Alignment Healthcare, Inc.

Good afternoon and welcome to Alignment Healthcare's fourth quarter 2023 earnings conference call and webcast. All participants will be in the listen-only mode. After today's presentation, there'll be an opportunity to ask questions. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one 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.

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 outlook 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.

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 ACO REACH population for 2024. Under this arrangement, we will recognize a nominal amount of gross profit and not share any ACO REACH program deficits. The changes to our ACO 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?