Alignment Healthcare, Inc.

Welcome to the Alignment Healthcare First Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Mr. John Cahill, Founder and Chief Executive Officer. Please go ahead.

Hello, and welcome to our first quarter earnings conference call. I appreciate you joining us. We are proud to report another strong quarter, beating guidance across each of our four key performance indicators. For the first quarter, our total revenue of $346 million represented 29% growth year over year. This was led by our health plan premium revenue of $331 million, representing 25% growth. Our health plan membership ended at 94,200 members, growing 13.4% year over year. Adjusted gross profit of $45 million in the first quarter was also ahead of expectations. Our gross margin engine continues to produced strong MBR outcomes, coming in this quarter at 87.0%. Lastly, our adjusted EBITDA was a loss of only $4 million as the vast majority of our adjusted gross profit outperformance fell to the bottom line. The outcomes in our first quarter indicate continued progress towards our long-term profitability objectives. After a solid start to the year, I'm feeling optimistic and about our ability to continue to successfully execute against our strategic and financial objectives for the remainder of 2022. For our conversation today, we would like to cover three topics with you, including an overview of how we uniquely engage with the primary care community, an update on growth and our investments in market management, and a preview into our 2023 planning. During our initial public offering last year, we shared that our operating model centers around core principles that drive our virtuous cycle and are critical to building a successful Medicare Advantage platform. In the past, you've heard us talk about the achievements of our clinical model and our proprietary AVA technology. Today, we want to talk to you about the third key piece of the model, provider engagement, which is an essential component of how we create our strong MBI results that translate into high-value products for seniors. Our engagement was based on three important value propositions for the primary care provider. Number one, better care. Number two, better practice operations. And number three, better financial results. As we've been out in the field focused on our growth initiatives, one of the most encouraging things we've experienced is that our provider engagement model and value proposition continue to uniquely resonate. Our approach to partnering with primary care physicians is different from others, as we do not have to employ primary care physicians in order to achieve successful outcomes. So we are certainly open to that dialogue should the provider have interest. Nor do we force them to change the way they practice medicine at the point of care. Instead, we create clinical, operational, and financial alignment allowing us to form win-win relationships between the doctor, their front office staff, and Alignment Healthcare, all for the benefit of the senior. From a clinical perspective, we believe that most clinicians are great at what they do, and we don't want to change what has made them successful. Alignment is committed to helping its primary care providers become even better and deliver even better care. We support the provider by helping them care for the most vulnerable seniors, through our Care Anywhere program, which we view as an extension of their practice. Our Care Anywhere employed clinical teams provide extra care in the home or virtually to the 10 to 20% of our members who are chronically ill or high risk. This support gives time back to our primary care physicians to provide more care to more patients. We do all of this free of charge for our alignment members and free of charge to the provider. Importantly, members enrolled in our Care Anywhere program stay paneled to the existing primary care provider. In addition, we support our providers with actionable insights and valuable member data, which are made available to them real time. From an operational perspective, our proprietary AVA technology tools and data help providers navigate the complex world of value-based care and optimize their performance. Physicians, front office staff, and provider organization leadership are provided with access to our population health data for their panel, as well as monthly reporting and stratification tools that we believe help them manage their practice. While we do not require providers to use our applications or tools at the point of care, we consistently hear feedback from our network of providers that our approach to sharing information is more transparent, comprehensive, timely, and insightful than other health plans. Whether it's stratification tools, gap closure lists, financial and utilization performance dashboards, or clinical insight applications, our model facilitates greater collaboration and more efficient and streamlined operations. From a financial perspective, we strongly believe in aligned incentives with our provider partners. In order to achieve this, we typically enter into gain share, profit share, and or risk-sharing contracts with aligned physician incentives to align its total cost of care or MBR for their panel. More than 97% of our members are paneled to providers that participate in some form of gainshore or risk-sharing opportunity. Since our partners are financially aligned to provide clinical and quality outcomes, our members are able to have a greater member experience as reflected in our net promoter scores while our providers are able to experience better financial results. These three key components of our provider engagement model have been critical to how we differentiate ourselves in the market and how we plan to grow our business model. Turning to 2022 and 2023 growth initiatives, our ingredients for growth remain the same. Provide high quality at a low cost. Invest in local market management and focus on on our products, partnerships, and expansions. While early, we're starting to see positive traction with our market management initiatives. Our membership as of April, which reflects both the start of Q2 and the end of the open enrollment period, ended at 95,000 health plan members, well on our way toward the 97,300 to 99,000 year-end membership guidance. While our primary Short-term focus is on 2022 growth. Our activities are also designed to support our 2023 growth plans as we build a repeatable, scalable platform. Though it is too early to comment on our specific 2023 product strategies due to the competitive nature of the bids, we intend to maintain our balanced approach targeting sustainable products and profitable growth. Meanwhile, to bolster our 2023 growth objectives, we are planning for both contiguous county expansions to go deeper in our existing states as well as new states in 2023 subject to regulatory approval. Given our 12 to 18-month new market sales cycle, we're very pleased with our progress toward 2023 new provider partnerships and market launches. We look forward to sharing more information later this summer after our bids have been submitted. Wrapping up, 2022 is off to a great start, as evidenced by our first quarter results. In addition to our financial performance, we continue to make great progress scaling our Medicare Advantage platform. Lastly, it is the steadfast commitment of our mission-driven employees that makes all of this possible for our seniors. As always, thank you to the entire alignment team for your tireless work putting seniors first in all you do. With that, I'll turn the call over to Thomas to review our financial performance.

Thomas? Thanks, John. Turning to the first 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. For the quarter ending March 2022, our health plan membership of 94,200 increased 13.4% compared to a year ago as we continue to see positive momentum across our markets. Total revenue was $346 million in the quarter, increasing 29% compared to a year ago. This was led by our health plan premium revenue of $331 million, reflecting growth of 25% year-over-year. It's worth noting that our first quarter health plan premium growth of 25% was a combination of both 13.4% membership growth along with 9% health plan revenue PMPM growth. Our revenue PMPM accrual for the first quarter reflects slightly earlier visibility to our projected full year revenue PMPM compared to this point in time last year. Accordingly, the 9% increase in our health plan revenue PMPM year over year was largely due to timing in the first quarter. On our last earnings call, we commented that our full year 2022 guidance incorporates an increase in our health plan revenue PMPM of approximately 2% compared to 2021. I will cover this in further detail momentarily, but we still believe that to be the case today. And we do not anticipate that the earlier Q1 visibility will change our full year expectations. Our top line outperformance in the quarter was coupled with strong MBR management. Our adjusted gross profit of 45 million reflects an MBR of 87.0%, including the impact of COVID utilization in the back half of January and the first part of February. As a reminder, 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 variant wave last summer. However, as we've seen in prior waves, we did experience an offset from a reduction in non-COVID utilization that continued throughout the remainder of the quarter. It's also worth noting that our $45 million of adjusted gross profit in the quarter included approximately $6 million of prior period favorable adjustments related to incurred but not paid claims estimates. We reflect our latest estimates of prior period development each quarter as part of our normal business cycle. However, this quarter was slightly more favorable than previous quarters. Excluding the prior period favorability, we were pleased to still deliver adjusted gross profit well above the high end of our guidance range. SG&A in the quarter was $74 million. Excluding equity-based compensation expense, our SG&A was $49 million, an increase of 24% year-over-year. Lastly, our adjusted EBITDA was a loss of $4 million, exceeding our expectations for the quarter on the back of our strong adjusted gross profit performance, as well as continued demonstration of SG&A scalability. Our consolidated adjusted EBITDA performance for the first quarter reflects our more mature markets continuing to build momentum towards consolidated profitability while we continue to invest in our newer market and growth initiatives. In terms of the balance sheet, we ended the quarter with $294 million in net cash. As mentioned on previous calls, we view our balance sheet as an area of strength given our ability to continue to fund our organic growth and working capital needs without requiring external financing. With that in mind, we also continue to evaluate small but accretive opportunities to deploy capital towards M&A. Turning to our guidance, for the second quarter, we expect health plan membership to be between 95,500 and 95,700 members, revenue to be in the range of $335 million and $340 million, adjusted gross profit to be between $41 million and $43 million, and adjusted EBITDA to be in the range of a loss of $11 million to a loss of $8 million. For a full year 2022, we expect health plan membership to be between 97,300 and 99,000 members, revenue to be in the range of $1.335 billion and $1.350 billion, adjusted gross profit to be between $165 and $174 million, and adjusted EBITDA to be in the range of a loss of 46 million to a loss of 39 million. We are reiterating our full year 2022 membership guidance and raising our full year revenue guidance on the back of a solid conclusion to the OEP period, as well as revenue outperformance in the first quarter. We know that our revenue forecast includes the 1% return of sequestration in the second quarter, as well as the full 2% return of sequestration beginning in the third quarter. As mentioned previously, Due to our revenue PMPM visibility and first quarter revenue accrual, we note that our second quarter revenue guidance implies a lower growth rate year over year. However, this is simply timing between quarters, and we encourage investors to focus on our full year revenue outlook. Given our first quarter adjusted gross profit outperformance, we are raising our full year 2022 adjusted gross profit expectations in addition to narrowing our guidance range. As we think about our adjusted gross profit and MBR assumptions over the next nine months, We remain mindful that we are early in the calendar year, and we will likely continue to see some variability in utilization as the rest of the year progresses. Our guidance expectations are predicated upon utilization running approximately in line with our historical baseline experience, inclusive of the potential for a modest spike in COVID-related utilization. Lastly, we are raising the low end of our adjusted EBITDA guidance. As we said before, it's a strategic imperative of ours to continue to balance our short-term profitability objectives with our longer-term growth objectives. As the year progresses, we anticipate continuing to evaluate ways to reinvest any adjusted gross profit outperformance towards our 2023 and 2024 growth initiatives. In summary, we are very pleased with our first quarter results and think it's a solid start to the year. Our team is executing on our strategic initiatives across markets, and we look forward to updating you on our progress throughout 2022. With that, let's open the call to questions.

Operator?

Thank you.

We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then 2. At this time, we will pass momentarily to a similar roster.

first question comes from Ryan Daniels with William Blair please go ahead as thanks for taking the questions and congrats on the strong start to the year John I wanted to address a question to you you spent a lot of time talking about how your relationship with physicians is different than that which they have with a lot of other payers which is more adversarial and I'm curious in This market where there's labor shortages and burnout, you know, working with you, you can improve their time. You can kind of make it easier to practice. You can provide additional incentives. So my question is, how do you get that message out into the market and leverage your unique position to help drive your growth engine?

Hey, Ryan, thank you for that question. I love that question. it's really something we talked about at the last conference call when we talked about making the investments in both community reps and provider development resources. And so it's taking all of the value proposition that was inherent with the way in which we started the company and then really packaging it up so that every single person in the company really understands why the primary care physician is so important. And so it's getting in the field and talking to them, which is what we've been doing since the beginning of the year. And I got to tell you, I'm so energized and excited about the response back from the PCPs that we talked to. I mean, they're looking for a solution. And again... You know, there's a lot of talk around consolidation. There's a lot of talk about staff models. There's a lot of talk about different kinds of models. And they just want to practice really good medicine. They want to remain autonomous. They want to be entrepreneurial. But they need help in getting into value-based care. And we provide the tools. We understand them. We come from a delivery culture. And so it's just – it's boots on the ground, Ryan, and – I'm really excited about that in the context of how we're growing the business.

Perfect. I appreciate that. And then as my follow-up, it looks like social determinants of health are really entering the mainstream. And I think in the Medicare 2023 notices, they're going to incorporate that a lot more in regards to how they view plans. So can you address how you look at social determinants of health? I think it's an area you've actually focused on collecting data and investing in probably ahead of anyone else in the industry. So love to hear what you're doing there and what the plans are. Thank you.

Yeah, Ryan, again, I love that question. From the IPO, we've said we think there's going to be a convergence between traditional health insurance, but also supplemental benefits that support social determinants of care. And in the context of the final notice and where CMS is going, we love what they're doing. We'd love to focus on health equity and We love to focus on care coordination and coordination of benefits with the states. And we'd love the transparency associated with this topic around supplemental benefits. And I just think that it's going to be more and more important that we look at whole health. I'm actually borrowing that phrase from somebody else, but I think it's appropriate. I mean, whole health care and all the social determinants of getting them groceries, getting them caregivers. And again, to personalize a lot of this, my family members, my mom and my brother, they're just beneficiaries of this and the amount of just improvement in their daily lives is huge. Having a shout out here for you, Andrew, Papa, is really additive to a senior because they have an hour a week just to drive her around and Get groceries. It's a big deal. I say, I think you're going to have more and more of that. And I think the transparency associated with that from CMS, what they're looking for, I think is great.

Great. Thank you for all that, Collin. I'll hop back in the queue.

The next question comes from Ricky Goldbother with Morgan Stanley. Please go ahead.

Yeah. Hi. Good evening. So I wanted to focus on MLR. Clearly you guys did a great job in managing medical costs down sort of continuation of what you did in the last couple of quarters. How should we think about MLR guidance for the rest of the year? Because I don't think you've changed or at least you didn't update that. And then As we think about the opportunity, can you maybe share with us some data points about how the year two cohorts are progressing? I know that you've shown meaningful improvement in the California cohort. Just curious to see how this is progressing also in your other states.

Yeah, absolutely. Hey, Ricky, this is Thomas here. So first off, very proud of our first quarter results. And to your point, I think it's another quarter where we just demonstrated the consistency of our operating model and our clinical model. And so as we think about the rest of your outlook, I think we feel very comfortable that another COVID wave has come and passed, which didn't cause us to have a significant deviation from our expectations. And as we shared earlier in the call, and I think we shared a little bit of this in our last call, You know, our experience with Omicron was that we had higher utilization to the tune of two and a half times compared to what we experienced during the Delta wave last year. And again, that's inpatient utilization. So the fact that we were able to kind of manage through that without skipping a beat is something we're very proud of. Having said that, we also recognize we're only three months into the year and we got, you know, a ways to go. And so When we think about our full-year outlook, I think we feel very comfortable with our approach in terms of our kind of 87-ish range for full year. If you look at our adjusted gross profit on the low and the high compared to the revenue, you back into something in the 87% range. And, again, that's inclusive of our DCE venture, which, as everyone knows, is running north of that. And so that obviously implies that our kind of core MA business is running better. And so we really feel great about the way we're set up and put a lot of thought into how we think the rest of the year might play out. In terms of your question on the year two cohorts, we're making a lot of progress. And again, we look at cohorts both on a member level and also on a market level. And so on the member level, I think you all have seen our vintage analysis before, we typically see about a five to ten point improvement on our membership from year one to year two. And similarly, from a market standpoint, we see the same concept, except we also get the benefit of improved operating leverage. both within the SG&A line but also inside of MLR as we start to get more membership relative to our local clinical model resources. And so right now, I think all things are tracking consistent with our original investment cases. Very excited about the opportunities in both North Carolina and Nevada and then Arizona as a year one market. And looking forward to continuing to grow those heading into 2023.

Our next question comes from Jeff Garrow with Piper Sandler.

Please go ahead.

Yeah, good afternoon, and thanks for taking the questions. I wanted to ask a little bit more about your progress on the market management efforts. And I guess given the tough labor environment that we're in right now, I wanted to specifically ask, if you're achieving your hiring goals for community reps and provider development resources in terms of both the quantity of people you want to hire and the quality you were expecting?

Hey, Jeff, it's John. Another great question. The answer is we are at about 60% of goal in terms of what we were anticipating hiring for the entire year. So from a timing point of view, we're really happy about that. not only setting us up well for the 2023 market, but really helping us with a variety of initiatives in 2022 on the growth side. So part one is we're absolutely getting really, really good quality people. I would agree with you that the competition for quality people that are familiar with value-based care and managed care is very competitive these days. I'd also say that we are a little bit different in that what we do and how we do it is different than, say, a traditional legacy managed care organization. And so we're looking for the best athlete, and we're training them, and we're spending a lot of time on people development. We're spending a lot of time on workforce management. We're being flexible. We are respectful of compensation-related issues with respect to peer groups, equity, all of that. And we're committed to getting the best people. So, yeah, it's competitive out there, but we're getting the people we want, and we're going to train them.

Excellent. Great to hear. And maybe follow up a little bit more there. I know that initiative was put in place thinking about 2023 open enrollment, and it's great to kind of hit the ground running and and lay the framework for success there. But you mentioned initiatives in 2022. So curious what those are, if they're more focused on enrollment or if they're focused on stars or retention or other components of your success.

Yeah, I'm really happy with the kind of, I call it kind of clinical operations throughout the company. I mean, in terms of stars, compliance, MRA, and kind of operational efficacy. I'm really happy with the way in which the company is progressing along all those fronts and all of the markets. And so while we're still, and Thomas will kind of nudge me here, but while we're still sticking to the range on membership that we've just shared, we've got a lot of things we're doing. I'm not at liberty quite yet to talk about them. But, you know, you know us. We're working hard. You know, we're a very competitive group, and we're working hard. And, you know, I still stand by my 20% long-term growth, and we're not, you know, stopping in 2022. So everybody is very focused on growth. And as Thomas mentioned, our clinical model is working well and our provider engagement is going really well. And so, really, the answer to your question is we really want to translate all that into the growth.

Excellent. You dropped some interesting crumbs there. Thanks again for taking the questions.

As usual, right? Thanks, Jeff.

The next question. Please go ahead. Hi, John. Is your line muted?

Hello. I'm sorry. Can you hear me?

Yes, we can hear you now.

Oh, sorry about that. I didn't catch my name. Hey, my question is, as you look three to five years out, you know, and the market's sort of impatience for you know, real profits and real EBITDA. Have you changed your thinking at all about getting to, you know, real EBITDA profit or are you just thinking more about the top line growth?

Hey, John, this is Thomas here. Definitely something that we are mindful of. And really, I think we've been pretty consistent since IPO that we were not believers in kind of the growth at all cost model. And so our approach has really been to try to strike a balance of, of solid growth while also doing it in a way that we think allows us to get to that point of EBITDA breakeven or EBITDA profitability over the next several years. And so we shared last call that our California franchise, which again is where we've been operational the longest, that was really approaching EBITDA breakeven last year and our forecast called for EBITDA positive this coming year. And so I think that's really a great data point and testament to kind of the ability of our consolidated profile to get to EBITDA breakeven But at the same time, we're very big believers in what we're accomplishing. So we do want to continue to invest in growth. And as a lot of our losses this year are related to those 21 and 22 new markets, as well as the anticipated spend over the back half of the year related to our 2023 new launches, we think that's the right thing to do to create long-term value for all shareholders. And so I think you'll see us continue to be disciplined, but also continue to be growth-oriented over the next couple of years as we march towards that EBITDA break, even on a consolidated basis.

Hey, do you have maybe a low to high revenue number where it'd be reasonable to think about breaking even on a consolidated basis?

You know, what I would tell you is it's partially a function of the amount of growth between our existing markets and our new markets. And what I mean by that is when we launch a new market, there are certain investments we make both on the medical expense side but also in the SG&A side that are typically short-term diseconomies of scale. Conversely, that same growth, if it happens in one of our existing markets, we tend to get faster operating leverage on it. So I'd be hesitant to give you a single kind of point estimate on revenue in and of itself, because I think it's the composition of that revenue that's really important. But as you've heard John say, you know, we're very dedicated to targeting that 20% kind of annual growth rate in the future. And I do think that we will be approaching EBITDA break even over the next several years. So I think you can kind of do some back of the envelope math that probably gets you directionally to what you're asking about.

Sure. Thank you.

The next question comes from Lisa Gill with JP Morgan.

Please go ahead.

Yeah, hi. This is Cal Sternick on for Lisa. Just a question since you guys touched on M&A earlier. I know that's something that you guys have been looking at for a while, and I think on our side we're all sort of waiting for that shoe to drop. So just curious if you could give us a sense for what you're seeing in the market, either in terms of health plan opportunities or provider opportunities.

Hey, Cal, it's John. Yeah, just to kind of talk about that in the context of, say, Q4 of last year, I think we were very aggressive on that front. I think in the first quarter of this year, our priority is to ensure that we protect the balance sheet and to be very, very thoughtful about cash such that we don't have to raise any cash to execute and grow on our organic growth numbers. Having said that, we're being very opportunistic. And what we're seeing is opportunities with very name-brand providers wanting to work with us in Medicare Advantage and on value-based care. And I would say both on the hospital side and the provider side. And so I think we're being very thoughtful about that. I think we're being very selective about that. And I think that There's going to be a normalization, if you will, with some of the private companies and their valuation expectations with the public markets, et cetera. And I think we're going to be just very, very prudent along that line. I will say that also our ability to analyze and, in my opinion, implement acquisitions is something I'm getting very, very comfortable with. And so I think we are being very selective, but we are still looking at a few very interesting opportunities. Okay, great.

And then if I could just ask, a couple of other companies, some of your competitors have mentioned changes to the way that they're incentivizing brokers for next year. Just curious if you have any plans to structure your relationships differently heading into the 2023 AEP, and if you could just give any color there.

Hey, Cal, this is Thomas. No real plan of changes on our side. I think maybe what you're referring to is some of the discussions around certain distribution channels that have had higher churn in the past and and how the payments to some of those distribution channels were kind of impacting that churn that others had experienced. While we are very much partnered with the external broker channel, we typically work more with the FMO channel than some of the kind of more telephonic and online channels. And so for us, it's a fairly small percentage of our overall distribution, and so not something that we've necessarily seen that I know others in the market have talked about. So I think we're kind of heading down the path of staying consistent with our approach, and we want to continue to work with these brokers who we've known for many, many years, who are great supporters of us, really understand our value proposition, not just in terms of the benefit richness, but also the overall experience of what it means to be a part of alignment. So no plan changes there on our end.

Our next question comes from Nathan Rich with Goldman Sachs. Please go ahead.

Hi. Good afternoon. If I could start with a follow-up for Thomas on the MBR guidance. I think you said it assumes utilization kind of running in line with kind of baseline and also includes a modest spike in COVID utilization. I just wanted to clarify that. And could you maybe add any color just in terms of how you saw utilization trend coming out of the Omicron spike, you know, in March and kind of how you expect that to play out in 2Q?

Yeah, yeah, absolutely. So heading into sort of the back part of January, as I mentioned, our COVID emissions per thousand peaked at a rate that was about two and a half times what we experienced during the Delta wave last summer. Importantly, though, our overall COVID admissions in the month of January were still significantly lower than what we experienced pre-vaccination during December 2020 and January 2021. So while it was higher, it was not near as severe or intense as we had seen before vaccinations. And so as we thought about our experience over the back half of the quarter where COVID came down at a very, very rapid pace, And while we did see some increase in non-COVID, it didn't quite come back at the pace we've seen in prior waves. We felt pretty comfortable in thinking that the next nine months, our overall expectation that utilization should run in line with our historical experience is a pretty reasonable starting point for the year. Now, I will say that if you had asked most folks back in October of last year whether they thought the soon-to-be-called Omicron wave would be worse than the Delta wave, I think most folks would have probably told you they didn't think that was possible and the Delta wave was hopefully the last of it. If we've learned anything, I think over the last almost two years now, it's that there's always a bit of unpredictability with respect to how COVID will continue to impact the medical expense line item. And so with that in mind, we thought it was sort of prudent of us to assume some portion of that utilization at baseline over the next nine months to be inclusive of the impact of COVID. And the reason, of course, is our COVID unit costs are about 50% higher than our non-COVID inpatient unit costs. So that mix is a really important KPI that we track daily here to make sure we're not surprised by any of that experience.

That's helpful. And maybe as my second question, John, you talked about the different types of gain share and risk share. contracts in the market and it seems like, you know, your discussions with providers for 2023 are well underway. I guess I'd just be curious from alignment's perspective, like what type of risk relationship do you feel like puts the company in the best competitive position? And I guess, do you kind of have a preference for that type of relationship that you have with the provider?

Yeah, yeah. Great, great question. I would say making sure that we are flexible with our providers. And that's the individual practitioner as well as IPAs as well as medical groups. And in that regard, we want to make sure that whatever kind of arrangement we have is going to result in the best outcomes for the member and will result in our ability to grow. And so what I mean by that is if we do a shared risk arrangement and we're really managing a lot of the institutional dollars, higher risk cost dollars, and we're deploying our Care Anywhere model and we're doing it with providers in the community, which is really largely what we've done in California, about two-thirds of our business is shared risk, that gives us the opportunity to have a differentiated cost structure while maintaining better clinical outcomes and better quality, which is really for the benefit of the beneficiary. I have mentioned several times before, we do not mind global cap deals. We have a lot of great global cap partners that have been with us from the beginning since we started the company. What we want, though, is to make sure that those relationships are delivering of all the aspects that we have delegated to them. We need to make sure the stars is what meets our expectations. We need to make sure that the coding is compliant and in line with prevalence data. All of those operational elements or value drivers, as I like to say, have to line up with contracting. We're flexible and We want the right outcomes. We want to have persistency of the delivery systems that gives us a competitive advantage. If we globally cap somebody at X percent and five other plans are at X percent, how are we differential from everybody else? That's kind of one concept. The other concept I would say that I think the market really doesn't understand but should is The difference between globally capping somebody for medical-related costs and also the notion of delegation of certain administrative services, like claims payment or utilization management. Those are two very different things. A lot of our competitors, I think, do, and we do things right, which is you're very thoughtful about who you delegate to, right? Because if you pay claims and do a lot of the UMP, you have the data and you have the information, you know, which is what we have. And so how we get that information into AVA, how quickly we get it to be transparent to our provider partners, I think is a competitive advantage we have vis-a-vis some other folks that have kind of this 45- to 90-day latency window on data, you know, for people taking risk. So very flexible and... It's worked this far, and we want persistency. That's the key.

That's helpful. Thank you.

The next question comes from Kevin Fishbeck with Bank of America. Please go ahead.

Great. Thanks. I'm actually a little bit confused about how to think about the quarter. Thomas, you gave a couple of things in there around consistency. you know, the rate in the quarter, you know, being nine instead of two because of the timing of that, you know, revenue condition, and then $6 million in favorable development. I mean, obviously, if we said that revenue only grew 2% and then we add $6 million to cost, you'd be having MLR, like, in the mid-90s. So why isn't that the right way to think about it? Where are the other adjustments in there? And I guess how did Q1 play out versus what your, you know, internal thoughts were?

Yeah, yeah. So Q1 was sort of right in line with expectations. So maybe we'll start with the revenue side. So when we put out our guidance, we obviously had, that was in early March, we had some visibility to how we were tracking on our first quarter revenue rates. And really that timing I alluded to was related to us having earlier visibility this year on our returning members. So as a reminder, the way we sort of look at our membership in a given year is which members we've had with us in the prior year. and therefore we have the data in-house that allows us to quantify and appropriately accrue for their expected revenue rate in the final sweep for 2022 payment. And then we also have our new members where we're really kind of subject to what we get paid starting in January of that year, and then we typically see a form of a true-up in the mid-year sweep over the course of summer. And so when I mentioned earlier that we were having earlier visibility on that returning member set, that's really a function of a lot of the great operational progress last year, and just less of an impact of COVID for prior year dates of service as compared to our 2021 Q1, our 2021 payment year, where obviously we're coming out of the back part of COVID in 2020, and that has a disruptive effect across the industry. So no surprise on the revenue side, very consistent with expectations. In terms of the medical expense side, we obviously, like everyone else in the industry, have a true up on our IVNR every quarter. And the way we've approached it is to be really focused on ensuring that we have all the data we could possibly capture in-house on our membership and tracking it not just from a utilization perspective, but also looking at the actual form of utilization, where the sites of service are occurring, which cases might be high-cost outliers, to ensure that when we close our books every quarter, we think we've done a really thoughtful job of making sure we're appropriately reserved. And so what we typically see in most quarters is there's often a true-up, and more often than not, it tends to be a little bit favorable than unfavorable, I would say. It's just that this quarter, the $6 million was a bit more favorable than normal. And so back to your question on MBR, I would not assume that all of the $6 million was sort of a one-time surprise. I think a part of that is sort of normal course for the businesses. And on the revenue side, I also would not assume that all of that is just flowing to the bottom line. As John mentioned, we do have a variety of gain share, profit share, and risk share type relationships where we're accruing for a payable at the same time we're accruing for the receivable on that revenue rate. And so those two things net out such that I think even absent those two items, our MBR for the quarter was sort of solidly in the 87s. and still ahead of both our kind of implied low and implied high guidance range.

Okay, that's helpful. And then I guess, John, I like the discussion you started off with and that's going on for this quarter about your physician engagement because it's a great preview for the panel you guys are going to be on at our conference next week. Looking forward to that. Yeah, but I guess you mentioned that 97% of your doctors are already kind of aligned with When you think about the improvement in MLR from here to kind of get to that profitability metric, it sounds like you basically are engaging the physicians to some degree already. What is the main driver to that? Is it deeper engagement with physicians? Is it getting them just to be on the system for longer? I mean, how do we think about that physician engagement and the levers to pull to get to profitability? Thanks.

Yeah, that's another great, great question. Yeah, I think if we look at our existing markets, I think we've got a lot of things working well in our existing markets. It's really kind of the new markets, both in terms of the new markets in 2023, but also the new markets that we launched in 21 and 22, it's kind of going deeper with that level of engagement. And so when I define engagement, when our team defines engagement, It's first and foremost, again, consistent with our values. Do everything for the senior, number one. Number two, it's support the doctor. Support the doctor. And so kind of the six engagement metrics that we track per doctor, by the way, if you have time, I can go through it right now. But number one, it's the ingestion of timely, accurate, and complete data. And so we've got a lot of information flowing back and forth from the doctors, the hospitals, et cetera. Number two is ensuring that we make it easy for them for the key value drivers in Medicare Advantage. So when we talk about closing gaps in HEDIS, closing gaps in CAPS, closing gaps in HOSS, you know, for all these stars who have made it clinical metrics, we've got to make it easy for them. And so that's where the AVA comes into play. Number three is compliantly and to... kind of consistently close gaps on Medicare risk adjustment. Number four is to really work with us in the Care Anywhere model and to trust that we are really an extension of their practice, not doing anything and taking away their members. It's still their members. They're still getting paid, and they're making more and working more efficiently and more effectively. And then working with us and letting us grow their paddle. I mean, those are the things that we work with and we track. And if we do that in some of the newer markets in California and the newer markets that we've just set up in the other states and how we do that in the new states, I don't I really am very, very encouraged with just the reaction we've had when we've been talking to the doctors about that. So, yeah, I'm not sure I answered your question, Kevin, but that's perfect.

That's exactly what I'm looking for. Thank you. Got it.

The next question comes from Kevin Caliendo with Wells Fargo.

Please go ahead.

Yeah, hi. Thanks for taking my call. What were you seeing during the OEP exactly? You know, the membership was a little bit better than we thought. Are you seeing yourselves taking, you know, a greater percentage of the share of new enrollees? Are you seeing potentially was there maybe a higher switch out from other plans? Any color around the early stages of OEP in terms of what you're seeing?

Yeah, so if you look at sort of our California marketplace as an example, I think you'd see our markets grew under 1% if you look at the overall Medicare Advantage growth for all payers, whereas we grew closer, I want to say about 2.5% in that time period. So to your point, we are growing faster than the market in our existing geographies, which is obviously occurring through taking share. And so I think we're seeing positive traction there. I think the performance was consistent with expectations both on the sales and the retention side. So I don't think there was one of the two that really drove any of the outperformance more than the other. And I think lastly, I think some of the general, I think, just kind of market – you know, awareness of some of these products we talked about in the past that were competitive is continuing to take shape. And a lot of dialogue is already turning towards 2023. And so, as we engage with the broader community, with the provider community, and with seniors themselves, a lot of folks are, you know, looking at AEP being only about five or six months away and asking us what we think. And so, As John mentioned earlier, we won't probably get into too many details today on that, but it's certainly top of mind, and I think it's going to be important for folks over the course of summer as well as they continue to think about benefit stability year over year and making sure that all seniors have access to the same level of quality and the richness of the offering heading into next year.

This is a nice segue into my follow-up, which is – When you see rates being as sort of robust as they are, the final rates came in, does that help you think about accelerating the pace to profitability? Do you think about faster growth? How do you, as a high-touch company... Think about the impact of maybe faster or higher growth or higher rates, excuse me, than what you maybe would have expected if you were modeling this out six months ago.

You want to take that? Hey, Kevin, it's John. Yeah, at a macro level, I would say that it just kind of underscores, I think, the investment thesis for Medicare Advantage overall. You know, remember maybe six months ago there was a lot of noise around coding intensity adjustments and RAF adjustments and so on and so forth. But I think that it just underscores the value proposition for MA. And so I think we're very encouraged about that, as well as some of the other more technical details associated with the final notice. We're all very supportive of all of that with CMS. We really like... The focus on health equity, we like the focus on transparency. We like how all of that lines up to what we think are our core competencies and how we differentiate ourselves from everybody else. And so those are like changes, but when we think about the bids and we think about ensuring that the bids line up with the level of provider engagement in each one of our markets, we kind of think about okay, is this a market where we have the level of engagement with the providers to do the kind of execution to help us execute together with the providers to realize those key value drivers that we know are going to be successful for an MA? Are we going to take and invest in the bids to double down on those kinds of markets? That's kind of how we think about this. And the other side of the coin is we also know that the other competitors of ours are going to view the the rates equally as tailwinds. And so I don't think it changes our view of having this balanced approach toward consistent growth and getting to profitability. And I think, this is just my opinion, I think this whole theme that we've been preaching from the beginning in terms of convergence between traditional health insurance and supplemental benefits whole health care, focusing on the 20% of the chronic frail. I mean, how can you get into MA, really, without a chronic disease management model that really takes care of where 80% of the money is, right? So I think all of that plays to us, but from a macro point of view, I see things with some of the larger competitors growing slower. I see the smaller people getting very aggressive on benefits and that I do not think are sustainable. I see abrasion between the global cap providers and the plans because if we're putting pressure on benefits because we're lower cost and higher quality, you know, and people want to match us, you know, they're going to get aggressive. But if they can't afford to do it, they're going to try to dump it on the global cap providers. I think that's just we've seen it. It's like not our first rodeo on this. I mean, we've seen this happen and occur. And so all of those things factor into the way we look at a market in terms of defining kind of how fast we want to grow. And so I think there are cracks in what we've been preaching. It's like I see cracks in kind of the legacy model starting. And we're going to be, again, very opportunistic about where we apply the investments to double down on growth. I hope that made sense, Kevin. No, it does.

It's actually very thoughtful. I appreciate it. Thanks.

Got it.

Go ahead.

Hey, thanks. Good afternoon. Maybe just one more question on the whole topic of physician engagement. My sense has been that the broad physician community, specifically primary care, has been pretty distracted over the last few years with this pandemic. Do you find that part of the deepening engagement, I guess, as you call it, or the receptivity to partner or have conversations, you know, is accelerating as a function of just less distraction today?

Yeah, hey, Witt, John. Great question. I think it is causing... kind of providers that have traditionally been fee-for-service providers, you know, get scared, right? Because, like, the last two years, you know, your fee-for-service, I mean, your practice revenue has been lower, right? I mean, so, and the practices, you know, that we work with, you know, and we'll do fee-for-service, we love that, but we just happen to think you know, a guaranteed monthly payment for, and we really don't use the word capitation, but really, you know, guaranteed monthly payment, to primary care is win-win-win. And so I think, to your point, the pandemic has caused more receptivity to value-based care. And so they think about, okay, well, how do I do value-based care? You know, do I sell the, you know, big ABC consolidator or XYZ consolidator do I you know join a staff model you know or or or can I you know remain independent and really do it do it myself and be my own boss that's at the individual practice level so we're getting a lot of that we're getting I would say you know five to ten practice groups that want to grow and want to become risk-taking IPAs. They want to grow into that. They see our tools and have seen what we've done. They want our help to do that. We are helping them do that. That's part of it. What's really interesting to me is the again, the learnings from the last seven or eight years since we started the business, the providers from a lot of the large integrated delivery systems we're having conversations with in the context of helping them with value-based care. And I think people are really getting sophisticated in terms of it's not just about heads and beds for hospitals. It's not just about It's actually how do we create better clinical outcomes and higher value so that, frankly, you can move market share. So it's all about direct-to-consumer marketing strategies and products that improve a human being's life. And so the large integrated delivery systems understand that, that the product is driving market share and, you know, I think it's a way for, again, win-win with the plan, the provider, and the hospital. I think hospitals are going to be important ingredients to the success of value-based care. And now it's like, you know, I think the pandemic, it kind of forced people to really think through that model, that reimbursement model. Did that answer your question?

Yeah, no, no, it was. I don't know if there's a right or wrong answer, but I think directionally you're onto something. And I was just thinking about Care Anywhere and the tools and the Omicron surge, and I feel like it gives you kind of a unique ability to meet your members whenever, wherever they need it. Is there any data that you can share around like the level of member engagement through the quarter? And I mean, you have this sort of omni-channel platform and how that may have helped your members, but also you on MLR. I just kind of have a suspicion, but I don't know if there's anything or substance behind that.

Yeah, so this is Thomas here. So that's something we absolutely track, and we look at it both in terms of kind of performance across markets, across provider groups, but also in terms of how long that member's been eligible, because obviously members become eligible, and at that point we begin the outreach, and it does take a bit of time to engage. But overall, we actually shared recently that Pre-pandemic, our average engagement was kind of hovering in the mid-50s. And actually over this past year in 2021, in spite of the pandemic, we actually got that engagement up into the mid-60s. And our goal is to continue to increase that into the 70s and hopefully 80s down the road. And so we've actually seen improved engagement in spite of some of the barriers you would expect during COVID. And that's been a function of not only just the solid outreach teams here at Alignment, as well as the care teams around the field. but also this notion of a virtual care center we introduced during the pandemic. And so that's a 24-7 call line for all members. But a big part of that is we can also service a lot of our Care Anywhere members to really try to help them not just in the home, but also virtually, either through telephonic means or video means. So that's been another great way for us to continue to engage with our seniors, particularly those who, to your point, are our most frail, most high risk.

Okay. Thanks, guys.

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