Q4 2023 Alignment Healthcare Inc Earnings Call
Operator: Alignment Hlthcr Good afternoon, and welcome to Alignment Hlthcr's fourth quarter 2023 earnings conference call and webcast. All participants will be in a listen-only mode.
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Good afternoon, and welcome to the alignment healthcare its fourth quarter 2023 earnings conference call and webcast all participants will be in a listen only mode. After today's presentation there'll be an opportunity to ask questions to ask a question. During this session you will need to press star one one on your telephone you would then hearing an automated message advising you handle.
Operator: After today's presentation, there will be an opportunity to ask questions. To ask a question during the session, you will need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 again. Please note that this event is being recorded. Leading today's call are John Cahill, Founder and CEO, and Thomas Freeman, 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 four forward-looking statements are subject to various risks and uncertainties and reflect our current expectations based on our beliefs, assumptions, and information currently available to us.
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To withdraw your question. Please press star one again please.
Please note that this event is being recorded.
Leading today's call are Jon <unk>, 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 subject to various risks and uncertainties and reflect our current expectations based on our beliefs assumptions and information currently available to us.
Operator: 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 31, 2023. Although we believe our expectations are reasonable, we undertake no obligation to revise any statements to reflect changes that occur after this call.
A description 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 31 2023.
Although we believe our expectations are reasonable we undertake no obligations to revise any statements to reflect changes that occur after this call.
Operator: In addition, please note that the company will be discussing certain non-GAAP financial measures that it believes are important in evaluating performance. 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 company's website and in our Form 10 case for the fiscal year ended December 31, 2023. And now I'd like to turn the cult over to your first speaker, John Cale, founder and CEO.
In addition, please note that the company will be discussing certain non-GAAP financial measures that they believe are important in evaluating performance.
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-K for the fiscal year ended December 31 2023.
And now I'd like to turn the call over to your first Speaker, John co founder and CEO.
John Cahill: Hello, and thank you for joining us on our fourth quarter earnings conference call. For the fourth quarter of 2023, our total revenue of $465 million represented approximately 29% growth year-over-year. We ended the quarter with health plan membership of 119,200 members, growing approximately 21% year-over-year. Adjusted gross profit was $49 million, producing a consolidated MBR of 89.4%. While our MBR excluding ACO reach was 88%, in line with our expectations. Lastly, our adjusted EBITDA was negative $20 million.
Hello, and thank you for joining us on our fourth quarter earnings Conference call.
For the fourth quarter 2023, our total revenue of $465 million represented approximately 29% growth year over year.
We ended the quarter with health plan membership of 119200 members growing approximately 21% year over year.
Adjusted gross profit was $49 million producing a consolidated MBR of 89, 4%, while our MBR, excluding ACO reach was 88% in line with our expectations.
Lastly, our adjusted EBITDA was negative $20 million.
John Cahill: Concluding the full year, total revenue of $1.82 billion grew 27%, and adjusted gross profit of $209 million resulted in an MBR of 88.5% and an MBR excluding ACO reach of 87.6%. Adjusted EBITDA was a loss of $35 million, consistent with our comments from our January 8th 8K. In 2023, we demonstrated why our purpose-built Medicare Advantage business model is built to thrive in the current MA environment. We generated strong membership growth, demonstrated control over our medical utilization, outperformed the market in STARS, and made investments to position us for even greater success in 2024. Our differentiated clinical platform is what enabled us to simultaneously achieve all of these objectives. We use employed clinical teams informed by actionable data to manage the care of our members, thus controlling costs. Our ability to take action on insights through direct data feeds from near real-time pharmacy, lab, admission, discharge, transfer, and authorization data is a significant competitive advantage in controlling our MBR and achieving excellent STARS results.
Including the full year total revenue of one point.
Eight 2 billion grew 27% and adjusted gross profit of $209 million resulted in an MBR of 88, 5%.
MBR, excluding ACO reach of 87, 6%.
Adjusted EBITDA was a loss of $35 million consistent with our comments from our January 8-K.
In 2023, we demonstrated why our purpose built Medicare advantage business model is built to thrive in the current M&A environment.
We generated strong membership growth demonstrated control over our medical utilization outperformed the market in stars and made investments to position us for even greater success in 2024.
Our differentiated clinical platform is what enabled us to simultaneously achieve all of these objectives last year we.
We use employed clinical teams informed by actionable data to manage the care of our members thus controlling the cost or.
Our ability to take action on insights through direct data feeds from near real time Pharmacy lab.
Admission discharge transfer and authorization data is a significant competitive advantage in controlling our MBR and achieving excellent stars results.
John Cahill: This past year, we again proved the ability of our clinical platform to control medical costs by managing care. Despite many industry participants noting higher inpatient utilization, our inpatient admissions per thousand for our at-risk members ran at 156, slightly better than the prior year of 159 and nearly 40% better than traditional Medicaid. More recently, during the fourth quarter, we saw a 7% year-over-year decline in inpatient volumes.
This past year, we again proved the ability of our clinical platform to control medical costs by managing care.
Despite many industry participants, noting higher inpatient utilization our inpatient admissions per thousand for our at risk members ran at a 156 slightly better than the prior year of 159, and nearly 40% better than traditional Medicare.
More recently during the fourth quarter, we saw 7% year over year decline in inpatient volume.
John Cahill: This trend continued to persist into January 2024. Furthermore, our model gave us early visibility into the increasing outpatient population. These trends started emerging in 2022, but we did not see a year over year increase in utilization or the impact of MBR in 2023. We expect the utilization levels we saw in 2023 to remain in 2024. Our visibility is also giving us early insight into a year-over-year step-up in supplemental benefit utilization in January. We have incorporated this into our guidance and are actively managing these trends. Thomas will share more on this in his remarks.
This trend continued to persist into January 2024.
Further our model gave us early visibility and the increasing outpatient trends. These trends started emerging in 2022, but we did not see a year over year increase in utilization or impact of MBR. In 2023, we expect the utilization levels. We saw in 2023 to remain in 2024.
Our visibility is also giving us early insight into a year over year step up in supplemental benefit utilization in January.
We have incorporated this into our guidance are actively managing these trends Thomas will share more of this in his remarks.
John Cahill: Taken together, our model is advantaged by enhanced visibility through AVA and control of member care provided by our employed clinical team. We utilize these capabilities to create a shared risk model with community providers that is competitively advantaged in Medicare Advantage, relative to models that rely on actuary underwriting or risk transfer through global capitation. Our ability to manage risk, drive higher quality clinical outcomes, and produce medical cost savings translates into more value for our members. This enables Alignment to grow membership above market rates at an attractive margin profile. As we contemplate our 2024 guidance, we are proud to share that our model continues to differentiate alignment in the market. As we noted earlier in the year, we began 2024 with 155,500 health plan members after our successful 2024 annual enrollment period. We further expect to end 2024 with 162,000 to 164,000 members, representing 37% growth year over year at the midpoint. Our AEP performance and full year membership outlook resulted from our focused investments across STARS, member experience, AVA technology enhancements, and sales operations in 2020. We reduced our churn during AEP by 24% year over year.
Taken together our model is advantaged by enhanced visibility through Ava and control of member care provided by our employed clinical teams.
We utilize these capabilities to create a shared risk model with community providers that is competitively advantaged in Medicare advantage relative to models that rely on actuarial underwriting or risk transfer through global capitation.
Our ability to manage risk drive higher quality clinical outcomes and produce medical cost savings translates into more value for our members.
This enables alignment to grow membership above market rates at an attractive margin profile.
As we contemplate our 2024 guidance, we are proud to share that our model continues to differentiate alignment in the marketplace.
As we noted earlier in the year, we began 2024 with 155500 health plan members. After a successful 2024 annual enrollment period.
We further expect to end 2024, with 162000 to 164000 members, representing 37% growth year over year at the midpoint.
Our AEP performance of full year membership outlook resulted from our focused investments across stars.
Member experience, Eva technology enhancements and sales operations in 2023.
We reduced our churn during AEP by 24% year over year.
John Cahill: We also leveraged our strong star rating relative to our competitors to take share in the market, with 82% of our AEP sales coming from planned switch. As in past years, we have a disciplined process that balances growth and profitability. Even with this growth, we expect our health plan MBR to be roughly unchanged year over year.
We also leveraged our strong stars ratings relative to our competitors to take share in the market with 82% of our AEP sales coming from planned switchers.
As in past years, we have a disciplined process, which balances growth and profitability.
Even with this growth, we expect our health plan MBR to be roughly unchanged year over year.
John Cahill: Our adjusted gross profit guidance is underpinned by improvements to returning member MBR, partially offset by hired new member MBR. For returning members, our clinical model drives an average 800 basis point improvement in at-risk MBR between years one and five. The improvement in member retention will also contribute to strong returning member MBR.
Our adjusted gross profit guidance is underpinned by improvements to returning member MBR, partially offset by higher new member MBR.
For returning members our clinical model drives it averaged 800 basis point improvement in at risk MBR between years, one at five <unk>.
The improvement in member retention will also contribute to strong returning member MBR for new members, we design products to generate positive new member gross profit to support our overall profitability goals.
John Cahill: For new members, we design products to generate positive new member gross profit that supports our overall profitability goals. New members typically begin at a higher NBR of approximately 89%, and given our significant growth through AEP, we expect these members to partially offset returning member NBR improvement. However, these members are still expected to be accretive to gross profit.
New members typically begin at a higher ABR of approximately 89% and given our significant growth through AEP. We expect these members to partially offset returning member MBR improvement.
These members are still expected to be accretive to gross product profit.
John Cahill: In total, we are confident in our 2024 MBR outlet because, first, we held benefits stable, increasing supplemental benefit value by just 0.7% year over year. Second, our new member wrap is consistent with our bid expectations. And third, our January utilization was in line with expectations. Beyond MBR, the entirety of our adjusted EBITDA margin expansion is driven by an improving SG&A ratio year-over-year. Additionally, our anticipated economies of scale as a result of our growth are controllable and give us a high degree of visibility toward our 2024 adjusted EBITDA break-even goal. Looking ahead to 2025 and beyond, we are confident about our continued ability to drive above market growth and profitability improvement. We see growth tailwinds from widening Star advantages and our conservative position on risk adjustment. Our competitors' percentage of members in a four-star or better plan will fall from 79% to 56% in payment year 2025. And we believe we are less impacted by B-28 than many of our local competitors.
In total we are confident in our 2024 MBR outlook, because first we held benefits stable increasing supplemental benefit value by just <unk>, 7% year over year.
Our new member Rapids, consistent with our bid expectations and.
Third our January utilization was in line with expectations.
Beyond MBR the entirety of our adjusted EBITDA margin expansion is driven by an improving SG&A ratio year over year.
Our anticipated economies of scale as a result of our growth are controllable and give us a high degree of visibility toward our 2024 adjusted EBITDA breakeven goal.
Looking ahead to 2025 and beyond we are confident about our continued ability to drive above market growth and profitability improvements we.
We see growth tailwind from widening stars advantages in our conservative position on risk adjustment.
Our competitors percentage of members in a four star or better plan will fall from 79% to 56% in payment year 2025.
And we believe we are less impacted by the 28 that many of our local competitors.
Thomas Freeman: We see profitability tailwinds as our new members of 2024 will yield significant NBR improvement next year, and we expect more scale economies resulting from the investments we have made in technology and workflow optimization. In conclusion, we believe our clinically-centric shared risk model, supported by our AVA technology insights, will thrive in the current MA environment. We expect that our member growth will outpace the industry, and we will gain market share by focusing on quality clinical outcomes, excellent member engagement, and high-value benefits for our members. Alignment is Medicare Advantage done right. Now, I'll turn the call over to Thomas to cover the full year's financial results, as well as our outlook for 2025. Thomas said,
We see profitability tailwind as our new members of 2024 will yield significant MBR improvement next year, and we expect more scale economies, resulting from the vessels, we have made in technology and workflow optimization.
In conclusion, we believe are clinically centric shared risk model supported by our <unk> technology and insights will thrive in the current M&A environment.
Expect that our member growth will outpace the industry and we will gain market share by focusing on quality clinical outcomes.
Excellent member engagement and high value benefits for our members.
Alignment is Medicare advantage is done right.
Now I will turn the call over to Thomas to cover the full year financial results as well as our outlook for 2020 for Thomas.
Thomas Freeman: Thanks, John. For the year ending December 2023, our health plan membership of 119,200 increased 21% year over year. This exceeded our expectation of 17% membership growth at the midpoint of our initial guidance, thanks to the strong momentum of our sales and retention efforts as we headed into AEP. Our total revenue in 2023 grew 27% to 1.82 billion. Meanwhile, our adjusted gross profit of 209 million reflected an MBR of 88.5% for the full year and an MBR of 87.6% excluding ACO reach. Taken together, we are pleased to have balanced strong MBR results in our core business while delivering over 20% member growth. We also made significant progress towards our operating leverage goals in 2023. SG&A for the year on a gap basis was $307 million. Our adjusted SG&A, which primarily excludes equity-based compensation expense, was $244 million.
Thanks, John for the year ending December 2023, our health plan membership of 119200 increased 21% year over year. This exceeded our expectation of 17% membership growth at the midpoint of our initial guidance. Thanks to the strong momentum of our sales and retention efforts as we headed into AEP, our total revenue.
In 2023 year, 27% to 182 billion. Meanwhile, our adjusted gross profit of $209 million, reflecting an MBR of 88, 5% for the full year and an MBR of 87, 6%. Excluding ACO reach taken together. We are pleased to have balanced strong MBR results in our core business while.
Delivering over 20% membership growth.
We also made significant progress towards our operating leverage goals in 2023.
SG&A for the year on a GAAP basis was $307 million, our adjusted SG&A, which primarily excludes equity based compensation expense was $244 million.
Adjusted SG&A as a percentage of revenue excluding ACO reach was 14, 4% an improvement of one 6% from the prior year result of 15, 9%. We anticipate that this significant improvement will continue into 2024 as we benefited from our membership growth and several of our shared services productivity and scaling.
Thomas Freeman: Adjusted SG&A as a percentage of revenue, excluding ACO reach, was 14.4%, an improvement of 1.6% from the prior year result of 15.9%. We anticipate that this significant improvement will continue into 2024 as we benefit from our membership growth and several of our shared services, productivity, and scaling initiatives. Lastly, our adjusted EBITDA was negative $35 million.
Initiatives.
Lastly, our adjusted EBITDA was negative $35 million as previously indicated in our 8-K are adjusted EBITDA result reflects decisions to increase discretionary investments in sales and marketing during the back half of AEP given significant growth opportunity presented to us in support of this drug we also accelerated new hires and clinical investments in December.
To assist with the Onboarding of new membership. We are pleased that these minimal incremental investments successfully positioned us to achieve the 2025 year and consensus membership full year early.
Thomas Freeman: As previously indicated in our AK, our adjusted EBITDA result reflects decisions to increase discretionary investments in sales and marketing during the back half of AEP given the significant growth opportunities presented to. In support of this growth, we also accelerated new hires and clinical investments in December to assist with the onboarding of new membership. We are pleased that these minimal incremental investments successfully positioned us to achieve the 2025 year-end consensus membership a full year early. Subsequent to the release of our January 8k, we saw $2 million of adverse development in our ACO Reach line of business related to fourth quarter days of service.
Subsequent to the release of our January 8-K, we saw $2 million of adverse development in our ACO rich line of business related to fourth quarter dates of service as I will share more on momentarily we have since execute this strategy to eliminate any downside exposure from RAC average book of business in 2024.
Moving to the balance sheet, our capital position remains strong as we ended the year with $319 million in cash and short term investments the sequential step down in cash compared to the third quarter included the previously discussed timing impact of an early payment from CMS of approximately $146 million in Q3.
Turning to our guidance for the first quarter, we expect health plan membership to be between 157000, and 159000 members revenue to be in the range of $590 million and 600 million adjusted gross profit to be between $52 million and $58 million and adjusted EBITDA to be in.
Thomas Freeman: As I will share more on momentarily, we have since executed a strategy to eliminate any downside exposure from our ACO Reach book of business in 2021. Moving to the balance sheet, our capital position remains strong as we enter the year with $319 million in cash and short-term investments. The sequential step-down in cash compared to the third quarter included the previously discussed timing impact of an early payment from CMS of approximately $146 million in Q2.
The range of a loss of $13 million to a loss of $19 million.
For full year 2024, we expect health plan membership to be between 162000 and 164000 members.
Revenue to be in the range of 238 billion and $2 four 1 billion.
Adjusted gross profit to be between $275 million and $310 million.
And adjusted EBITDA to be in the range of a loss of 15 million to positive $15 million.
Thomas Freeman: Turning to our guidance, for the first quarter, we expect health plan membership to be between 157,000 and 159,000 members, revenue to be in the range of $590 million and $600 million, adjusted gross profit to be between $52 million and $58 million, and adjusted EBITDA to be in the range of a loss of $13 million to a loss of $19 million. For full year 2024, we expect health plan membership to be between 162,000 and 164,000 members, and revenue to be in the range of $2.38 billion and $2.41 billion. Adjusted gross profit is expected to be between $275 million and $310 million, and adjusted EBITDA is expected to be in the range of a loss of $15 million to positive $15 million.
Based on early Q1 trends, we feel confident in our ability to achieve our full year membership and revenue outlook.
Our relative product value proposition Starz differentiation and brand recognition continue to resonate in the market post AEP. We also continue to see improvements in retention that reinforce our full year membership target.
Moving down the P&L the following factors support our full year 2024, adjusted gross profit outlook.
First our star ratings are stable year over year for 2020 for payment.
Second as John mentioned earlier, the bid value of our added benefits remained roughly unchanged in 2024, increasing just <unk>, 7% year over year.
Third the rack, we received for our new members is in line with our bid expectations and lastly, a recent utilization experience continues to be consistent with our expectations fourth quarter inpatient admissions per thousand brand, 7% better year over year, a trend which persisted into January.
Diving deeper into our utilization experience I'll spend a few moments on a few topical items.
Flu and RSV inpatient utilization.
Thomas Freeman: Based on early Q1 trends, we feel confident in our ability to achieve our full-year membership and revenue outlook. Our relative product value proposition, star differentiation, and brand recognition continue to resonate in the market post-AES. We also continue to see improvements in retention that reinforce our full-year membership target.
Realization trends for the full year and fourth quarter 2023 showed year over year declines flu and RSV are captured within our all in 156 admissions per thousand for full year 2023.
This category of utilization continues to be a primary area of differentiation given the strength of our clinical model to prevent avoidable admissions and readmissions.
Outpatient utilization.
As we've previously noted our outpatient costs in 2023 ran within a few dollars pnp and relative to 2022. Additionally, our early 2020 for Preauthorization data, which is a strong leading indicator of our outpatient volume continues to be in line with our prior year experience.
Thomas Freeman: Moving down to P&L, the following factors support our full year 2024 Adjusted Gross Profit Outlook. First, our star ratings are stable year over year for 2024 payments. Second, as John mentioned earlier, the bid value of our added benefits will remain roughly unchanged in 2024, increasing just 0.7% year over year. Third, the wrap we receive for our new members is in line with our bid expectation. And lastly, our recent utilization experience continues to be consistent with our expectations. Fourth quarter inpatient admissions per thousand ran 7% better year over year, a trend which persisted into January.
Inpatient unit costs, we expect the impact of the two midnight rule to be immaterial. The majority of our hospital contracts in California, which comprises 94% of our members already incorporate a de facto two midnight rule, while we foresee modest impact to our ex California markets. However, we are incorporating higher than the national average inpatient.
Unit cost increases in California, and Nevada for CMS fiscal year 2024.
Supplemental benefit expense.
We saw a year over year increase in our supplement benefit expense in 2023, but importantly, this was consistent with our budget forecast in 2024, we continue to contemplate higher supplemental benefit expense as part of our full year outlook. This is largely a result of our successful vendor transition that has improved black card service levels, while we have incorporated this.
Thomas Freeman: Diving deeper into our utilization experience, I'll spend a few moments on a few topical flu and RSV inpatient trends. Utilization trends for the full year and fourth quarter 2023 showed year over year. Flu and RSV are captured within our all-in 156 admissions per thousand for full year 2023. This category of utilization continues to be a primary area of differentiation, given the strength of our clinical model to prevent avoidable admissions and readmissions. Outpatient utilization
As an area of MBR headwind in our 2024 outlook. It is also contributing to improved retention and member engagement on our critical clinical initiatives.
And lastly, our clinical initiatives, we've identified numerous care and medical management opportunities to improve quality outcomes and utilization trends in 2024.
Our first quarter outlook generally reflects the regular seasonality of our MBR experience as a reminder, utilization is typically higher in the first quarter than the full year average part D is also much less profitable in the first half of the year as compared to the second half, particularly in the first quarter. This year. Our guidance also reflects an extra day of medical expense in the first quarter.
Due to the leap year, and a higher mix of pre mid year Sweet new members in Q1 relative to prior years.
Thomas Freeman: As we previously noted, our outpatient costs in 2023 ran within a few dollars PMPM relative to 2022. Additionally, our early 2024 pre-authorization data, which is a strong leading indicator of our outpatient volume, continues to be in line with our prior year experience. Inpatient Unit, We expect the impact of the two midnight rule to be immaterial. The majority of our hospital contracts in California, which comprises 94 percent of our members, already incorporate a de facto two midnight rule, while we foresee a modest impact on our ex-California markets.
Additionally, we expect our SG&A ratio seasonality to be less pronounced in the back half of this year as we gain economies of scale across the enterprise.
As we head into 2024, we're making changes to our ACO business and reporting.
Given the immense opportunity we see in Medicare advantage, particularly over the next few years as we benefit from our competitive positioning on stars and risk adjustment, we are reallocating, our time and youbet capital towards MAA and eliminating downside risk in the ACR each program.
Going forward revenue from the program will be reported on a net basis, meaning that we will no longer recognize the full benchmark risk as gross revenue. The difference in accounting is due to our decision to capital provider to take risks on the ACO reach population for 2024.
Thomas Freeman: However, we are incorporating higher than the national average inpatient unit cost increases in California and Nevada for CMS's fiscal year 2020, suffering from benefiting. We saw a year-over-year increase in our supplemental benefit expense in 2023, but importantly, this was consistent with our budget forecast. In 2024, we continue to contemplate higher supplemental benefit expense as part of our full-year outlook. This is largely a result of our successful vendor transition that has improved black card service levels. While we have incorporated this as an area of MBR headwind in our 2024 outlook, it is also contributing to improved retention and member engagement on our critical clinical, And lastly, our clinical. We've identified numerous care and medical management opportunities to improve quality outcomes and utilization trends. Our first quarter outlook generally reflects the regular seasonality of our MBR experience. As a reminder, utilization is typically higher in the first quarter than the full year average. Part D is also much less profitable in the first half of the year as compared to the second half, particularly in the first quarter.
This arrangement, we will recognize a nominal amount of gross profit and not share any easier reach program deficits.
The changes to our ACO reach accounting are reflected in the 2024 outlook I previously provided pro forma for changes in revenue recognition year over year revenue growth is expected to be 41% at the midpoint of our outlook range. We have included a financial supplement on our Investor Relations page with additional detail Inc.
In conclusion, we are well positioned to execute on our 2024 objectives and are excited for the opportunity ahead of us in 2025, where we expect our competitive advantages to compound even further with that let's open the call to questions operator.
Thank you Sir.
As a reminder to ask a question you will need to press star one on your telephone.
Your question. Please press star one again.
Please stand by while we compile the Q&A roster.
And I show. Our first question comes from the line of John Ransom from Raymond James. Please go ahead.
Hey, good evening gentlemen.
At what point on ACO race as to say that it's just not worth it.
Hey, John This is Thomas here I think.
I think we still think the overall program intent. It makes a lot of sense. The idea of trying to ensure that seniors enrolled in traditional Medicare get access to better care different modalities of value based care and potentially different forms of supplemental benefits longer term, which we think is really interesting, but that being said as you've heard from us to say.
All along that we would do this so long as it supports our strategic.
Thomas Freeman: This year, our guidance also reflects an extra day of medical expense in the first quarter due to the leap year and a higher mix of pre-mid-year suite new members in Q1 relative to the prior year. Additionally, we expect our SG&A ratio seasonality to be less pronounced in the back half of this year as we gain economies of scale across the enterprise. As we head into 2024, we are making changes to our HGO REACH business and reporting. Given the immense opportunity we see in Medicare Advantage, particularly over the next few years, as we benefit from our competitive positioning on STARS and RISK, we are reallocating our time and human capital towards MA and eliminating downside risk in the ACL Reach program. Going forward, revenue from the program will be reported on a net basis, meaning that we will no longer recognize the full benchmark risk as gross revenue. The difference in accounting is due to our decision to capitate a provider to take risks on the ACO REACH population in 2024. Under this arrangement, we will recognize a nominal amount of gross profit and not share any ACO REACH program deficit.
Jack gives with our provider network.
But in a way that causes us to lose money and so given where we ultimately landed for 2023% ACR reached MLR was which was a bit over 100%, we decided we'd take a step back and essentially insulate ourselves from any downside risk exposure, while not backing out of the program entirely I think for the foreseeable future. We do not plan to take downside risk on the <unk>.
CRH program, but rather we will look to continue to.
Support our provider partners with our existing license, we still have remaining and really focus our efforts on Medicare advantage, where we see an enormous growth opportunity and margin improvement opportunities started heading into 2025.
And just secondly, and I'll stop.
But that's just the.
The cadence of MLR throughout the year I know you talked about <unk> being higher but could you kind of talk about how you see it and why you see that.
Trends as.
You presented in your guidance, 2% to 14, thanks, Yeah.
Yeah. So as we typically would expect Q1 and Q4 seasonality to have a bit higher MBR than Q2 or Q3, I think this year similar to years past guidance. Our Q1, MBR seasonality reflects part D, which tends to run over 100% in Q1 and then we also just have sort of our normal course utilization, where inpatient volumes tend to be higher in.
<unk> January and oftentimes in March as well just around sort of flu and RSV season. I think this year. We also are recognizing that it is that we have an extra one day of medical expense in the first quarter that we've reflected.
Operator: The changes to our ACO REACH accounting are reflected in the 2024 outlook I previously provided. Pro forma for changes in revenue recognition, year-over-year revenue growth is expected to be 41% at the midpoint of our outlook. We have included a financial supplement on our investor relations page with, In conclusion, we are well positioned to execute on our 2024 objectives and are excited for the opportunity ahead of us in 2025, where we expect our competitive advantages to compound even more. With that, let's open the call to questions. Operator?
And then just given the overall growth of the membership that is pre midyear sweep. We think that is something that we're also take into account for our Q1 guidance.
As we've talked about in the past we tend to book, our new members to the paid revenue over the course of the first half of the year until we see the midyear sweep our full year guidance is not contingent upon a disproportionate pick up in the mid year, but we also like to take a conservative posture in Q1 to not assume that we will do anything better than what were currently being paid.
Thank you.
Thank you.
And I show. Our next question comes from the line of Nathan Rich from Goldman Sachs. Please go ahead.
Hey, good afternoon, thanks for the questions.
Operator: Thank you, sir. As a reminder, to ask a question, you will need to press star 11 on your telephone; to rejoin your question, please press star 11 again. Please stand by while we compile the Q&A roster. And I share our first question comes from the line of John Ransom from Raymond James. Please go ahead. Hey, good evening, gentlemen. At what point on ACRE should you say that it's just not worth it?
First just wanted to follow up on the utilization expectations I guess just to clarify on the change in ACO reach accounting I guess does that mean, it will essentially be a non factor in the MBR in 2024 based on that accounting change and then I guess bigger picture.
You kind of talked about January inpatient I think being in line with your expectations I guess, what does the guidance assume for inpatient specifically over the balance of the year and to the extent that.
Thomas Freeman: Hey, John, this is Thomas here. I think, um, I think the overall program intent makes a lot of sense, the idea of trying to ensure that seniors enrolled in traditional Medicare get access to better care, different modalities of value-based care, and potentially different forms of supplemental benefits over the long term, which we think is really interesting. But that being said, you've heard us say all along that we would do this so long as it supports our strategic objectives with our provider network, but not in a way that causes us to lose money. And so given where we ultimately landed for 2023 ACO REACH MLR, which was a bit over 100%, we decided to take a step back and essentially insulate ourselves from any downside risk exposure while not backing out of the program entirely. I think for the foreseeable future, we do not plan to take downside risk on the ACO REACH program, but rather, we'll look to continue to support our provider partners with our existing license we still have remaining.
We continue to see.
Greater I guess hospital utilization and patient utilization, just curious like how youre thinking about that potential within the guidance range. Thank you.
Yeah, absolutely so on the ACO risk point you are correct.
We do not expect it to be a material driver of our MBR in 2024, given our change in accounting revenue recognition from gross to net.
It's worth noting that we did provide a financial supplement on our Investor Relations page just to show the MBR in 2023, both with and without ACO reach that you all can look at it on a comparable basis as we head into 2024.
In terms of utilization I think we would expect overall utilization in 2024 to be comparable to what we saw in 2023 and I think on your first question was on inpatient.
This has been one of the areas that we have shine consistently since going public and even before we ever went public. So we brought about 155 to 165 inpatient admissions per thousand for about seven years straight at this point, including over the last few years, where we've been growing in excess of 20% and so I think as we contemplate our one bill.
To sustain that into 2024, it's really a testament to our clinical model, which is able to identify members early who need our clinical programs and ensure that we engage them with our employed clinical teams and so that's something we're going to be very focused on over the first 90 days of 2024, but as we sit here through February we're very pleased with our early results.
Thomas Freeman: And really focus our efforts on Medicare Advantage, where we see an enormous growth opportunity and margin improvement opportunity story heading into 2025. And secondly, and I'll stop with this, just the cadence of MLR throughout the year. I know you talked about 1Q being higher, but could you kind of talk about how you see it and why you see the trends as you presented in your guidance, 2Q to 4Q? Thanks.
And traction and making sure we get the right members engaged in our clinical programs.
Great and if I could just ask a quick follow up.
You mentioned, achieving kind of the 2025 membership.
Thomas Freeman: Yeah, so we typically would expect Q1 and Q4 seasonality to have a bit higher MBR than Q2 or Q3. I think this year, similar to years past guidance, our Q1 MBR seasonality reflects Part D, which tends to run over 100% in Q1. And then we also just have sort of our normal course utilization where inpatient volumes tend to be higher in December, January, and oftentimes March as well, just around flu and RSVC. I think this year we are also recognizing that it is a leap year.
A year early great to see the early membership gains obviously I guess could you maybe talk about how that impacts your thinking around two.
2025 performance of the business what type of EBITDA tailwind does that potentially create as you get the MBR improvement on those members just as we think about sort of the trajectory of the business a little bit longer term. Thank you.
Yes, we think it's a significant to your point and so both from a growth and margin standpoint, we're very optimistic about our 2025 positioning.
John mentioned a bit on the growth side of things that we're going to benefit in 2025 as our competitors fall on average below a forced our payment. There's only one other HMO competitor, who has a pretty broad footprint across California that actually maintained four stars for 2025, I think when you take that and add on the B 28 risk adjustment.
Operator: We have an extra one day of medical expense in the first quarter that we've reflected. And then just given the overall growth, the membership that is pre-mid-year sweep, we think that is something that we're also taking into account for our Q1 guidance. As we talked about in the past, we tend to book our new members into paid revenue over the course of the first half of the year until we see the mid-year sweep. Our full-year guidance is not contingent upon a disproportionate pickup in the mid-year, but we also like to take a kind of conservative posture in Q1 to not assume that we'll do anything better than what we're currently being paid. Thank you. And I show our next question comes from the line of Nathan Rich from Goldman Sachs. Please go ahead.
Headwinds in the broader utilization headwinds that you've heard from across the industry. We feel very good about our ability to sustain above market growth and achieve something in excess of 20% for 2025 at the same time to your point on the margin side of things I think that growth affords us continued SG&A economies of scale heading into 2025.
And given the 2024 bolus of new member growth I think it presents a significant MBR opportunity as you transition those year, one members, which tend to start in the high eighties into year, two which tended to go into the mid eighties and so that's something we're very optimistic about as we think about our overall positioning over the next 24 months.
Operator: Hey, good afternoon. Thanks for the questions. First, just wanted to follow up on the utilization expectations. I guess just to clarify on the change in ACO reach accounting. Does that mean it'll essentially be a non-factor in the MBR in 2024 based on that accounting change? And then I guess bigger picture, you kind of talked about January inpatient being in line with your expectations. I guess, what does the guidance assume for inpatient specifically over the balance of the year and to the extent that, you know, we continue to see greater, I guess, you know, hospital utilization and inpatient utilization? Just curious, like how you're thinking about that potential within the guidance range. Thank you. Yeah, absolutely. So on the ACO reach point, you are correct.
Thank you.
Thank you.
And I show. Our next question comes from the line of Scott Fidel from Stephens. Please go ahead.
Hi, Thanks, good evening.
Question, just interested if you can share with us just some of the initial indicators around the risking of acuity profile up the two.
1024 cohort that you've added in the AEP.
Any sort of you know sort of early warning indicators that you focus on around that population and then just as it relates to the supplemental benefits dynamics that you had touched on.
Whether you have enough information to ascertain sort of variation between the new members added this year versus prior members around stop benefit utilization.
Thomas Freeman: We did not expect it to be a material driver of our MBR in 2024, given our change in accounting revenue recognition from gross to net. It's worth noting that we did provide a financial supplement on our investor relations page, just to show the MBR in 2023, both with and without ACO reach, so that you can all look at it on a comparable basis as we head into 2024. In terms of utilization, I think we would expect overall utilization in 2024 to be comparable to what we saw in 2023. And I think your first question was about inpatient.
Yes. So this is Tom I'll say Scott.
I think maybe in terms of the new member MLR outlook.
I'll speak to both the revenue side and the cost side based on what we've seen so far so in terms of the revenue side of things.
Our actual paid RAF for the month of January our new members was within a couple of basis points of what we had incorporated into our 2024 bids back in June of 2023. So I think that was a very positive data point for us and ensuring that the payment relative to our expectations of mix byproduct, what's consistent with what we had hoped.
On the cost side, obviously, we track our inpatient admissions per 1000 with a maniacal.
Thomas Freeman: This has been one of the areas that we have shined consistently since going public and even before we ever went public. So we've run about 155 to 165 inpatient admissions per thousand for about seven years straight at this point, including over the last few years, when we've been growing in excess of 20%. And so I think as we contemplate our ability to sustain that into 2024, it's really a testament to our clinical model, which is able to identify members early who need our clinical programs and ensure that we engage them with our employed clinical teams. And so that's something we're going to be very focused on over the first 90 days of 2024. But as we sit here through February, we're very pleased with our early results and traction and making sure we get the right members engaged in our clinical program. And if I could just ask you a quick follow-up question.
Maniacal attention to detail and as we progressed through the first 45, almost 60 days of the first quarter, we've been looking at not only overall inpatient utilization, but specifically how the new members are performing by market by IPA and byproduct. So far all signs point to the utilization of those new members being consistent with expectations.
Think over the course of the next few months, we'll get more and more claims visibility some of the other categories of spend but so far I think we're feeling pretty optimistic that this year's new member MLR should be in line with what we would have anticipated from a bid standpoint.
Yes.
I think on your second question Oh, Sorry go ahead.
No. Please go ahead.
And then in terms of your second question on supplemental benefits I think it's less of a new member issue versus a loyal member issue I think what we have seen is as we change some of our vendors last year around the overall member experience inclusive of some of the black card vendors. What we've seen is improved service levels, which has been excellent in terms of some of our.
Thomas Freeman: You mentioned achieving kind of the 2025 membership a year early. Great to see the early membership gains, obviously. Could you maybe talk about how that impacts your thinking around 2025 performance for the business? You know, what type of EBITDA tailwind does that potentially create as you get CMBR improvement on those members, just as we think about sort of the trajectory of the business a little bit longer term? Thank you.
<unk> around our NPS scores Google.
Google reviews, most recently AEP retention, which improved by about 200 basis points year over year compared to the 2023 AEP results.
And ultimately we think it's going to be a tailwind heading into cap season for starz purposes. This year. So I think the the overall investment and initiative has been very successful, but at the same time has caused our overall black card spend to increase for the first part of <unk> 24, compared to 2023, I think that's reflected in overall MBR outlook and it's something that.
Thomas Freeman: Yeah, we think it's significant to your point. And so, both from a growth and margin standpoint, we're very optimistic about our 2025 positioning. I think you heard John mention a bit on the growth side of things that we're going to benefit in 2025 as our competitors fall on average below a four-star rating. There's only one other HMO competitor who has a pretty broad footprint across California that actually maintained four stars for 2025.
We're continuing to monitor but I think for now we feel like the initiative has been pretty successful and it's something we'll continue to keep in mind as we try to make sure. We're balancing all of our different initiatives across growth retention stars and ultimately profitability.
Operator: I think when you take that and add on the B28 risk adjustment headwinds and the broader utilization headwinds that you've heard from across the industry, we feel very good about our ability to sustain above-market growth and achieve something in excess of 20% for 2025. At the same time, to your point on the margin side of things, I think that growth affords us continued SG&A economies of scale heading into 2025. And given the 2024 bullets of new member growth, I think it presents a significant NBR opportunity as you transition those year one members, which tend to start in the high 80s, into year two, which tends to go into the mid-80s. And so that's something we're very optimistic about as we think about our overall positioning over the next 24 months. Thank you. And I show our next question comes from the line of Scott Fidel from Stevens. Please go ahead. Hi, thanks. Good evening.
Okay got it. Thank you and then just as my follow up interesting. If you could give us some of your thinking around operating cash flow for 2020 for Ed and key sources and uses of cash that you are thinking about for 24. Thanks.
Yeah, so overall from a.
A bridge from adjusted EBITDA to ultimately what our cash it looks like for 2024.
Couple of things to keep in mind, we typically have about $25 million of capex annually and based on our existing <unk>.
<unk> loan we have about probably.
$20 million or so of cash interest expense I would anticipate in 2024.
So I think if you guys think those two things into account youre kind of thinking about $50 million of cash burn outside of our adjusted EBITDA working capital doesn't tend to be a major source of or use of cash over a full 12 month period. So that's not something that I would expect to drive a significant change in our overall cash position this year.
And then lastly, just in terms of overall parent cash versus regulated cash I think we feel very good about the way to ultimate balance sheet is positioned today. So sitting here at the end of 2023, we had about $156 million of parent cash over $300 million of total cash with an additional $85 million of term loan undrawn capacity at our dispose.
Operator: First question, just interested if you can share with us just some of the initial indicators around the risk and acuity profile of the 2024 cohort that you've had in the AEP. Any sort of, you know, sort of early warnings, sort of indicators that you focus on around that population. And then, just as it relates to the supplemental benefits dynamics that you had touched on, whether you have enough information to ascertain any sort of variation between the new members added this year versus prior members around benefits utilization. Yeah, so this is Thomas Hitchcock.
So I think big picture, given our 2020 for outlook and then the margin potential improvement we see for 2025, we feel very good about the strength of the overall balance sheet.
Okay. Thank you.
Thank you.
And I show. Our next question comes from the line of Ryan Daniels from William Blair. Please go ahead.
Yes, congrats on the quarter. Thanks for taking the questions John maybe one for you.
Thomas Freeman: I think maybe in terms of the new member MLR outlook, maybe I'll speak to both the revenue side and the cost side based on what we've seen so far. So in terms of the revenue side of things, our actual paid wrap for the month of January, our new members, was within a couple of basis points of what we had incorporated into our 2024 bids back in June of 2023. So I think that was a very positive data point for us in ensuring that the payment relative to our expectations of mixed by product was consistent with what we had hoped. On the cost side, obviously, we track our inpatient admissions per thousand with maniacal attention to detail.
Pretty impressive with the year over year decline in inpatient utilization trends.
Trends that Youre seeing there in general and I'm curious if you can go into a little bit more detail on what you think is the key driver of that my impression is its probably your data and care anywhere in intervention, but.
More broadly is it the ability to really provide more proactive care and is that a twofold benefit and then maybe youre seeing less pent up demand because you manage that during COVID-19, so youre not seeing it in and continue to manage it.
So I do want to put words in your mouth, but just love to get some color there.
Yeah, Hey, Ryan Yes, no.
Say two words is the visibility and control.
Thomas Freeman: And as we progress here through the first 45, almost 60 days of the first quarter, we've been looking at not only overall inpatient utilization but specifically how the new members are performing by market, by IPA, and by product. So far, all signs point to the utilization of those new members being consistent with expectations. I think over the course of the next few months, we'll get more and more claims visibility into some of the other categories of spend. But so far, I think we're feeling pretty optimistic that this year's new member MLR should be in line with what we would have anticipated from a bid standpoint. I think on your second question, oh, sorry, go ahead. No, please Thomas, go ahead.
Visibility and control the data and Ava you've heard us talk about really gives us a lot of insight.
Into what's going on with the membership.
And so we have kind.
Kind of.
Day to day control, because we actually manage the risk ourselves.
And we prefer to manage the risk and we manage the risk really by managing the care, which I think is fundamentally.
The highest level, what you need to be to be successful in Medicare advantage, it's not an underwriting or financial engineering exercise it's actually.
Managing the care.
Thomas Freeman: And in terms of your second question on supplemental benefits, I think it's less of a new member issue versus a loyal member issue. I think what we have seen is as we changed some of our vendors last year around the overall member experience, inclusive of some of the black card vendors, what we've seen is improved service levels, which has been excellent in terms of some of our tailwinds around our NPS scores, Google reviews, and most recently AEP retention, which improved by about 200 basis points year over year compared to the 2023 AEP results. And ultimately, we think it's going to be a tailwind heading into cap season for STARS purposes this year.
And you've heard us talk about.
Understanding where the 10% to 20% of the high risk members are and then how we take care of them at the home with their interdisciplinary care teams.
And.
It's that consistency.
That really allows us to lower these admissions.
Thomas mentioned over the last seven years.
And that level of visibility and control is I think what makes us very differentiated and unique I also say.
That.
In this kind of Medicare advantage reality of just tighter stars tighter risk adjustment.
A lot of discussion around benchmarks right now.
Its notice.
We are positioned to do really well because from the start.
Thomas Freeman: So I think the overall investment and initiative has been very successful, but at the same time, it has caused our overall black card spend to increase for the first part of 24 compared to 2020. I think that's reflected in the overall NBR outlook and it's something that we're continuing to monitor, but I think for now, we feel like the initiative has been pretty successful, and it's something we'll continue to keep in mind as we try to make sure we're balancing all of our different initiatives across growth, retention, stars, and ultimately profitability. I got it. Thank you.
We focused on you have to be the highest quality.
And the lowest cost.
Ryder in the marketplace, it's very simple.
And I think I think the market is adjusting to the way that we've been built.
And Thats, what I think.
It has been reflected in some of the growth that you just saw with us.
In AEP.
Okay, great. Thank you for that color and then Thomas one for you it looks like the implied MBR in Q1, if I'm doing this right I'm jumping between so it was about 91% which was.
A little bit higher year over year, despite the utilization trends being pretty stable. So is that just the <unk> benefits and the new member growth pushing that up a little bit year over year.
Thomas Freeman: And then just my follow-up question, I'm interested if you could give us some of your thinking around operating cash flow for 2024 and key sources and uses of cash that you're thinking about for 2024. Yeah, so overall, from a kind of a bridge from adjusted EBITDA to ultimately what our cash flow looks like for 2024. A couple things to keep in mind; we typically have about $25 million of capex annually. And based on our existing term loan, we probably have about 20 million or so of cash interest expense, I would anticipate in 2024. And so I think if you kind of take those two things into account, you're kind of thinking about 50 million dollars of cash burn outside of our adjusted EBITDA. However, working capital doesn't tend to be a major source of or use of cash over a full 12 month period.
Yes, I think those two things and then I would add just kind of I guess, an earlier normal course seasonality and in part D. In particular, and so the part D program runs over 100% MLR in Q1, and so that's a pretty significant driver on the overall seasonality of the business from Q1 through Q4.
I think from a utilization standpoint.
Your comment I think we feel pretty good about what we're seeing on the inpatient side thus far.
Yes.
And I would also add I think I mentioned earlier it is a leap year this year.
Sounds immaterial, but actually is not insignificant when you think about adding one extra day of medical expense with the same number of days of revenue over the course of Q1.
That's a good point alright, thank you so much perfect.
Thank you.
And I show. Our next question comes from the line of Jeff <unk>.
From Piper Sandler. Please go ahead.
Thomas Freeman: So that's not something I would expect to drive a significant change in our overall cash position this year. And then lastly, just in terms of overall parent cash versus regulated cash, I think we feel very good about the way the Olaflood balance sheet is positioned today. So sitting here at the end of 2023, we had about 156 million of parent cash over 300 million of total cash, with an additional 85 million of term loan undrawn capacity at our disposal. So, in the big picture, given our 2024 outlook and then the margin potential improvement we see for 2025, we feel very good about the strength of the overall balance. Okay, thank you.
Hi, guys. Thanks for taking the question.
So I wanted to start with I know you all mentioned the opportunity for margin expansion and 25, just be a stars and kind of favorable positioning.
With version 2008 curious if you have any early comments about the impact of the expected changes from the inflation reduction act on part D kind of redesign and just the shift of liability from.
CMS to the plan and the catastrophic phase of Capex.
Yeah, Hey, Jeff It's Jon.
Great question.
We think that it could go either way actually.
It's going to be I think a very important part of the bid strategy heading into 2025.
I don't want to get into bid strategy for obvious competitive reasons right now.
Operator: Thank you. And I show the next question comes from the line of Ryan Daniels from William Blair. Please go ahead.
But I'm very comfortable with where we are.
With our.
John Cahill: Yeah, congrats on the quarter. Thanks for taking the questions, John. Maybe one for you. Pretty impressive with the year over year decline in inpatient utilization and the trends that you're seeing there in general. And I'm curious if you can go into a little bit more detail on what you think is the key driver of that. My impression is it's probably your data and care anywhere and intervention. But more broadly, is it the ability to really provide more proactive care? And is that a twofold benefit in that maybe you're seeing less pent-up demand because you manage that during COVID, so you're not seeing it and then continuing to manage it? So I don't want to put words in your mouth, but just love to get some color there because I think that's Yeah, hey, Ryan. No, I'd say two words.
Thats, what our thinking is on it.
But I think that.
Overall trends I think we can manage and we've had.
A few years to be able to digest. This we know what the program looks like.
And be able to embed that in our bids and as usual.
We will find the right balance between growth and margin, but it will be up.
Meaningful.
Level of I would say benefit designs.
Strategic thinking around IRA.
Got it.
That's helpful. And then I guess I, just I was hoping to understand when you just had.
82% of AEP adds coming from member switching despite the fact that supplemental benefits are only up market value is only up modestly year over year, I guess, just and I know you guys have have gone through this but just kind of what's driving the switching is it competitors paring back benefits versus your relative stability or just the sales approach or anything in particular to call up.
John Cahill: Visibility and control. Visibility and control. The data, and Ava, you've heard us talk about, really gives us a lot of insight into what's going on with the membership. And so we have, you know, kind of day-to-day control because we actually manage the risk ourselves. And we prefer to manage the risk, and we manage the risk really by managing the care, which I think is fundamentally, at the highest level, what you need to be to be successful in Medicare Advantage. It's not an underwriting or financial engineering exercise.
Out from this AEP. Thanks.
Yeah, Hey, it's John again, it's all of the above.
Touched on Starz.
Being a driver in our again our competitive position in stars is improving I think also <unk> 28, the impact of B 28 is affecting everybody, but it's affecting us less and its affecting us less because we knew heading into the year.
John Cahill: It's actually managing the care. And, you know, understanding where the 10 to 20% of the high-risk members are and then how we take care of them at home with our interdisciplinary care teams. And it's that consistency that really allows us to lower these admissions, you know, for the Thomas mentioned last seven years, and that level of visibility and control is, I think, what makes us very differentiated and unique. I also say that in this kind of Medicare Advantage reality of just tighter stars, tighter risk adjustment, you know, we've got a lot of discussion around benchmarks right now with the advance notice. We're positioned to do really well because, from the start, we focused on you have to be the highest quality and the lowest cost provider in the marketplace. It's very easy.
Are there some kind of reimbursement risk was going to be.
Something we had to deal with.
So those two things I think are our big drivers.
And I think you kind of look at some of the.
Just kind of the we call it Max that data on benefit designs people were generally flat and or pulled back.
<unk>.
Heading into 2024 from a benefit perspective, but we remained relatively flat maybe slightly up on supplemental benefits I think heading into 2025.
Our position is going to get even stronger.
And.
Think that a lot of the lot of the noise around reimbursement is somewhat a function of people star ratings going down and some organizations. If you go down from four 5% to three five stars.
As close to a 10% hit to reimbursement that's a big deal we add that to be 28, and so I think the notion of.
High quality against stars and then low cost utilization.
As is going to play to our advantage.
John Cahill: It's like it's, and I think the market is adjusting to the way that we've been built. And that's what I think has been reflected in some of the growth that you just saw with us in AEP. Thank you for that color.
The thing I would add to Jeff is just from a brand recognition standpoint, I think we're really starting to separate ourselves in the market, particularly in California, where you flashback five years ago, we were sort of one of the smaller upstart and and I think you flash forward to today, we've been consistently four stars or better now for I want to say about <unk>.
Thomas Freeman: And then Thomas, one for you. Looks like the implied MBR in Q1, if I'm doing this right, I'm jumping between stuff, is about 91%, which is a little bit higher year-over-year despite the utilization trends being pretty stable. So is that just the sub-benefits and the new member growth pushing that up a little bit year-over-year? Yeah, I think those two things.
Years in a row, all while offering market, leading products and experience along the way and so I think as that happens.
Start to become more top of mind in the broker community more top of mind, the senior community and in the provider community. So it's one of those stories to a certain extent why I think the bigger you get the stronger you get in many respects I think were starting to see the benefit of that Rob brand standpoint here in California.
Thomas Freeman: And then I would add, just kind of, like I said earlier, normal course seasonality, and then Part D, in particular. And so the Part D program runs over 100% MLR in Q1. And so that's a pretty significant driver of the overall seasonality of the business from Q1 through Q4. And I think from a utilization standpoint, to your comment, I think we feel pretty good about what we're seeing on the inpatient side thus far. And I would also add, Ryan, like I mentioned earlier, it is a leap year this year, which sounds immaterial but is actually not insignificant when you think about adding one extra day of medical expense with the same number of days of revenue over the course of Q1. Alright, thank you so much.
Thank you.
Sure.
Thank you.
And I show. Our next question comes from the line of with Mayo from Leerink Partners. Please go ahead.
Hey, first I was just wondering if theres any unusual switching you've seen in January and February any dis enrollment I haven't had a chance to see if you've changed your membership guidance. So just was wondering if there was any unusual movement.
No. So to your year end membership point, our full year membership is unchanged compared to our 8-K release of 162 to 164000 at year end more specifically to our January experience. We saw very solid I would say sales progress and pretty significant retention improvement again, so looking at our February one just enroll.
<unk> rate this year as compared to the run rate, we would've expected based on February 1st trends a year ago, we actually saw about a 20% year over year improvement in that February one just enrollment rate relative to prior year run rate. So I think a lot of again those investments around member experience are paying dividends not just in AEP, but into.
Operator: Thank you. And I show our next question comes from the line of Jess Tesson, from Piper Sandler. Please go ahead. Hi guys, thanks for taking the question. So I wanted to start with, I know you all mentioned the opportunity for margin expansion in 25 just via STARS and some kind of favorable positioning with version 28. Curious if you have any early comments about the impact of the expected changes from the Inflation Reduction Act on Part D kind of redesign and just the shift of liability from CMS to the plans in the catastrophic phase of COVID-19. Yeah, hey, Jess, it's John.
What we call OE, which lasts from now through April <unk> right right.
And John I'm just wondering.
CMS is making some potentially making some changes around the marketing the broker agent Commission just any updated evolving views on what you think this means to you in the industry.
John Cahill: Great question. We think that it could go either way, actually. It's going to be, I think, a very important part of the bid strategy heading into 2025. But I don't want to get into bid strategy for obvious competitive reasons right now. But I'm very comfortable with what our thinking is on it. But I think that overall, I think we can manage. And we've had, you know, a few years to be able to digest this. We know what the program looks like, and we'll be able to embed that in our bids. And as usual, we will, we'll find the right balance between growth and margin, but it will be a meaningful level of, I would say, benefit design and strategic thinking around IHRA. Got it.
Yes, yes.
Yes, I think I think.
Leveling the playing field is always a good thing.
Having more transparency is always a good thing.
And again being the high growth player in the space I think it's going to be to our advantage.
I think at the end of the day.
Theres more protections for our seniors to better.
And so.
I think as you know we've spent so much time and effort.
On our sales operations, our sales leadership, our marketing strategies are broker management, our broker tools are onboarding all of that.
It off for us.
Heading into the new year so.
I think it's going to be a good thing for us.
I think all these things that are leveling the playing field and doing what CMS really originally intended to be which is just provides the highest value.
John Cahill: Okay, that's helpful. And then I guess I just wanted to understand when you described, you know, 82% of AEP ads coming from members switching, despite the fact that supplemental benefits are only up mod or value is only up modestly year over year. I guess just, and I know you guys have gone through this, but just kind of what's driving the switching? Is it competitors paring back benefits versus your relative stability or just the sales approach or anything in particular to call out from this AEP? Thanks. Yeah, hey, yeah, it's John.
For beneficiaries.
As a good thing.
It's going to play well for us.
Okay. Thanks, a lot.
Got it.
Thank you.
And I show our last question in the queue comes from Adam <unk> from Bank of America. Please go ahead.
Hey, actually it's Kevin Fischbeck in for Adam Tonight.
I guess one of the things that I'm struggling with a little bit is just how different California as a market can be versus the rest of the United States do you have any sense for what the broader trend is in California like how much of the.
John Cahill: Again, it's all of the above. You know, we've touched on stars being a driver in our, again, our competitive position on stars is improving. I think also the 28th, the impact of the 28th is affecting everybody, but it's affecting us less because we knew heading into the year that some kind of reimbursement risk was going to be something we had to deal with. So those two things, I think, are the big drivers.
The outperformance that you're seeing here.
Really on the revenue side in 'twenty four versus on the cost side is it more calculated and costs are generally under control on your marginally outperforming that or.
Is it do you believe that it is really a truly differentiated trend that youre seeing even versus the competitors in California.
Yeah, Hey, Kevin it's Jon.
I think what makes California unique good and bad really is that the.
John Cahill: And I think if you kind of look at some of the, you know, just kind of the, we call it MACFAT data on benefit designs, people were generally flat and or pulled back heading into 2024 from a benefit perspective, and we remain relatively flat, maybe slightly up on supplemental benefits. I think heading into 2025, our position is going to get even stronger. And I think that a lot of the, you know, noise around reimbursement is somewhat a function of people's star ratings going down. And, you know, some organizations. If you go down from four and a half to three and a half stars, that's close to a 10% hit on reimbursement. That's a big deal. You add that to be 28.
The scale of the delegated catheter, the ipas and the delivery systems.
I think that.
Health plans work with those.
Ipas or independent physician Association, so to speak is really important and I think that.
We've been able to figure that out we've been able to design incentives with the delivery system to create us what I talked about a lot which is visibility and control.
The medical spend.
And then durability, we want durability on these on these networks.
And unless you have the tools that we have it is very difficult to kind of get the kind of outcomes that we'd be able to achieve and starts in particular.
Operator: And so I think the notion of high quality, again, stars, and then low cost utilization is going to play to our advantage. The other thing I would add to Jess is just from a brand recognition standpoint. I think we're really starting to separate ourselves in the market, particularly in California, where you flash back five years ago, we were sort of one of the smaller upstarts. And, and I think you flash forward to today, we've been consistently four stars or better now for, I want to say, about six years in a row, all while offering market-leading products and experience along the way. And so, I think as that happens, we start to become more top of mind in the broker community, more top of mind in the senior community, and in the provider community.
It's the one differentiator.
And then secondly, with respect to utilization.
We designed what we called shared risk models, which is really creating aligned incentives with these ipas as well as the directly contracted physicians and we create win win economic situations all for the benefit of the member.
Those are the I think.
Unique things that.
That make California different yet we think thats the opportunity of why we've been able to crack the code in California, while others have not the interesting thing is we think that by doing it in California. We think is the hardest thing anywhere.
Country, because if you take the tools that we have and you overlay. It on other parts of the country I think the opportunity is going to be even higher because you don't have the density of.
Operator: So it's, it's one of those stories to a certain extent where I think the bigger you get, the stronger you get, in many respects. I think we're starting to see the benefit of that from a brand standpoint here in California. Thank you. And my next question comes from the line of Whit Mayo from Lering Partners. Please go ahead.
These ipas or or competition.
In other parts of the country.
So I think the margin opportunity is even greater for us outside.
Okay. So a couple of questions and off of that I guess, the first one I'm just trying to figure out what that you've talked about that alignment with the physicians I think a lot of people are expecting that as the 2008 continues to ramp up that supplemental benefits get cut it kind of sounds like you don't think you need to do that.
John Cahill: Hey, first, I was just wondering if there's any unusual switching you've seen in January and February, any disenrollment. I haven't had a chance to see if you changed your membership guidance, so just was wondering if there was any unusual. No, so to your year-end membership point, our full-year membership is unchanged compared to our 8K release, so $162,000 to $164,000 at year-end. More specifically, on our January experience, we saw very solid, I'd say, sales progress and pretty significant retention improvement again. So looking at our February 1st disenrollment rate this year as compared to the run rate we would have expected based on February 1st trends a year ago, we actually saw about a 20% year-over-year improvement in that February 1st disenrollment rate relative to the prior year run rate.
Going forward.
Does that.
It seems like because the half if not really capitate didn't drive given by APRA is going to outperform does that create any pressure in your relationship with the physicians like that's it.
Their detriment.
Well, if he's got to pay when others arent. It's twofold. It's B 28 is part of it I mean, everyone is going to get shipped by the 28 that's.
That's clear.
We're just going to get hit less in our particular markets because of the way, we manage risk adjustments, but I would say we've been very conservative on risk adjustment.
And you put that in the context of some others that have been more aggressive on risk adjustments that are going to go down in some cases, 20%.
And just to remind everybody 20% from just.
John Cahill: So I think a lot, again, those investments around member experience are paying dividends, not just in AEP but into what we call OEP, which lasts from now through April 1st. And John, I'm just wondering whether CMS is making some changes around, you know, the marketing, the broker-agent commission, just any updated, evolving views on what you think this means to you and the industry. Yeah, I think leveling the playing field is always a good thing.
<unk> at 1.5, 20%, that's 30 basis points and if each basis point is worth $8 P. M. P. M. That's a meaningful hit to revenue that is being born functionally biologics globally calculated providers.
Hard pill to swallow, but more I think importantly, as stars you add stars to the equation somebody dropping from.
$4 five to three and a half that.
It was $80 of potential here, so when you combine those things.
John Cahill: Having more transparency is always a good thing. And again, being, you know, the high growth player in the space, I think it's going to be to our advantage. And I think, at the end of the day, if there are more protections for our seniors, the better.
And you look at our stars and you looked at our upward trend on risk adjustment that creates the effective <unk>.
And so these providers are going to be do better with us on just those two economics and then if we can deploy our data and our care model on that high risk population that we do ourselves in concert with the providers and these ipas.
Operator: And so, you know, I think, as you know, we've spent so much time and effort on our sales operations, our sales leadership, our marketing strategies, our broker management, our broker tools, our onboarding, all of that paid off for us as we head into the new year. So I think it's going to be a good thing for us. I think all these things that are leveling the playing field and doing what CMS really originally intended MA to be, which is just providing the highest value for beneficiaries, is a good thing. It's going to work well for us. Thanks a lot.
Everybody wins, because we surplus these these risk pools.
That's the whole construct of this and we do it and I would refer to as a capital light way, we don't have a lot of bricks and mortar. We don't think you need to have a lot of bricks and mortar you do it with the community physicians.
You create it in a way that everybody wins.
Ergo the name alignment.
Operator: Got it. Thank you. And I show our last question, and the cue comes from Adam Ron from Bank of America. Please go ahead. Hey, actually, it's Kevin Fischbeck in for Adam tonight.
Yeah, I guess, maybe then you mentioned that.
The model and how it works in California, and how it and how it can be exportable into other markets.
Is it interesting just how differently you are talking about trend versus how how your peers are talking about how kind of develops. This year are you seeing similar trends in California, and outside of California, or does outside of California, not performing quite as well as <unk>.
Kevin Mark Fischbeck: I guess one of the things that I'm struggling with a little bit is just how different California as a market can be compared to the rest of the United States. Do you have any sense of what the broader trend is in California? Like how much of, you know, the outperformance that you're seeing here is really on the revenue side in 24 versus on the cost side, where it's more complicated and costs are generally under control, and you're marginally outperforming that or, Do you believe that this is really like a truly differentiated trend that you're seeing even versus the competitors in California? Yeah, hey, Kev, it's John.
With California as well that's that's what's interesting is the portability of the care model is being replicated the utilization and MLR we have.
Outside of California is really really good.
Where we have to just get bigger and we're incrementally getting bigger kind of get the three to 5000 and some of our ex California markets, but we will get there, but the care model is managing the trend effectively.
John Cahill: Yeah, I think what makes California unique, good and bad, is the scale of the delegated capitated IPAs and the delivery system. And I think that how health plans work with those IPAs, or independent physician associations, so to speak, is really important. And I think that we've been able to figure that out. We've been able to design incentives with the delivery system to create what I talked about a lot, which is visibility and control of the medical spend. And then durability. We want durability on these networks, and unless you have the tools that we have, it is very difficult to achieve the kind of outcomes that we've been able to achieve in STARS, in particular.
What what people need to understand is a lot of inpatient hospitalizations a lot of its unnecessary a lot of it can be prevented just by paying attention to what's going on with your high risk population.
We have our interdisciplinary care teams spending times oftentimes on a weekly basis with high risk patients in person, but certainly virtually it makes a difference so I just keep saying we actually.
Deliver the care.
Not many other of our competitors deliver the care they may have.
John Cahill: That's the one differentiator. And then, secondly, with respect to utilization, we designed what we call shared risk models, which are really creating aligned incentives with these IPAs as well as directly contracted physicians. And we create win-win economic situations all for the benefit of the member. Those are, I think, the unique things that make California different.
Sure delivery divisions, that's very different than integrating all of that into.
The way, we talk about it which is product ties in if you will really good benefits product ties the care model.
It really is a different way of approaching the market.
Okay, and then maybe just last question it sounds like Youre, saying that you think you keyed up pretty well for growth again.
John Cahill: And yet, we think that's the opportunity and why we've been able to crack the code in California while others have not. The interesting thing is that by doing it in California, we think it's the hardest thing anywhere in the country. If you take the tools that we have and you overlay them on other parts of the country, I think the opportunity is going to be even higher because you don't have the density of these IPAs or capitation in other parts of the country. So I think the margin opportunity is even greater for us outside. Okay, so I have a couple of questions.
In.
In 2005 is that is that going to look a lot like this year in so far as it's going to be still largely California simply because that's what the disruption to the competitors.
Yes, and yes.
Yes, sorry.
Alright, good to meet a catch up.
I guess the second part of that would just be if it is coming in California, you mentioned balancing growth and profitability.
Does that give you an opportunity to actually push the growth.
John Cahill: And off of that, I guess the first one, I'm just trying to figure out what you talked about with alignment with the physicians. You know, I think a lot of people are expecting that as the 28 continues to ramp up, that supplemental benefits get cut. It kind of sounds like you don't think you need to do that going forward. Does that, it seems like because the half that's not really capitated and drugs given by AVA are going to outperform, does that create any pressure in your relationship with your physicians? Like, is that to their detriment?
Christa profitability lever a little bit more than we're used to or do you kind of feel like as long as you can take share taking share is the right move as long as you keep around breakeven.
Im not going to we're not going to grow at all costs, we're going to get to to the profitability.
All the commitments that we've made I think it's super important tying all of that to cash flow too.
Our balance sheet all of that is really poised for 2025 to be.
A really really good year for that I think if you just look at the differential on stars and risk adjustment plus you look at the utilization ability to manage utilization.
John Cahill: Well, it's twofold. V28 is part of it. I mean, everyone is going to get hit by V28.
<unk> actually have the tools to manage it.
John Cahill: That's clear. We're just going to get hit less in our particular markets because of the way we manage risk adjustment. And I would say we've been very conservative on risk adjustment, and you put that in the context of some others that have been more aggressive on risk adjustment that are going to go down, in some cases, 20%. And just to remind everybody, you know, 20% from just hypothetically at 1.5, 20%, that's 30 basis points. And if each basis point is worth $8 PMPM, that's a meaningful hit to revenue that is being born functionally by a lot of these globally capitated providers. It's a hard pill to swallow.
It's just a competitive advantage in this environment I think the.
I think that the.
<unk>.
The bid strategies, we'll talk about that in the next several months, but not right now.
But I feel very comfortable with.
Just kind of where we're at in terms of.
2025, that's going to be a.
Very good year, the other thing I would say is.
On 25, as Youre going to add even more scale economies on our on our back office I think some of the investments that we've made.
And our back office systems like what we've made in our kind of member services systems is going to pay off even more and they seem to be a more scale economies heading into 2025.
John Cahill: But more importantly, I think, importantly, is stars. You add stars to the equation, somebody dropping from four and a half to three and a half, that's a, you know, what? $80 of potential hit. I mean, when you combine those things, you know, and look at our stars, and you look at our upward trend on risk adjustment, that creates an effective tailwind. And so these providers are going to do better with us on just those two economics. And then if we can deploy our data and our care model on that high-risk population that we do ourselves in concert with the providers and these IPAs, everybody wins because we surplus these risk pools. That's the whole construct of this, and we do it in what I would refer to as a capital light way. We don't have a lot of bricks and mortar.
Don't know if we'll get the same kind of growth not going to comment on that.
But I feel very very good about the tail winds.
Alright, great. Thank you.
Thanks, Kevin.
Thank you that concludes our Q&A session and today's conference call. We want to thank you all for participating.
All disconnect at this time.
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John Cahill: We don't think you need to have a lot of bricks and mortar; you do it with the community physicians, and you create it in a way that everybody wins, hence the name Alignment. Yeah, I guess maybe then you mentioned the model and how it works in California and how it can be exported into other markets. It is interesting just how differently you're talking about trends versus how your peers are talking about how trends developed this year. Are you seeing similar trends in California and outside of California? Or does outside of California not performing quite as well as California?
Okay.
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John Cahill: Well that's what's interesting is the portability of the care model is being replicated. The utilization and MLR we have outside of California is really, really good where we have to just get bigger, and we're incrementally getting bigger, kind of getting to 3,000 to 5,000 in some of our ex-California markets, but we'll get there. But the care model is managing the trend effectively. And I think what people need to understand is that a lot of inpatient hospitalizations are unnecessary.
John Cahill: A lot of it can be prevented just by paying attention to what's going on with your high-risk population. And we have our interdisciplinary care teams spending time oftentimes on a weekly basis with high-risk patients in person, and certainly virtually, it makes a difference. That's why I just keep saying we actually deliver the care.
John Cahill: Not many other of our competitors deliver care. They may have care delivery divisions. That's very different than integrating all of that into the way we talk about it, which is productizing, if you will, really good benefits. Productizing the care model.
John Cahill: It really is a different way of approaching the market. Okay, and then maybe this last question, it sounds like you're saying that you think you're keyed up pretty well for growth again in 2025. Is that going to look a lot like this year in so far as it's going to be still largely California-centric, because that's where the disruption to the competitors is? You know, yeah, yeah. Sorry, go ahead.
John Cahill: I didn't mean to cut you off. I guess the second part of that would just be, if it is coming to California, you mentioned balancing growth and profitability. You know, does that give you an opportunity to actually push growth? I'm sorry, Chris, the profitability lever a little bit more than we're used to? Or do you kind of feel like as long as you can take shares, taking shares is the right move as long as you keep around right even? No, not going to. We're not going to grow at all costs.
John Cahill: We're going to get to the profitability commitments that we've made. I think it's super important to tie all that to cash flow and our balance sheet. All of that is really poised for 2025 to be a really, really good year for it, I think. And if you just look at the differential on stars and risk adjustment, plus you look at the ability to manage utilization, actually have the tools to manage it. It's It's just a competitive advantage in this environment. I think the I think the the best.
John Cahill: The bid strategies, you know, we'll talk about that in the next several months, but not right now. But I feel very comfortable with this, just kind of where we are at in terms of 2025. That's going to be a very good year.
John Cahill: The other thing I would say is, on 25, you're going to have even more scale economies in our back office. I think some of the investments that we've made in our back office systems, like what we made in our member services systems, are going to pay off even more. I mean, so you can get more scale economies heading into 2025. But I don't know if we'll get the same kind of growth. I'm not going to comment on that, but I feel very, very good about the tailwind. All right, great.
Operator: Thank you. Thanks, Kev. Thank you.
Operator: That concludes our Q&A session and today's conference call. We want to thank you all for participating. You may all disconnect at this time. HF Youtube has commented on the perhaps a little inaccurate clip on the Theory. This is a regrettable mistake though. And probably worth a watch, because what's there is hardly anything any person would ever give them.
Operator: I simply had to see what I could find. Thank you for your support of Hell's Kitchen and for giving me appreciation for my future. That is all I have to say. Take care!
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Operator: Please note that this event is being recorded. Leading today's call are John Cahill, Founder and CEO, and Thomas Freeman, 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 four forward-looking statements are subject to various risks and uncertainties and reflect our current expectations based on our beliefs, assumptions, 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 31, 2023. Although we believe our expectations are reasonable, we undertake no obligation to revise any statements to reflect changes that occur after this call.
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Yes.
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Operator: In addition, please note that the company will be discussing certain non-GAAP financial measures that it believes are important in evaluating performance. 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 company's website and in our Form 10 case for the fiscal year ended December 31, 2023. And now I'd like to turn the cult over to your first speaker, John Cale, founder and CEO.
Okay.
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John Cahill: Hello, and thank you for joining us on our fourth quarter earnings conference call. For the fourth quarter of 2023, our total revenue of $465 million represented approximately 29% growth year-over-year. We ended the quarter with health plan membership of 119,200 members, growing approximately 21% year over year. Adjusted gross profit was $49 million, producing a consolidated MBR of 89.4%. While our MBR excluding ACO reach was 88%, in line with our expectations. Lastly, our adjusted EBITDA was negative $20 million.
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John Cahill: Concluding the full year, total revenue of $1.82 billion grew 27%, and adjusted gross profit of $209 million resulted in an MBR of 88.5% and an MBR excluding ACO reach of 87.6%. Adjusted EBITDA was a loss of $35 million, consistent with our comments from our January 8th 8K. In 2023, we demonstrated why our purpose-built Medicare Advantage business model is built to thrive in the current MA environment. We generated strong membership growth, demonstrated control over our medical utilization, outperformed the market in STARS, and made investments to position us for even greater success in 2024. Our differentiated clinical platform was what enabled us to simultaneously achieve all of these objectives. We use employed clinical teams informed by actionable data to manage the care of our members, thus controlling costs. Our ability to take action on insights through direct data feeds from near real-time pharmacy, lab, admission, discharge, transfer, and authorization data is a significant competitive advantage in controlling our MBR and achieving excellent STARS results.
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John Cahill: This past year, we again proved the ability of our clinical platform to control medical costs by managing care. Despite many industry participants noting higher inpatient utilization, our inpatient admissions per thousand for our at-risk members ran at 156, slightly better than the prior year of 159 and nearly 40% better than traditional Medicare. More recently, during the fourth quarter, we saw a 7% year-over-year decline in inpatient volumes.
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Good afternoon.
And welcome to alignment healthcare fourth quarter 2023 earnings conference call and webcast all participants will be in a listen only mode. After today's presentation there'll be an opportunity to ask questions to ask a question. During this session you will need to press star one on your telephone you with inherent automated message advising your hand is raised.
John Cahill: This trend continued to persist into January 2024. Furthermore, our model gave us early visibility into the increasing outpatient trend. These trends started emerging in 2022, but we did not see a year over year increase in utilization or impact of MBR in 2023. We expect the utilization levels we saw in 2023 to remain in 2024. Our visibility is also giving us early insight into a year-over-year step-up in supplemental benefit utilization in January. We have incorporated this into our guidance and are actively managing these trends. Thomas will share more on this in his remarks.
To withdraw your question. Please press star one again please.
Please note that this event is being recorded.
Leading today's call are Jon <unk>, 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.
John Cahill: Taken together, our model is advantaged by enhanced visibility through AVA and control of member care provided by our employed clinical team. We utilize these capabilities to create a shared risk model with community providers that is competitively advantaged in Medicare Advantage, relative to models that rely on actuary underwriting or risk transfer through global capitation. Our ability to manage risk, drive higher quality clinical outcomes, and produce medical cost savings translates into more value for our members. This enables Alignment to grow membership above market rates at an attractive margin profile. As we contemplate our 2024 guidance, we are proud to share that our model continues to differentiate alignment in the market. As we noted earlier in the year, we began 2024 with 155,500 health plan members after our successful 2024 annual enrollment period. We further expect to end 2024 with 162,000 to 164,000 members, representing 37% growth year-over-year at the midpoint. Our AEP performance and full year membership outlook resulted from our focused investments across STARS, member experience, AVA technology enhancements, and sales operations in 2020. We reduced our churn during AEP by 24% year over year.
These forward looking statements are subject to various risks and uncertainties and reflect our current expectations based on our beliefs assumptions and information currently available to us.
A description of some of the factors that could cause actual results to differ materially from these forward looking statements are discussed in more details 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 31 2023.
Although we believe our expectations are reasonable we undertake no obligations to revise any statements to reflect changes that occur after this call and.
In addition, please note that the company will be discussing certain non-GAAP financial measures that they believe are important in evaluating performance.
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-K for the fiscal year ended December 31, 2023 and.
John Cahill: We also leveraged our strong star rating relative to our competitors to take share in the market, with 82% of our AEP sales coming from planned switch. As in past years, we have a disciplined process that balances growth and profitability. Even with this growth, we expect our health plan MBR to be roughly unchanged year over year.
And now I'd like to turn the call over to your first speaker, John Cale founder and CEO.
Hello, and thank you for joining us on our fourth quarter earnings Conference call.
For the fourth quarter 2023, our total revenue of $465 million represented approximately 29% growth year over year.
We ended the quarter with health plan membership of 119200 members growing approximately 21% year over year.
John Cahill: Our adjusted gross profit guidance is underpinned by improvements to returning member MBR, partially offset by hired new member MBR. For returning members, our clinical model drives an average 800 basis point improvement in at-risk MBR between years one and five. The improvement in member retention will also contribute to strong returning member MBR.
Adjusted gross profit was $49 million producing a consolidated MBR of 89, 4%, while our MBR, excluding ACO reach was 88% in line with our expectations.
Lastly, our adjusted EBITDA was negative $20 million.
Including the full year total revenue of one point.
John Cahill: For new members, we design products to generate positive new member gross profit that supports our overall profitability goal. New members typically begin at a higher NBR of approximately 89%, and given our significant growth through AEP, we expect these members to partially offset returning member NBR improvement. However, these members are still expected to be accretive to gross profit.
Eight 2 billion grew 27% and adjusted gross profit of $209 million resulted in an MBR of 88, 5% and an MBR, excluding ACO reach of 87, 6%.
Adjusted EBITDA was a loss of $35 million consistent with our comments from our January 8-K.
John Cahill: In total, we are confident in our 2024 MBR outlet because, first, we held benefits stable, increasing supplemental benefit value by just 0.7% year over. Second, our new member wrap is consistent with our bid expectations. And third, our January utilization was in line with expectations. Beyond MBR, the entirety of our adjusted EBITDA margin expansion is driven by an improving SG&A ratio year over year. Our anticipated economies of scale as a result of our growth are controllable and give us a high degree of visibility toward our 2024 adjusted EBITDA break-even goal. Looking ahead to 2025 and beyond, we are confident about our continued ability to drive above market growth and profitability improvement. We see growth tailwinds from widening Star advantages and our conservative position on risk adjustment. Our competitors' percentage of members in a four-star or better plan will fall from 79% to 56% in payment year 2025. And we believe we are less impacted by B28 than many of our local competitors.
In 2023, we demonstrated why our purpose built Medicare advantage business model is built to thrive in the current M&A environment.
We generated strong membership growth demonstrated control over our medical utilization outperformed the market in stars and made investments to position us for even greater success in 2024.
Our differentiated clinical platform is what enabled us to simultaneously achieve all of these objectives last year we.
We use employed clinical teams informed by actionable data to manage the care of our members thus controlling the cost.
Our ability to take action on insights through direct data feeds from near real time pharmacy.
<unk> admission discharge transfer and authorization data is a significant competitive advantage in controlling our MBR and achieving excellent stars results.
This past year, we again proved the ability of our clinical platform to control medical costs by managing care.
Despite many industry participants, noting higher inpatient utilization our inpatient admissions per thousand for our at risk members ran at a 156 slightly better than the prior year of 159, and nearly 40% better than traditional Medicare.
John Cahill: We see profitability tailwinds as our new members of 2024 will yield significant NBR improvement next year, and we expect more scale economies resulting from the investments we have made in technology and workflow optimization. In conclusion, we believe our clinically-centric shared risk model, supported by our AVA technology insights, will thrive in the current MA environment. We expect that our member growth will outpace the industry, and we will gain market share by focusing on quality clinical outcomes, excellent member engagement, and high-value benefits for our members. Alignment is Medicare Advantage done right. Now, I'll turn the call over to Thomas to cover the full year's financial results as well as our outlook for 2020. Thomas said,
More recently during the fourth quarter, we saw 7% year over year decline in inpatient volume.
This trend continued to persist into January 2024.
Further our model gave us early visibility and the increasing outpatient trends. These trends started emerging in 2022, but we did not see a year over year increase in utilization or impact of MBR. In 2023, we expect the utilization levels. We saw in 2023 to remain in 2024.
Our visibility is also giving us early insight into a year over year step up in supplemental benefit utilization in January.
We have incorporated this into our guidance are actively managing these trends Thomas will share more of this in his remarks.
Thomas Freeman: Thanks, John. For the year ending December 2023, our health plan membership of 119,200 increased 21% year over year. This exceeded our expectation of 17% membership growth at the midpoint of our initial guidance, thanks to the strong momentum of our sales and retention efforts as we headed into AEP. Our total revenue in 2023 grew 27% to 1.82 billion. Meanwhile, our adjusted gross profit of 209 million reflected an MBR of 88.5% for the full year and an MBR of 87.6% excluding ACO reach. Taken together, we are pleased to have balanced strong MBR results in our core business while delivering over 20% member growth. We also made significant progress towards our operating leverage goals in 2023. SG&A for the year on a gap basis was $307 million. Our adjusted SG&A, which primarily excludes equity-based compensation expense, was $244 million.
Taken together our model is advantaged by enhanced visibility through Ava and control of member care provided by our employed clinical teams.
We utilize these capabilities to create a shared risk model with community providers that is competitively advantaged in Medicare advantage relative to models that rely on actuarial underwriting or risk transfer through global capitation.
Our ability to manage risk drive higher quality clinical outcomes and produce medical cost savings translates into more value for our members.
This enables alignment to grow membership above market rates at an attractive margin profile.
As we contemplate our 2024 guidance, we are proud to share that our model continues to differentiate alignment of the marketplace.
As we noted earlier in the year, we began 2024 with 155500 health plan members. After a successful 2024 annual enrollment period.
We further expect to end 2024, with 162000 to 164000 members, representing 37% growth year over year at the midpoint.
Our AEP performance of full year membership outlook resulted from our focused investments across stars.
Member experience Ava technology enhancements and sales operations in 2023.
We reduced our churn during AEP by 24% year over year.
We also leveraged our strong stars ratings relative to our competitors to take share in the market with 82% of our AEP sales coming from plans switchers.
Thomas Freeman: Adjusted SG&A as a percentage of revenue, excluding ACO reach, was 14.4%, an improvement of 1.6% from the prior year result of 15.9%. We anticipate that this significant improvement will continue into 2024 as we benefit from our membership growth and several of our shared services, productivity, and scaling initiatives. Lastly, our adjusted EBITDA was negative $35 million.
As in past years, we have a disciplined process, which balances growth and profitability.
Even with this growth, we expect our health plan MBR to be roughly unchanged year over year.
Our adjusted gross profit guidance is underpinned by improvements to returning member MBR, partially offset by higher new member MBR.
For returning members our clinical model drives it averaged 800 basis point improvement in at risk MBR between years, one at five <unk>.
Thomas Freeman: As previously indicated in our AK, our adjusted EBITDA result reflects decisions to increase discretionary investments in sales and marketing during the back half of AEP, given the significant growth opportunity presented. In support of this growth, we also accelerated new hires and clinical investments in December to assist with the onboarding of new membership. We are pleased that these minimal incremental investments successfully positioned us to achieve the 2025 year-end consensus membership a full year early. However, subsequent to the release of our January 8k, we saw $2 million of adverse development in our ACO REACH line of business related to fourth quarter days of service.
The improvement in member retention will also contribute to strong returning member MBR.
For new members, we design products to generate positive new member gross profit to support our overall profitability goals.
New members typically begin at a higher ABR of approximately 89% and given our significant growth through AEP. We expect these members to partially offset returning member MBR improvement.
These members are still expected to be accretive to gross profit.
In total we are confident in our 2024 MBR outlook, because first we held benefits stable increasing supplemental benefit value by just <unk>, 7% year over year.
Thomas Freeman: As I will share more on momentarily, we have since executed a strategy to eliminate any downside exposure from our ACO REACH book of business in 2020. Moving to the balance sheet. Our capital position remains strong as we entered the year with 319 million in cash and short-term investments. The sequential stepdown in cash compared to the third quarter included the previously discussed timing impact of an early payment from CMS of approximately $146 million in Q2.
Our new member rapid consistent with our bid expectations and third our January utilization was in line with expectations.
Beyond MBR the entirety of our adjusted EBITDA margin expansion is driven by an improving SG&A ratio year over year.
Our anticipated economies of scale as a result of our growth are controllable and gives us a high degree of visibility toward our 2024 adjusted EBITDA breakeven goal.
Looking ahead to 2025 and beyond we are confident about our continued ability to drive above market growth and profitability improvements we.
Thomas Freeman: Turning to our guidance, for the first quarter, we expect health plan membership to be between 157,000 and 159,000 members, revenue to be in the range of $590 million and $600 million, adjusted gross profit to be between $52 million and $58 million, and adjusted EBITDA to be in the range of a loss of $13 million to a loss of $19 million. For full year 2024, we expect health plan membership to be between 162,000 and 164,000 members, and revenue to be in the range of $2.38 billion and $2.41 billion. Adjusted gross profit is expected to be between $275 million and $310 million, and adjusted EBITDA is expected to be in the range of a loss of $15 million to positive $15 million.
We see growth tailwind from widening stars advantages in a conservative position on risk adjustment.
Our competitors percentage of members in a four star or better plan will fall from 79% to 56% in payment year 2025.
And we believe we are less impacted by the 28 that many of our local competitors.
We see profitability tailwind as our new members of 2024 will yield significant MBR improvement next year, and we expect more scale economies, resulting from investments we have made in technology and workflow optimization.
In conclusion, we believe are clinically centric shared risk model supported by our <unk> technology insights will thrive in the current M&A environment.
We expect that our member growth will outpace the industry and we will gain market share by focusing on quality clinical outcomes excellent member engagement and high value benefits for our members.
Alignment is Medicare advantage is done right.
Now I'll turn the call over to Thomas to cover the full year financial results as well as our outlook for 2024.
Thomas.
Thanks, John for the year ending December 2023, our health plan membership of 119200 increased 21% year over year. This exceeded our expectation of 17% membership growth at the midpoint of our initial guidance. Thanks to the strong momentum of our sales and retention efforts as we headed into AEP, our total revenue and <unk>.
Thomas Freeman: Based on early Q1 trends, we feel confident in our ability to achieve our full-year membership and revenue outlook. Our relative product value proposition, STARS differentiation, and brand recognition continue to resonate in the market post-AES. We also continue to see improvements in retention that reinforce our full-year membership target.
'twenty three year, 27% to 182 billion. Meanwhile, our adjusted gross profit of 209 million reflected an MBR of 88, 5% for the full year and an MBR of 87, 6%. Excluding ACO reach taken together. We are pleased to have balanced strong MBR results in our core business while deliver.
Thomas Freeman: Moving down to P&L, the following factors support our full year 2024 Adjusted Gross Profit Outlook. First, our star ratings are stable year-over-year for 2024 payments. Second, as John mentioned earlier, the bid value of our added benefits will remain roughly unchanged in 2024, increasing just 0.7% year over year. Third, the wrap we receive for our new members is in line with our bid expectation. And lastly, our recent utilization experience continues to be consistent with our expectations. Fourth quarter inpatient admissions per thousand ran 7% better year over year, a trend which persisted into January. Diving deeper into our utilization experience, I'll spend a few moments on a few topical flu and RSV inpatient urovine.
Over 20% membership growth.
We also made significant progress towards our operating leverage goals in 2023 SG&A for the year on a GAAP basis was $307 million, our adjusted SG&A, which primarily excludes equity based compensation expense was $244 million.
Adjusted SG&A as a percentage of revenue excluding ACO reach was 14, 4% an improvement of one 6% from the prior year result of 15, 9%. We anticipate that this significant improvement will continue into 2024 as we benefited from our membership growth and several of our shared services productivity and scaling.
Initiatives <unk>.
Lastly, our adjusted EBITDA was negative $35 million as previously indicated in our 8-K are adjusted EBITDA result reflects decisions to increase discretionary investments in sales and marketing during the back half of AEP given the significant growth opportunity presented to us in support of this drug we also accelerated new hires and clinical investments in December.
Thomas Freeman: Utilization trends for the full year and fourth quarter 2023 showed year over year. Flu and RSV are captured within our all-in 156 admissions per thousand for full year 2023. This category of utilization continues to be a primary area of differentiation given the strength of our clinical model to prevent avoidable admissions and readmissions. Outpatient Utilization.
To assist with the Onboarding of new membership. We are pleased that these minimal incremental investments successfully positioned us to achieve the 2025 year and consensus membership our full year early.
Subsequent to the release of our January 8-K, we saw $2 million of adverse development in our ACO original line of business related to fourth quarter dates of service as I will share more on momentarily, we have executed a strategy to eliminate any downside exposure from our ACO reached book of business in 2024.
Thomas Freeman: As we previously noted, our outpatient costs in 2023 ran within a few dollars PMPM relative to 2022. Additionally, our early 2024 pre-authorization data, which is a strong leading indicator of our outpatient volume, continues to be in line with our prior year experience. We expect the impact of the two midnight rule to be immaterial.
Moving to the balance sheet, our capital position remains strong as we ended the year with $319 million in cash and short term investments the sequential step down in cash compared to the third quarter included the previously discussed timing impact of an early payment from CMS of approximately $146 million in Q3.
Thomas Freeman: The majority of our hospital contracts in California, which comprises 94 percent of our members, already incorporate a de facto two midnight rule, while we foresee a modest impact on our ex-California markets. However, we are incorporating higher than the national average inpatient unit cost increases in California and Nevada for CMS's fiscal year 2020. Supplemental Benefits. We saw a year over year increase in our supplemental benefit expense in 2023, but importantly, this was consistent with our budget forecast. In 2024, we continue to contemplate higher supplemental benefit expense as part of our full year outlook. This is largely a result of our successful vendor transition that has improved the black card service level. While we have incorporated this as an area of MBR headwind in our 2024 outlook, it is also contributing to improved retention and member engagement on our critical clinical, And lastly, our clinical. We've identified numerous care and medical management opportunities to improve quality outcomes and utilization. Our first quarter outlook generally reflects the regular seasonality of our MBR experience. As a reminder, utilization is typically higher in the first quarter than the full year average. Part D is also much less profitable in the first half of the year as compared to the second half, particularly in the first quarter.
Turning to our guidance for the first quarter, we expect health plan membership to be between 157000, and 159000 members revenue to be in the range of $590 million and 600 million adjusted gross profit to be between $52 million and $58 million and adjusted EBITDA to be in the range of <unk>.
A loss of $13 million to a loss of $19 million.
For full year 2024, we expect health plan membership to be between 162000 and 164000 members.
Revenue to be in the range of $2 38 billion and $2 four 1 billion.
Adjusted gross profit to be between $275 million and $310 million.
<unk> adjusted EBITDA to be in the range of a loss of $15 million to positive $15 million.
Based on early Q1 trends, we feel confident in our ability to achieve our full year membership and revenue outlook, our relative product value proposition Starz differentiation and brand recognition continue to resonate in the market post AEP. We also continue to see improvements in retention that reinforce our full year membership target.
Moving down the P&L the following factors support our full year 2024, adjusted gross profit outlook.
First our star ratings are stable year over year for 2020 for payment second as John mentioned earlier the bid value of our added benefits remained roughly unchanged in 2024, increasing just 0.7% year over year.
Third the wrap we received for our new members is in line with our bid expectations and lastly, a recent utilization experience continues to be consistent with our expectations fourth quarter inpatient admissions per thousand brand, 7% better year over year, a trend which persisted into January.
Thomas Freeman: This year, our guidance also reflects an extra day of medical expense in the first quarter due to the leap year and a higher mix of pre-mid-year suite new members in Q1 relative to the prior year. Additionally, we expect our SG&A ratio seasonality to be less pronounced in the back half of this year as we gain economies of scale across the enterprise. As we head into 2024, we are making changes to our ACO REACH business and reporting. Given the immense opportunity we see in Medicare Advantage, particularly over the next few years, as we benefit from our competitive positioning on STARS and RISKFUL, we are reallocating our time and HUBU capital towards MA and eliminating downside risk in the HCO REACH program. Going forward, revenue from the program will be reported on a net basis, meaning that we will no longer recognize the full benchmark risk as gross revenue. The difference in accounting is due to our decision to capitate a provider to take risks on the ACO REACH population in 2024. Under this arrangement, we will recognize a nominal amount of gross profit and not share any ACO REACH program debt.
Diving deeper into our utilization experience I'll spend a few moments on a few topical items.
Flu and RSV inpatient utilization.
Realization trend for the full year and fourth quarter 2023 showed year over year declines flu and RSV are captured within our all in 156 admissions per thousand for full year 2023.
This category of utilization continues to be a primary area of differentiation given the strength of our clinical model to prevent avoidable admissions and readmissions.
Outpatient utilization.
As we previously noted our outpatient costs in 2023 ran within a few dollars NPM relative to 2022. Additionally, our early 2020 for Preauthorization data, which is a strong leading indicator of our outpatient volume continues to be in line with our prior year experience.
Inpatient unit costs, we expect the impact of the two midnight rule to be immaterial. The majority of our hospital contracts in California, which comprises 94% of our members already incorporate a de facto two midnight rule, while we foresee modest impact to our ex California markets. However, we are incorporating higher than the national average inpatient.
Thomas Freeman: The changes to our ACO REACH accounting are reflected in the 2024 outlook I previously provided. Pro forma for changes in revenue recognition, year-over-year revenue growth is expected to be 41% at the midpoint of our outlook. We have included a financial supplement on our investor relations page with, In conclusion, we are well positioned to execute on our 2024 objectives and are excited for the opportunity ahead of us in 2025, where we expect our competitive advantages to compound even more. With that, let's open the call to questions. Operator?
Unit cost increases in California, and Nevada for CMS as fiscal year 2024.
Supplemental benefit expense.
We saw a year over year increase in our soft phone benefit expense in 2023, but importantly, this was consistent with our budget forecast in 2024, we continue to contemplate higher supplemental benefit expense as part of our full year outlook. This is largely a result of our successful vendor transition that has improved black card service levels, while we have incorporated this.
As an area of MBR headwind in our 2024 outlook. It is also contributing to improved retention and member engagement on our critical clinical initiatives.
And lastly, our clinical initiatives, we've identified numerous care and medical management opportunities to improve quality outcomes and utilization trends in 2024.
Operator: Thank you, sir. As a reminder, to ask a question, you will need to press star 1-1 on your telephone. To rejoin your question, please press star 1 1 again. Please stand by while we compile the Q&A roster, and I share our first question comes from the line of John Ransom from Raymond James. Please go ahead. Hey, good evening, gentlemen. At what point on ACRE should you say that it's just not worth it?
Our first quarter outlook generally reflects the regular seasonality of our MBR experience as a reminder, utilization is typically higher in the first quarter than the full year average part D is also much less profitable in the first half of the year as compared to the second half, particularly in the first quarter. This year. Our guidance also reflects an extra day of medical expense in the first quarter.
Due to the leap year, and a higher mix of pre midyear sweep new members in Q1 relative to prior years.
Additionally, we expect our SG&A ratio seasonality to be less pronounced in the back half of this year as we gain economies of scale across the enterprise.
Thomas Freeman: Hey, John, this is Thomas here. I think, um, I think the overall program intent makes a lot of sense, the idea of trying to ensure that seniors enrolled in traditional Medicare get access to better care, different modalities of value-based care, and potentially different forms of supplemental benefits over the long term, which we think is really interesting. But that being said, you've heard us say all along that we would do this so long as it supports our strategic objectives with our provider network, but not in a way that causes us to lose money. And so given where we ultimately landed for 2023 ACO REACH MLR, which was a bit over 100%, we decided to take a step back and essentially insulate ourselves from any downside risk exposure while not backing out of the program entirely. I think for the foreseeable future, we do not plan to take downside risk on the ACO REACH program, but rather, we'll look to continue to support our provider partners with our existing license we still have remaining.
As we head into 2024, we're making changes to our ACO business and reporting.
Given the immense opportunity we see in Medicare advantage, particularly over the next few years as we benefit from our competitive positioning on stars and risk adjustment, we are reallocating, our time and human capital towards M&A and eliminating downside risk in the ACR each program going.
Going forward revenue from the program will be reported on a net basis, meaning that we will no longer recognize the full benchmark risks as gross revenue. The difference in accounting is due to our decision to capital provider to take risks on the ACO reach population for 2024.
Arrangement, we will recognize a nominal amount of gross profit and not share any easier reach program deficits.
Changes to our ACO reach accounting are reflected in the 2024 outlook I previously provided pro forma for changes in revenue recognition year over year revenue growth is expected to be 41% at the midpoint of our outlook range. We have included a financial supplement on our Investor Relations page with additional detail.
In conclusion, we are well positioned to execute on our 2024 objectives and are excited for the opportunity ahead of us in 2025, where we expect our competitive advantages to compound even further with that let's open the call to questions operator.
Thomas Freeman: And really focus our efforts on Medicare Advantage, where we see an enormous growth opportunity and margin improvement opportunity story heading into 2025. And secondly, and I'll stop with this, just the cadence of MLR throughout the year. I know you talked about 1Q being higher, but could you kind of talk about how you see it and why you see the trends as you presented in your guidance, 2Q to 4Q? Thanks.
Thank you Sir.
As a reminder to ask a question you will need to press star one on your telephone.
Two which are your question. Please press star one again.
Please stand by while we compile the Q&A roster.
And I show. Our first question comes from the line of John Ransom from Raymond James. Please go ahead.
Hey, good evening gentlemen.
At what point on ACO races to say that it's just not worth it.
Thomas Freeman: Yeah, so we typically would expect Q1 and Q4 seasonality to have a bit higher MBR than Q2 or Q3. I think this year, similar to years past guidance, our Q1 MBR seasonality reflects Part D, which tends to run over 100% in Q1. And then we also just have sort of our normal course utilization where inpatient volumes tend to be higher in December, January, and oftentimes March as well, just around flu and RSVC. I think this year we are also recognizing that it is a leap year. We had an extra one day of medical expense in the first quarter that we didn't reflect.
Hey, John This is Thomas here I think.
I think we still think the overall program intend it makes a lot of sense. The idea of trying to ensure that seniors enrolled in traditional Medicare get access to better care different modalities of value based care and potentially different forms of supplemental benefits longer term.
It is really interesting, but that being said as you've heard from US say all along that we would do this so long as it supports our strategic objectives with our provider network.
But not in a way that causes us to lose money and so given where we ultimately landed for 2020 threes Acr's MLR was which was a bit over 100%. We decided we take a step back and essentially insulate ourselves from any downside risk exposure, while not backing out of the program entirely I think for the foreseeable future. We do not plan to take downside risk on the AC.
Thomas Freeman: And then just given the overall growth, the membership that is pre-mid year sweep, we think that is something that we're also taking into account for our Q1 guidance. As we talked about in the past, we tend to book our new members into paid revenue over the course of the first half of the year until we see the mid year sweep. Our full-year guidance is not contingent upon a disproportionate pickup in the midyear. But we also like to take a kind of conservative posture in Q1 to not assume that we'll do anything better than what we're currently being paid. Thank you. And I show our next question comes from the line of Nathan Rich from Goldman Sachs. Please go ahead. Hey, good afternoon.
Rich program, but rather we will look to continue to.
Support our provider partners with our existing license, we still have remaining and really focus our efforts on Medicare advantage, where we see an enormous growth opportunity and margin improvement opportunities started heading into 2025.
And then secondly, and I'll stop but Thats just the.
The cadence of MLR throughout the year I know you talked about <unk> being higher but could you kind of talk about how you see it and why you see the trends.
As you presented in your guidance. Thanks.
So as we typically would expect Q1 and Q4 seasonality to have a bit higher MBR than Q2, and Q3 I think this year similar to years past guidance. Our Q1, MBR seasonality reflects part D, which tends to run over 100% in Q1 and then we also just have sort of our normal course utilization, where inpatient volumes tend to be higher in December.
Operator: Thanks for the questions. First, I just wanted to follow up on the utilization expectations. I guess just to clarify on the change in ACO reach accounting, I guess does that mean it'll essentially be a non-factor in the MBR in 2024 based on that accounting change? And then, I guess, bigger picture, you kind of talked about January inpatient, I think it was in line with your expectations. I guess, what does the guidance assume for inpatient specifically over the balance of the year and to the extent that, you know, we continue to see greater, I guess, you know, hospital utilization and inpatient utilization? Just curious, like, how you're thinking about that potential within the guidance range. Thank you. Yeah, absolutely. So on the ACO reach point, you are correct.
<unk> January and oftentimes in March as well just around sort of flu and RSV season. I think this year. We also are recognizing that it is a leap year, we have an extra one day of medical expense in the first quarter that we reflected and and then just given the overall growth of the membership that is pre midyear sweep. We think that is something that we're also take into account for our Q1.
On guidance.
As we talked about in the past we tend to book, our new members to the paid revenue over the course of the first half of the year until we see the midyear sweep our full year guidance is not contingent upon a disproportionate pick up in the mid year, but we also like to take a conservative posture in Q1 to not assume that we will do anything better than what we're currently being paid.
Thomas Freeman: We do not expect it to be a material driver of our MBR in 2024, given our change in accounting revenue recognition from gross to net. It's worth noting that we did provide a financial supplement on our investor relations page, just to show the MBR in 2023, both with and without ACO reach, so you can all look at it on a comparable basis as we head into 2024. In terms of utilization, I think we would expect overall utilization in 2024 to be comparable to what we saw in 2023. And I think your first question was about inpatient.
Okay. Thank you.
Thank you.
And I show. Our next question comes from the line of Nathan Rich from Goldman Sachs. Please go ahead.
Okay.
Hey, good afternoon, thanks for the questions.
First just wanted to follow up on the utilization expectations I guess just to clarify on the change in ACO reach accounting I guess does that mean, it will essentially be a non factor in the MBR in 2024 based on that accounting change and then I guess bigger picture.
You kind of talked about January inpatient I think being in line with your expectations I guess, what does the guidance assume for inpatient specifically over the balance of the year and to the extent that.
We continue to see.
Thomas Freeman: This has been one of the areas that we have shined consistently since going public and even before we ever went public. So we've run about 155 to 165 inpatient admissions per thousand for about seven years straight at this point, including over the last few years, when we've been growing in excess of 20%. And so I think as we contemplate our ability to sustain that into 2024, it's really a testament to our clinical model, which is able to identify members early who need our clinical programs and ensure that we engage them with our employed clinical teams. And so that's something we're going to be very focused on over the first 90 days of 2024. But as we sit here through February, we're very pleased with our early results and traction and making sure we get the right members engaged in our clinical program. And if I could just ask you a quick follow-up question.
Greater I guess hospital utilization and patient utilization, just curious like how youre thinking about that potential within the guidance range. Thank you.
Yeah, absolutely so on the ACO reach point you are correct.
Do not expect it to be a material driver of our MBR in 2024, given our change in accounting revenue recognition from gross to net.
It's worth noting that we did provide a financial supplement on our Investor Relations page just to show the MBR in 2023, both with and without ACO reach that you go out and look at it on a comparable basis as we head into 2024.
In terms of utilization I think we would expect overall utilization in 2024 to be comparable to what we saw in 2023 and I think on your first question was on inpatient.
This has been one of the areas that we have shines consistently since going public and even before we ever went public. So we brought in about 155 to 165 inpatient admissions per thousand for about seven years straight at this point.
Thomas Freeman: You mentioned achieving kind of the 2025 membership a year early. Great to see the early membership gains, obviously. Could you maybe talk about how that impacts your thinking around 2025 performance for the business? You know, what type of EBITDA tailwind does that potentially create as you get CMBR improvement on those members, just as we think about sort of the trajectory of the business a little bit longer term? Thank you.
Over the last few years, where we've been growing in excess of 20% and so I think as we contemplate our ability to sustain that into 2024, it's really a testament to our clinical model, which is able to identify members early the need our clinical programs and ensure that we engage them with our employed clinical teams and so that's something we're going to be very focused on.
Over the first 90 days of 2024, but as we sit here through February we're very pleased with our early results and traction and making sure we get the right members engaged in our clinical programs.
Thomas Freeman: Yeah, we think it's significant to your point. And so, both from a growth and margin standpoint, we're very optimistic about our 2025 positioning. I think you heard John mention a bit on the growth side of things that we're going to benefit in 2025 as our competitors fall on average below a four-star rating. There's only one other HMO competitor who has a pretty broad footprint across California that actually maintained four stars for 2025.
Great and if I could just ask a quick follow up.
You mentioned, you're achieving kind of the 2025 membership.
A year early great to see the early membership gains obviously I guess could you maybe talk.
Talk about how that impacts your thinking around.
2025 performance of the business what type of EBITDA tailwind does that potentially create as you get the MBR improvement on those members just as we think about sort of the trajectory of the business a little bit longer term. Thank you.
Operator: I think when you take that and add on the B28 risk adjustment headwinds and the broader utilization headwinds that you've heard from across the industry, we feel very good about our ability to sustain above market growth and achieve something in excess of 20% for 2025. At the same time, to your point on the margin side of things, I think that growth affords us continued SG&A economies of scale heading into 2025. And given the 2024 bullets of new member growth, I think it presents a significant MBR opportunity as you transition those year one members, which tend to start in the high 80s, into year two, which tends to go into the mid 80s. And so that's something we're very optimistic about as we think about our overall positioning over the next 24 months. Thank you. And I show our next question comes from the line of Scott Fidel from Stevens. Please go ahead. Hi, thanks. Good evening.
Yes, we think it's a significant to your point and so both from a growth and margin standpoint, we're very optimistic about our 2025 positioning I think you heard John mentioned a bit on the growth side of things that we're going to benefit in 2025 as our competitors fall on average below a forced our payment there's only one other HMO.
Our competitor, who has a pretty broad footprint across California that actually maintained four stars for 2025, I think when you take that and add on the B 28 risk adjustment headwinds in the broader utilization headwinds that you've heard from across the industry. We feel very good about our ability to sustain above market growth and achieve something in excess of 20%.
For 2025 at the same time to your point on the margin side of things I think that growth affords us continued SG&A economies of scale heading into 2025 and given the 2024 bolus of new member growth I think it presents a significant MBR opportunity as you transition those year, one members, which tend to start in the high eighties into.
Year, two which tends to go into the mid eighties and so that's something we're very optimistic about as we think about our overall positioning over the next 24 months.
Thank you.
Thank you.
And I show. Our next question comes from the line of Scott Fidel from Stephens. Please go ahead.
Thomas Freeman: First question, just interested if you can share with us just some of the initial indicators around the risk and acuity profile of the 2024 cohort that you've had in the AEP. Any sort of, you know, sort of early warnings, sort of indicators that you focus on around that population. And then, just as it relates to the supplemental benefits dynamics that you had touched on, whether you have enough information to ascertain any sort of variation between the new members added this year versus prior members around benefits utilization. Yeah, so this is Thomas Hitchcock.
Hi, Thanks. Good evening first question just interested if you can share with US just some of the initial indicators around the risking of acuity profile of the.
2024 cohort that you've added in the AEP.
Any sort of <unk> sort of early warning indicators that you focus on around that population and then just as it relates to the supplemental benefits dynamics that you had touched on.
Whether you have enough information to ascertain sort of variation between the new members added this year versus prior members around stop benefit utilization.
Yes. So this is Thomas say Scott.
Thomas Freeman: I think maybe in terms of the new member MLR outlook, maybe I'll speak to both the revenue side and the cost side based on what we've seen so far. So in terms of the revenue side of things, our actual paid wrap for the month of January, our new members, was within a couple of basis points of what we had incorporated into our 2024 bids back in June of 2023. So I think that was a very positive data point for us in ensuring that the payment relative to our expectations of mixed by product was consistent with what we had hoped. On the cost side, obviously, we track our inpatient admissions per thousand with maniacal attention to detail.
I think maybe in terms of the new member MLR outlook.
I'll speak to both the revenue side and the cost side based on what we've seen so far so in terms of the revenue side of things.
Our actual paid RAF for the month of January our new members was within a couple of basis points of what we had incorporated into our 2024 bids back in June of 2023. So I think that was a very positive data point for us in ensuring that the payment relative to our expectations of mixed byproduct, what's consistent with what we had hoped.
On the cost side, obviously, we track our inpatient admissions per 1000 with a maniacal attention to detail and as we progressed through the first 45, almost 60 days of the first quarter, we've been looking at not only overall inpatient utilization, but specifically how the new members are performing by market by IPA and byproduct so far all signs point to.
Thomas Freeman: And as we progress here through the first 45, almost 60 days of the first quarter, we've been looking at not only overall inpatient utilization but specifically how the new members are performing by market, by IPA, and by product. So far, all signs point to the utilization of those new members being consistent with expectations. I think over the course of the next few months, we'll get more and more claims visibility into some of the other categories of spend. But so far, I think we're feeling pretty optimistic that this year's new member MLR should be in line with what we would have anticipated from a bid standpoint. I think on your second question, oh, sorry, go ahead. No, please Thomas, go ahead.
The utilization of those new members being consistent with expectations.
I think over the course of the next few months, we'll get more and more claims visibility to some of the other categories of spend but so far I think we're feeling pretty optimistic that this year's new member MLR should be in line with what we would have anticipated from a bid standpoint.
I think on your second question Oh, Sorry go ahead.
No. Please go ahead.
Thomas Freeman: And in terms of your second question on supplemental benefits, I think it's less of a new member issue versus a loyal member issue. I think what we have seen is as we changed some of our vendors last year around the overall member experience, inclusive of some of the black card vendors, what we've seen is improved service levels, which has been excellent in terms of some of our tailwinds around our NPS scores, Google reviews, and most recently, AEP retention, which improved by about 200 basis points year over year compared to the 2023 AEP results. And ultimately, we think it's going to be a tailwind heading into cap season for STARS purposes this year.
And then in terms of your second question on supplemental benefits I think it's less of a new member issue versus a loyal member issue I think what we have seen is as we change some of our vendors last year around the overall member experience inclusive of some of the black card vendors. What we've seen is improved service levels, which has been excellent in terms of some of our.
<unk> around our NPS scores.
Google reviews, most recently AEP retention, which improved by about 200 basis points year over year compared to the 2023 AEP results.
And ultimately we think it's going to be a tailwind heading into tax season for starz purposes. This year. So I think the overall investment and initiative has been very successful, but at the same time has caused our overall black card spend to increase for the first part of 'twenty four compared to 2023, I think that's reflected in our overall MBR outlook and it's something that.
Thomas Freeman: So I think the overall investment and initiative has been very successful, but at the same time, it has caused our overall black card spend to increase for the first part of 24 compared to 2020. I think that's reflected in the overall NBR outlook, and it's something that we're continuing to monitor. But I think for now, we feel like the initiative has been pretty successful. And it's something we'll continue to keep in mind as we try to make sure we're balancing all of our different initiatives across growth, retention, and ultimately profitability. I got it. Thank you.
We're continuing to monitor but I think for now we feel like the initiative has been pretty successful and something we will continue to keep in mind as we try to make sure. We're balancing all of our different initiatives across growth retention stars and ultimately profitability.
Thomas Freeman: And then, just as a follow-up, I'm interested if you could give us some of your thinking around operating cash flow for 2024 and key sources and uses of cash that you're thinking about for 2024. Thanks. Yeah, so overall, from a kind of a bridge from adjusted EBITDA to ultimately what our cash flow looks like for 2024. A couple things to keep in mind. We typically have about $25 million of capex annually. And based on our existing term loan, we probably have about 20 million or so of cash interest expense I would anticipate in 2024. And so I think if you kind of take those two things into account, you're kind of thinking about 50 million of cash burn outside of our adjusted EBITDA. Working capital doesn't tend to be a major source of or use of cash over a full 12 month period.
Okay got it. Thank you and then just as my follow up interesting. If you could give us some of your thinking around operating cash flow for 2024, and key sources and uses of cash that you're thinking about for 2004.
So overall from a.
Kind of a bridge from adjusted EBITDA to ultimately what our cash it looks like for 2024.
A couple of things to keep in mind, when we typically have about $25 million of capex annually and based on our existing debt.
Term loan we have about probably.
$20 million or so of cash interest expense I would anticipate in 2024.
So I think if you guys think those two things into account youre kind of thinking about $50 million of cash burn outside of our adjusted EBITDA.
<unk> capital doesn't tend to be a major source of or use of cash over a full 12 month period. So that's helped us, but I would expect to drive a significant change in our overall cash position this year.
Thomas Freeman: So that's not something I would expect to drive a significant change in our overall cash position this year. And then lastly, just in terms of overall parent cash versus regulated cash, I think we feel very good about the way the Olaflood balance sheet is positioned today. So sitting here at the end of 2023, we had about 156 million of parent cash over 300 million of total cash, with an additional 85 million of term loan undrawn capacity at our disposal.
And then lastly, just in terms of overall parent cash versus regulated cash I think we feel very good about the way to ultimate balance sheet is positioned today. So sitting here at the end of 2023, we had about $156 million of parent cash over $300 million of total cash with an additional $85 million of term loan undrawn capacity at our disposal.
Thomas Freeman: So, in the big picture, given our 2024 outlook and then the margin potential improvement we see for 2025, we feel very good about the strength of the overall balance. Okay, thank you. Thank you. And I have next question comes from the line of Ryan Daniels from William Blair. Please go ahead.
I think big picture, given our 2020 for outlook and then the margin potential improvement we see for 2025, we feel very good about the strength of the overall balance sheet.
Okay. Thank you.
Thank you.
And I show. Our next question comes from the line of Ryan Daniels from William Blair. Please go ahead.
Operator: Yeah, congrats on the quarter. Thanks for taking the questions, John. Maybe one for you. Pretty impressive with the year over year decline and inpatient utilization and the trends that you're seeing there in general. I'm curious if you can go into a little bit more detail on what you think is the key driver of that. My impression is it's probably your data and care anywhere and intervention. But more broadly, is it the ability to really provide more proactive care? And is that a twofold benefit in that maybe you're seeing less pent-up demand because you manage that during COVID, so you're not seeing it and then continuing to manage it? So I don't want to put words in your mouth, but I just love to get some color there because I think that Hey, Ryan. No, I'd say two words.
Yes, congrats on the quarter. Thanks for taking the questions John maybe one for you pretty impressive with the year over year.
Line in inpatient utilization.
Trends that Youre seeing there in general and I'm curious if you can go into a little bit more detail on what you think is the key driver of that my impression is its probably youre data and care anywhere in intervention.
More broadly is it the ability to really provide more proactive care and is that a twofold benefit and then maybe youre seeing less pent up demand because you manage that during COVID-19. So youre not seeing it and then continue to manage it.
So don't want to put words in your mouth, but just love to get some color there.
Yeah, Hey, Ryan Yes, no.
Say, two words is visibility and control <unk>.
John Cahill: Visibility and control. Visibility and control. The data, and Ava, you've heard us talk about, really gives us a lot of insight into what's going on with the membership. And so we have, you know, kind of day-to-day control because we actually manage the risk ourselves. And we prefer to manage the risk, and we manage the risk really by managing the care, which I think is fundamentally, at the highest level, what you need to be to be successful in Medicare Advantage. It's not an underwriting or financial engineering exercise.
Visibility and control the data and Ava you've heard us talk about really gives us a lot of insight.
Into what's going on with the membership.
And so we have kind.
Kind of.
Day to day control, because we actually manage the risk ourselves.
And we prefer to manage the risk and we manage the risk really by managing the share, which I think is fundamentally.
The highest level, what you need to be to be successful in Medicare advantage, it's not an underwriting or financial engineering exercise it's actually.
John Cahill: It's actually managing the care. And you've heard us talk about, you know, understanding where the 10 to 20% of the high-risk members are and then how we take care of them at home with our interdisciplinary care teams. And it's that consistency that really allows us to lower these admissions, you know, for the Thomas mentioned last seven years, and that level of visibility and control is, I think, what makes us very differentiated and unique. I also say that in this kind of Medicare Advantage reality of just tighter stars, tighter risk adjustment, you know, we've got a lot of discussion around benchmarks right now with the advance notice. We're positioned to do really well because, from the start, we focused on you have to be the highest quality and the lowest cost provider in the marketplace. It's very easy.
Managing the care.
And you've heard us talk about.
Understanding where the 10% to 20% of the high risk members are and then how we take care of them at the home with our interdisciplinary care teams.
And it's that consistency.
That really allows us to lower of these emissions.
Thomas mentioned over the last seven years.
And that level.
A visibility and control.
I think what makes us very differentiated and unique I also say.
In this kind of Medicare advantage reality of just tighter stars tighter risk adjustment.
A lot of discussion around benchmarks right now with the advance notice.
We are positioned to do really well because from the start.
We focused on you have to be the highest quality.
And the lowest cost.
Provider in the marketplace is very simple.
John Cahill: And I think the market is adjusting to the way that we've been built. And that's what I think has been reflected in some of the growth that you just saw with us in AEP. Thank you for that color.
And I think I think the market is adjusting to the way that we've been built.
And Thats, what I think.
It has been reflected in some of the growth that you just saw with us.
In AEP.
Okay, great. Thank you for that color and then Thomas one for you it looks like the implied MBR in Q1, if I'm doing this right I'm jumping between so it was about 91% which was.
Thomas Freeman: And then Thomas, one for you. Looks like the implied MBR in Q1, if I'm doing this right, I'm jumping between stuff, is about 91%, which is a little bit higher year-over-year despite the utilization trends being pretty stable. So is that just the sub-benefits and the new member growth pushing that up a little bit year-over-year? Yeah, I think those two things and then, just kind of like I said earlier, normal course seasonality and then Part D in particular.
A little bit higher year over year, despite the utilization trends being pretty stable. So is that just the sub benefits and the new member growth pushing that up a little bit year over year.
Yes, I think those two things and then I would add just kind of like I said earlier normal course seasonality and in part D. In particular, and so the part D program brands over 100% MLR in Q1, and so that's a pretty significant driver on the overall seasonality of the business from Q1 through Q4.
Thomas Freeman: And so the Part D program runs over 100% MLR in Q1. And so that's a pretty significant driver of the overall seasonality of the business from Q1 through Q4. From a utilization standpoint, as you mentioned, I think we feel pretty good about what we're seeing on the inpatient side thus far. And I would also add, Ryan, as I mentioned earlier, it is a leap year this year, which sounds immaterial but actually is not insignificant when you think about adding one extra day of medical expense with the same number of days of revenue over the course of Q1. Alright, thank you so much.
I think from a utilization standpoint.
Your comment I think we feel pretty good about what we're seeing on the inpatient side thus far.
Yes.
And I would also add rag I mentioned earlier it is a leap year this year.
Sounds immaterial, but actually is not insignificant when you think about adding one extra day of medical expense with the same number of days of revenue over the course of Q1.
That's a good point alright, thank you so much perfect.
Operator: Thank you. And I show our next question comes from the line of Jess Tesson, from Piper Sandler. Please go ahead.
Thank you.
And I show. Our next question comes from the line of Jeff fan.
From Piper Sandler. Please go ahead.
Operator: Hi guys, thanks for taking the question. So I wanted to start with, I know you all mentioned the opportunity for margin expansion in 25 just via STARS and some kind of favorable positioning with version 28. Curious if you have any early comments about the impact of the expected changes from the Inflation Reduction Act on Part D kind of redesign and just the shift of liability from CMS to the plans in the catastrophic phase of COVID. Yeah, hey Jess, it's John.
Hi, guys. Thanks for taking the question.
So I wanted to start with I know you all mentioned the opportunity for margin expansion and 25, just be a stars and kind of favorable positioning.
With version 2008 curious if you have any early comments about the impact of the expected changes from the inflation reduction act on part D kind of redesign and just the shift of liability from.
CMS to the plan and the catastrophic phase of Capex.
Yeah, Hey, Jeff It's Jon.
John Cahill: Great question. We think that it could go either way, actually. It's going to be, I think, a very important part of the bid strategy heading into 2025. But I don't want to get into bid strategy for obvious competitive reasons right now.
Great question.
We think that it could go either way actually.
It's going to be I think a very important part of the bid strategy heading into 2025.
I don't want to get into bid strategy for obvious competitive reasons right now.
John Cahill: But I'm very comfortable with what our thinking is on it. But I think that overall, I think we can manage. And we've had, you know, a few years to be able to digest this. We know what the program looks like, and we'll be able to embed that in our bits. And as usual, you know, we will, we'll find the right balance between growth and margin, but it will be a meaningful level of, I would say, benefit design and strategic thinking around IRA. Got it.
But I'm very comfortable with where we are.
With our.
That's what our thinking is on it.
But I think that.
Overall trends I think we can manage and we've had.
A few years to be able to digest. This we know what the program looks like.
And be able to embed that in our.
Our bids and as usual.
We will find the right balance between growth and margin, but it will be.
Meaningful.
Level of I would say benefit designs.
And strategic thinking around IRA.
Got it.
John Cahill: Okay, that's helpful. And then I guess I just, I was hoping to understand when you described, you know, 82% of AEP ads coming from members switching, despite the fact that supplemental benefits are only up mod or value is only up modestly year over year. I guess just, and I know you guys have gone through this, but just kind of what's driving the switching? Is it competitors paring back benefits versus your relative stability or just the sales approach or, or anything in particular to call out from this AEP? Thanks. Yeah, hey, yeah, it's John again. It's all of the above.
That's helpful. And then I guess I, just I was hoping to understand when you describe.
82% of AEP adds coming from member switching despite the fact that supplemental benefits are only up market.
Value is only up modestly year over year I guess just.
And I know you guys have have gone through this but just kind of what's driving the switching is it competitors paring back benefits versus your relative stability or just the sales approach or anything in particular to call out from this AEP.
Yeah, Hey, it's John again, it's all of the above.
John Cahill: You know, we've touched on STARS being a driver in our competitive position on STARS is improving. I think also V28 is affecting everybody, but it's affecting us less. And it's affecting us less because we knew heading into the year that some kind of reimbursement risk was going to be something we had to deal with. So those two things, I think, are the big drivers. And I think if you kind of look at some of the, you know, just kind of the, we call it MACFAT data on benefit designs, people were generally flat and or pulled back heading into 2024 from a benefit perspective, and we remain relatively flat, maybe slightly up on supplemental benefits.
Touched on Starz.
Being a driver.
Again, our competitive positioning starz is improving.
I think also the 28 the impact of B 28 is affecting everybody, but it's affecting us less.
And it's affecting us less because we knew heading into the year that some kind of reimbursement risk was going to be.
Something we had to deal with.
So those two things I think are our big drivers.
And I think if you kind of look at some of the.
Just kind of the.
We call it Max that data on benefit designs people were generally flat and or pulled back.
<unk>.
Heading into 2024 from a benefit perspective, but we remained relatively flat maybe slightly up on supplemental benefits I think heading into 2025.
John Cahill: I think heading into 2025, our position is going to get even stronger. And I think that a lot of the noise around reimbursement is somewhat a function of people's star ratings going down. And some organizations, if you go down from four and a half to three and a half stars, that's close to a 10% hit to reimbursement. That's a big deal. You add that up to be 28.
Our position is going to get even stronger.
And I think that a lot of the lot of the noise around reimbursement is somewhat a function of people star ratings going down and some organizations. If you go down from $4 five to three five stars.
As close to a 10% hit to reimbursement that's a big deal and you add that to be 28, and so I think the notion of.
John Cahill: And so I think the notion of high quality against stars and then low cost utilization is going to play to our advantage. The other thing I would add to Jess is, just from a brand recognition standpoint, I think we're really starting to separate ourselves in the market, particularly in California, where you flash back five years ago, we were sort of one of the smaller upstarts. And, and I think you flash forward to today, we've been consistently four stars or better now for, I want to say, about six years in a row, all while offering market-leading products and experiences along the way.
High quality against stars and then low cost utilization.
As is going to play to our advantage.
The thing I would add to Jeff is just from a brand recognition standpoint, I think we're really starting to separate ourselves in the market, particularly in California, where you flashback five years ago, we were sort of one of the smaller upstart.
And I think you flash forward to today, we've been consistently four stars or better now for I want to say about six years in a row, all while offering market, leading products and experience along the way and so I think as that happens.
John Cahill: And so I think as that happens, we start to become more top of mind in the broker community, more top of mind in the senior community, and in the provider community. So it's, it's one of those stories to a certain extent where I think the bigger you get, the stronger you get, in many respects. I think we're starting to see the benefit of that from a brand standpoint here in California. Thank you, www.kenhub.com. Thank you. And I show our next question comes from the line of Whit Mayo from Lering Partners. Please go ahead.
Start to become more top of mind in the broker community are top of mind, the senior community and in the provider community. So it's one of those stories to a certain extent why I think the bigger you get the stronger you get in many respects I think were starting to see the benefit of that Rob brand standpoint here in California.
Thank you.
Sure.
Thank you.
And I show. Our next question comes from the line of with Mayo from Leerink Partners. Please go ahead.
Operator: Hey, first, I was just wondering if there's any unusual switching you've seen in January and February, any disenrollment. I haven't had a chance to see if you changed your membership guidance, so just was wondering if there was anything unusual. No, so to your year-end membership point, our full-year membership is unchanged compared to our 8k release, so 162 to 164 thousand at year-end. More specifically, to our January experience, we saw very solid, I'd say sales progress and pretty significant retention improvement again. So looking at our February 1st disenrollment rate this year as compared to the run rate we would have expected based on February 1st trends a year ago, we actually saw about a 20% year-over-year improvement in that February 1st disenrollment rate relative to the prior year run rate. So I think a lot about those investments around member experience or paying dividends, not just an AEP but into what we call OEP, which lasts from now through April 1st, right?
Hey, first I was just wondering if theres any unusual switching you've seen in January and February any dis enrollment I haven't had a chance to see if you changed your membership guidance. So just was wondering if there was any unusual movement.
No. So to your year end membership point, our full year membership is unchanged compared to our 8-K release of 162 to 164000 at year end more specifically to our January experience. We saw very solid I'd say sales progress and pretty significant retention improvement again, so looking at our February 1st just enroll.
<unk> rate this year as compared to the run rate. We would have expected based on February 1st trends a year ago, we actually saw about a 20% year over year improvement in that February one just enrollment rate relative to prior year run rate. So I think a lot of again those are those investments around member experience are paying dividends not just in AEP, but into.
What we call OE, which lasts from now through April one right right.
John Cahill: And John, I'm just wondering whether CMS is making some, potentially making some changes around, you know, the marketing, the broker-agent commission, just any updated, evolving views on what you think this means to you and the industry. Yeah, I think leveling the playing field is always a good thing. Having more transparency is always a good thing. And again, being, you know, the high growth player in the space, I think it's going to be to our advantage. And I think at the end of the day, if there's more protection for our seniors, the better.
And John I'm just wondering.
CMS is making some potentially making some changes around the marketing the broker agent Commission just any updated evolving views on what you think this means to you in the industry.
Yes, yes, yes, I think I think.
<unk> the playing field is always a good thing.
Having more transparency is always a good thing.
And again being the high growth player in the space I think it's going to be to our advantage.
And I think at the end of the day.
Theres more protections for our seniors to better.
John Cahill: And so, you know, I think, as you know, we've spent so much time and effort on our sales operations, our sales leadership, our marketing strategies, our broker management, our broker tools, our onboarding, all of that paid off for us as we head into the new year. So I think it's going to be a good thing for us. I think all these things that are leveling the playing field and doing what CMS really originally intended MA to be, which is just providing the highest value for beneficiaries, is a good thing. It's going to work well for us. Thanks a lot.
And so.
I think as you know we've spent so much time and effort.
On our sales operations, our sales leadership, our marketing strategies are broker management, our broker tools are onboarding all of that.
Paid off for us.
Heading into the new year so.
I think it's going to be a good thing for us.
All of these things that are leveling the playing field and doing what CMS really originally intended to be which is just provides the highest value.
For beneficiaries.
<unk> is a good thing.
Operator: Got it. Thank you. And I show our last question, and the cue comes from Adam Rahn from Bank of America. Please go ahead. Hey, actually, it's Kevin Fischbeck in for Adam tonight.
It's going to play well for us.
Okay. Thanks, a lot.
Got it.
Thank you.
And I show our last question in the queue comes from Adam <unk> from Bank of America. Please go ahead.
Hey, actually it's Kevin Fischbeck in for Adam Tonight.
Kevin Mark Fischbeck: I guess one of the things that I'm struggling with a little bit is just how different California as a market can be compared to the rest of the United States. Do you have any sense of what the broader trend is in California? Like how much of, you know, the outperformance that you're seeing here is really on the revenue side of 24 versus on the cost side, where it's more complicated and costs are generally under control, and you're marginally outperforming that or, Do you believe that this is really like a truly differentiated trend that you're seeing even versus the competitors in California? Yeah, hey Kev, it's John.
I guess one of the things that I'm struggling with a little bit is just how different California as a market can be versus the rest of the United States do you have any sense for what the broader trend is in California like how much of.
The outperformance that you're seeing here.
It's really on the revenue side in 'twenty four versus on the cost side is it more complicated and costs are generally under control in your marginally outperforming that or.
Is it do you believe that it is really a truly differentiated trend that youre seeing even versus the competitors in California.
Yeah, Hey, Kevin It's John Yeah, I think what makes California unique good and bad really is that the.
John Cahill: Yeah, I think what makes California unique, good and bad, is the scale of the delegated capitated IPAs and the delivery system. And I think that how health plans work with those IPAs, or independent physician associations, so to speak, is really important. And I think that we've been able to figure that out. We've been able to design incentives with the delivery system to create what I talked about a lot, which is visibility and control of the medical spend. And then durability, which is that we want durability on these networks. And unless you have the tools that we have, it is very difficult to achieve the kind of outcomes that we've been able to achieve in STARS, in particular.
The scale of the delegated cascaded ipas in the delivery systems.
I think that.
Health plans work with those.
An independent physician association so to speak.
Important and I think that.
We've been able to figure that out we've been able to design incentives with the delivery system to create us.
They talked about.
A lot, which is visibility and control of the medical spend.
And then durability.
We want durability on these on these networks and unless you have the tools that we have it is very difficult to kind of get the kind of outcomes that we'd be able to achieve in stars in particular, that's the one differentiator.
John Cahill: That's the one differentiator. And then, secondly, with respect to utilization, we designed what we call shared risk models, which are really creating aligned incentives with these IPAs as well as directly contracted physicians. And we create win-win economic situations all for the benefit of the member. Those are, I think, the unique things that make California different, and yet we think that's the opportunity and why we've been able to crack the code in California while others have not.
And then secondly, with respect to utilization.
We designed what we called shared risk models, which is really creating aligned incentives with these ipas as well as the directly contracted physicians and we create win win economic situations all for the benefit of the member.
Those are the I think.
Unique things that.
That make California different and yet we think thats the opportunity of why we've been able to crack the code in California, while others have not the interesting thing is we think that by doing it in California. We think is the hardest thing anywhere in the country. So if you take the tools that we.
John Cahill: The interesting thing is that by doing it in California, we think it's the hardest thing anywhere in the country. If you take the tools that we have and you overlay them on other parts of the country, I think the opportunity is going to be even higher because you don't have the density of these IPAs or capitation in other parts of the country. So I think the margin opportunity is even greater for us outside. Okay, so I have a couple of questions.
Have and you overlay it on other parts of the country I think the opportunity is going to be even higher because you don't have the density of the.
These ipas or or capitation.
And in other parts of the country.
So I think the margin opportunity is even greater for us outside.
Okay. So a couple of questions and then off of that I guess, the first one I'm just trying to figure out what that you talked about that.
John Cahill: And off of that, I guess the first one, I'm just trying to figure out what you talked about with alignment with the physicians. You know, I think a lot of people are expecting that as the 28 continues to ramp up, that supplemental benefits get cut. It kind of sounds like you don't think you need to do that going forward. Does that, it seems like because the half that's not really capitated and drugs given by AVA are going to outperform, does that create any pressure in your relationship with your physicians? Like, is that to their detriment?
Alignment with the physicians I think a lot of people are expecting that as the 2008 continues to ramp up that supplemental benefits get cut it kind of sounds like you don't think you need to do that.
Going forward.
Does that.
It seems like because the half if not really capitate drive given by APRA is going to outperform does that create any pressure in your relationship with the physicians like it.
Their detriment.
He has got to pay when others arent.
Two fold. It's B 28 is part of it I mean, everyone is going to get hit by the 28.
That's clear.
John Cahill: We're just going to get hit less in our particular markets because of the way we manage risk adjustment. And I would say we've been very conservative on risk adjustment, and you put that in the context of some others that have been more aggressive on risk adjustment that are going to go down, in some cases, by 20 percent. And just to remind everybody, you know, 20% from just hypothetically of 1.5, 20%, that's 30 basis points. And if each basis point is worth $8 p.m. p.m., that's a meaningful hit to revenue that is being borne functionally by a lot of these globally capitated providers. It's a hard pill to swallow.
We're just going to get hit less in our particular markets because of the way, we manage risk adjustment, but I would say we've been very conservative on risk adjustment.
And you put that in the context of some others that have been more aggressive on risk adjustment that are going to go down in some cases, 20%.
And just to remind everybody, 20% from just hypothetically a one 520% that's 30 basis points and if each basis point is worth $8 P. M. P. M. That's a meaningful hit to revenue that is being born functionally bylaw. These globally calculated providers.
It's a hard pill to swallow, but more I think importantly, as stars you add stars to the equation suddenly dropping from.
John Cahill: But more importantly, I think, importantly, is stars. You add stars to the equation, somebody dropping from four and a half to three and a half, that's a, you know, what? $80 of potential hit. I mean, when you combine those things, you know, and you look at our stars, and you look at our upward trend on risk adjustment, that creates the effective tailwind, and so these providers are going to do better with us on just those two economics. And then if we can deploy our data and our care model on that high-risk population that we do ourselves in concert with the providers and these IPAs, everybody wins because we surplus these risk pools. That We don't have a lot of bricks and mortar.
$4 five to $3 five.
It was $80 of potential here I mean, so when you combine those things.
And you look at our stars and you look at our upward trend on risk adjustment that creates the effect of tailwind.
And so these providers are going to be do better with us on just those two economics and then if we can deploy our data and our care model on that high risk populations that we do ourselves in concert with the providers and these ipas.
Everybody wins, because we surplus these these risk pools.
That's the whole construct of this and we do it and I would refer to as a capital light way, we don't have a lot of bricks and mortar. We don't think you need to have a lot of bricks and mortar you do with the community physicians.
John Cahill: We don't think you need to have a lot of bricks and mortar; you do it with the community physicians, and you create it in a way that everybody wins, hence the name Alignment. Yeah, I guess maybe then you mentioned the model and how it works in California and how it can be exported into other markets. It is just interesting just how differently you're talking about trends versus how your peers are talking about how trends developed this year. Are you seeing similar trends in California and outside of California, or is outside of California not performing quite as well as California? California is?
You create it in a way that everybody wins.
Ergo the name alignment.
Yeah, I guess, maybe then you mentioned the.
The model and how it works in California, and how it and how it can be exploitable into other markets.
Is it interesting just have differently you are talking about trend versus how how your peers are talking about how kind of developed this year are you seeing similar trends in California, and outside of California, or does outside of California, not performing quite as well.
John Cahill: Well that's what's interesting is the portability of the care model is being replicated. The utilization and MLR we have outside of California is really, really good where we have to just get bigger, and we're incrementally getting bigger, kind of getting to 3,000 to 5,000 in some of our ex-California markets, but we'll get there. But the care model is managing the trend effectively. And I think what people need to understand is that a lot of inpatient hospitalizations are unnecessary. A lot of it can be prevented just by paying attention to what's going on with your high-risk population. And we have our interdisciplinary care teams spending time oftentimes on a weekly basis with high-risk patients in person, and certainly, it makes a difference. That's why I just keep saying we actually deliver the care. Not many other of our competitors deliver the care. They may have care delivery divisions, but that's very different than integrating all of that into the way we talk about it, which is productizing, if you will, really good benefits, productizing the care model.
California as well.
What's interesting is the portability of the care model is being replicated the utilization and MLR we have.
Outside of California is really really good.
Where we have to just get bigger and we're incrementally getting bigger kind of get the three to 5000 and some of our ex California markets, but we will get there, but the care model is managing the trend effectively and I think what what people need to understand is a lot of inpatient hospitalizations a lot.
Of its unnecessary a lot of it can be prevented just by paying attention to what's going on with your high risk population.
We have our interdisciplinary care teams spending times, often times on a weekly basis with high risk patients in person certainly virtually it makes a difference so I just keep saying we actually.
Deliver the care.
Not many other of our competitors deliver the care. They may have shared delivery divisions, that's very different than integrating all of that into.
The way, we talk about it which is product ties in if you will really good benefits product ties the care model.
John Cahill: It really is a different way of approaching the market. Okay, and then maybe this last question, it sounds like you're saying that you think you're keyed up pretty well for growth again in, in 25. Is that going to look a lot like this year?
It really is a different way of approaching the market.
Okay, and then maybe just last question it sounds like Youre, saying that you think you've teed up pretty well for growth again.
In.
In 2005 is that is that going to look a lot like this year in so far as it's going to be still largely California simply because that's what the disruption to the competitors.
John Cahill: In so far as it's going to be still largely California-centric, because that's what the disruption to the competitors is, you know? Yeah, yeah. Yeah, yeah. Sorry. I didn't mean to cut you off.
Yes, and yes.
Yes.
Good to meet the catch ups.
John Cahill: I guess the second part of that would just be, if it is coming to California, you mentioned balancing growth and profitability, does that give you an opportunity to actually, you know, push the growth? I'm sorry, Chris, the profitability lever a little bit more than we're used to? Or do you kind of feel like as long as you can take shares, taking shares is the right move as long as you're going to keep a round break even?
I guess the second part of that would just be if it is coming in California, you mentioned balancing growth and profitability.
Does that give you an opportunity to actually push the growth I'm.
I'm, sorry, Chris the profitability lever a little bit more than we're used to or do you kind of feel like as long as you can take share taking share is the right move as long as you keep around breakeven.
John Cahill: No, we're not going to grow at all costs. We're going to get to the profitability commitments that we've made. I think it's super important to tie all that to cash flow and our balance sheet. All of that is really poised for 2025 to be a really, really good year for that, I think. And if you just look at the differential on stars and risk adjustment, plus you look at the ability to manage utilization, actually have the tools to manage it, it's just a competitive advantage in this environment.
No not going to we're not going to grow at all costs.
To get to.
The profitability commitments that we've made I think it's super important tying all of that to cash flow to our balance sheet. All of that is really poised for 2025 to be.
A really really good year for that I think if you just look at the differential on stars and risk adjustment plus you look at the utilization ability to manage utilization.
Actually have the tools to manage it.
It's just a competitive advantage in this environment I think the.
John Cahill: The bid strategies, you know, we'll talk about that in the next several months, but not right now. But I feel very comfortable with this, just kind of where we are at in terms of 2025. That's going to be a very good year.
I think that the.
The.
The bid strategies, we'll talk about that in the next several months, but not right now.
But I feel very comfortable with.
Just kind of where we're at in terms of.
2025, that's going to be.
Very good yeah, the only thing I would say is.
John Cahill: The other thing I would say is, on 25, you're going to have even more scale economies in our back office. I think some of the investments that we've made in our back office systems, like what we made in our member services systems, are going to pay off even more. I mean, so you can get more scale economies heading into 2025. But I don't know if we'll get the same kind of growth.
On 25, as Youre going to add even more scale economies on our on our back office I think some of the investments that we've made.
And our back office systems like what we've made in our kind of member services systems is going to pay off even more and they seem to be a more scale economies heading into 2025.
Don't know if we'll get the same kind of growth not going to comment on that.
John Cahill: I'm not going to comment on that, but I feel very, very good about the tailwind. All right, great. Thank you. Thanks, Kev. Thank you. That concludes our Q&A session and today's conference call. We want to thank you all for participating. You may all disconnect at this time.
But I feel very very good about the tail winds.
Great. Thank you.
Thanks Scott.
Thank you that concludes our Q&A session and today's conference call. We want to thank you all for participating you may all disconnect at this time.