Alignment Healthcare, Inc.

Good afternoon and welcome to Alignment Healthcare third quarter 2021 earnings conference call and webcast. All participants are in the listen on the mode. After today's presentation, there will be an opportunity to ask questions. If you require any further assistance, please press star zero. Please note this event is being recorded. Leading today's call are John Kayo, founder and CEO, and Thomas Freeman, chief financial officer. Before we begin, We'd 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. Description of some factors that could cause actual asserts to differ materially from this forward linking statements are discussed in more detail in our filings with the SEC, including the risk factors section of prospectus for our initial public offering filed with SEC on March 29, 2021 and our Form 10-Q for the quarter ended September 30, 2021. In addition, please note that the company will be discussing certain non-GAAP financial measures that believe are important in valuating performance. Details of the relationship between non-GAAP measures to the most comparable GAAP measure and reconciliation of historical non-GAAP financial measures can be found in the press release that is posted on the company's website in our Form 10-Q for the quarter ended September 30, 2021.

Hello and welcome everyone to our third quarter 2021 earnings conference call. We're pleased to be reporting another quarter in which we significantly exceeded the high end of our guidance across each of our four key KPIs and show further dedication to our culture of continuous improvement. Our health plan membership ended at 86,000 members, an increase of 29% compared to last year. Total revenue of $293 million grew 18% from last year, which was led by our health plan premium revenue growth of 24% year over year. Adjusted gross profit came in at $42 million, with strong MBR performance of 85.7%, and adjusted EBITDA was a loss of $6 million. Thomas will share more regarding our financial performance for the quarter. But I first want to spend some time today talking about how we are able to consistently achieve our objectives of high quality and low cost for our members. As I've said in the past, accessing and leveraging data across our enterprise is foundational to how we run and scale our business. Our pay provider operating model is powered by our proprietary AVA platform, our care or clinical teams, and our business intelligence tools. AVA gives us access to real-time patient insights and enables us to take action to ensure the best outcomes for our members. I want to share three specific examples of how we continue to improve AVA and how we rely on it to achieve our outcomes. First, we continue to improve our stratification model. One example is our AVA inpatient risk admission module which is an AI-based model leveraging thousands of data points about each member to identify the population that is at greatest risk of hospitalization. We are able to accurately predict the highest risk 10% of our members who will represent 50% of inpatient admissions over the next 30 days. This 50% recall rate has increased from 33% over the past several years due to continuous improvements we've made using machine learning. Second is how our Care Anywhere clinical teams put AVA's workflow tool to use to manage this high-risk population, specifically via our recently implemented patient panel management module. This application simplifies the complexity of our clinical team's daily workload by helping to optimize the deployment of our clinicians to the right individuals at the right time, effectively systematizing our decades of experience managing risk. This helps us replicate and scale our quality standards as we grow into new markets. And third, we continue to invest in the business intelligence modules of AVA. These tools provide management and our provider partners with the data visibility and transparency to track hospitalizations and other clinical and operational performance metrics on a daily basis without data latency. This allows us to intervene real time It gives us a high degree of confidence to understand our financial cost trajectories throughout any given month. Together, the AVA platform and the Care Anywhere Care Model combine to deliver holistic care, allowing us to run approximately 160 inpatient admissions per thousand across our at-risk book of business for nearly five years in a row now. This represents a 35% to 40% improvement versus Medicare fee-for-service. Additionally, our most recent NPS of 82 for our Care Anywhere population is further tangible evidence of the superior quality and satisfaction we're able to achieve while lowering costs to the system. While we're just a couple of weeks into AEP, we remain growth-oriented and focused on delivering consistent and sustainable products in the marketplace year after year to drive market share gains over time. Our emphasis on tailoring products to meet the personalized needs of different ethnicities, acuities, and income levels continues to resonate. We have also recently announced several leading health system partnerships to support the launch of our PPO products, including Cedars-Sinai, Scripps Health, and Hoag Memorial. As we head into AEP, we're proud to note that the majority of our products will feature increased benefits in 2022. We are offering $0 monthly premium products in 32 out of our 38 markets. We continue to enhance our customized product features and supplemental benefit offerings, such as our partnership with Rite Aid, featuring $75 monthly over-the-counter allowance that can be used at participating Rite Aid locations in select markets. Our $30 debit benefit filed as part of CMS's Value-Based Innovation Design Model, or VBID, where consumers will get a Visa Access Black Card. Other enhancements such as improved acupuncture and chiropractic benefits, increased monthly OTC benefits, and an expanded grocery network to include the Kroger family of stores. Further, CMS recently announced the 2022 Plan Year Star Ratings. We are pleased to report that we achieved four out of five stars this past year. Our HEDA scores, which are an important measure of plan performance on care quality and service, medication adherence, and rating of health plan all come in at five stars, a testament to our clinical model and concierge-like services we provide our seniors. While this is our fifth year in a row of achieving four or four and a half stars overall, we are doubling down on our efforts with our provider partners to continue to strive for even greater outcomes in the future. Before turning it over to Thomas, I'll reiterate how pleased I am to report another strong quarter of operational results. We believe our ability to deliver high-quality care and manage MBR by leveraging and acting upon data is the key differentiator for alignment. Over the remainder of AEP, we will stay focused on growing our membership in a reliable fashion that helps fuel our long-term success. I also want to sincerely thank the alignment team for their hard work and commitment to putting our seniors first. Every day, our team of more than 850 associates builds trusted relationships and is committed to serving our seniors through care delivery, concierge services, and innovative products. I thank you for your continued interest in alignment's journey. I look forward to updating you in the new year. Now I'll turn the call over to Thomas to cover the third quarter financial results as well as our outlook for the remainder of the year.

Thomas? Thanks, John, and welcome, everyone, to our third quarter earnings call. As John mentioned, the third quarter was strong across the board, and we exceeded our guidance ranges across all four key KPIs. Our health plan membership of 86,000 increased 29% compared to a year ago, as we continue to see strong momentum across our markets. Total revenue was $293 million in the quarter, increasing 18% compared to a year ago. Notably, our company-wide performance was led by our health plan premium revenue of $279 million, which brings our year-to-date health plan premium revenue growth to 28% for the first nine months of 2021. This outperformance reflects the continued growth of our health plan membership in addition to sustained revenue PMPM performance based on last year's documentation efforts. The strength of our operating model was further highlighted in our adjusted gross profit and MBR this quarter. Adjusted gross profit was $42 million, which represented an 85.7% medical benefit ratio. From an inpatient utilization standpoint, we did see a modest increase in COVID utilization in August and September related to the Delta variant. However, non-COVID utilization declined, and overall inpatient utilization for the quarter was still 4% to 5% below a normalized 3Q baseline, inclusive of both COVID and non-COVID hospitalizations. In fact, we are pleased to report that our COVID hospitalization rate ran approximately 30% lower than the third quarter of 2020, as we continue to see a more stabilized operating environment take shape. We believe this performance is directly related to our overall vaccination rates across our seniors, thanks to the successful efforts of our internal clinical teams and our external provider partners. Beyond the continued stabilization of utilization this quarter, we also experienced approximately 3 million of favorability in our medical expense related to 2020 dates of service as part of normal course operations. We're particularly pleased with this adjusted gross profit in MBR performance, given that our new members, who come on board with lower levels of profitability in their first year of enrollment, continue to represent a larger percentage of our total membership as the year progresses. With our third quarter gross profit success in mind, we plan to redeploy some of our outperformance towards driving 2022 and 2023 growth, given our confidence in the unit economics of our flywheel. Our SG&A in the third quarter was $77 million. Excluding equity-based compensation expense of $28 million, our SG&A in the third quarter was $49 million, which increased 27% year-over-year. Note that there was some timing favorability in our third quarter SG&A related to when we incur various expenses related to AEP and our new market launches, and we anticipate that those expenses will still be incurred in the fourth quarter. All of these factors led to an adjusted EBITDA loss of only $6 million in the quarter, which was well ahead of expectations. As I wrap up our discussion of our third quarter performance, it's worth noting that the results we shared are inclusive of our DCE performance in the quarter. While it is still too early to set future expectations on DCE unit economics, we did receive another couple of months of CMS claims run-out data, which has improved our visibility of second quarter dates of service. We're happy to report that 2Q performance appears to be modestly better than what we shared on our last earnings call. While our third quarter DCE MLR continues to trend greater than 100%, we are pleased with some of the operational trends that we are beginning to see. We believe that with another couple of quarters of outcomes data, we will be able to share more definitive views on the long-term profitability potential of the DCE program. From a capital position, we ended the quarter with $347 million in net cash. Given the strength of our balance sheet, we are continuing to focus our efforts on accretive ways to deploy capital, including M&A in both existing markets as well as new markets. I'll conclude my remarks today by providing some color on our latest guidance. For the fourth quarter of 2021, we expect health plan membership to be between 86,100 and 86,300 members, revenue to be in the range of $265 million to $270 million, adjusted gross profit to be between $24 and $28 million, and adjusted EBITDA to be in the range of a loss of $30 million to a loss of $25 million. For the full year 2021 outlook, we are raising our health plan membership to be between 86,100 and 86,300 members, up from 85,000 to 85,800 members, our revenue to be in the range of $1,135,000,000 to $1,140,000,000, up from $1,105,000,000 to $1,120,000,000. Our adjusted gross profit to be between $126,000,000 and $130,000,000, up from $117,000,000 to $123,000,000. And our adjusted EBITDA to be in the range of a loss of $54,000,000 to $49,000,000, up from a loss of $55,000,000 to $50,000,000. With our highly predictable recurring revenue model We believe we're in a strong position in terms of both our membership and revenue PMPM outlook for the remainder of the year. We expect our fourth quarter revenue PMPM to decline modestly from our third quarter PMPM, which reflects the continued increase of new members, representing a greater percentage of our total population as the year progresses. Our gross profit forecast reflects continued cautiousness around 4Q utilization. We continue to closely monitor COVID trends and the potential impact of the flu this winter. To combat this possibility, our clinical and operational teams are continuing to support our seniors' needs by engaging our communities proactively with our annual flu shot campaign, in addition to supporting ongoing COVID booster shots for our seniors. For adjusted EBITDA, we expect to see a reversal of a few million in year-to-date SG&A favorability, while we also look for accretive ways to invest our year-to-date gross profit outperformance towards our 2022 and 2023 growth efforts. we continue to believe in the importance of making the right foundational investments today to ensure sustainable growth over the long term. Lastly, while it's too early to make any specific comments about 2022, we look forward to sharing more about our overall 2022 outlook next year after AEP concludes, which is when we'll gain further visibility to our new membership across our portfolio of markets and provider partners. To wrap up, We're very pleased to report our third strong quarter in a row given our recent public market debut, and we believe we're in a great position to continue that progress heading into 2022. With that, let's open the call to questions. Operator?