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

Good afternoon. My name is Lisa Gill, and I'm Head of Healthcare Services with JPMorgan. It's with great pleasure this afternoon that I introduce Alignment Health. With us this afternoon, we have John Kao, who is the CEO, who will do the presentation, and then John will join myself and Thomas Freeman, CFO, for the Q&A portion. With that, let me turn it over to John.

Thank you, Lisa. We've got good news to share. We've got really good news to share. Before I share it, I want to say something. We love Medicare Advantage. It's probably not something that you've been hearing all week, but we actually really, really like it. And we think that if you provide high quality with great outcomes at a fair price, you ought to be positioned to win in the marketplace. And that's what's happened with us. So I'm going to get right to the outcomes that I think you might be interested in. We had an AEP of 155,500 ending members for January 1. It's about 47,000 net adds, equating to about 44% growth. 82% of that growth came from plan switchers in the marketplace, and 86% of that growth came from California. I'm going to talk about how, operationally, what we executed to get that growth in a second. The second thing you're thinking I'm sure is, well, with that kind of growth, are you going to get blown up on your EBITDA guidance? And the answer is no. We feel very, very confident that we're going to get to EBITDA breakeven, and I'm going to tell you exactly why we have that degree of confidence as well. What's even more exciting is it sets us up really, really well for growth and cash flow breakeven -- Thomas is going to kill me when I say that -- for 2025, but I feel really good about that as well. And so it's really from the beginning of when we took the company public in terms of defining a new paradigm of doing Medicare Advantage is starting to come into fruition. So a couple of principles related to the model we think we have, and we'd like to call it a payvider -- I'm not sure that's the perfect description, but what it does is it gives us visibility and control. And so some of the things you might have been hearing this week lack visibility. They don't have the data in a timely enough fashion to make certain actionable decisions. Because we're the plan, we can get that data, and we can do something with that. We have visibility to our cost structure. That's of critical importance. The second thing is the care model. It's a very capital-efficient way of controlling the costs. And so if you have the data and you can point your resources toward where the money is, which is really in the polychronic cohort of your population, which is 10% to 15% to 20%, in that range, costs you somewhere between 80% to 90% of the spend, right? So it just makes sense that you'd focus your resources there and you do it in a capital-efficient way. We don't have a lot of bricks and mortar. That's -- a couple of generations ago we did that. So we use the data, we see people at the home. We have interdisciplinary care teams that take care of these patients that need the help. This whole business was predicated on a model that is doing well by doing good, serving seniors, actually caring about doing the right thing to take care of your mom or your dad, right? And so the whole notion is if you can identify who are the people that need the care, you envelop them with the care. What that does is it bends the cost curve consistently through control. You control the care delivery component on that component that's where 90% of the money is. That's what allows us to invest in consistent benefits. And in turn, we spent a lot of time, you've heard us talk about in 2023, time and effort on member experience and member engagement. And our team did a wonderful job of keeping the members, the stickiness and the retention rates of our members due to just service. Service delivery is working. And so each one of these boxes you see are investments that we made to make this virtuous cycle, we call it, smoother and better running. But all of it in aggregate yielded the kind of growth that we were able to achieve. AVA, you've heard us talk about, is our technology stack. It's all predicated on this unified data architecture. The data that we ingest comes in clean, it is cleansed and then it's stored in a way that all the functional parts of the company can access information in a consistent manner. The reconciliation that a lot of the legacy competitors have takes that 30, 60, 90 days of latency. And that's something we've spent a lot of time on to make sure that we have real-time decision-making information. That data is then organized into these different kinds of modules, care management, Stars, risk adjustment, infrastructure and consumer growth. And so there's different kinds of applications within each one of these modules that in turn drive what we call value drivers, things you have to be good at, you have to be good at, if you want to be successful in Medicare Advantage. And so on the revenue side, it's really -- it's Stars, right? You've got to be good at Stars. We made a huge investment in Stars last year. Tracking numerators and denominators daily for every measure. It's a commitment. We took Tukey very, very seriously. It was tough. We just got by, but we did it. Very few people did in California, and we'll talk about that in a second. Risk adjustment, the suite of applications we track to be compliant on risk adjustment. When we started the business, we did not, and this was very conscious, we did not set RAF as revenue cycle, it was in turn part of our quality and care plan clinical organization. Our overall RAF is like 1.13. It's not terrible, it's not too high. We knew there was going to be an adjustment. We actually -- we talked about it for the last couple of years. Adjustment came now in 2024 with V28 on the risk adjustment module. And so if you're here at 1.13, you've got upside now. If you're sitting at 1.5 or above, you got a lot of downside. And so between the two, between Stars execution, risk adjustment execution, sales execution, branding, all of that are AVA stack influenced to create the performance management that gives us confidence we're going to get to the EBITDA we want, okay? This slide really is how do we do it? And the key takeaway here is we actually manage the risk. We manage the risk, right? We control the cost, where the money is because we deliver the care to the people that are at the highest risk and the highest cost. If you think about the other competitors, they don't have that capability, right? The cost management strategy is to delegate and capitate to these global cap providers. That's okay. It's a little tougher in a compressed reimbursement environment, right? Just the pure calculus of it is there's not enough money in the supply chain to have -- I always say there's two insurance companies now. Somebody that's the licensed insurer, somebody that's getting 85% of the global cap. It's like squeezing, there's not enough money in that supply chain. So we've always said if you can be high quality at the lowest cost, you're going to be in a position to create the highest value for that consumer. For your mom and your dad, you're going to actually take care of with benefits, with access, right, with great service, and just treat them well. It's very, very simple. And then here, you see 74% of the membership is generally deemed to be healthy. Our algorithms would say they're healthy. They cost 5% of the institutional costs, right? 26% of the membership costs 95% of the spend. And we've separated those into 3 types of people. The far right, the chronic, is the polychronic. They're sick, they need help, they're the vulnerable, right? And we're there to make sure they get the care that they deserve. Irrespective of income, gender, race, anything, we take care of them. If you're a senior that needs help, we take care of you. Pre-chronic, 7%, 1% institutional claim is pretty interesting. These folks are on the launching pad. They're not in the claims system yet. But all the algorithms, all the markers would suggest they are going to need the same degree of help that the polychronic have. And then the healthy utilizer, 7% that cost 19%, the algorithms would suggest they pretty much are healthy, but they had an episode requiring an admission. They had a hip or they had a knee or something like that. And so all of this is to say we use the technology, we use our AI, to deliver more care, not to deny care, but to deliver more care. And we do that through our Care Anywhere teams. These are interdisciplinary care teams of doctors, APCs, medical assistants, social workers. All these people every single day are having meetings and doing rounds basically on patients. That's how we do it. It's all virtual and everybody just knows, everybody learns from each other. It's a very clinical organization. And we're just getting better. Some of the algorithms that we have can define and estimate the number of people that are going to be admitted within the next 30 days. And we're continuing to increase that recall rate up to 64%. And what that means is the clinical model is getting better and smarter. And so we have really, really good clinical outcomes. 150 to 160 admissions per thousand, we're keeping people out of the hospital while keeping our Star ratings high, right? That's a really good thing. It's hard to do, but it's a really good thing. And that's really what the secret sauce is that we have. Here's a timetable of investments since the IPO, and we've made investments in panel management, which is really think of it as a case management workflow tool. CRM, we had to build from the scratch up, and that's the member experience module that's yielding huge returns through retention. Eligibility and benefit design. Our whole bid process is extremely technical. We did a great job on the bids, really shout out to the team on that. The UM, the broker intelligence, provider data platform, case management. So all these different value drivers that are important to be successful, we've kept refining and continuous improvement, and they yield these kind of results: 90% of our members in 4-star plans or above; we're 4.5 stars in North Carolina and Nevada. A little bit pissed we didn't get to 4.5 in California, but we still have a chance for that through dates of service in 2024. Our NPS is 60, 4.9 Google star rating and our disenrollment rates are 40% lower than the market. That 156 in the middle, inpatient admissions, it's very good cost management. We have very good visibility. Our clinical organization tracks this stuff daily. It's a maniacal attention to detail. It's organized in dashboards where they can see where the high-cost outliers are, and we manage it, okay? And so that leads to the kind of the MBR for our Medicare Advantage business, 87%, and the 5-year CAGR on the growth side of 27%. And so just to reiterate, the membership is 155,500 as of 1/1 2024. We are giving guidance that that's going to increase to between 162,000 and 164,000 by 12/1 by the end of the year, which equates to about 38% on a 12/1 to 12/1 basis. Either way, it's very good, controlled growth. The things that we experienced, and I would say we had tailwinds in Stars and we had tailwinds in risk adjustment, but we created those tailwinds. They didn't automatically just happen to us. And so we spent a lot of effort on retention, product leadership, those are the bids and the tactics and the war simulations and the game theory for each and every market. Sales operations. We talked a lot about that during the year, and we executed with that with leaders that we brought in with more emphasis on distribution coming from our internal sources. Stars and tracking, I already mentioned that, just transparency and sitting on top of it and grinding daily to make sure you hit those numerators and denominators. And then we spend a lot of time on our networks, our IPAs, working with them and building our own simulated IPAs, our pods if you will, because the key is -- I love the IPAs, I love the medical groups, but they've got to perform. They got to get the 5 stars. They've got to get the gap closed in risk adjustment. They got to work with us in our Care Anywhere engagement. They need to grow with us, et cetera, et cetera. And so we spend a lot of time kind of refining that network. Now that led to the Stars, the Stars. We're one of two public companies that have 4 stars in California heading into 2025. The Stars that were just announced a couple of months ago have not yet been embedded in the 2025 bids yet, right? So we grew 44% with bids from last year heading into 2024, where there's still a lot of people at 4 stars and some at 4.5 stars, okay? So that's a lot of tailwind that we just created for ourselves heading into 2025. Care model continues to deliver, not only in California, but all the new markets. The performance is outstanding. Consistent margin focused, very disciplined. Some of you have been upset with us because we haven't just grown like crazy, but we weren't going to chase bad business. And we didn't chase bad business this year either. It's very consistent, consistent profitable growth. And the risk model, same thing. Risk model is -- the phase-in of V28 is going to be coming in 2025. That's going to put more pressure on the folks that were at the 1.5 level and above, and we see that as an opportunity for us. So those fundamental tailwinds have been really, really thought through by us, and we executed on a lot of the operations we said we would. The other thing here, 2 things to just note, and it -- and there's the growth again, 44%. What's really important is the disenrollment. That middle section, right? It's like people are not leaving. Once we get them, we're going to also get them coded. We're going to get them in our care model. They like us, they don't want to leave. That's so important, right? And then we're taking share. We're taking share like we told you we would, we were going to focus and we're going to take share. Here's why we have such high degrees of confidence in our 2024 EBITDA, right? Some of you are like, we're worried that you're going to change your EBITDA guidance. No, it's accretive business. All the bids are accretive business. We didn't raise our benefits from '23 to '24, 0.7%, right? It's basically flat. Didn't chase bad business. $89 PMPM is the historical new gross, new member gross profit. We don't bid negative margin business even for year 1. We're not giving golf clubs to people in our supplemental benefits. I mean this is good, solid business. And then you add to that the growth that will support the increased operating leverage. And you see kind of year-to-year 15.9% to 15%, 14.4%. With those kinds of growth numbers and you just add our growth year-to-year, you can just imagine, we're not giving guidance out yet on EBITDA or MLR or revenue yet. We'll do that come February. But we're going to have increased operating leverage in our SG&A. All of those things combined give us high degrees of confidence. The key thing is the visibility and the control. Visibility to the data soon, without latency, and then control of where the high-risk members are. That's the key and the differentiation about Alignment. You add to that this historical cohort analysis where a new member comes in at 89% and, over time, it gets down into 81% MLR range. That's on the left-hand side. On the right-hand side, you have each vintage of year on the cohort. And what's important to look at here is since we implemented Care Anywhere, which is 2017. Because we knew who the people that were sick were. We had the data, we had the list. What do you do with it? That's when we implemented Care Anywhere, where this is home-based care teams. And the starting point is lower all the way across. And the ending point is lower all the way across. And so that contrasts to the left-hand slide, that's just kind of the average over time. But the trends are even better than what's on the left-hand side of the chart. So you kind of add all that up, when we get the growth, that solid growth, and you add this cohort MBR improvement, it positions us very, very well for '24 and '25. And two more slides, just to emphasize here the Stars advantage we have is widening. If you look at this, 92% of our members are 4 stars and above. Come 2025, only 56% in California are going to have 4 stars and above. That's a big deal. People are suing CMS, there's all kinds of stuff going on, right? But this was not a surprise. Some people didn't take Tukey seriously; we did. CMS gave everybody ample warning for it. We like it, what they're doing with Stars, because it's normalizing the playing field in Stars. We like what CMS is doing in V28 because, again, it's normalizing the playing field. We like what they're doing with the broker commission stuff. It's normalized, making the playing field fair for the benefit of the consumer. That's a good thing. And that's where we're going to start excelling, okay? And so really, to summarize, it's a breakthrough year for us. We've been very disciplined and patient and the market has spoken in many respects. It is disruptive. It's designed to do Medicare Advantage. Investments in operations and AVA accelerating this virtuous cycle that's making it flow better. Durable growth supports 2024 adjusted EBITDA breakeven. Stars is -- and I would say V28 are going to be continued tailwinds for us, and '25 I'm really excited about. I can't wait to get into those bids. So with that, I think we're ready to take questions.

Great. And John, thanks for the detail. I mean, a great open enrollment season for Alignment Health. When I think about some of the comments that you made, one, 82% were switchers. So if I think about that and the level of data and information you'll have on that patient, it's generally a better patient when we think about from a risk perspective. You also talked about 86% being from California. So how do we think about winning in the California market? What do you think was your differentiation as far as your offering goes this year? And then secondly, when I do think about that 82% that are switchers, anything that you would call out within that, I guess, class of members that are shifting over?

It was fairly broadly distributed, meaning we got share gains from pretty much every single payer. Pretty much -- for profit, not for profit. We get questions, like did you get all your gains from the Bright membership? No, we got some. I think we did a very good job of kind of retaining those actually. So it was across the board. And I think there's a buzz about Alignment now in the marketplace. I think some of the marketing and branding initiatives we did with Instacart created some buzz, the initiatives with Walgreens created buzz. We were very tactical in introducing Luis Miguel as one of our spokespeople, and we did that kind of in AEP because we wanted to get the growth in OEP and also heading into next year. So that was very tactical, I think created a buzz. I think the other thing which is ironic is the 2025 Star numbers, which came out in October, was really interesting. The broker community and the provider community value consistency. You guys kind of do what you say you're going to do and you do it. They respect that. What they don't like is kind of the bait and switch who give you golf clubs here and then you pull back and you give a rebate and you pull back. They don't like that, it makes them look bad. But you have consistent benefits across the board that you can retain and you're servicing the members well, they respect that.

We see it in your retention number as well. I mean, is there anything you would call out there? The improvement year-over-year, it looks like it's about 180 basis points.

Yes. It's -- if you recall, in Q1 we were very direct. We had to make changes to some of our supplemental vendors, and we made those changes. We had to migrate them off of our chassis. We had to bring a new Flex Card vendor on. We had to insource our member services, again, to have that kind of control of quality that we wanted. And philosophically on the benefits, we made the decision to simplify the benefits so people could understand it and get what they think they bought. It's just like deliver what you say you're going to do and we did it, and I think people appreciated it.

You also talked about Stars for 2025. And if I look at your performance, it was a significant positive, especially versus the industry. What enables you to maintain that leading Stars score?

I would say it's -- we learned long ago, this is not a departmental function. We can't do it as a department. It has to be an industry -- a company-wide commitment to actually serving the member. Like you can't just -- it's not a -- you can't just -- it's not a math exercise. It's culture that is dictated by the board, by me, through every single person in the company, you just take care of that senior. And then second value of the company is support the doctor, support that doctor. If you actually do those two things, as people are beginning to understand MA now, it yields really good Stars and really good risk adjustment. I mean it's got to be compliant.

And I know you and I over the years have had these conversations about how do we think about your Star Ratings and think about breaking into new markets versus really driving the membership in existing markets? Can you maybe just talk about how you're thinking about new markets?

Yes. Yes. No, great question. Our focus now is -- we've talked about expansion and scale. I think the right word that we really pinpoint now is replicability. Replicability. What's the playbook that's caused the success that we've had in California? How can we do that in other markets? And I think it starts with the provider, really an anchor provider partner. And we've got lessons learned throughout the years in starting new markets. I'm not sure I would do pure de novos. It's just really hard. But if you have a good provider partner, an integrated delivery network of sorts that have a lot of membership opportunity and branding opportunity or co-branding opportunity, I think that's a very exciting way for we to grow. Let me share this one vignette. It's -- a lot of the health systems out there are, like the branded health systems, are at probably 120% to 125% of capacity. They can't -- there's too much demand for their beds, okay? They're getting reimbursed 100% of Medicare fee-for-service and they're losing money on it, right? The big guys are claims editing them, some of [ those ] have told us, to the point of 85%, 86% of Medicare reimbursement for a hospital stay, right? So they're getting hammered on Medicare admissions, which typically now is like 40-ish percent, 42% of the hospital's admissions. And so what's the solution for that? And they've come to us and they said, "Well, your AVA and your ability to manage inpatient acute admissions is really good. Can you help lower those admissions that we're getting paid 100% or less on, because we have the brand to drive commercial volume into our hospitals at 200% of Medicare. And by the way, we want to joint venture with you on the plan side to drive market share." It's pretty direct, it's pretty like logical, right? Hard to do. But we're spending some time figuring out how we can help some of these folks. And I think that will be disruptive.

Are there a lot of market opportunities around something like that? I mean that seems pretty sophisticated.

Every one is the same. But the key is you got to kind of be one of these branded facilities that are 100-plus percent of capacity. It doesn't work if you're at 70% of capacity.

You touched a little bit on V28 and the risk model changes. You talked about where your risk is today, right, when we think about the changes that are happening coming into '24 and over the next 3-year period of time. Can you maybe just talk a little bit more, give us a little bit more additional color on how we're thinking about your membership growth as it pertains to those, how you think about your existing book of business and are there ways to manage through these risk model changes?

Yes. I mean it started with us from day one, is not to get hooked on high RAF, because you get hooked on higher RAF, you get high revenue, and you get high revenue, you build your infrastructure around that high revenue. And when it comes down, you get hammered, which is what's happening in the industry. And so particularly with some of the delegated providers. I mean it's -- if they're taking 85% of the risk with not perfect visibility, what do you think is going to happen? I mean it's like not that complicated. For us, by starting at a reasonably, I would say, conservative -- I don't think it was terrible, but it's a conservative level. And I think, Thomas, we're at 1.5%, something like that? 1.5% a year?

Yes, the impact from V28.

Oh, yes.