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 consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K and the description of the Company's Business in Item 1 above. Unless the context otherwise indicates or requires, the terms "we", "our" and "the Company" as used herein refer to
Oak Street Health, Inc.and its consolidated subsidiaries, including Oak Street Health, LLC, which is Oak Street Health, Inc.'spredecessor for financial reporting purposes for periods presented prior to August 10, 2020. 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 I, Item 1A, "Risk Factors."
Oak Street Health, Inc.(collectively referred to as " Oak Street Health," "OSH," "we," "us," "our," or the "Company") was formed as a Delawarecorporation on October 22, 2019for the purpose of completing a public offering and related restructuring transactions (collectively referred to as the "IPO") in order to carry on the business of Oak Street Health, LLC(" OSH LLC") and its affiliates. As the managing member of OSH LLC, Oak Street Health, Inc.operates and controls all of the business affairs of OSH LLCand its affiliates. For further discussion related to the IPO, see Note 1 in Part IV, Item 15. Our common stock trades on the New York Stock Exchange("NYSE") under the ticker symbol "OSH." Oak Street Healthwas designed to provide and manage Medicare-eligible patients' total healthcare through capitated, value-based payments. We created a new care platform because the then existing primary care infrastructure was not built with the capacity to drive significant improvements in cost and quality the current health system needs. We decided to focus on the Medicare market due to its size, growth tailwinds and largely clinically cohesive population. We designed our platform to take risk in managing patients' health below and agreed-upon baseline cost because we believe there is a meaningful opportunity to produce system-wide cost savings by changing where and how patients' healthcare is delivered. Our platform's design has included investments in technology and patient centered, community-based care delivery to create a difference and we believe, better approach to addressing the needs of high-risk Medicare-eligible patients. As of December 31, 2021, the Company operated 129 centers across 19 states, which provided care for approximately 153,500 patients. We, together with our affiliated physician practice organizations, employed approximately 4,800 team members, including approximately 500 primary care providers as of December 31, 2021. Our operations are organized and reported under one segment.
COVID-19 update on our company
March 11, 2020, the World Health Organizationdesignated COVID-19 as a global pandemic. The rapid spread of COVID-19, including its variants, around the world and throughout the United Stateshas altered the behavior of businesses and people, with significant negative effects on federal, state and local economies, the duration of which is unknown at this time. Various policies were implemented by federal, state and local governments in response to the COVID-19 pandemic that caused many people to remain at home and forced the closure of or limitations on certain businesses, as well as suspended elective procedures by health care facilities. While some of these restrictions have been eased across the U.S.since the beginning of the pandemic, some restrictions remain in place, and many state and local governments are re-imposing certain restrictions due to the increasing rates of COVID-19 cases and new variants, such as Delta and Omicron. The virus disproportionately impacts older adults, especially those with chronic illnesses, which describes many of our patients.
In response to the COVID-19 pandemic, we have taken the following steps to keep our employees and their families safe and to ensure the physical, mental and social health of our patients:
• Created a
team members from across our organization to ensure a
response to the pandemic;
• Reopened all our corporate offices from summer 2021, which were
temporarily closed since
March 2020, with the expectation that
corporate work force will continue to work remotely at least part-time; • Transitioned much of our center-based care to be delivered by our providers virtually through newly developed telehealth
including video and telephone from March through
transitioned our business back to a more normal operating
July 2020, including seeing a larger proportion of our 66 --------------------------------------------------------------------------------
patients via in-center visits (with a corresponding reduction in telehealth visits) while maintaining stringent safety protocols to minimize the potential transmission of COVID-19. We continue to leverage our telehealth capabilities as a means of interacting with our patients to the extent an in-person visit is not required or preferred; • Made operational changes to the staffing and operations of our centers, which remain open as "essential" businesses, to minimize potential exposure to and transmission of COVID-19; • Temporarily delayed planned openings of new centers from March through
August 2020but have restarted our growth efforts through patient outreach and as of August 2020, we resumed opening new centers consistent with our pre-COVID operations;
• Temporary suspension of community outreach and other marketing initiatives
which drive new patients to our platform from March through June
but have recommenced marketing initiatives as of the third
2020 albeit with less frequency compared to periods before
March 2020; • Acquired and deployed significantly greater amounts of personal protective equipment ("PPE") to ensure the safety of our
patients; • Created a program called "COVID Care" to actively monitor our patients for suspected COVID-19 infections with the goal of managing those symptoms to keep our patients safely out of the hospital unless and until necessary due to the potential infection risks in the hospital environment; • Redeployed our contracted and employed drivers,
whotypically transport patients to our centers, to deliver food from food pantries to our patients to address food supply issues or challenges; • Provided free rapid COVID-19 tests to all members of the Chicagocommunity; • Launched an effort in January 2021to vaccinate frontline healthcare
workers (both employees of
Oak Street Healthand non-employees), our patients, and other eligible members of our communities. While this work is critically important for our communities, we also expect our agile vaccination efforts will result in greater brand awareness and loyalty and incremental patient growth; and • Administered more than 190,000 total COVID-19 vaccine doses as of December 31, 2021. COVID-19 has impacted both our per-patient capitated revenue due to lower risk scores for new patients as compared to historical risk scores and our medical claims expense for the year ended December 31, 2021. Although our risk scores for existing Oak Street Healthpatients have been consistent with our historical experience, new patients in 2021 had lower risk scores due to a lack of availability of care in 2020 as the healthcare system was inaccessible to non- Oak Street Healthpatients for several months in 2020, due to local COVID-19 restrictions. As we were able to more completely and accurately document both current and new patients' health conditions in 2021, we expect that risk scores will increase to reflect the true severity of these patients' conditions, which we would further expect to result in increased revenue for our 2022 fiscal year. It is unknown to us at present how significantly, if at all, this new patient risk score dynamic might impact our business in 2022. We continue to closely monitor the COVID-19 pandemic and its lingering impact on the economy, our patients and prospective patients and our business. Whereas the progress in mass vaccination programs in the U.S.had prompted state and local governments to lift many of the restrictions on commercial activity, certain restrictions have been reimposed in recent months as a result of the recent resurgence in COVID-19 cases due to the Delta and Omicron variants. This resurgence, as well as any future variants of the coronavirus entering the U.S., could prompt a return to tighter restrictions in certain areas of the country. Furthermore, pandemic-related labor shortages remain unresolved and could continue for an extended period of time. Therefore, uncertainty remains regarding the ongoing impact of the COVID-19 pandemic upon our financial condition and future results of operations. As we are financially responsible for essentially all of the healthcare costs associated with our at-risk patients whether we provide that care or a third party provides that care, we suspect that the healthcare costs of patients infected with COVID-19 will be greater than had COVID-19 not occurred. It is impossible, however, to know what other healthcare issues these patients may have encountered in their pre-COVID-19 lives and whether the COVID-19 costs are or will be greater or lesser than the costs these patients would otherwise incur. Additionally, because of the extraordinary measures taken by local governments in our markets particularly in the second quarter of 2020, all of our patients had more limited access to healthcare services, including healthcare specialists such as cardiologists or orthopedists, to schedule both inpatient and outpatient surgeries, and to some extent hospital care. Beginning in late March 2020and extending through most of the second quarter of 2020, our patients whowere not infected with COVID-19 incurred 67 -------------------------------------------------------------------------------- lower healthcare costs than we would have otherwise expected, which will result in lower medical claims expense that we incur. From the second half of 2020 through 2021, we did experience an increase in medical costs to levels above historical norms. We believe that a portion of the increase in medical costs was related to care delayed from 2020 and delivered in 2021. In November 2021, the Omicron variant of COVID-19 began to spread quickly throughout the United States, including markets in which we operate. As we have the least amount of medical claims data for the last month of the reporting period, which was the period in which the Omicron variant had the greatest impact, we have relied on our COVID experience to-date to estimate the potential costs of the Omicron variant. We also expect to incur incremental costs in 2022 related to the Omicron variant, although it is too early for us to estimate the magnitude of these costs and offsets to those costs, if any, related to deferred or avoided care. Because of the COVID-19 related volatility in medical cost data in 2020 and 2021 and the surge in COVID-19 cases at the end of 2021, we do not believe that these periods can serve as a reliable basis for estimating our 2022 performance and do not know what the impact from COVID-19 will be on medical costs. Given these factors, per-patient medical costs may be greater in 2022 than the levels we experienced in our recent historical results. Furthermore, given the time it takes for medical claims to be submitted to Medicare Advantage ("MA") plans, adjudicated, and sent to us, we believe it will be several quarters before we will be able to accurately calculate the impact on medical claims expense from the COVID-19 pandemic. We do believe, however, that the impact of on per-patient revenue and medical claims related to COVID-19 that we expect to experience will not have a materially detrimental effect on our long-term financial performance. The COVID-19 pandemic had a material impact on our results from operations, cash flows and financial position for the year ended December 31, 2021. Based upon claims paid to date, our direct costs related to COVID-19 claims were approximately $54.3 millionfor the period from March 1, 2020through December 31, 2021. We expect to incur additional COVID-19 related costs given the volume of positive cases in our markets. Due to the uncertainty of COVID-19 infection and hospitalization rates, we cannot estimate any incremental COVID-19 related costs we may incur. The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, future results of operations and financial condition will depend on future factors that are highly uncertain and cannot be accurately predicted, including new information that may emerge concerning COVID-19 including the impact of new variants of the virus, the actions taken to contain it or treat its impact and the economic impact on our markets. Such factors include, but are not limited to, the scope and duration of stay-at-home practices and business closures and restrictions, government-imposed or recommended suspensions of elective procedures, and expenses required for supplies and personal protective equipment. Because of these and other uncertainties, we cannot estimate the length or severity of the impact of the pandemic on our business. Furthermore, because of our business model, the full impact of the COVID-19 pandemic may not be fully reflected in our results of operations and overall financial condition until future periods. We will continue to closely evaluate and monitor the nature and extent of these potential impacts to our business, results of operations and liquidity.
For more information about the various risks posed by the COVID-19 pandemic, please read the risk factors included in this Annual Report on Form 10-K.
Key factors affecting our performance
• Addition of new patients in existing centers: our ability to add new patients
is a key indicator of market recognition of the attractiveness of
the Oak Street platform, both for our patients and MA plan partners, and a
main engine of growth for the company. As we add patients to our
centers, we expect these patients to contribute significantly
the economy to
center. We grow our patient base through our own internal sales and
marketing efforts, which are driving much of our new patient growth, as well as
missions of our MA plan partners. We have expanded our customer base from
approximately 97,000 patients in
153,500 patients in
• Expand our central base in existing and new markets: we believe that we
currently serve less than 2% of the total number of patients in the markets where we
currently have centers. Consequently, there is a significant possibility of
grow in our existing markets through the acquisition of new patients to
existing centers and adding new centers. In the long term, these
new strategically developed sites allow us to access
neighborhoods while leveraging our established brand and infrastructure in
a market. Our existing markets today represent a small fraction of
global market opportunity. Based on our experience to date, we believe
our model of care can scale nationwide, so we expect
expand selectively and strategically into new geographies. Additionally,
we started participating in the global and direct contract model from the
fee-for-service ("FFS") patients on an at-risk basis. The Direct Contracting Model and the ACO REACH Model, as its successor create new opportunities for CMS to test an array of financial risk-sharing
arrangements in the traditional fee-for-service population of Medicare, and
it will enable us to assume financial risk for the cost of care for patients covered by traditional 68
Health Insurance. Through this model, CMS aims to transform risk sharing
devices in Medicare FFS, empowering and involving beneficiaries (or
patients or members) in their own delivery of care, broaden participation in
CMS Innovation Center Models, Vendor Load Reduction, and Vendor Switching
from FFS to value-based payments in primary care. There cannot be
assurances, however, that these payment models or any other that align
with our strategy and our investments will be continued or will not be modified in a way
that could be disadvantageous to our business. • Contract with Payors: Our economic model relies on our capitated
partnerships with payers and CMSs that manage and market MA plans across
strategic value-based relationships with 32 different payors as of
December 31, 2021, including each of the top 5 national payors by number of MA patients. These existing contracts and relationships and our partners' understanding of the value of our model reduces the risk of entering into new markets as we typically have payor contracts before entering a new market. Maintaining, supporting, and growing these
relationships, especially as we enter new geographies, is essential for
our long-term success.
• Effectively manage the cost of care for our patients: capitalized nature
of our contracts with payers requires us to prudently manage medical expenses
expense of our patients. Our model of care emphasizes optimizing the
care setting as a way to avoid costly downstream healthcare costs,
such as acute care hospitalizations. Our patients, however, retain the
freedom to seek treatment in emergency rooms or hospitals; we do not limit
their access to care beyond the limits of their MA plan. Therefore, we are
liable for potentially large medical claims if we do not
manage the health of our patients. From
Holdings, Inc., a leading technology platform in New Yorkproviding access to specialist expertise. The acquisition enables Oak Street Healthto
integrate virtual specialty care into its existing model of care, which is
should significantly streamline the SEO process and improve
manage costs, enhance patient experience and provide comprehensive care far beyond traditional primary care.
• Contribution margin at the central level: we are striving to increase our number of
centers and the number of patients in each center over time. Because of
Significant fixed costs associated with operating and managing our centers
and the increases we are experiencing in patient contribution per patient
the longer a patient has been on the Oak Street platform, we generate
significantly better contribution margins at the center level (defined as
(i) patient earnings, excluding Medicare Part D earnings minus (ii) the sum
(a) medical expenses, excluding Medicare Part D expenses,
and (b) the cost of care, excluding depreciation and amortization)
the customer base of our centers is growing and maturing and our costs
decrease as a percentage of turnover. Therefore, the value of a center for
our business increases with time.
• Seasonality of our business: our operational and financial results,
including at-risk patient growth, per-patient revenue and medical costs, will experience some variability depending upon the time of year in which they are measured. We typically experience the largest portion of our
growth of at-risk patients in the first trimester, when enrollment in the regimen
selections made during the prior Annual Enrollment Period ("AEP") from
October 15th through December 7thof the prior year take effect. Our
revenue per patient will generally decline over the year. As
as the year progresses, our revenue per patient declines as new patients join us
usually with less complete or accurate documentation (and therefore
lower risk adjustment scores) and our attrition skews towards our
high-risk (and therefore higher-income) patients. Finally medical
costs vary seasonally depending on a number of factors including the
weather conditions that can cause certain illnesses, such as the flu
virus. We would therefore expect to see higher levels of per patient
medical expenses in the first and fourth quarters. Medical costs also depend
upon the number of business days in a period as periods with fewer business days will have lower medical costs all else equal.
• Investments in growth: we plan to continue to focus on long-term growth
through investments in our centres, our model of care and our sales and marketing. In
In addition, we expect our corporate, general and administrative expenses
increase in absolute dollars for the foreseeable future to support our growth and because of additional costs of being a public company. 69
The following table presents the main financial statistics of the Company for the years ended
For the twelve-months ended (dollars in millions) December 31, 2021 December 31, 2020 December 31, 2019 Centers 129 79 51 Total patients 153,500 97,000 79,000 At-risk 114,500 64,500 48,000 Fee-for-service 39,000 32,500 31,000 Total revenues $ 1,432.6 $ 882.8 $ 556.6 Loss from operations1 $ (414.0 ) $ (183.5 ) $ (103.9 ) Net loss1 $ (414.6 ) $ (192.1 ) $ (109.5 ) Platform contribution (Non-GAAP)2 $ 31.5 $ 77.5 $ 29.7 Patient contribution (Non-GAAP)2 $ 288.0 $ 233.5 $ 153.9 Adjusted EBITDA (Non-GAAP)2 $ (228.9 ) $ (92.6 ) $ (88.3 ) 1 Includes stock and unit-based compensation as shown in the table in the Results of Operations section below 2 See "-Non-GAAP Reconciliations" below for reconciliations to the most directly comparable financial measures calculated in accordance with GAAP and related disclosures
We define our centers as those primary care centers open for business and attending to patients at the end of a particular period. Our centers are leased or licensed by OSH MSO or an affiliated entity and, pursuant to the terms of certain contractual relationships between OSH MSO and our affiliated medical practices, made available for use by the medical practices in the provision of primary care services. Total Patients Total patients includes both at-risk Medicare Advantage and
Direct ContractingModel patients (those patients for whom we are financially responsible for their total healthcare costs) as well as fee-for-service Medicare patients (those patients for whom our affiliated medical groups submit claims to the federal government for direct reimbursement under the Medicare program or to MA plans which we do not have value-based arrangements). We define our total at-risk patients as at-risk patients whohave selected one of our affiliated medical groups as their provider of primary care medical services or have been aligned under the Direct Contracting Model as of the end of a particular period. We define our total fee-for-service Medicare patients as fee-for-service Medicare patients whocome to one of our centers for medical care at least once per year. A fee-for-service patient continues to be included in our patient count until the earlier to occur of (a) more than one year since the patient's last visit, (b) the patient communicates a desire to stop receiving care from us or (c) the patient passes away.
Non-GAAP Financial Measures
We utilize certain financial measures that are not calculated based on GAAP. Certain of these financial measures are considered "non-GAAP" financial measures within the meaning of Item 10 of Regulation S-K promulgated by the
SEC. We believe that non-GAAP financial measures provide an additional way of viewing aspects of our operations that, when viewed with the GAAP results, provide a more complete understanding of our results of operations and the factors and trends affecting our business. These non-GAAP financial measures are also used by our management to evaluate financial results and to plan and forecast future periods. However, non-GAAP financial measures should be considered as a supplement to, and not as a substitute for, or superior to, the corresponding measures calculated in accordance with GAAP. Non-GAAP financial measures used by us may differ from the non-GAAP measures used by other companies, including our competitors. To supplement our consolidated financial statements presented on a GAAP basis, we disclose the following Non-GAAP measures: platform contribution, patient contribution and Adjusted EBITDA as these are performance measures that our management uses to assess our operating performance. Because platform contribution, patient contribution and Adjusted EBITDA facilitate internal comparisons of our historical operating performance on a more consistent basis, we use these measures for business planning purposes and in evaluating acquisition opportunities. 70 -------------------------------------------------------------------------------- Platform and patient contributions are reconciled to loss from operations as the most directly comparable GAAP measure as set forth in the below tables under "Non-GAAP Reconciliations." Adjusted EBITDA is reconciled to net loss as the most directly comparable GAAP measure as set forth in the below table under "Non-GAAP Reconciliations." Our definitions of platform contribution, patient contribution and Adjusted EBITDA may differ from the definition used by other companies and therefore comparability may be limited. In addition, other companies may not publish this or similar metrics. Thus, our Non-GAAP Financial Measures should be considered in addition to, not as a substitute for, or in isolation from, measures prepared in accordance with GAAP, such as net loss and loss from operations. We provide investors and other users of our financial information with reconciliations of platform contribution, patient contribution and Adjusted EBITDA to loss from operations and net loss, respectively. We encourage investors and others to review our financial information in its entirety, not to rely on any single financial measure and to view platform contribution, patient contribution and Adjusted EBITDA in conjunction with loss from operations and net loss, respectively. Platform Contribution We define platform contribution as total revenues less the sum of medical claims expense and cost of care, excluding depreciation and amortization. We believe this metric best reflects the economics of our care model as it includes all medical claims expense associated with our patients' care as well as the costs we incur to care for our patients via the Oak Street Platform. As a center matures, we expect the platform contribution from that center to increase both in terms of absolute dollars as well as a percent of capitated revenue. This increase will be driven by improving patient contribution economics over time as well as our ability to generate operating leverage on the costs of our centers. Our aggregate platform contribution may not increase despite improving economics at our existing centers should we open new centers at a pace that skews our mix of centers towards newer centers. We would expect to experience seasonality in platform contribution due to seasonality in our patient contribution.
We define patient contribution as capitated revenue less medical claims expense. We view patient contribution as all of the dollars available for us to manage our business, including providing care to our patients, investing in marketing to attract new patients to the Oak Street Platform and supporting the organization through our central corporate infrastructure. We expect that patient contribution will grow year-over-year in absolute dollars as our at-risk patient base continues to grow. We would also expect that our patient contribution per-patient-per-month economics on our at-risk patients will continue to improve the longer our patients are part of the Oak Street Platform as we better understand their health conditions and the patients better engage with our care model. We would expect, however, that our aggregate patient contribution per-patient-per-month economics on our at-risk patients may decrease at an aggregate level to the extent our patient growth skews our mix of patients towards patients newer to the Oak Street Platform. We would also expect to experience seasonality in patient contribution per-patient-per-month with the first quarter generally generating the greatest patient contribution per-patient-per-month, decreasing for the rest of the year. This seasonality is primarily driven by our adding new patients to the Oak Street Platform throughout the year,
whogenerally have lower per-patient capitated revenue compared to our existing patient base.
We define adjusted EBITDA as net loss excluding interest expense and other income/ expense, income taxes, depreciation and amortization, transaction/ offering related costs and stock and unit-based compensation. We include adjusted EBITDA in this Annual Report because it is an important measure upon which our management assesses and believes investors should assess our operating performance. We also consider adjusted EBITDA to be an important measure because it helps illustrate underlying trends in our business and our historical operating performance on a more consistent basis. 71
The following table sets forth our consolidated statements of operations data for the periods indicated: For the twelve-months ended (dollars in millions) December 31, 2021 December 31, 2020 December 31, 2019 Revenues: Capitated revenue $ 1,397.0 $ 851.3 $ 539.9 Other revenue 35.6 31.5 16.7 Total revenues 1,432.6 882.8 556.6 Operating expenses: Medical claims expense 1,109.0 617.8 386.0 Cost of care, excluding depreciation and amortization (1) 293.7 187.5 140.9 Sales and marketing (2) 119.4 64.2 46.2 Corporate, general and administrative (3) 306.7 185.6 79.6 Depreciation and amortization 17.8 11.2 7.8 Total operating expenses 1,846.6 1,066.3 660.5 Loss from operations $ (414.0 ) $ (183.5 ) $ (103.9 ) Other income/(expense): Interest expense, net (2.5 ) (8.7 ) (5.7 ) Other - 0.1 0.1 Total other expense (2.5 ) (8.6 ) (5.6 ) Income before income taxes and non-controlling interests $ (416.5 ) $ (192.1 ) $ (109.5 ) Provision for income taxes (1.9 ) - - Net loss $ (414.6 ) $ (192.1 ) $ (109.5 ) Net loss attributable to noncontrolling interests 5.2 4.1 1.6 Net loss attributable to the Company $ (409.4 ) $ (188.0 ) $ (107.9 ) (1) Includes stock-based compensation, as follows: $ 1.6 $ - $ - (2) Includes stock-based compensation, as follows: 3.4 1.3 - (3) Includes stock-based compensation, as follows: $ 156.4 $ 77.3 $ 4.1 72
The following table sets forth our results of operations for the periods presented as a percentage of our total revenues for such periods. The percentages presented in the following tables may not correspond due to rounding.
For the twelve-months ended December 31, 2021 December 31, 2020 December 31, 2019 Revenues: Capitated revenue 98 % 96 % 97 % Other revenue 2 % 4 % 3 % Total revenues 100 % 100 % 100 % Operating expenses: Medical claims expense 77 % 70 % 69 % Cost of care, excluding depreciation and amortization 21 % 21 % 25 % Sales and marketing 8 % 7 % 8 % Corporate, general and administrative 21 % 21 % 14 % Depreciation and amortization 1 % 1 % 1 % Total operating expenses 129 % 121 % 119 % Loss from operations (29 )% (21 )% (19 )% Other income/(expense): Interest expense, net (0 )% (1 )% (1 )% Other 0 % 0 % 0 % Total other expense (0 )% (1 )% (1 )% Income before income taxes and non-controlling interests (29 )% (22 )% (20 )% Provision for income taxes (0 )% 0 % 0 % Net loss (29 )% (22 )% (20 )% Net loss attributable to noncontrolling interests 0 % 0 % 0 % Net loss attributable to the Company (29 )% (21 )% (20 )%
Comparison of the year ended
Total revenues For the twelve-months ended Change (dollars in millions) December 31, 2021 December 31, 2020 $ % Revenues: Capitated revenue $ 1,397.0 $ 851.3
$ 545.764 % Other revenue 35.6 31.5 4.1 13 % Total revenues $ 1,432.6 $ 882.8 $ 549.862 % Capitated revenue was $1,397.0 millionfor the year ended December 31, 2021, an increase of $545.7 million, or 64%, compared to $851.3 millionfor the year ended December 31, 2020. This increase was driven primarily by increases in our at-risk patient base and our capitated rates. For the year ended December 31, 2021, we recognized approximately $20.8 millionof capitated revenue that was primarily earned in 2020 but was recorded in the year-ended December 31, 2021. For the year ended December 31, 2020, we recognized approximately $10.0 millionof capitated revenue that was earned in 2019 but was recorded in the year-ended December 31, 2020. This increase was primarily due to patient retroactivity and rate increases due to final risk score adjustments. 73 -------------------------------------------------------------------------------- Other revenue was $35.6 millionfor the year ended December 31, 2021, an increase of $4.1 million, or 13%, compared to $31.5 millionfor the year ended December 31, 2020. The increase was driven primarily by higher fee-for-service revenue resulting from an increase in our patient base of approximately 20% and an increase in the number of centers that we operate. Operating Expenses For the twelve-months ended Change December 31, December 31, (dollars in millions) 2021 2020 $ % Medical claims expense $ 1,109.0 $ 617.8 $ 491.280 % Cost of care, excluding depreciation and amortization 293.7 187.5 106.2 57 % Sales and marketing 119.4 64.2 55.2 86 % Corporate, general and administrative 306.7 185.6 121.1 65 % Depreciation and amortization 17.8 11.2 6.6 59 % Total operating expenses $ 1,846.6 $ 1,066.3 $ 780.373 % Medical claims expense was $1,109.0 millionor 77% of total revenues for the year ended December 31, 2021, an increase of $491.2 million, or 80%, compared to $617.8 millionor 70% of total revenues for the year ended December 31, 2020. The increase was primarily due to an increased number of total patients under capitated arrangements as well as increases in medical costs per patient. The increase in cost per patient year over year is as a result of increased COVID-19 admissions, non-COVID-19 admissions and new patients. Additionally, medical claims expense of $6.7 millionfor the year ended December 31, 2021was the result of an increase in prior period incurred claims related to fiscal year 2020. This is compared to medical claims expense of $11.0 millionfor the year ended December 31, 2020that were related to incurred claims from fiscal year 2019. The decrease in the prior period adjustments was driven by favorable change in prior period development. Cost of care, excluding depreciation and amortization was $293.7 millionor 21% of total revenues for the year ended December 31, 2021, an increase of $106.2 million, or 57%, compared to $187.5 millionor 21% of total revenues for the year ended December 31, 2020. The increase was primarily driven by increases in salaries and benefits of $59.9 million, medical equipment of $12.4 million, and occupancy costs of $28.0 million, due to the growth in both the number of centers we operate and our patient base. Additionally, during the year ended December 31, 2020, we recorded $5.4 millionfrom CARES Act Provider Relief Funds to offset certain COVID-19 related expenses, in cost of care, excluding depreciation and amortization. For the year ended December 31, 2021, $3.6 millionof such funds were recorded against cost of care, excluding depreciation and amortization. Sales and marketing expense was $119.4 millionor 8% of total revenues for the year ended December 31, 2021, an increase of $55.2 million, or 86%, compared to $64.2 millionor 7% of total revenues for the year ended December 31, 2020. The increase was driven by greater advertising spend of $35.7 millionto drive new patients to our clinics and net headcount growth of $17.1 million. Sales and marketing expenses for the year ended December 31, 2020were partially depressed during the COVID-19 pandemic due to temporary suspension of community outreach roles and other marketing initiatives from March through September 2020, which drive new patients to our platform. Corporate, general and administrative expense was $306.7 millionor 21% of total revenues for the year ended December 31, 2021, an increase of $121.1 million, or 65%, compared to $185.6 millionor 21% of total revenues for the year ended December 31, 2020. The increase was primarily driven by greater salaries and benefits of $99.0 million, which includes an increase in stock and unit-based compensation expense of $79.1 millionprimarily due pre-IPO equity issuances and the modification of vesting terms for pre-IPO awards that occurred post IPO (2020 included approximately four and a half months of expense due to timing of our IPO), to support the growth of our business. As a result of being a public company, insurance and legal expenses increased $13.6 million. Depreciation and amortization expense was $17.8 millionor 1% of total revenues for the year ended December 31, 2021, an increase of $6.6 million, or 59%, compared to $11.2 millionor 1% of total revenues for the year ended December 31, 2020. The increase was primarily due to capital expenditures purchased to support the continued growth of our business.
Other income (expenses)
Interest expense was
$(2.5) millionfor the year ended December 31, 2021, a decrease of $6.2 millioncompared to $(8.7) millionfor the year ended December 31, 2020. The decrease was primarily due to the payoff of outstanding debt and related interest from the Hercules Loan Agreement on August 11, 2020and limited interest activity in 2021.
Comparison of the year ended
74 -------------------------------------------------------------------------------- For discussion related to changes in financial condition and the results of operations for fiscal year 2020 compared to fiscal year 2019, refer to Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2020, which was filed with the SECon March 10, 2021.
The following table provides a reconciliation between operating loss, the most comparable GAAP financial measure, and platform contribution:
For the twelve-months ended (dollars in millions) December 31, 2021 December 31, 2020 December 31, 2019 Loss from operations $ (414.0 ) $ (183.5 ) $ (103.9 ) Depreciation and amortization 17.8 11.2 7.8 Corporate, general and administrative 306.7 185.6 79.6 Sales and marketing 119.4 64.2 46.2 Stock and unit-based compensation 1.6 - - Platform contribution $ 31.5 $ 77.5 $ 29.7
The following table provides a reconciliation between operating loss, the most comparable GAAP financial measure, and patient contribution.
For the twelve-months ended (dollars in millions) December 31, 2021 December 31, 2020 December 31, 2019 Loss from operations $ (414.0 ) $ (183.5 ) $ (103.9 ) Other revenue (35.6 ) (31.5 ) (16.7 ) Cost of care, excluding depreciation and amortization 293.7 187.5 140.9 Sales and marketing 119.4 64.2 46.2 Corporate, general and administrative expenses 306.7 185.6 79.6 Depreciation and amortization 17.8 11.2 7.8 Patient contribution $ 288.0 $ 233.5 $ 153.9
The following table provides a reconciliation between net loss, the most comparable GAAP financial measure, and adjusted EBITDA:
For the twelve-months ended (dollars in millions) December 31, 2021 December 31, 2020 December 31, 2019 Net loss $ (414.6 ) $ (192.1 ) $ (109.5 ) Interest expense and other income 2.5 8.6 5.6 Depreciation and amortization 17.8 11.2 7.8 Stock and unit-based compensation 161.4 78.6 4.1 Transaction/offering related costs 5.9 1.1 3.7 Provision for income taxes (1.9 ) - - Adjusted EBITDA $ (228.9 ) $ (92.6 ) $ (88.3 ) Transaction/ offering related costs deducted in our Adjusted EBITDA calculation include one-time costs incurred related to private, public offerings and due diligence costs associated with our acquisitions. These expenses are included within corporate, general and administrative expenses in the consolidated statement of operations.
Cash and capital resources
75 -------------------------------------------------------------------------------- The Company's long-term capital policy is to: maintain a strong balance sheet and financial flexibility; reinvest in its care model; and invest in strategic opportunities that reinforce its care model and meet return requirements. To date, we have financed our operations through private placements of our equity securities, payments received from various payors, through the issuance of convertible notes and our IPO. We believe that our access to capital markets will provide adequate resources to fund our short-term and long-term operating and financing needs. As of
December 31, 2021, we had cash, restricted cash and cash equivalents of $120.4 million. Our cash and cash equivalents primarily consist of highly liquid investments in money market funds and cash. Since our inception and through December 31, 2021, we have generated significant operating losses from our operations as reflected in our accumulated deficit and negative cash flows from operations. We expect to continue to incur operating losses and generate negative cash flows from operations for the foreseeable future due to the investments we intend to continue to make in expanding our operations and sales and marketing and due to additional general and administrative costs we expect to incur in connection with supporting our growth and operating as a public company. As a result, we may require additional capital resources to execute strategic initiatives to grow our business. We believe that the proceeds from the convertible debt offering described below are sufficient to satisfy our anticipated cash requirements, which consist of capital expenditures, working capital, and potential acquisition and strategic transactions, for the next twelve months, even with the uncertainty arising from the COVID-19 pandemic, and for the foreseeable future. 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 and our future capital requirements could vary because of, many factors, including our growth rate, the timing and extent of spending to open new centers and expand into new markets and the expansion of 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.
Convertible Senior Notes,
March 2021, we issued $920.0 millionaggregate principal amount of 0% Convertible Senior Notes (the "Convertible Senior Notes"), including the exercise in full of the initial purchasers' option to purchase up to an additional $120.0 million, in a private offering exempt from registration under the Securities Act of 1933. The Convertible Senior Notes are governed by an indenture ("Indenture"), dated as of March 16, 2021, between the Company and U.S. Bank National Association, as trustee. Total proceeds realized from the sale of the Convertible Senior Notes, net of debt issuance and offering costs of $22.1 million, were $897.9 million. The Convertible Senior Notes will not bear regular interest and the principal amount of the Convertible Senior Notes will not accrete. We will pay special interest, if any, as the sole remedy, at our election, relating to the failure to comply with our reporting and certain other obligations under the Indenture for the first 365 days after the occurrence of such an event. The Convertible Senior Notes are general senior, unsecured obligations of the Company and will mature on March 15, 2026, unless earlier redeemed, repurchased or converted. Refer to Note 8, Convertible Senior Notes, of the Notes to Consolidated Financial Statements included in this annual report. We used approximately $123.6 millionof the net proceeds to pay the cost of the capped call transactions. Through December 31, 2021, the Company invested $677.1 millionof the proceeds from the Convertible Senior Notes in marketable debt securities. We also used approximately $134.9 millionto acquire RubiconMD on October 20, 2021. We intend to use the remaining proceeds invested in marketable debt securities for general corporate purposes, which may include working capital, capital expenditures, and potential acquisitions and strategic transactions.
The Indenture contains customary covenants relating to timely filings and reports, and customary events of default. From
The following table presents a summary of our consolidated cash flows from operating, investing and financing activities for the periods indicated.
For the twelve-months ended December (dollars in millions) 31, 2021 December 31, 2020 $ Change % Change Net cash used in operating activities
$ (197.2 )$ (77.2 ) $ (120.0 ) 155 % Net cash used in investing activities (887.4 ) (21.7 ) (865.7 ) 3989 % Net cash provided by financing activities 785.3 476.3 309.0 65 % Net change in cash $ (299.3 )$ 377.4 $ (676.7 ) (179 )% Operating Activities For the year ended December 31, 2021, net cash used in operating activities was $(197.2) million, an increase of $(120.0) millioncompared to net cash used in operating activities of $(77.2) millionfor the year ended December 31, 2020. The principal contributors to the year-over-year change in the operating cash flows were as follows: • A net change of $114.8 millionin net loss and non-cash charges and credits, primarily due to an increase in net loss for the business, as noted above under "Results of Operations" offset by increased stock and unit-based compensation and non-cash operating lease charges; and
• A net decrease of
and liabilities resulting from o Changes in accounts receivable due to the timing of collections and the growth in the number of at-risk patients;
o Changes in liability for unpaid claims due to timing of payments
and growth in the number of at-risk patients; and o Changes in other current and long-term liabilities primarily due to new center openings.
For the year ended
December 31, 2021, net cash used in investing activities was $(887.4) million, an increase of $(865.7) millioncompared to net cash used in investing activities of $(21.7) millionfor the year ended December 31, 2020. The increase was primarily due to business combinations, including the acquisition of Rubicon as of October 2021, resulting in an outflow of $124.0 millionand increased capital expenditures for the continued growth in new centers. Additionally, we had an outflow of $870.7 millionrelated to the purchase of marketable debt securities, partially offset by $193.6 millionof proceeds from the sales and maturities of marketable debt securities.
Cash provided by financing activities for the year ended
December 31, 2021was $785.3 millionprimarily due $897.9 millionin proceeds from the issuance of the Convertible Senior Notes, partially offset by cash outflows of $123.6 millionrelated to the capped call transactions completed in March 2021. Cash provided by financing activities for the year ended December 31, 2020was $476.3 million, which was primarily due to net IPO proceeds of $351.2 million, proceeds of $224.4 millionfrom the issuance of redeemable investor units, partially offset by $85.8 millionin debt payments and the payment for repurchases of units of $19.4 millionas a result of the completed tender offer in 2020.
Contractual obligations and commitments
The contractual obligations of the Company at
Less than 1 More than 5 (dollars in millions) Total Year 1-3 Years 3-5 Years Years Convertible Senior Notes
$ 920.0$ - $ - $ 920.0$ - Operating Lease Obligations 226.4 25.3 46.8 41.9 112.4 Contingent Consideration 21.8 9.4 12.4 - - Other Obligations 134.6 6.3 30.8 32.1 65.4 Total $ 1,302.8$ 41.0 $ 90.0 $ 994.0 $ 177.877
-------------------------------------------------------------------------------- Convertible Senior Notes- We hold borrowings under our Convertible Senior Notes, which have a 0% interest rate. The Convertible Senior Notes are governed by an indenture ("Indenture"), dated as of
March 16, 2021, between the Company and U.S. Bank National Association, as trustee. Under the Indenture, the Convertible Senior Notes are general senior, unsecured obligations of the Company and will mature on March 15, 2026, unless earlier redeemed, repurchased or converted. Operating Lease Obligations- The Companyleases offices, operating facilities, vehicles and IT equipment, which are accounted for as operating leases. These leases have remaining lease terms of up to 30 years, inclusive of renewal or termination options that the Company is reasonably certain to exercise. Contingent Consideration- As part of the acquisition of RMD, the Company may be obligated to pay contingent consideration of up to a maximum earn-out of $60 millionduring the fiscal year 2022 or 2023 should the acquired company achieve certain internal usage volumes in the year following the acquisition. We recorded the contingent consideration at fair value by calculating the present value of the probability weighted consideration expected to be transferred. We also recorded $0.1 millionof contingent consideration related to immaterial acquisitions of medical practices. The key unobservable inputs used to determine the fair value are the probabilities of achieving the stated objectives. Other Obligations- The Humana Alliance Provision contains an arrangement for a license fee that is 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 and is included in cost of care expenses in the consolidated statement of operations.
Emerging Growth Company Status
Based on the aggregate worldwide market value of our shares of common stock held by our non-affiliate stockholders as of
December 31, 2021, we have become a "large-accelerated filer" and have lost emerging growth status for the year ended December 31, 2021. We are no longer exempt from the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002, as amended, and our independent registered public accounting firm will evaluate and report on the effectiveness of internal control over financial reporting.
Accounting election of the JOBS law
The JOBS Act permits an emerging growth company to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. On
June 30, 2021, the last business day of the Company's second fiscal quarter in 2021, the market value of the Company's common stock held by non-affiliates exceeded $700 million. Accordingly, the Company was deemed a large-accelerated filer as of December 31, 2021, and can no longer take advantage of the extended timeline to comply with new or revised accounting standards applicable to public companies beginning with this Annual Report on Form 10-K.
Significant Accounting Policies and Estimates
Management prepared the consolidated financial statements of the Company under accounting principles generally accepted in
the United States. The application of these principles requires the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, revenue and expenses and related disclosures of contingent assets and liabilities. We believe that our estimates, judgments and assumptions are reasonable based upon available information and our past experience; we evaluate our estimates on an ongoing basis. Accordingly, actual results could materially differ from these estimates under different assumptions or conditions, impacting our reported results of operations and financial condition. We refer to accounting estimates of this type as critical accounting policies, which we further discuss below.
Please refer to Note 2, “Summary of Significant Accounting Policies” in the Notes to the Consolidated Financial Statements (Part IV, Item 15) for a summary of our significant accounting policies. Some of the most critical policies and estimates include capitation income, medical expenses, business combinations, goodwill and intangible assets, and impairment of long-lived assets.
The transaction price for our capitated payor contracts is variable as it primarily includes per patient, per month ("PPPM") fees associated with unspecified membership. PPPM fees can fluctuate throughout the contract based on the health status (acuity) of each individual enrollee. In certain contracts, PPPM fees also include "risk adjustments" for items such as performance incentives, performance guarantees and risk shares. The capitated revenues are recognized based on the estimated PPPM earned net of projected performance incentives, performance guarantees, risk shares and rebates because we are able to reasonably estimate the ultimate 78 -------------------------------------------------------------------------------- PPPM payment of these contracts. We recognize revenue in the month in which eligible members are entitled to receive healthcare benefits. Subsequent changes in PPPM fees and the amount of revenue to be recognized are reflected through subsequent period adjustments to properly recognize the ultimate capitation amount. We also assess the profitability of our capitation arrangements to identify contracts where current operating results or forecasts indicate probable future losses. If anticipated future variable costs exceed anticipated future revenues, a premium deficiency reserve is recognized. Certain third-party payor contracts include a Medicare Part D payment related to pharmacy claims, which is subject to risk sharing through accepted risk corridor provisions. Under certain agreements the fund risk allocation is established whereby we, as the contracted provider, receive only a portion of the risk and the associated surplus or deficit. We estimate and recognize an adjustment to Part D capitated revenues related to these risk corridor provisions based upon pharmacy claims experience to date, as if the annual risk contract were to terminate at the end of the reporting period. For our capitated revenue arrangements, we evaluate whether we are the principal, and report revenues on a gross basis, or an agent, and report revenues on a net basis. In this assessment, we consider if we obtain control of the specified services before they are transferred to our customers, as well as other indicators such as the party primarily responsible for fulfillment. We review our assumptions and adjust these estimates accordingly on a quarterly basis. Our consolidated financial statements could be materially impacted if actual risk scores are different from the estimated risk scores. If our accrual estimates for risk scores at
December 31, 2021were to differ by +/- 5%, the impact on revenues would be approximately $2.7 million.
Medical claims expenses are costs for third party healthcare service providers that provide medical care to our patients for which we are contractually obligated to pay through our full-risk capitation arrangements. The estimated reserve for our liability for incurred and not reported claims is included in the liability for unpaid claims in the consolidated balance sheets. Actual claims expense will differ from the estimated liability due to factors in estimated and actual member utilization of health care services, the amount of charges and other factors. We assess our estimates with an independent actuarial expert to ensure our estimates represent the best, most reasonable estimate given the data available to us at the time the estimates are made. The actuarial models consider factors such as time from date of service to claim processing, seasonal variances in medical care consumption, health care professional contract rate changes, medical care utilization and other medical cost trends, membership volume and demographics, the introduction of new technologies and benefit plan changes. We review our assumptions and adjust these estimates accordingly on a quarterly basis. Our consolidated financial statements could be materially impacted if actual claims expense is different from our estimates. If our liability for incurred and not reported claims at
December 31, 2021were to differ by +/- 5%, the impact on medical claims expense would be approximately $13.3 million.
The Company accounts for business combinations using the acquisition method of accounting, which requires that once control is obtained, all the assets acquired and liabilities assumed be recorded at their respective fair values at the date of acquisition. The determination of fair values of assets and liabilities acquired requires estimates. The determination of fair values of assets and liabilities acquired requires estimates and the use of valuation techniques when market value is not readily available. For intangible assets, the Company generally uses the income approach to determine fair value. The income approach requires management to make significant estimates and assumptions. These estimates and assumptions primarily include, but are not limited to: discount rates, terminal growth rates, royalty rates, forecasts of revenue, operating income, depreciation, amortization and capital expenditures. The discount rates applied to the projections reflect the risk factors associated with those projections. Our acquisitions may also include contingent consideration, or earn-out provisions, which provide for additional consideration to be paid to the seller if certain future conditions are met. These earn-out provisions are estimated and at fair value at the acquisition date based on certain internal volumes in the year following the acquisition. Although the Company believes its estimates of fair value are reasonable, actual financial results could differ from those estimates due to the inherent uncertainty involved in making such estimates. Changes in assumptions concerning future financial results or other underlying assumptions could have a significant impact on the determination of the fair value of the intangible assets acquired.
Judgment is also required to determine the useful life of the intangible asset.
Goodwillrepresents the excess of consideration paid over the fair value of net assets acquired through business acquisitions. Goodwillis not amortized but is tested for impairment at least annually. We test goodwill for impairment annually on October 1stor more frequently if triggering events occur or other impairment indicators arise which might impair recoverability. These events or circumstances would include a significant change in the business climate, legal factors, operating performance indicators, competition, sale, disposition of a significant portion of the business or other factors.
Impairment of long-lived assets
The Company evaluates the recoverability of long-lived assets whenever events or changes in circumstances indicate that the carrying value of such an asset may not be recoverable. The evaluation of long-lived assets is performed at the lowest level of identifiable cash flows. Long-lived assets related to the Company's centers include property, plant and equipment, definite-lived intangibles, right of use assets as well as operating lease liabilities. If the asset group fails the recoverability test, then an impairment charge is determined based on the difference between the fair value of the asset group compared to its carrying value. Fair value of the asset group is generally determined using an income approach based on cash flows expected from the use and eventual disposal of the asset group.
To determine the fair value of the group of assets, management must estimate a number of factors, including expected future cash flows and discount rates. Although we believe these estimates to be reasonable, actual results could differ from these estimates due to the inherent uncertainty in making such estimates.
Recent accounting pronouncements
See Note 2 to our consolidated financial statements (Part IV, Item 15) "Summary of Significant Accounting Policies-Recent Accounting Pronouncements" for more information.
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