ALHC - NASDAQ

Good afternoon, and welcome to Alignment Healthcare's Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] And please note that this event is being recorded. Leading today's call is John Kao, Founder and CEO; and Jim Head, Chief Financial Officer. Before we begin, we would like to remind you that certain statements made during this call will be forward-looking statements as defined by the Private Securities Litigation Reform Act. These forward-looking statements are subject to various risks and uncertainties and reflect our current expectations based on our beliefs, assumptions and information currently available to us. Descriptions of some of the factors that could cause actual results to differ materially from these forward-looking statements are discussed in more detail in our filings with the SEC, including the Risk Factors sections of our annual report on Form 10-K for the fiscal year ended December 31, 2025. Although we believe our expectations are reasonable, we undertake no obligation to revise any statements to reflect changes that occur after this call. In addition, please note that the company will be discussing certain non-GAAP financial measures that we believe are important in evaluating performance. Details on the relationship between these non-GAAP measures to the most comparable GAAP measures and reconciliations of historical non-GAAP financial measures can be found in the press release that is posted on our company's website and in our Form 10-K for the fiscal year ended December 31, 2025. I would now like to hand the conference over to John Kao, Founder and CEO. You may begin.

Hello, and thank you for joining us on our fourth quarter earnings conference call. For the fourth quarter 2025, health plan membership of 236,300 represented year-over-year membership growth of approximately 25% -- this supported total revenue of $1 billion, which grew 44% year-over-year. During the fourth quarter, we also exceeded the high end of guidance across each of our profitability metrics. Adjusted gross profit of $125 million represented an adjusted MBR of 87.7%. Meanwhile, adjusted EBITDA of $11 million solidly surpassed our guidance range of negative $9 million to negative $1 million. For the full year, total revenue of $3.9 billion grew 46% year-over-year. Adjusted gross profit of $495 million resulted in an MBR of 87.5%, representing an improvement of 130 basis points year-over-year. Taken together, this year marks a tremendous milestone in the maturation of our company's profitability. We transformed from roughly breakeven just $1 million in adjusted EBITDA in 2024 to delivering adjusted EBITDA of $110 million in 2025. This reflects an adjusted EBITDA margin of 2.8% and represents 270 basis points of margin expansion year-over-year. Throughout the course of 2025, we have demonstrated both the strategic and operational advantages of our clinically centric model, which is purpose-built to deliver the highest quality care at the lowest cost. The data insights provided by our AIVA technology platform, combined with our Care Anywhere clinical model provided us with the visibility and control necessary to navigate a year of significant disruption, where we overcame the second phase of the V28 risk model, a redesign of the Part D program and broad utilization pressures across the Medicare Advantage industry. And importantly, this allowed us to pursue growth while expanding margins even as competitors took a step back in 2025. I'd like to congratulate our team for their success and recognition by Fortune Magazine for their unwavering commitment to seniors, which named us to its World's -- most Admired Companies list for the first time. We believe our model of lowering costs by delivering more care to seniors, not less, is the MA model of the future, and we are eager to serve more seniors as we continue along our path towards 1 million members. 2025 also marked an important step in demonstrating the replicability of our model beyond California. We more than doubled our ex-California membership, while consistently exceeding our financial expectations throughout the course of the year. As of December 2025, we had approximately 38,000 members across our markets outside of California, representing approximately 16% of our total membership. We have grown confidently outside of California by first leading with quality, which starts with success in star ratings. We now have a 5-star plan in North Carolina for the third consecutive year, 2 5-star plans in Nevada, a 4.5-star plan in Texas and a 4-star plan in Arizona. These achievements are further supported by the portability of our Care Anywhere clinical model, which focuses on delivering care to our high-risk polychronic members. By leveraging the strength of our care model, quality of clinical outcomes and scalability of our health plan operations, we are unlocking the growth potential within these markets. We are now focused on sustaining the momentum of our ex-California markets. In 2026, we plan to invest in our sales and distribution engine, build deeper relationships with our broker partners and continue growing with aligned provider partners where we have durable relationships. With less than 4% market share across our 23 counties outside of California, we see significant opportunity to take share over the coming years. Turning to our 2026 AEP results. We grew to 275,300 health plan members in January of 2026, representing 31% growth year-over-year. We saw broad growth across each of our markets with 23% growth in California and more than 80% growth in our ex-California counties. Importantly, we focused on growing responsibly through our bid design and sales strategy. We drove nearly 20% improvement to our AEP voluntary disenrollment metric and sourced approximately 80% of our gross sales from plan switchers. By taking a balanced approach to growth and profitability this year, we remain mindful of the impact of the final phase-in of V28, while still capitalizing on the growth opportunity in a year of significant disruption. Taken together, we are pleased with the solid growth in California, while continuing our rapid expansion outside of California. Our growth this year is adding to our future embedded earnings potential, while supporting our near-term operating leverage objectives. Meanwhile, improved operating efficiency across the enterprise is creating additional capacity to reinvest in long-term projects and scalability initiatives. Each of these factors is giving us confidence in our initial full year adjusted EBITDA guidance range of $133 million to $163 million. This is consistent with our previous expectations for consensus adjusted EBITDA of approximately $145 million to be in the range of our initial 2026 outlook. Jim will expand further on our financial outlook in his remarks. Looking beyond 2026, I'd like to spend a few minutes on the 2027 advanced rate notice. On a net basis, the announcement appeared to indicate a relatively flat rate environment for the industry. This reflected a combination of underlying cost trends and policy changes. While we have heard disappointment across the industry, we believe the update is largely consistent with the CMS focus on program integrity and aligning payments with underlying costs. Specifically, we are encouraged that benchmark trends reflect continuing growth in costs within the fee-for-service population. This was partially offset by certain policy adjustments, including those related to skin substitutes. As it relates to unlinked chart reviews, we have long supported excluding these records from risk score calculations as part of improving program integrity. Of note, our exposure is limited. Approximately 1% of our total HCC value is derived from chart reviews of any kind. Within that category, an even smaller subset is related to unlinked chart reviews. For those, we believe we have a clear path to ensuring the diagnoses are supported by a linked claim or encounter over time. Most importantly, the current environment reinforces the importance of our strong clinically led model and core medical cost management competency. We believe this enables us to win in any rate environment, just as we have demonstrated in 2024 and 2025, where the industry experienced tighter reimbursement. And furthermore, we will continue to have STARS payment advantages in 2027 with 100% of our members and plans rated 4 stars or above. In closing, we believe we are entering a reimbursement environment that creates a more level playing field with our competitors, which allows our distinct care management model to shine. We are proving the effectiveness of our distinct medical cost advantages with the results we have shared with you over the past 2 years. While we're pleased with our performance, we are not done yet. 2026 will be a year of continuous improvement where we plan to make targeted investments across our clinical model, new market playbook and scalability initiatives, including investment in AI workflows to improve administrative efficiency. In doing so, we are balancing our near-term financial objectives with unlocking the embedded potential of our model. With that, I'll turn the call over to Jim to further discuss our financial results and outlook. Jim?

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

[Operator Instructions] Our first question comes from the line of Michael Ha with Baird.

So I want to frame this question by calling out a few numbers first. So over the past 2 years, Alignment has seen nearly 50% revenue growth CAGR, I think almost 500 basis points of margin improvement, right, sub-10% G&A, all while improving to 100% of members in 4-plus star rated plans, and all this happened in a flat rate environment, while trends nationally rose to high single digits. So on the heels of all of this and with the potential again for another flat rate year in '27, my question is, I guess, simply put, what would prevent Alignment in '27 from having a rerun of what you just accomplished in '24 or '25 because it looks very similar to setup into '27.

Well, Michael, this is John. You should probably expect my response to be, we feel very comfortable with the 20% growth rate. No, we feel good. I mean the model is working, and it will work irrespective of what happens in the rate universe. And I think that if rates do go back up a little bit in terms of the events switching to the final notice, I think it will be fine. I think what I'm hearing in terms of the amount of potential increase is still going to be pretty short of what we think trend is, at least what the sector thinks trend is. So I think that will be something favorable to us. And if rates don't go up, I think it could be more favorable to us. And I think we're going to do exactly what we've done year after year, which is be very, very disciplined and find the right balance between growth and margin expansion. I would say that we don't want to get ahead of our skis on terms of growth. We don't want to talk about bids. I do expect -- I said this to people beforehand, I think it's still going to be 1 or 2 years of kind of people finding the right model to dig out of this kind of post V-28 world. And I think that there are some folks that grew a lot this past year for AEP. And we chose not to grow at the level some of these other folks grew. We didn't just grow to get growth. We wanted durable provider relationships. We wanted to make sure our infrastructure would be able to sustain the level of stars that we've been able to produce. And the other thing that we're doing is we know how good we're doing in '25, and I feel very strongly about '26 as well. We're taking the opportunity and we're not complacent. We're getting even tougher on ourselves internally from an operational perspective, from a clinical perspective, from an AI deployment perspective. We're just getting stronger to really get to the level of growth we think we can get to over the next 3 or 4 years, getting into a number of growth that will be really meaningful for everybody. That's kind of how we're thinking about it. So Michael, I mean, you called it 2 years ago. I'm not going to give you the benefit of calling it again quite yet.

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

Yes. And thanks, Michael. I guess a couple of things. Just in terms of the inputs to the 2026 guide, I mean, we're -- it's kind of 3 core inputs that we feel pretty good about. So I want to start with that. And our 2025 experience, how we manage costs and delivered throughout the year, new members delivering, et cetera, that gives us a lot of confidence as we go into the year. We also bid in mid-'25 -- 2026. And you say, okay, how do we feel about that now that we're in January, February and building our model for the year. And it played out very, very nicely in terms of how we thought what was going to happen and happen. And then finally, John's point, this is very disciplined growth, and we chose to play in spots, where we could win with the products we like, with the cohort of members that we like and the geographies and the networks that we like. So that's the setup. Now as it pertains to the MBR, you're right, it's about a 10% kind of apples-to-apples improvement because -- or 10 basis points, I should say, apples-to-apples improvement because we're stripping out the impact of the suites last year. I would say 3 drivers, Michael, that kind of are inputs to why it wouldn't be better. #1, we're still going through the third phase in the B-28, okay? And so we've navigated that very, very nicely, as you mentioned. But that does -- it's not a tailwind. It's a headwind. The new member mix was disproportionately represented by Dual-Eligible, C-SNP eligible and LIS members, which is our sweet spot, but they come with a little higher MBR in the beginning. So it is -- that is a little bit of a headwind. But the trade-off is we know how to manage these members really well, and there's a lot of long-term opportunity there. So we consciously made that choice, and it was a big portion of our AEP -- and then as I mentioned before, we didn't have a suite. So I think the B-28 and the new members coming in at that, I'll call it, heavier mix in terms of special needs, et cetera, is driving that. But we feel very good about where we're at with respect to the visibility we have. And I'll also throw in Part D. A second year, we did a great job delivering on Part D in 2025 and on our promises, and we have a fair degree of visibility as we go into 2026. So I'd say that was another input that was part of the overall mix.

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

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

John, it's John. Yes, with respect to distribution, we're going to -- and I think that comment was specifically related to some of the ex-California markets, including some of the potential new market entry strategies that we're going to be taking into the existing states, new markets in existing states and what we're doing with potentially getting into another state. And so we're at a size now in pretty much each of our markets that we're really kind of a player and relevant. And so I think we've got deeper relationships with brokers and providers. And a lot of the success that we've been able to achieve in California is starting to take root in these new markets. And that really does start with the providers. And what we've learned also is really is the brokers are really pretty important in that discussion. And you put that against the backdrop where the receptivity of the brokers is just much greater given the fact that a lot of the incumbents are taking a step back for the last year or 2 and maybe for the next year or 2. I think that creates an opportunity for us. And so we're just very intentional about that. With respect to new markets, we are seriously thinking about that. We're not quite where I want to be quite yet with some of the provider engagement conversations, but I'm pretty comfortable we're going to be able to get into a new state. And the rates, I just don't think that matters to us. I think it's going to be whatever it is, it is, and I think we're going to do well in any environment. I really mean that. And again, a lot of this is choosing the right provider partners, which I think we have in these 2 distinct new markets.

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

TBD. I mean we submitted our comments like everybody else yesterday. I think from a policy point of view, I think we'll see what they have to say around the reward factors and the HEI. Again, we'll see what happens. I think we're going to be okay either way. And I think from a kind of just more information gathering purposes, we feel pretty strongly about kind of the C-SNPs remaining as C-SNPs and not really getting linked to any kind of aligned network. And the logic there really is we want there to be choice for the beneficiaries. We don't think that's right that the beneficiaries should be forced into a suboptimal star rating plan is more of a key plan. I think they should really be -- have choice, get the right benefits, get the right network and just to get the right quality they deserve. But other than that, there's other moving parts. I've been asked what we think about risk adjustment going forward. We do support documentation of the HRAs. We've always supported that. So I think that's a good thing. I think the administration focusing on program integrity and minimizing gaming, all that is kind of the right direction. But as I mentioned earlier, I do think there's going to be some exposure on rates. And as the previous Mike said before, I mean, I think we stand to be a beneficiary of that. But I think they're going to do the right thing on rates. That's what I actually think when the final comes out.

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

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

Well, I'll start with how we finished the year, we had an expectation, if you remember in the third quarter, Matt, that 80k might tick up. We weren't ready to bet on flu season being favorable, and it did come in pretty well. So we ended the year, as we said, in the low 140s. As we go into the new year, the answer is yes. Because of mix, our 80k could tick up a little bit, and that is not because the trend is wrong on an apples-for-apples basis, it's because of that. And so I view that as another component of the, I'll call it, the cost trend that we're pretty maniacally focused on and managing actively. But it might tick up a little bit in the -- over the course of the year. As you're aware, first quarter is usually a little bit higher. So that's just a seasonal issue.

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

Yes. Matt, it's John. Yes, it's a great question. We've got 30-some-odd different potential use cases where we could deploy Agentic AI. Having the use cases is not our issue. What we're actually doing is to require 2 foundational actions be at a level where we're satisfied. And the first one is really as part of this kind of revalidation of everything. It starts with a unified data architecture. It starts with AVA. And we're just looking at everything. We're making sure all the data ingestion is as tight as we think it is. We're validating everything. We're not assuming anything, all of which is designed to ensure that we can scale and replicate without any abrasion. We're going to be just that much more efficient scaling. And what that really translates into is we're going to get to cash flow breakeven faster than we would have thought before. We're going to grow and be more aggressive on Stars and benefits even more so than we did before. The second issue is what we're talking about internally, is just making sure the end-to-end workflows within each functional area is well documented and frankly, well understood. And what I mean by that is when you basically double in size every 2 years, you bring in a lot of people, a lot of new people that have to get trained. And so the training opportunity is to make sure that all of these different workflows are understood by everybody. And then within the end-to-end workflows, you've got micro workflows. You really know what's happening. And then ultimately is the cross-functional workflow processes. And when you -- again, those are very sophisticated workflows that factor in our clinical work processes, our provider contracting work processes, which one of these providers are we delegating, -- are we not delegating? We have our directly contracted networks. All of that is being evaluated right now. And once I get those done, which we expect to have done midyear this year, you're going to see us start deploying these use cases for Agentic AI. The other thing we're doing is we're kind of revisiting the initial stratification model within AVA. And I think there's going to be tools that we have -- sorry about that. I went on mute for a second. I was going to say, we talk about AVA and we're looking at using the new tools to make the stratification model even better for our Care Anywhere members of the 10% of the population we think that account for 78% of the spend. You're also going to see us have use cases around administrative improvements. I think member services is going to be one of the first ones, and I think there's going to be immediate savings there. I think in our financial reporting, I think you're going to -- we're going to be able to use AI and look at the raw data and be able to come up with actionable conclusions market by market. I think those are things you're going to see. What we're probably not going to do is kind of lead the market in deploying Agentic AI in care delivery. We're going to still rely on our doctors and nurses to do that. I hope that helps.

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

This is Sam on for Scott Fidel. I was just wondering if you could talk about just are you concerned about the DMA industry that has -- may have lost too much bipartisan support in Washington? And what can the industry do to improve its standing and position itself better to alleviate the ongoing regulatory pressures on the sector?

I think it's to get back to what CMS originally intended MA to be. And I think it's -- all the actions that I see going on are exactly consistent with that, meaning -- and I've spoken about this. They want a program that creates value to the end beneficiary. And to define that, you got to have higher quality, better experience. And I think to do that in a way that is the most affordable. And so this is what I always say, you got to have high quality and low cost. And in that environment, the folks that can create the highest degree of value ought to be positioned to win. I think there's been some financial engineering away from that over the past several years. There's an emphasis on coding, global capitation, prior auth, all of which I don't think are going to be sustainable going forward. So I think if people just do what CMS intended them to do, they're going to be in a good place. And I think the benefit differential in MA relative to traditional Medicare, I think, is going to cause MA to continue to grow, not go down. That's what I think. And I think for the last 40 years, we go through these different phases of whether it's the BBA in the '90s and the ACA in the early 2000s. I mean, you go through those peaks and valleys, MA has always thrived. It has always come through. And I just think it's -- I would be very surprised if that trend changed put that way.

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

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

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

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

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

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

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

I'm not sure I understood that.

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

Okay. And then I guess just building maybe on John's question and John, your remarks about sort of deepening broker relationships. A direct noncompetitor you guys in your markets announced some plan to use MA brokers more like health navigators and get them involved in patient experience. I guess is this -- is that sort of a strategy you think could work for the industry? And maybe just more broadly, how do you believe the payer broker relationship will or could evolve sort of over time?

Yes. We -- I mean, we have been consistent about this. We value our broker partners. We think they do a good job. We think they're generally looking out after the best interest of the beneficiary and are fair. What I do think is going to be interesting is how CMS tries to position itself as a bit of a, call it -- if not the actual agent, a little bit more of the FMO. I think that will be interesting. And we're kind of looking at some of that -- some of the developments, some of the -- just it's very nuanced, but I think that's going to be interesting, one to watch. Not sure it's going to be implemented anytime soon, but I think that's on their radar. With respect to your kind of commentary on some of our competitors, I don't know. I think they were, I think, very specifically saying that whatever it is, 4% to 6% of premiums going to distribution is a big line item, I think, is what was quoted. Yes, I'm not sure. I mean there are certain parts that they can maybe be additive to a little bit, but I'm just -- I'm not sure about that one.

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

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

And I'll take the growth issue. We -- about 50% of our AEP growth was in the LIS duals and C-SNP. And that was both in California, but also outside of California. As you know, we have strong outside California growth. So that's a real healthy portfolio for us. And we think we can manage that pretty well over time and with a lot of embedded value. But John, I think there's a second half of the question, maybe I'll give it over to you.

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

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

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

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

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

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

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

Yes. Why don't I try the first -- the second question first, which is the intra-year and then we can talk about retention. But as we come into this year, there was just a lot more movement. Disruption is probably too strong a word because we weren't picking up that stuff, but there was just a lot of movement. And so we are trying to assess whether we picked up most of that movement in AEP or whether it will sustain itself throughout the year. So it's a little bit like we're not ready to bank on a greater AEP opportunity turning into sustained growth throughout the year. OEP is feeling fine, but the -- we just aren't ready to kind of bank it all the way through December. And then as it pertains to retention, I think we talked about it in January at the conference. We felt very good about the retention this year. That was one of the reasons why we had kind of very nice -- we had both sales growth, but we also had retention, and that's wonderful for us, because of our ability to mature our cohorts and get better MDRs. So we're not churning them, we're holding on to the loyal numbers. So that was -- that's turned out to be a nice little boost for us.

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

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

That's actually an interesting question. I actually don't think we are as exposed as others for the simple reason that our kind of blended RAF scores are -- what are we, Jim, 1.08 or something like that. I mean it's just 1.1, yes.

Below 1.1, yes.

Yes, it's below 1.1. And even with the final phase of V28, you still got people coming down from 1.5, 1.6, 2.0 in certain markets, down kind of 20-some-odd percent. And so I just -- I think we're -- we've never relied on it other than to make sure that we're just very accurate and compliant on the coding part and have focused on the cost management side and the Star side. And I think we're going to be advantaged actually, if there's any more tweaks to that.

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

Yes. It's the -- it will be slightly different in '26 than '25, but -- which is to say that the profitability of Part D is going to be a little bit more weighted to the first half. But this is all in the margins. So I would kind of say at a high level, consistent but slightly more weighted to the first half. And that's just really kind of the construct of risk quarters and how we accrue for contra revenue when we're outside the risk quarter, et cetera. So I would say pretty similar to 2025, a little bit flatter.

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

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

It depends. It's a good question, John. It depends. Really, we're looking for full provider durability, full provider engagement. And I think we're going to get there. It's just -- again, our lessons learned over the past several years in terms of entering new markets is just causing us to be extra vigilant and to make sure people understand our model, why we're different than everybody else. And it really -- even if you work with different health systems and integrated delivery networks and whatnot, a lot of it really relates to the physicians and to create economic, clinical and operational alignment with that doctor and/or their MSO. And that's really what I was focusing on. I think we've got great hospital partners, and we've got a lot of good doctors that understand and like what we're saying in terms of the clinical model. We just need -- we just -- I would like to have a few more. That's all.

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

Yes. The 0.9% net kind of advanced rate notice, I think, is clearly disappointing to the industry. I think there's a little bit of debate over what's causing that low trend. And I think that CMS has certainly shared with us that it was really just an actuarial reality when they use different data for more recent dates relative to what was used in the past. So their intention was not kind of programmatic policy issue, but it's just like the data was different. And that's what led to a little bit lower-than-expected raw traditional fee-for-service trend. Then in addition, you deducted these skin substitutes as an offset to that and ergo, you kind of get this 0.9%, which is a big problem. If that maintains for the rest of the industry, people are going to be rationalizing benefits again. And so my point was I heard somebody say 9% to 10% from one of our competitors. I'm just not sure I've seen that number -- and so if you then -- if you think about the fee-for-service trend data and let's say you get a portion of the skin substitutes, if not all, but let's say a portion is actually used as an offset and then it's phased in over time. I think you could see kind of closer to what the other analysts was talking about 5%. I have heard a lot of people talk about 200 to 300 basis points increase, kind of getting 0.9 to increase to 200, 300 basis points, which gets you to whatever, 3% to 4%, 5% increase potentially. But my point was I think that's still lower than the kind of the utilization trends that would cause people to be aggressive on benefit designs. That's what I really meant. My point as it relates to alignment is I really think we can win either way because we're the high-quality, low-cost producer. We're not dependent on kind of an external entity to do our medical management. That's something that we're actually very good at. And what we've also said is the margin that would otherwise go to a third-party value-based provider, we actually reinvest to the individual practitioner and/or to richer benefits. So I just think either way, we're going to be in a really good place. From an industry perspective, I hope they're right, actually, that you're going to get a rate increase of 9% to 10%. Not sure that's going to happen.

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

Just thinking about bending the trend with AVA, 1.0 was, I think, pop health 1.0 was CHF, COPD, type 2 diabetes. What's the -- if it's going to become more about bending the trend, what's kind of 2.0 in terms of deploying your assets to do that?

Really good question.

I thought it really was, John, so I appreciate that.

No, it's -- your questions are always still like advanced. No, they really. No, no. So I think I think 2 things. It's actually a serious, serious answer. I think that as good as we are, we can do a lot better operationally. And so what I mean by that is I think our stratification models can be more precise. I think our workforce management of our clinicians can be more efficient. I think we're focusing on clinical outcome measures as what you talked about, which is kind of traditional chronic disease management. I think the outcomes measures are going to be more and more important where we demonstrate not only the efficacy of better utilization, but better clinical outcomes. I think that's going to be something we focus on. But in terms of programs, I think transitions of care programs we can do better on, case management [indiscernible] we can do better on, tighter integration with our provider partners from a medical management perspective and potentially on palliative programs, I think we can do better on. And like when you kind of combine all these together, I think they all represent small opportunities for we to continue bending the cost curve. The other thing I would say is, and I've alluded to this in the past, is and this is less of a clinical MLR piece, but an overall MLR piece, the supplemental benefits right now that we have, whether it be kind of dental coverage or vision coverage or transportation or Flex card, I mean those kinds of benefits represent about 5% of overall premium, right? And I think that we're getting big enough now that we are going to be investing in starting, buying kind of some of these captives, these specialty company captives. And I think from that, we ought to be able to save on margin because we would be paying ourselves basically. And if we did -- I'm just picking on whatever, whatever specialty we do, we'll be able to seed it with 300,000-ish seniors, if you know what I mean. And so I think that's going to be a way where we bend the cost curve. The other thing that we've also talked about is one of the benefits of our performance in '25 was we really working closer with these IPAs that we have and taking the technology tools and really helping them do the utilization management for the acute authorizations. And I think we've done a very good job. And we're operationally good with them. We have some work to do, I still think in terms of some data. But I think by delegating that has been something that's going to help us and help the member and help the IPA. And I think that -- before this past year, we hadn't done that. And so the full benefits of AVA and Care Anywhere weren't fully realized yet. So I'm very optimistic about that part.

That was quite the answer. My second question is a very simple one. There are studies as long as your arm about is MA a good deal for the taxpayers. If you do apples-to-apples, risk adjust apples-to-apples, where do you -- I mean you've got MedPAC on one hand saying it's terrible. There's the Evolent study on the other hand saying it's a great deal. And there's all over the -- when you talk to people in D.C., what study do you point to? And do you think it's apples-to-apples a good deal yet for the taxpayers?

I think it's a very good deal for the seniors. I think from a tax point of view, the last study I saw is post B-28. It's pretty much apples-to-apples is what I saw. And to the extent that plans that are able to remain competitive and still have a reasonable rebate back to that beneficiary are going to be the winners. And I think that CMS has been consistent with they want to grow MA. They just want to grow it the right way. They want to minimize the gaming, their words not mine, and ensure program integrity. On the other hand, they want to have an alternative with what they're referring to as traditional fee-for-service Medicare. Now I just -- I think just looking at the value proposition to the beneficiaries, I personally think you're going to get continued growth and market share growth in MA. -- because the rebate dollars, even though they go down, they're still material enough in terms of being better than fee-for-service that people are going to still choose it.

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

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

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

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

Yes. I got it. Yes, I would say it's about the same. I think there's opportunity for us to get better. We're spending a lot of time, again, taking advantage of, again, the -- I think the strategic decisions and operational decisions we made 2 years ago that are really paying off in '24 and '25, and I think will also pay off in '26. That same kind of operational focus of continuous improvement Again, just not being satisfied with any of it is going to cause us to get better and better and better. And one of those areas is Care Anywhere engagement. I think we were still at about 65%, which really isn't bad. But I think we've set a target internally. We're trying to get to 75%. And I think some of the new people that we brought in on the member service and member experience side, shout out to that team is really going to be good for the company and for our beneficiaries. So I'm optimistic about that. But year-to-year, to answer your question, it's about the same.

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

That's a very good question. I think the work that we're doing now in terms of, call it, I call it, operational scaling is really designed to make sure that the providers and the members outside of California get the same level of service they get inside of California. And that's part of our maturation. It's part of our scalability -- and we're working really hard on that right now. Again, having very clear member satisfaction, but we're really starting provider satisfaction metrics. And I think the bigger we get, the more critical this area is, particularly outside California. I think we've done a very good job on Stars. I think we've done a very good job on clinical replicability in terms of the ADK metrics outside of California. I think our provider engagement is something we got to just get better at. And I say that to all the providers out there. We're working on it. We're going to get really, really good. And we want 5 Stars from all of you, just like we got 5 Stars from the members.