Alignment Healthcare Inc Stock

Good afternoon, and welcome to Alignment Healthcare's Second Quarter 2026 Earnings Conference Call and Webcast. [Operator Instructions] Please note that this event is being recorded.

Leading today's call are John Kao, Chairman and CEO; and Jim Head, Chief Financial Officer.

Before we begin, we would like to remind you that certain statements made during this call will be forward-looking statements as defined by the Private Securities Litigation Reform Act. These forward-looking statements are subject to various risks and uncertainties and reflect our current expectations based on our beliefs, assumptions and information currently available to us.

Descriptions of some of the factors that could cause actual results to differ materially from these forward-looking statements are discussed in more detail in our filings with the SEC, including the Risk Factors section of our annual report on Form 10-K for the fiscal year ended December 31, 2025.

Although, we believe our expectations are reasonable, we undertake no obligation to revise any statements to reflect changes that occur after this call. In addition, please note that the company will be discussing certain non-GAAP financial measures that they believe are important in evaluating performance. Details on the relationship between these non-GAAP measures to the most comparable GAAP measures, a reconciliation of historical non-GAAP financial measures can be found in the press release that is posted on the company's website and our Form 10-Q for the fiscal quarter ended June 30, 2026.

I would now like to hand the conference over to John Kao, Executive Chairman and CEO. Sir, you may begin.

Hello, and thank you for joining us on our second quarter earnings conference call. For second quarter 2026, health plan membership of 294,100 represented year-over-year membership growth of approximately 31%. This drove total revenue of $1.3 billion, which increased 32% year-over-year.

Adjusted gross profit of $183 million represented an adjusted MBR of 86.3%, which improved by 40 basis points year-over-year. Meanwhile, adjusted SG&A of $115 million improved as a percentage of revenue by 20 basis points year-over-year to 8.6%. Taken together, Q2 adjusted EBITDA of $68 million produced an adjusted EBITDA margin of 5.1% and represents 60 basis points of margin expansion year-over-year.

This quarter marks our lowest MBR as a public company and culminated in first half adjusted EBITDA of $106 million, putting us well on track to achieve our full year guidance of $154 million at the midpoint. Importantly, we accomplished this while continuing to invest in our business.

Our year-to-date performance reflects our unique ability to balance both growth and margin objectives by actively managing our members through our Care Anywhere clinical teams. With 6 months of experience into the year, we have strong visibility into the acuity profile of our members and remain focused on engaging our polychronic population who are most at risk.

Strong second quarter performance is supported by the deployment of the newest version of our AVA AI-powered stratification model. This advancement improved our ability to predict which members are going to be hospitalized. Our model now accurately and dynamically predicts the 10% of members who account for nearly 70% of hospital admissions over the next 30 days.

Innovations such as this and the deployment of our disease state registries support the proactive engagement activities of our Care Anywhere teams. While we continue to demonstrate strong year-over-year improvement across each of our key financial indicators, an even greater opportunity remains ahead of us.

Given our rapid growth in recent years, approximately 50% of our members are still in a year 1 or year 2 cohort. This results in significant embedded earnings potential within our existing membership, which we expect to realize as we engage members through our clinical programs over time.

When we first shared the embedded gross profit potential within our membership in early 2025, we indicated a total opportunity of approximately $600 million of adjusted gross profit. Today, the midpoint of our 2026 full year guidance already indicates expectations for $640 million of adjusted gross profit.

Meanwhile, the embedded gross profit potential of today's membership has grown to approximately $880 million. This positions us well to deliver further earnings growth from the existing members we serve today, while future membership growth further expands our embedded earnings potential.

Equally important are the investments we have made in our core systems, cross-functional workflows and talent, each of which are strengthening the durability and scalability of our MA platform. These investments are translating into better clinical outcomes, reinforcing the confidence we have in our operations and highlighting a core principle of our business, creating alignment among providers, members and shareholders, which enables us to do well by doing good.

While we invest thoughtfully for the future, our near-term SG&A leverage demonstrates the efficiency of our operating model and improving unit economics. First half adjusted SG&A as a percentage of revenue of 8.7% improved 40 basis points year-over-year and more than 300 basis points over the past 3 years. All of this was achieved while making investments like implementing a more scalable human resources platform, clinical EHR capabilities and enhanced claims processing systems.

Looking ahead, we continue to see opportunities to invest in the second half of the year to drive further operating leverage in the future through automation of back-office processes and greater economies of scale. As we capture these efficiencies, we expect to reinvest a portion of our savings in areas with tangible, measurable returns. This includes new market expansions, branding initiatives and deepening our AI capabilities.

Beyond its potential to unlock efficiencies in our cost structure, AI represents a meaningful opportunity to further enhance our care model and support providers. Most importantly, our approach to AI is grounded in decades of clinical expertise and reinforces our commitment to high-quality care. This is further supported by a governance framework to ensure responsible use, human accountability and equitable treatment of our members.

In closing, our strategy of balancing rapid growth, disciplined margin expansion and continuous investment to scale our operations remain unchanged and continues to underpin our story. We achieved this by putting seniors first and supporting our providers.

Our second quarter results underscore the strength of our model. As we move forward, we will maintain our disciplined approach to strike the right balance between growth and profitability.

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

Thanks, John. I'll dive into our second quarter results. For the quarter ended June 2026, health plan membership of 294,100 increased 31% year-over-year, supported by strong new member additions and high retention amongst our existing members. This drove revenue of $1.3 billion in the quarter, representing 32% growth year-over-year.

Second quarter adjusted gross profit of $183 million represented an adjusted MBR of 86.3%, which reflects an improvement of approximately 40 basis points year-over-year. Adjusted MBR, excluding the final suite pickup related to our new members was 86.7%, which was favorable to the midpoint of our guidance range.

Overall, medical cost trends continue to track closely to our expectations. Consistent with typical seasonal patterns and our outlook for the year, inpatient admissions per 1,000 declined sequentially and core medical utilization was in line with our assumptions. Meanwhile, Part D and supplemental benefits expense ran modestly favorable to our expectations year-to-date. We believe each of these factors are supportive of our full year guidance.

Turning to operating expenses. Our adjusted SG&A was $115 million, an increase of 29% year-over-year. Adjusted SG&A as a percentage of revenue was 8.6%, which improved 20 basis points year-over-year and outperformed the midpoint of our implied guidance range by 40 basis points, even as we continue to invest in our automation and scalability initiatives, as John highlighted earlier.

Finally, second quarter adjusted EBITDA of $68 million grew by 48% year-over-year and produced an adjusted EBITDA margin of 5.1%, which represents approximately 60 basis points of margin expansion year-over-year. In addition, first half adjusted EBITDA of $106 million represents an increase of 60% versus the prior year.

Moving on to cash flow and the balance sheet. We generated $111 million in operating cash flow during the first half of the year, and our liquidity profile remains strong. We concluded the quarter with $702 million in cash, cash equivalents and short-term investments.

Lastly, our funded leverage ratio at the end of Q2 improved to 2.2x our trailing 12 months EBITDA. Moving to our guidance. For the full year 2026, we expect health plan membership to be between 298,000 and 301,000 members, revenue to be in the range of $5.20 billion to $5.23 billion, adjusted gross profit to be between $630 million and $650 million and adjusted EBITDA to be in the range of $145 million to $163 million.

For the third quarter, we expect health plan membership to be between 295,500 and 297,500 members, revenue to be in the range of $1.30 billion to $1.32 billion, adjusted gross profit to be between $148 million and $158 million and adjusted EBITDA to be in the range of $20 million to $30 million.

With respect to our full year guidance, we are increasing our membership growth expectations given continued strength of our sales execution. In conjunction with the increase in our membership outlook, we are also raising our full year revenue guidance to approximately $5.2 billion at the midpoint, which reflects 32% growth year-over-year.

Turning to our profitability metrics. We are raising the low end of our adjusted gross profit range by $10 million and increasing the low end of our adjusted EBITDA guidance range by $7 million to reflect increased confidence in our full year objectives following a strong first half of the year.

Spending a moment on seasonality. The midpoint of our full year guidance and year-to-date results indicate that we expect approximately 30% of our full year adjusted EBITDA to be generated in the second half. This compares to approximately 40% of full year EBITDA in the second half of the prior year.

The change in our seasonality expectation is partially driven by a flatter slope to our Part D MBR, along with investments we are making in our clinical operations during the third quarter. Meanwhile, we continue to take a prudent approach to our utilization assumptions across each of our major cost categories for the remaining 6 months of the year.

As we move into the back half of the year, given our strong performance, we will continue to make further investments in clinical innovation, AI and talent. In the third quarter, we anticipate additional investments in Care Anywhere and an earlier ramp of our clinical hiring in preparation for new market growth and expansion, which will result in a seasonally higher MBR when compared to the prior year.

Likewise, we expect a greater portion of our full year SG&A expenses to be incurred in the third quarter compared to prior years due to the timing of our investments.

In closing, we are very pleased with our performance throughout the first half of the year, which reflects our continued disciplined focus on our care model and our members and consistent execution against our operating plans. The progress we are making on the transformational progress we have discussed today further strengthens our competitive advantages long term. This reinforces our confidence in our ability to deliver continued growth and capture the substantial opportunity ahead for Alignment.

With that, let's open the call to questions. Operator?

[Operator Instructions] Our first question comes from the line of Ryan Daniels with William Blair.

I wanted to dive a little bit deeper into the Q3 guide. I think that's probably the focus of investors heading out of the print. Can you go into a little bit more detail about just the timing of some of the investments you're making? And any more color digging deeper to what some of those investments are, how transitory and then what benefits you see in the back half of the year and maybe more importantly, into '27 and '28?

Sure. I think the -- probably there's 2 dimensions to this Q3 guidance. It's kind of the seasonality aspect and then the investment aspect. So inside that seasonality, we'll dive into the investments. But sequentially, we're going to see a little bit of an uptick in our MBR, and that is from investments. It's a little bit year-over-year new member mix and it's Part D.

So think about those 3 components that are driving that. But as it pertains to the investments, we're just continuing to find areas to invest in the business. And John and the team has been pretty consistent about this throughout the last couple of years in terms of putting ourselves in a position to really take advantage of the opportunity in front of us. So more specifically in the investments, we're going to make it in 2 different areas.

One is going to hit the MBR, and that's in our clinical operations, Care Anywhere, preparing for new market growth and some other investments we're making there. And the other part is going to be in SG&A as we continue to push forward, get ready for market launches in 2027 and put ourselves in a position to get some returns in '27 on these projects. So think about automation, AI, things of that nature.

They're not insignificant. And we think they're a really good return and set us up for the long term. It could be in the second half, an additional double-digit million across clinical and SG&A categories with the weighting of some of that being a little bit higher in Q3. okay? But this was all very deliberate. And it's inside the financial commitments we're making for 2026.

So to kind of step back for a moment, we had a great '25. We're signing up for '26 and delivering against a very good first half, as you know, and still managing to invest in the business to put us in a good position for the future because we really feel it's -- there's a lot of opportunity in front of us. But it will impact the second half of the year in terms of our MBR and our SG&A, but we're still going to deliver on our commitments.

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

Multipart question. First, I'm backing into roughly $6 million sleep benefit. Is that right? And if so, any reason why it's smaller than last year, even though your book is larger this year?

Second, I noticed in the 10-Q, you had, I think, about $6.5 million of unfavorable prior year development this quarter. I was wondering if you could elaborate on the timing and nature of those costs.

And then last, just the underlying 2Q MLR, excluding both those items, I'm getting roughly around 86.2%. Is that about right? And any comments on like monthly cadence throughout second quarter when it comes to trend?

Let's do the 3 parts. The first one was the suite. And this is -- Michael, you're referring to the newbie final suite for 2025. And as you're aware, we take a prudent approach on that in the sense that we do not have visibility on that suite. And so we tend to take a cautious approach and just book to the MMR until we see it. And the thing that can impact that beyond just the number of members, Michael, is the mix. I think one of the bigger impacts is V28 as the second year of V28 rolled into our 2025 dates of service and then just risk-sharing agreements around it.

So you're absolutely right. It was a smaller number than last year. And I guess you could call it on a per member basis, it was smaller. I think one of the bigger drivers there was V28. And so is it -- you mentioned $6 million, that's circa pretty close to what it means. We talked about 40 basis points on the call in terms of impact. So that's point number one.

The second thing is prior period reserve. So just to kind of put it in context, we are always looking at our reserve positions, and that's in all states of service. Year-to-date, we're favorable about $2 million on prior year in total. And we feel good about where we're at. Inside Q2, we had a very solid quarter, as I just mentioned. And within that strong beat, we chose to bolster our reserves by about $6 million, okay?

And this is -- we looked at the development of the claims in 2025. And we're always looking at that and saying, can we take a position and increase our reserves. And we looked at the quarter and said this is a good time, this makes sense. And so we feel pretty good about our reserve positioning year-to-date.

And then the last one, I just want to make sure, I think you had the third part.

Yes. It was if you were to exclude the unfavorable development and the sweep benefit am I thinking about underlying like core 2Q MLR at about 86.2%?

Yes. I haven't done the math, Michael. But if you add back the prior period and then subtract out 40 basis points, I mean, it's a dollar and a percentage, but I think it's probably net around the same level on MBR.

Our next question comes from the line of Justin Lake with Wolfe Research.

Can you talk a little bit about the Q3 seasonality in terms of Part D and why it's different? And then also in terms of in terms of the new member mix and why that's driving a difference there?

Yes. And so Justin, it sounds like you're asking to amplify those 3 components or 2 of the 3 components. So the Part D is just a little different versus last year. It's a flatter slope between the first half and the second half. And that's just kind of the behavior in the second year post IRA and the behavior of our experience. And then the new member mix year-over-year, we just have more acuity in the new member mix, which is adding a little bit more to the MBR across the board. And so if you compare it to Q2 last year, it's a little bit heavier. But that investment that we talk about is a big piece of that, the investments in the clinical infrastructure.

Our next question comes from the line of Matthew Gillmor with KeyBanc.

Jim, I wanted to see if you'd be willing to share the 80,000 metric for the quarter or just year-to-date. And then more broadly for John, I was curious if you'd offer any perspective on just 2027 bids. I know you may be limited on what you may say in terms of how you approach, but just be curious in terms of the perspective you'd offer and how you think the industry will approach 2027 bidding.

Matt, thanks for that. So as we mentioned on the call, 80,000 did improve sequentially. And I'll be more specific, it was in the mid-150s and in line with our expectations given our membership mix and how we're tracking this year. So pretty much in line.

I would say, Matt, that on an ongoing disclosure perspective, I think we're going to move away from digitally disclosing it every quarter. And I'll give you the rationale. While it's really important internally how we manage the business, our clinical operations, et cetera, externally, it seems to create a little bit of noise. And I think it doesn't necessarily affect the overall health of our operations.

So Q1 last quarter was a perfect example of like talking about AK and kind of creating probably more static than signal. But having said that, we'll find a balance because we want to continue to provide the right context around our performance and the trends going forward. So I know you're mindful of this, and we'll be respectful of it, but it's just -- I don't know if we're going to get into the digital precision that we've had in the past because it isn't the story per se.

Yes, Matt, John here. With respect to '27, I mean, I'm going to give you the standard. It's too early to talk about the bids with respect to our strategy, obviously, for competitive reasons. I will say, I feel about as comfortable as I've ever felt about our overall product strategy and the amount of work that went into this year. I feel very, very strong about it. And a lot of these investments we've been talking about are designed to realize scale and portability. That's what we think we need to prove and that you are looking for us to focus on.

And everything is designed around that. It's scale and portability. I'm really happy -- really, really happy about our progress along that front. And so that gives me confidence with our ability to support the growth we expect in '27.

With respect to the industry, I think you're going to have more of a mixed bag. I think you've got people still that are going to be more margin focused than others. But I think there are going to be 1 or 2, maybe 3 players that come out of the woodwork that have not been aggressive over the last 2 years, and will be a little bit more aggressive just given some of the market chatter that we're hearing.

Our next question comes from the line of John Stansel with JPMorgan.

It seems like the upcoming MA technical rule has arrived at OMB somewhat sooner than some industry observers expected. And I think some have concluded that might mean it's a bit of a larger, more substantive rule. In your discussions, do you have a view or an expectation of what we might see from CMS when they roll out the new technical rule?

Yes. John, if you got something new, can you share because we're not to, frankly. Yes, I don't know. I'm not sure. We're all looking at each other, we miss something. John, are you there?

It was -- no, you said, it's under review at OMB already, the 28 technical rule.

Yes, no. We've heard that we don't have visibility to it. If there's anything that would have caused it to get there this early, it probably would be around stars would be my guess. But I don't know. We've heard the same that the ruling is in there now and -- but we don't know what it is technically.

Our next question comes from the line of Kevin Fischbeck with Bank of America.

Great. I guess last quarter, there's a bit of focus on MLR performance within California versus outside of California. I wonder if you could provide a little bit of disclosure about how those 2 sets of businesses performed.

Yes. Yes, there's been some focus on the statutory filings in California as a signal to broader performance. I just would remind you that these are statutory financials. They're not linked necessarily to our GAAP consolidated parent company financials. But I would say the following that we've got a mature California market that's performing quite well, and you've got pretty substantial growth over the last 2 years in our non-California markets. And the right way to think about it is cohort maturation.

If you've got a more mature portfolio in our -- with our care model and our model that we employ, we actually see MLRs improving. And so if the average kind of member is in 3, 4 years versus 1, 2, you're going to see a better MLR. And so there's a lot of embedded value in the ex-California states, but we feel very pleased with how they're performing right now year-to-date.

And so I guess you'll see some of that in the filings, but we generally don't operationally focus on those statutory filings as a proxy for our business. We run our business differently. But I know investors have been focused on it. And we just feel like we're tracking to our expectations across both of those arenas.

Our next question comes from the line of Jessica Tassan with Piper Sandler.

So in terms of your long-term MBR, I think in your '25 JPMorgan deck, you all implied 93% year 1 and 82.1% year 5 MBR. That was based on 2024. Is that framework still valid after 3 years of V28? Or should we assume some degradation?

And then just in light of the MBR opportunity on tenured members, should we kind of expect stable benefits in existing markets and existing products in '27? John, you mentioned 2 to 3 competitors could be more aggressive next year. So just interested if you could talk about how alignment is positioning for that change or for that expected change.

Yes. The cohort tracking and trending is directionally consistent with what we shared last year. There's really no change. The positioning around the embedded earnings potential that I spoke about is predicated on that. And so the way we're interpreting this kind of notion of portability is to realize the same kind of earnings power that we've been able to generate in California is to plant those seeds in these new markets.

And so when you're doing that, you're inherently going to have a higher MLR because you've got so much growth as a proportion of your base. So the more we're going to grow ex California, the stronger the earnings potential there is going to be -- and then a lot of the work that we're focusing on the investments is, again, designed to really scale this thing, really scale.

And again, I am really, really happy about the operational work we've done. The workflow processes, the technology, the addition of new teammates, all of which is terrific. So I'm very, very happy. And I think we mentioned we're going to be entering new markets in '27, not new states necessarily, but really gearing up for that for '28. Again, all of that's in the kind of the longer-term strategy to get to 1 million lives. And we're doing it really happy with our progress.

Our next question comes from the line of Scott Fidel with Goldman Sachs.

I wanted to just ask about the activities that you were implementing earlier this year around centralizing some of those sort of critical functions around some of the clinical and medical management exercises and sort of moving away from some of the sort of capitation that you had around that. How that's going?

And then also just around the clinical investments that you're making in the third quarter and maybe in the fourth quarter, do some of those relate also to sort of completing or continuing some of those centralization functions that relate into some of the inpatient sort of management, particularly in the non-California markets?

Scott, John here. Yes, it's actually a very, very good question. It's a very strategic question that we have paid a lot of attention to. And we are building out the end-to-end operational business model that incorporates different types of contracting strategies.

And so in other words, whether we're globally capping with the provider or we're doing a shared risk kind of arrangement that's delegated or it's a shared risk arrangement that's delegated where we will do a lot of the administrative work and/or as we are growing our number of directly contracted providers that we're fully at risk, both the professional and the institutional side, we are literally building out the end-to-end competency to take that risk and manage that risk such that we can really take advantage of the efficacy of Care Anywhere without diluting any of the hard work on lowering overall admissions that result from the Care Anywhere rollout.

And so we're a lot of the way through that process right now. And it will enable us to expand ex California, irrespective of the type of contracts we enter into. This gives us a huge amount of strategic flexibility to engage providers at their comfort level. And the whole idea is to create alignment with that provider with that health system. I think that gives us a big differential advantage over everybody else.

And then you layer in Care Anywhere on top of that. And so the investments that we're making are just continuations of that theme. And it's -- and I alluded to it in the script, we're making investments in the stratification model to have that become more precise. We're making investments in, I'll call it, chart prep automation to make workflows easier for our nurses. We are making investments in AI around all the back-end administrative functions like MRA, like SARS reconciliation.

All of that is starting to pay off now. And we have a lot of good people that have worked for a long time that have had a lot of value. We're adding to that great team of people now with some leaders that have abilities and experience scaling. It's all about getting to scale is the way I'm looking at this.

John, can I just ask a quick follow-up question relating to this? And Jim, just around that issue and these sort of activities you're taking to address those issues earlier in the year. Just curious of the $6 million in negative PYD, was that just sort of flow through from these same dynamics that we had talked about earlier in this year? Or is that unrelated to that?

Unrelated. Unrelated. We just took a look at prior year 2025 and wanted to bolster our reserves. What we talked about in the last quarter was really just a January of '26 issue that we resolved. And I would just say as a footnote to that, it's performance has been outstanding year-to-date.

Yes. The strategy is working. And the reason it's working is we're surplusing and gain sharing more with the providers. I mean, so you develop that kind of operational muscle to consistently surplus with providers. We're not fully there where I want to be with all providers yet, but we're making huge progress to create alignment. There's a whole point of alignment to create alignment with the providers in each market with full transparency for the benefit of that. That's what we're trying to do.

And we're starting to make that work outside of California where my confidence level is we're going to start deploying some capital heading into '27 and then more in '28. It's kind of consistent with what we've been saying all along. There's nothing really new there. We're just actually executing now.

Our next question comes from the line of Andrew Mok with Barclays.

We've seen a meaningful upward drift in Stars cut points in recent years. As we shift focus to bonus year 28 stars, what are your expectations for further movement in those thresholds? And how confident are you in your ability to perform against those benchmarks?

Andrew, we're not sure about what you just said. We're very comfortable. We're going through all the CAHPS data. We just got the CAHPS data. We're going through that. We expect to get other visibility to HOS data, Part B data, et cetera, down the line. I think it's a little early to start speculating about it. I will say that I think the regulatory and kind of legal footing surrounding Stars is a little shaky right now.

And a lot of outcomes could be different based on how some of these regulatory changes are actually implemented. It's all related to a lot of the litigation that one of our competitors, we really don't compete with another MA plan won that suit. And that has pretty significant implications for the rest of the industry. And all we want really is a consistent and fair regulatory landscape. So I don't know the answer to your question, but I feel good about our position.

Our next question comes from the line of Whit Mayo with Leerink Partners.

Jim, sorry, I wanted to go back just to the PYD. I know we're just going to get the question. The Q says the PYD was due to deteriorating collections and higher costs. So I'm just trying to reconcile your comments on proactive strengthening. I know these aren't big numbers, but just wanted to flesh that out.

Yes. It's consistent. It's -- you've got 2 things going on in prior year, your payment integrity activity, collections and then you've got your -- just how you're looking at the paid claims coming through. And we look at all of our dates of service across all the triangles and just make sure we're positioned well. And I think our MD&A is pretty accurate on that, but we feel good about our reserve positioning. When you have a prior year adjustment, you have to call it out in your financials, but we do this -- it's just normal course of business across all our triangles.

That's helpful. And just, John, I don't know if you're going to share what new markets you plan to enter, but maybe what are some of the underlying characteristics of those markets?

Yes. And you're right, we're not going to share where until the bids are out. I mean, the final product bids are out public in October. But we thought it best to be prudent for us to still have that balanced growth and margin profile in '27 with pretty meaningful market expansions within the existing state footprint that we have.

And then the expectation is to expand the number of states in '28, and as we get closer to that, I'll give you a little bit more visibility on how many. But again, all the work we're doing in '25, '26 and part of '27, we got to file service area expansions in February of '27 for '28. So really a lot of the operational preparedness is anticipation for scaling the business. And then again, coming back to you with proof points on getting the same kind of embedding earnings leverage in some of these newer markets.

Our next question comes from the line of Jonathan Yong with UBS.

I just want to go back to the costs that's coming in 3Q and 4Q. I guess, are any of these onetime in nature? Or should we consider these ongoing costs? And then kind of similarly, as we think about how '27 will shape up in relation to your growth strategy for '28, will we see these kind of investments where there may be a bolus kind of leading up into the '28 period?

Yes. It's a really good question. And I think in the near term, the second half of this year, we saw some opportunity to make some investment. But I think the cardinal rule is it's always inside our commitments on our guidance, but also on our commitments to continue to take our SG&A level down. So one of the themes that you'll hear from us consistently is we want to make investments in the business to lower costs, and then we want to take some of that savings and reinvest it back in the business -- and I think you're seeing that in action in the second half of this year.

On the SG&A front, investing back into new markets and branding. On the clinical side, we think we make those investments and we're going to get a return in terms of 2 really important things. Our members benefit because we're helping to make them healthier, and we're avoiding cost. And so we think that -- that's a win-win across the board. So all these investments we're making have returns, and we want to keep it inside the guardrails of what we're committing to.

Our next question comes from the line of Parker Snure with Raymond James.

I was just wondering if you could talk about your performance in your SNP members versus non-SNP members and how those are tracking relative to expectations? And just a follow-on on that. You're adding a fair amount of C-SNP members this year, and you mentioned some higher acuity in your new member mix. Just curious if those 2 dynamics are related.

It's related and intentional. This year, we added 50% of our new members were in C-SNP eligible, D-SNP eligible and Dual-Eligible. So like kind of the more acute categories. And what the implications are, at least in the early part, that the MLR is a little bit elevated compared to a typical new member. But we're making that investment very intentionally because we think we can do very well with this cohort. We -- our care model is really tailor-made to help these populations and make them healthier and reduce costs.

So when we positioned ourselves in 2026, we intentionally understood that there was going to be a little bit of a burden on our MLR in the beginning, and we think we can make these members create an MLR that's very favorable over time. And so that was the investment we made. Again, this is back to this balancing act between staying in line with our commitments, but also investing for the future.

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

Maybe on the '27 bids, just putting aside the particular makeup, should we still expect that you're targeting a 20% enrollment growth in 2027?

I think that's fair. Yes. No, I think that's fair. Right. Yep.

Okay. And then I just want to make sure, maybe I missed this, I'm sorry if I did. But taking into account the sweeps benefit that wasn't guided for the $5 million EBITDA guidance raise at the midpoint and the investments you called out, I think you said potentially double-digit millions of EBITDA. Is it fair to say you could have raised the guide by that double-digit million of EBITDA? Or were some of those investments already planned when you originally set the full year guide?

Yes. I understand the point. Could you just say pass on the sweeps, so to speak, in and of itself. And I do think we did make some -- we're consciously making some incremental investments in the second half that are a little bit above and beyond what we originally had planned for in our guidance. So inside the year, we're sticking to our commitments, but we're seeing some opportunity to make some further investments.

Yes. I'll answer it this way. If you guys look at the 10-K, you'll see management is highly incentivized to get to at least $55 a share. And just -- and so the way we're thinking about this is how do we do that. And part of that is, in fact, making these investments now in a year in which we're meeting high-end expectations. And why wouldn't we do that? And so passing along it to you in a raise may not have been in the best interest of our long-term ability to get to that target number. This is all about long term. And the guys are going in and out, sorry. But everything we're doing here is going to be -- I'm pretty sure everything we said we would do, we have done consistently. And the one thing we're very focused on is this portability and scale issue.

Ladies and gentlemen, I'm showing no further questions in the queue. That concludes today's conference call. Thank you for your participation. You may now disconnect.

All right. Thanks, everybody. I'm Scott Fidel. I'm the health care services analyst with Goldman Sachs. Really thrilled to have Alignment Healthcare with us today. Up on the podium with me, we've got the CEO and Founder, John Kao. And then we've also got the Chief Financial Officer, Jim Head. And then in the audience, I see over there, Head of Investor Relations, Harrison as well.

So guys, first, welcome to the conference. It's great to have you here. It feels like there's nothing to talk about, right, with Alignment these days. So I've just really been looking forward to this fireside chat. It feels like coming out of the first quarter, a number of different topics that came up on the first quarter. And certainly, I appreciate the transparency of you guys giving us some visibility under the hood. Some of those may not have been particularly material in terms of dollars, but are still important to -- for us to understand about the business.

So I think in terms of where I want to start with is just around the model, and we'll sort of work our way through it. The model as it relates to the sort of built in California, very successful, continuing to grow in California and then expanding out into other markets as well that may have different sort of local systems to them.

Let's just sort of start with the core of when we think about that internal sort of key value drivers of the company and it relates to things like medical management and sort of what you control inside, versus what you may subcontract or delegate outside. Why don't we talk about that to start with in terms of like how was the core model developed around that, John? And then as you've started to more expand into other states, have there been adjustments that have been made to that to sort of accommodate sort of expansion and entry and growth?

Yes. I mean, everything is predicated on using a lot of data, and it's specifically lab data, pharmacy data, encounter data, authorization data, admission discharge transfer data to help us identify who is the cohort in that 10% of the population we think are polychronic, high risk. And then we engage that population.

And we do that with interdisciplinary care teams of providers that are employed by the company. We think that core competency about medical management is what differentiates us from everybody else. I would say that is very replicable in the new markets. And in fact, that's what's given us the confidence to grow 100% last year, 80% this year ex California growth. And our ability to engage with individual practitioners as opposed to working through IPAs, which is really much the norm in California, has allowed us to do really good things with respect to Stars and medical management.

And so I'm very comfortable with all the work we've done there. I think the way to look at it is what we did in California was very much paying off in terms of the cohort maturation that you're seeing. And in California, we still have, I think, Jim, it's 60% or so of members that are in a year 1 or year 2 cohort. And ex California, you have like 90% of our members are in a year 1 or year 2 cohort. And so, as the model takes hold, you're going to start seeing just kind of overall MLR improvements. And I think, we think of things as -- in a portfolio context, and we're very comfortable with what's going on in California, comfortable with what's going on ex California. As you have more maturation, that embedded earnings value in the ex-California businesses are going to start paying off.

Okay. And maybe we'll sort of unpack a few of those pieces. And maybe just start with like the growth strategy, which we're already sort of talking to some degree. There are -- it feels like there's a few different layers to that right now. You've got the new market expansions. And you alluded to there may or may not be or may be some coming for next year. I want to maybe sort of touch on that. But before we do, just sort of lay out some of the different pieces for you.

And then from the product side, you've also now been -- it feels like sort of expanding out from some of the more traditional HMO products that you had in California and sort of broadening out those -- basically the types of members that you're looking to acquire in terms of -- you've been talking more about sort of the higher acuity side that would relate to sort of SNPs sort of across the board, it feels like on the SNP side. And then also, there's been some more PPO growth I've noticed as well. Maybe we could start with that last piece, John, because that's probably something that was a little bit more, sort of, unexpected in terms of seeing some of that growth on the PPO side.

Yes. I would say that on the PPO side, a lot of that growth was actually in globally capitated networks, okay? And we did that in concert with -- I do not expect that to be a [indiscernible] just generally speaking. I think that to the extent that we have it in the future, and I won't get into the bid strategy, but suffice it to say, I think the premiums will be accordingly priced accordingly.

Yes. And so, I mean, I think -- so that's on the last one, the PPO. On your first question, I would say it's not either or it's both end in terms of thinking about a portfolio inside California. I think there's still opportunity for us to take share inside of California. We were, I think, relatively reserved last year actually for 2026. We shared that with people. We could have grown a lot more, but we were very mindful of both growing and improving margins. I would suspect that a lot of the folks that grew really a lot last year are going to experience some degree of indigestion this year. I think that's going to be opportunistic for us.

And then the part is the ex California, last year, we grew 100% ex California, this year for 2026 we're growing 80%. And what's driving that is, again, our confidence in your first question, which is the care model is actually performing really well.

With respect to the second question, which was the C-SNP growth, I would characterize that as very opportunistic market-by-market, business plans. We just saw an opportunity for us to take share in that market. We happen to do very, very well with that cohort. And we also think that we have enough, call it, kind of the realization of the embedded earnings strength gives us the flexibility to be able to [indiscernible] kind of early year higher MLRs associated with those C-SNP members.

We think, we're factoring all of these into our, Jim and the team, on the portfolio strategy. So I think we feel very good about that as well. The thing that you kind of -- it's important to look at is, of the consolidated MLR, think in terms of what percentage of your -- whatever it is 87.7% or something like that for the year. What percentage of that is associated with supplemental benefits, we think that's about 5%-ish. So if you take that off the 87.7%, you're kind of at 82.7%. And then from that number, that's like your medical MLR per se.

Then you say, well, what percentage of that is newer members. And we just said like 90% in the year 1 or year 2 cohort ex California, we're still about 60% in California, our year 1, year 2 members. As that matures, you start looking at that 82.7%, you say, well, what percentage of that is your loyal? And what's your MLR for your loyal, which are people that have been with us longer than 2 years. It's really pretty good.

I mean, so that's what gives us confidence that the model can be repeatable. And so we've been spending a lot of time internally on getting all the other operational workflows, technologies, investments in AVA, all of that to further accelerate margin expansion in the future, both on the MLR side and the operating leverage side.

Great. There was a lot of good stuff in that. Just to put a bow on the PPO, and it's a small amount of membership, so I'm not trying to -- but again, it was a little bit of an outlier. In the global cap structure that you have, and I know you said that you'd be looking to reset premiums there. How -- I guess, how tightly can you manage the costs on that this year? Is that something that -- or any sort of like observations? Is that something that's been running a little bit hot or?

Well, I personally think PPO in general, just on a sector basis, not just based on Alignment, but it can work if you get the risk adjustment. And with the V28, I don't think it tightened up all the risk adjustment. And I don't think it's a surprise that a lot of players have really narrowed their growth expectations around PPO. I don't think we're going to be an exception to that. I think it's just -- I think the premiums have to just be priced accordingly. You can still have it as a product strategy, but I don't think we're going to bank on it for our growth.

Yes. Yes. I mean, I'm sure you've seen a lot of work. That's been a big focus as well. So why don't we sort of bring that up to some of the modeling questions as it relates to the MLR for this year? And firstly, we can talk about mix, why don't we sort of aggregate that together? And one of the questions I get asked a lot about, the one that I'm thinking about all the time as well is just around with that mix shift, first of all, I guess the price question was, was that fully contemplated around the mix of the growth? And then obviously, the output of that would be that as we model, has that been aligned with how you've guided for MLR and then how that -- how the seasonality may shift year-over-year because of the shift in the mix?

Okay. Well, let's just start with, was that contemplated? Roughly 50% of the growth being in '26 being in higher acuity members. And the answer is absolutely yes. Going back to John's point, we remain very disciplined, but we saw an opportunity to emphasize growth in those areas. We think it's a really good proposition over the long run, but the market was there for us. That doesn't mean that structurally, we're going for that every year because we're going to see how that plays out. So that's number one.

And when we started the quarter, we talked about that being part of our guide, right? So this was all contemplated. The 80,000 was going to be a little bit higher, ticked up a little bit higher, all things being equal, because of that mix shift. And so when we went through Q1, we saw that we performed within the range that we thought was going to happen in Q1. And as we come into Q2, we continue to see our kind of our medical indicators performing very, very well. We're 2 months into the quarter, as you know. And so we're just feeling very good about how we're managing...

2 months into 2Q.

Yes. We're feeling very good about how we're managing that. And John, if you got anything.

Yes, we feel very, very confident and comfortable with our Q2 guidance, very comfortable with it. Lots of good visibility, a lot of work, as we've shared in terms of our kind of investments in scaling the business around every single area of the company. And I'm actually very, very proud of the team for being able to kind of grow as much as we have, hit our numbers like we did in Q1. Again, we're very comfortable with Q2, while also making all these operational improvements. It's not an easy thing to do. The team has done a very good job.

I'm going to just sort of repeat for the stock because it hasn't been listening that John just said comfortable and confident 2Q the 2 months into the quarter. I think that's an important thing for the stock to hear, because it hasn't been hearing sort of that theme recently. So thank you for that update. Certainly allows me to ask questions sort of that I was going to be asking circuitously a little bit differently.

So okay, so I think we've hit the mix sort of point pretty well. Let's talk about just utilization since you guys sort of led us there. And just again, just for some of the -- maybe a little bit of coloring for you guys in terms of how I'm thinking about it. It certainly feels like for the end market that things are finally in a better spot than we've been in some time in terms of industry trend.

First quarter, a lot of debate around how much of it is seasonal. It feels like into 2Q, that argument recedes and most of what we've seen through all of our sort of very robust checks are seems pretty benign for the industry, and you have to look at the stocks and that would tell you that as well. So why don't we just -- I'll just sort of ask you sort of straightforward about utilization. And then would love to then unpack inpatient as well. So why don't we just sort of overall inpatient and then we'll funnel overall -- and then we'll funnel with inpatient.

And I would say that your description of benign utilization environment is, I think, is accurate. We're a little bit different because we have a much more active care model, right? And so we're a little bit more upfront in terms of managing our cost and utilization in the first instance. So that's one of the reasons why you didn't see our utilization blip last year when others were saying it was different, okay? So as we go into this year, things are tracking very nicely.

And maybe what we can do is walk down the cost side and think about it. So 80,000, as we said just now, 80,000 admissions per 1,000 in the hospitals is tracking in line with our expectations, okay? And that's with the mix and everything else through today. That feels good.

The other cost categories we talked about in the first quarter, we're tracking nicely as well. So other medical expenses, including Part D, supplementals, other health care costs, are actually tracking very nicely. We talked about in Q1. We feel good about where we're at on that. So -- and broadly speaking, it's in line with our expectations and stable. Now that is benign. And so that's how we feel about it today.

So that's clearly very helpful. And then in terms of the -- let's just sort of talk about the stat data that sort of has come out. And I get a little bit frustrated because Harrison, you could probably vouch for like that was our sort of product, right? We had rolled out and a while back and -- but we've tried to be, I think, also responsible around it in terms of having -- I spent plenty of time with you guys talking about it and and just some of the variability, some of the noise, right, in that data month-to-month. And we still publish it, but we publish it on a quarterly basis for that reason. That's why when there was all that sort of big volatility in the stock the other day, and we weren't out on it, because we're sticking with that. And I think it's really sort of important maybe to spend a minute, maybe you could sort of explain to the market around that -- why month-to-month that noise can occur? And then once you get to the quarter, it sort of settles out into more of a...

Well, there's 2 dimensions to this. There's a quarterly versus a monthly. And then there's statutory filings at a regulated sub versus consolidated GAAP filings across the business. And so on the latter, I would just say you have to be mindful that, that is not an accurate -- completely accurate snapshot of what's going on in the business, even on a quarterly basis because it's got -- it's statutory accounting at a regulated sub. It doesn't include the whole picture, okay?

So as it pertains to month-to-month, you're totally right, which is in any given month, there's accruals, there's allocations and there's also reconciliations with CMS, payments, things like that. So any given month can be a little bit different. By the end of the quarter, it usually smooths out a little bit. So I would just say quarterly is better, but statutory filings are a signal, but it's not a true signal.

Yes. And we'll continue to stay with that our approach. So I look forward to the second quarter.

Well -- And in particular, in Q2, what the April stats don't capture are the sweeps.

Right.

I mean, that's -- for those of you that don't understand it, that's a big deal that it typically comes in May, June. And so that's what we talk about it at the end of the quarter. So it's -- I think that is something that, again, we just feel -- we feel very, very comfortable with where we are in Q2.

Yes. I remember when we were building that product initially and your predecessor, Thomas, comments, with the time, that point about the sweeps. I guess given where we are at this point in June, do you have visibility into the sweep style or?

We do. In May, we get the new final and then the midyears come in June. But there's nothing to report right now. We'll do it at the quarter. But it is a known timing of those 2 sweeps that happen every year. I would just step back and say this is normal course of business, okay?

This is a normal part of our business -- it is reimbursement that we deserve. And I think the only notable difference with us is or at least the way we account for it is on the final sweep from 2025 for our new members, we are booking to what we get paid from CMS until we see the final sweep, okay? And in Q2, we'll have that incorporated into our numbers. But we don't want to guess and put ourselves in a position because it's an unknown factor. How the newbies get accrued for RAF by CMS is not known until May.

Okay. All right. Great. Let's -- maybe let's just sort of tunnel a little bit further into -- and because, again, part of the model, I think an important thing that I wanted to talk to you guys about was around some of the delegation dynamics that you brought up on the first quarter. And maybe just sort of to bring us in and give us some visibility into -- let's just sort of start at the top in terms of how -- in your model, how you sort of integrate or how you integrate with delegates doesn't sound very illustrative. So where does delegation play into that in your model? How does that sort of proposition get thought of? And is there a difference in California versus outside of California and how do you think about that?

No, without doubt. I mean, I think when people talk about California being different, it really is the kind of the saturation of the marketplace with medical groups and IPAs, independent physician associations, that either take some form of global cap or value-based capitation on a global basis or some form of a shared risk basis. And typically, the shared risk is comprised of professional capitation, so for specialty and primary care and then some really aligned metric around working together between the plan and the IPA and the medical group to align around institutional costs, okay?

And so as part and parcel with that historical capitation, there's a delegation that I think is unique in California, where the plans have delegated certain functions that typically outside of California reside exclusively with the plan, most notably claims payment and utilization management. Right? And so in California, a lot of those administrative functions have been delegated to the IPAs.

What we did and what we've shared with you for the last -- really the last year or so is start to de-delegate certain UM functions related to inpatient authorizations. We've taken over that function. And we have the tools and the technology in AVA to allow us to do that in a way that is actually appreciated from the IPAs now. And it's just more accurate and what that allows is better overall plan performance where we can actually benefit from -- fully benefit from the Care Anywhere, care models, fully benefit from the AVA technology, the stratification I just talked about.

And if somebody is admitted into a hospital on an inpatient basis, they get admitted on an inpatient basis, they get admitted on an observation basis, it's just accurate. And so that has yielded win-win benefits for pretty much everybody, the member, the plan and as well as the IPA. So everybody is kind of aligned in that regard. And that manifests itself in these shared risk gain share payments to the IPAs. Those dollars have gone up. So everybody is like more aligned, deepens the relationship. And allows us to work together even closer around other opportunities for delegation, where they're actually leveraging our technology.

So it's something that we did, I'd say, about 1.5 years ago with 1 IPA. And then we've gotten through about 70% of the shared risk IPAs last year and into this year. And I think there's still opportunity for us for the rest of this year for the remaining 30%. And again, those are the factors that give us confidence for not only the quarter but also for the year. That helps. And I think you see some trends. I was talking to some of the other plan CEOs, and they really admire what we did. And so they're starting to think about some of that, some of the capabilities.

Okay. And just one follow-up just on that sort of related California or not California, but the related cost that you had signaled in the first quarter. I just want to confirm, has that still the number? Because one thing I was just thinking about timing, whether were there any like prior period...

Yes. All that we said it was stable when we dealt with it in February, and it continued to be stable. That's just a non-issue.

It was a 1-month blip that we've already operationalized and every month since it's been tracking exactly where we want it.

Exactly.

Great. I've got 2 topics I definitely want to still hit on, but I do want to pause just to see if there's anybody has any questions in the audience?

Okay. Great. So I have a lot more questions, only 4 minutes. So let's talk about new markets and maybe certainly feel free to share whatever you're sort of comfortable sharing on that. But the way I'll frame the question is, as you've now had more sort of experience, right, and more markets so far, talk about how those -- what are those lessons, and this can be a 30-minute question itself, right? So I'm trying to think about let's -- maybe we'll spend a minute on it.

But what have been the key lessons that you've learned that are guiding how you may have advanced the criteria that you're using for new market selection at this point. And clearly, that's weighted towards geography, but within that would be inside of that geography, it's clearly product as well?

Yes. No, it's -- I'll call it, demographic filters. First phase, just broad demographic filters, number of seniors, number of seniors in a MA plan is important to us. Most of our -- I think 80-something percent of our members are switchers. So members that have made the transition from fee-for-service original Medicare to MA and then they find our products to be a better experience, better mousetrap, we get those.

So those are important market share kind of 40%, 50%, 60% market share that are MA are important markets. The provider composition, hospitals have been reaching out to us in a very constructive way. They like what we do. They like the fact that a lot of these main brand health systems are overcapacity. So they're about 120% of their beds. And because...

That's usually a key nexus, right? You are going to, sort of, start with that and anchor...

Well, yes because in the market. Yes, because if they're overcapacity, that means they don't want to fill heads and beds. And in fact, they'd rather put heads and beds of commercial members, which they are getting paid 150% or 200% of Medicare, not just getting paid Medicare. And so they want market share. They like our product mix. They like the fact that we're integrating a lot of our clinical programs, a lot of their facilities and their ambulatory programs.

And to the extent that we can move market share into their system without necessarily filling heads and acute beds, that's a strategic advantage for a lot of these hospitals. So they like working with us in that regard. Our prior auth rates in terms of denial rates are less than 2%. We just -- that's just not our program. That's not the game we play. We play about actually providing more care. It's just pinpointed to those seniors that need the care, and that's in that 10% polychronic cohort.

So all those things are things that we think about. And that's at the market level. The other part is what are we ready to deploy as a -- that I would call a franchise. What is the franchise playbook of how we deploy clinical resources, call capabilities, claims capabilities, UM capabilities, finance, HR, all these different competencies where we are ready to franchise this in a highly reliable way, more efficient way, where at the end of the day, you're going to get faster growth, better stars, better ADK, more reliably to mitigate risk of a new market.

That's why in '27, we've said that we're going to be entering a couple of new markets in existing states, but they're big markets. And I think you'll see more of that in '28. And so it's both the filtering of what's -- where you're going to go, but also how ready are we to kind of get all the core operations, the technologies to support that in -- again, I'll just call it a franchise way. It's very reliable. We're getting really close to that.

Well, a lot of detail on that. And I know we're out of time, but around that last comment, John. So should our -- I guess, it seems clear, but should we be anticipating that it's more likely that there won't be new states, that will be more in-state expansions or are on the table as well?

For '27 or '28?

For '27 and '28.

Yes. I would say they're definitely both on the table. But I would tend to be more conservative for '27. But I think we're really well positioned in those new markets. And overall, it's just the growth is going to come from both California and the ex California markets. And then once you get the ex California markets to start maturing, those embedded earnings are going to start paying off for everybody.

Great. Great. Well, I think that was a very productive conversation. And again, thanks so much for being here with you at the conference. It's great to see you guys, and hopefully, the rest of the day is productive for you as well.

Thank you, Scott. Thanks, everybody.

[Audio Gap] Bank of America. I have the pleasure of hosting John Kao, CEO of Alignment Healthcare; and CFO, Jim Head. So [ do you want to join ] a quick intro? Do you want to go straight to Q&A? How do you want to handle that?

I'll just do Q&A.

Q&A. All right. Sounds great. So why don't we start with the guide, maybe 2Q. So can you just clear up something for us. So can you explain sort of why the step down in MBR between 1Q and 2Q, sort of what happens in a typical year to drive that improvement? And then maybe what about this year? The seasonality is different versus 2025.

Okay. I'll take that one. So let's start with the Q2 guide in the first half. So we came out with a very strong first quarter, as you know. Q2, we also predicted a pretty strong improvement for the first half year-over-year, 60 basis points MBR improvement, 40 basis points SG&A and then almost 100 basis points in adjusted EBITDA. So very strong performance, 80% growth year-over-year. Now what Craig is asking about is there's a step down in the MBR between Q1 and Q2. And that is typical, okay? We have a step down. There's 2 reasons why there's an annual step down. Number one, utilization is just different in Q2 versus Q1. So you're going to see that seasonality. Number two, Part D influences that step down quite a bit. What folks are looking at right now is the step down is even greater than the past. And so it's about 140 basis points. In the past, it's been a little bit less. But if you strip out, just factor in a couple of things. The ADK or the UM headwind we had in January, just take that out. Part D, again, this year is influencing the MBR step down, too. And last year, we had a little bit of heaviness in Q2 MBR because of some of the other medical costs. So actually, when you kind of harmonize those, it's pretty consistent. So we feel pretty good about our second quarter guide and how that's playing out.

Okay. Great. So thanks for clarifying that. So Jim, maybe to follow up, I think you're about 1 year in now. I think maybe this time was last year was kind of your first foray into this job. So maybe 1 year in, what surprised you the most and why is you most excited?

It's interesting. It's been quite a year in the market, the Medicare Advantage, and that's an understatement. But what actually the -- call it, the underwriting I did when I came in is, I knew this model was different, and I knew the opportunity was distinctive. That hasn't -- I only feel better about that a year later. I think what is required to be successful in the market is getting more well defined. You got to have the right model and you got to execute. And I think what John really focuses on, and I've learned very, very quickly is it is about being operationally focused, visibility and control. And so we're just relentless about it. And so that's probably one of the key learnings in the last years. Visibility and control is everything in this business.

Okay. Yes. Sounds great. So maybe then let's transition to trend. Now you've had some historically great visibility there. So it seems like everyone is pretty cautiously optimistic maybe this year might be pretty good. So maybe what have you seen in trend in 2026 versus '25? What do you expect going into the year? And kind of how has that trended year-to-date?

I'll start with our guide kind of suggests that we've got a good sense of what the trend is. And I'd say, in a word, stable, okay? We've got a clinical model. We're very focused on, obviously, inpatient admissions as one of the big indicators, and that's been stable. We've had a slightly different book this year because we have some more -- we have new members that are probably a little bit more acute. But having said that, the trend versus our expectations has been very stable. And as we walk down the various categories of costs, admissions per 1,000, inpatient acute, inpatient non-acute, supplementals, Part D, all performing in line with expectations. So in some ways, our clinical model gives us that stability, and we haven't seen anything different this year.

Okay. Yes, you called out a few areas there. Is there anything that even though it's in line with expectations, maybe has moderated versus last year? Or is everything kind of in line?

We're always mindful that trend can bite. So if things are moderating, we're not ready to call that. And that's one of the reasons why we just -- we march through the year and deliver and make sure we hit our expectations because there's always going to be something that's going to be different throughout the year.

No, totally fair. All right. So maybe let's look back to the last few years. It seems like you've got a better sort of visibility on trend like you mentioned earlier, versus a lot of your peers. So what is it about the tech stack and the model that really enables you to forecast, it seems like so much more accurately.

It's a bottoms-up build. I mean we have data at the member level that kind of aggregate up to the group level to the market and then we consolidate it all. And so we have very detailed actionable data. And when we take that data, we have boots on the ground to actually execute if we see any kind of negative variance, whatever that is from a financial point of view. And so it's always starting with the member. We're looking at member satisfaction. We're looking at admissions per 1,000. We're looking at readmission rates. We're looking at ER rates. We're looking at all the data that would suggest kind of prevention. -- and then quality. So from day 1, we always said high quality, low cost. What does that really mean? It means you got to do good at starts. You got to have good clinical medical management. And I think this notion of transparency, visibility and control lead to durability. Well, that's something we just live by. And the bigger we get, the kind of the more we have to reinforce that everywhere. And I don't think others have the degree of actionable data that we have, partially because their back-end systems require reconciliation, which takes 30 or 45 days. We actually have data that we can look at on a daily basis. And then we meet daily as a management team and identify hotspots if there are any, negative variances if there are any on a PMPM basis, and we put action plans together to address it. And there's no other way you can run this business.

Yes. No, that makes sense. All right. Maybe switching to final rate notice. So '27 rate notice came in about 2.5% better than the preliminary, which was great to see. And a lot of that was due to the delay of the new risk adjustment data. And while it sounds like this is going to be help over '27 and potentially just we're delaying this until '28, right? So with that 1.8% headwind that got delayed, if it were implemented in '28, how would that hit alignment, would be more or less? And any color you can add there?

Yes. Our read was that the -- they didn't implement the recalibration because of the whole skin substitute double dipping. So I thought that was appropriate. I think the overall rate increase of 2.48% heading into the year is something we think we're probably going to do better. And it just kind of this whole -- I'm braincrapping, but this whole area around risk adjustment and kind of unlinked chart reviews, I think it was worth 1.53%. I think our -- the inherent nature of our career model, our care centricity, I think we're going to do better than that. So I think that's fundamentally an advantage for us. It's still less than overall trend. And I think that I think it's going to continue to put pressure on a lot of our competitors. And I think as we found out, as you all have found out and learned starting in '24, '25 and then I would even suggest '26, that plays to our advantage because we're the lowest cost producer. And so the business model was built on you have to be successful irrespective of what happens to the rates. Rates go up, all boats rise in a rising tide, rates go kind of are flattish or go down, we're going to have a competitive advantage. Having said that, to the second part of your question, we were in D.C. last week spending a lot of time with all the guys. It's unclear to me if there's going to be any material change to the risk model. And that's different than what I've said in the past. And they were pretty -- they were not saying one way or the other. So they're being pretty coy about it. But there was suggestions that there's just not enough time to actually implement the full magnitude of the risk changes that I think they know and they want to do. So I think it will be interesting heading into next year. And what I've said in the past is I would have thought there would be some material changes coming in this new technical notice that usually we get in November, December. You get comments on the events rate in January, you get the final in kind of April. And I was thinking there's going to be some material changes. I'm not sure there is.

So even -- so maybe we don't get the full big, I think, implied or the implied risk model...

[indiscernible] risk model versus [indiscernible].

Even like some kind of maybe middle step around health risk assessments or lean chart review, anything like that? Anything there might be helpful.

Yes. there may be -- but to me, that is not a wholesale change. I know the discussions have been -- this is a 22-year-old program now. And so when they initiated this risk adjustment and they look at the fee-for-service data, Medicare Advantage represented like 10% of the market share of all seniors. Now you're 52% or 53%. So the fundamental data, I think that fact pattern would suggest it is time to kind of retool this. I just don't know if they're going to have enough time to implement it. Having said that, we actually agree with their logic that the [ planner ] shouldn't be spending as much time on this topic is my humble opinion. And as we found out, it creates all kinds of opportunities for misalignment and gaming, if you will. And so this notion of kind of inferred diagnosis, looking at the actual data, both fee-for-service and MA data and then having the new AI tools that are out there, inferred diagnosis and then pay people on that, I think it's the right way to go. I just don't know that's going to happen operationally. And so if you're kind of left with kind of this current state, the first thing I would think is focus on this -- extend the logic on this discussion on program integrity, right? You've heard a lot of them say that. So focus on program integrity, I think they've beaten that one to the ground. I don't think there's much blood to squeeze out of that rock, much more for the plans. But extend -- think about what they're doing, pharmacy, right? They're going after pharmacy. They're trying to create value for the consumer in pharmacy. Fraud, waste and abuse, right? There's all the stuff you're reading about in hospice, home health, all this stuff. They're looking hard at all of that. And so implement program integrity through the entire supply chain. And so if you got these health systems and kind of integrated delivery networks that represent 50% to 60% of your costs in your MLR, you'll start looking at billing, apply the same degree of program integrity throughout the supply chain to ensure accurate billing, hold everybody to the same standard, accurate billing. And I think you're going to find a lot of opportunity so that the trend and this whole topic, the next topic you're going to hear about is affordability. What that means is, okay, look down into the supply chain. We kind of looked at the plans, V28 kind of linking charts, et cetera, all that, I think, is the exact thing they should have done. Now start looking down the supply chain. Who's looking at billing accuracy of the integrated delivery networks. I told them, I said, what if we give you a basket full of RAS scores, HCC codes and said, you guys figure it out, right? So the same kind of RADV intensity that was applied to the plans and whatever, 3% margins should be applied to the hospitals with their 20% margins. That's what's coming next.

All right. Well, that will be fun to watch. So maybe let's pivot to expanding outside of California now. So you've got about 20% of your members there outside of California. Your total enrollment, I think, just about doubled. So nice share gains. And you've talked previously about wanting to use free cash flow to fund growth. You got the free cash flow now. So how should we think about growth outside of California from here on now?

We're happy with the growth. We're making sure that we get the same kind of margin and kind of embedded earnings from the mix of members that we have, ex California, I think it will pay off. We were intentional about capturing share with respect to C-SNP, D-SNP members this year. Those have been the most profitable for us, I think, largely because of the care model. And I feel good about it. We -- it's kind of natural to think that our ex-California MLRs are higher than California just because of the amount of new growth that we've had this past year. But I think consistent with what we experienced inside California, that cohort maturation and the embedded earnings will start paying off in future years. I think that the deployment of capital and -- which we have and because of the free cash flow still has to kind of be bumped up against certain filters that I think about, which do we have the right providers that understand our model, want to work with this model and or not. And we're going to be entering markets in '27 where we found those like-minded providers. And also, interestingly enough, health systems that want us, they like our model. They like the care delivered. They like the fact that, that yields market share gains, so we can push market share to them. They don't like some of the big guys. And so that's cracked the door open for us to really provide an alternative for them. But the main thing is the doctors, the PCPs, we still think the PCP is very central to the equation, and we don't think we have to own them to get them to behave in an aligned way with us.

Okay. So maybe a follow-up there on the PCP relationship outside of California. So California is more of the delegated model. What has the differences been when you're contracting and partnering with these providers outside of California? What's the -- any dynamics there you could give us?

Yes, yes. No, So it's a great question. the markets outside of California, we are the IPA. So we're the ones engaging with the individual practices themselves and helping them with Star gap closures and risk adjustment gap closures and integration of our Care Anywhere clinical model. That's why you get 5 stars on all these ex-California markets. And we've been challenging caps inside California. That's number one. Number two is inside California, you have these IPAs, right? These medical groups that are either taking global cap and we've shared that it's about 25% or 30% of our business in California. 75%, 80% of our business, 75% of our business is kind of shared risk or directly contracted. Even when you have a shared risk deal with an IPA, there's margin implications that are accrued to the benefit of the IPA. Outside of California, because we're the IPA, there's more margin opportunity for us, right, because we're doing all the work and thus have the ability to drive margin expansion and richer benefits. There's no middleman taking a piece of the pie. And so I think the Stars Rating and the MRA kind of engagement is -- are 2 proof points for you that ex-California businesses are businesses that we can do better at. And so now we're taking all of our care models and the utilization metrics and the ADK metrics in these new markets are also pretty good. We just need some time for the maturation of the cohort RAS scores and kind of ADK to come down even more just given the growth that we've had. But I think the key for us is finding the like-minded doctors. And the -- just kind of this grand experiment about kind of global cap value-based providers, it was kind of your parlance. So of it -- it's -- jury is still out if there's enough money in that supply chain with V28. And I think it's V28, when you can't do the coding that some of these guys have done and/or have bought providers to incentivize them to do the coding, to get the coding to support a global cap arrangement, when that kind of financial engineering doesn't exist anymore, puts a lot of pressure on those guys. And so in that kind of world, our model stands to be even better because it's a more durable model.

Yes, it's great to have the longer-term margin capture opportunity outside of California. So maybe in the near term, as you are ramping, is there any incremental OpEx that you should be thinking about around startup costs, marketing, anything as you get to breakeven?

That's really embedded in the investments we're making back into the business. And so when we talk about SG&A, we do -- we are incorporating investments back in the business, investments in people like yesterday, investments in our process and technology and things like that. So we're trying to balance between giving investors a better SG&A as a percentage of sales versus firming up our foundation for the future. And so that's always going to be part of our philosophy.

[ To hire more people ], Mr. Chairman, do you want to add any color on the new hires?

Yes. Yes. So this whole idea of AVA Healthcare Partners, that is the IPA kind of really enterprise-wide, but really focused ex California. We do have members that we directly contract with inside California. But that's what -- that's the primary focus of Mark Kent, who's a great guy. You'll get to know him. and very, very experienced in this. He's run IPAs. He understands the payer side. He understands the provider side and nothing [indiscernible] them. And so he's going to be great. But that's kind of linked to the kind of this ex-California management and growth discussion. Shane Hochradel, really Chief Operations Officer, scale experience, experience with claim systems, experience with provider data, experience with end-to-end provider engagement at scale at -- from Elevance. And so he's joining us. So those are 2 key hires. The third person that you may not have heard of, but he's really our current Chairman of the Board, Joseph Konowiecki. And Joseph has been the strategic leader. And I asked him. I said, I really want you to leverage your experience and to help us grow and scale this business. So I asked him to do that, and he graciously accepted. And then to make sure that the governance structure maintained its integrity, I agreed to be Chairman. And I think the message to really the investment community is we're all in. We're all in. I shared with you 300,000 lives, $5 billion in revenue, $150 million EBITDA is, to me, a proof of concept. It's literally a proof of concept. And so we are now looking at strengthening all the foundational pieces we have in place and making them better to scale. And attitudinally, incentive-wise, I'm all in, Jim is all in, our Board is all in to get this to the next level. And that's really the signaling of that. It's a very positive thing that I think you should all think about. It's we all recommitting and committing to take this to the next level. I've said we're going to get to at least 1 million members. You all are asking by when. I'm going to say, I'm not going to tell you, but we're going to get there. And -- sorry. So it's a very positive thing.

That's great to hear. So maybe let's hit on AI really quick. So it's everywhere. You've had this AVA tech stack for a while. It's been kind of revolutionary right in the model. Maybe give us some use cases, where you are in that AI evolution. And then how much of this is sort of enhancing what you've already built in AVA versus ground-up kind of tools?

Yes. You probably noticed we've been intentionally quiet about AVA for the last couple of quarters. And we're doing that because of the intensity of work we are focusing on rebuilding the tech stack, taking what we have, which I still think is best-in-class and even making it better. We're not talking much about the details because we don't want anybody to know what we're doing. That's the net of it. We will share with you all the applications very shortly. But the stuff, the new technologies and the new models can do for us, it's staggering, both on MLR and G&A. I think the machine learning predictive analytical tools we have in terms of Care Anywhere and our stratification model feel pretty good. I think the new large language models are going to help us in all of the workflows that provide faster, more accurate, more timely data. And that data is going to help us have better outcomes within the predictive analytics. But I think you're just going to see the deployment of use cases everywhere in the company, you're going to start hearing us start using the word AI first. soon, and I'll give you a glimpse of that. But I think the opportunities there are going to be dramatic. I'll resuscitate a phrase that I heard from somebody a couple of years ago, which is, there's a lot of low-hanging fruit that we're going after, and there's watermelons rolling around the ground, remember that one? Well, I'm telling you, these AI tools are going to help us get those watermelons. And I think that will be reflected in better MLR and even tighter G&A, all of which are foundational for the bids. And I don't -- honestly, I don't know if there's anybody that can catch us once we can pull all this together.

All right. Well, that leads to, I think, what probably would be our final question here. So your '26 guide got you from an EBITDA perspective, kind of already in line with your national peers. They're growing faster than most of them. They kind of talk about margins in the 2% to 4% range now long term versus maybe 3% to 5%. Previously, you're already at 3%. You're still subscale. So what is it -- how do you -- how are you driving these structural advantages from a tech stack over your peers? And how high can these margins go longer term?

I think we've said 5% to 6%, right, Harrison. But you got to remember, you got this 85% rule thing hanging out there, right? So you can't -- you got to hit that 85%, and I think on a GAAP basis, closer to like 83.5%. But I think there's margin opportunity for us. But because of that, the way we get to the 85% are 2 ways, which is you got to have richer benefits, better supplemental benefits that foster growth and/or deeper partnership and with providers to pay providers more. And there's different ways you can do that, that just strengthen -- the key words should be durability, durability, right? So if you have great networks, great provider partners, and they're going to want to partner with you, which is what's happening in California. They all want to work with us because we're growing market share. That dynamic, I think you'll start seeing kind of get more and more real ex California, the more we grow. And for those of you that have been with us from the beginning, it's going to be more of the same. It's going to be balanced growth and margin, opportunistic depending upon what we see market by market. I think it's -- there's going to be the next generation of technology that we embed in our workflows. And we're getting people that have both the missional aspect that is very important to us and will always be central to our culture, but also have scale experience. And I'll close on just one point, Craig, which is I think we're proving that, that you can be mission-oriented and provide great returns for your shareholders. And I can tell you, our private equity guys, Warburg and GA are really pretty happy with their financial outcomes. And I think that when we get to where we want to be with all these changes that we've just talked about, you're going to be really happy with this as well.

All right. Well, thank you. I think this [indiscernible] time we have here.

Thank you, Craig. Thanks guys.

Good afternoon, and welcome to Alignment Healthcare's First Quarter 2026 Earnings Conference Call and Webcast. [Operator Instructions] Please note that this event is being recorded. Leading today's call are John Kao, Founder and CEO; and Jim Head, Chief Financial Officer. Before we begin, we would like to remind you that certain statements made during this call will be forward-looking statements as defined by the Private Securities Litigation Reform Act.

These forward-looking statements are subject to various risks and uncertainties and reflect our current expectations based on our beliefs, assumptions and information currently available to us. Descriptions of some of the factors that could cause actual results to differ materially from these forward-looking statements are discussed in more detail in our filings with the SEC, including the Risk Factors section on our annual report on Form 10-K for the fiscal year ended December 31, 2025.

Although we believe our expectations are reasonable, we undertake no obligation to revise any statements to reflect changes that occur after this call. In addition, please note that the company will be discussing certain non-GAAP financial measures that they believe are important in evaluating performance. Details on the relationship between these non-GAAP measures to the most comparable GAAP measures and reconciliation of historical non-GAAP financial measures can be found in the press release that is posted on the company's website and our Form 10-Q for the fiscal quarter ended March 31, 2026. I would now like to hand the conference over to CEO, John Kao.

Please go ahead, sir.

Hello, and thank you for joining us on our first quarter earnings conference call. For first quarter 2026, health plan membership of 284,800 represented year-over-year membership growth of approximately 31% -- this supported total revenue of $1.2 billion, which increased 33% year-over-year. Adjusted gross profit of $146 million represented an adjusted MBR of 88.2%, which improved by 20 basis points year-over-year. Meanwhile, adjusted SG&A of $108 million improved as a percentage of revenue by 60 basis points year-over-year to 8.7%.

Our adjusted EBITDA was $38 million, which grew by 88% compared to the prior year. This result exceeded the high end of our guidance range and implies an adjusted EBITDA margin of 3.1%.

Our results this quarter reflect strong execution across sales and member retention as well as our clinical operations. Our performance in our SG&A ratio also reflects the early outcomes of investments we've made to scale our infrastructure. Progress we are making across each of these areas is giving us even more confidence today that we are on the right path towards our goal of 1 million members. Growing and scaling a business as rapidly as we are in an industry as complex as Medicare Advantage is not a straight line. That being said, we are progressing very nicely as we continue to scale the company and achieve our near-term growth and margin expansion objectives.

Importantly, our operational discipline and unique model gives us swift visibility across the organization. This enables us to identify issues quickly and take actions to manage their near-term impact. We focus deeply on continuously identifying opportunities to improve and deploy solutions to create even greater durability across our company. For example, the CMS rule change impacted our observation determination process and drove inpatient admissions per 1,000 towards the higher end of our expectations in Q1. This process change was resolved by the end of February, but impacted our first quarter inpatient admissions per 1,000, which was in the high 150s this quarter.

We absorbed this headwind within our Q1 adjusted EBITDA beat and are well positioned as we enter the second quarter. As we build upon our culture of continuous improvement, this year, we are scrutinizing and revalidating every aspect of our people, process, technology and clinical culture to ensure they are positioned to scale. Through this process, we focused on opportunities to deliver more cost efficiencies through claims automation, improvements to our contract management infrastructure and scalability of our provider data management.

For example, just 12 months ago, our claims auto adjudication rate was less than 15%. Now our year-to-date auto adjudication rate is over 60%, and we expect to drive even higher claims automation as we progress throughout this year. Meanwhile, we are also deploying contract management solutions that leverage AI to create a more dynamic contract management platform and taking the next leap forward in our AVA AI risk stratification models to create even greater precision in our clinical engagement efforts. We are also investing in our talent by adding team members who will drive greater scalability within our technology infrastructure. These are just a few of the actions we are taking to support our near-term results and accelerate progress to our long-term growth and margin objectives.

Finally, before I turn the floor over to Jim, I'd like to spend a few minutes discussing the 2027 final rate notice, which was announced earlier this month. At a high level, we are encouraged by the administration's continued pursuit of actions that drive sustainability within the MA program. In a continuation of meaningful policy changes like the Wiser pilot program that tackle overspending in traditional Medicare, we also applaud the administration's actions to address overutilization of skin substitute products in fee-for-service.

By taking action to create more accountability across every stakeholder in the health care ecosystem, we believe the program will increasingly reward those who deliver true, measurable value to members over the long term. Importantly, these dynamics continue to reinforce a core point, Medicare Advantage is a durable program that is here to stay. In that context, we also believe Alignment is particularly well positioned to succeed regardless of the rate environment. Our clinical-first approach enables us to deliver high-quality outcomes at a low cost and forms the sustainable competitive moat that sets us apart from our competitors.

In closing, our first quarter results reinforce the strength and durability of our model. We are executing with discipline, scaling thoughtfully and continuing to translate our clinical approach into consistent financial performance. We're continuing to invest in the scalability of our platform, including automation, AI-enabled workflows and enhancements to our clinical infrastructure, all of which position us to drive further efficiency and growth over time.

With a path toward 1 million members and unique opportunity to take share and grow profitably across all of our markets, we believe we are well positioned for the years ahead.

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

Thanks, John. I'll dive straight into our first quarter results. For the quarter ended March 2026, health plan membership of 284,800 increased 31% year-over-year, driven by strong execution on sales and retention. Increase in membership supported revenue of $1.2 billion in the quarter, representing 33% growth year-over-year. First quarter adjusted gross profit of $146 million represented an MBR of 88.2%, which reflects an improvement of approximately 20 basis points year-over-year.

Our adjusted gross profit performance this quarter was underpinned by strong engagement from our clinical teams. Their disciplined execution held inpatient admissions per 1,000 within our range of expectations despite the temporary disruption to our utilization management process that John previously discussed. Meanwhile, the remainder of our medical costs were in line with supplemental benefit costs and Part D running modestly favorable through the first 3 months of the year.

Moving on to operating expenses. Our SG&A discipline and scalability initiatives such as back-office automation supported outperformance in our operating cost ratio. For the first quarter, GAAP SG&A was $121 million. Our adjusted SG&A was $108 million, an increase of 24% year-over-year. Adjusted SG&A as a percentage of revenue declined from 9.4% in the first quarter of '25 to 8.7% in the first quarter of 2026. This represents approximately 60 basis points of improvement year-over-year and outperformed the midpoint of our implied guidance range by 50 basis points even as we continue to make focused investments.

Taken together, first quarter adjusted EBITDA of $38 million produced an adjusted EBITDA margin of 3.1%, which represents 90 basis points of margin expansion year-over-year. Turning to our balance sheet. We generated strong operating cash flow in the quarter and concluded with $726 million in cash, cash equivalents and short-term investments.

Our liquidity profile remains strong with ample cash available to the parent company. The funded leverage ratio at the end of Q1 improved to 2.6x trailing 12-month EBITDA.

Turning to our guidance. For the full year 2026, we expect health plan membership to be between 294,000 and 299,000 members. Revenue to be in the range of $5.16 billion to $5.21 billion. Adjusted gross profit to be between $620 million and $650 million and adjusted EBITDA to be in the range of $138 million to $163 million.

For the second quarter, we expect health plan membership to be between 288,000 and 290,000 members, revenue to be in the range of $1.30 billion to $1.32 billion, adjusted gross profit to be between $167 million and $177 million and adjusted EBITDA to be in the range of $50 million to $60 million. As it pertains to our full year guidance, we are increasing our membership growth expectation given continued strength within our sales operations and outperformance in member retention through the open enrollment period.

We believe our disciplined approach to sales growth and focus on retention is serving us well this year, particularly as we absorb the impact of the third and final phase-in of V28. In conjunction with the increase in our membership outlook, we are also raising our full year revenue guidance to approximately $5.2 billion at the midpoint, which reflects 31% growth year-over-year.

With respect to our profitability metrics, we are raising the low end of each of our adjusted gross profit and adjusted EBITDA guidance ranges by $5 million to reflect confidence in our full year objectives following the strong start to the year.

Within our outlook expectations, we continue to assume that inpatient admissions per 1,000 will run higher year-over-year. As a reminder, this is primarily due to changes in our mix of membership. In 2026, we intentionally focused on growth amongst high acuity populations, whom we believe will benefit most from our clinical model. Consistent with past years, we also do not incorporate any assumption for final suite pickup from new members into our outlook assumptions. Taken together, our implied first half guidance reflects confidence that the strong performance we delivered in Q1 will continue into Q2. The midpoint of our guidance implies that approximately 60% of our full year EBITDA will be generated in the first half of 2026. This compares to approximately 55% of the full year EBITDA in the first half of 2025, excluding new member final suites.

Further, on that same basis, this represents nearly 100 basis points of first half adjusted EBITDA margin expansion year-over-year. In closing, we continue to deliver upon our promises each quarter as we assess, refine and scale our core workflows and processes. Each of the transformational projects we are investing in and deploying today are establishing the foundation upon which we can scale to achieve our ultimate potential. Our meticulous and disciplined execution to date leaves us even more encouraged about the opportunities ahead.

With that, let's open the call to questions. Operator?

[Operator Instructions] Our first question will come from the line of Matthew Gillmor with KeyBanc.

Maybe following up on the hospital observation issue. It sounds like this was temporary, but can you just walk us through what changed, how it was resolved and give us some sense for how hospital utilization trended now that it's been resolved?

Yes. Matt, it's John. Yes, basically, we paid authorizations at full acute rates when we should have paid them at observation rates. It was a workflow problem, and we, of course, corrected it, but it impacted our January numbers, a couple of million dollars, I think it was. And [ 80, 000-wise ], we were a little bit higher by a couple of days. And we wanted to share that with everybody. And it's really part of really how we are kind of looking at every part of our company to just continuously get better. And we'll talk about that a little bit more, I think. But I don't think it's a systemic problem. I think it was a 1-month blip, and we'll have that course correct. We have it course corrected.

Got it. And just to confirm, John, this is an internal thing that you all caught...

Yes, yes, exactly. It's an internal workflow issue. It's not a utilization issue. Yes, utilization I think decline. And Jim's got the insights.

Yes, okay.

Matt, I'll jump in on the utilization because I think that's important, and there's lots of points of reference out there. But utilization was notwithstanding what John described, which I kind of call a onetime course correction, utilization is tracking very closely to what we expected. And as you're aware, we had admits in the high 150s.

Absent that issue that John described, we probably in the mid-150s, and that is pretty much what we thought was going to happen. The flu is one thing that everybody is talking about. It wasn't a big driver, positive or negative in our numbers. We track admits with respiratory problems. We look at our Part D costs, et cetera, and it was pretty much in line. So we've got our eyes on all those categories, and it felt like things were tracking pretty nicely to what we expected, and we see that in April as well.

Our next question comes from the line of John Stansel with JPMorgan Securities.

I just want to talk a little bit about 2Q MBR. I mean stripping out sweeps, it seems like it improves by a pretty decent amount and that's even after adjusting for a couple of million of incremental pressure that's not going to recur in 1Q. Can you just talk about what's assumed for year-over-year improvement in the second quarter that is maybe different from the first quarter?

Yes. John, second quarter is usually our seasonal better quarter. And so there's just a natural decline in the MBR. So that's a good thing and it was expected. But I do want to step back and kind of describe -- we're laying out the actuals for first quarter. We're guiding on second quarter. And it's a pretty strong first half that we're positing. We set a reasonably high bar this year, by the way. But through the first half, we're expecting improvements across all our margins, MBR, SG&A, EBITDA, MBR first half, 40 basis points. SG&A, 40 basis points.

EBITDA is 90 basis points to 100 basis points. So really strong first half. And that's apples-to-apples on a pre-suite basis. We mentioned on the call, 60% of our profits are in the first half versus 55%. But all the while, we're making investments in the business to scale. So we're really doing this balancing act of trying to make sure that we're executing very, very well, investing in the future. We're bringing on talented folks across the enterprise. We're making investments in systems and processes. But we have our eyes on continuing to improve our execution clinically and get our margins up. And so this is really a continuation of what we were doing in 2025 and we march into 2026. First half feels very good.

Great. And then maybe just taking a step back and thinking about some of the changes in the final rate notice, I'll call it, deferral of a new risk model. How are you thinking about maybe reasons why that didn't make it in? And then as we think about potentially a new risk model in, say, '28 or '29, what we can take away from what was proposed versus what might actually be implemented?

Yes. John, Yes, I personally think there is going to be some changes. I think there's going to be more normalization, if you will. I don't think there's enough outcomes, feedback that CMS has yet to have initiated it in this past final notice. I think I actually don't know, but I believe that they're going to be working on this as a focus -- a topic of focus in the preliminary notice, the advanced notice coming up, and then we'll see something in the '27 to maybe be implemented by '29, something like that.

But I think CMS has been pretty consistent with their message of ensuring that coding is not some form of a gamified competitive advantage for people. And obviously, I think that's a good thing for the industry, and I think it serves us really, really well. And it really puts the purest form of who's got the highest quality at the lowest price point in those organizations should be rewarded to succeed. Does that answer your question, John?

Our next question comes from the line of Scott Fidel with Goldman Sachs.

Just was hoping to just get a little bit more detail, if you don't mind, just on the inpatient issue that -- just so we can fully understand this. And so what I'm hearing from the call was, I think Jim had talked about there was a CMS rule change. It sounds like internally, you may have needed to make some adjustments to some of your systems as a result of that, and that is where maybe some of this disruption occurred. So I just want to sort of confirm that or if there's another sort of backdrop to that?

And then sort of two questions just sort of around that would be in terms of your markets, is this something that -- like it's an internal system that sort of covers all of your markets or just California. So that was one. And then two, if it led to you guys paying full acute as compared to observation, is there an opportunity for you to claw back some of those additional reimbursements that you should not have paid? Or is that not something that you're going to have a resolution to?

That was my first question, Scott, but the answer is unfortunately no. Yes. No, it's a rule change that requires us to basically make authorizations a little bit more timely basis. And the backdrop of it is we've shared this with you guys in the past, which is we've kind of moved from this world of kind of capitation and delegation.

And even in our shared risk businesses, we've had the certain administrative functions that were delegated to the IPAs. And one of the things we've shared with you in the past is we have started dedelegating certain IPAs. That strategy has been phenomenal for us and the IPA. We just have a good process. But there's more and more of the dedelegation of the acute authorization process or we would call that concurrent review process. And it's a competency that we are getting better and better and better at. And it's a competency that we need to make sure that we have the more we scale outside of California. Because I think a lot of the networks that are being constructed are really going to be with the direct providers, practices, et cetera, without having an IPA or an MSO like we have in California. And so I think that's the context.

Yes. And Scott, given -- we put this as an example of corrective action and how we get on stuff fast. So by the end of January, we saw a little bit of an anomaly in our numbers. And then we went and found the root cause. And we knew that we were kind of going through a changeover at the beginning of the year, and we had staffed up and things like that. But by February, we had identified it and already corrected it. But it was a little bit of a drag on our adjusted gross profit. We want to call it out. But this is the kind of maniacal attention to detail that John talks about. And what you have to do to successfully execute. But we've corrected it. 80,000 is back exactly where we thought it was going to be by the time we got to February and March. And we kind of perfected that workflow and now we're ready to move ahead.

Yes. Last point really is we shared that with you all because we want to signal with you that a lot of the performance we are being able to achieve now was made 2 years ago on operational decisions. The most obvious one is the SG&A percentage being below 9% -- and so we're always continually refining all of our workflows. And it's a lot of focus of our time everywhere in the company. And the message is we are preparing ourselves to really grow and to support that growth in the same way that we have thus far. And that was the one line that I mentioned. It's not going to be a straight line. But I feel really good about this year, guys. I really do. And even for '27, '28 is a little bit far out, but -- and I think if anything, we've proven to you all we've kind of do what we say we're going to do.

Got it. Got it. And if I could just follow up. And certainly, we appreciate you calling it out certainly as compared to us being in the dark about it. So. And then just to clarify sort of one. So John, it sounds like maybe the skew might have been to some of the outside of California markets in terms of just how this flows through to some of the delegation. And then the other follow-up would be, Jim, I know you mentioned sort of there was a separate dynamic around it sounds more like a mix impact on inpatient from sort of product mix change. Is that sort of D-SNP -- or maybe if you could just sort of clarify or is that sort of the new markets? Just maybe clarify what specific mix change there was that impacted that?

It's not just an ex California issue. It really was just a corporate function that we're really scaling and growing putting new systems in, putting in new workflows, all of that. It's really limits to that. And it's not just a function of the ex California and then Jim.

Go ahead, Jim. Yes. And as it pertains to 80,000 being slightly higher, that is a mix issue. And it's a growth and a mix issue, Scott. In that instance, there's a lot of growth outside of California, and there's a lot of growth in more acute populations. And so we had planned for that as we came in. If you remember on our fourth quarter call, we talked about 80,000 is going to be inpatient admissions per 1,000 or 80,000 is going to be a little bit higher this year. It's going to tick up a little bit because we were making an investment in that population that we know has a lot of embedded gross margin. We're willing to make that investment. All of that is baked into our guidance at the beginning of the year and our outlook in the first half. So this is -- we're kind of tracking as to what we thought was going to happen.

Okay. So it's new member sort of mix and then it's sort of some of the new markets and then sort of both of the product sets in terms of sort of traditional HMO and then DFI or sort of skewed just towards one of those?

No, it's the -- we talked about a lot of our AEP growth being in the C-SNP, [indiscernible] population, like about 50% growth. That's what we're talking about in terms of...

Yes, that's what I was trying to clarify.

All of that is exactly tracking is how we expected. So that's -- the good news is we knew this -- we absolutely embraced going after that population because we think we can be very successful.

Yes. So when you were saying more acute population, you were referring to the SNP not that the traditional HMOs new members were more acute. It was more the... That's what I was just trying to confirm.

[Operator Instructions] Our next question will come from the line of Whit Mayo with Leerink.

Maybe just a follow-up on that. How you're feeling about risk adjustment versus expectations given this focus on the more medically complex members this year?

I think we're -- I'll break it into two pieces, our loyal population, which we really have a good line of sight. We're very good at predicting that and tracking it. And as it pertains to risk adjustment on the new members, we call them the newbies, that's where we're very cautious. So we book to the paid MMR, which means what CMS pays us will record as revenues. Now what that does is provides opportunity for upside in the second quarter when we get the final suites. So I think that you'll get more information when we get more information in the second quarter on that. But we are probably a little bit different than others in that we take a cautious stance on our new vision until CMS is giving us paid files that recognize that upside.

Okay. And maybe just my follow-up. I don't think we've talked about RADV in a while. I just wanted to give your take, John, on the 2020 audit methodology that was issued a few weeks ago. Just what's different you see about the 2020 audits versus maybe the 2018 and '19?

Well, the big one is the kind of the ongoing litigation around the extrapolation methodology, which is a huge deal with respect to potential financial exposure. And for those of you that don't know, that part of the extrapolation methodology is no longer in the 2020 audits. Not to say that they won't come back down sometime in the future. And we feel very good about that entire process. We've scrubbed that area very tightly, and I'm not worried about that.

[Operator Instructions] And our next question is going to come from the line of Michael Ha with Baird.

So it sounds like this inpatient admit issue is fully resolved, but it sounds like you realized anomalies in end of January. So would you say you knew about it by the time you reported earnings? And then secondly, I just wanted to ask about the LIS SNP members, it sounds like they were in line this quarter. But I was wondering if you could actually talk more about like higher mix of these members, how it might impact your cohort maturation into '27? Because if I'm thinking about it correctly, right, year 1 year to year 2 generally larger step-up in MLR improvement. Is it more pronounced next year given higher LIS SNP member mix, meaning if you're getting, say, like a 30 bps, 40 bps headwind in MLR this year, does that turn around into a larger tailwind next year?

Yes. I can take this, and Jim can provide color commentary. I think we have to wait a little bit in terms of getting the sweep data in. It's kind of linked to the prior question. We got to get the sweep data in on the newbies. I think from an MLR point of view, it's kind of consistent depending upon market, it's kind of in the high 80s, low 90s on the newbies that we got, inclusive of the numbers. So I don't think it's like ramping. But your point on the opportunity for we to improve embedded earnings once we have more time with these newbie members, particularly the SNP members, I think, is a good call out.

And the way I'm looking at this is when you look at the overall consolidated MLR, we are then kind of looking at, well, how much of the MLR is supplemental benefits. And we've kind of shared in the past, it's in that 5% to 6% range. And so your medical MLR is kind of 82%, 83% that's the way we think about it. And then you say, okay, of that, how much is newbie versus how much is loyal? And to your point, the bigger proportion of our membership that becomes bigger and bigger that becomes loyal, that embedded earnings is going to get stronger and stronger.

And then when you add on top of that, some of these people, process and technology changes that we're making that impact both MLR and SG&A, that's kind of where we're striving to get to, where we just are so good at all this, there's nobody that can compete with us with respect to bids. And then we start taking this thing out and expanding aggressively. That's kind of how I'm thinking about it.

Michael, you asked about kind of were we aware of when we -- I guess, when we did earnings at the end of the fourth quarter earnings call in February, were we aware of what was going on? The answer is yes. When you turn the page every year, there's always a little bit of ambiguity in January in terms of how you're predicting the rest of the year. And so when we did our guidance, et cetera, we understood the issue and incorporated that into our guidance. And I think corrective action is the right way to describe it. We fixed it fast. It didn't take months. It took 30 days to fix it. And I think you're seeing in our first half guide that we feel pretty good that we've got line of sight on the first 6 months of the year, and things are performing quite well.

Great. And just a quick clarification. A -- what would MLR have been if you did not have that issue in January? And then on DCPs...

Yes, I would say it's probably maybe 30 basis points higher or something like -- 30 basis points lower, something like that.

Got it. And if I could ask just one on DCPs. They're up a lot again this quarter. I think like 10 days year-to-year. Last quarter it was up 6 days, which I love to see that. Also noticing [indiscernible] is tracking well, down year-to-year. But I know last quarter, there were some, I think, timing dynamics around claims payment. So I was just wondering, were there any unique dynamics this quarter that might explain the large increase? And just would love to get your thoughts on the level of conservatism in your reserve methodology recently because it feels like there's a nice cushion.

Yes. And Michael, I think I'm tracking DCPs, reserve build, stuff like that. I'll just say, generally speaking, our reserve methodology is exactly the same. We're conservative and consistent. We haven't really changed our processes or our stance. It's not like we were conservative last year, we're less conservative this year. We're growing fast. But that's all part of it. The DCP did pick up a little bit. There is some Part D components in there, call it CMS Part D type stuff, which makes it a little bit anomalous. But generally speaking, the classic IBNR days claims payable has been moving upwards.

Over the last three or four quarters, we're just 3 quarters. We've just -- there's been a little bit of volatility in the pace, but we're working through that. But I wouldn't read into building conservatism, but I would certainly not say that we're -- that we've changed anything and we're less conservative at this point. So it feels like it's a good quality of earnings, so to speak, this quarter on that.

[Operator Instructions] Our next question will come from the line of Jessica Tassan with Piper Sandler.

I'm curious to know how you're thinking about supporting the bridge model for GLP-1s that launches this summer. I know the economics are separate from Part D, but just in terms of getting people who can benefit on the drug and adherent, retaining them into '27 and possibly capturing some trend benefit. Just interested to know how you're thinking about that launch this summer?

The kind of voluntary pilot is what you're asking about?

Yes.

Yes. We actually said we would participate with certain conditions. I think you guys know that they didn't get the 80% that they wanted. And so they're kind of extending that time period. And that kind of gets into a little bit of our product strategy for the '27 bids, which I'd like to not discuss at this point. is kind of how I'm thinking about it. I'm not sure.

It's all right. I can come back in a few months. Maybe then just on '27, to the extent that you guys are willing to comment, it sounds like the message for '26 is we're really happy with the growth for '27 sustained growth. So can you just update us on new market plans for '27 post rate announcement? Are you still planning to add at market? And then just whether you guys consider the '27 rates adequate? And if not, should we just expect kind of marginal benefit cuts to offset whatever the delta might be?

Yes. The other kinds of questions we're getting are, gee, with only 2.48% net, are you guys going to just like grow like crazy again like you did in '25, basically? And again, I don't want to comment on any bid tactics I will say -- just for competitive reasons. I will say that we will be expanding into new markets, some large markets next year. I'm not going to comment yet where and/or if we're getting new states. But I think -- again, we think about all of this as a portfolio of assets. And I think it's fair to say for we to expand where we have risk-based capital in a capital-efficient way is probably still the best way for we to grow, whether that be California, Texas, North Carolina, Vegas, it's doing great, et cetera. I think the other part of what's driving our decisioning is, again, this discussion around the operational framework and can it support the level of growth in the new markets?

And I think the answer is yes, given our performance. But I probably want to see another year of outcomes. And I think we can continue getting the growth. I think you'll see us getting good margin expansion. And I think you'll start seeing that in some of the discussions around '27. And we'll talk about that in the fall. So after the bids are in.

[Operator Instructions] Our next question will come from the line of Ryan Langston with TD Cowen.

Just on the G&A, I appreciate the comments on the benefits from investments and some automation. But was there any impact from timing in the first quarter that might sort of reverse out in the rest of the year? Should we maybe expect that level of performance to kind of carry through the back half of the year?

I think there is always a little bit of timing in the first quarter where you want to make sure that you've got cushion -- for hiring spending, things like that. But I think it was -- there's just a lot of good performance across all the categories even beyond labor, for instance.

Now as it pertains to whether we're going to pass that along, it's early in the year. And this -- as John and I have been talking about, we're really making investments in the business. So I suspect that we're not going to just turn that into a beat on the year just yet. But on the other hand, it gives us a little bit of comfort that we can continue to make investments in the business. And obviously, we're monitoring this holistically from a margin perspective, percentage of revenues and whether we're going to meet our commitments. So obviously, it's nice to have an early good start, but that doesn't mean we're ready to give it all back and put it into the margin.

Okay. And then can you just maybe talk a little bit about capital expenditures for 2026 and beyond? I mean, is there sort of an opportunity or maybe even a desire to push that up a little bit just given where the free cash flow generation is now?

Yes. Our capital expenditures are largely software development. And we do have a little bit of hardware. And we've got kind of a road map set up where we -- this year, we're probably in the $40 million spend range. It's a little bit -- we're coming out of the block a little bit softer than that, but that will accelerate. And it's well within our means.

Now on the other hand, the ability to -- if we have the dollars, we also need to make sure that we're -- we've got the right project, the right bandwidth, and we're getting the right returns out of it. So that is a little bit more of the constraint versus the quality and returns versus whether we have the capital for it. So we feel pretty good about 40%. My guess is that could tick up a little bit, but it's going to -- as we accelerate our revenues, it's certainly going to come down as a percentage of revenues over time.

Yes. And just to add to that, I mean, we have not shared with you all, and we won't on this call, we will likely have more transparency on the next call around how we're deploying AI. And just -- I think the opportunities for us in terms of our clinical operations, our provider data, our stars, our MR, like every part of the company can benefit from that and we will continue to drive down the SG&A in particular and the MLR, I think.

And so what we've had to do to maximize the benefit of AI and the tools that are available to us, which I think are just amazing is make sure we understand and validate all of the data. I think we have the best data in the industry, and we're going to get that even better. And I think our workflows, our end-to-end provider workflows, our end-to-end member workflows, our end-to-end Stars workflows, all of that is getting documented molecularly now so that we can apply the AI tools on top of that. And that's where the CapEx is going towards.

[Operator Instructions] And our next question will come from the line of Justin Lake with Wolfe Research.

This is Dylan on for Justin. From a trend perspective, some of your peers have talked about a moderation beyond weather and flu. Have you seen any early signs there? And then also curious on the churn rate you're seeing early in 2026 compared to 2025?

This is Jim. I'll take the second question first. Churn meaning retention, we're actually tracking really nicely on retention. That's been one of the helpful components of our membership growth year-to-date, OEP, et cetera. So we feel pretty good about that. As it pertains to trends, I mentioned earlier on the -- in the Q&A, flu and other trends are -- we track them, and they're not jumping out as anything anomalous per se. Now that's our book of business and how we think about things. But I will say that we look across the major categories of medical spend and the trends seem very consistent for us.

And obviously, the rate environment, as you guys know pretty well, it's low single digits. What we haven't talked about on the call here is Part D, which is tracking very nicely this year. We had a little bit of outperformance in Q1 in the margins. That was a good thing. We're not ready to kind of turn that into a full year expectation increase. But Part D is doing really, really nice. And that's -- over the last couple of years, that's been a big watch out. So we feel pretty good about that.

But trend-wise, we just have a different kind of rhythm than some of the other commercially focused or some of the other MCOs. And I don't think it's just because it's our footprint. I think it's because we are -- it's the way we set up our utilization management. I think the way we work with our providers. And there's some capitation in there that cushions us along the way, not necessarily full, but some of the capitation is absorbing some of those flu season trends, et cetera.

[Operator Instructions] Our next question will come from the line of Andrew Mok with Barclays.

Alignment is predominantly an HMO business, but you leaned a little bit more into the PPO product this year. Can you walk us through the rationale behind that decision? And how are you thinking about the relative attractiveness of the PPO product given some of the recent plan exits across the market? And do you expect PPO to become a larger driver of your growth over time?

Andrew, John. Part of the reason we were willing and able to do it last year and for this year is over half of the business is globally capitated. And so that factored into the way we think about things. I think that the logic around stratifying members, caring for the members through our Care Anywhere program, kind of positioning that part of the, call it, the clinical part of the business is something that should and could work for us as we think about extending the product, particularly outside of California. I don't think we have figured out the secret sauce yet, frankly. And I think that I think the only way to deal with that is probably going to be with higher member premiums going in the future. We are not going to be, I don't think, talking about, again, 27 bids.

But I think long term from an industry perspective, that whole part of the world was supported by high RAS scores. And I just don't think that's going to happen going forward. And I think the unit economics are going to be pretty tough for people. If anybody can do it, it should be us. But candidly, I don't think we've cracked that code quite yet.

[Operator Instructions] Our next question comes from the line of Jonathan Yong with UBS.

I recall last quarter, we talked about you still had some provider engagement negotiations outstanding in some states that you were thinking about entering. Has that progressed any further? And does the final rate update make any difference in terms of those negotiations? So you were negotiating when the advance came out and then obviously, the fines out. Does that change that negotiation process?

No, Yes. I know exactly what you're talking about. I wouldn't characterize it as negotiation. I think the negotiations part was fine. It was more around the engagement, the provider engagement model. And in some markets, the answer is yes. And we'll share with you where we're expanding to. In some markets, the answer is no. And I think that will also have -- would kind of dictate where we expand into certain markets or new states. I think the negotiations part is really interesting is -- the delivery system, and I can get on a whole thing on delivery systems, if you guys want. But they really need an alternative. They want an alternative to a payer that's willing to move market share to them without the kind of high denial rates some of the larger folks have.

And that's not to say that we're not good at it. It's just we're actually -- the model is very different. And so that though requires a high degree of engagement with the clinically integrated networks that are typically owned by these integrated delivery networks, these large monoliths now they are becoming somewhat monopolistic, but that's a whole different topic. And so it's really important that we find the right doctors and practices we can work with. And we're leaning into that significantly as we think about more scale outside of California.

Great. And just a follow-up just on the denial portion of it. Given the MCOs, broadly speaking, are reducing the amount of prior auths, et cetera, and presumably denials, does this make it harder to contract within that context?

No, it's going to be really interesting. I think it's where is the emphasis. And I think a lot of the AHIP discussions and what CMS is pushing the large plans is really around commercial. I think there's a little bit also that the exchanges in [ Caid ] and care are dragged into that as well. But our denial rates are like less than 2% -- and I won't name names, but some of the larger ones are 13% to 15%. And some of the data we pulled that Harrison pulled and shared with us just a few weeks ago was really interesting, and I'd encourage you all to get that. It's all publicly available. I do think we need to, as an industry, talk about, and I think you guys need to understand this part is when I get every single health system CEO and CFO say that Medicare Advantage pays them 85% or 86% of traditional Medicare. The inference is the plans are denying care or kind of playing insurance games.

When in fact, I would pause it that we think about that statement differently, meaning from our experience, we are paying the health systems 100% of what they deserve to be paid. And so when we talk about the same degree of program integrity that was applied to MA as it relates to coding for the insurers, we got to start looking at program integrity on hospital billing practices in the context of this affordability discussion.

And if 100% of the claims and authorizations we get from hospitals and systems is acute as opposed to observations, because ask the question, how are we going to make sure that everybody is aligned on the accuracy of those billings that are submitted to the plans. And so you got to look at the denominator also. The denominator is traditional Medicare. Well, traditional Medicare isn't editing any of their submissions, I would pause it. And so we got to just kind of deal with that issue. And that is -- that's going to be a policy issue. And if you heard the hospital CEOs in front of Congress the other -- I think it was earlier this week, it's all the plans. Everything is bad about the plans. And I would just reject that. We're paying -- we are paying hospitals 100% contractually what they show, and our denial rates are very, very low. So that's kind of my soapbox on that.

[Operator Instructions] Our next question will come from the line of Craig Jones with Bank of America.

So I want to follow up on the final rate notice. Chris Klump was out with some comments after the final rate notice is published that you happy with that 2.5% number as it is roughly in line with where general inflation comes in and thought that, that should be a target for just health care spend increases going forward. So do you think that 2% to 3% is where we will continue to see these rate notices going forward? And if that's the case, what kind of -- what level of unmanaged trend, I guess, could you manage without having to cut benefits if that's where the rate notice comes in?

It's a pretty insightful question there. I think overall trend nationally as an industry is way higher than 2.48%. And I think the default scenario for a lot of the plans is going to modulate the delta through kind of either tougher unit economics with the providers or, to your point, benefit reductions. I think for us, you got to look at the specific geographic impact of some of this information. And so I think it's public out there that when you look at the data region by region, for example, L.A. County's rate increases are closer to 6% okay?

So obviously, that stands to benefit us significantly. And so those are the kind of factors we're considering now, and I've shared this with you in the past that we're doing our business plans now market by market in preparation for the bids. So I feel pretty good about where we're positioned for '27 bids. But no way trend is going to be at 2.48%. There's just no way. I mean that's -- I love Chris. I have a lot of respect for him, but the trend is a lot higher, which gets to and speaks to affordability, which gets back to hospital billing.

[Operator Instructions] Our last question will come from the line of Ryan Daniels with William Blair.

John, you talked a little bit about ancillary benefits and the impact on MLR. And Jim, you've talked about capital deployment. Let's tie those two together and get your latest thoughts on maybe deploying some capital to bring some of that in-house, especially as you approach that 300,000 member number and think about going into new markets. Is that another strategy along with AI to kind of help the cost profile of the organization?

Yes, absolutely, Ryan. The supplemental benefits, if you kind of look at the larger we get and a lot of our larger competitors have those captives, we could call them, whether it be a behavioral health HMO, dental PPO vision PPO, transportation, all that stuff right now, we pay external vendors. And so it's an opportunity for us to lower MLR by bringing some of that in-house. And I've kind of alluded to that in the past where if we focus kind of M&A dollars, it could be in those areas, which are relatively low risk, low capital, high return. And so whether it's a dental PPO or a dental HMO even, those are some of the decisions we're weighing right now, you'd see that company. If we bought something or if we started something, you'd see it with 300,000 customers. That's a pretty good win for everybody.

Obviously, that is not something we're embedding into any of our thinking for the first half guidance, that would be an additional upside for us in the future.

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

Thank you.

Good afternoon, and welcome to Alignment Healthcare Fourth Quarter 2025 Earnings Conference Call and Webcast. [Operator Instructions] Please note that this event is being recorded.

Leading today's call is John Kao, Founder, and CEO; and Jim Head, Chief Financial Officer. Before we begin, we would like to remind you that certain statements made during this call will be forward-looking statements as defined by the Private Securities Litigation Reform Act. These forward-looking statements are subject to various risks and uncertainties and reflect our current expectations based on our beliefs, assumptions and information currently available to us.

Descriptions of some of the factors that could cause actual results to differ materially from these forward-looking statements are discussed in more detail in our filings with the SEC, including the Risk Factors sections of our annual report on Form 10-K for the fiscal year ended December 31, 2025.

Although we believe our expectations are reasonable, we undertake no obligation to revise any statements to reflect changes that occur after this call. In addition, please note that the company will be discussing certain non-GAAP financial measures that we believe are important in evaluating performance. Details on the relationship between these non-GAAP measures to the most comparable GAAP measures and reconciliations of historical non-GAAP financial measures can be found in the press release that is posted on our company's website and in our Form 10-K for the fiscal year ended December 31, 2025.

I would now like to hand the conference over to John Kao, Founder and CEO. You may begin.

Hello, and thank you for joining us on our fourth quarter earnings conference call. For the fourth quarter 2025, health plan membership of 236,300 represented year-over-year membership growth of approximately 25%. This supported total revenue of $1 billion, which grew 44% year-over-year. During the fourth quarter, we also exceeded the high end of guidance across each of our profitability metrics. Adjusted gross profit of $125 million represented an adjusted MBR of 87.7%.

Meanwhile, adjusted EBITDA of $11 million solidly surpassed our guidance range of negative $9 million to negative $1 million. For the full year, total revenue of $3.9 billion grew 46% year-over-year. Adjusted gross profit of $495 million resulted in an MBR of 87.5%, representing an improvement of 130 basis points year-over-year.

Taken together, this year marks a tremendous milestone in the maturation of our company's profitability. We transformed from roughly breakeven just $1 million in adjusted EBITDA in 2024 to delivering adjusted EBITDA of $110 million in 2025. This reflects an adjusted EBITDA margin of 2.8% and represents 270 basis points of margin expansion year-over-year.

Throughout the course of 2025, we have demonstrated both the strategic and operational advantages of our clinically centric model, which is purpose-built to deliver the highest quality care at the lowest cost. The data insights provided by our AIVA technology platform, combined with our Care anywhere clinical model provided us with the visibility and control necessary to navigate a year of significant disruption where we overcame the second phase in the B-28 risk model, our redesign of the Part D program and broad utilization pressures across the Medicare Advantage industry. And importantly, this allowed us to pursue growth while expanding margins even as competitors took a step back in 2025.

I'd like to congratulate our team for their success and recognition by Fortune Magazine for their unwavering commitment to seniors, which named us to its World's Most Admired Companies list for the first time. We believe our model of lowering cost by delivering more care to seniors not less, is the MA model of the future. and we are eager to serve more seniors as we continue along our path towards 1 million members.

2025 also marked an important step in demonstrating the replicability of our model beyond California. We more than doubled our ex-California membership while consistently exceeding our financial expectations throughout the course of the year.

As of December 2025, we had approximately 38,000 members across our markets outside of California, representing approximately 16% of our total membership. We have grown confidently outside of California by first leading with quality, which starts with success in star ratings.

We now have a 5-star plant in North Carolina for the third consecutive year, 2 Five Star plans in Nevada, a 4.5-star plan in Texas and a 4-star plan in Arizona. These achievements are further supported by the portability of our Care anywhere clinical model, which focuses on delivering care to our high-risk polychronic members. By leveraging the strength of our care model, quality of clinical outcomes and scalability of our health plan operations, we are unlocking the growth potential within these markets.

We are now focused on sustaining the momentum of our ex-California markets. In 2026, we plan to invest in our sales and distribution engine, build deeper relationships with our broker partners and continue growing with the line provider partners where we have durable relationships. With less than 4% market share across our 23 counties outside of California, we see significant opportunity to take share over the coming years.

Turning to our 2026 AEP results, we grew to 275,300 health plan members in January of 2026, representing 31% growth year-over-year. We saw broad growth across each of our markets with 23% growth in California and more than 80% growth in our ex-California counties.

Importantly, we focused on growing responsibly through our bid design and sales strategy. We drove nearly 20% improvement to our AEP voluntary disenrollment metric and sourced approximately 80% of our gross sales from planned switchers. By taking a balanced approach to growth and profitability this year, we remain mindful of the impact of the final phase-in of B-28 while still capitalizing on the growth opportunity in a year of significant disruption.

Taken together, we are pleased with the solid growth in California while continuing our rapid expansion outside of California. Our growth this year is adding to our future embedded earnings potential while supporting our near-term operating leverage objectives.

Meanwhile, improved operating efficiency across the enterprise is creating additional capacity to reinvest in long-term projects and scalability initiatives. Each of these factors is giving us confidence in our initial full year adjusted EBITDA guidance range of $133 million to $163 million.

This is consistent with our previous expectations for consensus adjusted EBITDA of approximately $145 million to be in the range of our initial 2026 outlook. Jim will expand further on our financial outlook in his remarks. Looking beyond 2026, I'd like to spend a few minutes on the 2027 advance rate notice. On a net basis, the announcement appeared to indicate a relatively flat rate environment for the industry. This reflected a combination of underlying cost trends and policy changes. While we have heard disappointment across the industry, we believe the update is largely consistent with the CMS focus on program integrity and aligning payments with underlying costs.

Specifically, we are encouraged that benchmark trends reflect continuing growth in costs within the fee-for-service population. This was partially offset by certain policy adjustments, including those related to skin substitutes. As it relates to unlinked chart reviews, we have long supported excluding these records from risk score calculations as part of improving program integrity.

Of note, our exposure is limited. Approximately 1% of our total HCC value is derived from chart reviews of any kind. Within that category, an even smaller subset is related to unlinked chart reviews. For those, we believe we have a clear path to ensuring the diagnoses are supported by a linked claim or encounter over time. Most importantly, the current environment reinforces the importance of our strong clinically-led model and core medical cost management competency. We believe this enables us to win in any rate environment. Just as we have demonstrated in 2024 and 2025, where the industry experienced tighter reimbursement.

And furthermore, we will continue to have Star's payment advantages in 2027 with 100% of our members and plans rated 4 stars or above. In closing, we believe we are entering a reimbursement environment that creates a more level playing field with our competitors, which allows our distinct care management model to shine. We are proving the effectiveness of our distinct medical cost advantages with the results we have shared with you over the past 2 years.

While we're pleased with our performance, we're not done yet. 2026 will be a year of continuous improvement where we plan to make targeted investments across our clinical model, new market playbook and scalability initiatives, including investment in AI workflows to improve administrative efficiency.

In doing so, we are balancing our near-term financial objectives with unlocking the embedded potential of our model.

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

Thanks, John. I will jump right in with our 2025 results. For the year ending December 2025, health plan membership of 236,300 increased 25% year-over-year. Growth in membership drove total revenue to $3.9 billion for full year 2025, representing 46% growth year-over-year. Full year adjusted gross profit of $495 million represented an MBR of 87.5%, an improvement of 130 basis points year-over-year. We ended the year with strong outcomes across all major cost categories. Of note, Part D profitability and supplemental expenses trended in line with our guidance expectations.

Meanwhile, our proactive care approach again delivered strong outcomes, leading to inpatient admissions per 1,000 in the low 40s during the fourth quarter. Taken together, the strength of our performance across each of these medical cost categories and the durability of our clinical model are giving us confidence in our underlying bid assumptions as we step into 2026.

Moving to operating expenses. Our operating cost ratios continue to demonstrate significant year-over-year improvement as our operational infrastructure scaled to support our new members. Full year 2025 GAAP SG&A was $443 million. Our adjusted SG&A was $385 million, an increase of 28% year-over-year.

Adjusted SG&A as a percentage of revenue declined from 11.1% in 2024 to 9.7% in 2025, representing an improvement of approximately 140 basis points. Taken together, we delivered full year adjusted EBITDA of $110 million and an adjusted EBITDA margin of 2.8%. This represents 270 basis points of margin expansion year-over-year.

Turning to cash flow and our balance sheet. We generated positive free cash flow in 2025 and ended the year with $604 million in cash and investments. Subsequent to the quarter, today, we announced the close of a $200 million revolving credit facility. This facility is simply good housekeeping and further evidence of the maturation of our capital structure. We do not expect to draw on the credit facility in the near term and our increasing positive free cash flow position allows us to support our organic growth objectives.

Moving to our guidance. For the full year 2026, we expect health plan membership to be between 292,000 and 298,000 members. Revenue to be in the range of $5.14 billion to $5.19 billion, adjusted gross profit to be between $615 million and $650 million, and adjusted EBITDA to be in the range of $133 million to $163 million.

For the first quarter, we expect health plan membership to be between 281,000 and 285,000 members, revenue to be in the range of $1.21 billion to $1.23 billion, adjusted gross profit to be between $138 million and $148 million; and adjusted EBITDA to be between $26 million and $36 million.

As it pertains to our full year expectations, given the strength of our OEP results and continued stability with our retention, we are raising our year-end membership guidance by 2,000 members at the midpoint relative to the commentary we provided in our January 8-K.

Moving to revenue, the midpoint of our initial revenue guidance range of $5.16 billion represents 31% growth year-over-year. The expected year-over-year increase to our revenue is primarily driven by our membership outlook.

Meanwhile, our underlying revenue PMPM assumptions are balanced by increases to benchmark rates and the Part B direct subsidy. This is partially offset by the impact of the final phase-in of B-28 risk model changes and mix of growth outside of California, which carries modestly lower per member revenue.

Turning to adjusted gross profit, our $633 million guidance midpoint implies an MBR of 87.7%. The outlook contemplates improvement from the retention of existing members and modifications to our product designs within markets to reflect the current reimbursement environment. These tailwinds are balanced by the third phase-in of V28 and our new member mix, which is disproportionately represented by LIS dual eligible and C-SNP eligible members. Caring for these complex members is core to our clinical model, but they typically join with higher MBRs in year 1 as we transition them from an unmanaged setting to our care model. Additionally, as a reminder, we do not incorporate any assumption for sweep pickup from new members in our initial 2026 guidance.

In 2025, this pickup was a benefit of approximately $14 million to our full year adjusted gross profit and EBITDA or roughly 30 basis points to our consolidated MBR.

Moving to SG&A. We forecast further improvement in our SG&A expense ratio. We expect to achieve operating expense scale economies resulting from both membership growth and enhancements to administrative workflows. As John mentioned earlier, we also plan to reinvest a portion of the savings derived from improved operating efficiency towards further advancements in our clinical model, new market activities, and technology infrastructure to prepare for scaling our business and the deployment of AI workflows in the future.

Taken together, we expect to deliver adjusted EBITDA of $133 million to $163 million. consistent with our preliminary profitability comments provided earlier this year. Turning to our seasonality expectations, we expect to modestly lower MBR in the first half of the year compared to the full year average. Conversely, we expect the second half of the year to be slightly higher versus the full year average. Our initial view generally reflects the regular seasonality of our Part C MBR experience, combined with a flatter slope to our Part D MBR in 2026.

In conclusion, the 2025 execution of our clinical model, the replicability of our results across markets and the consistency of our operating performance all give us tremendous confidence as we enter 2026. We are excited for the significant growth opportunity in the years ahead. and are determined to make the right investments in people, processes and technology to ensure that we are scaling responsibly. With that, let's open the call to questions. Operator?

[Operator Instructions] Our first question comes from the line of Michael Ha with Baird.

So I want to frame this question, like pulling out a few numbers first. Over the past 2 years, alignment has seen nearly 50% revenue growth CAGR, I think almost 500 basis points of margin improvement, right? Sub-10% G&A, all while improving to 100% of members in 4+ star-rated plans, and all this happened in a flat rate environment, while it trends nationally, rose to high single digits. So on the heels of all of this, and with the potential again for another flat rate year in '27, my question is, I guess, simply put, what would prevent alignment in 27 from having a rerun of what you just accomplished in '24 or '25 because it looks very similar to set up into '27?

Well, Michael, this is John. You should probably expect my response to be, we feel very comfortable with the 20% growth rate No, we feel good. I mean the model is working, and it will work irrespective of what happens in the rate universe. And I think that if rates do go back up a little bit in terms of the advance switching to the final notice. I think it will be fine. I think what I'm hearing in terms of the amount of potential increase, it's still going to be pretty short of what we think trend is at least what the sector thinks trend is. So I think that will be something favorable to us. And if rates don't go up, I think it could be more favorable to us.

And I think we're going to do exactly what we've done year after year, which is be very, very disciplined and find the right balance between growth and margin expansion. I would say that we don't want to get ahead of our skis in terms of growth. We don't want to talk about bids. I do expect -- and I said this to people beforehand. I think it's still going to be a 1 or 2 years of kind of people finding the right model to dig out of this kind of post V28 world? And I think that there are some folks that grew a lot this past year for -- and we chose not to grow at the level some of these other folks grew. We didn't just grow to get growth. We want a durable provider relationships.

We wanted to make sure our infrastructure, would be able to sustain the level of stars that we've been able to produce, and the other thing that we're doing is we know how good we're doing in '25, and I feel very strongly about 26 as well. We're taking the opportunity and we're not complacent. We're getting -- we're getting even tougher on ourselves internally from an operational perspective, from a clinical perspective, from an AI deployment perspective, we're just getting stronger to really get to the level of growth we think we can get to over the next 3 or 4 years, get into a number of growth that will be really meaningful for everybody. That's kind of how we're thinking about it.

So Michael, I mean you called it 2 years ago. I'm not going to give you the benefit of calling it again quite yet.

Got it. Helpful. Okay. My next question, the implied MLR for '26, Jim, I think you mentioned midpoint 87.7. If I were to talk about that fleet payment from $25 million I'm seeing maybe 10 bps of MLR improvement year-to-year. So at first glance, feels a bit conservative since clearly prior years have grown a lot more and done a lot more MLR improvement. So I'm just trying to understand the assumptions embedded in Amara little bit better? I know you mentioned LAS member mix. How much does that year 1 member mix impact your due to your MLR? What are you assuming on trend in '26 versus '25, just a general sense on the various components.

Yes. And thanks, Michael. I guess a couple of things. Just in terms of the inputs to the 2026 guide, I mean, we're -- there's kind of 3 core inputs that we feel pretty good about. So I want to start with that. And our 2025 experience how we've managed costs and delivered throughout the year, new members delivering, et cetera, that gives us a lot of confidence as we go into the year. We also bid and mid- or 2026, and you say, okay, how do we feel about that now that we're in January, February and building our model for the year. And it played out very, very nicely in terms of how we thought was what was going to happen and happen -- and then finally, to John's point, this is very disciplined growth. And we chose to play in spots where we could win with the products we like with the cohort of members that we like. and the geographies and the networks that we like. So that's the set. Now as it pertains to the MDR, you're right, it's about a 10% kind of apples-to-apples improvement because or 10 basis points, I should say, apples-to-apples improvement because we're stripping out the impact of the suites last year. I would say 3 drivers, Michael, that kind of our inputs to why it wouldn't be better.

Number one, we're still going through the third phase in V28, okay? And so we've navigated that very, very nicely, as you mentioned. But that does -- it's not a tailwind. It's a -- the new member mix was disproportionately represented by dual eligible, TST-eligible and LIS members, which is our sweet spot. -- but they come with a little higher MBR in the beginning. So it is -- that is a little bit of -- but the trade-off is we know how to manage these members really well, and there's a lot of long-term opportunity there. So we consciously made that choice. And it was a big portion of our -- and then as I mentioned before, we didn't have the suite. So I think the V-28 and the new member is coming in at that, I'll call it, a heavier mix in terms of special needs, et cetera, is driving that, but we feel very good about where we're at with respect to the visibility we have.

I also throw in Part D, a second year, we did a great job delivering on Part B in 2025, and on our promises, and we have a fair degree of visibility as we go into 2026. So I'd say that was another input that was part of the overall mix.

Our next question comes from the line of John Stansel with JPMorgan.

Great. I know you called out potentially changing some approaches around your distribution network and broker community. Can you talk about how you're thinking about that change? And then maybe looking at the '27 commentary a little bit. I think there's been an expectation about potentially expanding into new states in '27. Is that index at all to needing a better rates in '27? Or is that something that you think you can do in an all-weather environment?

John, it's John. Yes. With respect to distribution, we're going to -- and I think that come was specifically related to some of the ex California markets, including some of the potential new market entry strategies that we're going to be taking into existing states, new markets in existing states and what we're doing with potentially getting into another state.

And so we're at a size now in pretty much each of our markets that were really kind of a player and relevant. And so I think we've got deeper relationships with brokers and providers. And a lot of the success that we've been able to achieve in California is starting to take root in these new markets. and that really does start with the providers. And what we've learned also is really is the brokers are really pretty important in that discussion. And you put that against the backdrop where the receptivity of the brokers is just much greater given the fact that a lot of the incumbents are taking a step back for the last year or 2 and maybe for the next year or 2.

I think that creates an opportunity for us. And so we're just very intentional about that. With respect to new markets, we are seriously thinking about that. We're not quite I want to be quite yet with some of the provider engagement conversations, but I'm pretty comfortable we're to be able to get into a new state.

And the rates, I just don't think that matters to us. I think it's going to be whatever it is, it is, and I think we're going to do well in any environment. I really mean that. And again, a lot of this is choosing the right provider partners, which I think we have in these 2 distinct new markets.

Great. And then on the RFI from CMS that is still out and about, but has received comments at this point, a couple of different topics embedded in there. As you've had further discussions with the administration and with your counterparties, how are you thinking about potential -- incremental changes that could potentially come out of that RFI?

TBD. I mean, we submitted our comments like everybody else yesterday. I think from a policy point of view, I think we'll see what they have to say around the reward factors and the HEI. Again, we'll see what happens. I think we're going to be okay either way. And I think from a kind of just more information gathering purposes, we feel pretty strongly about kind of the C-SNPs remaining as C-SNPs are not really getting linked to any kind of aligned network. And the logic there really is we want there to be choice for the beneficiaries. We don't think that's right that the beneficiaries should be forced into a suboptimal star rating plan who's more of a cap plan.

I think they should really be have choice to get the right benefits, get the right network and just to get the right quality they deserve. But other than that, there's some moving parts that have been asked what we think about risk adjustment going forward.

We do support documentation of the HRAs. We've always supported that -- so I think that's a good thing. I think the administration focusing on program integrity and minimizing gaming, all that is kind of the right direction -- but as I mentioned earlier, I do think there's going to be some exposure on rates. And as the previous Mike said before, I mean, I think we stand to be a beneficiary of that. But I think they're going to do the right thing on rates. That's what I actually think the final comes out.

Next question comes from the line of Matthew Gillmor with KeyBank.

I want to start off with the ADK metric in your outlook. Can you provide some more details and unpack what drove the favorability in the fourth quarter, and then also, as we're looking ahead, I would think the ADK metric will probably tick up given the duals mix, but just wanted to get a sense for what's the right kind of apples-to-apples comp for ADK that's embedded within the guide?

Right. Well, I'll start with how we finished the year. We had an expectation, if you remember, in the third quarter, Matt, that ADK might tick up. We weren't ready to bet on flu season. being favorable, and it did come in pretty well. So we ended the year, as we said in the low 140s. As we go into the new year, the answer is yes, because of mix our 800 could pick up a little bit. And that is not because the trend is wrong on an apples-for-apples basis, it's because of that. And so I view that as another component of the I'll call it, the cost trend that we're pretty maniacally focused on and managing actively. But it might pick up a little bit in the -- over the course of the year. As you're aware, the first quarter is usually a little bit higher. So that's just a seasonal issue.

Great. Very helpful. And then maybe asking about AI investments, you mentioned some investments in the prepared remarks. I think last call, you also talked about AI within care anywhere and AVA, just wanted to get a flavor for where some of the technology enhancements you have in flight where they maybe be directed and how that may benefit the business over time.

Matt, it's John. Yes, it's a great question. We've got 30-some-odd different potential use cases where we could deploy a genic having the use cases is not our issue. What we're actually doing is to require 2 foundational actions be at a level where we're satisfied. And the first one is really as part of this kind of revalidation of everything. It starts with a unified data architecture. It starts with EVA. And we're just looking at everything. We're making sure all the data ingestion is as tight as we think it is -- we're validating everything. We're not assuming anything, all of which is designed to ensure that we can scale and replicate without any abrasion. We're going to be just that much more efficient scaling. And what that really translates into is we're going to get to cash flow breakeven faster than we would have thought before.

And we're going to grow and be more aggressive on Stars and benefits as even more so than we did before. The second issue is what we're talking about internally is just making sure the end-to-end workflows within each functional area is well documented, and, frankly, well understood. And what I mean by that is when you basically double in size every 2 years, you're bringing in a lot of people, a lot of new people that have to get trained. And so the training opportunity is to make sure that all of these different workflows are understood by everybody.

And then within the end-to-end workflows, you've got micro workflows. Do you really know what's happening and then ultimately is the cross-functional workflow processes. And when you -- again, those are very sophisticated workflows that factor in our clinical work processes, our provider contracting work processes which 1 of these providers are we delegating, are we not delegating. We have our directly contracted networks, all of that is being evaluated right now. And once I get those done, which we expect to have done midyear this year, you're going to see us start deploying these use cases for agenetic AI. The other thing we're doing is we're kind of revisiting the initial stratification model within AVO. And I think there's going to be tools that we have Sorry. Sorry about that. I went on you for a second. I was going to say, we talk about EVA -- and we're looking at using the new tools to make the stratification model even better for our care anywhere members, is the 10% of the population, we think that account for 70% of the spend. You're also going to see us have use cases around administrative improvements. I think member services is going to be 1 of the first ones. And I think there's going to be immediate savings there. I think, in our financial reporting. I think you're going to -- we're going to be able to use AI and look at the ROC data and be able to come up with actionable conclusions market by market. I think those are things you're going to see. What we're probably not going to do is kind of lead the market in deploying agentic AI and care delivery. We're going to still rely on our doctors and nurses to do that. Hope that helps.

Our next question comes from the line of Scott Fidel with Goldman Sachs.

This is Sam on for Scott Fidel. I was just wondering if you could talk about just -- are you concerned about the MI industry that has -- may have lost too much by parts and support in Washington? And what can the industry do to improve its standing and position itself better to alleviate the ongoing regulatory pressures on the sector?

I think it's to get back to what CMS originally intended MA 2b. And I think it's -- they're all the actions that I see going on are exactly consistent with that, meaning -- and I've spoken about this they want a program that creates a value to the end beneficiary -- and to define that, you got to have higher quality, better experience.

And I think to do that in a way that is the most affordable -- and so this is what I always say, you got to have high quality and low cost. And in that environment, the folks that can create the highest degree of value ought to be positioned to win.

I think there's been some financial engineering away from that over the past several years, where as an emphasis on coding global capitation prior , all of which I don't think are going to be sustainable going forward. So I think if people just do what CMS intended them to do, they're going to be in a good place. And I think the benefit differential of MA relative to traditional Medicare, I think is going to cause M&A to continue to grow, not go down. That's what I think.

And I think for the last 40 years, we go through these different phases or whether it's the BVA in the '90s and the ACA in the early 2000s. I mean if you go through those peaks and valleys, MA has always thrived. It has always come through. And I just think it's I would be very surprised if that trend changed to put it that way.

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

So I wanted to follow up on the, what you said about the final right notice for '27. You said you think CMS will do the right thing on rates in the final notice. We saw United in its letter to CMS around the advanced rate notice thinks that growth rate for '27 should be closer to 9% to 10% versus the 5% in the advanced notice. So where do you think that growth rate should be? And then what do you think CMS will actually end up doing when you say do the right thing?

I think the thing that I've been reading about really is related to the impact of the skin substitutes and how that's been an effective offset to the utilization trends for traditional Medicare. And I think it remains to be seen how they actually manage that specific issue. I'm not sure it will get up to the 9%, 10% rate net. But I think it's possible get to the 5%. And I'm not sure that's still enough, frankly, to kind of fully meet the trend. But I got to tell you, I was surprised by the rate notice in the -- in advanced notice. And very practically, it was related to the midterms, that's really how I was thinking about it.

And I think there's an opportunity with additional data that's going to be coming in to capture the second half trends I think they're going to come up with something hopefully to deal with skin substitutes that was a material takeaway. And I think it will be something that will be reasonable. And maybe I should say I'm hoping it will be something reasonable because if it's not, I think you're going to get a lot of people that are going to degrade benefits even more. And it is a real issue. And we saw this during BBA 30 years ago.

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

John, I want to make sure I call what you said on the chart reviews. Did you say the exposure to total chart reviews is 1% and then even smaller from the unlinked piece?

Yes, for us, we don't rely on that much at all. It was really the message. And we don't feel exposed by that change at all. Yes.

Okay. And then, I mean, is it fair to maybe assume the split is more just 50-50 within that sort of 1%? .

I'm not sure I understood that. .

I don't think we linked.

Yes. Ryan, I just don't think we're going to get precise about that because it's so immaterial. It's a small number. It's a small number.

And then I guess just building maybe on John's question and John, your remarks about sort of deepening broker relationships. So direct noncompetitor you guys in your markets announced some plan to use MA brokers more like health navigators and get them involved in patient experience. I guess is that sort of a strategy you think could work for the industry? And maybe just more broadly, how do you believe the payer broker relationship will or could evolve sort of over time?

Yes. We -- I mean we have been consistent about this. We value our broker partners. We think they do a good job. We think they're generally looking out after the best interest of the beneficiary, and are fair. What I do think is going to be interesting is how CMS tries to position itself as a bit of, call it, if not the actual agent of a little bit more of the FMO, I think that will be interesting. And we're kind of looking at some of that. Some of the developments -- some of the -- just -- it's very nuanced, but I think that's going to be interesting one to watch. I'm not sure it's going to be implemented anytime soon, but I think that's on their radar. .

With respect to your kind of commentary on some of our competitors, I don't know. I think they were, I think, very specifically saying that whatever it is, 4% to 6% of premiums going to distribution is a big line item, I think, is what was quoted. Yes, I'm not sure. I mean there are certain parts that they can maybe be additive to a little bit, but I'm just -- I'm not sure about that one.

Our next question comes from the line of Whit Mayo with Leerink Partners.

John, can we go back and talk about the D-SNP growth in some of the non-California markets? Are there any numbers that you can put behind that? And then also maybe just elaborate on the potential opportunity in the coordination only duals contract in Nevada.

And I'll take the growth issue. We -- about 50% of our AEP growth was in the LIS, duals and C-SNP. And that was both in California, but also outside of California. As you know, we have outside California growth. So that's a real healthy portfolio for us. And we think we can manage that pretty well over time and with a lot of embedded value. But John, I think there's a second half of the question, maybe I'll give it over to you.

Yes, I actually need to follow up with you on that one. I don't have a good answer for you.

Okay. And my follow-up would just be with some of the stars changes that if CMS deletes the 12 measures in stars. Is this a good or bad thing for you? I know you had some tos and times in some of those measures.

Yes, we've lived at it. I think it's net neutral. It's kind of the bottom line. I think it does get implemented, it's probably not going to actually take root until '27 anyways, which means it will impact '29, maybe '30, 2029, 2030. But net, I think, as of now, we think it's effectively a net neutral. I do think CMS is going to try to simplify that whole Stars program. And so we actually think that's actually a pretty good thing. .

Our next question comes from the line of Jessica Tassan with Piper Sandler.

Can you give us a little more detail on the slope of MDR over the year? I think you mentioned typical Part D seasonality and then flat MDR, flattish slope in Part D. So just trying to understand, excluding the sleep in '25, we'll see will calendar '26 follow kind of a similar seasonal cadence?

Yes, the sweep as you're aware, history has shown itself pretty consistently that Q1 and Q4 are kind of the higher and then not even with the suite, but just in Q2 is usually our seasonal low that picks up in Q3. So I think it's going to follow a similar pattern, Jess, and I think you're kind of seeing that in our first quarter guidance.

Okay. Great. And then just my next 1 is, can you all discuss retention during AEP and then on the lower projected entry year growth in '26 from 1Q to 4Q? Is that a matter of lower gross adds or increased intra-year churn or switching. I'm just trying to get a sense of basically year 1 versus tenured membership and the mix of year 1 versus tenured in 2026. .

Yes. Why don't I try the first -- the second question first, which is the intra-year and then we can talk about retention. But as we come into this year, there was just a lot more movement, disruption is probably too strong word because we weren't picking up bad stuff, but there was just a lot of movement. And so we are trying to assess whether we picked up most of that movement in AEP or whether it will sustain itself throughout the year.

So it's a little bit like we're not ready to bank on a greater AEP opportunity turning into sustained growth throughout the year. OEP is feeling fine. But the we just aren't ready to kind of bank it all the way through December. And then as it pertains to retention, I think we talked about it in January at the conference, we felt very good about the retention this year. That was one of the reasons why we had kind of very nice -- we had both sales growth, but we also had retention, and that's wonderful for us because of our ability to mature our cohorts and get better NBR. So we're not churning the we're holding on to the loyal numbers. So that was -- that's turned out to be a nice little boost for us.

Our next question comes from the line of Andrew Mok with Barclays.

This is Tiffany Yuan on for Andrew. I just wanted to follow up on the advanced notice. You mentioned your exposure to the unlinked chart review is fairly limited. Can you share what you think your exposure is to the risk model rebasing component relative to the industry? .

That's an interesting question. I actually don't think we are as exposed as others for the simple reason that our kind of blended RAP scores are what are we, Jim, 1.08 or something like that. I mean it's just...

Yes. Yes, it's below 1.1.

And even with the final phasing of the 20 you still got people coming down from 1.5, 1.6, 2.0 in certain markets down kind of 20-some-odd percent. And so I just -- I think we're -- we've never relied on it other than to make sure that we're just very accurate and compliant on the coding part. -- and have focused on the cost management side and the Star side. And I think we're going to be advantaged actually if there's any more tweaks to that.

Okay. Got it. And then I just wanted to follow up on the MLR seasonality. I appreciate the comments around sort of the blended seasonality. But could you remind us how your Part D MLR specifically progressed through the quarters in '25? And is your expected '26 slope consistent with that 25% experience?

Yes. It's the -- it will be slightly different than '26 than '25, but which is to say that the profitability of Part D is going to be a little bit more weighted to the first half. But this is all on the margins. So I would kind of say at a high level, consistent but slightly more weighted to the first half. And that's just really kind of the construct of the risk quarters and how we accrue for contra revenue when we're outside the risk order, et cetera. So I would say, pretty similar to 2025 a little bit flatter.

Our next question comes from the line of Jonathan Yong with UBS.

John, I think you mentioned that you're still in some provider engagement or negotiations in the new state. I guess what to, in your mind, is currently to hang up there. And typically, where are you in terms of when you're thinking about entering new state would you normally be what you did at this time? Or would it be a little bit further down the how that's completed?

It depends. It's a good question, Jon. It depends. Really, we're looking for full provider durability, full provider engagement. And I think we're going to get there. It's just, again, our lessons learned over the past several years in terms of entering new markets is just causing us to be extra vigilant and to make sure people understand our model why we're different than everybody else.

And it really -- even if you work with different health systems and integrated delivery networks and whatnot. A lot of it really relates to the physicians and to create economic, clinical and operational alignment with that doctor, and/or their MSO. And that's really what I was focusing on. I think we've got great hospital partners and we've got a lot of good doctors that understand and like what we're saying in terms of the clinical model. We just needed -- we just -- I would like to have a few more. That's all.

Got you. Okay. And then just going back to the rate update for '27. It wasn't clear to me because I think at the beginning in your prepared remarks, you said that the industry is complaining about what the effective growth rate is -- but then it sounded like it was fine to you, but then I believe later on, you said that it's running below trend in terms of what it is, I just want your clarity on that.

Yes, the 0.9% net kind of advance rate notice, I think, is clearly disappointing to the industry. I think there's a little bit of debate over what's causing that low trend. And I think that CMS has certainly shared with us that it was really just an actuarial reality when they use different data for more recent dates relative to what was used in the past. So their intention was not kind of programmatic policy issue, but it's just like the data was different. And that's what led to a little bit lower than expected raw traditional fee-for-service trend.

Then in addition, you deducted the skin substitutes as an offset to that and ERGO, you kind of get this 0.9%, which is a big problem. If that maintains for the rest of the industry, people are going to be rationalizing benefits again. And so my point was I heard somebody say 9%, 10% from one where competitors, I'm just not sure I've seen that number -- and so if you then -- if you think about the fee-for-service trend data and let's say you get a portion of the skin substitutes, if not all, but say a portion is actually used as an offset and that is phased in over time. I think you could see kind of closer to what the analysts was talking about 5%. I have heard a lot of people talk about 200 to 300 basis points increase kind of getting 0.9 to increase to 200 to 300 basis points, which gets you to, whatever, 3% to 4%, 5% increase potentially.

But my point was, I think that's still lower than the kind of the utilization trends that would cause people to be aggressive on benefit designs. That's what I really meant. My point as it relates to alignment is I really think we can win either way because we're the high-quality, low-cost producer. We're not dependent on kind of an external entity to do our medical management. That's something that we're actually very good at.

And what we've also said is the margin that would otherwise go to a third-party value-based provider. We actually reinvest to the individual practitioner and/or to richer benefits. So I just think either way, we're going to be in a really good place. From an industry perspective. I hope they're right actually that you're going to get a rate increase of 9% to 10%. I'm not sure that's going to happen.

Our next question comes from the line of John Ransom with Raymond James.

Just thinking about bending the trend with ABA, 1.0 was, I think, [indiscernible]. CHF, COPD, type 2 diabetes. What's the if it's going to become more about bending the trend. What's kind of 2.0 in terms of deploying your assets to do that?

Really good question. .

I thought it really was, John. So I appreciate that. .

No. It's your questions are always so like advanced. No, they really are. No. So I think 2 things. It's actually a serious answer. I think that as good as we are, we can do a lot better operation. And so what I mean by that is I think our stratification models can be more precise. I think our workforce management of our clinicians can be more efficient. I think we're focusing on clinical outcome measures as what you talked about, which is kind of traditional chronic disease management. I think the outcomes measures are going to be more and more important where we demonstrate not only the efficacy of better utilization, but better clinical outcomes. I think that's going to be something we focus on. But in terms of programs, I think transitions of care programs we can do better on. case management efficacy we can do better on. tighter integration with our provider partners from a medical management perspective and potentially on palliative programs, I think we can do better on. And like when you kind of combine all these together, I think they all represent small opportunities where we just continue bending the cost curve. .

The other thing I would say is, and I've alluded to this in the past is -- and this is less of a clinical MLR piece, but an overall MLR piece. The supplemental benefits right now that we have, whether it be kind of dental coverage or vision coverage or transportation or Flex Card. I mean those kinds of benefits represent about 5% of overall premium. And I think that we're getting big enough now that we are going to be investing in starting, buying kind of some of these captives. The specialty company captives. And I think from that, we ought to be able to save on margin because we would be paying ourselves basically. And if we did a -- I'm just picking on whatever specialty we do, we'll be able to seed it with 300,000-ish seniors if you know what I mean. And so I think that's going to be a way where we've been in the cost curve.

The other thing that we've also talked about is one of the benefits of our performance in '25 was we really working closer with these IPAs that we have and taking the technology tools and really helping them do the utilization management for the acute authorizations.

And I think we've done a very good job. And we're oral good with them. We have some work to do. I still think in terms of some data. But I think by de-delegating that has been something that's going to help us and help the member and help the IPA. And I think that before this past year, we hadn't done that. And so the full benefits of AVA and Care Anywhere weren't fully realized yet. So I'm very optimistic about that part.

That was quite the answer. My second question is a very simple one. There are studies as long as your arm about is a good deal for the taxpayers if you do apples-to-apples, risk adjust apples-to-apples, where do you -- I mean you got MedPAC, on 1 hand, saying it's terrible. There's the Evolent study on the other hand, saying it's a great deal. And there's all over the -- when you talk to people in D.C. what study do you point to? And do you think it's apples-to-apples a good deal yet for the taxpayers?

I think it's a very good deal for the seniors. I think from a tax point of view, the last study I saw was post V28. It's pretty much apples-to-apples. That's what I saw. And to the extent that plans that are able to remain competitive and still have a reasonable rebate back to that beneficiary are going to be the winners. .

I think that CMS has been consistent with the , they want to grow MA. They just want to grow it the right way. They want to minimize the gaming, their words, not mine. And ensure program integrity. On the other hand, we want to have an alternative with what they're referring to as traditional fee-for-service Medicare.

Now I just -- I think just looking at the value proposition to the beneficiaries, I personally think you're going to get continued growth and market share growth in because the rebate dollars, even though they go down, there's still material enough in terms of being better than fee-for-service that people are going to still choose it.

Our next question comes from the line of Raj Kumar with Stephens.

Maybe just 1 quick 1 around kind of AEP and just thinking about new member engagement kind of pertaining to the Care Annywhere platform. Any kind of insight on that and how that's trending relative to kind of this time last year?

Raj, it's John. Can you just repeat that again? I kind of faded out or you faded out. I didn't quite...

Yes. Just maybe kind of any details around kind of new member engagement and kind of pertaining to the care Anywhere platform? And how is that trending relative to kind of this time last year with the new membership?

I got it. yes, I would say it's about the same. I think there's an opportunity for us to be better. We're spending a lot of time again, taking advantage of again, the -- I think the correct strategic decisions and operational decisions we made 2 years ago that are really paying off in '24 and '25. And I think we'll also pay off in '26 that same kind of operational focus of continuous improvement, again, just not being satisfied with any of it is going to cause us to get better and better and better and 1 of those areas is care anywhere engagement. I think we were still at about 65%, which really isn't bad. But I think we've set a target internally we're trying to get to 75%.

And I think some of the new people that we brought in on the member service and member experience side shut out to that team. is really going to be good for the company and for our beneficiaries. So I'm optimistic about that. But year-to-year to answer your question, it's about the same.

Got it. And then just maybe as a follow-up, just kind of thinking about your ex California markets and kind of been in them for a while now. And as they mature, have you kind of seen any divergence in just overall trend or even consumer behavior and how maybe that has kind of led to operational kind of nuances in those distinct markets and maybe even kind of any catering or tweaking around AVA to kind of service those operations in the kind of most optimal manner?

That's a very good question. I think the work that we're doing now in terms of, call it, I call it operational scaling is really designed to make sure that the providers and the members outside of California get the same level of service they get inside of California. And that's part of our maturation. It's part of our scalability, and we're working really hard on that right now. Again, having very clear member satisfaction but we're really starting provider satisfaction metrics. And I think the bigger we get the more critical this area is particularly outside California. I think we've done a very good job on Stars.

I think we've done a very good job on clinical replicability in terms of the ADK metrics outside of California. I think our provider engagement is something we got to just get better at, and I say that to all the providers out there. We're working on it. We're going to get really, really good. And we want 5 stars from all of you, just like we got 5 stars from the members.

Ladies and gentlemen, that's all the time we have for questions. This concludes today's conference call. Thank you for your participation. You may now disconnect.

Great. Thank you all for being here. My name is John Stansel. I'm a member of the health care services equity research team here at JPMorgan. And we're thrilled to be joined by Alignment Healthcare, where we have CEO, John Kao; and CFO, Jim Head. John is going to give a presentation, and then we're going to move to some Q&A after that.

So John, without further ado.

Thanks, John. Good morning, everybody. Can you guys hear me okay? All right. Let's see here. Let me see if I can figure this out.

Okay. So what I'm going to share with you today is really start from the very beginning is like why do you call yourselves Alignment Healthcare, right? And it really is very simple, is the vision is to make sure that the health plans, the providers, hospitals and doctors, the brokers and very, very importantly, CMS are all working together in an aligned way with data fluidity, aligned economic incentives, operational seamlessness, all kind of functioning together for the benefit of the senior.

Everything is about the senior. Everything is about my mom. How do I take care of her in a way and get the hassle factor out of health care for my mom and your moms and your dads. That's the vision of alignment. And this vision was started and has produced results that I want to share with you.

Over the last 10 years or so, we have grown tremendously. We have grown responsibly. We are over 275,000 members now. And we kind of guided to close to 300,000 for the end of the year. We're approaching on a guidance basis, $4 billion in premium revenue. We've basically been growing at 30% per year. We've effectively been doubling every 2, 2.5 years. So I think the vision, the mission of the company is starting to be proved out from a financial perspective.

From a differential perspective relative to the performance of our stock to the peer group, I think this is the most astounding slide. And it's like why? Why are you guys performing so differently than the rest of the sector, right? And the entire rest of my discussion is to be very specific and share with you how we're doing it because I think it's very hard to do. I think to actually replicate it is very, very difficult from our competitors.

Fundamentally, we think Medicare Advantage is not just an underwriting business. It's a care management business. It's a clinical business. There are certain actuary fundamentals that have to be applied. But fundamentally, it's care delivery, taking care of human beings, taking care of them well, actually providing more care for them, not denying care.

I would argue the industry over the past 10 years is focused on 3 levers that are no longer going to be viable moving forward. They've been focused on coding arbitrage. Version 28 of the risk models shut that down. And I think they're going to make sure the program integrity of this program is adhered to. I really applaud the administration for focusing on that. I think it's great, okay.

Number two, global capitation, just shifting the risk to the global cap providers. I think it will still exist. But this kind of off-balance sheet medical management isn't really a core competency of the plans, right? And when you have lower premiums resulting from V28, there's going to be less money in the supply chain to have basically 2 insurance companies; one regulated, one unregulated. I'm not dissing global cap. I'm just saying that has been a practice that people have relied upon.

And third, our denials and denial rates. It's not going to be okay anymore, both from a regulatory point of view and a social perspective, people aren't going to tolerate anymore, right? Our denial rates are less than 2%, 1.9%, right? So how are we doing it is the question. Well, it starts with understanding and believing that 10% to 20% of your population account for 70% to 80% of your MLR, okay? The 80-20 rule.

And so what we do, the first thing is who are the cohorts in that 10% to 20% that are polychronic, frail and need extra help, right? Who are the people like my mom who's now 93, who's just frail. She's slowing down. She needs help. She needs extra care. She's doing okay mentally, but physically, it's starting to get a little slow, right?

So we stratify the members. We take data, a lot of AI. We take lab data, pharmacy data, encounter data, authorization data, hospital admission discharge transfer data, okay? We take ultimately still claims data. The problem with claims data is inherently lagged 30 to 45 days. It's very important to capture that information for administrative documentation purposes. But end of the day, you need actionable information. And we reconcile that real time on a unified data model, okay? And we stratify the members, who run it through our algorithms and it comes up with this kind of result.

74% of the membership cost 5% of our institutional costs, okay? We call those people generally healthy. And generally, they get good care. They see their PCPs 4 or 5 times a year. It kind of works.

Next cohort is the healthy utilizers. It's about 77% that cost 19% of the institutional claims, right? These people, it's very interesting, their markers or the algorithms would suggest they're generally healthy, but they did have an episode of care in an acute setting, right? Those are accidents, falls, unpredicted kind of episodes of care. But generally speaking, they're healthy.

Next are the pre chronic. These are just the opposite from the healthy utilizers, 7% account for 1% of the institutional claims. And these are the folks that we call on the launching pad. All the markers would suggest these folks need a lot of help, but they haven't yet gotten into the ED, but need to be treated proactively as if they are and have chronic conditions.

And the last one in the red, the chronic population, 12% account for 74% of the institutional spend, okay? And so the whole idea is to curate the care delivery for the type of individual moving towards personalized care depending upon the acuity of the patient and then to further design and curate the products specifically depending upon the needs of the individual. So all of this is step-by-step moving more towards personalized care in practice from product design to care delivery. That's what this is all about, all right?

And so now you have a list. You have a list of, okay, people on the chronic side, on the prechronic side, 26% of your population account for 95% of your spend, what do you do about it? What do you do, okay? And so on the right, what we've done is we've created a clinical and interdisciplinary clinical team called Care Anywhere. It's basically doctors, nurses, MAs, social workers, behavioral health coaches, case managers, care coordinators, all working together and serving that senior at the home for free. It costs us about 3% of premium. It's about 450 people employed by the company. We don't outsource it because we want to ensure quality control. Everything is about quality and quality outcomes, all right?

The most interesting thing here are the little dots. You look at the number of people we have with these kinds of chronic conditions and then you look at our gross margins based on those cohorts. We actually do very well with people with multiple chronic conditions, okay? You actually get paid more with correct compliant coding and you actually have the care plan regulatorily required to serve that C-SNP member or D-SNP member or polychronic member, but the efficacy of that care model works for everybody, right?

And what happens is if you can actually know who that 10% is, that cost 80% of spend, and you can bend the cost curve by deploying this kind of model, your overall trend goes down. If your overall trend goes down, you have to, by law, reinvest the savings into richer benefits that in turn creates growth while preserving margin, right?

And so if you go back to this slide here, the key to take away is the core competency of the company is medical management, population health, chronic disease management. It's -- that's what we do. We just happen to do a lot of the health plan functions really, really well, product design, distribution systems, right, regulatory compliance. I think we're the best -- one of the best scoring regulatory compliance scores in the country. That's the takeaway.

And so if you deploy the AI, stratify the members, you have a delivery mechanism that can scale. We're proving that out. It's scaling and it's portable, okay? And you get these kind of outcomes. Look at this thing. On the vertical axis is the year-to-year change in MBR, okay? The horizontal line is growth rate. And it kind of shouldn't be a surprise if you look at the regression line, right? If people grow a lot, they typically their MBRs bump up. That's what you hear about with a lot of our legacy competitors, right? If they don't grow, they're typically their MBRs kind of go down.

We are such an outlier because of this model where we can grow last year in 2024, we grew 58%, our MBR only went up a little bit, right? This year, we grew 31% for 1/1. And this is actually data through Q3. We actually went down, right?

How are they doing it? I'm telling you the answer is serving the senior. The shareholders will benefit from that. You will all generate good returns. All of our investors have produced good returns because we collectively are serving that senior, putting the senior first, do the right thing. Everybody wins that person [indiscernible] times several hundred thousand, hopefully, millions will benefit, okay? This is a really interesting slide to me.

And then kind of this notion of continuous improvement. Every year, we've told you we're getting better and better. We're reinvesting in people, process, technologies. We're implementing core systems. Over the last several years, we've implemented Athena, upgrade our EHR. We've implemented Workday, shout out to the Facets guys and TriZetto. We implemented that, great partners. And so we're automating and growing the company up to scale. If we keep doing that, you could afford to invest in products.

And the middle part of this is just an indication of supplemental benefits, which is important. And so we're investing in supplemental benefits and you're increasing your membership growth while increasing margin. Who can do that in the environment that the MCOs have been over the last 3 years? We're the only ones that have done it, okay?

The other thing is Star Ratings, focus on Stars. Stars is a institutional and cultural requirement. It is not a department in a health plan. It starts from our board. It starts from me, and we are committed to serving that senior to make sure that, that senior is served properly. 100% of our members now are in 4-star and above plans. We actually have 3-, 5-star plans. I'm not going to be happy until everything is 5 star. That's what the seniors deserve. It's really important. When we first IPO-ed, I would say this thing is based on high quality and low cost, right? Everybody goes, okay, what does that mean? It means you have to have really good Star Ratings. The unit economics that CMS incentivizes you with Stars is really important. You got to be 4 stars to play, all right?

Low cost is a function of the care model. We don't grind providers down. We partner with providers. We're aligned with the providers. The business model of serving and deploying these Care Anywhere teams is loved by the providers. It doesn't cost them anything. They get paid. They make more, they work less. And together, we provide a better experience and clinical quality outcome for the member.

Growth, here's a sense of 31% year-over-year. We could have grown a lot more. We were very, very disciplined in our contracts. We chose not to grow even more and take bad contracts. Okay, we'll let somebody else take that. It's okay. No free lunch. We'll take 31%, 20-some-odd percent in California. We'll take that, 84% growth ex California. Really happy about that.

Even more importantly, retention got better. It's a big deal with as much churn as that was going on in the marketplace this past year, people stuck with us. They like the service delivery. When we first IPO-ed, I said, kind of joked and said, I think our members really like us. They actually like us. That's not a joke. They really like us. It's a big deal. Which health plan can say that, okay?

And so you still have a better mousetrap. 80% of our growth comes from switchers, okay? And then you see on the last part on the green, 84% growth. We're over -- we're about 20% now ex California, which is double that from what we were just a couple of years ago. California still got a lot of runway for legs. And I think ex California is going to be -- I'll share in a second, the opportunity for us as well. So it's not an either/or with where you're going to grow, it's a both/and. We're going to keep taking share in California responsibly, and we're going to continue to grow in the existing ex-California markets. And then I've also said in 2027, we're going to start investing in some new markets using cash flow from operations, which is what we're exactly what we're going to do, okay?

This is a really interesting slide, and I'm very, very proud of it. Remember a few years ago, everybody was asking, well, can it work outside California, right? Are you just a California plan? And the answer is look at these numbers, right? Our gross profit PMPMs are better outside of California. Our Star Ratings are better outside of California. Our utilization management -- admissions per 1,000 metric is better outside of California.

And you go, well, why? Well, part of it is just the kind of inherent structural design of what's happened in California. There is a saturation of middlemen, IPAs, right, medical groups that want risk and are intermediaries between the plan and the member and then oftentimes between we and the doctor, right? Outside of California, we're working directly with the doctor serving that member directly. California, we've got to work through some of these IPAs. And some are good. And if they're good and they do a good job as subcontractors, great. If they're not doing a good job, we're taking the reins back on certain administrative functions, right?

But that's the opportunity. As we get bigger and bigger out of California, I actually think the margin is going to get better. And so this is a proof point along with the Star Ratings improvements that give us confidence that from our own deployment of capital, it makes sense for us to start making investments in terms of new markets in 2027.

So -- and you kind of just see the Star Ratings and you kind of see the growth rates. So I'm very optimistic. I think what we've achieved thus far is effectively a proof of concept. We've proven to ourselves, we've proven to you that this model, which is very different than what you've all been taught for the last 10 years, is very different, but it's working. It is the future of where this sector is going, and I think very consistent with what CMS wants, value for the beneficiary. Not gaming stuff to get the growth, but actual value measured in clinical outcomes, measured in affordability, all right?

And so just to kind of reflect, '25 was an inflection point for us. We had a lot of growth, a lot of good profits. It was kind of a breakthrough year in terms of we're getting to enough scale, and we kind of pretty much did exactly what we told you we would do. We managed the growth. I'm so proud of our team for ingesting 58% growth and improving retention, improving MLR, improving service. That's a lot of work. And so it's not just the growth, but it's the management of that growth that gives me a lot of confidence. And so we're going to really do a bit of a replay of that in 2026. So we're thinking about the operative word here is scale. How do we get from $300,000 to $3 million, right? How do we get that? And how do we do it reliably with the same attention to detail and quality.

And it's -- and I'll talk about it, but it's really just what you've heard other people say in terms of upgrading and deepening people, the bench, getting people that know how to scale. Managing that and hiring people that have the same passion for the mission that we have of serving seniors. It's not necessarily an easy thing to do. So we're very careful and selective at getting the best people we can get without compromising that mission, right?

Automating workflows, documenting workflows within each functional area, documenting micro workflows and then documenting cross-functional workflows and documenting the handoffs between the functional workflows. That's what we're doing. And then we're automating it, okay. That's the only way we're going to be able to retain the visibility and control that has allowed us to achieve the outcomes we've been able to achieve, visibility and control, okay? And that's going to allow us to scale. That's going to allow us to have those things so operationalized that we can reliably invest our capital and open new markets with the right providers, with the right workflows and with the right systems without having to reinvent the wheel every time we open a new store. That's where we're going, right?

If you could just do the math and say, okay, these guys keep growing 20% a year in 3 years, you're going to be between $7 billion and $8 billion. And I would say with margin expansion closer toward our long-term margin goals. I'm pretty confident with that. In this business, the bigger you get, the stronger you get, the better you get. But we have achieved or we've achieved being relatively small, is really a good proof of concept. So you're going to see more and more of this investment in '26. And we're preparing to really get quite big. Plus, you heard yesterday from the CMS team, they love MA. They just want it to be done right. That's not the same for other sectors. They want program integrity, okay? We've built the entire company off of the vision of the founders of the Medicare Modernization Act, Dr. Mark McClellan, right?

We shout out Matt Eyles here. He ran AHIP. He's on our team now. Why? Why do you get these people that are of such character joining this team because it's the mission to change health care for seniors, okay?

You all are part of that journey with us. Many of you have believed earlier than others, that's okay. But I'm telling you, all of our shareholders have made money. If we collectively work together for the benefit of your mom and my mom, I mean that like seriously. So their experience in health care are going to be good experiences. I was talking to somebody yesterday and said, well, where's your parents? He goes they are in Miami. So really, how do they like their health care? They go, well, they're in their 70s. So it's okay now. But I'm worried about when they get in their 80s and 90s. Pretty interesting, right?

So there's time if we make the steps now. So when that person's parents are in the 80s and 90s, the care delivery will fundamentally change in a way consistent with what CMS wants and what basically CMS has always wanted. That's what we're talking about here. And so my invitation to you is be part of this journey, and we're all going to make money. Everybody is going to make money, including the seniors, richer benefits, better benefits, better care outcomes. That's something that I think is a win-win-win and is aligned for go Alignment Healthcare. Thank you very much.

Any -- do we have questions, John?

Yes. Just come over here.

Sit back?

That was great. I think I want to start with California and the 23% growth there, really strong. You've continued to grow -- you target 20% growth, but you're growing above that in your home state. What do you attribute this AEP to driving that north of 20% enrollment growth there?

Well, the first thing I would say is we could have been a lot higher in California, a lot higher. And you've all read about a lot of the dislocation going on with some of the larger players. We were very, very selective about which specific markets we wanted to grow in and not. And that's a function of the provider delivery networks. And we chose not to actually enter into certain contracts that some of our competitors did choose to enter into. And that's okay.

Everything that we do is about durability. It's got to be balanced growth and margin expansion, but it has to be durable growth. It doesn't do any good if we kind of grow by x number and you got a 1-year deal and it just -- because there's no durability. It's short-term gratification. So we think in terms of longer term.

I think if you look at our market share county by county, there's a lot of opportunity for market share growth before you bump up against any kind of saturation level. And so I'm very comfortable kind of 20% in California. When you get out a little few years after 3 years, you got to start looking at kind of 15% to 20%. But I think that will be far more than made up outside of California.

And I think to that point, you said you could grow a lot more than the number that you put up. You had 80% of the enrollment growth came from switchers. I think we've given previous commentary saying that there's not one payer that these members are coming to you from. Does that end up playing out kind of the way you expected?

Yes. We got growth across the board. Our retention was very, very good. People like us. They like the service delivery. They like the philosophy. They like the nurses that visit their houses and care about them. I mean it's something that our members like. I think it's a better mousetrap. The math of it is something I think is really you need to understand is, again, I alluded to it, California has so many medical groups that want capitation, global capitation, right? And so if you enter into one of those kinds of arrangements, you got to make sure that there's something that differentiates you as the plan relative to the next guy, right?

Our model is really designed to allow us to be producing an MLR lower than what the global cap guys are going to be charging the plans, right? So the plan over -- is over here and the global cap is 70%, 85%, that's their cost of health care that they have to include in the bids. If we're doing our model and we're net actual real cost of health care is 80% or 82% or whatever the number is, that arbitrage between what the health plans paying 85% and what our real costs are, that's getting invested into benefits or invested directly into the provider itself. That margin that goes to the middleman, you got to kind of decide, is that something that's value creating in that supply chain, right?

And so our thesis all along has been you got to have that core competency of managing the risk because it's the most efficient delivery of care and to be consistent with what CMS wants, which is the best value for the beneficiary.

And kind of thinking more far afield from California, think about ex California, it was really powerful to see the higher PMPM gross profit for ex California. Is that just the IPA dynamic kind of playing out?

It's part of it.

And how do we think about that growth mix shift kind of continuing? You've got some [indiscernible] plans out of non-California.

Yes, I think California is still going to be ultimately the raw number growth engine. I think the proportion will be -- continue to be what you see now, particularly as we add more storefronts, the proportion is going to shift. But like I said, I don't think it's either/or. I think it's going to be both/and. And I think it's one of these situations where the bigger we get, the more scale we get, the more automated we get, the stronger we're going to get.

And so to me, this is -- we're just really beginning to see the effect of this in a credible way. That's the opportunity for everybody is get on board now, particularly when we've now seen the final phase in of Version 28 of the Risk Model in '26. Starting in 2027, you're going to get your benchmark rates again and you won't have the takeaway of V28, right? So the whole sector, I think, is going to kind of just start -- there's going to be some more air now in the whole sector.

The next question you guys say, well, is there a V29? Well, I don't know. I think there's going to be some thing that the administration does to make sure that they retain program integrity as they should.

And to that point, we had Dr. Oz here yesterday. I think you sat in on that. You sound pretty constructive on the current iteration of CMS. What do you think they're looking for? And how are they engaging with you?

They have called us [indiscernible] and say, you are the insurgent. You are the insurgent. And a lot of other words Chris used, virtuous cycle. Don't throw the baby out with the bathwater. I mean those are things we've talked to them about. And I think what we represent to them, and I would say the sector is hope. Hope it is doable. There is a way that you can make this work in this environment. There is a way to achieve CMS' intended outcomes from the very beginning of the design. It's possible, right? That's what we represent right now.

And to the extent we can help catalyze that change, we're not going to get 100% of the market share. But if we can have our fair share of it, we get to 1 million lives, it's a $20 billion company, that's like 1.5% market share. That's the opportunity. That's the TAM. That's what makes this investment opportunity so exciting for us. And we can -- like if we get to 1 million lives, like -- I think people will really start taking us seriously. I mean -- but it's so small. So the opportunity is there.

And equally important is it's the right thing to do. I'm telling you, if you think about all of this as to what would you want your mom or dad to experience, you want Alignment.

And thinking about that, getting to 1 million lives, you probably are going to expand to a couple of new states. And it's been something that's been on the radar for a bit that '27 could be the year where you put out some new states or new geographies. How are you thinking about where you want to be? And I know it's hard to get kind of the critical mass early on. It seems like it's more like the growth is going to come through in 2029 from what you do in '27. But how are you thinking about the bigger footprint that you probably have this time next year?

I think -- I feel really good about '26, okay? So we get -- we'll announce earnings sometime in late February. And so you'll see those numbers pretty comfortable with that, pretty comfortable, actually very comfortable with '26. And I think you're going to have then enough proof points. It will be better and better. You have a couple of years of consistent margin expansion. And I think you're going to have more people kind of getting back in MA. It will remain to be seen which ones can actually retool their business models. And I would say more aligned with us, ours or are they going to just revert back to what they've done in the past 10 years. That remains to be seen.

I think that -- I think we're going to have good growth also in '27 and '28, again, without the takeaway of V28. I think if there are any kind of kind of programmatic changes to risk adjustment or stars. It's probably going to start affecting payment year '29, right? And so I just -- and I think our company is very, very nimble. The hardest things to do, we've made lots of investments in, which is the data architecture. Data architecture is really very, very good. And we're continuing to upgrade people and processes around that. And I think we're going to be ready for that scale.

And Jim, I want to bring you in here. You reaffirmed guidance for '25. Anything you would want to highlight about trends in the fourth quarter that you think people should know about? And then just kind of a 2-parter here. You said $145 million of adjusted EBITDA will be in the range of preliminary guidance for '26. You're going to hurdle elevated sweeps from '25. You might have some implementation costs for new markets. Like are there any things you want people to keep in mind as they start sharpening the pencil on '26, '27?

Yes. And what I guess I would describe as the arc of our financial performance through the 3 phases of V28, a ton of growth since 2024 and the Inflation Reduction Act of Part D. So think about that performance, breakeven in 2024. We were guiding to the mid- to high 90s for 2025. We feel very good about that right now. That's a mid-2s margin from 0, all the while navigating the second phase. So we feel pretty good about our performance through the first 3 quarters.

And obviously, by affirming, we're kind of saying we feel good about how things are going. Trend on the long run has been very stable for us. And this is basically our model navigating all these cross currents, including elevated trend elsewhere. As we go into 2026, the inputs, I won't do puts and takes, but the inputs that will affect it are the third phase of V28, our growth mix of new members, which is quasi investment, if you will, in terms of what we're doing to embed value for the future.

I think there's going to be a little bit more opportunity on the SG&A side, but we're not going to give it all into margin. And the reason why, as John stated, we're going to continue to invest in the model, invest in the business, the technology, the people, the process. And we think that is going to benefit us very much in the long term to continue to be able to scale efficiently and put ourselves in a position to continue to manage costs well and expand those margins. So it's a little bit more of a journey after a big inflection point. And obviously, we'll talk a little bit more about the details when we come up with fourth quarter and our guidance for the year.

Great. And then just we're thinking about the advanced notices on the horizon. We're thinking for '26 number for benchmarks was positive, '27, I think there's a thesis that could also be positive. We've got a large number of the bigger payers who are kind of being prioritizing margin over membership. Do you see that changing at some point? Is that time just too far out in the horizon? Or like how do you see the competitive balance in MA progressing?

Well, I think everybody has basically taken their lumps in '24 and '25. I think the retooling has started. I think this notion of getting benchmark rate increases starting in '27 without effectively a 6% to 7% takeaway of phasing in [ B-20 ] is a big deal. It's going to create some breathing room for everybody. I think the -- like I said, I think if people kind of adhere to the old way of doing things kind of just like trying to arbitrage coding or dumping risk on undercapitalized providers or increasing -- it's just not going to work. And I can't tell you, you know better than I do who's going to be able to do what.

But I think the sector should be kind of on the upswing, like starting and we'll get the advanced notice in a couple of weeks, right? And the other thing I would say to you all is if you go back to 2011, same thing happened back then, right? It was part of the ACA, if you remember, right? They kind of reduced MA reimbursement 15% and phase it in over 5 years. A lot of you weren't in MA back then, but 2011, right?

And once they kind of made that adjustment, that reimbursement adjustment over the subsequent 15 years, it went straight up, right? I think that's the opportunity for you now. Why? Because it's -- the program is bipartisan, the administrations like it. They do. They're going to grow it. You heard that yesterday. They're going to grow it. And so they're not going to -- they want to clean it up, but they want to grow it. And so if you have those tailwinds just at a macro level, it's an opportunity. And I think we're leading that opportunity.

Well, this is great. I appreciate you both coming up and [indiscernible] a great presentation. Thank you so much.

Thank you, John. Thanks, everybody.

Good afternoon, and welcome to Alignment Healthcare's Third Quarter 2025 Earnings Conference Call and Webcast. [Operator Instructions] Please note that this event is being recorded. Leading today's call are John Kao, Founder and CEO; and Jim Head, Chief Financial Officer. Before we begin, we would like to remind you that certain statements made during this call will be forward-looking statements as defined by the Private Securities Litigation Reform Act. These forward-looking statements are subject to various risk and uncertainties and reflect our current expectations based on our belief, assumptions and information currently available.

Descriptions of some of the factors that could cause actual results to differ materially from these forward-looking statements are discussed in more detail in our filings with the SEC, including the Risk Factors sections of our annual report on Form 10-K for the fiscal year ended December 31, 2024. Although we believe our expectations are reasonable, we undertake no obligation to revise any statements to reflect changes that occur after this call.

In addition, please note that the company will be discussing certain non-GAAP financial measures that they believe are important in evaluating performance. Details on the relationship between these non-GAAP measures to the most comparable GAAP measures and reconciliation of historical non-GAAP financial measures can be found in the press release that is posted on our company's website and our Form 10-Q for the fiscal quarter ended September 30, 2025.

I would now like to turn the call over to John. John, you may begin.

Hello, and thank you for joining us on our third quarter earnings conference call. For the third quarter 2025, we exceeded the high end of each of our guidance metrics. Health plan membership of 229,600 members represented growth of approximately 26% year-over-year. Strong health plan membership growth supported total revenue of $994 million, increasing approximately 44% year-over-year. Adjusted gross profit of $127 million increased by 58% year-over-year. This produced a consolidated MBR of 87.2%, an improvement of 120 basis points over the prior year.

Finally, our adjusted SG&A ratio of 9.6% improved by 120 basis points year-over-year. Taken together, we delivered adjusted EBITDA of $32 million, solidly surpassing the high end of our adjusted EBITDA guidance. Our third quarter results now mark the third consecutive quarter in which we surpassed the high end of our adjusted gross profit and adjusted EBITDA guidance ranges and raised the full year guidance. These results were underpinned by inpatient admissions per 1,000 in the low 140s and demonstrate the power of our ability to manage risk in Medicare Advantage by placing care delivery at the center of our operations.

As we've demonstrated in 2024 and through our year-to-date performance in 2025, our unique model has positioned us to succeed amidst a paradigm shift in the industry marked by lower reimbursement and higher star standards. We continue to make investments that will improve operations to back-office automation, clinical engagement, AVA AI clinical stratification and Stars durability. These investments will further separate us from our competitors.

For the full year, we now expect to deliver $94 million of adjusted EBITDA at the midpoint of our guidance range in 2025 compared to our initial full year guidance of $47.5 million at the midpoint. Jim will expand further on guidance in his remarks.

Moving to Stars results, 100% of our health plan members are in plans that will be rated 4 stars or above for rating year 2026, payment year 2027 compared to the national average of approximately 63%. We are once again demonstrating the consistency and replicability of our high-quality outcomes across each of our markets.

For starters, our California HMO contract earned a 4-star rating. This is its ninth consecutive year rated 4 stars or higher. Meanwhile, our competitors in the state only have approximately 70% of members and plans rated 4 stars or higher for payment year 2027. Our ability to consistently earn high stars results from AVA's centralized data architecture that provides our organization and clinical resources with a cross-functional visibility to execute on each stars metric.

In addition to our strong California performance, we now have 2 5-star contracts in North Carolina and Nevada. Furthermore, we earned 4.5 stars in Texas in its first rating year. Our results outside of California not only demonstrate our commitment to quality, but also underscore the replicability of our outcomes across geographies, demographics and provider relationships. Our latest results set us apart from our peers and create additional funding advantages in payment year 2027.

Looking ahead, we believe the improvement we made to the raw star score of our California HMO plan in rating year 2026 sets a solid foundation for rating year 2027 and payment year 2028. Furthermore, we believe CMS' transition to the excellent health outcomes for all reward, formerly known as the Health Equity Index, will add cushion to our 4-star rating in California.

This change rewards health plans that effectively serve the most vulnerable low-income seniors, including those who are duly eligible. Our model is particularly well suited to manage this population with the clinical expertise and high-touch care provided by our Care Anywhere teams. Most importantly, we believe the move toward a bonus factor that focuses on clinical outcomes furthers CMS' mission to create greater alignment between quality and reimbursement.

Lastly, I'd like to share some early thoughts on the 2026 AEP. For the upcoming plan year, we are continuing to take a measured approach towards balancing membership growth and profitability objectives, consistent with our strategy in the past years. Our ability to deliver low cost through our care management capabilities is creating the capacity to keep benefits across our products generally stable to modestly down.

We believe this disciplined approach supports our growth objectives while staying mindful of the third and final phase in of V28. Given continued disruption in the MA industry in 2026, we believe there will be an incremental opportunity to take share while growing adjusted EBITDA year-over-year.

Based on the strength of our early AEP results, we are confident that we are on track to grow at least 20% year-over-year. Consistent with our approach in past years, our sales operations are focused on matching seniors with the right products that support their lifestyle and growing in markets where we have the strongest provider relationships. We're very encouraged by the early activity of this selling season and look forward to sharing our full results with investors after the conclusion of the 2026 AEP.

Taken together, our core competency in care management, continuous improvement in member experience and ongoing investments in AVA AI are all positioning us for further improvements to quality and outcomes. We believe we were the best Medicare solution for seniors everywhere, and we look forward to serving even more seniors across our markets in 2026.

Now I'll turn the call over to Jim to further discuss our financial results and outlook. Jim?

Thanks, John. I'm pleased to share our results for the third quarter, which were underpinned by strong execution across the board. For the third quarter, health plan membership of 229,600 increased by 26% year-over-year. Revenue of $994 million increased by 44% over the prior year. Outperformance in our revenue growth was predominantly driven by continued momentum in our new member sales during the quarter.

Third quarter adjusted gross profit of $127 million grew 58% compared to the prior year. This represented an MBR of 87.2% and improved by 120 basis points year-over-year. Outperformance of both adjusted gross profit and MBR was driven by a continuation of disciplined execution of our clinical activities. This drove inpatient admissions per 1,000 in the low 140s during the third quarter.

Meanwhile, Part D modestly outperformed our expectations as growth in utilization trends moderated sequentially. Our Part D experience through the first 9 months of the year gives us confidence that all of the moving parts related to the IRA changes have been appropriately captured and that we are on pace to meet the Part D margin assumptions embedded within our guidance.

Turning to our operating expenses. Adjusted SG&A in the third quarter was $95 million and declined as a percentage of revenue by 120 basis points year-over-year to 9.6%. The year-over-year improvement to our SG&A ratio was driven by the scalability of our operating platform. Additionally, we experienced a few million dollars of SG&A timing benefit in the third quarter that we expect to reverse in the fourth quarter, leaving our full year SG&A outlook roughly unchanged.

Taken together, adjusted EBITDA of $32 million resulted in an adjusted EBITDA margin of 3.3% and represents 240 basis points of margin expansion compared to the third quarter of 2024.

Moving to the balance sheet. We ended the third quarter with $644 million in cash, cash equivalents and investments. Cash in the quarter was favorably impacted by the timing of certain medical expense payments, which resulted in higher operating cash flow during the third quarter. This timing difference also increased our Q3 days claims payable, but we expect this timing difference to normalize in the coming quarters.

Our reservings methodology remains consistent and excluding this timing effect, we estimate that total cash would have been modestly higher sequentially and days claims payable would have been flat to modestly higher year-over-year. Importantly, this had no impact on the P&L.

Turning to our guidance. For the fourth quarter, we expect the following: health plan membership to be between 232,500 and 234,500 members, revenue to be in the range of $995 million to $1.01 billion; adjusted gross profit to be between $104 million and $113 million and adjusted EBITDA to be in the range of negative $9 million to negative $1 million.

For the full year 2025, we expect the following: revenue to be in the range of $3.93 billion to $3.95 billion; adjusted gross profit to be between $474 million and $483 million and adjusted EBITDA to be in the range of $90 million to $98 million. Building upon the strength of our third quarter results, we once again increased the full year outlook for each of our guidance metrics. Given our year-to-date momentum on membership growth, we raised our year-end membership guidance by 2,000 members at the midpoint.

Expectations for higher membership also drove our full year revenue outlook approximately $41 million higher at the midpoint, and we now expect to finish the year with nearly $4 billion of revenue for the full year 2025.

Moving to our full year profitability expectations. Our updated adjusted gross profit guidance of $479 million at the midpoint increased by $18 million. This implies an MBR of 87.9% and reflects nearly 100 basis points of MBR improvement year-over-year. Similarly, we increased the midpoint of our adjusted EBITDA guidance by $18 million, flowing through the entirety of the increase to the midpoint of our adjusted gross profit outlook, while full year SG&A assumptions remain roughly unchanged.

Our guidance assumes a portion of the strong year-to-date ADK performance persists through the fourth quarter. However, as a reminder, the final months of the year are expected to have higher utilization due to the seasonal impact of the flu. Meanwhile, we continue to take a prudent stance to our Part D assumptions given significant changes to the program this year.

Lastly, on seasonality, we expect our MBR in the fourth quarter to be higher than the third quarter due to the typical seasonality of medical utilization. As a reminder, our MBR seasonality in 2025 is not comparable to 2024 due to changes to the Part D program and prior period reserve development in 2024.

On SG&A, we expect an increase in expenses during the fourth quarter associated with growth-related costs, consistent with our past experience and the timing of certain expenses, which we expect to land in the fourth quarter.

In closing, consistent execution of our core capabilities in care management is taking root in our financial results in 2025. Reiterating John's earlier remarks regarding 2026, we remain confident in our membership growth expectation of at least 20%, given our progress during the early weeks of the selling season. We believe our balanced approach to growth and profitability positions us well as we close out the remainder of the year and prepare for 2026.

With that, let's open the call to questions. Operator?

[Operator Instructions] Our first question comes from the line of Scott Fidel with Goldman Sachs.

First question, and John, appreciate the sort of early insight into the growth on 2026 likely to meet or exceed your 20% growth target. And I know you're not giving guidance at this point, but just curious around the comment that you made around the market share opportunities from industry disruption. And clearly, we know there's a lot of that right now for MA. How would you frame that in terms of thinking about that in the context of California versus the non-California markets?

Scott, yes, I'd say very, very pleased with across-the-board growth in California and really leveraging the 5 stars in North Carolina and Nevada. So, we're very pleased about the geographic kind of composition of the growth. I'd say even more importantly is kind of the product mix and the kind of provider networks that we think are very high performing and where the growth is actually occurring. And so, I think for all those reasons, we're very, very pleased just we're only 2 weeks into this thing. So, I don't want to get too far ahead of ourselves, but 2 weeks in, we're really pleased with it.

The other thing I would just remind everybody, I know there's a concern that we're going to grow too much and we're going to pick up a bunch of bad business, et cetera, et cetera. I'm less worried about that simply because we had a 60% growth year in 2024. And not only do we onboard it well, we manage the risk really, really well. And I think we're proving that we can scale the clinical model and we can actually manage the polychronic population really, really well. And so, it's just a core competency that we have that I'm not sure others can replicate at this point. So, for all those reasons, I'm very pleased as to where we are.

Got it. And for my follow-up question, John, I know that at a recent industry conference, you had talked about considerations around potentially pursuing some M&A or sort of partnership opportunities on the vertical integration side to unlock the MLR opportunities, particularly associated with supplemental benefits. And just curious around how you think about weighing or balancing the opportunities that would be related to that, like improving the MLR versus the potential risks of sort of entering new markets that may have some different fundamental dynamics and then just maybe sort of moving away from sort of this sort of core strategy you've had that's clearly been working in terms of the focused strategy on MA.

Yes. No, good question, Scott. I'd say we're looking at a lot of different opportunities. And to your point, we're being very discerning. We're being very, very careful to the extent that there are tuck-in opportunities, I think we have to take those more seriously than others relative to, say, buying books of business in completely new markets. I think we're being very thoughtful about that. I would not worry about that part of it. What I said at a prior conference was around basically supplemental benefits and tuck-in acquisitions related to what we would call captives, ancillary captives.

And when you talk about 4% to 5% of premium being really kind of applied to the supplemental business and supplemental products, it just makes sense for us to -- if we bought or started, say, some ancillary business, whether it'd be a dental PPO or a behavioral HMO or whatever it is, that we could seed it with 250,000 lives right off the bat kind of thing. And I think that there's going to be some margin improvement opportunity for us to do that. And I think we can do that with very little execution risk.

Does that answer where you're going?

Yes, it does. Obviously, it's going to be an evolving story, but I appreciate that insight.

Our next question comes from the line of Matthew Gillmor with KeyBanc.

I want to follow-up on the 80,000 metric and the favorability on inpatient costs. I think last call, John, you talked about giving providers more tools and more data and also maybe moving some of the UM and inpatient risk back to Alignment's balance sheet. Can you just remind us where you are in terms of risk sharing with physicians in California? And how do you see that evolving during 2026 and beyond?

Yes. Matt, great question. We're about 65% to somewhere between 65% and 70% is in what we would refer to as our shared risk business. And what that represents is really where we're working with IPAs, particularly in parts of Southern California where we have shared risk arrangements where we're managing the inpatient -- we're at risk for the inpatient risk. And what we have done starting last year is really take on more of the UM component. And we've done that in a way that is resulting in better clinical outcomes and improved financial outcomes for our IPA partners. And so, it's kind of a win-win for everybody.

And the other 1/3 of the business is still kind of globally capitated, but I think you're going to start seeing more and more of that shared risk business. I think it's more durable overall. I think there's going to be less kind of abrasion with kind of global cap kinds of entities as there's more and more shared -- it's more aligning longer term. I think outside of California, you're going to have more shared risk and/or just directly [Technical Difficulty] we really are the IPA. We are the network, and we are supporting the practices in terms of not only UM, but making sure that -- all the stars gaps are closed the way we want and the -- our risk adjustment gaps are closed the way we want.

And frankly, that's what's caused us to get to 5 stars in North Carolina and Nevada. We have more visibility and control with the direct providers, PCP specialists and the hospital partners. And so, I think that's a trend that you're going to see more and more from us. And really, I think the team has done a very good job about kind of doing what we -- it's called de-delegation of UM. And we've done it in a win-win way, which is really important to us because we want to make sure that we're aligned with the providers and that collectively we can provide better clinical outcomes and better benefits for the beneficiaries.

Got it. That's helpful. As a follow-up, Jim had mentioned some favorability with SG&A, but that's being reinvested. Can you dimension that a little bit, both in terms of the sizing and then also where that reinvestment is going? Should we think about Stars or other items there?

Yes. Sure thing. The SG&A against the consensus guidance was a handful of million favorable in Q3. And as you noticed, we didn't adjust the full year expectations for SG&A. We kept those intact at around $385 million. So, what you're hearing from us is there was a little bit of timing issue with respect to the investments we're making. I would also say that we want to be well positioned for growth in 2026 and just make sure that we've got those resources ready. And so really, it's a timing issue. We kept our guidance intact and we outperformed a little bit in the third quarter. We think we'll kind of give it back in Q4.

The only addition to Jim's point is, it's kind of a part. The question you asked about where are we investing is what -- we're not talking a lot about yet, but we will just the continuous improvement that we're making to improve automation across the entire organization, improved AI logic in our Care Anywhere and AVA AI. And just even more, I would say, kind of productivity improvements and efficiency in a lot of our clinical programs. All of that's happening behind the scenes and that's where the dollars are being spent. And I think these investments that we're making now are really going to start paying out even more for '26 and '27.

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

Thank you and thank you for commenting on the investor debate about doing too much growth. I want to quickly clarify first on the flip side. If you were to do less growth, I imagine that would only serve to further empower your EBITDA bridge since you have less lower-margin new members. Is that fair to say as well? And then my real question on Star ratings, and congrats on your Star rating results back in September and today, I know you mentioned your overall raw Star rating score increased year-to-year, well within 4 stars. If not, I think you mentioned very close to 4.5, but when I double-click into the contracts, 315, 3443, the summary rating for Part C and Part D seem to be 3.5, but the overall star rating, of course, is 4.0. I know that there are certain measures excluded that go into that rating ending up at 4. But I guess that face value imply your underlying ratings might have declined instead of improved. So I was wondering if you could help sort of reconcile your commentary on the raw star ratings improvement versus the summary ratings that what they appear to indicate.

Yes, hey, Michael, it's John. Yes. No, our overall raw score went up significantly from 3.7, whatever it was 5.2 or something like that to 4.05 or 4.06. So we're really happy about the raw score increases. I think we can probably have a sidebar conversation with you on the mechanics of it. But really, it's a data science, this kind of how you think about the Part C, how you think about the Part D and kind of all that goes into it. But the raw scores absolutely went up, and we're happy about that.

Okay. And then on G&A, sub-10%, incredibly powerful. I know you're aiming for some more improvement on G&A going forward. And I think you're now actually planning for the first time to invest into your brand. I think I saw on LinkedIn, there's a commercial video. So I was wondering how should we think about the brand investment going forward. It seems like you're implementing it starting this year. And I guess my main question is, how should we think about this new marketing effort in terms of evolving your member acquisition costs near term, long term? I imagine driving member growth through marketing and advertisement might present opportunities on the cost side versus broker commission costs.

Yes. Michael, I'll take the first half, it's Jim here, and I'll let John talk about the brand. But as we continue to scale the business, there's going to be a natural decline in our SG&A ratio. But I think we're going to take a balanced approach to that in the sense that we want to continue investing in the business. And I would say it's not just brand, which John will talk about in a minute, but it's also making sure that we're reinvesting back in our clinical infrastructure and the other parts of the business so we can continue to evolve our model and step ahead of the competition. So I think as we think longer term, the SG&A trends will go down, but we got to be measured and balanced about it because we want to continue to invest. But John, over to you.

Yes. I think, Michael, we're just getting big enough that it's an opportunity for us to establish not only a brand for alignment, but really, it's an opportunity for us to demonstrate what is possible if you do Medicare Advantage the way it was designed to be operated, which is why we always talk about MA done right. And I think it's going to start really representing what was kind of reflected in that ad, which is it's all about serving seniors, actually changing the paradigm and the expectation, changing how people think about MA and all the good that we do and what all the good that MA can do. And so I think we're being very thoughtful about how to do that and what the brand is going to stand for. So stay tuned for that.

Our next question comes from the line of Jessica Tassan with Piper Sandler.

Congrats on the really strong results. So, I wanted to follow up on AEP. Can you just maybe offer some perspective on retention versus gross new adds for '26? Just interested in the dynamic between, obviously, the competitor with really rich dental benefits versus some service area exits from another competitor. Just how should we think about the composition of that 20% net AEP growth between retained members and gross new adds?

Yes. We're happy with both, Jess. Gross adds are strong across the board and retention is actually better than we anticipated across the board. So, it's a both and situation, which is where we need to be. The investments we've made in member experience is paying off. It continues to pay off. So really happy with both.

Okay. Got it. That's helpful. And then just as we look at Planfinder, it seems like Alignment stands out from kind of a core benefits perspective, so really favorable on metrics like average medical move, average outpatient max cost sharing, but maybe a little less generous on supplemental benefit. Is this an appropriate conclusion? And can you just explain the rationale or kind of the decision to structure benefits in this way? And then just secondarily, interested to know how Alignment seems to be managing through Part D redesign despite having relatively low deductible and co-pay versus co-insurance in Tier 3. Obviously, that's working for you guys in '25, and it looks like it will continue next year. So just hoping for some comments on structure of benefits.

Yes. No, it's -- everything is designed around consistency for the beneficiary. Everything is year-to-year. We're very thoughtful market-by-market. We've shared that with you all in the past, market-by-market business plans, strategies and consistency for value creation for each beneficiary is really paramount. It's the first thing we think about. And so, you're absolutely right. We have taken the same kind of approach this past year as we have in the past, very disciplined and detailed product design strategies.

In our markets in California, Part D is very competitive. So, we didn't make any material changes there. There is some shifts to coinsurance in a couple of different markets, but I think we're pretty stable across the board.

John, I'd echo that. Stability is the name of the game. And as we said, we've done a really good job executing against Part D through 2025. And as we went into bids, last year's bids for this year, we were prudent and thoughtful about how we did it, but we were executing well through 2025. And so we're kind of felt good about the stability in our benefits. And so we think that sets up well for next year.

With respect to your supplemental question, a lot of our thinking around that has been also driven by not just the bid economics, but also by quality. Yes, so, we ensure our members that we provide the right quality of supplement benefits. And so that's just something we always think about in some cases, the answer is we pretty give ourselves [indiscernible] make sure we were absolutely providing like best experience not all. And so we were -- it was just something that was factored into some of our experience.

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

I guess on the guidance, I think you've raised the full year EBITDA guidance 4x over the last calendar year. I'm just trying to get an appreciation for what sort of levels you were thinking in your internal budgeting? Or was this really sort of a legitimate surprise? I appreciate the conservative guidance. Just wondering how this stacks up versus sort of where you had initially expected the year to shake out.

Yes. This is the new person second call as CFO, but I would say the following. What's happened this year is we've just had a lot of good execution in a very difficult year, okay? So, I guess a couple of things coming into 2025 that, that were new to the Alignment in the industry, which is we continue to have the second step of V28 phase-in. We had a brand-new year of IRA, and we had a -- unique to Alignment was we had a very large cohort of new members. And so against that backdrop, and we weren't ready to bet on final suites from 2024. So, you had all those things swirling around as we set the year out. And what's happened throughout the course of the year is we've executed really well. And I would say executed across a whole variety of dimensions well, whether it's ADK and some of the moves that we've made with engaging with providers to manage utilization in a very constructive way.

I think Part D executed well for us across the board. We got some favorability from the final suite from our new members. And so there's an aspect here of working through a pretty big change in the business and the model over the last year successfully. And I think that points well for the future for us. It's one of the reasons why I joined.

Great. Just real quick. I appreciate the confidence in the 20% growth, but more just to industry growth. PMS is calling for basically flat year-over-year enrollment. I think the plan said they actually expected to decline. Just wondering if you have any view on overall MA market growth in 2026.

Yes, yes, California typically is lower than the industry, again, year-to-year. There is a lot of disruption out there. There's a lot of changes going on out there. And so again, we feel very well positioned on the growth side and the retention side.

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

So, I was wondering, as we enter the final year of V28, do you have any thoughts on the likelihood of a potential V29 in the next few years? And if there is one, do you have any thoughts on the positive or negative implications to using more encounter data as part of the risk adjustment calculation?

Yes. Craig, good questions. I think you're going to see some changes. This is what we hypothesize some changes with respect to how CMS is going to deal with HRAs. I think there's going to be more, shall we call it, program integrity around ensuring there will be clinical validation around an HRA, same with kind of chart reviews. The encounter-based baselining was referred to in last year's advanced notice. I don't know if they're going to be implementing any of that in this advanced notice. I would be surprised actually. It's something that has been discussed. But in terms of how to operationalize it in a timely way, again, I'd be surprised if it was introduced to impact 2027.

I think from a policy point of view, a lot of what we're hearing about really is around kind of MA program integrity, so to speak, making sure that trust in the program is high and kind of gaining is eliminated. I think that's what we see. And it's unclear that they did go to an encounter-based baseline methodology. It's kind of unclear as to what the net impact would be. It is one of the reasons why we don't think it's going to get implemented for '27.

Got it. And then just as a quick follow-up to a question earlier. I think you said your raw score for your primary plan was 4.05. And then you've talked about how that HealthEquity index next year will give you like a cushion. I think you said previously 0.25 as a tailwind, all else being equal. Is that still correct and that mean primary plan about 4.5 for next year?

Depending upon where the cut points end up, that's kind of what we mean by that. It does give us a little bit of cushion, but we just really aren't sure what's going to happen with the cut points. We thought -- I thought that they would not be as aggressive as they were this past year. They were aggressive. We're actually really happy with the fact that we still got the 4 stars for all of our members. And I think you've also heard me say in the past, I'm not going to be happy until we get to 5 stars for every one of our plans. We're making progress on that front. But your logic is right. What we don't know is where the cut points will end up.

Our next question comes from the line of Andrew Mok with Barclays.

I wanted to follow up on some of the seasonal flu comments in the context of what's going on with the broader policy guidance on vaccines. Are you seeing any behavioral changes from seniors or vaccine uptake this year? And if so, how are you managing that dynamic?

Yes. It's a question that we've been looking at internally, and we follow our -- essentially our Part D cost, which is basically a lot of it is flu shots and literally tracking it daily, weekly. It seems to be trending pretty much in line with what we've seen in the past. I'd say a little bit softer in Q3, but picking up in October. So, I don't think we see a material change in the trajectory of that. And I think we're mindful in Q4 of just kind of flu as it impacts both the Part D costs, but also inpatient ADK. Q4 is typically a seasonal quarter where that impacts us a little bit more. So we are cautious about that, but it doesn't seem to be anomalous.

Great. And as a follow-up, John, you made a number of comments today on continued investments in all things, operational, clinical, tech stars. Can you help us understand how much of that investment spend is already captured in current spend versus what's new or incremental? And it'd also be helpful to understand how much of that investment or that spend is directly earmarked for things like Stars, especially in the context of cut points moving higher?

Well, I don't think it's any -- there's no leaps and bounds types of investment. What we're doing is we're being very smart in applying investment dollars. I'm talking about OpEx and CapEx across the enterprise. And that will be a little bit in the fourth quarter. What's really impacting the fourth quarter is more making sure we're prepared for growth as we typically are in Q4. But as we move forward, we're making sure that we have enough room to make the investments in the platform, in our capabilities, in our human capital, et cetera, as we go forward. But none of it is dramatic. It's just making sure that we find room as we scale to reinvest back in the business and do it smartly.

And we're -- one of the things that I'm very focused on is making sure that we're really kind of underwriting that -- those investments smartly and making our choice as well.

Our next question comes from the line of Whit Mayo with Leerink Partners.

John, do you know what percent of competing plans in your markets were commissionable last year and how that compares to this year?

I can't answer that question. I actually don't know the answer. I know I do have a couple of plans stopped paying commissions. But I actually don't know and [indiscernible]. Most are still paying, just to be clear.

Yes. My follow-up was just on RADV. I was just wondering where we are on that, what the next steps are and how prepared do you think the organization is.

Yes and there's a little bit of a pause in the action, as you know, given the fact that the Humana case, the courts overturned RADV procedures based on Procedures Act violations. But I think our internal point of view is that CMS still has a lot of ways to pursue this, and we don't think that is going to go away. So, our base case is that it's going to be here. It's just a question of timing. But having said all that, we think we're well positioned. Our compliance or documentation processes are really good. We feel good about the operations and how we've set that up. And especially, we've never been an organization that has really relied on risk adjustment as a revenue tool.

So, we're just being prudent about that. But we do feel as the base case is that it's going to be there. Washington is not letting go of this topic just yet.

Our next question comes from the line of Jonathan Yong with UBS.

Just in relation to kind of AEP again, just in terms of the live that are coming on to your books, how do they look? What's kind of the makeup in terms of, say, new to MA either and who might be switching on to your books from elsewhere? Just curious on that particular dynamic and if those members, given the volatility we've seen in the market kind of fit into the Alignment model?

Yes, it's consistent. It's still between 80% and 85% of switches. And really, it's across the board. It's not really concentrated with any particular payer that we're taking share from. It's kind of consistent across the board. And that's really in all geographies as well.

Okay. Great. And then just as we kind of just thinking forward a little bit here, but as we think about, say, next year, final year of V28, the pressures in the industry, generally speaking, should hopefully have abated at that point. How do you think about a potentially more competitive environment kind of looking in the medium term, particularly with respect to possibly expanding more beyond your current markets into other states or geographies?

Yes. Just remember, after V28 final third year phased in 2026, they're not going back to V24. So it's still going to be a tight reimbursement environment. Unclear what's going to happen on [ starters ]. But I think the way that you should think about us is our ability to manage the care for our beneficiaries allows us to control the costs. And in this new world of taking away, this is call the gaming associated with coding, the organizations that can provide the highest quality care at the lowest cost will ultimately be the winners, which is why you've seen us do so well in '24 and '25. And so when you kind of get it into '26, that's going to be even emphasized even more. So we feel really good about how we're positioned in '26 and beyond. And I think heading into '27, you need to start looking at what exactly are they going to do from a policy perspective. And I think we're all kind of waiting for that. I would just underscore program integrity, I think is paramount to where CMS is focused.

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

Yes. John, maybe one for you. I noticed during your prepared comments, you mentioned the term replicability several times in discussing your business model. And I think we're seeing that with the good Star ratings outside of California. So, number one, how is that also translating into MLR performance and overall margins in those newer markets? And then number two, given that you brought that up several times, it wasn't lost on me. Is that an indication of more willingness from you and the Board to move into additional markets going forward?

Yes, hey, Ryan, yes, absolutely. What I've stated in the past is we really wanted to fund that growth from cash flow from operations. And obviously, we're going to kind of fulfill that promise. We're being diligent in looking at both new markets within the existing state footprint that's going to be the most capital efficient, brand efficient as well, as well as looking at some new states for 2027. And so, I think you're going to see us take a much more systematic kind of best practice playbook approach toward replicating into these new markets. I think we've come a long way in the last few years with our confidence not only in how we deploy the care model, but how we ensure that our shared services can scale in terms of ingesting the members, onboarding the members and then caring for the members. And I think that's going to be good for seniors everywhere. So, we feel really comfortable about that.

Ladies and gentlemen, I'm showing no further questions in the queue. And that concludes today's conference call. Thank you for your participation. You may now disconnect.

Great. Good morning, everyone. My name is Cheri Mowrey. I run the U.S. Healthcare Investment Banking business for Morgan Stanley. I am thrilled to have the team from Alignment Health. With me to my left, I have John Kao, who is the Founder and Chief Executive Officer of the company. And Jim Head, who is the Chief Financial Officer of the company. So great to have you guys this morning.

Morning, Cheri.

There's a few things going on in the industry.

A few.

Well, it's good to see that Alignment is having continued success.

Thank you.

So this year has been a very interesting year. It's a continuation of some of what we saw last year in terms of your success. Can you talk a little bit about what's going on in the industry that you've been able to achieve above average growth and really accelerated growth relative to others in the industry?

Yes. I mean if you look at just the raw unit economics, we really started looking at this in 2023. We could tell that we're going to have a Stars advantage with all the changes going on in Stars. We also knew heading into 2024, it would be the first year of V28 phase-in and we knew that we had tailwinds with respect to both Stars and risk adjustment. And we factored that in, in really the summer of 2023 heading into 2024 with our bids. And we had, as you guys know, something like a 60% growth rate in 2024, and we tilted toward growth that year. And then in 2025, we kind of tilted toward margin expansion, both of which are very good decisions, I think, that we made.

And the industry is going through a paradigm change. I mean there's just no doubt about it. And the way I'd think about it is what has worked for the sector for the last 10 years is not going to be the same going forward in the next 10 years. V28 really is similar to what happened in 2012, where they had really adjustments to reimbursement for MA back in 2012 is 15%.

When you think about the full phase-in of V28 heading now ending in 2026, it's going to be about 20%. And so those memories were very fresh in our minds. And so we're very conservative on risk adjustment and very aggressive on Stars. And I think those are the right decisions that translated into very good growth, very good margin expansion.

And I think going forward, it's -- it's going to be -- the keys to success are, do you have the ability to actually manage care and control costs. And the kind of reduction of revenue associated with V28 is really compromising the ability to have, I would call it, global cap, it tightens up the global cap providers.

And I think the third thing that is going to change is prior auth. What people have done in prior auth for the last 10 years is not going to be something that's going to be acceptable from Stars perspective or from a public perception perspective. And so you have to be really good at providing quality Stars at a low cost without just driving that low cost through dumping risk on the provider groups. So I think it's a paradigm shift that you're witnessing now, and I think it's going to play out over the next couple of years.

Talk about medical cost trend because you guys have done an unbelievable job of managing medical costs relative to your peers, right, who have not had that same experience this year. How are you thinking about cost trend in the industry? And how are you planning for it for the end of '25 and '26?

Yes. No, we feel really good about our ability to manage costs. For Q2, we announced that our admissions -- acute admissions per thousand dropped from 150. We've been in the 150 range for the last 6, 7 years. It actually dropped to about 140-ish. And so we were not immune to utilization hotspots in some of our markets.

What differentiates us is because of the data architecture that we have, we have visibility to hotspots very quickly. And we, as an organization, meet on markets every single day. Every single day, we're going through markets, grinding through metrics, looking at utilization, looking at disenrollment, looking at sales, looking at all the markets. That gives us the ability to make adjustments real time. It's literally visibility to good and bad. And then if it's bad, we have the control boots on the ground to make changes through our clinical leadership and our network leadership.

And so it's -- I don't think there's a kind of a silver bullet to any of this. It's having the data that's actionable that when you know what needs to be done, you do something about it. And for those of you that are new to the story, the whole thesis of the company is do well by doing good. And the doing good part is take care of those individuals that need the care. And it's usually the 10% of the polychronic population that really are your sick patients.

And so when we use our data and we identify who that 10% is, that's basically costing you 75% to 80% of your MLR. You then envelop them with care at home, okay, and that does 3 things. It really increases your customer satisfaction. It really implements kind of chronic disease management throughout that population and it lowers your admissions into the hospital.

It's kind of just like do the right thing, take care of people like your mom or your dad. You're not going to treat your mom or your dad like a number. You're going to treat your mom like your dad -- like your mom and your dad, you are going to do whatever it takes to make sure they're taken care of. That's kind of the mindset that we have and the organization has done a very good job of managing that care, thus controlling costs.

Great. So we're about halfway through the V28 implementation. Can you talk a little bit about the impacts and the progression of the model you're expecting?

Yes, yes. So for those of you who don't know, V28 is the new risk adjustment model that was implemented in 2024. It was phased in '24, '25, so you're 2/3 of the way through. '26 will be the last year. The impact is generally on a national basis, about 6% to 7% reduction per year. So when you kind of head into 2026, you're looking at like a high teens to 20-plus percent reduction in premium revenue.

That's what's creating a lot of the compression in premium right now. And what it's doing is when you take away that premium, the trickle-down effect is huge because the plants are not in the same ability to globally cap downstream providers. There's not enough money in that supply chain is what I say.

We experienced this same phenomenon back in the '90s. And so what's happening is the government is basically looking at MA and they're saying, the one area that we think we need to clean up is to mitigate any potential gaming associated with risk adjustment. I'd say gaming very distinctly rather than -- I don't think people are doing anything "illegal," that's my opinion. I think people are pushing the limits of what is legal.

And I think the intent of CMS is to make sure that the spirit of risk adjustment is actually adhere to, which is to make sure that they pay the plans more money for people that actually need it and need more care. And so they're focusing on ensuring that if you -- if we pay you plan for a higher-acuity patient, make sure the care plan is in place and make sure you can correlate the revenue that you get to the care that, that member receives. It's a very simple square deal. And I think the industry is not accountable for that.

And so I think V28 you're going to see more pressure on everybody and heading into 2026 when the third phase-in comes in. We saw this coming. And so we were very by very intentional of being conservative on our risk adjustment. And we knew that with kind of whatever changes that were going to happen, we didn't want to be exposed to it. If you think about this business overall, government reimbursement is your #1 risk, right? And so we had to design a business model that would win in either scenario.

If rates go up, the whole -- all boats rise on a rising tide, the rates go down, we are exposed less because we have the lowest cost structure, not the lowest cost structure plus the highest RAF. That wasn't the strategy. So that's we are advantaged and we're compromised much less than others. We've been public and we've said our RAF scores are about 1.1 and it's just not that high, but it's by intention. You contrast that to others that are 1.5, 1.7, 2.0. There's just a further distance to fall, so to speak, when you apply that 20% hit.

I think RADV is something you've probably heard of. RADV audits are going on right now. They started dates of service in 2018 for 2019 payments and then they're going to go through '19, '20, '21, '22, '23, '24 over the next 9 months or so. And so through that process, everybody is validating their HCCs. That's -- it's a huge process. And if you cannot validate your HCCs that you submitted, CMS is going to say, we want our money back.

That's what's happening right now. We feel very well positioned in that regard because of the care model because the entire thesis of the business is risk adjustment is not rev cycle to us. It's actually documentation of the care model. That's what I think about V28.

And once they kind of clean this RADV process up, this is going to take us to the first half of next year, it will remain to be seen what happens next, if they're going to make any changes to risk adjustment going forward. And I think whatever things they do, they're going to try to minimize any gaming on that. That's what I think. And so those that can be well positioned on that, I think, are going to be positioned well in the future.

Happy to agree as we've seen. So one of the unique elements of 2025 and MA is implementation of IR. Can you talk a little bit about what you're seeing in your part business and what your expectations are?

Yes. So think about V28 IRA and all the changes going on in the environment. So that was first 100 days has been really fun. But as it pertains to Part D, we came into the year with a cautious stance because we wanted to make sure we could keep our MBR intact. And so we -- I would say we came up with cautious guidance for the year. And as we roll through 7 months, we feel very good about landing that. We were a little bit ahead in the first half but we feel like we'll deliver on the results for the year. And that's really a testament to us being conservative but also kind of staying on top of it.

This idea of active care management permeates throughout the organization. I think in Part D, the challenges are typically around a few classes of drugs where price has risen, and that's harder to manage from our care model perspective. But utilization has been pretty reasonable notwithstanding a few pockets. And so we feel good about Part D. I know that was a big issue at the beginning of the year. We feel, as we're kind of crossing the halfway mark, quite good about it.

So one of the unique things about Alignment, and this has been the case for quite some time. You continue to grow above market while maintaining costs. Can you talk a little bit about what you're seeing in the progression of the MBR for members as they come on to the platform and how that's changed over time?

Yes. I mean it's something that we've disclosed publicly, which is really our cohort analysis. Year 1 members really come in at something like high 80s to low 90s MLRs. Year 5 members are kind of in the high 70s, low 80 MLRs.

And that's really a function of a combination of a little bit of the -- just kind of proper coding, just not aggressive, just proper coating. But really the adoption of the care model, the engagement of that 10% and then the care of that 10% and it's -- the whole thing is working. The key takeaway, I think, that is -- that right now, about 50%, a little bit over 50% of our members are still in a year 1 or year 2 cohort, right? So they're not even fully matured.

And what that implies is you've got this huge embedded earnings potential on the existing members that you have. And, i.e., if we grew like 0, which is not going to be the case, we'll talk about growth in a second. But if you didn't grow just the gross margin potential of the existing population is going to keep going up because, again, the adoption of the care model. So we're happy about that.

And so what you'll see in the future is more and more of the proportion of the business is going to be what we call loyal members who have been with us for at least a couple of years, and that margin profile is going to get very strong. That embedded earnings is what happened really this past year, and you saw that.

So beyond MLR, you guys are also maintaining one of the lowest ratios of the SG&A in the business, which is an impressive feat. Have you been able to drive that savings and kind of maintain that SG&A ratio while squeezing it over time?

We had the benefit of a clean sheet when we design the data architecture. And we don't have what the incumbents have, which is multiple back-end legacy systems that have to get reconciled. And so we have a single unified data architecture. We're making investments in that to get that even better, by the way.

And the kind of actionable nature of the data allows us to have very high productivity of our existing employees. And the other thing -- I mean we're going to invest and have invested over the last 3 or 4 years, huge amounts in automation, workflow design, process improvements, I mean just all the operational excellence stuff of the back-end systems is starting to pay off.

And this year, we just put in a new claims adjudication application that integrates into AVA. And we think of AVA as our core system, and it's a single source of truth. And then you have different apps that plug into AVA. That's work -- that's well. So the data architecture, the systems architecture is just a huge advantage from what the legacy guys have.

And the switching costs that they have is just a surmountable number. I think we will continue to get operating leverage heading into '26 really, you'll see in '25 and even into '26. I think that will be offset by we starting to invest in the brand. Just because we really haven't invested in the brand that much. And I think we'll still be below 10% overall SG&A.

But I think we're not going to drive it too much further below that because whatever operating leverage benefits we have, we're going to invest in the brand. And that's in the context that we're going to be big enough, and we're going to get bigger through that investment of the brand.

And what about for open enrollment this coming year? Your competitors are talking about plans and PPO rationalization. How are you guys approaching is an enrollment plan?

Pretty much the same as prior years. We do a lot of market research. We do a lot of analytical work. We look at what our competitors do, what our competitors have, where we think the competitors are getting compromised, et cetera. And we kind of have always been disciplined about 50% growth, 50% margin and some years, will tilt one way or the other.

I think we've pretty much been balanced heading into '26 there's going to be a lot of dislocation, this coming AEP, as you all have read. But we're still cautious. We're not chasing bad business. They're exiting products. They're exiting markets and you go, well, why? Well, because they're losing money on it. So we have to be very thoughtful about not just going out and growing and picking up that business. So we're very thoughtful about that.

The other thing is you still have the smaller players and some of the not-for-profits that I think are going to be very aggressive and I think we've all learned that these kind of periods of being aggressive in light of V28 in light of RAB in light of all this stuff is has not proven to be sustainable. Some of these smaller ones, some of these not for profits, they're very aggressive on product design and as some of the large players have demonstrated, you pay for the next year through trend increases and they just missed price.

So we're watching all that. We feel good about our 20% long-term growth. So there's no change there. And the fact that we've had 3 years -- kind of our 3-year CAGR is about 31% growth. So we're being a little bit conservative. I think that's fair to say. But you just kind of never know what's going to really happen in AEP. We feel good about it though. Our benefits are solid and we'll let the games begin. So I mean, we're geared up for it.

Great. You've been phenomenally successful in California, which in and of itself is a massive market. you've continued to expand outside of California. And talk a little bit about your success in replicating the success in California. Yes. No -- how you're thinking about that?

Yes. Yes. The big question for us, and we're very conscious of this is portability of the model and viral growth. How big can we get this? And we've always said we think we can grow this and make it viral. We think we can get we can get twice as big in the next, call it, 3 years.

The goal always is to get for us in the short term is how do we get to $10 billion in revenue. It's going to require we achieve about 600,000 in membership. And I think as we go on that journey, we're going to also be expanding our margin profile. We feel good about that.

I think the sequencing of -- we're going to continue focusing on margin expansion, which the answer is yes, vis-a-vis growth. Can we get to $7 billion or $8 billion in the next 3 years? I feel pretty comfortable with that actually. Can we get to $10 billion? That's going to require a little bit additional market expansions or any M&A. We'll talk about that. We're not going to do crazy M&A, so be careful.

I think that -- I think portability of the new markets is a priority in the company right now. But we have so much lessons learned that we're being very disciplined about where we go, with what partners do we go? Do we have the right broker distribution network? And we're finding that our Stars are solid, really good.

The care model is portable through the ADK of all of the ex-California markets, the ADK is really even better than California. The margin expansion opportunity for us outside of California is even higher than in California because we don't have the same degree of IPAs that we work with, right? And when you work with IPAs, either globally shared risk ones, there's some margin that's flowing through to them, which is fine.

But outside of California, we pretty much are the IPA and the margin profile is even better. Nevada is going to -- is growing nicely. I mean, Nevada, I think, is going to take off this year. Arizona, I think, is doing well. Texas is doing well. North Carolina, all the markets are starting to get toward 10,000 members or above, and in some cases, even close to 20,000. So we're starting to get the kind of the reputation in these markets. It takes about 3 years and it's starting to work.

That's given us the confidence to do what we also said we were going to do, which is we're going to fund any new markets through free cash flow from operations. And we're a year early on that in 2025. So again, very disciplined, very controlled consistent, reliable kind of growth and margin expansion.

So you do continue to outperform on Stars. 100% of your members are in 4-plus star rating markets. There are upcoming changes to the Star Ratings program. How are you going to continue to maintain that differentiated Stars platform?

Yes. Well, for those of you that don't know, the Plan Preview 2 on Stars came out yesterday afternoon, which is why you hear some of what the other MCOs are starting to share what do you think their Stars are.

What happens is they give you a Plan Preview and if there's any disagreements or discrepancies between your data and CMS' data, you talk about it between Plan Preview 2 and the end of the month. And so October 1 is when I think the final star ratings in Plan Finder come out, right?

So we're in that process right now. I can share with you -- I think I can share -- I got a legal counsel here. I think we can share based on Plan Review 2, we will still maintain at least 100% of the members of 4 stars and above and we're working on even improving that. But I'm very, very comfortable with that. So 100% of 4 stars and above throughout the company, you're going to have some increases in a couple of markets also.

Just to remind you, we have 5 stars in North Carolina, Nevada now, and we're working on moving toward that 5-star rating in other markets. So we're pretty happy about that. I think the key to this is it's -- Stars is not a departmental function. Stars is a enterprise-wide cultural commitment to actually doing what Stars has intended to do, we just take care of seniors, right, and make seniors happy, take care of them that their customer satisfaction should be good.

I think that as we have taken more and more control over some of the key functions associated with how we manage medical management vis-a-vis what we've done in the past, which we've delegated to some of these IPAs. The more that we're taking over a lot of that, you can see a stronger performance across some of our CAPS scores. And I think that's already starting to manifest itself this year.

So let's talk a little bit about priorities for 2026. You mentioned expansion?

They are not going to get easier. I think they're going to get tougher I think one of the things to think through for us is how they're thinking about HealthEquity index and how that impacts reward factors. Our California business is 4 stars now, and we get no reward factor. I think based on the calculations from the HealthEquity index that we think we are very well positioned to get a reward factor. And I think we publicly said we think that could be worth up to 23 basis points. I think that, that would benefit us in that regard. But with respect to cut points, we just got the planned preview. We're still waiting on some of the details on the cut points.

Let me make sure that I do take any questions from the audience. So if anybody does have a question, please do alert us.

Expectations, do you expect -- right, you're going through '19, you're going to go through the next 5 years. When we get preliminary rates in January, February time, timeline and final, do you expect any type of B30 like some other coding changes to be implemented where we got very excited over the trend assumption that catching up to the industry with V28? Do you think there's something else that could potentially come?

My -- the answer is I don't know. Is this the -- I don't know. I know there's been a lot of discussion at CMS around looking at the risk adjustment model potentially just making it more modernized. And for those of you that know, I mean, it's -- this existing model was developed 20 years ago, literally 20 years ago by Dr. McClellan. It was based predominantly against free-for-service data. And 20 years ago, Medicare Advantage represented about 15% market share of total seniors in the market today, it represents 53%.

So over the last 20 years, MA has really taken off in terms of market share acceleration, but that creates an opportunity for people to look at how that data is going to be reviewed differently. My hunch is the administration is going to kind of -- with -- they kept V28 intact. We didn't make any change in the 28. That was something that you could have done. They're going to keep V28 8 intact.

They're going to implement RADV audits, both of which I think is really good because it normalizes the playing field. And I think you think about -- are they pro MA or not pro MA, and then look at the benchmark rates. They give you 9%, right? So what I think is happening is good for the sector. Cleanup coating, eliminate the gaming, supported with benchmark increases, they account for some of the utilization increases as you've talked about.

And I think -- if you think about what happened in 2012 to 2024 when the last time they had -- we went through this cycle, everything just went up once they cleaned it up. That's what I think is going to happen. I would not bet against MA. Anybody that bets against MA loses. The market forces of the aging seniors is not going to slow and I think the market share penetration, the slope will kind of flatten a little bit, but market share is still -- I think it's going to be 65% when all's said and done, of MA in terms of total seniors.

So I think seniors are going to keep going up. MA percentages keep going up. I think that the value proposition to seniors as measured by benefits relative to fee-for-service in each market is still material, even though it's lower than in the past, it's still material enough to increase that market share. Steve, does that answer your question?

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I'm not sure what that means.

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Yes. I'm not sure that's just a California phenomenon. I think that the product design around -- if you're talking about HMO versus PPO. Yes, I think you're going to see a lot of PPO exits. And when all said and done, PPO exits, PPO exits in markets. I think there's -- I think I just -- I think that's an industry-wide phenomenon. I think you're going to see more HMO across the board. And if -- I just paused on the word gatekeeper because I've heard that in like 40 years.

But 40 years ago, you didn't have stars. I mean -- so if you kind of -- if you're denying care or blocking care, your stars are going to suffer. And so -- and we kind of think about that in the context of concierge services actually. Meaning you can't think of the PCP as blocking or being a gatekeeper. You have to support that PCP and make their practices better and more efficient. That's where this whole care anywhere model comes into play. But yes, I think you're going to see PPO exits across the board.

We only have about half a minute. Can you just quickly summarize what you're expecting to see for '26, what your priorities are? And you mentioned M&A, so we got to get a comment on that.

Yes. I think -- I mean, as you can imagine, we're looking at a lot of potential M&A opportunities being very, very discerning. Our Board is like you guys are doing really, really well, don't create problems for yourself. Having said that, we can have -- we're looking at membership that have overlay networks to ours, where the integration is pretty easy. We're thinking about it. I would say we're being very, very discerning around that.

I would say for 2026 and beyond, we feel really good about our growth in AEP. We feel good about Stars. I think our core operational system implementations are going really well. So I think the operating leverage opportunity is good. I think one thing around M&A that I'll touch on that's kind of new to what we've shared with you is in the context of captives. And so the large MCOs right now have -- most of them, I would say, have captive businesses that are ancillary in nature, ancillary or supplemental benefits. So dental PPO, behavioral HMO, transportation, flex card fulfillment, all those kinds of things.

Surprisingly, those account for like 5% of your MLR, 5%, right? So we're sitting at whatever, 87-ish, 87%, 88% MLR, 5% of that is supplemental benefits. That's kind of an industry phenomenon. They have captives already embedded into their MLR. We don't -- we're paying external vendors for that 5%. And so we're at a size now we're big enough that we can start investing in or buying some of these vendors ourselves. So we're paying ourselves. And so for example, if we went out and bought a small dental PPO, this is just an example. And then we would see that with 250,000 lives right off the bat as customers everybody that's a very accretive win for everybody, right?

And so I think you're going to see margin expansion opportunities for us in the context of focus on 2026. I right? And ultimately, if you -- if we own all of that supplemental ancillary kind of captive, we're going to improve our MLR by up to 5%.

So I think if we can do that and we're going to maintain our advantage on just medical management, which to me is the core of what we do is medical management. I think the opportunity for us to improve our bid position will even be greater. So the bigger we get, the stronger we're going to get, add that to the embedded earnings potential associated with the gross margin expansion. I think that's the big picture. We feel very well positioned if that makes sense.

We are out of time. Thank you so much for being here today. John and Jim.

Thanks, everyone.

Thank you.