Alignment Healthcare, Inc. (ALHC) May 13, 2026 Conference Transcript

All right. Hi, everyone. My name is Craig Jones. I'm one of the health care analysts here at Bank of America. They have the pleasure of hosting John Cahill, the CEO of Alignment Healthcare and CFO Jim Head. So why don't we do a quick intro? Do you want to go straight to Q&A? How do you want to handle it? Just do Q&A. Q&A. All right. Sounds great. So why don't we start with the guide, maybe a 2Q. So you just clear up something for us.

So can you explain sort of why this step down in NBR between 1Q and 2Q, sort of what happens in a typical year to drive that improvement and then maybe what about this year and the seasonality is different versus 2025 okay i'll take that one um so let's start with q you know the q2 guy in the first half so we came out with a very strong first quarter as you know q2 we um also predicted a pretty strong improvement for the first half year over year 60 basis points mbr improvement 40 basis points sgna and then almost 100 basis point and adjusted So very strong performance, 80% growth year over year. Now, what Craig is asking about is there's a step down in the MBR between Q1 and Q2, and that is typical. We have a step down. There's two reasons why there's an annual step down. Number one, utilization is just different in Q2 versus Q1, so you're going to see that seasonality. Number two, Part D influences that step down quite a bit. um what folks are looking at right now is the step down is even greater than the past and so um it's about 140 basis points in the past it's been a little bit less but if you strip out a couple you know just factor in a couple things the um 80k uh or the um headwind we had in january just take that out uh part d again this year is influencing the mbr step down too and last year we had a little bit of heaviness in Q2 and BR because of some of the other medical costs. So actually when you kind of harmonize those, it's, it's pretty consistent. So we feel pretty good about our, our second quarter guide and how that's playing out.

Okay, great. So thanks for clarifying that. So Jim, maybe to follow up, you know, I think we're about a one year in now. I think maybe this list conference last year was kind of your, your first foray into this, into this job.

So, you know, maybe one year in, you know, what surprised you the most and why is you most excited? um you know it's interesting it's been quite a year um in the market the you know medicare advantage and that's an understatement um but what what actually the you know call it the underwriting i did when i came in is i knew this model was different and i knew the opportunity was distinctive that hasn't you know i only feel better about that a year later i think um what is required to be successful in the market is getting more well defined you got to have the right model and you got to execute. And I think what, what John really focuses on, and I'm, you know, I've, I've learned very, very quickly is it is about being operationally focused, visibility and control. And so we can, we're just relentless about it. And so that, that's probably one of the key learnings in the last year is visibility and control is everything in this, in this business.

Okay. Yeah. Sounds great. So maybe then let's transition to trend. Now you've had some historically great visibility there. So it seems like everyone's pretty cautiously optimistic, maybe this year might be, you know, pretty good. So, you know, maybe what have you seen in trend in 2026, first 25, you know, what do you expect going into the year and kind of how is that trended year to date?

I'll start with our guide kind of suggests that we've got a good sense of what the trend is. And I'd say in a word stable, okay? We've got a clinical model. We're very focused on obviously inpatient admissions as one of the big indicators, and that's been stable. We've had a slightly different book this year because we have new members that are probably a little bit more acute. But having said that, the trend versus our expectations has been very stable. And as we walk down the various categories of cost, admissions per thousand, inpatient acute, inpatient non-acute, supplementals, Part D, all performing in line with expectations. So, in some ways, our clinical model gives us that stability, and we haven't seen anything different this year.

Okay, so you called a few areas there. Is there anything that, even though it's in line with expectations, maybe has moderated versus last year, or is everything kind of at the same level?

We're always mindful that trend can bite. So, if things are moderating, we're not ready to call that. And that's one of the reasons why we just march through the year and deliver and make sure we hit our expectations, because there's always going to be something that's going to be different throughout the year.

Yeah, no, totally fair. All right, so maybe, you know, let's look back the last few years. You know, it seems like you've had a better sort of visibility on trend, like you mentioned earlier, you know, versus, you know, a lot of your peers. So what is it about the tech stack or the model that really enables you to forecast, it seems like, so much more accurately?

It's a bottoms-up build. I mean, we have data at the member level that kind of aggregate up to the group level, to the market, and then consolidate it all. And so we have very detailed, actionable data. And when we take that data, we have boots on the ground to actually execute if we see any kind of negative variance, whatever that is, you know, from a financial point of view. um and and so it's it's it it's always starting with the member we're looking at member satisfaction we're looking at um admissions per thousand we're looking at readmission rates we're looking at er rates we're looking at all the data that would suggest you know kind of prevention uh and then quality so from day one we would say high quality low cost what does that really mean It means you've got to do good at stars, you've got to have good clinical medical management. And I think just this notion of transparency, visibility, and control lead to durability. That's something we just live by. And the bigger we get, the more we have to reinforce that everywhere. And I don't think others have the degree of actionable data that we have, partially because their back-end systems require reconciliation, which takes 30 or 45 days. You know, we actually have data that we can look at on a daily basis, and then we meet daily as a management team and identify hotspots, if there are any, negative variances, if there are any, on a PM-PM basis, and, you know, we put action plans together to address it. And, you know, there's no other way you can run this business.

Yeah, no, that makes sense. All right, maybe switching to the final rate notice. So, you know, the 27 rate notice came in about 2.5% better than the preliminary, which was great to see. And a lot of that was due to the delay of the new risk adjustment data. And while it sounds like this is going to be helpful for 27 and potentially just we're delaying this until 28, right? So with that 1.8% headwind that got delayed, you know, if it were implemented in 28, how would that, you know, hit alignment more or less? And, you know, any color you can add there?

Yeah, our read was that they didn't implement the recalibration because of the whole skin substitute double dipping. So I thought that was appropriate. I think the overall rate increase of 2.48 heading into the year is something we think we're probably going to do better. And it just kind of this whole, I'm brain cramping, but this whole area around risk adjustment and unlinked chart reviews, I think was worth 1.53. I think the inherent nature of our care newer model, our care centricity, I think we're going to do better than that. So I think that's fundamentally an advantage for us. um you know it's still less than overall trend you know and i think i i think that um i think it's going to continue to put pressure on a lot of our competitors and i think as we found out as you all have found out and learned starting at 24 25 and then i would even suggest 26 that plays to our advantage because we're the lowest cost producer um and so the business model was built on you have to be successful irrespective of what happens to the rates and rates go up all boats rise in a rising tide rates go kind of are flattish or go down you know we're going to have a competitive advantage um having said that to the second part of your question you know we were in dc last week spending a lot of time with all the guys um Um, you know, it's unclear to me if there's going to be any material change, the risk model. And, uh, and that's, uh, that's different than what I've said in the past. And, you know, they were pretty, uh, uh, they, they were not saying one way or the other. So they were being pretty coy about it, but there was suggestions that there's just not enough time to actually implement the full magnitude of the risk changes. that I think they know and they want to do. So I think it'll be interesting, you know, heading into next year. And what I've said in the past is I would have thought there would be some material changes coming in, this new technical notice that usually we get in November, December. You get comments on the advance rate in January. You get the final in kind of April. And I was thinking there was going to be some material changes. I'm not sure there is.

So even, so maybe we don't get the, you know, the full big, you know, I think it's implied or implied risk model, inferred risk model. Even like some kind of, say, middle step, you know, around health risk assessments or link chart reviews, anything like that?

Anything there? There may be, you know, but to me that is not, you know, wholesale change. You know, I know the discussions have been, you know, this is a 22-year-old program now. And so, you know, when they initiated this risk adjustment And they look at the fee-for-service data, you know, Medicare Advantage represented like 10% of the market share of all seniors. Now you're 52, 53%. So the fundamental data, you know, I think that fact pattern would suggest it is time to kind of retool this. I just don't know if they're going to have enough time to implement it. And having said that, we actually agree with their logic that the plan shouldn't be spending as much time on this topic, is my humble opinion. And as we found out, it creates all kinds of opportunities for misalignment and gaming, if you will. And so this notion of kind of inferred diagnosis, looking at the actual data, both fee-for-service and MA data, and then having the new AI tools that are out there infer diagnosis and then pay people on that, I think is the right way to go. I just don't know that's going to happen operationally. And so if you're kind of left with kind of this current state, you know, the first thing i would think is focus on um this this you know extend the logic on this discussion on program integrity right you've heard a lot of them say that so focus on program integrity i think they've beaten that one to the ground i i don't think there's much you know blood to squeeze out of that rock much much more for the plans but extend think about what they're doing pharmacy right They're going after pharmacy. They're trying to create value for the consumer in pharmacy. Broad waste and abuse. There's all this stuff you're reading about in hospice, home health, all this stuff. They're looking hard at all of that. And so implement program integrity through the entire supply chain. You know, and so if you've got these health systems and, you know, kind of integrated delivery networks that represent 50 to 60 percent of your costs in your MLR, you'll start looking at billing. You know, apply the same degree of program integrity throughout the supply chain to ensure accurate billing. Hold everybody to the same standard. Accurate billing, and I think you're going to find a lot of opportunity so that the trend and this whole topic, the next topic you're going to hear about is affordability. What that means is, okay, look down into the supply chain. We kind of looked at the plans, B-28, you know, kind of linking charts, et cetera. All that, I think, is the exact thing they should have done. Now start looking down the supply chain. Who's looking at billing accuracy of the integrated delivery networks? I told them, I said, what if we gave you a basket full of RAF scores, HCC codes, and said, you guys figure it out. right so the same kind of rad v intensity that was applied to the plans and are you know whatever three percent margins should be applied to the hospitals with their 20 margins that's what's coming next all right well that that'll be uh that'll be fun to watch so maybe let's uh pivot to you know it's expanding outside of california now so you've got about 20 percent of your members there outside of california your total enrollment i think just about doubled so nice share gains You know, you've talked previously about when to use free cash flow to fund growth.

We've got the free cash flow now. So how should we think about, you know, growth outside of California from here on out?

We're happy with the growth. We're making sure that we get the same kind of margin and kind of embedded earnings from the mix of members that we have. Ex-California, I think it'll pay off. You know, we were intentional about capturing share with respect to C-SNP, D-SNP members this year. Those have been the most profitable for us, I think, largely because of the care model. And I feel good about it. You know, it's kind of natural to think that our ex-California MLRs are higher than California just because of the amount of new growth that we've had this past year. But I think consistent with what we experienced inside California, that cohort maturation and the embedded earnings will start paying off in future years. I think that the deployment of capital, which we have because of the free cash flow, still has to be bumped up against certain filters that I think about, which do we have the right providers that understand our model, want to work with this model, and or not? And we're going to be entering markets in 27 where we found those like-minded providers. And also, interestingly enough, health systems that want us, they like our model, They like the care delivered. They like the fact that that yields market share gains. We can push market share to them. They don't like some of the big guys. And so that's cracked the door open for us to really provide an alternative for them. But the main thing is the doctors, the PCPs. We still think the PCP is very central to the equation. and we don't think we have to own them to get them to behave in an aligned way with us.

Okay, so maybe a follow-up there on the PCP relationship outside of California. So California is more of the delegated model. What are the differences been when you're contracting and partnering with these providers outside of California? Any dynamics there you could give us a call on?

Yeah, no, it's a great question. the the markets outside of california we are the ipa so we're the ones engaging with the individual practices themselves and helping them with star gap closures and risk adjustment gap closures and integration of our care anywhere clinical model that's why you get five stars in all these ex-california markets then you know and and we've been challenging caps inside california um that's number one number two is inside california you have these ipas right these medical groups that are either taking global cap and we've shared that it's about 25 or 30 percent of our business in california 75 to 80 of our business 75 of our business is is kind of shared risk or directly contracted even when you have a shared risk deal with an ipa there's margin implications that are crude to the benefit of the ipa outside of california because we're the ipa there's more margin opportunity for us right because we're doing all the work and thus have the ability to uh drive margin expansion and richer benefits there's no there's no middleman taking a piece of the pie. And so I think the STARS rating and the MRA kind of engagement are two proof points for you that ex-California businesses are businesses that we can do better at. And so now we're taking all of our care models and the utilization metrics and the ADK metrics in these new markets are also pretty good. We just need some time for the maturation of the cohort, you know, RAS scores and, you know, kind of ADK to come down even more, just given the growth that we've had. But I think the key for us is finding the like-minded doctors, you know, and the, you know, this kind of this grand experiment about, you know, kind of global cap value-based value-based providers it was kind of your parlance some you know it's jury's still out if there's enough money in that supply chain you know with V28 you know and I think it's V28 when you can't do the coding that some of these guys have and or have bought providers to incentivize them to do the coding to get the to support a global cap arrangement it. When that kind of financial engineering doesn't exist anymore, it puts a lot of pressure on those guys. And so in that kind of world, our model stands to be even better because it's a more durable model.

Yeah, that's great. You have the longer term margin capture opportunity outside of California.

So maybe in the near term, as you are ramping, is there any incremental op-acts that you should be thinking about around startup costs, marketing, anything as you get to break even that's that's that's really embedded in the investments we're making back into the business right and so when we talk about sgna we we do you know we are incorporating investments back in the business investments in people like yesterday investments in our process and technology and things like that so we're trying to balance between giving investors uh better sgna as a percentage of sales versus firming up our foundation for the future. And so that's, it's always going to be part of our philosophy.

So follow me on people, Mr. Chairman, do we want to add any, any, any, any call on the, on the new hires?

Yeah. Yeah. So, so this whole idea of Ava Healthcare Partners, that is the IPA kind of really enterprise wide, but really focused ex-California we do have you know members that we directly contract with inside California um but that that's what uh that's that's the primary focus of Mark Kent who's a great guy uh you'll get to know him um and very very experienced uh in this he's run IPAs he understands the payer side understands the provider side um and you know nothing phases him and so he's he's going to be great but but that's that's kind of linked to kind of this ex-california management and growth discussion uh shane hackerdahl really chief operations officer uh scale experience experience with claim systems experience with provider data experience with um you know end-to-end provider engagement at scale um and from elements and and so he's joining us so those are two key hires. The third person that you may not have heard of, but he's really our current chairman of the board, Joseph Konoviecki. And Joseph has been the strategic leader. And I asked him, I said, Joseph, I really want you to leverage your experience and to help us grow and scale this business. So I asked him to do that and he graciously accepted. And then to make sure that the governance structure maintained its integrity, I agreed to be chairman. And I think the message to really the investment community is we're all in. We're all in. I've shared with you, you know, 300,000 lives, 5 million in revenue, 150 million EBITDA is to me a proof of concept. It's literally a proof of concept. And so we are now looking at strengthening all the foundational pieces we have in place and making them better to scale. And, you know, attitudinally, incentive-wise, you know, I'm all in, Jim's all in, our board's all in, to get this to the next level. And that's really the signaling of that. It's a very positive thing that I think you should all think about. It's we all recommitting and committing to take this to the next level. You know, I've said we're going to get to at least a million members. You know, you all are asking by when.

I'm going to say I'm not going to tell you, but we're going to get there. um and sorry so so uh it's a very positive thing all right well that that's great to hear um so maybe let's hit on ai really quick so you know it's everywhere um you you've had this ava tech stack for a while that's been you know kind of revolutionary right in the model um you know maybe give us some some use cases you know where you are in that you know ai evolution you know and then how much of this is sort of enhancing what you've already built in ava versus you know ground up kind of kind of tools yeah we you've probably noticed we've been uh intentionally quiet about

ava for the last couple of quarters and we're doing that because of the intensity of work we are focusing on rebuilding the tech stack taking what we have which i still think is best in class and even making it better um we're not talking much about the details because we don't want anybody to know what we're doing that's that's the net of it we will share with you all the applications um uh very shortly but i the stuff the new technologies on the new models can do for us it's it's staggering both on mlr and gna um i think the machine learning predictive analytical tools we have in terms of care anywhere in our stratification model still pretty good i think the new large language models are going to help us in all of the workflows that provide faster, more accurate, more timely data. And that data is going to help us have better outcomes within the predictive analytics. But I think you're just going to see the deployment of use cases everywhere in the company. And you're going to start hearing us start using the word AI first soon. And I'll give you a glimpse of that. But I think the opportunities there are going to be dramatic. I'll resuscitate a phrase I heard from somebody a couple of years ago, which is, there's a lot of low-weighting fruit that we're going after and there's watermelons rolling around the ground remember that one well i'm telling you these ai tools are going to help us get those watermelons and i think that will be reflected in better mlr and even tighter gna all of which are foundational for for uh the vids i and i i don't honestly i don't know if there's anybody that can catch us once we get to pull all this together.

All right, well, that leads into, I think, what probably would be our final question here. So, you know, your 26 guys got you, you know, from an e-group perspective, kind of already in line with your national peers. You're growing faster than most of them. You know, they kind of talk about margins in the 2% to 4% range now long-term, it's maybe 3% to 5%. Previously, you were already at 3%. You know, you're still subscale. So what is it, you know, how are you driving these structural advantages from a tech stack over your peers? And, you know, how high can these margins go longer term?

I think we've said 5% to 6%, right, Harrison? But, you know, you've got to remember, you've got this 85% rule thing hanging out there, right? So you've got to hit that 85%. And I think on a gap basis, it's closer to like 83.5%. But I think there's margin opportunity for us. But because of that, you know, the way we get to the 85% are two ways. It's just you've got to have richer benefits, better supplemental benefits that foster growth and or deeper partnership with providers, paid providers more. And there's different ways you can do that that just strengthen. The key word should be durability. Durability. So if you have great networks, great provider partners, and they're going to want to partner with you, which is what's happening in California. They all want to work with us because we're growing market share. That dynamic, I think you'll start seeing kind of get more and more real ex-California, the more we grow. And for those of you that have been with us from the beginning, it's going to be more of the same. It's going to be balanced growth and margin, opportunistic, depending upon what we see market by market. I think there's going to be the next generation of technology that we embed in our workflows. um and and we're getting people that have both the missional aspect that is very important to us and will always be central to our our our culture um but also have scale experience and i'll close on with this one point greg which is i think we're proving that that you can you can be mission oriented and provide great returns for your shareholders and i can tell you our our private equity guys werberg and ga are really pretty pretty happy with with their financial outcomes um and i think i think that uh when we get to where we want to be with all these changes that we've just talked about you're going to be really happy with this as well all right well thank you thanks great thanks guys