Alignment Healthcare, Inc.

Good afternoon and welcome to Alignment Healthcare's fourth quarter and full year 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 session, you will need to press star 1 on your telephone. Please note that this event is being recorded. If you require any further assistance, please press star 0. 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 that 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 in our Form 10-K for the year ended July, December 31st, 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 Form 10-K for the year ended December 31st, 2021. Leading today's call are John Kao, Founder and CEO, and Thomas Freeman, Chief Financial Officer.

Hello, and welcome to our fourth quarter and full year 2021 earnings conference call. I appreciate you joining us today. I'm pleased to share that Alignment Healthcare had a successful 2021, financially and operationally, including a strong fourth quarter across our critical KPIs. We continue to distinguish our business by demonstrating the power of our proprietary AVA technology platform and our clinical model to deliver strong medical benefits ratio management while also achieving solid growth. That performance was driven by our team's steadfast commitment to change healthcare one person at a time and to always put the senior first. I thank our team for their tireless efforts toward making 2021 a success. For the fourth quarter, our health plan membership ended at 86,100, increasing 26% compared to last year. Total revenue of $298 million in the quarter grew 23% from last year. led by our health plan premium revenue growth of 28% year over year. Adjusted gross profit came out at $43 million in the quarter, with a strong MBR performance of 85.7%, and adjusted EBITDA was a loss of $9 million. Our robust performance to round out the year translated to total revenue of $1.168 billion in 2021, reflecting 22% total revenue growth and 28% health plan premium growth year over year. Our 2021 adjusted gross profit was $144 million with an MBR of 87.6%. Lastly, our adjusted EBITDA was a loss of $33 million ahead of expectations. As important as our strong financial performance was in 2021, Even more important was our continued progress toward building the foundation to achieve our vision of changing healthcare for seniors across the country. We believe our data and technology-enabled care model produces the highest value for seniors and is the cornerstone of our ability to manage future growth. With that in mind, we successfully continue to invest in our AVA technology platform that allows us to scale our Care Anywhere clinical model. We launched our patient panel management module, which acts as a workflow enablement tool for our care anywhere teams. We improved our risk stratification and inpatient admission prediction module, which is now able to accurately predict the highest 10% of our members who will represent 50% of inpatient admissions over the next 30 days. We implemented our Medicare risk adjustment suite, which improves the timeliness and accuracy of our Medicare risk adjustment activities and revenue per member. And we finalized other AVA applications geared towards scaling our clinical best practices. These investments led to increased member engagement for Care Anywhere from 57% in 2020 to over 64% in 2021. Better medical management outcomes with 156 inpatient admissions per thousand in 2021 which is approximately 38% lower than fee-for-service benchmarks, a 14% readmission rate compared to CMS fee-for-service benchmarks at 19%, improved clinical outcomes as reflected in our five-star HEDA scores, and the net promoter score of 64, which is significantly higher than the National Medicare Advantage NPS of 38, and includes an all-time high NPS score of 82 for our Care Anywhere program. All of this work is paying off in our NBR. While our 87.6% consolidated NBR for the year was quite strong, it is important to note that our year two and beyond markets are producing NBRs in the 86% range, while our year one markets and DCE markets are at 98% and 107% respectively. We expect these MBRs in our newer markets to come down as we grow market share and deploy our provider engagement and Care Anywhere best practices consistent with the vintage analysis we have previously shared. The strong 86% MBR of our year two and beyond markets is primarily driven by our successful California franchise, representing over 99% of this cohort and excluding our two 2021 California market launches. This performance consists of 16 diverse and unique counties that required us to leverage AVA to ensure a successful outcome. This 86% MBR is led by our at-risk membership performance, where our more tenured at-risk members are even lower than our 86% in aggregate. As a reminder, we define our at-risk membership as our seniors, where we take financial risk for at least a majority of the members' claims expenses through our aligned provider partnership relationships. Our effective MBR management has led our California business to approach adjusted EBITDA breakeven in 2021. We are also forecasting that it would be slightly adjusted EBITDA positive for 2022, even with the continued growth investments we're making in the state. These proof points are prerequisites to being able to successfully manage our future growth ambitions. We believe this performance validates our clinical operating model. It gives us confidence that the model is scalable. We previously shared that our AEP concluded with approximately 92,700 members as of January 2022, representing 16% year-over-year growth. We discussed where we thought we performed well and where we thought we could have done better, including being negatively impacted by competitive headwinds in Southern California. Though the level of competitive activity was abnormally aggressive in our four California counties this past AP, it is part of the normal cadence in our business. With that in mind, our 2022 investments are focused on step two of generating replicability, which is continuously improving the reliability of our growth model. We believe that investing in greater depth of market management infrastructure, as well as our member experience, will allow us to better leverage our geographic diversification irrespective of competitive market dynamics. First, we are aggressively resourcing our market management and network development teams. This includes hiring additional community engagement reps, local provider contracting team members, and dedicated sales resources who will support more consistency in our future market by market growth. We see an opportunity to deliver even better quality by continuously improving our service delivery and focusing on member experience workflows. Based on the latest national CMS data from 2020, our voluntary disenrollment rate was approximately 37.5% better than the national average. Further, our AEP voluntary disenrollment was minimally higher compared to the prior year. in spite of some of the broader churn issues noted across the industry. We're proud of our current results. We're confident we can deliver even better service to our members. In summary, last year we exceeded our financial goals, all while accelerating the differentiation of our key competitive advantage, our clinical model. I continue to believe the long-term benefits of the work we achieved in 2021 far outweigh the short-term membership headwinds we are now attacking. This year, we are continuing to invest in replicability and portability through market management resources and member experience and workflows. When you combine that with our 2021 MBR and critical outcomes, as well as the strength of our balance sheet, that makes me quite optimistic about our commitment to our long-term 20% growth rate and the scalability of the model. Thank you for your continued interest in alignment's journey. I look forward to updating you throughout the year. Now I'll turn the call over to Thomas to cover our financial results as well as the outlook for 2022. Thomas?

Thanks, John, and thanks to everyone who has joined us on the call today. I want to reiterate John's sentiment that we are proud of our 2021 results and committed to building upon them in 2022. On the call today, I intend to touch on a few highlights from the year, review the fourth quarter results in more detail, and conclude with the discussion of our first quarter and initial full year 2022 outlook. For the year ending 2021, our health plan membership surpassed our initial expectations and ended at 86,100 members, representing an increase of 26% year over year. Over the course of the year, we added approximately 6,000 members from January 2021 to December 2021, which is in line with what we achieved the prior year as well. Our total revenue grew 22% to $1.168 billion, driven by our strong health plan premium revenue growth of 28%. Further, our adjusted gross profit of $144 million reflected an MBR of 87.6% for the year, demonstrating the power of our clinical model and our AVA platform. As John mentioned, we're particularly proud of the strength of our California franchise. where our MBR outcomes continue to showcase the differentiation of our core capabilities relative to the market. Lastly, our full year adjusted EBITDA was minus 33 million, materially exceeding our expectations for the year on the back of strong adjusted gross profit performance, as well as continued discipline through the SG&A line. Our consolidated adjusted EBITDA loss for the year reflects our legacy markets continuing to build momentum towards consolidated profitability. Meanwhile, given the strength of our MBR outcomes over the last several years, we continue to believe in the importance of reinvesting this performance towards future growth. Our balanced approach targeting sustainable growth with an eye on long-term profitability is something that we will continue to balance moving forward. Turning to the fourth quarter results, total revenue of $298 million in the quarter represents a 23% increase compared to a year ago. Our health plan premium revenue accounted for $284 million of total revenue and increased 28% year-over-year. Our adjusted gross profit in the quarter was $43 million, representing an MBR of 85.7%. We approached our fourth quarter guidance with a cautious view towards potential spikes in COVID-related utilization, but were pleased to see overall fourth quarter inpatient utilization approximately 5% better than contemplated in guidance. This utilization outperformance along with sustained revenue PMPM outperformance led to our adjusted gross profit outperformance in the quarter. Our MBR was below 86% for the second quarter in a row in the fourth quarter, showcasing the replicability of the foundation we are building. SG&A in the quarter was $78 million. Excluding equity-based compensation expense, our SG&A was $53 million, an increase of 7% year over year. This leads to adjusted EBITDA, which was a loss of $9 million in the fourth quarter, ahead of expectations. Our balance sheet remains an area of strength for alignment where we ended the year with $312 million in net cash. We believe we are well capitalized to support our organic growth ambitions, and meanwhile continue to look for small but accretive opportunities to deploy capital towards M&A. Turning to our guidance. For the first quarter, we expect health plan membership to be between 93,700 and 93,900 members, revenue to be in the range of $330 million to $335 million, adjusted gross profit to be between $32 million and $35 million, and adjusted EBITDA to be in the range of a loss of $17 million to a loss of $13 million. For full year 2022, we are forecasting health plan membership to be between 97,399,000 members, revenue to be in the range of $1.33 billion and $1.345 billion, adjusted growth profit to be between $163 million and $173 million, and adjusted EBITDA to be in the range of a loss of $47 million to a loss of $39 million. As part of our forecast, we are assuming continued growth of our health plan membership throughout 2022. Our net growth anticipated from January 2022 to December 2022 is comparable to our experience in prior years, and we believe that it is achievable given the continued investments we're making in our local market management and our member experience. Our revenue PMPM forecast is based on our latest internal data regarding our returning members documentation for payment year 2022, as well as our initial payment we received in January for our new members this year. We're pleased with the progress we're seeing on our returning members documentation. However, that is slightly offset by new member RAF that is modestly lower than our expectations heading into the calendar year. Our revenue PMPM forecast also reflects the adverse impact of the return of sequestration, which is slated to begin in the second quarter this year. From a utilization perspective, our adjusted gross profit guidance reflects our recent experience the first part of 2022. Omicron had less of an impact on inpatient utilization through the first half of January. However, it began to more significantly increase in the back half of January and the first part of February. Our COVID inpatient admissions per thousand peaked in January at a rate that was close to two and a half times the COVID admissions per thousand we experienced during the Delta wave last summer. As we've seen in prior waves, however, we did experience a partial offset from a reduction in non-COVID utilization. Importantly, the back half of February has stabilized at a more normalized rate of COVID and non-COVID inpatient utilization, and we're optimistic about the fact that another variant has come and passed without causing a significant deviation from our overall expectations. The anticipated seasonality of our adjusted gross profit line and MBR for the first quarter reflects our recent Omicron experience, and we feel we are well positioned to deliver on our overall 2022 adjusted gross profit objectives. Turning to our DCE venture. Our DCE membership stands at approximately 5,200 members today, and we anticipate that membership to continue to remain roughly flat over the course of the year. As a reminder, our health plan membership of 92,700 as of January 2022, as well as our forward-looking health plan membership guidance excludes our DCE membership. Given the recently announced ACO REACH model, we are actively working through our 2023 approach and evaluating some of the underlying model changes. Similar to our prior comments on the Global and Professional Direct Contracting, or GPDC model, we will evaluate pursuing the ACO REACH model as long as we believe it's a financially viable model for us that can lead to better outcomes for seniors in traditional Medicare. While we are seeing progress with respect to better outcomes for seniors in the GPTC model, we have remained cautious with respect to that program's long-term economic potential. We look forward to keeping everyone informed as we work through these new regulatory changes and their potential impact on our go-forward strategy. Lastly, as we said before, It is a strategic imperative of ours to drive growth of the business sustainably and responsibly. We believe our 2022 adjusted EBITDA guidance is reflective of this balanced view of growth versus profitability. As John mentioned, our California franchise is set to potentially break even on an adjusted EBITDA basis in 2022, which is a powerful testament to our gross margin engines. Our consolidated adjusted EBITDA loss therefore reflects the continued investments we're making to support our new 2021 and 2022 health plan markets, our 2023 and 2024 growth and market expansion initiatives, and our recent public company expenses that we expect to achieve operating leverage on over time. These underlying trends and components of our consolidated adjusted EBITDA guidance, as well as the strength of our balance sheet, which provides us with significant strategic flexibility, give us confidence in our path towards our long-term growth and profitability targets. Wrapping up, our fourth quarter results were a strong end to an exciting and busy year. Looking forward, as John noted, I am confident we are well positioned to further build our foundation towards scalability and long-term profitability, and we look forward to updating you on our progress throughout the year. With that, let's open the call to questions. Operator?