Alignment Healthcare, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This is an annual report; the filing does not provide a distinct fourth-quarter financial summary. Alignment operates Medicare Advantage plans and related senior-care services, primarily in California, North Carolina, Nevada and Arizona.
Financial and operating performance
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Revenue | $1,167.8 million | $959.2 million | +21.7% |
| Medical expenses | $1,039.0 million | $793.0 million | +31.0% |
| Medical benefits ratio (MBR) | 87.6% | 82.6% | +5.0 percentage points |
| Adjusted gross profit (non-GAAP) | $144.4 million; 12.4% of revenue | $166.6 million; 17.4% | -13.3% |
| Operating loss | $178.1 million | $5.3 million | Loss widened |
| Net loss | $195.3 million | $22.9 million | Loss widened |
| Adjusted EBITDA (non-GAAP) | $(33.1) million | $11.9 million | Turned negative |
| Health Plan Membership at year-end | 86,100 | 68,323 | +26.0% |
Premium revenue was $1,167.1 million; other revenue was $0.7 million. Growth was primarily driven by Health Plan membership and a 28.4% increase in health-plan premium revenue. Total revenue growth was partly offset by lower third-party-payor capitation revenue after a contract ended in December 2020.
Medical expenses grew faster than revenue, reflecting membership mix, COVID-related utilization and $15.4 million of equity-based compensation recorded in medical expenses. SG&A rose 86.1% to $291.0 million, principally due to $106.6 million of equity-based compensation, as well as growth investments, hiring and IPO-related costs. Total equity-based compensation was $122.0 million, substantially above FY2020.
Cash and cash equivalents were $466.6 million at year-end; cash and restricted cash totaled $468.4 million. Current assets were $552.9 million and current liabilities were $167.2 million. Operating cash flow was negative $78.8 million, versus positive $7.6 million in FY2020; investing cash flow was negative $20.8 million, and financing cash flow was positive $360.1 million, mainly reflecting IPO proceeds.
Debt outstanding was $154.1 million, including payment-in-kind interest and fees; the balance-sheet carrying amount, net of debt issuance costs, was $150.6 million. The term loan bears interest at 10.25% and matures in June 2023. The filing estimates approximately $161.0 million due at maturity. Alignment reported compliance with its financial covenants at December 31, 2021. The company received approximately $361.6 million in net IPO proceeds in 2021.
Material changes and business developments
- Health Plan Membership grew to 86,100 at December 31, 2021; the company reported approximately 92,700 members across 38 markets as of January 1, 2022.
- MBR increased to 87.6% from 82.6%, while adjusted gross profit margin fell to 12.4% from 17.4%.
- The net loss expanded sharply, reflecting higher medical costs, growth spending and significant IPO-related equity compensation. Adjusted EBITDA also moved from positive to negative.
- Alignment launched two Direct Contracting Entities (DCEs) in April 2021. DCE revenue was $37.7 million for the year; approximately 5,400 traditional Medicare members were in DCE arrangements at year-end.
- CMS Star rating was 4.0 for the 2022 rating year/2023 payment year. The company stated that Nevada, North Carolina and Arizona did not yet have independent ratings because of limited operating history.
Outlook, commentary and risks
Management expects continued investment in market expansion, technology, provider networks, sales and marketing, new products and public-company operations. It cautioned that these investments may increase near-term losses, while stating that liquid assets and anticipated operating revenue should fund operating and organic capital needs for at least 12 months. The filing provides no specific financial guidance for FY2022.
Management cited COVID-19-related hospitalization increases early in 2021, a subsequent decline, and a rebound associated with Delta and Omicron later in the year. COVID-related disruption and less complete member diagnosis documentation, including lower risk-adjustment scores among new members, adversely affected per-member revenue in 2021; the future impact remained uncertain.
Key exposures include dependence on CMS and Medicare Advantage funding; annual CMS contract and bid approvals; medical-cost and incurred-but-not-reported claims estimation; accuracy and auditability of risk-adjustment data; provider-network relationships; intense competition; concentration in four states; cybersecurity and privacy; and substantial regulation. CMS’s transition to the Encounter Data System for risk adjustment, and proposed RADV audit methodology changes, could affect payments. The filing also identifies approximately 17,000 members potentially affected by 2023 restrictions on certain D-SNP look-alike plans, with possible transition, retention and benefit-cost implications.
Other notable items: no payable amount was recorded for the 85% minimum medical loss ratio test at year-end; management said pending litigation was not expected to have a material effect. The independent auditor issued an unqualified opinion on the financial statements and identified medical claims reserves and DCE revenue classification as critical audit matters. The company did not provide management’s internal-control effectiveness assessment or an auditor attestation for 2021 under the newly public company transition relief.
Important facts for investors to verify
- Whether the higher MBR and lower adjusted gross profit margin persist, and how new-member mix, medical utilization and COVID-related claims develop.
- Whether operating cash use moderates and whether cash, regulatory capital and subsidiary dividend restrictions support planned growth and the June 2023 term-loan maturity.
- Risk-adjustment revenue assumptions, claims-reserve adequacy, and effects of the EDS transition and any CMS RADV audit methodology or findings.
- Execution of market expansion and DCE arrangements, including profitability and the potential impact of 2023 D-SNP look-alike plan restrictions.
- Magnitude and timing of remaining equity-compensation expense, future dilution, and the company’s path toward profitability; FY2021 adjusted measures exclude significant compensation and other items.