Good afternoon and welcome to Alignment Healthcare Fourth Quarter 2023 Earnings Conference Call and Webcast. Please note that this event is being recorded. Leading today's call are John Kao, Founder and CEO; and Thomas Freeman, Chief Financial Officer. Before we begin, we would like to remind you that certain statements made during this call will be forward-looking statements as defined by the Private Securities Litigation Reform Act. These forward-looking statements are subject to various risks and uncertainties and reflect our current expectations based on our beliefs, assumptions and information currently available to us. Descriptions of some of the factors that could cause actual results to differ materially from these forward-looking statements are discussed in more detail in our filings with the SEC, including the Risk Factors section of our annual report on Form 10-K for the fiscal year ended December 31, 2023. Although we believe our expectations are reasonable, we undertake no obligations to revise any statements to reflect changes that occur after this call. In addition, please note that the company will be discussing certain non-GAAP financial measures that they believe are important in evaluating performance. Details on the relationship between these non-GAAP measures to the most comparable GAAP measures and reconciliation of historical non-GAAP financial measures can be found in the press release that is posted on the company's website and in our Form 10-K for the fiscal year ended December 31, 2023. And now, I'd like to turn the call over to your first speaker, John Kao, Founder and CEO.

Hello and thank you for joining us on our fourth quarter earnings conference call. For the fourth quarter of 2023, our total revenue of $465 million represented approximately 29% growth year-over-year. We ended the quarter with health plan membership of 119,200 members, growing approximately 21% year-over-year. Adjusted gross profit was $49 million, producing a consolidated MBR of 89.4%, while our MBR, excluding ACO REACH, was 88%, in line with our expectations. Lastly, our adjusted EBITDA was negative $20 million. Concluding the full year, total revenue of $1.82 billion grew 27% and adjusted gross profit of $209 million resulted in an MBR of 88.5% and an MBR, excluding ACO REACH of 87.6%. Adjusted EBITDA was a loss of $35 million, consistent with our comments from our January 8-K. In 2023, we demonstrated why our purpose-built Medicare Advantage business model is built to thrive in the current MA environment. We generated strong membership growth, demonstrated control over our medical utilization, outperformed the market in Stars and made investments to position us for even greater success in 2024. Our differentiated clinical platform is what enabled us to simultaneously achieve all of these objectives last year. We use employee clinical teams informed by actionable data to manage the care of our members, thus controlling the cost. Our ability to take action on insights through direct data feeds from near real-time pharmacy, lab, admission, discharge, transfer and authorization data is a significant competitive advantage in controlling our MBR and achieving excellent Stars results. This past year, we again proved the ability of our clinical platform to control medical costs by managing care. Despite many industry participants noting higher inpatient utilization, our inpatient admissions per thousand for our at-risk members ran at 156, slightly better than the prior year of 159 and nearly 40% better than traditional Medicare. More recently, during the fourth quarter, we saw a 7% year-over-year decline in inpatient volume. This trend continued to persist into January 2024. Further, our model gave us early visibility into increasing outpatient trends. These trends started emerging in 2022 but we did not see a year-over-year increase in utilization or impact of MBR in 2023. We expect the utilization levels we saw in 2023 to remain in 2024. Our visibility is also giving us early insight into a year-over-year step-up in supplemental benefit utilization in January. We have incorporated this into our guidance and are actively managing these trends. Thomas will share more on this in his remarks. Taken together, our model is advantaged by enhanced visibility through AVA and control of member care provided by our employee clinical teams. We utilize these capabilities to create a shared risk model with community providers that is competitively advantaged in Medicare Advantage relative to models that rely on actuarial underwriting or risk transfer through global capitation. Our ability to manage risk, drive higher quality clinical outcomes, and produce medical cost savings translates into more value for our members. This enables Alignment to grow membership above market rates at an attractive margin profile. As we contemplate our 2024 guidance, we are proud to share that our model continues to differentiate Alignment in the marketplace. As we noted earlier in the year, we began 2024 with 155,500 health plan members after our successful 2024 annual enrollment period. We further expect to end 2024 with 162,000 to 164,000 members, representing 37% growth year-over-year at the midpoint. Our AEP performance and full-year membership outlook resulted from our focused investments across Stars, member experience, AVA technology enhancements and sales operations in 2023. We reduced our churn during AEP by 24% year-over-year. We also leveraged our strong Stars rating relative to our competitors to take share in the market with 82% of our AEP sales coming from planned switchers. As in past years, we have a disciplined process which balances growth and profitability. Even with this growth, we expect our health plan MBR to be roughly unchanged year-over-year. Our adjusted gross profit guidance is underpinned by improvements to returning member MBR, partially offset by higher new member MBR. For returning members, our clinical model drives an average 800 basis point improvement in at-risk MBR between years 1 and 5. The improvement in member retention will also contribute to strong returning member MBR. For new members, we designed products to generate positive new member gross profit that support our overall profitability goals. New members typically begin at a higher MBR of approximately 89%, and given our significant growth through AEP, we expect these members to partially offset returning member MBR improvement. These members are still expected to be accretive to gross profit. In total, we are confident in our 2024 MBR outlook because, first, we help benefits stable, increasing supplemental benefit value by just 0.7% year-over-year. Second, our new member RAF is consistent with our bid expectations and third, our January utilization was in line with expectations. Beyond MBR, the entirety of our adjusted EBITDA margin expansion is driven by an improving SG&A ratio year-over-year. Our anticipated economies of scale as a result of our growth are controllable and give us a high degree of visibility toward our 2024 adjusted EBITDA breakeven goal. Looking ahead to 2025 and beyond, we are confident about our continued ability to drive above-market growth and profitability improvements. We see growth tailwinds from widening Stars advantages and our conservative position on risk adjustment. Our competitors' percentage of members in a 4-Star or better plan will fall from 79% to 56% in payment year 2025 and we believe we are less impacted by V28 than many of our local competitors. We see profitability tailwinds as our new members of 2024 will yield significant MBR improvement next year. And we expect more scale economies resulting from investments we have made in technology and workflow optimization. In conclusion, we believe our clinically-centric shared risk model supported by our AVA technology insights will thrive in the current MA environment. We expect that our member growth will outpace the industry and we will gain market share by focusing on quality clinical outcomes, excellent member engagement and high-value benefits for our members. Alignment is Medicare Advantage done right. Now, I'll turn the call over to Thomas to cover the full year financial results as well as our outlook for 2024.

Thanks, John. For the year ending December 2023, our health plan membership of 119,200 increased 21% year-over-year. This exceeded our expectation of 17% membership growth at the midpoint of our initial guidance, thanks to the strong momentum of our sales and retention efforts as we headed into AEP. Our total revenue in 2023 grew 27% to $1.82 billion. Meanwhile, our adjusted gross profit of $209 million reflected an MBR of 88.5% for the full year and an MBR of 87.6%, excluding ACO REACH. Taken together, we are pleased to have balanced strong MBR results in our core business while delivering over 20% membership growth. We also made significant progress towards our operating leverage goals in 2023. SG&A for the year on a GAAP basis was $307 million. Our adjusted SG&A, which primarily excludes equity-based compensation expense, was $244 million. Adjusted SG&A as a percentage of revenue, excluding ACO REACH, was 14.4%, an improvement of 1.6% from the prior year result of 15.9%. We anticipate that this significant improvement will continue into 2024 as we benefit from our membership growth and several of our shared services productivity and scaling initiatives. Lastly, our adjusted EBITDA was negative $35 million. As previously indicated in our 8-K, our adjusted EBITDA result reflects decisions to increase discretionary investments in sales and marketing during the back half of AEP, given the significant growth opportunity presented to us. In support of this growth, we also accelerated new hires and clinical investments in December to assist with the onboarding of new membership. We are pleased that these minimal incremental investments successfully positioned us to achieve the 2025 year-end consensus membership a full year early. Subsequent to the release of our January 8-K, we saw $2 million of adverse development in our ACO REACH line of business related to fourth quarter days of service. As I will share more on momentarily, we have since executed the strategy to eliminate any downside exposure from our ACO REACH book of business in 2024. Moving to the balance sheet, our capital position remained strong as we ended the year with $319 million in cash and short-term investments. The sequential step down in cash compared to the third quarter included the previously discussed timing impact of an early payment from CMS of approximately $146 million in Q3. Turning to our guidance. For the first quarter, we expect health plan membership to be between 157,000 and 159,000 members, revenue to be in the range of $590 million and $600 million, adjusted gross profit to be between $52 million and $58 million and adjusted EBITDA to be in the range of a loss of $13 million to a loss of $19 million. For full year 2024, we expect health plan membership to be between 162,000 and 164,000 members, revenue to be in the range of $2.38 billion and $2.41 billion, adjusted gross profit to be between $275 million and $310 million and adjusted EBITDA to be in the range of a loss of $15 million to positive $15 million. Based on early Q1 trends, we feel confident in our ability to achieve our full year membership and revenue outlook. Our relative product value proposition, Stars differentiation, and brand recognition continue to resonate in the market post AEP. We also continue to see improvements in retention that reinforce our full year membership target. Moving down the P&L, the following factors support our full year 2024 adjusted gross profit outlook. First, our Star ratings are stable year-over-year for 2024 payment. Second, as John mentioned earlier, the bid value of our added benefits remain roughly unchanged in 2024, increasing just 0.7% year-over-year. Third, the RAF we received for our new members is in line with our bid expectations. And lastly, our recent utilization experience continued to be consistent with our expectations. Fourth quarter inpatient admissions per thousand ran 7% better year-over-year, a trend which persisted into January. Diving deeper into our utilization experience, I'll spend a few moments on a few topical items. Flu and RSV inpatient utilization. Utilization trends for the full year and fourth quarter 2023 showed year-over-year declines. Flu and RSV are captured within our all-in 156 admissions per thousand for full year 2023. This category of utilization continues to be a primary area of differentiation, given the strength of our clinical model to prevent avoidable admissions and readmissions. Outpatient utilization. As we previously noted, our outpatient costs in 2023 ran within a few dollars PMPM relative to 2022. Additionally, our early 2024 preauthorization data, which is a strong leading indicator of our outpatient volume, continues to be in line with our prior year experience. Inpatient unit costs. We expect the impact of the Two-Midnight Rule to be immaterial. The majority of our hospital contracts in California, which comprises 94% of our members, already incorporate a de facto Two-Midnight Rule, while we foresee modest impact to our ex-California markets. However, we are incorporating higher than the national average inpatient unit cost increases in California and Nevada for CMS' fiscal year 2024. Supplemental benefit expense. We saw a year-over-year increase in our supplemental benefit expense in 2023, but importantly, this was consistent with our budget forecast. In 2024, we continue to contemplate higher supplemental benefit expense as part of our full year outlook. This is largely a result of our successful vendor transition that has improved Black Card service levels. While we have incorporated this as an area of MBR headwind in our 2024 outlook, it is also contributing to improved retention and member engagement on our critical clinical initiatives. And lastly, our clinical initiatives. We've identified numerous care and medical management opportunities to improve quality outcomes and utilization turns in 2024. Our first quarter outlook generally reflects the regular seasonality of our MBR experience. As a reminder, utilization is typically higher in the first quarter than the full year average. Part D is also much less profitable in the first half of the year compared to the second half, particularly in the first quarter. This year, our guidance also reflects an extra day of medical expense in the first quarter due to the leap year and a higher mix of pre-midyear sweep new members in Q1 relative to prior years. Additionally, we expect our SG&A ratio seasonality to be less pronounced in the back half of this year as we gain economies of scale across the enterprise. As we head into 2024, we are making changes to our ACO REACH business and reporting. Given the immense opportunity we see in Medicare Advantage, particularly over the next few years as we benefit from our competitive positioning on Stars and risk adjustment, we are reallocating our time and human capital towards MA and eliminating downside risk in the ACO REACH program. Going forward, revenue from the program will be reported on a net basis, meaning that we will no longer recognize the full benchmark risk as gross revenue. The difference in accounting is due to our decision to capitate a provider to take risk on the ACO REACH population for 2024. Under this arrangement, we will recognize a nominal amount of gross profit and not share any ACO REACH program deficits. The changes to our ACO REACH accounting are reflected in the 2024 outlook I previously provided. Pro forma for changes in revenue recognition, year-over-year revenue growth is expected to be 41% at the midpoint of our outlook range. We have included a financial supplement on our Investor Relations page with additional detail. In conclusion, we are well positioned to execute on our 2024 objectives and are excited for the opportunity ahead of us in 2025, where we expect our competitive advantages to compound even further. With that, let's open the call to questions.

Thank you, sir. And I share our first question comes from the line of John Ransom from Raymond James.

At what point on ACO REACH do you say that it's just not worth it?

John, this is Thomas here. I think we still think the overall program intent makes a lot of sense. The idea of trying to ensure that seniors enrolled in traditional Medicare get access to better care, different modalities of value-based care and potentially different forms of supplemental benefits longer term which we think is really interesting. But that being said, I think you've heard from us say all along that we would do this so long as it supports our strategic objectives with our provider network but not in a way that causes us to lose money. And so given where we ultimately landed for 2023 ACO REACH MLR which was a bit over 100%, we decided we take a step back and essentially insulate ourselves from any downside risk exposure while not backing out of the program entirely. I think for the foreseeable future, we do not plan to take downside risk on the ACO REACH program but rather we'll look to continue to support our provider partners with our existing license, we still have remaining and really focus our efforts on Medicare Advantage, where we see an enormous growth opportunity and margin improvement opportunities starting heading into 2025.

And just secondly, and I'll stop with this. Just the cadence of MLR throughout the year. I know you talked about Q1 being higher but could you kind of talk about how you see it and why you see the trends as you presented in your guidance for Q2 to Q4?

Yes. So, as we typically would expect Q1 and Q4 seasonality to have a bit higher MBR than Q2 or Q3. I think this year, similar to years past guidance, our Q1 MBR seasonality reflects Part D which tends to run over 100% in Q1. And then we also just have sort of our normal course utilization where inpatient volumes tend to be higher in December, January and oftentimes in March as well, just around sort of flu and RSV season. I think this year, we also are recognizing that it is a leap year. We have an extra day of medical expense in the first quarter that we reflected. And then just given the overall growth of the membership that is pre-mid-year sweep, we think that is something that we're also taking into account for our Q1 guidance. As we talked about in the past, we tend to book our new members to the paid revenue over the course of the first half of the year. Until we see the mid-year sweep, our full-year guidance is not contingent upon a disproportionate pickup in the mid-year, but we also like to take a conservative posture in Q1 to not assume that we'll do anything better than what we're currently being paid.

And I show our next question comes from the line of Nathan Rich from Goldman Sachs.

First, I just wanted to follow up on the utilization expectations. I guess just to clarify on the change in ACO REACH accounting. I guess does that mean it will essentially be a nonfactor in the MBR in 2024 based on that accounting change? And then I guess bigger picture, you kind of talked about January inpatient, I think, being in line with your expectations. I guess what does the guidance assume for inpatient specifically over the balance of the year? And to the extent that we continue to see greater, I guess, hospital utilization and inpatient utilization. Just curious like how you're thinking about that potential within the guidance range.

Yes, you are correct about ACO REACH. We do not anticipate it being a significant factor in our MBR for 2024 due to our change in revenue recognition accounting from gross to net. We have provided a financial supplement on our Investor Relations page that details the MBR for 2023, both including and excluding ACO REACH, for comparison as we approach 2024. In terms of overall utilization, we expect it in 2024 to be similar to what we observed in 2023. Regarding your question about inpatient admissions, we have consistently performed well in that area since before going public. For the past seven years, we've maintained around 155 to 165 inpatient admissions per thousand, even as we've experienced over 20% growth in recent years. As we look ahead to 2024, our ability to maintain this performance reflects our clinical model's effectiveness in identifying members early who require our programs and engaging them with our clinical teams. This will be a key focus for us in the first 90 days of 2024. As of February, we are pleased with our initial results and are actively ensuring that the right members are participating in our clinical programs.

And if I could just ask a quick follow-up. You mentioned achieving kind of the 2025 membership a year early. Great to see the early membership gains obviously. I guess could you maybe talk about how that impacts your thinking around 2025 performance of the business? What type of EBITDA tailwind does that potentially create as you get CMR improvement on those members just as we think about sort of the trajectory of the business a little bit longer term?

Yes. We think it's significant to your point. And so both from a growth and margin standpoint, we're very optimistic about our 2025 positioning. I think you heard John mention a bit on the growth side of things that we're going to benefit in 2025 as our competitors fall on average below a 4-Star payment. There's only one other HMO competitor who has a pretty broad footprint across California that actually maintains 4-Stars for 2025. I think when you take that and add on the V28 risk adjustment headwinds and the broader utilization headwinds that you've heard from across the industry, we feel very good about our ability to sustain above-market growth and achieve something in excess of 20% for 2025. At the same time, to your point on the margin side of things, I think that growth affords us continued SG&A economies of scale heading into 2025. And given the 2024 bolus of new member growth, I think it presents a significant MBR opportunity as you transition those year 1 members which tend to start in the high-80s into year 2 which tends to go into the mid-80s. And so that's something we're very optimistic about as we think about our overall positioning over the next 24 months.

And I show our next question comes from the line of Scott Fidel from Stephens.

First question, just interested if you can share with us just some of the initial indicators around the risk and acuity profile of the 2024 cohort that you've had in the AEP. Any sort of early warning sort of indicators that you focus on around that population? And then just as it relates to the supplemental benefits dynamics that you had touched on, whether you have enough information to ascertain sort of variation between the new members added this year versus prior members around sub benefits utilization?

Yes. This is Thomas. Regarding the new member medical loss ratio outlook, I will address both the revenue and cost aspects based on our observations thus far. On the revenue side, our actual paid Risk Adjustment Factor for January for new members was slightly below what we had included in our 2024 bid back in June 2023. This is a positive indicator for us, confirming that the payment expectations by product mix were aligned with our hopes. On the cost side, we carefully monitor inpatient admissions per thousand. As we move through the first 45 to 60 days of the quarter, we are assessing both overall inpatient utilization and specifically how new members are performing by market, Independent Practice Association, and product. So far, the utilization of these new members aligns with our expectations. In the coming months, we will gain more visibility on other spending categories through claims data. Overall, we are feeling optimistic that this year’s new member medical loss ratio will match our bid expectations. Regarding your second question, please continue.

No, please, Thomas, go ahead.

And then in terms of your second question on supplemental benefits, I think it's less of a new member issue versus a loyal member issue. I think what we have seen is as we changed some of our vendors last year around the overall member experience, inclusive of some of the Black Card vendors, what we've seen is improved service levels which has been excellent in terms of some of our tailwinds around our NPS scores, Google reviews, most recently, AEP retention which improved by about 200 basis points year-over-year compared to the 2023 AEP result. And ultimately, we think it's going to be a tailwind heading into cap season for Stars purposes this year. So, I think the overall investment and initiative has been very successful but at the same time has caused our overall Black Card spend to increase for the first part of '24 compared to 2023. I think that's reflected in our overall MBR outlook and it's something that we're continuing to monitor. But I think for now, we feel like the initiative has been pretty successful and it's something we'll continue to keep in mind as we try to make sure we're balancing all of our different initiatives across growth, retention, Stars and ultimately profitability.

And then just my follow-up. Interested if you could give us some of your thinking around operating cash flow for 2024 and key sources and uses of cash that you're thinking about for '24.

Overall, to provide some clarity on how adjusted EBITDA relates to our cash position for 2024, there are a few important points to consider. We generally expect to have around $25 million in capital expenditures each year. Additionally, based on our current term loan, I anticipate approximately $20 million in cash interest expenses for 2024. Taking these factors into account, we are looking at roughly $50 million in cash burn beyond our adjusted EBITDA. Working capital typically does not significantly impact cash flow over a full year, so it shouldn't lead to any major changes in our cash position this year. Furthermore, regarding our parent cash compared to regulated cash, we are optimistic about the current condition of the Alignment balance sheet. By the end of 2023, we had about $156 million in parent cash and over $300 million in total cash, along with an additional $85 million available from our undrawn term loan. In light of our outlook for 2024 and the potential for margin improvement in 2025, we feel confident in the strength of our overall balance sheet.

And I show our next question comes from the line of Ryan Daniels from William Blair.

Yes. Congrats on the quarter. John, maybe one for you. Pretty impressive with the year-over-year decline in inpatient utilization and the trends that you're seeing there in general. I'm curious if you can go into a little bit more detail on what you think is the key driver of that? My impression is it's probably your data and Care Anywhere and intervention. But more broadly, is it the ability to really provide more proactive care? And is that a two-fold benefit and that maybe you're seeing less pent-up demand because you managed that during COVID, so you're not seeing it and then continue to manage it. So, I don't want to put words in your mouth but just love to get some color there because I think that...

The key drivers are visibility and control. The data and AVA provide significant insight into membership status. We maintain day-to-day control by managing the risk ourselves, which we prefer, focusing on managing care as the fundamental aspect of succeeding in Medicare Advantage. It's not just about underwriting or financial engineering; it's about actual care management. We understand where the high-risk members are and how to care for them at home with their interdisciplinary care teams. This consistency helps us reduce admissions significantly over the past seven years. Our visibility and control set us apart in the market. In the evolving Medicare Advantage landscape with stricter Stars and risk adjustments, we are well-positioned for success because we have always aimed to be the highest quality and lowest cost provider. The market seems to be adapting to our approach, which I believe is reflected in our recent growth during the AEP.

And then, Thomas, one for you. It looks like the implied MBR in Q1, if I'm doing this right, is about 91%, which was a little bit higher year-over-year despite the utilization trends being pretty stable. So, is that just the supplemental benefits and the new member growth pushing that up a little bit year-over-year?

Yes. I think those two things, and then I would add just kind of like I said earlier, normal course seasonality and then Part D in particular. And so the Part D program runs over 100% MLR in Q1. And so that's a pretty significant driver on the overall seasonality of the business from Q1 through Q4. I think from a utilization standpoint, to your comment, I think we feel pretty good about what we're seeing on the inpatient side thus far. And I would also add, Ryan, I think I mentioned earlier, it is a leap year this year, which sounds immaterial but actually is not insignificant when you think about adding one extra day of medical expense with the same number of days of revenue over the course of Q1.

And I show our next question comes from the line of Jess Tassan from Piper Sandler.

I wanted to start by asking about the opportunity for margin expansion in 2025 with Stars positioned favorably alongside Version 28. Do you have any early comments on how the expected changes from the Inflation Reduction Act might impact the redesign of Part D and the shift of liability from CMS to the plan during the catastrophic phase of coverage?

Jess, it's John. That's a great question. We believe it could go either way. It's going to be a crucial aspect of our bidding strategy as we approach 2025. I prefer not to discuss our bidding strategy in detail for competitive reasons, but I feel confident in our current thinking. Overall trends are manageable, and we have had a few years to understand this. We're familiar with the program and will incorporate it into our bids. As always, we will strive to find the right balance between growth and margin. However, there will be significant considerations regarding benefit designs and strategic insights related to the Inflation Reduction Act.

I was hoping to understand your statement about 82% of AEP additions coming from member switching, even though supplemental benefits have only seen modest year-over-year growth. What is driving the switching? Is it competitors reducing benefits compared to your stability, or is it more related to your sales approach? Is there anything specific to highlight regarding this AEP?

Yes, it's John again. It's all of the above. We have highlighted that Stars is a key driver, and our competitive position in Stars is improving. Additionally, the impact of V28 is affecting everyone, but we are experiencing it to a lesser extent because we anticipated some level of reimbursement risk this year. These two factors are significant drivers for us. If you examine the MACVAT data on benefit designs, you'll see that most people are either maintaining or reducing their benefit offerings as we head into 2024, while we remain fairly stable, potentially seeing a slight increase in supplemental benefits. Looking ahead to 2025, our position is expected to strengthen further. Much of the noise surrounding reimbursement seems tied to the decline in some organizations' Star ratings; for example, a drop from 4.5 to 3.5 Stars could result in nearly a 10% decrease in reimbursement, which is considerable. When coupled with the V28 effects, this underscores that our focus on high quality, represented by Stars, along with low-cost utilization, will benefit us.

The other thing I would add too, Jess, is just from a brand recognition standpoint, I think we're really starting to separate ourselves in the market, particularly in California, where you flash back 5 years ago, we were sort of one of the smaller upstarts. And I think you flash forward to today, we've been consistently 4 Stars or better now for, I want to say, about 6 years in a row, all while offering market-leading products and experience along the way. And so I think as that happens, we start to become more top of mind in the broker community or top of mind in the senior community and in the provider community. So, it's one of those stories to a certain extent why I think the bigger you get, the stronger you get in many respects. So, I think we're starting to see the benefit of that from a brand standpoint here in California.

And I show our next question comes from the line of Whit Mayo from Leerink Partners.

First, I was just wondering if there's any unusual switching you've seen in January and February, any disenrollment. I haven't had a chance to see if you changed your membership guidance. So, just was wondering if there was any unusual movement.

No. So, to your year-end membership point, our full year membership is unchanged compared to our 8-K release, so 162,000 to 164,000 at year-end. More specifically to our January experience, we saw very solid, I'd say, sales progress and pretty significant retention improvement again. So, looking at our February 1 disenrollment rate this year as compared to the run rate we would have expected based on February 1 trends a year ago, we actually saw about a 20% year-over-year improvement in that February 1 disenrollment rate relative to prior year run rate. So, I think a lot of again, those investments around member experience are paying dividends, not just in AEP but into what we call OEP which lasts from now through April 1.

John, I'm curious about the potential changes CMS is considering regarding marketing and broker agent commissions. What are your updated thoughts on how this might impact you and the industry?

Yes, I think leveling the playing field is always a good thing. Having more transparency is always a good thing. And again, being the high-growth player in the space, I think it's going to be to our advantage. And I think at the end of the day, if there's more protections for our seniors, the better. And so I think, as you know, we've spent so much time and effort on our sales operations, our sales leadership, our marketing strategies, our broker management, our broker tools, our onboarding, all of that paid off for us heading into the New Year. So, I think it's going to be a good thing for us. I think all of these things that are leveling the playing field and doing what CMS really originally intended MA to be, which is just providing the highest value for beneficiaries is a good thing. It's going to play well for us.

And I show our last question in the queue comes from Adam Ron from Bank of America.

Actually, it's Kevin Fischbeck in for Adam tonight. I guess one of the things that I'm struggling with a little bit is just how different California as a market can be versus the rest of the United States. Do you have any sense for what the broader trend is in California? Like how much of the outperformance that you're seeing here is really on the revenue side in '24 versus on the cost side? Is it more capitated and costs are generally under control and you're marginally outperforming that? Or do you believe that it is really like a truly differentiated trend that you're seeing even versus the competitors in California?

Kevin, it's John. Yes, I think what makes California unique good and bad really is that the scale of the delegated capitated IPAs and the delivery systems. And I think that how health plans work with those IPAs or Independent Physician Associations, so to speak, is really important. And I think that we've been able to figure that out. We've been able to design incentives with the delivery system to create us what I talked about a lot which is visibility and control of the medical spend. And then durability, we want durability on these networks. And unless you have the tools that we have, it is very difficult to kind of get the kind of outcomes that we would be able to achieve in Stars in particular. That's the one differentiator. And then secondly, with respect to utilization, we designed what we call shared risk models which is really creating aligned incentives with these IPAs as well as directly contracted physicians and we create win-win economic situations, all for the benefit of the member. Those are, I think, the unique things that make California different. And yet we think that by doing it in California, we think it's the hardest thing anywhere in the country. So, if you take the tools that we have and you overlay it on other parts of the country, I think the opportunity is going to be even higher because you don't have the density of these IPAs or capitation in other parts of the country. And so I think the margin opportunity is even greater for us outside.

I have a couple of questions regarding your comments. First, I'm trying to understand your perspective on alignment with physicians. Many expect that as V28 grows, supplemental benefits might be reduced. It seems you believe that won’t be necessary moving forward. Given that the half isn’t really capitated and is influenced by AVA, does this create any tension in your relationship with the physicians? Could this situation be unfavorable for them if others are not in the same position?

It's two-fold. V28 is part of it. I mean, everyone is going to get hit by V28. I mean that's clear. We're just going to get hit less in our particular markets because of the way we manage risk adjustment. And I would say we've been very conservative on risk adjustment. And you put that in the context of some others that have been more aggressive on risk adjustment, that are going to go down, in some cases, 20%. And just to remind everybody, 20% from just hypothetically at 1.5, 20%, that's 30 basis points. And if each basis point is worth $8 PMPM, that's a meaningful hit to revenue that is being borne functionally by a lot of these globally capitated providers. It's a hard pill to swallow but more, I think, importantly, is Stars. When you add Stars to the equation, somebody dropping from 4.5 to 3.5, that's, what, $80 of potential hit. I mean, so when you combine those things and you look at our Stars and you look at our upward trend on risk adjustment, that creates the effective tailwinds. And so these providers are going to do better with us on just those two economics. And then if we can deploy our data and our care model on that high-risk population that we do ourselves in concert with the providers and these IPAs, everybody wins because we surplus these risk pools. That's the whole construct of this. And we do it and I would refer to as a capital-light way. We don't have a lot of bricks and mortar. We don't think you need to have a lot of bricks and mortar. You do it with the community physicians and you create it in a way that everybody wins or go the name Alignment.

And so I guess maybe then you mentioned the model and how it works in California and how it can be exportable into other markets. I guess it's just interesting just how differently you're talking about trend versus how your peers are talking about how trends develops this year. Are you seeing similar trends in California and outside of California? Or does outside of California not performing quite as well as California is?

Well, that's what's interesting is the portability of the care model is being replicated. The utilization and MLR we have outside of California is really, really good. Where we have to just get bigger and we're incrementally getting bigger kind of get to 3,000 to 5,000 in some of our ex-California markets, we'll get there. But the care model is managing the trend effectively. And I think what people need to understand is a lot of the inpatient hospitalizations, a lot of it's unnecessary. A lot of it can be prevented just by paying attention to what's going on with your high-risk population. And we have our interdisciplinary care teams spending time oftentimes on a weekly basis with high-risk patients in person and certainly, virtually, it makes a difference. And that's why I just keep saying we actually deliver the care. Not many other of our competitors deliver the care. They may have chair delivery divisions that's very different than integrating all of that into the way we talk about it, which is productizing, if you will, really good benefits, productized in the care model. It really is a different way of approaching the market.

And then maybe just last question. It sounds like you're saying that you think you're teed-up pretty well for growth again in '25. Is that going to look a lot like this year in so far, it's going to be still largely California-centric because that's what the disruption to the competitors is?

Yes. Sorry, go ahead.

I would just say regarding the second part of that question, if it's happening in California, you mentioned finding a balance between growth and profitability. Does that allow you to focus more on increasing profitability than usual? Or do you feel that as long as you're gaining market share, pursuing that is the right approach even while aiming to stay around breakeven?

No, we're not going to grow at all costs. We're going to get to the profitability commitments that we've made. I think it's super important, tying all that to cash flow, to our balance sheet. All of that is really poised for 2025 to be a really, really good year that I think. And if you just look at the differential on Stars and risk adjustment plus you look at the utilization, ability to manage utilization actually have the tools to manage it. It's just a competitive advantage in this environment. I think the bid strategies, we'll talk about that in the next several months but not right now. But I feel very comfortable with just kind of where we're at in terms of 2025. That's going to be a very good year. The other thing I would say is on '25 is you're going to have even more scale economies on our back office. I think some of the investments that we've made in our back office systems, like what we made in our kind of member services systems, is going to pay off even more. I mean, so you can get more scale economies heading into 2025. Don't know if we'll get the same kind of growth. I'm not going to comment on that but I feel very, very good about the tailwinds.

Thank you. That concludes our Q&A session and today's conference call. We want to thank you all for participating. You may all disconnect at this time.