Alignment Healthcare, Inc. (ALHC) Earnings Call Transcript

I think that's a fair statement. I think we do a good job. We can do a better job. Our completion factors should just get better. Our expectations for the work that we want our IPAs and medical groups to do, I think, should be higher. And I think all too often, if a particular Medigroup is not closing gaps the way we want. We'll take our resources currently in the care anymore team and just deploy them. We'll just get the work done. I think we need to be expecting more from select IPAs or we basically say, if we're going to do the work, that's okay, but I want to pay you if I'm doing the work. say you're working with a subcontractor. If they get paid, they don't do the work, you go do the work. And that's like a square deal. And I don't mind, we have a lot of IPAs that do a very good job of closing these gaps. So I think we can do a better job on some of the ones that have not delivered as much.

And I guess you guys -- when you guys in the public, you talked about this 20% membership growth that you were targeting falling short of that a couple of years. So like how do you think about getting back to that number? And when you look at where you were hoping to get versus what you were able to do. Where was the short focus new markets, new markets, how do you think about what CP fix?

I think we learned a lot with some of our new market entry strategies. I think we've concluded that you need to be good to win on 4 things. It starts with quality, which is what got us focused in going to IPO to begin with is we focused on quality. We focused on service, get to 5 stars, move toward 5 stars. That's #1. #2 is you need some aligned providers. You don't need a lot of female providers to start, but you need 20 to 25 primary care doctors augmented by the Care Anywhere team. And then you need very competitive products. You got to have good products. We did a pretty good job on products. I think we missed the market in a couple of markets, then we'll, of course, correct for that. But the big learning for us is the distribution side, we need more influence and control. And we've had a lot of success with field marketing organizations that have worked with us in our markets, both in California and in Nevada and Arizona and North Carolina. But when we did Texas and Florida, there was some -- we did not have a, I would say, tailwinds to get the brokers to engage with us. And those are lessons learned. And so we'll do better at that. I think that's going to be really important. But those 4 things in terms of productizing this care model, so to speak, is something that I still think the better the care model, the higher the quality manifests itself to higher PMs resulting from the stars. Lower PMPMs were in from the costs, more rebate dollars that we can afford to invest in product. And then if you have the tailwinds like we have to say, in North Carolina, you get 5 stars, you got something that people can point to and say, no, they're a 5-star plan. They have solid benefits. They've got good doctors in the network. And so how do we then sell that through the right distribution channels? I think you need all 4 to win in the market, which is exactly what we've done in California. Everyone has gotten to -- it's taken us 3 years to get to, say, operating cash flow breakeven in pretty much every one of our markets. And in 5 years, we get to right around 10,000 members. And everyone, every single one was as hard as, say, some of the new markets that we're investing in right now. But every market we've figured it out. I mean these are tough competitors. These are -- but we've always been able to figure it out.

So actually, I hands not keeping up with everything you're writing a -- so on the distribution, you said you were a little bit weaker in Texas. What was the other states?

Florida. Florida. We'll, course correct for that. Okay. And so then, I guess, when we think about next year, I mean, 20% is I guess, involve year, every year, but like does that seem reasonable based upon the rates that we've seen, how you're ramping up the new markets, how is that playing out? I think -- let me put this way, I'm more optimistic about this year in terms of finding that balance between growth and margin based on all the traction that we're getting from a clinical utilization perspective. And I think these -- what others may view as macro headwinds. We would view as opportunities. And so we'll never lose sight of the growth versus margin trades as we go through these bids right now. But I feel very, very good of where we stand right now.

Yes. It was interesting. You made a comment in the call that I wasn't sure exactly how to interpret it. You kind of made it sound like you guys are still talking about EBITDA breakeven next year. But then you also kind of said we might grow faster than average. And if that means higher MLR or what have you, that's fine. That's just the cost of doing business. So like are you saying that next year might not be breakeven if you grow really fast or you still can do both?

What I'm saying is if the proportion of our membership is relatively higher new members with a higher MLR. And typically, we would have year 1 members come in at something like 88% to 93%, 94% MLRs as opposed to -- our loyal members are closer to 45%. I think the MLR could tick up, we should offset some of that from SG&A. But to me, the real governor and I think what -- what I really think about is the growth that we would have is really governed by -- the point at which how soon can you guys get to operating cash flow, operate positive operating cash flow, not just EBITDA breakeven in the context of your balance sheet cash. So you have to go raise additional cash. I think that, to me, is kind of the ultimate governor and I feel good about it. And I think that we won't put ourselves in a situation where you're growing so much that [indiscernible] you need to find yourself raise additional cash. I don't think we'll find ourselves in that situation. But if we don't actually make an EBITDA breakeven, and we're some number close to where we are now, I think the confidence I have in getting those utilization, those risk adjustment, all the different initiatives on new members to be consistent with the kind of cohort performance we've had from year 1, which is, call it, 90% down to year 5, which you're in the 70%, 80% range. I'm very confident in our ability to do that. And to me, it's the care model is taking root. We need to productize that care model into growth. And we're growing into that. We're growing into it -- we'll be at about $1.7 billion this year. We'll probably be over 2 next year. I mean there's kind of, call it, scale operational improvements that I think will help us.

Yes. You mentioned a number of times your stars like your stars are some of the best in the industry. And in particular, I just want to understand, because North Carolina, new market, 5 stars. How do you get into a new market and get 5 star, which is unusual, generally speaking, but for a new market, I would think in particular...

I hate to say that the word is controlled. I mean it's actually controlling the experience with the doctors not relying on middlemen to do that or intermediaries to do that. And so North Carolina, like what we have in other markets outside of California is there aren't -- there isn't that middle intermediary. There's no IPA or medical group that wants to take global cap or shared risk cap. And so we are at the IPA. We're building the direct networks with the doctors, the subspecialists, the PCPs, the hospitals. And so when we are the ones doing the work, we can ensure quality control. It also is quality control. And when you have that control in every single market that we have, that's how we get the outcomes we get, I would say one thing in California, the identification of who that 20% of the really high-risk population is that cost 80% to 90% of the spend. If we're controlling that through our care annual teams and are basically our staff model, home-based clinicians, it's a very efficient use of capital and focused resources to ensure quality control. Where we can do a better job is the 80% of the population that cost 20% of the spend. They're not going to impact your MLR that much, but they're going to impact your stars. As you've got to give them the right access, the right experience, the right service delivery, all that matters to get to that 5 stars.

Is there anything like on the regulatory front that does -- where are you on you talked about the quoting adjustment. You've alluded to some of the marketing changes, the Starz qualification is going to evolve over the next few years? Like how do you adjust to those things? Are those headwinds?

Yes. On Starz, I think there's some headwinds coming, but also some tailwinds. And what I mean by that is what CMS has done with respect to Starz is they use something called 2 key. It's a 2 key methodology. It's a person that developed this methodology that effectively increases the cut points across each of the measures of Starz, making it tougher to get the higher starz. And so we're seeing that as it impacts '22 dates of service. I think we're going to be just fine, but it's requiring a lot of focus on our part. I still think the changes that the tailwinds coming are they're going to also change the weightings. This is actually really important that you're going to change the weightings on CAP scores, which are surveys, customer satisfaction surveys that they do from 4 weighting down, I think, the 2 waiting for 2026 waiting year, '27 payment year. That's a big deal because then they're going to increase the HEDIS certain HEDIS measures back after the 4 waiting. And we're really good on the quality side and the HEDIS scores, we're like 5 stars. So as I think about Starz longer term, I think we're going to be, again, relatively stronger position with the higher standards that CMS is going to require from people. And again, it's the focus on quality, it's a focus on clinical outcomes, taking care of people. I think will help us in the long term, position us. We know what the rate notice is, that's really important. And so you can plan against that now. And I think given the operational initiatives we're focusing on just getting scale economies is also going to kind of slowly chip away at the advantages the bigger plans have right now on just scale economies. Their SG&A as a percent of premium is a lot lower than ours. We're offsetting them. We're staying competitive because our MLR is really quite good. And as we get bigger and bigger, we're going to have more opportunities to scale. And that all gets reflected into the bids.

Because to meet the marketing changes, when I think about like the potential implications for MA growth, to your point, like $10 or $15 on $200 is not that big of a deal. To me, it feels more like in a very strict the ability of senior to learn about it once you see it, the value proposition is clear, but if you can't learn about it, then how do you sign up. So like -- but you don't sound worried about the marketing changes.

Well, it's -- our growth has come from switchers. And what I mean by that is most of our growth are people that have made the decision to say I'm going to move from a fee-for-service product, traditional fee -- Medicare fee-for-service into an MA plan, whether it's HML or a PPO. And so what we have typically done is let the big guys do the marketing to get the overall market share of MA to grow, and it's increasingly, it's like 52%, I think, of overall Medicare eligibles. What we do is we say, okay, what are the networks, what are the products? Where can we have the best opportunity? And we target those specific payers, and we have a very improved value proposition as measured by the rebates in each market. And then when the member of the beneficiary switches to us, we just service them. We just -- we service them with this Care Anywhere, and that's what keeps them. And -- but again, I think we can improve on that as well, getting that 5-star retention standard. So kind of how the macro world kind of reacts call it, mid- to high single-digit growth in MA overall on a national basis. We've been dealing with 4% industry growth in California forever because it's so saturated already, yet we're still growing 15%, 17%. And so yes, I mean -- but we're not -- I'm not backing off the 20 at all.

Yes. So I guess maybe last question, that's all the companies, like recession seems to be coming? Like how do you think about that? Is there -- I mean, obviously, you think you should be insulated, but does that -- does the recession make MA more attractive to seniors...

I think so. It's -- you look at some of our competitors and where they grew and how they grew with their product designs. A lot of it would include some form of Part B rebate. That's just a part of their -- the soil security, it's just cash. Simple, and I think if you can provide the right balance of coverages and benefit designs, people need help. And we say where social determinants of health and whatnot. At the end of the day, people need help mentally, people need help financially. People need help with the groceries for food and securities and food vulnerabilities. I think MA is going to play a more prominent role in solving for some of these issues for people. What we shouldn't do is just do massive Part B rebates and not have any coverage. I mean you've got to take care of people still at the end of the day. And I think simple, reliable benefit designs are going to be good. And I think the other thing that think through is when you're looking at the growth of the supplemental vendors, there's so much growth in some of these areas and to make sure that the service delivery and the quality of delivery can be maintained. I think that's something that we all have kind of taken for granted. I'm not sure we can afford to. So I think it's -- I think people need help during times of recession and MA is one way to do it.

I think that's all we have time for. Thank you very much.

Thanks, everyone. Thanks, Kevin.