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OAK STREET HEALTH, INC. – 10-Q – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is intended to help the reader understand our business, financial condition, results of operations, liquidity and capital resources. This discussion should be read in conjunction with our unaudited consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and our audited financial statements and the accompanying notes as well as the sections entitled "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our 2021 Form 10-K. 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," as well as those discussed under the "Risk Factors" section in our 2021 Form 10-K.
Business Overview
Oak Street Health, Inc. (collectively referred to as "Oak Street Health ," "OSH," "we," "us," "our" or the "Company") was formed as aDelaware corporation onOctober 22, 2019 for the purpose of completing a public offering and related restructuring transactions (collectively referred to as the "IPO") in order to carry on the business ofOak Street Health, LLC ("OSH LLC ") and its affiliates. As the managing member ofOSH LLC ,Oak Street Health, Inc. operates and controls all of the business affairs ofOSH LLC and its affiliates. Our common stock trades on theNew York Stock Exchange ("NYSE") under the ticker symbol "OSH."Oak Street Health was designed to provide and manage Medicare-eligible patients' total healthcare through capitated, value-based arrangements. We created a new care platform because the then-existing primary care infrastructure was not built with the capacity to drive the 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 an agreed-upon baseline cost because we believed there was 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 different and, we believe, better approach to addressing the needs of high-risk Medicare-eligible patients. As ofJune 30, 2022 , the Company operated 144 centers across 20 states, which provided care for approximately 191,000 patients. We, together with our affiliated physician practice organizations, employ approximately 5,300 team members, including approximately 500 primary care providers. Our operations are organized and reported under one segment. 28
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COVID-19 Update on our Business
OnMarch 11, 2020 , theWorld Health Organization designated COVID-19 as a global pandemic. The rapid spread of COVID-19 around the world and throughoutthe United States has 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. The on-going COVID-19 global pandemic disproportionately impacts older adults, especially those with chronic illnesses, which describes many of our patients. The COVID-19 pandemic has impacted both our per-patient capitated revenue and medical claims expense. Throughout the pandemic, our risk scores for existingOak Street Health patients have been consistent with our historical experience. New patients in 2021 had lower risk scores than what we would expect based on historical experience, due to a lack of availability of care in 2020 as the healthcare system was inaccessible to non-Oak Street Health patients for several months in 2020 because of local COVID-19 restrictions. As we are able to more completely and accurately document both current and new patients' health conditions, 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 during the full 2022 fiscal year. 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. 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 and beginning of 2022, we do not believe that these periods can serve as a reliable basis for estimating our future performance and do not know what the impact from COVID-19 will be on medical costs in the future. Given these factors, per-patient medical costs may be greater for the full 2022 fiscal year than the levels we experienced in our recent historical results. 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 in future periods. The COVID-19 pandemic had an impact on our results from operations, cash flows and financial position for the six-months endedJune 30, 2022 , primarily as a result of an increase in cases in early 2022 due to the Omicron variant. Based upon claims paid to- date, our direct costs related to COVID-19 claims were approximately$82.6 million for the period fromMarch 1, 2020 throughJune 30, 2022 . We estimated that total COVID-19 claims incurred during the six-months endedJune 30, 2022 were approximately$17.7 million , which was comparable to our direct COVID-19 claims of$13.3 million for the six-monthsJune 30, 2022 . 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 in future periods. We will continue to closely monitor the COVID-19 pandemic and its continued impact on the economy, our patients and prospective patients and our business. The ongoing effects of the pandemic, as well as the extent and significance of any future variants, remain unresolved and could continue for an extended period of time. Even as the COVID-19 pandemic subsides, disruptions caused by the pandemic, including labor shortages, supply chain disruptions, and inflationary pressures, may continue and could, in turn, have a negative impact on the Company. Further, recurring COVID-19 outbreaks, including outbreaks caused by different virus variants, could have the potential to impact the Company and its future results of operations, cash flows and financial position. The full extent to which the COVID-19 pandemic has and will continue to directly or indirectly impact our business, future results of operations and financial condition will depend on 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, rate and effectiveness of vaccinations in theU.S. , 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. 29
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For additional information on the various risks posed by the COVID-19 pandemic,
please see the "Risk Factors" section included in our 2021 Form 10-K.
Key Factors Affecting Our Performance
•Adding New Patients in Existing Centers: Our ability to add new patients is a
key indicator of the market's recognition of the attractiveness of the Oak
Street Platform, both to our patients and Medicare Advantage ("MA") plan
partners, and a key growth driver for the business. As we add patients to our
existing centers, we expect these patients to contribute significant incremental
economics to Oak Street Health as we leverage our fixed cost base at each
center. We grow our patient base through our own internal outreach efforts,
which drive most of our new patient growth, as well as assignments from our MA
plan partners. We grew our patient base from approximately 122,000 patients as
of June 30, 2021 to approximately 191,000 as of June 30, 2022 .
•Expand our Center Base within Existing and New Markets: We believe our core
market consists of approximately 27 million patients, and we served
approximately 191,000 patients as of June 30, 2022 . As a result, we believe
there is significant opportunity to expand in our existing markets through the
acquisition of new patients to existing centers and addition of new centers. For
the long term, these strategically developed new sites allow us to access
additional neighborhoods while leveraging our established brand and
infrastructure in a market. Our existing markets today represent a small
fraction of the overall market opportunity. Based upon our experience to date,
we believe our care model can scale nationally, and we therefore expect to
selectively and strategically expand into new geographies. Additionally, we
began participating in the Global and Direct Contracting Model as of April 1,
2021 , which we are hopeful will allow us to manage existing fee-for-service
("FFS") patients on an at-risk basis. The Direct Contracting Model and the
Accountable Care Organization Realizing Equity, Access and Community Health
("ACO REACH") model, as its successor, create new opportunities for the Centers
for Medicare & Medicaid Services ("CMS") to test an array of financial
risk-sharing arrangements in the traditional Medicare fee-for-service
population, and it will enable us to assume financial risk for the cost of care
for some patients covered by traditional Medicare. Through the Direct
Contracting model, CMS aims to transform risk-sharing arrangements in Medicare
FFS, empower and engage beneficiaries (or patients or members) in their own care
delivery, broaden participation in CMS Innovation Center models, reduce provider
burden and shift providers from FFS to value-based payments in primary care. The
stated goals of the ACO REACH model are to advance health equity to bring
benefits of accountable care to underserved communities, promote provider
leadership and governance, and protect beneficiaries and the model with more
participant vetting, monitoring and greater transparency. There can be no
assurances, however, that these or any other payment models that align with our
strategy and investments will be continued or changed in ways that could be
disadvantageous to our business.
•Contract with Payors: Our economic model relies on our capitated arrangements
with payors and CMS, which manage and market MA plans across the United States .
In our short history, we have been able to establish strategic value-based
relationships with over 30 different payors as of June 30, 2022 , including each
of the top 5 national payors by number of MA patients. These existing contracts
and relationships and our payors' 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, particularly as we enter new geographies, is critical to
our long-term success.
•Effectively Manage the Cost of Care for Our Patients: The capitated nature of
our contracts with payors requires us to prudently manage the medical expense of
our patients. Our care model focuses on leveraging the primary care setting as a
means of avoiding costly downstream healthcare costs, such as
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acute hospital admissions. Our patients, however, retain the freedom to seek care at emergency rooms or hospitals; we do not restrict their access to care beyond the limits of their MA plan, although we have developed many capabilities to manage and control the associated costs of this care. Therefore, we are liable for potentially large medical claims should we not effectively manage our patients' health. OnOctober 20, 2021 , we acquiredRubiconMD Holdings, Inc. ("RMD"), a leading technology platform inNew York providing access to specialist expertise. The acquisition enablesOak Street Health to integrate virtual specialty care into its existing care model, which is expected to significantly streamline the referral process and better manage costs, enhance patient experience and provide comprehensive care far beyond traditional primary care. •Center-Level Contribution Margin: We endeavor to expand our number of centers and number of patients at each center over time. Due to the significant fixed costs associated with operating and managing our centers and the increases we experience in patient contribution on a per-patient basis the longer a patient is part of the Oak Street Platform, we generate significantly better center-level contribution margins (defined as (i) patient revenue, excluding Medicare Part D revenue minus (ii) the sum of (a) medical claims expense, excluding Medicare Part D related expenses, and (b) cost of care, excluding depreciation and amortization) as the patient base within our centers increases and matures and our costs decrease as a percent of revenue. As a result, the value of a center to our business increases over time. •Seasonality to 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 at-risk patient growth during the first quarter, when plan enrollment selections made during the prior Annual Enrollment Period ("AEP") fromOctober 15th through December 7th of the prior year take effect. Our per-patient revenue will generally decline over the course of the year. As the year progresses, our per-patient revenue declines as new patients join us typically with less complete or accurate documentation (and therefore lower risk-adjustment scores) and our attrition skews towards our higher-risk (and therefore greater revenue) patients. Finally, medical costs will vary seasonally depending on a number of factors, including the weather which can be a driver of certain illnesses, such as the influenza virus. We would therefore expect to see higher levels of per-patient medical costs 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 expect to continue to focus on long-term growth through investments in our centers, care model, and sales and marketing. In addition, we expect our corporate, general and administrative expenses to increase in absolute dollars for the foreseeable future to support our growth and because of additional costs of being a public company. 31
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Executive Summary
The following table presents key financial statistics for the three and
six-months ended
For the three-months ended For the six-months ended
(dollars in millions) June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021
Centers 144 95 144 95
Total patients 191,000 122,000 191,000 122,000
At-risk 134,000 88,500 134,000 88,500
Fee-for-service 57,000 33,500 57,000 33,500
Total revenues $ 523.7 $
353.1
Loss from operations1
$ (112.7) $
(99.3)
Net loss1
$ (148.3) $
(100.3)
Platform contribution (Non-GAAP)2
$ 34.1 $
5.0 $ 73.9 $ 42.0
Patient contribution (Non-GAAP)2
$ 124.5 $
65.3
Adjusted EBITDA (Non-GAAP)2
$ (53.1) $
(53.5)
_______________________________________
1Includes stock-based compensation expense as shown in the table in the Results of Operations section below. 2See "Non-GAAP Reconciliations" below for reconciliations to the most directly comparable financial measures calculated in accordance with GAAP and related disclosures. Centers 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 byOak Street Health MSO, LLC or an affiliated entity and, pursuant to the terms of certain contractual relationships betweenOak Street Health MSO, LLC 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 MA andDirect Contracting 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 with which we do not have value-based arrangements). We define our total at-risk patients as at-risk patientswho have selected one of our affiliated medical groups as their provider of primary care medical services as of the end of a particular period or have been aligned under theDirect Contracting program. We define our total fee-for-service Medicare patients as fee-for-service Medicare patientswho come 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 theSEC . 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 financial 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 financial measures: patient contribution, platform contribution and adjusted EBITDA as these are performance measures that our management uses to assess our operating performance. Because patient contribution, platform 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. 32
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Patient and platform contributions are reconciled to gross profit as the most directly comparable GAAP measure as set forth in the below tables under "Non-GAAP Reconciliations." Gross profit is defined as total revenues less medical claims expense. 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 patient contribution, platform 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 patient contribution, platform 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 patient contribution, platform contribution and adjusted EBITDA in conjunction with loss from operations and net loss, respectively. Patient Contribution We define patient contribution as capitated revenue less medical claims expense. Patient contribution is intended to isolate the profitability of the Company's capitation arrangements with our health plan payors and/or CMS for which the Company provides and/or manages healthcare services for its at-risk patients. 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,who generally have lower per-patient capitated revenue compared to our existing patient base.
Platform Contribution
We define platform contribution as total revenues less the sum of medical claims expense and cost of care, excluding depreciation and amortization and stock-based compensation. We believe this metric best reflects the economics or overall profit margin of our care model and related centers 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.
Adjusted EBITDA
We define adjusted EBITDA as net loss excluding interest expense and other
income (expense), income taxes, fair value adjustments related to assets and
liabilities recorded in purchase accounting such as earn-out liabilities and
intangibles and related to impairment of equity investments, depreciation and
amortization, transaction/offering costs, one-time in nature litigation costs
and stock-based compensation. We include adjusted EBITDA in this Quarterly
Report on Form 10-Q 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.
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Results of Operations
The following tables set forth our results of operations for the periods
presented and as a percentage of our total revenues for those periods.
For the three-months ended For the six-months ended
June 30,
(dollars in millions) June 30, 2022 2021 % Change June 30, 2022 June 30, 2021 % Change
Revenues:
Capitated revenue $ 516.1 $ 346.7 49 % $ 1,022.2 $ 637.9 60 %
Other revenue $ 7.6 $ 6.4 19 % $ 15.3 $ 11.9 29 %
Total revenues $ 523.7 $ 353.1 48 % $ 1,037.5 $ 649.8 60 %
Operating expenses:
Medical claims expense $ 391.6 $ 281.4 39 % $ 771.0 $ 481.1 60 %
Cost of care, excluding depreciation and
amortization (1) $ 98.9 $ 67.0 48 % $ 194.1 $ 127.3 52 %
Sales and marketing (2) $ 42.6 $ 25.9 64 % $ 76.4 $ 50.0 53 %
Corporate, general and administrative (3) $ 94.9
28 %$ 183.6 $ 147.3 25 % Depreciation and amortization $ 8.4$ 3.9 115 %$ 16.2 $ 7.2 125 % Total operating expenses$ 636.4 $ 452.4 41 %$ 1,241.3 $ 812.9 53 % Loss from operations$ (112.7) $ (99.3) 13 %$ (203.8) $ (163.1) 25 % Other income/(expense): Interest expense, net (0.5) (1.0) (50) % (1.1) (1.2) (8) % Other (35.1) - 100 % (40.1) - 100 % Total other expense (35.6) (1.0) 3460 % (41.2) (1.2) 3333 % Net loss (148.3) (100.3) 48 % (245.0) (164.3) 49 % Net loss attributable to non-controlling interests (0.8) 2.3 (135) % (0.6) 2.9 (121) % Net loss attributable to the Company (149.1) (98.0) 52 % (245.6) (161.4) 52 % (1) Includes stock-based compensation, as follows: 0.9 0.3 191 % 1.5 0.6 145 % (2) Includes stock-based compensation, as follows: 1.7 0.9 91 % 2.3 1.7 36 % (3) Includes stock-based compensation, as follows: 47.2 39.7 19 % 85.4 80.9 6 % 34
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For the three-months ended For the six-months ended
June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021
Revenues:
Capitated revenue 99 % 98 % 99 % 98 %
Other revenue 1 % 2 % 1 % 2 %
Total revenues 100 % 100 % 100 % 100 %
Operating expenses:
Medical claims expense 75 % 80 % 74 % 74 %
Cost of care, excluding depreciation and
amortization 19 % 19 % 19 % 20 %
Sales and marketing 8 % 7 % 7 % 8 %
Corporate, general and administrative 18 % 21 % 18 % 22 %
Depreciation and amortization 2 % 1 % 2 % 1 %
Total operating expenses 122 % 128 % 120 % 125 %
Loss from operations (22) % (28) % (20) % (25) %
Other income/(expense):
Interest expense, net - % - % - % - %
Other (7) % - % (4) % - %
Total other expense (7) % - % (4) % - %
Net loss (28) % (28) % (24) % 24 %
Net loss attributable to non-controlling
interests 0 % 1 % - % - %
Net loss attributable to the Company (28) % (28) % (24) % (25) %
Total Revenues
For the three-months ended Change For the six-months ended Change
June 30, June 30, June 30,
(dollars in millions) 2022 2021 $ % June 30, 2022 2021 $ %
Revenues:
Capitated revenue $ 516.1 $ 346.7 $ 169.4 49 % $ 1,022.2 $ 637.9 $ 384.3 60 %
Other revenue $ 7.6 $ 6.4 1.2 19 % $ 15.3 $ 11.9 3.4 29 %
Total revenues $ 523.7 $ 353.1 $ 170.6 48 % $ 1,037.5 $ 649.8 $ 387.7 60 %
Capitated revenue was $516.1 million for the three-months ended June 30, 2022 ,
an increase of $169.4 million , or 49%, compared to $346.7 million for the
three-months ended June 30, 2021 . This increase was driven primarily by a 51%
increase in total patients under capitated arrangements, slightly offset by a
decrease of approximately 2% in the capitated revenue rate. For the three-months
ended June 30, 2022 , we recorded a decrease in capitated revenue of $3.7 million
related to prior periods due to the retrospective trend adjustments made by CMS
under the Direct Contracting program partially offset by favorable developments
within our MA plans. During the three-months ended June 30, 2021 , we recorded
$14.5 million of incremental capitated revenue related to prior periods due to
patient retroactivity and increases in our acuity adjustments. When excluding
the prior period revenue for the three-months ended June 30, 2022 and 2021, the
year over year capitated revenue rate per patient increased by approximately 3%.
Capitated revenue was $1,022.2 million for the six-months ended June 30, 2022 ,
an increase of $384.3 million , or 60%, compared to $637.9 million for the
six-months ended June 30, 2021 . This increase was driven primarily by a 51%
increase in total patients under capitated arrangements (including Direct
Contracting , which started as of April 2021 ) and an increase of approximately 6%
in capitated revenue rate. For the six-months ended June 30, 2021 , incremental
capitated revenue of $17.6 million was recorded related to prior periods related
to patient retroactivity and increases in our acuity adjustments. When excluding
the prior period revenue for the three-months ended June 30, 2021 , the year over
year capitated revenue rate per patient increased by approximately 9%.
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Other revenue was$7.6 million for the three-months endedJune 30, 2022 , an increase of$1.2 million , or 19%, compared to$6.4 million for the three-months endedJune 30, 2021 . Other revenue was$15.3 million for the six-months endedJune 30, 2022 , an increase of$3.4 million , or 29%, compared to$11.9 million for the six-months endedJune 30, 2021 . These increases were driven primarily by the addition of RMD subscription revenue as result of the acquisition inOctober 2021 and an increase in fee for service revenue, slightly offset by a decline in care coordination and care management services revenue. Operating Expenses For the three-months ended Change For the six-months ended Change June 30, June 30, June 30, (dollars in millions) 2022 2021 $ % June 30, 2022 2021 $ % Medical claims expense$ 391.6 $ 281.4 $ 110.2 39 %$ 771.0 $ 481.1 $ 289.9 60 % Cost of care, excluding depreciation and amortization$ 98.9 $ 67.0 31.9 48 %$ 194.1 $ 127.3 66.8 52 % Sales and marketing$ 42.6 $ 25.9 16.7 64 % $ 76.4$ 50.0 26.4 53 % Corporate, general and administrative$ 94.9 $ 74.2 20.7 28 %$ 183.6 $ 147.3 36.3 25 % Depreciation and amortization$ 8.4 $ 3.9 4.5 115 % $ 16.2$ 7.2 9.0 125 % Total operating expenses$ 636.4 $ 452.4 $ 184.0 41 %$ 1,241.3 $ 812.9 $ 428.4 53 % Medical claims expense was$391.6 million or 75% of total revenues for the three-months endedJune 30, 2022 , an increase of$110.2 million , or 39%, compared to$281.4 million or 80% of total revenues for the three-months endedJune 30, 2021 . This increase was driven primarily by a 51% increase in total patients under capitated arrangements, slightly offset by an 8% decrease in cost per patient. For the three-months endedJune 30, 2022 , we recorded a reduction to medical claims expense of$10.9 million related to prior periods. During the three-months endedJune 30, 2021 , we recorded incremental medical claims expenses of$17.6 million related to the first quarter of 2021. When excluding these prior period costs for the three-months ended June 30 2022 and 2021, respectively, the year over year medical claims expense per patient increased by 1%. Medical claims expense was$771.0 million or 74% of total revenues for the six-months endedJune 30, 2022 , an increase of$289.9 million , or 60%, compared to$481.1 million or 74% of total revenues for the six-months endedJune 30, 2021 . This increase was driven primarily by a 51% increase in total patients under capitated arrangements (including those underDirect Contracting which started as ofApril 2021 ) and a 6% increase in cost per patient. Cost of care, excluding depreciation and amortization was$98.9 million or 19% of total revenues for the three-months endedJune 30, 2022 , an increase of$31.9 million or 48%, compared to$67.0 million or 19% of total revenues for the three-months endedJune 30, 2021 . The increase was primarily driven by increases in salaries and benefits of$21.0 million ; occupancy costs of$3.4 million ; and medical supplies and patient transportation costs of$6.2 million , due to growth in both the number of centers we operate and the number of team members supporting our larger patient base. Cost of care, excluding depreciation and amortization was$194.1 million or 19% of total revenues for the six-months endedJune 30, 2022 , an increase of$66.8 million or 52%, compared to$127.3 million or 20% of total revenues for the six-months endedJune 30, 2021 . The increase was driven by increases in salaries and benefits of$42.4 million ; occupancy costs of$11.0 million ; and medical supplies and patient transportation costs of$10.5 million , due to growth in both the number of centers we operate and the number of team members supporting our larger patient base. Sales and marketing expense was$42.6 million or 8% of total revenues for the three-months endedJune 30, 2022 , an increase of$16.7 million or 64%, compared to$25.9 million or 7% of total revenues for the three-months endedJune 30, 2021 . The increase was driven by net headcount growth of$12.7 million and greater advertising spend of$3.2 million to drive new patients to our clinics. Sales and marketing expense was$76.4 million or 7% of total revenues for the six-months endedJune 30, 2022 , an increase of$26.4 million , or 53%, compared to$50.0 million or 8% of total revenues for the six-months endedJune 30 , 36
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2021. The increase was driven by net headcount growth of
greater advertising spend of
Corporate, general and administrative expense was$94.9 million or 18% of total revenues for the three-months endedJune 30, 2022 , an increase of$20.7 million , or 28%, compared to$74.2 million or 21% of total revenues for the three-months endedJune 30, 2021 . The increase was primarily driven by greater salaries and benefits, including stock-based compensation expense, of$16.5 million , an increase in legal and insurance fees of$1.2 million and an increase in technology costs of$1.6 million . These increased costs can be attributed to increased headcount to support our growth. Corporate, general and administrative expense was$183.6 million or 18% of total revenues for the six-months endedJune 30, 2022 , an increase of$36.3 million , or 25%, compared to$147.3 million or 22% of total revenues for the six-months endedJune 30, 2021 . The increase was primarily driven by greater salaries and benefits, including stock-based compensation expense, of$27.6 million , an increase in legal and insurance fees of$2.6 million and an increase in technology costs of$3.3 million . These increased costs can be attributed to increased headcount to support our growth. Depreciation and amortization expense was$8.4 million or 2% of total revenues for the three-months endedJune 30, 2022 , an increase of$4.5 million , or 115%, compared to$3.9 million or 1% of total revenues for the three-months endedJune 30, 2021 . Depreciation and amortization expense was$16.2 million or 2% of total revenues for the six-months endedJune 30, 2022 , an increase of$9.0 million , or 125%, compared to$7.2 million or 1% of total revenues for the six-months endedJune 30, 2021 . The increases were primarily due to capital expenditures purchased to support the continued growth of our business.
Other (Expense) Income
For the three-months ended Change For the six-months ended Change
June 30, June 30, June 30, June 30,
(dollars in millions) 2022 2021 $ % 2022 2021 $
%
Other income (expense): Interest expense, net$ (0.5) $ (1.0) $ 0.5 50 %$ (1.1) $ (1.2) $ 0.1 8 % Other$ (35.1) $ - (35.1) 100 %$ (40.1) $ - (40.1) 100 % Total other expense$ (35.6) $ (1.0) $ (34.6) 3460 %$ (41.2) $ (1.2) (40.0) 3333 % Interest expense was$(0.5) million for the three-months endedJune 30, 2022 , a decrease of$0.5 million , or 50%, compared to$(1.0) million for the three-months endedJune 30, 2021 . Interest expense was$(1.1) million for the six-months endedJune 30, 2022 , a decrease of$0.1 million , or 8%, compared to$(1.2) million for the six-months endedJune 30, 2021 . Other expense was$(35.1) million for the three-months endedJune 30, 2022 , an increase of$(35.1) million , or 100%, compared to$0.0 million for the three-months endedJune 30, 2021 . Other expense was$(40.1) million for the six-months endedJune 30, 2022 , an increase of$(40.1) million , or 100%, compared to$0.0 million for the six-months endedJune 30, 2021 . The increase was primarily due to a fair value adjustment to the contingent consideration or earn-out related to the acquisition of RMD inOctober 2021 . During the six-months endedJune 30, 2022 , RMD achieved internal metrics that resulted in the maximum earn-out amount, and we increased the balance of the earn-out liability to reflect the actual payout amount of$60.0 million . 37
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Non-GAAP Reconciliations
The following table provides a reconciliation of gross profit, the most closely
comparable GAAP financial measure, to platform contribution. Gross profit is
defined as total revenues less medical claims expense.
For the three-months ended For the six-months ended
(dollars in millions) June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021
Gross profit $ 132.1 $
71.7
Cost of care, excluding depreciation and
amortization
(98.9) (67.0) (194.1) (127.3) Stock-based compensation 0.9 0.3 1.5 0.6 Platform contribution $ 34.1 $ 5.0$ 73.9 $ 42.0
The following table provides a reconciliation of gross profit, the most closely
comparable GAAP financial measure, to patient contribution. Gross profit is
defined as total revenues less medical claims expense.
For the three-months ended For the six-months ended
(dollars in millions) June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021
Gross profit $ 132.1 $ 71.7 $ 266.5 $ 168.7
Other revenue (7.6) (6.4) (15.3) (11.9)
Patient contribution $ 124.5 $ 65.3 $ 251.2 $ 156.8
The following table provides a reconciliation of net loss, the most closely
comparable GAAP financial measure, to adjusted EBITDA:
For the three-months ended For the six-months ended
(dollars in millions) June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021
Net loss $ (148.3) $ (100.3) $ (245.0) $ (164.3)
Interest expense, net 0.5 1.0 1.1 1.2
Fair value adjustments 35.1 - 40.1 -
Depreciation and amortization 8.4 3.9 16.2 7.2
Stock-based compensation 49.8 40.9 89.2 83.2
Litigation costs1 1.3 - 2.3 -
Transaction/offering related costs 0.1 1.0 0.6 1.8
Adjusted EBITDA $ (53.1) $ (53.5) $ (95.5) $ (70.9)
Liquidity and Capital Resources
Overview
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, the issuance of Convertible Senior 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 ofJune 30, 2022 , we had cash, restricted cash and cash equivalents of$136.8 million . Our cash and cash equivalents primarily consist of highly liquid investments in money market funds and cash. Since our inception and throughJune 30, 2022 , we have generated significant operating losses from our operations as reflected in our accumulated deficit and negative cash flows from operations. 1 Litigation costs included in the calculation of Adjusted EBITDA include only those costs which are considered one-time in nature and outside of the ordinary course of business based on the following considerations which we assess regularly: (i) the frequency of similar cases that have been brought to date, or are expected to be brought within two years, (ii) the complexity of the case, (iii) the nature of the remedy(ies) sought, including the size of any monetary damages sought, (iv) the counterparty involved, and (v) our overall litigation strategy, such as litigation costs related to the DOJ matter and class-action lawsuit (refer to Note 10 in the Form 10-Q herein). 38
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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 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 in 2021 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. 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 outreach 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,
Securities
InMarch 2021 , we issued$920.0 million aggregate principal amount of Convertible Senior Notes. Concurrently with the pricing of the Convertible Senior Notes, we entered into capped call transactions to mitigate the impact of potential economic dilution to our common stock upon conversion of the Convertible Senior Notes. The Convertible Senior Notes are governed by an Indenture, are general senior, unsecured obligations of the Company and will mature onMarch 15, 2026 , unless earlier redeemed, repurchased or converted. Refer to Note 8, Long-Term Debt, of the notes to consolidated financial statements included in this Quarterly Report on Form 10-Q. 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 . We used approximately$123.6 million of the net proceeds to pay the cost of the capped call transactions. We intend to use the remainder of the net proceeds for general corporate purposes, which may include working capital, capital expenditures, and potential acquisitions and strategic transactions.
The Indenture contains customary covenants related to timely filings and
reporting, and customary events of default. As of
compliance with all covenants under the Indenture.
Changes in Cash Flows
The following table presents a summary of our consolidated cash flows from
operating, investing and financing activities for the periods indicated.
For the six-months ended
(dollars in millions) June 30, 2022 June 30, 2021 $ Change % Change
Net cash used in operating activities
119 % Net cash provided by (used in) investing activities 194.6 (688.8) 883.4 (128) % Net cash provided by financing activities 1.2 776.9 (775.7) (100) % Net change in cash $ 16.4 $ 6.1$ 10.3 169 % Operating Activities For the six-months endedJune 30, 2022 , net cash used in operating activities was$(179.4) million , an increase of$(97.4) million in cash outflows compared to net cash used in operating activities of$(82.0) million for the six-months endedJune 30, 2021 . The principal contributors to the year-over-year change in the operating cash flows were as follows: •A net change of$(9.9) million in 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 the fair value 39
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adjustment to RMD contingent consideration (see Note 5 to our consolidated
financial statements included in this Quarterly Form on Form 10-Q) and other
non-cash charges.
•An increase of
liabilities primarily resulting from:
•Changes in accounts receivable due to the timing of collections and the growth
in the number of at-risk patients;
•Changes in liability for unpaid claims due to the growth in the number of
at-risk patients; and,
•Changes in accounts payable and accrued compensation and benefits due to the
timing of payments to our vendors.
Investing Activities
For the six-months endedJune 30, 2022 , net cash provided by investing activities was$194.6 million , an increase of$883.4 million in cash inflows compared to net cash used in investing activities of$(688.8) million for the six-months endedJune 30, 2021 primarily due to the net cash inflows of$903.9 million from sales, maturities and purchases of marketable debt securities, offset by continued increased investments in our centers and purchases of property and equipment of approximately$(21.7) million .
Financing Activities
Cash provided by financing activities for the six-months endedJune 30, 2022 was$1.2 million , primarily related to the proceeds received from the exercise of options. Cash provided by financing activities for the six-months endedJune 30, 2021 of$776.9 million was primarily due to$897.9 million in proceeds from the issuance of the Convertible Senior Notes, partially offset by cash outflows of$123.6 million related to the capped call transactions completed inMarch 2021 .
Contractual Obligations and Commitments
As ofJune 30, 2022 , our contractual obligations are summarized in the table below. Less than 1 More than 5 (dollars in millions) Total Year 1-3 Years 3-5 Years Years Convertible Senior Notes$ 920.0 $ -
$ -
Operating lease obligations
441.6 41.8 101.4 97.6 200.8 Contingent consideration 60.0 60.0 - - - Total$ 1,421.6 $ 101.8 $ 101.4 $ 1,017.6 $ 200.8 Convertible Senior Notes-The Company holds borrowings under our Convertible Senior Notes, which have a 0% interest rate. The Convertible Senior Notes are governed by an indenture ("Indenture"), dated as ofMarch 16, 2021 , between the Company andU.S. Bank National Association , as the trustee. Under the Indenture, the Convertible Senior Notes are general senior, unsecured obligations of the Company and will mature onMarch 15, 2026 , unless earlier redeemed, repurchased or converted. Operating lease obligations- The Company leases offices, operating facilities, vehicles and information technology ("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. Also included in the operating lease obligations are license fees paid as a reimbursement to Humana for its costs of owning or leasing and maintaining the centers, including reimbursements for rental payments and leasehold improvements. Contingent consideration- As part of the acquisition of RMD, the Company is obligated to pay contingent consideration of up to a maximum earn-out of$60 million during the fiscal year 2022 or 2023 should the acquired company achieve certain internal usage volumes in the year following the acquisition. RMD met the internal usage volumes during the three-months endedJune 30, 2022 , and the Company increased the balance of the earn-out liability to reflect the expected payout amount of$60.0 million . This amount will be paid to RMD's shareholders in the third quarter of 2022. Per the merger agreement with RMD, the Company is able to fund up to$32.5 million of this payout via common shares inOak Street Health . 40
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Off-Balance Sheet Obligations
As of
arrangements.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements and accompanying notes have been prepared in accordance withU.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the amounts reported amounts of assets, liabilities, revenue and expenses, and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. The future effects of the COVID-19 pandemic on our results of operations, cash flows and financial position are unclear, however, we believe we have made reasonable estimates and assumptions in preparing the financial statements. Actual results may differ from these estimates. To the extent that there are material differences between these estimates and our actual results, our future financial statements will be affected. For a description of our critical accounting policies, see "Critical Accounting Policies" in our 2021 Form 10-K. There have been no significant changes in our critical accounting estimate policies or methodologies to our condensed consolidated financial statements.
Recently Adopted Accounting Pronouncements
For a description of recently issued accounting pronouncements, see Note 2,
Summary of Significant Accounting Policies, to our consolidated financial
statements included in this Quarterly Report on Form 10-Q.
ARTHUR J. GALLAGHER & CO. – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
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