Too bad that, John, I'm sorry about that.
Yeah.
Travel issues.
Yeah. We're doing some Zooms in the other rooms, but.
Okay. Cool. Well, that's as long as he's talking to everybody else.
Oh, yes.
I'll survive. We'll probably get started here. Just.
Sure.
Josh, are we okay on time, or?
There's no loose or round in that area.
Okay. All right. We're gonna get started with our next session. I'm Scott Fidel. I'm the Healthcare Services Analyst with Stephens. Really pleased to have Alignment Healthcare joining us here for the fireside chat today. We have Thomas Freeman, who's the Chief Financial Officer, and then we also have Harrison Zhuo from Investor Relations in the audience as well. Alignment is a leading innovative Medicare Advantage focused healthcare company. And Thomas, great to have you here. Thank you for coming to the conference. It's great to see you. Definitely plenty of topics, and in terms of timing, certainly a pretty dynamic backdrop right now, just post the election. So looking forward to digging into all that with you. I guess, you know, to start with, though, do want to maybe just start with the convertible notes transaction.
Sure.
Obviously, that was something from the corporate front that was timely recently. Just, as background, the company announced the private sale of Convertible Senior Notes last week, amounting to $330 million. You had around $215 million drawn on the term loan, which is expected to be paid down. That will leave some incremental capital as well for general purposes. Thomas, maybe just to start with, why don't we just, in terms of, I guess, from a timing perspective, and then from, sort of the selection of the converts as the preferred instrument.
Yeah.
Maybe sort of walk us through the thought process there.
Yeah. So I have to do that. Do I, do I need to use a microphone? I think you guys are probably hearing me either way.
We're on a webcast, though, too, so.
good point.
Yeah.
In terms of the convertible offering, you know, starting 6 months-12 months ago, you know, we were looking at the interest rate environment, and as Scott was mentioning, our prior debt facility was SOFR plus 650. We've been paying close to 12%, 11%-12% for a while. On next year's expected balance, we were gonna be paying $25 million + of cash interest expense, almost $30 million. Looking for ways to really improve our cost of debt as we kind of move towards EBITDA positive next year and then aspire to get the cash flow break even as soon as possible, you know, we started looking at ways to improve that, and the convert market is very strong right now.
By lowering our cost of debt from, you know, call it 11%-12% down to 4.25%, we're able to save over $10 million of annual cash interest expense, including the upsize facility of $215 million to the $330 million. We also had a delayed draw feature for $35 million remaining on the Oxford facility that we were otherwise set to lose access to in 2025. And so this really gave us an opportunity to, you know, just bolster the overall balance sheet in a pretty strong convert environment. And actually the deal itself was well oversubscribed, which allowed us to slightly increase at the finish line.
Great. And then just around that, I guess, around 115 million or so, let's call it.
Yeah.
Give or take of incremental proceeds, any, I guess, sort of, rank ordering of priorities for that? Will that just be investing in internal growth or anything else that you'd be thinking about?
Yeah, exactly. I mean, I think for us, it's about just, again, just part of it, I'd say, is even just like the actual $100 million parent cash milestone we talked about in the past, and just bolstering the balance sheet, making sure everybody feels as comfortable as we do with where it stands. And it's worth noting that, you know, in our 8-K, we did reiterate that, on the prior earnings call, we said we thought we'd have just over $100 million of parent cash at year-end prior to the financing. We still maintain that view. Nothing's changed. So we feel good about the overall cash balance. And I would also note that, you know, we had some comments on the 2025 outlook on the last earnings call, which I'm sure we'll get to today.
but our kind of views and kind of forecast for next year are also unchanged, so the convert was really opportunistic in a way to lower our cost of debt, and I'd say just make the balance sheet look even stronger than it did before.
Okay. Great. Well, why don't we dig in a little bit to the elections and some of the, I guess, sort of working through some of the different implications and policy appointments. Actually, Medicare Advantage stocks are up quite nicely today. And it seems like the news last night was about Dr. Oz being nominated for CMS Administrator. While some of these choices may seem unconventional, our understanding is that he has been traditionally a strong supporter of Medicare Advantage. But maybe from that, starting from that, from the staffing perspective, bring us up to speed with maybe from your perspective, you know, what you guys understand about maybe Dr. Oz's prior sort of comments or, you know, views on MA. Obviously, RFK Jr.
is another, you know, recent pick that we're all sort of, I think there's, you know, a well-documented, sort of case, amount of comments he's made on a number of topics, but relating to Medicare Advantage a little bit less so. So,
Yeah.
You know, maybe just an update there as well.
Yeah. So I mean, for Dr. Oz in particular, I mean, it's obviously kind of early days, given that it was announced less than, I think, 24 hours ago at this point. But I think you kind of hit the nail on the head with how you characterized it. I think our perspective there is that it's probably a positive for Medicare Advantage and obviously, as you noted, I think the market is reacting accordingly this morning. I think from our perspective, the overall Trump administration has been positive on MA in the past. If you go back to the last time he was in the seat, you know, reimbursement rates in terms of benchmarks were pretty high consistently in terms of annual increases year over year. You know, the Stars program was frankly easier back then.
Some of the other changes they've made around, you know, V28 were not in place. I think Medicare Advantage did very well under his administration in the past. I think we have a lot of optimism that Medicare Advantage will do very well in the future. I think from our perspective, you know, we feel like we're really well positioned either way. It is sort of the short of it.
And so over the last couple of years, as Stars have gotten more challenging in terms of the implementation of Tukey, for example, as you know, benchmark rate update increases haven't quite been as high as they were in prior years, through the introduction of V28 and the risk model changes, utilization challenges, you know, within the industry, you know, all these factors have come into play, making the MA environment, I'd say, very dynamic and really starting to separate the wheat from the chaff. And I'd say we have really risen in that environment, 2024 being the exclamation point, I think, to demonstrate how we can not only grow exceptionally relative to the market, given some of those favorable competitive dynamics, but also manage our costs and our MBR as we continue to scale the business.
So to the extent that the next four years looks like the last four years, I think we're exceptionally well positioned, to the extent that the next four years looks maybe more favorable towards Medicare Advantage as a whole. I think all boats rise in a rising tide. And, you know, if that means that one of our competitors can get from three to three and a half or three and a half to four Stars or whatever the changes might be, that just means that we should be getting from four to four and a half or, you know, we will continue to aspire towards five. So, I think we're in a kind of a win-win scenario either way.
Yeah, and it makes our conversation probably a little bit different, right, than I would be having with a number of the other companies right now, given that a number of these sort of increased regulatory activities have clearly created a number of disruptive events across the competitors where Alignment has generally been able to execute very well on those.
So, with that said, you know, as you think about just that theme that the Trump administration has presented already about rolling back, you know, re-regulatory, I guess, you know, intensity, particularly where it increases costs, you know, puts additional burdens on both the government and on the private sector, where would you say that Alignment's priorities would be in terms of what, you know, you would like to see maybe get addressed from the, that recent regulatory onslaught that we basically had when we think about V28 and maybe some ways to simplify that? Stars will be sort of a whole other topic, but certainly, you know, your perspective there.
You know, we haven't really RADV, obviously, was sort of put out there in a more intense way, but it still feels like a lot of that is still a little bit sort of on the calm, right, in terms of some of those enhanced audits, but maybe those are already playing out behind the scenes, and then clearly we're all gonna be looking at a more reasonable rate regime where the rates actually, you know, do actually correspond more with cost inflation. But that's something that's a little bit different than the regulatory burdens that have been put on the industry, so curious on the regulatory side, sort of where your priorities would be if you can see certain things modified.
In all honesty, I think we might be comfortable with status quo. And in all seriousness, you know, we just, we've seen these cycles come and go in the past. And every once in a while, things get more challenging. And I think the pretenders and those who haven't really built their models to scale or haven't emphasized being high quality and low cost or some of the things that we think we're all about, I think it seems to be a more challenging environment for them. And I think that just benefits us. And I don't think we would say that had we not been, you know, so successful in 2024 and so optimistic about 2025.
But I do think that when you have some of these large organizations, these scaled players who have been dominant for so many years, starting to show some cracks in the armor, I think that's a good thing for companies like Alignment who are, you know, more, I think just kind of nimble in many respects and able to adapt to those changes and then execute accordingly.
Understood. And one talked about one initiative in particular, which was a big area of focus but hasn't been formally implemented yet, which is the Health Equity Index. My perspective is that that may end up being kaput when we think about the views of the Trump crew on sort of health equity relative to the Biden administration. So, you know, maybe from the high level, you know, where you're thinking maybe on that at this point, and then from more of the operational and strategy level, talk to us about, you know, I guess how much sort of, you know, effort has been put in towards that.
And if theoretically the Health Equity Index was eliminated from moving forward with, do you see that as something that, you know, further improves your competitive envision, positioning given where, you know, some of the enhanced efforts, let's frankly say that some of the others, you know, have been putting towards that, especially some of the companies that have the high managed Medicaid?
Yeah.
presence.
You know, from our standpoint, we sort of have been running the business this way for years prior to Health Equity Index introduction. And for those of you who are less familiar with it, essentially what this is is CMS's desire to create reward factor opportunities for health plans who enroll a higher percentage of Low-Income Subsidy members. And then for those plans who do enroll a higher percentage, it's basically scoring them or ranking them on a series of quality measures. And the idea being that if you're enrolling those disproportionately, you know, disadvantaged and doing a better job providing them higher quality care, you as the health plan should get a higher reward factor in your Star Ratings, which ultimately leads to higher reimbursement.
From our perspective, you know, in particular for our largest contract, which is our California H number, represents 85% plus of our population, we are eligible for the reward factor opportunity based on our percentage of Low-Income Subsidy members. Based on what we know from CMS today as to which measures would likely be included in that quality scoring exercise, we think we would do really well on it. I would say to your question, you know, we've kind of just run the business this way historically because a lot of these measures are the same things you have to do a good job on for HEDIS, for example, which is something we've historically been four and a half to five Stars on, as an organization. I think to the extent that it sticks, it's a tremendous opportunity for us.
I think we feel like we have a Stars competitive advantage through not just 2026, which is what was announced a couple months ago, in October. We also feel very good about our positioning for 2027, payment year 2027, because the CAHPS weighting is going down from four Stars, excuse me, four weighting to two weighting, meaning the cap score is gonna go from being, call it 35%-40% of the overall score down into the low to mid twenties as a percentage of the total score, and then the health equity index would be set to kick in for 2028, so I think we have a Stars advantage runway for the next several years, and we'd like to see the health equity index stay in place. I think it would be helpful for us come 2028.
You know, if things change, damn things change, we'll, we'll adapt to that, kind of either way, but as of today, I think it's a real net positive for us.
Okay. And then on Stars, excuse me, maybe bringing us up to speed on what you're sort of hearing through the channels and possibly from CMS, just around, we've had a number of the competitors now pursue litigation after their results came out. The unifying theme is a lot around the call center component.
Sure.
And some very small sample sizes that seem to have penalized some of the others. It seems that CMS has, you know, basically conveyed a message that they will, you know, be potentially reevaluating the call center metric. But curious on sort of what your understanding may be of how they're gonna approach that. Is it gonna be similar to what we already had, you know, not too long ago where they just basically went and rescored everything and reduced the weighting for the call center? Or is that your expectation how they're gonna approach this? Or what are you learning, I guess, around how CMS is gonna approach this?
Well, and I think, I guess first off, I think there were some comments made by CMS last week, but they were really geared towards the admin measures going down in weighting too. So one of my CAHPS comments, the admin measures are already set to come down for 2027 payment year. So I think some of their comments were with respect to what was already underway in terms of the weighting changes for payment year 2027. You know, we're not gonna, you know, comment, I think, on some of our competitors' litigation, but I guess our general view would be that for the sector as a whole, I think the intent of the Stars program makes a ton of sense, right?
You're trying to, CMS is trying to reward plans for doing a better job with consumer experience, doing a better job for providing higher quality. And frankly, I think you should be paid more as a higher quality, better, better experience, providing organization. I think some of the measures, you're right, I think get a little challenging in terms of population sizes and the cut points. But I think the intent behind it makes a ton of sense. So I think if you look back over the last five plus years, there's been changes every year. There's gonna be changes in the future. And as I said earlier, I think you know, the introduction of Tukey, for example, caught a lot of organizations off guard, made the Star Ratings program more difficult. We managed to maintain our four star rating.
So, to the extent that it even gets harder in the future, I'm not sure that necessarily scares us, given our relative advantage to navigate those changes to the extent they make some of those measures that are more challenging easier in the future. I think that just benefits us similar to the others.
Okay. That's helpful. So that means that it's still open-ended on whether there'd actually be a rescoring of the prior results that were announced for the 2025.
For our competitors, you're talking about.
For the competitors, right? It's.
It's always possible. Yeah, it's always possible. I'm not sure whether that necessarily would impact our, all of our, you know, geographies and counties per se. Again, I think 2024 is a really great example because, you know, we're talking about the Star advantages we have, but those really come into play for 2025 and 2026. In 2024, where we've grown year to date just under 60%, three of our toughest competitors. Our four Stars are greater in California. Again, there's a series of value drivers in this business. And to the extent that, you know, let's say one of our competitors through one of these lawsuits happens to improve their Star rating positioning, I'm not sure our perspective on our outlook, in terms of, of growth and margin opportunity necessarily changes.
Because again, what underpins our performance today in 2024 is not having an advantage on Star Ratings. It's having an advantage from a cost management and MLR standpoint.
Wanted to get an update just, you know, on two of the differentiating aspects of your operating model, which are Ava and Care Anywhere platforms. Care Anywhere. You know, maybe if you wanna spend a quick moment first, just for those that aren't as familiar in terms of, you know, what competitive advantages that brings. And then if, you know, in terms of recent performance of those platforms, any KPIs you'd wanna share around, you know, as you've had this big ramp in growth, you know, for 2024, how you've been able to, you know, execute on those platforms in terms of engagement, and driving, you know, improved sort of tripling outcomes effectively.
Yeah. Absolutely. So when you think about, sort of how we've performed year to date, which, you know, we've provided some information in the past. We look at our growth year over year relative to our large national competitors. And we also look at our MBR year over year relative to our large national competitors. And if you think about sort of that, you know, scatter plot, what you would see is that our competitors who have seen the smallest MBR increases, which again, most of our competitors are up one, two, three% on MLR year over year, those folks are typically about flat on their growth. And in some cases, they're shrinking their books. So they're trying to basically cut membership towards managing MLR and profitability.
Those that have grown, you know, 20% plus year over year have seen their MLR increases go up north of 5% plus year over year from 2023 to 2024. If you look at Alignment, we, like I said earlier, through the third quarter, we've grown about, just under 60% year to date. And our increase in terms of year over year MBR was, I think, around one and a half, 2% through the third quarter. And so you say, well, how are they doing that? How is it that, that Alignment is able to not see MLR go off the rails given the tremendous growth they've achieved? And I think it starts with, Ava and the data. And so people will often ask, you know, aren't you guys experiencing hotspots in utilization? Or, or better said, they'll say, how is it that you're not experiencing hotspots in terms of utilization?
And our answer is, well, we are. I think what differentiates us versus our competitors is we don't find about it three or four months later when paid claims come through. We find out about it real time because Ava gives us the visibility to see these trends, emerging and happening on a real-time basis. So, from a stratification and identification standpoint, we're using our lab data, pharmacy data, admission, discharge, transfer data, demographic data, auth data, claims data, even though it's lagged. And we're using that information to try to pinpoint who in our population is in need of our more proactive care model. And so when members hit the we know about it. When members haven't hit the but we think they're on the quote unquote launching pad, meaning they have multiple chronic conditions and we think they're at risk for hospitalization, we know about it.
We built our workflows to have outbound, basically called teams. They use email, they use text messaging, they use actual just phone calls to try to get these members to engage in what we call Care Anywhere. And I think the predictive nature of the modeling is really important. You know, one of the metrics we provided in the past is we look at our overall population and we say, based on all the data we have, who are the members that we think are most likely to be hospitalized in the next 30 days? And not six to 12 months, but in the next 30 days. And then 30 days later, we do a look back and we say, based on the top 10% we predicted, how accurate were we?
If you look at those hospitalizations over that 30-day window, 60% to almost, I think, 65% of the people who were hospitalized came from our top 10% prediction. So visibility, you know, you, you know who they are. And so now what do you do about it? And then we also talk about control. So control comes to the form of Care Anywhere and employed clinical teams. Care Anywhere consists of employed nurses, doctors, case managers, social workers, behavioral health coaches, and the like, which are really geared towards trying to provide proactive preventative care, in the home and virtually to our top five, 10%-15% of our population. That's down the road going to drive 80-plus% of the costs. And through those interactions, we see people at different frequencies depending upon their care needs and the care plan we established.
Sometimes it's once a week, sometimes it's once a month, sometimes it's virtual, sometimes it's a home check-in. But we're really trying to address not just their medical needs, but their pharmaceutical needs, their social needs, their functional needs, and ultimately trying to prevent unnecessary or avoidable utilization such as readmissions to the hospital down the road. I think that, that kind of combination of identifying and then proactive management through our employed teams, just doing the small things that prevent bigger things down the road is what's allowing us to kind of manage our year of growth so far.
All right. Great. So speaking of growth, we're right in the middle of the 2025 annual enrollment period. So I have a couple of questions. I wanna talk about that and see what you're able to disclose at this point. I guess maybe starting with the headline, you've laid out a target for at least 20% growth in 2025, represents a moderation from very outsized, you know, robust growth in 2024, but still, probably a good close to four X, I would think, you know, the overall growth rate of the market, potentially in 2025. Maybe just sort of update us based on what you've seen so far in the AEP and your leading indicators, how you feel about that target. And why don't we just start with that and then we'll dig into a couple others.
You know, heading into 2025, we knew we were gonna have some advantages from a Stars positioning standpoint, the second year of V28 phasing in. You know, we actually said this in the last earnings call, I think, but whereas in 2024, I would say we were probably 60-40 growth versus profitability in terms of how we tried to balance our benefit richness versus margin goals in our 2024 bids. We sort of flipped the opposite in 2025, knowing we had some advantages. We did pull back on benefits a little bit in a few markets. We probably were more like 60% profitability focus versus 40% growth focus. Trying to be pretty even and pretty balanced with our approach.
And I think so far based on what we've seen in AEP, we feel really good about those decisions. I think our products are, you know, top three in most markets and, if not one or two, I should say in most markets. And I think, you know, based on what we said today, you know, we would echo our comments we shared on the earnings call, which is that we still feel good about our ability to drive 20% plus growth next year.
I think it's fair to say to your earlier comment that it's not probably gonna be a 40% or 50% growth year, but that was with intent given that we wanted to really make sure we got into EBITDA positive territory for 2025, which again, I know we'll get to, but one of the things we commented on the last earnings call was just our underlying confidence in our ability to achieve the $40 million of consensus EBITDA for next year. So I think being, you know, I guess a little almost four-ish weeks into AEP at this point, I think we still feel good about that 20% plus growth goal. I think we kind of handled the margin versus growth dynamic, you know, really well in this last bid cycle.
Okay. A couple of thoughts on the AEP. I guess the first would be just maybe some of the recent updates we've seen around some of the competitor decisions around sort of intra AEP and in particular some competitors rolling back or even eliminating broker commissions on certain either MA or PD products. Curious in your markets how much are you observing that? And is there any incremental you know growth that you're seeing maybe because of those decisions?
You know, we haven't seen a lot of that in our markets, quite honestly. So I don't think that's a big driver for us in terms of our growth expectations. What I would say as a more kind of general comment is I think those kinds of actions we think are why we think we're better positioned to succeed over the coming years. I mean, those decisions don't just have a, you know, 2025 only impact. These decisions have, you know, lasting implications over kind of multi-year period. So, while we haven't seen it in our markets, you know, I think we will feel that we're, you know, well positioned regardless of how some of those things play out for others.
And then from a geographic perspective, any observations on, I guess, the balance or the uniformity of growth in terms of mature markets in California versus some of the newer states and sort of how are you seeing the trends there?
So, you know, similar to years past, just given the size of California, it will continue to drive, you know, the majority of our net membership growth, but we're seeing nice growth ex California. That is one of our goals is to continue to build our presence in our ex California markets, so I think from a percentage growth basis, you know, we'll still see higher ex California growth, but in terms of net adds, California will continue to drive a lot of the growth in 2025.
And then, you know, I know it's a little bit tougher of a question to answer at this point in timing, you know, wanted to ask about new sales versus retention. Clearly at this point of the AEP, you have a higher visibility into new sales relative to retention, but I'm sure you have a number of leading indicators as well. So on that retention side, any leading indicators, obviously that's where, you know, driving, the cohort will clearly have a better MLR profile on who you retain versus the new sales. So it's important when thinking about margins for 2025. I guess your visibility and confidence around retention trends for 2025.
Yeah, I think we're feeling good about our core, kind of, you know, voluntary retention. And, you know, we said, this past year for Q1 of 2024, it was one of our best years ever, if not our best year ever. You know, we can't probably say at this point whether Q1 2025 will be better or similar or slightly worse, but in general, I think it's going pretty well. And I think we expect our Q1 2025 retention, or again, voluntary retention to be pretty solid.
Okay. Well, let's move over and talk about utilization. Certainly can't, can never, forget about that important topic. I guess maybe to start out with just, at this point, about halfway through the fourth quarter, just anything that you would be able to update us on, on sort of what you're observing around utilization trends, quarter to date, and anything that you're seeing either positive or negative that would not be explained by normal seasonality.
Yeah, nothing that I would say inconsistent with our expectations or inconsistent with kind of normal seasonality. I think we feel good about kind of where we sit through the balance of November. I think from an overall admissions per thousand standpoint, keep in mind we were in the kind of low 150s year to date through September. So for me, that's really important, not just in terms of our fourth quarter guidance and our ability to achieve our full year range, but really that sets us up, I think, very nicely for our 2025 kind of jumping off point and outlook for next year as well.
Okay. Great. So that was gonna be our next question. So it sounds like still that 150-155, that 153 or so is a good jumping off point for next year.
For next year. Yeah. Yeah. I mean, and you know, what I would say is there's always a little bit of variability between like products and markets and whatnot. So depending upon how our exact AEP mix plays out, you know, that could change a little bit. But in general, I think from a, you know, if you mix adjusted our results either way, I think we'd feel pretty good about our expectations for next year. And, you know, we never really expect an increase in our ADK. That's kind of our kind of, you know, core secret sauce and kind of key capability.
Okay. Want to ask about a couple of drivers of trend that have been more callouts from some different competitors and get your observations on that. Maybe to start with oncology, obviously has been one that's come up, you know, from some of the competitors. Maybe update us on what you've been seeing on the oncology side. And then I guess more broadly, that would also sort of play into the specialty pharmacy trend pressure that a number of major, you know, players have called out recently.
Yeah. We definitely have seen some of that, I would say, you know, some of our emerging oncology experience really began in 2023. And so I think for us, we've been kind of noticing this for at least the last year plus at this point. I think our 2024 experience, while we've seen the increases continue year over year, it's generally been in line with our expectations. So nothing to call out that I think presents outsized risk relative to 2025. I think what we've seen so far continues to be in line with what we would've otherwise expected, but it is an important area of spend for us to continue to keep an eye on, I think, as an industry and certainly for Alignment as a company.
Interested if you have any sort of observations at this point around, I guess, the thesis that United in particular laid out around effectively some pull forward of Part D utilization relating to the IRA and maybe some of the manufacturer strategies around promoting certain rebates ahead of that. They had called that out as an incremental trend factor. Curious if you guys are seeing anything similar to that.
You know, we really haven't, and I would say it's we have the benefit of having daily visibility on our pharmacy claims. So, you know, through the third quarter and, you know, for that matter, October, you know, we just really haven't seen some of the experience that others have described. Again, relative to expectations is probably key. Like we have seen some increase, obviously this year, but nothing inconsistent with what we would originally would've imagined. And I don't think we've seen much that would suggest there's been a dramatic pull forward in utilization relative to some of our prior experiences.
All right. Maybe thinking about all those qualitative comments and then converting that over to the numbers. So as we think about the implied 4Q or not even you guys sort of guide to 4Q, you know, you've got still a somewhat reasonable range, right? Between +$5 million and -$10 million on Adjusted EBITDA and then on adjusted gross profit, a range between $67 million and $82 million, at the high end. Sounds like everything we just sort of, the key sort of touch points seem to be tracking in line, at least, but maybe sort of walk us through sort of what particularly, you know, we should think about driving you towards the higher end relative to the lower end.
Obviously, you know, the intensity of growth that you're expecting for 2025 would play into your 4Q seasonal expenses, but you're talking about that being sort of probably still on track with what you've laid out before. There could always still be incremental investments on the SG&A side. My take seems to be that things seem to be tracking pretty good. But you know, maybe around that range, any more color you can give us.
Yeah. You know, I think for us, underlying some of those utilization KPIs will obviously be our care and our engagement. That's been one of our big goals is to continue to drive our engagement growth this year, given the outsized new membership we've gotten. You know, that was trending well through the third quarter and I think continues to trend well through the fourth quarter, but we also continue to add more and more new members. And so our fourth quarter growth is obviously going well, for those of you looking at the CMS enrollment files. And so, you know, I think utilization we feel pretty good about, but that's obviously one kind of variable that will play into how we land on the full year range.
I'd say the second is just kind of where we land on our supplemental benefits. So, you know, through the second quarter, we had commented that we were seeing about $5 PMPM higher, kind of, trend outlook for the full year relative to our initial assumptions entering the year. I'd say through the third quarter, we hadn't really seen much change in terms of that $5 PMPM. And I think for the fourth quarter, we don't think there would be too much of a change, but December tends to be the final month of the year where people use things before they lose it. So, you know, we'll see where December utilization comes in on that. But again, I think our overall range has kind of captured a pretty reasonable set of bookends in terms of where that may land.
I think maybe the last thing I would say is, you know, we have certain, you know, payment integrity programs ongoing from a claims management standpoint. I would say maybe just, you know, Part D, $1 or $2 PMPM up or down will probably play into where we land for the full range. So in general, I think we feel good about our achievability for Q4 and obviously for the full year accordingly. I think, you know, we'll be in a good spot kind of either way, depending upon where we land for our jumping off point for 2025.
Okay. And then on the supplemental benefits, maybe just in specifically when we think about which of those sup benefits have the most, I guess, attenuated seasonality that sort of the use it or lose it type of feature to them. Any particular sup benefits that you would highlight there that you would think that you're tracking?
Yeah. I mean, I would say, you know, the OTC, the flex tends to be a bigger driver of just month to month variability throughout the year, including the final month of the year. You know, and if you kind of look at our benefit, you know, modulations for 2025, that was the area we kind of pulled back on, I'd say the most, just given that we'd seen some of the outsized increases happening early in the year in 2024. But I would say that's probably one area, maybe a couple of smaller categories, but that's probably the biggest.
All right. Great. Well, with the time we have left, why don't we, actually let me first just pause and see if there's any questions out there. Let's talk about 2025 anyway. So, okay. So let's, let's sort of wrap up with the time here just on, on sort of, the 2025 dynamics. Thomas, as you mentioned, you reaffirmed that, that confidence around the street consensus, yeah, sort of north of 40 million and then the 20% growth. You know, one, one thing I wanted to ask you about is just on the PMPMs, you know, when thinking about the membership and sort of modeling PMPMs, any factors you would call out, you know, obviously one piece of noise around modeling is, is just related to the Part D changes.
You know, it's one thing sort of modeling the standalone, you know, PDP. It's another modeling MAPD, but I'm just sort of curious on what, what type of, I guess, sort of weighted impact that I don't wanna sort of be totally off on sort of modeling PMPMs around those IRA-based changes. So maybe start with that. You know, is there anything that, that could sort of affect the PMPMs that investors should be thinking about there?
Yeah. I mean, I think you just touched on probably the most important one in terms of how revenue PMPM shakes out for 2025 relative to 2024. I do think the changes on Part D from the Inflation Reduction Act will cause our Part D revenue obviously to be higher PMPM next year. I think it's probably too early for us to kind of draw a line in the sand in terms of where that comes in for 2025. But I think in general, it's fair to say that there should be some increase in revenue PMPM relative to 2024 given the IRA.
Right. And then a corresponding MLR effect.
Yeah. And you know, we do pretty well on our Part D MLR, you know, so I don't think that's a huge concern for us. I know for other folks, particularly those who have larger, standalone Part D products, that could be a concern for them. But I think from our perspective, that's not gonna be a problem for 2025 MLR.
So, is there additional incremental margin there or is there an SG&A, SG&A offset to that?
You know, I, I think it's more margin opportunity than not. There is some incremental SG&A, you know, there's changes with, you know, M3P that we have to be, you know, cognizant of, in certain programs that we're evaluating from a clinical standpoint that probably be more medical expense than SG&A, but certain clinical programs we're evaluating just given the incremental risk we're gonna be taking on, so there is some incremental cost, but there's also, I think, some incremental margin opportunity.
Okay. All right. Well, that sounds like a potential, potential tailwind there, and then on the SG&A side, you know, you've really had some nice OPEX leverage over the last couple of years. Next year, you know, still very robust growth that should be able to drive clearly operating leverage. But, you know, there's, I guess, sort of walk us through maybe how you think about operating leverage off of a 50%-60% growth experience against, let's say, a 20% plus.
Yeah. Yeah. Look, I think we, we do expect some incremental, operating leverage improvements on SG&A next year. I think you're right that, you know, we're gonna do over 300 basis points for 2024. We, we would not expect that necessarily for 2025. But I think the way we framed it for folks is we actually think we have a very, solid opportunity to drive both MBR and SG&A as a percentage of revenue improvement in 2025. I think the exact extent to which one drives more of the EBITDA margin expansion versus the other will in part just depend upon where growth kind of finalizes as we get through AEP and set our outlook for 2025. But, but I do think there should be some, incremental operating leverage for, for 2025 given the, the 20% plus growth we expect.
Okay. And then thinking about, you know, underlying free cash flow generation ultimately available for the parent company. So thinking about it from the insurance accounting perspective and some of the drivers there. So, you know, clearly when we think about the level of growth that you've had in 2024, it's a lot of stat capital that you need to post, you know, to the insurance subs for that. You're growing, but that rate of growth is probably gonna slow. So basically sort of thinking about how does that ultimately, how is that translating to how you think about, you know, potential improvement, or not, or if there's other offsets in terms of the level of capital that ultimately can get dividended up to the parent company for shareholder-friendly purposes.
Yeah. It's probably too early for us to get too much into our 2025 cash flow dynamics at this point. I think it's fair to say that, from a, I gave you a couple of data points. So from a CapEx standpoint, you know, I'm, I think we'll probably still do, you know, $30 million CapEx or so next year would be my suspicion. We have a couple of important projects we're continuing to work on that I think can add a lot of earnings power potential into 26, 27, 28. But I think in general, you know, working capital doesn't tend to be a major source or use of cash for us on a kind of enterprise basis over a full 12-month calendar year.
And as we talked about earlier, you know, I think we've made a really positive step forward in terms of improving our cash interest expense for next year. So, it gives you a couple of variables to think about, but I think what we'll kind of reserve our 2025 cash flow commentary as we get into the first quarter next year.
Understood. But it would seem, it certainly seems like given the existing sort of capital that you have available.
Oh, we feel very.
Obviously the transaction just did. I think.
We feel very good about the balance sheet. Absolutely.
Sustainable period of time.
Yes, 100%.
Okay. Two other things I wanted to get to before we wrap. Thinking about investment income. I mean, obviously we all can sort of plug, you know, estimates into our model there, but, you know, clearly that has been a meaningful tailwind for everyone in the space. You know, how are you guys sort of thinking about, you know, investment income and sort of, I guess, how you're plotting, you know, sort of rate assumptions into next year?
Yeah. You know, we take a pretty, you know, risk averse strategy to our program. You know, our cash management program is typically things like treasuries and money market accounts that don't have a lot of risk. And so I think for next year, our investment strategy will be consistent. Obviously, the rate outlook for next year does contemplate some cuts, but at the same time, you know, we, given our financing that we announced last week, we'll also have an extra hundred million plus in the balance sheet in 2025 that we, you know, for as compared to our prior forecast, we would not have had in the balance sheet. So I think we're in a pretty good spot for our investment outcome, investment income outlook for next year.
Okay. And then just from the, I guess, discretionary investment side of things as you look out to 2025, whether it's for additional technology, capabilities, clinical, investments that you may find to be compelling. How are you looking about that out at that as affecting the P&L next year?
You know, I think from our standpoint, we're looking at it both in terms of ways to improve MBR and drive SG&A economies of scale further. So, you know, on the SG&A side, the part of the benefit we got in 2024 was operating leverage against our fixed costs. But we've also been really focused on trying to improve our incremental, variable costs across a number of our departments, such as, you know, claims, our member experience functions, things that are highly variable and dependent upon our enrollment changes.
And so, you know, whether that's, you know, AI-based tools or just kind of frankly more basic blocking and tackling automation type tools, we're looking for lots of ways to try to just make our worker experience easier, make their jobs easier, make it simpler, try to automate what we can, try to cut down on unnecessary administrative work where we can, but really things that will continue to help us drive SG&A down in the future. I think from a medical expense standpoint, it's that's a lot of the same. I think it's partially about just continuing to recruit and train and make sure the adoption of our tools is happening.
I think we're focusing a lot on things like, you know, post-discharge, you know, care navigation we talked about, looking for other ways to drive down spend outside of just the inpatient setting where we've done, I think, a really great job of preventing unnecessary and avoidable hospitalizations and readmissions, and I would say, just kind of, this is more of a general one, but maintaining our culture as we continue to scale.
Something John often talks a lot about is, you know, the core team is kind of, you know, making sure that as we've grown up over the last 10 years and think about the next 10 years, how do you continue to make sure people appreciate the mission, the spirit of where we began and making sure that as you plot new states and hire more clinicians and do those sorts of things, you know, people don't just use the tools, but they think about it from the same perspectives that our clinicians set out from day one, so a lot goes into how we think about just employee engagement and training over the next couple of years.
All right. Awesome. Well, we're probably, we're pretty much at time here. So, gonna wrap it there, Thomas, Harrison. Thanks very much. Great to have you guys and appreciate the conversation.
Yeah, appreciate it, Scott. And thank you all for coming.