InnovAge Holding Corp. — FY2023 Form 10-K
Period: Fiscal year ended June 30, 2023, compared with fiscal 2022. The filing is an annual report, not a report for 2022 Q4. InnovAge operates a single reportable segment, PACE, providing fully capitated care to frail seniors, primarily people eligible for both Medicare and Medicaid. At year-end it served approximately 6,400 participants at 17 centers in five states.
Financial performance
| Metric | FY2023 | FY2022 |
|---|---|---|
| Revenue | $688.1 million | $698.6 million |
| Operating loss | $(49.4) million | $(4.4) million |
| Net loss | $(43.6) million | $(8.0) million |
| Net loss attributable to InnovAge | $(40.7) million | $(6.5) million |
| Adjusted EBITDA (non-GAAP) | $(1.3) million | $34.3 million |
| Operating cash flow | $20.2 million | $27.3 million |
- Revenue declined 1.5%. Capitation revenue fell 1.5% to $686.8 million: member months decreased 6.6%, partly offset by a 5.5% increase in capitation rates. Government capitation accounted for approximately 99.8% of revenue.
- Total operating expenses rose 4.9% to approximately $737.5 million. Cost of care, excluding depreciation and amortization, increased 17.8% to $212.3 million; corporate, general and administrative expense increased 13.8% to $115.6 million. External provider costs declined 2.2% to $374.5 million.
- Center-level contribution margin, a non-GAAP measure, fell to $101.3 million (14.7% of revenue) from $135.4 million (19.4%). Adjusted EBITDA margin fell to (0.2%) from 4.9%.
- Cash and cash equivalents were $127.2 million, with $46.2 million in short-term investments. Cash, cash equivalents and restricted cash declined $57.2 million during the year. Investing cash use was $69.5 million, including $23.4 million of property and equipment purchases and $46.2 million of short-term investment purchases.
- Debt principal totaled $69.8 million: $67.5 million under the term loan and $2.3 million under a convertible loan. The term loan carried a 6.95% variable rate at year-end. The $100 million revolver was undrawn, with $97.2 million available after letters of credit, subject to covenants. The company reported covenant compliance.
- Current assets were $215.2 million and current liabilities $148.5 million. The balance sheet also included $22.4 million of operating lease liabilities and $17.8 million of finance lease liabilities.
Material changes and operating developments
- Participant census was approximately 6,400 versus 6,650 in FY2022. The company attributed the decline principally to disenrollments and enrollment restrictions at Sacramento and Colorado centers following audits.
- Enrollment sanctions were lifted in Colorado in January 2023 and California in May 2023. Enrollment resumed, but the company said it was increasing enrollments gradually and continued post-sanction monitoring and corrective work.
- Higher cost of care reflected increased wages and staffing, compliance and audit support, transportation, and greater assisted-living and nursing-facility utilization. Management said the participant pool became more acute while enrollment restrictions limited replenishment with newer, lower-acuity participants.
- The company consolidated its Germantown LIFE center with two other Pennsylvania centers. It continued pursuing licenses for proposed centers in Tampa, Orlando and Downey, California.
Outlook, risks and unusual items
- No numerical financial guidance is provided in the supplied filing text. Management expects elevated operating expenses in FY2024, continued investment in remediation, compliance, technology and growth, and continued efforts to control costs. It states that cash, operating cash flows and financing sources are expected to fund needs for the next 12 months and beyond, while cautioning that assumptions may prove incorrect.
- Key risks include the full-cost responsibility inherent in capitated contracts; medical-cost inflation and labor availability; dependence on Medicare, Medicaid and a limited number of states; reimbursement, risk-adjustment and contract changes; future audits or sanctions; and the ability to restore enrollment and execute expansion plans.
- The company continues to cooperate with Colorado’s Attorney General and the Department of Justice on civil investigative demands concerning Medicaid billing, services, referrals and related matters; outcomes are not predictable. Securities and derivative stockholder lawsuits also remain unresolved. A California wage-and-hour class action settlement of $1.2 million was agreed to, subject to court approval.
- FY2023 Adjusted EBITDA included $9.8 million of litigation costs and settlement, $10.5 million of business optimization costs and $6.1 million of EMR implementation costs, among other adjustments. These are non-GAAP adjustments; consult the filing’s reconciliation when assessing their recurring nature.
- The independent auditor issued an unqualified opinion on the financial statements. The auditor did not express an opinion on internal control effectiveness; management reported effective internal controls as of June 30, 2023.
Most important facts for investors to verify
- Whether post-sanction corrective actions remain effective and enrollment, census and participant retention recover without renewed regulatory restrictions.
- Whether medical-cost trends, participant acuity and staffing costs improve enough to restore contribution margin and positive Adjusted EBITDA.
- The status and potential financial, operational or reputational effects of the DOJ and state investigations and pending stockholder litigation.
- Actual FY2024 cash burn, capital spending, liquidity and compliance with credit-facility covenants, including exposure to variable interest rates.
- The supportability of risk-adjustment submissions, capitation true-ups and the $43.0 million reported and estimated claims liability at year-end.