Good afternoon, and welcome to Alignment Healthcare Third Quarter 2021 Earnings Conference Call and Webcast. All participants are in a listen-only mode. Please note, this event is being recorded. Leading today’s call are John Kao, Founder and CEO; and Thomas Freeman, Chief Financial Officer. Before we begin, we would like to remind you that certain statements made during this call will be forward-looking statements as defined by the Private Securities Litigation Reform Act. These forward-looking statements are subject to various risks and uncertainties and reflect our current expectation based on our beliefs, assumptions and information currently available to us. Although we believe this expectation are reasonable, we undertake no obligation to revise any statements to reflect changes that occur after this call. Description of some factors that could cause actual result to differ materially from these forward-looking statements are discussed in more detail in our filings with the SEC, including the Risk Factors section of prospectus for our initial public offering filed with the SEC on March 29, 2021, and our Form 10-Q for the quarter ended September 30, 2021. In addition, please note that the company will be discussing certain non-GAAP financial measures they believe are important in evaluating performance. The relationship between non-GAAP measures to the most comparable GAAP measure and reconciliation of historical non-GAAP financial measures can be found in the press release that is posted on the company’s website and our Form 10-Q for the quarter ended September 30, 2021.

Hello, and welcome, everyone, to our third-quarter 2021 earnings conference call. We’re pleased to be reporting another quarter in which we significantly exceeded the high end of our guidance across each of our four key KPIs and show further dedication to our culture of continuous improvement. Our health plan membership ended at 86,000 members, an increase of 29% compared to last year. Total revenue of $293 million grew 18% from last year, which was led by our health plan premium revenue growth of 24% year-over-year. Adjusted gross profit came in at $42 million with a strong MBR performance of 85.7%, and adjusted EBITDA was a loss of $6 million. Thomas will share more regarding our financial performance for the quarter, but I first want to spend some time today talking about how we are able to consistently achieve our objectives of high quality and low cost for our members. As I’ve said in the past, accessing and leveraging data across our enterprise is foundational to how we run and scale our business. Our payvider operating model is powered by our proprietary AVA platform, our care or clinical teams, and our business intelligence tools. AVA gives us access to real-time patient insights and enables us to take action to ensure the best outcomes for our members. I want to share three specific examples of how we continue to improve AVA and how we rely on it to achieve our outcomes. First, we continue to improve our stratification model. One example is our AVA inpatient risk admission module, which is an AI-based model, leveraging thousands of data points about each member to identify the population that is at greatest risk of hospitalization. We are able to accurately predict the highest risk 10% of our members who will represent 50% of inpatient admissions over the next 30 days. This 50% recall rate has increased from 33% over the past several years due to continuous improvements we’ve made using machine learning. Second, our Care Anywhere clinical teams put AVA’s workflow tool to use to manage this high-risk population, specifically via our recently implemented patient panel management module. This application simplifies the complexity of our clinical team’s daily workload by helping to optimize the deployment of our clinicians to the right individuals at the right time, effectively systematizing our decades of experience managing risk. This helps us replicate and scale our quality standards as we grow into new markets. Third, we continue to invest in the business intelligence modules of AVA. These tools provide management and our provider partners with the data visibility and transparency to track hospitalizations and other clinical and operational performance metrics on a daily basis without data latency. This allows us to intervene in real-time and gives us a high degree of confidence to understand our financial cost trajectories throughout any given month. Together, the AVA platform and the Care Anywhere care model combine to deliver holistic care, allowing us to run approximately 160 inpatient admissions per 1,000 across our at-risk book of business for nearly five years in a row now. This represents a 35% to 40% improvement versus Medicare fee-for-service. Additionally, our most recent NPS of 82 for our Care Anywhere population is further tangible evidence of the superior quality and satisfaction we’re able to achieve while lowering costs to the system. While we’re just a couple of weeks into the AEP, we remain growth-oriented and focused on delivering consistent and sustainable products in the marketplace year-after-year to drive market share gains over time. Our emphasis on tailoring products to meet the personalized needs of different ethnicities, acuities, and income levels continues to resonate. We have also recently announced several leading health system partnerships to support the launch of our PPO products, including Cedars-Sinai, Scripps Health, and Hoag Memorial. As we head into AEP, we’re proud to note that the majority of our products will feature increased benefits in 2022. We are offering $0 monthly premium products in 32 out of our 38 markets. We continue to enhance our customized product features and supplemental benefit offerings such as our partnership with Rite Aid, featuring a $75 monthly over-the-counter allowance that can be used at participating Rite Aid locations in select markets. Our $30 debit benefit filed as part of CMS’ value-based innovation design model or VBID, where consumers will get a Visa access black card. Other enhancements include improved acupuncture and chiropractic benefits, increased monthly OTC benefits, and an expanded grocery network to include the Kroger family of stores. Further, CMS recently announced the 2022 plan year Star Ratings. We are pleased to report that we achieved four out of five stars this past year. Our HEDIS scores, which are an important measure of plan performance on care quality, service, medication adherence, and rating of the health plan, all come in at five stars, a testament to our clinical model and concierge-like services we provide our seniors. While this is our fifth year in a row of achieving four or 4.5 stars overall, we are doubling down on our efforts with our provider partners to continue to strive for even greater outcomes in the future. Before turning it over to Thomas, I’ll reiterate how pleased I am to report another strong quarter of operational results. We believe our ability to deliver high-quality care and manage MBR by leveraging and acting upon data is the key differentiator for alignment. Over the remainder of AEP, we will stay focused on growing our membership in a reliable fashion that helps fuel our long-term success. I also want to sincerely thank the alignment team for their hard work and commitment to putting our seniors first. Every day our team of more than 850 associates builds trusted relationships and is committed to serving our seniors through care delivery, concierge services, and innovative products. I thank you for your continued interest in Alignment’s journey. I look forward to updating you in the new year. Now, I’ll turn the call over to Thomas to cover the third-quarter financial results as well as our outlook for the remainder of the year.

Thanks, John, and welcome, everyone, to our third-quarter earnings call. As John mentioned, the third quarter was strong across the board, and we exceeded our guidance ranges across all four key KPIs. Our health plan membership of 86,000 increased 29% compared to a year ago as we continue to see strong momentum across our markets. Total revenue was $293 million in the quarter, increasing 18% compared to a year ago. Notably, our company-wide performance was led by our health plan premium revenue of $279 million, which brings our year-to-date health plan premium revenue growth to 28% for the first nine months of 2021. This outperformance reflects the continued growth of our health plan membership in addition to sustained revenue PMPM performance based on last year’s documentation efforts. The strength of our operating model was further highlighted in our adjusted gross profit and MBR this quarter. Adjusted gross profit was $42 million, which represented an 85.7% medical benefit ratio. From an inpatient utilization standpoint, we did see a modest increase in COVID utilization in August and September related to the Delta variant. However, non-COVID utilization declined and overall inpatient utilization for the quarter was still 4% to 5% below a normalized 3Q baseline, inclusive of both COVID and non-COVID hospitalizations. In fact, we are pleased to report that our COVID hospitalization rate ran approximately 30% lower than the third quarter of 2020 as we continue to see a more stabilized operating environment take shape. We believe this performance is directly related to our overall vaccination rates across our seniors, thanks to the successful efforts of our internal clinical teams and our external provider partners. Beyond the continued stabilization of utilization this quarter, we also experienced approximately $3 million of favorability in our medical expense related to 2020 dates of service as part of normal course operations. We’re particularly pleased with this adjusted gross profit and MBR performance given that our new members who come on board with lower levels of profitability in their first year of enrollment continue to represent a larger percentage of our total membership as the year progresses. With our third quarter gross profit success in mind, we plan to redeploy some of our outperformance towards driving 2022 and 2023 growth, given our confidence in the unit economics of our flywheel. Our SG&A in the third quarter was $77 million. Excluding equity-based compensation expense of $28 million, our SG&A in the third quarter was $49 million, which increased 27% year-over-year. Note that there was some timing favorability in our third-quarter SG&A related to when we incur various expenses related to AEP and our new market launches, and we anticipate that those expenses will still be incurred in the fourth quarter. All of these factors led to an adjusted EBITDA loss of only $6 million in the quarter, which was well ahead of expectations. As I wrap up our discussion of our third-quarter performance, it’s worth noting that the results we shared are inclusive of our DCE performance in the quarter. While it is still too early to set future expectations on DCE unit economics, we did receive another couple of months of CMS claims run-out data, which has improved our visibility to second quarter dates of service. We’re happy to report that second quarter performance appears to be modestly better than what we shared on our last earnings call. While our third quarter DCE MLR continues to trend greater than 100%, we are pleased with some of the operational trends that we are beginning to see. We believe that with another couple of quarters of outcomes data, we will be able to share more definitive views on the long-term profitability potential of the DCE program. From a capital position, we ended the quarter with $347 million in net cash. Given the strength of our balance sheet, we are continuing to focus our efforts on accretive ways to deploy capital, including M&A in both existing markets as well as new markets. I’ll conclude my remarks today by providing some color on our latest guidance. For the fourth quarter of 2021, we expect health plan membership to be between 86,100 and 86,300 members. Revenue to be in the range of $265 million to $270 million. Adjusted gross profit to be between $24 million and $28 million. And adjusted EBITDA to be in the range of a loss of $30 million to a loss of $25 million. For the full year 2021 outlook, we are raising our health plan membership to be between 86,100 and 86,300 members, up from 85,000 to 85,800 members. Our revenue to be in the range of $1.135 billion to $1.140 billion, up from $1.105 billion to $1.120 billion. Our adjusted gross profit to be between $126 million and $130 million, up from $117 million to $123 million. And our adjusted EBITDA to be in the range of a loss of $54 million to $49 million, up from a loss of $55 million to $50 million. With our highly predictable recurring revenue model, we believe we’re in a strong position in terms of both our membership and revenue PMPM outlook for the remainder of the year. We expect our fourth quarter revenue PMPM to decline modestly from our third quarter PMPM, which reflects the continued increase of new members representing a greater percentage of our total population as the year progresses. Our gross profit forecast reflects continued cautiousness around fourth quarter utilization. We continue to closely monitor COVID trends and the potential impact of the flu this winter. To combat this possibility, our clinical and operational teams are continuing to support our seniors’ needs by engaging our communities proactively with our annual flu shot campaign in addition to supporting ongoing COVID booster shots for our seniors. For adjusted EBITDA, we expect to see a reversal of a few million in year-to-date SG&A favorability, while we also look for accretive ways to invest our year-to-date gross profit outperformance toward our 2022 and 2023 growth efforts. We continue to believe in the importance of making the right foundational investments to date to ensure sustainable growth over the long term. Lastly, while it’s too early to make any specific comments about 2022, we look forward to sharing more about our overall 2022 outlook next year after AEP concludes, which is when we’ll gain further visibility to our new membership across our portfolio markets and provider partners. To wrap up, we’re very pleased to report our third strong quarter in a row, given our recent public market debut, and we believe we’re in a great position to continue that progress heading into 2022.

Your first question comes from the line of Ryan Daniels with William Blair. Please go ahead.

Yes, guys, congrats on the strong quarter and year-to-date performance, and thanks for taking my questions. Thomas, maybe one for you. I think you mentioned that hospital utilization is still running 3% to 5% below pre-COVID trends. And I’m curious, one, can you confirm that? And then number two, what’s your consideration for Q4 when you build your guidance in regards to that? Do you think there’s some pent-up demand that will start to spill forward in regards to utilization with COVID tapering back a bit in some states?

Yes, great to hear from you, Ryan. I can take that one. So in terms of the third quarter, you’re spot on, we did see about 4% to 5% lower total inpatient utilization as compared to our baseline for the third quarter in the past. And obviously, there was an offset where we saw some of that increase on the COVID side related to the Delta variant. And then we saw a decline in the non-COVID inpatient utilization. And so as we think about the fourth quarter, what we’re really being very cognizant of is the potential for the Delta variant to continue to be present, such as it was in both August and September as well as a possibility for the return of flu season. And as you know, the fourth quarter, in general for our business model, is typically a higher quarter MBR as compared to Q2 and Q3. So stepping back, I think what we would say is, we feel obviously really pleased with the third quarter results and the overall year-to-date performance in terms of our exceeding the high end of our gross profit range and analyst expectations. And you saw us raise our full year 2021 metrics accordingly, both in terms of our gross profit and our implied MBR on full year 2021. So we really feel very strongly about the position we’re in for our full year outlook. But at the same time, I think you’re consistently hoping to see us be prudent with how we think about our forecast and our guidance on a quarterly basis.

Okay. That’s helpful color. And then as my follow-up, I’ll ask one for John. John, can you just discuss your expectations for some of the newer products like the virtual-first AVA or el NICO? And maybe as part of that, love to hear what type of unique benefits you can offer with some of these demographic targeted plans that you think can garner market share, both in the near and longer term?

Yes, Ryan, good to hear from you, as always. Now, we’re excited about it. We’re excited about the PPO products that we announced with Cedars-Sinai and Scripps Health and Hoag Memorial. We’re excited about the el NICO product. Last year, we introduced the Harmony product that added a couple of thousand members. It’s too early to say thus far in terms of AEP for 2022. I think we’re a couple of weeks in. The noise level is positive. And sometimes, and we’ve experienced this in the past, sometimes the benefits are so good there’s a little bit of a “too good to be true” dynamic. But I feel good about it. Meaning the members think it’s too good to be true. And so I think the more we get into the marketplace, the more consistent our focus on consistency of the product design will catch fire. I’m confident of that.

All right. Thank you. I’ll hop back in queue. Congrats again.

Thanks, Ryan.

Your next question comes from the line of Ricky Goldwasser with Morgan Stanley. Please go ahead.

Hey guys. This is Michael Ha on for Ricky. Congrats on the quarter. Just a quick question to start. MLR was pretty great in Q3. Just curious if you may have mentioned an updated MLR outlook for the year. I think previously you were at high 80s. So just wanted to get that.

Yes, Michael, this is Thomas here. So in terms of our overall MBR outlook for 2021, we don’t explicitly guide on that metric. But if you look at sort of our previous guidance shared in August on both our gross profit and revenue outlook, you would have backed into something around an 89% consolidated MBR for full year 2021, inclusive of the DCE performance, which, as we shared last quarter, was a bit of a headwind on that consolidated MBR. So if you were to compare that approach to our more recent guidance we released today and look at our high-end gross profit versus high-end revenue, you would get about an 88.6% MBR for the full year, again inclusive of that DCE performance. So we’re continuing to make positive strides on the full year outlook, and that really is a reflection of that third-quarter outperformance you just alluded to.

Great. And just one more, if I may. So taking a step back, just as a Medicare Advantage plan, you’ve really grown without the use of marketing tactics. As you begin to kind of invest in building out the brand with sales and marketing spend, how should we think about SG&A developing next year and in future years? And even with this open enrollment period so far, has your marketing strategy changed at all versus prior years?

Yes. Michael, it’s John. The answer is, we’re really proud of Q3. But what you don’t see is all the work that’s not yet reflected in the financials. And that relates to putting in workflow processes, standardization of metrics, all of which are important as we sync up and grow into new markets with respect to your branding question. In other words, we need all the operational kind of infrastructure to be firing on all cylinders. I think it’s fair to say our clinical and our provider engagement capabilities are doing pretty good right now. And so now we need this operational piece to catch up. We’re making a lot of strides. And we’re positioning all of this from a branding strategy heading into our 2023 AEP. I think that’s pretty consistent with what we’ve communicated. And so I think once all that is built up, I’m going to be really excited. I was talking to Dawn Maroney, the leader on the team that runs our marketing, as well she’s also CEO of the Plans. What I said was this coming year in 2022 is really where – my expectation is that alignment starts becoming more and more of a household name, a household brand. And I think you can see that in 2022.

Thank you guys.

Thank you. Your next question comes from the line of John Ransom with Raymond James. Please go ahead.

Hey, good afternoon. Thanks for taking my question. So a couple for me. If I look at your PMPM, it jumped around. It was 1,071 in the first quarter, 1,216 in the second quarter and then 1,137 in the third quarter. Could you help us with some of the dynamics behind how that moves around sort of quarter-by-quarter?

Yes. Happy to, John. So on that second quarter jump in particular, I think maybe that’s where I would start. There are a couple of things happening in the second quarter that I think you would want to back out in terms of normalizing a 2Q versus 3Q revenue PMPM comparison. And so as a reminder, the second quarter, we introduced DCE for the first time. And so you saw a pickup or a spike in the revenue PMPM as compared to the first quarter when the DCE program wasn’t in existence. And then in terms of the second quarter itself, we also picked up about $13 million at that time related to first quarter and 2020 dates of service in terms of our updated view on our revenue PMPMs for 2021 final suite. So you saw a bit of a catch-up happen in the second quarter. The step down sequentially to the third quarter is, I think, just a reflection of a more normalized quarter.

So, if we think about Q4, we should kind of think about 3Q being a good run rate for Q4?

Yes. I think that’s the right way to look at it, with the caveat that what we typically see, if you took out some of that noise between the quarters that I was just describing, what you would typically see with our business is higher revenue PMPMs in the first quarter and then sequentially a bit lower in the second, third and fourth over the course of the year, which reflects the mix of members changing in terms of our percentage of new members versus our returning members and then the impact that involuntary disenrollment has over the course of the year. So typically, the fourth quarter would be lower revenue PMPM than the third quarter, and that is reflected in our updated guidance today. But otherwise, I think you’re thinking about it the right way in terms of 3Q being a good baseline to jump off of for Q4.

And my second question is, you’re kind of new in your rhythm of being a public company. Do you plan to provide any update in your AEP performance before you report Q4, which will probably be sometime in March?

I think we’ll see what we do in the first quarter. What typically will happen is CMS will release some preliminary enrollment data for January 1 effective membership, which I believe typically happens around the third week of January. If I’m recalling correctly. So I think we may speak to that at that point in time just to make sure there’s no miscommunication between what we’re seeing on our side and what CMS puts out for the market. More broadly speaking, we’ll speak to our overall 2022 outlook on that fourth quarter earnings call.

And I know you kind of made some qualitative comments, but any trends you’re seeing kind of this early that would persuade you one way or the other about how you’re trying?

Yes, AEP, it’s just a bit early, I think, to provide any type of specific commentary. So on the sales side, we’re only about two weeks in at this point. AEP runs through the first part of December. And then in terms of disenrollment, that is the piece that always is a little bit more lag compared to the sales visibility we have on a real-time basis. So, I think at this point, we’re going to save that commentary for some time in 2022, but we’ll keep you posted as it comes together.

Thank you so much.

Yes, great to hear from you.

Thank you. Your next question comes from the line of Jeff Garro with Piper Sandler. Please go ahead.

Yes. Good afternoon. Thanks for taking the questions. I want to ask about Star Ratings. And so congrats again on achieving a four-star level. I just want to ask what the plan is from here to achieve 4.5 or five stars, and certainly recognize that maybe a headwind for alignment for money as well as the CAHPS survey and how that influences the overall score. And so you guys are telling us that you have a great NPS at 82 and reflects how your members see you. So just maybe more comments on what your internal member feedback is from a broader base that just isn’t getting reflected in the CMS CAHPS surveys and the Star results to get to the highest levels?

Hey Jeff, it’s John. Great question. With respect to CAHPS, you’re absolutely right. We’re not happy with it, but we also understand it. Meaning it’s similar to risk adjustment headwinds that we experienced in 2021. When you have dates of service in 2020, you have the same kind of headwind regarding CAHPS because there’s a two-year lag as opposed to a one-year lag. The ratings that we just got and the CAHPS areas that we just saw reflect 2020 dates of service. We’re so reliant upon our IPA partners and our medical group partners. They had a rough go of it in the early part of 2020 as well as the fourth quarter of 2020 with respect to COVID. When practices weren’t open, it created a lot of care coordination kinds of issues. It’s something we understand. But I feel very confident we’re going to be able to solve it. It’s not different than anything else that we’ve had to lean into with our IPA partners, whether it be the early years of stars, where really the focus was on CDIS and medication adherence. And all of that were five stars and continue to be five stars. And risk adjustment, proper, accurate coding, working with our Care Anywhere model. I mean, just the level of engagement is always very high, and we’re going to solve this issue. Even in 2021 dates of service, you’re starting to see improvements on more of a normalized steady state with respect to access to providers. We’ve got some very specific tactics that we’re deploying that, again, give me a high degree of confidence we’re going to move that CAHPS score up. So, we’re very focused on it. I’m not going to be happy until we have a scalable five-star MA plan using this model. So yes, it’s clearly an area of emphasis.

Great. I appreciate all those comments. I’ll follow up with one on the underlying long-term MLR trends. I know there are several different factors here. But maybe if you could just address the prospect of more normal utilization in 2022 and how that combines with the pricing that you guys have rolled out for your 2022 plans as well as the investments that you’re pursuing in your internal teams to produce better outcomes at lower costs.

Yes, absolutely. In terms of how we think about 2022, I would say on the first part of your question related to pricing our bids and how that relates to the cost trend we might think about for next year and how that rolls into overall MBR and profitability. We approach this sort of two ways. One is certainly the way I think you’ve heard from many of the folks in our space in terms of taking a very kind of quantitative and actuarially oriented view toward how we think about the 2022 trend. We, like many others, looked at our pre-COVID experience as a way to try to extrapolate. But that means when we look back to 2019, we had about 50,000 members in California. We now have about 83,000 today. Given that pace of growth and the fact that the underlying mix of members is changing very quickly year-to-year in terms of members by market and by provider type, we like to supplement the more actuarial-based approaches with a much more operational- and clinically oriented view of how we think the next year might shape up. What I mean by that is we’re working with our clinical partners both externally and internally with our care delivery teams, getting actual feet on the street in these local markets to assess what we think the overall trend will be year-over-year by evaluating it on a bottoms-up build basis. We’re looking at the category of spend by category of spend, utilization metrics, unit cost metrics to have a really informed view as to what we think the overall trend might look like in the 2022 year. So those are the two approaches we take. And all that is to say, I think we feel really good about how we approached our bids in terms of growth versus profitability. As we think about that dynamic more holistically and how we think about the investments in 2022, we might be contemplating for future growth. I think what we said in the past is that we are absolutely a growth company. We’re going to continue to make those important growth-oriented investments to ensure we have the right foundation to achieve that sustainable growth over the long term. But at the same time, I don’t think you’re going to see us go crazy. I think we are very focused on not growth at all costs and trying to really find a nice balance between the two. I think that’s some feedback in terms of how we’ll approach the overall 2022 outlook when we share more early next year.

Excellent. Thanks for taking the questions.

Thank you. Your next question comes from the line of Gary Taylor with Cowen. Please go ahead.

Hey, good afternoon. I was wondering if you could disclose parent cash. I know total cash was $0.5 billion, but do you have parent cash for us?

Yes, Gary, it was right about $400 million or so.

And then, John, I think you made a comment about M&A, which caught my attention. I just wondered what form that might take; if you would in the future consider other health plans or other technology or medical groups? Like what should we think about if that was in the realm?

Hey Gary, good to hear from you. Yes, I think it’s kind of an all-of-the-above is the short answer. I think the priority is kind of accelerating what we’ve told you in terms of getting beachheads established to get the plan set up and accelerate the growth by getting these beachheads set up. We’ve spent a lot of time looking at different health plan assets throughout the country. We have been very selective about that. In the context of building the networks and all these beachheads that we’re setting up, we are meeting a variety of provider entities, provider organizations, integrated delivery networks that have provider organizations. I think lots of creative and strategic kinds of deals are going to result from that. I’m actually very excited about that. You’ve always heard me say, we need to have at least one product in the marketplace that we can sell directly to the consumer so that we can control our own growth dynamic, have that relationship with the customer. It’s not to say we can’t have provider organizations or have joint ventures with provider organizations in a marketplace and be nonexclusive, so to speak. We’re looking at all of it. From a priority perspective, it’s looking at plans and overlaying our whole model on AVA on the care delivery and a lot of the kind of synergy of what we can bring to the table is what’s being discussed with a whole variety of people. I hope that helps?

Thanks. Just one more. Yes, it does. Thank you. Let just one more, kind of going back to what John was asking about. I follow Thomas’ comment about the per-member per-month revenue and obviously saw the adjustments in Q2 and understand the dynamic with new enrollees at lower risk scores and then voluntary disenrollment, etc. But you’re actually guiding for total revenue to be down $25 million sequentially with health plan enrollment up just a touch. I don’t know what you’re assuming on DCE enrollment. So it isn’t just a mix effect on per-member per-month. You actually are suggesting revenues down sequentially. So just trying to understand that better; if there are any other out-of-period true-ups that help the revenue in the third quarter?

No, not in a meaningful way. So the third quarter, I think, I mean, literally maybe $1 million of out-of-period revenue, but nothing that was significant. So the third quarter versus fourth quarter is really, I think, just more a reflection of that revenue PMPM and anticipated trend. As you saw on membership, we do anticipate it to grow slightly in the fourth quarter, but this is the time of year where all eyes are focused on that AEP period. You really don’t see a lot of membership growth from the September to the December membership before those new AEP sales take effect. So it’s really just more on that revenue PMPM dynamic that we mentioned earlier. I think we feel really good about hitting those targets we laid out.

If I could ask one more. Thomas, I think you mentioned $3 million of favorable medical expense related to 2020 dates of service. When I look at the prior year development from the queue, it looks like it was only up $1 million sequentially. So maybe we’re not talking the same language. I just wanted to understand your comment.

Yes, absolutely. I think the $1 million change, I think it was $1.3 million or $1.40 million, was with IBNR. There was another approximately $1.5 million related to our accruals around our Part D program with respect to some of the rebate assumptions around prior spend. So those two things combined get to that $2.8 million, approximately $3 million we highlighted earlier. You’re spot on though that our $1 million of IBNR was a component of it. Overall, the IBNR change year-to-date for 2020 dates of service and prior is just about zero. We basically are spot on for the full year compared to what we booked as of year-end 2020.

Okay, thank you very much.

Yes, thank you.

Thank you. And your next question comes from the line of Kevin Fischbeck with Bank of America. Please go ahead.

This is actually Adam on for Kevin. Thanks for taking the question. I’m also kind of looking at the implied Q4 bridge and I guess implied MLR guidance. It looks like it’s actually, if I’m doing all this bridging math right, higher than what was implied on the Q4 MLR from last quarter’s guidance. I’m just wondering if MLR is coming in better now, what makes you feel worse about Q4?

Yes, Adam, so I don’t think we feel worse about it in terms of our confidence in our outlook. I think it’s a reflection of what I was speaking to earlier, which is just continued cautiousness around the Delta variant and then just flu season, more generally speaking, given that it is the fourth quarter of the year. I think the other thing that I would probably highlight in terms of comparing that third quarter versus fourth quarter number sequentially is the fourth quarter is always the time of year where we look to continue to invest a lot in some of our fourth quarter activities such as health risk assessments and Star-related activities, which obviously are for the benefit of future revenue years. A lot of that happens also in the fourth quarter of the year, and we’re continuing to anticipate some of that year-to-date gross profit will be reinvested in the fourth quarter accordingly. Lastly, I’d highlight is, of course, we are launching our new markets right now, and we are bringing onboard some of our new hires to support that new growth and those folks who are on the clinical team. There are salaries and such that hit our medical expense. That ramping up is also reflected in those fourth quarter numbers we shared.

Right. But I’m comparing it to your previous expectation, but I guess the point about reinvesting the outperformance is new. That makes sense. And then in terms of – so it sounds like the health plan membership number doesn’t reflect direct contracting, but the premiums do. Just wondering if you could give us more – is it in the 10-Q this data? Or do you not expect to give us MLR for direct contracting and premiums and membership?

Yes. So I’m happy to provide some color. We haven’t broken it out entirely in the 10-Q itself. The revenue is included in the footnote. If you were to back into it, you would see that the revenue PMPM of the DCE members is closer to $750 to $800 PMPM. When we think about our revenue PMPM, we do evaluate it between MA and non-MA. In terms of the MLR we shared this quarter that we did see the DCE trends continue to run something north of 100%. I think that is much a reflection of what we don’t know as what we do now. What I mean by that is we’re reliant upon the CMS claims data we get on a lagged basis. Sitting here today, I think we have strong visibility now to the second quarter, which while it was still not where we want it to be, it improved from a close to $1 million loss this what we originally shared. They’re now trending closer to breakeven. It’s still a slight loss, but trending closer to breakeven. We’ll be able to share more with respect to the third quarter in future quarters as we get that claims visibility from CMS. I think it’s probably too early for us to declare victory in terms of the ultimate profitability potential of that program. But we like some of the operational trends we’re beginning to see, and we’re very cognizant of the trade-off between potentially a lower gross margin business. But also a significantly less SG&A line of business. We think net-net that could still produce a viable business that we’re excited about. So it’s still a bit of early days, I’d say. But in general, we’re pleased with some of the trends we’re starting to see.

All right. And then last one for me. You might have already covered this last quarter, but I appreciate that you don’t have insight into the AEP yet, but I’d imagine that for the most part if you want to add DCE partners for next year, you kind of already need to be late into the process on that. So is that part of the plan? Or I think previously you might have said that you’re kind of sticking with your current group?

Yes. I think for 2022, what we’ve said so far is we’re really focused on proving out that model and creating proof points and case studies, similar to what we’ve done with our MA book of business before we really invest in a lot to grow that further. For 2022, I think you’re spot on that we’re going to continue to work with our existing provider partners and the panels of members associated with our current DCE program. I think in terms of our investment in future growth, that would really probably more be a 2023 growth opportunity as we look to potentially add other providers into the mix to expand the business accordingly.

Alright, fair enough. Thank you.

Thank you. Your next question comes from the line of Kevin Caliendo with UBS. Please go ahead.

Hi, thanks for taking my call. So I’m interested, and you made comments about having your population vaccinated and fully vaccinated which was great news. I’m just wondering if you’re seeing anything unusual with the experience post-vaccination now it’s been several months mostly. I guess my question really is, do you expect utilization to ever sort of get back to normal? You talked about flu season coming up, but a lot of your patients are still wearing masks. We’re still largely seeing Medicare utilization below baseline from almost all the other larger players in the marketplace. I’m wondering if there isn’t really going to be a catch-up, that maybe the baseline is just sort of lower now and maybe improves a little bit, but 2019 doesn’t seem like something that’s going to happen anytime soon. Is that fair? Or how do you guys think about that? Or what are you seeing maybe?

Yes. You want to take that, Thomas or? Yes, yes. Hey Kevin, yes, I mean I think COVID is not going to go away for a while. I mean, it’s going to be something we live with. I think it’s going to be controlled. Our population is getting boosters, and we’re certainly advocating that. Like the flu, every year you get flu vaccines. Every year we see some trend increases in November, December, January, sometimes into February. That seasonality is baked into our Q4 numbers. Last year we were doing great in October. And all of a sudden, you got a spike in November, December with COVID. I don’t necessarily expect that, actually, but you just don’t know. I think it’s better to be prudent now and just embed that into our thinking in Q4 than to regret it later, so to speak. I just don’t think it’s going away. Part of it also is just kind of geographical in nature. It’s still pretty stringent here in California. That’s obviously where the bulk of the membership is. People aren’t wearing masks. But our seniors are starting to get back to normal to a certain extent, just because I think the isolation part resulting from COVID and the mental health issues are real. We got to get people out in a safe way. I don’t think encouraging seniors to just stay home and get locked down is good for their long-term health, when you think about the whole health perspective. I hope you’re right. I hope that flu will be normal and COVID will be kind of isolated, but we just don’t know, right? I don’t know if that’s satisfactory, but that’s what we believe on the topic.

Yes, that’s fine. I guess my easy follow-up here is, are you seeing any trend differences in the other markets? I know they’re obviously a lot smaller for you, but how much is geography really – and I’m not talking about COVID-related expenses. I’m talking about traditional non-COVID. Are you seeing any differences by geography?

I would say at a county level, there’s always a little bit more variability. But I think you’re referring to some of our state presence, and you’re right. North Carolina, Nevada are clearly much smaller states as compared to California today. So generally speaking, I would say we see the same themes across the board. But there are always going to be some of those more micro-oriented factors that vary. But generally speaking, I would say that we see similar trends across really all of our markets today.

Okay. And just last one for me. Do you think that this environment that we’re in right now is beneficial to a high-touch plan like yourself, meaning people are more aware of their healthcare, they’re more aware of the kind of services that they want and need, and that you’re offering really fits in well? Basically, I’m asking if you think COVID and the fear of COVID is actually a beneficial thing for you in terms of generating membership.

I was really into the last sentence. Meaning, I think benefits and coverage are getting more and more aggressive across the board. We see that in every single market. I think that’s somewhat a function of what you said, some of the tailwinds associated with COVID for the last couple of years and how people have kind of embedded that into some of their bids heading into 2022. But that’s not going to go on forever, I don’t think. I think the notion of having consistently competitive, consistently aggressive kind of top three benefits in all the markets is something that seniors will appreciate in the long term. Having said that, I think service is going to be everything. Service, access, and affordability. I mean it’s the AAA. I like to say it’s the quintuple-A here at Alignment, which in addition to those three, just making sure your providers are engaged and aligned and doing well with you and helping them and their practices be more successful. Making sure that the service and products are designed for the individual. I think we’re all kind of nascent in that area. But I think product innovation, the servicing, the culture component seems kind of softy-feely, but it really is foundational to making sure that the little things are addressed with your member service teams, your clinical teams, your provider teams, your sales. All have to care about that senior, which really shows what will differentiate us. You’re not just a number, so to speak. Linking that back to Jeff’s comment with respect to CAHPS, it’s incongruous to think that we’re going to improve those CAHPS scores, but we’re still achieving five-star ratings. People like us; our NPS scores are still high. We’ve got to get that addressed, and I think it’s an advantage for us. People like us.

It’s a good thing to be now. Well, thanks so much for that answer. I really appreciate it.

Hope you got it. Thanks.

Thank you. Your next question comes from the line of Sarah James with Barclays. Please go ahead.

Hi guys. This is Steve Brown on for Sarah. As we think about the MDR and maybe can we talk about some of the longer-term opportunities that you have on some of the levers in the business like technology, like AVA, and how that could offset some of the other headwinds that are potentially going away on the NBR like DCE and COVID and flu season? Yes, that would be helpful. Thanks.

Yes, that’s a great question. The secret sauce of Alignment is not only AVA because I think, AVA is a huge advantage. We just see – it was just built to be an advantage to give us this real-time data. The secret sauce is how we’re using technology, the ingestion of the data, the application of the technology and the results from that technology used by our clinical teams and our sales teams and our network provider teams. It’s how we’re using it and then making sure that all of that is integrated into the way we report the financials. You’ve heard us say it’s really, really granular and bottoms-up built. Nothing is to chance. We know PMPMs by market, by member, by provider, etc. If you work all that together, it’s what gives us the confidence. The seams between technology and the clinical care model, the product innovation and the financials, that is where we’re really focused on building durability in those workflows. I go through that because I think that is going to continue to drive our MBR toward what we’ve told everybody our long-term MBRs were, which is 82% to 84%. I think we’re inching toward that. We’re heading toward that in spite of this kind of COVID dynamic over the last 18 months. Because of that, we’re going to be able to afford to maintain very competitive benefits. Every year, we see crazy things people do on benefits. You’ve got these little guys that will try to buy market share and throw out crazy benefits; they're all gone. Literally they are gone; they’re out of business. You’ve got the big guys that from year to year will say, we want margin one year, we want growth another year, so they kind of go up and down. It lacks durability and persistency. You’ve got these not-for-profits out there that try to do crazy things on benefits and bleed into the reserves, and that’s not sustainable, or they’ll dump the incremental benefits on the backs of the global CAHPS providers. That’s not sustainable either. The theme is consistent, aggressive growth, but profitable growth. Thomas said it, we’re not going crazy in these bids; a lot of people told us, just go get the market share and lose lots of money and have 99% MBRs. That’s not in our DNA. We have to have this disciplined approach to growth. DCE is – I look at DCE as another book add. You have the HMO products, which are our bread-and-butter products, but – and we’re introducing PPO products. Now you've got these DCE products; we’re not necessarily looking to migrate those members into HMO – into MA plans. Those folks in DCE have made a choice to stay fee-for-service. We’ve got to apply our tools on top of that kind of customer choice. Think of it as a portfolio and take care of them. The core business is doing really, really well. Just the core operations and the gross margin engine is producing as we had hoped.

Okay, great. Thank you for that detail. I appreciate it.

Got it.

It’s Mike again. I know we chatted about this a bit offline in person, but direct contracting PMPM, you guys are lower than M&A at around 750. I know you can’t speak for your peers, but there’s some conflicting perspectives on DCE revenue PMPM, whereas some of your peers actually expect DCE PMPM to be higher than MA. From my understanding, I know there exists a benchmark rate methodology difference between DCE and MA that might be structurally driving that difference. Is that the case? Or is that not the case and it’s more of a function of geography, acuity mix of your DCE members versus others? Just wondering if you could help shed some light on that?

Yes, I can certainly speak to at least our own experience. In terms of comparing our DCE revenue PMPM to the MA PMPM, I think there are absolutely some structural differences that are a driver of the delta. There are a couple of things off the top of my head. The first would be, obviously, with MA we are taking Part D risk, and we are not doing that in the DCE. You wouldn’t see the revenue or the cost on the DCE that you would in MA. The risk, the benchmark, if you will, is structured around the risk that CMS is taking. The member’s cost share is not a part of our benchmark the way it would be on the MA side. Absolutely some structural differences. In terms of our specific population, it has been a population; I think we mentioned this in one of our other calls where it is a lower risk adjustment score population. When we approach this group of people in terms of the assessment of our ability to generate a profit on the program, we actually were looking at our existing portfolio of markets across the country today. We have a wide variety of different profiles. Some of our markets that we’re in today that we’ve proven successful and profitable have pods of members that are typically healthier, lower risk adjustment scores, and lower utilization. Between the two of those things, we’re able to make that business model work. We’re applying the same toolkit we’ve demonstrated in other areas with this DCE population based on what we know. We’re coming up on six months in now, and we’re continuing to learn more about it as we get our clinical teams in place and apply a lot of the things that have made us successful in M&A in terms of our Care Anywhere teams doing proactive outreach, engaging them in the home, all the things that John was describing earlier as our key differentiators.

Yes, Michael, it’s John. Just to add to Thomas. This is the way I look at it. Structurally and definitionally, DCE is we’re going to be taking risk for what CMS would otherwise pay CHRIS for in a fee-for-service structure. That beneficiary still has to go out and buy supplemental coverage, gap insurance coverage. They’re still paying that premium. The risk that you’re stepping into is about 80-ish percent of the MA revenue stream. That’s the way I look at it. For those out there that are the plans, I don’t know how they’re doing it. I don’t understand that. For those that are on the provider side, I think it’s coming. It’s how they’re doing it, coding. Providers take 80%, 85% of whatever global CAHPS have taken from the payer. From an apples-to-apples perspective, they’re getting around the same as they would otherwise get in a global CAHPS deal from MA, if that makes sense. What we’re looking at is, what is the gross margin PMPM on that DCE business. As Thomas has alluded to in the past, there’s a lot less SG&A associated with DCE in terms of sales and marketing, utilization, and claims. We’re looking at observing what is that EBITDA potential for DCE. My initial thinking is it’s still going to be positive, both gross margin and EBITDA. But we’re still early. Give us a couple of quarters.

Got it. Thank you for the color and congrats again on the quarter.

Thanks, Mike.

Thank you so much, and we have no further questions at this time. Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.