Alignment Healthcare, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless otherwise noted.
Business context
Alignment operates Medicare Advantage plans and related risk-bearing healthcare arrangements, primarily in California, North Carolina, Nevada and Arizona. It reported 98,000 health plan members at quarter-end, up 14% year over year. Separately, approximately 5,000 traditional Medicare beneficiaries were served through its Direct Contracting Entity (DCE) arrangement.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $360.3 | $293.5 | $1,072.3 | $869.5 |
| Medical expenses | $312.9 | $254.0 | $923.9 | $779.5 |
| Loss from operations | $(33.4) | $(41.5) | $(76.5) | $(134.6) |
| Net loss | $(40.2) | $(45.8) | $(92.6) | $(147.5) |
| Adjusted EBITDA (non-GAAP) | $(9.5) | $(5.5) | $(3.1) | $(24.2) |
| Adjusted gross profit (non-GAAP) | $49.5 | $42.0 | $155.4 | $101.6 |
- Revenue increased 22.8% in Q3 and 23.3% year to date, driven by membership growth and higher revenue per member, primarily reflecting increased CMS benchmark rates.
- Medical benefits ratio (MBR) was 86.3% in Q3 versus 85.7% a year earlier; for the nine months it was 85.5% versus 88.3%. Adjusted gross profit as a percentage of revenue was 13.7% in Q3 versus 14.3%, and 14.5% year to date versus 11.7%.
- Q3 operating and net losses narrowed year over year, but adjusted EBITDA loss widened. Year-to-date losses narrowed substantially. SG&A was nearly flat as reported, while SG&A excluding equity compensation rose 22.4% in Q3 and 22.2% year to date.
- Cash provided by operations was $103.8 million for the nine months, versus $48.6 million used in the prior-year period. The company said the improvement was largely driven by $116.3 million of deferred premium revenue from the timing of CMS’s October payment, received in September. Cash used in investing was $20.1 million; financing provided $17.1 million.
Financial position and debt
- At September 30, cash was $567.4 million ($569.2 million including restricted cash); current assets were $692.2 million and current liabilities $340.3 million. The current liabilities include $116.8 million of deferred premium revenue, expected to be recognized in October.
- Long-term debt was $165.0 million principal, or $160.7 million net of debt issuance costs. The company refinanced its CRG loan with a senior secured Oxford facility in September, using the initial $165 million borrowing primarily to repay CRG. The new loan bears variable interest at one-month SOFR plus 6.50% (9.02% in September 2022), matures September 2027, and is secured by unrestricted assets. Up to $85 million of additional borrowing is available subject to facility terms.
- The facility includes a $23 million minimum-liquidity covenant and a maximum debt-to-trailing-revenue covenant; the company reported compliance at quarter-end. It also recorded a $2.2 million loss on extinguishment of debt related to the refinancing.
- Management stated that liquid assets should fund operating and organic capital needs for at least the next 12 months. Cash at the parent company was $303.7 million; transfers from regulated subsidiaries may be restricted. The company reported compliance with applicable state capital requirements.
Outlook, commentary and risks
- No specific financial guidance or quantified profitability target is provided in the supplied filing text. Management expects continued investment in technology, sales and marketing, and market expansion, and expects corporate, general and administrative expenses to rise in absolute dollars over time.
- The company announced anticipated 2023 expansion into 14 additional markets in its existing states and in Florida and Texas. It stated that ACO REACH, which replaces the DCE model beginning in 2023, may produce different financial results; CMS alignment information for the 2023 performance year had not yet been received. Failure to maintain at least 5,000 aligned beneficiaries could jeopardize participation.
- Key risks include continued operating losses; medical-cost and incurred-but-not-reported claims estimate variability; dependence on CMS payments and risk adjustment; competition and execution of growth plans; and data security, regulatory and provider-network risks. The new loan’s floating SOFR rate exposes the company to higher interest expense. Inflation, labor and medical-cost increases, and government budget pressure are also identified risks.
- COVID-related utilization was less significant in Q3 2022 than during earlier pandemic periods, but management said future effects remain uncertain. Favorable prior-year claims development was $0.3 million for Q3 and $11.0 million year to date, primarily from better-than-expected recoveries and claims costs.
- The Inflation Reduction Act was signed into law in August 2022; the company was evaluating its potential impact. Legal proceedings were described as ordinary-course matters, with no material accruals and no expected material adverse effect in management’s view.
- Subsequent to quarter-end, on October 31, 2022, the board appointed its chairman to an executive role leading strategic network and business development, with stated salary, bonus eligibility and equity awards.
Most important facts for investors to verify
- Whether reported MBR and favorable claims-reserve development are sustainable as membership grows and medical claims mature.
- How much operating cash generation is repeatable apart from the $116.3 million premium-payment timing benefit, and what cash is practically available after regulatory restrictions.
- The effect of SOFR changes, loan covenants and collateral terms on interest expense, liquidity and financial flexibility.
- Whether the 2023 market expansion and ACO REACH beneficiary alignment requirements are achieved, and how the transition affects membership and results.
- Management’s future updates on the Inflation Reduction Act and other changes to Medicare reimbursement, risk adjustment and program rules.