Good morning. My name is John Stansel . I'm a member of the Healthcare Services Equity Research Team here at J.P. Morgan. Today I'm joined by the team from Alignment Healthcare. We have CEO John Kao and CFO Tom Freeman. So we'll start with the presentation, and then we're going to move into Q&A after that. John, over to you.
Good morning, everybody. Can you hear me?
We're good?
Thanks for taking the time to listen to the presentation. I'd say over the last year or so, I've gotten a lot of questions from investors and bankers and other colleagues in the industry as to why are you at Alignment thriving in this MA environment? How are you doing it? My goal today is to share that with you, is to give you the blueprint of how we think MA should be done right. Let me set the stage, though, for you. 2024 was a breakout year for us. We kind of got to the scale level we need to be profitable: 185,000 members. We grew 58%, I'm sorry, 55% year to year. We had operating leverage really take root, 340 basis points improvement in our adjusted SG&A ratios. We improved EBITDA by $33 million. 98% of the members are in four-star or above plans.
Heading into 2025, I'm even more optimistic. We just announced 35% 1/1 growth in membership. We're right around 210,000 members. We expect improved MBR and SG&A ratios. We'll be providing guidance on our February 27 earnings call. So in a little bit over a month, we'll give you a lot more detail. I feel really good about it. We're confident in achieving consensus of $40 million EBITDA. Very confident, and I think a takeaway is the runway in 2025, 2026, and 2027 is very, very strong. Okay, and so as we talk about, well, what differentiates you from the rest of the industry, I think you've got to start with some of my personal experiences, and for those of you that haven't heard, I've been saying this for the same thing for the last four years at J.P. Morgan. It happened to me and my mom.
She had a heart attack. She had four stents put in her. This is going on 11 years ago. It was a situation where we experienced the healthcare system personally. It was troubling. It was confusing. After that experience, I made the decision at that point to say, somebody has to try to do something different. If I don't try to do it, and I say this with no hubris or no ego, we have to try to do something that improves the healthcare system for seniors. We kind of started this company off of these principles of very simply treating each member as a parent, treating every single senior as if it was one of our own. Okay? Internally, we kind of refer to our members as our parents, because in the collective, that's actually accurate. They're our parents.
Also, principles, put the senior first in everything you do. Just put the senior first. So simple. Number two, support the doctor. Enable the doctor, support the doctor, make the doctor successful, give them the tools to be successful, make them aligned with you. Don't put them in a situation where they have to decide between profit or care. Just take care of the doctor, take care of the senior. Use data and technology to change that senior's life, to change that doctor's life. And I would say, most importantly, have a serving heart. That's the number one requisite for when we hire people in the company. Do you care? Do you feel called to actually be part of this company, to want to serve people differentially, to build relationships with our members and their families? Okay? Sounds simple, right? How many others out there have these same principles?
And my hope is more and more of the industry adopts these principles, which, by the way, are very consistent with the Triple Aim that Health Affairs supported. Okay? And so I think on the right-hand side, it's just the experience. We have a lot of experience. And in this business, it is a complicated business. And so having that experience is invaluable. At FHP, the kind of learning how vertical integration can work. PacifiCare, partnering with doctors, enabling doctors to be successful. TriZetto, I learned around core systems, technology, supply chain, operations. Okay? And then at CareMore, it was all about chronic disease management. And you kind of put all those capabilities together, you kind of get alignment. Okay? That's the OG, the origin story of how we built the company.
I just think it's really important to get back to the roots of why did we do it, the why. And the ultimate is to change healthcare, to improve healthcare for everybody in this country. It's a big, hairy, audacious goal. But I'll tell you what, when we started it, it was just four or five people. And it's taking root. It's been 10 years, but it's been worth it. Okay? The goal is worth it. So what's different about us? I would start with, we think of MA as a care management business. Okay? It's a care management business. It's not an underwriting or an actuarial business, fundamentally. Okay? We don't think of it as a product that's part of a commercial insured chassis. It's an integrated business centered around clinical excellence, commitment to clinical excellence. Okay? You can't underwrite somebody that's sick.
You have to take care of them. And just the evidence of that is 4% of our medical expenses, 4% of our MLR is embedded in clinical costs, our at-risk chronic disease management part of the business. That's about 25% of our employees is clinical. We're very proud of that. All right? Those two concepts. The other concept, we like managing the risk. We like managing the risk. We are totally fine working with global cap providers at the right rates, with the right duration. But fundamentally, we think we do a better job clinically taking care of our members. It has to be a care, a core competency of ours, caring for these seniors. Okay? So that's something that's, I think, is lost sometimes when you talk to other MA insurers. Actionable data is a huge differentiator.
We did have the benefit of starting with a clean slate, a white slate to build a unified data architecture that you could take eligibility data, claims data, authorization data, encounter data, lab data, pharmacy data, all in a single repository. We define metrics for each part of the business that allow us to be making actionable decisions, real-time decision-making. Most of the legacy players have several back-end systems that require them to reconcile the data. It takes 30 or 45 days. When you hear them talk, they talk about claims. Well, claims by definition is 30 or 60 days old. You can't use claims definitionally. Now, claims is important for administrative functions, documentation, and all that. But in terms of clinical control, clinical best practices, you need it real-time. We're talking to one of the large players, and we're saying, you know, we get live lab data.
They go, why do you need live lab data? Well, because it's part of our definition of whether a person is polychronic or not polychronic. It's part of our stratification algorithms. Okay? Actionable data is so important. And then the last one, business model design to scale, super important. I learned this when we sold. This is going on 10 years ago, 11 years ago, when we sold CareMore to Anthem, the old Anthem Elevance. Is the network so important. The delivery system is so much, such an important part of the equation. And we just concluded you have community doctors that it's important to make better, make them successful. Okay? And I'm going to show you how we do that. You don't have to buy every single PCP in your marketplace. You can't afford to do it anyways.
So what we concluded is the best way to run this business most capital efficiently is see people at the home, right, and/or see people virtually. Right? You don't need a lot of bricks and mortar. And then you say, well, okay, how do you do that? Well, you got to know, use the data to know who that 10%-20% that need the care. And we'll show you that in a second. But if you know what to do, you have the control mechanism to manage and care for these people at the home. And we found it is absolutely the most capital efficient model that yields the best outcomes. Okay? So that's a different approach. The other thing you'll hear us talk about is this notion, these kind of four operating principles of transparency, visibility, control, and durability. Okay?
Transparency is, again, we grew up as a startup. When you grow up from nothing to $4 billion or what are we going to be talking about for 2025 revenue, when you grow up, you have to change workflows. You have to change operations. You have to mature operations. The way to do that, you've got to be transparent. You have to have the culture to say, we are okay with making changes culturally, continuous improvement. Right? If you do that, you're going to get better. And then visibility with the data allows us to know what to do, where to go, where to make changes real-time. Control is you got to have the control mechanism once you know what to do. How do you do it? And then that creates durability. That creates durability in the business model. Okay?
These are kind of the additional principles of what differentiates us in MA. Now I'll tell you how we do it. We talk about this as the virtuous cycle, doing well by doing good. Doing well by doing good. All right? First thing, you got to have the actionable data. That actionable data we use through our algorithms are really we define who do we think are in that 10%-20% of the population that need the care. This is our frail. This is our polychronic. This is mom and dad. My mom's 92 now. She's starting to, you know, her thinking is still really clear, but her body's getting frail. All right? She's like the poster child for this. Okay? If you know who they are, that's step one. Step two is, well, what do you do about it?
What do you do about it? What you do about it is you have to engage them to want to work with you first. We're at about 60% engagement of the identified members that we have that we think need this kind of extra care. And I want to get that up to 80%. So there's an opportunity for us to do better. But even at 60%, we are bending the cost curve. We have, like I said in the previous slide, 400 clinicians in our company that serve that 10%-20% of the population. We didn't outsource it because it has to be a core competency art. We have to have quality control over that. It's a core competency. If we do that, if you know who that 20% are that cost you 80% of the money, you're going to bend the cost curve. Okay?
You're going to bend the cost curve. And the way CMS's bids work is that translates into competitive benefits. And it's a word that you'll hear more and more about is rebates. And a rebate is essentially the amount of incremental benefits above and beyond fee-for-service Medicare in a particular county. All right? So if you have higher rebates, you're going to have theoretically a more competitive product offering against your competitors. The only way you can structurally have an advantage is if your cost structure is lower. But you can't just deny care and to lower your costs because you're going to piss people off. You got to have high quality. So how do you do that? Right? That's the magic of all this. And it's providing more care, not less care, more care. That leads to sustainable growth.
And when you get the growth, you got to keep them. You got to keep them happy. All right? And so this notion of having a core competency that ensures that you're providing high quality with a low cost is something we can do very reliably. And let me show you how we do it. This slide shows 74% of the members that we have, 74%, right? 3/4 of the members cost 5% of our institutional costs. 26% account for 95% of our institutional costs. The implications of that are significant. The 74% generally healthy. We would characterize that cohort as healthy seniors. They're 65. I'm getting close. They're healthy. Okay? They see their PCP. They see their specialist. There's no gatekeeper. They can do whatever they want, but they're generally healthy. All right? And the 26%, you kind of, we've kind of stratified that further.
To the right in the blue circle, we call that a healthy utilizer. These people have their markers, they're healthy. They're pretty good. But they had an accident or they fell. Right? It's an episode of care that caused them to go to the hospital, create a claim. All right? And but generally, they're pretty healthy. In the green, we call the pre-chronic. That's just the opposite of the healthy utilizer. Pre-chronic, their markers are really chronic. They need care. But for whatever reason, they haven't hit the claim system yet. They haven't gone into the hospital. So the data would require us to know who they are and treat them the same as what's in the orange circle, which is the chronic. That's 12% of the members that account for 74% of the institutional claims. You got to treat these different cohorts of seniors in MA differently.
You have to give them the right level of care that's efficient. It's data-driven, but it's still a clinician. It's not AI. It's not an app. It's somebody that knows what they're doing, taking care of your mom or your dad. Okay? And so if you look at the blue bars kind of underscoring it, generally speaking, the healthy and the healthy utilizer are seeing their PCPs, you know, approximately five times a year. You know, they're happy. They're generally happy. And they're generally healthy. The pre-chronic and the chronic, we see them, between PCPs and really our Care Anywhere teams, 24-36 times, depending upon their acuity level. I can tell you, I know of people that are being seen once a week, checking in. And here's where it is. It's preventing little things from being big problems. Little things, prevention, little things, paying attention.
Our clinical people would refer to it as a maniacal attention to the patient's detail. You can't do that if you don't care. So we build relationships with these people. We build relationships. We treat them literally like our parents. All of you would want your parent to be in an Alignment plan. I'm just telling you, it's just better care. It's the right way to think about it, and it's capital efficient. You're providing more care, and to the right, these are the interdisciplinary care teams we employ: doctors, APCs, medical assistants, social workers, behavioral coaches, case managers, care coordinators. All of them do rounds daily, virtual daily rounds on our polychronic patients. We know every hour how many of our members are in the hospital, why they're in the hospital, who their specialists are, who they're helping. We just know. It's doing good old-fashioned medicine the right way.
It's just scalable. Okay? So that's a piece of it, and that model yields these results. Quality. We talked about quality first. 80 NPS in our Care Anywhere members, close to 70 on an overall basis. I think the industry is like 35. Okay? They like us. They partner with us. We partner with our patients. Okay? 98% of our members are in four-star and above star ratings. Google. Google's tough. 4.9 Google star ratings. Usually, people post Google when they don't like you. It's like a Yelp, right? 4.9. They actually go to the effort of posting. 1.9% auth denial rates. You know, we don't think of the business in terms of providing less care. We provide more care, just the right care at the right time. Retention rates, 47% lower voluntary turnover. It's another metric for they like us. When they join us, they experience this.
They want to stay with us. 30% membership CAGR in growth over the last five years, and we haven't really invested in the brand yet. We're getting big enough. We're going to start to invest in the brand. That's when you're going to start seeing some real hockey sticks. Okay? And continuously, plan switchers represent 80% of our growth. Okay? The clinical consistency is something that is a mind-blower. 153 inpatient admissions. That's like 39% better than fee-for-service Medicare. I think Milliman would suggest a well-managed plan, MCO is like 200. We're like 153, and we've been doing it for seven years. What's even more exciting for you is California is at 152. Our ex-California markets, in terms of the replicability of the model, is at 148. So it's taking root, even ex-California. I get the question all the time, "John, can this model scale?" The answer is yes.
We're just waiting to get the cash flow positive before we fund the scalability. And you'll see in a couple of slides, you know, our ex-California members are already starting to scale. It's getting beyond 10,000 lives in a couple of our markets. And I tell people, it's easier to get from 10,000 to 100,000 members in a market than from 0 to 10,000. Because when you're 0, nobody knows who you are. You have no brand. You have no reputation. When you get over 10,000, you're like legit in a market, and then you can really build on that reputation. To see this in practice, this is how we run the business day-to-day at a market level. Okay? We have daily market review meetings where it's not required, but everybody joins these meetings. We go through the data. We go through the metrics. We make real-time changes.
Earlier in the year, when everything, all the utilization was blown up, we were not immune to high utilization. We just knew about it because of our data architecture real-time. We added a couple of thousand members in one IPA, and they were new. And basically, what happened was another plan dumped them. And so we had to absorb them. And we were looking at 300 admissions per thousand. We're looking at like 120 MLR, something like that. So what did we do? We had visibility. We knew what was going on. All right? We had the data. Then we had the vis that's the visibility. Then we had the control mechanism, the boots on the ground, the clinical teams, and we took action. And in 60 days, we got that down to 180. We talked to the hospital. We talked to the group. We talked to the specialists.
You know, we talked to the PCPs. We just knew it, and we took action. We got it all under control. Now I think it's back down to 150. All right? So there's nothing out of magic about this. It's data, it's visibility and control, and having the capabilities to do something about it when you see hotspots. I'm pretty sure if you asked anybody else, "Do you know where your hotspots are and what are you doing?" They wouldn't know. Right? And this is just not because we're only a couple hundred thousand members. This is going to be very scalable in a model, and it's training. It's development. It's teaching people how to apply the data. And it's organizational design, all of which is centered around caring for this senior. Okay? And so here's this example. You start year one, you know, 90-ish% MLR.
You kind of see that. And you kind of ends up by year five, you know, in the high 70s. That's kind of the basic kind of model we have. If you can get that MLR down, that gives you the ability to invest in product. And the product, the middle slide, are these rebate values. And so the lower the MLR gets, the more aggressive we can invest in the rebates. And you begin the rebates, as we've talked about before, you can grow while still preserving margin. And that's what led to the membership growth. This is just one example. But we have the financial architecture at the bottoms-up approach. Everything is detailed. There's nothing that is a silver bullet. It's a lot of things working together, serving the senior. Okay? This yields this kind of outcome at a consolidated level. All right? The x-axis is growth.
And this is through Q3 2024, which we did 58%. And you compare that to MLR increases of all of the people in the sector. Now, this shouldn't surprise you, right? Most of the people didn't grow. They chose not to grow because of stars or because of V28. And their MLR still went up. You got one player that, you know, grew aggressively in their bids, and then they blew up on the MLR side because they didn't have the cost controls in place. That's not surprising either. We're the only ones that have grown and not blown on MLR. Well, how do you do that? Right? You got to have the data. You got to have the clinical model, and you got to have the scalability of the systems, the operational systems were growing up significantly. In 2023, we made significant investments in member retention, member experience process.
A lot of work. A lot of work. And why did we do it? Well, we knew that we were going to be advantaged in stars and RAF for 2024. So come June of 2023, we grew. We designed the benefits in a way to grow. I didn't think we'd grow at 58%, but that's what it ended up being. Okay? So the dumbest thing you could do is get the growth and not keep the members, which is what we did. We kept the members because they like us. So if we win, everybody wins is the model. Ergo, the name Alignment Healthcare. If we win, everybody wins. The seniors win. They get better improved outcomes. The Triple Aim is met for that senior. They get really important supplemental benefits for their social determinants. It's real. Providers win. We help them with additional resources for free.
And then we gain share surplus them. We want them to do better financially. We help them. All of our clinicians are not in the provider directory. They don't have to fear that we're taking their members. They're their patients. We're there to augment their practices and make them successful. CMS wins. Right? It's a more efficient model. And you win. The shareholders win because everybody can win in this model. Okay? A couple more important slides here. You see our growth, again, 155 to 209, 35% growth. The middle slide is important. We've still got a lot of growth powder in California. We only have like 4% or 5% in the entire market. There's a lot of market share. We can grow significantly more in California. I think we can get 15%-20% growth every year just in California.
And now we're starting to get traction in Nevada and North Carolina with growth. We're getting traction in Texas with growth. And we'll get Arizona to grow a little bit better. So it's getting the ex-California markets to also get from 10,000 to 100,000. And then we're going to start planting flags in new states in 2027. And we're going to do it from cash flow from operations. It's not if you can scale. It's when do you scale and how do you fund that scaling. And we're going to do it from cash flow from operations. Okay? And so you see, you know, we doubled our ex-California growth this year. So over 25% of our growth came outside of California. Right? And the other thing I would say is this number could have been a lot higher, but we were very discerning in the way in which we contracted.
We exited some products. We exited some IPAs that we didn't think met our quality standards. Okay? And the right-hand side, 82% of the members came from switchers. Switchers. Of that 82%, 75% of those switched from a plan rated below four stars. That's relevant because heading into 2026, that gap is going to widen for us. So you see on the left-hand set of slides, if you kind of look on the left, we got 98% of our members in four-star and above. Everybody else on a national basis in the markets that we are is 64%. In California, we're at 100% of our members four-star and above, and our competitors at 61%. That's relevant because if you have a higher star advantage, you get more money from the CMS PMPM revenue. It's really important. Okay?
The point here is everything that has happened in 2024, which is really, really good, is starting to turn the corner. You're going to see profitability on an enterprise-wide basis in 2025. It's just going to get better in 2026 and 2027. Structurally. This is kind of the money slide as far as I'm concerned. Embedded gross margin potential. So you look at the growth that we've had the last couple of years. In the middle section, you see that a year-one member typically and historically provides us about $90 PMPM gross profit margin in year one. Year five, it's about $230. Right now, we've got half of our members in a year-one or year-two cohort. If we grew nothing more, you're going to get just a gross margin lift that's on the right-hand side. And the duration of our members is typically six and a half years.
And we're pushing really hard to get that to seven years. Member duration. That impacts lifetime value, etc. Okay? And so I just think that we're starting off, and we have a multi-year runway opportunity. Strong 2024, strong 2025. We're very disciplined on our bids. Very disciplined. We're not doing what everyone is telling us to do. We're doing what we know is the right thing to do, and it's going to pay off in 2025, 2026, 2027, and beyond. Stars advantages and the third phase-in of V28 is going to be a huge advantage for us. Huge advantage. We saw it coming. For those of you that have been here for the last four years, I've been saying it. You know, there's going to be a reckoning on risk adjustment. And it came with V28. Phase-in year number one, people had mitigation efforts. It's okay.
Year two is a little tougher. It's 2025, and you see it in people's growth that just came out this morning. Right? '26 is the third of the phase-in. That's going to get even tougher. We saw it coming, so we never got hooked on high RAF scores as a sustainable fundamental in the business. We were very conservative, and so we now have an upswing opportunity while everyone else is getting hammered. All right? We're going to continue to grow California. We're going to take that cash flow. We're going to get the other couple of markets to get the cash flow. We're going to use that to fund our growth, and we're going to fund it ourselves. That's how we're going to take over the world, and we're going to do it through blocking and tackling. There's no out of magic.
It's just scaling the company the right way. There's no shortcuts in this business. Okay? And to top it off, you've got some, again, structural changes right now going on in 2027 and 2028, by the way, where they're actually changing the CAHPS measures from and weighting it from four down to two. That's going to be a huge advantage for us. Huge advantage. Ensuring that we're going to be even solidly in the four and hopefully even four and a half and five. Okay? So you put that all in the context of where the rest of the sector is. And my hope actually is we can be a bit of a beacon for the rest of the industry to learn from this so more seniors in the country can benefit from just better care.
There's enough market share for us to hit all of our numbers and then some. But really, we want to catalyze change in this sector that needs change. This is the blueprint of how you fix MA. This is the way that Dr. McClellan wanted it to be when he designed it. And you're just seeing right now the fringes of, you know, the kind of, I call it financial engineering within MA starting to get stopped. You got to do what they want you to do is provide the Triple Aim and take care of people. All right? And I hope you can join us on this journey. Thank you very much.
Great. That was comprehensive.
Sorry.
No worries. I'll try to squeeze a couple in before we hit the road. I think just one quick one before we get into kind of the business model. You reaffirmed guidance as part of the presentation and what you put out. Is there anything you want to comment on about 4Q, how it played out versus your expectations? Maybe give John a sec to.
Take a breath.
Take a breath.
Yeah. So, for those who saw our press release earlier in the week, we reaffirmed our fourth quarter guidance. We provided an update on year-end 2025 membership in addition to one-on-one, and we also reiterated our confidence in $40 million of Adjusted EBITDA for 2025, and so with respect to your question on Q4 of 2024, we feel really good how things landed, and thematically, it was very similar to what we talked about on our third quarter and second quarter call. In other words, our kind of ability to manage utilization in line with our overall expectations was consistent through the fourth quarter. It kind of continues to be our big differentiator. We have seen some continued pressure on supplemental benefits, but again, in line with where we thought we would be as we closed out the year.
So not only was it obviously such a breakout from a growth standpoint in 2024, but to have managed within the overall range that we started with from an EBITDA standpoint, I think is a really powerful testament to the scalability of the care model while growing close to 60% last year.
Great. And then maybe a bit of a bigger picture question. You know, I think we talked about the update to growth enrollment guidance for 2025 was definitely positive. You know, 22%-25% for year-end 2025. You know, I think you've talked about targeting greater than 20% growth, you know, as kind of your longer-term target. I think you talked a lot in the presentation about being discerning and being targeted. And then at the same time, the widening advantage on stars and that advantage that you get from people who are losing, falling below four stars and potentially picking up switchers. Is 20% really the right number for over the next couple of years to target for enrollment growth, or is there something that maybe should be a little bit higher?
I think we'll provide 2025 guidance here in a month or two before we start talking about 2026 guidance. But look, to your point, our goal every year is to balance both margin expansion and 20% plus growth. We're never going to swing to a growth-at-all-cost mentality. We didn't do it when we went public. We're not going to do it moving forward. At the same time, we're not going to shoot for a profitability-at-all-cost mentality either. We want to continue to try to really thread the fairway and achieve both moving forward. I think the advantages are going to widen in our favor, but I think that just gives us latitude to pursue both of those goals together over the next several years.
Great. And then maybe just one quick one on regulatory elements. Obviously, new administration, lots of questions about what that means for Medicare Advantage. I think some positive theory that they might be more favorable is more favorable for MA, maybe making things easier, I guess, to kind of use the shorthand. Does that help or hurt you? Because you have kind of thrived in this environment where things have gotten more challenging for the, I'll call it the average MA player.
Yeah. I think it's a notch more, I would say, complicated and nuanced. Meaning, I think in general, it's going to be very favorable for MA players. But I think some of the principles that we were just talking about, I think, are going to get reinforced. For example, on the phase-in of V28, the third-year phase-in, do I think that's going to get, you know, curtailed or rolled back? I don't think so. Because what you don't want is you don't want to reinforce bad behavior. And so you want to, if you're going to do it, you need to make sure that you have a care plan that supports higher reimbursement. I mean, things like that operationally to ensure that the Triple Aim is actually achieved. But overall, I think its history would serve. It's going to be much more favorable for MA.
As far as I'm concerned, in terms of the Advance Rate Notice that came out last week, I think it sets the floor for what will happen in the final.
Great. You stuck in an extra question there, which is where I was going next. I appreciate it. I think we're out of time. Thank you, everyone, for coming.
Thanks, everyone.
Thank you, Thomas.
Thanks.