Astrana Health Third Quarter 2026 Earnings Call - VITRIA TECHNOLOGY INC

Hello everyone and welcome to Astrona Health's third quarter 2026 earnings call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question and answer session and instructions will be provided at that time. Today's speakers will be Brandon Sim, President and Chief Executive Officer of AstronaHealth and Chan Basho, Chief Operating and Financial Officer. The press release announcing Astrona's Health Results for the third quarter ended September 30, 2026, is available in the Investor Relations section of the company's website at www.astronahealth.com. The company will discuss certain non-GAAP measures during this call. Reconciliations to the most comparable GAAP measures are included in the press release. To provide some additional background on the results, the company has made a supplemental deck available on its website. A replay of this broadcast will be available on Astronia Health's website after the conclusion of this call. Before we get started, I would like to remind everyone that this conference call and any accompanying information discussed herein contains certain forward-looking statements within the meanings of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by such terms as anticipate, believe, expect, future, plan, outlook, and willing conclude, among other things. Statements regarding the company's guidance, continued growth, acquisition strategy, ability to deliver sustainable long-term value, value, ability to respond to changing environment, liquidity, operational focus, strategic growth plans, and acquisition integration efforts. Although the company believes that the expectations reflected in these forward-looking statements are reasonable as of today, those statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. There could be no assurance that these expectations will prove to be correct. Information about risks, associations with the investing in AstronaHealth is included in the filings with the Securities and Exchange Commission, which we encourage you to review before making any investment decision. The company does not assume any obligation to update any forward-looking statement as a result of new information, future events, change in market conditions, or otherwise, except as required by law regarding the disclaimer language, if you would like to refer to slide 2 of the conference call presentation for further information. With that, I will turn the call over to Astronaut Health's President and Chief Executive Officer, Brandon Sim. Please go ahead, Brandon. Good afternoon, and thank you for joining us today. Estrana delivered another strong quarter, driven by continued growth, margin expansion, and disciplined execution across the business. Revenue in the third quarter reached a record $1.02 billion, up 7% year-over-year. And adjusted EBITDA was a record 77.2 million, up 13% year over year, and near the high end of guidance. Adjusted diluted earnings per share was 71 cents. With prospects now included in both comparison periods, these results provide a clearer view of the underlying earnings power of our combined business. Importantly, our 13% year-over-year adjusted EBITDA growth was driven organically, reflecting the maturation of our risk-bearing cohorts, particularly in Texas, improved medical cost performance across our care partners' business, and continued operating efficiencies. Capitation revenue grew 8.5 percent despite Medicaid and exchange membership attrition, while adjusted EBITDA grew approximately twice as fast as total revenue, demonstrating the operating leverage and resilience of our business. Free cash flow also remains strong. Through the first nine months of the year, we've generated approximately $105 million in free cash flow and repaid $116 million of debt. This brings net leverage to approximately 2.2 times, well ahead of the deleveraging commitments we made when we acquired Prospect. And we remain on track to deliver on our free cashflow guidance for the year. Underlying these results is the differentiated operating platform we have built at Astrana, bringing together three foundational capabilities, intelligence, alignment, and delivery. Intelligence is how we leverage our vast clinical and operational data set, together with proprietary models and AI, to identify what care patients need, when they need it and how to deliver it most effectively. Alignment is how we use our delegated, payer-agnostic model and provider-facing technology platform to align clinical and financial incentives around delivering the right care. And delivery is how we put this into practice, using our broad, integrated network of physician, providers, and care teams to translate those insights into action and better outcomes for patients. What makes this platform particularly powerful is the feedback loop between these capabilities. We can identify opportunities to improve care, enable physicians to act on them, and then measure the resulting clinical outcomes and total cost of care. Those insights then feed back into our platform, continuously improving our recommendations, execution, and underwriting. Because this flywheel compounds, we believe we can reduce the upfront investment required to enter new markets, accelerate the path to profitability for new populations, and deliver increasingly consistent and predictable outcomes and economics. Our third quarter results demonstrate the growing impact of our platform. I'll walk through our progress against the four strategic priorities we've consistently focused on. Our first priority is growing membership responsibly. We ended the quarter with approximately 1.5 million members under management. Medicare Advantage membership grew organically at a high single-digit rate year-over-year, even as many health plans across the industry continued to reduce their Medicare Advanche footprints. This growth was partially offset by Medicaid and Exchange membership attrition, with Medicaid attrition expected to be at the middle to high end of the 10-15% range we assumed at the beginning of the year. As we discussed last quarter, our strong operating performance has given us greater flexibility to invest in growth while maintaining our profitability and balance sheet objectives. We continue to reinvest a portion of that outperformance towards attractive new opportunities across markets and business lines while remaining on track to deliver on our full year of financial commitments. And we're seeing those investments translate into tangible progress. On the provider side, we completed a tuck-in acquisition of an independent physician association in Georgia on October 1st, further expanding our presence in the Southeast. We also added two new clients to our AI-powered care enablement platform during the quarter, a leading primary and multi-specialty provider group in Connecticut, and a hospital client in California. We expect both to be onboarded onto the Estrana platform by early 2027. On the payer side, we've entered into several new Medicare Advantage partnerships effective January 1, 2027, building upon our existing networks and geographic expansion efforts. Together, these opportunities demonstrate the breadth of our growth model, spanning risk-bearing populations, physician network expansion, and technology-enabled services, all leveraging our shared platform to drive scalable, capital-efficient growth. Our second priority is continuing to progress responsibly into full-risk arrangements. We are on track for approximately 82% of our capitation revenue to be generated under full- risk arrangements by year-end, up from 76% at year- end of 2025. Within our care partners business, approximately 46% of members were in full-risk arrangements, compared to 34% a year ago. Importantly, the full-risk cohorts that we added earlier this year continue to perform in line with or ahead of our underwriting expectations. Texas is a particularly compelling example. Throughout 2026, we transitioned approximately 7,000 Medicare Advantage members from GainShare to GlobalRisk and added another 3,000 members under professional risk arrangements through a new payer partnership. Since then, we've onboarded those populations onto Estrana's technology platform and deployed our integrated care model, equipping local physicians and care teams with the clinical insights, care coordination capabilities, and operational support to manage patients more effectively. Three quarters in, our Texas business is performing ahead of plan, with medical cost trends running favorably to our underwriting assumptions and profitability improving faster than anticipated. This is an important proof point for our ability to enter new markets, assume greater risk responsibly, and improve profitability as cohorts mature. We believe the same operating model can be replicated across additional markets, with Texas becoming an increasingly meaningful contributor over time. Our third priority is managing medical cost trend through better clinical outcomes. Our delegated model enables us to intervene earlier, coordinate care more effectively, and align clinical decision-making with the long-term health of our patients. Year-to-date, overall medical cost trend remains slightly better than the approximately 5.2% assumption embedded in our full-year guidance. Within that, Medicare Advantage and Original Medicare continue to perform favorably relative to our expectations. Medicaid medical cost trends are the most common, and Medicare Advantages are the highest. is running above our initial assumptions, while commercial is slightly above expectations, primarily due to clinician-administered drug costs. These pressures remain manageable within our diversified portfolio, and our consolidated medical cost performance continues to outperform our expectations at the beginning of the year. Underpinning our approach is our growing suite of technology-enabled clinical programs. Our annual wellness visit program has reached nearly 65% of eligible members so far this year, helping identify risks earlier and close gaps in care. We also continue to advance our disease management programs for high-risk conditions, including congestive heart failure, COPD, and chronic kidney disease, alongside our care-at-home capabilities. These programs, together with our annual wellness visit program, run on our proprietary care management platform, Pathways, enabling us to coordinate interventions and standardize care across markets. By building these capabilities directly into our own technology platform, we are creating a repeatable clinical operating model that can deliver consistent, high-quality care as we expand across physicians, populations, and geographies. Our fourth priority is continuing to expand operating leverage as we scale. Last quarter, we highlighted how AI-powered workflows in claims operations and referral management reduced handling times by more than 50%. Since then, we've continued advancing beyond individual task automation towards automating entire business processes. One example is in claims administration where we're building an AI-orchestrated process that translates the economic terms of a provider contract directly into accurate claims configuration and payment. Historically, these contracts required hours of manual work to process. Our newest AI agents are reducing that process from hours to minutes while improving accuracy. And importantly, all of these capabilities are being built into our own operating platform, allowing us to deploy them across our network and capture the benefits as we scale. On the provider side, just this week, we launched Atlas, the next generation of our provider-facing platform. Atlas helps physicians prioritize patients who need attention most, identify gaps in care, and respond to high-risk events in real-time directly within their existing workflows. These applications are built on shared infrastructure, allowing us to deploy new capabilities across markets and business lines without rebuilding them independently. We're seeing the improvements to our platform continue to translate into tangible operating leverage. Year-to-date G&A has declined to approximately 6.2% of revenue, an improvement of approximately 80 basis points year-over-year, even as we continue investing in growth and new capabilities. We expect full-year G&O to remain around this level with meaningful opportunity for further operating leverage over the medium term as our AI capabilities mature and as we continue to scale. Turning briefly to prospect, more than a year after closing the transaction, performance continues to validate our original investment thesis. Gross provider retention remains above 99%. Operating expense synergies are at the high end of our original annual target of $12 to $15 million. An aggregate medical cost trend across the legacy prospect business remains below our underwriting assumptions. Just as importantly, the operational transformation has taken hold. We're consolidating legacy prospect payer arrangements into our enterprise contracts with shared health plan partners. Our California growth efforts now operate through a unified team and pipeline, and legacy prospect physicians are increasingly integrated into this Rana Care model. As a result, we now view and manage Prospect as part of our core business rather than as a separate integration initiative going forward. Turning now to initial thoughts about 2027. In Medicare Advantage, the annual enrollment period is underway. We expect our weighted average paid star rating to improve modestly in 2027 versus 2026 and remain relatively stable in 2028. With our membership diversified across more than a dozen health plans, our exposure to any individual contract remains limited. Regarding the 2027 Medicare Advantage final rate notice, we continue to believe that we face immaterial impact from the exclusion of certain diagnosis sources, and we expect Medicare Advvantage margins to remain stable into 2027. In Medicaid, we continued to plan conservatively for changes in 2027, including the transition of UIS members to fee-for-service, work requirements, more frequent eligibility redeterminations, and changes to asset limits. We are working closely with our health plan partners and our community to manage these transitions and support continuity of care for our members. We've been incorporating these developments into our planning for some time and currently anticipate a 10% to 15% decline in Medicaid membership in 2027. In the exchange business, membership attrition has been more favorable than our original assumption of a 30% to 40% decline this year, and the business remains approximately 3% of revenue. Commercial membership also remains stable. Stepping back, we entered 2027 with several meaningful growth drivers. a continued maturation of new cohorts in core and expansion markets, additional full-risk conversions, new Medicare Advantage payer partnerships, and continued operating leverage from our platform. These opportunities are balanced against the membership changes we've discussed in Medicaid and Exchange, all of which will be reflected in our formal 2027 guidance. In all, we remain confident in our ability to deliver at least mid-teens annual adjusted EBITDA growth.