Manymembers. In California, many health plans subcontract a significant portion of the responsibility for managing patient care to integrated medical systems such as ApolloMed.ApolloMed and our affiliated physician groups. These integrated healthcare systems whether medical groups or IPAs, offer a comprehensive medical delivery system, and sophisticated care management know-how, and infrastructure to more efficiently provide for the healthcare needs of the population enrolled with that health plan. ReimbursementWhile reimbursement models for these arrangements vary around the country. In California,U.S., health plans typicallyoften prospectively pay the IPA or medical groupintegrated healthcare system a fixed PMPM, or capitation payment, which is oftenfrequently based on a percentage of the amount received by the health plan. Capitation payments to IPAs or medical groups,integrated healthcare systems, in the aggregate, represent a prospective budget from which the IPAsystem manages care-related expenses on behalf of the population enrolled with that IPA. Those IPAs or medical groupssystem. To the extent that these systems manage care-relatedsuch expenses under the capitated levels, will realizethe system realizes an operating profit;profit. On the other hand, if care-relatedthe expenses exceed projected levels, the IPAsystem will realize an operating deficit.

Since premiums paid represent a substantial amount per person, there is a significant revenue opportunity for an integrated medical system that is able to effectively manage healthcare costs for the capitated arrangements entered into by its affiliated physician groups.

ApolloMed provides managed care services through its MMG

Medicaid

Medicaid is a Federal entitlement program administered by the states thatindependent physicians, and provides healthcare and long-term care services and support to low-income Americans. Medicaid is funded jointly by the states and the Federal government. The Federal government guarantees matching funds to states for qualifying Medicaid expenditures based on each state’s Federal medical assistance percentage, which is calculated annually and varies inversely with the average personal income in the state. Each state establishes its own eligibility standards, benefit packages, payment rates and program administration within Federal guidelines. In an effort to improve quality and provide more uniform and cost-effective care, many states have implemented Medicaid managed care programs to improve access to coordinated care, to improve preventive care and to control healthcare costs. Under Medicaid managed care programs, a health plan receives capitation payments from the state. The health plan then arranges for healthcare services to be provided by contracting either directly with providersHMOs, which are medical insurance groups that provide health services generally for a fixed annual fee, on a negotiated per capita rate, flat retainer fee, or with IPAsnegotiated FFS basis. Because of the prohibition against corporate practice of medicine under certain state laws, MSOs are formed to provide management and medicaladministrative support services to affiliated physician groups such as MMG. MMG has entered into capitation agreements withIPAs. These services include payroll, benefits, human resource services, physician practice billing, revenue cycle services, physician practice management, administrative oversight, coding, and other consulting services.

Commercial

Patients enrolled in health plans offered through their employers are generally referred to as commercial members. Accordingoutcomes will improve and Medicare Parts A and B expenditures for Medicare beneficiaries will decrease if Accountable Care Organizations (“ACOs”) (1) accept a higher level of financial risk compared to the United States Census Bureau, in 2014 approximately 55.4% of non-elderly U.S. citizens received their healthcare benefits through their employers, which contracted with health plansexisting MSSP model, and (2) are permitted to administer these healthcare benefits. Nationally, commercial employer-sponsored health plan enrollment was approximately 175 million in 2014.

Dual Eligibles

A portion of Medicaid beneficiaries are dual eligibles, meaning that they are low-income seniorsselect certain innovative Medicare payment arrangements and people with disabilities who are enrolled in both Medicaid and Medicare. Based on CMS estimates, there are approximately 10.7 million dual eligible enrollees with annual spending of approximately $285 billion. Only a small percentage of the total spending on dual eligibles is administered by managed care organizations. Dual eligibles tend to consume more healthcare services dueoffer certain additional benefit enhancements to their tendencyassigned Medicare beneficiaries. As a result, ACOs generally assume higher levels of financial risk and reward under the NGACO Model. CMS also established the MSSP to have more chronic conditions. In some states, dual eligible patients are being voluntarily enrolled and/or auto-assigned into managedimprove the care programs. About 1.1 million low-income seniorsquality and people with disabilities in California receive health care services through both the Medicare and Medi-Cal (Medicaid nationally) programs. Eight counties are participating in the duals pilot program begun in 2014, known as Cal MediConnect. The participating counties areSanta Clara, San Bernardino, San Diego, San Mateo, Orange, Alameda, Riverside, and Los Angeles Counties, with a total of not more than 456,000 participants and a cap of 200,000 participants in Los Angeles County. As of February, 2016, California’s demonstration had enrollment of over 128,000 beneficiaries.

Health Reform Acts

In an effort to reduce the number of uninsured and intending to control healthcare expenditures, President Obama signed the ACA in 2010, as amended by the Health Care and Education Reconciliation Act of 2010 (the “Health Reform Acts”) into law in March 2010. The Health Reform Acts seek a reduction of up to 32 million uninsured individuals by 2019, while potentially increasing Medicaid coverage by up to 16 million individuals and net commercial coverage by 16 million individuals. CMS projects that the total number of uninsured Americans will fall to 23 million by 2023 from 45 million in 2012. The current enrollment numbers (as of February 2016) are roughly 20 million total between the ACA between the Marketplace. The uninsured rate remains at an all-time low with 9.1% of under 65 uninsured as of 4th quarter 2015 according to CDC.Gov data. This represents a significant new market opportunity for health plans and integrated healthcare delivery companies.

As of March 31, 2016, MMG delivered services to nearly 14,500 members through a network of over 140 primary care physicians and over 380 specialist physicians.

ACOs

One provision of the Health Reform Acts required CMS to establish an MSSP that promotes accountability and coordination of care through the creation of ACOs, which, as described below, are eligible to participate in some of the savings generated by such ACOs. The Medicare FFS program was designedcosts for beneficiaries in the Medicare FFS program, which covers approximately 72% of Medicare recipients, or approximately 36 million eligible Medicare beneficiaries. CMS established theprogram. MSSP to facilitatepromotes accountability, facilitates coordination and cooperation among care providers, to improve the quality of care and reduce unnecessary costs. Eligible providers, hospitals and suppliers may participate in the MSSP by creating an ACO and then applying to CMS. MSSP ACOs must have at least 5,000 Medicare beneficiaries in order to be eligible to participate in the program.

The MSSP is designed to improve beneficiary outcomes and increase value of care by (1) promoting accountability for the care of Medicare FFS beneficiaries; (2) requiring coordinated care for all services provided under Medicare FFS; and (3) encouragingencourages investment in infrastructure and redesignedredesign of care processes. The MSSP rewards ACOs

CMS assigns a beneficiary to the preliminary roster of an ACO if the ACO physicians billed for a “plurality” of services during the calendar year preceding the performance period. A plurality means the ACO physicians provided a greater proportion of primary care services, measured in terms of allowed charges, than the physicians in any other ACO or Medicare-enrolled tax identification number. CMS sets the benchmark for each ACO using the historical medical costs of the beneficiaries assigned to the ACO. Under the final MSSP rules, primary care physicians may only join one ACO, unless they have more than one Medicare tax identification number.

Palliative Care; Home Health and Hospice Organizations

Hospice companies serve terminally ill patients and their families. Comprehensive management of the healthcare services and products needed by hospice patients and their families are provided through the use of an interdisciplinary team. Depending upon a patient’s needs, each hospice patient is assigned an interdisciplinary team comprised of a physician, nurse(s), home health aide(s), social worker(s), chaplain, dietary counselor and bereavement coordinator, as well as other care professionals. Hospice services are provided primarily in the patient’s home or other residence, such as an assisted living residence or nursing home, or in a hospital. Medicare’s hospice benefit is designed for patients expected to live six months or less. Hospice services for a patient can continue, however, for more than six months, as long as the patient remains eligible as reflected by a physician’s certification.

Home health care companies provide direct home nursing and therapy services in addition to nutrition and disease management education. These services are provided by licensed and Medicare-certified skilled nurses and other paraprofessional nursing personnel.

OUR OPERATIONS

Hospitalists

Through our affiliated physician group, AMH, we:

IPA

Our IPA isIPAs comprises a network of independent primary care physicians and specialists who collectively care for HMO patients and contract with HMOs to provide physician services to their enrollees typically under either a capitated payment or FFS arrangement.arrangements. Under the capitated model, an HMO pays ourthe IPA a PMPM rate, or a “capitation”capitation payment and then assigns our IPAsit the responsibility for providing the physician services required by the applicable patients. The IPA physicians in our IPA are exclusively in control of, and responsible for, all aspects of the practice of medicine for ourenrolled patients. Our IPA enters into contracts with HMOs, either directly or through a risk-shifting arrangement with MSOs, to provide physician services to enrollees of the HMOs. Most of the HMO agreements have an initial term of two years renewing automatically for successive one-year terms. The HMO agreements generally provide for a termination by the HMOs for cause at any time, although we have never experienced a termination. The HMO agreements generally allow either party to terminate the HMO agreements without cause typically with a four to six month notice.

Onemonths advance notice and provide for a termination for cause by the HMO at any time.

ApolloMed ACO entered into an agreement with Prospect Medical Group (“PMG”), located in Orange, California, that, among other things, granted to PMGpayors represent a rightsignificant portion of first refusal to acquire Apollo Med ACO’s network of physicians who were contracted with PMG and introduced to ApolloMed ACO by PMG. This right took effect only if ApolloMed ACO elected to sell its operations and terminated onour net revenue. For the termination of the agreement between ApolloMed ACO and PMG. The agreement expired in accordance with its terms onyears ended December 31, 2015.

Care Clinics

Our outpatient clinics provide specialty services, such as cardiologyStrengths and pulmonary services. ApolloMed also owns an imaging center complete with magnetic resonance imaging (MRI), compound tomography (CT), cardiac echo, ultrasound, and nuclear and exercise stress-test equipment. Our clinics focus on the efficient delivery of ambulatory treatment and ancillary services, with an increasing emphasis on preventive care and managing chronic conditions. Our clinics also serve as post-discharge centers for patients who have just left the hospital.

Our clinics are located within our historical core service areas in the greater Los Angeles area. The clinics have served their communities for many years, handle approximately 20,000 patient visits per year and provide specialty services and lab and imaging services.

Palliative Care, Home Health and Hospice Service Operations

Our palliative care, home health and hospice operations provide hospice, palliative care and home health services for patients using an interdisciplinary team composed of physicians, nurses and other healthcare workers. For hospice services, depending on the needs of the specific patient in each case, our service team may include a physician, nurse, home health aide, medical social worker, chaplain, dietary counselor and bereavement coordinator. Our hospice and palliative care services are provided in the patient's home, assisted living or nursing home or in a hospital. Our home health services are provided directly in each patient’s home and may include skilled nursing and therapy services, as well as specialty programs such as disease management education, nutrition and help with daily living activities.

In October 2013, California enacted the Home Care Services Consumer Protection Act. That act established a licensing program for home care organizations, and requires background checks, basic training and tuberculosis screening for the aides that are employed by home care organizations. Home care organizations and aides had until January 1, 2015 to comply with the new licensing and background check requirements and we are in compliance with the new requirements.

Our hospice and home health services are currently offered only in Southern California, with an average daily census of about 64 hospice patients and 120 home health patients during fiscal 2016.

As of March 31, 2016, entities owned by our subsidiary, ApolloMed Palliative, served over 180 patients on a daily basis.

STRENGTHS AND COMPETITIVE ADVANTAGES

Advantages

company:

Strong Management Team

Strong Relationships with Physicians

ACOs.

revenue for us.

OUR GROWTH STRATEGY

Our mission is to transform the delivery of health services to the communities we serve by implementing innovative population health and care coordination models and by creating a patient-centered, physician-centric experience in a high-performing environment of integrated care.

Our current intention is to implement our strategy through a combination of organic growth and acquisitions, as well as dispositions when appropriate. While we have taken many concrete steps to achieve our strategy, there is no guarantee that we will be successful in these endeavors and we may not achieve our strategic goals. The principal elements of our growth strategy are:

Pursue growth opportunities in established markets. We identify growth opportunities in established markets we serve by working with our local network physicians. Opportunities may include continued physician enrolment for MMG and ApolloMed ACO, additional or expanded hospitalist contracts, new risk-based insurance contracts and new clinic acquisitions.

Continue to strengthen our market presence and reputation. We position ourselves to thrive in a changing healthcare environment by continuing to build and operate high-performing, patient-centered care networks, fully engaging in health and wellness, and enhancing our reputation in our markets. We focus particularly on patient safety, patient satisfaction, care coordination, population health and implementing clinical quality best practices across all our operations. We measure the health status of our patients with the goal of directly improving their health.

Focus on high-quality, patient-centered care. We provide high-quality, patient-centered care in our communities. We have implemented several initiatives to maintain and enhance the delivery of high-quality care, including clinical best practices, information technology and tools, coordination of care, home visits, annual wellness exams and population health.

Drive physician collaboration and alignment. We foster a collaborative approach among our physicians to provide what we believe to be clinically superior healthcare services. We provide medical management, population health management and care coordination resources to our physicians sufficient to support the necessary, high-quality services to our patients. We have implemented several initiatives, including active participation of physician leadership in ApolloMed ACO, MMG and hospitalist boards and subcommittees, training programs and information technology resources. In addition, we are aligning with our physicians in various forms of risk contracting, including pay-for-performance programs such as clinical documentation improvement to improve RAF scores and certain programs, such as annual wellness visits, to improve Medicare Advantage STAR ratings.

Expand ambulatory services and further our population health strategies. We are flexible and competitive in a dynamic healthcare environment. We will continue to add medical management and population health management resources to our ambulatory care services. We intend to pursue further strategies in physician practice management and population health services, such as predictive analytics and telemedicine services. We also intend to pursue the expansion of certain strategic services, such as home health care, hospice and palliative care services in an attempt to create a more comprehensive network of healthcare services.

Pursue selective acquisitions. We believe that our philosophy, built on patient-centered healthcare and clinical quality and efficiency, gives us a competitive advantage in expanding our services in our existing markets as well as other markets through acquisitions or partnerships. We regularly monitor opportunities to acquire hospitalist groups, IPAs, ACOs and clinics that fit our vision and long-term strategies.

Pursue selective dispositions. We regularly monitor the performance of our operations and have curtailed, cut back on or disposed of, certain operations that either are not performing to our expectations or are creating a financial strain on us.

Expand our relationships with payors and facilities in selective markets across the U.S. We intend to explore ways to develop relationships with existing and new health plans and hospitals in selective markets across the U.S. in order to participate in the growing hospitalist medicine market, under value-based contracts.

Acquisitions and Dispositions

In furtherance of our growth strategy, we regularly evaluate opportunities to add to our portfolio of healthcare companies in areas where we do not have a presence, in order to expand our geographic footprint, in areas where we already have a presence to increase our market share, and in areas of practice that are complementary to our existing business model. Similarly, we periodically evaluate parts of our business that may not fit within our overall business model or may be underperforming and, when appropriate, we may dispose of such companies.

In January 2016, we formed Apollo Care Connect, Inc. (“Apollo Care Connect”) which acquired certain technology and other assets of Healarium, Inc., which provides us with a population health management platform that includes digital care plans, a case management module, connectivity with multiple healthcare tracking devices and the ability to integrate with multiple electronic health records to capture clinical data. We issued 275,000 shares of our Common Stock in exchange for the acquired assets and the seller paid us $200,000.

Also during fiscal 2016, we sold substantially all the assets of ApolloMed Care Clinic (“ACC”). ACC was as clinic providing care in Los Angeles area. The purchase price was $61,000 of which we received $10,000 in cash and the balance in the form of a non-interest bearing promissory note in the principal amount of $51,000. We also combined the operations of one of our IPAs, AKM, into those of our other IPA, MMG.

Hospitalists

We believe that attractive growth opportunities exist for our hospitalists’ inpatient business due to the increasing need for improved efficiencies in the hospital from both payors and hospital management teams. Our physicians work closely with our partners to improve the care given to patients and their families and enhance how care is coordinated within the hospital and upon discharge of the patient. We have designed programs for some of the largest health plans and hospital chains in California to improve outcomes, reduce over-utilization, reduce Medicaid denial rates, optimize lengths of stay, optimize senior and commercial bed-days, improve Hospital Consumer Assessment of Healthcare Providers and Systems (HCAHPS) scores, improve hospital core measures, improve documentation and reduce 30-day readmissions. In addition, our physicians consult with hospital management teams to assist in Medicaid denial reviews, case management and improving discharge management.

We believe that the demand for hospitalists, including our hospitalists’ inpatient business, will continue to grow due to the following significant changes in the healthcare delivery system:

The primary care physician’s role in hospital care appears to be decreasing due to the increasingly specialized nature of hospital care, the demands of treating increasingly sicker patients in the hospital and higher acuity patients in the clinic, the increased time it takes to round on patients in the hospital due to electronic health records and the desire to reduce on-call obligations.

Hospitals have a greater need for consistent on-site physician availability due to the increasing severity of illness required to justify hospital admissions, the need to reduce readmissions, the need for better documentation and external pressures to decrease the inpatient length of stay.

Health plans, IPAs and other payors are searching for strategies to control the increase in inpatient expenditures.

There is increasing pressure in providing a coordinated continuum of care for patients to improve the quality of care, improvethus patient satisfaction and to reduce costs over an entire episode of care.

IPAs

Senior/Medicare Advantage Market Opportunity. We believe that significant growth opportunities exist for patient-centered, physician-centric integrated groups serving the growing senior market. At present, approximately 55 million Americans are eligible for Medicare according to CMS. According to the U.S. Census Bureau, more than 2 million Americans turn age 65 in the United States each year, and this number is expected to grow as the so-called baby boomers continue to turn 65. Also, many large employers that traditionally provided medical and prescription drug coverage to their retirees have begun to curtail these benefits. In addition, the passage of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “MMA”), increased the healthcare options available to Medicare beneficiaries through the expansion of Medicare managed care plans through the Medicare Advantage program.

Medicaid Program and Dual Eligibles. As a result of the Health Reform Acts, CMS projects that the total number of uninsured Americans will fall to 23 million by 2023 from 45 million in 2012. This represents a significant new market opportunity for health plans and integrated healthcare delivery companies such as ApolloMed, and we believe that we are strategically positioned to benefit from this expansion.

“Dual-eligibles” present another opportunity for us. According to CMS data for 2013, the most recently available year, there are approximately 9 million dual-eligible enrollees. We believe that this represents a significant opportunity for companies like ours that have the capabilities to effectively manage this population.

ACOs

We believe that there are growth opportunities in the ACO market, both through starting new ACOs in new geographic areas, as well as by acquisition of, or joint ventures with, existing ACOs. Additionally, CMS is changing the business model of ACOs to allow ACOs to assume more financial risk. We submitted an application to CMS on May 25, 2016 for the Next Generation ACO under the AIPBP model. We also believe that there are increasing opportunities for ACOs to contract with health plans for commercial patients.

Palliative Care, Home Health and Hospice

We believe that there are multiple factors that will contribute to the growth of the hospice and home health industry, including (i) increasing consumer and physician awareness and interest in hospice, palliative and home health services; (ii) recognizing that in-home services can be a cost-effective alternative to more expensive institutional care; (iii) aging demographics and hanging family structures in which more aging people will be living alone and may be in need of assistance; (iv) the psychological benefits of recuperating from an illness or accident or receiving care for a chronic condition in one’sscores. Using our own home; and (v) medical and technological advances that allow more healthcare procedures and monitoring to be provided at home.

GEOGRAPHIC COVERAGE

Our business and operations are located exclusively in California, and all of our revenue is derived from our operations in California. As of March 31, 2016, through our managed physician practices, we provided hospitalist services at more than 20 acute-care hospitals and long-term acute care facilities in Southern and Central California, and operated 3 primary care and specialty medical clinics in the Los Angeles area. MMG provides primary and specialist care through its contracted physicians throughout the greater Los Angeles area. ApolloMed ACO has nearly 12000 Medicare beneficiaries assigned to it by CMS in California.

CORPORATE PRACTICE OF MEDICINE

Our consolidated financial statements include our accounts and those of our subsidiaries and certain affiliated medical practices. Some states have laws that prohibit business entities with non-physician owners, such as ApolloMed, from practicing medicine, which are generally referred to as corporate practice of medicine. States that have corporate practice of medicine laws require only physicians to practice medicine, exercise control over medical decisions or engage in certain arrangements with other physicians, such as fee-splitting. California is a corporate practice of medicine state. Therefore, in California, we operate by maintaining long-term management service agreements with our affiliates, each of which are owned and operated by physicians, and which employ or contract with additional physicians to provide hospitalist services. Under management agreements, we provide and perform all non-medical management and administrative services, including financial management, information systems, marketing,proprietary risk management and administrative support. The management agreements typically have an initial term of 20 years unless terminated by either party for cause. The management agreements are not terminable by our affiliates, except in the case of gross negligence, fraud, or other illegal acts by ApolloMed, or the bankruptcy of ApolloMed.

When necessary, Dr. Hosseinion, our Chief Executive Officer, serves as nominee shareholder, on our behalf, of affiliated medical practices, in order to comply with healthcare laws and certain accounting rules applicable to consolidated financial reporting.

Through the management agreements and our relationship with the physician owners of our medical affiliates,assessment scoring tool, we have exclusive authority over all non-medical decisions related to the ongoing business operations of those affiliates. Consequently, we consolidate the revenue and expenses ofalso developed our affiliates from the date of execution of the management agreements, as the primary beneficiary of these variable interest entities (“VIEs”).

OUR REVENUE STREAMS

We generate revenue through various contractual agreements which vary in both structure and by type of business operation. These contracts are multi-year renewable contracts that include traditional “feeown protocol for service”, capitation, case rates, and professional and institutional risk contracts. Our revenue streams consist of contracted, fee-for-service, capitation, and MSSP revenue.

Contracted revenue

Contracted revenue represents revenue generated under management agreements for which ApolloMed provides physician and other healthcare staffing and administrative services in return for a contractually negotiated fee. Contracted revenue consists primarily of billings based on hours of healthcare staffing provided at agreed-upon hourly rates. Additionally, contracted revenue also includes supplemental revenue from hospitals where we may have an FFS contract arrangement or provide physician advisory services to the medical staff at a specific facility. Such contract terms generally either provides for a fixed monthly dollar amount or a variable amount based upon measurable monthly activity, such as hours staffed, patient visits or collections per visit, compared to a minimum activity threshold. Such supplemental revenues based on variable arrangements are usually contractually fixed on a monthly, quarterly or annual basis considering the variable factors negotiated in each such agreement. Additionally, we derive a portion of our revenue as a contractual bonus from collections received by our partners and such revenue is contingent upon the collection of third-party billings.

FFS revenue

FFS revenue represents revenue earned under agreements in which ApolloMed bills and collects the professional component of charges for medical services rendered by our contracted and employed physicians. Under our FFS arrangements, we bill patients for services provided and receive payment from patients or their third-party payors. FFS revenue is reported net of contractual allowances and policy discounts. All services provided are expected to result in cash flows and are therefore reflected as net revenue in our consolidated financial statements. The recognition of net revenue (gross charges less contractual allowances) from patient visits is dependent on such factors as proper completion of medical charts following a patient visit, the forwarding of such charts to our billing center for medical coding and entering into our billing system and the verification of each patient’s submission or representation at the time services are rendered as to the payor(s) responsible for payment for such services.

Capitation revenue

Capitation revenue represents revenue that ApolloMed generates based on agreements that generally make ApolloMed or our affiliates liable for excess medical costs. The use of capitation under provider service agreements (“PSAs”) is intended to control the use of health care resources by putting ApolloMed or our affiliates at financial risk for services provided to patients. Capitation is a fixed amount of money per patient per unit of time paid in advance for the delivery of health care services. The actual amount of money paid to us is determined by the ranges of services that we provide, the number of patients involved, and the period of time during which the services are provided. Capitation rates under our PSAs are generally based on local costs and average utilization of services. To ensure that contracting physicians provide necessary care to their patients, we monitor and measure rates of resource utilization in physician practices and submit reports to appropriate regulators. These reports are made available to the public as a measure of health care quality, and can be linked to financial rewards, such as bonuses. For example, we receive incentives under “pay-for-performance” programs for quality medical care, based on various criteria.

Additionally, Medicare pays capitation using a “risk adjustment” model, which compensates managed care organizations and providers based on the health status (acuity) of each individual enrollee. Health plans and providers with higher acuity enrollees receive more and those with lower acuity enrollees receive less. Under risk adjustment, capitation is determined based on health severity, measured using patient encounter data. Capitation is paid on an interim basis based on data submitted for the enrollee for the preceding year and is adjusted in subsequent periods after the final data is compiled.

MSSP Revenue

Through our subsidiary, ApolloMed ACO, we participate in the MSSP sponsored by CMS. The MSSP allows ACO participants to share in cost savings it generates in connection with rendering medical services to Medicare patients. Payments to ACO participants, if any, are calculated annually and paid once a year by CMS on cost savings generated by the ACO participant relative to the ACO participants’ CMS benchmark. Under the MSSP program, an ACO either receives the full amount of its allocable cost savings or nothing. The MSSP is a newly formed program with minimal history of payments to ACO participants. Under the final MSSP rules, Medicare will continue to pay individual providers and suppliers for specific items and services as it currently does under the FFS payment methodologies. The MSSP rules require CMS to develop a benchmark for savings to be achieved by each ACO if the ACO is to receive shared savings. An ACO that meets the MSSP’s quality performance standards will be eligible to receive a share of the savings to the extent its assigned beneficiary medical expenditures are below the medical expenditure benchmark provided by CMS. An MSR must be achieved before the ACO can receive a share of the savings. Once the MSR is surpassed, all the savings below the benchmark provided by CMS will be shared 50% with the ACO. The MSR varies depending on the number of patients assigned to the ACO, starting at 3.9% for ACOs with patients totaling 5,000 and increasing to 2% for ACOs with more than 60,000 patients.

We consider revenue, if any, under the MSSP, as contingent upon the realization of program savings as determined by CMS, and are not considered earned and therefore are not recognized as revenue until notice from CMS that cash payments are to be imminently received. We received an MSSP payment in fiscal 2015 but we did not receive an MSSP payment in fiscal 2016.

Types of Revenue by Business Operation

Each of our operations generates revenue in the following manners:

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·Hospitalists.AMH contracts with health plans or IPAs to be paid on fee schedules or case rates to see patients and earns revenue primarily on a contracted basis. AMH also contracts directly with hospitals for fixed monthly stipends for continuous staffing coverage.

·IPA.MMG earns revenue based on capitation payments from health plans. In California, health plans prospectively pay the IPA or medical group a fixed PMPM amount, or capitation payment, which is often based on a percentage of the amount received by the health plan. Capitation payments to medical groups or IPAs, in the aggregate, represent a prospective budget from which the IPA manages care-related expenses on behalf of the population enrolled with that IPA. Those IPAs or medical groups that manage care-related expenses under the capitated levels will realize an operating profit; if care-related expenses exceed projected levels, the IPA will realize an operating deficit.

·ACO. ApolloMed ACO is a “shared savings” performance model that has contracted with CMS and earns revenue from MSSP based on cost-savings achieved. As discussed above, the MSSP reward ACOs that lower their healthcare costs while meeting performance standards on quality of care and patient satisfaction on an all-or-nothing basis once a year.

·Care Clinics - ApolloMed Care Clinic’s clinics receives the majority of their revenue from traditional FFS models where the physicians are paid based on professional fee schedules from various health plans, and also receive capitated payments from IPAs, including MMG.

·Palliative Care, Home Health and Hospice Service Operations - ApolloMed Palliative, which includes BCHC and Holistic Health, receives both FFS and contracted revenue. Under the home health Prospective Payment System (“PPS”) of reimbursement, for Medicare and Medicare Advantage programs paid at episodic rates, ApolloMed estimates net revenues to be recorded based on a reimbursement rate which is determined using relevant data, relating to each patient’s health status including clinical condition, functional abilities and service needs, as well as applicable wage indices to give effect to geographic differences in wage levels of employees providing services to the patient. Billings under PPS are initially recognized as deferred revenue and are subsequently amortized into revenue over an average patient treatment period. The process for recognizing revenue to be recorded is based on certain assumptions and judgments, including (i) the average length of time of each treatment as compared to a standard 60 day episode; (ii) any differences between the clinical assessment of and the therapy service needs for each patient at the time of certification as compared to actual experience; and (iii) the level of adjustments to the fixed reimbursement rate relating to patients who receive a limited number of visits, are discharged but readmitted to another agency within the same 60-day episodic period or are subject to certain other factors during the episode. Revenues for hospice are recorded on an accrual basis based on the number of days a patient has been on service at amounts equal to an estimated payment rate. The payment rate is dependent on whether a patient is receiving routine home care, general inpatient care, continuous home care or respite care. Adjustments to Medicare revenues are recorded based on an inability to obtain appropriate billing documentation or authorizations acceptable to the payor or other reasons unrelated to credit risk.

Key Payors

We have a few key payors that represent a significant portion of our net revenue. For the fiscal year ended March 31, 2016, three payors accounted for 55.4% of our net revenue. For the fiscal year ended March 31, 2015, three payors accounted for 60.3% of our net revenue.

COMPETITION

The healthcare industry is highly competitive and fragmentedfragmented. We compete for customers across all of our services and operations. We compete for customers with many other healthcare management companies, including MSOs and healthcare providers, including local physicians and practice groups as wellsuch as local, regional, and national networks of physicians, hospitalsmedical groups, and other healthcare companies,hospitals, many of which are substantially larger than us and have significantly greater financial and other resources, including personnel, than we have.

Hospitalists

AMH faces competition primarily from numerous small inpatient practices as well as large physician groups. Some of our competitors operate on a national level, such as EmCare, Team Health

IPAs

Heritage Provider Network (“Heritage”), as well as Optum (f.k.a. HealthCare Partners), a subsidiary of UnitedHealth Group.

ACOs

ApolloMed ACO competes with hospitals, sophisticated provider groups, and MSOs in the creation, administration, and management of ACOs. Many of our competitors have greater financial, personnel, and other resources available to them. For example, in Los Angeles, ourSome of such competitors include Heritage California ACO, which is part of Heritage and operatesoperate on a Pioneer ACO, and HealthCare Partners ACO, which is owned by DaVita and which participates in the MSSP.

Palliative Care, Homenational level, including EmCare, Team Health, and Hospice

The Palliative care and hospice providers with which we compete include not-for-profit and charity-funded programs that may have strong ties to their local communities and for-profit programs that may have greater financial, personnel and other resources available to them. Home health providers include not-for-profit and for-profit facility-based agencies, such as hospitals or nursing homes, as well as independent companies, some of which are large publicly-traded companies and which have greater financial, personnel and other resources available to them.

Apollo Palliative Services competes with Hospice and Home Health agencies with greater financial, personnel and other resources available to them. For example, in Los Angeles, our competitors include Vitas, Kindred, Haven and Lakeview

PROFESSIONAL LIABILITY AND OTHER INSURANCE COVERAGE

Our business has an inherent and significant risk of claims of medical malpractice against our affiliated physicians and us. Our independent physician contractors and we pay premiums for third-party professional liability insurance that indemnifies our affiliated hospitalists and us on a claims-made basis for losses incurred related to medical malpractice litigation. Professional liability coverage is required in order for our affiliated hospitalists to maintain hospital privileges. All of our physicians carry first dollar coverage with limits of liability equal to $1,000,000 for all claims based on occurrence up to an aggregate of $3,000,000 per year.

While we believe that our insurance coverage is adequate based upon our claims experience and the nature and risks of our business, we cannot be certain that our insurance coverage will be adequate to cover liabilities arising out of claims asserted against us, our affiliated professional organizations or our affiliated hospitalists in the future where the outcomes of such claims are unfavorable. We believe that the ultimate resolution of all pending claims, including liabilities in excess of our insurance coverage, will not have a material adverse effect on our financial position, results of operations or cash flows; however, there can be no assurance that future claims will not have such a material adverse effect on our business.

We also maintain worker’s compensation, director and officer, and other third-party insurance coverage subject to deductibles and other restrictions that we believe are in accordance with industry standards. We believe that these insurance coverage limits are appropriate based upon our claims experience and the nature and risks of our business. However, we cannot assure that any pending or future claim will not be successful or if successful will not exceed the limits of available insurance coverage.

REGULATORY MATTERS

Significant Federal and State Healthcare Laws Governing Our Business