Agilon Health, Inc. — Q3 2023 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2023. Agilon partners with community physician groups and generally accepts full financial risk for Medicare Advantage members through capitated contracts. At quarter-end, its network served approximately 420,300 Medicare Advantage members, up 58% year over year, and 87,700 ACO REACH beneficiaries, down 2% year over year. Eight new geographies began generating revenue in 2023.
Financial and operating performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $1,215.7 million | $694.9 million | $3,500.9 million | $2,018.4 million |
| Gross profit | $30.5 million | $25.9 million | $165.0 million | $102.3 million |
| Medical margin (non-GAAP) | $107.7 million | $75.6 million | $408.0 million | $243.9 million |
| Operating loss | $49.0 million | $29.5 million | $72.5 million | $51.3 million |
| Net loss | $31.5 million | $30.7 million | $32.3 million | $50.3 million |
| Adjusted EBITDA (non-GAAP) | $(5.8) million | $(25.8) million | $28.3 million | $(20.5) million |
Q3 revenue grew 75%, primarily on 57% growth in average membership and an 11% increase in PMPM capitation rates. Medical services expense rose 79%; expense per member increased 13%, and medical services expense was 91% of revenue versus 89% a year earlier. For the first nine months, revenue rose 73%, while medical services expense increased 74%. The company reported a Q3 loss of $0.08 per share and a nine-month loss of $0.08 per share.
Cash flow and liquidity: Operating cash use was $95.0 million for the first nine months, compared with $80.8 million in 2022. Investing cash use was $41.8 million; financing cash use was $192.3 million, including a $200 million stock repurchase. At September 30, cash and restricted cash totaled $178.5 million, and marketable securities were $395.9 million, or $574.4 million combined. Cash and cash equivalents alone were $168.3 million, down from $497.1 million at year-end 2022.
Debt and balance sheet: Debt was approximately $39.8 million net of debt costs, including $40 million outstanding on the term loan. The $100 million revolving facility had $32.9 million available after $67.1 million of letters of credit. The term loan’s effective interest rate was 9.349%; the facilities mature in February 2026. The company was in compliance with its debt covenants. Total assets were $2.28 billion and stockholders’ equity was $871.6 million. Medical claims and related payables were $1.01 billion.
Material changes and notable items
- Medical margin increased year over year, but Q3 gross profit increased more slowly than revenue and the medical expense ratio worsened. Management noted that new membership typically dilutes medical margin per member.
- Nine-month equity-method investment income rose to $24.5 million from $3.5 million, primarily reflecting stronger ACO REACH results and higher PMPM rates. Q3 equity-method income was $14.7 million versus a $4.3 million loss.
- Stock-based compensation was $54.0 million for the first nine months, versus $18.4 million a year earlier.
- Agilon acquired My Personal Health Record Express in February 2023 for $44.5 million net of cash acquired; preliminary purchase accounting included $20.6 million of goodwill.
- After quarter-end, the company sold MDX Hawaii and related operations; the sale closed October 31, 2023. The filing does not provide sale proceeds.
Outlook, risks, and contingencies
The filing gives no specific numerical revenue or earnings guidance. Management expects operating losses and negative operating cash flows to continue for the foreseeable future as it invests in expansion, but believes existing cash, marketable securities, and available borrowing capacity will cover working capital and capital expenditure needs for at least the next 12 months. It cautions that estimates may prove wrong and additional capital may be needed.
Key risks include the cost and utilization of medical care exceeding capitation revenue; the accuracy of risk-adjustment revenue and incurred-but-not-reported claims estimates; reliance on a small number of Medicare Advantage payors; and dependence on physician partners and government reimbursement programs. Three payors each accounted for at least 14% of Q3 revenue; one payor represented 26% of receivables at quarter-end. Management accrued $49.5 million for probable losses related to unasserted claims and estimated reasonably possible losses above that accrual of up to $69.1 million. The filing says it is not aware of legal proceedings expected to have a material adverse effect.
Management stated that disclosure controls and procedures related to previously identified material weaknesses in internal control over financial reporting were not effective at September 30, 2023; remediation efforts are ongoing. The filing identifies substantial judgment in estimating risk-adjustment revenue, medical expenses, and claims reserves.
Investor verification priorities
- Track medical costs per member, medical margin, and claims-reserve development against capitation rates and membership growth.
- Review payor concentration, receivable collection timing, and the effect of risk-adjustment settlements on operating cash flow.
- Assess liquidity after the $200 million repurchase, the availability of the revolver after letters of credit, and potential future funding needs.
- Verify the financial effects of the MDX Hawaii sale and the integration and returns from the 2023 acquisition.
- Monitor remediation of internal-control weaknesses and changes in the accrued and reasonably possible claims exposures.