Q2 2024 Alignment Healthcare Inc Earnings Call
Operator: Good afternoon, and welcome to Alignment Health Care's second quarter 2024 earnings conference call and webcast. All participants will be in a listen-only mode.
Speaker Change: Good afternoon and welcome to Alignment Hlthcr's second quarter 2024 earnings conference call and webcast.
Operator: After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your television. You will then hear an odd and amazing message advising that your hand has been raised. To withdraw your question, please press star 1 1 again.
Speaker Change: All participants will be in a listen-only mode.
After the speaker presentation, there will be a question and answer session. 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 that your hand has been raised. To withdraw your question, please press star 1 1 again.
Operator: I advise that today's conference is being, Leading today's call are John Kao, founder and CEO of Alignment Health Care; Thomas Fri, 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. All of these forward-looking statements are subject to various risks and uncertainties and reflect our current expectations based on our beliefs. Descriptions of some of the factors that could cause actual results to differ materially from those forward-looking statements are discussed in more detail in our filings with the SEC, including the risk factors The year ended on December 31st, 2020.
Please be advised that today's conference is being recorded.
Leading today's call are John Kao, 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 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.
John Kao: Although we believe our expectations are reasonable, we undertake no obligation to revise any statements to reflect changes that occur after this call. In addition, please note that the company will be discussing certain non-GAAP financial measures 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 company's website and in our Form 10-Q for the fiscal quarter ended June 30th, 2025. It is now my pleasure to introduce our founder and CEO, John Kao.
John Kao: Hello, and thank you for joining us on our second quarter earnings conference call. For the second quarter of 2024, our health plan membership of 175,100 members represented approximately 56% growth year over year and outperformed our year-end membership guidance of 170 to 172,000 members. Total revenue of $681 million grew approximately 47% year-over-year and 58% excluding ACO REIT.
John Kao: Adjusted gross profit of $77 million produced a consolidated NBR of 88.7%, which led to our adjusted EBITDA of positive $6 million in the quarter. Both our adjusted gross profit and adjusted EBITDA achieved the high end of our second quarter guidance, which places us on track toward our full year adjusted gross profit and adjusted EBITDA guidance ranges. As we round out the first half of the year, I'm proud of what the team has accomplished.
Speaker Change: Adjusted gross profit of $77 million produced a consolidated NBR of 88.7% which led to our adjusted EBITDA of positive $6 million in the quarter.
John Kao: Over the past several years, we have increased investments in member experience, clinical infrastructure, distribution, and our unified data platform AVA to realize our vision of Medicare Advantage Done Right. These investments provide us with the visibility and control required to manage our markets in real time, resulting in both exceptional growth and superior MBR outcomes. We continue to believe our platform is the model for the future of Medicare Advantage, and our year-to-date results reinforce my optimism about our replicability and scalability over time.
John Kao: During the second quarter, we continued to drive membership growth ahead of expectations. Our sustained growth momentum was enabled by strong product offerings resulting from our virtuous cycle, which reinvests savings from our unique ability to manage medical costs into richer benefit offerings. This was further supported by robust broker engagement activity and our expanding reputation for clinical quality and a superior member experience. Heading into this AEP, we continue to deepen strong relationships with our broker partners as we become the household name for seniors seeking the best quality at the lowest cost.
Speaker Change: During the second quarter, we continued to drive membership growth ahead of expectations. Our sustained growth momentum was enabled by strong product offerings resulting from our virtuous cycle, which reinvested savings from our unique ability to manage medical costs into richer benefit offerings.
Speaker Change: Heading into this AEP, we continue to deepen strong relationships with our broker partners as we become the household name for seniors seeking the best quality at the lowest cost.
John Kao: From a retention standpoint, our member experience investments last year resulted in our voluntary disenrollment rate improving roughly 22% year over year. We achieved this while improving service levels and seamlessly onboarding approximately 63,000 net new members in the last 12 months, demonstrating the scalability of our platform.
Speaker Change: From a retention standpoint, our member experience investments last year resulted in our voluntary disenrollment rate improving roughly 22% year-over-year.
Speaker Change: We achieved this while improving service levels and seamlessly onboarding approximately 63,000 NET members in the last 12 months.
John Kao: Our 56% growth year-over-year makes us one of the fastest-growing MA plans in the nation, and we believe it is the only MA plan that has demonstrated an ability to both grow membership rapidly and manage MBR. As we have said before, we are focused on profitable growth. This is enabled by our visibility and control over the value drivers required to manage our MBR.
Speaker Change: demonstrating the scalability of our platform.
John Kao: Risk adjustment. Medical Management, Product Development, and Provider Engagement These capabilities resulted in continued utilization outperformance in the second quarter, including inpatient admissions per thousand of 151, which is approximately in line with the prior quarter. Our MBR result in the second quarter is a continuation of the momentum we achieved in the first quarter, where we grew 51% year over year, while MBR increased just 1.5%. As a reminder, new members typically join at a higher MBR, meaning faster growing plans with a higher mix of new members typically see a greater increase in MBR year over year.
John Kao: To put our performance into perspective, the average publicly traded national health plan grew Medicare Advantage members just 2% year-over-year, while MBR still increased by 2.8% in the first quarter as the industry faced utilization, STARS, and risk adjustment challenges. Our differentiated results shared here are further highlighted in the latest investor presentation available on our Investor Relations website.
John Kao: While we are pleased with our MBR performance to date, we are already driving innovation to improve our clinical outcomes through pre-service care navigation, post-discharge case management, and IPA performance improvement, all of which we believe will continue to improve our MBR results in the future. Turning to our preparation for 2025, we believe we are well positioned to deliver at least 20% growth next year and adjusted EBITDA profitability through MBR improvement and continued SG&A leverage.
Speaker Change: post-discharge case management, and IPA performance improvement, all of which we believe will continue to improve our MBR results in the future.
John Kao: Our confidence in our ability to achieve both objectives is underpinned by our margin-focused bid process and our competitive advantages heading into 2025. We added more members than any other health plan in California in 2024.
John Kao: And our growing market presence is increasing our competitive advantage. In addition to supporting our enterprise operating leverage objectives, our size and market share gains enhance our local competitive position by increasing mindshare with brokers, collaboration with providers, and reputation among seniors. Even with our strong growth, our California market share stands at only 4.5%, leaving us significant room to expand further.
Speaker Change: We have added more members than any other health plan in California in 2024, and our growing market presence is increasing our competitive advantages.
Speaker Change: In addition to supporting our enterprise operating leverage objectives, our size and market share gains enhance our local competitive position by increasing mindshare with brokers, collaboration with providers, and reputation among seniors.
Speaker Change: Even with our strong growth, our California market share stands at only 4.5 percent.
John Kao: Over the long term, we believe we can capture at least 20% of the share across our California markets, similar to what we've achieved in some of our most mature counties. In 2025, we plan to fully capitalize on our position in California, where we have relative advantages on STARS and risk model changes. Even after accounting for the recent CMS star rating changes, there are still approximately 1.2 million total California seniors in HMO plans below four stars or not rated.
Speaker Change: leaving a significant room to expand further.
Speaker Change: Over the long term, we believe we can capture at least 20% share across our California markets.
Speaker Change: similar to what we've achieved in some of our most mature counties.
Speaker Change: In 2025, we plan to fully capitalize on our position in California, where we have relative advantages on STARS and risk model changes.
Speaker Change: Even after accounting for the recent CMS star rating changes, there are still approximately 1.2 million total California seniors in HMO plans below 4 stars or not rated.
John Kao: Given our position with roughly 95% of our California members and plans that will still have a four-star payment level, we anticipate a unique opportunity to capture strong growth while remaining focused on margin expansion. Outside of California, we have more than doubled our membership year over year and continue to demonstrate our commitment to quality. The recent update to CMS star ratings for payment year 2025 awarded us a five-star rating in our North Carolina and Nevada markets.
Speaker Change: Given our position with roughly 95% of our California members and plans that will still have four-star payment level, we anticipate a unique opportunity to capture strong growth while remaining focused on margin expansion.
Speaker Change: Outside of California, we have more than doubled our membership year-over-year and continue to demonstrate our commitment to quality. The recent update to CMS Star Ratings for Payment Year 2025 awarded us a 5-star rating in our North Carolina and Nevada markets.
John Kao: By first focusing on STARS and clinical outcomes, we have built a strong foundation that gives us a long-term competitive advantage. As we move toward consolidated profitability, we will be able to deepen our investments in these newer markets. When combined with our investments in our shared services infrastructure and our ability to scale, we see a significant opportunity to accelerate and sustain growth in these newer markets over time. However, given our competitive strength in our existing markets, our focus on profitability, and our solid positioning to achieve at least 20% growth, we will not enter any new states in 2025.
Speaker Change: By first focusing on STARS and clinical outcomes, we have built a strong foundation that gives us long-term competitive advantages.
Speaker Change: As we move toward consolidated profitability, we will be able to deepen our investments in these newer markets.
Speaker Change: When combined with our investments in our shared services infrastructure and our ability to scale, we see a significant opportunity to accelerate and sustain growth in these newer markets over time.
Speaker Change: Given our competitive strength in our existing markets, our focus on profitability, and our solid positioning to achieve at least 20% growth, we will not enter any new states in 2025.
John Kao: However, we expect to prioritize further market expansion in future years while committing to sustained profitability. In conclusion, I'd like to thank each of our employees for their part in pioneering the Medicare Advantage model of the future. Tens of thousands of new members are choosing Alignment as their senior healthcare partner this year, making us one of the fastest growing plans in the nation. However, we're just barely scratching the surface for the millions of seniors who need our help.
Speaker Change: However, we expect to prioritize further market expansion in future years while committing to sustained profitability.
Speaker Change: In conclusion, I'd like to thank each of our employees for their part in pioneering the Medicare Advantage model of the future.
Speaker Change: Tens of thousands of new members are choosing Alignment as their senior healthcare partner this year, making us one of the fastest growing plans in the nation.
Speaker Change: However, we are just barely scratching the surface for the millions of seniors who need our help, and I believe we will make further inroads toward our vision for Medicare done right in 2025.
John Kao: And I believe we will make further inroads toward our vision for Medicare done right in 2025. I look forward to sharing more as we get closer to AEP, and now I'll turn the call over to Thomas to further discuss our financial results and outlook. Thanks, John.
Speaker Change: I look forward to sharing more as we get closer to AEP, and now I'll turn the call over to Thomas to further discuss our financial results and outlook.
Thomas: For the quarter ending June 2024, our health plan membership of 175,100 increased 56% year over year, outperforming our expectation for 50% membership growth at the midpoint of our second quarter guidance range. Our second quarter revenue of 681 million represented 47% growth year over year and 58% growth, excluding ACR reach. As John described, our value proposition and reputation for quality, service delivery, and provider and broker partnership continue to expand in our local markets, setting us up with positive momentum heading into this AEP.
Speaker Change: Thomas
Thomas Freeman: Thanks, John . For the quarter ending June 2024, our health plan membership of 175,100 increased 56% year-over-year, outperforming our expectation for 50% membership growth at the midpoint of our second quarter guidance range.
Thomas Freeman: Our second quarter revenue of $681 million represented 47% growth year-over-year and 58% growth excluding ACO reach.
Speaker Change: As John described, our value proposition and reputation for quality, service delivery, and provider and broker partnership continue to expand in our local markets, setting us up with positive momentum heading into this AEP.
Thomas: The adjusted growth profit in the quarter was $77 million, representing an MBR of 88.7% and a 220 basis point improvement from the first quarter. For the second quarter in a row, we are demonstrating that industry-leading membership growth can be balanced with strong MBR performance if you have a model with differentiated visibility and control. Second quarter utilization experience continued to trend within our expectations, with inpatient emissions per thousand of 151 continuing to drive our overall MBR performance.
John Kao: Adjusted gross profit in the quarter was $77 million, representing an NBR of 88.7% and a 220 basis point improvement from the first quarter.
Speaker Change: For the second quarter in a row, we are demonstrating that industry-leading membership growth can be balanced with strong MBR performance if you have a model with differentiated visibility and control.
Thomas Freeman: Second quarter utilization experience continued to trend within our expectations with inpatient admissions per thousand of 151 continuing to drive our overall MBR performance.
Thomas: While we believe our inpatient emissions per thousand performance continues to lead the industry, we still see significant room for improvement in the back half of the year, which I will expand on shortly. Our utilization performance was partially offset by the overall increasing mix of new members from our strong growth outperformance who are still on board with our clinical programs. As we previously mentioned, we are also continuing to navigate heightened levels of supplemental benefit expense and atypically high unit cost increases in 2024, both of which will improve in 2025.
Speaker Change: While we believe our inpatient admissions per thousand performance continues to lead the industry, we still see significant room for improvement in the back half of the year, which I will expand on shortly.
Speaker Change: Our utilization performance was partially offset by the overall increasing mix of new members from our strong growth out performance who are still being on board on our clinical programs.
Speaker Change: As we previously mentioned, we are also continuing to navigate heightened levels of supplemental benefit expense and atypically high unit cost increases in 2024, both of which will improve in 2025.
Thomas: As we close out the second quarter, it's worth noting that we now have sufficient paid claims visibility on our first quarter dates of service experience to more fully assess our T1 performance. Given our overall volume of new membership, we are pleased to report that we remain confident in our first quarter incurred but not paid, or IV&P, accruals, implying both accuracy in our initial assessments, as well as stability in our overall reserves. Turning to OPEX, SG&A in the quarter was $88 million.
Speaker Change: As we close out the second quarter, it's worth noting that we now have sufficient paid claims visibility on our first quarter dates of service experience to more fully assess our T1 performance.
Speaker Change: Given our overall volume of new membership, we are pleased to report that we remain confident in our first quarter incurred but not paid, or IBNP, accruals, implying both accuracy in our initial assessments, as well as stability in our overall reserves.
Thomas: Our adjusted SG&A was $71 million, an increase of 27% year over year. Adjusted SG&A as a percentage of revenue, excluding ACO reach, declined from 12.9% to 10.4% year-over-year, improving by approximately 250 basis points and exceeding our Q2 operating leverage expectations. Taken together, our adjusted EBITDA was positive $6 million in the quarter, achieving the high end of our outlook range and placing us on track towards our full year adjusted EBITDA goal. Lastly, we ended the quarter with $364 million in cash.
Speaker Change: Turning to OpEx, SG&A in the quarter was 88 million. Our adjusted SG&A was 71 million, an increase of 27% year-over-year.
Speaker Change: Adjusted SG&A as a percentage of revenue, excluding ACO reach, declined from 12.9% to 10.4% year-over-year, improving by approximately 250 basis points and exceeding our Q2 operating leverage expectations.
Speaker Change: Taken together, our adjusted EBITDA was positive $6 million in the quarter, achieving the high end of our outlook range and placing us on track towards our full year adjusted EBITDA guidance.
Speaker Change: Lastly, we ended the quarter with $364 million in cash investments.
Thomas: Moving to our guidance, for the third quarter, we expect health plan membership to be between 176,000 and 178,000, revenue to be in the range of $655,000,000 and $665,000,000, adjusted gross profit to be between $75,000,000 and $81,000,000, and adjusted EBITDA to be in the range of zero to positive $6,000,000. For full year 2024, we expect health plan membership to be between 178,000 and 180,000 members, revenue to be in the range of $2.61 billion and $2.64 billion, and adjusted gross profit to be between $280 million and $310 million. And adjusted EBITDA to be in the range of a loss of $12 million to positive $12 million.
Speaker Change: Moving to our guidance. For the third quarter, we expect health plan membership to be between 176,000 and 178,000 members.
Speaker Change: Revenue to be in the range of $655,000,000 and $665,000,000. Adjusted gross profit to be between $75,000,000 and $81,000,000. And adjusted EBITDA to be in the range of $0 to positive $6,000,000.
Speaker Change: For full year 2024, we expect health plan membership to be between 178,000 and 180,000 members, revenue to be in the range of $2.61 billion and $2.64 billion,
Speaker Change: Adjusted gross profit to be between 280 million and 310 million and adjusted EBITDA to be in the range of a loss of 12 million to positive 12 million.
Thomas: We have raised our year-end membership guidance by an additional 8,000 members based on our year-to-date outperformance and our expectation for continued growth momentum in the second half, which further drives the increase in our full-year revenue outlook. Since our initial expectations in January, the midpoint of our membership guidance range has increased by 16,000 members. Our outlook now implies membership growth of 50% at the midpoint, versus our initial guidance of 37%, and revenue growth excluding ACO reach of 54% at the midpoint, versus our initial guidance of 41%.
Speaker Change: We have raised our year-end membership guidance by an additional 8,000 members based on our year-to-date outperformance and our expectation for continued growth momentum in the second half, which further drives the increase in our full-year revenue outlook.
Speaker Change: Since our initial expectations in January , the midpoint of our membership guidance range has increased by 16,000 members.
Speaker Change: Our outlook now implies membership growth of 50% at the midpoint, versus our initial guidance of 37%, and revenue growth excluding ACO reach of 54% at the midpoint, versus our initial guidance of 41%.
Thomas: Turning to profitability, our guidance remains unchanged in spite of our higher growth outlook. We are pleased with the results of our operational initiatives, investments in automation, and the continuous improvement of our clinical model. These efforts have resulted in improved SG&A scale economies and closely managed MBR, giving us confidence in our full-year adjusted EBITDA guidance. Specifically, on adjusted gross profit, we expect the added gross profit dollars from our incremental membership to be offset by a continued uptick in our supplemental benefit expense, which we have captured in our 2025 bid. These two factors result in an applied 50-basis point MBR increase over our prior guidance.
Speaker Change: Turning to profitability, our guidance remains unchanged in spite of our higher growth outlook.
Speaker Change: We are pleased with the results of our operational initiatives, investments in automation, and the continuous improvement of our clinical model. These efforts have resulted in improved SG&A scale economies and closely managed MBR, giving us confidence in our full-year adjusted EBITDA guidance.
Speaker Change: Specifically on adjusted gross profit, we expect the added gross profit dollars from our incremental membership to be offset by a continued uptick in our supplemental benefit expense, which we have captured in our 2025 bids.
Speaker Change: These two factors result in an applied 50 basis point MBR increase to our prior guidance. The midpoint of our guidance range now represents an MBR of 88.8%, which we are very well positioned to offset with SG&A scale economies.
Thomas: The midpoint of our guidance range now represents an MBR of 88.8%, which we are very well positioned to offset with sGNA-scale economies. From a utilization standpoint, our engagement rate for care and who are eligible among new members remains on target through the first half of the year. We still see significant opportunity remaining in the second half as we work toward achieving our expected year-end engagement rate of 60% from our current level of approximately 30%.
Speaker Change: From a utilization standpoint, our engagement rate of care and who are eligible among new members remains on target through the first half of the year. We still see significant opportunity remaining in the second half as we work toward achieving our expected year-end engagement rate of 60% from our current level of approximately 30%.
Thomas: As a reminder, we typically see a 30% improvement in institutional claims PMPM in the 12 months following engagement compared to our control group of members that have not yet engaged. Accordingly, we see an opportunity to improve our utilization performance as we continue to onboard our new membership and ramp up new member engagement in the back half of the year, with a particular eye toward the fourth quarter. Furthermore, as John commented previously, we continue to see opportunity for cost management beyond the inpatient setting and are ramping up our efforts on both pre-service care navigation, post-discharge case management, and IPA performance improvement to continue to improve our overall MBR. On SG&A, our first half results demonstrate the scalability of our model with adjusted SG&A as a percentage of revenue excluding ACO reach declining by 200 basis points year over year.
Speaker Change: As a reminder, we typically see a 30% improvement in an institutional claims PMPM in the 12 months following engagement compared to our control group of members that have not yet engaged.
Speaker Change: Accordingly, we see an opportunity to improve our utilization performance as we continue to onboard our new membership and ramp up new member engagement in the back half of the year with a particular eye towards the fourth quarter.
Speaker Change: Further, as John commented on previously, we continue to see opportunity on cost management beyond the inpatient setting and are ramping up our efforts on both pre-service care navigation, post-discharge case management, and IPA performance improvement to continue to improve our overall MDR.
Speaker Change: On SG&A, our first half results demonstrate the scalability of our model with adjusted SG&A as a percentage of revenue excluding ACO reach declining by 200 basis points year over year.
Thomas: We continue to expect even greater improvement in the second half since we will not have the impact of one-time costs incurred last year related to the insourcing of our member experience function and the acceleration of AEP growth and staffing. In conjunction with the increase in our membership outlook, our full year guidance now implies an adjusted SG&A as a percentage of revenue of 11.3 percent, representing roughly 300 basis points of improvement year over year, excluding ACO reach. This improvement includes commissions and other variable expenses related to incremental growth.
Speaker Change: We continue to expect even greater improvement in the second half, since we will not have the impact of one-time costs incurred last year, related to the insourcing of our member experience function and the acceleration of AEP growth and staffing expenses.
Speaker Change: In conjunction with the increase in our membership outlook, our full year guidance now implies an adjusted SG&A as a percentage of revenue of 11.3%, representing roughly 300 basis points of improvement year-over-year excluding ACO reach.
Speaker Change: This improvement includes commissions and other variable expenses related to incremental growth.
Thomas: As we look toward 2025, we are increasingly excited about the growth and margin opportunity in front of us that will be supported by a number of tailwinds. First, our growth momentum in 2024 adds to our scale advantages and mindshare with brokers in the upcoming AEP. Second, we believe we have appropriately captured our 2024 Higher Supplemental Benefit Expense experience in our 2025 bids. Third, our weighted average benchmark increase of 5% relative to the national average of 2.4% will allow us to hold for the outsized unit cost increases we are currently absorbing in 2024.
Speaker Change: As we look toward 2025, we are increasingly excited about the growth and margin opportunity in front of us that will be supported by a number of tailwinds.
Speaker Change: First, our growth momentum in 2024 adds to our scale advantages and mindshare with brokers in the upcoming AEP. Second, we believe we have appropriately captured our 2024 Higher Supplemental Benefit Expense experience in our 2025 bids.
Speaker Change: Third, our weighted average benchmark increase of 5% relative to the national average of 2.4% will make us hold for the outsized unit cost increases we are currently absorbing in 2024.
Thomas: Finally, our relative advantages on STARS and the second phase of the V28 risk model changes will further our competitive position. In summary, the combination of these factors positions us strongly towards driving adjusted EBITDA profitability while achieving our growth target of at least 20% or greater. With that, let's open the call to questions. Operator.
Speaker Change: Finally, our relative advantages on STARS and the second phase of the V28 risk model changes will further our competitive positioning.
Speaker Change: In summary, the combination of these factors positions us strongly towards driving adjusted EPA DOP profitability while achieving our growth target of at least 20% or greater next year.
Speaker Change: With that, let's open the call to questions. Operator?
Operator: Certainly. As a reminder, to ask a question, please press Star 1-1 on your television. Don't wait for your name to be announced. To withdraw your question, please press Star 1-1 again.
Speaker Change: Certainly. As a reminder, to ask a question, please press Star 1-1 on your telephone.
Speaker Change: And wait for your name to be announced. To withdraw your question, please press star 1 1 again.
John Ransom: Your first question comes from the line of John Ransom with Raymond James. Hey, good, good evening. I may have missed this, but was there anything to call out in the quarter from the midyear sweep? Hey, John. This is Thomas. Sorry, I can take that one.
Speaker Change: Hey, good evening.
Speaker Change: I may have missed this, but was there anything to call out in the quarter from the mid-year sweep?
Thomas: So, we did pick up a bit of revenue in the second quarter related to the sweeps, both the final sweep from last year and the mid-year sweep this year, though the majority of the revenue outperformance in the quarter was related to the membership outperformance. From a gross profit standpoint, we actually did not pick up much relative to expectations on the sweeps. And similar to last year, where we talked about how a lot of the sweeps came through some of our globally capitated contracts, it wasn't really a significant driver of overall NBR performance in the quarter relative to expectations. Okay, and then just this is a question for John, and I'll go back in the queue.
Speaker Change: Hey John, this is Thomas here. I can take that one.
Thomas Freeman: So we did pick up a bit of revenue in the second quarter related to the sweeps, both the final sweep from last year and the mid-year sweep of this year, though the majority of the revenue outperformance in the quarter was related to the membership outperformance.
Speaker Change: From a gross profit standpoint, we actually did not pick up much relative to expectations on the sweeps. And similar to last year, where we talked about how a lot of the sweeps came through some of our globally capitated contracts, it wasn't really a significant driver of overall NBR performance in the quarter relative to expectations.
John Kao: I asked this of one of your competitors, but, you know, it seems like there are a plurality of people in DC who are not convinced that Medicare Advantage is a great deal for the taxpayers. You know, when you're having those conversations with policy people, what's your elevator pitch that, I mean, we know it's good for members and doctors like it. But, you know, what's the pitch that says, at least it's a tie, if not better for the taxpayers? Thanks. Yeah. Hey, John.
Thomas Freeman: Okay and then just this is a question for John and I'll I'll go back in the queue ask this of one of your competitors but
Speaker Change: Yeah, it seems like there's a plurality of people in D.C. who are not convinced that Medicare Advantage is a great deal for the taxpayers.
Speaker Change: You know, when you're having those conversations with policy people, what's your elevator pitch that, I mean, we know it's good for members and doctors like it, but, you know, what's the pitch that says, at least it's a tie, if not better for the taxpayers? Thanks.
John Kao: I'd say that the benefits for the beneficiaries, and I think to your point, the doctors, are pretty compelling. I think some of the recent policy changes with respect to STARS and with respect to B28, and even with respect to some of the potential changes with respect to the distribution side of things. It's all getting back to what CMS really originally intended, which we think is a really good thing, which is to increase quality and access at a more affordable price, less than fee-for-service.
John Kao: Yeah, hey, John .
John Kao: I'd say that the benefits for the beneficiaries, and I think to your point, the doctors, I think is pretty compelling.
Speaker Change: I think some of the recent policy changes with respect to STARS and with respect to B28, and even with respect to some of the potential changes with respect to the distribution side of things,
John Kao: It's all getting back to what CMS really originally intended.
John Kao: which we think is a really good thing, which is to increase quality, access, at a more affordable price, less than fee-for-service.
John Kao: And I think I think that's the trend that I see happening. And I think this kind of higher standard and lower cost, if you will, overall for the taxpayer, is fundamentally going to be better for everybody. And I think that's certainly the foundation and the infrastructure that we've built. And we've been saying since, since the beginning, which is that the companies that will win are those that are going to be providing the highest quality of care at the lowest cost.
John Kao: And I think that's the trend that I see happening, and I think this kind of higher standard and lowering cost, if you will, overall for the taxpayer, fundamentally is going to be better for everybody.
John Kao: And I think that's certainly the foundation and the infrastructure that we've built. And we've been saying that since...
John Kao: since the beginning, which is the companies that will win are those that are going to be providing the highest quality of care at the lowest cost.
Speaker Change: Thank you, sir.
Speaker Change: Got it.
John Kao: Our next question comes from Whit Mayo with Lering Partners. Hey, thanks. Good afternoon, Thomas. Back on that member engagement metric that you referenced, is that 30% number for 100% of the total new members this year, or is that a subset of the total new members, and is that for the first quarter or for the first half? Sorry.
Thomas: Yeah, no, good questions. So what we're really talking about here is the engagement of the care anywhere eligible population. And so, as a reminder, when we onboarded our new membership this year, we quickly began running the data we were capturing from lab values, pharmacy data, authorization, and utilization data through our stratification model to identify those that we thought were at greatest risk of an inpatient event and had the greatest level of comorbidities and therefore needed that proactive care program that we call Care Anywhere. And so, as we have continued to identify those members over the course of the second quarter, it stands at about 10 percent of the population is eligible for that Care Anywhere program.
Thomas: We've engaged about 30 percent of them so far, which is really, I'd say, consistent with our expectations this year and is pretty consistent with where we have performed in years past. But of course, if you think about that relative to our overall population, which typically runs at about 60 percent engagement in that more intensive set of care programs, there's clearly a big opportunity for us to get from 30 to 60 percent over the back half of the year.
Speaker Change: is really, I'd say, consistent with our expectations this year and is pretty consistent to where we have performed in years past.
Speaker Change: But of course, if you think about that relative to our overall population, which typically runs at about 60% engagement on that more intensive set of care programs, there's clearly a big opportunity for us to get from 30 to 60% over the back half of the year.
Thomas: And so that's what we're really underscoring as a significant area of opportunity where, year to date, we're quite pleased with our emissions per thousand performance. We mentioned that for the second quarter in a row, we've run below 150 inpatient emissions per thousand.
Speaker Change: And so that's what we're really underscoring as a significant area of opportunity where year-to-date we're quite pleased with our emissions per 1,000 performance. We mentioned that for the second quarter in a row, we've run below 150 inpatient emissions per 1,000.
Thomas: But we still feel like there's an opportunity to do better as we continue to ramp up engagement and onboard the significant growth we've taken on this year. Maybe just my follow-up question: I'm still just staring at these 10,000 new members that you picked up in the quarter. Maybe unpack that a little bit.
Speaker Change: But we still feel like there's an opportunity to do better as we continue to ramp up engagement and onboard the significant growth we've taken on this year.
Speaker Change: And maybe just my follow-up, I'm still just staring at this.
Speaker Change: 10,000 new members that you picked up in the quarter and it certainly jumps off the page just maybe unpack that a little bit I presume the preponderance of that is is, California, but
Thomas: I presume the preponderance of that is, is California, but Nip, just agents, just any other color commentary to help us sort of visualize kind of how Yeah, absolutely. So I think from a market positioning standpoint, I think there's sort of a few things happening. So first, you know, our products continue to be market leaders, which is a function of the benefits we are able to afford based on the care model and our overall virtuous cycle we often talk about.
Speaker Change: maybe DSNP, just agents, just any other color commentary to help us sort of visualize kind of how you picked up that much growth.
Thomas: And so I think that that leading product position has combined with this kind of growing reputation amongst seniors for quality, and from brokers as well. And that's really, I think, underscored by the fact that we've maintained our star rating at four stars or greater now for the last, I think it's six or seven years in California for that HMO contract.
Speaker Change: Yeah, yeah, absolutely, so...
Speaker Change: I think from a from a market positioning standpoint, I think there's sort of a few things happening. So first is, you know, our products continue to be market leading, which is a function of the benefits we were able to afford based on the care model and our overall virtuous cycle we often talk about.
Speaker Change: and so I think that that leading product position has combined with this kind of growing reputation amongst seniors for quality and from brokers as well.
Thomas: And as we continue to grow market share, I think just that word of mouth, grassroots movement is continuing to gain traction. From an actual product standpoint, you're right, a good portion of the membership we continued to grow with in the second quarter was through the dual eligible population. That tends to be a sweet spot for us both for our care programs, and we tend to do well financially with those members.
Speaker Change: And that's really, I think, underscored by the fact that we've maintained our star rating at four stars or greater now for the last, I think it's six or seven years in California for that HMO contract.
Speaker Change: And as we continue to grow market share, I think just that word-of-mouth, grassroots movement is continuing to gain traction.
Speaker Change: From an actual product standpoint, you're right, a good portion of the membership we continue to grow with in the second quarter was through the dually eligible population. That tends to be a sweet spot for us, both for our care programs, and we tend to do well financially on those members. I think overall, our duals still stand at about 30% of our total book of business.
Thomas: I think overall, our duals still stand at about 30% of our total bookable. Beyond that, though, we offer products that are designed for a variety of acuities, ethnicities, and income levels. So I think we're continuing to see pretty good traction amongst different product types as well. Thanks, guys. This question comes from the line of Michael Ha with Bayard.
Speaker Change: Beyond that though, we offer products that are designed for a variety of acuities, ethnicities, and income levels. So I think we're continuing to see pretty good traction amongst different product types as well.
Speaker Change: Thanks, guys.
Speaker Change: Thank you. One moment please for our next question.
Speaker Change: Our next question comes from the line of Michael Ha with Baird.
Michael Ha: Hi, thank you. So I wanted to talk about SG&A. And yeah, what's really remarkable to me is that you guys are basically the same SG&A as Humana, yet they're, I think they're like 50 times your size and revenue. So it's pretty eye-opening to think about that and your ability to generate just a scalable economy, cost leverage, especially in a year where you're growing like 56%. So my first two questions would be, think about how sustainable do you think this is going forward?
Michael Ha: All right. Thank you.
Michael Ha: So I wanted to talk about SG&A. And what's really remarkable to me is that you guys are basically the same SG&A as Humana, yet I think they're like 50 times your size in revenue.
Speaker Change: So it's pretty eye-opening to think about that, and your ability to generate just a scaled economy, cost leverage, especially in a year where you're growing like 56%.
Speaker Change: So, my first two questions would be...
Michael Ha: Number two, any unique items to call out that may have benefited 2Q? And then, taking a step back, the general question on what you think the secret sauce is in creating this cost structure? And then I guess question four is, are there any other low-hanging fruit opportunities? Or do you think you're at that point where it's all about productivity, automation, and technology, and that's sort of the new stage of cost structure evolution? Yeah, hey, Michael.
Speaker Change: You think you're at that point where it's all about productivity, automation, technology, and that's sort of the new stage of cost structure evolution.
John Kao: Great question. I'd say we've kind of passed a scale threshold where we needed to really benefit from some of the investments that we've made over the past couple of years. And if you recall, we put a lot of effort into our consumer engagement. Everything is around service delivery and around clinical quality outcomes.
Speaker Change: Yeah, hey Michael. Great question. I'd say we've kind of passed a scale threshold.
Speaker Change: that we needed to really benefit from some of the investments that we've made over the past couple of years.
Speaker Change: If you recall, we spent a lot of effort on our consumer engagement. Everything is around service delivery and around clinical quality outcomes. So that whole line of thinking around just quality.
John Kao: So that whole line of thinking around just quality, as reflected in STARS and as reflected in retention rates, is really starting to pay off. But the foundation of your question, though, starts with the way in which we've architected our system. The way in which we look at our data. And so we have this kind of data architecture that's what we call a unified data architecture. And we have information that's actionable in real time. There is not a 60 or 90 day delay in reconciling claims data with eligibility data and provider databases.
Speaker Change: as reflected in STARS and as reflected in retention rates, is really starting to pay off.
Speaker Change: The foundation of your question, though, starts with the way in which we've architected our systems.
Michael Ha: the way in which we look at our data. And so we have this kind of data architecture that's what we call a unified data architecture.
Speaker Change: and we have information that's actionable.
Speaker Change: in in real time. There's not a
Speaker Change: 60 or 90 day delay in reconciling claims data with eligibility data, with provider databases. It's all kind of captured in a unified data architecture. That allows us to make...
John Kao: It's all captured in a unified data architecture. That allows us to make a very efficient and actionable decision, and it allows us to streamline our functional GNA in a way that we don't have to just staff up manually. And so that, I would say, is the main opportunity. And by the way, to your point, I mean, and it's, you know, with that additional growth that we just announced came incremental commission expenses.
Speaker Change: very efficient and actionable decisions. And it allows us to streamline our functional GNA in a way that we don't have to just staff up manually.
Speaker Change: And so that, I would say, is the main opportunity. And by the way, to your point, I mean, and it's, you know, with that additional growth that we just announced, came incremental commission expenses.
John Kao: You know, and so to the point that you just made, these efficiencies that we're garnering from these investments in automation are even more profound, and I think I think we're going to be able to scale that even further. Um, the thing that should also be noted is that onboarding 63,000 new members was seamless. That's a big deal. It's really quite a statement to be able to onboard all these folks and have no complaints. I'm at a, I'm actually at a broker event right now, and I asked the brokers, and they said no, they haven't heard any complaints from our, from our members. They're are very happy.
Speaker Change: You know, and so to the point that you just made, these efficiencies that we're garnering from these investments in automation are even more profiled.
Speaker Change: And I think I think we're going to be able to scale that even further. The thing that should also be noted is.
Speaker Change: Onboarding 63,000 new members was seamless.
Speaker Change: That's a big deal. It's really quite a statement to be able to onboard all these folks and have no complaints.
John Kao: That's a, that I think is a function of the systems and the automation paying off, the low-hanging fruit. Um, I do think there are opportunities. Um, I think there are opportunities in the way in which we work with our provider partners. I think we have set out on a path to, we call it a path to surplusing more. We want our IPAs to make more money.
Speaker Change: I'm at a, I'm actually at a broker event right now and I asked the brokers and they said no, they haven't heard any complaints from our, from our members. They're very happy. That's a, that I think is a function of the systems and the automation paying off.
Speaker Change: low-hanging fruit
Speaker Change: I do think there's opportunities. I think there is...
Speaker Change: opportunities in the way in which we work with our provider partners.
Speaker Change: I think we have set out on a path to, we call it a path to surplusing more. We want our IPAs to make more money. We want them to be more successful. I think there's opportunities there.
John Kao: We want them to be more successful. I think there are opportunities there. I think there are opportunities with the way in which we're improving our clinical model, again using AVA technology.
Speaker Change: I think there's opportunities with the way in which we're improving our clinical model, again, using AVA technology.
John Kao: On the GNA side, I think, back office automation in a variety of areas is also something that should be noted, that we're able to achieve these GNA scale economies while we're doing implementations of getting more automation in our back office and our EHR and our administrative functions. So all of that is going to, I think, even lend more opportunity for us for margin expansion the bigger we get. Thank you.
Speaker Change: On the GNA side, I think.
Speaker Change: Back office automation in a variety of areas is also something that should be noted.
Speaker Change: that we're able to achieve these GNA.
Speaker Change: scale economies while we're doing implementations of getting more automation in our back office and our EHR and our administrative functions.
Speaker Change: So all of that is going to, I think, even lend more opportunity for us for margin expansion the bigger we get.
Michael Ha: Really appreciate that thorough answer. Maybe just one more relatively longish question. So, yeah, in a year where everyone's reducing benefits, you guys have shown that edge and not only maintaining but increasing benefits, I think by 70 percent year to year. And so with that said, 2025 is expected to be another year with even worse benefit reductions across the board. So understanding that and also your massive advantage in star ratings in California, would it be fair to say next year could be another year where Alignment has similar benefits and stability?
Speaker Change: Thank you. Really appreciate that thorough answer. Maybe just one more relatively long-ish question. So, yeah, in a year where everyone's reducing benefits, you know, you guys have shown that edge in not only maintaining but increasing benefits, I think by 70 bits year-to-year.
Speaker Change: And so with that said, 2025 is expected to be another year, probably with even worse benefit reductions across the board.
Speaker Change: So understanding that and also your massive advantage in star ratings in California, would it be fair to say...
Michael Ha: Or is it a year where you're just so far ahead in terms of competitive positioning, star ratings, funding that investing more in benefits and taking advantage of your position might be a bigger priority? And I know it's a delicate balance between your focus on margins next year, but I'd love to hear your thoughts. Yeah, well, I'll just shout out to you, Michael.
Speaker Change: Next year could be another year where alignment has similar benefits stability or is it a year where you're just so far ahead in terms of
Speaker Change: [inaudible]
John Kao: I mean, you're the only one that called 50% growth last year. So having said that, we're still sticking to the 20%, at least 20% growth dynamic. I will say that in our bids, I would say we were much more margin focused in the 25 bids. And so the degree of growth we will achieve or won't achieve, I think is a bit of a function of what our competitors do. All of the kind of the rational metrics that we see with respect to star ratings, B28 exposure, and some of the perhaps aggressive pricing that they exhibited last year, lead us to conclude that you're right, that people will be more conservative than not. Um, and to your also to your point, remember, in 2024, we got this growth, we did not increase benefits very much. It was relatively flat.
Speaker Change: So, having said that, you know, we're still sticking to the 20%, at least 20% growth dynamic. I will say that in our bids, I would say we were much more margin focused in the 25 bids.
Speaker Change: And so the degree of growth we will achieve or won't achieve, I think, is a bit of a function of what our competitors do.
Speaker Change: All of the kind of the rational metrics that we see with respect to star ratings.
Speaker Change: B28 exposure and some of the perhaps aggressive pricing that they exhibited last year lead us to conclude that you're right, that people will be more conservative than not.
Speaker Change: And also to your point, remember in 2024 we got this growth, we did not increase benefits very much. It was relatively flat.
John Kao: And so, you know, we just found that balance between growth and margin. We are very, very, very focused on margin for 2025. I'll say that again.
Speaker Change: And so, you know, we just, we still found that balance between growth and margin. We are very, very, very focused on margin for 2025, I'll say that.
John Kao: But, you know... Logic would kind of conclude that we're going to have a pretty good year in terms of growth in 2025. My only caution is that you still have some people doing stuff that is, I'd call it, non-sustainable in terms of their growth strategies. If they don't have the stars or if they don't have the V28 tailwinds like we do, they may still price to lose money. That's certainly
Speaker Change: But, you know...
Speaker Change: I think logic would kind of conclude that we're going to have a pretty good year in growth in 25. My only caution is you still have some people doing stuff that are, I'd call it non-sustainable in terms of their growth strategies.
Speaker Change: You know, if they don't have the stars or they don't have the V28, you know, kind of tailwinds like we do, you know, they may still just price to lose money. That's certainly a possibility.
John Kao: But I feel really well positioned heading into 25. I remember last year we said we felt good with both 24 and 25, that's what we said, and potentially 26, by the way, depending upon how the stars come out. And we'll find out more about stars in the next couple of months. [inaudible] Yeah.
Speaker Change: But I feel really well positioned heading into 25. I remember last year we said we felt good with both 24 and 25.
Speaker Change: is what we said, and potentially 26, by the way, depending upon how the stars come out. And we'll find out more about stars in the next couple of months.
Michael Ha: Thank you, John. I really appreciate it. You got it, Mike. Thank you. One moment, please, for our next question. Our next question comes from the line of Jeff, Jess Tassin with Piper Sandler.
Speaker Change: Thank you John , really appreciate it.
John Kao: You got it, Mike.
Speaker Change: Thank you. One moment please for our next question.
Speaker Change: Our next question comes from the line of Jeff Tassin with Piper Sandler.
Jess Tassin: Hi guys, thanks very much for the question and congratulations on the results. I'm hoping you can help frame the impact of California's efforts to align Medicare and Medicaid benefits by regulating DSNPs in the state. I'm just interested to know if there's a way for Alignment to partner with the Medi-Cal plan and kind of insulate itself from any forthcoming regulations or restrictions on growth. Thanks. Yeah, hey Jess, it's John.
Speaker Change: Hi guys, thanks very much for the question and congratulations on the results.
Jeff Tassin: I'm hoping you can help frame the impact of...
Jeff Tassin: California's efforts to align Medicare and Medicaid benefits by regulating D-SNPs in the state. I'm just interested to know if there's a way for Alignment to partner with the Medi-Cal plan and kind of insulate.
Jeff Tassin: [inaudible]
John Kao: Good question. Yeah, I'd be we'd be very interested in partnering with Medicaid plans. I think the tactic that we've taken over the last couple of years, It's clearly an area that we've spent a lot of time on, has really allowed us to still get the kind of growth that we expect through some of the programs and products that will still be able to be sold during SEP, and we just feel good about that. I think fundamentally, from a kind of consumer perspective, people don't necessarily want to be forced into a Medicaid network or set of Medicaid products.
Speaker Change: It's clearly an area that we've spent a lot of time on, has really allowed us to still get the kind of growth that we expect.
Speaker Change: through some of the programs and products that will still be able to be sold during SCP.
Speaker Change: And we just feel good about that. I think fundamentally that a kind of consumer perspective.
Speaker Change: People don't necessarily want to be forced into a Medicaid network or a set of Medicaid products. They like our service levels, they like our
John Kao: They like our service levels. They like our... benefit designs, and they like our network. So, they like the clinical model of care. And so I think those things thus far have really superseded any kind of aligned network in some of the counties that we'll see, but thus far, we've been able to manage it pretty effectively. Great, thank you.
Speaker Change: benefit designs, and they like our networks, and they like the clinical model of care.
Speaker Change: And so I think those things thus far have really, um,
Speaker Change: superseded any kind of aligned network in some of the counties that we're in.
Speaker Change: And so we'll see, but thus far, we've been able to manage it pretty effectively.
Jess Tassin: And then I was just hoping that you could comment on utilization over the course of the second quarter. Did you see any kind of end-of-quarter surge in volumes in any particular setting? And then I wanted to just verify that you all said that you were increasing supplemental benefits in 2025. Is that accurate? Hey Jess, Tom, I'm sure I can take those two.
Speaker Change: Great, thank you. And then I was just hoping that you could comment on utilization over the course of the second quarter. Did you see any kind of end-of-quarter surge in volumes in any particular setting? And then I wanted to just verify, you all said that you were increasing supplemental benefits in 2025. Is that accurate? Thanks.
Thomas: So on your first question, in terms of utilization, I would say our utilization performance throughout the corner was pretty steady. I think those who maybe saw an uptick in utilization in other situations may have been driven by things such as the new two midnight rule, which, as we talked about on the last couple calls, hasn't really been an issue for us given that we were already really operating under the two midnight rule as a de facto way of adjudicating claims principally here in California.
Speaker Change: Hey Jess, Thomas, sure I can take those two. So on your first question in terms of utilization, I would say our utilization performance throughout the quarter was pretty steady. I think
Thomas: So that has not been an issue for us, nor do we anticipate it being an issue for us, kind of moving forward. On your second question about supplemental benefits, we did not speak to supplemental benefit changes or increases for 2025. Rather, what we were emphasizing is that throughout the first half of 2024, we have continued to see our supplemental benefit expenses increase relative to our initial expectations by a modest amount. And so that's a part of our overall updated guidance release today, is just contemplating that those will continue at slightly elevated levels over the back half of the year, which, to your point, we have captured in our 2025 bid outlook, but we're not really comment I got it.
Speaker Change: On your second question, on supplemental benefits, we did not speak to supplemental benefit changes or increases for 2025. Rather, what we were emphasizing is that throughout the first half of 2024, we have continued to see our supplemental benefit expenses increase relative to our initial expectations to a modest extent.
Speaker Change: And so that's a part of our overall updated guidance release today, is just contemplating that those will continue at slightly elevated levels over the back half of the year, which to your point, we have captured in our 2025 bid outlook, but we're not really commenting on the actual levels of changes in the investments and the benefits for next year.
Speaker Change: Got it, thanks.
Speaker Change: Thank you. One moment please for our next question.
Thomas: Thank you. Our next question comes from the line of Jared Haase. William Blair, Yeah, hey guys, this is Jared.
Speaker Change: Our next question comes from the line of Jared Haise with William Blair.
Jared Haase: I'm for Ryan Daniels this evening. Thanks for taking our questions. Maybe just a quick one kind of unpacking the utilization trends a little bit further. I know last quarter, the Part D MBR was kind of a big focus. So I was hoping to just get an update there in terms of how that's tracked relative to expectations, and then what's assumed for the second half of the year. Yeah, absolutely, Jared.
Jared Haise: Yeah, hey guys, this is Jared. I'm for Ryan Daniels this evening. Thanks for taking our questions. Maybe just a quick one, kind of unpacking the utilization trends a little bit further. I know last quarter the Part D MBR was kind of a big focus, so I was hoping to just get an update there in terms of how that's tracked relative to expectations and then what's assumed for the second half of the year.
Thomas: So I don't think we're going to break out C versus D, kind of every quarter moving forward necessarily. And we really wanted to emphasize that on the first quarter call just to make sure folks understood the overall mechanics and C tonality of Q1 relative to the rest of the year. But more specifically to your question, our Part D performance in the second quarter did run in line with expectations and really was not a major driver of the overall MBR on a consolidated basis relative to our Part C performance.
Speaker Change: Yeah, absolutely Jared, so
Speaker Change: and really was not a major driver of the overall MBR on a consolidated basis relative to our Part C performance. As we look at the back half of the year, we still anticipate that Part D will be a meaningful tailwind to MBR over the next two quarters, similar to what we talked about on the last call.
Thomas: As we look at the back half of the year, we still anticipate that Part D will be a meaningful tailwind to MBR over the next two quarters, similar to what we talked about on the last call. Okay, that's great to hear.
Jared Haase: And then, John, I know you mentioned no new states again for 2025. I guess I just wanted to touch base and sort of get the updated thoughts longer term around market expansion opportunities sort of beyond 2025. Obviously, I understand the runway that you have to continue to grow share in your current footprint. But how do you sort of balance that when you think about, especially some of the larger national plans, talking about exiting certain markets as they look to preserve margins and thinking about what opportunities that might open up for you and your geographies? Yeah, yeah, I think the whole governor that we have is just cash on the balance sheet.
Speaker Change: Okay, that's great to hear.
Jared Haise: John , I know you mentioned no new states again for 2025. I guess just wanted to touch base and sort of get the updated thoughts longer term around market expansion opportunities sort of beyond 2025. Obviously, I get the runway that you have to continue to grow share in your current footprint. But how do you sort of balance that when you think about especially some of the larger national plans, talking about exiting certain markets as they look to preserve margins and thinking about what opportunities that might open up for you and your geographies.
Speaker Change: Yeah, yeah, I think the whole
John Kao: And we feel really well positioned for that. But as I've said in the past, I really want us to start expanding when a couple of things start coming together. One is just producing the cash and funding the growth from cash, and I feel in a good position to do that over the next couple of years. And at the same time, we're leveraging these investments in automation that we were just talking about.
Speaker Change: Governor that that we have is just is just cash on the balance sheet and we feel really well positioned for that.
Speaker Change: But as I've said in the past, I really want us to start expanding when a couple of things start coming together. One is just producing the cash and funding the growth from cash.
Speaker Change: and I feel in a good position to do that over the next couple of years and at the same time we're leveraging these investments on automation that we were just talking about.
John Kao: And I think once we get these workflows and we get these systems in place, both on the administrative side, as well as the clinical side, as well as the network kind of management side, you get all these things kind of matured and packaged in best practices to go along with the cash from operations.
Speaker Change: And I think once we get these workflows and we get these systems in a way, both on the administrative side, as well as the clinical side, as well as the network kind of management side.
Speaker Change: You get all these things kind of matured and...
Speaker Change: packaged in best practices to go along with the cash from operations, that's when we really want to take this model and and get the kind of national footprint that we said we really desired to achieve in the IPO.
John Kao: That's when we really want to take this model and get the kind of national footprint that we said we really desired to achieve in the IPO. That's still the goal, and we are simply now focusing on the most accretive way for us to grow and to get scale economies and achieve EBITDA profitability. That's the priority now.
Speaker Change: That's still the goal. It's simply now focusing on the most accretive way for we to grow and to get scale economies and get the EBITDA profitability.
John Kao: And then what we're not quite showing everybody yet is all the work behind the scenes in terms of getting ready to have the degree of expansion I expect. The other thing I've said is that I do think there is an emerging trend toward integrated delivery networks, these large hospital systems that are looking for innovative ways to partner, from what they're currently experiencing in Medicare Advance. And I think you'll see that come to fruition over the next year or so. Awesome. Appreciate the appreciate all the calls.
Speaker Change: That's the priority now.
Speaker Change: And then we're not quite showing everybody yet is all the work behind the scenes in terms of getting ready to have
Speaker Change: The degree of expansion I expect.
Speaker Change: The other thing I've said is I do think there is an emerging trend toward integrated delivery networks, these large hospital systems that are looking for innovative ways to partner.
Speaker Change: from what they're currently experiencing in Medicare Advantage. And I think you'll see that come to fruition over the next year or so.
Speaker Change: Awesome. Appreciate all the calling. Thanks.
Jared Haase: Thanks. One moment, please for our next question. Our next question comes from the line of Kevin Fischbeck with Bank of America. Hey, this is actually Adam Ron.
Speaker Change: One moment please for our next question.
Speaker Change: Our next question comes from the line of Kevin Fischbeck with Bank of America.
Kevin Fischbeck: I appreciate you taking the question. So first, a quick one. When you say 20% growth, are you specifically talking about enrollment, or does that include yield? And so would yield be on top of the 20%? Yeah, I can take that one.
Speaker Change: Hey, this is actually Adam Ron, but I appreciate you taking the question. So, first a quick one. When you say 20% growth, are you specifically talking about enrollment or does that include yields? And so, would yields be on top of the 20%?
Thomas: Hey Adam, yeah, we're contemplating that both membership and revenue; we feel like we can achieve 20% growth next year and in 2025. I think we don't currently, I think it's too early to say, rather, you know, what we expect from an overall PMPM standpoint because while we do have a very positive benchmark rate update for 2025, we also have to take into account what we're doing in terms of our benefit designs as well as the new member population, product mix, et cetera.
Speaker Change: Yeah, I can take that one. Hey, Adam. Yeah, I think we're contemplating that both membership and revenue, we feel like we can achieve 20% growth next year in 2025.
Speaker Change: I think it's too early to say what we expect from an overall PMPM standpoint, because while we do have a very positive benchmark rate update for 2025, we also have to take into account what we're doing in terms of our benefit design, as well as new member population, product mix, etc. So, probably too early for us to talk about revenue PMPM change year over year into 2025.
Thomas: So, probably too early for us to talk about revenue PMPM change year over year into 2025, but I think we feel good about our ability to shoot for that 20% growth in membership and revenue that John was alluding to. Okay, I appreciate that.
Speaker Change: But I think we feel good about our ability to shoot for that 20% growth on membership and revenue that John was alluding to previously.
Adam Ron: And then on MLR, there's a lot of moving parts, just because last year you had ACL Reach and then that came out. And then this year, you have a very high percentage of members who are new to Alignment, and you're saying there's a wide delta between those members and returning members. So I was wondering if you could give us any color on, like, what that delta is and maybe what MLR was last year and this year for returning members and how that's different from new members to give us a sense of how, you know, things are trending versus what you bid. Yeah, yeah, absolutely.
Speaker Change: Okay, I appreciate that. And then
Speaker Change: On MLR, there's a lot of moving parts just because last year you had ACL Reach and then that came out, and then this year you have a very high percentage of members who are new to alignment, and you're saying there's a wide delta of MLR on those members and returning members, so I was wondering if...
Speaker Change: You can give us any color on what that delta is and maybe what MLR was last year and this year on returning members and how that's different from new members to give us a sense of how things are trending versus what you bid.
Thomas: So I would say overall, our new members are generally running relatively in line with expectations. So you all have seen our historical cohort performance in this past, which would suggest that members run around 89, maybe 90% MBRs for that at-risk population. And there's obviously some variability in various years, a few points better or a few points worse than that.
Speaker Change: Yeah, yeah, absolutely.
Speaker Change: I would say overall our new members are generally running relatively in line with expectations.
Speaker Change: So, you all have seen our historical cohort performance in this past, which would suggest that members run around 89, maybe 90% MBRs for that at-risk population.
Speaker Change: And there's been obviously some variability in various years, a few points better or a few points worse than that. I'd say we're within that overall range right now, maybe a couple points higher than the original kind of 89 to 90% historically, but certainly within the band of expectations.
Thomas: I'd say we're within that overall range right now, maybe a couple points higher than the original kind of 89 to 90% historically, but certainly within the band of expectations. Part of that is what I was describing about the supplemental benefits, which we're seeing across our overall population, both new and loyal. From a loyal member standpoint, I would say that it is continuing to run consistently with expectations, inclusive of or taking into consideration some of the supplemental benefit and unit cost dynamics we described on the call.
Speaker Change: Part of that is what I was describing on the supplemental benefits, which we're seeing across our overall population, both new and loyal.
Speaker Change: From a loyal member's standpoint, I would say that very similarly is continuing to run consistent with expectations, inclusive of or taking into consideration some of the supplemental benefit and unit cost dynamics we described on the call.
Thomas: On that point, I want to take just a second to kind of amplify our comments on the unit cost dynamics that we're currently navigating this year. So in totality, our overall inpatient and outpatient unit costs are going up about 8% in 2024. And I would say in a normal year in years past, we typically would have seen something closer to 3%, maybe 4% on average.
Speaker Change: On that point, I want to take just a second to kind of amplify our comments on the unit cost dynamics that we're currently navigating this year.
Speaker Change: In totality, our overall inpatient and outpatient unit costs are going up about 8% in 2024. And I would say in a normal year, in years past, we typically would have seen something closer to 3%, maybe 4% on average.
Thomas: And that value to us in total is worth about a point of overall MLR. And so, in other words, our experience here today in our full-year outlook, had we had what I would say is a kind of a more normalized unit cost rate update environment, would have been a little less than almost 1% better on overall MLR. And so I think that's really a testament to the team and our ability to manage not just the growth, to your point, but also manage some of these other dynamics around our overall unit cost experience based on the CMS rate update this year.
Speaker Change: And that value to us in total is worth about a point of overall MLR. And so in other words, our experience here today in our full year outlook, had we had what I would say is kind of a more normalized unit cost rate update environment, would have been a little less than almost 1% better on overall MLR.
Speaker Change: And so, I think that's really a testament to the team and our ability to manage not just the growth, to your point, but also manage some of these other dynamics around our overall unit cost experience based on the CMS rate updates.
Thomas: So I think we're in a very good position based on the first half performance, and I think our full year achievability for both our adjusted gross profit and adjusted EBITDA, we feel very good about that. And if I could just clarify one more thing about that, when you say unit costs are up 8%, is that because of, like, what Humana is talking about with the two midnight rule and doctors or hospitals are reclassifying what were previously outpatient admissions, or is this just, all across the board, anytime someone goes there, it's just 8% higher? Basically, I'm asking this because you would have more visibility on the ladder.
Speaker Change: I think we're in a very good position based on the first half performance and I think our full year achievability on both our adjusted gross profit and adjusted EBITDA we feel very good about.
Speaker Change: And if I could just clarify one more thing about that, when you say unit costs are up eight percent, is that because, like, about what Humana is talking about with the two midnight rule and doctors or hospitals are reclassifying what were previously outpatient admissions, or is this just
Speaker Change: You know you
Speaker Change: All across the board, anytime someone goes there, it's just 8% higher. Basically, I'm asking this because you would have more visibility on the ladder.
Adam Ron: Yeah, so it's not related to Midnight Rule. As I was saying earlier, you know, that really is not an area of exposure for us, and we've not seen any unfavorable performance due to that factor. What I'm referring to was kind of a one-time change that CMS put in place heading into 2024 where they reclassified urban and rural markets, and it caused certain markets to go up and beyond what I would say is kind of a normal increase.
Speaker Change: Yeah, so it's not related to Midnight Rule. As I was saying earlier, that really is not an area of exposure for us and we've not seen any unfavorable performance due to that variable.
Speaker Change: What I'm referring to was a kind of a one-time change that CMS put in place heading to 2024 where they reclassified urban and rural markets. And it caused certain markets to go up and beyond what I would say is kind of a normal increase. And in other places across the country, rates actually came down. So on a national basis, it was somewhat of a normal, I'd say, year-over-year change. But for our specific markets...
Adam Ron: And in other places across the country, rates actually came down. So on a national basis, it was somewhat of a normal, I'd say, year-over-year change, but for our specific markets, we saw an atypically high increase that we've been able to successfully navigate thus far. Thank you.
Speaker Change: We saw an atypically high increase that we've been able to successfully navigate thus far this year.
Thomas: One moment, please for our next question. Our next question comes from the line of Scott Fidel with Steve: Hi, thanks. Good evening.
Speaker Change: Thank you.
Speaker Change: One moment please for our next question.
Speaker Change: Our next question comes from the line of Scott Fidel with Stevens.
Scott Fidel: First, I was hoping you could maybe help us in terms of trying to quantify or ring-fence the impact of the supplemental benefits on the MLR this year. Maybe, if possible, in a similar way, Thomas, that you just did the exercise and sort of laying out the impact of the inpatient and outpatient unit costs and sort of gave us what those increased year over year. And the impact on the MLR at 100 basis points.
Scott Fidel: Hi, thanks. Good evening. First question was hoping if you could maybe help us in terms of trying to quantify or ring-fence the impact of the supplemental benefits on
Speaker Change: on the MLR this year. Maybe, if possible,
Speaker Change: In a similar way, Thomas, that you just did the exercise and sort of laying out the impact of the inpatient and outpatient unit costs and sort of gave us, you know, what those increased year over year and and the impact to the MLR at 100 basis points.
Scott Fidel: Is there any way you could sort of similarly, you know, sort of help quantify the supplemental benefits impact given that you talked about it impacting both new and existing members this year? Yeah, yeah, happy to.
Speaker Change: Is there any way you could sort of similarly, you know, sort of help quantify the supplemental benefits impact given that you talked about it impacting both the new and existing members this year?
Thomas: I think if you were to kind of look at our overall NBR implied by our prior guidance relative to our current guidance today, it went up about 50 basis points for the full year. And I would say if you think about the kind of the new member impact and the greater mix of new members that we were previously discussing, and you look at the supplemental benefit piece, I would say it's probably somewhere in the neighborhood of maybe 10 to 30 basis points on the new members and probably 20 to 30 basis points on the supplemental benefit expense. So it really is pretty consistent with expectations. It's just very slightly higher than we initially anticipated. Okay, thanks.
Speaker Change: Yeah, yeah, happy to. I think if you were to kind of look at our overall MBR implied by our prior guidance relative to our current guidance today, it went up about 50 basis points for the full year.
Speaker Change: And I would say if you think about the new member impact, and the greater mix of new members that we were previously discussing, and then you look at the supplemental benefit piece, I would say it's probably somewhere in the neighborhood of maybe 10 to 30 basis points on the new members, and probably 20 to 30 basis points on a supplemental benefit expense.
Speaker Change: So, it really is overall pretty consistent with expectations, it's just very slightly higher than we initially anticipated.
Scott Fidel: And then on my follow-up question, I definitely would be interested in getting your guys' initial assessment on the premium stabilization program that CMS has proposed for Part D that they just came out with this week for the one-year demo. So, no, it's still pretty early here, but if you want to give us initial observations on, you know, what you may like, what you may be concerned about with that demo program, and you're thinking about potentially participating in that,
Speaker Change: Okay, thanks. And then on my follow-up question, definitely would be interested in getting your guys' initial assessment on the premium stabilization program that CMS has proposed
Speaker Change: for part D that they just came out with this week for the one-year demo. No, it's still pretty early here, but if you wanna give us initial observations on what you may like, what you may be concerned about with that demo program, and you're thinking on potentially participating in that. Thanks.
Scott Fidel: Yeah, I think it's something we're evaluating, but probably too early for us to provide too much of a definitive view on one way or another. I think, big picture, obviously, there are a lot of changes coming down the pipeline for Part D in 2025 under the Inflation Reduction Act. And I think overall, we feel very well positioned, both from a kind of overall bid and benefit standpoint, but also in terms of our ability to continue to navigate those through our clinical teams employed internally, as well as the partnership through our PBM.
Speaker Change: Yeah, I think it's something we're evaluating, but probably too early for us to provide too much of a definitive view on one way or another. I think big picture, obviously there's a lot of changes coming down the pipeline for Part D in 2025 under the Inflation Reduction Act.
Speaker Change: And I think overall, we feel very well positioned, both from a kind of an overall bid and benefit standpoint, but also in terms of our ability to continue to navigate those through our clinical teams employed internally, as well as the partnership through our PBM. So we actually feel like there's probably more opportunity than risk on the Part D changes heading into 2025, and we'll continue to evaluate the program you were just describing as part of that.
Scott Fidel: So, we actually feel like there's probably more opportunity than risk in the Part D changes heading to 2025, and we'll continue to evaluate the program you were just describing as part of that. Okay, thank you. One moment, please for our next question. Our next question comes from the line of Ryan Langston with TD Cal. Hey, good, good afternoon. Just want to know any way you can talk about it.
Speaker Change: Okay, thank you.
Speaker Change: One moment please for our next question.
Speaker Change: Our next question comes from the line of Ryan Langston with TD Cowen.
Ryan Langston: Hey, good afternoon. Just wanted to know, any way you can talk about utilization trends, maybe California versus the rest of the
Ryan Langston: Organization Trends, maybe California. Enrollment Portfolio, obviously California State University. But just kind of curious if California's progressed, above, below. Outside just looking for any, Yeah, happy to run.
Speaker Change: Enrollment Portfolio, obviously California State University.
Speaker Change: I'm just kind of curious if California has progressed above, below utilization trends or outside. Just looking for any context you can give us there.
Thomas: So from an inpatient admissions per 1000 standpoint, our out of California markets continue to do quite well, depends on the market, but I'd say overall, we're running pretty similar out of California than or relative to what we're running in California. And I'd say over the past couple of years, we've launched these new markets, we typically run better than California or in line with California. And really, what that's a function of the replicability efforts that we've put in place over the last few years to ensure that as we're bringing on new care teams, we're being consistent in systematizing how we recruit for those individuals, how we train those individuals to use our tools, such as AVA, and then actually how we monitor them.
Speaker Change: Yeah, happy to, Ryan. So, from an inpatient admissions per thousand standpoint, our ex-California markets continue to do quite well. It depends on the market, but I'd say overall we're running pretty similar ex-California than or relative to what we run in California. And I'd say over the past couple of years we've launched these new markets we typically run better than California or in line with California.
Speaker Change: and really what that's a function of is the replicability efforts that we put in place over the last few years to ensure that as we're bringing on new care teams
Speaker Change: We're being consistent in systematizing how we recruit for those individuals, how we train those individuals to use our tools such as AVA, and then actually how we monitor them. So in terms of our ability to have a centralized command and control to evaluate metrics and making sure we're seeing the right people at the right time, and managing those metrics on the back end in terms of how are our teams doing things like readmission rates.
Thomas: So in terms of our ability to have centralized command and control to evaluate metrics and make sure we're seeing, you know, the right people at the right time and managing those metrics on the back end in terms of how our team's doing and things like readmission rates, skilled nursing length of stay, inpatient admissions per thousand, ER visits per thousand, etc. So I think we've been pretty disciplined about how we tried to build this from an operational standpoint, and we're seeing the results of that as we continue to grow the population. Great And then just one quick one, maybe talking about your non-California markets. I mean, you've been in some of those markets, et cetera.
Speaker Change: North Carolina, etc. Now that you have a little bit more, maybe one more year of experience, do you intend to grow faster in those markets into 25 maybe than you would have grown into 2024? Thanks.
Ryan Langston: Now that you have a little bit more, maybe one more year of experience, intend to grow faster in those markets into 25, maybe than you would have grown [inaudible] Yeah, hey, it's John. Foundationally, we want, and we made the decision that we need to get quality established and replicability of the care model established. And so we've been able to do that in North Carolina. We've been able to do that in Nevada.
John Kao: We're still working on Arizona in terms of the stars, but the clinical outcomes are very, very good. And so we've made the specific decision to emphasize growth from California, just because I think it's been the most accretive and the lowest acquisition. We have just such good provider partners and such good broker partners. It just made sense for us to really double down on that.
John Kao: And I think we'll continue to do that. And so, heading into 2025, I think because there's still so much emphasis that we have to and conviction that we're going to focus on is, [inaudible] We'll see. I think you'll see us... be much more aggressive in 26.
Speaker Change: I think because there's still so much emphasis that we have to and conviction that we're going to focus on is toward toward profitability, we'll see. I think you'll see us
John Kao: I think we're going to get growth in 25 in these ex-California markets, but I think you're going to get a lot of growth in 26, just because of the investments that we're going to be making, again, from the fact that we're going to be, you know, I think, very, very well positioned on profitability. And so it starts with that, and then we're going to make investments in our existing ex California markets. And then I think we're going to take both of those.
Speaker Change: I think we're going to get growth in 25 in these ex-California markets.
Speaker Change: But I think you're going to get a lot of growth in 26, just because of the investments that we're going to be making, again, from the fact that we're going to be, you know, I think very, very well positioned on profitability.
John Kao: Call it Factors and think about 26 new market expansions. That's kind of how we're thinking about priorities. Great, thank you. You got it.
Speaker Change: That's kind of how we're thinking about prioritization.
Andrew Mock: A moment, please, for our next question. Our next question comes from the line of Andrew Mock with Barclays. Hi, good evening.
Thomas: Now that the 2025 bids are behind us, we can even share a bit more on the potential for margin expansion next year. What do you think is a reasonable level of expansion and what do you think the bigger drivers will be between MLR and SG&S? Thanks.
Andrew Mock: So I think we'll probably withhold too much detailed commentary on 2025 benefits, just given that reallocations are kind of currently underway as the direct subsidy information has come through from CMS. But I think to your kind of more broad question around the MBR versus SG&A opportunity for 2025, you know, I think both are opportunities. And what I mean by that is, from an MBR standpoint, as John was describing, we were, I think, you know, continuing to be disciplined and margin-oriented in the bid process to drive MBR performance improvement into 2025.
Andrew Mock: I think the extent of which you see it will in part relate to the growth we did, but I think almost irrespective of the level of growth, we see an opportunity to improve MBR next year based on how we came together in the bid process. On the SG&A side of things that John was describing, while we've done a great job this year on driving, you know, close to 300 basis points of SG&A as a percentage of revenue improvement in 2024, we're still going to be north of 11% in total SG&A as a percentage of revenue this year, and as we've talked about in the past, our goal remains to get to 10% or even below that, possibly the high single, So I think as we continue to grow next year, we do continue to anticipate further economies of scale and SG&A leverage improvement in 2025 as well. Great.
John Kao: On the SG&A side of things that John was describing, while we've done a great job this year on driving, you know, close to 300 basis points of SG&A as a percentage of revenue improvement in 2024,
Speaker Change: We're still going to be north of 11% in total SGA percentage of revenue this year. As we've talked about in the past, our goal remains to get to 10% or even below that, possibly the high single digits.
Speaker Change: So, I think as we continue to grow next year, we do continue to anticipate further economies of scale and SG&A leverage improvement in 2025 as well.
Thomas: And if I could just follow up here, I'm hoping you could elaborate on some of the MLR seasonality that you're expecting this year. It looks like you're expecting MLR to improve sequentially in both 3Q and 4Q. But it wasn't clear to me why 4Q MLR would improve.
Speaker Change: Great. And if I could just follow up here, I'm hoping you could elaborate on some of the MLR seasonality that you're expecting this year. It looks like you're expecting MLR to improve sequentially in both 3Q and 4Q. It wasn't clear to me why 4Q MLR would improve. I think that's a bit different than historical trends. So can you walk us through that progression and maybe quantify the impact of the calendar, if meaningful? Thank you.
Andrew Mock: I think that's a bit different than historical trends. So can you walk us through that progression and maybe quantify the impact of the calendar, if it's meaningful? Thank you. Yeah, happy to.
Thomas: So I think in terms of the 3rd and 4th quarter dynamics and kind of in part thinking about that year over year, what I would say is that last year, the seasonality was a little bit distorted in that the 3rd quarter had a couple of kind of one-time or atypically favorable prior period items that helped drive down MLR in the 3rd quarter of last year. On the other hand, I think we feel good about the opportunities for further improvement in Care Anywhere.
Speaker Change: Yeah, yeah, happy to.
Speaker Change: I think in terms of the third and fourth quarter dynamics and kind of in part thinking about that year over year, what I would say is that last year the seasonality was a little bit distorted in that the third quarter had a couple of kind of one-time or atypically favorable prior period items that helped drive down MLR in the third quarter of last year. On the other side, the fourth quarter was a bit opposite in that we had a couple of atypically unfavorable items.
Speaker Change: that occurred in the fourth quarter last year, in particular, the inpatient unit costs I was describing actually went into effect October 1st of 2023.
Speaker Change: So I would say kind of third quarter, fourth quarter dynamics aside, it's probably more appropriate to think about our full year guidance or even our second half guidance.
Speaker Change: And in terms of that outlook, I think we feel really good about where we stand. As we talked about, I think our latest guidance reflects both kind of the incremental membership we have now added and the MDR implications of that incremental growth, as well as that kind of modest impact of the supplemental benefit increase.
Thomas: And then beyond that, some of the things we talked about last quarter, including payment integrity and some of the non-inpatient initiatives that we're talking about today. So I think kind of where we land in terms of the overall range for both gross profit and adjusted EBITDA will be somewhat dependent upon the timing of those initiatives. But big picture, I think we feel confident in our full year outlook and in our ability to continue to offset that modest MBR pressure with further economic scale and effort. Great, thanks for all the color.
Speaker Change: On the other side, I think we feel good about the opportunities for further improvement on Care Anywhere. And then beyond that, some of the things we talked about last quarter, including payment integrity, and some of the non-inpatient initiatives that we're talking about today. So I think kind of where we land in terms of the overall range on both gross profit and adjusted EBITDA will be somewhat dependent upon.
Speaker Change: The timing of those initiatives, but big picture, I think we feel confident in our full year outlook and in our ability to continue to offset that modest MBR pressure with the further economy scale on SG&A.
Speaker Change: Great, thanks for all the color.
Operator: Ladies and gentlemen, thank you for participating. This does conclude today's program and you may now disconnect. ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? Music Good afternoon and welcome to Alignment Hlthcr's second quarter 2024 earnings conference call and webcast. All participants will be in a listen-only mode.
Speaker Change: Ladies and gentlemen, thank you for participating. This does conclude today's program and you may now disconnect.
Speaker Change: Thanks for watching!
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After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 1 on your telephone. You will then hear an odd and amazing message advising that your hand has been raised. To withdraw your question, please press star 1 1 again.
Speaker Change: Good afternoon and welcome to Alignment Hlthcr's second quarter 2024 earnings conference call and webcast.
Speaker Change: All participants will be in a listen-only mode.
Speaker Change: After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising that your hand has been raised.
I advise that today's conference call is being led by John Kao, founder and CEO of Alignment Health. Thomas Fried, 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. All of 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.
Speaker Change: To withdraw your question, please press star 1 1 again.
Speaker Change: Please be advised that today's conference is being recorded.
Speaker Change: Leading today's call are John Kao, Founder and CEO , and Thomas Freeman, Chief Financial Officer.
Descriptions of some of the factors that could cause actual results to differ materially from those forward-looking statements are discussed in more detail in our filings with the SEC, including the risk factors, of our annual report on Form 10-K for the year ended December 31st, 2020.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: Descriptions of some of the factors that could cause actual results to differ materially from those 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. 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 company's website and in our Form 10-Q for the fiscal quarter ended June 30th, 2025. It is now my pleasure to introduce our founder and CEO, John Kao.
Speaker Change: Although we believe our expectations are reasonable, we undertake no obligation to revise any statements to reflect changes that occur after this call.
Speaker Change: In addition, please note that the company will be discussing certain non-GAAP financial measures that they believe are important in evaluating performance.
Speaker Change: 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-Q for the fiscal quarter ended June 30, 2024.
Speaker Change: It is now my pleasure to introduce founder and CEO , John Kao.
Hello, and thank you for joining us on our second quarter earnings conference call. For the second quarter of 2024, our health plan membership of 175,100 members represented approximately 56% growth year over year and outperformed our year-end membership guidance of 170 to 172,000 members. Total revenue of $681 million grew approximately 47% year over year and 58% excluding ACO REIT.
John Kao: Hello and thank you for joining us on our second quarter earnings conference call.
Speaker Change: For the second quarter of 2024, our health plan membership of 175,100 members
Speaker Change: represented approximately 56% growth year-over-year and outperformed our year-end membership guidance of 170 to 172,000 members.
Speaker Change: Total revenue of $681 million grew approximately 47% year-over-year and 58% excluding ACO reach.
Adjusted gross profit of $77 million produced a consolidated NBR of 88.7%, which led to our adjusted EBITDA of positive $6 million in the quarter. Both our adjusted gross profit and adjusted EBITDA achieved the high end of our second quarter guidance, which places us on track toward our full year adjusted gross profit and adjusted EBITDA guidance ranges. As we round out the first half of the year, I'm proud of what the team has accomplished.
Speaker Change: Adjusted gross profit of $77 million produced a consolidated MBR of 88.7% which led to our adjusted EBITDA of positive $6 million in the quarter.
Speaker Change: Both our adjusted gross profit and adjusted EBITDA achieved the high end of our second quarter guidance, which places us on track toward our full year adjusted gross profit and adjusted EBITDA guidance ranges.
Speaker Change: As we round out the first half of the year, I'm proud of what the team has accomplished.
Over the past several years, we have increased investments in member experience, clinical infrastructure, distribution, and our unified data platform AVA to realize our vision of Medicare Advantage done right. These investments provide us with the visibility and control required to manage our markets in real time, resulting in both exceptional growth and superior MBR outcomes. We continue to believe our platform is the model for the future of Medicare Advantage, and our year-to-date results reinforce my optimism about our replicability and scalability over time.
Speaker Change: Over the past several years, we increased investments in member experience, clinical infrastructure, distribution, and our unified data platform, AVA, to realize our vision of Medicare Advantage Done Right.
Speaker Change: These investments provide us with the visibility and control required to manage our markets in real time, resulting in both exceptional growth and superior MBR outcomes.
Speaker Change: We continue to believe our platform is the model for the future of Medicare Advantage, and our year-to-date results reinforce my optimism about our replicability and scalability over time.
During the second quarter, we continued to drive membership growth ahead of expectations. Our sustained growth momentum was enabled by strong product offerings resulting from our virtuous cycle, which reinvests savings from our unique ability to manage medical costs into richer benefit offerings. This was further supported by robust broker engagement activity and our expanding reputation for clinical quality and a superior member experience. Heading into this AEP, we continue to deepen strong relationships with our broker partners, as we become the household name for seniors seeking the best quality at the lowest cost. From a retention standpoint, our member experience investments last year resulted in our voluntary disenrollment rate improving roughly 22% year over year. We achieved this while improving service levels and seamlessly onboarding approximately 63,000 net new members in the last 12 months, demonstrating the scalability of our platform.
Speaker Change: During the second quarter, we continued to drive membership growth ahead of expectations. Our sustained growth momentum was enabled by strong product offerings resulting from our virtuous cycle which reinvest savings from our unique ability to manage medical costs into richer benefit offerings.
Speaker Change: This was further supported by robust broker engagement activity and our expanding reputation for clinical quality and a superior member experience.
Speaker Change: Heading into this AEP we continue to deepen strong relationships with our broker partners as we become the household name for seniors seeking the best quality at the lowest cost.
Speaker Change: From a retention standpoint, our member experience investments last year resulted in our voluntary disenrollment rate improving roughly 22% year-over-year.
Speaker Change: We achieved this while improving service levels and seamlessly onboarding approximately 63,000 NET members in the last 12 months.
Our 56% growth year-over-year makes us one of the fastest-growing MA plans in the nation, and we believe it is the only MA plan that has demonstrated an ability to both grow membership rapidly and manage MBR. As we have said before, we are focused on profitable growth. This is enabled by our visibility and control over the value drivers required to manage our MBR stars, risk adjustment.
Speaker Change: demonstrating the scalability of our platform.
Speaker Change: Our 56% growth year-over-year makes us one of the fastest growing MA plans in the nation and we believe the only MA plan that has demonstrated an ability to both grow membership rapidly and manage MBR.
Speaker Change: As we have said before, we are focused on profitable growth. This is enabled by our visibility and control over the value drivers required to manage our MBR. STARS.
Medical Management, Product Development, and Provider Engagement. These capabilities resulted in continued utilization outperformance in the second quarter, including inpatient admissions per thousand of 151, which is approximately in line with the prior quarter. Our MBR result in the second quarter is a continuation of the momentum we achieved in the first quarter, where we grew 51% year over year, while MBR increased just 1.5%. As a reminder, new members typically join at a higher MBR, meaning faster growing plans with a higher mix of new members typically see a greater increase in MBR year over year.
Speaker Change: Risk Adjustment
Speaker Change: Medical Management, Product Development, and Provider Engagement. These capabilities resulted in continued utilization outperformance in the second quarter, including inpatient admissions per thousand of a hundred fifty-one, which is approximately in line with the prior quarter.
Speaker Change: Our MBR result in the second quarter is a continuation of the momentum we achieved in the first quarter where we grew 51% year-over-year while MBR increased just 1.5%.
Speaker Change: As a reminder, new members typically join at a higher MBR, meaning faster growing plans with a higher mix of new members typically see a greater increase in MBR year over year.
To put our performance into perspective, the average publicly traded national health plan grew Medicare Advantage members just 2% year-over-year, while MBR still increased by 2.8% in the first quarter as the industry faced utilization, STARS, and risk adjustment challenges. Our differentiated results shared here are further highlighted in the latest investor presentation available on our Investor Relations website.
Speaker Change: To put our performance into perspective, the average publicly traded National Health Plan grew Medicare Advantage members just...
Speaker Change: 2% year-over-year, while MBR still increased by 2.8% in the first quarter as the industry faced utilization, STARS, and risk adjustment challenges.
Speaker Change: Our differentiated results shared here are further highlighted in the latest investor presentation available on our Investor Relations website.
While we are pleased with our MBR performance to date, we are already driving innovation to improve our clinical outcomes through pre-service care navigation, post-discharge case management, and IPA performance improvement, all of which we believe will continue to improve our MBR results in the future. Turning to our preparation for 2025, we believe we are well positioned to deliver at least 20% growth next year and adjusted EBITDA profitability through MBR improvement and continued SG&A leverage.
Speaker Change: While we are pleased with our MBR performance to date, we are already driving innovation to improve our clinical outcomes through pre-service care navigation.
Speaker Change: post-discharge case management, and IPA performance improvement, all of which we believe will continue to improve our MBR results in the future.
Speaker Change: Turning to our preparation for 2025, we believe we are well positioned to deliver at least 20% growth next year and adjusted EBITDA profitability through MBR improvement and continued SG&A leverage.
Our confidence in our ability to achieve both objectives is underpinned by our margin-focused bid process and our competitive advantages heading into 2025. We added more members than any other health plan in California in 2024.
Speaker Change: Our confidence and our ability to achieve both objectives is underpinned by our margin-focused bid process and our competitive advantages heading into 2025.
And our growing market presence is increasing our competitive advantage. In addition to supporting our enterprise operating leverage objectives, our size and market share gains enhance our local competitive position by increasing mindshare with brokers, collaboration with providers, and reputation among seniors. Even with our strong growth, our California market share stands at only 4.5%, leaving us significant room to expand further.
Speaker Change: We have added more members than any other health plan in California in 2024 and our growing market presence is increasing our competitive advantages.
Speaker Change: In addition to supporting our enterprise operating leverage objectives, our size and market share gains enhance our local competitive position by increasing mindshare with brokers, collaboration with providers, and reputation among seniors.
Speaker Change: Even with our strong growth, our California market share stands at only 4.5 percent.
Over the long term, we believe we can capture at least 20 percent of the share across our California markets, similar to what we've achieved in some of our most mature counties. In 2025, we plan to fully capitalize on our position in California, where we have relative advantages on STARS and risk model changes. Even after accounting for the recent CMS star rating changes, there are still approximately 1.2 million total California seniors in HMO plans below four stars or not rated.
Speaker Change: leaving us significant room to expand further.
Speaker Change: Over the long term, we believe we can capture at least 20% share across our California markets, similar to what we've achieved in some of our most mature counties.
Speaker Change: In 2025, we plan to fully capitalize on our position in California, where we have relative advantages on STARS and risk model changes.
Speaker Change: Even after accounting for the recent CMS star rating changes, there are still approximately 1.2 million total California seniors in HMO plans below 4 stars or not rated.
Given our position with roughly 95% of our California members and plans that will still have a four-star payment level, we anticipate a unique opportunity to capture strong growth while remaining focused on margin expansion. Outside of California, we have more than doubled our membership year over year and continue to demonstrate our commitment to quality. The recent update to CMS star ratings for payment year 2025 awarded us a five-star rating in our North Carolina and Nevada markets.
Speaker Change: Given our position with roughly 95% of our California members and plans that will still have four-star payment level, we anticipate a unique opportunity to capture strong growth while remaining focused on margin expansion.
Speaker Change: Outside of California, we have more than doubled our membership year-over-year and continue to demonstrate our commitment to quality. The recent update to CMS Star Ratings for Payment Year 2025 awarded us a 5-star rating in our North Carolina and Nevada markets.
By first focusing on STARS and clinical outcomes, we have built a strong foundation that gives us a long-term competitive advantage. As we move toward consolidated profitability, we will be able to deepen our investments in these newer markets. When combined with our investments in our shared services infrastructure and our ability to scale, we see a significant opportunity to accelerate and sustain growth in these newer markets over time. However, given our competitive strength in our existing markets, our focus on profitability, and our solid positioning to achieve at least 20% growth, we will not enter any new states in 2025.
Speaker Change: By first focusing on STARS and clinical outcomes, we have built a strong foundation that gives us long-term competitive advantages.
Speaker Change: As we move toward consolidated profitability, we will be able to deepen our investments in these newer markets.
Speaker Change: When combined with our investments in our shared services infrastructure and our ability to scale, we see a significant opportunity to accelerate and sustain growth in these newer markets over time.
Speaker Change: Given our competitive strength in our existing markets, our focus on profitability, and our solid positioning to achieve at least 20% growth, we will not enter any new states in 2025.
However, we expect to prioritize further market expansion in future years while committing to sustained profitability. In conclusion, I'd like to thank each of our employees for their part in pioneering the Medicare Advantage model of the future. Tens of thousands of new members are choosing Alignment as their senior healthcare partner this year, making us one of the fastest growing plans in the nation. However, we're just barely scratching the surface for the millions of seniors who need our help.
Speaker Change: However, we expect to prioritize further market expansion in future years while committing to sustained profitability.
Speaker Change: In conclusion, I'd like to thank each of our employees for their part in pioneering the Medicare Advantage model of the future.
Speaker Change: Tens of thousands of new members are choosing Alignment as their senior healthcare partner this year, making us one of the fastest growing plans in the nation.
Speaker Change: However, we are just barely scratching the surface for the millions of seniors who need our help, and I believe we will make further inroads toward our vision for Medicare done right in 2025.
And I believe we will make further inroads toward our vision for Medicare done right in 2025. I look forward to sharing more as we get closer to AEP, and now I'll turn the call over to Thomas to further discuss our financial results and outlook. Thanks, John.
Speaker Change: I'll look forward to sharing more as we get closer to AEP, and now I'll turn the call over to Thomas to further discuss our financial results and outlook. Thomas?
For the quarter ending June 2024, our health plan membership of 175,100 increased 56% year-over-year, outperforming our expectation for 50% membership growth at the midpoint of our second quarter guidance range. Our second quarter revenue of $681 million represented 47% growth year-over-year and 58% growth, excluding ACO reach. As John described, our value proposition and reputation for quality, service delivery, and provider and broker partnership continue to expand in our local markets, setting us up with positive momentum heading into this AEP.
Thomas Freeman: Thanks, John . For the quarter ending June 2024, our health plan membership of 175,100 increased 56% year over year, outperforming our expectation for 50% membership growth at the midpoint of our second quarter guidance range.
Thomas Freeman: Our second quarter revenue of $681 million represented 47% growth year-over-year and 58% growth excluding ACO reach.
Speaker Change: As John described, our value proposition and reputation for quality, service delivery, and provider and broker partnership continue to expand in our local markets, setting us up with positive momentum heading into this AEP.
The adjusted growth profit in the quarter was $77 million, representing an MBR of 88.7 percent and a 220 basis point improvement from the first quarter. For the second quarter in a row, we are demonstrating that industry-leading membership growth can be balanced with strong MBR performance if you have a model with differentiated visibility and control. Second quarter utilization experience continued to trend within our expectations, with inpatient admissions per 1,000 of 151 continuing to drive our overall MBR performance.
John Kao: The adjusted gross profit in the quarter was $77 million, representing an NBR of 88.7% and a 220 basis point improvement from the first quarter.
John Kao: For the second quarter in a row, we are demonstrating that industry-leading membership growth can be balanced with strong MBR performance if you have a model with differentiated visibility and control.
John Kao: Second quarter utilization experience continued to trend within our expectations with inpatient admissions per thousand of 151 continuing to drive our overall MBR performance.
While we believe our inpatient admissions per 1,000 performance continues to lead the industry, we still see significant room for improvement in the back half of the year, which I will expand on shortly. Our utilization performance was partially offset by the overall increasing mix of new members from our strong growth outperformance who are still on board with our clinical programs. As we previously mentioned, we are also continuing to navigate heightened levels of supplemental benefit expense and atypically high unit cost increases in 2024, both of which will improve in 2025.
John Kao: While we believe our inpatient emissions per thousand performance continues to lead the industry, we still see significant room for improvement in the back half of the year, which I will expand on shortly.
John Kao: Our utilization performance was partially offset by the overall increasing mix of new members from our strong growth out performance who are still being on board on our clinical programs.
John Kao: As we previously mentioned, we are also continuing to navigate heightened levels of supplemental benefit expense and atypically high unit cost increases in 2024, both of which will improve in 2025.
As we close out the second quarter, it's worth noting that we now have sufficient paid claims visibility on our first quarter dates of service experience to more fully assess our T1 performance. Given our overall volume of new membership, we are pleased to report that we remain confident in our first quarter incurred but not paid, or IV&P, accruals, implying both accuracy in our initial assessments, as well as stability in our overall reserves. Turning to OPEX, SG&A in the quarter was $88 million.
John Kao: As we close out the second quarter, it's worth noting that we now have sufficient paid claims visibility on our first quarter dates of service experience to more fully assess our T1 performance.
John Kao: Given our overall volume of new membership, we are pleased to report that we remain confident in our first quarter incurred but not paid, or IV&P, accruals, implying both accuracy in our initial assessments, as well as stability in our overall reserves.
Our adjusted SG&A was $71 million, an increase of 27% year over year. Adjusted SG&A as a percentage of revenue, excluding ACO reach, declined from 12.9% to 10.4% year-over-year, improving by approximately 250 basis points and exceeding our Q2 operating leverage expectations. Taken together, our adjusted EBITDA was positive $6 million in the quarter, achieving the high end of our outlook range and placing us on track towards our full year adjusted EBITDA goal. Lastly, we ended the quarter with $364 million in cash.
John Kao: Turning to OpEx, SG&A in the quarter was $88 million. Our adjusted SG&A was $71 million, an increase of 27% year-over-year.
John Kao: Adjusted SG&A as a percentage of revenue, excluding ACO reach, declined from 12.9% to 10.4% year-over-year, improving by approximately 250 basis points and exceeding our Q2 operating leverage expectations.
John Kao: Taken together, our adjusted EBITDA was positive six million in the quarter, achieving the high end of our outlook range and placing us on track towards our full year adjusted EBITDA guidance.
John Kao: Lastly, we ended the quarter with $364 million in cash investments.
Moving to our guidance for the third quarter, we expect health plan membership to be between 176,000 and 178,000 members, revenue to be in the range of $655,000,000 and $665,000,000, adjusted gross profit to be between $75,000,000 and $81,000,000, and adjusted EBITDA to be in the range of zero to positive $6,000,000. For full year 2024, we expect health plan membership to be between 178,000 and 180,000 members. Revenue to be in the range of $2.61 billion and $2.64 billion. Adjusted gross profit to be between $280,000,000 and $310,000,000, and adjusted EBITDA to be in the range of a loss of $12,000,000 to positive $12,000,000.
John Kao: Moving to our guidance. For the third quarter, we expect health plan membership to be between 176,000 and 178,000 members.
John Kao: Revenue to be in the range of $655,000,000 and $665,000,000. Adjusted gross profit to be between $75,000,000 and $81,000,000. And adjusted EBITDA to be in the range of $0 to positive $6,000,000.
John Kao: For full year 2024, we expect health plan membership to be between 178,000 and 180,000 members, revenue to be in the range of $2.61 billion and $2.64 billion,
John Kao: Adjusted gross profit to be between 280 million and 310 million and adjusted EBITDA to be in the range of a loss of 12 million to positive 12 million.
We have raised our year-end membership guidance by an additional 8,000 members based on our year-to-date outperformance and our expectation for continued growth momentum in the second half, which further drives the increase in our full-year revenue outlook. Since our initial expectations in January, the midpoint of our membership guidance range has increased by 16,000 members. Our outlook now implies membership growth of 50% at the midpoint versus our initial guidance of 37% and revenue growth excluding ACO reach of 54% at the midpoint versus our initial guidance of 41%.
John Kao: We have raised our year-end membership guidance by an additional 8,000 members based on our year-to-date outperformance and our expectation for continued growth momentum in the second half, which further drives the increase in our full-year revenue outlook.
John Kao: Since our initial expectations in January , the midpoint of our membership guidance range has increased by 16,000 members.
John Kao: Our outlook now implies membership growth of 50% at the midpoint, versus our initial guidance of 37%, and revenue growth excluding ACO reach of 54% at the midpoint, versus our initial guidance of 41%.
Turning to profitability, our guidance remains unchanged in spite of our higher growth outlook. We are pleased with the results of our operational initiatives, investments in automation, and the continuous improvement of our clinical model. These efforts have resulted in improved SG&A scale economies and closely managed NBR, giving us confidence in our full year of JessaDepot.guidance. Specifically, on adjusted gross profit, we expect the added gross profit dollars from our incremental membership to be offset by a continued uptick in our supplemental benefit expense, which we have captured in our 2025 bid. These two factors result in an applied 50-basis-point MBR increase over our prior guidance.
John Kao: Turning to profitability, our guidance remains unchanged in spite of our higher growth outlook. We are pleased with the results of our operational initiatives, investments in automation, and the continuous improvement of our clinical model. These efforts have resulted in improved SG&A scale economies and closely managed MBR, giving us confidence in our full-year adjusted EBITDA guidance.
John Kao: Specifically on adjusted gross profit, we expect the added gross profit dollars from our incremental membership to be offset by a continued uptick in our supplemental benefit expense, which we have captured in our 2025 bids.
John Kao: These two factors result in an applied 50 basis point MBR increase to our prior guidance. The midpoint of our guidance range now represents an MBR of 88.8%, which we are very well positioned to offset with SG&A scale economies.
The midpoint of our guidance range now represents an MBR of 88.8%, which we are very well positioned to offset with SG&A scale and economies. From a utilization standpoint, our engagement rate for care and who are eligible among new members remains on target through the first half of the year. We still see significant opportunity remaining in the second half as we work toward achieving our expected year-end engagement rate of 60% from our current level of approximately 30%.
John Kao: From a utilization standpoint, our engagement rate of care and who are eligible among new members remains on target through the first half of the year. We still see significant opportunity remaining in the second half as we work toward achieving our expected year-end engagement rate of 60% from our current level of approximately 30%.
As a reminder, we typically see a 30% improvement in institutional claims PMPM in the 12 months following engagement compared to our control group of members that have not yet engaged. Accordingly, we see an opportunity to improve our utilization performance as we continue to onboard our new membership and ramp up new member engagement in the back half of the year, with a particular eye toward the fourth quarter. Furthermore, as John commented previously, we continue to see opportunity for cost management beyond the inpatient setting and are ramping up our efforts on both pre-service care navigation, post-discharge case management, and IPA performance improvement to continue to improve our overall MBR. On SG&A, our first half results demonstrate the scalability of our model with adjusted SG&A as a percentage of revenue excluding ACO reach declining by 200 basis points year over year.
John Kao: As a reminder, we typically see a 30% improvement in an institutional claims PMPM in the 12 months following engagement compared to our control group of members that have not yet engaged.
John Kao: Accordingly, we see an opportunity to improve our utilization performance as we continue to onboard our new membership and ramp up new member engagement in the back half of the year with a particular eye towards the fourth quarter.
John Kao: Further, as John commented on previously, we continue to see opportunity on cost management beyond the inpatient setting and are ramping up our efforts on both pre-service care navigation, post-discharge case management, and IPA performance improvement to continue to improve our overall MDR.
Speaker Change: On SG&A, our first half results demonstrate the scalability of our model with adjusted SG&A as a percentage of revenue excluding ACO reach declining by 200 basis points year over year.
We continue to expect even greater improvement in the second half since we will not have the impact of one-time costs incurred last year related to the insourcing of our member experience function and the acceleration of AEP growth and staffing. In conjunction with the increase in our membership outlook, our full-year guidance now implies an adjusted SG&A as a percentage of revenue of 11.3%, representing roughly 300 basis points of improvement year-over-year, excluding ACO reach. This improvement includes commissions and other variable expenses related to incremental growth.
Speaker Change: We continue to expect even greater improvement in the second half, since we will not have the impact of one-time costs incurred last year, related to the insourcing of our member experience function and the acceleration of AEP growth and staffing expenses.
Speaker Change: In conjunction with the increase in our membership outlook, our full-year guidance now implies an adjusted SG&A as a percentage of revenue of 11.3%.
Speaker Change: representing roughly 300 basis points of improvement year-over-year excluding ACO reach. This improvement includes commissions and other variable expenses related to incremental growth.
As we look toward 2025, we are increasingly excited about the growth and margin opportunity in front of us that will be supported by a number of tailwinds. First, our growth momentum in 2024 adds to our scale advantages and mindshare with brokers in the upcoming AEP. Second, we believe we have appropriately captured our 2024 higher supplemental benefit expense experience in our 2025 bid. Third, our weighted average benchmark increase of 5% relative to the national average of 2.4% will make us whole for the outsized unit cost increases we are currently absorbing in 2024.
Speaker Change: As we look toward 2025, we are increasingly excited about the growth and margin opportunity in front of us that will be supported by a number of tailwinds.
Speaker Change: First, our growth momentum in 2024 adds to our scale advantages and mindshare with brokers in the upcoming AEP. Second, we believe we have appropriately captured our 2024 Higher Supplemental Benefit Expense experience in our 2025 bids.
Speaker Change: Third, our weighted average benchmark increase of 5% relative to the national average of 2.4% will make us hold for the outsized unit cost increases we are currently absorbing in 2024.
Finally, our relative advantages on STARS and the second phase of the V28 risk model changes will further our competitive position. In summary, the combination of these factors positions us strongly towards driving adjusted EBITDA profitability while achieving our growth target of at least 20% or greater. With that, let's open the call to questions. Operator.
Speaker Change: Finally, our relative advantages on STARS and the second phase of the V28 risk model changes will further our competitive positioning.
Speaker Change: In summary, the combination of these factors positions us strongly towards driving adjusted EPIDOT profitability while achieving our growth target of at least 20% or greater next year.
Certainly. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To draw your question, please press star 1 1 again.
Speaker Change: With that, let's open the call to questions. Operator?
Speaker Change: Certainly. As a reminder, to ask a question, please press star one one on your telephone.
Speaker Change: And wait for your name to be announced. To withdraw your question, please press star 1 1 again.
Your first question comes from the line of John Ransom with Raymond James. Hey, good, good evening. I may have missed this, but was there anything to call out in the quarter from the midyear sweep? Hey, John, this is Thomas. Sorry, I can take that one.
Speaker Change: Hey, good evening.
Speaker Change: I may have missed this, but was there anything to call out in the quarter from the mid-year sweep?
So, we did pick up a bit of revenue in the second quarter related to the sweeps, both the final sweep from last year and the mid-year sweep this year, though the majority of the revenue outperformance in the quarter was related to the membership outperformance. From a gross profit standpoint, we actually did not pick up much relative to expectations on the sweeps, and similar to last year, where we talked about how a lot of the sweeps came through with some of our globally capitated contracts, it wasn't really a significant driver of overall NBR performance in the quarter relative to last year. Okay, and then just this is a question for John, and I'll, I'll go back in the queue.
Thomas Freeman: Hey John , this is Thomas, sorry I didn't take that one. So we did pick up a bit of revenue in the second quarter related to the sweeps, both the final sweep from last year and the mid-year sweep of this year, though the majority of the revenue outperformance in the quarter was related to the membership outperformance.
Speaker Change: From a gross profit standpoint, we actually did not pick up much relative to expectations on the sweeps. And similar to last year, where we talked about how a lot of the sweeps came through some of our globally capitated contracts, it wasn't really a significant driver of overall NBR performance in the quarter relative to expectations.
I asked this of one of your competitors, but, you know, it seems like there are a plurality of people in DC who are not convinced that Medicare Advantage is a great deal for the taxpayers. You know, when you're having those conversations with policy people, what's your elevator pitch that, I mean, we know it's good for members and doctors like it. But, you know, what's the pitch that says, at least it's a tie, if not better for the taxpayers? Thanks. Yeah. Hey, John.
Speaker Change: Okay and then just this is a question for John and I'll I'll get back in the queue. Asked this of one of your competitors but...
Speaker Change: Yeah, it seems like there's a plurality of people in D.C. who are not convinced that Medicare Advantage is a great deal for the taxpayers.
Speaker Change: You know, when you're having those conversations with policy people, what's your elevator pitch that, I mean, we know it's good for members and doctors like it, but, you know, what's the pitch that says, at least it's a tie, if not better for the taxpayers? Thanks.
I'd say that the benefits for the beneficiaries, and I think to your point, the doctors, are pretty compelling. I think some of the recent policy changes with respect to STARS and with respect to V28, and even with respect to some of the potential changes with respect to the distribution side of things. It's all getting back to what CMS really originally intended, which we think is a really good thing, which is to increase quality and access at a more affordable price, less than fee-for-service.
John Kao: Yeah. Hey, John .
John Kao: I'd say that the benefits for the beneficiaries and I think to your point the doctors I think is pretty compelling.
Speaker Change: I think some of the recent policy changes with respect to STARS and with respect to B28, and even with respect to some of the potential changes with respect to the distribution side of things,
Speaker Change: It's all getting back to what CMS really originally intended, which we think is a really good thing, which is to increase
Speaker Change: Quality, access, at a more affordable price, less than fee-for-service.
And I think I think that's the trend that I see happening. And I think this kind of higher standard and lower cost, if you will, overall for the taxpayer, fundamentally is going to be better for everybody. And I think that's certainly the foundation and the infrastructure that we've built. And we've been saying since, since the beginning, which is that the companies that will win are those that are going to be providing the highest quality of care at the lowest cost. Thank you, sir. Thank you. Our next question comes from Whit Mayo with Lering Partners.
Speaker Change: And I think that's the trend that I see happening, and I think
Speaker Change: This kind of higher standard and lowering cost, if you will, overall for the taxpayer fundamentally is going to be better for everybody.
Speaker Change: And I think that's certainly the foundation and the infrastructure that we've built. And we've been saying that since...
Speaker Change: since the beginning, which is the companies that will win are those that are going to be providing the highest quality of care at the lowest cost.
Speaker Change: Thank you, sir.
Speaker Change: Got it.
Speaker Change: Thank you. One moment please for our next question.
Speaker Change: Our next question comes from the line of Whit Mayo with Lering Partners.
Hey, thanks, good afternoon. Thomas, just on that member engagement metric that you referenced, is that 30% number for 100% of the total new members this year, or is that a subset of the total new members, and is that for the first quarter or for the first half? Sorry.
Whit Mayo: Hey thanks, good afternoon. Thomas, back on that member engagement metric that you referenced, is that 30% number...
Whit Mayo: for 100% of the total new members this year.
Whit Mayo: or is that a subset of the total new members and is that for the first quarter or for the first half? Sorry.
Yeah, no, good questions. So what we're really talking about here is the engagement of the care anywhere eligible population. And so, as a reminder, when we onboarded our new membership this year, we quickly began running the data we were capturing from lab values, pharmacy data, authorization, and utilization data through our stratification model to identify those that we thought were at greatest risk of an inpatient event and had the greatest level of comorbidities and therefore needed that proactive care program that we call Care Anywhere. And so, as we have continued to identify those members over the course of the second quarter, it stands at about 10 percent of the population is eligible for that Care Anywhere program.
Speaker Change: Yeah, no, good questions. So what we're really talking about there is engagement of the care anywhere eligible population. And so, as a reminder, when we onboarded our new membership this year, we quickly began running the data we were capturing from lab values, pharmacy data, authorization and utilization data through our stratification model to identify those that we thought were at greatest risk of an inpatient event and had the greatest level of comorbidities and therefore needed that proactive care program that we call Care Anywhere.
Speaker Change: And so, as we have continued to identify those members over the course of the second quarter, it stands that about probably 10% of the population is eligible for that Caring Aware Program. We've engaged about 30% of them so far, which...
We've engaged about 30 percent of them so far, which is really, I'd say, consistent with our expectations this year. And it's pretty consistent with where we have performed in years past. But of course, if you think about that relative to our overall population, which typically runs at about 60 percent engagement in that more intensive set of care programs, there's clearly a big opportunity for us to get from 30 to 60 percent over the back half of the year.
Speaker Change: is really, I'd say, consistent with our expectations this year and is pretty consistent to where we have performed in years past.
Speaker Change: But of course, if you think about that relative to our overall population, which typically runs at about 60% engagement on that more intensive set of care programs, there's clearly a big opportunity for us to get from 30 to 60% over the back half of the year.
And so that's what we're really underscoring as a significant area of opportunity where, year to date, we're quite pleased with our emissions per thousand performance. We mentioned that for the second quarter in a row, we've run below 150 inpatient emissions per thousand. But we still feel like there's an opportunity to do better as we continue to ramp up engagement and onboard the significant growth we've taken on. Maybe just my follow-up, I'm still just staring at this 10,000. Maybe unpack that for a little bit.
Speaker Change: And so that's what we're really underscoring as a significant area of opportunity where year-to-date we're quite pleased with our emissions per thousand performance. We mentioned that for the second quarter in a row we've run below 150 inpatient emissions per thousand.
Speaker Change: But we still feel like there's an opportunity to do better as we continue to ramp up engagement and onboard the significant growth we've taken on this year.
Speaker Change: And maybe just my follow-up, I'm still just staring at this.
Speaker Change: 10,000 new members that you picked up in the quarter and it certainly jumps off the page just maybe unpack that a little bit I presume the preponderance of that is is, California, but
I presume the preponderance of that is in California, but and other color commentary to help us visualize how you picked up that moment. Yeah, absolutely. So from a market positioning standpoint, I think there's sort of a few things happening. So first, our products continue to be market leaders, which is a function of the benefits we were able to afford based on the care model and our overall virtuous cycle we often talk about.
Speaker Change: maybe
Speaker Change: DSNP, StageN, just any other color commentary to help.
And so I think that that leading product position has combined with this kind of growing reputation amongst seniors for quality, and from brokers as well. And that's really, I think, underscored by the fact that we've maintained our star rating at four stars or greater now for the last, I think it's six or seven years in California for that HMO contract.
Speaker Change: to sort of visualize kind of how you picked up that.
Speaker Change: Yeah, yeah, absolutely, so...
Speaker Change: I think from a from a market positioning standpoint, I think there's sort of a few things happening. So first is, you know, our products continue to be market leading, which is a function of the benefits we were able to afford based on the care model and our overall virtuous cycle we often talk about.
Speaker Change: and so I think that that leading product position has combined with this kind of growing reputation amongst seniors for quality and from brokers as well and that's really I think underscored by the fact that we've maintained our star rating at four stars or greater now for the last I think it's six or seven years in California for that HMO contract.
And as we continue to grow market share, I think just that word of mouth, grassroots movement is continuing to gain traction. From an actual product standpoint, you're right; a good portion of the membership we continued to grow with in the second quarter was through the dually eligible population. That tends to be a sweet spot for us both for our care programs, and we tend to do well financially on those members. I think overall, our duals still stand at about 30% of our total book. Beyond that, though, we offer products that are designed for a variety of acuities, ethnicities, and income levels. So I think we're continuing to see pretty good traction amongst different product types as well. Thanks, guys. This question comes from the line of Michael Ha with Bayard.
Speaker Change: And as we continue to grow market share, I think just that word-of-mouth, grassroots movement is continuing to gain traction.
Speaker Change: From an actual product standpoint, you're right, a good portion of the membership we continue to grow with in the second quarter was through the dually eligible population. That tended to be a sweet spot for us, both for our care programs, and we tend to do well financially on those members. I think overall, our duals still stand at about 30% of our total book of business.
Speaker Change: Beyond that though, we offer products that are designed for a variety of acuities, ethnicities, and income levels. So I think we're continuing to see pretty good traction amongst different product types as well.
Speaker Change: Thanks guys.
Speaker Change: Thank you. One moment, please, for our next question.
Speaker Change: Our next question comes from the line of Michael Ha with Baird.
Hi, thank you. So I wanted to talk about SG&A. And yeah, what's really remarkable to me is that you guys are basically the same SG&A as Humana, yet they're, I think they're like 50 times your size and revenue. So it's pretty eye-opening to think about that and your ability to generate just a scalable economy, cost leverage, especially in a year where you're growing like 56%. So my first two questions would be, think about how sustainable do you think this is going forward?
Michael Ha: All right, thank you.
Speaker Change: So I wanted to talk about SG&A, and yeah, what's really remarkable to me is that you guys are basically the same SG&A as Humana, yet they're, I think they're like 50 times your size in revenue.
Speaker Change: So it's pretty eye-opening to think about that and your ability to generate just a scaled economy, cost leverage, especially in a year where you're growing like 56%. So my first two questions would be
Number two, any unique items to call out that may have benefited 2Q? And then, taking a step back, a general question on what you think the secret sauce is in creating this cost structure. And then I guess question four is, are there any other low-hanging fruit opportunities? Or do you think you're at that point where it's all about productivity, automation, and technology, and that's sort of the new stage of cost structure evolution? Yeah, hey, Michael.
Speaker Change: Think how sustainable do you think this is?
Speaker Change: Going forward, number two, any unique items to call out that may have benefited 2Q and then taking a step back.
Speaker Change: a general question on what you think the secret sauce is in creating this cost structure and then I guess question four is
Speaker Change: Are there any other low-hanging fruit opportunities, or do you think you're at that point where it's all about productivity, automation, technology, and that's sort of the new stage of cost-structure evolution?
Great question. I'd say we've kind of passed a scale threshold where we needed to really benefit from some of the investments that we've made over the past couple of years. And if you recall, we put a lot of effort into our consumer engagement. Everything is around service delivery and around clinical quality outcomes.
Speaker Change: Yeah, hey Michael. Great question. I'd say we've kind of passed a scale threshold.
Speaker Change: that we needed to really benefit from some of the investments that we've made over the past couple of years.
Speaker Change: If you recall, we spent a lot of effort on our consumer engagement. Everything is around service delivery and around clinical quality outcomes. So that whole line of thinking around just quality.
So that whole line of thinking around just quality, as reflected in STARS and as reflected in retention rates, is really starting to pay off. But the foundation of your question, though, starts with the way in which we've architected our system. The way in which we look at our data. And so we have this kind of data architecture that's what we call a unified data architecture. And we have information that's actionable in real time. There's not a 60 or 90 day delay in reconciling claims data with eligibility data and provider databases.
Speaker Change: as reflected in STARS and as reflected in retention rates, is really starting to pay off.
Speaker Change: The foundation of your question, though, starts with the way in which we've architected our systems.
Speaker Change: The way in which we look at our data, is that we have this kind of data architecture that's what we call a unified data architecture.
Speaker Change: and we have information that's actionable.
Speaker Change: in in real time. There's not a
Speaker Change: 60 or 90-day delay in reconciling claims data with eligibility data, with provider databases. It's all captured in a unified data architecture. That allows us to make...
It's all captured in a unified data architecture that allows us to make a very efficient and actionable decision, and it allows us to streamline our functional GNA in a way that we don't have to just staff up manually. And so that, I would say, is the main opportunity. And by the way, to your point, I mean, and it's, you know, with that additional growth that we just announced came incremental commission expenses.
Speaker Change: very efficient and actionable decisions. And it allows us to streamline our functional GNA in a way that we don't have to just staff up manually.
Speaker Change: And so that, I would say, is the main opportunity. And by the way, to your point, I mean, and it's, you know, with that additional growth that we just announced, came incremental commission expenses.
You know, and so to the point that you just made, these efficiencies that we're garnering from these investments in automation are even more profound, and I think I think we're going to be able to scale that even further. Um, the thing that should also be noted is that onboarding 63,000 new members was seen. That's a big deal. It's like, it's really quite a statement to be able to onboard all these folks and have no complaints. I'm at a, I'm actually at a broker event right now, and I asked the brokers, and they said no, they haven't heard any complaints from our, from our members. They're are very happy.
Speaker Change: You know, and so to the point that you just made, these efficiencies that we're garnering from these investments in automation are even more profiled.
Speaker Change: And I think I think we're going to be able to scale that even further. The thing that should also be noted is.
Speaker Change: Onboarding 63,000 new members was seamless.
Speaker Change: That's a big deal. It's really quite a statement to be able to onboard all these folks and have no complaints.
Speaker Change: I'm at a, I'm actually at a broker event right now and I asked the brokers and they said no, they haven't heard any complaints from our, from our members. They're very happy. That's a, that I think is a function of the systems and the automation paying off.
That's a, that I think is a function of the systems and the automation page, the low-hanging fruit. Um, I do think there are opportunities. Um, I think there are opportunities in the way in which we work with our provider partners. I think we have set out on a path to, we call it a path to surplusing more. We want our IPAs to make more money.
Speaker Change: low-hanging fruit
Speaker Change: I do think there's opportunities. I think there is...
Speaker Change: opportunities in the way in which we work with our provider partners.
Speaker Change: I think we have set out on a path to, we call it a path to surplusing more. We want our IPAs to make more money. We want them to be more successful. I think there's opportunities there.
We want them to be more successful. I think there are opportunities there. I think there are opportunities with the way in which we're improving our clinical model, again using AVA technology.
Speaker Change: I think there's opportunities with the way in which we're improving our clinical model, again, using AVA technology.
On the GNA side, I think... Back-office automation in a variety of areas is also something that should be noted, that we're able to achieve these GNA-scale economies while we're doing implementations of getting more automation in our back office and our EHR and our administrative functions. So all of that is going to, I think, even lend more opportunity for us for margin expansion the bigger we get. Thank you.
Speaker Change: On the GNA side, I think
Speaker Change: Back office automation in a variety of areas is also something that should be noted.
Speaker Change: that we're able to achieve these GNA.
Speaker Change: scale economies while we're doing implementations of getting more automation in our back office and our EHR and our administrative functions.
Speaker Change: So all of that is going to, I think, even lend more opportunity for us for margin expansion the bigger we get.
Really appreciate that thorough answer. Maybe just one more relatively long-ish question? So, yeah, in a year where everyone's reducing benefits, you guys have shown that edge and not only maintaining but increasing benefits, I think by 70 percent year to year. And so with that said, 2025 is expected to be another year with even worse benefit reductions across the board. So understanding that and also your massive advantage in star ratings in California, would it be fair to say next year could be another year where Alignment has similar benefit stability?
Speaker Change: Thank you. Really appreciate that thorough answer. Maybe just one more relatively long-ish question. So, yeah, in a year where everyone's reducing benefits...
Speaker Change: You know, you guys have shown that edge and not only maintaining, but increasing benefits, I think by 70 bits year to year.
Speaker Change: And so with that said, 2025 is expected to be another year, probably with even worse benefit reductions across the board.
Speaker Change: So understanding that and also your massive advantage in star ratings in California, would it be fair to say next year could be another year where alignment has similar benefit stability or is it a year where it's just so far ahead in terms of benefits?
Or is it a year where you're just so far ahead in terms of competitive positioning, star ratings, funding that investing more in benefits and taking advantage of your position might be a bigger priority? And I know it's a delicate balance between your focus on margins next year, but I'd love to hear your thoughts. Yeah, well, I'll just shout out to you, Michael.
Robert Freeman: Robert Freeman, Competitive Positioning, Scar Ratings, Funding, that investing more into benefits and taking advantage of your position might be a bigger priority. And I know it's a delicate balance between your focus on margins next year, but I'd love to hear your thoughts. Yeah. Well, I'll just shout out to you, Michael. I mean, you were the only one that called 50% growth last year.
I mean, you were the only one that called for 50% growth last year. So having said that, we're still sticking to the 20%, at least 20% growth dynamic. I will say that in our bids, I would say we were much more margin focused in the 25 bids. And so the degree of growth we will achieve or won't achieve is, I think, a bit of a function of what our competitors do. All of the kind of rational metrics that we see with respect to star ratings, B28 exposure, and some of the perhaps aggressive pricing that they exhibited last year lead us to conclude that you're right, that people will be more conservative than not.
Speaker Change: So, having said that, you know, we're still sticking to the 20%, at least 20% growth dynamic. I will say that in our bids, I would say we were much more margin focused in the 25 bids.
Speaker Change: And so the degree of growth we will achieve or won't achieve, I think, is a bit of a function of what our competitors do.
Speaker Change: All of the kind of the rational metrics that we see with respect to star ratings.
Speaker Change: B28 exposure and some of the perhaps aggressive pricing that they exhibited last year lead us to conclude that you're right, that people will be more conservative than not.
Um, and to your point, remember in 2024, we got this growth; we did not increase benefits very much. It was relatively flat. And so, we just, we still found that balance between growth and margin. We are very, very, very focused on margin for 2025. I'll say that.
Speaker Change: And also to your point, remember in 2024 we got this growth, we did not increase benefits very much. It was relatively flat.
Speaker Change: And so, you know, we just, we still found that balance between growth and margin. We are very, very, very focused on margin for 2025, I'll say that.
But, you know... Logic would kind of conclude that we're going to have a pretty good year in terms of growth in 25. My only caution is that you still have some people doing stuff that is kind of, I'd call it non-sustainable in terms of their growth strategies. If they don't have the stars or if they don't have the V28 tailwinds like we do, they may still just price to lose money. That's
Speaker Change: But, you know...
Speaker Change: Logic would kind of conclude that we're going to have a pretty good year and growth in 2025. My only caution is you still have some people doing stuff that are, I'd call it non-sustainable in terms of their growth strategies.
Speaker Change: If they don't have the stars, or if they don't have the V28 tailwinds like we do, they may still price to lose money. That's certainly a possibility.
But I feel really well positioned heading into 25. I remember last year we said we felt good with both 24 and 25, that's what we said, and potentially 26, by the way, depending upon how the stars come out. And we'll find out more about stars in the next couple of months. [inaudible] Yeah.
Speaker Change: But I feel really well-positioned heading into 25. I remember last year we said we felt good with both 24 and 25.
Speaker Change: is what we said, and potentially 26, by the way, depending upon how the stars come out. And we'll find out more about stars in the next couple of months.
Thank you, John. I really appreciate it. You got it, Mike.
Speaker Change: Thank you John , really appreciate it.
John Kao: You got it, Michael.
Speaker Change: Thank you. One moment please for our next question.
Thank you. A moment, please, for our next question- Our next question comes from the line of Jeff Tassin with Piper Sandler. Hi guys, thanks very much for the question and congratulations on the results.
Speaker Change: Our next question comes from the line of Jeff Tassin with Piper Sandler.
I'm hoping you can help frame the impact of California's efforts to align Medicare and Medicaid benefits by regulating D-SNPs in the state. I'm just interested to know if there's a way for Alignment to partner with the Medi-Cal plan and kind of insulate itself from any forthcoming regulation or restrictions on growth. Thanks. Yeah, hey, Jess, it's John.
Speaker Change: Hi guys, thanks very much for the question and congratulations on the results.
Jeff Tassin: I'm hoping you can help frame the impact of...
Jeff Tassin: California's efforts to align Medicare and Medicaid benefits by regulating D-SNPs in the state and just interested to know if there's a way for Alignment to partner with the Medi-Cal plan and kind of insulate
John Kao: insulate yourselves from any forthcoming regulation or restrictions on growth. Thanks. Yeah, hey Jess, it's John . Good question. Yeah, I'd be, we'd be very interested in partnering with Medicaid plans. I think the tactic that we've taken over the last couple of years
Good question. Yeah, I'd be we'd be very interested in partnering with Medicaid plans. I think the tactic that we've taken over the last couple of years, It's clearly an area that we've spent a lot of time on, has really allowed us to still get the kind of growth that we expect through some of the programs and products that will still be able to be sold during SEP. Um, and we just feel good about that. I think fundamentally from a, uh, kind of consumer perspective. People don't necessarily want to be forced into a Medicaid network or set of Medicaid products.
John Kao: It's clearly an area that we've spent a lot of time on, has really allowed us to still get the kind of growth that we expect.
John Kao: through some of the programs and products that will still be able to be sold during SCP.
John Kao: And we just feel good about that. I think, fundamentally, at a kind of consumer perspective,
John Kao: People don't necessarily want to be forced into a Medicaid network or a set of Medicaid products. They like our service levels, they like our
They like our service levels. They like our... benefit designs, and they like our network. So, they like the clinical model of care.
John Kao: Benefit Designs, and they like our networks, and they like the clinical model of care.
And so I think those things thus far have really superseded any kind of aligned network in some of the counties that we'll see, but thus far, we've been able to manage it pretty effectively. Great, thank you. And then I was just hoping that you could comment on utilization over the course of the second quarter. Did you see any kind of end-of-quarter surge in volumes in any particular setting? And then I wanted to just verify that you all said that you were increasing supplemental benefits in 2025. Is that accurate? Hey Jess and Tom, I'm sure I can take those two.
John Kao: And so I think those things thus far have really, um,
John Kao: superseded any kind of aligned network in some of the counties that we're in.
John Kao: And so we'll see, but thus far, we've been able to manage it pretty effectively.
Speaker Change: Great, thank you. And then I was just hoping that you could comment on utilization over the course of the second quarter. Did you see any kind of end of quarter surge in volumes in any particular setting? And then I wanted to just verify you all said that you were increasing supplemental benefits in 2025. Is that accurate? Thanks.
So on your first question, in terms of utilization, I would say our utilization performance throughout the quarter was pretty steady. I think those who maybe saw an uptick in utilization in other situations may have been driven by things such as the two midnight rule, which, as we talked about on the last couple calls, hasn't really been an issue for us given that we were already really operating under the two midnight rule as a de facto way of adjudicating claims principally here in California.
Thomas Freeman: Hey Jess, Tom, I'm sure I can take those two. So on your first question in terms of utilization, I would say our utilization performance throughout the quarter was pretty steady. I think
Thomas Freeman: Those who maybe saw an uptick in utilization in other situations may have been driven by things such as the two midnight rule, which as we talked about on the last couple calls hasn't really been an issue for us given that we were already really operating under the two midnight rule as a de facto way of adjudicating claims.
So that has not been an issue for us, nor do we anticipate it being an issue for us kind of moving forward. On your second question about supplemental benefits, we did not speak to supplemental benefit changes or increases for 2025. Rather, what we were emphasizing is that throughout the first half of 2024, we have continued to see our supplemental benefit expenses increase relative to our initial expectations by a modest amount. And so that's a part of our overall updated guidance release today, is just contemplating that those will continue at slightly elevated levels over the back half of the year, which, to your point, we have captured in our 2025 bid outlook, but we're not really comment I got it.
Thomas Freeman: principally here in California. So that has not been an issue for us nor do we anticipate it being an issue for us kind of moving forward.
Speaker Change: On your second question on supplemental benefits, we did not speak to supplemental benefit changes or increases for 2025. Rather, what we were emphasizing is that throughout the first half of 2024, we have continued to see our supplemental benefit expenses increase relative to our initial expectations to a modest extent.
Speaker Change: And so that's a part of our overall updated guidance release today, is just contemplating that those will continue at slightly elevated levels over the back half of the year, which to your point, we have captured in our 2025 bid outlook, but we're not really commenting on the actual levels of changes in the investments and the benefits for next year.
Speaker Change: Got it, thanks.
Speaker Change: Thank you. One moment please for our next question.
Thank you. Our next question comes from the line of Jared Haase with William Blair. Yeah, hey guys, this is Jared.
Speaker Change: Our next question comes from the line of Jared Haase with William Blair.
I'm for Ryan Daniels this evening. Thanks for taking our questions. Maybe just a quick one kind of unpacking the utilization trends a little bit further. I know last quarter, the Part D MBR was kind of a big focus. So I was hoping to just get an update there in terms of how that's tracked relative to expectations, and then what's assumed for the second half of the year. Yeah, absolutely, Jared.
Jared Haase: Yeah, hey guys, this is Jared. I'm for Ryan Daniels this evening. Thanks for taking our questions. Maybe just a quick one, kind of unpacking the utilization trends a little bit further. I know last quarter the Part D MBR was kind of a big focus, so I was hoping to just get an update there in terms of how that's tracked relative to expectations and then what's assumed for the second half of the year.
So I don't think we're going to break out C versus D, kind of every quarter moving forward necessarily. And we really wanted to emphasize that on the first quarter call just to make sure folks understood the overall mechanics and C tonality of Q1 relative to the rest of the year. But more specifically to your question, our Part D performance in the second quarter did run in line with expectations and really was not a major driver of the overall MBR on a consolidated basis relative to our Part C performance.
Speaker Change: Yeah, absolutely, Jared. So I don't think we're going to break out C versus D kind of every quarter moving forward necessarily, and we really wanted to underscore that on the first quarter call just to make sure folks understood the overall mechanics and C tonality from Q1 relative to the rest of the year. But more specifically to your question, our Part D performance in the second quarter did run in line with expectations.
Speaker Change: and really was not a major driver of the overall MBR on a consolidated basis relative to our Part C performance. As we look at the back half of the year, we still anticipate that Part D will be a meaningful tailwind to MBR over the next two quarters, similar to what we talked about on the last call.
As we look at the back half of the year, we still anticipate that Part D will be a meaningful tailwind to MBR over the next two quarters, similar to what we talked about on the last call. Okay, that's great to hear. And then, John, I know you mentioned no new states again for 2025.
Speaker Change: Okay, that's great to hear. And then, John , I know you mentioned no new states again for 2025. I guess just wanted to touch base and sort of get the updated thoughts longer term around market expansion opportunities sort of beyond 2025. Obviously, I get the runway that you have to continue to grow share in your current footprint. But how do you sort of balance that when you think about especially some of the larger national plans, talking about exiting certain markets as they look to preserve margins and thinking about what opportunities that might open up for you in your geographies?
I guess just wanted to touch base and sort of get the updated thoughts longer term around market expansion opportunities sort of beyond 2025. Obviously, I understand the runway that you have to continue to grow share in your current footprint. But how do you sort of balance that when you think about, especially some of the larger national plans, talking about exiting certain markets as they look to preserve margins and thinking about what opportunities that might open up for you in your geographies? Yeah, yeah, I think the whole governor that we have is just cash on the balance sheet.
John Kao: Yeah, yeah, I think the whole
And we feel really well positioned for that. But as I've said in the past, I really want us to start expanding when a couple of things start coming together. One is just producing the cash and funding the growth from cash, and I feel in a good position to do that over the next couple of years. And at the same time, we're leveraging these investments in automation that we were just talking about.
Speaker Change: Governor that that we have is just is just cash on the balance sheet and we feel really well positioned for that.
Speaker Change: But as I've said in the past, I really want us to start expanding when a couple of things start coming together. One is just producing the cash and funding the growth from cash.
Speaker Change: And I feel in a good position to do that over the next couple of years. And at the same time, we're leveraging these investments on automation that we were just talking about.
And I think once we get these workflows and we get these systems in place, both on the administrative side, as well as the clinical side, as well as the network kind of management side, you get all these things kind of matured and packaged in best practices to go along with the cash from operations.
Speaker Change: And I think once we get these workflows and we get these systems in a way, both on the administrative side, as well as the clinical side, as well as the network kind of management side.
Speaker Change: You get all these things kind of matured and packaged in best practices to go along with the cash from operations, that's when we really want to take this model and get the kind of national footprint that we said we really desired to achieve in the IPO.
That's when we really want to take this model and get the kind of national footprint that we said we really desired to achieve in the IPO. That's still the goal, and we are simply now focusing on the most accretive way for us to grow and to get scale economies and achieve EBITDA profitability. That's the priority now.
Speaker Change: That's still the goal, is simply now focusing on the most accretive way for we to grow and to get scale economies and get to EBITDA profitability.
And then we're not quite showing everybody yet the work behind the scenes in terms of getting ready to have the degree of expansion I expect. The other thing I've said is I do think there is an emerging trend toward integrated delivery networks, these large hospital systems that are looking for innovative ways to partner, from what they're currently experiencing in Medicare Advantage. And I think you'll see that come to fruition over the next year or so. Awesome. Appreciate the appreciate all the color.
Speaker Change: That's the priority now.
Speaker Change: And then we're not quite showing everybody yet is all the work behind the scenes in terms of getting ready to have.
Speaker Change: The degree of expansion I expect.
Speaker Change: The other thing I've said is I do think there is an emerging trend toward integrated delivery networks, these large hospital systems that
Speaker Change: are looking for innovative ways to partner from what they're currently experiencing in Medicare Advantage. And I think you'll see that come to fruition over the next year or so.
Speaker Change: Awesome, appreciate all the calling. Thanks. You got it.
Thanks. One moment, please for our next question. Our next question comes from the line of Kevin Fischbeck with Bank of America. Hey, this is actually Adam Ron.
Speaker Change: Our next question comes from the line of Kevin Fischbeck with Bank of America.
I appreciate you taking the question. So first, a quick one. When you say 20% growth, are you specifically talking about enrollment, or does that include yields? And so would yields be on top of the 20%? Yeah, I can take that one. Hey Adam.
Speaker Change: Hey, this is actually Adam Ron, but I appreciate you taking the question. So first, a quick one. When you say 20% growth, are you specifically talking about enrollment or does that include yields? And so would yields be on top of the 20%?
Yeah, I think we're contemplating that both membership and revenue, we feel like we can achieve 20% growth next year in 2025. I think we don't currently, I think it's too early to say, rather, you know, what we expect from an overall PMPM standpoint because while we do have a very positive benchmark rate update for 2025. We also have to take into account what we're doing in terms of our benefit designs as well as the new member population, product mix, et cetera.
Speaker Change: Yeah, I can take that one. Hey, Adam. Yeah, I think we're contemplating that both membership and revenue, we feel like we can achieve 20% growth next year in 2025.
Speaker Change: I think we don't currently, I think it's too early to say rather, you know, what we expect from an overall PMPM standpoint, because while we do have a very positive benchmark rate update for 2025, we also have to take into account what we're doing in terms of our benefit designs, as well as new member populations, product mix, etc. So, probably too early for us to talk about revenue PMPM change year over year into 2025.
So, probably too early for us to talk about revenue PMPM change year over year into 2025, but I think we feel good about our ability to shoot for that 20% growth in membership and revenue that John was alluding to. Okay, I appreciate that.
Speaker Change: But I think we feel good about our ability to shoot for that 20% growth on membership and revenue that John was alluding to previously.
And then on MLR, there's a lot of moving parts, just because last year, you had an eight-year reach, and then that came out. And then this year, you have a very high percentage of members who are new to Alignment, and you're saying there's a wide delta of MLR between those members and returning members. So I was wondering if you could give us any color on like what that delta is, and maybe what MLR was last year and this year for returning members and how that's different from new members, to give us a sense of how things are trending versus what you bid. Yeah, yeah, absolutely.
Speaker Change: Okay, I appreciate that. And then, on MLR, there's a lot of moving parts just because last year you had ACL Reach, and then that came out, and then this year you have a very high percentage of members who are new to alignment, and you're saying there's a wide delta of MLR on those members and returning members. So I was wondering if you can give us any color on, like, what that delta is and, like, maybe what MLR was last year.
Speaker Change: And this year on returning members and how that's different from new members to give us a sense of how, you know, things are trending versus what you bid.
So I would say overall, our new members are generally running relatively in line with expectations. So you all have seen our historical cohort performance in this past, which would suggest that members run around 89, maybe 90% MBRs for that at-risk population. And there's obviously been some variability in various years, a few points better or a few points worse than that. I say we're within that overall range right now, maybe a couple points higher than the original kind of 89 to 90% historically, but certainly within the band of expectations.
Speaker Change: Yeah, yeah, absolutely. So I would say overall our new members are generally running relatively in line with expectations.
Speaker Change: So, you all have seen our historical cohort performance in this past, which would suggest that members run around 89, maybe 90% MBRs for that at-risk population.
Speaker Change: And there's been obviously some variability in various years, a few points better or a few points worse than that. I'd say we're within that overall range right now, maybe a couple points higher than the original kind of 89 to 90% historically, but certainly within the band of expectations.
Part of that is what I was describing about the supplemental benefits, which we're seeing across our overall population, both new and loyal. From a loyal member standpoint, I would say that it is very similarly continuing to run consistent with expectations, inclusive of or taking into consideration some of the supplemental benefit and unit cost dynamics we described on the call. On that point, I want to take just a second to kind of amplify our comments on the unit cost dynamics that we're currently navigating this year.
Speaker Change: Part of that is what I was describing on the supplemental benefits, which we're seeing across our overall population, both new and loyal. From a loyal member standpoint, I would say that, yeah, very similarly is continuing to run consistent with expectations, inclusive of or taking into consideration some of the
Speaker Change: Supplemental Benefit and Unit Cost Dynamics we described on the call.
Speaker Change: On that point, I want to take just a second to kind of amplify our comments on the unit cost.
So in totality, our overall inpatient and outpatient unit costs are going up about 8% in 2024. And I would say in a normal year in years past, we typically would have seen something closer to 3%, maybe 4% on average.
Speaker Change: dynamics that we're currently navigating this year.
Speaker Change: In totality, our overall inpatient and outpatient unit costs are going up about 8% in 2024. And I would say in a normal year, in years past, we typically would have seen something closer to 3%, maybe 4% on average.
And that value to us in total is worth about a point of overall MLR. And so, in other words, our experience here today in our full-year outlook, had we had what I would say is a kind of a more normalized unit cost rate update environment, would have been a little less than almost 1% better on overall MLR. And so I think that's really a testament to the team and our ability to manage not just the growth, to your point, but also manage some of these other dynamics around our overall unit cost experience based on the CMS rate updates this year.
Speaker Change: And that value to us in total is worth about a point of overall MLR. And so in other words, our experience here today in our full year outlook, had we had what I would say is kind of a more normalized unit cost rate update environment, would have been a little less than almost 1% better on overall MLR.
Speaker Change: And so, I think that's really a testament to the team and our ability to manage not just the growth, to your point, but also manage some of these other dynamics around our overall unit cost experience based on the CMS rate updates.
So I think we're in a very good position based on the first half performance, and I think our full year achievability for both our adjusted gross profit and adjusted EBITDA would feel very good. And if I could just clarify one more thing about that, when you say unit costs are up 8%, is that because of, like, what Humana is talking about with the two midnight rule and doctors or hospitals are reclassifying what were previously outpatient admissions?
Speaker Change: this year.
Speaker Change: And if I could just clarify one more thing about that. When you say unit costs are up 8%, is that because like about what Humana is talking about with the two midnight rule and doctors or hospitals are reclassifying what were previously outpatient missions or is this just?
Or is this just, all across the board? Anytime someone goes there, it's just 8% higher. Basically, I'm asking this because you would have more visibility on the ladder. Yeah, so it's not related to Midnight Rule. As I was saying earlier, you know, that really is not an area of exposure for us, and we've not seen any unfavorable performance due to that variable. What I'm referring to was kind of a one-time change that CMS put in place heading into 2024, where they reclassified urban and rural markets, and it caused certain markets to go up and beyond what I would say is kind of a normal increase.
Speaker Change: you know.
Speaker Change: All across the board, anytime someone goes there, it's just 8% higher. Basically, I'm asking this because you would have more visibility on the ladder.
Speaker Change: Yeah, so it's not related to two midnight rule. As I was saying earlier, you know, that really is not an area of exposure for us and we've not seen any unfavorable performance due to that variable.
Speaker Change: What I'm referring to was a kind of a one-time change that CMS put in place heading to 2024 where they reclassified urban and rural markets. And it caused certain markets to go up and beyond what I would say is kind of a normal increase. And in other places across the country, rates actually came down. So on a national basis, it was somewhat of a normal, I'd say, year-over-year change. But for our specific markets...
And in other places across the country, rates actually came down. So on a national basis, it was somewhat of a normal, I'd say, year-over-year change, but for our specific markets, we saw an atypically high increase that we've been able to successfully navigate thus far. Thank you.
Speaker Change: We saw an atypically high increase that we've been able to successfully navigate thus far this year.
One moment, please for our next question. Our next question comes from the line of Scott Fidel with Steve: Hi, thanks. Good evening.
Speaker Change: Thank you.
Speaker Change: One moment please for our next question.
Speaker Change: Our next question comes from the line of Scott Fidel with Stevens.
My first question is if you could maybe help us in terms of trying to quantify or ring-fence the impact of the supplemental benefits on the MLR this year. Maybe, if possible, in a similar way, Thomas, that you just did the exercise and sort of laying out the impact of the inpatient and outpatient unit costs and sort of gave us, you know, what those increased year over year and the impact on the MLR at 100 basis points.
Scott Fidel: Hi, thanks. Good evening. First question was hoping if you could maybe help us in terms of trying to quantify or ring-fence the impact of the supplemental benefits on
Scott Fidel: on the MLR this year. Maybe, if possible,
Scott Fidel: In a similar way, Thomas, that you just did the exercise and sort of laying out the impact of the inpatient and outpatient unit costs and sort of gave us, you know, what those increased year over year and and the impact to the MLR at 100 basis points.
Is there any way you could sort of similarly, you know, sort of help quantify the supplemental benefits impact given that you talked about it impacting both new and existing members this year? Yeah, yeah, happy to.
Speaker Change: Is there any way you could sort of similarly, you know, sort of help quantify the supplemental benefits impact, given that you talked about it impacting both the new and existing members this year?
I think if you were to kind of look at our overall NBR implied by our prior guidance relative to our current guidance today, it went up about 50 basis points for the full year. And I would say if you think about the kind of the new member impact and the greater mix of new members that we were previously discussing, and then you look at the supplemental benefit piece, I would say it's probably somewhere in the neighborhood of maybe 10 to 30 basis points on the new members and probably 20 to 30 basis points on the supplemental benefit expense. So it really is pretty consistent with expectations.
Speaker Change: Yeah, yeah, happy to. I think if you were to kind of look at our overall MBR implied by our prior guidance relative to our current guidance today, it went up about 50 basis points for the full year.
Speaker Change: And I would say if you think about the new member impact, and the greater mix of new members that we were previously discussing, and then you look at the supplemental benefit piece, I would say it's probably somewhere in the neighborhood of maybe 10 to 30 basis points on the new members, and probably 20 to 30 basis points on a supplemental benefit expense.
Speaker Change: So, it really is overall pretty consistent with expectations, it's just very slightly higher than we initially anticipated.
It's just very slightly higher than we initially thought. Okay, thanks. And then on my follow-up question, I definitely would be interested in getting your guys' initial assessment on the premium stabilization program that CMS has proposed for Part D that they just came out with this week for the one-year demo. So, no, it's still pretty early here, but if you want to give us initial observations on, you know, what you may like, what you may be concerned about with that demo program, and you're thinking about potentially participating in that,
Speaker Change: Okay, thanks. And then on my follow-up question, definitely would be interested in getting your guys' initial assessment on the premium stabilization program that
Speaker Change: CMS has proposed.
Speaker Change #100: for part D that they just came out with this week for the one-year demo. No, it's still pretty early here, but if you want to give us initial observations on what you may like, what you may be concerned about with that demo program and you're thinking on potentially participating in that. Thanks.
Yeah, I think it's something we're evaluating, but probably too early for us to provide too much of a definitive view on one way or another. I think, big picture, obviously, there are a lot of changes coming down the pipeline for Part D in 2025 under the Inflation Reduction Act. And I think overall, we feel very well positioned, both from a kind of overall bid and benefit standpoint, but also in terms of our ability to continue to navigate those through our clinical teams employed internally, as well as the partnership through our PBM.
Speaker Change #101: Yeah, I think it's something we're evaluating, but probably too early for us to provide too much of a definitive view on one way or another. I think big picture, obviously, there's a lot of changes coming down the pipeline for Part D in 2025 under the Inflation Reduction Act.
Speaker Change #101: And I think overall we feel very well positioned.
Speaker Change #101: Both from a kind of an overall bid and benefit standpoint, but also in terms of our ability to continue to navigate those through our clinical teams employed internally, as well as the partnership through our PBM. So, we actually feel like there's probably more opportunity than risk on the Part D changes heading into 2025, and we'll continue to evaluate the program you were just describing as part of that.
So, we actually feel like there's probably more opportunity than risk in the Part D changes heading into 2025, and we'll continue to evaluate the program you were just describing as part of that. Okay, thank you. One moment, please, for our next question. Our next question comes from the line of Ryan Langston with TD Cal. Hey, good afternoon. Just want to know any way you can talk about it.
Speaker Change #102: Okay, thank you.
Speaker Change #103: Our next question comes from the line of Ryan Langston with TD Cowan.
Ryan Langston: Hey, good afternoon. Just wanted to know, any way you can talk about utilization trends, maybe California versus the rest of the
Realization Trends, maybe California. Enrollment Portfolio, obviously California State University. But just kind of curious if California's progressed, above-below utilization track, outside just looking for any, Yeah, happy to run. So from an inpatient admissions per 1000 standpoint, our out of California markets continue to do quite well, depends on the market, but I'd say overall, we're running pretty similar out of California, then relative to what we're running in California. And in the past couple of years, when we launched these new markets, we typically run better than California or in line with California.
Speaker Change #104: Enrollment Portfolio, obviously California State University.
Ryan Langston: I'm just kind of curious if California has progressed above, below utilization trends or outside. Just looking for any context you can give us.
Ryan Langston: there.
Speaker Change #105: Yeah, happy to, Ryan. So, from an inpatient admissions per thousand standpoint, our ex-California markets continue to do quite well. It depends on the market, but I'd say overall we're running pretty similar ex-California than or relative to what we're running in California. And I'd say over the past couple years we've launched these new markets we typically run better than California or in line with California.
And really, what that's a function of the replicability efforts that we've put in place over the last few years to ensure that as we're bringing on new care teams, we're being consistent in systematizing how we recruit for those individuals, how we train those individuals to use our tools, such as AVA, and then actually how we monitor them. So in terms of our ability to have centralized command and control to evaluate metrics and make sure we're seeing, you know, the right people at the right time and managing those metrics on the back end in terms of how our team's doing and things like readmission rates, skilled nursing length of stay, inpatient admissions per thousand, ER visits per thousand, etc.
Speaker Change #105: And really what that's a function of is the replicability efforts.
Speaker Change #105: that we've put in place over the last few years to ensure that as we're bringing on new care teams.
Speaker Change #105: We're being consistent in systematizing how we recruit for those individuals, how we train those individuals to use our tools such as AVA, and then actually how we monitor them. So in terms of our ability to have a centralized command and control to evaluate metrics and making sure we're seeing the right people at the right time, and managing those metrics on the back end in terms of how are our teams doing things like readmission rates.
So I think we've been pretty disciplined about how we've tried to build this from an operational standpoint, and we're seeing the results of that as we continue to grow the population exponentially. And then just one quick one, maybe talking about your non-California markets. I mean, you've been in some of those markets, et cetera. Now that you have a little bit more, maybe one more year of experience, intend to grow faster in those markets into 25, maybe more than you would have grown in 2024. Yeah, hey, it's John.
Speaker Change #105: skilled nursing length of stay, inpatient admissions per thousand, ER visits per K, etc. So I think we've been pretty disciplined about how we've tried to build this from an operational standpoint and we're seeing the results of that as we continue to grow the population next California.
Speaker Change #106: Great, and then just one quick one maybe. Talking about your non-California markets, I mean you've been in some of those markets now for a couple of years.
Speaker Change #107: North Carolina, etc. Now that you have a little bit more, maybe one more year of experience, do you intend to grow faster in those markets into 25 maybe than you would have grown into 2024? Thanks.
Yeah, foundationally, we want and made the decision that we need to get quality established and replicability of the care model established. And so we've been able to do that in North Carolina. We've been able to do that in Nevada. We're still working on Arizona in terms of the stars, but the clinical outcomes are very, very good.
John Kao: Yeah, hey, it's John .
Speaker Change #108: Foundationally, we want and made the decision that we need to get
Speaker Change #109: Quality established and replicability of the care model established.
Speaker Change #109: and so we've been able to do that in North Carolina. We've been able to do that in Nevada. We're still working on
Speaker Change #109: Arizona in terms of the stars, but the clinical outcomes are very, very good.
And so we've made the specific decision to emphasize growth from California, just because I think it's been the most accretive of the lowest acquisition. We have just such good provider partners and such good broker partners. It just made sense for us to really double down on that.
Speaker Change #109: And so we've made the specific decision to emphasize growth from California.
Speaker Change #109: Just because I think it's been the most accretive and the lowest acquisition cost. We have just such good provider partners and such good broker partners it just made sense for us to really double down on that. And I think we'll continue to do that.
And I think we'll continue to do that. And so, heading into 2025, I think because there's still so much emphasis that we have to and conviction that we're going to focus on is, toward profitability. We'll see.
Speaker Change #109: I think because there's still so much emphasis that we have to and conviction that we're going to focus on is toward profitability, we'll see. I think you'll see us
I think you'll see us... be much more aggressive in 26. I think we're going to get growth in 25 in these ex-California markets. But I think you're going to get a lot of growth in 26, just because of the investments that we're going to be making, again, from the fact that we're going to be, you know, I think, very, very well positioned for profitability. And so it starts with that, and then we're going to make investments in our existing non-California markets.
Speaker Change #109: be much more aggressive in 26.
Speaker Change #109: I think we're going to get growth in 25 in these ex-California markets.
Speaker Change #109: But I think you're going to get a lot of growth in 26, just because of the investments that we're going to be making, again, from the fact that we're going to be, I think, very, very well positioned on profitability.
Speaker Change #109: And so it starts with that, and then we're going to make investments in our existing ex-California markets.
Speaker Change #109: And then I think we're going to take both of those,
Speaker Change #109: Call it Factors and think about 26 new market expansions.
Speaker Change #109: That's kind of how we're thinking about prioritization.
Speaker Change #110: Great, thank you. You got it.
And then I think we're going to take both of those, call it Factors, and think about 26 new market experiences. That's kind of how we're thinking about priorities. Great, thank you. You got it. A moment, please for our next question comes from the line of Andrew Mock with Barclays. Hi, good evening.
Speaker Change #111: Our next question comes from the line of Andrew Mock with Barclays.
Now that the 2025 bids are behind us, we need to share a bit more on the potential for margin expansion next year. What do you think is a reasonable level of expansion and what do you think the bigger drivers will be between MLR and SG&S? So I think we'll probably withhold too much detailed commentary on 2025 benefits, just given that reallocations are kind of currently underway as the direct subsidy information has come through from CMS.
Andrew Mock: Hi, good evening. Now that 2025 bids are behind us, I'm hoping you could share a bit more on the potential for margin expansion next year. What do you think is a reasonable level of expansion, and what do you think the bigger drivers will be between MLR and SG&A? Thanks.
Speaker Change #113: So, I think we'll probably withhold too much detailed commentary on 2025 benefits, just given that reallocations are kind of currently underway as the direct subsidy information has come through from CMS, but I think to your kind of more broad question around the MBR versus SG&A opportunity for 2025,
But I think to your kind of more broad question around the MBR versus SG&A opportunity for 2025, you know, I think both are opportunities. And what I mean by that is, from an MBR standpoint, as John was describing, we were, I think, you know, continuing to be disciplined and margin-oriented in the bid process to drive MBR performance improvement into 2025. I think the extent of which you see it will, in part, relate to the growth we did, but I think, almost irrespective of the level of growth, we see an opportunity to improve MBR next year based on how we came together in the bid process.
Speaker Change #113: You know, I think both are an opportunity, and what I mean by that is, from an NBR standpoint, as John was describing,
John Kao: We were, I think, you know, continuing to be disciplined and margin-oriented in the bid process.
John Kao: to drive MBR performance improvement into 2025. I think the extent of which you see it will in part relate to the growth we did, but I think almost irrespective of the level of growth, we see an opportunity to improve MBR next year based on how we came together in the bid process.
On the SG&A side of things that John was describing, while we've done a great job this year on driving, you know, close to 300 basis points of SG&A as a percentage of revenue improvement in 2024, we're still going to be north of 11% in total SG&A as a percentage of revenue this year, and as we've talked about in the past, our goal remains to get to 10% or even below that, possibly the high single, So I think as we continue to grow next year, we do continue to anticipate further economies of scale and SGA leverage improvement in 2025 as well. Great.
John Kao: On the SG&A side of things that John was describing, while we've done a great job this year on driving, you know, close to 300 basis points of SG&A as a percentage of revenue improvement in 2024,
Speaker Change #114: We're still going to be north of 11% in total SGA as a percentage of revenue this year. And as we've talked about in the past, our goal remains to get to 10% or even below that, possibly the high single digits.
Speaker Change #115: So, I think as we continue to grow next year, we do continue to anticipate further economies of scale and SG&A leverage improve it in 2025 as well.
And if I could just follow up here, I'm hoping you could elaborate on some of the MLR seasonality that you're expecting this year. It looks like you're expecting MLR to improve sequentially in both 3Q and 4Q. But it wasn't clear to me why 4Q MLR would improve.
Speaker Change #116: Great, and if I could just follow up here, I'm hoping you could elaborate on some of the MLR seasonality that you're expecting this year. It looks like you're expecting MLR to improve sequentially in both 3Q and 4Q. It wasn't clear to me why 4Q MLR would improve. I think that's a bit different than historical trends. So can you walk us through that progression and maybe quantify the impact of the calendar, if meaningful? Thank you.
I think that's a bit different than historical trends. So can you walk us through that progression and maybe quantify the impact of the calendar, if it's meaningful? Thank you. Yeah, happy to.
So I think in terms of the 3rd and 4th quarter dynamics and kind of in part thinking about that year over year, what I would say is that last year, the seasonality was a little bit distorted in that the 3rd quarter had a couple of kind of one-time or atypically favorable prior period items that helped drive down MLR in the 3rd quarter of last year. So I would say, kind of 3rd quarter and 4th quarter dynamics aside, it's probably more appropriate to think about our full year guidance or even our second half guidance.
Speaker Change #117: Yeah, yeah, happy to.
Speaker Change #118: I think in terms of the third and fourth quarter dynamics and kind of in part thinking about that year over year, what I would say is that last year the seasonality was a little bit distorted in that the third quarter had a couple of kind of one-time or atypically favorable prior period items that helped drive down MLR in the third quarter of last year. On the other side, the fourth quarter was a bit opposite in that we had a couple of atypically unfavorable items.
Speaker Change #118: that occurred in the fourth quarter last year, in particular, the inpatient unit costs I was describing actually went into effect October 1st of 2023. So I would say kind of third quarter, third quarter, fourth quarter dynamics aside, it's probably more appropriate to think about our full year guidance or even our second half guidance.
And in terms of that outlook, I think we feel really good about where we stand. As we talked about, I think our latest guidance reflects both the kind of incremental membership we have now added and the MBR implications of that incremental growth, as well as that kind of modest impact of the supplemental benefit increase. On the other side, I think we feel good about the opportunities for further improvement on Care Anywhere.
Speaker Change #118: And in terms of that outlook, I think we feel really good about where we stand. As we talked about, I think our latest guidance reflects both kind of the incremental membership we have now added and the MDR implications of that incremental growth, as well as that kind of modest impact of the supplemental benefit increase.
And then beyond that, some of the things we talked about last quarter, including payment integrity, and some of the non-inpatient initiatives that we're talking about today. So I think kind of where we land in terms of the overall range for both gross profit and adjusted EBITDA will be somewhat dependent upon the timing of those initiatives. But, big picture, I think we feel confident in our full year outlook and our ability to continue to offset that modest NBR pressure with further economic scaling.
Speaker Change #118: On the other side, I think we feel good about the opportunities for further improvement on Care Anywhere. And then beyond that, some of the things we talked about last quarter, including payment integrity, and some of the non-inpatient initiatives that we're talking about today.
Speaker Change #118: So I think kind of where we land in terms of the overall range on both Droz Prop and Jessica Diva Da will be somewhat dependent upon the timing of those initiatives. But big picture, I think we feel confident in our full year outlook and in our ability to continue to offset that modest MBR pressure with the further economy to scale on SG&A.
Speaker Change #119: Great, thanks for all the color.
Great, thanks for all the color. Ladies and gentlemen, this does conclude today's program, and you may now disconnect.
Speaker Change #120: Ladies and gentlemen, thank you for participating. This does conclude today's program and you may now disconnect.