Astrana Health (ASTH) Q2 2026 Earnings Call Transcript

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DATE

Thursday, Aug. 6, 2026 at 5:30 p.m. ET

CALL PARTICIPANTS

• President and Chief Executive Officer - Brandon Sim
• Chief Operating and Financial Officer - Chan Basho

TAKEAWAYS

• Revenue -- $972.5 million, up 49% year over year, driven by organic growth in the Care Partners segment and the Prospect Health acquisition.
• Adjusted EBITDA -- $68.9 million, up 43% year over year, reflecting medical cost trend management and expanding operating leverage.
• Adjusted EPS -- $0.80, up 45% year over year, representing a record high for the company.
• Free Cash Flow -- $92.9 million for the six months ended June 30, 2026, representing a 69% conversion rate of adjusted EBITDA.
• Net Leverage -- 2.26 on a trailing 12-month basis, down from previous periods and surpassing the management target of 2.5 ahead of schedule.
• Value-Based Membership -- 1.5 million members, with year-over-year changes primarily driven by anticipated Medicaid related attrition.
• Full Risk Capitation -- 81% of total capitation revenue, up as the company continues to move cohorts further along the risk curve.
• Full Risk Membership -- 42% of the total member base, reflecting the company's objective to assume greater accountability for patient outcomes.
• Medical Cost Trend -- 5.2% year to date, tracking slightly better than full-year assumptions despite elevated commercial trends.
• G&A Expense -- 5.6% of revenue, an improvement of approximately 210 basis points year over year due to AI-enabled automation.
• Full-Year Revenue Guidance -- $3.8 billion to $4.1 billion, reaffirmed despite a one-time reduction in ACO REACH payments.
• Full-Year Adjusted EBITDA Guidance -- $255 million to $280 million, raised from the previous range due to operational outperformance.
• Full-Year Free Cash Flow Guidance -- $105 million to $132.5 million, reaffirmed based on first-half performance.
• Q3 2026 Guidance -- Revenue of $1 billion to $1.03 billion and adjusted EBITDA of $72.5 million to $77.5 million.
• Prospect Synergies -- $12 million to $15 million in annual operating expense savings, with execution currently at the high end of this range.
• ACO REACH Adjustment -- $15 million one-time revenue reduction in the quarter related to CMS billing adjustments for the 2025 performance year.
• Debt Retirement -- $92 million of debt retired during the second quarter using cash on hand.
• Texas Membership Growth -- 3,000 new Medicare Advantage professional risk lives added through a new partnership with a national payer.
• Reinvestment Allocation -- $5 million to $9 million in quarterly outperformance reinvested into provider and payer growth opportunities.
• Cash Balance -- $401 million as of June 30, 2026, following the retirement of a portion of company debt.
• MSSP Performance -- Ranked seventh nationwide out of 476 ACOs in net shared savings per beneficiary for the 2024 performance year.

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RISKS

• Sim noted that Medicaid attrition is "tracking towards the high end of our expectations" as the company manages eligibility redeterminations in California.
• Sim reported that "commercial has run slightly above expectations in the quarter," necessitating the use of clinical and operational levers to manage cost trends.
• Basho highlighted that revenue for the quarter was impacted by a "one-time $15 million reduction" following CMS implementation of billing adjustments for the ACO REACH program.

SUMMARY

The company focused on scaling its AI-native healthcare operating system to improve risk-adjusted returns and expand operational capacity. Management reported that the integration of Prospect Health completed its first year with gross provider retention exceeding 99% and synergy realization at the high end of previous targets. Astrana Health, Inc. (NASDAQ:ASTH) is rebalancing its portfolio by transitioning tens of thousands of Medicaid members from professional risk to full risk arrangements to better align financial incentives with care performance. Management chose to reinvest outperformance from the first half of the year into expansion markets and new payer contracts to support future earnings power.

• Sim stated that durable competitive advantage comes from "owning the orchestration layer, where data, workflows, clinical decision-making, operational processes, and financial accountability are integrated into a single operating system."
• AI-powered workflows in claims and referral management reduced handling time by over 50%, creating operational capacity equivalent to approximately 60 full-time employees over the past 12 months.
• Management expects to exit the year with general and administrative expenses at approximately 6% of revenue, reflecting continued capture of synergies and platform improvements.
• The company expanded its Medicare Advantage footprint with new agreements in Hawaii and Texas, leveraging its payer-agnostic model to stabilize membership despite Medicaid attrition.
• Sim noted that the company's "AI agents are creating capacity, improving productivity, and enabling our teams to focus on higher value clinical and operational work."
• Management reaffirmed medium-term adjusted EBITDA growth targets of mid to high teens as new cohorts mature and reach profitability more quickly through technology-enabled onboarding.

INDUSTRY GLOSSARY

• ACO REACH: Accountable Care Organization Realizing Equity, Access, and Community Health, a CMS value-based care model.
• MSSP: Medicare Shared Savings Program, a voluntary program that encourages groups of doctors and hospitals to coordinate care for Medicare patients.
• RAF: Risk Adjustment Factor, a score used to predict the healthcare costs of a patient based on their health status and demographics.
• V28: The 28th version of the CMS Hierarchical Condition Category risk adjustment model, which introduced significant changes to how risk is calculated.
• Capitation: A healthcare payment model where providers receive a fixed amount of money per patient for a set period, regardless of the number of services provided.
• Full Risk: A contract arrangement where a healthcare provider assumes total financial responsibility for the cost of a patient's care.
• HQAF: Hospital Quality Assurance Fee, a program in California that provides supplemental payments to hospitals.

Full Conference Call Transcript

Operator: Hello, everyone, and welcome to Astrana Health's second 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 Astrana Health, and Chan Basho, Chief Operating and Financial Officer. The press release announcing Astrana Health's results for the second quarter ended June 30th, 2026, is available in the investor relations section of the company's website at www.astranahealth.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 at Astrana 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 could be identified by terms such as anticipate, believe, expect, future, plan, outlook, and will and conclude, among other things.

Statements regarding the company's guidance, continued growth, acquisition strategy, ability to deliver sustainable long-term value, ability to respond to the changing environment, liquidity, operational focus, strategic growth plans, and acquisition integration efforts. Although the company believes that 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 associated with investing in Astrana Health is included in the filings with the Securities and Exchange Commission, which we encourage you to review before making any investment decisions.

The company does not assume any obligation to update any forward-looking statements as a result of new information, future events, change in market conditions, or otherwise, except as required by law. Regarding to the disclaimer language, if you would like to refer to slide two of the conference call presentation for further information. With that, I will turn the call over to Astrana Health's President and Chief Executive Officer, Brandon Sim. Please go ahead, Brandon.

Brandon Sim: Good afternoon, and thank you for joining us for Astrana Health's second quarter 2026 earnings call. Today, I'll begin with an overview of our financial results, then discuss how our care model and AI native operating system for healthcare are accelerating our ability to deliver high-quality, patient-centered care at scale. I'll then provide an update on the Prospect integration following our first full year together. Finally, I'll discuss our strategic positioning in each line of business and provide color on our guidance before turning the call over to Chan. Astrana delivered another strong quarter, reflecting continued momentum across the business.

We saw accelerating demand from payer and provider partners, continued maturation of our value-based care cohorts, disciplined medical cost trend management, and expanding operating leverage driven by our proprietary technology platform. In the second quarter, we generated revenue of $973 million, up 49% year-over-year, and adjusted EBITDA of $69 million, up 43% year-over-year. Adjusted diluted earnings per share reached a record high $0.80, up 45% year-over-year. Our business continues to generate substantial cash. Free cash flow totaled $93 million in the first half of the year, representing approximately 69% conversion of adjusted EBITDA into free cash flow. That cash generation, combined with continued earnings growth, has enabled us to continue deleveraging ahead of schedule.

Net leverage declined to 2.26 times on a trailing 12-month basis. As a reminder, when we first announced the Prospect transaction, we committed to reducing net leverage below 2.5 times within 24 months. We've already surpassed that goal by approximately a quarter turn in half the time. These results continue to demonstrate the scalability of our AI-native healthcare operating system and the consistency of its execution. There's an important distinction between simply adopting AI and actually creating value from AI. We believe that durable competitive advantage comes from owning the orchestration layer, where data, workflows, clinical decision-making, operational processes, and financial accountability are integrated into a single operating system across the enterprise.

That unified operating system gives our AI agents a shared context across the enterprise. Allowing them to work seamlessly across clinical, operational, and administrative functions rather than being confined to isolated point solutions. The result is intelligent automation that spans the organization, becomes more capable over time, and creates more value as the platform scales. Building that operating system has required years of healthcare expertise, proprietary data, workflow development, and organizational learning, creating a set of capabilities that we believe are difficult to replicate. Just as importantly, we've paired that operating system with a delegated payer-agnostic business model that captures the economic value that those better decisions create.

That foundation is reflected in our execution across our four longstanding strategic priorities. First, we continue to grow responsibly. Our growth has never been constrained by demand. It's constrained by the economics of each new cohort that we onboard. Every new cohort requires upfront investment before reaching at-scale profitability, and our objective is to maximize long-term value by balancing growth with profitability. That equation is changing. As our AI-native healthcare operating system continues to improve, every new cohort we onboard generates stronger risk-adjusted returns. New cohorts become more predictable, require less upfront investment, and reach profitability more quickly.

That allows us to responsibly move further along the growth profitability frontier, capturing more of the demand available to us without compromising our underwriting standards or long-term return thresholds. Because the business has outperformed expectations and generated strong free cash flow in the first half of the year, we've been able to move further along that frontier, accelerating growth by onboarding additional high-return opportunities while simultaneously exceeding our profitability expectations and raising our guidance for the year. On the payer side, we signed new Medicare Advantage agreements in Hawaii and Texas, expanded existing relationships in California, and saw strong demand across the platform.

On the provider side, both our Care Partners and Care Enablement pipelines continued to strengthen, including planned new physician partnerships in the South and on the East Coast that we expect to begin contributing to revenue in 2027. We also continued to execute on disciplined strategic tuck-in acquisitions within our expansion markets, further strengthening our care delivery capabilities. We expect these investments to progress along the same maturation curve and become meaningful contributors to earnings over time. Second, we continue to progress prudently into full risk arrangements. In value-based care, success isn't about avoiding risk entirely. It's about reducing the uncertainty associated with that risk.

Our platform continuously strengthens our ability to predict and influence the drivers of performance, fundamentally improving the risk-adjusted economics of value-based care. Our competitive advantage isn't a greater willingness to assume risk. It's a greater ability to reduce uncertainty through better clinical and operational execution. As a result, we're able to responsibly pursue full risk opportunities that others may view as too uncertain while maintaining the same disciplined underwriting standards. The full risk contracts that commenced in Q1 continue to perform in line with our underwriting expectations as those cohorts mature. At quarter end, approximately 81% of capitation revenue and 42% of our membership came from full risk arrangements.

Our expansion markets continue to validate the portability of our operating model. In Texas, our delegated full risk partnership with a large national payer is now two full quarters into operation and continues to perform in line with our expectations. Based on that performance, we continue to expand our presence in the market, including adding approximately 3,000 new Medicare Advantage professional risk lives with a payer that selected Astrana as its risk partner. Third, we continue to manage medical cost trend through better care. Historically, risk stratification determined which patients received scarce clinical resources. Today, it increasingly determines how every patient receives care.

Higher-risk patients continue to receive physician and nurse-led interventions, while lower-risk patients receive AI-enabled navigation, outreach, and longitudinal monitoring. AI does not replace clinicians. It extends their reach across a much larger portion of the population without compromising quality. On a year-to-date basis, overall medical cost trend remains slightly better than our full year assumption of approximately 5.2%. Medicare Advantage and original Medicare continue to perform favorably relative to our expectations. Medicaid cost trend is tracking in line with our expectations. Although commercial has run slightly above expectations in the quarter, we are confident in our ability to manage those trends through the clinical and operational levers enabled by our delegated model.

For the 2024 performance year, our flagship MSSP ACO ranked seventh out of 476 ACOs nationwide in net shared savings per beneficiary, while our flagship ACO REACH entity ranked in the top 15% nationally in net shared savings. Fourth, we continue to expand operating leverage as we scale. Across the business, our AI agents are creating capacity, improving productivity, and enabling our teams to focus on higher value clinical and operational work. For example, in claims operations and referral management, AI powered workflows have reduced handling time by more than 50%, creating operational capacity equivalent to approximately 60 full-time employees over the past 12 months.

As a result, G&A as a percentage of revenue improved approximately 210 basis points year-over-year in the second quarter. We continue to expect to exit the year with G&A at approximately 6% of revenue. Taken together, these four pillars demonstrate how Astrana's operating system for healthcare translates into measurable economic value, and we believe that's what fundamentally differentiates Astrana. Turning to Prospect. July first marks the one-year anniversary of closing the Prospect acquisition. Over the past year, we've systematically integrated Prospect onto the Astrana operating system, bringing clinical operations under a unified care model, embedding the workflows and technology that have driven our historical performance across the enterprise, and establishing a unified operating and financial framework across the business.

The results continue to validate that approach. Gross provider retention has remained above 99%. We continue to expect operating expense synergies at the high end of our annual target of $12 million-$15 million. Medical cost trend within the legacy Prospect business continues to run slightly ahead of our expectations. More importantly, we've established the operational and clinical foundation that we believe will continue to drive improvement over the years ahead. Turning to the positioning of our portfolio. We continue to actively position our business for long-term value creation while remaining disciplined in our planning assumptions.

We exited the quarter with approximately 1.5 million members in value-based arrangements with year-over-year membership changes driven primarily by Medicaid related attrition that was already contemplated in our guidance. Medicare Advantage membership remained stable during the quarter. In the exchange product, we continue to expect full year attrition consistent with both our guidance and our internal planning assumptions. In Medicaid, we continue to see attrition tracking towards the high end of our expectations, while adverse selection continues to be in line with expectations, as we shared last quarter. While these dynamics remain fluid across the industry, we remain comfortable with the assumptions embedded in our outlook and continue to plan conservatively.

At the same time, we are continuing to improve the quality and alignment of our portfolio. In California, we're rebalancing portions of our Medi-Cal business by transitioning members from professional risk arrangements into full risk arrangements in response to changes in the state's Medicaid program. We expect these transitions with several of our health plan partners to occur over the next 12 months and view them as a natural progression of the strategy we've discussed over the past several years. Before I turn the call over to Chan, I'd like to provide a bit of color around our raised adjusted EBITDA guidance for 2026. Our underlying performance continues to run ahead of plan.

Rather than allowing all of today's outperformance to flow through to earnings, we've deliberately chosen to reinvest a substantial portion of that into the provider and payer growth opportunities that I mentioned earlier. In aggregate, these investments are in the mid to high single digit millions of dollars this year. As I discussed earlier, our operating system continues to improve the economics of growth, giving us the confidence to capture more of the demand available to us, even while maintaining the same disciplined investment standards. We believe that allocating some of our outperformance towards these growth opportunities is among the highest return capital allocation decisions available to us and will continue to compound our earnings power over time.

With that, I'll turn the call over to Chan.

Chan Basho: Thank you, Brandon, good afternoon, everyone. Our second quarter results reflect disciplined execution across the platform. Adjusted EBITDA finished towards the higher end of our guidance range, and free cash flow generation remained strong. We made meaningful progress on the balance sheet, retiring $92 million of debt during the quarter. Today, I will cover three areas: our second quarter financial performance, including medical cost trends, the balance sheet and free cash flow, and our updated outlook for the year. Total revenue for the second quarter was $973 million, up 49% versus the prior year period, driven by organic growth in our Care Partners segment, the Prospect Health acquisition, and continued ramp-up of our full risk contracts.

Second quarter revenue was impacted by a one-time $15 million reduction related to CMS's implementation of the adjustments for significant anomalous and highly suspect billing activity for the ACO REACH 2025 performance year. Despite this, we are reaffirming our full year revenue guidance of $3.8 billion-$4.1 billion. Adjusted EBITDA for the quarter was $69 million, up 43% versus the prior year period and near the high end of our guidance range of $65 million-$70 million. This reflects controlled trend, solid performance across our full risk arrangements, continued realization of Prospect Health synergies, and disciplined cost management. Net income attributable to Astrana was $20 million. Adjusted EPS was a record $0.80 per share, up 45% versus the prior year period.

Turning to G&A, we expect to be approximately 6% of revenue for the full year. Free cash flow for the first six months was $93 million, an increase of $29 million from Q1 2026. We remain on track to deliver full year free cash flow within our guidance range of $105 million-$132.5 million. On the balance sheet, de-leveraging moved from commitment to execution this quarter. We used our strong cash generation and position to retire $92 million of debt, bringing pro forma gross leverage down to 3.8 times from 4.2 times at the end of the first quarter.

We ended the quarter with $401 million in cash, $579 million of net debt, and pro forma net leverage of 2.26 times on a trailing 12-month basis. As Brandon discussed, we're raising our full year 2026 Adjusted EBITDA guidance to $255 million-$280 million. The increase reflects broad-based outperformance across the business, including the continued maturation of our full risk cohorts, continued realization of Prospect Health synergies, and operating leverage from our AI-native operating system. We are raising guidance even while continuing to reinvest a substantial portion of our outperformance into attractive long-term growth opportunities.

These investments include growth in our core and expansion markets, newly onboarded payer contracts, planned provider partnerships, disciplined strategic tuck-in acquisitions, and recently converted risk cohorts that remain early in their maturation curves. We continue to believe these investments will generate attractive long-term returns while further strengthening our earnings power over time. On revenue, despite the one-time 2025 ACO REACH billing-related adjustment, the continued ramp-up of our full risk contracts keeps us comfortably within our previously communicated range. Accordingly, we are reaffirming our full year revenue guidance of $3.8 billion-$4.1 billion, as well as our free cash flow guidance of $105 million-$132.5 million. Our outlook continues to assume zero contribution from HQAF and conservative Medicaid membership trends.

We expect greater clarity on both items as the year progresses. For the third quarter of 2026, we expect revenue between $1 billion and $1.03 billion and adjusted EBITDA between $72.5 million and $77.5 million. Taken together, our first half performance, including record profitability and earnings growth, strong free cash flow generation, and continued operating momentum gives us confidence in our updated outlook. We enter the second half of the year with momentum, a strong balance sheet, and confidence in the long-term trajectory of our business. With that, operator, we're happy to take questions from the audience.

Operator: Thank you. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For a participant choosing speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Please ask one question and one follow-up question and re-queue for any additional questions. Our first question is from Ryan Daniels with William Blair. Please proceed.

Matthew Mardula: Yeah. Hello, this is Matthew Mardula in for Ryan. Thank you for taking the questions. With you talking about outperforming the full year trend assumption of about 5%, what cost trend are you currently at? With commercial above trend, what is impacting that segment, and is it the exchange segment? Lastly, did any segment cost trends needed to be revised versus your expectations?

Brandon Sim: Hey, Matthew. Thank you for joining the call. I think there were a few questions. First on trend, year to date, overall trend is tracking slightly better than our guided 5.2% assumption blended across the business. By line of business, Medicare Advantage and original Medicare are slightly favorable to our overall trend. Our ACO populations and original Medicare are performing well. Medicaid is in line with that trend number, and that was inclusive of potential adverse selection effects in our guidance. Commercial, as I mentioned earlier, was slightly above. On commercial, we feel comfortable with our ability to inflect that throughout the year. It's only slightly higher than what we had anticipated.

We're not anticipating changing our guidance at this time.

Matthew Mardula: Great. Thank you for that. With the new members added in Texas, Hawaii, as well as in California for Medicare Advantage, and with you talking about continuing to expand membership, as we think about expansion, is MA the area that looks most favorable to you? As we think about into the second half and into 2027, should we be expecting MA membership to continue to grow? Do you believe this could maybe offset that decrease in Medicaid membership seen?

Brandon Sim: Our model is based on being payer-agnostic. However, given some of the changes in Medicaid that are to come, naturally, there is a higher percentage of revenue that will be coming from Medicare, both Medicare Advantage as well as original Medicare, going forward.

Matthew Mardula: Great. Thank you for taking all the questions.

Operator: Our next question is from Jack Slevin with Jefferies. Please proceed.

Jack Slevin: Hey, good afternoon, guys. Thanks for taking the question and congrats on a solid quarter. Apologies if you tread over this a little bit, but I guess I wanted to just touch on MA a little. Really two things, I guess. I know it's a little early without landscape files or other things, but maybe what you're hearing or seeing from payers, given we are past bid deadlines, or any chatter that might be in the marketplace on sort of where those things are aligning.

Secondly, as you look at trend and opportunities to moderate there, any pockets you can call out or areas you might see that could be potential drivers of upside in MA as we progress through the year and into the out years?

Brandon Sim: Hey, thanks for the question. I mean, first of all, on the plan, none of that is public yet. We do work closely with the plans, especially in those provider-specific plans that we develop in partnership with our plan partners to find the right benefits for the populations that we're serving and ensure that the benefits are driving better care coordination and better access to care for those members. I think it's a bit early to comment on the exact bids. I do think that we feel confident that our success in Medicare Advantage will continue to 2027.

Of course, in California, which is our core market and a very competitive market for MA, there are always going to be, as we've seen in past years, folks who want to grow their plans dramatically. This has been a recurring theme, and we've managed through that, and we understand how to do that, and kind of spread our membership across our portfolio of health plan partners as we feel confident kind of going to 2027, especially with where the final rate notice was. In terms of potential opportunities, there are always opportunities to continue moderating medical cost trends. However, we're already seeing that outperforming our overall expectations, and we feel confident that we can continue doing that going forward.

For example, inpatient admits per K in our Medicare business were very well controlled, and relatively flat year-over-year here in the first half of the year. That being said, there's always opportunity to more appropriately code our members. As we had mentioned before, our risk scores are approximately 1.0, which we believe is lower than the average for Medicare Advantage. That's something that, in the medium term, we will be looking to capture and diagnose and code more or chart more accurately.

Jack Slevin: Got it. Okay. Really helpful. Then just as a follow-up, the G&A commentary continues to be, I think, pretty optimistic, and delivering on some of the upside there. I guess what I'm trying to parse out, related to some of the synergies in Prospect and then just ongoing efforts you have to make the business more efficient, more automated, more AI forward. If I try to balance those two things, can you just speak a little bit to sort of are those two things tracking nicely together? Is there room to go on Prospect within some of the core initiatives you're putting out across the business that are separate from the synergies?

Would love to just hear sort of on those two tracks, how to think about the G&A improvements and how that casts forward.

Brandon Sim: Right. Consistent with what we've been saying the last couple of quarters, we have been measurably improving our G&A spend, or decreasing G&A spend as a percentage of revenue. This quarter, for example, was over 2% lower than the same quarter last year, coming in underneath the 6% mark, and we expect to exit the year at the 6% range. Going forward, we continue to expect to see declines in G&A as a percentage of premiums under management, as a result of both increased capture of synergies, which are at the top end of the $12 million-$15 million range that we had previously guided, as well as core operational changes in the legacy Astrana business.

It really is a mix of both. I don't have a breakdown of exactly what % is coming from each, but it's going to be continued improvements across the board in both capturing synergies as well as improvements in the core platform.

Jack Slevin: Understood. Appreciate it, Brandon.

Brandon Sim: Thanks.

Operator: Our next question is from Michael Ha with Baird. Please proceed.

Michael Ha: Hi. Thank you. On the rebalancing of Medi-Cal lives from professional to full risk, I was wondering if you could elaborate more on this. What's driving it? Is this related to the increased payer appetite you mentioned in your remarks, is there increased appetite from these Medicaid plans in California who are facing elevated margin pressures? How many lives are you expecting to convert over the next 12 months, and how should we think about the expected earnings impact?

Brandon Sim: Hey, Michael. Thanks for the question. I think there are a couple of dynamics at play in Medicaid, especially in California for the Medi-Cal program. One part of it is that a lot of our care model is predicated on saving dollars across both outpatient and inpatient utilization. In areas or contracts in which there is no path to a full risk arrangement, or in areas where we can push towards a full risk arrangement, we believe that allows us to better align our performance with the financial outcomes that we receive from those contracts, especially in a time of compressing margin, and disenrollments in California, both now and potentially in 2027 and beyond, after OBRA '90 comes online.

We're making a further push to emphasize that we would want to be fully accountable for the results that our model is driving, across all lines of business, but certainly especially in the Medi-Cal business, which we call out in the prepared remarks. We also believe that these transitions are generally amenable, for our plan partners, and we expect in the order of tens of thousands of members, conservatively moving into these arrangements over the next, call it 12 months, as I mentioned in the prepared remarks. We aren't currently sizing the economics necessarily tied to that. I think what's important is that we want to be aligned with our health plan partners.

We want to deliver and be rewarded for the outcomes that we're driving. We believe that moving to full risk arrangements, which we have already started, as I mentioned with one contract in the remarks, this quarter, but continuing to do so in the next year will help us align in that fashion.

Michael Ha: Great. Thank you. On risk capture, which you talked about in the other question, I guess when I think about it, over the past few years, you've had pretty nice improvement growing your RAF. It has grown 5% from 0.97 to 1.02 all during V28. Now that V28 is ending, trying to think, how should we think about the go forward annual RAF improvement? Would it be fair to presume if you were able to do 5% growth during one of the toughest risk coding environments, V28, that heading out it might even be greater RAF improvement? I was wondering if you could talk more about your internal RAF initiatives, investments being made.

Are you embedding AI into this coding function? Even for this year, just wondering how are your AWV rates tracking year to date so far? Thank you.

Brandon Sim: Thanks, Michael. We've historically been strong at the annual wellness visit, at driving that engagement with our patient base, especially in the Medicare population. That's something that we report, and track as an internal KPI that's important to us in terms of our ability to get the patients in, and really assess them in a comprehensive way. We view RAF and charting as a natural consequence event, not the primary motivation. Our model, as you know, is primarily focused on driving coordination, access and better outcomes and, kind of as an ancillary function, charting appropriately so that we're being reimbursed in a fair manner. We believe that improvements in RAF for existing cohorts will continue as before.

That being said, as we continue growing membership in new regions, it really depends on what the RAF is for the new cohorts coming in. The blended average of that is impactful to the overall RAF number. We do believe, as in historical periods, that over time each cohort does improve in terms of the risk adjustment profile. We think that there is still upside in the medium term from being more appropriately coded in our Medicare population.

Operator: Our next question is from Jailendra Singh with Truist. Please proceed.

Jailendra Singh: Yeah, thank you, and thanks for taking my questions. First, I want to ask about second half EBITDA guidance and the implied Q4 outlook. It implies a pretty wide Q4 range of $47 million-$67 million. I understand Q4 is seasonally weaker quarter, the low end seems to imply a meaningful step down from Q3 levels. Is there anything meaningfully different in Q4 versus Q3 this year versus prior years? If not, can you help us understand the swing factors in the Q4 outlook?

Brandon Sim: Hey, Jailendra. Thank you for the question. I think if you're focused on the width of the range, I think that's primarily an artifact, frankly, of just the range that we guided to for the year versus the quarter. I think how we would think about it is that the Q3 and Q4 cadence is very similar to past years. Q3 is typically a much better quarter, in fact, the best quarter of the year. There's a sequential step down into Q4 relative to Q3. I would be more focused on the midpoint potentially than the range necessarily, which is just an artifact, I think, of the range of the annualized guidance versus the quarterly guidance.

Jailendra Singh: Okay. We didn't hear any thoughts on 2027. You have talked about mid to high teens year-over-year organic EBITDA growth, in 2027. First, I want to confirm, see if any changes to that thought process. Related to that, how are you thinking of Medicaid work requirement headwind next year? Is that captured in that mid to high teens number? The investments you're doing this year Do they have potential to drive incremental growth next year, or they are more supporting your mid to high teens growth? How should we think about that?

Brandon Sim: Yeah, definitely. I think we have said, we'll stand by and reaffirm, medium term, mid to high teens EBITDA growth, not just for 2027, but into the medium term years as well. There are Medicaid changes starting 1-1-2027, as is well known. We think that based on the portfolio rebalancing and the changes we are making, we will have the right levers to continue growing in that range in a go-forward basis. In terms of the investments that we're making, as I mentioned, we're investing mid to high single-digit million dollars. Primarily, these are essentially losses in new contracts and new geographies to take on membership faster than we would've otherwise planned.

These may not flip to profitability necessarily in 2027, but any losses related to them would be contemplated into our 2027 guide when we put that out. It's possible, depending on the cadence, some of the cohorts may turn positive more quickly, especially as we continue to compress the slope of the J-curves that we have given our operating system. At this time, we're contemplating kind of a more normal cohort improvement as in historical periods.

Jailendra Singh: Okay. One more, if I can sneak in here. Some of the large health insurers have talked about exiting Medicaid markets. Some have talked about shrinking their exchange footprint, some talk about exiting certain MA plans. Some of these decisions are for 2027, I understand you don't have much exposure to some of these health plans, I believe others are partners. Generally, how much lead time do you get to contract with plans, winning those lives? Is that membership risk or share gain for a dense delegated network? Just help us understand how quickly you can shift these and how much lead time you have generally when plans exit or get out of these markets.

Brandon Sim: Yeah. That's an interesting one. That really depends payer to payer. I think what really helps us is our unique payer-agnostic model. The idea is that we are acting as a coordinated, unified payer for our downstream delegated networks. For example, if one payer were to exit a certain market or exit a certain product, those members are still there. They will still be needing insurance. They may go to a different plan, a different product. The idea is that because of our unique model, our providers are not negatively impacted by that because it would simply be a switch in ID card benefit, et cetera, the providers would be extracted away from those changes.

We would handle that on the back end for our providers. That being said, recently, we typically get around a few months in advance of some of these things happening, our teams are preparing to make sure that those members are moving to a plan that we do have a contract with so that their care is not interrupted, that operationally, the providers are not being disrupted either.

Jailendra Singh: Great. Thanks a lot.

Operator: Our next question is from David Larsen with BTIG. Please proceed.

Jenny Shan: Hi, this is Jenny Shan on for Dave. Thanks for taking my question. I just wanted to ask about some of the member attrition that you referred to earlier. Just any thoughts on what you're seeing, what you saw this quarter versus last quarter? We were under the impression that the declines that you were seeing were pretty favorable, especially compared to some of your peers. Has that accelerated at all? If you could put any numbers or quantify that would be great. Thank you.

Brandon Sim: Thanks, Jenny. Say hi to Dave for us. On Medicaid's, or sorry on attrition broadly, they were largely in line with expectations. Breaking that down a little bit by line of business. California Medicaid is in line. It's not a great picture. It is in line and towards the higher end of the low to mid-teens kind of range that we had provided before in terms of Medicaid attrition in California. That was within the guidance and is fully contemplated in the revised 2026 guidance that we put out. In terms of the exchange, it is actually running a little better than our 30%-40% assumption at the beginning of the year.

However, out of conservatism, we're still contemplating the 30%-40% range for our full year guidance. Then Medicare, both original and Medicare Advantage, that's fairly stable. I would say really the only area if we're watching something for sure is in Medicaid. But as I mentioned, that's the source of some of the strategic rebalancing and kind of focus on taking full accountability for our members in Medi-Cal.

Jenny Shan: Perfect. Thank you.

Operator: Our next question is from Andrew Mok with Barclays. Please proceed.

Andrew Mok: Hi. A couple questions on the revised guidance. First, you noted mid to high single digit reinvestment in the business. If you're reinvesting, say, $7+ million from the first half and still raising the guide by two and a half million, is it fair that the first half outperformed plan by $10 million or so? And is there anything driving that outperformance that's one-time in nature that wouldn't necessarily recur in the back half? Thanks.

Brandon Sim: Hey, Andrew. Thanks for the question. I think probably, yes, that's fair. There are obviously puts and takes here and there, but we felt we were very happy to be able to improve guidance, admittedly by a small amount, but also reinvest, call it three quarters or so of that back into growing quicker into new markets. Some new provider partnerships that I mentioned, taking on new blocks of membership and winning organic growth, in some of our expansion markets. We believe, like I mentioned, that sets us up really nicely for continued medium-term and long-term earnings expansion. In terms of one-time items, there was not really anything large one time here.

There was an immaterial net effect of prior period development. Do want to get ahead of that when we file the Q very shortly here, you will see some positive claims restatement from prior periods. That being said, there were also changes in revenue, stop loss, provider share, et cetera. On net, the prior period items were immaterial. In our view, it was purely outperformance, and we reinvested, call it around three quarters of that outperformance into future growth.

Andrew Mok: Great. Just a follow-up to your response, I think to Jill Lindner's question. You noted that Q3 is the best quarter of the year from an EBITDA perspective. Why exactly is that? Is that going to have a meaningful impact to seasonality this year different from last year? Thanks.

Brandon Sim: Yeah, of course. There are a couple of main reasons for that. It's primarily related to when we accrue and take some of the profitability from, for example, the MSSP program. Out of conservatism, we typically do not take any of those dollars until Q3 when we have better visibility, even if we are fairly confident that we're doing well in that program in terms of other leading metrics. There's also sweeps, for example, that we typically take in Q3. IRA is not a really large impact. As we've said before, we don't really take Part D as in dog risk, typically, and if we do, it's very minor. It's really driven by the ACO programs, and sweeps in Q3.

Andrew Mok: Great. Appreciate all the color. Thank you.

Brandon Sim: Thanks.

Operator: Our next question is from Ryan Langston with TD Cowen. Please proceed.

Ryan Langston: Thanks. Good evening. I want to go back to this $15 million revenue reduction, Chan, you called out, I think in ACO REACH. Can you elaborate what's driving that? Is that related to operations for Astrana? Maybe give us a little bit more detail how that's affecting the P&L. Did that hit all in the second quarter, and maybe how that flows through to EBITDA?

Chan Basho: Hey, Ryan. How are you? The $15 million is associated with claims tied to the fraud, waste, and abuse for the ACO REACH program billings. That is a revenue reduction for 2025 periods as well as an expense reduction also for the 2025 periods.

Ryan Langston: There were no impact to EBITDA? Sorry.

Chan Basho: When you net it out, it's really immaterial.

Ryan Langston: Okay. Got it. Then I noticed, I think management fee income was up pretty substantially in the first half of the year versus last year. Is that related to the Prospect transaction? Maybe just elaborate a bit on what's driving that. Thank you.

Chan Basho: Yeah, it is related to. You should probably see that in Q3 and Q4 of last year also. It's related to the clients that Astrana began managing post the Prospect acquisition.

Brandon Sim: There have also been some new client wins. I think we mentioned that on the Q4 call that started 1/1/2027. Kind of in combination, inorganic and organically, we continue to grow that business, which we're excited about. It's a nice kind of EBITDA margin business, and continues to play into the AI capabilities that we're developing in-house.

Ryan Langston: Got it. Thank you.

Chan Basho: Thanks, Ryan.

Operator: Our next question is from Matthew Gillmor with KeyBanc Capital Markets. Please proceed.

Matthew Gillmor: Hi. Thanks for the question. On the theme of automation, the slide presentation referenced a statistic about Astrana driving over 500,000 automated member encounters per month. I was kind of curious what the nature of those interactions were and what the benefit is to the company from those interactions.

Brandon Sim: Hey, thanks for the question. Those are automated member interactions, including, for example, voice interactions, scheduling interactions, text messages, medication reconciliation, transitions of care, things of that nature. Letters as well or interactions, notifications pushed through our member-facing applications or websites. As I mentioned in the prepared remarks, historically, the idea of risk stratification was that you would use that to limit the types of resources that our members get, simply because of the constraint on the amount of humans and time that people have. I think what's really exciting about AI partially is certainly reducing the amount of G&A. That's great, and we're doing that certainly to a large degree, as you can see in the G&A numbers.

Even more exciting to me is that we truly have the ability to fulfill the potential of getting people more care, especially folks who are living in potentially more rural areas or places where it's harder for them to get to a physician's office, and being able to engage with them more frequently to support lower cost trends and lower utilization without sacrificing quality. It's a question of not having to pick and choose who you're going to engage anymore because you have limited time. Now it's a question of what kind of interventions you choose. Do you have a nurse reach out? Do you have someone go to the home? Is an AI-supported patient engagement enough?

You just kind of decide when you escalate that, if necessary, into an in-person engagement. That's only going to continue to grow, I think, over time. We're excited because it means we get to not only find some G&A savings, but also, over the long run, we believe there will be AI-enabled kind of MLR improvements as well. Just to be clear, we're not underwriting that into our guidance necessarily, but we do think it'll be great for the outcomes of our patient populations.

Matthew Gillmor: Got it. That's great. Then as a follow-up, on the trend discussion, I wanted to see if there was anything to call out in terms of the categories of costs that are trending better within the MA and Medicare book and the categories of costs that are maybe running a little bit higher for commercial. Anything noteworthy to call out there?

Brandon Sim: Yeah, sure. Medicare has really been a broad-based strong performance. In particular, we're proud of the inpatient admits per 1,000. That's a number that continues to be extremely stable year-over-year. I think it's a testament to the care model, and the work of our teams, the work of our clinicians and providers. Really a lot of the trend is really only just the unit cost increase and not so much number of units, because the admits per care is so stable kind of a year-over-year in the Medicare book of business. In commercial, slightly above expectations. We believe it's very manageable.

Commercial, of course, is only a single-digit % of revenue to begin with, but it's really concentrated in some of the outpatient specialties, interestingly, and we think we have the levers to really address that this year and don't anticipate that impacting our guidance much of at all.

Matthew Gillmor: Okay. Thank you.

Operator: As a reminder, just star one on your telephone keypad if you would like to ask a question. Our next question is from Matt Shea with Needham & Company. Please proceed.

Matt Shea: Yeah. Hey, thanks for taking the questions. Apologies if any of this was covered. Juggling a few calls here tonight. Congrats on the wins in Hawaii and Texas. Maybe off of those, how does Hawaii fit the delegated model? What makes this market attractive? Then in Texas, maybe help us understand why the Texas ad coming in as professional risk rather than the fully delegated construct that you've been leading with since the start of this year. Is that a deliberate partial risk first on-ramp type of stance? If so, how are you thinking about the timeline to full risk?

Brandon Sim: Yeah, sure thing. Hawaii's an interesting market for us as it's a market that is obviously smaller than Texas, but we like it because it represents an opportunity to quickly build a scaled provider entity, a provider group, in a state, given that, again, the size is much smaller, and there's an opportunity to do that. As you may recall, we actually entered Texas in partnership with an electronic health record company. There's also opportunities where we've been more deeply embedding our technology platform directly into the EHRs that the provider's already using in Texas. We are seeing good performance in Texas and want to continue growing our presence there. Or sorry, in Hawaii. I apologize.

Well, Texas too, but Hawaii first. In Hawaii, there actually is a history of some element of delegation. There were other provider organizations in Hawaii who have some semblance of delegated risk. That's something that we're working on. Yeah, I'm sorry. In the first half, I meant Hawaii, so I apologize for misspeaking there. Texas next. Going forward in Texas, as we mentioned before, the 15,000 lives in the full risk contracts delegated, the professional lives that we're adding, the 33,000 members, are also delegated, just not in a full risk arrangement. It's a partial risk arrangement first. Those are net new members to the organization.

In the full risk members, we had some gain share kind of construct for those members already, and then we moved them up the risk curve as in the second pillar of our strategy. For these members, these are net new members that we're starting off in a partial risk arrangement. It is still delegated, similar to our partial risk members in California. Going forward, as performance matures, we would hope to move them to full risk construct in Texas too. Sorry for the mix-up. Got too excited about Texas. Thanks.

Matt Shea: No worries. Helpful color there, Brandon. Maybe a higher level one, just on the tech stack. Part of our thesis is that fragmented peers can't replicate the integrated data and orchestration layer that you have, even as they spend heavily on AI. It sounds like with the EBITDA performance to date, there's a good amount of reinvestment in the outlook. Curious on that reinvestment, is any of that going into incremental tech or AI innovation? Then if we take a step back, are you seeing your tech leadership relative to peers compound at this stage, or any way to think about how much you're pulling away from peers from a technological perspective?

Brandon Sim: Yeah. I think the majority of the reinvestment, or really all the reinvestment that we talked about this quarter, is really first going into the provider and payer growth. I think down the line there may be prudent investment that we make in AI. A lot of that is already contemplated in our existing guidance, as we had done that in previous years and talked about that in previous years. We try to be very prudent with our AI spend. Even though we're developing things in-house, we have our own engineers. We're not training our own models ourself, but we're developing our entire orchestration stack ourselves in-house.

That is being done in a very prudent way that doesn't-- We're not going to go out and spend $200 million building out AI. I think we've gotten results and ROI far and beyond what we've invested in the platform. In terms of the talent level, we are always looking for new talent, 100%. That's never going to stop. In fact, just this quarter, we added, not on the technology side necessarily, but we added two senior executives that we put out a press release about in enterprise transformation, and to lead our provider growth practice. It's something that we're always focused on. On the engineering side as well, we continue to add new engineers and upgrade that talent.

I think relative to the industry, we think we are working really hard and building some cool things. Hopefully, our providers agree with that as well, and certainly, the outcomes will reflect that.

Operator: There are no further questions at this time. Thank you all. This will conclude today's conference. You may disconnect at this time, and thank you for your participation.

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