agilon health, inc. Q4 FY2024 Earnings Call

Hello and welcome to the agilon health Fourth Quarter 2024 Earnings Conference. My name is Elliot, and I will be coordinating your call today. I would now like to hand over to Evan Smith. Please proceed.

Thank you, operator. Good afternoon and welcome to the call. With me is our CEO, Steve Sell; and our CFO, Jeff Schwaneke. Following our prepared remarks, we will conduct a Q&A session. Before we begin, I'd like to remind you that our remarks and responses to questions may include forward-looking statements. Actual results may differ materially from those stated or implied by forward-looking statements due to risks and uncertainties associated with our business. These risks and uncertainties are discussed in our SEC filings. Please note that we assume no obligation to update any forward-looking statements. Additionally, certain financial measures we will discuss in this call are non-GAAP financial measures. We believe that providing these measures helps investors gain a better and more complete understanding of our financial results and is consistent with how management views our financial results. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measures is available in the earnings press release and Form 8-K filed with the SEC. And with that, let me turn the call over to Steve.

Thanks, Evan. Good afternoon and thank you for joining us. On today's call, I will provide you with an overview on: one, our fourth quarter and full year 2024 financial results and our 2025 guidance; two, investments we are making to further enhance our clinical strategy and capabilities; and three, actions and programs we are implementing to reduce certain business risks that lie outside our control, enhance our operational execution and drive improved performance going forward. But I'd like to begin with some context on the trajectory of our business as we continue to take actions to manage through the third year of a difficult Medicare Advantage rate and utilization cycle. While the 2025 macro environment continues to be challenging, we enter this year with a laser focus on strengthening our business for near-term improvement, success, and profitability. In 2024, we took actions to: one, reduce our underwriting exposure to costs outside our control, such as a reduction in Medicare Part-D exposure to less than 30% of our membership; two, pursue profitable and measured growth aligned with current payor and provider dynamics which is reflected in both our reduced 2024 membership step-off and a smaller revised 2025 partner class; three, strengthen our core clinical and operational capabilities to reduce variability and enhance quality outcomes; and four, maintain operating cost discipline by further leveraging our scaled infrastructure and technology investments. We intend for this focused approach to continue in 2025. And despite the near-term headwinds, our goal is to be cash flow breakeven by 2027. With respect to those 2025 headwinds, the Medicare Advantage market continues to experience an elevated cost trend, while managing through the ongoing transition to V28, changes related to the Inflation Reduction Act, and increased quality bonus thresholds, all of which are embedded in our '25 outlook. Our ability to weather this down cycle in Medicare Advantage and differentiate on the management of medical costs and quality outcomes relative to the fee-for-service alternative should position us well with health plans and physicians as the rate and cost spread ultimately corrects. With that said, the recent favorable trends in payor bids and the 2026 advanced notice from CMS make us optimistic that we will see a more favorable overall environment for '26 and beyond. Now, let me provide a quick overview of our fourth quarter and full year results and our guidance for 2025. Note that Jeff will provide more details in his remarks later in the call. For the fourth quarter, MA membership continued its growth trend and was in line with our expectations, increasing 36% or 138,000 members year-over-year to 527,000 members, driven by the continued expansion of our '24 partner class and 4.1% same geography growth. ACO model membership was 132,000 members, slightly ahead of our expectations. Total revenue grew 44% to $1.52 billion in the quarter and $6.06 billion on the year. Growth was primarily driven by the class of '24 and organic growth in our existing classes, partially offset by higher costs associated with Medicare Part-D and lower risk adjustment revenue related to unfavorable prior-period development for the full year. Medical margin was $1 million in the quarter and $205 million for the year which when adjusted for a $5 million reserve for estimated 2025 losses from partnerships we intend to exit this year was at the low end of our guidance range. In the quarter, we also recorded elevated Medicare Part-D prescription drug and supplemental benefit costs, partially offset by favorable medical cost development from Q1 and Q2. It should be noted that $6 million of the higher Medicare Part-D costs in the quarter are tied to payor contracts in which Part-D risk is carved out, starting in 2025. Adjusted EBITDA was minus $84 million for the quarter and minus $154 million for the year which came in at the low end of our guide. The quarter reflected lower medical margin due to the aforementioned items, lower ACO model contract performance isolated to one partnership that we will be exiting for 2025, and favorable operating cost leverage. Now turning to full year 2025 guidance. Based on current market dynamics, we have made a strategic decision to constrain our 2025 MA membership to balance near-term risk and opportunities. And we now anticipate a full year MA membership decline of approximately 4% or 22,000 members to a range of 490,000 to 520,000 or 505,000 at the midpoint. This year-over-year change includes; adding 20,000 members in a smaller class of 2025 from three new partners, same geography growth of 3% or 13,000 members, and a reduction of 54,000 members from previously disclosed partnership exits, multiple December 2024 payor contract terminations, and tighter attribution management with health plans. Similarly, our ACO model business which has been an area of strength, will see 2025 membership projected at 110,000 members as we exit one underperforming MSSP partnership. Revenue is forecasted to decline 2% to $5.925 billion, driven by the impact of the above-mentioned membership decline, offset by a better revenue yield, inclusive of improved payor contracts, member mix changes, and 2025 payor bid impact. Medical margin is expected to improve 46% to $300 million at the midpoint which reflects a slightly lower jumping off point from what we communicated in November and our view of an elevated cost trend continuing in 2025. Finally, 2025 adjusted EBITDA guidance is expected to be minus $75 million at the midpoint which assumes a gross medical cost trend of 6.3%, in line with our '24 experience and a series of offsetting strategic actions noted above. Jeff will provide more specific details on the impact of our actions, market trends, and growth priorities embedded in our '25 guide. While the outlined actions are anticipated to provide incremental benefit in 2025, we expect they will be more fully reflected in our '26 performance, supporting a potential reacceleration of medical margin and adjusted EBITDA growth. Now let me provide some color on the focused investments we continue to make in what we see as a differentiated set of clinical and quality programs. Our ability to manage cost trends relative to a benchmark and deliver top-tier quality performance fully relies on our ability to leverage the strength of a PCP's relationship with the senior patient. Current MA results show our readmission, hospital admission, and ER visit rates 20% to 30% better than the local fee-for-service benchmark and quality scores for each year two-plus market approaching or greater than 4.25 stars. This level of quality performance reinforces our value to payors and is reflected in 2025 payor contracts with increased incentives tied to delivering 4-plus stars performance. Similarly, ACO REACH results show our network as a top performer in terms of quality and medical cost management, with the most recent period delivering $150 million or 13% in gross savings, beating the national overall cost trend by approximately 280 basis points. To extend our impact on these key metrics and drive stronger, more consistent performance, we continue to advance our clinical strategy. Specifically, with our physician partners, we are better connecting opportunities across our burden of illness, quality, and care delivery programs to drive best-in-class medication adherence, further address advanced illnesses like palliative care, and target significant high-acuity chronic disease categories like heart failure, dementia, and COPD, in which the primary care physician is positioned to intervene earlier with the goal of preventing disease progression, alleviating symptom burden, and avoiding unnecessary ER and inpatient utilization. In addition to continuing to invest in our clinical strategy, we continue to be tightly focused on the block and tackle elements of our business to improve operating performance and reduce variability around the following key components. First, we are focused on measured growth as a controllable lever across existing and new geographies with a smaller 20,000-member class of 2025. In addition, for certain new partners in '25, we have taken a glide path approach with select payors via year one agreements with no downside in care coordination fee structure. Second, our payor strategy is focused on minimizing risk for elements outside our control, like Part D and supplemental benefits, and maximizing reward for areas within our control, like quality performance and Part C medical cost management, where we perform well. For January 2025, we successfully repriced 40% of our membership with improved percentage of premium economic terms, including incentive dollars tied to our partners' quality performance, while reducing our Part D exposure to less than 30% of our '25 membership. Third, we are enhancing our core clinical strategy and capabilities to improve quality outcomes and accelerate performance. This includes leveraging our investments in software and AI technology, physician education and coaching content and practice, and an expanded team of regional medical directors. And fourth, we continue to maintain cost discipline while investing in technology and clinical programs to further support medical margins and patient outcome improvements, as well as strengthen our position with payors and PCPs. All these actions are supported by our enhanced data and analytics capabilities that benefit our geography, practice selection, contracting, and day-to-day operating visibility. Jeff will talk more about these important improvements. In closing, and before I turn it over to Jeff, there are a few points I want to underscore. First, we see '25 as both a transition year in terms of membership and financial performance and an inflection year in terms of focused quality, clinical program, and payor underwriting work to further position our platform and network as the scaled solution for physicians and health plans in full-risk care for senior patients. Second, the scaled platform we have built across 615,000 senior patients, 2,200 PCPs, 30 markets, and 12 states has yielded more favorable payor economic contract terms while delivering consistent outperformance relative to the MA and ACO quality and clinical cost benchmarks. Third, we believe the actions we took in '24 and our continued focus on reducing our exposure to things outside our control, pursuing measured growth due to current market dynamics, enhancing our core clinical and operational capabilities, and maintaining cost discipline will further strengthen our network and support improved and sustainable performance for all stakeholders. And fourth and finally, while early, the advance rate notice is a positive signal that MA rates will improve for 2026, but it renews the call for rates that keep pace with increased costs in Medicare Advantage. With that, let me turn the call over to Jeff.

Thanks, Steve. Good evening. Before I discuss the fourth quarter results and 2025 guidance, I want to highlight the actions we have taken to improve the performance of the business. Over the last six months, we have exited two unprofitable partnerships and underperforming payor contracts, substantially improving our bottom line profitability and cash burn. We've improved our back-end processes and data and analytics capabilities designed to enhance our visibility and reduce volatility around risk adjustment and medical costs. We've reduced our exposure and risk in areas outside of our control, such as Medicare Part D. We've implemented new training and clinical programs designed to improve practice performance and increased our ability to more closely align incentive payments and percentage of premium to agilon performance. These actions will help mitigate most of the cost trend headwinds and regulatory changes impacting our 2025 outlook and establish a stronger foundation for the future, while we continue to navigate a rate environment that has not kept pace with underlying cost trends. Early indications from the advanced rate notice combined with greater potential contribution from our actions give us confidence in our ability to deliver improved financial performance in 2026 and beyond. Now, let me start by reviewing our overall financial performance for the fourth quarter and full year 2024 results. And then, I will discuss our guidance for the first quarter and full year 2025. Overall medical margin and adjusted EBITDA came in at the lower end of our previously communicated guidance range, driven by several items. First, we recorded $5 million of additional medical expense associated with projected 2025 losses on a contract we intended to exit at the end of this year. And we reported higher Medicare Part D and supplemental benefits expense in the fourth quarter based on updated information from our payor partners. Walking through the line items, our Medicare Advantage membership increased to approximately 527,000 members at the end of the fourth quarter of 2024, representing a year-over-year increase of 36%. ACO model membership was approximately 132,000 at the end of the fourth quarter, representing 48% year-over-year growth. MA membership growth was driven by the class of 2024 and 4.1% same geography growth. Total revenues increased 44% on a year-over-year basis to $1.52 billion for the fourth quarter. For the full year, revenues increased 40% to $6.06 billion. Growth was primarily driven by the class of 2024 markets and continued organic growth in our existing classes, partially offset by higher costs associated with Medicare Part D and lower risk adjustment revenue related to unfavorable prior year development that we recorded in the third quarter. Fourth quarter medical expense increased to $1.52 billion compared to $1.16 billion last year. The 31% growth compared to last year was driven by the expansion of the 2024 class and continued elevated cost trends. Additionally, as mentioned earlier in my prepared remarks, in the fourth quarter, we also recorded additional reserves of $5 million for lost contracts that we expect to exit at the end of 2025, as well as additional medical expense primarily related to supplemental benefits. For the full year, medical services expense increased 46% due primarily to average membership growth of 38% and the continued impact of elevated medical cost trends and unfavorable prior year reserve development. The fourth quarter and full-year 2024 cost trend was 4.6% and 6.8%, respectively. The full year also includes the loss contract that I previously mentioned. Medical margin for the fourth quarter was $1 million compared to a negative medical margin of $102 million in the fourth quarter of 2023. The full year 2024 medical margin was $205 million compared to $299 million in 2023. Medical margin for the full year 2024 was negatively impacted by prior year development that we recorded in the third quarter and the continued impact of elevated medical cost trends. General and administrative expense or G&A expense for the fourth quarter of 2024 was $60 million compared to $65 million in the fourth quarter of 2023. For the full year, G&A expense was $269 million compared to $286 million for 2023. G&A expense for the fourth quarter and the full year of 2024 reflects lower geography entry costs, capital support, and stock compensation expense. This was partially offset by cost related to exited markets resulting from business optimization initiatives. Lower geography entry costs for 2024 are driven by continued cost discipline, lower capital support funding needs, and, as Steve mentioned, a more measured market expansion strategy to balance growth and performance in the current cost trend and rate environment. Platform support costs were $40 million compared to $37 million for the fourth quarter of 2023. For the full year, platform support costs were $169 million compared to $164 million for 2023. Platform support costs remain in line with our target and demonstrate our cost discipline efforts while continuing to invest in the business. The adjusted EBITDA loss for the fourth quarter of 2024 was $84 million which compares to a loss of $137 million for 2023. For the full year, 2024 adjusted EBITDA was negative $154 million compared to negative $95 million for 2023 and is attributable to the continued elevated medical cost trends and unfavorable prior year development, as previously discussed. Adjusted EBITDA for our ACO model markets for the fourth quarter of 2024 was breakeven. For the full year 2024, adjusted EBITDA attributable to our ACO model markets was $33 million compared to $39 million for the full year 2023. Fourth quarter and full-year 2024 results include $5 million of additional medical costs for one of our Medicare shared savings program contracts where we received additional performance data in the fourth quarter. This true-up is related to an underperforming MSSP market which we expect to exit in 2025. Performance in our other ACO model markets was in line with expectations. Turning to our balance sheet and cash flow; agilon ended the quarter with cash and marketable securities of $406 million and another $36 million of off-balance sheet cash held by our ACO entities. We added $7 million in cash during the fourth quarter; and for the full year, used $90 million, which is well below our previous expectations. About half of the favorable variance is timing-related which will now occur in 2025. Turning now to our 2025 guidance. We have provided our first quarter and full-year 2025 guidance metrics in the press release and slides provided for you today. For the full year 2025, we expect year-end membership on the agilon platform will be in a range of 595,000 to 635,000 members. This includes estimated Medicare Advantage membership of 505,000 and ACO model membership of 110,000 at the midpoint. As Steve mentioned, the year-over-year change includes adding 20,000 members in a smaller class of 2025 from three new partners and reduced same geography growth of 3% or 13,000 members. Note that this is net of multiple December 2024 payor contract terminations, tighter attribution management with health plans, and the reduction of 54,000 members from previously disclosed partnership exits at the end of last year. Regarding these exits, an additional 29,000 members will exit at the end of 2025. Additionally, as mentioned earlier in my prepared remarks, we will exit one of our underperforming MSSP contracts in 2025. For the full year, we expect revenues in the range of approximately $5.83 billion to $6.03 billion which is down slightly at the midpoint from 2024. The slight decrease in revenue is due to the following: first, a decrease in members served as a result of the market and partnership exits in 2024, payor contract terminations and more measured growth in 2025. This reduction has been primarily offset by favorable Medicare Part C percentage of premium rate adjustments, inclusive of additional incentives for quality tied to re-contracting approximately 40% of our membership effective January 1, 2025. Medicare Part D carve-outs and caps which reduced Medicare Part D risk effective January 1, 2025 to below 30% of our overall membership which should reduce the performance beta in our business. For 2025, we had assumed that our Part D losses double on a PMPM basis from 2024 for the membership where we continue to take Part D risk. Targeted clinical programs supporting improved outcomes and quality scores of greater than 4.25 stars which are heavily valued by our payor partners given the increased CMS stars cut points effective for measurement year 2025 and year-over-year risk adjustment improvement of a net 2% increase which is roughly in line with 2024. We expect medical margin to be in the range of $275 million to $325 million in 2025 or $300 million at the midpoint. This reflects a lower starting point exiting 2024 than we previously estimated due to continued elevated medical expense and higher supplemental benefits recorded in Q4 and lower prior year development than we anticipated. Our 2025 medical margin guidance includes the benefit of the underperforming contract and market exits completed in 2024, premium increases in excess of 4% driven by payor bids of approximately 2% and an incremental 2% net benefit from risk adjustment. Additionally, as Steve mentioned earlier, we expect to execute on $50 million of operating, quality, and clinical initiatives in 2025. We expect these tailwinds to be more than offset by the continued high medical cost trend in 2025. Our cost trend for 2024 was 6.8% which we estimate includes 50 basis points associated with the 2 midnight rule. For 2025, our estimated cost trend is 6.3% gross and 5.3% net. The 1% difference is due to the effect of payor bids which we expect to lower medical expense in 2025. We expect our adjusted EBITDA to be negative $75 million at the midpoint. This is driven by the medical margin guidance I previously mentioned and assumes flat G&A costs, including platform support costs as we maintain our cost discipline. We expect our ACO model performance to be between $35 million and $40 million for 2025. In addition, we expect geo entry costs of between $35 million and $40 million, based on our assumption that the class of '26 membership will be between 30,000 and 45,000 members, reflecting our balanced approach to growth. For the first quarter, we expect MA membership of 490,000 to 510,000, revenues of $1.48 billion to $1.52 billion, medical margin of $125 million to $140 million, and adjusted EBITDA of $10 million to $25 million, inclusive of $18 million contribution from ACO REACH at the midpoint. Our expected use of cash for 2025 is approximately $110 million. We continue to believe we have adequate capital on the balance sheet to support the business and achieve our goal of cash flow breakeven in 2027. Our focus for 2025 is executing on our clinical and operational initiatives to drive better outcomes for our members and shareholders. We are confident that our investments, disciplined growth, and strategic actions will drive long-term profitability. This concludes my remarks. Operator, we are now ready for questions.

Our first question comes from Stephen Baxter with Wells Fargo.

Just wanted to ask a little bit about some of the changes you're making to Part D and the contracting there for 2025. I guess, first, could you just give us a little bit more color on how that's going to flow through the P&L, both at the revenue line and the medical expense line? And then it'd also be great to just better understand what was actual Part D medical margin in 2024? Just trying to understand why we're not seeing that as a specific spike out in the medical margin bridge? And maybe that's because the PMPM losses are getting bigger in 2025, as you mentioned but I just want to make sure we're fully tracking that discussion.

Sure. Steve, thanks for the question. I'll start and Jeff can give you some of the specifics on the P&L. So, last time we talked to all of you, one of the key areas we talked about was really narrowing our exposure to things that we can't control and Part D risk was at the top of that list. It has a series of challenges that come with it. There's a lag in terms of our finding out where the results actually occur and that's typically Q3 of the following year. But there's also things like the formulary and the rebates that we just can't control and don't have visibility to. We laid out a goal of getting to less than 50% of our members with D risk. We've exceeded that. We've taken it down to 30%. And I think that reflects the good relationship that we've got with our payors and they're recognizing that we really can control that. So, that's been a real area of success for us. And Jeff, do you want to talk about the P&L?

Yes. Yes. Thanks, Steve. So, a couple of things. Just to remind everybody, we record Part D net in revenue in the P&L. That's why you're not really seeing it show up because it's a really small component of the overall revenue number. And it has been a loss for us. So, it continues to be a loss for us. And what we've done is, if you think about from '24 to '25, we've taken the 30% of members that we are going to retain that risk for 2025, we've taken that PMPM loss for '24 and we've doubled that because we know the Inflation Reduction Act materially increases the dollars at risk there. And we think that's a pretty good starting point for the '25 budget.

Our next question comes from Justin Lake with Wolfe Research.

Apologize if you covered this but could you talk a little bit about the year one performance this year versus what you're expecting or I should say in '24, what you're expecting for '25 there? And then also, can you talk a little bit about how you're thinking about the potential for a class of '26, which you typically have visibility on at this point in time?

Thank you, Justin. The performance for the class of '24 in its first year was very strong, making it our largest class to date. As we mentioned at your conference, they had a solid start and ended the year maintaining that level of performance. The class of '25, which is part of the growth strategy we discussed in November, has 20,000 members. This is a smaller class and the first one to include a care management fee with no downside risk for most members, aimed at minimizing volatility with the intention of transitioning them to full-risk as market conditions improve. We also have a strong class for '26, having signed letters of intent related to it, and we are optimistic about that. This class will be larger than '25, reflecting a need for a new business model in the primary care physician market. Given our past success and the positive references from our existing network, we believe there are fewer alternatives for primary care physicians. There’s potential to enlarge the '26 class, but we prefer to have a thorough implementation cycle. Our attention will soon shift to the class of '27, and we’ll begin discussions in the next couple of months about its potential. Regarding overall growth, there's a significant in-market opportunity for us, which we discussed briefly in November. We see the potential for a stronger growth rate over time, linked to payer and market dynamics, and we're focusing on a measured and disciplined approach to our growth strategy.

We now turn to Jack Slevin with Jefferies.

I would like to clarify a couple of points regarding the medical cost trend guidance, and I appreciate the insights shared earlier. First, regarding the 2 Midnight policy, I'm trying to understand the 50 basis point estimates for the full year. We've received varying reports about whether that has increased throughout the year. Can you share your thoughts on whether it may be higher in 2024, and if so, does the 50 basis points represent the current run rate level? Secondly, concerning supplemental benefits, it appears from the press release that it is excluded from the medical cost trend guidance provided. I would like to know if there is a potential benefit this year from either removing it from some contracts or from plans scaling back. I believe the impact there could be quite significant, so I'd like to hear your thoughts on both of these matters.

Thank you, Jack. Regarding the 2 midnight rule, we did experience a gradual increase, which is accounted for in our calculation of the 50 basis points year-over-year. This will be reflected fully in our numbers for 2025. Concerning supplemental benefits, we previously indicated that the bids from payors showed an overall decline. Approximately 97% of these bids experienced reductions in supplemental benefits, which means the financial impact will decrease as we consider 2025. As for contracting changes, as Steve has mentioned and we have discussed, we aim to be accountable for factors within our control, and supplemental benefits do not fall under that category. In the long run, we would like to pursue this direction, but currently, they are at risk for 2025.

Yes. Jack, I'll just wrap up by saying, we're on an evolution in terms of reducing risk around the things we can't control. We were ahead of what we laid out on Part D for this year. Supplemental benefits based on what Jeff talked about with how payors really adjusted down on those was a little bit lower on our risk but it remains a real priority, and our payor partners know that we would like to carve that out the same way we have on Part D.

We now turn to Ryan Langston with TD Cowen.

On the ACO REACH side, can you provide insight into the impact for the fourth quarter and the full year regarding that one client? I noticed that for the cost trend, you're estimating about 100 basis points lower for the year two cohort. Is that primarily due to benefit reductions, geographic factors, or differences between national and regional payors? I'm looking for more details on why the year two cohort is expected to perform better.

Yes. I can address the first question. I may need to follow up on the second one. Regarding the MSSP, one reason for our exit is that it was unprofitable for the year. I won’t specify the exact amount, but it was significant. Now, what was your second question? I didn't catch that.

Yes. I think you called out cost trends 6.2% or 6.3% but you're saying, I think year two cohorts, a 1% difference or something. So just wondering what that delta is?

Yes. So, Ryan, I think what you're asking about is we show you from '24 to '25, we adjust '24 cost trend from 6.8% to 6.3% to reflect the 2 Midnight rule that was asked about earlier. We then say '25 is roughly at that same level. And then there is a 100 basis point reduction from 6.3% to 5.3% which is reflective of the change in the payor bids that Jeff talked about earlier. And we saw a reduction from a revenue perspective of 100 basis points and a cost perspective of 100 basis points. So at the mid-margin line, we're not really reflecting a pickup around that but it does reflect in the overall cost trend.

Our next question comes from Amir Farahani with Bernstein.

In the last quarter, you mentioned that you could implement additional strategies to enhance working capital, and it seems that was beneficial in Q4. Could you elaborate on those factors and whether you anticipate them to aid you in '25? It appears you expect some of these factors to reverse. If you could provide some numerical insights on that, it would be greatly appreciated.

Yes, Amir. Thanks for that question. Let me just say, I mean, I think this is something that we're proud of. We were really focused on disciplined cash management. We called it out last time we talked, both in terms of working with our payor partners and in terms of working capital and Jeff can dimension the improvement relative to what we projected.

Yes. Let me walk you through the numbers. We finished the year with $440 million in cash, which includes our ACO funds. We anticipate using $110 million in 2025, leaving us with about $330 million by the end of that year, which is $75 million better than we previously expected. As Steve mentioned, in November we focused on several cash-flow strategies. The primary one involves exiting partnerships, which should significantly enhance our cash flow moving forward. You can see the effects of this in the EBITDA bridge shared today. Additionally, we are managing working capital more tightly, particularly concerning receivables. Lastly, we successfully negotiated contracts with several payors, who often pay a portion of our premiums upfront, contributing to our cash flow success. We still have opportunities to explore and remain focused on that. Quantifying the timing and volume of these will be difficult since it depends on negotiations, but we believe there is still potential for improvement, and we will provide more updates later.

We now turn to Jailendra Singh with Truist.

So, I want to go back to this medical margin bridge, $50 million initiatives you called out, various drivers. I was curious how much visibility do you have at this point? Are there any initiatives which still need to be executed? Just trying to get a better sense of range of outcomes there because you clearly need to offset some pretty large delta of $90 million on revenue and cost front.

Yes. Thanks, Jailendra. I really appreciate it. So, I think we talked about, we feel like we are differentiating in terms of cost trends relative to a benchmark and in terms of our quality performance. But when you talk about specifically our initiatives for next year, it reflects that. Roughly half of those initiatives are around quality performance, delivering greater than 4 stars, in some cases 4.25, some even will give us an additional incentive up at 4.5. This is something that a payor is not able to do with their fee-for-service network. And so, as I talked about, 40% of our membership being renewed and one of the areas we saw improvement in was not just percentage of premium but also around these incentives for quality, that is a much larger number for this coming year. And so we need to execute the way we have but it is something that's clearly within our control. We've been successful with our payor partners in terms of having them reward us for that because in this environment, it is worth so much to them because it is so difficult to do that. Cut points are up and a PCP model with a tight relationship with the patient has the ability to close those care gaps and deliver that. So, that is a huge component of it. The other part is really around our clinical management activities. Palliative that I called out is an area that we've done very well on, in terms of reducing the admission rates, in terms of reducing the total cost of care. And so that is a significant component of that. And we are literally on a daily basis tracking that, looking at what our enrollment is around the appropriate patients. That's a critical component of that program. So, I would say there is high visibility around that and I think we have confidence around that number.

Okay, that's helpful. And a quick follow-up. Steve, you talked about 2026 MA advance notice, clearly showing some nice improvement. But curious from your point of view, from agilon point of view and geographical presence, any puts and takes we should be aware of as we think about the update there in 2026?

Well, I mean, I think like everyone, we were encouraged by the advance notice. I think my color would be, as we look towards the final notice, I sort of called out, I think it reinforces the need for rates to catch up with the utilization that we've seen over the last couple of years in the program. So, like everyone, we would like to see an increase from the advance notice to the final notice. And we obviously won't know that for a little while here but that will be a key indicator. That's not something we can control. So we're super focused on our controllables. We talked about this year as a transition year and you asked about the $50 million. But as we look towards next year, I think given where we're at and our ability to differentiate around quality and cost, we see the opportunity for improvement in 2026.

Our next question comes from Michael Ha with Baird.

Just two questions. Firstly, I know you mentioned certain new partners in '25 glide path approach with no downside in year one. I think you mentioned that applies to the vast majority of your 20,000 lives which is great. Curious, how receptive do you believe payors are in doing more of these sorts of no downside year one arrangements? Is it basically a temporary type arrangement to help you guys navigate near-term trends? Or could this be something new, like a structural payor arrangement going forward that you could extend to future partners in new markets?

So, Michael, it's a great question. I think from a macro perspective, we've made a lot of progress with our payor partners, whether it's around the cash that Jeff talked about, whether it's around reducing our Part D risk. As we think about these year one contracts, this is the first year that we've done that. I think our payor partners were receptive to that. Ultimately, they would obviously like to see this move to full risk. But that's really going to be predicated around kind of market dynamics and just the dynamics with them overall. So, I think this is something that's available to us but it's really going to be dictated by the environment. We have not done it in prior years. And as I said, the class of '24 on full-risk contracts performed very well. So, I think it's going to be situational but it's a quiver that we've got that we can work with.

Our next question comes from Andrew Mok with Barclays.

This is Thomas on for Andrew. Could you share the latest 2024 national trend you received from CMS for ACO REACH? I believe you last shared that September, it stood around 7% or 8%.

Yes, I think it's correct. 7.8% is the latest that we've seen published...

In terms of the reference population for 2024. But that will be updated again. And I think there's some discussion and people expecting that, that number will end up being larger than that but that is the latest number that we've got.

Our next question comes from Elizabeth Anderson with Evercore.

I was wondering if you could discuss the repricing of membership growth. You mentioned that you repriced 40% of the contracts. Do you think that was the complete adjustment, or do you see potential for further changes? Please elaborate on the evolution of this as you consider 2025 and how to approach it moving forward. Additionally, is there anything noteworthy regarding the medical cost trends throughout 2025?

I'll start with the first part and then Jeff can address the seasonality and time progression. Thank you for your question, Elizabeth. To provide some context, we adjusted the pricing for 40% of our membership effective January 1, 2025, and we plan to do the same for another 50% on January 1, 2026. We recognize that we are currently in a challenging environment, but we have the ability to leverage pricing to navigate it. From our perspective on premium percentage, we are optimistic about achieving the increases we aimed for. A major focus for us was also the reduction in Part D. There were instances where the Part C trend was adjusted based on the payor's treatment, but overall, we experienced an improvement in the premium percentage for Part C. We also noted a reduction in Part D risk in about 30% of the 40%, where we received standard language that we believe will significantly aid our future efforts. It feels like a strong beginning. Looking ahead to 2025 and planning for 2026, we see an excellent opportunity in these renewals. We believe the repricing will serve as a support as we move toward 2026 and into the future.

Yes. And this is Jeff. Real quick on the seasonality. You have to strip out all of the development and really look at an incurred basis, I think it would follow a normal progression that you would see in this business where there's more medical margin or lower medical costs in the first half of this year, higher medical costs in the back half of this year. And I think we've talked specifically about the fourth quarter generally being the highest medical expense quarter of the year, just based on the way the plans are designed.

Our next question comes from Adam Ron with Bank of America.

I'm not sure if I'm misunderstanding your explanation, but with the 1% impact on trends from payors repricing or changing their bids, it seems like they're reducing their rebates, which would mean lowering benefits for their members due to pressure. I initially thought this would create a positive impact for you regarding medical margins since Steven mentioned cutting benefits. Could you clarify if the payors cutting benefits is not actually a net positive for your medical margins? If that's the case, is it simply because the cuts weren't significant in 2025 and you're anticipating more substantial changes in 2026? Additional details on this would be appreciated.

Yes. Sure. This is Jeff. I guess what I would say is when you think about the two components, you have the revenue component which was based on the bid information. And then you have the cost trend component. And what we've done here is, we've said, listen, embedded in the bids is really, you're exactly right, a member cost share reduction or increase to the member, if you will. And so that was taken out of our revenue but we also think it's going to obviously reduce our medical expense as well. And so that's how we get from the 6.8% to the 5.3%. You have the 50 basis points of 2 Midnight that we talked about. And then from 6.3% to 5.3% is really the benefit of, I would say, those costs being pushed to the member.

We now turn to Ryan Daniels with William Blair.

Just one quick follow-up on the new kind of payment model with the care management fee. And I guess it's multifold. Is that paid by your provider partners to you or from the payors, number one? Number two, is there actual upside potential after those fees if there's residual shared savings? And then number three, can you speak to how you can move that to full risk over time? Is there a trigger? Is it an annual contract? Just want to get a little more color on that.

Yes. Thanks for the question, Ryan. So first, it's in this umbrella of working really constructively with payors. The care management fee is paid to the partnership that we operate 50-50 with our physician partners. So, it's paid directly there. Two is, there are upside incentives in these contracts for outperformance and in particular, around some of the areas that we do well and are important to our partners like the quality incentives that I mentioned. The expectation is that you do move to full risk across time, maybe as quickly as you move to year two. And so that is the discussion that you have as you approach the back half of year one. And that's why we describe it as a glide path. I think you're ultimately moving towards that full risk model but you're doing it in a more protected kind of lower beta type of way.

We now turn to Whit Mayo with Leerink Partners.

Steve, I'm just wondering how you guys are internally planning for the fork in the road here with ACO REACH with your physician groups. I'm not sure what happens next year if it gets extended or not, I'm not smart enough to know. But when do you guys say like, hey, we need to move on this. We need to evaluate MSSP or we need to pull the plug? Just wondering kind of how you guys are thinking about the decision tree here?

Yes, Whit, thank you for your question. It’s an important one that we have dedicated considerable time to. ACO REACH has clearly been a strong area for us. As we mentioned, we consistently exceed the benchmark and perform well in terms of quality. Our medical margin is approximately above $100 PMPM, which is very encouraging. We are feeling more optimistic about the outlook after 2026, whether through an extension of REACH or a new full-risk program in Medicare fee-for-service. There are several options available, including within the MSSP framework. We believe this year will involve active discussions, and we need to engage more people in these conversations. By early next year, we should have a clearer understanding, especially if we're considering MSSP or similar options, as enrollment will be necessary. We anticipate ongoing discussions, and our optimism about a follow-on program or extension has increased compared to six months ago.

Our next question comes from Daniel Grosslight with Citi.

Just a couple of quick ones. On the glide path, not to beat it to death. But I'm still a little confused on who actually decides to move that to full risk? Is it the partnership? Is it the payors? Is it done in conjunction, you both have to agree to move to full-risk? Is there any kind of timeline where you'd have to, there is a drop dead where you must move to full-risk? And then as we think about the 2026 class, the letters of intent that you have, are they as well on the glide path or is it PBD on 2026, how you're thinking about that?

Yes, Daniel. Thanks for the question. I think the timeline on the glide path is we would mutually work it out with the payor at the end of this year, just like we worked out Part D which was off-cycle on a lot of things, just like we worked out accelerations on cash payments that Jeff talked about, off-cycle. I think payors are going through the same world that we're going through. And just like physicians have a real need for an alternative business model, payors have a real need for a primary care-centric model that's great on quality and great on medical cost management. So, we have payors who have more flexibility in terms of working with us than we did six, nine, twelve months ago. And I would put this in that bucket. As we think about the class of 2026, it will be situational in terms of the markets and the payors that we're working with there. Obviously, the things we talked about around advanced notice, final notice, the traction we've got around the controllable items around quality and medical cost management will all factor into that. And then finally, how payors bid for 2026. So, I think it's in front of us. I think it's an option that we've got available to us but we're going to be making those decisions as we approach it.

We now turn to David Larsen with BTIG.

I seem to recall you reporting cost trends in like the 7% or 8% or 9% range in the first three quarters of the year. And I heard a bunch of cost trend numbers reported on the call here. What was your final trend for 2024? And what do you expect it to be for 2025, please?

The final cost trend for 2024 is 6.8%. For next year, we have budgeted a 5.3%. There’s a slide that explains the transition from 6.8% at the end of 2024 to 5.3%. The 2 Midnight rule accounts for a 50 basis points reduction, bringing us down to 6.3%. The decrease from 6.3% to 5.3% reflects a 1% impact from payor bids and the cost sharing we discussed earlier. We believe the cost trend from 2024 to 2025 will remain at the same level.

We now turn to George Hill with Deutsche Bank.

Jeff, I kind of have a numbers question. You had indicated that you guys had carved Part D out of about 70% or greater than 70% of the membership for 2025 but the PMPM is indicated up and I would have thought that the percent of premium that you guys received would be down kind of reflecting the carving out of the Part D piece but you guys also indicated that you've repriced about 40% of the members. I was just kind of wondering if you could talk about kind of the interplay of those pieces and like maybe I don't know if it's an accounting issue or if it's a rev-rec issue. I just want to know kind of like how the revenue on a per member basis changes when you guys do big carve-outs, whether it'd be supplemental or Part D? And then my quick follow-up would be, am I doing the math right in the deck that the PYD in the quarter was about $8 million positive?

Yes. The first question is about Part D. It's important to note that we handle it differently here compared to other places, particularly with payors. We report Part D on a net basis, meaning we record revenue minus expenses within our total revenue. This approach is why you're not seeing an increase in the revenue line, as costs are deducted. For members continuing with risk in 2025, we took the 2024 per member per month amount on a net basis and doubled it due to the Inflation Reduction Act's impact. The second point is regarding prior year development (PYD). In the quarter, we had approximately $3 million in favorable PYD. This isn't reflected directly in the financial statements because we account for retroactively assigned memberships that include both revenue and claims. If you adjust for that, the net positive development for prior years in the quarter is about $3 million.

And George, if I can just call out on that, I think Jeff and the team have done a really nice job in terms of stabilizing and providing predictable kind of medical cost trend forecasts. You see it in terms of what he just talked about in terms of the favorable prior year but as he also called out, Q1 and Q2 developed more favorably. And so, that's the pattern that we're trying to get in and making sure that we're really doing that. Now we've got further to go in terms of Part D and supplemental benefit. We're trying to reduce our exposure to that for the remaining piece we've got both in the quarter and in the guide for 2025, we are forecasting that cautiously.

Our final question comes from Matt Shea with Needham.

Congratulations on getting Part D exposure below 30%, nice beat relative to the 50% expectation. I guess, anything to call out in terms of why you were more successful than anticipated on the Part D? And maybe looking ahead, how are you thinking about the remainder of the book from here? Is the intention to remove all Part D risk over time? And if so, how long would an initiative like that take?

Thank you for the question, Matt. Our ultimate goal is to reduce that exposure to zero, similar to our supplemental benefit exposure. Achieving less than 30% based on a target of under 50% involves complex discussions on various aspects. Payors are aware of the challenges posed by the Inflation Reduction Act and the potential impact a primary care-based model might have on a smaller group, as this is evaluated at each individual partnership level. The main concern was how to manage the administration of this and navigate through the details, alongside making the math work that Jeff mentioned. This required significant effort, and our payor team deserves a lot of credit; they did an outstanding job. They spent considerable time with senior management to emphasize the significance of this initiative, and they want us to be their value-based partner for the next decade and beyond. This commitment is a key reason for our success with cash payments and other areas because in a market with fewer primary care-centric options, maintaining that relationship is crucial for the payor. Therefore, this aspect played a major role in driving our overall success.

This concludes our Q&A. I'll now hand back to the management team for any final remarks.

Well, thank you all for the call. I think we're managing through a dynamic and difficult environment but we feel really good about the actions that we're taking. We laid things out at the end of last year. We've executed on all of those things. We see this year as a transition year, as we talked about from a membership and a margin perspective but it's also an inflection year. And as we look to '26, we talked about we're feeling optimistic. So, thanks everybody. Talk to you soon.

Ladies and gentlemen, today's call has now concluded. We'd like to thank you for your participation. You may now disconnect your lines.