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

Great. Thank you all for being here. My name is John Stansel. I'm a member of the health care services equity research team here at JPMorgan. And we're thrilled to be joined by Alignment Healthcare, where we have CEO, John Kao; and CFO, Jim Head. John is going to give a presentation, and then we're going to move to some Q&A after that. So John, without further ado.

Thanks, John. Good morning, everybody. Can you guys hear me okay? All right. Let's see here. Let me see if I can figure this out. Okay. So what I'm going to share with you today is really start from the very beginning is like why do you call yourselves Alignment Healthcare, right? And it really is very simple, is the vision is to make sure that the health plans, the providers, hospitals and doctors, the brokers and very, very importantly, CMS are all working together in an aligned way with data fluidity, aligned economic incentives, operational seamlessness, all kind of functioning together for the benefit of the senior. Everything is about the senior. Everything is about my mom. How do I take care of her in a way and get the hassle factor out of health care for my mom and your moms and your dads. That's the vision of alignment. And this vision was started and has produced results that I want to share with you. Over the last 10 years or so, we have grown tremendously. We have grown responsibly. We are over 275,000 members now. And we kind of guided to close to 300,000 for the end of the year. We're approaching on a guidance basis, $4 billion in premium revenue. We've basically been growing at 30% per year. We've effectively been doubling every 2, 2.5 years. So I think the vision, the mission of the company is starting to be proved out from a financial perspective. From a differential perspective relative to the performance of our stock to the peer group, I think this is the most astounding slide. And it's like why? Why are you guys performing so differently than the rest of the sector, right? And the entire rest of my discussion is to be very specific and share with you how we're doing it because I think it's very hard to do. I think to actually replicate it is very, very difficult from our competitors. Fundamentally, we think Medicare Advantage is not just an underwriting business. It's a care management business. It's a clinical business. There are certain actuary fundamentals that have to be applied. But fundamentally, it's care delivery, taking care of human beings, taking care of them well, actually providing more care for them, not denying care. I would argue the industry over the past 10 years is focused on 3 levers that are no longer going to be viable moving forward. They've been focused on coding arbitrage. Version 28 of the risk models shut that down. And I think they're going to make sure the program integrity of this program is adhered to. I really applaud the administration for focusing on that. I think it's great, okay. Number two, global capitation, just shifting the risk to the global cap providers. I think it will still exist. But this kind of off-balance sheet medical management isn't really a core competency of the plans, right? And when you have lower premiums resulting from V28, there's going to be less money in the supply chain to have basically 2 insurance companies; one regulated, one unregulated. I'm not dissing global cap. I'm just saying that has been a practice that people have relied upon. And third, our denials and denial rates. It's not going to be okay anymore, both from a regulatory point of view and a social perspective, people aren't going to tolerate anymore, right? Our denial rates are less than 2%, 1.9%, right? So how are we doing it is the question. Well, it starts with understanding and believing that 10% to 20% of your population account for 70% to 80% of your MLR, okay? The 80-20 rule. And so what we do, the first thing is who are the cohorts in that 10% to 20% that are polychronic, frail and need extra help, right? Who are the people like my mom who's now 93, who's just frail. She's slowing down. She needs help. She needs extra care. She's doing okay mentally, but physically, it's starting to get a little slow, right? So we stratify the members. We take data, a lot of AI. We take lab data, pharmacy data, encounter data, authorization data, hospital admission discharge transfer data, okay? We take ultimately still claims data. The problem with claims data is inherently lagged 30 to 45 days. It's very important to capture that information for administrative documentation purposes. But end of the day, you need actionable information. And we reconcile that real time on a unified data model, okay? And we stratify the members, who run it through our algorithms and it comes up with this kind of result. 74% of the membership cost 5% of our institutional costs, okay? We call those people generally healthy. And generally, they get good care. They see their PCPs 4 or 5 times a year. It kind of works. Next cohort is the healthy utilizers. It's about 77% that cost 19% of the institutional claims, right? These people, it's very interesting, their markers or the algorithms would suggest they're generally healthy, but they did have an episode of care in an acute setting, right? Those are accidents, falls, unpredicted kind of episodes of care. But generally speaking, they're healthy. Next are the pre chronic. These are just the opposite from the healthy utilizers, 7% account for 1% of the institutional claims. And these are the folks that we call on the launching pad. All the markers would suggest these folks need a lot of help, but they haven't yet gotten into the ED, but need to be treated proactively as if they are and have chronic conditions. And the last one in the red, the chronic population, 12% account for 74% of the institutional spend, okay? And so the whole idea is to curate the care delivery for the type of individual moving towards personalized care depending upon the acuity of the patient and then to further design and curate the products specifically depending upon the needs of the individual. So all of this is step-by-step moving more towards personalized care in practice from product design to care delivery. That's what this is all about, all right? And so now you have a list. You have a list of, okay, people on the chronic side, on the prechronic side, 26% of your population account for 95% of your spend, what do you do about it? What do you do, okay? And so on the right, what we've done is we've created a clinical and interdisciplinary clinical team called Care Anywhere. It's basically doctors, nurses, MAs, social workers, behavioral health coaches, case managers, care coordinators, all working together and serving that senior at the home for free. It costs us about 3% of premium. It's about 450 people employed by the company. We don't outsource it because we want to ensure quality control. Everything is about quality and quality outcomes, all right? The most interesting thing here are the little dots. You look at the number of people we have with these kinds of chronic conditions and then you look at our gross margins based on those cohorts. We actually do very well with people with multiple chronic conditions, okay? You actually get paid more with correct compliant coding and you actually have the care plan regulatorily required to serve that C-SNP member or D-SNP member or polychronic member, but the efficacy of that care model works for everybody, right? And what happens is if you can actually know who that 10% is, that cost 80% of spend, and you can bend the cost curve by deploying this kind of model, your overall trend goes down. If your overall trend goes down, you have to, by law, reinvest the savings into richer benefits that in turn creates growth while preserving margin, right? And so if you go back to this slide here, the key to take away is the core competency of the company is medical management, population health, chronic disease management. It's -- that's what we do. We just happen to do a lot of the health plan functions really, really well, product design, distribution systems, right, regulatory compliance. I think we're the best -- one of the best scoring regulatory compliance scores in the country. That's the takeaway. And so if you deploy the AI, stratify the members, you have a delivery mechanism that can scale. We're proving that out. It's scaling and it's portable, okay? And you get these kind of outcomes. Look at this thing. On the vertical axis is the year-to-year change in MBR, okay? The horizontal line is growth rate. And it kind of shouldn't be a surprise if you look at the regression line, right? If people grow a lot, they typically their MBRs bump up. That's what you hear about with a lot of our legacy competitors, right? If they don't grow, they're typically their MBRs kind of go down. We are such an outlier because of this model where we can grow last year in 2024, we grew 58%, our MBR only went up a little bit, right? This year, we grew 31% for 1/1. And this is actually data through Q3. We actually went down, right? How are they doing it? I'm telling you the answer is serving the senior. The shareholders will benefit from that. You will all generate good returns. All of our investors have produced good returns because we collectively are serving that senior, putting the senior first, do the right thing. Everybody wins that person [indiscernible] times several hundred thousand, hopefully, millions will benefit, okay? This is a really interesting slide to me. And then kind of this notion of continuous improvement. Every year, we've told you we're getting better and better. We're reinvesting in people, process, technologies. We're implementing core systems. Over the last several years, we've implemented Athena, upgrade our EHR. We've implemented Workday, shout out to the Facets guys and TriZetto. We implemented that, great partners. And so we're automating and growing the company up to scale. If we keep doing that, you could afford to invest in products. And the middle part of this is just an indication of supplemental benefits, which is important. And so we're investing in supplemental benefits and you're increasing your membership growth while increasing margin. Who can do that in the environment that the MCOs have been over the last 3 years? We're the only ones that have done it, okay? The other thing is Star Ratings, focus on Stars. Stars is a institutional and cultural requirement. It is not a department in a health plan. It starts from our board. It starts from me, and we are committed to serving that senior to make sure that, that senior is served properly. 100% of our members now are in 4-star and above plans. We actually have 3-, 5-star plans. I'm not going to be happy until everything is 5 star. That's what the seniors deserve. It's really important. When we first IPO-ed, I would say this thing is based on high quality and low cost, right? Everybody goes, okay, what does that mean? It means you have to have really good Star Ratings. The unit economics that CMS incentivizes you with Stars is really important. You got to be 4 stars to play, all right? Low cost is a function of the care model. We don't grind providers down. We partner with providers. We're aligned with the providers. The business model of serving and deploying these Care Anywhere teams is loved by the providers. It doesn't cost them anything. They get paid. They make more, they work less. And together, we provide a better experience and clinical quality outcome for the member. Growth, here's a sense of 31% year-over-year. We could have grown a lot more. We were very, very disciplined in our contracts. We chose not to grow even more and take bad contracts. Okay, we'll let somebody else take that. It's okay. No free lunch. We'll take 31%, 20-some-odd percent in California. We'll take that, 84% growth ex California. Really happy about that. Even more importantly, retention got better. It's a big deal with as much churn as that was going on in the marketplace this past year, people stuck with us. They like the service delivery. When we first IPO-ed, I said, kind of joked and said, I think our members really like us. They actually like us. That's not a joke. They really like us. It's a big deal. Which health plan can say that, okay? And so you still have a better mousetrap. 80% of our growth comes from switchers, okay? And then you see on the last part on the green, 84% growth. We're over -- we're about 20% now ex California, which is double that from what we were just a couple of years ago. California still got a lot of runway for legs. And I think ex California is going to be -- I'll share in a second, the opportunity for us as well. So it's not an either/or with where you're going to grow, it's a both/and. We're going to keep taking share in California responsibly, and we're going to continue to grow in the existing ex-California markets. And then I've also said in 2027, we're going to start investing in some new markets using cash flow from operations, which is what we're exactly what we're going to do, okay? This is a really interesting slide, and I'm very, very proud of it. Remember a few years ago, everybody was asking, well, can it work outside California, right? Are you just a California plan? And the answer is look at these numbers, right? Our gross profit PMPMs are better outside of California. Our Star Ratings are better outside of California. Our utilization management -- admissions per 1,000 metric is better outside of California. And you go, well, why? Well, part of it is just the kind of inherent structural design of what's happened in California. There is a saturation of middlemen, IPAs, right, medical groups that want risk and are intermediaries between the plan and the member and then oftentimes between we and the doctor, right? Outside of California, we're working directly with the doctor serving that member directly. California, we've got to work through some of these IPAs. And some are good. And if they're good and they do a good job as subcontractors, great. If they're not doing a good job, we're taking the reins back on certain administrative functions, right? But that's the opportunity. As we get bigger and bigger out of California, I actually think the margin is going to get better. And so this is a proof point along with the Star Ratings improvements that give us confidence that from our own deployment of capital, it makes sense for us to start making investments in terms of new markets in 2027. So -- and you kind of just see the Star Ratings and you kind of see the growth rates. So I'm very optimistic. I think what we've achieved thus far is effectively a proof of concept. We've proven to ourselves, we've proven to you that this model, which is very different than what you've all been taught for the last 10 years, is very different, but it's working. It is the future of where this sector is going, and I think very consistent with what CMS wants, value for the beneficiary. Not gaming stuff to get the growth, but actual value measured in clinical outcomes, measured in affordability, all right? And so just to kind of reflect, '25 was an inflection point for us. We had a lot of growth, a lot of good profits. It was kind of a breakthrough year in terms of we're getting to enough scale, and we kind of pretty much did exactly what we told you we would do. We managed the growth. I'm so proud of our team for ingesting 58% growth and improving retention, improving MLR, improving service. That's a lot of work. And so it's not just the growth, but it's the management of that growth that gives me a lot of confidence. And so we're going to really do a bit of a replay of that in 2026. So we're thinking about the operative word here is scale. How do we get from $300,000 to $3 million, right? How do we get that? And how do we do it reliably with the same attention to detail and quality. And it's -- and I'll talk about it, but it's really just what you've heard other people say in terms of upgrading and deepening people, the bench, getting people that know how to scale. Managing that and hiring people that have the same passion for the mission that we have of serving seniors. It's not necessarily an easy thing to do. So we're very careful and selective at getting the best people we can get without compromising that mission, right? Automating workflows, documenting workflows within each functional area, documenting micro workflows and then documenting cross-functional workflows and documenting the handoffs between the functional workflows. That's what we're doing. And then we're automating it, okay. That's the only way we're going to be able to retain the visibility and control that has allowed us to achieve the outcomes we've been able to achieve, visibility and control, okay? And that's going to allow us to scale. That's going to allow us to have those things so operationalized that we can reliably invest our capital and open new markets with the right providers, with the right workflows and with the right systems without having to reinvent the wheel every time we open a new store. That's where we're going, right? If you could just do the math and say, okay, these guys keep growing 20% a year in 3 years, you're going to be between $7 billion and $8 billion. And I would say with margin expansion closer toward our long-term margin goals. I'm pretty confident with that. In this business, the bigger you get, the stronger you get, the better you get. But we have achieved or we've achieved being relatively small, is really a good proof of concept. So you're going to see more and more of this investment in '26. And we're preparing to really get quite big. Plus, you heard yesterday from the CMS team, they love MA. They just want it to be done right. That's not the same for other sectors. They want program integrity, okay? We've built the entire company off of the vision of the founders of the Medicare Modernization Act, Dr. Mark McClellan, right? We shout out Matt Eyles here. He ran AHIP. He's on our team now. Why? Why do you get these people that are of such character joining this team because it's the mission to change health care for seniors, okay? You all are part of that journey with us. Many of you have believed earlier than others, that's okay. But I'm telling you, all of our shareholders have made money. If we collectively work together for the benefit of your mom and my mom, I mean that like seriously. So their experience in health care are going to be good experiences. I was talking to somebody yesterday and said, well, where's your parents? He goes they are in Miami. So really, how do they like their health care? They go, well, they're in their 70s. So it's okay now. But I'm worried about when they get in their 80s and 90s. Pretty interesting, right? So there's time if we make the steps now. So when that person's parents are in the 80s and 90s, the care delivery will fundamentally change in a way consistent with what CMS wants and what basically CMS has always wanted. That's what we're talking about here. And so my invitation to you is be part of this journey, and we're all going to make money. Everybody is going to make money, including the seniors, richer benefits, better benefits, better care outcomes. That's something that I think is a win-win-win and is aligned for go Alignment Healthcare. Thank you very much. Any -- do we have questions, John?

Yes. Just come over here.

Sit back?

That was great. I think I want to start with California and the 23% growth there, really strong. You've continued to grow -- you target 20% growth, but you're growing above that in your home state. What do you attribute this AEP to driving that north of 20% enrollment growth there?

Well, the first thing I would say is we could have been a lot higher in California, a lot higher. And you've all read about a lot of the dislocation going on with some of the larger players. We were very, very selective about which specific markets we wanted to grow in and not. And that's a function of the provider delivery networks. And we chose not to actually enter into certain contracts that some of our competitors did choose to enter into. And that's okay. Everything that we do is about durability. It's got to be balanced growth and margin expansion, but it has to be durable growth. It doesn't do any good if we kind of grow by x number and you got a 1-year deal and it just -- because there's no durability. It's short-term gratification. So we think in terms of longer term. I think if you look at our market share county by county, there's a lot of opportunity for market share growth before you bump up against any kind of saturation level. And so I'm very comfortable kind of 20% in California. When you get out a little few years after 3 years, you got to start looking at kind of 15% to 20%. But I think that will be far more than made up outside of California.

And I think to that point, you said you could grow a lot more than the number that you put up. You had 80% of the enrollment growth came from switchers. I think we've given previous commentary saying that there's not one payer that these members are coming to you from. Does that end up playing out kind of the way you expected?

Yes. We got growth across the board. Our retention was very, very good. People like us. They like the service delivery. They like the philosophy. They like the nurses that visit their houses and care about them. I mean it's something that our members like. I think it's a better mousetrap. The math of it is something I think is really you need to understand is, again, I alluded to it, California has so many medical groups that want capitation, global capitation, right? And so if you enter into one of those kinds of arrangements, you got to make sure that there's something that differentiates you as the plan relative to the next guy, right? Our model is really designed to allow us to be producing an MLR lower than what the global cap guys are going to be charging the plans, right? So the plan over -- is over here and the global cap is 70%, 85%, that's their cost of health care that they have to include in the bids. If we're doing our model and we're net actual real cost of health care is 80% or 82% or whatever the number is, that arbitrage between what the health plans paying 85% and what our real costs are, that's getting invested into benefits or invested directly into the provider itself. That margin that goes to the middleman, you got to kind of decide, is that something that's value creating in that supply chain, right? And so our thesis all along has been you got to have that core competency of managing the risk because it's the most efficient delivery of care and to be consistent with what CMS wants, which is the best value for the beneficiary.

And kind of thinking more far afield from California, think about ex California, it was really powerful to see the higher PMPM gross profit for ex California. Is that just the IPA dynamic kind of playing out?

It's part of it.

And how do we think about that growth mix shift kind of continuing? You've got some [indiscernible] plans out of non-California.

Yes, I think California is still going to be ultimately the raw number growth engine. I think the proportion will be -- continue to be what you see now, particularly as we add more storefronts, the proportion is going to shift. But like I said, I don't think it's either/or. I think it's going to be both/and. And I think it's one of these situations where the bigger we get, the more scale we get, the more automated we get, the stronger we're going to get. And so to me, this is -- we're just really beginning to see the effect of this in a credible way. That's the opportunity for everybody is get on board now, particularly when we've now seen the final phase in of Version 28 of the Risk Model in '26. Starting in 2027, you're going to get your benchmark rates again and you won't have the takeaway of V28, right? So the whole sector, I think, is going to kind of just start -- there's going to be some more air now in the whole sector. The next question you guys say, well, is there a V29? Well, I don't know. I think there's going to be some thing that the administration does to make sure that they retain program integrity as they should.

And to that point, we had Dr. Oz here yesterday. I think you sat in on that. You sound pretty constructive on the current iteration of CMS. What do you think they're looking for? And how are they engaging with you?

They have called us [indiscernible] and say, you are the insurgent. You are the insurgent. And a lot of other words Chris used, virtuous cycle. Don't throw the baby out with the bathwater. I mean those are things we've talked to them about. And I think what we represent to them, and I would say the sector is hope. Hope it is doable. There is a way that you can make this work in this environment. There is a way to achieve CMS' intended outcomes from the very beginning of the design. It's possible, right? That's what we represent right now. And to the extent we can help catalyze that change, we're not going to get 100% of the market share. But if we can have our fair share of it, we get to 1 million lives, it's a $20 billion company, that's like 1.5% market share. That's the opportunity. That's the TAM. That's what makes this investment opportunity so exciting for us. And we can -- like if we get to 1 million lives, like -- I think people will really start taking us seriously. I mean -- but it's so small. So the opportunity is there. And equally important is it's the right thing to do. I'm telling you, if you think about all of this as to what would you want your mom or dad to experience, you want Alignment.

And thinking about that, getting to 1 million lives, you probably are going to expand to a couple of new states. And it's been something that's been on the radar for a bit that '27 could be the year where you put out some new states or new geographies. How are you thinking about where you want to be? And I know it's hard to get kind of the critical mass early on. It seems like it's more like the growth is going to come through in 2029 from what you do in '27. But how are you thinking about the bigger footprint that you probably have this time next year?

I think -- I feel really good about '26, okay? So we get -- we'll announce earnings sometime in late February. And so you'll see those numbers pretty comfortable with that, pretty comfortable, actually very comfortable with '26. And I think you're going to have then enough proof points. It will be better and better. You have a couple of years of consistent margin expansion. And I think you're going to have more people kind of getting back in MA. It will remain to be seen which ones can actually retool their business models. And I would say more aligned with us, ours or are they going to just revert back to what they've done in the past 10 years. That remains to be seen. I think that -- I think we're going to have good growth also in '27 and '28, again, without the takeaway of V28. I think if there are any kind of kind of programmatic changes to risk adjustment or stars. It's probably going to start affecting payment year '29, right? And so I just -- and I think our company is very, very nimble. The hardest things to do, we've made lots of investments in, which is the data architecture. Data architecture is really very, very good. And we're continuing to upgrade people and processes around that. And I think we're going to be ready for that scale.

And Jim, I want to bring you in here. You reaffirmed guidance for '25. Anything you would want to highlight about trends in the fourth quarter that you think people should know about? And then just kind of a 2-parter here. You said $145 million of adjusted EBITDA will be in the range of preliminary guidance for '26. You're going to hurdle elevated sweeps from '25. You might have some implementation costs for new markets. Like are there any things you want people to keep in mind as they start sharpening the pencil on '26, '27?

Yes. And what I guess I would describe as the arc of our financial performance through the 3 phases of V28, a ton of growth since 2024 and the Inflation Reduction Act of Part D. So think about that performance, breakeven in 2024. We were guiding to the mid- to high 90s for 2025. We feel very good about that right now. That's a mid-2s margin from 0, all the while navigating the second phase. So we feel pretty good about our performance through the first 3 quarters. And obviously, by affirming, we're kind of saying we feel good about how things are going. Trend on the long run has been very stable for us. And this is basically our model navigating all these cross currents, including elevated trend elsewhere. As we go into 2026, the inputs, I won't do puts and takes, but the inputs that will affect it are the third phase of V28, our growth mix of new members, which is quasi investment, if you will, in terms of what we're doing to embed value for the future. I think there's going to be a little bit more opportunity on the SG&A side, but we're not going to give it all into margin. And the reason why, as John stated, we're going to continue to invest in the model, invest in the business, the technology, the people, the process. And we think that is going to benefit us very much in the long term to continue to be able to scale efficiently and put ourselves in a position to continue to manage costs well and expand those margins. So it's a little bit more of a journey after a big inflection point. And obviously, we'll talk a little bit more about the details when we come up with fourth quarter and our guidance for the year.

Great. And then just we're thinking about the advanced notices on the horizon. We're thinking for '26 number for benchmarks was positive, '27, I think there's a thesis that could also be positive. We've got a large number of the bigger payers who are kind of being prioritizing margin over membership. Do you see that changing at some point? Is that time just too far out in the horizon? Or like how do you see the competitive balance in MA progressing?

Well, I think everybody has basically taken their lumps in '24 and '25. I think the retooling has started. I think this notion of getting benchmark rate increases starting in '27 without effectively a 6% to 7% takeaway of phasing in [ B-20 ] is a big deal. It's going to create some breathing room for everybody. I think the -- like I said, I think if people kind of adhere to the old way of doing things kind of just like trying to arbitrage coding or dumping risk on undercapitalized providers or increasing -- it's just not going to work. And I can't tell you, you know better than I do who's going to be able to do what. But I think the sector should be kind of on the upswing, like starting and we'll get the advanced notice in a couple of weeks, right? And the other thing I would say to you all is if you go back to 2011, same thing happened back then, right? It was part of the ACA, if you remember, right? They kind of reduced MA reimbursement 15% and phase it in over 5 years. A lot of you weren't in MA back then, but 2011, right? And once they kind of made that adjustment, that reimbursement adjustment over the subsequent 15 years, it went straight up, right? I think that's the opportunity for you now. Why? Because it's -- the program is bipartisan, the administrations like it. They do. They're going to grow it. You heard that yesterday. They're going to grow it. And so they're not going to -- they want to clean it up, but they want to grow it. And so if you have those tailwinds just at a macro level, it's an opportunity. And I think we're leading that opportunity.

Well, this is great. I appreciate you both coming up and [indiscernible] a great presentation. Thank you so much.

Thank you, John. Thanks, everybody.