AGL Q1 2025: 280bps CMS Rate Tailwind Fuels 2026 Margin Outlook
- Stable Membership Base & Disciplined Risk Management: Executives emphasized that 2025’s membership is largely the same as in 2024—with careful exits and measured growth—providing predictable risk adjustment and an established revenue platform.
- Favorable Pricing Environment & Rate Tailwinds: The final CMS rate notice, delivering around 280 basis points improvement, coupled with increased percentage-of-premium pricing for re-priced membership, signals a positive revenue tailwind heading into 2026.
- Advancements in Clinical & Technological Initiatives: Investments in clinical programs (e.g., heart failure and palliative care initiatives) and the launch of an enhanced financial data pipeline are already showing enrollment acceleration and efficiency gains that are expected to improve quality outcomes and margin performance over time.
- Elevated cost trends and margin pressure: The call highlighted higher-than-expected medical cost trends—particularly driven by inpatient admissions and Part B drug costs—with negative prior period development adding uncertainty to future margins.
- Risk adjustment headwinds from V28: Executives noted a 3% headwind from the V28 risk model, which, on a same member basis, may pressure margins if the transition does not deliver the anticipated benefits.
- Payer and quality performance concerns: Potential declines in payer star ratings (e.g., Humana's significant star rating drop) and uncertainties around renewals could lead to lower quality bonus payments and less favorable renegotiated terms, adversely impacting revenue and member growth.
| Metric | YoY Change | Reason |
|---|---|---|
Total Revenues | Declined 4.5% (from $1,604.4M to $1,532.8M) | Total Revenues in Q1 2025 fell slightly due to a decline in average membership—driven by prior partnership exits—as well as lower new member additions, although partially offset by growth in existing geographies and a 1% increase in PMPM capitation rates. These factors build on the previous period’s expansion momentum that saw higher revenues in Q1 2024. |
Net Income | Rebounded sharply from a loss of $6.0M to a gain of $12.1M | The turnaround in Net Income is largely attributable to significant gains from discontinued operations and increased income from equity method investments, overcoming the previous period’s losses. This resulted in an improvement of over $18M, indicating a shift in the operational and non-operational income mix relative to Q1 2024. |
Operating Loss | Widened from $7.2M to $22.1M (over 200% deterioration) | Despite the rebound in net income, Operating Loss deepened sharply due to a less aggressive revenue base combined with substantial fixed and variable expenses that remained from the previous period. This indicates that while certain areas (like discontinued operations) improved, core operating costs did not adjust at the same pace, reflecting a lag in cost efficiency adjustments compared to Q1 2024. |
Cash and Cash Equivalents | Increased 22.7% (from $111.7M to $136.9M) | Improved Cash and Cash Equivalents in Q1 2025 are primarily due to more disciplined cash management, with reduced cash outflows from operating activities and effective adjustment in investing and financing flows—benefits that built on improved liquidity trends observed in previous periods. |
Stockholders’ Equity | Fell by about 27% (from $688.5M to $500.3M) | The significant decline in Stockholders’ Equity is a cumulative result of prior period net losses, extensive stock-based compensation charges, and adjustments impacting equity valuation, which continued into Q1 2025 despite the recent net income improvement. These factors indicate ongoing balance sheet pressures stemming from historical and structural cost pressures. |
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
Medicare Advantage Membership | Q2 2025 | 490,000 to 510,000 members | 485,000 to 515,000 members | no change |
Revenue ($USD Billions) | Q2 2025 | $1.48 billion to $1.52 billion | $1.44 billion to $1.51 billion | lowered |
Medical Margin ($USD Millions) | Q2 2025 | $125 million to $140 million | $50 million to $70 million | lowered |
Adjusted EBITDA ($USD Millions) | Q2 2025 | $10 million to $25 million | Negative $35 million to Negative $20 million | lowered |
ACO Model Membership | Q2 2025 | no prior guidance | 105,000 to 115,000 members | no prior guidance |
Metric | Period | Previous Guidance | Current Guidance | Change |
Revenue ($USD Billions) | FY 2025 | $5.83 billion to $6.03 billion | $5.85 billion to $6.03 billion | raised |
Medical Margin ($USD Millions) | FY 2025 | $275 million to $325 million | $275 million to $325 million | no change |
Adjusted EBITDA ($USD Millions) | FY 2025 | Negative $75 million (midpoint) | Negative $95 million to Negative $55 million | no change |
Cash Usage ($USD Millions) | FY 2025 | Approximately $110 million | Approximately $110 million | no change |
Medicare Advantage Membership | FY 2025 | 490,000 to 520,000 members | 490,000 to 520,000 members | no change |
ACO Model Membership | FY 2025 | 110,000 members | no current guidance | no current guidance |
Medical Cost Trend – Gross | FY 2025 | 6.3% | no current guidance | no current guidance |
Medical Cost Trend – Net | FY 2025 | 5.3% | no current guidance | no current guidance |
ACO Model Performance | FY 2025 | $35 million to $40 million | no current guidance | no current guidance |
Geography Entry Costs | FY 2025 | $35 million to $40 million (assumes 30,000 to 45,000 members) | no current guidance | no current guidance |
| Metric | Period | Guidance | Actual | Performance |
|---|---|---|---|---|
Revenue | Q1 2025 | $1.48B - $1.52B | $1,532.8M | Beat |
Medical Margin | Q1 2025 | $125M - $140M | $47.8M (derived by subtracting $1,401.9M + $80.2M from $1,529.9M) | Missed |
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
Medical Cost Trends | Consistently discussed in Q4 2024 (e.g. forecasted cost trend improvements and adjustments from the 2-midnight rule), Q3 2024 (increased costs and utilization pressures) and Q2 2024 (prudent guidance with adjusted cost estimates) | In Q1 2025, cost trends are “in line with expectations” with moderated year-over-year reductions (e.g. 5.5% vs 6.7% in prior year) driven by inpatient services and Part B drug spend | Continued focus on managing and moderating cost trends. The messaging evolved to reflect clear improvements compared with previous higher estimates while still addressing key cost drivers. |
Margin Pressure | Previously noted in Q4 2024 with challenges from elevated cost trends and unfavorable developments; Q3 2024 and Q2 2024 calls highlighted margin pressures from higher utilization and risk adjustment issues | In Q1 2025, margin pressure remains evident with medical margin declining from prior Q1 levels, yet the company is actively engaging in mitigation efforts such as cost management and improved payer terms | Persistent concern, though partly mitigated. While challenges remain, management is taking deliberate cost management actions to control margin erosion. |
Risk Adjustment Processes | In Q3 2024, negatively impacted by process gaps and forecast issues; Q2 2024 indicated lower-than-expected improvements with only nominal STAR rating impacts | In Q1 2025, risk adjustment shows a 2% net increase despite a 3% headwind from the V28 model, suggesting that the company expects to manage these challenges through established processes | Consistent challenge with cautious optimism. The issue remains a concern due to model transitions, but management expects gradual stabilization over time. |
V28 Headwinds | Addressed in Q2 2024 with an expected 2% impact; Q4 2024 and Q3 2024 mentioned the ongoing transition (though with less explicit detail in Q3) | Q1 2025 quantifies V28 headwinds as contributing to a 3% impact in risk adjustment, aligning with expectations while reinforcing the challenge inherent in the model transition | Slightly higher impact acknowledged in Q1 2025. The theme remains consistent but shows a modest increase in headwind magnitude, emphasizing management’s continued focus on this risk. |
Payer Contract Negotiations | Discussed actively in Q4 2024 (improved economic terms, reduced Part D exposure), Q3 2024 (repricing and mitigation efforts for Part D risk), and Q2 2024 (off-cycle rate increases and productive discussions with health plans) | Q1 2025 continues to highlight improved payer negotiations with better economic terms (including effective repricing of 40% of the membership) and further efforts to reduce Part D exposure | Steady and positive. The narrative maintains progress with constructive renegotiations and ongoing efforts to secure favorable contract terms. |
Exiting Unprofitable Partnerships | Highlighted in Q4 2024 and Q3 2024 as strategic exits to address losses and improve margins; Q2 2024 mentioned retroactive terminations reducing membership but stabilizing margins | In Q1 2025, strategic exits are reiterated with acknowledgment of prior period negative developments tied to exited markets, reinforcing the focus on refining profitability | Consistent strategic maneuver. Exits continue to be used to streamline operations and reinforce a disciplined approach to profitability, with similar messaging across periods. |
Membership Base Dynamics | Q4 2024 projected a slight decline (4% drop) offset by new partner growth; Q3 2024 and Q2 2024 reported membership growth figures with adjustments due to contract terminations and retroactive actions | Q1 2025 shows a slight year-over-year decline in Medicare Advantage membership yet emphasizes stability through strong PCP relationships and measured growth | Shift from decline to stability. While numbers have minor downward adjustments, the commentary underscores a stable membership base built on long-term PCP relationships. |
Cash Burn Management | Q4 2024 demonstrated improved cash flow with lower-than-expected usage; Q3 2024 and Q2 2024 emphasized steady liquidity and controlled cash burn, with detailed breakdowns of cash usage and expectations | In Q1 2025, the focus remains on disciplined cash management with a projected usage of approximately $110 million in 2025 and the aim for cash flow breakeven by 2027, supported by strong cash and marketable securities levels | Consistent and disciplined. Cash management strategies remain stable across periods, reaffirming liquidity and a clear path toward long-term cash flow breakeven. |
Liquidity Position | Consistently detailed in Q4 2024, Q3 2024, and Q2 2024 with robust cash and marketable securities figures alongside off-balance sheet cash from ACO entities | Q1 2025 reports a solid liquidity position with $369 million in cash and marketable securities plus additional off-balance sheet assets, underscoring prudent liquidity management | Stable core liquidity. The company consistently maintains robust liquidity, supporting operational stability and strategic investments. |
Pricing Environment | Q4 2024 and Q3 2024 discussions focused on active repricing initiatives and adjustments amid challenging market conditions; Q2 2024 emphasized market-by-market adjustments and off-cycle rate increases | Q1 2025 reaffirms the strategic approach, with 40% of the membership repriced effective January 1, and highlights ongoing improvements in economic terms and risk mitigation (notably reduced Part D exposure) | Ongoing proactive management. The approach remains consistent, with continued focus on leveraging pricing as a lever to improve financial performance and risk exposure. |
Premium Rate Adjustments | Consistently addressed in Q4 2024 and Q3 2024 with detailed discussions on improved percentage-of-premium terms and contractual incentives; Q2 2024 mentioned off-cycle premium rate increases along with retroactive contract adjustments | In Q1 2025, premium rate adjustments remain a focus with a clear path for increased percentage of premium and quality-linked incentives, reflecting continuity in pricing strategy | Stable and forward-looking. The emphasis on premium rate improvements is maintained, with ongoing enhancements around quality incentives and risk mitigation. |
Advancements in Clinical and Technological Initiatives | Q4 2024 emphasized clinical quality, targeted programs (e.g. heart failure, palliative care), and enhancements in data and analytics; Q2 2024 focused on PCP engagement, data lake implementation, and reduction in platform support costs; Q3 2024 did not include new information on this topic | Q1 2025 expands on clinical initiatives including the heart failure and PalliUM programs, integration of AI and enhanced data pipelines (e.g. via mphrX) and outlines anticipated benefits in outcomes and forecasting improvements | Evolving with increased clarity. The initiative remains a priority with additional details and emphasis on technological integration to drive future clinical and financial benefits. |
ACO REACH Program | In Q4 2024, Q3 2024 and Q2 2024, the program was well covered with strong performance metrics (membership, savings, quality outcomes) and discussions on potential extensions to full-risk models | Q1 2025 reinforces the program’s strengths and strategic positioning, with an emphasis on advocating for a post-2026 full-risk pathway while maintaining its core performance | Sustained performance with long-term potential. The messaging remains positive, emphasizing continuity and potential expansion into full-risk structures. |
Medicare Fee-for-Service Opportunities | Q4 2024, Q3 2024, and Q2 2024 discussed future opportunities in fee-for-service models and potential program extensions (e.g. MSSP full-risk tracks), highlighting bipartisan support and strategic belief in long-term models | In Q1 2025, opportunities are highlighted through partnerships with leading physician groups that provide competitive differentiation and value in both Medicare Advantage and fee-for-service markets | Consistent strategic focus. The emphasis on fee-for-service opportunities continues as a long-term growth pillar, with consistent expectations for evolving risk models and market opportunities. |
Payer Quality Performance | Q4 2024 and Q3 2024 highlighted top-tier quality performance with high star ratings (often above 4.25 stars) and its role in securing improved economic terms; Q2 2024 noted minimal impact from STAR ratings recalculations | Q1 2025 confirms strong quality outcomes and reinforces that high performance (with scores at or near 4.5 stars) remains a competitive advantage in securing quality incentives from payers | Consistent excellence. Quality performance continues to be a cornerstone, bolstering the company’s market position and contract negotiation leverage. |
Star Rating Impacts | Q4 2024 featured detailed discussions on incentivizing quality through star ratings with thresholds at 4+, 4.25, and 4.5 stars; Q3 2024 and Q2 2024 discussed the importance of quality scoring and minimal impacts from STAR recalculations | In Q1 2025, star rating impacts are discussed in the context of mitigating potential declines (e.g. Humana’s ratings situation) by leveraging high quality scores and structured incentives | Steady focus with proactive mitigation. The topic remains central, with measures in place to offset adverse impacts and maintain strong payer relationships through quality metrics. |
Expansion Strategies | Q4 2024 and Q3 2024 discussed measured growth, strategic exits, and a focus on same geography expansion; Q2 2024 detailed a planned expansion via the class of 2025 with new partners within the current footprint | Q1 2025 shifts focus toward future demand from groups experienced in full-risk value-based care (notably the strong class of 2027), reflecting continued disciplined expansion in existing geographies | Gradually evolving with long-term vision. While maintaining disciplined growth, the focus is shifting towards capturing future opportunities and leveraging partnerships that support full-risk models. |
New Partner Acquisitions | Q4 2024 and Q3 2024 provided updates on new partner classes and successful onboarding efforts; Q2 2024 highlighted the addition of several new partners within existing markets, emphasizing quality and operational efficiency | In Q1 2025, the narrative emphasizes a measured yet robust acquisition strategy with strong demand, particularly for partners experienced in transitioning to full-risk models, indicating refinement toward high-quality growth | Continued focus with refinement. The company remains committed to targeted partner acquisitions, refining its approach to ensure high-quality and sustainable growth, as evidenced by evolving class dynamics. |
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EBITDA & Initiatives
Q: How are operating initiatives impacting EBITDA?
A: Management noted that the $50 million anticipated from operating initiatives—split $25 million from quality incentives and $25 million from clinical savings—is tracking well in Q1, setting a promising stage for improved margins in 2026. -
Free Cash Flow Outlook
Q: Will improved rates boost free cash flow?
A: Management explained that the 280 basis points final rate notice is a beneficial tailwind that should help, although the incremental free cash flow lift remains not fully quantified at this time. -
Renewal Pricing
Q: How will 2026 renewals capture rate benefits?
A: Management detailed that with roughly 50% of membership up for renewal—and with 40% already repriced for '25—the company expects enhanced payer economic terms to flow through, positively affecting future revenue. -
V28 Risk Impact
Q: What is V28’s effect on risk adjustment?
A: Management reported a 2% net increase in risk scores on a same member basis, which already factors in about a 3% headwind from the V28 transition, all underpinned by longstanding primary care relationships. -
Risk Adjustment Detail
Q: Explain the 2% risk adjustment improvement.
A: Management clarified that the 2% net lift arises from improved risk scoring among existing members, particularly in markets transitioning from fee‐for‐service models, ensuring more accurate reimbursement as patients remain with their PCPs. -
Clinical Programs Impact
Q: How will clinical programs lift margins later?
A: Management emphasized investments in initiatives such as heart failure and palliative care are in early stages this year, with anticipated benefits in reduced hospitalizations that should boost medical margins in 2026 and beyond. -
Payer Star Ratings
Q: What about the effect of declining star ratings?
A: Management acknowledged that one payer is experiencing a notable star rating drop, but expects to offset this with mechanisms like increased percentage premiums or lump-sum adjustments, strengthened by their consistently high quality scores. -
Cost Trends
Q: What drove higher Q1 cost trends?
A: Management attributed the elevated cost trends to higher inpatient admissions—especially in January and February due to the flu—and steady Part B drug spend, with improved data transparency now available via their new financial pipeline. -
Part D & MA Membership
Q: Will Part D changes affect membership numbers?
A: Management confirmed that Part D exposure has already been reduced to below 30%, and they continue disciplined membership growth with group Medicare Advantage penetration at about 18%, thereby avoiding significant membership impacts. -
Membership Pipeline
Q: What are the plans for 2026 membership growth?
A: Management stated they plan to exit 29,000 members this year while targeting an addition of 30,000–45,000 new members for 2026 on a risk basis, though detailed distributions are still early in the process. -
Provider Dynamics & Drug Risk
Q: Are provider partnerships and drug risks stable?
A: Management described robust provider interest in value-based care while noting challenges remain managing Part B drug risk—particularly in oncology—with early initiatives already underway for mitigation. -
Pipeline & Partnerships
Q: How is the future partnership pipeline shaping?
A: Management expressed that demand is robust across various groups and geographies, with a particularly rich pipeline expected to materialize more fully in 2027 as macroeconomic conditions improve. -
Exited Area Contributions
Q: Any lingering impact from exited markets?
A: Management indicated that the unfavorable development from exited markets—about $7 million—is largely confined to 2024 and is now minimal, with most issues resolved by enhanced data visibility. -
Drug Pricing Policy
Q: How do new drug pricing policies affect the business?
A: Management noted that since they have limited control over formulary and manufacturer rebates, their approach is to further reduce Part D exposure, though the actual impact of recent policy changes remains uncertain. -
Patient Continuity
Q: Are new patients bouncing across payers?
A: Management reassured that despite some movement between payers, long-standing relationships with primary care physicians ensure continuity of care and minimal disruption in service delivery. -
Accrual Reversal
Q: What caused the $1.2M negative charge this quarter?
A: Management clarified that the charge reflects a straightforward true-up reversal of an accrual for annual wellness visits, representing a non-recurring adjustment with no long-term impact. -
Negative PYD Impact
Q: Can you explain the adverse prior year development?
A: Management explained that approximately $22 million of negative prior year development—of which about $7 million relates to exited markets and another $10 million from 2023 dates—has largely been addressed, with 90% of 2024 claims now complete. -
Q2 EBITDA Seasonality
Q: What drives Q2 EBITDA seasonality?
A: Management noted that lower Q2 EBITDA is consistent with normal seasonal adjustments derived using an incurred basis, leading to higher profitability in other quarters, particularly in Q4.
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