Good afternoon, and welcome to Alignment Healthcare third quarter 2026 earnings conference call and webcast. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one again. Please be advised that today's conference is being recorded.
Leading today's call are John Kao, Chairman and CEO, and Jim Head, Chief Financial Officer. Before we begin, we would like to remind you that certain statements made during this call will be forward-looking statements as defined by the Private Securities Litigation Reform Act. These forward-looking statements are subject to various risks and uncertainties and reflect our certain expectations based on our beliefs, assumptions, and information currently available to us.
Descriptions of some of the factors that cause actual results to differ materially from these forward-looking statements are discussed in more detail in our filings with the SEC, including the Risk Factors sections of our annual report on Form 10-K for the fiscal year ended December 31st, 2025, and our Form 10-Q for the fiscal quarter end September 30th, 2026. Although we believe our expectations are reasonable, we undertake no obligation to revise any statements to reflect changes that occur after this call.
In addition, please note that the company will be discussing certain non-GAAP financial measures that they believe are important in evaluating performance. Details on the relationship between these non-GAAP measures to the most comparable GAAP measures, that reconciliation of historical non-GAAP financial measures can be found in the press release that is posted on the company's website in our Form 10-Q for the fiscal quarter ending September 30th, 2026.
Good afternoon, and thank you for joining us on our third quarter earnings conference call. For the third quarter, 2026 health plan membership of 301,200 represented growth of 31% year-over-year and drove overall revenue of approximately $1.4 billion, a 37% increase year-over-year. Adjusted gross profit of $142 million represented an adjusted MBR of 89.5%, a 240 basis point increase year-over-year. Meanwhile, adjusted SG&A of $120 million represented an SG&A ratio of 8.9%, which improved by 70 basis points year-over-year.
Taken together, adjusted EBITDA was $22 million within the range of our guidance. I want to spend a few minutes on the headwinds that emerged this quarter and the actions we have taken in response. As part of our broader scaling initiatives, we began a comprehensive claims system migration last year designed to improve our payment speed, auto adjudication rates, and payment integrity capabilities. During this transitional period, we experienced greater volatility in claims processing.
As this volatility normalized, we identified a notable increase in aggressive provider appeal and disputes in our paid claims data, which resulted in higher cost trends. Separately, during the quarter, we saw pockets of higher costs in areas such as catastrophic cases and skilled nursing, which also pressured medical expenses. To address the headwinds we experienced, we acted swiftly over the past several months to build out a more robust payment integrity function, including industry standard prepay claims edits and more rigorous post-pay review.
Additionally, we have moved quickly to manage and deploy our clinical resources more effectively and are making targeted investments to ensure our clinical best practices and operating rigor are applied systematically across our markets to reduce the variability in member outcomes. We are confident that the actions we are taking to scale our clinical programs will enable us to achieve the level of clinical effectiveness that we are accustomed to. We are pleased with the progress we have made across our multiple initiatives and saw institutional acute cost trends stabilized as we closed out September and entered October.
Furthermore, we have experienced positive momentum across other cost categories. Despite our progress, we are taking a prudent approach to the increased trend seen in Q3 and assume that higher costs in the third quarter will continue to weigh on our results for the remainder of the year. Given this position, we lowered our annual guidance to no less than adjusted gross profit of $575 million and adjusted EBITDA of $100 million. I want to emphasize that the guidance we have provided today is a guidance that we are confident in delivering.
Furthermore, we have thoroughly reviewed each market to identify the issues that impacted our financial performance this year and mobilized quickly with plans to address them. Our revised outlook reflects both a prudent posture toward the cost pressures we are seeing today and a disciplined approach to forecasting the balance of the year. Our focus is now on execution, delivering against the commitments we are making today, and positioning ourselves well for 2027. As we enter 2027, we feel well-positioned to achieve our top-line growth target of at least 20% given the early results of this AEP.
Importantly, we bid prudently, reconciled those assumptions in the bids to the trends we are seeing today and have made adjustments in areas we saw room for improvement. At this time, we have a firm grasp of the underlying market dynamics we faced in 2026 and the actions required to address them. Taken together, we believe we will strike the right balance between growth and margins for 2027. We will share our thoughts in greater detail following AEP results in January. I would like to take a moment to address our Star Ratings for payment year 2028, which reflects performance for 2025 dates of service.
We maintain a 4-star or higher rating in six of our seven eligible plans, demonstrating our ability to deliver strong Stars performance across much of our portfolio. At the same time, our California HMO contract earned a 3.5 Star Rating, which is below our expectations. The shortfall in our California HMO contract was primarily driven by misses on several triple-weighted measures, particularly in HOS and Part D, as well as higher than expected industry cut points. We have already identified data and workflow opportunities within our Stars infrastructure and initiated actions across our enterprise to drive better and more consistent Stars performance.
We have conducted more provider and member engagement initiatives to improve performance and survey measures, address data issues that impacted gap closure in Part D, and accelerated our progress in HEDIS gap closures to further strengthen our position in these metrics. These changes are in place and operationalized for the 2026 performance cycle. In conclusion, we continue to demonstrate profitable growth and are addressing the challenges that impacted our performance this year.
We have taken decisive action in those areas, and our revised outlook reflects a prudent view of the cost pressures we're seeing today. At the same time, we continue to invest in capabilities and operational changes that are important to support our next phase of growth. Over the past couple of years, we have evolved our leadership, processes, and technology architecture to support greater scale. We are already seeing benefits from some of these changes. This includes greater visibility and control over inpatient utilization through our partnerships with the providers to de-delegate institutional acute UM functions.
We also continue to seek opportunities to assert more control over our pre-service UM for outpatient and professional costs where appropriate. Additionally, our clinical model remains a core strength of our business and primary driver of our unit cost advantages. The investment in claims processes, clinical operations, and Stars infrastructure build on that foundation. With that, I'll turn the call over to Jim to further discuss our financial results and outlook. Jim?
Thanks, John. I'll dive into our third quarter results. For the quarter ended September 2026, health plan membership of 301,200 increased 31% year-over-year, supported by strong member additions and high retention in our existing membership base. This drove revenue of approximately $1.4 billion in the quarter, representing approximately 37% growth year-over-year. Third quarter adjusted gross profit of $142 million represented an adjusted MBR of 89.5%. Approximately 100 basis points above the implied midpoint of our third quarter guidance, and an increase of approximately 240 basis points year-over-year.
Approximately half of the year-over-year increase in MBR was driven by changes in Part D seasonality and additional clinical model investments, consistent with the comments we made on the Q2 call. As John mentioned earlier, we also observed a notable increase in provider-led appeals and disputes in the quarter, along with elevated costs within our skilled nursing and catastrophic case categories. These components drove the remaining increase in MBR. Turning to operating expenses, our adjusted SG&A was $120 million, an increase of 27% year-over-year.
As a percentage of revenue, adjusted SG&A of 8.9% improved 70 basis points year-over-year and outperformed the midpoint of our guidance range by approximately 90 basis points. We delivered this result even as we made incremental investments in our business previously mentioned in the Q2 call and John's commentary today. Additionally, included in the quarter was a benefit from lower incentive compensation accruals given our year-to-date performance against target. Taken together, third quarter adjusted EBITDA of $22 million produced an adjusted EBITDA margin of 1.6%.
Moving on to cash flow and the balance sheet. We generated $158 million in operating cash flow during the first nine months of the year, and our liquidity profile remains strong. We concluded the quarter with $743 million in cash equivalents, and short-term investments. Overall, our reserves remain well-positioned in both current and prior years, and we are confident our cash flow generation will continue to support our growth going forward. Lastly, our funded leverage ratio at the end of Q3 was 2.4 x our trailing 12-month EBITDA.
Moving to our guidance. For the fourth quarter, we expect health plan membership to be no less than 305,000 members. Revenue of no less than $1.32 billion. Adjusted gross profit of no less than $104 million, and adjusted EBITDA of no less than negative $28 million. For the full year 2026, we expect revenue of no less than $5.25 billion, adjusted gross profit of no less than $575 million, and adjusted EBITDA of no less than $100 million. Our fourth quarter adjusted gross profit guidance of at least $104 million implies an MBR of 92.1%.
In our guidance, we have assumed a continuation of the elevated medical claims expense we experienced in Q3, with no contemplation of the stabilizing trends we observed in both September and October. Furthermore, while we are not including any benefits from the initiatives currently in progress, the cost of these initiatives are fully burdened in our guidance. Lastly, on seasonality. Our revised guidance continues to embed an assumption for increased costs relative to typical medical expense and Part D seasonality.
Additionally, we are assuming a continuation of the higher costs we experienced in the third quarter related to elevated appeals and disputes activity, along with increased costs in certain categories. On SG&A, we expect higher expenses during the fourth quarter associated with growth-related costs and marketing expenses related to AEP, consistent with our past experience. In closing, our updated outlook reflects prudence in our positioning as we address the pressures we discussed today, as well as the seasonal factors typical of the fourth quarter.
We expect the actions we have taken this quarter to provide visibility and control and support improved performance as we position ourselves for 2027. With that, let's open the call to questions. Operator?
Thank you. At this time, we will conduct a question- and- answer session. As a reminder to ask a question, you will need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes to the line of Matthew Gillmor of KeyBanc. Your line is now open.
Hey, thanks, guys. I guess I just wanted to start off with the cost trends that you have identified. There was a discussion that John started off with in terms of this new claims processing system. I think it is called Facets, and the deploying of that system sort of led, I think, to the better identification or sort of faster claims processing. I was just hoping you could talk a little bit about that new system and how that is either contributed to you identifying these claims or was that just concurrent with you sort of seeing higher claims? Just hoping you would unpack that a little bit. Thanks.
Speaker, you are on mute. If you can just unmute your mic.
Sorry, guys. Yeah, Matt. Facets is the industry leading claims adjudication application. We migrated off of something that we thought was subscale. One of the benefits of this is we felt that we needed better auto adjudication rates so we could pay our providers faster. We needed to make sure that we had kind of state-of-the-art payment integrity programs to offset the AI initiatives from a lot of the larger providers. Anybody that has gone through one of these conversions knows it is a messy process. I am actually pretty happy with where we ended up in terms of getting through most of this in July.
We are three months past that now, and I feel very happy about where we are from a stability point of view. But really what happened is we saw volatility in our paid claims, and we started seeing that in July. Once we realized we had a lot more appeals and disputes coming through, we had to react on that. I am happy to say that the amount of appeals has dropped off significantly in August, September, and October. As Jim said, in spite of that kind of stabilization, we are still taking a very prudent approach toward the rest of the year.
I feel good about where we are in that regard. I feel good about where we are with our reserves. That is the main issue on Facets.
Great. Just to make sure we understand, was it the case that the claims just happened to be running higher after you had implemented Facets, or was Facets helping you identify some of these higher cost trends?
It created volatility. When you go through one of these system conversions, what happened was we were making sure that the configuration of the system was correct. You had some timing differences between when claims were coming through, and we saw a higher trend, it really peaking in July. Once we saw that, we made all the requisite changes and got all of that through, in terms of getting paid claims stabilized. That created the higher trend really starting in July. We started seeing that, and the actually trends is starting to actually tail off a little bit, in August, September, and October.
But again, we are just being extra careful to make sure that we are kind of assuming that trend continues into Q4, despite the fact that I think some of the trends are already starting to stabilize.
Great. Thanks a lot.
You got it.
Thank you. One moment for our next question. Our next question comes from the line of Kevin Fischbeck of Bank of America. Your line is now open. Kevin Fischbeck, your line is now open. If you could just unmute your mic, can I hear you?
Hi, this is Joaquin on for Kevin Fischbeck. Can you guys hear me now? Sorry about that.
Yeah. Hey, Joaquin.
Yeah. Could I just get your initial thoughts on 2027 bid positioning to start off?
Yeah, it is a good question. We did a deep dive, as you might expect, on the assumptions that we made into the bids. We kind of compared that to the trends that we anticipate and the mitigation efforts that we have in place for the balance of this year, which just to underscore, we did not factor into the guidance. The result of that is we made some changes with respect to certain networks. We made some changes with respect to how fast we are going to grow certain products or not grow certain products specifically.
But overall, we feel good about where we are in 2027. We feel good about finding, again, that balance between growth and margin expansion. I think we have been pretty good at that over the years, and we will get back to that same cadence. You can imagine, we did a pretty thorough dive as to how much we should grow, and how we are positioned relative to competitors in Plan Finder. Again, I think we feel pretty good with solid, profitable growth at that 20% level.
Got it. Thanks. Just last one. A lot of companies have taken action to diversify their membership across plans. Is that something you guys are looking to do? Do you have any targets on how big any one contract as a percentage of membership should be? Thank you, guys.
Well, I think with respect to us, we have so much membership in the California HMO. That is something that we are looking at, obviously. I am not going to comment too much on the tactics associated with that, but more so focused on really getting to the root issues in Stars. Really what I think is going on is we still got six out of seven 4-star and above. We got 3, 4.5 star plans, just to remind everybody. But those are still being well run, really, because we are smaller in those markets. California has gotten so big that we just have to continue to invest in automation.
We have to continue investing and really incentivizing our provider partners and our IPAs to work with us and focus on Stars more and better. That is kind of where we are zeroing in on. It is like we might have some kind of crosswalk types of tactics, but we got to get to the root issues. We got to get to the root and fix it. Just to remind everybody, when we started the company, we bought a plan that was 3.5 Stars. It dropped to three. This is way before we had anything to do with it. We are still the only company to get from 3 Stars to 4.5 Stars.
The way we did that was underscore the fact that Stars is not a functional department. Stars is a cultural requirement. We have so many new people here. We are growing so big with new people, new leadership. That is something that we are going to be underscoring yet again, is this is something that everybody in the company has to focus on serving that senior, and we will get this fixed. That I can promise you.
Thank you. One moment for our next question. Our next question comes from the line of John Stansel of JPMorgan. Your line is now open.
Great. Thanks for taking the question. Just thinking about the reduction in guidance here in the back half. Appreciate that, generally speaking, your profit is a little bit more front half weighted. Can you just spend a little bit of time thinking about, I appreciate the conservatism in the back half of the year, but what the jumping off point is when we think about kind of like a fully burdened gross profit and EBITDA number to grow off of in 2027?
Yeah. John, I'll take this one. John Kao can fast follow. But just in terms of developing our Q4 guidance, we did want to reflect the cost trends that we identified in the call, and put ourselves in a position where we could deliver on the revised expectations. Obviously, you're seeing some prudence in that. In our guide, we're assuming a couple things and we're not assuming a couple things. That's important to understand from the jumping off point. In our guide, we're assuming that we're continuing these higher appeals and disputes at what I would describe a peak rate.
Okay, so putting some prudence in the appeals and disputes expectation. As John mentioned, John Kao mentioned, that's already starting to come down. We also are assuming a continuation of the SNF length of stay issues that we've talked about, but also CAT cases kind of continuing. As we exited Q3, we saw both of these things kind of moderate. What we are not assuming is any favorability from payment integrity or payment accuracy activity. That's not in the assumption. We're not assuming any returns from the clinical investments that we called out in Q2.
So, in that, we're kind of making sure that we can deliver and not baking in any of what we think is going to be run rate benefits for 2027. Then finally, we just put an extra layer of conservatism on it. The question, and maybe I'll push this over to John Kao, is that the right starting point for 2027?
Yeah, John, I would strongly advise not to use the Q4 MLR as an annualized starting point for 2027. That would be, I think, a mistake. We have a lot of initiatives going on. And again, just made a decision that this is a bit of a reset, and if we're going to do the reset, let's just make sure we can convey confidence to the street as to what we can achieve. And I think there's potential for upside. And we're going to be focusing on that. And that would be my suggestion for you, without getting into 2027 guidance.
Got it. And then just thinking about as you think about 2027 AEP, how are you thinking. I know 2026 was a year where you had kind of a higher mix of chronic and higher acuity enrollment. As you think about your 20% growth in 2027 as a baseline, your confidence there, do you think the mix will look more like 2026 or more of a normal year, where it's maybe less skewed to chronic and high acuity enrollment?
Yeah, that's a great question. And just to underscore one piece of detail, the margins associated with that C-SNP membership, even in year for this year, has been pretty good. That's a big deal. And so really, I think the points that we highlighted with respect to appeals, disputes, revenue cycle, aggressiveness of providers, a couple of outpatient kinds of costs, were the drivers. The mix issue is not something that we think contributed to this. Having said that, for 2027, I think you're going to see a more balanced on HMO products.
I think there are still some pockets that we think C-SNP makes sense for us. But yeah, that was the first thing I looked at is that as part of this mix, and it's actually performing quite well in year. Does that answer, John, your question?
Yep. Very helpful. Thank you.
Yeah.
Thank you. One moment for our next question. Our next question comes from the line of Justin Lake of Wolfe Research. Your line is now open.
Thanks. Just following up there on the fourth quarter. One way to look at it is your third quarter MLR was up about 200 basis points year-over-year. Looks like the fourth quarter implied is up closer to 400 basis points year-over-year. Is there any way to parse out that extra 200 basis points? Is that just, like you said, conservatism? Is there increased spending on initiatives that you've added for the fourth quarter that wasn't there in the third quarter? Anything more that you can give us there?
I think the one thing that we would say that was present in Q3 as well, in terms of a little bit extra burden that was in the baseline, was just Part D, which adds a little bit of an uptick in the MBR in the fourth quarter. That's just structural and kind of how the bids work out and the risk corridors, etc . We did add a little extra layer of investment in the clinical side. So that is, if you're doing a year-over-year, you have to kind of apply that same factor. Then sequentially, you've got, I would call it a pretty full run rate of these costs that we described, the appeals and disputes, the CAT cases, and the SNF kind of pushing into Q4.
What we're really doing is saying it's a bit one-sided, which is we are putting a full count for what we think the trend could be without any offset that we've already been actioning and actually starting to see some results. Payment integrity is a perfect example of that. We are being prudent on that. But that's how the build came about, Justin.
Yeah, Justin, I would add to Jim's comments, really the operative word from our point of view is prudence. We really looked at the Q3 numbers. We saw uptick in those appeals and disputes. Those are in our world called adjustments with respect to claims payment. We have seen a positive trend with those coming back down, starting in August, September and October, stabilizing. We see ADK stabilizing. We have initiatives with respect to cat case management, SNF length of stay management. All of the blocking and the tackling is implemented.
But really, we are just like, let's just be super prudent and not assume any of that is going to start being reflected until we actually get the paid claims in place.
Okay. Then same question on SG&A. Looks like it is relatively flat Q3 to Q4, typically up $12 million-$15 million, which kind of makes sense just given selling costs during AEP. What is going on Q3 to Q4 that is keeping SG&A flat despite that?
Yeah. But for a little bit of incentive comp that we mentioned on Q3, it is tracking exactly as to what our expectations were in terms of quarter-over-quarter. We were $120 million in Q3 and $132 million, I believe, in Q4. So it actually does tick up, Justin.
How much was the incentive comp benefit for Q3?
We said it would track according to plan. So maybe we'd be in the high $120s in Q3, I think was our guide, our original guide. And it's ticking up to $132. So we really haven't made any material changes. And in fact, we've been investing in the SG&A areas because we want to position ourselves for 2027. We called that out in Q2. There was going to be a little extra investment made in Q3 and Q4.
Got it. Thanks, guys.
Thank you. One moment for our next question. Our next question comes from the line of Michael Ha of Baird. And I'll open.
Hey, thank you. So I know you're pursuing Stars litigation now, but assuming no litigation relief, is restoring four Stars in time for next October impacting payment year 2029 achievable? Are there any milestones from now till next October that would demonstrate that to us? And also, can you help us frame the gross Stars funding headwind for 2028 and the portion that would remain after things like provider sharing and benefit cost actions, and if you would take benefit cuts potentially in 2028?
Yeah. With respect to dates of service 2026, payment 2029, obviously it's a bit early to comment on that, but I will give you some input that we feel good about our HEDIS gap closure initiatives. We feel good about our Part D data issues that got cleaned up. Just really as a reminder, even heading into Plan Preview 2 just a couple of months ago, I was feeling optimistic just because we had such a good CAHPS score come in, and we really got a little bit blindsided with HOS. That's still one area that is a little bit elusive for us, which really caused me to pause about 2026 in aggregate.
A lot of the changes in operations I'm comfortable with. But give us a little bit more time, and obviously I think CAHPS and HOS is going to be more and more important. I think our Part D is going to be strong this year in terms of dates of service. With respect to, I think your third question, you got to remind me what the second one was. Yeah, I think we're going to look at this like we always do, finding the right balance between growth and margin. I will say that the confidence I have with our ex-California markets and our operationalizing of those markets, I feel good about. I think we have a handle on the issues. We have a handle on utilization.
We have so much growth in those areas that the embedded earnings is going to start to steer the right way with us in those ex-California markets that would allow us to grow there. I think there's still more room for us in California to still get decent growth. I don't think we need to slow down growth in California maybe a little bit, particularly given where everybody else is. We'll make the right decisions with respect to benefit design. We're pretty good at that. Michael, what was your second question again?
Second question. I guess just the gross Stars headwind after provider sharing benefit cost actions, like mitigation plans you have in place, and it's just how you think about that.
Yeah. Let us get back to you on that one, please, because the mitigation initiatives is pretty material. I underscore two areas. One is embedded earnings. A lot of the investments that we made in obviously 2026 and the C-SNPs, I think is going to start paying off. It's going to help bridge some of that gap with respect to Stars. MRA, I think we are, as we have shared with you in the past, pretty conservative as it relates to risk adjustment. I think that there's lots of opportunity for us. We took a very, I would just say, conservative approach philosophically to coding. We did not want to be dependent on that.
I think it's also fair to say we can do a better job, and we're doing I think we're starting to dive into that. We've determined there's lots of opportunity for us on risk adjustment. We'll be in a position to share a lot of that with you when we give you the full plan. We expect to do that after this Q4 call.
Got it. Thank you. I wanted to clarify, I know you're still targeting 20% membership for next year, but I just want to clarify, your Star rating decline in California, has it not affected early AEP sales at all, or even broker feedback? For 2028.
Not yet.
Okay.
It's a great question. The answer is, it has not. The brokers are fine. We have such a strong set of relationships with them, built over the last 12 years. We've earned their respect. We do what we say. They have confidence in us. We feel really good about 2027 AEP. I mean, really good. I'd say the right products in the right markets with the right margins. I'm very happy about that. Just to note a couple of things that we've announced. We've added some pretty important provider partners this year. Hoag Memorial is a premier delivery system in Orange County in our backyard.
We've got a very good win-win contract with them. Then our expansion in L.A. with Astrana. I feel really good about that. There's a couple of other markets with certain products we're going to probably de-emphasize heading into 2027. Even with that, I feel good about the growth. Yeah. Even the providers, particularly the ones I just mentioned, are going to work with us because they have confidence in us that we'll get this thing corrected. That is a very good question. The next logic was, okay, well, how do you think about the growth in 2027? How do you think that'll impact your bids and your product strategy in 2028?
I think we've contemplated that, and I think we're going to be fine. I think it's really going to be, what does the margin profile look like in California with respect to benefit design relative to how much we grow ex-California? I think that's what we'll start looking at as we head into 2028.
Got it. Thank you. If I can squeeze one more in on 2028. It sounds like you're still focused on growth in California, but does your Stars shortfall change your thinking at all on your plans for new market expansions? I know you are sort of slated for that in 2028. Or will you delay it?
Yeah. The whole point of this, everybody, is to get this care model everywhere in this country. It's a good care model, and we needed to do this. We needed to scale. We needed to put these processes in place, and to automate more of what we do so that we can get this model in more states. I feel good about where we are and what we've done so far heading into 2027. We're going to be entering San Antonio and Charlotte. Again, that was a bit prudent on our part that we could have added additional states. We chose not to in 2027.
In 2028, we're working very diligently to add a couple of states. The whole point of this is what we've been talking about, is to scale this model. I think that you're going to be happy with what we end up with. We're going to get back to this kind of beat and raise cadence. Everything's going to be bigger and much more reliable. We got to get through this kind of transformative phase.
Thank you so much, John.
Yeah, you got it, Michael.
Thank you. We'll move for our next question. Our next question comes from the line of Jonathan Yong of UBS. Your line is now open.
Hey, thanks for taking a question. I guess, just on the stabilization that you're speaking to in medical cost trends, I guess, is it stabilizing back towards your kind of original guidance and assumptions that you came into for the year, or is it still tracking above your original guidance assumptions. To any extent, can you frame how much above it currently is tracking.
Well, in the quarter, we definitely saw some elevation, and you can kind of think about that in terms of the MBR 120 basis points that we called out. We are seeing it stabilize, and I would say that probably exiting the quarter below the peak of the quarter. But in our guidance for Q4, we are certainly predicting or guiding towards that, maintaining at essentially a peak level just in an effort to be prudent. So the trend level we think is going to come down over time, clearly as we go into 2027 based on the actions we're taking.
That's things like payment integrity initiatives, the clinical model initiatives that we've talked about, and just getting sharper in some of these spots, cat case management, et c. For the next three months, we're just being prudent. We do think that this will get back to normal in 2027 in terms of our typical trends.
Okay, great. Just going back to kind of the mitigation efforts to try to get back your Stars and just kind of SG&A. Are there any additional investments that you need to make either within this upcoming quarter or throughout 2027 to kind of get your Stars back. Or is that kind of within your overall planning process already such that there's no real change with respect to that. Thanks.
No, it's a good question, Jonathan. We're putting more boots on the ground in the markets. That's the kind of the short answer. Again, to reiterate what I said earlier, we have to just get back to the fact that this is a cultural requirement. It's not a functional department. This is like everybody in the entire company needs to believe in serving that senior as best we can, partnering with the providers as best we can. So, it stems from the top, from the board to me. I'm going to be sitting on this daily. I've got great leadership in place now to sit on it daily.
It really is numerators and denominators for every single measure that we track daily. I think we just got away from that. So we got to put more bodies in the markets, have more consistency around how we close these gap closures and engage the providers, particularly in California, much more tightly. Those are the things we've invested in. Those are embedded in the guidance numbers.
Thank you.
Thank you. One moment for our next question. Our next question comes on the line of Scott Fidel of Goldman Sachs. Your line is now open.
Hi, thanks. Good evening. First question, just on product selection and sort of having diversified into sort of more higher acuity products with the SNPs and with the C-SNPs and the D-SNPs. Just curious around your thinking for 2027 in terms of ultimately with the bids and then ultimately sort of since you've identified some of the cost pressures. Are you continuing to sort of stay with the sort of the original trajectory of what you were thinking on the growth? Or have you made any adjustments in terms of how intensively you're sort of pursuing that?
In particular, also just curious around your assessment of the competitive environment on the D-SNPs side. That felt like within an overall pretty sort of conservative and sort of less overly aggressive market for 2027. It did feel like in the landscape data that D-SNP did seem to be an area where competition is still looking pretty intense or maybe even increasing for next year, but I'm curious on your view on that.
Yeah. Scott, it's a great question. We do well in the C-SNPs. A concern I had heading into this year, I thought we bid appropriately, but were we going to get negative trend there worse than we budgeted? What's interesting is I think we're pretty much spot on in terms of contemplated margin for the C-SNP in year for 2026. I think you can expect us in 2027 to have good growth in C-SNP in selected markets. I think you're going to see more HMO growth, more traditional HMO growth. If you look at the Plan Finder, I think you'll find that our benefits were pretty good relative to our competition.
That speaks to our confidence in all the different initiatives we're working on. I just can't emphasize the importance of kind of getting through this kind of claim system conversion. That was a big deal. It took a huge effort. We started it like three years ago. We went live last July. We're 17, 16 months into it now, so that part of it is starting to work. I would say one area that is going to be a huge opportunity for us is just the payment integrity part. Shout out to our team working on that. They're doing a great job.
It's going to be more and more important as you hear the providers deploying more sophisticated AI tools. We had to go through this in order to get to our long-term growth objectives. So getting that kind of stabilized is going to bring into focus everything that we've been so proud of in terms of visibility and control. So with respect to the competitive dynamic, yeah, I mean, I think things are going to get tougher, I think in 2027. We don't have another year of V28, so I think you're going to get some good lift in that regard.
I'm not sure you're going to get rewarded, the industry's going to get rewarded for any kind of large or huge revenue benchmark increases. But I think in that new world, I think we win still. I really do. I think we just get all these transformative changes in place. Biggest one is the Facets conversion. Very proud of the team. They worked their butts off on that, and shout out to that team as well. Anyway, I don't know if I answered your question, Scott.
Yeah, absolutely. Maybe you can answer it a little more in my follow-up question. With the follow-up question, I was hoping to maybe just sort of, I guess maybe reconcile or just align, I guess, no pun intended, in terms of around the provider delegation and delegation and risk-sharing, and in terms of where exactly you're at that. Because you guys talked about in certain markets centralizing more and sort of moving with the new system.
But then in the lawsuit, and also in your 8-K, you guys also emphasized in terms of where the mitigation efforts and value could come from, or would be around adjusting the provider sort of risk-sharing and delegation arrangements looking out to 2028. Just would love to have a level set around where exactly you guys are in that journey and sort of how many bullets in the chamber you may still have left for 2028 in terms of leveraging that.
That's the best question so far. We deemed about two years ago that it was strategically important that we build a core competency of doing the UM work. We still have this kind of shared risk delegated model in California. What that means is we've delegated UM to our IPAs. The UM is really two parts. There's the inpatient, acute, institutional determinations, and then there's the, what we would call pre-service, and that's really the outpatient and the professional. What strategically we decided was we could not be in a place where we were entirely dependent upon the global cap providers. Right?
Because you could see that with V28, there was going to be a lot of margin pressure because the revenue's going down. In that world, we were accustomed to is that the providers, their global cap want more money, and they're going to squeeze our margins. We had to move away from that and move away from that kind of dependence. What we did was we started to de-delegate the IPAs and the medical groups for the acute inpatient part of the UM. We've done a very good job with that. Again, shout out to the team for working so hard to develop that competency.
We're about 80% through our process. The key thing we've done is do that in a way that is aligning with the providers. Because if we do better, they do better. That's a key thing. The area that there are more opportunities for us, and we've alluded to this, is in the pre-service. If we go outside of California, there's going to be less dependency on IPAs that are going to take any kind of downside risk, whether it be shared risk or global cap.
Our ability to do pre-service and to integrate more care navigation, okay, into our processes for pre-service is going to do huge amounts of improvement for us, I think, on MLR, particularly on outpatient and professional spend. The way we want to do it is we want to use that capability to route people to the right high-performing providers. It's not a matter of denying care. Our denial rates are very low. It's about getting them to the right care, the right timely provider in a timely basis. That is going to be the next frontier.
We need to do that very carefully with our IPAs in California, and we need to execute that very quickly ex California. I think that would be a big opportunity for us. I think then what we will have is the ability to operationalize our networks as we expand throughout the country. Whether it's fee for service, we can make that work. Whether it's shared risk, we can make that work. I got nothing against global cap. Global cap works as long as we have durability to that rate. That can work.
The whole idea of this is to be able to enter any market with any kind of contracting with providers, overlay our clinical model, and then get the same reliable growth that we've experienced for the first, whatever, five years of being public and 12 years of being a company. Great question.
All right. Thank you. No, that's a lot I can tell. Thank you.
Thank you. One moment for our next question. Our next question comes from the line of Matthew Shea of Needham. Your line is now open.
Hey, thanks for taking the question. Maybe back to Stars. HOS was a notable hit to the 2027 Stars, and it seems like the remediation effort is to do more on provider and member communication, both this year and next. I guess it wasn't clear to me, were you able to make changes before the 2026 fielding window? If so, what were they? How is that informing your recovery view? Then within the big H 3815 contract, did members actively managed through AVA and Care Anywhere score differently on HOS versus members not managed by those offerings?
The answer to both is I need to get back to you as a follow-up. Those are good questions. I don't have the degree of visibility I would have liked for the 2026 dates of service, or measurement year, really, because you're talking about 2024 dates of service. I'm hunting that down. I know that the work that we're doing now for 2026 dates of service is a lot of work around town halls. I think we've touched over, I think the last number I saw was like 70,000 members in some capacity. So it's obviously a concerted effort, but I need to follow up with you on that one.
Okay, fair enough. I guess maybe just asking a similar question, I guess, to the last one, but under your percent of premium deals, your California IPAs are also up to lose bonus dollars in 2028. Has the Stars downgrade changed your conversations with the delegated groups or with new partners like Hoag or Astrana? Are they asking to reopen terms? It sounds like they're eager to help in the remediation work. So just curious to get any color on what the feedback or conversations with your provider partners has been so far.
Yeah, it's another good question. It's a concern for providers, but I will say our market management team has done a very good job. We're collaborating with all of them. They get it. I think there's upside opportunity. Remember, this isn't going to affect them until 2028, so there's a lot of work that we can do now and through 2027 in terms of trend bender initiatives. I think there's opportunities for inpatient acute, candidly. I think there's lots of opportunity for just getting back to basics of how we did the cat case management with them.
There's incentive strategies being put in place with respect to Stars. Part of it is the alignment or misalignment is because of the IPAs on some of these Stars issues. We got to get them more aligned with us to see what they can do to help us, with respect to transitions of care initiatives and access to care and timeliness of care. Those kinds of things, again, in California, are delegated to a lot of the IPAs. It's like we're aligned to solve the problem together, and there's other levers, not the least of which is risk adjustment, by the way, that they're very collaborative in working with us on ensuring that we capture encounters in a more timely way, et c.
I think it's kind of in this category of not let any crisis go to waste. It's allowed us to really have very constructive dialogues with the IPAs, and it's forcing us to get even more and more aligned with them. Again, I think our market management team has done an excellent job in that regard.
Makes sense. Thanks, John.
Got it.
Thank you. One moment for our next question. Our next question comes to the line of Andrew Mok of Barclays. Your line is now open.
Hi, this is Tiffany Yuan on for Andrew. I think you recorded favorable prior year development in the first quarter, negative in the second quarter, and a modest favorable benefit this quarter from the latest 10-Q. Can you help us understand what's driving that variability? Is there anything specific to call out on third quarter reserve positioning?
Yeah, very good question. The Q3 reserve position, let's start with the statement that we made in the script, which was, we feel very good about our reserves. As we migrated through this claims transformation, there was a lot of volatility, and as a result, it was more difficult to predict how the runout for dates of service 2025 was going to play out. So in Q2, we said we're going to be prudent and make sure we bolster our reserves for those dates of service in 2025 and prior. So that's that prior year. So we did that in Q2. Q3, we're flat.
I would say that we feel actually very well positioned at this juncture. We're essentially at 99% runout on those dates of service, and very little new date claims coming in the door. What is continuing to help us is we are getting payment integrity recoveries still coming through. Feel good about the 2025 reserves. You are right. We are kind of migrating or managing through the claims transition. But the reserve position, again, that is quite good at this point.
Okay, got it. Just a quick numbers follow-up. Last quarter you called out double-digit millions worth of clinical investments impacting the second half. Is that still the right number to anchor to for 2026?
We have not changed any of our investments that we called out on Q2. In fact, we have been investing back in the business on a variety of initiatives, but we are absolutely sticking to our clinical and SG&A investments. Those are in our Q3 numbers and in our Q4 guidance.
Okay. If I could just squeeze one more in, could you help size how much investment spend flowed through?
We talked about it on the last call of double digit, kind of split 50/50 between clinical and SG&A, and it was weighted towards Q3. That obviously when it comes in, then it is going to start running.
Okay, got it. Thank you.
Thank you. One moment for our next question. Our next question comes from the line of Jessica Tassan of Piper Sandler. Your line is now open.
Hi, guys. Thanks very much for the question. Can you all maybe explain what you mean by the assertion that 2027 bids are appropriately calibrated? Does that mean appropriately calibrated to deliver kind of flat MBR versus the 89% 2026 floor on 20% growth? Does it mean flat versus the initial 2026 guide? When you say appropriately calibrated, are you all assuming that the incremental 260 basis points call it of implied second half MBR pressure abates next year? Or are there kind of specific examples of benefit design that you have introduced that are expected to drive margin expansion?
If so, could you point us to some of those elements of benefit design that might not be so obvious from just a cursory look at the landscape? Any color, just to give us confidence on the 2027 pricing would be great.
Hey, Jess, can you repeat that, please?
Yeah.
I'm joking. I'm joking. I'm joking. No, I got it.
Okay.
No, I got it.
2027.
No, what we had to do was we looked at the bids, right? The bids were obviously done in April, May, June. They're submitted in June. What I mean recalibrate is, how far were our MLR assumptions for each product in each market, and were those numbers, were they consistent with our current trend and more specifically, our current trend that we think is going to lead into 2027? We're sharing with you guys a very prudent kind of Q4 guide. I'll just reiterate, I would not peg Q4 MLR, and I would not annualize that for next year.
We haven't done that either. We're factoring in all the different initiatives that we're going through, and then I had to look at that on a product-by-product and market-by-market specific basis. What we concluded, and in certain markets, for example, we kind of said, "This doesn't make sense. What was assumed in the bid didn't actually It was consistent with what our current trends are." We made the decision, while they may be a product, we're not gonna grow that product, just as an example. I obviously can't speak to which products and which markets, but that's an example.
Another example is like, okay, another market was, do we have the right engaged network, right? The conclusion was not really. We had to move and grow with a different network in that market. Just as another example. Okay? A third on the other side of the equation is we I think we're too conservative with respect to our assumptions in the 2027 bid. We then double down on growth assumptions in that market. The only way you can do this is in a detailed product-by-product, market-by-market review.
When you kind of tally all those puts and takes up, we're still pretty comfortable about the 20% growth that we're telling you guys. That's probably as much as I can get into without getting into 2027 guidance. Again, just to underscore, don't annualize Q4 trends or MLR.
Got it. That's helpful. Then just a quick follow-up. I know you gave some color on the expanded network relationships, but just interested if you could offer some color on the new physician relationships you're announcing for 2027. We've noticed some of these partnerships seem to expand into new counties over the course of kind of several staggered announcements in a single week. Is the network truly evolving in real time as it kind of appears to be?
How should we think about the economics of those new arrangements, whether from the perspective of capitated concessions, because those providers are ostensibly feeling some of the pressure in 2026, or in terms of additional incentives to kind of help you guys recover or return H 3815?
Yeah. No, it is a good question. I would say the common theme with all of these different providers is a commitment to quality healthcare. I know that sounds a little Pollyanna, but really, I think that is what they like about us. They know we are going to do the right thing. They are obviously not happy with the 3.5, but we are going to work together to get that solved, so much so that they are also willing to expand geographically with us. The key to the whole thing is long term. We are not doing this just for the short term.
We own and take accountability for Stars for 2028 payment. We are going to get that fixed. It is very, very serious. I take it very personally, actually. Our leadership team is fully on board. What is equally important is the providers on their leadership team is collaborating with us. They know they have input and a say in how they drive our Stars. We got to do that better together. That is really the approach that we have taken. The whole name Alignment Healthcare was building alignment with the providers for the benefit of the beneficiary.
That is the whole reason for this. I think it is a wake-up call for everybody. We have had nine years of 4 Stars or above, and if anything, that is what I am taking away from this. It is a wake-up call. We got to get back to basics, and there is urgency in all of it. We will get there.
Got it. Thank you.
Thank you. This concludes the question- and- answer session. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.