Alignment Healthcare, Inc.

Good afternoon, and welcome to Alignment Healthcare's first quarter 2024 earnings conference call and webcast. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. To ask a question during the session, you will need to press star 1-1 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 Kao, 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 detail 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 31, 2023. Although we believe our expectations are reasonable, we undertake no obligation to revise any statements to reflect changes that occur after this call. In addition, please note that the company will be discussing certain non-GAAP financial measures that they believe are important in evaluating performance. Details on the relationship between these non-GAAP measures to the most comparable GAAP measures and reconciliation of historical non-GAAP financial measures can be found in the press release that is posted on the company's website and in our Form 10-Q for the fiscal quarter ended March 31, 2024. I would now like to hand the conference over to your speaker today, John Kao, founder and CEO. You may begin.

Hello, and thank you for joining us on our first quarter earnings conference call. For the first quarter of 2024, our health plan membership of 165,100 members represented approximately 50% growth year-over-year. Total revenue of $629 million grew approximately 43% year-over-year and approximately 54%, excluding ACO REACH. Adjusted gross profit was $57 million, producing a consolidated MBR of 90.9%, and an MBR excluding Part D of 88.3%. Meanwhile, our adjusted EBITDA of negative 12 million exceeded the high end of our first quarter outlook range and represents solid progress toward our full year adjusted EBITDA objective. Growth in the first quarter significantly outperformed expectations. This result continued to be driven by increased member retention, improved sales operations, and competitive product offerings. Meanwhile, our ability to achieve our adjusted EBITDA outlook while scaling to support four times the number of new members demonstrates the power of our integrated data insights, clinical model, shared risk provider partnerships, and operating platform. Central to our results is AVA's visibility into emerging trends, which allows us to rapidly deploy our clinical teams to improve care outcomes and control our medical costs, even while achieving rapid growth. The combination of these differentiated capabilities led to a first quarter consolidated MBR of 90.9%, reflecting only a modest year-over-year increase in our MBR despite growing membership 50% relative to 17% a year ago. This strong result is underscored by an MBR excluding Part D of 88.3% and a Part D MBR of 129%, both consistent with expectations and in further indication of our early success in managing our new members. Thomas will expand more on Part D seasonality in his remarks. Following a strong first quarter, we're raising our full-year membership and revenue guidance, raising the low end of our adjusted gross profit guidance, and narrowing our adjusted EBITDA range. Our updated guidance reflects expectations for continued membership growth momentum, a greater mix of new members, our confidence in our clinical model, and improving operating leverage on adjusted SG&A. To manage our significant membership growth, our top priorities in the first quarter were providing our new members with exceptional onboarding experience and engaging with members who had the greatest chronic health needs. From a service delivery standpoint, Our past investments in AVA Consumer and Insourcing Member Experience delivered exceptional results. These efforts resulted in an MPS of 69 at the end of 2023, a 30% reduction year-over-year on our first quarter new member voluntary disenrollment rate, and a 4.9 stars Google rating across more than 4,000 reviews. All of this was accomplished while achieving over 50% membership growth. By improving member satisfaction and reducing disenrollment rates, we lower our member acquisition costs, raise our star measures, improve our net growth, and increase the lifetime value of our membership. From a care management standpoint, the visibility created by our real-time utilization data allows us to quickly engage high-risk members to manage care and control costs market by market. we immediately began managing new members who experienced an acute episode in January and successfully engaged approximately 70% of new members post-discharge. This resulted in 141 inpatient admissions per thousand for new members and 151 admissions per thousand overall. We expect to build upon the strength of these results throughout the year as we ramp up our Care Anywhere engagement. AVA stratification of at-risk members sees a significant jump 30 days after enrollment as our real-time data feeds analyze pharmacy data, lab values, admission, discharge, transfer information, and other data sources. This presents us with the greatest cost improvement opportunity in the second, third, and fourth quarters as we raise our high-risk new member engagement levels. Once engaged, high-risk members typically see a 30% net improvement in institutional claims over the following 12 months. This, combined with our focus on improving outpatient quality outcomes, which drives lower costs, gives us confidence in our continued MBR improvement throughout the year, consistent with our full year outlook. Looking ahead to 2025, we believe we are well positioned to grow health plan membership at or above 20% while expanding margins. As we plan for the current bid cycle, we believe we have distinct tailwinds that support our financial position and competitive advantages. First, there are over 1.2 million HMO members in our California markets who are in plans that will be rated below four stars in 2025, including approximately 700,000 who are in plans that are receiving four star or above payment today but will be dropping below a four-star payment next year. Meanwhile, roughly 95% of our California members are in plans that will have four-star payment level in 2025. The difference between a three-and-a-half-star and a four-star plan is approximately 5% less per member revenue, while the difference between a three-star and a four-star plan is approximately 10% less member revenue. We expect this funding advantage to support our ability to offer attractive benefits while improving consolidated margins. Second, we believe the continued phase-in of the D28 risk model changes will further widen our relative advantage in risk adjustment. And third, following the announcement of the final Medicare Advantage rate notice, we expect a weighted average change in our effective growth rate of 5% which is more than double the national average of 2.4%. These factors combined with our differentiated operating platform and strong retention of new members gives us confidence in our ability to deliver both growth and margin improvement in 2025. In conclusion, I'd like to thank each of our employees for being part of the team that is raising the standard for what it means to do Medicare Advantage right. Our unique degree of visibility, combined with our clinical and operational execution, is enabling us to navigate the dynamics facing the MA sector and gives us confidence in our 2024 outlook. Combined with tailwinds in 2025 on relative STARS advantages, positioning into the continued risk model phase-in, clarity on benchmark changes in 2025, and increased scale, I believe we will achieve both strong growth and margin improvement in 2025. Taken together, we believe our operating model will continue to prove alignment is the optimal Medicare Advantage platform for today and for the future. Now I'll turn the call over to Thomas to further discuss our financial results and outlook. Thomas?

Thanks, John. For the quarter ending March 2024, our health plan membership of 165,100 increased 50% year-over-year. This exceeded our expectation of 44% membership growth at the midpoint of our first quarter guidance, as well as our year-end guidance range of 162,000 to 164,000 members. Our first quarter revenue of $629 million represented 43% growth year-over-year and 54% growth excluding ACO REACH. The top-line outperformance was primarily a function of higher health plan membership as our superior value proposition continued to resonate in the market. Adjusted gross profit in the quarter was $57 million, representing an NBR of 90.9%. The modest increase year-over-year was driven by a significantly larger portion of new members, reflecting strong control over our medical costs, even as we grew membership by 50% compared to 17% a year ago. First quarter performance was driven by favorable inpatient utilization relative to expectations, with overall inpatient admissions per thousand of 151 declining 8% year over year. Our favorable utilization performance was partially offset by higher inpatient unit costs related to CMS's increase in 2024 fee-for-service rates and greater supplemental benefit utilization. As John mentioned, our first quarter results reflect an MBR excluding Part D of 88.3% and a Part D MBR of 129%, both in line with expectations. As a reminder, Part D profitability improves over the course of the year as the health plan's cost share declines meaningfully after the initial coverage phase. Consistent with normal seasonality, Part D increased our consolidated MBR by 260 basis points during the first quarter. Through the remaining three quarters of the year, we expect Part D to lower our consolidated MBR by 150 basis points. This results in a net change of roughly 400 basis points between the first quarter and the remainder of the year. We expect our Part C MBR to be only modestly higher for the rest of the year, meaning that Part D will be the primary driver of seasonality between the first quarter and the following three quarters. During the quarter, it's worth noting that we were not materially impacted by the cybersecurity incident that disrupted a national claims clearinghouse. Importantly, we do not use this clearinghouse for pharmacy claims, prior authorization, or provider claims payment functions. While we experienced a temporary dip in claims receipt in February due to the use of the impacted clearinghouse by a small number of our providers, we believe we are currently at normalized claims flow levels. SG&A in the quarter was 90.5 million. Our adjusted SG&A was 69 million, an increase of 37% year-over-year. Adjusted SG&A, the percentage of revenue excluding ACO reach, decreased by approximately 140 basis points year-over-year. We continue to expect even greater SG&A ratio improvement over the next three quarters, which I will share more on shortly. Lastly, our adjusted EBITDA was negative 12 million, ahead of expectations and putting us on track to achieve our full year adjusted EBITDA guidance. Moving to the balance sheet, we remain in a strong position with 302 million in cash and investments at the end of the quarter. Turning to our guidance. For the second quarter, we expect health plan membership to be between 167,000 and 169,000 members, revenue to be in the range of 625 million and 635 million, adjusted gross profit to be between 71 million and 77 million, and adjusted EBITDA to be in the range of zero to positive 6 million. For the full year 2024, we expect health plan membership to be between 170 and 172,000 members, revenue to be in the range of $2.495 billion and $2.525 billion, adjusted gross profit to be between $280 million and $310 million, and adjusted EBITDA to be in the range of a loss of $12 million to positive $12 million. The increase to our full-year membership and revenue outlook follows strong first quarter membership outperformance and our expectation that our sales and member retention momentum will continue through the remainder of the year. Our revised membership guidance now reflects 43% membership growth at the midpoint for year-end 2024. Moving down to P&L, we are increasing the low end of our adjusted gross profit range and narrowing our adjusted EBITDA outlook. The following elements are captured within our updated adjusted gross profit outlook. First, while the increase in our year-end membership growth contributes incremental gross profit dollars, the new membership increases the MBR implied by our guidance as new members typically begin at a higher MBR. Second, we expect a continuation of higher inpatient unit costs related to CMS's increase in 2024 fee-for-service rates and greater supplemental benefit utilization, both offsetting the incremental gross profit from higher new member expectations. Third, we expect a moderate decline in inpatient admissions per thousand for the full year, partly due to member mix. The 13 admissions per thousand year over year decline we experienced in the first quarter from 164 to 151 places us well on pace to deliver on this objective. As mentioned earlier, we expect to see continued benefit from the ongoing engagement with new members and deployment of Care Anywhere resources to those identified as high risk. Our differentiated engagement with both new members and providers is a core reason why alignment has not experienced the same degree of utilization headwinds that some others in the sector have experienced. Fourth, in addition to our normal course operations, we have identified new payment integrity programs that are currently being implemented. We expect these solutions to provide additional upside throughout the remainder of the year, particularly in the second half. And lastly, our Part D seasonality is expected to drive roughly 400 basis points of MBR improvement between the first quarter and the remainder of the year. This is consistent with our historical experience and normal course seasonality. Our adjusted EBITDA guidance also highlights continued improvement in our operating leverage. We now expect our adjusted SG&A as a percentage of revenue excluding ACO REACH to be 11.8% at the midpoint, an improvement of 260 basis points year-over-year. Our operating leverage gains over the next three quarters are driven by a combination of factors. including first, continued fixed cost leverage relative to greater membership growth and productivity improvement measures. Second, elimination of one-time expenses associated with the insourcing of member experience functions in 2023, most of which were incurred in the second half of last year. And third, sales and marketing and year zero expense leverage, which is also concentrated in the second half. In conclusion, our strong growth has been well managed by our clinical and operational resources, and is a testament to our differentiated Medicare Advantage platform. After our robust start to the year, we believe we are on pace to deliver against our full-year outlook and are set up for both growth and margin improvement in 2025. With that, let's open the call to questions. Operator?