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spk06: Good afternoon, and welcome to Alignment Healthcare's second quarter 2022 earnings conference call and . At this time, . After the presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. Please be advised that today's conference is being recorded. Leading today's call are John Cahill, founder and CEO, and Thomas Freeman, Chief Financial Officer. Before we begin, we would like to remind you that certain statements made during this call will be forward-looking statements as defined by the Private Securities Litigation Reform Act. These forward-looking statements are subject to various risks and uncertainties and reflect our current expectations based on our beliefs, assumptions, and information currently available to us. Description of some of these 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 factor sections of our annual report on Form 10-K for the fiscal year ended December 31st, 2021, and our quarterly report on Form 10-Q for the quarter ended June 30th, 2022. Although we believe our expectations are reasonable, we undertake no obligation to revise any statements to reflect changes that occur after this call. 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-Q for the quarter ended June 30th, 2022. It is now my pleasure to introduce founder and CEO, John Cahill.
spk05: Hello, and welcome to our second quarter earnings conference call. I appreciate you joining us. We are pleased to announce another strong quarter in which we exceeded guidance across each of our four key performance indicators and raised guidance for full year 2022 top and bottom line metrics. For the second quarter, our total revenue of $366 million represented 19% growth year over year, bringing our year-to-date revenue growth to 24% year over year. Our health plan membership ended at 95,900 members, growing 13% year over year. Adjusted gross profit of $61 million in the second quarter was solidly ahead of expectations, resulting in an MBR of 83.4%, our lowest quarterly MBR to date as a public company. Lastly, our adjusted EBITDA was positive $10 million, reflecting significant gross profit outperformance during the quarter. Our positive adjusted EBITDA in the second quarter brings our year-to-date adjusted EBITDA positive as well. demonstrated the continued success of our care management capabilities, our AVA technology platform, and the progress of our recent investments in local market management resources. Following a solid first half, we plan to invest a portion of our year-to-date outperformance towards service delivery, quality initiatives, and new market investments. I'm confident about our ability to achieve our full-year financial metrics in 2022 and our capacity to balance solid growth with long-term profitability. As I reflect on the strength of the quarter, I'd like to take a moment to discuss how we are delivering this performance. The short answer is that the replicability of our business model is starting to take hold in all of our markets. The investments in AVA's tools related to clinical operations and provider engagement are being used by providers and our local market management teams, allowing us to replicate outcomes everywhere. We are proving that this business model derived from the notion of doing well by doing good can be successful across varying types of local geographies, ethnicities, acuities, provider relationships, and income levels. We believe our model is the model for delivering the highest value care to seniors while addressing health equity for seniors. Once again, our care management model powered by AVA drove our performance. Across our portfolio of markets, we ran 155 inpatient admissions per thousand in the second quarter, which remains 38% lower than Medicare fee-for-service. Even as we ramp up our new markets, we are becoming more precise in identifying who's most in need of our Care Anywhere resources, and we are increasingly efficient and effective in caring for these members collaboratively with our primary care partners. The deliberate investments we've made in these best practice workflows and actionable data enable us to mass customize our operations in a scalable fashion. In addition, our investments in our local market teams, which we internally refer to as the ground game, are beginning to pay off. We're executing against our market by market plans with a focus on consistent provider engagement and disciplined market management. We believe this combination of centralized technology, consistent workflow processes, and investments in the ground game give us the playbook to systematically reproduce operating results in each market, irrespective of local dynamics. Lastly, we cannot emphasize enough the importance of our focus on service delivery to the consumer. As we continue to enhance our overall member experience, we strive to provide our members with not only best-in-class benefits and access, but also with the highest level of service. In our opinion, that is ultimately the definition of value-based care, holistic value to the consumer in the form of better health outcomes, improved experience, and richer benefits, all at a lower cost. Turning to our recent expansion announcements, subject to CMS approval, we anticipate entering Florida and Texas alongside eight new counties within our four existing states in 2023. These markets are well suited for a diverse array of products in our model of care, while also featuring aligned provider partners. As a reminder, Once established in this state, further expansion over time into contiguous counties creates a more capital-efficient pathway for growth. As we think about our long-term growth runway and the beachheads we are establishing today, the six states we will be operating in for 2023 represent approximately 20 million Medicare eligibles in aggregate. This is just over 30% of the entire Medicare market. Beyond our geographic expansion, as we look ahead to the 2023 annual enrollment period, we are strengthening our provider relationships, investing in our innovative products and expanding our local community presence through our target hires in 2022. We look forward to sharing more about our products in the coming months. In conclusion, After one of our best quarters since taking the company public, we are encouraged by our core operational execution and remain confident in our team's ability to achieve our long-term 20% annual growth target. Our structurally advantaged medical management capabilities, our product innovation competencies, and our provider development engagement model present a durable path forward. With an anticipated six states, 52 counties, and roughly 96,000 members, we are just starting to put our mark on the map. With that, I'll turn the call over to Thomas to review our financial performance. Thomas?
spk07: Thanks, John. Turning to the second quarter results, as John mentioned, we are proud to deliver another strong quarter in which we exceeded the high end of our guidance ranges across each of our four KPIs. For the quarter ending June 2022, our health plan membership of 95,900 increased 13% compared to a year ago, as we continue to see positive momentum across our markets. For the second quarter, our total revenue of $366 million represented 19% growth year over year, bringing our year-to-date revenue growth to 24% year over year. A large part of our revenue outperformance in the period resulted from sweep payments from CMS that exceeded our expectations. This includes both the final sweep from 2021 as well as the mid-year true-up for 2022. Similar to our comments during the second quarter last year, we would reiterate that these sweep payments are standard course of business on our industry and happen every year. It's also worth noting that a significant portion of the sweep dollar payments we receive are shared with our providers through various contract arrangements, including full capitation, partial risk pool, and upside-only profit share payments. Accordingly, our revenue outperformance in the quarter does not entirely flow through to our profitability measures. Our top line outperformance in the quarter was coupled with strong MBR management. In fact, as John mentioned, our best quarter yet as a public company. Our adjusted gross profit of $61 million implies an MBR of 83.4% as utilization continued to run below our seasonal baseline. This is reflected in our 155 inpatient admissions per thousand this quarter, including a lower mix of COVID hospital admissions relative to total hospital admission than was contemplated in guidance. SG&A in the quarter was $62 million, excluding equity-based compensation expense, our SG&A was $51 million, an increase of 20% year-over-year. Our SG&A for the second quarter included a couple million of timing favorability that we anticipate reversing over the back half of the year. Lastly, our adjusted EBITDA was a positive $10 million, exceeding our expectations for the quarter. Notably, we're proud to report that our first half of 2022 adjusted EBITDA was positive 6 million, demonstrating the competitive differentiation of our MBR model. Given the strength of our results in the first two quarters of the year, we are assessing areas to redeploy this outperformance over the next two quarters. Turning to the balance sheet, we ended the quarter with 297 million in net cash. We continue to expect our balance sheet strength to fund our organic growth and working capital needs without requiring external financing. Turning to guidance, for the third quarter, we expect health plan membership to be between 97,100 and 97,300 members, revenue to be in the range of 330 million and 335 million, adjusted gross profit to be between 38 million and 40 million, and adjusted EBITDA to be in the range of a loss of $23 million to a loss of $20 million. For full year 2022, we expect health plan membership to be between 97,300 and 99,000 members, revenue to be in the range of $1.365 billion and $1.38 billion, adjusted gross profit to be between $177 million and $184 million, and adjusted EBITDA to be in the range of a loss of $41 million to a loss of $35 million. On the back of our outperformance in the second quarter, we are reiterating our full-year 2022 membership guidance and raising our full-year revenue guidance. We note that our revenue forecast takes into account the sweep pickups in the second quarter and includes the full 2% return of sequestration beginning in the third quarter. Now that we are through the mid-year sweep, and given the high degree of visibility associated with our subscription-like recurring revenue model, we feel confident about our second half revenue outlook. Additionally, we are raising our full year 2022 adjusted gross profit expectation and narrowing our guidance range. We remain mindful of the potential for COVID utilization to increase over the next six months, particularly in the fourth quarter. Of note, our COVID hospital census has increased over a 45-day period into mid-July, as the new BA.5 variant became more prevalent. However, while this trend is something we are continuing to monitor, our COVID utilization levels today continue to run lower than our experience with the Omicron wave. Our second half guidance assumes that our overall utilization runs approximately in line with our historical baseline, inclusive of the potential for a modest spike in COVID-related utilization. We are also looking to reinvest some of our year-to-date MDR outperformance towards furthering our care and quality initiatives, as well as ramping up our new market clinical hires as we think about our 2023 launches. Lastly, we are also raising our adjusted EBITDA guidance inclusive of the SG&A timing factors we mentioned previously. As we've said before, we are thoughtfully managing our short-term profitability objectives with our longer-term growth, MBR management, and scalability objectives. In summary, we are very pleased with how our business has performed in the first half of the year, and we believe we're in a strong position to continue to build upon that progress in the second half. With that, I'd like to turn it back to John to wrap things up.
spk05: Thanks, Thomas. Lastly, before we close, I would like to spend a moment on our inaugural 2021 ESG report, which we released yesterday. Environmental, social, and governance factors are inherently built into our organizational culture and everything we do here at Alignment. From improving health outcomes to bridging health equity gaps, we strive toward better healthcare access for all, regardless of health or wealth. The cornerstone of our member journey begins with having a serving heart, and we've embedded this value in our ESG oversight approach with three key pillars, all centered around serving. serving people, serving the environment, and serving responsibly. The comprehensive report highlights many powerful themes and data points, including our positive member outcomes reflected in lower hospital admissions and readmissions, our focus on social determinants, and the impactful diversity and representation of both our employees and members. To explore our ESG focus further, please visit alignmenthealthcare.com I am proud and appreciative of the strides our employees have made towards a healthier and sustainable future for our members. I look forward to sharing more of these important efforts in the years to come. With that, let's open the call to questions. Operator?
spk06: Thank you. As a reminder, to ask a question, you will need to press star 1-1 on your telephone. Please stand by while we compile the Q&A roster. And our first question comes from the line of Ryan Daniels with William Blair.
spk02: Yeah, guys, thanks for taking the questions and congrats on a great start to the year. What does it talk a little bit about your market expansion? We don't have a ton of history with how you've expanded into markets, but this seems pretty significant to me in regards to the number of expansions and the total opportunity set of new members you're targeting. So can you discuss how we can compare and contrast that versus prior years, and then also help us think about any potential cash flow implications as you enter this level of new markets, thinking of the next six to 12 months. Thanks.
spk05: Hey, Ryan, it's John. Yeah, happy to talk about it. We announced that we're going to be entering Texas and Florida for 2023. We really spent a lot of resources on, I would say, five or six potential states that we were looking at entering and really had a pretty high bar in terms of ensuring that we had the right provider partners, kind of the right competitive dynamic that we thought we could really win in. and so really felt comfortable with ending with Texas and Florida. I think it's consistent with what we've shared with everybody in that we want to get into 15 or 16 states over the long term where we think 70-ish percent of the membership of the eligibles are going to be. Right now, as it stands with... with the six states that we'll be in it represents a little bit over a third of where the seniors are and so i think we'll get those beachheads set up we're going to continue to do what we refer to as contiguous county expansions and really focus on portability really focus on execution I think we've proven that in California in every single one of our markets that I would still say are as diverse as anything out of state. But we need to do it and prove that. And I think we've got really three of the largest opportunities to prove our model. And I feel good about it. And I feel like the team really is prepared in terms of the network construction, the engagement, the contracting. I think we feel very prepared from a product perspective. And I think equally important, and you've always heard me say this, it's not just about planting flags. It's making sure that we have confidence we can grow profitably in each market, and I feel very comfortable that our operators and our clinical teams can support this growth. And Thomas, you want to speak to some of the financial parts of Ryan's question?
spk07: Yeah, this is Thomas here, Ryan. So just to add on to what John was saying, from an investment standpoint, those dollars really around sort of the sales and marketing expenses to launch those new markets, this upcoming AEP, along with the year zero quote unquote expenses, which really includes hiring a lot of our local market leaders, some of the clinicians we'll need in order to go live. A lot of that happens over the back half of the year. And so both of those two factors, the sales and marketing piece as well as the G&A or the medical expense year zero pieces, are both contemplated in guidance and really consistent with our overall financial expectations when we set guidance earlier this year.
spk02: Okay, super helpful. And then maybe another one for you just in regards to the suite payments and more specific how you share those with providers. Is that just your internal group of practitioners, or is that shared externally? And if the latter, is that something that is kind of a unique initiative to you that you think kind of bolsters your position in the community and can help with MA membership growth as well? Thanks, guys.
spk07: Yeah, I can take that one as well. This is Thomas here. The way we approach this is all of our contracts have different underlying value-based care mechanisms. And so on one end of the spectrum, obviously some providers might be in a global capitation or a global risk contract. And on the other end of the spectrum, even our contracts that don't have any type of downside risk for the provider, we often look to create upside opportunities through either a risk pool or a profit share. And so dependent upon where those sweep dollars are coming from, which members and therefore which provider group, how that kind of contract works will vary depending upon that provider organization. But generally speaking, what we really are focused on is ensuring that when we win, our providers win and our members win. And so that's the strategic and kind of philosophic goal behind how we approach the network contracts.
spk05: Yeah. And just really to add to that, the Kind of the percent of premium kinds of reimbursement with the providers kind of creates that alignment with all the providers and has been a cornerstone of our success. It's just making sure that we are partnering with providers.
spk02: Thanks, guys. I'll hop back in the queue.
spk05: Thanks, Ryan.
spk06: Thank you. And our next question comes from the line of Whit Mayo with SVB Securities.
spk08: Hey, thanks. I thought I heard you say in your prepared comments that days per thousand were 155. That seems really low. I have, you know, 165 sort of in my head. So I wonder if you could just confirm that and just I presume you've studied it. Just interesting to hear, you know, kind of how and why it was so low. So maybe I'll just stop there.
spk07: Yeah, great. This is Thomas here. Sue, I think you heard correctly. Our inpatient admissions per thousand for the second quarter were right about 155, which is a bit better, I would say, than our seasonal kind of historical baseline. But at the same time, we've been running about 155 to 165 inpatient admissions per thousand now for over five years straight. And that dates back, obviously, to our IPO experience as well. So that is around 35% to 40% better than Medicare fee-for-service. And when you couple that with our industry-leading readmission rates, SNF, ER, et cetera, types of metrics, I think these are all just different forms of how we measure and monitor quality and making sure that all the proactive investment we're making towards the seniors' health and well-being not only improves their health outcomes, but also prevents any unnecessary or potentially avoidable utilization. So yeah, that was really the core driver of the quarter, and I'm pleased to see us continuing to maintain that efficacy of our model as we continue to grow and expand into new markets.
spk08: Yeah, no, that's helpful. I just was wondering if there was like, I just wonder if the low days per thousand, can you attribute it more to any of the clinical programs or the care anywhere? I'm just still trying to sort of reconcile how, you know, how it's so low.
spk07: Yeah. So, you know, our model from a high touch care delivery standpoint is what we refer to as care anywhere. And for those who are less familiar with that, care anywhere is a cross-functional interdisciplinary team consisting of doctors, nurses, case managers, social workers, behavioral health coaches, and other types of clinicians who are all focused on taking care of that portion of the population who represents a significant portion of the spend. So the 80-20 rule you've heard about in the past, our data actually most recently would suggest that our top 20% of members are closer to 90% of our overall institutional costs. And so by using AVA to stratify the members, proactively outreach those members and try to engage them in our care delivery model, principally in the home, but alongside of our virtual care center capabilities, you know, we've historically been really successful with, again, trying to improve health outcomes that result in an improved utilization downstream. So I think it's really a testament of a lot of the care delivery efforts and, again, being willing to make that investment up front and betting on ourselves that it will pay off kind of multiple times over in the form of reduced medical expense elsewhere.
spk05: Yeah, just one other comment. To me, it's a bit of an early indicator as to the efficacy of the model working in some of the newer markets. Because some of the more established markets, it's always been working. And so as we've entered more markets in the last couple of years, getting those markets to be performing with the same model, I think is kind of helping the overall come down. So I look at it from that vantage point.
spk08: No, that's helpful. And Thomas, I think when you say that you plan on spending some of the MBR upside, but we're kind of past the bid season, I presume this is more on marketing, broker strategies, maybe I'm wrong, but just like to hear a little bit more as to what you're thinking and where you're spending the money? Thanks.
spk07: Yeah. So a couple of things. I think from a quality standpoint, we see incremental opportunities to continue to invest in some of those programs around STARS, and we're continuing to make some of those investments over the back half of the year. From a service delivery standpoint, we're continuing to make strides to improve the overall member experience. and making some investments that we think can yield to ultimately higher NPS or higher member satisfaction, better retention, therefore greater lifetime values. And then some of that has to do with just ramping up our new markets that we were just talking about earlier with Ryan. So kind of across the board, both within medical expense and SG&A, those are some of the areas that we're looking at. And again, it's really on the back of that strong year-to-date performance that we're comfortable making a few of those investments today. that are things we might have otherwise made in the future, but we have the opportunity to kind of really go after them here and now. Okay. Thanks, guys.
spk06: Thanks. Thank you. And our next question comes from the line of Michael Ha with Morgan Stanley.
spk11: Hey. Thanks, guys. Congrats on the quarter. So just a question on guidance. So with 25 mil beat this quarter, only about 4 to 5 million raised on the full year guide. Looks like you guys are carrying a lot of that excess earnings cushion into the back half of the year. Is that lower raise on guide more an indication of new conservatism, or are there incremental costs that we should account for? Because some of the outperformance, it sounds like you guys are baking it into new market implementation costs, but I think Thomas also mentioned you guys are assessing areas to redeploy outperformance. So I'm a little bit confused. Just any clarity I'm watching the back half of the year would be great.
spk07: Yeah, I'm happy to take that. This is Thomas here. So maybe to kind of start with the gross profit raise, I think if you look at sort of our gross profit year to date or our MBR year to date, and then kind of think about the back half of the year, there are a couple of things that we're being sort of mindful of as we think about the back half gross profit. So the first is obviously just the dynamic environment around utilization and COVID. And while our recent uptick this summer has not been at the level we experienced with the Omicron wave, it's certainly something we remain mindful of looking out over the back half, and in particular, maybe the fourth quarter, where the last two years, we really haven't had much of a flu season either. So something we're just continuing to be, I think, mindful of and kind of thoughtful about just from a pure utilization standpoint. I think that's kind of the first thing. And the second thing is just the kind of normalization from some of the items we had in the first half of the year that we would not anticipate to recur in the second half of the year around the sweeps. While those were obviously a favorable contributor to the second quarter, I do think it's worth noting that our MBR in the second quarter would have otherwise been in the 85% MBR range, irrespective of those prior period items. So really a very strong quarter regardless, but we're kind of normalizing the back half of the year for that one-time pickup in the second quarter.
spk11: Got it. Yeah, I appreciate that commentary. And just one other question. So, you know, this year, seemingly unique in the sense that every managed care plan has basically outperformed this quarter across the board. And now all the MA plans are reinvesting into marketing, distribution. So my question is, does this impact the competitive landscape at all? Or even you're thinking about, you know, with benefit offerings already locked in, like how you stay nimble and decide your strategy into the back half of the year?
spk07: Yeah, I think in terms of kind of AEP around the quarter and how we're thinking about some of the investments, so obviously when we set our guidance to begin the year and thought about our budget for the year, we obviously remain growth-oriented as an organization. And so I wouldn't view some of these investment opportunities based on the year-to-date outperformance as being driven by growth first and foremost. But that really, again, is a function of already having contemplated those investments we think we need to be successful just in the course of our normal budgeting cycle and our normal guidance cycle. Beyond the kind of investment in the sales and marketing season, which happens every year, I think you heard a bit from John in his prepared remarks just really describing a lot of our focus these days on the ground game and making sure that the investments we made more recently in some of our provider engagement resources and our community representatives are are continuing to help us gain traction, not just for this year's enrollment period, but also looking out towards the 23 AEP season. So obviously we're sort of in the middle of hearing what others across the industry are doing from a competitive bid standpoint. So it's a bit early to comment on what we're seeing across the market landscape, but in terms of our approach, I think we did a nice job with the bids to kind of balance our growth versus profitability objectives and really continue to strive towards that 20% looking out to 2023.
spk06: Thank you, guys. Thank you. And our next question comes from the line of John Ransom with Raymond James.
spk10: Hey, good morning. Just another cut at the market expansion question. So let's say you're going to do $100 of revenue in Texas and Florida. As a percent of $100, what's the front-loaded investment that you would have in 2022? And then for that book of business in 23, how do we think about overhead and MLR? Thanks.
spk07: So I think maybe just to talk to the year zero expense, which would be the back half of 22, dependent upon the size of the market and therefore the market opportunity, we will scale up or down the investment accordingly. And so to give you an extreme example, if a county only has 10,000 eligibles, let's say a smaller rural county, frankly you wouldn't probably see a lot of incremental capital deployed towards that and that would really probably be a contiguous County expansion where we're leveraging a lot of our existing investments both from a people standpoint as well as from a sales and marketing standpoint to target the growth in that market if I were to then contrast that on the other end of the spectrum where maybe you have hundreds of thousands or a half a million plus eligible as an accounting that's where you would typically see us really deploy a lot more year zero spend both in the form of sales and marketing and and in the form of our year zero clinical and non-clinical hires. And in that case, it may be anywhere from $1 to $2, $3 million for a given MSA. And so it just kind of depends on the market we're talking about. But as we then transition into 2023, what we typically have experienced based on our historical cohort data is an MBR that will often run sort of in the 90% range, or maybe the mid-90s, depending upon the mix of members. And then Ultimately, we're really trying to get the EBITDA break-even by year three. And so that's been our experience in the past, and it's kind of how we underwrite our investment cases, looking out to not just Florida and Texas, but even some of the contiguous county expansion in the past, and it's kind of how we underwrite our investment cases, looking out to not just Florida and Texas, but even some of the contiguous county expansions within California, as an example that we're really excited about for next year.
spk10: So if we were to look at just Florida and Texas, you know, I'm rapidly approaching Medicare age, so if you're not in Tampa, I would be very disappointed, you know, soon. But just Florida and Texas, two years from now, you would be disappointed if you didn't have what number of lives in those two markets.
spk07: So I think typically what we have really targeted for a given MSA is getting to 10,000 members over a five-year period. And so over the first, call it three years or so, I think we really want to be striving towards that at least 3,000 to 5,000 range. And I think that puts you on a great kind of trajectory to get to that 10,000 mark over five years.
spk10: Yeah, John, this is John. An entire state or is it like a county by county? How do you define MSA?
spk07: Yeah, so like as an example, we're going to Clay and Duvall, which are contiguous counties in Florida, as an example, in that Jacksonville market. And so we would view sort of Jacksonville as the MSA with the two counties together.
spk05: Yeah, the metric, hey, John's John, the metric that Thomas just shared is really just data that we've experienced in all of the different new markets that we've entered. And it's kind of striking. It's kind of like it takes about, five years to get to 10,000 members, and we kind of break even in year three. And that's really our internal underwriting case. And there are situations in specific markets that have done a lot better for us. We're not necessarily underwriting to it. Our internal goals, I would say, are more aggressive than what I just shared. For example, our San Diego market, our Sacramento market, you kind of get to 12, 13, 14,000 members in two to three years. Do I think that given the nature of the provider relationships, the product strategies, the distribution strategies that we have in some of these new markets, There's an opportunity for us to outperform. I would hope so. But again, you know us. We're setting the right expectations. And I would be disappointed to your question in a couple years if we didn't have 10,000 members in each state.
spk10: You are conservative. So you know this is my perpetual fascination. So let's say you're brand new in Duval County, kind of your marketing. What is the, you know, how much do you spend and what's the general strategy just to tell people who you are and how you're different? What channels do you use?
spk07: So, naturally, we use a lot of the same channels you've probably heard about from others. So, from a people standpoint, we're doing a lot of local kind of grassroots efforts. That's that community representative you heard about. And these folks are really boots on the ground who are focused on Building relationships in the community, whether it's with external brokers, providers, or just community representatives. These are the ones who are hosting events and creating leads that we can ultimately try to just tell the story of what we think alignment can do for them. So a lot of it is very local-oriented. And then from kind of more of an advertising or brand standpoint, you would probably see us on TV, newspaper, radio. a lot of digital channels, a lot of things that you would expect.
spk05: The other thing we're learning, John, is that kind of our reliance on some of the FMO partners that we've been successful with and expanding with them as we grow out of state is something we're looking at. We're spending a lot of time focusing on broad distribution mix and distribution strategies. As a follow-up to what Michael was asking earlier, we're looking at all that. We're obviously looking at our branding and positioning, particularly in the new markets. I would say we're very efficient on acquisition costs relative to the market. I think we've got to look at, and particularly some of the newer markets, direct and employed strategies. I think the FMOs that have been really great partners of ours are the ones we're going to rely on to help us in some of these newer markets as well. And we have made some of the mistakes where we relied on some of the bigger folks or some of the e-folks. that have not grown us, say, for example, in North Carolina. And so those are lessons learned, and I feel pretty good about this.
spk10: I'll conclude that it strikes me, living in a market, I see the Cigna Blue Phone commercial, I see J.J. Walker, and I see Joe Namath. And I'm not thinking any of those are right. I think MA might have the worst marketing, like mass marketing, I think I've ever seen in the consumer product area. So it's a low bar. We're rooting for you.
spk05: Yeah, yeah. No, it's the service delivery side, I think, is where I think you're going to find us with a lot of this grassroots referrals and just a lot of just, you know, word of mouth, is still really important. I mean, we've grown this thing really from that more than any kind of, you know, huge brand investment. And I would envision that also happening on the service delivery side.
spk06: Thank you.
spk05: Thanks, John.
spk06: Thank you. And our next question comes from the line of Jeff Garrow with Piper Sandler.
spk03: hi good afternoon guys congrats on the court and thanks for taking the question maybe one more on the fy 23 expansion plans and i just want to ask since florida and texas they're huge states but your entrance is targeted to specific counties that that aren't necessarily the biggest each in each state so what can you tell us about the the competition the the populations you anticipate serving and the the provider relationships that you fostered in those markets that make them compelling
spk05: Yeah, hey, Jeff, it's John. That's a great question. I think the kind of the big takeaway is that we think this business model can be successful at a local market level, irrespective of whether it's rural or urban, irrespective of ethnicity or income, it's portable. And so one of the things we're doing is we're making really focused um investments in markets where we think we can win and and not just not just to hit those metrics that we just talked about but actually get share and win frankly similar to what we've done in some of the rural markets in in or smaller i would say or mid-sized markets in california where we've got 20 plus percent market share i think i think that's kind of how we're thinking about it and then once we get that foothold in and we're we're kind of producing the kind of profitable growth that we want. And then we'll be very also selective and expand into contiguous markets. And obviously, you know, to your point, those are massive states. And I think the same kind of takeaway that we've learned in California is where we can be applied to those two massive states. And every market's different. All the hospital and the provider dynamics are different. And so ergo kind of this conversation around mass customization where we get all of our processes, our workflows, our best practices, our systems, our dashboards, all of these kind of operating tools we want to be as portable as possible, but apply it to a set of local market dynamics. It's all unique. Healthcare is a local business. And so that's kind of the idea. And I think we just have a better chance of winning in some of these targeted markets is the bottom line. We looked at all the bigger markets also, and there was just less competitive kind of dynamic that would cause me to have, gee, can we really win in this bigger market when we're small? I think the conclusion is let's go to some of these more secondary markets first, and then we'll work our way up. That's how we thought about it.
spk03: Excellent. That's super helpful. I love the concept of mass customization. One more question from me. I've heard some discussion from other plans about moderated expectations for STARS ratings in October, given the lapsing of some of the COVID dynamics and You certainly share a lot of positive data about the outcomes that alignment is delivering for seniors. But curious if you have any insights into how those outcomes will shake out across the peculiarities of measures and cut points into a star rating this October.
spk05: Yeah, no, I think the general themes that you're hearing out there are accurate. You know, I think there are a lot of plans that benefit from some of the relaxed standards resulting from COVID, you know, and, you know, particularly as it relates to CAPS scores. And for those of you that don't know, I mean, you know, CMS has really, I think, historically focused on kind of clinical outcome quality as measured by what's referred to as HEDIS scores. And clearly, that's where we have traditionally focused our efforts. And, you know, we have five stars across the board, really, on HEDIS. But since a couple of years ago, CMS is now focusing on really the member experience. And so, therefore, they're doing kind of this focus on caps, where the weighting measures for caps is going to be going up and being paid beginning in 24 differently. Yeah, 24 differently. And so we've spent a lot of time and effort focusing on cap scores, and we've been working with our downstream delegated partners provider partners to make sure that some of these cap scores can really get improved. And we've made good progress there. I feel pretty good about where we stand coming into the next couple of months when we'll find out what our marketing is for next year. You know, this stars really the entire business, but stars in particular is becoming more and more data science. I mean, it really is data and analytics and predictive analytics. And I think we're pretty good at that across the board. I would say areas that we need to improve continue to be around working with our delegated provider partners to make sure that they are helping us increase cap scores across the board. And I'm confident we can get there because we did the same thing with them on HEDIS. several years ago, and they got us to five stars. But I think you're right, Joe. I think you're going to have a lot of plants get half a star or a full star taken down.
spk03: Great. Thanks for all those comments. Thanks again for taking the questions.
spk06: You got it. Thank you. And our next question Great, thanks.
spk09: I just want to go back to kind of the reinvesting the app performance in the second half of the year because that back half guidance is a little bit different than what we were assuming. Can you maybe help us think about how much of that reinvestment goes back into G&A expense versus MLR expense?
spk07: Yeah, this is Thomas here. I'm not sure we're going to kind of break down all the moving pieces, but I think if you kind of look at the gross profit beat in the second quarter relative to the full year raise, again, obviously part of that sort of extra conservatism in the back half gross profit I think relates to COVID, but then a portion of that is certainly the investments themselves, whereas in SG&A I would say that is generally just investment. And so I think you can kind of think about it in those two ways, but But in general, again, I think we're very focused on making sure that we're kind of deploying capital in a way that is very mindful of our short-term profitability objectives, but also making sure that we're doing the right thing and setting ourselves up for success and value creation over the next kind of one, two, three-plus years. So we're really trying to find that right balance, and that really informs kind of where we're at year-to-date and how we're thinking about the next six months.
spk09: Okay, so maybe ask it a little differently then. If I have this right, you're saying that your view on the back half of the year hasn't changed versus where it was maybe with Q1, even though Q2 was better. And you're building in conservatism on COVID, even though you're not seeing necessarily a reason to be more conservative. I just want to make sure that I understand the core hasn't changed. You're just throwing conservatism on without that, rather than there's a reason to be more worried about COVID.
spk07: Yeah, you know, I think if anything, over the last two years since the pandemic began, you know, we have learned that there's always something new to learn. And so with that in mind, I think we've been, you know, just thoughtful and kind of mindful of what that may look like in the back half of the year. And I think if you kind of think back to our prior comments last quarter, you heard something similar where we had suggested that we were going to assume that overall utilization kind of runs in line with our historical baseline experience. but a portion of that would be COVID-driven. And so to the extent that we had either lower utilization versus baseline and or we had a lower percentage of the total utilization being driven by COVID, which comes with a higher unit cost, there could be room for outperformance. And so you clearly saw that come through in the second quarter. And so we'll see how the back half plays out. I think we feel generally comfortable with where things stand today, nothing concerning. But at the same time, I think we're all kind of highly respectful of of this dynamic environment we're in today and just trying to be very thoughtful about it over the back half.
spk09: Okay. And then I know it's hard to comment on 2023 since you haven't seen competitor benefits yet, but at least one of your competitors talked about how their benefit design was shaping up and the reception from brokers, the kind of initial peak. I don't know if you have any color like that that you might be able to share for us about how you think 2023 is shaping up obviously is about a full picture.
spk05: Yeah, Kevin, it's John. Yeah, I was just with the brokers last week. I'm feeling very good about where we stand. I think this whole kind of notion of profitable growth, consistency, discipline around the bids is kind of reflected in our Q2 numbers. And I think you're going to see more of that. We're not going to be doing a grow at all costs strategy. We are pretty thoughtful, kind of competitor by competitor. And I would say overall, our hypothesis with respect to 23 is given the kind of the better than contemplated rates, final rates. And I would say some of the behaviors of some of the other let's just call them not-for-profit entities, I think is going to cause our competitors to be aggressive. That's kind of how we're thinking about this. And I think we're still very well positioned across the board. But I think you're going to see more of these Part B buybacks. I think you're going to see focus on duals. I mean, people are going to be very aggressive across the board. I just think, I don't think anybody has the kind of model that we have that can produce kind of consistent growth at these margins. I don't see anybody being able to do that. And I think the bigger concept, I think, is the bigger we get, the kind of the more aggressive we're going to be simply because any kind of scale economy disadvantages that we have are going to start eroding and we'll get stronger. So that's why I think about the bids. But yeah, I think people are going to be generally aggressive. I'm not hearing people are going to be like stupid aggressive like last year. I think people are pulling back a little bit. I think some of the big guys are going to be a little bit more aggressive, you know, but I think I feel good about where we are. Great. Thank you. Yeah.
spk06: Thank you. And our next question comes from the line with Goldman Sachs.
spk04: Hey, John. Thanks for taking the question. I wanted to go back to the market expansion. How have you felt about your ability to find provider partners in the markets in Florida and Texas that you're going into, since that's a key part of the differentiation of your value proposition? And kind of building on the discussion around market share assumptions, do you feel like you've been able to put together a competitive provider network that would enable you to kind of get the share that you would expect when going into a new market?
spk05: Yeah, great question. I mean... It's really a key for really the focus we had at the beginning of the year. And we talked a lot about provider engagement and provider development and the value proposition. Remember, all of that work for really the first half of the year really resulted in finding key providers that we feel really comfortable with. And I think that was one of the best investments, and not only capital, but just time and effort is getting on the road, meeting with these providers. And I got to tell you, people love what we're trying to do. The doctors love what we're trying to do. They don't want to get consolidated either by their hospital system or any large consolidator. There's a lot of independent and smaller practices out there that just need some tools and some assistance assistance getting into value-based care in a kind of a rational way. And I think we're an option that seems to resonate with a lot of them. And so we're not kind of, you know, just going in with the biggest groups. We're working with a lot of, you know, smaller to middle-sized practices. And we really need, and I've said this before, we need 20 to 25 really engaged doctors that like our model to start. And that's what we've done in every single market is you need 20 to 25. And I kind of tease our team internally. I go, you know, how many cell phone numbers do you have of these doctors? I mean, do you really know these doctors and they understand what we're trying to do and what we're trying to do for our members and for them and to help them? And I think that's the standard by which we're really building these networks up. And that whole kind of initiative has taken root in a way that has exceeded my expectations. So I'm really happy about that. Now we've got to just execute, focus and execute. And, you know, you complement that with strong benefits, which I'm very comfortable with. And then you complement that with the right distribution mix and the distribution strategy. And we've been very thoughtful about that. So we'll see what happens. But I will say some of the markets that we launched one and two years ago, the engagement level and the MLRs of some of these newer markets are really good. I mean, I'm really happy about that. And again, that leads to kind of why we got this kind of overall 83 percent and and and it's just like it's like the model like is starting to replicate itself consistently so now we just got to translate it into the growth dynamic that's really helpful and if i could just maybe sneak in a quick follow-up
spk04: How are you guys thinking about the timeline to break even now? Obviously, the business is performing well. You have some large growth opportunities ahead of you. So just wondering if the timeline and how you're thinking about the path to break even has changed at all.
spk05: You want me to take that? I'll give you that. I think our whole philosophy and approach was frankly, the right approach since we IPO, which is a more measured, longer-term strategy of getting the 20% long-term growth. And I can talk about why I feel more confident than ever about our ability to achieve that, but also getting to break even. Getting to break even EBITDA is really important. I mean, it still matters. And so, you know, I think that, you know, getting there by 2024 is certainly something we're really focused on. for a whole variety of reasons. And I think the really compelling argument for us is if we can maintain that 20 plus percent growth and get there and kind of maintain these MLRs, I don't think anybody else can do that. And so that's kind of one thing. So just to further differentiate us from everybody else and prove our business model. The second thing is what Thomas referred to in terms of just the balance sheet. I mean, I'm very sensitive to not needing to raise more capital. I want to get there without having to raise any more capital. And so we want to not only get to EBITDA positive, but get to cash flow positive as soon as possible. And I think we can do that and do so kind of And I still think we can hit these growth rates with these MLR kind of improvements and get to EBITDA positive. And I know that's something that's important to our investors, you know, to prove this thing out. And kind of the implication of that is kind of what was inferred by Thomas earlier, which is, you know, we're going to Texas, we're going to Florida. But as we think about, and we're making investments now in 2022 about the 2023 new markets, but as we head into 24, the bar is going to be pretty high in terms of adding new states out there. Just because the TAMs and the existing states are so big and the new market contiguous counties are so big, we need to prove we're taking more and more share and leverage the management infrastructure that we're building in each of these six existing states. Because it's huge. I think it's 20 million seniors or something like that. We've got to just execute on that. And so what that means is, and I'm not saying we're not going to do any new states in 2024. I'm just saying the standard is going to be pretty high. It's got to be really, really good underwriting internally about that growth case. And I also think that you're going to see us have more kind of in-state joint ventures, in-state co-branding opportunities, you know, kind of in-state just, you know, kind of large, you know, partnerships with different providers and hospitals. This past couple years we've announced, you know, again, Scripps and Hoag and Cedars and Sutter and all these big, you know, strong, wonderful delivery systems that want to partner with us and we want to partner with them. You're going to see more of that, I think, through each of our markets. Hope that helps.
spk04: Yeah, thanks for all the comments.
spk05: Yeah, it was long-winded, but sorry about that.
spk06: Thank you. And our next question comes from the line of Sarah James with Barclays. Hey, Sarah.
spk01: Hi. Just wanted to understand this quarter a little bit better. One of your peers talked about ACO REACH. having a 7.5% retroactive back to Jan 1 restatement of cost trends and payments. Did you guys experience any out of period adjustments related to that? And is there any change in your view of margin profile of that business?
spk07: Hey Sarah, this is Thomas here. So in terms of the 7.5% or so, so we did get the same sort of information from CMS this past quarter. However, when we were sort of thinking about our first quarter, you know, guidance for the full year, that is, we were sort of reflecting on our experience last year where CMS had also implemented a retrospective sort of, you know, trend adjustment on us. And so with that in mind, you know, we approached our guidance from a little bit more of a conservative posture. And so we actually had incorporated or, I guess, in other words, anticipated some of that as we thought about our previous guidance. So we did experience it, but at the same time, it was sort of in line with expectations, and therefore did not really cause much of an impact on the quarter's performance.
spk01: Got it. And then in the new guidance on 3Q gross profit, it was a little bit off from where consensus was, and I'm wondering if you can help bridge the margin assumptions or MLR assumptions from 2Q to 3Q, if there's anything other than seasonality with deductible wear down going on there.
spk07: Yeah, I'm happy to do that. So I think you heard hopefully earlier. So if you kind of take out the benefit or the favorability from some of those one-time prior period items, you know, the sweeps and whatnot, we were sort of in the 85 range for the second quarter. And so kind of using that as your launching off point, thinking about sort of the third quarter or back half of the year, obviously a lot of that has to do with expecting utilization to run in line with baseline again, as opposed to second quarter where we were a bit better than baseline. And also, assuming a portion of that has to do with COVID, which comes with a higher unit cost than a non-COVID hospitalization. So that's really that COVID head when we were discussing earlier, in addition to sort of a minimal amount of some of that investment that falls into medical expense we were also discussing earlier.
spk01: Great. It's nice to see people put out conservative guidance, so I appreciate that. Thank you.
spk06: Thanks, Sarah. Thank you. Ladies and gentlemen, that does conclude. Thank you for participating.
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