Unless otherwise indicated or the context otherwise requires, references in this section to "the Company," "Cano Health ," "we," "us," "our," and other similar terms refer, for periods prior to the completion of the Business Combination, to PCIH and its subsidiaries, and for periods upon or after the completion of the Business Combination, to the consolidated operations ofCano Health, Inc. and its subsidiaries, including PCIH and its subsidiaries. The following discussion and analysis is intended to help the reader understand our business, results of operations, financial condition, liquidity and capital resources. This discussion should be read in conjunction withCano Health, Inc.'s audited consolidated financial statements and related notes presented here in Part II, Item 8, Part I, "Cautionary Note Regarding Forward-Looking Statements," Part I, Item 1A, "Risk Factors" included in this Form 10-K. The discussion contains forward-looking statements that are based on the beliefs of 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 Form 10-K, particularly in the sections entitled "Forward-Looking Statements" and Part I, Item 1A, "Risk Factors." Overview Description ofCano Health We are a primary care-centric, healthcare delivery and population health management platform designed with a focus on clinical excellence. Our mission is simple: to improve patient health by delivering superior primary care medical services, while forging life-long bonds with our members. Our vision is clear: to become a leader in primary care by improving the health, wellness and quality of life of the communities we serve, while reducing healthcare costs. We are one of the largest independent primary care platforms in theU.S. , but still maintain significant growth runway. We have sought to address the fundamental problems with traditional healthcare payment models by leveraging our technology solutions and proven business model to align incentives among patients, payors and providers: •Patients: Our members are offered services in modern, clean, and contemporary medical centers, with same or next day appointments, integrated virtual care, wellness services, ancillary services (such as physiotherapy), home services, transportation, telemedicine and a 24/7 urgency line, all without additional cost to them. This broad-based care model is critical to our success in delivering care to members of low-income communities, including large minority and immigrant populations, with complex care needs, many of whom previously had very limited or no access to quality healthcare. We are proud of the impact we have made in these underserved communities. •Providers: We believe that providers want to be clinicians. Our employed physicians are supported with the tools and multi-disciplinary support they need to focus on medicine, their patients and their families rather than administrative matters like pre-authorizations, referrals, billing and coding. Our physicians receive ongoing training through regular clinical meetings to review the latest findings in primary care medicine. Furthermore, we offer above-average pay and no hospital call requirements. In addition, our physicians are eligible to receive a bonus based upon clinical outcomes, among other metrics. •Payors: Payors want three things: high-quality care, membership growth and effective medical cost management. We have a track record of delivering on all three. Our proven track record of high-quality ratings increases the premiums paid by the CMS to health plans, increases our quality primary-care-driven membership growth, and increases our scaled, highly professional value-based provider group that delivers quality care. 79 -------------------------------------------------------------------------------- CanoPanorama, our proprietary population health management technology-powered platform, powers our efforts to deliver superior clinical care. Our platform provides the healthcare providers at our medical centers with a 360-degree view of their members, along with actionable insights to empower better care decisions and drive high member engagement. We leverage our technology to risk-stratify members and apply a highly personalized approach to primary care, chronic care, preventive care and members' broader healthcare needs. We believe our model is well-positioned to capitalize on the large and growing opportunity being driven by the marketplace's shift to value-based care, demographic tailwinds in the market and the increased focus on improving health outcomes, care quality and the patient experience. We predominantly enter into capitated contracts with the nation's largest health plans to provide holistic, comprehensive healthcare. We predominantly recognize recurring PMPM capitated revenue, which, in the case of health plans, is a pre-negotiated percentage of the premium that the health plan receives from the CMS. We also provide practice management and administrative support services to independent physicians and group practices that we do not own through our managed services organization relationships, which we refer to as our affiliate relationships. Our contracted recurring revenue model offers us highly predictable revenue and rewards us for providing high-quality care, rather than driving a high volume of services. In this capitated arrangement, our goals are well-aligned with payors and patients alike - our strategy is based upon the expectation that the more we improve health outcomes, the more profitable we will be over time. Our capitated revenue is generally a function of the pre-negotiated percentage of the premium that the health plan receives from CMS, as well as our ability to accurately and appropriately document member health status, or their acuity, and achieve quality metrics. Under this capitated contract structure, we are responsible for all members' medical costs inside and outside of our medical centers. Keeping members healthy is our primary objective. When they need medical care, delivery of the right care in the right setting can greatly impact outcomes. Through members' engagement with our entire suite of services, including high-frequency primary care and access to ancillary services like our wellness programs,Cano Life and Cano@Home, we aim to reduce the number of occasions that members need to seek specialty care in higher-cost environments. When care outside of our medical centers is needed, our primary care physicians control referrals to specialists and other third-party care, which are typically paid by us on a fee-for-service basis. This allows us to proactively manage members' health within our medical centers first, prior to resorting to more costly care settings. As ofDecember 31, 2022 , we employed approximately 400 providers (physicians, nurse practitioners, physician assistants) across our 172 owned medical centers, maintained affiliate relationships with over 1,500 physicians and approximately 800 clinical support employees focused on supporting physicians in enabling patient care and experience. For the years endedDecember 31, 2022 , 2021 and 2020 our total revenue was$2.7 billion ,$1.6 billion , and$831.6 million respectively. Our net loss for the years endedDecember 31, 2022 , 2021 and 2020 was$428.4 million which includes a$323.0 million non-cash goodwill impairment,$116.7 million and$71.1 million , respectively. Key Factors Affecting Our Performance
Our historical financial performance has been driven by our ability to:
Build Long-Term Relationships with our Existing Members
We focus on member satisfaction in order to build long-term relationships. Our
members enjoy highly personalized value-based care and their visits to our
medical centers cover primary care and ancillary programs, such as pharmacy and
dental services, in addition to wellness and social services, which are designed
to lead to healthier and happier members. By integrating member engagement and
the Cano Life wellness program within the CanoPanorama platform, we also help
foster long-term relationships with members. Resulting word-of-mouth referrals
contribute to our high organic growth rates. Patient satisfaction can also be
measured by a provider's Net Promoter Score ("NPS"), which measures the loyalty
of customers to a company. We believe our high NPS speaks to our ability to
deliver high-quality care with superior member satisfaction.
Add New Members in Existing Centers
Our ability to organically add new members is a key driver of our growth. We
believe that we have a large embedded growth opportunity within our existing
medical center base. In medical centers that are approaching full capacity, we
are able to augment our footprint by expanding our existing medical centers,
opening de novo centers or acquiring centers that are more
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convenient for our members. Please see Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Key Factors
Affecting Our Performance - Expand our Medical Center Base." Additionally, as we
add members to our existing medical centers, we expect these members to
contribute significant incremental economics as we leverage our fixed cost base
at each medical center.
Our payor partners also direct members to our medical centers by either
assigning patients who have not yet selected a primary care provider or through
insurance agents who inform their clients about our services. We believe this
often results in the patient selecting us as their primary care provider when
they select a Medicare Advantage plan. Due to our care delivery model's
patient-centric focus, we have been able to consistently help payors manage
their costs while raising the quality of their plans, affording them quality
bonuses that increase their revenue. We believe that we represent an attractive
opportunity for payors to meaningfully improve their overall membership growth
in a given market without assuming any financial downside.
Expand our Medical Center Base
We operate in
entering a new market, we tailor our entry strategy to the characteristics of
the specific market and provide a customized solution to meet that market’s
needs. When choosing a market to enter, we look at various factors including:
•Medicare population density;
•underserved demographics;
•existing payor relationships; and
•specialist and hospital access/capacity.
We typically choose a location that is highly visible and accessible and work to enhance brand development pre-entry. Our flexible medical center design allows us to adjust to local market needs by building medical centers that may include ancillary services, such as pharmacies, mental health, and dental services. We seek to grow member engagement through targeted multi-channel marketing, community outreach and use of mobile clinics to expand our reach. When entering a new market, based on its characteristics and economics, we decide whether to buy existing medical centers, build de novo medical centers or to help manage members' health care via affiliate relationships. We believe that this highly flexible model enables us to choose the right solution for each market. When building or buying a medical center is the right solution, we lease the medical center and employ physicians. In our medical centers, we receive PMPM capitated revenue, which, in the case of health plans, is a pre-negotiated percentage of the premium that the health plan receives from CMS. While we have grown our business to encompass 172 medical centers as ofDecember 31, 2022 , we are experiencing less than anticipated patient utilization rates. Accordingly, the Company plans to significantly reduce its de novo investments in 2023. Also, our affiliate relationships allow us to partner with independent physicians and group practices that we do not own and to provide them access to components of our population health management platform. As ofDecember 31, 2022 , we provided services to over 1,500 providers. As in the case of our owned medical centers, we receive PMPM capitated revenue and a pre-negotiated percentage of the premium that the health plan receives from CMS. We pay the affiliate a primary care fee and a portion of the surplus of premium in excess of third-party medical costs. The surplus portion paid to affiliates is recorded as direct patient expense. This approach is extremely capital efficient as the costs of managing affiliates are minimal. Further, we believe that the affiliate model is an important growth avenue as it serves as a feeder into our acquisition pipeline, enabling us to evaluate and target affiliated practices for acquisition based on our operational experience with them.
Contracts with Payors
Our economic model relies on our capitated partnerships with payors, which
manage Medicare members across the
81 --------------------------------------------------------------------------------U.S. We have established ourselves as a top-quality provider across multiple Medicare and Medicaid health plans, including Humana, UnitedHealthcare and Elevance (or their respective affiliates). Our relationships with our payor partners go back as many as 10 years and are generally evergreen in nature. We are viewed as a critical distributor of effective healthcare with market-leading clinical outcomes (led by primary care), and as such we believe that our payor relationships will continue to be long-lasting and enduring. These plans and others are seeking further opportunities to expand their relationship with us beyond our current markets. Having payor relationships in place reduces the risk of entering into new markets. Maintaining, supporting and growing these relationships, particularly as we enter new geographies, is critical to our long-term success. Health plans look to achieve three goals when partnering with a provider: membership growth, clinical quality and medical cost management. We are capable of delivering all 3 based on our care coordination strategy, differentiated quality metrics and strong relationships with members. We believe that this alignment of interests and our highly effective care model will ensure continued success with our payor partners.
Effectively Manage the Cost of Care for Our Members
The capitated nature of our contracting with payors requires us to invest in
maintaining our members' health, while prudently managing the medical costs of
our members. Our care model focuses on maintaining health and leveraging the
primary care setting as a means of avoiding costly downstream healthcare costs.
Our members, however, retain the freedom to seek care at emergency rooms or
hospitals without the need for referrals; we do not restrict their access to
care. Therefore, we are liable for potentially large medical claims should we
not effectively manage our members' health. To mitigate this exposure, we
utilize stop-loss insurance for our members, protecting us from medical claims
per episode in excess of certain levels.
Furthermore, to effectively manage the cost of care for our members, we utilize
a MSP Recovery, Inc. D/B/A LifeWallet ("MSP"), a third-party healthcare claims
reimbursement recovery service provider. MSP provides healthcare claims
reimbursement recovery services using data analytics to identify and recover
improper payments made by Medicare, Medicaid and commercial health insurers
(each a "Health Plan"), and charged to us under risk agreements, when the Health
Plan is not the primary payer under the Medicare Secondary Payer Act and other
state and federal laws. MSP employs a team of data scientists and medical
professionals who analyze historical medical claims data to identify recoverable
opportunities, which MSP then aggregates and pursues. The Company has
irrevocably assigned certain past claims data to MSP, which will be paid by
either cash or equity at MSP's option.
Acquisitions
We seek to supplement our organic growth through our acquisition strategy. We
have established a rigorous data-driven approach and the necessary
infrastructure to identify, acquire and quickly integrate targets.
Our historical acquisitions have all been accounted for in accordance with ASC 805, "Business Combinations", and the operations of the acquired entities are included in our historical results for the periods following the closing of the acquisition. See Note 6, "Business Acquisitions," in our audited consolidated financial statements in Item 8 of Part II of this Form 10-K.
Member Acuity and Quality Metrics
Medicare pays capitation using a risk-adjusted model, which compensates payors based on the health status, or acuity, of each individual member. Payors with higher acuity members receive a higher payment and those with lower acuity members receive a lower payment. Moreover, some of our capitated revenues also include adjustments for performance incentives or penalties based on the achievement of certain clinical quality metrics as contracted with payors. Our capitated revenues are recognized based on member acuity and quality metrics and may be adjusted to reflect actual member acuity and quality metrics.
Seasonality to Our Business
Our operational and financial results, including capitated revenue per member, medical costs and organic membership growth, experience some variability depending upon the time of year in which they are measured. This variability is most notable in the following areas:
Capitated Revenue Per Member
82 -------------------------------------------------------------------------------- We typically experience the largest portion of our at-risk patient growth during the first quarter when plan enrollment selections made during the prior annual enrollment period fromOctober 15th through December 7th of the prior year take effect. Excluding the impact of large-scale shifts in membership demographics or acuity, our Medicare Advantage capitated revenue per member per month ("PMPM") will generally decline over the course of the year. As the year progresses, Medicare Advantage PMPM typically declines as new members typically join us with less complete or accurate documentation in the previous year (and therefore lower current year Medicare Risk Adjustment ("MRA") revenue).
Medical Costs
Medical costs vary seasonally depending on a number of factors. Typically, we experience higher utilization levels during the first quarter of the year due to influenza and other seasonal illnesses, as well as a result of adding new members with higher acuity. Medical costs also depend upon the number of business days in a period. Shorter periods will typically have lower medical costs due to fewer business days. Business days can also create year-over-year comparability issues if one year has a different number of business days compared to another.
Organic Member Growth
We experience organic member growth throughout the year as existing Medicare
Advantage plan members choose our providers and during special enrollment
periods when certain eligible individuals can enroll in Medicare Advantage plans
during the year. We experience some seasonality with respect to organic
enrollment, which is generally higher during the first and fourth quarters,
driven by Medicare Advantage plan advertising and marketing campaigns and plan
enrollment selections made during the annual open enrollment period. We also
grow through serving new and existing traditional Medicare, Affordable Care Act
("ACA"), Medicaid, and commercial patients.
Key Performance Metrics
In addition to our GAAP and non-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 business plans and make strategic decisions.
December 31, 2022 December 31, 2021 December 31, 2020
Membership 309,590 227,005 105,707
Medical centers 172 130 71
Members
Members represent those Medicare, Medicaid, and ACA, and commercially insured
patients for whom we receive a fixed PMPM fee under capitation arrangements as
of the end of a particular period.
Owned Medical Centers
We define our medical centers as those primary care medical centers open for
business and attending to members at the end of a particular period in which we
own the medical operations and the physicians are our employees.
Key Components of Results of Operations
Revenue
Capitated revenue. Our capitated revenue is derived from medical services
provided at our medical centers or affiliated practices under capitation
arrangements made directly with various health plans or CMS. Capitated revenue
consists of a PMPM amount paid for the delivery of healthcare services, and our
rates are determined as a percent of the premium that the health plans receive
from the CMS for our at-risk members. Those premiums are based upon the cost of
care in a local market and the average utilization of services by the members
enrolled. Medicare pays capitation using a "risk adjustment model," which
compensates providers based on the health status (acuity) of each individual
patient. Groups with higher acuity patients receive more, and those with lower
acuity patients receive less. Under the risk adjustment model, capitated premium
is paid based on the acuity of
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members enrolled for the preceding year and subsequently adjusted once current
year data is compiled. The amount of capitated revenue may be affected by
certain factors outlined in the agreements with the health plans, such as
administrative fees paid to the health plans and risk adjustments to premiums.
Moreover, the capitated revenue benchmark for our DCE and ACO's may be adjusted
based on current year utilization.
Generally, we enter into 3 types of capitation arrangements: non-risk
arrangements, limited risk arrangements, and full risk arrangements. Under our
non-risk arrangements, we receive monthly capitated payments without regard to
the actual amount of services provided. Under our limited risk arrangements, we
assume partial financial risk for covered members. Under our full risk
arrangements, we assume full financial risk for covered members.
Fee-for-service and other revenue. We generate fee-for-service revenue from
providing primary care services to patients in our medical centers and
affiliates when we bill the member or their insurance plan on a fee-for-service
basis as medical services are rendered. While substantially all of our patients
are members, we occasionally also provide care to non-members. Fee-for-service
amounts are recorded based on agreed-upon fee schedules determined within each
contract.
Other revenue includes pharmacy and ancillary fees earned under contracts with
certain care organizations for the provision of care coordination and other
services. With respect to our pharmacies, we contract with an administrative
services organization to collect and remit payments on our behalf from the sale
of prescriptions and medications. We have pharmacies at some of our medical
centers, where patients may fill prescriptions and retrieve their medications.
Patients also have the option to fill their prescriptions with a third-party
pharmacy of their choice. Other revenue also includes fixed amounts due from a
third-party healthcare claims reimbursement recovery service provider for claims
which have been irrevocably assigned to them related to these ancillary
services. We also may receive and recognize a percentage of these claims
recovered in excess of certain thresholds. These variable payments are
recognized at the time of settlement. No such payment has been received to date.
Operating Expenses
Third-party medical costs. Third-party medical costs primarily consist of
medical expenses incurred by the health plans or CMS (contractually on behalf of
the Company), including costs for inpatient and hospital care, specialists, and
certain pharmacy purchases, net of rebates and other recoveries. Provider costs
are accrued based on the date of service to members, based in part on estimates,
including an accrual for medical services incurred but not reported ("IBNR").
Liabilities for IBNR are estimated and adjusted for current experience. These
estimates are continually reviewed and updated, and we retain the services of an
independent actuary to review IBNR on a quarterly basis. We expect our
third-party medical costs to increase given the healthcare spending trends
within the Medicare population, which is also consistent with what we receive
under our payor contracts. Third-party medical costs also include fixed amounts
due from a third-party healthcare claims reimbursement recovery service provider
for claims which have been irrevocably assigned to them related to third-party
medical costs. We also may receive and recognize a percentage of these claims
recovered in excess of certain thresholds. These variable payments are
recognized at the time of settlement. No such variable consideration has been
received to date.
Direct patient expense. Direct patient expense primarily consists of costs
incurred in the treatment of our patients, at our medical centers and affiliated
practices, including the compensation related to medical service providers and
clinical support staff, medical supplies, purchased medical services, drug costs
for pharmacy sales, and payments to affiliated providers.
Selling, general, and administrative expenses. Selling, general, and
administrative expenses include employee-related expenses, including salaries
and benefits, technology infrastructure, operations, clinical and quality
support, finance, legal, human resources, and corporate development departments.
In addition, selling, general, and administrative expenses include all corporate
technology and occupancy costs. Our selling, general, and administrative
expenses increased in 2021 following the closing of the Business Combination. We
anticipate that these expenses will decrease as a percentage of revenue over the
long term, although they may fluctuate as a percentage of revenue from period to
period due to the timing and amount of these expenses. For purposes of
determining center-level economics, we allocate a portion of our selling,
general, and administrative expenses to our medical centers and affiliated
practices. The relative allocation of these expenses to each center depends upon
the number of centers open during a given period of time, and, if determinable,
the center where the expense was incurred.
Depreciation and amortization expense. Depreciation and amortization expenses
are primarily attributable to our capital investment and consist of fixed asset
depreciation and amortization of intangibles considered to have finite lives.
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Transaction costs and other. Transaction costs and other primarily consist of
deal costs (including deferred acquisition costs, due diligence, integration,
legal, internal staff, and other professional fees, incurred in connection with
acquisition activity).
Change in fair value of contingent consideration. Change in fair value of
contingent consideration consists of adjustments in contingent consideration due
to acquisitions.
Goodwill impairment loss. Subsequent to our annual goodwill impairment test, the Company determined there was a triggering event and performed a quantitative assessment which resulted in a goodwill impairment loss being booked in the fourth quarter of 2022. See Note 7, "Goodwill ," in our audited consolidated financial statements in Item 8 of Part II of this Form 10-K for details.
Other Income (Expense)
Interest expense. Interest expense primarily consists of interest incurred on our outstanding borrowings under our notes payable related to our equipment loans and credit facility. See "Liquidity and Capital Resources". Costs incurred to obtain debt financing are amortized and shown as a component of interest expense.
Interest income. Interest income primarily consists of interest earned through a
loan agreement with an affiliated company.
Loss on extinguishment of debt. Loss on extinguishment of debt primarily
consists of unamortized debt issuance costs related to our term loan in
connection with our financing arrangements.
Change in fair value of embedded derivative. Change in fair value of embedded derivative consists primarily of changes to an embedded derivative identified in our previously existing debt agreement. The embedded derivative was revalued at each reporting period. Change in fair value of warrant liabilities. Change in fair value of warrant liabilities consists primarily of changes to the public warrants and private placement warrants assumed upon the consummation of the Business Combination. The liabilities are revalued at each reporting period.
Other income (expense). Other income (expense) primarily relates to sublease
income and legal settlement fees.
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Results of Operations
The following table sets forth our consolidated statements of operations data
for the periods indicated:
Years Ended December 31,
($ in thousands) 2022 2021 2020 (as
revised)
Revenue:
Capitated revenue $
2,606,916
Fee-for-service and other revenue
132,000 80,249 35,203 Total revenue 2,738,916 1,609,369 831,576 Operating expenses: Third-party medical costs 2,062,356 1,231,047 564,987 Direct patient expense 254,867 179,353 101,358 Selling, general, and administrative expense 422,443 252,133 103,962 Depreciation and amortization expense 90,640 49,441 18,499 Transaction costs and other 27,435 44,262 42,945 Change in fair value of contingent consideration (5,025) (11,680) 65 Goodwill impairment loss 323,000 - - Total operating expenses 3,175,716 1,744,556 831,816 Loss from operations (436,800) (135,187) (240) Other income and expense: Interest expense (62,495) (51,291) (34,002) Interest income 14 4 320 Loss on extinguishment of debt (1,428) (13,115) (23,277) Change in fair value of embedded derivative - - (12,764) Change in fair value of warrant liabilities 72,771 82,914 - Other income (loss) 1,706 (48) (450) Total other income (loss) 10,568 18,464 (70,173) Net income (loss) before income tax expense (426,232) (116,723) (70,413) Income tax expense (benefit) 2,157 14 651 Net income (loss) $
(428,389)
Net income (loss) attributable to non-controlling
interests
(221,117) (98,717) - Net income (loss) attributable to Class A common stockholders$ (207,272) $ (18,020) $ - 86
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The following table sets forth our consolidated statements of operations data
expressed as a percentage of total revenues for the periods indicated:
Years Ended December 31,
(% of revenue) 2022 2021 2020 (as revised)
Revenue:
Capitated revenue 95.2 % 95.0 % 95.8 %
Fee-for-service and other revenue 4.8 % 5.0 % 4.2 %
Total revenue 100.0 % 100.0 % 100.0 %
Operating expenses:
Third-party medical costs 75.3 % 76.5 % 67.9 %
Direct patient expense 9.3 % 11.1 % 12.2 %
Selling, general, and administrative expense 15.4 % 15.7 % 12.5 %
Depreciation and amortization expense 3.3 % 3.1 % 2.2 %
Transaction costs and other 1.0 % 2.8 % 5.2 %
Change in fair value of contingent consideration (0.2) % (0.7) % 0.0 %
Goodwill impairment loss 11.8 % 0.0 % 0.0 %
Total operating expenses 115.9 % 108.5 % 100.0 %
Loss from operations (15.9) % (8.5) % 0.0 %
Other income and expense:
Interest expense (2.3) % (3.2) % (4.1) %
Interest income 0.0 % 0.0 % 0.0 %
Loss on extinguishment of debt (0.1) % (0.8) % (2.8) %
Change in fair value of embedded derivative 0.0 % 0.0 % (1.5) %
Change in fair value of warrant liabilities 2.7 % 5.2 % 0.0 %
Other income (loss) 0.1 % 0.0 % (0.1) %
Total other income (loss) 0.4 % 1.2 % (8.5) %
Net income (loss) before income tax expense (15.6) % (7.3) % (8.5) %
Income tax expense (benefit) 0.1 % 0.0 % 0.1 %
Net income (loss) (15.5) % (7.3) % (8.4) %
Net income (loss) attributable to non-controlling (8.1) % (6.1) % - %
interests
Net income (loss) attributable to Class A common (7.4) % (1.2) % - %
stockholders
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The following table sets forth the Company’s disaggregated revenue for the
periods indicated:
Years Ended December 31,
2022 2021 2020 (as revised)
($ in thousands) Revenue $ Revenue % Revenue $ Revenue % Revenue $ Revenue %
Capitated revenue
Medicare $ 2,392,445 87.4 % $ 1,334,308 82.9 % $ 672,588 80.9 %
Other capitated revenue 214,471 7.8 % 194,812 12.1 % 123,785 14.9 %
Total capitated revenue 2,606,916 95.2 % 1,529,120 95.0 % 796,373 95.8 %
Fee-for-service and other
revenue
Fee-for-service 43,171 1.6 % 25,383 1.6 % 9,504 1.1 %
Pharmacy 50,096 1.8 % 36,306 2.3 % 23,079 2.8 %
Other 38,733 1.4 % 18,560 1.1 % 2,620 0.3 %
Total fee-for-service and
other revenue 132,000 4.8 % 80,249 5.0 % 35,203 4.2 %
Total revenue $ 2,738,916 100.0 % $ 1,609,369 100.0 % $ 831,576 100.0 %
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The following table sets forth the Company's member and member month figures for
the periods indicated:
Years Ended December 31,
2022 2021 % Change
Members:
Medicare Advantage 140,353 118,348 18.6 %
Medicare DCE 39,183 7,651 412.1 %
Total Medicare 179,536 125,999 42.5 %
Medicaid 76,717 66,500 15.4 %
ACA 53,337 34,506 54.6 %
Total members 309,590 227,005 36.4 %
Member months:
Medicare Advantage 1,503,286 1,167,848 28.7 %
Medicare DCE 485,562 69,707 596.6 %
Total Medicare 1,988,848 1,237,555 60.7 %
Medicaid 856,738 518,335 65.3 %
ACA 570,316 286,005 99.4 %
Total member months 3,415,902 2,041,895 67.3 %
Per Member Per Month (“PMPM”):
Medicare Advantage$ 1,161 $ 1,066 8.9 % Medicare DCE$ 1,333 $ 1,276 4.5 % Total Medicare$ 1,203 $ 1,078 11.6 % Medicaid $ 221$ 355 (37.7) % ACA $ 45$ 39 15.4 % Total PMPM $ 763$ 749 1.9 % Medical centers 172 130 89
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Comparison of the Years Ended December 31, 2022 and 2021
Revenue
Years Ended December 31, December
31,
($ in thousands) 2022 2021 $ Change % Change
Revenue:
Capitated revenue $ 2,606,916 $ 1,529,120 $ 1,077,796 70.5 %
Fee-for-service and other revenue 132,000 80,249 51,751 64.5 %
Total revenue $ 2,738,916 $ 1,609,369 $ 1,129,547
Capitated revenue. Capitated revenue was $2.6 billion for the year ended
December 31, 2022 , an increase of $1.1 billion , or 70.5%, compared to $1.5
billion for the year ended December 31, 2021 . The increase was primarily driven
by a 67.3% increase in the total member months and a 1.9% increase in total
revenue per member per month. The increase in member months was due to an
increase in the total number of members served at new and existing centers due
to organic growth and as a result of certain acquisitions.
Fee-for-service and other revenue. Fee-for-service and other revenue was $132.0
million for the year ended December 31, 2022 , an increase of $51.8 million , or
64.5%, compared to $80.2 million for the year ended December 31, 2021 . The
increase in fee-for-service and other revenue was primarily attributable to an
increase in ACO revenue of $12 million . In addition, there was an increase in
patients served across existing centers, as well as a $8.0 million benefit from
claims irrevocably assigned to MSP.
Operating Expenses
Years Ended December 31, December 31,
($ in thousands) 2022 2021 $ Change % Change
Operating expenses:
Third-party medical costs $ 2,062,356 $ 1,231,047 $ 831,309 67.5 %
Direct patient expense 254,867 179,353 75,514 42.1 %
Selling, general, and administrative
expenses 422,443 252,133 170,310 67.5 %
Depreciation and amortization expense 90,640 49,441 41,199 83.3 %
Transaction costs and other 27,435 44,262 (16,827) -38.0 %
Change in fair value of contingent
consideration (5,025) (11,680) 6,655 -57.0 %
Goodwill impairment loss 323,000 - 323,000 N/A
Total operating expenses $ 3,175,716 $ 1,744,556 $ 1,431,160
Third-party medical costs. Third-party medical costs were $2.1 billion for the
year ended December 31, 2022 , an increase of $831.3 million , or 67.5%, compared
to $1.2 billion for the year ended December 31, 2021 . The increase was driven by
a 67.3% increase in total member months, the addition of DCE members with higher
medical costs, and the trending shift toward proportionately more higher acuity
patients across service lines. Further, in the year ended December 31, 2022
there was $6 million of unfavorable prior year claims development for the
Company's Medicare DCE program. During the year ended December 31, 2022 ,
$44.0 million was recognized as a reduction in third-party medical costs related
to claims irrevocably assigned to MSP for recovery. This amount was offset by
$7.3 million that was recognized during the year ended December 31, 2021 related
to certain of the claims assigned to MSP which the Company was previously
independently pursuing from a third-party payor. During the year ended December
31, 2021 $7.3 million was recognized as a reduction to third party medical costs
related to the third-party payor, and $10.0 million was recognized as a
reduction in third party medical cost related to claims irrevocably assigned to
MSP recovery.
Direct patient expense. Direct patient expense was $254.9 million for the year
ended December 31, 2022 , an increase of $75.5 million , or 42.1%, compared to
$179.4 million for the year ended December 31, 2021 . The increase was primarily
driven by increases in payroll and benefits of $52.1 million , pharmacy drugs of
$9.6 million , provider payments of $6.5 million , and ancillary medical services
of $5.0 million .
90
-------------------------------------------------------------------------------- Selling, general, and administrative expenses. Selling, general, and administrative expenses were$422.4 million for the year endedDecember 31, 2022 , an increase of$170.3 million , or 67.5%, compared to$252.1 million for the year endedDecember 31, 2021 . The increase was primarily driven by higher salaries and benefits of$74.1 million , stock-based compensation of$26.8 million , occupancy costs of$24.6 million , legal and professional services of$18.8 million , which included a one-time fee to MSP of$5.0 million related to a professional services agreement, marketing expenses of$9.1 million and information technology of$8.5 million . These increases were incurred to support the continued growth of our business and expansion into other states. Depreciation and amortization expense. Depreciation and amortization expense was$90.6 million for the year endedDecember 31, 2022 , an increase of$41.2 million , or 83.3%, compared to$49.4 million for the year endedDecember 31, 2021 . The increase was driven by purchases of new property and equipment to support the growth of our business during the period, as well as the addition of several brand names, non-compete agreements, and payor relationships from our 2021 and 2022 acquisitions. Transaction costs and other. Transaction costs and other were$27.4 million for the year endedDecember 31, 2022 , a decrease of$16.8 million , or 38.0%, compared to$44.3 million for the year endedDecember 31, 2021 . The decrease related to higher than usual transaction costs in 2021 related to the Business Combination and a decrease in acquisition related costs in 2022. Change in fair value of contingent consideration. Contingent consideration generated a gain of$5.0 million for the year endedDecember 31, 2022 . The gain partially related to an amount owed to an acquisition that will be paid in shares of our Class A common stock. The decrease in the liability and corresponding gain was a result of our stock price decreasing during the fourth quarter of 2022.Goodwill impairment loss. Our non-cash goodwill impairment loss was$323.0 million for the year endedDecember 31, 2022 . AtDecember 31, 2022 , the Company determined there was a triggering event for a goodwill impairment and performed a quantitative assessment which resulted in the fair value of the Company being below the carrying value. See Note 7, "Goodwill ," in our audited consolidated financial statements included in Item 8 of Part II of this Form 10-K for more details. Other Income (Expense) Years Ended December 31, December 31, ($ in thousands) 2022 2021 $ Change % Change Other income and expense: Interest expense $ (62,495) $ (51,291)$ (11,204) 21.8 % Interest income 14 4 10 250.0 % Loss on extinguishment of debt (1,428) (13,115) 11,687 -89.1 % Change in fair value of warrant liabilities 72,771 82,914 (10,143) -12.2 % Other income (expense) 1,706 (48) 1,754 N/A Total other income (expense) $ 10,568 $ 18,464$ (7,896) Interest expense. Interest expense was$62.5 million for the year endedDecember 31, 2022 , an increase of$11.2 million , or 21.8%, compared to$51.3 million for the year endedDecember 31, 2021 . The increase was primarily driven by interest incurred on our higher outstanding borrowings and a higher interest rate on the term loan under ourCredit Suisse Credit Agreement due to SOFR exceeding the floor rate. See Note 13, "Debt," in our audited consolidated financial statements included in Item 8 of Part II of this Form 10-K for more details. The Company expects interest expense to increase by approximately$18.0 million in 2023 driven by the 2023 Term Loan which, at the Company's discretion, can be paid in cash or in kind. Loss on extinguishment of debt. Loss on extinguishment of debt was$1.4 million for the year endedDecember 31, 2022 related to the amendment to theCredit Suisse Credit Agreement inJanuary 2022 . See Note 13, "Debt," in our audited consolidated financial statements included in Item 8 of Part II of this Form 10-K for more details. Change in fair value of warrant liabilities. Change in fair value of warrant liabilities was$72.8 million for the year endedDecember 31, 2022 as a result of a change in the fair value of the public warrants and private placement warrants assumed 91 --------------------------------------------------------------------------------
in connection with the Business Combination.
Liquidity and Capital Resources
General
We have financed our operations principally through the Business Combination and debt securities and borrowings. As ofDecember 31, 2022 andDecember 31, 2021 , we had cash, cash equivalents and restricted cash of$27.3 million and$163.2 million , respectively. As ofDecember 31, 2022 andDecember 31, 2021 , the outstanding balance under our revolving credit facility was$84.0 million and we had an available balance of$36.0 million . Our cash, cash equivalents and restricted cash primarily consist of highly liquid investments in money market funds and cash. Since our inception, we have generated significant operating losses from our operations, as reflected in our accumulated deficit of$286.0 million as ofDecember 31, 2022 and negative cash flows from operations. OnFebruary 24, 2023 , we entered into a credit agreement to borrow a gross aggregate principal amount of$150 million ("2023 Term Loan"). The 2023 Term Loan bears interest through its second anniversary at a rate of 14%, payable quarterly either in cash or in kind, at our discretion, by adding such amount to the principal balance of the 2023 Term Loan and thereafter at a rate of 13%, payable quarterly in cash. The 2023 Term Loan will mature onNovember 23, 2027 . In March of 2023 the Company used a portion of the funds from the 2023 Term Loan to repay$99.0 million of the outstanding balance under its revolving line of credit. Upon such repayment, the Company had$120 million available for borrowing under its revolving line of credit. Under the 2023 Term Loan the Company is required to perform a financial covenant calculation on a quarterly basis. The Company believes it will be compliant for all quarters in 2023. See Note 13, "Debt," in our audited consolidated financial statements in Item 8 of Part II of this Form 10-K for additional details. During the year endedDecember 31, 2022 , the Company completed 10 asset acquisitions for a total purchase price of$76.1 million . The consideration included$5.8 million in cash,$5.9 million in deferred cash,$39.3 million in Class A common stock and$29.3 million in deferred Class A common stock. These amounts were offset by$4.1 million in net contingent assets. Upon the completion of the Business Combination,Cano Health, Inc. became a party to the Tax Receivable Agreement ("TRA"). Under the terms of that agreement,Cano Health, Inc. generally will be required to pay to the Seller and to each other person from time to time that becomes a "TRA Party " under the Tax Receivable Agreement, 85% of the tax savings, if any, thatCano Health, Inc. is deemed to realize in certain circumstances as a result of certain tax attributes that exist following the Business Combination and that are created thereafter, including as a result of payments made under the Tax Receivable Agreement. See further discussion related to the TRA agreement in Note 19, "Income Taxes," in our audited consolidated financial statements in Item 8 of Part II of this Form 10-K. We believe that our existing cash, cash equivalents and restricted cash along with our expected cash generation through operations, our 2023 Term Loan Financing (See Note 13, "Debt," in our audited consolidated financial statements in Item 8 of Part II of this Form 10-K) and revolving line of credit will be sufficient to fund our operating and capital needs for at least the next 12 months from the date of issuance of the audited consolidated financial statements included in this 2022 Form 10-K.
Cash Flows
The following table presents a summary of our consolidated cash flows from
operating, investing and financing activities for the periods indicated.
92
--------------------------------------------------------------------------------
Years Ended December 31,
($ in thousands) 2022 2021
Net cash (used in) provided by operating activities $ (146,337) $ (118,033)
Net cash (used in) provided by investing activities (64,155) (1,131,248)
Net cash (used in) provided by financing activities 74,651 1,378,644
Net Increase (decrease) in cash, cash equivalents and restricted (135,841) 129,363
cash
Cash, cash equivalents and restricted cash at beginning of year 163,170 33,807
Cash, cash equivalents and restricted cash at end of period $
27,329$ 163,170 Operating Activities For the year endedDecember 31, 2022 , net cash used in operating activities was$146.3 million , an increase of$28.3 million in cash outflows compared to net cash used in operating activities of$118.0 million for the year endedDecember 31, 2021 . Significant changes impacting net cash used in operating activities were as follows:
An increase in cash of
and credits, primarily related to the following:
•Increase in net losses of
•Decrease in non-cash loss on extinguishment of debt of
Offset by the following non-cash items:
•Increase in depreciation and amortization of
•Increase in gain related to the change in the fair value of warrant liabilities
of
•Increase in stock-based compensation expense of
•Increase related to goodwill impairment loss of
A decrease in cash of
primarily resulting from:
•Changes in accounts receivable due to the timing of collections and the growth
in membership;
•Changes in liability for unpaid claims due to the growth in membership; and
•Changes in accounts payable and accrued expenses due to the timing of payments.
Investing Activities For the year endedDecember 31, 2022 , net cash used in investing activities was$64.2 million , a decrease of$1.1 billion in cash outflows compared to net cash used in investing activities of$1.1 billion for the year endedDecember 31, 2021 , primarily due to a decrease in cash used for acquisitions slightly offset by increased capital expenditures. The Company expects the net cash used in investing activities to be less in 2023 due to a significant reduction in spending on de novo medical centers.
Financing Activities
Net cash provided by (used in) financing activities was$74.7 million during the year endedDecember 31, 2022 , a decrease of$1.3 billion compared to net cash provided by financing activities of$1.4 billion during the year endedDecember 31, 2021 primarily due to proceeds received in the Business Combination in June of 2021. Non-GAAP Financial Metrics The following discussion includes references to EBITDA and Adjusted EBITDA, which are non-GAAP financial measures. A non-GAAP financial measure is a performance metric that departs from GAAP because it excludes earnings components that are required under GAAP. Other companies may define non-GAAP financial measures differently and, as a result, our non-GAAP financial measures may not be directly comparable to those of other companies. These non-GAAP financial metrics should be used as a supplement to, and not as an alternative to, the Company's GAAP financial results.
By definition, EBITDA consists of net income (loss) before interest, income
taxes, depreciation and amortization. Adjusted EBITDA is EBITDA adjusted to add
back the effect of certain expenses, such as stock-based compensation expense,
93 -------------------------------------------------------------------------------- non-cash goodwill impairment loss, de novo losses (consisting of costs associated with the ramp up of new medical centers and losses incurred for the 12 months after the opening of a new facility), transaction costs (consisting of transaction costs and corporate development payroll costs), restructuring and other charges, fair value adjustments in contingent consideration, loss on extinguishment of debt and changes in fair value of warrant liabilities. Adjusted EBITDA is a key measure used by our management to assess the operating and financial performance of our Company. The presentation of non-GAAP financial measures also provides additional information to investors regarding our results of operations and is useful for trending, analyzing and benchmarking the performance and value of our business. By excluding certain expenses and other items that may not be indicative of our core business operating results, these non-GAAP financial measures: •allow investors to evaluate our performance from management's perspective, resulting in greater transparency with respect to supplemental information used by us in our financial and operational decision-making; •provide better transparency as to the measures used by management and others who follow our industry to estimate the value of our Company? and •allow investors to view our financial performance and condition in the same manner that our significant lenders and landlords require us to report financial information to them in connection with determining our compliance with financial covenants. Our use of EBITDA and Adjusted EBITDA have limitations as an analytical tool, and you should not consider them in isolation or as a substitute for analysis of our financial results as reported under GAAP. Some of these limitations are as follows: •although depreciation and amortization expense are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements; •Adjusted EBITDA does not reflect: (1) changes in, or cash requirements for, our working capital needs; (2) the potentially dilutive impact of non-cash stock-based compensation; (3) the change in the fair value of our warrant liabilities; (4) the change in the fair value of contingent consideration; or (5) net interest expense/income; and •other companies, including companies in our industry, may calculate EBITDA and/or Adjusted EBITDA or similarly titled measures differently, which reduces its usefulness as a comparative measure.
Because of these and other limitations, investors and prospective investors
should consider Adjusted EBITDA along with our other GAAP-based financial
performance measures, including net loss, cash flow metrics and our GAAP
financial results.
The following table provides a reconciliation of net loss to non-GAAP financial
information:
Years Ended December 31,
($ in thousands) 2022 2021 2020
Net loss $ (428,389) $ (116,737) $ (71,064)
Interest income (14) (4) (320)
Interest expense 62,495 51,291 34,002
Income tax expense (benefit) 2,157 14 651
Depreciation and amortization expense 90,640 49,441 18,499
EBITDA $ (273,111) $ (15,995) $ (18,232)
Stock-based compensation 54,778 27,983 528
Goodwill impairment loss 323,000 - -
De novo losses (1) 78,989 40,562 8,662
Transaction costs (2) 34,449 48,303 43,333
Restructuring and other (3) 10,769 7,883 2,435
Change in fair value of contingent consideration (5,025) (11,680) 65
Loss on extinguishment of debt 1,428 13,115 23,277
Change in fair value of embedded derivatives - - 12,764
Change in fair value of warrant liabilities (72,771) (82,914) -
Adjusted EBITDA $ 152,506 $ 27,257 $ 72,832
94
-------------------------------------------------------------------------------- (1) De novo losses include those costs associated with the ramp up of new medical centers and losses incurred for the 12 months after the opening of a new facility. These costs collectively are higher than comparable expenses incurred once such a facility has been opened and is generating revenue, and would not have been incurred unless a new facility was being opened. The Company plans to significantly reduce its de novo investments in 2023 and, accordingly, for future periods is modifying its definition of Adjusted EBITDA beginningJanuary 1, 2023 , to no longer exclude de novo losses in calculating Adjusted EBITDA. Using the newly-modified definition, Adjusted EBITDA would have been$73.5 million ,($13.3) million and$64.2 million for the years endedDecember 31, 2022 , 2021 and 2020, respectively, compared to Adjusted EBITDA of$152.3 million ,$27.3 million and$72.8 million for the years endedDecember 31, 2022 , 2021 and 2020, respectively, by including the impact of de novo losses under the definition used prior toJanuary 1, 2023 . (2) Transaction costs included$7.0 million ,$4.0 million and$0.4 million for the years endedDecember 31, 2022 , 2021 and 2020, respectively, of corporate development payroll costs. Corporate development payroll costs include those expenses directly related to the additional staff needed to support our acquisition activity.
(3) Restructuring and other included a one-time fee from MSP of
related to a professional service agreement for the year ended
2022
We experienced an increase in EBITDA and Adjusted EBITDA between the years endedDecember 31, 2022 , 2021 and 2020. The increases in EBITDA and Adjusted EBITDA relate to growth in the overall business of the Company. Critical Accounting Policies and Estimates Our consolidated financial statements and accompanying notes in this Form 10-K have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Actual results may differ from these estimates. To the extent that there are material differences between these estimates and our actual results, our future financial statements will be affected. Certain accounting policies involve significant judgments and assumptions by management, which have a material impact on the carrying value of assets and liabilities and the recognition of income and expenses. Management considers these accounting policies to be critical accounting policies. The estimates and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances. The significant accounting policies which we believe are the most critical to aid in fully understanding and evaluating our reported financial results are described below. See Note 2, "Summary of Significant Accounting Policies," in our audited consolidated financial statements in Item 8 of Part II of this Form 10-K for more information. Revenue Revenue consists primarily of fees for medical services provided under capitated arrangements with HMO health plans. Capitated revenue also consists of revenue earned through Medicare Advantage as well as through commercial and other non-Medicare governmental programs, such as Medicaid, which is captured as other capitated revenue. As we control the healthcare services provided to enrolled members, we act as the principal and the gross fees under these contracts are reported as revenue and the cost of provider care is included in third-party medical costs. Additionally, since contractual terms across these arrangements are similar, we group them into one portfolio. Capitated revenues are recognized in the month in which we are obligated to provide medical care services. The transaction price for the services provided is variable and depends upon the terms of the arrangement provided by or negotiated with the health plan and includes PMPM rates that may fluctuate. PMPM rates are also subject to adjustment for incentives or penalties based on the achievement of certain quality metrics and other metrics such as member acuity, as defined in the Company's contracts with payors. The Company recognizes these adjustments as earned using the "most likely amount" methodology and only to the extent that it is probable that a significant reversal of cumulative revenue will not occur once any uncertainty is resolved. Through our Medicare Risk Adjustment ("MRA"), the rates are risk adjusted based on the health status 95 -------------------------------------------------------------------------------- (acuity) and demographic characteristics of members. The fees are paid on an interim basis based on submitted enrolled member data for the previous year and are adjusted in subsequent periods after the final data is compiled by the CMS. MRA revenues are estimated using the "most likely amount" methodology under ASC 606 and the revenue is recorded when the price can be estimated by the Company and only if it is probable that a significant reversal will not occur and any uncertainty associated with the variable consideration is subsequently resolved. Fee-for-service revenue is generated from primary care services provided in the Company's medical centers. During an office visit, a patient may receive a number of medical services from a healthcare provider. These healthcare services are not separately identifiable and are combined into a single performance obligation. The Company recognizes fee-for-service revenue at the net realizable amount at the time the patient is seen by a provider, and the Company's performance obligation to the patient is complete. Pharmacy revenue is generated from the sales of prescription medication to patients. Pharmacy contracts contain a single performance obligation. The Company satisfies its performance obligation and recognizes revenue at the time the patient takes possession of the medical supply. Other revenue includes revenue from certain third parties which include ancillary fees earned under contracts with certain care organizations for the provision of care coordination services and other services. Third-Party Medical Costs Third-party medical costs primarily consist of all medical expenses paid by the health plans, including inpatient and hospital care, specialists, and medicines, net of rebates, for which the Company bears risk. Third-party medical costs include estimates of future medical claims that have been incurred by the patient, but for which the provider has not yet billed. Our accrual for medical services incurred but not reported reflects our best estimates of unpaid medical expenses as of the end of any particular period. These claim estimates are made utilizing standard actuarial methodologies and are continually evaluated and adjusted by management based upon our historical claims experience and other factors, including regular independent assessments by a nationally recognized actuarial firm. Adjustments, if necessary, are made to medical claims expense and capitated revenues when the assumptions used to determine our claims liability change and when actual claim costs are ultimately determined.
Impairment of Long-Lived Assets
Long-lived assets are reviewed periodically for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset. Business Acquisitions We account for acquired businesses using the acquisition method of accounting. All assets acquired and liabilities assumed are recorded at their respective fair values at the date of acquisition. The determination of fair value involves estimates and the use of valuation techniques when market value is not readily available. We use various techniques to determine fair value in accordance with accepted valuation models, primarily the income approach. The significant assumptions used in developing fair values include, but are not limited to, EBITDA growth rates, revenue growth rates, the amount and timing of future cash flows, discount rates, useful lives, royalty rates and future tax rates. The excess of purchase price over the fair value of assets and liabilities acquired is recorded as goodwill. Refer to Note 6, "Business Acquisitions," in Item 8 of Part II of this Form 10-K for a discussion of the Company's recent acquisitions.
Goodwill represents the excess of the purchase price of an acquired business over the fair value of the underlying net tangible and intangible assets acquired. We test goodwill for impairment annually onOctober 1st or more frequently if triggering events occur or other impairment indicators arise which might impair recoverability. These events or circumstances would include a significant change in the business climate, legal factors, operating performance indicators, competition, sale, disposition 96 --------------------------------------------------------------------------------
of a significant portion of the business or other factors.
for impairment at the reporting unit level and we have identified a single
reporting unit.
ASC 350, "Intangibles-Goodwill and Other," allows entities to first use a qualitative approach to test goodwill for impairment by determining whether it is more likely than not (a likelihood of greater than 50%) that the fair value of a reporting unit is less than its carrying value. If the qualitative assessment supports that it is more likely than not that the fair value of the asset exceeds its carrying value, a quantitative impairment test is not required. If the qualitative assessment does not support the fair value of the asset the Company will perform the quantitative goodwill impairment test, in which we compare the fair value of the reporting unit, that we primarily determine using an income approach based on the present value of expected future cash flows, to the respective carrying value, which includes goodwill. If the fair value of the reporting unit exceeds its carrying value, then goodwill is not considered impaired. If the carrying value is higher than the fair value, the difference is recognized as an impairment loss. We performed our annual goodwill impairment test as ofOctober 1, 2022 and chose to bypass the qualitative assessment and proceed directly to the quantitative assessment, which indicated no impairment. Subsequent to the test as ofOctober 1, 2022 , the Company determined there was a triggering event and performed an additional quantitative assessment that resulted in an impairment. Refer to Note 7, "Goodwill ," in Item 8 of Part II of this Form 10-K for details. Our intangibles consist of trade names, brands, non-compete agreements, and customer, payor, and provider relationships. We amortize intangibles using the straight-line method over the estimated useful lives of the intangible, which range from one to 20 years. Intangible assets are reviewed for impairment in conjunction with long-lived assets. The determination of fair values and useful lives requires us to make significant estimates and assumptions. These estimates include, but are not limited to, future expected cash flows from acquired capitation arrangements from a market participant perspective, discount rates, industry data and management's prior experience. Unanticipated events or circumstances may occur that could affect the accuracy or validity of such assumptions, estimates or actual results. Stock-Based Compensation ASC 718, "Compensation-Stock Compensation," requires the measurement of the cost of the employee services received in exchange for an award of equity instruments based on the grant-date fair value or, in certain circumstances, the calculated value of the award. For the restricted stock units ("RSUs"), the fair value is estimated using the Company's closing stock price and for the market condition stock options, the fair value is estimated using a Monte Carlo simulation. The Company recognizes compensation expense associated with stock-based compensation as a component of selling, general and administrative expenses in the accompanying consolidated statements of operations. All stock-based compensation is required to be measured at fair value on the grant date, is expensed over the requisite service period, generally over a 4-year period for RSUs and over the derived vesting period for market-condition stock options, and forfeitures are accounted for as they occur.
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