ALHC - NASDAQ

Good day and thank you for standing by. Welcome to the Alignment Healthcare First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today, CEO, John Kao. Please go ahead.

Hello, and thank you for joining us on our first quarter earnings conference call. We are pleased to announce a strong start to the year, delivering consistent operating performance and beating all of our key performance indicators. For the first quarter 2023, our total revenue of $439.2 million represented 27% growth year-over-year. We ended the quarter with health plan membership of 109,700 members, growing 16.5% year-over-year. Adjusted gross profit was $45.4 million, producing an MBR of 89.7%. Meanwhile, our adjusted EBITDA was negative $5.2 million. Our MBR and profitability outperformance resulted from significant efforts by our Care Anywhere team and continued improvements to AVA. Our ongoing enhancements to AVA allow us to improve both the identification and engagement of our Care Anywhere eligible members and has been core to keeping our Q1 utilization stable. We continue to believe that AVA, clinical innovation, and our clinical culture serve as the foundation of what differentiates alignment. More than ever, we believe we are executing Medicare Advantage done right. CMS has taken actions that reinforce its standards for Medicare Advantage that adhere to its vision of maximizing value to the seniors through high-quality outcomes at an affordable cost. We believe the following changes will create competitive tailwinds for Alignment over the next several years beginning in 2024. First, Star Ratings are once again differentiating between high and low performance. For the 2023 rating year, CMS ended COVID disaster provisions which artificially inflated Star scores. We maintain our high stars in the 2023 rating cycle despite these changes with over 90% of our members in 4-star or above plans. In addition, CMS announced that the weighting of CAPS measures will be reduced by half for 2026 Star Ratings, shifting the weightings back toward HEDIS scores, which measure clinical outcomes. This has been a strength of ours. Second, third-party marketing standards are being modified to increase consumer protections. CMS is limiting aggressive marketing practices by third-party marketing organizations that have become increasingly pervasive over the last few years. We are supportive of CMS' efforts to protect seniors and believe this will be additive to our retention goals. And last, risk model changes are being implemented in 2024. As many of you well know, CMS recently announced their final rate notice for 2024, phasing in the V28 risk model changes over three years. Since the company's inception, we've predicated our operating philosophy on achieving high quality and low cost. We've always approached risk adjustment as part of our clinical care and quality initiatives. As a reminder, our current RAF score today of 1.13 includes 30% duly eligible members. This approach has served us well and places us in a solid position as we assess the moving parts within the new risk model. After conducting a full review of the final notice, we believe the net change in PMPM revenue will be neutral to positive 1% in 2024. Thomas will share more details during his financial discussion. Most importantly, as we assess the competitive dynamics in each of our markets, we believe, we'll be advantaged under the new risk model relative to many of our local competitors, particularly in California. As a reminder, 85% of our new members have historically come from plan switchers as opposed to agents or conversions from traditional Medicare. We believe this is a reflection of consumers finding greater value in our products versus our competitors. This is how we've grown at more than 4x the California market growth rate over the past five years. As a result, we believe our RAF scores relative to competitors, our Star Rating tailwinds, and our growth predominantly coming from plan switches, all helped position us for strong growth in 2024 and beyond. Looking toward the 2024 AEP, we are focused on driving deeper share within our existing states to develop a larger market presence and significant local scale economies. As part of this strategy, we will double down on brokers who have delivered for us while also adding more captive and employed agents in markets where needed. In addition to this, we are also taking a focused approach to member retention. While we have noted in the past that we have better retention metrics than the industry, we continue to strive towards a 5-star retention rate under CMS' definition, which has always been our North Star. A few of the actions we've already taken today include employing a more rigorous supplemental benefit vendor management program, enhancing customer service by leveraging our newly deployed CRM application within AVA, and insourcing member call center functions. The early results we've seen in these activities give us confidence as we strive towards 5 stars. It's an exciting time at our company as we move forward into the next phase of our operating maturity. Having achieved impressive repeated clinical results, both within and outside of California, we are now investing in operating scale initiatives, which will support the growth in each of our markets. In conclusion, our clinical objectives and retention goals are showing solid progress. Our operating scale initiatives are taking root, and we are excited about how many of the broader Medicare Advantage changes position us competitively over the next several years. Now I'll turn the call over to Thomas to cover the financial results for the quarter. Thomas?

Thanks, John. Turning to the first quarter results, we are pleased to deliver a strong start to the year in which we exceeded the high-end of our outlook ranges across each of our four KPIs. For the quarter ending March 2023, our health plan membership of 109,700 members increased 16.5% compared to a year ago. Our first quarter revenue of $439.2 million represented 27% growth year-over-year. The top-line outperformance was primarily a function of both higher health plan membership as well as growth of our ACO REACH revenue. Our adjusted gross profit in the quarter was $45.4 million, representing an MBR of 89.7% with our clinical operations continuing to produce results across markets. Utilization ran generally in line with expectations at approximately 160 inpatient admissions per 1,000, inclusive of January seasonality, which tends to be a higher utilization month due to the flu season. As a reminder, the year-over-year comparison of MBR includes the full return of sequestration as well as the impact of faster growth in our ACO REACH population. SG&A in the quarter was $70.4 million. Excluding equity-based compensation expense, our SG&A was $51 million, an increase of 3.2% year-over-year. SG&A excluding equity-based compensation expense as a percentage of revenue decreased by approximately 270 basis points year-over-year, which represents solid progress towards our goal of improving our operating leverage by 150 basis points for full-year 2023 relative to 2022 as we continue to scale the business. Note that our SG&A in the quarter was slightly lower than expectations in part due to timing, and we anticipate some of that to reverse over the next nine months of the year. Lastly, our adjusted EBITDA was negative $5.2 million, well ahead of our initial expectations. Moving to the balance sheet. We exited the quarter in a strong capital position with $488 million in cash and investments. Our cash balance at the end of the quarter included an early second quarter payment from CMS of approximately $141 million. We recorded the early payment as deferred premium revenue in Q1 and will recognize it as revenue in Q2. Importantly, this does not have any impact on our income statement metrics. Cash and investments, excluding the early payment were $347 million. Turning to our guidance, for the second quarter we expect health plan membership to be between 111,200 and 111,400 members, revenue to be in the range of $433 million and $438 million, adjusted gross profit to be between $47 million and $50 million, and adjusted EBITDA to be in the range of a loss of $13 million to a loss of $10 million. For the full-year 2023, we expect health plan membership to be between 113,000 and 115,000 members, revenue to be in the range of $1.710 billion and $1.735 billion, adjusted gross profit to be between $205 million and $217 million, and adjusted EBITDA to be in the range of a loss of $34 million to a loss of $20 million. In summary, we are largely reiterating our full-year 2023 guidance while raising our revenue guidance given the outperformance in the first quarter and our visibility towards our full-year revenue PMPM. Given that it's still early, we remain mindful of potential variations in utilization as we progress throughout the year. That said, our initial look at April utilization continued to run in line with our seasonal expectations and we are pleased with how our first quarter results position us to achieve our full-year expectations. As we've said before, it's a strategic imperative of ours to continue to balance our short-term profitability objectives with our longer-term growth objectives, and we look forward to updating you all on our results as we progress through the year. Before we close, I'd like to spend a moment on the final notice. As John noted earlier, we believe the net change in PMPM revenue will be neutral to positive 1% in 2024. This consists of all known moving pieces to our current population, including benchmark changes, fee-for-service normalization, Stars, their V28 risk model impact, and our ongoing operational initiatives. As it relates specifically to the V28 risk model and our operating initiative components within that range, we expect the PMPM revenue impact to be negative 0.8% to positive 0.2%. This reflects the phased-in risk model impact of approximately negative 1.3% and offsetting operating initiatives of approximately positive 0.5% to positive 1.5% annually over the next three years. Expanding on our operational initiatives, we have identified opportunities to close known risk score gaps under the current risk model given our historically prudent risk scoring position. Additionally, we are deploying training and engagement programs with our employed clinicians and provider network to ensure a smooth transition into the new risk model. We expect these initiatives to amount to a total of 1.5% to 4.5% of revenue upside over the next three years. Taken together, we expect the impact of the risk model changes will be mostly or entirely offset by the operating initiatives both in 2024 and over the course of the full phasing. Altogether, we continue to believe the impact of the model changes are highly manageable, and in fact, are excited by how this positions us competitively both in 2024 and over the course of the phased-in impact. With that, let's open the call to questions. Operator?

Thank you. [Operator Instructions]. Our first question comes from the line of Ryan Daniels with William Blair. Your line is open. Please go ahead.

Hey guys thank you for taking the questions and congrats on the strong start to the year. Thomas, perhaps one for you. You talked a little bit about SG&A declining nicely year-over-year. That probably drove a lot of the big EBITDA beat relative to guidance, but it looks like the Q2 EBITDA is below expectations. So can you provide a little bit more color on kind of what timing issues led to that big upside in the period? And then, number two, how we should expect some of those costs to come back into the income statement over the next few quarters so we can calibrate our EBITDA expectations.

Yes, Ryan, thanks for the question. I'll speak to both the SG&A question and then maybe a couple of comments more broadly about the earnings cadence over the course of 2023 that we anticipate. In terms of your question on SG&A, I think you're right. We mentioned that we had a few million dollars of favorability in the first quarter that we would attribute to sort of just timing or temporary favorability based on when certain expenses hit the P&L. And that probably is in the neighborhood of $3 million to $4 million that we would anticipate to reverse over the course of second, third and fourth quarter. Now, a lot of that just has to do with ramping up of new hires to support the membership growth, ongoing sales and marketing expenditures, and things of that nature. In general, though, we feel pretty good about our ability to manage to our overall SG&A target that we had outlined in our initial guidance about 60 days ago. And then, in terms of your kind of broader comment about the earnings cadence for the year relative to I think consensus expectations, which is in part modeled on prior year performance, both 2021 and 2022 I think earnings seasonality, what we would note is that, obviously, 2021 and 2022 had a bit more I'd say atypical variability just due to the impact of COVID on things like our risk adjustment scores, our sweeps, and our IBNR quarter-to-quarter. And so, I think a little bit of what you're alluding to is the kind of just lack of a true comparable in the prior year as compared to the current year. And then I think the second thing we would note is that from an MLR standpoint, the second quarter of last year I think was an outperformer primarily due to the sweeps that we see typically in the second quarter of each year. As a reminder, we don't typically accrue for those on a very aggressive basis, in particular for our new members. And so, as a result, we tend to approach our guidance slightly more conservatively, which may lead to upside for the second quarter relative to our current guidance. We don't rely on it, and it's not something we bank on as we think about all the moving pieces with respect to our full-year outlook, but I think that's one element of seasonality that you might see in our historicals that you don't see in our guidance today.

Okay. Very helpful color. And then, John, maybe one for you. I noticed you hired two pretty senior new market executives, one in the kind of NCA

Yes, hey, Ryan, absolutely. I think we're speaking specifically about Tim Morehead and Lisa Ferrari, and they are senior people. They know the respective markets in which they're leading. We're excited to have them. They've been integrated wonderfully. They share the same culture and vision that we have, and I'm very excited about that. When I say we're going to be investing in network resources and when I say we're going to be investing in distribution, member acquisition resources, I'm serious about it. We're deepening the bench. We're adding talent. And we're doing that with an eye towards scaling. And you can see that I think throughout the year as we head into the 2024 AEP, and I'm just very excited about it. And I think it starts with the team and the people that we have, the people we're adding, how we get them onboarded, and kind of how they fit into the whole culture of what we're trying to do. I'm very excited about that.

Okay. Very helpful color. And then a quick housekeeping for Thomas. I know last quarter in your guidance, and I'm assuming this hasn't changed but I want to confirm, you talked about the MBR impact from a few nuances. I think ACO REACH was like 60 basis points hit, sequestration 15, and new members maybe 50, 60 bps. Is that still kind of the algorithm as we think about the year-over-year bridge in the MBR?

Yes, exactly. I think you said it well. When we think about the 2023 overall outlook as compared to 2022, I think those three elements you just described, which were the ACO REACH incremental growth impact on consolidated MPR, the sequestration year-over-year impact, and some of the lower new member RAF scores we saw in our January payment file. I think those three things are still very much the way we think about that year-over-year bridge. I think that being said, the key to all of it is that our shared risk MLR, which is really the core unit economic driver of the business, remains quite strong. And in fact, we're really pleased that we started the year once again with our overall inpatient utilization running right around 160 admissions per 1,000 for not only the first quarter but also through April. And so, kind of all of that together gives us a lot of confidence to continue to invest in growth and continue to drive economies of scale on the SG&A side along with that growth.

Thank you. And one moment, for our next question. And our next question is going to come from the line of Michael Ha with Morgan Stanley. Your line is open. Please go ahead.

Hey, thank you. Just a quick one on mid-year sweeps. Last year second quarter, did you accrue anything for it? I think it drove almost 200 bps to better MLRs if I remember correctly. Just trying to get a sense of magnitude and how much sweeps could potentially benefit next quarter?

Yes, I think directionally you are correct, that was about a 200-basis point pickup in the second quarter of 2022 relative to what we had previously been accruing and guiding to up until that point. I would say last year, we probably over the course of the full-year, saw slightly higher kind of outperformance than we have seen in other historical periods, again, just due to the impact of COVID and the timing of when encounters are being submitted by some of the downstream providers. But that being said, I think generally speaking, it tends to be a positive item and it's certainly something that we're keen to see how we see those come through over the next 60 days. As a reminder, these relate specifically to the new members in particular, and that's where we book to what we're being paid just given that the payment for this year is ultimately dependent upon the encounters for that population last year. They obviously were not with Alignment. And so that's typically where we kind of start more conservative and then reevaluate over the course of the year.

Got it. That makes sense. Thank you. And maybe just switching to or looking to 2024. In terms of just modulating benefits, I understand for MA plans, there are TBC rules that don't allow plans to reduce benefits in any given year by more than 20%. But my understanding this doesn't apply to D-SNP. And while 30% around 30% of your members are dual eligible, I think only about 4,000 of them are in actual D-SNP plans. And if I'm not mistaken, I think it's probably because California hasn't accepted new D-SNP licenses in recent years. But with that context, given your mix of D-SNP plan offerings and heading into the20'24 rate environment where most plans are probably going to toggle down benefits, how do you view your ability to modulate benefits to protect margins next year?

So I think in terms of how we think about benefits, we probably won't go into too much specifically just from a competitive standpoint. But to your kind of broader statement, I think the region folks are talking about benefit modulation into 2024, is a reflection of what John described in his prepared remarks, both in terms of some of the Star Rating headwinds that some of our competitors faced, some of the impact of risk adjustment, the V28 space that I think some of our competitors disproportionately faced relative to us. And just given the fact that while the benchmarks are going up in 2024, they're not quite going up at the same rate that they have over the past several years. And so, when you take all those factors into account, I think that's why you're hearing folks in the industry talk a little bit more about potential benefit modulation. And clearly, we're going to be very mindful and continue to be disciplined about growth versus profitability the same way you've seen from us over the last two years since IPO. But I think we're also going to make sure that we're continuing to invest in growth. And because we don't see a Star Rating headwind, and we think we are very well-positioned to navigate the V28 phase-in, I think that presents an opportunity to continue to invest in growth accordingly.

Hey, and Michael, it's John. Just to kind of remind everybody, I mean, just -- and we've talked about this before, but we did a really good job last year on the D-SNP lookalike cross-walking to other products. I mean I don't think we lost anybody actually through that process, and so we're very proud of that. And I think that with respect to the 2024 benefits, to Thomas' point, we're deep into the product design and bid process right now, and we'll share more on the Q2 call. But I feel very comfortable with that whole process.

Thank you. And one moment for our next question. Our next question comes from the line of Whit Mayo with SVB. Your line is open. Please go ahead.

Hey, thanks. Good afternoon. Thomas, just back to utilization in the quarter, can you maybe just comment visibility on outpatient? And since you provided the inpatient days per 1,000 of 160 in the quarter, what did that compare to last year?

Yes, happy to take that question, Whit. So in terms of the performance this quarter as compared to the first quarter of last year, last year was very similar. I want to say it was in the high 150s. And so, I would sort of view the whatever that is, two or three difference, as kind of normal course of variability given population changes year-over-year, very, very much in line with our seasonal expectations as well as our performance in the prior year. And in terms of your question about outpatient trends, if I kind of go back to when COVID first had a more significant impact on utilization in 2020, I think we first started to experience an increase or a return of some of that outpatient utilization in 2021. And then we more holistically saw that I think more fully return in 2022. And so, as we stand here today and we kind of look back on 2022 claims experience now with the benefit of fairly significant run-out, I think our overall outpatient utilization today looks similar to that of pre-COVID. And I think that would be kind of our expectation on a go-forward basis.

Okay. Looking at the membership, you tracked a little bit ahead of your first quarter guidance. I presume you just picked up maybe a few more lives in OEP, just not sure if there are any more details to share. And then maybe more specifically, talk about some of the newer products and plans that you saw resonate either better or worse relative to the expectations. You guys have a lot of very tailored specific plans relative to some of the other companies we cover.

Yes. Hey, Whit, it's John. Yes, I think we're getting some mix tailwinds with respect to what we just talked about in terms of the D-SNP and kind of the -- and just for everybody's benefit, they kind of eliminated this D-SNP lookalike product, and so we had to crosswalk a lot of these members over into other products last year. And so, that created a little bit of an MBR headwind on that product. But as we are actually seeing, resulting from OEP, we're getting a bit of a tailwind because we're getting growth from pure D-SNP members into that product design. And so that's something that we're pretty optimistic about.

Thank you. And one moment for our next question. And our next question comes from the line of Kevin Fischbeck with Bank of America. Your line is open. Please go ahead.

Hey, guys. Thanks for the question. This is Adam Ron on for Kevin. I think I want to focus my questions around the risk model revision changes and what you think, what levers you think you have at your disposal to offset it. So, first, if you could go into more detail about what specific mitigation steps you're taking to get to that 1%, 1.5% to 4.5% rate lift over the next couple of years. Is it all just recoding? And why is it such a wide range?

Yes. So, I think -- this is Thomas speaking. Thanks, Adam. I think in terms of the range itself, the range partially reflects the full opportunity, but also impacts or reflects the timing of when we anticipate to realize these results. And I think we feel pretty good that the upper bound of the opportunity is that 4.5%. I think we're maybe being a little conservative with the pace of us achieving that opportunity. Hence, the range you're seeing for us in terms of the 2024 bookings. In terms of the actual operational initiatives, a lot of it is kind of I'd say basic blocking and tackling and ensuring things like we have as high of a success rate or engage rate as possible on annual wellness visits, ensuring that the chronic recapture is as high as possible, and in making sure that as many of our members are being seen by both our clinical resources as well as our network of PCPs, again, as is possible. I think over the last several years, just given the pace of overall growth, we have done good on each of those different aspects of the overall wellness visit activities. However, we haven't been perfect. And I think we are recognizing that and that is some of the opportunity we see to ensure that there is a great offset relative to the V28 impact coming down the pipeline.

Would that explain why you think you would see less of an impact than others because you haven't been engaging members in as many wellness visits and they would have lower RAF than they should?

I would say it maybe a little bit differently. I would say our engagement has been quite good. And I think over 80% of our members have had an annual wellness visit between us or our PCPs, which I think is a pretty solid industry standard-type benchmark. I think what we're saying is, we can do a better job with the efficacy of each of those visits. I think we can do a slightly better job at increasing the overall completion rate above and beyond our historical trends. And I think for a market like California, and it's probably similar in other markets like a Florida or Texas, but in markets that are generally a bit more mature around Medicare Advantage and value-based care, I suspect that many of our competitors have probably been a little more focused on risk adjustment in the past than we have. Where so much of our emphasis for the past several years has been this notion of high quality, low cost, i.e., we've been very focused on the clinical model, putting that Care Anywhere team at the center of the member experience, and ensuring that our improved health outcomes translate to improved cost outcomes. We haven't necessarily used the risk adjustment model as much as revenue cycle management, as I think some others have, which is why we think that maybe some of them might not have quite the mitigating factors that we see in front of us.

Yes, Adam, it's John. We noted that our overall consolidated RAF is like 1.13. And by I'd say any standards, that's very much in the safe zone and that we continue to want to be in the safe zone. But we've run the business off of revenue and RAF of 1.13. And we've done that from the very beginning because we've known from the beginning that you're going to have some kind of an adjustment to reimbursement. And we've been around this business long enough that we still remember 2012 and what happened there with ACA and normalization. And so now that we have clarity, I mean, these kinds of changes come around every five years or so or 5 to 10 years actually. And so, we feel very good about that and kind of the predictability of that. And we feel very good about just a pivot a little bit on where Stars is going. And so, we kind of know what the rules are. And I think that, to Thomas' point, we've got some opportunity to grow in those areas.

Great. And then my last question around this is, you're in California, you have a relatively high capitation rate in terms of like how many, percentage of your members that are seen by capitated and doctors. And in theory, those doctors are seeing a bigger headwind than what you're seeing. And so, if you cut benefits or adjust your cost structure to offset some of these rate headwinds, in theory they're getting a bigger rate headwind. So are they going to turn around and ask you for a higher capitation rate? Or are they going to just see net margin headwinds and they'll sort of have to absorb it? Is it likely you're going to have to support them in any way?

Yes. No, that's something we've been saying from the beginning, from the IPO. Meaning we have about a third of our business that's globally capitated and about two-thirds that is not globally capitated. And what we would call shared risk. And it's a contracting environment where we make sure that we are aligned with the providers and that we're managing those institutional risk pools, those hospital risk pools with AVA and with Care Anywhere, et cetera. And so, it in fact is going to help us, again, relatively speaking. Because to your point, the preponderance of the plans that are globally capping, I think -- and we've seen this. This is why we haven't built the company on just having 80% plus global cap. That's why you also see I think the industry going toward more and more, call it vertical and/or virtually vertical integration. And I think the folks that are going to be depending on global cap kinds of arrangements are in fact going to feel that squeeze that you just mentioned. And frankly, we've seen that occur for 30 years in California. I mean, it's literally I think the reason why we built the company the way we did, why we built AVA, why we built Care Anywhere, is we think we can be that most efficient delivery model and do so in supporting the individual doctors. Not the intermediary groups per se. Now we also do think that a lot of intermediary IPAs that we work with are actually doing a better job delivering Stars, delivering gap closures on HEDIS, et cetera. But the beauty of it is, is our Care Anywhere team is there to make sure that we have the control to ensure that we get those outcomes. And I think to your exact point, there's going to be more and more pressure on those that are just relying fully on global cap.

Thank you. And one moment for our next question. Our next question comes from the line of Nathan Maliki [ph] with Raymond James. Your line is open. Please go ahead.

Hey, this is Nathan Maliki [ph] stepping in for John Ransom. Just on your expansion efforts, the new markets, I'm wondering if you can comment on what you're seeing in terms of membership growth there, especially maybe in Florida and Texas. And then anything incremental you can provide on learnings as you continue to expand in those states?

Yes, hey, how you're doing? It's John. Yes, I think we're -- I'm feeling very, very comfortable we're going to be able to hit or exceed our growth rates without relying heavily on Florida and Texas. I do think we're making great progress on network, on distribution, on Stars, which is something we've mentioned in the past. We are -- the focus on working with the provider delivery partners that we have, again, just taking a little bit of a playbook out of the North Carolina model, which is get to the 5 stars, move toward 5 stars, have really good products, have good operational support. The problem we had last year, as you recall, is we had to find the right distribution partners and we've got solutions for that, so I'm feeling really good about that. And I'm optimistic about both markets. But on the other hand, we're not going to just be entirely dependent on those two for the material growth that I expect heading into 2024.

Yes, that's helpful. And then just kind of following up on Stars, anything you can provide on membership satisfaction or maybe some other internal data that you might have access to and how that will translate to the 2024 Star Ratings?

Yes. MPS is still very good. It's still in the 60s. I think it's 62. It kind of bounced around between 60 and 68 historically for the whole membership. Our Care Anywhere membership has kind of been around between 75 and 85, and I think the last I saw it was 78. So I think those triggers are in fact very good. I think with respect to caps and the weighting that CMS put on caps, I think you guys know that they're changing the weightings back down for rating year 2026 I think it is. And they're going to reemphasize HEDIS. The other thing I would note is with respect to caps and just member satisfaction, we're spending a lot of time on, and we alluded to this in the remarks, but we're spending a lot of time on I would say supplemental vendor management. Making sure that the contracted vendors that we work with, I won't name any of them, but are delivering on the promise and their service levels to us and to our members. And so, I'm very confident that that's going to be dealt with this year heading into 2024. But that was a source of abrasion for us from a pure Stars perspective.

Thank you. And one moment for our next question. Our next question comes from the line of Gary Taylor with Cowen. Please go ahead.

Hey, good evening guys. Two quick numbers questions and then a theoretical question. On the numbers, I understand the seasonality around the EBITDA and MLR from a year ago in the sweeps, but the mid-point of the 2Q revenue guide is down a little bit sequentially. I was just wondering, does that imply there's anything else retro in the 1Q? Or that's just your typical conservatism, Thomas, or anything on that piece?

Hey, Gary, yes, so in terms of the second quarter revenue, I think the sort of two offsetting factors that drive the guidance are obviously we guided to the continued anticipated membership growth in the second quarter as compared to the first quarter. And on the other hand, what we typically see from a revenue PMPM standpoint is that the revenue PMPM goes down sequentially as we both grow new members, which come on with lower revenue than the PMPMs, and we see involuntary disenrollment of our older, typically sicker and higher revenue PMPM members. Just the mix of those two things over the course of the year. And then to your point, obviously what I mentioned earlier is that we do expect to see the sweeps from CMS this quarter, and that could be an area of opportunity based on our historical experience.

Thanks. And then looking at the days claims payable down sequentially and year-to-year and from the Q, the bulk of that year-to-year and sequentially is really coming out of your incurred but not paid bucket. Is there some color you can help us with on why those -- that -- that dollar reserve -- is it floating higher with the medical expense?

Yes. This has been one of our initiatives ongoing now for the last really six to nine months in terms of how we can continue to invest in and increase the productivity of our overall claims department. The benefit of that obviously is earlier visibility to emerging claims trends. And so, this is something we've been actively investing in, in terms of just more examiners and kind of different automation tools accordingly. So I think you're starting to see a little bit of the benefit of some of those efforts in the first quarter, which we're very pleased to see. And I think more broadly speaking; we're continuing to think about how we scale the overall business. And so, investing in things like the claims system on a go-forward basis will be I think areas of opportunity for us to continue to drive down that SG&A as a percentage of revenue over time. So that's really the primary driver of the days payable question you had in terms of the first quarter actuals.

Was there a P&L impact from that in the 1Q? Or is it the adjudicated claims incurred but not paid that you're saying is moving?

No. In fact, we actually had some slight favorability on IBNR in the first quarter from 2022. It wasn't a significant number, but a couple few million dollars.

Last one for me; just give us a quick update on how you're thinking about the Alzheimer's drugs heading into 2024. CMS put nothing in the benchmark form. You've got that existing NCD requiring trial or registry, but there's chatter now with the latest Lilly drug that maybe the NCD will get reexamined, et cetera. And I guess in theory, you could just rely on CMS to do the significant cost calculation and slip it through a pass-through if it's going to be a material uptake of patients. But do you head into your June bid just assuming CMS will protect you on that? Or do you feel like you have to protect yourself in the bid process?

Hey, Gary, John here. That's one specific variable that's of many that I think are going to impact Part D resulting from the whole IRA initiative. I think that is going to be a pretty important component of our bid strategy heading into 2024. Generally speaking, I think for your specific question, I do think we're going to rely, and we've said this in the past also, that we're going to rely on kind of the CMS factoring that into the whole benchmarks and the hope calculus. But I will say that Part D, specific Part D drug strategies as it relates to the bids, are going to be a very important part of the product design heading into 2024.

Okay, thank you.

Hey, Gary.

Yes.

Hey, just one other thing. Just to Thomas' point on Q2 sweeps, I mean we are, you know this, we don't know it, so we're relatively conservative. But I think as you know, for the last I don't know, since we started the business, we've always had some positive pickup in the Q2 sweep numbers. I will say for 2022, they were unusually good because of the whole timing issues associated with COVID. Remember that? So we're just being very disciplined about that.

Got you. 10-4. Seen that playbook, so nothing wrong with that.

Thank you. And one moment for our next question. Our next question comes from the line of Jessica Tassan with Piper Sandler. Your line is open. Please go ahead.

Hi. Thank you guys so much for taking the question and congrats on the quarter. Can you just remind us what the current criteria for the Care Anywhere program are? And are those criteria changing in 2024 as you move to adopt the new V28 risk adjustment model?

Yes. So I would sort of entirely separate RAF and V28 from Care Anywhere. Those two things are -- in other words, someone's risk score under the current model or the new model has no impact whatsoever on how we think about Care Anywhere criteria. So the way we've evolved this over time is basically using a variety of machine learning algorithms and more recently some AI tools that allow us to take all the data we have on members, including pharmacy data, lab data, demographic data, encounter data, admission/discharge transfer data, and a variety of other sources that allow us to basically try to pinpoint who the people are who would be most likely to have an acute event in the next 30 days as well as those who have a much higher or greater chronic set of factors than the average population or the average senior. And so all those things kind of go into how we think about our eligibility criteria, and then that gets routed automatically to our outbound call team into our provider engagement resources so that we can try to get these members enrolled in the program. On average, I would say our Care Anywhere population in terms of age is in the high 70s. They typically have five or six chronic conditions, if not more, and kind of things of that nature. So I don't anticipate any change in how we approach our Care Anywhere engagement or criteria other than just continuing to ensure we get everyone engaged to the extent we can.

Yes. We've got to get closer to that 80% engagement level on the identified Care Anywhere eligible members. But like we're going to take care of these people that need the care irrespective of the reimbursement, we have to do that, and we're going to continue doing that. And yes, no, yes, I think Thomas is exactly right.

Got it. Thank you. And then just I wanted to just ask your kind of level of comfort with the 2024 adjusted EBITDA breakeven target and how you think about the balance between potentially accelerating membership gains in 2024 versus the persistence of that target? And that's it for me. Thanks.

You got it. Yes, this is John. I feel good about it predominantly because of the Care Anywhere and AVA investments that we continue to make. The kind of loyal shared risk MLRs in the company are still very, very good. And we've got a lot of innovation on the clinical side that we're going to be being putting into production in several of our markets. We've got a bunch of ideas that we're going to be testing out that I think are going to kind of create some tailwinds for us on an MBR basis. I think the initiatives that we've got just kind of from a core operational scale perspective to kind of do blocking and tackling on retention I think it's just a very good opportunity for us. For, like we said before, vendor management, making sure that our vendors are going to be doing what they say they were going to do. These are things that I just have a high degree of confidence that we will roll out to more efficiency in our back-office operations. Having said all that, I think that if the market opportunity presents itself, if, and we find ourselves from a product design perspective kind of growing, I do think that -- I think if we would, said differently, if I see a little bit of an uptick in MBR because we're growing a lot resulting from a lot of new members, I think I would make that trade. And that's not backing off any of the core MLR. It's not backing off our confidence in getting to profitability. But if you've got a disproportionate share of your membership base being new members, combined with the fact you're going to pick up just raw scale economies because of that growth, I think that's something we've got to do. So with that little proviso, I still feel good about it and we'll keep everybody posted on how these initiatives actually get operationalized.

Thank you. And one moment for our next question. Our next question comes from the line of Calvin Sternick with JPMorgan. Your line is open. Please go ahead.

Yes, thanks for the question. I have a follow-up to the last one. Just curious how you would be thinking about some of the opportunities in your markets next year just given that it sounds like you guys are going to be a bit advantaged relative to some others, where there could be a little bit more volatility. So just curious if you're looking at those changes leading you to revisiting potential M&A within any of your markets?

Okay. Okay, Calvin. Yes, that was good. Let me answer the first one. The way we look at it is this way. I think it's not a secret the last three years have had headwinds on a macro industry perspective. I think people have been aggressive on benefits resulting from technical kind of loopholes on Stars. I think people have been aggressive on risk adjustment. I think people have been kind of unyielding on distribution. And what we love is the fact that CMS has kind of just closed all of that down and refocused on the way Medicare Advantage was designed. And so I think you're going to have some of our competitors be impacted by Stars. You're going to have some of our competitors impacted by risk adjustment. I think everybody is going to have more of a playing field on the distribution side with the brokers, although I think there can be even more done there. So I do feel pretty good about that. I think that the fact that we've proven we can take share from the bigger competitors over the years, and in fact 85% of our growth is coming from switchers, also is a factor. Because I do think those folks have been able to maintain their stars. We'll see what happens with respect to the risk adjustment though, and particularly in California that is. So I feel really pretty good about that. With respect to M&A, I think the notion of just being very careful, being very careful, very thoughtful about kind of what kind of risks are incremental that you would incur. Because I think we've got a very solid, well-run business right now. We've got to be -- we've got to keep that in mind with the trade-off of just getting scale. I mean, I think getting scale is going to be important in the overall mix of things. Just to accelerate the scale economies on the back office in particular, number one. And number two, taking AVA and Care Anywhere and just applying it over more memberships. I think that's just -- those two kind of thematic synergies I think is causing -- we've got to look at stuff -- look at stuff seriously. But having said that, we've got a good thing going, and we've got to make sure we don't goof that up.

Thank you. And one moment for our next question. Our next question comes from the line of Nathan Rich with Goldman Sachs. Your line is open. Please go ahead.

Hey, good afternoon, John and Thomas, thanks for the questions. Maybe kind of following on the last question, just when we think about the 2024 PMPM, the flat to up 1%, for a market like California, I guess how would you compare where you are relative to the market averages in those counties that you're in? And is really the delta between flat and plus 1% the ability to offset some of the risk model changes? And if so, what kind of pushes you to the high or low end of those ranges? Just sort of what you need to do to make sure you execute on those offsets?

Yes. So in terms of the ability to get to the high-end of the range versus the low-end of the range, I think it's a matter of ensuring that we're continuing to ramp up our staffing and resources as well as our training and our engagement in a very timely fashion. So this has been a priority of ours now really for the last 60 days, and we're starting to see some solid traction, and I anticipate that to continue over the course of the second quarter. I think just that the timing in other words is probably the key thing that would put us at the low-end or the high-end for 2024, which is why I still think that the overall opportunity is pretty sizable though over the course of a full three-year phase-in where you don't have to necessarily have it all in, in year one. I think in terms of the competitive backdrop relative to our outlook, yes, I think, I suspect at least, that some of our competitors may not have the opportunity to offset some of the headwinds that the industry collectively faces. But I think furthermore, just based on what we know about California and some of the historical CMS data available from CMS going back several years ago, I think we have at least a sense of some of the risk adjustment scores of some of our competitors. And we would anticipate that there could be some headwinds for certain of those competitors in a more kind of significant way or more adverse way than what we are facing. So I think it's a little bit of both. But that being said, this is a competitive market. And as we said before, I'm sure everyone will be working on different forms of offsets. And while we feel quite good about how we're positioned, we'll see how others continue to navigate the environment over the next couple of quarters and next couple of years.

Okay. Great. And sorry to go back to the topic of utilization, but hospitals have talked about increasing kind of capacity and demand is kind of driving their outlooks for the balance of the year. I guess could you maybe give us your view on how you see inpatient volumes trending over the course of the year? And if we do kind of see a pickup, if that's kind of contemplated within the range of expectations that you have for MLR in your guidance?

Yes, yes. So I do think that our ability to kind of maintain our historical performance is quite strong. And so, as a reminder, when we talk about 160 or so admissions per 1,000, that would compare to, for our markets, around 250 admissions per 1,000 for traditional Medicare. And the difference between 160 and 250 is about 14 percentage points of MBR. It's a pretty significant driver of our performance over the course of the year. In terms of the consistency factor, we have run between 155 and 165 each year for the last six years. And then obviously, for the first four months of this year as I mentioned. In other words, on track to continue to achieve that I think for the seventh year in a row. I think the important part about that is not just the consistency, but it's the consistency in light of the growth. And so, as a reminder, seven years ago, we were significantly smaller than we are today. We were only in seven or eight counties seven years ago. And so given the fact that we've expanded to six states, 52 counties, and grown the membership by a factor of probably 3x over that period of time, I think we've generated a lot of kind of performance and replicability of the care model, which is what gives us confidence that we will be able to continue to perform on that key metric of ours being inpatient admissions per 1,000 in light of some of these evolving utilization patterns that you're describing on a more national basis.