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

Hello, and good afternoon, everyone. My name is Lindsay Golub. I work on the healthcare services team at Goldman Sachs. We're very pleased to have Alignment here with us today. We have John Kao from Alignment, the CEO and Founder. Thank you for being here.

Thanks for having me.

Great. So just to get started right away. I think I want to start talking about the provider strategy. You have a unique model when it comes to contracting with providers. How do you leverage this as a competitive advantage? And have you seen more appetite from providers in terms of the type of pressure they're willing to take on into your markets?

Yes, I think the kind of the provider contracting strategy, the provider engagement strategy has been borne from many years of experience from pure staff model solutions to pure IPA contracted models. And I think the whole thesis is to partner with community doctors, leverage the infrastructure in the bricks and mortar that have already been invested by them, but really to use the technology that we have and the data that we have to identify the high-risk 20% of the population that account for 80% of the spend. And then to support these community practices with our -- what we refer to as Care Anywhere, which is our version of a chronic disease management program that are employed clinicians that we deploy to support their practices to care for these high-risk seniors. And so it's kind of the best of both worlds. We're not investing in bricks and mortar because it's already in place. We're investing on competencies that can address where the high acuity patients are and we make life easier for the practices. And then you design the economics and the contracts in a way where you ease them into value-based care, if they want. And there's more and more receptivity. We spent the better part of the fourth quarter and then the first quarter, talking to providers and engaging providers in the context of our 2023 strategies and new market launches. And I would say the receptivity has been better than expected. So I'm really encouraged with this model.

Great. I'm glad to hear that and thank you for the additional color. We've -- you've talked a lot about not needing to own the provider to get operational and financial alignment. Why do you prefer this model to -- versus a more fully integrated model that some of your peers are using? And do you believe you can deliver the same or better financial outcomes as a result?

Yes. I think the vertically integrated model is very powerful. I will say that. It's just really hard scale. It's hard to replicate in all the markets in which you operate. And when you look at the total number of physicians and then the physicians that are part of kind of more vertically integrated systems. The inherent challenge is the options available to the consumer on choice. And so if you have a vertically integrated delivery model with the plan, the counterpunch to that solution is choice. And so rather than 1 doctor that's in the staff model that's vertical, you have multiple community doctors. And so these are kind of lessons learned. But in selected markets, I think going vertical is powerful. Whether or not you can translate the profitability of the regulated entity into the nonregulated globally [ capped ] group entity is subject to lots of [ arm's ] length, they call it related party rules. And so we've been facing that possibility, so to speak, since we started the company in California with obviously the large market share that Optum has in California. And yet we've still been able to take market share on the -- against [indiscernible] plan side. I think we've grown 65,000 or 70,000 members in the last 5 years or so. And so -- yes, it matters, but we just found that a lot of doctors still want to be independent. They don't want to be owned by a hospital system or a health plan.

I think it's really good for investors to hear how Alignment is differentiated from peers, especially on this provider strategy. I want to talk about the 2023 MA bids. These were due just last week. How do you approach those bids for next year? I know that you weren't happy with the level of enrollment last year, but you've also been very clear about the need to balance enrollment with profitability and growth. How does this translate into your bidding strategy for 2023?

It's discernment. It's balanced, it's discipline. We, from the beginning, wanted and still believe we can hit 20% growth while achieving the kind of MLR margins that we've been able to achieve. And we're very serious about getting to EBITDA positive. I mean that's something from day 1, we've said and resisted the temptation to grow at 40% or 50% in [indiscernible] losses and not be able to get to the proof point that ultimately, I think everybody wants to see is that if we can get to 20-plus percent growth and have consistently good MLRs and get an EBITDA positive. I don't think there's too many people being able to kind of talk about those 3 metrics all at the same time. We can grow. That's frankly, we can grow a lot higher. But to grow and to get the profitability, I think, is something that we've been consistent. And I think that's reflected in the 2023 bids. I would say that we have been incrementally more aggressive, but we're also sensitive to the mix of both the product mix and the geographic mix of our bid strategy with respect to what we think the competition will be in each specific local geography, and kind of the whole kind of bid logic is nothing short of data science these days. And we have really good people building the products, building the networks to come up with these solutions. I think we'll be very balanced in choosing both goals.

I'd love to dig into that more. You just talked about being more aggressive in some areas, but really looking by product and looking by geography. In 2022, the underperformance in enrollment was concentrated in a few select markets. What can you do to improve your competitiveness in the specific counties for 2023? If we could just dig in a little bit more on what you were just [ thinking ] about.

It's, first and foremost, understanding what are the value drivers of success in Medicare Advantage. So what's important from a KPI point of view. And so the way I describe it is very simple. So if you just think through the P&L, you think about revenue and say go, what are the unit economics associated with the pricing elements of revenue? Well, the benchmark, so where you decide to grow is relevant. Number 2 is stars; quality is really important. The difference between 3 and 4 stars, for example, translates into over $100 PMPM of revenue. That's important. Risk adjustment is a factor with respect to the unit economics of price. And just to give people a sense, 1 basis point increase in RAF, is worth between $7 and $8 PMPM, but you didn't know that, right? So that's important in relative context. All of those we factor into the way we think about the unit economics. And obviously, on the volume side of revenue is gross sales, that's product strategy. And then retentions like the new sales. You got -- your retention rate has to get -- we have spent a lot of time and effort on retention. And then you've got to shift to the cost side and that starts with who are you engaged, providers that you can work with and what are the unit economic costs associated with being your contracts. The way in which you contract, is it shared risk contracts in PCP capitation, is a global cap. Those get factored into it. And then the volume part of costs you refer to as the utilization component. And where we kind of distinguish ourselves, I think, through the data, through AVA, through Care Anywhere, is we drive really good institutional PMPMs on the hospital side, i.e., we keep people out of the hospital. And so the way we can have higher quality metrics, both measured in terms of stars, and promoter scores and lower costs as we take care of the people at the home. We identify again 20% costing 80% of spend. We take care of them at the home, we drive down the unit economics of the PMPM dollars of hospital and institutional dollars. That all gets translated into bids that you all hear about, we just talked about. And the consistency by which we can have good, consistent low cost enables us to be aggressive in the way in which we bid. All of these factors at a geographic level are what's considered as we go through each and every one of these questions with every single county with respect to what we think the competition is going to do.

Yes. That's really helpful. All the detail and breaking down all of those different factors. Obviously, it's complicated. It's geography base, but great to talk through. Maybe one more kind of on the MA bids and outlook. You talked about targeted investments in market teams, feet on the street, service delivery, member experience. How does this translate to the market? And what will you be doing differently as you interact with members or prospects and upcoming, or you just talked about how important retention is? Maybe just some of the investments you're making on that front?

Yes. I think that for 2020 and 2021 -- we intentionally, I would say, under-invested in actual resources, boots on the ground resources in the local geographies that we're engaging with the provider community and other kind of senior centric services because of COVID, where you [ can't ] do anything. And I think we talked about in January because of where we are now, we really -- we've hired in a lot of different people in the different markets. I think that's going to lead to better lead generation, working with our broker community, more in-market specific customer service resolution types of resources. And I would say, more specific and more real-time provider services engagement resources. And it's the real time -- so it's all service. Everything is service, service, service. And I think the old standard by which people were accustomed to what to expect from a health insurer service-wise just has to get better. I mean Net Promoter Scores, I think, for legacy health plans was, I think, like on average. So I got to pick on one in, but on average, like 35. It's like a little bit better than your cable company. we're like 65 to 70. It's just service. It's just basic execution and taking care of people. I think that's what these resources may yield. That impacts star ratings. And again, that translates into higher PMPMs basically. So -- and if you have healthier and happier members, your retention rates should also get better. So those -- it's just so basic. You just take care of people, service them and do -- this way we say our values just take care of the senior, don't worry about anything else. You just take care of the senior. Number two, support the doctor to make sure the doctor supports the senior. Use a lot of data to inform both of those stakeholders. And as a culture within our company, having a serving heart matters. Sounds so basic, I know, but it just matters. You got to care about taking care of people. You can't be apathetic about it. And so that is a defining mark of the employees that we have. [indiscernible].

Yes, that's very helpful. And thank you for sort of running through all of those investments and the key focus on service for this year. I want to shift to talk about the gross margin strategy. You've spoken about the importance of MLR sustainability and driving consistent improvement in gross margin. How do you price for gross margin improvement while also continuing to target 20% growth per year? And on the balance of growth versus profitability in this market backdrop, has the pendulum swung one way or another in your mind?

Yes. So the first thing I would say is when we talk about gross margin, we need to talk about what gross margin, right? So on a consolidated gross margin basis, we reported 87%, okay? The way we run the business, though, is we have a few different additional cuts of granularity of how we would define gross margin. First and foremost is just by tenure. And so for members that have been with us for over a year, we have the ability to properly document their acuity levels from a risk adjustment perspective. We have the time to engage them and -- particularly the 20% and get them into a Care Anywhere program if need be. And so the MLRs or MBRs for that, where we would define the -- our loyal population, which is, to me, the long-term sustainable MBR of the company that is important in the way which we bid is in the low 80s. And I think we shared that publicly before. And I think if you go back to the 2020 GAAP financial statements in our [ S-1 ], we were like 82% on a consolidated basis. As so in 2021 to '22, we cranked up the growth like having new markets. It's important that we keep growing though because when your efficacy of your care model and your cost model is so good, remember, as a plan, we still have an 85% minimum MLR rule we've got to respect. And so if our core business MBR is low 80s, and we're growing new members before they're engaged on the Care Anywhere side, before we really have the time to properly compliantly document their acuity levels, they're in the 90% to 95% range, MBR in year 1. And so the way you have to look at it is on a weighted average basis, you kind of need to solve to getting closer to that 85% because we're a health plan. And then there's additional nuances such as the manner in which you contract matters. And we've also said this publicly that we do have about 30% of our business globally capitated. And -- but the reasons are a little bit different in that it's a little bit higher MBR, but it helps us on a mix basis, again, managed to that 85% threshold. And just as a nuance, the 85% rule from CMS perspective translates to about 83-ish percent on a GAAP basis. I'll get into details, but that's basically how we're managing to it. And so having consistency on that loyal MBR is really important to us. And the degree to which we grow is a lever point and where we grow is a lever point of how we drive down the overall consolidated MBRs, okay? And that, in turn, is a -- obviously, a key factor in the pace at which we move toward path to profitability.

Perfect. Well, we just started getting more into the importance of growth and why that matters so much of your model, which I know you have talked about even since the beginning of the IPO, and we were following you. So maybe moving on to market expansion, which is obviously related in one of the avenues by which you're growing. How are you thinking about market expansion both for 2023 and longer term? And as you've started to grow outside of California, what have you learned about what makes the market attractive for Alignment?

Yes. Great question. We said during the IPO that we planned on setting up beachheads. And what's given us the confidence to expand outside of California is the work inside California. And we have -- at the time, we have 18 markets inside California. Every single one of them was positive EBITDA and certainly positive gross margin. And that was not the case when we first started some of these newer markets. And so you're looking at rural, urban, suburban markets, high income, low income, ethnic -- I mean every market is different, right? I mean Stanislaus County market is totally different than Santa Clara, totally different than Los Angeles. The network strategies are different. The demographics are different, the reimbursement is different. But we understand the market says, "Oh, you guys in California are kind of the same, right? And so proving portability is a strategic imperative for us. And I believe that our ability to get to EBITDA breakeven in the newer markets is going to be better and faster than inside California for this reason. There are a lot of IPAs and medical groups in California to the point it's somewhat saturated. And these are middlemen that there's margin embedded in these risk-taking entities. You have a lot less of that outside of California. And despite a lot of the consolidation going on and some of the new public market providers, there's a lot of physicians, individual practices, practices consisting of 2 or 3 or 4 physicians. They need help. They need support. They want to remain independent, and we're there to make sure we help them accomplish that. And all of that is factored into the way we think about margin. And it's just really, really important to do the basics that are service-centric and serving where the growth and the MLR, the financial implications almost follow. If we do the right thing to a human being and somebody's mom and somebody's dad that help them, I think the financial kind of consequences really will accrue to us. We do the right thing.

Makes a lot of sense. Let's turn to the utilization outlook, which has been a big focus this week at our conference. We've hosted a lot of companies in the [indiscernible] providers. For 2022, Alignment expects utilization to run in line with the company's historical baseline and also includes potential for COVID cost spike. We've seen an uptick in COVID cases from the end of 1Q. I know you didn't have any specific timing around the next COVID waiving your guidance that how does the current environment compare to what was anticipated in guidance?

The utilization for Q2 is kind of on point to where we thought it was. I think that we have embedded the potential for some increase in utilization and the related unit economic increases associated with COVID admission versus a non-COVID admission. Some of that is already baked into our Q2 and 2022 full year guidance. And I think that prior to COVID, remember, we had seasonality and increases in utilization in November, December and January anyways due to the flu. And so what's really interesting to me is last year, in January, we had the spike, our COVID admissions went up, but our flu admissions went down. And the involuntary disenrollment of our seniors was about the same. Meaning seniors, they get older, they pass away. The involuntary celestial disenrollment was kind of flat. And so when we -- we'll see kind of the emergency funding go away to the hospitals, we're not sure. But that's an extra 20% [indiscernible] economic kicker on our cost structure with respect to the inpatient admission. We're thinking that it could have gone away a couple of weeks ago that obviously didn't happen. Not sure what's going to happen. I suspect it will be potentially gone by the mid-years, but we don't know.

Great. Well, maybe 2 quick follow-ups on that point on utilization. Hospital bonds is still track below baseline levels. Are you continuing to see the historical relationship between COVID cases and deferral and care? And then as you think about 2023, how do you think about the level of utilization next year that's embedded in your bids?

Yes. No, we haven't seen the uptick on kind of deferred care. Part of it, I think, is a function of -- again, this notion that 20% of the members account for 80% of spend, and we're continuing to see these people either in person or virtually, depending upon the individual. And so from our view, there kind of isn't this deferral or pent-up demand because we're seeing them. We're taking care of them. And my mom's the perfect example. I mean she's a member, and she hasn't gotten COVID yet. But I tell her to get the extra booster. But the nurses still kind of see her once a week, make sure her [ vitals ] are safe. And she still needs to go to see a specialist for whatever reason, she can go. So with respect to how we're, in fact, thinking about that, it's more of the same in that we have just kind of historical increases in utilization, as I said, in November, December, January, we're going to factor that in. Probably have some cushion built in it for the higher admission per admission cost. But there's nothing we're doing that's out of the ordinary, I think.

Great. So I want to talk a little bit about M&A. Alignment has said that it could have appetite for small but accretive M&A opportunities that would be selective. What are you looking for in a potential acquisition? You said that you're open to types of deal you would look at. But should we think about primary care as the most direct way to improve your value proposition. And how would you use M&A to enhance the value of the Alignment [indiscernible]

Primary care practices, again, selective practices in very specific sets of ZIP codes in specific markets are kind of how we're proactively thinking about M&A. We think they're relatively small bets. They're high impact. Their physicians that we can rely on that serve a little bit as a sandbox for the rest of the marketplace. This is how it can work with us and our Care Anywhere models and our data sets and our contracting strategies. And because of the product design, and the fact that we're growing because we're -- of the product design, it's kind of this virtuous cycle, we talk about those -- that growth benefits some of these individual practices that are growing with us. As when they grow, other practices in the marketplace notice that because they're losing members to this doctor, and so they have a tendency to want to contract with us. And so it's kind of these kind of very specific catalyzing target M&A opportunities. I think that we're focused on. We are still open to plan acquisitions. We are not looking at plan acquisitions that are dilutive or turnarounds, not in this environment. We are focused on the organic growth part of the business and focused on getting toward a path to profitability. We're focused on just executing the plan. To the extent there's a great opportunity that is accretive. Sure, we will look at that. I will say that the balance sheet is really strong right now. We've got $0.5 billion of cash. We've got a debt facility. I think it's $150 million approximately that we're going to get refinanced. We have enough cash on the balance sheet to get to cash flow breakeven. And so we have to be very protective of that balance sheet position, so.

Great. Thank you so much for all the detail there. And again, I think this all fits into the strategy of balance and taking a very thoughtful approach to growth. Maybe in the last 5 minutes we have, I'd love to touch on star scores and then Care Anywhere. First on star scores. The company has been back and forth between 4 and 4.5 stars over the last several years, but really strives to get to that 5 stars and you've discussed that it works. You work with IPAs, your provider engagement reps to make sure MRA and clinical operational gaps are closed. Can you go into more detail about the process here and how this will translate to higher star ratings over the next few years?

Yes, it's a great question. It's -- so stars specifically is comprised of 4 key areas, just to give you a sense. One is they call it HEDIS. And it's really an area where CMS is emphasized in terms of their waiting system, but it's really quality, quality and clinical outcome centricity with 5 stars on HEDIS. The second is pharmacy and so Part D/Pharmacy. And the focus there really is on medication adherence. And we're 5 stars on that. The other is the general administrative back-office functions, and we're 5 stars on that. And so where we have specifically been working on is something referred to as CAHPS scores. And so what CMS is doing is they're saying, we pretty much have the plans and the quality metrics addressed the way we want. And so really now we're focusing on CAHPS. And CAHPS is an acronym C-A-H-P-S or consumer advocacy something, I forget the acronym. But it's really a survey to consumers on, are you getting the -- are you satisfied and we're around 3 on that. And part of the reason is we have delegated some of the UM functions in California to some of our IPA partners. And so we're really working with them to ensure that the members have faster, more timely access to the subspecialists, right, which is kind of the notion of our concierge services. And we're working with the IPAs and saying, you really got to get these folks in to see your subspecialists. And so what we're doing is we're saying, to the IPAs, who are the subspecialists inside your IPA and that are the highest performing quality providers. We want to identify them and include them in our [ Blue Ribbon ] network of specialists such that if an Alignment member needs to go see a specialist, they can be put to the front of the line, so to speak. And there's different incentives that you put in place to make that happen, both with the provider and with the IPA. And so that's one example of how we're trying to address the CAHPS issue. We get the CAHPS issue solved right. We actually have a chance to get the 5 stars. Five stars is not going to give you more PMPM revenue than 4.5 stars, it gives you is the ability to market 12 months a year, which is a pretty big deal. So...

Great. Well, maybe in the last 1 minute, we can just squeeze in 1 on Care Anywhere. What examples would you point to, to show that this model is successful in bringing down medical costs and improving outcomes for members? And as you've grown and expanded to new states, how are you finding Care Anywhere's ability to scale?

It is the leg of what I think creates the secret sauce for us. And so there's 3 legs of the stool here. One is the data to know who are in that 20% cohort. So we use AVA, we have our stratification engines. We know who the people are, okay? So that one. What do you do? So we had to create Care Anywhere, which is about 200 now employed clinical -- clinicians forming clinical teams of doctors, advanced practitioners, case managers, social workers, nurses that see patients virtually and at the home. And so the original model was really deploying at the home because of COVID, we had to develop virtual interaction capabilities that -- and so right now, about 50% of our engagement with these Care Anywhere eligible members is virtually. And it combined with the engagement with the provider form kind of the triangle of success, so to speak. And kind of having all 3 work is what is allowing us to then productize that through the bid process to have competitive products that are sustainable to get us both the 20% and the margin. That's what's hard in this business. You got to do both. And it is what I think differentiates us, which is why we didn't outsource this core competence to vendors.

Wonderful. I think that's a great place to end is how Alignment is trying to differentiate itself from all of its peers. And thank you again so much for joining us today in California.

Thanks for having me. If you have any questions, I'll stand outside for a couple of minutes, and we can just -- we can answer questions. Thanks, Lindsay. Thanks. Okay. Thank you.