Astrana Health, Inc. (ASTH) Earnings Call Transcript & Summary

Hello, everyone, and welcome to Astrana Health's Second Quarter 2026 Earnings Call. [Operator Instructions] Today's speakers will be Brandon Sim, President and Chief Executive Officer of Astrana Health; and Chan Basho, Chief Operating and Financial Officer. The press release announcing Astrana Health's results for the second quarter ended June 30, 2026, is available in the Investor Relations section of the company's website at www.astranahealth.com. The company will discuss certain non-GAAP measures during this call. Reconciliations to the most comparable GAAP measures are included in the press release. To provide some additional background on the results, the company has made a supplemental deck available on its website. A replay of this broadcast will be available at Astrana Health's website after the conclusion of this call. Before we get started, I would like to remind everyone that this conference call and any accompanying information discussed herein contains certain forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terms such as anticipate, believe, expect, future, plan, outlook and will and conclude, among other things. Statements regarding the company's guidance, continued growth, acquisition strategy, ability to deliver sustainable long-term value, ability to respond to the changing environment, liquidity, operational focus, strategic growth plans and acquisition integration efforts. Although the company believes that expectations reflected in these forward-looking statements are reasonable as of today, those statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. There could be no assurance that these expectations will prove to be correct. Information about risks associated with investing in Astrana Health is included in the filings with the Securities and Exchange Commission, which we encourage you to review before making any investment decisions. The company does not assume any obligation to update any forward-looking statements as a result of new information, future events, change in market conditions or otherwise, except as required by law. Regarding to the disclaimer language, if you would like to refer to Slide 2 of the conference call presentation for further information. With that, I will turn the call over to Astrana Health's President and Chief Executive Officer, Brandon Sim. Please go ahead, Brandon.

Good afternoon, and thank you for joining us for Astrana Health's Second Quarter 2026 Earnings Call. Today, I'll begin with an overview of our financial results, then discuss how our Care Model and AI-native operating system for health care are accelerating our ability to deliver high-quality patient-centered care at scale. I'll then provide an update on the Prospect integration, following our first full-year together. Finally, I'll discuss our strategic positioning in each line of business and provide color on our guidance before turning the call over to Chan. Astrana delivered another strong quarter, reflecting continued momentum across the business. We saw accelerating demand from payer and provider partners, continued maturation of our value-based care cohorts, disciplined medical cost trend management and expanding operating leverage driven by our proprietary technology platform. In the second quarter, we generated revenue of $973 million, up 49% year-over-year and adjusted EBITDA of $69 million, up 43% year-over-year. Adjusted diluted earnings per share reached a record high $0.80, up 45% year-over-year. Our business continues to generate substantial cash. Free cash flow totaled $93 million in the first half of the year, representing approximately 69% conversion of adjusted EBITDA into free cash flow. That cash generation, combined with continued earnings growth, has enabled us to continue deleveraging ahead of schedule. Net leverage declined to 2.26x on a trailing 12-month basis. As a reminder, when we first announced the Prospect transaction, we committed to reducing net leverage below 2.5x within 24 months. We have already surpassed that goal by approximately a quarter turn in half the time. These results continue to demonstrate the scalability of our AI-native health care operating system and the consistency of its execution. There is an important distinction between simply adopting AI and actually creating value from AI. We believe that durable competitive advantage comes from owning the orchestration layer, where data, workflows, clinical decision-making, operational processes and financial accountability are integrated into a single operating system across the enterprise. That unified operating system gives our AI agents a shared context across the enterprise, allowing them to work seamlessly across clinical, operational and administrative functions rather than being confined to isolated point solutions. The result is intelligent automation that spans the organization, becomes more capable over time and creates more value as the platform scales. Building that operating system has required years of health care expertise, proprietary data, workflow development and organizational learning. creating a set of capabilities that we believe are difficult to replicate. Just as importantly, we've paired that operating system with a delegated payer-agnostic business model that captures the economic value that those better decisions create. That foundation is reflected in our execution across our 4 long-standing strategic priorities. First, we continue to grow responsibly. Our growth has never been constrained by demand. It's constrained by the economics of each new cohort that we onboard. Every new cohort requires upfront investment before reaching at scale profitability, and our objective is to maximize long-term value by balancing growth with profitability. That equation is changing. As our AI-native health care operating system continues to improve, every new cohort we onboard generates stronger risk-adjusted returns. New cohorts become more predictable, require less upfront investment and reach profitability more quickly. That allows us to responsibly move further along the growth profitability frontier, capturing more of the demand available to us without compromising our underwriting standards or long-term return thresholds. Because the business has outperformed expectations and generated strong free cash flow in the first half of the year, we've been able to move further along that frontier, accelerating growth by onboarding additional high-return opportunities while simultaneously exceeding our profitability expectations and raising our guidance for the year. On the payer side, we signed new Medicare Advantage agreements in Hawaii and Texas, expanded existing relationships in California and saw strong demand across the platform. On the provider side, both our Care Partners and Care Enablement pipelines continued to strengthen, including planned new physician partnerships in the South and on the East Coast that we expect to begin contributing to revenue in 2027. We also continue to execute on disciplined strategic tuck-in acquisitions within our expansion markets, further strengthening our Care Delivery capabilities. We expect these investments to progress along the same maturation curve and become meaningful contributors to earnings over time. Second, we continue to progress prudently into full-risk arrangements. In value-based care, success isn't about avoiding risk entirely, it's about reducing the uncertainty associated with that risk. Our platform continuously strengthens our ability to predict and influence the drivers of performance, fundamentally improving the risk-adjusted economics of value-based care. Our competitive advantage isn't a greater willingness to assume risk. It's a greater ability to reduce uncertainty through better clinical and operational execution. As a result, we're able to responsibly pursue full-risk opportunities that others may view as too uncertain while maintaining the same disciplined underwriting standards. The full-risk contracts that commenced in Q1 continue to perform in line with our underwriting expectations as those cohorts mature. At quarter end, approximately 81% of capitation revenue and 42% of our membership came from full-risk arrangements. Our expansion markets continue to validate the portability of our operating model. In Texas, our delegated full-risk partnership with a large national payer is now 2 full quarters into operation and continues to perform in line with our expectations. Based on that performance, we continue to expand our presence in the market, including adding approximately 3,000 new Medicare Advantage professional risk lives with a payer that selected Astrana as its risk partner. Third, we continue to manage medical cost trend through better care. Historically, risk stratification determined which patients received scarce clinical resources. Today, it increasingly determines how every patient receives care. Higher-risk patients continue to receive physician and nurse-led interventions, while lower-risk patients receive AI-enabled navigation, outreach and longitudinal monitoring. AI does not replace clinicians. It extends their reach across a much larger portion of the population without compromising quality. On a year-to-date basis, overall medical cost trend remains slightly better than our full-year assumption of approximately 5.2%. Medicare Advantage and original Medicare continue to perform favorably relative to our expectations. Medicaid cost trend is tracking in line with our expectations. And although commercial has run slightly above expectations in the quarter, we are confident in our ability to manage those trends through the clinical and operational levers enabled by our delegated model. For the 2024 performance year, our flagship MSSP ACO ranked seventh out of 476 ACOs nationwide in net shared savings per beneficiary, while our flagship ACO REACH entity ranked in the top 15% nationally in net shared savings. Fourth, we continue to expand operating leverage as we scale. Across the business, our AI agents are creating capacity, improving productivity and enabling our teams to focus on higher-value clinical and operational work. For example, in claims operations and referral management, AI-powered workflows have reduced handling time by more than 50%, creating operational capacity equivalent to approximately 60 full-time employees over the past 12 months. As a result, G&A as a percentage of revenue improved approximately 210 basis points year-over-year in the second quarter, and we continue to expect to exit the year with G&A at approximately 6% of revenue. Taken together, these 4 pillars demonstrate how Astrana's operating system for health care translates into measurable economic value. And we believe that's what fundamentally differentiates Astrana. Now, turning to Prospect. July 1 marks the 1-year anniversary of closing the Prospect acquisition. Over the past year, we systematically integrated Prospect onto the Astrana operating system, bringing clinical operations under a unified care model, embedding the workflows and technology that have driven our historical performance across the enterprise and establishing a unified operating and financial framework across the business. The results continue to validate that approach. Gross provider retention has remained above 99%. We continue to expect operating expense synergies at the high end of our annual target of $12 million to $15 million and medical cost trend within the legacy Prospect business continues to run slightly ahead of our expectations. More importantly, we've established the operational and clinical foundation that we believe will continue to drive improvement over the years ahead. Now, turning to the positioning of our portfolio. We continue to actively position our business for long-term value creation while remaining disciplined in our planning assumptions. We exited the quarter with approximately 1.5 million members in value-based arrangements, with year-over-year membership changes driven primarily by Medicaid-related attrition that was already contemplated in our guidance. Medicare Advantage membership remained stable during the quarter. In the exchange product, we continue to expect full-year attrition consistent with both our guidance and our internal planning assumptions. And in Medicaid, we continue to see attrition tracking towards the high end of our expectations, while adverse selection continues to be in line with expectations as we shared last quarter. While these dynamics remain fluid across the industry, we remain comfortable with the assumptions embedded in our outlook and continue to plan conservatively. At the same time, we are continuing to improve the quality and alignment of our portfolio. In California, we're rebalancing portions of our Medi-Cal business by transitioning members from professional risk arrangements into full-risk arrangements in response to changes in the state's Medicaid program. We expect these transitions with several of our health plan partners to occur over the next 12 months and view them as a natural progression of the strategy we've discussed over the past several years. Before I turn the call over to Chan, I'd like to provide a bit of color around our raised adjusted EBITDA guidance for 2026. Our underlying performance continues to run ahead of plan. Rather than allowing all of today's outperformance to flow through to earnings, we've deliberately chosen to reinvest a substantial portion of that into the provider and payer growth opportunities that I mentioned earlier. In aggregate, these investments are in the mid- to high single-digit millions of dollars this year. As I discussed earlier, our operating system continues to improve the economics of growth, giving us the confidence to capture more of the demand available to us even while maintaining the same disciplined investment standards. We believe that allocating some of our outperformance towards these growth opportunities is among the highest return capital allocation decisions available to us and will continue to compound our earnings power over time. With that, I'll turn the call over to Chan.

Thank you, Brandon, and good afternoon, everyone. Our second quarter results reflect disciplined execution across the platform. Adjusted EBITDA finished towards the higher end of our guidance range and free cash flow generation remained strong. Also, we made meaningful progress on the balance sheet, retiring $92 million of debt during the quarter. Today, I will cover 3 areas: our second quarter financial performance, including medical cost trends, the balance sheet and free cash flow and our updated outlook for the year. Total revenue for the second quarter was $973 million, up 49% versus the prior year period, driven by organic growth in our Care Partners segment, the Prospect acquisition and continued ramp-up of our full-risk contracts. Second quarter revenue was impacted by a one-time $15 million reduction related to CMS' implementation of the adjustments for significant anomalous and highly suspect billing activity for the ACO REACH 2025 performance year. Despite this, we are reaffirming our full-year revenue guidance of $3.8 billion to $4.1 billion. Adjusted EBITDA for the quarter was $69 million, up 43% versus the prior year period and near the high end of our guidance range of $65 million to $70 million. This reflects controlled trend, solid performance across our full-risk arrangements, continued realization of Prospect synergies and disciplined cost management. Net income attributable to Astrana was $20 million. Adjusted EPS was a record $0.80 per share, up 45% versus the prior year period. Turning to G&A. We expect to be approximately 6% of revenue for the full year. Free cash flow for the first 6 months was $93 million, an increase of $29 million from Q1 2026. We remain on track to deliver full-year free cash flow within our guidance range of $105 million to $132.5 million. On the balance sheet, deleveraging moved from commitment to execution this quarter. We used our strong cash generation and position to retire $92 million of debt, bringing pro forma gross leverage down to 3.8x from 4.2x at the end of the first quarter. We ended the quarter with $401 million in cash, $579 million of net debt and pro forma net leverage of 2.26x on a trailing 12-month basis. As Brandon discussed, we're raising our full-year 2026 adjusted EBITDA guidance to $255 million to $280 million. The increase reflects broad-based outperformance across the business, including the continued maturation of our full-risk cohorts, continued realization of Prospect synergies and operating leverage from our AI-native operating system. We are raising guidance even while continuing to reinvest a substantial portion of our outperformance into attractive long-term growth opportunities. These investments include growth in our core and expansion markets, newly onboarded payer contracts, planned provider partnerships, disciplined strategic tuck-in acquisitions and recently converted risk cohorts that remain early in their maturation curves. We continue to believe these investments will generate attractive long-term returns while further strengthening our earnings power over time. On revenue, despite the one-time 2025 ACO REACH billing-related adjustment, the continued ramp-up of our full-risk contracts keeps us comfortably within our previously communicated range. Accordingly, we are reaffirming our full-year revenue guidance of $3.8 billion to $4.1 billion, as well as our free cash flow guidance of $105 million to $132.5 million. Our outlook continues to assume 0 contribution from HQAF and conservative Medicaid membership trends. We expect greater clarity on both items as the year progresses. For the third quarter of 2026, we expect revenue between $1 billion and $1.03 billion and adjusted EBITDA between $72.5 million and $77.5 million. Taken together, our first half performance, including record profitability and earnings growth, strong free cash flow generation and continued operating momentum gives us confidence in our updated outlook. We enter the second half of the year with momentum, a strong balance sheet and confidence in the long-term trajectory of our business. With that, operator, we're happy to take questions from the audience.

Our first question is from Ryan Daniels with William Blair.

This is Matthew Mardula on for Ryan. So, with you talking about outperforming the full-year trend assumption of about 5%, what cost trends are you currently at? And then with commercial above trend, what is impacting that segment? And is it the Exchange segment? And then lastly, did any segment cost trends needed to be revised versus your expectations?

Matthew, thank you for joining the call. So, I think there are a few questions. First, on trend. Year-to-date, overall trend is tracking slightly better than our guided 5.2% assumption blended across the business. By line of business, Medicare Advantage and original Medicare are slightly favorable to our overall trend. Our ACO populations and original Medicare are performing well. Medicaid is in line with that trend number, and that was inclusive of potential adverse selection effects in our guidance. And commercial, as I mentioned earlier, was slightly above. On commercial, we feel comfortable with our ability to inflect that throughout the year. And it's only slightly higher than what we had anticipated. So, we are not anticipating changing our guidance at this time.

Great. And then with the new members added in Texas, Hawaii as well as in California for Medicare Advantage and with you talking about continuing to expand membership, as we think about expansion, is MA the area that looks most favorable to you? And as we think about into the second half and into 2027, should we be expecting MA membership to continue to grow? And do you believe this could maybe offset that decrease in Medicaid membership?

Our model is based on being payer-agnostic. However, given some of the changes in Medicaid that are to come, naturally, there is a higher percentage of revenue that will be coming from Medicare, both Medicare Advantage as well as original Medicare going forward.

Our next question is from Jack Slevin with Jefferies.

Congrats on a solid quarter. Apologies if you tread over this a little bit, but I guess I wanted to just touch on MA a little and really 2 things, I guess. I know it's a little early without landscape files or other things, but maybe what you're hearing or seeing from payers given we are past bid deadlines or any chatter that might be in the marketplace on sort of where those things are aligning? And then secondly, as you look at that trend and opportunities to moderate there, any pockets you can call out or areas you might see that could be potential drivers of upside in MA as we progress through the year and into the out years?

Thanks for the question. I mean, first of all, on the plan, none of that is public yet. We do work closely with the plans, especially in those provider-specific plans that we develop in partnership with our plan partners to find the right benefits for the populations that we're serving and ensure that they are -- that the benefits are driving better care coordination and better access to care for those members. I think it's a bit early to comment on the exact bids, but I do think that we feel confident that our success in Medicare Advantage will continue into 2027. Of course, in California, which is our core market and a very competitive market for MA, they're always going to be, as we've seen in past years, folks who want to grow their plans dramatically. But this has been a recurring theme, and we've managed through that and we understand how to do that and kind of spread our membership across our portfolio of health plan partners as we feel confident kind of going to '27, especially with where the final rate notice was. In terms of potential opportunity, there are always opportunities to continue moderating medical cost trend. However, we're already seeing that outperforming our overall expectations and we feel confident that we can continue doing that going forward. For example, inpatient admits per 1,000 in our Medicare business were very well controlled and relatively flat year-over-year here in the first half of the year. That being said, there's always opportunity to more appropriately code our members. As we have mentioned before, our risk scores are approximately 1.0, which we believe is lower than the average for Medicare Advantage. So, that's something that in the medium term, we will be looking to capture and diagnose and code more or chart more accurately.

Got it. Okay. Really helpful. And then just as a follow-up. The G&A commentary continues to be, I think, pretty optimistic and delivering on some of the upside there. I guess what I'm trying to parse out related to some of the synergies in Prospect and then just ongoing efforts you have to make the business more efficient, more automated, more AI forward. If I try to balance those 2 things, can you just speak a little bit to sort of -- are those 2 things tracking nicely together? Is there room to go on Prospect within some of the core initiatives you're putting out across the business that are separate from the synergies? Would love to just hear sort of on those 2 tracks, how to think about the G&A improvements and how that casts forward?

Right. Consistent with what we've been saying in the last couple of quarters, we have been measurably improving our G&A or decreasing G&A spend as a percentage of revenue. This quarter, for example, was over 2% lower than the same quarter last year, coming in at or underneath the 6% mark, and we expect to exit the year at the 6% range. Going forward, we continue to expect to see declines in G&A as a percentage of premiums under management as a result of both increased capture of synergies, which are at the top end of the $12 million to $15 million range that we previously guided as well as core operational changes in the legacy Astrana business. So it really is a mix of both. I don't have a breakdown of exactly what percent is coming from each, but it's going to be continued improvements across the board in both capturing synergies as well as improvements in the core platform.

Our next question is from Michael Ha with Baird.

On the rebalancing of Medi-Cal lives from professional full risk, I was wondering if you could elaborate more on this, what's driving it? Is this related to the increased payer appetite you mentioned in your remarks? Is there increased appetite from these Medicaid plans in California who are facing elevated margin pressures? I mean, how many lives are you expecting to convert over the next 12 months? And how should we think about the expected earnings impact?

Michael, thanks for the question. I think there are a couple of dynamics at play in Medicaid, especially in California for the Medi-Cal program. One part of it is that a lot of our Care Model is predicated on saving dollars across both outpatient and inpatient utilization. And so in areas or contracts in which there is no path to a full-risk arrangement or in areas where we can push towards a full-risk arrangement, we believe that allows us to better align our performance with the financial outcomes that we receive from those contracts, especially in the time of compressing margin and disenrollments in California, both now and potentially in 2027 and beyond after OBBBA comes online. We're making a further push to emphasize that we would want to be fully accountable for the results that our model is driving across all lines of business, but certainly, especially in the Medi-Cal business, which we called out in the prepared remarks. We also believe that these transitions are generally amenable for our plan partners, and we expect in the order of tens of thousands of members conservatively moving into these arrangements over the next, call it, 12 months, as I mentioned in the prepared remarks. We aren't currently sizing the economics necessarily tied to that. I think what's important is that we want to be aligned with our health plan partners. We want to deliver and be rewarded for the outcomes that we're driving. And we believe that moving to full-risk arrangements, which we have already started, as I mentioned, with one contract in the remarks this quarter, but continuing to do so in the next year will help us align in that fashion.

Great. And on risk score capture, which you talked about in the other question, I guess. When I think about it, over the past few years, you've had pretty nice improvement growing your RAF. I think it has grown, I think, like 5% from 0.97 to 1.02 all during V28. And I mean now that V28 is ending, trying to think how should we think about the go-forward annual RAF improvement? Would it be fair to presume if you were able to do 5% growth during one of the toughest risk coding environments, V28, that heading out, it might even be greater RAF improvement. So, I was wondering if you could talk more about your internal RAF initiatives, investments being made? Are you embedding AI into this coding function? And even for this year, I'm just wondering how are your AWV rates tracking year-to-date so far?

Thanks, Michael. We've historically been strong at the annual wellness visit. driving that engagement with our patient base, especially in the Medicare population. That's something that we report and track as an internal KPI that's important to us in terms of our ability to get the patients in and really assess them in a comprehensive way. We view RAF and charting as a natural consequence of that, not the primary motivation. Our model, as you know, is primarily focused on driving coordination access and better outcomes and kind of as an ancillary function charting appropriately so that we're being reimbursed in a fair manner. We believe that improvements in RAF for existing cohorts will continue as before. That being said, as we continue growing membership in new regions, it really depends on what the RAF is for the new cohorts coming in. And so the blended average of that is impactful to the overall RAF number. But we do believe as in historical periods that over time, each cohort does improve in terms of the risk adjustment profile. And we think that there is still upside in the medium term from being more appropriately coded in our Medicare population.

Our next question is from Jailendra Singh with Truist.

First, I want to ask about second half EBITDA guidance and the implied Q4 outlook. It implies a pretty wide Q4 range of $47 million to $67 million. I understand Q4 is a seasonally weaker quarter, but the low end seems to imply a meaningful step down from Q3 levels. Is there anything meaningfully different in Q4 versus Q3 this year versus prior years? If not, can you help us understand the swing factors in the Q4 outlook?

Jailendra, thank you for the question. I think if you're focused on the width of the range, I think that's primarily an artifact, frankly, of just the range that we guided to for the year versus the quarter. I think how we would think about it is that the Q3 and Q4 cadence is very similar to past years. Q3 is typically a much better quarter, in fact, the best quarter of the year and there's a sequential step down into Q4 relative to Q3. But I would not -- I would be more focused on the midpoint potentially than the range necessarily, which is just an artifact, I think, of the range of the annualized guidance versus the quarterly guidance.

Okay. And then we didn't hear any thoughts on 2027. You have talked about mid- to high teens year-over-year organic EBITDA growth in 2027. First, I want to confirm any -- if any changes to that thought process? And related to that, how are you thinking of Medicaid work requirement headwind next year? Is that captured in that mid- to high teens number? And the investments you're doing this year, do they have potential to drive incremental growth next year? Or they are more like supporting your mid- to high teens growth? How should we think about that?

Yes. Definitely. I think we have said and we'll stand by and reaffirm medium-term mid- to high teens EBITDA growth, not just for '27, but into the medium-term years as well. There are Medicaid changes starting 1/1/27 as is well known. And we think that based on the portfolio rebalancing and the changes we are making, we will have the right levers to continue growing in that range on a go-forward basis. In terms of the investments that we're making, as I mentioned, we're investing mid- to high single-digit million dollars. Primarily, these are essentially losses in new contracts and new geographies to take on membership faster than we would have otherwise planned. Now, these may not flip to profitability necessarily in '27, but they are -- but any losses related to them would be contemplated into our '27 guide when we put that out. It's possible depending on the cadence, some of the cohorts may turn positive more quickly, especially as we continue to compress the slope of the J curves that we have given our operating system. But at this time, we are contemplating kind of a more normal cohort improvement as in historical periods.

Okay. And one more, if I can sneak in here. Some of the large health insurers have talked about like exiting Medicaid markets. Some have talked about shrinking their Exchange footprint and some talked about exiting certain MA plans. Some of these decisions are for 2027, and I understand you don't have much exposure to some of these health plans, but I believe others are partners. Generally, how much lead time do you get to contract with plans, winning those lives? Is that membership risk or share gain for a dense delegated network? Just help us understand like how quickly you can shift these and how much lead time you have generally when plans exit or get out of these markets?

Yes. That's an interesting one. I mean, that really depends payer to payer. I think what really helps us is our unique payer-agnostic model. The idea is that we are acting as a coordinated unified payer for our downstream delegated networks. And so for example, if one payer were to exit a certain market or exit a certain product, those members are still there. They will still be needing insurance. They may go to a different plan, a different product. And the idea is that because of our unique model, our providers are not negatively impacted by that because it would simply be a switching ID card benefit, et cetera, and the providers would be extracted away from those changes. We would handle that on the back end for our providers. That being said, recently, we typically get around a few months in advance of some of these things happening. And our teams are preparing to make sure that those members are moving to a plan that we do have a contract with so that their care is not interrupted and that operationally, the providers are not being disrupted either.

Our next question is from David Larsen with BTIG.