Alignment Healthcare, Inc. ($ALHC)

All right. Thanks, everybody. I'm Scott Fidel. I'm the health care services analyst with Goldman Sachs. Really thrilled to have Alignment Healthcare with us today. Up on the podium with me, we've got the CEO and Founder, John Kao. And then we've also got the Chief Financial Officer, Jim Head. And then in the audience, I see over there, Head of Investor Relations, Harrison as well. So guys, first, welcome to the conference. It's great to have you here. It feels like there's nothing to talk about, right, with Alignment these days. So I've just really been looking forward to this fireside chat. It feels like coming out of the first quarter, a number of different topics that came up on the first quarter. And certainly, I appreciate the transparency of you guys giving us some visibility under the hood. Some of those may not have been particularly material in terms of dollars, but are still important to -- for us to understand about the business. So I think in terms of where I want to start with is just around the model, and we'll sort of work our way through it. The model as it relates to the sort of built in California, very successful, continuing to grow in California and then expanding out into other markets as well that may have different sort of local systems to them.

Let's just sort of start with the core of when we think about that internal sort of key value drivers of the company and it relates to things like medical management and sort of what you control inside, versus what you may subcontract or delegate outside. Why don't we talk about that to start with in terms of like how was the core model developed around that, John? And then as you've started to more expand into other states, have there been adjustments that have been made to that to sort of accommodate sort of expansion and entry and growth?

Yes. I mean, everything is predicated on using a lot of data, and it's specifically lab data, pharmacy data, encounter data, authorization data, admission discharge transfer data to help us identify who is the cohort in that 10% of the population we think are polychronic, high risk. And then we engage that population. And we do that with interdisciplinary care teams of providers that are employed by the company. We think that core competency about medical management is what differentiates us from everybody else. I would say that is very replicable in the new markets. And in fact, that's what's given us the confidence to grow 100% last year, 80% this year ex California growth. And our ability to engage with individual practitioners as opposed to working through IPAs, which is really much the norm in California, has allowed us to do really good things with respect to Stars and medical management. And so I'm very comfortable with all the work we've done there. I think the way to look at it is what we did in California was very much paying off in terms of the cohort maturation that you're seeing. And in California, we still have, I think, Jim, it's 60% or so of members that are in a year 1 or year 2 cohort. And ex California, you have like 90% of our members are in a year 1 or year 2 cohort. And so, as the model takes hold, you're going to start seeing just kind of overall MLR improvements. And I think, we think of things as -- in a portfolio context, and we're very comfortable with what's going on in California, comfortable with what's going on ex California. As you have more maturation, that embedded earnings value in the ex-California businesses are going to start paying off.

Okay. And maybe we'll sort of unpack a few of those pieces. And maybe just start with like the growth strategy, which we're already sort of talking to some degree. There are -- it feels like there's a few different layers to that right now. You've got the new market expansions. And you alluded to there may or may not be or may be some coming for next year. I want to maybe sort of touch on that. But before we do, just sort of lay out some of the different pieces for you. And then from the product side, you've also now been -- it feels like sort of expanding out from some of the more traditional HMO products that you had in California and sort of broadening out those -- basically the types of members that you're looking to acquire in terms of -- you've been talking more about sort of the higher acuity side that would relate to sort of SNPs sort of across the board, it feels like on the SNPs side. And then also, there's been some more PPO growth I've noticed as well. Maybe we could start with that last piece, John, because that's probably something that was a little bit more, sort of, unexpected in terms of seeing some of that growth on the PPO side.

Yes. I would say that on the PPO side, a lot of that growth was actually in globally capitated networks, okay? And we did that in concert I do not expect that to be a meaningful -- just generally speaking, I think that to the extent that we have it in the future, and I won't get into the bid strategy, but suffice it to say, I think the premiums will be accordingly -- priced accordingly. Yes. So I mean, I think -- so that's on the last one, the PPO. On your first question, I would say it's not either or it's both and in terms of thinking about a portfolio inside California. I think there's still opportunity for us to take share inside of California. We were I think relatively reserved last year actually for 2026. We shared that with people. We could have grown a lot more, but we were very mindful of both growing and improving margins. I would suspect that a lot of the folks that grew really a lot last year are going to experience some degree of indigestion this year. I think that's going to be opportunistic for us. And then the and part is the ex California, last year, we grew 10% ex California, this year for 2026, we were growing 80%. And what's driving that is, again, our confidence in your first question, which is the care model is actually performing really well. With respect to the second question, which was the C-SNP growth, I would characterize that as very opportunistic market-by-market business plans, we just saw an opportunity for us to take share in that market. We happen to do very, very well with that cohort. And we also think that we have enough, call it, kind of the realization of the embedded earnings strength gives us the flexibility to be able to -- kind of early year higher MLRs associated with those C-SNP members. We think we're factoring all of these into our -- Jim and the team on the portfolio strategy. So I think we feel very good about that as well. The thing that you kind of -- it's important to look at is of the consolidated MLR -- think in terms of what percentage of your -- whatever it is 87.7% or something like that for the year. What percentage of that is associated with supplemental benefits. We think that's about 5%-ish. So if you take that off the 87.7%, you're kind of at 82.7%. And then from that number, that's your like your medical MLR per se. Then you say, well, what percentage of that is newer members. And we just said, like 90% in year 1 or year 2 cohort ex California, we're still about 60% in California, our year 1, year 2 members. As that matures, you start looking at 2.7, you say, well, what percentage of that is your loyal and what's your MLR for your loyal, which are people that have been with us longer than 2 years. It's really pretty good. I mean, so that's what gives us confidence that the model can be repeatable. And so we've been spending a lot of time internally on getting all the other operational workflows, technologies, investments in [indiscernible] all of that to further accelerate margin expansion in the future, both on the MLR side and the operating leverage side.

Great. There was a lot of good stuff in that. Just to put a ball on the PPO, and it's a small matter of membership. So I'm not trying to slightly again. It was a little bit of an outlier. In the global global cap structure that you have -- and I know you said that you'd be looking to reset premiums there. How -- I guess, how tightly can you manage the cost on that this year? Is that something that -- or any sort of like observations? Is that something that's running a little bit hot or?

Well, I personally think PPO in general, just on a sector basis, not just based on Alignment, but it can work if you get the risk adjustment. And with the B-28, I don't think it tightened up all the risk adjustment. And I don't think it's a surprise that a lot of players have really narrowed their growth expectations around PPO. I don't think we're going to be an exception to that. I think it's -- I think the premiums have to just be priced accordingly. You can still have it as a product strategy. But I don't think we're going to bank on it for our growth.

Yes. Yes. I mean I'm sure you've seen with our work. That's been a big focus as well. So why don't we sort of bring that up to some of the modeling questions as it relates to the MLR for this year? And if we can talk about mix, why don't we sort of aggregate that together. And one of the questions I get asked a lot about the one that I'm thinking about all the time as well, is just around with that mix shift, first of all, I guess the right question was, was that fully contemplated around the mix of the growth? And then obviously, the output of that would be that as we model, is that been aligned with how you've guided for MLR and then how that -- any -- how the seasonality may shift year-over-year because of the shift in the mix?

Okay. Well, let's just start with, was that contemplated roughly 50% of the growth being in '26 being in higher acuity members, the answer is absolutely yes. Going back to John's point, we remain very disciplined, but we saw an opportunity to emphasize growth in those areas. We think it's a really good proposition over the long run, but the market was there for us. That doesn't mean it structurally, we're going forward that every year because we're going to see how that plays out. So that's number one. And when we started the quarter, we talked about that being part of our guide, right? So this was all contemplated. The 80,000 was going to be a little bit higher, ticked up a little bit higher, all things being equal because of that mix of shift. And so when we went through Q1, we saw that we performed within the range that we thought was going to happen in Q1. And as we come into Q2, we continue to see our kind of our medical indicators performing very, very well. We're 2 months into the quarter, as you know. And so we're just feeling very good about how we're managing...

2 months into 2Q.

Yes, we're feeling very good about how we're managing that. And John, if you got anything?

Yes, we feel very, very confident and comfortable with our Q2 guidance. Very comfortable with it. Lots of good visibility. A lot of work, as we've shared in terms of our kind of investments in scaling the business around every single area of the company. And we're actually very, very proud of the team for being able to kind of grow as much as we have hit our numbers like we did in Q1. Again, we're very comfortable with Q2, while also making these operational improvements. It's not an easy thing to do. The team has done a very good job.

I'm going to just sort of repeat for the stock because it hasn't been listening that John just said comfortable and confident with the 2Q 2 months into the quarter. I think that's the important thing for the stock here because it hasn't seem to be hearing that sort of that theme recently. So thank you for that update. Certainly allows me to ask questions sort of that I was in as [indiscernible] a little bit differently. So okay. So I think we've hit the mix sort of point pretty well. Let's talk about just utilization since you guys sort of -- you guys sort of let us there. And just again, just for some of the -- maybe a little bit of coloring for you guys in terms of how I'm thinking about it. Certainly feels like for the end market that things are finally in a better spot than we've been in some time in terms of of industry trend. First quarter, a lot of debate around just how much of the seasonal feels like into 2Q, that argument receives and most of what we've seen through all of our sort of very robust check star seems pretty benign for the industry, you have to look at the stocks, and that would tell you that as well. So why don't we just -- I'll just sort of ask you sort of straightforward about utilization. And then we love to that unpack inpatient as well. So why don't we just sort of overall inpatient and then we'll fund overall and then we'll final [indiscernible]

And I would say that your description of benign utilization environment is I think is accurate. We're a little bit different because we have a much more active care model, right? And so we're a little bit more upfront in terms of managing our costs and utilization in the first instance. So that's one of the reasons why you didn't see our utilization blip last year when others were saying it was different, okay? So as we go into this year, things are tracking very nicely. And maybe what we can do is walk down the cost side and think about the -- so 80,000, as we said, just now, 800 admissions per thousand in the hospitals is tracking in line with our expectations, okay? That's with the mix and everything else through today. That feels good. The other cost categories we talked about in the first quarter, we're tracking nicely as well. So other medical expenses, including Part D, supplementals and other health care costs are actually tracking very nicely. We talked about in Q1, we feel good about where we're at on that. So broadly speaking, it's in line with our expectations and stable. Now that is benign. And so that's how we feel about it today. My work is done?

So that's clearly very helpful. And then in terms of the -- let's just sort of talk about the stat data that sort of has come out and I get a little bit frustrated because Harrison, you could probably batch for like that was our sort of product, right? We have rolled out and a while back in. But we're trying to be, I think, also responsible around it in terms of having I spent plenty of time with you guys talking about it, just some of the variability, some of the noise right is in that data month-to-month, and we still publish it, but we publish it on a quarterly basis for that reason. That's why when there was all that sort of big volatility in the stock the other day, and we were not on it because we're sticking with that. And I think it's really sort of important maybe to spend a minute. Maybe you could sort of explain to the market around that why month-to-month that noise can occur? And then once you get to the quarter, it sort of settles out into more of a...

Well, there's 2 dimensions to this. There's a quarterly versus the monthly. And then there's statutory filings at a regulated sub versus consolidated GAAP filings across the business. And so on the latter, I would just say -- you have to be mindful that, that is not an accurate -- completely accurate snapshot of what's going on in the business on a quarterly basis because it's got -- it's statutory accounting at a regulated sub. It doesn't include the whole picture, okay? So as it pertains to month-to-month, you're totally right, which is, in any given month, there's accruals, there's allocations and there's also reconciliations with CMS, payments, things like that. So any given month can be a little bit different. By the end of the quarter, it usually smooths out a little bit. So I would just say, quarterly is better. But statutory filings are a signal, but it's not a true signal.

And we'll continue to stay with that. Our approach. So I look forward to [indiscernible] second quarter.

Well, -- and in particular, in Q2, what the April stats don't capture are the sweeps. I mean that's -- for those of you who don't understand it, that's a big deal that it typically comes in, in May, June. And so that's how we talk about it at the end of the quarter. So it's -- I think that is something that, again, we just feel -- we feel very, very comfortable with where we are in Q2.

Yes. I remember when we were building that product initially and your predecessor Thomas was at the size of that quote about the sweeps. I guess given where we are at this point in June, do you have visibility into the sweep style or...

We do. In May, we get the new final and the midyears come in June. But there's nothing to report right now. We'll do it at the quarter. But it is a known timing of those suites that happen every year. I would just step back and say this is normal course of business, okay? This is a normal part of our business. It is reimbursement that we deserve. And I think the only notable difference with us is -- or at least the way we account for it is on the final suite from 2025 for our new members, we are booking to what we get paid from CMS until we see the final suite, okay? And in Q2, you'll -- we'll have that incorporated into our numbers. But we don't want to guess and put ourselves in a position because it's an unknown factor. It's what -- how the newbies get accrued for RAF by CMS is not known until May.

Okay. All right. Great. Let's -- maybe let's just sort of tunnel a little bit further into -- and because again, part of the model, I think an important thing that I wanted to talk to you guys about was around some of the delegation dynamics that you brought up on the first quarter and -- and maybe just sort of to bring us in and give us some visibility into -- let's just sort of start at the top in terms of how in your model, how you sort of integrate or how you integrate delegates have very [indiscernible] So where does allegation play into that in your model? How does that sort of decision get prompted? And is there a difference in California versus outside of California and how do you think about that?

No, without doubt. I mean I think when people talk about California being different, it really is the kind of the saturation of the marketplace with medical groups and IPAs, independent physician associations, that either take some form of global cap or value-based capitation on a global basis or some form of a shared risk basis. And typically, the shared risk is comprised of professional capitation. So for specialty and primary care, and then some really aligned metric around working together between the plan and the IPA and the medical group to align around institutional costs. Okay? And so as part and parcel with that historical capitation, there's a delegation that I think is unique in California, where the plans have delegated certain functions that typically outside of California reside exclusively with the plan, most notably claims payment and utilization management. Right? And so in California, a lot of those administrative functions have been delegated to the IPAs. What we did and what we shared with you for the last -- really the last year or so is start to de-delegate certain UM functions related to inpatient authorizations. We've taken over that function. And we have the tools and the technology and AVA to allow us to do that in a way that is actually appreciated from the IPAs now. And it's just more accurate. And what that allows is better overall plant performance where we can actually benefit from -- fully benefit from the care anywhere -- care models fully benefit from the AVA technology, the stratification I just talked about. And if somebody is admitted into hospital on an inpatient basis, they get admitted on an inpatient basis. They get admitted on an observation basis. It's just accurate. And so that has yielded win-win benefits for pretty much everybody, the member, the plan and as well as the IPA. So everybody is kind of aligned in that regard. And that manifests itself in the shared risk gain share payments to the IPAs. Those dollars have gone up. So everybody is like more aligned, deepens the relationship and allows us to work together even closer around other opportunities for de-delegation, where they're actually leveraging our technology. So it's something that we did, I'd say, about 1.5 years ago with 1 IPA. And then we've gotten through about 70% of the shared risk IPAs last year and into this year. And I think there's still opportunity for us for the rest of this year for the remaining 30%. And again, those are the factors that give us confidence for not only the quarter but also for the year. That helps. And I think I think you see some trends. I was talking to some of the other planned CEOs, and they really admire what we did. And so they're starting to think about some of that, some of the capabilities.

Okay. And just one follow-up just on that sort of related California or not California, but the related cost that you had signaled in the first quarter. I just want to confirm, is that still the number? Because one thing I was just thinking about was timing, Were there any like prior period [indiscernible]

It's all the that came in on -- all the we said it was stable when we dealt with it in February, and it continued to be stable. That's just a non-issue.

It was a 1-month blip that we've already operationalized every month since it's been tracking exactly where we want it.

Exactly.

Right. I've got 2 topics I definitely want to still hit on, but I do want to pause just to see if there's anybody as any questions in the audience. Okay. Great. So I have a lot more questions, only 4 minutes. So let's talk about new markets and maybe certainly feel free to share whenever you're sort of comfortable sharing on that. But the way I'll frame the question is, as you've now had more sort of experience, right, and more markets so far, talk about how like how those -- like one of those lessons, and this is going to be a 30-minute question itself, right? So I'm trying to think about let's -- maybe we'll spend a minute on it. But what are the key lessons that you've learned that are guiding how you may have advanced the criteria that you're using for new market selection at this point? And clearly, that's weighted towards geography within that would be inside of that geography is clearly product as well.

Yes. No, it's -- I'll call it demographic filters. The first phase, just broad demographic filters, number of seniors, number of seniors in a MA plan is important to us. Most of our -- I think 80-something percent of our members are switchers. So members that have made the transition from fee-for-service original Medicare to MA and then they find our products to be a better experience, a better mouse trap. We get those. So those are important market share kind of 40%, 50%, 60% market share that our MA are important markets. The provider composition hospitals have been reaching out to us in a very constructive way. They like what we do, they like the fact that a lot of these main brand health systems are overcapacity. So they're about 120% of their beds and because...

That's usually a key nexus, right? You are going sort of start with that and anchor...

Yes, because if they're overcapacity, that means they don't want to fill heads and beds. And in fact, they'd rather put heads and beds of commercial members, which again pay at 150% or 200% of Medicare, not just getting paid Medicare. And so they want market share. They like our product mix. They like the fact that we're integrating a lot of our clinical programs, a lot of their facilities and their [indiscernible] programs. And to the extent that we can move market share into their system without necessarily filling heads and acute beds, that's a strategic advantage for a lot of these hospitals, and they like working with us in that regard. Our prior auth rates in terms of denial rates are less than 2%. We just -- that's just not our program. That's not the game we play. We play about actually providing more care. It's just pinpointed to those seniors that need the care. That's in that 10% polychronic cohort. So all those things are things that we think about. And that's at the market level. The other part is what are we ready to deploy as a -- that I would care a franchise. What is the franchise playbook of how we deploy clinical resources, call capabilities, claims capabilities, UM capabilities, finance, HR, all these different competencies where we are ready to franchise this in a highly reliable way. More efficient way where at the end of the day, you're going to get faster growth, better stars, better ADK, more reliably to mitigate risk of the new market. That's why in '27, we said that we're going to be entering a couple of new markets in existing states, but they're big markets. And I think you'll see more of that in '28. And so it's both the filtering of what's -- where you're going to go, but also how ready are we to kind of get all the core operations, the technologies to support that in a in -- again, I'll just call it a franchise way. It's very reliable. We're getting really close to that.

Well, a lot of detail on that. And I know we're out of time, but around that last comment, John. So should our -- I guess, seems clear, but should we be anticipating a it's more likely that there won't be new states that will be more in-state expansions or are new to the table as well.

For '27 or '28?

For '27 and '28.

Yes. I would say they're definitely both on the table. But I would tend to be more conservative for '27. But I think I think we're really well positioned in those new markets. And overall, it's just the growth is going to come from both California and the ex California markets. And then once you get the ex California markets to start maturing, those embedded earnings are going to start paying off for everybody.

Great. Great. Well, I think that was a very productive conversation. And again, thanks so much for being here with you at the conference. It's great to see you guys, and hopefully, the rest of the day is productive for you as well.

Thank you, Scott. Thanks, everybody.