Astrana Health Inc. Common Stock 2026 Q2 Earnings Call

Please go ahead, Brandon. 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 Chandan. 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%.