Alignment Healthcare - Earnings Call - Q1 2025

Executive Summary

• Strong start to 2025: revenue $926.9M (+47.5% y/y), adjusted gross profit $107.2M (+87% y/y), adjusted EBITDA $20.2M, membership ~217.5k (+31.7% y/y); MBR 88.4%.
• Beat S&P Global consensus: revenue $926.9M vs $888.3M*, and Primary EPS +$0.044 vs -$0.045*; company GAAP EPS was -$0.05, reflecting basis differences vs S&P “Primary EPS” [GetEstimates Q1 2025]*.
• Raised FY25 guidance midpoints across membership, revenue (~$3.79B midpoint), adjusted gross profit, and adjusted EBITDA (midpoint $49M), and introduced Q2 guide (rev $950–$965M; adj. EBITDA $10–$18M).
• Call color: outperformance driven by favorable inpatient utilization, modest Part D favorability expected to reverse, and prior-year IBNR releases; continued operating leverage (adj. SG&A 9.4% of revenue). CFO transition announced; Jim Head named CFO effective May 2, 2025.

What Went Well and What Went Wrong

• What Went Well

  • Material top-line and margin expansion with disciplined utilization: revenue +47.5% y/y; adjusted gross profit +87% y/y; MBR 88.4% (250 bps y/y improvement). “We exceeded expectations across all key measures” — John Kao, CEO.
  • Clinical model scaled across geographies; inpatient admissions per 1,000 outperformed expectations (CA 153; ex-CA 145; overall 152) underpinning MBR strength.
  • Operating leverage: adjusted SG&A $87M (9.4% of revenue), -160 bps y/y; adj. EBITDA margin expanded 410 bps y/y to $20M.

• What Went Wrong

  • GAAP still loss-making: net loss $(9.4)M and GAAP EPS $(0.05) despite adjusted EBITDA turning positive.
  • Part D favorability in Q1 is expected to reverse in the remainder of the year; management remains cautious on specialty drug trends in non-LIS populations.
  • Seasonality headwinds ahead: management expects second-half MBR and SG&A ratios to run higher (Q4 peak SG&A for AEP), implying back-half pressure vs 1H.

Transcript

Operator (participant)

Good afternoon, and welcome to Alignment Healthcare's first quarter 2025 earnings conference call and webcast. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press Star 11 on your telephone. You will then hear an automated message advising your hand has been raised. To withdraw your question, please press Star 11 again. Please note that this event is being recorded. Leading today's call are John Kao, Founder and CEO, and Thomas Freeman, 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 Securities and Exchange Commission, including the risk factors section 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 the company's website and in our Form 10-Q for the fiscal year ended March 31, 2025.

John Kao (Founder and Ceo)

Hello, and thank you for joining us on our first quarter earnings conference call. We are pleased to announce a strong start to the year where we surpassed the high end of guidance for each of our four key metrics. For the first quarter of 2025, our health plan membership of 217,500 members represented approximately 32% growth year over year. This drove total revenue of $927 million, which grew approximately 47% year over year. We also delivered strong margin expansion even as we grew faster than our initial expectations. Adjusted gross profit of $107 million grew 87% year over year, which produced a consolidated MBR of 88.4%, a 250 basis point improvement versus the prior year. Meanwhile, adjusted EBITDA of $20 million resulted in 410 basis points of margin expansion year over year and exceeded the high end of our first quarter guidance.

Our strong results are once again demonstrating that our business model is Medicare Advantage done right. Building upon last year's momentum, we continued to scale our clinical model across the enterprise, including our ex-California markets, where we more than doubled our membership year over year. This resulted in first quarter inpatient admissions per thousand of 153 in California and 145 across our ex-California markets, both of which outperformed our expectations. As the Medicare Advantage landscape has evolved around us, our approach to serving our seniors has remained unchanged since our founding. Our model combines the product control and data visibility of a health plan, clinical insights of a modern technology platform, medical management expertise of a care delivery organization, and member experience of a consumer-first company.

By bringing each of these capabilities together, we are creating a durable senior health platform that is enabling us to take share at an accelerated pace while controlling medical costs, just as we have demonstrated again this quarter. Given the strength of our first quarter results and our solid growth momentum, we are raising the midpoint of our guidance ranges across each of our four key metrics. Thomas will share more in his remarks. While we are proud of our recent results, we believe the biggest opportunities are still on the horizon. Despite our rapid growth in recent years, we still have less than 5% share across our existing markets. As we prepare to scale the organization in anticipation of the growth opportunity ahead, we are investing in our back office operations, enhancing the member journey, and doubling down on our provider relationships through long-term collaborative partnerships.

With Medicare Advantage penetration now over 50% and seniors becoming a larger share of provider-patient panels, we believe there will be more symbiotic opportunities to help our provider partners manage their seniors, particularly for those most at risk, like the dually eligible population and seniors with multiple chronic conditions. These members benefit most from the enhanced care that our Care Anywhere teams provide through greater care coordination, chronic disease management, and in-home support. We also see opportunity to further expand our competitive advantages by driving continued innovation in our AVA technology. These innovations aim to further advance our ability to improve clinical quality and member experience outcomes at lower costs. Each of these improvements are positioning us for the next phase of growth and maturing our operations as we scale. As we plan for 2026, we remain confident in our multi-year trajectory.

First, our STARS payment advantages are widening considerably in 2026, when we will have 100% of our California members in plans rated four stars or above, which will be approximately 40% better than competitors in the state with just 59% of members in four-star or above plans. Second, we believe we will be less impacted than our competitors by the third and final phase-in of V28 risk model changes, which may create an even greater opportunity for us relative to the first two years of the phase-in. Third, the final rate notice incorporates a healthy increase in benchmark rates, which more accurately reflects industry utilization trends and positions us well to achieve our financial objectives in 2026. Meanwhile, our relative advantages on medical cost management, quality, and STARS reimbursement will continue to support our growth objectives.

Over the long term, we believe these differentiators will continue to position us for success irrespective of the rate environment. Beyond 2026, we are pleased that the final rate notice indicated CMS's intent to continue transitioning the current STARS reward factor into the Health Equity Index reward, now called the Excellent Health Outcomes for All reward, and rating year 2027, payment year 2028. We believe the new methodology more accurately rewards plans that perform well on clinical quality, particularly amongst complex populations. Finally, today we announced that Thomas has decided to step down from his role as CFO, and effective tomorrow will serve as strategic advisor to the CEO. In this new role, he will focus on ensuring a smooth transition of his CFO responsibilities and supporting the company's long-term strategies and partnerships.

As Thomas enters his new role, I'd like to thank him for 10 years of financial leadership and service to Alignment and its members. During this time with Alignment, Thomas helped us grow to a nationally recognized Medicare Advantage leader, profitably serving over 200,000 members across five states. He has been a trusted friend and partner throughout his tenure, and I sincerely appreciate his contributions over the past decade. After conducting a thoughtful and extensive search, I'm excited to introduce Jim Head, who will succeed Thomas as CFO and provide financial leadership as we continue to scale Alignment's business from its strong foundation. Jim most recently served as the Chief Financial Officer of Claritiv, a publicly traded data analytics company for health plans, and joins us with more than 30 years of experience in strategic finance, healthcare, and business development.

Above all else, Jim is the financial leader best positioned to build upon our unique Medicare Advantage playbook and help us continue to scale Alignment's vision of Medicare Advantage done right. Thomas and I look forward to introducing you to Jim over the coming months as we meet with investors. In conclusion, I'd like to thank our employees for their tireless dedication to our seniors as we continue to define industry expectations. As we step forward to the future ahead, we do so in a stronger financial and competitive position than at any time in our history. With a sturdy foundation to build upon, we are eager to push forward to new frontiers, explore new ways to improve the lives of our members, and bring our model to more seniors everywhere. Now, I'll turn the call over to Thomas to further discuss our financial results and outlook. Thomas.

Thomas Freeman (CFO)

Thanks, John. For the quarter ending March 2025, our health plan membership of 217,500 increased 32% year over year. Meanwhile, our first quarter revenue of $927 million represented 47% growth year over year. Our top line was supported by membership outperformance as our AEP momentum continued through OEP, as well as higher Part D revenue PMPM due to changes associated with the Inflation Reduction Act. Total adjusted gross profit in the quarter of $107 million grew 87% versus the first quarter of 2024. This represented an MBR of 88.4% and an improvement of 250 basis points year over year. Our first quarter outperformance relative to guidance was driven by favorable inpatient utilization as we continue to demonstrate our ability to scale our clinical model across a larger population.

Our overall inpatient admissions per thousand of 152 increased slightly year over year, consistent with our expectations shared last quarter due to changes in membership mix. Our first quarter outperformance was also driven by modest favorability in our Part D MBR, which we anticipate to reverse over the next three quarters. Lastly, we experienced favorable prior-period IV&P reserve releases that supported our first quarter results. This further reinforces the strength of our ability to manage through rapid membership growth and sets a solid foundation towards our full year 2025 outlook. Moving down the P&L, SG&A in the quarter was $104 million. Our adjusted SG&A of $87 million represented 9.4% of revenue, decreasing by 160 basis points year over year.

Our first quarter result puts us squarely on track towards our full-year operating leverage target as we continue to see opportunities to scale the business and drive efficiencies throughout 2025, just as we did in 2024. Lastly, our adjusted EBITDA of $20 million represented 410 basis points of margin expansion year over year. This was well ahead of our initial expectations and places us in a solid position to achieve our full-year profitability objectives, which we will expand upon shortly. Moving to the balance sheet, we remain in a strong position with $480 million in cash and investments at the end of the quarter.

Turning to our guidance, for the second quarter, we expect health plan membership to be between 220,000 and 222,000 members, revenue to be in the range of $950 million-$965 million, adjusted gross profit to be between $105 million and $113 million, and adjusted EBITDA to be in the range of $10 million-$18 million. For the full year 2025, we expect health plan membership to be between 228,000 and 233,000 members, revenue to be in the range of $3.77 billion-$3.815 billion, adjusted gross profit to be between $420 million and $445 million, and adjusted EBITDA to be in the range of $38 million-$60 million. We are raising the midpoint of our guidance ranges across each of our four key metrics. The increase to the midpoint of our membership outlook reflects our latest visibility following a strong OEP season.

Along with our membership increase, we are also raising our full-year revenue outlook to now reflect approximately $3.8 billion and 40% growth at the midpoint. The increase to our revenue outlook also reflects our expectations for a continued increase in our Part D revenue PMPM through the remainder of the year. Although it's early in the year, our strong first quarter also gives us the confidence to increase the low end of both our adjusted gross profit and adjusted EBITDA ranges. The following elements are captured within our updated profitability outlook. First, we expect continued stability in our inpatient admissions per thousand. Similar to the first quarter, we anticipate inpatient utilization to continue to run modestly higher compared to 2024 for the remainder of the year. This is due to a shift in our mix of membership during AEP and in line with our commentary last quarter.

Second, we anticipate our early favorability in Part D gross margin to reverse during the remainder of the year. While our first quarter Part D MBR outperformed, we expect our Part D MBR to be slightly higher in the second through fourth quarters relative to prior expectations, leaving our Part D outlook for the full year roughly unchanged. We continue to take a prudent stance around our expectations for heightened pharmacy utilization, including oncology drugs, an approach which served us well in the first quarter. Third, we plan to invest a portion of our early outperformance towards our ongoing member engagement activities that support both our growth and profitability objectives in 2026 and beyond. Finally, turning to SG&A, the midpoint of our guidance implies an adjusted SG&A ratio of 10.1% for the full year.

This reflects a 100 basis point improvement year over year on top of the 320 basis points of operating leverage we delivered in 2024. In terms of seasonality over the remainder of the year, we expect our second half MBR to be higher than the first half MBR. This cadence is driven by assumptions for normal utilization seasonality patterns, including the regular flu season in the fourth quarter and greater Part D liability in the second half due to changes related to the Inflation Reduction Act. Additionally, we also expect our second half SG&A ratio to be higher than the first half, with the highest SG&A ratio in the fourth quarter. This is consistent with prior years and driven primarily by AEP sales and marketing costs, as well as increased staffing levels to support anticipated AEP growth.

Taken together and combined with the strength of our first quarter outperformance, we have established a solid foundation for our full-year adjusted EBITDA outlook of $49 million at the midpoint of our updated guidance range. Lastly, as previously shared, this will be my last earnings call. My 10-year CFO has been an incredible journey, and I'd like to extend my heartfelt appreciation to our employees for their unwavering partnership. I'd also like to thank our investors and analysts for their immense support over the last four years as a public company. While it's never an easy time to step away, I'm more optimistic than ever about Alignment's opportunities ahead. As we have demonstrated time and time again, Alignment has set itself apart by balancing industry-leading growth with strong margin expansion as a result of our unique MA strategy and capabilities.

I've yet to find a Medicare Advantage company better positioned to succeed as the industry continues to evolve, and I look forward to working with John and Jim to execute a seamless transition. With that, let's open the call to questions. Operator.

Operator (participant)

Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Our first question comes from the line of Ryan Daniels with William Blair.

Ryan Daniels (Group Head of Healthcare Technology and Services)

Yeah, congratulations to the team, and thanks for taking the questions. John, maybe one for you to start. You had an interesting comment about working more with duals and patients with multiple chronic conditions and doing more care coordination with providers. I am curious if you're alluding there to more things like the integrated strategic partnerships such as Sutter, or if there's actually some thoughts on the chalkboard about maybe doing a practice partner/tech platform where you might sell it into the market or help with provider enablement even more so.

John Kao (Founder and Ceo)

Hey, hey, Ryan. No, I think it's just that we do so well managing that population, and it's becoming more and more important in each of our markets. I think that they're a hard population to actually manage. They have more complex conditions. They just require more sophisticated care management. I think that that's something that differentiates us from everybody else, which is that care management capability, that we're not just dependent on captating that out to downstream providers. In the context of how we do that, I think we also are seeing really good ADK performance ex-California. We know it's not limited to just the kind of California phenomenon. I think when you combine that with the stars, it gives us that much more confidence that we can kind of extend that into new markets. I think that's what the reference is about.

Ryan Daniels (Group Head of Healthcare Technology and Services)

Okay. Maybe it is now that you've proven the model, you're showing that AVA is replicable in other markets, you've hit profitability, you've seen the SG&A leverage. Is this really the time you think you will look to grow in 2026 into new markets or maybe contemplate some M&A activity? Is that how we should think about it?

John Kao (Founder and Ceo)

Yeah, exactly. I think that we said that we're going to add new markets in the existing markets in 2026. We want to still be very thoughtful and disciplined about how we do that. We are going to do that from operating cash. We also said that we're starting initiatives now for 2027 new market launches, which require us to have service area expansions completed in February of 2026. All of that activity is starting now. To your point, given our—if you're an ECHO, by the way—given our strong growth, our strong margin performance, and a lot of it is really a function of AVA and the care model, and the scale economies we've been able to garner, I think, is going to give us that much more credibility to think about building that business out.

I've said in the past, we don't want to get ahead of ourselves. We want to be, again, very thoughtful. It's a very different business. Others have tried this and not been successful. If we do it, we need to make sure it's very, very referenceable. I still think, again, it's a strategy that we've contemplated from the beginning. I think all the cards are starting to line up, particularly given some of the challenges that we see in the sector. I think we can help a lot of people.

Operator (participant)

Thank you. Our next question comes from the line of Michael Hao with Baird.

Michael Ha (Senior Research Analyst)

Hi, thank you. Yeah, just firstly, really a pleasure working with you, Thomas. One of the best in the game. Also, congrats to Jim. Yeah, switching gears, congrats on the quarter. Monster earnings beat. I was wondering first if you could elaborate a bit more on the MLR outperformance. Thomas, I know you mentioned Part D. I think you said benefited one Q. I'm just curious how much of your MLR outperformance this quarter was attributed to any sort of pull forward of earnings into one Q related to that changing Part D cadence this year. Trying to parse out, figure out what the MLR performance would have been excluding Part D. I also thought in your one Q guidance, you may have already reflected that seasonality change.

Thomas Freeman (CFO)

Yeah. Hey, Mike, I appreciate the kind words, of course. In terms of our first quarter outperformance, we did allude to some early favorability we saw in Part D that we anticipate to reverse over the second to fourth quarters, leaving our kind of our full year expectations on Part D largely unchanged. It was pretty modest, to be quite honest. I would not say it was a significant driver of our outperformance in the quarter, but it was slightly better than our original expectations, where I think we had taken in just a bit more cautiousness and conservatism around what the first quarter Part D results might look like, given the many changing variables for 2025. Beyond Part D, I would say we did allude to some favorability in terms of our IV and P reserve releases from the prior year.

Not all of that fell to the bottom line, of course, because we share part of that back in the form of our risk pool and profit shares with providers. Quite honestly, a little bit of that, I think, is sort of normal course of operations. I think it's very demonstrative of our ability to be both conservative, but also appropriate with how we think about our reserve setting, particularly on a big year like last year, where we had a lot of growth, not just in the first half, but in the back half of 2024. I think big picture, when we think about the quarter, our utilization was right in line with expectations. In fact, slightly better on the inpatient ADK setting. I think we're continuing to see solid progress in terms of our cohorts maturing.

Notwithstanding the Part D and the IV and R, we would have beaten the high end of our guidance range regardless without those two factors. Big picture, I think a lot of things are going well as we start the year and really set a very solid foundation towards our full year outlook.

Michael Ha (Senior Research Analyst)

Great. Thank you. Just a quick, or not a quick, but my follow-up question. Heading into 2026, you have a very favorable final rate notice. You have HAPS admin measure down weighting, so more star ratings tailwinds to come. It feels like rates are very much on your side next year, especially in a year where your competitors are still negative margins, benefits likely rational again. Yeah, just understanding that, I wanted to get your thoughts on how you're going to approach this favorable rate dynamic next year. Because if my math is right, even, let's say, 300 basis points better than expected 2026 rates, after you pass through about a third of it to your global cap partners, that's still, I mean, roughly $90 million of additional rate tailwind.

It could be a very powerful part of your EBITDA bridge next year if we assume rates flow through to margins. I just wanted to get your thoughts on your posture toward margins versus growth next year. Yeah, any color there would be great. Thanks.

John Kao (Founder and Ceo)

Yeah. Hey, Michael. It's John. No, I think our relative advantages in STARS and our relative advantages on V28, which we've shared in the past, will continue. They were obviously very pleased with the new final rate notice. I think your assessment of the, I would say, the larger players is actually accurate. I would remind you, there are still smaller players and not-for-profit types of players where anything can happen, as we've seen in the past. We've observed that those strategies where people are buying business are not durable. I think we've also demonstrated we're not going to go chase dumb business. We're right literally in the throes of the bid process now. We're not going to comment on the margin versus growth question at this point. We feel very, very well positioned.

Operator (participant)

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

John Ransom (Managing Director)

Hey, there. Can you hear me?

Thomas Freeman (CFO)

Yep. Hey, John.

John Ransom (Managing Director)

Hey, Thomas. Congratulations. Look forward to seeing where you land. John, a little more of a soft question, but if we think about AVA today, what's it doing at kind of a patient engagement level that maybe is new and different than it was doing 1.0 version or a couple of years ago? Where else do you see some opportunity to continue to kind of knock down, get into that 20% of the population that's all the cost and continue to drive down that cost curve?

John Kao (Founder and Ceo)

Yeah. Thanks, John. I think the stratification model, kind of the identification of who are the high-risk members that AVA gives us, is really working well. Our engagement with that population continues to go up. I think the medical management and the proactive kind of at-home care support, all of that, I think, is working both in California and ex-California. Really happy about that. I think to your point, the next evolution of AVA requires us to have the, I call it the kind of culture of continuous improvement, where we're really looking at it and zeroing in on what is the efficacy of every single module within AVA, and what is the adoption rates, what are the returns, what are we getting out of each module. We are going to double down on the ones that are producing really good outcomes for us.

We might sunset ones that are less, and then we're going to be very focused on how we deploy capital with respect to our CapEx. Having said that, your question is a really good one in that I think the entire, I would say, member experience or member journey is going to be something that AVA helps us glue together end to end. As we've talked about from day one, having high quality, i.e., STARS and making sure that those gaps are closed at affordable costs, which is the MLR management, the clinical management, and having those be core competencies inside the company is what we need to do. I think AVA is going to evolve into that.

We are being very mindful for every part of that journey, really starting before a member is a member, that they're a consumer or a prospect is part of that journey. They come in and they become members, and how we onboard them, how we support them, how we answer their questions, how we take care of them from a medical management point of view and care for the polychronic at home, as well as ensuring that, I think, the administrative functions are really, really well run, like star gap closures, be very, very compliant on Medicare risk adjustment, and all the kind of the operational functions. All of that is working really well right now. We need to really automate it so that experience is completely seamless for that member.

I think that will get to ultimately what you and I have talked about over the years, where that consumer platform, the Medicare Advantage consumer platform, is going to be able to take a lot of different kind of revenue models. Given our performance as a company, we're our best referenceable customer. We want to keep that going, and then we can talk about what opportunities exist on the services side.

John Ransom (Managing Director)

Thanks so much.

John Kao (Founder and Ceo)

Thanks, John.

Operator (participant)

Thank you. Our next question comes from the line of Whitmail with Learning Partners.

Whit Mayo (Senior Managing Director of Healthcare Providers and Managed Care)

Hey, thanks. Best of luck, Thomas. My first question is, given the membership growth this year and some of the peer commentary on RAF issues, can you talk about the visibility that you guys have on RAF on new members with the January premium payment from CMS? Maybe just elaborate more on the process that you have on estimating RAF on new members. Thanks.

John Kao (Founder and Ceo)

Yeah, happy to. I appreciate it, Whit. I'm not going anywhere overnight, but I appreciate the kind words. In terms of the new member revenue PMPMs, that is one of the advantages of being the health plan, is we get visibility to our paid revenue PMPM on new members the first month of the year in January. From a revenue recognition standpoint, we actually book our revenue on the new members consistent with what we're being paid up until we see the mid-year sweeps. That creates, I think, a really conservative posture heading into the sweeps and ensures that we don't find ourselves surprised by having overestimated from what we might see on new members, which, again, the revenue PMPM for this year, based on last year's codes and activities, we don't have control over.

I think we've historically taken a conservative approach on that, and we feel very comfortable with our visibility on the new member revenue PMPMs.

Whit Mayo (Senior Managing Director of Healthcare Providers and Managed Care)

Got it. My second question or follow-up is just on STARS, John. Any new initiatives that have crystallized into 2025 for CAHPS or anything that you care to share? Thanks.

John Kao (Founder and Ceo)

Yeah. No, it's been across the board emphasis on pretty much everything to make sure that the regulatory changes with respect to CAHPS is not something that we're just relying on, nor is just the health equity index something we're relying on. Just core operations, making sure that we are performance managing our IPAs where they understand how we can improve our CAHPS scores. In certain situations where the IPA is not doing the kind of job that we need, we are doing it. I think that's the main one. I think our Part D, our admin are all on track. We feel good about that. It's visibility that we have on a daily basis. I feel very good about where we are. I can't comment on the litigation with CMS. I'm not going to comment on that as it relates to 2026 payment.

I will say that our dates of service in 2024 and our ratings in 2025 are on track.

Whit Mayo (Senior Managing Director of Healthcare Providers and Managed Care)

Okay. Thanks.

Operator (participant)

Thank you. Our next question comes from the line of Jessica Tassin with Piper Sandler.

Jessica Tassan (VP and Senior Research Analyst)

Hi, guys. Thanks so much for taking the question. Congrats on the quarter. Also, Thomas, congrats and thanks for all the help last couple of years. I think just I'm interested to know how are you all expecting the competitive landscape in California specifically to change in 2026, just as competitors try to capitalize on the rate announcement. I think we saw a press release from SCAN and Sutter a few weeks back. Just interested to know what sorts of investments you might make in the fourth quarter to kind of brace the salesforce for an increasingly competitive landscape.

John Kao (Founder and Ceo)

Yeah. No. I mean, I think the key thing to think about is that given the rate notice, I think that's going to advantage everybody relative to the advance notice, obviously. The relative advantages for both, I underscore both, STARS and V28, I think is something that we still feel very strongly in. The Sutter organization is a friend of ours. We like each other. We are one of two really plans they intend to work with in the coming year. We feel good about that. Does it create some complexities? Yeah, it does. I'm not really particularly worried about it. I think there are some other smaller players that are in the marketplace that we have to be mindful of as it relates to kind of our short-term 2026 considerations.

I would be surprised if they had long-term, if they were a long-term threat to us. I do not particularly see that. I think from what we see, what they are doing is not sustainable. I think, again, we have seen that come and go over the last several years. I think there is going to be a lot of opportunity given the stars declinations. I would think people are going to be, certainly the larger players that we have all read about, are going to be more margin expansion focused than anything else. I feel good. Like I mentioned, we are right in the middle of the bids. I am not going to comment on that part of it. I do not think we have been in a stronger position than we are right now, is what I would say heading into 2026 relative to everybody else.

Remember, the V28 thing is a big deal. It's a big deal. Many of our competitors are reliant upon global cap providers who are experiencing meaningful declination because of V28. That's going to impact our competitors' revenues.

Jessica Tassan (VP and Senior Research Analyst)

That's really helpful. I guess that actually is my next question. I'm interested to know if you guys are getting any feedback or requests from your capitated providers for increased either MLR concessions or just Part D carve-outs, just any changes in those contracts. I guess the way that we look at it, at least your capitated provider MLRs are considerably higher than your at-risk tenured member MLRs. At what point do you start to kind of reassume that risk from those capitated providers to capture the margin that is effectively getting lost? Thanks.

Thomas Freeman (CFO)

Hey, Jess, Thomas here. I think in terms of your question on how we contract with our global cap IPAs and providers, I'd say what we do is maybe a little bit different than a few others. Our global cap IPAs, more often than not, do not take any risk on Part D, nor do they have any risk on supplemental benefits. What that does is it creates a more, I think, aligned relationship versus what you've heard about in other situations nationally where providers have felt like they're getting dumped benefit adjustments or increases on them without any seat at the table to make any kind of choices around those decisions. From our perspective, that is not something we've experienced in terms of providers coming back to the table. I think we're in a pretty good place from that perspective.

We are very aligned with them moving forward. I think as we think about the overall book of business, we do want to continue to grow the at-risk book of business where we manage institutional costs. That does allow us to share in the profits with the providers as we drive down those MBRs for those more tenured members. At the same time, we have a number of good global cap partners, and we will continue to work with those so long as we are hitting all of our marks on things like STARS performance, retention, data exchange, and a series of other things that are really important to us as far as ensuring that we have long-term durability to our contracts.

Jessica Tassan (VP and Senior Research Analyst)

Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Joanna Goodjoke with Bank of America.

Joanna Gajuk (Equity Research Analyst)

Hi. Thanks so much for taking the question. If I may, I guess, a couple of related questions around the reimbursement, right? We have been talking about how the final rate notice was better. First part of the question is, do you expect these rates to keep getting better as CMS tries to kind of catch up with these higher trend levels the last few years? On the other hand, is there any indication or the sense you're getting in D.C. for any appetite for additional risk adjustment model changes maybe? I guess if that was to happen, right, the question is, how would you think this would impact your company? Would this be a headwind or kind of a repeat of the most recent experience and other kind of opportunity to get more market share? Thank you.

John Kao (Founder and Ceo)

That's a great question. That's John. I just remind you that we built the business with specifically the ability to thrive in either an increasing or decreasing rate environment. As we've demonstrated over the last couple of years, if rates are compressed, which they obviously have been in really the last four years, but in particular, the last couple of years would be 2028, and the stars tightening, we have thrived. It's because we have focused on having the best quality at the lowest cost. When you're the low-cost producer of quality products, you have an advantage when it's tightened up. When rates go up, which they will in 2026, our relative advantages are going to still be intact. We think that there's an opportunity for margin expansion in the context of all boats rise and a rising tide.

Now, to some of the previous questions that others have asked, I think that the competitive dynamic is going to play to our favor just because of what you've been reading with the bigger folks. Smaller folks, it's hard to say what they're going to do. Again, I think given our position, we feel very good about where we are.

Operator (participant)

Thank you. Our next question comes from the line of Matthew Gilmore with KeyBank.

Matthew Gillmor (Analyst)

Hey, thanks for the question. Good luck to Thomas and Jim. I just wanted to follow up on some of the utilization comments. We appreciate the visibility you all provide to the 80K metric. We understand the mixed dynamics at play this quarter. Are you able to look at that on a same-store, same-member basis? Would it be fair to assume that it was sort of flat to down if you normalized for that membership mixed dynamic?

Thomas Freeman (CFO)

Yeah, it would have been roughly flat.

Matthew Gillmor (Analyst)

Thomas, any additional comments on utilization in terms of other categories, whether that's outpatient or however else you want to slice and dice it? Anything else kind of to call out in terms of how things are trending relative to expectations?

Thomas Freeman (CFO)

Yeah, happy to. I think a couple of thoughts. First is one of the reasons we like the inpatient KPI is I think it's a very strong leading indicator for other categories of spend such as skilled nursing, home health, visits per 1,000, things that are kind of preceding the inpatient admission and that then typically occur post-discharge. When you think about the inpatient KPI stability and in the first quarter outperformance versus expectations, I think we would expect to see similar types of performance along some of those key categories. I think from an overall outpatient standpoint, we continue to feel good about the trends there. I know that was a big topic over the last few years, whereas we didn't quite fully see the increase some of the others saw.

I would say particularly with respect to 2024, where we now have pretty much full visibility to last year's claims experience, that was one area that actually ran below expectations in terms of our anticipated year-over-year trend in 2024. I think we're continuing to feel good about that through the first quarter. I would just add that from a pharmacy standpoint, we have seen, similar to others, an increase in some of the pharmacy spend during the first quarter. Generally aligned with our expectations, but as we've discussed in the past, I think we took a fairly conservative posture on how we thought that would unfold during 2025. While it is within the overall realm of expectations, we have seen a pretty sizable increase year-over-year. Similar to others, thematically, we've seen that with some of the specialty drugs, some of the non-low-income subsidy populations.

I think we feel good about our ability to kind of forecast from here what the rest of the year will look like based on the first quarter results.

Matthew Gillmor (Analyst)

Got it. Thanks very much.

Operator (participant)

Thank you. Our next question comes from the line of Jonathan Young with UBS.

Jonathan Yong (Analyst)

Hey, thanks for taking the question. I guess just going back to kind of the Part D portion of the business, are you seeing any behavior changes that are kind of becoming evident right now? I know it's within the realm of your expectations, but is anything changing from your perspective? How much visibility do you have right now into kind of where it's heading towards as we progress throughout the year?

Thomas Freeman (CFO)

Yeah. Hey, Jonathan, Thomas here. I think to your point, we have seen, I think, a little bit of uptick in, like I said, the non-low-income subsidy population, which is where, if any, there would be some of the behavioral changes that might be caused by the changes in 2025 Part D related to the Inflation Reduction Act. I think we've seen a little bit of that similar to others. At the same time, though, like I said, one of the great things about the Part D program is you get real-time claims visibility. As we sit here through the end of April, and given that our first quarter generally ran within expectations, I think we feel pretty good about our full-year visibility.

More to come as we get through the second quarter, but I would say at this point, it's definitely a good place for us in terms of where we thought we would be when we started the year back in January.

Jonathan Yong (Analyst)

Okay. The CMS and the administration has talked about trying to limit or reduce the use of prior authorization. They obviously haven't introduced anything yet. How are you kind of thinking about this and what it may mean for you and kind of the industry at large? Thanks.

Thomas Freeman (CFO)

I think from our perspective, one of the mottos of this company is more care, not less care. The way we look at it is when we look at our auth and denial rates, we historically have been considerably below the national averages for Medicare Advantage. Our whole theory is built upon this idea that if you provide the right care to the right people, you're going to have the right population engage in order to control the vast majority of your costs. There's going to be a much, much larger portion of the population that is going to drive a much lower portion of the overall spend. Really ensuring that they're getting directed to the right high-quality networks is our goal. From our standpoint, it's not something that keeps us up at night.

I would say from a competitive perspective, it's one of our potential tailwinds heading into the years ahead.

Jonathan Yong (Analyst)

Thanks.

Operator (participant)

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

Ryan Langston (Director and Senior Analyst of Healthcare Research)

Great. Thanks. Welcome, Jim and Thomas. Just thanks. Always enjoyed our interactions through the year. Appreciate it. I know you called out the $6 million favorable EBITDA release, but the total PYD looked really strong kind of just versus historical first quarters. Can you give us a sense on what maybe drove that strength versus the historicals?

Thomas Freeman (CFO)

Yeah. I think you're maybe referring to the difference in the footnote on our IVNR release versus what is as in the table around the prior year. That dynamic is really driven more so by the margin and LAE pad that we apply against our IVNR reserves. The way to think about that is that's roughly an extra 7% that we add to our reserves that is intended to ensure that in a worst-case scenario, we have adequate reserves for runout purposes. From our perspective, that 7% is something that we never anticipate really needing to use. It's intended to be cushioned and keep us compliant with the states amongst other things. I think that's really driving the difference between the tables. I don't look at the $13 million-$14 million in the footnote table as the driver in the quarter.

I really focus on the $6 million you mentioned in the footnote. I would note that on that $6 million, again, not all of that falls to the bottom line. A portion of that we do share back with providers in the form of our risk pools and profit shares. I would say it was a part of the first quarter outperformance, but definitely not one of the larger drivers.

Ryan Langston (Director and Senior Analyst of Healthcare Research)

Got it. Obviously, the 2026 rate over 5% is good. Is there a way, I think historically you've given us the weighted average rate. I think it was about 5% for 2025. Can you give us that for 2026 for Alignment versus the just sort of overall rate?

Thomas Freeman (CFO)

Yeah. I think we tend to focus first and foremost on sort of the top line of the table that CMS puts out, the effective growth rate as a starting point for us. Nationally, it looks to be about 9% for 2026. I think our weighted average across our markets is approximately 8%. That would compare to last year, yeah, you're right, at about 5% for the overall company. I think as John was saying, that provides us a lot of kind of flexibility as we think through both our growth and margin goals for 2026.

Ryan Langston (Director and Senior Analyst of Healthcare Research)

All right. Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Andrew Mock with Barclays.

Andrew Mok (Director)

Hi. Good evening. Just wanted to echo congratulations and best wishes to Thomas in your new role. I wanted to clarify the Part D seasonality. I think the initial expectation was that Part D MLR would improve throughout the year. Now it sounds like Part D MLR will be increasing. Can you help us understand what you're seeing on Part D trends that would flip the cost curve? Because it doesn't sound like one Q performance was that off plan. Thanks.

Thomas Freeman (CFO)

Yeah. Happy to take that one. I think what we would expect is that the second and third quarters do still continue to improve in terms of MBR versus the first quarter. I think on the fourth quarter, it's possible that there could be an uptick on Part D specifically in the fourth quarter. I think big picture, we still anticipate the first half MBR to be higher than the second half on Part D.

Andrew Mok (Director)

Great. Maybe just to follow up on that, Thomas, I think you made a comment that Part D PMPMs would increase throughout the year. Can you help us understand what would cause that? Thanks.

Thomas Freeman (CFO)

You mean from a medical expense standpoint?

Andrew Mok (Director)

I thought it was on a revenue standpoint, but if it's on a medical expense standpoint, maybe that would clarify.

Thomas Freeman (CFO)

No, that makes perfect sense. I understand the question now. Yeah. From a revenue standpoint, it has to do with both the sweep timing, where I think we'll likely see some revenue PMPM impact from the sweeps as we get to the end of the second quarter. It also has to do with the way we book our risk corridor revenue, where today we are in a payable position and booking contra revenue. Though we would anticipate that to reverse over the course of the year and actually start contributing to overall revenue PMPM in a positive fashion.

Andrew Mok (Director)

Got it. Understood. Thank you.

Operator (participant)

Thank you. Ladies and gentlemen, thank you for participating. This does conclude today's program, and you may now disconnect.