Agilon Health, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparison is with the three months ended March 31, 2020. Amounts below are in U.S. dollars. Agilon provides infrastructure and capital to physician groups operating Medicare-focused, globally capitated healthcare businesses. At quarter-end, its physician networks served approximately 165,300 Medicare Advantage members, up 35% year over year.
Key financial results
| Metric | Q1 2021 | Q1 2020 | Change / context |
|---|---|---|---|
| Total revenue | $413.1 million | $291.0 million | Up 42%; nearly all was medical services revenue |
| Medical services revenue | $412.4 million | $289.8 million | Up 42%, mainly from membership growth and new geographies |
| Medical services expense | $360.4 million | $247.7 million | Up 46%; 87% of revenue versus 85% a year earlier |
| Medical margin | $52.1 million | $42.2 million | Up 23%; approximately 12.6% of medical services revenue versus 14.5% |
| Operating loss | $12.1 million | $5.8 million | Loss widened |
| Net loss attributable to common shares | $15.1 million | $16.1 million | Loss narrowed, helped by lower discontinued-operations losses |
| Adjusted EBITDA | $3.8 million | $2.6 million | Up 46%; non-GAAP measure |
| Operating cash flow | $(40.8) million | $(26.1) million | Cash use increased |
| Cash, cash equivalents and restricted cash | $119.5 million | $147.2 million at March 31, 2020 | Unrestricted cash was $105.3 million at March 31, 2021 |
| Debt | $100.0 million long-term debt | — | New secured term loan; $81.5 million revolving capacity remained, net of letters of credit |
Medical margin increased in dollars, but medical costs grew faster than revenue. Management attributed the 46% increase in medical expense to membership growth and an 8% increase in average medical expense per member. General and administrative expense rose 37% to $37.8 million; total expenses exceeded revenue, producing an operating loss.
Balance sheet, liquidity and financing
At March 31, 2021, total assets were $574.0 million and total liabilities were $562.8 million. Current assets of $417.6 million exceeded current liabilities of $372.1 million. Medical claims and related payables were $277.0 million, up from $162.9 million at year-end 2020; receivables increased to $288.8 million from $144.6 million.
In February 2021, Agilon refinanced prior debt with a $100 million secured term loan and a $100 million revolving facility. The term loan’s weighted-average effective interest rate was 4.40% at quarter-end. The company was in compliance with debt covenants. After quarter-end, it completed its April 19 IPO, selling 53.59 million shares at $23 per share and receiving approximately $1.2 billion in net proceeds. It repaid $50 million of term debt on April 26; the facilities’ maturity was extended to February 2026. Management stated that cash, IPO proceeds and borrowing capacity should cover working capital and capital expenditure needs for at least 12 months, while cautioning that estimates could prove wrong.
Material changes and unusual items
- Revenue growth reflected 35% growth in average membership, three geographies entering operation in 2021 and a 5% increase in PMPM capitation rates. Medical expense per member rose 8%.
- Agilon completed the sale of its remaining California operations in February 2021. California and the Medicaid business are reported as discontinued operations; their loss was $1.4 million in Q1 2021, versus $8.2 million in Q1 2020.
- A transition of a group Medicare Advantage contract between payors was not completed in time for Q1 reporting. Agilon estimated the affected Q1 membership at 9,000 and associated revenue at approximately $24 million; it expected the cumulative revenue and costs to be reflected in Q2 2021.
- The April IPO triggered vesting and issuance of 11.7 million shares under physician-group equity agreements and $268.5 million of stock-based compensation expense in April, not in Q1 results. Agilon also disclosed $2.6 million of IPO-related option expense and $3.7 million of severance expense. It provided $59.6 million of financing to physician groups for taxes on shares distributed to them.
- Capital commitments to physician partners increased $25.1 million from year-end to $43.8 million. No material off-balance-sheet arrangements were reported.
Outlook, commentary and principal risks
The filing gives no specific quarterly or full-year revenue, earnings or margin guidance. Management expects continued operating losses and negative operating cash flow for the foreseeable future as it invests in expansion and public-company costs. It expects platform support costs to decline as a percentage of revenue with scale, while noting that new membership may dilute medical margin per member.
Agilon launched five Direct Contracting Entities with seven physician partners on April 1, 2021, representing more than 50,000 attributed traditional Medicare beneficiaries. Management noted that a CMS announcement would limit new DCE entrants for 2022, although existing DCEs could serve as a vehicle for physician groups.
- COVID-19 and utilization: Deferred care and lower utilization during 2020 may lead to future cost increases; the company could not estimate the net impact. Disrupted diagnosis documentation could also reduce future risk-adjustment revenue.
- Medical estimates: Revenue depends on risk adjustment estimates, while medical expense includes estimates for incurred-but-not-reported claims; actual results may differ materially.
- Payor and regulatory exposure: Revenue and receivables are concentrated among a small number of payors, and substantially all revenue is Medicare Advantage-related. Medicare reimbursement, regulation and government funding changes pose risks.
- Contingencies: The company recorded $73.3 million for contingent liabilities related to unasserted claims and estimated reasonably possible losses above reserves of $0 to $18.6 million. A California Department of Managed Health Care investigation concerning claims and utilization-management practices remains unresolved; Agilon said it could not estimate any adverse impact. It retained certain liabilities after divesting California.
- Debt and interest rates: The credit facilities carry floating rates and financial covenants. A hypothetical 100-basis-point rate change was estimated to affect quarterly interest expense by less than $1 million.
Most important facts for investors to verify
- Whether Q2 reporting includes the estimated $24 million of Q1 contract-transition revenue and related costs, and whether membership reconciles to the estimated 9,000 affected members.
- How medical expense per member, claims reserves and medical margin develop as care utilization normalizes after pandemic-related deferrals.
- The final impact and accounting treatment of IPO-triggered compensation, physician-group tax financing and the $50 million debt repayment.
- Updates on the DMHC matter, retained California liabilities and potential losses above the recorded contingency reserve.
- Whether membership and geography expansion generate sustainable cash flow, given Q1 operating cash use and the company’s stated expectation of continued losses and negative operating cash flow.