

Caps and the weighting that CMS put on caps I think you guys know that they're changing the weightings back down.

For raising your 2026 I think it is.

And theyre going to re emphasize heat us.

The other thing I would note is with respect to cap So just member satisfaction.

We're spending a lot of time on and we alluded to this in the remarks, but we're spending a lot of time on I would say supplemental vendor management, making sure that the contracted vendors that we work with but I won't name any of them, but but are delivering on the promise.

And their service levels to us and to our members.

And so.

I am very confident that that's going to be dealt with this year heading into 2024.

But that was a source of abrasion for us for much of the pure stars perspective.

Great and Thats all I had thanks, so much you got it.

Thank you and one moment for our next question.

Okay.

Our next question comes from the line Gary Taylor with Cowen. Please go ahead.

Hey, Good evening guys two quick numbers questions and then a theoretical question on the numbers.

I understand.

The seasonality around the EBITDA the MLR from that.

Year ago in the sweep.

But.

The midpoint of the <unk> revenue guide is down a little bit.

Sequentially and I was wondering if that does that imply there is anything else retro in the <unk> or that's just your typical conservatism Thomas or anything on that piece.

Hey, Gary Yes, so in terms of the second quarter revenue I think the sort of two offsetting factors that drive the guidance are obviously, we guided today continued anticipated membership growth in the second quarter as compared to the first quarter.

And then on the other hand, what we typically see from a revenue <unk> standpoint is that the revenue <unk> goes down sequentially as we both grow new members, which come in with lower revenue Mpls and we see it.

In voluntary enrollment of our older typically sicker and higher revenue members. So just the mix of those two things over the course of the year.

And then to your point, obviously, what I mentioned earlier is that we do expect to see the sweeps and CMS this quarter and that could be an area of opportunity based on our historical experience.

Yes.

Thanks, and then looking at the days claims payable down sequentially and.

Year to year and from the queue.

The bulk of that year to year and sequentially is really coming out of year incurred but not paid.

Bucket is there some color you can help us with on why those.

That that dollar reserve is at floating higher with the with the medical expense.

Yes. So this has been one of our initiatives ongoing now for the last.

Six months to nine months.

In terms of how we can continue to invest and increase the productivity of our overall claims department.

The benefit of that obviously is.

Earlier visibility to emerging claims trends and so this is something we've been actively investing in in terms of.

Just more one more.

Examiners in kind of different automation tools. Accordingly, so I think youre starting to see a little bit of a benefit of some of those efforts in the first quarter.

We're very pleased to see I think more broadly speaking what we're continuing to think about how we scale. The overall business and so investing in things like the claims system on a go forward basis will be I think areas of opportunity for us to continue to drive down that SG&A as a percentage of revenue over time. So that's really the primary driver.

Of.

The days payable question you had.

In terms of the first quarter actuals.

Was there a P&L impact from that in the <unk>.

It's dedicated claims mature.

But that pace that you are saying no no no.

We actually had some slight favorability on IV in our in the first quarter from 2022, it wasn't a significant number but a couple of few million dollars.

Last one for me.

Just give us a quick update on how youre thinking about the alzheimers drove heading into.

24.

CMS put nothing in the benchmark form you get that existing NCD requiring trial or.

Registry, but there's chatter now with.

Ladies slowly drug that navy, the NCD will get weak damn it et cetera, and I guess in theory.

You can just rely on CMS.

Due to the significant cost calculation and flip it to pass through it if it's going to be a material uptake of patients, but you head into your June did just.

Assuming CMS will protect you on that or do you feel like you have to protect yourself in the bid process.

Hey, Gary John here.

That's one.

Specific variable thats of many that I think youre going to impact part D, resulting from the whole IRR initiative I think I think that.

Is it going to be a pretty important component of our bid strategy.

Heading into any into 2024.

<unk>.

Part D specific part D drug strategies as it relates to the bids or are going to be a very important part of <unk>.

The product design heading into 'twenty four.

Okay. Thank you.

Hey, Gary.

Yes, yes.

Just one other thing just just to Thomas' point on Q2 suites, we are.

We don't know so we're relatively conservative, but I think gives you know for the last.

Since we started the business we've always had some.

Positive pickup.

In the.

In Q2 suite numbers.

I will say for 2022.

Were unusually good.

Because of the whole timing issues associated with Covid, if you remember that.

So we're just being very disciplined about that.

Got Ya <unk> seen that in that playbook, so nothing wrong with that.

Thanks.

Thank you and one moment for our next question.

Our next question comes from the line of Jessica Tan.

Piper Sandler your line is open. Please go ahead.

Alright. Thank you guys. So much for taking my question and congrats on the <unk> and.

Can you just remind us what the current criteria for the care anywhere program. Our engines are those criteria changing in 2024, if you move to adopt.

The new B 28 risk adjustment model.

Yes, so I would sort of entirely separate RAF and day 28 from Kerr anywhere so those two things are.

Other words, so someone's risk score under the current model or the new model has no impact whatsoever on how we think about share anywhere criteria.

The way we've evolved this overtime as <unk>.

Basically using a variety of machine learning algorithms and more recently, some AI tools that allow us to take all the data we have on members, including pharmacy data lab data demographic data and counter data admission discharge transfer data and a variety of other sources that allow us to basically try to pinpoint who the people are who.

It would be most likely to have an acute event in the next 30 days as well as those who have a much higher or greater.

Chronic set of factors band than the average population or the average senior and so all those things kind of go into how we think about our eligibility criteria and then that gets routed automatically to our outbound call team into our provider engagement resources. So that we can try to get these members enrolled in the program.

On average I would say are carrying where population in terms of ages in the high <unk>. It typically have five or six chronic conditions if not more.

And then kind of things of that nature. So.

I don't anticipate any change in how we approach our care anywhere engagement or criteria.

Other than just continuing to ensure we get everyone engaged to the extent, we can yes, we got to get closer to that 80% engagement level.

On the identified care anywhere eligible members.

<unk>.

But.

We're going to take care of these people that need the care irrespective of <unk>, we have to do that and we're going to continue doing that.

And.

Yes.

I think Tom is exactly right.

Okay got it. Thank you and then just.

I wanted to just ask your kind of level of comfort with the 24 adjusted EBITDA breakeven target. How you think about the balance between potentially accelerating membership gain in.

In 24 versus versus the persistence of that target.

And that's it for me thanks.

Got it yes. This is John I feel good about it predominantly because of the share anywhere in either investments that we continue to make.

The.

Loyal shared risk.

MLR and the company is still very very good.

And we've got a lot of innovation on the clinical side that we're going to be being.

Putting into production.

And several of our markets, we've got a bunch of ideas that we're going to be testing out that I think are going to.

Kind of creates some tailwind for us on the MBR basis.

I think the initiatives that we've got just kind of from a core operational scale perspective to kind of do blocking and tackling on retention I think is just a very good opportunity for us.

Having said all of that.

I think that if the market opportunity.

Resents itself.

And we find ourselves from a product design perspective.

Kind of growing.

Yes, I do think that.

I think if we would.

<unk>.

Said differently.

You might see a little bit, but uptick in <unk>, because we are growing a lot, resulting from a lot of new members.

I think I would make that trade.

And and.

That's not backing off any of the core MLR, that's not backing off.

Our confidence of getting to profitability, but if you've got a disproportionate share of your your membership base.

B new members combined with the fact youre going to pick up just raw scale economies because of that growth.

I think that's something we got to do.

So.

With that little proviso I still I still feel.

Good about it.

And.

We'll keep everybody posted on how these initiatives actually get operationalized.

Great. Thank you very much.

<unk>.

Thank you and one moment for our next question.

Our next question comes from the line of Cowen Your neck with Jpmorgan. Your line is open. Please go ahead.

Yeah. Thanks for the question.

A a follow up to the last one.

Just curious if you are looking at those changes into revisiting potential M&A within that area markets.

Okay.

Yeah that was good.

Let me answer the first one.

So the way we look at is this way.

I think I think it's not a secret the last three years have had.

<unk> at a macro industry perspective.

People have.

Been aggressive on benefits, resulting from.

Technical.

Kind of loopholes on Starz I think people have been aggressive on risk adjustment.

I think people have been.

Yield on distribution.

And what we love is the fact that CMS is kind of just closed all of that down and refocused on the way Medicare advantage was designed.

And so I think youre going to have some of our competitors be impacted by Starz, you're going to have some of our competitors impacted by risk adjustment I think everybody is going to have more of a playing field on the distribution side with the brokers, although I think it can be even more done there.

So I do feel pretty.

Good about that.

I think that.

The fact that we've proven we can take share from the bigger competitors over the years and in fact, 85% of our.

Our growth is coming from switches also is a factor because I do think those folks have been able to maintain their stars.

We'll see what happens with respect to the risk adjustment, though.

Particularly in California that is.

So.

I feel really pretty good about that with respect to M&A.

I think the notion of.

Of just being very careful to be very careful very very thoughtful about.

Kind of what.

What kind of <unk>.

Risks are incremental that you would incur because I think we've got a very solid well run business right now we've got to be we got to keep that in mind with the trade off of just getting scale.

I think I think getting scale is going to be.

Important in the overall mix of things.

Just to accelerate.

Accelerated the scale economies on the back office in particular number one and number two taking Ava and care anywhere just applying it over more memberships.

I think thats just.

Those two kind of.

The magic synergies I think is pause we got we got to look at stuff.

The good stuff seriously.

Having said that we've got a good thing going and we got to make sure we don't.

Good setup.

Got it thanks John .

Thank you and one moment for our next question.

Our next question comes from the line of Nathan Rich with Goldman Sachs. Your line is open. Please go ahead.

Hey, good afternoon, Jonathan Thomas Thanks for the questions.

Maybe kind of.

Following on the last question just when we think about the 2024 pm PM the flat to.

One.

For a market like California, I guess.

Would you compare where you are relative to the market averages and in those counties that you're in and.

Those offsets.

Yes, so in terms of the <unk>.

The ability to get to the high end of the range versus the low into the range I think it's a matter of.

Ensuring that we're continuing to ramp up our our staffing and resources as well as our training and our engagement.

Timely fashion. So this has been a priority of ours now really.

Really for the last 60 days and we're starting to see some solid traction and I anticipate that to continue over the course of the second quarter.

You don't have to necessarily have it all in year one.

I think in terms of the competitive backdrop relative to our outlook.

Yes, I think I suspect at least that some of our competitors may not have the opportunity to offset some of the headwinds that the industry collectively basis.

I would anticipate that.

There could be some headwinds for certain of those competitors.

And a more significant way or more adverse way than what we are facing.

I think it's a little bit of both but that being said this is a competitive market and as we said before.

Sure everyone will be working on different forms of offsets and while we feel quite good about how we're positioned we'll see how others.

Continue to navigate the environment over the next couple of quarters and next couple of years.

Okay, great and sorry to go back to the topic of utilization, but.

If we do see a pickup of that.

What's kind of contemplated within the range of expectations that you have for MLR.

In your guidance.

Yes, yes so.

I do think that.

Our ability to kind of maintain our historical performance is quite strong and so as a reminder, when we talk about 160 or so admissions per thousand.

That would compare to for our markets around 250 admissions per 1000 per traditional Medicare and the difference between 160 to 250, it's about 14 percentage points of MTR. So it's a pretty significant driver of our performance over the course of the year.

In terms of the consistency factor, we have run between 155 and 165.

Each year for the last six years and then obviously for the first four months of this year as I mentioned in other words on track to continue to achieve that I think for the seventh year in a row I think the important part about that is not just the consistency, but its the consistency in light of the growth and so as a reminder, seven years ago, we were significantly smaller than we are.

Today, we are only in seven or eight counties seven years ago, and so given the fact that we've expanded to six states 52 counties and grown the membership by a factor of probably three X over that period of time I think we've generated a lot of.

Kind of performance and replicable any of the care model, which is what gives us confidence that we will be able to continue to perform on that key metric of ours. The inpatient admissions per thousand in light of some of these evolving utilization patterns that youre, describing on a more national basis.

Thank you.

Thank you and this does conclude today's question and answer session, Ladies and gentlemen. This does conclude today's conference call. Thank you for participating you may now disconnect.

Alignment Healthcare Inc. Q1 2023 Earnings Call

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