Hello, and welcome to the agilon health Fourth Quarter 2025 Earnings Conference Call. My name is Carla, and I will be coordinating your call today. [Operator Instructions] I will now hand you over to your host, Evan Smith, to begin. Please go ahead when you're ready.

Thank you, operator. Good afternoon, and welcome to the call. With me are Executive Chairman, Ron Williams; and our CFO, Jeff Schwaneke. Following our prepared remarks, we will conduct a Q&A session. Before we begin, I would like to remind you that our remarks and responses to questions may include forward-looking statements. Actual results may differ materially from those stated or implied by forward-looking statements due to risks and uncertainties associated with our business. These risks and uncertainties are discussed in our SEC filings. Please note that we assume no obligation to update any forward-looking statements. Additionally, certain financial measures we will discuss in this call are non-GAAP financial measures. We believe that providing these measures helps investors gain a better and more complete understanding of our financial results, and it's consistent with how management views our financial results. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measures is available in the earnings press release and the Form 8-K filed with the SEC. And with that, let me turn the call over to Ron.

Thank you, Evan, and thank you all for joining us today. 2025 was a year for building the foundation of sustainable performance through intense focus on operational discipline. While we are navigating a comprehensive transformation, our mission remains unchanged, empowering physicians to lead the transformation of health care through our total care model. The fundamental resilience and effectiveness of our partnership model demonstrates a durable long-term growth runway through trusted relationships with community-based physicians. These individuals are leaders in their communities and have an average 10-year-plus relationship with their patients, creating deep community ties that are difficult to replicate. While we are not satisfied with our financial performance in 2025, we made tangible progress in the areas that matter most for a durable turnaround, which Jeff will provide more detail on in a moment. Our tangible progress includes the advancement of our clinical pathways and quality programs, our disciplined approach to payer relations and our continued focus on data-driven performance. All are driving greater clarity and sustainability across agilon's scalable operating model to support long-term value-based care success for our total care model. Our preparation for the future includes applying our continued discipline and focus across these critical areas as we navigate the potential of a lower-than-expected rate increase in 2027 following CMS's advanced rate. We believe the advanced rate notice does not sufficiently reflect the ongoing population-wide increase in cost and utilization due to growing chronic disease burden and aging of the Medicare population. In addition, our further review of the risk model revision and normalization outlined in the advance notice, we believe the potential impact will be generally in line with the national average. However, we believe that our clinically focused program remains a critical part of the long-term answer. Continued advancement of our burden of illness and…

Thank you, Ron, and good afternoon. As Ron stated, 2025 was a transformational year. We took significant actions focused on improving the profitability of the business, including a disciplined approach to contracting, improvements in our burden of illness program, enhancing our clinical and quality programs, meaningful cost reductions and continuing to advance strategic initiatives related to our data visibility, clinical and cost management programs. Through the execution and implementation of these initiatives, we expect to drive significant improvement in profitability in 2026 while continuing to invest in our platform and partners. As we discussed last quarter, this is supported by several underlying market and payer-related tailwinds, including the 2026 final rate notice by CMS, payer bids, which were focused on margin and our actions we took in 2025 centered on execution and profitability. For today's discussion, I will cover 3 key areas. First, I will walk through our fourth quarter and full year results and a bridge to our jumping off point for 2026. Second, I will walk through our 2026 guidance, including key assumptions, driving improved profitability. And finally, I will discuss the strength of our capital position and a more disciplined near-term growth outlook. Moving to our financial performance for the fourth quarter and full year 2025. Starting with membership. Medicare Advantage membership at the end of the quarter and fiscal year-end 2025 was 511,000 members. Our ACO REACH membership for the quarter and fiscal year-end 2025 was 114,000 members. As a reminder, membership continues to be affected by our decision to take a measured approach to growth, inclusive of previously announced market exits in a smaller 2025 class. Total revenue for the fourth quarter was $1.57 billion and $5.93 billion for full year 2025, respectively. Revenue in both reflect the impact of lower-than-expected risk adjustment revenue and…

[Operator Instructions] Our first question comes from Jack Slevin with Jefferies.

I just want to kick off on some of the trend discussion because I think I caught all of it, Jeff, but I want to make sure we've got sort of the right understanding in terms of what's baked in for 2025. So I guess I just want to clarify, it sounds like 3Q has stepped up. You sort of roughly match that or maybe step it up slightly. Just a little color or clarification there. And then if there's anything you've seen in some of that true-up in the third quarter on what might be driving that acceleration in cost trend, I would be interested just to hear if there's any color on that at this point.

Yes. Sure, Jack. Thanks for the question. Yes, you're right. So what we saw in the third quarter, in the prepared remarks, we commented on really higher inpatient stays. So we had a lot more inpatient volume. Specifically, we had several cases that were over $1 million. And if you aggregate those, it's roughly $6.5 million of cases that were over $1 million in the third quarter. And so sitting at this point, we took the cost trend in Q3 from the low 6s to 7.2%. And listen, we recognize that we have limited claims visibility, paid claims visibility for the fourth quarter. But we felt it prudent given that Q3 is kind of coming in so high that we moved Q4 up to 7.4%. And so what that did is it took the full year from the low to mid-5s to 6.5%. So right now, we have 2025 at 6.5% cost trend.

Okay. That's really helpful. I appreciate that color. And then maybe just to follow up on some of the '27 commentary, sort of acknowledging you all have a lot of wood to chop in '26, and I think that seems to be clear in sort of the guidance that's laid out. But maybe just on '27 on the rate notice and then on the ACO front as well. I guess I'm on record saying I think value-based care players can get to roughly 5% on rev trend. It sounds like you guys maybe have a slightly different bridge there, but are landing in a similar zone. Considering that sort of environment, 7.5% cost trend that seems possibly conservative for '26, but maybe unclear where that goes. How do you think about what actions you might need to take in '27 on MA, whether it's further contract adjustments? Maybe just -- I'll leave it open ended there, but interested to get sort of what that landscape might look like. And if I can squeeze in a loose second piece on the ACO front, I heard the LEAD commentary. Would love to hear just sort of how you're approaching what to do in '27 on that front with the end of REACH.

Yes. Yes, I'll handle the '27 commentary that you talked about, and then I'll send it to Ron for the ACO part. But really, Jack, it's the same actions we've been taking, right? So it's contracting, it's our burden of illness program. We'll see how the final rate notice shakes out. But it's the same levers that we've been, I would say, executing on this year. We will do more of that as we think about '27. I would say the 2 open components are what happens with payer bids. And so obviously, we get a preview of what those bids look like before we enter into our contracting discussions. So that will be an important piece. And then overall, what the cost trends do. But I think from our perspective, we believe that we can continue to improve margins beyond 2026 through all of these levers that we've talked about today, and that's what we're focused on. So -- and then -- and Ron, on the ACO.

Yes. Look, Jack, I think the ACO new model is encouraging in the sense that it's a 10-year model, which provides for a longer period of time, gives you a basis to plan and perhaps to make investments to support the development of the model. Now we have encouraged from a policy point of view, further clarity, much greater even stretching out of the implementation of the program. I think that at this point, there's not a lot that we know, but the main thing that we know is that it represents a continuing opportunity. And I think that the work that we've done so far in the current model will position us very well in terms of however the program unfolds. And so we're looking forward to being actively involved. As a matter of fact, I'll be in Washington next week. Dr. Oz is going to be in a meeting on that, and we'll continue to advocate physicians to make that program effective for patients, for physicians and for us.

And the next question comes from Jailendra Singh with Truist.

I want to follow up on the incremental inpatient admit costs you just were talking about for Q3. Were those claims tied to some specific payers and geographies? Just trying to understand if your Q3 reserving of 7.4% versus 7.2% in Q3 kind of assumes -- Q4 reserving of 7.4% versus 7.2% in Q3, assumes those inpatient stays continue at a similar level or get worse? Just trying to understand if cushion built in Q4 is enough.

Yes. Thanks, Jailendra. I guess a couple of things. Number one, they weren't concentrated in specific markets is what I would say. And we did see utilization step up, not across the board, but in several of our markets, specifically in inpatient stays. And I would say September appears to be the highest of the quarter. And so it was more focused on the end of the quarter is where we saw that. And I understand your point, you're saying, could these just be random acute events that don't reoccur. That's certainly possible. But again, with limited claims visibility as we closed out the year, we just felt it was prudent to provide a solid foundation from which to jump off into 2026. And so we went ahead and moved that cost trend up to 7.4%. So again, limited claims visibility for us, but we felt it necessary to provide a good stepping off point.

Got it. And then my quick follow-up on your OpEx cost initiatives, which is now $35 million benefit in 2026. Do you guys see any additional opportunities in terms of streamlining cost? And what areas that could come from?

Yes. I think it's all the areas that generated the $35 million. Certainly, we're not done looking, okay? Let's put it that way. And so I think there are further opportunities for cost reduction. Some of that's going to require automation and AI and technology. So I think they'll be harder to achieve, but it doesn't mean it's not there. And so that's what we're focused on as we think about executing on 2026 and heading into 2027.

And the next question comes from Michael Ha with Baird.

Wondering, is there any update you've received on the '25 fee-for-service trend within ACO REACH? Is it still 8.5%? And then also just on trends more broadly across both REACH and MA. There's been some conversation about the MA rate notice, I'm saying that back half trends are actually less steep. So if CMS were to include more back half '25 claims experience, it might actually drive the effective growth rate slightly lower than the advanced notice, but it sounds like your own back half trends have actually stepped higher versus the front half, which would obviously go against that thinking. So I'm curious to hear your thoughts on the ongoing conversation.

Yes. Yes, for sure. Thanks, Michael. I think the first half we commented on is in the mid-5s for us. So in the MA population, we certainly did see an acceleration of cost trends, at least for Q3. We'll have to see how Q4 plays out. But at least for Q3, we certainly saw that. The fee-for-service cost trend, the latest on that is 8.1%. So it came down a little bit. But what I would say is in the ACO program, it was also concentrated in the back half, and we have a lot more current data there from the government is what I would say. And so those cost trends were tilted toward the back half as well, but they've come down from 8.5% to 8.1%.

And one more on the rate notice. I'm curious, after you've reviewed it yourself, I'm just wondering if you -- there's anything you view as most notable with potential for CMS to improve. Again, there's conversation about another area about the treatment of skin subs and the risk model recalibration. By that, I mean, they adjusted the effective growth rate to exclude it, but it doesn't look like they did that for -- potentially for the coefficients aligned with those skin subs. So now we have this strange situation potentially where it's distorting the risk model recalibration and driving this rate headwind. I'm curious if that's an area you've been looking at thinking about and just broader thoughts on areas of improvement into the final rate notice.

Yes. Certainly, all of those items that you have mentioned, in addition to what is the final kind of cost trend, all of those items are top of mind for us. I guess what I would say is, again, just broadly, ultimately, we're looking for rates that account for the cost trends that we've seen over the last several years. However that shakes out. That's ultimately what we're trying to achieve. I guess we'll have to see how all of these things that you mentioned play out. Hopefully, some of those get delayed or lengthened or spread over time to balance, I would say, the cost trend dynamics that we're dealing with. But ultimately, we'll have to see how that shakes out.

[Operator Instructions] And our next question goes to Ryan Langston with TD Cowen.

A few of the larger public plans have highlighted expected margin recovery in group MA specifically. I think the last disclosure of your mix was around 17% or 18% kind of midway through last year. I guess where does that percentage sit now and in 2026? And I guess, how is that potential recovery reflected in the guidance?

Yes. Thanks, Ryan. It's a little early to figure out kind of where the membership is going to play out is what I would say. But I don't think that we're going to have too different of a mix heading into 2026. But obviously, we really don't get final membership until towards the end of the first quarter. And so we'll kind of give an update at that point in time. But right now, there's nothing that says our mix is going to be substantially different from that.

And the next question goes to Matthew with Needham & Co.

I wanted to hit on quality. Nice to see the medical margin opportunities there. I think in 2025, you've been targeting $25 million of opportunity tied to quality. How did you do on achieving that? And then for 2026, as we think about that opportunity doubling, could you maybe just give us a sense of what those increased incentives look like and pathway to achievement? Is that just greater stars improvement or any discrete strategies you're laying out to achieve that quality opportunity?

Yes. So a couple of things. The quality, obviously, the measures aren't done yet. There's runout that has to happen. But I think we're in the ballpark or getting close to what we thought we would achieve for 2025. That's the first thing. The second piece, which you mentioned is there's an opportunity for us to -- there's doubling of the potential for us to earn. And what I would say is broadly across our network in 2024, we were roughly at 4.2 stars. We made progress and improved that in 2025. Now the verdict is not all the way out because we have the runout that has to happen, but we're pretty confident that we will do better in 2025. And as we think about 2026, the opportunity is there. What we have included in our guide is similar performance to 2025. And so we haven't banked on that in the guide, but we're obviously shooting for a higher level of performance. And we have programs that are centered, as you can imagine, around driving that performance.

And the next question comes from Stephen Baxter with Wells Fargo.

Just want to make sure that I'm fully tracking the comments on the advanced notice that you gave and why you think that your view of it is more in line with the effective growth rate. I think you're saying that you have, I guess, little to no exposure to unlinked chart review, which makes perfect sense given the model that you operate. But in terms of the other risk model changes, including the normalization impact, that 330 basis points item in the CMS announcement, are you saying that you just don't have exposure to that? Or you're saying that other things like coding trend and clinical efforts offset that? I'm just trying to get to what an apples-to-apples comparison is for you guys.

Yes, yes. Good clarification. I would say, yes, we are exposed to that. And generally, we've run the math, and we're very close to what is outlined in the rate notice. What we are saying is that we've shown the ability over the last several years to offset the implementation of V28. And recall, V28 was roughly 3% to 3.5% per year. And so we feel pretty confident that we can do that again in 2027. And so that's what -- that was the comment that was made is we have a way to offset that. And so generally, we're viewing it as the effective growth rate is really the number.

Yes. I would just add that what's been driving has really been the implementation of our clinical pathways and particularly with our congestive heart failure, we ended the year with about 90% of the platform well implemented in that program. So we think we're crossing over with a pretty good run rate, and we think there's still a lot more prevalence in the communities for us to help patients get diagnosed and get on the right kind of therapy to help better manage that condition. And we also will be implementing additional clinical pathways, which we talked about that we think will be important contributors over time. And I think that one of the things I would say also is that we recognize that we need to focus on 2027 in terms of taking a step up in order to address this. So we're not saying that what we're doing, we think is perfectly adequate. We think it's a really, really solid foundation, and we're going to be doing more to make certain as best we can that we can get to where we need to.

Got it. And then my actual more tangible question, just on the medical margin bridge that you guys gave us in the slides. The $127 million for the payer contract, there any rough sense you can give on how much of that is percent of premium changes versus having less Part D risk. I'd love to just get a better sense of what inning you feel like you're in on this percentage of premium effort and whether you kind of characterize the success you're having as being relatively broad-based or maybe having more success with a subset of payers and maybe there's more opportunity in front of you?

Yes. I would say the majority of that is either percent of premium or relief from the payers stars -- specific payer stars issues that they've had. And that is contracted and done. So that's -- those are -- that's locked in value is what I would say as we think about the 2026 P&L.

And the next question comes from George Hill with Deutsche Bank.

This is Liz on for George. I just have one question on the special need plans. Could you help frame the current exposure to the special need plans versus the traditional MA membership and whether the mix shift towards a special need plan means a structurally higher margin opportunity over time?

Yes. I don't -- yes, if I just look at our special needs plans, it's roughly 7% roughly for us, right around 7%. And I don't think we have enough information right now with our membership to determine if there's been a big mix shift, but more to come on that one.

And the next question comes from Justin Lake with Wolfe Research.

A couple of follow-ups for you guys on the stuff you've already talked about. First, on the membership exits, right, and some of the recontracting you've done there. I -- is it fair to think that you've kind of walked away from the contracts and the plans that you think are not good partners? And the kind of go-forward improvement here will be execution and hopefully, rates that reflect cost trends? Or do you still feel like there's more to come on that side? And also, were there any partners that stood out there? Is it concentrated in 1 or 2 plans that you walked away from? Or are you seeing that more broad-based?

Yes, Justin, I guess what I would say is it's probably payer and market specific. So it's not specific to any one payer. I think as you know, economics are different across payers and markets. And so I wouldn't single any payer out to say they were specifically an issue. And so it's broad-based. And ultimately, as we think about it going forward, I think these are members that we can ultimately get to a contract sometime in the future. But obviously, we're in challenging macroeconomic times. And we just couldn't get to a deal this year. So it doesn't mean we can't get to a deal ever. It just means the economics and the risk wasn't right for us at this point in time. And that's the same lens that we'll have as we renew contracts for 2027.

Yes. I think the point I would make, Justin, is that we've been pretty clear about the value that we create. And that if we're not going to be paid for it, then we will not be delivering that value. And we'll see what happens next year as they realize that what we were telling them was really an important contributor to their success. So we're hopeful, but we're also firm about it has to be the right agreement for us and for our physician partners.

Perfect. And then just last follow-up on the -- on trend. I think this question has been out there for a while, but CMS went on their call and said, we think trend is 5.5%. ACO REACH have been pushing 8% to 9% in the last couple of years. Have you been able to -- you sit in a unique position kind of playing in a significant way in both. Have you been able to sit down and kind of bridge that gap in terms of -- I know skin substitutes is a big part of it. But beyond that, do you think there's 300 basis points of difference between ACO REACH and Medicare Advantage? Or do you think there are a couple of pieces that the industry can kind of bring down the DC and sit down with CMS and say, here's what you're missing.

Yes. I guess what I'd say, Justin, is I think the industry and we are aligned that there seems to be a disconnect between the ultimate rate at the bottom line that's getting paid and the cost trends that everybody, including fee-for-service has seen over the last several years. So there's no -- I think there's no answer here that bridges that gap is what I would say. And I think that's why everybody is advocating for kind of a revisit of what the initial rate notice is.

The next question goes to Craig Jones with Bank of America.

I want to follow up on the chart review comment you made. So do you say you're in line and be in line with the 1.5% or do you think it will be like closer to 0%? And then as you think about how that spread among your payer partners, is it a pretty tight cluster or some potentially going to have like a 5% impact and some will have a 0% impact?

Yes. I think what we're saying is the removal of selected diagnosis is minimal for us just given our model because we're highly aligned with the primary care physician. And really, we're seeing those members in the office. And so for us, there's not a lot of unlinked conditions given how our model is designed and our proximity to the primary care physician. So I'd say that's just broad across everywhere. The Part C risk model changes, that obviously would be different by market.

And our last question goes to Daniel Grosslight with Citi.

This is Luis on for Daniel. I just have a quick cleanup question. I know you're intentionally slowing down market growth this year, but guidance still includes $15 million of new geography entry expenses. Can you remind us where exactly that is allocated to?

Yes. That's really capital commitments from prior growth. There's some of that, that drags into the following years, what I would say. And there was a little bit of growth this year. And obviously, there's some other groups that we're talking to, but not really getting into that right now.

And that does conclude the Q&A portion of today's call. So I will hand back over to you, Ron Williams, for any final comments.

Yes. Thank you. I would like to close by really expressing a deep appreciation and a huge thank you to our physician partners whose commitment to quality care to their patients is really fundamental to our long-term success. I also want to thank all of the employees of agilon who have really been focused on this transformation that we've gone through this year, positioning us for the kind of success that we've outlined in our guidance. So -- and thank you for joining the call. We appreciate your questions and the opportunity to engage with you. Have a good day.

Thank you, everyone. This concludes today's call. Thank you for joining. You may now disconnect.