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spk08: Good afternoon and welcome to Alignment Healthcare's second quarter 2021 earnings conference call and webcast. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. To ask a question during the question and answer session, you will need to press star 1 on your telephone's keypad. Please note, this event is being recorded. Leading today's call are John Kao, founder and CEO, and Thomas Freeman, Chief Financial Officer. Before we begin, we would like to remind you that certain statements made during this call will be forward-looking statements as defined by the Private Securities Litigation Reform Act. These forward-looking statements are subject to various risks and uncertainties and reflect our current expectations based on our beliefs, assumptions, and information currently available to us. Although we believe these expectations are reasonable, we undertake no obligation to revise any statements to reflect changes that occur after this call. Descriptions of some of the factors that could cause actual results to differ materially from these forward-looking statements are discussed in more detail in our filings with the SEC. including the risk factors section of the prospectus for our initial public offering filed with the SEC on March 29, 2021, and our Form 10Q for the quarter ended June 30, 2021. In addition, please note that the company will be discussing certain non-GAAP financial measures that they believe are important in evaluating performance. Details on the relationship between these non-GAAP measures to the most comparable GAAP measures and reconciliation of historical non-GAAP financial measures can be found in the press release that is posted on the company's website and in our 10Q for the quarter ended June 30, 2021. Hello.
spk04: and welcome everyone to our second quarter earnings conference call. We are pleased to report a solid quarter in which we exceeded the high end of our guidance across each of our four key KPIs. Our health plan membership ended at 84,700, an increase of 32% compared to last year. Total revenue of 309 million grew 26% from last year, which was led by our health plan premium revenue growth of 32% year-over-year. Adjusted gross profit came in at $37 million, and adjusted EBITDA was a small loss of $5 million as we continue to invest in growth and scaling of the business. Thomas will share more regarding our financial performance for the quarter, but from an operational perspective, we are executing on the growth strategy via our virtuous cycle that we laid out during our IPO roadshow. As a reminder, this growth strategy consists of three components. These are, first, entering new states by establishing anchored beachheads and partnerships. Second, delivering contiguous market expansions in our existing states. And third, adding new innovative products and provider partnerships to further grow market share in each of our existing geographies. Across each of these three prongs of our growth strategy, our business is exceeding my expectations. Our ability to deliver upon our growth agenda is due to the consistency of our operating model. I'm thrilled with how we're performing and how our team is skillfully executing on the plan. Though our 2022 AEP market expansions and products are still subject to regulatory approval, we are excited about our strong positioning. In terms of overall geographic expansion, we are making steady progress to expand our addressable market to allow a greater number of seniors to experience what makes alignment unique. We anticipate growing the number of markets we operate in from 22 counties in 2021 to 38 counties in 2022. As a result, we will have access to approximately 7 million Medicare eligible members in 2022, an increase of about 27% from today. Since our IPO, we've been very clear about our growth strategy of first establishing beachheads in new states and then expanding into contiguous markets, which means counties, and those states over time. With that in mind, on the first strategy, we recently announced that we're entering our fourth state, Arizona, by offering plans in Pima and Maricopa counties beginning in 2022. These two new markets provide access to nearly 1 million eligible seniors and represent a natural extension of our existing operations in California and Nevada. On the second prong of adding contiguous markets, we are planning to add 12 new counties in North Carolina in 2022, which will bring the total number of markets alignment serves to 15 in the state. We also intend to add two new markets in Nevada next year, as we expand to Washoe and Nye counties. Shifting to our third problem, which is to drive market share gains in our existing markets, our plans and supplemental benefits are designed to meet community needs by ethnicity, income, and health status. Our innovative product offerings, which are considerate of culture and social determinants of health, continue to be well received in the market. we are pleased to recently announce several new products and product line expansions effective January 2022, subject to regulatory approval. After the success of our Harmony product focused on the Asian community in 2021, we are eager to launch our El Unico product designed to serve the Hispanic population in 2022. This product has been developed to better customize the experience of our Spanish-speaking population which today represent over 25% of our total membership. In addition to our ethically focused plans, we're also expanding our offering to include PPO plans and plans for dual eligible special needs members, or DSNPs, as well as chronic conditions special needs plans, or CSNPs. Beginning in 2022, the PPO plan will be offered in 28 of our markets and provide our members with greater flexibility in their care and coverage decisions. The DSNF plans will be available in 24 markets and are designed to provide the same level of care and service associated with our regular MA products in conjunction with members' Medicaid benefits. Meanwhile, the CSNF plans will be offered in 11 markets and targeted to members who believe can benefit from our chronic disease management programs, such as those with cardiovascular disorders, chronic heart failure, or diabetes. Adding these differential plans in 2022 allows us to further penetrate our existing markets and to offer broader value proposition across different senior consumer segments. These product strategies designed to meet the individual needs of a diverse set of consumers demonstrate our product leadership in the market and are consistent with our goal to provide a more personalized experience for our consumers. We look forward to sharing more about these products during this upcoming AEP. On the provider partnership front, we have recently closed several relationships that we plan to announce in the coming weeks as we gear up our 2022 AEP. We believe the growing list of provider and delivery system organizations that want to work with alignment reflects the value proposition we deliver to the provider stakeholders in our ecosystem. More specifically, These providers are partnering with us because of our differentiated products, our proprietary AVA technology, and our Medicare Advantage expertise, all of which result in consistent outcomes of high quality and low cost, which enable us to offer market-leading benefits for seniors. This in turn drives our ability to help our providers grow and gain market share. As we continue to demonstrate the efficacy of our platform, We believe we'll establish more and more partnership arrangements like these in the future, helping us drive in our existing and new expansion markets. Looking to the remainder of the year ahead with the annual enrollment period right around the corner, we are working diligently to educate our channel partners about alignment's differentiated approach. It is this powerful combination of market entry strategies, product positioning, provider relationships, and broker engagement and partnerships that allow us to continue to grow our market share across our geographic footprint. As a result of all this work we've done over the past several months, we believe we are well positioned for a successful enrollment season. Finally, before I conclude, I want to touch on our AVA technology platform. AVA represents a core differentiated advantage to our company as it embeds the intelligence from our experience into repeatable and scalable technology and associative processes. This allows us to manage risk consistently and successfully with our provider partners as we implement our high-quality, low-cost growth model. AVA is central to our ability to provide our senior consumers with differentiated products that meet their personal needs. Many of you have begun to see demos of portions of our AVA platform, and we look forward to sharing new and improved features with you in the future. Wrapping up, the first half of 2021 is off to a great start operationally. We are positioning ourselves well for a successful 2022 enrollment period And we're very focused right now on putting the building blocks in place to set up meaningful and sustainable long-term growth for 2023 and beyond. Our prudent and disciplined approach to continuously investing towards growth and AVA remain priorities for us heading into the back half of the year. I look forward to keeping you updated on our progress across these initiatives. With that, I'll turn the call over to Thomas to review our financial performance. Thomas?
spk07: Thank you, John, and thank you, everyone, for joining us on the call today. Turning to the second quarter results, as John mentioned, we had another strong quarter in which we exceeded the high end of our guidance ranges across each of our four KPIs. Our health plan membership of 84,700 increased 32% over last year as we wrapped up the final month of CMS's open enrollment period in April. Our strong membership growth further translated to revenue outperformance in the quarter. Total revenue of $309 million increased 26% year-over-year, representing $39 million over the high end of our guidance range. Notably, our health plan premium revenue of $293 million increased 32% over last year. The strength of our second quarter revenue outcome was supported by a couple of drivers worth highlighting. The $39 million of outperformance versus the high end of our guidance range can generally be thought about in two buckets. Our Medicare Advantage, or MA Health Plan Business Performance, and the introduction of our initial DCE venture into our financials, which was launched at the beginning of the second quarter and was previously excluded from guidance. First, our continuing MA business delivered strong results ahead of guidance shared last quarter. Excluding incremental sweep revenue from 2020 and excluding incremental DCE revenue, I would highlight that we exceeded the high end of our 2Q revenue guidance by $21 million. This was due to a combination of better-than-anticipated membership performance, as well as increasing our revenue PMPM for the first half of 2021 dates of service based on our latest data. Note that 8 million of the 21 million related to the first quarter of 2021 dates of service. The upward momentum of our revenue PMPM is reflective of the operational efforts we took in the back half of 2020 to engage our provider partners and our seniors directly in documenting our members' underlying conditions, as well as visibility from the mid-year sweep for the 24% of our members who were new to alignment in the first half of 2021. This quarter's revenue also incorporated our 2020 final suite payment, representing another $5 million of revenue related to 2020 days of service. These suite payments for prior periods are standard course of business in our industry and happen every year. In total, our continuing MA business contributed $26 million of the $39 million of revenue outperformance in the quarter versus the high end of our previous guidance. Additionally, our second quarter revenue included another $13 million from our direct contracting launch in North Carolina. Through our joint venture with a number of leading independent clinicians, we are leveraging our experience, platform, and capabilities for our Medicare Advantage book of business to take risk on 5,900 seniors in traditional Medicare. Our revenue for the program is reflected on a gross basis, which means that we are accruing for our revenue based on the benchmark expenditures established by CFS. While our participation in Medicare's direct contracting program remains early, we remain cautiously optimistic as to the long-term economic opportunity as we increasingly apply our AVA technology and related critical processes to this population. Thus far, our revenue per member per month is meaningfully below our Medicare Advantage population. However, we believe our ability to generate a profit remains positive given the significantly less direct and indirect operating expenditures associated with DCE members as compared to our MA population. That said, we reserved a small gross profit loss in the quarter on our DCE partnership, given the early stage nature of the program, as well as due to the limited claims data we received from CMS thus far. Just to reiterate, the 5,900 DCE members are in addition to our 84,700 health plan members we reported for the second quarter. Turning to adjusted gross profit, We delivered 37 million in the second quarter as we saw a continued decline of COVID-19 impacting our overall utilization consistent with our expectations we shared on our previous earnings call. Relative to our pre-COVID experience, total inpatient utilization in the quarter was slightly better than what we would consider to be a normal 2Q baseline. Further in the quarter, we continued to see some of the temporary favorability we discussed on our last earnings call with our internal clinical model spend. That said, We still anticipate this to reverse in the second half of the year. All things considered, our second quarter medical benefit ratio, or MBR, of 88% was a market improvement versus our first quarter MBR of 91.5%. Further, excluding DCE, our MBR for the quarter was 87%, which is comparable to our previous communications, which excluded the DCE venture. It's worth noting that we do not anticipate sharing our separate MDR performance in future quarters unless we feel it is necessary to explain the underlying trends of the business. However, we felt that it was appropriate to share this quarter given that our previous guidance excluded DCE. Our SG&A in the second quarter was $71 million. Excluding equity-based compensation expense of $28 million, our SG&A in the second quarter was $43 million, which increased 28% year-over-year. We continued to experience some temporary favorability in SG&A in the quarter, which we intend to reinvest in the second half of the year towards growth in our existing geographies, as well as 22 expansion geographies and potential 2023 target markets. All of these factors resulted in an adjusted EBITDA loss of just $5 million. Turning to the balance sheet, we ended the second quarter with a net cash balance of $343 million. The strength of our balance sheet is allowing us to remain offensively oriented while evaluating new markets and partnerships for 2023 and as well as various M&A opportunities in both existing as well as targeted expansion markets. Finally, I'll conclude my remarks by providing our initial outlook for the third quarter and some color on the increased full-year guidance being announced today. For the third quarter of 2021, we expect health plan membership to be between 84,800 and 85,200 members, revenue to be in the range of 270 to 275 million, adjusted gross profit to be between 30 and 32 million, and adjusted EBITDA to be in the range of a loss of $19 to $17 million. For the full year 2021 outlook, we now expect health plan membership to be between 85,000 and 85,800 members, an increase from our previous range of 83,500 to 84,500, revenue to be in the range of $1,105,000 to $1,120,000, an increase from our previous range of $1,040,000 to $1,055,000, adjusted gross profit to be between $117 and $123 million, an increase from our previous range of $116 to $122 million, adjusted EBITDA to be in the range of a loss of $55 million to $50 million, and improvement from our previous range of a loss of $56 to $51 million. As we think about the second half of the year, we expect continued sales and membership growth, as well as this enrollment, to be consistent with our prior experience. As previously discussed, there is an element of seasonality to our business where a majority of our net membership growth occurs by April 1st of a given calendar year due to the timing of the annual enrollment period and open enrollment period. We therefore expect more modest membership growth from July to December, and we then expect a step-up in membership effective January 2022 after this upcoming AEP. Given our receipt of the midyear sweep, as well as having experienced another three months of data run out for our returning members who were with us in 2020, we now have improved visibility to our revenue PMPM for the second half of the year and feel confident about our second half revenue outlook. As we think about our gross profit and NBR assumption in the back half of the year, we remain mindful of the potential for utilization to increase, in particular in Q4. We anticipate a return of the flu season, which was largely absent this past winter due to the various COVID-19 protocols that were in place. And further, we are keeping an eye on infection rates in our markets related to the more highly contagious COVID-19 Delta variant. And accordingly, we remain somewhat cautious with respect to our second half claimed expense outlook. With that in mind, we continue to further engage and outreach our members to support their vaccination needs and are pleased to report that we estimate that over 80% of our seniors have been vaccinated. We also have incorporated our new member sales outperformance year to date, where newer members that join alignment typically begin with higher MBRs that then improve over time as we engage our population. As a reminder, this mix of new versus returning members is a key driver to our consolidated MBR performance. Finally, we remain highly focused on executing against our strategic growth plan for this upcoming AEP, as well as developing our 2023 target market opportunities given the 18-month sales cycle associated with our business model. With those two items in mind, we anticipate continuing to make intentional growth and scaling investments to redeploy EBITDA performance and therefore expect to see several million dollars of reversal in early-in-the-year SG&A favorability during the second half of 2021. As John noted, the building blocks we've put in place today are foundational to driving sustainable growth in the out years. Our EBITDA guidance for the remainder of the year also reflects the seasonality of our SG&A spend, whereby we typically have greater growth-oriented investments in the second half of the year, such as the timing of our sales and marketing spend around AEP. To wrap up, I'm very pleased with how our business has performed in the first half of the year given our recent public market debut, and I believe we're in a strong position to continue that progress in the second half of the year. With that, let's open the call to questions. Operator? Operator?
spk08: As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Again, that's star 1 on your telephone to ask a question. Please stand by while we compile the Q&A roster. Our first question comes from the line of Ricky Goldwasser of Morgan Stanley. Your line is open.
spk01: Yeah, hi, good afternoon and thank you, John and Thomas, for all the details. My question is really focused on the MLR. You gave us a number for the adjustment, but a few follow-ups here. So first of all, on your last call, you didn't guide to MLR, but you gave us some colors, how to think about MLR in the second half of the year. I think you talked about MLR in the high 80s. So when I take kind of like your performance this quarter and last quarter and kind of like what's implied for second half of the year, should we think about MLR at around the 84% to 86% range, And how is it impacted by, or how should we adjust for it for BC?
spk07: Yeah, great, Ricky. This is Thomas here. So let me play that back. So I think you're absolutely right that I think when we last spoke on our Q1 earnings call, I think we did share that our outlook for the year was in the high 80s. I want to make sure I'm tracking the 84 to 86 comment there. Are you just intending to somewhat bifurcate the the MA comments versus the introduction of DCE? Is that really the core of your question?
spk01: Yeah. How should we think about sort of second half of the year MLR now that you're incorporating DCE?
spk07: Yeah. So I think I'd say two things. So the first is while we do not explicitly guide on MBR, we do obviously guide on gross profit and revenue. And so I think directionally you can get a sense of how we're thinking about things just from some sort of back of the envelope math. And I think we still stand by the high 80s comments from the first quarter. In terms of DCE, what I would say is we're in the early stages today. And as a reminder, the strategic rationale for why we entered into that partnership was really to demonstrate our ability to take our toolkit and our MA platform set of capabilities, that we're using to manage our existing MA book of business and apply that to the traditional Medicare members in terms of taking the data, stratifying the members, engaging them through our care plans, and working with the providers to provide a more holistic set of care for that population. So I think as that happens, we actually anticipate the MBR on that specific population to continue to improve. I think what we saw in the second quarter was just largely reflective of the early stage nature of the program itself. And so We obviously have about 5,900 members today, and I think for the second quarter, we only had about two months' worth of paid claims data from CMS. So our visibility is a little bit different in that program as compared to our MA book of business, but we do anticipate to continue to improve over the back half of the year as we continue to apply our AVA technologies and our care models to this specific set of members in traditional Medicare.
spk01: And then just a follow-up question on your utilization commentary. It sounds like you're assuming for the second half of the year that we're going to see utilization continuing to to accelerate going back to sort of kind of like pre-pandemic baseline, but you're also kind of like assuming higher COVID costs related to the Delta variant. Are you starting to see any change in behavior of your members in terms of how to utilize the healthcare system for core services now that we're seeing this uptick in COVID cases?
spk07: You know, we really haven't quite yet. I guess maybe to respond to the Delta comment first, we have seen a very, very slight uptick over the last 30 days related to the Delta variant. But just to put that comment in context, our COVID-related hospitalizations today are still, you know, five times lower than they were a year ago. And so we're really just not seeing a big spike in our markets today as compared to maybe some of the other folks you're speaking with who have a different geographic footprint than we do. That said, I think you're right. We do, I think, remain cautious just in terms of what that might look like in the back half of the year, given the rapidly evolving set of factors in play. And so I think our guidance is really predicated upon, you're right, a return to sort of pre-pandemic baseline levels of utilization, if not a slight uptick, just given the nature of what COVID may do to us overall. But that said, I think, you know, we're in a pretty strong position and aren't seeing any type of major pent-up demand from electives or any real, you know, high-acuity cases related to deferred care, nothing of that nature right now.
spk01: Okay. So just to clarify, the higher uptake and utilization, is that combining COVID and CORE together, or is that just CORE?
spk07: I'm speaking of, yeah, absolutely. I'm speaking of it overall, including sort of COVID and non-COVID, correct.
spk01: Okay. Thank you.
spk04: Hey, Ricky, it's John. Just as additional data point, we continue to have our virtual town halls with the members. We just concluded one last week, and we had over 12,000 people participate. And so we're getting some very good, like, engagement data on, again, 85%-ish vaccination rates of the members. You know, like 89%, you know, they understand just, you know, the, you know, safety of getting vaccinations. They're, you know, anxious to get boosters. And so, and as Thomas mentioned, if you just go kind of look at June of last year to June of this year, it's like a five times more admissions last year than we have this year. Having said that, you know, we're, you know, we're being prudent as we usually are on Q3, Q4 utilization.
spk01: I appreciate the commentary and the conservatism.
spk04: Thanks, Ricky.
spk08: Thank you. Our next question comes from Ryan Daniels of William Blair. Your question, please.
spk02: Yeah, good afternoon. This is Jared Haas for Ryan. Thanks for the questions, and congrats on the quarter end. I wanted to ask one on the health plan membership. Obviously, that continues to grow at a nice clip of about 30%. So continuing to see nice growth there. Just curious if you could tease out how much of that is coming from, you know, sort of plan switchers. I know in the past you kind of disclosed historically seeing, you know, the bulk of your membership growth coming from sort of plan switchers in that sense. So just curious if you're still seeing similar dynamics there or if you're starting to see more growth coming from just kind of broader MA sort of market growth.
spk07: Yeah, hey, Jared, this is Thomas here. So we do see a majority of our membership growth still coming from plan switchers. And so, you know, strategically, we obviously target market across really all of the consumer segments in terms of agents as well as those who are switching plans. But one of the things that we think we play well at in terms of the competitive landscape is offering a value proposition, a benefit package, an overall product inclusive of supplemental benefits, that we think really stand above and beyond some of our competitors in certain markets and that we think attract some of those plan switchers. So we really pursue a lot of the opportunity that we think could be potential movement from Plan A or Plan B to alignment, and that's kind of a core part of how we approach our growth, both during AEP and outside of AEP, such as the second quarter.
spk02: Thank you. Got it. Yeah, that makes sense. Thomas, maybe I'll stick with you. Can you just confirm? I think I maybe missed the number. Can you confirm what the magnitude of the contribution of the DCE was in the period?
spk07: In terms of revenue?
spk02: In terms of revenue, yeah.
spk07: Yeah, it was $13 million of revenue.
spk02: $13 million of revenue. Okay, got it. Thanks. And then just real quick, one more quick one. You know, thinking about the guidance, maybe you can just kind of clarify one more thing for me. In terms of the guidance rates for the rest of the year, can you help maybe tease out how much of that is attributable to the inclusion of DCE revenues for the rest of the year and how much of that is maybe more favorable risk adjustment than what you had previously assumed in your guidance now that you have the better visibility?
spk07: Yeah. So what I would say is about 20 to maybe 25 million. That is related to DCE. And then there's a portion beyond that that's related to revenue PMPM for the rest of the year. And so I think all things considered, we feel pretty good about where that stands, and we'll kind of keep you guys posted as we get into the third quarter here.
spk02: Great. Thanks, and congrats again.
spk08: Thank you. Our next question comes from John Ramson of Raymond James. Your line is open.
spk05: Hey, good afternoon. John, I was curious, as we think about you as a consumer marketing company versus a you know, healthcare, how do you think that you get the word out and attract membership, you know, one year out, two years out, versus kind of the traditional ways it's done now, mostly through the broker network? Are there any new things to come in terms of your messaging and marketing?
spk04: Yes. Hey, John, how you doing? The interesting thing with our growth is it's really a result of, We focusing on patient satisfaction, kind of member engagement, and just doing everything we said we would do, which is just putting that patient first. And I know that sounds kind of cliche, but it really is the truth. And so it's relevant because we haven't really invested in the brand yet, and we're going to start doing that. Really, we're planning for it now. and you can start seeing a lot more branding and positioning of the alignment brand next year. I think the only thing I would say is the listening part. We actually listen to our members, and we ask them what they want. We listen intently to the providers, and we listen very carefully to the broker community. and they give us a lot of input that we try to embed not only in our products and our care delivery models, but also in just our core customer service, and we're always looking to get that net promoter score higher and higher. You know, you've heard me say it before. I think product leadership is ultimately what's going to define and change, you know, healthcare per se. I think... Getting the ability to fund that product change so that you have a greater value proposition consistently is kind of the hard part, which again, we think we're doing a pretty good job on that. But yeah, I think you're going to see more and more of a push toward traditional health services and social determinants and just senior lifestyle Put that together, and you're going to get just a differentiated value proposition going forward. And so product leadership is going to be really important, and then branding strategy. You'll be expecting that.
spk05: All right, Ben. No, it's just that you're focused on it because most health care service companies don't think of themselves as consumer-facing. They're going to like you, too.
spk04: You know, so our members actually like us.
spk05: Yeah, that's funny. So, Thomas, do you have a longer-term view, just to enter the fray because there's a debate? Let's say the gross profit, the long-term gross profit of the traditional MCO member is X, year five. Do you have a view yet of a DCE member, you know, adjusted for, some of the dynamics, including your joint venture relationship? How do we think about the value of that life versus your traditional MA life?
spk07: Yeah, let me comment on sort of what we know today in terms of the economic opportunity and how I think that may evolve. And I'll let you guys, you know, help think through how you value those lives in the future. But in terms of what we know today, so we mentioned in our prepared remarks that our Our revenue PMPM for the 5,900 members is below that of our Medicare Advantage book of business. But we went into this program very eyes wide open about that. And it's actually taken a page out of our California playbook in terms of our approach where we have actually some markets in California that are kind of lower revenue PMPM markets, typically healthier members with lower utilization. And we've still demonstrated an ability to generate a profit on that book of business. And so, With the DCE population, it is admittedly lower revenue PMPM today for us as compared to our Medicare Advantage book of business overall. But that said, you know, we don't have to do things like as much sales and marketing, paying claims, a lot of the utilization management or member service efforts. So overall, our SG&A and kind of corporate infrastructure associated with the DCE book of business should really be significantly less than that of what is required to support the Medicare Advantage book of business. So I'm not sure we're drawing a line in the sand today in terms of what we think the ultimate PMPM profitability looks like in terms of bottom line EBITDA opportunity. But I think we have a strong case to make that it could prove, you know, valuable over time as we, like I said, apply AVA and our care management programs to this new group of members that we just started working with a couple months ago.
spk05: I mean, do you see this strategically long-term as a backdoor into MA? Or do you think this population is a standalone population for different reasons?
spk04: Yeah, this is John. You know, I think we look at it from kind of a product portfolio perspective. And, you know, people are fee-for-service, you know, and chosen traditional Medicare fee-for-service for a reason. And so I think... You know, we've spent a lot of time with our clinical organization to see, you know, can we manage this population given our AVA tools, given our, you know, care anywhere model. And the team seems very optimistic about it. And the goal for us is not to rely on, you know, flipping these into MA per se, you know, because I really think, you know, we've got to meet the consumer where they are. Give them a value proposition that makes sense. You know, do I think over time some people will conclude, gee, I can save a bunch of, you know, monthly premium and join an MA plan and get the same, if not better, quality of outcome by joining alignment? Yeah, I think that will happen. But I don't think we look at it organizationally as just, you know, a conversion strategy. We look at it as a product portfolio strategy.
spk05: Great. That's it for me. Thank you.
spk04: Thanks.
spk08: Thank you. Our next question comes from Kevin Fishbeck of Bank of America. Your line is open.
spk06: Great, thanks. Yeah, it looks like, you know, MLR came in a little bit higher than what consensus was thinking, and it does look like your guidance is looking for maybe a higher MLR in the back half of the year than originally. I just want to make sure I understand that, I guess, A, that's the case, but then, B, how we should think about that if the rate is also coming in better? Does that mean that MLR would be even higher if not for favorable rate experience, or is there some offset in there?
spk07: Yeah, maybe I'll jump in first. Hey, Kevin, this is Thomas here. So starting with the second quarter itself, so as we mentioned in the prepared remarks, part of the reason we wanted to really share the DCE results with you all is we recognize that that did have an impact on the overall consolidated MBR in the quarter. And so I think we would have had an 87% MBR as opposed to the consolidated ADA had we not introduced the DCE into our second quarter results. So I think with that in mind, I think we felt pretty good about how we performed relative to our kind of internal and external expectations heading into the quarter. In terms of the back half of the year, I think what we're kind of showing in our forecast is a couple of things, and obviously there's a lot of puts and takes across the board here. But we have definitely, I think, some more confidence in our revenue PMPM outlook for the year. But that said, we're also, as we mentioned, watching the overall environment involved with respect to utilization in the Delta variant more specifically. And so I think what you're seeing in our forecast for the year is somewhat reflective of that uncertainty and cautiousness. And as we think about the DCE program, we do anticipate, as I mentioned, that to contribute sort of low 20 millions of incremental revenue in the back half of the year that was previously excluded from guidance. And while I do think that we'll continue to demonstrate improvements around the DCE population and sort of the MBR with respect to that specific group of members, I think the overall DCE program will remain a bit of a headwind for us on consolidated MBR for the next three to six months. just as we continue to ramp up our programs there and really engage the members most in need of our care. So hopefully that gives you a bit of color on how to think about sort of the second half outlook we shared today and the second quarter more specifically.
spk04: Kevin, the only thing I can add is, you know, we are getting higher growth, membership growth than we anticipated. And so along with that is that, you know, kind of initial year NBR that's a little bit higher. in the first year. And so I'd factor that into the equation. I think that, again, just the kind of prudence around COVID utilization. Again, we don't think it's going to reach the levels that they reached last year. But, you know, we've got some appropriateness in there. And then just DCE. If you kind of factor out DCE in the whole thing, I think we're actually very much in line.
spk06: Okay, because I guess that's always the question is that, you know, when we see variations in MLR and particularly, you know, after you guys have submitted bids, you don't feel like anything's changed about your view about profitability in 2022 or anything like that?
spk07: No, I can maybe speak to that. So I think we're feeling pretty good about the way we set up the bids for 2022 and, And all things considered, I think, you know, we're sort of largely consistent with the industry where we currently foresee 2022 looking more normalized, both from a revenue and cost standpoint, based on what we see today.
spk06: Okay, great. And then I guess just, you know, you guys are doing a lot more PPO products next year. I mean, I forget what the number is, but I think you guys are like 98% HMO membership. Is that? Are you going to be able to deliver the differentiated value through the PPO plans, or is that going to look different and feel different than your HMO plans?
spk04: That's a great question. Yeah, I personally have spent a lot of time making sure from the team, both from a bid perspective on the product design as well as the clinical team on the care delivery side, that we can get the same if not better outcomes from that population. And I think the construction of the network was foundational in the way in which we designed the products. And I think we just recently announced kind of the relationship with the Cedars-Sinai in Los Angeles. And really we're kind of building that PPO network around that relationship. And, you know, as you know, they're going, you know, one of the preeminent, uh, delivery systems in Southern California. So I think the way that we contracted it, the way that we've engaged them on the, on the delivery side, I think this has got me pretty optimistic. Um, cause I think that's a great question because I think that product's going to be pretty well, uh, at least that's the initial feedback from some of the brokers. Um, but, uh, Yeah, no, it's getting the data, being able to still identify who the 10 to 20% of the individuals that need the care, being able to deploy the care anywhere model at home virtually, et cetera, are still building blocks that we can leverage for the PPO population. All right, thanks.
spk08: Thank you. Our next question comes from Jeff Garrow of Piper Sandler. Your question, please.
spk03: Yeah, good afternoon, and thanks for taking the questions. Maybe I'll ask about your FY22 new markets with a couple questions. First would be, what can you tell us about the market leadership you have in place for those new FY22 geographies, whether it's new hires that are very familiar with the local markets or existing leaders that know what has made alignment successful previously and growing membership?
spk04: That's another great question. Yeah, so we announced a little bit before the IPO that we hired Raj Shrestha as really the market leader outside of our existing three markets. And just to recall, we wanted to do that so that we did not take our eye off the ball on California, Nevada, and North Carolina. So we really brought Raj, who's brought in several new players to help us oversee the growth of these new markets. And having said that, Raj was the market president of a large health plant in Arizona. So he knows that market really well. We've hired market leaders or in the process of hiring sales network and just overall state leadership that's very familiar with the market. We know them through all of our different relationships and have worked with them and they've delivered for us in the past. With respect to the kind of the contiguous counties expansions in North Carolina, And Nevada, same kind of thing. It's the group of people in North Carolina that have delivered both growth and outcomes for us. We've got good, strong relationships that we'll be announcing with some of these provider partnerships and some of these new markets in actually both new states. So kind of that's forthcoming. So I feel good. I feel good that we are... you know, growing, but growing with a high quality, you know, low cost view in mind. It's not just putting dots on maps and it's actually, you know, getting the infrastructure, getting the people, getting the workflow processes, getting all of that set up in a way that we can ensure that we can execute this virtual cycle.
spk03: Nice one. That really helps. I'll maybe follow up by asking about some of the markets specifically. You know, Arizona, your entrance there includes some very well-known health systems, so curious whether expectations might be a little bit higher for, you know, I think what everyone recognizes, a very attractive market, and then add one in on North Carolina, you know, expanding, you know, some to the west of your current geographies. You know, there are some health systems there with very strong market share, so maybe curious a little bit on the network strategy and approach to managing utilization and some of those new geographies in North Carolina?
spk04: Yeah, it's the, so I can start with North Carolina and I'll go back to, um, I'll go back to Arizona. The North Carolina is interesting in that, uh, there's 12 new counties, but some of our smaller counties, um, but they, they do get us into that, that triad market as opposed to where we are now. Um, and, and, uh, I like the partnership. I like the contract. I like the engagement levels. You know, could it turn into, you know, a Sutter or a San Diego? Maybe. It's just hard to say. I think we've been very thoughtful with benefits, been very thoughtful with engagement. Meaning, have we modeled that? No, we haven't modeled that. We've been, I think, very prudent, very conservative with our growth assumptions in all of those markets. Same with Arizona. I mean, I think everybody knows Tucson and Phoenix are very competitive, very managed care. I mean, I think the market share penetration for MA, there's 40 plus percent. So it's a very savvy buyer base. And I think that kind of profile is good for us. And just that we think we can come in with a better mousetrap. But again, it's going to, all these new markets take a couple of years. And just to remind you, you know, our goal kind of internally is to get to that kind of 10,000 member mark in each kind of large MSA within five years. Kind of want to even break even around, you know, three years. And we're really starting year one, year two, between 1,000, 1,500, something like that. You know, we get all the infrastructure, all the people hired, et cetera. It's kind of the way we look at it. But you're right. I mean, could one of them, you know, pop? Yeah, I think so. It's possible. I mean, we had nothing in the Sacramento market, and we had to deal with Sutter, and I think we're doing really well there. Same with San Diego. We had nothing there, like zero. In two years, we got, what, 8,000, 9,000 members there. So those would be all good guys for all of us if those things happen.
spk03: Excellent. Appreciate all the comments. Thanks again. Thanks, guys. Thanks.
spk08: Thank you. That ends our Q&A session and concludes today's conference call. Thank you for participating. You may now disconnect.
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