10-Q 1 osh-20220930.htm 10-Q osh-20220930
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
___________________________________
FORM 10-Q
___________________________________
(Mark One)
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2022
OR
oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                to                
Commission File Number: 001-39427
___________________________________
Oak Street Health, Inc.
(Exact Name of Registrant as Specified in its Charter)
___________________________________
Delaware84-3446686
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
30 W. Monroe Street
Suite 1200
Chicago, Illinois 60603
60603
(Address of principal executive offices)(Zip Code)
Registrant’s telephone number, including area code: (844) 871-5650
___________________________________
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, $0.001 par valueOSHNYSE
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. Yes No o
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 for such shorter period that the registrant was required to submit such files). Yes No o
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 the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller 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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No
As of November 2, 2022, the registrant had 242,915,915 shares of common stock, $0.001 par value per share, outstanding.




FORWARD-LOOKING STATEMENTS
Throughout this Quarterly Report on Form 10-Q, we make “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements describe future expectations, plans, results or strategies and can often be identified by the use of terminology such as “may,” “will,” “estimate,” “intend,” “plan,” “continue,” “believe,” “expect,” “anticipate,” “target,” “should,” “could,” “potential,” “opportunity,” “goal” or similar terminology. The forward-looking statements contained in this Quarterly Report on Form 10-Q are generally set forth under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” but may be found in other sections as well. These statements are based upon management’s current expectations, assumptions and estimates and are not guarantees of timing, future results or performance. Therefore, you should not rely on any of these forward-looking statements as predictions of future events. Actual results may differ materially from those contemplated in these statements due to a variety of risks and uncertainties and other factors, including, among other things:
our history of net losses and our ability to achieve or maintain profitability in an environment of increasing expenses;
the impact of the Coronavirus disease 2019 (“COVID-19”) pandemic or any other pandemic, epidemic or outbreak of an infectious disease in the United States or worldwide on our business, financial condition and results of operations;
the effect of our relatively limited operating history on investors’ ability to evaluate our current business and future prospects;
the viability of our growth strategy and our ability to realize expected results;
our ability to manage our growth effectively, execute our business plan, maintain high levels of service and patient satisfaction and adequately address competitive challenges;
our ability to attract new patients;
the dependence of our revenues and operations on a limited number of key payors;
the potential adverse impact of legal proceedings and litigation;
the risk of termination or non-renewal of the Medicare Advantage contracts held by the health plans with which we contract, or the termination or non-renewal of our contracts with those plans;
the impact on our business from changes in the payor mix of our patients and potential decreases in our reimbursement rates;
our ability to compete in the healthcare industry;
our ability to timely enroll new physicians and other providers in governmental healthcare programs before we can receive reimbursement for their services;
the impact on our business of reductions in Medicare reimbursement rates or changes in the rules governing the Medicare program;
our dependence on reimbursements by third-party payors and payments by individuals;
our assumption under most of our agreements with health plans of some or all of the risk that the cost of providing services will exceed our compensation;
the impact on our business of renegotiation, non-renewal or termination of capitation agreements with health plans;
risks associated with estimating the amount of revenues and refund liabilities that we recognize under our risk agreements with health plans;
the impact on our business of security breaches, loss of data or other disruptions causing the compromise of sensitive information or preventing us from accessing critical information;
the impact on our business of disruptions in our disaster recovery systems or management continuity planning;
the impact of reductions in the quality ratings of the health plans we serve;
the risk of our agreements with the physician equity holder of our practices being deemed invalid;
3

our ability to maintain and enhance our reputation and brand recognition;
our ability to effectively invest in, implement improvements to and properly maintain the uninterrupted operation and data integrity of our information technology and other business systems;
our ability to obtain, maintain and enforce intellectual property protection for our technology;
the potential adverse impact of claims by third parties that we are infringing on or otherwise violating their intellectual property rights;
risks associated with existing securities class action litigation;
our ability to protect the confidentiality of our trade secrets, know-how and other internally developed information;
the impact of any restrictions on our use of or ability to license data or our failure to license data and integrate third-party technologies;
risks associated with our use of “open-source” software;
our dependence on our senior management team and other key employees;
the concentration of our primary care centers in Illinois, Michigan, Pennsylvania, Ohio and Texas;
the impact on our business of an economic downturn;
our ability to attract and retain highly qualified personnel;
our management team’s limited experience managing a public company;
the impact on our business of the termination of our leases, increases in rent or inability to renew or extend leases;
the impact of failures by our suppliers, material price increases on supplies, lack of reimbursement for drugs we purchase or limitations on our ability to access new technology or products;
our ability to maintain our corporate culture;
the impact of competition for physicians and nurses, shortages of qualified personnel and related increases in our labor costs;
our ability to attract and retain the services of key primary care physicians;
the risk that our submissions to health plans may contain inaccurate or unsupportable information regarding risk adjustment scores of members;
our ability to accurately estimate incurred but not reported medical expense;
the impact of negative publicity regarding the managed healthcare industry;
the impact of state and federal efforts to reduce Medicaid spending;
the impact on our centers of adverse weather conditions and other factors beyond our control;
factors related to our indebtedness; and
our ability to develop and maintain proper and effective internal control over financial reporting.
We derive many of our forward-looking statements from our operating budgets and forecasts, which are based on many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results. Important factors that could cause actual results to differ materially from our expectations, or cautionary statements, are disclosed under the sections entitled “Risk Factors” in our Form 10-K for the year-ended December 31, 2021 ("2021 Form 10-K") and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2021 Form 10-K and this Quarterly Report on Form 10-Q. All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by these cautionary statements as well as other cautionary statements that are made from time to time in our other filings with the Securities and Exchange Commission ("SEC") and public communications. You should evaluate all forward-looking statements made in this Quarterly Report on Form 10-Q in the context of these risks and uncertainties.
4

We caution you that the important factors referenced above may not contain all of the factors that are important to you. In addition, we cannot assure you that we will realize the results or developments we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our operations in the way we expect. The forward-looking statements included in this Quarterly Report on Form 10-Q are made only as of the date hereof. We undertake no obligation to update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.
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PART I    FINANCIAL INFORMATION
Item 1.    FINANCIAL STATEMENTS
OAK STREET HEALTH, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the quarterly period ended September 30, 2022
OAK STREET HEALTH, INC.
CONSOLIDATED BALANCE SHEETS
($ in millions, except shares and per share data)
September 30, 2022 (unaudited)
December 31, 2021
ASSETS
Current assets:
Cash and cash equivalents$204.3 $104.7 
Restricted cash18.7 15.7 
Other receivables, net (Humana comprised $0.2 as of December 31, 2021)
2.1 3.1 
Capitated accounts receivable (Humana comprised $105.0 as of December 31, 2021)
833.9 559.4 
Marketable debt securities339.0 671.1 
Prepaid expenses and other current assets18.1 14.0 
Total current assets1,416.1 1,368.0 
Property, plant and equipment, net196.1 144.8 
Goodwill158.0 152.9 
Intangible assets, net9.6 10.8 
Operating right-of-use assets (Humana comprised $70.9 as of December 31, 2021)
313.1 157.7 
Other long-term assets7.6 6.9 
Total assets$2,100.5 $1,841.1 
LIABILITIES AND STOCKHOLDERS' EQUITY/(DEFICIT)
Current liabilities:  
Accounts payable$25.9 $22.1 
Accrued compensation and benefits47.1 41.7 
Liability for unpaid claims (Humana comprised $99.1 as of December 31, 2021)
787.1 556.3 
Other liabilities (Humana comprised $19.3 as of December 31, 2021)
46.4 44.0 
Total current liabilities906.5 664.1 
Long-term debt977.0 901.4 
Long-term operating lease liabilities (Humana comprised $66.0 as of December 31, 2021)
341.8 164.2 
Other long-term liabilities (Humana comprised $43.1 as of December 31, 2021)
30.8 55.4 
Total liabilities2,256.1 1,785.1 
Commitments and contingencies (See Note 10)
STOCKHOLDERS' EQUITY/(DEFICIT)
Preferred stock, par value $0.001; 50,000,000 shares authorized as of September 30, 2022 and December 31, 2021; no shares issued and outstanding as of September 30, 2022 and December 31, 2021
  
Common stock, par value $0.001; 500,000,000 shares authorized as of September 30, 2022 and December 31, 2021; 242,950,926 and 240,937,465 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively
0.2 0.2 
Additional paid-in capital (Humana comprised $50.0 as of December 31, 2021)
1,185.0 1,017.9 
Accumulated other comprehensive loss(4.1)(1.4)
Accumulated deficit(1,341.5)(965.3)
Total stockholders' equity/(deficit) allocated to Oak Street Health, Inc.(160.4)51.4 
Non-controlling interests4.8 4.6 
Total stockholders' equity/(deficit)(155.6)56.0 
Total liabilities and stockholders' equity/(deficit) $2,100.5 $1,841.1 
The accompanying notes are an integral part of these consolidated financial statements.
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OAK STREET HEALTH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
($ in millions, except shares and per share data)
Three-Months Ended September 30,Nine-Months Ended September 30,
2022202120222021
Revenues:
Capitated revenue (Humana comprised $130.7 for the three-months ended September 30, 2021 and $379.2 for the nine-months ended September 30, 2021)
$537.9 $376.7 $1,560.1 $1,014.6 
Other revenue (Humana comprised $2.8 for the three-months ended September 30, 2021 and $4.5 for the nine-months ended September 30, 2021)
7.8 12.0 23.1 23.9 
Total revenues545.7 388.7 1,583.2 1,038.5 
Operating expenses:
Medical claims expense (Humana comprised $99.1 for the three-months ended September 30, 2021 and $277.7 for the nine-months ended September 30, 2021)
427.4 309.8 1,198.4 790.9 
Cost of care, excluding depreciation and amortization (Humana comprised $2.8 for the three-months ended September 30, 2021 and $7.1 for the nine-months ended September 30, 2021)
113.6 76.3 307.6 203.6 
Sales and marketing44.1 30.5 120.5 80.5 
Corporate, general and administrative81.7 77.0 265.3 224.3 
Depreciation and amortization9.1 4.5 25.3 11.7 
Total operating expenses675.9 498.1 1,917.1 1,311.0 
Loss from operations(130.2)(109.4)(333.9)(272.5)
Other (expense):    
Interest expense, net (0.6)(1.1)(1.8)
Other(0.2) (40.3) 
Total other (expense)(0.2)(0.6)(41.4)(1.8)
Net loss(130.4)(110.0)(375.3)(274.3)
Net income/(loss) attributable to non-controlling interests0.3 (0.6)0.9 (3.5)
Net loss attributable to Oak Street Health, Inc.$(130.7)$(109.4)$(376.2)$(270.8)
Weighted average common shares outstanding - basic and diluted
231,919,421 223,435,698 228,042,160 221,932,624 
Net loss per share – basic and diluted$(0.56)$(0.49)$(1.65)$(1.22)
The accompanying notes are an integral part of these consolidated financial statements.
7

OAK STREET HEALTH, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
($ in millions, except shares and per share data)
Three-Months Ended September 30,Nine-Months Ended September 30,
2022202120222021
Net loss$(130.4)$(110.0)$(375.3)$(274.3)
Other comprehensive loss:    
Net unrealized gain/(loss) on marketable debt securities, net of tax0.7 0.1 (2.7)(0.2)
Comprehensive loss(129.7)(109.9)(378.0)(274.5)
Less: Comprehensive income/(loss) attributable to non-controlling interests0.3 (0.6)0.9 (3.5)
Comprehensive loss attributable to Oak Street Health, Inc.$(130.0)$(109.3)$(378.9)$(271.0)
The accompanying notes are an integral part of these consolidated financial statements.
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OAK STREET HEALTH, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY/(DEFICIT)
(Unaudited)
($ in millions, except shares and per share data)
Three-Months Ended
Common StockAdditional
Paid-In Capital
Accumulated
Deficit
Accumulated Other
Comprehensive Loss
Non-controlling
Interest
Total
Equity/(Deficit)
Shares
Issued
Amount
Balances June 30, 2021240,785,554 $0.2 935.0 $(717.2)(0.3)$3.1 $220.8 
Issuance of common stock upon vesting of restricted stock units33,542 — — — — — $— 
Issuance of common stock upon exercise of options47,389 — 0.9 — — — $0.9 
Shares withheld related to net settlement of stock based awards(782)— — — — — $— 
Issuance of common stock under the employee purchase plan62,575 — 3.0 — — — $3.0 
Forfeitures(8,322)— (0.1)— — — $(0.1)
Stock-based compensation expense— 38.8 — — — $38.8 
Payments to non-controlling interests— — — — (0.4)$(0.4)
Net unrealized gain on marketable debt securities— — — 0.1 — $0.1 
Net loss— — (109.4)— (0.6)$(110.0)
Balances September 30, 2021240,919,956 0.2 977.6 (826.6)(0.2)2.1 $153.1 
The accompanying notes are an integral part of these consolidated financial statements.
9

OAK STREET HEALTH, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY/(DEFICIT)
(Unaudited)
($ in millions, except shares and per share data)
Three-Months Ended
Common StockAdditional Paid-In Capital
Accumulated
Deficit
Accumulated Other
Comprehensive Loss
Non-controlling
Interests
Total
Equity/(Deficit)
Shares
Issued
Amount
Balances June 30, 2022241,084,244 $0.2 $1,108.5 $(1,210.8)$(4.8)$5.0 $(101.9)
Issuance of common stock upon vesting of restricted stock units70,849 — — — — — — 
Issuance of common stock upon exercise of options543,082 — 11.1 — — — 11.1 
Shares withheld related to net settlement of stock based awards(9,478)— (0.2)— — — (0.2)
Issuance of common stock under the employee purchase plan161,189 — 2.3 — — — 2.3 
Issuance of common stock pursuant to RubiconMD Holdings, Inc. earn-out1,225,122 — 32.5 — — — 32.5 
Forfeitures(124,082)— (2.9)— — — (2.9)
Stock-based compensation expense— — 33.7 — — — 33.7 
Payments to non-controlling interests— — — — — (0.5)(0.5)
Net unrealized gain on marketable debt securities— — — — 0.7 — 0.7 
Net loss— — — (130.7)— 0.3 (130.4)
Balances September 30, 2022242,950,926 $0.2 $1,185.0 $(1,341.5)$(4.1)$4.8 $(155.6)
The accompanying notes are an integral part of these consolidated financial statements.
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OAK STREET HEALTH, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY/(DEFICIT)
(Unaudited)
($ in millions, except shares and per share data)
Nine-Months Ended
Common StockAdditional Paid-In Capital
Accumulated
Deficit
Accumulated Other
Comprehensive Income (Loss)
Non-controlling
Interest
Total
Equity/(Deficit)
Shares
Issued
Amount
Balances December 31, 2020240,756,714 $0.2 971.8 $(555.8) $7.0 $423.2 
Purchase of capped calls— — (123.6)— — — $(123.6)
Issuance of common stock upon vesting of restricted stock units55,781 — — — — — $— 
Issuance of common stock upon exercise of options222,203 — 4.5 — — — $4.5 
Shares withheld related to net settlement of stock based awards(1,412)— — — — — $— 
Issuance of common stock under the employee purchase plan62,575 — 3.0 — — — $3.0 
Forfeitures(175,905)— (0.9)— — — $(0.9)
Stock-based compensation expense— — 122.8 — — — $122.8 
Payments from non-controlling interests— — — — — 0.1 $0.1 
Payments to non-controlling interests— — — — — (1.5)$(1.5)
Net unrealized loss on marketable debt securities— — — — (0.2)— $(0.2)
Net loss— — — (270.8)— (3.5)$(274.3)
Balances September 30, 2021240,919,956 0.2 977.6 (826.6)(0.2)2.1 153.1 
The accompanying notes are an integral part of these consolidated financial statements.
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OAK STREET HEALTH, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY/(DEFICIT)
(Unaudited)
($ in millions, except shares and per share data)
Nine-Months Ended
Common StockAdditional Paid-In Capital
Accumulated
Deficit
Accumulated Other
Comprehensive Income (Loss)
Non-controlling
Interest
Total
Equity/(Deficit)
Shares
Issued
Amount
Balances December 31, 2021240,937,465 $0.2 $1,017.9 $(965.3)$(1.4)$4.6 $56.0 
Issuance of common stock upon vesting of restricted stock units149,850 — — — — — — 
Issuance of common stock upon exercise of options662,034 — 13.4 — — — 13.4 
Shares withheld related to net settlement of stock based awards(15,995)— (0.2)— — — (0.2)
Issuance of common stock under the employee purchase plan224,473 — 4.1 — — — 4.1 
Issuance of common stock pursuant to RubiconMD Holdings, Inc. earn-out1,225,122 — 32.5 — — — 32.5 
Forfeitures(232,023)— (4.3)— — — (4.3)
Stock-based compensation expense— — 124.3 — — — 124.3 
Payments to non-controlling interest— — — — — (1.3)(1.3)
Purchase of joint venture minority interest— — (2.7)— — 0.6 (2.1)
Net unrealized loss on marketable debt securities— — — — (2.7)— (2.7)
Net loss— — — (376.2)— 0.9 (375.3)
Balances September 30, 2022242,950,926 $0.2 $1,185.0 $(1,341.5)$(4.1)$4.8 $(155.6)
The accompanying notes are an integral part of these consolidated financial statements.
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OAK STREET HEALTH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in millions)
(Unaudited)
Nine-Months Ended September 30,
20222021
Cash flows from operating activities:
Net loss$(375.3)$(274.3)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of discount on debt and related issuance costs3.3 2.4 
Accretion of discounts and amortization of premiums on short-term marketable securities, net4.9 2.4 
Fair value adjustment to contingent consideration38.3  
Depreciation and amortization25.3 11.7 
Non-cash operating lease costs31.6 11.2 
Stock-based compensation, net of forfeitures120.0 121.9 
Change in operating assets and liabilities, net of impact of acquisitions:
Accounts receivables(273.4)(208.0)
Other assets(5.3)(10.5)
Accounts payable and accrued compensation and benefits7.4 23.1 
Liability for unpaid claims230.9 180.2 
Operating lease liabilities(15.6)(9.9)
Other liabilities(5.4)23.9 
Net cash used in operating activities$(213.3)(125.9)
Cash flows from investing activities:
Proceeds from sales and maturities of marketable debt securities$716.6 43.7 
Purchases of marketable debt securities(392.2)(817.6)
Purchase of business, net of cash acquired(5.6)(1.4)
Purchases of property and equipment(67.6)(40.6)
Net cash provided by (used by) investing activities$251.2 (815.9)
Cash flows from financing activities:
Proceeds from borrowings on term loan, net$72.3 $ 
Proceeds from borrowings on Convertible Senior Notes, net 897.9 
Purchase of capped calls (123.6)
Capital contributions from non-controlling interests 0.1 
Settlement of contingent earnout liability(21.7) 
Capital distributions to non-controlling interests(1.3)(1.5)
Purchase of joint venture minority interest(2.1) 
Proceeds from exercise of options13.4 4.5 
Proceeds from issuance of common stock under the employee purchase plan4.1 3.0 
Net cash provided by financing activities$64.7 780.4 
Net change in cash, cash equivalents and restricted cash102.6 (161.4)
Cash, cash equivalents and restricted cash, beginning of period120.4 419.7 
Cash, cash equivalents and restricted cash, end of period$223.0 $258.3 
Supplemental disclosures
Additions to construction in process funded through accounts payable7.04.7 
The accompanying notes are an integral part of these consolidated financial statements.
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OAK STREET HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. ORGANIZATION AND NATURE OF BUSINESS
Description of Business
Oak Street Health, Inc. (collectively with its consolidated subsidiaries is referred to as “Oak Street Health,” “OSH,” “we,” “us,” “our” or the “Company”) was formed as a Delaware corporation on October 22, 2019 for the purpose of completing a public offering and related reorganization transactions (collectively referred to as the “IPO”) in order to carry on the business of Oak Street Health, LLC (“OSH LLC”) and its affiliates. On August 10, 2020, the Company completed its IPO. As the managing member of OSH LLC, Oak Street Health, Inc. operates and controls all of the business affairs of OSH LLC and its affiliates.
The Company operates primary care centers serving Medicare beneficiaries. The Company, through its centers and management services organization, combines an innovative care model with superior patient experience. The Company invests resources into primary care to prevent unnecessary acute events and manage chronic illnesses. The Company engages Medicare eligible patients through the use of an innovative community outreach approach. Once patients are engaged, the Company integrates population health analytics, social support services and primary care into the care model to drive improved outcomes. The Company contracts with health plans to generate medical costs savings and realize a return on its investment in primary care. As of September 30, 2022, the Company operated 161 centers.
Basis of Presentation and Consolidation
The accompanying unaudited interim consolidated financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been omitted pursuant to such regulations that would substantially duplicate the disclosures contained in the Company's annual audited consolidated financial statements. These financial statements have been prepared on a basis consistent with the accounting principles applied for the fiscal year ended December 31, 2021 in the Company’s 2021 Form 10-K filed with the SEC. In the opinion of management, all adjustments (consisting of all normal and recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and nine-months ended September 30, 2022, including the impact of COVID-19, are not necessarily indicative of the results that may be expected any other interim period for or for the year ending December 31, 2022.
The consolidated financial statements of the Company include the financial statements of all wholly owned subsidiaries and majority-owned or controlled companies, which include the variable interest entities (“VIE”) in which OSH has an interest and is the primary beneficiary. See Note 11, “Variable Interest Entities.” For those consolidated subsidiaries where our ownership is less than 100%, the portion of the net income or loss allocable to the non-controlling interests is reported as “Net loss (gain) attributable to non-controlling interests” in the consolidated statements of operations. Intercompany balances and transactions have been eliminated in consolidation.
In addition, Oak Street Health is the majority interest owner in two joint ventures: OSH-PCJ Joliet, LLC ("PCJ JV") and OSH-RI, LLC ("RI JV"), which are consolidated in the Company’s financial statements. In January 2022, the Company paid a former joint venture partner, Evangelical Services Corporation, $2.1 million to acquire its 49.9% ownership interest in OSH-ESC Joint Venture, LLC. As such, OSH owned 100% of this entity as of March 31, 2022, and the joint venture was effectively dissolved. During the quarters ended June and September 30, 2022, distributions were made from OSH-PCJ Joliet, LLC to Oak Street Health MSO, LLC, a subsidiary of the Company that holds 50.1% ownership interest in PCJ JV, and Primary Care Physicians of Joliet, an unaffiliated third party that holds 49.9% ownership interest in PCJ JV. Distributions made during the quarter ended June 30, 2022 totaled $0.8 million to each owner and in the quarter ended September 30, 2022 distributions totaled $0.5 million to each owner.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The Company bases its estimates on the information available at the time, its experiences and various other assumptions believed to be reasonable under the circumstances including estimates of the impact of COVID-19. The areas
14

where significant estimates are used in the accompanying financial statements include revenue recognition, the liability for unpaid claims, stock-based compensation, valuation and related impairment recognition of long-lived assets, including intangibles and goodwill and the valuation of stock options. Actual results could differ from those estimates.
COVID-19
Even as the COVID-19 pandemic subsides, disruptions caused by the pandemic, including labor shortages and inflationary pressures, may continue and could, in turn, have a negative impact on the Company. Further, recurring COVID-19 outbreaks, including outbreaks caused by different virus variants, could have the potential to impact the Company and its future results of operations, cash flows and financial position.
On March 27, 2020, the United States President signed into law the Coronavirus Aid, Relief and Economic Securities Act (“CARES Act”) which provides economic assistance to a wide array of industries, including healthcare. This legislation did not have a material impact on our financial statements as of and for the nine-months ended September 30, 2022. Refer to our 2021 Form 10-K for details on the prior year impact of the legislation.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company described its significant accounting policies in Note 2 of the notes to consolidated financial statements for the year ended December 31, 2021 included in its 2021 Form 10-K. During the nine-months ended September 30, 2022, there were no significant changes to those accounting policies, other than those noted below and those policies impacted by the new accounting pronouncements adopted during the period and further described below.

Stock-based compensation expense
The Company accounts for stock-based compensation as an expense in the statements of operations based on the awards' fair values at their respective grant dates. The Company estimates the fair value of options with service conditions granted using the Black-Scholes option pricing model. Stock options that include service and performance conditions are valued at their grant date using the Black-Scholes model and estimates regarding the probability of achieving the performance metrics. The Black-Scholes option pricing model requires inputs based on certain assumptions, including (a) the fair value per share of the Company's common stock, (b) the expected stock price volatility, (c) the expected term of the award, (d) the risk-free interest rate and (e) expected dividends.

The fair value of stock-based awards is recognized as compensation expense, net of actual forfeitures, over the requisite service period, which is generally the vesting period, with the exception of the fair value of stock-based payments for awards that include service and performance conditions which is recognized as compensation expense over the requisite service period as achievement of the performance objective becomes probable.

The Company issued certain performance stock options (“PSOs”) during the first quarter of 2022, that vest based on the satisfaction of certain service and performance-based conditions. The Company estimates compensation expense based on the grant date fair value of the awards and recognizes the expense on a graded vesting basis over the vesting period of the awards. Compensation expense for these awards is recognized only if the Company has determined that it is probable that the performance condition will be met. The Company reassesses the probability of vesting at each reporting period and adjusts compensation expense based on the probability assessment.

The Company issued certain performance stock units ("PSUs") during the second quarter of 2022. The awards will vest based on the satisfaction of certain service conditions and performance-based conditions. The Company estimates compensation expense based on the grant date fair value of the awards and recognizes the expense on a straight-line basis over the vesting period of the award. Compensation expense for these awards is recognized only if the Company has determined that it is probable that the performance condition will be met. The Company reassesses the probability of vesting at each reporting period and adjusts compensation expense based on the probability assessment.

Correction of immaterial error in previously issued financial statements
The Company has arrangements with Humana, that include a license fee payable by the Company to Humana for the Company’s provision of health care services in certain centers owned or leased by Humana. The license fee is a reimbursement to Humana for its costs of owning or leasing and maintaining the centers, including rental payments, center maintenance or repair expenses, equipment expenses, special assessments, cost of upgrades, taxes, leasehold improvements and other expenses identified by Humana. During the second quarter of 2022, the Company reassessed the nature of its license fee arrangements and determined that the reimbursement for leasehold improvements included in the license fee payments should be included as a lease component and accounted for under ASC 842, Leases ("ASC 842"). As previously
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disclosed in the Company's 2021 Form 10-K, the Company adopted ASC 842 effective January 1, 2021 under the modified retrospective transition method.
The Company considered the guidance Accounting Standards Codification 250, Accounting Changes and Error Corrections as well as the guidance in SEC Staff Bulletin 99, Materiality and concluded that the error was immaterial to the Company's previously issued interim and annual consolidated financial statements. The Company has corrected the cumulative impact of the error within the Quarterly Report on Form 10-Q for the period ended June 30, 2022 and disclosed the impact in Note 2 therein.
We recorded a decrease to cost of care, excluding depreciation and amortization, within the consolidated statements of operations of $3.6 million and impact of $0.02 to our net loss per share- basic and diluted for the nine-months ended September 30, 2022. There was no impact to the consolidated statement of cash flows or the consolidated statements of equity/(deficit).
Recently Adopted Accounting Pronouncements
In October 2021, the FASB issued Accounting Standard Update ("ASU") 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The new guidance requires contract assets and liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with ASC 606, Revenue from Contracts with Customers, as if it had originated the contracts. Under the current business combinations guidance, such assets and liabilities are recognized by the acquirer at fair value on the acquisition date. The new standard is effective for fiscal years beginning after December 15, 2022. Early adoption is permitted. The standard will not impact acquired contract assets or liabilities from business combinations occurring prior to the effective date of adoption. We elected to adopt this guidance early effective as of the quarter ended September 30, 2022 in connection with the Company’s acquisition of substantially all of the assets of CHW Cares Inc. ("CHW"), which was completed during the quarter. The guidance was not applicable to the CHW acquisition as contract assets and liabilities were not acquired, and as such, the adoption did not have a material effect on our consolidated financial statements or notes to the consolidated financial statements. For more information about the CHW acquisition, see Note 5, "Business Combinations, Goodwill and Intangible Assets."

In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance. This update requires annual disclosures about transactions with a government that are accounted for by applying a grant or contribution accounting model by analogy. This standard is effective for fiscal years beginning after December 15, 2021 and should be applied prospectively or retrospectively. We have adopted ASU 2021-10 as of January 1, 2022 using the prospective method. This adoption did not have a material impact on our consolidated financial statements or notes to the consolidated financial statements.

Recent Accounting Pronouncements Not Yet Adopted
In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820) of Equity Securities Subject to Contractual Sale Restrictions. The new guidance clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The amendments also clarify that an entity cannot, as a separate unit of account, recognize and measure a contractual sale restriction. The guidance is required to be adopted by January 1, 2024, and we do not anticipate this standard update will have a material impact on our consolidated financial statements or notes to the consolidated financial statements.
NOTE 3. REVENUE RECOGNITION
The Company earns revenue from our capitated arrangements with health plan payers and other revenue arrangements. Other revenue is comprised of ancillary fees earned under contracts with certain managed care organizations for the provision of certain care coordination and care management services; license subscription and fees; and fee-for- service revenue. Both our capitated and fee-for-service revenue generally relate to contracts with patients in which our performance obligation is to provide and/or manage healthcare services to the patients. Revenues are recorded during the period our obligations to provide healthcare services are satisfied as noted below within each service type.
Our care coordination services include a single performance obligation to stand ready to provide care coordination services to patients, which constitutes a series of distinct service increments. Payments received are recognized in other revenue ratably over the length of contract terms and are refundable on a pro rata basis to Humana if the Company ceases to provide services at the centers within the length of the term specified in the contracts. Under our care management services, we have a single performance to stand ready to provide care management services, which constitutes a series of distinct service increments.
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The Company acquired RubiconMD Holdings, Inc. (“RMD”) on October 20, 2021. RMD is a healthcare technology company specializing in an online eConsult platform which enables primary care providers to easily access same-day insights from top specialists in order to provide better care for their patients. RMD generates revenue by providing subscription licenses to its customers to access its eConsult platform, as well as providing integration, training and other ad-hoc services. We have identified the performance obligation to be standing ready to provide access to the eConsult platform. Subscription license revenue is recognized when the performance obligation is met over time by either the straight-line method or when services are performed over the terms of the applicable contract. RMD also provides services to assist customers with initial usage and training of the platform. These services are typically provided for a fixed fee and do not have a variable component. We identified the performance obligation is to provide the other professional services, which is typically achieved over time.
Capitated Revenue and Accounts Receivable
The Company has agreements in place with the payors listed below, and payor sources of capitated revenue for each period presented were as follows:
Three-Months Ended September 30,Nine-Months Ended September 30,
2022202120222021
Humana31 %35 %32 %37 %
Wellcare/Meridian16 %15 %17 %16 %
UnitedHealth Care10 %8 %9 %7 %
CMS8 %10 %8 %7 %
Other35 %32 %34 %33 %
Medicare Part D comprised 2% of capitated revenues for the three and nine-months ended September 30, 2022 and September 30, 2021. Medicare Part D comprised 3% of medical claims expense for the three-months ended September 30, 2022 and 2% for the nine-months ended September 30, 2022. Medicare Part D comprised 2% of medical claims expense for the three-months ended September 30, 2021 and 3% for the nine-months ended September 30, 2021.
For the nine-months ended September 30, 2022 and 2021, respectively, we estimate that we will receive an additional $44.4 million and $40.1 million for acuity-related adjustments to be received in subsequent periods. Under our capitated revenue arrangements, we receive a fixed fee per patient, per month ("PPPM") for services. In certain contracts, PPPM fees also include adjustments for items such as performance incentives or penalties based on the achievement of certain clinical quality metrics as contracted with payors. There were no material PPPM adjustments related to performance incentives/penalties for quality-related metrics for the three and nine-months ended September 30, 2022 and 2021.
Other Revenue
The composition of other revenue for each period was as follows ($ in millions):
Three-Months Ended September 30,Nine-Months Ended September 30,
2022202120222021
Care coordination and care management services$1.8 $9.8 5.2 $18.4 
License subscription and other fees3.3  9.5  
Fee for service2.7 2.2 8.4 5.5 
Total other revenue$7.8 $12.0 23.1 $23.9 
As of September 30, 2022 and December 31, 2021, the Company’s contract liabilities related to the Humana care coordination payments totaled $37.3 million and $33.9 million, respectively. The short-term portion is recorded in other liabilities and the long-term portion is included in other long-term liabilities in the accompanying consolidated balance sheets. As of September 30, 2022 and December 31, 2021, we recorded $6.7 million and $6.2 million of short-term contract liabilities, respectively, and $30.6 million and $27.7 million of long-term contract liabilities, respectively.
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NOTE 4. FAIR VALUE MEASUREMENTS AND INVESTMENTS
Fair Value Measurements
In determining the fair value of financial assets and liabilities, the Company utilizes market data or other assumptions that it believes market participants would use in pricing the asset or liability in the principal or most advantageous market and adjusts for non-performance and/or other risks associated with the Company as well as counterparties, as appropriate. Assets and liabilities measured at fair value are classified using the following hierarchy, which is based upon the transparency of inputs to the valuation as of the measurement date:
Level 1 – Valuations based on unadjusted quoted prices which are available in active markets for identical assets or liabilities accessible at the measurement date.
Level 2 – Valuations with inputs other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.
Level 3 – Valuations with unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.
The following tables present information about the Company’s financial assets measured at fair value on a recurring basis ($ in millions):
Fair Value Measurements as of September 30, 2022 using:Fair Value Measurements as of December 31, 2021 using:
Level 1Level 2Level 3Level 1Level 2Level 3
Marketable debt securities:
Commercial paper$61.5 $ $ $120.8 $ $ 
U.S. Treasury obligations 12.8   26.0  
Corporate bonds 201.2   412.3  
Asset-backed securities 33.8   99.2  
Other 29.7   12.8  
Total financial assets$61.5 $277.5 $ $120.8 $550.3 $ 
Liabilities:
Convertible senior notes$ $710.5 $ $ $752.7 $ 
Contingent consideration1
  0.2   21.8 
Total liabilities$ $710.5 $0.2 $ $752.7 $21.8 
1 During the quarter-ended June 30, 2022, RMD achieved both earn-out hurdles. As such, the Company no longer measured the fair value of the contingent consideration and instead recorded the maximum earn-out as an amount payable to RMD as of June 30, 2022. See Footnote 5 for further detail.
The Company measures the fair value of corporate bonds, U.S. treasury obligations and asset-backed securities by taking into consideration valuations obtained from third-party pricing services. The pricing services utilize industry standard valuation models, including both income and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. During the three and nine-months ended September 30, 2022, there were no transfers between Levels 1, 2 and 3.
The Company's Convertible Senior Notes are classified within Level 2 of the fair value hierarchy as the valuation inputs are based on quoted prices in an inactive market on the last day in the reporting period.
In September 2022, the Company and certain of its subsidiaries entered into a $300.0 million loan and security agreement (the "Loan Agreement") with Hercules Capital Inc., as administrative and collateral agent and lender (the “Agent”), and Silicon Valley Bank and other lenders from time to time parties thereto (collectively with the Agent in its capacity as a lender, the “Lenders”) with such amount to be funded in five committed tranches (collectively, the "Term Loan"). As of September 30, 2022, the carrying value of the loan is $72.3 million, net of debt issuance costs. The fair value of the Term Loan approximates its carrying value since the interest rate is at market. For more information about the Term Loan, see Note 8, “Long-Term Debt.”
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Investments
At September 30, 2022, the Company’s marketable debt securities classified as available-for-sale were as follows ($ in millions):
September 30, 2022December 31, 2021
Amortized costNet unrealized gains (losses) Fair valueAmortized costNet unrealized gains (losses)Fair value
Marketable debt securities:
Commercial paper$61.7 $(0.2)$61.5 $120.9 $(0.1)$120.8 
U.S. Treasury obligations12.9 (0.1)12.8 26.0  26.0 
Corporate bonds204.6 (3.4)201.2 413.4 (1.1)412.3 
Asset-backed securities34.0 (0.2)33.8 99.4 (0.2)99.2 
Other29.9 (0.2)29.7 12.8  12.8 
Total marketable debt securities$343.1 $(4.1)$339.0 $672.5 $(1.4)$671.1 
These investments in marketable debt securities carry maturity dates of less than five years from the date of purchase. The net realized gains and losses were immaterial during the three and nine-months ended September 30, 2022. We do not intend to sell these investments, and it is not more likely than not that we will be required to sell the investments before recovery of their amortized cost basis. We did not record an allowance for credit losses as of September 30, 2022 or December 31, 2021 as no losses were determined to be caused by credit losses.
NOTE 5.