BRIGHT HEALTH GROUP INC. – 10-K – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion summarizes the significant factors affecting our operating results, financial condition, liquidity, and cash flows as of and for the periods presented below. The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and the Notes to Consolidated Financial Statements included elsewhere in this Annual Report. The statements in this discussion regarding industry outlook, our expectations regarding our future performance, liquidity, and capital resources, and all other non-historical statements in this discussion are forward-looking statements and are based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management. Actual results could differ materially from those discussed in or implied by forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Annual Report, particularly under "Forward-Looking Statements" and Item 1A - Risk Factors.
Business Overview
Bright Health Group, Inc. ("Bright Health ," "we," "our," "us," or the "Company") was founded in 2015 to transform healthcare. Although 2022 was a year of significant transition for our business, our mission remains the same: Making Healthcare Right. Together. It is built upon the belief that by connecting and aligning the best local resources in healthcare delivery with the financing of care, leveraging what we call the "Value Layer" of healthcare, we can drive a superior consumer experience, reduce systemic waste, lower costs, and optimize clinical outcomes.Bright Health Group consists of two reportable segments within our continuing operations:Consumer Care and Bright HealthCare . Additionally, we have one reportable segment in our discontinued operations:Bright HealthCare - Commercial. Consumer Care. Our value-driven care delivery business that manages risk in partnership with external payors. Consumer Care, aims to significantly reduce the friction and current lack of coordination between payors and providers to enable a truly consumer-centric healthcare experience. As ofDecember 2022 , Consumer Care delivers high-quality virtual and in-person clinical care through its 74 owned primary care clinics within an integrated care delivery system. Through these risk-bearing clinics and our affiliated network of care providers, Consumer Care maintained over 579,000 unique patient relationships as ofDecember 31, 2022 , approximately 530,000 of which are served through value-based arrangements, across multiple payors.Bright HealthCare . Our delegated senior managed care business that partners with a tight group of aligned providers inCalifornia .Bright HealthCare delivers simple, personal, and affordable financing solutions that are focused on consumer retail healthcare and delivered throughBright Health's alignment model. As ofDecember 31, 2022 ,Bright HealthCare's MA products served over 125,000 lives and generally focus on higher risk, special needs, or other traditionally underserved populations.Bright HealthCare - Commercial. Included in our discontinued operations, our Commercial healthcare financing and distribution business focused on commercial plans. InOctober 2022 , we announced that we will no longer offer commercial health plans in 2023.
Key Factors Affecting Our Performance
We believe that the growth and future success of our business depends on a number of factors described below. While each of these factors presents significant opportunities for our business, they also pose important challenges that we must successfully address to sustain our growth and continue to improve results of operations.
Consumer Care's ability to deliver and enable high-quality, value-based care
drives revenue
Our Consumer Care business supports and manages providers in value-based and fee-for-service contracts with payors. We help organizations enter value-based arrangements designed around their needs, while simultaneously empowering them with the tools and capabilities necessary to maximize their success. In order to drive financial performance, our Consumer Care business must effectively manage risk and continue to develop and deliver tools and services supporting both managed and affiliated providers. 57
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Consumer Care's ability to identify and align with high-performing care delivery
partners drives performance
Our Consumer Care business engages providers through a variety of alignment
options ranging from having providers participate in our networks to having
providers employed by us. We must continue to build and maintain an ecosystem of
care delivery assets capable of supporting our third-party payors.
Consumer Care's ability to grow our consumer base, inclusive of growth in our
ACO Reach membership
Consumer Care grows its consumer base through contractual relationships with
third party payors, alignment of consumers participating in the ACO Reach
program as well as patient satisfaction.
revenue growth
Bright HealthCare MA products are primarily sold for the following year through an annual enrollment period. Outside of an annual selling season, MA products typically can only be sold during Special Enrollment Periods ("SEPs") based on the consumer's eligibility status and certain life events. It is critical to effectively engage both prospective and existing consumers through our multi-channel distribution strategy. We aim to offer competitive benefits at an affordable price to meet the needs of our consumers. Historically, we have increased our MA consumer base during SEPs, given our consumers' eligibility to enroll during those periods. Our MA business is afforded additional in-year growth opportunity due to its focus on serving low-income seniors and special needs individuals, who can enroll in and change MA health plans at any time. Therefore, constant engagement with this population is critical to effectively retain membership and drive in-year growth.
data affects revenue
Portions of premium revenue from our MA plans are determined by the applicable CMS risk adjustment models, which compensate insurers based on the underlying health status (acuity) of insured consumers. CMS requires that a consumer's health status be documented annually and accurately submitted to CMS to determine the appropriate risk adjustment. Ensuring that complete and accurate health conditions of our consumers are captured within documentation submitted to CMS is critical to recognizing accurate risk adjustment, which is reflected in our revenue year-over-year.
reduces medical costs and Medical Cost Ratio ("MCR")
Bright HealthCare utilizes our Bright Health Networks to provide healthcare services primarily within its exclusive provider networks under capitated contracts and fee-for-service arrangements. Certain provider and payor contracts include value-based incentive compensation based on providers meeting contractually defined quality and financial performance metrics. To effectively manage medical costs,Bright HealthCare must ensure a consumer's healthcare needs are primarily delivered through itsCare Partners to recognize discounted contracted rates, which limits the amount of out-of-network utilization that can have an adverse financial impact on medical costs and MCR. Our business is generally affected by the seasonal patterns of medical expenses. With respect to MA plans, medical costs are impacted by the severity of the flu season, generally from December to March, and we typically experience slightly higher Part D medical costs early in the year, which decline toward the end of year due to standard plan design.
profitably
Bright Health Group , includingBright HealthCare and Consumer Care, needs to continue to adjust our costs to our more focused business. We must continue to act on our restructuring plan, aligning our expenses with the business over the course of the run-out period of the exited markets. 58
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Components of Our Results of Operations
Revenue
We generate revenue from premiums, including value-based provider revenue,
fee-for-service provider revenue received from consumers and payors,
Contracting
Premium revenue
Premium revenue within continuing operations is derived from Bright HealthCare
MA plans sold to consumers, as well as Consumer Care value-based capitation
revenue from serving patients.
Bright HealthCare MA premium revenue
The sources of MA premium revenue are Medicare Part C premiums related to consumers' medical benefit coverage and Part D premiums related to consumers' prescription drug benefit coverage. Medicare Part C premiums are comprised of CMS monthly capitation premiums that are risk adjusted based on CMS defined formulas using consumers' demographics and prior-year medical diagnoses. Medicare Part D premiums are comprised of CMS monthly capitation premiums that are risk adjusted, consumer billed premiums and CMS low-income premium subsidies for the Company's insurance risk coverage. Medicare Part D premiums are subject to risk sharing with CMS under the risk corridor provisions based on profitability of the Part D benefit.
Consumer Care premium revenue
Consumer Care premium revenue represents revenue under value-based arrangements entered into by Consumer Care'sValue Services Organization and affiliated medical groups in which the responsibility for control of an attributed patient's medical care is wholly transferred to such medical groups. Such revenue includes capitation payments, as well as quality incentive payments, and shared savings distributions payable upon achievement of certain financial and quality metrics. Value-based revenue shifts responsibility for control over the medical care delivered to attributed patients to the Company and aligns incentives around the overall well-being of the payor's consumers.
Direct Contracting revenue represents the revenue from participation in CMS' Global andProfessional Direct Contracting model ("DC Model") on our Consumer Care segment. Our two Direct Contracting Entities ("DCE's") participate in the DC Model through the global risk arrangement and assuming full risk for the total cost of care of aligned beneficiaries. As part of our participation in the DC Model, we are guaranteeing the performance of our care network of participating and preferred providers. The intention of the DC Model is to enhance the quality of care for Medicare FFS beneficiaries while reducing the administrative burden, supporting a focus on complex, chronically ill patients, and encouraging physician organizations that have not typically participated in Medicare FFS programs to serve Medicare FFS beneficiaries. OurDirect Contracting revenue is presented net of reinsurance costs. CMS redesigned the DC Model and renamed the model the ACO Realizing Equity, Access, andCommunity Health (REACH) Model ("ACO REACH Model") effectiveJanuary 1, 2023 .
Service revenue
Service revenue primarily represents revenue from fee-for-service payments received by Consumer Care's affiliated medical groups. These include patient copayments and deductibles collected directly from patients and payments from private and government payors based upon contractual terms that define the fee-for-service reimbursement for specific procedures performed.
Investment income
The sources of investment income are interest income and realized gains and
losses derived from the Company's investment portfolio that is comprised of debt
securities of the
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investment grade, money market funds and various other securities, as well as
realized and unrealized gains and losses from equity securities.
Operating Expenses
Medical costs
Medical costs consist of reimbursements to providers for medical services, costs of prescription drugs, supplemental benefits, risk share payments to payors, and quality incentive, management fees and shared savings compensation to providers net of any reinsurance recoveries. The Company contracts with hospitals, physicians and other providers of healthcare primarily within its exclusive provider networks under fee-for-service and value-based arrangements. Emergency medical services incurred out-of-network are a covered benefit to consumers and reimbursed to providers according to the Company's payment policies that are based on applicable regulations. Prescription drug costs are determined based on the contracts with our pharmacy benefits managers, which includes pharmacy rebates that are received for certain drug utilization levels or contracted minimums. Dental, vision, and other supplemental medical services are provided to consumers under capitated arrangements. Reinsurance arrangements enable us to cede a specified percent of our premiums and claims to our third-party reinsurers. Under such contracts, the reinsurer is paid to cover claims-related losses over a specified amount, which mitigates catastrophic risk. We make quality incentive and shared savings compensation payments to certain providers in accordance with the terms of the contractual arrangement upon the achievement of certain financial and quality metrics. For value-based arrangements in which we bear limited risk, we recognize revenue on a net basis. Medical costs incurred from these arrangements are presented net of the associated premium revenue.
Operating Costs
Operating costs are comprised of the expenses necessary to execute the Company's business operations. These include employee compensation for salaries and related benefit costs, share-based compensation, outsourced vendor contracted service and technology fees, professional services, technological infrastructure and service fees, facilities costs and other administrative expenses. We expect operating costs to decrease with our exit of the Commercial market beginning with the 2023 plan year and the restructuring of our operations.
Restructuring Charges
Restructuring charges are comprised of contract termination costs and severance costs as part of a workforce reduction in 2022. The charges included within our continuing operations are those not directly attributable to our decision to exit the Commercial business for the 2023 plan year.
Goodwill Impairment
Goodwill impairment within our continuing operations is primarily comprised of the impairment of ourBright HealthCare reporting unit, formerly Medicare Advantage, that was primarily driven by an increase in the discount rate, which was impacted by higher interest rates and other market factors.
Intangible Assets Impairment
The intangible assets impairment within our continuing operations is primarily related to a full impairment of Centrum's reacquired contract with Bright HealthCare Florida as a result of our announcement that we will no longer offer Commercial products for the 2023 plan year.
Depreciation and Amortization
Depreciation and amortization consist of depreciation of property, equipment and
capitalized software, as well as amortization of definite-lived intangible
assets acquired in business combinations, including customer relationships,
trade names, reacquired contracts and developed technology.
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Table of Contents Other Income and Expenses Interest Expense
Interest expense consists of interest payments on credit facilities, as well as
amortization of debt issuance costs.
Income Tax Expense (Benefit)
Income tax expense (benefit) consists primarily of changes to our current and
deferred federal tax assets and liabilities net of applicable valuation
allowances.
Loss from Discontinued Operations
Commercial premium revenue
Premium revenue within discontinued operations is derived from commercial plans sold to consumers. The sources of commercial premium revenue are primarily IFP products which are comprised of APTC subsidies that are based on consumers' income levels and compensated directly by the federal government, as well as billed consumer premiums. IFP products reflect adjustments related to the ACA risk adjustment program, which adjusts premium revenue based on the demographic factors and health status of each consumer as derived from current-year medical diagnoses. Investment income The sources of investment income are interest income and realized gains and losses derived from the Company's investment portfolio that is comprised of debt securities of theU.S. government and other government agencies, corporate investment grade, money market funds and various other securities. Impairments recognized on our investments are also included within investment income of our discontinued operations. Medical costs Medical costs consist of reimbursements to providers for medical services, costs of prescription drugs, supplemental benefits, reinsurance and quality incentive and shared savings compensation to providers in relation to our Commercial products. The Company contracts with hospitals, physicians and other providers of healthcare primarily within its exclusive provider networks under fee-for-service and value-based arrangements. Emergency medical services incurred out-of-network are a covered benefit to consumers and reimbursed to providers according to the Company's payment policies that are based on applicable regulations. Prescription drug costs are determined based on the contracts with our pharmacy benefits managers, which includes pharmacy rebates that are received for certain drug utilization levels or contracted minimums. Dental, vision, and other supplemental medical services are provided to consumers under capitated arrangements. Reinsurance arrangements enable us to cede a specified percent of our premiums and claims to our third-party reinsurers. Under such contracts, the reinsurer is paid to cover claims-related losses over a specified amount, which mitigates catastrophic risk. We make quality incentive and shared savings compensation payments to certain providers in accordance with the terms of the contractual arrangement upon the achievement of certain financial and quality metrics.
Operating Costs
Operating costs within discontinued operations are direct expenses incurred in the operation of our Commercial business. These include employee compensation for salaries and related benefit costs, outsourced vendor contracted service and technology fees, professional services, technological infrastructure and service fees and other administrative expenses. Operating costs also include payments made by the discontinued operations to Consumer Care for the provision of Bright Health Networks services; selling and marketing expenses from external broker commissions and advertising, primarily related to consumer acquisition; and premium taxes, exchange fees and other regulatory costs, which are primarily based on premium revenue. Additionally, in prior years, the premium deficiency reserve expense for expected future losses in certain markets is included in operating costs. 61
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Table of Contents Restructuring Charges Restructuring charges are comprised of contract termination costs and severance costs as part of a workforce reduction in 2022 and impairment of long-lived assets. The charges included within our discontinued operations are those directly attributable to our decision to exit the Commercial business for the 2023 plan year. Goodwill Impairment
impairment of our
Commercial business, that was driven by our decision to exit the Commercial
markets beginning for the 2023 plan year.
Intangible Assets Impairment
Intangible assets impairment within our discontinued operations is comprised of the impairment of intangible assets related to our TrueHealth New Mexico ("THNM") acquisition, that was driven by our decision to exit the Commercial markets beginning for the 2023 plan year.
COVID-19 Impact
The ongoing COVID-19 pandemic, including its effect on the macroeconomic environment, and the response of local, state, and federal governments to contain and manage the virus, continues to impact our business. The emergence of COVID-19 variants inthe United States and abroad continues to prolong the risk of additional surges of the virus. In addition, certain new variants have emerged that appear more transmissible and more resistant to current vaccines. Some individuals have also delayed or are not seeking routine medical care to avoid COVID-19 exposure. These and other responses to the COVID-19 pandemic have meant that our MCR may be subject to additional uncertainty as certain segments of the economy and workforce come back on line, members resume care that may have been foregone, and the broader population becomes vaccinated. For the years endedDecember 31, 2022 , 2021, and 2020 the impact of COVID-19 increased our medical costs by$36.4 million ,$59.4 million , and$30.2 million respectively. Overall measures to contain the COVID-19 outbreak may remain in place for a significant period of time, as new strains of COVID-19 that appear to be more transmissible and may potentially evade vaccines have emerged. The duration and severity of this pandemic is unknown and the extent of the business disruption and financial impact depends on factors beyond our knowledge and control.
Business Update
Our mission - Making Healthcare Right. Together. - is built on the belief that by connecting and aligning the best local resources in healthcare delivery with the financing of care, we can deliver better outcomes, at a lower cost, for all consumers. InOctober 2022 , we announced that our business will be focused on delivering affordable healthcare for aging and underserved populations in the largest healthcare markets in the country and continuing to leverage our Fully Aligned Care Model with external payor partners and affiliate care providers. We will continue to build on the value-driven care model that we have been advancing since the start of the company. We have started implementing restructuring plans to adjust our costs to our more focused business in order to achieve our 2023 gross margin and operating expense targets. We will continue to take steps to adjust our expenses in-line with milestones in the marketplace business over the course of the run-out period of the exited markets. As we move forward into 2023, we are focusing our business on our Consumer Care care delivery business and our Medicare Advantage health plans inCalifornia . We have a scaled Medicare Advantage business inCalifornia , the largest market for seniors and underserved populations, and we have built a high performing Fully Aligned Care Model with ourCare Partners . InFlorida andTexas , our Consumer Care risk-bearing care delivery and provider affiliate management business continues to deliver differentiated results. We expect to expand our footprint over time serving the aging and 62
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underserved consumers in Medicare and the consumer marketplace, together with
our key health plan partners. We will also continue to grow our
Contracting
performance.
While we wind down the marketplace business, we will remain focused on the growth opportunities for ourBright HealthCare and Consumer Care businesses. We believe both businesses are in attractive markets with strong tailwinds, where we have differentiated offerings. We intend to manage each business to maximize operating profitability in 2023, as well as working to manage corporate expenses to maximize consolidated Adjusted EBITDA profitability.
We believe the near-term steps that we are taking to improve our performance
will optimize the business for long-term success.
Key Metrics and Non-GAAP Financial Measures
In addition to our GAAP financial information, we review a number of operating
and financial metrics, including the following key metrics, to evaluate our
business, measure our performance, identify trends affecting our business,
formulate our business plan and make strategic decisions.
Year Ended December
31,
2022 2021
2020
Bright HealthCare Consumers Served Medicare Advantage 125,000 117,000 62,000 Consumer Care Patients Value-Based Care Consumers 530,000 170,000 21,000 Key Metrics
Bright HealthCare Consumers Served
Consumers served includeBright HealthCare individual lives served via MA plans in markets across the country. We historically believed growth in the number of consumers for both our Commercial plans and Medicare Advantage plans was a key indicator of the performance of ourBright HealthCare business. However, givenBright HealthCare's decision to exit the commercial marketplace for the 2023 plan year, we expect Commercial consumers to decline to zero, and we will focus on growth in our Medicare Advantage consumers inCalifornia . The number of consumers served also informs our management of the operational, clinical, technological and administrative functional area needs that will require further investment to support future consumer growth.
Value-Based Care Consumers
Value-based care consumers are consumers attributed to providers contracted under varied value-based care delivery models in which the responsibility for control of an attributed patient's medical care is transferred, in part or wholly, to our Consumer Care managed medical groups. We believe growth in the number of value-based care consumers is a key indicator of the performance of our Consumer Care business. It also informs our management of the operational, clinical, technological and administrative functional area needs that will require further investment to support expected future patient growth. While we expect the number of value-based consumers Consumer Care supports in 2023 to decline compared to 2022 due toBright HealthCare's commercial market exits, we expect external value-based payor contracts as well as the conversion of fee for service patients into value-based patients, will increase the number of patients managed in value-based arrangements over time. Year Ended December 31, ($ in thousands) 2022 2021 2020 Net Loss $ (1,359,880) (1,178,365) (248,442) Adjusted EBITDA (1) $ (233,489) (321,317) (151,692)
(1)See "Non-GAAP Financial Measures" below for reconciliations to the most
directly comparable financial measures calculated in accordance with GAAP and
related disclosures.
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Table of Contents Non-GAAP Financial Measures Adjusted EBITDA We define Adjusted EBITDA as net loss excluding loss from discontinued operations, interest expense, income taxes, depreciation and amortization, any impairment of goodwill or intangible assets, adjusted for the impact of acquisition and financing-related transaction costs, share-based compensation, changes in the fair value of equity securities, changes in the fair value of contingent consideration, contract termination costs and restructuring costs. Adjusted EBITDA has been presented in this Annual Report as a supplemental measure of financial performance that is not required by, or presented in accordance with, GAAP, because we believe it assists management and investors in comparing our operating performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. Management believes Adjusted EBITDA is useful to investors in highlighting trends in our operating performance, while other measures can differ significantly depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which we operate and capital investments. Management uses Adjusted EBITDA to supplement GAAP measures of performance in the evaluation of the effectiveness of our business strategies, to make budgeting decisions, to establish discretionary annual incentive compensation and to compare our performance against that of other peer companies using similar measures. Management supplements GAAP results with non-GAAP financial measures to provide a more complete understanding of the factors and trends affecting the business than GAAP results alone. Adjusted EBITDA is not a recognized term under GAAP and should not be considered as an alternative to net income (loss) as a measure of financial performance or cash provided by operating activities as a measure of liquidity, or any other performance measure derived in accordance with GAAP. Additionally, this measure is not intended to be a measure of free cash flow available for management's discretionary use as we do not consider certain cash requirements such as interest payments, tax payments and debt service requirements. The presentation of this measure has limitations as an analytical tool and should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP. Because not all companies use identical calculations, the presentation of this measure may not be comparable to other similarly titled measures of other companies and can differ significantly from company to company. 64
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The following table provides a reconciliation of net loss to Adjusted EBITDA for the periods presented: Year Ended December 31, (in thousands) 2022 2021 2020 Net loss$ (1,359,880) $ (1,178,365) $ (248,442) Loss from discontinued operations (a) 721,915 855,255 87,220 EBITDA adjustments from continuing operations: Interest expense 12,821 7,230 - Income tax expense (benefit) 3,680 (26,521) (9,161) Depreciation and amortization 50,430 35,049 8,289 Goodwill impairment 71,225 - - Intangible assets impairment 42,611 - - Transaction costs (b) 1,661 2,064 4,950 Share-based compensation expense (c) 109,713 68,423 5,452 Change in fair value of equity securities (d) 80,231 (80,231) $ - Change in fair value of contingent consideration (e) 332 (4,221) - Contract termination costs (f) 1,241 - - Restructuring costs (g) 30,531 - - EBITDA adjustments from continuing operations 404,476 1,793 9,530 Adjusted EBITDA$ (233,489) $ (321,317) $ (151,692) (a)Beginning in the fourth quarter of 2022, Adjusted EBITDA excludes the impact of discontinued operations. The comparable period in 2021 has been recast to exclude these impacts. Loss from discontinued operations represents losses associated with the Commercial business segment that we exited at the end of 2022. The loss from discontinued operations includes over$180 million of investment impairments, restructuring costs, goodwill and intangibles impairments and other exit related costs for the twelve months endedDecember 31, 2022 , respectively. (b)Transaction costs include accounting, tax, valuation, consulting, legal and investment banking fees directly relating to business combinations and certain costs associated with our initial public offering. These costs can vary from period to period and impact comparability, and we do not believe such transaction costs reflect the ongoing performance of our business. (c)Represents non-cash compensation expense related to stock option and restricted stock unit award grants, which can vary from period to period based on a number of factors, including the timing, quantity and grant date fair value of the awards. (d)Beginning in 2022, Adjusted EBITDA excludes the impact of changes in unrealized gains and losses on equity securities. The comparable prior periods have been recast to exclude changes in unrealized gains and losses on equity securities. (e)Represents the non-cash change in fair value of contingent consideration from business combinations, which is remeasured at fair value each reporting period. (f)Represents amounts paid for early termination of existing vendor contracts. (g)Restructuring costs represent severance costs as part of a workforce reduction in 2022 and impairment of certain long-lived assets relating to our decision to exit the Commercial business for the 2023 plan year. 65
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Table of Contents Acquisitions EffectiveApril 30, 2020 , we acquiredUniversal Care, Inc. (d.b.a. Brand New Day) ("BND"), which is focused on serving primarily MA special needs consumers. ThisBright HealthCare acquisition was completed to bolster our MA platform and provide entry intoCalifornia . EffectiveDecember 31, 2020 , we acquired a 62% controlling interest inPremier Medical Associates of Florida, LLC ("PMA"). This Consumer Care acquisition was completed to enhance our clinical capabilities to better serve enrollees as part of ourFlorida market expansion in 2021. EffectiveMarch 31, 2021 , we acquired THNM, which offers policies available through the commercial market for individual on- and off-exchange and employer-sponsored health coverage. Included in our discontinued operations, this acquisition was completed to enter into a new state of strategic interest and to leverage THNM's strong local clinical model of care. EffectiveMarch 31, 2021 , we acquiredZipnosis, Inc. ("Zipnosis"), which is a telehealth platform that offers virtual care to health systems around theU.S. This Consumer Care acquisition was completed to enhance our proprietary technology platform, DocSquad, and our consumer and provider connectivity with Zipnosis' virtual care capabilities. EffectiveApril 1, 2021 , we acquiredCentral Health Plan of California, Inc. ("CHP"), an insurance provider of MA health maintenance organization ("HMO") services. ThisBright HealthCare acquisition was completed to gain synergies from leveraging CHP's clinical model andCalifornia consumer expertise to continue to expand our MA business in theCalifornia market. EffectiveJuly 1, 2021 , we acquired Centrum, a value-based primary care focused, multi-specialty medical group, serving Commercial, Medicare, and Medicaid consumers across multiple payors. This Consumer Care acquisition was completed for the incremental financial benefits achievable through our Fully Aligned Care Model, whereby Commercial, Medicare, and Medicaid consumers across multiple payors are cared for under value-based arrangements with Centrum. This model brings together the financing, distribution, and delivery of high-quality healthcare.
See Note 3 in the Notes to Consolidated Financial Statements for more
information regarding our business combinations.
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Table of Contents Results of Operations
The following table summarizes our audited consolidated statements of income
(loss) data for the years ended
(in thousands) Year Ended December 31, Consolidated Statements of Income (loss) and 2022 2021 2020 operating data: Revenue: Premium revenue$ 1,764,949 $ 1,390,330 $ 487,905 Direct Contracting revenue 654,087 - - Service revenue 48,013 42,469 18,514 Investment income (loss) (55,019) 80,234 8,468 Total revenue 2,412,030 1,513,033 514,887 Operating costs Medical costs 2,206,243 1,294,158 451,918 Operating costs 632,030 527,453 225,063 Restructuring charges 31,739 - - Goodwill impairment 71,225 - - Intangibles impairment 42,611 - - Depreciation and amortization 50,430 35,049 8,289 Total operating costs 3,034,278 1,856,660 685,270 Operating loss (622,248) (343,627) (170,383) Interest expense 12,821 7,230 - Other income (784) (1,226) - Loss from continuing operations before income taxes (634,285) (349,631) (170,383) Income tax expense (benefit) 3,680 (26,521) (9,161) Net loss from continuing operations (637,965) (323,110) (161,222) Loss from discontinued operations, net of tax (Note (721,915) (855,255) (87,220)
4)
Net loss (1,359,880) (1,178,365) (248,442) Net earnings from continuing operations attributable (95,664) (6,497) - to noncontrolling interests Series A preferred stock dividend accrued (37,889) - - Series B preferred stock dividend accrued (1,798) - - Net loss attributable to Bright Health$ (1,495,231) $ (1,184,862) $ (248,442) Group, Inc. common shareholders Adjusted EBITDA$ (233,489) $ (321,317) $ (151,692) Operating Cost Ratio (1) 26.2 % 34.9 % 43.7 % _______________________
(1)Operating Cost Ratio is defined as operating costs divided by total revenue.
2022 Compared to 2021
Total revenue increased by$899.0 million , or 59.4%, for the year endedDecember 31, 2022 as compared to the same period in 2021. The increase is largely attributable to our two DCEs aligned with our Consumer Care segment that began participating in the DC Model effectiveJanuary 1, 2022 , which contributed$654.1 million of the increase in total revenue. In addition, premium revenue increased$374.6 million , or 26.9%, due to organic growth of ourBright HealthCare business as well as a full year of CHP operations that was acquired onApril 1, 2021 . Also contributing to the premium revenue increase was an increase of over 360,000 value-based care consumers as well as organic increases in consumers served by ourBright HealthCare business. The increases in premium revenue andDirect Contracting revenue were partially offset by a reduction in investment income driven by changes in the fair value of investments in equity securities. 67
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Medical costs increased by$912.1 million , or 70.5%, for the year endedDecember 31, 2022 , as compared to the same period in 2021. Medical costs incurred associated with beneficiaries aligned to our DCEs contributed to the increase as well as organic growth in ourBright HealthCare business. In 2022, we also had a full year of medical costs from CHP that was acquired onApril 1, 2021 . Operating costs increased by$104.6 million , or 19.8%, for the year endedDecember 31, 2022 as compared to the same period in 2021. The increase in operating costs was primarily due to a$97.3 million increase in compensation and fringe benefits inclusive of share-based compensation expense. This increase is partially offset by the release of the$9.4 million premium deficiency reserve in the year endedDecember 31, 2022 that was accrued in the year endedDecember 31, 2021 for the then future expected losses in certain markets in 2022 in ourBright HealthCare segment. Our operating cost ratio of 26.2% for the year endedDecember 31, 2022 improved 870 basis points as compared to the same period in 2021. The decrease was primarily due to operating costs increasing at a slower rate than the increased premium revenues earned due to consumer growth and participating in the DC Model, as we gain leverage on our operating costs as we grow. We recognized$31.7 million of restructuring costs for the year endedDecember 31, 2022 for employee termination benefits, contract termination costs and long-lived asset impairments incurred in relation to the actions we have taken to restructure the Company's workforce and reduce expenses based on our updated business model. There were no restructuring costs in the year endedDecember 31, 2021 . We recognized$71.2 million of non-cash goodwill impairment for the year endedDecember 31, 2022 , which included$70.0 million in ourBright HealthCare segment. We also recognized$42.6 million of non-cash intangible assets impairment for the year endedDecember 31, 2022 , which included impairments at our Consumer Care segment. There were no impairments of goodwill or intangibles in the year endDecember 31, 2021 . Depreciation and amortization increased by$15.4 million , or 43.9%, for the year endedDecember 31, 2022 as compared to the same period in 2021. The increase is primarily due to a full year of amortization expense from 2021 acquisitions in the 2022 period compared to only portions of the 2021 period specifically the acquisition of CHP onApril 1, 2021 and Centrum onJuly 1, 2021 . Additionally, depreciation expense increased in 2022 due to depreciation related to capitalized software projects completed in the past year.
Interest expense increased
borrowings on the credit agreement we entered into
Income tax expense was$3.7 million for the year endedDecember 31, 2022 as compared to the$26.5 million income tax benefit for the year endedDecember 31, 2021 . The impact from income taxes varies from the federal statutory rate of 21.0% due to state income taxes, changes in the valuation allowance for deferred tax assets and adjustments for permanent differences. The expense for the year endedDecember 31, 2022 largely relates to amortization of originating goodwill from asset acquisitions and estimated state income taxes attributable to income earned in separate filing states without state net operating loss carryforwards. The overall tax benefit recognized during the year endedDecember 31, 2021 primarily relates to adjustments to the valuation allowance for federal and state deferred tax assets, as well as the effect of deferred taxes recorded as part of business combination accounting for the BND, Zipnosis, and CHP acquisitions
2021 Compared to 2020
Total revenue increased by$1.0 billion , or 193.9%, for the year endedDecember 31, 2021 as compared to the same period in 2020. The increase was largely driven by an increase in our Medicare Advantage consumers of approximately 55,000 consumer lives, or 88.7%, through both organic and inorganic growth. The year endedDecember 31, 2021 also included$781.8 million from the acquisitions of PMA, Zipnosis, CHP and Centrum and a full year of BND, which was acquired onApril 30, 2020 . These acquisitions were the primary driver of the increase in service revenue contributing$23.8 million for the year endedDecember 31, 2021 . In addition, investment income increased due to unrealized gains from investments in equity securities of$80.2 million .
Medical costs increased by
medical costs was driven by an increase in consumers through both organic growth
in our
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Bright HealthCare business and inorganic growth attributable to the acquisitions of PMA, CHP and Centrum, as well as a full year of BND. We also experienced an increase in medical costs from COVID-19 during the year endedDecember 31, 2021 . Operating costs increased by$302.4 million , or 134.4%, for the year endedDecember 31, 2021 as compared to the same period in 2020. The increase in operating costs was primarily due to increased marketing and selling expenses and increased compensation and benefit costs driven by an increase in employees and an increase in share-based compensation costs. Operating cost ratio of 34.9% for the year endedDecember 31, 2021 improved 880 basis points as compared to the same period in 2020. This was primarily due to operating costs increasing at a slower rate than revenue increases as the Company grew. Depreciation and amortization increased by$26.8 million , or 322.8%, for the year endedDecember 31, 2021 as compared to the same period in 2020. The increase was primarily due to an increase in amortization expense resulting from intangible assets acquired in the PMA, Zipnosis, CHP, and Centrum acquisitions, for which there were no comparable amounts in 2020 as well as the full year of amortization expense of the intangible assets acquired as part of the BND acquisition onApril 30, 2020 . Income tax benefit was$26.5 million and$9.2 million for the years endedDecember 31, 2021 and 2020 respectively. The overall tax benefit recognized during the year endedDecember 31, 2021 was primarily related to adjustments to the valuation allowance for federal and state deferred tax assets, as well as the effect of deferred taxes recorded as part of business combination accounting for the BND, Zipnosis, and CHP acquisitions. The overall tax benefit recognized during the year endedDecember 31, 2020 was primarily due to the tax impact of goodwill and intangible assets acquired as part of the BND acquisition in 2020.Bright HealthCare (in thousands) Year Ended December 31, Statements of income (loss) and operating data: 2022 2021 2020 Revenue: Premium revenue 1,652,045 1,297,273 480,112 Investment income (loss) 410 (80) 8,468 Total revenue 1,652,455 1,297,193 488,580 Operating expenses Medical costs 1,550,934 1,262,407 454,858 Operating costs 187,636 189,648 75,879 Goodwill impairment 70,017 - - Depreciation and amortization 17,702 14,245 1,477 Total operating expenses 1,826,289 1,466,300 532,214 Operating loss$ (173,834) $ (169,107) $ (43,634) Medical Cost Ratio (MCR) 93.9 % 97.3 % 94.7 % 2022 Compared to 2021 Premium revenue increased by$355.3 million , or 27.4%, for the year endedDecember 31, 2022 as compared to the same period in 2021. The increase was driven by favorable premium rates and an increase in consumer lives of approximately 15,000 year over year. Additionally, the increase is attributable to a full year of revenue from our acquisition of CHP, which occurred onApril 1, 2021 Medical costs increased by$288.5 million , or 22.9%, for the year endedDecember 31, 2022 as compared to the same period in 2021. The impact of COVID-19 increased our medical costs$36.4 million and$59.4 million for the years endedDecember 31, 2022 and 2021, respectively. The increase in medical costs was primarily driven by an increase in members, 69
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partially offset by favorable medical cost rates. Additionally, the increase is attributable to a full year of medical costs from our acquisition of CHP, which occurred onApril 1, 2021 Our MCR of 93.9% for the year endedDecember 31, 2022 decreased 340 basis points as compared to the same period in 2021. Our California Medicare Advantage operations achieved a MCR of 92.0%, excluding prior period claims; this metric excludes the MA markets that we have exited as ofDecember 31, 2022 . Our MCR for the year endedDecember 31, 2022 included a 220 basis point unfavorable impact from COVID-19 related costs as compared to 460 basis point unfavorable impact from COVID-19 included in our MCR for the year endedDecember 31, 2021 .
Operating costs decreased by
remained relatively flat year over year due to increases in costs as a result of
consumer growth and compensation and benefit costs that were offset by the
release of the PDR.
We recognized a
ended
discount rate due to higher interest rates and other market factors.
Depreciation and amortization increased by$3.5 million , or 24.3%, for the year endedDecember 31, 2022 as compared to the same period in 2021. The increase was primarily due to a full year of amortization expense of the intangible assets acquired in the CHP acquisition that occurred onApril 1, 2021 .
2021 Compared to 2020
Premium revenue increased by$817.2 million , or 170.2%, for the year endedDecember 31, 2021 as compared to the same period in 2020. The year endedDecember 31, 2021 included$679.1 million of revenue from our acquisition of CHP onApril 1, 2021 , and the impact of a full year of revenue from BND, which was acquired onApril 30, 2020 . We also experienced volume increases due to organic growth. Medical costs increased by$807.5 million , or 177.5%, for the year endedDecember 31, 2021 as compared to the same period in 2020. For the years endedDecember 31, 2021 and 2020, the impact of COVID-19 increased our medical costs by$59.4 million and$30.2 million , respectively. The increase in 2021 is also due to an increase in consumers driven by organic growth, unfavorable medical cost rates and inorganic growth as a result of the acquisition of CHP. Our MCR of 97.3% for the year endedDecember 31, 2021 increased 260 basis points as compared to the same period in 2020. Our MCR for the year endedDecember 31, 2021 included a 460 basis point unfavorable impact from COVID-19. Our MCR for the year endedDecember 31, 2020 included a 630 basis point unfavorable impact from COVID-19 costs. Our MCR for the year endedDecember 31, 2021 , was also impacted by an increase in medical costs from product mix as a result of a full year of activity from BND and the acquisition of CHP.
Operating costs increased by
operating costs was primarily a result of higher compensation and benefit costs
driven by an increase in employees to support the growing business.
Additionally, operating costs increased from a full year of operating costs
related to BND and the CHP acquisition.
Depreciation and amortization increased by
year ended
increase was primarily due to a full year of amortization expense of the
intangible assets acquired in the BND acquisition as well as nine months of
amortization expense of the intangible assets acquired in the CHP acquisition.
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Table of Contents Consumer Care ($ in thousands) Year Ended December 31, Statements of income (loss) data: 2022 2021 2020 Revenue: Premium revenue $ 1,141,936 $ 338,391 $ 7,793 Direct Contracting revenue 654,087 - - Service revenue 48,013 42,469 29,354 Investment income (loss) (55,429) 80,314 - Total revenue 1,788,607 461,174 37,147 Operating expenses Medical costs 1,844,578 432,318 - Operating costs 191,702 125,444 43,959 Goodwill impairment 1,208 - - Intangible assets impairment 42,611 - - Depreciation and amortization 24,252 18,333 1,895 Total operating expenses 2,104,351 576,095 45,854 Operating loss $ (315,744) $ (114,921) $ (8,707) 2022 Compared to 2021 Consumer Care premium revenue increased by$803.5 million , or 237.5%. for the year endedDecember 31, 2022 as compared to the same period in 2021. The increase in premium revenue is primarily due to the full risk transfer for a portion of our commercial business inFlorida andTexas to our Consumer Care segment. Also contributing to the increase is the full year of revenue from Centrum, acquired onJuly 1, 2021 . We began participating in the DC Model beginning inJanuary 2022 through two DCEs aligned with our Consumer Care business.Direct Contracting revenue was$654.1 million for the year endedDecember 31, 2022 . This revenue was attributable to the alignment of beneficiaries to our DCE entities, which numbered approximately 46,000 atDecember 31, 2022 . Service Revenue increased by$5.5 million , or 13.1%, for the year endedDecember 31, 2022 as compared to the same period in 2021. The acquisition of Zipnosis onMarch 31, 2021 contributed to the year-over-year increase in service revenue. We had investment loss of$55.4 million for the year endedDecember 31, 2022 as compared to investment income of$80.3 million for the year endedDecember 31, 2021 . The investment income and loss in both periods was due to gains and losses on equity securities. As ofDecember 31, 2022 we hold no equity securities, so we do not expect investment income or losses within the Consumer Care segment going forward. Medical costs increased by$1.4 billion , or 326.7%, for the year endedDecember 31, 2022 as compared to the same period in 2021. The increase in medical costs was primarily driven by an increase in patient lives as a result of the Centrum acquisition, new market expansion and our participation inDirect Contracting beginning inJanuary 2022 . Operating costs increased$66.3 million , or 52.8%, for the year endedDecember 31, 2022 as compared to the same period in 2021. The increase in operating costs was primarily due to higher compensation and benefit costs as a result of more employees and outsourced vendor fees in support of consumer growth. In addition, the year endedDecember 31, 2022 included two additional quarters of costs from Centrum as a result of the acquisition onJuly 1, 2021 .
We recognized
ended
reacquired contract with Bright HealthCare Florida as a result of our decision
to no longer
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offer Commercial products for the 2023 plan year. We also recognized a
Depreciation and amortization increased$5.9 million , or 32.3%, for the year endedDecember 31, 2022 as compared to the same period in 2021. The increase was primarily due to the full year of amortization expense resulting from intangible assets acquired as part of the Centrum acquisition, which occurred onJuly 1, 2021 . 2021 Compared to 2020 Premium revenue increased by$330.6 million , or 4,242.2%, for the year endedDecember 31, 2021 as compared to the same period in 2020. The increase in premium revenue for the year endedDecember 31, 2021 includes$262.4 million of premium revenue from the acquisitions of PMA and Centrum, as well as an organic increase in patient lives.
Service revenue increased by
PMA, Zipnosis and Centrum contributed
increase in service revenue.
Investment income was
unrealized gains on equity securities acquired in 2021. Our Consumer Care
business did not hold any investments during the year ended
Medical costs were$432.3 million for the year endedDecember 31, 2021 , which were primarily driven by an increase in patient lives as a result of the PMA and Centrum acquisitions, as well as organic growth in our value-based arrangements. Operating costs increased by$81.5 million , or 185.4%, for the year endedDecember 31, 2021 as compared to the same period in 2020. The increase was primarily due to higher compensation and benefit costs as a result of additional employees and outsourced vendor fees in support of consumer growth, as well as costs from the PMA, Zipnosis and Centrum acquisitions.
Depreciation and amortization increased by
primarily due to amortization expense of
assets acquired for which there were no comparable amounts in 2020.
Discontinued Operations ($ in thousands) Year Ended December
31,
Statements of income (loss) data: 2022 2021 2020 Revenue: Premium revenue $ 3,998,622$ 2,512,384 $ 692,433 Service revenue 147 232 - Investment income (loss) (41,221) 3,740 - Total revenue 3,957,548 2,516,356 692,433 Operating expenses Medical costs 3,732,755 2,659,516 595,382 Operating costs 883,318 710,934 184,271 Restructuring costs 50,704 - - Goodwill impairment 4,147 - - Intangible assets impairment 6,720 - - Depreciation and amortization 145 435 - Total operating expenses 4,677,789 3,370,885 779,653 Operating loss $ (720,241)$ (854,529) $ (87,220) Medical Cost Ratio (MCR) 93.4 % 105.9 % 86.0 % 72
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InOctober 2022 , we announced that we will no longer offer commercial plans throughBright HealthCare in 2023. As a result, we exited the Commercial marketplace effectiveDecember 31, 2022 . We determined this exit represented a strategic shift that will have a material impact on our business and financial results that requires presentation as discontinued operations. The discontinued operations presentation has been retrospectively applied to all periods presented.
2022 Compared to 2021
Premium revenue increased by$1.5 billion , or 59.2%, for the year endedDecember 31, 2022 as compared to the same period in 2021. The increase in revenue, was driven by an increase in consumer lives of approximately 410,000 due to organic growth and entry into new markets in 2022 - particularly entry intoTexas . The increase was partially offset by increases in risk adjustment of$1.1 billion , inclusive of a$93.1 million increase in risk adjustment based on final settlement of the 2021 risk adjustment payable.
Service revenue was immaterial to the
the years ended
Investment income for the year endedDecember 31, 2022 was a loss of$41.2 million compared to income of$3.7 million due to a$67.7 million impairment of our available-for-sale securities portfolio resulting from our conclusion, as ofDecember 31, 2022 , that it was more likely than not that we would have to sell some of the securities before recovering the amortized cost basis due to our decision to exit the commercial business. This impairment is related to the decrease in the fair value of debt securities primarily driven by an increase in market interest rates since the time the securities were purchased. Medical costs increased by$1.1 billion , or 40.4%, for the year endedDecember 31, 2022 as compared to the same period in 2021. For the years endedDecember 31, 2022 and 2021, the impact of COVID-19 increased our medical costs$81.7 million and$148.5 million , respectively. The remaining increase is due to an increase in consumers, partially offset by favorable medical cost rates. Our MCR of 93.4% for the year endedDecember 31, 2022 decreased 1,250 basis points compared to the same period in 2021. Our MCR for the year endedDecember 31, 2022 included a 200 basis point unfavorable impact from COVID-19 costs. Our MCR for the year endedDecember 31, 2021 included a 590 basis point unfavorable impact from COVID-19 costs. The decrease in MCR in 2022 compared to 2021, was primarily due to improved utilization and care management as well as the risk transfer agreement with our Consumer Care segment for theFlorida andTexas markets. Operating costs increased by$172.4 million , or 24.2%, for the year endedDecember 31, 2022 as compared to the same period in 2021. The increase in operating costs was driven by increases in operating costs from new market entry and increased marketing and selling expenses, partially offset by a net release of$93.4 million of PDR. We recognized$50.7 million of restructuring costs for the year endedDecember 31, 2022 for employee termination benefits, contract termination costs and long-lived asset impairments incurred in relation to the actions we have taken to restructure the Company's workforce and reduce expenses based on our updated business model. There were no restructuring costs in the year endedDecember 31, 2021 . We recognized non-cash impairments of goodwill and intangible assets of$4.1 million and$6.7 million , respectively, for the year endedDecember 31, 2022 , as a result of our decision to exit the Commercial market for the 2023 plan year.
Depreciation and amortization was immaterial to the
Commercial segment for the years ended
2021 Compared to 2020
Premium revenue increased$1.8 billion , or 262.8%, for the year endedDecember 31, 2022 compared to the same period in 2021. The increase in revenue was driven by an increase in consumer lives of approximately 520,000 due to organic growth and inorganic growth from the acquisition of THNM, as well as higher net premium rates in certain markets and plan mix, which were partially offset by an increase in risk adjustment payables. 73
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Medical costs increased by$2.1 billion , or 346.7%, for the year endedDecember 31, 2021 as compared to the same period in 2020. For the years endedDecember 31, 2021 and 2020, the impact of COVID-19 increased our medical costs by$148.5 million and$16.4 million , respectively. The increase in 2021 is also due to an increase in consumers driven by organic growth, unfavorable medical cost rates and inorganic growth as a result of acquisitions Our MCR of 105.9% for the year endedDecember 31, 2021 increased 1,990 basis points as compared to the same period in 2020. Our MCR for the year endedDecember 31, 2021 included a 590 basis point unfavorable impact from COVID-19 related costs as compared to a 240 basis point unfavorable impact from COVID-19 related costs in our MCR for the year endedDecember 31, 2020 . Our MCR for the year endedDecember 31, 2021 , was also impacted by an increase in risk adjustment payable. Operating costs increased by$526.7 million , or 285.8%, for the year endedDecember 31, 2021 as compared to the same period in 2020. The increase was primarily due to increases in operating costs from new market entry, increased marketing and selling expenses related to the 2021 SEP in our Commercial business and increased compensation and benefit costs driven by an increase in employees. In addition, the year endedDecember 31, 2021 also includes$93.4 million of premium deficiency reserve expense due to expected future losses in certain markets in 2022, as well as increased operating costs from the acquisition of THNM.
Depreciation and amortization was immaterial to the
Commercial segment for the years ended
Liquidity and Capital Resources
We assess our liquidity in terms of our ability to generate adequate amounts of cash to meet current and future needs. Our expected primary uses on a short-term and long-term basis are for geographic and service offering expansion, acquisitions, and other general corporate purposes. We have historically funded our operations and acquisitions primarily through the sale of preferred stock and sales of our common stock. We believe that existing cash on hand, investments and amounts available under our Credit Agreement described below may not be sufficient to satisfy our anticipated cash requirements for the next twelve months for items such as risk adjustment payable associated with the IFP business we are exiting, medical costs payable, accounts payable and other current liabilities. We are evaluating additional capital sources through other strategic opportunities to ensure we have the liquidity to satisfy these obligations. The Company is actively engaged with the Board of Directors and outside advisors to evaluate additional financing. However, the Company may not be able to obtain financing on acceptable terms, as any potential financing will be subject to market conditions that are not within the Company's control. As ofDecember 31, 2022 , we had$1.9 billion in cash and cash equivalents,$290.9 million in short-term investments and$849.1 million long-term investments on the Consolidated Balance Sheet. As ofDecember 31, 2021 , we had$1.1 billion in cash and cash equivalents,$193.8 million in short-term investments and$675.2 million long-term investments. Our cash and investments are held at non-regulated entities and regulated insurance entities.
As of
2021
short-term investments of
As of
equivalents of
long-term investments of
regulated insurance entity cash and cash equivalents of
short-term investments of
million
Cash and investment balances held at regulated insurance entities are subject to regulatory restrictions and can only be accessed through dividends declared to the non-regulated parent company or through reimbursements from administrative services agreements with the parent company. The Company declared no dividends from the regulated insurance entities to the parent company during the year endedDecember 31, 2022 , and declared two dividends during 2021. The regulated legal entities are required to hold certain minimum levels of risk-based capital and surplus to meet regulatory requirements. As ofDecember 31, 2022 and 2021,$42.1 million and$398.5 million , respectively, was held in risk-based capital and 74
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surplus at regulated insurance legal entities. We are out of compliance with the
minimum levels for certain of our regulated insurance legal entities.
Indebtedness
OnAugust 2, 2021 , the Credit Agreement was amended to change the definition of "Qualified IPO" by reducing the net proceeds required to be received by the Company from$1.0 billion to$850.0 million (the "Amendment"). In addition, prior to such amendment, the Credit Agreement contained a covenant that required the Company to maintain a total debt to capitalization ratio of (a) 0.25 to 1.00 prior to a Qualified IPO, and (b) 0.30 to 1.00 after a Qualified IPO. The Amendment changed this covenant by removing the increase in the ratio after a Qualified IPO such that the Company is now required to maintain a total debt to capitalization ratio of 0.25 to 1.00. OnAugust 4, 2021 , we elected to extend the maturity date of the Credit Agreement fromFebruary 28, 2022 toFebruary 28, 2024 . As ofDecember 31, 2022 , we had$303.9 million borrowed on the Credit Agreement at an effective annual interest rate of 8.41% as well as$46.1 million of outstanding, undrawn letters of credit under the Credit Agreement, which reduce the amount available to borrow. Further to the undrawn letters of credit under the Credit Agreement, we had an additional$7.5 million of unused letters of credit as ofDecember 31, 2022 . OnNovember 8, 2022 , we executed an amendment to the Credit Agreement pursuant to which certain collateral related defaults were waived and, in addition, it was agreed that we would (i) not be required to test our debt to capitalization ratio covenant during and including the four quarter test period endingSeptember 30, 2022 through and including the four quarter test period endingSeptember 30, 2023 , (ii) be required to maintain a minimum liquidity of$200.0 million fromNovember 8, 2022 through and includingSeptember 30, 2023 and (iii) be required to maintain a minimum liquidity of$150.0 million afterSeptember 30, 2023 . OnMarch 1, 2023 , the Company disclosed that that during the First Quarter of 2023, the Company breached the minimum liquidity covenant of the Credit Agreement. The Company entered into a limited waiver and consent (the "Waiver") under the Credit Agreement, which, among other matters, provides for a temporary waiver for the period fromJanuary 25, 2023 throughApril 30, 2023 (the "Waiver Period") of compliance with the minimum liquidity covenant set forth in Section 11.12.2 of the Credit Agreement. During the Waiver Period, the Company will be subject to a minimum liquidity covenant of not less than$75 million untilMarch 3, 2023 , and not less than$85 million thereafter until the end of the Waiver Period. In addition, during the Waiver Period, the Company will not have access to certain negative covenant baskets and will be subject to additional cash-flow and cash balance reporting requirements. Any non-compliance with the covenants under the Credit Agreement or the Waiver may result in the obligations under the Credit Agreement being accelerated. The obligations under the Credit Agreement are secured by substantially all of the assets of the Company and its wholly owned subsidiaries that are designated as guarantors, including a pledge of the equity of each of its subsidiaries. Borrowings under the Credit Agreement accrue interest at the Company's election either at a rate of: the (i) the sum of (a) the greatest of (1) the Prime Rate (as defined in the Credit Agreement), (2) the rate of theFederal Reserve Bank of New York in effect plus 1/2 of 1.0% per annum, and (3)London interbank offered rate ("LIBOR"), plus 1% per annum, and (b) a margin of 4.0%; or (ii) the sum of (a) the LIBOR multiplied by a statutory reserve rate and (b) a margin of 5.0%. In addition, the commitment fee is 0.75% of the unused amount of the Credit Agreement. Furthermore, the Credit Agreement contains covenants that, among other things, restrict the ability of the Company and its subsidiaries to make dividends or other distributions, incur additional debt, engage in certain asset sales, mergers, acquisitions or similar transactions, create liens on assets, engage in certain transactions with affiliates, change its business or make investments. In addition, the Credit Agreement contains other customary covenants, representations and events of default.
Preferred Stock Financing
On
Convertible Perpetual Preferred Stock, par value
aggregate purchase price of
repay in full our
Agreement on
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On
Convertible Perpetual Preferred Stock, par value
aggregate purchase price of
Cash Flows
The following table presents a summary of our cash flows for the periods shown: Year Ended December 31, (in thousands) 2022 2021 2020
Net cash provided by (used in) operating activities
82,059$ (57,238) Net cash used in investing activities (429,723) (552,892) (689,742) Net cash provided by financing activities 1,066,368 1,043,641 712,441
Net increase (decrease) in cash and cash equivalents
572,808$ (34,539) Cash and cash equivalents at beginning of year 1,061,179 488,371 522,910 Cash and cash equivalents at end of year$ 1,932,290 $
1,061,179
Operating Activities
During the year endedDecember 31, 2022 , cash provided by operating activities increased by$152.4 million as compared to the same period in 2021. This was primarily driven by an increase of our risk adjustment payable of$270.6 million as compared to 2021 as well as a$121.6 million year over year reduction in cash used for the purchase of other current assets. The increases were partially offset by more timely payment of our medical cost liabilities resulting in a reduction of cash generated from medical costs payable and an increase in our net loss. During the year endedDecember 31, 2021 , net cash provided by operating activities was$82.1 million as compared to$57.2 million cash used in the same period in 2020. This was primarily driven by the increase in consumer growth driving the increased medical costs and risk adjustment payables, as well as accounts payables and other liabilities, and increased medical costs in the MA business driven by a full year of activity from BND and the acquisition of CHP. These increases were partially offset by an increase in our net loss.
Investing Activities
During the year endedDecember 31, 2022 , net cash used in investing activities decreased by$123.2 million as compared to the same period in 2021. The decrease was primarily attributable to a decrease in cash used in acquisitions partially offset by an increase in the cash used in purchases of investments. During the year endedDecember 31, 2021 , net cash used in investing activities decreased by$136.9 million as compared to the same period in 2020. The decrease was primarily attributable to a decrease in purchases of investments, net of proceeds from sales, paydowns and maturities of investments which was partially offset by an increase in cash used for acquisitions.
Financing Activities
During the year endedDecember 31, 2022 , net cash provided by financing activities increased by$22.7 million as compared to the same period in 2021. The increase was due to$920.4 million in preferred stock financing during 2022 as compared to$887.3 million in proceeds from our IPO in 2021. During the year endedDecember 31, 2021 , net cash provided by financing activities increased by$331.2 million . The increase was due to$887.3 million of proceeds from our IPO inJune 2021 , offset by$6.7 million of cash paid for IPO offering costs, and a$155.0 million increase in net proceeds from short-term borrowings. These increases were partially offset by a$711.2 million decrease in proceeds from preferred stock financings in 2020, for which there were no similar offerings in 2021. 76
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Table of Contents Critical Accounting Policies and Estimates Our management's discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make judgments and estimates that affect the reported amounts of assets, liabilities, revenue, and expenses and the disclosure of contingent assets and liabilities in our consolidated financial statements. We base our estimates on historical experience, known trends and events, and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. On an ongoing basis, we evaluate our judgments and estimates in light of changes in circumstances, facts, and experience. The effects of material revisions in estimates, if any, are reflected in the consolidated financial statements prospectively from the date of change in estimates.
While our significant accounting policies are described in more detail in the
notes to the consolidated financial statements appearing elsewhere in this
Annual Report, we believe the following accounting policies used in the
preparation of our consolidated financial statements require the most
significant judgments and estimates.
Medical Costs Payable
Medical costs payable includes estimates for the costs of healthcare services consumers have received but for which claims have not yet been received or processed. Depending on the healthcare professional and type of service, the typical billing lag for services can be up to 90 days from the date of service. Approximately 80% of claims related to medical care services are known and settled within 90 days from the date of service and substantially all within eighteen to twenty-four months. In each reporting period, our operating results include the effects of more completely developed medical costs payable estimates associated with previously reported periods. If the revised estimate of prior period medical costs is less than the previous estimate, we will decrease reported medical costs in the current period (favorable development). If the revised estimate of prior period medical costs is more than the previous estimate, we will increase reported medical costs in the current period (unfavorable development). Medical costs in 2022, 2021, and 2020 included unfavorable medical cost development related to prior years of$7.5 million ,$3.5 million and$6.9 million , respectively. Depending on the healthcare professional and type of service, the typical billing lag for services can be at least 90 days from the date of service. In developing our medical costs payable estimates, we apply different estimation methods depending on the month for which incurred claims are being estimated. For example, for the most recent months, we estimate claim costs incurred by applying observed medical cost trend factors to the average per consumer (member) per month ("PMPM") medical costs incurred in prior months for which more complete claim data is available, supplemented by a review of near-term completion factors. Completion Factors: A completion factor measures the percentage of paid claims completion relative to an estimate of the total expected ultimate claims at a given point in time for medical services incurred in a given month. Completion factors are the most significant assumptions used in developing our estimate of medical costs payable. For periods prior to the three most recent months, completion factors are typically more complete and deemed credible for reliance in estimating unpaid medical claims. For the most recent three months, the completion factors are deemed less credible for reliance, and estimates of incurred claims are derived from prior incurred medical PMPM claims experience and adjusted as appropriate for other considerations such as seasonality, to arrive at forecasted incurred PMPM medical costs to generate estimates of ultimate incurred claims for the most recent three months. In certain instances, when there is unusual disruption to claims processing, such as for CHP and BND during 2022, it may be warranted to apply PMPM overrides to completion factors exceeding the 75% threshold when it appears they may be overstating completion when a review of the claim processing indicates a backlog has been building, and the completion factors may be overstating completion. 77
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The following table illustrates the sensitivity of the completion factors and
the estimated potential impact on our medical costs payable estimates as of
Completion Factors (Decrease) Increase in Factors Increase (Decrease) in Medical Costs Payable (in thousands) (3.00)% $ 22,218 (2.00)% 14,661 (1.00)% 7,256 1.00% (7,113) 2.00% (14,086) 3.00% (20,924) The completion factors analysis above includes a wide range of possible outcomes based on the early stage of development, combined with strong growth, that may drive additional volatility. Management believes the amount of medical costs payable is reasonable and adequate to cover our liability for unpaid claims as ofDecember 31, 2022 ; however, actual claim payments may differ from established estimates as discussed above. Assuming a hypothetical 1% difference between ourDecember 31, 2022 estimates of continuing operations medical costs payable and actual continuing operations medical costs payable net earnings would have increased or decreased by approximately$4.1 million .
See Note 2 and Note 10 in the Notes to Consolidated Financial Statements for
additional detail on our medical costs payable.
Risk Adjustment
The risk adjustment programs in our MA line of business in our continuing
operations and our IFP line of business in our discontinued operations, are
designed to mitigate the potential impact of adverse selection and provide
stability for health insurers.
Continuing operations: In the MA risk adjustment program, each consumer is assigned a risk score based on their demographic and prior year medical encounters information submitted to CMS that reflects the consumer's predicted health costs based on the CMS risk adjustment methodology. Plans receive higher payments for consumers with higher risk scores than consumers with lower risk scores. As ofDecember 31, 2022 the MA risk adjustment receivable was$1.2 million . Discontinued operations: Under the individual and small group risk adjustment program, each plan is assigned a risk score based upon demographic and current year medical encounters information that is submitted to CMS for its consumers and calculated based on the CMS risk adjustment methodology. Plans with a plan level risk score that is lower than the State average risk scores will generally pay into the pool, while plans with a plan level risk score higher than State average risk scores will generally receive distributions. As ofDecember 31, 2022 the IFP risk adjustment payable was$1.9 billion . For IFP, we utilize external sources to help determine market risk scores, and we estimate the amount of risk adjustment payable or receivable based upon the processed claims and medical diagnosis data submitted and expected to be submitted to CMS. We refine our estimate as new information becomes available.
Historically, we test goodwill for impairment annually at the beginning of the fourth quarter or whenever events or circumstances indicate the carrying value may not be recoverable. We test for goodwill impairment at the reporting unit level. When testing goodwill for impairment, we may first assess qualitative factors to determine if it is more likely than not that the carrying value of a reporting unit exceeds its estimated fair value. During a qualitative analysis, we consider the 78
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impact of changes, if any, to the following factors: macroeconomic trends, industry and market factors, cost factors, changes in overall financial performance, and any other relevant events and uncertainties impacting a reporting unit. If our qualitative assessment indicates that goodwill impairment is more likely than not, we perform additional quantitative analyses. We may also elect to skip the qualitative testing and proceed directly to the quantitative testing. For reporting units where a quantitative analysis is performed, we perform a test measuring the fair values of the reporting units and comparing them to their aggregate carrying values, including goodwill. If the fair value of the reporting unit is greater than its carrying value, no goodwill impairment is recognized. If the fair value of the reporting unit is less than its carrying value, we recognize an impairment equal to the difference between the carrying value of the reporting unit and its calculated fair value. For our two reporting units within our continuing operations,Bright HealthCare and Consumer Care, we estimate the fair values of our reporting units using a combination of discounted cash flows and comparable market multiples. For the one reporting unit within our discontinued operations,Bright HealthCare - Commercial, we estimate the fair value of the reporting unit using discounted cash flows. Our estimation methodology includes assumptions about a wide variety of internal and external factors. Significant assumptions used in the impairment analysis include financial projections of free cash flow (including significant assumptions about revenue growth rates, operating margins, capital requirements and income taxes), long-term growth rates for determining terminal value beyond the discretely forecasted periods and discount rates. Underperformance to the financial projections used in the impairment analysis could negatively impact the fair value of our reporting units. Additionally, the passage of time and the availability of additional information regarding areas of uncertainty with respect to the reporting units' operations could cause these assumptions to change in the future. We determined that our decision to exit the Commercial markets and the decrease in our enterprise market capitalization due to a decrease in the price of our common stock, represented events that indicated the carrying values of our reporting units may not be recoverable. As such, we performed an interim impairment test as ofSeptember 30, 2022 . We estimated the fair values of our reporting units using a combination of discounted cash flows and comparable market multiples, which include assumptions about a wide variety of internal and external factors. As a result of our interim impairment test, we recognized a non-cash impairment loss of$70.0 million in ourBright HealthCare reporting unit. The impairment of ourBright HealthCare reporting unit was primarily driven by an increase in the discount rate, which was impacted by higher interest rates and other market factors. We estimated the fair value of our, now discontinued,Bright HealthCare - Commercial reporting unit using an adjusted balance sheet approach as a result of our decision to exit the Commercial business for the 2023 plan year. We recognized a$4.1 million non-cash impairment loss related to ourBright HealthCare - Commercial reporting unit, which represented all of the goodwill associated with theBright HealthCare - Commercial reporting unit. Given the proximity of our interim impairment measurement date (last day of our fiscal third quarter -September 30, 2022 ) to our annual goodwill impairment measurement date (first day of our fiscal fourth quarter -October 1, 2022 ), we performed a qualitative assessment to determine whether it was more likely than not that the fair value of any of our reporting units was less than the carrying value. As material changes in the business that occurred during the valuation procedures but subsequent to our interim impairment measurement date were taken into consideration during our interim impairment assessment, we concluded that there would be no reasonable expectation of changes in estimates or the reporting unit fair values and carrying values between our interim impairment and annual impairment measurement dates. As ofDecember 31, 2022 , we recognized a$1.2 million goodwill disposition related to our Consumer Care reporting unit. Additionally, we determined that the sustained decline in our stock price triggered a qualitative assessment of our goodwill to determine if it was more likely than not that the fair value of our reporting units were less than their respective carrying values. Through our assessment of our reporting units, we concluded that it was not more likely than not that the fair value of our reporting units were less than their respective carrying values as ofDecember 31, 2022 . We will continue to closely monitor the operational performance of our reporting units as it relates to goodwill impairment. Recently Adopted and Issued Accounting Standards
See Note 2 in the Notes to Consolidated Financial Statements for a discussion of
accounting pronouncements recently adopted and recently issued accounting
pronouncements not yet adopted and their potential impact to our financial
statements.
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AM Best Removes From Under Review With Negative Implications, Downgrades Credit Ratings of Rockingham Insurance Company and Its Affiliates
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