John Kao: Ryan, it’s John. I think Thomas is navigating some Wi-Fi issues right now. But the answer to the question is yes. And we’re pretty happy with that. And just let me comment on that. We’re not immune to certain utilization hotspots with some of the new members that we picked up. We have a couple of markets, not a lot of members, but we still have some members that had higher inpatient utilization, actually a couple of different markets. And we’re just all over it.
We have visibility to it. We are addressing the care needs of these patients on a daily basis. And so we’re just managing it really aggressively. So it’s — I’m really happy with the performance on the admissions per 1,000. 151 for the whole book is a lot better than what we did a year ago even. And so these kind of continuous improvements that we’re making to AVA and to Care Anywhere are really starting to pay off. And I actually think there’s even more opportunity for us as we start maturing some other initiatives that we’ve got in the clinical.
Ryan Daniels: Right. Perfect. And then maybe another bigger picture question directed to you. We’ve seen some data recently talking about Medicare Advantage HMOs versus PPOs and the ability for providers with HMOs to better control cost and utilization and manage the patient. I know your exposure is mostly HMO lives versus some of your peers. Do you think that also is providing you with a unique advantage as it comes to your MLR stability or MBR stability versus what a lot of the other players are seeing as we enter 2024?
John Kao: Yes. I think that’s fair. I think that’s a fair statement. I think the way we design our provider contracts also, I think, is part of that answer. Kind of this notion of prior auth though is something that’s a bit of a misnomer in that a lot of our provider partners and a lot of what we do is auto auth.
I think it’s making sure that we have the proper care navigation in the HMO to get people into the right providers in a kind of a timely fashion for access. That’s really important from a cap on a Stars perspective and kind of having — kind of a preferred network, if you will, in care navigating to the right, the highest quality provider, all those kind of dynamics, I think, are things that you get with the HMO.
I think on the PPO, Ryan, the stratification model of identifying who the high-cost vulnerable PPO members and then caring for them with carrier, that principle still holds as well. And I think one of the things we’ve done a really better job on with the PPO is engaging those PPO members without a dedicated PCP and engaging them and making sure we get proper documentation on the coding side. That makes a big difference.
Ryan Daniels: Congrats again.
John Kao: Thanks, Ryan.
Operator: [Operator Instructions] Our next question comes from the line of John Ransom from Raymond James.
John Ransom: One issue for the industry is this thing about claims lag and what do you know when you know when you report a quarter, especially around outpatients. And I know you guys have your AVA technology and your Care Anywhere plan. But what — your ability to accrue your cost accurately, how has that changed? And what tools do you use that maybe some of your competitors when you stand here and say with confidence what the — kind of what the 1Q medical costs look like?
Robert Freeman: John, this is Thomas. I appreciate the question. So I think our ability to actually have the visibility that allows us to accrue for our performance in Q1 or any other quarter actually is very much underpinned by the visibility and control we have from a medical management standpoint. In other words, it’s not that we do things from a financial standpoint to create the visibility. It’s that we actually run our business day to day with things like admission discharge transfer data, i.e., heads in beds every single day, and then we use that information in order to actually track and accrue our financial reserves or medical expenses.
And so more specifically, when I think about the broader spend outside of the inpatient setting, there’s a lot of correlation between the different categories of spend. And so for instance, about 90% of our members go through the ER when they’re hospitalized. And conversely, on the way out of the hospital, about 2/3 of our discharges go to a skilled nursing facility or a home health facility. So there’s a high degree of correlation between how that inpatient KPI moves and how other categories of spin claims PMPM also move.
And then beyond that, we do, of course, track off data on other things like outpatient hospital surgery or ASC metrics, skilled nursing, length of stay, home health per 1,000, et cetera. So I think our ability to have pretty good visibility to how the overall claims PMPM is running for the first quarter is quite strong. But it’s underpinned by us using that information day-to-day as opposed to the other way around.
John Ransom: Great. And then my second question, this is my favorite, like walking in the weeds Medicare Advantage question. But do you have any visibility on the 2Q midyear sweep? And what’s embedded in your guidance as we sit today?
Robert Freeman: Yes. So there’s two different sweeps we get in the second quarter. One is the final sweep from last year, which we typically receive at the end of May in our June payment file. And then we also get the midyear sweep on the 2024 membership, which typically comes at the end of June in the July payment file. So typically speaking, both of those two sweeps would be reflected in our 2Q financial results.
We typically don’t accrue or expect anything on the financial sweep — the final sweep from the prior year. It depends upon the year. I would say, in COVID years, in particular, we saw outsized favorability associated with that sweep. But I think if you look at our results last year, which is probably more indicative of a normal year, we didn’t have near as much of a pickup last year. But nonetheless, if we do see any kind of positive favorability there, it would be, I think, in addition to what is currently guided.
From a midyear sweep standpoint, very similarly, we typically see kind of a few basis points of pickup on the new members that allows us to actually have our full year new member RAF be consistent with what we got paid in January. And that’s really how we build our guidance over the course of the year on the new members, is whatever we get paid in January is whatever we expect to be paid for the full year.
To the extent that, that comes in more favorable in the mid-year sweep, that could also be upside. We don’t like to kind of bank our guidance on that assumption because it’s out of our control. That midyear sweep comes from whatever was documented last year with the members prior health plan. So I think it puts us in a conservative position, but also at the same time, I think given what we’ve seen last year after COVID, that typically is not going to be a major driver of significant outperformance. It could be some modest upside.
Operator: [Operator Instructions] Our next question comes from the line of Adam Ron from Bank of America.
Adam Ron: So you mentioned that this year was a growth year and that next year, potentially margin could be more important. But if I look at like even this year where you’re saying new members come in and they don’t have super high margins, you still are on track to, I think, increase EBITDA margins 200 basis points. So if next year, margins are more important, is there a reason why we shouldn’t see that kind of margin expansion again? Or are there onetime items like the ACO REACH kind of skewing that?
Robert Freeman: Adam, Thomas here. On the last part of that question, ACO REACH is not a significant driver of profitability improvement from ’23 to 2024. I think we sized that in the kind of like $3 million to maybe $4 million or $5 million range in terms of dollars of improvement from ’23 to 2024 guidance. So the vast majority of our improvement in 2024 is really coming from the Medicare Advantage business. And as we talked about, the vast majority of that is really coming from improved operating leverage through the adjusted SG&A line.
And so I think to your broader question on 2025, while we’re not going to draw a line in the sand today on our 2025 margin goals for next year, I think what we were really trying to amplify in John’s remarks is that we think we have the ability to do both growth and margin improvement again next year also. And I think we’re in that position because of some of the tailwinds John described, where while we’re impacted by V28, I think we are less impacted by — relative to our local competitors.
And then from a Stars standpoint, we very much have a funding advantage over the vast majority of our competitors for 2025. So I think that gives us a little more flexibility to achieve both next year and continue on the trajectory we set forth for 2024.
Adam Ron: Makes sense. And then in your remarks, you mentioned a couple of things about a widening relative advantage in 2025 and how your competitors would see reimbursement headwinds. But one thing that was like sort of pushing in the other direction is the fact that the L.A., where your most few members are benchmarked, is expanding by 5%, which is very strong. So does that help your competitors overcome some of their reimbursement headwinds such that maybe they don’t actually have to cut benefits and they kind of close that relative advantage because they needed the reimbursement more? Like how are you thinking about that? Like — or is that a tailwind for you relative to your expectations?
Robert Freeman: So I think a couple of things. So in terms of the benchmarks in some of the markets, particularly Southern California, to your point, I think some of those markets have also seen higher inpatient and outpatient unit cost increases. And so a little bit of that, I think, is catch-up in 2025 relative to the 2024 rate updates with CMS. But I think from a competitive standpoint, we sort of look at it as one kind of pool of overall funding or reimbursement dollars for us and our competitors and each of us has our own pluses and minuses.
So to the extent that we have 5% in a market and our competitor has 5% in a market, I agree that would be sort of a neutral factor. I don’t think it necessarily helps us. I don’t think it necessarily hurts us. But I think what creates that relative advantage are the other 2 factors, where, on average, there’s really only one of our major HMO competitive plans in our markets. That’s going to be 4 Stars. Everyone else is either 3, 3.5 or in some cases, 2.5. And so that extra 5% to 10% revenue PMPM funding advantage on Stars alone is, I think, a major advantage for 2025, even if some of the benchmarks in certain counties are going up by 5%.
Adam Ron: If I could squeeze one more in. So Humana recently talked about the industry margin potentially settling out at around 3%. That’s like EBIT, not EBITDA. Do you have a view on that? Or has your view changed at all based on the new reimbursement environment? That would be my last question.
Robert Freeman: Yes. I think our view of long-term margins is fundamentally unchanged in that the overall structure of the Medicare Advantage program is unchanged. So when we went public several years ago, we talked about a 6% to 7% adjusted EBITDA margin long term, which I think is more like a 4% to 5% pretax margin. And when you think about what has changed in the more recent macro environment, you’re right. I think Stars has gotten tougher with the introduction of 2 key and the removal of some of the COVID kind of protection mechanisms that were put in place on Stars. V28 has been introduced. And then broadly speaking, across the board, utilization pressures have been seen in a variety of different categories of spend.
And so while I think that’s put pressure on the industry at large in the short term, I don’t think it changes the fundamental opportunity given that, at the end of the day, a number of plans have demonstrated the ability to run efficiently with SG&A at 10% or below. We’re starting to get pretty close to that, getting down below 12% in 2024. And from an MLR standpoint, the 85% MLR rule is unchanged.
So I think just structurally, the opportunity is no different today than it was a year or a couple of years ago. I think the changes in macroeconomic factors, though, have put more pressure on the requirement to be a high-quality, low-cost player. And if you’re able to do that, I think you can still win in this current environment, and long term, generate the same 4% to 5% pretax margins you could have or would have expected several years ago.
John Kao: Just Adam, let me echo that. This is John. Let me echo that. It’s an opportunity for organizations that have the lowest cost structure or have a model to get to the lowest cost structure without compromising quality. And it gets measured by Stars because you get reimbursement that’s more, the better quality you are. But that’s why we’ve spent so much time and effort making sure that the care model and the belief that if you can manage the care, you’re in a position to control the cost.
That’s the — from day 1, that’s been our philosophy. And I think there’s somewhat of a sea change that those that have just relied on risk adjustment to be successful are the ones experiencing tough margin compression right now. So it’s like a structural change intentional by CMS. And so those who have been in this business for 30 years or so have gone through 4 or 5 of these reimbursement blips.
But the kind of the wave of aging of seniors and the political kind of power of MA, we just don’t see it slowing. In fact, we still see market share penetration going from 52% to 65% in the next 7 years. I mean, so I think it’s an opportunity. And I think it requires a structural change in terms of who will win and what will succeed going forward in MA. And I think we’re really well positioned for that.
Operator: [Operator Instructions] Our next question comes from the line of Whit Mayo from Leerink Partners.
Benjamin Mayo: The new lives that you picked up in the first quarter, can you maybe quantify the — how much of those are agents versus switchers? And if there were a lot of switchers, any themes on the switching, if you have any market intelligence on that?
Robert Freeman: Yes. Whit, this is Thomas here. So I’d say our OEP experience, which lasted through the April 1 eligible beneficiaries, was very similar to our AEP experience. And so what I mean by that is the majority of the membership or the new sales were planned switchers. But we see those plan switchers coming from a variety of our competitors across a broad swath of our markets. And so there’s not really just kind of 1 or 2 or 3 competitors that were disproportionately taking share from. We’re really, I think, advantaged in most markets this year to take share from a variety of players, both in terms of the local or regional competitors and also many of the large national competitors.
And I think in terms of our product mix, it’s also been pretty broadly distributed across the board. And sitting here today, we still have about 30% of our members that are enrolled in one of our [indiscernible] like our C-SNF products or are duly eligible, which is pretty consistent to where we ended at the end of last year.
