Alignment Healthcare, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Unless otherwise noted, financial amounts below are in millions of dollars. The company operates Medicare Advantage plans and related care arrangements, principally across six states.
Business context and key metrics
- Health plan membership was 112,200 at quarter-end, up 17.0% year over year. The company also reported approximately 7,600 seniors in its ACO REACH arrangement.
- Management describes its model as combining a proprietary technology platform, AVA, with clinical care and provider partnerships. More than 90% of health plan members were enrolled in plans rated four stars or higher.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $462.4 | $366.5 | $901.5 | $712.0 |
| Medical expenses | $410.6 | $307.3 | $807.0 | $611.0 |
| Medical benefits ratio (MBR) | 88.4% | 83.4% | 89.0% | 85.1% |
| Adjusted gross profit | $53.6 | $61.0 | $99.0 | $105.9 |
| Adjusted gross profit margin | 11.6% | 16.6% | 11.0% | 14.9% |
| Operating loss | $(23.7) | $(6.6) | $(56.1) | $(43.1) |
| Net loss | $(28.5) | $(11.6) | $(65.9) | $(52.4) |
| Adjusted EBITDA | $(2.1) | $10.3 | $(7.2) | $6.4 |
- Q2 revenue grew 26.2% year over year, reflecting 17% membership growth, higher revenue per member and increased ACO REACH revenue. Six-month revenue rose 26.6%.
- Medical expenses grew faster than revenue: 33.6% in Q2 and 32.1% for the six-month period. Management cited membership and ACO REACH growth, richer benefits, utilization seasonality and less favorable prior-year claims development as factors. The higher MBR coincided with lower adjusted gross profit and a swing to negative adjusted EBITDA.
- SG&A was $70.2 million in Q2, up 13.8%, and $140.6 million for six months, up 3.4%. Six-month depreciation and amortization was $10.1 million, versus $8.1 million. Interest expense was $5.3 million in Q2 and $10.3 million for six months.
- Q2 net loss per share was $0.15, compared with $0.06; six-month net loss per share was $0.36, compared with $0.29.
Cash flow, liquidity and debt
- At June 30, cash and cash equivalents were $395.3 million and short-term investments were $122.2 million. Management reported $517.5 million in cash, cash equivalents and short-term investments, including $193.6 million held at the parent company. Restricted cash of $1.8 million is separate.
- Six-month operating cash flow was $122.3 million, compared with cash used of $1.3 million in 2022. The 2023 inflow was substantially affected by $147.2 million of deferred premium revenue: CMS paid the July premium on June 30 because July 1 was not a business day. The company said operating cash use would have increased $23.7 million year over year excluding this deferred premium revenue.
- Investing cash outflow was $136.6 million, primarily reflecting purchases of short-term Treasury securities; financing cash inflow was $0.06 million. Cash, cash equivalents and restricted cash ended the period at $397.0 million, down $14.3 million from the beginning of the year.
- Long-term debt was $165.0 million principal, or $161.4 million net of issuance costs. The Oxford loan bears variable interest at one-month SOFR plus 6.50%; the reported Q2 rate ranged from 11.30% to 11.67%. Principal is due September 2027. The loan is secured by unrestricted assets and includes liquidity and leverage covenants. The company reported compliance at quarter-end.
- Current assets were $683.6 million and current liabilities $401.9 million; liabilities included $147.5 million of deferred premium revenue and $207.2 million of medical expenses payable. Management stated liquid assets should fund operating and organic capital needs for at least 12 months, while noting that additional financing may be needed depending on growth and investment needs.
Outlook, risks and unusual items
- The filing provides no numerical revenue, earnings or cash-flow guidance. Management expects continued investment in technology, market expansion, sales and marketing, and public-company costs; it also notes that expenses are generally higher in the second half of the year.
- Management describes seasonal patterns in enrollment, medical utilization and Part D costs. New members may have higher MBRs, while management says MBRs for returning member cohorts have improved over time.
- Key risks include medical-cost and incurred-but-not-reported claims estimation, risk-adjustment data and CMS reimbursement, plan quality ratings, provider relationships, competition, regulatory and government-program changes, labor costs, cybersecurity and technology disruption, and the ability to manage growth and service debt.
- Medical expenses payable totaled $207.2 million, including $91.9 million of claims incurred but not paid. Management reported favorable prior-year claims development of $1.1 million in Q2 and $2.9 million for six months, primarily from better-than-expected recoveries and claims costs; actual claims may differ from estimates.
- A former employee’s purported class action alleges meal- and rest-break violations. The company intends to defend the case; possible losses could not be estimated and no liability was accrued. Management said other legal matters were not expected to materially affect the financial statements.
- The company reported compliance with state risk-based capital and California tangible-net-equity requirements. It also reported no material changes to previously disclosed risk factors and no off-balance-sheet arrangements.
Most important facts for investors to verify
- Whether medical-cost trends and the MBR improve after rising materially year over year, and how claims reserve estimates develop.
- How much reported operating cash flow reflects the timing-related $147.2 million deferred premium receipt, and whether underlying cash use tracks management’s expectations.
- Whether growth in membership and ACO REACH generates sustainable margins after medical costs, benefits and expansion spending.
- Available liquidity at the parent and regulated subsidiaries, covenant headroom, variable-rate debt costs and the terms of any future financing.
- Developments in the employment class action, CMS risk-adjustment and regulatory matters, and plan Star ratings.