Great. Well, welcome everyone. My name is Michael Ha, the Managed Care and Healthcare Facilities Analyst at Baird. Our next session is with Alignment Healthcare, technology-enabled managed care company focused on the Medicare Advantage business, and I'm very, very pleased to have with us today Chief Executive Officer John Kao, Chief Financial Officer Thomas Freeman. So thank you both for being here, and, with that said, would you like to make any comments or jump right into Q&A?
We can do whatever you like. We can just start diving into the Q&A.
All right, great. All right, so maybe an easy one to start: utilization. Year-to-date, it's been in line with your expectations. I was wondering if there's any update there. How's it continuing to track?
Yeah, so similar to our comments on the last earnings call in early August, we feel really good about where utilization stands overall. So over the course of July and August, I think it's kind of continued to pace within the range of expectations. And kind of from a full year standpoint, you know, we're sort of through the first half of the year. I think our MBR is up about a hundred and fifty basis points year over year, and that's while growing our membership 50% through the first half of the year. And just to sort of compare and contrast across the industry, our average MA plan competitor for the large national plans is up about two hundred basis points year over year, and has grown in the low to mid-single digits.
In some cases, some of these plans have actually shrank their membership through the first half of the year and still seen their MBR increase. So our, I'd say our overall positioning, yeah, just pulling up a slide here that I was sort of giving the verbal highlights on. I think our overall positioning is really strong at this point in terms of our ability and really what we've demonstrated in terms of our ability to manage the costs of our membership, engage them from both a clinical and really service them from a non-clinical standpoint, in spite of the membership growth we delivered so-
Just walk through that graph.
Yeah, that's a big, big picture, though, from an overall kind of gross profit and just EBITDA guidance standpoint, we feel good about where we stand for the full year. So this chart specifically, just to kind of paint a quick picture, so the Y-axis here is year-over-year membership growth for the first half of the year. The X-axis along the bottom is MBR year over year is the Y-axis, membership growth is the X-axis. So Alignment in the bottom right corner there has grown over 50% through the first half of the year, so like I said, only has seen MBR increase up about 150 basis points through the first half of the year.
As a reminder, year one members in our business typically come on with a higher MBR, and so typically what you see in our business is the faster you grow, the more difficulty you have managing the cost of the new members, and your MBR goes up. So to compare and contrast our performance, you can see on the far left of the page, Peer One, which is one of the large national plans, has shrunk their membership 15% and still seen their MBR up about 450 basis points through the first half of the year.
Peer Two, the only one of our peers who's actually improved MBR, did so by shrinking membership also, and then you can sort of see Peers Three, Four, and Five, kinda all clustered in that low to mid-single digit growth range, with MBR increasing still about 150-200 basis points. The only peer who's really grown is Peer, I believe that's Six, and they're up about 450 basis points year over year on MBR also.
So this notion of visibility and control, knowing who the population is that needs the care, identifying hot spots of utilization pressure early, and then actually having the action mechanism to do something about it, i.e., our care delivery model, is what has allowed us to produce these results for the first half of the year and I think positioned us for the full year outlook question.
That's great. Really appreciate it. I love that slide. I think it's a testament to your, your business model. So next question, it's the hot topic, Star Ratings. I know you're limited on what you can say, but now you have Cut Points, caps, you have the early preview. Any color there? Maybe a different way to ask is, Cut Points are arguably, you know, very aggressive this year, you know, to max guardrails. I'm curious, what do you think the potential impact is to the industry, to Alignment, and maybe if I can weave in part three is, I know your largest contract, one of the opportunities was around caps to get to four and a half or five stars. Any new thinking there or update there?
Yeah. Yeah, I can speak to that, Michael. I at a macro level, we think that CMS is not necessarily changing or making it harder, they wanna get it back to what the original intent and design of Medicare Advantage was supposed to be all along, which is to provide that T riple Aim, to have high-quality clinical outcomes, high-quality access and member experience, with strong benefits, at an affordable price. Really, that's what they want. And so their actions with respect to stars, and I would also say risk adjustment, is to get back to that high-value intent for MA and to eliminate any potential for any kind of financial engineering around globally capping or upcoding, or any of the bad stuff that I think have been well documented.
So at a macro level, we think all of these changes are actually good for Alignment, and I think that it's raising the bar and raising the standards for the entire sector. We just happened to build our company around managing populations, managing people, ensuring that the quality outcomes they get are very, very good, and to do it in a cost-efficient manner. And a lot of what you've heard us talk about is how we actually execute that. That's around using data to identify who the 10% of the polychronic are, and then caring for those individuals, like my mom and my dad. It's caring for them and having their experience be very good, be the advocate for the, that senior....
So having said that, I think Alignment is investing in so much member experience beginning in 2023, that that investment in increasing retention rates and improving stars is starting to pay off. And it certainly positioned us strongly for the 2025 year in our bids in 2025, and I think I feel very well positioned for 2026. And you're right, we really can't speak to any of it. We did get the plan preview one and plan preview two. That process, for those of you that don't know, is really designed for you to look at the data and to verify all the data integrity associated with some of their conclusions. And, you know, we've been going through that process. We'll all find out what everybody stars is in October, early October, but I feel very, very well positioned.
I think my general counsel here is gonna be okay with that statement. And if you think about all the headwinds to stars and V28 on the risk model, utilization that the sector's experienced, and you look at us and based on this slide, well, how are they doing it? Why are they doing it? And I would proffer to you, it is a paradigm change, where if you focus on the beneficiary and really want your entire organization to care about taking care of that individual, it's gonna pay off to good business. And so we just happen to be focused on lowering costs as opposed to living off of high RAF, 'cause we knew there's always gonna be reimbursement exposure. But if you actually have the lowest cost infrastructure while maintaining quality, you should win in the marketplace. Right?
If you buy SNPS and you have... It's higher value. So that's what we've been doing.
That's great. I, I appreciate that. One thing that I think is very underappreciated with Star Ratings is, and we talked about this a little bit before, last night, payment year 2028, the change in reward factor and, Health Equity Index, how disruptive do you think this will be to the industry? How is Alignment positioned? Do you think plans are even prepared? Because the measurement years are happening as we speak, right, 2024 and 2025.
Yeah. No, absolutely. You know, we've said beginning last year, heading into this year, 2024, we thought we would have tailwinds with Stars and V28. We think that logic also extends to 2026 payment year, 2027 payment year, and then also what you're talking about is 2028 payment year. And so what Michael's talking about is this introduction of a Health Equity Index, which CMS is phasing in with data collection in 2024 and 2025. And they're basically saying, if a certain proportion of your membership is in the low-income subsidy, the LIS population, dual population, and the disabled population, there's a certain percentage, and you're providing benefits to that type of membership, you qualify for additional reward factors. It's an introduction of a new metric that will impact Stars.
We just happen to be very, very well positioned for that looking forward. Not only do we think we qualify, but our performance on those members has been excellent. So we think that's yet another tailwind. It all is in the broader picture of serving seniors and serving beneficiaries, which is what CMS wants. They don't want financial engineering. They want actual population health models taking care of people. And I think you've got a lot of plans that they're trying to construct products and getting into D-SNP and C-SNP types of products right now, because they're trying to get the proportion of their membership up to include more of these eligible members that can help them on this health equity index. And I think it's gonna be a tougher lift for some of these other folks.
And so in that big context, you know, this concept that we always do internally, you know, doing well by doing good. Doing well by doing good, this falls into that camp. We're serving people, we're executing really well, and we're gonna get rewarded for it. All of that plays into that theme, and I think that's gonna be the future of MA for the next five to ten years: population health.
Great. Thank you. About to combine a few questions on benefits together right now, so bear with me. So broker conventions, your outlook on 2025, what you're seeing in the market, anything catching your eye? And then also, this year, 70 basis points increase in benefit richness, 50% plus membership growth. And I know a lot of membership growth depends on what happens competitively with benefits, and next year is set to be even more volatile, plans reducing to maximum TBC threshold. So I wanted to ask about your margin strategy and your bids as well. If we were to just look at benefits in a vacuum, would it be fair to assume a similar flattish benefit year next year? And yeah, or are you expecting to take an even more conservative margin-first approach to your bids?
I think that's what you're gonna see from our 2025 bids. More margin-focused, and that has to be put in the context of what we think our competitive position is. And because we have these tailwinds on Stars and these tailwinds on V28, it gave us a lot of latitude, and so even if we took a step down in benefits, it's still materially less of a step than we think our competitors are gonna be forced to take because of the pressures they're facing on Stars and V28. So everything is relative from a competitive dynamic, and we are just very, very confident that we're doing the right thing on margin protection. We've been very specific on a market-by-market basis, very, very granular.
And I think the degree of growth we get will be a function of what our competitors are gonna be offering. I would say that the degree of consistency that we've had over the last several years, where we've not bait-and-switched members, not bait-and-switched brokers, has really provided a strong brand in the broker and the member and the provider community, and I think that's gonna manifest itself in a pretty good AEP for us.
Great, and then in terms of your first look at the competitive benefit landscape?
Yeah, it's interesting. The, you know, it's been well documented, I think everyone knows that people are gonna be taking a step back in benefits, right? I mean, that's no secret. What was interesting is when you've had some of these broker off-sites, a lot of the plans are not disclosing with transparency what their benefits are looking like. We don't know. So there's, I think, two. Well, there's us, and there are a couple, two others actually showed what their benefit design was. A lot of the big guys are not sharing it, and so you can conclude what you want about that, but my hypothesis is, if your benefits are gonna go way down, you're not gonna wanna be real transparent too early about that.
and as I think we discussed earlier, there's gonna be something like, seven hundred thousand members that will have dropped from a four-star to a three-and-a-half-star, rating heading into this 2025 year. So to your point, the degree of switching, I think, is gonna be even more than last year.
Mm-hmm.
And so, I think that puts us in a very strong position for both margin expansion and growth.
Great. So, Thomas, last quarter, you mentioned your confidence in improving MLR next year, irrespective of the level of growth due to your bid process. I wanted to-
Mm-hmm
... dive deeper into that. What about your bids, and, John, I know you mentioned it just now, like, gives you extreme confidence that you can achieve improving MLR year to year? And is it true that any level of growth would not compromise MLR improvement?
Yeah, we feel good about it. I think there's sort of a few factors in play there, but two that are really the biggest needle movers. First is when you got 50% membership growth this year, while that's a headwind on the 2024 MBR, that means you're gonna have that many members becoming or moving from a year one cohort to a year two cohort, which obviously provides a significant tailwind from a consolidated MBR standpoint. And then in terms of the bid specifically, we have the advantage next year, where our benchmark rates are up 5% across the company and 5.5% in California, more specifically. That's over two times the national average benchmark rate update of 2.4%, I think, for 2025.
Contrast that rate update from a revenue standpoint with the unit cost increase we expect in 2025, which is closer to 2%, and the reason we're seeing that difference next year is the rate update for revenue is basically making us whole for the outsized unit cost increases that we saw in 2024. Our inpatient, outpatient unit costs are about 8% in 2024. So we're essentially getting that back next year in 2025, and that gives us the funding flexibility, given the difference between the revenue and the unit cost increases, to ensure that we are providing general benefit stability. As John said, we pulled back in a few places, but where we thought it could still position us really favorably for growth still, while also being able to drive consolidated MBR improvement and EBITDA expansion next year.
Great, and I wanted to dive deeper into the cohort maturation story 'cause I feel like, you know, what's so key to at least my thesis on Alignment, is that it's a grossly underappreciated cohort maturation. You have more than 30% of your lives this year, year one, usually it's the biggest step function increase, 300 basis points MLR. And, so while that might pressure your MLR this year slightly, it's gonna be a huge benefit next year. So my question is: Is this cohort maturation the right way to think about 2025? Any reason to think we wouldn't see 300 basis points of MLR improvement from year one to year two in this year's cohort? And.
Yeah, absolutely. I mean, that's, that's the way we look at the business also is from a cohort standpoint. We often look at it on an individual cohort basis, and also in terms of what we call returning members or loyal members versus new members, i.e., have you had them for at least one year or not? And so in terms of that year one to year two cohort maturation, you're spot on. Typically, we've seen about three hundred basis points of improvement on our we call our at-risk members, which is where we manage the institutional costs. If it's a global cap member, which is about 30% of the book, you obviously don't see that level of MBR improvement because it's a contractual percentage of premium rate.
But we see that on the at-risk members, and I think that's gonna be a meaningful tailwind towards our 2025 MBR next year.
... Great. And, shifting gears to cost structure, SG&A. I think with no exaggeration, it's one of the most powerful cost structures I've seen from any plan, especially at your size. It's remarkable because you're basically at or better than Humana, and they're fifty times the size of you on an annual revenue basis. So when thinking about that, wanted to dive deeper and ask you, what's the secret sauce to achieving this? You know, scale economies, fixed cost leverage, and what do you think investors are underappreciating the most about just how powerful your cost structure is?
Yeah, I think the simple way to describe it is what we would refer to as a unified data architecture. And so the amount of work that centers around having consistent data, whether it be from eligibility or medical management or provider engagement or our Care Anywhere clinical model deployment, all of it's looking at a single set of data that's consistent, and so you have actionable data that is pretty much real time. There's not a sixty or ninety-day tail of how you can take action on that data, and so that allows us to be much more action-oriented and efficient in how we solve problems. And so internally, we live by this notion of kind of this maniacal attention to detail, and that detail stems from consistent, actionable data. That gives us visibility and then the control.
So visibility, do you know where your high-utilization markets are? The answer is, we do on a daily basis, okay? If you know, what do you do about it? Well, that's where you deploy your clinical teams to work with your provider partners to address a series of quality measures and KPIs. Now, whether it's admissions per thousand, whether it's ER admissions, whether it's observation rates, whether it's skilled nursing facility readmission rates, skilled nursing facility length of stays, and the list goes on. There, there's just A1C levels, you know, just there's a whole series of, of focused on quality metrics that'll gives us the control then to do the right thing, to take care of people and actually manage, you know, high-utilization markets down. And so having a unified data architecture is not to be taken for granted.
So we'd use the words actionable data. People don't know what that means, but if you ask anybody else in the sector, "Do you know where your hotspots are, and what are you doing about it?" I'm not sure you'd get a straight answer.
Great, got it. So, maybe going off script right now, just twenty twenty-five, I've done analysis on cohort maturation, and what I'm getting to is basically, on that alone, not just year one, but all the way to year four, year five, maturing a year, I'm getting basically where the street's at, at EBITDA, around $40 million already on that alone. So I'm just kind of curious, when you stack up the headwinds and tailwinds, I don't even hear much in tailwind, the headwind space. What's your thinking on twenty-five? Are you comfortable with where the street's at today?
Very, very comfortable where consensus is. And we feel very well positioned. Our Q3 call is, I think, scheduled for October 31. I think it is.
Mm-hmm.
And we'll give more visibility into 2025 at that point in time. But the short answer to your question is yes. And I think when you add up all the things that we've already communicated, and you kind of add up the incremental value associated with that, you could kind of easily conclude the same. And what I mean by that is, we get the growth, you get the bids, and how the bids are impacting our MLRs for twenty-five. You get the 90,000 new members we added this year, and the coding associated with that, just to get to a 10%, you know, increase, which is very conservative and very compliant. Add up the benchmark rate increases of 5.5%.
In California, you add, you know, some of the revenue associated with the, IRA Part D. You add all that up, and without the degree of headwinds that I think everybody else is still gonna be trying to navigate, we're very well positioned. Very, very well positioned.
Great. So last quarter, you mentioned, Care Anywhere engagement. It's been on target, first half this year, pretty consistent with previous years and no difference there.
Mm-hmm.
But you do expect that significant opportunity in the back half of the year as you track from 30% engagement rate up to 60%. And I think you mentioned that typical 30% improvement in institutional claims PMPM, 12 months after engagement. So curious-
Right
... how are you tracking to that 60% year-end goal at the moment? And, is there opportunity in future years to actually get that number higher, above 60%?
So first question, we're on track. We're continuing to make progress over the last 30 days, and, you know, over the last, basically, you know, four or five months of the year, you know, we'll continue to see that tick up. In terms of what I think our target is, I think internally we want to get that to 70% or 80%. Ideally, it's 90% or 100%, but I think more realistically in the short term, 70% or 80%, and not just on the new members, but in terms of the total population that we go after.
The reason, and for those of you who haven't heard the data point he shared, is when we look at our claims PMPM and utilization metrics, post-engagement, compared to what we call a control group, which is the members who haven't engaged in Care Anywhere but are also eligible, we see about a 30% improvement in our institutional claims PMPM in the 12 months following the members we actually engage. So we know this program provides a lot of value and can really help bend the, quote-unquote, "cost curve." And so from an engagement standpoint, we're thinking a lot about how we expand our existing workflows.
Today, the way it works is when a member becomes eligible, typically, if they're already pretty sick when they enroll with us, it takes about sixty days or so, I'd say, for us to have enough data on them between lab values and pharmacy values and auth and claims data to start to generate our stratification. We then automatically route them through an outbound campaign, including call, text, email, etc. And really where we're expanding today is diving deeper into some of our provider engagement and broker engagement efforts to try to use those as other levers to help get the members who are eligible to enroll in the program. And obviously from the member's perspective, it's free to them, it's free to the PCP.
They get to still see their PCP, so there's a lot of value that comes through for, not just us, but for the senior as well. I think if we can get that 60 up to 70 or 80% over time, that's just another upside opportunity to continue to improve our overall utilization.
Thank you. And I guess in the last few minutes, I wanna shift gears to new markets. I think right now the stage is set. Over the next couple of years, Align is gonna drive massive growth, earnings through California alone. But as we look toward, you know, past the next couple of years and the lens begins to shift back to new market expansion, you know, Texas and Florida presumably reaching maturity, curious to hear what lessons have you learned in the past couple of years in terms of, you know, porting and replicability of success in new states and markets?
Great question. Yeah, so first things first, so first thing is keep growing the California market share. I think we're, like, at 5% or less. You know, get that to 20%, and I don't see any macro issue preventing us from really driving growth even up to between 500,000 and 1 million lives over the next several years. I feel good about the model, the momentum, etcetera. But also, to use that as a cash cow, to use it to produce cash to fund the new market expansions. That's what we're doing.
What we're also doing in the background is systematizing a lot of the best practices that we're learning in California and then approaching the new markets, and we're gonna start with the ones we are currently in and growing those before we start adding a bunch more additional dots on the map. It's like, let's get Vegas to grow. Let's formulate the right strategy, the right network partners, the right incentives, the right read, and I think in that particular marketplace, quality and access to care are gonna be things that are gonna play to our advantage. We need to so we just need to focus on it. And so you'll see us spending a lot of time on the existing ex-California markets and getting them up to scale, and we'll be focused on that. We have already been focused on it this year.
We continue to do that next year, and then I think for 2026 or 2027 is when we can start. Depending upon how much growth we get in some of these new markets, existing new markets, are gonna be the... Will determine how aggressive we are in putting more dots on the map. I think having these systematized workflow best practices is really gonna help us manage provider-related operations better and think of it as a real business and frankly, not just as a service area expansion, and I think that's part of the main lesson learned.
Great, and just final question. You mentioned 500,000 to 1 million lives over the next several years.
Did I just say that?
I think maybe. Is that mainly, California, or new markets, or-
I think California, we have a lot of upside opportunity.
Okay.
A lot of upside opportunity, and again, a lot of the people in our company were part of Secure Horizons, and it's now part of United. You know, I think we got up to something like 1.5 million lives back in the day. So the scale part doesn't scare us. I think our ability to ingest and manage the kind of growth that we have this year in 2024 with, like, no abrasion is really a testament to some of the investments that we've made that are pay-