Bright Health Group(US:BHG)2022-03-17 16:00PART I Item 1. Business Bright Health Group integrates healthcare financing and delivery through its NeueHealth and Bright HealthCare segments, leveraging local partnerships and proprietary technology Business Overview The company operates through its NeueHealth and Bright HealthCare segments to align local healthcare delivery with care financing - The company is structured into two main business segments: NeueHealth and Bright HealthCare17 - The core strategy involves integrating three pillars: Delivery of Care, Financing of Care, and Optimization of Care via the BiOS technology platform1819 Our Business Segments NeueHealth focuses on care delivery and provider enablement, while Bright HealthCare provides insurance plans to over 727,000 consumers Key Operational Metrics (as of Dec 31, 2021) | Metric | NeueHealth | Bright HealthCare | | :--- | :--- | :--- | | Partners/Consumers | 260,000+ Care Partners | 727,000+ Consumers | | Clinics/Markets | 180 Managed & Affiliated Clinics | 99 Markets in 14 States | | Patients/Lives | 200,000+ Unique Patients | 611,000+ Commercial Lives | | | 175,000+ Value-Based Patients | 117,000 Medicare Advantage Lives | - NeueHealth serves multiple customer segments, including Bright HealthCare, external payors, affiliated providers, and government programs like ACO REACH4647 Competition The company faces intense competition from provider enablement companies, medical groups, large national insurers, and newer market entrants - NeueHealth's competitors include MSOs, IPAs, and primary care providers such as Agilon Health, Inc., Cano Health, Inc., and OptumHealth83 - Bright HealthCare's competitors include large national insurers like Aetna and UnitedHealthcare, regional payors, and recent entrants like Alignment Healthcare and Oscar Health84 Government Regulation The business operates in a heavily regulated industry subject to comprehensive federal and state laws, including HIPAA, ACA, and CMS guidelines - The business is subject to the Health Insurance Portability and Accountability Act (HIPAA), which governs the use and disclosure of protected health information939495 - State insurance regulations require the company to maintain minimum statutory capital levels, including risk-based capital (RBC), which were met as of December 31, 2021102104105 - The Patient Protection and Affordable Care Act (ACA) significantly impacts business operations, including rules on benefits and medical loss ratios110111 - The company is subject to federal fraud and abuse laws, including the Anti-Kickback Statute, the Stark Law, and the False Claims Act (FCA)123125126 Item 1A. Risk Factors The company faces material risks related to its business model, rapid growth, history of net losses, regulatory changes, and financial controls Risks Related to Our Business Key business risks include a history of net losses, operational strains from rapid growth, reliance on technology, and geographic concentration - The company has incurred net losses each year since inception, with a net loss of $1.2 billion for the year ended December 31, 2021, and may not achieve profitability172 - Rapid growth has placed significant demands on management and resources and has outpaced the capacity of some third-party vendors169170 - The ongoing COVID-19 pandemic has adversely affected and may continue to affect business and results, with risks including increased cost of care and operational disruptions175176 - As of December 31, 2021, membership is geographically concentrated, with approximately 83% of consumers in Florida, California, North Carolina, and Colorado190 - The company relies on third-party vendors for critical functions, and a material weakness was identified in 2021 related to claims processing by a third-party provider215 Risks Related to Legal Proceedings and Governmental Regulations The company is exposed to significant regulatory risks from potential changes to the ACA and Medicare, non-compliance penalties, and a pending class action lawsuit - Approximately 62% of revenue for the year ended December 31, 2021, was derived from health plans subject to the ACA288 - Failure to comply with healthcare laws like the Anti-Kickback Statute, Stark Law, and False Claims Act could result in substantial penalties and exclusion from government programs303304306 - A putative securities class action lawsuit was filed against the company and certain officers on January 6, 2022, alleging materially false and misleading statements325 Risks Related to our Financial Statements Financial statement risks include complex accounting estimates, a material weakness in internal controls, and potential impairment of goodwill and intangible assets - A material weakness was identified for the year ended December 31, 2021, related to inaccurate claims processing for the IFP business by a third-party service provider344348 - Material weaknesses identified in 2020 and Q1 2021 were remediated as of December 31, 2021345346347 - Goodwill and intangible assets accounted for approximately 33% of total assets as of December 31, 2021, and are at risk of impairment351352 Item 2. Properties The company leases all of its corporate and medical facilities, including eleven corporate offices and 74 medical properties for its NeueHealth segment - The company leases eleven corporate offices across the U.S. and 74 properties for its NeueHealth medical offices and clinics382 Item 3. Legal Proceedings The company is defending a putative securities class action lawsuit filed in January 2022 and reports no other material contingent liabilities - A putative securities class action lawsuit was filed against the company on January 6, 2022, alleging materially false and misleading statements regarding its business and operations325767 PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the NYSE, it does not pay dividends, and it recently completed a $750 million private placement of preferred stock - The company's common stock trades on the NYSE under the symbol 'BHG'393 - The company has never declared dividends and does not plan to in the foreseeable future395 - On January 3, 2022, the company completed a $750 million private placement of Series A Convertible Perpetual Preferred Stock399 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Revenue grew 233.7% to $4.0 billion in 2021, but the net loss widened to $1.2 billion as the Medical Cost Ratio increased to 101.3% Results of Operations Revenue grew 233.7% in 2021, but a faster rise in medical costs led to a significant increase in operating loss and a deteriorated MCR of 101.3% Consolidated Results of Operations (2019-2021) | (in thousands) | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Total revenue | $4,029,389 | $1,207,320 | $280,673 | | Medical costs | $3,953,674 | $1,047,300 | $224,387 | | Operating loss | $(1,198,156) | $(257,603) | $(125,337) | | Net loss | $(1,178,365) | $(248,442) | $(125,337) | | Adjusted EBITDA | $(1,080,906) | $(238,912) | $(121,091) | | Medical Cost Ratio (MCR) | 101.3% | 88.7% | 82.4% | - The MCR increase in 2021 was driven by a 530 basis point unfavorable impact from COVID-19 costs and a 90 basis point unfavorable impact from non-COVID prior period development479 - Operating costs increased by 202.5% to $1.24 billion in 2021, including a $102.8 million premium deficiency reserve expense480 Segment Results In 2021, the Bright HealthCare segment generated a $1.11 billion operating loss, while the NeueHealth segment produced a $87.0 million operating loss Bright HealthCare Segment Performance (2021 vs 2020) | (in thousands) | 2021 | 2020 | | :--- | :--- | :--- | | Total revenue | $3,813,636 | $1,181,013 | | Medical costs | $3,766,897 | $1,047,300 | | Operating loss | $(1,111,171) | $(248,896) | NeueHealth Segment Performance (2021 vs 2020) | (in thousands) | 2021 | 2020 | | :--- | :--- | :--- | | Total revenue | $493,179 | $37,147 | | Medical costs | $432,318 | $0 | | Operating loss | $(86,985) | $(8,707) | Liquidity and Capital Resources The company held $1.1 billion in cash at year-end 2021, with financing activities providing $1.04 billion primarily from its IPO Cash and Investments (as of Dec 31) | (in millions) | 2021 | 2020 | | :--- | :--- | :--- | | Cash and cash equivalents | $1,061.2 | $488.4 | | Short-term investments | $193.8 | $499.9 | | Long-term investments | $675.2 | $175.2 | Summary of Cash Flows (Year Ended Dec 31) | (in thousands) | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Net cash from operating activities | $82,059 | $(57,238) | $(8,208) | | Net cash used in investing activities | $(552,892) | $(689,742) | $(94,643) | | Net cash from financing activities | $1,043,641 | $712,441 | $424,060 | - On January 3, 2022, the company closed a $750.0 million preferred stock financing and used proceeds to repay $155.0 million on its credit facility525 Item 8. Financial Statements and Supplementary Data This section contains the audited consolidated financial statements, independent auditor's reports, and detailed notes for fiscal years 2019-2021 Report of Independent Registered Public Accounting Firm The auditor's report provides an unqualified opinion and identifies four critical audit matters related to key accounting estimates and goodwill valuation - The auditor identified the Incurred but not Reported (IBNR) claim liability of $660 million as a critical audit matter due to significant management assumptions562563 - The ACA Risk Adjustment liability of $931 million was identified as a critical audit matter because of significant management judgment565566 - The Premium Deficiency Reserve (PDR) of $103 million was deemed a critical audit matter due to significant forecasting assumptions567568 - Goodwill, with a balance of $839 million, was identified as a critical audit matter because its impairment testing relies on significant management estimates570571 Consolidated Financial Statements The company ended 2021 with $3.60 billion in assets and reported a net loss attributable to common shareholders of $1.18 billion Consolidated Balance Sheet Highlights (as of Dec 31) | (in thousands) | 2021 | 2020 | | :--- | :--- | :--- | | Total Assets | $3,598,339 | $1,810,802 | | Cash and cash equivalents | $1,061,179 | $488,371 | | Goodwill | $835,140 | $263,035 | | Total Liabilities | $2,324,812 | $593,859 | | Medical costs payable | $817,975 | $249,777 | | Risk adjustment payable | $931,170 | $187,777 | | Total Shareholders' Equity (Deficit) | $1,145,120 | $(503,672) | Consolidated Income Statement Highlights (Year ended Dec 31) | (in thousands) | 2021 | 2020 | | :--- | :--- | :--- | | Total revenue | $4,029,389 | $1,207,320 | | Operating loss | $(1,198,156) | $(257,603) | | Net loss attributable to common shareholders | $(1,184,862) | $(248,442) | Notes to Consolidated Financial Statements The notes detail accounting policies, business combinations, and financial statement components, including statutory capital and surplus levels - The company completed several acquisitions in 2021, including Centrum for $296.2 million and Central Health Plan (CHP) for $271.7 million655661666 - Medical costs payable increased to $817.9 million at year-end 2021 from $249.8 million in 2020, with the IBNR portion growing to $681.4 million704705 - As of December 31, 2021, regulated insurance entities held $398.5 million in statutory capital and surplus, exceeding the required minimum of $290.0 million750 Item 9A. Controls and Procedures Management concluded that disclosure controls were not effective as of year-end 2021 due to a new material weakness in internal control - A material weakness was identified for the year ended December 31, 2021, because claims for the IFP business were processed inaccurately by a third-party775 - Due to this material weakness, the CEO and CFO concluded that disclosure controls and procedures were not effective as of December 31, 2021772 - The company has remediated previously identified material weaknesses related to the Brand New Day acquisition and common stock valuation777779781 PART III Item 10. Directors, Executive Officers and Corporate Governance Information regarding directors and corporate governance is incorporated by reference from the company's 2022 proxy statement - Information required by this item will be included in the definitive proxy statement for the 2022 Annual Meeting of Shareholders and is incorporated by reference787 Item 11. Executive Compensation Information regarding executive and director compensation is incorporated by reference from the company's 2022 proxy statement - Information required by this item will be included in the definitive proxy statement for the 2022 Annual Meeting of Shareholders and is incorporated by reference788 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section details securities authorized under equity compensation plans, with further ownership information incorporated by reference Equity Compensation Plan Information (as of Dec 31, 2021) | Plan Category | Securities to be Issued Upon Exercise | Weighted-Average Exercise Price | Securities Available for Future Issuance | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by shareholders | 99,595,339 | $1.84 | 11,326,129 | PART IV Item 15. Exhibits, Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed as part of the Form 10-K report - This section contains the list of financial statements, financial statement schedules, and exhibits filed with the Annual Report794