ALIGNMENT HEALTHCARE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is intended to help the reader understand
our business, financial condition, results of operations, liquidity and capital
resources. This discussion should be read in conjunction with our audited
financial statements and the accompanying notes as well as "Risk Factors" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in our Annual Report on Form 10-K for the year ended
In addition to historical data, the discussion contains forward-looking statements about the business, operations and financial performance of the Company based on our current expectations that involves risks, uncertainties and assumptions. Actual results could differ materially from those discussed in or implied by forward-looking statements as a result of various factors, including those discussed above in "Forward-Looking Statements," and Part II, Item 1A, "Risk Factors."
Overview
Alignment is a next generation, consumer-centric platform designed to improve
the healthcare experience for seniors. We deliver this experience through our
Medicare Advantage plans, which are customized to meet the needs of a diverse
array of seniors. Our innovative model of consumer-centric healthcare is
purpose-built to provide seniors with care as it should be: high quality, low
cost and accompanied by a vastly improved consumer experience. We combine a
proprietary technology platform and a high-touch clinical model that enhances
our members' lifestyles and health outcomes while simultaneously controlling
costs, which allows us to reinvest savings back into our platform and products
to directly benefit the senior consumer. We have grown Health Plan Membership,
which we define as members enrolled in our health maintenance organization
("HMO") and preferred provider organization ("PPO") contracts, from
approximately 13,000 at inception to 109,700 as of
Our model is based on a flywheel concept, referred to as our "virtuous cycle," which is designed to delight our senior consumers. We start by listening to and engaging with our seniors in order to provide a superior experience in both their healthcare and daily living needs. Through our proprietary technology platform, Alignment's Virtual Application ("AVA"), we utilize data and predictive algorithms that are specifically designed to ensure personalized care is delivered to each member. When our information-enabled care model is combined with our member engagement, we are able to improve healthcare outcomes by, for example, reducing unnecessary hospital admissions, which in turn lowers overall costs. Our ability to manage healthcare expenditures while maintaining quality and member satisfaction is a distinct and sustainable competitive advantage. Our lower total healthcare expenditures allow us to reinvest our savings into richer coverage and benefits, which propels our growth in revenue and membership due to the enhanced consumer value proposition. As we grow, we continue to listen to and incorporate member feedback, and we are able to further enhance benefits and produce strong clinical outcomes. Our virtuous cycle, based on the principle of doing well by doing good, is highly repeatable and a core tenet of our ability to continue to expand in existing and new markets in the future.
For the 2023 plan year, Alignment offers plans in 52 markets across
Factors Affecting Our Performance
Our proprietary technology platform, AVA, is a key element of our business with capabilities that we expect to impact our future performance. AVA enables us to personalize and manage our member relationships, care quality and experience, and to coordinate and manage risk with our provider partners. AVA's unified platform, analytical tools and data across the healthcare ecosystem enable us to produce consistent outcomes, unit economics and support new member growth. Additionally, our historical financial performance has been, and we expect our financial performance in the future will be, driven by our ability to:
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Capitalize on Our Existing Market Growth Opportunity: Our ability to attract and retain members to grow in our existing markets depends on our ability to offer a superior value proposition. We have proven that we can compete against, and take market share from, large established players in highly competitive markets. According to CMS data, we
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were one of the top three Medicare Advantage Organizations in terms of HMO net
members growth in our
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Drive Growth and Consistent Outcomes Through New Market Expansion: We enter new
markets with the goal of building brand awareness across our key stakeholders to
achieve meaningful market share over time. We intend to focus on markets with
significant senior populations where we expect to be able to replicate our model
most effectively. Our existing markets also feature a diverse array of
membership profiles across ethnicities, income levels and acuity. In 2022 and
2023, we expanded into 16 and 14 new markets, respectively, across our four
existing states and two new states,
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Provide Superior Service, Care and Consumer Satisfaction: We are highly focused on providing superior service and care to our members and on maintaining high levels of consumer satisfaction, which are key to our financial performance and growth. The CMS Five Star Quality Rating System provides economic incentives to Medicare Advantage plans that achieve higher Star ratings by (i) meeting certain care criteria (such as completing particular preventative screening procedures or ensuring proper follow-up care is provided for specific conditions or episodes) and (ii) receiving high member satisfaction ratings. These incentives impact financial performance in the year following the CMS Rating Year (for example, CMS's announcement of the 2023 Ratings occurred in the second half of 2022 and will impact our financial performance in 2024). In aggregate, more than 90% of our health plan members are enrolled in plans rated 4 stars and above, meaning the vast majority of members consistently receive a high-quality care experience, as defined under CMS star measurement criteria.
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Effectively Manage the Quality of Care to Improve Member Outcomes: Our care delivery model is based on a clinical continuum through which we have created a highly personalized experience that is unique to each member depending on their personal health and circumstances. Utilizing data and predictive analytics generated by AVA, our clinical continuum separates seniors into four categories in order to provide optimized care for every stage of a senior's life: healthy, healthy utilizer, pre-chronic and chronic. We partner with our broader network of community providers to service members in our non-chronic categories, and we have developed a Care Anywhere program implemented by our internal clinical teams to care for our higher risk and/or chronically ill members. By investing in our members' care proactively, our model has consistently reduced unnecessary and costly care while improving the quality of our members' lifestyle and healthcare experience. By delivering superior care and preventing avoidable utilization of the healthcare system, we are able to reduce our claims expenditures in some of our largest medical expense categories, which translates to superior medical benefits ratio ("MBR") financial performance and ultimately the ability to offer richer products in the market.
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Achieve Superior Unit Economics: As our senior population ages, their healthcare needs become more frequent and complex. To combat the healthcare cost increases that typically result, we proactively look to (i) connect with our population early in their enrollment with Alignment to assess their care needs, (ii) develop care plans and engage those members with more chronic, complex health challenges in our clinical model, and (iii) continue to monitor and evaluate our healthier members in a preventative fashion over time. Given the Medicare Advantage payment mechanism and the retention of the vast majority of our members who continue to choose Alignment after their initial selection year, we are able to focus our efforts on driving favorable long-term health outcomes for our entire population. As a result, our clinical model efforts have demonstrated the ability to lower the MBRs of our returning members. We believe this is evidence of our ability to manage the financial risk of our members as they age, and that these favorable underlying unit economic trends translate directly to our ability to continue to deliver a richer product to the marketplace. With this dynamic in mind, our consolidated MBR may be impacted year-to-year based on our pace of new member growth and mix of members by cohort. However, we believe our ability to sustain MBR performance improvement over time positions us well to invest in new member growth to drive long-term financial performance.
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Invest in our Platform and Growth: We plan to continue to invest in our business in order to further develop our AVA platform, pursue new expansion opportunities and create innovative product offerings. In addition, in order to maintain a
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differentiated value proposition for our members, we continue to invest in innovative product offerings and supplementary benefits to meet the evolving needs of the senior consumer. We anticipate further investments in our business as we expand into new markets and pursue strategic acquisitions, which we expect will primarily be focused on healthcare delivery groups in key geographies, standalone and provider-sponsored Medicare Advantage plans and other complementary risk bearing assets.
•
Navigate Seasonality to our Business: Our operational and financial results will
experience some variability depending upon the time of year in which they are
measured. We experience the largest portion of member growth during the first
quarter, when plan enrollment selections made during the annual enrollment
period ("AEP") from
Executive Summary
The following table presents key financial statistics for the periods indicated:
Three Months Ended March 31,
(dollars in '000's, except percentages) 2023 2022 % Change
Health plan membership (at period end) 109,700 94,200 16.5 %
Medical benefits ratio 89.7 % 87.0 % 2.7 %
Revenues $ 439,155 $ 345,526 27.1 %
Loss from Operations $ (32,489 ) $ (36,475 ) NM(2)
Net loss $ (37,371 ) $ (40,817 ) NM(2)
Adjusted EBITDA(1) $ (5,172 ) $ (3,890 ) NM(2)
Adjusted gross profit (1) $ 45,425 $ 44,932 1.1 %
(1)
See "Adjusted EBITDA" and "Adjusted Gross Profit" below for a reconciliation to
the most directly comparable financial measure calculated in accordance with
GAAP and related disclosures.
(2)
Not meaningful
Health Plan Membership
We define Health Plan Membership as the number of members enrolled in our HMO
and PPO contracts as of the end of a reporting period. We believe this is an
important metric to assess growth of our underlying business, which is
indicative of our ability to consistently offer a superior value proposition to
seniors. This metric excludes third party payor members with respect to which we
are at-risk for managing their healthcare expenditures, which represented
approximately 400 members and 500 members as of
Adjusted Gross Profit and Medical Benefits Ratio
Adjusted gross profit is a non-GAAP financial measure that we define as loss from operations before depreciation and amortization, clinical equity-based compensation expense, and selling, general, and administrative expenses. Adjusted gross profit is a key measure used by our management and Board to understand and evaluate our operating performance and trends before the impact of our consolidated selling, general and administrative expenses.
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Adjusted gross profit should not be considered in isolation of, or as an alternative to, measures prepared in accordance with GAAP. There are a number of limitations related to the use of adjusted gross profit in lieu of loss from operations, which is the most directly comparable financial measure calculated in accordance with GAAP.
Our use of the term adjusted gross profit may vary from the use of similar terms by other companies in our industry and accordingly may not be comparable to similarly titled measures used by other companies.
Adjusted gross profit is reconciled as follows:
Three Months Ended March 31,
2023 2022
(dollars in thousands)
Loss from operations $ (32,489 ) $ (36,475 )
Add back:
Equity-based compensation (medical expenses) 2,524 3,121
Depreciation (medical expenses) 61 43
Depreciation and amortization 4,921 3,950
Selling, general, and administrative expenses 70,408 74,293
Total add back 77,914 81,407
Adjusted gross profit $ 45,425 $ 44,932
Adjusted gross profit % 10.3 % 13.0 %
We calculate our MBR by dividing total medical expenses, excluding depreciation and equity-based compensation, by total revenues in a given period. We believe our MBR is an indicator of our gross profit for our Medicare Advantage plans and demonstrates the ability of our clinical model to produce superior outcomes by identifying and providing targeted care to our high-risk members resulting in improved member health and reduced total population medical expenses. We expect that this metric may fluctuate over time due to a variety of factors, including our pace of new member growth given that new members typically join Alignment with higher MBRs, while our model has demonstrated an ability to improve MBR for a given cohort over time.
When we determine, on an annual basis, whether we have satisfied the CMS minimum Medical Loss Ratio of 85%, adjustments are made to the MBR calculation to include certain additional expenses related to improving the quality of care provided, and to exclude certain taxes and fees, in each case as permitted or required by CMS and applicable regulatory requirements.
Adjusted EBITDA
Adjusted EBITDA is a non-GAAP financial measure that we define as net loss before interest expense, income taxes, depreciation and amortization expense, reorganization and transaction-related expenses and equity-based compensation expense. Adjusted EBITDA is a key measure used by our management and our Board to understand and evaluate our operating performance and trends, to prepare and approve our annual budget and to develop short and long-term operating plans. In particular, we believe that the exclusion of the amounts eliminated in calculating Adjusted EBITDA provides useful measures for period-to-period comparisons of our business. Given our intent to continue to invest in our platform and the scalability of our business in the short to medium-term, we believe Adjusted EBITDA over the long term will be an important indicator of value creation.
Adjusted EBITDA should not be considered in isolation of, or as an alternative to, measures prepared in accordance with GAAP. There are a number of limitations related to the use of Adjusted EBITDA in lieu of net loss, which is the most directly comparable financial measure calculated in accordance with GAAP.
Our use of the term Adjusted EBITDA may vary from the use of similar terms by other companies in our industry and accordingly may not be comparable to similarly titled measures used by other companies.
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Adjusted EBITDA is reconciled as follows:
Three Months Ended
March 31,
2023 2022
(dollars in thousands)
Net loss $ (37,371 ) $ (40,817 )
Less: Net loss attributable to noncontrolling interest 87 -
Add back:
Interest expense 5,019 4,401
Depreciation and amortization 4,982 3,993
Income taxes 1 -
EBITDA (27,282 ) (32,423 )
Equity-based compensation(1) 21,978 28,047
Acquisition expenses(2) 132 486
Adjusted EBITDA $ (5,172 ) $ (3,890 )
(1)Represents equity-based compensation related to grants made in the applicable year, as well as equity-based compensation related to the timing of the IPO, which includes previously issued stock appreciation rights ("SARs") liability awards, modifications related to transaction vesting units, and grants made in conjunction with the IPO.
(2)
Represents acquisition-related fees, such as legal and advisory fees, that are non-capitalizable.
Results of Operations
The following table sets forth our consolidated statements of operations data
for the periods indicated:
Three Months Ended March 31,
2023 2022
(dollars in thousands)
Revenues:
Earned premiums $ 434,812 $ 345,292
Other 4,343 234
Total revenues 439,155 345,526
Expenses:
Medical expenses 396,315 303,758
Selling, general and administrative expenses 70,408 74,293
Depreciation and amortization 4,921 3,950
Total expenses 471,644 382,001
Loss from operations (32,489 ) (36,475 )
Other expenses:
Interest expense 5,019 4,401
Other income (138 ) (59 )
Total other expenses 4,881 4,342
Loss before income taxes (37,370 ) (40,817 )
Provision for income taxes 1 -
Net loss $ (37,371 ) $ (40,817 )
Less: Net loss attributable to noncontrolling interest 87 -
Net loss attributable to
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The following table sets forth our consolidated statements of operations data expressed as a percentage of total revenues for the periods indicated:
Three Months Ended March 31,
2023 2022
(% of revenue)
Revenues:
Earned premiums 99 % 100 %
Other 1 -
Total revenues 100 100
Expenses:
Medical expenses 90 88
Selling, general and administrative expenses 16 22
Depreciation and amortization 1 1
Total expenses 107 111
Loss from operations (7 ) (11 )
Other expenses:
Interest expense 1 1
Other expenses (income) - -
Total other expenses 1 1
Loss before income taxes (8 ) (12 )
Provision for income taxes - -
Net loss (8 ) (12 )
Less: Net loss attributable to noncontrolling interest - -
Net loss attributable to Alignment Healthcare, Inc. (8 )% (12 )%
Revenues
Three Months Ended
March 31, Change
2023 2022 $ %
(dollars in thousands)
Revenues:
Earned premiums $ 434,812 $ 345,292 $ 89,520 25.9 %
Other 4,343 234 4,109 1756.0 %
Total revenues $ 439,155 $ 345,526 $ 93,629 27.1 %
Revenues. Revenues were
Expenses
Three Months Ended
March 31, Change
2023 2022 $ %
(dollars in thousands)
Expenses:
Medical expenses $ 396,315 $ 303,758 $ 92,557 30.5 %
Selling, general and
administrative expenses 70,408 74,293 (3,885 ) (5.2 )%
Depreciation and amortization 4,921 3,950 971 24.6 %
Total expenses $ 471,644 $ 382,001 $ 89,643 23.5 %
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Medical Expenses. Medical expenses were
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were
Depreciation and Amortization. Depreciation and amortization expense was
Other Expenses
Interest expense. Interest expense was
Other expenses (income). Other expenses (income) were
Liquidity and Capital Resources
General
To date, we have financed our operations principally through our IPO, private
placements of our equity securities, revenues, and certain term loans (described
below). As of
In addition, we operate as a holding company in a highly regulated industry.
We may incur operating losses in the future due to the investments we intend to continue to make in expanding our operations and sales and marketing and due to the general and administrative costs we expect to incur in connection with continuing to operate as a public company. As a result, we may require additional capital resources to execute strategic initiatives to grow our business.
We believe that our liquid assets will be sufficient to fund our operating and organic capital needs for at least the next 12 months. Our assessment of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement and involves risks and uncertainties. Our actual results could vary because of, and our future capital requirements will depend on, many factors, including our growth rate, the timing and extent of spending to expand our presence in existing markets, expand into new markets and increase our sales and marketing activities. We may in the future enter into arrangements to acquire or invest in complementary businesses, services and technologies, including intellectual property rights. We have based this estimate on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. We may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, or if we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, results of operations, and financial condition would be adversely affected.
Certain states in which we operate as a CMS-licensed Medicare Advantage company
may require us to meet certain capital adequacy performance standards and tests.
The
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coverage. The requirements take the form of risk-based capital ("RBC") rules, which may vary from state to state. Certain states in which our health plans or risk bearing entities operate have adopted the RBC rules. Other states in which our health plans or risk bearing entities operate have chosen not to adopt the RBC rules, but instead have designed and implemented their own rules regarding capital adequacy. Our health plans or risk-bearing entities were in compliance with the minimum capital requirements for all periods presented.
Oxford Term Loan
On
The Term Loans are guaranteed by certain of our wholly owned subsidiaries and collateralized by all unrestricted assets.
For certain prepayments of the Term Loans prior to the second anniversary of the Effective Date, the Borrower will be required to pay a prepayment fee ranging from 1.00% to 2.00% of the principal amount of the Term Loans being prepaid.
The Oxford Loan Agreement includes customary events of default, including, among
others, payment defaults, breach of representations and warranties, covenant
defaults, judgment defaults, insolvency and bankruptcy defaults, and change of
control. The occurrence of an event of default could result in the acceleration
of the obligations under the Loan Agreement, termination of the Term Loan
commitments and the right to foreclose on the collateral securing the
obligations. During the existence of an event of default, the outstanding Term
Loans will accrue interest at a rate per annum equal to 2.00% plus the otherwise
applicable interest rate. Additionally, in the event of any contemplated asset
sale or series of asset sales yielding net proceeds in excess of
The Oxford Loan Agreement includes financial covenants that require the Borrower
Parties to (i) maintain minimum liquidity, as defined in the Loan Agreement, of
Cash Flows
The following table presents a summary of our consolidated cash flows from operating, investing and financing activities for the periods indicated:
Three Months Ended March 31,
(dollars in thousands) 2023 2022
Net cash provided by (used in) operating activities
(110,428 ) (6,127 )
Net cash provided by financing activities 30 -
Net change in cash (25,288 ) (17,765 )
Cash, cash equivalents and restricted cash at
beginning of period 411,299 468,350
Cash, cash equivalents and restricted cash at end of
period $ 386,011 $ 450,585
Operating Activities
For the three months ended
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2022. The increase is mainly attributable to an increase in prepayments on
certain vendor contracts, as well as improved timeliness of claims payments for
three months ended
Investing Activities
For the three months ended
Financing Activities
For the three months ended
Material cash requirements from known contractual and other obligations
There have been no material changes to our contractual obligations disclosed in our Annual Report.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations
are based upon our condensed consolidated financial statements, which have been
prepared in accordance with
There have been no significant changes in our critical accounting estimate policies or methodologies to our condensed consolidated financial statements. For a description of our policies regarding our critical accounting policies, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies" in the Annual Report.
Recent Accounting Pronouncements
See Note 2 to our condensed consolidated financial statements, "Summary of Significant Accounting Policies-Recent Accounting Pronouncements Adopted" for more information.
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