Alignment Healthcare to eliminate ACO REACH exposure, exceeds revenue expectations

Updated: Wednesday, February 28 at 1:18 pm

Insurtech Alignment Healthcare has recorded $1.82 billion in revenue for full-year 2023 and beat market expectations for quarterly revenue by more than $20 million, the company announced Feb. 27 during its 2024 fourth-quarter earnings call.

However, its earnings per share was a loss of 25 cents, falling short of Wall Street expectations of a loss of 22 cents per share, according to Zacks Investment Research analysts.

The company is also making changes to its ACO REACH business and reporting, citing its competitive advantage in the Medicare Advantage (MA) market.

"We are reallocating our time and human capital towards MA and eliminating downside risk in the ACO REACH program," said Chief Financial Officer Thomas Freeman during the call. "Going forward, revenue from the program will be reported on a net basis, meaning we will no longer recognize the full benchmark risk as gross revenue.

"Under this arrangement, we will recognize a nominal amount of gross profit and not share in ACO REACH program deficits," he added.

Freeman noted that while Alignment Healthcare appreciates the program's intent, the company felt it was important to insulate from risks while "not backing out of the program entirely." This business unit will no longer be a material driver of its medical benefits ratio. As of Jan. 1, the company had 8,900 members in its ACO REACH program arrangement.

In December, Clover Health announced it was leaving the ACO REACH program at the end of the 2023 performance year. Clover also said the program no longer made financial sense for the company.

While Alignment is yet to record net profit, the company backed up claims from last month indicating that it would be this year. Alignment expects to hit $2.4 billion in revenue and $310 million in adjusted gross profit by the end of 2024. It also hopes to post a positive adjusted EBITDA of $15 million toward the upper range of its estimates, and hit a membership goal range of 162,000 to 164,000. The company posted a medical benefits ratio of 89.4%.

"We have always been marginal at best of the strategic importance of ACO REACH for us, and we said that we would keep it for some of our providers but we never really invested in it," said CEO John Kao to Fierce Healthcare. "The way that ACO REACH is designed is if you actually hit your targets, CMS will lower the targets. Each year you do well, they make it harder. It's a bit of a race to the bottom."

He said that due to a surprise variance of $2 million to the company's EBITDA, Alignment capitated the program to mitigate risk. While the variance impacted performance in the fourth quarter, the company sees robust star ratings results and broader industry headwinds as signs Alignment will be able to sustain growth into 2025 in Medicare Advantage, the primary driver of its business.

"The impact of V28 [risk adjustment model] is affecting everybody, but it's affecting us less," said Kao during the call. "We knew heading into the year that some kind of reimbursement risk was going to be something we had to deal with. I think that a lot of the lot of the noise around reimbursement is somewhat a function of people star ratings going down."

Alignment's stock finished up more than 11% at the end of the Feb. 27 business day.