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

All right. Last but not least, we are at the Credit Suisse Healthcare Conference Day 1, it is Alignment Healthcare. With us today, we have CEO, John Kao; and CFO, Thomas Freeman. I'm Jonathan Yong, the health care technology analyst here at Credit Suisse. And first, we'll kick off with some -- you guys just reported 3Q results. So if you could provide some quick commentary and a summary of how the results came in and how they came in relative to your expectations, et cetera.

Yes. I can jump in. Great to chat with you this evening here. So we reported earnings on Thursday last week, and we're really proud to come in ahead of expectations across kind of all 4 of our key KPIs. So from a top line standpoint, I think the kind of key point of emphasis is not just the quarter in and of itself, will repeat the high end of our guidance by about $25 million. But really, we raised our outlook for the year where for full year 2022, we now anticipate north of 20% revenue growth, which was our kind of goal from the get-go back in early 2022. So we are pleased to provide that update from a top line standpoint, but probably more important is how we're kind of managing the cost of the business. So for the quarter, we came in at an 86.3% MBR, which brings our year-to-date MBR to 85.5%. We're kind of looking at a full year MBR of 86.5% embedded in guidance, which is about 1 point better than where we started guidance earlier in the year. And from an EBITDA standpoint, we have a negative $3 million of adjusted EBITDA year-to-date first 9 months. And so again, significantly ahead of expectations and really allowing us to continue to make a lot of the investments today that we think will help pay dividends in the future. But really, a great quarter and I think positioning us well for a solid 2023 ahead.

Okay. The company announced an expansion into Florida and Texas. Can you talk about the decision-making process to enter those states and the counties in those states?

Yes. Sure. Good evening, everybody. So the template we want to deploy is to get beachheads set up. And I think it's kind of obvious to say, if you want to be in MA, you need to be in Texas and Florida to be in California, probably a couple of other states. The playbook is the same one we want to execute against the same way we've had success with, and that's focusing on quality. And I think a lot of the lessons learned we've had in terms of entering into these new markets, -- it's very competitive. You got to build the relationship with the distribution network. You have to earn the trust of the provider community. And so what we said was let's target certain communities where we have like-minded physicians, let's focus on quality, let's focus on deploying the care model, and it's kind of what we did in North Carolina. And we'll get into Texas and Florida in just 1 second. But lead with STARS, lead with quality, lead with Net Promoter Scores and just have the experience that your members have with you be kind of the driving force that allows us to have very competitive benefits. And so we have the kind of the PR tailwinds, if you will, with the star ratings. You have very good competitive benefits. We have engaged delivery systems -- and you have kind of our AVA platform and our care anywhere capabilities. I think that's how we break into the market. And then you have to have, I think, a kind of a more evenly distributed distribution model. We still rely on brokers, but we'll have some more captives. And I think specifically as it relates to Florida and Texas is like Jacksonville, Sarasota are -- I was referred to as driven by like-minded provider partners is really the key differentiator. And we're looking at it from a competitive perspective. They're both competitive markets. But we're also looking at just where do we think we can deploy our model with like-minded providers and when -- and that's where we settled there. Same with Texas and on El Paso, like-minded providers focus on quality, focus on STARS. And it's going to -- the lessons learned, it takes a couple of years for all that to get kind of rooted. But once you get that infrastructure in place, the ability to have a differentiated product is more -- it gives us a higher expected value and higher probability of winning in that particular market rather than just going in with, say, just a pure intermediary that doesn't really give you any differentiation from a network point of view.

Okay. Just in relation to kind of starting at those counties, I mean what do you need to see in those counties before you decide, hey, we're going to go into Miami date or something like that? What do you need to see exactly...

Yes. It's all the kind of demographics that I think anybody else would see. One of the things we -- like 85% of our growth comes from switchers. And so we do like to have a lot of MA penetration. We think we have a better mousetrap. And so all of that is important, but really, it's the providers. And the providers, we still have found in each of the markets that we've expanded to like-minded smaller practices that we kind of aggregate and construct ourselves. And -- they don't necessarily want to be consolidated. We're sold to other consolidators don't want to be part of their health hospital system in the marketplace. They want to remain independent. They end up but they need help. And they need help in the value-based care. They need help with data. They need help with extending their practices with kind of a differentiated care model. And what we've learned is a lot of these doctors love the care model that we offer. And so it's a better outcome for their patients. And that's the key thing. And -- and so that's number one. Number two, I think is just high MA penetration. We'll take share.

Okay. You did bring up some topics that I do want to address it afterwards, but we'll try to go in order here. When you think about the potential year 1 market share gains, how do you kind of think about this? And if you think about other counties or states that you first landed in, can you look at those and say, "Hey, this is kind of how we'll grow or any considerations there?

Well, yes. So kind of the underwriting model we have for pretty much every single new market inside and outside of California is predicated on getting to 3,000 to 5,000 members by year 3 and getting the kind of operating kind of cash flow positive by year 3 and then getting to 10,000 members by year 5. And so all the initial work is really market specific and the problems that you have to solve for are all different. And if I look at, let's just say, a new market that we had in Santa Clara. 4 years ago, we had 300 members. We had, whatever, 100-plus percent MLR. We identified the problems. We put forth the solutions. We put forth kind of the culturally competent capabilities in that particular market. And you fast forward it, and you get, what, 13,000 members with an 80-something percent MLR. And so each market has its own set of challenges. It's so localized. And every single market kind of has fit into that underwriting kind of model. So that's how we're thinking about it. I think, though, like North Carolina, get the quality, get the stars -- and if you can provide what we always say, high quality and then you implement the care model, kind of get a low cost. I think that's a winning combination.

Okay. In those new expansion markets, do you have to tweak your benefit design specifically just tailored to that market? Or are you kind of just going with the normal playbook? Just any color there?

That's a great question. What I -- what you're going to find us doing is kind of focusing more, I would say, on kind of culturally competent benefit packages with specific culturally competent providers. And you've got certain markets that are, let's just say, more of an agent population, you're going to design products that are going to be more targeted for that, particularly related to some of the supplemental benefits. In other markets, I would say Texas is one is a good example of that is you're going to have more Latino population design our Unico product line to target that market. But generally speaking, you've got caregiver benefits. You've got gas and utility betas for low-income subsidy members. -- different kinds of benefits that are in addition to this traditional health insurance but deal with the social determinants, I think that's going to be more and more important.

Okay. You mentioned that there would be a high bar to enter any new states for 2024, given the TAM of the states that you did enter. Do you have to achieve a level of market share within the counties or states before you decide to reexpand -- or what's the high-level thinking behind it?

Well, yes, the strategy really is we really -- we still think our long-term goal of 20% top line growth is something we're striving for. And getting to EBITDA, I mean, 24% is important. EBITDA positive. We're EBITDA positive. We pretty much believe we'll do that in 2022. And so a lot of the negative EBITDA is related to the investments that we're making in the new marketplaces. And so we're going to have 30% kind of footprint of where all the seniors are. And so we need to just get deeper and deeper and take market share, leverage the infrastructure that we've invested in, in the existing 6 states. And we are certainly looking at expanding new contiguous counties within those states. So I just think that if we enter a new state, you've got year 0 cost that you got to absorb in the current year. And so we got to be very thoughtful about that versus kind of the growth versus getting the EBITDA positive trade-off. And right now, I think if we can be positioning 20% plus growth, get the EBITDA positive, get to a leveraged cash flow positive with 25 or so and fund that incremental new market expansion from cash flow. I think we're going to be in a really strong place..

So how has AEP gone? Any early commentary there. And we've obviously heard some of the larger MCOs and carriers really expand their benefits fairly dramatically, at least from what we're hearing. So how is that changing the competitive dynamic in your markets?

Yes. So what we've shared on the call was through 3 weeks of AEP, the first couple of weeks, we've seen a lot of our brokers and others really focus on retention and minimizing churn across the board. I think it's a function of a couple of things. One is just kind of some of the churn challenges that occurred last AEP. So people are making extra sure that the retention is a priority. And second is just there's kind of a focus on ensuring that any of the transitions related to the D-SNP look likes that impact not only us but say, some of the other large MCOs, that, that membership is sticky with us, respectively. And I'm really happy with the outcomes of that. We're not experiencing a lot of churn on that at all. And so secondly, the third week, which is kind of last week and heading into this week, we've seen the volume pick up. And so what we shared was based on kind of extrapolating that kind of activity, we're kind of saying, from a membership point of view, you're kind of in the kind of high teens percent on membership growth is what we think is going to happen. There's a big asterisk next to that, that is still very early. But we wanted to share with everybody what we know. And what we know is, again, we still know that -- so 70% plus of our growth is going to happen in the next 4, 4.5 weeks. And I think that just kind of the general landscape is folks are still investing in product design. I mean they're investing. Certainly, the big guys are. I would say some of the more aggressive players last year have kind of scaled back benefits, which I think is kind of predictable and normal. I'm surprised some of the, I would say, smaller players are still competitive with respect to some of their Part B benefits. And it's surprising to a certain extent just because of some of the declination that they absorbed on the star rating side. So I think it's competitive, but I still feel good about where we are. We're pretty much 1, 2 or 3 in each market from a kind of product positioning perspective. What else do we share, I think anything else?

I think those are all the kind of key things we shared. And again, just further context, we see 10% to 20% of sales on the final day while we're trying to share what we're seeing so far, but also being mindful of the fact that it is back loaded sort of seasonality curve to the AEP period.

And we'll give '23 guidance formally on February 28th.

Fourth quarter call.

Ya. Fourth quarter call.

As you expand into some of these new counties and states, you guys obviously need to contract to develop your network. -- but you're also doing it during a period of high inflation and costs are very high for hospitals, health systems, providers. Can you talk about the approach to contracting during this period? And what's different from prior years? And anything of note kind of going on right now?

Yes. So we typically contract from a hospital standpoint on a DRG basis. So you're paying Medicare rates. And it's always a negotiation. I would say that was the case even prior to some of the challenges that have occurred kind of on that side of the supply chain. But in general, I would say it hasn't been a barrier to entry as we evaluate some of our newer markets. And on the other side of the coin, we think about sort of our -- the nature of our provider kind of the PCP type compensation. We're typically working with folks on a guaranteed monthly basis or a PCP capitation basis. And in certain cases, fee for service, if that's the preference. But -- in any event, the model is structured such that we have aligned economic incentives, where they're going to hopefully make the same, if not more than they would have otherwise. But they also have an upside opportunity with us in the form of quality incentives. So focusing on STARS and HEDIS and CAPS. And also, usually, there's some type of upside financial arrangement related to our institutional cost pool or the kind of a profit share arrangement. And so as a result, our provider partners are in a position where they're typically doing better than they would have done in kind of traditional Medicare or versus other health plans. And so again, it has not been a barrier to entry. And if anything, I think that value proposition continues to resonate, not just financially but clinically and administratively in terms of how we work with them.

Okay. you guys maintained your star ratings, obviously, very strong ratings compared to everyone else that effectively saw pretty stark declines. I guess where do you guys see that UL versus the others? And how do you see yourself capitalizing on this opportunity? Because some of them, to your point, have not actually cut benefits you're holding it. But then when they look at it, they're obviously a bit in the whole kind of on a go-forward basis. So how do you see yourself...

Yes. I mean just the unit economics of it is the difference between 3 stars and 4 stars is like over $100 PMPM. So I think it really starts from our point of view as just a cultural dynamic that's focused on kind of serving the senior and it may sound trite, but really, it's really important that we think about STARS in the context of an entire culture in the company focused on or senior. It's not just a kind of administrative function. It's not a department. It's an entire company that is committed to all aspects of that consumer experience. That's how we're doing it. And I think that look like all the financial metrics are going to really follow from that. This culture of taking care of people like if they're your mom or your dad and it's kind of a service for mentality. And so then obviously, if we can do that and we can do that reliably and consistently, not only in California, but like North Carolina, the new markets, then we're going to be aggressive on product. because we have a chassis that is high quality and low cost, right? And I think there's an element of durability to that where we productize our care delivery model and you basically productize quality through these benefit designs. And I think as the market continues to kind of figure out who's got the durability and who doesn't, I think we're very well positioned.

Okay. I did want to jump on the topic that kind of popped up more recently, which was flu. There was a lot of noise last week regarding what was happening with hospitalizations, et cetera. It generally impacts more Medicaid and children population in our minds, but obviously, everyone seems to be hit. So are you seeing anything in your markets related to flu? And how are you currently projecting flu within the context of your guidance?

Yes. So we shared on our call last week that through the first month of the fourth quarter, we have not seen much of a spike yet in terms of utilization in the hospital specifically around flu. And from a guidance standpoint, we shared that our guidance assumption is essentially predicated upon utilization of running consistent with our historical experience, where in terms of a total inpatient volume, you typically do see seasonality in the fourth quarter in the first part of the first quarter with respect to flu. And more recently, the flu hasn't been there, we've obviously seen COVID spikes in Louiflu the last 2 years. But I think our perspective is that the people who historically pre-covid were most chronic, most frail and therefore, most susceptible to being hospitalized due to flu. In many cases, it's the same people that are most susceptible to be hospitalized due to COVID. And so when we think about our care management approach, where we're taking our employee clinical resources, we're trying to proactively engage with that group of people, usually in the home, but also virtually. The whole concept is supporting them to try to provide the preventative care to keep them out of the hospital when it can be avoided. And so I think we feel pretty good about our operational approach to doing that. And I think we feel pretty good about our guidance in terms of having to assume that the overall utilization for the quarter will run consistent with that prior experience. To the extent that, that doesn't materialize, I think there could be upside, if anything, but I think we've been just thoughtful about what we've seen in the past and how we should approach our fourth quarter guidance accordingly.

I do want to move on to a topic that you touched on earlier, which was M&A in the space. There's been a lot going on in home health, primary care assets, technology assets. What's your take on all that's going on with the big carriers? And do you see yourself having to go down this route at some point? Or are you guys set in your pathway from here on out?

It's -- if you kind of look at just the general consolidation occurring in services. A lot of what I see happening is kind of the -- I want to say the emulation of what we've been describing in terms of whether it be home-based care, whether it be using a lot of the data using the predictive analytics -- so what I would say is the magic with alignment is kind of how it all gets integrated and operationalized. It's the actual connection points and the workflows that make it all work where the kind of the clinical, the operational, the product, the financial, all kind of are kind of integrated into one chassis. I think that's -- I think people are going to find that it's harder than people think in terms of buying the component pieces and trying to glue it together. And I think one of the biggest advantages we have is we actually have this culture of of care delivery. It's a care delivery-centric vocabulary care delivery-centric culture, just kind of this passion towards actually serving. We just happen to be really good at very traditional health plan functions, product, regulatory compliance, IT, sales. I mean we're really good at that stuff. But culturally, it's that of a care delivery heart. I think that piece is going to be really important for anybody trying to kind of put the pieces together through a consolidation.

Okay. So you basically see yourself as not necessarily going out having to acquire any form of asset or you have all the pieces already and just...

We have the pieces, and it really was built to scale. And what I mean by scale is it's built to be growing profitably and to be kind of reproducible market by market by market. And I think there's a notion out there that you have to have scale economies, you have to be big to really be competitive in MA. And I think what we've proven is, if you have a really sound clinical model and you can productize that clinical model, you can compete at a very local market level. And so you have a lot of local market and then you can compete along all these different local markets, you get big. And so the scale economies on the SG&A side is something that we think we're going to get as we get bigger and bigger. And I think the notion of getting from 100,000 to 500,000 is something that you can see to be very actionable if we keep reproducing this model. And even at $500,000, were small, right, relative to some of the other folks. But the power of being able to have the consistency around our MBR percentage, market by market by market is something that's not easy to do while you're growing.

Yes. So kind of touching on that a little bit. You -- I believe you have talked about monetizing the platform, but it sounded like it was small nature, maybe more of a pilot. Can you expand on what the company is doing there and perhaps what the go-to-market on sale?

Yes. No. It's -- what we've kind of talked about is do we want to take some of the investments that we've made in a of the technology platform and get into kind of the kind of we would call it care as a service business, given the fee-based business. It's just a totally different business. I've done it when I was at TriZetto, the kind of the kind of the service bureau mentality, it's just very different. The key issue though is it's not just selling kind of the applications to somebody that wants to get into value-based care and wants to take risk. There's a lot of organizational preparedness on the client side or the partner side. In other words, they have to make some fundamental changes and to actually leverage the tools that we have. And so the worst thing we would do is actually do one of these deals, sell it to them. And then on the implementation front, not have them be able to implement or execute it. And so what we're doing is, I think, kind of interesting, is we're working with different delivery systems and health systems. I still think health systems a little bit to the question you had before with hospitals, they've got a lot of, as we know, uneconomic challenges, you're going to have some reimbursement challenges. But what they're doing is they're now we're having conversations about can we do kind of kind of MA health plan joint ventures. And in that context, we would do what we're doing with co-branded kind of delivery co-branded products, but also we would help enable them, and these are the health systems out there that don't want to divest their primary care assets. They want to keep their primary assets and actually get good at it, help enable them to be effective taking global cap with certain other payers, while we're joint venturing on certain products on an MA health plan side, where we would be really driving a lot of that kind of risk management because doing what we're doing right now. So I think the hospitals are going to be an important kind of factor in all this in a way that people don't expect, I think. And I think the unique omics on their side is kind of forcing them to have these kind of dialogues with different kinds of people.

Okay. So you guys currently participate in the direct contracting program. It converts the ACO REACH next year. Can you talk about your experience thus far? And it sounds like you're going to continue with ACO REACH. But I guess, do you need to participate in AC REACH? What are the benefits actually being in that program, given some of the volatility there?

Yes. So we started in the second quarter of 2021. And the strategic sort of industrial logic behind our participation was sort of twofold. First is the providers we are working with were providers that were usually already in our health plan networks. And so to a certain extent, it was just creating deeper relationships with them that we thought could be beneficial to all the things we're already doing day-to-day operationally speaking. And the second is, I think we also recognize that MA penetration has gone from 25% to almost 50% now in the last 5 to 10 years. I think we all continue to anticipate that to go from 50% to 60% to 70% in the future. But having said that, there's still a large portion of the population that is in traditional Medicare. And to the extent that we can find ways to partner and commercialize some of the IP and capabilities we've built for MA in different traditional Medicare programs in the future. I think that's net-net a positive for us and it's ultimately beneficial for the beneficiary. And so that was sort of our thesis to begin with. But we also, I think we're very upfront with investors that we didn't view it as a significant growth opportunity. We weren't going to kind of pursue it at all costs. And we're kind of taking a prudent and a little bit cautious approach, just given the questions around the long-term sustainability of the program. So flash forward today, where are we at, I think you're right, I think we will be participating in 2023. We submit our application for that. Again, I don't think it's a huge growth area for us necessarily, but we started to see traction operationally speaking. And I think from a kind of profitability standpoint, while the MBRs on that book of business have not been quite as good as our MA -- MBRs, the SG&A load is significantly less in terms of percentage of revenue. And so since we started the program, we've been roughly breakeven on an EBITDA basis. And I think there's more upside to continue to improve on that than there is downside. So I think we'll continue to be balanced in terms of kind of just capital deployment towards growing that in the future. But I think you'll see us continue to kind of treat it as a learning laboratory and continue to offer ways to participate in the future.

Okay. Great. Well, with that, we have run over time here. So appreciate John and Thomas for participating today, and I'd like to thank them for being here. Take care, everyone.

We appreciate everybody. Have a good evening.