Alignment Healthcare, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Alignment operates Medicare Advantage plans across 52 markets in six states and also participates in the CMS ACO REACH model. The company reported one operating segment.
Financial performance and position
| Metric | Q1 2023 | Q1 2022 | Change / context |
|---|---|---|---|
| Total revenue | $439.2 million | $345.5 million | Up 27.1% |
| Earned premiums | $434.8 million | $345.3 million | Up 25.9% |
| Medical expenses | $396.3 million | $303.8 million | Up 30.5% |
| Medical benefits ratio (MBR) | 89.7% | 87.0% | Up 2.7 percentage points |
| Adjusted gross profit and margin | $45.4 million; 10.3% | $44.9 million; 13.0% | Profit up 1.1%; margin down 2.7 points |
| Operating loss | $32.5 million | $36.5 million | Loss narrowed |
| Net loss | $37.4 million | $40.8 million | Loss narrowed; diluted loss per share was $0.20 versus $0.23 |
| Adjusted EBITDA | $(5.2) million | $(3.9) million | Loss increased |
| Operating cash flow | $85.1 million | $(11.6) million | Included a $140.8 million increase in deferred premium revenue from payment timing |
Management attributed revenue growth to membership gains, higher revenue per member—primarily from higher CMS benchmark rates—and higher ACO REACH revenue. Health plan membership was 109,700, up 16.5% from 94,200 a year earlier; ACO REACH covered approximately 7,800 seniors. Medical costs grew faster than revenue, which management attributed to richer benefits, seasonal utilization, ACO REACH mix, and less favorable prior-year claims development. SG&A fell 5.2% to $70.4 million, primarily because equity-based compensation decreased; excluding that compensation, SG&A rose 3.2%.
The company reported $384.3 million of cash and cash equivalents and $103.5 million of short-term investments at quarter-end, or $487.7 million combined. Deferred premium revenue of $141.1 million was primarily the April CMS premium payment received on March 31 and was to be recognized in April. Investing cash outflow was $110.4 million, mainly reflecting purchases of Treasury securities; cash, cash equivalents, and restricted cash ended at $386.0 million. The company stated its liquid assets should fund operations and organic capital needs for at least 12 months, while noting that actual needs depend on growth and spending.
Debt was $165.0 million principal, or $161.1 million net of issuance costs, under the Oxford term loan. The variable interest rate ranged from 10.86% to 11.16% during the quarter; principal and accrued interest are due in September 2027. The loan includes a $23.0 million minimum-liquidity covenant and a debt-to-revenue covenant; Alignment reported compliance at March 31. Current assets were $670.9 million and current liabilities were $374.2 million. Stockholders’ equity was $223.9 million.
Material changes and notable items
- Revenue increased 27.1%, while medical expenses rose 30.5%; the MBR consequently increased to 89.7% from 87.0%. The reported MBR is a company-defined metric and is not necessarily the CMS-calculated annual medical loss ratio.
- Operating cash flow improved substantially year over year, but the filing says this was mainly due to the timing-related deferred premium receipt. The $141.1 million liability was expected to unwind when revenue was recognized in April.
- Other revenue rose to $4.3 million from $0.2 million, mainly from higher interest income on cash balances. Interest expense increased to $5.0 million from $4.4 million.
- Management reported $1.7 million of favorable prior-year claims development, primarily from better-than-expected recoveries and lower-than-expected claims expense.
- No material changes to previously disclosed risk factors, contractual obligations, or internal controls were reported. Disclosure controls were deemed effective, and there were no off-balance-sheet arrangements.
Outlook, risks, and contingencies
The filing provides no numerical financial guidance. Management expects continued investment in technology, market expansion, sales and marketing, and public-company costs; it also notes that expenses may rise as the business grows. Results are subject to seasonality, including first-quarter membership additions and potentially higher medical costs in the first and fourth quarters. Management cautioned that new members can have higher MBRs and less complete diagnosis documentation, while member mix and utilization can affect results.
Key risks include reliance on CMS payments and risk-adjustment estimates, accurately estimating unpaid medical claims, maintaining provider relationships and quality ratings, competition, growth execution, data security, labor costs, and the ability to meet debt covenants and generate cash. The company said COVID-19 had less impact on Q1 2023 than on Q1 2022 but continues to monitor potential effects on claims. It is evaluating the future business effects of the Inflation Reduction Act.
A former employee’s purported class action alleges missed meal and rest breaks or unpaid premiums. The case was stayed pending mediation scheduled for August 2023; the company intends to defend itself and had not accrued a liability because the possible loss could not be estimated. Regulatory capital requirements were met at quarter-end.
Investor items to verify
- Whether the Q1 operating cash flow improvement is temporary by reconciling the deferred premium receipt and subsequent April cash collection.
- Whether membership growth translates into improved MBR and adjusted gross margin, given medical costs grew faster than revenue.
- How much of the reported claims development and medical expense estimates may change as claims mature, including the adequacy of unpaid-claims reserves.
- Available liquidity at regulated subsidiaries versus parent-company liquidity, and ongoing compliance with the Oxford loan’s financial covenants and variable-rate terms.
- Developments in the meal-and-rest-break lawsuit, CMS risk-adjustment reviews, and the potential effects of the Inflation Reduction Act.