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

Hello, everyone. My name is Michael Ha. The managed care and health care services analyst at Morgan Stanley, and welcome to our C-Suite Conference Call Series. This is the first call of our series that will take place every week from now through the end of June. And it is my pleasure today to host the Alignment Health management team. So on the webcast with us, we have John Kao, Alignment's CEO; Thomas Freeman, Alignment's CFO. So John, Thomas, good morning. [Operator Instructions] We'll aim to make this as interactive as possible to get you the most out of today's conversation.

So with that, John, let me pass it on to you with the first question. So it's almost 2 years since the anniversary of Alignment going public. So I thought maybe a good way to set up the conversation and set the context would be for you to give us an overview of the goals that you set up for yourself and for Alignment 2 years ago and the milestones that you achieved over the last 24 months.

First of all, thank you, Michael, for having us on this program. Really appreciate it. Yes, it's been 2 years almost to the day since we went public. And if we compare what we've done through 2022, our revenues have been about $200 million ahead of what we said we would do back then, at least what the consensus was at IPO. So it was $1.4 billion compared to $1.2 billion. I think the membership was right around 100,000. We're a little bit less than 100,000, but it's pretty close. I think our gross profits and our EBITDAs were way ahead of consensus estimates as well. So I think from a kind of a financial perspective, we've done much more than what we said we would do at the IPO. Having said that, I think the thing that I'm most proud of is the actual quality of service that we've provided to our members and the quality of care outcomes that we've provided to our members. And really, that missional aspect of what we're trying to accomplish is really supported by just an inpouring of support and letters of thanks, gratefulness, appreciation from our seniors.

Terrific. Terrific. And maybe jumping right into revenue growth. So you're still set to achieve your 20% growth target in '23. But I know 20% is also an internal target you have for membership as well, which did fall slightly short of that goal this year. However, I just want to mention, by the way, it looks like we finally received an updated MA enrollment from CMS this week, and Alignment's membership is slightly north of 17%. But yes, so in '23, there's been some market-specific competitive issues over the past year, which we'll dive into deeper later. But as we think about your internal target, eventually achieving 20% membership growth, if you couple that with annual rate increases greater than 20% revenue growth over time, so looking forward, can you talk about how membership and revenue growth could evolve, progress over time and the ability to sustainably achieve this growth target long term? And then how much of that growth algorithm should we think of as being driven by new markets versus existing markets?

Yes, no, great question. Thank you, Michael. Yes, I mean, I think my commitment to 20% growth long term is stronger today than it ever has been. And I think over the last couple of years, whether it be with COVID, whether it be with kind of Stars subsidies, so to speak, and kind of with this MRA environment, which I'm sure we'll get into a little bit later, I think we've had to be very prudent and discerning with respect to our balancing growth versus margin. We have made the decision, obviously, the last couple of years as we've grown kind of in this 15% to 20% range on raw membership that it's a function of just being disciplined: being disciplined, being patient and playing long ball of our growth. And I understand people are kind of saying, well, you're 15% to 20%. Is that really the growth engine of Alignment? I would say, absolutely not. This is a unique time. I think the capital markets are unique. I think the competitive dynamic has been driven by a lot of people doing benefit strategies I don't think are sustainable. And so we've had to be just very disciplined. And certainly, that was reflected in the last couple of years of our bid strategies and our rebate strategies. We had to make sure that margin was important. We had to make sure our balance sheet was protected. And we did not deploy a kind of, gee, we have to grow, we have to grow at a rate that was uncomfortable for us. Having said that, we absolutely can do better in a couple of areas, and we're working on that, both of which we've talked about in terms of some of our distribution strategies in our newer markets. We are going to need to be more self-reliant, so to speak, with respect to more captive sales. We can talk about that and some of the systems implications that has that we're investing in now and just having a more mixed distribution strategy, having more captives, more 1099 agents as well as working with FMOs that have delivered for us in the past. And the second thing, I think, we can do better on is just retention. We're really good at retention. We have really good NPS scores and Star Ratings in that area, but we have to get better. And I think if we focus on that and manage some of our supplemental vendors differently, we're going to be able to get that 20% just on that alone. And so I think heading into 2024, you kind of got some tailwinds that we have with respect to Stars. I think we'll all see what happens with MRA and the final notice. But I still believe that we're going to be advantaged in that in some of our markets. So I get it. We need to get to 20% plus. I feel very confident we can do that, but we have to make sure we are just conscious of all the other factors as well.

Makes sense. So maybe diving deeper into the MRA risk model revisions, 2024 growth. So from our end, we're seeing and hearing more and more discussion about the potential impact of these new MA risk model revisions on '24. There's rising concern from investors just how this could impact risk adjustments. So -- with some speculation that this could disproportionately impact plans with higher and arguably more aggressive RAF scores. So with that said, to my knowledge, Alignment is quite the opposite. Your RAF scores are, I would say, on the more conservative side, around roughly 1.1 and about 30% dual eligibles. That, coupled with your AVA tech platform, your Care Anywhere clinical model, you can argue it provides greater risk for documentation support, substantiation. So with that said, could you talk about how you view the potential impact of these risk model revisions on '24? I think CMS may have provided a model or a calculator that helps you input your own members and you can see the impact yourselves. Have you tested this? And sorry, there's like a million questions to this. But do you believe the minus 3% adjustment in the advance rate notice is an accurate reflection of impact? And just taking a step back, advance rate notice is lower than expected. But could this mean a relative impact between Alignment and other local competitors could actually become an opportunity for growth in '24?

And actually -- I got all those questions, by the way. I got it. So yes, I mean, the entire company was predicated on providing the highest quality at the lowest cost, not being the highest quality, the highest RAF and the lowest cost. And we designed the company largely because of our experience and the freshness of what happened in 2010, 2011, where there was normalization of Medicare Advantage rates to the tune of 14% where they phased that in over 5 years. And so that process was something that was very top of mind when we set up the business. So you couldn't get hooked on high RAFs because the exposure, with respect to reimbursement risk, was always very real because of the experiences that we know of. And so since the IPO, we've been kind of calling this out from the very beginning. And I think the reason we love Medicare Advantage is because the purity of the concept, which is if you can provide a high quality of care to beneficiaries and a good experience and do so with very competitive products and you do that by offering the highest value at the lowest cost, then you should be advantaged to win in the marketplace. I think some of the issues reflected in version 28 of the risk model really point to perceived -- and this is not me speaking. This is a lot of presses have been around this -- around potential, let's just call it, abuses and/or shortcuts with respect to that intent. And I think all CMS wants is that if you are going to get paid for a higher-acuity patient, make sure that you provide the care and track the care to ensure that higher-acuity patient gets the care they need and deserve. I really think that's at the core of it. And so it's kind of predictable from our perspective. I think number 2 question was if you look at the details around it, I think that the 3% average is an average. I do not think that is something that is kind of consistent through all the different populations. And I think there's a disproportionate hit to the risk model in particular chronic disease states that impact specific populations that happen to be people of minority and people with lower income. I mean that has been something that I said on the call, and I think that is a true statement. I'm not sure if that was the original intent of CMS. I think that -- again, I just -- I don't think it's consistent with what we actually love about what CMS is doing now, which is pushing and advocating for health equity, make sure that everybody has the right level of care they deserve. And -- but having said that, I think in populations or markets that are higher density in MA, like California, like Florida, like Texas, I do think it's going to be a little bit higher than the 3%, on average. Having said that, I think that we, because of the way in which we code and our coding philosophy, which is all about quality, not revenue cycle management, I think, is going to be relatively advantaged vis-à-vis our competitors knowing what risk adjustments that they have, at least what's publicly available. And so I think as we head into 2024, the way we're looking at it is we have some tailwinds with respect to Stars, in which, by the way, they increased the cut points on Stars. They increased the level of quality there, which we like. And we're going to have relative tailwinds heading into 2024 from a risk adjustment point of view. And the entire Care Anywhere program is designed to ensure that the higher acuity people that you get paid for are getting better care. So the whole company is designed around this whole thesis of high quality and low cost.

Great. Thank you for that. It sounds like '24 could potentially be an opportunity for you guys because of your model. And so we're getting hit with a bunch of investor questions right now and -- on the same topic, impact of MA risk model revisions, [ if any, that you've noticed ]. So maybe let me take a moment and try to package them all together in a couple of questions, and [indiscernible] return back to our question list. So just hitting on that topic, so it looks like you've reviewed the proposed risk model changes. It seems like you've mentioned the senior population that's most impacted are lower income, higher chronic conditions. So are you saying that -- any sense on whether this could be worse for, it sounds like, D-SNP versus mature MA members versus the tailwind that may come from the higher demographic score to new MA members? And also, it sounds like these changes might have a more mature impact -- more impact on mature MA markets like you mentioned, California and Texas, Florida. But rebates are also much richer in those areas than the rest of the U.S. So do you think there could be a negative impact on MA growth in those markets? Or do you think it could actually lead to increased plan shopping?

Both. I think the macro issue is both. I think that incumbents with large share in these kinds of environments, I think, have traditionally at least focused on margin protection. And I think exactly what you said. To the extent that there is any kind of rate reduction overall, net of any kind of benchmark increases and what have you, people are going to just modulate products. They're going to modulate benefits and coverages, modulate supplemental benefits, for example. And the clear example of that, going back again to 2011-ish, is when they had normalization. I remember back then, we had something like 18 -- or 15 million or 18 million seniors in MA and about a 25-ish percent market share of total seniors. You fast forward 10 years and you've got over 50% market share penetration in Medicare Advantage in an increasing population. And all the plans have done really, really well that are focused on MA, irrespective of some of that risk model change 10 years ago. And so the plans have the benefit, which is why we like being the plan have the ability to modulate benefits. And keep in mind that having this kind of population of seniors who are very value-oriented shoppers represent 85% of our growth is switchers, plan switchers. And so when you have kind of less aggressive benefits out there, I think we're going to be in a position to get more of that share from plan switchers because more people are going to be shopping. I think this has been our track record.

Great. That makes sense. So then you mentioned supplementary benefits. Do you think one area of benefit reductions could be like the OTC cards, [ meal ] cards, which were -- have become so prevalent over the past couple of years?

I think the quality standards that the plans are going to impose on supplemental vendors, whether they be fulfillment vendors, transportation vendors, retailers, is going to be much higher. The quality standards and the performance of these supplemental vendors has to meet expectations of the plans in the context of retention and customer service. It's really important, number one. Number two, the efficacy of the program has to be correlated to some kind of clinical outcome or some kind of social determinant. And I think the plans are going to be much more [ strident ] to make sure that whatever those supplemental benefits are, are going to help that senior, in some capacity, have a better life, be more healthy. And a lot of these programs deal with, frankly, empowerment of the senior. They deal with mental health kinds of issues, independence, ensuring people start independence, start confidence as they age. It's kind of aging well, so to speak. I think those kinds of things are going to be important, but they have to work the way they need to and have been designed to. I think you're going to get -- I think there's going to be probably a pullback with some of these Part B rebate programs when you add higher Stars to the -- higher Stars cut points, tighter risk adjustment methodology. I think some of the plans that have grown purely on Part B rebates, I think, are going to probably see those pull back.

Got it. That makes sense. So 2 more questions from investors that are related and then we'll get back to the question list. For '23, are you making any changes to your coding behavior this year in anticipation for the risk model going into effect in '24?

Two things. The answer is yes, and it's a continuation of what we do right now. Again, we embed our Medicare risk adjustment program as part of our clinical organization, our quality organization. And we're focusing on more completeness, more early identification. Obviously, the areas that may have been under prevalence are areas that we're going to be focusing on both internally through our Care Anywhere programs where we do a lot of these, we call them, JSA assessments. We are ramping up on that. And we're also ramping up on education to the provider community and our provider partner community, making sure they understand clearly what all the changes mean specifically and to get them to help also focus on, I would say, a higher level of alignment with them to just be educated on the different changes on how it impacts them specifically. So those are a couple of areas we're spending a lot of time on right now. But I think, again, overall, I think this was predictable. Frankly, I thought this was going to happen last year. There's a lot of press on this last year. And so it came this year, and that's okay.

Got it. And staying on the topic of provider partners, and this is -- there's a number of questions from investors right now about it. Basically, how are you thinking about the effects to your provider partners regarding these risk model revisions, specifically for those [ captive ] alignment, so your value-based care providers? We're hearing estimates anywhere from 10% to 20% impact. Like who will it hurt the most? How much will MCOs end up bailing them out with risk mitigation efforts? Just any thoughts on that.

Yes. That -- again, I don't want to sound like a broken record, but I mean, we've always talked about being the highest quality, lowest cost supply chain. And so the fact that we have Care Anywhere, we have AVA that we're managing the risk with our partners, we think is something we're already having a durable model. I think the models that have been more around, say, an 85% global cap is going to be under pressure. And it's just kind of if there is an environment that is not a 5% to 7% kind of rate increasing environment and you have some compression on top line revenue, the plans are going to do what the plans do, which is modulate benefits. So their margins are going to be insulated. And to the extent that the plans are taking 15% of it and 85% of that risk is falling on top of the global cap group, I think there's going to be pressure with the groups that take that kind of risk because they have a lot of fixed costs, but they're not in the position to be modulating the product. And so particularly those with a lot of bricks and mortar. I think it's just -- it's not -- it would be a nice time to figure that out. I think that our model is actually helping these providers more because, again, we are taking the risk. And working together with them, making sure that they are successful in the long term, I think it creates more durability with the way in which we work through the IPAs. And it's always about how much can you produce in terms of value to the end consumer, the end member. And so if your supply chain is the most efficient, there's going to be more funds that flow to that end consumer. That's what ultimately is going to win. That's what's reflected in these rebate dollars. I just think our ability to produce incremental relative improvement in rebates vis-à-vis our competition is just stronger heading into '24.

Got it. That makes sense. All right. So let's pivot away from risk model revisions for now. Let's double-click into 2023. So it seems to be a year of improving Texas, Florida distribution challenges and also a year where you saw some aggressive and, I guess we could argue, potentially unsustainable levels just benefit competition in Central and NorCal. So one, could you please parse out for us how much of the membership headwind in '23 was driven by Texas, Florida versus Central and Northern California? Two, could you talk about how solvable the distribution challenges in Texas and Florida are? Is it fixable by '24? And what's your confidence level in getting back on track?

Yes. If we had hit our budget numbers in Texas, Florida, we would have far exceeded 20%. I mean that's just the net of it. And so yes, it's very fixable. We know what to do. We have great provider partners, great networks, great products, so very comfortable with that. We are focusing, as I mentioned before, on Stars and getting to 5 Stars similar to what we've done in North Carolina. And -- but I think it's very fixable. And it's very consistent with every single market that we've entered in California or outside California. And so there's nothing new. It's just -- it's hard. It's competitive. It's a different kind of problem, and we'll solve the problem. That's number one with Texas and Florida. And we got very good providers I'm happy with and very good unit economics with hospitals. In Northern California, it's an accurate statement what happened and -- but it's kind of the business. Every year, somebody is going to be doing something a little bit crazy, and it's just -- we got to be prepared for that, and what we can do better is on a retention basis. So that's what I would say on that one. Some -- every year, somebody is going to do something nuts. They just do. Whether it's small, whether it's big, but we got to be prepared for that. So I think we -- that's on us. I'm not going to blame it on anybody else's strategies and behaviors. We can do better on that, and we will. And like I said, last year, with respect to Southern California, it's the same thing. It was -- we got a tough year in Southern California last year, came back with 17%, 18% growth. And so it's going to ebb and flow. And again, I really do believe some of these have been bolstered by some of the kind of the structural subsidies in Stars and in risk adjustment. I think as this level playing field kind of normalizes, the people that have something differential are going to be successful. And that means, to me, the big guys, which have scale economies on their G&A, are going to have an advantage. People like us that have an advantage on a great care model and an MLR engine, I think, are going to be just fine and survive. I think people that don't have the care model or the [ ALR ] advantage are going to be compromised. So I just think it's all kind of playing out the way that we have just experientially thought it would. But we got to be a little bit patient. I don't think the 15% to 20% membership growth is indicative of our long-term opportunity, particularly in this capital markets environment where we got to make sure that we're -- got plenty of capital, which we do. We've got a really strong balance sheet.

Great. Thanks, John. And sorry, there's music playing in the background right now. But just wanted to talk about the captive internal sales team in Texas, Florida. How far along are you in building that sales team? And I guess, when I think about the expected cost of an internal captive sales team, presumably, year 1 is higher upfront cost. But over time, it should be a long-term tailwind to profitability. So how should we think about the cost difference of hiring internal team versus paying external broker commissions? And just curious, what's your current external versus internal broker sales split in Texas, Florida? And how does that compare to your other markets?

Yes. Maybe I can take that one, Michael. So to your point, the way to think about the unit economic difference between the internally employed sales agent or even 1099 versus external is essentially more upfront costs. You have -- you pay a salary, you pay benefits, but you have less recurring commissions on the back end relative to that external sale. And so the way we sort of think about that is it's slightly, and I say slightly, maybe 10% more expensive, year 1; but it's actually slightly cheaper, maybe 10% less expensive, year 2 and then beyond. And so as you think about a life of a member being 6-plus years, it actually is a margin tailwind for us in the coming years as we continue to emphasize that internal distribution strategy in select geographies or market [ pause ] where we don't have the sort of engaged external distribution partner that we've been so successful with in certain other markets. So I think you'll see us be really kind of surgical with respect to how we deploy it, making sure we're doubling down on those folks who have been sort of great at growing us in the past, but also looking to supplement areas of opportunity with some of these employed agents, which adds, I think, a lot of benefits both in terms of the margin tailwind but also retention. We typically see better retention with an internally employed sales agent than we do external. In terms of your question on Florida, Texas, I would say our Florida, Texas experience, in spite of even the kind of membership we have today, is pretty similar, I'd say, year 1 to what we have in other markets like California where it was still majority external. And I think you'll see us make a more significant investment in some of those internal distribution resources in '23, which is part of how we thought about guidance this year.

Got it. So outside of Texas, Florida, you're performing well, and you recently entered new markets, Arizona and Nevada. Looking ahead, do you believe future new markets will require similar distribution efforts? It sounds like you're focusing more on internal, like you just said. Or are those 2 particular space more of an outlier, more unique in geographic competitive dynamics? And if you could talk about your future plans when it comes to expansion into new states and markets, how should we think about the future pace of that growth? And we also have an investor question coming in, related topic. What is your medium-term view of the California MA market as seniors move out of the state? How does their destination state inform your expansion into new states? And what impact does that have on brand awareness in new markets?

Yes. Let me start by -- let me start with that one. I think it's important to note that as the kind of macro growth of MA is in that kind of 9% -- 8%, 9% range on a national basis, in our core markets in California, it's closer to 4% to 5%. And so on a relative basis, as we grow in the kind of the 17% range, it's really against that backdrop. And I just think that in a couple of our counties, we have 20-plus percent market share, which is pretty good. But in many of our other counties, we're closer to that 3% to 5% market share. So there's just so much internal share in the existing footprint that we have that I'm not worried about any kind of migration out. There's so many seniors in California, Arizona, Nevada that the opportunity for us, if we did nothing else, we could hit our 20%. I think it was important this year for us to establish beachheads, get the license in place, get the networks in place and start working on 5 Stars. We mean just 5 Stars and similar to our North Carolina strategy. Get in there, work on 5 Stars, get the Star Rating, get the tailwind of a little bit of press with respect to, "These guys are actually pretty good. They're really kind of viewed as the best MA plan in North Carolina with the 5-Star Rating. That's the kind of thing we have to do in some of these newer markets. In addition to that, I think the provider engagement that we talked about last year is working. I like what's happening there. We've identified physicians and physician groups that don't want to be sold, don't want to be bought, don't want to be rolled up by the hospital. They want to remain independent. Those are the folks that we have been very successful with. They need help, both of which translate into good benefit designs. You got to be competitive from a benefit design perspective, and I think we've been responsible in that regard. And then lastly is, obviously, the distribution discussion that we've had. I think you need all 4 of those pillars to work in any market, and that's basically how we've built the company starting from 10 years ago. Literally, that's -- those are the 4 pillars. And I think for '24, you could see contiguous county expansions from us in the existing states. So it's not -- we're not saying that we're not going to grow in additional markets. We just are saying for '24, partially to just kind of like operationalize the existing expansions, get deeper market share and just focus, focus. We've got plenty of seniors. We've got 30% of the whole market in just the states that we're in right now to get the growth that we want.

Got it. So turning to profitability. I know your goal is currently breakeven by '24. And I know there might have been some confusion from investors following your fourth quarter earnings call just around that target. So taking all the headwinds, tailwinds, all the swing factors over the next 2 years into account, many of which we just discussed, is '24 still the target year for breakeven? Has anything changed in your confidence level to achieving that? And looks like we have an investor question sort of related. But does Alignment expect to see PMPM premium growth or decline in 2024 into mature markets?

Yes. So maybe I can take that one. The way we sort of think about the path to profitability is both continued MBR improvement, but then also economies of scale or operating leverage through our SG&A line. So maybe on the MBR side first, I think that's one of the things that we've been pretty consistent about is sharing our experience both in our more mature markets, but also by cohort over time. And if anything else, I think we've gotten more confident today about our path forward around MBR than we were when we went public. Things like some of our AVA stratification tools have really improved. Our Care Anywhere engagement is up about 5% from what we went public. And we've rolled out new programs, such as our CKD management program that didn't exist a couple of years ago. So I think we've done a lot operationally to continue to march forward on MBR consistent with that prior cohort data we shared. And it's probably worth noting, just for those who maybe hadn't heard us on our earnings call, about a month ago now, when we talk about our MBR kind of in aggregate for '23, I think one of the things we emphasized is that because of the relative growth rate of that ACO REACH line of business, it was pulling up our MBR in '23. And if you exclude MBR -- excuse me, exclude ACO REACH from the numerator and the denominator of the MBR calculation, our actual MBR implied in guidance is kind of in the mid-86% range still. So very much consistent with our prior year experience and I think a real testament to what we're doing to be able to continue to get the growth we're getting while achieving an MBR of 86% range at least in terms of our guidance starting point. In terms of SG&A, I think what's really important there is the last 2 years, we've been really focused on how we can derive economies of scale as we continue to grow, but also what can we do to become more efficient in our back office. So things like how do we improve productivity and more variable cost centers like claims, UM, member services, things of that nature. And I think our 2023 guidance, again, is really important context for that trajectory over time. So when we went public, we had our SG&A as a percentage of revenue right around 15%, maybe 16%. Our guidance for 2023 implies 13.9% or about 140 basis point improvement year-over-year from '22 to '23. So I think we're starting to see the benefit of some of those focused initiatives and investments over the last couple of years. And as we continue to grow and continue to reap the benefit of those investments, I think we're feeling even more confident today on our path to get that 13.9% down to 10% over time, again, than we were 2 years ago at IPO. So I think the core unit economic drivers of our MBR and SG&A are as strong as ever. And as John said earlier, I think what's interesting is some of these macro factors that are now circling us with respect to Stars and risk adjustment, I think could, if anything, be additive to the growth profile of the business, which also helps on SG&A. So I think we're feeling good about it, and we're committed to trying to make that a reality in '24.

Yes. Can I just add to Thomas' comments, Michael? I think everything Thomas said is exactly right. I'm really just -- I'm really comfortable with our MBR and our clinical model. AVA continues to get better. Care Anywhere continues to perform. Our G&A [ ALR ] ratio is going down. We've got, I think, relative tailwinds with respect to Stars in our core markets. And I really do think on a relative basis, we should be advantaged on this potential change with respect to version 28 of the risk model. Having said that, we may grow and have more new members in '24 than expected. And if the trade-off there is we get good solid growth consistent with the right networks that we want such that we know we can get those members and their MBRs down consistent with our vintage analysis that you all have seen and we really grow, we might not get to EBITDA breakeven. And I'm going to be okay with that because long term, that is the best strategy for the company. I'm not backing off of what Thomas said. Don't get me wrong, everybody on this call. But I'm just saying, if the opportunity presents itself and we do grow kind of -- in a, I would say, potentially contrarian and offensive way, that's a possibility and I'm going to be okay with that. And you guys can interpret that the way you want, but really it's -- we've always been very prudent about this conversation, '24 may be a little different just because of some of these changes.

Right. I think you make a really good point with 2024. I mean I think the golden opportunity ultimately is relative competitive positioning, picking up more lives. And if you apply this year 1, [ 2 ], year 3, year 4, year 5 profitability, it's tremendous in terms of earnings growth. So I definitely understand what you're saying. Yes, so maybe -- I really only have a couple of minutes. Maybe you want to drill down a little bit deeper on MLR and then we can talk about G&A once again. Yes, so on MLR, I think the -- I think most people might have been, like Thomas said, a bit surprised by the increase in the MLR guide in '23. But when you start excluding ACO REACH, sequestration and all those things, it's a much more manageable increase, about, I think, 30 bps increase on the core book. So one -- question one is can you talk about what's driving that increase from 86.5% to 86.8%. And then two, with Alignment, you guys have beaten and raised essentially every quarter since becoming public. Is it fair to say that your starting guide for '23 -- or rather, your initial guide each year is always going to generally be much more conservative as a starting point?

Yes. So I think in the context of a bridge sort of from '22 to '23, the way we sort of described that bridge on the earnings call was sort of threefold. So first was the ACO REACH membership. That was about a 60 basis point headwind from '22 MBR actual to what's implied at the midpoint for our '23 MBR. So ACO REACH, about 60 basis points. Sequestration was another 15. And then to your point on new members, that was the remaining 55 basis points. And if you sort of take those 3 factors into account, you actually would get a year-over-year bridge of something like 86.4%. And the way to think about that relative to our prior experience is I think that is 2 things. One is that's within the norm of what we would expect given the significant growth of our business, taking into account how the membership, both new and loyal, breaks down every year kind of by provider, by geography, by contract type, et cetera. So I think that's the #1 driver in that kind of minimal just difference year-over-year. And I think the second thing is, to your point, it's early in the year, and we'll see where things go. I think we feel pretty good about the initial starting point for guidance. We mentioned on the call, in January, utilization was a bit high, but we've seen a return in February to kind of, what I would say, is more normalized level. And so the next kind of big catalyst for us will be in the second quarter, we'll see how the [ sweeps ] come in, which typically has been an area of opportunity. And then typically, fourth quarter is where our MBR would probably spike once again similar to first quarter just in terms of normal core seasonality. So I think we've kind of taken those factors into account, and we'll see how the next few months go.

Yes. Michael, with respect to the ACO REACH, just to be clear, we think it's an opportunity, and it's a complementary line of business that we want to support our provider partners. And I think the incremental capital, the incremental expenses for we to kind of be successful there is very low. It's really a complementary strategy. I think that if there's an opportunity to grow a bunch of ACO lives in Ohio, we probably won't be the ones that do that. To the extent that we have ACO live fee-for-service member opportunity with our existing network of physicians, we want to support them. And one of the things we talked about on the call, and I'm not sure people got this, was we had 5,000 members in North Carolina a couple of years ago with the second-lowest benchmark in the entire country, and we were still able to produce 6% savings due to the efficacy of AVA and the Care Anywhere product -- MLR management tools that we have. That's given us some confidence that we can produce incremental margin on that line. And so we've had additional physicians wanting us to help them in California, Nevada and Arizona. And so we did it. And again, it's complementary, too. It's something we feel we can produce margin on. But it is not a kind of shift in strategy from our core MA business, whose MLR, as Thomas said, is very strong. And I think our long-term MLR goals have not changed either. I think we still want to drive that down in that 82% to 84% range, filling the gap between that and the 85% really with competitive rebates and benefits so that we can continue to grow.

Great. Great. So it sounds like this core book is still running well in MLR in '24. You guys are in a good position for risk model revisions and growth and still breakeven as a target. So yes, I wish we had another 45 minutes. I know we're 3 minutes over now. But I just wanted to thank John and Thomas and everyone for joining in. And if you have any other follow-up questions, feel free to email me or call me directly. And thank you, everyone. Have a great day.

Thanks, Michael. It's always good to be here with you. Thanks to everybody on the call. Appreciate you taking the time. Call us if you need anything. Thanks.