10-Q 1 agl-20220331.htm 10-Q 10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

For the quarterly period ended March 31, 2022

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from to

Commission file number 001-40332

 

 

agilon health, inc.

(Exact name of registrant as specified in its charter)

 

Delaware

37-1915147

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

6210 E Hwy 290, Suite 450

Austin, TX 78723

(Address of principal executive offices)

(562) 256-3800

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading symbol(s)

Name of each exchange on which registered

Common stock, $0.01 par value

AGL

New York Stock Exchange

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YesNo

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer

  ☐

 

Accelerated Filer

  ☐

 

 

 

 

 

Non-accelerated Filer

  ☒

 

Smaller Reporting Company

 

 

 

 

 

 

 

 

Emerging Growth Company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) YES NO ☒

At April 30, 2022, there were 406,730,863 shares of the registrant’s $0.01 par value common stock outstanding.

 

 


 

agilon health, inc.

INDEX

 

 

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

Item 1.

Unaudited Financial Statements:

 

 

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021

3

 

 

 

 

Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2022 and 2021

4

 

 

 

 

Condensed Consolidated Statements of Contingently Redeemable Common Stock and Stockholders’ Equity (Deficit) for the Three Months Ended March 31, 2022 and 2021

5

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2022 and 2021

6

 

 

 

 

Notes to the Condensed Consolidated Financial Statements

7

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

18

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

32

 

 

 

Item 4.

Controls and Procedures

32

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

33

 

 

 

Item 1A.

Risk Factors

33

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

33

 

 

 

Item 6.

Exhibits

34

 

 

 

Signatures

35

 

2

 


 

agilon health, inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

 

 

 

March 31,
2022

 

 

December 31,
2021

 

 

 

(unaudited)

 

 

 

 

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,021,754

 

 

$

1,040,039

 

Restricted cash and equivalents

 

 

14,470

 

 

 

14,781

 

Receivables, net

 

 

571,869

 

 

 

293,407

 

Prepaid expenses and other current assets, net

 

 

19,847

 

 

 

18,968

 

Total current assets

 

 

1,627,940

 

 

 

1,367,195

 

Property and equipment, net

 

 

12,526

 

 

 

9,161

 

Intangible assets, net

 

 

53,709

 

 

 

55,398

 

Goodwill

 

 

41,540

 

 

 

41,540

 

Other assets, net

 

 

119,496

 

 

 

112,958

 

Total assets

 

$

1,855,211

 

 

$

1,586,252

 

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Medical claims and related payables

 

$

472,323

 

 

$

239,014

 

Accounts payable and accrued expenses

 

 

133,138

 

 

 

112,946

 

Current portion of long-term debt

 

 

5,000

 

 

 

5,000

 

Total current liabilities

 

 

610,461

 

 

 

356,960

 

Long-term debt, net of current portion

 

 

42,172

 

 

 

43,401

 

Other liabilities

 

 

91,101

 

 

 

94,295

 

Total liabilities

 

 

743,734

 

 

 

494,656

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity (deficit):

 

 

 

 

 

 

Common stock, $0.01 par value: 2,000,000 shares authorized;
   
405,727 and 400,095 shares issued and outstanding, respectively

 

 

4,057

 

 

 

4,001

 

Additional paid-in capital

 

 

2,064,242

 

 

 

2,045,572

 

Accumulated deficit

 

 

(956,447

)

 

 

(957,677

)

Total agilon health, inc. stockholders' equity (deficit)

 

 

1,111,852

 

 

 

1,091,896

 

Noncontrolling interests

 

 

(375

)

 

 

(300

)

Total stockholders’ equity (deficit)

 

 

1,111,477

 

 

 

1,091,596

 

Total liabilities and stockholders’ equity (deficit)

 

$

1,855,211

 

 

$

1,586,252

 

 

The condensed consolidated balance sheets include assets and liabilities of consolidated variable interest entities (“VIEs”) as agilon health, inc., together with its consolidated subsidiaries and variable interest entities (the “Company”), is the primary beneficiary of these VIEs. The condensed consolidated balance sheets include total assets that can only be used to settle obligations of the Company’s consolidated VIEs totaling $712.6 million and $420.5 million as of March 31, 2022 and December 31, 2021, respectively, and total liabilities of the Company’s consolidated VIEs for which creditors do not have recourse to the general credit of the primary beneficiary of $535.9 million and $282.0 million as of March 31, 2022 and December 31, 2021, respectively. See Note 13 for additional details.

See accompanying Notes to the Condensed Consolidated Financial Statements.

3

 


 

agilon health, inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

 

 

 

Three Months Ended
March 31,

 

 

 

2022

 

 

2021

 

Revenues:

 

 

 

 

 

 

Medical services revenue

 

$

652,423

 

 

$

412,412

 

Other operating revenue

 

 

1,022

 

 

 

692

 

Total revenues

 

 

653,445

 

 

 

413,104

 

Expenses:

 

 

 

 

 

 

Medical services expense

 

 

566,208

 

 

 

360,354

 

Other medical expenses

 

 

44,773

 

 

 

23,661

 

General and administrative (including noncash stock-based compensation
   expense of $
3,970 and $1,472, respectively)

 

 

39,834

 

 

 

37,777

 

Depreciation and amortization

 

 

3,373

 

 

 

3,427

 

Total expenses

 

 

654,188

 

 

 

425,219

 

Income (loss) from operations

 

 

(743

)

 

 

(12,115

)

Other income (expense):

 

 

 

 

 

 

Other income (expense), net

 

 

2,269

 

 

 

1,336

 

Interest expense

 

 

(871

)

 

 

(2,941

)

Income (loss) before income taxes

 

 

655

 

 

 

(13,720

)

Income tax benefit (expense)

 

 

71

 

 

 

(16

)

Income (loss) from continuing operations

 

 

726

 

 

 

(13,736

)

Discontinued operations:

 

 

 

 

 

 

Income (loss) before income taxes

 

 

429

 

 

 

(1,351

)

Income tax benefit (expense)

 

 

 

 

 

(64

)

Total discontinued operations

 

 

429

 

 

 

(1,415

)

Net income (loss)

 

 

1,155

 

 

 

(15,151

)

Noncontrolling interests’ share in (earnings) loss

 

 

75

 

 

 

73

 

Net income (loss) attributable to common shares

 

$

1,230

 

 

$

(15,078

)

 

 

 

 

 

 

 

Net income (loss) per common share, basic and diluted

 

 

 

 

 

 

Continuing operations

 

$

 

 

$

(0.04

)

Discontinued operations

 

$

 

 

$

(0.01

)

Weighted average shares outstanding

 

 

 

 

 

 

Basic

 

 

401,964

 

 

 

325,659

 

Diluted

 

 

424,065

 

 

 

325,659

 

 

See accompanying Notes to the Condensed Consolidated Financial Statements.

4

 


 

agilon health, inc.

CONDENSED CONSOLIDATED STATEMENTS OF CONTINGENTLY REDEEMABLE COMMON STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)

(in thousands)

(unaudited)

For the three months ended March 31, 2022:

 

 

Total Stockholders’ Equity

 

 

 

Common Stock

 

 

Additional
Paid-In

 

 

Accumulated

 

 

Noncontrolling

 

 

Total
Stockholders’
Equity

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Interest

 

 

(Deficit)

 

January 1, 2022

 

 

400,095

 

 

$

4,001

 

 

$

2,045,572

 

 

$

(957,677

)

 

$

(300

)

 

$

1,091,596

 

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

1,230

 

 

 

(75

)

 

 

1,155

 

Exercise of stock options
   and other, net

 

 

5,632

 

 

 

56

 

 

 

14,700

 

 

 

 

 

 

 

 

 

14,756

 

Stock-based compensation
   expense

 

 

 

 

 

 

 

 

3,970

 

 

 

 

 

 

 

 

 

3,970

 

March 31, 2022

 

 

405,727

 

 

$

4,057

 

 

$

2,064,242

 

 

$

(956,447

)

 

$

(375

)

 

$

1,111,477

 

For the three months ended March 31, 2021:

 

 

 

Contingently
Redeemable
 Common Stock

 

 

 

Total Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Additional
Paid-In

 

 

Accumulated

 

 

Noncontrolling

 

 

Total
Stockholders’
Equity

 

 

 

Shares

 

 

Amount

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Interests

 

 

(Deficit)

 

January 1, 2021

 

 

76,201

 

 

$

309,500

 

 

 

 

249,374

 

 

$

2,494

 

 

$

263,966

 

 

$

(551,190

)

 

$

 

 

$

(284,730

)

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(15,078

)

 

 

(73

)

 

 

(15,151

)

Exercise of stock options
   and other, net

 

 

 

 

 

 

 

 

 

100

 

 

 

 

 

 

165

 

 

 

 

 

 

 

 

 

165

 

Stock-based compensation
   expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,472

 

 

 

 

 

 

 

 

 

1,472

 

March 31, 2021

 

 

76,201

 

 

$

309,500

 

 

 

 

249,474

 

 

$

2,494

 

 

$

265,603

 

 

$

(566,268

)

 

$

(73

)

 

$

(298,244

)

 

See accompanying Notes to the Condensed Consolidated Financial Statements.

5

 


 

agilon health, inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2022

 

 

2021

 

Cash flows from operating activities:

 

 

 

 

 

 

Net income (loss)

 

$

1,155

 

 

$

(15,151

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

3,373

 

 

 

3,481

 

Stock-based compensation expense

 

 

3,970

 

 

 

1,472

 

Loss on debt extinguishment

 

 

 

 

 

1,186

 

Loss (income) from equity method investments

 

 

(2,033

)

 

 

3

 

Other noncash items

 

 

556

 

 

 

1,763

 

Changes in operating assets and liabilities

 

 

(30,254

)

 

 

(33,582

)

Net cash provided by (used in) operating activities

 

 

(23,233

)

 

 

(40,828

)

Cash flows from investing activities:

 

 

 

 

 

 

Purchase of property and equipment, net

 

 

(4,049

)

 

 

(178

)

Purchase of intangible assets

 

 

(1,000

)

 

 

(3,986

)

Investment in loans receivable and other

 

 

(4,503

)

 

 

(1,204

)

Proceeds from repayment of loans receivable and other

 

 

183

 

 

 

 

Proceeds from sale of business and property, net of cash divested

 

 

500

 

 

 

(3,706

)

Net cash provided by (used in) investing activities

 

 

(8,869

)

 

 

(9,074

)

Cash flows from financing activities:

 

 

 

 

 

 

Proceeds from exercise of stock options

 

 

14,756

 

 

 

165

 

Proceeds from the issuance of long-term debt

 

 

 

 

 

100,000

 

Repayments of long-term debt

 

 

(1,250

)

 

 

(68,649

)

Debt issuance costs

 

 

 

 

 

(1,218

)

Net cash provided by (used in) financing activities

 

 

13,506

 

 

 

30,298

 

Net increase (decrease) in cash, cash equivalents and restricted cash and equivalents

 

 

(18,596

)

 

 

(19,604

)

Cash, cash equivalents and restricted cash and equivalents from
   continuing operations, beginning of period

 

 

1,054,820

 

 

 

135,178

 

Cash, cash equivalents and restricted cash and equivalents from
   discontinued operations, beginning of period

 

 

 

 

 

3,917

 

Cash, cash equivalents and restricted cash and equivalents,
   beginning of period

 

 

1,054,820

 

 

 

139,095

 

Cash, cash equivalents and restricted cash and equivalents, end of period

 

$

1,036,224

 

 

$

119,491

 

 

See accompanying Notes to the Condensed Consolidated Financial Statements.

6

 


 

agilon health, inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. Business

Description of Business

agilon health, inc., through its partnerships and platform, provides the necessary capabilities, capital, and business model for existing physician groups to create a Medicare-centric, globally capitated line of business. As of March 31, 2022, the Company, through its contracted physician networks, provided care to approximately 250,300 Medicare Advantage members enrolled with private health plans. Beginning January 1, 2022, the Company expanded its operations into: (i) Syracuse, New York, (ii) Grand Rapids and Traverse City, Michigan; (iii) Pinehurst, North Carolina; and (iii) Longview and Texarkana, Texas, along with additional partnerships in the Company’s existing Ohio markets. Beginning January 1, 2022, the Company also began operating three additional Direct Contracting Entities (“DCE”) that, in collaboration with four of its physician group partners, are participating in the Center for Medicare & Medicaid Services Innovation Center’s Direct Contracting Model, which is being redesigned and renamed the Accountable Care Organization Realizing Equity, Access, and Community Health (“ACO REACH”) beginning in 2023.

See Note 13 for additional discussions related to the Company’s involvement with VIEs.

The Company is ultimately controlled by an investment fund associated with Clayton Dubilier & Rice, LLC (“CD&R”), a private equity firm headquartered in New York, New York. All funds affiliated with CD&R are considered related parties.

NOTE 2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared by management in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information.

The condensed consolidated financial statements include the accounts of agilon health, inc., its wholly-owned subsidiaries, and both joint ventures and VIEs that it controls through voting rights or other means. Intercompany transactions and balances have been eliminated upon consolidation. All adjustments (consisting of normal recurring adjustments unless otherwise indicated), which the Company considers necessary to present fairly its financial position, results of operations, and cash flows, have been included. Operating results for the three months ended March 31, 2022, including the impact of COVID-19, are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. The accompanying condensed consolidated financial information should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2021 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”).

Use of Estimates

Management is required to make estimates and assumptions in the preparation of financial statements. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates can include, among other things, those used to determine revenues and related receivables from risk adjustments, medical services expense and related payables (including the reserve for incurred but not reported (“IBNR”) claims), and the valuation and related recognition of impairments of long-lived assets, including goodwill. Management’s estimates for revenue recognition, medical services expense, and other estimates, judgments, and assumptions, may be materially and adversely different from actual results as a result of the COVID-19 pandemic, among other things. See Note 8 for additional discussion on the impact of the COVID-19 pandemic. These estimates are based on knowledge of current events and anticipated future events, and accordingly, actual results may ultimately differ materially from those estimates.

Goodwill and Amortizable Intangible Assets

As of both March 31, 2022 and December 31, 2021, goodwill of $39.0 million was allocated to the Company’s Hawaii reporting unit, which had a negative carrying value.

7

 


 

As of March 31, 2022 and December 31, 2021, the Company’s gross carrying amount of amortizable intangible assets was $109.7 million and $108.7 million, with accumulated amortization of $56.0 million and $53.3 million, respectively. For the three months ended March 31, 2022 and 2021, the Company recognized $2.7 million and $2.8 million, respectively, in amortization expense, which is included in depreciation and amortization expense in the condensed consolidated statement of operations.

Property and Equipment

As of March 31, 2022 and December 31, 2021, the Company’s gross carrying amount of property and equipment was $21.4 million and $17.4 million, with accumulated depreciation of $8.9 million and $8.2 million, respectively. For the three months ended March 31, 2022 and 2021, the Company recognized $0.7 million and $0.6 million, respectively, in depreciation expense, which is included in depreciation and amortization expense in the condensed consolidated statement of operations.

Income Taxes

The Company determined the income tax provision for interim periods using an estimate of the Company’s annual effective tax rate, applied to year-to-date results, adjusted for discrete items arising in that quarter. In each quarter, the Company updates its estimated annual effective tax rate, and if the estimated annual effective tax rate changes, a cumulative catch-up adjustment is recorded in that quarter. The Company applied the intra-period tax allocation rules to allocate income taxes between continuing operations and discontinued operations as prescribed in U.S. GAAP, where the tax effect of income (loss) before income taxes from continuing operations is computed without regard to the tax effects of income (loss) before income taxes from the other categories.

NOTE 3. Revenue, Receivables, and Concentration of Credit Risk

Medical Services Revenue

Medical services revenue consists of capitation fees under contracts with various Medicare Advantage payors (“payors”). Under the typical capitation arrangement, the Company is entitled to monthly per-member, per-month (“PMPM”) fees to provide a defined range of healthcare services for Medicare Advantage health plan members (“members”) attributed to the Company’s contracted primary care physicians. PMPM fees are determined as a percent of the premium payors receive from the Centers for Medicare & Medicaid Services’ (“CMS”) for these members. The Company generally accepts full financial risk for members attributed to its contracted primary care physicians and therefore is responsible for the cost of all healthcare services required by those members. Fees are generally recorded gross in revenue because the Company is acting as a principal in coordinating and controlling the range of services provided (other than clinical decisions) under its capitation contracts with payors. Capitation contracts with payors are generally multi-year arrangements and have a single performance obligation that constitutes a series, as defined by Accounting Standards Codification ("ASC") 606, Revenue From Contracts With Customers, to stand ready on a monthly basis to provide all aspects of necessary medical care to members for the contracted period. The Company recognizes revenue in the month in which eligible members are entitled to receive healthcare benefits during the contract term.

The transaction price for the Company’s capitation contracts is variable, as the PMPM fees to which the Company is entitled are subject to periodic adjustment under CMS’s risk adjustment payment methodology. CMS deploys a risk adjustment model that determines premiums paid to all payors according to each member’s health status and certain demographic factors. Under this risk adjustment methodology, CMS calculates the risk adjusted premium payment using diagnosis data from various settings. The Company and healthcare providers collect and submit the necessary and available diagnosis data to payors and such data is utilized by the Company to estimate risk adjustment payments to be received in subsequent periods. Risk adjustment-related revenues are estimated using the most likely amount methodology and amounts are only included in revenue to the extent that it is probable that a significant reversal of cumulative revenue will not occur once any uncertainty is resolved. PMPM fees are also subject to adjustment for incentives or penalties based on the achievement of certain quality metrics defined in the Company’s contracts with payors. The Company recognizes incentive revenue as earned using the most likely amount methodology and only to the extent that it is probable that a significant reversal of cumulative revenue will not occur once any uncertainty is resolved.

Neither the Company nor any of its affiliates is a registered insurance company because state law in the states in which it operates does not require such registration for risk-bearing providers.

Receivables

Receivables primarily consist of amounts due under capitation contracts with various payors. Receivables due under capitation contracts are recorded monthly based on reports received from payors and management’s estimate of risk adjustment payments to be received in subsequent periods for open performance years. Receivables are recorded and stated at the amount expected to be collected.

8

 


 

Concentration

The Company is economically dependent on maintaining a base of primary care and specialty care physicians as well as capitation contracts with payors. The loss of certain of those contracts could have a material adverse effect on the Company’s financial position, results of operations, or cash flows.

The Company contracts with various payors whereby the Company is entitled to monthly PMPM fees to provide a defined range of healthcare services for members attributed to its contracted primary care physicians. The Company generally accepts full financial risk for such members and therefore is responsible for the cost of all healthcare services required by them. Substantially all of the Company’s receivable balances are from a small number of payors.

Revenue from Medicare Advantage constitutes substantially all of the Company’s total revenue, accounting for nearly 100% of the Company’s total revenues for the three months ended March 31, 2022 and 2021.

The following table provides the Company’s revenue concentration with respect to major payors as a percentage of the Company’s total revenues:

 

 

 

Three Months Ended
March 31,

 

 

 

2022

 

 

2021

 

Payor A

 

 

25

%

 

 

28

%

Payor B

 

 

19

%

 

 

21

%

Payor C

 

 

14

%

 

 

12

%

Payor D

 

*

 

 

 

10

%

 

* Less than 10% of total revenues.

The following table provides the Company’s concentration of credit risk with respect to major payors as a percentage of receivables, net:

 

 

 

March 31,
2022

 

 

December 31,
2021

 

Payor A

 

 

14

%

 

 

18

%

Payor B

 

 

21

%

 

 

21

%

Payor C

 

 

15

%

 

 

14

%

Payor D

 

 

12

%

 

 

12

%

 

NOTE 4. Other Assets, net

The following table summarizes the Company’s other assets, net (in thousands):

 

 

 

March 31,
2022

 

 

December 31,
2021

 

Loans to physician partners

 

$

78,686

 

 

$

76,821

 

Indemnification assets

 

 

2,117

 

 

 

2,107

 

Health plan deposits

 

 

11,728

 

 

 

11,523

 

Equity method investments(1)

 

 

11,236

 

 

 

6,690

 

Right-of-use assets

 

 

12,042

 

 

 

11,739

 

Other

 

 

3,687

 

 

 

4,078

 

 

 

$

119,496

 

 

$

112,958

 

 

(1)
See Note 13 for additional discussion related to the Company's equity method investments.

 

Loans to Physician Partners

The Company provided loans to its physician partners in connection with taxes payable on shares distributed to them in connection with the initial public offering ("IPO"). These loans mature between 2026 and 2031 with nominal interest compounding annually and no prepayment penalties. Such loans are stated at the amount expected to be collected.

 

9

 


 

Indemnification Assets

Indemnification assets have been established to offset certain pre-closing liabilities for which the prior owners of some of the Company’s California subsidiaries are obligated to indemnify the Company. The Company deems the amounts receivable under the indemnification agreements to be fully collectible should indemnification claims arise, and, as such, a valuation allowance is not deemed necessary.

NOTE 5. Medical Claims and Related Payables

Medical services expense represents costs incurred for medical services provided to members by physicians, hospitals and other ancillary providers for which the Company is financially responsible and that are paid either directly by the Company or by payors with whom the Company has contracted. Medical services expenses are recognized in the period in which services are provided and include estimates of claims that have been incurred but have either not yet been received, processed, or paid and as such, not reported.

Such estimates are developed using actuarial methods commonly used by health insurance actuaries that include a number of factors and assumptions including medical service utilization trends, changes in membership, observed medical cost trends, historical claim payment patterns and other factors. Generally, for the most recent months, the Company estimates claim costs incurred by applying observed medical cost trend factors to the average PMPM medical costs incurred in prior months for which more complete claims data are available.

Each period, the Company re-examines previously established medical claims payable estimates based on actual claim submissions and other changes in facts and circumstances. As more complete claims information becomes available, the Company adjusts its estimates and recognizes those changes in estimates in the period in which the change is identified. The difference between the estimated liability and the actual settlements of claims is recognized in the period the claims are settled. The Company’s medical claims payable balance represents management’s best estimate of its liability for unpaid medical costs as of March 31, 2022 and December 31, 2021. The Company uses judgment to determine the appropriate assumptions for developing the required estimates.

The following table presents the components of changes in medical claims and related payables (in thousands):

 

 

 

March 31,

 

 

 

2022

 

 

2021

 

Medical claims and related payables, beginning of the year

 

$

239,014

 

 

$

164,161

 

Components of incurred costs related to:

 

 

 

 

 

 

Current year

 

 

561,478

 

 

 

359,988

 

Prior years

 

 

4,730

 

 

 

366

 

Discontinued operations - current year

 

 

 

 

 

1,229

 

Discontinued operations - prior years

 

 

(85

)

 

 

(591

)

 

 

 

566,123

 

 

 

360,992

 

Claims paid related to:

 

 

 

 

 

 

Current year

 

 

(167,526

)

 

 

(112,968

)

Prior years

 

 

(165,316

)

 

 

(131,363

)

Discontinued operations - current year

 

 

 

 

 

(298

)

Discontinued operations - prior year

 

 

28

 

 

 

(3,540

)

 

 

 

(332,814

)

 

 

(248,169

)

Medical claims and related payables, end of the period

 

$

472,323

 

 

$

276,984

 

 

Medical claims and related payables presented in the periods above include immaterial balances related to claims liabilities associated with certain divested California businesses for which the Company has retained the liability for claims incurred prior to the date of divestiture.

10

 


 

NOTE 6. Other Liabilities

The following table summarizes the Company’s other liabilities (in thousands):

 

 

 

March 31,
2022

 

 

December 31,
2021

 

Other long-term contingencies

 

$

67,390

 

 

$

71,344

 

Reserve for uncertain tax positions

 

 

2,117

 

 

 

2,107

 

Lease liabilities, long-term

 

 

8,268

 

 

 

7,904

 

Equity method liabilities – DCEs

 

 

7,234

 

 

 

6,380

 

Other

 

 

6,092

 

 

 

6,560

 

 

 

$

91,101

 

 

$

94,295

 

 

As of March 31, 2022 and December 31, 2021, the Company’s accruals for contingent liabilities related to unasserted claims were $67.4 million and $71.3 million, respectively. The accrued amounts represent the Company’s estimate of probable losses in accordance with ASC Topic 450, Contingencies. The Company’s estimate of the range of reasonably possible losses in excess of such accruals was $0 to $37.3 million as of March 31, 2022.

See Note 13 for equity method liabilities related to the Company's DCE investments.

NOTE 7. Debt

On February 18, 2021, the Company executed a credit facility agreement (as amended by the First Amendment to Credit Agreement, dated as of March 1, 2021, the “Credit Facilities”). The Credit Facilities include: (i) a $100.0 million secured term loan (the “Secured Term Loan Facility”) and (ii) a $100.0 million senior secured revolving credit facility (the “Secured Revolving Facility”) with a capacity to issue standby letters of credit in certain circumstances up to a maximum of $80.0 million. Subject to specified conditions and receipt of commitments, the Secured Term Loan Facility may be expanded (or a new term loan facility, revolving credit facility or letter of credit facility added) by up to (i) $50.0 million plus (ii) an additional amount determined in accordance with a formula tied to repayment of certain of the Company’s indebtedness. The proceeds from the Secured Term Loan Facility were used to refinance an aggregate of $68.6 million of outstanding indebtedness under the prior credit facility and unsecured debt, with the remaining $30.1 million of net proceeds used for working capital and other general corporate purposes. In connection with the refinance of the existing debt, the Company recognized $1.1 million of additional interest expense for the write-off of the related debt issuance costs. The Secured Term Loan Facility required, among other things, a mandatory prepayment of $50.0 million if gross proceeds from the IPO exceeded $1.0 billion. On April 26, 2021, the Company repaid $50.0 million of the Secured Term Loan Facility. The maturity date of the Credit Facilities is February 18, 2026, with mandatory periodic payments.

As of March 31, 2022, the Company had $47.5 million outstanding under the Secured Term Loan Facility and availability under the Secured Revolving Facility was $49.9 million, as the Company had outstanding letters of credit totaling $50.1 million, of which $26.5 million was for the Company's DCE investments. The standby letters of credit are automatically extended without amendment for one-year periods, unless the Company notifies the institution in advance of the expiration date that the letter will be terminated. No amounts have been drawn on the outstanding letters of credit as of March 31, 2022.

At the Company’s option, borrowings under the agreement, can be either: (i) LIBO Rate Loans or (ii) Base Rate Loans. LIBO Rate Loans bear interest at a rate equal to the sum of 4.00% (stepping down to 3.50% on and following October 1, 2023) and the higher of (a) LIBO, as defined in the credit agreement, and (b) 0%. Base Rate Loans bear interest at a rate equal to the sum of 3.00% (stepping down to 2.50% on and following October 1, 2023) and the highest of: (a) 0.50% in excess of the overnight federal funds rate, (b) the prime rate established by the administrative agent from time to time, (c) the one-month LIBO rate (adjusted for maximum reserves) plus 1.00% and (d) 0%. Additionally, the Company pays a commitment fee on the unfunded 2021 Revolving Credit Facility amount of 0.50% (stepping down to 0.375% on and following October 1, 2023). The Company must also pay customary letter of credit fees. As of March 31, 2022, the weighted average effective interest rate on the Secured Term Loan Facility was 4.55%.

11

 


 

The Credit Facilities are guaranteed by certain of the Company’s subsidiaries, including those identified as VIEs, and contain customary covenants including, among other things, limitations on restricted payments including: (i) dividends and distributions from restricted subsidiaries, (ii) requirements of minimum financial ratios, and (iii) limitation on additional borrowings based on certain financial ratios. Failure to meet any of these covenants could result in an event of default under the agreement. If an event of default occurs, the lenders could elect to declare all amounts outstanding under the agreement to be immediately due and payable. As of March 31, 2022, the Company was in compliance with all covenants under the Credit Facilities.

NOTE 8. Commitments and Contingencies

Legal Proceedings

From time to time, the Company is a party to, or has a significant relationship to, legal proceedings, lawsuits, and other claims. Except as described below, the Company is not aware of any legal proceedings or claims that it believes may have, individually or taken together, a material adverse effect on the Company’s financial condition, results of operations or cash flows. The Company’s policy is to expense legal costs as they are incurred.

COVID-19

The Company continues to monitor and assess the estimated operating and financial impact of the COVID-19 pandemic, and as it evolves, the Company continues to process, assemble, and assess member utilization information. The COVID-19 pandemic continues to evolve and the ultimate impact on the Company's business, results of operations, financial condition and cash flows remains uncertain. During 2021 and the first quarter of 2022, overall care activity continued to increase, including a mix of temporary deferral of care activity and COVID-19 related care costs. These costs may be incurred at future points in time, and it is possible that the deferral of healthcare services, or the impact of the Company’s members (who are seniors typically with chronic conditions) being diagnosed with COVID-19, could cause additional health problems in its existing members, which could increase costs in the future. In future periods, care patterns may moderately exceed normal baselines as previously deferred care is obtained and acuity temporarily rises due to missed regular care. From time to time, health system capacity may be subject to possible increased volatility due to the pandemic. The Company cannot accurately estimate the net ultimate impact, positive or negative, to medical services expense at this time.

Given the disruption caused by COVID-19, it is unclear whether the Company’s contracted physicians will be able to document the health conditions of members as comprehensively as they did in historical periods. Because risk adjustment factors in the current period are based on the preceding year’s diagnosed disease conditions, the Company’s revenue in future periods may be adversely impacted.

The ultimate impact of the COVID-19 pandemic on the Company’s operations is unknown and will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak, new information that may emerge concerning the severity of the COVID-19 pandemic, and any additional preventative and protective actions that governments, or the Company, may direct, which may result in an extended period of continued business disruption. The ultimate impact of these matters to the Company and its financial condition cannot be reasonably estimated at this time.

The Company believes that its cash resources, funds from the IPO in April 2021, borrowing capacity available under the Secured Revolving Facility, and cash flow generated from operations will continue to be sufficient to withstand the financial impact of the pandemic and will enable the Company to continue to support its operations, regulatory requirements, debt repayment obligations, and geography expansion for the foreseeable future.

Regulatory Matters

The healthcare industry is subject to numerous laws and regulations of federal, state, and local governments. Violations of these laws and regulations could result in expulsion from government healthcare programs, together with the imposition of significant fines and penalties. Compliance with such laws and regulations can be subject to future government review and interpretation, as well as regulatory actions unknown or unasserted at this time.

The healthcare regulatory landscape is constantly changing. It is difficult to predict which final rules may be adopted and implemented by federal and state authorities, and if such final rules would result in any material adverse effect on the Company’s business, consolidated financial condition, results of operations, or cash flows. Management is unable to determine how any future government spending cuts will affect Medicare reimbursement. There likely will continue to be legislative and regulatory proposals at the federal and state levels directed at containing or lowering the cost of healthcare that, if adopted, could have a material adverse effect on the Company’s condensed consolidated financial statements.

12

 


 

Compliance Requirements

In February 2018, the Company self-disclosed to the California Department of Managed Health Care (“DMHC”), the California Department of Health Care Services, and its affected payors certain noncompliant practices in the Company’s claims and utilization management. The Company submitted various reports in May, June, and August of 2018 and coordinated with the DMHC and certain of its payors to remediate noncompliant claims and utilization management practices and implement improvements through various corrective action plan (“CAPs”). On December 17, 2019, the Company completed substantial remediation of all known deficiencies identified by the DMHC’s audit findings. In February 2021, the Company completed divesting all of its California operations. On March 9, 2021, the Company received a set of investigative interrogatories from the DMHC pursuant to its investigation of conduct and matters described in the Company’s various reports. The interrogatories sought information concerning certain claims data and authorizations denied due to lack of medical necessity, including information regarding the health plans affected thereby. The Company responded timely to such interrogatories and provided requested information. Any adverse review, audit or investigation could result in, among other things: refunding of amounts the Company have been paid pursuant to its contracts; or the imposition of fines, penalties and other sanctions on the Company, or certain of its payors. While the Company does not expect the amount to be material, it is unable to predict the potential dollar value of recoupments or fines, penalties or other sanctions that may be imposed on the Company or the impacted payors related to the DMHC’s audit findings, if any. Per publicly available information, six out of the nine impacted payors have entered into letters of agreement with the DMHC whereby each of the payors have agreed to pay an administrative penalty related to the deficiencies. These penalties equal $0.2