agilon health, inc. ($AGL)

Hi. Welcome back to the Barclays Global Healthcare Conference. My name is Andrew Mok. I'm the Facilities and Managed Care Analyst here at Barclays, and I'm pleased to have agilon Health joining me on stage today. We have Karthik Rao, Chief Medical Officer; and Evan Smith, SVP of Investor Relations. Welcome.

Thank you.

So first, we just -- you just reported fourth quarter results, set 2026 guidance a few weeks ago. Why don't we start with just an overview of kind of the business and recent results, where we are, take stock of where we are today and sort of the outlook for 2026?

So as everybody, if you listened to the call, we've initiated a fairly substantive transformation initiative. So across the board for 2026, we've reset our contracting with about 250 bps or better, $125 million incremental benefit year-over-year where we get from that. In addition, the rate will ask about $500 million in incremental benefit in 2026. And then our BOI and clinical pathways initiatives will also continue to generate in excess of V28, which we think is positive, and Karthik can talk more about that in a minute. And then we've also been able, from a contracting standpoint to get substantial incremental potential from our quality initiatives. So higher incentives from payers for quality incentives. And then going into 2026, if you look at our cost trend, we estimate, I think, prudent, conservative, whichever word you want to use, about 7.5% growth, 7% net, which will actually be -- the net is impacted by payer bids. But if you look at us historically, over the last few years, we had about 7% cost trend in 2023, 7% cost trend in 2024 and about 6.5% in 2025. So we think 7% on a net basis is a good place to start for 2026.

[ Evan ], you mentioned the 50 basis points differential between gross and net trend. Can you help us understand that -- explain that concept a little bit? What specifically did you do during payer contracting yielding that benefit?

Yes. So the 50 basis points is really from the payer side. They're changing their benefit designs across our markets. So we contract individual payers, individual markets. And so basically, across the board, we've seen increase in maximum out-of-pockets, increased deductibles, lower supplemental benefits. And on a net basis across the markets, that will benefit us by about 50 basis points net on a cost trend basis. Those costs are shifted to the members.

Great. And in the fourth quarter, you revised your full year trend assumption from mid-5% to about 6.5%, driven by several high-cost inpatient claims. Can you provide more detail on the nature of those claims, specifically what types of diagnoses or service categories were those related to?

So we said there's slightly higher acuity, but those individual members were actually $1 million-plus claims. Usually, on an annual basis, maybe you get two or three, we actually wound up getting those two or three in 1 individual quarter. So it outsized the impact in that individual quarter. One we indicated was gene therapy, which is one of the largest pieces of that. And then -- but we haven't actually talked about each individual area. But what we did project is for the fourth quarter, we basically assumed everything status quo, kept it at a high rate, which is how we got to 6.5%. We think, again, it's prudent, it's conservative and setting up a really strong foundation going into 2026. So again, to go into that year so that we don't have any development from the prior -- from 2025.

Agilon has been investing to enhance the Burden of Illness program. You're beginning to see sort of returns on some of those investments, including this year, I think there's approximately $22 million of benefit. Can you provide more color on the key enhancements made over the past year, particularly around the data pipeline and AI investments? How are those improvements translating into medical margin benefit in 2026?

Yes. And so I think three primary things to think about there, and you hit on two. So financial data pipeline to our data architecture and AI algorithms that sit on top of that. And I'd say three are clinical pathways. So double-clicking into each of those a little bit deeper. So our financial data pipeline, what this is allowing us to do is get accurate condition level data on a member basis and verify actually what is going from the payer to CMS and coming back to us. And looking back a few years, where we've missed is our RAF projections and where our current performance is. So we now have this data across about 80% of our payers and our confidence level on our performance today and our projections is much better. Two, on the data connectivity. So even our prior panels mentioned this, data is really the fuel for any AI algorithms that your company is running. One of our core levers is appropriately identifying and documenting disease burden. What we've been able to do this year is implement Generative AI technology. And what this is basically helping us do is take unstructured data and parse together basically condition diagnoses, which we haven't been able to do as well before. And we're seeing meaningful suspecting lift on a per patient basis, leveraging that. Three, the other thing that we've been doing are clinical pathways. So clinical pathways are all about early disease identification and proactive treatment of conditions. There are a subset of diseases where we see we are -- we've got a big delta between benchmarks that exist for that disease category in the community and what we've documented. So to close that gap, we follow evidence-based screening protocols for those conditions in all of our markets. And you've seen that through our earnings and what we've reported on. We've implemented our heart failure pathway in about 90% of markets. We're seeing really good uptake, both on the clinician side and pull-through to outcome on that. And that's some of what's driving that $20 million benefit that you referenced. And we think there is good runway for us through '26 and '27 on that as well.

Great. And with the enhancements to your data pipeline, can you share what level of visibility you now have into new member RAF scores at this point in the year? And maybe how that compares with where you were at this time in 2025?

So visibility on RAF scores is significantly different year-over-year. So what Karthik was talking about is the ability to have validated [ HCC codes ] directly from the managed care provider as well as through CMS fully validated. And now the data pipeline has a 99-plus percent correlation to what those midyears and finals happened over the last couple of years. So now as I stand -- as we sit here today, we can actually know our RAF score for January, which is based on June 2024 to June 2025 paid through September, so I can calculate it and actually have it validated today, and then we'll soon get February incrementally. Historically, we were using proxy or operational data metrics to do that, but now we actually have validation on the individual. In addition, to combine that, we also changed our methodology and processes for actuarial for estimating midyear to final. So we have -- that's also correlated with some of those data sets. So greater predictability, greater data sets and actual high visibility on what RAF scores are on a current basis.

Right. So with all that said, are you expecting a much smoother, less volatile sort of?

Much sooner reconciliation, higher visibility sooner. So traditionally, we reconcile in Q3, you'll get midyears. If that reconciles, you'll have a high visibility for the full year and the midyears, so in second quarter.

Great. Clinical pathways was the third pillar you mentioned, you've been building out the congestive heart failure program over the past year or so with additional programs coming online. Can you share a little bit more detail on that program specifically, what you've implemented, key learnings from the rollout and how we should think about the potential impact from that program?

Yes. I'm happy to. And I actually want to start with the whys of these, which I think are really important. And so we start with clinical problems that we're trying to solve. What we know today is about 40% to 50% of heart failure patients are diagnosed at time of first admission. And so why is that a problem? Well, that's leading to a bunch of unnecessary downstream cost if you're getting an outpatient diagnosis in the inpatient setting. And two, it's just less than ideal patient care. You're having to go through a hospital admission for. That. The second thing we know about heart failure is less than 10% of patients are actually on the right therapies for heart failure. And so through our pathways, again, what we do on the diagnostic side is we equip our markets with technology in their office to make these diagnoses. So that's point-of-care BNP testing or echo technology that we're able to get into their office or increase access to. Two, on the treatment side, there's a reason patients are not on these therapies. You have to see them frequently. It's tough to titrate these in a manner that actually gets patients on them and adherence to them is not great unless patients actually understand how and the why. And so we are scaling a virtual pharmacy service that will actually meet with patients every week to titrate these medications after diagnosis, and we have pretty clear inclusion criteria for who goes into that program. So that's now live across 90% of our markets. And on the outcome side, in 2025, what we've seen is that inpatient diagnosis, time of place of first diagnosis, was about 25% on the inpatient side for 2024. For '25, we moved that to less than 5%. So less than 5% of heart failure diagnoses are now in the inpatient setting. On the treatment side, again, these are smaller market proof points, but we're seeing heart failure readmission rates drop below 10% relative to, I would say, industry averages of around 20%. So we're really starting to see the pull-through on the clinical side of this, and we're seeing in all of these markets, bridging that prevalence gap. So we're able to actually receive the funding to reinvest in care for these patients.

Great. As we think about some of your other pilots, newer programs such as COPD and dementia. Can you provide an update on the implementation progress there and help frame what the rollout of those programs looks like over time and the potential impact you're expecting there?

Yes, happy to. And so on COPD and dementia, I would say from a prevalence perspective, our heart failure prevalence delta to benchmark was 15% to 20% when we started. So it's a pretty big prevalence gap in disease that existed in our patients to what we expected. In dementia and COPD, it's more in that 5% to 7% range. So pretty meaningful, but not quite as significant. Where we are on the implementation of these is currently live in five to seven markets. By the end of Q2, we expect to get to 70% plus of our markets live on our dementia and COPD pathways. The problems we're solving are slightly different in those two conditions on dementia, I would say estimates are 50% of seniors actually have undiagnosed dementia today. Why? It's a pretty tough and great diagnosis to make. And so we're partnering with vendors to actually implement virtual technology to help them make that diagnosis. And two, support them in that early treatment phase post diagnosis. We're starting to see good engagement on that, and I expect we'll have a pretty smooth ramp throughout the year. COPD, and I would actually broaden that to lung health. What we're finding is two things. One, we don't screen for lung cancer well in this country. And a lot of those patients actually have undiagnosed emphysema and COPD. So we are pushing pretty hard on appropriate and evidence-based lung cancer screening. And two, we've actually given a lot of our practices spirometry devices so they can not only do the low-dose CTs that are necessary, but do spirometry follow-up in the clinic to make the diagnosis and actually formulate the treatment path. And so again, we expect that pathway to be live in 50% to 70% of markets by the end of Q2 as well.

Great. Can you walk us through maybe how you select which disease states are candidates for this pathway program? And what other programs you see forming in the future?

Yes, just roll the dice. So we largely look at two things. One is, again, a prevalence gap. So what we are studying basically is what should illness burden be in a community relative to where we are today and what are utilization patterns of our highest utilization conditions. And we know a few things. Conditions where we have the biggest prevalence gaps are heart failure, dementia, COPD, CKD tends to fall in there. Those tend to be in the top 5 to 6. On the utilization side, we know our top utilizing conditions are CHF, COPD, patients with dementia, that's not what drives the utilization, but patients with dementia and end-stage renal disease. So when you put those two things together, what starts to emerge is you have a set of conditions that you're not documenting well, so you're underdiagnosing. You don't have plans for those patients. That's what's driving excess utilization. And even when you make the diagnosis, you're not getting those patients on the appropriate therapy. And so you can close care gaps on the treatment side. And so we basically prioritize where we have the biggest opportunity to make a quality of care impact and drive financial value for our business.

Great. And these clinical pathway programs seem to be at the core of what value-based care delivers. What's been the response from your payer partners? How are these conversations evolving as you roll out these programs?

Yes. It's a good question. What's been really interesting, we talk a lot about our proximity to partners and patients, right? How can we leverage our proximity as an enabler to drive differential impact. These are things that payers can't do. You can't get that close to a physician to really reengineer the way that they deliver care. You can't integrate into their EMR to actually nudge them at the point of care with pointed recommendations. And what you need ultimately is to drive adherence to these protocols at a patient level, but you need that trust with the physician to go and do. So I think payers have largely been pretty positive on what we're trying to do here and see that as differential impact that we're driving.

Great. Staying on the contracting side, it's another focus area for the company as you head into 2026. Can you provide a final update on where contracting efforts landed for the year?

Yes. So from a contracting standpoint, we got incremental percentage of premium. We improved our quality incentives opportunity, and we've also decreased our Part D exposure to under 15%. So I think we had a successful year, and that underscores the value, I think, that the payers understand that we're bringing to them and the members that we serve. With respect to going into next year, we think we're going to take the same disciplined approach and continue to look at across the board, having positive medical margin, positive cash flow throughout the membership while we continue to deliver and have the access for our members.

Right. And as we think about the evolution of this contracting initiative, it seems like some of the low-hanging fruit might have been addressed like Part D carve-outs, things of that nature. What do you look to do in the future around the contracting side?

So we continue the same. So again, the discipline around getting paid for what we deliver. So our clinical pathways programs continue to drive additional quality initiatives, which are highly receptive because we continue to -- across the board, 4.2 stars, we continue to think we're going to do even better this year, so getting more quality incentives. And then the flip side of that, and we'll get to the contracting is also our relationship with our PCP partners, which I'll let Karthik talk about sort of what we're doing there and sort of managing those practices a little bit more diligently.

Yes, happy to. And so Evan talked a little bit about our, I'd say, our hardline stance with payers. We know we're creating value, and we're not going to get into contracts where we can't create value for ourselves or our partnerships. If you double-click into that at a physician group level, what we're also starting to do is pretty aggressively manage our networks within those markets. And so what does that mean? We know that there's a lot of variability in performance at a physician level. And so if you are an unsustainable panel or a panel that we don't see a path to value creation on, we are trying to find win-win ways for those physicians to either go back to fee-for-service or managing them out of the network. And so in Michigan, we've talked about that publicly. We've seen pretty meaningful value creation through that. And we think there's pretty meaningful value across the rest of our network. So we're starting to engage in a deeper exercise to go and do that in every single one of our markets.

Great. Maybe another topic I wanted to touch on was the ACO REACH program. I know it's not as big of a business for you, but there was a small headwind embedded in the 2026 EBITDA guidance. Can you provide a little bit more color on what's driving that this year?

Yes. So it was a change in the rebasing of what their risk adjustment lift can be. So they moved the years from -- going the right direction from 2022 back to 2019. So it decreased the ability to drive -- to get value for the performance that we drove, and it was just a mathematical piece. Our performance continues to be extremely strong. but that was a change in their methodology. And going into -- I'm sure you're going to go into LEAD. We think we're probably the best positioned in the marketplace, top performer in ACO REACH, both on quality performance, execution savings for CMS and going into LEAD, it's a clinically driven program that's well suited to what we've already delivered with our ACO partners. And it also adds elements that we think add significant additional value, including specialists and sort of rural populations, which we think we could actually advance and exceed. So we think there's an opportunity to continue to drive performance, whether it's called ACO REACH or next year called LEAD as driving performance for us in 2027.

Right. And how is the attractiveness of the program evolved, like, say, today versus 5 years ago?

Of ACO REACH?

ACO REACH.

You could go into the details of the...

Yes. I'd say from a program fundamentals perspective, we continue to do pretty well in ACO REACH. We think it enables the right things for our partners. I would also say the data exchange on the ACO REACH side is pretty attractive for us, timely data throughout the year. There's predictability in the program as well. So there are a lot of things that I think have worked in our favor on the ACO REACH side.

And if you look at what we're doing on the MA side, sort of carving out things like Part D, that makes it more similar to the ACO REACH program. So some of those variabilities that we're doing on the MA side, again, are the positive signs for the ACO REACH program.

Great. Let's move on to cash flow. You ended 2025 with $285 million of cash and investments and $91 million of ACO cash. You expect to end 2026 with at least $125 million of cash on hand, including those -- including the ACO cash. Can you walk us through the cash considerations for 2026 and how we should think about the progression towards your previous target of free cash flow breakeven in 2027?

Yes. So the cash flow in 20 -- we have sort of like a cash flow in 2025 informs cash -- actually, adjusted EBITDA in 2025 informs our cash flow in 2026. So if you look at our adjusted EBITDA performance and prior year development in year would be net out of that because that would be settled in year. That's driving that $250 million gap between the $375 million with ACO REACH cash and cash on our balance sheet and the $125 million that we're going to end with. I'll also remind people that, that's there's additional working capital initiatives that we're doing and additional cost initiatives that we're doing that should actually positively impact that cash position. And then also remind everybody, we beat our '24 projection, we beat our '25 cash projection. So we think we have ample cash to get through the transformation period. And also move into 2027. I think given our performance, our expected performance this year, there's a path to getting to breakeven or better from a cash flow standpoint in 2027. So we think we're in a good position as we stand here today.

Right. And if that plays out, presumably, you're in a position to grow membership again. Can you talk about that transition? How does the portfolio look today? Are you -- at what point do you think the portfolio is stabilized and you can start to think about growth in membership in some new markets?

We actually think we did a significant amount of work on the portfolio, both from the physician side and from the payer side. So we think it's fairly stable now. We think there's opportunity. We've put on -- we have about 25,000 care coordination fee members, which look at that as sort of a backlog of potential people to move to risk as long as we can get the economics associated with the payers. And even the 50,000 members that moved off from the payer negotiations, those are not gone. They're still with their physicians. So as we move into next year, I think those are, again, up for negotiation to figure out with the payers if there's an economic way we can bring those back on. Because remember, the patients or the members value the clinical programs that we provide. They value the quality initiatives that we provide. So the care levels and the access piece go up. So we think that's going to be part of an opportunity set, too. And from a membership standpoint, we can have -- we would look at sort of balanced growth. It depends upon market conditions, and it depends upon sort of our economics. But we're not going to sway from that disciplined approach. We expect to be medical margin positive and cash flow positive on that. And the other thing is we're streamlining the onboarding where geo entry costs will be more muted as well as we move forward.

Right. And if we look back on the last few years, it's been very volatile for agilon, but also for the value-based care industry more broadly. What lessons have you learned operationally or from a regulatory perspective that is informing your actions today or how you're applying that to the future?

Yes, I can start. And so maybe I'll say three things. So if you look back 5 years ago, I think everyone showed up in value-based care and full risk care because there's a lot of margin in the space. And you didn't have to do that much to get a piece of that. I think what we've learned over the years is probably three big things. One, you need the right payer partners, payers who are sophisticated enough to operate in full risk, who can actually set up data exchanges with you to get you that data in a timely way. And if they can't, it's going to be a tough hill to climb. Two, you need the right partners. And you've seen that with our market exits as well. Not every group is prime time for full risk care. Even within those groups, not every physician is prime time for full risk care, and that comes down to network management for us. And so before we even get into any new growth, it's like, are you willing to actually do these things? These are tough decisions for groups to make. And three, you got to have the right clinical programs and the actions required by a PCP within those programs and be pretty specific and pretty decisive so you can actually manage variability at a PCP level. I think over the last 2 years, what you've seen is we've come a long way in being able to do that on the risk adjustment side, the quality side. And I would say on the cost side, we've made a lot of progress on the palliative hospice front. We made some progress on the Pathways front. I think there's a pretty good runway for us to really continue to iterate and make a bigger dent in that vertical.

Great. Well, with that, we're just about out of time. Thank you so much for joining, and please enjoy the rest of the conference.

Yes. Thank you.

Thanks.