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Operator: Good afternoon, and welcome to Alignment Healthcare’s Fourth Quarter 2022 Earnings Conference Call and Webcast. 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 SEC, including the Risk Factors section of our annual report on Form 10-K for the fiscal year ended December 31, 2022.

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 are reconciliation of historical non-GAAP financial measures can be found in the press release that is posted on the company’s website and on our Form 10-K for the fiscal year ended December 31, 2022. With that, I would now like to hand the conference over to your speaker today, John Kao, Founder and CEO. Please go ahead.

John Kao: Hello, and welcome to our fourth quarter earnings conference call. We appreciate you joining us. I’d like to start us off by congratulating our employees for a year of outstanding progress and continued dedication to serving our members. As we approach the 10-year anniversary of our founding, I’d like to take a moment to reflect our accomplishments together. We’ve grown our membership from less than 13,000 in 2014 to over 108,000 today, and have grown revenue from just $130 million to an expected $1.7 billion in 2023. During our time together, we have focused on quality in all we do. We have helped improve our members’ lives by conducting more than 300,000 face-to-face meetings between our members and our Care Anywhere teams, and completing more than 1.5 million grocery and OTC transactions.

Through our Care Anywhere model and partnership with providers, our inpatient utilization outcomes represent a combined total of nearly 24,000 fewer hospital stays relative to traditional Medicare, giving our members precious time with their family — families and loved ones. And this is just the beginning. Turning to today’s results. We are pleased to have concluded the year with strong performance, having met or exceeded our outlook range across each of our 4 key performance indicators for the eighth straight quarter. For the fourth quarter 2022, our total revenue of $362 million represent a 21% growth year-over-year. We ended the quarter with health plan membership of 98,400 members, growing 14% year-over-year. Adjusted gross profit was $38.3 million, resulting in an MBR of 89.4%.

Meanwhile, our adjusted EBITDA was negative $23.7 million. Concluding the full year total revenue of $1.434 billion grew 23%. Adjusted gross profit of $193.6 million resulted in an MBR of 86.5%, and adjusted EBITDA was a loss of $26.7 million, all well ahead of our initial and updated expectations. Last year, we conveyed expectations for our California market to be slightly adjusted EBITDA positive in 2022. We are proud to share that we exceeded those expectations and produced an MBR of 86.3%, even as we rapidly brought on new members. This result was driven by ongoing clinical engagement with our provider partners and members through our Care Anywhere clinical teams and greater operating scale. Additionally, each one of our new states ran less than 155 inpatient admissions per thousand, a powerful testament to the replicability of our care model.

This is similar to our California performance, which has ranged between 155 to 165 admissions per thousand over the past 6 years, and nearly 40% better than the traditional Medicare, which averages over 250 inpatient emissions per thousand. I’d like to share a few statistics that demonstrate how we are consistently improving outcomes across markets by deploying our Care Anywhere clinical engagement model powered by AVA Insights. Number one, members in our Care Anywhere program show a 32% net reduction in institutional claims expense 12 months after engagement versus Care Anywhere eligible members who did not enroll in the program. Number two, at-risk members across all chronic condition cohorts saw 47% lower ER visits per thousand versus traditional Medicare, including 58% reduction in ER utilization for members with 6 or more chronic conditions.

And number three, lastly, at-risk members from our year 1 cohort to our year 6-plus cohorts see a 10% improvement in MBR going from 88% to 78%. The improvement in MBR acts as the funding mechanism for our rich product benefits, and we see even greater opportunity ahead of us as we replicate these results across an increasingly large membership base. These examples and more are described in greater detail on our latest corporate presentation available on our Investor Relations page. Importantly, they showcase how our AVA-powered Care Anywhere clinical model is making a difference in members’ lives, while driving our outstanding MBR results in 2022. Furthermore, we are seeing these clinical outcomes materialize, not just in our Medicare Advantage members, but also in our fee-for-service members.

CMS recently released data for direct contracting performance year 2021 results, and despite having the second lowest weighted average benchmark PMPM in the country, we produce top quartile net savings results. These results underscore the adaptability of our clinical engagement model and our ability to effectively manage costs across Medicare populations. When we first began our DCE efforts in 2021, we balanced the strategic merits working more collaboratively with our provider partners across a broader portion of their senior panel with a cautious attitude toward the long-term economics of the program. With our ’21 and ’22 performance in mind, we have grown increasingly comfortable that we could generate a positive long-term margin on the ACO reach book of business, and most importantly, continue to leverage the program as a way to drive more strategic and integrated relationships with providers that complement our MA business.

Accordingly, we have continued to invest resources in the ACO reach program for 2023, and began the year with 7,900 aligned beneficiaries, an increase of 52% year-over-year. Turning to the results of this annual enrollment period as of January 1, 2023, we had 108,300 Medicare Advantage members, representing approximately 17% growth year-over-year. We previously shared a few highlights from the selling season, including a successful market launch in Fresno, California with 1,800 new members; improved performance in Southern California versus 2022, netting 16% growth year-over-year; a 50 basis point improvement in our California AEP voluntary disenrollment rate; and lastly, positive momentum in our states outside of California, with membership growth of more than 60% year-over-year.

These achievements were a direct result of our ability to replicate our AVA insights and Care Anywhere outcomes, giving us the confidence to create market-leading products. As we continue to target 20% top line growth in 2024, we are focused on 4 areas this year that we believe are key to driving repeatable market success in future years. First, we are doubling down on our quality and cost initiatives, which has been the foundational element of our playbook for sustained growth, both inside and outside of California. Maximizing stars outcomes as part of these efforts remains a strategic priority for us heading into 2023, as evidenced by the successful AEP in North Carolina, where we achieved our first five-star plan. Second, we are deepening relationships with our provider partners and expanding our network to create greater access for members.

We have established a significant geographic footprint and remain focused on going deep in each one of our markets. Third, we are laser-focused on creating opportunities to increase the richness of our products heading into 2024 without sacrificing MBR, including looking at how we optimize the allocation of our rebate dollars across benefits. And fourth, we are employing a broader, more balanced distribution strategy. We will continue to invest in our durable relationships with third-party brokers that have consistently delivered, while we will add internal sales agents and a greater online sales presence in areas where we need better performance. While we are pleased with the establishment of our Florida and Texas beachheads and our early traction of provider engagement, we have identified numerous targeted actions to reconfigure our growth strategies, starting with our 4-pillar playbook, with a noted emphasis on distribution.

In summary, we have identified key pillars that we believe will elevate us to the next phase of organizational growth and look forward to sharing our progresses as we move through the year. Looking ahead to 2023, I feel confident that we are positioned for continued success as we continue to make strides across each of our key value drivers. Now I’ll turn the call over to Thomas to cover the fourth quarter financial results as well as our outlook for 2023. Thomas?

Thomas Freeman: Thanks, John. I’d like to echo how proud we are of the milestones we’ve achieved not only in ’22, but throughout our journey over the past 10 years. Now turning to our year-end results. For the year ending December 2022, our health plan membership of 98,400 increased 14% year-over-year. Over the course of the year, we added approximately 5,700 net members from January 22 to December 2022, which is similar to our past experience. Our total revenue in 2022 grew 23% to $1.434 billion, Further, our adjusted gross profit of $193.6 million reflected an MBR of 86.5% for the full year, driven by a continuation of strong medical outcomes in California, while Care Anywhere and our core medical management capabilities began to produce outcomes in our new states as well.

SG&A for the year was $295.6 million. Excluding equity-based compensation expense, our SG&A was $223.1 million. Lastly, our full year adjusted EBITDA was negative $26.7 million. This reflects a margin of negative 1.9%, and represents approximately 90 basis points of improvement year-over-year, even as we grew revenue by over 20%. As we reflect on the year, we’re proud to note that we ultimately delivered a $97 million revenue beat and a $16 million adjusted EBITDA beat, both relative to the respective midpoints of our initial 2022 guidance. We aim to strike a continued balance between both our growth and profitability objectives going forward. Turning to the balance sheet. We ended the quarter with $245 million in net cash. The sequential step down in cash compared to the third quarter included the previously discussed timing impact of an early payment from CMS of approximately $117 million, which temporarily inflated the prior quarter ending balance.

This had no impact on a full year basis. Moving to our 2023 guidance. For the first quarter, we expect health plan membership to be between 109,300 and 109,500 members, revenue to be in the range of $429 million and $434 million, adjusted gross profit to be between $38 million and $41 million, and adjusted EBITDA to be in the range of a loss of $17 million to a loss of $14 million. For the full year 2023, we expect health plan membership to be between 113,000 and 115,000 members, revenue to be in the range of $1.705 billion and $1.730 billion, adjusted gross profit to be between $205 million and $217 million, and adjusted EBITDA to be in the range of a loss of $34 million to a loss of $20 million. Consistent with our long-term outlook, the midpoint of our 2023 revenue guidance represents approximately 20% growth year-over-year.

As part of our forecast, we are assuming continued growth of our health plan membership throughout 2023, comparable to our experience from January to December in prior years. Our health plan revenue per member per month forecast contemplates a few moving parts. First, our returning member revenue PMPM is increasing year-over-year, partially offset by new member growth, which on average comes in at lower PMPM. Second, we will realize the full adverse impact of the return of sequestration, which began phasing in during the second quarter last year, and represents a roughly 75 basis point headwind to revenue PMPMs in 2023 versus full year results in 2022. Additionally, our ACO reach membership is increasing year-over-year, and we expect total program revenue of approximately $130 million, which represents over 150% growth compared to 2022 DCE revenue.

While we don’t include ACO reach beneficiaries in our health plan membership count guidance, the associated benchmark revenue is recognized on our income statement and is included in our guidance. Moving to MBR utilization. We’d like to note a few factors that impact the year-over-year comparison. First, our previously mentioned growth in ACO reach membership is expected to weigh on our consolidated MBR in 2023. At this time, we are forecasting the program to run close to 100% in 2023, presenting a drag on consolidated MBR of roughly 60 basis points year-over-year, but also creating meaningful operating leverage across our SG&A spend. We remain confident in medical improvement over time as we deploy our AVA and Care Anywhere resources and continue to view the ACO reach program as a strategic extension of our relationships with our participating provider partners.

It’s also worth noting that the MBR implied in our guidance, excluding both ACO reach medical expense and revenue, is approximately 86.8% at the midpoint. Second, we expect new member growth to increase consolidated MBR by approximately 55 basis points this year and trend down in future years as we engage these new members with our Care Anywhere teams. Consistent with our past cohort experience, we are seeing strong year-over-year improvement in MBR results with our returning members, including continuing to expect non-California inpatient admissions per thousand of less than 165 in 2023. Third, we will realize the full year impact of sequestration this year, which we expect to weigh on our consolidated MBR by approximately 15 basis points.

Normalizing for these 3 factors, our core MBR of 86.4% at the midpoint of our guidance reflects a continuation of strong underlying trends, and we now also expect an incremental $2 million to $4 million of additional embedded earnings power in our ACO reach members over time as they mature toward our target margins in the future. Lastly, our first quarter guidance contemplates an increase in admissions per thousand, similar to our past seasonal experience. This resulted in a higher MBR in the first quarter and implies MBR over the remainder of the year will be lower than the full year MBR on average. Overall, we feel confident that we are well positioned to deliver on our full year adjusted gross profit objectives. We expect to add significant operating leverage in 2023, with $240 million of operating expense implying an SG&A ratio of 13.9%, an improvement of 140 basis points year-over-year.

This is a result of our disciplined focus on deriving economies of scale as we continue to grow, along with the additional benefit from growth in our ACO reach book of business. While we believe the long-term MBR profile of the MA business is more attractive than ACO reach, the incremental SG&A required to grow our ACO reach business is significantly less than MA. Lastly, our adjusted EBITDA outlook range takes each of these factors into account and reflects a margin of negative 1.5%, a 40 basis point improvement year-over-year and on pace with our adjusted EBITDA breakeven objective in 2024. As John mentioned earlier, our California franchise was adjusted EBITDA positive in 2022, and we expect this to continue in 2023. Our consolidated adjusted EBITDA loss guidance in 2023, therefore, continues to reflect the investments we’re making to support growth in markets outside of California and future expansion initiatives.

As we continue to scale, we foresee a high degree of visibility into the leverage we will achieve over our corporate resources, clinical model costs and public company expenses. Importantly, our strong balance sheet position and operating projections give us confidence that we will not require additional financing to fund our organic growth objectives in the future. I’m proud of how we are positioned today, and we look forward to updating you all on our progress throughout the year. With that, let’s open the call to questions. Operator?

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Operator: Our first question comes from the line of Connor Massari of Morgan Stanley. Connor Massari ? Our question comes from the line of Whit Mayo of SVB.

Whit Mayo: Can you hear me?

Operator: Yes.

Whit Mayo: John, I just wanted to go back to your prepared comments and kind of unpack some of the initiatives you have around stars, just where you’re focused, where you’re not particularly happy where you think you can advance some improvement. You sit pretty close on some of the cut points on your largest age contract? And maybe just provide some thinking around how you’re sort of reviewing the rebate dollars?

John Kao: Whit, great question. We are still one of the first, and I think there may be somebody else that got in the early days of our company’s history, got from 3 stars to 4.5 stars. And that focus was on ensuring that stars was not just a departmental function, but really a corporate initiative and a corporate commitment all the way from our Board to me, to the entire company. And so we’ve kind of reinstituted that kind of thinking really with enterprise-wide training along all the star measures. And I think — I think it’s something that we have to do to address just the industry-wide increase in cut points across all the different measures. And to be — 4 stars today is you got to get better to stay in 4 stars. And I think with respect to the rebate concept — I think we’re a good company right now.

And we did a good job in 22 stars. I think 23 stars is going to be harder also. And so we have to get better along those lines moving towards 4.5 to 5 stars in every one of our markets. And we have to get better on, — I mean, our MLR engine. Our medical management and clinical operations is really, really good, like really good. I’m really proud of what the team is doing there. But there’s opportunities for us to improve there as well. All of which, I think, address kind of the rebate question, which is really something that I think we have to get better at to drive the kind of membership growth in MA that we want. And so it’s really across the board Whit, on pretty much everything we do, just because I think, in the 23 measures, we were notified, and the industry was notified, that the cut points were even going to be higher.

And so we have to do it on an enterprise level. And I’m encouraged with the feedback from the employees and the call to arms, so to speak, and just really proud of the team for stepping up.

Whit Mayo: Last question for me is just looking at some of the new markets, North Carolina, Arizona, Nevada, maybe just an update around some of the inroads you’re making on physician partnerships and just engagement efforts, gain-sharing strategies? Anything that you’ve learned.

John Kao: Yes, lots of lessons learned, obviously, from Florida and Texas. And we really concluded, you really need all 4, we call them these growth pillars that have to work, and it starts with stars. It starts with quality and stars. And what we learned in North Carolina was when you get 5 stars, you got a lot of tailwinds as a new market entrant because it brings legitimacy and credibility to your brand in a new market. And so a lot of the emphasis in Texas, Florida and all the other markets now is really getting to that star rating. And that’s just not enough. That combined with the medical management and AVA Career Anywhere deployment, which, again, I’m really proud of how that’s being executed. We’re running about 155-ish admissions per thousand outside of California, which is really one of the core reasons why we’re able to beat in 2022 is the performance in these new markets excelled with what we expected.

And so then even with that, you got to have good products, and we had pretty good products in all of these new markets. But really, the key thing that we learned was the distribution strategy has to be more reliable, more controllable, and we’re making adjustments to the distribution. You need all 4 of these components to — not just enter a market or grow a market, but really win in a market. And I think that’s kind of the standard that we’re holding ourselves to is if we get into a market and we’re going to make investments, we can’t just enter, we need to win, which is pretty consistent with pretty much every market that we’ve entered in California. And so we need to do the same outside of California. But those are some lessons that we’re operationalizing right now as we speak.

Operator: One moment for our next question, which comes from the line of Ryan Daniels.

Ryan Daniels: First one on ACO reach. I appreciate all the color there. Nice to see you’re going to push more into it given your experience there. But I want to try to pair the commentary of the positive experience with experiencing 100% MBR. Is that mostly due to just the rapid growth in kind of newer patients coming in with a much higher MBR contrasted to existing patients that are lower? And if so, can you give us any color on the delta between those 2 groups?

Thomas Freeman: Ryan, this is Thomas here. Happy to take that question. So in terms of the overall outlook for ’23, I think what you’re seeing from us is just maybe a prudent sort of expectation setting exercise as we think about the considerable growth we’re seeing, where you’re right, we’re kind of going from 5,000 to 7,900 to start the year. But that also includes a pretty significant mix shift just kind of by participating provider by region, et cetera. So it’s pretty much a new population for us in many respects. And so I think — you know us, we tend to be cautious with respect to our comments on our outlook until we get our arms around new members and new groups. That being said, I think we’re really very proud of our results in the 2021 outcomes that are released by CMS recently, as John mentioned, we were the second lowest benchmark in the country, which obviously means there’s not as much opportunity to really bend the cost curve, yet we were still able to produce top quartile results.

And I think our savings rate for 2021 calendar year was right around something like 6% in terms of how CMS measures that program. And I think we feel good about our 2022 results also. So I think we have a lot of confidence that this can be an accretive line of business for us and something that we can continue to grow in combination with our MA relationships. I don’t think this is something where you’re going to see us grow it in a really significant or material way in lieu of MA. In other words, I think our 20% revenue goal for MA kind of stands in the future. And this is really, I think, something that could be an incremental and again, accretive opportunity for us as we continue to work with these providers across a broader portion of their senior panel.

Ryan Daniels: Okay. That’s very helpful. And then as my follow-up, this one is for John. As you discussed your 4-pillar playbook, one of the things you mentioned, and you discussed this in the Q&A already, is optimizing rebate dollars across benefits. And I think in the context of lower potential MA rate increases for 2024, that becomes even more important. So I’m curious just how you think about that maybe specific opportunities there, especially given what might be lower rebate dollars given the rate outlook for ’24. Kind of what is the organization really focused on there? Is it going to differ market by market? Or are there certain benefits that you really want to push the pedal on because you’ve seen more engagement with consumers, et cetera? Would love some color there.

John Kao: Ryan, of course, great question as usual. I think just the general increase in standards across the board from CMS on star ratings — in terms of increased cut points, in terms of reimbursement — I actually think it will be a strategic advantage to us in the long term. And we’ve kind of reiterated that theme for many of you, and the company was built on ensuring that we had high quality at a low cost. And that ultimately will be the formula for the highest value creation for consumers. I think that given some of the — kind of the — call it, COVID-related artificial metrics in stars — the past several years and some of the reimbursement for the past several years, I don’t think we’re sustainable. I think it’s going to — the market is going to start rationalizing to our favor.

That’s what I think. And again, have this kind of sustainable benefit design, sustainable coverages, sustainable supplemental benefits and some of the crazy stuff that we’ve seen is not going to be sustainable. And I think the tightening is going to be impacting people that have been relying on some of those short-term subsidies, so to speak. So I think that we’re waiting — we’re all waiting for the final notice. And I think it’s going to be a really interesting bid cycle this year. I think it’s going to be a lot of strategy with respect to how aggressive people are going to be in sustaining those rebate dollars and the benefits, how much people are going to pull back. But at the end of the day, if you got the best cost structure, you ought to be in the best position to still add the most value.

And you can combine that thought with Whit’s question, you say, we just — we got to continue to get better in stars. We got to get — continue to get better in — MLR, medical management. And we’re good. I’m not saying we’re not good. We’re good. We just have to get better. That’s what’s going to drive that incremental rebate value to consumers. And I think a lot of these artificial kind of engineering strategies are going to go by the wayside.

Ryan Daniels: And I think your color on using AVA and the results you’re achieving, not only in existing markets but new markets, is a pretty powerful testament of how you can do that.

Operator: Our next question comes from the line of Michael Ha of Morgan Stanley.

Michael Ha: And maybe just to come back on the last question, piggybacking off of that one. And the advance rate notice, slightly lower than expected. And I just wanted to expand on your thoughts on competitive positioning into ’24 because like you said, my thinking is — when other MA plan may need to slow down or toggle down their benefit to mitigate potential MA rate pressure, this — I feel like this presents a golden opportunity for the higher-quality MA plan to thrive in. So your superior star rating care delivery model, do you think that presents a stronger possibility for alignment to in ’24 perhaps to gain market share, see outsized growth? And just general thoughts around that or expanded thoughts on that?

Thomas Freeman: Yes, Michael, this is Thomas. I think what you’re describing is definitely an interesting dynamic that we’re contemplating as we look out to 2024. I don’t think we’re going to comment too specifically on our bid strategies or our product strategies with respect to how we think that impacts the whole growth versus margin conversation today. And just being very thoughtful about not sharing too much that could adversely impact us from a strategic and competitive standpoint in this next upcoming bid cycle. But all that being said, I think you’re exactly right. We certainly know there are some competitors in our markets who have benefited from COVID protections around star ratings. They benefited from higher-than-average benchmark increases the last couple of years.

And in certain cases, I think have been able to manage some of their benefit offerings in part because they’ve done a nice job with risk adjustment. And as some of those things change in the future, and as CMS continues to try to tighten the dial around risk adjustment, I think the overall impact for some of our competitors could be worse than the impact on us. And it’s that relative dynamic that I think is most important in terms of our ability to compete and, as John said, win in every market we’re in, not just in ’24, but really over the long term. So as John said, it will be an interesting bid cycle coming up, but I think we feel optimistic as to what this means for the industry and our relative positioning in the years to come.

Michael Ha: That makes sense. Maybe just 1 more question. Looking at California, a great rebound in Southern California, regained your competitive positioning. I’m seeing SCAN, Kaiser, Centene a few top players really taking their foot off the gas pedal in terms of benefit investment. But also now, the competitive dynamics seems to have flipped in Central and North Cal, where you’ve seen some plans offering really aggressive Part B rebates. So looking forward, how do you view the competitive marketplace in both SoCal and NorCal? Do you think SoCal is back to being fully rational marketplace? And do you think the aggressive offerings in NorCal are sustainable? And also 1 more question on this. The membership headwind in Central Northern California, how much of that was driven by existing member attrition versus lower-than-expected new members?

Thomas Freeman: So in terms of the — kind of Southern California versus Northern California dynamics, what I would say is, really, from a macro standpoint or from a kind of portfolio management standpoint across our geographies, I think there will always be different competitors who are more aggressive and are kind of more focused on growth in certain years, and other competitors who are less focused on growth and are more focused on margin in certain years. I think that’s just the reality of the business, and we’ve sort of seen this dynamic play out time and time again, really, over the last 8, 9, 10-plus years that we’ve been operating here in California. So I think, to a certain extent, our belief is that we should expect it.

We should expect there’s always going to be someone who might be bidding more aggressively than we view is sustainable in the long run. But it’s on us to make sure that we have the right product strategies, the right market management strategies, the right broker and distribution and provider relationships, such that we have insulated ourselves from some of those anomalies in any given year to still get to our 20% top line growth target on a consistent basis. So I don’t think it’s as simple as 1 competitor in 1 market that’s going to kind of dictate our future performance. I think we have to continue to take control of our own destiny, and that’s what you’ll see from us in the future. I think your second part of your question was just in terms of specifically in some of the counties in Northern California where we didn’t quite see the growth we had hoped for.

It was a bit of a combination, I would say, on both the retention side as well as the incremental new sales side. I think it is worth noting and reiterating that, that was again more than offset from a retention standpoint by our other markets such that California as a state was actually 50 basis points better in terms of our retention this past AEP versus 2022.

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

John Ransom: John, my question for you is the advanced notice part of that, of course, is the ICD-10 changes which are complicated, lots of codes going away. So how do you think about that kind of at a plan level, what calibrations you make? And then also what would be downstream at sort of your downstream provider level?

John Kao: John, good question. Yes. I think from just a — from a systems perspective, I think we’re very, very well in hand. I think the way in which we engage downstream with our providers, the workflow processes, the data ingestion, all of that is just something that we’ve been working on for, frankly, a couple of years. So I’m not really worried about that. I think the advanced notice itself, I think is, frankly, consistent with a lot of the kind of industry themes that we’ve been professing over the last several quarters. And we’re kind of working our way through that right now with respect to kind of directional findings. I think that there is kind of this 3% kind of hit to risk adjustments, so to speak. Based on some of the preliminary analysis that we’ve looked at, there is a kind of a disproportional hit to certain populations that are of color and/or lower income in terms of specific chronic diseases impacting those populations.

And so we’re working our way through that. And I think that how that gets embedded in our product mix, our rebate strategy, the bids, all of that, I think, is going to be something that we’re working on right now heading into — I mean, we’re already planning for ’24, so to speak. I don’t know if that answered your question, John.

John Ransom: Well, I guess the follow-up is, I mean, what we’ve heard is that, while it’s a 3% hit that certain provider groups with certain profile, it might be a much bigger hit than that, and then others will be just fine. And I guess it gets down to — at a very simplistic level, are you treating what you’re coding for, or you’re just coding? If you thought about your physician partners and thought, well, this group may be in a little bit of trouble, that group is going to be fine, or if that’s kind of too — too in the weeds at this point?

John Kao: Yes. I’m not sure we think about it that way. But I mean, we are looking at all the changes to the demographic changes, the non-demographic changes, the impact on different HCCs. But we are seeing some — again, this is all public stuff, disproportionate impact to diabetes and vascular disease, in particular, certain conditions that relate to, like I said, lower income and people of color, so to speak. So that’s something we’re looking at. And it will be built into the product strategies and the product designs. But overall, we’ve heard people, to your point, in that 3%, 4% range, we’ve heard people say something significantly higher. And it’s such a kind of strategic number with respect to how you embed your bid strategies, and it’s something that we want to make sure we are very clear on. And obviously, we don’t want to talk about any competitive dynamics.

Operator: This question comes from the line of Kevin Fischbeck of BofA.

Kevin Fischbeck: I wanted to dig into the EBITDA guidance, and maybe it’s not 100% fair because you just made the comparison more difficult by beating Q4, but it does look like, from an absolute basis, the EBITDA loss is going to be relatively flat year-over-year, and I appreciate the 40 basis points improvement. But ultimately, you’re going to have to show actual EBITDA dollar improvement year-over-year, but I guess, particularly thinking about 2024. So I guess they what — what would you say, is there anything unusual, either in the comparison year-over-year or the impact going on this year that kind of makes less of a dollar EBITDA improvement flow through in this comp?

Thomas Freeman: Kevin, Thomas here. So I think in terms of the year-over-year comparison, to your point, I think we are pleased to see that we are improving in terms of our margin year-over-year. And as we continue to think about that breakeven target in the years to come, I think it’s going to be a combination of both MBR improvement as well as continued operating leverage through the SG&A line item. And I think the kind of beauty of where we stand today is we’ve shown enough consistency with our cohort MBR performance over time, that I think we’re confident that we can continue to replicate those results, not just in California, but now outside of California, where we’re starting to see some of that traction materialize. And I think, on our side, we recognize that the SG&A in terms of the SG&A relative to our size of our revenue and membership, we have to continue to show improvement on to really get to breakeven.

And I think if you compare 2021 to 2022, we didn’t quite have a lot of improvement just continuing to absorb a lot of new expenses as a public company, but we really are starting to show that improvement now as we look out to 2023. So while I think we’ve had a lot of great proof points around our ability to manage MBR and improve MBR, I think the SG&A side of things is where we needed to continue to show the market that we can demonstrate that operating leverage over time, which is how we feel we’re positioned for ’23. So with those 2 things in mind, I think we still feel like we have a good shot at working towards breakeven in the future. I think we got to continue to grow. Obviously, as a part of that recipe as we — and we think about our 2024 breakeven objective.

But all things considered, I think our ’23 guidance sets us up pretty solid for that objective in ’24. And the last thing I’ll say is, it’s, of course, early, and we’ll see how the year plays out. We’re only 2 months in.

Kevin Fischbeck: Okay. And then I guess on the MLR bridge, I guess I followed what you were saying on the puts and takes to get to the kind of the core EBITDA, core MLR number. But I guess the one part that I wasn’t 100% following was just the 55 basis points of pressure from new members in that number? Because doesn’t the 2022 number have a similar 35 basis point headwind in that number as well? So like year-over-year, is that an adjustment to be making?

Thomas Freeman: Yes, that’s — so the 55 is actually the incremental. So to your point, there’s — the current 2022 new member MBR embedded in our overall ’22 results, and really, we’re measuring the expected new member MBR in ’23 versus the new member MBR in ’22. And it’s really an incremental 55 sort of year-over-year in terms of the consolidated headwind. And so as we reflect on kind of where the growth is that we’ve seen so far and our expectations for the year, I would say, based on the distribution of members by market, by product, by provider group, the corresponding new member revenue PMPMs across those different variables and our expected MLR for each of those different again, groups, markets and products, we are expecting our new member MBR to be slightly higher this year than ’22.

But again, that being said, I think what is most important to us is not necessarily where the new members come in at year 1, where they typically don’t really produce much contribution margin anyway. What we’re more focused on is our ability to manage those new members and improve those MBRs over time. And I think that we still feel really strongly and kind of confident about today.

Kevin Fischbeck: Okay. So it’s not the number of numbers, it’s where the numbers are that’s causing that year-over-year delta?

Thomas Freeman: That’s right. It’s a bit of a mix when you consider geography, product and provider.

Operator: This question comes from the line of Lisa Gill of JPMorgan.

Cal Sternick: This is Cal Sternick on for Lisa. A couple of clarifications — is your reach. I guess on the — have you given what the margin profile of the business is over the long term? Apologies if I missed that. And then in terms of the membership growth, I know you said it’s not going to preclude you from hitting your 20%-plus MA target. But how should we think about the growth trajectory of that business going forward? I know there’s a much different SG&A load associated with ACO reach, but are there any material incremental investments you need to make to grow that membership?

Thomas Freeman: Cal, so this is Thomas here. In terms of the EBITDA comment, I think our belief today is that the ACO reach book of business is probably in the low to mid-single digits in terms of the EBITDA margin opportunity. And I think we’ll continue to learn as we continue to grow that in recognizing that it is a new program, and our experience so far has been limited to a pretty small population in a pretty concentrated geography. So I think as we continue to expand that, like we are in ’23, adding new providers in California, Florida, Arizona and Nevada, I think we’ll start to get more of a broader set of experience that we can draw on that will inform our view of the longer-term margin opportunity. But I’d say that’s kind of our current thinking today.

And in terms of the incremental investments required to grow this business, the reason that it’s not too significant from an SG&A investment standpoint is because the providers we’re partnering with are already providers that we are working with on our MA books of business. So we haven’t had to create a massive or significant new business development infrastructure because these are providers and partners that we’re already talking to kind of day-to-day, week-to-week as a part of our MA operations. And then from a — sort of shared services and from a fixed cost standpoint, the only real incremental resources we’re deploying are in the medical expense line as we bring on more nurses, case managers, et cetera, to deploy a lot of our Care Anywhere programs for this population.

But if you compare the kind of core operational aspects of ACO reach versus MA, we don’t have to do claims payment. We don’t have to do member services, sales and marketing, commissions, UM credentialing, the list goes on. So all these things that we have to do for MA that are obviously capital intensive in terms of SG&A, we really don’t have to do for ACO reach, and that’s why we’re able to grow it in such a capital-efficient manner.

Operator: This question comes from the line of Nathan Rich of Goldman Sachs.

Nathan Rich: Thomas, I wanted to follow up on the MBR comments that you made in response to Kevin’s question. I guess what I wanted to try to get at is, I think if we make the adjustments for all of the year-over-year items that you mentioned, it seems like it’s implying that MBR for returning members is going to be roughly flat year-over-year. I guess, is that roughly right? And if so, are there any factors that you kind of highlight in driving that? I guess I would have thought you’d maybe see some improvement on the MBR for this membership base. So I’d just be curious to get your thoughts there.

Thomas Freeman: Nathan, Thomas here. So I think we might look at that a little bit differently to the way you described it. So I think we do expect improvement on our returning members or our loyal members. And that’s pretty consistent with what we’ve shared in terms of our historical cohort data. We’re not seeing anything today that would cause us to deviate from our prior experience. So I think when you kind of think about the bridge we shared earlier, what — again, what we’re saying with the new members is that the new members in ’22 and the impact of those members on ’22 is consistent with the impact on ’23, plus an additional 55 basis points on top of that. If you were to actually kind of take that ’23 number and we were to break it down between all the loyal and new members, you would see an expectation of the loyal or the returning members improving in ’23 versus ’22.

I think we feel pretty good about how those trends are shaping up, both from a revenue standpoint as well as from a medical cost standpoint.

Nathan Rich: Okay. Great. And then just a quick follow-up. I guess, for ’23, is there anything from an EBITDA cadence standpoint that we should be aware of? And I guess, it seemed like the 1Q EBITDA guidance was maybe a little bit lower than we would have expected relative to the full year. So I just wanted to ask if there’s anything from a cadence standpoint?

Thomas Freeman: Yes. So I think in terms of MBR, our guidance for Q1 reflects what we saw in January utilization, where similar to prior experience, it typically is a higher utilization month, and that was very much the case this past January, though we’re pleased to share that the February utilization has come back down relative to January. And so I think if you’re looking at our guidance for the first quarter of last year in terms of the implied MBR, it would actually look pretty similar to the guidance that we put out today in terms of the MBR. That being said, I recognize we, of course, beat our guidance last year in MBR, and we’ll see how this quarter plays out. But I think the seasonality we’re contemplating around MBR is fairly consistent with how we might think about a normal operating environment.

And then in terms of the SG&A, the last couple of years, we typically had about 55% of our SG&A hit in the back half of the year as opposed to the first half of the year, which is the ramping up of the sales and marketing expense as well as the kind of year 0 market spend around the third and the fourth quarter. So I would expect sort of a similar cadence around SG&A this year as well.

Operator: Thank you for your participation in today’s conference. This does conclude the program, and you may now disconnect.