Earnings Call Transcript - ALHC Q3 2025

Operator, Operator

Good afternoon, and welcome to Alignment Healthcare's Third Quarter 2025 Earnings Conference Call and Webcast. Please note that this event is being recorded. Leading today's call are 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. 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, 2024. 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 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 our company's website and our Form 10-Q for the fiscal quarter ended September 30, 2025. I would now like to turn the call over to John. John, you may begin.

John Kao, CEO

Hello, and thank you for joining us on our third quarter earnings conference call. For the third quarter of 2025, we exceeded the high end of each of our guidance metrics. Health plan membership of 229,600 members represented growth of approximately 26% year-over-year. Strong health plan membership growth supported total revenue of $994 million, increasing approximately 44% year-over-year. Adjusted gross profit of $127 million increased by 58% year-over-year. This produced a consolidated MBR of 87.2%, an improvement of 120 basis points over the prior year. Finally, our adjusted SG&A ratio of 9.6% improved by 120 basis points year-over-year. Taken together, we delivered adjusted EBITDA of $32 million, solidly surpassing the high end of our adjusted EBITDA guidance. Our third-quarter results now mark the third consecutive quarter in which we surpassed the high end of our adjusted gross profit and adjusted EBITDA guidance ranges and raised the full-year guidance. These results were underpinned by inpatient admissions per 1,000 in the low 140s and demonstrate the power of our ability to manage risk in Medicare Advantage by placing care delivery at the center of our operations. As we've demonstrated in 2024 and through our year-to-date performance in 2025, our unique model has positioned us to succeed amidst a paradigm shift in the industry marked by lower reimbursement and higher star standards. We continue to make investments that will improve operations including back-office automation, clinical engagement, AVA AI clinical stratification, and Stars durability. These investments will further separate us from our competitors. For the full year, we now expect to deliver $94 million of adjusted EBITDA at the midpoint of our guidance range in 2025 compared to our initial full-year guidance of $47.5 million at the midpoint. Jim will expand further on guidance in his remarks. Moving to Stars results, 100% of our health plan members are in plans that will be rated 4 stars or above for rating year 2026, payment year 2027 compared to the national average of approximately 63%. We are once again demonstrating the consistency and replicability of our high-quality outcomes across each of our markets. For starters, our California HMO contract earned a 4-star rating. This is its ninth consecutive year rated 4 stars or higher. Meanwhile, our competitors in the state only have approximately 70% of members and plans rated 4 stars or higher for payment year 2027. Our ability to consistently earn high stars results from AVA's centralized data architecture that provides our organization and clinical resources with cross-functional visibility to execute on each star metric. In addition to our strong California performance, we now have 2 5-star contracts in North Carolina and Nevada. Furthermore, we earned 4.5 stars in Texas in its first rating year. Our results outside of California not only demonstrate our commitment to quality but also underscore the replicability of our outcomes across geographies, demographics, and provider relationships. Our latest results set us apart from our peers and create additional funding advantages in payment year 2027. Looking ahead, we believe the improvement we made to the raw star score of our California HMO plan in rating year 2026 sets a solid foundation for rating year 2027 and payment year 2028. Furthermore, we believe CMS' transition to the excellent health outcomes for all reward, formerly known as the Health Equity Index, will add cushion to our 4-star rating in California. This change rewards health plans that effectively serve the most vulnerable low-income seniors, including those who are dually eligible. Our model is particularly well suited to manage this population with the clinical expertise and high-touch care provided by our Care Anywhere teams. Most importantly, we believe the move toward a bonus factor that focuses on clinical outcomes furthers CMS' mission to create greater alignment between quality and reimbursement. Lastly, I'd like to share some early thoughts on the 2026 AEP. For the upcoming plan year, we are continuing to take a measured approach towards balancing membership growth and profitability objectives, consistent with our strategy in the past years. Our ability to deliver low costs through our care management capabilities is creating the capacity to keep benefits across our products generally stable to modestly down. We believe this disciplined approach supports our growth objectives while staying mindful of the third and final phase-in of V28. Given continued disruption in the MA industry in 2026, we believe there will be an incremental opportunity to take share while growing adjusted EBITDA year-over-year. Based on the strength of our early AEP results, we are confident that we are on track to grow at least 20% year-over-year. Consistent with our approach in past years, our sales operations are focused on matching seniors with the right products that support their lifestyle and growing in markets where we have the strongest provider relationships. We're very encouraged by the early activity of this selling season and look forward to sharing our full results with investors after the conclusion of the 2026 AEP. Taken together, our core competency in care management, continuous improvement in member experience, and ongoing investments in AVA AI are all positioning us for further improvements to quality and outcomes. We believe we are the best Medicare solution for seniors everywhere, and we look forward to serving even more seniors across our markets in 2026. Now I'll turn the call over to Jim to further discuss our financial results and outlook.

James Head, CFO

Thanks, John. I'm pleased to share our results for the third quarter, which were underpinned by strong execution across the board. For the third quarter, health plan membership of 229,600 increased by 26% year-over-year. Revenue of $994 million increased by 44% over the prior year. Outperformance in our revenue growth was predominantly driven by continued momentum in our new member sales during the quarter. Third quarter adjusted gross profit of $127 million grew 58% compared to the prior year. This represented an MBR of 87.2% and improved by 120 basis points year-over-year. Outperformance of both adjusted gross profit and MBR was driven by a continuation of disciplined execution of our clinical activities. This drove inpatient admissions per 1,000 in the low 140s during the third quarter. Meanwhile, Part D modestly outperformed our expectations as growth in utilization trends moderated sequentially. Our Part D experience through the first 9 months of the year gives us confidence that all of the moving parts related to the IRA changes have been appropriately captured and that we are on pace to meet the Part D margin assumptions embedded within our guidance. Turning to our operating expenses. Adjusted SG&A in the third quarter was $95 million and declined as a percentage of revenue by 120 basis points year-over-year to 9.6%. The year-over-year improvement to our SG&A ratio was driven by the scalability of our operating platform. Additionally, we experienced a few million dollars of SG&A timing benefit in the third quarter that we expect to reverse in the fourth quarter, leaving our full-year SG&A outlook roughly unchanged. Taken together, adjusted EBITDA of $32 million resulted in an adjusted EBITDA margin of 3.3% and represents 240 basis points of margin expansion compared to the third quarter of 2024. Moving to the balance sheet. We ended the third quarter with $644 million in cash, cash equivalents, and investments. Cash in the quarter was favorably impacted by the timing of certain medical expense payments, which resulted in higher operating cash flow during the third quarter. This timing difference also increased our Q3 days claims payable, but we expect this timing difference to normalize in the coming quarters. Our reserving methodology remains consistent and excluding this timing effect, we estimate that total cash would have been modestly higher sequentially and days claims payable would have been flat to modestly higher year-over-year. Importantly, this had no impact on the P&L. Turning to our guidance. For the fourth quarter, we expect the following: health plan membership to be between 232,500 and 234,500 members; revenue to be in the range of $995 million to $1.01 billion; adjusted gross profit to be between $104 million and $113 million; and adjusted EBITDA to be in the range of negative $9 million to negative $1 million. For the full year 2025, we expect the following: revenue to be in the range of $3.93 billion to $3.95 billion; adjusted gross profit to be between $474 million and $483 million; and adjusted EBITDA to be in the range of $90 million to $98 million. Building upon the strength of our third-quarter results, we once again increased the full-year outlook for each of our guidance metrics. Given our year-to-date momentum on membership growth, we raised our year-end membership guidance by 2,000 members at the midpoint. Expectations for higher membership also drove our full-year revenue outlook approximately $41 million higher at the midpoint, and we now expect to finish the year with nearly $4 billion of revenue for the full year 2025. Moving to our full-year profitability expectations. Our updated adjusted gross profit guidance of $479 million at the midpoint increased by $18 million. This implies an MBR of 87.9% and reflects nearly 100 basis points of MBR improvement year-over-year. Similarly, we increased the midpoint of our adjusted EBITDA guidance by $18 million, flowing through the entirety of the increase to the midpoint of our adjusted gross profit outlook, while full-year SG&A assumptions remain roughly unchanged. Our guidance assumes a portion of the strong year-to-date ADK performance persists through the fourth quarter. However, as a reminder, the final months of the year are expected to have higher utilization due to the seasonal impact of the flu. Meanwhile, we continue to take a prudent stance to our Part D assumptions given significant changes to the program this year. Lastly, on seasonality, we expect our MBR in the fourth quarter to be higher than the third quarter due to the typical seasonality of medical utilization. As a reminder, our MBR seasonality in 2025 is not comparable to 2024 due to changes to the Part D program and prior period reserve development in 2024. On SG&A, we expect an increase in expenses during the fourth quarter associated with growth-related costs, consistent with our past experience and the timing of certain expenses, which we expect to land in the fourth quarter. In closing, consistent execution of our core capabilities in care management is taking root in our financial results in 2025. Reiterating John's earlier remarks regarding 2026, we remain confident in our membership growth expectation of at least 20%, given our progress during the early weeks of the selling season. We believe our balanced approach to growth and profitability positions us well as we close out the remainder of the year and prepare for 2026.

Operator, Operator

Our first question comes from Scott Fidel with Goldman Sachs.

Scott Fidel, Analyst

First question, and John, I appreciate the sort of early insight into the growth on 2026 likely to meet or exceed your 20% growth target. And I know you're not giving guidance at this point, but just curious around the comment that you made around the market share opportunities from industry disruption. And clearly, we know there's a lot of that right now for MA. How would you frame that in terms of thinking about that in the context of California versus the non-California markets?

John Kao, CEO

Scott, yes, I am very pleased with across-the-board growth in California and really leveraging the 5 stars in North Carolina and Nevada. So, we're very pleased about the geographic kind of composition of the growth. I'd say even more importantly is kind of the product mix and the kind of provider networks that we think are very high performing and where the growth is actually occurring. And so, I think for all those reasons, we're very, very pleased just we're only 2 weeks into this thing. So, I don't want to get too far ahead of ourselves, but 2 weeks in, we're really pleased with it. The other thing I would just remind everybody, I know there's a concern that we're going to grow too much and we're going to pick up a bunch of bad business, etc., etc. I'm less worried about that simply because we had a 60% growth year in 2024. And not only did we onboard it well, we managed the risk really, really well. I think we're proving that we can scale the clinical model and manage the polychronic population really, really well. It’s just a core competency that we have that I'm not sure others can replicate at this point. So, for all those reasons, I'm very pleased as to where we are.

Scott Fidel, Analyst

Got it. And for my follow-up question, John, I know that at a recent industry conference, you had talked about considerations around potentially pursuing some M&A or sort of partnership opportunities on the vertical integration side to unlock the MLR opportunities, particularly associated with supplemental benefits. And just curious around how you think about weighing or balancing the opportunities that would be related to that, like improving the MLR versus the potential risks of sort of entering new markets that may have some different fundamental dynamics and then just maybe sort of moving away from sort of this sort of core strategy you've had that's clearly been working in terms of the focused strategy on MA.

John Kao, CEO

Yes, that's a great question, Scott. We're exploring a variety of opportunities, and as you pointed out, we're being very selective. We're carefully considering tuck-in opportunities, which we believe are more critical than entering entirely new markets. We're approaching this thoughtfully, so there's no reason to be concerned about that aspect. Previously, I mentioned our focus on supplemental benefits and tuck-in acquisitions related to captives, specifically ancillary captives. With 4% to 5% of premium designated for the supplemental business and products, it makes sense to launch or acquire an ancillary business, like a dental PPO or a behavioral HMO, and gain access to about 250,000 lives immediately. I see a significant margin improvement opportunity in doing this with minimal execution risk. Does this address your inquiry?

Operator, Operator

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

Matthew Gillmor, Analyst

I want to follow up on the 80,000 metric and the favorability on inpatient costs. I think last call, John, you talked about giving providers more tools and more data and also maybe moving some of the UM and inpatient risk back to Alignment's balance sheet. Can you just remind us where you are in terms of risk sharing with physicians in California? And how do you see that evolving during 2026 and beyond?

John Kao, CEO

Yes, Matt, that's a great question. We're currently operating with around 65% to 70% of our business under shared risk arrangements. This involves working closely with IPAs, especially in Southern California, where we take on the inpatient risk. Since last year, we've increasingly assumed responsibility for utilization management, which has led to better clinical and financial outcomes for our IPA partners, creating a win-win situation. The remaining portion of our business remains globally capitated, but I believe we will see a growing emphasis on shared risk. This model is more sustainable and aligns our interests more effectively with global capitated entities. Beyond California, we expect to increase our shared risk arrangements and establish ourselves as a primary IPA and network, supporting practices with not just utilization management but also ensuring we address quality measures and risk adjustment effectively. This approach has contributed to our achieving 5-star ratings in North Carolina and Nevada, as we maintain better visibility and control over our direct providers, primary care physicians, specialists, and hospital partners. I anticipate this trend will continue, and our team has excelled in managing what we refer to as de-delegation of utilization management in a way that benefits everyone involved. It's crucial for us to be aligned with providers to deliver superior clinical outcomes and enhanced benefits for beneficiaries.

Matthew Gillmor, Analyst

Got it. That's helpful. As a follow-up, Jim had mentioned some favorability with SG&A, but that's being reinvested. Can you dimension that a little bit, both in terms of the sizing and then also where that reinvestment is going? Should we think about Stars or other items there?

James Head, CFO

Yes. Sure thing. The SG&A against the consensus guidance was a handful of million favorable in Q3. And as you noticed, we didn't adjust the full-year expectations for SG&A. We kept those intact at around $385 million. So, what you're hearing from us is there was a little bit of timing issue with respect to the investments we're making. I would also say that we want to be well positioned for growth in 2026 and just make sure that we've got those resources ready. And so really, it's a timing issue. We kept our guidance intact and we outperformed a little bit in the third quarter. We think we'll kind of give it back in Q4.

John Kao, CEO

The only addition to Jim's point is that the question you asked about where we are investing is something we haven't discussed much yet, but we will. We're making continuous improvements aimed at enhancing automation throughout the organization, advancing AI logic in our Care Anywhere and AVA AI, and achieving greater productivity and efficiency in many of our clinical programs. All of this is taking place in the background, and that's where the funding is being allocated. I believe these investments we are making now will really begin to yield significant returns in 2026 and 2027.

Operator, Operator

Our next question comes from the line of Michael Ha with Baird.

Michael Ha, Analyst

Thank you and thank you for commenting on the investor debate about doing too much growth. I want to quickly clarify first on the flip side. If you were to do less growth, I imagine that would only serve to further empower your EBITDA bridge since you have less lower-margin new members. Is that fair to say as well? And then my real question on Star ratings, and congrats on your Star rating results back in September and today, I know you mentioned your overall raw Star rating score increased year-to-year, well within 4 stars. If not, I think you mentioned very close to 4.5, but when I double-click into the contracts, 315, 3443, the summary rating for Part C and Part D seem to be 3.5, but the overall star rating, of course, is 4.0. I know that there are certain measures excluded that go into that rating ending up at 4. But I guess that face value implies your underlying ratings might have declined instead of improved. So, I was wondering if you could help sort of reconcile your commentary on the raw star ratings improvement versus the summary ratings that what they appear to indicate.

John Kao, CEO

Yes, hey, Michael, it's John. Yes. No, our overall raw score went up significantly from 3.7, whatever it was 5.2 or something like that to 4.05 or 4.06. So we're really happy about the raw score increases. I think we can probably have a sidebar conversation with you on the mechanics of it. But really, it's a data science, this kind of how you think about the Part C, how you think about the Part D, and kind of all that goes into it. But the raw scores absolutely went up, and we're happy about that.

Michael Ha, Analyst

Okay. And then on G&A, sub-10%, incredibly powerful. I know you're aiming for some more improvement on G&A going forward. And I think you're now actually planning for the first time to invest into your brand. I think I saw on LinkedIn, there is a commercial video. So I was wondering how should we think about the brand investment going forward? It seems like you're implementing it starting this year. And I guess my main question is, how should we think about this new marketing effort in terms of evolving your member acquisition costs near term, long term? I imagine driving member growth through marketing and advertisement might present opportunities on the cost side versus broker commission costs.

James Head, CFO

Yes. Michael, I'll take the first half, it's Jim here, and I'll let John talk about the brand. But as we continue to scale the business, there's going to be a natural decline in our SG&A ratio. But I think we're going to take a balanced approach to that in the sense that we want to continue investing in the business. And I would say it's not just brand, which John will talk about in a minute, but it's also making sure that we're reinvesting back in our clinical infrastructure and the other parts of the business so we can continue to evolve our model and step ahead of the competition. So I think as we think longer term, the SG&A trends will go down, but we got to be measured and balanced about it because we want to continue to invest. But John, over to you.

John Kao, CEO

Yes. I think, Michael, we're just getting big enough that it's an opportunity for us to establish not only a brand for alignment but really, it's an opportunity for us to demonstrate what is possible if you do Medicare Advantage the way it was designed to be operated, which is why we always talk about MA done right. And I think it's going to start really representing what was kind of reflected in that ad, which is it's all about serving seniors, actually changing the paradigm and the expectation, changing how people think about MA and all the good that we do and what all the good that MA can do. And so I think we're being very thoughtful about how to do that and what the brand is going to stand for. So stay tuned for that.

Operator, Operator

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

Jessica Tassan, Analyst

Congrats on the really strong results. So, I wanted to follow up on AEP. Can you just maybe offer some perspective on retention versus gross new adds for '26? Just interested in the dynamic between, obviously, the competitor with really rich dental benefits versus some service area exits from another competitor. Just how should we think about the composition of that 20% net AEP growth between retained members and gross new adds?

John Kao, CEO

Yes. We're happy with both, Jess. Gross adds are strong across the board and retention is actually better than we anticipated across the board. So, it's a both-and situation, which is where we need to be. The investments we've made in member experience are paying off. It continues to pay off. So really happy with both.

Jessica Tassan, Analyst

Okay. Got it. That's helpful. And then just as we look at Planfinder, it seems like Alignment stands out from kind of a core benefits perspective, so really favorable on metrics like average medical move, average outpatient max cost sharing, but maybe a little less generous on supplemental benefit. Is this an appropriate conclusion? And can you just explain the rationale or kind of the decision to structure benefits in this way? And then just secondarily, interested to know how Alignment seems to be managing through Part D redesign despite having relatively low deductible and co-pay versus co-insurance in Tier 3. Obviously, that's working for you guys in '25, and it looks like it will continue next year. So just hoping for some comments on structure of benefits.

John Kao, CEO

Yes, everything is designed for consistency for the beneficiary. We approach this year-to-year and are very considerate of each market. We've previously shared our market-by-market business plans and strategies, focusing on consistent value creation for each beneficiary. This is our top priority. You are correct that we have maintained the same disciplined and detailed product design strategies this past year as in previous years. In our California markets, Part D is highly competitive, so we did not implement any significant changes. There are some adjustments to coinsurance in a few markets, but overall, we are fairly stable.

James Head, CFO

John, I'd echo that. Stability is the name of the game. And as we said, we've done a really good job executing against Part D through 2025. As we went into bids, last year's bids for this year, we were prudent and thoughtful about how we did it, but we were executing well through 2025. And so we're kind of felt good about the stability in our benefits. So we think that sets up well for next year.

John Kao, CEO

In response to your additional question, our considerations have been influenced not only by the bid economics but also by the quality of our offerings. We are committed to providing our members with high-quality supplemental benefits, and this is always a key focus for us. We strive to ensure that we deliver the best experience possible, which is an important aspect we incorporate into our overall strategy.

Operator, Operator

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

Ryan Langston, Analyst

I guess on the guidance, I think you've raised the full year EBITDA guidance 4x over the last calendar year. I'm just trying to get an appreciation for what sort of levels you were thinking in your internal budgeting? Or was this really sort of a legitimate surprise? I appreciate the conservative guidance. Just wondering how this stacks up versus sort of where you had initially expected the year to shake out.

James Head, CFO

Yes. This is my second call as CFO, and I want to highlight that this year has seen strong execution despite the challenges. Looking ahead to 2025, there are new elements for Alignment in the industry, including the second phase of V28, a new year of IRA, and a significant number of new members. With these factors in play and our inability to rely on final suites from 2024, we approached the year cautiously. Throughout the year, however, we've executed exceptionally well across various aspects, including our engagement with providers to manage utilization effectively and the success of Part D. We benefited from the final suite related to our new members and navigated substantial changes within the business model successfully. This positive performance indicates a bright future for us, which is one of the reasons I decided to join the company.

Ryan Langston, Analyst

Great. Just real quick. I appreciate the confidence in the 20% growth, but more just to industry growth. PMS is calling for basically flat year-over-year enrollment. I think the plan said they actually expected to decline. Just wondering if you have any view on overall MA market growth in 2026.

John Kao, CEO

Yes, yes, California typically is lower than the industry, again, year-to-year. There's a lot of disruption out there. There's a lot of changes going on out there. And so again, we feel very well positioned on the growth side and the retention side.

Operator, Operator

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

Craig Jones, Analyst

So, I was wondering, as we enter the final year of V28, do you have any thoughts on the likelihood of a potential V29 in the next few years? And if there is one, do you have any thoughts on the positive or negative implications to using more encounter data as part of the risk adjustment calculation?

John Kao, CEO

Yes. Craig, good questions. I think you're going to see some changes. This is what we hypothesize some changes with respect to how CMS is going to deal with HRAs. I think there's going to be more, shall we call it, program integrity around ensuring there will be clinical validation around an HRA, same with kind of chart reviews. The encounter-based baselining referred to in last year's advanced notice. I don't know if they're going to be implementing any of that in this advanced notice. I would be surprised actually. It's something that has been discussed. But in terms of how to operationalize it in a timely way, again, I'd be surprised if it was introduced to impact 2027. I think from a policy point of view, a lot of what we're hearing about really is around kind of MA program integrity, so to speak, making sure that trust in the program is high and gaming is eliminated. I think that's what we see. And it's unclear that they did go to an encounter-based baseline methodology. It's kind of unclear as to what the net impact would be. It is one of the reasons why we don't think it's going to get implemented for '27.

Craig Jones, Analyst

Got it. And then just as a quick follow-up to a question earlier. I think you said your raw score for your primary plan was 4.05. And then you've talked about how that HealthEquity index next year will give you like a cushion. I think you said previously 0.25 as a tailwind, all else being equal. Is that still correct and that mean primary plan about 4.5 for next year?

John Kao, CEO

Depending upon where the cut points end up, that's kind of what we mean by that. It does give us a little bit of cushion, but we just really aren't sure what’s going to happen with the cut points. I thought they would not be as aggressive as they were this past year. They were aggressive. We're actually really happy with the fact that we still got the 4 stars for all of our members. I think you've also heard me say in the past, I'm not going to be happy until we get to 5 stars for every one of our plans. We're making progress on that front. But your logic is right. What we don't know is where the cut points will end up.

Operator, Operator

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

Andrew Mok, Analyst

I wanted to follow up on some of the seasonal flu comments in the context of what's going on with the broader policy guidance on vaccines. Are you seeing any behavioral changes from seniors or vaccine uptake this year? And if so, how are you managing that dynamic?

James Head, CFO

Yes, we have been analyzing this internally, particularly focusing on our Part D costs, which mainly consist of flu shots. We monitor this on a daily and weekly basis, and it appears to be following historical trends. There was a slight dip in Q3, but we are seeing improvement in October. Therefore, I don't anticipate a significant change in this trend. We are also cautious about Q4, as flu season typically affects both Part D costs and inpatient ADK more noticeably during this time. While we are mindful of this impact, it doesn't seem to be out of the ordinary.

Andrew Mok, Analyst

Great. And as a follow-up, John, you made a number of comments today on continued investments in all things, operational, clinical, tech stars. Can you help us understand how much of that investment spend is already captured in current spend versus what's new or incremental? And it'd also be helpful to understand how much of that investment or that spend is directly earmarked for things like Stars, especially in the context of cut points moving higher?

James Head, CFO

I don't believe there are any significant leaps in investment at this time. We are being strategic with how we allocate our investment dollars, both operationally and in capital expenditures across the company. We anticipate some impacts in the fourth quarter, but primarily we are focused on preparing for growth, as we often do during this period. Looking ahead, we are ensuring that we have the necessary resources to invest in our platform, capabilities, and workforce. However, these adjustments are not dramatic; they are about finding the right balance to reinvest in the business wisely as we scale. I am particularly focused on ensuring that we make these investment decisions thoughtfully and carefully.

Operator, Operator

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

Benjamin Mayo, Analyst

John, do you know what percent of competing plans in your markets were commissionable last year and how that compares to this year?

John Kao, CEO

I can't answer that question. I actually don't know the answer. I know I do have a couple of plans that stopped paying commissions. But I actually don't know. Most are still paying, just to be clear.

Benjamin Mayo, Analyst

Yes. My follow-up was just on RADV. I was just wondering where we are on that, what the next steps are and how prepared do you think the organization is.

James Head, CFO

Yes, and there's a little bit of a pause in the action, as you know, given the fact that the Humana case, the courts overturned RADV procedures based on Procedures Act violations. But I think our internal point of view is that CMS still has a lot of ways to pursue this, and we don't think that is going to go away. So, our base case is that it's going to be here. It's just a question of timing. But having said all that, we think we're well positioned. Our compliance or documentation processes are really good. We feel good about the operations and how we've set that up. And especially, we've never been an organization that has really relied on risk adjustment as a revenue tool. So, we're just being prudent about that. But we do feel as the base case is that it's going to be there. Washington is not letting go of this topic just yet.

Operator, Operator

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

Jonathan Yong, Analyst

Just in relation to kind of AEP again, just in terms of the live that are coming onto your books, how do they look? What's kind of the makeup in terms of, say, new to MA either and who might be switching onto your books from elsewhere? Just curious on that particular dynamic and if those members, given the volatility we've seen in the market kind of fit into the Alignment model?

John Kao, CEO

Yes, it's consistent. It's still between 80% and 85% of switches. And really, it's across the board. It's not really concentrated with any particular payer that we're taking share from. It's kind of consistent across the board. And that's really in all geographies as well.

Jonathan Yong, Analyst

Okay. Great. And then just as we kind of just thinking forward a little bit here, but as we think about, say, next year, final year of V28, the pressures in the industry, generally speaking, should hopefully have abated at that point. How do you think about a potentially more competitive environment kind of looking in the medium term, particularly with respect to possibly expanding more beyond your current markets into other states or geographies?

John Kao, CEO

Yes. Just remember, after V28 final third year phased in 2026, they're not going back to V24. So it's still going to be a tight reimbursement environment. Unclear what's going to happen on starters. But I think the way that you should think about us is our ability to manage the care for our beneficiaries allows us to control the costs. In this new world of taking away, this is called the gaming associated with coding, the organizations that can provide the highest quality care at the lowest cost will ultimately be the winners, which is why you've seen us do so well in '24 and '25. And so when you kind of get it into '26, that's going to be even emphasized even more. So we feel really good about how we're positioned in '26 and beyond. And I think heading into '27, you need to start looking at what exactly are they going to do from a policy perspective. I think we're all kind of waiting for that. I would just underscore program integrity, I think is paramount to where CMS is focused.

Operator, Operator

Our next question comes from the line of Ryan Daniels with William Blair.

Ryan Daniels, Analyst

Yes. John, maybe one for you. I noticed during your prepared comments, you mentioned the term replicability several times in discussing your business model. And I think we're seeing that with the good Star ratings outside of California. So, number one, how is that also translating into MLR performance and overall margins in those newer markets? And then number two, given that you brought that up several times, it wasn't lost on me. Is that an indication of more willingness from you and the Board to move into additional markets going forward?

John Kao, CEO

Yes, hey, Ryan, yes, absolutely. What I've stated in the past is we really wanted to fund that growth from cash flow from operations. And obviously, we're going to kind of fulfill that promise. We're being diligent in looking at both new markets within the existing state footprint that's going to be the most capital efficient, brand efficient as well, as well as looking at some new states for 2027. And so, I think you're going to see us take a much more systematic kind of best practice playbook approach toward replicating into these new markets. I think we've come a long way in the last few years with our confidence not only in how we deploy the care model, but how we ensure that our shared services can scale in terms of ingesting the members, onboarding the members, and then caring for the members. And I think that's going to be good for seniors everywhere. So, we feel really comfortable about that.

Operator, Operator

Ladies and gentlemen, I'm showing no further questions in the queue. And that concludes today's conference call. Thank you for your participation. You may now disconnect.