Good afternoon, and welcome to Alignment Healthcare Third Quarter 2022 Earnings Conference Call and Webcast. [Operator Instructions] Please note that this event is being recorded. Leading today’s call are John Kao, Founder and CEO; and Thomas Freeman, 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 Factor section of our annual report on Form 10-K for the fiscal year ended December 31, 2021, and our quarterly report on the Form 10-Q for the quarter ended September 30, 2022.

Although we believe our expectations are reasonable, we undertake no obligations to revise any statements to reflect changes that occur after this call. In addition, please note that the company will be discussing certain non-GAAP financial measures that they may believe are important in evaluating performances.

Detail on the relationship between these non-GAAP measures to the most comparable GAAP measures and reconciliation of historical non-GAAP financial measures can be found in a press release that is posted on the company’s website and in our Form 10-Q for the quarter ended September 30, 2022.

I would now like to hand the conference over to your speaker today, John Kao, Founder and CEO. Please go ahead..

Hello, and welcome to our third quarter earnings conference call. We are pleased to announce another strong quarter in which we exceeded the high end of guidance across each of our four key performance indicators and raised guidance for full year 2022 top and bottom line metrics.

For the third quarter, our total revenue of $360 million represented 23% growth year-over-year, beating our high-end guidance by $25 million.

Our ending health plan membership of 98,000 members grew 14% year-over-year, beating our high-end guidance by 700 members and placing us solidly in the range of our previous year-end membership guidance of 97,300 to 99,000 members.

Adjusted gross profit was $49.5 million, beating our high-end guidance of $40 million and resulting in an MBR of 86.3%, 180 basis points better than implied at the high end of our guidance. Meanwhile, our adjusted EBITDA was negative $9.5 million, beating the high end of guidance by $10.5 million.

Lastly, on the back of our strong performance, we’re pleased to share that we are raising our full year revenue guidance to reflect growth of greater than 20% year-over-year, consistent with our long-term annual revenue growth objective.

Closing out the third quarter, we are encouraged to see continued progress in the replicability and scalability of our operating model.

Our investments in our risk prediction models, clinical workflow tools, provider engagement activities and our local community reps are yielding outstanding results, both inside California and our new geographies as well. Meanwhile, our investments to optimize service delivery are on track to produce operating results quicker than anticipated.

Our continued success delivering high quality at a low cost across markets gives us confidence in the repeatability of our platform and our long-term runway as we carry that momentum into next year. Key to this repeatability of our model is AVA.

While plants have historically leaned on scale and unit cost to create the competitive advantage, our success is founded upon data science, information and analytics. AVA allows us to effectively compete and outperform by providing the insights required to optimize our key value drivers at the local level.

Our teams rely on this actionable information to deliver a tailored and agile approach to each market. We believe technology alone cannot change health care.

Rather, it is the interconnected nature of AVA and its actionable insights leveraged by the people across our business, including our clinical care teams and our provider partners that is driving the consistency of our performance across geographies.

Simply said, providing the right data at the right time to the right people is allowing us to improve member outcomes and deliver durable financial results. This is the culmination of our founding vision for what value-based technology-enabled health care should be.

Turning to stars, CMS recently announced the 2023 plan year star ratings, which measure the quality of health and drug services received by our seniors. We are pleased to report that our California HMO contract achieved 4 out of 5 stars, which marks the sixth consecutive year we have achieved 4 stars or greater.

In total, for the 2023 plan year, we anticipate approximately 95% of our members will be in plans that CMS rated as 4-plus starts. Additionally, due to the strength of our weighted average parent rating, our plans in Florida, Texas and Arizona, which are currently too new to be measured, will also adopt a 4-star rating.

Given that 2023 stars determined 2024 reimbursement, we are excited for the continued momentum our results will provide us over the next two years. We are also proud of the strides our teams have made this year to produce a 5-star result in North Carolina.

This is a crucial step forward in demonstrating the portability of our model and the traditionally fee-for-service market. To achieve this result, our clinical teams, community physician partners and member concierge teams took a hands-on approach with members.

The actions of these teams are aided by AVA-enabled insights to identify gaps in care and make targeted actions to support care navigation and address member concerns. These capabilities are core to our model and allow us to consistently deliver high quality at a low cost.

As we previously shared, we are continuing to make focused investments in quality and service delivery to not only maintain our strong company-wide results but also push our ratings higher across all plans in the future.

As we enter this annual enrollment period, we are once again enhancing benefits of lowering monthly premiums for our members while distinguishing our plans through product innovation. We continue to explore new ways to create benefits that improve our members’ standards of living and address social determinants of health.

This summer, we published the Alignment Health 2022 Social Threats to Aging Well in America survey results. Our inaugural report revealed that economic instability, loneliness and food insecurity are the top three social barriers impacting seniors’ access to comprehensive, affordable, high-quality health care.

We further recognize that these elements of day-to-day life for our seniors have been exacerbated by an uncertain economic environment and inflationary pressures.

Understanding these obstacles, we introduced a variety of new products and benefits this AEP to address these challenges, including a gas and utility benefit for low-income subsidy eligible members to address economic instability.

In addition, many of our plans now feature $300 to $600 of annual reimbursement for personal caregivers, including family members as we strive to directly aid our senior support system and combat social isolation.

We have also expanded over-the-counter benefits across our spectrum of products, moved many of our plans to zero premium and expanded our flagship Black Card benefit to include a flex allowance for a wider variety of services.

Our capacity to drive product innovation and improved benefits year after year is a direct result of our care model, powered by AVA’s insights and the MBR outperformance we’ve been able to achieve.

In aggregate, our enhancements this year, along with the continued support of our 24/7 concierge services, give our seniors greater benefits and choice at no additional cost. We are proud of our role in supporting our members and look forward to sharing more about AEP results in January.

As I wrap things up, I’d like to sincerely thank our employees for their continued outstanding contributions to our company and our members well-being. The results of this quarter added significant momentum to our impressive first half of the year and further solidifies our conviction in our strategy of balancing growth with long-term profitability.

Now I’ll turn the call over to Thomas to cover the third quarter financial results as well as our outlook for the remainder of the year.

Thomas?.

Thanks, John. Turning to the third quarter results. As John mentioned, we are proud to deliver another strong quarter in which we exceeded the high end of our guidance ranges across each of our four KPIs. For the quarter ending September 2022, our health plan membership of 98,000 increased 14% compared to a year ago.

Our third quarter revenue of $360 million represented 23% growth year-over-year. Our third quarter outperformance brings our year-to-date revenue growth to 23%. And as John mentioned earlier, sets the company up to its full year 2022 revenue growth of greater than 20%, consistent with our long-term annual revenue growth target.

Our adjusted gross profit in the quarter was $49.5 million, representing an MBR of 86.3% as our California franchise and newer states, both contributed to outperformance versus our MBR expectations.

While we previously noted that we had seen an uptick in COVID cases to begin the third quarter, the early increases in COVID admissions abated as we progressed throughout the remainder of the quarter. In total, inpatient emissions per 1,000 continue to run below baseline.

We also benefited from a final adjustment to our 2021 final suite accrual, which contributed a few million of adjusted gross profit outperformance in the quarter.

While we do not anticipate this event to recur in the fourth quarter, we note that we would have still run meaningfully ahead of gross profit and MBR expectations in the third quarter, excluding this pickup. SG&A in the quarter was $76.5 million.

Excluding equity-based compensation expense, our SG&A was $59.7 million, an increase of 22% year-over-year.

Due to the timing of some of our sales and marketing spent around AEP as well as the ramp-up of our year zero market spend, we experienced a couple of million of SG&A timing favorability in the quarter that we anticipate to reverse in the fourth quarter. Lastly, our adjusted EBITDA was negative $9.5 million, solidly ahead of expectations.

As we rounded out the third quarter, we are proud to note that our adjusted EBITDA loss for the first nine months of the year is only negative $3 million. We view this trend and outperformance as another indicator of our ability to leverage our operating model to produce strong growth while balancing our long-term profitability objectives.

Turning to the balance sheet. We ended the quarter with $402 million in net cash. Our cash position at the end of the quarter included an early fourth quarter payment from CMS of approximately $117 million. We recorded the early payment as deferred premium revenue in Q3, and we’ll recognize it as revenue in Q4.

Note that this does not have any impact on our income statement metrics. Net cash, excluding the early payment, was $285 million, which was in line with expectations.

In prudent management of our balance sheet, during the third quarter, we announced the close of a $250 million senior secured term loan facility, of which $165 million was funded upon closing of the transaction. The initial proceeds were principally used to refinance our existing term loan facility, which was otherwise due in approximately 12 months.

The remaining $85 million is available under a delayed draw subject to certain conditions. We continue to expect our balance sheet strength to fund our organic growth and working capital needs without requiring external financing. Turning to our guidance.

For the fourth quarter, we expect health plan membership to be between 98,000 and 99,000 members, revenue to be in the range of $338 million to $343 million, adjusted gross profit to be between $34 million and $37 million and adjusted EBITDA to be in the range of a loss of $30 million to a loss of $27 million.

For the full year 2022, we expect revenue to be in the range of $1.41 billion and $1.415 billion, adjusted gross profit to be between $189 million and $192 million and adjusted EBITDA to be in the range of a loss of $33 million to a loss of $30 million.

Following continued strong performance in the third quarter, we are raising the lower end of our full year 2022 membership guidance and raising our full year revenue guidance.

We note that the anticipated step down from our third quarter to our fourth quarter revenue takes into account both the additional suite pickup that we do not anticipate to recur in the fourth quarter as well as normal course seasonality of our revenue PMPM as a portion of our membership that is comprised of new members trend higher throughout the year.

Additionally, we are raising our full year 2022 adjusted gross profit expectations and narrowing our guidance range, which now represents growth of over 30% year-over-year. We remain cautiously postured against potential increases in utilization due to COVID and the flu as we enter the colder months of the year.

As such, our clinical teams and provider partners are actively working to encourage our members to get their annual flu shot and latest round of COVID boosters. As mentioned last quarter, we also continue to invest towards our member engagement and care quality efforts given our strong outperformance year-to-date.

While a headwind on short-term MBR, we believe these efforts will be meaningful to our performance in years to come. Lastly, we are also raising our adjusted EBITDA guidance, which reflects our strong year-to-date outperformance and increased visibility as we approach the final months of the year.

Our adjusted EBITDA outlook also takes into account our SG&A timing favorability from third quarter into fourth quarter. From our initial 2022 guidance provided in March to our updated outlook as of today, the midpoint of our EBITDA guidance range improved by $11.5 million or 27%, and our implied MBR improved by approximately 90 basis points.

In conclusion, we are delighted with our year-to-date results and believe we are well positioned heading into 2023. With that, let’s open the call to questions.

Operator?.

[Operator Instructions] And our next question comes from the line of Ryan Daniels with William Blair. Your line is open..

Good morning. This is Jared Haase in for Ryan. Thanks for taking the questions and congrats on the strong results year-to-date. I wanted to ask a question just around stars and specifically looking at the 5-star rating in North Carolina. I would love to hear if you’re able to share any color here.

I would love to hear a bit more about the dynamics that just led to the early successes in the early days of that franchise for you guys.

How much of that is sort of related to the external provider networks in that market? How much of it is just related to the execution of your own internal teams over there? And how are you thinking about any kind of learnings there that might be applicable to extend to your other markets?.

Jared, it’s John. Yes, it’s something we’re really proud of. But I think equally important, it’s something that forms the basis of a template that shows us what will work. And as we get into some of these new markets, I think you really have to focus on this notion of high quality to low cost.

And the ingredients of that are having the right like-minded provider partners, overlaying our clinical model, using AVA and really just being very hands-on with all of the members. And what you get is what you get, which is this 5-star kind of highly satisfied member.

And that’s relevant and important because if we get that, it helps on the unit economics. It gives us year-round marketing, and it allows us to be aggressive on product. And we’ll use that and really kind of force our way into some of these new markets. And every single market is a tough market, as we know in MA.

But this gives us the kind of the formula to make these new markets very successful. And I think that’s kind of the significance of it with respect to the portability of our business model..

Got you. Yes, that’s helpful color there. And then just as a quick follow-on from us. This is more related to guidance, maybe one for Thomas. But I think at the end of your prepared remarks there, you talked a little bit about some SG&A favorability that’s reversing and that was sort of factored into the EBITDA guidance.

I mean, if I look at where the updated EBITDA guide is, it’s coming in a little bit lighter relative to the Street.

So I guess number one, did you actually size that SG&A favorability? And were there any other dynamics that were kind of unique to 3Q or that are showing up in 4Q that we should be thinking about?.

Yes. Yes. Maybe let me speak to your SG&A question and then also maybe just comment on gross profit because that’s obviously a critical factor in terms of looking at EBITDA. So maybe from an annual perspective, I’ll start there. I think from an annual perspective, our full year EBITDA guidance increased meaningfully from our previous EBITDA guidance.

And I believe our updated annual EBITDA guidance as of today is meaningfully ahead of where the consensus EBITDA was heading into the quarter. I think with respect to kind of the Q3 versus Q4 timing dynamics you mentioned, I think we shared in our prepared remarks that it was a couple of million of SG&A timing favorability from Q3 into Q4.

But I think it’s also important to highlight that the midpoint of our previous range implied around 15.9%. SG&A as a percentage of revenue, excluding stock-based comp, and our updated guidance actually shows it about 15.7%.

So in other words, as we’re continuing to outperform on revenue, we’re continuing to see operating leverage in SG&A, which is part of that adjusted EBITDA raise for the full year. So I think it’s more of a timing thing than anything else, and we’re really feeling very proud of the Q3 results and how that sets us up for Q4 and full year 2022..

Thank you. One moment for our next question. And our next question comes from Lisa Gill with JPMorgan. Your line is open. Lisa Gill with JPMorgan, your line is open..

Hi. This is Kal on for Lisa. I wanted to ask a quick question on profitability. So I think you guys have talked about 2024 as getting to breakeven, but you’ve already outperformed your own initial expectations this year pretty meaningfully. I think adjusted EBITDA about $15 million higher at the midpoint versus your original guidance.

So just curious how you guys think about the ability to maybe hit EBITDA breakeven in 2023. I’m wondering if you can comment on current consensus, I think, about $23 million loss for next year and whether you think that’s a reasonable estimate..

Kal, Thomas here. So I think in terms of commenting on 2023 guidance, we’re probably not going to do that today. I think we’ll look to share our 2023 guidance in our fourth quarter earnings call after we have a benefit of the full AEP period, and we see where our final new member mix comes in by market, by provider group, et cetera.

I think in terms of your question, though, that’s more directed towards our year-to-date outperformance and how that translates to our time line to profitability in the future.

I think what we would say is while we are extraordinarily pleased with our first nine months and clear that sets us up to outperform for full year relative to initial expectations, I think we would probably caution folks on how that then translates into our ability to breakeven in 2023.

We obviously continue to make that a top priority for the organization to get to EBITDA positive in aggregate. But at the same time, I think we’re also mindful of the fact that we are launching Florida and Texas 2023 as year one markets, and those will require investment next year.

And we still have North Carolina, Nevada and Arizona, which will be year two and year three markets. I think the important thing – the last thing I’d emphasize is, as we shared on our first call of 2022 that we expected California to be EBITDA positive this year.

And obviously, given the significant outperformance year-to-date, we very much maintain that view. And so we’re looking to create a dynamic where we can continue to drive that performance in California and use some of that to offset some of these investments we’re making in our newer markets in the future..

Great. If I could just ask a follow-up. I know you’ve talked before about altering some of the relationships you have with brokers and your distribution strategy there. Can you remind us what some of those changes you made were? And I know we’re early in the AEP so far, but maybe some of the early returns you’re seeing on those? Thanks..

Kal, John. Yes. No, I think the formula that’s worked for us for the past several years in terms of some of the FMOs that we’re working with continues to be something that we’re comfortable with. I think that the newer markets where we’re really trying to establish a foothold is going to kind of be the areas in which we look at.

You’re really using product, having very competitive products, which in turn requires you to have really good stars, really good MLRs, et cetera and driving that. And we’ll work with the brokers in those markets that are engaged, are loyal, are just performing.

And in certain markets that we don’t have those, we’re going to have our own distribution channels, whether it be telesales and/or employed sales. And so it’s – I just think that if you have the right product and then you have the right partnerships with the right FMOs, it’s going to be a good formula.

If we can’t get the right ones because they’re loyal to the big guys, that’s okay, too. We’ll just – we’ll force our way in with employed sales people. I think we’re also continuing to be, kind of, thoughtful about some of the, I’ll call them e-brokers. Some of them have been good partners for us. We have not been dependent on that.

And therefore, some of our – kind of our retention initiatives have been pretty good. So we’re not really exposed there, I think, like some other folks have communicated. So I think you can see more of that, particularly as we get more and more positions outside of California..

All right. Thanks and congrats again on the quarter..

Thanks, Kal..

Thank you. Please stand by for our next question. And our next question comes from John Ransom with Raymond James. Your line is open..

Hey, there. One boring model question and one strategic question. It’s hopefully a little more interesting. So the PMPM came a little bit – came in higher this quarter versus our model by about 7%. So maybe you could talk about that.

And then John, for you, just kind of interested when you go into a market like, say, Jacksonville, where nobody knows who you are and they’re a bunch of plans, just kind of what is the first one or two or three things that you do? And how do you establish your brand in a crowded market where some of the incumbents have been there for a long time and have established foothold much more than you have? Thanks..

John, Thomas here. Maybe I’ll take the first one and then turn it over to John for the second one. So in terms of the revenue PMPM, the third quarter did benefit from a final true-up on our 2021 final suite from CMS. And so we mentioned this on our second quarter earnings call, and we actually continue to see a bit of upside in the third quarter.

And that relates to CMS having the last two years, slightly changed their payment schedule where they created an interim final in the second quarter and then an actual final which takes place in the fourth quarter. And that was really a result of wanting to support the providers during the public health emergency related to COVID.

So I think that’s a lot of what you’re seeing from Q3 to Q4 is just we don’t anticipate that portion of the Q3 outperformance to continue in Q4. Having said that, we think Q4 is set up for great success otherwise. I think maybe, John, if you want to speak to the second question, I’ll turn it over..

Yes. Thanks, Thomas. John, yes, it’s something that we think about all the time, obviously, and it starts with finding like-minded providers.

And pretty much every single market kind of inside California and outside California, you really start with 20 to 25 PCPs that understand the model, are willing to work with us on stars, want to work with us on our AVA tools, want to work with us on our Care Anywhere model, home-based care.

And then with that, it drives a lot of engagement, which then in turn drives the stars that you need to be successful in MA. It drives the utilization management; it drives Net Promoter Scores. It drives all the, we call it, value drivers that you need.

As you create this connection with these providers, and then that then, in turn, gives us the ability to put our clinical infrastructure in place and then have very aggressive products. And as I mentioned before, with Kal’s question is, I think that’s how you get into the market and have a, kind of, durable profitability profile.

And we’ve done that pretty much everywhere, and it’s worked pretty much everywhere. And then what happens is that product will then attract members, and those members will leave other PCPs, and they’ll come and join the PCPs that we contract with. And then you slowly add to that network of engaged providers.

You augment that, obviously, with good and strong broker relationships, good and strong kind of employed distribution strategies and then you’ll relay that with branding. That’s the only way we think this can work. And Jacksonville is very competitive, as you know. And a lot of other established brands.

But then again, that’s like not the first time we faced that, particularly in Southern California, where we have the same set of dynamics, and we’ve made a lot of the providers very – just strong, and we’ve helped each other grow or grow in the name of Alignment Healthcare. So that’s really the model. And it will take some time, and it always does.

But I’m actually very happy with the work that the team has done in Florida and Texas. And we’re not relying on a lot of growth from those markets in 2023. We’re pretty realistic about that. But in terms of the engagement strategies, I’m very happy with that..

Just as a follow-up on that. So I mean, these doctors are pushed for time and 1 million people try to go see them.

So you probably bang your way in there, get 5 minutes with some guy in the coffee room, what’s kind of the – if you just have a little bit of time with this person, what do you tell them that makes them kind of set up and pay attention and block out the noise from the other dozens and dozens of vendors who are trying to get their attention. What....

Yes. I’ve done this hundreds of times the front. And every single time, it’s pretty much the same, which is you go and you talk to the physician, talked with the office manager, they kind of lean them back in their chair, you walk them through our – his alignment story. They kind of sit back.

Then you talk about the care model, you talk about the data, then you talk about how we actually are an extension of their practice, whether Care Anywhere programs. And while it’s their patient, our clinicians are not in any kind of provider directory. So then they kind of sit up in the chair.

Then we say, this is the way we want to compensate you and we walk through the unit economics of how they’re getting paid. And then they kind of understand the math where at the end of the day, it’s they get paid more for working less and providing jointly with us a better clinical outcome for that member. And that story resonates with these folks.

And then the next question that people should ask and always do ask is how do you get this doctor to really care if you’re just a small portion of their wallet size, so to speak. If you’re just starting, how do you get them to actually care and change all the practices to be successful in MA? And I said we don’t expect that.

We’ll do a lot of the lifting. We’ll do the work through identifying that 10% to 20% of the population that’s polychronic, that’s really sick. We’ll then do a lot of the work. We’ll do the health assessments. We’ll do the coding. We’ll do the UN. We’ll provide all of that and actually act as an extension of their practice.

And I think at the end, the doctor is like, "Well, they have no downside. It’s just upside with this relationship." That’s how we do it. Stock by dock..

Thank you, sir..

Thank you. One moment for our next question. And our next question comes from Michael Ha with Morgan Stanley. Your line is open..

Thank you, guys for the question and congrats on the 5 stars in North Carolina.

So I guess now that OEP has started, I’m curious about just your thoughts on the competitive landscape? Are you seeing evidence of any surprising, highly competitive benefit offering dynamic almost similar to what happened with Part B buydowns last year? Or is it a more rational marketplace? And just any early thoughts on any growth expectations relative to your 20% long-term growth target? Thank you..

Michael, John here. Yes, I mean, we’re three weeks in to AEP. But I can give you a little bit of just kind of what we see and how we think about things. First thing I would say is we’re a lot happier this year than relative to last year, just in terms of just the rationale, in terms of what we see, in terms of products.

Having said that, I think people are, at least for the first two weeks, focused a lot on minimizing churn, I think, given some of the experiences last year. And that includes some of the broker behaviors, what we see. I’m encouraged for the last week in terms of kind of our apps that we received.

I would say that given three weeks of data, we would be looking for – and again, this is Thomas’ make sure I say this properly, we’re not giving any kind of guidance expectations for 2023, not.

But based on three weeks you kind of extrapolate, I think we’re kind of in the high teens, the low 20s kind of growth rate on membership would be something that, again, I’m just – you got to remember, 70% of the growth comes in the back end of our AEP process. So it’s very early.

And so – but just to give you some expectations, that’s kind of what we’re seeing as of today. I’m really proud of the sales organization. They are doing a great job. They are working so hard. And if the last week is any indication, I’m really happy about that. A couple of other insights.

I think, as I mentioned earlier, we’re not going to be expecting a lot of growth coming from Florida and Texas for 2023. We’re going to be more focused on ensuring that we get kind of the infrastructure chassis setup to make sure that we get those stars and just get the quality investment and infrastructure in place. And so – let’s see here.

We’re fighting every single day. I mean it’s pretty much what I can say for now. Thomas, did I do that right..

Yes, I think that’s well said..

Thank you, guys. I appreciate that color. Maybe just a quick follow-up, a quick one on stars. Just related to CAP, some of your peers have mentioned just basically having trouble adapting to the weighting methodology. I know the sample size is small per cap.

But how do you feel about your care model and AVA performing here? Do you feel like you have a competitive advantage because of your closely aligned model, that gives you an upper hand?.

Yes, Michael. I mean the North Carolina is proof in the pudding. I mean it’s how we work with our providers in a very collaborative way. And I’d really make the point that there’s kind of a difference between capitation versus delegation.

And I think the market doesn’t really understand that too often, but there are certain core capabilities that we do claims payment, the UM process, the crack disease management programs, utilizing real-time data and information that’s actionable that we partner with our community doctors and our IPA doctors, those capabilities that if we can control those fully, we get the outcome we get in North Carolina.

And so we’re working hard on ensuring that some of the IPAs that we’re partnered with, the California that I would emphasize, have been good partners. We have to work with them in getting – the bottom line is more access and faster access for our members. That’s really the bottom line on caps. And to do so in a kind of coordinated way.

And in the California marketplace, a lot of the – just from a legacy perspective, there’s a lot of delegation.

And we got to be very, very vigilant in ensuring that – it’s like a subcontract, if you subcontract something to somebody, they got to make sure that they do a really good job, whether that’s on the utilization, the access that influences is caps, compliant risk adjustment. I mean just all these things they have to do a good job on.

And some of the partners that we have can do a better job, and we’re going to help them get there..

Perfect. Thank you guys..

Thank you. One moment for our next question. And our next question comes from the line of Jessica Tassan with Piper Sandler. Your line is open..

Hi. Thank you so much for taking the question.

I’m just curious to know in markets like Nevada where maybe stars came in a little bit lower than average, how is your approach to local marketing change, if at all? Do you kind of take a more passive approach? Or do you deploy additional resources to kind of help supplement – help supplement in the market?.

Jess, it’s John. Great question. No, it’s kind of consistent with my last response – if you contract with the provider group, they – and we have no problem globally capping with folks if they perform. People have to just do what they say you’re going to do. I think that we’ve got a good partner there.

We’re helping them with a lot of the gaps that I think we’re – frankly, we’re just not well executed on caps on stars-related items. And so we’re being very aggressive with that. They’re working with us. So I’m happy about that.

But it really just shows you contrast that kind of a global cap market versus say North Carolina, where we’re going in with kind of our model kind of end-to-end where you can like drive and have more durability and consistency with kind of all aspects of what makes MA successful, starting with [Audio Gap] And so our lesson learned is there’s – you can’t just go in and there’s no shortcut.

You can’t just globally cap somebody and just say, you’re going to save a few bucks going into a new market and have a new provider just kind of help you there, you got to make the investments upfront, which is what we did in North Carolina, which we were doing in Texas, we’re doing in Florida.

And just work with the community doctors and make them successful. And I think just systemically kind of at a macro level, Jess, is like other folks are experiencing the same thing. Because you delegate a lot of this stuff to folks, they have to deliver for you. And I think we’re taking it one-step further, and it’s what we did in California.

None of these – earlier when we started the company, none of the earlier IPAs had the tools to be successful. We help them become successful with real-time action, with workflows with best practices. And they were receptive. And so – in Nevada the same thing. They’re being receptive. So we’re working together and we’ll get it fixed.

Jess, did I answer your question?.

Sorry, I was on mute. Yes. Thank you. That was helpful. I just had one follow-up.

How are you seeing flu kind of evolve so far in the fourth quarter? And how do we think about flu just in terms of MCR impact on an – in a normal flu season?.

Jess, Thomas here. So in terms of what we’re seeing, I would say, so far, we have not seen much of an uptick in flu. But having said that, we also recognize that the last two years have been atypical and we’ve not always seen much of a flu season.

And so as we thought about our fourth quarter guidance and sort of our utilization expectations for the fourth quarter, we approached our kind of baseline assumption that utilization for the inpatient setting would run in line with our historical experience, inclusive of a portion of which would be kind of flu driven and potentially COVID-driven, particularly given what we saw with Omicron last year.

Having said that, we’re kind of one month in through October, and we’re pleased to say that our utilization has remained, I’d say, kind of in line with where we left things in the third quarter. And so far, we’re feeling pretty good about where things stand.

So to the extent that I think some of the flu season does materialize this year or we do have a bit of a spike related to COVID, I think our guidance is kind of well positioned for that. And to the extent that we don’t see some of that materialize, I think there could be some upside to our guidance. But too early to say at this point..

Okay. Great. Thank you..

Thank you. One moment for our next question. And our next question comes from Kevin Fischbeck with Bank of America. Your line is open..

This is Nabil Gutierrez on for Kevin. Thanks for taking the question. Can you talk about how direct contracting has been trending for you? And can you remind us about the plan for 2023 and beyond? Thanks..

Happy to. This is Thomas here.

So if I flash back to when we first began the direct contracting program, that would be the second quarter of 2021, I think what we shared out of the gate is that we didn’t have a lot of visibility around our IBNR experience, but that we had booked our first quarter of the program right around 110% MBR kind of out of the gate and that it was a headwind to our consolidated MBR.

I’d say flashing forward now, we’ve been in the program now for the better part of 18 months. And we continue to see some operational traction and momentum that we’re pleased with. And so I think on a kind of cumulative basis, since when the program began, we’re probably about even from an EBITDA standpoint.

And I think we still have opportunity to continue to improve that given some of the traction we’ve seen. I think in terms of 2023, we are interested in continuing in the 2023 program with ACO REACH.

I think how that plays out will be dependent upon the upcoming enrollment files from CMS, and so we’re looking forward to getting that here in the next month or two. And I think we’ll remain sort of cautious in terms of our views around the long-term sustainability of how that program evolves.

But we’ve – I think we’ve learned a lot from participating in the program, and I think we’ll continue to focus on how we can leverage some of the capabilities we’ve built around Medicare Advantage and continue to look for ways to potentially export or monetize those in other ways in the future, such as with direct contracting or ACO REACH..

Thanks.

And then how are you thinking about utilization next year?.

So I think big picture, we’re continuing to be pleased with what we’re seeing from an inpatient standpoint, and I give our clinical teams, the Care Anywhere folks, a lot of credit for continuing to be very proactive and really engaging those seniors who are most in need in that at greatest risk.

And so I think our view today is that things continue to trend well in spite of some of the ebb and flow we’ve seen with COVID in 2022. And I think we’re probably in a good place to see a lot of that trend continue in 2023. I think outside the inpatient setting, we’ve seen similar trends to what you might have heard others in the industry suggest.

Outpatient seems to be fully back to normal. We’ve really seen that over the last couple of quarters. And there’s been some pluses and minuses in other areas. We’ve seen probably lower ER utilization, but also seeing a bit higher urgent care utilization.

I think in general, we feel like what we’re seeing today is largely representative of what we’ll probably continue to see next year. Having said that, I think if we learned anything in the last two years during COVID is that these things do change pretty quickly.

So I think we’ll give you guys a more comprehensive update when we release our 2023 guidance here in a few months..

Thanks..

Thank you. One moment for our next question. And our next question comes from Nathan Rich of Goldman Sachs. Your line is open..

Great. Thank you. If I could just ask a follow-up to that previous question. As we think about cost trend next year, how are you thinking about – I wanted to ask on a few different factors. First, kind of the normalization of inpatient volumes.

And do you feel like there’s kind of any notion of pent-up demand that might still be out in the system? And then how are you thinking about potentially paying for more of the COVID and vaccine treatments if that’s kind of left footed by the government? And then just lastly on the cost trend, contracting with providers and inflation.

Could you maybe just talk about what you’re seeing there?.

Great. Happy to Nathan. This is Thomas here. So in terms of our inpatient results, I think while we’ve seen continued performance this year, I would really emphasize the continued performance over the last five-plus years.

And really, we’ve run around 155 to 165 inpatient admissions per 1,000, inclusive of some of the ebbs and flows we’ve seen around COVID for five years straight now. And so I think we feel really good about our kind of continued ability to kind of maintain those results and that trend heading into next year.

And again, I would say that the reason we’ve been able to be so consistent with that, while also maintaining the growth and really launching some of the markets we launched over the last few years is a function of having a very active and hands-on care delivery mechanism, which is focused on those chronic frail and high-risk seniors.

And so I think we feel pretty good about the inpatient trends and today don’t see a lot of pent-up demand or something that concerns us. I think in terms of your question around the COVID vaccines, I think the second one. I don’t think we view that today as a material headwind.

I think there’s always pluses and minuses that go into our updated forecasting process. And so that will just be one of the several that we take into account as we think about next year’s outlook.

And lastly, from a contracting standpoint, I think we’re all aware of some of the pressures that many of the hospitals and other institutions face from a labor standpoint. And as it relates to how that kind of impacts our contracting, the vast majority of our contracts are fee-for-service contracts.

And so Medicare obviously releases those rates in advance. And so we’re able to have pretty good visibility as to what type of rate increases we’ll see on those contracts heading into next year. And those are typically multiyear contracts with an evergreen mechanism on the back end.

So I think we feel pretty good about where we stand from a just pure unit cost standpoint looking out into 2023 while also being respectful of the broader environmental trends that you’re alluding to..

Great. Thanks, Thomas for all those comments. I’ll ask a shorter follow-up. I wanted to follow up on your comments on AEP.

I’d be curious how traction in new markets like Texas and Florida is going relative to your expectations, I guess specifically in terms of both growing awareness, but just kind of aspects of kind of the planned value where you feel like you might be differentiated versus competitors?.

Yes. Nathan, this is John. I think our product design is pretty good. But we kind of set the products with kind of a multiyear view of growth. I think it’s trending slightly below basically from our budgets. But again, I don’t think they were material to begin with.

And I think from a kind of an underwriting perspective, what we really needed was the engagement with the provider community and to get our staffing, particularly on the clinical side, in place, start deepening the relationship with the brokers, all the basic fundamental stuff we wanted to get in place.

And I think we’re going to get traction like we had in Arizona and Nevada. It’s just going to take a couple of years..

Thank you..

Thank you. One moment for our next question. And our next question comes from Whit Mayo with SVB Securities. Your line is open..

Thanks. I’ve only got one question. Can you discuss any of the IT priorities that you have around AVA for 2023? I know you’re going through the budgeting process right now, but are there any new modules in development? Anything that you’re particularly excited about or we care to share anything with Care Anywhere that’s new? And that’s it. Thanks..

Yes. Whit, its John. I think – yes, the answer is yes. And the – give me one second here. The investments in kind of the care coordination chassis is one of the reasons that we were kind of able to get the 5 stars and maintain the 4 stars in California.

And so it’s kind of a – it’s kind of an integrated approach or you call it a health CRM system, if you will. That got put in this year. And we’re going to make sure that that gets continued to be refined next year.

I think the investments we’ve made in terms of automating some of the broker – online broker, app submission processes and how we get some of the brokers paid faster, paid more real time, apps reconciled that you’re going to see us make investments in. And I think the kind of the stratification model is going to be incorporating more consumer data.

I think it’s kind of broadly speaking. So we start really understanding kind of social determinants and kind of how that plays into the entire experience for that consumer. And while 2022 was, I would say, more focused on kind of clinical and clinical workflows, I think you’re going to see more kind of consumer-facing modules in 2023.

And I would say including some of the broker investments that I talked about. Did I miss anything there, Thomas, anything? I believe that’s what we’re doing..

Okay. Thanks, guys..

You got it..

Thank you. One moment for our next question, please stand by. And our next question comes from Sarah James with Barclays. Your line is open..

Thank you.

Can you give us an idea of what the pacing of physician engagement adoption curve looks like for AVA in a new market? And as you see this timing become consistent and you iterate entering more and more markets, how does what you’re seeing on that engagement adoption curve impact your long-term strategy on clinic partnership versus ownership?.

Well, that’s a – those are like two really big questions. We think about them all the time. To get a physician kind of educated, engaged, trained on using some of the tools that we have, I would say it takes between six and six months.

And it’s a combination of our kind of on-the-ground clinical operational and kind of practice management kinds of resources, along with our Care Anywhere resources. And a lot of it is education.

It really forms the basis of long-term strategy and I think our kind of engagement model with providers is really born from a lot of years of experience, whether it be kind of globally cap delegated, whether it be staff model, whether it be brick-and-mortar, I mean we’ve got experience in all of that.

And where we kind of came out was really partner with the community doctors. There’s still really 40% of all the primary care doctors out there, if you take out the PEDs, is still kind of independent, if not owned by a hospital system or owned by some of the consolidators. So there’s a lot of physicians out there.

And to work with them and enable them to be successful and to be efficient with our collective resources and to not have to reinvest in bricks and mortar in the markets, but to really have the existing physicians in a market that have the bricks and mortar already in place more successful.

And the way to do that is to know who the 10% to 20% of that polychronic population are and then to extend that care team to support that practice. And so as I mentioned before, a lot of the heavy lifting we do and it’s not on the entire population. We don’t expect them to change all their workflows, change their charts, et cetera.

We’ll do a lot of the lifting. And then what happens is that we can bend the cost curve consistently, they make more money. And most of the physicians we see are not just in it for the money. They want to make sure that that patient gets the best possible care. And I think that dynamic is what separates us.

It’s just – we just think it’s a more capital-efficient way to do this. And we share some of the gain shares with these folks and everybody wins. That’s kind of philosophically how we’re thinking about it. There may be some markets where we want to augment that with an acquisition of a practice here or there.

But I would say that’s very – it’s more tactical, it’s more at a regional level. And we’ve been successful in that in key markets, Nevada being one of them..

Okay.

And then just digging into what kind of details you can see, as you start to have a new physician partner bend the cost curve and you’re getting these very consistent inpatient trends, are you actually able to see actions taken by them that are care navigation and inpatient diversion and reward them for that? Or what level of clarity do you have on that….

Yes. It’s why we like being at the plan level because we have top of the food chain access to actionable data. There’s no latency. There’s no 45 or 60-day latency to a global cap group. And so we get that information to them kind of real time. And our internal clinical teams use that data real time.

We know daily, if not hourly, where our members that are in hospitals are and why they’re there and who the referring doctor – we know all of that. It’s – within our company, we talk a lot about a maniacal attention to detail. And it’s not automatic. I mean we work at it and it’s driven by the data.

And – but think about this, I mean I’m going to really make sure you guys understand this, is the 80%, if not 90%, of the population that cost 10% or 20%, the actual engagement with those particular physicians, we think up a member that sees that doctor is – it works pretty well. It’s really the 10% to 20% that really is where all the costs are.

That’s where we would deploy our clinical teams where we do a lot of the work with and for them, like we work for them and just support their practices. And the people that we care for at the home through our Care Anywhere program, they’re not 9-minute office visits. There’s like 45-minute office visits.

So we really free up their capacity with their practice. That’s how we do it. And there’s full transparency. I mean they have access to our P360 or patient 360 longitudinal patient record. They have just full access to it. I’m not sure if I answered your question there, Sarah, but that’s how we think about it..

Okay. Thank you..

You got it..

Thank you. I’m showing no further questions at this time. This concludes today’s call. Thank you for participating. You may now disconnect..