agilon health, inc. Q3 2025 earnings call

Thank you, Operator. Good afternoon, and welcome to the call. With me is 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 is 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 Form 8-K filed with the SEC. And with that, let me turn the call over to Ron.

Thank you, Evan. Good afternoon, everyone, and thank you for joining us. I'm pleased to be with all of you today. For the third quarter, we reported revenue of $1.44 billion, medical margin of -$57 million, and adjusted EBITDA of -$91 million. We are also reinitiating 2025 guidance. While the quarter benefited from the execution of our clinical and quality programs, as well as cost discipline, we nevertheless were impacted by lower-than-expected in-year RAF contribution, as well as continued high costs from exited markets. As we look forward, we believe 2026 is shaping up to be a strong stepping stone in our transformation, with positive development in the first half, the enhanced financial data pipeline ramping to 80% in membership, and Part D exposure potentially moving below 30%. We believe we are establishing a solid 2026 baseline.

We expect to have improved forecasting and lower volatility, as well as significant internal and market-driven tailwinds. These tailwinds include our burden of illness and clinical pathways initiatives driving broader identification and diagnosis of high-risk conditions, increased incentives for our quality performance, and more disciplined and favorable contracting. This is further supported by more favorable payer bids, including increased premiums, maximum out-of-pocket, and deductibles, benefiting Agilon's financial performance. And last, we believe we are establishing a more efficient platform to drive additional operating leverage and have reduced our operating costs by $30 million. With increased visibility, we have reinstated our 2025 guidance.

At the midpoint, we expect revenue of $5.82 billion, medical margin of $5 million, and adjusted EBITDA of -$258 million, which includes the impact of lower-than-expected risk scores for 2025 and costs related to exited markets, partially offset by positive development in first-half medical costs, strong performance in ACO REACH, and continued operating cost discipline. Jeff will provide more detail in a moment. Our focus is on executing a strong finish to 2025 and a quick start in 2026. Our organization is executing with precision and purpose. Our strategic initiatives are tightly aligned with our mission and partners and centered on embedding urgency, focus, operational rigor, clinical excellence, and data-driven executional accountability across the enterprise, which we believe will translate into improved performance in 2026.

Through investment in technology and efforts to expand our access to richer and more timely data, Agilon is leveraging data analytics and AI-driven insights to support delivery with a focus to improve the visibility and predictability of our financial performance. Through our enhanced data pipeline, which went live in the first quarter, we now have more timely direct payer data feeds with validated and highly correlated member-level clinical and claims data, as well as member-level risk scores on approximately 80% of our members. We expect the increased visibility and alignment of our financial and operational data will enable us to more quickly identify and drive improvements. We remain extremely focused on the performance optimization initiatives we previously laid out. These are centered on improving the near-term profitability of the business. Allowing us to drive improved medical margin, adjusted EBITDA, and cash flow performance in 2026.

With respect to improved contract economics, we are currently in active negotiation with our payer partners for 2026. Based on our discussions to-date, we are making strong progress on several fronts. First, further reduction in Part D exposure. Second, an expansion of quality incentives. Third, improved economic terms for Part C. And fourth, we expect a continued narrowing of risk from supplemental benefits through better information. Based on the public commentary and initial review of payer bids, we expect more favorable bid design focused on M&A profitability, including improved pricing, reduced benefits, increased deductibles, and maximum out-of-pocket, which is expected to have a positive impact on Agilon's medical margin in 2026. We are also taking a very disciplined approach to contracting. And for those payers with benefit designs and pricing that are inconsistent with market dynamics, we are prepared to take decisive action.

While this may result in reduced membership, we're focused on profitable growth and earning the appropriate economics for the value we are delivering. With respect to quality or stars, approximately 75% of health plan Star Ratings are directly impacted by the PCP, making our success in delivering four stars in a majority of our markets critical for payers. Our programs enable care gap closure rates that exceed the overall MA average on key star measures such as Cancer Screening and Chronic Condition Management. To further enhance our stars' performance, we are leveraging our enhanced analytics capabilities and collaborating with our partners to further improve condition identification, diagnosis, and screening, leading to documenting and closing of gaps in care through treatment such as medication adherence. In early October, CMS released the 2026 Stars Ratings, which will impact 2027.

Approximately 75% of Agilon members are expected to be in 4+ Star plans, an increase from 71% in 2026 payment year. This also compared favorably to 65% in the overall Medicare Advantage market. In addition, for the 2026 Stars Ratings, Agilon achieved a consolidated average of 4.2 stars across our markets. This supports our efforts for improved payer economics that are better aligned with Agilon's strong quality performance. Our BOI program is also contributing to improvements in early and accurate identification, assessment, and documentation of a patient's comprehensive health conditions. By connecting the burden of illness assessment to our quality and care delivery programs, we can more effectively manage high-acuity chronic disease categories like heart failure. We are on track for our palliative program and clinical pathways. Based on the performance to-date, we believe this will positively contribute to our financial results in 2026.

As a reminder, these patient-focused, physician-driven, and technology-enabled clinical pathways have been developed in collaboration with our physician partners and national experts. They enable our teams to close care gaps by looking at some of the highest prevalence chronic conditions which affect our patient population. With respect to our heart failure pathway, we are seeing encouraging results by identifying and diagnosing these conditions earlier in the outpatient setting. Our physician partners are better able to manage the progression of each illness, improving the quality of care for the patient. We have reduced new inpatient heart failure diagnosis rates from 18% in 2024 to 5% in 2025 across our MA population. In markets where our virtual pharmacy solutions are active, about 50% of patients with heart failure and reduced ejection fraction are receiving guideline-directed medication therapy. This is approximately 30% higher than the national average.

Similarly, when virtual pharmacy solutions are combined with transitions of care cardiology, we have seen 30-day readmission rates fall below 5% as compared to the national average of approximately 20%. This performance is expected to continue as we expand the programming and we move into 2026 as more partners fully implement the program. With respect to our palliative care program, we continue to make progress in our education, market penetration, and enrollment. By focusing on providing care in a hospice or home setting, we see better care satisfaction for the member and their families and less hospital admissions. As we move into 2026, in addition to existing programs, we are beginning to expand our COPD and dementia pilots and anticipate further adoption. In the quarter, we have also taken steps to optimize our cost structure to align with current market dynamics, including a more balanced near-term growth outlook.

The leadership team is working to strategically realign our organizational structure. We have made thoughtful decisions to streamline certain teams while simultaneously investing in other areas that will help drive our next chapter of innovation. Through the centralization of certain functions, implementation of technology, and alignment with our PCP partners, we have reduced our headcount and streamlined our capital requirements and third-party costs, all to gain greater operating leverage from the platform and support our growth objectives. These operating expense initiatives are expected to reduce our costs by approximately $30 million in 2026. Finally, while we are making progress in our search for a CEO, the skills, experience, and relationships that are aligned to our new path, we remain committed to moving decisively now to enhance performance and Agilon's position for sustainable value creation. Thank you for your continued support during this transition period.

With that, I'll turn it over to Jeff.

Thanks, Ron, and good afternoon. As Ron touched on, 2025 is a transformational year. We are advancing strategic initiatives that we started putting in place last year to improve our contract economics, reduce our risk, and optimize our cost structure. We believe the increased visibility gained from the enhanced data pipeline, advances we have made in our BOI and clinical pathways programs, a $30 million reduction in operating expenses, and a more disciplined approach to growth is expected to have positive impact in 2026. For today's discussion, I will cover four key areas. First, I will walk through our third-quarter results. Second, I will provide details on our reinstated 2025 guidance and a bridge to our jumping-off point for 2026. Third, I will provide color on the significant number of tailwinds we believe will support improvement in our 2026 performance.

And finally, I will discuss the strength of our capital position based on our expectations for 2026 and a more disciplined near-term growth outlook. Moving to our financial performance for the third quarter. Starting with membership, Medicare Advantage membership at the end of Q3 2025 was 503,000 members compared to 525,000 members in Q3 2024. Our ACO REACH membership for Q3 was 115,000 members compared to 132,000 members in the same period of 2024. As we discussed previously, our decision to take a measured approach to membership growth has resulted in a slight year-over-year decline driven by previously disclosed partner exits in a smaller 2025 class. Total revenue for the third quarter of 2025 was $1.44 billion compared to $1.45 billion in the same period of 2024. Our year-over-year revenue comparison continues to be impacted by lower-than-expected risk adjustment, as well as the impact from market and payer contract exits.

During the third quarter, we received the remainder of the 2024 risk adjustment data and substantially all the mid-year 2025 risk adjustment data from our payer partners. This indicated the 2025 risk adjustment for the remaining 28% of members we did not include in our prior results was lower than the average. The third quarter reflects the impact of lower-than-expected revenue associated with 2025 risk adjustment scores of $73 million, including a nine-month true-up of approximately $50 million for the remaining 28%. We now estimate the full-year impact to medical margin for lower-than-expected risk adjustment is approximately $150 million. The larger-than-average impact for the remaining 28% was primarily driven by one payer representing a new market in 2024, where we also did not have data for 2023. This payer is now in our data pipeline, which provides us with confidence in establishing our risk adjustment baseline and potential for 2026.

In addition, exited markets negatively impacted the quarter by $20 million. First half cost trends continue to develop favorably and were approximately 5.7%. We took a prudent approach in the current quarter and recorded cost trends at a little over 6%. As we have previously stated, we have limited paid claims visibility at this point post-quarter close. Medical margin this quarter was -$57 million compared to -$58 million in Q3 2024. The current quarter reflects continued elevated cost trends in line with our expectations for the year. In addition, this includes the previously mentioned risk adjustment and exited market impact. Adjusted EBITDA for the quarter was -$91 million compared to -$96 million in the third quarter of 2024. The third quarter reflects the items I already highlighted, partially offset by lower geography entry costs and benefit from continued operating cost discipline.

We are very pleased with our strong ACO REACH performance during the quarter, including our final 2024 reconciliation. Adjusted EBITDA related to this program this quarter was ahead of expectations at $18 million. ACO REACH continues to demonstrate the value creation Agilon can deliver and is shaping the way we are transforming our MA business, reducing our exposure for things outside of our control, like Part D and supplemental benefits, while focusing on improved economics and incentives for Agilon's quality, clinical, and medical cost performance. On the balance sheet, we ended the quarter with $311 million in cash and marketable securities and $172 million of off-balance sheet cash held by our ACO entities. Next, let's move to our medical cost trend outlook and reinstated 2025 guidance. Managing medical cost trends remains a top priority.

For the first half of 2025, medical cost trends have been stable but elevated in areas such as inpatient and Part B oncology drugs and restated favorably relative to our expectations. We anticipate the medical cost trend to remain in line with our expectations. Now moving to guidance. With greater visibility as we head into the year-end, we are reinstating our full-year 2025 guidance. I will also provide some color on our expectations for 2026 based on our actions to-date and initial review of payer bids and contracting efforts. For the full-year 2025, we expect Medicare Advantage membership in the range of 503,000-506,000, with ACO Model membership projected to be between 113,000-15,000. We expect revenue for 2025 to be in the range of $5.81 billion-$5.83 billion, reflecting the impact of membership shifts and improved revenue yield from payer contracts.

The revenue outlook also reflects lower-than-expected 2025 risk adjustment performance of approximately $150 million, prior-year development to-date of $70 million, and exited markets of approximately $60 million. Full-year medical margins are projected to be between -$5 million to $15 million and adjusted EBITDA guidance range of -$270 million to -$245 million. We expect to end the year with approximately $310 million of cash on our balance sheet, including approximately $65 million held off-balance sheet by our ACO entities. We have provided a bridge in the earnings presentation we issued today that walks from the current guide for 2025 to our jumping-off point for 2026. The expected $135 million medical margin jumping-off point for 2026 includes approximately $150 million of lower-than-expected risk adjustment contribution for 2025. Now let me provide some color on 2026.

While we are not prepared to provide specific 2026 guidance at this time, I want to walk through why we are optimistic about next year, as illustrated on slide seven of our earnings presentation. We see several tailwinds, including macro factors like the 9% benchmark rate increase, better-aligned payer contracts, and the discipline cost actions Ron outlined that we believe will both drive material improvement in our performance in 2026 and establish a path for consistent improvement as we move beyond next year. First, in the third quarter, we completed restructuring actions to improve our operating expenses. We rationalized other medical expenses, including better alignment of incentives with our PCP partners, reduced overhead and vendor costs in line with our current revenue run rate, and more balanced growth outlook.

We estimate that this will drive $30 million in cost and adjusted EBITDA benefit in 2026, with additional opportunities for savings in 2027. Second, we have taken a more disciplined approach to payer contracting, which includes incremental percentage of premium and enhanced quality incentives from payers for the value we deliver. This is expected to drive revenue growth on a PMPM basis, potentially greater than the 9% CMS final rate notice for 2026. We have reviewed payer bids across our markets, and on average, we see payers bidding for profitability with benefit design changes, including increases in premiums, deductibles, and maximum out-of-pocket expenses, and a reduction in supplemental benefits. This is expected to be a positive offset to cost trend in 2026. As a reminder, 2025 included a 1% benefit from payer bids.

As part of our disciplined contracting strategy, we are taking decisive action market by market with payer contracts that do not meet a minimum threshold for profitability. While our contracting for 2026 is not final, if we cannot come to appropriate economic terms in certain markets, we may not contract with specific payers in these markets. As part of our discussions, we may also transition some of these members to a care coordination fee with additional performance incentives. Depending on the outcome, this may reduce our overall membership in 2026, though this impact may be mitigated if a member shifts to another payer with more favorable economics for Agilon or moves to a coordinated care fee arrangement. This disciplined approach is expected to be favorable to medical margin and adjusted EBITDA in 2026 and beyond.

Our contracting efforts also include additional steps to reduce variability in our performance by effectively managing multi-year contract terms to reduce our exposure to macro cost trend volatility, interim payer benefit design changes, and pricing that may be detrimental to our capitated economics. This includes reducing our payer contract term length if needed or adding additional material adverse change clauses to the contracts. In addition, while our exposure to Part D in 2025 was primarily related to carved-out or exited markets, we are continuing to further reduce our exposure. With respect to BOI, we are confident that the enhanced data pipeline, which now includes the outlier payer from the remaining 28% of our members, AI advances for high-risk member identification and diagnosis in our BOI program, and execution on clinical pathways will deliver results over and above the final year of V28.

Our confidence is based on a review of validated codes in our data pipeline and our ability to deliver results above the impact of V28. Last, on our cash outlook, with the anticipated performance improvement in 2026 from our initiatives and the macro factors I just walked through, combined with our focus on working capital management, we expect to end 2025 with approximately $310 million in cash and 2026 with at least $100 million in cash on our balance sheet, including cash held in our ACO reach entities. Before I close, given our current stock price, we anticipate pursuing a reverse stock split and expect to seek stockholder approval at our annual general meeting in 2026.