CLOVER HEALTH INVESTMENTS, CORP. /DE – 10-K – Management report and analysis of the financial situation and operating results.
The following discussion and analysis provides information that management believes is relevant to an assessment and understanding of our consolidated results of operations and financial condition. The discussion should be read in conjunction with the consolidated financial statements and notes thereto for the year ended
December 31, 2021, contained in this Annual Report on Form 10-K (the "Form 10-K"). This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described in the "Risk Factors" section of this document. Actual results may differ materially from those contained in any forward-looking statements. Unless the context otherwise requires, references in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" to "we," "us," "our," "Clover," the "Company," and the "Corporation" are intended to mean the business and operations of Clover Health Investments, Corp.and its consolidated subsidiaries subsequent to the closing of the Business Combination (as defined below). Overview At Clover Health, we are singularly focused on creating great, sustainable healthcare to improve every life. We have centered our strategy on building and deploying technology that we believe will enable us to solve a significant data problem while avoiding the limitations of legacy approaches. We leverage our flagship software platform, the Clover Assistant, to help America's seniors receive better care at lower costs. By empowering physicians with data-driven, personalized insights at the point of care through our software, we believe we can improve clinical decision making. We operate Preferred Provider Organization (PPO) and Health Maintenance Organization(HMO) Medicare Advantage (MA) plans for Medicare-eligible consumers. We call our plans "Obvious" because we aim to provide great, affordable healthcare for all-we offer most of our MA members (the "members") the lowest average out-of-pocket costs for primary care provider co-pays, specialist co-pays, drug deductibles and drug costs in their markets. Unlike most MA plans, we deeply believe in providing our members provider choice, and we consider our PPO plan to be our flagship insurance plan. An important feature of our MA product is wide network access, and we often offer the same cost-sharing (co-pays and deductibles) for visits with primary care providers who are in- and out-of-network. We believe the use of the Clover Assistant and related data insights allows us to improve clinical decision-making through a highly scalable asset-light approach. As of January 1, 2022, we operated our MA plans in nine states and 209 counties, with 84,403 MA members. On April 1, 2021, our subsidiary, Clover Health Partners, LLC( Health Partners), began participating as a direct contracting entity (DCE) in the Global and Professional Direct Contracting Model (DC Model) of the Centers for Medicare and Medicaid Services(CMS), an agency of the United States Department of Health and Human Services. Our DCE assumes full risk (i.e., 100.0% shared savings and shared losses) for the total cost of care of aligned Original Medicare beneficiaries (the "DCE Beneficiaries" and, collectively with the members, "Lives under Clover Management" or the "beneficiaries"). We operate our Direct Contracting(DC) operations through Health Partners, which focuses on our technology platform, the Clover Assistant, to enhance healthcare delivery, reduce expenditures, and improve care for DCE Beneficiaries. As of December 31, 2021, we had approximately 720 contracted participating providers who manage primary care for our DCE Beneficiaries. Additionally, as of December 31, 2021, we had approximately 635 preferred providers and preferred facilities in our DCE network. Our participation in the DC Model has enabled us to moved beyond the MA market and target the Medicare fee-for-service (FFS) market, which is the largest segment of Medicare. We believe that expanding into the FFS market is not only a strategic milestone for Clover but also demonstrates the scalability of the Clover Assistant. Additionally, in 2021, we announced our plans to scale our in-home primary care program, Clover Home Care, through our DC operations. Clover Home Carewas designed to better identify and care for our most medically complex members, with a focus on health outcomes improvement and medical expense reduction rather than risk adjustment. As of December 31, 2021, we were partnering with providers to care for 129,996 Lives under Clover Management, which included 68,120 Medicare Advantage members and 61,876 aligned DCE Beneficiaries. The number of Lives under Clover Management as of December 31, 2021, was approximately double the number of Lives under Clover Management as of January 1, 2021.
January 2022, we launched our MA plans in 101 new counties and an additional state, and we announced that our MA membership had grown by over 25% versus the beginning of 2021. This expansion makes our MA plans available in a total of 209 counties across nine states. Additionally, after launching our DCE in eight states in April 2021, we have grown our Direct Contractingpresence to 22 states in 2022. 60 --------------------------------------------------------------------------------
Issue of common shares
November 2021, we completed an underwritten public offering of 52,173,913 shares of Class A Common Stock at $5.75per share. We received net proceeds of $283.8 million, after deducting underwriting discounts and commissions and other offering costs. CMS Stars On October 8, 2021, we announced that CMS assigned Clover's PPO plan 3.5 stars on the Medicare Star Ratings for its MA plans for the 2020 measurement year. Over 90% of our MA membership is served through our PPO plan. The higher rating could positively impact the reimbursement rate for our PPO plan beginning in 2023 as well as potentially positively impact the plan's image in the market. Higher-rated plans may offer enhanced benefits and additional enrollment opportunities compared to lower-rated plans.
January 7, 2021, we consummated the previously announced domestication and mergers (the "Business Combination") pursuant to that certain Agreement and Plan of Merger, dated October 5, 2020(the "Merger Agreement"), by and among Social Capital Hedosophia Holdings Corp III, a Cayman Islandsexempted company (SCH), Asclepius Merger Sub Inc., a Delawarecorporation and a direct wholly-owned subsidiary of SCH, and Clover Health Investments, Inc., a corporation originally incorporated on July 17, 2014, in the state of Delaware(Legacy Clover), and us. Additionally, in connection with the Business Combination, we issued and sold to certain investors an aggregate of 40,000,000 shares of our Class A Common Stock for an aggregate purchase price equal to $400.0 million(the " PIPE Investment") concurrently with the completion of the Business Combination. As a result of the Business Combination, we became the successor to a public company, which required us to hire additional personnel and implement procedures and processes to address public company regulatory requirements and customary practices. For additional information regarding the impacts of the Business Combination, see Note 3 (Business Combination), Note 12 (Notes and Securities Payable), Note 13 (Warrants Payable), and Note 17 (Stockholders' Equity and Convertible Preferred Stock) to Financial Statements in this report.
Impact of COVID-19
The societal and economic impact of the COVID-19 pandemic continues to evolve,
and the ultimate impact on our business, results of operations,
the condition and cash flows are uncertain and difficult to predict. The Global
the pandemic has severely affected businesses around the world, including many in the
health insurance sector.
We are continuing to monitor the ongoing financial impact of COVID-19 on our business and operations and are making adjustments accordingly. A large portion of our membership is elderly and generally in the high-risk category for COVID-19, and we have worked closely with our network of providers to ensure that members are receiving necessary care. During 2021, we incurred elevated costs as compared to 2020 to care for those members who have contracted the virus, and indirect costs attributable to the COVID-19 pandemic increased as well, as deferral of services and increased costs related to conditions that were exacerbated by a lack of diagnoses and treatment in the earlier periods of the pandemic contributed to increased utilization. We will continue to monitor the pandemic's emerging treatment-related trends as well as the impact on our beneficiaries. Additionally, CMS risk adjustment requires that a member's health issues be documented annually regardless of the permanence of the underlying causes. Historically, this documentation was required to be completed during an in-person visit with a patient. As part of relief measures adopted pursuant to the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), CMS is allowing documentation prepared during video visits with patients to serve as support for CMS risk adjustments. While our ability to document health conditions was adversely impacted in 2020 and early 2021, the comprehensiveness of the documentation improved throughout 2021. We intend to leverage the Clover Assistant to increase in-person and video visits for our members and document their health conditions on a timely basis, which we expect to have a positive impact on risk adjustment and revenue for the applicable populations. 61 --------------------------------------------------------------------------------
The information presented in the following table illustrates the financial situation
results of our MA segment impacted by COVID-19:
Years ended December 31, 2021 2020 Total PMPM (1) Total PMPM (1) (dollars in thousands, except PMPM amounts) Premiums earned, net
$ 799,414 $ 996 $ 665,698 $ 976Medicare Advantage net medical claims (2) incurred 847,286 1,056 591,038 866 Medical care ratio, net (MCR) (3) 106.0 % N/A 88.8 % N/A (1) Calculated per member per month (PMPM) figures are based on the applicable amount divided by member months in the given period. Member months represents the number of months members are enrolled in a Clover Health Plan in the period. (2) Net medical claims incurred reported for Medicare Advantage differs from the corresponding amount reported on the Consolidated Statements of Operations and Comprehensive Loss due to the impacts of eliminations.
(3) Defined as net AD medical claims incurred divided by earned premiums, net.
For additional information regarding the risks to our business and results of operations related to the COVID-19 pandemic, see the section entitled "Risk Factors-Risks Related to Clover's Business and Industry-We are subject to risks associated with the COVID-19 pandemic, which could have a material adverse effect on our business, results of operations, financial condition and financial performance" in Part I, Item IA of this document.
Main performance measures of our operating segments
We manage our business with two reportable segments: Medicare Advantage and
Direct Contracting. The reportable segments are distinguished based on the healthcare delivery business model. Our MA segment is an insurance business model that focuses on leveraging the Clover Assistant at the point of care. Our DC segment is similar to a cost management and care coordination model accounted for as a performance guarantee, where Clover is responsible for coordinating care, managing costs, and providing support to providers and their DCE Beneficiaries through the use of Clover Assistant. These segment groupings are consistent with information used by our Chief Executive Officer, our chief operating decision maker, to assess performance and allocate resources. The Medicare Advantage segment consists of MA plans that generally provide access to a wide network of primary care providers, specialists, and hospitals. The Direct Contractingsegment consists of our operations in connection with the DC Model, which provides options aimed at reducing expenditures and preserving or enhancing quality of care for DCE Beneficiaries. We review several key performance measures, discussed below, to evaluate our business and results, measure performance, identify trends, formulate plans, and make strategic decisions. We believe that the presentation of such metrics is useful to management and counterparties to model the performance of healthcare companies such as Clover. 62 --------------------------------------------------------------------------------
Benefit of Medicare
Through its MA operating segment, the Corporation provides PPO and HMO plans that generally provide access to a wide network of primary care providers, specialists, and hospitals. We seek to improve care and lower costs by empowering physicians with data-driven, personalized insights at the point of care through our software platform, the Clover Assistant. Years ended December 31, 2021 2020 Total PMPM Total PMPM Medicare Advantage Data (Premium and expense amounts in thousands, except PMPM amounts) Members as of period end (#) 68,120 N/A 58,056 N/A Premiums earned, gross
$ 799,903 $ 997 $ 666,297 $ 975Premiums earned, net 799,414 996 665,698 976 MA medical claim expense incurred, gross 848,288 1,057 591,521 867 MA net medical claims incurred 847,286 (1) 1,056 591,038 866 Medical care ratio, gross (2) 106.0 % N/A 88.8 % N/A Medical care ratio, net 106.0 N/A 88.8 N/A (1) Net medical claims incurred reported for Medicare Advantage differs from the corresponding amount reported on the Consolidated Statements of Operations and Comprehensive Loss due to the impacts of eliminations.
(2) Defined as our MA gross medical claims incurred divided by earned premiums,
Membership and associated premiums earned and medical expenses
We define new and returning members on a calendar year basis. Any member who is active on
July 1of a given year is considered a returning member in the following year. Any member who joins a Clover plan after July 1in a given year is considered a new member for the entirety of the following calendar year. We view our number of members and associated PMPM premiums earned and medical claim expenses, in the aggregate and on a PMPM basis, as important metrics to assess our financial performance because member growth aligns with our mission, drives our total revenues, expands brand awareness, deepens our market penetration, creates additional opportunities to inform our data-driven insights to improve care and decrease medical claim expenses, and generates additional data to continue to improve the functioning of the Clover Assistant. Among other things, the longer a member is enrolled in one of our MA plans, the more data we collect and synthesize and the more actionable insights we generate. We believe these data-driven insights lead to better care delivery as well as improved identification and documentation of members' chronic conditions, helping to lower PMPM medical claim expenses.
Earned premiums, gross
Premiums earned, gross is the amount received, or to be received, for insurance policies written by us during a specific period of time without reduction for premiums ceded to reinsurance. We believe premiums earned, gross provides useful insight into the gross economic benefit generated by our business operations and allows us to evaluate our underwriting performance without regard to changes in our underlying reinsurance structure. Premiums earned, gross excludes the effects of premiums ceded to reinsurers, and therefore should not be used as a substitute for premiums earned, net, total revenue or any other measure presented in accordance with GAAP.
Earned premiums, net
Premiums earned, net represents the earned portion of our premiums earned, gross, less the earned portion that is ceded to third-party reinsurers under our reinsurance agreements. Premiums are earned in the period in which members are entitled to receive services, and are net of estimated uncollectible amounts, retroactive membership adjustments, and any adjustments to recognize rebates under the minimum benefit ratios required under the Patient Protection and Affordable Care Act (ACA). Premiums earned, gross is the amount received, or to be received, for insurance policies written by us during a specific period of time without reduction for premiums ceded to reinsurance. We earn premiums through our plans offered under contracts with CMS. We receive premiums from CMS on a monthly basis based on our actuarial bid and the risk-adjustment model used by CMS. Premiums anticipated to be received within twelve months based on the documented diagnostic criteria of our members are estimated and included in revenue for the period including the member months for which the payment is designated by CMS. Premiums ceded is the amount of premiums earned, gross ceded to reinsurers. From time to time, we enter into reinsurance contracts to limit our exposure to potential losses as well as to provide additional capacity for growth. Under these agreements, the "reinsurer," agrees to cover a portion of the claims of another insurer, i.e., us, the "primary insurer," in return for a portion of their premium. Ceded 63 -------------------------------------------------------------------------------- earned premiums are earned over the reinsurance contract period in proportion to the period of risk covered. The volume of our ceded earned premium is impacted by the level of our premiums earned, gross and any decision we make to adjust our reinsurance agreements.
MA gross medical claims incurred
MA gross medical claims incurred reflects claims incurred excluding amounts ceded to reinsurers and the costs associated with processing those claims. We believe gross medical claims incurred provides useful insight into the gross medical expense incurred by members and allows us to evaluate our underwriting performance without regard to changes in our underlying reinsurance structure.
MA gross medical claims incurred excludes the effects of medical claims and
associated costs ceded to reinsurers, and should therefore not be used as
replace net incurred losses, total expenses or any other measure
presented in accordance with GAAP.
MA net medical claims incurred
MA net medical claims incurred are our medical expenses and consists of the costs of claims, including the costs incurred for claims net of amounts ceded to reinsurers. We enter into reinsurance contracts to limit our exposure to potential catastrophic losses. These expenses generally vary based on the total number of members and their utilization rate of our services.
Ratio of medical care, gross and net
We calculate our medical care ratio by dividing total MA medical claim expenses incurred by premiums earned, in each case on a gross or net basis, as the case may be, in a given period. We believe our MCR is an indicator of our gross margin for our MA plans and the ability of our Clover Assistant platform to capture and analyze data over time to generate actionable insights for returning members to improve care and reduce medical expenses.
Our DC segment consists of operations in connection with the DC Model. provides a variety of programs aimed at reducing expenditures and preserving or enhancing quality of care for DCE Beneficiaries. We measure
Direct Contractingrevenue and medical claims on a per-beneficiary per-month (PBPM) basis. In the aggregate, we view these as important metrics to assess our financial performance, including our ability to reduce expenditures and preserve or enhance quality of care for DCE Beneficiaries. Year ended December 31, 2021Total PBPM (Revenue and claims amounts in thousands, except PBPM Direct Contracting Data(1)
Beneficiaries as of period end (#) 61,876 N/A Direct Contracting revenue $ 667,639 $ 1,194 Direct Contracting net medical claims incurred 705,407 1,262 Direct Contracting margin(2) 105.7 % N/A
(1) We started participating in
(2) Defined as
Beneficiaries A beneficiary is defined as an eligible Original Medicare covered life that has been aligned to our DCE,
Health Partners, via attribution to a DCE-participating provider through alignment based on claims data or by beneficiary election through voluntary alignment. A beneficiary alignment is effective as of the first of the month, for the full calendar month, regardless of whether eligibility is lost during the course of the month.
Income from direct contracts
Direct Contractingrevenue represents CMS' total expense incurred for medical services provided on behalf of DCE Beneficiaries during months in which they were alignment eligible during the performance year. Direct Contractingrevenue is calculated by taking the sum of the capitation payments made to us for services within the scope of our capitation arrangement and FFS payments made to providers directly from CMS. Direct Contractingrevenue is also known in the DC Model as performance year expenditures and is the primary component used to calculate shared savings or shared loss versus the performance year benchmark. Direct Contractingrevenue includes a direct reduction or increase of shared savings or loss, as applicable. Premiums and recoupments incurred in direct relation to the DC Model are recognized as a reduction or increase in Direct Contractingrevenue, as applicable. We believe Direct 64 --------------------------------------------------------------------------------
Contract revenue provides a useful insight into the gross economic benefit
generated by our business operations and allows us to assess our performance
regardless of changes to our underlying reinsurance structure.
Direct contracts Net medical claims incurred
Direct Contractingnet medical claims incurred consists of the total incurred expense that CMS and we will remit for medical services provided on behalf of DCE Beneficiaries during the months in which they are alignment eligible and aligned to the DCE. Additionally, Direct Contractingnet medical claims incurred is inclusive of fees paid to providers for Clover Assistant usage, care coordination, and any shared savings or shared loss agreements with providers. Direct Contractingnet medical claims incurred is presented on our Consolidated Statements of Operations and Comprehensive Loss in accordance with GAAP.
Direct Contracting Margin (DCM)
We calculate our DCM by dividing
Direct Contractingnet medical claims incurred by Direct Contractingrevenue in a given period. We believe our DCM is an indicator of our gross profitability and the ability to capture and analyze data over time to generate actionable insights for returning beneficiaries to improve care and reduce medical expenses.
Components of our operating results
In addition to the components described below, additional components of our results of operations include Premiums Earned, Net, Direct Contracting Revenue, MA Net Medical Claims Incurred, and Direct Contracting Net Medical Claims Incurred, which are described in the "Key Performance Measures of Our Operating Segments" section above. Other Income Other income mostly consists of income earned from rental agreements with third parties for subleases of our leased office facilities. In addition, other income includes income generated from ceded allowances under reinsurance agreements, which are amounts paid by the reinsurers to help cover certain expenses incurred by the ceding party in relation to the ceded contracts, and an immaterial amount of other income from commissions related to premiums ceded under our reinsurance agreements. Commissions from premiums ceded under reinsurance agreements are earned when ceded to reinsurers over the period of policies. The amount of commissions we earn is dependent upon the terms of our reinsurance contracts and the amount of premiums ceded. Other income also includes interest earned from fixed-maturity securities, short-term securities and other investments, the gains or losses on sales and maturities of investments. Our cash and invested assets primarily consist of fixed-maturity securities, and may also include cash and cash equivalents, equity securities, and short-term investments. The principal factors that influence net investment income are the size of our investment portfolio and the yield on that portfolio. As measured by amortized cost (which excludes changes in fair value, such as changes in interest rates), the size of our investment portfolio is mainly a function of our invested equity capital along with premiums we receive less amounts paid in costs of care.
Other medical expenses
Other medical costs consist of other clinical services not included in Medicare Advantage or
Direct Contracting, and all other corporate overhead. Clinical services is comprised of Clover Home Careand other clinical services that are offered to eligible beneficiaries.
Salaries and benefits
Salaries and benefits include salaries, sales commissions, stock
compensation expenses, employee benefits, severance and payroll taxes
Following the consummation of the Business Combination, we have incurred and expect to continue to incur significant additional expenses for salaries and benefits as a result of expanding our headcount to support our increased compliance requirements associated with operating as a public company or otherwise and the growth of our business. As a result, we expect that our salaries and benefits will increase in absolute dollars in future periods and vary from period-to-period as a percentage of revenue.
General and administrative costs
General and administrative expense consists of legal, accounting, tax and other professional fees, consulting fees, hardware and software costs, payments to our third-party cloud infrastructure providers for hosting our software, travel expenses, recruiting fees, certain tax, license and insurance-related expenses, including industry assessments, advertising and marketing costs, membership- 65 --------------------------------------------------------------------------------
incurred administrative costs, rental and occupancy costs, statutory and other
fees and other overheads. Administrative costs related to memberships consist of
registration costs, broker commissions and call center expenses.
We are subject to the ACA, which established insurance industry assessments, including an annual health insurance industry fee. The annual health insurance industry fee was suspended in 2019. In 2020, the fee incurred and paid by the Corporation was approximately
$8.0 million. The fee has been permanently repealed beginning in 2021. Following the consummation of the Business Combination, we have incurred and expect to continue to incur significant additional general and administrative expenses as a result of operating as a public company, including expenses related to compliance with the rules and regulations of the SECand the listing standards of Nasdaq, additional corporate, director and officer insurance expenses, greater investor relations expenses, and increased professional service fees. As a result, we expect that our general and administrative expenses will increase in absolute dollars in future periods and vary from period-to-period as a percentage of revenue.
Reserve expense for insufficient premiums (benefit)
Premium deficiency reserves are established to the extent that the sum of expected future costs, claim adjustment expenses, and maintenance costs exceeds related future premiums. We assess the profitability of our contracts with CMS to identify those contracts where current operating results or forecasts indicate probable future losses. Premium deficiency reserve expense (benefit) is recognized in the period in which the losses are identified. Premium deficiency reserves are then amortized over the period in which losses were expected to occur. The amortization is expected to have an offsetting impact to the operating losses in that period. We may identify and recognize additional premium deficiency reserves depending on the rates that are paid to us by CMS based on our actuarial bids and the utilization of healthcare services by our members.
Depreciation and amortization
Depreciation includes all depreciation
expenses associated with our property and equipment. Depreciation includes
expenditures related to property, plant and equipment. Depreciation includes charges
related to leasehold improvements.
Other expense consists primarily of debt issuance costs incurred in connection with the issuance of an aggregate of
$373.8 millioninitial principal amount of convertible securities ( Convertible Securities) in February, March, May, and August 2019. The Convertible Securitieswere converted into shares of the Corporation's Class B common stock upon the completion of the Business Combination on January 7, 2021.
Change in fair value of warrants payable
Change in fair value of warrants payable is related to a mark-to-market adjustment associated with warrants to purchase our capital stock. In connection with the Closing, the warrants of Legacy Clover automatically converted into shares of Class B Common Stock, and we are no longer required to re-measure the value of those warrants. Change in fair value of warrants payable for our public warrants (the "Public Warrants") and private placements warrants (the "Private Placement Warrants") assumed in connection with the Business Combination reflects the mark-to-market adjustment associated with warrants to purchase our Class A Common Stock from
January 7, 2021, through the end of the reporting period. The change in fair value of warrants payable is inclusive of the warrant amortization expense associated with the warrants payable in each period. We had no Warrants outstanding following the exercises and redemptions of our Public Warrants and Private Placement Warrants in the third quarter of 2021.
Interest expense consists mostly of interest expense associated with our previously outstanding non-convertible notes (Term Loan Notes) under a term loan facility entered into by us on
March 21, 2017, for an aggregate principal amount of $60.0 million(the "Loan Facility"). All remaining principal and accrued interest under the Loan Facility was voluntarily paid, and the facility was terminated, as of June 29, 2021. We also have interest expense associated with the Seek Convertible Note entered into by Seek, an indirect wholly-owned subsidiary, on September 25, 2020, for an aggregate principal amount of $20.0 million.
Amortization of tickets and discounts on titles
Amortization of notes and securities discounts consists of the amortization of
debt discount associated with the
issue costs associated with the term loan notes.
(Gain) Loss on derivative
The (gain) loss on derivatives activity consists mainly of a (gain) loss on
embedded derivatives contained in
derivatives related to the conversion characteristics of
which reflected a premium above the principal and accrued interest thereon.
We recorded gains or losses on those derivatives based on the changes in fair value of the embedded derivatives contained in the
Convertible Securities. The carrying amounts of these embedded derivatives were recorded at fair value at issuance, marked-to-market as of each balance sheet date, and changes in fair value were reported as either income or expense during the period. To estimate the fair value attributable to these features, we estimated the value of the Convertible Securities(i) with the embedded derivatives and (ii) without the embedded derivatives. The incremental difference between the two values was then used to estimate the fair value of the embedded derivatives. A probability-weighted present value of expected future returns model was then used to estimate the value of the conversion features under various probable scenarios. The assumptions used to arrive at the estimated fair value generally included the stock price, strike price, volatility, risk-free rate, and time to maturity, among others.
converted into ordinary shares of the Company and the associated shares
the derivative liability has been eliminated.
Comparison of years ended
The following table summarizes our consolidated operating results for
results are not necessarily indicative of results in future periods.
Change between Years ended December 31, 2021 and 2020 2021 2020 ($) (%) ($ in thousands) Revenues Premiums earned, net (Net of ceded premiums of
$489and $599for the years ended December 31, 2021and 2020, respectively) $ 799,414 $ 665,698 $ 133,71620.1 % Direct Contracting revenue 667,639 - 667,639 * Other income 4,943 7,190 (2,247) (31.3) Total revenues 1,471,996 672,888 799,108 118.8 Operating expenses Medicare Advantage net medical claims incurred 838,134 585,432 252,702 43.2 Direct Contracting net medical claims incurred 705,407 - 705,407 * Other medical costs 7,637 4,650 2,987 64.2 Salaries and benefits 260,458 71,256 189,202 265.5 General and administrative expenses 185,287 120,830 64,457 53.3 Premium deficiency reserve expense (benefit) 110,628 (17,128) 127,756 745.9 Depreciation and amortization 1,246 555 691 124.5 Other expense 191 - 191 * Total operating expenses 2,108,988 765,595 1,343,393 175.5 Loss from operations (636,992) (92,707) (544,285) 587.1 Change in fair value of warrants payable (66,146) 80,328 (146,474) (182.3) Interest expense 3,229 35,990 (32,761) (91.0) Amortization of notes and securities discount 13,681 21,118 (7,437) (35.2) (Gain) loss on derivative - (93,751) 93,751 (100.0) Net loss $ (587,756) $ (136,392) $ (451,364)330.9 % * Not presented because the prior period amount is zero or the amount for the line item changed from a gain to a loss (or vice versa) and thus yields a result that is not meaningful. 67 --------------------------------------------------------------------------------
Earned premiums, net
Premiums earned, net increased
$133.7 million, or 20.1%, to $799.4 millionfor the year ended December 31, 2021, compared to the year ended December 31, 2020. The increase was primarily due to membership growth of 17.3% from 58,056 Medicare Advantage members at December 31, 2020, to 68,120 Medicare Advantage members at December 31, 2021. Additional risk adjustment revenue of $7.8 millionwas recognized during the year ended December 31, 2021.
Income from direct contracts
Our participation in
Direct Contractinglaunched in April 2021. Revenue related to Direct Contractingwas $667.6 millionfor the year ended December 31, 2021. This revenue was attributable to the alignment of Original Medicare beneficiaries to our DCE, which numbered 61,876 at December 31, 2021.
Other income decreased
$2.2 million, or 31.3%, to $4.9 millionfor the year ended December 31, 2021, compared to the year ended December 31, 2020. The decrease was primarily due to lower net investment income of $2.4 millionand decreased rental income of $0.4 millionduring the year ended December 31, 2021, and the receipt of a $0.5 millionstate subsidy during the year ended December 31, 2020, that was not received in the year ended December 31, 2021.
MA net medical claims incurred
MA net medical claims incurred increased
$252.7 million, or 43.2%, to $838.1 millionfor the year ended December 31, 2021, compared to the year ended December 31, 2020. The increase was primarily due to MA membership growth, the impact of COVID-19 related treatment costs, and the return of healthcare utilization that was reduced in 2020 in connection with the COVID-19 pandemic.
Direct contracts Net medical claims incurred
Our participation in
beneficiaries to our DCE.
Other medical expenses
Other medical costs increased
$3.0 million, or 64.2%, to $7.6 millionfor the year ended December 31, 2021, compared to the year ended December 31, 2020. The increase was primarily related to an increase in beneficiaries receiving in-home care services for a flat monthly fee.
Salaries and benefits
Salaries and benefits increased
$189.2 million, or 265.5%, to $260.5 millionfor the year ended December 31, 2021, compared to the year ended December 31, 2020. The increase was primarily driven by higher year-over-year stock-based compensation expense of $156.6 milliondue to the issuance of stock-based compensation, increased headcount, and additional awards issued in connection with the Business Combination.
General and administrative expenses
General and administrative expenses increased
$64.5 million, or 53.3%, to $185.3 millionfor the year ended December 31, 2021, compared to the year ended December 31, 2020. The increase was driven in part by increases in legal and other professional fees to support our growth and additional costs related to operating as a public company and higher costs associated with obtaining and maintaining directors' and officers' liability insurance, partially offset by the absence in 2021 of the ACA's health insurance industry fee of $8.0 millionthat we incurred in 2020. Legal and professional fees increased $23.6 millionfor the year ended December 31, 2021, compared to the year ended December 31, 2020, and directors' and officers' liability insurance costs increased $12.7 millionover the same periods. Software application expense also increased due to the continued development of platform and information technology capabilities within the organization. For the year ended December 31, 2021, we also recognized $10.7 millionin amortization expense related to deferred acquisition costs. There was no amortization expense related to deferred acquisition costs recognized for the year ended December 31, 2020.
Reserve expense for insufficient premiums (benefit)
$110.6 millionpremium deficiency reserve expense was recorded for the year ended December 31, 2021, compared to a benefit of $17.1 millionfor the year ended December 31, 2020. This expense includes amortization associated with a previously recorded 68 --------------------------------------------------------------------------------
fully amortized reserve and a reserve deemed necessary to
fiscal year 2022. The change is due to management’s assessment of the
anticipated experience related to contract profitability.
Change in fair value of warrants payable
We reported an increase of
$66.1 millionon the change in fair value of warrants payable for the year ended December 31, 2021, compared to a decrease of $80.3 millionfor the year ended December 31, 2020. The increase for the year ended December 31, 2021, was due to the mark-to-market adjustment of the Public Warrants and Private Placement Warrants recognized for the year ended December 31, 2021prior to being fully exercised and redeemed, compared to the initial measurement value as of January 7, 2021. The decrease for the year ended December 31, 2020, was related to an increase in the valuation of the legacy warrants during the period. For additional information, see Note 5 (Fair Value Measurements) and Note 13 (Warrants Payable) to Financial Statements in this report. Interest Expense Interest expense decreased $32.8 million, or 91.0%, to $3.2 millionfor the year ended December 31, 2021, compared to the year ended December 31, 2020, primarily related to the conversion of the Convertible Securitiesto shares of the Corporation's common stock in connection with the completion of the Business Combination on January 7, 2021.
Amortization of tickets and discounts on titles
Amortization of notes and securities discounts decreased
$7.4 million, or 35.2%, to $13.7 millionfor the year ended December 31, 2021, compared to the year ended December 31, 2020. The decrease primarily relates to the completion of the Business Combination on January 7, 2021, whereby the unamortized discount associated with the August 2019tranche of the Convertible Securitieswas accelerated. The decrease was also driven by $0.6 millionof amortization of debt discount associated with the Convertible Securitiesduring the period from January 1, 2021, to January 7, 2021.
Gain (loss) on derivative
There was no gain on derivative for the year ended
December 31, 2021, as compared to a $93.8 milliongain on derivative for the year ended December 31, 2020. This change relates to the capital contribution treatment of the elimination of the derivative associated with the convertible securities upon completion of the Business Combination on January 7, 2021.
Cash and capital resources
We manage our liquidity and financial position in the context of our overall business strategy. We continually forecast and manage our cash, investments, working capital balances, and capital structure to meet the short-term and long-term obligations of our businesses while seeking to maintain liquidity and financial flexibility. As of
December 31, 2021, we had cash, cash equivalents, and short-term investments of $593.8 million. Additionally, as of December 31, 2021, we had $197.4 millionof available-for-sale and held-to-maturity investment securities, an outstanding balance of $22.0 millionon convertible notes issued by an indirect wholly-owned subsidiary, and no outstanding balance on our Term Loan Notes. Our cash equivalents, short-term investments, and investment securities consist primarily of money market funds and U.S.government debt securities. Since inception, we have financed our operations primarily from the proceeds we received through public and private sales of equity securities, funds received in connection with the Business Combination, issuances of convertible notes, premiums earned under our MA plans, borrowings under our term loan facility and, most recently, with our Direct Contractingrevenues. We expect that our cash, cash equivalents, short-term investments, and our current projections of cash flows, taken together, will be sufficient to meet our projected operating and regulatory requirements for the next 12 months based on our current plans. Our future capital requirements will depend on many factors, including our needs to support our business growth, to respond to business opportunities, challenges or unforeseen circumstances, or for other reasons. We may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us, or at all. If we are unable to raise additional capital when desired, our business, results of operations, and financial condition would be adversely affected. We operate as a holding company in a highly regulated industry. As such, we may receive dividends and administrative expense reimbursements from our subsidiaries, two of which are subject to regulatory restrictions. We continue to maintain significant levels of aggregate excess statutory capital and surplus in our state-regulated operating subsidiaries. Cash, cash equivalents, and short-term investments at the parent company were $350.9 millionand $5.4 millionas of December 31, 2021, and December 31, 2020, respectively. This increase at the parent company primarily reflects proceeds from the Business Combination offset by capital 69 -------------------------------------------------------------------------------- contributions made to insurance subsidiaries, operating expenses, and repayment of debt. Our unregulated subsidiaries held $55.7 millionand $44.6 millionof cash, cash equivalents, and short-term investments as of December 31, 2021, and December 31, 2020, respectively. Our regulated insurance subsidiaries held $187.2 millionand $46.4 millionof cash, cash equivalents, and short-term investments as of December 31, 2021, and December 31, 2020, respectively. Additionally, our regulated insurance subsidiaries held $118.0 millionand $54.7 millionof available-for-sale and held-to-maturity investment securities as of December 31, 2021, and December 31, 2020, respectively. Our use of operating cash derived from our non-insurance subsidiaries is generally not restricted by departments of insurance (or comparable state regulatory agencies). Our regulated insurance subsidiaries have not paid dividends to the parent, and applicable insurance laws restrict the ability of our regulated insurance subsidiary to declare and pay dividends to the parent. Insurance regulators have broad powers to prevent reduction of statutory surplus to inadequate levels, and there is no assurance that dividends of the maximum amounts calculated under any applicable formula would be permitted. State insurance regulatory authorities that have jurisdiction over the payment of dividends by our regulated insurance subsidiary may in the future adopt statutory provisions more restrictive than those currently in effect. For additional information, please refer to the parent company financial statements and accompanying notes in Schedule II-Parent Company Financial Information contained in our consolidated financial statements included in this Form 10-K. For a detailed discussion of our regulatory requirements, including aggregate statutory capital and surplus as well as dividends paid from the subsidiaries to the parent, please refer to Notes 24, 25, and 26 to our Consolidated Financial Statements included in this Form 10-K.
The following table summarizes our consolidated cash flows for the years ended
December 31, 2021and 2020. Years ended December 31, 2021 2020 (in thousands) Consolidated Statements of Cash Flows Data: Net cash used in operating activities $ (282,326)$
Net cash (used) from investing activities (435,447) 137,404
Net cash provided by financing activities
2021 Cash Flow vs. 2020 Cash Flow
Increased cash flows provided by finance activities were primarily driven by the business combination proceeds received in
January 2021and the underwritten public offering proceeds received in November 2021. A significant portion of these proceeds were invested for future use by the company. This was also partly offset by net cash operating outflows due to higher medical claims disbursements in 2021 due to COVID-19 and higher operating costs since becoming a public company.
Our cash requirements within the next twelve months include medical claims payable, accounts payable and accrued liabilities, current liabilities, purchase commitments, and other obligations. We expect the cash required to meet these obligations to be primarily generated through cash flows from current operations and cash available for general corporate use.
Our largest source of operating cash flows is capitated payments from CMS. Our primary uses of cash from operating activities are payments for medical benefits and payments of operating expenses. For the year ended
December 31, 2021, net cash used in operating activities was $282.3 million, which reflects net loss of $587.8 million. Non-cash activities included a $66.1 milliongain as a result of the change in fair value of warrants payable and a $163.7 millioncharge to stock-based compensation expense. Changes to our working capital included a $110.6 millioncharge to our premium deficiency reserve and an increase of $12.6 millionin surety bonds and deposits related to Direct Contracting. For the year ended December 31, 2020, net cash used in operating activities was $118.5 million, which reflects a net loss of $136.4 million. Non-cash activities primarily consisted of a $93.8 milliongain on derivative, an $80.1 millionloss on the change in fair value of warrants payable, $28.3 millionin paid-in-kind interest expense, $21.1 millionin amortization of notes and securities discount, and $7.1 millionof stock-based compensation expense. 70 --------------------------------------------------------------------------------
Net cash used in investing activities for the year ended
December 31, 2021, of $435.4 millionwas primarily due to $876.3 millionused to purchase investment securities, offset by $441.5 millionprovided from the sale and maturity of investment securities. Net cash provided by investing activities for the year ended December 31, 2020, of $137.4 millionwas primarily due to $312.4 millionprovided from the sale and maturity of investment securities, partially offset by $174.3 millionused to purchase investment securities. For additional information regarding our investing activities, please refer to Notes 2 and 4 to our Consolidated Financial Statements included in this Form 10-K. Financing Activities Net cash provided by financing activities for the year ended December 31, 2021, of $925.4 millionwas the result of $666.2 millionin proceeds from the reverse recapitalization in connection with the Business Combination, net of transaction costs, and $283.8 millionin proceeds from the Class A common stock offering, net of fees, partially offset by $30.9 millionin principal payments on our outstanding Term Loan Notes. Net cash provided by financing activities for the year ended December 31, 2020, of $5.8 millionwas primarily the result of $20.0 millionin proceeds from the issuance of the Convertible Securities, $3.9 millionfrom the acquisition of our noncontrolling interest, and $1.7 millionin proceeds from the issuance of common stock, offset by $18.8 millionin principal payments on our outstanding Term Loan Notes and $1.0 millionin payments associated with the buyback and subsequent cancellation of common stock.
Term Loan Notes
We entered into a loan and security agreement with a commercial lender in
March 2017, which provided for term loans in an aggregate principal amount of up to $60.0 million. At that time, we borrowed $40.0 millionas a term loan under the agreement which was subject to an interest rate of 11.0%, payable monthly, and had a maturity date of March 1, 2022. In October 2017, we borrowed the remaining $20.0 millionas a term loan under the agreement which was subject to an interest rate of 11.25%, payable monthly, and had a maturity date of October 1, 2022. Each loan was payable in monthly installments of interest only for the first 24 months, and thereafter interest and principal were payable in 36 equal monthly installments. The loans were secured by substantially all of our assets, including our intellectual property, and equity interests in our unregulated subsidiaries.
December 2018, we entered into a convertible securities purchase agreement with qualified institutional buyers, including entities affiliated with our Chief Executive Officer and other holders of more than 5.0% of our common stock, for an aggregate principal amount of up to $500.0 million. In February, March, May, and August 2019, we issued an aggregate of $373.8 millioninitial principal amount of convertible securities, or the Convertible Securities, under the agreement. In connection with and upon the closing of the Business Combination, the Convertible Securitiesmandatorily converted into 74,694,107 shares of the Corporation's Class B Common Stock. For additional information about the Convertible Securitiesand the conversion of the Convertible Securitiesupon the closing of the Business Combination, see Note 12 (Notes and Securities Payable) to Financial Statements in this report.
Contractual obligations and commitments
We believe that funds from future operating cash flows, cash and investments
will be sufficient for future operations and commitments, and for the capital
acquisitions and other strategic operations, at least over the next 12 months.
Material cash requirements from known contractual obligations and commitments as of
December 31, 2021include: (1) the recognition of a performance guarantee of $36.9 millionin connection with the Corporation's participation in the DC Model, (2) operating lease obligations of $7.9 million, and (3) the outstanding principal balance related to the Seek Convertible Note of $20.0 million. These commitments are associated with contracts that were enforceable and legally binding as of December 31, 2021, and that specified all significant terms, including fixed or minimum serves to be used, fixed, minimum, or variable price provisions, and the approximate timing of the actions under the contracts. There were no other material cash requirements from known contractual 71 -------------------------------------------------------------------------------- obligations and commitments. For additional information regarding our remaining estimated contractual obligations and commitments, see Note 12 (Notes and Securities Payable), Note 16 (Leases), Note 21 (Commitments and Contingencies), and Note 22 ( Direct Contracting) to Financial Statements in this report.
In the ordinary course of business, we enter into agreements, with various parties (providers, vendors, consultants, etc.), of varying scope and terms pursuant to which we agree to defend, indemnify, and hold harmless the other parties from any claim, demand, loss, lawsuit, settlement, judgment, fine, or other liability, and all related expenses which may accrue there from (including reasonable attorney's fees), arising from or in connection with third party claims, including, but not limited to, negligence, recklessness, willful misconduct, fraud, or otherwise wrongful act or omission with respect to our obligations under the applicable Agreement.
Off-balance sheet arrangements
We do not have any off-balance sheet arrangements, as defined by applicable regulations of the
SEC, that are reasonably likely to have a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures, or capital resources.
Significant Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with GAAP. The preparation of the consolidated financial statements in conformity with GAAP requires our management to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the period. We evaluate, on an ongoing basis, our significant accounting estimates, which include, but are not limited to, net claims and claims adjustment expense and revenue recognition, including the risk adjustment provisions related to Medicare contracts. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates under different assumptions or conditions, impacting our reported results of operations and financial condition. We believe that the accounting policies and estimates described below involve a significant degree of judgment and complexity. Accordingly, we believe these are the most critical to aid in fully understanding and evaluating our Consolidated Financial Condition and Results of Operations. For further information, see Note 2 (Summary of Significant Accounting Policies) to the Financial Statements in this Form 10-K.
MA net medical claims incurred
MA net medical claims incurred is recognized in the period in which services are provided and includes paid claims and an estimate of the cost of services which have been incurred but not yet reported (IBNR) and certain other unpaid claims and adjustments. IBNR represents a substantial portion of our unpaid claims, as reflected below: Years ended December 31, 2021 2020 Total % Total % (dollars in thousands) IBNR
$ 125,43692.0 % $ 93,55390.0 % Other unpaid claims 5,863 4.3 6,681 6.4 Claims adjustment expense 5,018 3.7 3,742 3.6 Total unpaid claims and claims adjustment expense $ 136,317
Management determines the unpaid claims and claims adjustment expense with a supplemental perspective provided by a third-party actuarial firm. We estimate our unpaid claims by following a detailed actuarial process that uses both historical claim payment patterns as well as emerging medical expense trends to project the best estimate of claims liabilities. These data and trends include historical data adjusted for claims receipt and payment patterns, cost trends, product mix, seasonality, utilization of healthcare services, changes in membership, provider billing practices, benefit changes, known outbreaks of disease, including COVID-19 or increased incidence of illness such as influenza, the incidence of high dollar or catastrophic claims and other relevant factors. These factors are used to determine our lag-dependent completion factors, which represent the average percentage of total incurred claims that have been paid 72 -------------------------------------------------------------------------------- through a given date after being incurred. Completion factors are applied to claims paid through the period-end date to estimate the ultimate claim expense incurred for the period. The completion factors are the most significant factor impacting the IBNR estimate. We continually adjust our completion factor with our knowledge of recent events that may impact current completion factors when establishing our reserves. Because our reserving practice is to consistently recognize the actuarial best estimate using an assumption of moderately adverse conditions as required by actuarial standards, there is a reasonable possibility that there could be variances between actual completion factors and those assumed in our
December 31, 2021and 2020, unpaid claim estimates. Actuarial standards require the use of assumptions based on moderately adverse experience, and as such, a provision for adverse deviation (PAD) is recognized on current reserves and released on prior reserves. For further discussion of our reserving methodology, including our use of completion factors to estimate IBNR, refer to Note 2 (Summary of Significant Accounting Policies) within the Financial Statements in this Form 10-K.
Direct contracts Net medical claims incurred
Direct Contractingnet medical claims incurred is recognized in the period in which services are provided and includes paid claims and an estimate of the cost of services which have been incurred but not yet reported and certain other unpaid claims and adjustments. IBNR represents a substantial portion of our unpaid claims, as reflected below: Years ended December 31, 2021 Total % (dollars in thousands) IBNR $ 4,607 100.0 % Other unpaid claims - - Claims adjustment expense - - Total unpaid claims and claims adjustment expense $ 4,607 100.0 % Our actuaries estimate the unpaid claims by following a detailed actuarial process that uses historical claim payment patterns. We extrapolate in order to form an opinion of ultimate incurred claims based on claims that have been paid to date. This is generally most effective for mature coverage months under stable periods of claims adjudication; therefore, for the estimates of Primary Care Qualified Evaluation and Management expenses, we evaluate IBNR using the historical rate of payment for services based on the lag between service date and payment date. Under this approach, we include an average historical "age-to-age" estimate, excluding the highest and lowest of the historical factors. We also set a lower limit on the cumulative or "age-to-ultimate" development factors at 1.0, to prevent negative amounts incurred but not paid as a result of expected claim recoveries from being factored into our IBNR. In addition, for more recent coverage periods we utilize historical estimates of completed claims to estimate the cost of subsequent months based on either expected or known changes in cost drivers. These cost drivers include weekday seasonality, secular seasonality, direct COVID cases and other adjustments as necessary, which enable our actuaries to estimate claims when the available claims experience is either limited or ambiguous. Our actuaries also consider this population's history of observed completion percentages in estimating ultimate claims incurred, using completion percentages that are consistent with historical ranges and informed by new information with other functional departments. Clover's reserving practice is to recognize the actuarial best estimate of our ultimate liability for claims. Actuarial standards require the use of assumptions based on moderately adverse experience, and as such, a provision for adverse deviation is recognized on current reserves and released on prior reserves. The PAD is lower for DCE than MA; for DCE, claims submission and payment patterns support more precise estimates than are observed in MA.
Reserve expense for insufficient premiums (benefit)
A premium deficiency reserve is established when future premiums and current reserves are not sufficient to cover future claim payments and expenses for the remainder of a contract period. These reserves are required to monitor solvency and help ensure that a reporting entity's contractual obligations will be adequately funded. We assess the profitability of our MA contracts to identify where current operating results or forecasts indicate potential future losses. We do not assess the impacts of the premium deficiency reserve for our
Direct Contractingoperations as that business segment is not an insurance plan and is not accounted for under ASC 944- Financial Services-Insurance. 73 -------------------------------------------------------------------------------- The reserve is derived from the assessments performed and provides the amount that insurance related expenses are expected to exceed insurance revenues. There are key financial statement line items and associated drivers considered in determining the reserve. The most significant of financial statement line items considered when performing reserve assessments are premiums earned and MA net medical claims incurred. Key inputs considered for premiums earned include, expected enrollment changes, revenue rates, risk adjustment, and risk score forecasts. Key metrics considered for MA net medical claims incurred include claims experience, benefit changes, membership mix, membership changes, and medical management programs. Administrative expenses are assessed for expenses directly and indirectly incurred in order to operate the insurance entities and cannot exceed a percentage of regulatory entity premiums earned due to contractual agreements. There are other operating activities that are considered in accordance with regulatory guidelines. The premium deficiency reserve assessment is performed on a quarterly basis. Every quarter, reserve assessments are made for the period following the most recently ended period through to the end of the current year. For the fourth quarter, assessments are made related to the entire subsequent fiscal year's projected net performance. If a reserve is deemed necessary, a liability and expense will be recognized as of the end of the quarter directly preceding the period for which the future loss is projected. That reserve will be amortized over the course of the contract period assessed to have expected insurance expenses that will exceed insurance revenues. The amortization of the reserve occurs ratably over the assessed contract period and will offset expected future losses. Revenue Recognition - MA We receive monthly premiums from the federal government according to government specified payment rates and various contractual terms. Revenue from premiums earned is recognized as income in the period in which members are entitled to receive services. Premiums received in advance of the service period are reported as other liabilities and subsequently recognized as revenue in the period earned. CMS uses a risk-adjustment model which adjusts premiums paid to MA contracts, based on member risk scores, which are meant to compensate plans that enroll beneficiaries with higher-than-average health risks and to reduce payments for healthier beneficiaries who have lower health risks. Risk scores are based on member diagnoses from the previous year and are periodically adjusted retroactively based on additional plan data collection. Risk adjustments can have a positive or negative retroactive impact to rates. Prospective payments to MA plans are based on the estimated cost of providing standard Medicare-covered benefits to a member with an average risk profile. Under the risk-adjustment methodology, all MA plans must collect and submit the necessary diagnosis code information to CMS within prescribed deadlines. Estimated retroactive lump-sum settlement payments are accrued within revenue for premiums earned to account for the difference between lag risk scores, mid-year risk scores and final risk scores. Any known or expected unfavorable risk score impacts related to quality assurance diagnosis deletions or risk adjustment data validation audits are also considered within accruals and are recorded as a reduction of revenue from premiums earned, based on available information.
Medicare Advantage Part D
Payments received from CMS and members in connection with our participation in the Medicare Advantage Part D program are determined from our annual bid and represent amounts for providing prescription drug insurance coverage; these amounts are recognized as premium revenue for providing this insurance coverage ratably over the term of the annual contract. Part D CMS payments are subject to risk sharing through risk corridor provisions. The risk corridor provisions compare costs targeted in bids to actual prescription drug costs, limited to actual costs that would have been incurred under the standard coverage as defined by CMS. Variances exceeding certain thresholds may result in CMS making additional payments to us or requiring us to refund to CMS a portion of the premiums received. Management estimates and recognizes an adjustment to premium revenue related to these provisions based upon pharmacy claims experience and input from third-party experts. Management records a receivable or payable at the contract level. Rebates are paid by drug manufacturers to our pharmacy benefit manager (PBM) which shares a portion of the rebates with us. Management estimates favorable adjustments to medical expenses related to rebates negotiated by the PBM on our behalf. Estimates are based on both actual and estimated pharmacy claims experience throughout the year as well as input from third-party experts and the PBM. Management records a receivable at the contract level. There are additional cost-sharing elements that are recorded within medical expenses and take into account factors such as member income levels, brand-name versus generic drug spend, and total spend by member within a plan year. Management estimates and recognizes adjustments to medical expenses based upon inputs such as pharmacy claims experience, rebate activity, and input from third-party experts. Management records a receivable or payable at the end of the year based on these items. 74 --------------------------------------------------------------------------------
Revenue Recognition – DCE
Direct Contractingrevenue represents CMS' total expense incurred for medical services provided on behalf of DCE Beneficiaries during months in which they were alignment eligible during the performance year. Direct Contractingrevenue is calculated by taking the sum of the capitation payments made to us for services within the scope of our capitation arrangement and FFS payments made to providers directly from CMS. Direct Contractingrevenue is also known in the DC Model as performance year expenditures and is the primary component used to calculate shared savings or shared loss versus the performance year benchmark. Direct Contractingrevenue includes a direct reduction or increase of shared savings or loss, which is calculated as the difference between the total benchmark and the total cost of care. Premiums and recoupments incurred in direct relation to the DC Model are recognized as a reduction or increase in Direct Contractingrevenue.
Direct contract receivable and performance year obligation
Performance year receivable and obligation represents the average Medicare beneficiary's total cost of care for beneficiaries aligned to our DCE and refers to the target expenditure amount that will be compared to Medicare expenditures for items and services furnished to aligned beneficiaries during a performance year. This comparison will be used to calculate shared savings and shared losses. The key inputs in determining the performance year receivable and obligation are trends, risk score, and the number of beneficiaries aligned to the DCE. We begin our benchmark estimation process with benchmark reports delivered from the
Centers for Medicare & Medicaid Services Innovation Center(CMMI) on a quarterly basis, which drive the determination of whether certain inputs to that calculation need to be adjusted or accrued as a result of more accurate data. Prospective and retrospective trends are set at a national level, and while it is unlikely we would deviate from CMMI's estimates, we could adjust from the benchmark report due to new information received directly from CMMI, national studies we complete ourselves, or other anticipated policy updates that we believe are probable and estimable. The preliminary benchmark is set based on risk scores with data captured as of a certain point in time. Once new data is received, an updated analysis of claims provides an opportunity for the benchmark to be adjusted. Lastly, beneficiary counts are updated through the year and represent a timing difference between CMMI reporting, for which we accrue. For the initial performance year, seasonality was assessed in the calculation of the benchmark. Warrants Legacy Warrants In September 2015, we issued warrants to purchase 2,100,000 shares of our common stock. On March 21, 2017, we entered into a loan facility (the "Loan Facility") for an aggregate principal amount of $60.0 million. In conjunction with the Loan Facility, we issued 1,266,284 warrants to purchase shares of our Series D preferred stock. The September 2015warrants and the Loan Facility warrants were determined to be freestanding instruments as they were detachable and separately exercisable. These warrants were accounted for as derivative instruments in accordance with ASC 815-40 and were presented within warrants payable on the Consolidated Balance Sheet. The warrant liabilities were measured at fair value at inception and on a recurring basis until redeemed, with changes in fair value presented within change in fair value of warrants payable in the Consolidated Statement of Operations and Comprehensive Loss. In November 2016and December 2017, we issued warrants to purchase 261,681 shares of our common stock to a service provider for services performed. For warrants issued to non-employees as payment for services, such as the November 2016and December 2017warrants, we consider the warrants to be in scope of stock-based compensation guidance to non-employees. To determine whether the warrants should be classified as liabilities or equity awards, we evaluate the criteria for debt accounting guidance because share-based payments classified as liabilities under this guidance would also be classified as liabilities under the stock-based accounting guidance. As the November 2016and December 2017warrants did not meet any of the criteria to be accounted for as debt, they were classified as equity awards. On the grant date, these warrants were measured by estimating the fair value of the equity instruments to be issued. Stock-based compensation expense was recorded for the vested portion of the warrants.
simultaneously modified the terms of the mandates inherited, and they were
automatically converted into common stock as part of the business
Public Warrants and Private Placement Warrants
We assumed, in connection with the Business Combination, public warrants and private placement warrants to purchase shares of our Class A Common Stock. These warrants were accounted for as liabilities in accordance with ASC 815-40 and are presented within warrants payable on the Consolidated Balance Sheet. The warrant liabilities were measured at fair value at inception and on a recurring basis until redeemed, with changes in fair value presented within change in fair value of warrants payable in the Consolidated Statement of Operations and Comprehensive Loss. The Public Warrants were classified within Level 1 of the fair value hierarchy because the fair value was equal to the publicly traded price of the Public Warrants, and the Private Placement Warrants 75 -------------------------------------------------------------------------------- were classified within Level 2 of the fair value hierarchy because the fair value was estimated using the price of the Public Warrant. On
July 22, 2021, we issued a press release stating that we would redeem all unexercised Public Warrants and Private Placement Warrants. In connection with the redemption, effective August 24, 2021, the Public Warrants were delisted and classified within Level 2 of the fair value hierarchy as the fair value of the Public Warrants was based on proportional changes in the price of our common stock. There were no Private Warrants outstanding at August 24, 2021.
We evaluated the embedded features of the
Convertible Securitiesby applying the derivatives accounting guidance. Derivatives embedded within non-derivative instruments, such as convertible securities, are bifurcated from the host instrument when the embedded derivative is not clearly and closely related to the host instrument. The embedded derivatives associated with the Convertible Securitieswere recognized as derivative liabilities and recorded at fair value.
For more information on fair value and data used in modeling
regarding warrants classified as passive, please refer to Note 13 (Warrants
payable) to our consolidated financial statements in this report.
Fair values of the legacy warrants and derivative liabilities related to the
Convertible Securitieswere estimated using a probability-weighted expected return method, where the values of various instruments were estimated based on an analysis of future values of our business, assuming various future outcomes. The resulting instruments' values were based upon the probability-weighted present value of expected future investment returns, considering each of the possible future outcomes available to us, as well as the economic benefits attributable to each class of instruments. The expected future investment returns were estimated using a variety of methodologies, including both the market approach and the income approach, where an observable quoted market does not exist, and were generally classified as Level 3. Such methodologies included reviewing values ascribed to our most recent financing, comparing the subject instrument with similar instruments of publicly traded companies in similar lines of business, and reviewing our underlying financial performance and subject instrument, including estimating discounted cash flows. To estimate the fair value attributable to the derivative liabilities, the "with and without" approach is used. An evaluation of multiple scenarios for future payoffs for the underlying Convertible Securitieswas performed using option pricing models, and probability-weighted average value indications were used to arrive at the estimated fair values.
For more information on the fair values of public warrants and private warrants,
please refer to the section entitled “Warrants” above.
We measure and recognize compensation expense for all stock-based awards, including stock options, restricted stock units granted to employees, directors, and non-employees, and stock purchase rights granted under the 2020 Employee Stock Purchase Plan (ESPP) to employees, based on the estimated fair value of the awards on the date of grant. The fair value of each stock option and ESPP opportunity granted is estimated using the Black-Scholes option-pricing model. The fair value of each RSU is based on the estimated fair value of our common stock on the date of grant. The measurement date for employee awards is the date of grant, and stock-based compensation costs are recognized as expense over the employees' requisite service period, which is the vesting period, on a straight-line basis. The measurement date for non-employee awards is the date of grant without changes in the fair value of the award. Stock-based compensation costs for non-employees are recognized as expense over the vesting period on a straight-line basis. Stock-based compensation expense is classified in the Consolidated Statements of Operations and Comprehensive Loss within salaries and benefits. We recognize stock-based compensation expense for the portion of awards that have vested. Forfeitures are recorded as they occur. We also grant certain awards that have performance-based vesting conditions, including performance restricted stock units that become eligible to vest if prior to the vesting date the average closing price of one share of our common stock for ninety consecutive days equals or exceeds a specified price (Market PRSUs). Stock-based compensation expense for such awards is recognized using an accelerated attribution method from the time it is deemed probable that the vesting condition will be met through the time the service-based vesting condition has been achieved. The grant date fair value of the Market PRSUs is recognized as expense over the vesting period under the accelerated attribution method and is not adjusted in future periods for the success or failure to achieve the specified market condition. The Corporation has also determined the requisite service period for the PRSUs with multiple performance conditions to be the longest of the explicit, implicit, or derived service period. The determination of the grant-date fair value using an option-pricing model is affected by the estimated fair value of our common stock as well as assumptions regarding a number of other complex and subjective variables. These variables include expected stock price volatility over an expected term, actual and projected employee stock option exercise behaviors, the risk-free interest rate for an expected term, and expected dividends. The assumptions used in our option-pricing model represent our best estimates. These estimates involve inherent uncertainties and the application of judgment. If factors change and different assumptions are used, our stock-based compensation expense could be materially different in the future. 76 --------------------------------------------------------------------------------
These assumptions are estimated as follows:
Expected term - For stock options considered to be "plain vanilla" options, we estimate the expected term based on the simplified method, which is essentially the weighted average of the vesting period and contractual term, as our historical option exercise experience does not provide a reasonable basis upon which to estimate the expected term. Expected volatility - We perform an analysis of using the average volatility of a peer group of representative public companies with sufficient trading history over the expected term to develop an expected volatility assumption. The grant date fair value of the Market PRSUs is recognized as expense over the vesting period under the accelerated attribution method and is not adjusted in future periods for the success or failure to achieve the specified market condition. The grant date fair value of Market PRSUs is determined using a Monte Carlo simulation model that incorporates multiple valuation assumptions, including the probability of achieving the specified market condition, expected volatility and risk-free interest rate.
See Note 18 (Employee benefit plans) to our consolidated financial statements at
this report for a full description of stock accounting
Recently issued and adopted accounting pronouncements
See Note 2 (Summary of Significant Accounting Policies) to the Financial Statements in this report for a discussion of accounting pronouncements recently adopted and recently issued accounting pronouncements not yet adopted and their potential impact to our financial statements.