Buried within Agilon Health's recent Q1 2024 earnings call transcript lies a bombshell that seems to have slipped past most analysts' radar. While the headline numbers focused on medical cost trends and reserve adjustments, a more profound shift is underway. Agilon, faced with a constrained Medicare Advantage funding environment, appears to be actively and successfully rewriting the rules of engagement with its payer partners. This bold strategy, if it continues to play out as suggested in the transcript, could reshape the entire MA landscape.

The company's CEO, Steve Sell, repeatedly emphasized the "tuning" of payer economics and risk-sharing arrangements. This isn't simply about asking for a bigger slice of the pie; it's about fundamentally changing the structure of the pie itself. Agilon is leveraging its unique position - controlling a significant portion of independent primary care capacity in its markets - to push for contracts that shield them from the volatility inherent in traditional MA contracts.

Historically, MA providers have shouldered substantial risk for factors largely outside their control, including supplemental benefit costs, star rating fluctuations, and overly optimistic payer bids that lead to unanticipated utilization spikes. Agilon, it seems, is having none of it.

The transcript details several examples of this new approach. Sell highlighted "targeted changes in percentage of premium rates" negotiated in key markets, reflecting payer acknowledgment of Agilon's value proposition. Even more striking is the company's success in negotiating retroactive relief for prior-year medical margin losses due to changes in payer benefit approaches. This is unprecedented and signals a significant power shift towards providers like Agilon.

Furthermore, Agilon is actively pursuing contract structures for 2025 that mitigate exposure to uncontrollable elements. These include:

While the exact details of these negotiations are still unfolding, the transcript suggests a high degree of payer receptivity. After all, payers rely heavily on Agilon's physician network to build competitive MA plans. In a constrained funding environment, access to high-quality, cost-effective providers is more critical than ever.

Consider this: Agilon exited a group Medicare Advantage contract and several payer contracts in year-two markets, citing unsustainable dynamics. This demonstrates that the company isn't afraid to walk away from arrangements that don't align with its long-term vision of value-based care.

This raises a tantalizing question: Are we witnessing the emergence of a new paradigm in Medicare Advantage contracting? One where providers like Agilon, wielding significant market power and demonstrable value creation, dictate terms that shift risk away from factors they can't control?

Potential Financial Impact of Agilon's New Contracting Strategy

The financial implications are potentially enormous. If Agilon can successfully implement these new contract structures across a significant portion of its book of business, its medical margin trajectory could accelerate dramatically. Imagine:

These are just two potential scenarios. The point is, by shifting risk away from uncontrollable factors, Agilon could unlock substantial margin expansion beyond what traditional MA contracts allow.

Membership Growth and Medical Cost Trends

This chart shows Agilon Health's Medicare Advantage membership growth and medical cost trends based on information provided in the Q1 2024 and Q4 2023 earnings calls:

This strategic shift, combined with the company's focus on operational improvements and PCP support, suggests that Agilon is not simply weathering the current storm, but building a more resilient and profitable business model for the future. A model that could very well become the new standard for value-based care in Medicare Advantage.

"Fun Fact: Agilon Health's name is a blend of the words "agile" and "longevity," reflecting their commitment to creating a more adaptable and sustainable healthcare system for seniors."