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?

Ladies and gentlemen, if you have a question at this time, please press star 1 on your telephone keypad. And if your question has been answered or you wish to remove yourself from the queue, press the pound key. Your first question comes from the line of Brian Daniels with William Blair. Please go ahead.

Yeah, guys, congrats on the strong quarter and year-to-date performance, and thanks for taking my questions. Thomas, maybe one for you. I think you mentioned that hospital utilization is still running 3% to 5% below pre-COVID trends. And I'm curious, one, can you confirm that? And then number two, kind of what's your consideration for Q4 when you build your guidance in regards to that? Do you think there's some pent-up demand that will start to spill forward in regards to utilization now that COVID is tapering back a bit in some states?

Yeah, great to hear from you, Ryan. I can take that one. So in terms of the third quarter, you're spot on. We did see about 4% to 5% lower total inpatient utilization as compared to our baseline for the third quarter in the past. And obviously, there was an offset where we saw some of that increase on the COVID side related to the Delta variant, and then we saw a decline in the non-COVID inpatient utilization. And so as we think about the fourth quarter, You know, what we're really being, I think, very cognizant of is the potential for the Delta variant to continue to be present, such as it was in both August and September, as well as the possibility for the return of flu season. And as you know, the fourth quarter in general for our business model is typically a higher quarter MBR as compared to 2Q and 3Q. Yes, stepping back, I think what we would say is we feel obviously really, really pleased with the third quarter results and the overall year-to-date performance in terms of our are exceeding the high end of our gross profit range and analyst expectations. And you saw us raise our full year 2021 metrics accordingly, both in terms of our gross profit and our implied MBR on full year 2021. So we really feel, I think, very strongly about the position we're in for our full year outlook. But at the same time, I think you're consistently hoping seeing us be prudent with how we think about our forecast and our guidance on a quarterly basis.

Okay. That's helpful, Culler. And then As my follow-up, I'll ask one for John. John, can you just discuss your expectations for some of the newer products like the Virtual First, AVA, or El Unico, and maybe it's part of that. I'd love to hear what type of, you know, unique benefits you can offer with some of these demographic targeted plans that you think can garner market share both in the near and longer term. Thanks.

Yeah. Hey, Ryan. Good to hear from you as always. No, we're excited about it. We're excited about the PPO products that we announced with Cedars-Sinai and Scripps Health and Hoag Memorial. We're excited about the El Unico product. Last year we introduced the Harmony product that added a couple of thousand members. It's too early to say thus far in terms of AEP for 2022. I think we're a couple of weeks in. The noise level is positive. And, you know, sometimes, and we've experienced this in the past, sometimes the benefits are so good, there's a little bit of a, you know, it's too good to be true kind of dynamic. But, you know, I feel good about it, you know, meaning the members think it's too good to be true. And so I think the more and more we get into the marketplace, the more consistent or go to focus on consistency of the product design, you know, it'll catch fire. I'm confident of that.

All right. Thank you. I'll hop back in the queue. Congrats again.

Thanks, Ryan.

Thank you. Your next question comes from the lineup, Ricky Goldwasser with Morgan Stanley. Please go ahead.

Hey, guys. This is Michael Ha. I'm for Ricky. Thanks for the question. Congrats on the quarter. Just a quick question to start. MLR was pretty great in 3Q. Just curious if you may have mentioned an updated MLR outlook for the year. I think previously you were at high 80s, so just wanted to get that.

Yeah. Hey, Michael. This is Thomas here. So in terms of our overall MBR outlook for 2021, we don't explicitly guide on that metric. But if you look at sort of our previous guidance shared in August on both our gross profit and revenue outlook, you would have backed into something around an 89% consolidated MBR for full year 2021, inclusive of the DCE performance, which, as we shared last quarter, was a bit of a headwind on that consolidated MBR outlook. So if you were to compare that approach to our more recent guidance we released today and look at our kind of high-end gross profit versus high-end revenue, you would get about an 88.6% MBR in the full year, again, inclusive of that DCE performance. So we're continuing to make positive strides on the full-year outlook, and that really is a reflection of that third-quarter outperformance you just alluded to.

Great. Thank you. And just one more, if I may. So taking a step back, just as a Medicaid Advantage plan, there's really grown without the use of marketing tactics, as you begin to kind of invest in building out the brand with sales and marketing, how should we think about SG&A developing next year, future years, and even with this open enrollment period so far, has your marketing strategy changed at all versus prior years?

Yeah, hey, Michael, it's John. The answer is we're really proud of Q3, but what you don't see is all the work that's not yet reflected in the financials, and that relates to putting in workflow processes, standardization of metrics, all of which are important as we sync up and grow into new markets with respect to your branding question. In other words, we need all the operational kind of infrastructure to be firing on all cylinders I think it's fair to say our clinical and our provider engagement capabilities are doing pretty good right now. And so now we need this operational piece to catch up. We're making a lot of strides and we're positioning all of this from a branding strategy heading into our 2023 AEP. I think that's pretty consistent with what we've communicated. And so I think once Once all that is built up, I'm going to be really excited. I was talking to Don Maroney, the leader on the team that runs our marketing as well. She's also CEO of the plans. But what I said was, you know, this coming year in 2022 is really where my expectation is that alignment starts becoming more and more of a household name, a household brand. And I think you can see that in 2022.

Thank you, guys.

You got it, Michael.

Thank you. Your next question comes from the lineup, Jen Ronson with Raymond James. Please go ahead.

Hey, good afternoon. Thanks for taking my question. So a couple for me. If I look at your PMPM, it jumped around. It was 10.071 in the first quarter, 12.16 in the second quarter, and then 1.137 in the third quarter. Could you help us with some of the dynamics behind how that moves around sort of quarter by quarter?

Yeah, happy to, John. So on that second quarter jump in particular, I think maybe that's where I would start. There was a couple of things happening in the second quarter that I think you would want to back out in terms of normalizing a 2Q versus 3Q revenue PMPM comparison. And so as a reminder, the second quarter, we introduced DCE for the first time. And so you saw a pickup or a spike in the revenue PMPM as compared to the first quarter when the DCE program wasn't in existence. And then in terms of the second quarter itself, we also picked up – about $13 million at that time related to first quarter and 2020 dates of service in terms of our updated view on our revenue PMPMs for 2021 final suite. And so you saw a bit of a catch up there happen in the second quarter and then the step down sequentially to the third quarter is I think just a reflection of a more normalized quarter.

So if we think about 4Q, we should kind of think about 3Q being a good run rate for 4Q.

Yeah, I think that's the right way to look at it with the caveat that what we typically see, if you took out some of that noise between the quarters that I was just describing, what you would typically see with our business is higher revenue PMs in the first quarter and then sequentially a bit lower in the second, third, and fourth over the course of the year, which is the reflection of the mix of members changing in terms of our percentage of new members versus our returning members and then the impact that involuntary disenrollment has over the course of the year. And so typically the fourth quarter would be lower revenue PMPM than the third quarter, and that is reflected in our updated guidance today. But otherwise, I think you're thinking about it the right way in terms of 3Q being a good baseline to jump off of for 4Q.

And my second question is, you know, you're kind of new in your rhythm of being a public company. Do you plan to provide any update in your AEP performance before you report 4Q, which would probably be sometime in March?

I think we'll see what we do in the first quarter. What typically will happen is CMS will release some preliminary enrollment data for January 1st effective membership, which I believe typically happens around the third week of January, if I'm recalling correctly. And so I think we may speak to that at that point in time just to make sure there's no miscommunication between what we're seeing on our side and what CMS puts out for the market. And I think more broadly speaking, we'll speak to our overall 2022 outlook on that fourth quarter earnings call.

And I know you kind of made some qualitative comments, but are you – any trends you're seeing kind of this early that would, you know, persuade you one way or the other about how you're tracking?

In terms of AEP, or do you mean just more broadly across the business?

No, AEP. Okay.

Yeah, AEP, you know, it's just a bit early, I think, to provide any type of specific commentary. So on the sales side, we're only about two weeks in at this point. AEP runs through the first part of December. And then in terms of disenrollment, that is the piece that always is a little bit more lag compared to the sales visibility we have on a real-time basis. So I think at this point, you know, we're going to save that commentary for sometime in 2022. But we'll keep you posted as it comes together.

Thanks so much.

Yeah, great hearing from you.

Thank you. Your next question comes from the line of Jeff Garrow with Piper Sandler. Please go ahead.

Yeah, good afternoon. Thanks for taking the questions. I want to ask about star ratings. And so congrats again on achieving a four-star level. I just want to ask what the plan is from here to achieve four and a half or five stars and certainly recognize that maybe a headwind for alignment and for money is the cap survey. and how that influences the overall score. And so, you know, you guys are telling us that you have a great NPS at 82 and reflects how your members see you. So, you know, just maybe more comments on what your internal member feedback is from a broader base that, you know, just isn't getting reflected in the CMS CAHPS surveys and the STAR results to get to, you know, the highest levels.

Hey, Jeff, it's John. Great question. With respect to caps, you're absolutely right. You know, we're not happy with it, but we also understand it. Meaning, you know, it's similar to risk adjustment headwinds that we experienced in 2021. When you have dates of service in 2020, you have the same kind of headwind with respect to caps because there's a two-year lag as opposed to a one-year lag. And so the ratings that we just got and the caps ratings that we just saw reflect 2020 dates of service. And so we're, we're so, uh, reliant upon our IPA partners and our medical group partners. They had a rough go of it in the, in the early part of 2020, as well as the fourth quarter of 2020 with respect to COVID. And so when practices weren't open, it created a lot of care coordination kinds of issues. And, and so, so it's, it's something we understand, um, But I feel very confident we're going to be able to solve it. And it's not different than anything else that we've had to lean into with our IPA partners, whether it be the early years of STARS, where really the focus was HEDIS and medication adherence, and all of that were five stars and continue to be five stars. And risk adjustment, proper, accurate coding, working with our Care Anywhere model. I mean, just the level of engagement is always very high, and we're going to solve this issue. I think that even in 2021 dates of service, you're starting to see improvements of more of a normalized, you know, kind of steady state with respect to access to providers. And we've got some very specific tactics that we're deploying that, again, give me a high degree of confidence we're going to move that cap score up. So we're very focused on it. And, you know, as I've told everybody, you know, I'm not going to be happy until, you know, a scalable five-star MA plan using this model. So, yeah, I mean, that's – It's clearly an area of emphasis.

Great. Appreciate all those comments. I'll follow up with one on the underlying long-term MLR trends. I know there's several different factors here, but maybe if you could just address the prospect of more normal utilization in 2022 and how that combines with the pricing that you guys have rolled out for your 2022 plans, as well as the investments that you're pursuing in your internal teams to produce better outcomes at lower costs?

Yeah, absolutely. So, in terms of how we think about 2022, I would say on the first part of your question related to, you know, how do we, I think you're kind of getting at how do we price our our bids and how does that relate to the cost we might think about for next year and therefore how that rolls into overall MBR and profitability. We approach this two ways. One is certainly the way I think you've heard from many of the folks in our space in terms of taking a very quantitative and actuarially oriented view towards how we think about the 2022 trend. And we, like many others, look at our pre-COVID experience as a way to try to extrapolate. But that's to say, you know, we look back to 2019, we had about 50,000 members in California. We now have about 83,000 today. And so given that pace of growth and the fact that the underlying mix of members is changing very quickly from year to year in terms of members by market and by provider type, we like to supplement the more actuarial-based approaches with a much more, I would say, operational approach. and clinically oriented view of how we think the next year might shape up. And what I mean by that is we're working with our clinical partners both externally but also with our internal care delivery teams with actual feet on the street in these local markets to assess what we think overall trend will be year over year by evaluating it on a bottoms-up build basis. So we're looking at category of spend by category of spend, utilization metric, unit cost metrics, to try to have a really informed view as to what we think the overall trend might look like in the 2022 year. So those are the sort of two approaches we take, and all that is to say I think we feel really good about the way we approached our bids in terms of growth versus profitability. And as we think about that dynamic more holistically and we think about the investments in 2022 we might be contemplating for future growth, I think what we said in the past is that we are absolutely a growth company. We're going to continue to make those important growth-oriented investments to ensure we have the right foundation to achieve that sustainable growth over the long term. But at the same time, I don't think you're going to see us go crazy. I think we are very focused on not growth at all costs and trying to really find a nice balance between the two. I think that's some kind of feedback in terms of how we'll approach the overall 2022 outlook. when we share more early next year.

Excellent. Thanks for taking the question.

Thank you. Your next question comes from the line up, Gary Taylor with Cowan. Please go ahead.

Hey, good afternoon. I was wondering if you could disclose parent cash. I know total cash is half a billion dollars, but do you have parent cash for us?

Yeah, it was right about $400 million or so.

And then, John, I think you made a comment about M&A, which caught my attention. I just wondered what form that might be if you would, in the future, consider other health plans or other technology or medical groups. Like, what would we think about if that was in the realm?

Hey, Gary, good to hear from you. Yeah, I think it's kind of in the all of the above is the short answer. I think the kind of priority, though, is kind of accelerating what we've told you in terms of getting beachheads established to get the plan set up and accelerate the growth by getting these beachheads set up. And so we've spent a lot of time looking at different health plan assets throughout the country. We have been very selective about that. And in the context of building the networks in all these beachheads that we're setting up, we are meeting a variety of provider entities. provider organizations, integrated delivery networks that have provider organizations. And I think lots of creative and strategic kinds of deals are going to result from that. So I'm actually very excited about that. And, you know, you've always heard me say, you know, we need to have at least, you know, kind of one product in the marketplace that we can sell directly to the consumer so that we can control our own growth dynamics have that relationship with the customer. It's not to say we can't have provider organizations or have joint ventures with provider organizations in a marketplace and be non-exclusive, so to speak. So we're looking at all of it, but I think from a priority perspective, it's looking at plans and then overlaying our whole model and AVA and the care delivery and A lot of the kind of synergy of what we can bring to the table is what's being discussed with a whole variety of people. I hope that helps, Gary. Thanks.

There's just one more. Yeah, it does. Thank you. There's just one more kind of going back to what John was asking about. So I follow Thomas' comment about the per member per month revenue and obviously saw the adjustments in the Q and understand the dynamic with new enrollees at lower risk scores and involuntary disenrollment, et cetera. But you're actually guiding for total revenue to be down $25 million sequentially with health plan enrollment up just a touch. I don't know what you're assuming on D.C., enrollment. So it isn't just a mix effect on per member per month. You actually are suggesting revenues down sequentially. So just trying to understand that better, if there are any other out-of-period true-ups that helped revenue in the 3Q.

No, not in a meaningful way. So the 3Q, I think, I mean, literally maybe a million dollars of of out-of-period revenue, but nothing that was significant. So the 3Q versus 4Q is really, I think, just more a reflection of that revenue PMPM anticipated trend. As you saw on membership, we do anticipate it to grow slightly in the fourth quarter, but this is the time of year where really all eyes are focused on that AEP period, and so you really don't see a lot of membership growth from the September to the December membership before those new AEP sales take effect. It's really just more on that revenue PM-PM dynamic that we mentioned earlier. And I think we feel really good about hitting those targets we laid out.

If I could ask one more. Thomas, I think you mentioned $3 million of favorable medical expense related to 2020 dates of service. But when I look at the prior year development from the Q, it looks like it was only up a million dollars sequentially. So maybe we're not talking the same language. I just wanted to understand. your comment.

Yeah, absolutely. So I think the million change, I think it was 1.3 or 1.4 was IVNR. There was another approximately 1.5 million related to our accruals around our Part D program, specifically with respect to some of just the rebate assumptions around prior spend. So those two things combined get to that 2.8, approximately $3 million we highlighted earlier. You're spot on, though, that our million dollars of IV&R was a component of it. And I think overall the IV&R change year to date for 2020 dates of service and prior is just about zero. I think we basically are spot on for the full year compared to what we booked as of year in 2020. Okay.

Thank you very much.

Yep. Thank you.

Thank you. And your next question comes from the line of Kevin Fishbeck with Bank of America. Please go ahead.

Hey, this is actually Adam on for Kevin. Thanks for taking the question. I'm also kind of looking at the implied Q4 bridge and the, I guess, implied MLR guidance. And it looks like it's actually, if I'm doing all this bridging math right, higher than what was implied on the Q4 MLR from last quarter's guidance. And I'm just wondering if MLR is coming in better now. What makes you feel worse about Q4?

Hey there, Adam. So I don't think we feel worse about it in terms of our confidence and sort of our outlook. I think it's a reflection of what I was speaking to earlier, which is just, I think, continued cautiousness around the Delta variant and then just flu season, more generally speaking, given that it is the fourth quarter of the year. And I think the other thing that I would probably highlight in terms of preparing that 3Q versus 4Q number sequentially is the fourth quarter is always a time of year where we look to continue to invest a lot in some of our fourth-quarter activities such as health risk assessments and STARS-related activities, which obviously are for the benefit of future revenue years. And so a lot of that happens also in the fourth quarter of the year, and so we're continuing to anticipate some of that year-to-date gross profit will be reinvested in the fourth quarter accordingly. And then the last thing I'd highlight is, of course, we are launching our new markets right now, and we are bringing on board some of our new hires to support that new growth. And those folks who are on the clinical team, and so their salaries and such hit our medical expense, that ramping up is also reflected in those fourth quarter numbers we shared.

Right, but I'm comparing it to your previous expectation, but I guess the point about reinvesting the outperformance is new, if that makes sense. And then in terms of... Sounds like the health plan membership number doesn't reflect direct contracting, but the premiums do. Just wondering if you could give us more. Is it in the 10Q, this data, or do you not expect to kind of give us MLR for direct contracting and premiums and membership?

Yeah, so I'm happy to provide some color. We haven't actually broken it out entirely in the 10Q itself. The revenue is included in the footnote. And if you were to back into it, you would see that the revenue PMPM on the DCE members is closer to $750 to $800 PMPM. And so when we think about, obviously, our revenue PMPM, we do evaluate it between MA and non-MA. I think the earlier conversation, I was just speaking to John's question that he had asked in terms of how he was calculating it. In terms of the MLR, we shared this quarter that we did see the DCE trends continue to run slightly north of 100%. I think that is much a reflection of what we don't know as what we do know. What I mean by that is we're reliant upon the CMS claims data we get on a lag basis. Sitting here today, I think we have obviously very strong visibility now to the second quarter which while it was still not where we wanted it to be, it improved from close to a million dollar loss, which we originally shared, to now trending closer to break even. It's still a slight loss, but trending closer to break even. And so I think we'll be able to share more with respect to the third quarter in future quarters as we get that claims visibility from CMS. And so I think it's probably too early for us to declare victory in terms of the ultimate profitability potential of that program, but we like some of the operational trends we're beginning to see And we're very cognizant of the tradeoff between potentially a lower gross margin business, but also a significantly less SG&A line of business. And so we think net-net that could still produce a viable business that we're excited about. So it's still a bit of an early days, I'd say, but in general, we're pleased with some of the trends we're starting to see.

All right. And then last one for me. You might have already covered this last quarter, but... I appreciate that you don't have insight into the AEP yet, but I'd imagine that, for the most part, if you want to add DC partners for next year, you kind of already need to be late into the process on that. So is that part of the plan? Or I think previously you might have said that you kind of are just sticking with your current group.

Yeah, I think for 2022, what we've said so far is we're really focused on proving out that model and creating – almost, you know, just more proof points in case studies, similar to what we've done with our MA book of business, before we really invest in a lot to grow that further. And so for 2022, I think you're spot on that we're going to continue to work with our existing provider partners and the panels of members associated with our current DCE program. And then I think in terms of our investment in future growth, that would really probably be more of a 2023 growth opportunity as we look to potentially add other providers into the mix to expand the business accordingly.

All right. Fair enough. Thank you.

Thank you. Your next question comes from the line at Kevin Caliendo with UBS. Please go ahead.

Hi. Thanks for taking my call. So I'm interested in you made comments about having your population vaxxed and fully vaxxed, which is great news. And I'm just wondering if you're seeing anything unusual with the experience post-vaccination now that it's been several months, mostly. I guess my question really is, do you expect utilization to ever sort of get back to normal? You talked about flu season coming up, but a lot of your patients are still wearing masks. And we're still largely seeing Medicare utilization below baseline from almost all the other larger players in the marketplace. And I'm wondering, if there isn't really ever going to be a catch-up, that maybe the baseline is just sort of lower now and maybe improves a little bit. But, you know, 2019 doesn't seem like something that's going to happen anytime soon. Is that fair? Or, I mean, how do you guys think about that? Or what are you seeing, maybe? Yeah.

You want to take that, Thomas? Yeah, yeah. Hey, Kevin. Yeah, I mean, I think COVID is not going to go away for a while. I mean, I think it's going to be something we live with. I think it's going to be controlled. I think that our population is getting boosters, and we're certainly advocating that. But, I mean, like the flu, I mean, every year you get flu vaccines, and every year we see some some trend increases in November, December, January, sometimes into February. So that seasonality is baked into our Q4 numbers. And again, last year, you know, we were doing great in October and all of a sudden you get a spike in November, December with COVID. I don't necessarily expect that actually, but you just don't know, you know? And so I think it's, better to be prudent now and just embed that into our thinking in Q4 than to regret it later, so to speak. But, you know, I just don't think it's going to go away. I mean, part of it also is, you know, kind of geographical in nature. I mean, you know, it's still pretty, you know, it's pretty stringent here in California, and that's obviously where the bulk of the membership is. People aren't wearing masks. But, you know, our seniors are starting to, you know, get back to normal to a certain extent, just because I think the isolation part of resulting from COVID and the mental health issues resulting from COVID are real. I mean, it's, you know, and so we got to get, we kind of need to get people out in a safe way. I don't think encouraging the seniors to just stay home and get locked down is just good for their long-term health when you think about the whole health perspective. I hope you're right. I hope that flu will be kind of normal and COVID will be kind of isolated, but we just don't know. I don't know if that's satisfactory, but that's what I believe on the topic.

No, that's fine. I guess my easy follow-up here is, are you seeing any trend differences in the other markets? I know they're obviously a lot smaller for you, but How much is geography really, and I'm not talking about COVID related expenses. I'm talking about sort of traditional non-COVID. Are you seeing any differences by geography?

I would say at a county level, there's always a little bit more variability, but I think you're kind of referring to some of our state presence, and you're right. North Carolina and Nevada are clearly much smaller states as compared to California today. And so generally speaking, I would say we see the same themes across the board, but then there's always going to be some of those more micro-oriented factors that vary. But generally speaking, I would say that we see similar trends across really all of our markets today.

And just the last one for me. Do you think that this environment that we're in right now is beneficial to a high-touch plan like yourself, meaning people are more – aware of their health care. They're more aware of the kind of services that they want and need and that this that you're offering really fits in well. Basically, I'm asking if you think COVID and the fear of COVID is actually a beneficial thing for you in terms of generating membership.

I was with you until the last sentence. Meaning, I think, you know, benefits and coverages are getting more and more aggressive across the board. We see that in every single market. And I think that's somewhat a function of what you said in some of the tailwinds associated with COVID for the last couple years and how people have kind of embedded that into some of their bids heading into 2022. But, you know, that's not going to go on forever, I don't think. Um, and so I think the notion of having kind of consistently, uh, competitive, consistently aggressive kind of top three benefits in all the markets is going to be something that, that seniors are going to appreciate in the longterm. Um, having said that, I just think service is going to be everything, um, service and access and affordability. I mean, it's the, it's the triple aim and, and, I think we like to kind of call it the quintuple aim here at Alignment, which in addition to those three, just making sure your providers are engaged and aligned and doing well with you and helping them and their practices be more successful. And then really having the products, the service and the products that are designed for the individual. I think we're all kind of nascent in that area. But But I think that product innovation, I think the servicing, and I would say to your point, this culture kind of component seems kind of softy-feely, but it really is foundational to making sure that the little things are addressed with your member service teams, your clinical teams, your provider teams, your sales teams, all these folks, if they actually care about that senior role, which really, I think, begins to show is what will differentiate us. You're not just a number, so to speak. And I link that back to kind of the comment that Jeff had with respect to CAPS. I mean, it's incongruous to think that You know, we get these cap scores, we're going to improve those, but we're still five-star rating. You know, people like us. Our MPS scores are still high. And so we've got to get that addressed. And I think it's an advantage for us. I think people, like I said this on the last call, people actually like us.

It's a good place to be right now. Well, thanks so much for that answer. I really appreciate it.

You got it.

Thank you. Your next question comes from the lineup Sarah James with Barclays. Please go ahead.

Hi, guys. Yeah, this is Steve Braun on for Sarah. Hey, Steve. Hey, as we think about the MBR and I guess like maybe can we talk about like some of the like maybe like the longer term opportunities that you have on some of the levers in the business like like technology like AVA and how that could offset some of the other headwinds that are potentially going to weigh on the NBR like DCE and COVID and flu season. Yeah, that would be helpful. Thanks.

Yeah. Yeah. Hey, it's a great question. So the kind of the secret sauce of alignment is is not only AVA, because I do think AVA is a huge advantage. It was just built to be an advantage to give us this real-time data. But I think the secret sauce is the way in which the technology, the ingestion of the data, the application of the technology, and the results from that kind of technology used by our clinical teams. and our sales teams and our network provider teams. It's how we're using it and then to make sure that all of that is kind of integrated into the way we report the financials, which, you know, you've heard us say is really, really granular and bottoms-up build. I mean, we just, you know, nothing is to chance. We just know, you know, PMPMs by market, by member, by provider, I mean, et cetera, et cetera. And so if you work all that together, that's what gives us the confidence. And the seams between the technology and the clinical care model and the product innovation and the financials, the seams are where we're really focused on building kind of durability in those workflows. And so I go through that because I think that is going to continue to drive growth our MBR toward what, you know, we told everybody our long-term MBRs were, which, you know, 82 to 84%. I think we're inching toward that. We're heading toward that in spite of this kind of COVID dynamic over the last 18 months. And I think because of that, we're going to be able to afford to maintain very competitive benefits. And, you know, every year we see crazy things people do on benefits. I mean, you've got these little guys that will try to buy market share and throw out crazy benefits. They're all gone. Literally, they're gone. They're out of business. You've got the big guys that, you know, from year to year will say, well, we want margin, you know, one year. We want growth another year. You know, so they kind of go up and down. So, you know, it lacks that durability and persistency. And you've got these not-for-profits out there They try to kind of do crazy things on benefits and bleed into the reserves, and that's not sustainable. Or they'll dump the incremental benefits on the backs of the global cap providers. I mean, that's not sustainable either. And so I think the theme is kind of consistent, aggressive growth, but profitable growth. And Thomas said it. We're not going crazy in these bids. A lot of people told us, yeah, just go get the market share, you know, and lose lots of money. And, you know, I have 99% MBRs. We just, that's not in our DNA. So we have to have this kind of disciplined approach to growth, you know. And DCE is, you know, I look at DCE as another bookend. So you have the HMO products, you know, which are kind of our bread and butter products. but we're introducing PPO products, so now you've got these DCE products. We're not necessarily looking to migrate those members into an MA plan. Those folks in DCE have made a choice to stay fee-for-service, and so we've got to apply our tools on top of that kind of customer choice, and think of it as a portfolio. and be able to take care of them. That's why we're still a little bit, you know, just cautious about, you know, is this a long-term product we're going to go deep in? I'm encouraged by it, you know, but I think the core business is doing really, really well. I mean, just the core operations and the Some would call it the gross margin engine is kind of producing as we had hoped.

Okay, great. Thank you for that detail. Appreciate it. Got it.

And your next question comes from the line at Reiki Gold Vassar with Morgan Stanley. Please go ahead.

Hey, guys. It's Mike again. Thanks for the extra question. I know we chatted about this a bit offline in person, but direct contracting PMPMs. You guys are lower than MA at around 750. And I know you can't speak for your peers, but there's some conflicting perspectives on DC revenue PMPMs, where some of your peers actually expect DC PMPMs to be higher than MA. And from my understanding, I know there exists a benchmark rate methodology difference between DC and MA that might be structurally driving that kind of difference. Is that the case or is that not the case and it's more of a function of geography, acuity mix of your DC members versus others? Just wondering if you could help shed some light on that.

Yeah, I can certainly speak to at least our own experience. In terms of comparing our DCE revenue, PMPM, to the MA PMPM, I think there's absolutely some, obviously, structural differences that are a driver of the delta. And so kind of a couple of things off the top of my head. So the first would be, obviously, with MA, we are taking Part D risk, and we are not doing that in the DCE. And so you wouldn't see the revenue or the costs on the DCE that you would in MA. And then similarly, we're taking the risk or the benchmark, if you will, the structure around the risk that CMS is taking. And so the member's cost share is not a part of our benchmark the way it would be on the MA side. So absolutely some structural differences. And then in terms of our specific population, it has been a population, I think we mentioned this in one of our other calls, where it is a lower risk adjustment score population. When we approached this group of people in terms of the assessment of our ability to generate a profit on the program, we actually were looking at our existing portfolio markets across the country today. As we said before, we have a wide variety of different profiles and certainly some of our markets that we're in today that we've proven successful and profitable. are actually pods of members that are typically healthier, lower risk adjustment scores, but also lower utilization. And ultimately between the two of those things, we're able to make that business model work. And so we're sort of applying the same toolkit we've demonstrated in other areas with this DCE population based on what we know. And obviously we're coming up on six months in now, and we're continuing to learn more about it as we get our clinical teams in place and really begin to apply a lot of things that have made us successful in MA in terms of our care anywhere teams, doing the proactive outreach, engaging them in the home, all the things that John was really just describing earlier as our key differentiators.

Yeah, Michael, it's John. Just to add to Thomas, this is the way I look at it. I mean, I you know, kind of structurally and definitionally, you know, DCE is, you know, we're going to be taking risk for what CMS would otherwise take risk for in a fee-for-service structure, you know, and that beneficiary still has to go out and buy supplemental coverage, gap insurance coverage, you know, so they're still paying that premium. And so, you know, fundamentally the, the, the risk that you're kind of stepping into is about 80 ish percent of the, the, the kind of, uh, uh, MA revenue stream. That's what I look at it. And so, so, you know, for, for those out there that are the plans, um, you know, I, I don't know how they're doing it. You know, I don't understand that for those that are on the provider side, You know, I think it's coding. It's how they're doing it. It's coding. And remember, the providers are taking 80%, 85% or whatever global cap they're taking from the payer. So from an apples-to-apples basis, they're kind of getting maybe around the same as they would otherwise get in a global cap deal from them. Does that make sense? Yeah, that makes sense. You know what I'm saying? So for us, what we're looking at is what is the gross margin PMPM on that DCE business? And then, as Thomas has alluded to in the past, there's a lot less SG&A associated with DCE in terms of sales and marketing, utilization and claims and whatnot. So we're looking at zeroing in on what is that EBITDA potential for DCE. And, you know, my initial, you know, kind of thinking is it's still going to be positive, both gross margin and EBITDA, but we're not, again, it's a little early. Give us a couple quarters.

Got it. Thank you for the call, and congrats again on the quarter.

Thanks, Mike.

Thank you so much. And we have no further question at this time. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now