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DATE

Thursday, April 30, 2026 at 5 p.m. ET

CALL PARTICIPANTS

  • Chief Executive Officer — John Kao
  • Chief Financial Officer — James Head

TAKEAWAYS

  • Health Plan Membership -- 284,800 members, reflecting 31% year-over-year growth, primarily attributed to strong sales execution and member retention.
  • Total Revenue -- $1.2 billion, increasing 33% year over year, driven by membership gains.
  • Adjusted Gross Profit -- $146 million, with an adjusted medical benefit ratio (MBR) of 88.2%, a 20 basis-point improvement year over year.
  • Adjusted SG&A Expense -- $108 million, up 24% year over year, but improved to 8.7% of revenue, a 60 basis-point percentage decrease year over year.
  • Adjusted EBITDA -- $38 million, growing 88% year over year and producing a 3.1% margin, marking a 90 basis-point margin expansion.
  • Cash and Liquidity -- Operating cash flow was “strong”; quarter-end cash, cash equivalents, and short-term investments totaled $726 million; funded leverage ratio improved to 2.6x trailing 12-month EBITDA.
  • Claims Auto Adjudication Rate -- Automation increased from under 15% one year ago to over 60% year-to-date.
  • Inpatient Admissions per 1,000 -- “High 150s” due to a temporary CMS rule-driven workflow issue resolved by February; impact was incorporated in Q1 results.
  • Guidance Update – Full Year 2026 -- Membership outlook raised to 294,000–299,000; revenue expected between $5.16 billion–$5.21 billion; adjusted gross profit guided to $620 million–$650 million; adjusted EBITDA to $138 million–$163 million.
  • Guidance Update – Q2 2026 -- Membership projected at 288,000–290,000; revenue at $1.30 billion–$1.32 billion; adjusted gross profit at $167 million–$177 million; adjusted EBITDA at $50 million–$60 million.
  • Profitability Guidance -- The company raised the low end of both the adjusted gross profit and adjusted EBITDA guidance ranges by $5 million, citing confidence after Q1 performance.
  • Operational Efficiency Initiatives -- Company cited investments in claims automation, contract management with AI, and provider data management to drive cost savings and scalability.
  • Market Share Strategy -- Plans to expand into “large markets next year” and considers risk-based capital deployment as the preferred growth method; specific markets and new states not yet disclosed.

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RISKS

  • CEO Kao described a “temporary disruption” from a CMS rule change that led to paying authorizations at full acute rates instead of observation rates, causing a “couple of million dollars” impact in January, though stated this was rapidly corrected and deemed non-systemic.
  • CFO Head stated, Within our outlook expectations, we continue to assume that inpatient admissions per 1,000 will run higher year over year. primarily due to intentional focus on high-acuity member growth, which could heighten medical cost pressures within projections.
  • CEO Kao stated, no way trend is going to be at 2.48%. regarding national healthcare cost trends versus the CMS rate announcement, implying persistent sector-wide margin pressures not matched by reimbursement rates.

SUMMARY

Alignment Healthcare (ALHC 9.32%) reported accelerated top- and bottom-line growth, driven by a 31% health plan membership increase and a 33% revenue rise, while delivering a significant 88% gain in adjusted EBITDA. Management attributed margin expansion to discipline in selling, retention, and clinical execution, supported by successful automation and ongoing operating efficiencies. The quarter reflected incorporation of a one-time, workflow-related cost headwind, with corrective actions implemented by February, and did not alter the overall trajectory toward higher profitability and scale. Guidance was raised for full-year membership, revenue, gross profit, and EBITDA, reflecting considerable confidence in the durability of member retention, product mix strategy, and regional growth opportunities. The company signaled expansion into additional large markets for the coming year and reaffirmed ongoing investment in its proprietary AI and operational platforms to support future growth.

  • CFO Head said, The midpoint of our guidance implies that approximately 60% of our full year EBITDA will be generated in the first half of 2026. up from around 55% in the comparable prior period excluding new member final suites.
  • Leadership emphasized strategic “dedelegation” and improvement of internal clinical authorization competencies as critical for scalable growth, particularly in new geographies outside California.
  • Enhanced provider engagement models and growth in C-SNP segments were highlighted as sources of new margin expansion opportunities.
  • Management confirmed cautious accounting for new-member risk adjustment revenue, only booking to paid CMS MMR, which may provide upside once sweep data is received in Q2.
  • Planned investments of about $40 million in capital expenditures target software and hardware development focused on AI-driven clinical operations, provider data, and workflow enhancements.
  • Potential future in-house development or acquisition of supplemental benefit platforms (dental PPO/HMO, vision, transportation) was discussed as a lever for further medical cost ratio improvement and margin gains when scale allows.

INDUSTRY GLOSSARY

  • Medical Benefit Ratio (MBR): Ratio of medical costs paid to premiums earned, indicating efficiency in healthcare claims payments.
  • SG&A: Selling, General, and Administrative expenses, a measure of operating overhead relative to revenue.
  • Auto Adjudication: Automated claims processing without manual intervention, accelerating payment cycles and lowering administrative costs.
  • C-SNP: Chronic Condition Special Needs Plan, a type of Medicare Advantage plan targeting members with specific chronic illnesses.
  • MMR: Monthly Membership Report, the official file from CMS detailing payments and membership structure.
  • Final Suites: CMS process of finalizing new member risk adjustment and supplemental revenue, typically realized in the period after initial enrollment.
  • Capitation: Provider payment model where a set amount is paid per patient member regardless of services used, promoting cost discipline.

Full Conference Call Transcript

John Kao: Hello, and thank you for joining us on our first quarter earnings conference call. For first quarter 2026, health plan membership of 284,800 represented year-over-year membership growth of approximately 31% -- this supported total revenue of $1.2 billion, which increased 33% year-over-year. Adjusted gross profit of $146 million represented an adjusted MBR of 88.2%, which improved by 20 basis points year-over-year. Meanwhile, adjusted SG&A of $108 million improved as a percentage of revenue by 60 basis points year-over-year to 8.7%. Our adjusted EBITDA was $38 million, which grew by 88% compared to the prior year. This result exceeded the high end of our guidance range and implies an adjusted EBITDA margin of 3.1%.

Our results this quarter reflect strong execution across sales and member retention as well as our clinical operations. Our performance in our SG&A ratio also reflects the early outcomes of investments we've made to scale our infrastructure. Progress we are making across each of these areas is giving us even more confidence today that we are on the right path towards our goal of 1 million members. Growing and scaling a business as rapidly as we are in an industry as complex as Medicare Advantage is not a straight line. That being said, we are progressing very nicely as we continue to scale the company and achieve our near-term growth and margin expansion objectives.

Importantly, our operational discipline and unique model gives us swift visibility across the organization. This enables us to identify issues quickly and take actions to manage their near-term impact. We focus deeply on continuously identifying opportunities to improve and deploy solutions to create even greater durability across our company. For example, the CMS rule change impacted our observation determination process and drove inpatient admissions per 1,000 towards the higher end of our expectations in Q1. This process change was resolved by the end of February, but impacted our first quarter inpatient admissions per 1,000, which was in the high 150s this quarter.

We absorbed this headwind within our Q1 adjusted EBITDA beat and are well positioned as we enter the second quarter. As we build upon our culture of continuous improvement, this year, we are scrutinizing and revalidating every aspect of our people, process, technology and clinical culture to ensure they are positioned to scale. Through this process, we focused on opportunities to deliver more cost efficiencies through claims automation, improvements to our contract management infrastructure and scalability of our provider data management. For example, just 12 months ago, our claims auto adjudication rate was less than 15%. Now our year-to-date auto adjudication rate is over 60%, and we expect to drive even higher claims automation as we progress throughout this year.

Meanwhile, we are also deploying contract management solutions that leverage AI to create a more dynamic contract management platform and taking the next leap forward in our AVA AI risk stratification models to create even greater precision in our clinical engagement efforts. We are also investing in our talent by adding team members who will drive greater scalability within our technology infrastructure. These are just a few of the actions we are taking to support our near-term results and accelerate progress to our long-term growth and margin objectives. Finally, before I turn the floor over to Jim, I'd like to spend a few minutes discussing the 2027 final rate notice, which was announced earlier this month.

At a high level, we are encouraged by the administration's continued pursuit of actions that drive sustainability within the MA program. In a continuation of meaningful policy changes like the Wiser pilot program that tackle overspending in traditional Medicare, we also applaud the administration's actions to address overutilization of skin substitute products in fee-for-service. By taking action to create more accountability across every stakeholder in the health care ecosystem, we believe the program will increasingly reward those who deliver true, measurable value to members over the long term. Importantly, these dynamics continue to reinforce a core point, Medicare Advantage is a durable program that is here to stay.

In that context, we also believe Alignment is particularly well positioned to succeed regardless of the rate environment. Our clinical-first approach enables us to deliver high-quality outcomes at a low cost and forms the sustainable competitive moat that sets us apart from our competitors. In closing, our first quarter results reinforce the strength and durability of our model. We are executing with discipline, scaling thoughtfully and continuing to translate our clinical approach into consistent financial performance. We're continuing to invest in the scalability of our platform, including automation, AI-enabled workflows and enhancements to our clinical infrastructure, all of which position us to drive further efficiency and growth over time.

With a path toward 1 million members and unique opportunity to take share and grow profitably across all of our markets, we believe we are well positioned for the years ahead. With that, I'll turn the call over to Jim to further discuss our financial results and outlook. Jim?

James Head: Thanks, John. I'll dive straight into our first quarter results. For the quarter ended March 2026, health plan membership of 284,800 increased 31% year-over-year, driven by strong execution on sales and retention. Increase in membership supported revenue of $1.2 billion in the quarter, representing 33% growth year-over-year. First quarter adjusted gross profit of $146 million represented an MBR of 88.2%, which reflects an improvement of approximately 20 basis points year-over-year. Our adjusted gross profit performance this quarter was underpinned by strong engagement from our clinical teams. Their disciplined execution held inpatient admissions per 1,000 within our range of expectations despite the temporary disruption to our utilization management process that John previously discussed.

Meanwhile, the remainder of our medical costs were in line with supplemental benefit costs and Part D running modestly favorable through the first 3 months of the year. Moving on to operating expenses. Our SG&A discipline and scalability initiatives such as back-office automation supported outperformance in our operating cost ratio. For the first quarter, GAAP SG&A was $121 million. Our adjusted SG&A was $108 million, an increase of 24% year-over-year. Adjusted SG&A as a percentage of revenue declined from 9.4% in the first quarter of '25 to 8.7% in the first quarter of 2026.

This represents approximately 60 basis points of improvement year-over-year and outperformed the midpoint of our implied guidance range by 50 basis points even as we continue to make focused investments. Taken together, first quarter adjusted EBITDA of $38 million produced an adjusted EBITDA margin of 3.1%, which represents 90 basis points of margin expansion year-over-year. Turning to our balance sheet. We generated strong operating cash flow in the quarter and concluded with $726 million in cash, cash equivalents and short-term investments. Our liquidity profile remains strong with ample cash available to the parent company. The funded leverage ratio at the end of Q1 improved to 2.6x trailing 12-month EBITDA. Turning to our guidance.

For the full year 2026, we expect health plan membership to be between 294,000 and 299,000 members. Revenue to be in the range of $5.16 billion to $5.21 billion. Adjusted gross profit to be between $620 million and $650 million and adjusted EBITDA to be in the range of $138 million to $163 million. For the second quarter, we expect health plan membership to be between 288,000 and 290,000 members, revenue to be in the range of $1.30 billion to $1.32 billion, adjusted gross profit to be between $167 million and $177 million and adjusted EBITDA to be in the range of $50 million to $60 million.

As it pertains to our full year guidance, we are increasing our membership growth expectation given continued strength within our sales operations and outperformance in member retention through the open enrollment period. We believe our disciplined approach to sales growth and focus on retention is serving us well this year, particularly as we absorb the impact of the third and final phase-in of V28. In conjunction with the increase in our membership outlook, we are also raising our full year revenue guidance to approximately $5.2 billion at the midpoint, which reflects 31% growth year-over-year.

With respect to our profitability metrics, we are raising the low end of each of our adjusted gross profit and adjusted EBITDA guidance ranges by $5 million to reflect confidence in our full year objectives following the strong start to the year. Within our outlook expectations, we continue to assume that inpatient admissions per 1,000 will run higher year-over-year. As a reminder, this is primarily due to changes in our mix of membership. In 2026, we intentionally focused on growth amongst high acuity populations, whom we believe will benefit most from our clinical model. Consistent with past years, we also do not incorporate any assumption for final suite pickup from new members into our outlook assumptions.

Taken together, our implied first half guidance reflects confidence that the strong performance we delivered in Q1 will continue into Q2. The midpoint of our guidance implies that approximately 60% of our full year EBITDA will be generated in the first half of 2026. This compares to approximately 55% of the full year EBITDA in the first half of 2025, excluding new member final suites. Further, on that same basis, this represents nearly 100 basis points of first half adjusted EBITDA margin expansion year-over-year. In closing, we continue to deliver upon our promises each quarter as we assess, refine and scale our core workflows and processes.

Each of the transformational projects we are investing in and deploying today are establishing the foundation upon which we can scale to achieve our ultimate potential. Our meticulous and disciplined execution to date leaves us even more encouraged about the opportunities ahead. With that, let's open the call to questions. Operator?

Operator: [Operator Instructions] Our first question will come from the line of Matthew Gillmor with KeyBanc.

Matthew Gillmor: Maybe following up on the hospital observation issue. It sounds like this was temporary, but can you just walk us through what changed, how it was resolved and give us some sense for how hospital utilization trended now that it's been resolved?

John Kao: Yes. Matt, it's John. Yes, basically, we paid authorizations at full acute rates when we should have paid them at observation rates. It was a workflow problem, and we, of course, corrected it, but it impacted our January numbers, a couple of million dollars, I think it was. And [ 80, 000-wise ], we were a little bit higher by a couple of days. And we wanted to share that with everybody. And it's really part of really how we are kind of looking at every part of our company to just continuously get better. And we'll talk about that a little bit more, I think. But I don't think it's a systemic problem.

I think it was a 1-month blip, and we'll have that course correct. We have it course corrected.

Matthew Gillmor: Got it. And just to confirm, John, this is an internal thing that you all caught...

John Kao: Yes, yes, exactly. It's an internal workflow issue. It's not a utilization issue. Yes, utilization I think decline. And Jim's got the insights.

Matthew Gillmor: Yes, okay.

James Head: Matt, I'll jump in on the utilization because I think that's important, and there's lots of points of reference out there. But utilization was notwithstanding what John described, which I kind of call a onetime course correction, utilization is tracking very closely to what we expected. And as you're aware, we had admits in the high 150s. Absent that issue that John described, we probably in the mid-150s, and that is pretty much what we thought was going to happen. The flu is one thing that everybody is talking about. It wasn't a big driver, positive or negative in our numbers. We track admits with respiratory problems.

We look at our Part D costs, et cetera, and it was pretty much in line. So we've got our eyes on all those categories, and it felt like things were tracking pretty nicely to what we expected, and we see that in April as well.

Operator: Our next question comes from the line of John Stansel with JPMorgan Securities.

John Stansel: I just want to talk a little bit about 2Q MBR. I mean stripping out sweeps, it seems like it improves by a pretty decent amount and that's even after adjusting for a couple of million of incremental pressure that's not going to recur in 1Q. Can you just talk about what's assumed for year-over-year improvement in the second quarter that is maybe different from the first quarter?

John Kao: Yes. John, second quarter is usually our seasonal better quarter. And so there's just a natural decline in the MBR. So that's a good thing and it was expected. But I do want to step back and kind of describe -- we're laying out the actuals for first quarter. We're guiding on second quarter. And it's a pretty strong first half that we're positing. We set a reasonably high bar this year, by the way. But through the first half, we're expecting improvements across all our margins, MBR, SG&A, EBITDA, MBR first half, 40 basis points. SG&A, 40 basis points. EBITDA is 90 basis points to 100 basis points. So really strong first half.

And that's apples-to-apples on a pre-suite basis. We mentioned on the call, 60% of our profits are in the first half versus 55%. But all the while, we're making investments in the business to scale. So we're really doing this balancing act of trying to make sure that we're executing very, very well, investing in the future. We're bringing on talented folks across the enterprise. We're making investments in systems and processes. But we have our eyes on continuing to improve our execution clinically and get our margins up. And so this is really a continuation of what we were doing in 2025 and we march into 2026. First half feels very good.

John Stansel: Great. And then maybe just taking a step back and thinking about some of the changes in the final rate notice, I'll call it, deferral of a new risk model. How are you thinking about maybe reasons why that didn't make it in? And then as we think about potentially a new risk model in, say, '28 or '29, what we can take away from what was proposed versus what might actually be implemented?

John Kao: Yes. John, Yes, I personally think there is going to be some changes. I think there's going to be more normalization, if you will. I don't think there's enough outcomes, feedback that CMS has yet to have initiated it in this past final notice. I think I actually don't know, but I believe that they're going to be working on this as a focus -- a topic of focus in the preliminary notice, the advanced notice coming up, and then we'll see something in the '27 to maybe be implemented by '29, something like that.

But I think CMS has been pretty consistent with their message of ensuring that coding is not some form of a gamified competitive advantage for people. And obviously, I think that's a good thing for the industry, and I think it serves us really, really well. And it really puts the purest form of who's got the highest quality at the lowest price point in those organizations should be rewarded to succeed. Does that answer your question, John?

Operator: Our next question comes from the line of Scott Fidel with Goldman Sachs.

Scott Fidel: Just was hoping to just get a little bit more detail, if you don't mind, just on the inpatient issue that -- just so we can fully understand this. And so what I'm hearing from the call was, I think Jim had talked about there was a CMS rule change. It sounds like internally, you may have needed to make some adjustments to some of your systems as a result of that, and that is where maybe some of this disruption occurred. So I just want to sort of confirm that or if there's another sort of backdrop to that?

And then sort of two questions just sort of around that would be in terms of your markets, is this something that -- like it's an internal system that sort of covers all of your markets or just California. So that was one. And then two, if it led to you guys paying full acute as compared to observation, is there an opportunity for you to claw back some of those additional reimbursements that you should not have paid? Or is that not something that you're going to have a resolution to?

John Kao: That was my first question, Scott, but the answer is unfortunately no. Yes. No, it's a rule change that requires us to basically make authorizations a little bit more timely basis. And the backdrop of it is we've shared this with you guys in the past, which is we've kind of moved from this world of kind of capitation and delegation. And even in our shared risk businesses, we've had the certain administrative functions that were delegated to the IPAs. And one of the things we've shared with you in the past is we have started dedelegating certain IPAs. That strategy has been phenomenal for us and the IPA. We just have a good process.

But there's more and more of the dedelegation of the acute authorization process or we would call that concurrent review process. And it's a competency that we are getting better and better and better at. And it's a competency that we need to make sure that we have the more we scale outside of California. Because I think a lot of the networks that are being constructed are really going to be with the direct providers, practices, et cetera, without having an IPA or an MSO like we have in California. And so I think that's the context.

James Head: Yes. And Scott, given -- we put this as an example of corrective action and how we get on stuff fast. So by the end of January, we saw a little bit of an anomaly in our numbers. And then we went and found the root cause. And we knew that we were kind of going through a changeover at the beginning of the year, and we had staffed up and things like that. But by February, we had identified it and already corrected it. But it was a little bit of a drag on our adjusted gross profit. We want to call it out. But this is the kind of maniacal attention to detail that John talks about.

And what you have to do to successfully execute. But we've corrected it. 80,000 is back exactly where we thought it was going to be by the time we got to February and March. And we kind of perfected that workflow and now we're ready to move ahead.

John Kao: Yes. Last point really is we shared that with you all because we want to signal with you that a lot of the performance we are being able to achieve now was made 2 years ago on operational decisions. The most obvious one is the SG&A percentage being below 9% -- and so we're always continually refining all of our workflows. And it's a lot of focus of our time everywhere in the company. And the message is we are preparing ourselves to really grow and to support that growth in the same way that we have thus far. And that was the one line that I mentioned. It's not going to be a straight line.

But I feel really good about this year, guys. I really do. And even for '27, '28 is a little bit far out, but -- and I think if anything, we've proven to you all we've kind of do what we say we're going to do.

Scott Fidel: Got it. Got it. And if I could just follow up. And certainly, we appreciate you calling it out certainly as compared to us being in the dark about it. So. And then just to clarify sort of one. So John, it sounds like maybe the skew might have been to some of the outside of California markets in terms of just how this flows through to some of the delegation. And then the other follow-up would be, Jim, I know you mentioned sort of there was a separate dynamic around it sounds more like a mix impact on inpatient from sort of product mix change.

Is that sort of D-SNP -- or maybe if you could just sort of clarify or is that sort of the new markets? Just maybe clarify what specific mix change there was that impacted that?

John Kao: It's not just an ex California issue. It really was just a corporate function that we're really scaling and growing putting new systems in, putting in new workflows, all of that. It's really limits to that. And it's not just a function of the ex California and then Jim.

James Head: Go ahead, Jim. Yes. And as it pertains to 80,000 being slightly higher, that is a mix issue. And it's a growth and a mix issue, Scott. In that instance, there's a lot of growth outside of California, and there's a lot of growth in more acute populations. And so we had planned for that as we came in. If you remember on our fourth quarter call, we talked about 80,000 is going to be inpatient admissions per 1,000 or 80,000 is going to be a little bit higher this year. It's going to tick up a little bit because we were making an investment in that population that we know has a lot of embedded gross margin.

We're willing to make that investment. All of that is baked into our guidance at the beginning of the year and our outlook in the first half. So this is -- we're kind of tracking as to what we thought was going to happen.

Scott Fidel: Okay. So it's new member sort of mix and then it's sort of some of the new markets and then sort of both of the product sets in terms of sort of traditional HMO and then DFI or sort of skewed just towards one of those?

James Head: No, it's the -- we talked about a lot of our AEP growth being in the C-SNP, [indiscernible] population, like about 50% growth. That's what we're talking about in terms of...

Scott Fidel: Yes, that's what I was trying to clarify.

James Head: All of that is exactly tracking is how we expected. So that's -- the good news is we knew this -- we absolutely embraced going after that population because we think we can be very successful.

Scott Fidel: Yes. So when you were saying more acute population, you were referring to the SNP not that the traditional HMOs new members were more acute. It was more the... That's what I was just trying to confirm.

Operator: [Operator Instructions] Our next question will come from the line of Whit Mayo with Leerink.

Benjamin Mayo: Maybe just a follow-up on that. How you're feeling about risk adjustment versus expectations given this focus on the more medically complex members this year?

James Head: I think we're -- I'll break it into two pieces, our loyal population, which we really have a good line of sight. We're very good at predicting that and tracking it. And as it pertains to risk adjustment on the new members, we call them the newbies, that's where we're very cautious. So we book to the paid MMR, which means what CMS pays us will record as revenues. Now what that does is provides opportunity for upside in the second quarter when we get the final suites. So I think that you'll get more information when we get more information in the second quarter on that.

But we are probably a little bit different than others in that we take a cautious stance on our new vision until CMS is giving us paid files that recognize that upside.

Benjamin Mayo: Okay. And maybe just my follow-up. I don't think we've talked about RADV in a while. I just wanted to give your take, John, on the 2020 audit methodology that was issued a few weeks ago. Just what's different you see about the 2020 audits versus maybe the 2018 and '19?

John Kao: Well, the big one is the kind of the ongoing litigation around the extrapolation methodology, which is a huge deal with respect to potential financial exposure. And for those of you that don't know, that part of the extrapolation methodology is no longer in the 2020 audits. Not to say that they won't come back down sometime in the future. And we feel very good about that entire process. We've scrubbed that area very tightly, and I'm not worried about that.

Operator: [Operator Instructions] And our next question is going to come from the line of Michael Ha with Baird.

Michael Ha: So it sounds like this inpatient admit issue is fully resolved, but it sounds like you realized anomalies in end of January. So would you say you knew about it by the time you reported earnings? And then secondly, I just wanted to ask about the LIS SNP members, it sounds like they were in line this quarter. But I was wondering if you could actually talk more about like higher mix of these members, how it might impact your cohort maturation into '27? Because if I'm thinking about it correctly, right, year 1 year to year 2 generally larger step-up in MLR improvement.

Is it more pronounced next year given higher LIS SNP member mix, meaning if you're getting, say, like a 30 bps, 40 bps headwind in MLR this year, does that turn around into a larger tailwind next year?

John Kao: Yes. I can take this, and Jim can provide color commentary. I think we have to wait a little bit in terms of getting the sweep data in. It's kind of linked to the prior question. We got to get the sweep data in on the newbies. I think from an MLR point of view, it's kind of consistent depending upon market, it's kind of in the high 80s, low 90s on the newbies that we got, inclusive of the numbers. So I don't think it's like ramping. But your point on the opportunity for we to improve embedded earnings once we have more time with these newbie members, particularly the SNP members, I think, is a good call out.

And the way I'm looking at this is when you look at the overall consolidated MLR, we are then kind of looking at, well, how much of the MLR is supplemental benefits. And we've kind of shared in the past, it's in that 5% to 6% range. And so your medical MLR is kind of 82%, 83% that's the way we think about it. And then you say, okay, of that, how much is newbie versus how much is loyal? And to your point, the bigger proportion of our membership that becomes bigger and bigger that becomes loyal, that embedded earnings is going to get stronger and stronger.

And then when you add on top of that, some of these people, process and technology changes that we're making that impact both MLR and SG&A, that's kind of where we're striving to get to, where we just are so good at all this, there's nobody that can compete with us with respect to bids. And then we start taking this thing out and expanding aggressively. That's kind of how I'm thinking about it.

James Head: Michael, you asked about kind of were we aware of when we -- I guess, when we did earnings at the end of the fourth quarter earnings call in February, were we aware of what was going on? The answer is yes. When you turn the page every year, there's always a little bit of ambiguity in January in terms of how you're predicting the rest of the year. And so when we did our guidance, et cetera, we understood the issue and incorporated that into our guidance. And I think corrective action is the right way to describe it. We fixed it fast. It didn't take months. It took 30 days to fix it.

And I think you're seeing in our first half guide that we feel pretty good that we've got line of sight on the first 6 months of the year, and things are performing quite well.

Michael Ha: Great. And just a quick clarification. A -- what would MLR have been if you did not have that issue in January? And then on DCPs...

James Head: Yes, I would say it's probably maybe 30 basis points higher or something like -- 30 basis points lower, something like that.

Michael Ha: Got it. And if I could ask just one on DCPs. They're up a lot again this quarter. I think like 10 days year-to-year. Last quarter it was up 6 days, which I love to see that. Also noticing [indiscernible] is tracking well, down year-to-year. But I know last quarter, there were some, I think, timing dynamics around claims payment. So I was just wondering, were there any unique dynamics this quarter that might explain the large increase? And just would love to get your thoughts on the level of conservatism in your reserve methodology recently because it feels like there's a nice cushion.

James Head: Yes. And Michael, I think I'm tracking DCPs, reserve build, stuff like that. I'll just say, generally speaking, our reserve methodology is exactly the same. We're conservative and consistent. We haven't really changed our processes or our stance. It's not like we were conservative last year, we're less conservative this year. We're growing fast. But that's all part of it. The DCP did pick up a little bit. There is some Part D components in there, call it CMS Part D type stuff, which makes it a little bit anomalous. But generally speaking, the classic IBNR days claims payable has been moving upwards. Over the last three or four quarters, we're just 3 quarters.

We've just -- there's been a little bit of volatility in the pace, but we're working through that. But I wouldn't read into building conservatism, but I would certainly not say that we're -- that we've changed anything and we're less conservative at this point. So it feels like it's a good quality of earnings, so to speak, this quarter on that.

Operator: [Operator Instructions] Our next question will come from the line of Jessica Tassan with Piper Sandler.

Jessica Tassan: I'm curious to know how you're thinking about supporting the bridge model for GLP-1s that launches this summer. I know the economics are separate from Part D, but just in terms of getting people who can benefit on the drug and adherent, retaining them into '27 and possibly capturing some trend benefit. Just interested to know how you're thinking about that launch this summer?

John Kao: The kind of voluntary pilot is what you're asking about?

Jessica Tassan: Yes.

John Kao: Yes. We actually said we would participate with certain conditions. I think you guys know that they didn't get the 80% that they wanted. And so they're kind of extending that time period. And that kind of gets into a little bit of our product strategy for the '27 bids, which I'd like to not discuss at this point. is kind of how I'm thinking about it. I'm not sure.

Jessica Tassan: It's all right. I can come back in a few months. Maybe then just on '27, to the extent that you guys are willing to comment, it sounds like the message for '26 is we're really happy with the growth for '27 sustained growth. So can you just update us on new market plans for '27 post rate announcement? Are you still planning to add at market? And then just whether you guys consider the '27 rates adequate? And if not, should we just expect kind of marginal benefit cuts to offset whatever the delta might be?

John Kao: Yes. The other kinds of questions we're getting are, gee, with only 2.48% net, are you guys going to just like grow like crazy again like you did in '25, basically? And again, I don't want to comment on any bid tactics I will say -- just for competitive reasons. I will say that we will be expanding into new markets, some large markets next year. I'm not going to comment yet where and/or if we're getting new states. But I think -- again, we think about all of this as a portfolio of assets.

And I think it's fair to say for we to expand where we have risk-based capital in a capital-efficient way is probably still the best way for we to grow, whether that be California, Texas, North Carolina, Vegas, it's doing great, et cetera. I think the other part of what's driving our decisioning is, again, this discussion around the operational framework and can it support the level of growth in the new markets? And I think the answer is yes, given our performance. But I probably want to see another year of outcomes. And I think we can continue getting the growth. I think you'll see us getting good margin expansion.

And I think you'll start seeing that in some of the discussions around '27. And we'll talk about that in the fall. So after the bids are in.

Operator: [Operator Instructions] Our next question will come from the line of Ryan Langston with TD Cowen.

Ryan Langston: Just on the G&A, I appreciate the comments on the benefits from investments and some automation. But was there any impact from timing in the first quarter that might sort of reverse out in the rest of the year? Should we maybe expect that level of performance to kind of carry through the back half of the year?

James Head: I think there is always a little bit of timing in the first quarter where you want to make sure that you've got cushion -- for hiring spending, things like that. But I think it was -- there's just a lot of good performance across all the categories even beyond labor, for instance. Now as it pertains to whether we're going to pass that along, it's early in the year. And this -- as John and I have been talking about, we're really making investments in the business. So I suspect that we're not going to just turn that into a beat on the year just yet.

But on the other hand, it gives us a little bit of comfort that we can continue to make investments in the business. And obviously, we're monitoring this holistically from a margin perspective, percentage of revenues and whether we're going to meet our commitments. So obviously, it's nice to have an early good start, but that doesn't mean we're ready to give it all back and put it into the margin.

Ryan Langston: Okay. And then can you just maybe talk a little bit about capital expenditures for 2026 and beyond? I mean, is there sort of an opportunity or maybe even a desire to push that up a little bit just given where the free cash flow generation is now?

James Head: Yes. Our capital expenditures are largely software development. And we do have a little bit of hardware. And we've got kind of a road map set up where we -- this year, we're probably in the $40 million spend range. It's a little bit -- we're coming out of the block a little bit softer than that, but that will accelerate. And it's well within our means. Now on the other hand, the ability to -- if we have the dollars, we also need to make sure that we're -- we've got the right project, the right bandwidth, and we're getting the right returns out of it.

So that is a little bit more of the constraint versus the quality and returns versus whether we have the capital for it. So we feel pretty good about 40%. My guess is that could tick up a little bit, but it's going to -- as we accelerate our revenues, it's certainly going to come down as a percentage of revenues over time.

John Kao: Yes. And just to add to that, I mean, we have not shared with you all, and we won't on this call, we will likely have more transparency on the next call around how we're deploying AI. And just -- I think the opportunities for us in terms of our clinical operations, our provider data, our stars, our MR, like every part of the company can benefit from that and we will continue to drive down the SG&A in particular and the MLR, I think.

And so what we've had to do to maximize the benefit of AI and the tools that are available to us, which I think are just amazing is make sure we understand and validate all of the data. I think we have the best data in the industry, and we're going to get that even better. And I think our workflows, our end-to-end provider workflows, our end-to-end member workflows, our end-to-end Stars workflows, all of that is getting documented molecularly now so that we can apply the AI tools on top of that. And that's where the CapEx is going towards.

Operator: [Operator Instructions] And our next question will come from the line of Justin Lake with Wolfe Research.

Unknown Analyst: This is Dylan on for Justin. From a trend perspective, some of your peers have talked about a moderation beyond weather and flu. Have you seen any early signs there? And then also curious on the churn rate you're seeing early in 2026 compared to 2025?

James Head: This is Jim. I'll take the second question first. Churn meaning retention, we're actually tracking really nicely on retention. That's been one of the helpful components of our membership growth year-to-date, OEP, et cetera. So we feel pretty good about that. As it pertains to trends, I mentioned earlier on the -- in the Q&A, flu and other trends are -- we track them, and they're not jumping out as anything anomalous per se. Now that's our book of business and how we think about things. But I will say that we look across the major categories of medical spend and the trends seem very consistent for us.

And obviously, the rate environment, as you guys know pretty well, it's low single digits. What we haven't talked about on the call here is Part D, which is tracking very nicely this year. We had a little bit of outperformance in Q1 in the margins. That was a good thing. We're not ready to kind of turn that into a full year expectation increase. But Part D is doing really, really nice. And that's -- over the last couple of years, that's been a big watch out. So we feel pretty good about that. But trend-wise, we just have a different kind of rhythm than some of the other commercially focused or some of the other MCOs.

And I don't think it's just because it's our footprint. I think it's because we are -- it's the way we set up our utilization management. I think the way we work with our providers. And there's some capitation in there that cushions us along the way, not necessarily full, but some of the capitation is absorbing some of those flu season trends, et cetera.

Operator: [Operator Instructions] Our next question will come from the line of Andrew Mok with Barclays.

Andrew Mok: Alignment is predominantly an HMO business, but you leaned a little bit more into the PPO product this year. Can you walk us through the rationale behind that decision? And how are you thinking about the relative attractiveness of the PPO product given some of the recent plan exits across the market? And do you expect PPO to become a larger driver of your growth over time?

James Head: Andrew, John. Part of the reason we were willing and able to do it last year and for this year is over half of the business is globally capitated. And so that factored into the way we think about things. I think that the logic around stratifying members, caring for the members through our Care Anywhere program, kind of positioning that part of the, call it, the clinical part of the business is something that should and could work for us as we think about extending the product, particularly outside of California. I don't think we have figured out the secret sauce yet, frankly.

And I think that I think the only way to deal with that is probably going to be with higher member premiums going in the future. We are not going to be, I don't think, talking about, again, 27 bids. But I think long term from an industry perspective, that whole part of the world was supported by high RAS scores. And I just don't think that's going to happen going forward. And I think the unit economics are going to be pretty tough for people. If anybody can do it, it should be us. But candidly, I don't think we've cracked that code quite yet.

Operator: [Operator Instructions] Our next question comes from the line of Jonathan Yong with UBS.

Jonathan Yong: I recall last quarter, we talked about you still had some provider engagement negotiations outstanding in some states that you were thinking about entering. Has that progressed any further? And does the final rate update make any difference in terms of those negotiations? So you were negotiating when the advance came out and then obviously, the fines out. Does that change that negotiation process?

John Kao: No, Yes. I know exactly what you're talking about. I wouldn't characterize it as negotiation. I think the negotiations part was fine. It was more around the engagement, the provider engagement model. And in some markets, the answer is yes. And we'll share with you where we're expanding to. In some markets, the answer is no. And I think that will also have -- would kind of dictate where we expand into certain markets or new states. I think the negotiations part is really interesting is -- the delivery system, and I can get on a whole thing on delivery systems, if you guys want. But they really need an alternative.

They want an alternative to a payer that's willing to move market share to them without the kind of high denial rates some of the larger folks have. And that's not to say that we're not good at it. It's just we're actually -- the model is very different. And so that though requires a high degree of engagement with the clinically integrated networks that are typically owned by these integrated delivery networks, these large monoliths now they are becoming somewhat monopolistic, but that's a whole different topic. And so it's really important that we find the right doctors and practices we can work with. And we're leaning into that significantly as we think about more scale outside of California.

Jonathan Yong: Great. And just a follow-up just on the denial portion of it. Given the MCOs, broadly speaking, are reducing the amount of prior auths, et cetera, and presumably denials, does this make it harder to contract within that context?

John Kao: No, it's going to be really interesting. I think it's where is the emphasis. And I think a lot of the AHIP discussions and what CMS is pushing the large plans is really around commercial. I think there's a little bit also that the exchanges in [ Caid ] and care are dragged into that as well. But our denial rates are like less than 2% -- and I won't name names, but some of the larger ones are 13% to 15%. And some of the data we pulled that Harrison pulled and shared with us just a few weeks ago was really interesting, and I'd encourage you all to get that. It's all publicly available.

I do think we need to, as an industry, talk about, and I think you guys need to understand this part is when I get every single health system CEO and CFO say that Medicare Advantage pays them 85% or 86% of traditional Medicare. The inference is the plans are denying care or kind of playing insurance games. When in fact, I would pause it that we think about that statement differently, meaning from our experience, we are paying the health systems 100% of what they deserve to be paid.

And so when we talk about the same degree of program integrity that was applied to MA as it relates to coding for the insurers, we got to start looking at program integrity on hospital billing practices in the context of this affordability discussion. And if 100% of the claims and authorizations we get from hospitals and systems is acute as opposed to observations, because ask the question, how are we going to make sure that everybody is aligned on the accuracy of those billings that are submitted to the plans. And so you got to look at the denominator also. The denominator is traditional Medicare. Well, traditional Medicare isn't editing any of their submissions, I would pause it.

And so we got to just kind of deal with that issue. And that is -- that's going to be a policy issue. And if you heard the hospital CEOs in front of Congress the other -- I think it was earlier this week, it's all the plans. Everything is bad about the plans. And I would just reject that. We're paying -- we are paying hospitals 100% contractually what they show, and our denial rates are very, very low. So that's kind of my soapbox on that.

Operator: [Operator Instructions] Our next question will come from the line of Craig Jones with Bank of America.

Craig Jones: So I want to follow up on the final rate notice. Chris Klump was out with some comments after the final rate notice is published that you happy with that 2.5% number as it is roughly in line with where general inflation comes in and thought that, that should be a target for just health care spend increases going forward. So do you think that 2% to 3% is where we will continue to see these rate notices going forward? And if that's the case, what kind of -- what level of unmanaged trend, I guess, could you manage without having to cut benefits if that's where the rate notice comes in?

John Kao: It's a pretty insightful question there. I think overall trend nationally as an industry is way higher than 2.48%. And I think the default scenario for a lot of the plans is going to modulate the delta through kind of either tougher unit economics with the providers or, to your point, benefit reductions. I think for us, you got to look at the specific geographic impact of some of this information. And so I think it's public out there that when you look at the data region by region, for example, L.A. County's rate increases are closer to 6% okay? So obviously, that stands to benefit us significantly.

And so those are the kind of factors we're considering now, and I've shared this with you in the past that we're doing our business plans now market by market in preparation for the bids. So I feel pretty good about where we're positioned for '27 bids. But no way trend is going to be at 2.48%. There's just no way. I mean that's -- I love Chris. I have a lot of respect for him, but the trend is a lot higher, which gets to and speaks to affordability, which gets back to hospital billing.

Operator: [Operator Instructions] Our last question will come from the line of Ryan Daniels with William Blair.

Ryan Daniels: John, you talked a little bit about ancillary benefits and the impact on MLR. And Jim, you've talked about capital deployment. Let's tie those two together and get your latest thoughts on maybe deploying some capital to bring some of that in-house, especially as you approach that 300,000 member number and think about going into new markets. Is that another strategy along with AI to kind of help the cost profile of the organization?

John Kao: Yes, absolutely, Ryan. The supplemental benefits, if you kind of look at the larger we get and a lot of our larger competitors have those captives, we could call them, whether it be a behavioral health HMO, dental PPO vision PPO, transportation, all that stuff right now, we pay external vendors. And so it's an opportunity for us to lower MLR by bringing some of that in-house. And I've kind of alluded to that in the past where if we focus kind of M&A dollars, it could be in those areas, which are relatively low risk, low capital, high return.

And so whether it's a dental PPO or a dental HMO even, those are some of the decisions we're weighing right now, you'd see that company. If we bought something or if we started something, you'd see it with 300,000 customers. That's a pretty good win for everybody. Obviously, that is not something we're embedding into any of our thinking for the first half guidance, that would be an additional upside for us in the future.

Operator: Thank you. This will conclude today's question-and-answer session. Ladies and gentlemen, this will also conclude today's conference call. Thank you for participating, and you may now disconnect. Everyone, have a great day.

John Kao: Thank you.