Alignment Healthcare, Inc. Q4 FY2025 Earnings Call

Good afternoon, and welcome to Alignment Healthcare's Fourth Quarter 2025 Earnings Conference Call. Please note that this event is being recorded. Leading today's call is John Kao, Founder and CEO, and Jim Head, 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 sections of our annual report on Form 10-K for the fiscal year ended December 31, 2025. Although we believe our expectations are reasonable, we undertake no obligation to revise any statements to reflect changes that occur after this call. In addition, please note that the company will be discussing certain non-GAAP financial measures that we believe are important in evaluating performance. Details on the relationship between these non-GAAP measures and the most comparable GAAP measures, along with reconciliations of historical non-GAAP financial measures, can be found in the press release posted on our company's website and in our Form 10-K for the fiscal year ended December 31, 2025. I would now like to hand the conference over to John Kao, Founder and CEO. You may begin.

Hello, and thank you for joining us on our fourth quarter earnings conference call. For the fourth quarter 2025, health plan membership of 236,300 represented year-over-year membership growth of approximately 25%. This supported total revenue of $1 billion, which grew 44% year-over-year. During the fourth quarter, we also exceeded the high end of guidance across each of our profitability metrics. Adjusted gross profit of $125 million represented an adjusted MBR of 87.7%. Meanwhile, adjusted EBITDA of $11 million solidly surpassed our guidance range of negative $9 million to negative $1 million. For the full year, total revenue of $3.9 billion grew 46% year-over-year. Adjusted gross profit of $495 million resulted in an MBR of 87.5%, representing an improvement of 130 basis points year-over-year. Taken together, this year marks a tremendous milestone in the maturation of our company's profitability. We transformed from roughly breakeven just $1 million in adjusted EBITDA in 2024 to delivering adjusted EBITDA of $110 million in 2025. This reflects an adjusted EBITDA margin of 2.8% and represents 270 basis points of margin expansion year-over-year. Throughout the course of 2025, we have demonstrated both the strategic and operational advantages of our clinically centric model, which is purpose-built to deliver the highest quality care at the lowest cost. The data insights provided by our AIVA technology platform, combined with our Care Anywhere clinical model provided us with the visibility and control necessary to navigate a year of significant disruption, where we overcame the second phase of the V28 risk model, a redesign of the Part D program and broad utilization pressures across the Medicare Advantage industry. And importantly, this allowed us to pursue growth while expanding margins even as competitors took a step back in 2025. I'd like to congratulate our team for their success and recognition by Fortune Magazine for their unwavering commitment to seniors, which named us to its World's Most Admired Companies list for the first time. We believe our model of lowering costs by delivering more care to seniors, not less, is the MA model of the future, and we are eager to serve more seniors as we continue along our path towards 1 million members. 2025 also marked an important step in demonstrating the replicability of our model beyond California. We more than doubled our ex-California membership, while consistently exceeding our financial expectations throughout the course of the year. As of December 2025, we had approximately 38,000 members across our markets outside of California, representing approximately 16% of our total membership. We have grown confidently outside of California by first leading with quality, which starts with success in star ratings. We now have a 5-star plan in North Carolina for the third consecutive year, two 5-star plans in Nevada, a 4.5-star plan in Texas, and a 4-star plan in Arizona. These achievements are further supported by the portability of our Care Anywhere clinical model, which focuses on delivering care to our high-risk polychronic members. By leveraging the strength of our care model, quality of clinical outcomes, and scalability of our health plan operations, we are unlocking the growth potential within these markets. We are now focused on sustaining the momentum of our ex-California markets. In 2026, we plan to invest in our sales and distribution engine, build deeper relationships with our broker partners, and continue growing with aligned provider partners where we have durable relationships. With less than 4% market share across our 23 counties outside of California, we see significant opportunity to take share over the coming years. Turning to our 2026 AEP results. We grew to 275,300 health plan members in January of 2026, representing 31% growth year-over-year. We saw broad growth across each of our markets with 23% growth in California and more than 80% growth in our ex-California counties. Importantly, we focused on growing responsibly through our bid design and sales strategy. We drove nearly 20% improvement to our AEP voluntary disenrollment metric and sourced approximately 80% of our gross sales from plan switchers. By taking a balanced approach to growth and profitability this year, we remain mindful of the impact of the final phase-in of V28, while still capitalizing on the growth opportunity in a year of significant disruption. Taken together, we are pleased with the solid growth in California while continuing our rapid expansion outside of California. Our growth this year is adding to our future embedded earnings potential while supporting our near-term operating leverage objectives. Meanwhile, improved operating efficiency across the enterprise is creating additional capacity to reinvest in long-term projects and scalability initiatives. Each of these factors is giving us confidence in our initial full year adjusted EBITDA guidance range of $133 million to $163 million. This is consistent with our previous expectations for consensus adjusted EBITDA of approximately $145 million to be in the range of our initial 2026 outlook. Jim will expand further on our financial outlook in his remarks. Looking beyond 2026, I'd like to spend a few minutes on the 2027 advanced rate notice. On a net basis, the announcement appeared to indicate a relatively flat rate environment for the industry. This reflected a combination of underlying cost trends and policy changes. While we have heard disappointment across the industry, we believe the update is largely consistent with the CMS focus on program integrity and aligning payments with underlying costs. Specifically, we are encouraged that benchmark trends reflect continuing growth in costs within the fee-for-service population. This was partially offset by certain policy adjustments, including those related to skin substitutes. As it relates to unlinked chart reviews, we have long supported excluding these records from risk score calculations as part of improving program integrity. Of note, our exposure is limited. Approximately 1% of our total HCC value is derived from chart reviews of any kind. Within that category, an even smaller subset is related to unlinked chart reviews. For those, we believe we have a clear path to ensuring the diagnoses are supported by a linked claim or encounter over time. Most importantly, the current environment reinforces the importance of our strong clinically led model and core medical cost management competency. We believe this enables us to win in any rate environment, just as we have demonstrated in 2024 and 2025, where the industry experienced tighter reimbursement. And furthermore, we will continue to have STARS payment advantages in 2027 with 100% of our members and plans rated 4 stars or above. In closing, we believe we are entering a reimbursement environment that creates a more level playing field with our competitors, which allows our distinct care management model to shine. We are proving the effectiveness of our distinct medical cost advantages with the results we have shared with you over the past two years. While we're pleased with our performance, we are not done yet. 2026 will be a year of continuous improvement where we plan to make targeted investments across our clinical model, new market playbook, and scalability initiatives, including investment in AI workflows to improve administrative efficiency. In doing so, we are balancing our near-term financial objectives with unlocking the embedded potential of our model. With that, I'll turn the call over to Jim to further discuss our financial results and outlook.

Thanks, John. I will jump right in with our 2025 results. For the year ending December 2025, health plan membership of 236,300 increased 25% year-over-year. Growth in membership drove total revenue to $3.9 billion for full year 2025, representing 46% growth year-over-year. Full-year adjusted gross profit of $495 million represented an MBR of 87.5%, an improvement of 130 basis points year-over-year. We ended the year with strong outcomes across all major cost categories. Of note, Part D profitability and supplemental expenses trended in line with our guidance expectations. Meanwhile, our proactive care approach again delivered strong outcomes, leading to inpatient admissions per 1,000 in the low 140s during the fourth quarter. Taken together, the strength of our performance across each of these medical cost categories and the durability of our clinical model are giving us confidence in our underlying bid assumptions as we step into 2026. Moving to operating expenses. Our operating cost ratios continue to demonstrate significant year-over-year improvement as our operational infrastructure scaled to support our new members. Full year 2025 GAAP SG&A was $443 million. Our adjusted SG&A was $385 million, an increase of 28% year-over-year. Adjusted SG&A as a percentage of revenue declined from 11.1% in 2024 to 9.7% in 2025, representing an improvement of approximately 140 basis points. Taken together, we delivered full year adjusted EBITDA of $110 million and an adjusted EBITDA margin of 2.8%. This represents 270 basis points of margin expansion year-over-year. Turning to cash flow and our balance sheet. We generated positive free cash flow in 2025 and ended the year with $604 million in cash and investments. Subsequent to the quarter, today, we announced the close of a $200 million revolving credit facility. This facility is simply good housekeeping and further evidence of the maturation of our capital structure. We do not expect to draw on the credit facility in the near term, and our increasing positive free cash flow position allows us to support our organic growth objectives. Moving to our guidance. For the full year 2026, we expect health plan membership to be between 292,000 and 298,000 members, revenue to be in the range of $5.14 billion to $5.19 billion, adjusted gross profit to be between $615 million and $650 million; and adjusted EBITDA to be in the range of $133 million to $163 million. For the first quarter, we expect health plan membership to be between 281,000 and 285,000 members, revenue to be in the range of $1.21 billion to $1.23 billion, adjusted gross profit to be between $138 million and $148 million, and adjusted EBITDA to be between $26 million and $36 million. As it pertains to our full-year expectations, given the strength of our OEP results and continued stability with our retention, we are raising our year-end membership guidance by 2,000 members at the midpoint relative to the commentary we provided in our January 8-K. Moving to revenue. The midpoint of our initial revenue guidance range of $5.16 billion represents 31% growth year-over-year. The expected year-over-year increase to our revenue is primarily driven by our membership outlook. Meanwhile, our underlying revenue PMPM assumptions are balanced by increases to benchmark rates and the Part D direct subsidy. This is partially offset by the impact of the final phase-in of B-28 risk model changes and mix of growth outside of California, which carries modestly lower per member revenue. Turning to adjusted gross profit. Our $633 million guidance midpoint implies an MBR of 87.7%. The outlook contemplates improvement from the retention of existing members and modifications to our product designs within markets to reflect the current reimbursement environment. These tailwinds are balanced by the third phase in of V28 and our new member mix, which is disproportionately represented by LIS, dual eligible, and C-SNP eligible members. Caring for these complex members is core to our clinical model, but they typically join with higher MBRs in year one as we transition them from an unmanaged setting to our care model. Additionally, as a reminder, we do not incorporate any assumption for sweep pickup from new members in our initial 2026 guidance. In 2025, this pickup was a benefit of approximately $14 million to our full-year adjusted gross profit and EBITDA or roughly 30 basis points to our consolidated MBR. Moving to SG&A. We forecast further improvement in our SG&A expense ratio. We expect to achieve operating expense scale economies resulting from both membership growth and enhancements to administrative workflows. As John mentioned earlier, we also plan to reinvest a portion of the savings derived from improved operating efficiency towards further advancements in our clinical model, new market activities, and technology infrastructure to prepare for scaling our business and the deployment of AI workflows in the future. Taken together, we expect to deliver adjusted EBITDA of $133 million to $163 million, consistent with our preliminary profitability comments provided earlier this year. Turning to our seasonality expectations. We expect a modestly lower MBR in the first half of the year compared to the full-year average. Conversely, we expect the second half of the year to be slightly higher versus the full-year average. Our initial view generally reflects the regular seasonality of our Part C MBR experience, combined with a flatter slope to our Part D MBR in 2026. In conclusion, the 2025 execution of our clinical model, the replicability of our results across markets, and the consistency of our operating performance all give us tremendous confidence as we enter 2026. We are excited for the significant growth opportunity in the years ahead and are determined to make the right investments in people, processes, and technology to ensure that we are scaling responsibly.

Our first question comes from Michael Ha with Baird.

So I want to frame this question by calling out a few numbers first. So over the past two years, Alignment has seen nearly 50% revenue growth CAGR, I think almost 500 basis points of margin improvement, right, sub-10% G&A, all while improving to 100% of members in 4-plus star rated plans, and all this happened in a flat rate environment, while trends nationally rose to high single digits. So on the heels of all of this and with the potential again for another flat rate year in '27, my question is, I guess, simply put, what would prevent Alignment in '27 from having a rerun of what you just accomplished in '24 or '25 because it looks very similar to setup into '27.

Well, Michael, this is John. You should probably expect my response to be that we feel very comfortable with the 20% growth rate. We feel good. The model is working and will continue to work regardless of changes in the interest rates. I believe that if rates do increase slightly regarding events transitioning to the final notice, it will be fine. What I'm hearing about the potential increase still seems to fall short of what we believe the trend is, at least according to the sector’s perspective. So that should be favorable for us. If rates don't increase, it could be even more favorable. We will continue to focus on maintaining a disciplined approach and finding the right balance between growth and margin expansion. We do not want to rush our growth. I'm expecting that it will still take one or two years for people to find the right model for recovery in this post V-28 environment. Some companies experienced significant growth this past year, but we chose a different path. We didn’t grow just for the sake of growing; we wanted to establish durable relationships with providers and ensure our infrastructure could support the level of performance we've achieved. We are aware of our strong position for 2025 and I feel confident about 2026 as well. We are seizing the opportunity without becoming complacent, intensifying our focus on operational efficiency, clinical effectiveness, and AI implementation. We're strengthening ourselves to reach our growth potential over the next three to four years, aiming for substantial achievements. That's our perspective on it. So Michael, you predicted this two years ago, but I'm not prepared to confirm any predictions just yet.

Got it. Helpful. Okay. My next question, the implied MLR for '26, Jim, I think you mentioned midpoint 87.7%. If I were to strip out that sweep payment from '25, I'm seeing maybe 10 bps of MLR improvement year-to-year. So at first glance, it feels a bit conservative since clearly, prior years have grown a lot more and done a lot more MLR improvement. So I'm just trying to understand the assumptions embedded in MLR a little bit better. I know you mentioned LIS, SNP, SNP member mix. How much does that year 1 member mix impact your year-to-year MLR? What are you assuming on trend in '26 versus '25? Just a general sense on the various components.

Thank you, Michael. I’d like to highlight a few key points regarding our guidance for 2026. We have three main inputs that we feel optimistic about. Our experience in 2025, including how we've managed costs and the performance throughout the year, has built our confidence as we approach 2026. Additionally, we placed our bids in mid-2025 for 2026, and as we assess our position in January and February while constructing our model, everything is aligning with our expectations. Furthermore, we are focused on disciplined growth, strategically investing in areas where we can be successful with our preferred products, target member cohorts, and specific regions. In regard to the MBR, the year-on-year improvement is about 10 basis points, mainly due to the removal of last year's suite impact. There are three main factors why our MBR improvement isn’t more substantial. Firstly, we are still navigating the third phase of B-28, which presents some challenges rather than benefits. Secondly, our new member mix features a higher representation of Dual-Eligible, C-SNP eligible, and LIS members. While these groups align with our strengths, they initially contribute to a higher MBR. Nevertheless, we are adept at managing these members, and there is significant long-term potential. This strategy was a significant focus during our Annual Enrollment Period, and as mentioned earlier, we also lacked a suite last year. Therefore, the transitions in B-28, coupled with the higher mix of special needs members, influence our current performance. However, we are confident in our visibility moving forward. Lastly, I’d like to point out our strong performance in Part D last year, which also contributes to our visibility for 2026.

Our next question comes from the line of John Stansel with JPMorgan.

I know you called out potentially changing some approaches around your distribution network and broker community. Can you just talk about how you're thinking about that change? And then maybe looking at the '27 commentary a little bit, I think there's been an expectation about potentially expanding into new states in '27. Is that index at all to needing a better rate in '27? Or is that something that you think you can do in an all-weather environment?

John, regarding distribution, I believe my previous comments were specifically about some of the markets outside California, including potential new market entry strategies we're considering within existing states and possibly entering another state. At this point, we're established enough in each of our markets to be considered a significant player. We've developed stronger relationships with brokers and providers, and the success we've experienced in California is beginning to take hold in these new markets, which starts with the providers. We've also realized that brokers play a crucial role in this process. Given that many incumbents have been stepping back over the past couple of years and may continue to do so, we see this as an opportunity for us, and we are being very deliberate about it. As for new markets, we are actively considering options, but we are not yet where I would like to be in terms of engaging with providers. However, I am confident that we will be able to enter a new state. I don’t believe the rates will significantly impact us; we will adapt to whatever the rates are and perform well in any situation. It's really about partnering with the right providers, which I believe we have in these two new markets.

Great. And then on the RFI from CMS that is still out and about but has received comments at this point, a couple of different topics embedded in there. As you've had further discussions with the administration and with your counterparties, how are you thinking about potential incremental changes that could potentially come out of that RFI?

We submitted our comments yesterday like everyone else. From a policy standpoint, we'll see what they say regarding the reward factors and the HEI. Either way, I think we'll be okay. We are strongly in favor of C-SNPs remaining as C-SNPs and not being linked to any aligned network because we believe beneficiaries should have choices. It's not right to force them into a suboptimal plan with a lower star rating when they deserve the right benefits, network, and quality. There are other factors to consider as well. Regarding risk adjustment, we support the documentation of the HRAs, and we've always supported that initiative. The administration's focus on program integrity and curbing gaming is a positive step. However, I do believe there may be some exposure on rates, and as mentioned earlier, we could benefit from that. I trust they will make the correct decisions concerning rates when the final report is released.

Our next question comes from the line of Matthew Gillmor with KeyBanc.

I wanted to start off with the 80k metric in your outlook. Can you provide some more details and unpack what drove the favorability in the fourth quarter? And then also, as we're looking ahead, I would think the 80k metric will probably tick up given the duals mix, but just wanted to get a sense for what's the right kind of apples-to-apples comp for 80k that's embedded within the guide?

I'll begin by discussing how we wrapped up the year. We had anticipated, as mentioned in the third quarter by Matt, that the 80k number might increase. We were cautious about betting on a favorable flu season, which turned out to be better than expected. Consequently, we ended the year in the low 140s. Looking ahead to the new year, I do believe there is potential for the 80k figure to rise slightly, not because the underlying trend has changed, but due to various factors. I see this as part of the cost trend that we are closely monitoring and managing. It's worth noting that this number might see a slight increase throughout the year. Typically, the first quarter is slightly higher, making it a seasonal consideration.

Great. Very helpful. And then maybe asking about AI investments. You mentioned some investments in the prepared remarks. I think last call, you also talked about AI within Care Anywhere and AVA. Just wanted to get a flavor for where some of the technology enhancements you have in flight, where they maybe be directed and how that may benefit the business over time?

Yes, it's a great question. We have over 30 potential use cases for deploying Agentic AI. The main challenge we face is ensuring that two foundational elements reach a satisfactory level. The first is to establish a unified data architecture, starting with AVA, where we are thoroughly reviewing everything. We are validating all our data ingestion processes to ensure they are functioning correctly, without making any assumptions, all aimed at allowing us to scale and replicate our efforts efficiently. This will help us reach cash flow breakeven more quickly than anticipated, and we plan to grow more aggressively with Stars and benefits than before. The second issue involves ensuring that end-to-end workflows in each functional area are well documented and understood. As we double our size every two years, we bring in many new employees who need proper training. It's important to ensure that everyone understands various workflows and their micro workflows, as well as cross-functional processes. This includes evaluating our clinical work processes and provider contracting decisions. We expect to have these evaluations completed by midyear, after which we will begin deploying Agentic AI use cases. Additionally, we are revisiting the initial stratification model within AVA and plan to enhance it to better serve the Care Anywhere members, who represent 10% of the population but account for 78% of the spending. We will also develop use cases focused on administrative improvements, starting with member services, which should yield immediate savings. In financial reporting, AI will help analyze raw data to produce actionable insights on a market-by-market basis. However, we do not intend to be at the forefront of deploying Agentic AI in care delivery; we will continue to rely on our doctors and nurses for that. I hope this clarifies things.

Our next question comes from the line of Scott Fidel with Goldman Sachs.

This is Sam for Scott Fidel. I was just wondering if you could discuss your concerns about the DMA industry potentially losing bipartisan support in Washington. Additionally, what can the industry do to enhance its reputation and better address the ongoing regulatory challenges it faces?

I believe we need to return to the original intentions of CMS for Medicare Advantage. The ongoing actions I observe align with that vision, aiming for a program that delivers value to the beneficiaries. To achieve this, we must focus on higher quality and improved experiences while ensuring affordability. It's essential to balance high quality with low cost. In this landscape, those who can provide the most value should naturally succeed. Unfortunately, there seems to have been some financial maneuvering that distracts from this goal in recent years, with more focus on aspects like coding, global capitation, and prior authorizations, which may not be sustainable in the long term. If stakeholders adhere to the initial guidelines set by CMS, I foresee a positive outcome. Moreover, I believe the growing benefits of Medicare Advantage compared to traditional Medicare will contribute to its continued expansion. Historically, through different phases such as the BBA in the '90s and the ACA in the early 2000s, Medicare Advantage has consistently thrived despite fluctuations. I would be quite surprised if this trend were to change.

Our next question comes from the line of Craig Jones with Bank of America.

So I want to follow-up on what you said on the final rate notice for '27. You said you think CMS will do the right thing on rates in the final notice. We saw United in its letter to CMS around the advanced rate notice thinks that growth rate for '27 should be closer to 9% to 10% versus the 5% in the advanced notice. So where do you think that growth rate should be? And then what do you think CMS will actually end up doing when you say do the right thing?

I think the thing that I’ve been reading about really is related to the impact of these skin substitutes and how that’s been an effective offset to the utilization trends for traditional Medicare. And I think it remains to be seen how they actually manage that specific issue. I’m not sure it will get up to the 9%, 10% rate net. But I think it’s possible you get to the 5%. And I’m not sure that’s still enough, frankly, to kind of fully meet the trend. But I got to tell you, I was surprised by the rate notice in the advanced notice. And very practically, it was related to the midterms. That’s really how I was thinking about it. And I think there’s an opportunity with additional data that’s going to be coming in to capture the second half trends. I think they’re going to come up with something hopefully to do with skin substitutes that was a material takeaway. And I think it will be something that will be reasonable. And maybe I should say I’m hoping it will be something reasonable because if it’s not, I think you’re going to get a lot of people that are going to degrade benefits even more. And it is a real issue. And we saw this during BBA 30 years ago.

Our next question comes from the line of Ryan Langston with TD Cowen.

John, I want to make sure I caught what you said on the chart reviews. Did you say the exposure to total chart reviews is 1% and then even smaller from the unlinked piece?

Yes. For us, we don’t rely on that much at all is really the message. And we don’t feel exposed by that change at all.

Okay. And then, I mean, is it fair to maybe assume the split is more just 50-50 within that sort of 1%?

Yes. Ryan, I just don’t think we’re going to get precise about that because it’s so immaterial. It’s a small number. It’s a small number.

Okay. Building on John's question and his comments about strengthening broker relationships, a direct competitor in your markets revealed a plan to utilize MA brokers more like health navigators and involve them in the patient experience. Do you think this is a strategy that could be effective for the industry? Additionally, how do you foresee the payer-broker relationship evolving over time?

Yes, we have been consistent about this. We value our broker partners and believe they perform well, acting in the best interest of the beneficiaries fairly. I find it intriguing how CMS may position itself as somewhat more of a field marketing organization, if not an actual agent. This is something we are observing, as it involves nuanced developments that will be interesting to watch. I'm not certain it will be implemented soon, but it is on their radar. Regarding your comments about competitors, I am not sure. They mentioned that 4% to 6% of premiums allocated to distribution is a significant line item. While I think certain aspects could add some value, I'm uncertain about that particular point.

Our next question comes from the line of Whit Mayo with Leerink Partners.

John, can we go back and talk about the D-SNP growth in some of the non-California markets? Are there any numbers that you can put behind that? And then also maybe just elaborate on the potential opportunity in the coordination-only duals contract in Nevada.

I'll address the growth issue. Approximately 50% of our AEP growth came from the LIS duals and C-SNP, occurring both in California and outside of it. We are experiencing strong growth outside of California, which contributes to a healthy portfolio for us. We believe we can manage this effectively over time, considering the significant embedded value. John, there’s a second part to the question, so I'll pass it on to you.

Yes. I actually would need to follow up with you on that one. I don't have a good answer for you.

Okay. And my follow-up would just be with some of the Stars changes that if CMS deletes the 12 measures in Stars, is this a good or bad thing for you? I know you had some 2s and 3s in some of those measures.

Yes, we've looked at it. I think it's net neutral is kind of the bottom line. I think it does get implemented, it's probably not going to actually take root until '27 anyways, which means it will impact '29, maybe 2029, 2030. But net, I think as of now, we think it's effectively a net neutral. I do think CMS is going to try to simplify that whole Stars program. And so we actually think that's actually a pretty good thing.

Our next question comes from the line of Jessica Tassan with Piper Sandler.

Can you maybe give us a little more detail on the slope of MBR over the year? I think you mentioned typical Part C seasonality and then flat MBR flattish slope in Part D. So just trying to understand, excluding the sweep in '25, will calendar '26 follow kind of a similar seasonal cadence?

Yes, ex the sweep. And as you're aware, history has shown itself pretty consistently that Q1 and Q4 are kind of the higher MBRs. And then not even with the sweep, but just in Q2 is usually our seasonal low and then it picks up in Q3. So I think it's going to follow a similar pattern, Jess. And I think you're kind of seeing that in our first quarter guidance.

Okay. Great. And then just my next one is, can you all discuss retention during AEP? And then on the lower projected intra-year growth in '26 from 1Q to 4Q, is that a matter of lower gross adds or increased intra-year churn or switching? Just trying to get a sense of basically year 1 versus tenured membership and the mix of year 1 versus tenured in 2026.

Sure. Let me address the second question first, which is about intra-year movements, then we can discuss retention. As we entered this year, we observed significant changes. While "disruption" might be too strong a term, there was indeed notable activity. We are evaluating whether we captured most of that movement during the Annual Enrollment Period or if it will continue throughout the year. We're cautious about assuming that a greater opportunity during AEP will translate into sustained growth for the entire year. The Open Enrollment Period is looking good, but we are not ready to rely on it fully through December. Regarding retention, we mentioned in January at the conference that we were optimistic about it this year. This positive retention was one of the factors contributing to our sales growth, which is encouraging as it helps us improve our cohorts and achieve better Monthly Developments Ratios. We’re retaining our loyal customers, which has provided a nice boost for us.

Our next question comes from the line of Andrew Mok with Barclays.

This is Tiffany Yan on for Andrew. I just wanted to follow-up on the advanced notice. You mentioned your exposure to the unlinked chart review is fairly limited. Can you share what you think your exposure is to the risk model rebasing component relative to the industry?

That's actually an interesting question. I don't think we are as exposed as others because our blended RAF scores are around 1.1.

Yes, it's below 1.1. Even with the final phase of V28, you still have people coming down from 1.5, 1.6, 2.0 in certain markets, down approximately 20 percent. I think we’ve never relied on it other than to ensure that we are accurate and compliant with the coding and have focused on cost management and the Star side. I believe we will actually be at an advantage if there are any further adjustments to that.

Okay. Got it. And then I just wanted to follow-up on the MLR seasonality. I appreciate the comments around sort of the blended seasonality. But could you remind us how your Part D MLR specifically progressed through the quarters in '25? And is your expected '26 slope consistent with that '25 experience?

Yes. It will be slightly different in 2026 compared to 2025, which means that the profitability of Part D will be a bit more concentrated in the first half. However, this is all within the margins. Overall, it's consistent but with a slight emphasis on the first half. This reflects the nature of risk quarters and how we account for contra revenue when we are outside the risk quarter, among other factors. So, I would say it's quite similar to 2025, just a little flatter.

Our next question comes from the line of Jonathan Yong with UBS.

John, I think you mentioned that you're still in some provider engagement or negotiations in the new state. I guess what in your mind is currently the hang up there? And typically, where are you in terms of when you're thinking about entering new states? Would you normally be completed at this time? Or would it be a little bit further down the road you have that completed?

It really depends. It's a good question, John. We're aiming for full provider durability and engagement, and I believe we can achieve that. Our experiences over the past few years in new markets have made us extra cautious, and we want to ensure people fully understand our unique model and how we differ from others. Working with various health systems and integrated delivery networks often hinges on the relationship with physicians, and it’s essential to create economic, clinical, and operational alignment with them and their management service organizations. That's my main focus. We have excellent hospital partners and many doctors who resonate with our clinical model. I would just like to have a few more on board. That's all.

Got you. Okay. And then just going back to the rate update for '27. It wasn't clear to me because I think at the beginning in your prepared remarks, you said that the industry is complaining about what the effective growth rate is. But then it sounded like it was fine for you, but then I believe later on, you said that it is running below trend in terms of what it is I just want clarity on that.

The 0.9% net advanced rate notice is disappointing for the industry. There seems to be some debate about the reasons for this low trend. CMS has indicated that this reflects an actuarial reality, as they used different data for more recent dates compared to the past. Their aim was not to implement a programmatic policy change; it's simply that the data varied, leading to a lower-than-expected traditional fee-for-service trend. Additionally, the deduction of skin substitutes contributed to this figure, resulting in a problematic 0.9%. If this persists across the industry, it may prompt companies to reassess benefits. I heard one competitor mention a 9% to 10% increase, but I'm skeptical about that figure. If we consider the fee-for-service trend data and assume that at least part of the skin substitutes are being phased in as an offset, we might see the figures align more closely with the 5% discussed by other analysts. I've heard others suggest that the increase could go from 0.9% to 200 or 300 basis points, potentially reaching around 3% to 5%. However, that still seems lower than the utilization trends that could lead to more aggressive benefit designs. As for alignment, I believe we are well-positioned either way since we offer high-quality, low-cost services without relying on external medical management. We excel in that area. Additionally, the margins that would typically go to a third-party value-based provider are instead reinvested back into the individual practitioner or towards richer benefits. Overall, I think we will remain in a strong position. From an industry perspective, I hope for a 9% to 10% rate increase, but I'm unsure if that will actually happen.

Our next question comes from the line of John Ransom with Raymond James.

I'm considering the evolution of AVA. Initially, we focused on populations with conditions like congestive heart failure, COPD, and type 2 diabetes. If the goal is to shift the trend, what does the next phase look like in terms of utilizing your resources for that?

Really good question. No, your questions are always quite advanced. I believe two things are important here. First, while we perform well, there's significant room for operational improvement. Our stratification models need to be more accurate, and we should enhance the efficiency of managing our clinicians. We're concentrating on clinical outcome measures, focusing on traditional chronic disease management, and these measures will increasingly demonstrate not only effective utilization but also improved clinical outcomes. This will be a key focus for us. In terms of specific programs, we have opportunities to enhance transitions of care, improve case management, and achieve tighter integration with our provider partners regarding medical management and possibly even palliative care programs. When we bring all these elements together, they represent various small opportunities for us to continue reducing costs. Additionally, I've mentioned previously that, although this isn't strictly about the clinical medical loss ratio, the supplemental benefits we currently offer—like dental, vision, transportation, and Flex cards—constitute about 5% of overall premium. We are now large enough to begin investing in and potentially acquiring specialty company captives, which should allow us to save on margins since we would essentially be paying ourselves. For instance, whatever specialty we pursue, we could serve around 300,000 seniors in that area, which will help us manage costs effectively. Another point we've discussed is that one of the benefits of our performance in 2025 was our closer collaboration with the IPAs. We utilized technology tools to assist them in managing acute authorizations effectively. We've made significant progress operationally with them, although we still have some work to do regarding data. However, by delegating these responsibilities, we believe this will benefit us, the members, and the IPAs. Before last year, we hadn't fully engaged in this collaborative approach, and we hadn't realized the full benefits of AVA and Care Anywhere. Therefore, I'm very optimistic about this direction.

That was quite the answer. My second question is a very simple one. There are numerous studies regarding whether managed care is beneficial for taxpayers. If you compare them equally and adjust for risk, where do you stand? MedPAC claims it's unsuccessful, while the Evolent study presents it as a favorable option. When discussing this in Washington D.C., which study do you reference? Do you believe that, when compared equally, it remains a good deal for taxpayers?

I believe it is a very favorable arrangement for seniors. From a tax perspective, the latest study I reviewed after B-28 indicates that it's essentially comparable. Plans that manage to stay competitive while still providing a reasonable rebate to beneficiaries are likely to succeed. I think CMS is committed to expanding MA, but they aim to do it appropriately. They want to reduce any potential for exploitation and ensure the integrity of the program. Additionally, they are considering an alternative option, which they define as traditional fee-for-service Medicare. Personally, I believe that when examining the value for beneficiaries, we can expect continued growth and an increase in market share for MA. Although rebate amounts may decrease, they remain significant enough to make it more appealing than fee-for-service, prompting individuals to continue selecting it.

Our next question comes from the line of Raj Kumar with Stephens.

Maybe just one quick one around kind of AEP and just thinking about new member engagement kind of pertaining to the Care Anywhere platform. Any kind of insight on that and how that's trending relative to kind of this time last year?

Yes, Raj, it's John. Can you just repeat that again? I kind of faded out or you faded out. I didn't quite...

Yes. Sorry about that. Yes. Just maybe kind of any details around kind of new member engagement and kind of pertaining to the Care Anywhere platform and how that's trending relative to kind of this time last year with the new membership.

I understand your question. I would say the engagement levels are similar to last year, but I believe there's room for improvement. We are focused on leveraging the strategic and operational decisions we made two years ago, which are beginning to show results in 2024 and 2025, and are expected to continue into 2026. We're committed to continuous improvement and not settling for the current state. Currently, our Care Anywhere engagement is around 65%, which is decent, but we aim to increase that to 75%. I am confident that the new members of our service and experience teams will positively impact the company and our beneficiaries. So, year over year, I would say the levels are about the same.

Got it. And then just maybe as a follow-up, just kind of thinking about your ex-California markets and kind of been in them for a while now and as they've matured, have you kind of seen any divergence in just overall trend or even consumer behavior and how maybe that has kind of led to operational kind of nuances in those distinct markets and maybe even kind of any catering or tweaking around AVA to kind of service those operations in the kind of most optimal manner.

That's a very good question. The work we're currently doing in operational scaling is aimed at ensuring that providers and members outside of California receive the same level of service as they do within California. This is part of our growth and scalability efforts, and we're putting in a lot of effort to achieve this. While we have clear member satisfaction, we are now starting to focus on provider satisfaction metrics as well. As we expand, this aspect becomes increasingly important, especially outside California. We believe we've performed well on Stars and have successfully replicated our clinical metrics beyond California. However, we need to improve our provider engagement. I want to assure all the providers that we are actively working on this. We aim to excel and earn 5 Stars from you, just as we have from our members.

Ladies and gentlemen, that's all the time we have for questions. This concludes today's conference call. Thank you for your participation. You may now disconnect.