Alignment Healthcare's Q3 2025: Contradictions Emerge on Member Retention, Ad Growth, and Expansion Strategies

Date of Call: None provided

Financials Results

• Revenue: $994.0M, up ~44% year over year
• Gross Margin: Adjusted gross profit $127M, up 58% YOY; implied MBR 87.2% (improved 120 bps YOY)
• Operating Margin: Adjusted EBITDA margin 3.3%, up 240 bps YOY; adjusted SG&A ratio 9.6% (improved 120 bps YOY)

Guidance:

• Q4 2025: membership 232,500–234,500; revenue $995M–$1.01B; adjusted gross profit $104M–$113M; adjusted EBITDA -$9M to -$1M.
• Full-year 2025: revenue $3.93B–$3.95B; adjusted gross profit $474M–$483M; adjusted EBITDA $90M–$98M (midpoint raised vs prior guidance).
• Year-end membership midpoint raised ~2,000; full-year revenue midpoint up ≈$41M due to higher membership.
• Expect higher Q4 MBR seasonality and some SG&A timing pull-forward; maintain cautious Part D assumptions.

Business Commentary:

• Revenue and Membership Growth:
• Alignment Healthcare reported revenue of $994 million for Q3 2025, up 44% year over year, with a health plan membership of 229,600 members, representing a 26% increase.

• The growth was driven by strong health plan membership growth, reflecting the company's ability to manage risk and Medicare Advantage effectively amidst industry challenges.

• Operational and Financial Performance:

• The company's adjusted gross profit increased by 58% year over year to $127 million, with a consolidated medical loss ratio (MBR) improving by 120 basis points to 87.2%.

• These improvements were attributed to disciplined execution in clinical activities and lower-than-expected Part D costs due to moderated utilization trends.

• STARS Ratings and Quality of Care:

• All of Alignment Healthcare's health plan members are projected to be in plans rated four stars or above for rating year 2026, payment year 2027.

• This is a result of the company's ability to consistently execute on STARS metrics through its centralized data architecture and commitment to high-quality care.

• Investment in Growth and Operational Improvements:

• The company is investing in operational improvements, including back office automation and clinical engagement, to further separate itself from competitors.
• These investments are aimed at enhancing care delivery and clinical outcomes, positioning Alignment Healthcare for future growth in quality and outcomes.

Sentiment Analysis:

Overall Tone: Positive

• Management said they "exceeded the high end of each of our guidance metrics," reported adjusted EBITDA of $32M surpassing guidance, raised full-year guidance (midpoint adjusted EBITDA now ~$94M referenced), and highlighted membership growth of ~26% YOY and multiple four-/five-star contracts as evidence of strong execution.

Q&A:

• Question from Scott Fadell (Goldman Sachs): How should we think about market-share opportunities and growth in California versus non-California markets during AEP?
  Response: Growth is strong across California and non‑California markets; company is leveraging five‑star contracts (e.g., NC, NV) and high‑performing provider networks—early AEP activity is encouraging.

• Question from Scott Fadell (Goldman Sachs): You mentioned potential M&A/vertical integration for supplemental benefits — how are you weighing margin upside versus execution risk?
  Response: Pursuing selective tuck‑ins (ancillary/captive businesses like dental or behavioral) to capture supplemental margin with low execution risk; being cautious about buying books in unfamiliar markets.

• Question from Matthew Gilmore (KeyBank): What proportion of your business is in shared‑risk arrangements and how will that evolve?
  Response: About 65–70% of business is shared‑risk; company is increasing shared‑risk/de‑delegation to better align with providers and improve clinical and financial outcomes.

• Question from Matthew Gilmore (KeyBank): You noted SG&A favorability in Q3—how material was it and where will the savings be reinvested?
  Response: Q3 had a small timing benefit of a few million; full‑year SG&A guidance unchanged and temporary favorability expected to reverse in Q4; savings are being redeployed into automation, AVA AI, and clinical productivity.

• Question from Michael Haugh (Baird): You said raw STARS scores improved materially, but some contract summary ratings appear lower—can you reconcile?
  Response: Raw STARS score increased to roughly 4.05 from prior levels (meaningful improvement); differences in published contract measures reflect measurement mechanics, but overall improvement is genuine.

• Question from Michael Haugh (Baird): How should we think about your new brand investments and impact on member acquisition costs?
  Response: Initiating measured brand/marketing spend to articulate 'MA done right' while remaining disciplined; long‑term SG&A ratio should decline with scale even as selective brand and clinical investments continue.

• Question from Jessica Tassen (Piper Sandler): For 2026 AEP, how is the 20%+ net growth splitting between retention and gross new ads?
  Response: Both components are strong—gross ads are robust and retention is better than anticipated, producing the combined net growth trajectory.

• Question from Jessica Tassen (Piper Sandler): Your plan designs show stable medical out‑of‑pocket but lighter supplemental benefits—what's the rationale and how are you handling Part D redesign?
  Response: Product design focuses on consistent member value and market‑by‑market discipline; Part D remained stable through 2025 with limited, targeted changes; supplemental benefits offered only where quality and bid economics justify them.

• Question from Ryan Langston (TD Cowen): You raised full‑year EBITDA multiple times—was this a budgeting surprise or execution beat?
  Response: Primarily strong execution—better utilization management, favorable Part D performance, and onboarding benefits from new members drove results above conservative initial budgeting.

• Question from Ryan Langston (TD Cowen): Do you have a view on overall Medicare Advantage market growth for 2026 given CMS's expectations?
  Response: Company expects to outgrow the broader market—while California historically grows slower and CMS projects flat enrollment, Alignment is confident in retention and share gains.

• Question from Craig Jones (Bank of America): Thoughts on a potential V29 or using more encounter data for risk adjustment and implications?
  Response: CMS likely to emphasize program integrity; encounter‑based baselines are discussed but unlikely to be operationalized for 2027, and net impact remains uncertain.

• Question from Craig Jones (Bank of America): Will the Health Equity Index (HEI) provide the ~0.25 tailwind you previously referenced for California ratings?
  Response: HEI should provide modest cushion to California's four‑star positioning, but the net benefit depends on future cut points which remain uncertain.

• Question from Andrew Mott (Barclays): Are you seeing behavioral changes in vaccine uptake or flu trends and how are you managing them?
  Response: Vaccine uptake tracked historical patterns—slightly softer in Q3 then picked up in October; no material anomaly, but company remains cautious about typical Q4 seasonality impacts.

• Question from Andrew Mott (Barclays): How much of the operational/technology/STARS investment is new versus already captured in spend?
  Response: Investments are incremental and targeted (OpEx/CapEx, platform, human capital) rather than a dramatic step‑change; timing concentrates in Q4 to prepare for 2026 growth.

• Question from Whitmail (Liberty Partners): What percent of competing plans were commissionable last year versus this year?
  Response: Management did not have the percentage available on the call; noted most competitors still pay commissions and said they will follow up.

• Question from Whitmail (Liberty Partners): Where do you stand on RADV readiness and next steps?
  Response: Expect RADV enforcement to persist despite legal pauses; Alignment feels well‑positioned with strong compliance and documentation practices and is prepared operationally.

• Question from Jonathan Young (UBS): Of the lives coming onto your books during AEP, how many are new‑to‑MA vs switchers and where are they coming from?
  Response: Approximately 80–85% of incoming lives are switchers (not new‑to‑MA), and flows are broadly distributed across payers and geographies—not concentrated from a single competitor.

• Question from Jonathan Young (UBS): Given industry pressures, how do you view geographic expansion beyond current states?
  Response: Plan to expand methodically—prioritizing adjacent/within‑state markets for capital efficiency and using a systematic playbook to replicate the model into new states (targeting selective 2027 expansion).

• Question from Ryan Daniels (Baird): You emphasized 'replicability'—how does that translate to MLR/margins and willingness to enter new markets?
  Response: Replicable care model produces consistent quality and cost control; company intends to fund measured expansion from operating cash flow while scaling shared services to protect margins.

Contradiction Point 1

Member Retention and Gross Advertisement

It involves the company's strategy and performance in member retention and gross advertisements, which are critical for growth and financial outlook.

Can you compare retention and gross new ads for 2026? - Jessica Tassen (Piper Sandler)

2025Q3: Gross ads are strong, and retention is better than anticipated. The investments in member experience are paying off, creating a beneficial both-and situation. - John Kao(CEO)

How do you assess growth opportunities in California and other regions for 2026? - Ryan M. Langston (TD Cowen)

2025Q2: Retention results are in line with our expectations, showing an increase in retention rates year-to-date and a decline in new-to-market churn. - John Kao(CEO)

Contradiction Point 2

Investment Strategy

It involves the company's approach to investments, which can impact growth and operational efficiency, affecting investor expectations.

What portion of the investment is new/incremental and allocated to STARS? - Andrew Mott (Barclays)

2025Q3: Investments are being made smartly across OpEx and CapEx for future growth. The focus is on efficiency and underwriting investments well. - John Kao(CEO)

Is the 8.8% SG&A this quarter sustainable, and are there opportunities for further improvement? - Hua Ha (Robert W. Baird & Co. Incorporated)

2025Q2: Our clean slate data architecture and operationalized systems give us a competitive advantage, reducing the need for excessive FTEs. We are investing in areas like member experience and clinical capabilities to drive future advantages and will continue to improve efficiency. - John Kao(CEO)

Contradiction Point 3

Expansion into New Markets

It involves the company's strategic plans for market expansion, which can significantly impact future growth and market positioning.

How does Alignment Healthcare balance M&A or partnership opportunities to improve MLR versus the risks of entering new markets? - Scott Fadell (Goldman Sachs)

2025Q3: Alignment is looking at tuck-in opportunities and ancillary captives. Supplemental benefits and ancillary business could improve MLR through existing member seeding. The focus is on validating execution risk, and Alignment will continue to be discerning in its approach. - John Kao(CEO)

Are you considering strategic partnerships or developing a practice partner/tech platform to better serve dual-eligible patients and those with multiple chronic conditions? - Ryan Daniels (William Blair)

2025Q1: Our strong growth and margin performance position us well for future growth opportunities. We are contemplating market expansions in 2026 and have begun preparing for 2027 launches. - John Kao(CEO)

Contradiction Point 4

Impact of Part D on MLR Performance

It involves the company's explanation of the impact of Part D on its MLR performance, which can affect financial forecasts and investor perceptions.

How does Alignment Healthcare balance M&A and partnership opportunities to improve MLR with the risks of entering new markets? - Scott Fadell (Goldman Sachs)

2025Q3: The first quarter outperformance was not significantly driven by Part D. We saw some early favorability, but it was modest. Our utilization was in line with expectations, with favorable inpatient and favorable Part D gross margin. - Thomas Freeman(CFO)

Can you explain the MLR outperformance and the impact of Part D on it? - Michael Ha (Baird)

2025Q1: The first quarter outperformance was not significantly driven by Part D. We saw some early favorability, but it was modest. Our utilization was in line with expectations, with favorable inpatient and favorable Part D gross margin. - Thomas Freeman(CFO)

Contradiction Point 5

Market Growth and Expansion Strategy

It involves differing perspectives on market growth expectations and the strategic approach to expansion, which are crucial for understanding the company's growth trajectory and market positioning.

What is the potential for market share opportunities due to industry disruption in California versus non-California markets? - Scott Fadell(Goldman Sachs)

2025Q3: Expect ex-California to grow materially faster than California but contribute less than 50% of overall net membership growth. - Robert Freeman(CFO)

What is the expected membership growth split between California and non-California in 2025? How does new member engagement with Aeva in non-California markets compare to California? - Scott Fadell(Stephens)

2024Q4: Alignment is pleased with growth across California and other markets. The growth is in high-performing product mixes and provider networks. - John Kao(CEO)