Good afternoon, and welcome to Alignment Healthcare's Second Quarter 2022 Earnings Conference Call and Webcast. [Operator Instructions] Please be advised that today's conference is being recorded. Leading today's call are John Kao, Founder and CEO; and Thomas Freeman, 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. Description of some of these 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 of our annual report on Form 10-K for the fiscal year ended December 31, 2021 and our quarterly report on Form 10-Q for the quarter ended June 30, 2022. 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 in our Form 10-Q for the quarter ended June 30, 2022. It is now my pleasure to introduce Founder and CEO, John Kao.

Hello, and welcome to our second quarter earnings conference call. I appreciate you joining us. We are pleased to announce another strong quarter in which we exceeded guidance across each of our four key performance indicators and raised guidance for full year 2022 top and bottom line metrics. For the second quarter, our total revenue of $366 million represented a 19% growth year-over-year, bringing our year-to-date revenue growth of 24% year-over-year. Our health plan membership ended at 95,900 members, growing 13% year-over-year. Adjusted gross profit of $61 million in the second quarter was solidly ahead of expectations, resulting in an MBR of 83.4%, our lowest quarterly MBR to date as a public company. Lastly our adjusted EBITDA was positive $10 million, reflecting significant gross profit outperformance during the quarter. Our positive adjusted EBITDA in the second quarter brings our year-to-date adjusted EBITDA positive as well, demonstrating the continued success of our care management capabilities, our AVA technology platform and the progress of our recent investments in local market management resources. Following a solid first half, we plan to invest a portion of our year-to-date outperformance towards service delivery, quality initiatives and new market investments. I'm confident about our ability to achieve our full year financial metrics in 2022 and our capacity to balance solid growth with long-term profitability. As I reflect on the strength of the quarter, I'd like to take a moment to discuss, how we are delivering this performance. The short answer is that the replicability of our business model is starting to take hold in all of our markets. The investments in AVA's tools related to clinical operations and provider engagement are being used by providers and our local market management teams, allowing us to replicate outcomes everywhere. We are proving that this business model derived from…

Thanks, John. Turning to the second quarter results. As John mentioned, we are proud to deliver another strong quarter in which we exceeded the high-end of our guidance ranges across each of our four KPIs. For the quarter ending June 2022, our health plan membership of 95,900 increased 13% compared to a year ago, as we continue to see positive momentum across our markets. For the second quarter, our total revenue of $366 million represented a 19% growth year-over-year bringing our year-to-date revenue growth to 24% year-over-year. A large part of our revenue outperformance in the period resulted from sweep payments from CMS that exceeded our expectations. This includes both the final sweep in 2021 as well as the midyear true-up for 2022. Similar to our comments during the second quarter last year, we would reiterate that these sweep payments are standard course of business on our industry and happen every year. It's also worth noting that a significant portion of the sweep dollar payments we received are shared with our providers through various contract arrangements including full capitation, partial risk pool and upside only profit share payments. Accordingly, our revenue outperformance in the quarter does not entirely flow through to our profitability measures. Our top line outperformance in the quarter was coupled with strong MBR management. In fact, as John mentioned, our best quarter yet as a public company. Our adjusted gross profit of $61 million implies an MBR of 83.4%, as utilization continued to run below our seasonal baseline. This is reflected in our 155 inpatient admissions per 1,000 this quarter including a lower mix of COVID hospital admissions relative to total hospital admissions than was contemplated in guidance. SG&A in the quarter was $62 million. Excluding equity-based compensation expense, our SG&A was $51 million, an increase of…

Thanks, Thomas. Lastly, before we close, I would like to spend a moment on our inaugural 2021 ESG report, which we released yesterday. Environmental social and governance factors are inherently built into our organizational culture, and everything we do here at Alignment. From improving health outcomes to bridging health equity gaps, we strive toward better health care access, for all regardless of health or wealth. The cornerstone of our member journey begins with having a serving heart and we've embedded this value in our ESG oversight approach with three key pillars, all centered around serving people, serving environment, and serving responsibly. The comprehensive report highlights many powerful themes and data points including our positive member outcomes reflected in lower hospital admissions and readmissions our focus on social – and the impactful diversity and representation of both our employees and members. To explore ESG focus further, please visit alignmenthealthcare.com/esg. I am proud and appreciative of the strides our employees have made towards a healthier and sustainable future for our members and look forward to sharing more of these important efforts in the years to come. With that, let's open the call for questions. Operator?

Thank you. [Operator Instructions] And our first question comes from the line of Ryan Daniels with William Blair.

Yeah, guys. Thanks for taking the questions, and congrats on a great start to the year. Wanted to talk a little bit about your market expansion, we don't have a ton of history with how you've expanded into markets, but this seems pretty significant to me in regards to the number of expansions and the total opportunity set of new members you're targeting. So can you discuss how we can compare and contrast that versus prior years? And then also help us think about any potential cash flow implications as you enter this level of new markets thinking over the next 6 months to 12 months? Thanks.

Hey, Ryan, it's John. Yeah, happy to talk about it. We announced that we're going to be entering Texas and Florida for 2023. We really spent a lot of resources on, I would say five or six potential states that we were looking at entering and really had a pretty high bar in terms of ensuring that we have the right provider partners kind of the right competitive dynamic that we thought, we could really win, and so really comfortable with ending with Texas and Florida. I think, it's consistent with what we've shared with everybody in that, we want to get into 15 or 16 states over the long term, where we think 70-ish percent of the membership of the eligible’s are going to be. Right now, as it stands with the six states that we'll be in it represents a little bit over a-third of where the seniors are. And so I think, we'll get those beachheads set up. We're going to continue to do what we refer to as contiguous county expansions and really focus on portability, really focus on execution. I think we've proven that in California, in every single one of our markets that, I would still say are as diverse as anything out of state, but we need to do it and prove that. And I think, we've got really three of the largest opportunities to prove our model. And I feel good about it, and I feel like the team really is prepared in terms of the network construction, the engagement, the contracting. I think we feel very prepared from a product perspective. And I think equally important and you always heard me say this, it's not just about planting flags, it's making sure that we have confidence, we can grow profitably in each market, and I feel very comfortable that our operators and our clinical teams can support this growth. And Thomas, do you want to speak to some of the financial parts of Ryan's question?

Yeah. This is Thomas here Ryan. So, just to add on to what John was saying. From an investment standpoint, those dollars really around sort of the sales and marketing expenses to launch those new markets that's upcoming AEP, along with the year "zero" expenses, which really includes hiring a lot of our local market leaders some of the clinicians will need in order to go live. A lot of that happens over the back half of the year and so both of those two factors the sales and marketing piece as well as the G&A or the medical expense year zero pieces are both contemplated in guidance and really consistent with our overall financial expectations, when we set guidance earlier this year.

Okay. Super helpful. And then maybe another one for you just in regards to the sweep payments and more specific how you share those with providers. Is that just your internal group of practitioners, or is that shared externally? And if the latter is, that something that is kind of a unique initiative to you that you think kind of bolsters your position in the community and can help with MA membership growth as well? Thanks, guys.

Yeah, I can take that one as well. This is Thomas here. So the way we approach this is all of our contracts have different underlying value-based care mechanisms. And so on one end of the spectrum, obviously, some providers might be at a global capitation or a global risk contract. And on the other end of the spectrum even our contracts that don't have any type of downside risk for the provider we often look to create upside opportunities through either a risk pool or a profit share. And so dependent upon, where those sweep dollars are coming from, which members and therefore, which provider group how that kind of contract works will vary dependent upon that provider organization. But generally speaking, what we really are focused on is ensuring that, when we win, our providers win, and our members win. And so that's the strategic and kind of philosophic goal behind how we approach the network contracts.

Yes. And just really to add to that, the kind of the percent of premium kinds of reimbursement with the providers kind of creates that alignment with all the providers, and has been a cornerstone of our success is just making sure that we are partnering with providers.

Understood. Thanks guys. I’ll hop back in the queue.

Thanks, Ryan.

Thank you. And our next question comes from the line of Whit Mayo with SVB Securities.

Hey, thanks. I thought I heard you say in your prepared comments that days per 1,000 were 155, that seems really low. I have 165 sort of in my head. So one if you could just confirm that. And just I presume you've studied, it just interesting to hear kind of how and why it was so low. So maybe I'll just stop there.

Yes great. Whit, this is Thomas here. So, I think you heard correctly, our inpatient admissions per 1,000 for the second quarter were at about 155, which is a bit better I would say, than our seasonal kind of historical baseline. But at the same time, we've been running about 155 to 165 inpatient admissions per 1,000 now for over five years straight. And that dates back obviously to our IPO experience as well. So, that is around 35% to 40% better than Medicare fee-for-service. And when you couple that with our industry-leading readmission rates SNF, ER, et cetera, types of metrics, I think these are all just different forms of how we measure and monitor quality and making sure that all the proactive investment we're making towards the seniors' health and well-being, not only improves their health outcomes but also prevents any unnecessary or potentially avoidable utilization. So yes, that was really the core driver of the quarter and pleased to see us continuing to maintain that efficacy of our model as we continue to grow and expand into new markets.

Yes. No, that's helpful. I just was wondering, if there was like -- I just wonder if the low days per 1,000, can you attribute it more to any of the clinical programs or the Care Anywhere? I'm just still trying to sort of reconcile how it's so low?

Yes. So our model from a high-touch care delivery standpoint is what we refer to as Care Anywhere. And for those who are less familiar with that Care Anywhere is a cross-functional interdisciplinary team consisting of doctors, nurses, case managers, social workers, behavioral health coaches and other types of clinicians, who are all focused on taking care of that portion of the population, who represents a significant portion of the spend. So, the 80-20 rule, you've heard about in the past, our data actually most recently would suggest that our top 20% of members are closer to 90% of our overall institutional costs. And so by using AVA to stratify the members, proactively outreach those members and try to engage them in our care delivery model, principally in the home but alongside of our virtual care center capabilities, we've historically been really successful with again trying to improve health outcomes that result in improved utilization downstream. So, I think it's really a testament of a lot of the care delivery efforts and again, being willing to make that investment upfront and betting on ourselves that it will pay off kind of multiple times over in the form of reduced medical expense elsewhere.

Yes. Just one other comment. To me, it's a bit of an early indicator as to the efficacy of the model working in some of the newer markets. Because some of the more established markets, it's always been working. And so, as we've entered more markets in the last couple of years getting those markets to be performing with the same model, I think is kind of helping the overall come down. So I look at it from that vantage point.

That's helpful. And Thomas, I think when you say that you plan on spending some of the MBR upside when we're kind of past the bid season, I presume this is more on marketing broker strategies, maybe I'm wrong but just like to hear a little bit more as to what you're thinking and where you're spending the money? Thanks.

Yes. So, a couple of things. I think from a quality standpoint, we see incremental opportunities to continue to invest in some of those programs around STARS and we're continuing to make some of those investments over the back half of the year. From a service delivery standpoint, we're continuing to make strides to improve the overall member experience and making some investments that we think can yield to ultimately higher NPS or higher member satisfaction, better retention therefore greater lifetime values. And then some of that has to do with just ramping up our new markets that we were talking about earlier with Ryan. So, kind of across the board both within medical expense and SG&A, those are some of the areas that we're looking at. And again, it's really on the back of that strong year-to-date performance that we're comfortable making a few of those investments today, that are the things we might have otherwise made in the future, but we have the opportunity to kind of really go after them here and now.

Okay. Thanks guys.

Thanks, Whit.

Thank you. And our next question comes from the line of Michael Ha with Morgan Stanley.

Hey. Thanks guys and congrats on the quarter. So, just a question on guidance. So with $25 million beat this quarter, only about $4 million to $5 million raised in the full year guide, it looks like you guys are carrying a lot of that excess earnings cushion into the back half of the year. Is that lower raise on guide more an indication of new conservatism, or are there incremental costs that we should account for? Because some of the outperformance, it sounds like you guys are baking it into new market implementation costs. But I think Thomas also mentioned, you guys are stressing areas to redeploy outperformance. John, I'm little bit confused. Just any clarity on what's in the back half of the year would be great.

Yes. I'm happy to take that. This is Thomas here. So, maybe to kind of start with the gross profit rate. I think if you look at sort of our gross profit year-to-date or our MBR year-to-date and then kind of think about the back half of the year, there are a couple of things that we're being sort of mindful of as we think about the back half gross profit. So, the first is, obviously, just the dynamic environment around utilization in COVID. And while our recent uptick this summer has not been at the level we experienced with the Omicron wave, it's certainly something we remain mindful of looking out over the back half and in particular maybe the fourth quarter where the last two years we really haven't had much of a flu season either. So something we're continuing to be I think mindful of and kind of thoughtful about just from a pure utilization standpoint. I think that's kind of the first thing. And the second thing is just the kind of normalization from some of the items we had in the first half of the year that we would not anticipate to recur in the second half of the year around the sweeps. While those were obviously a favorable contributor to the second quarter, I do think it's worth noting that our MBR in the second quarter would have otherwise been in the 85% MBR range, irrespective of those prior period items. So really a very strong quarter regardless but we're kind of normalizing in the back half of the year for that one-time pickup in the second quarter.

Got it. Yes I appreciate that commentary. And just one other question. So this year seemingly unique in the sense that every managed care plan has basically outperformed this quarter across the board. And now all the MA plans are reinvesting into marketing distribution. So my question is does this impact the competitive landscape at all, or even your thinking about, let's benefit offerings already locked in like how you stay nimble and decide your strategy into the back half of the year?

Yes. I think in terms of kind of AEP around the quarter and how we're thinking about some of the investments. So obviously, when we set our guidance to begin the year and thought about our budget for the year, we obviously remain growth-oriented as an organization. And so I wouldn't view some of these investment opportunities based on the year-to-date outperformance as being driven by growth first and foremost. But that really again is a function of already having contemplated those investments we think we need to be successful just in the course of our normal budgeting cycle and our normal guidance cycle. Beyond the kind of investment in the sales and marketing season, which happens every year, I think you heard a bit from John in his prepared remarks just really describing a lot of our focus these days on the ground game and making sure that the investments we made more recently in some of our provider engagement resources and our community representatives are continuing to help us gain traction not just for this year's enrollment period but also looking out towards the 23 AEP season. So obviously, we're sort of in the middle of hearing what others across the industry are doing from a competitive bid standpoint. So it's a bit early to comment on what we're seeing across the market landscape. But in terms of our approach, I think we did a nice job with the bids to kind of balance our growth versus profitability objectives and really continue to strive towards that 20% looking out to 2023.

Thank you, guys.

Thank you. And our next question comes from the line of John Ransom with Raymond James.

Hi, good morning. Just another cut at the market expansion question. So let's say you're going to do $100 of revenue in Texas and Florida. What's the – as a percent of $100, what's the front-loaded investment that you would have in 2022? And for that book of business in 2023 How do we think about like overhead and MLR? Thanks.

So I think maybe just to talk to the year zero expense which would be the back half of 2022. Dependent upon the size of the market and therefore, the market opportunity, we will scale up or down the investment accordingly. And so to give you an extreme example if a county only has 10,000 eligibles, let's say smaller rural county, frankly you wouldn't probably see a lot of incremental capital deployed towards that. And that would really probably be a contiguous county expansion, where we're leveraging a lot of our existing investments both from a people standpoint as well as from a sales and marketing standpoint to target the growth in that market. If I were to then contrast that on the other end of the spectrum, where maybe you have hundreds of thousands or half a million plus eligible in the county, that's where you would typically see us really deploy a lot more year zero spend both in the form of sales and marketing and in the form of our year zero clinical and non-clinical hires. And in that case, it may be anywhere from $1 million to $2 million, $3 million for a given MSA. And so it just kind of depends on the market we're talking about. But as we then transition into 2023, what we typically have experienced based on our historical cohort data is an MBR that will often run sort of in the 90% range or maybe to mid 90s dependent upon the mix of members. And then ultimately, we're really trying to get to EBITDA breakeven by year three. And so that's been our experience in the past and it's kind of how we underwrite our investment cases, looking out to not just Florida and Texas but even some of the contiguous county expansions within California as an example that we're really excited about for next year.

So if we were to look at just Florida and Texas, I'm rapidly approaching Medicare age. So if you're not in Tampa, I would be very disappointed. But just Florida and Texas, two years from now you would be disappointed if you didn't have what number lies in these two markets.

So I think typically what we are really targeted for a given MSA is getting to 10,000 members over a five-year period. And so over the first call it three years or so, I think we really want to be striving towards that at least 3,000 to 5,000 range and I think that puts you on a great kind of trajectory to get to that 10,000 mark over five years.

And that's in entire state or is it like a county by county how do you define MSA?

Yes. So like as an example, we're going to Clay and Duval, which are contiguous counties in Florida as an example and that's Jacksonville market. And so we would view sort of Jacksonville as MSA with two counties together.

The metric – John, it's John. The metric that Thomas just shared is really just data that we've experienced in all of the different new markets that we've entered and it's kind of striking. It's kind of like it takes about five years to kind of get to 10,000 members. And we kind of breakeven in year three there. And that's really our internal underwriting case. And there are situations in specific markets that that have done a lot better for us. We're not necessarily underwriting to it. Our internal goals I would say are more aggressive than what I just shared. And for example our San Diego market or Sacramento market, I mean, you kind of get to 12,000, 13,000, 14,000 members in two to three years. I mean so, do I think that that given the nature of the provider relationships, the product strategies, the distribution strategies that we have in some of these new markets there is an opportunity for us to outperform? I would hope so. But again, you know us we're setting the right expectations and I would be disappointed to your question in a couple of years, if we didn't have 10,000 members in each state. So …

You are conservative. So you know this is my perpetual like fascination. So let's say you're brand new in the Duval County you are marketing. What is that -- how much do you spend in most of the general strategy to tell people who you are? And how you're different? What channels do you use?

So naturally we use a lot of the same channels you probably heard about from other. So from a people standpoint, we're doing a lot of local kind of grassroots effort that that community representative you heard about. And these folks are really boots on the ground, who are focused on building relationships in the community, whether it's with external brokers, providers or just community representatives. These are the ones who are hosting events and creating leads that we can ultimately try to just tell the story of what we think Alignment can do for them. So a lot of is very local oriented. And then from a kind of more of an, advertising a brand standpoint, you would probably see us on TV, newspaper, radio, a lot of digital channels, a lot of other things that you would expect.

Yeah. The other thing we're learning, John is that kind of our reliance on some of the FMO partners that we've been successful with and expanding with them as we grow out of state is something we're looking at. We're spending a lot of time focusing on, kind of just broad distribution mix and distribution strategies. And kind of as a follow-up kind of what Michael was asking earlier, we're looking at all that. We're obviously looking at our branding and positioning particularly in the new markets. I would say we're very efficient on acquisition costs relative to the market. I think we've got to look at in particularly some of the newer markets, direct and employed strategies. I think the FMOs that have been really great partners of ours, are the ones we're going to rely on to help us in some of these newer markets as well. And we have made some of the mistakes where we relied on some of the bigger folks or some of the e-folks that have not grown us say for example in North Carolina. And so those are lessons learned. And I feel pretty good about.

I'll conclude that it strikes me living in an MA market, I see the Cigna build on Commercial, I see Jimmie Walker and I see that [indiscernible]. I'm not thinking any of those are right. I think MA might have the worst marketing like mass marketing, I think I've ever seen in consumer product area. So it's a low bar. We're waiting for you.

Yeah. No the service delivery side I think is where I think you're going to find us with a lot of this grassroots referrals. And just a lot of just word of mouth is still really important. I mean we've grown this thing really from that, more than any kind of huge brand investment. And I would envision that also happening on the service delivery side.

Thank you.

Thanks, John.

Thank you. And our next question comes from the line of Jeff Garro with Piper Sandler.

Hi. Good afternoon guys. Congrats on the quarter and thanks for taking the question. Maybe one more on the FY 2023 expansion plans. I just want to ask since Florida and Texas they're huge states but your entrance is targeted to specific counties, that aren't necessarily the biggest in each state. So what can you tell us about the competition the populations you anticipate serving and the provider relationships that you fostered in those markets that make them compelling?

Yes Hi Jeff, its John. That's a great question. I think the kind of the big takeaway is that we think this business model can be successful at a local market level irrespective of whether it's rural or urban whether -- irrespective of ethnicity or income it's portable. And so one of the things we're doing is we're making really focused investments in markets where we think we can win. And not just to hit those metrics that we just talked about, but actually get share and win frankly similar to what we've done in some of the rural markets in -- or smaller I would say or midsized markets in California where we've got 20-plus percent market share. I think that's kind of how we're thinking about it. And then, once we get that foothold in and we're kind of producing the kind of profitable growth that we want and then we'll be very also selective and expand into contiguous markets. And obviously to your point those are massive states. And I think the same kind of takeaway that we've learned in California is where it cannot be applied to those two massive states since every market is different. All the hospital and the provider dynamics are different. So ergo kind of this conversation around mass customization where we get all of our processes, our workflows, our best practices, our systems, our dashboards all of these kind of operating tools we want to be as portable as possible, but apply it to a set of local market dynamics. It's just all unique. Health care is a local business. And so that's kind of the idea. And I think we just have a better chance of winning in some of these targeted markets is the bottom-line. And we looked at all the bigger markets also and there was just less competitive kind of dynamic that would cause me to have what we'll have and achieve -- can we really win in this bigger market when we thought about it. I think the conclusion is let's go to some of these more secondary markets first and then we'll work our way up. That's how we thought about it.

That's super helpful. I love the concept of mass customization. One more question for me. I've heard some discussion from other plans about moderated expectations for STARS ratings in October given the lapsing of some of the COVID dynamics. And you've certainly shared a lot of positive data about the outcome that Alignment is delivering for seniors. But curious if you have any insights into how those outcomes will shake out across the peculiarities of measures and cut points into a star rating this October?

Yes. No, I think the general themes that you're hearing out there are accurate. I think there are a lot of plans that benefit from some of the relaxed standards resulting from COVID and particularly as it relates to CAP scores. And for those of you that don't know I mean CMS has really I think historically focused on kind of clinical outcome quality as measured by what's referred to as HEDIS scores. And clearly that's where we have traditionally focused our efforts. And we have five stars across the board really on HEDIS. But since a couple of years ago, CMS is now focusing on really the member experience. And so therefore, they're doing kind of this focus on CAPs where the waiting measures for CAPs is going to be going up and being paid beginning in 2024 differently. Yes 2024 differently. And so we spent a lot of time and effort focusing on CAP scores and we've been working with our downstream delegated provider partners to make sure that some of these CAP scores can really get improved and we've made good progress there. I feel pretty good about where we stand coming into next couple of months when we'll find out what our marketing is for next year. The STARS -- really the entire business, but STARS in particular is becoming more and more data science. I mean it really is data and analytics and predictive analytics. And I think we're pretty good at that across the board. I would say areas that we need to improve continue to be around working with our delegated provider partners to make sure that they are helping us increase CAP scores across the board. And I'm confident we can get there because we did the same thing with them on HEDIS several years ago and they got us to five stars. So -- but I think you're right, Joe, I think you're going to have a lot of plans get half a star or as full star taking down.

Great. Thanks for all those comments. Thanks again for taking the question.

You got it.

Thank you. And our next question comes from Kevin Fischbeck with Bank of America.

Great. Thanks. Just want to go back to kind of the reinvesting in the outperformance in the second half of the year. That back half guidance is a little bit different than what we were assuming. Can you maybe help us think about how much of that reinvestment goes back into G&A expense versus MLR expense?

Yes, this is Thomas here. I'm not sure we're going to kind of break down all the moving pieces, but I think if you kind of look at the gross profit beat in the second quarter relative to the full year raise, again obviously, part of that sort of extra conservatism in the back half gross profit I think relates to COVID but then a portion of that is certainly the investments themselves. Whereas in SG&A, I would say that is generally just investment. And so I think you can kind of think about it in those two ways. But in general, again, I think we're very focused on making sure that we're kind of deploying capital in a way that is very mindful of our short-term profitability objectives, but also making sure that we're doing the right thing and setting ourselves up for success and value creation over the next kind of one, two, three plus years. So, we're really trying to find that right balance and that really informs kind of where we're at year-to-date and how we're thinking about the next six months.

Okay. So, maybe asking a little differently then. It sounds -- if I have this right you're saying that your view on the back half of the year hasn't changed versus where it was in Q1 even though Q2 was better and you're building in conservatism on COVID even though you're not seeing necessarily a reason to be more conservative. I just want to make sure that I understand. The core hasn't changed. Just throwing conservatism line without that rather than there's a reason to be more worried about COVID?

Yes, I think if anything over the last two years since the pandemic began, we have learned that there's always something new to learn. And so with that in mind I think we've been just thoughtful and kind of mindful of what that may look like in the back half of the year. And I think if you kind of think back to our prior comments last quarter, you heard something similar where we had suggested that we were going to assume that overall utilization kind of runs in line with our historical baseline experience, but a portion of that would be COVID-driven. And so to the extent that we had either lower utilization versus baseline and/or we had a lower percentage of the total utilization being driven by COVID, which comes with a higher unit cost, there could be room for outperformance. And so you clearly saw that come through in the second quarter. And so we'll see how the back half plays out. I think we feel generally comfortable with where things stand today, nothing concerning. But at the same time I think we're all kind of highly respectful of this dynamic environment we're in today and just trying to be very thoughtful about it over the back half.

Okay. And then I know it's hard to comment on 2023 because you haven't seen competitor benefits yet, but at least one of your competitors talked about how their benefit design was shaping up and the reception from brokers on the kind of initial peak. I don't know if you have any color like that that you might be able to share for us about how you think 2023 is shaping up? Obviously, it's about a full picture.

Yes. Hey, Kevin, it's John. Yes, I was just with the brokers last week. I'm feeling very good about where we stand. I think, this cold kind of notion of profitable growth of consistency discipline around the bids is just -- is kind of reflected in our Q2 numbers. And I think you're going to see more of that. We're not going to be doing a grow at all costs strategy. We are pretty thoughtful, kind of, competitor by competitor. And I would say overall our hypothesis with respect to 2023 is given the kind of the better than contemplated rates final rates. And I would say some of the behaviors of some of the other, kind of, let's just call them not-for-profit entities. I think it's going to cause our competitors to be aggressive. That's kind of how we're thinking about this. And I think, we're still very well positioned across the board. And -- but I think you're going to see more of these Part B buybacks. I think you're going to see focus on duals. I mean, people are going to be very aggressive across the board. I just think -- I don't think anybody has the kind of model that we have that can produce kind of consistent growth at these margins. I don't see anybody being able to do that. And I think the bigger concept I think is, the bigger we get, the kind of the more aggressive we're going to be, simply because any kind of scale economy disadvantages that we have are going to start eroding and we'll get stronger. So that's why I think about the bids. But, yes, I think people are going to be generally aggressive. I don't -- I'm not hearing people are going to be like stupid aggressive like last year. I think people are pulling back a little bit. I think some of the big guys are going to be a little bit more aggressive. But I think, I feel good about where we are.

Great. Thank you.

Yes.

Thank you. And our next question comes from [indiscernible] with Goldman Sachs.

Yes. Hey, John. Thanks for taking the question. I wanted to go back to the market expansion. Have you felt about your ability to find provider partners in the markets in Florida and Texas that you're going into, since that's a key part of the differentiation of your value proposition. And kind of building on the discussion around market share assumptions, do you feel like you've been able to put together a competitive provider network that would enable you to kind of get the share that you would expect when going into a new market?

Yes. Great question. I mean, it's really a key -- for really the focus we had at the beginning of the year and we talked a lot about provider engagement and provider development and the value proposition. Remember, all of that work for really the first half of the year really resulted in finding key providers that we feel really comfortable with. And I think that was one of the best investments in, not only capital, but just time and effort getting on the road, meeting with these providers. And I got to tell you, people love what we're trying to do. The doctors love what we're trying to do. They don't want to get consolidated, either by their hospital system or any large consolidator. There's a lot of independent and smaller practices out there that just need some tools and some assistance getting into value-based care in a kind of a rational way. And I think we're an option that seems to resonate with a lot of them. So we're not kind of just going in with the biggest groups. We're working with a lot of smaller to middle-sized practices. And we really need, and I've said this before, we need 20 to 25 really engaged doctors that like our model to start. And that's what we've done in every single market, is you need 20 to 25. And I kind of tease our team internally, I go, how many cell phone numbers do you have of these doctors? I mean do you really know these doctors and they understand what we're trying to do and what we're trying to do for our members and for them and to help them? And I think that's the standard by which we're really building these networks up. And that whole kind of initiative has taken root in a way that has exceeded my expectations. So I'm really happy about that. Now, we got to just execute, focus and execute and you complement that with strong benefits, which I'm very comfortable with. And then you complement that with the right distribution mix and the distribution strategy and we've been very thoughtful about that. So we'll see what happens. But I will say some of the markets that we launched one year and two years ago, the engagement level and the MLRs in some of these newer markets are really good. I mean, I'm really happy about that.

And again, that leads to kind of why we got this kind of overall 83%. And it's just -- it's like the model, like, is starting to replicate itself consistently. So now we just got to translate into the growth dynamic.

That's really helpful. And if I could just maybe sneak in a quick follow-up. How are you guys thinking about the time line to breakeven now? Obviously, the business is performing well. You have some large growth opportunities ahead of you. So just wondering, if the time line and how you're thinking about the path to breakeven has changed at all?

You want to take that or you want me to take that? I'll give you that. I think our whole philosophy and approach was frankly the right approach since we IPO'd, which is a more measured longer-term strategy of getting the 20% long-term growth, and I can talk about why I feel more confident than ever about our ability to achieve that, but also getting to breakeven. Getting to breakeven EBITDA is really important. I mean, it still matters. And so I think that getting there by 2024 is certainly something we're really focused on for a whole variety of reasons. And I think the really compelling argument for us is if we can maintain that 20-plus percent growth and get there and kind of maintain these MLRs, I don't think anybody else can do that, and so that's kind of one thing. So it's just to further differentiate us from everybody else, hence prove our business model. The second thing is what Thomas referred to in terms of just the balance sheet. I mean, I'm very sensitive to not needing to raise more capital. I want to get there without having to raise any more capital. And so we want to not only get to EBITDA, but get the cash flow positive as soon as possible. And I think we can do that, and do so kind of -- and I still think we can hit these growth rates with these MLR kind of improvements and get to EBITDA positive. And I know that's something that's important to our investors to prove this thing out. And kind of the implication of that is kind of what was kind of inferred by Thomas earlier, which is we're going to Texas or going to Florida. But as we think about --…

Great. Thanks -- yes. Thanks for the comments.

Yes. It’s long-winded, but sorry about that.

Thank you. And our next question comes from the line of Sarah James with Barclays.

Hey, Sarah.

Hi. Just wanted to understand this quarter a little bit better. One of your peers talked about ACO reach having a 7.5% retroactive back to Jan 1 restatement of cost trends and payments. Did you guys experience any out-of-period adjustments related to that? And is there any change in your view of margin profile of that business?

Hey Sarah, this is Thomas here. So, in terms of the 7.5% or so, so we did get the same sort of information from CMS this past quarter. However, when we were sort of thinking about our first quarter guidance for the full year that is we were sort of reflecting on our experience last year, where CMS had also implemented a retrospective sort of trend adjustment on us. And so with that in mind we approached our guidance from a little bit more of a conservative posture. And so we actually had incorporated, or I guess in other words anticipated some of that, as we thought about our previous guidance. So we did experience it, but at the same time it was sort of in line with expectations, and therefore did not really cause much of an impact on the quarter's performance.

Got it. And then in the new guidance on 3Q gross profit, it was a little bit off from where consensus was. And I'm wondering if you can help bridge the margin assumptions or MLR assumptions from 2Q to 3Q, if there's anything other than seasonality with deductible wear down going on there?

Yes I'm happy to do that. So I think you heard hopefully earlier. So if you kind of take out the benefit or the favorability from some of those one-time prior period items the suites and whatnot, we're sort of in the 85% range for the second quarter. And so kind of using that as you're launching off point thinking about sort of the third quarter or back half of the year. Obviously, a lot of that has to do with expecting utilization to run in line with baseline again, as opposed to second quarter where we were a bit better than baseline. And also assuming a portion of that has to do with COVID, which comes with a higher unit cost than a non-COVID hospitalization. So that's really the COVID headwind we were discussing earlier in addition to sort of a minimal amount of some of that investment that falls into medical expense we were also discussing earlier.

Great. It’s nice to see people put out conservative guidance. So appreciate that. Thank you.

Thanks, Sarah.

Thank you. Ladies and gentlemen, that does conclude [Technical Difficulty] Thank you for [Technical Difficulty] disconnect.