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

Well, good morning, everyone. I'm Nathan Rich, I cover the [ medicine ] space here at Goldman. Very happy to have Alignment Healthcare here. To my right, John Kao, CEO; and Thomas Freeman, CFO. Thank you so much for joining us.

Thanks, Dave, for having us.

Awesome. Maybe we start with what's been topical, just with the bids submitted last week. A lot of focus on what the market might do next year, just given the tougher rate environment across most of the space. How do you -- how are you guys kind of viewing market growth for next year? And when it came to putting your bids in, how did you kind of prioritize or what did you prioritize in terms of as you thought about your competitive positioning?

Yes. I mean we've always found a balance between growth and margin. I think when we look at this, the raw data market by market, I feel very, very good about where we are. And what I mean by that is if you think about some of the tailwinds that we would benefit from, from our respective markets on Star Ratings, and on a relative basis, we think V28 and the new risk model is actually going to be a tailwind for us on a relative basis. And you kind of put those together and you, I would say, combine that with just how we're thinking about products in general this year. And I would focus on kind of the way we've looked at our different cohorts, call it, the 20% of the polychronic that need a lot of care, care anywhere in the low-income duals, I think that's kind of one bucket and we're having very specific products around that. And then the 80% of the people that are generally pretty healthy. And I think we'd simplify the experience for those people, I think that's going to be something that you see. And I just feel very optimistic about it this year just because of the depth of detail market by market that we've gone through. Tom, anything else?

The only thing I would just add is we've mentioned some of our doubling down around our sales and distribution strategies in some of these markets. And we announced a few new hires and sales leaders last week that we're really excited about, both on kind of the West Coast, the East Coast and then kind of over our national sales operations which I think will be valuable as we develop and kind of execute against some of these market-by-market strategies as coming to AEP. And as part of that, again, continuing to double down with the brokers and FMO partners that have been great and then tactically trying to deploy more telesales, 1099, et cetera, as appropriate, where we feel like we have areas of opportunity. And so I think you kind of marry that with a lot of the competitive backdrop John was describing. And that's what really informs a lot of that confidence and excitement for the AEP.

I think you guys have always been good at being very targeted. I guess how will kind of that new leadership team, and I think the bent is really more of a focus on growth. How are they going to go to market differently? And can you maybe talk about how you approached markets that you view as being more competitive with -- differently from those that may be a little bit less competitive for next year?

They're all competitive. I mean, in all seriousness, I don't mean to dismiss it. I mean, I think they're all competitive. I just think that some of the artificial, call it, subsidies associated with Stars and some of the subsidies related to V28 risk adjustment are really going to be normalized heading into the '24 AEP and I think you're going to start seeing that reflected in people's bids. And there's rhetoric on just general headwinds with respect to MA, which I think of it as a speed bump and if we can kind of look back kind of 20, 30 years on MA, that train is just not going to slow down. Just what, this is a raw demographic increases in the number of seniors, and that train is chugging from 60 million to 90 million seniors. It's just not going to slow. And then the market share penetration from MA, I think, is also going to be whatever was it, 51%, 50% now market share penetration going up to something like 60-plus percent. I don't think you can slow that train. When you particularly look at the monthly benefit or the rebate associated with how much an individual beneficiary gets from joining MA relative to fee for service, it's -- sometimes, it's on average, $200 PMPM and sometimes up to $300. And so if you kind of look at the cycle of MA over the last 30 years, there's always kind of ups and downs with different kinds of regulatory changes. BBA in the mid-90s MMA in the early 2000s, ACA in 2011, '12, and then now V28. But in that time window, MA just keeps going up. And so right now, I think it's very opportunistic for us, just kind of where we're positioned.

So you think kind of based on -- even with some of like the V28 changes, I understand the changes to Stars maybe you don't affect you guys directly, but you don't think the relative attractiveness of Medicare Advantage has changed. Just from a number of benefits that can be...

I think from a macro level, I would say you are right. I would -- you can see benefits because of Stars and V28 have overall benefits come down for the sector. I think that's okay. I just think on a relative basis, when you consider Stars and V28 and our markets, they pose huge opportunities for us.

Well, certainly, other payers will be more challenged next year. And so I guess, do you see potentially a year of kind of elevated switching based on some of the changes in those lines or...

Yes, plans are not going to be as aggressive overall on benefit design. And so whether or not you can see a slowdown of MA penetration this year on a macro level, that probably is the case. But remember, 85% of our members are switchers to begin with. And so it's kind of a better mousetrap, more value. And I would say this year is like more targeted, more just data-driven, more analytical and so it kind of just all line up to give me a lot of optimism.

I guess kind of tying it all together, you have the long-term target for 20% revenue growth. Is that still the right benchmark for next year, kind of taking all of these factors?

Yes. I'm very comfortable with 20%, and we're getting bigger and bigger. So yes, I think that's the right target. And we'll see what happens.

And maybe, Thomas, just any kind of broad brush strokes on how we should think about that between membership gains, geographic expansion, price growth.

Yes. I think you'll see -- obviously, the majority of it will be membership-driven. And from a market expansion standpoint, we're continuing to be really disciplined about this path to profitability. And that's one of the things driving the notion that we're not going to add any new states for 2024. So I think we will look to add a couple of sort of tangential or adjacent counties within our existing 6-state footprint. But generally speaking, I think we're focused on really going deep and driving share gains across our geographic footprint today where we plan the flags. And I think even in our more mature markets in California, there's still a significant growth runway there. And so I think you'll see it both inside of California and outside of California to kind of try to hit that 20% growth target.

And how is the strategy for Texas and Florida going to change? Obviously, year 1 may be a little bit more challenging than you anticipated. Can you maybe just talk through what changes you're thinking about for next year? And...

Yes. No. It's four key drivers that we've said that we need to have in place to win, not just grow, but really win and win for the long term, and it's Stars, it's -- which we're moving -- progress is really good in those markets, number one. Number two would be product. Product, I think we have just greater visibility. And I was just down in Texas to just see for myself and meet all the folks. Provider partners, I think, are very good. I think the broker distribution, I think, is also very good. And I think our product strategy this year is going to be attractive. And I think our network is attractive. And so I think that's -- I'm optimistic about Texas. Florida, same kind of thing. We've got very good provider partners, we're making changes on some of the distribution, which we've talked about. And Ergo, one of the new leaders that we've brought on board. And I think our products are going to be much more, I think, on the mark. And again, Stars, I think we're making good progress. So I feel very confident with what Thomas was referring to, which is getting the kind of that long-term growth rate from our markets that are more mature. I feel very comfortable with that market share gain and hitting our numbers. And I think if we can get the kind of growth we want out of these two markets in '24 is going to be that much better for everybody. But...

But not necessarily like reliant on...

I don't -- yes. I mean I think that would just be prudent for us and I will say there's deeper and deeper relationships with certain providers that I think would be opportunities for us to begin doubling down in each of those markets.

Maybe taking a step back, just thinking about the utilization picture and how that's shaping up. Obviously, there's been a lot of focus on some of the more positive procedure commentary that a lot of the hospitals have made. I think a lot of managed care, I think, including yourselves, has said that utilization overall is kind of running in line with how you price. So I guess sitting here in mid-June, I guess, you still feel like for 2023, you kind of priced appropriately based on what you're seeing. And anything to call out favorable or running better than trend as we think about kind of the different buckets of utilization.

So I think to your first question, I do think everything we've seen so far year-to-date is kind of consistent with expectations. Maybe just on the inpatient setting first. That's the area that we really just sort of attack from a clinical standpoint, ensuring that the right members get the right care at the right time. And that both means if we can prevent an unnecessary hospitalization. We want to do so. And also it means encouraging people to seek care in an inpatient setting if that's the right thing for them to do for their care plan. And so we've run about 160 admissions per thousand for the last 6 years straight. And I think we're very much on track right now to continue to kind of run between 155 and 165 the way we have for a long period of time now. And I think from a non-inpatient standpoint, some of the depressed utilization we saw during COVID in 2021, a lot of that we really saw came back over the back half of '22. I know there's been some commentary just in the broader marketplace about some of the outpatient trends. And we've certainly seen some of that ourselves. But I think a lot of that is actually net positive from an overall unit cost standpoint and that some of these things may have previously taken place in an inpatient setting, but maybe you might see that hip or that may be done in an outpatient setting where they can still get the same quality of care, but at a more cost-effective price for both the beneficiary and for us in the plan. So I think we've seen some of that similar to others. But net-net, I think that's actually kind of a positive from an overall MLR outlook standpoint.

And I guess when it comes to this, looking at like elective procedures and just like the sheer volume that will likely miss during the last 2 years, I guess what's your view on if and when those might come back, do you feel like there is some level of kind of demand that could kind of continue to come through the system over the next couple of years?

I think we saw a lot of that for us really materialize in 2022. And even in I'd say '21, what we often saw was there was certainly more of an ebb and a flow sort of highs and lows throughout the year even throughout certain quarters. But over the course of a full 12-month period, a lot of that, I would say, was still similar to our pre-COVID experience. So other words, the seasonality and the variability month-to-month, quarter-to-quarter was certainly a little bit different. But in totality, when we reflect in the last 12 to 18 months, I think a lot of that "pent-up demand" has kind of come through on the elective side. And then from more of a nonelective emergent standpoint, I mean, that's where we're really actively managing these patients ourselves, that 10% to 20% who are responsible for 80% of the cost. And so I think that proactive engagement model throughout COVID was really important to ensuring members were getting the right care upfront as opposed to facing barriers to care during the COVID challenging times.

Okay. And I guess you've kind of been, I think, very intentional about kind of working towards profitability and that kind of maintaining kind of a laser focus towards that. I guess when you think about kind of how we get there, how important is kind of realizing top line growth with maybe getting MLR down, getting some scale and getting to the -- getting to profitability and kind of do you feel like you can kind of manage to both over the next several years?

Yes, I think we have to is the answer. And I'm optimistic about it because, again, I'm comfortable with our bid strategies and I think operationally, there's upside for us in retention. And it's really a shout out to the team. Thank you guys for just working so hard on that, number one. Number two, I think the investments that we've made in AVA from an operational scale economy point of view and just more efficiencies and higher degrees of productivity along our back office operations, a shout out to the team there for all the work they're doing. So I expect just more efficiencies. Three is just scale economies, it's just getting bigger. And and we'll have a higher leverage effect on some of the, call it, the corporate services and just the fixed costs, so to speak. And I do think there's still some upside opportunity for us even with V28 and we've kind of alluded to this in some of the offsets and the upsides. But we spent so much of our time on the 20% of the polychronic that account for 80% of the spend making sure there's care plans in place for those members. And really, this year, we really started looking at the 80% of the membership and operationally looking at how we can code those folks more efficiently, more reliably because there's going to be, I think, the last statistics we saw, there's still 20-plus percent of that membership that have not hit the claims system yet, but are prechronic. So properly capturing those opportunities and then affecting care anywhere in a preventative way I think is an opportunity. So when you add all these things up, you say, can you get the growth that you want and also get the path to profitability. Well, I think the answer is absolutely. So that's kind of what we're -- the company has been focused on.

I guess maybe one question on the risk model changes I wanted to ask since you mentioned it, I guess maybe the process of adjusting to kind of the new -- the coding structure, like -- maybe walk us through what that's like, what changes that entails and kind of how the -- you're kind of putting the organization in the place to like, yes, execute on that new model.

Yes. I mean I think, first and foremost, sort of the V28 conversation is entirely separate and distinct from how we approach our care programs. So there are sort of two different things. And the Care Anywhere programs you've heard about for the last several years now, remain unchanged as a part of whether or not vascular disease or diabetes or complications is worth more or less than it used to be. We don't change to do that. I think in terms of how we then think about V28 and what we need to do to achieve the operational targets that we've laid out, is really an emphasis on two things. One is, as John mentioned, so much of our energy and investment from a clinical standpoint has been on that 20%. I think when we look about the broader population, we see an opportunity where there are certain markets, certain providers that do a good, but maybe they could do a better job on properly documenting and closing the gaps around both Stars and risk adjustment. And so essentially doing more of that work ourselves, particularly if a provider only has a couple of Alignment members, I think we can reduce some of that variability we see and ensure just more broad kind of completion and accuracy on that population. And the second thing is we're continuing to make sure that both our network of PCPs and also our internally employed clinical resources just understand the model changes. And that entails both educational kind of rollout programs around what's happening and then also ensuring that our systems and making sure AVA and our product Patient 360 has properly been adapted to reflect the new changes coming down the pipeline. So that's really been our focus for the last, whatever it has been 90-plus days now. I think we feel really good about the traction we're seeing.

And I guess when we look at kind of the outlook for MLR more broadly, I think you have a long-term target that's in the low 80s. The business is a decent amount above that today. Thomas, can you maybe just walk us through kind of what the big buckets of opportunities are?

Yes. Yes. So I think first, I would got to separate a little bit of the MA core business from our ACO reach business, which the ACO reach business tends to be higher MLR, but obviously, very low in terms of incremental SG&A and is net positive from a bottom line kind of EBITDA or profitability standpoint. So we think it's accretive to the story. But obviously, that's not been our kind of core focus area from a growth standpoint. It's a part of how we engage with our provider network, and it's a part of how we create better continuity of care from their -- across their senior panel on both MA and traditional Medicare. But it's a little bit different than obviously our core MA MBR. On the MA side of things, I think it's a few key drivers. The first is we need to continue to grow our at-risk book of business relative to that just global cap book of business. And we've been a little bit contrary to others over the past -- going on 10 years now since the company really began where we really want to manage the risk ourselves. And we know based on all of our performance and historical cohort data, that when we take care of that person ourselves, we ultimately do a better job on MBR than if we were to globally cap that member to a downstream provider. And I think as we continue to drive growth, not only in California, but outside of California, you'll see that shift occur where we're able to have a larger percentage of our members be "at risk" versus global cap. And I think the second thing is within the at-risk bucket, obviously, we need to continue to perform and essentially mature those members along the cohort curves that we've shared in the past. And as we've been able to demonstrate and kind of shared our most recent data at a conference earlier this year, our year 6-plus MBRs on that population run in the high 70s. And so there's a significant advantage if we are able to continue to mature those members and retain them over time as opposed to gain the global cap model. And the last thing I would say is we're really proud of what we've done from an operational and clinical standpoint, but we also know there's still low-hanging fruit. And so our Care Anywhere program today is about 60%, 65% engagement. We really want to see that closer to 75% to 80% engagement. I think some of our AVA tools we've rolled out over the last 12 months, including some of our new CM systems are great, but we're just now starting to see the benefits of some of those things come into play. So there's -- there are certain things that are more operational where I think we can just continue to take our efficacy and our clinical innovation to another level in the future. And I think kind of taking those three things into account, what gives us optimism that we can get to that long-term MBR target.

Maybe just a very quick clarification. So you want to grow your at-risk book. I guess, how much control do you have over that? Because usually, we think of it as like you're kind of pushing a capitated model, what some of your peers are doing. It seems like it's maybe the opposite. And obviously, California is a unique market, which seems to be...

Yes. I can take that one. So kind of contextually, if you think about kind of this trend towards vertical integration and kind of controlling your supply chain, and that's certainly what I think a lot of the larger MCOs are doing. And you contrast that to say kind of a contracted network. And certainly, you see a lot of that in California with these capitated IPAs. We've been working really well with these capitated IPAs over the past 9 or 10 years. And part of our model is it's a little bit of a hybrid, meaning we think -- if you know who that 10% to 20% of your membership population, that's contracted has selected the PCP, for example, that is not controlled or owned but contracted, but if you know that 10% to 20% are, that account for 80% to 90% spend. It would stand the reason that the Care Anywhere team or, call it, our internal clinical SWAT team focuses on that subpopulation and takes care of people on the home. And so the degree of control to ensure that the outcomes of the performance management on the population where the money, so to speak. And also where the biggest opportunity to take care of people and serve the people, that's the opportunity. So it's been capital-efficient deployment model, high yield, I think our NPS score is something like 82 on the members that we actually take care of at the whole. And so it's a high leverage model relative to the other kind of models out there. And I do think there's opportunities for us on the 80% to improve performance on some of the Star measures, for example, but I think it's a very scalable model because I don't think it's realistic that you're going to be over here and have vertically integrated staff models in every single market that you're in. Some markets, I think it could make some sense, but not every single one.

I think in the past, you've maybe talked about being interested in potentially acquiring that type of business. What are your latest thoughts?

Again, I think we have been selective in certain practice acquisitions in certain markets. And I think those have been very successful for us. But in terms of vertically integrating kind of everywhere, I think that's going to be really tough to do. In certain select markets, maybe but I just think that the -- this is...

What would -- like what would be the like characteristics that you'd have to look for in that market?

I think kind of if you look at -- you can think of a handful of markets right now that are more comfortable with more staff models, more vertically and good market models. I think those kind of dynamics are where you would -- we would point to. And I think focus on particular markets, where there's some distinct competency and at the end of the day, I think the opportunity is taking the Care Anywhere model and overlaying it to one of these potential opportunities you're talking about, I think, is where the magic is. I think just having call it, a multipayer global cap chassis, I'm not sure how survival that's going to be, frankly, particularly in the light of V28.

Makes sense. And Thomas, I guess any latest thoughts on just like the time line to profitability and sort of how investors should think about that?

Yes. No, I think based on how the bids have come together over the last couple of months, we remain disciplined and focused on that '24 breakeven target -- 2024 breakeven target. So that's still the right way to what we're shooting for. Based on a lot of again, the work over the last 45 days, I think we're incrementally sort of positive on how achievable that is.

Okay. Great. I guess maybe I wanted to ask on Star, just kind of the strategy to get to 5 stars, kind of the relative importance of getting to that threshold in your mind and what the company is doing to try to achieve that.

I think you have to. Whether we achieve it or not is another issue, but I think the cut points are just increased across the board for the sector. I think the relativity of how the different plans stack up against each other is something that is important. But I don't think you have the luxury of shooting for 4 stars or shooting for 4.5 stars anymore. I mean, you have to shoot for 5 stars. Now if you miss on 5 stars, that's okay, you can get 4, 4.5. And I think you can still be competitive. But if you don't shoot for the 5 stars, I just think it's getting -- it's just getting tighter. You have to understand what those cut points are and put your operations in place. And every week, every week, we're looking at numerators and denominators on every single measure and closing those gaps. And the goal is to get to 5 stars. Again, it depends on where everyone else kind of lands, but I think we've proven in the past, we've held our own on Stars.

And from a distribution strategy for next year, it sounds like it may be a more balanced approach than what has been in the past.

I think it's going to be more tactical, as the way I would say it. And each market and submarket is different. We've got leaders in place that are building tactical plans now as we speak. Again, we hired the head of West Coast sales for United, sales leader for Bright, sales leader for Florida Blue. I mean these are senior executives that we're just very fortunate to have joined the team. And so they're building out the tactics with the relationships that they have. Some markets may be more 1099, some may be more FMO, some may be more captive. I do think we're going to be investing in more telesales across the board. I think we're going to be investing in broker management, kind of broker payment solutions. They're going to make it easier to work with us. All that, I think, is going to be market to market and very tactical, very tactical and team met this past week and I'm just very encouraged by what happened there.

And I guess, more aggressive with the spend this year, then maybe in the past or is it just more a reallocation of what you typically spend.

I would say it's more of the latter, yes. I think -- and in part, as we think about just sort of overall profitability this year, kind of outlook for '24, I think we have to be just really, I think, disciplined about how we think about it, prudent how we think about it. So no, I don't think we're having any type of deviation from expectations to start the year. And it's just -- it's getting more precise in many respects.

Got it. Okay. Moving on ACO reach, I guess, I think you're kind of -- I think, guided to like 100% MLR for the business this year. How does that change over the next couple of years? And I guess, what does it take to kind of see that it's going to be a small improvement, but improvement to maybe get a little bit of profitability in that business?

Yes. So I think our comments on the kind of guidance outlook was implied in our guidance outlook for 2023 was in part just based on the fact that we had a pretty significantly new population this year. So I think that was just a reflection of that kind of unknown. But based on what we have actually achieved when you go back to 2021, we had one of the top quartile savings rates in the country for the DCE program in spite of the fact that we had the second lowest benchmark PMPM in the country. And while we have not seen the kind of official and final CMS data for 2022 days of service, I think ultimately, when it's all said and done, we'll have achieved really well for 2022 days of service as well. So I think just big picture, as I mentioned earlier, it's additive, both from a financial kind of contribution margin standpoint, but then also just strategically, again, because we're working with providers in our existing MA networks. I don't think you'd likely see us go pursue a brand-new ACO reach deal in a state that we're not already -- or even on a county that we're not already operationally in today. And I think for a long-term margin standpoint, it will probably never have the MLR that you would see in the MA book of business. I think that's pretty fair to say, particularly when you take into account some of the upside kind of profit share arrangements that we would anticipate for those arrangements with the providers. But as I mentioned earlier, the SG&A incrementally required in order to support any growth in that business is really quite minimal because we're not doing marketing. There's no commissions, we're not paying claims. And so it's just a very different operational implication as compared to growing your MA book of business. So even if the MLR is in the 90s long term in that book of business, it could still be a nice margin from an overall EBITDA standpoint given the insignificant SG&A associated.

Got it. Okay. And maybe just lastly to wrap up, obviously, heading into a presidential election cycle, any policy that's in focus from an Alignment standpoint in your mind?

No. I mean it's the beauty of MA. I mean it's so bipartisan. And I don't think there's been any change to that. And I think the value to 60 million voters is so compelling. I don't see a change to it. And I think V28 was actually designed and the star model for that matter, was designed to get the MA program kind of back to what its original CMS intent was, which is higher value, lower cost. Higher quality, lower cost. And I think it kind of took out any of the kind of technical kind of nuances on the fringes. And really intended to kind of refocus everybody on that, just serving that beneficiary, giving our beneficiary more value and more affordability. And I think that's -- it's just the right thing to do for seniors. And I don't see it slowing. And if you look historically, this goes back to the trends. Even if kind of the Republican administration gets in, typically, it's always been an uptick. So I think there's upside, [indiscernible] in the industry stays intact, it's still advantageous to us. That's when the business was built, irrespective of reimbursement up or down, we stand positioned to excel.

Great. We'll wrap it up there. Yes, John and Thomas, thanks very much for your time.

Thanks, Nate. Appreciate it. Always. Thank you very much.