I think that's a good start. So, Thomas, thanks for getting up bright and early this morning. MBR, Medical Loss Ratio, whatever your acronym is, that's obviously the topic du jour. Alignment's guidance, on the surface is a bit more aggressive than its peers in the face of a hot trend. And so that's going to be what we mostly talk about today. So just to jump right in, you know, you guys helpfully spelled out the ACO REACH, but we're reading that the right comparison of 2023 to 2024 is about a 20 basis point increase. So just want to make sure that's kind of the start-out level set, that's the right comparison.
Yeah, thanks, Joe. Appreciate you having me this morning. So I think that's a great place to start, just to make sure that all of the investment community is on the same page with regard to the year-over-year comparison. So, we did provide a supplemental disclosure on our investor relations web page last week that broke out our ACO REACH book of business from our consolidated book of business. And we had talked about this off and on over the last couple of years, particularly in quarters where we felt like the ACO REACH MBR performance had deteriorated, and it was kind of masking the strength of the non-ACO REACH book of business, i.e., our core MA book of business. So we went ahead and provided that quarter, excuse me, disclosure on a quarterly basis, for 2023.
If you kind of look at that performance last year, 87.6% would be the appropriate apples-to-apples MBR comparison as we look out to 2024. We can talk about ACO REACH and why that's the right way to look at it year-over-year, due to the accounting change happening within that book of business. In terms of the 2024 guide, you know, we don't technically guide on MBR, but I know everybody's looking at our revenue and our adjusted gross profit guidance to kind of back into what that would imply in terms of the MBR. Just to kind of lean into that directly and make sure we're all looking at the same numbers, if you look at our overall adjusted gross profit and adjusted revenue ranges, the implied MBR range is 88.4%-87.1%, with a midpoint of about 87.8%.
On an apples-to-apples basis, the 87.6 from 2023 to your earlier comment is stepping up 20 basis points year-over-year at the midpoint.
Great. So, you know, there are a couple of ways to do the math to get to bridge. One way we've heard from clients is, you know, looking at the first quarter to the full year, you know, it looks like there's about a 300-ish basis point step down in that comparison. Or just the other way to look at it is, you know, obviously the year-over-year. And either way, you get to a pretty heavy seasonality component, but even more of a seasonality implied this year than last year. So just kind of talk about the bridge either, and preferably kind of both, either first quarter to full year or year-over-year.
Yeah, yeah, absolutely. Maybe I'll start with year-over-year, I think, just to kind of set the stage for how we look at things big picture, and then maybe we'll talk a little bit about Q1 versus full year. And I think for that latter conversation, we should talk about both MBR and SG&A as the latter point is, I think, more relevant this year than past years. So starting with sort of just the year-over-year comparison, I think a couple of things are worth knowing, so worth noting. So I think from our perspective, I think we feel like our guidance isn't heroic by any means.
I think the common theme that we've heard from investors is, well, how is it that company X could see these challenges, whether it's utilization or V28, and have MBR going up year-over-year, whereas you all are expecting your MBR to only go up 20 basis points at the midpoint, while having delivered exceptional growth relative to many of your peers? I think a couple of things are kind of relevant. The first is, I would actually just comment on 2023, which I know is not the direct question, Joe, but I think it's still relevant. You know, we delivered an 87.6% MBR last year on the back of 21% membership growth.
And I don't think there's very many plans out there that have managed an MBR at that level while not only having grown membership 21% last year, but having compounded 20% each year over the last three years since going public. And so I think our ability to identify the new members we need to manage, engage them in our clinical programs is a real differentiator from a strategic standpoint, but certainly from a financial standpoint as well. And so when you think about that 2024 year-over-year comparison, I think there's a couple of things from a more quantitative standpoint that I think are important context. So the first is, the bids. So one of the questions we've gotten is, you know, you delivered this exceptional growth for January 1st. You're expecting 37% membership growth at the end of 2024.
Did you increase your benefits significantly, which would obviously impact the year-over-year MBR comparison? Our answer to that is, no, that was not the case. We actually modestly increased our benefits year-over-year. They were closer to flat than not. And just to clarify that point, we had shared at a prior analyst conference that we increased the benefit value to the consumer about 70 basis points. Just as a point of clarification, that is referring to the actual value to the consumer, not to the impact on our total MBR. That 70 basis point impact to the consumer reflects roughly like a 10 to maybe 15 basis point, 10-15 basis point impact to our consolidated MBR year-over-year. So not a significant driver for us.
I think our growth is more of a function of the relative value we're offering, versus our competitors that were flat to, in many cases, down because of challenges with STARS and V28, particularly in California. I think the second thing worth noting is as we are mitigating our downside risk in ACO REACH, that's going to help with the overall consolidated performance. I know that's not going to impact the MA versus other year-over-year, but that will add $2 million of gross profit in 2024 versus a $3 million-dollar loss in 2023 as we think about the overall EBITDA comparison year-over-year. And then more specifically to the kind of utilization and RAF dynamics as we think about our loyal and our new population. So obviously, everyone's been very concerned about different aspects of utilizations since summer of 2023.
You know, this is an area where I think we really have differentiated ourselves through the fourth quarter where we have not seen the spike that many others have seen. And so when we think about forecasting our business for 2024, we're looking at the loyal or returning membership, so those members we've had with us for, at least a year, versus our brand new membership. And for that loyal cohort, we have a high degree of visibility on the revenue for those members. And I think we did a very good job, probably relative to our peers, is a guess, on navigating the first-year impact of V28 for 2024. And we have not seen the outpatient or inpatient utilization spikes that many of our peers have seen.
So as a result, I think that loyal cohort is going to be improving into 2024, not flat or up like many of our peers are seeing on their books of business. That obviously then leaves the new member population. And our early data points there so far are positive in the sense that they are in line with expectations. Our revenue PM/PM for the month of January was consistent with what we bid. And our utilization for the first now 60 days into the year has also been in line with expectations relative to what we would normally assume based on the member mix of sales by product and by provider relationship. So I think our overall view is that the loyal members will continue to improve year-over-year.
That will be offset by the new members coming on, at a higher than average pace in 2023. But we think big picture, our overall guidance reflects that potential variability associated with the new members. One line I would note is on the new membership and overall, as a reminder, a little over a third of our business is globally capitated. And while strategically, we think it's really important that we continue to drive down that percentage each year over the next several years because it will allow us to accelerate our long-term MBR margin target objectives. In the short term for 2024, it does help mitigate some of the growth dynamics that I think investors are concerned about because we don't have any MBR exposure really on those new members. For that are what we capitated.
So, you know, we had CVS at our conference this week, and this isn't new information, but it was just kind of underscored that, you know, they said, and you can go to the webcast, and I think I'm right here, but, you know, CFO of CVS said, "Look, when we talk about a quarter, and let's say it's April 20th on the March quarter, we really only have one month of real clean visibility into our cost." So when Alignment reports a quarter, could you do the compare-contrast of how your claims lag is either better than equal to or worse than, say, you know, big CVS says it's basically it takes three months or three or four months to really get full visibility?
I think, for us, that might be true of some categories of spend, but I think we probably have better, and kind of earlier identification of how we track some of our clinical KPIs that we then use for our reserving purposes, it sounds like. So, starting with the inpatient setting, which again is 50% of our overall institutional costs, it's the largest swing factor for us from month to month, both in terms of the volume of hospitalizations and the actual average cost per case. Obviously, just a few very high-cost or catastrophic case outliers can have a pretty meaningful impact on an overall population. So this is something we track daily.
And when I sit with our actuarial team to close the month every, every single month, we are basing our reserve estimates based on the overall inpatient utilization, based on the mix of, inpatient utilization by facility, so understanding our different hospital contracts across our six states, and looking at specific reserves set up for any high-cost case that we think will be over $100,000. We don't have as many of those as I think a lot of our competitors do because of the clinical model, but they do happen sometimes. And we want to make sure that we don't get surprised on those three or four months down the line, to your point, Jonah, when we actually end up in the claim. From a non-inpatient standpoint, we look at a few other,
So that's okay. If I could just hit pause there for a minute. Just to kind of be Captain Obvious, you're sitting here, you know, second week of March, and you would have pretty clear line of sight into not only your January, but your February inpatient trends, which represent about 50% of your spend. Just to kind of make sure we're level setting that, comment to make sure I'm not missing something.
Yeah, that's, that is correct. 50% of the institutional cost, just to clarify, not necessarily 50% of the overall.
Right. No.
spend. 50% of the institutional cost. Yeah, that's correct.
Okay.
We obviously do retrospective reviews all the time as to how our auth-based inpatient tracking data compares to what we ultimately end up paying in terms of paid claims. It's 99+% complete and accurate. It's a very reliable indicator for us to understand how we're tracking, you know, not every month, but even every day.
Mm-hmm. Okay. So you're about to talk about the non-hospital cost, so please go ahead.
Yeah. Then for the non-hospital cost, we have some other auth data points that I think help us, again, relative to others. We do have some auth tracking that we use on things like skilled nursing facility, both the utilization rate of people in our SNFs, but also the SNF length of stay because many of those contracts are on a per diem basis. We also look at our outpatient auth data. While that's not always as good of an indicator on the unit cost for that specific event, it's pretty reliable in terms of our volume of outpatient spend. So take you back to the second quarter of 2023 when most folks were asking about concerns around spike in surgery cases, I think we were able to comfortably say at that time that that's not what we were seeing.
Then over the following months, heading into the third quarter, even into the fourth quarter, our paid claims data supported our initial observations we had in the second quarter based on our auth data. And then we do a variety of sort of regressions to look at how inpatient spend impacts other categories of spend because 90% of our inpatient utilization comes through the. And so if you're tracking that KPI, you have a good sense of how is trending. Similar on SNF, a third of our cases get delivered to skilled nursing facilities. So I, I think we have a pretty good line of sight, and it's supported by the fact that overall, we've not had unfavorable IBNR statements, any of the years since we've, since we've gone public or any of the years prior to going public that I've been CFO.
Great. So, let's kind of talk about maybe my least favorite topic because it's just, it's just weird. But yeah, this FlexCard usage, you know, you guys did have a rare miss in 4Q on kind of late in the quarter. I think your FlexCard usage went up. Your vendor, you changed a vendor. But just maybe if we could talk about that in isolation, how does the, I mean, I assume you're going to have a pretty easy fourth quarter 2024 comp on your FlexCard use because you had some catch-up. But just isolating, is FlexCard something that's going to be a drag, as your utilization trends higher in 2024 versus what you had in 2023 after you changed vendors?
Well, let me speak to the fourth quarter comment, and then I'll come back to your thing. So just to be, or maybe clarify, you know, when we were at another analyst conference early January, we put out an 8-K and shared that we'd be at the low end of our adjusted EBITDA guidance range based on kind of all this visibility that you and I were just talking about a second ago. Flash forward a couple weeks later, we came to realize based on a restated claims file from CMS on that ACO REACH book of business that our performance there was going to be about $2 million worse than we previously had anticipated. And obviously, it's very, very different than our MA book of business where we have that real-time visibility we were just talking about.
So that was frustrating, and that took us from kind of -$33 million to -$35 million, just outside, by about $1 million, the low end of our Adjusted EBITDA guidance that we had put out. So that was really the driver of the change relative to the prior 8-K communication. And then to your question on supplemental benefit utilization, we did start to see that pickup in the fourth quarter on the back of that vendor change. And that's been a very successful implementation for us. I think the consumer experience associated has been excellent. And I think it was part of that 2% improvement in our January 1st AEP disenrollment year-over-year. But to your point, on the cost side, we did start to see the utilization increase in the fourth quarter, and that has persisted into Q1.
I think when we think about the overall year, what we would anticipate is that it will be higher in terms of the overall spend PM/PM on our FlexCard relative to 2023. I think Q1 and a little bit of Q2 will have probably the most pronounced year-over-year impact associated with that. But our full-year guidance does reflect that visibility because we started seeing it starting in the third quarter of 2023 during that implementation.
Okay. So just to go back to an earlier question, you know, you're looking at the market's focus, I'm not asking you to talk about UnitedHealthcare, but UnitedHealthcare, for example, has about 110 basis points of MLR year-over-year in the first quarter versus 80 for the year, whereas yours is 300 basis points-ish versus the full year. And I know you've talked about the harvest and I've talked about the extra day in the first quarter. That's been a little bit of a subject of discussion. But just what's, maybe kind of just walk us through 1Q versus the full year and some of the seasonality considerations.
Yeah. Yeah, absolutely. So, maybe on the MBR first, to your point, the extra leap year is worth about 100 basis points. And that kind of simple math is if you take our full quarter of revenue and medical expense and kind of look at it on a per-day basis, we're essentially getting one extra day of medical expense with no extra days of revenue. And so that translates to about a 1% MBR headwind, year-over-year versus a non-leap year first quarter. I think beyond that, you know, I'll kind of pause there. If you kind of look at our Q1 of 2023, non-ACO REACH performance was about 89.5%. I think our midpoint of our guide for Q1 of 2024 is around 90.8%. And so I think that 1% is largely reflected in that step up in Q1 MBR guide for 2024.
In terms of the other kind of dynamics there, I think, relative to many other companies that have much more diversified books of business, I think some of the aspects of seasonality for us are more meaningful than a, either a health insurance organization that has broader, you know, commercial or Medicaid coverage or certainly a, a broader, health service or health services organization that has a non-insurance line of business. And so, on the Part D program, you see this most meaningfully with someone like maybe Humana, who historically has had most of its revenue concentrated in the MA program. You would have a over 100% MBR on Part D in Q1. And that improves sequentially into Q2, Q3, and Q4, where it's, actually quite favorable in Q4 based on how the program is designed.
And so that is something that I think is more significant in terms of the quarter-to-quarter seasonality for us as an MA-only company. I think beyond that, you know, we talked a little bit about how, you know, we do tend to see higher utilization in the inpatient setting in December, kind of January, and sometimes March, I would say, are the three months that typically stand out as high months, which is why Q1 tends to have a bit higher MBR than the full year. And as we've talked about before, you know, the second quarter is when we get the midyear sweep revenue true-ups on those new members. And we essentially assume in our guidance for the full year that whatever we got paid in January on the new members is what we will be paid for the full year.
So we'll see how the second quarter plays out. But I would say there's definitely a possibility that there could be improvement on that depending upon how that sweep comes in, in 2Q.
Just to talk about the Midyear Sweep for a minute, I want to nail this point down. We've had a little bit of back and forth. Is this new members these are 2024 new members, or are these 2023 new members? These are 2024 new members that you get the Midyear Sweep?
Right.
Okay. So that's a pretty good chunk of your members. So even, I mean, again, just trying to underscore, captain obvious points, you know, even a modest payment on those new members is meaningful because you've added so many new members this year. Just to kind of get that point.
Yeah. That's right. And you know, there's obviously, while the percentage may be a bit higher this year, we have all of our historical years of data to understand how this typically plays out. And the reason that we don't assume getting more than what we were initially paid in January, even though it does happen sometimes, is because it doesn't happen every time. And these new members' payments for 2024 are based on the 2023 dates of service activity. So dependent upon what the member's prior health plan did will dictate what we see in our Midyear Sweep this year. So it's out of our control, and it's a reason why we don't want to rely on it as part of our overall 2024 outlook. But you know, we'll see what happens.
Typically, it's in the end of June when we get visibility on that data point.
So if 0 is the bottom end, what's been in your unfair question because I didn't put this in the Q, but just kind of walking around number, what's the high end that you have gotten versus let's say you get 0, but what would be considered a good year just in terms of a percent, percent payment on those new members?
You know, you might get an extra 1%, you know, maybe 2%, something like that.
Okay. All right.
Hey, Jonah, I wanted to speak to the SG&A seasonality real quick. I know that.
Sure.
The MBR is top of mind for folks, but I think it's related to the overall Adjusted EBITDA guidance for the Q1 and the full year. So, what typically happens in our business, right, is we have less SG&A as a percentage of revenue in Q1 and Q2, and then it ramps more significantly into 3Q and 4Q. And that's a function of us ramping employees over the course of the year to support the growth that we are delivering. And it's also obviously related to the timing of the sales and marketing spend as well as any year zero investments. Year zero meaning for 2024, if we were investing in a brand new state for 2025, you would start to incur that spend in 2024 predominantly in the back half of the year.
As we think about the 2024 outlook, what I would say is, in terms of the ramping up of FTEs, as opposed to that happening a bit later in the year, we actually started doing that more in the fourth quarter. We talked about this in the past, but we started seeing the significant ramp-up and growth for January 1st AEP membership. We started hiring a lot more quickly than we usually would to make sure we could service that growth. As a result, I think we have just less of an overall kind of vacancy factor happening in January than we would have in a normal year where we're waiting a little bit later to start really ramping that hiring.
The second thing is, I think, in terms of the overall back half step up in SG&A as a percentage of revenue relative to first half, it'll be a little bit more muted this year, both because as our overall book of business grows, any year zero expenses we have become pretty modest as a percentage of revenue. And I think we're also starting to achieve some economies of scale on our sales and marketing, particularly in some of those newer markets that are a bit smaller in the past. And so as a result, I would expect less SG&A as a percentage of revenue step up from first half to second half, compared to years past. So, something for investors to keep in mind over the course of the year.
So, you've got, in your Adjusted EBITDA, a pretty decent range. What are a couple of the key assumptions in the low end of the range versus the high end of the range?
Yeah. I think for us, going back to earlier conversation on the kind of new membership versus the returning members where we have that visibility, I think our returning members is obviously where we have the strongest line of sight. And I feel like our success in managing some of the broader utilization noise that we've heard across the industry gives us confidence that that's an area that we should do a pretty good job of in 2024. We're not expecting significant utilization improvement year-over-year, but we are expecting it to hold flat year-over-year relative to what we achieved in 2023. And then that will obviously and just to be clear, I talked about the utilization volume metric.
We obviously will have some cost inflation year over year just based on the fact that our unit costs go up every year with our, you know, DRG contracts for the hospital setting as an example. But.
Right.
That utilization comment is underpinned by the fact that we ran, you know, 156 inpatient admissions per thousand in 2023. That was better than what we ran in 2022, around 158 or 159. And we've run between 155 and 160 now for at least three years, 155-165 for about seven years. So I think this is something that we have a lot of control over that's afforded to us by the fact that we are managing the care directly for the most high-risk and acute population that drives a disproportionate large percentage of the overall spend. I think from a new member standpoint, I think that's where the variability is, obviously, most possible.
That being said, I think we do a good job, like I've mentioned earlier, of identifying who those people are quickly, trying to get them engaged in our clinical programs over the first 30, 60, 90 days. That's why we wanted to ramp up some of that staff earlier in kind of late Q4 of 2023 and Q1 of 2024 than we have in years past. I think that new member population is what we're really focused on right now. As I mentioned earlier, the revenue payment for January on those was in line with expectations, and the utilization has been so far for the first 60 days also. That's where I think we're going to be laser-focused as we continue to grow the book of business this year.
So, I know some folks have talked to Humana about this physician fee schedule. You know, the cut was cut in half, if you will, and they've kind of broken that out as a bad guy. So maybe talk about what was contemplated in your guidance and if that's something that moves the needle.
Yeah. It's kind of a non-issue for us. We had contemplated that 3% would go up. And the reality for us is a lot of that primary care and some of that specialist spend too is capitated, which we do as part of our overall clinical alignment where we don't want the PCP to feel like we're ever stealing fee-for-service visit volume from them when one of our Care Anywhere nurses sees a member at their home or virtually. So, with those contract dynamics in mind, it's not something that we're concerned about for 2024.
Okay. And then, I know United made some news last night about, you know, the Change Healthcare switch being turned back on. Has that been bigger than a breadbox for you?
Yeah. You know, we don't use Change ourselves, but like many others, it's an interconnected system. And so we have seen some impact over the last couple of weeks. I would say we feel okay about how that will impact our short-term reserves just because, as you were saying earlier, a lot of our kind of reliability of our Q1 estimates comes from, you know, our auth-based data and some of our clinical tracking metrics as opposed to how much claims do we pay in the month of, you know, January, February, March for January, February, March dates of service. So I don't think it's something we're too concerned about from a reserve perspective today.
I think we're working directly with a lot of our provider partners to make sure that we kind of have the workarounds in place to not have a significant impact to our overall claims inventory levels.
Okay. All right. Well, let's look at. I don't see any Q&A. So let's just kind of pause here to see if any Thomas has got to turn into a pumpkin in a couple of minutes. But, you know, I've asked a couple of questions from you via email, but, we'll wait just a minute for Q&A. But otherwise, I think we can call it a wrap.
Yeah. I appreciate it, Jonah. You go ahead.
Yeah. So, I think we covered this, but I'll read the question. What is the assumption on the percent utilization of? We didn't cover percent, but, I think United has talked about 70% utilization of these Flex, Flex cards or Flex cards. What's your assumption in your guide?
Yeah. It, it depends on the product. So we have some products that are well north of that, I would say, particularly like our, our products designed for the dual eligible population. They have pretty high utilization on many of those benefits, as you would imagine. I would say on the other end of the spectrum, we have some products that tend to attract a more affluent population, and they're less interested in some of those benefits, and they're more interested in, you know, Part D, you know, formulary covers, that kind of thing. So overall, I'd say, we're probably not that dissimilar, but it does vary based on the product.
Right. Okay. And I just want to close back to what you said earlier. So your hospital utilization is between 155 and 160. You've closed the books on, you know, you got visibility through at least February. And so you're not seeing any change in that trend. As you sit here today, you're seeing consistent hospital trends, as you sit here today?
Yeah. Year to date through February, we are in line with expectations.
Okay. And then just last one for me. I mean, I don't expect an answer, but I'm going to be an annoying pest and ask the question. I mean, at, you know, mid-fives, you know, a month from now, would it be crazy to think somebody on the team might buy some shares in the open market here? Is that something that's being contemplated?
I think of our general counsel on the phone. He's saying I'm not supposed to talk about any of those things. What I will say, Jonah, just bigger picture is I know there's a lot of noise in the environment right now. And frankly, I think it's warranted. Like, we are going through a shift across the industry where I don't think, I know our experience of utilization has differed relative to others over the last 12 months. I think some of the utilization noise itself is more broad than just utilization. I think V28 is definitely impacting the industry. And we're going through a price adjustment where, particularly around STARS, things are getting tougher for reimbursement in the future.
And our perspective on all of it is it's going to allow the companies who are most designed and, kind of have built their capabilities to deliver high quality and low cost to thrive over the next several years. And, you know, kind of Q1, full-year MBR dynamics aside, I think our positioning over the next couple of years is, you know, unique, if not unrivaled. And I say that because we feel like our, our STARS advantages and our, kind of primary markets in California are massive heading into 2025. And I think while we are impacted by V28 just like everybody else, our overall impact, I think, is less than many of our competitors, again, particularly in California, who rely on globally capitated systems that tend to have slightly higher than average risk adjustment scores.
Our perspective is we're in this really unique window right now where, given the growth we've generated in 2024, I think we can deliver both growth and margin expansion looking out to 2025 where we don't have to chase crazy benefits to still target that 20% or greater growth objective. We'll be able to reap the benefits of that 2024 growth as they mature one more year down the cohort curve into 2025 to help with the overall MBR improvement of goals as well as the SG&A operating leverage goals, which, maybe I'll end on that. You know, we are delivering about 200 basis points or expect to deliver 200 basis points of SG&A, as a percentage of that, kind of non-ACO REACH revenue, year-over-year in 2024.
I think given the growth outlook for 2025, we'll see more favorable development there in 2025 as well.
Great. All right, sir. We'll let you go. Thanks so much for joining. Everybody, have a great day.
Appreciate it. Thanks, everybody.
All right. Bye.