The following discussion summarizes the significant factors affecting our operating results, financial condition, liquidity, and cash flows as of and for the periods presented below. The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and the Notes to Consolidated Financial Statements included elsewhere in this Annual Report. The statements in this discussion regarding industry outlook, our expectations regarding our future performance, liquidity, and capital resources, and all other non-historical statements in this discussion are forward-looking statements and are based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management. Actual results could differ materially from those discussed in or implied by forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Annual Report, particularly under "Forward-Looking Statements" and Item 1A - Risk Factors.
Bright Health Groupwas founded in 2015 to transform healthcare. Our mission of Making Healthcare Right. Together. is built upon the belief that by connecting and aligning the best local resources in healthcare delivery with the financing of care, we can drive a superior consumer experience, reduce systemic waste, lower costs, and optimize clinical outcomes. We believe that for too long, U.S.healthcare, primarily designed to cater to employers and large institutions, has failed the consumer through unnecessary complexity, a lack of transparency, and rising costs. We are making healthcare simple, personal, and affordable. To execute on our mission, we have developed a model for healthcare transformation built upon the delivery, financing, and optimization of care. By bringing these three core pillars together, we aim to build the national, integrated healthcare system of the future, designed to break down historical barriers and create an environment in which all stakeholders - from the consumer, to the provider, to the payor - can win.
NeueHealth is critical to our differentiated, aligned model of care. While
Bright HealthCareis currently a larger contributor to revenue, due in part to the significant health plan premium revenue contribution from our consumers, we believe NeueHealth has a disproportional impact on our enterprise today and anticipate it will become increasingly important to our business, contributing an increasing percentage of our overall revenue in the long-term. We have presented NeueHealth first in the following discussion, consistent with management's view of our business. NeueHealth. Our healthcare enablement and technology business, NeueHealth, is developing the next generation, integrated healthcare system. NeueHealth significantly reduces the friction and current lack of coordination between payors and providers to enable a truly consumer-centric healthcare experience. As of December 2021, NeueHealth works with over 260,000 care provider partners and delivers high-quality virtual and in-person clinical care through its 52 owned primary care clinics within its integrated care delivery system. Through those risk-bearing clinics, NeueHealth maintains over 200,000 unique patient relationships as of December 31, 2021, over 175,000 of which are served through value-based arrangements, across multiple payors. In addition to our directly owned clinics, NeueHealth manages care for an additional 128 clinics through its affiliated clinics.
NeueHealth engages in local, personalized care delivery in multiple ways,
•Integrated Care Delivery - NeueHealth operates clinics providing comprehensive care to all populations. •Bright Health Networks - A key component of our NeueHealth business is our ecosystem of
Care Partnerswith whom we contract in service of Bright HealthCaretoday. •Value Services Organization - NeueHealth empowers high-performing primary care practices and care delivery organizations to succeed in their evolution towards risk-bearing care delivery. NeueHealth receives network rental fees from Bright HealthCarefor the delivery of NeueHealth's Care Partner and network services. In addition, NeueHealth contracts directly with Bright HealthCareto provide care through its managed and affiliated clinics. Other NeueHealth customers include external payors and third-party administrators, affiliated providers and direct-to-government programs. 61
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Bright HealthCare. Our healthcare financing and distribution business, Bright HealthCare, delivers simple, personal, and affordable solutions to integrate the consumer into Bright Health'salignment model. Bright HealthCarecurrently aggregates and delivers healthcare benefits to over 727,000 consumers through its various offerings, serving consumers across multiple product lines in 14 states and 99 markets. We also participate in a number of specialized plans and offer employer group plans. Bright HealthCare'scustomers include commercial health plans across 11 states, which serve approximately 611,000 individuals, as well as MA products in 11 states, which serve approximately 117,000 lives and generally focus on higher risk, special needs populations.
Key Factors Affecting Our Performance
We believe that the growth and future success of our business depends on a number of factors described below. While each of these factors presents significant opportunities for our business, they also pose important challenges that we must successfully address to sustain our growth and continue to improve results of operations.
Bright HealthCareproducts are primarily sold for the following year through an annual selling season, which includes the open enrollment period for IFP products and annual enrollment period for MA. Outside of an annual selling season, IFP and MA products typically can only be sold during SEPs based on the consumer's eligibility status and certain life events. It is critical to effectively engage both prospective and existing consumers through our multi-channel distribution strategy. For both IFP and MA products, we aim to offer competitive benefits at an affordable price to meet the needs of our consumers. Our IFP products' membership typically peaks after the open enrollment period and experiences modest levels of attrition until year-end. We have historically increased our MA consumer base during SEPs, given our consumers' eligibility to enroll during those periods. Our MA business is afforded additional in-year growth opportunity due to its focus on serving low-income seniors and special needs individuals, who can enroll in and change MA health plans at any time. Therefore, constant engagement with this population is critical to effectively retain membership and drive in-year growth. MA products are generally associated with higher revenue and higher MCR as compared to IFP products, particularly with respect to special needs plans.
data affects revenue
Portions of premium revenue from our IFP products and MA plans are determined by the applicable CMS risk adjustment models, which compensate insurers based on the underlying health status (acuity) of insured consumers. CMS requires that a consumer's health status be documented annually and accurately submitted to CMS to determine the appropriate risk adjustment. Ensuring that complete and accurate health conditions of our consumers are captured within documentation submitted to CMS is critical to recognizing accurate risk adjustment, which is reflected in our revenue year-over-year. See "Risk Factors - Risks Related to Our Business - Our health plan products are subject to risk adjustment programs, which if not managed properly can result in risk adjustment transfers that do not reflect our true risk profile, which could adversely impact our financial results and cash flows."
reduces medical costs and MCR
Bright HealthCareutilizes our Bright Health Networks to provide healthcare services primarily within its exclusive provider networks under capitated contracts and fee-for-service arrangements. Certain provider and payor contracts include value-based incentive compensation based on providers meeting contractually defined quality and financial performance metrics. To effectively manage medical costs, Bright HealthCaremust ensure a consumer's healthcare needs are primarily delivered through its Care Partnersto recognize discounted contracted rates, which limits the amount of out-of-network utilization that can have an adverse financial impact on medical costs and MCR. Out-of-network utilization is typically higher upon entry into new markets, which increases medical costs during periods of market expansion. Our business is generally affected by the seasonal patterns of medical expenses. With respect to IFP products, medical costs tend to be lower early in the year and increase toward the end of year, driven by high deductible plan designs and out- 62
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of-pocket maximums over the course of the policy year, which shift more costs to us in the second half of the year as we pay a higher proportion of claims. With respect to MA plans, medical costs are impacted by the severity of the flu season, generally from December to March, and we typically experience slightly higher Part D medical costs early in the year, which decline toward the end of year due to standard plan design.
NeueHealth’s ability to identify and align with high-performing care delivery
partners drives performance
NeueHealth engages providers through a variety of alignment options ranging from having providers participate in our networks to having providers employed by us. As we enter new markets and expand our offerings, we must build an ecosystem of care delivery assets capable of supporting both our
Bright HealthCarebusiness as well as third-party payors.
NeueHealth’s ability to deliver and enable high-quality, value-based care drives
NeueHealth supports and manages providers in fee-for-service and value-based contracts with payors. We help organizations enter value-based arrangements designed around their needs, while simultaneously empowering them with the tools and capabilities necessary to maximize their success. In order to drive financial performance, NeueHealth must effectively manage risk and continue to develop and deliver tools and services supporting both managed and affiliated providers.
Bright Health Group, including Bright HealthCareand NeueHealth, will need to continue investing in operating platforms, processes, people, and resources to enable our businesses to scale profitably. We leverage centralized shared services for operational, clinical, technological, and administrative functions to support the segments in a cost-effective and efficient manner.
Components of Our Results of Operations
We generate revenue from premiums, including value-based provider revenue, and fee-for-service provider revenue received from consumers and payors, as well as income from our investments. Premium revenue Premium revenue is derived primarily from Bright HealthCare IFP and MA plans sold to consumers, as well as NeueHealth value-based capitation revenue from serving patients.
Bright HealthCare Commercial premium revenue
The sources of commercial premium revenue are primarily IFP products which are comprised of APTC subsidies that are based on consumers' income levels and compensated directly by the federal government, as well as billed consumer premiums. IFP products reflect adjustments related to the ACA risk adjustment program, which adjusts premium revenue based on the demographic factors and health status of each consumer as derived from current-year medical diagnoses.
Bright HealthCare MA premium revenue
The sources of MA premium revenue are Medicare Part C premiums related to consumers' medical benefit coverage and Part D premiums related to consumers' prescription drug benefit coverage. Medicare Part C premiums are comprised of CMS monthly capitation premiums that are risk adjusted based on CMS defined formulas using consumers' demographics and prior-year medical diagnoses. Medicare Part D premiums are comprised of CMS monthly capitation premiums that are risk adjusted, consumer billed premiums and CMS low-income premium subsidies for the Company's insurance risk coverage. Medicare Part D premiums are subject to risk sharing with CMS under the risk corridor provisions based on profitability of the Part D benefit. As a percentage of our total consolidated revenue, premium revenues from CMS were 32%, 40% and 13% for the years ended
December 31, 2021, 2020 and 2019, respectively, which are included in our Bright HealthCaresegment. 63
Table of Contents NeueHealth premium revenue NeueHealth premium revenue represents revenue under value-based arrangements entered into by NeueHealth's
Value Services Organizationand affiliated medical groups in which the responsibility for control of an attributed patient's medical care is transferred, in part or wholly, to such medical groups. Such revenue includes capitation payments, as well as quality incentive payments, and shared savings distributions payable upon achievement of certain financial and quality metrics. Value-based revenue shifts responsibility for control over the medical care delivered to attributed patients to the Company and aligns incentives around the overall well-being of the payor's consumers.
We expect that as our NeueHealth business continues to grow, NeueHealth premium
revenue will become an increasing proportion of our overall revenue.
Service revenue primarily represents revenue from fee-for-service payments
received by NeueHealth’s affiliated medical groups. These include patient
copayments and deductibles collected directly from patients and payments from
private and government payors based upon contractual terms that define the
fee-for-service reimbursement for specific procedures performed.
In addition, service revenue includes network service revenue generated by
NeueHealth’s Bright Health Networks.
customer of Bright Health Networks.
The sources of investment income are interest income and realized gains and losses derived from the Company's investment portfolio that is comprised of debt securities of the
U.S.government and other government agencies, corporate investment grade, money market funds and various other securities, as well as realized and unrealized gains and losses from equity securities.
Medical costs consist of reimbursements to providers for medical services, costs of prescription drugs, supplemental benefits, reinsurance and quality incentive and shared savings compensation to providers. The Company contracts with hospitals, physicians and other providers of healthcare primarily within its exclusive provider networks under fee-for-service and value-based arrangements. Emergency medical services incurred out-of-network are a covered benefit to consumers and reimbursed to providers according to the Company's payment policies that are based on applicable regulations. Prescription drug costs are determined based on the contracts with our pharmacy benefits managers, which includes pharmacy rebates that are received for certain drug utilization levels or contracted minimums. Dental, vision, and other supplemental medical services are provided to consumers under capitated arrangements. Reinsurance arrangements enable us to cede a specified percent of our premiums and claims to our third-party reinsurers. Under such contracts, the reinsurer is paid to cover claims-related losses over a specified amount, which mitigates catastrophic risk. We make quality incentive and shared savings compensation payments to certain providers in accordance with the terms of the contractual arrangement upon the achievement of certain financial and quality metrics.
Operating costs are comprised of the expenses necessary to execute the Company's business operations. These include employee compensation for salaries and related benefit costs, share-based compensation, outsourced vendor contracted service and technology fees, professional services, technological infrastructure and service fees, facilities costs and other administrative expenses. Operating costs also include payments made by
Bright HealthCareto NeueHealth for the provision of Bright Health Networks services; selling and marketing expenses from external broker commissions and advertising, primarily related to consumer acquisition; and premium taxes, exchange fees and other regulatory costs, which are primarily based on premium revenue. Additionally, the premium deficiency reserve expense for expected future losses 64
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in certain markets is included in operating costs. We expect operating costs to
increase in absolute amounts as our business grows, but to decrease as a
percentage of our revenue in the long-term.
Depreciation and Amortization
Depreciation and amortization consist of depreciation of property, equipment and
capitalized software, as well as amortization of definite-lived intangible
assets acquired in business combinations, including customer relationships,
trade names, reacquired contracts and developed technology.
Other Income and Expenses
Interest expense consists of interest payments on credit facilities, as well as
amortization of debt issuance costs.
Income Tax (Benefit) Expense
Income tax (benefit) expense consists primarily of changes to our current and
deferred federal tax assets and liabilities net of applicable valuation
Initial Public Offering
June 23, 2021, the Company's Registration Statement on Form S-1 for the initial public offering of shares of common stock was declared effective by the U.S. Securities & Exchange Commission. The Company's common stock began trading on the NYSE under the ticker symbol "BHG" on June 24, 2021. The IPO closed on June 28, 2021and the Company sold 51,350,000 shares of common stock at a price of $18.00per share. In aggregate, the shares issued in the offering generated $887.3 millionin net proceeds, the amount of which is net of $37.0 millionin underwriters' discounts and commissions. Immediately effective upon the closing of our IPO, all 167,731,830 shares of our then outstanding preferred stock were converted into 427,897,381 shares of common stock, causing the Company to reclassify $1.8 billionfrom redeemable preferred stock within temporary equity to common stock and additional paid-in capital on our consolidated balance sheet. We utilized a portion of the net proceeds to repay the $200.0 millionprincipal balance of indebtedness outstanding under our revolving credit agreement originally entered into on March 1, 2021and the associated interest and other costs of $3.2 million. Additionally, we used a portion of the proceeds to fund the acquisition of Centrum Medical Holdings, LLC("Centrum") as described in Note 3 of the Notes to Consolidated Financial Statements. The remainder of the net proceeds were used for general corporate purposes.
See further discussion related to the IPO as described in Note 1 of the Notes to
Consolidated Financial Statements.
The ongoing COVID-19 pandemic, including its effect on the macroeconomic environment, and the response of local, state, and federal governments to contain and manage the virus, continues to impact our business. The emergence of COVID-19 variants in
the United Statesand abroad continues to prolong the risk of additional surges of the virus. In addition, some individuals have delayed or are not seeking routine medical care to avoid COVID-19 exposure. These and other responses to the COVID-19 pandemic have meant that our MCR may be subject to additional uncertainty as certain segments of the economy and workforce come back on line, members resume care that may have been foregone, and the broader population becomes vaccinated. We have experienced impacts to our business from COVID-19, which have varied as the pandemic progressed. Initially, as a result of the suspension of elective surgeries and deferral of medical care, we experienced decreased medical utilization, particularly in the second quarter of 2020. Since then, medical utilization has returned to more normal levels and adverse financial impacts from inpatient admissions emerged primarily due to increased average length of stays. In 2021, our results were more significantly impacted by COVID-19 than in 2020. We experienced increased COVID-19 related costs throughout 2021, with a more significant increase in the second half of 2021, particularly due to negative 65
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trends in the
Southeast United States, which includes two of our largest markets - Floridaand North Carolina. For the years ended December 31, 2021and 2020, the impact of COVID-19 increased our MCR by 530 basis points and 400 basis points, respectively, reflecting an increase in medical costs of $208.0 millionand $46.6 million, respectively. Overall measures to contain the COVID-19 outbreak may remain in place for a significant period of time, as certain geographic regions have experienced a resurgence of COVID-19 infections and new strains of COVID-19 that appear to be more transmissible and may potentially evade vaccines have emerged. Although the number of people who have been vaccinated has been increasing, the duration and severity of this pandemic is unknown and the extent of the business disruption and financial impact depends on factors beyond our knowledge and control.
Our mission - Making Healthcare Right. Together. - is built on the belief that by connecting and aligning the best local resources in healthcare delivery with the financing of care, we can deliver better outcomes, at a lower cost, for all consumers.
Bright Health Groupis building a truly unique model that we believe will transform how healthcare is delivered. We believe when healthcare is delivered in a Fully Aligned and Integrated Care model, we can bend the cost curve and, most importantly, enhance value for both consumers and providers. We achieved substantial growth in 2021, reaching over $4.0 billionin revenue, and we are enthusiastic about our positioning for 2022. As we executed on our strategy to quickly gain scale in the business, we expected some variability in our results, and we saw that play out as we closed 2021. The meaningful revenue growth we delivered in 2021, which was driven to a combination of higher than anticipated growth to start the year and additional growth from the Special Enrollment Period, outpaced our operational and system capabilities. Unique factors in 2021, including the COVID-19 pandemic and our large group of new members without risk scores, combined with scaling up our organizational capabilities and enterprise technologies, impacted our results into the fourth quarter more significantly than anticipated. These factors impacted our ability to engage with our members in order to accurately capture their underlying health conditions and impacted prior period medical costs as we caught up on claims processing. Despite the challenges we faced 2021, we believe our larger base of business along with continued growth into 2022, provides a solid platform to continue executing on our strategy. We anticipate that through our Fully Aligned Care model we can drive differentiated results and we are taking specific actions to focus the Company, improve our systems and processes, and drive toward profitable growth. We are continuing to invest in building our NeueHealth business and have successfully expanded NeueHealth owned clinics outside of the Floridamarket, while also continuing to build our affiliated Care Partner network across the country. Many of the challenges we encountered this past year can be attributed to specific areas that were already on our list for improvement, but the growth we experienced exacerbated the gaps in performance. We made significant progress correcting these issues in our operational capabilities in 2021, which we expect will help drive improved 2022 performance along with opportunities we see for further improvement over the course of 2022.
We have taken the following specific actions against several areas that we
believe will impact near-term performance, which include:
1.Net Pricing Action in Core Markets: We took pricing action in excess of our expectation for underlying medical cost trends for the majority of our membership in legacy IFP markets, while still being able to demonstrate meaningful growth. In addition, we priced in potential COVID related costs to reflect the risk of future COVID related expenses. We also are focusing on pricing as an important lever in 2023, as we continue our path to profitability. 2.Unit Cost and Medical Management Reduction Initiatives: In 2021, we identified several unit cost and medical management opportunities across our IFP and MA businesses that we were unable to capitalize on in 2021, which are expected to drive value in 2022. These medical cost efforts are in addition to the net pricing actions we have taken. As we gained scale and optimized our processes, we were able to renegotiate ancillary and pharmacy contracts, reduce out of network rates, optimize existing contract structures, more closely manage high-cost cases, and improve our specialty provider network. We expect that optimizing the care network will be an 66
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ongoing process that requires data on our members and volume, both of which we
now have significantly more of, as well as better systems to provide visibility.
3.Risk Adjustment Actions: Accurate risk adjustment was a challenge due to several structural issues in 2021; however, those challenges drove us to make significant investment in our capabilities. We are working on faster attribution of our members to a larger network of owned and affiliated physicians that have better ability to engage with their members earlier in the year. We have also made technology and operational investments in suspecting analytics, outreach and engagement teams, and our end-to-end risk adjustment process in order to accurately capturing the risk of the population we manage. We are also working to help members better manage and navigate their care, which we expect will drive better in-network trends. 4.Claims and Clinical Platform Stabilization: Our growth significantly challenged the capacity of our fully aligned provider networks, as well as the capacity of our administrative, operational, and clinical systems. This growth occurred while we were building BiOS and transitioning from numerous vendor solutions to BiOS, our end state operating platform. In 2022, we transitioned to new finance and people systems. In addition, 70% of our membership is on our proprietary clinical system, Panorama, and all of our new market membership is on our new claims administration platform with the remainder of our IFP membership expected to migrate in
January 2023. BiOS provides us greater visibility and efficiency, the benefits of which include faster claims processing times, more accurate payments, industry standard denial rates, and more timely and complete consumer data. 5.We are Addressing Talent and Cost Structure: A high performing team is critical to our ability to improve performance and drive sustainable results. We continue to evolve our team, adding expertise as needed, and have taken specific actions to reduce the cost structure, eliminate redundancies, and drive efficiencies across the organization.
We also believe the following Company and industry factors will have an impact
of our performance in 2022:
1.Scale and Diversification: We achieved growth in the 2022 Annual and Open Enrollment Periods, which provides improved scale, at more than 1 million health plan members, and 400,000 lives under risk-based contracts. This scale not only allows us to better manage population risk and reduce volatility, but our density in specific markets such as
California, Texas, Florida, and North Carolina, allows us to better engage with providers and be a more meaningful portion of their overall business. 2.Higher Retained Membership: Inclusive of the impact of the 2021 SEP, approximately 85% of our IFP membership was new in 2021. To begin 2022, including new markets, approximately 55% of our enrollment is new. We also benefit from strong renewal rates, with a retention rate of 79% in our mature markets - those existing for more than two years. This has multiple benefits, including more data and information on our members to help us better manage the population and accurately capture member risk. 3.Normalized Special Enrollment Period: The 2021 SEP, while providing us with continued growth over the course of the year, came with unique challenges with regards to performance. The shorter member duration and higher acute care costs for those members, all against the backdrop of COVID, made it very difficult to engage with this population and accurately capture their risk. We expect a much more normalized SEP this year. 4.Reduced Operational Backlog: The operational challenges driven by our 2021 growth caused us to spend significant time and effort working through an operational backlog. We have made significant investments in the team and systems and we believe we are far better prepared for the growth we expect in 2022. This will allow us to better engage and respond to issues and more effectively manage performance within our population. 5.Endemic COVID: We believe COVID will continue in some capacity for the foreseeable future; however, do not expect it to be nearly as acute as it was in 2021. With the increase in vaccination rates, while cases of COVID may continue, we expect direct COVID costs will be more manageable.
We believe the near-term steps that we are taking to improve our performance
will optimize the business for long-term success.
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Key Metrics and Non-GAAP Financial Measures
In addition to our GAAP financial information, we review a number of operating
and financial metrics, including the following key metrics, to evaluate our
business, measure our performance, identify trends affecting our business,
formulate our business plan and make strategic decisions.
Year Ended December
Bright HealthCare Consumers Served Commercial (1) 611,078 145,459 54,782 Medicare Advantage 116,621 61,663 4,146 NeueHealth Patients Value-Based Care Patient Lives 175,587 21,126 -
(1) Commercial includes IFP and employer plans. Prior to 2021, our Commercial
business was solely comprised of IFP products.
Bright HealthCare Consumers Served
Consumers served include
Bright HealthCareindividual lives served via health insurance policies across multiple lines of business, primarily attributable to IFP products and MA plans in markets across the country. We believe growth in the number of consumers is a key indicator of the performance of our Bright HealthCarebusiness. It also informs our management of the operational, clinical, technological and administrative functional area needs that will require further investment to support expected future consumer growth.
Value-based care patients are patients attributed to providers contracted under varied value-based care delivery models in which the responsibility for control of an attributed patient's medical care is transferred, in part or wholly, to our NeueHealth managed medical groups. We believe growth in the number of value-based care patients is a key indicator of the performance of our NeueHealth business. It also informs our management of the operational, clinical, technological and administrative functional area needs that will require further investment to support expected future patient growth. Over time, we expect our value-based care patients will increase as we convert fee-for-service arrangements into value-based care financial arrangements. Year Ended December 31, ($ in thousands) 2021 2020 2019 Net Loss $ (1,178,365) (248,442) (125,337) Adjusted EBITDA(1) $ (1,080,906) (238,912) (121,091)
(1)See “Non-GAAP Financial Measures” below for reconciliations to the most
directly comparable financial measures calculated in accordance with GAAP and
Non-GAAP Financial Measures
We define Adjusted EBITDA as net loss excluding interest expense, income taxes, depreciation and amortization, adjusted for the impact of acquisition and financing-related transaction costs, share-based compensation, changes in the fair value of contingent consideration and contract termination costs. Adjusted EBITDA has been presented in this Annual Report as a supplemental measure of financial performance that is not required by, or presented in accordance with, GAAP, because we believe it assists management and investors in comparing our operating performance across reporting periods on a 68
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consistent basis by excluding items that we do not believe are indicative of our core operating performance. Management believes Adjusted EBITDA is useful to investors in highlighting trends in our operating performance, while other measures can differ significantly depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which we operate and capital investments. Management uses Adjusted EBITDA to supplement GAAP measures of performance in the evaluation of the effectiveness of our business strategies, to make budgeting decisions, to establish discretionary annual incentive compensation and to compare our performance against that of other peer companies using similar measures. Management supplements GAAP results with non-GAAP financial measures to provide a more complete understanding of the factors and trends affecting the business than GAAP results alone. Adjusted EBITDA is not a recognized term under GAAP and should not be considered as an alternative to net income (loss) as a measure of financial performance or cash provided by operating activities as a measure of liquidity, or any other performance measure derived in accordance with GAAP. Additionally, this measure is not intended to be a measure of free cash flow available for management's discretionary use as we do not consider certain cash requirements such as interest payments, tax payments and debt service requirements. The presentation of this measure has limitations as an analytical tool and should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP. Because not all companies use identical calculations, the presentation of this measure may not be comparable to other similarly titled measures of other companies and can differ significantly from company to company. The following table provides a reconciliation of net loss to Adjusted EBITDA for the periods presented: Year Ended December 31, (in thousands) 2021 2020 2019 Net loss
$ (1,178,365) $ (248,442) $ (125,337)Interest expense 7,956 - - Income tax (benefit) expense (26,521) (9,161) - Depreciation and amortization 35,484 8,289 1,134 Transaction costs (a) 6,338 4,950 1,248 Share-based compensation expense (b) 68,423 5,452 1,864
Change in fair value of contingent consideration (c) (4,221)
- - Contract termination costs (d) 10,000 - - Adjusted EBITDA
$ (1,080,906) $ (238,912) $ (121,091)(a)Transaction costs include accounting, tax, valuation, consulting, legal and investment banking fees directly relating to business combinations and certain costs associated with our IPO. These costs can vary from period to period and impact comparability, and we do not believe such transaction costs reflect the ongoing performance of our business. (b)Represents non-cash compensation expense related to stock option, restricted stock unit, and performance-based restricted stock unit grants, which can vary from period to period based on a number of factors, including the timing, quantity and grant date fair value of the awards. (c)Represents non-cash change in the fair value of contingent consideration from business combinations, which is remeasured at fair value each reporting period. There was no material activity for periods prior to the first quarter of 2021.
(d)Represents amount paid for early termination of an existing vendor contract.
Table of Contents Acquisitions Effective
December 31, 2019, we acquired substantially all of the assets of Associates in Family Practice of Broward, L.L.C., a Floridalimited liability corporation, renaming it to AssociatesMD Medical Group, Inc.("AMD"). This NeueHealth acquisition was completed to enhance our clinical capabilities to better serve enrollees as part of our planned Floridamarket entrance in 2020. Effective April 30, 2020, we acquired Universal Care, Inc.(d.b.a. Brand New Day) ("BND"), which is focused on serving primarily MA special needs consumers. This Bright HealthCareacquisition was completed to bolster our MA platform and provide entry into California. Effective December 31, 2020, we acquired a 62% controlling interest in Premier Medical Associates of Florida, LLC("PMA"). This NeueHealth acquisition was completed to enhance our clinical capabilities to better serve enrollees as part of our Floridamarket expansion in 2021.
through the commercial market for individual on- and off-exchange and
employer-sponsored health coverage. This
completed to enter into a new state of strategic interest and to leverage THNM’s
strong local clinical model of care.
March 31, 2021, we acquired Zipnosis, Inc.("Zipnosis"), which is a telehealth platform that offers virtual care to health systems around the U.S.This NeueHealth acquisition was completed to enhance our proprietary technology platform, DocSquad, and our consumer and provider connectivity with Zipnosis' virtual care capabilities. Effective April 1, 2021, we acquired Central Health Plan of California, Inc.("CHP"), an insurance provider of MA health maintenance organization ("HMO") services. This Bright HealthCareacquisition was completed to gain synergies from leveraging CHP's clinical model and Californiaconsumer expertise to continue to expand our MA business in the Californiamarket. Effective July 1, 2021, we acquired Centrum, a value-based primary care focused, multi-specialty medical group, serving Commercial, Medicare, and Medicaid consumers across multiple payors. This NeueHealth acquisition was completed for the incremental financial benefits achievable through our integrated care delivery model, whereby Bright HealthCaremembers are cared for under value-based arrangements with Centrum. This model brings together the financing, distribution, and delivery of high-quality healthcare and provides the opportunity to enhance our overall margin potential.
See Note 3 in the Notes to Consolidated Financial Statements for more
information regarding our business combinations.
Table of Contents Results of Operations
The following table summarizes our audited consolidated statements of income
(loss) data for the years ended
(in thousands) Year Ended December 31, Consolidated Statements of Income (loss) and 2021 2020 2019 operating data: Revenue: Premium revenue
$ 3,902,714 $ 1,180,338 $ 272,323Service revenue 42,701 18,514 - Investment income 83,974 8,468 8,350 Total revenue 4,029,389 1,207,320 280,673 Operating costs Medical costs 3,953,674 1,047,300 224,387 Operating costs 1,238,387 409,334 180,489 Depreciation and amortization 35,484 8,289 1,134 Total operating costs 5,227,545 1,464,923 406,010 Operating loss (1,198,156) (257,603) (125,337) Interest expense 7,956 - - Other income (1,226) - - Loss before income taxes (1,204,886) (257,603) (125,337) Income tax (benefit) expense (26,521) (9,161) - Net loss (1,178,365) (248,442) (125,337) Net earnings attributable to non-controlling (6,497) - -
Net loss attributable to Bright Health
$ (1,184,862) $ (248,442) $ (125,337) Group, Inc.common shareholders Adjusted EBITDA $ (1,080,906) $ (238,912) $ (121,091)Medical Cost Ratio (MCR) (1) 101.3 % 88.7 % 82.4 % Operating Cost Ratio (2) 30.7 % 33.9 % 64.3 % _______________________
(1)Medical Cost Ratio is defined as medical costs divided by premium revenue.
(2)Operating Cost Ratio is defined as operating costs divided by total revenue.
2021 Compared to 2020
Total revenue increased by
$2.8 billion, or 233.7%, for the year ended December 31, 2021as compared to the same period in 2020. The increase was largely driven by an increase in Bright HealthCareconsumers of approximately 520,000 consumer lives, or 251.3%, primarily from organic growth in IFP within our Commercial business, including the 2021 Special Enrollment Period, as well as organic and inorganic contributions from the MA business. Increases in our risk adjustment liability partially offset the total revenue increases. The year ended December 31, 2021also included $906.1 millionfrom the acquisitions of PMA, THNM, Zipnosis, CHP and Centrum and a full year of Brand New Day, which was acquired on April 30, 2020. These acquisitions were the primary driver of the increase in service revenue contributing $23.8 millionfor the year ended December 31, 2021. In addition, investment income increased due to unrealized gains from investments in equity securities of $80.2 million. Medical costs increased by $2.9 billion, or 277.5%, for the year ended December 31, 2021, as compared to the same period in 2020. The increase in medical costs was driven by an increase in consumers through both organic growth in our Commercial and MA businesses and inorganic growth attributable to the acquisitions of PMA, THNM, CHP and Centrum, as well as a full year of Brand New Day. We also experienced an increase in medical costs from COVID-19 during the year ended December 31, 2021. 71
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Our MCR of 101.3% for the year ended
December 31, 2021, increased 1,260 basis points as compared to the same period in 2020. The 2021 Special Enrollment Period and our overall growth created challenges for capturing underlying risk, and we were more significantly impacted by COVID-19 related costs, particularly given the significant portion of our consumers in Florida. Our MCR for the year ended December 31, 2021included a 530 basis point unfavorable impact from COVID-19 costs, and a 90 basis point unfavorable impact from non-COVID prior period development ("PPD"). Operating costs increased by $829.1 million, or 202.5%, for the year ended December 31, 2021as compared to the same period in 2020. The increase in operating costs was primarily due to increases in operating costs from new market entry, increased marketing and selling expenses related to the 2021 special enrollment period in our Commercial business and increased compensation and benefit costs driven by an increase in employees and an increase in share-based compensation costs. In addition, the year ended December 31, 2021also includes $102.8 millionof premium deficiency reserve expense due to expected future losses in certain markets in 2022 in our Bright HealthCaresegment. Our operating cost ratio of 30.7% for the year ended December 31, 2021improved 320 basis points as compared to the same period in 2020. The decrease was primarily due to operating costs increasing at a slower rate than the increased premium revenues earned due to consumer growth, as we continue to gain leverage on our operating costs as we grow, partially offset by an increase in broker commission costs associated with new membership growth. Depreciation and amortization increased by $27.2 million, or 328.1%, for the year ended December 31, 2021as compared to the same period in 2020. The increase was primarily due to a $25.5 millionincrease in amortization expense resulting from intangible assets acquired in the PMA, THNM, Zipnosis, CHP, and Centrum acquisitions, for which there were no comparable amounts in 2020. Interest expense was $8.0 millionfor the year ended December 31, 2021, which was due to interest on the Credit Agreement we entered into in March 2021, as well as amortization of debt issuance costs. We did not have any interest expense for the years ended December 31, 2020and 2019. Income tax benefit was $26.5 millionfor the year ended December 31, 2021. The overall tax benefit recognized during the year is primarily due to the release of valuation allowance in connection with new deferred tax liabilities recorded on identifiable intangibles as part of business combination accounting for the Zipnosis, THNM, and CHP stock acquisitions, as well as a measurement period adjustment related to the BND acquisition.
2020 Compared to 2019
Total revenue increased by
$926.6 million, or 330.2%, to $1.2 billionfor the year ended December 31, 2020as compared to the same period in 2019. The increase in revenue was driven by an increase in Bright HealthCareconsumers of 251% from organic growth and inorganic contributions from the Brand New Day Acquisition, as well as the creation of the NeueHealth segment with the acquisition of AMD. Medical costs increased by $822.9 million, or 366.7%, to $1.0 billionfor the year ended December 31, 2020as compared to the same period in 2019. This was primarily due to an increase in consumers through both organic and inorganic growth, increased MA product mix at a higher MCR primarily due to the Brand New Day Acquisition and the adverse financial impacts of the COVID-19 pandemic on MA and IFP inpatient admissions. In certain new IFP markets, we experienced increased medical costs due to greater out-of-network utilization in 2020. Medical Cost Ratio of 88.7% for year ended December 31, 2020increased 630 basis points as compared to the same period in 2019. This was primarily due to the increased medical costs from COVID-19, increased MA product mix as the result of the Brand New Day Acquisition and an increase in out-of-network utilization in certain new IFP markets. Operating costs increased by $228.8 million, or 126.8%, to $409.3 millionfor the year ended December 31, 2020as compared to the same period in 2019. This was primarily due to increased compensation and benefit costs from more employees, outsourced vendor fees, broker commissions, marketing, premium taxes and fees in support of consumer growth, acquisitions and business segment expansion. 72
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Operating cost ratio of 33.9% for the year ended
December 31, 2020improved 3,040 basis points as compared to the same period in 2019. This was primarily due to operating costs increasing at a slower rate than revenue increases as the Company grows. Depreciation and amortization increased by $7.2 million, or 631.0%, to $8.3 millionfor the year ended December 31, 2020as compared to the same period in 2019. This was primarily due to $5.4 millionof amortization expense resulting from intangibles assets acquired in our acquisition of AMD and the Brand New Day Acquisition. There was no amortization expense in 2019. Income tax benefit was $9.2 millionfor the year ended December 31, 2020. The overall tax benefit recognized during the year was primarily due to the tax impact of goodwill and intangible assets acquired as part of the Brand New Day Acquisition in 2020. We did not have any income tax (benefit) expense in 2019. Bright HealthCare(in thousands) Year Ended December 31, Statements of income (loss) and operating data: 2021 2020 2019 Bright HealthCare: Revenue: Commercial premium revenue $ 2,512,624 $ 692,433 $ 236,290Medicare Advantage premium revenue 1,297,273 480,112 36,033 Investment income 3,739 8,468 8,350 Total revenue 3,813,636 1,181,013 280,673 Operating expenses: Medical costs 3,766,897 1,047,300 224,387 Operating costs 1,140,842 376,215 180,489 Depreciation and amortization 17,068 6,394 1,134 Total operating expenses 4,924,807 1,429,909 406,010 Operating loss $ (1,111,171) $ (248,896) $ (125,337)Medical Cost Ratio (MCR) 98.9 % 89.3 % 82.4 % 2021 Compared to 2020 Commercial revenue increased by $1.8 billion, or 262.9%, for the year ended December 31, 2021as compared to the same period in 2020. The increase in revenue was driven by an increase in consumer lives of approximately 520,000 due to organic growth and inorganic growth from the acquisition of THNM, as well as higher net premium rates in certain markets and plan mix, which were partially offset by an increase in risk adjustment payables. MA revenue increased by $817.2 million, or 170.2%, for the year ended December 31, 2021as compared to the same period in 2020. The year ended December 31, 2021included $679.1 millionof revenue from our acquisition of CHP on April 1, 2021, and the impact of a full year of revenue from Brand New Day, which was acquired on April 30, 2020. We also experienced volume increases due to organic growth. Medical costs increased by $2.7 billion, or 259.7%, for the year ended December 31, 2021as compared to the same period in 2020. For the years ended December 31, 2021and 2020, the impact of COVID-19 increased our medical costs by $208.0 millionand $46.6 million, respectively. The increase in 2021 is also due to an increase in consumers driven by organic growth, unfavorable medical cost rates and inorganic growth as a result of acquisitions. Our MCR of 98.9% for the year ended December 31, 2021increased 960 basis points as compared to the same period in 2020. Our MCR for the year ended December 31, 2021included a 530 basis point unfavorable impact from COVID-19 related costs and a 90 basis point unfavorable impact from non-COVID PPD. Our MCR for the year ended December 31, 2020included a 400 basis point unfavorable impact from COVID-19 costs, a 110 basis point favorable impact from non-COVID PPD and a 110 basis point favorable impact from deferred utilization. Our MCR for the year ended December 31, 73
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2021, was also impacted by an increase in risk adjustment payable and medical costs from MA product mix as a result of a full year of activity from Brand New Day and the acquisition of CHP. Operating costs increased by
$764.6 million, or 203.2%, for the year ended December 31, 2021as compared to the same period in 2020. The increase was primarily due to increases in operating costs from new market entry, increased marketing and selling expenses related to the 2021 SEP in our Commercial business and increased compensation and benefit costs driven by an increase in employees and an increase in share-based compensation costs. In addition, the year ended December 31, 2021also includes $102.8 millionof premium deficiency reserve expense due to expected future losses in certain markets in 2022, as well as increased operating costs from the acquisitions of THNM and CHP, which do not have a comparable prior year impact. Depreciation and amortization increased by $10.7 million, or 166.9%, for the year ended December 31, 2021as compared to the same period in 2020. The increase was primarily due to amortization expense of $9.6 millionresulting primarily from intangible assets acquired in 2021 for which there were no comparable amounts in the 2020 period.
2020 Compared to 2019
Commercial revenue increased by
$456.1 million, or 193.0%, to $692.4 millionfor the year ended December 31, 2020as compared to the same period in 2019. This was primarily driven by a 166% increase in consumers, with the remainder primarily attributable to higher premium rates in certain new markets. MA revenue increased by $444.1 millionto $480.1 millionfor the year ended December 31, 2020as compared to the same period in 2019. This was primarily driven by the Brand New Day acquisition, which contributed $426.3 millionof the revenue increase, and other organic growth, which together helped drive consumer growth of 1,387%. Medical costs increased by $822.9 million, or 366.7%, to $1.0 billionfor the year ended December 31, 2020as compared to the same period in 2019. This was primarily due to increased consumers, impacts from the COVID-19 pandemic and the Brand New Day Acquisition driving increased MA product mix. In addition, certain new IFP markets experienced increased levels of out-of-network utilization in 2020. MCR increased from 82.4% for the year ended December 31, 2019to 89.3% for the year ended December 31, 2020, representing a 690 basis points increase. This was primarily due to the increased medical costs from COVID-19, increased MA product mix as a result of the Brand New Day Acquisition and an increase in out-of-network medical claims utilization in certain new IFP markets. Operating costs increased by $195.7 million, or 108.4%, to $376.2 millionfor the year ended December 31, 2020as compared to the same period in 2019. This was primarily due to an increase in employee headcount leading to increased compensation and benefit costs, as well as an increase in outsourced vendor fees, broker commissions, marketing, premium taxes and fees in support of consumer growth and the Brand New Day acquisition. Depreciation and amortization increased by $5.3 million, or 463.8%, to $6.4 millionfor the year ended December 31, 2020as compared to the same period in 2019. This was primarily due to $3.2 millionof amortization expense resulting from intangibles assets acquired in our Brand New Day Acquisition, as well as depreciation expense from the acquired property, equipment and capitalized software. There was no amortization expense in 2019. 74
Table of Contents NeueHealth ($ in thousands) Year Ended December 31, Statements of income (loss) data: 2021 2020 2019 NeueHealth: Revenue: Premium revenue $ 338,254
$ 7,793$ - Service revenue 74,690 29,354 - Investment income 80,235 - - Total revenue 493,179 37,147 - Operating expenses: Medical costs 432,318 - - Operating costs 129,430 43,959 - Depreciation and amortization 18,416 1,895 - Total operating expenses 580,164 45,854 - Operating loss $ (86,985) $ (8,707)$ - Medical Cost Ratio (MCR) 127.8 % - % - %
No activity reflected in 2019 due to establishment of segment in 2020.
2021 Compared to 2020
Premium revenue increased by
$330.5 millionfor the year ended December 31, 2021as compared to the same period in 2020. The increase in premium revenue for the year ended December 31, 2021includes $262.4 millionfrom the acquisitions of PMA and Centrum, as well as an organic increase in patient lives. Service revenue increased by $45.3 million, or 154.4%, for the year ended December 31, 2021as compared to the same period in 2020. The increase in service revenue is primarily driven by increased intercompany network contract service revenue with our Bright HealthCaresegment, which is charged on a per consumer per month basis and has increased due to market expansion and an increase in consumer lives. The acquisitions of PMA, Zipnosis and Centrum also contributed $23.7 millionto the year-over-year increase in service revenue. Investment income was $80.2 millionfor the year ended December 31, 2021due to unrealized gains on equity securities acquired in 2021. NeueHealth did not hold any investments during the year ended December 31, 2020. Medical costs were $432.3 millionfor the year ended December 31, 2021, which were primarily driven by an increase in patient lives as a result of the PMA and Centrum acquisitions, as well as organic growth in our value-based arrangements. MCR was 127.8% for the year ended December 31, 2021. There were no medical costs in the year ended December 31, 2020. Operating costs increased by $85.5 million, or 194.4%, for the year ended December 31, 2021as compared to the same period in 2020. The increase was primarily due to increased compensation and benefit costs from more employees, and outsourced vendor fees in support of consumer growth, as well as costs from the PMA, Zipnosis and Centrum acquisitions.
Depreciation and amortization increased by
primarily due to amortization expense of
assets acquired for which there were no comparable amounts in 2020.
2020 Compared to 2019
Our NeueHealth segment was created in 2020 through the acquisition of AMD and the establishment of our Bright Health Network service. Service revenue reflects fee-for-service revenue attributable to AMD service patients and internal revenue generated by Bright Health Networks for network contract services with
Bright HealthCare. Premium revenue reflects 75
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AMD revenue related to capitation payments and other value-based revenue from
third-party payors. There was no comparable activity in 2019.
Liquidity and Capital Resources
We assess our liquidity in terms of our ability to generate adequate amounts of cash to meet current and future needs. Our expected primary uses on a short-term and long-term basis are for geographic and service offering expansion, acquisitions, and other general corporate purposes. We have historically funded our operations and acquisitions primarily through the sale of preferred stock, and more recently, through sales of our common stock, which generated cash proceeds of
$887.3 millionupon closing of our IPO on June 28, 2021. We expect to continue to incur operating losses and generate negative cash flows from operations for the foreseeable future due to the investments we intend to continue to make in expanding our operations and due to additional general and administrative costs we expect to incur in connection with operating as a public company. We believe that existing cash on hand, investments and amounts available under our Credit Agreement described below will be sufficient to satisfy our anticipated cash requirements for the next twelve months for items such as risk adjustment payable, medical costs payable, accounts payable and other current liabilities. However, we may seek additional capital to support our future growth plans and other strategic opportunities that may arise, as well as anticipated cash requirements beyond that period for long-term obligations such as operating leases and redeemable noncontrolling interest. As of December 31, 2021, we had $1.1 billionin cash and cash equivalents, $193.8 millionin short-term investments and $675.2 millionlong-term investments on the Consolidated Balance Sheet. As of December 31, 2020, we had $488.4 millionin cash and cash equivalents, $499.9 millionin short-term investments and $175.2 millionlong-term investments. Our cash and investments are held at non-regulated entities and regulated insurance entities. As of December 31, 2021, we had non-regulated cash and cash equivalents of $76.3 millionand short-term investments of $121.5 million. As of December 31, 2020, we had non-regulated cash and cash equivalents of $133.3 million, short-term investments of $385.6 millionof which $1.1 millionwas restricted, and long-term investments of $5.6 million.
long-term investments of
regulated insurance entity cash and cash equivalents of
short-term investments of
Cash and investment balances held at regulated insurance entities are subject to regulatory restrictions and can only be accessed through dividends declared to the non-regulated parent company or through reimbursements from administrative services agreements with the parent company. The Company declared two dividends from the regulated insurance entities to the parent company during the year ended
December 31, 2021, and declared no dividends during 2020. The regulated legal entities are required to hold certain minimum levels of risk-based capital and surplus to meet regulatory requirements. As of December 31, 2021and 2020, $398.5 millionand $235.8 million, respectively, was held in risk-based capital and surplus at regulated insurance legal entities, which was in excess of the minimum requirements in each year.
March 1, 2021, we entered into a $350.0 millionrevolving credit agreement with a syndicate of banks (the "Credit Agreement"). On August 2, 2021, the Credit Agreement was amended to change the definition of "Qualified IPO" by reducing the net proceeds required to be received by the Company from $1.0 billionto $850.0 million(the "Amendment"). In addition, prior to such amendment, the Credit Agreement contained a covenant that required the Company to maintain a total debt to capitalization ratio of (a) 0.25 to 1.00 prior to a Qualified IPO, and (b) 0.30 to 1.00 after a Qualified IPO. The Amendment changed this covenant by removing the increase in the ratio after a Qualified IPO such that the Company is now required to maintain a total debt to capitalization ratio of 0.25 to 1.00. On August 4, 2021, we elected to extend the maturity date of the Credit Agreement from February 28, 2022to February 28, 2024. As of December 31, 2021, we had $155.0 millionborrowed on the Credit Agreement at an effective annual interest rate of 7.25%. The Credit Agreement also contains a covenant that requires us to maintain a minimum liquidity of $150.0 million. 76
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The obligations under the Credit Agreement are secured by substantially all of the assets of the Company and its wholly owned subsidiaries that are designated as guarantors, including a pledge of the equity of each of its subsidiaries. Borrowings under the Credit Agreement accrue interest at the Company's election either at a rate of: the (i) the sum of (a) the greatest of (1) the Prime Rate (as defined in the Credit Agreement), (2) the rate of the
Federal Reserve Bank of New Yorkin effect plus 1/2 of 1.0% per annum, and (3) Londoninterbank offered rate ("LIBOR"), plus 1% per annum, and (b) a margin of 4.0%; or (ii) the sum of (a) the LIBOR multiplied by a statutory reserve rate and (b) a margin of 5.0%. In addition, the commitment fee is 0.75% of the unused amount of the Credit Agreement. Furthermore, the Credit Agreement contains covenants that, among other things, restrict the ability of the Company and its subsidiaries to make dividends or other distributions, incur additional debt, engage in certain asset sales, mergers, acquisitions or similar transactions, create liens on assets, engage in certain transactions with affiliates, change its business or make investments. In addition, the Credit Agreement contains other customary covenants, representations and events of default.
Preferred Stock Financing
Convertible Perpetual Preferred Stock, par value
aggregate purchase price of
repay in full our
The following table presents a summary of our cash flows for the periods shown: Year Ended December 31, (in thousands) 2021 2020 2019
Net cash provided by (used in) operating activities
Net cash used in investing activities
(552,892) (689,742) (94,643) Net cash provided by financing activities 1,043,641 712,441 424,060
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
488,371 522,910 201,701 Cash and cash equivalents at end of year
$ 1,061,179 $ 488,371 $ 522,910Operating Activities During the year ended December 31, 2021, cash provided by operating activities increased by $139.3 millionas compared to the same period in 2020. This was primarily driven by the increase in consumer growth driving the increased medical costs and risk adjustment payables, as well as accounts payables and other liabilities, and increased medical costs in the MA business driven by a full year of activity from Brand New Day and the acquisition of CHP. These increases were partially offset by an increase in our net loss. During the year ended December 31, 2020, net cash used in operating activities increased by $49.0 millionas compared to the same period in 2019. This was primarily driven by the year-over-year increase in our net loss, which was partially offset by consumer growth driving the increased medical costs and risk adjustment payables. Investing Activities During the year ended December 31, 2021, net cash used in investing activities decreased by $136.9 millionas compared to the same period in 2020. The decrease was primarily attributable to a decrease in purchases of investments, net of proceeds from sales, paydowns and maturities of investments of $362.2 million, which was partially offset by a $201.5 millionincrease in cash used for acquisitions. During the year ended December 31, 2020, net cash used in investing activities increased by $595.1 millionas compared to the same period in 2019. The increase was primarily attributable to growth of our investment portfolio, as purchases more 77
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than offset sales and maturities of investment in 2020. In addition, we used
During the year ended
December 31, 2021, net cash provided by financing activities increased by $331.2 millionas compared to the same period in 2020. The increase was due to $887.3 millionof proceeds from our IPO in June 2021, offset by $6.7 millionof cash paid for IPO offering costs, and a $155.0 millionincrease in net proceeds from short-term borrowings. These increases were partially offset by a $711.2 milliondecrease in proceeds from preferred stock financings in 2020, for which there were no similar offerings in 2021.
Our net cash provided by financing activities was primarily related to cash
received from our preferred stock financings in 2020 and 2019. See Note 10 in
the Notes to Consolidated Financial Statements for additional detail on our
Critical Accounting Policies and Estimates Our management's discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make judgments and estimates that affect the reported amounts of assets, liabilities, revenue, and expenses and the disclosure of contingent assets and liabilities in our consolidated financial statements. We base our estimates on historical experience, known trends and events, and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. On an ongoing basis, we evaluate our judgments and estimates in light of changes in circumstances, facts, and experience. The effects of material revisions in estimates, if any, are reflected in the consolidated financial statements prospectively from the date of change in estimates.
While our significant accounting policies are described in more detail in the
notes to the consolidated financial statements appearing elsewhere in this
Annual Report, we believe the following accounting policies used in the
preparation of our consolidated financial statements require the most
significant judgments and estimates.
Medical Costs Payable
Medical costs payable includes estimates for the costs of healthcare services consumers have received but for which claims have not yet been received or processed. Depending on the healthcare professional and type of service, the typical billing lag for services can be up to 90 days from the date of service. Approximately 80% of claims related to medical care services are known and settled within 90 days from the date of service and substantially all within twelve months. In each reporting period, our operating results include the effects of more completely developed medical costs payable estimates associated with previously reported periods. If the revised estimate of prior period medical costs is less than the previous estimate, we will decrease reported medical costs in the current period (favorable development). If the revised estimate of prior period medical costs is more than the previous estimate, we will increase reported medical costs in the current period (unfavorable development). Medical costs in 2021 included unfavorable medical cost development related to prior years of
$9.5 million. In 2020 and 2019 medical costs included favorable development related to prior years of $8.6 millionand $7.4 million, respectively. In developing our medical costs payable estimates, we apply different estimation methods depending on the month for which incurred claims are being estimated. For example, for the most recent months, we estimate claim costs incurred by applying observed medical cost trend factors to the average per consumer per month ("PMPM") medical costs incurred in prior months for which more complete claim data is available, supplemented by a review of near-term completion factors. Completion Factors: A completion factor is an actuarial estimate, based upon historical experience and analysis of current trends, of the percentage of incurred claims in a given period adjudicated by us at the date of estimation. Completion factors are the most significant assumptions we use in developing our estimate of medical costs payable. For periods prior to the three most recent months, completion factors include judgments related to claim submissions such as the time from date of service to claim receipt, claim levels, and processing cycles, as well as other factors. If actual claims submission 78
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rates from providers (which can be influenced by a number of factors, including provider mix and electronic versus manual submissions) or our claim processing patterns are different than estimated, our reserve estimates may be significantly impacted. For the most recent three months, the completion factors are informed primarily from forecasted PMPM claims projections developed from our historical experience and adjusted by emerging experience data in the preceding months which may include adjustments for known changes in estimates of recent hospital and drug utilization data, provider contracting changes, changes in benefit levels, changes in consumer cost sharing, changes in medical management processes, product mix, and workday seasonality.
The following table illustrates the sensitivity of the completion factors and
the estimated potential impact on our medical costs payable estimates as of
Completion Factors (Decrease) Increase in Factors Increase (Decrease) in Medical Costs Payable (in thousands) (3.00)% $ 89,100 (2.00)% 58,794 (1.00)% 29,100 1.00% (28,524) 2.00% (56,488) 3.00% (83,910) The completion factors analysis above includes a wide range of possible outcomes based on the early stage of development, combined with strong growth, that may drive additional volatility. Management believes the amount of medical costs payable is reasonable and adequate to cover our liability for unpaid claims as of
December 31, 2021; however, actual claim payments may differ from established estimates as discussed above. Assuming a hypothetical 1% difference between our December 31, 2021estimates of medical costs payable and actual medical costs payable net earnings would have increased or decreased by approximately $8.2 million.
See Note 2 and Note 8 in the Notes to Consolidated Financial Statements for
additional detail on our medical costs payable.
The risk adjustment programs in the IFP and MA lines of business are designed to mitigate the potential impact of adverse selection and provide stability for health insurers. Under the individual and small group risk adjustment program, each plan is assigned a risk score based upon demographic and current year medical encounters information that is submitted to CMS for its consumers and calculated based on the CMS risk adjustment methodology. Plans with a plan level risk score that is lower than the State average risk scores will generally pay into the pool, while plans with a plan level risk score higher than State average risk scores will generally receive distributions. In the MA risk adjustment program, each consumer is assigned a risk score based on their demographic and prior year medical encounters information submitted to CMS that reflects the consumer's predicted health costs based on the CMS risk adjustment methodology. Plans receive higher payments for consumers with higher risk scores than consumers with lower risk scores.
For both IFP and MA, we utilize external sources to help determine market risk
scores, and we estimate the amount of risk adjustment payable or receivable
based upon the processed claims and medical diagnosis data submitted and
expected to be submitted to CMS. We refine our estimate as new information
Table of Contents Premium Deficiency Reserves Premium deficiency reserve ("PDR") liabilities are established when it is probable that expected future claims and maintenance expenses will exceed future premium and reinsurance recoveries on existing medical insurance contracts, including consideration of investment income. We assess if a PDR liability is needed through review of current results and forecasts. For purposes of determining premium deficiency losses, contracts are grouped consistent with our method of acquiring, servicing, and measuring the profitability of such contracts.
We test goodwill for impairment annually at the beginning of the fourth quarter or whenever events or circumstances indicate the carrying value may not be recoverable. We test for goodwill impairment at the reporting unit level. When testing goodwill for impairment, we may first assess qualitative factors to determine if it is more likely than not that the carrying value of a reporting unit exceeds its estimated fair value. During a qualitative analysis, we consider the impact of changes, if any, to the following factors: macroeconomic trends, industry and market factors, cost factors, changes in overall financial performance, and any other relevant events and uncertainties impacting a reporting unit. If our qualitative assessment indicates that goodwill impairment is more likely than not, we perform additional quantitative analyses. We may also elect to skip the qualitative testing and proceed directly to the quantitative testing. For reporting units where a quantitative analysis is performed, we perform a test measuring the fair values of the reporting units and comparing them to their aggregate carrying values, including goodwill. If the fair value of the reporting unit is greater than its carrying value, no goodwill impairment is recognized. If the carrying value of the reporting unit is less than its calculated fair value, we recognize an impairment equal to the difference between the carrying value of the reporting unit and its calculated fair value. We estimate the fair values of our reporting units using a combination of discounted cash flows and comparable market multiples, which include assumptions about a wide variety of internal and external factors. Significant assumptions used in the impairment analysis include financial projections of free cash flow (including significant assumptions about revenue growth rates, operating margins, capital requirements and income taxes), long-term growth rates for determining terminal value beyond the discretely forecasted periods and discount rates. Underperformance to the financial projections used in the impairment analysis could negatively impact the fair value of our reporting units. Additionally, the passage of time and the availability of additional information regarding areas of uncertainty with respect to the reporting units' operations could cause these assumptions to change in the future. As of
October 1, 2021, we completed our annual impairment tests for goodwill with all of our reporting units having fair values significantly in excess of their carrying values. Recently Adopted and Issued Accounting Standards
See Note 2 in the Notes to Consolidated Financial Statements for a discussion of
accounting pronouncements recently adopted and recently issued accounting
pronouncements not yet adopted and their potential impact to our financial