Alignment Healthcare - Q4 2025

Transcript

Operator (participant)

Good afternoon, welcome to Alignment Healthcare Fourth Quarter 2025 Earnings Conference Call and Webcast. All participants will be in a listen-only mode. After instructions after today's presentation, there will be opportunity to ask questions. Operator instructions, please note that this event is being recorded. Leading today's call is John Kao, Founder and CEO, 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 31st, 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 the 31st, 2025.

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

John Kao (Founder and CEO)

Hello, 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 -$9 million to -$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 AVA 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 of the V28 risk model, a redesign of the Part D program, and broad utilization pressures across the Medicare Advantage industry. 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 costs 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 plan in North Carolina for the third consecutive year, two 5-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 aligned 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 plan switchers. By taking a balanced approach to growth and profitability this year, we remain mindful of the impact of the final phase-in of V28, 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-$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 advanced 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. Furthermore, we will continue to have stars 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 two 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?

Jim Head (CFO)

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 thousand in the low 140s 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 continued 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-$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-$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-$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 D direct subsidy. This is partially offset by the impact of the final phase-in of V28 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 one 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-$163 million, consistent with our preliminary profitability comments provided earlier this year.

Turning to our seasonality expectations, we expect a 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 (participant)

Thank you. Ladies and gentlemen, to ask the question, please press star one one on your telephone, then wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Michael Ha with Baird. Your line is open.

Michael Ha (Senior Research Analyst)

Hi. Thank you. I want to frame this question by 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. All this happened in a flat rate environment while trends nationally rose to high single digits. On the heels of all of this, and with potential again for another flat rate year in 2027, my question is, I guess simply put, what would prevent Alignment in 2027 from having a rerun of what you just accomplished in 2024 or 2025? Because it looks very similar, the setup into 2027.

John Kao (Founder and CEO)

Well, Michael, this is John. You should probably expect my response to be, we feel very comfortable with a 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, you know? 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'll be fine. I think what I'm hearing in terms of the amount of potential increase is still gonna be pretty short of what we think trend is, or at least what the sector thinks trend is. I think that will be, you know, something favorable to us. If rates don't go up, I think it could be more favorable to us.

I think we're gonna 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 wanna get ahead of our skis in terms of growth. We don't wanna talk about bids. I do expect, and I said this to people beforehand, I think it's still gonna be one or two years of, you know, kind of people, you know, finding the right model to dig out of this kind of post V28 world. I think that there are some, you know, folks that grew a lot this past year, you know, for AEP, and, you know, we chose not to grow at the level some of these other folks grew. We didn't just grow to get growth.

We wanted durable provider relationships. We wanted to make sure our infrastructure would, you know, be able to sustain, you know, the level of stars that we've been able to produce. The other thing that we're doing is we, you know, we know how good we're doing in 2025, and I feel very strongly about 2026 as well. We're taking the opportunity. We're not complacent. We're getting, you know, 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 three or four years.

You know, getting to a number of growth that will be really meaningful for everybody. That's kinda how we're thinking about it. Michael, I mean, you called it two years ago. I'm not gonna give you the benefit of calling it again quite yet.

Michael Ha (Senior Research Analyst)

Got it. Helpful. Thank you so much, John. Okay. My next question, the implied MLR for 2026, Jim, I think you mentioned midpoint 87.7%.

Jim Head (CFO)

Yep.

Michael Ha (Senior Research Analyst)

If I were to strip out that sweep payment from 2025, I'm seeing maybe 10 basis points of MLR improvement year to year. At first glance, feels a bit conservative since, like, clearly prior years you've grown a lot more and done a lot more MLR improvement. I'm just trying to understand the assumptions embedded in MLR a little bit better. I know you mentioned LIS, C-SNP, D-SNP member mix. How much does that year 1 member mix impact your year-to-year MLR? What are you assuming on trend in 2026 versus 2025? Just a general sense on the various components. Thank you.

Jim Head (CFO)

Yeah. Thanks, Michael. I guess a couple things. Just in terms of the inputs to the 2026 guide, I mean, it's kind of three core inputs that we feel pretty good about. I want to start with that. Our 2025 experience, how we managed cost and delivered throughout the year, new members delivering, et cetera, you know, that gives us a lot of confidence as we go into the year. We also bid in mid-2025 for 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 what was gonna happen, happened. Finally, John's point, this is very disciplined growth. 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 with the geographies and the networks that we like. That's the setup. Now, as it pertains to the MBR, you're right. It's about a 10% kind of apples to apples improvement because for 10 basis points, I should say, apples to apples improvement because we're stripping out the impact of the sweeps last year. I would say 3 drivers, Michael, that, you know, kind of our inputs to why it wouldn't be better.

Number one, we're still going through the third phase of V28. Okay. We've navigated that very, very nicely, as you mentioned. That's, you know, that does, you know, it's not a tailwind, it's a, it's a headwind. The new member mix was disproportionately represented by dual eligible, C-SNP eligible, and LIS members, which is our sweet spot. They come with a little higher MBR in the beginning. That is a little bit of a headwind. The trade-off is we know how to manage these members really well, and there's a lot of long-term opportunity there. We consciously made that choice, and it was a big portion of our AEP. As I mentioned before, we didn't have a suite.

I think the V28 and the new members coming in at that, I'll call it, you know, heavier mix in terms of special needs, et cetera, is driving that. 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 D in 2025 and, you know, on our promises. We have a fair degree of visibility as we go into 2026. I'd say that was another input that was part of the overall mix.

Michael Ha (Senior Research Analyst)

Perfect. Thank you so much.

Operator (participant)

Thank you. Our next question comes from the line of John Stansel with JP Morgan. Your line is open.

John Stansel (Equity Research VP)

Great. Thank you for taking the question. 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? Maybe looking at the 2027 commentary a little bit, I think there's been an expectation about potentially expanding into new states in 2027. Is that indexed at all to needing a better rate in 2027, or is that something that you think you can do in an all-weather environment?

John Kao (Founder and CEO)

No. Hey, John. It's John. Yeah. With respect to distribution, you know, we're going to, and I think that comment was specifically related to some of the ex-California markets, including some of the potential new market entry strategies that we're gonna be taking into existing states, new markets in existing states, and what we're doing with potentially getting into another state. So we're at a size now in pretty much each of our markets that we're really kind of a player and relevant. So I think we've got deeper relationships with brokers and providers. A lot of the success that we've been able to achieve in California is starting to take root in these new markets. That really does start with the providers.

What we've learned also is the brokers are really pretty important in that discussion. You put that against a 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, you know, for the last year or two and maybe for the next year or two. I think that creates an opportunity for us. We're just very intentional about that. With respect to new markets, we are seriously thinking about that. We're not quite where I wanna be quite yet with some of the provider engagement conversations, but I'm pretty comfortable we're gonna be able to get into a new state. The rates, I just don't think that matters to us.

I think it's gonna be whatever it is, it is. I think we're gonna do well in any environment. I really mean that. Again, a lot of this is choosing the right provider partners, which I think we have, in these two distinct new markets.

John Stansel (Equity Research VP)

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

John Kao (Founder and CEO)

TBD. I mean, we submitted our comments, like everybody else yesterday. You know, I think from a policy point of view, you know, 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 gonna be okay either way. 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 and not really getting linked to any kind of aligned network. You know, 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, you know, a suboptimal star rating plan, who's more of a C-SNP plan. I think they should really be, you know, have choice, get the right benefits, get the right network, and just to get the right quality they deserve. Other than that, you know, there's other moving parts. I've been asked, you know, what we think about risk adjustment going forward. You know, we do support documentation of the HRAs.

We've always supported that. 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. As I mentioned earlier, I do think there's gonna be some exposure on rates, you know? You know, as the previous Mike said before, I mean, I think we stand to be a beneficiary of that. I think they're gonna do the right thing on rates. That's what I actually think when the final comes out.

Operator (participant)

Thank you. Please stand by for our next question. Our next question comes from the line of Matthew Gillmor with KeyBanc. Your line is open.

Matthew Gillmor (Director and Equity Research Analyst)

Hey, thanks for the question. I wanted 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? 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.

Jim Head (CFO)

Right. Well, I'll start with, you know, how we finished the year. We had an expectation, if you remember in 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. 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 ADK could tick up a little bit. That is not because the trend is wrong on an apples for apples basis, it's because of mix. 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.

It might tick up a little bit in the over the course of the year. As you're aware, first quarter is usually a little bit higher. That's just a seasonal issue.

Matthew Gillmor (Director and Equity Research Analyst)

Great. Very helpful. You know, maybe asking about AI investments. You know, 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 may be directed and how that may benefit the business over time. Thanks.

John Kao (Founder and CEO)

Yeah. Hey, Matt, it's John. Yeah, it's a great question. you know, we've got, you know, 30 some odd different potential use cases where we could deploy agentic AI. Having the use cases is not our issue. What we're actually doing is to require two foundational actions be at a level where we're satisfied. The first one is really, as part of this kind of, you know, revalidation of everything. It starts with a unified data architecture. It starts with AVA. 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 gonna be just that much more efficient scaling.

What that really translates into is we're gonna get to cash flow break even faster than we would have thought before. We're gonna 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. What I mean by that is when you basically double in size every two years, you're bringing in a lot of people, a lot of new people that have to get trained. So the training opportunity is to make sure that all of these different workflows are understood by everybody. Then within the end-to-end workflows, you've got micro workflows. Do you really know what's happening? Then ultimately is the cross-functional workflow processes.

When you Again, those are very sophisticated workflows that factor in our clinical work processes, our provider contracting work processes. Which one of these providers are we delegating? Are we not delegating? We have our directly contracted networks. All of that is being evaluated right now. Once I get those done, which we expect to have done mid-year this year, you're going to see us start deploying these use cases for agentic AI. The other thing we're doing is we're kind of revisiting the initial stratification model within AVA. I think there's going to be tools that we have. Sorry about that. I went on mute for a second.

I was going to say, we talk about AVA, and we're looking at using the new tools to make the stratification model even better for our Care Anywhere members. That's the 10% of the population we think that account for 78% of the spend. You're also going to see us have use cases around administrative improvements. I think member service is going to be one 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, you know, we're going to be able to use AI and look at the raw 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 in care delivery. We're going to still rely on our doctors and nurses to do that. Hope that helps.

Matthew Gillmor (Director and Equity Research Analyst)

It does. Thank you.

John Kao (Founder and CEO)

Yeah.

Operator (participant)

Thank you. Our next question comes from the line of Scott Fidel with Goldman Sachs. Your line is open.

Sam Becker (Goldman Sachs)

Hi, this is Sam on for Scott Fidel. I was just wondering if you could talk about, are you concerned about the MA industry that may have lost too much bipartisan support in Washington? What can the industry do to improve its standing and position itself better to alleviate the ongoing regulatory pressures on the sector?

John Kao (Founder and CEO)

I think it's to get back to what CMS originally intended MA to be. I think it's All the actions that I see going on are exactly consistent with that. Meaning, you know, and I've spoken about this, you know, they want a program that creates value to the end beneficiary. 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. This is what I always say: You got to have high quality and low cost. In that environment, the folks that can create the highest degree of value ought to be positioned to win.

I think there's been, you know, some financial engineering away from that over the past several years, where there's an emphasis on coding, global capitation, you know, prior op, all of which I don't think are going to be sustainable going forward. I think if people just do what CMS intended them to do, they're going to be in a good place, you know? I think the, you know, the benefit differential of MA relative to traditional Medicare, I think is going to cause MA to continue to grow, not go down. That's what I think. I think for the last 40 years, we go through these different, you know, phases of whether it's the BBA in the 90s and the ACA in the early 2000s.

I mean, as you go through those peaks and valleys, MA has always thrived. It has always come through. I would be very surprised if that trend changed, put it that way.

Operator (participant)

Thank you. Our next question comes from the line of Craig Jones with Bank of America. Your line is open.

Craig Jones (Healthcare Analyst)

Great. Thank you. I wanted to follow up on the what you said on the final rate notice for 2027. 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 advance rate notice, thinks that growth rate for 2027 should be closer to 9%-10% versus the 5% in the advance notice. Where do you think that growth rate should be? What do you think, you know, CMS will actually end up doing when you say, "Do the right thing"? Thank you.

John Kao (Founder and CEO)

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

That's really how I was thinking about it. 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. There was a, you know, it was a material takeaway. You know, I think it'll be something that'll be reasonable. Maybe I should say I'm hoping it'll be something reasonable, because if it's not, I think you're gonna get a lot of people that are gonna degrade benefits even more, and it is a real issue. We saw this during BBA, you know, 30 years ago.

Operator (participant)

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

Ryan Langston (Director & Senior Analyst of Healthcare Research)

Thanks. Good afternoon. John, I wanna make sure I caught 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?

John Kao (Founder and CEO)

Yeah, for us. Yeah, we don't, we don't rely on that much at all, is really the message. We don't feel exposed by that change at all. Yeah.

Ryan Langston (Director & Senior Analyst of Healthcare Research)

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

John Kao (Founder and CEO)

Not sure I understood that.

Jim Head (CFO)

I don't think.

Ryan Langston (Director & Senior Analyst of Healthcare Research)

Linked and unlinked.

Jim Head (CFO)

Yeah.

Ryan, I just don't think we're gonna get precise about that because it's so immaterial.

Ryan Langston (Director & Senior Analyst of Healthcare Research)

Got it.

Jim Head (CFO)

It's a small number. It's a small number.

Ryan Langston (Director & Senior Analyst of Healthcare Research)

Okay. I guess just building maybe on John's question, and John, your remarks about sort of deepening broker relationships. A direct noncompetitor to 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? Maybe just more broadly, how do you believe the payer-broker relationship will or could evolve sort of over time? Thanks.

John Kao (Founder and CEO)

Yeah, I mean, we have been consistent about this. You know, we value our broker partners. We think they do a good job. We think they're generally, you know, looking out after the best interest of the beneficiary, and are fair. What I do think is gonna be interesting is how CMS tries to position itself as a bit of a, call it a, if not the actual agent of, you know, a little bit more of the FMO. I think that'll be interesting. 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 gonna be interesting, one to watch. Not sure it's gonna be implemented anytime soon, but I think that's on their radar.

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

Ryan Langston (Director & Senior Analyst of Healthcare Research)

Appreciate it. Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Whit Mayo with Leerink Partners. Your line is open.

Whit Mayo (Senior Managing Director and Senior Research Analyst in Healthcare Providers and Managed Care)

Hey, 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? Maybe just elaborate on the potential opportunity in the coordination-only duals contract in Nevada. Thanks.

Jim Head (CFO)

Yeah. I'll take the growth issue. About 50% of our AEP growth was in the LIS, D-SNPs, and C-SNP. That was both in California, but also outside of California. As you know, we have strong Cal outside California growth. That's a real healthy portfolio for us. You know, we think we can manage that pretty well over time and with a lot of embedded value. John, I think there's a second half of the question. Maybe I'll give it over to you.

John Kao (Founder and CEO)

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

Whit Mayo (Senior Managing Director and Senior Research Analyst in Healthcare Providers and Managed Care)

Okay. 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 twos and threes in some of those measures.

John Kao (Founder and CEO)

Yeah, we've looked at it. I think it's net neutral, is kind of the bottom line. You know, I think it does get implemented. It's probably not gonna actually take root, you know, until 2027 anyways, which means it'll impact 2029, maybe 2030, you know, 2029, 2030. Net, I think as of now, we think it's effectively a net neutral. I do think CMS is gonna try to, you know, simplify that whole Stars program. So we actually think that's actually a pretty good thing.

Whit Mayo (Senior Managing Director and Senior Research Analyst in Healthcare Providers and Managed Care)

Thanks, guys.

John Kao (Founder and CEO)

Yep.

Operator (participant)

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

Jessica Tassan (Vice President and Senior Research Analyst in Healthcare IT and Delivery Sector)

Hi, guys. Thanks for taking the question. Can you maybe give us a little more detail on the slope of MBR over the year? I think you mentioned typical Part C seasonality and then flat MBR, flattish, slope in Part D. Just trying to understand, excluding the sweep in 2025, will calendar 2026 follow kind of a similar seasonal cadence?

Jim Head (CFO)

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

Jessica Tassan (Vice President and Senior Research Analyst in Healthcare IT and Delivery Sector)

Okay, great. Thank you. My next one is, can you all discuss retention during AEP and then on the lower, projected intra-year growth in 2026 from 1Q to 4Q? Is that a matter of lower growth adds or increased intra-year, churn or switching? Just trying to get a sense of basically year one versus tenured membership in the mix of year one versus tenured in 2026.

Jim Head (CFO)

Yeah, why don't I try the first. The second question first, which is the intra-year. We can talk about retention. You know, as we come into this year, there was just a lot more movement. Disruption is probably too strong a word because we weren't picking up bad stuff, but there was just a lot of movement. We are trying to assess whether we picked up most of that movement in AEP or whether it will sustain itself throughout the year. 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, you know, feeling fine, but we're just not ready to kind of bank it all the way through December.

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, you know, kind of very nice... We had both sales growth, but we also had retention. That's wonderful for us because of our ability to mature our cohorts and get, you know, better MBR. We're not churning them. We're holding on to the loyal members. That's turned out to be a nice little boost for us.

Jessica Tassan (Vice President and Senior Research Analyst in Healthcare IT and Delivery Sector)

Great. Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Andrew Mok with Barclays. Your line is open.

Tiffany Yuan (Barclays)

Hi, this is Tiffany Yuan on for Andrew. I just wanted to follow up on the advance 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?

John Kao (Founder and CEO)

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 RAF scores are, you know, like, what are we, Jim, 1.08 or something like that? I mean, it's just.

Jim Head (CFO)

About 1.1, yes.

John Kao (Founder and CEO)

It's below 1.1. Even with the final phase in of V28, you know, you still got people coming down from 1.5, 1.6, 2.0 in certain markets, you know, down kind of 20 some odd percent. I just I think we've never relied on it other than to make sure that we're just very accurate and compliant on the coding part. Have focused on the cost management side and the Star side, you know. I think we're gonna be advantaged actually if there's any more tweaks to that.

Tiffany Yuan (Barclays)

Okay, got it. I just wanted to follow up on the MLR seasonality. I appreciate the comments around sort of the blended seasonality. Could you remind us how your Part D MLR specifically progressed through the quarters in 2025? Is your expected 2026 slope consistent with that 2025 experience?

Jim Head (CFO)

Yeah, it will be slightly different in 2026 than 2025, but which is to say that the profitability of Part D is gonna be a little bit more weighted to the first half. This is all in the margins. I would kind of say at a high level, consistent, but slightly more weighted to the first half. That's just really kind of the construct of, the risk corridors and how we accrue, for contra revenue, when we're outside the risk quarter, et cetera. I would say pretty similar to 2025, a little bit flatter.

Tiffany Yuan (Barclays)

Okay, thank you.

Operator (participant)

Thank you. Our next question comes from the line of Jonathan Yong with UBS. Your line is open.

Jonathan Yong (Executive Director and Senior Equity Research Analyst)

Hey, thanks for taking the question. John, I think you mentioned that you're still in some provider engagement or negotiations in the new state. I guess what in your mind is currently the hangup there? Typically, where are you in terms of when you're thinking about entering a new state, would you normally be completed at this time, or would it be a little bit further down the road where you would have that completed?

John Kao (Founder and CEO)

It depends. It's a good question, Jonathan. It depends. Really, we're looking for, you know, full, you know, provider durability, full provider engagement. I think we're gonna get there. It's just again, we're 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. You know, 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. That's really what I was focusing on. I think, we've got great, you know, 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. I would like to have a few more. That's all.

Jonathan Yong (Executive Director and Senior Equity Research Analyst)

Gotcha. Okay. Just going back to the rate update for 2027. 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. It sounded like it was fine for you. I believe later on, you said that it is running below trend in terms of what it is.

Jim Head (CFO)

No, no.

Jonathan Yong (Executive Director and Senior Equity Research Analyst)

I just want your clarity on that.

John Kao (Founder and CEO)

Yeah. The 0.9% net, you know, 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, I think that CMS has certainly shared with us that it was really just an actuarial reality when they used different data for more recent dates relative to what was used in the past. Their intention was not, you know, kind of programmatic policy issue, but it was just like the data was different, and that's what led to a little bit lower than expected raw traditional fee-for-service trend. In addition, you deducted these skin substitutes as an offset to that and ergo, you kinda get this 0.9%, which is a big problem.

If that maintains for the rest of the industry, people are gonna, you know, be rationalizing benefits again. My point was, I heard somebody say, you know, 9%-10% from one of our competitors. I'm just not sure I've seen that number. 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 let's say a portion is actually used as an offset and then is phased in over time, I think you could see kind of a, you know, closer to what the other analysts was talking about, 5%.

You know, I have heard a lot of people talk about 200 to 300 basis points increase, kinda getting 0.9 to, you know, increase to 200, 300 basis points, which gets you to, you know, whatever, 3%-4%, 5% increase potentially. 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, low-cost producer. We're not dependent on, you know, kind of an external entity to do our medical management. That's something that we're actually very good at.

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. I just think either way, we're gonna be in a really good place. From an industry perspective, I hope they're right, actually, that, you know, that you're gonna get a rate increase of 9%-10%. Not sure that's gonna happen.

Jonathan Yong (Executive Director and Senior Equity Research Analyst)

Yep. Okay. Great. Thank you.

John Kao (Founder and CEO)

You bet.

Operator (participant)

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

John Ransom (Managing Director in Equity Research)

Hey, good evening. Just thinking about bending the trend with AVA. You know, 1.0 was, I think, pop health 1.0 was CHF, COPD, type 2 diabetes. What's If it's gonna become more about bending the trend, what's kinda 2.0 in terms of deploying your assets to do that?

John Kao (Founder and CEO)

Really good question.

John Ransom (Managing Director in Equity Research)

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

John Kao (Founder and CEO)

No. It's your questions are always so, like, advanced. No, they really are.

John Ransom (Managing Director in Equity Research)

For sure.

John Kao (Founder and CEO)

No, no. I think, I think two things. It's actually a serious answer. I think that as good as we are, we can do a lot better operation. 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 focusing on clinical outcome measures as what you talked about was just kind of traditional, you know, chronic disease management. I think the outcomes measures is gonna be more and more important, where we demonstrate not only the efficacy of, you know, better utilization, but, you know, better clinical outcomes. I think that's gonna be something we focus on.

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. 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, you know, kind of dental coverage or vision coverage or transportation or flex card, I mean, those kinds of benefits represent about 5% of overall premium. Right?

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, these specialty company captives. I think from that, we ought to be able to save on margin because we would be paying ourselves basically. If we did a, just picking on a, whatever specialty we do, we'll be able to seed it with 300,000-ish seniors, if you know what I mean. I think that's gonna be a way where we bend the cost curve.

The other thing that we've also talked about is, you know, one of the benefits of our performance in 2025 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. I think we've done a very good job, and we're operationally 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 gonna help us and help the member and help the IPA. I think that before this past year, we hadn't done that. The full benefits of AVA and Care Anywhere weren't fully realized yet.

I'm very optimistic about that part.

John Ransom (Managing Director in Equity Research)

That was quite the answer. My second question is a very simple one. There are studies as long as your arm about, is MA a good deal for the taxpayers? If you do apples to apples, yeah, risk adjust apples to apples. Where do you I mean, you got MedPAC on one hand saying it's terrible. There's the Avalere study on the other hand saying it's a great deal. There's all over the... When you talk to people in D.C., what study do you point to? Do you think it's apples to apples, a good deal yet for the taxpayers?

John Kao (Founder and CEO)

I think it's a very good deal for the seniors.

John Ransom (Managing Director in Equity Research)

Yeah.

John Kao (Founder and CEO)

I think from a taxpayer point of view, the last study I saw is post-V28. It's pretty much apples to apples, is 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 gonna be the winners. And I said I think that CMS has been consistent with they want to grow MA. They just wanna grow it the right way. They wanna minimize the gaming, their words, not mine, and ensure program integrity. On the other hand, they wanna have an alternative with what they're referring to as, you know, traditional fee-for-service Medicare.

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

John Ransom (Managing Director in Equity Research)

Thank you.

John Kao (Founder and CEO)

You got it.

Operator (participant)

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

Raj Kumar (Research Analyst in Healthcare Services)

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

John Kao (Founder and CEO)

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

Raj Kumar (Research Analyst in Healthcare Services)

Oh.

John Kao (Founder and CEO)

Just kidding.

Raj Kumar (Research Analyst in Healthcare Services)

Yeah, sorry about that. Yeah, just maybe kind of any details around kind of new member engagement and kind of pertaining to the Care Anywhere platform and how that's trending relative to kinda this time last year with the new membership?

John Kao (Founder and CEO)

Oh, yeah. Okay, I got it. Yeah. I would say it's about the same. I think there's opportunities for us to get better. We're spending a lot of time, again, you know, taking advantage of, again, the, I think, the correct strategic decisions and operational decisions we made two years ago that are really paying off in 2024 and 2025, and I think will also pay off in 2026. That same kind of operational focus of continuous improvement, again, just not being satisfied with any of it is gonna cause us to get better and better and better. One 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%.

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

Raj Kumar (Research Analyst in Healthcare Services)

Got it. 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've matured, have you kind of seen any divergence in just overall trend or even consumer behavior and how maybe that has kinda led to operational kinda nuances in those distinct markets and maybe even kind of any catering or tweaking around AVA to kinda service those operations in the kinda most optimal manner?

John Kao (Founder and CEO)

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. 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. 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 gotta just get better at. I say that to all the providers out there. We're working on it. We're gonna get really, really good. We want five stars from all of you, just like we got five stars from the members.

Raj Kumar (Research Analyst in Healthcare Services)

Great. Thank you.

Operator (participant)

Thank you. 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.