Alignment Healthcare Q4 2024 Earnings Report

Alignment Healthcare EPS Results

• Actual EPS: N/A
• Consensus EPS: -$0.18
• Beat/Miss: N/A
• One Year Ago EPS: N/A

Alignment Healthcare Revenue Results

• Actual Revenue: N/A
• Expected Revenue: $677.42 million
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

Alignment Healthcare Announcement Details

• Quarter: Q4 2024
• Date: 2/27/2025
• Time: After Market Closes
• Conference Call Date: Thursday, February 27, 2025
• Conference Call Time: 5:00PM ET

Alignment Healthcare (NASDAQ:ALHC) is a technology-driven health plan operator specializing in Medicare Advantage programs for seniors and individuals with complex care needs. The company integrates proprietary data analytics, predictive modeling and a bespoke care coordination platform to deliver personalized, preventive and value-based healthcare. Alignment Healthcare partners with a network of primary care physicians, specialists and ancillary providers to support comprehensive care management and improve quality outcomes for its members.

Founded in 2013 and headquartered in San Diego, California, Alignment Healthcare has built its business on a direct-to-consumer model and a national footprint. The company deploys a cloud-based operating system that captures clinical, pharmacy and social determinants data to identify high-risk individuals and anticipate emerging health issues. This technology enables proactive outreach, timely care interventions and an enhanced member experience that emphasizes in-home visits, virtual consultations and community-based support.

Alignment Healthcare serves beneficiaries across more than 20 states, including key markets in California, Florida, Texas and Arizona. Its Medicare Advantage plans cover a full spectrum of benefits such as preventive screenings, chronic condition management and prescription drug coverage. By aligning financial incentives with patient health outcomes, the organization focuses on reducing hospital admissions, lowering total cost of care and elevating satisfaction among members and providers alike.

The company’s leadership team is led by co-founder and Chief Executive Officer Kai Pan, whose background in health technology and value-based care has guided Alignment’s strategic expansion and product innovation. Supported by a seasoned executive team in technology, clinical operations and finance, the organization continues to refine its platform, pursue strategic partnerships and explore opportunities to enhance care delivery models for Medicare beneficiaries nationwide.

Alignment Healthcare Q4 2024 Earnings Call Transcript

Key Takeaways

• In FY 2024, Alignment delivered revenue of $2.7 billion (+48% YoY; +59% ex-ACO REACH), improved its medical benefit ratio (MBR) to 88.8%, achieved positive adjusted EBITDA of $1 million, and in Q4 saw revenue of $701 million (+51% YoY) with adjusted gross profit of $88 million and an MBR of 87.5%.
• Membership grew 59% YoY in FY 2024 to 189,100 members, accelerated to 209,900 (35% YoY) entering 2025, and management guides to 460,000 members full-year with $3.72–3.78 billion in revenue, $415–445 million in adjusted gross profit and $35–60 million in adjusted EBITDA for 2025.
• Alignment’s care-management model employs 400+ clinical staff (25% of FTEs) leveraging AVA analytics to engage at-risk seniors, drive down admissions and control costs, underpinning higher quality and efficiency compared with peers.
• The company achieved industry-leading STARS performance with 95% of California members and 98% nationally in 4-star-plus plans (vs. 61% and 64% for competitors), boosting CMS reimbursements and strengthening competitive positioning through 2028.
• Over half the membership is in their first two years, with gross profit PMPM projected to rise from $90 in year one to $230 by year five, creating an estimated $600 million of embedded gross profit and a path to double 2024’s $300 million base without new enrollment.

Presentation

[Operator]

Good afternoon, and welcome to Alignment Healthcare's Fourth Quarter twenty twenty four Earnings Conference Call and Webcast. All participants are in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. Leading today's call are John Kao, Founder and CEO and Thomas Freeman, Chief Financial Officer.

[Operator]

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 risks and uncertainties and reflect our current Descriptions of some of the factors that could cause actual results to differ materially from these forward looking statements are discussed in more detail in our filings with the SEC, including the Risk Factors section of our annual report on Form 10 ks for the fiscal year ended 12/31/2024. Although we believe our expectations are reasonable and undertake no obligation to revise any statements to reflect changes that occur after this call, in addition, please note that the company will be discussing certain non GAAP financial measures that they believe are important in evaluating performance. Details on the relationship between these non GAAP measures to the most current 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 K for the fiscal year ended 12/31/2024. I would now like to hand the call over to your speaker today, John Kao. Please go ahead.

[John Kao, Founder, President, CEO & Director at Alignment Healthcare]

Hello, and thank you for joining us on our fourth quarter earnings conference call. For the fourth quarter twenty twenty four, our health plan membership of 189,100 concluded a milestone year where we grew membership approximately 59%. Our final result is more than 25,000 members above the high end of our initial guidance range and reflects an additional 21% growth relative to initial expectations. As a result of our continued membership outperformance, total revenue of $7.00 $1,000,000 in the quarter grew approximately 51% year over year and 61% excluding ACL reach. In the fourth quarter, each of our key margin ratios improved year over year, even as our membership growth accelerated beyond expectations.

[John Kao, Founder, President, CEO & Director at Alignment Healthcare]

Adjusted gross profit of $88,000,000 produced a consolidated MBR of 87.5%, a 200 basis point improvement year over year and 50 basis point improvement excluding ACO reach. Combined with substantial scale economies, we delivered adjusted EBITDA of positive $1,000,000 in the quarter and 400 basis points of margin expansion year over year. For the full year, total revenue of $2,700,000,000 grew 48% year over year and 59% excluding ACO REACH. Adjusted gross profit of $3.00 $3,000,000 resulted in an MBR of 88.8%. Lastly, we delivered positive adjusted EBITDA of $1,000,000 which reflects 200 basis points of margin expansion year over year and marks our first year of adjusted EBITDA profitability as a public company.

[John Kao, Founder, President, CEO & Director at Alignment Healthcare]

Our exceptional results in 2024 highlight our differentiated ability to navigate a dynamic MA environment and demonstrate that plans can win by providing more care, not less. Our success starts with approaching Medicare Advantage as a care management business, not just an actuarial underwriting business. To execute our model, we employ more than 400 clinical staff who represent approximately 25% of our full time employees and roughly 4% of medical expenses for at risk members. These home and virtual based resources leverage actionable insights from Ava to create greater control over medical quality and costs. As a result, we were able to offer market leading benefits and grow confidently in 2024, while others in the industry took a step back to rising star standards, the first year of V-twenty eight phase in and changes in utilization patterns.

[John Kao, Founder, President, CEO & Director at Alignment Healthcare]

Taken together, the results of 2024 are demonstrating our ability to capitalize on a changing MA environment that will favor plans with low cost, high quality outcomes. Turning to our AEP results, we entered January 2025 with 209,900 health plan members representing 35% growth year over year. This resulted from a combination of 28% growth in California and more than 100% growth in our ex California markets. Much like 2024 was a breakout year for consolidated growth, 2025 is a breakout year for growth outside of California. Nevada now has over 10,000 members while each of our other ex California states up between 13,000 seniors.

[John Kao, Founder, President, CEO & Director at Alignment Healthcare]

Our ex California growth during AEP was enabled by our industry leading STARS results, including our five star contract in Nevada and North Carolina and strong medical management performance, including twenty twenty four admissions per 1,000 of 144 for ex California markets. These factors increased reimbursement from CMS and lower cost by improving the health of our members, both of which allow us to afford richer product benefits. In total, our successful AEP provides us with line of sight to our full year membership guidance of 227,000 to 233,000 members and further positions us to drive greater economies of scale and adjusted EBITDA margin improvement in 2025. Thomas will share more on our 2025 guidance shortly. Looking beyond 2025, we believe our relative advantages on STARS and the final phase in of the B-twenty eight risk adjustment model create a multi year pathway for robust growth and continued margin expansion.

[John Kao, Founder, President, CEO & Director at Alignment Healthcare]

For 2025 payment year, 95% of our California members are in plans rated four stars or above compared to 68% for competitors in California. This is already 27% higher than competitors and our advantage is further widening for the 2026 payment year when we will have 100% of our California members and plans rated four stars or above. This will be nearly 40% better than the competitors in the state who are declining to just 61% of members and four star above plans. We are similarly well positioned at a national level. Approximately 98% of all alignment members are in plans that will be rated four stars or above in payment year 2026, which is 34% better than the industry of just 64%.

[John Kao, Founder, President, CEO & Director at Alignment Healthcare]

Beyond our rating year 2025 Star Scores, which impact our 2026 payment, we see multiple years of meaningful Star's tailwinds ahead of us. For rating year 2026 impacting payment year 2027, caps and admin weightings will be reduced from four to two. This change would have resulted in an increase to our raw score by approximately 0.23 during the past rating cycle for our California HMO contract, further reinforcing our STARS position. For rating year 2027 impacting payment year 2028, CMS is replacing the current reward factor with a health equity index. Our California HMO contract doesn't currently receive any benefit from the existing reward factor.

[John Kao, Founder, President, CEO & Director at Alignment Healthcare]

So this change creates an additional potential tailwind to our raw STAAR score. Based on our early analysis, we believe we could achieve a STAAR score bonus of 0.25 or greater under the new Health Equity Index. Each of these tailwinds increases our confidence in maintaining at least four stars and strengthens our conviction in growing membership 20% or above over the coming years while balancing margin expansion objectives. Lastly, I'd like to spend a moment to talk about the embedded gross margin opportunity within our existing membership. Due to our rapid growth in 2024 and 2025, over 50% of our members are expected to be in a year one or year two cohort.

[John Kao, Founder, President, CEO & Director at Alignment Healthcare]

As we engage our at risk members with our clinical resources, gross profit grows from $90 PMPM for our at risk year one members to $230 PMPM for our at risk members in year five and beyond. This dynamic creates embedded gross profit of approximately $600,000,000 just within our existing membership base, creating a pathway to double the $300,000,000 of gross profit we delivered in 2024 without any incremental membership growth. In closing, 2024 was a milestone year on growth and profitability improvement, while we again demonstrated the resiliency of our STARS results. By prioritizing health outcomes and putting the senior first, we have created a durable cost and quality mode that positions us to win irrespective of the policy and rate environment. For their dedication to our seniors, I'd like to thank each of our employees for playing their part in fulfilling our mission for Medicare Advantage Done Right.

[John Kao, Founder, President, CEO & Director at Alignment Healthcare]

With that, I'll turn the call over to Thomas to further discuss our financial results and outlook. Thomas?

[Thomas Freeman, CFO at Alignment Healthcare]

Thanks, John. For the year ending December 2024, our health plan membership of 189,100 increased 59% year over year. This drove total revenue just north of $2,700,000,000 for full year 2024, representing 48% growth year over year and 59% growth excluding ACO reach. As membership continued to accelerate during the year, we ultimately exceeded the midpoint of our initial 2024 revenue guidance by over $300,000,000 dollars Full year adjusted gross profit of $3.00 $3,000,000 exceeded the high end of our latest guidance by $6,000,000 and represented an MBR of 88.8%. We continue to demonstrate the strength of our medical management capabilities during the fourth quarter with our MBR of 87.5% marking our lowest MBR quarter of the year.

[Thomas Freeman, CFO at Alignment Healthcare]

Our strong finish drove our full year inpatient admissions per 1,000 for our at risk members to one hundred and forty nine showing continued improvement from one hundred and fifty six in 2023 and one hundred and fifty nine in 2022. Our adjusted gross profit results in the fourth quarter also benefited from the release of prior period IBMP reserves. Given the atypically large cohort of new members we onboarded during 2024, we took a prudent approach to setting initial reserves during the first through third quarters. As we closed out the year, our favorable claims run out allowed us to deliver upside relative to our prior expectations. Our strong admission performance in 2024 combined with our latest visibility into our 2024 claims experience together give us confidence in our 2025 outlook.

[Thomas Freeman, CFO at Alignment Healthcare]

Turning to OpEx, our operating cost ratios showed year over year improvement given our continued growth and the elimination of one time costs associated with the in sourcing of our member experience functions that we incurred in the second half of last year. Full year 2024 SG and A was $371,000,000 Our adjusted SG and A was $3.00 $1,000,000 an increase of just 23% year over year relative to membership growth of 59% year over year. Adjusted SG and A as a percentage of revenue excluding ACR reach declined from 14.4% in 2023 to 11.1% in 2024 represent an improvement of approximately three thirty basis points. Taken together, we achieved our breakeven profitability goal with full year adjusted EBITDA of positive $1,000,000 and did so while onboarding more net new members in 2024 than in the prior four years combined. This demonstrates the differentiated power of our model to scale outcomes and places us on track to drive continued adjusted EBITDA margin expansion in 2025.

[Thomas Freeman, CFO at Alignment Healthcare]

Turning to the balance sheet, we ended the year with $471,000,000 in cash and investments. This includes net proceeds from the sale of $330,000,000 aggregate principal convertible senior notes in the fourth quarter. The funds from this transaction were used to pay down $215,000,000 in outstanding term loan principal and added $106,000,000 of cash to the balance sheet net of transaction costs. This significantly lowers our cost of capital and reduces annual interest expense by approximately $10,000,000 moving forward. Moving to our guidance.

[Thomas Freeman, CFO at Alignment Healthcare]

For the first quarter, we expect health plan membership to be between 426,000 members, revenue to be in the range of $880,000,000 and $895,000,000 adjusted gross profit to be between $89,000,000 and $97,000,000 and adjusted EBITDA to be between $2,000,000 and $10,000,000 For the full year 2025, we expect health plan membership to be between 460,000 members revenue to be in the range of $3,720,000,000 and $3,780,000,000 adjusted gross profit to be between $415,000,000 and $445,000,000 and adjusted EBITDA to be in the range of $35,000,000 and $60,000,000 Given our strong sales momentum through the first two months of the year, we are raising the midpoint of our year end health plan membership guidance by 2,000 relative to our early guidance commentary provided in January. Our Our products continue to resonate across our markets and the strength of our early results give us confidence in our full year trajectory. Turning to revenue, the midpoint of our initial revenue guidance range of approximately $3,750,000,000 represents nearly 40% growth year over year. Beyond our strong membership growth, our revenue outlook is supported by increases to our Part D revenue PMPM due to changes related to the Inflation Reduction Act and the retention of our twenty twenty four new member cohort, partially offset by the impact of the second phase in the D-twenty eight risk model changes.

[Thomas Freeman, CFO at Alignment Healthcare]

Moving to our adjusted gross profit guidance, our midpoint of $430,000,000 represents 42% growth year over year. This implies an MBR of 88.5% and compounds off of our strong 2024 result where we grew adjusted gross profit by 45%. Our outlook embeds the MBR improvement from the retention of twenty twenty four new members and modifications to our product design. These factors are balanced by the impact of the second phase in of the D20 risk model, initial assumptions on Part D changes associated with the Inflation Reduction Act and modestly higher utilization volume expectations due to our mix of membership. Progressing down the P and L, we expect to see further improvement in our SG and A ratio as we continue to scale our back office functions and ex California markets, while driving automation and productivity improvements across our shared services.

[Thomas Freeman, CFO at Alignment Healthcare]

Taken together, the midpoint of our adjusted EBITDA guidance range of $47,500,000 implies 130 basis points of margin expansion year over year and reflects our confidence in underlying cost trends and operating leverage opportunities in 2025. In terms of our first quarter guidance, it's worth noting that our MBR seasonality is anticipated to shift in 2025 due to changes related to the Inflation Reduction Act. Similar to prior years, we anticipate that our Part D MBR will improve sequentially throughout the year, however, at less of a slope than in years past. Accordingly, the change in seasonality will modestly lower MBR in the first half of the year and conversely increase MBR in the second half of the year relative to prior years experience, all else being equal. Beyond changes to Part D seasonality, our first quarter guidance broadly reflects our regular seasonality, which incorporates higher utilization in the first quarter of the year.

[Thomas Freeman, CFO at Alignment Healthcare]

In conclusion, our consistent strategy of balancing growth and profitability combined with our differentiated Medicare Advantage platform enabled us to deliver breakout performance in 2024. As we step into 2025 with momentum on growth and confidence in our 2025 outlook, we believe we are well positioned to continue distancing ourselves from competitors this year as well as looking ahead to 2026 and beyond. With that, let's open the call to questions. Operator?

[Operator]

Thank Our first question is going to come from the line of Scott Fidel with Stephens. Your line is open. Please go ahead.

[Scott Fidel, Managing Director at Stephens Inc]

Hi, thanks. Good evening. First question, just wanted to maybe unpack the guidance for 2025 for the adjusted EBITDA, which shows solid improvement in profitability, both on the top end and the bottom end of the range. There's a reasonable sort of range embedded there between the top and the bottom end. So just was hoping maybe you could give us some of your thinking around some of the key assumptions that you may have between that could ultimately allow you to reach the high end possibly versus the midpoint at the low end of the range?

[Thomas Freeman, CFO at Alignment Healthcare]

Yes. Hey, Scott. Thomas here. Happy to take the question. So I guess, first off, I think it's probably worth noting that we feel just great about where we landed for the fourth quarter and full year 2024, which is not only important in terms of the actual outcome looking backwards, but really what it means for us looking forward as we march into 2025.

[Thomas Freeman, CFO at Alignment Healthcare]

And so to your question on sort of what would send us towards sort of the low end of the range versus the high end of the range, I think there's a few variables that are kind of key to us this year. So the first is, as you've heard many others in the space talk about, we are stepping into some new aspects of the Part D program under the Inflation Reduction Act. I think we've taken a prudent approach in terms of thinking through what the MLR should look like on that program in 2025. And I would say the low end of our range in particular has a bit more conservatism on how that would look relative to prior years. I think our 2024 experience on Part D ultimately landed within about $1 PMPM of what we expected.

[Thomas Freeman, CFO at Alignment Healthcare]

So I think we feel really good about our ability to forecast what that looks like. We are being a little more conservative there on the low end just given some of the changes coming our way. I think beyond that, it's sort of the usual suspects in terms of where our utilization and emissions per 1,000 run for the year, how our growth progresses sort of intra quarter throughout the year and how our overall just cohorts mature from year one to year two, year two to year three and so forth. I think big picture, we feel very confident in our overall range for the year, particularly given that we do still have 50% of our members in the year one or year two cohort. I think we're in a great place looking ahead to 2025.

[Scott Fidel, Managing Director at Stephens Inc]

Okay, great. And then just as my follow-up question, we'd be interested if you even have this, if you have sort of the breakdown of when looking at the guidance you've given for membership growth for the full year of 2025, What do you expect that split would be between California and then non California? Certainly nice to see growth playing out in both of those areas. And then just related to that, just in terms of engagement, are there any sort of initial indicators that you have or that you could share with us around how the new members are engaging with AVA in the non California markets versus the home California market? Thanks.

[Thomas Freeman, CFO at Alignment Healthcare]

Yes. So just on the membership point, I would expect our results for 01/2013 AEP would be a kind of a good indicator as to what we expect to occur over the duration of 2025. So I think from a obviously from a growth percentage standpoint, we would expect ex California to continue to grow materially faster than California, some of our comments on AEP. And I would say, Nevada, for example, would be one area where we expect continued growth during the year in addition to our other ex California markets. That being said, I think from an overall net membership growth, we would still expect California to drive over 50% of the total net member growth, just given the success we saw during AEP and how we would anticipate that to continue through the rest of the year.

[Thomas Freeman, CFO at Alignment Healthcare]

And I think to your question on sort of engagement, I'd say, Ava and maybe just more generally speaking sort of replicability of the care model ex California. I think that remains to be one of the things we're hyper focused on and really continuing to demonstrate proof points around. And so we mentioned in our prepared remarks that ex California actually ran about 144 inpatient admissions per 1,000, which is better than that of the consolidated enterprise and therefore California. So I think we're doing a nice job at sort of hiring, training, driving adoption of the tools and really making sure we're kind of being consistent market by market around how we approach our care teams and care delivery. And I think from an engagement standpoint, it doesn't really matter what the market is.

[Thomas Freeman, CFO at Alignment Healthcare]

From the consumer's perspective or from the senior's perspective, they're getting ultimately better care for free in a convenient manner, I. E. In the home or virtually dependent upon what they prefer, really acting as an extension of their primary care relationship. And so I don't think we see differences in terms of our ability to engage irrespective of the county or the state.

[Scott Fidel, Managing Director at Stephens Inc]

Okay. Thank you.

[Operator]

Thank you. And one moment as we move on to the next question. And the next question is going to come from the line of Adam Rahn with Bank of America. Your line is open. Please go ahead.

[Adam Ron, Analyst at Bank of America]

Hey, thanks for the question. I got two questions. So first, on the MLR guidance for 2025, based on your quick math on the press release, it seems like you're talking about MLR being down 30 basis points in 2025 after being up 30 basis points in 2024, which was another big growth year. Meanwhile, if I just simplistically look at how United and Humana are talking about it, United was mostly Medicare, it's talking about 100 basis point MLR increase into 2025 while you're seeing a decrease and then Humana is saying flat, but that includes them exiting markets where it was very unprofitable. At the same time, I'd presume that they're both cutting benefits more than you are.

[Adam Ron, Analyst at Bank of America]

And so if you could just bridge and you have a lot of new members coming that are more MLR diluted than they do. And so if you could just bridge how they seem to be talking about a more severe MLR increase than you are, that would be helpful. I have a follow-up.

[Thomas Freeman, CFO at Alignment Healthcare]

Yes, happy to cover that. I think, I can't comment on sort of the peer universe in terms of what they're seeing. But I think many of those organizations, not necessarily the two you mentioned per se, but just in general, a lot of these organizations are really struggling with a myriad of factors, including STARS changes impacting payment year 2025. The second year of the V-twenty eight risk model changes and of course the broad utilization challenges that you've seen across the industry for going back over the last twelve to eighteen months. I think 2024 really is the starting point to answer your question as to why we're showing differentiated results versus others.

[Thomas Freeman, CFO at Alignment Healthcare]

We shared at a conference back in January that our year to date excuse me, our year to date MDR through the third quarter year over year was up about, I want to say 200 basis points, when you normalize for ACO reach in 2023 relative to about high 50 percentage membership growth at that point in time. If you were to refresh that analysis today, we actually had our MBR for full year 2024, only up about 130 basis points year over year relative to 2023. And again, while growing membership 59%. If you were to contrast that with the industry, you would see that many of the peers were up 200% to 300% in 2024 alone, while barely growing or in some cases shrinking membership and those that did grow more than 10% to 20% saw NVR increasing to the tune of 500 to 600 basis points year over year. So I think 2024 really demonstrates our ability to kind of control our own destiny and manage MBR while continuing to grow membership.

[Thomas Freeman, CFO at Alignment Healthcare]

I think 2025 is similar as we move forward where we do have some pluses and minuses like the industry. We do have a couple of headwinds around D-twenty eight and in some of the Part D changes under the Inflation Reduction Act I mentioned previously. But conversely, we have a significant of members maturing from a year one to year two cohort, which is a tailwind year over year. We did modestly trim our benefits in certain areas between 2024 and 2025. And of course, we have the benchmark rate update for 2025, which does help us.

[Thomas Freeman, CFO at Alignment Healthcare]

So I think given some of those pluses and minuses, we feel very good about our ability to achieve the 2025 guidance we laid out today.

[Adam Ron, Analyst at Bank of America]

That's helpful. If I could squeeze two questions, one just following up very quickly on what you said and then the second one. So on the first one, if you could give one answer as to what you think the biggest delta is versus your peers, is it like the rate notice or is it risk adjustment or is it something else? And then the actual question is if you guys could just give you had mentioned the release, but your thoughts on the 2026 rate notice from CMS and if you have any thoughts about it? Thanks.

[Thomas Freeman, CFO at Alignment Healthcare]

I'm not sure you can say it's one thing because all these variables are so interrelated. I mean, I think fundamentally our model starts with our differentiability to engage members and drive up quality, I. E. STARS and control costs by managing care and engaging with that chronic acute high risk population. I think that's the foundation, but it didn't I think flows through how we think about changes around B-twenty eight.

[Thomas Freeman, CFO at Alignment Healthcare]

It impacts how we think about the benefits we can offer in the market. It impacts our ability to perform STARS to manage utilization and navigate changes such as Part D or Inflation Reduction Act. So I'm not sure you can pinpoint one specific variable and say why our trends are different than others across those different more financial variables. I think it starts with just our fundamental approach to this business being different than the others. It's not just an actuarial underwriting model for us.

[Thomas Freeman, CFO at Alignment Healthcare]

It really starts from the perspective of care delivery, care management. And I think the other things then kind of flow downhill from there.

[Operator]

Thank you.

[Adam Ron, Analyst at Bank of America]

Appreciate it.

[Operator]

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

[Michael Ha, Senior Research Analyst at Robert W. Baird & Co]

Thank you. Congrats on the earnings. It's so rare that I think sitting here in February 2025, there's already so much visibility into tailwinds all the way out to 2028. You mentioned past admin weightings driving I think 0.23 benefits your raw star rating for 27%. And then 28% another tailwind, I think you said 0.25% for your reward factor change.

[Michael Ha, Senior Research Analyst at Robert W. Baird & Co]

So my question is, what is your current raw star rating score for that California HMO contract? And would it be fair to assume your competitors likely won't see the same magnitude benefit? Some plans might already be getting a reward factor, which means, if I'm thinking about it right, just from the star rating program changes alone, you have line of sight to moving that contract up from four to 4.5 or even five. And then also your competitive advantage might even widen even further. So massive tailwind, just wanted to confirm the thesis and better understand the magnitude. Thank you.

[Thomas Freeman, CFO at Alignment Healthcare]

Yes, absolutely. So I think you sort of hit the nail on the head there. I think at minimum it provides a lot of buffer for us in terms of maintaining four star rating for that California HMO contract. Beyond that, it certainly is a tailwind as we continue to strive towards 4.5 or five stars, which remains our objective. I think from a competitive standpoint, for 2024, '3 of our toughest competitors were four or 4.5 stars and we still have your membership 59%.

[Thomas Freeman, CFO at Alignment Healthcare]

For 2025, a couple of those continue to fall below four stars and looking ahead at 2026, really only one competitor of ours that is above four stars or at or above four stars. And so I think from our perspective, we do see a significant opportunity to continue to grow through 2026 just based on that alone. But what I would emphasize is that it's not just stars. And while I think these tailwinds certainly help us with our own stars visibility to the extent that any others in the industry benefit from some of these changes in the future, I think it goes back to all the variables I was describing previously in terms of our ability to differentiate and continue to grow disproportionately relative to our markets. And so at the end of the day, I think our ability to be high quality and low cost is the key to success.

[Thomas Freeman, CFO at Alignment Healthcare]

Things like not relying on the global capitation model and really wanting to engage with our seniors directly and manage the risk ourselves are really the secret sauces that allow us to continue to grow faster than market year in, year out. I think as you get out into 2027 and 2028, I think we still continue to see a very positive opportunity for us to continue to grow 20% or above based on the STARS results and certainly those other variables as well.

[Michael Ha, Senior Research Analyst at Robert W. Baird & Co]

Thank you. And maybe one more question. On your cohort maturation, I know how powerful year one and year two typically you see the largest step function and alarm improvement, I think 300 bps. I think a lot of it's also driven by the risk adjustment itself, like 10% improvement. And the magnitude of this power, quite significant, we estimate it could almost be the entire bridge from '24 to 25.

[Michael Ha, Senior Research Analyst at Robert W. Baird & Co]

So with that said, in terms of this cohort maturation, is everything so far tracking in line with expectations, risk adjustment capture on that 24% cohort, I guess, Care Anywhere engagement, nothing really impeding that maturation story, everything sort of moving along as expected and fueling this maturation dynamic? Thank you.

[Thomas Freeman, CFO at Alignment Healthcare]

Yes. I think we continue to remain confident in our ability to drive those cohort results over time. I think in terms of that 2024 cohort maturing into year two in 2025, similarly, we feel very good about how that's continuing to evolve. I would say, keep in mind, in the second half of the year alone last year, we grew membership by about 15,000 between June and December. And so what I would say is for some of those members that we've only had on board for a couple of months, we're still continuing to engage with those.

[Thomas Freeman, CFO at Alignment Healthcare]

And so I think that just provides an incremental tailwind for us as we think about not just 2026, but also the margin opportunity moving towards 2027, where we are still just continuing to engage some of those opportunity moving towards 2027, where we are still just continuing to engage some of those members that have been on board for a few months. But big picture, I would say, our engagement for last year did exceptionally well. We got close to that 60% goal we had previously described. And that was really a major driver of our ability to land at 149 inpatient admissions per one thousand and four full year 2024, including Q4 being our best MBR quarter of the year.

[Operator]

Thank you. And one moment as we move on to the next question. Our next question is going to come from the line of Matthew Gillmor with KeyBanc. Your line is open. Please go ahead.

[Matthew Gillmor, Director & Senior Research Aanalyst at KeyBanc Capital Markets]

Hey, thanks for the question. I had the first one on guidance. Thomas had mentioned a modestly higher utilization assumption due to mix of membership. I was hoping you could unpack that a little bit. Is that just a reflection of the favorable duals mix or something else underlying that?

[Thomas Freeman, CFO at Alignment Healthcare]

Yes, that's exactly correct. So both during 2024 and then through AEP oneone hundred and twenty five, we have continued to see solid growth in our duals membership, which tends to come with slightly higher utilization. So I think in total for full year 2025, we wouldn't expect too much of a change in terms of total emissions per thousand. It might be up a couple of percent year over year. But it is something that we are mindful of just given the changes in PBP mix from 2023 to 2024 and then 2024 to 2025.

[Matthew Gillmor, Director & Senior Research Aanalyst at KeyBanc Capital Markets]

Got it. That's great. And then, Thomas, do you have any commentary for us in terms of expectations for cash flow and sort of how you're thinking about CapEx and sort of where that money is going?

[Thomas Freeman, CFO at Alignment Healthcare]

Yes. So, without kind of getting into full guidance on cash flow for 2025, I guess, a couple of data points worth noting. So from an EBITDA standpoint, obviously, we did share our guidance today with a midpoint of $47,500,000 Beyond that, we would expect probably about $14,000,000 of interest expense in 2025 and CapEx probably to the tune of $30,000,000 to $35,000,000 So I think those are some of the kind of major variables to consider. Working capital tends to not be a major driver of overall cash kind of year in, year out, kind of depends on how some of the medical expense payables evolve relative to some of the receivables. And so, I think we feel like we're in a great spot from an overall cash standpoint.

[Thomas Freeman, CFO at Alignment Healthcare]

We ended 2024 with over $200,000,000 of cash as a parent. And as we think about our organic growth pathway over the next several years, I think we're in a great spot to continue to achieve those targets without the need for external financing. Got it. Thank you.

[Operator]

Thank you. And one moment as we move on to the next question. Our next question comes from the line of Jessica Tasson with Piper Stanley. Your line is open. Please go ahead.

[Jessica Tassan, Senior Equity Research Analyst at Piper Sandler Companies]

Hi guys. Thanks for taking the question and congrats on the guidance rates and the strong results. So I wanted to just ask, understanding that new members are dragged obviously on MBR in their first one, two years, are new members in your markets outside of California starting at kind of even lower MBRs than the California or sorry, higher MBRs than the California members? And does that MVR trajectory eventually converge? And kind of if so, at what point at what year would that happen?

[Thomas Freeman, CFO at Alignment Healthcare]

Hi, Jess. I can take that one. So I'd say it depends. It depends on the market. It depends on the product type.

[Thomas Freeman, CFO at Alignment Healthcare]

It depends on the provider group. So it's variable. I think it's a simple answer. There are certain markets, products, provider combinations that do start higher MBR. But what we typically see with those is there just a greater opportunity to drive MBR improvement from year one through year three, year three through year five, etcetera.

[Thomas Freeman, CFO at Alignment Healthcare]

So sort of a steeper slope of improvement curve opportunity. But it does just depend on some of those variables I mentioned earlier.

[Jessica Tassan, Senior Equity Research Analyst at Piper Sandler Companies]

Got it. So they eventually do converge at roughly the same level of profitability?

[Thomas Freeman, CFO at Alignment Healthcare]

Yes. In fact, I would say we actually see in instances where there's actually a greater opportunity to drive NBR performance ex California than even inside of California.

[Jessica Tassan, Senior Equity Research Analyst at Piper Sandler Companies]

Okay. That's helpful. And then maybe just can you give some comments about retention during AAP? I know you said more than 50% in your one, two cohorts, but just any commentary on retention during AAP given that you guys had emphasized margin in the 2025 benefit spend. So just is AEP churn higher year over year in 2025 or is it did some alternate reality play up?

[Thomas Freeman, CFO at Alignment Healthcare]

No, actually, so going back a year to oneonetwenty four, oneonetwenty '4 was our best AEP retention percentage in I think the history of the company certainly in the last three or four or five years before that. Oneonetwenty five was very similar to the oneonetwenty four retention rate. So we feel very good about how that evolved during the year. We did make a couple of decisions on certain markets and certain provider contracts that were really designed to make sure that our overall MBR trajectory over a multi year period had durability and that those contracts have or contracts or products have longevity to them as well. So we did lose a couple of few thousand lives associated with some of those decisions, but I think big picture, we feel very good about how the retention played out during AEP.

[Jessica Tassan, Senior Equity Research Analyst at Piper Sandler Companies]

Thank you. That's helpful. And then I want to sneak in just one quick one and ask if you guys have any thoughts or just baseline expectations for the final rate notice that you would like to share with us? Thanks again.

[John Kao, Founder, President, CEO & Director at Alignment Healthcare]

Hey, Jess, it's John. I think the last couple of years have taught us that irrespective of the reimbursement whether they go up or down, we're just really well positioned on a relative basis, not only with what Thomas talked about in terms of stars, but the way that we've approached risk adjustment really from the beginning of the company has been not to be too aggressive around it. And so I think that's like a second relative advantage to us. Now, I would expect it to be a little bit higher and is what my just nothing more than my gut would suggest. I think the 5.93% kind of actual benchmark increase on a national basis, I think could go up a little bit.

[John Kao, Founder, President, CEO & Director at Alignment Healthcare]

And the only reason I would say that is predicated on the ACO rate increase as well as the fee for service increase and the potential inclusion of some run out in the first half of twenty twenty four. And if you just remember, there's a lot of utilization increases in the first part of twenty twenty four that I'm not sure made it into the 05/1993. But other than that, we'll just have to wait and see. But I think we feel really good either way.

[Jessica Tassan, Senior Equity Research Analyst at Piper Sandler Companies]

That's so helpful. Thank you.

[John Kao, Founder, President, CEO & Director at Alignment Healthcare]

Yes.

[Operator]

Thank you. One moment for our next question. Our next question comes from the line of Andrew Mok with Barclays. Your line is open. Please go ahead.

[Analyst]

Hi. This is Tiffany on for Andrew. I think some of your peers are pointing to like a significantly more dramatic upward slope on MLR from 1Q to 4Q due to the Part D IRA changes. But it seems like you guys are still assuming Part D MLR improvement throughout the year just at a flatter slope. Can you help us understand why there might be some differences in experience and whether that has anything to do with your Part D like benefit structure versus peers?

[Thomas Freeman, CFO at Alignment Healthcare]

Yes, I'm happy to address that. I don't want to overly speculate on others, but I suspect part of it has to do with the fact that they also have broader standalone Part D or PDP offerings, which we don't have. I think in terms of our experience, going back to 2024, we shared previously that Q1 tends to be our higher MBR quarter for Part D and then it improves sequentially over the course of the year. And as I mentioned earlier, our kind of ability to forecast that and track that is quite strong, including the fact that we have sort of real time claims visibility on Part D. And in April 2024, as I mentioned earlier, we land within about $1 where we expected PMPM.

[Thomas Freeman, CFO at Alignment Healthcare]

And so moving into 2025, I do think it will be similar to years past, just less of a slope. And so as we said in our prepared remarks, I would expect that it would cause the first half to be slightly lower than prior years all else being equal and conversely would be a slight headwind to the second half of the year year over year.

[Analyst]

Okay. That's helpful. And just a quick follow-up on G and A. I think 4Q G and A came in a little bit higher than what was implied in guide and your 1Q guide implies about a 200 basis point Q over Q step down. Like can you give a little bit of color on what drove the slightly higher 4Q result and how we should think about quarterly G and A progression in 2025?

[Thomas Freeman, CFO at Alignment Healthcare]

Yes. I mean, I would say in general, you obviously have sort of a step up as a percentage of revenue kind of as the quarters progress, typically in the back half of the year, in particular, where you have a concentration of the sales and marketing spend. I think the fourth quarter for us was a combination of that normal dynamic including the timing of some of the sales and marketing dollars as well as the fact that we did ultimately meaningfully outperform relative to our membership expectations. So with that comes higher commission costs and certain other variable expenses that we have to continue to incur to support the incremental membership growth.

[Analyst]

Okay, perfect. Thank you.

[Thomas Freeman, CFO at Alignment Healthcare]

And I guess I know we've said in our prepared remarks, but worth noting again, I think in terms of sort of where we landed for the full year, I think our full year operating leverage improvement from '23 to '24 was about three thirty basis points year over year given that significant 59% membership growth. So I think our confidence and our ability to continue to control SG and A and kind of manage it relative to our membership growth in 2025 moving forward is quite high given the success of 2024.

[Operator]

Thank you. This is going to conclude our question and answer session. Ladies and gentlemen, this is also going to conclude today's conference call. Thank you for participating and you may now disconnect. Everyone have a great day.

Participants

Executives

• John Kao, Founder, President, CEO & Director
• Thomas Freeman, CFO

Analysts

• Scott Fidel, Managing Director at Stephens Inc
• Adam Ron, Analyst at Bank of America
• Michael Ha, Senior Research Analyst at Robert W. Baird & Co
• Matthew Gillmor, Director & Senior Research Aanalyst at KeyBanc Capital Markets
• Jessica Tassan, Senior Equity Research Analyst at Piper Sandler Companies
• Analyst