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spk14: Good afternoon and welcome to Alignment Health Care's fourth quarter 2023 earnings conference call and webcast. All participants will be in the listen-only mode. After today's presentation, there will be an opportunity to ask questions. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please note that this event 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. Descriptions of some of the factors that could cause actual results to differ materially from these forward-looking statements are discussed in more details in our filings with the SEC, including the risk factors section of our annual report on Form 10-K for the fiscal year ended December 31st, 2023. Although we believe our expectations are reasonable, we undertake no obligations 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-K for the fiscal year ended December 31st, 2023. And now I'd like to turn the call over to your first speaker, John Cahill, founder and CEO.
spk05: Hello, and thank you for joining us on our fourth quarter earnings conference call. For the fourth quarter 2023, our total revenue of $465 million represented approximately 29% growth year over year. We ended the quarter with health plan membership of 119,200 members, growing approximately 21% year over year. Adjusted gross profit was $49 million, producing a consolidated MBR of 89.4%, while our MBR excluding ACO reach was 88%, in line with our expectations. Lastly, our adjusted EBITDA was negative $20 million. Concluding the full year, total revenue of $1.82 billion grew 27%, An adjusted gross profit of $209 million resulted in an MBR of 88.5% and an MBR excluding ACO reach of 87.6%. Adjusted EBITDA was a loss of $35 million consistent with our comments from our January 8th 8K. In 2023, we demonstrated why our purpose-built Medicare Advantage business model is built to thrive in the current MA environment. We generated strong membership growth, demonstrated control over our medical utilization, outperformed the market in STARS, and made investments to position us for even greater success in 2024. Our differentiated clinical platform was what enabled us to simultaneously achieve all of these objectives last year. We use employed clinical teams informed by actionable data to manage the care of our members, thus controlling the cost. Our ability to take action on insights through direct data feeds from near real-time pharmacy, lab, admission, discharge, transfer, and authorization data is a significant competitive advantage in controlling our MBR and achieving excellent STARS results. This past year, we again proved the ability of our clinical platform to control medical costs by managing care. Despite many industry participants noting higher inpatient utilization, our inpatient admissions per thousand for our at-risk members ran at 156, slightly better than the prior year of 159, and nearly 40% better than traditional Medicare. More recently, during the fourth quarter, we saw a 7% year-over-year decline in inpatient volume. This trend continued to persist into January 2024. Further, our model gave us early visibility in the increasing outpatient trends. These trends started emerging in 2022, but we did not see a year-over-year increase in utilization or impact of MBR in 2023. We expect the utilization levels we saw in 2023 to remain in 2024. Our visibility is also giving us early insight into a year-over-year step-up in supplemental benefit utilization in January. We have incorporated this into our guidance and are actively managing these trends. Thomas will share more on this in his remarks. Taken together, our model is advantaged by enhanced visibility through AVA and control of member care provided by our employed clinical teams. We utilize these capabilities to create a shared risk model with community providers that is competitively advantaged in Medicare Advantage relative to models that rely on actuarial underwriting or risk transfer through global capitation. Our ability to manage risk, drive higher quality clinical outcomes, and produce medical cost savings translates into more value for our members. This enables alignment to grow membership above market rates at an attractive margin profile. As we contemplate our 2024 guidance, we are proud to share that our model continues to differentiate alignment in the marketplace. As we noted earlier in the year, we began 2024 with 155,500 health plan members after our successful 2024 annual enrollment period. We further expect to end 2024 with 162,000 to 164,000 members, representing 37% growth year over year at the midpoint. Our AEP performance and full-year membership outlook resulted from our focused investments across STARS, member experience, AVA technology enhancements and sales operations in 2023. We reduced our churn during AEP by 24% year over year. We also leveraged our strong stars rating relative to our competitors to take share in the market with 82% of our AEP sales coming from plan switchers. As in past years, we have a disciplined process which balances growth and profitability. Even with this growth, we expect our health plan MBR to be roughly unchanged year over year. Our adjusted gross profit guidance is underpinned by improvements to returning member MBR, partially offset by higher new member MBR. For returning members, our clinical model drives an average 800 basis point improvement in at-risk MBR between years one and five. The improvement in member retention will also contribute to strong returning member MBR. For new members, we design products to generate positive new member gross profit that support our overall profitability goals. New members typically begin at a higher MBR of approximately 89%, and given our significant growth through AEP, we expect these members to partially offset returning member MBR improvement. These members are still expected to be accretive to gross profit. In total, we are confident in our 2024 MBR outlet because first, we held benefits stable, increasing supplemental benefit value by just 0.7% year-over-year. Second, our new member RAF is consistent with our bid expectations. And third, our January utilization was in line with expectations. Beyond MBR, the entirety of our adjusted EBITDA margin expansion is driven by an improving SG&A ratio year-over-year. Our anticipated economies of scale as a result of our growth are controllable and give us a high degree of visibility toward our 2024 adjusted EBITDA break-even goal. Looking ahead to 2025 and beyond, we are confident about our continued ability to drive above-market growth and profitability improvements. We see growth tailwinds from widening STARS advantages and our conservative position on risk adjustments. Our competitors' percentage of members in a four-star or better plan will fall from 79% to 56% in payment year 2025. And we believe we are less impacted by B28 than many of our local competitors. We see profitability tailwinds as our new members of 2024 will yield significant MBR improvement next year. And we expect more scale economies resulting from investments we have made in technology and workflow optimization. In conclusion, we believe our clinically-centric shared risk model supported by our AVA technology insights will thrive in the current MA environment. We expect that our member growth will outpace the industry, and we will gain market share by focusing on quality clinical outcomes, excellent member engagement, and high-value benefits for our members. Alignment is Medicare Advantage done right. Now I'll turn the call over to Thomas to cover the full year financial results, as well as our outlook for 2024.
spk18: Thomas? Thanks, John. For the year ending December 2023, our health plan membership of 119,200 increased 21% year over year. This exceeded our expectation of 17% membership growth at the midpoint of our initial guidance, thanks to the strong momentum of our sales and retention efforts as we headed into AEP. Our total revenue in 2023 grew 27% to $1.82 billion. Meanwhile, our adjusted gross profit of $209 million reflected an MBR of 88.5% for the full year and an MBR of 87.6% excluding ACO REACH. Taken together, we are pleased to have balanced strong MBR results in our core business while delivering over 20% membership growth. We also made significant progress towards our operating leverage goals in 2023. SG&A for the year on a GAAP basis was $307 million. Our adjusted SG&A, which primarily excludes equity-based compensation expense, was $244 million. Adjusted SG&A as a percentage of revenue, excluding ACO REACH, was 14.4%, an improvement of 1.6% from the prior year result of 15.9%. We anticipate that this significant improvement will continue into 2024 as we benefited from our membership growth and several of our shared services productivity and scaling initiatives. Lastly, our adjusted EBITDA was negative $35 million. As previously indicated in our AK, our adjusted EBITDA result reflects decisions to increase discretionary investments in sales and marketing during the back half of AEP, given significant growth opportunity presented to us. In support of this growth, we also accelerated new hires and clinical investments in December to assist with the onboarding of new membership. We are pleased that these minimal incremental investments successfully positioned us to achieve the 2025 year-end consensus membership a full year early. Subsequent to the release of our January 8K, we saw 2 million of adverse development in our ACO REACH line of business related to fourth quarter days of service. As I will share more on momentarily, we have since executed a strategy to eliminate any downside exposure from our ACO REACH book of business in 2024. Moving to the balance sheet, our capital position remains strong as we ended the year with $319 million in cash and short-term investments. The sequential step down in cash compared to the third quarter included the previously discussed timing impact of an early payment from CMS of approximately $146 million in Q3. Turning to our guidance, for the first quarter, we expect health plan membership to be between 157,000 and 159,000 members, revenue to be in the range of $590 million and $600 million, adjusted gross profit to be between $52 million and $58 million, and adjusted EBITDA to be in the range of a loss of $13 million to a loss of $19 million. For full year 2024, we expect health plan membership to be between 162,000 and 164,000 members, revenue to be in the range of $2.38 billion and $2.41 billion, Adjusted gross profit to be between $275 million and $310 million, and adjusted EBITDA to be in the range of a loss of $15 million to positive $15 million. Based on early Q1 trends, we feel confident in our ability to achieve our full-year membership and revenue outlook. Our relative product value proposition, star differentiation, and brand recognition continue to resonate in the market post-AEP. We also continue to see improvements in retention that reinforce our full year membership target. Moving down to P&L, the following factors support our full year 2024 adjusted gross profit outlook. First, our star ratings are stable year over year for 2024 payment. Second, as John mentioned earlier, the bid value of our added benefits remain roughly unchanged in 2024, increasing just 0.7% year over year. Third, the RAF we receive for our new members is in line with our bid expectations. And lastly, our recent utilization experience continues to be consistent with our expectations. Fourth quarter inpatient admissions per thousand ran 7% better year over year, a trend which persisted into January. Diving deeper into our utilization experience, I'll spend a few moments on a few topical items. Flu and RSV inpatient utilization. Utilization trends for the full year and fourth quarter 2023 showed year over year declines. Flu and RSV are captured within our all-in 156 admissions per thousand for full year 2023. This category of utilization continues to be a primary area of differentiation, given the strength of our clinical model to prevent avoidable admissions and readmissions. Outpatient utilization. As we previously noted, our outpatient costs in 2023 ran within a few dollars PMPM relative to 2022. Additionally, our early 2024 pre-authorization data, which is a strong leading indicator of our outpatient volume, continues to be in line with our prior year experience. Inpatient unit costs. We expect the impact of the two midnight rule to be immaterial. The majority of our hospital contracts in California, which comprises 94% of our members, already incorporate a de facto two midnight rule while we foresee modest impact to our ex-California markets. However, we are incorporating higher than the national average inpatient unit cost increases in California and Nevada for CMS's fiscal year 2024. Supplemental benefit expense. We saw a year-over-year increase in our supplemental benefit expense in 2023, but importantly, this was consistent with our budget forecast. In 2024, we continue to contemplate higher supplemental benefit expense as part of our full-year outlook. This is largely a result of our successful vendor transition that has improved Black Card service levels. While we have incorporated this as an area of MBR headwind in our 2024 outlook, it is also contributing to improved retention and member engagement on our critical clinical initiatives. And lastly, our clinical initiatives. We've identified numerous care and medical management opportunities to improve quality outcomes and utilization trends in 2024. Our first quarter outlook generally reflects the regular seasonality of our MBR experience. As a reminder, utilization is typically higher in the first quarter than the full year average. Part D is also much less profitable in the first half of the year as compared to the second half, particularly in the first quarter. This year, our guidance also reflects an extra day of medical expense in the first quarter due to the leap year and a higher mix of pre-mid-year sweep new members in Q1 relative to prior years. Additionally, we expect our SG&A ratio seasonality to be less pronounced in the back half of this year as we gain economies of scale across the enterprise. As we head into 2024, we are making changes to our ACO REACH business and reporting. Given the immense opportunity we see in Medicare Advantage, particularly over the next few years as we benefit from our competitive positioning on stars and risk adjustment, we are reallocating our time and human capital towards MA and eliminating downside risk in the ACO REACH program. Going forward, revenue from the program will be reported on a net basis, meaning that we will no longer recognize the full benchmark risk as gross revenue. The difference in accounting is due to our decision to capitate a provider to take risk on the ACR REACH population for 2024. Under this arrangement, we will recognize a nominal amount of gross profit and not share any ACR REACH program deficits. The changes to our ACR REACH accounting are reflected in the 2024 outlook I previously provided. Pro forma for changes in revenue recognition Year-over-year revenue growth is expected to be 41% at the midpoint of our outlook range. We have included a financial supplement on our investor relations page with additional detail. In conclusion, we are well-positioned to execute on our 2024 objectives and are excited for the opportunity ahead of us in 2025, where we expect our competitive advantages to compound even further. With that, let's open the call to questions. Operator?
spk14: Thank you, sir. As a reminder, to ask a question, you need to press star 1-1 on your telephone. To return your question, please press star 1-1 again. Please stand by while we compile the Q&A roster. And I'm sure our first question comes from the line of John Ransom from Raymond James. Please go ahead.
spk08: Hey, good evening, gentlemen. At what point on ACRE should you say that it's just not worth it?
spk18: Hey John, this is Thomas here. I think we still think the overall program intent makes a lot of sense. The idea of trying to ensure that seniors enrolled in traditional Medicare get access to better care, different modalities of value-based care, and potentially different forms of supplemental benefits longer term, which we think is really interesting. But that being said, you've heard from us say all along that we would do this so long as it supports our strategic objectives with our provider network, but not in a way that causes us to lose money. And so given where we ultimately landed for 2023's ACO REACH MLR, which was a bit over 100%, We decided we'd take a step back and essentially insulate ourselves from any downside risk exposure while not backing out of the program entirely. I think for the foreseeable future, we do not plan to take downside risk on the ACR REACH program, but rather we'll look to continue to support our provider partners with our existing license we still have remaining and really focus our efforts on Medicare Advantage, where we see an enormous growth opportunity and margin improvement opportunity starting heading into 2025.
spk08: And secondly, and I'll stop with this, just the cadence of MLR throughout the year. I know you talked about 1Q being higher, but could you kind of talk about how you see it and why you see the trends as you presented in your guidance 2Q to 4Q? Thanks.
spk18: Yeah. So we typically would expect Q1 and Q4 seasonality to have a bit higher MBR than Q2 or Q3 seasonality. I think this year, similar to years past guidance, our Q1 MBR seasonality reflects Part D, which tends to run over 100% in Q1. And then we also just have sort of our normal course utilization where inpatient volumes tend to be higher in December, January, and oftentimes March as well, just around sort of flu and RSV season. I think this year we also are recognizing that it is a leap year. We have an extra one day of medical expense in the first quarter that we've reflected. And then just given the overall growth, the memberships, That is pre-mid-year sweep. We think that is something that we're also taking into account for our Q1 guidance. As we talked about in the past, we tend to book our new members to the paid revenue over the course of the first half of the year until we see the mid-year sweep. Our full-year guidance is not contingent upon a disproportionate pickup in the mid-year, but we also like to take a kind of conservative posture in Q1 to not assume that we'll do anything better than what we're currently being paid.
spk14: Thank you. Thank you. And I show our next question comes from the line of Nathan Rich from Goldman Sachs. Please go ahead.
spk26: Hey, good afternoon. Thanks for the questions. First, just wanted to follow up on the utilization expectations. I guess just to clarify on the change in ACO REACH accounting, I guess does that mean it'll essentially be a non-factor in the MBR in 2024 based on that accounting change? And then I guess Bigger picture, you know, you kind of talked about January inpatient, I think, being in line with your expectations. I guess, what does the guidance assume for inpatient specifically over the balance of the year and to the extent that, you know, we continue to see greater, I guess, you know, hospital utilization and inpatient utilization? Just curious, like, how you're thinking about that potential within the guidance range. Thank you.
spk18: Yeah, absolutely. So on the ACO reach point, you are correct. We did not expect it to be a material driver of our MBR in 2024, given our change in accounting revenue recognition from gross to net. It's worth noting that we did provide a financial supplement on our investor relations page just to show the MBR in 2023, both with and without ACO reach that you all can look at it on a comparable basis as we head into 2024. In terms of utilization, I think we would expect overall utilization in 2024 to be comparable to what we saw in 2023. And I think your first question was on inpatient. This has been one of the areas that we have shined consistently since going public and even before we ever went public. So we've run about 155 to 165 inpatient admissions per thousand for about seven years straight at this point, including over the last few years where we've been growing in excess of 20%. And so I think as we contemplate our ability to sustain that into 2024, it's really a testament to our clinical model, which is able to identify members early who need our clinical programs and ensure that we engage them with our employed clinical teams. And so that's something we're going to be very focused on over the first 90 days of 2024. But as we sit here through February, we're very pleased with our early results and traction and making sure we get the right members engaged in our clinical programs.
spk26: Great, and if I could just ask a quick follow-up. You mentioned achieving kind of the 2025 membership a year early. Great to see the early membership gains, obviously. I guess, could you maybe talk about how that impacts your thinking around 2025 performance of the business? You know, what type of EBITDA tailwind does that potentially create as you get CMBR improvement on those members, just as we think about sort of the trajectory of the business a little bit longer term? Thank you.
spk18: Yeah, we think it's significant to your point. And so both from a growth and margin standpoint, we're very optimistic about our 2025 positioning. I think you heard John mentioned a bit on the growth side of things that we're going to benefit in 2025 as our competitors fall on average below a four-star payment. There's only one other HMO competitor who has a pretty broad footprint across California that actually maintained four stars for 2025. I think when you take that and add on the B28 risk adjustment headwinds and the broader utilization headwinds that you've heard from across the industry, we feel very good about our ability to sustain above market growth and achieve something in excess of 20% for 2025. At the same time, to your point on the margin side of things, I think that growth affords us continued SG&A economies of scale heading into 2025. And given the 2024 bullets of new member growth, I think it presents a significant NBR opportunity as you transition those year one members, which tend to start in the high 80s, into year two, which tends to go into the mid 80s. And so that's something we're very optimistic about as we think about our overall positioning over the next 24 months.
spk27: Thank you.
spk14: Thank you. And I show our next question comes from the line of Scott Fidel from Stevens. Please go ahead.
spk24: Hi, thanks. Good evening. First question, just interested if you can share with us just some of the initial indicators around the risk and acuity profile of the 2024 cohort that you've had in the AEP. Any sort of, you know, sort of early warning sort of indicators that you focus on around that population? And then just as it relates to the supplemental benefits dynamics that you had touched on, whether you have enough information to ascertain sort of variation between the new members added this year versus prior members around sub-benefits utilization.
spk18: Yeah, so this is Thomas. Hey, Scott. I think maybe in terms of the new member MLR outlook, maybe I'll speak to both the revenue side and the cost side based on what we've seen so far. So in terms of the revenue side of things, our actual paid RAF for the month of January, our new members, was within a couple of basis points of what we had incorporated into our 2024 bids back in June of 2023. So I think that was a very positive data point for us in ensuring that the payment relative to our expectations of mixed byproduct was consistent with what we had hoped. On the cost side, obviously we track our inpatient emissions per thousand with a maniacal attention to detail. And as we progress here through the first 45, almost 60 days of the first quarter, we've been looking at not only overall inpatient utilization, but specifically how the new members are performing by market, by IPA, and by product. So far, all signs point to the utilization of those new members being consistent with expectations. I think over the course of the next few months, we'll get more and more claims visibility to some of the other categories of SPIN, but so far, I think we're feeling pretty optimistic that this year's new member MLR should be in line with what we would have anticipated from a bid standpoint. I think on your second question, Sorry, go ahead. No, please Thomas, go ahead. And in terms of your second question on supplemental benefits, I think it's less of a new member issue versus a loyal member issue. I think what we have seen is as we changed some of our vendors last year around the overall member experience, inclusive of some of the black card vendors, what we've seen is improved service levels, which has been excellent in terms of some of our tailwinds around our NPS scores. Google reviews, most recently AEP retention, which improved by about 200 basis points year over year compared to the 2023 AEP results. And ultimately, we think it's going to be a tailwind heading into cap season for STARS purposes this year. So I think the overall investment and initiative has been very successful, but at the same time has caused our overall black card spin to increase for the first part of 24 compared to 2023. I think that's reflected in overall MBR outlook, and it's something that we're continuing to monitor. But I think for now, we feel like the initiative has been pretty successful, and it's something we'll continue to keep in mind as we try to make sure we're balancing all of our different initiatives across growth, retention, STARS, and ultimately profitability.
spk24: Okay, got it. Thank you. And then just my follow-up. Interesting if you could give us some of your thinking around operating cash flow for 2024 and
spk25: and key sources and uses of cash that you're thinking about for 2024? Thanks.
spk18: Yeah, so overall from a kind of a bridge from adjusted EBITDA to ultimately what our cash flow looks like for 2024, I'd say a couple things to keep in mind. We typically have about $25 million of CapEx annually, and based on our existing term loan, we have about probably, you know, $20 million or so of cash interest expense, I would anticipate, in 2024. And so I think if you kind of take those two things into account, you're kind of thinking about 50 million of cash burn outside of our adjusted EBITDA. Working capital doesn't tend to be a major source of or use of cash over a full 12 month period. So that's not something I would expect to drive a significant change in our overall cash position this year. And then lastly, just in terms of overall parent cash versus regulated cash, I think we feel very good about the way the Oldswood balance sheet is positioned today. So sitting here at the end of 2023, we had about 156 million of parent cash, over 300 million of total cash, with an additional 85 million of term loan undrawn capacity at our disposal. So I think big picture given our 2024 outlook and then the margin potential improvement we see for 2025, we feel very good about the strength of the overall balance sheet.
spk22: Okay, thank you.
spk14: Thank you. And I see our next question comes from the line of Ryan Daniels from William Blair. Please go ahead.
spk02: Yeah, congrats on the quarter. Thanks for taking the questions. John, maybe one for you. Pretty impressive with the year-over-year decline in inpatient utilization and the trends that you're seeing there in general. I'm curious if you can go into a little bit more detail on what you think is the key driver of that my impression is it's probably your data and care anywhere and intervention but you know more broadly is it is it the ability to really provide more proactive care and is that a two-fold benefit and that maybe you're seeing less pent-up demand because you manage that during covet so you're not seeing it and then continue to manage it So I don't want to put words in your mouth, but just love to get some color there.
spk05: Yeah, hey, Ryan. No, I'd say two words, and it's visibility and control. Visibility and control. The data, and Ava, you've heard us talk about, really gives us a lot of insight into what's going on with the membership. And so we have kind of day-to-day control because we actually manage the risk ourselves. And we prefer to manage the risk. And we manage the risk really by managing the care, which I think is fundamentally, at the highest level, what you need to be to be successful in Medicare Advantage. It's not an underwriting or financial engineering exercise. It's actually managing the care. And you've heard us talk about understanding where the 10% to 20% of the high-risk members are. and then how we take care of them at the home with our interdisciplinary care teams. And it's that consistency that really allows us to lower these admissions for the Thomas mentioned over the last seven years. And that level of visibility control is I think what makes us very differentiated and unique. I also say that in this kind of Medicare Advantage reality of just tighter stars, tighter risk adjustment. We've got a lot of discussion around benchmarks right now with the advance notice. We're positioned to do really well because from the start, we focused on you have to be the highest quality and the lowest cost provider in the marketplace. It's very simple. And I think I think the market is adjusting to the way that we've been built, and that's what I think has been reflected in some of the growth that you just saw with us in AEP.
spk02: Okay, great. Thank you for that, Keller. And then, Thomas, one for you. It looks like the implied MBR in Q1, if I'm doing this right, I'm jumping between stuff, is about 91%, which was a little bit higher year-over-year despite the utilization trends being pretty stable. So is that just the sub-benefits and the new member growth pushing that up a little bit year-over-year?
spk18: Yeah, I think those two things, and then I would add just kind of, like I said earlier, normal core seasonality and then Part D in particular. And so the Part D program runs over 100% MLR in Q1, and so that's a pretty significant driver on the overall seasonality of the business from Q1 through Q4. I think from a utilization standpoint to your comment, I think we feel pretty good about what we're seeing on the inpatient side thus far.
spk00: Yeah.
spk18: And I would also add, Ryan, I think I mentioned earlier, it is a leap year this year, which sounds immaterial, but actually is not insignificant when you think about adding one extra day of medical expense with the same number of days of revenue over the course of Q1.
spk02: That's a good point. All right. Thank you so much. Perfect.
spk14: Thank you. And I show our next question comes from the line of Jess Tesson from Piper Sandler. Please go ahead.
spk20: Hi, guys. Thanks for taking the question. So I wanted to start with, I know you all mentioned the opportunity for margin expansion in 25 just via stars and kind of favorable positioning with version 28. Curious if you have any early comments about the impact of the expected changes from the Inflation Reduction Act on Part D kind of redesign and just the shift of liability from CMS to the plan in the catastrophic phase of coverage.
spk05: Yeah. Hey, Jess. It's John. Great question. We think that it could go either way, actually. It's going to be, I think, a very important part of the bid strategy heading into 2025. I don't want to get into bid strategy for obvious competitive reasons right now, but I'm very comfortable with what our thinking is on it. But I think that overall trends, I think we can manage, and we've had a few years to be able to digest this. We know what the program looks like. and we'll be able to embed that in our bids. And as usual, we'll find the right balance between growth and margin. But it will be a meaningful level of, I would say, benefit designs and strategic thinking around IRA.
spk20: Got it. Okay, that's helpful. And then I guess I was hoping to understand when you described You know, 82% of AEP ads coming from members switching, despite the fact that supplemental benefits are only up, or value is only up modestly year over year. I guess just, and I know you guys have gone through this, but just kind of what's driving the switching? Is it competitors paring back benefits versus your relative stability, or just the sales approach, or anything in particular to call out from this AEP? Thanks again.
spk05: Yeah, hey, yeah, it's John again. It's all of the above. You know, we've touched on STARS being a driver, and again, our competitive position on STARS is improving. I think also V28, the impact of V28 is affecting everybody, but it's affecting us less. And it's affecting us less because we knew heading into the year that some kind of reimbursement risk was going to be something we had to deal with. So those two things, I think, are big drivers. And I think if you kind of look at some of the, you know, just kind of the, we call it MACVAT data on benefit designs, people were generally flat and or pulled back heading into 2024 from a benefit perspective. And we remained relatively flat, maybe slightly up on supplemental benefits. I think heading into 2025, our position is going to get even stronger. I think that a lot of the noise around reimbursement is somewhat a function of people's star ratings going down. Some organizations, if you go down from 4.5 to 3.5 stars, that's close to a 10% hit to reimbursement. That's a big deal. You add that to be 28. I think the notion of high quality, again, stars, and then low cost utilization is going to play to our advantage.
spk18: The other thing I would add too, Jess, is just from a brand recognition standpoint, I think we're really starting to separate ourselves in the market, particularly in California, where you flashback five years ago, we were sort of one of the smaller upstarts. And And I think if you flash forward to today, we've been consistently four stars or better now for, I want to say about six years in a row, all while offering market leading products and experience along the way. And so I think as that happens, we start to become more top of mind in the broker community, more top of mind in the senior community and in the provider community. So it's one of those stories to a certain extent where I think the bigger you get, the stronger you get in many respects. I think we're starting to see the benefit of that from a brand standpoint here in California.
spk19: Thank you.
spk18: Sure.
spk14: Thank you. And I show our next question comes from the line of With Mayo from Laring Partners. Please go ahead.
spk06: Hey, first I was just wondering if there's any unusual switching you've seen in January and February, any disenrollment. I haven't had a chance to see if you changed your membership guidance. I just was wondering if there was any unusual movement.
spk18: No. So to your year-end membership point, our full-year membership is unchanged compared to our 8K release, so $162,000 to $164,000 at year-end. More specifically to our January experience, we saw very solid, I'd say, sales progress and pretty significant retention improvement again. So looking at our February 1st disenrollment rate this year as compared to the run rate we would have expected based on February 1st trends a year ago, we actually saw about a 20% year over year improvement in that February 1st disenrollment rate relative to prior year run rate. So I think a lot, again, those, those investments around member experience or paying dividends, not just an AEP, but into what we call OEP, which lasts from now through April 1st. Right.
spk06: Right. And John, I'm just wondering, you know, CMS is making some potentially making some changes around, you know, the marketing, the broker agent commission, just any, any, updated evolving views on what you think this means to you and the industry?
spk05: Yeah. Hey, yeah. Yeah. I think, I think leveling the playing field is, is always a good thing. Having more transparency is always a good thing. And again, being, you know, the, the high growth player in the space, I think it's going to be to our advantage. And I think at the end of the day, if, there's more protections for our seniors, the better. And so, you know, I think, as you know, we've spent so much time and effort on our sales operations, our sales leadership, our marketing strategies, our broker management, our broker tools, our onboarding, all of that paid off for us heading into the new year. So I think it's going to be a good thing for us. I think all these things that are leveling the playing field and doing what CMS really originally intended MA to be, which is just provide the highest value for beneficiaries, is a good thing. It's going to play well for us.
spk07: Thanks a lot. Got it.
spk14: Thank you. And I show our last question in the queue comes from Adam Ron from Bank of America. Please go ahead.
spk16: Hey, actually, it's Kevin Fishbeck in for Adam tonight. I guess one of the things that I'm struggling with a little bit is just how different California as a market can be versus the rest of the United States. Do you have any sense for what the broader trend is in California? Like how much of you know, the outperformance that you're seeing here is really on the revenue side in 24 versus on the cost side? Is it more capital hit and costs are generally under control and you're marginally outperforming that? Or do you believe that it is really like a truly differentiated trend that you're seeing even versus the competitors in California?
spk05: Yeah. Hey, Kev, it's John. Yeah, I think what makes California unique, good and bad, really is that the scale of the delegated capitated IPAs and the delivery systems. And I think that how health plans work with those IPAs or independent physician associations, so to speak, is really important. And I think that we've been able to figure that out. We've been able to design incentives with the delivery system to create us what I talked about a lot, which is visibility and control of the medical spend. And then durability. We want durability on these networks. And unless you have the tools that we have, it is very difficult to kind of get the kind of outcomes that we'd be able to achieve in STARS in particular. That's the one differentiator. And then secondly, with respect to utilization, We designed what we call shared risk models, which is really creating aligned incentives with these IPAs, as well as directly contracted physicians. And we create win-win economic situations, all for the benefit of the member. Those are, I think, the unique things that make California different. And yet we think that's the opportunity and why we've been able to crack the code. in California while others have not. The interesting thing is we think that by doing it in California, we think it's the hardest thing anywhere in the country, because if you take the tools that we have and you overlay it on other parts of the country, I think the opportunity is going to be even higher, because you don't have the density of these IPAs or capitation. in other parts of the country. So I think the margin opportunity is even greater for us outside.
spk16: Okay. So a couple of questions in off of that. I guess the first one, I'm just trying to figure out what that, you talked about that alignment with the physicians. You know, I think a lot of people are expecting that as V28 continues to ramp up, that supplemental benefits get cut. It kind of sounds like you don't think you need to do that going forward. It seems like because the half that's not really capitated in drugs given by Ava is going to outperform. Does that create any pressure in your relationship with the physicians? Is that to their detriment if you increase benefits when others aren't?
spk05: It's twofold. V28 is part of it. I mean, everyone's going to get hit by V28. I mean, that's clear. We're just going to get hit less in our particular markets because of the way we manage risk adjustment. And I would say we've been very conservative on risk adjustment. And you put that in the context of some others that have been more aggressive on risk adjustment that are going to go down, in some cases, 20%. And just to remind everybody, 20% from just hypothetically a 1.5, 20%, that's 30 basis points. And if each basis point is worth $8 p.m. p.m., that's a meaningful hit to revenue that is being borne functionally by a lot of these globally capitated providers. That's a hard pill to swallow. But more, I think, importantly, is stars. You add stars to the equation, somebody dropping from four and a half to three and a half, that's a, you know, what, $80 of potential hit. I mean, so when you combine those things, you know, and you look at our stars and you look at our upward trend on risk adjustment, that creates the effective tailwinds. And so these providers are going to do better with us on just those two economics. And then if we can deploy our data and our care model on that high-risk population that we do ourselves in concert with the providers and these IPAs, everybody wins because we surplus these risk pools. That's the whole construct of this. And we do it in what I would refer to as a capital light way. We don't have a lot of bricks and mortar. We don't think you need to have a lot of bricks and mortar. You do it with the community physicians, and you create it in a way that everybody wins, ergo the name alignment.
spk16: Yeah, and I guess maybe then you mentioned the model and how it works in California and how it can be exportable into other markets. It is just interesting just how differently you're talking about trend versus how your peers are talking about how trends developed this year. Are you seeing similar trends in California and outside of California, or is outside of California not performing quite as well as California is?
spk05: Well, that's what's interesting, is the portability of the care model is being replicated. The utilization and MLR we have outside of California is really, really good. You know, where we have to just get bigger, and we're incrementally getting bigger, kind of get to 3,000 to 5,000 in some of our ex-California markets, but we'll get there. But the care model is managing the trend effectively. And I think what people need to understand is a lot of inpatient hospitalizations, a lot of it's unnecessary. A lot of it can be prevented just by paying attention to what's going on with your high-risk population. And if we have our interdisciplinary care teams spending time, oftentimes on a weekly basis, with high-risk patients in person, and certainly virtually, it makes a difference. And so I just keep saying, we actually deliver the care. Not many other of our competitors deliver the care. They may have care delivery divisions that's very different than integrating all of that into um the way we talk about it which is productizing if you will really good benefits productizing the care model it really is a is a different way of approaching the market okay and then maybe this last question it sounds like you're saying that you think you're keyed up pretty well for growth again in um
spk16: in 25, is that going to look a lot like this year insofar as it's going to be still largely California-centric because that's where the disruption to the competitors is?
spk04: Yeah.
spk16: Sorry.
spk04: Go ahead. I didn't mean to cut you off.
spk16: I was going to say the second part of that would just be if it is coming in California, you mentioned balancing growth and profitability. Does that give you an opportunity to actually push the growth I'm sorry, push the profitability lever a little bit more than we're used to? Or do you kind of feel like as long as you can take share, taking shares is the right move as long as you can keep a round break even?
spk05: No, we're not going to grow at all costs. We're going to get to the profitability commitments that we've made. I think it's super important tying all that to cash flow, to Our balance sheet, all of that is really poised for 2025 to be a really, really good year that I think. And if you just look at the differential on stars and risk adjustment, plus you look at the utilization, ability to manage utilization, actually have the tools to manage it, it's just a competitive advantage in this environment. I think the... The bid strategies, we'll talk about that in the next several months, but not right now. But I feel very comfortable with just kind of where we're at in terms of 2025. That's going to be a very good year. The other thing I would say is on 2025 is you're going to have even more scale economies on our back office. I think some of the investments that we've made in our back office systems like what we made in our kind of member services systems, is going to pay off even more. So you can get more scale economies heading into 2025. Don't know if we'll get the same kind of growth. Not going to comment on that. But I feel very, very good about the tailwinds. All right.
spk07: Great. Thank you. Thanks, Kev.
spk14: Thank you. That concludes our Q&A session and today's conference call. We want to thank you all for participating.
spk12: You mean all disconnected. do do you you Bye.
spk14: Good afternoon and welcome to Alignment Health Care's fourth quarter 2023 earnings conference call and webcast. All participants will be in the listen-only mode. After today's presentation, there will be an opportunity to ask questions. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please note that this event 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. Descriptions of some of the factors that could cause actual results to differ materially from these forward-looking statements are discussed in more details in our filings with the SEC, including the risk factors section of our annual report on Form 10-K for the fiscal year ended December 31st, 2023. Although we believe our expectations are reasonable, we undertake no obligations 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-K for the fiscal year ended December 31st, 2023. And now I'd like to turn the call over to your first speaker, John Cahill, founder and CEO.
spk05: Hello, and thank you for joining us on our fourth quarter earnings conference call. For the fourth quarter 2023, our total revenue of $465 million represented approximately 29% growth year over year. We ended the quarter with health plan membership of 119,200 members, growing approximately 21% year over year. Adjusted gross profit was $49 million, producing a consolidated MBR of 89.4%, while our MBR excluding ACO reach was 88%, in line with our expectations. Lastly, our adjusted EBITDA was negative $20 million. Concluding the full year, total revenue of $1.82 billion grew 27%, An adjusted gross profit of $209 million resulted in an MBR of 88.5% and an MBR excluding ACO reach of 87.6%. Adjusted EBITDA was a loss of $35 million consistent with our comments from our January 8th 8K. In 2023, we demonstrated why our purpose-built Medicare Advantage business model is built to thrive in the current MA environment. We generated strong membership growth, demonstrated control over our medical utilization, outperformed the market in STARS, and made investments to position us for even greater success in 2024. Our differentiated clinical platform was what enabled us to simultaneously achieve all of these objectives last year. We use employed clinical teams informed by actionable data to manage the care of our members, thus controlling the cost. Our ability to take action on insights through direct data feeds from near real-time pharmacy, lab, admission, discharge, transfer, and authorization data is a significant competitive advantage in controlling our MBR and achieving excellent STARS results. This past year, we again proved the ability of our clinical platform to control medical costs by managing care. Despite many industry participants noting higher inpatient utilization, our inpatient admissions per thousand for our at-risk members ran at 156, slightly better than the prior year of 159, and nearly 40% better than traditional Medicare. More recently, during the fourth quarter, we saw a 7% year-over-year decline in inpatient volume. This trend continued to persist into January 2024. Further, our model gave us early visibility in the increasing outpatient trends. These trends started emerging in 2022, but we did not see a year-over-year increase in utilization or impact of MBR in 2023. We expect the utilization levels we saw in 2023 to remain in 2024. Our visibility is also giving us early insight into a year-over-year step-up in supplemental benefit utilization in January. We have incorporated this into our guidance and are actively managing these trends. Thomas will share more on this in his remarks. Taken together, our model is advantaged by enhanced visibility through AVA and control of member care provided by our employed clinical teams. We utilize these capabilities to create a shared risk model with community providers that is competitively advantaged in Medicare Advantage relative to models that rely on actuarial underwriting or risk transfer through global capitation. Our ability to manage risk, drive higher quality clinical outcomes, and produce medical cost savings translates into more value for our members. This enables alignment to grow membership above market rates at an attractive margin profile. As we contemplate our 2024 guidance, we are proud to share that our model continues to differentiate alignment in the marketplace. As we noted earlier in the year, we began 2024 with 155,500 health plan members after our successful 2024 annual enrollment period. We further expect to end 2024 with 162,000 to 164,000 members, representing 37% growth year over year at the midpoint. Our AEP performance and full-year membership outlook resulted from our focused investments across STARS, member experience, AVA technology enhancements and sales operations in 2023. We reduced our churn during AEP by 24% year over year. We also leveraged our strong stars rating relative to our competitors to take share in the market with 82% of our AEP sales coming from plan switchers. As in past years, we have a disciplined process which balances growth and profitability. Even with this growth, we expect our health plan MBR to be roughly unchanged year over year. Our adjusted gross profit guidance is underpinned by improvements to returning member MBR, partially offset by higher new member MBR. For returning members, our clinical model drives an average 800 basis point improvement in at-risk MBR between years one and five. The improvement in member retention will also contribute to strong returning member MBR. For new members, we design products to generate positive new member gross profit that support our overall profitability goals. New members typically begin at a higher MBR of approximately 89%, and given our significant growth through AEP, we expect these members to partially offset returning member MBR improvement. These members are still expected to be accretive to gross profit. In total, we are confident in our 2024 MBR outlet because, first, we held benefits stable, increasing supplemental benefit value by just 0.7% year over year. Second, our new member RAF is consistent with our bid expectations. And third, our January utilization was in line with expectations. Beyond MBR, the entirety of our adjusted EBITDA margin expansion is driven by an improving SG&A ratio year over year. Our anticipated economies of scale as a result of our growth are controllable and give us a high degree of visibility toward our 2024 adjusted EBITDA break-even goal. Looking ahead to 2025 and beyond, we are confident about our continued ability to drive above-market growth and profitability improvements. We see growth tailwinds from widening STARS advantages and our conservative position on risk adjustments. Our competitors' percentage of members in a four-star or better plan will fall from 79% to 56% in payment year 2025. And we believe we are less impacted by V28 than many of our local competitors. We see profitability tailwinds as our new members of 2024 will yield significant MBR improvement next year. And we expect more scale economies resulting from investments we have made in technology and workflow optimization. In conclusion, we believe our clinically-centric shared risk model supported by our AVA technology insights will thrive in the current MA environment. We expect that our member growth will outpace the industry, and we will gain market share by focusing on quality clinical outcomes, excellent member engagement, and high-value benefits for our members. Alignment is Medicare Advantage done right. Now I'll turn the call over to Thomas to cover the full year financial results, as well as our outlook for 2024.
spk18: Thomas? Thanks, John. For the year ending December 2023, our health plan membership of 119,200 increased 21% year over year. This exceeded our expectation of 17% membership growth at the midpoint of our initial guidance, thanks to the strong momentum of our sales and retention efforts as we headed into AEP. Our total revenue in 2023 grew 27% to $1.82 billion. Meanwhile, our adjusted gross profit of $209 million reflected an MBR of 88.5% for the full year and an MBR of 87.6% excluding ACO REACH. Taken together, we are pleased to have balanced strong MBR results in our core business while delivering over 20% membership growth. We also made significant progress towards our operating leverage goals in 2023. SG&A for the year on a GAAP basis was $307 million. Our adjusted SG&A, which primarily excludes equity-based compensation expense, was $244 million. Adjusted SG&A as a percentage of revenue, excluding ACO REACH, was 14.4%, an improvement of 1.6% from the prior year result of 15.9%. We anticipate that this significant improvement will continue into 2024 as we benefited from our membership growth and several of our shared services productivity and scaling initiatives. Lastly, our adjusted EBITDA was negative 35 million. As previously indicated in our 8K, our adjusted EBITDA result reflects decisions to increase discretionary investments in sales and marketing during the back half of AEP, given significant growth opportunity presented to us. In support of this growth, we also accelerated new hires and clinical investments in December to assist with the onboarding of new membership. We are pleased that these minimal incremental investments successfully positioned us to achieve the 2025 year-end consensus membership a full year early. Subsequent to the release of our January 8K, we saw $2 million of adverse development in our ACO REACH line of business related to fourth quarter days of service. As I will share more on momentarily, we have since executed a strategy to eliminate any downside exposure from our ACO REACH book of business in 2024. Moving to the balance sheet, our capital position remains strong as we ended the year with $319 million in cash and short-term investments. The sequential step down in cash compared to the third quarter included the previously discussed timing impact of an early payment from CMS of approximately $146 million in Q3. Turning to our guidance, for the first quarter, we expect health plan membership to be between 157,000 and 159,000 members, Revenue to be in the range of 590 million and 600 million. Adjusted gross profit to be between 52 million and 58 million. And adjusted EBITDA to be in the range of a loss of 13 million to a loss of 19 million. For full year 2024, we expect health plan membership to be between 162,000 and 164,000 members. Revenue to be in the range of 2.38 billion and 2.41 billion. adjusted gross profit to be between $275 million and $310 million, and adjusted EBITDA to be in the range of a loss of $15 million to positive $15 million. Based on early Q1 trends, we feel confident in our ability to achieve our full-year membership and revenue outlook. Our relative product value proposition, star differentiation, and brand recognition continue to resonate in the market post-AEP. We also continue to see improvements in retention that reinforce our full year membership target. Moving down to P&L, the following factors support our full year 2024 adjusted gross profit outlook. First, our star ratings are stable year over year for 2024 payment. Second, as John mentioned earlier, the bid value of our added benefits remain roughly unchanged in 2024, increasing just 0.7% year over year. Third, the RAF we receive for our new members is in line with our bid expectations. And lastly, our recent utilization experience continues to be consistent with our expectations. Fourth quarter inpatient admissions per thousand ran 7% better year over year, a trend which persisted into January. Diving deeper into our utilization experience, I'll spend a few moments on a few topical items. Flu and RSV inpatient utilization. Utilization trends for the full year and fourth quarter 2023 showed year over year declines. Flu and RSV are captured within our all-in 156 admissions per thousand for full year 2023. This category of utilization continues to be a primary area of differentiation, given the strength of our clinical model to prevent avoidable admissions and readmissions. Outpatient utilization. As we previously noted, our outpatient costs in 2023 ran within a few dollars PMPM relative to 2022. Additionally, our early 2024 pre-authorization data, which is a strong leading indicator of our outpatient volume, continues to be in line with our prior year experience. Inpatient unit costs. We expect the impact of the two midnight rule to be immaterial. The majority of our hospital contracts in California, which comprises 94% of our members, already incorporate a de facto two midnight rule while we foresee modest impact to our ex-California markets. However, we are incorporating higher than the national average inpatient unit cost increases in California and Nevada for CMS's fiscal year 2024. Supplemental benefit expense. We saw a year-over-year increase in our supplemental benefit expense in 2023, but importantly, this was consistent with our budget forecast. In 2024, we continue to contemplate higher supplemental benefit expense as part of our full-year outlook. This is largely a result of our successful vendor transition that has improved Black Card service levels. While we have incorporated this as an area of MBR headwind in our 2024 outlook, it is also contributing to improved retention and member engagement on our critical clinical initiatives. And lastly, our clinical initiatives. We've identified numerous care and medical management opportunities to improve quality outcomes and utilization trends in 2024. Our first quarter outlook generally reflects the regular seasonality of our MBR experience. As a reminder, utilization is typically higher in the first quarter than the full year average. Part D is also much less profitable in the first half of the year as compared to the second half, particularly in the first quarter. This year, our guidance also reflects an extra day of medical expense in the first quarter due to the leap year and a higher mix of pre-mid-year sweep new members in Q1 relative to prior years. Additionally, we expect our SG&A ratio seasonality to be less pronounced in the back half of this year as we gain economies of scale across the enterprise. As we head into 2024, we are making changes to our ACO REACH business and reporting. Given the immense opportunity we see in Medicare Advantage, particularly over the next few years as we benefit from our competitive positioning on stars and risk adjustment, we are reallocating our time and human capital towards MA and eliminating downside risk in the ACO REACH program. Going forward, revenue from the program will be reported on a net basis, meaning that we will no longer recognize the full benchmark risk as gross revenue. The difference in accounting is due to our decision to capitate a provider to take risk on the ACR REACH population for 2024. Under this arrangement, we will recognize a nominal amount of gross profit and not share any ACR REACH program deficits. The changes to our ACR REACH accounting are reflected in the 2024 outlook I previously provided. Pro forma for changes in revenue recognition Year-over-year revenue growth is expected to be 41% at the midpoint of our outlook range. We have included a financial supplement on our investor relations page with additional detail. In conclusion, we are well-positioned to execute on our 2024 objectives and are excited for the opportunity ahead of us in 2025, where we expect our competitive advantages to compound even further. With that, let's open the call to questions. Operator?
spk14: Thank you, sir. As a reminder, to ask a question, you need to press star 1-1 on your telephone. To return your question, please press star 1-1 again. Please stand by while we compile the Q&A roster. And I share our first question comes from the line of John Ransom from Raymond James. Please go ahead.
spk08: Hey, good evening, gentlemen. At what point on ACRE should you say that it's just not worth it?
spk18: Hey John, this is Thomas here. I think we still think the overall program intent makes a lot of sense. The idea of trying to ensure that seniors enrolled in traditional Medicare get access to better care, different modalities of value-based care, and potentially different forms of supplemental benefits longer term, which we think is really interesting. But that being said, you've heard from us say all along that we would do this so long as it supports our strategic objectives with our provider network, but not in a way that causes us to lose money. And so given where we ultimately landed for 2023's ACO REACH MLR, which was a bit over 100%, We decided we'd take a step back and essentially insulate ourselves from any downside risk exposure while not backing out of the program entirely. I think for the foreseeable future, we do not plan to take downside risk on the ACR REACH program, but rather we'll look to continue to support our provider partners with our existing license we still have remaining and really focus our efforts on Medicare Advantage, where we see an enormous growth opportunity and margin improvement opportunity starting heading into 2025.
spk08: And secondly, and I'll stop with this, just the cadence of MLR throughout the year. I know you talked about 1Q being higher, but could you kind of talk about how you see it and why you see the trends as you presented in your guidance 2Q to 4Q? Thanks.
spk18: Yeah. So we typically would expect Q1 and Q4 seasonality to have a bit higher MBR than Q2 or Q3 seasonality. I think this year, similar to years past guidance, our Q1 MBR seasonality reflects Part D, which tends to run over 100% in Q1. And then we also just have sort of our normal course utilization where inpatient volumes tend to be higher in December, January, and oftentimes March as well, just around sort of flu and RSV season. I think this year we also are recognizing that it is a leap year. We have an extra one day of medical expense in the first quarter that we've reflected. And then just given the overall growth, the memberships, That is pre-mid-year sweep. We think that is something that we're also taking into account for our Q1 guidance. As we talked about in the past, we tend to book our new members to the paid revenue over the course of the first half of the year until we see the mid-year sweep. Our full-year guidance is not contingent upon a disproportionate pickup in the mid-year, but we also like to take a kind of conservative posture in Q1 to not assume that we'll do anything better than what we're currently being paid.
spk14: Thank you. Thank you. And I show our next question comes from the line of Nathan Rich from Goldman Sachs. Please go ahead.
spk26: Hey, good afternoon. Thanks for the questions. First, just wanted to follow up on the utilization expectations. I guess just to clarify on the change in ACO REACH accounting, I guess does that mean it'll essentially be a non-factor in the MBR in 2024 based on that accounting change? And then I guess bigger picture, you know, you kind of talked about January inpatient, I think, being in line with your expectations. I guess, what does the guidance assume for inpatient specifically over the balance of the year and to the extent that, you know, we continue to see greater, I guess, you know, hospital utilization and inpatient utilization? Just curious, like, how you're thinking about that potential within the guidance range. Thank you.
spk18: Yeah, absolutely. So on the ACO reach point, you are correct. We did not expect it to be a material driver of our MBR in 2024, given our change in accounting revenue recognition from gross to net. It's worth noting that we did provide a financial supplement on our investor relations page just to show the MBR in 2023, both with and without ACO reach that you all can look at it on a comparable basis as we head into 2024. In terms of utilization, I think we would expect overall utilization in 2024 to be comparable to what we saw in 2023. And I think your first question was on inpatient. This has been one of the areas that we have shined consistently since going public and even before we ever went public. So we've run about 155 to 165 inpatient admissions per thousand for about seven years straight at this point, including over the last few years where we've been growing in excess of 20%. And so I think as we contemplate our ability to sustain that into 2024, it's really a testament to our clinical model, which is able to identify members early who need our clinical programs and ensure that we engage them with our employed clinical teams. And so that's something we're going to be very focused on over the first 90 days of 2024. But as we sit here through February, we're very pleased with our early results and traction and making sure we get the right members engaged in our clinical programs.
spk26: Great, and if I could just ask a quick follow-up. You mentioned achieving kind of the 2025 membership a year early. Great to see the early membership gains, obviously. I guess, could you maybe talk about how that impacts your thinking around 2025 performance of the business? You know, what type of EBITDA tailwind does that potentially create as you get CMBR improvement on those members, just as we think about sort of the trajectory of the business a little bit longer term? Thank you.
spk18: Yeah, we think it's significant to your point. And so both from a growth and margin standpoint, we're very optimistic about our 2025 positioning. I think you heard John mentioned a bit on the growth side of things that we're going to benefit in 2025 as our competitors fall on average below a four star payment. There's only one other HMO competitor who has a pretty broad footprint across California that actually maintained four stars for 2025. I think when you take that and add on the B28 risk adjustment headwinds and the broader utilization headwinds that you've heard from across the industry, we feel very good about our ability to sustain above market growth and achieve something in excess of 20% for 2025. At the same time, to your point on the margin side of things, I think that growth affords us continued SG&A economies of scale heading into 2025. And given the 2024 bullets of new member growth, I think it presents a significant advantage NBR opportunity as you transition those year one members, which tend to start in the high 80s, into year two, which tends to go into the mid 80s. And so that's something we're very optimistic about as we think about our overall positioning over the next 24 months.
spk27: Thank you.
spk14: Thank you. And I show our next question comes from the line of Scott Fidel from Stevens. Please go ahead.
spk24: Hi, thanks. Good evening. First question, just interested if you can share with us just some of the initial indicators around the risk and acuity profile of the 2024 cohort that you've had in the AEP. Any sort of, you know, sort of early warning sort of indicators that you focus on around that population? And then just as it relates to the supplemental benefits dynamics that you had touched on,
spk18: um whether you have enough information to ascertain sort of variation between the new members out of this year versus prior members around sub benefits uh utilization yeah so uh this is thomas scott um i think maybe in terms of the the new member mlr outlook um maybe i'll speak to both the revenue side and the cost side based on what we've seen so far so in terms of the revenue side of things uh our actual paid raft for the month of january our new members was within a couple of basis points of what we had incorporated into our 2024 bids back in June of 2023. So I think that was a very positive data point for us in ensuring that the payment relative to our expectations of mixed byproduct was consistent with what we had hoped. On the cost side, obviously we track our inpatient emissions per thousand with a maniacal attention to detail. And as we progress here through the first 45, almost 60 days of the first quarter, we've been looking at not only overall inpatient utilization, but specifically how the new members are performing by market, by IPA, and by product. So far, all signs point to the utilization of those new members being consistent with expectations. I think over the course of the next few months, we'll get more and more claims visibility to some of the other categories of SPIN, but so far, I think we're feeling pretty optimistic that this year's new member MLR should be in line with what we would have anticipated from a bid standpoint. I think on your second question, Sorry, go ahead. No, please Thomas, go ahead. And in terms of your second question on supplemental benefits, I think it's less of a new member issue versus a loyal member issue. I think what we have seen is as we changed some of our vendors last year around the overall member experience, inclusive of some of the black card vendors, what we've seen is improved service levels, which has been excellent in terms of some of our tailwinds around our NPS scores. Google reviews, most recently AEP retention, which improved by about 200 basis points year over year compared to the 2023 AEP results. And ultimately, we think it's going to be a tailwind heading into cap season for STARS purposes this year. So I think the overall investment and initiative has been very successful, but at the same time has caused our overall black card spin to increase for the first part of 24 compared to 2023. I think that's reflected in overall MBR outlook, and it's something that we're continuing to monitor. But I think for now, we feel like the initiative has been pretty successful, and it's something we'll continue to keep in mind as we try to make sure we're balancing all of our different initiatives across growth, retention, stars, and ultimately profitability.
spk24: Okay, got it. Thank you. And then just my follow-up. Interesting that you gave us some of your thinking around operating cash flow for 2024 and
spk18: and uh key sources and uses of cash that you're uh thinking about for 24. thanks yeah so overall from a um kind of a bridge from adjusted eva dot to ultimately what our cash looks like for 2024. uh i'd say a couple things to keep in mind uh we typically have about 25 million dollars of capex annually and based on our existing uh term loan we have about probably you know 20 million or so of cash interest expense i would anticipate in 2024. And so I think if you kind of take those two things into account, you're kind of thinking about 50 million of cash burn outside of our adjusted EBITDA. Working capital doesn't tend to be a major source of or use of cash over a full 12 month period. So that's not something I would expect to drive a significant change in our overall cash position this year. And then lastly, just in terms of overall parent cash versus regulated cash, I think we feel very good about the way the Oldfoot balance sheet is positioned today. So sitting here at the end of 2023, we had about $156 million of parent cash, over $300 million of total cash, with an additional $85 million of term loan undrawn capacity at our disposal. So I think big picture given our 2024 outlook and then the margin potential improvement we see for 2025, we feel very good about the strength of the overall balance sheet.
spk22: Okay, thank you.
spk14: Thank you. And I see our next question comes from the line of Ryan Daniels from William Blair. Please go ahead.
spk02: Yeah, congrats on the quarter. Thanks for taking the questions. John, maybe one for you. Pretty impressive with the year-over-year decline in inpatient utilization and the trends that you're seeing there in general. I'm curious if you can go into a little bit more detail on what you think is the key driver of that my impression is it's probably your data and care anywhere and intervention but you know more broadly is it is it the ability to really provide more proactive care and is that a two-fold benefit and that maybe you're seeing less pent-up demand because you manage that during covet so you're not seeing it and then continue to manage it So I don't want to put words in your mouth, but just love to get some color there.
spk05: Yeah, hey, Ryan. No, I'd say two words, and it's visibility and control. Visibility and control. The data, and Ava, you've heard us talk about, really gives us a lot of insight into what's going on with the membership. And so we have kind of day-to-day control because we actually manage the risk ourselves. And we prefer to manage the risk. And we manage the risk really by managing the care, which I think is fundamentally, at the highest level, what you need to be to be successful in Medicare Advantage. It's not an underwriting or financial engineering exercise. It's actually managing the care. And you've heard us talk about understanding where the 10% to 20% of the high-risk members are. and then how we take care of them at the home with our interdisciplinary care teams. And it's that consistency that really allows us to lower these admissions for the Thomas mentioned over the last seven years. And that level of visibility control is I think what makes us very differentiated and unique. I also say that in this kind of Medicare Advantage reality of just tighter stars, tighter risk adjustment. We've got a lot of discussion around benchmarks right now with the advance notice. We're positioned to do really well because from the start, we focused on you have to be the highest quality and the lowest cost provider in the marketplace. It's very simple. And I think I think the market is adjusting to the way that we've been built, and that's what I think has been reflected in some of the growth that you just saw with us in AEP.
spk02: Okay, great. Thank you for that, Keller. And then, Thomas, one for you. It looks like the implied MBR in Q1, if I'm doing this right, I'm jumping between stuff, is about 91%, which was
spk18: um a little bit higher year over year despite the utilization trends being pretty stable so is that just the sub benefits and the new member growth pushing that up a little bit year over year yeah i think um those two things and and then i would add um just kind of like i said earlier normal core seasonality and then part d in particular and so the party program runs over 100 mlr in q1 and so that's a pretty significant driver on the overall seasonality of the business from q1 through q4 I think from a utilization standpoint to your comment, I think we feel pretty good about what we're seeing on the inpatient side thus far.
spk00: Yeah.
spk18: And I would also add, Ryan, I think I mentioned earlier, it is a leap year this year, which sounds immaterial, but actually is not insignificant when you think about adding one extra day of medical expense with the same number of days of revenue over the course of Q1.
spk02: That's a good point. All right. Thank you so much. Perfect.
spk14: Thank you. And I show our next question comes from the line of Jess Tesson from Piper Sandler. Please go ahead.
spk20: Hi, guys. Thanks for taking the question. So I wanted to start with, I know you all mentioned the opportunity for margin expansion in 25 just via stars and kind of favorable positioning with version 28. Curious if you have any early comments about the impact of the expected changes from the Inflation Reduction Act on Part D kind of redesign and just the shift of liability from CMS to the plan in the catastrophic phase of coverage.
spk05: Yeah. Hey, Jess. It's John. Great question. We think that it could go either way, actually. It's going to be, I think, a very important part of the bid strategy heading into 2025. I don't want to get into bid strategy for obvious competitive reasons right now, but I'm very comfortable with what our thinking is on it. But I think that overall trends, I think we can manage, and we've had a few years to be able to digest this. We know what the program looks like. and we'll be able to embed that in our bids. And as usual, we'll find the right balance between growth and margin. But it will be a meaningful level of, I would say, benefit designs and strategic thinking around IRA.
spk20: Got it. Okay, that's helpful. And then I guess I was hoping to understand when you described You know, 82% of AEP ads coming from members switching, despite the fact that supplemental benefits are only up, or value is only up modestly year over year. I guess just, and I know you guys have gone through this, but just kind of what's driving the switching? Is it competitors paring back benefits versus your relative stability, or just the sales approach, or anything in particular to call out from this AEP? Thanks again.
spk05: Yeah, hey, yeah, it's John again. It's all of the above. You know, we've touched on STARS being a driver, and again, our competitive position on STARS is improving. I think also V28, the impact of V28 is affecting everybody, but it's affecting us less. And it's affecting us less because we knew heading into the year that some kind of reimbursement risk was going to be something we had to deal with. So those two things, I think, are big drivers. And I think if you kind of look at some of the, you know, just kind of the, we call it MACFAT data on benefit designs, people were generally flat and or pulled back heading into 2024 from a benefit perspective. And we remained relatively flat, maybe slightly up on supplemental benefits. I think heading into 2025, our position is going to get even stronger. I think that a lot of the noise around reimbursement is somewhat a function of people's star ratings going down. Some organizations, if you go down from 4.5 to 3.5 stars, that's close to a 10% hit to reimbursement. That's a big deal. You add that to be 28. I think the notion of high quality, again, stars, and then low cost utilization is going to play to our advantage.
spk18: The other thing I would add too, Jess, is just from a brand recognition standpoint, I think we're really starting to separate ourselves in the market, particularly in California, where you flashback five years ago, we were sort of one of the smaller upstarts. And And I think if you flash forward to today, we've been consistently four stars or better now for, I want to say about six years in a row, all while offering market leading products and experience along the way. And so I think as that happens, we start to become more top of mind in the broker community, more top of mind in the senior community and in the provider community. So it's one of those stories to a certain extent where I think the bigger you get, the stronger you get in many respects. I think we're starting to see the benefit of that from a brand standpoint here in California.
spk19: Thank you.
spk18: Sure.
spk14: Thank you. And I show our next question comes from the line of With Mayo from Laring Partners. Please go ahead.
spk06: Hey, first I was just wondering if there's any unusual switching you've seen in January and February, any disenrollment. I haven't had a chance to see if you changed your membership guidance. I just was wondering if there was any unusual movement.
spk18: No. So to your year-end membership point, our full-year membership is unchanged compared to our 8K release, so $162,000 to $164,000 at year-end. More specifically to our January experience, we saw very solid, I'd say, sales progress and pretty significant retention improvement again. So looking at our February 1st disenrollment rate this year as compared to the run rate we would have expected based on February 1st trends a year ago, we actually saw about a 20% year over year improvement in that February 1st disenrollment rate relative to prior year run rate. So I think a lot of, again, those, those investments around member experience or paying dividends, not just an AEP, but into what we call OEP, which lasts from now through April 1st. Right.
spk06: Right. And John, I'm just wondering, you know, CMS is making some potentially making some changes around, you know, the marketing, the broker agent commission, just any, any, updated evolving views on what you think this means to you and the industry?
spk05: Yeah. Hey, Whit. Yeah. Yeah. I think, I think leveling the playing field is, is always a good thing. Having more transparency is always a good thing. And again, being, you know, the, the high growth player in the space, I think it's going to be to our advantage. And I think at the end of the day, if, there's more protections for our seniors, the better. And so, you know, I think, as you know, we've spent so much time and effort on our sales operations, our sales leadership, our marketing strategies, our broker management, our broker tools, our onboarding, all of that paid off for us heading into the new year. So I think it's going to be a good thing for us. I think all these things that are leveling the playing field and doing what CMS really originally intended MA to be, which is just provide the highest value for beneficiaries, is a good thing. It's going to play well for us.
spk07: Okay. Thanks a lot. Got it.
spk14: Thank you. And I show our last question in the queue comes from Adam Ron from Bank of America. Please go ahead.
spk16: Hey, actually, it's Kevin Fishbeck in for Adam tonight. I guess one of the things that I'm struggling with a little bit is just how different California as a market can be versus the rest of the United States. Do you have any sense for what the broader trend is in California? Like how much of you know, the outperformance that you're seeing here is really on the revenue side in 24 versus on the cost side? Is it more capital hit and costs are generally under control and you're marginally outperforming that? Or do you believe that it is really like a truly differentiated trend that you're seeing even versus the competitors in California?
spk05: Yeah. Hey, Kev, it's John. Yeah, I think what makes California unique, good and bad, really is that the scale of the delegated capitated IPAs and the delivery systems. And I think that how health plans work with those IPAs or independent physician associations, so to speak, is really important. And I think that we've been able to figure that out. We've been able to design incentives with the delivery system to create us what I talked about a lot, which is visibility and control of the medical spend. And then durability. We want durability on these networks. And unless you have the tools that we have, it is very difficult to kind of get the kind of outcomes that we'd be able to achieve in STARS in particular. That's the one differentiator. And then secondly, with respect to utilization, We designed what we call shared risk models, which is really creating aligned incentives with these IPAs, as well as directly contracted physicians, and we create win-win economic situations, all for the benefit of the member. Those are, I think, the unique things that make California different, and yet we think that's the opportunity of why we've been able to crack the code, in California while others have not. The interesting thing is we think that by doing it in California, we think it's the hardest thing anywhere in the country, because if you take the tools that we have and you overlay it on other parts of the country, I think the opportunity is going to be even higher because you don't have the density of these IPAs or capitation you know, in, in other parts of the country. So I think that the margin opportunity is even greater for us outside.
spk16: Okay. So a couple of questions in off of that, I guess the first one, I'm just trying to figure out what that, you talked about that alignment with the physicians. You know, I think a lot of people are expecting that as V28 continues to ramp up, that supplemental benefits get cut. It kind of sounds like you don't think you need to do that going forward. Um, It seems like because the half that's not really capitated in drugs given by Ava is going to outperform. Does that create any pressure in your relationship with the physicians? Like, is that to their detriment if you treat them when others aren't?
spk05: It's twofold. V28 is part of it. I mean, everyone's going to get hit by V28. I mean, that's clear. We're just going to get hit less in our particular markets because of the way we manage risk adjustment. And I would say we've been very conservative on risk adjustment. And you put that in the context of some others that have been more aggressive on risk adjustment that are going to go down, in some cases, 20%. And just to remind everybody, 20% from just hypothetically a 1.5, 20%, that's 30 basis points. And if each basis point is worth $8 p.m. p.m., that's a meaningful hit to revenue that is being borne functionally by a lot of these globally capitated providers. That's a hard pill to swallow. But more, I think, importantly, is stars. You add stars to the equation, somebody dropping from four and a half to three and a half, that's a, you know, what, $80 of potential hit. I mean, so when you combine those things, you know, and you look at our stars and you look at our upward trend on risk adjustment, that creates the effective tailwinds. And so these providers are going to do better with us on just those two economics. And then if we can deploy our data and our care model on that high-risk population that we do ourselves in concert with the providers and these IPAs, everybody wins because we surplus these risk pools. That's the whole construct of this. And we do it in what I would refer to as a capital light way. We don't have a lot of bricks and mortar. We don't think you need to have a lot of bricks and mortar. You do it with the community physicians, and you create it in a way that everybody wins. Ergo the name alignment.
spk16: Yeah, and I guess maybe then you mentioned the model and how it works in California and how it can be exportable into other markets. It is just interesting just how differently you're talking about trend versus how your peers are talking about how trends developed this year. Are you seeing similar trends in California and outside of California, or is outside of California not performing quite as well as California is?
spk05: Well, that's what's interesting, is the portability of the care model is being replicated. The utilization and MLR we have outside of California is really, really good. You know, where we have to just get bigger, and we're incrementally getting bigger, kind of get to 3,000 to 5,000 in some of our ex-California markets, but we'll get there. But the care model is managing the trend effectively. And I think what people need to understand is a lot of inpatient hospitalizations, a lot of it's unnecessary. A lot of it can be prevented just by paying attention to to what's going on with your high-risk population. And if we have our interdisciplinary care teams spending time, oftentimes on a weekly basis, with high-risk patients in person, and certainly virtually, it makes a difference. And so I just keep saying, we actually deliver the care. Not many other of our competitors deliver the care. They may have care delivery divisions that's very different than integrating all of that into um the way we talk about it which is productizing if you will really good benefits productizing the care model it really is a is a different way of approaching the market okay and then maybe this last question it sounds like you're saying that you think you're keyed up pretty well for growth again in um
spk16: in 25, is that going to look a lot like this year insofar as it's going to be still largely California-centric because that's where the disruption to the competitors is?
spk04: Yeah.
spk16: Sorry.
spk04: Go ahead. I didn't mean to cut you off.
spk16: I was going to say the second part of that would just be if it is coming in California, you mentioned balancing growth and profitability. Does that give you an opportunity to actually push the growth I'm sorry, push the profitability lever a little bit more than we're used to? Or do you kind of feel like as long as you can take share, taking shares is the right move as long as you can keep a round break even?
spk05: No, we're not going to grow at all costs. We're going to get to the profitability commitments that we've made. I think it's super important tying all that to cash flow, to Our balance sheet, all of that is really poised for 2025 to be a really, really good year that I think. And if you just look at the differential on stars and risk adjustment, plus you look at the utilization, ability to manage utilization, actually have the tools to manage it, it's just a competitive advantage in this environment. I think the... The bid strategies, you know, we'll talk about that in the next several months, but not right now. But I feel very comfortable with this just kind of where we're at in terms of 2025. That's going to be a very good year. The other thing I would say is on 25 is you're going to have even more scale economies on our back office. I think some of the investments that we've made in our back office systems are like what we made in our kind of member services systems, is going to pay off even more. So you can get more scale economies heading into 2025. Don't know if we'll get the same kind of growth. Not going to comment on that. But I feel very, very good about the tailwinds. All right.
spk07: Great.
spk05: Thank you.
spk07: Thanks, Kev.
spk14: Thank you. That concludes our Q&A session and today's conference call. We want to thank you all for participating. You may all disconnect at this time.
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