Alignment Healthcare, Inc. (ALHC) Earnings Call Transcript

Good afternoon. My name is Lisa Gill, and I'm the health care services analyst with JPMorgan. It is with great pleasure this afternoon that we have with us Alignment Health. Presenting for Alignment Health is John Kao, CEO. Also with us this afternoon is CFO, Thomas Freeman. After John does his presentation, he will join Thomas and I for a quick Q&A session. With that, John?

Thank you, Lisa. Good afternoon. My name is John Kao, the Founder and CEO of Alignment Healthcare. This is our inaugural in-person presentation. So I'm going to take a couple of minutes and give you a little bit of an introduction of the company. For those of you, there are a lot of familiar faces that I see out there, you're going to see a few additional utilization and medical management levels of detail, I think you'll find interesting. And at the very end, we're going to share with you what we're focusing on to get the company to the next level of performance. Personally, we started the company in 2014. My mom had a heart attack. She spent 3 days in ICU, 3 days of telemetry and then she got discharged and at that point in time, I made the decision we had to do something different. We had to do something that is a resource and an advocacy to seniors, particularly those individuals that have polychronic conditions. We don't think necessarily that the sick care system is that particularly good outside of the acute setting. And the whole goal is to take care of seniors, particularly those individuals that have the greatest needs. And by the way, that 10% or 20% of the population account for 80% to 90% of the spend. So it makes good business sense to take care of these individuals. Background, FHP International, PacifiCare, TriZetto, CareMore, all are lessons learned that I think can get encapsulated in what we're doing in Alignment Healthcare. Senior focused, that's all we do, is take care of seniors. That's number one. Direct-to-consumer is something I'd like to emphasize. We're selling directly to individuals in a recurring revenue model. And value-based care, we'll talk about what we define. That to me, it's not only in the essence of care delivery, not only in the essence of managing risk, but it's also productizing that care model in a way that products, coverages and benefits are realized by the individual, human being, senior that improve their life. We love the Medicare Advantage kind of framework business model. We like being at the top of the premium food chain. We like constructing and curating products and networks. We like that. Equally important, we like having access to the data in a real time fashion. There's no latencies of data and data interchange. We like the fact we partner with community physicians in an asset-light fashion. A lot of lessons learned over the years where we partnered with community physicians that want to do the right thing. They want to provide better care. They need some additional help, and they don't want to be consolidated. Those are the target physicians that we spend a lot of time with. And you'll hear us talk about our Care Anywhere in our clinical medical management model. We like the fact that MA and CMS created a platform that incentivizes high quality and at a low cost. If you can do something really well and do it cost-efficiently, you're going to create value to people to each human being. And I think that's where the opportunity for this whole direction of consumer set of care in MA is going. Some outcomes that you've seen, a lot of you that have spent time with us have seen this. 95% of our members in 4 star are higher plans or 5 star in North Carolina with 60 NPS score. Our stickiness is good. Our [indiscernible] run rate is 40% less than the industry. If you look at clinical outcomes -- and I've never experienced this anywhere before. If you look at the left, the middle, inpatient admissions per 1,000 is right around 156. We've been consistent in the 155 to 160 range for 5 straight years. And our previous company -- it's called CareMore, a very successful company. The best we did, there was about 200, 210 admissions per 1,000, right? You can see our MBR consolidated results from 87.6% in 2021 to 2022 guidance of 86.5%. So we're sequentially improving it. Long-term MLRs, we think, are in the 82% to 84% range. All that translates into taking share. About 85% of our growth is from switchers. We took the company public in March of 2021. We met or exceeded all quarterly guidance metrics for 7 straight quarters. We've taken somewhat of a contrarian view, I'd say, looking back a couple of years and that we've kind of been, you know what, we're going to really value consistent growth. We're going to value getting the cash flow positive. Margin matters. We did not deploy growth at all cost kind of approach. I think that's served us well. 20% is what we said we're going to grow by. We've hit those numbers. And look, a couple of concepts in terms of long-term growth. We've established beachheads -- geographic beachheads in Nevada, Arizona, North Carolina, Texas and Florida. And we've gone through all the regulatory licensing issues there. We've created our networks. And now it's about growing that new geographic platform. The other thing we're doing consistently is the construction of the portability of the Care model. So can this Care model be replicated outside of California? It's that kind of hand-in-hand with the growth dynamic. And the reason we've outperformed on MLRs because it is performing in some of the smaller markets that we have in Nevada, Arizona and North Carolina. And it's one of the reasons why we were able to get 5 stars in North Carolina, is the efficacy of what we're going to talk to you about in terms of how we do it. And I think that's going to be the differential with our business. That's yielding this kind of growth trajectory. We've got 108,300 health plan seniors as of now. In addition, there's about 7,500 DCE members on top of this. So again, consistent, steady growth, profitability, good margins, delivering for our members. Everything is quality in our humble opinion. If you can do high quality and low cost, you should be positioned to win. And the whole model is predicated on this concept here, and it's all, I think, not new to you. 80% of the spend in Medicare is with somewhere between 10% and 20% of the population. So it just stands as a reason that you can have an area of focus is focusing on that population, that's the absolute population that needs the care. And that's the polychronic -- the frail population. And you proactively do the right thing. You take care of them like your mom or your dad, and good things happen. An example of that is what we refer to as our stratification model. And so one of the things that we learned is to ingest data, cleanse the data, store the data such that you have one source of truth. And then you can apply different functional access points to that source of truth, one of which is stratifying our members. And so you look at this and you say, 74% of our membership, 74% account for only 4% of our institutional spend. Okay? Then you look at the other cohorts on the other side, you say 26% representing 96% of that institutional spend. And then you say, the healthy utilizer where their algorithms, their markers would say that they're generally healthy. But for some reason, they had a hip replacement or they had an accident of some sort. And they got into the claims system. But the way you manage them kind of proactively and give them a care plan, generally, they're pretty healthy. Conversely, the pre-chronic population, that 8%, all the markers there we see, these folks are in need of aggressive care management. These haven't hit the ER yet. So you can say the markets allow us to manage them similar to the right-hand side, the chronic population, which again shows 10% of the population accounting for 73% of the spend, right? And so the whole point of that is you curate the care delivery depending upon the acuity level of your patients. And somebody in that red area, we manage in partnership with the community primary care physicians with what we call our Care Anywhere team. It's a proactive outreach, 27 -- 24/7 access, and it's led by physicians. It's executed by nurse practitioners and advanced practice clinicians, MAs, social workers, behavioral health coaches, case managers, [indiscernible], a whole team of people in each market designed to take care of that 10% to 20% that we employ these Care Anywhere resources. We don't feel compelled to have to own or buy all the primary care practices in the marketplace. We think there's a lot of individual doctors out there that want to stay independent, that need help. And we think they do a great job on the folks that are not really polychronic. They do a great job. And people will see them 4, 5 times a year, they do a good job. It's just 10% to 20% of the cost. For that 10% to 20% that are polychronic, we're going to do the work. And so the doctors will say, well, how does that work? Do I lose control? I said, well, if one of your patients goes into the hospital, do you go in the hospital anymore, like the old days? They go, no, we -- hospitals will do the work. They say, well, think of us as a hospitalist team at home for you. It's an extension of your practice. And we're making -- getting into this whole value-based Medicare Advantage that's easier for you and your practice, not burdening you with additional administrative work, okay? So that execution is leading to these kind of outcomes. If you just -- for a second, the ER visits per 1,000, right? And you look at the number of chronic conditions that we have. And the whole point here is irrespective of your acuity level, we're improving outcomes, particularly on the higher-end scale where you've got 6-plus polychronic conditions. We're really driving down costs significantly. We take care of people at the home, and we keep them out of the hospital. And the ROI is really, really good and reflected in that 86.5% MLR, which, by the way, has about 3% of staff model dollars already inclusive and embedded in that 86.5%. So it's like all in. Really good clinical outcomes. The other data point here is for those individuals that we think are eligible for our Care Anywhere program, we compare that. And so like we use the data on the AVA stratification. We kind of identify who should be in the program. Step 2 is to engage them to want to be in the program. And our success rate is about 65% right now. And obviously, we're working hard to get that 65% to 70% or 75%. And step 3 is then to deploy the Care Anywhere team. If we can deploy the Care Anywhere team, we're lowering cost by 21%. If we don't enroll that individual polychronic patients, costs are going up 10%. So the effect of getting them engaged and then enrolled is a 32% improvement. Okay? Here's another data point across cohorts, about age cohorts. Again, it's a PMPM institutional, PMPM depending upon age group, again, at how much differential cost savings we can have with the higher acuity of patients. And you'll see here the blue bars represent our cost structure relative to -- it's kind of the untrended data on fee-for-service, which is the green. If you trend that data, it's the light blue, right? So all of this is coming into place and gives us a lot of confidence why we, as the MA plan, are comfortable managing the risk because we're delivering care and, therefore, lowering trend. And we use this as an illustrative -- the year 1 cohort of members, that's kind of our MLR trends, if we manage the risk. The other illustrative part is the 85% global cap. So we, global cap, say, a provider and just pass that risk on to a provider group, call it, 85% [indiscernible] cases is higher than that. But if you look at our ability to drive down costs, it's a significant advantage. The difference between the green line with the global cap and the blue line, that shaded area is what we use to fuel the incremental benefits that's causing our growth, okay? So in other words, if you got to have high quality, people kind of like you. They have 4 stars and NPS. Your cost structure has to get differentiated from everybody else. If we global cap just everybody, just global cap everybody, and we're at 85% relative to everybody else, it's 85%, where is the cost advantage? How do you differentiate yourself as a plan, right? That's why we're still -- we're like 2x from the market now at 17% this last -- we just announced. We'll talk about that in a second. Another last data point on the efficacy of the care model is in our DCE fee-for-service business. We are applying the same kind of model. And look at the outcomes. Top quartile in terms of savings, 6% savings. What was really interesting is we're the second lowest benchmark in the entire country. We're still getting 6% savings, okay? And so that gives us confidence not only necessary for the DCE to reach fee-for-service business. We all know that MA is probably going to cross over the 50% market share of all seniors like this enrollment cycle. But what's important is in MA, within MA, not only is the HMO product growing, the PPO product is going to take more and more share, we think, particularly outside of California. And so this gives us confidence to design products that are more PPO-ish products, okay? So the takeaway there is all of that has to get productized. So consumers and value-based care, value to the end consumer is manifest in better coverage, better care. And there's lots of focus on supplemental benefits designed to improve some human beings' average daily living needs, right? Whether it's more groceries or whether it's dealing with food and securities or over-the-counter drugs or transportation. And I'm sure everyone [indiscernible] it's like having somebody see my mom, who's a member by the way, still a member, and can pick her up for an hour and take her to the Chinese grocery store to buy some stuff once a week, gives her a sense of independence, mental health, right? So important to the whole overall mix. And so the whole experience is designed to curate ultimately and take a step toward personalized products, personalized products, starting with the care delivery and the product design benefits for the individual person. The way we look at where we are now organizationally is we have a lot of pieces working. And so we have to now take that chassis and manifest that into disruptive growth, right? And right now, we just announced in our 8-K, 17% January to January growth. And so we're kind of in this 15% to 20% membership growth while we're being very responsible in terms of adherence to margin. And obviously, the goal for us is to work on each of the value driver areas that launches into that next tier of growth, meaning it's like -- 17% is good. It's 2x the market. But really the opportunity for us, the chassis can support something that we think is significantly more than that, and we just have to show you and improve that. With respect to the specific year, we launched Fresno in California, 1,800 new members there. California -- Southern California growth was good, 16%. North Carolina doubled in size, as we have about 3,000 members now. And what I'm equally proud of is our stickiness improved by 50 basis points. Our disenrollment rate was improved by 50 basis points. Areas of opportunity, lots of lessons learned here. Our launch in Texas and our launch in Florida ran into headwinds that I would say mostly relate to distribution challenges. And I think that we're going to really take a playbook out of what we did in North Carolina, which is get to 5 stars, get to 5 stars to differentiate yourself as a new entrant in the market, have the tailwinds associated with that, be confident with our provider engagement, which I think is good in all markets and then, again, have the confidence with aggressive pricing on benefits with still responsibility toward margin. But we're going to need to take more control, I think, at least initially in certain markets on the distribution side with respect to captive agents, direct agents and/or more telesales. And I think when you've got 5 stars, you've got really competitive products and you've got the kind of more controlled captive internal sales, I think the markets will adjust, just the key market share, particularly with the brokers. And so that leads me to the last couple of slides here, which are, what are we doing? And everything now is just quality. Everything is going to be quality, incentives, focus, tolerance is get to 4.5 or 5 stars. And CMS is increasing the standards, right? CMS is saying to everybody, you've got to do better. And the standards are higher. If you want to be 4 stars -- we're 4 stars. We're very proud of that. The team worked really well, but we've got to get to 4.5, 5 stars. And I think there's opportunities for us for being more efficient in terms of our performance management of our networks to be supportive and our provider engagement and access. I mean we've done really well with IPAs. The people will say, how did you do that? And just we can -- a lot of the IPAs that we work with were smaller and less capitalized, but we've worked with them with data, and that actionable data to improve stars, improves risk adjustment, increase utilization, all of that is what we've done together with our IPA partners. We're going to do more of that. They need to get to 5 stars and be 5-star partners. The systems -- the systematic sales and distribution, same thing. We love brokers. You've got to be 5-star brokers. It's really nothing more complex. You've got to be 5-star brokers. And what that means is you can't have disenrollment rates in excess of 7%. That's what CMS standard is for 5 stars for disenrollment. So we're just going to be holding ourselves to that standard. If we get 4.5, that's going to be okay, but that's what we're doing. And all of that again is going to manifest itself in products. And something that you don't understand, we're happy to talk to you about. But the bids and how we compete with our competitors relative to fee-for-service in a particular market is the bids and the rebates. The rebates have to get bigger relative to our competition. I think we're one of the only folks that can drive down costs meaningfully enough to increase the rebates to take more share. So that's kind of the high-level introduction and overview. I think the point here is, I think we're very well positioned from a balance sheet point of view, consistent operational financial execution. I think our clinical outcomes are outstanding. I think our data architecture and the way in which we apply it is really, really good. We need to move toward 5 stars. And I just think the long-term potential of what we're trying to do is bringing that care delivery model productized and having that realized in the long-term growth. So thank you very much. We'll take some questions now.

Thanks, John, and thanks for all the detail. Just looking at your presentation and thinking about some of the things you talked about -- you talked about the AVA platform. You talked about this virtuous cycle and the ability to really truly drive differentiated cost savings. For the people in the room, can you maybe just give people some real-world examples of what you've been able to do?

So when we started the company, and I see some familiar faces that go way back, we bought a company that had about 10,000 members that when we bought it -- back to 2014, we thought we had 3.5 stars. It ended up dropping at 3 stars for [indiscernible] from the past before we even bought it. And we were with a network of providers that were, again, smaller, undercapitalized without the technology or expertise for Medicare management and probably maybe next to South Florida, the most competitive market in the country, Southern California. Like how do you dig out of that hole, right? And the answer was alignment with the providers and actionable data with the providers. We worked together, and we worked on stars. That increased revenue PMPM. We worked compliantly on risk adjustment. And I would say we're very conservative on that, increased revenue PMPM. We deployed what we talked about in terms of the Care model in concert with them that lowered unit cost utilization, PMPM. And we started getting to a point where you start surplusing, and the surplusing -- everybody starts winning and then you start growing, right, because you're reinvesting a lot of those savings back into product, and we deliver for people. And that's kind of how we did it. Personally, my mom is a member -- and I shared with you she was a motivation for me doing this. And she's doing great. I've got to tell you, you want your parent in this thing. If you can have somebody that is seeing you weekly, or at the very least, calling weekly, it's just peace of mind. And there's no restrictions. You can do [indiscernible] PCP, specialists. You can do it whatever. But to have that extra added layer of care with data that supports what she needs, it's the best.

You touched on membership. So 17% growth for 2023. You talked about 16% growth in Southern California. But Florida and Texas not coming in quite where you had hoped. Are those markets that you want to continue to develop? And what are some of the future opportunities you see in those 2 markets?

Yes. It's, to me, no different than some of the initial markets we had in California. I remember 5, 6 years ago, we were in Santa Clara, we had 32 members and 105% MLR. Nobody knew who we were. Nobody cared who we were. Brokers wouldn't talk to us. I mean it's the same -- it's like the same. No one is going to give you anything in MA. And so you've got to take it with value. And so what we did in the California market is going to be exactly what we do in Texas and Florida, which is focus on quality, work with the providers, lead market share differential with product. And I think one difference in California, we had some relationships on the broker distribution side and other markets that we extended into Santa Clara. I think the way to break that piece of the kind of gauntlet down is by having captives and more controlled distribution in Texas, Florida. But yes, I mean, we're not in South Florida. I think we just like crawl, walk, run kind of thing. And I think Jacksonville, we like that market; Sarasota, we like that market. I think we can get the same kind of growth in those markets that we had in some of these other California markets.

And you talked about how important it is to get to 5 stars, and that's really what the goal is. When we think about the time line for that, you're in a good position for 2024 with 4 stars, where some competitors don't have that. So really 2 questions here. One, do you think that'll be beneficial to you for 2024 to have the 4 stars versus some other competitors? But the second, what's that time line to get to the 5 stars?

Yes. So the work we did in 2021 dates of service is yielding the tailwinds that we should benefit from for the 2024 bids. Okay? And what I'm suggesting now is I think it's going to be even harder to maintain your star ratings. So you've got to shoot for 5 stars and above that and to have a chance of 4.5 to 5 stars. But to answer your question, for dates of service in 2023, you're going to be notified what your star rating is in 2024, the fall of 2024. You get to market that in your 2025 advertising, and you get paid on that for '26, right? And so the way we're thinking about Texas and Florida specifically and California for that matter is Texas and California is still going to leverage off of the California [indiscernible] number and 4 stars for a couple more years. And so in that time frame, we've got to do what we did in North Carolina, which is get to 5 stars -- 4.5 to 5 stars. I think in California, it's just -- it's -- we're going to do what we did in the early days and to treat STARS as not a functional department. It's not something a person does or a group of people do. I have to drive it. The Board needs to support it. Every single person in the company needs to own it, and that's how we're going to do it.

You mentioned in the presentation that the guidance for this year is 86.5% for...

For 2022.

For 2022. Sorry.

Thomas is going to kill me.

[indiscernible].

Thomas is -- we did not give '23 guidance yet. For 2022, 86.5%. As we think about fourth quarter utilization, we did have the impact of flu as well as COVID and RSV, not as much in the senior population, but still elevated levels. Can you talk about any impact that you saw from that specifically? And then more generally, is there any level of pent-up demand that you saw pull through in the fourth quarter?

Yes. So in terms of the fourth quarter and maybe stepping back to the third quarter earnings call where we shared our fourth quarter guidance, our fourth quarter guidance assumed that utilization came back to a more normalized level, consistent with our kind of fourth quarter experience in years prior pre-COVID, which December, in particular, is usually a higher utilization month. So we didn't actually see months at all in October or November. But as you suggested December, we did see a pick-up both with COVID, not near to the extent of some of our prior waves like Omicron, but we did see COVID come back in the hospital. And we actually did have some flu and RSV this year. Nothing inconsistent with expectations though, and we did reaffirm our fourth quarter guidance for 2022 earlier this week. And in terms of your question on pent-up demand or deferred care, we've yet to see that really materialize through the system. And I think a lot of that has to do with the Care Anywhere proactive care teams that John was describing earlier. And what I mean by that is, even though in those times the last couple of years where the system has been somewhat tempered or doors have been closed at the provider offices, our care teams either in the home or through a lot of the virtual engagement we've been able to achieve have been able to maintain that continuity of care for the 10% to 20% of members most likely to wind up in the hospital if they do contract the flu or COVID. So I think it's been a real success story, and that's something we haven't really fully seen materialize at this point.

The other area of focus right now is obviously D.C. and a couple of things out of D.C. One, February 1, RADV. Can you give us your thoughts around risk adjustment, what you think the ruling will look like and what you think it means for both Alignment, but also for the industry?