Alignment Healthcare, Inc. (NASDAQ:ALHC) Q1 2026 Earnings Call Transcript

Alignment Healthcare, Inc. (NASDAQ:ALHC) Q1 2026 Earnings Call Transcript May 1, 2026

Operator: Good afternoon, and welcome to Alignment Healthcare, Inc.’s First Quarter 2026 Earnings Conference Call and Webcast. [Operator Instructions] Please note that this event is being recorded. Leading today’s call are John E. Kao, Founder and CEO; and James M. Head, Chief Financial Officer. Before we begin, we would like to remind you that certain statements made during this call will be forward-looking statements as defined by the Private Securities Litigation Reform Act. These forward-looking statements are subject to various risks and uncertainties and reflect our current expectations based on our beliefs, assumptions and information currently available to us. Descriptions of some of the factors that could cause actual results to differ materially from these forward-looking statements are discussed in more detail in our filings with the SEC, including the Risk Factors section on our annual report on Form 10-K for the fiscal year ended December 31, 2025.

Although we believe our expectations are reasonable, we undertake no obligation to revise any statements to reflect changes that occur after this call. In addition, please note that the company will be discussing certain non-GAAP financial measures that they believe are important in evaluating performance. Details on the relationship between these non-GAAP measures to the most comparable GAAP measures and reconciliation of historical non-GAAP financial measures can be found in the press release that is posted on the company’s website and our Form 10-Q for the fiscal quarter ended March 31, 2026. I would now like to hand the conference over to CEO, John E. Kao. Please go ahead, sir.

John E. 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 have 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 would 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 Healthcare, Inc. 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 are 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 will turn the call over to Jim to further discuss our financial results and outlook. Jim?

James M. Head: Thanks, John. I will 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 2025 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 us open the call to questions. Operator?

Q&A Session

Operator: [Operator Instructions] We will now open the call for questions. Our first question will come from the line of Matthew Dale Gillmor with KeyBanc.

Matthew Dale 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 has been resolved?

John E. Kao: Yes. Matt, it is 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 [inaudible], we were a little bit higher by a couple of days. And we wanted to share that with everybody. And it is really part of really how we are kind of looking at every part of our company to just continuously get better. And we will talk about that a little bit more, I think. But I do not think it is a systemic problem. I think it was a one-month blip, and we will have that course correct. We have it course corrected.

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

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

Matthew Dale Gillmor: Yes, okay.

James M. Head: Matt, I will jump in on the utilization because I think that is important, and there are 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 are 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 was not 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 have 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 Paul Stansel with JPMorgan Securities.

John Paul 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 is even after adjusting for a couple of million of incremental pressure that is not going to recur in 1Q. Can you just talk about what is assumed for year-over-year improvement in the second quarter that is maybe different from the first quarter?

John E. Kao: Yes. John, second quarter is usually our seasonal better quarter. And so there is just a natural decline in the MBR. So that is a good thing and it was expected. But I do want to step back and kind of describe — we are laying out the actuals for first quarter. We are guiding on second quarter. And it is a pretty strong first half that we are positing. We set a reasonably high bar this year, by the way. But through the first half, we are 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 is 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 are making investments in the business to scale. So we are really doing this balancing act of trying to make sure that we are executing very, very well, investing in the future. We are bringing on talented folks across the enterprise. We are 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 Paul Stansel: Great. And then maybe just taking a step back and thinking about some of the changes in the final rate notice, I will call it, deferral of a new risk model. How are you thinking about maybe reasons why that did not make it in? And then as we think about potentially a new risk model in, say, 2028 or 2029, what we can take away from what was proposed versus what might actually be implemented?

John E. Kao: Yes. John, yes, I personally think there is going to be some changes. I think there is going to be more normalization, if you will. I do not think there is enough outcomes, feedback that CMS has yet to have initiated it in this past final notice. I think I actually do not know, but I believe that they are going to be working on this as a topic of focus in the preliminary notice, the advanced notice coming up, and then we will see something in the 2027 to maybe be implemented by 2029, 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 is a good thing for the industry, and I think it serves us really, really well. And it really puts the purest form of who has got the highest quality at the lowest price point and 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 do not mind, just on the inpatient issue that — just so we can fully understand this. And so what I am 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 is 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 is 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 are going to have a resolution to?

John E. Kao: That was my first question, Scott, but the answer is unfortunately no. Yes. No, it is a rule change that requires us to basically make authorizations a little bit more timely basis. And the backdrop of it is we have shared this with you guys in the past, which is we have kind of moved from this world of kind of capitation and delegation. And even in our shared risk businesses, we have had the certain administrative functions that were delegated to the IPAs. And one of the things we have 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 is more and more of the dedelegation of the acute authorization process or we would call that concurrent review process.

And it is a competency that we are getting better and better and better at. And it is 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 is the context.

James M. Head: Yes. And Scott, 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 have corrected it. [inaudible] 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 are ready to move ahead.

John E. 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 are always continually refining all of our workflows. And it is 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 is not going to be a straight line. But I feel really good about this year, guys. I really do. And even for 2027, 2028 is a little bit far out, but — and I think if anything, we have proven to you all we kind of do what we say we are 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 E. Kao: It is not just an ex California issue. It really was just a corporate function that we are really scaling and growing, putting new systems in, putting in new workflows, all of that. It is really limited to that. And it is not just a function of the ex California and then Jim. Go ahead, Jim.

James M. Head: Yes. And as it pertains to [inaudible] being slightly higher, that is a mix issue. And it is a growth and a mix issue, Scott. In that instance, there is a lot of growth outside of California, and there is 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 [inaudible] is going to be inpatient admissions per 1,000 or [inaudible] is going to be a little bit higher this year. It is 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 are 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 are kind of tracking as to what we thought was going to happen.

Scott Fidel: Okay. So it is new member sort of mix and then it is 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 M. Head: No, it is the — we talked about a lot of our AEP growth being in the C-SNP, [inaudible] population, like about 50% growth. That is what we are talking about in terms of…

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

James M. Head: All of that is exactly tracking is how we expected. So that is — 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 is what I was just trying to confirm.

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

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

James M. Head: I think we are — I will break it into two pieces, our loyal population, which we really have a good line of sight. We are 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 is where we are very cautious. So we book to the paid MMR, which means what CMS pays us we 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 will 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 Whitman Mayo: Okay. And maybe just my follow-up. I do not think we have 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 is different you see about the 2020 audits versus maybe the 2018 and 2019?

John E. 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 do not know, that part of the extrapolation methodology is no longer in the 2020 audits. Not to say that they will not come back down sometime in the future. And we feel very good about that entire process. We have scrubbed that area very tightly, and I am 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 2027? Because if I am 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 are getting, say, like a 30 bps, 40 bps headwind in MLR this year, does that turn around into a larger tailwind next year?

John E. 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 is kind of linked to the prior question. We have got to get the sweep data in on the newbies. I think from an MLR point of view, it is kind of consistent depending upon market, it is kind of in the high 80s, low 90s on the newbies that we got, inclusive of the numbers. So I do not think it is 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 am 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 have kind of shared in the past, it is in that 5% to 6% range. And so your medical MLR is kind of 82%, 83% — that is 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 are making that impact both MLR and SG&A, that is kind of where we are striving to get to, where we just are so good at all this, there is nobody that can compete with us with respect to bids. And then we start taking this thing out and expanding aggressively.

That is kind of how I am thinking about it.

James M. 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 is always a little bit of ambiguity in January in terms of how you are 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 did not take months. It took 30 days to fix it. And I think you are seeing in our first half guide that we feel pretty good that we have 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. What would MLR have been if you did not have that issue in January? And then on DCPs…

James M. Head: Yes, I would say it is 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 are 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 [inaudible] 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 is a nice cushion.

James M. Head: Yes. And Michael, I think I am tracking DCPs, reserve build, stuff like that. I will just say, generally speaking, our reserve methodology is exactly the same. We are conservative and consistent. We have not really changed our processes or our stance. It is not like we were conservative last year, we are less conservative this year. We are growing fast. But that is 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, or just 3 quarters, there has been a little bit of volatility in the pace, but we are working through that.

But I would not read into building conservatism, but I would certainly not say that we have changed anything and we are less conservative at this point. So it feels like it is 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 Elizabeth Tassan with Piper Sandler.

Jessica Elizabeth Tassan: I am curious to know how you are 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 2027 and possibly capturing some trend benefit. Just interested to know how you are thinking about that launch this summer?

John E. Kao: The kind of voluntary pilot is what you are asking about?

Jessica Elizabeth Tassan: Yes.

John E. Kao: Yes. We actually said we would participate with certain conditions. I think you guys know that they did not get the 80% that they wanted. And so they are kind of extending that time period. And that kind of gets into a little bit of our product strategy for the 2027 bids, which I would like to not discuss at this point. It is kind of how I am thinking about it. I am not sure.

Jessica Elizabeth Tassan: It is all right. I can come back in a few months. Maybe then just on 2027, to the extent that you guys are willing to comment, it sounds like the message for 2026 is we are really happy with the growth for 2027 sustained growth. So can you just update us on new market plans for 2027 post rate announcement? Are you still planning to add at market? And then just whether you guys consider the 2027 rates adequate? And if not, should we just expect kind of marginal benefit cuts to offset whatever the delta might be?

John E. Kao: Yes. The other kinds of questions we are getting are, gee, with only 2.48% net, are you guys going to just like grow like crazy again like you did in 2025, basically? And again, I do not 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 am not going to comment yet where and/or if we are getting new states. But I think — again, we think about all of this as a portfolio of assets. And I think it is 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 is doing great, et cetera.

I think the other part of what is 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 will see us getting good margin expansion. And I think you will start seeing that in some of the discussions around 2027. And we will 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 M. Langston with TD Cowen.

Ryan M. 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 M. Head: I think there is always a little bit of timing in the first quarter where you want to make sure that you have got cushion — for hiring spending, things like that. But I think it was — there is just a lot of good performance across all the categories even beyond labor, for instance. Now as it pertains to whether we are going to pass that along, it is early in the year. And this — as John and I have been talking about, we are really making investments in the business. So I suspect that we are 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 are monitoring this holistically from a margin perspective, percentage of revenues and whether we are going to meet our commitments.

So obviously, it is nice to have an early good start, but that does not mean we are ready to give it all back and put it into the margin.

Ryan M. 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 M. Head: Yes. Our capital expenditures are largely software development. And we do have a little bit of hardware. And we have got kind of a road map set up where we — this year, we are probably in the $40 million spend range. It is a little bit — we are coming out of the block a little bit softer than that, but that will accelerate. And it is 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 are — we have got the right project, the right bandwidth, and we are 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 million. My guess is that could tick up a little bit, but as we accelerate our revenues, it is certainly going to come down as a percentage of revenues over time.

John E. Kao: Yes. And just to add to that, I mean, we have not shared with you all, and we will not on this call, we will likely have more transparency on the next call around how we are 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 have 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 are 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 is where the CapEx is going towards.

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

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 are seeing early in 2026 compared to 2025?

James M. Head: This is Jim. I will take the second question first. Churn meaning retention, we are actually tracking really nicely on retention. That has 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 are not jumping out as anything anomalous per se. Now that is 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 is low single digits. What we have not 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 are not ready to kind of turn that into a full year expectation increase. But Part D is doing really, really nice. And that is — over the last couple of years, that has 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 do not think it is just because it is our footprint. I think it is because we are — it is the way we set up our utilization management. I think the way we work with our providers. And there is 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?

John E. Kao: 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 do not 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 do not think, talking about, again, 2027 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 do not think that is 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 do not think we have 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 finals out. Does that change that negotiation process?

John E. Kao: No, yes. I know exactly what you are talking about. I would not 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 will share with you where we are 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 is willing to move market share to them without the kind of high denial rates some of the larger folks have.

And that is not to say that we are not good at it. It is just we are 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 is a whole different topic. And so it is really important that we find the right doctors and practices we can work with. And we are 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 E. Kao: No, it is going to be really interesting. I think it is 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 is a little bit also that the exchanges in [inaudible] and care are dragged into that as well. But our denial rates are like less than 2% — and I will not 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 would encourage you all to get that. It is 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 posit 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 have 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, 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 have got to look at the denominator also. The denominator is traditional Medicare. Well, traditional Medicare is not editing any of their submissions, I would posit. And so we have got to just kind of deal with that issue. And that is — that is going to be a policy issue. And if you heard the hospital CEOs in front of Congress earlier this week, it is all the plans. Everything is bad about the plans. And I would just reject that. We are paying — we are paying hospitals 100% contractually what they show, and our denial rates are very, very low. So that is 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 are 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 is the case, what kind of — what level of unmanaged trend, I guess, could you manage without having to cut benefits if that is where the rate notice comes in?

John E. Kao: It is 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 have got to look at the specific geographic impact of some of this information. And so I think it is 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%. So obviously, that stands to benefit us significantly. And so those are the kind of factors we are considering now, and I have shared this with you in the past that we are doing our business plans now market by market in preparation for the bids.

So I feel pretty good about where we are positioned for 2027 bids. But no way trend is going to be at 2.48%. There is just no way. I mean that is — 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 have talked about capital deployment. Let us 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 E. 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 is an opportunity for us to lower MLR by bringing some of that in-house. And I have 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 is a dental PPO or a dental HMO even, those are some of the decisions we are weighing right now. You would see that company. If we bought something or if we started something, you would see it with 300,000 customers.

That is a pretty good win for everybody. Obviously, that is not something we are 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 E. Kao: Thank you.