Alignment Healthcare, Inc. (ALHC) Earnings Call Transcript & Summary

[Technical Difficulty] tech-enabled managed care company focused on the Medicare Advantage business. Presenting today, we have John Kao, the CEO; and Thomas Freeman, the CFO of the company. And I think we should jump right into Q&A.

So I guess any updated thoughts on utilization. Obviously, COVID peaks and values and core utilization, it seemed like generally, things were under control heading into Q1. But I guess what are you seeing and what are you assuming as far as future spikes of COVID?

Yes. Maybe I can take that one. So we feel probably similar to what you've heard from others and that Q1 was interesting. We obviously had a great quarter, very proud of our performance. But if you had asked us in October coming off the Delta wave, whether we thought another variant was on the horizon, I think everybody would have said no. And so as January rolled around, we did see our COVID-related utilization spike. Actually, the 2.5x the level that we saw with the Delta variant last summer. But similar to our prior waves in the past, we saw a pretty significant drop off in the non-COVID utilization such that the overall business was performing well throughout Q1. And really, as we saw that rapid decline of the Omicron related utilization, the non-COVID utilization didn't quite pick up at the same pace that the COVID decline, and then that led to that Q1 outperformance. And so, as we sit here today and we kind of look out for the rest of the year, our guidance is kind of predicated upon running overall utilization similar to our historical baseline levels, a portion of which we are contemplating as part of COVID. And I think we feel pretty comfortable today that another wave has kind of come in pass. It didn't cause a significant kind of deviation from our expectations. And with that, we feel pretty good about our rest of the year outlook.

And how are you thinking about future spikes? So like is it -- does it matter anymore? Is it like a future spike point comes with a reduction in core. So it doesn't impact your guidance? Or do you have something kind of built in for an extra cost later in the year?

No. No, it definitely matters, both from which the kind of care delivery perspective, obviously, we're very focused on it from an actual kind of senior consumers' perspective. We want to make sure we're protecting our seniors and providing proactive care as best we can. But purely from a financial perspective, I would say, while we've seen that correlation in the past and we kind of anticipate that it will likely to continue in the future in terms of what COVID is up, non-COVID tends to be down. I would say that we certainly learned that it's not entirely predictable in the last 2 years. And so if anything, I think we would probably expect that the fourth quarter, in particular, is one we're keeping a close eye on where in the past couple of fourth quarters, we really haven't had much of a flu season, at least not to the extent we had pre-COVID. So that's something that we are keeping an eye on as we think about COVID, but also just kind of non-COVID utilization and how those 2 things play out for the fourth quarter. But otherwise, I think we're -- I said we're feeling good and not overly concerned at the moment, just given to your point, we have seen that kind of strong correlation where COVID is up and non-COVID is down for the last 2 years.

And as you think about that progression that you mentioned through Q1 about core volumes coming back or not coming back, do you believe that there is a pent-up demand at all dynamic here that we're going to see not just baseline but above baseline for some period of time? Or do you feel like there's always a certain amount of volume that just doesn't happen during a storm or during something like this, and it's just lost and we shouldn't be worried about extra utilization on top of core trend?

Well, I think it's a little both. So on the -- like within Q1, as an example, I mean, we talk about it on a multiyear basis. But even within the quarter, we saw exactly that dynamic you were just describing where in January, where Omicron was at its high, we did see a reduction in some of the kind of more elective driven and outpatient utilization. But it ramped significantly in March, such that the overall Q1 level of utilization was pretty similar to a normal quarter. So I think you do have that ebb and flow potentially quarter-to-quarter or even inside of a quarter. But on a kind of 12-month kind of overall basis, I don't feel like it's something we're overly worried about today. And we have not in the last 2 years, really seen the pent-up demand or sort of the more kind of catastrophic caseloads from people not getting the care they needed earlier on in the last 2 years. And a function of that, I think, is related to that carrying we're team. Keep in mind, our employee, clinicians, nurses, doctors, case managers, social workers, et cetera, they're spending a lot of time both in the home and also virtually supporting our most kind of complex for our seniors to make sure that we are getting the right levels of preventative care and engagement even during some of these COVID waves that tend to come and go.

Yes. And I guess, so to that point, just to wrap this line of questioning up. I think people haven't worried about higher acuity that deferred care means are coming, but you're not seeing any signs that's coming through.

Not right now. No. No, We've definitely been keeping an eye on. And it's a question we started getting even probably 6 months into the pandemic. But so far, we've actually not seen that materialize in a way that concerns us.

Is there a reason why that, that thesis made so much sense. I mean, I guess, one of the things we've been wondering about is just the mortality dynamic that the sickest patients may be died during COVID and therefore, that might have changed the risk pool of what was remaining. Do you think like -- is there any other explanation for why it's not coming in the way people feared?

Well, I think on the question of the topic of involuntary disenrollment, again, within a given set of months or given set of quarters, we've seen a bit more variability. But on a kind of full 12-month basis, our involuntary disenrollment in the last 2 years actually hasn't been that significantly different than it was pre-COVID. And so again, I think, a spike occasionally for a certain month, then you typically would see a decline in the second one. So there might be a little of that, but I give a lot of credit to our care teams. And again, I think that's one of the beauties of the Medicare Advantage program is designed such that if you are providing that proactive care for the most chronic high-risk population, not only does that create better financial outcomes but also create better health outcomes and things like the STARS program, which are designed to ensure we are getting the right levels of preventative care in place, I think, are also very aligned with that goal. So I think we just -- apart from a clinical perspective, have done a good job in getting to see the right people and trying to create access equitably across our seniors as best we can.

All right. Great. So maybe talk a little bit about the model that you guys have. How do you think your business is differentiated. There's been a lot of disruptors out there, obviously, United and Humana do a good job of doing what they do. So how do you really think about how you differentiate yourself and why you should be positioned well to grow faster than the market?

I can take that, Kevin. The whole thesis is what we would refer to as the virtuous cycle. And that's to know who the 20% of the sick rail are and just envelop them with care. That at home and virtually, that drives down overall trend that should give us the ability to be investing in benefits while retaining margins. And it's I think the key word is sustainability of that kind of competitive product in the marketplace and which leads to the growth. And we can talk about that in a second as well. But I think the simple notion, which is why we love MA is if you can produce a high-quality product consistently at a lower relative cost, you're going to be able to increase value accruing to the individual human being. And if you can do that sustainably and then at scale, you ought to be a winner in the marketplace. And I think the whole theme is like if you don't have a really good [ crack ] disease management program, which is 20% of the population that account for 80% of your MDR, I'm not sure if you can be very, very effective in MA. I mean you have to have that capability, I think.

I think like on the investor side from the outside, sometimes hard to see like everyone says they have the technology. So how do we, from the outside, get comfort that your technology is differentiated?

Yes. I think that's the best question that I've heard in a long time. And the answer, I think, is in the sustainability of the MLR. I mean you have to get outcomes is the bottom line. And that's why we've spent so much time and effort refining this what we would refer to as a gross margin engine is to ensure that we're getting good quality, and we're getting consistency around our Net Promoter Scores with our members and our utilization metrics make -- that's the key. You can't just have really low utilization metrics and have unhappy people. You have to have happy people and low utilization metrics. And I think we've been running between 155 to 160 admissions per thousand for like 5 years straight. That's like world-class. I've never -- when I was at FHP or Pacific Care or even CareMore, we never ran at those levels. And I think that -- I think the engage -- so if you have the data, you have the care anywhere, disease management capability, the engagement with the community doctors and then you productize all that such that the value is actually accrued to and realized by the consumer. I think that's the start, I would say, if that makes sense.

Yes. So if you can grow above average and have a strong MLR, then you're doing something right because it basically have been the...

Yes, it's just hard -- I mean it's hard to grow and be profitable in MA and have -- I tease what I mean is our members like us. I'm not sure all the plants can say that.

I mean 100% or 4 star.

Yes. I'm not happy about that. I mean, we've got to get to at least 4.5 and hopefully 5.

All right. So I guess when we think about -- like if you put you in the disruptor category, which a lot of people think is the euphemism for companies that start making money today. You guys are closest to doing that really. And so -- but you're not quite there yet. So how do you think about balancing where you are today? And how do you get to profitability?

Yes. I mean we're right now in the throes of the 2023 bid cycle. And so that is the question we're asking, and we're looking at this going, okay, you got the market that's looking at EBITDA, cash flow, profitable. The kind of growth at all cost model seems to be not something people like. So as we enter into the '23 bids, what's our thinking about that. And I -- we kind of concluded it's kind of what we have said from the outset, which is we need to get long-term growth of at least 20%, and we can talk about this year, but we kind of keep driving those MLRs down. And so it's kind of both end. And so then the levers that you have at your disposal to kind of achieve that goal is very granular in terms of how aggressive you will be in certain bids in certain markets, whether it be existing markets or newer markets, how we would resource our clinical model in certain markets versus new markets. I mean all those kind of drivers are things that we're kind of putting forth now in our algorithm. I think we're going to need to continue toward profitability is my -- is the way I think. We've made trends on that. California is EBITDA positive right now. So a lot of the EBITDA negative is related to the new markets we've invested in '21 -- 2021 and '22. And so our track record is it takes us about 3 years to get to EBITDA breakeven for each new market we set up. And it takes us about 5 years to get to 10,000 members. And there's different levers that we pull, whether it be recontracting, whether it be a focus on compliant risk adjustment, whether it's making sure that all of these stars gaps are closed in certain situations, it's making sure there's the pure economics on the hospitals, the skilled nursing, the home care are all kind of making sense. So there's a lot of levers we pull. But every single one is -- works. And I'm telling you some of these markets, I'm the first one, I tell my team, we can't make this -- we have to get it. And they may have worked every single one. And like I'm surprised. And so I'm very confident with our ability to get to that level of profitability. Question then is how much growth is enough growth? I think it's still got to be 20% plus, and I'm going to preempt you a little bit, Kevin, on why didn't you do it this year? The year's not over, year is not over. What I do think is happening at a macro level is, I think 2 things. The pressure being put on kind of aggressive benefits, I think we can sustain that because of this model we're talking about. I don't think others can sustain it. I think people are doing some unnatural acts for profit -- not for profit. And I think that the notion of being super aggressive on benefits, having relatively high MLRs and then offsetting that with ancillary or specialty businesses, I think that's a good strategy. But I don't think you need to compromise your core MA margins. It's both end. So if you have a good specialty products or ancillary products as the case may be as a plan, whether it be a behavioral plan or a dental plan or whatever, you should be able to produce margin there, selling into your installed base and produce a good margin on the core MA. So those are things that we see. I think some of the lower guys are being super aggressive just kind of don't know what they're doing. They'll be out of business. I think some of the not-for-profits are burning into the reserves they won't be able to do that forever. There's like no -- there's no secret bullet on this one. There's no silver bullet.

So I guess, if I can maybe just kind of clarify. It seems like a lot of the disruptive companies have this -- had this growth at all cost IPO pitch and then they've all -- the market sold them, you've got to get the profitability they're moving. And you're saying, we told you 20% plus revenue growth. That's still exactly the same right strategy for you. There's no change at all.

Yes. I mean, after a little bit of time, I wouldn't be surprised if once we get our kind of consistency on not only EBITDA positive in California, we get a little traction in some of the newer markets. And where we're spending a lot of time on is building this kind of flywheel to scale, a lot of focus on the G&A economies, a lot of focus on control systems, so legal, financial, regulatory control systems to ensure that, that growth is not only growth but -- and not only profitable growth, but profitable and compliant growth, profitable and compliant growth. And there are some examples out there where they're growing and under the pressure of growth, they lose sight of this kind of culture of compliance. And it starts with me. So you got to have a culture of compliance on everything. And I think that once the peer group kind of really kind of begins to respect the criticality of compliance, I mean it's healthcare. I think the whole sector will be good.

And you mentioned the competitive dynamic where some of these companies have to kind of pivot and focus for more sustainable margins, and that means different worse benefits. When you look at the rate update that the industry got, does that like almost in some ways a bad thing because it would have -- it's good enough that it might not force them to make the hard decisions right away or is a good rate update, a good rate update and it's net-net a positive for you guys?

Yes. No, it's a great question. And the underwriting thesis for some of our original sponsors was, it's always kind of about regulatory reimbursement, right, government reimbursement. And I think the conclusion people have had is, if you can be the high-quality, low-cost player, you're going to be in a position to win in either environment, right? So if rates go up, all boats rise on a rising tide. I think that throws a lifeline to a lot of people, frankly. And we've seen in a couple of cycles previously if rates go down or they hit coding intensity or they do something to risk adjustment, a lot of these guys are going to just -- they're just going to be hard hit. And so if they're losing money now and you have some kind of reimbursement exposure and all of a sudden you need cash in this environment, not a good place to be. That's my personal opinion. So I think we're kind of keep your head down, execute, execute, execute, keep growing, don't -- like don't slow growth just to get the profitability. I don't think we would do that. I think you have to keep growing. You have to keep your unit economics, keep hitting your MLRs. And it's just -- it's -- I will say, I think kind of making investments at the right time with respect to kind of specialty businesses that -- whether it be a dental PPO or behavioral HMO or whatever kind of ancillary businesses that you could -- that we can own that you could sell into the marketplace, but you could incubate basically with 100,000 starting members are things that I think would be accretive to the company. And we've done that before in other [ Pacific Care ] we did that, CareMore we did that. So I think that's an opportunity. And then I think partnering with some of these provider organizations more on a JV basis where you have an interest in, let's say, a JV with a provider that's kind of within the MLR concept, I think will expand long-term EBITDA margins, lower MLRs even more. We're getting a lot of calls around that, they kind of say, "Gee, you guys seem to know what you're doing in MA. We -- group or we hospital system haven't been able to figure that out in the last several years, how can we work together, those kinds of things.

Yes. So maybe expand a little bit more on that because I think one of the things that differentiates, because you're in California, where captive physicians are all around you, and yet your model is not -- we got to own the captatphysician groups. So why isn't that necessarily the right [ way ]? Why isn't that the first thing off your lips when you say we've got some cash still, not a probability, but we've got plenty of cash to fund that and potentially do deals. Why isn't this the right first move?

The physician acquisition?

Yes.

Well, we are having lots of conversations. When we -- just give me 30 seconds on this, but the context of it is we started, I don't know, 7 years ago, and we had 8,000 members. We had pretty much a network of IPAs that I would say were good IPAs, but we're undercapitalized, lack systems, lack expertise in MA, and we're basically the IPAs and the groups that Optum didn't buy. It's basically what happened. And so in Southern California, land of the giants, how do you dig out of that hole? And so what we did was we used a lot of data, we used a lot of our subject matter competency, we worked together with these IPAs and medical groups, and we all -- we lifted each other up for the benefit of the consumer. And we started on quality. You just focus on quality, which is Stars. Get the Stars gaps properly documented, be clear about compliant coding and just what -- see a lot of education and training to the physician community. We introduced care anywhere. We introduced AVA to them to help them make better decisions, higher transparency. And over time, it worked. It's just we got all of these groups to be very successful. And so we haven't deployed capital. A lot of the market share that we have with these particular groups are ourselves. And so I think the position we want to be in is -- and again, this goes back to the Caremark experience. We don't need to own everybody, because by owning everybody, you can't necessarily scale it capital efficiently. And so what I mean by that is, if we can make the existing community physicians or community physician groups in a particular market, more successful, more efficient while they can retain their autonomy, their governance, they're in-charge, but we can give them tools to be successful, and we can drive market share to them. It's just -- it's a more capital-efficient way of growing. And then you say, okay, well, we still need that staff model piece, this care anywhere piece that is designed to only focus on that 10% to 20% of the highly [indiscernible]. And so you don't have to have an entire bricks-and-mortar infrastructure to support all 100 members. You don't need that. You need tools, you need people, you visit the home, take care of them at the home, you're connected with a lot of data and alerts and remote monitoring, all this kind of stuff, and you're connected to that PCP. That's kind of philosophically how we're thinking about this. Now I will say that as we've made a lot of these IPAs successful and they've made us successful, what's also on our mind is it's also made them more of a target for some of these consolidators? So we've got a lot of direct contracts and protections in place. And the shared model that we shared risk model that we have in place with these providers is working. And we say, look, we're not trying to cut you out. Is there a freight we're going to go to all CareMore and like they do not work with IPA. And so now, what's worked with us with 7 years, it's been good for you. It's been good for us. Let's just keep it going. And so we're beginning to enter into long-term deals, long-term contracts. So all that is fine. But we can't be in a situation where you're successful, largely due to the tools that we've provided you, have Optum come in or Humana or whoever else come in and consolidate you, flip you to a global cap, that's not right. And so we just have those adult conversations and it's going to be -- I think it's going to be fine.

You mean fine being that there's going to be something as we end up buying them and sometimes it's just...

We are just keep it going? Or even if they do get bought, you have long-term contracts in place that I mean, 3 or 4 of the groups we work with now are owned by Optum, but they've been very good partners of ours from the beginning. So the contract nature kind of retains in place and both sides win. And that's what I mean by fine. I think that will happen. We don't -- the notion of needing to own and going full [indiscernible] vertical in each market. I just don't think you can scale that capital efficiently. I mean it's just -- that's a lot of bricks-and-mortar.

Do you get at all worried that another provider like United or Humana, who talks about being able to improve margins 2x to 4x if they own home health and doctors might eventually get a rationale on the MA piece and make it hard for someone who doesn't have those assets to compete?

Yes. There are certain, they call it, related party rules that kind of help modulate some of that. But basically, that line of thinking, I mean, it's not if, let's say hard to begin, I mean they're doing it right now. And so we're still holding our own. It's basically shifting margins from a regulated entity into a non-regulated entity, I mean on the provider side and why a non-regulated entity getting 85% of the premium dollar is unregulated is a different conversation. I mean, you got to think about that. But I mean I think they've been doing it. I think they've been successfully. I think that's how they're competing with us right now, frankly. I think they've got just better scale economies on the G&A. I think they have more flexibility as to where to shift the product the profits, et cetera, from non-regulated to regulated, not from regulated to non-regulated. So I don't think it's systemically anything new that's going to change the world. I think if we keep doing what we're doing, are we -- because what you're really asking is, are you guys going to be more aggressive on the bids than you were last year. And the answer is it depends on which markets and in some cases, yes. I mean, I've said this publicly, when we always say 20% and we came in, I think our guidance is 13% to 15% now, it's like 3,000 members. That's on us. We should have hit 3,000 members in these other markets. We should have -- which is why we've been focused so much on the network development, the market management resources in terms of just training and educating people to understand what a lot of the original leaders see and to educate and I'm really happy about that progress.

Can you talk a little bit about that then, like so when you do that post mortem and that 3,000 members, like where is it new markets? Is it existing markets? Is it...

I think it's opportunities everywhere. I mean it's execution, it's training, it's -- we -- I think we under-resourced certain markets. I think we kind of grouped some provider relationships that we've had in the kind of 5 or 6 or 8 markets, but we kind of dump them into one bucket. And so we're like we're saying, like, no, it's not one bucket, it's like we really want to know and understand the network strategies between the providers, the hospitals, the brokers, the products in every single one of these strategies, who's going to resource it, who is going to build those network relationships. And right now, I mean, when we have our network calls, the first question is how many cell phone numbers do you have with doctors? It's seriously. The CEOs of the hospital systems, the CEOs of large provider groups, I have all their cell phone numbers. We know each other. They have an issue, they call me. I have an issue I call them. Do you have -- I'm talking about our internal people, do we -- do you have the cell phone numbers of the doctor leader or leaders in your community? If you don't, it's not real. Those are the kinds of things we've been spending a lot of time on. And I think the progress, you can just see lightbulbs going off internally. And I think that will manifest itself in all the markets. And even if you get a few hundred more here, a few hundred more there it adds up, that's kind of the approach, I think we're taking.

All right. I think that's all we have time for. Thank you very much.

You're welcome. Hope that makes sense, guys.