Agilon Health Inc Stock

Thank you. Hello everyone. Thank you for joining us and welcome to the Agilon Health second quarter 2026 earnings call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star one again. I will now hand the conference over to Evan Smith, Senior Vice President, Investor Relations. Evan, please go ahead.

Thank you, operator. Good afternoon and welcome to the call. With me are our CEO, Tim O'Rourke, and our CFO, Jeff Schwanake. Following our prepared remarks, we will conduct a Q&A session. Before we begin, I would like to remind you that our remarks and responses to questions may include forward-looking statements. Actual results may differ materially from those stated or implied by forward-looking statements due to risks and uncertainties associated with our business. These risks and uncertainties are discussed in our SEC filings. Please note that we assume no obligation to update any forward-looking statements.

Additionally, certain financial measures, which we will discuss in this call, are non-GAAP financial measures. Non-GAAP measures are supplemental and not a substitute for GAAP results. However, we believe that providing these non-GAAP measures helps investors gain a better and more complete understanding of our financial results and are consistent with how management views our financial results. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measures is available in the Earnings Press Release and Form 8-K filed with the SEC today.

And with that, let me turn the call over to Tim. Good afternoon, everyone, and thank you for joining us today. For those I have not yet had the opportunity to meet, I'm Tim O'Rourke. I joined Agilent as Chief Executive Officer in early May. Over the past 90 days, I have met with nearly all of our physician partners, shadowed PCPs, and have witnessed firsthand how we can help and continue to improve how they care for their patients. Their passion and caring reinforces our mission at Agilon, the proximity and durability of our physician partnerships and our absolute responsibility to support these physicians in their work across all of our communities. I have been engaged in good discussions with our payer partners and have engaged with the Agilon team.

I am listening, learning, and focusing on key areas to drive additional value for all of our stakeholders. I came to Agilon because I believe it sits at the center of where value-based care is going. By partnering with community-based primary care physicians and providing them with enhanced economics, technology, and clinical tools, we enable PCPs to focus on what they are trained to do, keeping patients healthy. To further our mission, Agilon continues to advance new clinical, quality, and AI initiatives that will build upon our historical success in delivering improved patient outcomes while reducing unnecessary medical costs. We believe our collaboration with and proximity to our PCP partners enables us to embed solutions and insights directly into their daily workflows, supporting improved patient care. In turn, our proximity and understanding of our patient populations place both Agilon and our PCP partners in what we believe is the best position to have meaningful impact on members' lives. Against that backdrop, I am pleased to report that Agilent exceeded our second quarter guidance across our key financial metrics.

We are also raising our full year 2026 guidance driven by three key components. Our performance in the second quarter, the improved medical cost trend we began to see in the first quarter, and a stronger than expected performance of our burden of on this program that reflects the quality and completeness of the care our physician partners are delivering. Our performance for the quarter reflects our disciplined operating approach and execution across our PCP network. With advances in our enhanced data pipeline, we continue to gain earlier insights to further improve both operational execution and support our PCP partners to drive improved patient outcomes through earlier identification, diagnosis, and intervention of high-risk conditions and gaps in care. With respect to medical cost trends, we are seeing early signs of moderation in macro cost trends as well, as the impact from systematic work at Agilon. Investments and execution in clinical and quality programs. Claims and clinical data power the model, helping us stratify high-risk patients more effectively, trigger real-time intervention sooner, and avoid unnecessary medical costs while improving outcomes and member satisfaction.

These are not short-term fixes. We believe these are structural changes to how care is delivered in our markets. But I don't want this call to be just about a strong quarter. I want to talk about what is happening inside Agilent that gives us confidence, not just in 2026, but in the future. We feel the results are evidence that our transformation efforts are gaining traction, our physician partnerships continue to strengthen, and our operating model is becoming increasingly resilient, scalable, and durable. At Agilon, our mission remains unchanged, empowering primary care physicians to transform health care for seniors. Everything we do begins and ends with supporting our physician partners in delivering better outcomes improve the patient experience, and reducing the total cost of care. As we look across our business today, we believe we are positioned to capitalize on the long-term shift toward value-based care.

Over the past year, the Agilon team has been highly focused on strengthening the fundamentals of our platform. Our transformation initiatives have centered on three priorities. First, driving greater clinical and operational performance across our markets through more consistent execution and deeper physician engagement. Second, enhancing our data, real-time insights, and risk management capabilities to improve both care delivery and financial predictability. Third, creating a more scalable operating model that allows us to support position groups with greater efficiency while maintaining the local market expertise that differentiates Agilent. We see measurable progress across each of these areas, contributing to stronger medical cost performance, improved care management effectiveness, and better alignment between operating discipline, clinical outcomes, and financial results. The underpinning of the model remains, providing our PCP partners with greater insights and tools embedded in the workflow at the point of care to reduce unnecessary medical costs while driving better patient outcomes.

To drive additional improvement, we will look to further reduce variability across our PCP network. implementing operating programs, and embedding technology to drive improved performance across the Agilent team and our PCP partner network by unlocking deeper insights and standardizing best practices at scale. A key element of this will be continued investment in AI tools to drive greater operational and clinical insights. creating more efficient workflow and improved member care, reducing administrative burden, and servicing evidence-based interventions so physicians can allocate their time to the highest acuity patient populations. We view AI not as a replacement for physicians, but as a force multiplier for primary care. We are also making significant progress in advancing evidence-based clinical pathways across our network. Through greater alignment around proven care protocols, we are improving consistency of care delivery while preserving physician autonomy. These pathways support better management of chronic disease, more appropriate specialty utilization, and ultimately better health outcomes for the populations we serve. The CHF program is deployed across 90% of our markets.

It is our most mature pathway, and as such, it serves as the clearest proof point for what these programs can deliver. As we have stated before as a result of the program, our inpatient first diagnosis rates within our network have improved from approximately 25% to less than 5%. These are the types of clinical outcomes that are possible when we more closely monitor closely linked payment and care delivery. We are also expanding our pharmacy integrated approach for heart failure patients as fewer than 10% of heart failure patients nationally are on the appropriate medications. We are working systematically to improve that rate for our population, which we expect to further reduce downstream complications and avoidable admissions. We are also moving decisively with our lung health and our dementia guideline directed programs with the dementia pathway expected to be rolled out to a number of our markets by the end of the year. And the continued expansion of the COPD program.

Our focus for both programs is on earlier identification, expanded screenings, and increased utilization of advanced diagnostics by our physician groups. of which is designed to drive earlier intervention, improve treatment adherence, and prevent avoidable complications in hospitalizations. Looking ahead, we also remain highly encouraged by the opportunities emerging in the next phase of the Value-Based Care ACO models. This is evidenced by our recently announced ACO REACH program results for the 2024 performance year, which found delivery of $229 million in gross savings and an average quality score of 96% across eight ACOs. We believe our continued strong performance in ACO REACH establishes a strong foundation as we move into 2027. For 2027, the Medicare Shared Savings Program and the Future ACO Lead Model represent important opportunities to further align incentives around quality, affordability, and patient-centered care. We are evaluating the best path forward for both existing and new ACO partners as we enter 2027, with the expectation for both to be positive contributors to our performance in the coming years. This quarter's results confirm that our strategy for delivering on our mission is working.

We've succeeded in our raising guidance. Our transformation is advancing. Our physician partnerships are deepening. And our investments in AI and technology are beginning to show the kind of clinical impact that justifies our conviction. Our competitive advantage is not a product feature nor a technology platform alone. is our proximity to the patient mediated through a trusted primary care physician partner who knows that patient, lives in that community, and has aligned economic interests in keeping that patient healthy. That is extraordinarily difficult to replicate. You cannot build it in a quarter. You build it over years through thousands of individual physician relationships and the trust that forms when a doctor sees that Agilent's model is successful in improving patient outcomes.

Those relationships create richer clinical insight, earlier intervention opportunities, stronger patient engagement, and ultimately better outcomes. We believe the future of value-based care will increasingly reward organizations that can combine sophisticated technology, actionable data, and local clinical relationships. We believe Agilon sits at the intersection of all three. We have more work to do. We are working to reduce physician and group performance variability. We are establishing and advancing clinical pathways for earlier high-risk patient identification and intervention in order to improve outcomes and quality, as well as overall cost. Markets are still maturing, capabilities are still improving, and there are patients whose outcomes we have not yet fully transformed.

I am confident Agilon is on the right path. And that path leads to a genuinely better health care system for the communities and patients we serve. I want to thank our physician partners, our employees, and our health plan partners for their continued commitment and collaboration. Your dedication is the foundation of our success and the reason we continue to make meaningful progress in our mission. With that, I'll turn the call over to Jeff to discuss our financial results and update Outlook in greater detail.

Thank you, Tim, and good afternoon. As Tim mentioned, we're pleased by our second quarter results, which exceeded the high end of our guidance for medical margin and adjusted EBITDA. The positive results and increase to our full year guidance were driven by better than expected performance in the diagnosis, assessment and treatment of our members in 2025. And favorable medical expense development for both 2025 and the 1st quarter of 2026. This combined with our enhanced data visibility and estimation process. provide confidence in the underlying performance of our business. I'll cover three things today. First, our strong second quarter financial performance. Second, an update on cost trends in the macro environment.

And finally, our increased full year 2026 outlook and third quarter guidance. First, let me highlight our second quarter performance. Medicare Advantage membership at the end of the second quarter was 437,000 members compared to 426,000 members at the end of Q1 2026 and 498,000 members in the second quarter of 2025. As a reminder, the year-over-year decline reflects our disciplined, profitability-focused approach to contracting in 2026 and measured approach to growth. ACO REACH membership for the second quarter was 112,000 members compared to 110,000 in Q1 2026 and 116,000 in the second quarter of 2025. As a reminder, a subset of our Medicare Advantage members remain in care coordination fee arrangements. These contracts are primarily net neutral to Agilon with an incentive opportunity based on quality and cost performance.

We continue to view these as a long-term risk-adjusted growth opportunity to potentially recontract these members to full risk when appropriate. Revenue for the second quarter was approximately $1.5 billion compared to $1.4 billion in the second quarter of 2025. The year-over-year increase reflects the membership decline I just mentioned, which was more than offset by more constructive rates for 2026 from the CMS benchmark, favorable payer contracting, and higher revenue associated with improved diagnosis of our members' health conditions. Our performance in the second quarter was driven by higher than expected revenue associated with the risk adjustment, which is now estimated at approximately 3% year-over-year net of the V28 impact. This is above our prior estimate of approximately 1.5% increase at the end of the first quarter. We continue to see the benefit of the enhanced data pipeline, which provided additional visibility from intracorder midyear risk adjustment data from payers, which is validated with midyear MA04 and MMR data. It also reflects the success of our Burden of Illness program, which serves as the foundation for our clinical and quality programs through the treatment of patients' comprehensive health conditions.

Moving on to medical expense. The cost trends from the second half of 2025 continue to develop favorably. This is supported by early signs of potential moderation in macro trends as mentioned in public commentary by the large MCOs. We also believe it reflects Agilon's ability to impact unnecessary medical costs as we continue to advance our clinical and and quality programs. The full year 2025 cost trend is now estimated at 5.8 percent down from the 6.2 percent we estimated when we reported our first quarter results. First quarter 2026 cost trends have developed favorably as well and are now in the low 6% range. In addition, while we have seen some moderation in cost trends, we recorded a second quarter cost trend in the low 7% range, which reflects our prudent reserving approach given the limited paid claims data we have at the end of any given quarter. Medical margin for the second quarter was $197 million, compared to negative $53 million in the second quarter of 2025. succeeded the midpoint of our second quarter guidance by approximately $74 million.

This This was driven by favorable prior year development of $22 million, the year-to-date impact from our revised risk score estimates of $38 million, and favorable first quarter cost trend development of $14 million. Adjusted EBITDA for the second quarter was $70 million compared to negative $83 million in the second quarter of 2025. This exceeded the midpoint of our second quarter guidance by approximately $50 million. This was driven by favorable prior year development of $22 million, the year-to-date impact from the increase in our revised estimate for risk adjustment of $20 million and favorable development of first quarter cost trends of $7 million. In addition, results include ACO REACH adjusted EBITDA contribution of $7 million, which was roughly in line with our Q2 guidance. On the balance sheet, we ended the quarter with $257 million in cash and marketable securities and $83 million of off-balance sheet cash held by our ACO entities. We continue to expect year-end 2026 cash of at least $125 million.

Now let me turn to our outlook. We are revising our full year 2026 guide to reflect the strength of the second quarter results, including better than expected revenue associated with higher estimated risk scores for the year and the second quarter performance. Using the midpoint of our guidance ranges for the full year 2026, we now expect revenue of approximately $5.8 billion, medical margin of approximately $485 million, and adjusted EBITDA of approximately $85 million. The increased full-year 2026 guidance reflects the year-to-date performance, prudent assumption for cost trends in a 7% range for the remainder of the year, and the positive impact for the second half of the year from the increase in our revenue associated with the better than expected risk adjustment estimate contribution to 3% net the V28 impact. also includes ACO, REACH, adjustity, but die between 25 and 30 million dollars. Our confidence is rooted in the same key tenants we have outlined throughout the year. operating execution across our clinical and quality programs, improved data visibility and forecasting from the enhanced data pipeline, They are contracting improvements that emphasize profitability for both medical margin and cash flow and a conservative cost trend assumption. Returning to the third quarter outlook, utilizing the midpoint of our guidance ranges, we expect revenue of approximately $1.46 billion, medical margin of approximately $110 million, and break-even adjusted EBITDA. close by saying we are encouraged by the continued progress across the business. The work our physician partners and employees are doing every day is showing up in our results, and we believe the foundation we're building supports durable, predictable performance into 2027 and beyond.

With that, operator, let's move to the Q&A portion of the call. We will now begin the question and answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device.

Please stand by while we compile the Q&A roster. Your first question comes from the line of Jack Slevin with Jefferies. Your line is open. Please go ahead.

Hey, good afternoon, guys. Congrats on the really strong results. I appreciate you taking the questions. Maybe just to start here, I just want to confirm it because the line cut a little. That PYD, the 22 million, that's the only item that would make the first half not reflective on the EBITDA line of sort of what we've seen in the first half as far as what we have both now in 1Q and 2Q. Is that a fair way to frame it?.

Yes, yes, that's a fair way to frame it, Jack. Just recall, we did have some favorable prior year development in the first quarter, but we offset that with additional accruals on Part D for 2025 dates of service. So you're right. On the six-month, the $22 million is really the only piece that's, I would say, included in EVA.

moved off from prior period. OK, I appreciate that and then to get to my real questions here. So, a little bit forward, but on the current year, you know, with the flat EBITDA and 3Q, the really strong first half performance, it obviously assumes a dip off in 4Q. I guess just balancing maybe to take a step back on sort of what you're thinking from a cost trend perspective. those back two quarters and and how that accounts for. You know, pulling back some of the exposure you had in year? Just just thinking about how a lot of the plans are calling out steeper seasonality, but Part D is the big driver in MA. So that's the question on the end year and then for next year we'd love to just get an update on what you've seen now that we sit here in August from early conversations with payers around 2027 bids and then.

any potential recontracting that might need to get done. Thanks. Yes, yes, so that's a lot there, Jack. But first, I'll get into the Part D. So one thing to remember for us is that we record Part D net in revenue. So it really doesn't impact seasonality like it does the payers. So as you think about our income statement, I would think about the way it was before the changes to Part D. So your highest earning quarters are in the first half.

Your lowest would be in the second half, right? that's the way I would frame it. The second piece, is really related to contracting. I would say it's, it's early. Um, you know, we don't have the bid detail yet. We ultimately get that bid detail in the third and late in the third quarter. And obviously we have to complete our contracts by the end of the year. Again, discussions with payers have been productive.

We're in continuous conversations with them. We believe that they recognize the value that we bring in quality cost of care and overall patient satisfaction. And as we think about contracting into next year, we're really focused on the same discipline approach, including profitability, gaining economic for the value we deliver and quality and improved outcomes and obviously continuing to reduce our exposure to Part D. And we're less than 15% of our book has Part D exposure now. We look to continue to further reduce that. And then just as a reminder, you know, we touched 80% of our contracts last year and 50% of them are open So again, it's early. We expect to hit full stride in the third quarter and get them all wrapped up by the end of the year.

the end of the year. Your next question comes from the line of Jalendra Singh with Truist Securities. Your line is open. Please go ahead.

Thank you and congrats on a strong quarter and thanks for taking my questions. So I want to talk about the 2026 medical margin guidance. Updated guidance clearly includes current year medical cost performance. I think we tabulate $36 million PYD year to date and that some changes around risk adjustment. about 2027 not looking for guidance but want to make sure we have right 2026 jump off point should we think of medical margin guide net of pyd a good starting point or are there other items we should be aware of as we think about the building blocks for for next year.

Yes, yes, sure, Jolinder. I can walk you through that. So first is on PYD, it's in the medical margin line, it's roughly $22 million. So it's both $22 million on the medical margin and $22 million on EBITDA, given our performance last year. So there's really 100% flow through on that because a lot of our partners were in negative positions last year. And so if there's improvement, we get 100% of that benefit coming into this year. So that's really the only thing in the six-month period that I would call out is in the medical.

margin line. So hopefully that helps you get to what I call the jumping off point. Okay. And then, Tim, thanks for sharing your first few months of experience and your focus area. company has seen some nice operational improvement over the past 12 months, but curious on how you think about the next phase for the company. Do you see the growth coming from existing markets and peer relationship? Or will your strategy be more get more opportunistic in terms of adding new physician markets? And related to that, what financial and operating thresholds would you want to see before committing meaningful capital to new market growth? Any color will be helpful.

I really appreciate the question. Thanks for that, and it's great to be here. look, as we kind of think about growth and the next phase of growth, we continue to remain focused on the execution and strengthening the foundation of our current markets. Those current markets have additional growth opportunities as we sit here today. Jeff talked a little bit earlier about care coordination fee contracts. Converting those into full risk is a growth opportunity that exists in our current markets today. We have the ability to reengage with our partners who we did not come to terms with, and our payer partners in 2026, and revisit those agreements. We have the ability to take a look at our ECO relationships with partners and look at those as new opportunities for the organization with both LEAD and MSSP. And then we also have historical agent opportunity in our current markets through the MA program and ACOs.

As respect to new markets, as we sit here today, we are going to remain measured and disciplined as we approach that new market opportunity. and continue to kind of assess those market conditions moving forward. I want to remind you of two things. First of all, the demand for our model is strong. the demand sits there today, we continue to get inbounds from potential new partners. And if you remember correctly, before we put a pause on growth, we were in conversation with several new partners. that we can reengage with at this point in time. A reminder, we have a pretty long implementation timeframe on new markets, I think 12 to 18 months. So we're really evaluating that new market growth as we look at 2028.

Your next question comes from the line of George Hill with Deutsche Bank. Your line is open. Please go ahead.

Yes, hi, it's Max Young for George. Thanks for taking the question. You talked about medical cost trend, trending favorable in the quarter. Could you provide a little bit more detail on what you're seeing across inpatient, outpatient, pharmacy and supplemental and expectations embedded in the guide? Thank you.

Yes, certainly. I think what we've seen is while the trends are still high, they're a little bit lower in inpatient and surgical and ER. And so we've seen that moderate a little bit. So while they're still high from a historical perspective, I think if you look year over year we're seeing trends come down a little bit in those categories, I think consistent with what other public payers have said. And then I think this circles back to Jack's question that I missed earlier here, but as we think about cost trend for the back half, what we've assumed in this guide is roughly 7% for Qs 2 and 3. And as a reminder, we recorded in the low 7% range also for Q2, 3, and 4, all roughly in the low 7% range.

Got it. Just a quick follow-up. I don't know if it's too early to discuss membership outlook for next year right now, but could you talk about the key puts and takes we should consider in modeling 2027 membership growth? Thank you.

Yes, yes, certainly. It is a little bit early, right? We're in the contracting process now with our payer partners. But I think, as Tim mentioned, we have an opportunity for growth with the care coordination fee members. So there's opportunity to potentially go to full risk there. Additionally, there's potential growth, just organic growth in our existing existing markets as well, certainly on the ACO side. I think Tim discussed that. So I think it's a little early, but there's certainly opportunity for us to increase membership, not through new partners, as we mentioned, but there's certainly opportunity there.

Your next question comes from the line of Ryan Langston with TD Cowen. Your line is open. Please go ahead.

Great, thanks. And the first quarter you had talked about a new risk contract that you had taken on. Can you maybe give us an update on how that particular new contract is progressing?.

Yes, yes, certainly. I think recall we budgeted that it roughly break even. I would say, you know, it's early. As you know, as we talked about, we don't have a lot of paid claims visibility for the second quarter. So really all we have is, you know, I'd say paid data for Q1, but it's in line with expectations and ultimately Ultimately, we just need a few more quarters under our belt to get a clear view.

Got it. And then on the enhanced data pipeline, can you just remind us how much of your membership is actually flowing through that? And if there's substantially more opportunity to enhance the performance of that pipeline? Thanks.

Yes, absolutely. So data pipelines above 80% of our payers are included in the data pipeline. I think I mentioned this in the past, but obviously we're starting with the largest payers and working our way down, working our way down. And so progress towards the end is a lot more number of payers, so it will go slower, but we're certainly looking to put more payers into the enhanced data pipeline. And so we've certainly made progress, and we'll update you as we go throughout the year.

Your next question comes from the line of Matt Shea with Needham. Your line is open. Please go ahead.

Hi, thanks for taking the question and congrats on the really nice quarter here. Maybe kind of piggybacking on the last question with the data pipelines, obviously member risk or uplift was a nice improvement in the quarter. Anything to call out in terms of conditions driving this, just thinking as you better identify conditions and properly risk adjust, how that potentially aligns with your current clinical pathway programs. And then just in conjunction In conjunction with that, how much of this 3% do you view as something that is potentially repeatable versus just a one-time catch-up as the data pipeline matures?.

Yes, thanks for the question, Matt. You know, you're right, results were better than expected, really driven by the rollout and execution on our clinical programs in 2025. So the programs were ramping throughout 2025, so the results were back in loaded. We did have some indication that we were performing well, which is why we increased our risk adjustment estimate in the first quarter. With additional claims run out in the midyear data, we now expect that increase to be roughly 3%. The important piece is that our members are now receiving the care that they need sooner. As you think about 2027, given the rollout of our programs last year, we would still expect RAF to be a net positive contributor on a net basis next year, but probably not to the level we are experiencing this year.

Tim, anything to add on that? The only thing I'd add is just a reminder of the clinical pathway work that we do. CHF is a great example. As we identify these diagnoses earlier, we're able to create the right intervention for the patient and help support that physician. Again, a great example of that is CHF. heart failure diagnosis and the inpatient setting. talked in the opening remarks, for our population dropped from 25% to under 5%. So again, a great opportunity for us to identify with the physician conditions for that patient sooner, drive an earlier intervention, and keep them out of the hospital in the ER.

Okay, appreciate that. And then maybe continuing on the clinical pathways thread, I think last quarter you had talked about targeting COPD and dementia pathways in 50 to 70% of markets by the end of Q2. Just curious if you hit that, and then are you seeing any early claims-based benefit yet? still be too early, so maybe still kind of a back half of the year 2027 event, but curious on your thinking there. And then as we think about the evolution of those clinical pathways, any new programs you're starting to contemplate, areas you're starting to build out, or any kind of initiatives that we should maybe be aware of?.

Yes, appreciate the question. This is Tim. I'll start and then hand it to Jeff. I think you're right, we continue to look at clinical pathways as really a continued opportunity to identify those chronic conditions early, help identify those patients for physicians, create those interventions and help them with that identification at the point of care in their workflow and help them with early treatment. To your point. Our next focus after CHF continues to be dementia and COPD. We're working through our markets in terms of the deployment of those pathways. We'll continue to progress with those as we kind of finish out the rest of the year. And if you take a look at our focus, I would say those are the three clinical pathways we're focused on as we run out the rest of 2026.

Jeff, anything to add?.

Yes, no, I think certainly there's opportunity there that we see, but, you know, I'd stick with my previous comment that, you know, I think we expect it to be a positive next year, but obviously not to the level this year.

Your next question comes from the line of Andrew Mock with Barclays. Your line is open. Please go ahead.

Hi. What is the follow-up on the guidance raise? I think you beat the 2Q guide by $57 million and raised the full year guide by $60 million. the 2Q beat was related to the higher risk adjustment revenue. Is that isolated to the quarter or is that going to flow through for the balance of the year? And if so, would that contribute to the raise in the guidance? Thanks.

Yes, so maybe I can take a second and kind of walk you through the bridge for the guide. So you're right, the Q2 performance compared to our previous midpoint, the previous guide midpoint was roughly 50 million ahead. And so you have Q2 performance, and then you're right, the risk adjustment, there is a second half impact. So I would call that roughly $19 million at the EBITDA line. for an impact on the rest of the year for the improvement in risk scores. And then that's offset a little bit by incentive compensation and incremental annual wellness visit dollars. So obviously with the performance of the company, there's additional incentive compensation costs. And that kind of brings you down to roughly the new mid of $85 million.

So I hope that helps. Got it. That's helpful. And then maybe just a follow-up on the trend commentary. The favorability you called out in the quarter, was that what you observed in 2Q, or was that related to the 1Q trend revision that you recorded in the second quarter results, and any color on trend,.

going from 6% to 7% would be helpful. Thanks. Yes, yes. There's a couple of pieces. First, we saw improvement in 2025. So recall we had 2025 and at the end of the first quarter, roughly 6.2% cost trend. That's now at 5.8. So we had favorable development from 2025 dates of service. And then Q1, we initially recorded at 7.4% and that's now in the low sixes. And so there's favorability there as well.

And again, as I mentioned before, we really have limited paid claim data for Q2, and so we felt it prudent to record a cost trend in the low 7% range.

Your next question comes from the line of Michael Ha with Baird. Your line is open. Please go ahead.

Thank you. And just another one on medical cost trends. In terms of monthly progression through second quarter, you know, now trends are getting into that 6% area. Was the degree of favorability relatively consistent throughout the quarter? Do you see any moderation as you move into June? And then on trend more broadly, broadly you talked about like the macro backdrop improving. Are there any distinct like macro factors that you think might be pretty notable? For example, for some patient, are you seeing better unit costs maybe from moderating provider coding intensity, anything to call out there? Thank you.

Yes, Michael, thanks for the question. As I mentioned before, we really have limited paid claims visibility for Q2, and so not much to say on the specifics there. And additionally, I think as you look at months, right, you have to adjust for day count, et cetera, et cetera. It's kind of hard to look at It cost trends on a monthly basis is what I would say. So, really nothing more to add from that perspective. And on the cost trends, I think we mentioned earlier, the moderation and really inpatient and ER. still high trends from a historical perspective, but certainly lower than they have been last year.

just had Jeff on top of the macro trends. Michael, remember our clinical programs, our data, our interventions, we're actually starting to see the impact of that as well in our markets as we move forward. So again, that early identification, input into the physician workflow at the point of care. the intervention and treatment on an earlier basis. We're starting to see that pull through as well in our business.

Got it. Thank you. And one more question, just more higher level question into 27. When I think about the past into 27, I think last quarter you mentioned final rate notice about 5.3% starting point across your markets trend. and you're still assuming 7% in the back half of the year. I was wondering if you could bridge us from that starting point to potential margin recovery. Should we be thinking about it like, okay, you add on another one to two points in coding improvement, another one to two points of plan pricing benefit design, all that is before cohort maturation, like trend initiatives, as that being like potentially sufficient to drive revenue PMPM growth above trend? Or are there other missing components in that framework?.

Yes, Michael, it is a little early for 2027, but I would just think broadly about the value creation levers that you've heard us talk about in the past. I think I've given you kind of a range on the net impact of risk adjustment. And then, you know, I think that's a good place to start, but it's early for us to really get too far ahead on 2027.

Your next question comes from the line of Daniel Grossleit with CITI. Your line is open. Please go ahead.

Hey, this is Luis on for Daniel and congrats on the core and thank you. Thank you for taking my question. I'll ask you another one on clinical programs. I know in 2025, you said, I think it's 20. $25 million benefit from the clinical programs, which I think was largely from the Alley of Care program. And I know you sound like a decent amount of this call talking about wrapping up other programs. And my question is how much of the medical margin of proven and guidance this year is driven by the continued wrapping of clinical programs. And just trying to parse out what is really just more macro benefits versus more the using product.

Yes, yes, sorry you cut out there at the end. But I think I have the question. The $25 million that you're talking about, that was really in 2025 related to our quality. our quality program. So the payers incentivize us to perform in quality and we had $25 million of opportunity for 2025. What we've said in the past is that opportunity has doubled. I think the importance of quality has obviously increased for payers, and so there's more dollars on the table for us to earn. What we have in this guide is a consistent level of performance from 25 to 26.

So although we're striving to improve our performance and quality, as far as guidance purposes are concerned, it's an equal level of performance from 25 to 26. So I hope that clarifies the number.

Understood. Thank you. There are no further questions at this time. I will now turn the call back to Tim O'Rourke for closing remarks.

Well, I want to thank everyone for joining us and for all the questions here today. heard us discuss, we continue to stay focused on driving improved performance, executing it across our operations, and really delivering value to our partners. patients and our shareholders. I wanna thank all of our employees and partners for their continued dedication and collaboration to Agilent's mission as we continue to strengthen our model and relationships together.

Have a great night and we'll talk soon. This concludes today's call. Thank you for attending. You may now disconnect.

This live transcript is auto-generated without human intervention or review.

[Call has ended.]

Hello, everyone. Thank you for joining us, and welcome to agilon health First Quarter 2026 Earnings Call. After today's prepared remarks, we will host a question-and-answer session. [Operator Instructions]

I will now hand the conference over to Evan Smith, Senior Vice President, Investor Relations. Please go ahead.

Thank you, operator. Good afternoon, and welcome to the call. With me are Executive Chairman, Ron Williams; and our CFO, Jeff Schwaneke. Following our prepared remarks, we will conduct a Q&A session.

Before we begin, I would like to remind you that our remarks and responses to questions may include forward-looking statements. Actual results may differ materially from those stated or implied by forward-looking statements due to risks and uncertainties associated with our business. These risks and uncertainties are discussed in our SEC filings. Please note that we assume no obligation to update any forward-looking statements.

Additionally, certain financial measures we will discuss in this call are non-GAAP financial measures. Non-GAAP measures are supplemental and not substitute for GAAP results. However, we believe that providing these non-GAAP measures helps investors gain a better and more complete understanding of our financial results and are consistent with how management views our financial results. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measures is available in the earnings press release and Form 8-K filed with the SEC today.

And with that, let me turn the call over to Ron.

Thank you, Evan, and good afternoon, everyone. In 2026, we remain focused on disciplined execution and building a durable foundation for sustainable long-term performance. We are advancing the same strategy and mission, empowering best-in-class physicians through long-term partnerships to deliver high-quality, cost-effective patient care that delivers value for all of our stakeholders.

In 2025, we made meaningful progress across all of our initiatives, which has translated into strong first quarter performance and increased expectations for our full year 2026 outlook. As we announced last week, we are excited to welcome Tim O'Rourke as our new CEO beginning tomorrow, May 7. Tim brings significant experience across the payer and provider space with a deep understanding of what is needed to succeed in value-based care. Tim is fully committed to furthering our mission and strategy to continue driving improvement in agilon's performance for all of our stakeholders.

In the first quarter, we delivered results that were above our expectations. Our performance demonstrates operational discipline, the strength of our long-term physician partnerships, and early benefits from the strategic decisions we made last year. Operationally, we are building upon several key initiatives you've heard me discuss before, the enhanced data pipeline and improved actuarial visibility enabling earlier identification and validation of trends, continued advancement of our clinical and quality programs with our congestive heart failure program now scaled broadly across the network, and ongoing execution of disciplined payer contracting and operating expense optimization focused on profitability and sustainability. Each of these efforts are designed to improve predictability and alignment with our physician partners, reduce variability, and support durable margin expansion over time.

With the enhanced data pipeline, we now have more timely direct payer data feeds with validated and highly correlated member level clinical and claims data as well as member level risk scores on approximately 85% of our members. The increased visibility and alignment of our financial and operational data enable us to more quickly identify and drive improvements. As Jeff will discuss in more detail, this has enabled us to increase our revenue and adjusted EBITDA expectations in part due to better progress on the validation of our burden of illness initiatives.

Going forward, we will continue to enhance the data pipeline to support clinically actionable insights as well as improved network design and care model innovation. In combination with our physician reviewers, we are integrating generative AI-based insights directly into clinical workflows to drive more informed physician decision-making at the point of care, and we are seeing encouraging results. This capability is helping physicians intervene at the most appropriate points of care earlier.

We are continuing to increase our focus on high-risk patients, an increasingly important focus for all constituents in the Medicare space. We have grown the richness of our member level data and are now aligning it better with PCP actions. This is helping physicians improve the quality of their intervention with higher-risk patients, identifying gaps in care, and leveraging industry standard guideline-directed clinical pathways.

Greater access to timely and high integrity data has also improved the quality of our forecasting as demonstrated in the ongoing development of our 2025 cost trends. We have favorable medical cost trend development from the second half of 2025 and are seeing slight moderation within patient census so far in 2026. With that said, given it is early in the year, we believe it remains prudent to maintain our net cost trend outlook of approximately 7% for full year 2026.

Our full risk Total Care Model is delivering clinical and quality outcomes and driving strong patient and PCP Net Promoter Scores while demonstrating the ability to effectively manage utilization and medical cost trend.

Next, let me discuss clinical and quality programs, focusing primarily on our clinical execution, which is a core driver for our model. As a reminder, the congestive heart failure or CHF program remains the most mature pathway deployed across 90% of our markets. Let me start with why this program is important to patients. Approximately 40% to 50% of patients nationally are diagnosed at the time of first admission to the hospital. That means missed opportunities for earlier detection, leading to less-than-ideal care and unnecessary hospital costs.

The second thing we know about heart failure is that less than 10% of patients are actually on the right therapies. Through a proactive and guideline-directed approach, our physician partners have been able to shift CHF diagnosis to earlier in the care continuum, with inpatient first diagnosis rates improving from approximately 25% to less than 5%. So less than 5% of heart failure diagnoses are now in the inpatient setting.

Additionally, we are expanding our pharmacy integrated management approach for heart failure patients across the network and observing positive trends in guideline-directed therapy rates, which we expect to improve functional outcomes for patients and prevent downstream complications of disease that lead to admissions.

Current results reflect the combination of our early detection and diagnosis supported by in-office or increased access to diagnostics, structured and physician-supported clinical protocols and ongoing patient engagement, including virtual pharmacy support. These pathways are increasingly informed by AI-driven risk stratification and early detection models, enabling more proactive intervention with this high-risk population.

We plan to utilize this evidence-based approach by rapidly scaling COPD and broader lung health pathways through 2026. The initial focus for these programs will be earlier identification of COPD, expanded lung cancer screenings and increased use of advanced diagnostics by our physician groups, each of which is designed to drive earlier intervention, improve treatment adherence or prevent avoidable complications and hospitalizations.

In addition, we are seeing good engagement as we continue to roll out the dementia program in conjunction with our physician partners. Increased health care costs and the burden on caregivers is being driven by the approximately 50% of dementia patients across the broad population that go undiagnosed, increasing both health care costs and the burden on caregivers. We are working with partners to deploy enhanced caregiver models, structured early-stage pathways and virtual diagnostics.

Moving to our quality and stars performance. agilon stars' performance is a result of a highly integrated quality operating model that combines data infrastructure, physician engagement and payer alignment. Operationally, quality performance starts with our ability to identify care gaps early and deliver actionable insights directly to our physician partners. Because we are working closely with our physician partners, quality measures are embedded into their everyday clinical workflows. Our partners and their care teams have clear visibility into their performance and the actions needed to efficiently close care gaps for their patients.

Looking ahead, we expect to see continued opportunity to expand our performance through deeper data integration and earlier intervention, leveraging analytics to identify patients at risk of missing key quality measures earlier in the measurement year. Ultimately, our approach is about building durable infrastructure that supports physicians in delivering high-quality care that is aligned with the key objectives of the Medicare Advantage program while ensuring performance is accurately measured and rewarded.

Now let me move on to ACO REACH. As evidenced in the quarter's results, we continue to demonstrate the strength of our model and the ability to deliver superior performance across both Medicare fee-for-service programs and Medicare Advantage. In addition, we are pleased that CMS took a pragmatic approach to addressing fraudulent claims related to urinary catheter and suspect skin substitute claims for 2025.

Finally, we have finalized 2026 payer contracts, which Jeff will discuss in a moment. We are beginning our 2027 payer contracting process where we plan to take the same disciplined and partnership-oriented approach with our payers, focused on shared profitability and durable margin expansion.

In closing, we have had a strong start to 2026 and feel good about the progress we are making. We are seeing it across all areas that matter: Payer contract, burden of illness, clinical and quality initiatives and cost discipline. First, the work we have done with our physician partners around burden of illness initiatives and clinical pathways is starting to show up more clearly in our clinical results and financial performance.

Second, our AI-enabled technology platform and enhanced data capabilities deployed in very close proximity to the physician are allowing us to identify opportunities earlier, act faster, and manage performance with greater precision. We are beginning to see the benefits of AI more deeply into both physician and operational workflows.

Third, the discipline we applied, particularly around payer contracting and cost structure is starting to come through.

We are raising our outlook for financial performance this year due to the early impact of these initiatives and remain confident in the long-term strength of our unique partnership model.

With that, I will turn the call over to Jeff to go through the financials.

Thank you, Ron, and good afternoon. As Ron mentioned, we are very pleased that we exceeded our guidance for the first quarter and are increasing our expectations for the full year. The positive results and increase to our full year guidance were driven by the strategic actions we took throughout 2025 and the continued strong work of our physician partners across the country. These include the significant improvement in our data visibility and estimation process, execution of our clinical and quality programs across our network, cost management, and disciplined payer contracting, all of which were focused on improving our operations and creating a strong foundation for durable and predictable performance this year and beyond.

During our call today, I will cover 3 key areas of our financials. First, I will discuss our financial performance for the first quarter. Second, I will provide an update on cost and macroeconomic trends, including the recently announced final rate notice for 2027. And finally, I will discuss our second quarter and revised full year 2026 outlook, along with key assumptions we have made.

Moving to our financial performance for the first quarter of 2026. We exceeded the top end of our guidance range for total revenue, medical margin, and adjusted EBITDA. The performance in the quarter was driven by higher-than-expected revenue from risk adjustment and additional full risk contract with a new payer in an existing market and strong performance in ACO REACH.

Starting with membership. Medicare Advantage membership at the end of the quarter was 426,000 compared to 491,000 in Q1 2025. Our ACO REACH membership for Q1 was 110,000 members compared to 114,000 in the same period of 2025. As a reminder, Medicare Advantage membership was affected by our measured approach to growth, previously disclosed market exits, which were finalized as of January 1, 2026, and payer exits in certain markets, which were a result of our disciplined and profitability-focused contracting efforts. Additionally, a subset of our members are under care coordination fees. These contracts are primarily net neutral to agilon health with financial opportunity based upon strong quality and cost performance.

Next, revenue for the first quarter was approximately $1.42 billion compared to $1.53 billion in the same period of 2025. Our year-over-year revenue decrease is driven by the membership decline I just mentioned, partially offset by more constructive rates for 2026 from both the CMS benchmark and favorable payer contracting benefits as well as increased revenue from higher estimated risk scores from our previous expectations.

Revenue for the first quarter was higher than our expectations, driven by the execution of an additional full risk contract in an existing market and the estimated benefit of higher-than-expected risk scores. Using the enhanced data pipeline for a meaningful portion of our membership, we calculated member level risk scores for the mid-year data period. This enhanced data is based on claims data as well as MAO4 and MMR data that our payer partners receive from CMS. These data files are both claims and plan submitted encounters that are accepted for risk adjustment. As a reminder, we did not have this increased visibility into member level clinical and claims data as well as member level risk scores until the pipeline went live at the end of the first quarter of 2025.

Our revised estimate for the increase in risk scores over 2025 for the full year is now 1.5%, which is above our previous estimate of 0.4% for the full year 2026, both net of the V28 impact. This was driven by the improvement in our data and forecasting capabilities as well as the operational process improvements we put in place over the past 18 months.

Moving on to medical expense. The cost trends for the second half of 2025 continue to develop favorably, further demonstrating our ability to effectively manage medical costs. The full year 2025 cost trend is now estimated at 6.2%, down from the 6.5% we estimated when we reported our 2025 full year results. The favorable development for 2025 medical expense was offset by additional reserves related to Part D costs for 2025, which, as a reminder, are recorded net in premium revenue. Given the lack of data for 2025 Part D costs, we continue to take a prudent approach to Part D reserving as we won't get final reconciliations of the cost typically until the third quarter of this year.

Given we have limited paid claims visibility for the first quarter of 2026, we recorded a cost trend of 7.4% for the quarter. I would note that based on our census data, cost trends remain in line with what has been mentioned nationally by our payer partners and others. However, given our limited paid claims visibility early in the year, we took what we believe is a conservative approach in the quarter.

Medical margin for the first quarter was $149 million compared to $128 million in the first quarter of 2025, which exceeded the high end of guidance. This was driven by higher revenue, as I previously discussed, and lower overall medical expenses in the quarter.

ACO REACH adjusted EBITDA for the first quarter was $27 million and ahead of our expectations by approximately $5 million. The favorable performance was primarily driven by CMS' removal of fraudulent urinary catheter and suspect skin substitute costs from our 2025 performance and the corresponding benchmark changes. Adjusted EBITDA was $54 million as compared to $21 million in the same period of the prior year. The favorable overall performance reflects higher medical margin, OpEx discipline, and the favorable ACO REACH performance I previously highlighted.

As Ron mentioned, ACO REACH results underscore our confidence in our model and the potential for driving continued value creation as we look forward to the advancement of both the MSSP and CMS lead model in 2027.

On the balance sheet, we ended the quarter with $303 million in cash and marketable securities and $47 million of off-balance sheet cash held by our ACO entities. Year-end cash position is still expected to be at least $125 million. Last, we executed a reverse stock split at the end of the quarter. Additional details can be found on our Investor website.

Now moving to guidance. We are revising our full year 2026 guide to reflect the strength of the first quarter results, including better-than-expected revenue associated with higher estimated risk scores for the year and the first quarter performance in ACO REACH. In addition, as previously mentioned, it also includes a new full risk contract signed in Q1 2026 in an existing market with a new payer.

Our confidence remains rooted in the same key tenets we have previously outlined, including operating execution across clinical and quality programs, improved data visibility and forecasting capabilities related to the enhanced data pipeline, payer contracting improvements, which emphasize profitability for both medical margin and cash flow and a conservative cost trend assumption supported by factors previously mentioned.

Utilizing the midpoint of guidance ranges provided within our earnings release, we now expect revenue of approximately $5.7 billion, medical margin of approximately $375 million in 2026 and adjusted EBITDA of approximately $25 million. As I indicated, while the second half of 2025 saw favorable claims development, we continue to be prudent in our reserving and are maintaining our full year net cost trend outlook of 7%. Focusing on the second quarter and utilizing the midpoint of guidance ranges, we expect revenue of $1.45 billion, medical margin of $123 million and adjusted EBITDA of $20 million.

I will close by saying that we are very pleased with our first quarter's performance, including delivering strong positive adjusted EBITDA. The enhanced data and reserving model is improving our visibility to claims and revenue trends. We have executed on our strategic transformation and continue to drive improved performance across all aspects of the business.

As Ron mentioned, we also remain optimistic about our runway for continued improvement beyond 2026 based on the continued execution across our initiatives and the final 2027 rate notice. With respect to the final rate notice for 2027, we believe our starting point across our markets is in line with the 5.33% effective growth rate CMS noted with additional opportunities based on our BOI, quality, and contracting efforts. Based on our model and review across the business, we believe we have minimal exposure to unlinked chart reviews and with respect to the 1.12% normalization factor, I will remind everyone that we have been able to more than offset the V28 hurdle over the past couple of years.

Further supporting our potential will be continued discipline around payer contracting, implementation of programs to lower overall medical costs, and further driving operating efficiencies. The team will remain focused on minimizing risk related to Part D, emphasizing our quality initiatives, and balancing payer priorities with our own profitability.

And last, we believe CMS continues to demonstrate their support for full risk value-based care models focused on clinical and quality programs that drive improved outcomes, reduce costs, and enhance member satisfaction. And therefore, we remain optimistic about the potential for agilon.

With that, operator, let's move to the Q&A portion of the call.

[Operator Instructions] Your first question comes from the line of Jailendra Singh with Truist Securities.

I want to ask about ACO REACH EBITDA, kind of nice number there, $26.5 million. But you guys are maintaining the guidance for full year is $25 million to $30 million now for the full year. Why are you guys not expecting any further contribution for that business for the rest of the year?

Yes. Thanks, Jailendra. The real -- the $5 million benefit that we saw, we just really increased that in the guide for the year for the REACH program, but the $5 million benefit that we saw in the quarter was really related to 2025 performance, and it was associated with the suspect skin substitutes and the urinary catheters. And so CMS decided to back those out of the costs for 2025, and so we got a pickup there. And so that's really what you're seeing. And it's a little early in the year for us to think about, I would say, REACH performance and adjusting that at this point in time, right?

And then my follow-up, you guys talked about AI helping you to capture some more efficiencies in the provider operational workflow and admin stuff there. The efficiencies you're seeing, the gains you're seeing right now, should we think of those like incremental to the OpEx benefit of $35 million you guys have talked about for 2026? Or is that already reflected in your guidance? Just trying to understand the opportunity there.

Yes. Two things. I would say, I would bifurcate the AI programs. One is OpEx efficiencies. The other one would probably impact more of, I would say, above the line, right? So more of medical costs and revenue. So we mentioned the AI-driven risk stratification. I mean that's really looking at medical costs, we use AI in our suspecting algorithms as well. So that's on the revenue side.

And so I guess what I would say is probably limited early impact on the OpEx line, more significant on both the revenue and medical cost line. And as you know, we operate in an environment where you're working on things today, but the value shows up much, much later in the health care environment, right?

Your next question comes from the line of Matthew Shea with Needham.

Nice to hear about the scaling clinical programs. I guess maybe I just want to put some finer points around those. I think at a conference a couple of months ago, you guys have talked about that by the end of Q2, you had expected to get 50% to 70% plus of markets live on dementia and COPD pathways. Is that still the right way to think about the rollout?

And then on the financial side, could you remind us how long it takes to generate outcomes from these programs? Like does scaling COPD and dementia add benefit to 2026 profitability? Or should we look at that as more of a 2027 benefit?

Yes. I would say, yes, on the COPD and dementia rollout. And yes, again, on your second question of would it add value to 2026? However, it has to show up in the claims. And obviously, that takes time, right? But I would say, yes. And scaling, if you think about, we initiated the heart failure program a year ago. It's our most mature program, and we are obviously seeing the benefit of that today. And I think in the prepared remarks, you heard a lot of statistics about how it's really improving the lives of our members. And so we have seen the outcomes of that. And I think we're pretty excited about rolling out the other programs and continuing to focus on other clinical programs as we think about member care going forward.

Yes. Probably the only comment I would make is how our physicians feel about being actively engaged in these clinical pathways. They see this as really part of the reason they went to medical school was to help improve the quality of people's lives. And the ability to earlier identify these conditions to get people on the right therapies, not only avoid perhaps unnecessary hospitalization, but most importantly, improves the lives of the patients. And they really feel very positive about that.

And then maybe to follow-up on that point about provider engagement and working with them. A couple of months ago, you guys have been vocal about maybe some governance changes and that at a physician group level, you're being more aggressive in terms of how you manage networks and sort of going market by market and tightening up that governance. Would love to just have you guys maybe unpack that a little bit. What ultimately are you doing or implementing? And any way to think about what sort of inning we're in with that tightening of the governance and when we might start to see some results from that?

Thank you, Matthew. I think the focus we've had is really working with the payers and basically saying to our payers that we're not going to pay them for the privilege of doing business with them, that our physicians are doing a great job of improving quality, which is reflected in the stars rating that we've often talked about. Our focus has really been working collaboratively with the physicians to articulate to the payer community the value that we can create for them, the value we can create for their patients. So it really hasn't been about the governance of the groups themselves. It's about how we work together to participate and actively develop the kind of contractual negotiating results we've seen this year.

Your next question comes from the line of George Hill with Deutsche Bank.

Just, Jeff, I was wondering if you could talk about your conversations with your ACO REACH clients' customers right now about how they're thinking about the lead program for next year? Like are you expecting to see the same level of participation? Do you guys expect that your economics are going to look the same? And kind of would just be very -- given the contribution that ACO REACH has made to the business, I'd be interested to hear how those conversations are going or standing going forward.

Yes. Yes. I mean, obviously, the details of the lead program just came out. So we're in the process of, I would say, analyzing all that information and really determining which path is best from either a lead or MSSP program. I think the good news for us is that we participated in MSSP and obviously, the REACH program and have been very successful. And so I guess as we think about it, we think we can be successful in both programs moving forward, and they will be positive contributors to our financial performance in 2027 and beyond. So it's a little early, but we're certainly having conversations, and we're running all the calculations to figure out which path is best to go down.

And Jeff, if I can have a quick follow-up. I guess just as you think about kind of the improvement in the guidance in fiscal '26, just from talking to some of the plans, do you feel like the results in fiscal '26 are something that can be built on for 2027? Or what I'm worrying about is to what degree do you think the business faces a reset as you go into contracting for '27 and bids for '27 -- membership bids for '27? Just interested in how you're thinking about sustainability.

Yeah. No, I would certainly say it's a foundation that can be built on. I mean that's what we've been focused on over the last 18 months is really driving towards profitability. We will take that same lens as we think about contract negotiations for 2027, which we are in active discussions at this point in time for all the reasons that Ron just previously mentioned. So I do think it's a solid foundation for us to build off of.

Your next question comes from the line of Stephen Baxter with Wells Fargo.

I just wanted to make sure that we understand all the sources of medical margin upside in the quarter versus your guidance. I think you sized the full year expected benefit from the higher risk scores at the 1% level. I think that on a quarterly basis is something like $14 million or $15 million of additional medical margin. When we look at the balance of the peak, which I think was closer to $35 million, again, trying to make sure we have all the pieces there. I guess you had a benefit from PYD, but you're also saying your booking cost trend to guidance levels versus kind of modeling any kind of improvement. So yes, first, maybe we could clarify that. And then I have a question as a follow-up.

Yes. Maybe I'll start with just for Q1, bridging you to maybe the guide mid for a medical margin perspective. So the variance is roughly $26 million compared to the guide mid, and there's a couple of things in there. You're right, the risk adjustment update. Think of that as $50 million for the full year. Obviously, we would get half of that. And so there's a piece that's associated with the risk adjustment update. And then we mentioned the new contract. So the new contract, although it has -- I would say, we've modeled it as breakeven margin for the year, obviously, Q1, if you lay out the seasonality of our business, there would be margin on that contract in the first quarter. So those are the 2 things that are impacting medical margin in Q1 as you think about the midpoint of the guidance we previously provided.

And then just in terms of the 2027 payer contracting objectives, I would love to just hear a little bit more of an expansion of like what are the things that have sort of been fully accomplished in terms of what you're able to do for 2026? I'm thinking like it sounds like Part D risk is something you've made a lot of progress on, but maybe things like percentage of premium are more of an opportunity prospective. I guess how would you kind of characterize the opportunity set on payer contracting versus what you've been able to do so far?

Yes, certainly. I don't think our perspective has changed as far as the items that we are seeking. You're right, percent of premium is obviously one of the ones at the top of the list. Continued reduction of Part D exposure, we were very successful over the last couple of years. This year, less than 15% exposure on Part D. We'd certainly like to see that go down even more. But we have reduced the magnitude of the risk to where it's manageable. But certainly, we are -- that is on the list.

The other thing is capture corridors or carving out things that are outside of our control like supplemental benefits. But all of those same levers that we were talking about a year ago are the same things that we're focused on for 2027. And again, I think it's just early in our contracting cycle. We're having very productive conversations with the payers. They're very supportive of our model. And so we'll have to play that out as the year goes on.

Your next question comes from the line of Daniel Grosslight with Citigroup.

Hello, this is Luis on for Daniel. You said last quarter that there was $15 million of new geography entry expenses. I know some of those are for current providers, but you also said that some would be -- some of that guidance is embedded for new possible investments for additional growth. Can you provide an update on that, if possible?

Yes. Yes. I think you maybe talking the geo entry that was in the guide maybe for the full year. I think that's what you're talking about. I would say those costs are just generally in line with what we expected in the first quarter. Nothing really out of the ordinary there.

And one more follow-up for me is, are you able to break up the 7.4% cost trend embedded in guidance? Is there any particular categories that are expected to drive much of that? And what would give you comfort to revise that down maybe for?

Say that again, that first part, you kind of cut out there.

Sorry. Are you able to break out the 7.4% cost trend embedded in guidance? Like, I mean, are there any particular categories that are expected to drive like much of that trend?

Yes. I would say the 7.4% was just to clarify, that's what we recorded in the first quarter. For the full year, our guidance is 7% net. And we have limited paid claims visibility as we sit here today in the first quarter. But what we do have, I would say, continues the theme of Part B, Part D escalated Part B costs and inpatient costs. That's where we continue to see the cost escalation. That's been a common theme over the last year. So it's, I would say, consistent. But again, we're setting on limited data here for the first quarter.

Your next question comes from the line of Amir Farahani with Evercore.

You previously discussed roughly 50 bps of tailwind from improved payer bids. I guess how is that tracking year-to-date? And also with the '27 bidding season around the corner, I would love to hear what you guys are hearing from your payer partners in terms of benefit design, premiums, et cetera. And I would appreciate your view on how that's translating into potential impact for next year.

Yes. Maybe I'll do the payer part. The messages that we're hearing in their communications is continuing to have a very strong focus on margin improvement. And so we would expect that their bids, their product positioning, everything is about restoring themselves to what they view as a reasonable level of margin, which we think is good for us.

Yes. And the second piece you talked about was the benefit of the payer contracting. I think the number we quoted in the initial guide was roughly $127 million for the full year. And when we talked about that on the guide, that was done. Those contracts were executed. So that benefit is absolutely flowing through in the first quarter.

In terms of the -- maybe one follow-up question on the group MA mix, maybe you can give an update in terms of where that stands today. We've heard from several payers that have flagged that there is recovery in the MA margin in the group business in '26. I guess are you seeing structurally better economics in your book? And is that upside captured in the guide?

Yes. I guess what I'd say, our group mix roughly hasn't changed from last year, very consistent. And obviously, when we think about negotiations with payer contracts, it's all members. And so the number that we quoted in our initial guide would be inclusive of that.

Your next question comes from the line of Jack Slevin with Jefferies.

Congrats on the quarter. Maybe to start, just to clean up a little bit of what I heard as far as that upside in the quarter, maybe piggybacking on Stephen's comment or question, just to be super clear, there was no PYD that you recognized in the first quarter. Is that the way to understand it? And maybe to add on that, just heard about the favorable development. Would love to hear a little bit about what that may have looked like on that development that you saw in the second half of '25. Was it just not a continuation of some of the outlier cases you had at the end of 3Q? Any incremental color would be really helpful.

Yes. Yes, certainly. So the prior year development, that's a number that you can find in the filing in the 10-Q and the medical cost roll forward is roughly $12 million for the quarter related to 2025 dates of service. And you are correct, effectively, there was really no flow-through because during the quarter, we added additional reserves to Part D. And as you know, we have limited information on Part D costs, and we had 30% of our members had that risk in 2025. And so we just took the opportunity to bolster those reserves because we really don't get final reconciliation until the third quarter of this year. So you are correct that there was really no benefit from the prior year development. And remember, Part D is in revenue for us. So you had a good news from last year in the medical expense line, and that was offset by a reduction in revenue, which really represents the Part D.

And then just as a follow-up on some of the 2027 commentary. Jeff, I think you had said on the last quarter that even with sort of looking at the advance notice, considering what you guys have been able to do on burden of illness, you guys felt like you could possibly expand margins or felt confident about expanding margins in '27. I guess, obviously, the numbers have changed here and gotten more positive. Has anything else really changed as we think about where you were a few months ago as far as confidence for '27 or how you're thinking about that equation on the core side of the business?

Yes. I mean I would say the only thing that I would point to that changes is obviously our performance this quarter with respect to the risk adjustment, right? So I would say now we have more confidence on a going-forward basis. This year, for example, we said we were going to outperform the final year of V28. Now we have more confidence that it's going to be even higher than that. So I guess that gives us more confidence going forward in 2027 and beyond that we can offset, for example, the risk normalization, the normalization factor of 1.12. Again, we've commented that in the prepared remarks that we don't believe we have any material exposure to sources of diagnosis given the design of our model being closely aligned with the primary care physicians. And so as we think about the growth rate for 2027, we're really zeroing in on that 5.33%.

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

Appreciate all the commentary here. On the new risk contract with the new payer, I guess what was attractive about that contract? Like I get it's in an existing market. Are those generally members maybe you had before the switch to this payer's plans? Or is this a new member cohort? And are you able to provide what the pickup in the guidance was from this contract? If you already said it, I'm sorry, just a lot of numbers flying around.

Yes, yes. No, certainly. It's in a market with an existing physician group. And I think from our perspective, it is a new payer contract. So it's a new contract with a payer. And as we think about that, and I just mentioned earlier that we modeled that at roughly -- it's roughly $200 million in revenue. We've modeled it at roughly breakeven margin for the year. And I think for us, it's really an opportunity for a multi-year improvement in margin, and we think we can deliver that. I mean it's not uncommon for us to have year zero conservatively modeled at breakeven margin.

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

So you mentioned pretty much no impact from the unlinked chart reviews that we're going to see in 2027. But it seems like CMS is pretty Gung ho on continuing to kind of level the playing field. So as you look forward, maybe '28 or even further out there, what about -- what kind of impact would you see from linked chart reviews and maybe health risk assessments? And is there any other kind of low-hanging fruit you see that CMS could go after?

Well, look, I think that we feel good about where we are for the reason that we have 100% chart review, physicians see every patient, physicians -- the charts are audited very carefully. It doesn't mean we won't have some issues, but it means that we're much more rigorous than we think some of the other plans have been in terms of how they have coded historically.

So I think that we can expect CMS will continue to try to spend the taxpayer's dollar wisely. And our focus on making certain it's linked to real care that's delivered to real patients, we think, is the best thing we can do.

Your next question comes from the line of Michael Ha with Baird.

So regarding the lead model, I guess, as you run your calculations to determine which path to go down, how are you contemplating the eventual -- that AI inferred risk adjustment model that's being phased into the lead program? How much visibility do you actually have into how this AI model might impact risk adjustment?

Yes, Michael, there's not a lot of details on that right now, right? So I think it's hard to obviously model in something where there's really no details about how that's going to work. And we'll just have to play that out as we get visibility to whatever that model is.

And then I think last quarter, you mentioned the opportunity to possibly more than double payer incentive contributions in '26, which I think was $25 million for '25, your '26 guide conservatively assumed the same, which presented, I think, an area of upside. So I was wondering how is that tracking so far through '26? How much of that path from $25 million to potentially north of $50 million might you already have visibility into? And I just would love to understand like what it takes to get from $25 million to possibly double that this year.

Yes. I guess what I'd say you're correct that the opportunity has doubled. I think that just shows the importance of quality across the board, specifically for payers. And so the opportunity for us to earn additional dollars is there. What we said as part of the guide is we have a similar level of performance in '26 guide, assuming we performed at the same level of '25. We don't have any -- I mean, it's super early, right? We don't really have any data on that yet. So we're just going to have to wait until time goes on throughout the year. But we feel pretty confident that we are delivering superior quality to our payer partners and our members.

Your next question comes from the line of Ryan Daniels with William Blair.

I'll keep it to just one. Given the operational improvements you're seeing, the clinical pathways, the better data feeds, when does the company consider going back on the offensive a bit, kind of growing the member base, maybe going out and reinvigorating the new partner pipeline, especially as there's a clear demand from payers to continue to expand these partnerships?

Yes. I think one thing that sometimes gets missed is the fact that our partners are deeply embedded in these communities. They've been there for years. They have large commercial panels. And every month, people turn 65 and enter Medicare Advantage. So there is some degree of embedded growth. It's nowhere near like opening a new market, but it means that you don't suffer attrition typically as a result of not expanding in a meaningful way. And also, some of the groups do, in fact, add new physicians, they bring them in. So I would say the focus right now is on in-market growth, in market execution. The time will come when we will turn our attention to other things, but that time is not here yet.

We have reached the end of the Q&A session. I will now turn the call back to Ron Williams for closing remarks.

Yes. I want to thank everyone who joined us this evening. Since stepping in as Executive Chair 8 months ago, I've really worked very closely with the leadership team. We've been highly focused on increasing the sense of urgency, heightened the focus on the key priorities that are focused on really, really driving improved performance for our members, for our primary care partners and for payers. And I think that while we believe that the environment remains dynamic, we are confident that the actions we have taken will deepen the existing strengths of our partnership model. We think it's a very unique model because of the proximity to the physician. It gives us an ability to make certain that the suspects and things that we determine are resulting in real clinical interventions. And we think that is extremely important to patients and please be important to CMS.

I want to close really by welcoming Tim O'Rourke, our new CEO. I am thrilled to have Tim join us today. He brings the right balance of understanding the payer, understanding the provider and understanding the importance of primary care physicians bring to our unique delivery model. So I want to close by thanking Tim for joining us. And I have to say he did extensive due diligence, which was most impressive on making a decision that we feel very good about having him part of our team.

Our employees have really worked very hard to get us where we are, and I want to give a special thank you to everyone in agilon who helped us achieve the results we are reporting today. Thank you all.

This concludes today's call. Thank you for attending. You may now disconnect.

Hi. Welcome back to the Barclays Global Healthcare Conference. My name is Andrew Mok. I'm the Facilities and Managed Care Analyst here at Barclays, and I'm pleased to have agilon Health joining me on stage today. We have Karthik Rao, Chief Medical Officer; and Evan Smith, SVP of Investor Relations. Welcome.

Thank you.

So first, we just -- you just reported fourth quarter results, set 2026 guidance a few weeks ago. Why don't we start with just an overview of kind of the business and recent results, where we are, take stock of where we are today and sort of the outlook for 2026?

So as everybody, if you listened to the call, we've initiated a fairly substantive transformation initiative. So across the board for 2026, we've reset our contracting with about 250 bps or better, $125 million incremental benefit year-over-year where we get from that.

In addition, the rate will ask about $500 million in incremental benefit in 2026. And then our BOI and clinical pathways initiatives will also continue to generate in excess of V28, which we think is positive, and Karthik can talk more about that in a minute.

And then we've also been able, from a contracting standpoint to get substantial incremental potential from our quality initiatives. So higher incentives from payers for quality incentives.

And then going into 2026, if you look at our cost trend, we estimate, I think, prudent, conservative, whichever word you want to use, about 7.5% growth, 7% net, which will actually be -- the net is impacted by payer bids. But if you look at us historically, over the last few years, we had about 7% cost trend in 2023, 7% cost trend in 2024 and about 6.5% in 2025. So we think 7% on a net basis is a good place to start for 2026.

[ Evan ], you mentioned the 50 basis points differential between gross and net trend. Can you help us understand that -- explain that concept a little bit? What specifically did you do during payer contracting yielding that benefit?

Yes. So the 50 basis points is really from the payer side. They're changing their benefit designs across our markets. So we contract individual payers, individual markets. And so basically, across the board, we've seen increase in maximum out-of-pockets, increased deductibles, lower supplemental benefits. And on a net basis across the markets, that will benefit us by about 50 basis points net on a cost trend basis. Those costs are shifted to the members.

Great. And in the fourth quarter, you revised your full year trend assumption from mid-5% to about 6.5%, driven by several high-cost inpatient claims. Can you provide more detail on the nature of those claims, specifically what types of diagnoses or service categories were those related to?

So we said there's slightly higher acuity, but those individual members were actually $1 million-plus claims. Usually, on an annual basis, maybe you get two or three, we actually wound up getting those two or three in 1 individual quarter. So it outsized the impact in that individual quarter. One we indicated was gene therapy, which is one of the largest pieces of that. And then -- but we haven't actually talked about each individual area.

But what we did project is for the fourth quarter, we basically assumed everything status quo, kept it at a high rate, which is how we got to 6.5%. We think, again, it's prudent, it's conservative and setting up a really strong foundation going into 2026. So again, to go into that year so that we don't have any development from the prior -- from 2025.

Agilon has been investing to enhance the Burden of Illness program. You're beginning to see sort of returns on some of those investments, including this year, I think there's approximately $22 million of benefit. Can you provide more color on the key enhancements made over the past year, particularly around the data pipeline and AI investments? How are those improvements translating into medical margin benefit in 2026?

Yes. And so I think three primary things to think about there, and you hit on two. So financial data pipeline to our data architecture and AI algorithms that sit on top of that. And I'd say three are clinical pathways. So double-clicking into each of those a little bit deeper.

So our financial data pipeline, what this is allowing us to do is get accurate condition level data on a member basis and verify actually what is going from the payer to CMS and coming back to us. And looking back a few years, where we've missed is our RAF projections and where our current performance is. So we now have this data across about 80% of our payers and our confidence level on our performance today and our projections is much better.

Two, on the data connectivity. So even our prior panels mentioned this, data is really the fuel for any AI algorithms that your company is running. One of our core levers is appropriately identifying and documenting disease burden. What we've been able to do this year is implement Generative AI technology. And what this is basically helping us do is take unstructured data and parse together basically condition diagnoses, which we haven't been able to do as well before. And we're seeing meaningful suspecting lift on a per patient basis, leveraging that.

Three, the other thing that we've been doing are clinical pathways. So clinical pathways are all about early disease identification and proactive treatment of conditions. There are a subset of diseases where we see we are -- we've got a big delta between benchmarks that exist for that disease category in the community and what we've documented. So to close that gap, we follow evidence-based screening protocols for those conditions in all of our markets. And you've seen that through our earnings and what we've reported on. We've implemented our heart failure pathway in about 90% of markets. We're seeing really good uptake, both on the clinician side and pull-through to outcome on that.

And that's some of what's driving that $20 million benefit that you referenced. And we think there is good runway for us through '26 and '27 on that as well.

Great. And with the enhancements to your data pipeline, can you share what level of visibility you now have into new member RAF scores at this point in the year? And maybe how that compares with where you were at this time in 2025?

So visibility on RAF scores is significantly different year-over-year. So what Karthik was talking about is the ability to have validated [ HCC codes ] directly from the managed care provider as well as through CMS fully validated. And now the data pipeline has a 99-plus percent correlation to what those midyears and finals happened over the last couple of years.

So now as I stand -- as we sit here today, we can actually know our RAF score for January, which is based on June 2024 to June 2025 paid through September, so I can calculate it and actually have it validated today, and then we'll soon get February incrementally. Historically, we were using proxy or operational data metrics to do that, but now we actually have validation on the individual.

In addition, to combine that, we also changed our methodology and processes for actuarial for estimating midyear to final. So we have -- that's also correlated with some of those data sets. So greater predictability, greater data sets and actual high visibility on what RAF scores are on a current basis.

Right. So with all that said, are you expecting a much smoother, less volatile sort of?

Much sooner reconciliation, higher visibility sooner. So traditionally, we reconcile in Q3, you'll get midyears. If that reconciles, you'll have a high visibility for the full year and the midyears, so in second quarter.

Great. Clinical pathways was the third pillar you mentioned, you've been building out the congestive heart failure program over the past year or so with additional programs coming online. Can you share a little bit more detail on that program specifically, what you've implemented, key learnings from the rollout and how we should think about the potential impact from that program?

Yes. I'm happy to. And I actually want to start with the whys of these, which I think are really important. And so we start with clinical problems that we're trying to solve. What we know today is about 40% to 50% of heart failure patients are diagnosed at time of first admission. And so why is that a problem? Well, that's leading to a bunch of unnecessary downstream cost if you're getting an outpatient diagnosis in the inpatient setting. And two, it's just less than ideal patient care. You're having to go through a hospital admission for.

That. The second thing we know about heart failure is less than 10% of patients are actually on the right therapies for heart failure. And so through our pathways, again, what we do on the diagnostic side is we equip our markets with technology in their office to make these diagnoses. So that's point-of-care BNP testing or echo technology that we're able to get into their office or increase access to. Two, on the treatment side, there's a reason patients are not on these therapies. You have to see them frequently. It's tough to titrate these in a manner that actually gets patients on them and adherence to them is not great unless patients actually understand how and the why. And so we are scaling a virtual pharmacy service that will actually meet with patients every week to titrate these medications after diagnosis, and we have pretty clear inclusion criteria for who goes into that program. So that's now live across 90% of our markets.

And on the outcome side, in 2025, what we've seen is that inpatient diagnosis, time of place of first diagnosis, was about 25% on the inpatient side for 2024. For '25, we moved that to less than 5%. So less than 5% of heart failure diagnoses are now in the inpatient setting.

On the treatment side, again, these are smaller market proof points, but we're seeing heart failure readmission rates drop below 10% relative to, I would say, industry averages of around 20%. So we're really starting to see the pull-through on the clinical side of this, and we're seeing in all of these markets, bridging that prevalence gap. So we're able to actually receive the funding to reinvest in care for these patients.

Great. As we think about some of your other pilots, newer programs such as COPD and dementia. Can you provide an update on the implementation progress there and help frame what the rollout of those programs looks like over time and the potential impact you're expecting there?

Yes, happy to. And so on COPD and dementia, I would say from a prevalence perspective, our heart failure prevalence delta to benchmark was 15% to 20% when we started. So it's a pretty big prevalence gap in disease that existed in our patients to what we expected.

In dementia and COPD, it's more in that 5% to 7% range. So pretty meaningful, but not quite as significant. Where we are on the implementation of these is currently live in five to seven markets. By the end of Q2, we expect to get to 70% plus of our markets live on our dementia and COPD pathways.

The problems we're solving are slightly different in those two conditions on dementia, I would say estimates are 50% of seniors actually have undiagnosed dementia today. Why? It's a pretty tough and great diagnosis to make. And so we're partnering with vendors to actually implement virtual technology to help them make that diagnosis. And two, support them in that early treatment phase post diagnosis. We're starting to see good engagement on that, and I expect we'll have a pretty smooth ramp throughout the year.

COPD, and I would actually broaden that to lung health. What we're finding is two things. One, we don't screen for lung cancer well in this country. And a lot of those patients actually have undiagnosed emphysema and COPD. So we are pushing pretty hard on appropriate and evidence-based lung cancer screening. And two, we've actually given a lot of our practices spirometry devices so they can not only do the low-dose CTs that are necessary, but do spirometry follow-up in the clinic to make the diagnosis and actually formulate the treatment path.

And so again, we expect that pathway to be live in 50% to 70% of markets by the end of Q2 as well.

Great. Can you walk us through maybe how you select which disease states are candidates for this pathway program? And what other programs you see forming in the future?

Yes, just roll the dice.

So we largely look at two things. One is, again, a prevalence gap. So what we are studying basically is what should illness burden be in a community relative to where we are today and what are utilization patterns of our highest utilization conditions.

And we know a few things. Conditions where we have the biggest prevalence gaps are heart failure, dementia, COPD, CKD tends to fall in there. Those tend to be in the top 5 to 6. On the utilization side, we know our top utilizing conditions are CHF, COPD, patients with dementia, that's not what drives the utilization, but patients with dementia and end-stage renal disease.

So when you put those two things together, what starts to emerge is you have a set of conditions that you're not documenting well, so you're underdiagnosing. You don't have plans for those patients. That's what's driving excess utilization. And even when you make the diagnosis, you're not getting those patients on the appropriate therapy. And so you can close care gaps on the treatment side.

And so we basically prioritize where we have the biggest opportunity to make a quality of care impact and drive financial value for our business.

Great. And these clinical pathway programs seem to be at the core of what value-based care delivers. What's been the response from your payer partners? How are these conversations evolving as you roll out these programs?

Yes. It's a good question. What's been really interesting, we talk a lot about our proximity to partners and patients, right? How can we leverage our proximity as an enabler to drive differential impact. These are things that payers can't do. You can't get that close to a physician to really reengineer the way that they deliver care. You can't integrate into their EMR to actually nudge them at the point of care with pointed recommendations. And what you need ultimately is to drive adherence to these protocols at a patient level, but you need that trust with the physician to go and do. So I think payers have largely been pretty positive on what we're trying to do here and see that as differential impact that we're driving.

Great. Staying on the contracting side, it's another focus area for the company as you head into 2026. Can you provide a final update on where contracting efforts landed for the year?

Yes. So from a contracting standpoint, we got incremental percentage of premium. We improved our quality incentives opportunity, and we've also decreased our Part D exposure to under 15%. So I think we had a successful year, and that underscores the value, I think, that the payers understand that we're bringing to them and the members that we serve.

With respect to going into next year, we think we're going to take the same disciplined approach and continue to look at across the board, having positive medical margin, positive cash flow throughout the membership while we continue to deliver and have the access for our members.

Right. And as we think about the evolution of this contracting initiative, it seems like some of the low-hanging fruit might have been addressed like Part D carve-outs, things of that nature. What do you look to do in the future around the contracting side?

So we continue the same. So again, the discipline around getting paid for what we deliver. So our clinical pathways programs continue to drive additional quality initiatives, which are highly receptive because we continue to -- across the board, 4.2 stars, we continue to think we're going to do even better this year, so getting more quality incentives. And then the flip side of that, and we'll get to the contracting is also our relationship with our PCP partners, which I'll let Karthik talk about sort of what we're doing there and sort of managing those practices a little bit more diligently.

Yes, happy to. And so Evan talked a little bit about our, I'd say, our hardline stance with payers. We know we're creating value, and we're not going to get into contracts where we can't create value for ourselves or our partnerships.

If you double-click into that at a physician group level, what we're also starting to do is pretty aggressively manage our networks within those markets. And so what does that mean? We know that there's a lot of variability in performance at a physician level. And so if you are an unsustainable panel or a panel that we don't see a path to value creation on, we are trying to find win-win ways for those physicians to either go back to fee-for-service or managing them out of the network.

And so in Michigan, we've talked about that publicly. We've seen pretty meaningful value creation through that. And we think there's pretty meaningful value across the rest of our network. So we're starting to engage in a deeper exercise to go and do that in every single one of our markets.

Great. Maybe another topic I wanted to touch on was the ACO REACH program. I know it's not as big of a business for you, but there was a small headwind embedded in the 2026 EBITDA guidance. Can you provide a little bit more color on what's driving that this year?

Yes. So it was a change in the rebasing of what their risk adjustment lift can be. So they moved the years from -- going the right direction from 2022 back to 2019. So it decreased the ability to drive -- to get value for the performance that we drove, and it was just a mathematical piece.

Our performance continues to be extremely strong. but that was a change in their methodology. And going into -- I'm sure you're going to go into LEAD. We think we're probably the best positioned in the marketplace, top performer in ACO REACH, both on quality performance, execution savings for CMS and going into LEAD, it's a clinically driven program that's well suited to what we've already delivered with our ACO partners. And it also adds elements that we think add significant additional value, including specialists and sort of rural populations, which we think we could actually advance and exceed. So we think there's an opportunity to continue to drive performance, whether it's called ACO REACH or next year called LEAD as driving performance for us in 2027.

Right. And how is the attractiveness of the program evolved, like, say, today versus 5 years ago?

Of ACO REACH?

ACO REACH.

You could go into the details of the...

Yes. I'd say from a program fundamentals perspective, we continue to do pretty well in ACO REACH. We think it enables the right things for our partners. I would also say the data exchange on the ACO REACH side is pretty attractive for us, timely data throughout the year. There's predictability in the program as well. So there are a lot of things that I think have worked in our favor on the ACO REACH side.

And if you look at what we're doing on the MA side, sort of carving out things like Part D, that makes it more similar to the ACO REACH program. So some of those variabilities that we're doing on the MA side, again, are the positive signs for the ACO REACH program.

Great. Let's move on to cash flow. You ended 2025 with $285 million of cash and investments and $91 million of ACO cash. You expect to end 2026 with at least $125 million of cash on hand, including those -- including the ACO cash. Can you walk us through the cash considerations for 2026 and how we should think about the progression towards your previous target of free cash flow breakeven in 2027?

Yes. So the cash flow in 20 -- we have sort of like a cash flow in 2025 informs cash -- actually, adjusted EBITDA in 2025 informs our cash flow in 2026. So if you look at our adjusted EBITDA performance and prior year development in year would be net out of that because that would be settled in year. That's driving that $250 million gap between the $375 million with ACO REACH cash and cash on our balance sheet and the $125 million that we're going to end with.

I'll also remind people that, that's there's additional working capital initiatives that we're doing and additional cost initiatives that we're doing that should actually positively impact that cash position.

And then also remind everybody, we beat our '24 projection, we beat our '25 cash projection. So we think we have ample cash to get through the transformation period.

And also move into 2027. I think given our performance, our expected performance this year, there's a path to getting to breakeven or better from a cash flow standpoint in 2027. So we think we're in a good position as we stand here today.

Right. And if that plays out, presumably, you're in a position to grow membership again. Can you talk about that transition? How does the portfolio look today? Are you -- at what point do you think the portfolio is stabilized and you can start to think about growth in membership in some new markets?

We actually think we did a significant amount of work on the portfolio, both from the physician side and from the payer side. So we think it's fairly stable now. We think there's opportunity. We've put on -- we have about 25,000 care coordination fee members, which look at that as sort of a backlog of potential people to move to risk as long as we can get the economics associated with the payers.

And even the 50,000 members that moved off from the payer negotiations, those are not gone. They're still with their physicians. So as we move into next year, I think those are, again, up for negotiation to figure out with the payers if there's an economic way we can bring those back on. Because remember, the patients or the members value the clinical programs that we provide. They value the quality initiatives that we provide. So the care levels and the access piece go up. So we think that's going to be part of an opportunity set, too.

And from a membership standpoint, we can have -- we would look at sort of balanced growth. It depends upon market conditions, and it depends upon sort of our economics. But we're not going to sway from that disciplined approach. We expect to be medical margin positive and cash flow positive on that.

And the other thing is we're streamlining the onboarding where geo entry costs will be more muted as well as we move forward.

Right. And if we look back on the last few years, it's been very volatile for agilon, but also for the value-based care industry more broadly. What lessons have you learned operationally or from a regulatory perspective that is informing your actions today or how you're applying that to the future?

Yes, I can start. And so maybe I'll say three things. So if you look back 5 years ago, I think everyone showed up in value-based care and full risk care because there's a lot of margin in the space. And you didn't have to do that much to get a piece of that.

I think what we've learned over the years is probably three big things. One, you need the right payer partners, payers who are sophisticated enough to operate in full risk, who can actually set up data exchanges with you to get you that data in a timely way. And if they can't, it's going to be a tough hill to climb.

Two, you need the right partners. And you've seen that with our market exits as well. Not every group is prime time for full risk care. Even within those groups, not every physician is prime time for full risk care, and that comes down to network management for us. And so before we even get into any new growth, it's like, are you willing to actually do these things? These are tough decisions for groups to make.

And three, you got to have the right clinical programs and the actions required by a PCP within those programs and be pretty specific and pretty decisive so you can actually manage variability at a PCP level.

I think over the last 2 years, what you've seen is we've come a long way in being able to do that on the risk adjustment side, the quality side. And I would say on the cost side, we've made a lot of progress on the palliative hospice front. We made some progress on the Pathways front. I think there's a pretty good runway for us to really continue to iterate and make a bigger dent in that vertical.

Great. Well, with that, we're just about out of time. Thank you so much for joining, and please enjoy the rest of the conference.

Yes. Thank you.

Thanks.

Hello, and welcome to the agilon health Fourth Quarter 2025 Earnings Conference Call. My name is Carla, and I will be coordinating your call today.

[Operator Instructions]

I will now hand you over to your host, Evan Smith, to begin. Please go ahead when you're ready.

Thank you, operator. Good afternoon, and welcome to the call. With me are Executive Chairman, Ron Williams; and our CFO, Jeff Schwaneke. Following our prepared remarks, we will conduct a Q&A session.

Before we begin, I would like to remind you that our remarks and responses to questions may include forward-looking statements. Actual results may differ materially from those stated or implied by forward-looking statements due to risks and uncertainties associated with our business.

These risks and uncertainties are discussed in our SEC filings. Please note that we assume no obligation to update any forward-looking statements.

Additionally, certain financial measures we will discuss in this call are non-GAAP financial measures. We believe that providing these measures helps investors gain a better and more complete understanding of our financial results, and it's consistent with how management views our financial results.

A reconciliation of these non-GAAP financial measures to the most comparable GAAP measures is available in the earnings press release and the Form 8-K filed with the SEC. And with that, let me turn the call over to Ron.

Thank you, Evan, and thank you all for joining us today. 2025 was a year for building the foundation of sustainable performance through intense focus on operational discipline. While we are navigating a comprehensive transformation, our mission remains unchanged, empowering physicians to lead the transformation of health care through our total care model. The fundamental resilience and effectiveness of our partnership model demonstrates a durable long-term growth runway through trusted relationships with community-based physicians.

These individuals are leaders in their communities and have an average 10-year-plus relationship with their patients, creating deep community ties that are difficult to replicate. While we are not satisfied with our financial performance in 2025, we made tangible progress in the areas that matter most for a durable turnaround, which Jeff will provide more detail on in a moment.

Our tangible progress includes the advancement of our clinical pathways and quality programs, our disciplined approach to payer relations and our continued focus on data-driven performance.

All are driving greater clarity and sustainability across agilon's scalable operating model to support long-term value-based care success for our total care model. Our preparation for the future includes applying our continued discipline and focus across these critical areas as we navigate the potential of a lower-than-expected rate increase in 2027 following CMS's advanced rate.

We believe the advanced rate notice does not sufficiently reflect the ongoing population-wide increase in cost and utilization due to growing chronic disease burden and aging of the Medicare population. In addition, our further review of the risk model revision and normalization outlined in the advance notice, we believe the potential impact will be generally in line with the national average.

However, we believe that our clinically focused program remains a critical part of the long-term answer. Continued advancement of our burden of illness and clinical pathway initiatives with our partners will help to mitigate the impact of the risk model changes as they did for V28.

In addition, given the focus of our model is the assessment of conditions at the point of care with diagnosis tied to documentation from a visit we believe we have minimal exposure to unlinked or audio-only coding.

We believe our ability to differentiate on the management of medical cost and quality outcomes should continue to position us well with health plans and physicians with the expectation that the rate and cost spread will ultimately normalize over time.

Throughout the year, we advanced several key transformation priorities, which are embedded in our expectation for material improvement in year-over-year medical margin and adjusted EBITDA. At the midpoint, we expect revenue of $5.5 billion, medical margin of $325 million and adjusted EBITDA at breakeven.

Our 2026 outlook reflects the expected positive impacts from the team's execution on payer contracting, clinical and quality programs, cost initiatives as well as premium increases.

We also anticipate benefiting from payer benefit design changes, including increases to deductibles and maximum out-of-pocket expenses as well as reductions in supplemental benefits. While this is expected to benefit cost trend, we are assuming that net cost trends will remain elevated in 2026 at approximately 7%.

Let me now reinforce key areas we believe are supporting a stronger foundation for execution in 2026 and forward. First, we entered 2026 with an enhanced financial data pipeline and strengthened actuarial and analytical capabilities, improving financial discipline, clinical visibility and overall predictability.

We are increasingly able to identify variants earlier and intervene faster. As we have previously stated, we now have greater visibility into detailed revenue and claims information with the ability to calculate member level risk scores, utilizing our enhanced data pipeline, a key difference versus prior years.

In addition, we believe the pipeline, AI-assisted advances for high-risk member identification and diagnosis through our burden of illness program as well as execution on clinical pathways will deliver results over and above the final year of the V28 impact.

Second, through a disciplined approach to better underwriting the risk we take by contracting, agilon intentionally prioritize economic sustainability over membership growth.

This approach included a willingness to pause growth, walk away from unprofitable payer contracts and restructuring arrangements with certain payers in specific markets temporarily migrating to a care coordination fee model as opposed to full risk. As a result, we expect to benefit from incremental percentage of premium and enhanced quality incentives for the value we deliver.

A reduction in Part D exposure to less than 15% of our membership as well as shorter average contract term lifts, which we expect will help us better navigate changing market dynamics, including exposure to at-most policy, utilization or payer behaviors.

In addition, our disciplined and rigorous recontracting process led us to exit certain payer contracts in specific markets. These contracts did not meet our minimum threshold of profitability.

We expect membership will be reduced to approximately 430,000 members in 2026, including approximately 25,000 members in no downside care coordination fee arrangements with upside performance-based fees.

We believe care coordination fee arrangements provide a long-term risk-adjusted growth opportunity to potentially move these members when appropriate to a full risk arrangement.

Third, we advanced clinical pathways, which are evidence-based data-enabled care models designed to help our partners proactively identify, diagnose and manage the care journey for patients with high-impact chronic conditions.

We believe these pathways, including heart failure, dementia and COPD can materially affect utilization, quality and total cost of care. We concluded the year with active heart failure programs adopted in over 90% of our network.

Congestive heart failure or CHF is the most mature and scaled pathway, serving as a blueprint for other conditions, including early identification, expanded support for guideline-directed medical therapy and appropriate end-of-life care guided by patient preference and goals.

Palliative care is also a core extension of our total care model. It's designed to proactively support patients with advanced illness, often those with late-stage heart failure, COPD, cancer or significant multi-morbidity.

While only representing a small subset of our population, we have increased the number of patients engaged with this program. Clinically, it improves quality of life and care coordination. Financially, it helps us reduce avoidable late-stage utilization, particularly inpatient admissions and emergency care.

Most importantly, the patients and their families have a better experience and clearer goal of care discussions and more coordinated support. Fourth are our quality initiatives. Our quality programs continue to mature with stronger measuring discipline and improved care gap closures.

Quality isn't just a scorecard for us, it's a lever for patient outcomes, member experience, cost and revenue. The strategy recognizes that primary care performance directly drives the majority of Star measures, making agilon's physician-centric model structurally advantaged and an area of increasing focus by payers.

Our value-based care model enables exceptional quality performance by providing the necessary tools and support to help our network deliver the highest quality care. To drive additional performance in 2025, we strengthened our data access and analytic capabilities to further enhance our ability to identify care gaps.

We also expanded our capabilities for providers to close care gaps in areas such as diabetic eye exams. Our network consistently delivers quality performance for measures we can influence and control ahead of benchmarks at 4.2 stars on a composite basis across the platform, maximizing quality bonus revenue while reinforcing physician alignment.

In 2026, we believe we have the opportunity to more than double the incentive contribution. As we indicated last quarter, 2024 results were very strong in ACO REACH and an improvement over 2023 results.

ACO REACH continues to demonstrate the value creation agilon can deliver and is shaping the way we are transforming our MA business. CMS recently announced the lead program long-term enhanced ACO design, intended to launch after the REACH model concludes at the end of 2026.

LEAD is designed as a 10-year voluntary model with a longer planning horizon, benchmarking enhancements and an emphasis on better serving high needs patients. We see LEAD as a positive signal. It reinforces CMS commitment to value-based care with a longer-term structure that can support sustained investment and consistent operating execution.

Lastly, we executed on initiatives to reduce operating costs and controls. We believe we made meaningful progress on forecasting, performance reporting and market level accountability in 2025. These are critical to improving decision speed and execution.

We executed on $35 million in operating cost reductions above what we communicated at the end of the third quarter. This will enable greater operating leverage from the platform and support our business objectives.

In summary, we are executing with urgency, while cost trends are expected to remain elevated, we believe our transformation actions will support improved operating performance. We plan to build on the progress made last year with a continued emphasis on disciplined execution, collaboration and measurable positive impact for patients.

We expect 2026 to mark a strong improvement in medical margin and adjusted EBITDA supported by renegotiating with health insurers to better reflect the reality of today's environment, care costs and plan initiated decisions.

A heightened focus on investments in quality performance as health plans continue to increase the incentives available for top quartile performance. Continued progress to improve patient outcomes and reduce total cost of care through proactive chronic disease management and ongoing development and expansion of clinical pathways, strengthening provider engagement and reducing variability in performance across markets and practices, optimizing our cost structure.

Lastly, we will continue to advance initiatives, which we expect to support continued performance improvement in 2027. With that, I'll turn it over to Jeff to walk through the financial results.

Thank you, Ron, and good afternoon. As Ron stated, 2025 was a transformational year. We took significant actions focused on improving the profitability of the business, including a disciplined approach to contracting, improvements in our burden of illness program, enhancing our clinical and quality programs, meaningful cost reductions and continuing to advance strategic initiatives related to our data visibility, clinical and cost management programs. Through the execution and implementation of these initiatives, we expect to drive significant improvement in profitability in 2026 while continuing to invest in our platform and partners.

As we discussed last quarter, this is supported by several underlying market and payer-related tailwinds, including the 2026 final rate notice by CMS, payer bids, which were focused on margin and our actions we took in 2025 centered on execution and profitability.

For today's discussion, I will cover 3 key areas. First, I will walk through our fourth quarter and full year results and a bridge to our jumping off point for 2026.

Second, I will walk through our 2026 guidance, including key assumptions, driving improved profitability. And finally, I will discuss the strength of our capital position and a more disciplined near-term growth outlook. Moving to our financial performance for the fourth quarter and full year 2025.

Starting with membership. Medicare Advantage membership at the end of the quarter and fiscal year-end 2025 was 511,000 members. Our ACO REACH membership for the quarter and fiscal year-end 2025 was 114,000 members. As a reminder, membership continues to be affected by our decision to take a measured approach to growth, inclusive of previously announced market exits in a smaller 2025 class.

Total revenue for the fourth quarter was $1.57 billion and $5.93 billion for full year 2025, respectively. Revenue in both reflect the impact of lower-than-expected risk adjustment revenue and previously disclosed market and payer contract exits. With respect to medical costs, we continue to see favorable development from the first half of 2025 with the respective cost trend now sitting in the mid-5% range.

However, for the third quarter of 2025, we experienced elevated costs, primarily attributed to inpatient stays, including a few large discrete multimillion-dollar claims totaling $6.5 million.

Based on this, we increased our medical cost trend for the third quarter of 2025 to 7.2%, up from the low 6% range we previously recorded. Given the elevated cost trend we experienced in the third quarter, along with minimal paid claims visibility at close of the fourth quarter, we took a prudent approach and recorded fourth quarter medical cost trends at 7.4%.

This brings our full year 2025 cost trend to approximately 6.5%, which we believe provides a solid foundation heading into 2026. Medical margin for the fourth quarter was negative $74 million and negative $57 million for the full year.

Both the fourth quarter and full year results are reflective of the elevated cost trend assumptions just discussed as well as the previously discussed risk adjustment impact. In addition, the full year results include negative $60 million from exited markets and negative $53 million from prior year development.

Adjusted EBITDA was negative $142 million and negative $296 million for the fourth quarter and full year, respectively. The fourth quarter reflects the items I already highlighted, partially offset by lower geography entry costs and the benefit from continued operating cost discipline.

ACO REACH was in line with our expectations. Adjusted EBITDA for the fourth quarter was negative $6 million and for the full year of 2025 was $41 million. As Ron mentioned previously, ACO REACH performance further supports our confidence in our approach, the total care model and value we bring to our partners and members.

On the balance sheet, we ended the quarter with $285 million in cash and marketable securities and $91 million of off-balance sheet cash held by our ACO entities. Year-end cash was ahead of our expectations by approximately $66 million, including $34 million in permanent improvement and $32 million related to expense timing.

Last, in tandem with our transformation initiatives, after the quarter, we extended our credit facility and term loan. Details were filed in an 8-K. Next, let me discuss our outlook for 2026. As I previously mentioned, we are optimistic about our ability to deliver significant growth and profitability in 2026, driven by our actions in 2025.

We have provided our first quarter and full year 2026 guidance metrics in the press release and earnings presentation posted on our website for you today.

We have also provided bridges in the earnings presentation that walk from our jumping off point to the full year 2026 guidance. For the full year 2026, we expect year-end membership on the agilon platform will be in a range of 525,000 to 540,000 members. This includes estimated Medicare Advantage membership of 430,000 and ACO model membership of approximately 103,000 at the midpoint.

The estimated Medicare Advantage membership reflects the market exits we announced in 2025, a small amount of growth as well as the impact of our disciplined contracting. As we highlighted on our third quarter earnings call, our contracting efforts were focused on achieving positive adjusted EBITDA across all markets, which embeds our assumptions of medical cost trends, payer-specific bids, quality performance and market-specific cost structure for 2026.

As a result of this disciplined profitability-focused approach, we exited several payer-specific contracts for 2026, which reduced overall Medicare Advantage membership by 50,000 members. Additionally, Medicare Advantage membership includes approximately 25,000 members in a care coordination fee structure with additional incentives tied to quality and cost performance.

For the full year, we expect revenues in the range of approximately $5.41 billion to $5.58 billion. As highlighted in the slides we provided today, most of the year-over-year improvement is expected to be driven from known factors, including increased percentage of premium from our contracting efforts and payer bids, which were on average at or above the CMS benchmark rate.

Combined, these are expected to create over $625 million in incremental value in medical margin in 2026. As mentioned earlier, in addition to exiting structurally unprofitable arrangements, we also reduced exposure to Medicare Part D costs to below 15% of our membership. We prioritize care coordination fee structures with performance-based incentives, more than doubling the quality incentive opportunity from 2025 for the value we deliver to our members and payers.

With respect to our burden of illness program, we are confident that the enhanced data pipeline, which now includes over 85% of our members, AI advances for high-risk member identification and diagnosis in our BOI program and execution on clinical pathways are expected to deliver results over and above the final year of V28 implementation.

We expect a net 40 basis point improvement year-over-year at the midpoint. As a reminder, over the last 2 years, we have more than offset the impact of the V28 implementation. Our enhanced data pipeline has shown a 99% plus correlation rate and is expected to improve the accuracy and forecasting of our risk-based revenue.

With respect to cost trend, we are assuming a gross cost trend of 7.5% for 2026 as trends remain elevated and net 7% when considering the 50 basis points estimated benefit from payer bids. As we have stated previously, 2026 payer bids across our markets, on average, demonstrated payers bidding for improved profitability with benefit design changes, including increases in premiums, deductibles and maximum out-of-pocket expenses and a reduction in supplemental benefits.

It's important to note that this 7.5% cost trend for 2026 comes on top of the higher cost baseline that we are now assuming for 2025, which we believe is an appropriate stance in this continued elevated cost environment.

We expect medical margin to be in the range of $300 million to $350 million in 2026. This reflects the positive impact from our disciplined contracting efforts, a slight benefit from our BOI program and a more conservative cost trend assumption heading into 2026 due to the continuation of elevated medical expenses. We anticipate G&A expense of approximately $234 million, which is slightly lower than the full year 2025 and geo entry expenses of approximately $15 million.

G&A expense for 2026 includes the benefit from the organizational realignment initiatives we implemented in the second half of 2025, which reduced operating expenses by $35 million, exceeding what we previously communicated.

This was partially offset by employee merit and medical cost inflation and the reestablishment of incentive compensation expense, assuming a full target payout. We continue to focus on additional initiatives to optimize our cost structure and drive additional operating leverage heading into 2027.

Last, adjusted EBITDA for the full year is expected to be in the range of negative $15 million to positive $15 million or breakeven at the midpoint. This includes the contribution from our ACO REACH programs, which is expected to be in the range of $20 million to $25 million.

As a reminder, our ACO REACH outlook reflects announced changes to the ACO REACH program for the 2026 performance year, primarily related to a rebasing of the risk adjustment cap from 2022 to 2019. While we are confident these factors will drive improved performance, we are continuing to actively manage the business to further enhance execution across all initiatives, laying the foundation to drive improved performance beyond 2026.

Finally, I will discuss our capital position, which will enable our teams to continue executing on our transformation and deliver our anticipated material year-over-year performance improvement. We expect to end 2026 with at least $125 million of cash on hand, including our ACO REACH entities.

This is driven by our better-than-expected year-end cash position, combined with our current 2026 outlook. Additionally, we have extended our credit facility with our existing lenders by 2 years and currently plan to pursue a reverse stock split as indicated in our proxy filing. We believe the extension reflects the strength of our operating performance outlook and continued lender confidence in our business.

Finally, I would like to address the advanced rate notice released by CMS. To reiterate, we are disappointed and believe the proposal does not adequately address the high cost and utilization trends experienced over the last several years. As Ron mentioned, after further analysis of the details provided with the advanced notice, we believe our BOI and clinical pathway initiatives will help mitigate the impact of the risk model revision and normalization factor outlined in the advanced notice.

In addition, our initial analysis of the sources of diagnosis indicates we should experience minimal impact as the strength of our model is our primary care partners' physical interaction with their patients. This would set our expected baseline closer to the published effective growth rate.

We will continue to analyze and monitor this release and remain hopeful that a more comprehensive and appropriate approach will be taken when final rates are released in April.

In summary, we recognize that we are operating in a dynamic macro environment, including industry headwinds and regulatory changes. We have executed on a significant business transformation plan, combined with our physician-centric model and scale, we believe, positions agilon health to deliver sustainable value for patients, partners and shareholders. With that, operator, let's move to the Q&A portion of the call.

[Operator Instructions]

Our first question comes from Jack Slevin with Jefferies.

I just want to kick off on some of the trend discussion because I think I caught all of it, Jeff, but I want to make sure we've got sort of the right understanding in terms of what's baked in for 2025. So I guess I just want to clarify, it sounds like 3Q has stepped up.

You sort of roughly match that or maybe step it up slightly. Just a little color or clarification there. And then if there's anything you've seen in some of that true-up in the third quarter on what might be driving that acceleration in cost trend, I would be interested just to hear if there's any color on that at this point.

Yes. Sure, Jack. Thanks for the question. Yes, you're right. So what we saw in the third quarter, in the prepared remarks, we commented on really higher inpatient stays. So we had a lot more inpatient volume. Specifically, we had several cases that were over $1 million.

And if you aggregate those, it's roughly $6.5 million of cases that were over $1 million in the third quarter. And so sitting at this point, we took the cost trend in Q3 from the low 6s to 7.2%. And listen, we recognize that we have limited claims visibility, paid claims visibility for the fourth quarter.

But we felt it prudent given that Q3 is kind of coming in so high that we moved Q4 up to 7.4%. And so what that did is it took the full year from the low to mid-5s to 6.5%. So right now, we have 2025 at 6.5% cost trend.

Okay. That's really helpful. I appreciate that color. And then maybe just to follow up on some of the '27 commentary, sort of acknowledging you all have a lot of wood to chop in '26, and I think that seems to be clear in sort of the guidance that's laid out.

But maybe just on '27 on the rate notice and then on the ACO front as well. I guess I'm on record saying I think value-based care players can get to roughly 5% on rev trend. It sounds like you guys maybe have a slightly different bridge there, but are landing in a similar zone. Considering that sort of environment, 7.5% cost trend that seems possibly conservative for '26, but maybe unclear where that goes.

How do you think about what actions you might need to take in '27 on MA, whether it's further contract adjustments? Maybe just -- I'll leave it open ended there, but interested to get sort of what that landscape might look like. And if I can squeeze in a loose second piece on the ACO front, I heard the LEAD commentary. Would love to hear just sort of how you're approaching what to do in '27 on that front with the end of REACH.

Yes. Yes, I'll handle the '27 commentary that you talked about, and then I'll send it to Ron for the ACO part. But really, Jack, it's the same actions we've been taking, right? So it's contracting, it's our burden of illness program. We'll see how the final rate notice shakes out.

But it's the same levers that we've been, I would say, executing on this year. We will do more of that as we think about '27. I would say the 2 open components are what happens with payer bids.

And so obviously, we get a preview of what those bids look like before we enter into our contracting discussions.

So that will be an important piece. And then overall, what the cost trends do. But I think from our perspective, we believe that we can continue to improve margins beyond 2026 through all of these levers that we've talked about today, and that's what we're focused on. So -- and then -- and Ron, on the ACO.

Yes. Look, Jack, I think the ACO new model is encouraging in the sense that it's a 10-year model, which provides for a longer period of time, gives you a basis to plan and perhaps to make investments to support the development of the model. Now we have encouraged from a policy point of view, further clarity, much greater even stretching out of the implementation of the program.

I think that at this point, there's not a lot that we know, but the main thing that we know is that it represents a continuing opportunity. And I think that the work that we've done so far in the current model will position us very well in terms of however the program unfolds.

And so we're looking forward to being actively involved. As a matter of fact, I'll be in Washington next week. Dr. Oz is going to be in a meeting on that, and we'll continue to advocate physicians to make that program effective for patients, for physicians and for us.

And the next question comes from Jailendra Singh with Truist.

I want to follow up on the incremental inpatient admit costs you just were talking about for Q3. Were those claims tied to some specific payers and geographies?

Just trying to understand if your Q3 reserving of 7.4% versus 7.2% in Q3 kind of assumes -- Q4 reserving of 7.4% versus 7.2% in Q3, assumes those inpatient stays continue at a similar level or get worse? Just trying to understand if cushion built in Q4 is enough.

Yes. Thanks, Jailendra. I guess a couple of things. Number one, they weren't concentrated in specific markets is what I would say. And we did see utilization step up, not across the board, but in several of our markets, specifically in inpatient stays. And I would say September appears to be the highest of the quarter.

And so it was more focused on the end of the quarter is where we saw that. And I understand your point, you're saying, could these just be random acute events that don't reoccur. That's certainly possible.

But again, with limited claims visibility as we closed out the year, we just felt it was prudent to provide a solid foundation from which to jump off into 2026. And so we went ahead and moved that cost trend up to 7.4%. So again, limited claims visibility for us, but we felt it necessary to provide a good stepping off point.

Got it. And then my quick follow-up on your OpEx cost initiatives, which is now $35 million benefit in 2026. Do you guys see any additional opportunities in terms of streamlining cost? And what areas that could come from?

Yes. I think it's all the areas that generated the $35 million. Certainly, we're not done looking, okay? Let's put it that way. And so I think there are further opportunities for cost reduction. Some of that's going to require automation and AI and technology. So I think they'll be harder to achieve, but it doesn't mean it's not there. And so that's what we're focused on as we think about executing on 2026 and heading into 2027.

And the next question comes from Michael Ha with Baird.

Wondering, is there any update you've received on the '25 fee-for-service trend within ACO REACH? Is it still 8.5%? And then also just on trends more broadly across both REACH and MA. There's been some conversation about the MA rate notice, I'm saying that back half trends are actually less steep.

So if CMS were to include more back half '25 claims experience, it might actually drive the effective growth rate slightly lower than the advanced notice, but it sounds like your own back half trends have actually stepped higher versus the front half, which would obviously go against that thinking. So I'm curious to hear your thoughts on the ongoing conversation.

Yes. Yes, for sure. Thanks, Michael. I think the first half we commented on is in the mid-5s for us. So in the MA population, we certainly did see an acceleration of cost trends, at least for Q3.

We'll have to see how Q4 plays out. But at least for Q3, we certainly saw that. The fee-for-service cost trend, the latest on that is 8.1%. So it came down a little bit. But what I would say is in the ACO program, it was also concentrated in the back half, and we have a lot more current data there from the government is what I would say. And so those cost trends were tilted toward the back half as well, but they've come down from 8.5% to 8.1%.

And one more on the rate notice. I'm curious, after you've reviewed it yourself, I'm just wondering if you -- there's anything you view as most notable with potential for CMS to improve. Again, there's conversation about another area about the treatment of skin subs and the risk model recalibration.

By that, I mean, they adjusted the effective growth rate to exclude it, but it doesn't look like they did that for -- potentially for the coefficients aligned with those skin subs. So now we have this strange situation potentially where it's distorting the risk model recalibration and driving this rate headwind. I'm curious if that's an area you've been looking at thinking about and just broader thoughts on areas of improvement into the final rate notice.

Yes. Certainly, all of those items that you have mentioned, in addition to what is the final kind of cost trend, all of those items are top of mind for us. I guess what I would say is, again, just broadly, ultimately, we're looking for rates that account for the cost trends that we've seen over the last several years.

However that shakes out. That's ultimately what we're trying to achieve. I guess we'll have to see how all of these things that you mentioned play out. Hopefully, some of those get delayed or lengthened or spread over time to balance, I would say, the cost trend dynamics that we're dealing with. But ultimately, we'll have to see how that shakes out.

[Operator Instructions]

And our next question goes to Ryan Langston with TD Cowen.

A few of the larger public plans have highlighted expected margin recovery in group MA specifically. I think the last disclosure of your mix was around 17% or 18% kind of midway through last year.

I guess where does that percentage sit now and in 2026? And I guess, how is that potential recovery reflected in the guidance?

Yes. Thanks, Ryan. It's a little early to figure out kind of where the membership is going to play out is what I would say. But I don't think that we're going to have too different of a mix heading into 2026.

But obviously, we really don't get final membership until towards the end of the first quarter. And so we'll kind of give an update at that point in time. But right now, there's nothing that says our mix is going to be substantially different from that.

And the next question goes to Matthew with Needham & Co.

I wanted to hit on quality. Nice to see the medical margin opportunities there. I think in 2025, you've been targeting $25 million of opportunity tied to quality. How did you do on achieving that?

And then for 2026, as we think about that opportunity doubling, could you maybe just give us a sense of what those increased incentives look like and pathway to achievement? Is that just greater stars improvement or any discrete strategies you're laying out to achieve that quality opportunity?

Yes. So a couple of things. The quality, obviously, the measures aren't done yet. There's runout that has to happen. But I think we're in the ballpark or getting close to what we thought we would achieve for 2025. That's the first thing.

The second piece, which you mentioned is there's an opportunity for us to -- there's doubling of the potential for us to earn. And what I would say is broadly across our network in 2024, we were roughly at 4.2 stars. We made progress and improved that in 2025. Now the verdict is not all the way out because we have the runout that has to happen, but we're pretty confident that we will do better in 2025.

And as we think about 2026, the opportunity is there. What we have included in our guide is similar performance to 2025. And so we haven't banked on that in the guide, but we're obviously shooting for a higher level of performance. And we have programs that are centered, as you can imagine, around driving that performance.

And the next question comes from Stephen Baxter with Wells Fargo.

Just want to make sure that I'm fully tracking the comments on the advanced notice that you gave and why you think that your view of it is more in line with the effective growth rate. I think you're saying that you have, I guess, little to no exposure to unlinked chart review, which makes perfect sense given the model that you operate. But in terms of the other risk model changes, including the normalization impact, that 330 basis points item in the CMS announcement, are you saying that you just don't have exposure to that? Or you're saying that other things like coding trend and clinical efforts offset that? I'm just trying to get to what an apples-to-apples comparison is for you guys.

Yes, yes. Good clarification. I would say, yes, we are exposed to that. And generally, we've run the math, and we're very close to what is outlined in the rate notice. What we are saying is that we've shown the ability over the last several years to offset the implementation of V28.

And recall, V28 was roughly 3% to 3.5% per year. And so we feel pretty confident that we can do that again in 2027. And so that's what -- that was the comment that was made is we have a way to offset that. And so generally, we're viewing it as the effective growth rate is really the number.

Yes. I would just add that what's been driving has really been the implementation of our clinical pathways and particularly with our congestive heart failure, we ended the year with about 90% of the platform well implemented in that program.

So we think we're crossing over with a pretty good run rate, and we think there's still a lot more prevalence in the communities for us to help patients get diagnosed and get on the right kind of therapy to help better manage that condition. And we also will be implementing additional clinical pathways, which we talked about that we think will be important contributors over time.

And I think that one of the things I would say also is that we recognize that we need to focus on 2027 in terms of taking a step up in order to address this. So we're not saying that what we're doing, we think is perfectly adequate. We think it's a really, really solid foundation, and we're going to be doing more to make certain as best we can that we can get to where we need to.

Got it. And then my actual more tangible question, just on the medical margin bridge that you guys gave us in the slides. The $127 million for the payer contract, there any rough sense you can give on how much of that is percent of premium changes versus having less Part D risk. I'd love to just get a better sense of what inning you feel like you're in on this percentage of premium effort and whether you kind of characterize the success you're having as being relatively broad-based or maybe having more success with a subset of payers and maybe there's more opportunity in front of you?

Yes. I would say the majority of that is either percent of premium or relief from the payers stars -- specific payer stars issues that they've had. And that is contracted and done. So that's -- those are -- that's locked in value is what I would say as we think about the 2026 P&L.

And the next question comes from George Hill with Deutsche Bank.

This is Liz on for George. I just have one question on the special need plans. Could you help frame the current exposure to the special need plans versus the traditional MA membership and whether the mix shift towards a special need plan means a structurally higher margin opportunity over time?

Yes. I don't -- yes, if I just look at our special needs plans, it's roughly 7% roughly for us, right around 7%. And I don't think we have enough information right now with our membership to determine if there's been a big mix shift, but more to come on that one.

And the next question comes from Justin Lake with Wolfe Research.

A couple of follow-ups for you guys on the stuff you've already talked about. First, on the membership exits, right, and some of the recontracting you've done there. I -- is it fair to think that you've kind of walked away from the contracts and the plans that you think are not good partners?

And the kind of go-forward improvement here will be execution and hopefully, rates that reflect cost trends? Or do you still feel like there's more to come on that side? And also, were there any partners that stood out there? Is it concentrated in 1 or 2 plans that you walked away from? Or are you seeing that more broad-based?

Yes, Justin, I guess what I would say is it's probably payer and market specific. So it's not specific to any one payer. I think as you know, economics are different across payers and markets.

And so I wouldn't single any payer out to say they were specifically an issue. And so it's broad-based. And ultimately, as we think about it going forward, I think these are members that we can ultimately get to a contract sometime in the future.

But obviously, we're in challenging macroeconomic times. And we just couldn't get to a deal this year. So it doesn't mean we can't get to a deal ever. It just means the economics and the risk wasn't right for us at this point in time. And that's the same lens that we'll have as we renew contracts for 2027.

Yes. I think the point I would make, Justin, is that we've been pretty clear about the value that we create. And that if we're not going to be paid for it, then we will not be delivering that value.

And we'll see what happens next year as they realize that what we were telling them was really an important contributor to their success. So we're hopeful, but we're also firm about it has to be the right agreement for us and for our physician partners.

Perfect. And then just last follow-up on the -- on trend. I think this question has been out there for a while, but CMS went on their call and said, we think trend is 5.5%. ACO REACH have been pushing 8% to 9% in the last couple of years. Have you been able to -- you sit in a unique position kind of playing in a significant way in both.

Have you been able to sit down and kind of bridge that gap in terms of -- I know skin substitutes is a big part of it. But beyond that, do you think there's 300 basis points of difference between ACO REACH and Medicare Advantage? Or do you think there are a couple of pieces that the industry can kind of bring down the DC and sit down with CMS and say, here's what you're missing.

Yes. I guess what I'd say, Justin, is I think the industry and we are aligned that there seems to be a disconnect between the ultimate rate at the bottom line that's getting paid and the cost trends that everybody, including fee-for-service has seen over the last several years.

So there's no -- I think there's no answer here that bridges that gap is what I would say. And I think that's why everybody is advocating for kind of a revisit of what the initial rate notice is.

The next question goes to Craig Jones with Bank of America.

I want to follow up on the chart review comment you made. So do you say you're in line and be in line with the 1.5% or do you think it will be like closer to 0%? And then as you think about how that spread among your payer partners, is it a pretty tight cluster or some potentially going to have like a 5% impact and some will have a 0% impact?

Yes. I think what we're saying is the removal of selected diagnosis is minimal for us just given our model because we're highly aligned with the primary care physician. And really, we're seeing those members in the office.

And so for us, there's not a lot of unlinked conditions given how our model is designed and our proximity to the primary care physician. So I'd say that's just broad across everywhere. The Part C risk model changes, that obviously would be different by market.

And our last question goes to Daniel Grosslight with Citi.

This is Luis on for Daniel. I just have a quick cleanup question. I know you're intentionally slowing down market growth this year, but guidance still includes $15 million of new geography entry expenses. Can you remind us where exactly that is allocated to?

Yes. That's really capital commitments from prior growth. There's some of that, that drags into the following years, what I would say. And there was a little bit of growth this year. And obviously, there's some other groups that we're talking to, but not really getting into that right now.

And that does conclude the Q&A portion of today's call. So I will hand back over to you, Ron Williams, for any final comments.

Yes. Thank you. I would like to close by really expressing a deep appreciation and a huge thank you to our physician partners whose commitment to quality care to their patients is really fundamental to our long-term success.

I also want to thank all of the employees of agilon who have really been focused on this transformation that we've gone through this year, positioning us for the kind of success that we've outlined in our guidance. So -- and thank you for joining the call. We appreciate your questions and the opportunity to engage with you. Have a good day.

Thank you, everyone. This concludes today's call. Thank you for joining. You may now disconnect.

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" Robert W. Baird & Co. Incorporated, Research Division

" Jefferies LLC, Research Division

" Truist Securities, Inc., Research Division

" TD Cowen, Research Division

" Wolfe Research, LLC

" BofA Securities, Research Division

" Citigroup Inc., Research Division

" Barclays Bank PLC, Research Division

" Needham & Company, LLC, Research Division

" BTIG, LLC, Research Division

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Good afternoon, and thank you all for attending the agilon Health Third Quarter 2025 Earnings Conference Call. My name is Brika, and I will be your moderator for today. [Operator Instructions]

I would now like to pass the conference over to your host, Evan Smith, Investor Relations at agilon Health. Thank you. You may proceed, Evan.

Thank you, operator. Good afternoon, and welcome to the call.

With me is Executive Chairman, Ron Williams; and our CFO, Jeff Schwaneke. Following our prepared remarks, we will conduct a Q&A session. Before we begin, I would like to remind you that our remarks and responses to questions may include forward-looking statements. Actual results may differ materially from those stated or implied by forward-looking statements due to risks and uncertainties associated with our business.

These risks and uncertainties are discussed in our SEC filings. Please note that we assume no obligation to update any forward-looking statements. Additionally, certain financial measures we will discuss in this call are non-GAAP financial measures. We believe that providing these measures helps investors gain a better and more complete understanding of our financial results and is consistent with how management views our financial results.

A reconciliation of these non-GAAP financial measures to the most comparable GAAP measures is available in the earnings press release and Form 8-K filed with the SEC. And with that, let me turn the call over to Ron.

Thank you, Evan. Good afternoon, everyone, and thank you for joining us. I'm pleased to be with all of you today.

For the third quarter, we reported revenue of $1.44 billion, medical margin of negative $57 million and adjusted EBITDA of negative $91 million. We are also reinitiating 2025 guidance. While the quarter benefited from the execution of our clinical and quality programs as well as cost discipline, we nevertheless were impacted by lower-than-expected in-year RAF contribution as well as continued high costs from exited markets.

As we look forward, we believe 2026 is shaping up to be a strong stepping stone in our transformation with positive development in the first half, the enhanced financial data pipeline ramping to 80% in membership and Part D exposure potentially moving below 30% we believe we are establishing a solid 2026 baseline.

We expect to have improved forecasting and lower volatility as well as significant internal and market-driven tailwinds. These tailwinds include our burden of illness and clinical pathways initiatives driving broader identification and diagnosis of high-risk conditions, increased incentives for our quality performance and more disciplined and favorable contracting.

This is further supported by more favorable payer bids, including increased premiums, maximum out-of-pocket and deductibles, benefiting agilon's financial performance. And last, we believe we are establishing a more efficient platform to drive additional operating leverage and have reduced our operating costs by $30 million.

With increased visibility, we have reinstated our 2025 guidance. At the midpoint, we expect revenue of $5.82 billion, medical margin of $5 million and adjusted EBITDA of negative $258 million, which includes the impact of lower-than-expected risk scores for 2025 and costs related to exited markets, partially offset by positive development in first half medical costs, strong performance in ACO REACH and continued operating cost discipline. Jeff will provide more detail in a moment.

Our focus is on executing a strong finish to 2025, and a quick start in 2026. Our organization is executing with precision and purpose. Our strategic initiatives are tightly aligned with our mission and partners and centered on embedding urgency, focus, operational rigor, clinical excellence and data-driven executional accountability across the enterprise, which we believe will translate into improved performance in 2026.

Through investment in technology and efforts to expand our access to richer and more timely data, agilon is leveraging data analytics and AI-driven insights to support delivery with a focus to improve the visibility and predictability of our financial performance.

Through our enhanced data pipeline, which went live in the first quarter, we now have more timely direct payer data feeds with validated and highly correlated member level clinical and claims data, as well as member level risk scores on approximately 80% of our members. We expect the increased visibility and alignment of our financial and operational data will enable us to more quickly identify and drive improvements.

We remain extremely focused on the performance optimization initiatives we previously laid out. These are centered on improving the near-term profitability of the business, allowing us to drive improved medical margin, adjusted EBITDA and cash flow performance in 2026. With respect to improved contract economics, we are currently in active negotiation with our payer partners for 2026. Based on our discussions to date, we are making strong progress on several fronts.

First, further reduction in Part D exposure;

second, an expansion of quality incentives;

third, improved economic terms for Part C.

And fourth, we expect a continued narrowing of risk from supplemental benefits through better information.

Based on the public commentary and initial review of payer bids, we expect more favorable bid design, focus on MA profitability, including improved pricing, reduced benefits, increased deductibles and maximum out-of-pockets, which is expected to have a positive impact on agilon's medical margin in 2026.

We are also taking a very disciplined approach to contracting. And for those payers with benefit designs and pricing that are inconsistent with market dynamics, we are prepared to take decisive action. While this may result in reduced membership, we are focused on profitable growth and earning the appropriate economics for the value we are delivering.

With respect to quality or stars, approximately 75% of health plan star ratings are directly impacted by the PCP, making our success in delivering 4 stars in the majority of our markets critical for payers. Our programs enable Care gap closure rates that exceed the overall MA average on key star measures, such as cancer screening and chronic condition management.

To further enhance our Stars performance, we are leveraging our enhanced analytics capabilities and collaborating with our partners to further improve condition identification, diagnosis and screening, leading to documenting and closing of gaps in Care through treatments such as medication adherence.

In early October, CMS released the 2026 Stars ratings, which will impact 2027. Approximately 75% of agilon members are expected to be in 4+ Star plans, an increase from 71% in 2026 payment year. This also compared favorably to 65% in the overall Medicare Advantage market. In addition, with the 2026 star ratings, agilon achieved a consolidated average of 4.2 stars across our markets.

This supports our efforts for improved payer economics that are better aligned with agilon's strong quality performance. Our BOI program is also contributing to improvements in early and accurate identification, assessment and documentation of a patient's comprehensive health conditions. By connecting the burden of illness assessment to our quality and care delivery programs, we can more effectively manage high-acuity chronic disease categories like heart failure.

We are on track for our palliative program and clinical pathways. Based on the performance to date, we believe this will positively contribute to our financial results in 2026. As a reminder, these patient-focused, physician-driven and technology-enabled clinical pathways have been developed in collaboration with our physician partners and national experts. They enable our teams to close Care gaps by looking at some of the highest prevalence chronic conditions, which affect our patient population.

With respect to our heart failure pathway, we are seeing encouraging results by identifying and diagnosing these conditions earlier in the outpatient setting. Our physician partners are better able to manage the progression of each illness and improving the quality of care for the patient. We have reduced new inpatient heart failure diagnosis rates from 18% in 2024 to 5% in 2025 across our MA population.

In markets where our virtual pharmacy solutions are active, about 50% of patients with heart failure and reduced ejection fraction are receiving Guideline-Directed Medication Therapy. This is approximately 30% higher than the national average. Similarly, when virtual pharmacy solutions are combined with transitions of Care cardiology, we have seen 30-day readmission rates fall below 5% as compared to the national average of approximately 20%.

This performance is expected to continue as we expand the program and we move into 2026 as more partners fully implement the program.

With respect to our Palliative Care Program, we continue to make progress in our education, market penetration and enrollment. By focusing on providing care in a hospice or home setting, we see better Care satisfaction for the member and their families and less hospital admissions.

As we move into 2026, in addition to existing programs, we are beginning to expand our COPD and dementia pilots and anticipate further adoption. In the quarter, we have also taken steps to optimize our cost structure to align with current market dynamics, including a more balanced near-term growth outlook. The leadership team is working to strategically realign our organization structure. We have made thoughtful decisions to streamline certain teams while simultaneously investing in other areas that will help drive our next chapter of innovation.

Through the centralization of certain functions, implementation of technology and alignment with our PCP partners, we have reduced our headcount and streamlined our capital requirements and third-party costs, all to gain greater operating leverage from the platform and support our growth objectives. These operating expense initiatives are expected to reduce our costs by approximately $30 million in 2026. Finally, while we are making progress in our search for a CEO, the skills, experience and relationships that are aligned to our new path, we remain committed to moving decisively now to enhance performance and agilon's position for sustainable value creation. Thank you for your continued support during this transition period.

With that, I'll turn it over to Jeff.

Thanks, Ron, and good afternoon.

As Ron touched on, 2025 is a transformational year. We are advancing strategic initiatives that we started putting in place last year to improve our contract economics, reduce our risk and optimize our cost structure. We believe the increased visibility gained from the enhanced data pipeline, advances we have made in our BOI and clinical pathways programs, a $30 million reduction in operating expenses and a more disciplined approach to growth is expected to have positive impact in 2026.

For today's discussion, I will cover 4 key areas:

First, I will walk through our third quarter results.

Second, I will provide details on our reinstated 2025 guidance and a bridge to our jumping off point for 2026.

Third, I will provide color on the significant number of tailwinds we believe will support improvement in our 2026 performance.

And finally, I will discuss the strength of our capital position based on our expectations for 2026 and a more disciplined near-term growth outlook.

Moving to our financial performance for the third quarter. Starting with membership. Medicare Advantage membership at the end of Q3 2025 was 503,000 members compared to 525,000 members in Q3 2024. Our ACO REACH membership for Q3 was 115,000 members compared to 132,000 members in the same period of 2024. As we discussed previously, our decision to take a measured approach to membership growth has resulted in a slight year-over-year decline driven by previously disclosed partner exits in a smaller 2025 class.

Total revenue for the third quarter of 2025 was $1.44 billion compared to $1.45 billion in the same period of 2024. Our year-over-year revenue comparison continues to be impacted by lower-than-expected risk adjustment as well as the impact from market and payer contract exits.

During the third quarter, we received the remainder of the 2024 risk adjustment data and substantially all the midyear 2025 risk adjustment data from our payer partners. This indicated the 2025 risk adjustment for the remaining 28% of members we did not include in our prior results was lower than the average.

The third quarter reflects the impact of lower-than-expected revenue associated with 2025 risk adjustment scores of $73 million, including a 9-month true-up of approximately $50 million for the remaining 28%. We now estimate the full year impact to medical margin for lower-than-expected risk adjustment is approximately $150 million.

The larger-than-average impact for the remaining 28% was primarily driven by one payer representing a new market in 2024, where we also did not have data for 2023. This payer is now in our data pipeline, which provides us with confidence in establishing our risk adjustment baseline and potential for 2026.

In addition, exited markets negatively impacted the quarter by $20 million. First half cost trends continue to develop favorably and were approximately 5.7%. We took a prudent approach in the current quarter and recorded cost trends at a little over 6%. As we have previously stated, we have limited paid claims visibility at this point post quarter close.

Medical margin this quarter was negative $57 million compared to negative $58 million in Q3 2024. The current quarter reflects continued elevated cost trends in line with our expectations for the year. In addition, this includes the previously mentioned risk adjustment and exited market impact.

Adjusted EBITDA for the quarter was negative $91 million compared to negative $96 million in the third quarter of 2024. The third quarter reflects the items I already highlighted, partially offset by lower geography entry costs and benefit from continued operating cost discipline.

We are very pleased with our strong ACO REACH performance during the quarter, including our final 2024 reconciliation. Adjusted EBITDA related to this program this quarter was ahead of expectations at $18 million. ACO REACH continues to demonstrate the value creation agilon can deliver and is shaping the way we are transforming our MA business, reducing our exposure for things outside of our control like Part D and supplemental benefits while focusing on improved economics and incentives for agilon's quality, clinical and medical cost performance.

On the balance sheet, we ended the quarter with $311 million in cash and marketable securities and $172 million of off-balance sheet cash held by our ACO entities.

Next, let's move to our medical cost trend outlook and reinstated 2025 guidance. Managing medical cost trends remains a top priority. For the first half of 2025, medical cost trends have been stable but elevated in areas such as inpatient and Part D oncology drugs and restated favorably relative to our expectations. We anticipate the medical cost trend to remain in line with our expectations.

Now moving to guidance. With greater visibility as we head into the year-end, we are reinstating our full year 2025 guidance. I will also provide some color on our expectations for 2026 based on our actions to date and initial review of payer bids and contracting efforts. For the full year 2025, we expect Medicare Advantage membership in the range of 503,000 to 506,000 with ACO model membership projected to be between 113,000 to 115,000.

We expect revenue for 2025 to be in the range of $5.81 billion to $5.83 billion, reflecting the impact of membership shifts and improved revenue yield from payer contracts. The revenue outlook also reflects lower-than-expected 2025 risk adjustment performance of approximately $150 million, prior year development to date of $70 million, and exited markets of approximately $60 million.

Full year medical margins are projected to be between negative $5 million to $15 million and adjusted EBITDA guidance range of negative $270 million to negative $245 million. We expect to end the year with approximately $310 million of cash on our balance sheet, including approximately $65 million held off balance sheet by our ACO entities.

We have provided a bridge in the earnings presentation we issued today that walks from the current guide for 2025 to our jumping off point for 2026. The expected $135 million medical margin jumping off point for 2026 includes approximately $150 million of lower-than-expected risk adjustment contribution for 2025.

Now let me provide some color on 2026. While we are not prepared to provide specific 2026 guidance at this time, I want to walk through why we are optimistic about next year as illustrated on Slide 7 of our earnings presentation.

We see several tailwinds, including macro factors like the 9% benchmark rate increase, better aligned payer contracts and the disciplined cost actions Ron outlined that we believe will both drive material improvement in our performance in 2026 and establish a path for consistent improvement as we move beyond next year.

First, in the third quarter, we completed restructuring actions to improve our operating expenses. We rationalized other medical expenses, including better alignment of incentives with our PCP partners, reduced overhead and vendor costs in line with our current revenue run rate and more balanced growth outlook. We estimate that this will drive $30 million in cost and adjusted EBITDA benefit in 2026 with additional opportunities for savings in 2027.

Second, we have taken a more disciplined approach to payer contracting, which includes incremental percentage of premium and enhanced quality incentives from payers for the value we deliver. This is expected to drive revenue growth on a PMPM basis potentially greater than the 9% CMS final rate notice for 2026. We have reviewed payer bids across our markets. And on average, we see payers bidding for profitability with benefit design changes, including increases in premiums, deductibles and maximum out-of-pocket expenses and a reduction in supplemental benefits. This is expected to be a positive offset to cost trend in 2026. As a reminder, 2025 included a 1% benefit from payer bids.

As part of our disciplined contracting strategy, we are taking decisive action market by market with payer contracts that do not meet a minimum threshold for profitability. While our contracting for 2026 is not final, if we cannot come to appropriate economic terms in certain markets, we may not contract with specific payers in these markets. As part of our discussions, we may also transition some of these members to a Care coordination fee with additional performance incentives.

Depending on the outcome, this may reduce our overall membership in 2026, though this impact may be mitigated if a member shifts to another payer with more favorable economics for agilon or moves to a coordinated Care fee arrangement. This disciplined approach is expected to be favorable to medical margin and adjusted EBITDA in 2026 and beyond.

Our contracting efforts also include additional steps to reduce variability in our performance by effectively managing multiyear contract terms to reduce our exposure to macro cost trend volatility, interim payer benefit design changes and pricing that may be detrimental to our capitated economics. This includes reducing our payer contract term length if needed or adding additional material adverse change clauses to the contract.

In addition, while our exposure to Part D in 2025 was primarily related to carved out or exited markets, we are continuing to further reduce our exposure.

With respect to BOI, we are confident that the enhanced data pipeline, which now includes the outlier payer from the remaining 28% of our members, AI advances for high-risk member identification and diagnosis in our BOI program, and execution on clinical pathways will deliver results over and above the final year of V28. Our confidence is based on a review of validated codes in our data pipeline and our ability to deliver results above the impact of V28.

Last, on our cash outlook, with the anticipated performance improvement in 2026 from our initiatives and the macro factors I just walked through, combined with our focus on working capital management, we expect to end 2025 with approximately $310 million in cash and 2026 with at least $100 million in cash on our balance sheet, including cash held in our ACO REACH entities. Before I close, given our current stock price, we anticipate pursuing a reverse stock split and expect to seek stockholder approval at our Annual General Meeting in 2026.

In summary, while we continue to operate in a challenging environment, the actions we are taking to refine our strategy, improve operational execution and financial visibility and strengthen our financial position are expected to have a positive impact on our performance in 2026 and beyond. We remain confident in the value we bring to our members, PCP partners and payers and our ability to navigate the near-term headwinds while positioning agilon for long-term success.

With that, operator, let's move to the Q&A portion of the call.

[Operator Instructions] The first question we have from the phone lines comes from Michael Ha with Baird.

I see on your slide that you have ACO REACH as a negative impact for next year. And I know the risk corridors are narrowing next year to 10% savings rate. I think agilon is at 13%. If, on our back of the envelope math, we're getting somewhere around $10 million to $15 million of EBITDA impact. Is that the right ballpark to frame it? Is that what you're highlighting in your slide? Are you able to offset it? Does this narrowing of the savings rate create any friction with your ACO REACH partners? Just thoughts there would be great.

Yes. Thanks, Michael, for the question. This is Jeff. I actually think the re-baselining of the risk adjustment is actually more meaningful for us. And so yes, what we are reflecting here is that there were several changes to the ACO REACH program. And I think we've commented about this before that we do expect lower economics from the program while still contributing, I would say, very good margin. And we're reviewing our ACOs right now and determining what model is actually better.

And I think we've made the decision on some of our ACOs to move them to the MSSP program as we think about 2026 because the economics would be better in that program. Not going to really size the impact right now. We're getting a little ahead here on the '26 guide. But you are correct, it's really driven by those changes.

We will now move on to the next question. We have Jack Slevin with Jefferies on the line.

I appreciate all the color included in the deck in the release. I guess this might be a little high level because I acknowledge it's a bit early, but I just wanted to frame some of your commentary around potential further exits from payer contracts. And maybe I'll just broaden it out to say, are you contemplating, I guess, one, market exits on the table at this point? Or is it really just specific payers? And then two, if there's any way to get a sense of the order of magnitude that might be at play here? Just trying to frame out sort of what we might be looking at going forward. And any thoughts or sort of qualitative color would be really helpful.

Yes. Thanks, Jack, for the question. You're right, it is a little early. We're kind of midstream on the contracting here as we think about 2026. I think the takeaway for you would be, listen, we are taking a very disciplined approach and where the economics don't make sense for the value that we're delivering, ultimately, we don't have to do business with that payer. Some of those members may move to another payer in that market; and, or we may enter into a Care management deal, a Care coordination fee with upside for quality and things like that. I think the point I would take away is any potential reduction in membership would be beneficial to the medical margin and the EBITDA for agilon. And that's really what we're focused on. So unfortunately, I can't size it for you right now, but any reduction would ultimately be to the benefit of the bottom line.

Yes. I would just add, Ron here, that we have been very clear with the payers about the value that our physician partners create, both in terms of the Stars Program as well as closing gaps in Care. And I think we've been very clear that we are contracting for tomorrow and not the historical relationship that we've had in a more normalized trend, more normalized utilization. I think the good news is that we've been working with some of our partners who understand this, who are exhibiting an attitude that's supportive of the kinds of objectives that we have. But we're very clear, this is about being profitable and achieving the kind of margin that we want, and we're committed to working through that.

We now have Jailendra Singh with Truist Securities.

This is [Indiscernible] on for Jailendra. I guess just to start, is there any type of update you can provide on the CEO search and how that's going? And if you guys have made a decision between like internal and external candidates?

Yes. I would say that I've been spending a good deal of time. I think I'm pleased to say that we have some very good candidates coming forward. The process is open to all candidates who are interested in applying for the opportunity. And I would say that we feel good about where we are in pace and timing. I certainly wouldn't forecast a conclusion here. I think the most important thing for you to know is that while we don't have a permanent CEO, I am 100% focused on what we need to do to improve performance in the business. I meet regularly on a daily basis. The office of the Executive Chairman meets every day. We focus on the critical priorities and objectives with the goal of having a very strong finish to the year and a strong start for next year. So, while no time line on the process, this is not caretaking. This is active engagement and focused execution.

And if you don't mind, if I could squeeze in just a quick follow-up. Thank you for all the color on the medical cost trends. Is there just anything to call out in terms of what you saw in Q3 in areas that were maybe high or cooling off a little bit? And then also if there's any color you can provide into Q4?

Yes. I think it's the same issues we've highlighted in the past quarters, really, its in-patient Part B drug spend, specifically oncology; In-patient continues to run a little bit high as well. I think those have been consistent over the last several quarters. So, nothing new here. I would say that the first half medical cost trends have all restated favorably. So Q1 has come down. Q2 has come down since we last spoke, which is good, and it's just a little bit over the mid-5% range. And again, for Q3, we just took what I call a relatively conservative approach in the low 6s. Ultimately, we don't have a lot of paid claims for that. And so, we'll have to see how that estimate plays out as we get into the fourth quarter.

Your next question comes from Ryan Langston with TD Cowen.

I think I heard you say there's about $65 million currently at the ACO entity level. I guess, is there a minimum amount of cash you need to have allocated to the REACH entities? And in the year-end 2026 balance for cash, what's contemplated at the ACO REACH level?

Yes. So actually, at the end of the quarter, we had $172 million in the REACH entities, and there's cash settlements that happen in the fourth quarter. And so, the way we think about it is once those settlements are processed in Q4, we'll roughly be at the $65 million. And as you think about the year-end balance, the $310 million we quoted, it includes that $65 million. So, we expect to end the year at roughly $310 million. That includes $65 million from REACH. I would say there's no requirement to hold those dollars in the REACH entities. It's more from a tax perspective because they're outside of our consolidated umbrella. There's some tax efficiencies gained by leaving it there and then monetizing that over time. But we have access to that if we needed it.

Okay. Great. And then on the sort of higher-than-average impact on the risk revenue for the remaining 28% of the enrollment, I guess, was there any particular reason you expected these members to have higher scores? Was it accrual driven incomplete coding? Just trying to understand the potential implications for 2026.

Yes. I think we highlighted that in the prepared remarks. It's really, I would say, the higher than average is really driven by one payer that was new to us in 2024. We did not have data for them in 2023. So, I think that made the estimation, I would call it, more challenging, obviously, because you have to have '23 and '24 to really determine the increase in actual risk scores.

The good news is that, that payers now on our enhanced data pipeline. And what I will say is sitting here today, we actually have the ability to calculate member level risk scores. We did not have that ability a year ago. And so, as you think about what happened in the second quarter, we were able to calculate member level risk scores that tied or that agreed highly correlated with the midyear data from CMS and the final year risk scores as well. And so, we're in a much better position this year to calculate member level risk scores. That's all been driven by the process change associated with the enhanced data pipeline. So, we feel pretty good that we have a solid foundation in order to, I would say, set a foundation for this year and obviously project forward as we think about a 2026 guide.

We now have Justin Lake with Wolfe Research on the line.

This is Dean Rosales on for Justin. Is there any color you can give on what CMS is estimating for fee-for-service trend in '25 within the ACO REACH program? And then my second question is in your earnings presentation, you stated that you expect payer bids to act as a tailwind in '26. Is there any color on the benefit designs that you're seeing that you could share? Would you say reduction of benefit is largely consistent across your payers?

Yes. First, I'll handle the REACH question. The latest data, I think we have is fee-for-service cost trends are 8.5%, and so that's the latest information we have on the cost trends in the fee-for-service business. And then as far as the bid detail, it is different by payer is what I would say. And obviously, everybody kind of reads the public announcements from all of our payer partners. But generally, I would say it's different. But broadly across our network, what we've seen is really pricing for margin.

And it's maximum out of pockets, it's all of the things and the levers that the payers have in the bid design. And so, across our book, generally, I would say what we see is pricing for margin, which we believe is going to be a tailwind for us as we head into '26. So not all payers are the same, but across our footprint and our network, it's going to be a positive for next year.

We now have a question from the line of Craig Jones with Bank of America.

So looking at your Palliative and Heart Failure Program, I think you've rolled those out about most of your geographies now. For 2025, what kind of savings do you expect from those, either PMPM or millions? And then as we think about these test programs going forward, once you kind of get installed in all your geographies, is this sort of like a onetime boost that then kind of oscillates up and down based on participation? Or is it sort of an annual continued margin accretion?

Yes. I would say, just to go back, we implemented a lot of these clinical programs, I would say, late in 2024, early in 2025. So there certainly is a ramp period, and some of that benefit will accrue to 2026, given the long-tail nature of our business. We're not going to get into any specific PMPM savings, but I think Ron highlighted in his prepared remarks, some of the outcomes that we're seeing from those programs.

They have been very successful. Ultimately, it is reducing medical expense and improving, I would say, the identification of disease burden for our members so that we can get them into the appropriate treatment programs. And so, we look to, I would say, continue the evolution of these programs as we exit '25 into '26. And they will be permanent programs. So, they will continuously drive value, and we would continue to iterate on these programs to continue to make them successful.

Yes. Probably the only thing I would add is that we will continue to enrich the data sets and the AI algorithms that we use to identify potential suspects and the burden of illness in patients that has not yet been detected along with other diagnostic techniques that our medical groups have invested in, and we've supported. So, I think you can expect that this will continue some level of progression into the future, while at the same time, we expect to ramp up other programs that our medical groups have determined represent good clinical care for their patients.

We have Daniel Grosslight with Citigroup

I think you've covered the changes you're making to payer contracting well. But correct me if I'm wrong, I may have misheard this. I think I heard in your prepared remarks that you're also altering how you're contracting on the provider side. Can you just provide a little bit more detail on how, if at all, your provider contracts are changing, particularly with regard to risk sharing and how this may shift receptivity on the provider side to contracting?

Yes. On the provider side, we're not changing any of the contracts on the provider side. I think what you're referring to is there was a comment about the $30 million of operating savings really executed on for next year. I think part of that was aligning the incentives with our physician partners. So, we did take a fresh look at incentive alignment, and that was a component of that $30 million.

Okay. Can you provide a bit more detail on what that means in practice with incentive alignment, how incentives are changing?

Probably not here. I mean it wasn't a substantial piece of the $30 million is what I would say. And so, as you think about that $30 million, I would say half was generally corporate, what I'd call corporate overhead costs. And then the other half would have been, I would say, more market operating costs that we are looking at. So the physician incentive piece was relatively small.

We now have a question from Andrew Mok with Barclays.

I wanted to follow up on the payer contract discussion. When you see benefit misalignment with your payer partners, is that concentrated more in small regional health plans or large national carriers? And how much of your current membership is already contracted for next year? And how much is still outstanding?

Yes. I guess what I would say is it's a market-by-market item, right? So it's not just broadly across one payer or this payer. You have to go into each specific market and understand the benefit designs that impact us. And ultimately, as part of our contracting process, we get the bid information, we analyze that, and that is a key component of our request on economics, as you can imagine. And so I would say it's a little more nuanced than kind of what you're saying.

And then the second part of your question, what was that?

How much of your membership is already contracted for next year when you think about what's left outstanding?

Yes. I would say it's kind of hard to put a pin on exactly how much is where the ink is dry, if you will. I think we've come to general business terms with; remember, we had about 50% of our contracts open for renewal. We've come to, I'd say, relative agreement on a substantial portion of that. But obviously, you have to dot the I’s and cross the T’s and that matters. And so I would hesitate to say right now at this point how much. But obviously, we're going to work through the bulk of this in the fourth quarter, and we'll have an update for you when we do our year-end call.

Yes. The only thing I would add is that the negotiations have really been extensively supported by our physician partners because they are in that community. They have the relationship with the patient. And so they have been really actively at the table with us in markets to assist in delivering the important messages to payers who may not have heard us as clearly as we had hoped.

Great. And if I could sneak in one additional question. I would love to follow up on Stars. I appreciate the comment that bonus year 2027 Star scores will increase. But as we think about bonus year 2026 and some of the volatility there, to the extent some of your payer partners have a reduction in Stars, can you help us understand whether this headwind flows downstream to you? Or are you getting a fair premium increase to offset that Stars headwind?

Yes. Obviously, that's another key component of what we're talking about when we're doing our contracting. So again, I would say we are looking for total overall economics that makes sense for our partners in agilon, and that's what we're focused on. And that's when we said we're taking a disciplined approach, that would be part of that equation.

We now have Matthew Shea with Needham on the line.

I wanted to hit on the clinical programs again and the broader COPD and dementia rollout. What is the staging or timing of going from a pilot to permanent program look like? And based on your success with palliative, how long do these broader launches tend to take to ramp towards meaningful savings with that, I guess, given the early success from your existing programs and some of your commentary, do you plan on rolling out incremental programs or piloting new specialty areas in 2026? Or how should we think about clinical programs sort of evolving from here?

Yes. I would say you're heading down the correct path, meaning the first thing we typically do is pilot some of these programs and validate that ultimately, it's improving the Care for the member. And so we would pilot those. You have to have enough data, obviously, to make sure that, that's happening. So I'd say the pilot phase is relatively 6 to 8 months could be longer. But then ultimately, we would roll that out.

And of course, it's, you can't roll it out to everyone at all times, right? And so we roll it out market by market, starting with the markets that we believe would provide the most value. And so yes, I would say we plan to take the pilots of COP and dementia. I think we're going to roll those out to more markets in 2026. And then yes, obviously, potential new pilots are on the table, and we're thinking about those as we think about our 2026 guide and what we're planning on doing for next year.

Yes. All of these programs are developed in consultation with our partners, and we have network Advisory Board where the leaders of the principal medical groups come and advise, review the evidence and support and endorse these types of initiatives as good patient care for their members. And so we do have some teed up, as Jeff described. And we feel like as we've implemented congestive heart failure, we've learned a lot about that process of diffusion of both the clinical evidence technology, training and support of the physicians.

We have the next question on the line from David Larson with BTIG.

This is Jenny Shen on for David. I just wanted to ask about the Big Beautiful Bill Act. Do you expect that on the Medicare side to have any impact on your business at all? And if you do, what do you expect those impacts to be?

Yes. We don't expect it to have a meaningful impact on the business. And I guess we'll just leave it at that.

[Operator Instructions] And we now have Amir Bani with Evercore on the line.

So Humana is one of your largest payer partners, I believe, and it looks like they're focused on benefit stability for '26. So I guess I'm trying to get a sense for how you think this impacts your medical costs for next year. Some numbers around that would be very helpful. And if I could squeeze in a quick follow-up. What do you see as minimum working capital for your business?

Yes. So real quick, I think we've kind of covered this maybe the first question as far as Humana. I think we've kind of covered this in the contracting phase, which is ultimately, we get the benefits for each of our markets. We get the plan designs, and we analyze that, and that's part of our overall contracting efforts looking for the economics that we think makes sense for us. And so I would say that's just one, you're just talking specifically about one payer, but the process is the same across all payers. And so I think that's where we are from that standpoint. It's part of the overall contracting process and the economics we look for. And your second question on minimum working capital, I don't know what you're trying to really get at there. I don't have a number off the top of my head for what you're trying to pinpoint, but we can certainly follow up.

[Operator Instructions] I can confirm that will conclude the question-and-answer session here. And I would like to hand it back to Ron Williams for some final closing comments.

Well, thank you for joining us today. agilon will post 2025 with a sharpened focus and momentum driven by a suite of high-impact initiatives that are fundamentally reshaping our operating discipline and executional rigor.

I want to thank our employees and our partners who may be listening and I also want to thank you for your dedication and partnership with us. You're playing a crucial role in the health care industry, helping to transform health care to our employees and empowering our primary care physicians to focus on the entire health of their patients. We will continue to fulfill this mission with our employees. Thank you. Have a good evening.

Thank you. I can confirm that does conclude the agilon Health Third Quarter 2025 Earnings Conference Call. Thank you all for your participation. You may now disconnect, and please enjoy the rest of your day.