agilon health, inc. (AGL) Q4 2025 Earnings Call Transcript

Hello and welcome to the Agilent Health Fourth Quarter 2025 Earnings Conference Call. My name is Carla and I will be coordinating your call today. During the presentation, you can register to ask questions by pressing star followed by one on your telephone keypad. If you change your mind, please press star followed by two. I will now hand you over to your host, Evan Smith, to begin. Please go ahead when you're ready.

Thank you, operator. Good afternoon and welcome to the call. With me, our executive chairman, Ron Williams, and our CFO, Jeff Schwaneky. Following our prepared remarks, we will conduct a Q&A session. Before we begin, I would 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 it's 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 the Form 8-K filed with the SEC. And with that, let me turn the call over to Ron.

Thank you, Evan. And thank you all for joining us today. 2025 was a year for building the foundation of sustainable performance through intense focus on operational discipline. While we are navigating a comprehensive transformation, our mission remains unchanged, empowering positions to lead the transformation of healthcare through our total care model. The fundamental resilience and effectiveness of our partnership model demonstrates a durable long-term growth runway through trusted relationships with community-based physicians. These individuals are leaders in their communities and have an average 10-year-plus relationship with their patients, creating deep community ties that are difficult to replicate. While we are not satisfied with our financial performance in 2025, we made tangible progress in the areas that matter most for a durable turnaround, which Jeff will provide more detail on in a moment. Our tangible progress includes the advancement of our clinical pathways and quality programs, our disciplined approach to payer relations, and our continued focus on data-driven performance. All are driving greater clarity and sustainability across Agilon's scalable operating model to support long-term value-based care success for our total care model. Our preparation for the future includes applying our continued discipline and focus across these critical areas as we navigate the potential of a lower-than-expected rate increase in 2027 following CMS's advanced rate. We believe the advance rate notice does not sufficiently reflect the ongoing population-wide increase in cost and utilization due to growing chronic disease burden in aging and Medicare population. In addition, our further review of the risk model revision and normalization outlined in the advance notice, we believe the potential impact will be generally in line with the national average. However, we believe that our clinically focused program remains a critical part of the long-term answer. Continued advancement of our burden of illness and clinical pathway initiatives with our partners will help to mitigate the impact of the risk model changes, as they did for V28. In addition, given the focus of our model is the assessment of conditions at the point of care with diagnosis tied to documentation from a visit, we believe we have minimal exposure to unlinked or audio-only coding. We believe our ability to differentiate on the management of medical costs and quality outcomes should continue to position us well with health plans and physicians, with the expectation that the rate and cost spread will ultimately normalize over time. Throughout the year, we advanced several key transformation priorities, which are embedded in our expectation for material improvement in year-over-year medical margin and adjusted EBITDA. At the midpoint, we expect revenue of $5.5 billion, medical margin of $325 million, and adjusted EBITDA at breakeven. Our 2026 outlook reflects the expected positive impacts from the team's execution on payer contracting, clinical and quality programs, cost initiatives, as well as premium increases. We also anticipate benefiting from payer benefit design changes, including increases to deductibles and maximum out-of-pocket expenses, as well as reductions in supplemental benefits. While this is expected to benefit cost trends, we are assuming that net cost trends will remain elevated in 2026 at approximately 7%. Let me now reinforce key areas we believe are supporting a stronger foundation for execution in 2026 and forward. First, we entered 2026 with an enhanced financial data pipeline and strengthened actuarial and analytical capabilities, improving financial discipline, clinical visibility, and overall predictability. We are increasingly able to identify variants earlier and intervene faster. As we have previously stated, we now have greater visibility into detailed revenue and claims information with the ability to calculate member-level risk scores utilizing our enhanced data pipeline, a key difference versus prior years. In addition, we believe the pipeline, AI-assisted advances for high-risk member identification and diagnosis through our Burden of Illness program, as well as execution on clinical pathways, will deliver results over and above the final year of the V28 impact. Second, through a disciplined approach to better underwriting the risks we take by contracting, Agilon intentionally prioritized economic sustainability over membership growth. This approach included a willingness to pause growth, walk away from unprofitable payer contracts, and restructuring arrangements with certain payers in specific markets temporarily migrating to a care coordination fee model as opposed to full risk. As a result, we expect to benefit from incremental percentage of premium and enhanced quality incentives for the value we deliver, a reduction in Part D exposure to less than 15% of our membership, as well as shorter average contract term lists, which we expect will help us better navigate changing market dynamics, including exposures to adverse policy, utilization, or payer behaviors. In addition, our disciplined and rigorous recontracting process led us to exit certain payer contracts in specific markets. These contracts did not meet our minimum threshold of profitability. We expect membership will be reduced to approximately 430,000 members in 2026, including approximately 25,000 members in no downside care coordination fee arrangements with upside performance-based fees. We believe care coordination fee arrangements provide a long-term risk-adjusted growth opportunity to potentially move these members, when appropriate, to a full risk arrangement. Third, we advance clinical pathways, which are evidence-based, data-enabled care models designed to help our partners proactively identify, diagnose, and manage the care journey for patients with high-impact chronic conditions. We believe these pathways, including heart failure, dementia, and COPD, can materially affect utilization, quality, and total cost of care. We concluded the year with active heart failure programs adopted in over 90% of our network. Congestive heart failure, or CHF, is the most mature and scaled pathway, serving as the blueprint for other conditions, including early identification, expanded support for guideline-directed medical therapy, and appropriate end-of-life care guided by patient preference and goals. Palliative care is also a core extension of our total care model. It's designed to proactively support patients with advanced illness, often those with late-stage heart failure, COPD, cancer, or significant multi-morbidity. While only representing a small subset of our population, we have increased the number of patients engaged with this program. Clinically, it improves quality of life and care coordination. Financially, it helps us reduce avoidable late-stage utilization, particularly inpatient admissions and emergency care. Most importantly, the patients and their families have a better experience and clearer goal of care discussions and more coordinated support. Fourth are our quality initiatives. Our quality programs continue to mature with stronger measuring discipline and improved care gap closures. Quality isn't just a scorecard for us, it's a lever for patient outcomes, member experience, cost, and revenue. The strategy recognizes that primary care performance directly drives the majority of STAR measures, making Agilent's physician-centric model structurally advantaged and an area of increasing focus by payers. Our value-based care model enables exceptional quality performance by providing the necessary tools and support to help our network deliver the highest quality care. To drive additional performance in 2025, we strengthen our data access and analytic capabilities to further enhance our ability to identify care gaps. We also expanded our capabilities for providers to close care gaps in areas such as diabetic eye exams. Our network consistently delivers quality performance for measures we can influence and control ahead of benchmarks at 4.2 stars on a composite basis across the platform, maximizing quality bonus revenue while reinforcing physician alignment. In 2026, we believe we have the opportunity to more than double the incentive contribution. As we indicated last quarter, 2024 results were very strong in ACO REACH and an improvement over 2023 results. ACO REACH continues to demonstrate the value creation Agilon can deliver and is shaping the way we are transforming our MA business. CMS recently announced the LEAD program Long-Term Enhanced ACO Design, intended to launch after the REACH model concludes at the end of 2026. LEAD is designed as a 10-year, voluntary model with a longer planning horizon, benchmarking enhancements, and an emphasis on better-serving high-needs patients. We see LEAD as a positive signal. it reinforces CMS commitment to value-based care with a longer-term structure that can support sustained investment and consistent operating execution. Lastly, we executed on initiatives to reduce operating costs and controls. We believe we made meaningful progress on forecasting, performance reporting, and market-level accountability in 2025. These are critical to improving decision speed and execution. We executed on $35 million in operating cost reductions above what we communicated at the end of the third quarter. This will enable greater operating leverage from the platform and support our business objectives. In summary, we are executing with urgency. While cost trends are expected to remain elevated, we believe our transformation actions will support improved operating performance. We plan to build on the progress made last year with continued emphasis on discipline execution, collaboration, and measurable positive impact for patients. We expect 2026 to mark a strong improvement in medical margin and adjusted EBITDA supported by renegotiating with health insurers to better reflect the reality of today's environment, care costs, and plan-initiated decisions. A heightened focus on investments in quality performance as health plans continue to increase the incentives available for top-quietile performance, continued progress to improve patient outcomes, and reduce total cost of care through proactive chronic disease management and ongoing development and expansion of clinical pathways. strategies, strengthening provider engagement and reducing variability in performance across markets and practices, optimizing our cost structure. Lastly, we will continue to advance initiatives which we expect to support continued performance improvement in 2027. With that, I'll turn it over to Jeff to walk through the financial results.

Thank you, Ron, and good afternoon. As Ron stated, 2025 was a transformational year. We took significant actions focused on improving the profitability of the business, including a disciplined approach to contracting, improvements in our burden of illness program, enhancing our clinical and quality programs, meaningful cost reductions, and continuing to advance strategic initiatives related to our data visibility, clinical, and cost management programs. Through the execution and implementation of these initiatives, we expect to drive significant improvement in profitability in 2026 while continuing to invest in our platform and partners. As we discussed last quarter, this is supported by several underlying market and payer-related tailwinds, including the 2026 final rate notice by CMS, payer bids, which were focused on margin, and our actions we took in 2025 centered on execution and profitability. For today's discussion, I will cover three key areas. First, I will walk through our fourth quarter and full-year results and a bridge to our jumping off point for 2026. Second, I will walk through our 2026 guidance, including key assumptions driving improved profitability. And finally, I will discuss the strength of our capital position in a more disciplined near-term growth outlook. Moving to our financial performance for the fourth quarter and full-year 2025. Starting with membership, Medicare Advantage membership at the end of the quarter and fiscal year end 2025 was 511,000 members. Our ACO REACH membership for the quarter and fiscal year end 2025 was 114,000 members. As a reminder, membership continues to be affected by our decision to take a measured approach to growth inclusive of previously announced market exits in a smaller 2025 class. Total revenue for the fourth quarter was $1.57 billion and $5.93 billion for full year 2025, respectively. Revenue in both reflect the impact of lower-than-expected risk adjustment revenue and previously disclosed market and payer contract exits. With respect to medical costs, we continue to see favorable development from the first half of 2025, with the respective cost trend now sitting in the mid-5% range. However, for the third quarter of 2025, we experienced elevated costs, primarily attributed to inpatient stays, including a few large discrete multimillion-dollar claims totaling $6.5 million. Based on this, we increased our medical cost trend for the third quarter of 2025 to 7.2 percent, up from the low 6 percent range we previously recorded. Given the elevated cost trend we experienced in the third quarter, along with minimal paid claims visibility at close of the fourth quarter, we took a prudent approach and recorded fourth quarter medical cost trends at 7.4 percent. This brings our full-year 2025 cost trend to approximately 6.5 percent, which we believe provides a solid foundation heading into 2026. Medical margin for the fourth quarter was negative $74 million and negative $57 million for the full year. Both the fourth quarter and full-year results are reflective of the elevated cost trend assumptions just discussed, as well as the previously discussed risk adjustment impact. In addition, the full-year results include negative $60 million from exited markets and negative $53 million from prior year development. Adjusted EBITDA was negative $142 million and negative $296 million for the fourth quarter and full year, respectively. The fourth quarter reflects the items I already highlighted, partially offset by lower geography entry costs and a benefit from continued operating cost discipline. ACO REACH was in line with our expectations, adjusted EBITDA for the fourth quarter was negative $6 million, and for the full year of 2025 was $41 million. As Ron mentioned previously, ACO REACH performance further supports our confidence in our approach, the total care model, and value we bring to our partners and members. On the balance sheet, we ended the quarter with $285 million in cash and marketable securities and $91 million of off-balance sheet cash held by our ACO entities. Year-end cash was ahead of our expectations by approximately $66 million, including $34 million in permanent improvement and $32 million related to expense timing. Last, in tandem with our transformation initiatives, after the quarter, we extended our credit facility and term loan. Details were filed in an 8K. next let me discuss our outlook for 2026 as i previously mentioned we are optimistic about our ability to deliver significant growth and profitability in 2026 driven by our actions in 2025 we have provided our first quarter and full year 2026 guidance metrics in the press release and earnings presentation posted on our website for you today we have also provided bridges in earnings presentation that walked from our jumping off point to the full year 2026 guidance. For the full year 2026, we expect year-end membership on the Agilon platform will be in a range of 525,000 to 540,000 members. This includes estimated Medicare Advantage membership of 430,000 and ACO model membership of approximately 103,000 at the midpoints. The estimated Medicare Advantage membership reflects the market exits we announced in 2025, a small amount of growth, as well as the impact of our discipline contracting. As we highlighted on our third quarter earnings call, our contracting efforts were focused on achieving positive adjusted EBITDA across all markets, which embeds our assumptions and medical cost trends, payer-specific bids, quality performance, and market-specific cost structure for 2026. As a result of this disciplined profitability-focused approach, we exited several payer-specific contracts for 2026, which reduced overall Medicare Advantage membership by 50,000 members. Additionally, Medicare Advantage membership includes approximately 25,000 members in a care coordination fee structure with additional incentives tied to quality and cost performance. For the full year, we expect revenues in the range of approximately $5.41 billion to $5.58 As highlighted in the slides we provided today, most of the year-over-year improvement is expected to be driven from known factors including increased percentage of premium from our contracting efforts and payer bids which were on average at or above the CMS benchmark rate. Combined, these are expected to create over $625 million in incremental value in medical margin in 2026. As mentioned earlier, in addition to exiting structurally unprofitable arrangements, we also reduce exposure to Medicare Part D costs to below 15% of our membership. We prioritize care coordination fee structures with performance-based incentives, more than doubling the quality incentive opportunity from 2025 for the value we deliver to our members and payers with respect to our burden of illness program we are confident that the enhanced data pipeline which now includes over 85 percent of our members ai advances for high risk member identification and diagnosis in our boi program and execution on clinical pathways are expected to deliver results over and above the final year of v28 implementation we expect a net 40 basis point improvement year over year at the midpoint as a reminder over the last two years we have more than offset the impact of the v28 implementation our enhanced data pipeline has shown a 99 plus correlation rate and is expected to improve the accuracy and forecasting of our risk-based revenue With respect to cost trend, we are assuming a gross cost trend of 7.5% for 2026 as trends remain elevated and net 7% when considering the 50 basis points estimated benefit from payer bids. As we have stated previously, 2026 payer bids across our markets, on average, demonstrated payers bidding for improved profitability with benefit design changes, including increases in premiums, deductibles, and maximum out-of-pocket expenses, and a reduction in supplemental benefits. It's important to note that this 7.5% cost trend for 2026 comes on top of the higher cost baseline that we are now assuming for 2025, which we believe is an appropriate stance in this continued elevated cost environment. We expect medical margin to be in the range of $300 million to $350 million in 2026. This reflects the positive impact from our discipline contracting efforts, a slight benefit from our boi program and a more conservative cost trend assumption heading into 2026 due to the continuation of elevated medical expenses we anticipate gna expense of approximately 234 million dollars which is slightly lower than the full year 2025 and geo entry expenses of approximately 15 million dollars gna expense for 2026 includes the benefit from the organizational realignment initiatives we implemented in the second half of 2025, which reduced operating expenses by $35 million, exceeding what we previously communicated. This was partially offset by employee merit and medical cost inflation and the reestablishment of incentive compensation expense, assuming a full target payout. We continue to focus on additional initiatives to optimize our cost structure and drive additional operating leverage heading into 2027. Last, adjusted EBITDA for the full year is expected to be in the range of negative $15 million to positive $15 million or breakeven at the midpoint. This includes the contribution from our ACO REACH programs, which is expected to be in the range of $20 million to $25 million. As a reminder, our ACO REACH outlook reflects announced changes to the ACO REACH program for the 2026 performance year, primarily related to a rebasing of the risk adjustment cap from 2022 to 2019. While we are confident these factors will drive improved performance, we are continuing to actively manage the business to further enhance execution across all initiatives laying the foundation to drive improved performance beyond 2026. Finally, I will discuss our capital position, which will enable our teams to continue executing on our transformation and deliver our anticipated material year-over-year performance improvement. We expect to end 2026 with at least $125 million of cash on hand, including our ACO REACH entities. This is driven by our better-than-expected year-end cash position combined with our current 2026 outlook. Additionally, we have extended our credit facility with our existing lenders by two years and currently plan to pursue a reverse stock split as indicated in our proxy filing. We believe the extension reflects the strength of our operating performance outlook and continued lender confidence in our business. Finally, I would like to address the advance rate notice released by CMS. To reiterate, we are disappointed and believe the proposal does not adequately address the high cost and utilization trends experienced over the last several years. As Ron mentioned, after further analysis of the details provided with the advance notice, we believe our BOI and clinical pathway initiatives will help mitigate the impact of the risk model revision and normalization factor outlined in the advance notice. In addition, our initial analysis of the sources of diagnosis indicates we should experience minimal impact as the strength of our model is our primary care partners' physical interaction with their patients. This would set our expected baseline closer to the published effective growth rate. We will continue to analyze and monitor this release and remain hopeful that a more comprehensive and appropriate approach will be taken when final rates are released in April. In summary, we recognize that we are operating in a dynamic macro environment, including industry headwinds and regulatory changes. We have executed on a significant business transformation plan Combined with our physician-centric model and scale, we believe positions Agilent Health to deliver sustainable value for patients, partners, and shareholders. With that, operator, let's move to the Q&A portion of the call.

Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star followed by 1 on your telephone keypad. If you change your mind, please press star followed by 2. When we bring to ask you a question, please ensure your device is unmuted locally. We'll make a quick pause here for the questions to be registered. And our first question comes from Jack Slevin with Jeff Race.

Hey, good afternoon, guys. Thanks for taking the question. I just want to kick off on some of the trend discussion because I think I caught all of it, Jeff, but I want to make sure we've got sort of the right understanding in terms of what's baked in for 2025. So I guess I just want to clarify, it sounds like 3Q has stepped up. You sort of roughly match that or maybe set that up slightly further for 4Q, but just a little color of clarification there. And then, you know, if there's anything you've seen in some of that true up in the third quarter on what might be driving that acceleration and cost trend, I would be interested just to hear if there's any color on that at this point.

Yeah, sure. Sure, Jack. Thanks for the question. Yeah, you're right. So what we saw in the third quarter in the prepared remarks, we commented on really higher inpatient stays. so we had a lot more inpatient volume. Specifically, we had several cases that were over a million dollars, and if you aggregate those, it's roughly six and a half million dollars of cases that were over a million dollars in the third quarter. And so, you know, sitting at this point, we took the cost trend in Q3 from the low sixes to 7.2 percent, and listen, we recognize that we have limited claims visibility, paid claims visibility for the fourth quarter. But we felt it prudent given that Q3 is kind of coming in so high that we moved Q4 up to 7.4%. And so what that did is it took the full year from the low to mid fives to six and a half percent. So right now we have 2025 at six and a half percent cost trend.

Got it. Okay. That's really helpful. I appreciate that color and then maybe just to follow up on some of the 27 commentary sort of acknowledging you all have a lot of wood to chop in 26 and and i think you know that seems to be clear and sort of the guidance that's laid out but um it may be just on 27 on the rate notice and then on on the aco front as well i guess you know i'm on record saying i think value-based care players can get to roughly five percent on rev trend it sounds like you guys maybe have a slightly different bridge there but but are landing in a similar zone um considering that sort of environment seven and a half percent cost trend that seems you know possibly conservative for 26 but maybe you know i'm unclear where that goes how do you think about what actions you might need to take in 27 on ma whether it's further contract adjustments maybe just i'll leave it open-ended there but but interested to get sort of what that landscape might look like and if i can squeeze in the a loose second piece on on the aco front you know i heard the lead commentary we'd love to hear just sort of how you're approaching you know what to do in 27 on that front at the end of of reach thanks yeah yeah i'll i'll handle the the 27 commentary that you talked about and then i'll send it to ron for the aco uh aco part but um really really jack it's the same actions we've been taking right so it's contracting it's our burden of illness program um you know we'll see how the

final rate notice shakes out um but it's the same levers that we've been i would say executing on this year we will do more of that as we think about 27 i would say the two open components are you know what happens with payer bids um and so obviously we get a preview of what those bids look like before we enter into our contracting discussions. So that will be an important piece. And then overall, what do cost trends do? But I think from our perspective, we believe that we can continue to improve margins, you know, beyond 2026 through all of these levers that we've talked about today. And that's what we're focused on. So, and then, and Ron, on the ACO.

Yeah. Well, Jack, I think that the ACO new model is encouraging in a sense that it's a 10-year model which provides for a longer period of time gives you a basis to plan and and perhaps to make investments to to support the development of the model now we have encouraged uh from a policy point of view further clarity uh much greater even uh stretching out of the implementation of the program i think that at this point there's not a lot that we know but the main thing that we know is that it represents a continuing opportunity, and I think that the work that we've done so far in the current model will position us very well in terms of however the program unfolds, and so we're looking forward to being actively involved. As a matter of fact, I'll be in Washington next week. Dr. Oz is going to be at a meeting I'm at, and we'll continue to advocate positions to make that program effective for patients, for physicians, and for us.

Got it. Really helpful. Appreciate it, guys.

Thank you, and the next question comes from Jailendra Singhwitrus.

Thank you, and thanks for taking my questions. I want to follow up on that incremental inpatient admit cost you just were talking about for Q3. Were those claims tied to some specific pairs and geographies? Just trying to understand if your Q3 reserving of 7.4 versus 7.2 in Q3, and assumes Q4 reserving of 7.4 versus 7.2 in Q3 assumes those inpatient stays continue at a similar level or get worse. Just trying to understand if cushion built-in Q4 is enough.

Yeah, thanks, Jilinder. I guess a couple things. Number one, they weren't concentrated in specific markets is what I would say. And we did see utilization step up, not across the board, but in several of our markets, specifically in inpatient stays. And I would say September appears to be the highest of the quarter. And so it was more focused on the end of the quarter is where we saw that. And I understand your point. You're saying, you know, could these just be random acute events that don't reoccur? That's certainly possible. But, again, with limited claims visibility as we closed out the year, we just felt it was prudent to provide a solid foundation from which to jump off into 2026. And so we went ahead and moved that cost trend up to 7.4%. So again, limited claims visibility for us, but we felt it necessary to provide a good stepping off point.

And then my quick follow-up on your OPEX cost initiatives, which is now $35 million benefit in 2026. Do you guys see any additional opportunities in terms of streamlining costs and what area that could come from?

Yeah, I think it's all the areas that generated the $35 million. And certainly, we're not done looking, okay? Let's put it that way. And so, I think there are further opportunities for cost reduction. Some of that's going to require automation and AI and technology. So, I think they'll be harder to achieve, but it doesn't mean it's not there. And so, that's what we're focused on as we think about executing on 2026 and heading into 2027.

All right.

Thank you. And the next question comes from Michael Hub with Baird.

Thank you. I'm wondering, is there any update you've received on the 25 fee-for-service trend within ACO REACH? Is it still 8.5%? And then also just on trends more broadly across both REACH and MA, there's been some conversation about the MA rate notice, something that back-half trends are actually less deep. So if CMS were to include more back-half, 25 claims experience, it might actually drive the effective growth rate slightly lower than the advance notice but it sounds like your own back half trends have actually stepped higher versus the front half which would obviously go against that that thinking so i'm curious to hear your thoughts on this ongoing conversation yeah yeah for sure uh thanks michael i think the first half we've commented on is in the mid fives for us uh so in the in the uh ma population we certainly did see an acceleration of cost trends at least for Q3.

We'll have to see how Q4 plays out, but at least for Q3, we certainly saw that. The fee-for-service cost trend, the latest on that is 8.1%, so it came down a little bit. But what I would say is in the ACO program, it was also concentrated in the back half, and we have a lot more current data there from the government, is what I would say. And so those cost trends were tilted toward the back half as well, but they've come down from 8.5 to 8.1.

Got it. Thank you. And one more on the rate notice. I'm curious, after you've reviewed it yourself, I'm just wondering if there's anything you view as most notable with potential for CMS to improve. Again, there's conversation about another area about the treatment of skin subs and the risk model recalibration. By that, I mean, they adjusted the effective growth rate to exclude it, but it doesn't look like they did that for potentially for the coefficients aligned with those skin subs so now we have this strange situation potentially where it's distorting the risk model recalibration and driving this great headwind i'm curious if that's an area you've been looking at thinking about and just broader thoughts on areas of improvement into the the final rate notice thank you yeah certainly all of those items that you have mentioned in addition to what is the final kind of cost trend all of those items are top of mind for us.

I guess what I would say is, again, just broadly, ultimately, we're looking for rates that account for the cost trends that we've seen over the last several years, however that shakes out. That's ultimately what we're trying to achieve. I guess we'll have to see how all of these things that you mentioned play out. Hopefully, some of those get delayed or lengthened or spread over time to balance, I would say, the cost trend dynamics that we're dealing with. But ultimately, we'll have to see how this shakes out.

Thank you. So just as a reminder to all of the participants, so for us to be able to go through all of the questions on today's call, we kindly ask all the participants to limit themselves to only one question. And our next question goes to Ryan Langston with TD Cohen.

Hi, thanks. A few of the larger public plans have highlighted expected margin recovery in group MA specifically. I think the last disclosure of your mix was around 17 or 18 percent kind of midway through last year. I guess where does that percentage sit now and in 2026? And I guess how is that potential recovery reflected in the guidance? Thanks.

Yeah, thanks, Ryan. You know, it's a little early to figure out kind of where the membership is going to play out is what I would say, but I don't think that we're going to have two different of a mix heading into 2026 but you know obviously we really don't get final membership until towards the end of the first quarter and so we'll you know we'll kind of give an update at that point in time but right right now there's there's nothing that says our mix is going to be substantially different from that all right thanks thank you and the next question goes to match you with Needham & Co. Hey, thanks for the question.

Wanted to hit on quality. Nice to see the medical margin opportunities there. I think in 2025, you'd been targeting 25 million of opportunity tied to quality. How did you do on achieving that? And then for 2026, as we think about that opportunity doubling, could you maybe just give us a sense of what those increased incentives look like and pathway to achievement? Is that just greater stars improvement or any discrete strategies you're laying out to achieve that quality opportunity? Thanks.

Yeah, so a couple of things. You know, the quality, obviously the measures aren't done yet. You know, there's runout that has to happen, but I think we're in the ballpark or getting close to what we thought we would achieve for 2025. That's the first thing. The second piece, which you mention is, you know, there's an opportunity for us to, there's doubling of the potential for us to earn. And what I would say is broadly across our network in 2024, we were roughly at 4.2 stars. We made progress and improved that in 2025. Now the verdict's not all the way out because we have the runout that has to happen, but we're pretty confident that we will do better in 2025. And as we think about 2026, the opportunity is there. What we have included in our guide is similar performance to 2025. And so we haven't banked on that in the guide, but we're obviously shooting for a higher level of performance. And we have programs that are centered, as you can imagine, around driving that performance.

Thank you. And the next question comes from Stephen Baxter with Wells Fargo.

Yeah, hi. Thanks. Just wanted to make sure that I'm fully tracking the comments on the advance notice that you gave and why you think that your view of it is more in line with the effective growth rate. I think, you know, you're saying that you have, I guess, little to no exposure to unlinked chart review, which, you know, makes perfect sense given the model that you operate.

But in terms of the other risk model changes, including the normalization impact, that 330 basis points item in the the cms announcement are you saying that you just don't have exposure to that or you're saying that other things like coding trend and clinical efforts offset that i'm just trying to get to what an apple apple's comparison is is for you guys yeah yeah good good clarification i would say yes we are exposed to that and generally um we've run the math and we're we're very close to what is outlined in the rate notice what we are saying is is that we've um shown the ability over the last several years to offset the implementation of V28. And recall, V28 was roughly three to three and a half percent per year. And so, we feel pretty confident that we can do that again in 2027. And so, that's what, you know, that was the comment that was made is we have a way to offset that. And so, generally, we're viewing it as the effective growth rate is really the number.

Yeah, I would just add that what's been driving has really been the implementation of our clinical pathways, and particularly with our congestive heart failure, we ended the year with about 90% of the platform well implemented in that program. So we think we're crossing over with a pretty good run rate, and we think there's still a lot more prevalence in the communities for us to help patients get diagnosed and get on the right kind of therapy to help better manage that condition. And we also will be implementing additional clinical pathways, which we talked about, that we think would be important contributors over time. And I think that one of the things I would say also is that we recognize that we need to focus on 2027 in terms of taking a step up in order to address this. So we're not saying that what we're doing we think is perfectly adequate. it, we think it's a really, really solid foundation, and we're going to be doing more to make certain as best we can that we can get to where we need to.

Got it. And then my actual more tangible question, just on the medical margin bridge that you guys gave us in the slides, the $127 million for the payer contract, is there any rough sense you can give on how much of that is percent of premium changes versus having less Part D risk? I'd love to just get a better sense of, you know, what inning you feel like you're in on this percentage of premium effort and whether you kind of characterize the success you're having as being, you know, relatively broad based or maybe having more success with a subset of payers and maybe there's more opportunity in front of you.

Yeah, I would say the majority of that is either percent of premium or relief from the payers, specific payers, stars issues that they've had. And that is contracted and done. So that's locked-in value, is what I would say, as we think about the 2026 P&L.

Thank you. And the next question comes from George Hill with Deutsche Bank.

Hi, this is Liz on for George. I just have one question on the special need plans. Could you help frame the current exposure to the special need plans versus the traditional MA membership and whether the mixed shift towards a special needs plan means a structurally higher margin opportunity over time?

Yeah, I don't – yeah, if I just look at our special needs plans, it's roughly 7 percent, roughly for us, right around 7 percent. And I don't think we have enough information right now with our membership to determine if there's been a big mixed shift, but more to come on that one.

Thank you. And the next question comes from Jason, Jason, Justin Lake with Wolf Research.

Thanks. Appreciate the time. A couple of follow ups for you guys and stuff you've already talked about. First, on the on the membership exits, right, and some of the recontracting you've done there. the is it fair to think that you kind of walked away from the contracts and the part and the the plans that you think are not good partners and the kind of go forward improvement here will be execution and hopefully you know rates that reflect cost trends but do you still feel like there's more to come on that side and also you know it was there any partners that stood out there? Is it concentrated in one or two plans that you walked away from, or are you seeing that more broad-based?

Yeah, Justin, I guess what I would say is it's probably payer and market-specific. So, it's not specific to any one payer. I think, as you know, economics are different across payers and markets. And so, I wouldn't single any payer out to say they were specifically an issue. And so it's broad-based. And ultimately, as we think about it going forward, I think these are members that we can ultimately get to a contract sometime in the future. But obviously, we're in challenging macroeconomic times. And we just couldn't get to a deal this year. So it doesn't mean we can't get to a deal ever. It just means the economics and the risk wasn't right for us at this point in time. And that's the same lens that we'll have as we, you know, renew contracts for 2027.

Yeah, I think the point I would make, Justin, is that we've been pretty clear about the value that we create and that if we're not going to be paid for it, then we will not be delivering that value. And we'll see what happens next year as they realize that what we were telling them was really an important contributor to their success. So we're hopeful, but we're also firm about it has to be the right agreement for us and for our physician partners.

Perfect. And then just last follow up on the on trend. It would be I think this question has been out there for a while. But CMS went on there on their call and said, you know, we think trends five and a half percent. ACO reaches, you know, been pushing eight to nine the last couple of years. have you been able to you know you sit in a unique position kind of playing uh in a significant way in both have you been able to sit down and kind of bridge that gap in terms of you know i know skin substitutes is a big part of it but beyond that do you think there's 300 basis points of difference between acl reach and medicare advantage or do you think there are a couple of pieces that you know the industry can kind of bring down the dc and sit down with cms and say here's what you're missing.

Yeah, I guess what I'd say, Justin, is I think the industry and we are aligned that there seems to be a disconnect between the ultimate rate at the bottom line that's getting paid and the cost trends that everybody, including fee-for-service, has seen over the last several years. So, you know, there's no, I think there's no answer here that bridges that gap is what i would say um and i think that's why every everybody's advocating for you know kind of a revisit of what's what the the initial rate notice is thanks the next question goes to craig jones with bank of america hey thanks for the question um i want to follow up on the on the chart review um comment you made so do you say you're in line as in you'll be in line with the one and a half percent or you think it'll be like closer to zero percent

And then as you think about how that's spread among your payer partners, is it, you know, a pretty tight cluster or is some potentially going to have like a 5% impact and some will have a 0% impact? Thank you.

Yeah, you know, I think what we're saying is the removal of selective diagnosis is minimal for us just given our model. Because we're, you know, we're highly aligned with the primary care physician and, you know, really we're seeing those members in the office. And so, for us, there's not a lot of unlinked conditions, given how our model is designed and our proximity to the primary care physician. So, I'd say that's just broad across everywhere. The Part C risk model changes, that obviously would be different by market.

Okay, got it.

Thank you. And our last question goes to Daniel Crusoe with CT.

Hey, this is Luis Sanford. Daniel, I just have a quick cleanup question. I know you're intentionally slowing down market growth this year, but that still includes $15 million of new geography entry expenses. Can you remind us where exactly that is allocated to?

Yeah, that's really capital commitments from prior growth. There's some of that that drags into the following years, what I would say. And there was a little bit of growth this year, and obviously there's some other groups that we're talking to, but not really getting into that right now.

Yep, thanks.

And that does conclude the Q&A portion of today's call. So I will hand it back over to you, Ron Williams, for any final comments.

Yes, thank you. I would like to close by really expressing a deep appreciation and a huge thank you to our physician partners whose commitment to quality care to their patients is really fundamental to our long-term success. I also want to thank all of the employees of Agilon who have really been focused on this transformation that we've gone through this year, positioning us for the kind of success that we've outlined in our guidance. So, and thank you for joining the call. We appreciate your questions and the opportunity to engage with you. Have a good day.