Earnings Call Transcript - ALHC Q1 2022

Operator, Operator

Welcome to the Alignment Healthcare First Quarter 2022 Earnings Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Mr. John Kao, Founder and Chief Executive Officer. Please go ahead.

John Kao, CEO

Hello, and welcome to our first quarter earnings conference call. I appreciate you joining us. We are proud to report another strong quarter beating guidance across each of our four key performance indicators. For the first quarter, our total revenue of $346 million represented 29% growth year-over-year. This was led by our health plan premium revenue of $331 million, representing 25% growth. Our health plan membership ended at 94,200 members, growing 13.4% year-over-year. Adjusted gross profit of $45 million in the first quarter was also ahead of expectations. Our gross margin engine continues to produce strong MBR outcomes, coming in this quarter at 87.0%. Lastly, our adjusted EBITDA was a loss of only $4 million as the vast majority of our adjusted gross profit outperformance fell to the bottom line. The outcomes in our first quarter indicate continued progress towards our long-term profitability objectives. After a solid start to the year, I’m feeling optimistic about our ability to continue to successfully execute against our strategic and financial objectives for the remainder of 2022. For our conversation today, we would like to cover three topics with you, including an overview of how we uniquely engage with the primary care community; an update on growth and our investments in market management; and a preview into our 2023 planning. During our initial public offering last year, we shared that our operating model centers around core principles that drive our virtuous cycle and are critical to building a successful Medicare Advantage platform. In the past, you’ve heard us talk about the achievements of our clinical model and our proprietary AVA technology. Today, we want to talk to you about the third key piece of the model: provider engagement, which is an essential component of how we create our strong MBR results that translate into high-value products for seniors. Our engagement is based on three important value propositions for the primary care provider: Number one, better care; number two, better practice operations; and number three, better financial results. As we’ve been out in the field focused on our growth initiatives, one of the most encouraging things we’ve experienced is that our provider engagement model and value proposition continue to resonate. Our approach to partnering with primary care physicians is different from others, as we do not have to employ primary care physicians in order to achieve successful outcomes. We are certainly open to that dialogue should the provider have interest, nor do we force them to change the way they practice medicine at the point of care. Instead, we create clinical, operational, and financial alignment, allowing us to form win-win relationships between the doctor, their front office staff, and Alignment Healthcare, all for the benefit of seniors. From a clinical perspective, we believe that most clinicians are great at what they do, and we don’t want to change what has made them successful. Alignment is committed to helping its primary care providers become even better and deliver even better care. We support the provider by helping them care for the most vulnerable seniors through our Care Anywhere program, which we view as an extension of their practice. Our Care Anywhere employed clinical teams provide extra care in the home or virtually to the 10% to 20% of our members who are chronically ill or high risk. This support gives time back to our primary care physicians to provide more care to more patients. We do all of this free of charge for Alignment members and free of charge to the provider. Importantly, members enrolled in our Care Anywhere program remain paneled to the existing primary care provider. In addition, we support our providers with actionable insights and valuable member data, which are made available to them in real time. From an operational perspective, our proprietary AVA technology, tools, and data help providers navigate the complex world of value-based care and optimize their performance. Physicians, front office staff, and provider organization leadership are provided with access to our population health data for their panel, as well as monthly reporting and stratification tools that we believe help them manage their practice. While we do not require providers to use our applications or tools at the point of care, we consistently hear feedback from our network of providers that our approach to sharing information is more transparent, comprehensive, timely, and insightful than those of other health plans. Our model facilitates greater collaboration and more efficient operations. From a financial perspective, we strongly believe Alignment centers with our providers. In order to achieve this, we typically enter into gain share, profit share, or risk-sharing contracts with Alignment physician incentives tied to Alignment’s total cost of care or MBR for their panel. More than 97% of our members are paneled to providers that participate in some form of gain share or risk-sharing opportunity. Since our partners are financially aligned to provide clinical and quality outcomes, our members are able to experience a greater member experience as reflected in our Net Promoter Scores, while our providers are able to experience better financial results. These three key components of our provider engagement model have been critical to how we differentiate ourselves in the market and how we plan to grow our business model. Turning to 2022 and 2023 growth initiatives, our ingredients for growth remain the same: provide high quality at a low cost, invest in local market management, and focus on our products, partnerships, and expansions. While early, we’re starting to see positive traction with our market management initiatives. Our membership as of April, which reflects both the start of Q2 and the end of the open enrollment period, ended at 95,000 health plan members, well on our way toward the 97,300 to 99,000 year-end membership guidance. While our primary short-term focus is on 2022 growth, our activities are also designed to support our 2023 growth plans as we build a repeatable, scalable platform. Though it is too early to comment on our specific 2023 product strategies due to the competitive nature of the bids, we intend to maintain our balanced approach targeting sustainable products and profitable growth. Meanwhile, to bolster our 2023 growth objectives, we are planning for both contiguous county expansions to go deeper in our existing states as well as new states in 2023, subject to regulatory approval. Given our 12 to 18 month new market sales cycle, we’re very pleased with our progress toward 2023 new provider partnerships and market launches. We look forward to sharing more information later this summer after our bids have been submitted. Wrapping up, 2022 is off to a great start as evidenced by our first quarter results. In addition to our financial performance, we continue to make great progress scaling our Medicare Advantage platform. Lastly, it is the commitment of our mission-driven employees that makes all of this possible for our seniors. As always, thank you to the entire Alignment team for your tireless work putting seniors first in all you do. With that, I’ll turn the call over to Thomas to review our financial performance.

Thomas Freeman, CFO

Thanks, John. Turning to the first quarter results. As John mentioned, we had another strong quarter in which we exceeded the high end of our guidance ranges across each of our four KPIs. For the quarter ending March 2022, our health plan membership of 94,200 increased 13.4% compared to a year ago as we continue to see positive momentum across our markets. Total revenue was $346 million in the quarter, increasing 29% compared to a year ago. This was led by our health plan premium revenue of $331 million, reflecting growth of 25% year-over-year. It’s worth noting that our first quarter health plan premium growth of 25% was a combination of both 13.4% membership growth, along with 9% health plan revenue PMPM growth. Our revenue PMPM of accrual for the first quarter reflects slightly earlier visibility to our projected full year revenue PMPM compared to this point in time last year. Accordingly, the 9% increase in our health plan revenue PMPM year-over-year was largely due to timing in the first quarter. On our last earnings call, we commented that our full year 2022 guidance incorporates an increase in our health plan revenue PMPM of approximately 2% compared to 2021. I will cover this in further detail momentarily, but we still believe that to be the case today, and we do not anticipate that the earlier Q1 visibility will change our full year expectations. Our top line outperformance in the quarter was coupled with strong MBR management. Our adjusted gross profit of $45 million reflects an MBR of 87.0%, including the impact of COVID utilization in the back half of January and the first part of February. As a reminder, our COVID inpatient admissions per 1,000 peaked in January at a rate that was close to 2.5 times the COVID admissions per 1,000 we experienced during the Delta variant wave last summer. However, as we’ve seen in prior waves, we did experience an offset from a reduction in non-COVID utilization that continued throughout the remainder of the quarter. It’s also worth noting that our $45 million of adjusted gross profit in the quarter included approximately $6 million of prior period favorable adjustments related to incurred but not paid claims estimates. We reflect our latest estimates of prior period development each quarter as part of our normal business cycle. However, this quarter was slightly more favorable than previous quarters. Excluding the prior period favorability, we were pleased that we still delivered adjusted gross profit well above the high end of our guidance range. SG&A in the quarter was $74 million, and excluding equity-based compensation expense, our SG&A was $49 million, an increase of 24% year-over-year. Lastly, our adjusted EBITDA was a loss of $4 million, exceeding our expectations for the quarter on the back of our strong adjusted gross profit performance as well as continued demonstration of SG&A scalability. Our consolidated adjusted EBITDA performance for the first quarter reflects our more mature markets continuing to build momentum towards consolidated profitability while we continue to invest in our newer market and growth initiatives. In terms of the balance sheet, we ended the quarter with $294 million in net cash. As mentioned on previous calls, we view our balance sheet as an area of strength given our ability to continue to fund our organic growth and working capital needs without requiring external financing. With that in mind, we also continue to evaluate small but accretive opportunities to deploy capital towards M&A. Turning to our guidance. For the second quarter, we expect health plan membership to be between 95,500 and 95,700 members, revenue to be in the range of $335 million and $340 million. Adjusted gross profit to be between $41 million and $43 million, and adjusted EBITDA to be in the range of a loss of $11 million to a loss of $8 million. For the full year 2022, we expect health plan membership to be between 97,300 and 99,000 members. Revenue to be in the range of $1.335 billion and $1.350 billion. Adjusted gross profit to be between $165 million and $174 million, and adjusted EBITDA to be in the range of a loss of $46 million to a loss of $39 million. We are reiterating our full year 2022 membership guidance and raising our full year revenue guidance on the back of a solid conclusion to the OEP period as well as revenue outperformance in the first quarter. We note that our revenue forecast includes the 1% return of sequestration in the second quarter, as well as the full 2% return of sequestration beginning in the third quarter. As mentioned previously, due to our revenue PMPM visibility and first quarter revenue accrual, we note that our second quarter revenue guidance implies a lower growth rate year-over-year. However, this is simply timing between quarters, and we encourage investors to focus on our full year revenue outlook. Given our first quarter adjusted gross profit outperformance, we are raising our full year 2022 adjusted gross profit expectations in addition to narrowing our guidance range. As we think about our adjusted gross profit and MBR assumptions over the next nine months, we remain mindful that we are early in the calendar year, and we will likely continue to see some variability in utilization as the rest of the year progresses. Our guidance expectations are predicated upon utilization running approximately in line with our historical baseline experience, inclusive of the potential for a modest spike in COVID-related utilization. Lastly, we are raising the low end of our adjusted EBITDA guidance. As we said before, it’s a strategic imperative of ours to continue to balance our short-term profitability objectives with our longer-term growth objectives. As the year progresses, we anticipate continuing to evaluate ways to reinvest any adjusted gross profit outperformance towards our 2023 and 2024 growth initiatives. In summary, we are very pleased with our first-quarter results. I think it’s a solid start to the year. Our team is executing on our strategic initiatives across markets, and we look forward to updating you on our progress throughout 2022. With that, let’s open the call to questions.

Operator, Operator

Thank you. The first question comes from Ryan Daniels with William Blair. Please go ahead.

Ryan Daniels, Analyst

Yes. Thanks for taking the questions and congrats on the strong start to the year. John, I wanted to address a question to you. You spent a lot of time talking about how your relationship with physicians is different than that which they have with a lot of other payers, which is more adversarial. And I’m curious, in this market where there are labor shortages and burnout, working with you could improve their time. You can kind of make it easier to practice. You can provide additional incentives. So my question is, how do you get that message out into the market and leverage your unique position to help drive your growth engine?

John Kao, CEO

Hey Ryan, thank you for that question. I love that question. It’s really something we talked about at the last conference call when we talked about making the investments in both community reps and provider development resources. So it’s taking all of the value proposition that was inherent with the way in which we started the company, and then really packaging it up so that every single person in the company understands why the primary care physician is so important. It’s getting in the field and talking to them, which is what we’ve been doing since the beginning of the year. I got to tell you, I’m so energized and excited about the response from the PCPs that we talked to. They’re looking for a solution. There’s a lot of talk around consolidation, there’s a lot of talk about staff models, and there’s a lot of talk about different kinds of models. They just want to practice really good medicine. They want to remain autonomous and entrepreneurial, but they need help in getting into value-based care, and we provide the tools. We understand them. We come from a delivery culture, and so it’s just boots on the ground, Ryan. I’m really excited about that in the context of how we’re growing the business.

Ryan Daniels, Analyst

Perfect. I appreciate that. And then as my follow-up, it looks like social determinants of health are really entering the mainstream. I think in the Medicare 2023 notices, they’re going to incorporate that a lot more in regards to how they view plans. Can you address how you look at social determinants and health? I think it’s an area you’ve focused on collecting data and investing in probably ahead of anyone else in the industry. I’d love to hear what you’re doing there and what the plans are.

John Kao, CEO

Yes, Ryan, again, I love that question. From the IPO, we’ve said we think there’s going to be a convergence between traditional health insurance and also supplemental benefits that support social determinants of care. In the context of the final notice and where CMS is going, we love what they’re doing. We love the focus on health equity. We love the focus on care coordination and coordination of benefits with the states. And we love the transparency associated with this topic around supplemental benefits. It’s going to be more and more important that we look at whole health. To personalize this a bit, my family members and my mom and my brother, they’re just beneficiaries of this and the amount of improvement in their daily lives is huge. Having a shout out here for you, Andrew Papa, is really additive to a senior because they have an hour a week just to drive around and get groceries. It’s a big deal. I think you’re going to have more and more of that. The transparency associated with CMS and what they’re looking for is great.

Ryan Daniels, Analyst

Great. Thank you for all my color. I’ll hop back in the queue.

Operator, Operator

The next question comes from Ricky Goldwasser with Morgan Stanley. Please go ahead.

Ricky Goldwasser, Analyst

Yes, hi, good evening. So, I wanted to focus on MLR. Clearly, you guys did a great job in managing medical costs down, continuing from what you did in the last couple of quarters. How should we think about MLR guidance for the rest of the year? Because I don’t think you’ve changed or at least you didn’t update that. And then as we think about the opportunity, can you share with us some data points about how the year two cohorts are progressing? I know that you have shown meaningful improvement in the California cohort, just curious to see how this is progressing also in your other states?

Thomas Freeman, CFO

Yes, absolutely. Hey Ricky, this is Thomas here. First off, we’re very proud of our first-quarter results. To your point, this is another quarter where we demonstrated the consistency of our operating and clinical model. As we think about the rest of the year outlook, we feel very comfortable that another COVID wave has come and gone without significantly deviating from our expectations. Our experience with Omicron was that we faced higher utilization at two to two and a half times compared to what we experienced during the Delta wave last year. The fact that we managed through that without a hitch is something we’re proud of. Regarding our full year outlook, we feel comfortable with our approach in terms of our kind of 87-ish range for the full year. You can look at our adjusted gross profit on the low and high compared to revenue and back into something in the 87% range. Again, that’s inclusive of our DCE venture, which is running north of that, implying that our core MA business is running better. We’re excited about the opportunities in both North Carolina and Nevada, as well as the potential in Arizona as a year-one market as we head into 2023.

Operator, Operator

Our next question comes from Jeff Garro with Piper Sandler. Please go ahead.

Jeff Garro, Analyst

Yes. Good afternoon and thanks for taking the questions. I wanted to ask a little bit more about your progress on the market management efforts. Given the tough labor environment that we’re in right now, I wanted to specifically ask if you’re achieving your hiring goals for community reps and provider development resources, both in terms of quantity and the quality you were expecting?

John Kao, CEO

Hey Jeff, it’s John. Another great question. The answer is we are at about 60% of goal in terms of what we anticipate hiring for the entire year. From a timing point of view, we’re really happy about that, not only setting us up well for the 2023 market but helping us with various initiatives in 2022 on the growth side. We’re getting really good quality people. While the competition for quality people that are familiar with value-based care and managed care is competitive these days, we’re a bit different in that what we do and how we do it is different than a traditional managed-care organization. We’re looking for the best talent and training them, spending a lot of time on people development and flexible workforce management. We are committed to getting the best people, and we’re going to train them.

Jeff Garro, Analyst

Excellent. Great to hear! And maybe follow up a little bit more there. I know that initiative was put in place considering 2023 open enrollment, but I’m curious what other initiatives you have for 2022 focusing on enrollment or retention or other components of your success?

John Kao, CEO

I'm really happy with the operations throughout the company in terms of Stars, compliance, and operational efficacy. While we still stick to the range on membership we shared, we have a lot of things in progress. I'm not at liberty quite yet to talk about them, but we are competitive and working hard. I stand by my 20% long-term growth target, and we won't stop in 2022. Everybody is very focused on growth. As Thomas mentioned, our clinical model is working well, and our provider engagement is going great. So, the answer to your question is we really want to translate all of that into growth.

Operator, Operator

The next question comes from an unidentified analyst with Raymond James. Please go ahead.

Unidentified Analyst, Analyst

I’m sorry, can you hear me?

Operator, Operator

Yes, we can hear you now.

Unidentified Analyst, Analyst

Sorry about that. My question is, as you look three to five years out in the market for real process and real EBITDA, have you changed your thinking at all about getting to real EBITDA profit? Or are you just focusing more on top-line growth?

Thomas Freeman, CFO

Hey John, this is Thomas here. We’re definitely mindful of that. We’ve been consistent since our IPO that we were not believers in the growth-at-all-cost model. Our approach has focused on solid growth while positioning ourselves towards EBITDA breakeven profitability over the next several years. We’ve shared that our California franchise, operational the longest, was approaching EBITDA breakeven last year, and our forecast called for EBITDA positive status this coming year. This is a testament to our ability to achieve EBITDA breakeven while continuing to invest in growth in newer markets.

Unidentified Analyst, Analyst

Do you have a low to high revenue number where it’d be reasonable to think about EBITDA breakeven on a consolidated basis?

Thomas Freeman, CFO

What I would tell you is it’s partially a function of the growth composition between our existing markets and our new ones. When we launch new markets, we make specific investments both in medical expenses and SG&A that introduce short-term diseconomies of scale. Alternatively, when growth happens in our existing markets, we generally achieve better operating leverage. I’d hesitate to provide a single point estimate on revenue, as it largely depends on the composition of that revenue. As John mentioned, we are targeting that 20% annual growth rate in the future, and we will be approaching EBITDA breakeven over the next several years.

Operator, Operator

The next question comes from Lisa Gill with JPMorgan. Please go ahead.

Cal Sternick, Analyst

Yes, hi, this is Cal Sternick on for Lisa. Just a question since you touched on M&A earlier. I know that’s something you’ve been looking at for a while. Curious if you could give us a sense of what you’re seeing in the market regarding health line or provider opportunities?

John Kao, CEO

Hey Cal, it’s John. I think we were very aggressive on that front in Q4 of last year. In Q1 of this year, our priority is ensuring we protect the balance sheet and to be very thoughtful about cash, so we don’t have to raise any funds for organic growth. We are seeing opportunities with reputable providers wanting to collaborate with us in Medicare Advantage. Our ability to analyze and implement acquisitions is also something I'm getting comfortable with, and we are being very selective while still looking at a few interesting opportunities.

Cal Sternick, Analyst

That’s great. If I could just ask a couple more questions. Some of your competitors have mentioned changes to the way they incentivize brokers for next year. Just curious if you have any plans to structure your relationships differently heading into the 2023 AEP, and what your thoughts are there.

Thomas Freeman, CFO

Hey Cal, this is Thomas. No real plans for changes on our side. I think what you’re referring to is discussions around distribution channels with higher churn and how that affects some of those payments. While we partner with the external broker channel, we typically work more with the FMO channel than some of the more telephonic and online channels. For us, it’s a small percentage of our overall distribution, not something we've necessarily seen that I know others in the market have discussed. So we’re staying consistent with our approach and continuing to work with long-time brokers who understand our value proposition.

Operator, Operator

Our next question comes from Nathan Rich with Goldman Sachs. Please go ahead.

Nathan Rich, Analyst

Hi, good afternoon. If I could start with a follow-up for Thomas on the MBR guidance. I think you said it assumes utilization kind of running in line with historical baselines and also includes a modest spike in COVID utilization. I just wanted to clarify that. Can you share how you saw utilization trends coming out of the Omicron spike in March and how you expect that to play out in 2Q?

Thomas Freeman, CFO

Yes, absolutely. So heading into the back part of January, our COVID admissions per 1,000 peaked at a rate about 2.5 times compared to the Delta wave last summer. However, our COVID admissions in January were still significantly lower than what we experienced pre-vaccination in December 2020 and January 2021. Though it was higher, it wasn't near as severe or intense before vaccinations. We felt pretty comfortable that over the next nine months, our overall expectation of utilization should run in line with our historical experience. That said, if you had asked most folks back in October about whether Omicron would be worse than Delta, I think most would have said no, showing the unpredictability of COVID's future impacts on our medical expense line item.

Nathan Rich, Analyst

That's helpful. As my second question, John, you talked about different types of gain share and risk share contracts in the market. What type of risk relationship do you feel puts the company in the best competitive position? Do you have a preference for that type of relationship with the provider?

John Kao, CEO

Yes, great question. We want to ensure flexibility with our providers, whether at the individual practitioner, IPA, or medical group level. We want any arrangement to result in the best outcomes for the member and facilitate our growth. Shared risk arrangements allow us to manage institutional dollars while deploying our Care Anywhere model, leading to better clinical outcomes and higher value. We don't mind global cap deals with partners that we trust, but our relationships need to deliver on quality and compliance. Our competitive advantage is our understanding of the market's operational elements and the timely sharing of information with our provider partners.

Nathan Rich, Analyst

That's helpful. Thank you.

Operator, Operator

The next question comes from Kevin Fischbeck with Bank of America. Please go ahead.

Kevin Fischbeck, Analyst

Great. Thanks. I’m a little confused about how to think about the quarter. Thomas, you gave a couple of things regarding the quarter being non-institutional due to the timing of revenue conditions and then $6 million of favorable development. If we say that we only grew 2%, then add $6 million to cost, you’d have an MLR like in the mid-90s. Why isn't that the right way to think about it, and how did Q1 play out versus what your internal thoughts were?

Thomas Freeman, CFO

Yes, Q1 was right in line with expectations. On the revenue side, we had visibility to first quarter revenue rates in early March. The timing I alluded to was due to having earlier visibility this year on our returning members. We successfully tracked membership through operational progress last year. Regarding the medical expense side, I want to ensure we accurately capture data on utilization and what type of services are occurring. We typically see true-ups favorable to our MBR, but this quarter, the $6 million was slightly more favorable than normal. Excluding prior period favorability, our MBR for the quarter was solidly in the 87s and above our guidance range.

Kevin Fischbeck, Analyst

Okay, that’s helpful. Then, John, I’d like to discuss the physician engagement as a great preview for the panel you guys are going to be on at our conference next week. You mentioned that 97% of your doctors are already aligned financially. What is the main driver to that? Is it deeper engagement with physicians? Is it simply being on the system for longer? How do we think about that physician engagement and the levers to get to profitability?

John Kao, CEO

Yes, that’s another great question. In existing markets, we have a lot of things working well. The key for me is the new markets, both recent ones and those launched in 2021 and 2022. Engagement is ensuring we support the doctor while delivering excellent care to seniors. We track six engagement metrics per doctor and utilize timely data for them. We’re very encouraged by our discussions with doctors showing a positive response. We want to grow their panels while ensuring they feel empowered.

Kevin Fischbeck, Analyst

Thanks.

Operator, Operator

Our next question comes from Kevin Caliendo with Wells Fargo. Please go ahead.

Kevin Caliendo, Analyst

Yes, hi. Thanks for taking my call. What were you seeing during the OEP exactly? The membership is a little better than we thought. Are you seeing yourselves gaining a larger percentage of the share of new enrollees? Any color around the early stages of OEP in terms of your observations?

Thomas Freeman, CFO

Yes. In our California marketplace, we grew closer to about 2.5% in that time period as compared to overall Medicare Advantage growth for all payers under 1%. To your point, we are growing faster than the market in our existing geographies, which has occurred through taking share. Our performance has been consistent with expectations, both on sales and retention sides, reflecting general market awareness of our products.

Kevin Caliendo, Analyst

This is a nice segue into my follow-up. When you see rates being as robust as they are, does that help you think about accelerating the pace to profitability? How do you think about faster growth in light of this improvement from what you anticipated six months ago?

Thomas Freeman, CFO

Yes, and to that point, at a macro level, I think it underscores the investment thesis for Medicare Advantage. There was a lot of uncertainty around coding intensity adjustments previously, but the shift towards a stronger MA value proposition can be encouraging. As we invest in the bids, we think about how these align with our level of provider engagement in each market, and where we can apply investments for growth amidst potential competitive headwinds. We’ll focus on growth but will remain disciplined.

Operator, Operator

This concludes the question-and-answer session. The conference has also now concluded. Thank you for attending today’s conference. You may now disconnect.