Agilon Health, Inc. annual report, FY2022

Agilon Health, Inc. — 2022 Form 10-K

Reporting period: Fiscal year ended December 31, 2022. This is an annual report, not a standalone fourth-quarter report. Agilon partners with community-based physician groups and takes financial responsibility for attributed members’ healthcare costs under primarily Medicare Advantage capitation arrangements.

Financial and operating performance

Metric	2022	2021
Total revenue	$2.708 billion	$1.834 billion
Medical services revenue	$2.704 billion	$1.830 billion
Medical services expense	$2.400 billion	$1.648 billion
Medical margin	$304.6 million; 11.3% of medical revenue	$182.1 million; 10.0% of medical revenue
Operating loss	$120.4 million	$394.0 million
Net loss	$106.9 million	$406.8 million
Adjusted EBITDA (non-GAAP)	$4.3 million	$(38.6) million
Net cash used in operating activities	$130.8 million	$148.2 million

Revenue rose 48%, chiefly reflecting 45% growth in average Medicare Advantage membership and, to a lesser extent, a 2% increase in PMPM capitation rates. Medical services expense grew 46%; average expense per member was relatively flat. Medical margin increased 67%. Reported 2022 net loss improved substantially, but comparison with 2021 is affected by $292.4 million of non-cash stock-based compensation in 2021, largely tied to physician-group equity issued at the IPO. 2022 stock-based compensation was $28.4 million. Platform support costs were $146.5 million, or 5% of revenue, versus $123.5 million, or 7%, in 2021. Geography-entry costs included $67.7 million in 2022 versus $32.6 million in 2021.

Membership and scale: At year-end, the platform served approximately 269,500 Medicare Advantage members, up 45%, and approximately 89,000 Direct Contracting beneficiaries, up 72%. Agilon reported 23 anchor physician groups and 25 geographies; six geographies became operational during 2022. It had eight Direct Contracting Entities, transitioning to the ACO REACH model in 2023.

Cash, liquidity and debt

• At December 31, 2022, cash and cash equivalents were $497.1 million, restricted cash was $10.6 million, and marketable securities were $411.9 million. Cash, cash equivalents and restricted cash totaled $507.7 million, down from $1.055 billion a year earlier. Marketable securities were newly held in 2022; their year-end fair value was $5.6 million below amortized cost, primarily due to higher interest rates. The company said it did not expect to need to sell them before recovery or maturity.
• Operating cash outflow was $130.8 million. Investing cash outflow was $444.4 million, mainly reflecting $458.3 million of marketable-securities purchases. Financing cash inflow was $28.1 million, including $33.1 million in net proceeds from stock-option exercises.
• Term-loan principal was $43.75 million at year-end; the balance-sheet carrying amount, net of debt costs, was $43.5 million. The $100 million revolving facility had $38.8 million available, with $61.2 million of letters of credit outstanding. The effective term-loan rate was 6.04%; the facility matures February 18, 2026. Agilon reported compliance with debt covenants.
• Management expects operating losses and negative operating cash flows to continue for the foreseeable future, but believes cash, cash equivalents and available borrowing capacity will cover working capital and capital-expenditure needs for at least 12 months. Future financing may be needed; availability and terms are uncertain.

Material changes, outlook and risks

• Medical margin and network contribution increased as membership expanded. Network contribution, a non-GAAP measure, was $132.3 million versus $84.6 million in 2021; it excludes implementation-geography costs and is not a substitute for GAAP results.
• Other medical expenses increased 79% to $196.1 million, including higher physician surplus-sharing compensation and provider costs. General and administrative expense fell 52% to $218.9 million, chiefly because the prior year included large IPO-related non-cash compensation charges.
• Management said care in 2022 was near normal baseline levels in aggregate, though some areas remained below baseline; missed regular care could temporarily increase future utilization and acuity. No specific financial guidance or quantified earnings outlook is provided in the supplied filing text.
• Key business risks include medical costs exceeding capitation revenue; reliance on a limited number of payors and physician partners; membership attribution, diagnosis coding, risk-adjustment and incurred-but-not-reported-claims estimation; changes to Medicare Advantage reimbursement or CMS programs; regulatory and licensing requirements; and cybersecurity, privacy and litigation exposure.
• At year-end, the company recorded $62.9 million for unasserted claims and contingencies. It estimated reasonably possible losses in excess of recorded reserves of $0 to $52.9 million. Management said it was not aware of legal proceedings believed likely to have a material adverse effect; outcomes remain uncertain.
• The independent auditor gave an unqualified opinion on the financial statements but an adverse opinion on internal control over financial reporting. Management and the auditor identified material weaknesses in IT general controls and revenue/accounts-receivable controls. Remediation was underway and had not yet been established as effective.
• The auditor identified estimation of Medicare Advantage risk-adjustment revenue and valuation of incurred-but-not-reported claims as critical audit matters. Medical claims and related payables were $346.7 million on the balance sheet; the auditor described substantially all of the $347 million balance as estimated IBNR claims.
• CMS’s January 2023 final rule allows extrapolation in certain Medicare Advantage RADV audits for payment years 2018 onward and eliminates the fee-for-service adjuster for Part C contract-level audits. Agilon said it could not predict the effect on its financial results.

Most important facts for investors to verify

• Whether medical margin and operating cash use improve as new geographies mature, and how much growth depends on new-member economics.
• Whether the risk-adjustment revenue and IBNR claims estimates prove accurate as payor data and claims develop.
• Progress and independent testing of remediation for the two material weaknesses; the auditor’s adverse internal-control opinion is distinct from its unqualified financial-statement opinion.
• Potential exposure from unasserted claims, including whether losses exceed recorded reserves, and any effects of RADV audits or other payor recoveries.
• Liquidity available after restricted deposits and letters of credit, alongside the continuing cash burn, contractual capital commitments of $134.8 million, and debt-facility restrictions.
• Payor concentration: four payors represented 68% of 2022 revenue, and the largest represented 25%.