Item 1A. Risk Factors
You should carefully consider the risks and uncertainties described below, together with the other information in this 2023 Form 10-K, including the section of this report titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes. The occurrence of one or more of the events or circumstances described in these risk factors, alone or in combination with other events or circumstances, may have a material adverse effect on our business, reputation, revenue, financial condition, results of operations, liquidity, cash flows and/or future prospects, in which event the market price of our Class A Common Stock could decline, and you could lose part or all of your investment in us. Unless otherwise indicated, reference in this section and elsewhere in this 2023 Form 10-K to our business being adversely affected, negatively impacted or harmed will include an adverse effect on, or a negative impact or harm to, the business, reputation, financial condition, results of operations, liquidity cash flows, stock price, revenue and our future prospects. The material and other risks and uncertainties summarized above and described below are not intended to be exhaustive and are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. This 2023 Form 10-K also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of a number of factors, including the risks described below. See the section titled “Cautionary Note Regarding Forward-Looking Statements.”
Risks Associated with Chapter 11 Cases
We are subject to the risks and uncertainties associated with the Chapter 11 Cases.
For the duration of our Chapter 11 Cases, our operations and our ability to develop and execute our business strategy, as well as our continuation as a going concern, are subject to the risks and uncertainties associated with bankruptcy. These risks include the following:
• our ability to develop, confirm and consummate a chapter 11 plan or alternative restructuring transaction;
• our ability to obtain and/or maintain court approval with respect to motions filed in the Chapter 11 Cases from time to time;
• our ability to operate within the restrictions and the liquidity limitations of the DIP Credit Agreement and any related orders entered by the Bankruptcy Court in connection with the Chapter 11 Cases;
• our ability to obtain sufficient financing to allow us to emerge from bankruptcy and execute our business plan of reorganization post-emergence;
• our ability to maintain our relationships with our suppliers, vendors, payors, patients, physicians, customers, employees and other third parties;
• our ability to maintain contracts that are critical to our operations;
• our ability to execute on our business plan;
• our ability to attract, motivate and retain key employees;
• the high costs of bankruptcy and related fees;
• the ability of third parties to seek and obtain court approval to terminate contracts and other agreements with us;
• the ability of third parties to seek and obtain court approval to terminate or shorten the exclusivity period for us to propose and confirm a chapter 11 plan, to appoint a chapter 11 trustee, or to convert the Chapter 11 Cases to a chapter 7 proceeding;
• the actions and decisions of our creditors and other third parties who have interests in our Chapter 11 Cases that may be inconsistent with our plans and;
• uncertainties and continuing risks associated with our ability to achieve our stated goals and continue as a going concern.
Delays in our Chapter 11 Cases increase the risks of us being unable to reorganize our business and emerge from bankruptcy and increase our costs associated with the bankruptcy process.
These risks and uncertainties could affect our business and operations in various ways. For example, negative events associated with our Chapter 11 Cases could adversely affect our relationships with our suppliers, vendors, payors, patients, physicians, customers, employees and other third parties, which in turn could adversely affect our operations and financial condition. Also, we need the prior approval of the Bankruptcy Court for transactions outside the ordinary course of business, which may limit our ability to respond timely to certain events or take advantage of certain opportunities. Because of the risks and uncertainties associated with our Chapter 11 Cases, we cannot accurately predict or quantify the ultimate impact of events that will occur during our Chapter 11 Cases that may be inconsistent with our plans.
Operating under Bankruptcy Court protection for a long period of time may harm our business.
Our future results are dependent upon the successful confirmation and implementation of a plan of reorganization or WholeCo Sale Transaction. A long period of operations under Bankruptcy Court protection could have a material adverse effect on our business, financial condition, results of operations and liquidity. So long as the Chapter 11 Cases continue, our senior management will be required to spend a significant amount of time and effort dealing with the reorganization instead of focusing exclusively on our business operations. A prolonged period of operating under Bankruptcy Court protection also may make it more difficult to retain management and other key personnel necessary to the success and growth of our business.
Additionally, so long as the Chapter 11 Cases continue, we will be required to incur significant costs for professional fees and other expenses associated with the administration of the Chapter 11 Cases. We have secured commitments for the DIP Facility in an aggregate principal amount of $150 million, which was approved by the Bankruptcy Court on an interim basis on February 7, 2024 and on a final basis on March 6, 2024.
Furthermore, we cannot predict the ultimate amount of all settlement terms for the liabilities that will be subject to a plan of reorganization. Even once a plan of reorganization is approved and implemented, our operating results may be adversely affected by the possible reluctance of prospective lenders and other counterparties to do business with a company that recently emerged from the Chapter 11 Cases.
The Chapter 11 Cases limit the flexibility of our management team in running our business.
While we operate our businesses as debtors-in-possession under supervision by the Bankruptcy Court, we are required to obtain the approval of the Bankruptcy Court and, in some cases, certain lenders prior to engaging in activities or transactions outside the ordinary course of business. Bankruptcy Court approval of non-ordinary course activities entails preparation and filing of appropriate motions with the Bankruptcy Court, negotiation with creditors’ committees and other parties-in-interest and one or more hearings. The creditors’ committees and other parties-in interest may be heard at any Bankruptcy Court hearing and
may raise objections with respect to these motions. This process may delay major transactions and limit our ability to respond quickly to opportunities and events in the marketplace. Furthermore, in the event the Bankruptcy Court does not approve a proposed activity or transaction, we would be prevented from engaging in activities and transactions that we believe are beneficial to us.
We may not be able to obtain confirmation of a chapter 11 plan of reorganization.
To emerge successfully from Bankruptcy Court protection as a viable entity, we must meet certain statutory requirements with respect to adequacy of disclosure with respect to the plan of reorganization, solicit and obtain the requisite acceptances of such a plan and fulfill other statutory conditions for confirmation of such a plan, which have not occurred to date. The confirmation process is subject to numerous, unanticipated potential delays, including a delay in the Bankruptcy Court’s commencement of the confirmation hearing regarding our plan of reorganization.
We may not receive the requisite acceptances of constituencies in the Chapter 11 Cases to confirm our plan. Even if the requisite acceptances of our plan are received, the Bankruptcy Court may not confirm such a plan. The precise requirements and evidentiary showing for confirming a plan, notwithstanding its rejection by one or more impaired classes of claims or equity interests, depends upon a number of factors including, without limitation, the status and seniority of the claims or equity interests in the rejecting class (i.e., secured claims or unsecured claims or subordinated or senior claims). If a chapter 11 plan of reorganization is not confirmed by the Bankruptcy Court, it is unclear whether we would be able to reorganize our business and what, if anything, holders of claims us would ultimately receive with respect to their .
There can be no assurance as to whether we will successfully reorganize and emerge from the chapter 11 Cases or, if we do successfully reorganize, as to when we would emerge from the Chapter 11 Cases. If we are unable to successfully reorganize, we may not be able to continue our operations.
Our long-term liquidity requirements and the adequacy of our capital resources are difficult to predict at this time.
We face uncertainty regarding the adequacy of our liquidity and capital resources. In addition to the cash requirements necessary to fund ongoing operations, we have incurred significant professional fees and other costs in connection with preparation for the Chapter 11 Cases and expect that we will continue to incur significant professional fees and costs throughout our Chapter 11 Cases. In addition, we must comply with the covenants of our DIP Credit Agreement and other agreements associated therewith in order to continue to access our borrowings thereunder. We cannot assure you that cash on hand, cash flow from operations and the DIP Facility will be sufficient to continue to fund our operations and allow us to satisfy our obligations related to the Chapter 11 Cases until we are able to emerge from the Chapter 11 Cases.
Our liquidity, including our ability to meet our ongoing operational obligations, is dependent upon, among other things: (i) our ability to comply with the terms and conditions of our DIP Credit Agreement and associated agreements, (ii) our ability to comply with the terms and conditions of any cash collateral order that may be entered by the Bankruptcy Court in connection with the Chapter 11 Cases, (iii) our ability to maintain adequate cash on hand, (iv) our ability to generate cash flow from operations, (v) our ability to develop, confirm and consummate a chapter 11 plan or other alternative restructuring transaction, and (vi) the cost, duration and outcome of the Chapter 11 Cases.
As a result of the Chapter 11 Cases, our financial results may be volatile and may not reflect historical trends.
During the Chapter 11 Cases, we expect our financial results to continue to be volatile as restructuring activities and expenses, contract terminations and rejections, and claims assessments significantly impact our consolidated financial statements. As a result, our historical financial performance is likely not indicative of our financial performance after the date of the bankruptcy filing. In addition, if we emerge from chapter 11, the amounts reported in subsequent consolidated financial statements may materially change relative to historical consolidated financial statements, including as a result of revisions to our operating plans pursuant to a plan of reorganization. We also may be required to adopt fresh start accounting, in which case our assets and liabilities will be recorded at fair value as of the fresh start reporting date, which may differ materially from the recorded values of assets and liabilities on our consolidated balance sheets. Our financial results after the application of fresh start accounting also may be different from historical trends.
We may be subject to claims that will not be discharged in the Chapter 11 Cases, which could have a material adverse effect on our financial conditions and results of operations.
The Bankruptcy Code provides that the confirmation of a plan of reorganization discharges a debtor from substantially all debts arising prior to confirmation. With few exceptions, all claims that arose prior to the commencement of the Company's Chapter 11 Cases on February 4, 2024, or before confirmation of the plan of reorganization (i) would be subject to compromise and/or treatment under the plan of reorganization and/or (ii) would be discharged in accordance with the terms of the plan of reorganization. Any claims not ultimately discharged through the plan of reorganization could be asserted against the reorganized entities and may have an adverse effect on our financial condition and results of operations on a post-reorganization basis.
The Debtors may be unable to comply with restrictions imposed by the agreements governing the DIP Facility and the Debtors' other financing arrangements.
The agreements governing the DIP Facility impose a number of obligations and restrictions on the Debtors. The Debtors’ ability to borrow under the DIP Facility is subject to the satisfaction of certain customary conditions precedent set forth in the DIP Credit Agreement. Covenants of the DIP Facility would include general affirmative covenants, as well as negative covenants such as prohibiting us from incurring or permitting debt, investments, liens or dispositions unless specifically permitted. Failure to comply with these covenants would result in an event of default under the DIP Facility and permit the lenders thereunder to exercise remedies under the loan documentation for the DIP Facility. The Debtors’ ability to comply with these provisions may be affected by events beyond their control and their failure to comply, or obtain a waiver in the event the Debtors cannot comply with a covenant, could result in an event of default under the agreements governing the DIP Facility and the Debtors’ other financing arrangements.
We may experience increased levels of employee attrition as a result of the Chapter 11 Cases.
As a result of the Chapter 11 Cases, we may experience increased levels of employee attrition, and our employees likely will face considerable distraction and uncertainty. A loss of key personnel or material erosion of employee morale could adversely affect our business and results of operations. Our ability to engage, motivate and retain key employees or take other measures intended to motivate and incentivize key employees to remain with us through the pendency of the Chapter 11 Cases may be limited by restrictions on implementation of incentive programs under the Bankruptcy Code. The loss of services of members of our senior management team could impair our ability to execute our strategy and implement operational initiatives, which would be likely to have a material adverse effect on our business, financial condition and results of operations. In order to mitigate the risk of attrition of key employees, the Debtors implemented a key employee retention plan in January 2024, which was to the Court in a filing on February 4, 2024 (Docket No. 6) and may be subject to approval by the Court at a later date.
Senior management may leave the Debtors during the pendency of the Chapter 11 Cases if not adequately compensated.
The Bankruptcy Code limits a debtor’s ability to pay bonus compensation to insiders absent court approval. If we are unable to obtain sufficient creditor support and court approval of any insider incentive bonus program, our senior management team will be substantially under compensated compared to both our market peers and their compensation prior to the Chapter 11 Cases. There can be no assurance that members of management will continue to work for the Company under such circumstances. Should the Company lose all or part of the senior management team during the pendency of the Chapter 11 Cases, we may experience substantial disruption and value destruction as a result.
Our post-bankruptcy capital structure is yet to be determined, and any changes to our capital structure may have a material adverse effect on existing debt and security holders, including holders of our Class A and Class B C ommon Stock.
Our post-bankruptcy capital structure has yet to be determined and will be set pursuant to a plan that requires Bankruptcy Court approval. The RSA provides for the conversion of nearly $1 billion in secured debt to a combination of new debt and full equity ownership in the reorganized company. It also allows for solicitation of strategic partnerships and potential offers – including the sale of the Company or substantially all its assets – that may result in a value-maximizing outcome to the Company's stakeholders . Such new debt may be issued at different interest rates, payment schedules and maturities than our
existing debt securities. The success of a reorganization through any such exchanges or modifications will depend on approval of a chapter 11 plan of reorganization by the Bankruptcy Court and the willingness of existing debt and security holders, as applicable, to agree to the exchange or modification, subject to the provisions of the Bankruptcy Code, and there can be no guarantee of success. If such exchanges or modifications are successful, holders of our debt or of claims against us may find their holdings no longer have any value or are materially reduced in value, or they may be converted to equity and be diluted or may be modified or replaced by debt with a principal amount that is less than the outstanding principal amount, longer maturities and reduced interest rates. Holders of our Class A and Class B Common Stock may also find that their holdings no longer have any value and face highly uncertain or no recoveries under a court-approved plan. There can be no assurance that any new debt or equity securities will maintain their value at the time of issuance. If existing debt or equity holders are adversely affected by a reorganization, it may affect our ability to issue new debt or equity in the future. Although we cannot provide assurances as to how the and interests of stakeholders in the Chapter 11 Cases, including holders of Class A and Class B Common Stock, will ultimately be resolved, we expect that holders of our Class A and Class B Common Stockholders will not receive a recovery through any court-approved plan, unless the holders of more senior and interests, such as secured and unsecured indebtedness (which is currently trading at a significant discount), approve of any such recovery. Consequently, there is a significantly high likelihood that the holders of our Class A and Class B Common Stock will receive no recovery under the Chapter 11 Cases and that our existing outstanding shares of Class A and Class B Common Stock will be and extinguished with no recovery.
Any Chapter 11 plan that we may implement will likely be based in large part upon assumptions and analyses developed by us. If these assumptions and analyses prove to be incorrect, or adverse market conditions persist or worsen, our plan may be unsuccessful in its execution.
Any Chapter 11 plan that we may implement will affect both our capital structure and the ownership, structure and operation of our remaining businesses and will likely reflect assumptions and analyses based on our experience and perception of historical trends, current conditions and expected future developments, as well as other factors that we consider appropriate under the circumstances. Whether actual future results and developments will be consistent with our expectations and assumptions depends on a number of factors, including but not limited to (i) our ability to substantially change our capital structure; and (ii) the overall strength and stability of general economic conditions, both in the U.S. and in global markets. The failure of any of these factors could materially adversely affect the successful reorganization of our businesses.
In addition, any plan of reorganization will likely rely upon financial projections, including with respect to revenues, consolidated Adjusted EBITDA, capital expenditures, debt service and cash flow. Financial forecasts are necessarily speculative, and it is likely that one or more of the assumptions and estimates that are the basis of these financial forecasts will not be accurate. In our case, the forecasts will be even more speculative than normal, because they may involve fundamental changes in the nature of our capital structure. Accordingly, we expect that our actual financial condition and results of operations will differ, perhaps materially, from what we have anticipated. Consequently, there can be no assurance that the results or developments contemplated by any plan of reorganization we may implement will occur or, even if they do occur, that they will have the anticipated effects on us and our subsidiaries or our businesses or operations. The failure of any such results or developments to materialize as anticipated could materially adversely affect the successful implementation of any plan of reorganization.
We may be subject to claims that will not be discharged in the Chapter 11 Cases, which could have a material adverse effect on our financial condition and results of operations.
The Bankruptcy Code provides that the confirmation of a Chapter 11 plan of reorganization discharges a debtor from substantially all debts arising prior to confirmation. With few exceptions, all claims that arose prior to confirmation of the plan of reorganization (i) would be subject to compromise and/or treatment under the plan of reorganization; and (ii) would be discharged in accordance with the Bankruptcy Code and the terms of the plan of reorganization. The Company is not currently aware of any material claims that would not be discharged in the Chapter 11 Cases, however, any claims not ultimately discharged through a Chapter 11 plan of reorganization could be asserted against the reorganized entities and may have an adverse effect on our financial condition and results of operations on a post-reorganization basis.
In certain instances, the Chapter 11 Cases may be converted to liquidation proceedings under Chapter 7 of the Bankruptcy Code.
While we have entered into the RSA and commenced the Chapter 11 Cases, there can be no assurances as to whether we will successfully reorganize and emerge from the Chapter 11 Cases or, if we do successfully reorganize, as to when we would emerge from the Chapter 11 Cases. If the Bankruptcy Court finds that it would be in the best interest of creditors and/or the Debtors, the Bankruptcy Court may convert our Chapter 11 Cases to liquidation proceedings under chapter 7 of the Bankruptcy Code. In such event, a chapter 7 trustee would be appointed or elected to liquidate the Debtors’ assets for distribution in accordance with the priorities established by the Bankruptcy Code. The Debtors believe that liquidation under chapter 7 would result in significantly smaller distributions being made to the Debtors’ creditors than those provided for in a chapter 11 plan through the Chapter 11 Cases or reorganization because of (i) the likelihood that the assets would have to be sold or otherwise disposed of in a fashion over a short period of time rather than reorganizing or selling in a controlled manner the Debtors’ businesses as a going , (ii) additional administrative expenses involved in the appointment of a chapter 7 trustee, and (iii) additional expenses and , some of which would be entitled to priority, that would be generated during the and from the of leases and other executory contracts in connection with a cessation of operations.
The Chapter 11 Cases are expected to cause shares of our Class A and Class B Common Stock to decrease in value materially and render them worthless.
We have a substantial amount of indebtedness that is senior to the Company’s existing shares of Class A and Class B Common Stock in our capital structure. If a chapter 11 plan of reorganization implementing the transactions contemplated under the RSA is approved by the Bankruptcy Court, we expect that shares of our Class A and Class B Common Stock will be cancelled, with no recovery. Consequently, there is a high likelihood that the holders of our Class A and Class B Common Stock will receive no recovery under the Chapter 11 Cases and that shares of our Class A and Class B Common Stock will decrease in value materially until they are cancelled and extinguished, without any recovery.
Trading in shares of our Class A Common Stock during the pendency of the Chapter 11 Cases is highly speculative and you could lose all or part of your investment.
The price of shares of our Class A Common Stock has been volatile following the commencement of the Chapter 11 Cases and they are expected to decrease in value and may ultimately be cancelled, without any recovery pursuant to a chapter 11 plan of reorganization approved by the Bankruptcy Court. Accordingly, any trading in our Class A Common Stock during the pendency of our Chapter 11 Cases is highly speculative and poses substantial risks of experiencing a complete loss to purchasers of our Class A Common Stock. We cannot assure you that there will be any active trading market or liquidity for your shares of our Class A Common Stock, your ability to sell your shares of our Class A Common Stock when desired may be extremely limited or non-existent, and the prices that you may obtain, if any, for your shares of our Class A Common Stock are highly likely to be adversely impacted by the Chapter 11 Cases.
In the past, following periods of extreme volatility in the market price of a company’s securities, securities class-action litigation has often been instituted against that company. Securities litigation against us could result in substantial costs and a diversion of our management’s attention and resources.
Our delisting by the NYSE could adversely affect the value and liquidity of your shares of our Class A Common Stock, which may ultimately be cancelled and extinguished without any recovery pursuant to a chapter 11 plan of reorganization approved by the Bankruptcy Court .
As previously disclosed, on February 5, 2024, NYSE Regulation notified the Company that NYSE Regulation had determined to (a) commence proceedings to delist the Company’s Class A Common Stock from the NYSE and (b) immediately suspended trading on the NYSE in the Company’s Class A Common Stock pursuant to Section 802.01D of the NYSE Listed Company Manual after the Company commenced the Chapter 11 Cases on February 4, 2024. The NYSE filed a Form 25 with the SEC on February 6, 2024 to initiate such delisting from the NYSE, which delisting became effective on February 16, 2024. Delisting our Class A Common Stock may adversely impact its liquidity, impair our stockholders’ ability to buy and sell shares of our Class A Common Stock, impair our ability to raise capital, and the market price of our Class A Common Stock could decrease significantly. Delisting of our Class A Common Stock could also adversely impact the perception of our financial
condition and have additional negative ramifications, including loss of confidence by our payors, patients, physicians, employees and other third parties that do business with us, as well as the loss of institutional investor interest and fewer business opportunities.
The delisting of our Class A Common Stock from the NYSE could adversely affect our ability to attract new investors, reduce the liquidity of our outstanding shares of Class A Common Stock, reduce our ability to raise additional capital, reduce the price at which our Class A Common Stock trades, result in negative publicity and increase the transaction costs inherent in trading such shares with overall negative effects for our stockholders. We cannot assure you that our Class A Common Stock will be listed on another national securities exchange or quoted on an over-the-counter quotation system, such as the OTC Market or Pink Sheets. In addition, delisting of our Class A Common Stock could deter broker-dealers from making a market in or otherwise seeking or generating interest in our Class A Common Stock and might deter certain institutions and persons from investing in our securities at all. For these reasons and others, the delisting could adversely affect our business, financial condition, liquidity, cash flows and/or stock price.
Risks Related to Our Indebtedness
Our indebtedness could adversely affect our business, financial condition, results of operations, liquidity, cash flows, stock price and/or prospects.
Our indebtedness, or any additional indebtedness we may incur, could require us to divert funds identified for other purposes for debt service and impair our liquidity position. If we cannot generate sufficient cash flow from operations or have less than expected access to funds available under the DIP Facility, we may need to refinance our indebtedness, dispose of assets or issue equity to obtain necessary funds. We do not know whether we will be able to take any of these actions on a timely basis, on terms satisfactory to us or at all.
The filing of the Chapter 11 Cases constitutes an event of default that permits acceleration of the Company’s obligations under the following Debt Instruments:
• Indenture, dated as of September 30, 2021, by and among Cano Health, LLC as issuer, the guarantors party thereto and U.S. Bank National Association, as trustee, relating to the 6.250% Senior Notes due 2028;
• Credit Agreement, dated November 23, 2020 (as amended and restated, supplemented, waived or otherwise modified from time to time), by and among Cano Health, LLC, Primary Care (ITC) Intermediate Holdings, LLC, Credit Suisse AG, Cayman Islands Branch, as administrative agent and the lenders party thereto from time to time; and
• Credit Agreement, dated as of February 24, 2023 (as amended and restated, supplemented, waived or otherwise modified from time to time), by and among Cano Health, LLC, Primary Care (ITC) Intermediate Holdings, LLC, the lenders party thereto from time to time and JPMorgan Chase Bank, N.A., as administrative agent.
Any efforts to enforce payment obligations under these Debt Instruments are automatically stayed as a result of the filing of the Chapter 11 Cases and the holders’ rights of enforcement in respect of these Debt Instruments are subject to the applicable provisions of the Bankruptcy Code.
Our levels of indebtedness and the cash flow needed to satisfy our indebtedness have important consequences, including:
• limiting funds otherwise available for financing our working capital, capital expenditures, acquisitions, investments and other general corporate purposes by requiring us to dedicate a portion of our cash flows from operations to the repayment of indebtedness and the interest on this indebtedness;
• making it more difficult for us to satisfy our obligations with respect to our indebtedness;
• increasing our vulnerability to general adverse economic and industry conditions;
• exposing us to the risk of increased interest rates as certain of our borrowings are at variable rates of interest;
• limiting our flexibility in planning for and reacting to changes in the industry in which we compete; and
• making us more vulnerable in the event of a downturn in our business.
Our level of indebtedness may place us at a competitive disadvantage to our competitors that are not as highly leveraged. Our indebtedness under the DIP Facility is floating rate debt. For example, borrowings under the DIP Facility bear interest at the rate of, at the Company’s election, (i) SOFR plus 11.00% or (ii) alternate base rate plus 10.00%. As a result, fluctuations in interest rates can and have significantly increased our borrowing costs. Increases in interest rates may directly impact the amount of interest we are required to pay and reduce earnings accordingly. For example, our interest payments in 2022 were $61.2 million, compared to our cash and PIK interest of $95.7 million in 2023. In addition, developments in tax policy, such as the disallowance of tax deductions for interest paid on outstanding indebtedness, could have an adverse effect on our liquidity and our business, financial condition, results of operations, cash flows and/or stock price.
We may be able to incur substantial additional indebtedness in the future. Although the agreements governing our existing indebtedness contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to several significant qualifications and exceptions and, under certain circumstances, the amount of indebtedness that could be incurred in compliance with these restrictions could be substantial.
As may be approved by the Bankruptcy Court, we expect to use cash flows from operations, plus amounts available under our DIP Facility to meet our financial obligations, including funding our operations, certain indebtedness service requirements and capital expenditures. The ability to make these payments depends on our satisfaction of borrowing conditions under the DIP Facility and our financial and operating performance, which is subject to prevailing economic, industry and competitive conditions and certain financial, business, economic and other factors beyond our control. If these cash flows and amounts available under the DIP Facility are less than expected, we may not be able to satisfy such obligations.
We may not be able to generate sufficient cash flow to service all of our indebtedness, and may be forced to take other actions to satisfy our obligations under such indebtedness, which may not be successful.
Our ability to manage our outstanding indebtedness depends on our ability to maintain access to amounts available under the DIP Facility and on improving our financial and operating performance, which will be affected by prevailing economic, industry and competitive conditions and by financial, business and other factors beyond our control. We may not be able to maintain a sufficient level of cash flow from operating activities, and we may not be able to satisfy all conditions required to gain access to all funds available under the DIP Facility to permit us to pay the principal, premium, if any, and interest on our indebtedness. Any failure to make payments of interest and principal on our outstanding indebtedness on a timely basis would likely result in penalties or defaults, which would also harm our ability to incur additional indebtedness.
If our cash flows and capital resources, plus amounts available under the DIP Facility, are insufficient to fund our indebtedness service obligations, we may be forced to reduce or delay capital expenditures, sell assets, seek additional capital or seek to restructure or refinance our indebtedness. Our ability to sell assets may be limited by the terms and conditions of our various debt instruments. Any refinancing of our indebtedness could be at higher interest rates and may require us to comply with more onerous covenants that could further restrict our business operations. These alternative measures may not be successful and may not permit us to meet our scheduled indebtedness service obligations. In the absence of such cash flows and other capital resources, we could face additional substantial liquidity problems and might be required to sell material assets or operations. For example, in September 2023, as part of the Company’s effort to generate additional liquidity, the Company sold to Primary Care Holdings II, LLC ("CenterWell"), a wholly owned subsidiary of Humana Inc. (“Humana”), substantially all of the assets associated with the operation of Cano Health’s senior-focused primary care centers in Texas and Nevada (the "Sale Transaction”) for a total transaction value to the Company of approximately $66.7 million, consisting of approximately $35.4 million in cash paid at (of which approximately $1.9 million was withheld for of potential indemnification ), plus the release of certain liabilities owed by Cano Health or its affiliates primarily for centers built under commercial agreements entered into with affiliates of Humana. The net cash proceeds from the Sale Transaction the Company to repay a portion of its outstanding commitment under its revolving credit facility, for which Credit Suisse AG, Cayman Islands Branch is the administrative agent, such that the financial maintenance covenant of this facility was not applicable for the testing period ended September 30, 2023 .
As part of its plan to improve cash flow and liquidity, the Company also exited operations within its medical centers in California and New Mexico, actions that were substantially completed by the end of the third quarter of 2023. The Company also exited its Illinois and Puerto Rico markets by the end of the fourth quarter of 2023. These actions are designed to position the Company to focus on and optimize its core Florida Medicare Advantage and ACO REACH assets.
Other ongoing initiatives designed to generate additional liquidity include the Company’s continued pursuit of its strategic review, which may result in the sale of all or substantially all of the Company’s business and/or the sale of certain lines of business, such as the Company’s Medicaid business in Florida, pharmacy assets and other specialty practices.
The Company has formally launched, announced and continues to pursue a comprehensive process to identify and evaluate interest in a sale of the Company, or all or substantially all of its assets, including having engaged advisors to assist in the process. While these efforts have yet to yield a sale transaction, the Company’s process remains ongoing. There is no assurance that this process will result in any transaction.
If we cannot meet our indebtedness service obligations, the holders of our indebtedness may accelerate such indebtedness, terminate their commitments to make additional loans, cease to make further loans, and, to the extent such indebtedness is secured, foreclose on our assets and we could be forced into liquidation. In such an event, we may not have sufficient assets to repay all of our indebtedness.
We may be unable to refinance our indebtedness.
We may need to refinance all or a portion of our indebtedness before maturity. We cannot assure you that we will be able to refinance any of our indebtedness on commercially reasonable terms or at all. There can be no assurance that we will be able to obtain sufficient funds to enable us to repay or refinance our debt obligations on commercially reasonable terms, or at all.
Our debt instruments restrict our current and future operations, particularly our ability to respond to changes or to take certain actions.
Our debt instruments contain a number of restrictive covenants that impose significant operating and financial restrictions on us and may limit our ability to engage in acts that may be in our long-term best interests, including restrictions on our ability to:
• incur or guarantee additional indebtedness;
• incur liens;
• pay dividends and distributions on, or redeem, repurchase or retire our capital stock;
• make investments, acquisitions, loans, or advances;
• engage in mergers, consolidations, liquidations or dissolutions;
• sell, transfer or otherwise dispose of assets, including capital stock of subsidiaries;
• engage in certain transactions with affiliates;
• change of the nature of our business;
• prepay, redeem or repurchase certain indebtedness; and
• designate restricted subsidiaries as unrestricted subsidiaries.
As a result of the restrictions described above, we will be limited as to how we conduct our business and we may be unable to raise additional debt or equity financing to compete effectively or to take advantage of new business opportunities. The terms of any future indebtedness we may incur could include more restrictive covenants. We cannot assure you that we will be able to maintain compliance with these covenants in the future and, if we fail to do so, that we will be able to obtain waivers from the lenders and/or amend the covenants.
The DIP Credit Agreement (as modified by the Final DIP Order) includes milestones, representations and warranties, covenants, and events of default applicable to the Debtors. As part of the consensual resolution with the Creditors’ Committee of matters relating to the Final DIP Order, the Final DIP Order reflects the Debtors’ and DIP Lenders’ agreement to extend certain of the milestones set forth in the DIP Credit Agreement. Specifically, the Final DIP Order sets forth the following key milestones: (i) entry by the Bankruptcy Court of an order approving the Disclosure Statement no later than 96 days following the Petition Date; (ii) a hearing to approve the Reorganization Transaction no later than 148 days after the Petition Date; and (iii) the effective date of the Reorganization Transaction no later than 162 days after the Petition Date, subject to an automatic extension of up to 45 days if the effective date has not occurred solely due to any pending healthcare-related regulatory approvals or any pending approval under the Hart-Scott-Rodino Act.. If an event of default under the DIP Credit Agreement occurs, the Administrative Agent may, among other things, permanently cancel any remaining commitments under the DIP Facility and declare the outstanding obligations under the DIP Facility to be immediately due and payable. If the holders of our indebtedness under the DIP Facility accelerate the repayment, we may not have sufficient assets to repay that indebtedness or be to borrow sufficient funds to refinance it. Even if we are to obtain new financing, it may not be on commercially reasonable terms or on terms acceptable to us. As a result of these restrictions, we may be:
• limited in how we conduct our business;
• unable to raise additional debt or equity financing to operate during general economic or business downturns which may require us to convert the Chapter 11 Cases to become liquidation proceedings under Chapter 7 of the Bankruptcy Code; or
• unable to compete effectively or to take advantage of new business opportunities.
These restrictions, along with restrictions that may be contained in agreements evidencing or governing other future indebtedness, may affect our ability to pursue our business strategy and/or achieve our goals.
Any future credit facilities or debt instruments we may issue may contain similar, or potentially more restrictive, events of default as compared to those set forth in the terms of our current debt instruments. All borrowings under the DIP Facility are secured by a first priority pledge of and security interests in substantially all of our assets, and any indebtedness we incur in the future may also be so secured.
A further decline in our operating results or available cash could cause us to experience future difficulties in complying with the covenants contained in the DIP Credit Agreement, which our lenders may be unwilling to waive or amend and could result in our liquidation.
If we were to sustain a further decline in our operating results or available cash, we could experience future difficulties in complying with the covenants contained in the DIP Credit Agreement which our lenders may be unwilling to waive or amend and could results in our converting our Chapter 11 Cases to become liquidation proceedings under Chapter 7 of the Bankruptcy Code. The DIP Credit Agreement (as modified by the Final DIP Order) includes milestones, representations and warranties, covenants, and events of default applicable to the Debtors. As part of the consensual resolution with the Creditors’ Committee of matters relating to the Final DIP Order, the Final DIP Order reflects the Debtors’ and DIP Lenders’ agreement to extend certain of the milestones set forth in the DIP Credit Agreement. Specifically, the Final DIP Order sets forth the following key milestones: (i) entry by the Bankruptcy Court of an order approving the Disclosure Statement no later than 96 days following the Petition Date; (ii) a hearing to approve the Reorganization Transaction no later than 148 days after the Petition Date; and (iii) the effective date of the Reorganization Transaction no later than 162 days after the Petition Date, subject to an automatic extension of up to 45 days if the date has not occurred solely due to any pending healthcare-related regulatory approvals or any pending approval under the Hart-Scott-Rodino Act. . If an event of under the DIP Credit Agreement occurs, the Administrative Agent may, among other things, permanently any remaining commitments under the DIP Facility and declare the outstanding obligations under the DIP Facility to be immediately due and payable.
The failure to comply with such covenants could result in an event of default under the DIP Credit Agreement that may then become immediately due and payable. In addition, should an event of default occur, the lenders under the DIP Credit Agreement could elect to terminate their commitments thereunder, cease making loans and institute foreclosure proceedings
against our assets, and we could be forced to convert our Chapter 11 Cases to become liquidation proceedings under chapter 7 of the Bankruptcy Code. If our operating performance declines further, we may in the future need to obtain waivers from the required lenders under our DIP Credit Agreement to avoid being in default, which the lenders may be unwilling to waive or amend. If we breach our covenants under the DIP Credit Agreement and seek a waiver and/or an amendment, we may not be able to obtain a waiver and/or amendment from the required lenders. If this occurs, we would be in default under the DIP Credit Agreement, the lenders could exercise their rights, as described above, and we could be forced to convert our Chapter 11 Cases to become liquidation proceedings under chapter 7 of the Bankruptcy Code.
The terms of the DIP Credit Agreement restrict our current and future operations, particularly our ability to respond to changes or to take certain actions.
The DIP Credit Agreement contains a number of restrictive covenants that impose significant operating and financial restrictions on us and may limit our ability to engage in acts that may be in our long-term best interests, including restrictions (that are subject to certain qualifications and exceptions) on our ability to:
• pay certain dividends on, repurchase, or make distributions in respect of capital stock or make other restricted payments;
• issue or sell capital stock of restricted subsidiaries;
• incur or guarantee certain indebtedness;
• make certain investments;
• sell or exchange certain assets;
• enter into transactions with affiliates;
• create certain liens; and
• consolidate, merge, or transfer all or substantially all of our assets and the assets of our subsidiaries on a consolidated basis.
As a result of these covenants, we are limited in the manner in which we conduct our business, and we may be unable to raise additional debt or equity financing to operate during general economic or business downturns, engage in favorable business activities or finance future operations or capital needs or compete effectively or take advantage of new business opportunities. These restrictions may also hinder our ability to pursue our strategy and/or achieve its goals.
The terms of any future indebtedness we may incur could include more restrictive covenants. We cannot assure you that we will be able to comply with these covenants in the future and, if we fail to do so, that we will be able to obtain waivers from the lenders and/or amend the covenants.
A breach of the covenants or restrictions under the DIP Credit Agreement, if not waived or amended, could result in an event of default under such instrument. Such a default may allow the creditors to accelerate the related debt, and foreclose on the Company’s assets securing such indebtedness, consisting of substantially all of the Company’s assets . If the holders of our indebtedness accelerate the repayment, we may not have access to sufficient funds to repay that indebtedness or be able to sell assets to raise funds to repay it, and we may not have the ability to refinance that debt on terms that are acceptable to us. Even if we are able to obtain new financing, it may not be on commercially reasonable terms or on terms acceptable to us. As a result of these restrictions, we may be:
• limited in how we conduct our business;
• unable to raise additional debt or equity financing to operate during general economic or business downturns which may require us to convert the Chapter 11 Cases to become liquidation proceedings under chapter 7 of the Bankruptcy Code; or
• unable to compete effectively or to take advantage of new business opportunities.
These restrictions, along with restrictions that may be contained in agreements evidencing or governing other future indebtedness, may affect our ability to pursue our strategy and/or achieve our goals.
Any future credit facilities or debt instruments we may issue will likely contain similar, or potentially more restrictive, events of default as compared to those set forth in the terms of the DIP Credit Agreement.
Our capital requirements, liquidity and financial condition raise significant risks as to our ability to continue as a going concern.
The Company’s current liquidity as of March 15 , 2024 w as approximately $46.0 million , consisting of cash and cash equivalents (excluding restricted cash of approximately $35.2 million). The Company currently believes that this amount of liquidity is not sufficient to cover the Company’s operating, investing and financing cash uses for the next 12 months. Management has evaluated the significance of these relevant conditions in relation to the Company’s ability to meet its obligations and has concluded that there is substantial doubt about the Company’s ability to continue as going concern within one year after the date that the financial statements are issued. For additional information, see Note 3, “Going Concern,” in the notes to the consolidated financial statements in Item 8 of Part II of this 2023 Form 10-K.
The Company is pursuing several initiatives to improve its liquidity and net cash, such as reducing operating expenses, selling assets and operations and exiting certain markets. The Company’s efforts to reduce operating expenses include reducing permanent staff, lowering its third-party medical costs through negotiations with payors, consolidating underperforming medical centers, delaying renovations and other capital projects and significantly reducing nonessential spending. Other Company efforts to improve its liquidity include a strategic review of its Medicaid business in Florida, pharmacy assets and other specialty practices. The Company has also closed its medical centers in California, New Mexico, Texas, Nevada, Illinois and Puerto Rico.
Notwithstanding these initiatives, if we are unable to continue as a going concern, we may have to liquidate our assets and may receive less than the value at which those assets are carried on our financial statements, and it is likely that investors will lose all or a part of their investment. Further, the perception that we may be unable to continue as a going concern may impede our ability to pursue strategic opportunities or operate our business due to concerns regarding our ability to discharge our contractual obligations. In addition, if there remains substantial doubt about our ability to continue as a going concern, investors or other financing sources may be unwilling to provide additional funding to us on commercially reasonable terms, or at all. Any failure or to secure additional financing, or our ability to access our existing cash, cash equivalents and investments, could us to , limit or our operations, make further reductions in our workforce, all or a portion of our assets and/or convert the existing Chapter 11 Cases to become proceedings under chapter 7 of the Code.
Despite our substantial indebtedness, we are still able to incur significant additional amounts of debt.
We may be able to incur substantial additional indebtedness in the future. The DIP Credit Agreement contains restrictions on the incurrence of additional indebtedness. However, these restrictions are subject to a number of significant qualifications and exceptions, and under certain circumstances, the amount of indebtedness that could be incurred in compliance with these restrictions could be substantial. Accordingly, we may be able to incur substantial additional indebtedness in the future.
If new debt is added to our existing debt levels, the related risks that we now face would increase. In addition, the DIP Credit Agreement will not prevent us from incurring obligations that do not constitute indebtedness under those agreements, such as certain obligations to trade creditors.
Adverse changes in our credit ratings could affect our borrowing capacity and borrowing terms.
Our outstanding indebtedness is periodically rated by nationally recognized credit rating agencies. The credit ratings are based on our operating performance, liquidity and leverage ratios, financial condition and prospects, and other factors viewed by the credit rating agencies as relevant to us and our industry and the economic outlook in general. Our credit ratings can affect the amount of capital we can access, as well as the terms of any financing we obtain. For example, in November 2022, S&P Global Ratings, based on their view of our operating performance and elevated leverage, downgraded our issuer credit rating from a “B”
to a “B-“, changed their outlook to negative, and lowered their issue-level ratings on our revolving credit facility and term loan under the Credit Suisse Credit Agreement to “B-“ from “B” and lowered their issue-level rating on our unsecured senior notes in the aggregate principal amount of $300 million (the “Senior Notes” to “CCC” from “CCC+”. Since we depend primarily on debt financing to fund our business, an adverse change in our credit ratings, including changes in outlook, or even the initiation of a review of our credit ratings, could adversely affect our borrowing capacity and the terms on which we may have the opportunity to borrow, such as higher interest rates, which in turn could have a material adverse effect on our business, financial condition, results of operations, liquidity, cash flows and/or stock price.
Risks Related to Our Business
Under most of our agreements with health plans, we assume some or all of the risk that the cost of providing services will exceed our compensation.
A significant portion of our total revenue is capitated revenue, which, in the case of health plans, is a pre-negotiated percentage of the premium that the health plan receives from CMS. We receive payments directly from CMS under our DCE model. While there are variations specific to each agreement, we generally contract with health plans to receive recurring PMPM revenue and we assume the financial responsibility for the healthcare expenses of our members. This type of contract is referred to as a “capitation” contract. To the extent that members require more care than is anticipated and/or the cost of care increases, aggregate fixed compensation amounts, or capitation payments, may be insufficient to cover the costs associated with treatment. If medical costs and expenses exceed estimates, except in very limited circumstances, we will not be able to increase the fees received under these capitation agreements during their then-current terms and we could suffer losses with respect to such agreements. While we maintain stop-loss insurance for our members, protecting us for medical claims per episode in excess of certain levels, future claims could exceed our applicable insurance coverage limits or potential increases in insurance premiums may require us to decrease our level of coverage.
Changes in our anticipated ratio of medical expense to revenue can significantly impact our financial results. Accordingly, the failure to adequately predict and control medical costs and expenses and to make reasonable estimates and maintain adequate accruals for incurred but not reported ("IBNR") claims could have a material adverse effect on our business, results of operations, financial condition, liquidity, cash flows and/or stock price. Additionally, the Medicare expenses of our members may be outside of our control if members take certain actions that increase such expenses, such as unnecessary hospital visits.
Historically, our medical costs and expenses as a percentage of revenue have fluctuated. Factors that may cause medical expenses to exceed estimates include:
• the health status of our members;
• higher levels of hospitalization among our members;
• higher than expected utilization of new or existing healthcare services or technologies;
• an increase in the cost of healthcare services and supplies, whether as a result of inflation or otherwise;
• changes to mandated benefits or other changes in healthcare laws, regulations and practices;
• increased costs attributable to specialist physicians, hospitals and ancillary providers;
• changes in the demographics of our members and medical trends;
• contractual or claims disputes with providers, hospitals or other service providers within and outside a health plan’s network;
• the occurrence of catastrophes, major epidemics or pandemics, including COVID-19 and any variants thereof, or acts of terrorism; and/or
• the reduction of health plan premiums.
Our revenues and operations are dependent upon a limited number of key existing payors and our continued relationship with those payors, and disruptions in those relationships (including renegotiation, non-renewal or termination of capitation agreements) or the inability of such payors to maintain their contracts with CMS could adversely affect our business.
Our operations are dependent on a concentrated number of payors with whom we contract to provide services to members. Contracts with three such payors accounted for approximately 70.6%, 63.7% and 59.9%, of our total revenues for the years ended December 31, 2023, 2022 and 2021, respectively. Contracts with the same three such payors accounted for approximately 75.9%, 56.3%, 43.3%, of total accounts receivable as of December 31, 2023, 2022 and 2021, respectively. The loss of revenue from these contracts could have a material adverse effect on our business, results of operations, financial condition, liquidity, cash flows and/or stock price. We believe that a majority of our revenues will continue to be derived from a limited number of key payors, who may terminate their contracts with us or our physicians credentialed by them for convenience on short-term notice, or upon the occurrence of certain events. The sudden loss of any of our payor partners or the renegotiation of any of our payor contracts could adversely affect our operating results.
In the ordinary course of business, we engage in active discussions and renegotiations with payors in respect of the services we provide and the terms of our payor agreements. As the payors’ businesses respond to market dynamics and financial pressures, and as payors make strategic business decisions in respect to the lines of business they pursue and programs in which they participate, certain of our payors may seek to renegotiate or terminate their agreements with us. These discussions could result in reductions to the fees and changes to the scope of services contemplated by our original payor contracts and consequently could negatively impact our revenues, business and prospects.
Because we rely on a limited number of payors for a significant portion of our revenues, we depend on the creditworthiness of these payors. Our payors are subject to a number of risks, including reductions in payment rates from governmental programs, higher than expected health care costs and lack of predictability of financial results when entering into new lines of business, particularly with high-risk populations. If the financial condition of our payor partners declines, our credit risk could increase. Should one or more of our significant payor partners declare bankruptcy, be declared insolvent or otherwise be restricted by state or federal laws or regulation from continuing in some or all of their operations, this could adversely affect our ongoing revenues, the collectability of our accounts receivable, our bad debt reserves and our net income. If a plan with which we contract loses its Medicare contracts with CMS, receives reduced or insufficient government reimbursement under the Medicare program, decides to discontinue its Medicare , and/or commercial plans, decides to contract with another company to provide capitated care services to its members, or decides to directly provide care, our contract with that plan could be at risk and we could revenue.
Under most of our capitation agreements with health plans, the health plan is generally permitted to modify the benefit and risk obligations and compensation rights from time to time during the terms of the agreements. If a health plan exercises its right to amend its benefit and risk obligations and compensation rights, we are generally allowed a period of time to object to such amendment. If we so object, under some of the capitation agreements, either party may terminate the applicable agreement upon a certain period of prior written notice. If we enter into capitation contracts with unfavorable economic terms, or a capitation contract is amended to include unfavorable terms, we could suffer losses with respect to such contract. Since we do not negotiate with CMS or any health plan regarding the benefits to be provided under their plans, we often have just a few months to familiarize ourselves with each new annual package of benefits we are expected to offer. Depending on the health plan at issue and the amount of revenue associated with the health plan’s capitation agreement, the renegotiated terms or could have a material effect on our business, results of operations, financial condition and cash flows.
Although we have contracts with many payors, these contracts may be terminated before their term expires for various reasons, such as changes in the regulatory landscape and poor performance by us, subject to certain conditions. Certain of our contracts are terminable immediately upon the occurrence of certain events. Certain of our contracts may be subject to termination immediately by the partner if we lose applicable licenses, lose our liability insurance or receive an exclusion, suspension or debarment from state or federal government authorities or experience certain other customary events of default. Additionally, if a payor were to lose applicable licenses, lose liability insurance, or receive an exclusion, suspension or debarment
from state or federal government authorities, or experience certain other customary events of default, our contract with such payor could in effect be terminated. If any of our contracts with our payors is terminated, we may not be able to recover all fees due under the terminated contract, which may adversely affect our operating results. If any of these contracts were terminated, certain members covered by such plans may choose to shift to another primary care provider within their health plan’s network. Moreover, our inability to maintain our agreements with health plans with respect to their members or to negotiate favorable terms for those agreements in the future could result in the loss of members and could have a material adverse effect on our profitability and business.
COVID-19 or another pandemic, epidemic, or outbreak of an infectious disease may have an adverse effect on our business, results of operations, financial condition, liquidity, cash flows and/or stock price.
In March 2020, the World Health Organization declared COVID-19 a global pandemic. In the U.S., the Biden-Harris Administration announced that it will end COVID-19 emergency declarations on May 11, 2023. The outbreak of COVID-19 caused severe disruptions in the global economy. These disruptions have adversely impacted businesses including in the markets in which we operate. While most COVID-19 restrictions have been lifted, we continue to monitor the impact of the pandemic on our business.
The extent to which the COVID-19 pandemic will continue to impact our business or the extent to which a new pandemic or outbreak will affect us in the future will depend on future developments, which remain uncertain and cannot be predicted, including, but not limited to variants and waves of any virus, the severity and spread of any virus and the actions to contain or treat its impact, including vaccination rates among the population, the effectiveness of vaccines or boosters against variants, availability and efficacy of treatments and the response by the governmental bodies and regulators. In addition, the COVID-19 virus disproportionately impacted older adults, especially those with chronic illnesses, such as many of our members.
We may experience increased internal and third-party medical costs as we provide care for members suffering from COVID-19 or another virus. This increase in costs may be particularly significant given the significant number of our members who are under capitation agreements. We may also incur liabilities related to our operations during the COVID-19 or another pandemic.
In response to the COVID-19 pandemic, we made operational changes to the staffing and operations of our medical centers to minimize potential exposure to COVID-19. If there is another pandemic, especially in regions where we have offices or medical centers, our business activities originating from affected areas could be adversely affected. Disruptive activities could include business closures in impacted areas, further restrictions on our employees’ and service providers’ ability to travel or work, impacts to productivity if our employees or their family members experience health issues, and potential delays in hiring and onboarding of new employees. We may take further actions that alter our business operations as may be required by local, state, or federal authorities or that we determine are in the best interests of our employees. Such measures could negatively affect our revenue, medical costs and marketing efforts, employee productivity or member retention, any of which could harm our financial condition and business operations.
Due to the COVID-19 or another pandemic, we may not be able to document the health conditions of our members as completely as we have in the past. Medicare pays capitation using a “risk adjustment model,” which compensates providers based on the health status (acuity) of each individual member. Payors with higher acuity members receive more, and those with lower acuity members receive less. Medicare requires that a patient’s health issues be documented semi-annually regardless of the permanence of the underlying causes. Historically, this documentation was required to be completed during an in-person visit with a patient. As part of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), Medicare is allowing documentation for conditions identified during video visits with patients. It remains unclear, given the disruption caused by COVID-19, whether we will be able to comprehensively document the health conditions of our members, which may adversely impact our revenue in future periods.
Further, the COVID-19 pandemic resulted in our employees and those of many of our vendors working from home and conducting work via the internet, and if the network and infrastructure of internet providers becomes overburdened by increased usage or is otherwise unreliable or unavailable, our employees’ and our vendors’ employees’ access to the internet to conduct
business could be negatively impacted. Limitations on access or disruptions to services or goods provided by or to some of our suppliers and vendors upon which our platform and business operations relies, could interrupt our ability to provide our platform, decrease the productivity of our workforce, and significantly harm our business operations, financial condition, and results of operations.
Our platform and the other systems or networks used in our business may experience an increase in attempted cyber-attacks, privacy breaches, targeted intrusion, ransomware, and phishing campaigns seeking to take advantage of shifts to employees working remotely using their household or personal internet networks and to leverage fears promulgated by the COVID-19 or another pandemic. The success of any of these unauthorized attempts could substantially impact our platform, the proprietary and other confidential data contained therein or otherwise stored or processed in our operations, and ultimately our business. Any actual or perceived security incident also may cause us to incur increased expenses to improve our security controls and to remediate security vulnerabilities.
To the extent the COVID-19 pandemic or another pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in this “ Risk Factors ” section.
Reductions in the quality ratings of the health plans we serve or our Medicare Risk Adjustment scores could have a material adverse effect on our business, results of operations, financial condition, liquidity, cash flows and/or stock price.
As a result of the ACA, the level of reimbursement each health plan receives from CMS is dependent, in part, upon the quality rating of the Medicare plan. Under the Medicare Advantage plans' star rating system, lower star ratings correspond to lower quality ratings. Such ratings impact the percentage of any cost savings rebate and any bonuses earned by such health plans. Since a significant portion of our revenue is expected to be calculated as a percentage of CMS reimbursements received by these health plans with respect to our members, reductions in the quality ratings of a health plan that we serve could have a material adverse effect on our business, results of operations, financial condition, liquidity, cash flows and/or stock price.
Given each health plan’s control of its local plans and the many other providers that serve such plans, we believe that we will have limited ability to influence the overall quality rating of any such plan. The Balanced Budget Act passed in February 2018 implemented certain changes to prevent artificial inflation of star ratings for Medicare Advantage plans offered by the same organization. In addition, CMS has terminated plans that have had a rating of less than 3 stars for 3 consecutive years, whereas Medicare Advantage plans with 5 stars are permitted to conduct enrollment throughout almost the entire year. Because low quality ratings can potentially lead to the termination of a plan that we serve, we may not be able to prevent the potential termination of a contracting plan or a shift of members to other plans based upon quality issues which could, in turn, have a material adverse effect on our business, results of operations, financial condition, liquidity, cash flows and/or stock price.
Our medical centers and affiliate providers are concentrated in certain geographic regions, which makes us sensitive to regulatory, economic, environmental and competitive conditions in those regions.
As o f December 31, 2023, we provided care for approximately 270,000 members in Florida, and had more than approximately 300 employed providers ( i.e., physicians, nurse practitioners, physician assistants) at our 100 owned medical centers and more than 200 affiliate providers. Such geographic concentration makes us particularly sensitive to regulatory, economic, environmental and competitive conditions in the State of Florida. Any material changes in those factors in Florida could have a disproportionate effect on our business and results of operations. Due to the concentration of our operations in Florida, our business may be adverse ly affected by economic or other conditions that disproportionately affect Florida as compared to other states. In addition, our exposure to many of the risks described herein are not mitigated by a diversification of geographic focus.
Moreover, regions in and around the southeastern U.S. commonly experience hurricanes and other extreme weather conditions. As a result, certain of our medical centers, especially those in Florida, are susceptible to physical damage and business interruption from an active hurricane season or a single severe storm. Moreover, adverse climate conditions could increase the intensity of individual hurricanes or the number of hurricanes that occur each year. We may in the future experience and have experienced considerable disruptions in our operations due to property damage or electrical outages experienced in storm-affected areas by our members, physicians, payors, vendors and others. Additionally, long-term adverse weather conditions
could cause an outward migration of people from the communities where our medical centers are located. If any of the circumstances described above occurred, there could be a harmful effect on our business and our results of operations could be adversely affected.
We primarily depend on reimbursements by third-party payors, which could lead to delays and uncertainties in the reimbursement process.
The reimbursement process is complex and can involve delays. Although we recognize revenue when we provide services to our members, and to the extent that it is probable that a significant reversal will not occur, we may from time to time experience delays in receiving the associated capitation payments or, for our members on fee-for-service arrangements, the reimbursement for the service provided. In addition, third-party payors may disallow, in whole or in part, requests for reimbursement based on determinations that the member is not eligible for coverage, certain amounts are not reimbursable under plan coverage or were for services provided that were not medically necessary or additional supporting documentation is necessary. Retroactive adjustments may change amounts realized from third-party payors. We are subject to claims reviews and/or audits by such payors, including governmental audits of our Medicare claims, and may be required to repay these payors if a finding is made that we were incorrectly reimbursed. Delays and uncertainties in the reimbursement process may adversely affect revenue and accounts receivable, increase the overall costs of collection and cause us to incur additional borrowing costs. Third-party payors are also increasingly focused on controlling healthcare costs, and such efforts, including any revisions to reimbursement policies, may further and our reimbursement .
We have encountered and will continue to encounter significant risks and uncertainties frequently experienced by companies in rapidly changing industries.
We have encountered and will continue to encounter significant risks and uncertainties frequently experienced by new and growing companies in rapidly changing industries, such as determining appropriate investments for our limited resources, competition from other providers, acquiring and retaining members, hiring, integrating, training and retaining skilled personnel, determining prices for our services, unforeseen expenses, challenges in forecasting accuracy and successfully integrating practices that we have acquired. If we are unable to successfully manage our membership, successfully manage our third-party medical costs or successfully expand into new member services, our revenue and our ability to achieve and sustain profitability would be impaired. Additional risks include our ability to effectively manage the growth of, process, store, protect and use personal data in compliance with governmental regulations, contractual obligations and other legal obligations related to privacy and security and manage our obligations as a provider of healthcare services under Medicare and Medicaid. If our assumptions regarding these and other similar risks and uncertainties, which we use to plan our business, are or change as we more experience operating our business or due to changes in our industry, or if we do not address these , our operating and financial results could differ materially from our expectations and our business could .
We will need to continue to hire, train and manage additional qualified information technology, operations and marketing staff, and improve and maintain our technology and information systems. If our new hires perform poorly, or if we are unsuccessful in hiring, training, managing and integrating these new employees, or if we are not successful in retaining our existing employees, our business may be adversely affected.
Labor shortages and constraints in the supply chain could adversely affect our results of operations.
In 2021, we experienced labor shortages and other labor-related issues, which were pronounced as a result of the COVID-19 pandemic. A number of factors may adversely affect the labor force available to us or increase labor costs, including high employment levels, federal unemployment subsidies, increased wages offered by other employers, vaccine mandates and other government regulations and our responses to such developments. As more employers offer remote work, we may have more difficulty recruiting for jobs that require on-site attendance. We have recently observed an overall tightening and increasingly competitive labor market. If we are unable to hire and retain employees capable of performing at a high-level, our business could be adversely affected. A sustained labor shortage, lack of skilled labor, or increased turnover within our employee base could have a material adverse impact on our business and operating results.
In addition, developments in the national and worldwide supply chain slowdown, and the general inflationary environment, have resulted in increased cost and reduced supply for most supplies and materials, including healthcare supplies and equipment and building materials necessary for the build-out and completion of new medical centers. It is impossible to predict how long this supply chain slowdown will last or how much it will impact our business operations, but it is likely that our costs will increase for supplies and equipment and our ability to quickly open new centers on budget will be impaired.
We have a history of net losses, we anticipate increasing expenses in the future, and we may not be able to achieve or maintain profitability.
We incurred a net loss of $1.1 billion (which includes a $442.9 million non-cash goodwill impairment), $428.4 million (which includes a $323.0 million non-cash goodwill impairment) and $116.7 million, for the years ended December 31, 2023, 2022 and 2021, respectively. Our accumulated deficit was $880.5 million, $286.0 million, and $78.8 million, as of December 31, 2023, 2022 and 2021, respectively. We may not succeed in increasing our revenue or decreasing our costs. Our cash flows from operating activities were negative for the years ended December 31, 2021, 2022 and 2023. We may not generate positive cash flow from operating activities in any given period, and our limited operating history may make it difficult for stakeholders to evaluate our current business and our future prospects. In addition, we have used a significant amount of cash on acquisitions and investing in de novo medical centers. There is no guarantee that any such acquisition or investment will be successful or generate a net profit. Please see “Risks Related to Our Growth” and Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations – Key Factors Affecting Our Performance.”
Changes in the payor mix of members and potential decreases in our reimbursement rates could adversely affect our revenues and results of operations.
The amounts we receive for services provided to members are determined by a number of factors, including the payor mix of our members and the reimbursement methodologies and rates utilized by our members’ plans. Reimbursement rates are generally higher for capitation agreements than they are under fee-for-service arrangements, and capitation agreements provide us with an opportunity to capture any additional surplus we create by investing in preventive care to keep a particular member’s third-party medical expenses low. Under a capitated payor arrangement, we receive recurring per-member-per-month revenue and we assume the financial responsibility for the healthcare expenses of our members. Under a fee-for-service payor arrangement, we collect fees directly from the payor as services are provided. A significant portion of our total revenue is capitated revenue, with the remainder being fee-for-service and other revenue. A significant decrease in the number of capitation arrangements could adversely affect our revenues and results of operations.
The healthcare industry has also experienced a trend of consolidation, resulting in fewer but larger payors that have significant bargaining power, given their market share. Payments from payors are the result of negotiated rates. These rates may decline based on renegotiations and larger payors have significant bargaining power to negotiate higher discounted fee arrangements with healthcare providers. As a result, payors increasingly are demanding discounted fee structures or the assumption by healthcare providers of all or a portion of the financial risk related to paying for care provided through capitation agreements.
Via our management services organization relationships, we have relationships with affiliated independent physicians and group practices, which we do not own or control, that provide healthcare services, and our business could be harmed if a material number of those relationships were disrupted or if our arrangements with such providers become subject to legal challenges, liabilities or reputational harm.
In addition to our owned medical centers, 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 providers. Our affiliate relationships allow us to partner with independent physicians and group practices and provides them access to components of our population health platform. As of December 31, 2023, we maintained relationships with over 200 affiliate providers. As in the case of our owned medical centers, we receive per-member-per-month 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. However, we do not own our affiliated centers and our affiliated physicians are not our employees, and we have limited control over their operations. Accordingly, we do not exercise influence or control over the
practice of medicine by our affiliated physicians, including, but not limited to, quality and cost of care. Our affiliated physicians and physician groups may not maintain standards of evidence-based medical practice and population health management that are consistent with our standards. If a material number of those relationships were disrupted or if our arrangements with such providers become subject to legal challenges, liabilities or reputational harm, it could have a material adverse impact on our business, results of operations, financial condition, liquidity, cash flows and/or stock price.
There are risks associated with estimating the amount of revenue that we recognize under our capitation agreements with health plans, and if our estimates of revenue are materially inaccurate, it could impact the timing and the amount of our revenue recognition or have a material adverse effect on our business, results of operations, financial condition and cash flows.
There are risks associated with estimating the amount of revenues that we recognize under our capitation agreements with health plans in a reporting period. 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 projected member acuity and quality metrics and are subsequently adjusted to reflect actual member acuity and quality metrics. Our ability to accurately project and recognize member acuity and quality metric adjustments are affected by many factors. For instance, our ability to accurately project member acuity and quality metrics may be more limited in the case of medical centers operating in new markets or medical centers that were recently acquired.
In addition, the billing and collection process is complex due to ongoing insurance coverage changes, geographic coverage differences, differing interpretations of contract coverage, and other payor issues, such as ensuring appropriate documentation. Determining applicable primary and secondary coverage for our members, together with the changes in member coverage that occur each month, requires complex, resource-intensive processes. Errors in determining the correct coordination of benefits may result in refunds to payors. Collections, refunds and payor retractions typically continue to occur for up to 3 years and longer after services are provided. If our estimates of revenues are materially inaccurate, it could impact the timing and the amount of our revenue recognition and have a material adverse impact on our business, results of operations, financial condition, liquidity, cash flows and/or stock price.
A failure to accurately estimate incurred but not reported medical expense could adversely affect our results of operations.
Patient care 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.
Due to the inherent uncertainties associated with the factors used in these estimates and changes in the patterns and rates of medical utilization, materially different amounts could be reported in our financial statements for a particular period under different conditions or using different, but still reasonable, assumptions. It is possible that our estimates of this type of claim may be inadequate in the future. In such event, our results of operations could be adversely impacted. Further, the inability to estimate these claims accurately may also affect our ability to take timely corrective actions, further exacerbating the extent of any adverse effect on our results of operations.
Negative publicity regarding the managed healthcare industry generally could adversely affect our results of operations or business.
Negative publicity regarding the managed healthcare industry generally, or the Medicare Advantage program in particular, may result in increased regulation and legislative review of industry practices that further increase our costs of doing business and adversely affect our results of operations or business by:
• requiring us to change or increase our services and products provided to members;
• increasing the regulatory, including compliance, burdens under which we operate, which, in turn, may negatively impact the manner in which we provide services and increase our costs of providing services;
• adversely affecting our ability to market our services or services through the imposition of further regulatory restrictions regarding the manner in which plans and providers market to Medicare Advantage or traditional Medicare enrollees; and/or
• adversely affecting our ability to attract and retain members.
We lease or license all of our medical centers and may experience risks relating to lease terminations, lease expense escalators, lease extensions and special charges.
We currently lease or license all of our medical centers. Generally, our lease or license agreements provide that the lessor may terminate the lease, subject to applicable cure provisions, for a number of reasons, including the defaults in any payment of rent, taxes or other payment obligations, the breach of any other covenant or agreement in the lease. If a lease agreement is terminated, there can be no assurance that we will be able to enter into a new lease agreement on similar or better terms or at all.
Our lease obligations often include annual fixed rent escalators or variable rent escalators based on a consumer price index. These escalators could impact our ability to satisfy certain obligations and financial covenants. If the results of our operations do not increase at or above the escalator rates, it would place an additional burden on our results of operations, liquidity, financial position, cash flows and/or stock price.
As we have leases or licenses with different start dates, it is likely that some number of our leases and licenses will expire each year. Our lease or license agreements often provide for renewal or extension options. There can be no assurance that these rights will be exercised in the future or that we will be able to satisfy the conditions precedent to exercising any such renewal or extension. If we are not able to renew or extend our leases or licenses at or prior to the end of the existing lease terms, or if the terms of such options are unfavorable or unacceptable to us, our business, financial condition, results of operations, liquidity, cash flows and/or stock price could be adversely affected.
Leasing medical centers pursuant to binding lease or license agreements may limit our ability to exit markets. For instance, if one facility under a lease or license becomes unprofitable, we may be required to continue operating such facility or, if allowed by the landlord to close such facility, we may remain obligated for the lease payments on such facility. We could incur special charges relating to the closing of such facility, including lease termination costs, impairment charges and other special charges that would reduce our profits and could have a material adverse effect on our business, financial condition, results of operations, liquidity, cash flows and/or stock price.
Our failure to pay the rent or otherwise comply with the provisions of any of our lease agreements could result in additional liabilities under such lease agreements. Upon an event of default, remedies available to our landlords generally include, without limitation, terminating such lease agreement, repossessing and reletting the leased properties and requiring us to remain liable for all obligations under such lease agreement, including the difference between the rent under such lease agreement and the rent payable as a result of reletting the leased properties, or requiring us to pay the net present value of the rent due for the balance of the term of such lease agreement. The exercise of such remedies would have a material adverse effect on our business, financial position, results of operations, liquidity, cash flows and/or stock price.
If certain of our suppliers do not meet our needs, if there are material price increases on supplies, if we are not reimbursed or adequately reimbursed for drugs we purchase or if we are unable to effectively access new technology or superior products, it could negatively impact our ability to effectively provide the services we offer and could have a material adverse effect on our business, results of operations, financial condition, liquidity, cash flows and/or stock price.
We have significant suppliers that may be the sole or primary source of products critical to the services we provide, including our primary providers of pharmaceutical drugs and pharmacy supplies. If any of these suppliers do not meet our needs,
including in the event of a product recall, shortage or dispute, and we are not able to find adequate alternative sources, if we experience material price increases from these suppliers (for instance, increases in the wholesale price of generic drugs) that we are unable to mitigate, or if some of the drugs that we purchase are not reimbursed or not adequately reimbursed by commercial or government payors, it could have a material adverse impact on our business, results of operations, financial condition, liquidity, cash flows and/or stock price. In addition, the technology related to the products critical to the services we provide is subject to new developments which may result in superior products. If we are not able to access superior products on a cost-effective basis or if suppliers are not able to fulfill our requirements for such products, we could face member and other consequences which could have a material effect on our business, results of operations, financial condition, liquidity, cash flows and/or stock price.
Our pharmacy business is subject to governmental regulations, procedures and requirements; our noncompliance or a significant regulatory change could adversely affect our business, results of operations, financial condition, liquidity and/or stock price.
Our pharmacy business is subject to numerous federal, state and local laws and regulations. Changes in these regulations may require extensive system and operating changes that may be difficult to implement. Untimely compliance or noncompliance with applicable regulations could result in the imposition of civil and criminal penalties that could adversely affect the continued operation of our pharmacy business, including: (i) suspension of payments from government programs; (ii) loss of required government certifications; (iii) loss of authorizations or changes in requirements for participating in, or exclusion from government reimbursement programs, such as the Medicare and Medicaid programs; (iv) loss of licenses; or (v) significant fines or monetary penalties. The regulations to which we are subject include, but are not limited to, federal, state and local registration and regulation of pharmacies; dispensing and sale of controlled substances and products containing pseudoephedrine; applicable Medicare and Medicaid regulations; regulations implementing HIPPA; regulations relating to the protection of the environment and health and safety matters, including those governing exposure to and the management and disposal of substances; regulations enforced by the U. S. Federal Trade Commission, HHS and the Drug Enforcement Administration as well as state regulatory authorities, governing the sale, advertisement and promotion of the services we offer and we sell; state and federal anti- laws; laws and federal and state laws governing pharmacy operations. We are also governed by federal and state laws of general applicability, including laws regulating wages and hours, working conditions, health and safety and equal employment . If we are to provide pharmacy services, we may not be to the expected benefits of our value-based care model where members have access to both primary care and ancillary programs such as pharmacy services at our medical centers, which may have a effect on our business, results of operations, financial condition, liquidity, cash flows and/or stock price.
The continued conversion of various prescription drugs, including potential conversions of a number of popular medications, to over-the-counter medications may reduce our pharmacy sales and customers may seek to purchase such medications through other channels. Also, if the rate at which new prescription drugs become available slows or if new prescription drugs that are introduced into the market fail to achieve popularity, our pharmacy sales may be adversely affected. The withdrawal of certain drugs from the market or concerns about the safety or effectiveness of certain drugs or negative publicity surrounding certain categories of drugs may also have a negative effect on our pharmacy sales or may cause shifts in our pharmacy product mix.
Certain risks are inherent in providing pharmacy services, which may adversely impact our business, results of operations, financial condition, liquidity, cash flows and/or stock price; our insurance may not be adequate to cover any claims against us.
Pharmacies are exposed to risks inherent in the packaging and distribution of pharmaceuticals and other healthcare products, such as with respect to improper filling of prescriptions, labeling of prescriptions, adequacy of warnings, unintentional distribution of counterfeit drugs and expiration of drugs. In addition, federal and state laws that require our pharmacists to offer counseling, without additional charge, to customers about medication, dosage, delivery systems, common side effects and other information the pharmacists deem significant can impact our pharmacy business. Our pharmacists may also have a duty to warn customers regarding any potential negative effects of a prescription drug if the warning could reduce or negate these effects. Although we maintain professional liability and errors and omissions liability insurance, from time to time, claims may result in the payment of significant amounts, some portions of which are not funded by insurance. We cannot stakeholders that the coverage limits under our insurance programs will be adequate to protect us future , or that we will be to maintain this insurance on acceptable terms in the future. Our results of operations, financial condition, liquidity, cash flows and/
or stock price may be adversely affected if in the future our insurance coverage proves to be inadequate or unavailable or there is an increase in liability for which we self-insure or we suffer reputational harm as a result of an error or omission.
We are subject to a right of first refusal in favor of Humana, Inc. and certain of its affiliates, which could impede our growth and adversely impact the potential value of the Company.
We are subject to an Amended and Restated Right of First Refusal Agreement (the “ROFR Agreement”), entered into by and among Humana and certain of its affiliates and PCIH, the Seller and the Company upon completion of the business combination on June 3, 2021 (the "Business Combination") pursuant to the terms of the Business Combination Agreement, dated as of November 11, 2020 (as amended) by and among Jaws Acquisition, Corp., Jaws Merger Sub, LLC, PCIH and the seller. Under the ROFR Agreement, Humana has been granted a right of first refusal on any sale, lease, license or other disposition, in one transaction or a series of related transactions, of assets, businesses, divisions or subsidiaries that constitute 20% or more of the net revenues, net income or assets of, or any equity transaction (including by way of merger, consolidation, recapitalization, exchange offer, spin-off, split-off, reorganization or sale of securities) that results in a change of control of PCIH, the Seller, or the Company or its subsidiary, HP MSO, LLC. If exercised, Humana would have the right to acquire the assets or equity interests by matching the terms of the proposed sale transaction.
The ability of Humana to elect to exercise its right of first refusal may limit or impede the Company’s ability to conduct its business on the terms and in the manner it considers most favorable, which may adversely affect its future growth opportunities. The existence of the right of first refusal may also deter potential acquirors from seeking to acquire the Company. If potential acquirors are deterred from considering an acquisition of the Company, the Company may receive less than fair market value acquisition offers or may not receive acquisition offers at all, which might have a substantial negative effect on the value of your investment in the Company and may impact the long-term value, growth and potential of the Company.
Our overall business results may suffer from an economic downturn and budget deficits.
During economic downturns, governmental entities often experience budget deficits as a result of increased costs and lower than expected tax collections. These budget deficits may force federal, state and local government entities to decrease spending for health and human service programs, including Medicare, Medicaid and similar programs, which represent significant payor sources for our medical centers together with payors with whom we contract to provide health plans to our members which could harm our business, results of operations, financial condition, liquidity, cash flows and/or stock price.
We may not realize the cost reductions and other benefits that we expect from our various restructuring programs that may be in effect from time to time, which could have a material adverse effect on our business, prospects, results of operations, financial condition, liquidity, cash flows and/or stock price.
From time to time, we implement restructuring programs, such as our December 2022 reduction in force, the restructuring program that we announced in August 2023, and the Transformation Plan announced in December 2023, that are generally designed to streamline our operations, reporting structures and business processes, with the objective of maximizing productivity and improving profitability, cash flows and liquidity. Events and circumstances may occur that are beyond our control, such as delays caused by third parties and unexpected costs, that could result in our not realizing all of the anticipated cost reductions and benefits or our not realizing the cost reductions or other benefits on our expected timetable. In addition, changes in labor and other costs and/or in tax, labor or other laws may result in our not achieving the anticipated cost reductions and benefits. If we are unable to realize the restructuring programs’ cost reduction objectives and other benefits, our ability to fund other initiatives and our may be affected. In addition, some of the actions that we are, or may be, taking in furtherance of our programs may become a for our management team and employees and may our ongoing business operations; cause in employee morale, which may make it more for us to retain or attract qualified employees; result in ; or our internal control structures; and/or give rise to publicity which could affect our business reputation. If we are to implement any of our programs, in whole or in part, in accordance with our expectations, it could affect our business, prospects, results of operations, financial condition, liquidity, cash flows and/or stock price.
Risks Related to Our Strategy
If we fail to manage our strategy effectively, we may be unable to execute our objectives, maintain high levels of service and member satisfaction or adequately address competitive challenges.
We have experienced, and may continue to experience, organizational transformation and change, which has placed, and may continue to place, significant demands on our management and our operational and financial resources. Additionally, our organizational structure may become more complex as we seek to improve our operational, financial and management controls, as well as our reporting systems and procedures. We may require significant capital expenditures and the allocation of valuable management resources to improve in these areas. We must effectively manage our headcount and continue to effectively train and manage our employees. If we fail to effectively manage our strategy, the quality of our services may suffer, which could negatively affect our brand and reputation and harm our ability to attract and retain members and employees.
In addition, as we optimize and transform our business, it is important that we continue to maintain a high level of member service and satisfaction. As our member base continues to change, we will need to improve and transform our medical, member services and other personnel and our network of partners to provide personalized member service. If we are not able to continue to provide high quality medical care with high levels of member satisfaction, our reputation as well as our business, results of operations and financial condition, liquidity, cash flows and/or stock price could be adversely affected.
We have encountered and will continue to encounter risks and difficulties frequently experienced by transforming companies in rapidly changing industries, including increasing expenses as we continue to optimize our business. The investments necessary to accomplish this transformation may be more costly than we expect, and if we do not achieve the benefits anticipated from these investments, or if the realization of these benefits is delayed, we may not achieve the objectives of our strategy, which could adversely affect our financial condition, results of operations, liquidity, cash flows and/or stock price. If we are not able to achieve positive cash flow, we may require additional financing, which may not be available on favorable terms or at all and/or which could be dilutive to our stockholders. If we are unable to successfully address these risks and as we encounter them, our business, results of operations, financial condition, liquidity, cash flows and/or stock price would be affected. Our to or maintain could impact the value of our securities.
We may not be able to successfully enter into contracts with local payors on terms favorable to us.
Our business strategy depends upon a number of factors, including, among other things, enrolling new members, entering into contracts with additional payors, establishing new relationships with physicians and other healthcare providers, and recruiting and retaining qualified personnel.
Our business strategy involves a number of risks and uncertainties, including that:
• we may not be able to successfully enter into contracts with local payors on terms favorable to us or at all, including as a result of competition for payor relationships with other potential players, some of whom may have greater resources than we do, which competition may intensify due to the ongoing consolidation in the healthcare industry;
• we may not be able to manage our membership to execute our business strategy—for example, we may incur substantial costs to enroll new members and we may be unable to enroll a sufficient number of new members to offset those costs and/or the loss of existing members; and
• we may not be able to hire sufficient numbers of physicians and other staff and may fail to integrate our employees, particularly our medical personnel, into our care model.
We cannot guarantee that we will be successful in pursuing our business strategy. If we fail to evaluate and execute our business strategy in light of changing market dynamics, we may not achieve its goals and we may incur increased costs, which may negatively impact our revenues, results of operations, financial condition, liquidity, cash flows and/or stock price.
We must attract and retain highly qualified personnel in order to execute our business strategy.
Competition for highly qualified personnel is intense, especially for physicians and other medical professionals who are experienced in providing care services to older adults. We have, from time to time, experienced, and we expect to continue to experience, difficulty in hiring and retaining employees with appropriate qualifications. Many of the companies and healthcare providers with which we compete for experienced personnel have greater resources than we have. If we hire employees from competitors or other companies or healthcare providers, their former employers may attempt to assert that these employees or we have breached certain legal obligations, resulting in a diversion of our time and resources. If we fail to attract new personnel or fail to retain and motivate our current personnel, our business and future growth prospects could be harmed. Many of our senior employees are subject to non-competition and non-solicitation agreements with us. However, the use of non-competition agreements has recently come under scrutiny by the FTC and the enforceability of non-competition agreements may differ from state to state and by circumstance and if any of our non-competition agreements was found to be unenforceable, our business and prospects could be .
If we are unable to attract new members, our revenue will be adversely affected.
To achieve our revenue targets, our business strategy includes our continuing to enroll and retain new members. We are focused on the Medicare-eligible population and face competition from other primary healthcare providers in the enrollment of Medicare-eligible potential members. If potential or existing members prefer the care provider model of one of our competitors, we may not be able to fully achieve our business strategy, which depends on our ability to attract and enroll new members, as well as retain existing members. In addition, our business strategy is dependent in part on patients electing to move from fee-for-service to capitated arrangements and selecting us as their primary care provider under their plan. Our inability to enroll new members and retain existing members, particularly those under capitation arrangements, would harm our ability to execute our business strategy and may have a material adverse effect on our business, results of operations, financial condition, liquidity, cash flows and/or stock price.
We have limited experience serving as a DCE or ACO REACH with CMS and may not be able to realize the expected benefits thereof.
The CMS Center for Medicare and Medicaid Innovation unveiled a direct contracting model which began in 2021 to create value-based payment arrangements directly with DCEs, which is part of CMS’ strategy to drive broader healthcare reform and accelerate the shift from original Medicare toward value-based care models. A key aspect of direct contracting is providing new opportunities for a variety of different DCEs to participate in value-based care arrangements in Medicare fee-for-service. Our wholly owned subsidiary, American Choice Healthcare, was one of 41 unique companies chosen by CMS as a DCE to participate in the Implementation Period of the Direct Contracting Model for Global and Professional Options, which ran from October 1, 2020 through March 31, 2021, and is now participating in the Global and Direct Contracting Performance Period, which runs from April 1, 2021 until December 31, 2026. However, we have no previous experience serving as a DCE (or ACO REACH) and may not be able to realize the expected benefits of such program. We can provide no assurances that direct contracting will allow us to achieve risk-like patient economics on original Medicare patients. For instance, we may not be able to calibrate our historical medical expense estimates to this new beneficiary population, who have not chosen to participate in value-based care and thus may utilize third-party medical services differently than our current members. Beneficiaries that we are assigned under the direct contracting model may not be to us initially or at all. In addition, our management team has and may further invest considerable time and resources in adapting to the direct contracting model, but we may not be to realize its expected benefits. Adding additional members through direct contracting will require absorbing additional members into our existing medical centers, which may resources or affect our quality of care. We can provide no assurances that the direct contracting model will continue for additional performance years beyond the initial 5-year period (or within the initial period), including as a result of decreased political support for value-based care or the direct contracting model, or that it will expand our total addressable market in the manner that we expect. Our existing DCE contracts are subject to annual review by CMS.
We operate ACO's whose governance and financial model is subject to change by CMS.
The CMS Center for Medicare and Medicaid Innovation has continually made improvements to ACO models. We operate ACOs across multiple markets. ACOs have been a part of CMS’ strategy to drive broader healthcare reform and accelerate the shift from original Medicare toward value-based care models. Further, CMS has stated that it would like all Medicare lives in a value-based care arrangement by 2030. However, there could be material changes to the ACO programs which affect our clinical or financial performance. For example, effective January 1, 2023, CMS has transitioned DCE lives into the ACO REACH program which has a number of changes, including to risk score calculation, quality withholds, and other items. If we are unable to adapt our business processes to operate profitably under these changing regimes, it could have an adverse impact on our business, results of operations, financial condition, liquidity, cash flows and/or stock price.
Risks Related to Government Regulation
We conduct business in a heavily regulated industry, and if we fail to comply with applicable state and federal healthcare laws and government regulations or lose governmental licenses, we could incur financial penalties, become excluded from participating in government healthcare programs, be required to make significant operational changes or experience adverse publicity, which could harm our business.
Our operations are subject to extensive federal, state and local government laws, rules and regulations, such as:
• Medicare and Medicaid reimbursement rules and regulations;
• the federal Anti-Kickback Statute, which, subject to certain exceptions known as “safe harbors,” prohibits the knowing and willful offer, payment, solicitation or receipt of any bribe, kickback, rebate or other remuneration for referring an individual, in return for ordering, leasing, purchasing or recommending or arranging for or to induce the referral of an individual or the ordering, purchasing or leasing of items or services covered, in whole or in part, by any federal healthcare program, such as Medicare and Medicaid. A person or entity can be found guilty of violating the statute without actual knowledge of the statute or specific intent to violate it. In addition, a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of FCA;
• the federal physician self-referral law, commonly referred to as the Stark Law, and analogous state self-referral prohibition statutes, which, subject to limited exceptions, prohibit physicians from referring Medicare or Medicaid patients to an entity for the provision of certain “designated health services” if the physician or a member of such physician’s immediate family has a direct or indirect financial relationship (including an ownership interest or a compensation arrangement) with an entity, and prohibit the entity from billing Medicare or Medicaid for such “designated health services.” The Stark Law excludes certain ownership interests in an entity from the definition of a financial relationship, including ownership of investment securities that could be purchased on the open market when the designated health services referral was made and when the entity had stockholder equity exceeding $75 million at the end of the corporation’s most recent fiscal year or on average during the previous three fiscal years. “Stockholder equity” is the difference in value between a corporation’s total assets and total liabilities;
• federal civil and criminal false claims laws, including the FCA, which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, false or fraudulent claims for payment to, or approval by Medicare, Medicaid, or other federal healthcare programs, knowingly making, using or causing to be made or used a false record or statement material to a false or fraudulent claim or an obligation to pay or transmit money to the federal government, or knowingly concealing or knowingly and improperly avoiding or decreasing an obligation to pay money to the federal government. The FCA also permits a private individual acting as a “whistleblower” to bring actions on behalf of the federal government of the FCA and to share in any monetary recovery;
• the CMP Statute and associated regulations, which authorizes the Secretary of the HHS to impose civil money penalties, an assessment, and program exclusion for various forms of fraud and abuse involving the Medicare and Medicaid programs;
• the criminal healthcare fraud provisions of HIPAA, and related rules that prohibit knowingly and willfully executing, or attempting to execute, a scheme or artifice to defraud any healthcare benefit program or obtain, by means of false or fraudulent pretenses, representations, or promises, any of the money or property owned by, or under the custody or control of, any healthcare benefit program, regardless of the payor (e.g., public or private), and knowingly and willfully falsifying, concealing or covering up by any trick or device a material fact or making any material false, fictitious or fraudulent statement in connection with the delivery of or payment for health care benefits, items or services. Similar to the federal Anti- Statute, a person or entity can be found of HIPAA without actual knowledge of the statute or specific intent to it;
• federal and state laws regarding telemedicine services, including necessary technological standards to deliver such services, coverage restrictions associated with such services, the amount of reimbursement for such services, and the licensure of individuals providing such services;
• federal and state laws and policies related to the prescribing and dispensing of pharmaceuticals and controlled substances;
• federal and state laws related to the advertising and marketing of services by healthcare providers;
• state laws regulating the operations and financial condition of risk bearing providers, which may include capital requirements, licensing or certification, governance controls and other similar matters;
• state and federal statutes and regulations that govern workplace health and safety;
• federal and state laws and policies that require healthcare providers to maintain licensure, certification or accreditation to enroll and participate in the Medicare and Medicaid programs, to report certain changes in their operations to the agencies that administer these programs and, in some cases, to re-enroll in these programs when changes in direct or indirect ownership occur;
• state laws pertaining to kickbacks, fee splitting, self-referral and false claims, some of which are not consistent with comparable federal laws and regulations, including, for example, not being limited in scope to relationships involving government health care programs;
• state insurance laws governing what healthcare entities may bear financial risk and the allowable types of financial risks, including direct primary care programs, provider-sponsored organizations, ACOs, Independent Physician Associations, and provider capitation;
• federal and state laws pertaining to the provision of services by nurse practitioners and physician assistants in certain settings, physician supervision of those services, and reimbursement requirements that depend on the types of services provided and documented and relationships between physician supervisors and nurse practitioners and physician assistants; and
• federal and state laws pertaining to the privacy and security of PHI, PII and other patient information.
In addition to the above laws, Medicare and Medicaid regulations, manual provisions, local coverage determinations, national coverage determinations and agency guidance also impose complex and extensive requirements upon healthcare providers. Moreover, the various laws, rules and regulations that apply to our operations are often subject to varying interpretations and additional laws, rules and regulations potentially affecting providers continue to be promulgated that may impact us. A violation or departure from any of the legal requirements implicated by our business may result in, among other things, government audits, lower reimbursements, significant fines and penalties and costs and expenses related to contesting such matters, the potential loss of certification, recoupment efforts or voluntary repayments. These legal requirements are civil, criminal and administrative in nature depending on the law or requirement.
We endeavor to comply with all legal requirements. We further endeavor to structure all of our relationships with physicians and providers to comply with state and federal anti-kickback physician and Stark laws and other applicable healthcare
laws. On December 2, 2020, the HHS OIG, and CMS issued final rules expanding and modifying existing and adding new regulatory Anti-Kickback Statute “safe harbors” and Stark Law exceptions, respectively. The rules are part of the Regulatory Sprint that HHS launched in 2018 in an effort to encourage innovative arrangements designed to improve the quality of care, health outcomes, and efficiency in the U.S. health care system. These final rules center on the concept of “value-based enterprises” (“VBEs”), and “value-based arrangements” between participants in VBEs. Both the Anti-Kickback Statute safe harbors and the Stark Law exceptions are broken down by the amount of financial risk assumed under the value-based arrangement, and the more risk assumed, the more flexibility offered under the safe harbors and exceptions. We continue to evaluate what effect, if any, these rules have on our business. We utilize considerable resources to monitor laws, rules and regulations and implement necessary changes. However, the laws, rules and regulations in these areas are complex, changing and often subject to varying interpretations. As a result, there is no guarantee that we will be able to adhere to all of the laws and regulations that apply to our business, and any to do so could have a material impact on our business, results of operations, financial condition, liquidity, cash flows, stock price and/or reputation. Similarly, we may face under the FCA, the federal CMP statute or otherwise related to to report and return within 60 days of when the is identified and quantified. These obligations to report and return could subject our procedures for identifying and processing to or . We have made investments in resources to decrease the time it takes to identify, quantify and process , and may be required to make additional investments in the future.
Additionally, the federal government has used the FCA to prosecute a wide variety of alleged false claims and fraud allegedly perpetrated against Medicare, Medicaid and other federally funded health care programs. Moreover, amendments to the federal Anti-Kickback Statute in the ACA make claims tainted by anti-kickback violations potentially subject to liability under the FCA, including qui tam or whistleblower suits. The penalties for a violation of the FCA range from $5,500 to $11,000 (adjusted for inflation) for each false claim plus 3 times the amount of damages caused by each such claim which generally means the amount received as reimbursement directly or indirectly from the government. On January 30, 2023, the U.S. Department of Justice (the "DOJ") issued a final rule announcing adjustments to FCA , under which the per claim range increases to a range from $13,508 to $27,018 per claim or statement (as of January 30, 2023, and subject to annual adjustments for inflation). Given the high volume of processed by our various operating units, the potential is high for substantial in connection with any FCA . increases in these could have a material impact on our business, results of operations, financial condition, liquidity, cash flows, stock price and/or reputation.
In addition to the provisions of the FCA, which provide for civil enforcement, the federal government can use several criminal statutes to prosecute persons who are alleged to have submitted false or fraudulent claims for payment to the federal government.
In addition, with the various government shutdowns, stay at home orders, and restrictions on elective health care services brought about by the COVID-19 pandemic, our owned and affiliated practices have increasingly relied upon the availability of, and reimbursement for, telemedicine and other emerging technologies (such as digital health services) to generate revenue. Federal and state laws regarding such services, necessary technological standards to deliver such services, coverage restrictions associated with such services, and the amount of reimbursement for such services are subject to changing political, regulatory and other influences. Failure to comply with these laws could result in denials of reimbursement for our affiliated providers’ services (to the extent such services are billed), recoupments of prior payments, professional discipline for our affiliated providers or civil or criminal penalties against our business.
If any of our operations are found to violate these or other government laws or regulations, we could suffer severe consequences that would have a material adverse effect on our business, results of operations, financial condition, cash flows, reputation and/or stock price, including:
• suspension or termination of our participation in government payment programs;
• refunds of amounts received in violation of law or applicable payment program requirements dating back to the applicable statute of limitation periods;
• loss of our required government certifications or exclusion from government payment programs;
• loss of our licenses required to operate healthcare medical centers or administer pharmaceuticals in the states in which we operate;
• criminal or civil liability, fines, damages and the costs and expenses associated with contesting such items, as well as exclusion from participation in federal and state health care programs and/or monetary penalties for violations of healthcare fraud and abuse laws, including the federal Anti-Kickback Statute, CMP Statute, Stark Law and FCA, state laws and regulations, or other failures to meet regulatory requirements;
• enforcement actions by governmental agencies and/or state law claims for monetary damages by patients who believe their PHI has been used, disclosed or not properly safeguarded in violation of federal or state patient privacy laws, including HIPAA and the Privacy Act of 1974;
• mandated changes to our practices or procedures that significantly increase operating expenses;
• imposition of and compliance with corporate integrity agreements that could subject us to ongoing audits and reporting requirements as well as increased scrutiny of our billing and business practices which could lead to potential fines and costs and expenses associated with contesting such matters, among other things;
• termination of various relationships and/or contracts related to our business, including payor agreements, joint venture arrangements, medical director agreements, real estate leases and consulting agreements with physicians;
• changes in and reinterpretation of rules and laws by a regulatory agency or court, such as state corporate practice of medicine laws, that could affect the structure and management of our business and its affiliated physician practice corporations;
• negative adjustments to government payment models including, but not limited to, Medicare Parts A, B, C and D and Medicaid; and
• harm to our reputation which could negatively impact our business relationships, affect our ability to attract and retain members, physicians and other employees, affect our ability to obtain financing and decrease access to new business opportunities, among other things.
We are, and may in the future be, a party to various lawsuits, demands, claims, qui tam suits, governmental investigations and audits (including investigations or other actions resulting from our obligation to self-report suspected violations of law) and other legal matters, any of which could result in, among other things, substantial financial penalties or awards against us, mandated refunds, substantial payments made by us, required changes to our business practices, exclusion from future participation in Medicare, Medicaid and other healthcare programs and possible criminal penalties, any of which could have a material adverse effect on our business, results of operations, financial condition, cash flows and materially harm our reputation. Please see the description of such legal proceedings set forth in the “Legal Matters” section in Note 19, "Commitments and Contingencies," in the notes to the consolidated financial statements in Item 8 of Part II of this 2023 Form 10-K.
We may in the future be subject to investigations and audits by state or federal governmental agencies and/or private civil qui tam complaints filed by relators and other lawsuits, demands, claims and legal proceedings, including investigations or other actions resulting from our obligation to self-report suspected violations of law.
Responding to subpoenas, investigations and other lawsuits, claims and legal proceedings, as well as defending ourselves in such matters will continue to require management’s attention and cause us to incur significant legal expense. Negative findings or terms and conditions that we might agree to accept as part of a negotiated resolution of pending or future legal or regulatory matters could result in, among other things, substantial financial penalties or awards against us, substantial payments made by us, such as costs and expenses to contest such matters, harm to our reputation, required changes to our business practices, exclusion from future participation in the Medicare, Medicaid and other healthcare programs and, in certain cases, criminal penalties, any
of which could have a material adverse effect on us. It is possible that criminal proceedings may be initiated against us and/or individuals in our business in connection with investigations by the federal government.
We, our employees, the medical centers in which we operate and our affiliated physicians are subject to various federal, state and local licensing and certification laws and regulations and accreditation standards and other laws, relating to, among other things, the adequacy of medical care, equipment, privacy of patient information, physician relationships, personnel and operating policies and procedures. Failure to comply with these licensing, certification and accreditation laws, regulations and standards could result in our services being found non-reimbursable or prior payments being subject to recoupment, requirements to make significant changes to our operations and can give rise to civil or, in extreme cases, criminal penalties. We routinely take the steps we believe are necessary to retain or obtain all requisite licensure and operating authorities. While we have made reasonable efforts to substantially comply with federal, state and local licensing and certification laws and regulations and standards as we interpret them, agencies that administer these programs could find that we have failed to comply in some material respects, which could have a material adverse impact on our business, results of operations, financial condition, liquidity, cash flows, stock price and/or reputation.
Reductions in Medicare reimbursement rates or changes in the rules governing the Medicare program could have a material adverse effect on our financial condition, results of operations, liquidity, cash flows and/or stock price.
We receive the majority of our revenue from Medicare, either directly or through Medicare Advantage plans, and revenue from Medicare accounts for a significant portion of our capitated revenue . In addition, many private payors base their reimbursement rates on the published Medicare rates or are themselves reimbursed by Medicare for the services we provide. As a result, our results of operations are, in part, dependent on government funding levels for Medicare programs, particularly Medicare Advantage programs. Any changes that limit or reduce Medicare Advantage or general Medicare reimbursement levels, such as reductions in or limitations of reimbursement amounts or rates under programs, reductions in funding of programs, expansion of benefits without adequate funding, elimination of coverage for certain benefits, or elimination of coverage for certain individuals or treatments under programs, could have a material adverse effect on our business, results of operations, financial condition, liquidity, cash flows and/or stock price.
The Medicare program and its reimbursement rates and rules are subject to frequent change. These include statutory and regulatory changes, rate adjustments (including retroactive adjustments), administrative or executive orders and government funding restrictions, all of which may materially adversely affect the rates at which Medicare reimburses us for our services. Budget pressures often lead the federal government to reduce or place limits on reimbursement rates under Medicare. Implementation of these and other types of measures has in the past and could in the future result in substantial reductions in our revenue and operating margins. For example, due to the federal sequestration, an automatic 2% reduction in Medicare spending took effect beginning in April 2013. The CARES Act, designed to provide financial support and resources to individuals and businesses affected by the COVID-19 pandemic, and subsequent legislation temporarily suspended these reductions until December 31, 2021, and extended the sequester by one year. Additional legislation extended the temporary suspension through March 31, 2022. Following the temporary suspension, a 1% payment reduction began April 1, 2022, lasting through June 30, 2022, and the 2% payment reduction resumed on July 1, 2022.
Each year, CMS issues a final rule to establish the Medicare Advantage benchmark payment rates for the following calendar year. Any reduction to Medicare Advantage rates may have a material adverse effect on our business, results of operations, financial condition, liquidity, cash flows and/or stock price. In addition, our Medicare Advantage revenues may continue to be volatile in the future, which could have a material adverse impact on our business, results of operations, financial condition, liquidity cash flows and/or stock price.
In addition, CMS often changes the rules governing the Medicare program, including those governing reimbursement. Changes that could adversely affect our business include:
• administrative or legislative changes to base rates or the bases of payment;
• limits on the services or types of providers for which Medicare will provide reimbursement;
• changes in methodology for member assessment and/or determination of payment levels;
• the reduction or elimination of annual rate increases; or
• an increase in co-payments or deductibles payable by beneficiaries.
Recent legislative, judicial and executive efforts to enact further healthcare reform legislation have caused the future state of the exchanges, other reforms under the ACA, and many core aspects of the current U.S. health care system to be unclear. Since 2016, various administrative and legislative initiatives have been implemented that have had adverse impacts on the ACA and its programs. For example, in October 2017, the federal government announced that cost-sharing reduction payments to insurers would end, effective immediately, unless Congress appropriated the funds, and, in December 2017, Congress passed the Tax Cuts and Jobs Act, which includes a provision that eliminates the penalty under the ACA’s individual mandate for individuals who fail to obtain a qualifying health insurance plan and could impact the future state of the exchanges. In an appeal from a lower court decision holding that the individual mandate is unconstitutional, the Supreme Court issued a decision in June 2021, ruling that the plaintiffs lacked standing to challenge the individual mandate provision, thus leaving the ACA in effect. Litigation and legislation over the ACA are likely to continue, with and uncertain results.
While specific changes and their timing are not yet apparent, enacted reforms and future legislative, regulatory, judicial, or executive changes, particularly any changes to the Medicare Advantage program, could have a material adverse effect on our business, results of operations, financial condition, liquidity, cash flows and/or stock price.
Among the important statutory changes that are being implemented by CMS include provisions of the IMPACT Act. This law imposes a stringent timeline for implementing benchmark quality measures and data metrics across post-acute care providers. The enactment also mandates specific actions to design a unified payment methodology for post-acute providers. CMS is in the process of promulgating regulations to implement provisions of this enactment. Depending on the final details, the costs of implementation could be significant and could have an adverse impact on our business, results of operations, financial condition, liquidity, cash flows and/or stock price. The failure to meet implementation requirements could expose providers to fines and payment reductions.
There is also uncertainty regarding traditional Medicare and Medicare Advantage in both payment rates and beneficiary enrollment, whi ch, if reduced, would reduce our overall revenues and net income. Although Medicare Advantage enrollment increased by approximately 15 million, or by 136%, between the enactment of the ACA in 2010 and 2021, there can be no assurance that this trend will continue. Further, fluctuation in Medicare Advantage payment rates is evidenced by CMS’s annual announcement of the expected average change in revenue from the prior year: for 2021, CMS announced an average increase of 1.66%; and for 2022, 4.08%. Uncertainty over traditional Medicare and Medicare Advantage enrollment and payment rates present a continuing risk to our business.
In March 2023, CMS issued its final notice detailing final 2024 Medicare Advantage payment rates. Final 2024 Medicare Advantage rates resulted in an expected average increase in revenue for the Medicare Advantage industry of 3.32%, and the year-to-year percentage change included a 1.24% decrease for star ratings, a risk model revision and normalization of (2.16%), and a risk score trend of 4.44%. In March 2023, CMS also finalized the 2024 Medicare Advantage reimbursement rates, which result in an expected average decrease in revenue for the Medicare Advantage industry of 1.12%, excluding the CMS estimate of Medicare Advantage risk score trend, though the rates may vary widely depending on the provider group and patient demographics. On January 31, 2024, CMS issued an advance notice detailing proposed 2025 Medicare Advantage payment rates. The 2025 Medicare Advantage rates, if finalized as proposed, will result in an expected average decrease in revenue for the Medicare Advantage industry of 0.16%, excluding the CMS estimate of Medicare Advantage risk score trend. CMS intends to publish the final 2025 rate announcement no later than April 1, 2024.
According to the Kaiser Family Foundation (“KFF”), Medicare Advantage enrollment continues to be highly concentrated among a few payors, both nationally and in local regions. In 2021, the KFF reported that 3 payors together accounted for more than half of Medicare Advantage enrollment and 7 firms accounted for approximately 83% of enrollment. Consolidation among Medicare Advantage plans in certain regions, or the Medicare program’s failure to attract additional plans to participate in the Medicare Advantage program, could have a material adverse effect on our business, results of operations, financial condition, liquidity, cash flows and/or stock price.
Reductions in reimbursement rates or the scope of services being reimbursed, or an expansion of the scope of services to be provided under our contracts with payors without a corresponding increase in payment rates could have a material, adverse effect on our financial condition, results of operations, liquidity, cash flows and/or stock price or even result in reimbursement rates that are insufficient to cover our operating expenses. Additionally, any delay or default by the government in making Medicare reimbursement payments could materially and adversely affect our business, financial condition, results of operations, liquidity, cash flows and/or stock price.
State and federal efforts to reduce Medicaid spending could adversely affect our financial condition, results of operations, liquidity, cash flows and/or stock price.
Approximately 40% of our Medicare Advantage members are dual-eligible, qualifying for both Medicare and Medicaid, and 29% of our total members are covered by state Medicaid programs. Medicaid is a joint federal-state program purchasing healthcare services for the low income and indigent, as well as certain higher-income individuals with significant health needs. Under broad federal criteria, states establish rules for eligibility, services and payment. Medicaid is a state-administered program financed by both state funds and matching federal funds. Medicaid spending has increased rapidly in recent years, becoming a significant component of state budgets. This, combined with slower state revenue growth, has led both the federal government and many states to institute measures aimed at controlling the growth of Medicaid spending, and in some instances reducing aggregate Medicaid spending.
If any state in which we operate were to decrease premiums paid to us or pay us less than the amount necessary to keep pace with our cost trends, it could have a material adverse effect on our results of operations, financial conditions, liquidity, cash flows and/or stock price.
For example, a number of states have adopted or are considering legislation designed to reduce their Medicaid expenditures, such as financial arrangements commonly referred to as provider taxes. Under provider tax arrangements, states collect taxes from healthcare providers and then use the revenue to pay the providers as a Medicaid expenditure, which allows the states to then claim additional federal matching funds on the additional reimbursements. Current federal law provides for a cap on the maximum allowable provider tax as a percentage of the provider’s total revenue. There can be no assurance that federal law will continue to provide matching federal funds on state Medicaid expenditures funded through provider taxes, or that the current caps on provider taxes will not be reduced. Any discontinuance or reduction in federal matching of provider tax-related Medicaid expenditures could have a significant and adverse effect on states’ Medicaid expenditures, and as a result could have an adverse effect on our business, results of operations, financial condition, liquidity, cash flows and/or stock price.
As part of the movement to repeal, replace or modify the ACA and as a means to reduce the federal budget deficit, there are renewed congressional efforts to move Medicaid from an open-ended program with coverage and benefits set by the federal government to one in which states receive a fixed amount of federal funds, either through block grants or per capita caps, and have more flexibility to determine benefits, eligibility or provider payments. If those changes are implemented, we cannot predict whether the amount of fixed federal funding to the states will be based on current payment amounts, or if it will be based on lower payment amounts, which would negatively impact those states that expanded their Medicaid programs in response to the ACA.
In addition, from early 2020 until December 2022, Medicaid eligibility redeterminations were suspended due to the COVID-19 public health emergency. On December 29, 2022, the Consolidated Appropriations Act (“CAA”) was enacted; under the CAA, expiration of the continuous enrollment condition will no longer be linked to the end of the COVID-19 public health emergency effective March 31, 2023. Beginning April 1, 2023, individual states will be permitted to terminate Medicaid enrollment for individuals who are no longer eligible for Medicaid benefits. We expect that states will implement Medicaid eligibility redeterminations, and this may have the effect of reducing our membership. Maintaining current eligibility levels could cause states to reduce reimbursement or reduce benefits in order for states to afford to maintain eligibility levels. If any state in which we operate were to decrease premiums paid to us or pay us less than the amount necessary to keep pace with our cost trends, it could have a material adverse effect on our results of operations, financial condition, liquidity, cash flows and/or stock price.
We expect these state and federal efforts to continue for the foreseeable future. The Medicaid program and its reimbursement rates and rules are subject to frequent change at both the federal and state level. These include statutory and regulatory changes, rate adjustments (including retroactive adjustments), administrative or executive orders and government funding restrictions, all of which may materially adversely affect the rates at which our services are reimbursed by state Medicaid plans.
Our business could be harmed if the ACA is overturned or by any legislative, regulatory or industry change that reduces healthcare spending or otherwise slows or limits the transition to more assumption of risk by healthcare providers.
Our operating model, our platform and our revenue are dependent on the healthcare industry’s continued movement towards providers assuming more risk from payors for the cost of patient care. Any legislative, regulatory or industry changes that slows or limits that movement or otherwise reduces the risk-based healthcare spending would most likely be detrimental to our business, revenue, financial projections and growth, as well as our results of operations, financial condition, liquidity, cash flows and/or stock price.
We are also impacted by the Medicare Access and CHIP Reauthorization Act, under which physicians must choose to participate in one of two payment formulas, the Merit-Based Incentive Payment System (“MIPS”), or Alternative Payment Models (“APMs”). MIPS allows eligible physicians to receive upward or downward adjustments to their Medicare Part B payments based on certain quality and cost metrics, among other measures. Alternatively, physicians can choose to participate in an Advanced APM. Advanced APMs are exempt from the MIPS requirements, and physicians who are meaningful participants in APMs receive bonus payments from Medicare pursuant to the law. CMS has issued reporting requirements for MIPS Value Pathways (“MVPs”), a subset of measures to meet MIPS reporting requirements, which are available in the 2023 performance year. CMS also expanded the list of MIPS-eligible clinicians to include clinical social workers and certified nurse mid-wives. In November 2022, CMS released its 2023 Quality Payment Program final rule, which finalized 5 new MVPs and revised 7 previously finalized MVPs to add new measures and activities. as well as remove several measures and activities. The final rule also implemented several policies for Advanced APMs, including permanently establishing an 8% minimum Generally Applicable Nominal Risk standard (which was previously set to expire in 2024).
In addition, current and prior healthcare reform proposals have included the concept of creating a single payor or public option for health insurance. If enacted, these proposals could have an extensive impact on the healthcare industry, including us. We are unable to predict whether such reforms may be enacted or their impact on our operations.
We expect that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state governments and private payors will pay for healthcare services, which could harm our business, financial condition, results of operations, liquidity, cash flows and/or stock price.
If we are unable to effectively adapt to changes in the healthcare industry or changes in state and federal laws and regulations affecting the healthcare industry, including changes to laws and regulations regarding or affecting the U.S. healthcare reform, our business may be harmed.
Due to the importance of the healthcare industry in the lives of all Americans, federal, state, and local legislative bodies frequently pass legislation and promulgate regulations relating to healthcare reform or that affect the healthcare industry. As has been the trend in recent years, it is reasonable to assume that there will continue to be increased government oversight and regulation of the healthcare industry in the future. We cannot assure our stockholders as to the ultimate content, timing or effect of any new healthcare legislation or regulations, nor is it possible at this time to estimate the impact of potential new legislation or regulations on our business. It is possible that future legislation enacted by Congress or state legislatures, or regulations promulgated by regulatory authorities at the federal or state level, could adversely affect our business or could change the operating environment of our medical centers. It is possible that the changes to the Medicare, Medicaid or other governmental healthcare program reimbursements may serve as precedent to possible changes in other payors’ reimbursement policies in a manner adverse to us. Similarly, changes in private payor reimbursements could lead to adverse changes in Medicare, Medicaid and other governmental healthcare programs, which could have a material adverse effect on our business, financial condition, results of operations, liquidity, cash flows and/or stock price.
While we believe that we have structured our agreements and operations in material compliance with applicable healthcare laws and regulations, there can be no assurance that we will be able to successfully address changes in the current regulatory environment. We believe that our business operations materially comply with applicable healthcare laws and regulations. However, some of the healthcare laws and regulations applicable to us are subject to limited or evolving interpretations, and a review of our business or operations by a court, law enforcement or a regulatory authority might result in a determination that could have a material adverse effect on us. Furthermore, the healthcare laws and regulations applicable to us may be amended or interpreted in a manner that could have a material adverse effect on our business, prospects, results of operations, financial condition, liquidity, cash flows and/or stock price.
Our use, disclosure, and other processing of PHI and PII, including health information, is subject to HIPAA and other federal and state privacy and security rules and regulations. If we suffer a data breach or unauthorized disclosure, we could incur significant liability including government and private investigations and claims of privacy and security non-compliance. We could also suffer significant reputational harm as a result and, in turn, a material adverse effect on our member base and on our reputation, business, revenue, prospects, results of operations, financial condition, liquidity, cash flows and/or stock price.
Numerous state and federal laws, rules and regulations, such as HIPPA, govern the collection, dissemination, use, privacy, confidentiality, security, availability, integrity, and other processing of PHI and PII. HIPAA establishes a set of national privacy and security standards for the protection of PHI by health plans, healthcare clearinghouses and certain healthcare providers, referred to as covered entities, and the business associates with whom such covered entities contract for services.
HIPAA requires covered entities, such as us, and their business associates to develop and maintain policies and procedures with respect to PHI that is used or disclosed, including the adoption of administrative, physical and technical safeguards to protect such information. HIPAA also implemented the use of standard transaction code sets and standard identifiers that covered entities must use when submitting or receiving certain electronic healthcare transactions, including activities associated with the billing and collection of healthcare claims.
HIPAA imposes mandatory penalties for certain violations. Penalties for violations of HIPAA and its implementing regulations start at $100 per violation and, except in certain circumstances, are not to exceed $50,000 per violation, subject to a cap of $1.78 million for violations of the same standard in a single calendar year. However, a single breach incident can result in violations of multiple standards. HIPAA also authorizes state attorneys general to file suit on behalf of their residents. Courts may award damages, costs and attorneys’ fees related to violations of HIPAA in such cases and we may incur significant costs and expenses related to contesting such actions. While HIPAA does not create a private right of action allowing individuals to sue us in civil court for of HIPAA, its standards have been used as the basis for duty of care in state civil suits such as those for or in the or of PHI.
In addition, HIPAA mandates that the Secretary of HHS conduct periodic compliance audits of HIPAA covered entities and business associates for compliance with the HIPAA Privacy and Security Standards. It also tasks HHS with establishing a methodology whereby harmed individuals who were the victims of breaches of unsecured PHI may receive a percentage of the CMP fine paid by the violator.
HIPAA further requires that patients be notified of any unauthorized acquisition, access, use or disclosure of their unsecured PHI that compromises the privacy or security of such information, with certain exceptions related to unintentional or inadvertent use or disclosure by employees or authorized individuals. HIPAA specifies that such notifications must be made “without unreasonable delay and in no case later than 60 calendar days after discovery of the breach.” If a breach affects 500 patients or more, it must be reported to HHS without unreasonable delay, and HHS will post the name of the breaching entity on its public web site. Breaches affecting 500 patients or more in the same state or jurisdiction must also be reported to the local media. If a breach involves fewer than 500 people, the covered entity must record it in a log and notify HHS at least annually.
In addition to HIPAA, numerous other federal and state laws, rules and regulations protect the confidentiality, privacy, availability, integrity and security of PHI and other types of PII. State statutes and regulations vary from state to state, and these
laws and regulations in many cases are more restrictive than, and may not be preempted by, HIPAA and its implementing rules. These laws and regulations are often uncertain, contradictory, and subject to changed or differing interpretations, and we expect new laws, rules and regulations regarding privacy, data protection, and information security to be proposed and enacted in the future. If new data security laws are implemented, we may not be able to timely comply with such requirements, or such requirements may not be compatible with our current processes. Changing our processes could be time consuming and expensive, and failure to timely implement required changes could subject us to liability for non-compliance. Some states may afford private rights of action to individuals who believe their PII has been misused. This complex, dynamic legal landscape regarding privacy, data protection, and information security creates significant compliance issues for us and potentially restricts our ability to collect, use and disclose data and exposes us to additional expense, adverse publicity and liability. While we have implemented data privacy and security measures in an effort to comply with applicable laws and regulations relating to privacy and data protection, some PHI and other PII or confidential information is transmitted to us by third parties, who may not implement adequate security and privacy measures, and it is possible that laws, rules and regulations relating to privacy, data protection, or information security may be interpreted and applied in a manner that is with our practices or those of third parties who transmit PHI and other PII or confidential information to us. If we or these third parties are found to have such laws, rules or regulations, it could result in government-imposed , orders requiring that we or these third parties change our or their practices, or charges, which could affect our business. Complying with these various laws and regulations could cause us to incur substantial costs or require us to change our business practices, systems and compliance procedures in a manner to our business.
We also publish statements to our members and partners that describe how we handle and protect PHI. If federal or state regulatory authorities or private litigants consider any portion of these statements to be untrue, we may be subject to claims of deceptive practices, which could lead to significant liabilities and consequences, including, without limitation, costs of responding to investigations, defending against litigation, settling claims, and complying with regulatory or court orders. Any of the foregoing consequences could seriously harm our business and our financial results. Any of the foregoing consequences could have a material adverse impact on our business and our financial results.
We face unique regulatory and other challenges in our Medicare and Medicaid businesses.
We face unique regulatory and other challenges that may inhibit the growth and profitability of our Medicare and Medicaid businesses. In March 2023, CMS issued its final notice detailing final 2024 Medicare Advantage payment rates. Final 2024 Medicare Advantage rates resulted in an expected average increase in revenue for the Medicare Advantage industry of 3.32%, and the year-to-year percentage change included a 1.24% decrease for star ratings, a risk model revision and normalization of (2.16%), and a risk score trend of 4.44%. In March 2023, CMS also finalized the 2024 Medicare Advantage reimbursement rates, which result in an expected average decrease in revenue for the Medicare Advantage industry of 1.12%, excluding the CMS estimate of Medicare Advantage risk score trend, though the rates may vary widely depending on the provider group and patient demographics. On January 31, 2024, CMS issued an advance notice detailing proposed 2025 Medicare Advantage payment rates. The 2025 Medicare Advantage rates, if finalized as proposed, will result in an expected average decrease in revenue for the Medicare industry of 0.16%, excluding the CMS estimate of Medicare risk score trend. CMS intends to publish the final 2025 rate announcement no later than April 1, 2024.
The Company faces challenges from the impact of the increasing cost of medical care, changes to methodologies for determining payments and CMS local and national coverage decisions that require the Company to pay for services and supplies that are not factored into the Company’s bids. We cannot predict how the rates will be finalized, future Medicare funding levels, the impact of future federal budget actions or ensure that such changes or actions will not have a material adverse effect on our Medicare operating results.
The organic expansion of our Medicare Advantage and Medicare Part D service area is subject to the ability of CMS to process our requests for service area expansions and our ability to build cost competitive provider networks in the expanded service areas that meet applicable network adequacy requirements. CMS’ decisions on our requests for service area expansions also may be affected adversely by compliance issues that arise each year in our Medicare operations.
CMS regularly audits our performance to determine our compliance with CMS’s regulations and our contracts with CMS and to assess the quality of the services we provide to our Medicare members, and state regulators are increasingly conducting audits to assess the quality of services we provide to our Medicaid members. As a result of these audits, we may be
subject to significant or material retroactive adjustments to and/or withholding of certain premiums and fees, fines, criminal liability, civil monetary penalties, CMS- or state-imposed sanctions (including suspension or exclusion from participation in government programs) or other restrictions on our Medicare, Medicaid and other businesses, including suspension or loss of licensure.
“Star ratings” from CMS for our Medicare Advantage plans will continue to have a significant effect on our plans’ operating results. Only Medicare Advantage plans with a star rating of 4 or higher (out of 5) are eligible for a quality bonus in their basic premium rates. CMS continues to change its rating system to make achieving and maintaining a 4 or higher star rating more difficult. If our star ratings fall or remain below 4 for a significant portion of our Medicare Advantage membership, or do not match the performance of our competitors, or the star rating quality bonuses are reduced or eliminated, our revenues, operating results and cash flows may be significantly adversely affected. In addition, due to uncertainties with CMS cut-points, no Medicare Advantage plan can guarantee their overall star ratings. There can be no assurances that the Company will be successful in maintaining or improving its star ratings in future years.
Payments we receive from CMS for our Medicare Advantage and Medicare Part D businesses also are subject to risk adjustment based on the health status of the individuals we enroll. Elements of that risk adjustment mechanism continue to be challenged by the DOJ, the OIG and CMS itself. For example, CMS made significant changes to the structure of the hierarchical condition category model in version 28, which may impact RAF scores for a larger percentage of Medicare Advantage beneficiaries and could result in changes to beneficiary RAF scores with or without a change in the patient’s health status. Substantial changes in the risk adjustment mechanism, including those that result from the final Part C contract-level Risk Adjustment Data Validation Audits (“RADV Audit Rule”) issued in January 2023 or other changes that may result from enforcement or audit actions, could materially affect the amount of our Medicare reimbursement, require us to raise prices or reduce the benefits we offer to Medicare beneficiaries, impact the services we provide and potentially limit our (and the industry’s) participation in the Medicare program.
The RADV Audit Rule creates uncertainty for Medicare Advantage plans. The lack of detail provided with respect to how CMS will select contracts and claims to audit, the methodology CMS will use, and how it will extrapolate as part of the RADV Audit Rule may impact future Medicare Advantage bids and result in other implications. The RADV Audit Rule also permits extrapolation of OIG contract level audits for payment years 2018 forward. The RADV Audit Rule is subject to ongoing litigation and the outcome and future impacts are uncertain.
We have experienced challenges in obtaining complete and accurate encounter data for our Medicaid products due to difficulties with providers and third-party vendors submitting claims in a timely fashion in the proper format, and with state agencies in coordinating such submissions. As states increase their reliance on encounter data, and some states mandate that certain amounts be included or excluded from encounter data, these difficulties could affect the Medicaid premium rates we receive and how Medicaid membership is assigned to us, which could have a material adverse effect on our Medicaid operating results and cash flows and/or our ability to bid for, and continue to participate in, certain Medicaid programs.
If we fail to report and correct errors discovered through our own auditing procedures or during a CMS audit or otherwise fail to comply with the applicable laws and regulations, we could be subject to fines, civil monetary penalties or other sanctions, including fines and penalties under the False Claims Act, which could have a material adverse effect on our ability to participate in Medicare Advantage, Medicare Part D or other government programs, and on our operating results, cash flows and financial condition.
The Company’s Medicare Advantage and Prescription Drug Plan ("PDP") products are heavily regulated by CMS.
Payments the Company receives from CMS for its Medicare Advantage and Part D businesses also are subject to risk adjustment based on the health status of the individuals enrolled. Elements of that risk adjustment mechanism continue to be challenged by the DOJ, the OIG and CMS itself. For example, CMS made significant changes to the structure of the hierarchical condition category model in version 28, which may impact risk adjustment factor (“RAF”) scores for a larger percentage of Medicare Advantage beneficiaries and could result in changes to beneficiary RAF scores with or without a change in the patient’s health status. Substantial changes in the risk adjustment mechanism, including changes that result from enforcement or audit actions, could materially affect the amount of the Company’s Medicare reimbursement; require the Company to raise prices or reduce the benefits offered to Medicare beneficiaries; impact the services we provide; and potentially limit the Company’s (and the industry’s) participation in the Medicare program.
Programs funded in whole or in part by the U.S. federal government account for a significant portion of our revenues, and we expect that percentage to increase.
Programs funded in whole or in part by the U.S. federal government account for a significant portion of our revenues, and we expect that percentage to increase. As our government funded businesses grow, our exposure to changes in federal and state government policy with respect to and/or regulation of the various government funded programs in which we participate also increases.
The laws and regulations governing participation in Public Exchange, Medicare Advantage (including dual eligible special needs plans), Medicare Part D, Medicaid, and Managed Medicaid plans are complex, are subject to interpretation and can expose us to penalties for non-compliance. Federal, state and local governments have the right to cancel or not to renew their contracts with us on short notice without cause or if funds are not available. Funding for these programs is dependent on many factors outside our control, including general economic conditions, continuing government efforts to contain health care costs and budgetary constraints at the federal or applicable state or local level and general political issues and priorities.
The U.S. federal government and our other government customers also may reduce funding for health care or other programs, cancel or decline to renew contracts with us, or make changes that adversely affect the number of persons eligible for certain programs, the services provided to enrollees in such programs, our premiums and our administrative and health care and other benefit costs, any of which could have a material adverse effect on our businesses, operating results and cash flows. When federal funding is delayed, suspended or curtailed, we continue to receive, and we remain liable for and are required to fund, claims from providers for providing services to beneficiaries of federally funded health benefits programs in which we participate. An extended federal government shutdown or a delay by Congress in raising the federal government’s debt ceiling also could lead to a delay, reduction, or of federal government spending and a significant increase in interest rates that could, in turn, have a material effect on the value of our investment portfolio, our ability to access the capital markets and our businesses, operating results, cash flows and liquidity.
We face inspections, reviews, audits and investigations under federal and state government programs and contracts. These audits could have adverse findings that may negatively affect our business, including our results of operations, liquidity, financial condition, cash flows, stock price and/or reputation.
As a result of our participation in the Medicare and Medicaid programs, we are subject to various governmental inspections, reviews, audits and investigations to verify our compliance with these programs and applicable laws, rules and regulations. For example, in January 2024, the DOJ requested information from the Company regarding the possible referral of Medicare beneficiaries in connection with a False Claims Act investigation by the DOJ. The Company is cooperating with the DOJ in its inquiry and cannot predict its outcome or duration. Payors may also reserve the right to conduct audits. We also periodically conduct internal audits and reviews of our regulatory compliance. An adverse inspection, review, audit or investigation could result in:
• refunding amounts we have been paid pursuant to the Medicare or Medicaid programs or from payors;
• state or federal agencies imposing fines, penalties and other sanctions on us and we may incur significant costs and expenses in contesting such actions;
• temporary suspension of payment for new patients to the facility or agency;
• decertification or exclusion from participation in the Medicare or Medicaid programs or one or more payor networks;
• self-disclosure of violations to applicable regulatory authorities;
• damage to our reputation;
• the revocation of a facility’s or agency’s license; and
• loss of certain rights under, or termination of, our contracts with payors.
We have in the past and will likely in the future be required to refund amounts we have been paid and/or pay fines and penalties as a result of these inspections, reviews, audits and investigations. If adverse inspections, reviews, audits or investigations occur and any of the results noted above occur, it could have a material adverse effect on our business and our financial condition, results of operations, liquidity, cash flows and/or stock price. Furthermore, the legal, document production and other costs associated with complying with these inspections, reviews, audits or investigations could be significant.
Laws regulating the corporate practice of medicine could restrict the manner in which we are permitted to conduct our business, and the failure to comply with such laws could subject us to penalties or require a restructuring of our business.
Some states have laws that prohibit business entities, such as us, from practicing medicine, employing physicians to practice medicine, exercising control over medical decisions by physicians or engaging in certain arrangements, such as fee-splitting, with physicians (such activities generally referred to as the “corporate practice of medicine”). In some states these prohibitions are expressly stated in a statute or regulation, while in other states the prohibition is a matter of judicial or regulatory interpretation.
Penalties for violations of the corporate practice of medicine vary by state and may result in physicians being subject to disciplinary action, as well as to forfeiture of revenues from payors for services rendered. For lay entities, violations may also bring both civil and, in more extreme cases, criminal liability for engaging in medical practice without a license. Some of the relevant laws, regulations and agency interpretations in states with corporate practice of medicine restrictions have been subject to limited judicial and regulatory interpretation. Moreover, state laws are subject to change. Regulatory authorities and other parties may assert that, despite the management agreements and other arrangements through which we operate, we are engaged in the prohibited corporate practice of medicine or that our arrangements constitute unlawful fee-splitting. If this were to occur, we could be subject to civil and/or criminal penalties, our agreements could be found legally invalid and unenforceable (in whole or in part) or we could be required to our contractual arrangements. In markets where the corporate practice of medicine is prohibited, we have historically operated by maintaining long-term management contracts with multiple associated professional organizations which, in turn, employ or contract with physicians to provide those professional medical services required by the enrollees of the payors with which the professional organizations contract. Under these management agreements, our managed services organization performs only non-medical administrative services, does not represent that it offers medical services and does not exercise influence or control over the practice of medicine by the physicians or the associated physician groups with which it contracts. Under our management services agreements, as permitted by state law, in the event of death or disability or upon certain other triggering events, we maintain the right to direct the transfer of the ownership of the professional organizations to another licensed physician.
In addition to the above management arrangements, we have certain contractual rights relating to the orderly transfer of equity interests in our physician practices through succession agreements and other arrangements with their physician equity holders. Such equity interests cannot, however, be transferred to or held by us or by any non-professional organization. Accordingly, neither we nor our direct subsidiaries directly own any equity interests in any of the affiliated physician practices that provide services to our members in “corporate practice of medicine” states. If any of the physician owners of our practices fail to comply with the management arrangement, if any management arrangement is terminated and/or we are unable to enforce our contractual rights over the orderly transfer of equity interests in any of these contracted physician practices, such events could have a material adverse effect on our business, results of operations, financial condition, liquidity, cash flows and/or stock price.
It is possible that a state regulatory agency or a court could determine that our agreements with physician equity holders of our contracted practices and the way we carry out these arrangements as described above, either independently or coupled with the management services agreements with such contracted physician practices, are in violation of prohibitions on the corporate practice of medicine. As a result, these arrangements could be deemed invalid, potentially resulting in a loss of revenues and an adverse effect on results of operations derived from such practices. Such a determination could force a restructuring of our management arrangements with the affected practices, which might include revisions of the management services agreements, including a modification of the management fee and/or establishing an alternative structure that would permit us to contract with a physician network without violating prohibitions on the corporate practice of medicine. There can be no assurance that such a restructuring would be feasible, or that it could be accomplished within a reasonable time frame without a material effect on our business, results of operations, financial condition, liquidity, cash flows and/or stock price.
Our records and submissions to a health plan may contain inaccurate or unsupportable information regarding risk adjustment scores of members, which could cause us to overstate or understate our revenue and subject us to various penalties.
CMS has implemented a risk adjustment payment system for Medicare health plans to improve the accuracy of payments and establish appropriate compensation for Medicare plans that enroll and treat less healthy Medicare beneficiaries. CMS’s risk adjustment model bases a portion of the total CMS reimbursement payments on various clinical and demographic factors. The claims and encounter records that we submit to health plans may impact data that support the Medicare Risk Adjustment Factor (“RAF”), scores attributable to members. These RAF scores determine, in part, the revenue to which the health plans and, in turn, we are entitled to for the provision of medical care to such members. The data submitted to CMS by each health plan is based, in part, on medical charts and diagnosis codes that we prepare and submit to the health plans. Each health plan generally relies on us and our affiliated physicians to appropriately document and support such RAF data in our medical records. Each health plan also relies on us and our affiliated physicians to appropriately code claims for medical services provided to members. Erroneous claims and erroneous encounter records and submissions could result in inaccurate revenue and risk adjustment payments, which may be subject to or retroactive adjustment in later periods. This or adjusted information may be reflected in financial statements for periods subsequent to the period in which the revenue was recorded. We might also need to refund a portion of the revenue that we received, which refund, depending on its magnitude, could our relationship with the applicable health plan and could have a material effect on our business, results of operations, financial condition, liquidity, cash flows and/or stock price.
Additionally, CMS audits Medicare Advantage plans for documentation to support RAF-related payments for members chosen at random. The Medicare Advantage plans ask providers to submit the underlying documentation for members that they serve. It is possible that claims associated with members with higher RAF scores could be subject to more scrutiny in a CMS or plan audit. There is a possibility that a Medicare Advantage plan may seek repayment from us should CMS make any payment adjustments to the Medicare Advantage plan as a result of its audits. The plans also may hold us liable for any penalties owed to CMS for inaccurate or unsupportable RAF scores provided by us or our affiliated physicians. In addition, we could be liable for penalties to the government under the FCA.
CMS has indicated that payment adjustments will not be limited to RAF scores for the specific Medicare Advantage enrollees for which errors are found, but may also be extrapolated to the entire Medicare Advantage plan subject to a particular CMS contract. CMS has described its audit process as plan-year specific and stated that it will not extrapolate audit results for plan years prior to 2011.
Elements of the risk adjustment mechanism continue to be challenged, reevaluated, and revised by the DOJ, the OIG, and CMS. For example, on February 1, 2023 CMS published the Medicare Advantage Risk Adjustment Data Validation ("RADV") Program Final Rule (the "Final Rule"), which will take effect on April 3, 2023. The Final Rule includes major updates to the RADV audit methodology used by CMS to address overpayments to MA plans based on the submission of unsupported risk-adjusting diagnosis codes, which are used to determine payments under MA. Most notably, the Final Rule: (1) allows CMS to extrapolate RADV audit findings beginning with Payment Year 2018; and (2) does not include a Fee-For-Service ("FFS") adjuster in RADV audits, which was previously contemplated as a method of equalizing payment errors between FFS Medicare and Medicare Part C, and viewed as critical to ensuring actuarial equivalence between traditional and managed Medicare. CMS will not extrapolate RADV audit findings for Payment Years 2011 through 2017, as originally contemplated. The Final Rule has already received significant industry pushback and is expected to be a target of litigation by MA plans.
In March 2023, CMS issued its final notice detailing final 2024 Medicare Advantage payment rates. Final 2024 Medicare Advantage rates resulted in an expected average increase in revenue for the Medicare Advantage industry of 3.32%, and the year-to-year percentage change included a 1.24% decrease for star ratings, a risk model revision and normalization of (2.16%), and a risk score trend of 4.44%. In March 2023, CMS also finalized the 2024 Medicare Advantage reimbursement rates, which result in an expected average decrease in revenue for the Medicare Advantage industry of 1.12%, excluding the CMS estimate of Medicare Advantage risk score trend, though the rates may vary widely depending on the provider group and patient demographics. On January 31, 2024, CMS issued an advance notice detailing proposed 2025 Medicare Advantage payment rates. The 2025 Medicare Advantage rates, if finalized as proposed, will result in an expected average decrease in revenue for the
Medicare Advantage industry of 0.16%, excluding the CMS estimate of Medicare Advantage risk score trend. CMS intends to publish the final 2025 rate announcement no later than April 1, 2024.
There can be no assurance that claims submitted by the Company will not be randomly selected or targeted for review by CMS or that the outcome of such a review will not result in a material adjustment in our revenue and profitability, even if the information we submitted to CMS is accurate and supportable. Substantial changes in the risk adjustment mechanism, including changes that result from enforcement or audit actions, could materially affect our revenue.
New physicians and other providers must be properly enrolled in governmental healthcare programs before we can receive reimbursement for their services, and there may be delays in the enrollment process.
Each time a new physician joins us, we must enroll the physician under our applicable group identification number for Medicare and Medicaid programs and for certain managed care and private insurance programs before we can receive reimbursement for services the physician renders to beneficiaries of those programs. The estimated time to receive approval for the enrollment is sometimes difficult to predict. These practices result in delayed reimbursement that may adversely affect our cash flows.
With respect to Medicare, providers can retrospectively bill Medicare for services provided 30 days prior to the effective date of the enrollment. In addition, the enrollment rules provide that the effective date of the enrollment will be the later of the date on which the enrollment application was filed and approved by the Medicare contractor, or the date on which the provider began providing services. If we are unable to properly enroll physicians and other applicable healthcare professionals within the 30 days after the provider begins providing services, we will be precluded from billing Medicare for any services which were provided to a Medicare beneficiary more than 30 days prior to the effective date of the enrollment. With respect to Medicaid, new enrollment rules and whether a state will allow providers to retrospectively bill Medicaid for services provided prior to submitting an enrollment application varies by state. Failure to timely enroll providers could reduce our physician services segment total revenues and have a material adverse effect on the business, financial condition, cash flows and/or results of operations of our physician services segment.
The ACA, as currently structured, added additional enrollment requirements for Medicare and Medicaid, which have been further enhanced through implementing regulations and increased enforcement scrutiny. Every enrolled provider must revalidate its enrollment at regular intervals and must update the Medicare contractors and many state Medicaid programs with significant changes on a timely basis. If we fail to provide sufficient documentation as required to maintain our enrollment, Medicare and Medicaid could deny continued future enrollment or revoke our enrollment and billing privileges, which could have a material adverse effect on our business, results of operations, financial condition, liquidity, cash flows and/or stock price.
The requirements for enrollment, licensure, certification, and accreditation may include notification or approval in the event of a transfer or change of ownership or certain other changes. Other agencies or payors with which we have contracts may have similar requirements, and some of these processes may be complex. Failure to provide required notifications or obtain necessary approvals may result in the delay or inability to complete an acquisition or transfer, loss of licensure, lapses in reimbursement, or other penalties. While we make reasonable efforts to substantially comply with these requirements, we cannot assure you that the agencies that administer these programs or have awarded us contracts will not find that we have failed to comply in some material respects. A finding of non-compliance and any resulting payment delays, refund demands or other sanctions could have a material adverse effect on our business, financial condition, results of operations, liquidity, cash flows and/or stock price.
Risks Related to Competition
The healthcare industry is highly competitive, and if we are not able to compete effectively, our business would be harmed.
We compete directly with national, regional and local providers of healthcare for members and physicians. There are many other companies and individuals currently providing healthcare services, many of which have been in business longer and/or have substantially more resources. There have been increased trends towards consolidation and vertical integration in the healthcare industry, including an influx of additional capital. Since there are virtually no substantial capital expenditures required for
providing healthcare services, there are few financial barriers to entry in the healthcare industry. Other companies could enter the healthcare industry in the future and divert some or all of our business. Our ability to compete successfully varies from location to location and depends on a number of factors, including the number of competing primary care medical centers in the local market and the types of services available at those medical centers, our local reputation for quality care of members, the commitment and expertise of our medical staff, our local service offerings and community programs, the cost of care in each locality, and the physical appearance, location, age and condition of our medical centers. If we are unable to attract members to our medical centers, our revenue and profitability will be adversely affected. Some of our competitors may have greater recognition and be more established in their respective communities than we are, and may have greater financial and other resources than we have. Competing primary care providers may also offer larger medical centers or different programs or services than we do, which, combined with the foregoing factors, may result in our competitors being more to our current members, potential members and referral sources. Furthermore, while we budget for routine capital expenditures at our medical centers to keep them competitive in their respective markets, to the extent that competitive forces cause those expenditures to increase in the future, our financial condition may be affected. In addition, our relationships with governmental and private third-party payors are not and our competitors have established or could seek to establish relationships with such payors to serve their covered patients. Additionally, as we expand into new geographies, we may encounter competitors with relationships or recognition in the community in such new geography, which could give those competitors an in obtaining new patients. Individual physicians, physician groups and companies in other healthcare industry segments, including those with which we have contracts, and some of which have financial, marketing and staffing resources, may become competitors in providing health care services, and this competition may have a material effect on our business operations, financial condition, results of operations, liquidity, cash flows and/or stock price. In addition, established competitors in new markets (or new lines of business) may seek to increase competitive marketing, enrollment and recruiting practices in an effort to or our market entry. Such increased competitive activity could lead to competitive marketing and recruiting that could drive up the costs of entry and vigorous enforcement of contractual rights (e.g., non-compete agreements) that could increase the number lawsuits which could have a material effect on our business, financial condition, results of operations, liquidity, cash flows and/or stock price.
Our performance depends on our ability to recruit and retain quality physicians, nurses and other personnel. Competitors in primary care markets may aggressively employ non-compete, non-solicitation and other restrictive covenant tools to slow the entry of new operators. Competition for or shortages in quality physicians, nurses and other personnel, increases in labor costs or expiration of non-compete, non-solicitation and other restrictive covenants with past, present or future employees could adversely affect our revenue, profitability, liquidity, cash flows, quality of care and member enrollment.
Our operations are dependent on the efforts, abilities and experience of our physicians and clinical personnel. We compete with other healthcare providers, primarily hospitals and other medical centers, in attracting physicians, nurses and medical staff to support our medical centers, recruiting and retaining qualified management and support personnel responsible for the daily operations of each of our medical centers and in contracting with payors in each of our markets. Competitors in primary care markets may aggressively employ non-compete, non-solicitation and other restrictive covenant tools to slow the entry of new operators. In some markets, the lack of availability of clinical personnel, such as nurses and mental health professionals, has become a significant operating issue facing all healthcare providers. This shortage may require us to continue to enhance wages and benefits to recruit and retain qualified personnel or to contract for more expensive temporary personnel. We also depend on the available labor pool of semi-skilled and unskilled workers in each of the markets in which we operate.
Key primary care physicians with large member enrollment could retire, become disabled, terminate their provider contracts, get recruited by a competing independent physician association or medical group, or otherwise become unable or unwilling to continue practicing medicine or continue working with us. As a result, members who have been served by such physicians could choose to enroll with competitors’ physician organizations or could seek medical care elsewhere, which could reduce our revenues, profits, liquidity and/or cash flows. Moreover, we may not be able to attract new physicians to replace the services of terminating physicians or to service our growing membership.
We have employment contracts with physicians and other health professionals in many states. Some of these contracts include provisions preventing these physicians and other health professionals from competing with us both during and after the term of our contract with them. The law governing non-compete agreements and other forms of restrictive covenants varies from state to state. Some jurisdictions prohibit us from using non-competition covenants with our professional staff. Other states are
reluctant to strictly enforce non-compete agreements and restrictive covenants applicable to physicians and other healthcare professionals. Additionally, the use of non-competition agreements has recently come under scrutiny by the FTC. There can be no assurance that our non-compete agreements related to physicians and other health professionals will be found enforceable if challenged in certain states or federally. In such event, we would be unable to prevent physicians and other health professionals formerly employed by us from competing with us, potentially resulting in the loss of some of our members.
If our labor costs increase, we may not be able to raise rates to offset these increased costs. Because a significant percentage of our revenue consists of fixed, prospective payments, our ability to pass along increased labor costs is limited. In particular, if labor costs rise at an annual rate greater than our net annual consumer price index basket update from Medicare, our results of operations, liquidity, and/or cash flows will likely be adversely affected. In 2021, we experienced labor shortages and other labor-related issues, which were pronounced as a result of the COVID-19 pandemic, and a sustained labor shortage or increased turnover rates within our employee base could lead to increased labor costs. See “Labor shortages and constraints in the supply chain could adversely affect our results of operations.” In addition, any union activity at our medical centers that may occur in the future could contribute to increased labor costs. Certain proposed changes in federal labor laws and the National Labor Relations Board’s modification of its election procedures could increase the likelihood of employee unionization attempts. Although none of our employees are currently represented by a collective bargaining agreement, to the extent a significant portion of our employee base unionizes, it is possible our labor costs could increase materially. Our to recruit and retain qualified management and medical personnel, or to control our labor costs, could have a material effect on our business, prospects, results of operations, financial condition, liquidity, cash flows and/or stock price.
If we fail to cost-effectively develop widespread brand awareness and maintain our reputation, or if we fail to achieve and maintain market acceptance for our healthcare services, our business could suffer.
We believe that maintaining and enhancing our reputation and brand recognition is critical to our relationships with both members and payors and to our ability to attract new members. The promotion of our brand may require us to make substantial investments and we anticipate that, as our market becomes increasingly competitive, these marketing initiatives may become increasingly difficult and expensive. Our marketing activities may not be successful or yield increased revenue, and to the extent that these activities yield increased revenue, the increased revenue may not offset the expenses we incur and our results of operations, liquidity and/or cash flows could be harmed. In addition, any factor that diminishes our reputation or that of our management, including failing to meet the expectations of or provide quality medical care for our members, or any adverse publicity or litigation involving or surrounding us, one of our medical centers or our management, could make it substantially more difficult for us to attract new members. Similarly, because our existing members often act as references for us with prospective new members, any existing member that the quality of our care could our ability to secure additional new members. In addition, publicity resulting from any government payor audit could our reputation. If we do not maintain and our reputation and brand recognition, our business may not grow and we could our relationships with members, which would our business, results of operations, financial condition, liquidity, cash flows and/or stock price.
The registered or unregistered trademarks or trade names that we own or license may be challenged, infringed, circumvented, declared generic, lapsed or determined to be infringing on or dilutive of other marks. We may not be able to protect our rights in these trademarks and trade names, which we need in order to build name recognition with members, payors and other partners. In addition, third parties may in the future file for registration of trademarks similar or identical to our trademarks. If they succeed in registering or developing common law rights in such trademarks, and if we are not successful in challenging such third-party rights, we may not be able to use these trademarks to promote our business in certain relevant jurisdictions. If we are unable to establish name recognition based on our trademarks and trade names, we may not be able to compete effectively and our brand recognition, reputation and results of operations may be affected.
Our business depends on our ability to effectively invest in, implement improvements to and properly maintain the uninterrupted operation and data integrity of our information technology and other business systems.
Our business is highly dependent on maintaining effective information systems as well as the integrity and timeliness of the data we use to serve our members, support our care teams and operate our business. Because of the large amount of data that we collect and manage, it is possible that hardware failures or errors in our systems could result in data loss or corruption or cause the information that we collect to be incomplete or contain inaccuracies that our partners regard as significant. If our data
were found to be inaccurate or unreliable due to fraud or other error, or if we, or any of the third-party service providers we engage, were to fail to maintain information systems and data integrity effectively, we could experience operational disruptions that may impact our members and care teams and hinder our ability to provide services, establish appropriate pricing for services, retain and attract members, manage our member risk profiles, establish reserves, report financial results timely and accurately and maintain regulatory compliance, among other things.
Our information technology strategy and execution are critical to our continued success. We must continue to invest in long-term solutions that will enable us to anticipate member needs and expectations, enhance the member experience, act as a differentiator in the market and protect against cybersecurity risks and threats. Our success is dependent, in large part, on maintaining the effectiveness of existing technology systems and continuing to deliver and enhance technology systems that support our business processes in a cost-efficient and resource-efficient manner. Increasing regulatory and legislative changes will place additional demands on our information technology infrastructure that could have a direct impact on resources available for other projects tied to our strategic initiatives. In addition, recent trends toward greater patient engagement in health care require new and enhanced technologies, including more sophisticated applications for mobile devices. Connectivity among technologies is becoming increasingly important. We must also develop new systems to meet current market standards and keep pace with continuing changes in information processing technology, evolving industry and regulatory standards and patient needs. to do so may present compliance and our ability to deliver services in a competitive manner. Further, because system development projects are long-term in nature, they may be more than expected to complete and may not deliver the expected benefits upon completion. Our to effectively invest in, implement to and properly maintain the uninterrupted operation and data of our information technology and other business systems could affect our results of operations, financial condition, liquidity, cash flows and/or stock price.
Risks Related to Data Security and Intellectual Property
Our population health management technology platform relies on third-party vendors, and disruptions in those relationships or other failures of our platform could damage our reputation, give rise to claims against us or divert the application of our resources from other purposes, any of which could harm our business.
CanoPanorama, our population health management technology-powered platform, contains components developed and maintained by third-party software vendors. Moreover, we use a third-party cloud-based electronic health record management system. The ability of these third-party suppliers to successfully provide reliable and high-quality services is subject to technical and operational uncertainties that are beyond our control. We may not be able to replace the functions provided by the third-party software currently used in CanoPanorama if that software becomes obsolete or defective or is not adequately maintained or updated. We may not be able to maintain our relationships with our third-party software vendors. Any significant interruption in the availability of these third-party software products or defects in these products could harm our business unless and until we can secure or develop an alternative source. In the event of failure in such third-party vendors’ systems and processes, we could experience business or privacy and/or security surrounding our data. Any of these outcomes could our reputation, give rise to us or the application of our resources from other purposes, any of which could our business, results of operations, financial condition, liquidity, cash flows and/or stock price.
Data security breaches, loss of data and other disruptions could compromise sensitive information related to our business or our members, or prevent us from accessing critical information and expose us to liability, which could adversely affect our business and our reputation.
In the ordinary course of our business, we collect, store, use and disclose sensitive data, including PHI and other types of PII relating to our employees, members and others. We also process and store, and use third-party service providers to process and store, sensitive information, including intellectual property, confidential information and other proprietary business information. We manage and maintain such sensitive data and information utilizing a combination of on-site systems, managed data center systems and cloud-based computing center systems.
We are highly dependent on information technology networks and systems, including the internet, to securely process, transmit and store this sensitive data and information. Security breaches of this infrastructure, including physical or electronic
break-ins, computer viruses, attacks by hackers and similar breaches, and employee or contractor error, negligence or malfeasance, can create system disruptions, shutdowns or unauthorized disclosure or modifications of such sensitive data or information, causing PHI or other PII to be accessed or acquired without authorization or to become publicly available. We utilize third-party service providers for important aspects of the collection, storage, processing and transmission of employee, user and member information, and other confidential and sensitive information, and therefore rely on third parties to manage functions that have material cybersecurity risks. Because of the sensitivity of the PHI, other PII and other sensitive information that we and our service providers collect, store, transmit, and otherwise process, the security of our technology platform and other aspects of our services, including those provided or facilitated by our third-party service providers, are important to our operations and business strategy. We take certain administrative, physical and technological safeguards to address these risks, such as requiring contractors and other third-party service providers who handle this PHI, other PII and other sensitive information to enter into agreements that contractually obligate them to use reasonable efforts to safeguard such PHI, other PII, and other sensitive information. Measures taken to protect our systems, those of our contractors or third-party service providers, or the PHI, other PII, or other sensitive information we or contractors or third-party service providers process or maintain, may not protect us from the risks associated with the collection, storage, processing and transmission of such sensitive data and information. We may be required to expend significant capital and other resources to protect security or to alleviate caused by security . our implementation of security measures, cyber-attacks are becoming more sophisticated and frequent. As a result, we or our third-party service providers may be to anticipate these techniques or implement adequate protective measures.
A security breach or privacy violation that leads to disclosure or unauthorized use or modification of, or that prevents access to or otherwise impacts the confidentiality, security, or integrity of, member information, including PHI or other PII, or other sensitive information that we or our contractors or third-party service providers maintain or otherwise process, could harm our reputation, compel us to comply with breach notification laws, cause us to incur significant costs for remediation, fines, penalties, costs and expenses contesting such actions, notification to individuals and for measures intended to repair or replace systems or technology and to prevent future occurrences, potential increases in insurance premiums, and require us to verify the accuracy of database contents, resulting in increased costs or loss of revenue. While we have not experienced any material system failure, or security to-date of which we are aware, we nevertheless have experienced from time to time, and continue to experience in the future, cyber-attacks on our information technology systems our efforts to prevent them. For instance, in June 2020, we to the public a data resulting from a business email compromise by an unknown actor that affected Office 365 email accounts of certain employees. As some of the affected email inboxes contained PHI or PII, we notified all potentially affected individuals and the HHS OCR. In December 2020, we received a data request from OCR relating to this , to which we responded. In June 2021, OCR notified us that it has this with no findings. In addition, a class action lawsuit related to this was filed us in the Miami-Dade County Court of the State of Florida. Our insurance carrier has reached a settlement with the class action and the settlement was approved by the Miami-Dade County Court at a hearing held on July 1, 2021.
If we are unable to prevent or mitigate such security breaches or privacy violations or implement satisfactory remedial measures, or if it is perceived that we have been unable to do so, our operations could be disrupted, we may be unable to provide access to our systems, we could suffer a loss of members and we may as a result suffer loss of reputation, adverse impacts on member and investor confidence, financial loss, governmental investigations or other actions, regulatory or contractual penalties, and other claims and liability and related costs and expenses in such matters. In addition, security and other access to, or acquisition or processing of, information can be to detect, and any in identifying such or in providing any notification of such may lead to increased .
Any such breach or interruption of our systems or those of any of our third-party service providers could compromise our networks or data security processes and sensitive information could be made inaccessible or could be accessed by unauthorized parties, publicly disclosed, lost or stolen. Any such interruption in access, improper access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws and regulations that protect the privacy of member information or other personal information, such as HIPAA, as amended by HITECH, and their implementing regulations and regulatory penalties. Unauthorized access, loss or dissemination could also disrupt our operations, including our ability to perform our services, access member health information, collect, process, and prepare company financial information, provide information about our current and future services and engage in other member and clinician education and outreach efforts. Any such could also result in the compromise of our trade secrets and other proprietary information, which could affect our business and competitive position. While we maintain insurance that covers certain security and privacy and claim
expenses, we may not carry insurance or maintain coverage sufficient to compensate for all liability and costs and in any event, insurance coverage would not address the reputational damage that could result from a security incident.
Disruptions in our disaster recovery systems or management continuity planning could limit our ability to operate our business effectively.
Our information technology systems facilitate our ability to conduct our business. While we have disaster recovery systems and business continuity plans in place, any disruptions in our disaster recovery systems or the failure of these systems to operate as expected could, depending on the magnitude of the problem, adversely affect our operating results by limiting our capacity to effectively monitor and control our operations. Despite our implementation of a variety of security measures, our information technology systems could be subject to physical or electronic break-ins, and similar disruptions from unauthorized tampering or any weather-related disruptions where our headquarters are located. In addition, if a significant number of our management personnel are unavailable in the event of a disaster, our ability to effectively conduct business could be affected.
If we are unable to obtain, maintain and enforce intellectual property protection for our content or if the scope of our intellectual property protection is not sufficiently broad, our business may be adversely affected.
Our business depends on certain internally developed content, including software, databases, confidential information and know-how, the protection of which is crucial to the success of our business. We rely on a combination of trademark, trade-secret, and copyright laws and confidentiality procedures and contractual provisions to protect our intellectual property rights in our internally developed content. We may, over time, increase our investment in protecting our intellectual property through additional trademark, patent and other intellectual property filings that could be expensive and time-consuming. Effective trademark, trade-secret and copyright protection is expensive to develop and maintain, both in terms of initial and ongoing registration requirements and the costs of defending our rights. These measures, however, may not be sufficient to offer us meaningful protection. Additionally, we do not currently hold a patent or other registered or applied for intellectual property protection for CanoPanorama. If we are unable to protect our intellectual property and other rights, our competitive position and our business could be harmed, as third parties may be able to commercialize and use technologies and software products that are substantially the same as ours without incurring the development and licensing costs that we have incurred. Any of our owned or licensed intellectual property rights could be , , , or , our trade secrets and other confidential information could be in an manner to third parties, or our intellectual property rights may not be sufficient to permit us to take of current market trends or otherwise to provide us with competitive , which could result in redesign efforts, of certain offerings or other competitive .
Monitoring unauthorized use of our intellectual property is difficult and costly. From time to time, we seek to analyze our competitors’ services, and may in the future seek to enforce our rights against potential infringement. However, the steps we have taken to protect our intellectual property rights may not be adequate to prevent infringement or misappropriation of our intellectual property. We may not be able to detect unauthorized use of, or take appropriate steps to enforce, our intellectual property rights. Any inability to meaningfully protect our intellectual property rights could result in harm to our ability to compete and reduce demand for our services. Moreover, our failure to develop and properly manage new intellectual property could adversely affect our market positions and business . Also, some of our services rely on technologies and software developed by or licensed from third parties, and we may not be to maintain our relationships with such third parties or enter into similar relationships in the future on reasonable terms, or at all.
Uncertainty may result from changes to intellectual property legislation and from interpretations of intellectual property laws by applicable courts and agencies. Accordingly, despite our efforts, we may be unable to obtain and maintain the intellectual property rights necessary to provide us with a competitive advantage. Our failure to obtain, maintain and enforce our intellectual property rights could therefore have a material adverse effect on our business, financial condition, results of operations, liquidity, cash flows and/or stock price.
Third parties may initiate legal proceedings alleging that we are infringing or otherwise violating their intellectual property rights, the outcome of which would be uncertain and could have a material adverse effect on our business, financial condition, results of operations, liquidity, cash flows and/or stock price.
Our commercial success depends on our ability to develop and commercialize our services and use our technology platform without infringing the intellectual property or proprietary rights of third parties. Intellectual property disputes can be costly to defend and may cause our business, operating results, financial condition, liquidity, cash flows and/or stock price to suffer. As the market for healthcare in the U.S. expands and more patents are issued, the risk increases that there may be patents issued to third parties that relate to our technology platform of which we are not aware or that we must challenge to continue our operations as currently contemplated. Whether merited or not, we may face allegations that we, our vendors or licensors or parties indemnified by us have infringed or otherwise violated the patents, trademarks, copyrights or other intellectual property rights of third parties. Such claims may be made by competitors seeking to obtain a competitive or by other parties. Additionally, in recent years, individuals and groups have begun purchasing intellectual property assets for the purpose of making of and attempting to extract settlements from companies like ours. We may also face that our employees have the intellectual property or proprietary rights of their former employers or other third parties. It may be necessary for us to initiate to ourselves in order to determine the scope, enforceability and validity of third-party intellectual property or proprietary rights, or to establish our respective rights. We may not be to settle or otherwise such proceedings or . If we are to settle future on terms acceptable to us we may be required to engage in or to continue , regardless of whether such have merit, which can be time-consuming, management’s attention and financial resources and can be to evaluate and . Results of any such are to predict and may require us to stop commercializing or using our technology platform, obtain licenses, modify our services and technology platform while we develop non- substitutes or incur substantial , settlement costs or face a temporary or permanent prohibiting us from marketing or providing the affected services. If we require a third-party license, it may not be available on reasonable terms or at all, and we may have to pay substantial royalties, service fees, upfront fees or grant cross-licenses to intellectual property rights for our services. We may also have to redesign our services so they do not on third-party intellectual property rights, which may not be possible or may require substantial monetary expenditures and time, during which our technology platform may not be available for commercialization or use. Even if we have an agreement to indemnify us such costs, the indemnifying party may be to uphold its contractual obligations. If we cannot or do not obtain a third-party license to the technology, license the technology on reasonable terms or obtain similar technology from another source, our revenue, earnings, liquidity, cash flows and/or stock price could be impacted.
From time to time, we may be subject to legal proceedings and claims in the ordinary course of business with respect to intellectual property. We are not currently subject to any claims from third parties asserting infringement of their intellectual property rights. Some third parties may be able to sustain the costs of complex litigation more effectively than we can because they have substantially greater resources. Even if resolved in our favor, litigation or other legal proceedings relating to intellectual property claims may cause us to incur significant expenses, and could distract our technical and management personnel from their normal responsibilities. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments, and if securities analysts or investors perceive these results to be negative, it could have a material adverse effect on the price of our securities. Moreover, any uncertainties resulting from the initiation and continuation of any legal proceedings could have a material effect on our ability to raise the funds necessary to continue our operations. by third parties that we their intellectual property rights could therefore have a material effect on our business, financial condition, results of operations, liquidity, cash flows and/or stock price.
If we are unable to protect the confidentiality of our trade secrets, know-how and other proprietary and internally developed information, the value of our technology platform could be adversely affected.
We may not be able to adequately protect our trade secrets, know-how and other internally developed information platforms. Although we use reasonable efforts to protect this internally developed information and technology platform, our employees, consultants and other parties (including independent contractors and companies with which we conduct business) may unintentionally or willfully disclose our information or technology to competitors. Enforcing a claim that a third party illegally disclosed or obtained and is using any of our internally developed information or technology is difficult, expensive and time-consuming, and the outcome is unpredictable. In addition, courts outside the U.S. are sometimes less willing to protect trade
secrets, know-how and other proprietary information. We rely, in part, on non-disclosure and confidentiality agreements with our employees, independent contractors, consultants and companies with which we conduct business to protect our trade secrets, know-how and other intellectual property and internally developed information. These agreements may not be self-executing, or they may be breached and we may not have adequate remedies for such breaches. Moreover, third parties may independently develop similar or equivalent proprietary information or otherwise gain access to our trade secrets, know-how and other internally developed information.
Any restrictions on our use of, or ability to license, data, or our failure to license data and integrate third-party technologies, could have a material adverse effect on our business, financial condition, results of operations, liquidity, cash flows and/or stock price.
We depend upon licenses from third parties for components of the technology and data used in our population health management technology platform. We expect that we may need to obtain additional licenses from third parties in the future in connection with the development of our services. In addition, we obtain a portion of the data that we use from government entities, public records and our partners for specific partner engagements. We believe that we have all rights necessary to use the data that is incorporated into our services. Our licenses for information may not allow us to use that information for all potential or contemplated applications. In addition, our ability to continue to offer integrated healthcare to our members depends on maintaining our population health management technology platform, which is partially populated with data disclosed to us by our affiliates with their consent. If these affiliates revoke their consent for us to maintain, use, identify and share this data, consistent with applicable law, our data assets could be degraded.
In the future, data providers could withdraw their data from us or restrict our usage for any reason, including if there is a competitive reason to do so, if legislation is passed restricting the use of the data or if judicial interpretations are issued restricting use of the data that we currently use to support our services. In addition, data providers could fail to adhere to our quality control standards in the future, causing us to incur additional expense to appropriately utilize the data. If a substantial number of data providers were to withdraw or restrict their data, or if they fail to adhere to our quality control standards, and if we are unable to identify and contract with suitable alternative data suppliers and integrate these data sources into our service offerings, our ability to provide appropriate services to our members would be materially adversely impacted, which could have a material adverse effect on our business, financial condition, results of operations, liquidity, cash flows and/or stock price.
We also integrate our internally developed applications and use third-party software to support our technology infrastructure. Some of this software is proprietary and some is open source software. If we combine our proprietary software with open-source software in certain ways, we may be required, under the terms of the applicable open-source licenses, to make our proprietary source code available to third parties. Additionally, the terms of open-source licenses have not been extensively interpreted by U.S. or international courts, so there is a risk that open-source software licenses could be construed in a manner that imposes unanticipated conditions or restrictions on us or our proprietary software. These technologies may not be available to us in the future on commercially reasonable terms, or at all, and could be difficult to replace once integrated into our own internally developed applications. Most of these licenses can be renewed only by mutual consent and may be terminated if we breach the terms of the license and fail to cure the breach within a specified period of time. Our inability to obtain, maintain or comply with any of these licenses could development until equivalent technology can be identified, licensed and integrated, which would our business, financial condition, results of operations, liquidity, cash flows and/or stock price.
Most of our third-party licenses are non-exclusive and our competitors may obtain the right to use any of the technology covered by these licenses to compete directly with us. Our use of third-party technologies exposes us to increased risks, including but not limited to risks associated with the integration of new technology into our solutions, the diversion of our resources from development of our own internally developed technology and our inability to generate revenue from licensed technology sufficient to offset associated acquisition and maintenance costs. In addition, if our data suppliers choose to discontinue support of the licensed technology in the future, we might not be able to modify or adapt our own solutions and the loss of such capabilities could have a material adverse effect on our business, results of operations, financial condition, liquidity, cash flows and/or stock price.
We are currently and may in the future be subject to legal proceedings and litigation, including intellectual property, privacy and medical malpractice disputes, which are costly to defend and could materially harm our business and results of operations.
We are currently and may in the future be party to lawsuits and legal proceedings in the normal course of business. These matters are often expensive and disruptive to normal business operations. We may face allegations, lawsuits and regulatory inquiries, audits and investigations regarding the services we provide, as well as data privacy, security, labor and employment, consumer protection and intellectual property infringement, including claims related to privacy, patents, publicity, trademarks, copyrights and other rights, as well as claims related to our business potentially operating in a noncompliant manner with applicable laws, rules or regulations. See also, “We face inspections, reviews, audits and investigations under federal and state government programs and contracts. These audits could have adverse findings that may negatively affect our business, including our results of operations, liquidity, financial condition, cash flows, stock price and/or reputation” earlier in these risk factors. We may also face , and regulatory inquiries, audits and related to our acquisitions, securities issuances or business practices, including public disclosures about our business. For example, in December 2023 we received a from the SEC’s Division of Enforcement requesting information regarding certain of the matters related to its former CEO that were the subject of the commenced in April 2023 by its former directors, Messrs. Cooperstone, Gold and Sternlicht, in the Delaware Chancery Court. The Company prevailed after a hearing at the Delaware Court or Chancery in an effort by the 3 directors to prevent the Company from holding its 2023 annual stockholders' meeting in June 2023 and to enforcement of the Company’s advance notice by-law provisions. The Company is cooperating with the SEC in its and cannot predict its outcome or duration. and regulatory proceedings may be and expensive, and the results are to predict. Certain of these matters may include speculative for substantial or indeterminate amounts of and include for injunctive relief. Additionally, our costs could be significant. outcomes with respect to or any of these legal proceedings may result in significant settlement costs or judgments, and , or require us to modify our services or require us to stop serving certain members or geographies, all of which could impact our geographic expansion and revenue growth. We may also become subject to periodic audits, which would likely increase our regulatory compliance costs and may require us to change our business practices, which could impact our revenue growth, as well as on our business, results of operations, financial condition, liquidity, cash flows and/or stock price. Managing legal proceedings, and audits, even if we outcomes, is time-consuming and management’s attention from our business. Please see the description of certain legal proceedings set forth in the “Legal Matters” section in Note 19, "Commitments and Contingencies," in the notes to the consolidated financial statements in Item 8 of Part II of this 2023 Form 10-K.
The results of regulatory proceedings, litigation, claims, and audits cannot be predicted with certainty, and determining reserves for pending litigation and other legal, regulatory and audit matters requires significant judgment. There can be no assurance that our expectations will prove correct, and even if these matters are resolved in our favor or without significant cash settlements, these matters, and the time and resources necessary to litigate or resolve them, could harm our reputation, business, financial condition, results of operations, liquidity, cash flows and/or the market price of our securities.
We also may be subject to lawsuits under the FCA and comparable state laws for submitting allegedly fraudulent or otherwise inappropriate bills for services to the Medicare and Medicaid programs. These lawsuits, which may be initiated by government authorities as well as private party relators, can involve significant monetary damages, fines, attorney fees and the award of bounties to private plaintiffs who successfully bring these suits, as well as to the government programs. In recent years, government oversight and law enforcement have become increasingly active and aggressive in investigating and taking legal action against potential fraud and abuse.
Furthermore, our business exposes us to potential medical malpractice, professional negligence or other related actions or claims that are inherent in the provision of healthcare services. These claims, with or without merit, could cause us to incur substantial costs, and could place a significant strain on our financial resources, divert the attention of management from our core business, harm our reputation and adversely affect our ability to attract and retain members, any of which could have a material adverse effect on our business, financial condition, results of operations, liquidity, cash flows and/or stock price.
Although we maintain third-party directors’ and officers’ professional liability insurance coverage, it is possible that claims against us may exceed the coverage limits of our insurance policies. Even if any professional liability loss is covered by an
insurance policy, these policies typically have substantial deductibles for which we are responsible. Professional liability claims in excess of applicable insurance coverage could have a material adverse effect on our business, financial condition, results of operations, liquidity, cash flows and/or stock price. In addition, any professional liability claim brought against us, with or without merit, could result in an increase of our professional liability insurance premiums. Insurance coverage varies in cost and can be difficult to obtain, and we cannot guarantee that we will be able to obtain insurance coverage in the future on terms acceptable to us or at all. If our costs of insurance and claims increase, then our earnings could decline, which could have a material adverse effect on our business, financial condition, results of operations, liquidity, cash flows and/or stock price. Please see the description of certain legal proceedings set forth in the “Legal Matters” section in Note 19, "Commitments and Contingencies" in the notes to the consolidated financial statements in Item 8 of Part II of this 2023 Form 10-K.
Risks Related to Being a Public Company
The requirements of being a public company may strain our resources, result in more litigation and divert management's attention, which could make it difficult to manage our business.
Since becoming a public company, we have and will continue to incur legal, accounting and other expenses that we did not previously incur. We are subject to the reporting requirements of the Exchange Act, and the Sarbanes-Oxley Act, and other applicable securities laws, rules and regulations. Compliance with these laws, rules and regulations has and will continue to increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and increase demand on our systems and resources. The Exchange Act requires that we file annual, quarterly and current reports with respect to our business, financial condition and results of operations. The Sarbanes-Oxley Act requires, among other things, that we establish and maintain effective internal controls and procedures for financial reporting. Furthermore, the need to establish the corporate infrastructure demanded of a public company may divert our management’s attention from implementing our growth strategy, which could prevent us from improving our business, financial condition and results of operations. We have made, and will continue to make, changes to our internal controls and procedures for financial reporting and accounting systems to meet our reporting obligations as a public company. However, the measures we take may not be sufficient to our obligations as a public company. In addition, these rules and regulations have and will continue to increase our legal and financial compliance costs and will make some activities more time-consuming and . For example, these rules and regulations may make it more expensive for us to obtain director and officer liability insurance and, in the future, we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage, which could make it more for us to attract and retain qualified members of our board of directors. These additional obligations could have a material effect on our business, financial condition, results of operations, liquidity, cash flows and/or stock price.
In addition, changing laws, rules, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. These laws, rules, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, rules, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of our management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, rules, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us and there could be a material adverse effect on our business, financial condition, results of operations, liquidity, cash flows and/or stock price.
Our management team has limited experience managing a public company.
Most members of our management team have limited or no experience managing a publicly traded company, interacting with public company investors and complying with the increasingly complex laws pertaining to public companies. Our management team may not successfully or efficiently manage us as a public company that is subject to significant regulatory oversight and reporting obligations under the federal securities laws and the continuous scrutiny of securities analysts and investors. These new obligations and constituents require significant attention from our senior management team and could divert
their attention away from the day-to-day management of our business, which could adversely affect our business, results of operations, financial condition, liquidity, cash flows and/or stock price.
Our operating results and stock price may be volatile.
Our operating results are likely to fluctuate in the future. For example, we incurred a net loss of $1.1 billion, (which includes a $442.9 million non-cash goodwill impairment), $428.4 million (which includes a $323.0 million non-cash goodwill impairment) and $116.7 million, for the years ended December 31, 2023, 2022 and 2021, respectively. Our accumulated deficit was $880.5 million, $286.0 million, and $78.8 million, as of December 31, 2023, 2022 and 2021, respectively. We expect our aggregate costs will increase substantially in the foreseeable future and our losses will continue as we expect to invest heavily in transforming our business. We may not succeed in increasing our revenue sufficiently to offset these higher expenses. Our cash flows from operating activities were negative for the years ended December 31, 2021, 2022 and 2023. We may not generate positive cash flow from operating activities in any given period, and our limited operating history may make it difficult for stakeholders to evaluate our current business and our future prospects. In addition, we have used a significant amount of cash on acquisitions and investing in new medical centers.
In addition, securities markets worldwide have experienced, and are likely to continue to experience, significant price and volume fluctuations. This market volatility, as well as general economic, market or political conditions, could subject the market price of our securities to wide price fluctuations regardless of our operating performance. Our operating results and the trading price of our securities may fluctuate in response to various factors, including:
• market conditions in our industry or the broader stock market;
• actual or anticipated fluctuations in our quarterly financial and operating results our liquidity and our financial condition, including our non-compliance with the covenants under our Credit Agreements;
• issuances of new or changed securities analysts’ reports or recommendations;
• sales, or anticipated sales, of large blocks of our stock;
• additions or departures of key personnel;
• regulatory, legislative or political developments;
• litigation and governmental investigations;
• changing economic conditions;
• investors’ perception of us;
• events beyond our control such as weather, chemical disasters and war; and
• any default on our indebtedness acceleration of our indebtedness, our inability to repay some or all of such indebtedness upon acceleration and/or any foreclosure on our assets which serve as collateral for the indebtedness under our Credit Agreements, which constitutes substantially all of our assets.
These and other factors, many of which are beyond our control, may cause our operating results and the market price and demand for our securities to fluctuate substantially. Fluctuations in our quarterly operating results could limit or prevent investors from readily selling their shares and may otherwise negatively affect the market price and liquidity of our securities. The market price of our Class A Common Stock may decline below your purchase price, and you may not be able to sell your shares of our Class A Common Stock at or above the price you paid for such shares (or at all). In addition, in the past, when the market price of a stock has been volatile, holders of that stock have sometimes instituted securities class action litigation against the company that issued the stock. If any of our stockholders brings one or more lawsuits against us, we could incur substantial costs defending these lawsuits, which could also divert the time and attention of our management from our business, which could
significantly harm our profitability, reputation, business, results of operations, financial condition, liquidity, cash flows and/or stock price. See “Our business and operations could be negatively affected if we become subject to any securities litigation or stockholder activism, which could cause us to incur significant expense, hinder execution of business and growth strategy and impact our stock price.”
Because we have no current plans to pay regular cash dividends on our Class A Common Stock, you may not receive any return on investment unless you sell your Class A Common Stock for a price greater than that which you paid for it.
We do not anticipate paying any regular cash dividends on our Class A Common Stock. Further, with the Chapter 11 Cases, any dividend payment would require pre-approval by the Bankruptcy Court, which we expect would not be granted. Any decision to declare and pay dividends in the future will be made at the discretion of our Board and will depend on, among other things, our results of operations, financial condition, cash requirements, contractual restrictions and other factors that our Board may deem relevant. In addition, our ability to pay dividends is currently restricted by the DIP Credit Agreement and may in the future be limited by covenants of existing and any future outstanding indebtedness we or our subsidiaries incur. Therefore, any return on investment in our Class A Common Stock is solely dependent upon the appreciation of the price of our Class A Common Stock on the open market, which may not occur. Also, it is expected that if the terms and conditions of the RSA are successfully implemented through a chapter 11 plan of reorganization approved by the Bankruptcy Court, all of the Company’s current equity securities, including all Class A Common Stock, Class B Common Stock, warrants and other securities will be cancelled and extinguished in the restructuring without any recovery.
We may issue shares of preferred stock in the future, which could make it difficult for another company to acquire us or could otherwise adversely affect holders of our Class A Common Stock, which could depress the price of our Class A Common Stock.
Our current Certificate of Incorporation authorizes us to issue one or more series of preferred stock. Our Board has the authority to determine the preferences, limitations and relative rights of the shares of preferred stock and to fix the number of shares constituting any series and the designation of such series, without any further vote or action by our stockholders. Our preferred stock could be issued with voting, liquidation, dividend and other rights superior to the rights of our Class A Common Stock. The potential issuance of preferred stock may delay or prevent a change in control of us, discouraging bids for our Class A Common Stock at a premium to the market price, and materially and adversely affect the market price and the voting and other rights of the holders of our Class A Common Stock.
Risks Related to Our Organizational Structure
We are a holding company and our only material asset is our interest in PCIH, and accordingly, we are dependent upon distributions made by our subsidiaries to pay taxes, make payments under the Tax Receivable Agreement and pay dividends.
We are a holding company with no material assets other than our ownership of the PCIH Common Units and our managing member interest in PCIH. As a result, we have no independent means of generating revenue or cash flow. Our ability to pay taxes, make payments under the Tax Receivable Agreement and pay dividends will depend on the financial results and cash flows of PCIH and the distributions we receive from PCIH. Deterioration in the financial condition, earnings or cash flow of PCIH for any reason could limit or impair PCIH’s ability to pay such distributions. Additionally, to the extent that we need funds and PCIH is restricted from making such distributions under applicable law or regulation or under the terms of any financing arrangements, or PCIH is otherwise unable to provide such funds, this could materially adversely affect our results of operations, liquidity, financial condition, cash flows and/or stock price.
PCIH will continue to be treated as a partnership for U.S. federal income tax purposes and as such, generally will not be subject to any entity-level U.S. federal income tax. Instead, taxable income will be allocated to the holders of PCIH Common Units. Accordingly, we will be required to pay income taxes on our allocable share of any net taxable income of PCIH. Under the terms of the Second Amended and Restated Limited Liability Company Agreement, PCIH is obligated to make tax distributions to the holders of PCIH Common Units (including the Company), calculated at certain assumed tax rates. In addition to income taxes, we will also incur expenses related to our operations, including payment obligations under the Tax Receivable Agreement,
which could be significant, some of which will be reimbursed by PCIH (excluding payment obligations under the Tax Receivable Agreement). Subject to approval by the Bankruptcy Court, we may cause PCIH to make ordinary distributions and tax distributions to holders of PCIH Common Units on a pro rata basis in amounts sufficient to cover all applicable taxes, relevant operating expenses, payments under the Tax Receivable Agreement and dividends, if any, declared by us. However, as discussed below, PCIH’s ability to make such distributions may be subject to various limitations and restrictions including, but not limited to, retention of amounts necessary to satisfy the obligations of PCIH and restrictions on distributions that would violate any applicable restrictions contained in PCIH’s debt agreements, or any applicable law, or that would have the effect of rendering PCIH insolvent. To the extent that we are unable to make payments under the Tax Receivable Agreement for any reason, such payments will be deferred and will accrue interest until paid; provided, however, that nonpayment for a specified period may constitute a material breach of a material obligation under the Tax Receivable Agreement and therefore accelerate payments under the Tax Receivable Agreement, which could be substantial.
Additionally, although PCIH generally will not be subject to any entity-level U.S. federal income tax, it may be liable for adjustments to its tax return, absent an election to the contrary, arising out of audits of its tax returns for 2018 and subsequent years. If PCIH’s calculations of taxable income are incorrect, PCIH and/or its members, including us, may be subject to material liabilities in later years.
We anticipate that the distributions we will receive from PCIH may, in certain periods, exceed our actual tax liabilities and obligations to make payments under the Tax Receivable Agreement. Our Board, in its sole discretion, may make any determination from time to time with respect to the use of any such excess cash so accumulated, which may include, among other uses, to pay dividends on our Class A Common Stock. We have no obligation, nor do we have any current intention, to distribute such cash (or other available cash other than any declared dividend) to our stockholders. Further, with the Chapter 11 Cases, any dividend payment or TRA distributions would require pre-approval by the Bankruptcy Court, which we expect would not be granted.
Dividends on our Class A Common Stock, if any, will be paid at the discretion of our Board, which will consider, among other things, our available cash, available borrowings and other funds legally available therefor, taking into account the retention of any amounts necessary to satisfy our obligations that will not be reimbursed by PCIH, including taxes and amounts payable under the Tax Receivable Agreement and any restrictions in then-applicable bank financing agreements. Financing arrangements may include restrictive covenants that restrict our ability to pay dividends or make other distributions to its stockholders. In addition, PCIH is generally prohibited under Delaware law from making a distribution to a member to the extent that, at the time of the distribution, after giving effect to the distribution, liabilities of PCIH (with certain exceptions) exceed the fair value of its assets. PCIH’s subsidiaries are generally subject to similar legal limitations on their ability to make distributions to PCIH. If PCIH does not have sufficient funds to make distributions, our ability to declare and pay cash dividends may also be restricted or impaired.
Pursuant to the Tax Receivable Agreement, we generally will be required to pay each person from time to time that becomes a “TRA Party” under the Tax Receivable Agreement, 85% of the tax savings, if any, that we are deemed to realize in certain circumstances as a result of certain tax attributes that existed following the Business Combination and that are created thereafter, including as a result of payments made under the Tax Receivable Agreement, and to the extent payments are made to Seller and to each other person that becomes a “TRA Party” to the agreement, we generally will be required to pay to the Sponsor (as defined below), and to each other person from time to time that becomes a “Sponsor Party” under the Tax Receivable Agreement, such, Sponsor Party’s proportionate share of an amount equal to such payments multiplied by a fraction with the numerator 0.15 and the denominator 0.85, and those payments may be substantial. As a result of the payments to the TRA Party and Sponsor Party, we generally will be required to pay an amount equal to but not in excess of the tax benefit realized from the tax attributes subject to the Tax Receivable Agreement. In addition, the filing of the Chapter 11 Cases, may have resulted in the acceleration of our obligations under the Tax Receivable Agreement. Further, with the Chapter 11 Cases, any payment under the Tax Receivable Agreement would require pre-approval by the Bankruptcy Court, which we expect would not be granted.
We entered into the Tax Receivable Agreement, which generally provides for the payment by us to PCIH, and to each other person from time to time that becomes a “TRA Party” under the Tax Receivable Agreement, of 85% of the tax savings, if any, that we are deemed to realize in certain circumstances as a result of certain tax attributes that existed following the Business Combination and that are created thereafter, including as a result of payments made under the Tax Receivable Agreement. To the extent payments are made pursuant to the Tax Receivable Agreement, which in any event would require Bankruptcy Court
approval during the Chapter 11 Cases, we generally will be required to pay to Jaws Sponsor LLC (the "Sponsor"), and to each other person from time to time that becomes a “Sponsor Party” under the Tax Receivable Agreement such Sponsor Party’s proportionate share of, an amount equal to such payments multiplied by a fraction with the numerator 0.15 and the denominator 0.85. The term of the Tax Receivable Agreement will continue until all such tax benefits have been utilized or expired unless we exercise our right to terminate the Tax Receivable Agreement for an amount representing the present value of anticipated future tax benefits under the Tax Receivable Agreement or certain other acceleration events occur. The Tax Receivable Agreement is subject to rejection or affirmation in the Chapter 11 Cases and, if affirmed, any payments under such agreement will require Bankruptcy Court approval during the Chapter 11 Cases.
The Tax Receivable Agreement liability is determined and recorded under ASC 450, “ Contingencies, ” as a contingent liability; therefore, we are required to evaluate whether the liability is both probable and the amount can be estimated. The Tax Receivable Agreement liability is payable upon cash tax savings or upon an early termination event. The Company has not recorded a Tax Receivable Agreement liability as of December 31, 2023 as the Company determined that: (i) the Company's positive future taxable income is not probable, based on, among other things, the Company's historical loss position and other factors that make it difficult to rely on forecasts, and (ii) the early termination event due to the Company's Chapter 11 Cases, which occurred subsequent to the fiscal year ended December 31, 2023. T he TRA contemplates, in the event of an acceleration, that the Company pay an Early Termination Payment (as defined in the TRA). The Company expects to record a liability, during the quarter ending March 31, 2024 of an estimated $279.3 million in respect of such Early Termination Payment, subject to the applicable provisions of the Bankruptcy Code. The Company will continue to evaluate this contingent liability on a quarterly basis, which may result in an adjustment in the future. If the Seller were to exchange their PCIH equity interests for our securities, we would recognize a liability for the total amount owed to the PCIH equity interests. These payments are our obligation and not those of PCIH. The actual increase in our allocable share of PCIH’s tax basis in its assets, as well as the amount and timing of any payments under the Tax Receivable Agreement, will vary depending upon a number of factors, including the timing of exchanges, the market price of shares of our Class A Common Stock at the time of the exchange, the extent to which such exchanges are taxable and the amount and timing of the recognition of our income. While many of the factors that will determine the amount of payments that we will make under the Tax Receivable Agreement are outside of our control, we expect that any payments we make under the Tax Receivable Agreement, if approved by the Court, could be substantial and could have a material effect on our financial condition, results of operations, liquidity, cash flows and/or stock price. Any payments made by us under the Tax Receivable Agreement will generally reduce the amount of overall cash flow that might have otherwise been available to us. To the extent that we are to make timely payments under the Tax Receivable Agreement for any reason, the amounts will be deferred and will accrue interest until paid; however, for a specified period may constitute a material of a material obligation under the Tax Receivable Agreement and therefore accelerate payments due under the Tax Receivable Agreement, as further described below. Furthermore, our future obligation to make payments under the Tax Receivable Agreement could make it a less target for an acquisition, particularly in the case of an acquirer that cannot use some or all of the tax benefits that may be deemed realized under the Tax Receivable Agreement.
In addition, by reason of the payments made to the Sponsor, we are not expected to retain any of the tax benefits stemming from events that will give rise to payments under the Tax Receivable Agreement.
In certain cases, payments under the Tax Receivable Agreement may exceed the actual tax benefits we realize or be accelerated.
Payments under the Tax Receivable Agreement, if approved by the Bankruptcy Court, will be based on the tax reporting positions that we determine, and the Internal Revenue Service (the "IRS") or another taxing authority may challenge all or any part of the tax basis increases, as well as other tax positions that we take, and a court may sustain such a challenge. If any tax benefits initially claimed by us are disallowed, the Seller and the exchanging holders will not be required to reimburse us for any excess payments that may previously have been made under the Tax Receivable Agreement, for example, due to adjustments resulting from examinations by taxing authorities. Rather, excess payments made to such holders will be netted against any future cash payments otherwise required to be made by us, if any, after the determination of such excess. However, a challenge to any tax benefits initially claimed by us may not arise for a number of years following the initial time of such payment or, even if challenged early, such excess cash payment may be greater than the amount of future cash payments that we might otherwise be required to make under the terms of the Tax Receivable Agreement and, as a result, there might not be future cash payments which to net. As a result, in certain circumstances, we could make payments under the Tax Receivable Agreement, if
approved by the Bankruptcy Court, in excess of our actual income or franchise tax savings, which could materially impair our financial condition.
Moreover, the Tax Receivable Agreement provides that, if (i) we exercise our early termination rights under the Tax Receivable Agreement, (ii) certain changes of control of us occur (as described in the Tax Receivable Agreement), or (iii) we breach any of our material obligations, or otherwise experience an early termination event, under the Tax Receivable Agreement, including potentially as a result of the filing of the Chapter 11 Cases, our obligations under the Tax Receivable Agreement will accelerate and, if approved by the Bankruptcy Court, we could be required to make lump-sum cash payments to certain parties to the agreement, the Sponsor and/or other applicable parties to the Tax Receivable Agreement equal to the present value of all forecasted future payments that would have otherwise been made under the Tax Receivable Agreement, which lump-sum payments would be based on certain assumptions, including those relating to our future taxable income. These lump-sum payments, if any are approved by the Bankruptcy Court, could be substantial and could exceed the actual tax benefits that we realize subsequent to such payment because such payment would be calculated assuming, among other things, that we would have certain tax benefits available to us and that we would be able to use the potential tax benefits in future years, which actual experience could differ significantly from the assumptions used to calculate the lump-sum payments.
There may be a material negative effect on our liquidity and cash flows if the payments, if any are approved by the Bankruptcy Court, under the Tax Receivable Agreement exceed the actual income or franchise tax savings that we realize. Furthermore, our obligations to make payments under the Tax Receivable Agreement, if approved by the Bankruptcy Court, could also have the effect of delaying, deferring or preventing certain mergers, asset sales, other forms of business combinations or other changes of control, which could adversely impact stockholder value and our stock price.
These estimates and assumptions are also subject to various factors beyond our control, including, for example, changes in the consumer demand for our services, our incurring increased costs in our care management model, increased labor costs, changes in the regulatory environment, the adoption of future legislation, particularly with respect to Medicare and Medicaid, changes in regulations, the impact of global health crises (including the COVID-19 pandemic and its variants) and changes in our executive team. There can be no assurance that our actual results will be realized, as compared to those used in the estimates or assumptions which are inherently prospective in nature, or that actual results will not be significantly higher or lower than estimated. Notably, our financial projections reflect assumptions regarding contracts with health plans, as well as indications of interest from potential members, acquisition targets and strategic partners who may withdraw at any time. Accordingly, our future financial condition and results of operations may differ materially from our projections. Our failure to achieve our projected results could also harm the trading price of our securities and our financial position.
Delaware law, our current Certificate of Incorporation and our current By-laws contain certain provisions, including anti-takeover provisions, that currently limit the ability of stockholders to take certain actions and could delay or discourage takeover attempts that stockholders may consider favorable.
Delaware law, our current Certificate of Incorporation and our current By-laws contain provisions that could have the effect of rendering more difficult, delaying, or preventing an acquisition deemed undesirable by our Board and therefore depress the trading price of our securities. These provisions could also make it difficult for stockholders to take certain actions, including electing directors who are not nominated by the current members of our Board or taking other corporate actions, including effecting changes in management.
Among other things, our current Certificate of Incorporation and By-laws include provisions regarding:
• a classified board of directors with 3-year staggered terms, which could delay the ability of stockholders to change the membership of a majority of our Board;
• the ability of our Board to issue shares of preferred stock, including “blank check” preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquirer;
• the limitation of the liability of, and the indemnification of, our directors and officers;
• the right of our Board to elect a director to fill a vacancy created by the expansion of our Board or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our Board;
• the requirement that directors may only be removed from our Board for cause;
• the requirement that a special meeting of stockholders may be called only by a majority of our directors, whether not there exists any vacancies or unfilled seats, which could delay the ability of stockholders to force consideration of a proposal or to take action, including the removal of directors;
• controlling the procedures for the conduct and scheduling of our Board and stockholder meetings;
• the requirement for the affirmative vote of holders of (i) (a) at least 66-2/3%, in case of certain provisions, or (b) a majority, in case of other provisions, of the voting power of all of the then-outstanding shares of the voting stock, voting together as a single class, to amend, alter, change or repeal certain provisions of our Certificate of Incorporation, and (ii) (a) at least 66-2/3%, in case of certain provisions, or (b) a majority, in case of other provisions, of the voting power of all of the then-outstanding shares of the voting stock, voting together as a single class, to amend, alter, change or repeal certain provisions of our By-laws, which could preclude stockholders from bringing matters before annual or special meetings of stockholders and delay changes in our Board and also may inhibit the ability of an acquirer to effect such amendments to facilitate an unsolicited takeover attempt;
• the ability of our Board to amend our By-laws, which may allow our Board to take additional actions to prevent an unsolicited takeover and inhibit the ability of an acquirer to amend our By-laws to facilitate an unsolicited takeover attempt; and
• advance notice procedures with which stockholders must comply to nominate candidates to our Board or to propose matters to be acted upon at a stockholders’ meeting, which could preclude stockholders from bringing matters before annual or special meetings of stockholders and delay changes in our Board and also may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of the Company.
These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our Board or management.
Any provision of our current or future Certificate of Incorporation, our current or future By-laws or Delaware law that has the effect of delaying or preventing a change in control could limit the opportunity for stockholders to receive a premium for their shares of our Class A Common Stock and could also affect the price that some investors are willing to pay for shares of our Class A Common Stock. Also, it is expected that if the terms and conditions of the RSA are successfully implemented through a chapter 11 plan of reorganization approved by the Bankruptcy Court, all of the Company’s current equity securities, including all Class A Common Stock, Class B Common Stock, warrants and other securities will be cancelled and extinguished in the restructuring without any recovery.
General Risk Factors
Provisions of our current organizational documents could make an acquisition of us more difficult and may prevent attempts by our stockholders to replace or remove our current management, even if beneficial to our stockholders.
Our current Certificate of Incorporation and current By-laws and the Delaware General Corporation Law (the “DGCL”) contain provisions that could make it more difficult for a third party to acquire us, even if doing so might be beneficial to our stockholders. Among other things, these provisions:
• allow us to authorize the issuance of undesignated preferred stock, the terms of which may be established and the shares of which may be issued without stockholder approval, and which may include super majority voting, special approval, dividend, or other rights or preferences superior to the rights of stockholders;
• provide for a classified board of directors with staggered 3-year terms;
• provide that any amendment, alteration, rescission or repeal of our By-laws or certain provisions of our Certificate of Incorporation by our stockholders will require the affirmative vote of the holders of a majority of at least two-thirds of the outstanding shares of our capital stock entitled to vote thereon as a class; and
• establish advance notice requirements for nominations for elections to our Board or for proposing matters that can be acted upon by stockholders at stockholder meetings.
These provisions could discourage, delay or prevent a transaction involving a change in control of our company. These provisions could also discourage proxy contests and make it more difficult for our stockholders to elect directors of their choosing and cause us to take other corporate actions they may desire, including actions that they may deem advantageous, or negatively affect the trading price of our securities. In addition, because our Board is responsible for appointing the members of our management team, these provisions could in turn affect any attempt by our stockholders to replace current members of our management team.
These and other provisions in our current Certificate of Incorporation and current By-laws and Delaware law could make it more difficult for stockholders or potential acquirers to obtain control of our Board or initiate actions that are opposed by our then-current Board, including delay or impede a merger, tender offer or proxy contest involving our company. The existence of these provisions could negatively affect the price of our securities and limit opportunities for you to realize value in a corporate transaction.
Our current By-laws designate the Court of Chancery of the State of Delaware as the exclusive forum for certain litigation that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for certain disputes with us.
Pursuant to our current By-laws, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for (1) any derivative action or proceeding brought on our behalf, (2) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders, (3) any action asserting a claim against us arising pursuant to any provision of the DGCL, our current Certificate of Incorporation or our current By-laws, (4) any action to interpret, apply, enforce or determine the validity of our current Certificate of Incorporation or our current By-laws, (5) any action or proceeding as to which the DGCL confers jurisdiction to the Court of Chancery of the State of Delaware or (6) any other action asserting a claim against us that is governed by the internal affairs doctrine. The foregoing provisions will not apply to any claims arising under the Exchange Act or the Securities Act and, unless we consent in writing to the selection of an alternative forum, the federal district courts of the U.S. will be the sole and exclusive forum for resolving any action asserting a claim arising under the Securities Act.
This choice of forum provision in our current By-laws may limit a stockholder’s ability to bring certain claims in a judicial forum that it finds favorable for disputes with us or any of our directors, officers, or other employees, which may discourage lawsuits with respect to such claims. There is uncertainty as to whether a court would enforce such provisions, and the enforceability of similar choice of forum provisions in other companies’ charter documents has been challenged in legal proceedings. It is possible that a court could find these types of provisions to be inapplicable or unenforceable, and if a court were to find the choice of forum provision contained in our current By-laws to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business, results of operations, financial condition, liquidity, cash flows and/or stock price.
Our business and operations could be negatively affected if we become subject to any securities litigation or stockholder activism, which could cause us to incur significant expense, hinder execution of business and growth strategy and impact our liquidity, cash flows and/or stock price.
In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been brought against that company. Stockholder activism, which could take many forms or arise in a variety of situations, has been increasing recently. Volatility in the stock price of our Class A Common Stock or other securities or other reasons may in the future cause us to become the target of securities litigation or stockholder activism. Securities litigation and stockholder activism, including potential proxy contests, could result in substantial costs and divert management’s and the Board’s attention and resources from our business. For example, and as previously disclosed, during 2023, three directors, Elliot Cooperstone, Lewis Gold and Barry Sternlicht (together, the “Former Directors”) resigned from the Company’s Board and filed a lawsuit seeking to re-open the Company’s advance-notice nomination window for stockholder notice of director candidate nominations and business proposals for the Company’s 2023 annual stockholders’ meeting and a of fiduciary duties by the Board. The Company prevailed in securing a from the Delaware Chancery Court in June 2023 of the advance notice nomination of such , and the later voluntarily their fiduciary duty claim. Please see the description of our pending legal proceedings set forth in the “Legal Matters” section in Note 19, "Commitments and Contingencies," in the notes to the consolidated financial statements in Item 8 of Part II of this 2023 Form 10-K.
While we strive to maintain constructive communications with our shareholders, activist shareholders, such as the Former Directors, have and may continue to engage in proxy solicitations or advance shareholder proposals, or otherwise attempt to affect changes and assert influence on our Board and management. Our prospects, liquidity, cash flows and/or stock price could be subject to significant fluctuation or otherwise be adversely affected by the events, risks and uncertainties related to the actions of the Former Directors or other securities litigation or stockholder activism.
Additionally, such securities litigation and stockholder activism could give rise to perceived uncertainties as to our future, adversely affect our relationships with service providers and make it more difficult to attract and retain qualified personnel. Also, we may be required to incur significant legal fees and other expenses related to any securities litigation and activist stockholder matters. Further, our prospects, liquidity, cash flows and/or stock price could be subject to significant fluctuation or otherwise be adversely affected by the events, risks and uncertainties of any securities litigation and stockholder activism.
Changes in laws or regulations, or a failure to comply with any laws and regulations, may adversely affect our business and results of operations.
We are subject to laws and regulations enacted by national, regional and local governments. In particular, we are required to comply with certain SEC and other legal requirements. Compliance with, and monitoring of, applicable laws and regulations may be difficult, time consuming and costly. Those laws and regulations and their interpretation and application may also change from time to time and those changes could have a material adverse effect on our business, investments and results of operations. In addition, a failure to comply with applicable laws or regulations, as interpreted and applied, could have a material adverse effect on our business, results of operations, financial condition, liquidity, cash flows and/or stock price.
We depend on our senior management team and other key employees, and the loss of one or more of these employees or an inability to attract and retain other highly skilled employees could harm our business and/or our growth prospects.
Our success depends largely upon the continued services of our senior management team and other key employees. We rely on our leadership team in the areas of operations, provision of medical services, information technology and security, marketing, compliance and general and administrative functions. From time to time, there may be changes in our executive management team resulting from the hiring or departure of executives, which could disrupt our business. Our employment agreements with our executive officers and other key personnel do not require them to continue to work for us for any specified period and, therefore, they could terminate their employment with us at any time. The loss of one or more of the members of our senior management team, or other key employees, could harm our business.
If securities or industry analysts do not publish research or reports about our business, if they adversely change their recommendations regarding our shares or if our results of operations do not meet their expectations, our stock price and trading volume could decline.
The trading market for our shares will be influenced by the research and reports that industry or securities analysts publish about us or our business. We do not have any control over these analysts. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price
or trading volume to decline. Moreover, if one or more of the analysts who cover us downgrade our stock, or if our results of operations do not meet their expectations, our stock price could decline.
