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

All right. Welcome, everyone. My name is Michael Ha. I'm managed care and health care services analyst at Morgan Stanley. Our next session is with Alignment Healthcare, a technology-enabled managed care company, focused on the Medicare Advantage business. I'm very pleased to have with us today, Chief Executive Officer, John Kao; and Chief Financial Officer, Thomas Freeman. I may read the research disclosure real quick. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representatives. Okay. With that said, I think we'll jump straight into the Q&A, and I'll leave some time at the end if there are any audiences.

So maybe just to start, how are utilization trends going so far in the third quarter? How are they trending relative to expectations as well?

Yes. And maybe I can jump in on that one. So when we did our earnings call in the first week of August, we shared that we had started to see some kind of moderate levels of COVID increasing in July. But very consistent with prior COVID waves, we had seen some offsets in the non-COVID utilization. So I'd say quarter-to-date, it's kind of largely running in line with expectations. And really what we shared and really keeping an eye on to sort of how things may trend into the fourth quarter. Flu season has been largely absent, obviously, the last 2 years. And so it's something we're very mindful of and we're kind of contemplating as we think about guidance and our ability to achieve those expectations. But I think in general, that's sort of where we stand now. And it's not just the actions today we're focused on, but also making sure we set ourselves up for a successful '23 as well.

Excellent. So touching on Medicare Advantage. The competitive landscape this year. I know your enrollment growth is a bit short of your expectations. But looking to next year, you guys have targeted 4 areas of investments to boost your competitive positioning. I was wondering, could you talk about how those investments changes are going? And also, your latest thoughts on just how competitive positioning should look next year, your conviction in regaining 20% revenue growth into next year?

Yes. I can take that one. I feel really good. I feel good about the investments we've made in our ground game. The community reps in terms of lead generation, in terms of provider engagement, all of that is going well in each of the markets. And we're already starting to see some of that pay off in terms of some of our Q2 results in terms of the 83% MLR. So we're happy about that. And as we've shared before in the past, foundationally, having that high quality, low-cost framework forms the basis of really good growth. So I'm encouraged with that. I think if we look at the midpoint of our guidance, we're getting top line about 18%. So I feel really good about the 20% growth rate for top line. And of course, the best way to get that is we get to 20% on membership. And the other thing we've said though is while maintaining that kind of growth rate, we do want to move toward getting the EBITDA positive. So we're trying to find that balance. And then the other thing I would say is heading into this AEP season, we feel pretty well positioned. Kind of it's still through early, all the final benefit details are going to come out on October 1, but we're getting some previews from different events that we've had and different feedback from brokers and I think we're pretty well positioned. And as a reminder, up until this last AEP, we were still -- our CAGR was still over 30% for top line in membership. So I think 20%, I feel good about it.

Great. Great. I know you mentioned your ground game. So I just wanted to get your latest thoughts on changes to the ground game distribution strategy. I know you've talked about increasing broker efficacy, lead generation, provider engagement reps. Just how is that going, thoughts around that?

Yes. It's just resourcing each and every market to have the people producing leads to ensure that the engagement levels with each of our providers is kind of where we want it to be. I'm again, happy with the progress. We're getting the people recruited. We're getting the people trained. We're working with the provider community. We're working with the broker community. Just really pleased with that. I think the next evolution of that is to just be really precise around what is the market-by-market strategies that these folks that we've now trained and the leadership we have in the market, making sure that's all working with our providers to drive additional growth with hospital systems to drive additional growth. And I'm hopeful that, that will all kind of be reflected in how we perform during AEP. I think the operational and the clinical operational investments that we've made in AVA, the ground game and how all that works together is also going to be something we start seeing in this AEP. So again, it's all execution, but in terms of where we stand right now, I feel good.

Great. Great. And then year-to-date, you've had strong performance. I know in your second quarter earnings call, you mentioned you're currently assessing areas to redeploy that outperformance into the back half of the year. Just given the time of the bid and benefit offerings being lots, and my thinking is it's probably going to sales and marketing, distribution. But with that said, have you decided which particular areas to reinvest into?

Yes, absolutely. First, I'd say is we're starting to look at branding, branding the Alignment Health brand. So people are going to just be more aware of this. So that's something that I think we're at a large enough size. Those kinds of investments are going to make some sense for us. That's number one. Number two is, again, ensuring that the ability to reproduce kind of profitable growth market by market by market requires systems, requires training and requires a lot of provider engagement and provider communications, who are putting people in those roles to help us be successful there, particularly in some of the new markets. And what I was trying to say is California is already EBITDA positive. So a lot of our operating losses are investments in some of the newer markets. So it stands the reason that we're going to make sure those markets get the resources so we can get to that growth bolus of profitability sooner.

Terrific. So question on STARS. I think many of your peers have mentioned the disaster relief provision is going away, impacting their star ratings as a headwind for payment year 2024. But for Alignment, I believe over the 98% of your California members pre-COVID were already in 4-plus star plans. So could this dynamic actually pose a competitive advantage for Alignment next year as your peers see their star rating hit a headwind, but yours might be stable?

It's a good question, Michael. I guess I would say, I'll just say it. I mean, I won't be happy until we're 5 stars everywhere. I mean you can -- I mean just I think the model portends that we can get that. I mean, I think your thesis is right. But we're not counting on that from a competitive perspective. We -- I want our organization to be 5 stars across the board on everything, for every product, everywhere. I think we'll make some strides toward that this year, at least that's kind of where our second preview has come out with the STARS. So we're making progress along that. I think it might surprise some people, might have a market where we do get 5 stars, but we'll see what the final numbers come out. But I just think this whole focus on ensuring this kind of maniacal detail to serve the consumer is something that manifest itself in consistently good Net Promoter Scores, consistently good star ratings and good MLRs. If we do that, we translate that into more value in the form of supplemental benefits for our members, and that's good for everybody.

Great. Great. So looking at new market growth, you recently announced you're entrance into Texas and Florida. I think you're now at 6 states. And I understand you've also been very vocal about long term being in 15 to 16 states, covering, I believe, 70% of the Medicare eligibles. But you still have significant white space in your existing current state. So looking forward, how do you think about the balance of expanding into new states, reaching that 15 to 16 states target versus expanding in existing counties and -- existing states rather?

I think it goes back to the 20% growth, getting to EBITDA positive, making sure that our MLR is consistently reproducible, beginning to start getting more scale economies to achieve that and go deep. And so we get those 2 kind of strategic focused initiatives done, just go deep. Go deep and take more market share in all of our existing markets. I think I've told this internally, as I'll share it externally also, for our 24 new markets, bars going to be pretty high in terms of new states for the exact reason that you said. And so one thing that I know that we've done every time we focus, every time. 100% of the time, we focus on something, we get it done. And it'll go down the list of all the things we've had to improve on and focus on, we've accomplished it. Right now, it's -- I want that 20%. I want to get the EBITDA positive. I want to continue the reproducibility of our MLR. And then if we can get to a point where we're going to fund the growth from internal operations in the new markets for '25 or even '24 potentially, but certainly for future, you can see 2 or 3 additional states. Over the next 3, 4 years, I think we're going to kind of get there. But we got to go deep.

2 or 3 additional states perhaps in the next...

Yes. Just like in '25, '26, we do 2 or 3 in those years, assuming we achieve what we're focused on, which is continuing to grow, get more market share of the existing footprint. Now the other thing to say is for Texas and Florida, there's all kinds of contiguous county opportunities for us to expand into new markets, but within those states. It's more efficient use of capital.

Got it. Got it. So with your largest market, I think you mentioned California is now at profitability this year, and a lot of investor focus has been turning to, okay, when will Alignment reach enterprise profitability. And I think on your second quarter call, you mentioned getting breakeven by 2024 is a heavy focus. So is that the target internally? And what has to happen between now and 2024 for you guys to get to breakeven?

Yes. Maybe I can take that one. I think I view it both from a kind of corporate standpoint as well as from a market-by-market standpoint. So maybe I start with latter given where John left off, if you think about our new states outside of California, we launched North Carolina and Nevada in 2021, Arizona in '22 and Florida and Texas upcoming in '23. And typically, depending upon the pace of growth in the market and the type of contracts we have in those markets, typically, it's a couple of few years or 2 to 3 years to get to EBITDA breakeven. And so as we continue to not just grow in those new markets, but continue to demonstrate MLR replicability, I think those will turn towards EBITDA breakeven, the way California has been so successful over the last few years. From a corporate standpoint, I think it's 2 things. One is just growth, frankly. We've obviously incurred a lot of costs as a public company, as an example, we didn't have as a private company, and those should have tremendous economies of scale baked in as overall membership continues to grow irrespective of market. And then the last part is we're continuing to make investments today into some of our shared services areas, where the quality of the interaction with the member or the productivity is good, but how can we make it more efficient, more automated. And obviously, we've put a lot of capital towards our clinical efforts historically. Over the last, I'd say, 2 years, we've really shifted the balance from AVA being purely a clinically centric tool to also an operational driver, a consumer experience driver, a provider engagement tool. And so I think a lot of those things will ultimately manifest itself in just improved staffing ratios, productivity and things of that nature.

Yes. Great. This is a good segue into AVA. So when it comes to managed care technology, most of the demo, systems, capabilities seem similar to me. I'm probably tech literate too, which is why, but the one point of differentiation I do see with AVA, clearly, you have all of your systems on one AVA platform, which allows you to be more nimble with rolling things out and changes are less difficult and tedious. But with that said, when it comes to AVA, what would you attribute as the main point of differentiation versus other legacy managed care systems?

Single source of truth. We have one repository, where we have a process where we ingest data, transit data and have the data access from different stakeholders, whether it be internal clinicians, internal operations, sales, et cetera, but also external users of the data. And so the reconciliation process is very efficient because we have one single source of truth. In other organizations, just how you would define membership with simple question, right? Membership -- in accounting membership, in eligibility membership, in sales membership, at what point in time you can remember, all that thinking in terms of how we make definitions is already pre done. And so we have -- we just know where the data is, what the data is and there's just consistency everywhere. That's, I think, the -- one of the most important things that we've done. And then exposing that information that you have confidence and you have to do a bunch of back-end reconciliation, exposing an information real time to the clinical team, which is going to make decisions based on that information is point of care that allows them to make better decisions to take care of the member. I think all of that is foundational for care anywhere. Foundational for the way in which we engage our providers, foundational for how we communicate to the consumers themselves is like you have consistent information.

Great. Great. So with the power of AVA, I know earlier this year, you mentioned potentially modularizing your AVA platform, and I think you guys call it care as a service. And it's different offerings that you'll distribute to providers or, I guess, other plans potentially. One, how are those efforts going? And would these modularization efforts require additional costs?

Yes. So we made the strategic decision at our last Board meeting, that we need to do a couple of things. First is focus on the core business and get that 20%, get the MLR consistently low, get to EBITDA positive. That's the big picture. However, we do want to have, 1, maybe 2 provider partners, where we're going to be working with them on a multi-payer, multi-product strategy. And so rather than setting up an entire division, doing all this kind of stuff as separate company, first things first is get the core to be its own best reliable reference point. That's number one. Number two, get 1 or 2 pilots out there. And what we're finding is the receptivity for what we have is huge. Everybody wants the tools that we have. Getting them to be able to be maximized by the provider or by the hospital system requires some preplanning to ensure that their organization is designed to be optimized to take advantage of these tools. In other words, if part of the game is for them to get into taking risk in MA on a multi-payer basis, they're going to be organizationally structured, and the incentives have to be designed in a way that they can actually use these tools. Then you have to have the conversation and say, okay, how much of it is are you ready to do yourself, in which case we would help you through professional services and they would license certain applications to you to help you do that, or if you can't get there yourself, we think about some form of an outsourced service for a period of time until you can't get there. So I think a lot of the implementation nuances have to be done right because if we do it, it has to work. We can't because -- I think we know it works within Alignment. To make it work with a partner, it has to work and the setup has to be right because their organizations are not the same as Alignment's organization. We had to customize our organization so they could maximize all these levers. So that's a step that we're taking.

Great. Great. And when I think about just the vast opportunity with empowering physicians to take on risk. I mean we're still -- I think united before I said we're in any number 2 or 3 of value-based care.

I agree.

And we are seeing -- with that said, we are seeing some other planned offering similar type of SaaS offering. Is that something you're running into when you're having conversations with provider partners? Are there perhaps competing platforms?

Yes. We've been, frankly, facing that issue since we started the company. And if you remember -- this is one of my worst jokes, but I'll say it anyways. When we started back in -- this 2014 or so, everyone was going to be an ACO, right? And I used to run around with these hospital systems. I got no laughs on this. But I say, you guys know what ACO stands for. They go, yes, it's an affordable care organization -- no, stands for another consulting opportunity. Because if you fast forward to today, how many people have actually gotten into MA in a viable way that's actually working and sustainable? I would argue very few. It's just hard. It's hard to do. And the data has to get set up right. The application of the data. The use of the data has to get set up right. The incentives with providers has to be set up right. And then you have to -- one thing I will say, people are getting smart with, is they understand now that a lot of this is best product. Meaning, if you have a consumer product, that's a product benefits that's better, that product will move market share. And so a lot of the hospital systems we're talking to that we're contracting with the best hospital systems anywhere in the world, they're working with us because of that, and this is saying, "We know you guys can produce product that will move market share to us," which is what they ultimately want is the market share. But yes, I won't name any names, but we've been dealing with that issue from the beginning. Will there be some people that pop in and out? I'm sure there will be. But end of the day, it's not easy to do.

Right. Right. So another one on AVA, I just have a couple more. So when I think about the size and scope of AVA, again, one of your peers have mentioned, there's about 6 different tech modules that they're aiming to modularize. How should we think about that for AVA? How many applications, modules or any currently packaged and ready to go at this point?

Yes, yes. No, that -- the use of that word actually credit to share there, doing our IPO really. But really, it's -- we've designed it, so it is in modules. And the modules are designed to address what I would refer to as the value drivers of which you have to do well in Medicare Advantage, right? And the modules -- you just think about through a profit and loss and income statement, look at the revenue first. What are the drivers of success in MA? Well, you have to be really good at STARS, right? So what are the tools and the modules and the workflows for optimizing STARS? And there are different components of STARS. There's HEDIS, there's CAPS, there's all this other stuff. There's Part D. All these different modules and workflows are what we had to build to optimize that 1 component of revenue for STARS. Next is MRA. How do you compliantly and get compliant documented risk adjustment, that has to be a module. Then you kind of say, okay, what about retention and a CRM application. So you have the ability to have your member services and your concierge teams retain members, right? So you have visibility, you've a consistent CRM. That's an area that we spend a lot of time with. What is the consumer journey, right? What's the consumer journey? So you look at revenue, then you look at the cost side. The cost side is going to be about volume and rate. Obviously, the rate is the unit economics we have with providers. And I would say a lot of the providers work with us. We have very good kind of unit economics, fair unit economics. We're not just grinding them on unit economics. But what we're really good at is the stratification, identifying the 10% of the population that account for 89% of first line spend, having our care resources focused on that population. And so the care management module is another module, right? And then the dashboard tools and actually having a whole suite of insights that we provide to internal and external is another module. And so these are just 4 I can think of right off the top of my head, but there's dozens of these different modules. We're trying to package each of the different modules in these different suites. So it's easier to buy and sell. What else? Do I miss anything in terms of some of the modules?

I think you covered a lot of the kind of key ones. I think you had the big ones...

If Hakan Kardes -- Hakan Kardes, he's our CTO, if he was here, he'd yell at me. But yes...

Great. Maybe I'll ask 1 more, and then we'll open the floor up. So when I think about the Alignment model, I think about your high-powered tech platform through AVA, your wraparound care team through care anywhere that cares for the 20% of members that comprise 80% of the cost. But then the power of your external provider partnership model, the physicians that care for the other 80% of the lives, how do you incentivize them to want to join Alignment? Why would a physician opt to select Alignment from both the care delivery and a financial perspective?

It's such a critical question. We have found that the model that has been developed is just a function of a lot of years of experience. And so just to give you some context, when we were at CareMore, the prior company, we made the conclusion that we didn't want to compete with the community doctors. We really wanted to empower them and make them more successful. And so when we constructed AVA and we constructed Care Anywhere, there -- they're basically an extension of primary care. Similar to how hospitals work inside the hospital, how they work with primary care. We're really an extension of the PCP office and practice. We take care of their patient at the patient's home for free, right? And that leads to really good utilization metrics. We keep people out of the hospital. I mean it's just say it that way. Hospitals also win though because we move market share for them because we have really good benefits. That's how everybody wins. The doctor wins, the patient wins, hospital wins, Alignment wins, shareholders win, everybody wins. And so if 80% or even 90% of the membership is accounting for 10% or 20% of the spend, the whole key there is to make that experience for those non-polychronic members, that experience has to be white glove. It's hassle-free, white glove advocacy is where we're spending all of our time and effort, right? It's -- you just don't want any problem. We have an 82 Net Promoter Score on the members that we do touch in the 10% to 20%. That high-risk population that we're seeing at home, literally, they love us because of the care we give them, and they know that we care for them. And so to your point, the non-Care Anywhere members has kind of been a big focus area where we've invested a lot of money on panel management, on CRM, on care coordination, on care navigation, all of which we would deem we call the consumer journey, right? How do we just keep all the different collateral materials, member service calls, sales calls, doctor calls, risk adjustments has to be seamless and hassle free. You don't want 30 people calling you when you're a senior because you've got all these other plans, sending email and everything. Keep it simple, keep it high, just white glove. It's -- everything is service. Everything is just service, whether you're Care Anywhere member or you're not Care Anywhere member, everything is service.

Great. Maybe we'll open up the floor to any questions, if you like to raise your hand.

So I have a question about liquid biopsies, particularly oncology, liquid biopsies and how payers such as Medicare really just -- any kind of payers are thinking about those going forward as you expect kind of predictive value to increase over the next decade?

We have looked at that. I think we've even made an announcement around that a year ago or so. I think that and other kinds of genomic kinds of markers and input is what we're thinking about in the context of our AVA stratification model. Is that can we use that information, can we use pharmacogenomic markers to help us identify with more precision, who should be in this Care Anywhere program to make them more eligible. There's half a dozen kinds of these initiatives that we're looking at, liquid biopsy being one of them. I think there's a couple of different vendors that probably shouldn't name those names that we're working with. I do think that's going to be the future, not-so-distant future of more and more personalized care, which is really what we're talking about. If you can -- if you have that data and you can identify the kind of care intervention, we can provide the member and the product that you can put them in. You're really moving towards personalized medicine, really, if not quite precision medicine, but personalized medicine. And then you augment that with the service level that actually makes somebody feel special. I think that's an opportunity for we to win.

There's always a great debate around virtualization, right? Should we go -- be more digital? Should we go physical, which level of care, how that relates to control medical loss ratio versus how it constrains expansion. What is the current state of your virtualization and what you think about going back and forth around that?

Well, it's the thing I think about the most. Because I do think the one factor is the aging in of people becoming seniors, right? So I think the virtualization is here now for the commercial population. I really do think that. For seniors, all of the surveys that we've taken, people still -- seniors, 70 plus, they still need that kind of handholding. They still need counsel and guidance as to what product to use. Still -- I think some of the FMOs, we still are very good partners, but we have to have relationships. I think as people start aging in -- people that are 55 to 60, now start aging in and are being 65, you're more tech-savvy, you are more app-savvy. You're going to be making decisions to comparison shop on products, on networks and then be able to enroll in an automated fashion, pick your doctor, pick a product first where it's more PPO, pick a doctor where it's an HMO, be able to schedule, be able to get your personal health record. All of that, I think, is going to get automated. And so I think the adoption of that by seniors, we'll see, maybe 2, 3 years away still. I will say internally, due to COVID, we had to build our virtual care center. And it's basically the virtual hub for supporting our Care Anywhere program. That has allowed us to scale. It's really interesting. It's allowed us to scale our staff model, focused on the polychronic. And right now, I still think the number is about 60% of our overall touches are done virtually. And that's a video -- mostly video, some telephone as well. But I think -- if you think about that comment in the context of MA being direct-to-consumer, recurring revenue, subscription-based models with a heavy emphasis on social determinants of health and senior lifestyle as represented by these supplemental benefits. Remember the thing that we're offering this year is really interesting, it's pet care, and don't laugh -- people laugh. But -- or discounts to pharmaceuticals related to your pet. I mean, all I'm saying is the definition of a traditional MA plan, I think, is also changing.

Thank you. Sorry for that. I remember we're right at time or 4 minutes over, but thank you, John. Thank you, Thomas.

We can meet at the back if you guys have questions, too. All right. Thanks, everybody.

Thank you.