Q2 2023 Alignment Healthcare Inc Earnings Call

August 3, 2023

[music].

Yeah.

Good afternoon, and welcome to alignment healthcare second quarter 2023 earnings conference call and webcast.

All participants will be in a listen only mode.

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A reminder, this conference is being recorded.

Leading today's call are John co founder and CEO and Thomas Freedman, Chief Financial Officer before we begin we would like to remind you that certain statements made during this call will be forward looking statements as defined by the private Securities Litigation Reform Act. These forward looking statements are sub.

Various risks uncertainties and reflect our current expectation based on our beliefs assumptions and inform currently and information currently available to us.

Descriptions of some of the factors that could cause actual results to differ materially from these forward looking statements are discussed in more detail in our filings with the SEC, including the risk factors section of our annual report on Form 10-K for the fiscal year ended December 31st 2002.

Two.

Although we believe our expectations are reasonable we undertake no obligation to revise any statements to reflect changes that occur. After this call. In addition, please note that the company will be discussing certain non-GAAP financial measures and that they believe are important in evaluating performance details on the relationship.

Ship between these non-GAAP measures to the most comparable GAAP measures and reconciliation of historical non-GAAP financial measures can be found in the press release that is posted on the company's website and in our Form 10-Q for the fiscal year ended June 30th 2023.

Hello, and thank you for joining us we're pleased to deliver another strong quarter in which we met or exceeded each of our key performance indicators for the 10th consecutive quarter since our IPO for.

For the second quarter 2023, our total revenue of 460 to $2 4 million represented 26% growth year over year.

We ended the quarter with health plan membership of 112200 members growing 17% year over year.

<unk> gross profit of $53 6 million producing a consolidator MBR of 88, 4% better than our implied outlook range of 88, 6% to 89, 1% importantly.

Importantly, we delivered an MBR of 87, 1%, excluding our ACO reach business.

Meanwhile, our adjusted EBITDA was negative $2 1 million well ahead of our outlook range.

As I reflect on our year to date results and pleased with the progress we have made across the organization. We continue to improve upon our care model each year and in the second quarter inpatient admissions per thousand ran at 151, an improvement from 163 in the first quarter and one of our best Q2 results in the history of the company.

This brings our year to date inpatient admissions per 157, which is in line with the prior year and consistent with our expectations, all while growing well above the industry well.

Thomas will drill into more detail during his remarks I'd like to emphasize that we feel confident in our ability to drive our MBR lower in the second half and achieve our adjusted gross profit guidance for the full year.

Our confidence is underpinned by our successful utilization outcomes, driven by care anywhere and Eva in the second quarter.

We also see further upside as we continue to improve our care anywhere engagement rates and execute against our network performance management initiatives.

Together with regular part D seasonality. We believe these factors will deliver our anticipated MBR improvement in the back half of the year and position us for a robust 2024 as.

As we think about our 2024 objectives that are long term MBR target. We are laser focused on actions to improve our member mix by network and product in 2024.

We believe our shared risk networks provide the best clinical experience for members and as we've shared in the cohort data create the best MBR opportunity for us over the long term with this strategic priority in mind, we are designing products to direct growth to our shared risk book of business, making changes to our networks.

Vesting at Avis external provider capabilities, and enhancing infrastructure to engage and manage these networks.

Beyond our gross margin trends I'd like to highlight the progress our team is making against our sales our retention goals as we laid out at the beginning of the year.

During the second quarter, we saw a 50 basis point improvement in our total retention rate year over year. This result was supported by our recently deployed CRM application within Eva and improvements towards in sourcing member call Center functions, we expect more of the total opportunity to materialize in 2024 following our trans.

<unk> to higher quality supplemental benefit vendors retention initiatives with our distribution partners and continued deployment of our call Center plan.

As we scale up our business, we are actively seeking to improve our mix of internal versus external sales, while also making improvements to our sales operations infrastructure to.

To date, 24% of our sales have been generated internally versus 20% last year, an improvement of 4% year over year. This improved mix is partially result of about 37% year over year improvement to our lead to sales conversion rates from internal sales channels. These.

These efforts complement our plans to double down on high performing external brokers as we gear up for the upcoming AEP.

While it's still early I would like to share some comments on our bids.

As we previously discussed we believe competitors within our markets will be challenged a lower stars payment and face risk adjustment pressure with.

With the competitive landscape is shifting in our favor in 2024, we are leaning into the opportunity by maintaining or increasing our product richness across each of our markets.

This cycle, we also refined our product strategy to more directly address our seniors in a similar fashion to how we think about our clinical operations.

Does this approach curates distinct products that complement the need of two key member types.

Low utilizing healthy seniors who value immediate savings.

Hi, Rick seniors with whom we tend to see the greatest level of engagement with our care anywhere programs.

We are creating clear and more competitive products by simplifying member benefits.

Hudson trading benefit value in high impact areas that we believe will drive growth.

Taken together, we are excited that our product approach combined with relative tailwind on stars and Rep will decisively set us apart from other plants and the upcoming AEP.

Lastly, given our confidence in our existing market growth strategies, and our focus on achieving adjusted EBITDA breakeven we.

We are limiting our new market expansions too in state expansions in 2024.

However, we are actively engaged in strategic discussions with provider partners at health systems in new and existing states as we plan for 2025.

These opportunities centered around joint ventures that other innovative ways to deploy our differentiated care anywhere Eva and other provider engagement capabilities to help solve for the strategic needs of many providers and health systems.

We are optimistic about our opportunity set and we look forward to sharing more about our growth pipeline in the future.

Before I close I'd like to thank each and every employee who has helped US further our mission to improve health care once senior at a time.

Our investments and activities in the first half position us well to deliver on our full year commitments and achieve our 2024 growth in breakeven objectives.

With that I'll turn the call over to Thomas to review, our financial performance Thomas.

Thanks, John for the quarter ending June 2023, our health plan membership of 112200 increased 17% compared to a year ago, our second quarter revenue of $462 4 million, representing 26% growth year over year. The strong result was driven by Medicare advantage.

<unk> that exceeded our outlook combined with favorable <unk> and our revenue <unk> due to the timing of the annual CMS sweep cycle.

Our adjusted gross profit in the quarter was $53 6 million, reflecting an MBR of 88, 4% or 87, 1%, excluding our ACO reach book of business. The outperformance in the second quarter was a direct result of our actions to drive higher engagement with our care anywhere eligible population, including targeted efforts.

Towards our ESR D and skilled nursing facility members.

In the first half MBR, excluding ACO region was 88, 2% compared to 84, 9% a year ago. As we previously noted the year over year comparison is distorted by a typically favorable prior period items last year due to COVID-19 related dynamics, including higher suite payments this dining.

It comprises roughly two thirds of the year over year difference in MBR, while revenue in the quarter benefited from some positives repayments. This year. The gross profit impact was meaningfully lower due to contract mix.

The remaining approximately one third relates to other factors, we discussed in the past, including sequestration and member mix by product and network specifically as it relates to the 2023 look alike transition we see this as an additional MBR opportunity, which we took into consideration for our 2020 for bids.

On the outpatient utilization our paid claims <unk> for all outpatient elective procedures in the first quarter remained roughly in line year over year, including hip and knee replacements, which for within $3 <unk> in the prior year.

While we have partial second quarter outpatient paid claims data, we are able to attract outpatient authorization data on the vast majority of our at risk members to evaluate our second quarter trends.

This data is strongly correlated with total outpatient claims volume and authorizations received through June indicate that we are running at levels similar to last year consistent with our expectations and.

In aggregate, we feel comfortable that care anywhere Eva and our provider engagement efforts are continuing to give us a competitive advantage towards managing overall utilization trends and we believe we are in a solid position to achieve our back half outlook.

Turning to Opex SG&A in the quarter was $70 $2 million, excluding equity based compensation expense or SG&A was $56 3 million, an increase of nine 8% year over year.

SG&A, excluding equity based compensation expense as a percentage of revenue decreased by approximately 180 basis points year over year, a portion of the favorability was driven by the timing of expenses that we expect to reverse in the second half.

Lastly, our adjusted EBITDA was negative $2 1 million well ahead of our expectations move.

Moving to the balance sheet, we ended the quarter with $517 $5 million in cash and investments our cash balance at the end of the quarter again included an early payment from CMS of approximately $147 5 million. We recorded the early payment as deferred premium revenue in Q2, and we will recognize it as revenue in Q3.

As a reminder, this does not have any impact on our income statement metrics cash and investments excluding the early payment were $370 million.

Turning to our guidance for the third quarter, we expect helped by a membership to be between 113501 hundred 13700 members.

Revenue to be in the range of $440 million and $445 million.

Adjusted gross profit to be between $54 million and $57 million.

And adjusted EBITDA to be in the range of a loss of $12 million to a loss of $9 million.

For the full year 2023, we expect health plan membership to be between 113501 hundred 15500 members revenue to be in the range of $1 76 billion and $1 seven to eight 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.

Given the strong results of our year to date sales and retention efforts, we are raising our full year 2023 membership guidance. We are pleased to see our year to date focus on these activities start to pay off and we continue to feel optimistic about how this positions us for AEP.

We are also raising our full year revenue guidance on the back of our second quarter revenue outperformance, which now implies 24% growth year over year at the midpoint of the outlook range.

Next we are reiterating our adjusted gross profit guidance for the full year second half seasonality, which implies an MBR of $86 six to 87, 7% reflects a favorable mix of duals achieved year to date.

A continuation of utilization trends experienced in the first half.

And normal seasonality of part D and BR, which is more profitable in the second half as compared to the first half we.

Additionally, see opportunity, resulting from our initiatives to drive increased provider relationship alignment and operational efficiency. This entails extending Eva and care anywhere to more of our contracted doctors to reduce high cost cases and improve medical management.

Further we are actively managing payment integrity vendors and processes and anticipate tailwind associated with those efforts to materialize in the third and fourth quarter.

These items are partially offset by higher than expected new membership given our year to date sales outperformance and increasing investment in our clinical and annual wellness visit activities in preparation for our AEP growth and 2020 for risk model changes.

Our overall views on SG&A and adjusted EBITDA are unchanged in spite of our higher membership growth and we now anticipate delivering a 190 basis point improvement in SG&A as a percentage of revenue in 2023 relative to 2022.

Lastly, as mentioned earlier, we feel good about our overall utilization outlook and believe we have fully incorporated our medical cost experience into our bid assumptions for 2024.

We remain on track with our previously announced operational initiatives to completely offset the impact of <unk> 28, and are showing clear signs of continuous improvement on medical utilization management through our clinical operations. Each of these factors leave us optimistic about our 2024 objectives and we look forward to keeping you updated as the year progresses.

With that let's open the call to questions operator.

Thank you as a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.

One moment, while we wait for the Q&A to compile.

Okay.

Our first question will come from the line of Michael Hall with Morgan Stanley . Your line is open.

Hi, Thank you yes.

Very solid earnings outperformance, so far year to date about $20 million better than expectation.

But you are keeping full year EBITDA guide unchanged Thomas I think you might have explained it but I'm wondering should we view it as more prudent conservatism or unanticipated cost expectations in the back half of the year or I think you mentioned, possibly accelerated investments just any color there would be helpful. And also could you help us quantify.

Mid years prepayment benefits MLR.

Yes, so happy to start with the first question in terms of the kind of back half outlook and how we see things evolving over the next six months and so I think a lot is kind of moving in our favor and some of the things. We outlined include the favorable mix of the duly eligible membership we've achieved year to date. So as a reminder, those are members who.

Tend to be most engaged with our care anywhere programs and therefore, we often see the highest returns from a financial standpoint, as we continue to grow that book of business second I think in spite of some of the concerns across the industry. We still feel really confident in how our utilization trends are evolving and we delivered one of our best second quarter, we've had in history of the <unk>.

In terms of our inpatient utilization metric, which is as you know is one of our major Kpis. We track in terms of monitoring overall claims spend and then lastly, we do have some tailwind from the first half heading into the second half with part D, where the fourth quarter in particular tends to be most profitable in terms of quarterly seasonality just.

As it relates to the catastrophic protection that come into play over the course of the year as members incur more drug cost.

I think additionally, you mentioned a couple of investment items and and what we're talking about there is really a lot of our clinical efforts, both with our employee resources as well as our external provider partners to ensure that we're seen as many members as possible. This year to put care plans in place as it relates to 2024 both in terms.

Our AEP growth coming up as well as the impact of the 2008 on overall risk model changes and so we're continuing to invest in extra few million dollars in the back half of the year given our year to date outperformance and that's also reflected in our our overall MBR updated outlook here.

I think the last thing is you have seen our cohorts before our new members typically comment around 90% MBR and then trend down into the low <unk> and even the high seventy's overtime and so just given that year to date sales outperformance, we are absorbing a bit of higher MBR related to that new membership.

But we're holding the line on SG&A to ensure that we offset that from an SG&A as a percentage of revenue standpoint to show flat if not improving overall EBITDA margin of 23.

Great. Thank you I appreciate that.

So while the focus has been basically breakeven target next year, given the rate environment, just how unique 2024.

With it possibly being.

Quite arguably the biggest year for planned shopping and the relative strength of your star ratings I think John mentioned, we are actually maintaining our increasing product richest next year.

Is quite powerful and so I think most plans are reducing benefits so.

Golden opportunity to grab market share. The average member retention is quite high the lifetime value is extremely attractive.

That said two questions one what level of membership growth in excess of your 20% target next year do you believe could begin to place some pressure on your 24 breakeven target in Q, how much of incremental long term earnings value. That's outsized membership growth provides alignment in your multiyear story for example, let's say.

Every 100 bps of excess member growth above 20% is there a way to quantify or articulate just how beneficial. It is for your long term earnings trajectory. Thank you.

Yes, so in terms of the overall AEP outlook as John described we're really excited.

Really.

Comfortable with the way, we've tried to find that balance between growth and profitability.

And as we think about I think your question was is there a certain level of growth that would cause us concern about achieving our breakeven target next year on an EBITDA basis, and I think the answer is no and the reason we say that is yes, new members do tend to come on with a bit higher MBR than a kind of more tenured members that's been with us for.

There are few years however.

Any MBR pressure, we might see from significantly outsized growth. We also would expect to see an offset on SG&A.

Part of our SG&A is of course variable that we have to continue to grow to support a membership, but we have a lot of fixed cost, particularly those we've incurred.

I'm wishing ourselves as a public company over the last few years that we anticipate seeing economies of scale on as we continue to grow overall membership. So we we don't look at it as a tradeoff, where if you've got a certain amount of growth. It's a problem to our EBITDA breakeven target, we actually think it would be neutral if not additive to that objective and then to your point the comps.

Rounding benefit as that group growth in 'twenty, four really starts to pay dividends in the form of lifetime value into years, two three and four and so the way I would think about it in terms of our previous cohort analyses. We've shared as I mentioned earlier as you can see about at least 10, if not 15 percentage point improvement in MBR from year one.

Through year five as.

As we manage the membership engage them clinically and continue to deploy all of our care anywhere efforts and so that's sort of the way we think about it is the investments we make today.

Drive the short term membership growth, but really pay long term dividends in the form of MLR improvement.

Perfect. Thank you guys.

Thank you one moment for our next question.

Thanks again.

That will come from the line of John Ransom with Raymond James Your line is open.

Hey, good morning.

We have the stars coming up in September .

Yes, I know that Youre, a big plan on a raw basis kind of close to some of the points to three five I was just wondering how youre thinking about.

That dynamic as we head into the fall.

Hey, John It's John .

Yes, I feel a lot better actually.

Right now than I did 90 days ago, I think a lot of the execution.

Around all of the measures.

<unk> is coming in.

Better.

And on the better side.

On four or five specific measures than we had originally thought.

It's still early obviously, we're still waiting for the overall cut points.

I had shared earlier in the year it was pretty close for comfort too close for comfort, but right now I feel really very positive.

And the California, maintaining before.

I think there is opportunity in some of the other states to even.

Get better.

And.

And so we'll see.

I think industry wide and then were not an exception I think caps.

It is challenging for everybody.

But I think we're so good on some of the heat as admin and part D measures that.

<unk>.

That we're going to be we're going to be okay. That's my latest thinking again, it's just a subject to the to the to the final cut points that we'll know in the next.

A couple of months.

And when you mentioned four or five things.

What four or five things I mean, there is so many different measures, but which four five that you focus on doing better.

Yes, they were.

Tty was one example.

<unk> was another example of <unk> is another example.

A lot of our analysis, we were kind of on the bubble.

On some of these different metrics.

As we've gotten more and more data.

Starting to edge toward the good side of Av.

Both of those different measures.

Whether it was.

We're sitting in the middle between the three out of four or four to five et cetera.

Yeah.

Getting more data to get us more comfortable rolling on the good guys side of that.

And just lastly, I keep asking our spin.

Do you agree with the general thesis that Theyre, just raising the bar and so the overall number of if you had 100 people in MAA across the country youre going to have fewer than four star plans under the new measures than you did this year do you think they're just trying to shrink that and raise the bar that that's what it looks like but do you agree with that general.

I think so I mean, I think the whole thesis of MAA.

Was too.

Encourage high quality.

At a lower cost, thereby increasing value to that beneficiary.

I think over the last two to three years.

There have been a variety of reasons and loopholes and whatnot I think.

Different players.

Use different loopholes to get around that original thesis and I think CMS is getting back to that original thesis.

I think it's going to be good for all the companies that provide higher quality at a low cost.

And.

And I think at the end of this is going to be better for the beneficiary.

Those two concepts for.

Lot of the foundational comments, we've made around.

We are being very disciplined around growth versus margin the last couple of years.

And why we're so optimistic about the 2020 for AEP because I think.

We've held the line.

Not chasing growth at the expense of margin.

And I think I think this year, we're going to turn the jets on a little bit so.

So I think it's a good thing for the industry overall John .

Yep.

Now, having said that I'll have.

Slide provides which is I think the shift of the weighting of caps.

<unk>.

Next year I think is a really good thing for the industry I think having that be four weighted measure.

For a fraction of the membership on surveys was not indicative of the overall quality of all the plants.

So I think that's going to be a healthy thing and then when you put that in context to some of where we sit with these measures I think we're super good on quality on heat us Super good in part D and Super good on an admin and so I think net net that's going to be very advantageous for us.

And.

In the short and long term.

Alright, Thank you Sir.

I'll jump back in queue.

Got it.

Yes.

Thank you one moment our next question.

That will come from the line of Kevin Fischbeck with Bank of America. Your line is open.

Hey, this is Adam Ron on for Kevin.

Yes, I guess my question would just be around utilization.

Obviously, we cover the larger health plans in the United and Humana, Cvs and <unk>.

Talked about higher utilization MAA and I appreciate you, saying the data you have doesn't support.

No.

A higher utilization trends, but just wondering.

And the outlook you've kind of maintained.

The gross profit you expected.

Is there anything you have that could like absorb.

Potential.

Pricing utilization if that were to materialize like are you seeing reserve.

What are you seeing and how how what gives you the confidence that you won't see that kind of pressure materialize.

Yeah, Hey, Adam this is Thomas.

I think a lot of the commentary across the industry.

Dependent upon the plan has been probably centered around the outpatient setting in general and and I guess just to expand upon some of the comments we made in our prepared remarks.

We started to see some outpatient increases coming out of Covid back in the I would say kind of summer months to <unk> of 2022, so about a year ago and we.

Saw that continue into the fourth quarter and the early part of this year and so what I would say is that it's not that we haven't seen in some of the outpatient spend come back from the depressed levels. We saw during Covid I would just say that what we've seen so far this year is very much in line with our expectations and it is not that different.

And what we experienced in 2022 in other words I think we did a nice job of trying to take into account all the moving pieces. When we put together our 23 bids as well as our 2023 guidance and as we sit here today.

Obviously, we continue to see some ebb and flow across the different individual categories of spin, but big picture I think based on our off data on the outpatient side through the second quarter. We continue to feel like the utilization trends are trending pretty.

Pretty stably and inline with expectations as we think about our second half outlook.

And then.

It sounded like we just got off the phone with agile on his earnings call in May they've made it sound like they got some positive payer from CMS on like a positive retro trend adjustment and that they meaningfully increase their outlook in terms of.

What they're expecting for for TCE contribution I'm, just wondering if youre seeing some of our things are if you've noticed any changes.

Reached this year that makes you feel more confident in.

In the program.

I can't comment on their specific messaging I would say in terms of what we've seen so far I know CMS has put out a data point on the first quarter growth perspective, the retro trend benchmark and that number Youre right was I wanted to say in the.

3% to 4% range lower than the 5% to 6%, we ultimately saw in 'twenty, one and 'twenty two.

That being said what I would suggest is that.

If we were to go back in 'twenty, one and 'twenty, two and look at it on a quarterly basis that number does move around from quarter to quarter and so I think we're anticipating getting the next update from CMS over the next 30 days on the second quarter and it will continue to see how the third and fourth quarter evolves and so big picture I would say.

Probably too early for us to call that an outright win.

But relative to our expectations I would agree that.

We are running pretty in line with how we set the year to begin with in terms of guidance I think big picture, we continue to view ACO reach as a strategic.

Sort of extension of what we're trying to do on our health plan networks in other words, we view it as a way to more deeply aligned with our provider partners and to apply some of our best practices around care anywhere NEVA across a broader portion of their panels.

We think that has a benefit both to the senior into us as the plan.

But what we said in the past is that we also.

I think that the ACO reach program will continue to run at much higher <unk> than the MA book of business and while it has much lower SG&A.

Probably comparative profitability long term and for us its not something youre going to see US go crazy on in terms of growth I don't think youll see us expand into new states or new markets just to pursue ACR reach growth, but rather something that is accretive to what were otherwise trying to accomplish from a health plan growth standpoint.

Yeah.

Awesome. Thank you so much.

Thank you one moment for our next question.

That will come from the line of Jared Haas with William Blair.

Yes, good afternoon, Jared on for Ryan Daniels and thanks for taking our questions.

John you talked a little bit about some of the progress youre seeing.

In regards to two retention goals and I think you called out some improvements on the sort of internal CRM application I guess I'd be curious if there's any more color around I guess specific updates or innovations that you think are really driving retention and then I guess to ask a little bit more broadly are there any other technology investments that you think could enhance engagement.

With seniors.

Yeah, Hey, Hey, there yeah, absolutely it's been I would say.

In absolute focal point operationally for us to be laser.

On improving retention.

And so we kind of like four things. We've done is apply the technology across all the touch points of that consumer.

And.

Also make sure that the.

Vendors that we subcontract too, particularly on some of the supplemental vendors that we've used.

That we've actually really improve the I'd call it the vendor management and the quality and the service level expectations across the board.

And I think there was so much just emphasis and focus on supplemental benefits being incorporated into the 'twenty three benefits.

Lot of the vendors were stressed frankly, and I think that that caused some abrasion for us as the plan.

So we've really focused on that.

And did a really good job on frankly, replacing some of them.

The second thing we've done is we've decided to in source.

A lot of the.

Remember call functions from also vendors and we're just taking more control over that member experience.

End to end.

I think our story is so differentiated so to speak.

With care anywhere.

Our model.

Transparency with providers et cetera anyway. So so a lot of that we've taken control of <unk>.

When you combine that with the.

With the implementation of the CRM.

And if you.

Just look at the Google results.

It's really really encouraging I mean, all the feedback and the service levels are getting us back to really what got us here to begin with which is focusing on serving that senior.

And it's really a testament to.

Just the hard work of the member experience team across the board. So really this is a shout out to that whole group of people.

I think I.

I think as we sort of related to your question is I think the market and the way we've approached 24 bids just making sure you give the senior what you commit to.

So so.

It's obviously.

Obviously aggressive benefits, we're very comfortable with being opportunistic about that.

But if you say you're going to do something do it.

Simple as that both.

Two members that.

But generally healthy.

Sure that the benefit delivery.

Is just consistent reliable and then also for the.

The higher acuity patients make sure that we take care of them reliably.

With care anywhere and so both of those I think theyre going to not only improve stars it's going to improve retention is going to improve the risk adjustment of the people that we retained.

And I think it's going to improve NPS.

So it's all.

All roads lead to just the service delivery to the consumer.

Absolutely Yeah I appreciate the color there.

I guess, just one quick follow up that we had and Thomas I think you mentioned.

Sort of year over year SG&A leverage that's implied in the guidance.

I am curious how sustainable do you think that level of operating leverages going forward, especially as we think about the sort of breakeven target in 2024, obviously, there's some moving parts with some of these investment areas that you guys have outlined this.

This year. So I guess, just just kind of how sustainable should we think about that level of operating leverage going forward.

Yes, so I would absolutely expect SG&A as a percentage of revenue improvement from 23 heading into 'twenty four I'm not sure we're going to provide specific guidance today in terms of what that looks like.

The one thing I would probably say is that when you think about what drove that improvement in 'twenty three relative to 'twenty. Two there is sort of two pieces one was the.

Economies of scale associated with our MA book of business, where Dover growing membership and that sort of high teens range. This year, we're still able to deliver a pretty considerable SG&A improvement relative to the revenue growth associated with that membership and then we also saw a benefit from the ACO reach growth in 2020.

Three which as we mentioned on our prior call had been a headwind to MBR on a consolidated basis. This year, but it has also contributed to the SG&A improvement year over year and so as we think about our 2024 outlook. What I would say is while I would absolutely expect SG&A as a percentage of revenue to continue to decline next year I think given that we don't anticipate ACO.

Our reach growth and 24 to be quite as significant as it was in 'twenty three you might not see the same 180 190 basis points of improvement in 2004 that you saw in 'twenty, three but again I would take that into consideration with how that <unk> reach growth impacts both SG&A and MBR in other words. It should also be less of a headwind on MBR as we think about year over year.

Year 24 versus 23.

Okay, that's perfect that makes sense I'll hop back in the queue. Thanks.

Thank you my moment for our next question.

That will come from the line of Whit Mayo with Leerink partners. Your line is open.

Hey, Thanks, just two quick ones John would love to hear just an update on the broker strategy I know thats been a big focus in sort of evolving in terms of your thinking so would love to hear some color. There and then secondly can you remind us just the percentage of your members today and shared risk networks.

Where you think that.

Perhaps grow next year, and maybe just remind us kind of the difference on MLR.

Those shared risk arrangements versus the ones that arent in thanks.

Hey, Whit.

And congrats on Leerink partners that's awesome.

Thank you.

Yes no.

Are going to do a couple of things one is double down on the good <unk> partners that we have.

We've had great.

Retention with and growth with.

So overall I think the standards are going to be.

Just increased across the board.

In both existing markets and new markets.

We are being intentional about.

I would say more direct.

$10 99.

Our relationships with agents in certain markets.

We don't have the kind of strength.

We want some of the.

That's one of those.

I think the.

Direct employed captive strategy is going to be used in select markets.

Already starting to pay off.

And I think we alluded to it.

About 22 going to 24% kind of controlled and captives.

And so I'm happy about that.

I think the.

<unk>.

I'd say the the economic impact is going to be really felt I think in retention more so than like G&A.

I think more control and reliability of the and we alluded to this also kind of the lead Gen and the lead Gen conversion the salesforce automation initiatives.

And I think that we've got some new leaders in here that augment the existing leaders that we currently have but I think theyre, just given us more bench strength across the board.

Particularly in some of the newer markets.

And.

Yes.

And so we've been intentional about that.

And I think the.

We said this link.

Link this to.

Texas, and Florida, I think I think in.

In.

Particularly some of these new markets that has been a challenge for us building in establishing those relationships. This year I feel pretty good about it.

Been out to some of these markets we've looked.

And worked with these brokers.

And I think we're giving them something that they want that they havent had.

Which is I would call it durable.

The relationships that they can rely on is there's been a lot of people going in and out of markets on the plant side. So.

So I feel good about some of the newer markets.

And the relationships that we have there.

California, I think we are.

We are always strong feel.

We feel good about that we're tightening the belt there.

<unk>.

Just performance.

No dis enrollments five star brokers, you were going to work with you. So.

On the second Thomas you want to take the second one.

Sure I'd be happy to so we shared in the past with that.

Just over a third about 35% of our business today is his global cap.

The way, we sort of think about that as a couple of things first is some of those organizations.

Really that created the global cap model grew up in California. So in certain markets. Those are some of the best provider partners to work with in terms of quality.

And then in terms of sort of overall service delivery.

But having said that our overall strategic objective is to continue to grow our shared risk book of business faster than our global Cat book of business, both inside of California, but particularly outside of California, and the reason, we think about it that way is because as you've seen with our cohort data we tend to not only provide the best clinical experience for members.

We also provide the best financial returns in terms of lifetime value when we manage the risk ourselves as opposed to passing it on to someone else.

I think you had asked about the global cap MLR.

But what I would say is while we don't breakout our MLR by contract type or by county or anything of that nature.

California Global cap MLR.

Slightly higher than global cap MLR is across the rest of the country just because they tend to get paid a bit extra for certain services like paying claims in doing <unk>.

But generally speaking we view it as one of our key long term goals is to drive that shared risk or at risk book of business.

Two a higher percentage of the total membership over the next five years as we continue to March towards that long term MBR target.

Okay. Thanks.

Thank you.

Our next question.

That will come from the line of Jessica <unk> with Piper Sandler Your line is open.

Hi, Thanks for taking my question, So I guess.

There is to know given that next year's growth is going to be confined to.

New geographies in existing states. When do you expect new members to come on line that may be slightly lower or more favorable MBR relative to the historical.

Experience.

Or even despite the planned benefit design enhancements.

Maybe I'll take that one.

It depends on the market on the product and the provider.

That's contracted for that membership and so.

To put it in perspective, you've seen our kind of our average year one at risk MBR is kind of in the high 80%, if not 90%, but to your point there is variability where some of those new members come on and kind of low to mid nineties and on southern case and other cases come in kind of closer to the mid eighties very occasionally low 80, so I'd say that's more rare.

And so it just kind of depends on the nature of where that growth is coming from one of the things that we've taken into consideration in our 24 bit is less about whether we get the growth in a brand new market or not but it's how do we continue to invest in the product benefit value in the geographies and with the provider partners that we think are.

Im going to be the greatest tailwind towards that MBR goal in 'twenty, four and beyond and so that was really a part of our planning process. This year I think in a.

It really strategic fashion and hope we will see that continue to pay dividends next year.

Got it and then just my quick follow up would be on.

As you think about growing the percent of membership.

Shared risk networks I guess, what is the preferred structure of your shared risk contract.

And then I was hoping you could quantify the yen the MBR benefit in the second half from the part D seasonality is members moving through the catastrophically correct rich.

And Thats it for me thank you.

Yes, so I think the things we pride ourselves on in terms of our non global cap contracting is really flexibility and what I mean by that is we have contracts today that include fee for service to the PCP.

Quality incentives in some type of upside only arrangement layered on top of that whether it be on MLR share or gross profit or net income share.

We have PCP capitation contracts that also have the same thing in terms of quality incentives in some form of risk share or profit share and we have professional capitation, we're essentially paying both TCT and specialist capitation and then again, we have an aligned incentive on institutional cost to MLR share or profit share.

So it depends on the market what the provider really wants and we try to tailor our approach using the same consistent toolkit, but to do it in a contracting that meets their suits and preferences.

Versus the preferences.

In terms of part D that is.

Two to three point tailwind in the second half as compared to the first half with a little bit more of that concentrated in the fourth quarter versus the third quarter.

Great. Thank you again.

Thank you one moment for our next question.

And that will come from the line of Nathan Rich with Goldman Sachs. Your line is open.

Great. Good afternoon, thanks for the questions.

I wanted to maybe start by going back.

Excuse me to utilization.

I think.

Thomas you said the outpatient PM Pms are relatively consistent year over year, and you mentioned you kind of called out hips and knees I'd just be curious some of the other categories that we've heard called out during the second quarter cardio behavioral dental.

Maybe outside of the outpatient ortho surgery is what youre seeing from a utilization standpoint.

Yes so.

I'd say a couple of things in that list I mean, we are continuing to shift CA shift on things like hips, and knees, but broader outpatient surgeries to ASC settings, where appropriate.

And we think Thats really a win win from the consumer standpoint, as well as from the planned standpoint, So that's something we're.

Continuing to see year to date.

We have not seen I think some of the comments you've heard from others about their dental benefits and that's really more of a supplemental benefit but that's something we are not necessarily seeing the same degree as I think some others may have.

And I think the bigger picture, we're continuing to see.

Lower ER utilization, maybe than we used to in the past a bit more urgent care as opposed to ER.

And so there's a few things like that but I guess big picture.

In any given year, if I went back even before some of the recent commentary of some of the larger players out there on utilization there is sort of always pluses and minuses in a given year and so at the end of the day I think big picture, we feel good about the overall trends all.

All of those pluses and minuses taken into consideration.

Great I appreciate that.

Maybe John .

I'd be curious to get your thoughts in markets like southern California that tend to be competitive and have been competitive in the past.

How are you positioning in those markets, specifically and kind of where do you see the biggest opportunity to differentiate yourself next year as you look to capitalize on seniors and maybe looking to switch plans.

Yeah, Hey, Hey, Nate.

What I would say is looking at our product strategy.

In a way that is consistent with our care delivery models and what I mean by that is really identifying the individuals that are really in that 10% to 20% the cost $80 to 90% of the spend.

And the designing specific products around that.

<unk>.

The high acuity and the low income.

But but what we did this year was also really look at the 80% to 90% of the population they are generally healthy.

And and to design products for them.

They're going to be very confident and reliable and receiving.

And so it's a little bit different than what we've done in the past.

I think the degree of.

I would call it competitive analysis.

<unk> is just much more rigorous.

Factoring in not only the actuarial benefit values within each market.

But looking at network looking at distribution realities looking at.

Our trend analysis.

All of that got factored into the bid process this year.

Just I would say just more rigorous level.

And I think what we will expect from that is.

Something thats going to be very attractive to beneficiaries.

Again part of that competitive analysis is looking at where some of our competitors stack up and change from star ratings year to year.

And I think thats very public.

As well as the impact on the 28.

And so we're thinking about all of that.

And we also know a lot of our competitors reserve are.

Lowering the best maintaining benefits I think that's been a common theme we've heard.

I think.

We are yet again, taking a bit of a contrarian view in terms of increasing.

The markets.

Yeah.

So so in southern California, it's a tough market.

But I think with that product strategy and you combine that with our network strategy.

What we've seen in the past is.

Seniors are going to be very very loyal to their doctors, we all know that.

For situations, where the benefits aside is materially better they will shop.

And I think this is the year that that theyre going to do it so.

We will see.

And when you add that with retention focus when you add that with.

Kind of deeper provider engagement and you add that with.

New sales.

Operation kind of distribution capabilities and leadership.

I feel I feel pretty optimistic.

Great I appreciate the detail.

You got it.

Thank you and Im showing no further questions in the queue. At this time. This concludes today's program. Thank you for participating you may now disconnect.

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Okay.

Good afternoon, and welcome to alignment healthcare second quarter 2023 earnings conference call and webcast.

All participants will be in a listen only mode.

After the speaker presentation, there will be a question and answer session.

Ask a question during the session you will need to press star one one on your telephone you will.

Then here an automated message advising your hand is right.

So withdraw your question. Please press star one again.

As a reminder, this conference is being recorded.

On today's call are John Kao, founder and CEO , and Thomas Freedman, Chief Financial Officer before we begin we would like to remind you that certain statements made during this call will be forward looking statements as defined by the private Securities Litigation reform.

These forward looking statements are subject to various risks uncertainties and reflect our current expectation based on our beliefs assumptions and inform currently and information currently available to us.

'twenty two.

We believe our expectations are reasonable we undertake no obligation to revise any statements to reflect changes that occur after this call.

In addition, please note that the company will be discussing certain non-GAAP financial measures and that they believe are important in evaluating performance details.

Details on the relationship between these non-GAAP measures to the most comparable GAAP measures and reconciliation of historical non-GAAP financial measures can be found in the press release that is posted on the Companys website and in our Form 10-Q for the fiscal year ended June 32000.

And in 'twenty three.

Hello, and thank you for joining US we are pleased to deliver another strong quarter in which we met or exceeded each of our key performance indicators for the 10th consecutive quarter since our IPO.

For the second quarter 2023, our total revenue of $462 4 million represented 26% growth year over year.

We ended the quarter with health plan membership of 112, 200 members growing 17% year over year.

Adjusted gross profit of $53 6 million producing a consolidated MBR of 88, 4% better than our implied outlook range of 88, 6% to 89, 1%.

Importantly, we delivered an MBR of 87, 1%, excluding our ACO reach business.

Meanwhile, our adjusted EBITDA was negative $2 1 million well ahead of our outlook range.

As I reflect on our year to date results and pleased with the progress we have made across the organization. We continue to improve upon our care model each year and in the second quarter inpatient admissions per thousand ran at a 151 an improvement from 163 in the first quarter in one of our best Q2 results in the history of the company.

This brings our year to date inpatient admissions per 157, which is in line with the prior year and consistent with our expectations, all while growing well above the industry.

Well Thomas will drill into more detail during his remarks I'd like to emphasize that we feel confident in our ability to drive our MBR lower in the second half and achieve our adjusted gross profit guidance for the full year.

Our confidence is underpinned by our successful utilization outcomes driven by care anywhere and Eva in the second quarter. We also see further upside as we continue to improve our care anywhere engagement rates and execute against our network performance management initiatives.

Together with regular part D seasonality. We believe these factors will deliver our anticipated MBR improvement in the back half of the year and position us for a robust 2024 as.

As we think about our 2024 objectives under long term MBR target. We are laser focused on actions to improve our member mix by network and product in 2024.

Vesting at Avis external provider capabilities, and enhancing infrastructure to engage and manage these networks.

Beyond our gross margin trends I'd like to highlight the progress our team is making against our sales and retention goals as we laid out at the beginning of the year.

<unk> to higher quality supplemental benefit vendors retention initiatives with our distribution partners and continued deployment of our call Center plan.

As we scale up our business, we are actively seeking to improve our mix of internal versus external sales, while also making improvements to our sales operations infrastructure today.

These efforts complement our plans to double down a high performing external brokers as we gear up for the upcoming AEP.

While still early I would like to share some comments on our bids.

As we previously discussed we believe competitors within our markets will be challenged a lower stars payment and face risk adjustment pressure with.

With the competitive landscape is shifting in our favor in 2024, we are leaning into the opportunity by maintaining or increasing our product richness across each of our markets.

This cycle, we also refined our product strategy to more directly address our seniors in a similar fashion to how we think about our clinical operations.

Does this approach curates distinct products that complement the need of two key member types.

Low utilizing healthy seniors, who value immediate savings and hybrid of seniors with whom we tend to see the greatest level of engagement with our care anywhere programs.

We are creating clear and more competitive products by simplifying member benefits and concentrating benefit value in high impact areas that we believe will drive growth.

Taken together, we are excited that our product approach combined with relative tail winds on stars and Rep will decisively set us apart from other plants and the upcoming AEP.

Lastly, given our confidence in our existing market growth strategies, and our focus on achieving adjusted EBITDA breakeven, we are limiting our new market expansions to instate expansions in 2024. However.

However, we are actively engaged in strategic discussions with provider partners and health systems in new and existing states as we plan for 2025.

We are optimistic about our opportunity set and we look forward to sharing more about our growth pipeline in the future.

Before I close I'd like to thank each and every employee who has helped US further our mission to improve health care once senior at a time.

Our investments and activities in the first half position us well to deliver on our full year commitments and achieve our 2024 growth in breakeven objectives.

With that I'll turn the call over to Thomas to review, our financial performance Thomas.

Thanks, John for the quarter ending June 2023, our health plan membership of 112200 increased 17% compared to a year ago, our second quarter revenue of $462 $4 million represented 26% growth year over year. This strong result was driven by Medicare advantage.

<unk> that exceeded our outlook combined with favorability in our revenue <unk> due to the timing of the annual CMS sweep cycle.

Towards our ESR D and skilled nursing facility members.

<unk> comprises roughly two thirds of the year over year difference in MBR, while revenue in the quarter benefited from some positive prepayments. This year. The gross profit impact was meaningfully lower due to contract mix.

On the outpatient utilization our paid claims P. M. P M for all outpatient elective procedures in the first quarter remained roughly in line year over year, including hip and knee replacements, which were within $3 <unk> in the prior year.

Turning to Opex SG&A in the quarter was $70 $2 million, excluding equity based compensation expense or SG&A was $56 3 million, an increase of nine 8% year over year.

Lastly, our adjusted EBITDA was negative $2 1 million well ahead of our expectations movie.

As a reminder, this does not have any impact on our income statement metrics cash and investments excluding the early payment were $370 million.

Turning to our guidance for the third quarter, we expect health plan membership to be between 113501 hundred 13700 members.

Revenue to be in the range of $440 million and $445 million.

Adjusted gross profit to be between $54 million and $57 million.

And adjusted EBITDA to be in the range of a loss of $12 million to a loss of $9 million.

For the full year 2023, we expect health plan membership to be between 113501 hundred 15500 members revenue to be in the range of $1 76 billion and $1 seven to eight 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.

We are also raising our full year revenue guidance on the back of our second quarter revenue outperformance, which now implies 24% growth year over year at the midpoint of the outlook range.

Next we are reiterating our adjusted gross profit guidance for the full year second half seasonality, which implies an MBR of 86, 6% to 87, 7% reflects a favorable mix of duals achieved year to date.

A continuation of utilization trends experienced in the first half.

And normal seasonality of part D MBR, which is more profitable in the second half as compared to the first half we.

We additionally, see opportunity, resulting from our initiatives to drive increased provider relationship alignment and operational efficiency. This entails extending Eva and care anywhere to more of our contracted doctors to reduce high cost cases and improved medical management.

Further we are actively managing payment integrity vendors and processes and anticipate tailwind associated with those efforts to materialize in the third and fourth quarter.

Our overall views on SG&A and adjusted EBITDA are unchanged in spite of our higher membership growth. We now anticipate delivering a 190 basis point improvement in SG&A as a percentage of revenue in 2023 relative to 2022.

Lastly, as mentioned earlier, we feel good about our overall utilization outlook and believe we have fully incorporated our medical cost experience into our bid assumptions for 2024.

With that let's open the call to questions operator.

Thank you as a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.

One moment, while we wait for the Q&A to compile.

Okay.

Our first question will come from the line of Michael Hall with Morgan Stanley . Your line is open.

Hi, Thank you yes.

Very solid earnings outperformance, so far year to date about $20 million better than expectation.

Mid years prepayment benefits MLR.

Tend to be most engaged with our care anywhere programs and therefore, we often see the highest returns from a financial standpoint, as we continue to grow that book of business.

Second I think in spite of some of the concerns across the industry, we still feel really confident in how our utilization trends are evolving and we delivered one of our best second quarter. We've had in the history of the company in terms of our inpatient utilization metric, which is as you know is one of our major Kpis. We track in terms of monitoring overall claims spend and then lastly, we do.

Have some tailwind from the first half heading into the second half with part D, where the fourth quarter in particular tends to be most profitable in terms of quarterly seasonality just as it relates to the catastrophic protection that come into play over the course of the year as members incur more drug cost.

Of our AEP growth coming up as well as the impact of the 2008 on overall risk model changes and so we're continuing to invest in extra few million dollars in the back half of the year given our year to date outperformance and that's also reflected in our our overall MBR updated outlook.

The last thing is you have seen our cohorts before our new members typically comment around 90% MBR and then trend down into the low <unk> and even the high seventy's overtime and so just given that year to date sales outperformance, we are absorbing a bit of higher MBR related to that new membership.

But we're holding the line on SG&A to ensure that we offset that from an SG&A as a percentage of revenue standpoint to show flat if not improving overall EBITDA margin in 'twenty three.

Great. Thank you I appreciate that.

So while the focus has been basically breakeven target next year given the rate environment, just how unique 2024 is with the possibly being.

Arguably the biggest year for planned shopping and the relative strength of your star ratings, I think John mentioned actually maintaining or increasing product richest next year, which is quite powerful and so I think most plans are reducing benefits.

Golden opportunity to grab market share.

Average member retention is quite high for lifetime value at extremely attractive.

So with that said two questions one what level of membership growth in excess of your 20% target next year do you believe could begin to place some pressure on your 24 breakeven target in Q, how much of incremental long term earnings value. That's outsized membership growth provides alignment in your multiyear story for example.

I'd say every 100 bps of excess member growth above 20% is there a way to quantify or articulate just how beneficial it is for your long term earnings trajectory.

Thank you.

Yes, so in terms of the overall AEP outlook as John described we're really excited and we're really.

Comfortable with the way, we've tried to find that balance between growth and profitability and as we think about I think your question was is there a certain level of growth that would cause us concern about achieving our breakeven target next year on an EBITDA basis.

And I think the answer is no and the reason we say that is yes, new members do tend to come on with a bit higher MBR than a kind of more tenured members that's been with us for a few years. However.

Any MBR pressure, we might see from significantly outsized growth. We also would expect to see an offset on SG&A part of our SG&A is of course variable that we have to continue to grow to support a membership, but we have a lot of fixed costs, particularly those we've incurred.

Without wishing yourselves as a public company over the last few years that we anticipate seeing economies of scale on as we continue to grow overall membership. So we we don't look at it as a tradeoff, where if you've got a certain amount of growth. It's a problem to our EBITDA breakeven target, we actually think it would be neutral if not additive to that objective and then to your point the comp.

Pounding benefit as that group growth in 'twenty, four really starts to pay dividends in the form of lifetime value into years, two three and four and so the way I would think about it in terms of our previous cohort analyses. We've shared as I mentioned earlier as you can see about at least 10, if not 15 percentage point improvement in MBR from year one.

Through year five as.

As we manage the membership engage them clinically and continue to deploy all of our care anywhere efforts and so that's sort of the way we think about it is the investments we make today.

Drive the short term membership growth, but really pay long term dividends in the form of MLR improvement.

Perfect. Thank you guys.

Thank you one moment for our next question.

Thanks again.

That will come from the line of John Ransom with Raymond James Your line is open.

Hey, good morning.

We have the stars coming up in September .

Yes, I know that Youre, a big plan on a raw basis kind of close to some of the points to three five I was just wondering how youre thinking about.

That dynamic as we head into the fall.

Hey, John It's John .

Yes, I feel a lot better actually.

Right now than I did 90 days ago, I think a lot of the execution.

Around all of the measures.

<unk> is coming in.

Better.

And on the better side.

On four or five specific measures than we had originally thought.

It's still early obviously, we're still waiting for the overall cut points.

I had shared earlier in the year it was pretty close for comfort too close for comfort, but right now I feel really very positive.

And the California, maintaining before.

I think there is opportunity with some of the other states to even.

Get better.

And.

And so we'll see.

I think industry wide and then were not an exception I think caps.

It is challenging for everybody.

But I think we're so good on some of the heat as admin and part D measures that.

<unk>.

That we're going to be we're going to be okay. That's my latest thinking again subject to the to the to the final cut points that we'll know in the next.

A couple of months.

And when you mentioned four or five things.

What four or five things I mean, there's so many different measures, but which four five that you focus on doing better.

Yes, they were.

Tty was one example.

<unk> was another example of <unk> is another example in and a lot of our analysis, we were kind of on the bubble.

On some of these different metrics.

As we've gotten more and more data.

Trying to edge toward the good side of Av.

Both of those different measures.

Whether it was.

We're sitting in the middle between the three out of four or four to five et cetera.

End of <unk>.

Getting more data to get us more comfortable rolling on the.

Good guys side of that.

And just lastly, I keep asking.

Do you agree with the general thesis that Theyre, just raising the bar and so the overall number of if you had 100 people on MAA across the country youre going to have fewer than four star plans.

Under the new measures than you did this year do you think they're just trying to shrink that and raise the bar that that's what it looks like but do you agree with that general.

So I mean, I think the whole thesis of MAA.

Does too.

Encourage high quality.

At a lower cost, thereby increasing value to that beneficiary.

I think over the last two to three years, there have been a variety of reasons and loopholes and whatnot that I think dish.

Different players.

Use different loopholes to get around that original thesis and I think CMS is getting back to that original thesis.

I think it's going to be good for all the companies that provide higher quality at a low cost.

And.

And I think at the end of this is going to be better for the beneficiary.

Those two concepts for.

A lot of the foundational comments, we've made around we are being very disciplined around growth versus margin. The last couple of years.

And why we're so optimistic about 2020 for AEP because I think.

We've held the line.

Not chasing growth at the expense of margin.

And I think I think this year, we're going to turn the jets a little bit so.

So I think it's a good thing for the industry overall John .

Yes.

Now, having said that I'll have a slide provides which is I think the shift of the weighting of caps.

<unk>.

Next year I think is a really good thing for the industry I think having that be a four weighted measure.

For a fraction of the membership on surveys was not indicative of the overall quality of all the plants.

And.

The short and long term.

Alright, Thank you Sir.

I'll jump back in queue.

Got it.

Yes.

Thank you one moment our next question.

That will come from the line of Kevin Fischbeck with Bank of America. Your line is open.

Hey, this is Adam Ron on for Kevin.

Yes, I guess my question would just be around utilization, obviously, we cover the larger health plans in the United and Humana, Cvs and <unk>, all talked about higher utilization MAA and I. Appreciate you, saying the data you have doesn't support.

Being higher utilization trends, but just wondering.

And the outlook you've kind of maintained.

The gross profit you expected.

Is there anything you have that could absorb.

Potential.

Pricing utilization if that were to materialize like are you seeing reserve.

What are you seeing and how how what gives you the confidence that you won't see that kind of pressure materialized.

Yeah, Hey, Adam this is Thomas.

So I think a lot of the commentary across the industry.

Dependent upon the plan has been probably centered around the outpatient setting in general.

And I guess just to expand upon some of the comments we made in our prepared remarks.

We started to see some outpatient increases coming out of Covid back in the I would say kind of summer months to <unk> of 2022, so about a year ago and we saw that continue into the fourth quarter and the early part of this year and so what I would say is that it is.

Not that we haven't seen some of the outpatient spend come back from the depressed levels. We saw during Covid I would just say that what we've seen so far this year is very much in line with our expectations.

It's not that different than what we experienced in 2022 in other words I think we did a nice job of trying to take into account all the moving pieces. When we put together our 23 bids as well as our 2023 guidance.

And as we sit here today.

And then.

It sounded like we just got off the phone with agile on the earnings call in May they've made it sound like they got some positive payer from CMS on like a positive retro trend adjustment and that they meaningfully increase their outlook in terms of.

What they are expecting for <unk>.

Fee contribution I'm, just wondering if youre seeing similar things or if you've noticed any changes in <unk>.

ACO reached this year that makes you feel more confident.

And the program.

2% to 6%, we ultimately saw in 'twenty, one and 'twenty two.

That being said what I would suggest is that.

Probably too early for us to call that an outright win.

But relative to our expectations I would agree that.

We are running pretty in line with how we set the year to begin with in terms of guidance.

Big picture, we continue to view ACO reach as a strategic.

Sort of extension of what we're trying to do on our health plan networks in other words, we view it as a way to more deeply align with our provider partners and to apply some of our best practices around carrier anywhere NEVA across a broader portion of their panels.

We think that has a benefit both to the senior into us as the plan, but what we said in the past is that we also.

I think that the ACO reach program will continue to run at much higher <unk> than the MA book of business and while it has much lower SG&A.

Thank you so much.

Thank you one moment for our next question.

That will come from the line of Jared Haas with William Blair.

Yes, good afternoon, Jared on for Ryan Daniels and thanks for taking our questions. Johnny you talked a little bit about some of the progress you're seeing in regards to retention goals and I think you called out some improvements on the sort of internal CRM application I guess I'd be curious if there's any more color around I guess specific updates or innovations that you.

Think of really driving retention and then I guess to ask a little bit more broadly are there any other technology investments that you think could enhance engagement with seniors.

Yeah, Hey, there, yes, absolutely it's been I would say.

In absolute focal point operationally for us to be laser.

On improving retention.

And so we kind of like four things. We've done is apply the technology across all the touch points of that consumer.

And and and also make sure that the vendors that we subcontract to particularly on some of the supplemental vendors that we've used.

That we've actually really improve the I'd call it the vendor management and the quality and the service level expectations across the board.

And I think there was so much just emphasis and focus on supplemental benefits being incorporated into the 'twenty three benefits.

Lot of the vendors were stressed frankly, and I think that that caused some abrasion for us as the plan.

So we've really focused on that.

And done a really good job on frankly, replacing some of them.

The second thing we've done is we've decided to in source.

A lot of the.

Remember call functions from also vendors and we're just taking more control over that member experience.

End to end.

I think our story is so differentiated so to speak.

With with care anywhere our care model.

Transparency with providers et cetera anyway. So so a lot of that we've taken control of and then you combine that with the.

With the implementation of the CRM.

And if you.

Just look at the Google results.

It's really really encouraging I mean, all the feedback and the service levels are getting us back to really what got us here to begin with which is focusing on serving that senior.

And it's really a testament.

Testament to.

Just the hard work of the member experience team.

Across the board. So really this is a shout out to that whole group.

People.

I think I see.

Think as we said are related to your question.

As I think the market and the way we've approached 24 bids.

Just making sure you give the senior what should commit to.

So it's it's.

It's.

Obviously aggressive benefits, we're very comfortable with being opportunistic about that.

But if you say you're going to do something do it.

As a simple is that both.

Two members that.

But generally healthy so to make sure that the benefit delivery is.

Just consistent reliable and then also for the.

The higher the <unk>.

<unk> patients make sure that we take care of them reliably.

With care anywhere and so both of those I think theyre going to not only improve the stars.

To improve retention, it's going to improve the risk adjustment of the people that we retained.

I think it's going to improve NPS.

So it's all.

All roads lead to just service delivery to the consumer.

Absolutely Yeah I appreciate the color there.

I guess, just one quick follow up that we had and Thomas I think you mentioned.

Sort of year over year SG&A leverage that's implied in the guidance.

Yes, I am curious how sustainable do you think that level of operating leverages going forward, especially as we think about the sort of breakeven target in 2024, obviously, there's some moving parts with some of these investment areas that you guys have outlined.

This year, so I guess, just kind of how sustainable should we think about that level of operating leverage going forward.

Yes, so I would absolutely expect SG&A as a percentage of revenue improvement from 23 heading into 'twenty four I'm not sure. We're in a kind of provide specific guidance today in terms of what that looks like.

So the one thing I would probably say is that when you think about what drove that improvement in 'twenty three relative to 'twenty. Two there is sort of two pieces one was the.

Kind of economies of scale associated with our MA book of business, where Dover growing membership and that sort of high teens range. This year, we're still able to deliver a pretty considerable SG&A improvement relative to the revenue growth associated with that membership and then we also saw a benefit from the ACO reach growth in 2020.

Three which as we mentioned on our prior call has been a headwind to MBR on a consolidated basis. This year, but has also contributed to the SG&A improvement year over year and so as we think about our 2024 outlook. What I would say is while I would absolutely expect SG&A as a percentage of revenue to continue to decline next year I think given that we don't anticipate ACO.

Reach growth in 24 to be quite as significant as it was in 'twenty three you might not see the same 180 190 basis points of improvement in 2004 that you saw in 'twenty, three but again I would take that into consideration with how that ACO reach growth impacts both SG&A and MBR in other words. It should also be less of a headwind on MBR as we think about year over.

Year 24 versus 23.

Okay, that's perfect that makes sense I'll hop back in the queue. Thanks.

Thank you my moment for our next question.

That will come from the line of Whit Mayo with Leerink partners. Your line is open.

Hey, Thanks, just two quick ones John would love to hear just an update on the broker strategy I know that's been a big focus in sort of evolving in terms of your thinking so would love to hear some color. There and then secondly can you remind us just the percentage of your members today in and shared risk networks.

Where you think that could perhaps go next year and maybe just remind us kind of the difference on MLR.

Those shared risk arrangements versus the ones that are in thanks.

Hey, Whit.

And congrats on Leerink partners that's awesome.

Thank you.

Yes no.

Are going to do a couple of things one is double down on the good <unk> partners that we have.

We've had great.

Retention with and growth with.

So overall I think the standards are going to be.

Just increased across the board.

In both existing markets and new markets.

We are being intentional about.

I would say more direct.

$10 99.

Our relationships with agents in certain markets.

We don't have the kind of strength.

What some of the.

That's on those.

I think the.

Direct employed chapter strategy is going to be used in select markets.

Already starting to pay off.

And I think we alluded to it.

About 22 going to 24% kind of kind of controls and captives.

And so I'm happy about that.

I think the.

The.

I'd say the the economic impact is going to be really felt I think in retention more so than like G&A.

I think more control and reliability of the and we alluded to this also kind of the lead Gen and the lead Gen conversion the salesforce automation initiatives.

And I think that we've got some new leaders in here that augment the existing leaders that we currently have but I think theyre, just given us more bench strength across the board.

Particularly in some of the newer markets.

And.

Yes.

And so we've been intentional about that.

And.

And I think the.

We said this link.

Link this to.

Texas, and Florida, I think I think in.

In.

Particularly some of these new markets that has been a challenge for us building in establishing those relationships. This year I feel pretty good about it.

Been out to some of these markets we've looked.

And worked with these brokers.

And I think we're giving them something that they want that they havent had.

Which is I would call it durable.

The relationships that they can rely on is there's been a lot of people going in and out of markets on the plant side.

So I feel good about some of the newer markets.

And the relationships that we have there and the California I think we are.

We are always strong.

Feel good about that we're tightening the belt there.

<unk>.

Just performance.

No disinterested.

Enrollments five star brokers, you were going to work with you so.

On the second Thomas you want to take the second one.

Yes, sure I'd be happy to so we shared in the past with that.

Just over a third about 35% of our business today is his global cap.

And the way, we sort of think about that as a couple of things first is some of those organizations.

Really that created a global cap model grew up in California. So in certain markets. Those are some of the best provider partners to work with in terms of quality.

And in terms of sort of overall service delivery.

We also provide the best financial returns in terms of lifetime value when we manage the risk ourselves as opposed to passing it on to someone else.

I think you had asked about the global cap Mlr's, but what I would say is while we don't break out our MLR by contract type or by county or anything of that nature.

California Global cap MLR.

Slightly higher than global cap MLR is across the rest of the country just because they tend to get paid a bit extra for certain services like paying claims in doing <unk>.

But generally speaking we view it as one of our key long term goals is to drive that shared risk or at risk book of business.

Two a higher percentage of the total membership over the next five years as we continue to March towards that long term MBR target.

Okay. Thanks.

Thank you.

Our next question.

That will come from the line of Jessica <unk> with Piper Sandler Your line is open.

Hi, Thanks for taking my question so.

I'm curious to know given that next year's growth is going to be confined to.

New geographies in existing states. When do you expect new members to come on line that may be slightly lower or more favorable MBR relative to the historical.

Experience.

Even despite the planned benefit design.

Maybe I'll take that one Jeff.

It depends on the market on the product and the provider.

Contract for that membership and so.

Put it in perspective, you've seen our kind of our average year one at risk MBR is kind of in the high 80%, if not 90%, but to your point there is variability where some of those new members come on and kind of low to mid nineties.

Another case and other cases come in kind of closer to the mid eighties very occasionally low 80, so I'd say, that's more rare and so it just kind of depends on the nature of where that growth is coming from one of the things that we've taken into consideration in our 24 bit is less about whether we get to growth in a brand new market or not but it's how do we can.

You need to invest in the product benefit value in the geographies and with the provider partners that we think are going to be the greatest tailwind towards that MBR goal in 'twenty, four and beyond and so that was really a part of our planning process. This year I think it.

It really strategic fashion and hope we will see that continue to pay dividends next year.

Got it and then just my quick follow up would be.

As you think about growing the percent of membership.

Shared risk networks I guess, what is the preferred structure of your share gross contract.

And then I was hoping you could quantify the yen the MBR benefit in the second half from the part D seasonality is members moving through the catastrophically correct.

And that's it for me thank you.

<unk> quality incentives in some type of upside only arrangement layered on top of that whether it be MLR share or gross profit or net income share.

We have PCP capitation contracts that also have the same thing in terms of quality incentives in some form of risk share or profit share and we have professional capitation, where we're essentially paying both TCT and specialist capitation and then again, we have an aligned incentive on institutional cost to MLR share or profit share.

It depends on the market what the provider really wants and we try to tailor our approach using the same consistent toolkit, but to do it in a contracting that meets their suits and preferences.

Versus the preferences.

In terms of part D.

That is.

Probably a two to three point tailwind in the second half as compared to the first half with a little bit more of that concentrated in the fourth quarter versus the third quarter.

Great. Thank you again.

Thank you one moment for our next question.

And that will come from the line of Nathan Rich with Goldman Sachs. Your line is open.

Great. Good afternoon. Thanks for the questions I wanted to maybe start by going back.

Excuse me to utilization.

I think.

Thomas you said outpatient PM Pms are relatively consistent year over year, and you mentioned you kind of called out hips and knees I'd just be curious some of the other categories that we've heard called out during.

During the second quarter cardio behavioral dental.

Maybe outside of the outpatient or those surgeries, what youre seeing from a utilization standpoint.

Yes so.

I'd say a couple of things in that list I mean, we are continuing to shift CA shift on things like hips, and knees, but brought our outpatient surgeries to ASC settings, where appropriate.

And we think Thats really a win win from the consumer standpoint, as well as from the planned standpoint, so thats something were continuing.

Continuing to see year to date.

And I think the bigger picture, we're continuing to see.

Lower ER utilization, maybe than we used to in the past a bit more urgent care as opposed to ER.

And so there's a few things like that but I guess big picture.

In any given year, if I went back even before some of the recent commentary of some of the larger players out there on utilization.

All these pluses and minuses in a given year and so at the end of the day I think big picture, we feel good about the overall trends.

Those pluses and minuses taken into consideration.

Great I appreciate that in May.

Maybe John .

I'd be curious to get your thoughts in markets like southern California that tend to be competitive and have been competitive in the past.

Hey, Hey, Nate.

What I would say is looking at our product strategy.

The way that is consistent with our care delivery.

Models, and what I mean by that is really identifying the individuals that are really in that 10% to 20% the cost $80 to 90% of the spend.

And the designing specific products around that.

And.

The high acuity and the low income.

But but what we did this year was also really look at the 80% to 90% of the population they are generally healthy.

And and the design products for them.

They're going to be very confident and reliable and receiving.

And so it's a little bit different than what we've done in the past.

I think the degree of.

I would call it competitive analysis.

Is just much more rigorous.

Factoring in not only the actuarial benefit values within each market, but looking at network looking at distribution realities looking at.

Our trend analysis.

All of that got factored into the bid process this year.

Just I would say just more rigorous level.

And I think what we will expect from that is.

Yeah.

Something that's going to be very attractive to beneficiaries.

Again part of that competitive analysis is looking at where some of our competitors stack up and change from star ratings year to year.

And I think thats very public.

As well as the impact on the 28.

And so we're thinking about all of that.

And we also know a lot of our competitors or are kind of lowering it.

Best maintaining benefits I think that's been a common theme we've heard.

Thank you.

We are yet again, taking a bit of a contrarian view in terms of increasing that a lot of the markets.

So so in southern California, it's a tough market.

But I think with that product strategy and you combine that with our network strategy.

What we've seen in the past is.

Seniors are going to be very very loyal to their doctors, we all know that.

Seth for situations, where the benefits aside is materially better they will shop.

And I think this is the year that that theyre going to do it so.

We will see but when you add that with retention focus when you add that with.

Kind of deeper provider engagement and you add that with.

New sales.

Operation kind of distribution capabilities and leadership.

I feel I feel pretty optimistic.

Great I appreciate the detail.

You got it.

Thank you and I'm showing no further questions in the queue. At this time. This concludes today's program. Thank you for participating you may now disconnect.

Q2 2023 Alignment Healthcare Inc Earnings Call

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