Bright Health Group(BHG) - 2022 Q4 - Annual Report

PART I Business Bright Health Group operates technology-enabled Consumer Care and California senior managed care, exiting IFP and non-California MA markets to focus on aging and underserved populations - Bright Health Group operates through two reportable segments: Consumer Care (value-driven care delivery) and Bright HealthCare (delegated senior managed care in California)[466] - The company has exited the Affordable Care Act Marketplace, ceasing IFP product coverage and ending Medicare Advantage insurance outside of California at the end of 2022 to focus on aging and underserved populations in Florida, Texas, and California[468] Segment Overview as of December 31, 2022 | Segment | Description | Key Metrics | | :--- | :--- | :--- | | Consumer Care | Value-driven care delivery managing risk with external payors | Operates 74 managed and affiliated risk-bearing clinics. Maintained over 579,000 unique patient relationships, with ~530,000 under value-based arrangements | | Bright HealthCare | Delegated senior managed care business in California | Offers Medicare Advantage plans to ~125,000 lives | | Bright HealthCare - Commercial (Discontinued) | Commercial health plans | Served over 1.0 million individuals. Ceased coverage at the end of 2022 | - The company's growth strategy includes increasing membership in existing markets, expanding its care delivery footprint, taking on more population health risk, and participating in government programs like ACO Reach[543][544][545] Competition The company faces intense competition in both Consumer Care and Bright HealthCare segments from provider enablement companies, medical groups, national insurers, and regional payors - The Consumer Care business competes with MSOs, IPAs, and primary care providers such as Agilon Health, Inc., Cano Health, Inc., ChenMed LLC, Oak Street Health, Inc., and OptumHealth[18] - The Bright HealthCare business faces competition from large national insurers like Aetna, Anthem, Humana, and UnitedHealthcare, as well as regional payors like Blue Cross Blue Shield licensees and Kaiser Permanente[19] Government Regulation The company operates in a heavily regulated healthcare and insurance industry, subject to federal and state laws including HIPAA, ACA, state insurance regulations, and anti-fraud statutes - The business is governed by extensive federal, state, and local laws, including those related to the healthcare industry, insurance, and data privacy (HIPAA)[27][28] - As an insurance holding company, it is subject to state laws that restrict intercompany transactions and dividend payments from insurance subsidiaries. For example, New York law limits dividends to be paid out of earned surplus and requires regulatory approval for amounts exceeding certain thresholds[46] - Certain insurance subsidiaries failed to meet mandatory risk-based capital requirements as of December 31, 2022, making them subject to supervision orders under state insurance laws[47] - The company's operations are significantly impacted by the Affordable Care Act (ACA), which dictates standards for benefits, pricing, and minimum medical loss ratios. The Inflation Reduction Act extended enhanced Advance Premium Tax Credits (APTCs) through 2025, which affects the individual market[51][52] - The business is subject to federal and state anti-kickback laws, the Stark Law, and the False Claims Act, which regulate financial arrangements and prohibit fraudulent claims to government healthcare programs[65][66][67] Risk Factors The company faces significant risks including going concern doubts, restructuring disruptions, operational challenges, a history of losses, regulatory changes, intense competition, potential NYSE delisting, and material weaknesses in internal controls - The company has a history of operating losses, including a net loss from continuing operations of $638 million for the year ended December 31, 2022. These factors, along with a breach of a minimum liquidity covenant in its Credit Agreement in Q1 2023, raise substantial doubt about its ability to continue as a going concern[90][91][270] - In October 2022, the company announced a major restructuring to focus on its aligned care model in Florida, Texas, and California, and to exit the IFP and non-California MA markets. This restructuring involves workforce reductions and may disrupt business operations[94][96] - The company received a notice from the NYSE on December 6, 2022, for non-compliance with the minimum average closing price of $1.00 per share, posing a risk of delisting[372][373] - Material weaknesses in internal control over financial reporting were identified for the years ended December 31, 2021 and 2022. The 2022 weakness relates to a decreased focus on performing certain control activities for the IFP business following the decision to exit that market[315][324][328] - A significant portion of revenue depends on Medicare Advantage risk adjustment programs. Inaccurate capture of patient health data (RAF scores) can materially impact revenue and subject the company to CMS audits and potential penalties under the False Claims Act[202][204][205] - As of December 31, 2022, approximately 92% of the company's consumers were in California, Florida, and Texas, concentrating risk related to local economic conditions, competition, and regulation in these states[156] Properties The company leases 13 corporate offices and 82 medical offices across three states, currently assessing facility needs as part of its restructuring plan - The company leases 13 corporate offices, including its headquarters in Minneapolis, Minnesota, and 82 properties for medical offices and clinics in three states[417] - As part of its restructuring, the company is assessing its facility needs and may sublet or terminate leases for redundant locations[403] Legal Proceedings Legal proceedings information is incorporated by reference from Note 17 of the Notes to Consolidated Financial Statements - Details on legal proceedings are provided by reference to Note 17 in the Financial Statements section of the report[405] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the NYSE under "BHG", has never paid dividends, and has seen significant value decline since its 2021 IPO, with a recent $175 million Series B Preferred Stock private placement - The company's common stock is traded on the New York Stock Exchange under the symbol "BHG"[4] - The company has never declared or paid dividends and does not expect to in the foreseeable future, anticipating that all earnings will be used to support operations and finance growth[6] Stock Performance Comparison ($100 Initial Investment) | Date | Bright Health Group | S&P 500 Index | S&P Health Care Index | | :--- | :--- | :--- | :--- | | 6/24/2021 | $100.00 | $100.00 | $100.00 | | 12/31/2021 | $20.67 | $112.50 | $113.51 | | 12/31/2022 | $3.91 | $92.13 | $111.30 | - On October 17, 2022, the company sold 175,000 shares of Series B Convertible Perpetual Preferred Stock for an aggregate price of $175.0 million in a private placement exempt from registration under the Securities Act[11] Management's Discussion and Analysis of Financial Condition and Results of Operations In 2022, Bright Health Group transitioned to focus on Consumer Care and California MA, discontinuing commercial plans; total revenue grew 59.4% to $2.4 billion, but a $638 million net loss and liquidity concerns raise substantial doubt about its going concern ability - In October 2022, the company announced a strategic shift to focus on aging and underserved populations in specific markets, leading to the discontinuation of its commercial health plan business, which is now reported as discontinued operations[346][496] Consolidated Results of Operations (Continuing Operations) | (in thousands) | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Total revenue | $2,412,030 | $1,513,033 | $514,887 | | Total operating costs | $3,034,278 | $1,856,660 | $685,270 | | Operating loss | ($622,248) | ($343,627) | ($170,383) | | Net loss from continuing operations | ($637,965) | ($323,110) | ($161,222) | | Loss from discontinued operations, net of tax | ($721,915) | ($855,255) | ($87,220) | | Net loss | ($1,359,880) | ($1,178,365) | ($248,442) | - The 59.4% increase in total revenue for 2022 was largely due to $654.1 million from the new Direct Contracting business and a $374.6 million increase in premium revenue from organic growth and acquisitions[525] - The company's liquidity is a significant concern. Management stated that existing cash and investments may not be sufficient to meet obligations for the next twelve months, and these conditions raise substantial doubt about the company's ability to continue as a going concern[1335] Results of Operations by Segment In 2022, Bright HealthCare premium revenue grew 27.4% to $1.65 billion, Consumer Care revenue increased to $1.79 billion, and the discontinued Commercial segment saw 59.2% premium growth to $4.0 billion but incurred significant losses Bright HealthCare (Continuing Operations) Performance | (in thousands) | 2022 | 2021 | | :--- | :--- | :--- | | Premium revenue | $1,652,045 | $1,297,273 | | Total segment revenue | $1,652,455 | $1,297,193 | | Operating loss | ($173,834) | ($169,107) | Consumer Care (Continuing Operations) Performance | (in thousands) | 2022 | 2021 | | :--- | :--- | :--- | | Total segment revenue | $1,788,607 | $461,174 | | Direct Contracting revenue | $654,087 | $0 | | Operating loss | ($315,744) | ($114,921) | Bright HealthCare – Commercial (Discontinued Operations) Performance | (in thousands) | 2022 | 2021 | | :--- | :--- | :--- | | Premium revenue | $3,998,622 | $2,512,384 | | Operating loss | ($720,241) | ($854,529) | | Medical Cost Ratio (MCR) | 93.4% | 105.9% | Liquidity and Capital Resources As of December 31, 2022, the company held $1.9 billion in cash and $1.1 billion in investments, but restricted access and a Q1 2023 liquidity covenant breach raise going concern doubts, despite 2022 preferred stock financings totaling $925 million - As of December 31, 2022, the company held $1.9 billion in cash and cash equivalents and $1.14 billion in short- and long-term investments[609] - The company breached the minimum liquidity covenant of its Credit Agreement in Q1 2023 and entered into a temporary waiver period lasting until April 30, 2023[611][872] - In 2022, the company raised capital through two preferred stock financings: $750.0 million from Series A in January and $175.0 million from Series B in October[902][878] Financial Statements and Supplementary Data The consolidated financial statements received an unqualified auditor's opinion with a going concern emphasis, highlighting critical audit matters like IBNR, ACA risk adjustment, and goodwill impairment, and detailing significant acquisitions and the commercial business discontinuation - The independent auditor's report from Deloitte & Touche LLP issued an unqualified opinion on the financial statements but included a paragraph expressing substantial doubt about the company's ability to continue as a going concern[627][628] - Critical Audit Matters identified by the auditor include: the Incurred but not Reported (IBNR) claim liability, the Affordable Care Act (ACA) risk adjustment liability, and the valuation of Goodwill[629][1355] - The company completed several acquisitions between 2020 and 2021, including Universal Care, Inc. (BND), Premier Medical Associates (PMA), Central Health Plan of California (CHP), and Centrum, significantly increasing goodwill and intangible assets[515][516][519][520] - In October 2022, the company decided to exit the Commercial marketplace, which has been classified as discontinued operations. This resulted in significant restructuring charges of $50.7 million and impairment charges for goodwill ($4.1 million) and intangible assets ($6.7 million) within discontinued operations for 2022[1469][810][1364] Controls and Procedures Management concluded disclosure controls were ineffective as of December 31, 2022, due to a material weakness in internal control over financial reporting related to decreased focus on IFP business controls, leading to an adverse auditor opinion - Management concluded that disclosure controls and procedures were not effective as of December 31, 2022, due to a material weakness in internal control over financial reporting[1004] - A material weakness was identified in the control activities component of the COSO framework. This was attributed to a decreased focus on performing control activities for the IFP business after the decision was made to exit the market[1006][1030] - The independent registered public accounting firm, Deloitte & Touche LLP, issued an adverse opinion on the Company's internal control over financial reporting as of December 31, 2022[1011] PART III Directors, Executive Officers and Corporate Governance The company's executive team is led by CEO G. Mike Mikan, with a 12-member Board transitioning to annual elections by 2024, comprising mostly independent directors across key committees, and adhering to a Code of Conduct Executive Officers (as of March 6, 2023) | Name | Age | Position | | :--- | :--- | :--- | | G. Mike Mikan | 51 | Chief Executive Officer, President and Director | | Catherine R. Smith | 59 | Chief Financial and Administrative Officer | | Jeff Cook | 52 | Chief Operating Officer | | Jeff Craig | 40 | General Counsel and Corporate Secretary | - The Board of Directors currently consists of 12 members and is structured into three classes, with a plan to transition to an annually elected board by the 2024 annual meeting[549][1019] - The Board has three standing committees: Audit, Compensation and Human Capital, and Nominating and Corporate Governance[1060] - The Board has affirmatively determined that all directors are independent under NYSE rules, with the exception of CEO G. Mike Mikan and co-founder Robert J. Sheehy[774] Executive Compensation The company's pay-for-performance executive compensation includes base salary, AIP, and equity awards, with CEO Mikan's 2022 total compensation at $10.0 million, and features stock ownership guidelines and a clawback policy 2022 Summary Compensation Table | Name | Position | Salary ($) | Bonus ($) | Stock Awards ($) | Option Awards ($) | All Other Comp ($) | Total ($) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | G. Mike Mikan | CEO | 1,300,000 | 1,690,000 | 3,249,999 | 3,249,236 | 503,934 | 9,993,169 | | Cathy Smith | CFO & CAO | 650,000 | 585,000 | 1,400,000 | 1,399,671 | 14,780 | 4,049,451 | | Jeff Cook | COO | 300,000 | 540,000 | 2,250,000 | - | 6,100 | 3,096,100 | - The 2022 Annual Incentive Plan (AIP) performance factor was set at 100% of target, despite performance against metrics suggesting 130%, in light of the company's significant business transition and failure to meet certain metrics[1141] - The company maintains stock ownership guidelines requiring the CEO to hold shares equal to five times base salary and other executives to hold three times base salary[1150] - Non-employee directors receive an annual cash retainer of $80,000 and an annual RSU award valued at $175,000, with additional retainers for committee chairs and members[1261] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters As of March 1, 2023, beneficial ownership is concentrated, with New Enterprise Associates owning 47.2%, Bessemer Venture Partners 13.5%, StepStone Group 6.9%, and all directors and executive officers collectively owning 58.4% of common stock Beneficial Ownership as of March 1, 2023 | Holder | Shares Beneficially Owned | Percentage | | :--- | :--- | :--- | | New Enterprise Associates and affiliated funds | 368,001,007 | 47.2% | | Bessemer Venture Partners and affiliated funds | 85,998,211 | 13.5% | | StepStone Group LP and affiliated funds | 43,517,440 | 6.9% | | All directors and executive officers as a group (15 persons) | 476,295,925 | 58.4% | Certain Relationships and Related Transactions, and Director Independence In October 2022, the company sold Series B Preferred Stock to affiliates of major investors, with whom certain directors are related, and maintains a formal policy for approving related person transactions, with most directors deemed independent - In October 2022, the company entered into an Investment Agreement to sell Series B Preferred Stock to purchasers including affiliates of New Enterprise Associates, Bessemer Venture Partners, and StepStone Group LP, with which certain directors are affiliated[770][771] - The company has a formal written policy requiring Board or committee approval for any related person transaction exceeding $120,000[773] - The Board has determined that each director, other than G. Mike Mikan and Robert J. Sheehy, qualifies as independent under NYSE listing standards[774] Principal Accounting Fees and Services For FY2022, Bright Health Group paid Deloitte & Touche LLP $3.81 million, primarily for audit fees ($3.74 million) and tax fees ($74,830), with the Audit Committee pre-approving all auditor services Fees Billed by Deloitte & Touche LLP | Fee Category | 2022 | 2021 | | :--- | :--- | :--- | | Audit Fees | $3,737,356 | $3,243,831 | | Audit-Related Fees | $0 | $490,021 | | Tax Fees | $74,830 | $60,375 | | Total | $3,812,186 | $3,794,227 | - The Audit Committee has a policy that requires advance approval of all audit and permissible non-audit services provided by the independent registered public accounting firm[567] PART IV Exhibits, Financial Statement Schedules This section lists financial statements, schedules, and exhibits, including corporate governance documents, financing agreements, compensation plans, auditor consent, and CEO/CFO certifications - This section includes the consolidated financial statements, notes, and the Report of Independent Registered Public Accounting Firm[742] - A list of exhibits filed with the report is provided, including key corporate governance documents, debt and equity financing agreements, and executive compensation plans[748][749] - Schedule I, the Condensed Financial Information of the Registrant (Parent Company Only), is included as a financial statement schedule[747]