UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One) | | | | | |
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20212022
OR
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| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 001-04321001-40537
BRIGHT HEALTH GROUP, INC.
(Exact Name of Registrant as Specified in its Charter)
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| Delaware | 47-4991296 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
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8000 Norman Center Drive, Suite 1200900, Minneapolis, MN | 55437 |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (612) 238-1321
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
| Common Stock, $0.0001 par value | | BHG | | New York Stock Exchange |
Securities registered pursuant to section 12(g) of the Act: | | |
| Common Shares |
| (Title of class) |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes o No ☒
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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| Large accelerated filer | ☐ | Accelerated filer | ☐☒ |
| Non-accelerated filer | ☒☐ | Smaller reporting company | ☐ |
| | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements
of the registrant included in the filing reflect the correction of an error to previously issued financial statements. o
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No ☒
The aggregate market value of voting stock held by non-affiliates of the Registrant on June 30, 2021,2022, based on the closing price of $17.16$1.82 for shares of the Registrant’s common stock as reported by the New York Stock Exchange, was approximately $5,069,104,601.$549,215,469. Shares of common stock beneficially owned by each executive officer, director, and holder of more than 10% of our common stock have been excluded in that such persons may be deemed to be affiliates.
As of March 7, 2022,6, 2023, the registrant had 628,751,245630,331,300 shares of common stock, $0.0001 par value per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Definitive Proxy Statement relating to its 2022 Annual Meeting of Shareholders ("Proxy Statement") are incorporated by reference into Part III of this annual report on Form 10-K. The Proxy Statement will be filed with the U.S. Securities and Exchange Commission within 120 days after the end of the fiscal year to which this annual report relates.None.
Table of Contents
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (“Annual Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Statements made in this Annual Report that are not statements of historical fact, including statements about our beliefs and expectations, are forward-looking statements, and should be evaluated as such. Forward-looking statements include any statement or information concerning possible or assumed future results of operations, our business plan and strategies, and our operational and financial outlook, estimates, projections, and guidance. These statements often include words such as “anticipate,” “expect,” “plan,” “believe,” “intend,” “project,” “forecast,” “estimates,” “projections,” “should,” “might,” “may,” “will”“will,” “ensure” and other similar expressions. Such forward-looking statements are subject to various risks, uncertainties and assumptions. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these statements. Factors that might materially affect such forward-looking statements include: our ability to raise capital and continue as a going concern; our ability to comply with the terms of our credit facility, including financial covenants, both during and after any waiver period, and/or obtain any additional waivers of any terms of our credit facility to the extent required; the impacts of our corporate restructuring and the associated headcount reduction; our ability to quickly and efficiently wind down our Individual and Family Plan (“IFP”) businesses and Medicare Advantage (“MA”) businesses outside of California; our ability to accurately estimate and effectively manage the costs relating to changes in our business offerings and models; a delay or inability to withdraw regulated capital from our subsidiaries; our ability to comply with ongoing regulatory requirements, including consent decrees or government orders; a lack of acceptance or slow adoption of our business model; our ability to retain existing consumers and expand consumer enrollment; our ability to obtain and accurately assess, code, and report IndividualIFP and Family Plan (“IFP”) and Medicare Advantage (“MA”)MA risk adjustment factor scores for consumers; our ability to contract with care providers and arrange for the provision of quality care; our ability to accurately estimate our medical expenses, effectively manage our costs and claims liabilities or appropriately price our products and charge premiums; our ability to obtain claims information timely and accurately; the impact of the ongoing COVID-19 pandemic on our business and results of operations; the risks associated with our reliance on third-party providers to operate our business; the impact of modifications or changes to the U.S. health insurance markets; our ability to manage the growth of our business; our ability to operate, update or implement our technology platform and other information technology systems; our ability to retain key executives; our ability to successfully pursue acquisitions and integrate acquired businesses; the occurrence of severe weather events, catastrophic health events, natural or man-made disasters, and social and political conditions or civil unrest; our ability to prevent and contain data security incidents and the impact of data security incidents on our members, patients, employees and financial results; our ability to comply with requirements to maintain effective internal controls; our ability to adapt to new risks associated with our expansion into the ACO Reach program; our ability to comply with the continued listing standards of the New York Stock Exchange; and the other factors set forth under the heading Item 1A – “Risk Factors” in this Annual Report.
The preceding list is not intended to be an exhaustive list of all of the factors that might affect our forward-looking statements. The forward-looking statements are based on our beliefs, assumptions and expectations of future performance, taking into account the information currently available to us. These statements are only predictions based upon our current expectations and projections about future events. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements. Other sections of this Annual Report may include additional factors that could adversely impact our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time and it is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make.
You should not rely upon forward-looking statements as predictions of future events. Our forward-looking statements speak only as of the date of this Annual Report and, although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance and events and circumstances reflected in such forward-looking statements will be achieved or occur at all. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this release to conform these statements to actual results or to changes in our expectations.
SUMMARY OF RISK FACTORS
Investing in our securities involves a high degree of risk. You should carefully consider all information in this Annual Report, including our financial statements and the related notes included elsewhere in this report prior to investing in our securities. The following is only a summary of the principal risks that may materially adversely affect our business, financial condition, results of operations and cash flows. The following should be read in conjunction with the more complete discussion of the risk factors we face, which are discussed more fully in Item 1A – Risk Factors.
SUMMARY OF KEY RISK FACTORS
Investing in our securities involves a high degree of risk. You should carefully consider the risk factors set forth under the heading Item 1A – “Risk Factors” in this Annual Report, together with other information in this Annual Report, before deciding whether to invest in shares of our common stock. The following summary highlights certain of the principal risks and uncertainties included in the discussion of our risk factors in Item 1A – “Risk Factors” in this Annual Report. This is not a complete list of the risks set out in that section and readers are encouraged to review the “Risk Factors” section of this Annual Report in its entirety for a more fulsome understanding of the risks and uncertainties that may impact the Company.
Risks Related to Our Business
•The ongoing COVID-19 pandemic has adversely affected,Our corporate restructuring and the associated headcount reduction could disrupt our business.
•Management action plans in place may not fully alleviate doubt about our ability to continue as a going concern.
•Lack of acceptance or slow adoption of our business model could impact our business and results of operations.
•Our inability to retain existing consumers, expand consumer enrollment, or diversify and expand our portfolio of products and services may adversely affect our business and results of operations;operations.
•We may not be able to contract with care providers on favorable terms or at all, or to arrange for the provision of the quality care necessary to attract consumers.
•We may be required to work with care providers who are not contracted with our health plans or in our networks, which may result in costly out-of-network claims.
•Failure to appropriately set premiums or effectively manage our costs could negatively affect our results.
•If our business model iswe grow rapidly, we may not accepted or is slowbe able to be adopted by the healthcare industry,manage our growth could be impacted and our business and results of operations could be adversely affected;effectively.
•We have incurred net losses each year since our inception, and we may not be able to achieve or maintain profitability in the future;future.
•FailureOur limited operating history makes it difficult to appropriately set premiums or effectively manageevaluate our costs could negatively affectbusiness and assess our profitability, results of operations and cash flows;future prospects.
•If we are unableThe ongoing COVID-19 pandemic has and may continue to retain existing consumers, expand consumer enrollment, diversify and expand our portfolio of products and services, or manage such growth effectively,adversely affect our business and resultsresults.
•Large-scale medical emergencies could significantly increase costs or overwhelm and disrupt our systems.
•Delays in our receipt of operations may behealth plan premiums could adversely affected;affect our results.
•Our membership is concentrated in certain geographic areas and amongst certain populations, exposing us to unfavorable changes in local benefit costs, reimbursement rates, competition and economic conditions in those areas or affecting those populations;conditions.
•If we decide to enter new markets, they may not be as economical to serve as our existing markets.
•We operate in competitive markets within a highly competitive industry;industry.
•Despite recent improvementsWe may fail to enter into value-based care agreements with health plans or renegotiate them.
•If we are not able to maintain required statutory capital levels, our balance sheet may be adversely affected.
•We may fail to achieve robust brand recognition or maintain or enhance our reputation.
•Failure to provide high-quality customer support may adversely affect our reputation and our ability to maintain or expand membership or attract Care Partners and third-party payors.
•Reductions in the quality ratings of our MA health plans could have a materially negative impact our results.
•We may fail to identify and acquire suitable acquisition candidates or integrate acquired companies.
•Medical liability claims could cause us to incur significant expenses and pay significant damages.
•We rely on our talent, members of senior management or other key employees.
•Negative global economic conditions and economic uncertainty could adversely affect our results.
•Shortages of qualified personnel or other factors could increase labor costs and adversely affect our results.
•Our health plan products are subject to risk adjustment programs and may not be managed properly.
•Our expansion into ACO REACH presents new risks to our claims processing operationsbusiness.
Risks Related to our Intellectual Property, Information Technology, and procedures,Data Privacy
•Protecting our technology platformintellectual property rights may not operate properly or as we expect itbe expensive and demand management’s attention.
•Claims that allege intellectual property right violations of others may be costly and limit our ability to operate. We must continue to develop and maintain our technology platform to grow our business;
•We may not be able to maintain the accuracy, integrity or availability of our data.
•Our new enterprise resource planning system may prove ineffective.
•Our technology platform may not operate as we expect and requires continued development and maintenance.
•Security incidents or breaches, loss of data and other disruptions to our or our third-party service providers’ systems, information technology infrastructure, and networks could compromise sensitive or legally protected information, related to our business or consumers, disrupt our business, operations, and expose us to liability, which could adversely affectliability.
Risks Related to our business and our reputation;Indebtedness
•We rely on various third-party service providers to support the operationmay incur a substantial level of indebtedness and reduce our business. If these service providers fail to meet their contractual obligations to us or comply with applicable laws or regulations, or if we are unable to renew our contracts with them, our business may be adversely affected;financial flexibility.
•If we are required to maintain higher statutory capital levels or if we are subject to additional capital reserve requirements as we pursue new business opportunities, our balance sheet may be adversely affected;
•If we fail to offer high-quality customer support in our business, our reputation and our ability to maintain or expand membership or attract Care Partners and third-party payors could suffer, which could adversely affect our results of operations;
•Medical liability claims made against us in the future could cause us to incur significant expenses and pay significant damages if not covered by insurance;
•We compete for physicians and other healthcare personnel for our business, and shortages of qualified personnel or other factors could increase our labor costs and adversely affect our revenue, profitability and cash flows;
•Our executive officers, directors and holders of 5% or more of our common stock have substantial control over us, which may limit your ability to influence the outcome of important transactions;
•Our level of indebtedness, including the restrictions included in theThe Credit Agreement (as defined below), may reduce our financial flexibility,contains restrictions and covenants that affect our ability to operate our business, and divert cash flow from operations for debt service;business.
Risks Related to Legal Proceedings and Governmental Regulations
•Modifications or changes to the U.S. health insurance markets, including as a result of legislation, could adversely affect our business and operating results;
•The ongoing challenges and changes to the ACA (as defined below) and related laws and regulations, as well as our inabilityWe are unable to predict the ultimate impact of the CARES Act (as defined below) and other stimulus legislation oron our business.
•Our MA plans, contracts with third-party MA plans and reimbursement are subject to the effect that such legislationMedicare program.
•Failure to comply with certain healthcare laws and other governmental responses intended to assist providersincurring substantial penalties could result in responding to COVID-19, may adversely affect our business, cash flows,adverse financial condition and results of operations;
•Our use and disclosure of PII and PHI (as defined below) is subject to federal and state privacy and security regulations, andregulations.
•Laws regulating the corporate practice of medicine could restrict the conduct of our failurebusiness.
•We may be subject to comply with those regulationslitigation, administrative proceedings or to adequately secure the information we hold could result in significant liability or reputational harm and, in turn, a material adverse effect on our client base and revenue;investigations.
•We are subject to a pending putative securities class action lawsuitlawsuit.
•We are subject to inspections, reviews, audits and have received a shareholder demand to inspect booksinvestigations under government programs and records;contracts.
Risks Related to Ourour Financial Statements
•We have identified material weaknesses in our internal controls over financial reporting and may identify additional material weaknesses in the future or otherwise fail to maintain an effective system of internal controls, which may result in material misstatements of our consolidated financial statements or cause us to fail to meet our periodic reporting obligations;reporting.
•Our balance sheet includes significant amounts of goodwillAccounting for health plan benefits is complicated and intangible assets. The impairment of a significant portion of these assets would negativelysubject to foreseen and unforeseen risks.
•Failure to design, implement and maintain effective internal controls could adversely affect our results of operations;stock price.
Risks Related to Ownership of Our Common Stock
•Our stock price has experienced significant volatility and may change significantly in the future.
•Our quarterly operating results fluctuate and may fall short of prior periods, our projections or the expectations of securities analysts or investors, which could materially adversely affect our stock price;results and expectations.
Risks Related to Investing in Our Common Stock
•Issuance of shares of our common stock in connection with theThe conversion of our outstanding Preferred Stock would cause substantial dilution which could materially affect the trading price of our common stock and earnings per share. Holders of our Preferred Stock own a significant percentage of our capital stock and may be able tohave significant influence on certain corporate matters.
PART I
ITEM 1. BUSINESS
Bright Health Group, Inc. (“Bright Health,” “we,” “our,” “us,” or the “Company”) was founded in 2015 to transform healthcare. OurAlthough 2022 was a year of significant transition for our business, our mission ofremains the same: Making Healthcare Right. Together. It is built upon the belief that by connecting and aligning the best local resources in healthcare delivery with the financing of care, leveraging what we call the “Value Layer” of healthcare, we can drive a superior consumer experience, reduce systemic waste, lower costs, and optimize clinical outcomes. We believe that for too long, U.S. healthcare, primarily designed to cater to employers and large institutions, has failed the consumer through unnecessary complexity, a lack of transparency, and rising costs. We are making healthcare simple, personal, and affordable.
Bright Health consists of two reportable segments:
•NeueHealthConsumer Care — Our healthcarevalue-driven care delivery enablement, and technology business that manages risk in partnership with external payors.
•Bright HealthCare — Our healthcare financing and distributiondelegated senior managed care business that partners with a tight group of aligned providers in California.
OVERVIEW
At its core, Bright Health is a technology enabled, value-driven healthcare company. We are founded and led by industry veterans intimately familiar with the challenges that have plagued U.S. healthcare for decades. We believe that to drive meaningful change, we must leverage technology and bring together the financing and delivery of care, while strengthening healthcare’s strongest relationship: that between the consumer and their primary care provider (“PCP”). We look to do this through value-based care arrangements where the company and our payor or care provider partners benefit from improvements in outcomes and lowering risk-adjusted medical costs.
To execute on our mission, we have developed a model for healthcare transformation built upon the delivery, financing, and optimization of care.
•Delivery of Care — Acknowledging that healthcare is local, we employ a tailored, market-specific approach to building deep relationships with high-performing care provider organizations, which we call Care Partners. We engage with our Care Partners through a full spectrum of alignment options ranging from having providers participate in our networks to having providers employed by us. Leveraging proprietary analytical tools and capabilities, we offer our Care Partners population health management support and directly deliver payor-agnostic care. Our flexible approach to local Care Partner alignment enables us to manage against different market types while delivering a consistent consumer experience and driving superior outcomes nationally.
•Financing of Care — Bright Health seeks to aggregate consumers and design and offer affordable benefits to help effectively manage risk. We structure value-based arrangements with our Care Partners that are designed to reward the quality of care delivered over the quantity of services rendered, reducing the total cost of care while enhancing clinical outcomes. Our model is designed to address the needs of all consumers, from high-acuity, special needs individuals requiring high-touch care management, to lower acuity individuals seeking to protect themselves from catastrophic healthcare events. We engage deeply with providers, while giving consumers the tools and incentives they need to take a proactive role in their personal well-being. We endeavor to put the consumer in the driver seat.
•Optimization of Care — Our ability to optimize the delivery and financing of care is driven by our purpose-built, end-to-end technology platform, the Bright Health Intelligent Operating System (“BiOS”). Using robust data generated through our Care Partner alignment model, BiOS enables an integrated healthcare system of the future. Within BiOS lies our proprietary technology, Panorama and DocSquad. Panorama is our proprietary set of workflows that are designed to support our consumer and provider service teams, our clinical operations teams, and other support teams across both NeueHealth and Bright HealthCare. DocSquad is a set of tools and experiences which personalize the individual healthcare experience and are designed to seamlessly connect consumers with the providers responsible for their care.
By bringing these three core pillars together, we aim to build the national, integrated healthcare system of the future, designed to break down historical barriers and create an environment in which all stakeholders – from the consumer, to the provider, to the payor – can win.
•How the Consumer Wins — We offer consumers a simple, affordable healthcare experience, empowering the consumer with a Personalized Care Team and equipping them with the information they need to take an active role in healthcare decision making.
•How the Provider Wins — We offer our Care Partners a multi-pronged value proposition, by aggregating and delivering consumers and enabling increased share of wallet, while providing innovative tools and solutions to support population health management and the evolution towards value-based care.
•How the Payor Wins — We offer payors – both Bright HealthCare and other payors – the opportunity to participate in value-based payment arrangements, while managing risk-bearing care delivery on a payor-agnostic basis across multiple product lines.
We believe that alignment among the consumer, provider, and payor results in a better healthcare experience for all and that through the creation and enablement of localized, high-performing, value-based systems of care that are centered around the consumer, everybody wins. We Partner. We Transform. We Care.
Through our aligned model of care, Bright Health is working to democratize access to healthcare. Rather than addressing only a specific segment of the market, such as health insurance, primary care delivery, or tech-enablement, our holistic approach gives us durability through enhanced consumer engagement. We believe we are well-positioned to transformfocused on delivering affordable healthcare through multiple channels that enable us to influence and optimize a consumer’s experience throughout their healthcare journey.
As a result of our holistic approach, we believe our total addressable market will reach approximately $4.5 trillion in 2022, equivalent to the national health expenditures projected byfast-growing aging and underserved populations in Florida, Texas and California through our fully aligned care model. Bright Health has exited the Centers forAffordable Care Act Marketplace as an insurer, ceasing coverage of IFP products through Bright HealthCare, as well as ending Medicare and Medicaid Services (“CMS”). Of this total, we believe $2.1 trillion to be our targeted addressable market, which representsAdvantage insurance coverage outside of California at the portionend of total health expenditures currently subject to provider alignment, as projected by Nephron Research. As value-based delivery models continue to evolve, we believe this provider alignment component will eventually converge towards total healthcare expenditure, which CMS projects will continue to grow over 5% annually on average, reaching $6.2 trillion by 2028.2022.
OUR APPROACH
U.S. healthcare has traditionally been designed to serve large employers and institutions, with limited focus on the consumer and a bias towards broad, impersonal networks. This dynamic has resulted in a highly fragmented system, where high-performing individual care providers have faced challenges given limited coordination and perverse incentives amongst key stakeholders. Traditional managed care organizations have primarily focused their efforts on cost containment, keeping their network participants at arm’s length and leaving the underlying healthcare consumer lost in the mix. We believe this one-dimensional approach has driven a poor consumer experience, sub-optimal clinical outcomes, and tremendous economic waste. While legacy managed care organizations have attempted to address these issues in recent years, we believe their failure to employ a consumer-centric approach has limited their success. The time is ripe for disruption.
At Bright Health, we are delivering what we believe is the future of integrated healthcare by deploying a differentiated approach that is built on alignment, focused on the consumer and powered by technology.
Built on Alignment
Bright Health has created a new alignment model built upon three core principles applied consistently but flexed accordingly to “meet our Care Partners where they are”:
•Clinical Alignment — We believe that alignment in healthcare starts with those responsible for delivering care locally. As each of our Care Partners has a unique set of clinical tools and capabilities to manage population health risk, our adaptable model lends them the support necessary to enhance local healthcare delivery and strengthen existing provider-consumer relationships. As Bright Health enters into each Care Partner relationship, we endeavor to understand that Care Partner’s existing clinical needs, tools, and capabilities. We then work together to develop a collaborative approach to manage clinical programs addressing the healthcare needs of the consumers we serve. This robust playbook outlines the division of accountability and supports Care Partners with evidence-based best practices to enhance outcomes, lower costs, and drive a consistent experience for consumers.
•Financial Alignment — We have developed value-based payment structures that enable us to take a staged approach to financial alignment with our Care Partners. We first carefully consider each Care Partner’s ability and
interest to take varying levels of population health risk. Whether through shared savings contracts, capitated arrangements, or other contractual incentives, we work collaboratively with our Care Partners to determine and structure the best financial alignment model for each local market and individual organization. Once aligned, we then work with our Care Partners over time to optimize the relationship and prepare them for success under more advanced models of value-based care.
•Data and Technology Alignment — Our clinical and financial alignment with our Care Partners is designed to incentivize maximum platform interoperability and data transparency, affording us and our Care Partners a more holistic view of the consumers we serve. Using comprehensive clinical, administrative, and consumer data, BiOS and its suite of solutions drive consumer engagement and optimize clinical decision making. Recognizing that each of our Care Partners has unique infrastructure in place, we enhance clinical technology by providing each Care Partner with purpose-built tools and experiences that seamlessly embed into existing workflows.
Bright Health recognizes that each market is different, and we have been able to apply our three core principles of alignment in a flexible manner to meet the specific needs of the local communities we serve and to drive differentiated experiences and outcomes across a variety of markets, each with distinctive organizational constructs.
•Market Type 1: Markets Organized Around Risk-Bearing Organizations (“RBOs”).
In some markets, local healthcare delivery is organized around significant risk-bearing physician aggregators, such as mature independent physician associations (“IPAs”) and management services organizations (“MSOs”). Working collaboratively with these RBOs, or through NeueHealth developing its own, Bright Health applies proprietary analytics to identify and align with high-performing specialists and facility partners to create an integrated delivery network (“IDN”) that is focused on the management of population health risk. Together, we ensure that healthcare is delivered in a seamless manner for consumers across the ecosystem – from primary care provider to specialist, from medical clinic to acute care hospital.
•Market Type 2: Markets Organized Around IDNs.
In other markets, we see existing IDNs that have already invested in building and managing a network of clinically aligned physicians and other care delivery providers. Bright Health engages with these established entities to further optimize local market performance and meet the holistic healthcare needs of consumers across both Bright HealthCare — through aligned financing and distribution to aggregate and engage consumers — and NeueHealth — through the technology, data, and experience to drive outcomes. While markets featuring IDNs are not common nationally, we have the ability to optimize these markets by seamlessly plugging into existing care delivery networks and offering our financing expertise to more closely align with Care Partners, making healthcare simpler and more affordable for consumers.
•Market Type 3: “De Novo” Organized Market.
We also serve markets comprised of health system partners that seek to manage population health risk but are looking for greater expertise and support in aligning with high-performing primary and specialty care physicians. Through our proprietary tools, we analyze existing referral relationships and work with local care providers to assemble a set of high-performing Care Partner relationships “de novo.” There are markets where physicians are looking for a partner to support care delivery in a value- based environment, but historically they have had neither the appropriate incentives nor payor support in place to develop the capabilities needed to successfully manage population health risk. In markets such as these, our Bright HealthCare enablement model and NeueHealth tools and capabilities enable our Care Partners to manage low acuity populations while affording them greater opportunity to serve more complex populations over time.
We believe Bright Health’s alignment model can adapt to the nuances of local markets while delivering medical cost ratio (“MCR”) improvement as our markets mature.
Focused on the Consumer
Our approach to healthcare isremains centered around the belief that there is an ongoing shift from broad, employer-driven, one-size-fits-all offerings to a model built on individual choice. This has driven us to implement what we believe is a novel approach to consumer empowerment that focuses on making healthcare simple, personal, and affordable. Bright Health provides the answers to the questions that we believe matter most for healthcare consumers:
•Simple — Am I able to connect with my physician and care team when and how I want? At Bright Health, we connect you to your Personalized Care Team on your terms and help you choose the benefits, care setting, and
follow-up options that best support your individual needs and preferences. We start by identifying and aligning with a tailored set of primary care practitioners most capable of effectively managing population health and demonstrating high-quality clinical outcomes. This selective approach to provider engagement allows us to invest more deeply in these Care Partner relationships, with a focus on optimizing the consumer experience. We afford consumers easy, convenient access to their Personalized Care Teams, with our proprietary technology. Our simple, customer facing virtual care platform ensures consumers know where to go for care at the click of a button, and through a diverse set of initiatives and programs, consumers never leave an interaction without a clear, customized follow-up action.
•Personal — Do you know me, and do you understand my healthcare needs? At Bright Health, we know you. We interact with you in your accustomed language, through your preferred channel, and can anticipate your needs. We ensure that your comprehensive healthcare information is made available to your Personalized Care Team, equipping them with the data they need to serve your individualized healthcare needs. We start by aggregating data to inform a consumer’s unique healthcare needs. That data feeds into our proprietary DocSquad set of tools and experiences, where we customize a Personalized Care Team best suited to meet individual needs and suit consumer preferences. These Personalized Care Teams are equipped with a comprehensive view of a consumer from the start, and this understanding is further enhanced over time through continued consumer interaction.
•Affordable — Do I have access to affordable healthcare without sacrificing quality? At Bright Health, we know that healthcare costs are a burden and consumers often feel that they do not receive value for their healthcare dollar. We deliver low cost, high-quality healthcare in every market we serve. We start by designing innovative products affording consumers access to high-quality care coupled with high-value benefits, all at an attractive price. We have consistently lowered the total cost of care for consumers in our markets, which we believe is critical to overall consumer satisfaction.
Powered by Technology
Bright Health’s aligned and consumer-focused model enables us to transform the way technology can affect meaningful change in healthcare. Historically, key stakeholders with misaligned incentives have generally been unwilling to share critical information, thereby limiting the effectiveness of healthcare technology. In addition, data has been transactional, serving the needs of payors and care providers, but not the individual. By aligning stakeholders across the financing and delivery of care and putting consumers in control of their healthcare data, we believe Bright Health can capture a holistic view of the consumer and empower the individual and their care teams to drive better coordination and optimize clinical outcomes.
Bright Health’s product and technology strategy is focused around three key pillars:
•Simplifying the Consumer Experience — Creating an individual shopping experience for consumers who prioritize price, quality, and convenience.
•Enabling High-Value Care Delivery — Curating high-performing Personalized Care Teams that help consumers and providers make the right complex care decisions and drive supply-side competition.
•Driving Sustainable Affordability — Significantly reduces the friction that keeps providers from clinical practice and adds unnecessary cost to the system.
To operationalize our product and technology strategy, Bright Health has developed a differentiated consumer-centric healthcare platform. BiOS is built upon our proprietary intelligent data hub, Consumer360, which integrates with an ecosystem of connected Care Partner data and technology infrastructure to power DocSquad and Panorama, our suite of proprietary consumer and care provider solutions. We ensure information is available when and where it is needed, whether through interactions with Bright Health directly or through embedded experiences with our Care Partners. We allow consumers to see their providers on their terms, leveraging DocSquad to personalize interactions whether they occur in-person or virtually. BiOS is designed to make healthcare simple, personal, and convenient for consumers.
BiOS contains three principal components:
•Consumer360 — Consumer360 is our intelligent data hub that is at the core of BiOS. It aggregates not only clinical and administrative data, but also information derived from the consumer experience (i.e., from call center and other consumer interactions), as well as data relating to social determinants of health. This multi-dimensional, connected data, obtained through our aligned Care Partner model, affords us a differentiated, 360-degree view of the consumer. Experiences in DocSquad and Panorama are powered by Consumer360, allowing them to leverage all data known about each consumer we support.
•DocSquad — DocSquad is a collaboration platform built to support consumers and providers in an efficient and personalized healthcare experience. The platform is backed by a network of providers offering 24/7 nationwide support to healthcare consumers. It is designed to work in concert with a consumer’s care team by allowing individual providers inside of our integrated system of care to adopt the platform and service consumers directly. We provide the consumer simple and convenient ways to connect, whether through an asynchronous conversation, a live chat/video visit, or via in-person appointment when needed.
•Panorama — Panorama is an administrative platform designed to support our employees working in an integrated care model. The platform is a single set of workflows that spans our care financing and care management/care delivery functions allowing a streamlined consumer experience. By enabling the employees that support the financing and delivery of care to work together, we can provide better outcomes with less friction. Because Panorama sits on top of Consumer360, we can alert our teams in real-time based on a shared data asset allowing them to intervene proactively for the benefit of the consumer.
The BiOS ecosystem we developed enhances the long-term relationship between a consumer and their team of care professionals. By having the consumer, their care team, and the payor share a connected platform, we believe Bright Health has unlocked a new opportunity for all parties to work together to achieve optimal healthcare outcomes.
Our Market Approach
When we enter a market, we begin with an assessment and understanding of the unique attributes of that market to determine how to deploy our alignment model and position us for success. We have developed a proprietary set of tools that enable us to assess critical consumer (demand side) attributes as well as care provider (supply side) characteristics in each market. These tools have enabled us to develop a measured approach to state and market entry, helping to ensure that the complexity of the population served is commensurate with the level of clinical, financial, and technological integration we initially have with our local Care Partners. As our local Care Partner relationships evolve over time and we more deeply align, we are better positioned to successfully serve increasingly complex populations, maximizing our total market opportunity.
We believe our aligned enablement model affords us an opportunity to serve an untapped (underpenetrated) segment of the population. While legacy managed care organizations have focused on serving low-acuity populations, our model is designed to serve a much broader population, including consumers with complex medical needs.
Our deep Care Partner relationships allow us to enter new states with an aligned growth partner and quickly scale membership as we increase our service area across the state. We believe many of our markets have embedded growth potential as we leverage existing infrastructure and Care Partner relationships to address higher acuity consumers, while introducing new Bright HealthCare products to the market.
OUR BUSINESS
We deploy our capabilities across NeueHealthConsumer Care and Bright HealthCare, both working in tandemwith a shared focus on leveraging technology and leveraging technology,our aligned model to optimize the healthcare experience. By participating in and connecting both the delivery and financing of care, our approach allows us to control the healthcare dollar while rewarding us for reducing the total cost of care, all while engaging with and enhancing the experience and clinical outcomes for the underlying consumer.
NeueHealthConsumer Care
NeueHealthConsumer Care seeks to significantly reducesreduce the friction and current lack of coordination between payors and providers to enable a truly consumer-centric healthcare experience. Providers are looking for solutions that will enable them to perform in a value-based world and focus on what matters most: their patients’ health. Payors are looking for systems of high-performing providers who can partner with them to deliver the best care locally. Consumers want personalized, easy-to-access care, regardless of who is paying for it. NeueHealthConsumer Care brings this together through a combination of technology and services that are scaled centrally and deployed locally.
As of December 31, 2021, NeueHealth works with over 260,000 care provider partners and operates 1802022, Consumer Care operated 74 managed and affiliated risk-bearing clinics within its integrated care delivery system. Through those risk-bearing clinics, NeueHealth maintainsConsumer Care maintained over 200,000579,000 unique patient relationships as of December 31, 2021,2022, approximately 175,000530,000 of which are
delivered under value-based arrangements, across multiple payors. NeueHealthpayors, including 46,000 through our Direct Contracting Entities (now ACO Reach). Consumer Care engages in local, personalized care delivery in multiple ways:
•Integrated Care Delivery — As of December 31, 2021, NeueHealth operates 1802022, Consumer Care operated 74 managed and affiliated risk-bearing clinics providing comprehensive care to all population types. Our integrated system of care includes embedded pharmacy, laboratory, radiology, and population health focused specialty services. We proactively manage the needs of consumers and offer expansive preventive care services to reduce hospitalizations and other unnecessary utilization of the healthcare system. Our clinics leverage NeueHealth’sConsumer Care’s data and technology capabilities to ensure a comprehensive care system for our at-risk patients. NeueHealthConsumer Care is tightly aligned with Bright HealthCare’s financing solutions, while also servingour third-party payors.payor partners.
Our care delivery approach focuses on three primary components:
1.Simplicity and Convenience — We offer a one-stop-shop for consumers offering primary care, behavioral health, rotating specialties, pharmacy, radiology, and laboratory services, many times at a single location.
2.Community Connectivity — Our clinics are designed to foster a sense of local community, bring consumers together to build supportive relationships and support their non-medical needs.
3.Proactive Engagement — Leveraging our technology, we keep our local consumers highly engaged in their healthcare. We proactively communicate with our consumers to close care gaps and, when appropriate, arrange for medical transportation to and from appointments, all while making our Personalized Care Teams available 24/7 through call centers and virtual connectivity, maximizing adherence to a consumer’s care plan.
•Bright Health Networks — A key component of our NeueHealth business is our ecosystem of Care Partners, which includes over 260,000 care providers as of December 31, 2021. Whether organized around IDNs, accountable care organizations (“ACOs”), clinically integrated networks (“CINs”), IPAs or MSOs, our practitioners serve as the backbone of Bright Health’s alignment model.
•Value Services Organization — NeueHealthConsumer Care empowers primary care practices and care delivery organizations to evolve and succeed in their evolution towards risk-bearing primary care delivery. We help these organizations enter value-based arrangements designed around their needs, while simultaneously empowering them with the tools and capabilities necessary to maximize their success. NeueHealth’sConsumer Care’s Value Services Organization takes a comprehensive approach to provider enablement focusing on:
◦1.Organizing and Aligning Providers — Building, managing, and delivering high-performing, aligned delivery systems in local markets.
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2.Transforming Practices — Redesigning practice workflows and facilitating culture change with care providers so that they understand and embrace value-based care.
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3.Driving Outcomes — Empowering consumers to access care in the way they desire and providing tools that empower providers to effectively manage risk and deliver outcomes.
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4.Enabling Frictionless Transactions — Reducing administrative complexity for consumers and care providers, while supporting transitions of care across the ecosystem.
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5.Assessing and Improving Performance — Evaluating financial, clinical, and quality performance under risk-based contracts, empowering providers to improve and succeed.
NeueHealthConsumer Care Customer Segments
NeueHealthConsumer Care serves a diverse set of customers across the healthcare ecosystem, including:
•Bright HealthCare — NeueHealth receives network rental fees from Bright HealthCare for the delivery of NeueHealth’s Care Partner and network services. In addition, NeueHealth contracts directly with Bright HealthCare to provide care through its managed and affiliated clinics.
•External Payors — NeueHealthConsumer Care managed and affiliated clinics currently contract with various third-party payors through both fee-for-service andprimarily value-based arrangements.
•Affiliated Providers (e.g., IDNs, IPAs, Medical Groups, etc.) — NeueHealthConsumer Care supports these care providers with a suite of services including technology, payor contracting, risk management, and administrative support to accelerate the transition to value-based care.
•Federal and State Governments — Beginning January 1, 2022, NeueHealth began participatingConsumer Care currently participates in the Global Direct Contracting modelACO Reach program where in partnership with its owned and plans to expand to additional direct-to-government programs in the future, both at the state and federal level. Examples include the ACO REACH model and Medicaidaffiliated providers, it manages traditional Medicare beneficiaries through value-based programs.relationships.
Bright HealthCare
Bright HealthCare delivers simple, personal, and affordable financing solutions that are focused on consumer retail healthcare and delivered through Bright Health’s alignment model. We tailor our plan design and experiences to meet consumer needs, align top-to-bottom incentives to drive the best outcomes for our stakeholders, and develop capabilities to enable superior performance.
Bright HealthCare began serving consumers in 2017 through our IFP products. Since then, our business has evolved to serve higher acuity populations, adding Medicare Advantage plans in 2018 and expanding further to serve a special needs population in 2019.
As of December 31, 2021, Bright HealthCare aggregates and delivers healthcare benefits to over 727,000 consumers through its various offerings, serving consumers across multiple product lines in 14 states and 99 markets. We also participate in a number of specialized plans and are the nation’s third largest provider of Chronic Condition Special Needs Plans (“C-SNPs”).
Bright HealthCare Customer Segments
Bright HealthCare’s customers include:
•Commercial — Bright HealthCare offersoffered commercial health plans to more than 611,0001.0 million individuals as of December 31, 2021.2022. Bright Health has exited the Affordable Care Act Marketplace as an insurer, ceasing coverage of IFP products through Bright HealthCare at the end of 2022.
•Medicare Advantage — Bright HealthCare offers Medicare Advantage plans to approximately 125,000117,000 lives as of December 31, 2021.2022. Bright HealthCare has focused its Medicare Advantage business for 2023 on the California market, exiting other states as a Medicare Advantage insurer at the end of 2022.
Through these diversified businesses, we believe we are able to align consumer, provider, and payor interests, creating localized, high-performing, value-based systems of care where everybody wins.
OUR COMPETITIVE ADVANTAGES
We Believe We Have a Differentiated Business Model That Integrates the Delivery and Financing of Healthcare. Unlike the traditional relationship between payors and providers, our aligned model brings together the delivery and financing of healthcare. Our Bright HealthCare products are designed in close collaboration with our NeueHealth Care Partnersdelegated partners to ensure financial incentives which reward total cost of care reduction, clinical outcome optimization, and consumer experience enhancement are in place. Our NeueHealth Value Services Organization supports local care delivery organizationsConsumer Care segment partners with external payors who believe in managing care under value-based arrangements, providing tools and capabilities to enhance their ability to take total cost of care risk and capture greater financial benefit. Together, Bright HealthCare and NeueHealth are well-positioned to continue to disrupt the existing healthcare system.arrangements.
We Have a Broad, Diversified Service Model. Bright Health is focused on serving consumer retail healthcare. Our Bright HealthCare business spans across 99 markets and 14 states, with multiple health plan products today serving commercial and Medicare Advantage populations. Our NeueHealth business lends additional services revenue and earnings diversification, while bringing us closer to consumers. Our aligned enablement model is built for scale and can be leveraged to support the collaborative launch of new products and services. We believe there is significant opportunity to continue diversifying Bright HealthCare product revenue in close alignment with our existing NeueHealth Care Partners to serve new populations in managed care, and Medicare fee-for-service via participation in the ACO REACH model and other alternative payment models.
We Have a Purpose-Built, Consumer and Provider Technology Platform. Our technology is purpose-built to support all key stakeholders in healthcare delivery. Our BiOS suite of solutions supports consumer engagement in healthcare, while supporting clinical decision making for our aligned Care Partners. We believe our proprietary Panorama and DocSquad technology platforms combine to provideplatform provides the first truly consumer-centric healthcare platform designed to bridge healthcare enablement and delivery and bring a connected experience to consumers and their care teams.
We Have a Flexible, Differentiated Model Able to Meet the Needs of Any Market. Our approach to healthcare transformation is local. No two markets we serve are alike, yet when consistently applied, the core tenets of our aligned enablement model show that we can effect change in any market we serve. Whether operating in a market with a strong existing IDN or a market with disparate provider organizations, we seek to align and structure Care Partner relationships with the appropriate mix of high-performing care delivery assets necessary to address the underlying consumer’s healthcare needs, while supporting such organizations with the transition to value-based care, no matter where they are on that spectrum today.
We Have a Seasoned Management Team Built for Scale. Our executive leadership team has extensive experience leading multi-billion dollar organizations across a wide range of industries, from healthcare to consumer retail to technology. Our team has a proven track record of growing organizations and leading large, publicly traded enterprises. OurWe believe our team’s experience in navigating through different healthcare regulatory regimes positions us to be able to adapt quickly as needed, scale our business model, and drive continued success in any political or regulatory environment.
We Have a Multi-Pronged Growth Strategy. OurWe believe our growth will be driven by a mix of organic and inorganic initiatives. We plan to continue to grow in our core markets as they scale to maturity, and we will leverage our relationships with some ofdifferent channels across both the largest care provider organizations nationally to expand and diversify into new product and service lines.
MARKET CHALLENGES AND OPPORTUNITY
Market Challenges
The current U.S. healthcare system has deep-rooted, foundational issues that have impeded legacy providers from meeting changing patient needs. As a result, the current system is inefficient, ineffective, and expensive for all.
Unsustainably High Costs Coupled with Sub-Optimal Outcomes. According to CMS estimates, total healthcare spending in the United States will reach $4.5 trillion in 2022, representing over 18% of U.S. GDP. This per capita healthcare spend is more than any other country in the world and is approximately twice the Organization for Economic Cooperation and Development (“OECD”) average for comparable countries. However, quality outcomes are not correlated with the increased spend. Obesity rates, as well as the percentage of seniors with multiple chronic conditions, are significantly higher in the U.S. than in comparable countries. An above average mortality rate further highlights the ineffectiveness of the U.S. health system. With an average U.S. lifespan of approximately 77 years, the U.S. trails the OECD average of 82 years. The wasted spending in U.S. healthcare ranged from $760 billion to $935 billion, accounting for approximately 20%-25% of total spend.
Negative Consumer Experience. The U.S. healthcare system is built upon an employer-centric model, where group purchasing results in a lack of personalization. Expensive and inefficient preferred provider organization (“PPO”) networks are still at the core of legacy managed care, and network structure and financing frameworks are still designed with employer-based populations in mind. This approach has resulted in an impersonal consumer experience and a negative perception of the healthcare system as being transactional in nature, which makes it more difficult to proactively engage consumers in their healthcare decision-making.
Misaligned Incentives Rewarding Volume Over Value. Only 2.9% of total U.S. healthcare spending in 2018 was related to preventative care. This underinvestment in proactive healthcare is reflective of a legacy fee-for-service (“FFS”) reimbursement model that rewards reactive “visit-based” decision making instead of a proactive “population health” focused approach. This dynamic leads to undesirable outcomes, from physician burnout and frustration to consumer dissatisfaction. Although there has been broad support for the idea of value-based payment models over the past decade, few organizations have been able to successfully bring together the analytics, capital,payor and provider buy-in necessarylandscape. We are in fast growing markets for aging and underserved consumer populations, with opportunities for overall market growth and gaining market share. Each of our segments and business lines has opportunities to operationalize the concept.
Inadequate Access to Quality Care at an Affordable Cost. Vulnerable populations across the U.S. suffer from a lack of access to affordable, high-quality healthcare. According to the Commonwealth Fund, approximately 45% of U.S. adults who are considered underinsured reported a medical problem but did not visit a physician because of cost concerns. This has contributed to the U.S. ranking last overall among 11 industrialized countries on measures of health equity.
Disaggregated Health Data Leading to Suboptimal Outcomes. While legacy billing and administrative tools help collect data, it is scattered across care settings, such as hospitals, physician offices, and pharmacies. Payors and providers are often reluctant to share data unless it serves their financial interests, creating barriers to evidence-based, real-time care delivery.
Foundation for Change
We believe the U.S. healthcare system is broken. In recent years, point solutions have emerged that are beginning to address the misalignment of incentives and evolving consumer needs, but have been unable to achieve meaningful change at scale for the following reasons:
New Payment Structures Have Seen Limited Adoption. Beyond the Medicare Advantage program, efforts to structure and execute value-based arrangements have had limited success due to a lack of standardization and misaligned incentives. The ability to drive adoption of new payment models across a broad swath of the population requires both a model which aligns the incentives between payors and providers, as well as supportive infrastructure enabling value-based care, which few organizations have been able to provide.
Effective Integrated Care Models Exist, but Only on a Regional Basis. Integrated models like Kaiser Permanente and Geisinger have demonstrated an ability to lower medical costs, deliver higher quality care, and improve the consumer experience. However, while these organizations have spent decades developing successful regional models of care tailored to their core geographies, these models have not been scalable to other markets. The ability to deliver integrated care nationally requires a flexible approach that can adapt to the unique needs of each local market.
Increasing Consumer Dissatisfaction, Coupled with Rising Expectations. Consumers are dissatisfied with healthcare’s status quo and are increasingly demanding change. The number of individuals who are aligned to a PCP has been declining, and the utilization of retail care has been increasing, especially among younger generations. Accelerated by the COVID-19 pandemic, broader adoption of virtual care has also been on the rise. Innovation outside of the healthcare sector is driving consumers to seek and entertain new and more convenient healthcare options.
Reactive and Fragmented Approach to Healthcare Innovation. Both traditional platforms and new technology start-ups have been reacting to healthcare’s challenges but have achieved limited success to date. The traditional platforms have struggled to react swiftlybring our services to new and more complex consumer demands due to conflicts with their rigid, legacy business models, while tech-enabled start-ups have generally delivered point solutions serving only a narrow segment of the population. To effect meaningful change and drive transformation at scale, a comprehensive, end-to-end approach is required.
Successfully pursuing and executing on a full-scale paradigm shift requires a fulsome and expansive solution that can address the needs of all stakeholders in any local market. We believeconsumers, growing our differentiated and disruptive integrated healthcare model is that solution.
Our Market Opportunity
The flexibility of our model positions us to address the needs of consumers across the entire healthcare system. Bright Health is working to democratize access to the healthcare system of the future, seeking to bring solutions to all consumers instead of addressing only a specific segment of the market, such as health insurance, primary care delivery, or tech-enablement. We believe our approach to serving the entire market provides durability, allowing us to serve a consumer throughout the entirety of their healthcare journey.
As a result, we believe we operate in a total addressable market today that will reach approximately $4.5 trillion in 2022, equivalent to the 2022 national health expenditures projected by CMS. Of this total, we believe $2.1 trillion to be our targeted addressable market, which represents the portion of total health expenditures currently subject to provider alignment, as projected by Nephron Research. As value-based delivery models continue to evolve, we believe the provider
alignment component will converge towards total healthcare expenditure, which CMS projects will continue to grow over 5% annually on average, reaching $6.2 trillion by 2028. This expansion is driven by the following trends:
•Growing Retail Market Segments (Medicare, IFP, etc.) — We believe the Medicare Advantage market is the most dynamic segment of U.S. health insurance today. It is estimated that the 5-year CAGR from 2019 to 2024 will be 10% and that the market will grow by $170 billion over that time. CMS estimates that the total overall Medicare market will exceed $1 trillion by 2023. The IFP market has also significantly stabilized, maintaining between 11 million and 12 million covered lives since 2015. Furthermore, with tailwinds from recent political developments, we believe the IFP market is well-positioned to grow.
•Shifting Employer Market Segments (ICHRA, etc.) — The employer market is evolving to be more consumer-directed. While currently in the early stages, we believe products like individual coverage health reimbursement arrangement (“ICHRA”) will yield significant opportunity for employers to shift lives into consumer-directed plan options, a segment of the market in which we have historically demonstrated robust growth. In addition, employers overall are shifting business to administrative services only (“ASO”) models, offering more flexible network options in order to better manage costs while continuing to meet employee healthcare expectations.
•Government and Innovation (ACO / ACO REACH, Medicaid, etc.) Programs — In response to increased costs across traditional unmanaged populations, the federal and state governments have been introducing innovative programs that reward care providers and payors that are able to effectively manage risk. Notably, CMS announced the Global and Professional Direct Contracting model, which began in April 2021 and the ACO REACH model commencing in 2023 to create value-based payment arrangements directly with provider groups for their current Medicare FFS patients, similar to the value-based contracts that we enter intopartnerships with our provider partners. The Medicare FFS market represented an approximately $320 billion opportunity as of 2018. Additionally, states are increasingly migrating to Managed Medicaid programs that specifically incentivize payor and care provider partnerships to drive better outcomes at a lower cost. As government-sponsored innovation continues to accelerate, we believe our model and national market presence position us well to succeed under these emerging programs.partners.
We have built our model of high-quality, affordable healthcare to succeed in any environment. As a payor-agnostic business with a diverse set of market opportunities, we believe we are well-positioned to achieve growth regardless of the political and regulatory backdrop. We believe our aligned partnerships and growing position in the healthcare ecosystem offer us visibility into how regulatory dynamics will unfold, such that we can anticipate and meet potential changes accordingly.
GROWTH STRATEGIES
Bright Health’s alignment model allows us to pursue additional growth through the following avenues, aligned around the integration of delivery, financing, and optimization of care.
•Increase Membership in Existing Markets. We plan to continue to drive membership growth through greater consumer awareness of our brand and our ability to deeply align and integrate with high-performingour delegated partners in our Senior Managed Care Partners.
•Enter New Markets. Many of our Care Partners have national or regional footprints, which afford us the opportunity to continue to expand into new markets with existing, trusted partners, increasing our ability to scale nationally with greater efficiency. Further,business. In addition, we plan to leverage new provider partnerships to enter additional geographiesexpand the relationships we have with our payor partners in the Consumer Care business, growing the membership we are managing on behalf of strategic interest.those partners.
•Expand Our Care Delivery Footprint. We plan to add new payor contracts to serve additional patientsconsumers at our existing clinics, while integrating additional services. Additionally, our exportable model affords us valuable opportunities for de novo growth through the addition of new clinics across both existing and future markets.
•Take and Support the Management of Population Health Risk. We leverage our actuarial expertise and population health management infrastructure to take population health risk under total cost of care arrangements in close collaboration with our Care Partners. In addition, we help our Care Partners maximize the benefit of value-based arrangements through tools and capabilities that enable high-touch, high-quality care for consumers at a lower total cost.
•Participate in Emerging Direct-to-Government Programs. We were one of the first participants in these innovative new programs and in 2023, approximately 65,000 of our value-based consumers are well-positioned bothattributable to directly assume population health risk and to support care providers with the services needed to succeed under emerging direct-to-government programs, such as Managed Medicaid and Global and Professional Direct Contracting model andour ACO REACH model for Medicare FFS populations. We have two Global Direct Contracting entities, and we continue to evaluate other direct-to-government contracting opportunities.Reach businesses.
•Introduce New Product Offerings. Leveraging our trusted Care Partner relationships, we are well-positioned to launch new, innovative products within our NeueHealthConsumer Care and Bright HealthCare businesses focused on serving additional segments of the population.
SALES AND MARKETING
We view sales and marketing as a strategic imperative and core differentiator for our products and services. We use data and technology to effectively predict marketing outcomes and constantly improve our campaigns. We market our Bright HealthCare plans through a number of channels including, but not limited to: (1) the Health Insurance Marketplaces, (2) an extensive network of brokers and field marketing organizations, (3)(2) direct to the consumer, and (4)(3) our Care Partner relationships. We support these organizations with in-house advertising, sales collateral, and other materials. Our sales representatives, as well as independent brokers and agents, earn commissions based on applications submitted and plans effectuated.
We market our plans and productsthe services within our NeueHealthConsumer Care business using sophisticated technology and data resources to target and engage care organizations who can benefit fromconsumers in tight partnership with our products and services.payor partners. Using zip+4, we deliver our advertising content to the right audiences across expanded geographic areas, beyond our direct markets.areas. We employ advanced message testing to identify core messages that drive our performance. NeueHealthConsumer Care delivers these messages through all media channels including display, search, digital video, audio, direct mail, telesales and materials in provider offices.
COMPETITION
The market for personalized care delivery and health insurance products and plans is highly competitive. Our industry involves evolving regulatory requirements and changing consumer preferences and demands and requires us to develop new product offerings at competitive prices in order to effectively compete. See “Risk Factors – Risks Related to Our Business – We operate in competitive markets within a highly competitive industry” for additional discussion of our risks related to competition.”
Our principal competitors vary considerably in type and identity by each market. Our NeueHealthConsumer Care business competes with other provider enablement companies, as well as medical groups in the markets in which we operate clinics. Our competitors include MSOs, IPAs, and other organizational providers of primary care services, such as Agilon Health, Inc., Cano Health, Inc., ChenMed LLC, Iora Health, Inc., Oak Street Health, Inc., OptumHealth of UnitedHealth Group Incorporated, and Village Practice Management Company, LLC (VillageMD). Our NeueHealthConsumer Care business also competes with other participants in the Medicare Shared Savings Program and other programs designed to bring value-based care to fee-for-service Medicare beneficiaries.
Our Bright HealthCare business currently faces competition from a range of companies, including other health plans, many of whom are developing their own technology or partnering with third-party technology providers to drive improvements in care. Our competitors in this segment include large, national insurers, such as Aetna, Inc., Anthem, Inc., Centene Corporation, Cigna Corporation, Humana Inc., Molina Healthcare, Inc., UnitedHealthcare of UnitedHealth Group Incorporated and others. These companies are more established and have greater financial resources than we do, and each of them provides products that compete with ours in the markets where we operate. Other competitors include regionally-focused payors such as Blue Cross Blue Shield licensees, Kaiser Permanente and other provider-sponsored health plan organizations. These companies have significant regional market share, making competition in those geographies more difficult. Our competitors also include recent market entrants such as Alignment Healthcare, Inc., Clover Health Investments, Corp., Devoted Health, Inc., Oscar Health, Inc. and others. These companies utilize disruptive models and other approaches to increase consumer engagement and grow their market share.
To effectively compete and better engage with consumers, we believe we offer a compelling and affordable range of products and services, as well as access to high-quality care providers. In addition, we aim to provide excellent customer service,
including a seamless onboarding experience, ready access to our Care Partners and their medical personnel, and tools to assist in our consumers’ understanding of their healthcare benefits.
We differentiate our products and services on the basis that managed care, when built for and embedded within the delivery system, drives better outcomes. We believe in our ability to align the financing and delivery of care while maintaining agility to constantly evolve our model to better serve our consumers.
RESEARCH AND DEVELOPMENT
Our product and engineering teams focus on constantly refining and improving BiOS, Panorama and DocSquad,our technology platform, which connect our consumers with their providers. We leverage the data generated by our platform to better assess specific consumer needs and to guide towards future innovation. We continue to devote significant resources to further develop, expand and upgrade our platform to enhance consumer experience and enable an integrated, aligned healthcare ecosystem.
INTELLECTUAL PROPERTY
Our continued growth and success depend, in part, on our ability to protect our intellectual property and internally developed technology, including BiOS Panorama and DocSquad.Panorama. We primarily protect our intellectual property through a
combination of copyrights, trademarks and trade secrets, and contractual rights (including confidentiality, non-disclosure and assignment-of- invention agreements with our employees, independent contractors, consultants and relevant companies with which we conduct business). We have applied for, obtained and maintainin many instances, obtained registration in the U.S. for a number of trademarks, including Bright Health, NeueHealth, DocSquad, and Physicians Plus. We pursue trademark registrations to the extent management believes doing so would be the most appropriate and effective means of protecting our brands.
We are not presently a party to any legal proceedings relating to intellectual property that, in the opinion of our management, would individually or taken together have a material adverse effect on our business, financial condition, results of operations or cash flows.
However, our efforts to protect and maintain our intellectual property rights may not prevent others from competing with us, or from infringing our intellectual property rights. We may be unable to obtain, maintain or enforce our intellectual property rights, and assertions by third parties that we violate their intellectual property rights could have a material adverse effect on our business, financial condition and results of operations. See “Risk Factors – Risks Related to Our Business – Protecting our intellectual property rights may be expensive and demand management’s attention, and failure to protect or enforce our intellectual property rights could harm our business and results of operations” and “Risk Factors– Risks Related to Our Business — In the future, we may be subject to claims that we violated intellectual property rights which can be costly to defend and could require us to pay significant damages and limit our ability to operate.”
GOVERNMENT REGULATION
The provision of healthcare services and the marketing and sale of insurance products and plans is a heavily regulated industry. Our business is governed by comprehensive federal, state, and local laws and regulations, including those relating to the healthcare industry, the insurance industry, and state and federal privacy and data security laws. Our NeueHealthConsumer Care business is subject to various standards relating to, among other things, the provision of healthcare services and licensing requirements. Our Bright HealthCare business is subject to, among other things, laws and regulations governing our marketing and advertising activities in states which require prior review of our marketing collateral. As a provider of health plan products in multipleone or more states, we are required to apply for, comply with, and maintain various licenses and approvals and we are subject to frequent audits of our financial soundness and operational compliance with the respective laws and regulations. The laws and regulations applicable to our business continue to change and evolve over time. Current proposals and directives to change or modify the implementation of such laws and regulations, whether legislative, regulatory, or in the form of executive orders, create areas of uncertainty and, if such proposals are enacted, the potential for material adverse impacts on our business.
HIPAA and Privacy and Security Laws
We are subject to federal and state laws and regulations that protect the use and disclosure of patient and other personal, sensitive or regulated data. These include the Health Insurance Portability and Accountability Act of 1996 and the Health Information Technology for Economic and
Clinical Health Act, each as amended, and the regulations that implement these laws (collectively “HIPAA”), which created privacy and security standards that limit the use and disclosure of protected health information, referred to as PHI. HIPAA governs the use and disclosure of PHI and requires covered entities, which include health plans and healthcare providers who transmit health information electronically in connection with certain transactions, and their business associates to implement and maintain administrative, physical and technical safeguards to ensure the confidentiality, integrity and availability of individually identifiable health information. In addition, HIPAA imposed obligations on covered entities and business associates with respect to the use and disclosure of PHI, including requirements for written agreements known as business associate agreements and breach notification requirements. On January 21, 2021, the U.S. Department of Health & Human Services (“HHS”) published a proposed rule, Proposed Modifications to the HIPAA Privacy Rule to Support, and Remove Barriers to, Coordinated Care and Individual Engagement, which would impose new obligations on covered entities with respect to patient access to PHI, including shorter time frames within which covered entities must respond to requests for access, and would create categories of access to electronic PHI for which covered entities could not charge individuals a fee.
Covered entities must notify affected individuals of breaches of unsecured PHI without unreasonable delay but no later than 60 days after discovery of the breach, and such timelines are generally shortened under state law obligations and contractual provisions. Reports must be made to the HHS Office for Civil Rights and, for breaches of unsecured PHI involving more than 500 residents of a state or jurisdiction, to the media. Generally, impermissible uses or disclosures of unsecured PHI are presumed to be breaches unless the covered entity or business associate establishes that there is a low probability the PHI has been compromised. Various state laws and regulations may also require us to notify affected individuals in the event of a data breach involving personal information. If we experience a breach under HIPAA or state laws, we may be subject to fines, penalties or other regulatory action, and we may face class action or other lawsuits from customers or individuals impacted by the breach. See “Risk Factors – Risks Related to Our Business – Security incidents or breaches, loss of data and other disruptions to our or our third-party service providers’ systems, information technology infrastructure, and networks could compromise sensitive or legally protected information related to our business or consumers, disrupt our business operations, and expose us to liability, which could adversely affect our business and our reputation” and “Risk Factors – Risks Related to Legal Proceedings and Governmental Regulations – Our use and disclosure of PII and PHI is subject to federal and state privacy and security regulations, and our
failure to comply with those regulations or to adequately secure the information we hold could result in significant liability or reputational harm and, in turn, a material adverse effect on our client based and revenue.”
Violations of HIPAA by entities like us, including, but not limited to, failing to implement appropriate administrative, physical and technical safeguards, have resulted in enforcement actions and in some cases triggered settlement payments or civil monetary penalties. Penalties for violations of HIPAA vary, with larger breaches for some organizations ranging up to $16 million for one breach. Violations of HIPAA may result in civil or criminal penalties, including a tiered system of civil monetary penalties that range up to $60,226 per violation, with a maximum civil penalty of $1,806,757 for violations of the same standard in a single calendar year. These penalties are required to be adjusted for inflation. HIPAA provides for criminal penalties, with the severest penalties for obtainingenforcement actions, settlement payments, resolution agreements, and disclosing PHI with the intent to sell, transfer or use such information for commercial advantage, personal gain or malicious harm.other sanctions. Further, state attorneys general may bring civil actions seeking either injunctions or damages in response to violations of HIPAA that threaten the privacy of state residents and may also negotiate settlements for related cases on behalf of their respective residents. There can be no assurance that we will not be the subject of an investigation (arising out of a reportable breach incident, audit or otherwise) alleging noncompliance with HIPAA in our maintenance of PHI.HIPAA. While HIPAA does not create a private right of action allowing individuals to sue us in civil court for violations of HIPAA’s requirements, its standards have been used as a basis for the duty of care in state civil suits, such as those for negligence or recklessness in the handling, misuse or breach of PHI. Any such penalties or lawsuits could harm our business, financial condition, results of operations and prospects.
In addition to HIPAA, numerous state and federal laws and regulations govern the collection, dissemination, use, privacy, confidentiality, security, availability, integrity, creation, receipt, transmission, storage, and other processing of PHI and other personally identifiable information (“PII”). Privacy and data security 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 include the Confidentiality of Substance Use Disorder Patient Records, 42 C.F.R. Part 2, and a range of other laws that protect data pertaining to specific conditions, such as HIV/AIDS, genetic disorders, and mental and behavioral health. Health Insurance Marketplaces are also required to adhere to privacy and security standards with respect to personally identifiable information and to impose privacy and security standards that are at least as protective as those the marketplaces must follow. These standards may differ from, and be more stringent than,
HIPAA. Privacy and data security laws and regulations are often uncertain, contradictory and subject to change or differing interpretations. For example, HHS has also proposed new regulations on patient access to PHI and substance use disorder records and issued guidance on the use of tracking technologies. The complex, dynamic legal landscape regarding privacy, data protection and information security creates significant compliance challenges for us, potentially restricts our ability to collect, use and disclose data, and exposes us to additional expense, and, if we cannot comply with applicable laws in a timely manner or at all, adverse publicity, harm to our reputation, and liability.
States are beginning to adopt additional requirements, including California, which is one of our largest markets, where the California Consumer Privacy Act (“CCPA”) took effect on January 1, 2020. The CCPA requires covered businesses to provide certain notices and disclosures to California residents, and also gives California residents rights to opt-out of selling their personal information, and to exercise rights such as obtaining access to and requesting deletion of their personal information. The CCPA allows for certain civil penalties for violations, as well as private rights of action for data breaches under certain circumstances. Additionally, the California Privacy Rights Act (“CPRA”), which further expandsexpanded the CCPA with additional data privacy compliance requirements that may impact our business, and establishesestablished a regulatory agency dedicated to enforcing those requirements takeswhich took effect on January 1, 2023, and will apply to data collected starting on January 1, 2022. Virginia and Colorado additionally2023. Other states have passed their own comprehensive consumer privacy laws that takehave taken effect, on January 1, 2023 and July 1, 2023, respectively, and it is possible thatstill other states could passare considering passing comparable or more restrictive legislation, with comparable or greater penalties for non-compliance, and such requirements could negatively impact our business. See “Risk Factors – Risks Related to Our Business – Our use and disclosure of PII and PHI is subject to federal and state privacy and security regulations, and our failure to comply with those regulations or to adequately secure the information we hold could result in significant liability or reputational harm and, in turn, a material adverse effect on our client base and revenue.” Additionally, companies that we interact with, such as payors and Care Providers, have increasingly stringent expectations relating to privacy and security protections for PHI and other PII. We have incurred, and may incur in the future, significant costs to develop new processes and procedures to comply with evolving privacy and security laws, regulations and expectations of third parties. Violations of privacy and security laws and regulations, or of contractual obligations relating to privacy and data security, may result in significant liability and expense, damage to our reputation, or termination of our relationships with government-run health insurance exchanges and our consumers, Care Providers and other important partners.
In addition, we have entered, and will continue to enter, into contracts with third-party service providers and others under which they will engage in the collection, maintenance, protection, use, transmission, disclosure and disposal of the sensitive personal information of our consumers and for which we will remain primarily responsible. We must ensure that each of these parties is strictly following all applicable rules and regulations and implement audit procedures that will ensure full compliance therewith.
Federal consumer protection laws may also apply in some instances to our privacy and security practices related to personally identifiable information. The Federal Trade Commission (“FTC”) and many state attorneys general are interpreting existing federal and state consumer protection laws to impose evolving standards for the collection, storage, processing, use, retention, disclosure, transfer, disposal and security of information about individuals, including health-related information, and to regulate the presentation of website content. The FTC has become increasingly aggressive in prosecuting certain data breach cases as unfair and deceptive acts or practices under the FTC Act which presents additional risk.and has charged companies with violating this act based on failures to appropriately and transparently safeguard personal information and respect consumers' privacy rights and based on disclosures of health and personal information to third parties, the failure to
limit third-party use of health information, the failure to implement policies and procedures to prevent the improper or unauthorized disclosure of health information, and the failure to provide notice and obtain consent before the use and disclosure of health information for advertising. Courts may also adopt the standards for fair information practices promulgated by the FTC, which concern consumer notice, choice, security and access. Consumer protection and other laws require us to inform our consumers how we handle their PII and the choices which consumers may have about how we collect, handle, share, and secure PII. If such information that we share with our consumers is found to be untrue, we could be subject to government claims of unfair or deceptive trade practices, which could lead to significant liabilities and consequences.
State Regulation of Insurance Companies
We must obtain and maintain regulatory approvals to sell and operate specific health plans in the jurisdictions in which we conduct business. The nature and extent of state regulation varies by jurisdiction, and state insurance regulators generally have broad administrative authority with respect to all aspects of the insurance business. The Model Audit Rule, where adopted by states, requires expanded governance practices, risk and solvency assessment reporting and the filing of periodic financial and operating reports. Most states have adopted these or similar measures to expand the scope of regulations relating to corporate governance and internal control activities of insurance companies. Health insurers are subject to state examination and periodic regulatory approval renewal proceedings. Some of our business activity is subject to other healthcare-related regulations and requirements, including utilization review, pharmacy service, or provider-related
regulations and regulatory approval requirements. These requirements differ from state to state and may contain network, contracting, product and rate, licensing and financial and reporting requirements. There are laws and regulations that set specific standards for delivery of services, appeals, grievances, and payment of claims, adequacy of healthcare professional networks, fraud prevention, protection of consumer health information, pricing and underwriting practices, and covered benefits and services. Additionally, certain states have laws that prohibit submitting a false claim or making a false record or statement in order to secure reimbursement from an insurance company.
In addition, we are regulated as an insurance holding company and are subject to the insurance holding company laws of the states in which our health insurance subsidiaries are domiciled. These laws and other laws that govern operations of insurance companies contain certain reporting requirements, as well as restrictions on transactions between an insurer and its affiliates, and may restrict the ability of our health insurance subsidiaries to pay dividends to our holding companies. Under New York law, for example, Bright Health Insurance Company of New York, our New York-domiciled insurance subsidiary, may not declare or distribute a dividend to shareholders except out of earned surplus (as defined under New York law). Additionally, absent prior approval of the Superintendent of the Department of Financial Services (the “Superintendent”), Bright Health Insurance Company of New York may not declare or distribute any dividend to shareholders which, together with all dividends declared or distributed by us during the preceding 12 months, exceeds the lesser of (a) ten percent of Bright Health Insurance Company of New York’s surplus to policyholders as shown by its last statement on file with the Superintendent, or (b) one hundred percent of adjusted net investment income (as defined under New York law) during such period. Holding company laws and regulations generally require registration with applicable state departments of insurance and the filing of reports describing capital structure, ownership, financial condition, certain intercompany transactions, enterprise risks, corporate governance, and general business operations. In addition, state insurance holding company laws and regulations generally require notice or prior regulatory approval of certain transactions including acquisitions, material intercompany transfers of assets, and guarantees and other transactions between the regulated companies and their affiliates, including parent holding companies. Applicable state insurance holding company acts also restrict the ability of any person to obtain control of an insurance company without prior regulatory approval. These acts generally define “control” as the direct or indirect power to direct or cause the direction of the management and policies of a person and is presumed to exist if a person directly or indirectly owns or controls 10% or more of the voting securities of another person. Some state laws have different definitions or applications of this standard. Dispositions of control generally are also regulated under applicable state insurance holding company laws.
The states of domicile of our health insurance subsidiaries have statutory risk-based capital requirements for insurance companies based on the Risk-Based Capital For Health Organizations Model Act. These risk-based capital requirements are intended to assess the capital adequacy of life and health insurers, taking into account the risk characteristics of a company’s investments and products. In general, under these laws, an insurance company must submit a report of its risk-based capital level to the insurance regulator of its state of domicile each calendar year. These laws typically require increasing degrees of regulatory oversight and intervention if a company’s risk-based capital declines below certain thresholds. As of December 31, 2021,2022, the risk-based capital levels of certain of our insurance subsidiaries metfailed to meet or exceeded allexceed applicable mandatory risk-based capital requirements.requirements, and as a result such subsidiaries are or may be subject to
supervision orders under state insurance laws.Such supervision orders require additional reporting as well as approval of certain transactions by our regulators.
Further, almost all states require insurers to comply with the standards set forth in the Model Audit Rule, which imposes financial reporting, independent audit, and corporate governance requirements.
Additionally, as a company that directly or indirectly controls insurers, we have an obligation to adopt a formal enterprise risk management function and file enterprise risk reports on an annual basis. The enterprise risk management function and reports must address any activity, circumstance, event, or series of events involving the insurer that, if not remedied promptly, is likely to have a material adverse effect upon the financial condition or liquidity of the insurer, including anything that would cause the insurer’s risk-based capital to fall below certain threshold levels or that would cause further transaction of business to be hazardous to policyholders or creditors, or the public. Similarly, in accordance with National Association of Insurance Commissioners’ Risk Management and Own Risk Solvency Assessment Model Act, we must complete an annual “own risk and solvency assessment,” which is an internal assessment, appropriate to the nature, scale, and complexity of our company, of the material and relevant risks associated with the current business plan, and of the sufficiency of capital resources to support those risks.
Healthcare Reform
The U.S. Congress and certain state legislatures have introduced and passed a large number of proposals and legislation designed to make major changes in the healthcare system, including changes that have impacted access to health insurance.
In March 2010, the enactment of the The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (“ACA”) significantly increased oversight of health plans and reformed healthcare in the United States, including how healthcare services are covered, delivered, and reimbursed. Since then, there have been political and legal efforts to expand, repeal, replace, and modify the ACA. For example, on June 17, 2021, the U.S. Supreme Court dismissed a constitutional challenge to the ACA on procedural grounds and issued an opinion preserving the ACA and its consumer protections in its current form. The current presidential administration has indicated that it generally intends to protect and strengthen the ACA and Medicaid programs. For example, in January 2021, President Biden issued an executive order that instructed certain governmental agencies to examine agency actions to determine whether they are consistent with the administration’s commitment to protect and strengthen the ACA and Medicaid and begin rulemaking to suspend, revise or rescind any inconsistent actions. In response to the executive order, HHS opened a special enrollment period from February to August 2021. In a final rule published in September 2021, HHS extended the annual open enrollment period for coverage through federal marketplaces and granted state exchanges flexibility to lengthen their open enrollment periods. Federal regulatory agencies continue to modify regulations and guidance related to the ACA and markets more broadly, often as a result of presidential directives. We cannot predict how healthcare consumers might react to special or extended enrollment periods or to federal or state legislation and regulation, whether already enacted or enacted in the future. For example, the American Rescue Plan Act of 2021, enacted in March 2021, temporarily increased the amounts of premium tax credits, temporarily expanded eligibility for premium tax credits for unemployment compensation beneficiaries who receive such compensation in 2021, and expanded eligibility for Advance Premium Tax Credits (“APTCs”) for the 2021 and 2022 plan years for households with annual incomes above 400% of the federal poverty level. The Inflation Reduction Act extended the APTCs through the end of 2025. While we anticipate continued changes with respect to the ACA, either through Congress, court challenges, executive actions, or administrative action, we expect the major portions of the ACA to remain in place and continue to significantly impact our business operations and results of operations, including pricing, minimum medical loss ratios and the geographies in which our products are available.
The ACA prohibits annual and lifetime limits on essential health benefits, consumer cost-sharing on specified preventive benefits, and pre-existing condition exclusions. Further, the ACA implemented certain requirements for insurers, including changes to Medicare Advantage payments and the minimum medical loss ratio (“MLR”) provision that requires insurers to pay rebates to consumers when insurers do not meet or exceed the specified annual MLR thresholds. In addition, the ACA required a number of other changes with significant effects on both federal and state health insurance markets, including strict rules on how health insurance is rated, what benefits must be offered, the assessment of new taxes and fees (including annual fees on health insurance companies), the creation of public Health Insurance Marketplaces for individuals and small employer group health insurance and the availability of premium subsidies for qualified individuals. The ACA allows individual states to choose to enact additional state-specific requirements that extend ACA mandates and some of the states where we operate have implemented higher MLR percentage requirements, lower tobacco user rating ratios, and different age curve variations. Changes to our business environment are likely to continue as elected officials at the national and state levels continue to enact, and both elected officials and candidates for election continue to propose, significant modifications to existing laws and regulations, including changes to taxes and fees. Also, although the U.S. Supreme Court’s 2021 decision preserved the ACA in its current form, legal challenges regarding the ACA could have a material adverse effect on our business, cash flows, financial condition, and results of operations.
Further, the ACA increases oversight responsibilities imposed on health insurers that may result in increased governmental audits, increased assertions of alleged liability under the federal False Claims Act (“FCA”), and an increased risk of other litigation.
Other health reform initiatives, requirements and proposals, including requirements aimed at price transparency and out-of-network charges, may impact prices, our competitive position, and our relationships with patients, insurers, and ancillary
providers (such as anesthesiologists, radiologists, and pathologists). For example, the No Surprises Act imposes new limitations and prohibitions on surprise billing and requires providers to send an insured patient’s health plan a good faith estimate of expected charges, including billing and diagnostic codes, prior to when the patient is scheduled to receive the item or service. As another example, the Transparency in Coverage rule issued in 2020 by the HHS, the DOL and the Department of the Treasury requires most group health plans and health insurance issuers in the individual and group markets to publicly disclose price and cost-sharing information for all items and services to participants and enrollees. Health plans and health insurers must publicly disclose (i) in-network provider negotiated rates, and (ii) historical out-of-network allowed amounts and billed charges. In 2023, we will be required to make available to members personalized cost-sharing information for 500 covered health care items and services. In 2024, this cost-sharing information requirement will expand to all items and services, including prescription drugs. Insurers offering group or individual health insurance coverage may receive credit in their MLR calculations for certain savings they share with enrollees that result from the enrollees shopping for, and receiving care from, lower-cost, higher-value providers. Other industry participants, such as private payors and large employer groups and their affiliates, may also introduce financial or delivery system reforms. We are unable to predict the nature and success of such health reform initiatives, which may have an adverse impact on our business.
Additionally, there is the potential for changes due to health reform efforts at the state level. Some states have imposed individual health insurance mandates, and other states have explored or offer public health insurance options. Some reforms may have a positive impact on our business, while others may increase our operating costs, adversely impact the reimbursement we receive, or require us to modify certain aspects of our operations.
While there may be significant changes to the healthcare environment in the future, the specific changes and their timing are not yet apparent. Any failure to successfully implement strategic initiatives that respond to future legislative, regulatory, and executive changes could have a material adverse effect on our business, results of operations and financial condition.
CMS Guidelines
Our Bright HealthCare segment is subject to regulations and guidelines issued by CMS and state departments of insurance that put numerous requirements on insurance payors, agents and brokers during the marketing and sale of MA and IFP plans. CMS and state insurance department regulations and guidelines include a number of prohibitions regarding the ability to contact Medicare-eligible individuals and restrictions on the marketing of Medicare-related plans. For example, our IFP and MA plans must file certain information with CMS and state departments of insurance such as sales scripts and marketing materials for our Medicare plans. In some circumstances, CMS or state departments of insurance must provide pre-approval for those marketing materials. The rules, laws, regulations and guidance around the marketing and sale of IFP and MA plans are complicated and frequently change.
We are also subject to CMS review of our compliance with CMS contracts, the performance of our plans, adherence to governing rules and regulations, and the quality of care we provide to Medicare beneficiaries, among other areas. A portion of each MA plan’s reimbursement is tied to the plan’s Star Ratings system, which awards between 1.0 and 5.0 stars to MA plans based on a variety of performance measures adopted by CMS, including quality of preventative services, chronic illness management, compliance and overall consumer satisfaction. None of our plans achieved aan overall 4.0 Star Rating in 2021,2022, which is required to obtain significant quality bonus payments and could materially impact our financial performance. In addition ourMedicare Advantage plans with an overall Star Rating of 4 or more stars are eligible for a quality bonus in their basic premium rates. Our inability to improve our Star Rating could limit the benefits that our plans can offer, which could materially and adversely affect the marketability of our plans, our membership levels, results of operations, financial position and cash flows. CMS may modify the methodology and measures included in the Star Ratings system. Our ability to improve our Star Rating has been adversely impacted by the ongoing COVID-19 pandemic, which has prevented plans from encouraging conduct to address consumer care gaps and collecting information required to demonstrate plan compliance with and performance on Star Rating metrics. There can be no assurances that we will be successful in maintaining or improving our Star Ratings in future years, and our Medicare Advantage plans may not become eligible for full level quality bonuses.
Corporate Practice of Medicine and Fee-Splitting Laws
Our NeueHealthConsumer Care segment includes direct medical service providers and, as such, are subject to additional laws and regulations. Some states have corporate practice of medicine laws that prohibit specific types of entities from practicing medicine, preventing unlicensed persons from interfering with or influencing a physician’s professional judgment or
employing physicians to practice medicine. Although we have structured our operations to comply with our understanding of applicable state statutory and regulatory requirements, interpretative legal precedent and regulatory guidance varies by jurisdiction and is often sparse and not fully developed. The consequences associated with violating corporate practice of medicine laws vary by state and may result in physicians being subject to disciplinary action, as well as to forfeitures of revenue from government payors for services rendered. For lay entities, violations may also bring both civil and, in more extreme cases, criminal liability for engaging in the practice of medicine 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. In limited cases, courts have required companies to divest or reorganize structures deemed to violate corporate practice restrictions. In the event that regulatory authorities or other third parties were to challenge these arrangements, we could be subject to adverse judicial or administrative interpretations, to civil or criminal penalties, our contracts could be found legally invalid and unenforceable or we could be required to restructure our arrangements with our care providers. A determination that we are in violation of applicable laws and regulations in any jurisdiction in which we operate could have a material adverse effect on our business, particularly if we are unable to restructure our operations and arrangements to comply with the requirements of that jurisdiction, if we are required to restructure our operations and arrangements at a significant cost, or if we are subject to penalties or other adverse action. Additionally, certain states prohibit certain entities from engaging in fee-splitting practices that involve sharing in the fees or revenue with a professional practice. These prohibitions can be either statutory or regulatory, or may be imposed through judicial interpretation, and are subject to change.
Licensing and Telehealth Laws
Our care providers must be licensed to practice medicine in the state in which they are located and must comply with licensing laws and regulations and requirements regarding notification of licensing agencies regarding certain material events. These licensing requirements vary from state to state. In addition to state requirements, we and/or our care providers are in some cases subject to federal licensing and certification requirements, such as certification or waiver under the Clinical Laboratory Improvement Amendments of 1988 for performing limited laboratory testing and Drug Enforcement Administration registration requirements for writing prescriptions for controlled substances. Certain of the states where we currently operate or may choose to operate in the future regulate the operations and financial condition of risk-bearing providers. These regulations can include capital requirements, licensing or certification, governance controls and other similar matters. In addition, our care providers must remain in good standing with the applicable medical board,boards of medicine, board of nursing or other applicable entity,regulatory authority, as activities that qualify as professional misconduct under state laws may subject our care providers to sanctions or result in the loss of their licensure. Furthermore, they cannot be excluded, suspended or debarred from participation in certain government programs at either the state or federal levels, such as Medicare and Medicaid.
Failure to comply with federal, state and local licensing and certification laws, regulations and standards could result in a variety of consequences, including the cessation of our services, loss of our contracts, prior payments by government payors being subject to recoupment, requirements to make significant changes to our operations, or civil or criminal penalties. We routinely take the steps we believe are necessary to retain or obtain all requisite licensure and operating authorities. While we endeavor to comply with federal, state, and local licensing and certification laws and regulations and standards as we interpret them, the laws and regulations in this area are complex, changing, and often subject to varying interpretations. Any failure to satisfy applicable laws and regulations could have a material adverse impact on our business, results of operations, financial conditions, cash flows and reputation.
Additionally, states generally require providers of professional healthcare services via telehealth to a patient to be licensed in that state.state where the patient is physically located at the time services are rendered. States have established a variety of licensing and other regulatory requirements around the provision of telehealth services. We have established systems for ensuring that our providers are appropriately licensed under applicable state laws and that their provision of telehealth occurs in each instance in compliance with applicable laws and regulations governing telehealth. Failure to comply with these laws and regulations could result in licensure actions against the providers as well as civil, criminal or administrative penalties against the providers and/or those engaging the services of the provider.
The Anti-Kickback Statute, Federal False Claims Laws and Stark Law
Our products and services are subject to federal and state anti-kickback laws, false claims acts, and other laws related to reimbursement by government programs. A federal law commonly referred to as the “Anti-Kickback Statute” prohibits the offer, payment, solicitation, or receipt of any form of remuneration to induce, or in return for, the referral of Medicare or
other governmental health program patients or patient care opportunities or in return for the purchase, lease, or order of items or services, or arranging for or recommending the purchase, lease or order of any good, facility, item or service that are covered by Medicare or other federal governmental health programs. The federal Anti-Kickback Statute has been interpreted to apply to, among others, financial arrangements between entities that have the ability to refer and generate business that is subject to healthcare reimbursement. Accordingly, the Anti-Kickback Statute applies to both our Bright HealthCare and NeueHealthConsumer Care segments. Any potential violation of these provisions constitutes a felonySanctions for violating federal and state anti-kickback laws may include criminal offense and applicable sanctions could includecivil fines and exclusion from the Medicarefederal and state healthcare programs. While there are a number of statutory exceptions and regulatory safe harbors protecting some common activities from prosecution, the exceptions and safe harbors are drawn narrowly and practices that involve remuneration may be subject to scrutiny if they do not qualify for an exception or safe harbor. Our practices may not always meet all of the criteria for protection under a statutory exception or regulatory safe harbor. A person or entity does not need to have specific intent or knowledge to violate in order to have committed a violation, and a claim including an item or a service resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the FCA described below. In January 2021, a final rule that revised safe harbors under the Anti-Kickback Statute and Civil Monetary Penalty rules regarding beneficiary inducements took effect. Under the final rule, the Office of Inspector General (“OIG”) added safe harbor protections under the Anti-Kickback Statute for certain coordinated care and value-based arrangements among clinicians, providers, and others. We continue to evaluate what effect, if any, the rule will have on our business.
The federal false claims laws, including the civil FCA, among other things, impose criminal and civil penalties against individuals or entities for knowingly presenting, or causing to be presented, to the federal government, claims for payment or approval that are false or fraudulent, for knowingly making, using or causing to be made or used, a false record or statement material to a false or fraudulent claim, or for knowingly making or causing to be made a false statement to avoid, decrease or conceal an obligation to pay money to the federal government. There has been increased government scrutiny on health insurers’ diagnosis coding and risk adjustment practices, particularly for Medicare plans. We are and may be subject to audits, reviews and investigation of our practices and arrangements and the federal government might conclude that they violate the FCA, the Anti-Kickback Statute and/or other federal and state laws governing fraud and abuse. Further, the FCA can be enforced by private citizens through civil qui tam actions. A claim includes “any request or demand” for money or property presented to the U.S. government.
In addition, Section 1877 of the Social Security Act (the “Stark Law”) prohibits physicians, subject to certain exceptions described below, from referring Medicare or Medicaid patients to an entity providing “designated health services” in which the physician, or an immediate family member, has an ownership or investment interest or with which the physician, or an immediate family member, has entered into a compensation arrangement. Certain services provided by NeueHealthour Consumer Care business qualify as “designated health services.” Persons or entities found to be in violation of the Stark Law are subject to denial of payment for services furnished pursuant to an improper referral, civil monetary penalties, and exclusion from the Medicare programs. On December 2, 2020,New CMS and the OIG published further modifications tofinal regulations on Anti-Kickback Statute safe harbors and the federal Stark Law that addressed concerns regarding compensation arrangements between parties that participate in alternative payment models and novel financial agreements that potentially implicated the Anti-Kickback Statute and the Stark Law. Under the final rules, CMS and the OIG added exceptions for certain coordinated care and value-based arrangements among clinicians, providers, and others. The regulations took effect on January 19,in 2021 with the exception of certain revisions to group practice physician regulations, which took effect on January 1, 2022. Weand 2022, and we continue to evaluate what effect, if any, the rule will have on our business.
Many states have enacted similar laws to combat the issues covered by the Anti-Kickback Statute, federal false claims laws and the Stark Law, which may provide for criminal penalties, fines, and damages and can apply more broadly than just those services paid for by Medicare or Medicaid. In addition, most states have statutes, regulations and professional codes that can restrict our Care Partners from accepting various kinds of remuneration in exchange for making referrals. These laws vary widely from state to state.
We believe that our segments’ operations comply with the Anti-Kickback Statute, the FCA, the Stark Law, and similar federal or state laws addressing fraud and abuse. These laws are subject to modification and changes in interpretation and are enforced by authorities vested with broad discretion. We continually monitor developments in these regulatory areas, and we must operate our business within the requirements of these laws. If these laws change or are interpreted in a manner contrary to our current interpretation or are reinterpreted, or if new legislation is enacted with respect to healthcare fraud and abuse, illegal remuneration, or similar issues, we may be required to modify our operations or policies to maintain compliance with such laws. There can be no assurances that any such modification will be possible or, if possible, would not have a material adverse effect on our results of operations, financial position, or cash flows. Violations of any of these laws may result in potentially significant penalties, including criminal and civil and administrative penalties, damages, fines, disgorgement, imprisonment, exclusion from participation in government healthcare programs, contractual damages, reputational harm, administrative burdens, diminished profits and future earnings, and the curtailment or restructuring of our operations.
Civil Monetary Penalties Statute
The federal Civil Monetary Penalties Statute 42 U.S.C. § 1320a-7a, authorizes the imposition of civil monetary penalties, assessments and exclusion against an individual or entity based on a variety of prohibited conduct, including, but not limited to:
•presenting, or causing to be presented, claims, reports or records relating to payment by Medicare, Medicaid or other government payors that the individual or entity knows or should know are for an item or service that was not provided as reported, is false or fraudulent or was presented for a physician’s service by a person who knows or should know that the individual providing the service is not a licensed physician, obtained licensure through misrepresentation or represented certification in a medical specialty without in fact possessing such certification;
•offering remuneration to a federal healthcare program beneficiary that the individual or entity knows or should know is likely to influence the beneficiary to order or receive healthcare items or services from a particular provider;
•arranging contracts with or making payments to an entity or individual excluded from participation in the federal healthcare programs or included on CMS’s preclusion list;
•violating the federal Anti-Kickback Statute;
•making, using or causing to be made or used a false record or statement material to a false or fraudulent claim for payment for items and services furnished under a federal healthcare program;
•making, using or causing to be made any false statement, omission or misrepresentation of a material fact in any application, bid or contract to participate or enroll as a provider of services or a supplier under a federal healthcare program; and
•failing to report and return an overpayment owed to the federal government.
We could be exposed to a wide range of allegations to which the federal Civil Monetary Penalty Statute would apply. We perform monthly checks on our employees and certain affiliates and vendors using government databases to confirm that these individuals have not been excluded from federal programs or otherwise ineligible for payment. We have also implemented processes to ensure that we do not make payments to providers listed on CMS’s preclusion list nor make payments for drugs prescribed by individuals on the preclusion list. However, should an individual or entity be excluded on the preclusion list, or otherwise ineligible for payment and we fail to detect it, a federal agency could require us to refund amounts attributable to all claims or services performed or sufficiently linked to such individual or entity. Due to this area of risk and the possibility of other allegations being brought against us, we cannot forecloseforesee the possibility that we could face allegations subject to the Civil Monetary Penalty Statute with the potential for a material adverse impact on our business, results of operations and financial condition.
INDEMNIFICATION AND INSURANCE
Our business exposes us to potential liability including, but not limited to, potential liability for breach of contract or negligence claims by our consumers, (ii) medical malpractice and professional negligence, (iii) non-compliance with applicable laws and regulations, including SEC rules and regulations, and (iv) employment-related claims.
To manage our potential liability, we currently maintain property, general liability, umbrella, managed care errors and omissions, cyber and privacy liability and other coverage in amounts and on terms deemed adequate by management, based on our actual claims experience and expectations for future claims. We procure additional medical liability insurance to manage any potential liability of the affiliated medical groups we work with through our NeueHealthConsumer Care business, and are currently considering an umbrella policy to provide coverage with respect to such potential liability. See “Risk Factors – Risks Related to Our Business – Medical liability claims made against us in the future could cause us to incur significant expenses and pay significant damages if not covered by insurance.” Our care providers are otherwise required to maintain their own malpractice insurance. Although we consider our insurance coverage to be adequate, the coverage may not be sufficient for all claims made and such claims may be contested by applicable insurance payors.
We also have certain reinsurance arrangements, where the reinsurer assumes a portion of the ceding company’s risk in exchange for a corresponding percentage of premiums or in excess of a specified amount. There can be no assurance that we will be able to renew our reinsurance contracts on similar terms, or at all, or that we will be able to negotiate coverage with another reinsurance carrier if we are unable to renew our existing arrangements.
HUMAN CAPITAL MANAGEMENT
We are led by a diverse and talented team of seasoned executives who have extensive experience leading multi-billion dollar organizations across a wide range of industries, from healthcare to consumer retail, to technology and services. We employ a deep bench of health insurance professionals, sales and operations specialists, software engineers and developers, and other subject matter experts. As of December 31, 2021,2022, we employed a total of 3,2032,840 individuals. We believe that our employees are fundamental to the success of our company, and we have built a high-performance environment based on mutual trust, confidence, humility and inclusion, which provides significant opportunities for our people to grow and be recognized. Our relationship withWe work hard to ensure our employees is strong,are engaged, and none of our employees are represented by a labor union or party to a collective bargaining agreement.
We have endeavored to create a mission-driven company, with a culture of inclusion, partnership and desire to challenge the status quo. Our values reflect this future-oriented culture of teamwork:
1.Be Brave. Challenge the status quo with curiosity, courage and tenacity.
2.Be Brilliant. Deliver predictable excellence with a learning mindset.
3.Be Accountable. Live by your word, always.
4.Be Inclusive. Value all voices and contributions to achieve big things.
5.Be Collaborative. Fearlessly partner with all people.
ADDITIONAL INFORMATION
Our executive offices are located at 8000 Norman Center Drive, Suite 1200,900, Minneapolis, Minnesota 55437, and our telephone number is (612) 238-1321.
You can access our website at www.brighthealthgroup.com to learn more about our company. From the site you can download and print copies of our annual reports to shareholders,stockholders, annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, along with amendments to those reports. Our reports filed with the SEC also may be found on the SEC’s website at www.sec.gov. You can also download from our website our certificate of incorporation and bylaws; Board of Directors Committee Charters; Code of Conduct; and Corporate Governance Guidelines. We make periodic reports and amendments available, free of charge, on our website, as soon as reasonably practicable after we file or furnish these reports to the SEC. We will also provide a copy of any of our corporate governance policies published on our website free of charge, upon request. The Company may use its website as a distribution channel of material company information. To request a copy of any of the documents listed above, please submit your request to: Bright Health Group, Inc., 8000 Norman Center Drive, Suite 1200,900, Minneapolis, Minnesota 55437, Attn: Corporate Secretary. Information on or linked to our website is neither part of nor incorporated by reference into this Annual Report or any other SEC filings.
ITEM 1A. RISK FACTORS
Investing in our common stocksecurities involves a high degree of risk. You should carefully consider the following risk factors together with other information in this Annual Report, including our consolidated financial statements and related notes included elsewhere in this Annual Report, before deciding whether to invest in shares of our common stock. The occurrence of any of the events described below could harm our business, financial condition, results of operations and growth prospects. In such an event, the trading price of our common stock may decline and you may lose all or part of your investment.
Risks Related to Our Business
Although we raised capital in 2022, we may require additional capital, which might not be available on acceptable
terms, if at all. If capital is not available to us, our business and financial condition may be impaired, and we may not be able to continue as a going concern.
We have invested heavily in our business. We expect to make additional investments to support our business growth and
may require additional capital to respond to business needs, requirements and opportunities, including to develop and
enhance new and existing products and services, enter new markets, further develop our infrastructure, and comply with
any statutory capital and risk-based capital requirements. In addition, we may continue to make strategic acquisitions as the
opportunities arise, some of which may be material to our operations. Accordingly, although we raised capital in 2022, we
may make future commitments of capital resources and may need to engage in additional equity or debt financings to
secure additional funds. Whether we issue debt or equity securities will, in part, depend on contractual, legal and other
restrictions that may limit our ability to raise additional capital. For example, our Credit Agreement contains, and any
agreements governing our future indebtedness could contain, restrictive covenants relating to our financial and operational
matters, including covenants that limit the amount of debt we may incur. In addition, we may not be able to obtain
additional or sufficient financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or
financing on terms satisfactory to us when we require it, our ability to continue to support our business growth and to
respond to business challenges could be significantly limited or impaired.
As previously disclosed, we have a history of operating losses, and we generated a net loss from continuing operations of
$638 million for the year ended December 31, 2022. These losses, as well as significant additional expenses and future projected cash outflows in our discontinued Bright HealthCare – Commercial segment, which has required us to infuse additional cash to satisfy statutory capital requirements, have reduced the cash available to fund operations.
In addition, as noted earlier, we breached the minimum liquidity covenant of our Credit Agreement in the first quarter of
fiscal year 2023. We entered into a limited waiver and consent (the “Waiver”) under our Credit Agreement, which, among
other matters, provides for a temporary waiver for the period from January 25, 2023 through April 30, 2023 of compliance
with the minimum liquidity covenant set forth in Section 11.12.2 of the Credit Agreement. Based on our projected cash flows and absent any other action, the Company may not meet certain covenants under the Credit Agreement or the Waiver, which may result in the obligations under the Credit Agreement being accelerated. Based on our projected cash flows and absent any other action, we will require additional liquidity to meet our obligations as they come due in the 12 months following the date of this annual report on Form 10-K.
While we have actively engaged with our Board and outside advisors to evaluate financing opportunities, we may not be
able to obtain required financing on acceptable terms, as any potential financing will be subject to market conditions that
are not within our control. In the event we are unable to obtain financing or take other management actions to alleviate these concerns, among other potential consequences, we may be unable to satisfy our financial obligations as they become due or continue as a going concern.
Our corporate restructuring and the associated headcount reduction could disrupt our business, may not result in anticipated savings and could result in total costs and expenses that are greater than expected.
In October 2022, we announced, among other things, that we will focus on delivering affordable healthcare to aging and underserved populations through our fully aligned care model in Florida, Texas and California, and that we will no longer offer IFP products through Bright HealthCare in 2023, or MA products outside of California.As a result of these strategic changes, on November 4, 2022, our Board approved a plan to restructure our workforce and reduce expenses based on our updated business model (the “Restructuring”).
The Restructuring has resulted in the loss of institutional knowledge and expertise, as well as the reallocation and combination of certain roles and responsibilities across the Company, all of which could adversely affect our operations. These effects could have a material adverse effect on our ability to execute on our updated business model. There can be no assurance that we will be successful in implementing the Restructuring. The Restructuring may also be disruptive to our operations. For example, our headcount reductions could yield unanticipated consequences, such as increased difficulties in implementing our business strategy, including retention of our remaining employees. Future growth would impose significant added responsibilities on members of management, including the need to identify, recruit, maintain and integrate additional employees. Due to our limited resources, we may not be able to effectively manage our operations or recruit and retain qualified personnel, which may result in weaknesses in our infrastructure and operations, risks that we may not be able to comply with legal and regulatory requirements, and loss of employees and reduced productivity among remaining employees. Our future financial performance will depend, in part, on our ability to effectively manage any future growth or restructuring, as applicable. In addition, we may not realize, in full or in part, the anticipated benefits, savings and improvements in our cost structure from the Restructuring due to unforeseen difficulties, delays or unexpected costs. If we are unable to realize the expected operational efficiencies and cost savings from the Restructuring, our operating results and financial condition would be adversely affected. Furthermore, we may incur unanticipated charges or make cash payments as a result of the Restructuring initiative that were not previously contemplated which could result in an adverse effect on our business or results of operations.
Management action plans in place may not fully alleviate doubt about our ability to continue as a going concern
We have a history of operating losses. These losses, as well as significant growth in consumers in the Bright HealthCare – Commercial segment over the last few years, which required us to set aside additional cash for equity contributions to maintain minimum regulatory amounts, have reduced the cash available to fund operations. These factors raised significant doubt about our ability to meet future obligations and continue as a going concern in the second quarter of 2022 and caused us to seek additional financing.
In response to these conditions, management is implementing a restructuring plan to reduce our capital needs and our operating expenses in the future to drive positive operating cash flow and increase liquidity. The Company’s Bright HealthCare business has exited the Commercial marketplace beginning with the 2023 plan year and is focusing on its Medicare Advantage business in California. In addition to our market exits, management is implementing additional restructuring activities, which include reducing our workforce, exiting excess office space, and terminating or restructuring contracts. The Company also raised $925.0 million in 2022 to capitalize our continuing operations as further described in Note 12. While the Company believes its restructuring initiatives, along with existing cash and investments, will provide sufficient liquidity to meet its obligations as they come due in the 12 months following the date the consolidated financial statements are issued, there can be no assurance that such actions will be sufficient or that such actions will fully alleviate the fears of investors and creditors that we may be unable to continue as a going concern. In addition, there can be no assurance that we will not face conditions in the future that raise doubts about our ability to continue as a going concern.
If our new business model is not accepted or is slow to be adopted by the healthcare industry, our growth could be impacted and our business and results of operations could be adversely affected.
Our business model is based on the integration of the financing and delivery of healthcare. Key to the growth of our Bright HealthCare business is our ability to drive provider adoption of value-based care arrangements that give our Care Partners a stake in the financial and quality outcomes of our health plans. Given that the Health Insurance Marketplaces were only created within the last decade, value-based arrangements are a relatively new contracting mechanism for parties serving the IFP population. We cannot assure you that our contracting approach will achieve and sustain acceptance by care providers, consumers or the healthcare industry generally. Additionally, in some states,locations, provider risk-sharing and value-based compensation models are less prevalent even among parties serving the MA population. Acceptance of our business model may be affected by a variety of factors, including but not limited to the lack of willingness of certain care providers to embrace value-based care payment arrangements with payors, and the entrenchment of historical fee-for-service models of compensation.
For the year ended December 31, 2021, 11%2022, 52% of our total revenue was generated by our NeueHealthConsumer Care business (including intercompanyaffiliate revenue). The growth of our NeueHealthConsumer Care business will depend on our ability to attract high-performing care delivery partners.partners and new patients. If we are unable to attract and successfully develop relationships with thesesuch provider organizations, we may not be successful in building and growing our NeueHealthConsumer Care business. Also, if we are unable to provide adequate tools and capabilities to support value-based care, to directly manage risk, and to deliver care under
value-based arrangements, we may not be able to enter and rapidly scale our NeueHealthConsumer Care business across and within markets, or to deliver superior outcomes for consumers nationally.If we are unable to convince new patients of the benefits of our offerings or if potential or existing patients prefer the care provider model of one of our competitors, we may not be able to effectively implement our growth strategy, which depends on our ability to grow organically and attract new patients. In addition, our growth strategy is dependent on patients selecting our Consumer Care business as their primary care provider. Our inability to recruit new patients and retain existing patients would harm our ability to execute our growth strategy and may have a material adverse effect on our business operations and financial position.
If we are unable to retain existing consumers, expand consumer enrollment, or diversify and expand our portfolio of products and services, our business and results of operations may be adversely affected.
We generate, and expect to continue to generate, a substantial portion of our revenue from consumers enrolled in our IFP and MA health plans. As a result, the continued enrollment of individuals into and adoption of our health plans, through our platform, our broker network, employers, or other third parties, is paramount to our future growth and success. If we fail to retain existing consumers, grow consumer enrollment, or diversify and expand our portfolio of products and services, our business and results of operations may be negatively impacted. In addition, if we do not grow our membership, we could find it difficult to retain or increase the number of contracted Care Partners and other network providers at favorable rates or at all, which could jeopardize our ability to provide health plan products in our current markets and our ability to expand into new markets in a cost-efficient manner.
Our ability to retain existing consumers, expand consumer enrollment and diversify and expand our portfolio of products and services depends on a number of factors, some of which are beyond our direct control. Some of these factors include:
•our ability to provide low-cost and high-value plans which meet a broad range of consumer needs;
•the ease of our consumers’ adoption of, and enrollment into, our products and services;
•our ability to seamlessly onboard our consumers and create a positive overall experience with our products and services;
•our consumers’ ability to easily use our technology, including our DocSquad platform and our virtual care offerings;technology;
•our consumers’ ability to receive convenient and ready access to quality medical care and treatment through our Care Partner networks;
•our ability to grow our provider networks and contract with Care Partners that support our model of care on competitive terms;
•our ability to safeguard our consumers’ data;
•our ability to anticipate and respond to shifting consumer preferences for healthcare products and services in a timely manner;
•our ability to retain licenses required to conduct our existing business and obtain licensing in new geographies into which we intend to expand;
•our ability to manage a reduction in the size of our target market due to continued expansion of public insurance financing options, including state expansions of Medicaid and a potential shift to public financing options administered by the federal government, which could encourage our consumers to explore and switch to these other options;
•our ability to effectively compete against our competitors, who may offer products containing fewer restrictions on the network of care providers available to consumers, may provide higher quality levels of care, or may be priced more competitively than our offerings;
•our ability to market and sell our plans effectively in our target markets, including our ability to retain and incentivize our broker network at reasonable commission rates; and
•regulatory changes pertaining to the marketing and/or enrollment of our consumers, which might negatively impact the overall pool of eligible beneficiaries across our health plans.
In addition, our ability to retain our existing consumers and expand consumer enrollment could be adversely impacted by delays in, or increased difficulty or cost associated with, the implementation of our growth strategies, strategic initiatives and operating plans, and the incurrence of unexpected costs associated with operating our business.
The growth in our membership is also highly dependent upon our success in attracting new consumers during annual and open enrollment periods. If our ability or the ability of our partners, including our broker network, to market and sell our
products and services is constrained during an enrollment period for any reason, such as technology failures, reduced allocation of resources, commission costs, any inability on the part of our sales partners to timely employ, license, train, certify and retain employees and contractors and their agents to sell plans, interruptions in the operation of our website or systems, disruptions caused by other external factors, such as the ongoing COVID-19 pandemic, cyber-attacks, or security breaches or incidents or other computer-related penetrations, or issues with government-run health insurance exchanges, we could acquire fewer new consumers than expected or suffer existing consumer attrition and our business, operating results and financial condition could be adversely affected.
We may not be able to contract with care providers on favorable terms or at all, or to arrange for the provision of the quality care necessary to attract consumers.
Our strategy across both our Bright HealthCare and NeueHealthConsumer Care businesses requires that we successfully contract with care providers to ensure access to quality healthcare services for our consumers, to manage medical costs and utilization, and to better monitor and ensure the quality of care being delivered. We compete with other health plans and networks to contract with healthcare providers based on reimbursement rates, timeliness and accuracy of claims payments, the potential to deliver new patient volume and/or support the retention of existing patients, the effectiveness of resolution of calls and complaints, and other factors.
We cannot assure you that we will be able to continue to attract and retain the right Care Partners necessary to deliver healthcare through high-performing networks in the geographic areas we serve, while providing high-quality care to our consumers. In addition, certain care providers, particularly hospitals, physician/hospital organizations and specialists, or their related care provider networks, may have significant negotiating power due to their size or market positions and could demand higher payment rates or otherwise negotiate contracts on terms that are less favorable to us. With respect to our Bright HealthCare business, if our health plans are unable to contract with care providers or if we contract with care providers on unfavorable terms, care provider access for our consumers could be restricted or limited, and we may not be able to deliver the high-quality healthcare that our consumers expect, which could drive consumer attrition or make it more difficult for us to attract new consumers. In addition, we could be exposed to higher medical costs and our health plans may not meet regulatory or accreditation requirements, which could restrict us from offering such plans and could lead to lower revenues.
Our NeueHealthConsumer Care business also contracts with physicians and other healthcare providers to create high-performing networks on behalf of its own risk-bearing organizations, or RBOs, and on behalf of its third-party payor or IPA clients. Our NeueHealthConsumer Care business is subject to the same risks described above relating to its ability to contract with healthcare providers on favorable terms, or at all. If NeueHealthour Consumer Care business is unable to contract with physicians and other healthcare providers at all due to regulatory or other restrictions, or at affordable rates and/or in a manner that leads to high-performing networks, it may yield poor financial and quality results for its own RBOs and may result in dissatisfaction amongst its third-party payor clients.
Furthermore, becauseFurther, our RBOs rely on a limited number of physician and other provider groups to assume a certain amount of risk, and we depend on the successcreditworthiness of these groups. These groups are subject to a number of risks including reductions in payment rates from governmental programs, higher than expected health care costs, fewer than expected patients, and lack of predictability of financial results when entering new lines of business, particularly with high-risk populations. If the financial condition of our business model depends onpartners declines, our credit risk could increase. Should one or more of our significant 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 integrationcollectability of payorour accounts receivable, our bad debt reserves and provider capabilities, our ability to execute on our model will be limited to geographies wherenet income.
In addition, although we have contractedlong-term contracts with a sufficient numbermany such provider groups, 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 care providers necessary to create a robust provider network. Our ability to grow our business couldcontracts are terminable immediately upon the occurrence of certain events. Certain of our contracts may be adversely affectedterminated immediately by the partner if we are unablelose applicable licenses, go bankrupt, lose our liability insurance or receive an exclusion, suspension or debarment from state or federal government authorities. Additionally, if such a group were to lose applicable licenses, go bankrupt, lose liability insurance, become insolvent, file for bankruptcy or receive an exclusion, suspension or debarment from state or federal government authorities, our contract with a sufficient numbersuch group could in effect be terminated. In addition, certain of care providers in markets inour contracts may be terminated immediately if we
become insolvent or file for bankruptcy. If any of our contracts with these groups is terminated, we may not be able to recover all fees due under the terminated contract, which we operate or in which we seek to expand.may adversely affect our operating results.
We may be required to work with care providers who are not contracted with our health plans or in our networks, which may result in costly out-of-network claims.
We may, from time to time, be required to work with care providers who are not contracted with our health plans. In those cases, there is no pre-established understanding between the provider or provider network and our health plan regarding the amount of compensation that is due to the provider or provider network for rendering healthcare services. This can result in high levels of out-of-network claims, which can be significantly more costly than claims based on rates that have been pre-negotiated with our provider network Care Partners. In particular, out-of-network utilization is typically higher upon entry into new markets, which increases medical costs during periods of market expansion. In some states, the amount of compensation for out-of-network claims is defined by law or regulation, but in most instances it is either not defined or it is established by a standard that makes the financial implications unclear. In such instances, care providers may claim that they are underpaid for their services and may either litigate or arbitrate their dispute with our health plan, and any subsequent adjustment of the payment made to such care providers could adversely affect our results of operations.
Furthermore, under the No Surprises Act provisions of the Consolidated Appropriations Act, 2021 (“Appropriations Act”), payor and provider parties are precluded from referencing government reimbursement rates as a benchmark for out-of-network disputes. As a result, providers may be incentivized to collectively set high rates for high-volume out-of-network services, which could result in ongoing price inflation for critical services. This is a particular risk for elective health care service types (i.e., not emergency or urgent care) in geographic service areas where there are shortages of available and accessible providers of the health plans who are willing to contract with us and/or our competitors. Any uncertainty in the amount that a consumer may pay as a co-pay or otherwise when visiting a provider who is not a contracted Care Partner may also hurt consumer satisfaction with our plan, which could adversely impact our ability to retain our existing consumers or grow the size of our membership base.
Failure to appropriately set premiums or effectively manage our costs could negatively affect our profitability, results of operations and cash flows.
The premiums we set for our health plans are a material source of our revenue. We set our premiums using actuarial estimates and our failure to set appropriate premiums, including as a result of inaccuracies in our actuarial estimates, could adversely affect our profitability and cash flows. We use a substantial portion of our health plan revenue to pay the costs of healthcare services delivered to our consumers. As such, our profitability depends in large part on our ability to accurately estimate and manage such costs. Relatively small differences between estimated and actual medical costs as a percentage of revenue can result in significant changes in our financial results.
Our use of actuarial methods to determine premiums and estimate other healthcare costs involves a significant degree of judgment and is subject to a number of inherent uncertainties and assumptions. Such actuarial methods are consistently applied, centrally controlled, and are based upon various data points, including our historical submissions and payment data, cost trends, patient and product mix, seasonality, utilization of healthcare services, contracted service rates and other factors for our consumers. Our ability to accurately estimate such costs depends on various factors, many of which are not within our control, including:
•the utilization rates of medical facilities and services;
•the cost of medical services (including as a result of labor market constraints);
•the use or cost of prescription drugs, in particular the increased use of specialty prescription drugs;
•the introduction or widespread adoption of new or costly treatments, including new technologies;
•our membership mix;
•variances in actual versus estimated levels of cost associated with new products, benefits, lines of business, product changes or benefit level changes;
•changes in the demographic characteristics of an account or market;
•changes in economic conditions (including as a result of the ongoing COVID-19 pandemic);
•changes or reductions related to our utilization management functions such as preauthorization of services, concurrent review, or requirements for physician referrals;
•changes in our pharmacy volume rebates received from drug manufacturers;
•catastrophes, including acts of terrorism, pandemics (such as the ongoing COVID-19 pandemic and other similar unforeseen cost drivers), epidemics or severe weather (e.g., hurricanes, wildfires or earthquakes, including those as a result of climate change);
•medical cost inflation;
•volatility with respect to the individual market risk pool, including public Health Insurance Marketplaces; and
•potential changes in legislation or other rules and regulations, such as changes in government mandated benefits or consumer eligibility criteria.
The impact of many of these items on the ultimate costs for claims is difficult to estimate, and they could have a material impact on our business. In addition, the historical data on which our assumptions are based may not necessarily be indicative of the actual costs of claims due to our rapid growth in consumer enrollment and our recent expansion into new businesses and markets. WhenIf we were to commence operations in a new state, region, or other market, or introduce a new product line, we would have limited information from which to estimate our potential medical claims liability. For a period of time after oursuch entry, into a new market, our inception of a new business, or our acquisition of an existing business, we base our estimates on government-provided and third-party historical actuarial data and limited actual incurred and received claims and inpatient acuity information. The addition of new categories of eligible individuals or coverage requirements for certain items or services, such as at-home COVID-19 tests, as well as new plan designs we may offer, may make it difficult for us to estimate our medical claims liability and may result in the actual cost of claims being higher than we anticipate.
We set our premiums for twelve-month periods several months prior to the commencement of the premium period and do not change our premiums during such period, consistent with industry practice. Our inability to implement changes in premium rates within a given period is also governed by federal and state regulatory agencies. For example, we are required to submit data on all proposed rate increases to HHSThe U.S. Department of Health and Human Services (HHS) on many of our products, and under the ACA, we are prohibited from implementing unreasonable rate increases. If our medical costs exceed our estimates, we will not be able to recover the difference through higher premiums, and our results of operations and financial condition could be adversely affected.
Conversely, if we set our premium rates too high, our existing membership may decline or we may not grow our membership. We operate in a competitive industry, and while health plans compete on the basis of many factors, including service, breadth of benefits, and the quality and depth of provider networks, we believe that price is and will continue to be the most significant driver in our and our competitors’ ability to attract consumers. If we do not appropriately price our products, our results of operations and financial condition could be materially and adversely affected.
Furthermore, in order for our health plan premium revenue to adequately cover our losses and expenses and enable us to profitably grow our business, we must effectively manage our costs, including healthcare spend. To do so, we must negotiate appropriate unit rates for each healthcare service provided by our Care Partners to our consumers. If we are unable to negotiate new Care Partner contracts or renew existing Care Partner contracts with favorable provisions relating to unit costs, we may not be able to contain our medical costs at a level that would be adequately covered by the premium levels we set, and our profitability could be adversely impacted. In addition, we must drive effective utilization management to control our costs by evaluating the necessity, appropriateness, and efficiency of the use of healthcare services, procedures, and facilities, while successfully educating our health plan consumers and directing them to the most appropriate and cost-effective healthcare treatments, Care Partners, and sites of care.
Our NeueHealthConsumer Care managed and affiliated medical groups and MSOsmanaged service organizations (MSOs) negotiate agreements with our Bright HealthCare business and with other third-party payors for which the NeueHealthConsumer Care entities serve as RBOs. Our RBOs manage the
medical costs and quality metrics on behalf of such payors and are at financial risk for the performance of those payors’ medical costs for consumers attributed to our RBOs. Our ability to manage the financial risk depends on our ability to achieve quality targets and to accurately estimate and manage medical costs, and these estimates contain inherent uncertainties and assumptions similar to those facing our health plan business, which depend on various factors outside of our control, as described above. Additionally, Bright HealthCare and third-party payors may modify their product mix, benefit designs, or member mix in ways that could limit the ability of NeueHealthConsumer Care RBOs to effectively manage the financial performance under our risk
arrangements. Our failure to effectively drive quality outcomes, optimize financial performance, or manage medical cost spend could negatively impact the profitability and marketability of our NeueHealthConsumer Care business.
Further, and as discussed more below, the IFP and MA markets we serve employ risk adjustment programs that impact the revenue we recognize for our enrolled membership. If our Care Partners do not accurately record our consumers’ “risk scores”, we may not be able to accurately estimate our revenue and medical costs. In the past, we have had difficulties accurately capturing consumers’ risk scores in a timely manner, which has resulted in higher than expected liabilities and lower than expected revenue. Although we have and continue to make operational changes to address these challenges, we may not be successful, which may materially adversely impact our financial results.
If we continue to grow rapidly, we may not be able to manage our growth effectively.
SinceFrom our inception through 2022, we have experienced rapid growth, with total revenue having grown from $130.6 million in 2018 to $4.0$2.4 billion in 2021. Our significant2022.This growth to date, attributable to both rapid organic membership growth and acquisitions of other businesses, has placed and, notwithstanding our updated business model, we expect it will continue to place, significant demands on our management team and our operational and financial resources. Sustaining such growth will require additional resources to improve our operational, management, and financial controls, which can take time and may require new capabilities in mission-critical areas, to support our growth. We have experienced, and may alsocontinue to experience, significant personnel changes related to acquisition-related integration efforts. Our organizational structure may also become more complex as we add these additional resources, making it more difficult to manage. Further, as a result of our Restructuring, we have fewer resources available to manage the multiple aspects of any growth or expansion of our business.
Furthermore, in order to effectively operate our business, we rely heavily on third-party vendors. Our rapidAny growth could outpace the capacity of our third-party service providers to effectively support our business needs. Certain of our third-party service providers have in the past been unable to effectively scale their operations to meet our increased demands resulting from our rapid expansion. Continuedexpansion at any time. Any rapid growth in membership similar to what we have seen in recent years could significantly impact our ability to pay claims on a timely basis, provide effective utilization management and have sufficient operational resources in these and other areas in order to keep pace with our members’ needs. In the event that our existing third-party service providers are unable to meet our needs as our business grows, we may need to find alternative service providers. If we are unable to do so in a timely manner or if we are unable to contract with new service providers on terms that are acceptable to us or at all, our ability to operate our business may be disrupted, which may adversely affect our business, financial condition, results of operations, and cash flows. See “— We rely on various third-party service providers to support the operation of our business. If these service providers fail to meet their contractual obligations to us or comply with applicable laws or regulations, or if we are unable to renew our contracts with them, our business may be adversely affected.”
If we grow rapidly in a new market or expanded territory, the risks associated with new market entry can exacerbate the strains on our operational capabilities, including provider contract fee schedule loading in claims systems, provider credentialing, prompt pay claims adjudication, customer service capacity, and utilization management.
Continued rapid growth in our business may exacerbate certain of the risks described elsewhere in this section, including our ability to accurately estimate costs, price our products, and charge appropriate premiums, as well as our ability to accurately assess, code and report IFP and MA risk adjustment factor (“RAF”) scores for our consumers. If we are not able to manage our growth effectively while maintaining the quality of our services and consumer satisfaction, our business, financial condition and results of operations may be materially adversely affected.
We have incurred net losses each year since our inception, and we may not be able to achieve or maintain profitability in the future.
We have incurred net losses on an annual basis since our inception, and our net losses have grown as we have invested heavily in our business. We incurred net losses of $1.5 billion, $1.2 billion, $248.4 million, and $125.3$248.4 million for the years ended
December 31, 2022, 2021 2020 and 2019,2020, respectively. We must generate and sustain higher revenue levels in future periods to become profitable, and, even if we do, we may not be able to maintain or increase our profitability. We plan toIf we continue to invest to grow our consumer base, diversify our product offerings, add additional Care Partners, and invest in additional assets related to the delivery of healthcare, and hire more employees. Wewe expect our operating costs will increase and therefore expect to incur net losses in
the near to medium term. We may not achieve the benefits anticipated from these investments, which could be more costly than we currently anticipate, or the realization of these benefits could be delayed. These investments may not result in increased revenue or growth in our business and, accordingly, we may not be able to generate sufficient revenue to offset these cost increases and achieve and sustain profitability. Our recent and historical growth should also not be considered indicative of our future performance. If we fail to achieve and sustain growth and profitability, the market price of our common stock could decline.
Our limited operating history makes it difficult to evaluate our business and assess our future prospects.
We have encountered and will continue to encounter significant risks and uncertainties frequently experienced by new and growing companies in heavily regulated industries, such as difficulties determining appropriate investments given limited resources, effectively managing growth and efficiently navigating and complying with evolving regulations. We began offering our first health insurance plans in 2017, and our most substantial growth has occurred inIn the last two years. During that time,three years, we have significantly expanded our products and services across both our Bright HealthCare and NeueHealthConsumer Care businesses, including as a result of the acquisitions we have made. We have also expanded our operations to different lines of business and geographies. As such, the complexity of our business has increased significantly in a short period of time,time.Then, in October 2022, we announced that we will focus on delivering affordable healthcare to aging and underserved populations through our fully aligned care model in Florida, Texas and California, and that we will no longer offer IFP products through Bright HealthCare in 2023, or MA products outside of California.Although our updated business model resulted in a reduction of the scale of our business, we still operate multiple businesses in several different markets, as well as managing run-out of our IFP products and MA products outside of California. Our growth, strategy and profitability could be negatively impacted if we are unable to effectively manage this complexity. Any inability to manage our business effectively could result in slowing demand for our services, increased competition, a failure to capitalize on growth opportunities or the need to dispose of underperforming business units.
The ongoing COVID-19 pandemic has adversely affected, and may continue to adversely affect, our business and results of operations.
The severity and magnitude of the ongoing COVID-19 pandemic has continued to evolve, and the duration of the pandemic continues to be uncertain. The pandemicit has adversely affected our business and results of operations. The extent to which the COVID-19 pandemic will continue to impact our business, results of operations and financial condition will depend on future developments, whichincluding whether COVID-19 becomes endemic, are unknown at this time. Factors that could impact our results include: the ultimate geographic spread, severity and duration of the COVID-19 pandemic; the impact of business closures, travel restrictions, social distancing and other government actions taken to contain the spread of COVID-19 and to address the related economic and financial impacts related to the pandemic more broadly;impacts; the volume of canceled, delayed or rescheduled procedures or medical care and treatment; the effectiveness of actions taken to reduce transmission of the virus that causes COVID-19 (including the ongoing administration of vaccines, the availability of effective medical treatments, tests, and vaccines for additional groups of individuals, such as children under age five, continued research into treatments, the virus, and the disease); the ongoing emergence of new variants of the virus that causes COVID-19; the impact of the pandemic on economic activity and the labor market (particularly in the healthcare industry); and any impairment in value of our tangible or intangible assets which could be recorded as a result of weaker economic conditions caused by the pandemic. In addition, the long-term impact of the COVID-19 pandemic may not be fully understood or reflected in our results of operations and overall financial condition until future periods.
As a result of the ongoing COVID-19 pandemic and the associated protective and preventative measures and economic impacts, we have experienced and may continue to experience disruptions to our business. Risks presented by the ongoing effects of COVID-19 include, but may not be limited to, the following:
•Cost of Care for Consumers. The COVID-19 pandemic disproportionately impacts older adults, especially those with chronic illnesses, who constitute a significant portion of our MA consumer base, particularly in California, our largest MA population, and in Florida, where we have a significant concentration of our IFP members.California. We have experienced increased internal and third-party medical costs attributable to the provision of care for consumers suffering from the virus, primarily attributable to inpatient hospitalizations. Additionally, those of our consumers who have been infected by, and recovered from, the disease potentially face long-term health consequences which medical researchers continue to investigate. The total financial impact of the COVID-19 pandemic as well as the unknowns surrounding the length of time that the public health emergency and associated public health measures will continue, is difficult to estimate.
•Changes to Care for Consumers and Patients. Many individuals have been prevented from seeking, have been reluctant to seek, or have intentionally delayed or postponed, in-person, non-life-threatening medical care and treatment, including elective procedures. Such reduction in healthcare services in our managed and affiliated medical groups has resulted in reduced NeueHealthConsumer Care fee-for-service revenue, while concurrent COVID-19 prevention protocols have increased costs. If our medical groups and MSOs continue to experience losses, NeueHealth’sConsumer Care’s financial results may be adversely affected.
•Documentation of Health Conditions. Due to the COVID-19 pandemic, we may not be able to adequately document the health conditions of our consumers and patients, as many of them have avoided in-person medical visits. Our third-party clients for our NeueHealthConsumer Care MSO may similarly be unable to adequately document the health conditions of their members. Inaccurate or inadequate documentation could result in an inaccurate RAF score, which could materially and adversely impact our Bright HealthCare revenue for future periods. In addition, inaccurate documentation could impact the ability of our NeueHealthConsumer Care MSOs to manage medical costs and quality metrics on behalf of its clients, putting it at greater financial risk and potentially adversely affecting the profitability of our NeueHealthConsumer Care business.
•Operational Disruptions and Heightened Cyber Security and Data Privacy Risks. The COVID-19 pandemic has resulted in our employees and those of many of our vendors working from home and conducting work via the internet. If the infrastructure of internet providers required for such work becomes overburdened by increased usage or is otherwise unreliable or unavailable, our employees’, our consumers’, and our vendors’ employees’ access to the internet could be limited. Such a disruption could result in work stoppages, delays, loss of productivity, and general business interruptions, all of which have the potential to harm our business operations, financial condition, and results of operations.
These remote working arrangements can also result in significantly more external touchpoints into our network and lead to a heightened risk of cyber security attacks or data security incidents. As we have grown and continued to operate remotely, and similar to other public companies, we have experienced an increase in attempted cyber-attacks, targeted intrusion, ransomware and phishing campaigns, and the pandemic has created additional difficulties in managing risk in the work-from-home environment. In the last sixeighteen months, one of our subsidiaries and one of our third-party suppliers experienced cyber security incidents. See “— Security incidents or breaches, loss of data and other disruptions to our or our third-party service providers’ systems, information technology infrastructure, and networks could compromise sensitive or legally protected information related to our business or consumers, disrupt our business operations, and expose us to liability, which could adversely affect our business and our reputation” for further information. We have incurred and may continue to incur increased expenses to improve our security controls and remediate security vulnerabilities in response to these heightened cyber security risks. Over time, however, the sophistication of these threats continues to increase and the preventative actions we take to reduce the risk of cyber security incidents and protect our information may be insufficient.If such attempts are successful in the future or if PHI, or other proprietary, confidential, or personal data or information were to be exposed or compromised or our systems were shut down or became unavailable, our reputation, business and results of operations could be materially harmed. In addition, as mentioned above, our vendors have been, and may in the future be, subject to increased risks due to the current remote working environment, and any attempted cyber-attacks or other security incidents impacting our vendors could also disrupt our business and harm our reputation, business and results of operation.
•Changes in Regulatory Requirements. As a result of the COVID-19 pandemic, regulatory agencies have made, and may continue to make, significant changes (temporary or otherwise) to benefit coverage requirements (including the provision of free in-home COVID-19 test or other related products), enrollment standards or disenrollment standards, in each case, that could negatively impact our financial performance. For example, mandatory coverage of COVID-19 testing in the workplace or coverage requirements related to surprise medical bills and new mandates for continuity of care for certain patients, price comparison tools, disclosure of broker compensation and reporting on pharmacy benefits and drug costs contained in the Appropriations Act could result in substantial expenses that are not contemplated by our current rates. Furthermore, mandatory termination deferrals due to nonpayment of insurance premiums could result in a situation where we incur significant medical expense without the ability to collect any associated premium revenue.
•Market Disruption. If the pandemic continues to create disruptions or turmoil in the credit or financial markets, it could adversely affect the price of our common stock and our ability to access capital on favorable terms and continue to meet our liquidity and any acquisition financing needs.
To the extent the ongoing COVID-19 pandemic continues to adversely affect our business and financial results, it may also have the effect of heightening many of the other risks described in this section of this Annual Report titled “Risk Factors.”
Large-scale medical emergencies in one or more states in which we operate our business could significantly increase utilization rates, medical costs or risk overwhelming and disrupting our systems.
Large-scale medical emergencies can take many forms which may be associated with widespread illness, such as the ongoing COVID-19 pandemic, medical conditions or general threats to wellness. Currently, our largest markets are in California, Florida, California,and Texas, North Carolina, and Colorado, which can from time to time be impacted by hurricanes, flooding, earthquakes, wildfires, winter storms and other similar natural events, including as a result of climate change. A significant event of this kind could impact one or more of our markets by affecting outsized portions of our consumer population and require increased medical care or intervention, which could result in an unexpected increase in our medical costs. For example, we have experienced significant increased costs attributable to the provision of care for consumers suffering from COVID-19 and its related variants. Other conditions that could impact our consumers include labor shortages in critical need areas, a particularly virulent influenza season, pandemics or epidemics, and other foreign or domestic viruses or new variants of existing viruses for which vaccines may not exist, are not effective, or have not been widely administered. The medical costs and operating costs associated with assisting our consumers in response to any of these large-scale medical emergencies is difficult to predict. However, if one of the states in which we operate were to experience a large-scale natural disaster, a viral epidemic or pandemic, or some other large-scale event affecting the health of a large number of our consumers, our consumer costs in that state could rise, which could have a material adverse effect on our business, financial condition, cash flows and results of operations.
Large-scale medical emergencies may also adversely impact our NeueHealthConsumer Care managed and affiliated medical groups, causing disruption in patient scheduling; displacement of patients, employees and care management personnel; or force clinics to close entirely for periods of time.
In addition, we may not be able to adequately maintain system functionality and business continuity due to any such events. This risk is further exacerbated by our reliance on third-party providers that perform critical operational functions for us. Any such disruption to our ability to conduct business could have a material adverse effect on our business, cash flows and results of operations.
Delays in our receipt of health plan premiums could adversely affect our operations, financial position and cash flows.
A substantial portion of our revenue is derived from health plan premiums. While we recognize premium revenue over the period that coverage is effective, there can be no assurance that we will receive premiums within a relevant coverage period. In addition, the implementation of certain policies by the state and federal governments could result in increased delays in the receipt of health plan premiums.
Our membership is concentrated in certain geographic areas and amongst certain populations, exposing us to unfavorable changes in local benefit costs, reimbursement rates, competition and economic conditions in those areas or affecting those populations.
Our membership is concentrated in certain states in the United States. As of December 31, 2021,2022, approximately 8392%% of our consumers were residents of California, Florida, California, North Carolina and Colorado.Texas. In particular, our IFP business in Florida and our MA business in California made up 34% and 31%43% of total revenue respectively, for the year ended December 31, 2021.2022, and as of January 1, 2023, 99% of our membership was in California. Unfavorable changes in the regulatory environment for healthcare, unforeseen changes affecting the cost of living, other benefit costs, inflation (including wage inflation), reimbursement rates or increased competition in these states or any other geographic area where our membership becomes concentrated in the future could therefore have a disproportionately adverse effect on our operating results.
If we decide to enter new markets, they may not be as economical to serve as our existing markets.
Due to a variety of factors, such as novel local market dynamics and increased administrative costs relating to compliance with state laws and regulations, we may have difficulty providing the same level and types of healthcare in any new markets as we and our Care Partners currently provide in our established markets for the same cost. If we are unable to adequately price our new products in these markets, if the medical expenses of new consumers are higher than we anticipate, if the market is saturated with significant competition or if the rates of adoption for our business model or the demand for our product offerings in such new geographies are lower than we anticipate, we may not be able to serve those regions while realizing economic results as favorable as those results realized in the markets we currently serve. If we are unable to profitably grow and diversify our membership geographically, our results of operations may be materially and adversely affected.
We operate in competitive markets within a highly competitive industry.
The health insurance and care delivery markets are highly competitive. Competitors across the markets in which we compete are subject to dynamic regulatory requirements and industry expectations, emerging new product offerings, and constantly evolving consumer preferences and demands. Our principal competitors for consumers and payor contracts vary considerably in type and identity by market.
Our Bright HealthCare business currently faces competition from a range of health insurance companies targeting the IFP, MA Medicaid, and employer markets,market, many of whom are developing their own technology or partnering with third-party technology providers to drive improvements in care. These competitors include large, national insurers, such as Aetna, Anthem, Centene, Cigna, Humana, and UnitedHealthcare and others, in addition to more regionally-focused insurers, such as Blue Cross Blue Shield licensees, Kaiser Permanente and other provider-sponsored health plan organizations.
Our NeueHealthConsumer Care business currently operates medical groups and competes with other medical groups in the same localities. NeueHealthOur Consumer Care business also competes with MSOs, IPAs and other organizational entities aggregating and enabling providers to deliver primary care services under value-based care arrangements. These competitors include companies such as Agilon Health, ChenMed, Iora Health, Oak Street Health, OptumHealth and VillageMD. In addition, our NeueHealthConsumer Care business participates in the Medicare Shared Savings Program and other government programs designed to bring value-based care to fee-for-service Medicare beneficiaries, and NeueHealthour Consumer Care business competes with other participants in such programs. Furthermore, third-party payor clients may resist purchasing NeueHealth services because such clients may compete with Bright HealthCare in the same markets.
Many of our competitors have longer operating histories; greater brand recognition; stronger, more developed, and more extensive networks of physicians and other care providers; significantly greater financial, technical, marketing, and other resources; lower labor and development costs due to economies of scale; greater access to healthcare data; and larger membership bases, than we do. These competitors may engage in more extensive research and development efforts; undertake broader, more expensive, and more powerful marketing campaigns; and adopt more aggressive pricing or payment policies, each of which may enable them to build membership faster than us and to establish a larger patient base more quickly than us. Our competitors may also provide more differentiated products or services to their clients. Furthermore, the healthcare industry in the United States has experienced a substantial amount of consolidation. If our competitors were to be acquired by third parties with greater resources, these competitive risks could intensify, and we may face significant challenges in markets that have experienced significant competitor consolidation.
In addition, other companies may enter our markets in the future, including emerging competitors targeting IFP, MA and other populations, or other markets or products we choose to enter or be in at the time. We do not believe the barriers to enter our markets are substantial, and new competitors with comparable, better, or differentiated healthcare products and plans may emerge, or competitors may develop new approaches to value-based care, which could put us at a competitive disadvantage. In addition, because health plans are generally renewed annually, consumers enjoy significant flexibility in moving between health plans.
One of the key factors on which we compete for our consumers, especially in uncertain economic environments, is overall cost. We are therefore under pressure to contain premium price increases despite being faced with increasing healthcare
and other benefit costs, as well as increasing operating costs. If, as a result of the competition we face, we are unable to increase our premium rates or our prices commensurate with increasing costs, our profitability could be adversely affected.
To the contrary, if we do not limit our price increases, we may lose consumers to our competitors offering more favorable pricing. In response to rising prices, our consumers may also purchase different types of products from us that are less profitable. If we are unable to compete effectively with our current and potential competitors for market share, we may also see a reduction in the demand for our products and services. Any of the foregoing could materially and adversely affect our business, results of operations and financial condition.
The failure to enter into value-based care agreements with health plans or the renegotiation, non-renewal or termination of such agreements could materially negatively impact our business, results of operations, financial condition and cash flows.
The success of our Consumer Care business is dependent on our ability to enter into value-based care agreements with third-party payors. Even if we are successful at entering into these agreements, such agreements may be subject to renegotiation, and the renegotiated terms may not be as favorable to us. Additionally, under certain of our existing value-based care agreements with third-party payors, the health plan is permitted to modify their benefit designs, their pricing parameters, and the specific terms and conditions governing the value-based arrangement from time to time during the terms of the agreements. If a health plan makes such changes during the term of our agreement, or if we enter into contracts with unfavorable economic terms, we could suffer losses with respect to such contract. In particular, if we enter into capitation or other value-based care contracts with unfavorable terms, or such contracts are amended to include unfavorable terms, we could experience significant losses. Depending on the health plan at issue and the amount of revenue associated with Consumer Care’s agreement with the health plan, if the contract permits a renegotiation of the terms triggered by health plan changes, the renegotiated terms or termination could materially negatively impact our business, results of operations, financial condition and cash flows.
If we are not able to maintain required statutory capital levels, our balance sheet may be adversely affected.
Our MA plans (and our IFP and employer plans that have been discontinued but that are being run out) are operated through regulated insurance subsidiaries in various states. These subsidiaries are subject to state regulations that, among other things, require us to maintain minimum levels of statutory capital, or net worth, as defined by each applicable state. Such states may raise or lower the statutory capital level requirements at will. Our history of losses has generally meant that we have had to infuse more capital into our largest states. Certain other states have adopted risk-based capital requirements based on guidelines adopted by the National Association of Insurance Commissioners, which tend to be, although are not necessarily, higher than existing statutory capital requirements. The state departments of insurance, or applicable bodies regulating insurance, in any state could require our regulated insurance subsidiaries to maintain minimum levels of statutory capital in excess of amounts required under the applicable state laws if they determine that maintaining additional statutory capital is in the best interests of our consumers.
As of December 31, 2022, the amount of capital in certain of our insurance subsidiaries failed to meet or exceed applicable mandatory risk-based capital requirements, and as a result such subsidiaries are or may become subject to supervision orders under state insurance laws.Such supervision orders require additional reporting as well as approval of certain transactions by our regulators. These scope of these orders may be expanded, we may become subject to additional orders, or both, any of which may harm our ability to execute our business strategy, invest in growth opportunities, and adversely affect our balance sheet and results of operations.
Further, these agencies could require our regulated insurance subsidiaries to maintain minimum levels of statutory capital in excess of amounts required under the applicable state laws if they determine that maintaining additional statutory capital is in the best interests of our consumers. In addition, although we will no longer offer health plans in certain states, if we are unable to withdraw, or are subject to an unexpected delay in withdrawing, the statutory capital in these subsidiaries, this could reduce our available funds, which could harm our ability to execute our business strategy, invest in growth opportunities, and adversely affect our balance sheet and results of operations.
If we expand our plan offerings and grow our membership, we may be required to maintain higher levels of statutory capital. If higher level of statutory capital are required, this could reduce our available funds, which could harm our ability to execute our business strategy and invest in our growth opportunities. In addition, laws in many states require increasing degrees of regulatory oversight and intervention if a company’s risk-based capital declines below certain thresholds. If our
levels of statutory capital were to decline below these thresholds, we may be subject to heightened supervision, examination, rehabilitation or liquidation.
Our Consumer Care business may be subject to state regulations that, among other things, require us to maintain minimum capital reserves, as defined by each applicable state in connection with the assumption of financial risk for the performance of for consumers attributed to our Consumer Care RBOs.
If we fail to achieve robust brand recognition or are unable to maintain or enhance our reputation, our business, financial condition and results of operations may be adversely affected.
Developing strong brand recognition and maintaining and enhancing our reputation in both our Bright HealthCare and Consumer Care businesses is critical to maintaining our existing relationships and to our ability to attract new consumers, Care Partners and other constituents to our platform. Promoting our brand requires substantial investments and we anticipate that, as our market remains increasingly competitive, our marketing initiatives may become increasingly expensive and challenging to successfully implement. Attempts to grow our brand and investments in marketing our platform and plans may not be successful or yield increased revenue as we expect, and even if these activities result in increased revenue, the increased revenue may not offset the expenses we incur to achieve such results. In addition, much of our marketing efforts to date have been limited to certain geographic regions and markets where our business operates to ensure an efficient use of resources. If we expand, we will need to spend additional resources to build strong national brand recognition and there can be no assurance that our efforts will be effective. If we do not successfully develop widespread brand recognition and maintain and enhance our reputation, our business may not grow and we could lose our existing relationships, which could harm our business, financial condition and results of operations.
If we fail to offer high-quality customer support in our business, our reputation and our ability to maintain or expand membership or attract Care Partners and third-party payors could suffer, which could adversely affect our results of operations.
Providing high-quality operational support and service to our consumers, Care Partners and third-party payors is an important part of our business. Our ability to attract and retain consumers is largely dependent upon our ability to offer an easy-to-navigate membership enrollment process as well as upon our ability to provide cost effective, quality customer service, including effective call center operations and claims processing support, that meets or exceeds our consumers’ expectations. Certain user support operations are supported by third-party vendors. If we or our vendors fail to provide services that meet our customers’ expectations, we may have difficulty retaining or growing our membership as well as Care Partner and third-party payor relationships, which could adversely affect our business, financial condition and results of operations.
We expect that the importance of offering high-quality support to our consumers will increase if we grow or expand our business, add new products, and pursue new consumers, Care Partners, and third-party payors. This has put, and will continue to put, pressure on our ability to maintain high-quality customer support, or a market perception that we do not maintain high-quality user support, could harm our reputation and negatively impact our ability to grow membership, build Care Partner relationships, and attract third-party payors, which could adversely affect our business, results of operations, and financial condition. Additionally, as our number of consumers, Care Partners and third-party payors grows, we will need to hire additional support personnel to provide efficient platform support at scale. If we are unable to provide such support, our business, results of operations, financial condition and reputation could be harmed.
Reductions in the quality ratings of our MA health plans could have a materially negative impact on our business, results of operations, financial condition and cash flows.
Many of the government healthcare coverage programs in which we participate are subject to the prior satisfaction of certain conditions or performance standards or benchmarks. For example, a portion of each Medicare Advantage plan’s reimbursement is tied to the plan’s Star Rating. A plan’s Star Rating affects its image in the market, and plans that perform well are able to offer enhanced benefits and market more effectively. The Star Rating system considers various measures adopted by CMS, including, among others, quality of care, preventive services, chronic illness management and consumer satisfaction. Only plans with a rating of four (4.0) stars or higher qualify for bonus payments. Medicare Advantage plans with Star Ratings of five (5.0) stars are eligible for year-round open enrollment; conversely, plans with lower Star Ratings
have more restricted times for enrollment of beneficiaries. Medicare Advantage plans with Star Ratings of less than three (3.0) stars for three consecutive years are denoted as “low performing” plans on the CMS website and in the CMS “Medicare and You” handbook. In addition, in 2019, CMS had its authority reinstated to terminate Medicare Advantage contracts for plans rated below three (3.0) stars for three consecutive years. As a result, Medicare Advantage plans that achieve higher Star Ratings may have a competitive advantage over plans with lower Star Ratings. To date, we have not been able to achieve a four (4.0) Star Rating on our MA plans, which are therefore not currently eligible for quality bonuses. Furthermore, the Star Rating system is subject to change annually by CMS, which may make it more difficult to achieve and maintain three (3.0) Star Ratings or greater in the future. We cannot assure you that we will be successful in maintaining or improving our Star Ratings in the future. In addition, audits of our performance for past or future periods may result in downgrades to our Star Ratings. Our health insurance subsidiaries’ operating results, premium revenue, and benefit offerings will likely depend significantly on their Star Ratings, and there can be no assurances that we will be successful in achieving and maintaining favorable Star Ratings. If we do not achieve an acceptable level of Star Ratings, our plans will not be eligible for quality bonuses in the future and we may experience a negative impact on our revenue and the benefits that our plans can offer, which could materially and adversely affect the marketability of our plans, our membership levels, results of operations, financial position and cash flows. Any changes in standards or care delivery models that apply to government healthcare programs, including Medicare, or our inability to maintain or improve our quality scores and Star Ratings to meet government performance requirements or to match the performance of our competitors could result in limitations to our participation in or exclusion from these or other government programs, which in turn could materially negatively impact our results of operations, financial position and cash flows.
We may be unsuccessful in identifying and acquiring suitable acquisition candidates or integrating acquired companies, which could impede our growth and ability to remain competitive.
Over the course of the last several years, we have acquired several businesses. Maintaining acceptable growth may rely in part on our ability to successfully acquire and integrate companies that complement and accelerate the execution of our strategies in new and existing markets. However, we may not successfully identify suitable acquisition candidates or we may have difficulty in identifying prospective acquisition candidates. In addition, we may not be able to successfully complete an acquisition after identifying a candidate. We sometimes compete for acquisition and expansion opportunities with entities that have greater financial resources or are otherwise willing to pay more than us. Furthermore, pursuing an acquisition strategy is likely to require us to seek additional financing, which we may not be able to obtain on satisfactory terms and conditions, or at all. Furthermore, any additional financing would increase our level of indebtedness, exacerbating the risks described under “—Our ability to incur a substantial level of indebtedness may reduce our financial flexibility, affect our ability to operate our business, and divert cash flow from operations for debt service.”
Even after the acquisition of a business, we may be unable to successfully integrate the acquired business with our existing business and operations or the business may not perform in accordance with the projections that informed the purchase price for such acquisition. The integration of an acquired business involves a number of factors that may negatively affect our operations, including, but not limited to:
•distraction of management or lack of leadership within the acquired business to succeed retiring leaders;
•significant costs and difficulties, including implementing or remediating controls, procedures, and policies at the acquired company; integrating the acquired company’s accounting, human resource and other administrative systems; integrating and/or remediating information security systems; coordinating product and sales and marketing functions; transitioning operations, consumers, clients, and other users onto our existing technology platforms; and retaining of key personnel;
•tax and accounting issues, including the creation of significant future contingent liabilities relating to earn-outs for acquisitions or other financial liabilities; and
•unanticipated problems or legal liabilities, or lack of adequate compliance or regulatory policies, processes, technologies and resources.
Although we conduct due diligence with respect to the business and operations of each of the companies we acquire, we may not have identified all material facts concerning these companies. Unanticipated events or liabilities relating to these companies could have a material adverse effect on our results of operations, financial condition and cash flow. Furthermore, once we have integrated an acquired company, it may not achieve levels of revenue, profitability, or productivity comparable to our existing business, or otherwise perform as expected, and we cannot assure you that past or
future acquisitions will be accretive to earnings or otherwise meet our operational or strategic expectations. Our failure to successfully acquire and integrate businesses may cause us to fail to realize the anticipated benefits of such acquisitions or investments, cause us to incur unanticipated liabilities and/or harm our business generally, which may have an adverse effect on our revenue, results of operations, financial condition and cash flow.
Medical liability claims made against us in the future could cause us to incur significant expenses and pay significant damages if not covered by insurance.
The risk of medical liability claims against our Consumer Care business managed and affiliated medical groups, as well as against the treating physicians and other medical practitioners, is an inherent part of our business. While we endeavor to carry appropriate levels of insurance covering medical malpractice claims, successful medical liability claims might exceed our insurance coverage or the coverage held by our provider partners, which could make us secondarily liable for such incidents. Furthermore, professional liability insurance, including medical malpractice insurance, is expensive and insurance premiums may increase significantly in the future, especially as we continue to expand our service offerings. As a result, adequate professional liability insurance may not be available to our physicians and other medical practitioners or to us in the future at acceptable costs or at all.
Additionally, our health plan business may be targeted for medical liability lawsuits based on vicarious liability or other legal theories by which plaintiffs seek to hold our health plans liable for medical results associated with care rendered by our managed and affiliated medical groups or other network providers.
Any claims made against us that are not fully covered by insurance could be costly to defend against, result in substantial damage awards against us and divert the attention of our management and our partners from our operations, which could have a material adverse effect on our business, reputation, financial condition and results of operations. Additionally, any claims made against us, whether meritorious or not, may increase the cost of our insurance premiums which could adversely impact our business.
We rely on our talent, and the loss of any members of senior management or other key employees or an inability to hire, retain, motivate or develop other highly skilled employees could harm our business or impact our ability to grow effectively.
We are led by a seasoned management team with decades of healthcare and public company operating experience. The success of our business relies, in part, on the continued services of our senior management team and other key employees. Competition for talent is intense in our industry. While we use various measures to attract and retain talent, including fair and reasonable market-based compensation plans and an equity incentive program for key executive officers and other employees, these measures may not be adequate to hire, retain, motivate and develop the personnel we require to successfully scale our business and to operate our business effectively. Furthermore, members of our senior management team are difficult to replace. In particular, the loss of the employment contributions of our Chief Executive Officer, Mr. Mikan, or other key members of the executive management team, could significantly delay or prevent the achievement of our strategic objectives.
Global economic conditions and economic uncertainty or downturns, particularly as it impacts particular industries, could materially and adversely affect our business and operating results.
In recent years, our business has been and may continue to be affected by various factors and events that are beyond our control. The United States has experienced economic downturns and market volatility, and domestic and worldwide economic conditions remain uncertain. For example, Russia’s attack on Ukraine has had significant impacts on a wide variety of financial markets and supply chains around the world. It may be extremely difficult for us, our Care Partners and our other key constituents to accurately plan future business activities and execute on our business objectives as a result of economic uncertainty and other macroeconomic factors. In addition, global economic conditions and economic uncertainty may cause our consumers to slow spending on our health plans or Care Partners to cease partnering with our business, which could ultimately harm our business. Furthermore, during uncertain economic times our consumers may face challenges or delays in obtaining access to funds used to make monthly premium payments, which could result in an impairment of their ability to make timely payments to us. In addition, our business relies on third parties, and we are susceptible to risks related to the potential financial instability of such third parties, including vendors that provide services
to us or to whom we delegate certain functions. If these third-party vendors cease to do business as a result of broader economic conditions or if they become unable to provide us with the level of service we expect, we may not be able to find an alternative service provider in a timely manner, or on acceptable financial terms, which could impact our ability to meet the expectations and needs of our consumers.
We cannot predict the timing, severity or duration of any economic slowdown or the strength or speed of any subsequent recovery generally. If the conditions in the general economy and the markets in which we operate worsen from present levels, our business, financial condition and results of operations could be materially adversely affected.
We compete for physicians and other healthcare personnel for our Consumer Care business, and shortages of qualified personnel or other factors could increase our labor costs and adversely affect our revenue, profitability and cash flows.
Our Consumer Care business is dependent on the efforts, abilities and experience of employed and contracted physicians, nurse practitioners, registered nurses and other medical professionals. We compete with other healthcare providers, hospitals, clinics, networks and other facilities, in attracting physicians, nurses and medical staff required to support our business. Recruiting and retaining qualified management and support personnel responsible for the daily operations of our business is vital to the continued growth and success of our business, as well as our profitability. In many markets in which we operate, the lack of availability of clinical personnel, such as nurses and mental health professionals, has become a significant operating issue facing our business and all healthcare providers exacerbated by increased worker attrition as a result of the ongoing COVID-19 pandemic. As a result of this competition, we may need to continue to enhance wages and benefits to recruit and retain qualified personnel or to contract for more expensive temporary personnel. We may not be able to attract new physicians and clinical personnel to replace the services of terminating personnel or to service our growing membership.
We may not be able to raise rates or to grow our business to offset increased labor costs. Because a significant percentage of our revenue consists of fixed, prospective payments, our ability to pass along increased labor costs is limited.
We have employment contracts with physicians and other health professionals in Florida, Texas, and other 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 current laws governing non-compete agreements and other forms of restrictive covenants varies from state to state, and the Federal Trade Commission recently proposed a nationwide ban on non-competition covenants. California, Florida, and other states’ laws and, if enacted, federal law, may prohibit us from enforcing our non-competition covenants with our professional staff particularly in rural locations or in specialty practice areas. Some states are reluctant to strictly enforce non-compete agreements and restrictive covenants applicable to physicians and other healthcare professionals. There can be no assurance that our non-compete agreements related to physicians and other health professionals will be found enforceable if challenged. 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 patients and other health professionals
Our health plan products are subject to risk adjustment programs, which if not managed properly can result in risk adjustment payments that do not reflect our true risk profile, which could adversely impact our financial results and cash flows.
The IFP and MA markets we serve (and previously served) employ risk adjustment programs that impact the revenue we recognize for our enrolled membership. These risk adjustment programs are designed to compensate us for the level of risk we take in providing healthcare services to our overall consumer population. In order to be reimbursed by government payors, for MA products, or by other market participating health plans, for IFP products, at a level commensurate with our consumer population risk, we must ensure that our Care Partners are identifying and properly inputting data to document all chronic and severe diagnoses to create an accurate health profile for each consumer. If our Care Partners do not accurately record this patient data, we may not be able to accurately estimate our revenue and medical costs. If we fail to obtain accurate claims or other related data in a timely manner, we may not be able obtain accurate risk scores during the time period in which we expected to, or at all. See “– We rely on various third-party service providers to support the operation of our business. If these service providers fail to meet their contractual obligations to us or comply with applicable laws or regulations, or if we are unable to renew our contracts with them, our business may be adversely affected.” If the data on our consumer population overstates the health risk of our consumer population, we may be obligated to return funds to government payors, for MA products, or to other market participating health plans, for IFP products, that we have received. Conversely, if we understate the health risk of our consumer population, we will not
receive funds from government payors, for MA products, or other market participating health plans, for IFP products, that we would otherwise be entitled to receive. As a result of the variability of certain factors that go into the development of the risk adjustment we recognize, such as risk scores and other market-level factors where applicable, the actual amount of revenue could be materially more or less than our estimates. Consequently, our estimate of our health plans’ risk scores for any period, and any resulting change in our accrual of revenue related thereto, could have a material adverse effect on our results of operations, financial condition, and cash flows. The data provided to CMS to determine risk scores is subject to audit by CMS even several years after the annual settlements occur. If the risk adjustment data we submit is found to incorrectly overstate the health risk of our consumers, we may be required to refund monies previously received by us and/or be subject to penalties or sanctions, including potential liability under the FCA, which could be significant and would reduce our revenue in the year that repayment or settlement is required. We have had in the past to take reserves against our premium revenue because of our difficulty to accurately estimate risk adjustment in our business. Furthermore, if the data we provide to CMS incorrectly understates or overstates the health risk of our consumers, we might be underpaid or overpaid for the care that we must provide to our consumers, which could have a negative impact on our results of operations and financial condition.
It is possible that claims associated with consumers with higher RAF scores could be subject to more scrutiny in such an audit and that the findings of an audit could result in future adjustments to premiums or in adjustments to the payments made by CMS to us. CMS may also assess penalties for inaccurate or unsupportable RAF scores provided by us or our Care Partners. In addition, we could be liable for penalties to the government under the FCA that range from $5,500 to $11,000 (adjusted for inflation) for each false claim, plus up to three times the amount of damages caused by each false claim, which can be as much as the amounts received directly or indirectly from the government for each such false claim. In 2022, the Department of Justice increased the range of FCA penalties on a per claim basis from $12,537 to $25,076 per claim. Because CMS conducts its audits at random, there can be no assurance that we 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 to the risk adjustment mechanism, including changes that result from enforcement or audit actions, could materially affect our reimbursement.
Our expansion into ACO REACH presents new risks to our business.
We expanded our business into CMS’ ACO REACH model (formally known as the Direct Contracting model) (the “ACO REACH Model”) in January 2022, enabling us to target a larger market opportunity, the Medicare FFS market, which is the largest segment of Medicare. As such, although we completed our first year in the ACO REACH model, we are subject to the risks inherent to the launch of any new business, including the risks that we may not generate sufficient returns to justify our investment, it may take longer or be more costly to achieve the expected benefits from this new program, and that it may require us to, at least initially, divert management attention and other resources from our existing businesses. In connection with our expansion into ACO REACH, we have formed and continue to form relationships with a greater number of physicians, which may pose challenges to scaling quickly, influencing physician behavior and directly engaging beneficiaries, and we may face additional new risks and difficulties, many of which we may not be able to predict or foresee. Any potential future changes to the ACO REACH model may have a significant impact on our ability to carry out our business. Similarly, while ACO REACH is expected to continue through 2026, Centers for Medicare & Medicaid Services Innovation Center (CMMI) can determine to terminate the program at any time, and in some cases may be required to do so. If the program is terminated, we would need to reevaluate our Medicare FFS strategic options, which in turn could reduce the return on our investments and negatively impact our business, financial condition, results of operations and future prospects. Additionally, our ACO REACH participation agreements with CMS permit CMS to take certain actions if CMS determines that any provision may have been violated, including requiring the ACO to provide additional information to CMS, placing the ACO on a monitoring and/or auditing plan developed by CMS, requiring the ACO to terminate its relationship with any other individual or entity performing functions or services related to certain ACO or marketing activities, amending the agreement without the consent of the ACO to take certain actions, including denying, terminating or amending the use of any capitation payment mechanism. CMS may also immediately or with advance notice terminate an ACO REACH participation agreement if CMS determined that the ACO has failed to comply with any term of the agreement or any other Medicare program requirement, rule or regulation or if CMS determines that the ACO has taken or failed to take certain other actions. If our ACO REACH participation agreements were terminated, our business, financial condition, results of operations and future prospects would be negatively impacted.
Our executive officers, directors and holders of 5% or more of our common stock collectively beneficially own approximately 58% of the outstanding shares of our common stock as of December 31, 2022, and have substantial control over us, which may limit your ability to influence the outcome of important transactions.
Our executive officers, directors and each of our stockholders who own 5% or more of our outstanding common stock and their affiliates, in the aggregate, beneficially own approximately 58% of the outstanding shares of our common stock, as of December 31, 2022. As a result, these stockholders, if acting together, may continue to exercise significant influence over or control matters requiring approval by our stockholders, including the election and removal of directors and the approval of mergers, acquisitions or other extraordinary transactions. They may also have interests that conflict or differ from yours and may vote in a way with which you disagree and which may be adverse to your interests. This concentration of ownership may also have the effect of delaying, preventing or deterring a change in control of our company, and could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company or by discouraging others from making tender offers for our shares, which may ultimately affect the market price of our common stock.
Risks Related to our Intellectual Property, Information Technology, and Data Privacy
Protecting our intellectual property rights may be expensive and demand management’s attention, and failure to protect or enforce our intellectual property rights could harm our business and results of operations.
We rely on a combination of trade secret, copyright and trademark laws and confidentiality agreements, along with other contractual provisions to protect our proprietary technology and intellectual property rights, including the content and design of our brand and logo, our website, our platform, our software code and our data. We believe that our intellectual property rights are an essential asset of our business and critical to our success. We endeavor to maintain and protect our intellectual property. Despite such efforts, unauthorized parties may attempt to copy aspects of our intellectual property or obtain and use information that we regard as proprietary and, if we do not adequately protect our intellectual property, our brand and reputation could be harmed and competitors may be able to erode or negate our competitive advantage, which could materially harm our business, negatively affect our position in the marketplace, limit our ability to commercialize our technology and delay or render impossible our achievement of profitability. We cannot guarantee that confidentiality agreements we have put into place will not be breached, that we will have adequate remedies in the event of a breach, or that such agreements will adequately protect our intellectual property rights, internally developed technology and other information that we consider proprietary. Moreover, there can be no assurance that our proprietary technology will not be independently developed by competitors or that the intellectual property rights we own or license will provide competitive advantages or will not be challenged or circumvented by our competitors.
Obtaining, maintaining and defending our intellectual property rights can be expensive, and a failure to protect our intellectual property rights in a cost-effective and meaningful manner could have a material adverse effect on our ability to compete. In particular, we believe it is important to maintain, protect and enhance our brands. Accordingly, we pursue the registration of domain names and our trademarks and service marks in the United States. Third parties may challenge our use of our trademarks, oppose our trademark applications, or otherwise impede our efforts to protect our brand. In the event that we are unable to register our trademarks in certain jurisdictions, we could be forced to rebrand our products, which could slow our growth in those jurisdictions, harm our brand recognition, or could require us to devote resources to advertising and marketing new brands.
In addition, we may not always detect or protect against infringement of our intellectual property rights. Litigation may be necessary to enforce or defend our intellectual property rights or determine the validity and scope of proprietary rights claimed by others. Any litigation of this nature, regardless of outcome or merit, could result in substantial costs and diversion of management attention and technical resources, any of which could adversely affect our business and results of operations. Furthermore, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims, countersuits and adversarial proceedings that attack the validity and enforceability of our intellectual property rights.
If we fail to maintain, protect and enhance our intellectual property rights, our business, results of operations and financial condition may be harmed and the market price of our common stock could decline.
In the future, we may be subject to claims that we violated intellectual property rights, which can be costly to defend and could require us to pay significant damages and limit our ability to operate.
We cannot be certain that the operation of our business does not and will not infringe the intellectual property rights of others, or that third parties will not claim, legitimately or otherwise, that our products and services infringe their intellectual property rights. Our future success could be affected by claims of intellectual property infringement, whether or not such
claims have merit. There may be intellectual property rights held by others that cover important parts of our technologies, content, branding or business methods, and we may be unaware of such rights.
We may be subject to legal proceedings and claims in the ordinary course of our business, including claims of alleged infringement of intellectual property rights of third parties by us or our consumers in connection with their use of our products and services. These claims also could subject us to significant liability for damages and could force us to stop using technology, content, branding or business methods found to be in violation of another party’s intellectual property rights. We might be required or may opt to seek a license for rights to intellectual property rights owned by others, which may be unavailable on commercially reasonable terms, or at all. We could be required to pay significant royalties to license products, increasing our operating expenses. We may also be required to develop alternative non-infringing technology, content, branding or business methods, which could require significant effort and expense, be infeasible or make us less competitive in the market. Such disputes could also disrupt our business, which could adversely impact our consumer satisfaction and ability to attract consumers. Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. If we cannot license or develop technology, content, branding or business methods for any allegedly infringing aspect of our business, we may be unable to execute our business strategy. Furthermore, we may be obligated to indemnify other parties as a result of litigation. In the case of infringement or misappropriation caused by technology that we obtain from third parties, the indemnification or other protections we receive from such third parties, if any, may be insufficient to cover the liabilities we incur as a result of such infringement or misappropriation. Any of these outcomes could have knock-on effects and harm our business and operating results.
We may not be able to maintain the accuracy, integrity or availability of our data.
Our Bright HealthCare and NeueHealthConsumer Care businesses are highly dependent on the accuracy, integrity and availability of the data we generate and use to serve our consumers, Care Partners and other constituents, and to provide patient care. The volume of healthcare data generated, and the uses of data, including for electronic health records, are rapidly expanding. Our ability to implement new and innovative services, adequately price our products and services, provide timely and effective service to our consumers and clients and accurately report our results of operations depends on the accuracy and the integrity of the data in our information systems. If the data we rely upon to run our businesses is found to be inaccurate or unreliable, we could experience adverse effects on our ability to effectively conduct our business, including our ability to:
•accurately estimate revenue and medical costs;
•establish appropriate and timely pricing and accurately code our consumers’ RAF scores;
•prevent, detect and control fraud;
•prevent disputes with consumers and network providers;
•prevent errors in medical records;
•manage value-based care contracts;
•prevent regulatory sanctions, scrutiny or penalties; and
•reduce the incurrence of increased operating expenses.
We are in the process of implementing aOur new enterprise resource planning system and may experience issues with the transition or the new system may prove ineffective.
We are in the process of implementingIn 2022, we implemented a new enterprise resource planning (“ERP”) system, including our systemswhich includes a system for trackingrecording revenue and performing day-to-day business activities, such as accounting, procurement, project and risk management, and supply chain. Our ERP system will beis key to our ability to execute our strategy, provide important information to management, accurately maintain our books and records, prepare our financial statements in a timely and efficient manner and fulfill our contractual obligations. Our transition to this new ERP systembusinesses may disrupt our businessbe disrupted if the system does not work as planned or if we experience issues relating to the implementation.expected. Such disruptions could impact our ability to make payments timely or accurately to our service providers, and could also inhibit our ability to invoice and collect from our consumers.providers. This system may also discover or create data integrity problems or other technical issues, which could impact our business or financial results. In addition, periodic or prolonged disruption of our financial functions could result from our adoption of the new system, general use of the ERP system, regular updates or other external factors outside of our control. If unexpected issues arise with our ERP system or related systems or technology infrastructure, our business, results of operations and financial condition could be adversely affected. Additionally, if we do not effectively implement the ERP system as planned or the system does not operate as intended, the effectiveness
Our technology platform may not operate properly or as we expect it to operate. We must continue to develop and maintain our technology platform to grow our business.
Our ability to drive brand awareness and to increase our membership and client base in our Bright HealthCare and NeueHealthConsumer Care businesses will depend, in part, on our ability to develop and improve our healthcare platform, BiOS, which includes Panorama, our administrative platform supporting our employees, and Consumer360, our intelligent data hub, and DocSquad, our collaboration platform built to support consumers and providers.hub. Although we launched the initial version of BiOS in 2021, we are still in the process of fully developing it. We cannot assure you that it will be broadly adopted by the market, including our consumers, providers and third-party payors, or that any component of BiOS will be timely completed. This system may encounter unforeseen difficulties, such as performance problems, undetected defects or errors, data integrity problems or other technical glitches. Any of these issues could impact the user experience and cause us to
lose consumers, providers and payors, which could adversely impact our ability to execute on our growth strategy and adversely affect our business and results of operations.
Furthermore, recent trends toward greater consumer and client engagement in healthcare require new and enhanced technologies, including more sophisticated applications for mobile devices. Our information systems platforms require an ongoing commitment of significant resources to maintain, protect and enhance existing systems and develop new systems to keep pace with continuing changes in information processing technology, evolving systems and regulatory standards and changing consumer and client preferences.
In addition, we periodically consolidate, integrate, upgrade and expand our information technology systems’ capabilities as a result of technology initiatives and new regulations, changes in our system platforms and integration of new business acquisitions. Any failure to protect, consolidate and integrate our systems successfully could result in higher-than-expected costs and diversion of management’s time and energy, which could materially and adversely affect our results of operations, financial position and cash flows. In addition, if any such failure causes our platform to malfunction or be temporarily unavailable, our existing consumers could become dissatisfied and leave our platform to join a competitor, we may be unable to attract new consumers and our brand and reputation could be adversely impacted. As a result, our revenue may not grow as expected, which could have a material adverse effect on our business, financial condition and results of operations.
Security incidents or breaches, loss of data and other disruptions to our or our third-party service providers’ systems, information technology infrastructure, and networks could compromise sensitive or legally protected information related to our business or consumers, disrupt our business operations, and expose us to liability, which could adversely affect our business and our reputation.
In the ordinary course of our business, we create, receive, collect, maintain, store, use, process, transmit and disclose (“Process”) sensitive data, including PHI, and other types of personal data, personal information or personally identifiable information protected by various laws and regulations (collectively, “PII”). We also use third-party service providers to Process PHI, PII, sensitive information and other confidential information, including that of our consumers and service providers. We manage and maintain our technology platform and data using a combination of on-site systems, managed data center systems and cloud-based systems. Because of the sensitivity of the PHI, other PII and other confidential information we and our consumers and service providers 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 critically important to our operations and business strategy.
The operation, stability, integrity and availability of our technology platform and underlying network infrastructure are critical to the implementation of our business strategy, our financial results, our brand and reputation, our relationship with our Care Partners, consumers, network providers, broker network, third-party providers and other key constituents. Any system failure, including network, software or hardware failure, that causes an interruption in our network or a decrease in the responsiveness of our technology platform could result in dissatisfaction and a loss of trust with those constituents and adversely impact our business and reputation. Although we have redundancies in place that will permit us to respond, at least to some degree, to service outages, it could take significant time to have all systems fully operational and our third-party cloud providers are also subject to vulnerabilities.
Security incidents and breaches of our infrastructure or our third-party service providers’ infrastructure, including physical or electronic break-ins, computer viruses, ransomware, or other malware, employee or contractor error or malfeasance, can disrupt or shut down our systems, or allow unauthorized access to, or misuse, disclosure, modifications or loss of confidential information, PHI, and other PII. Such breaches could result in legal claims or proceedings, liability under laws and regulations that protect the privacy of PHI or other PII, such as HIPAA, the CCPA, and other state and federal laws and regulations. We may also be required to notify government authorities, individuals, the media, and other third parties in connection with a security incident or breach involving PHI or other PII, and could become subject to investigations, consent decrees, resolution agreements, monitoring agreements and similar agreements, and civil penalties. We require business associates and other outsourcing subcontractors who handle consumer and patient information to enter into business associate agreements, if applicable, and to agree to use reasonable efforts to safeguard PHI, other PII and other sensitive information. However, these measures may not adequately protect us from the risks associated with the Processing of such information.
In October 2021, one of our subsidiaries, True Health New Mexico, Inc. (“True Health” or “THNM”) experienced a data security incident. Upon learning of the incident, we promptly took steps to secure and contain the impacted True Health systems and supplemented our internal response teams with leading cyber security defense firms and other outside experts. These steps included taking preventative measures, including shutting down certain systems where necessary, as well as taking steps to supplement existing security monitoring, scanning and protective measures. True Health has restored its principal operations with no material day-to-day impact to its operations. Our investigation of the attack is substantially complete, and we are also working with law enforcement officials on their ongoing criminal investigation of this matter. True Health has notified appropriate governmental authorities and impacted parties and individuals, as required.
In addition, breaches of our security systems or those systems used by our third-party service providers or other cyber security incidents could also result in the misappropriation of confidential or proprietary information of ourselves, our consumers, our patients, or other third parties; viruses, spyware, ransomware or other malware being served from our network, platform or systems; the deletion or modification of content or the display of unauthorized content on our platform; the loss of access to critical data or systems through ransomware, destructive attacks or other means; and business delays, service or system disruptions such as denials of service attacks. For example, although none of our consumers’ PHI or PII was put at risk last year,in either case, in 2021, one of our third-party suppliers of certain services was recently subject to a ransomware attack, which caused delays in our claims payment processing to consumers. Further, in 2022 and 2023, unauthorized third parties gained access to the internal systems of two separate vendors of ours. We cannot guarantee that our recovery protocols and backup systems will be sufficient to prevent data loss now or in the future, or that our remedies against third-party service providers will be sufficient to protect us in the event such service provider suffers a security breach or similar incident.
If we are not or are perceived to not be able to prevent such security breaches or privacy violations or implement acceptable remedial measures, we may be unable to operate our platform, perform our services, provide consumer assistance services, maintain accurate patient medical records, conduct research and development activities, collect, process and prepare company financial information, or provide information about our current and future products. There can be no assurance that we will be able to prevent another security incident such as occurred with True Health or that any future incidents will not have a more significant impact on our operations. There is an increased risk that we may experience cyber security-related events such as COVID-19-themed phishing attacks and other security challenges as a result of our employees and service providers working remotely from non-corporate-managed networks during the ongoing pandemic and beyond. The True Health breach and any future such breaches and violations may result in litigation, fines and penalties, require us to comply with breach notification laws, require us to verify the accuracy of database contents, and expose us to material operating expenses related to investigation, remediation and resolution of claims, all of which could result in increased costs.
As a result, we could suffer a loss of business and we may suffer reputational harm, adverse impacts on consumer and investor confidence and negative impact to our results of operations.
We rely on various third-party service providers to support the operation of our business. If these service providers fail to meet their contractual obligations to us or comply with applicable laws or regulations, or if we are unable to renew our contracts with them, our business may be adversely affected.
We rely on a number of third parties to perform certain operational functions and services for us, as well as to support our technology platform and our general services and administration functions. The continued growth of our business will depend, in part, on the ability of these third parties to perform their contractual obligations and our ability to achieve and maintain successful business relationships with these third parties. These third parties include but are not limited to:
• Claims management vendors.vendors. Our claims management vendors adjudicate and pay claims and generally manage the billing of medical services provided to our consumers and to members of NeueHealth’sour Consumer Care business’ third-party payors and other clients. We rely on two principal suppliers for ACA claims management and MA claims management, and which supplier we use depends on a variety of factors, including geography, specialty and capability.management. Any disruption or loss of either of these suppliers, or failure by them to comply with their contractual obligations and/or to timely and accurately provide
claims information to us, could cause considerable strain on our business, result in delays in billings and collections, and negatively impact the experience of our consumers, our network providers, and our third-party payors and other clients. For the year ended December 31, 2021, we identified a material weakness related to claims pertaining to our IFP business, which were processed by a third-party service provider. Claims were processed inaccurately according to terms of provider contracts and/or related fee schedules, or did
not consistently go through claims re-pricing, where necessary, prior to payment. Although we are undertaking and evaluating several steps to remediate this material weakness, we cannot assure you that the measures we have taken to date, and actions we may take in the future, will be sufficient to remediate the control deficiency that led to such material weakness or that they will prevent or avoid a potential future material weakness.If we are unable to remediate this weakness or prevent the occurrence of similar control deficiencies in the future, it may have a material adverse impact on our financial conditions, results of operations or both.
• Utilization management vendors. Our utilization management vendors assist our business in managing healthcare costs by educating our health plan consumers and directing them to effective, efficient and personalized healthcare treatments based on evidence-based criteria or guidelines. If our utilization management vendors became less effective or were unable to provide their services to us, the costs of healthcare for our consumers may increase and our results of operations and financial condition may be adversely affected. Furthermore, our NeueHealthConsumer Care business also relies on the services of utilization management vendors when NeueHealthour Consumer Care business has been delegated responsibility for utilization management by its third-party payors and other clients.
• Pharmacy benefit management (“PBM”) service providers. Our PBM services suppliers provide us and certain of our consumers with services that include claims processing, specialty pharmacy services, mail pharmacy services, formulary services and coordination of benefits, retail network pharmacy network, participating pharmacy audits and reporting, all of which are crucial to our business.
•Cloud service providers and internet infrastructure service providers. We rely on cloud service providers and other service providers to host certain aspects of our IT infrastructure. We do not control the operation of our cloud service providers’ infrastructure or the facilities where their servers are located. The level of service provided by cloud service providers or managed data center providers could affect the availability or speed of our platform, which may also impact the usage of, and our consumers’, Care Partners’ and other constituents’ satisfaction with, our platform and could seriously harm our business and reputation. We also cannot guarantee that the contractual remedies we may have in place with these service providers would be sufficient to cover our losses.
• Software license providers. Our technology platform utilizes and integrates software licensed from third parties. However, it is possible that this software may not continue to be available on commercially reasonable terms, or at all. Any loss of the right to use any of this software could result in delays in the provisioning of our services until equivalent technology is either developed by us, or, if available, is identified, obtained and integrated. We also cannot guarantee that the contractual remedies we may have in place with such software providers will adequately protect us in the event such software is modified in a manner such that it can no longer be integrated with our own systems and networks, or if such software includes viruses, malware, other corruptants, or security vulnerabilities that impact our own systems and networks.
• Other vendors of core business functions. We rely on the systems of our third-party vendors to submit plan enrollment applications from potential consumers. If these systems were to fail or experience disruptions, we could experience significant failures and interruptions of our systems and the systems of our vendors, which could harm our business, operating results and financial condition. Because the ACA and Medicare annual enrollment periods areperiod is typically open for a limited time each year and areis critical to our overall annual consumer enrollment, if these failures or interruptions occurred during that period or during other open enrollment periods, the negative impact on us would be amplified and could result in harm to our business and results of operations.
While we have entered into agreements with these third-party service providers, they have no obligation to renew their agreements on similar terms or on terms that we find commercially reasonable, or at all. Identifying replacement third-party service providers, and negotiating agreements with them, requires significant time and resources. If any one of our material third-party service provider’s ability to perform their obligations was impaired, we may not be able to find an alternative supplier in a timely manner or on acceptable financial terms, and we may not be able to meet the full demands of our consumers and Care Partners within the time periods expected, or at all. While we believe we will be able to insource the responsibilities of many of our third-party service providers in the future, there can be no assurance that we will be able to do so in a manner that enables us to meet the demands of our consumers and Care Partners.
In addition, any shift in business strategy, corporate reorganization, or financial difficulties faced by our third-party providers, such as bankruptcy, may have negative effects on our ability to execute our business strategy. If our third-party
providers are unable to keep up with our growing needs for capacity, it could have an adverse effect on our business and reputation, cause us to lose consumers or harm our ability to attract new consumers to our health plan business, or to maintain and grow our other businesses. In the event we make any material changes to our third-party service providers
due to changes in our business needs or otherwise, such as mid-year changes or efforts to insource currently outsourced services, we may experience significant operational and service disruptions.
In addition, we may not be able to ensure that our third-party providers perform in accordance with agreed upon, regulated and expected standards, and we could be held accountable for their failure to do so which may subject us to fines or other sanctions or otherwise materially negatively impact our business and results of operations. See “— We are subject to inspections, reviews, audits and investigations under federal and state government programs and contracts. The results of such audits could adversely and negatively affect our business, including our results of operations, liquidity, financial condition and reputation.”
Any termination of our agreements with, or disruption in the performance of, one or more of these service providers could result in service disruption or unavailability, and harm our ability to continue to develop, maintain and improve our products. This could reduce our ability to attract Care Partners, limit enrollment in our health plan business, increase our medical costs, hinder expansion of our NeueHealthConsumer Care business, and result in an inability to meet our obligations or require us to seek alternative service providers on less favorable contract terms, any of which could adversely affect our business, brand, reputation or operating results.
The failureFurther, in connection with the transition to enter into value-based care agreementsour updated business model, we have become subject to an increased number of disputes with health plans or the renegotiation, non-renewal or terminationservice providers, and expect to continue to be subject to an increased number of such agreementsdisputes while we are in transition. We cannot guarantee we will resolve these disputes favorably, which could materially negatively impact our business, results of operations, financial condition and cash flows.
The success of our NeueHealth business is dependent on our ability to enter into value-based care agreements with third-party payors and with Bright HealthCare. Even if we are successful at entering into these agreements, such agreements may be subject to renegotiation, and the renegotiated terms may not be as favorable to us. Additionally, under certain of our existing value-based care agreements with third-party payors, the health plan is permitted to modify their benefit designs, their pricing parameters, and the specific terms and conditions governing the value-based arrangement from time to time during the terms of the agreements. If a health plan makes such changes during the term of our agreement, or if we enter into contracts with unfavorable economic terms, we could suffer losses with respect to such contract. In particular, if we enter into capitation or other value-based care contracts with unfavorable terms, or such contracts are amended to include unfavorable terms, we could experience significant losses. Depending on the health plan at issue and the amount of revenue associated with the health plan’s agreement, if the contract permits a renegotiation of the terms triggered by health plan changes, the renegotiated terms or termination could materially negatively impact our business, results of operations, financial condition and cash flows.
If we are required to maintain higher statutory capital levels or if we are subject to additional capital reserve requirements as we pursue new business opportunities, our balance sheet may be adversely affected.
Our IFP, MA and employer plans are operated through regulated insurance subsidiaries in various states. These subsidiaries are subject to state regulations that, among other things, require us to maintain minimum levels of statutory capital, or net worth, as defined by each applicable state. Such states may raise or lower the statutory capital level requirements at will. Our history of losses has generally meant that we are infusing more capital into our largest states. Certain other states have adopted risk-based capital requirements based on guidelines adopted by the National Association of Insurance Commissioners, which tend to be, although are not necessarily, higher than existing statutory capital requirements. The state departments of insurance, or applicable bodies regulating insurance, in any state could require our regulated insurance subsidiaries to maintain minimum levels of statutory capital in excess of amounts required under the applicable state laws if they determine that maintaining additional statutory capital is in the best interests of our consumers. In addition, as we continue to expand our plan offerings and expand into new states, grow our membership, and pursue new business opportunities, we may be required to maintain higher levels of statutory capital. If higher level of statutory capital are required, this could reduce our available funds, which could harm our ability to execute our business strategy and invest in our growth opportunities. In addition, laws in many states require increasing degrees of regulatory oversight and intervention if a company’s risk-based capital declines below certain thresholds. If our levels of statutory capital were to decline below these thresholds, we may be subject to heightened supervision, examination, rehabilitation or liquidation.
NeueHealth may be subject to state regulations that, among other things, require us to maintain minimum capital reserves, as defined by each applicable state in connection with the assumption of financial risk for the performance of for consumers attributedRisks Related to our NeueHealth RBOs.
If we fail to achieve robust brand recognition or are unable to maintain or enhance our reputation, our business, financial condition and results of operations may be adversely affected.
Developing strong brand recognition and maintaining and enhancing our reputation in both our Bright HealthCare and NeueHealth businesses is critical to maintaining our existing relationships and to our ability to attract new consumers, Care Partners and other constituents to our platform. Promoting our brand requires substantial investments and we anticipate that, as our market remains increasingly competitive, our marketing initiatives will become increasingly expensive and challenging to successfully implement. Attempts to grow our brand and investments in marketing our platform and plans may not be successful or yield increased revenue as we expect, and even if these activities result in increased revenue, the increased revenue may not offset the expenses we incur to achieve such results. In addition, our current marketing efforts to date have been limited to certain geographic regions and markets where our business operates to ensure an efficient use of resources. If we continue to grow nationally, we will need to spend additional resources to build strong national brand recognition and there can be no assurance that our efforts will be effective. If we do not successfully develop widespread brand recognition and maintain and enhance our reputation, our business may not grow and we could lose our existing relationships, which could harm our business, financial condition and results of operations.
If we fail to offer high-quality customer support in our business, our reputation and our ability to maintain or expand membership or attract Care Partners and third-party payors could suffer, which could adversely affect our results of operations.
Providing high-quality operational support and service to our consumers, Care Partners and third-party payors is an important part of our business. Our ability to attract and retain consumers is largely dependent upon our ability to offer an easy-to-navigate membership enrollment process as well as upon our ability to provide cost effective, quality customer service, including effective call center operations and claims processing support, that meets or exceeds our consumers’ expectations. Certain user support operations are supported by third-party vendors. If we or our vendors fail to provide services that meet our customers’ expectations, we may have difficulty retaining or growing our membership as well as Care Partner and third-party payor relationships, which could adversely affect our business, financial condition and results of operations.
We expect that the importance of offering high-quality support to our consumers will increase as we expand our business, grow markets, add new products, and pursue new consumers, Care Partners, and third-party payors. This has put, and will continue to put, pressure on our ability to maintain high-quality customer support, or a market perception that we do not maintain high-quality user support, could harm our reputation and negatively impact our ability to grow membership, build Care Partner relationships, and attract third-party payors, which could adversely affect our business, results of operations, and financial condition. Additionally, as our number of consumers, Care Partners and third-party payors grows, we will need to hire additional support personnel to provide efficient platform support at scale. If we are unable to provide such support, our business, results of operations, financial condition and reputation could be harmed.
Reductions in the quality ratings of our MA health plans could have a materially negative impact on our business, results of operations, financial condition and cash flows.
Many of the government healthcare coverage programs in which we participate are subject to the prior satisfaction of certain conditions or performance standards or benchmarks. For example, a portion of each Medicare Advantage plan’s reimbursement is tied to the plan’s Star Rating. A plan’s Star Rating affects its image in the market, and plans that perform well are able to offer enhanced benefits and market more effectively. The Star Rating system considers various measures adopted by CMS, including, among others, quality of care, preventive services, chronic illness management and consumer satisfaction. Only plans with a rating of four (4.0) stars or higher qualify for bonus payments. Medicare Advantage plans with Star Ratings of five (5.0) stars are eligible for year-round open enrollment; conversely, plans with lower Star Ratings have more restricted times for enrollment of beneficiaries. Medicare Advantage plans with Star Ratings of less than three (3.0) stars for three consecutive years are denoted as “low performing” plans on the CMS website and in the CMS “Medicare and You” handbook. In addition, in 2019, CMS had its authority reinstated to terminate Medicare Advantage
contracts for plans rated below three (3.0) stars for three consecutive years. As a result, Medicare Advantage plans that achieve higher Star Ratings may have a competitive advantage over plans with lower Star Ratings. To date, we have not been able to achieve a four (4.0) Star Rating on our MA plans, which are therefore not currently eligible for quality bonuses. Furthermore, the Star Rating system is subject to change annually by CMS, which may make it more difficult to achieve and maintain three (3.0) Star Ratings or greater in the future. We cannot assure you that we will be successful in maintaining or improving our Star Ratings in the future. In addition, audits of our performance for past or future periods may result in downgrades to our Star Ratings. Our health insurance subsidiaries’ operating results, premium revenue, and benefit offerings will likely depend significantly on their Star Ratings, and there can be no assurances that we will be successful in achieving and maintaining favorable Star Ratings. If we do not achieve an acceptable level of Star Ratings, our plans will not be eligible for quality bonuses in the future and we may experience a negative impact on our revenue and the benefits that our plans can offer, which could materially and adversely affect the marketability of our plans, our membership levels, results of operations, financial position and cash flows. Any changes in standards or care delivery models that apply to government healthcare programs, including Medicare, or our inability to maintain or improve our quality scores and Star Ratings to meet government performance requirements or to match the performance of our competitors could result in limitations to our participation in or exclusion from these or other government programs, which in turn could materially negatively impact our results of operations, financial position and cash flows.
Similarly, healthcare accreditation agencies such as the National Committee for Quality Assurance (“NCQA”), evaluate health plans based on various criteria, including effectiveness of care and consumer satisfaction. Health insurers seeking accreditation from NCQA must pass a rigorous, comprehensive review, and must annually report their performance. If we fail to achieve and maintain accreditation from agencies, such as NCQA, we could lose the ability to offer our health plans on Health Insurance Marketplaces, or in certain jurisdictions, which could materially and adversely affect our results of operations, financial position, and cash flows.
We may be unsuccessful in identifying and acquiring suitable acquisition candidates or integrating acquired companies, which could impede our growth and ability to remain competitive.
Over the course of the last several years, we have acquired several businesses. Maintaining acceptable growth may rely in part on our ability to successfully acquire and integrate companies that complement and accelerate the execution of our strategies in new and existing markets. However, we may not successfully identify suitable acquisition candidates or we may have difficulty in identifying prospective acquisition candidates. In addition, we may not be able to successfully complete an acquisition after identifying a candidate. We sometimes compete for acquisition and expansion opportunities with entities that have greater financial resources or are otherwise willing to pay more than us. We face higher risks if our acquisition strategy requires us to seek additional financing, as our ability to obtain additional financing on satisfactory terms and conditions will depend upon several factors, many of which are beyond our control. Additionally, in recent years, the number of special purpose acquisition companies (“SPACs”) that have been formed has increased substantially. Many potential targets for SPACs have already entered into an initial business combination, and there are still SPACs seeking targets for their initial business combination, as well as many SPACs currently in registration with the SEC. As a result, at times, fewer attractive acquisition targets may be available, and may require more time, more effort and more resources for us to identify a suitable target and to consummate an acquisition.
Even after the successful acquisition of a business, we may be unable to successfully integrate the acquired business with our existing business and operations or the business may not perform in accordance with the projections that informed the purchase price for such acquisition. The integration of an acquired business involves a number of factors that may negatively affect our operations, including, but not limited to:
• distraction of management or lack of leadership within the acquired business to succeed retiring leaders;
• significant costs and difficulties, including implementing or remediating controls, procedures, and policies at the acquired company; integrating the acquired company’s accounting, human resource and other administrative systems; integrating and/or remediating information security systems; coordinating product and sales and marketing functions; transitioning operations, consumers, clients, and other users onto our existing technology platforms; and retaining of key personnel;
• tax and accounting issues, including the creation of significant future contingent liabilities relating to earn-outs for acquisitions or other financial liabilities; and
• unanticipated problems or legal liabilities, or lack of adequate compliance or regulatory policies, processes, technologies and resources.
Although we conduct due diligence with respect to the business and operations of each of the companies we acquire, we may not have identified all material facts concerning these companies. Unanticipated events or liabilities relating to these companies could have a material adverse effect on our results of operations, financial condition and cash flow. Furthermore, once we have integrated an acquired company, it may not achieve levels of revenue, profitability, or productivity comparable to our existing business, or otherwise perform as expected, and we cannot assure you that past or future acquisitions will be accretive to earnings or otherwise meet our operational or strategic expectations. Our failure to successfully acquire and integrate businesses may cause us to fail to realize the anticipated benefits of such acquisitions or investments, cause us to incur unanticipated liabilities and/or harm our business generally, which may have an adverse effect on our revenue, results of operations, financial condition and cash flow.
Medical liability claims made against us in the future could cause us to incur significant expenses and pay significant damages if not covered by insurance.
The risk of medical liability claims against our NeueHealth managed and affiliated medical groups, as well as against the treating physicians and other medical practitioners, is an inherent part of our business. While we endeavor to carry appropriate levels of insurance covering medical malpractice claims, successful medical liability claims might exceed our insurance coverage or the coverage held by our provider partners, which could make us secondarily liable for such incidents. Furthermore, professional liability insurance, including medical malpractice insurance, is expensive and insurance premiums may increase significantly in the future, especially as we continue to expand our product offerings. As a result, adequate professional liability insurance may not be available to our physicians and other medical practitioners or to us in the future at acceptable costs or at all.
Additionally, our health plan business may be targeted for medical liability lawsuits based on vicarious liability or other legal theories by which plaintiffs seek to hold our health plans liable for medical results associated with care rendered by our Care Partners or other network providers.
Any claims made against us that are not fully covered by insurance could be costly to defend against, result in substantial damage awards against us and divert the attention of our management and our partners from our operations, which could have a material adverse effect on our business, reputation, financial condition and results of operations. Additionally, any claims made against us, whether meritorious or not, may increase the cost of our insurance premiums which could adversely impact our business.
Protecting our intellectual property rights may be expensive and demand management’s attention, and failure to protect or enforce our intellectual property rights could harm our business and results of operations.
We rely on a combination of trade secret, copyright and trademark laws and confidentiality agreements, along with other contractual provisions to protect our proprietary technology and intellectual property rights, including the content and design of our brand and logo, our website, our platform, our software code and our data. We believe that our intellectual property rights are an essential asset of our business and critical to our success. We endeavor to maintain and protect our intellectual property. Despite such efforts, unauthorized parties may attempt to copy aspects of our intellectual property or obtain and use information that we regard as proprietary and, if we do not adequately protect our intellectual property, our brand and reputation could be harmed and competitors may be able to erode or negate our competitive advantage, which could materially harm our business, negatively affect our position in the marketplace, limit our ability to commercialize our technology and delay or render impossible our achievement of profitability. We cannot guarantee that confidentiality agreements we have put into place will not be breached, that we will have adequate remedies in the event of a breach, or that such agreements will adequately protect our intellectual property rights, internally developed technology and other information that we consider proprietary. Moreover, there can be no assurance that our proprietary technology will not be independently developed by competitors or that the intellectual property rights we own or license will provide competitive advantages or will not be challenged or circumvented by our competitors.
Obtaining, maintaining and defending our intellectual property rights can be expensive, and a failure to protect our intellectual property rights in a cost-effective and meaningful manner could have a material adverse effect on our ability to compete. In particular, we believe it is important to maintain, protect and enhance our brands. Accordingly, we pursue the registration of domain names and our trademarks and service marks in the United States. Third parties may challenge our use of our trademarks, oppose our trademark applications, or otherwise impede our efforts to protect our brand. In the event
that we are unable to register our trademarks in certain jurisdictions, we could be forced to rebrand our products, which could slow our growth in those jurisdictions, harm our brand recognition, or could require us to devote resources to advertising and marketing new brands.
In addition, we may not always detect or protect against infringement of our intellectual property rights. Litigation may be necessary to enforce or defend our intellectual property rights or determine the validity and scope of proprietary rights claimed by others. Any litigation of this nature, regardless of outcome or merit, could result in substantial costs and diversion of management attention and technical resources, any of which could adversely affect our business and results of operations. Furthermore, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims, countersuits and adversarial proceedings that attack the validity and enforceability of our intellectual property rights.
If we fail to maintain, protect and enhance our intellectual property rights, our business, results of operations and financial condition may be harmed and the market price of our common stock could decline.
In the future, we may be subject to claims that we violated intellectual property rights, which can be costly to defend and could require us to pay significant damages and limit our ability to operate.
We cannot be certain that the operation of our business does not and will not infringe the intellectual property rights of others, or that third parties will not claim, legitimately or otherwise, that our products and services infringe their intellectual property rights. Our future success could be affected by claims of intellectual property infringement, whether or not such claims have merit. There may be intellectual property rights held by others that cover important parts of our technologies, content, branding or business methods, and we may be unaware of such rights.
We may be subject to legal proceedings and claims in the ordinary course of our business, including claims of alleged infringement of intellectual property rights of third parties by us or our consumers in connection with their use of our products and services. These claims also could subject us to significant liability for damages and could force us to stop using technology, content, branding or business methods found to be in violation of another party’s intellectual property rights. We might be required or may opt to seek a license for rights to intellectual property rights owned by others, which may be unavailable on commercially reasonable terms, or at all. We could be required to pay significant royalties to license products, increasing our operating expenses. We may also be required to develop alternative non-infringing technology, content, branding or business methods, which could require significant effort and expense, be infeasible or make us less competitive in the market. Such disputes could also disrupt our business, which could adversely impact our consumer satisfaction and ability to attract consumers. Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. If we cannot license or develop technology, content, branding or business methods for any allegedly infringing aspect of our business, we may be unable to execute our business strategy. Furthermore, we may be obligated to indemnify other parties as a result of litigation. In the case of infringement or misappropriation caused by technology that we obtain from third parties, the indemnification or other protections we receive from such third parties, if any, may be insufficient to cover the liabilities we incur as a result of such infringement or misappropriation. Any of these outcomes could have knock-on effects and harm our business and operating results.
We rely on our talent, and the loss of any members of senior management or other key employees or an inability to hire, retain, motivate or develop other highly skilled employees could harm our business or impact our ability to grow effectively.
We are led by a seasoned management team with decades of healthcare and public company operating experience. The continued growth and success of our business relies, in part, on the continued services of our senior management team and other key employees. Competition for talent is intense in our industry. While we use various measures to attract and retain talent, including fair and reasonable market-based compensation plans and an equity incentive program for key executive officers and other employees, these measures may not be adequate to hire, retain, motivate and develop the personnel we require to successfully scale our business and to operate our business effectively. Furthermore, members of our senior management team are difficult to replace. In particular, the loss of the employment contributions of our Chief Executive Officer, Mr. Mikan, or other key members of the executive management team, could significantly delay or prevent the achievement of our strategic objectives.
Global economic conditions and economic uncertainty or downturns, particularly as it impacts particular industries, could materially and adversely affect our business and operating results.
In recent years, our business has been and may continue to be affected by various factors and events that are beyond our control. The United States has experienced economic downturns and market volatility, and domestic and worldwide economic conditions remain uncertain. For example, Russia’s recent attack on Ukraine has had significant impacts on a wide variety of financial markets and supply chains around the world. It may be extremely difficult for us, our Care Partners and our other key constituents to accurately plan future business activities and execute on our business objectives as a result of economic uncertainty and other macroeconomic factors. In addition, global economic conditions and economic uncertainty may cause our consumers to slow spending on our health plans or Care Partners to cease partnering with our business, which could ultimately harm our business. Furthermore, during uncertain economic times our consumers may face challenges or delays in obtaining access to funds used to make monthly premium payments, which could result in an impairment of their ability to make timely payments to us. In addition, our business relies on third parties, and we are susceptible to risks related to the potential financial instability of such third parties, including vendors that provide services to us or to whom we delegate certain functions. If these third-party vendors cease to do business as a result of broader economic conditions or if they become unable to provide us with the level of service we expect, we may not be able to find an alternative service provider in a timely manner, or on acceptable financial terms, which could impact our ability to meet the expectations and needs of our consumers.
We cannot predict the timing, severity or duration of any economic slowdown or the strength or speed of any subsequent recovery generally. If the conditions in the general economy and the markets in which we operate worsen from present levels, our business, financial condition and results of operations could be materially adversely affected.
We compete for physicians and other healthcare personnel for our NeueHealth business, and shortages of qualified personnel or other factors could increase our labor costs and adversely affect our revenue, profitability and cash flows.
Our NeueHealth business is dependent on the efforts, abilities and experience of employed and contracted physicians, nurse practitioners, registered nurses and other medical professionals. We compete with other healthcare providers, hospitals, clinics, networks and other facilities, in attracting physicians, nurses and medical staff required to support our business. Recruiting and retaining qualified management and support personnel responsible for the daily operations of our business is vital to the continued growth and success of our business, as well as our profitability. In many markets in which we operate, the lack of availability of clinical personnel, such as nurses and mental health professionals, has become a significant operating issue facing our business and all healthcare providers exacerbated by increased worker attrition as a result of the ongoing COVID-19 pandemic. As a result of this competition, we may need to continue to enhance wages and benefits to recruit and retain qualified personnel or to contract for more expensive temporary personnel. We may not be able to attract new physicians and clinical personnel to replace the services of terminating personnel or to service our growing membership.
We may not be able to raise rates or to grow our business to offset increased labor costs. Because a significant percentage of our revenue consists of fixed, prospective payments, our ability to pass along increased labor costs is limited.
We have employment contracts with physicians and other health professionals in Florida and anticipate growing into other geographies. 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. California, Florida, and other states’ laws, may prohibit us from enforcing our non-competition covenants with our professional staff particularly in rural locations or in specialty practice areas. Some states are reluctant to strictly enforce non-compete agreements and restrictive covenants applicable to physicians and other healthcare professionals. 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. 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 patients and other health professionals.
Our health plan products are subject to risk adjustment programs, which if not managed properly can result in risk adjustment transfers that do not reflect our true risk profile, which could adversely impact our financial results and cash flows.
The IFP and MA markets we serve employ risk adjustment programs that impact the revenue we recognize for our enrolled membership. These risk adjustment programs are designed to compensate us for the level of risk we take in providing healthcare services to our overall consumer population. In order to be reimbursed by government payors at a level commensurate with our consumer population risk, we must ensure that our Care Partners are identifying and properly inputting data to code all chronic and severe diagnoses to create an accurate health profile for each consumer. If our Care Partners do not accurately record this consumer data, including our consumers’ “risk scores”, we may not be able to accurately estimate our revenue and medical costs. If we fail to obtain accurate claims or other related data in a timely manner, we may not be able obtain accurate risk scores during the time period in which we expected to, or at all. See “– We rely on various third-party service providers to support the operation of our business. If these service providers fail to meet their contractual obligations to us or comply with applicable laws or regulations, or if we are unable to renew our contracts with them, our business may be adversely affected.” If the data on our consumer population overstates the health risk of our consumer population, we may be obligated to return funds we have received to government payors. Conversely, if we understate the health risk of our consumer population, we will not receive funds from government payors that we would otherwise be entitled to receive. As a result of the variability of certain factors that go into the development of the risk adjustment we recognize, such as risk scores and other market-level factors where applicable, the actual amount of revenue could be materially more or less than our estimates. Consequently, our estimate of our health plans’ risk scores for any period, and any resulting change in our accrual of revenue related thereto, could have a material adverse effect on our results of operations, financial condition, and cash flows. The data provided to CMS to determine risk scores is subject to audit by CMS even several years after the annual settlements occur. If the risk adjustment data we submit is found to incorrectly overstate the health risk of our consumers, we may be required to refund monies previously received by us and/or be subject to penalties or sanctions, including potential liability under the FCA, which could be significant and would reduce our revenue in the year that repayment or settlement is required. We have had in the past to take reserves against our premium revenue because of our difficulty to accurately estimate risk adjustment in our business. Furthermore, if the data we provide to CMS incorrectly understates or overstates the health risk of our consumers, we might be underpaid or overpaid for the care that we must provide to our consumers, which could have a negative impact on our results of operations and financial condition.
It is possible that claims associated with consumers with higher RAF scores could be subject to more scrutiny in such an audit and that the findings of an audit could result in future adjustments to premiums or in adjustments to the payments made by CMS to us. CMS may also assess penalties for inaccurate or unsupportable RAF scores provided by us or our Care Partners. In addition, we could be liable for penalties to the government under the FCA that range from $5,500 to $11,000 (adjusted for inflation) for each false claim, plus up to three times the amount of damages caused by each false claim, which can be as much as the amounts received directly or indirectly from the government for each such false claim. On December 13, 2021, the Department of Justice announced a final rule regarding adjustments to FCA penalties, under which the per claim range increases to a range from $11,803 to $23,607 per claim, so long as the underlying conduct occurred after November 2, 2015. Because CMS conducts its audits at random, there can be no assurance that we 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 to the risk adjustment mechanism, including changes that result from enforcement or audit actions, could materially affect our reimbursement.
Our business may require additional capital, and this capital might not be available on acceptable terms, if at all. If capital is not available to us, our business and financial condition may be impaired.
We have invested heavily in the growth of our business. We intend to make additional investments to support our business growth and may require additional capital to respond to business needs, requirements and opportunities, including to develop and enhance new and existing products and services, enter new markets, further develop our infrastructure, and comply with any statutory capital and risk-based capital requirements as we continue to grow our enrollment of plan consumers. In addition, we intend to continue making strategic acquisitions as the opportunities arise, some of which may be material to our operations. Accordingly, we may make future commitments of capital resources and may need to engage in additional equity or debt financings to secure additional funds. Whether we issue debt or equity securities will, in part, depend on contractual, legal and other restrictions that may limit our ability to raise additional capital. For example, the Credit Agreement contains, and any agreements governing our future indebtedness could contain, restrictive covenants relating to our financial and operational matters, including covenants that limit the amount of debt we may incur. In addition, we may not be able to obtain additional or sufficient financing on terms favorable to us, if at all. If we are unable
to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly limited or impaired.
Our executive officers, directors and holders of 5% or more of our common stock collectively beneficially own approximately 59% of the outstanding shares of our common stock as of December 31, 2021, and have substantial control over us, which may limit your ability to influence the outcome of important transactions.
Our executive officers, directors and each of our stockholders who own 5% or more of our outstanding common stock and their affiliates, in the aggregate, beneficially own approximately 59% of the outstanding shares of our common stock, as of December 31, 2021. As a result, these stockholders, if acting together, may continue to exercise significant influence over or control matters requiring approval by our stockholders, including the election and removal of directors and the approval of mergers, acquisitions or other extraordinary transactions. They may also have interests that conflict or differ from yours and may vote in a way with which you disagree and which may be adverse to your interests. This concentration of ownership may also have the effect of delaying, preventing or deterring a change in control of our company, and could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company or by discouraging others from making tender offers for our shares, which may ultimately affect the market price of our common stock.Indebtedness
Our ability to incur a substantial level of indebtedness may reduce our financial flexibility, affect our ability to operate our business, and divert cash flow from operations for debt service.
As of March 1, 2022,2023, we had$46.1had $46.1 million of of outstanding letterssletters of credit under the Credit Agreement and $303.9 million ofno remaining availability thereunder. We may incur substantial indebtedness under the Credit Agreement or otherwise in the future and, if we do so, the risks related to our level of indebtedness could increase. Our borrowings, current and future, will require interest payments and will need to be repaid or refinanced, which could require us to divert funds identified for other purposes to debt service and could create additional cash demands or impair our liquidity position and add financial risk. Diverting funds identified for other purposes for debt service may adversely affect our business and growth prospects. If we cannot generate sufficient cash flow from operations to service our debt, we may need to refinance our debt, dispose of assets, reduce or delay expenditures, or issue equity to obtain necessary funds. We do not know whether we would be able to take any of these actions on a timely basis, on terms satisfactory to us or at all.
Our level of indebtedness could affect our operations in several ways, including but not limited to the following:
•it may be difficult for us to satisfy our obligations with respect to our debt;
•the covenants contained in the Credit Agreement or in future agreements governing our outstanding indebtedness may limit our ability to borrow additional funds, refinance debt, dispose of assets, and make certain investments;
•our debt covenants may also affect our flexibility in planning for, and reacting to, changes in the economy and in our industry;
•a high level of debt would increase our vulnerability to general adverse economic and industry conditions;
•a high level of debt may place us at a competitive disadvantage as compared to our competitors that are less leveraged and therefore may be able to take advantage of opportunities that our level of indebtedness would prevent us from pursuing; and
•a high level of debt may impair our ability to obtain additional financing in the future for working capital, capital expenditures, debt service requirements, acquisitions, or other purposes.
In addition, borrowings under the Credit Agreement bear interest at variable rates based on prevailing conditions in the financial markets, and changes to such variable market rates may affect both the amount of cash we must pay for interest as well as our reported interest expense. Assuming our $350 million credit facility were to be fully drawn, a 100 basis point increase to the applicable variable rate of interest would increase the amount of interest expense by $3.5 million per annum.
If we are unable to generate sufficient cash flows to pay the interest expense on our debt, future working capital, borrowings, or equity financing may not be available from which to pay or refinance such debt. Further, the publication of LIBOR is expected to be discontinued in mid-2023. We are currently assessing the impact that the discontinuation of LIBOR may have on us. It is possible that the transition from LIBOR will result in interest rates and/or payments that result in higher borrowing costs over time than would have been our obligations if LIBOR continued to be available in its current form. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital resources — Indebtedness.”
The Credit Agreement contains restrictions on our ability to operate our business and to pursue our business strategies, and our failure to comply with, cure breaches of, or obtain waivers of covenants could result in an acceleration of the maturity date on our indebtedness.
The Credit Agreement contains, and agreements governing future debt issuances may contain, covenants that restrict our ability to finance future operations or capital needs, to respond to changing business and economic conditions, or to engage in other transactions or business activities that may be important to our growth strategy or otherwise important to us. The Credit Agreement restricts, subject to certain exceptions, among other things, our ability and the ability of our subsidiaries to:
•incur additional indebtedness and guarantee indebtedness;
•create or incur liens;
•make investments and loans;
•engage in mergers, consolidations, or sales of all or substantially all of our assets;
•pay dividends or make other distributions, in respect of, or repurchase or redeem, capital stock;
•prepay, redeem, or repurchase certain debt;
•engage in certain transactions with affiliates;
•sell or otherwise dispose of assets; and
•amend, modify, waive, or supplement certain subordinated indebtedness to the extent such amendments would be materially adverse to lenders.
In addition, any future financing arrangements entered into by us or any of our subsidiaries may contain similar restrictions. As a result of these covenants and restrictions, through our subsidiaries we are and will be limited in 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. In addition, we are required to maintain specified financial ratios and satisfy other financial condition tests. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Indebtedness.” The terms of any future indebtedness we or our subsidiaries 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.
Our or our subsidiaries’ failure to comply with the restrictive covenants described above as well as others contained in our or our subsidiaries’ future debt instruments from time to time could result in an event of default, which, if not cured or waived, could require us to repay these borrowings before their maturity. As of September 30, 2022, we were not in compliance with the total debt to capitalization ratio covenant of our Credit Agreement. On November 8, 2022, we executed an amendment to the Credit Agreement pursuant to which, among other things, it was agreed that we would not be required to testour debt to capitalization ratio covenant during and including the four quarter test period ending September 30, 2022 through and including the four quarter test period ending September 30, 2023.
Further, as noted earlier, we breached the minimum liquidity covenant of our Credit Agreement in the first quarter of fiscal year 2023. We entered into a limited waiver and consent (the “Waiver”) under our Credit Agreement, which, among other things, provides for a temporary waiver for the period from January 25, 2023 through April 30, 2023 of compliance with the minimum liquidity covenant set forth in Section 11.12.2 of the Credit Agreement. During the Waiver Period, the Company will be subject to a minimum liquidity covenant of not less than $75 million until March 3, 2023, and not less than $85 million thereafter until the end of the Waiver Period. In addition, during the Waiver Period, the Company will not have access to certain negative covenant baskets and will be subject to additional cash-flow and cash balance reporting
requirements. Any non-compliance with the covenants under the Credit Agreement or the Waiver may result in the obligations under the Credit Agreement being accelerated. Based on our projected cash flows and absent any other action, we will require additional liquidity to meet our obligations as they come due in the 12 months following the date the consolidated financial statements are issued. These conditions raise substantial doubt about our ability to continue as a going concern. In addition, as we previously disclosed, during the waiver period referred to above, we will not have access to certain negative covenant baskets and will be subject to additional cash-flow and cash balance reporting requirements, which limits our ability to execute on our updated strategy.
If we are forced to refinance theseour borrowings on less favorable terms or cannot refinance these borrowings,them, our results of operations and financial condition could be adversely affected. If we were unable to repay or otherwise refinance these borrowings, the lenders under the Credit Agreement could proceed against the collateral granted to them to secure such indebtedness, which could force us into bankruptcy or liquidation. Any acceleration of amounts due under the Credit Agreement, or the exercise by the applicable lenders or agent of their rights under the related security documents, would likely have a material adverse effect on our business.
Risks Related to Legal Proceedings and Governmental Regulations
Modifications or changes to the U.S. health insurance markets, including as a result of legislation, could adversely affect our business and operating results.
Our business operates in the evolving public and private sectors of the U.S. health insurance system, and our future financial performance will depend in part on growth in the market for private health insurance, as well as our ability to adapt to regulatory developments and the development of new state and federal government programs. Such modifications and changes could reduce demand and adversely affect our business. For example, some elected officials have recently introduced proposals to expand the Medicare program, which range from the creation of a new single-payor national health insurance program for all residents to less overarching proposals, including lowering the age of eligibility for the Medicare program, expanding Medicare to a larger population and creating a new public health insurance option that could compete with private insurers. In addition, in some states, such as New York and California, legislators have regularly introduced proposals to establish a single-payor or government-run healthcare system at the state level. Federally, there have been numerous political and legal efforts to modify or repeal the ACA, its implementation or its interpretation, as well as court challenges to the constitutionality of the law. On June 17, 2021, the U.S. Supreme Court determined that the plaintiffs in the latest constitutional challenge to the ACA lacked standing, but did not specifically rule on the constitutionality of the individual mandate or the severability issue presented by the case. The Biden administration and Congress may propose
changes to elements of the ACA. There is uncertainty regarding whether, when, and what other health reform measures will be adopted, the timing and implementation of alternative provisions, and the impact of alternative provisions on providers, plans, and other healthcare industry participants. Other health reform initiatives and proposals, such as the limitations and prohibitions on surprise billing enacted under the Appropriations Act and price transparency requirements, may impact prices, our competitive position and our relationships with patients, insurers, and ancillary providers (such as anesthesiologists, radiologists, and pathologists). Other industry participants, such as private payors and large employer groups and their affiliates, may also introduce financial or delivery system reforms. The U.S. Department of Health and Human Resources recentlyServices proposed regulatory changes for 2023 and beyond whereby individual market health plan products would need to meet standardized benefit design requirements and heightened network adequacy standards that may impact how our products operate in existing service areas. These changes may impact our ability to ensure Care Partner networks meet evolving adequacy and availability standards. Until the details of these evolving requirements and any additional future reform standards are clarified, we are unable to predict the nature and success of such health reform initiatives, which may have an adverse impact on our business. We continue to evaluate the effect that such proposals and the ACA and its possible modifications, repeal and replacement haswould have on our business.
As the regulatory and legislative environments within which we operate are evolving, we may not be able to ensure timely compliance with such changes due to limited resources. Furthermore, we face challenges prioritizing the allocation of resources between implementing systems responsive to new legislative or regulatory requirements, focusing on growth-related operations and implementing adequate management systems and controls. If our operations are found to be in violation of any of the federal and state regulations that apply to us, we may be subject to penalties that curtail our operations, which could adversely affect our ability to operate our business and our results of operations.
The ongoing challenges and changes to the ACA and related laws and regulations could adversely affect our business, cash flows, financial condition and results of operations.
Approximately 62% of our revenue for the year ended December 31, 2021 was derived from sales of health plans subject to regulation under the ACA. Consequently, changes to, or repeal of, portions or the entirety of the ACA, as well as judicial interpretations in response to legal and other constitutional challenges, could materially and adversely affect our business and financial position, results of operations, or cash flows. Even if the ACA is not amended or repealed, elected and appointed officials could continue to propose changes impacting the ACA, which could materially and adversely affect our business, results of operations, and financial conditions.
There have been significant efforts to repeal, or limit implementation of, certain provisions of the ACA. Such initiatives include the elimination of the financial penalty associated with not complying with the ACA’s individual mandate effective in 2019, as well as easing of the regulatory restrictions placed on short-term limited duration insurance plans, some or all of which may provide fewer benefits than the traditional ACA-mandated insurance benefits. The Biden administration and Congress have implemented changes to the ACA and may advance additional changes to the ACA in the future. We are unable to predict how these events will ultimately be resolved and what the potential impact may be on our business, products, services and relationships with our consumers and Care Partners. Further regulations and modifications to the ACA at the federal or state level, could have significant effects on our business and future operations, some of which may adversely affect our results of operations and financial condition.
We rely on the Health Insurance Marketplaces, which were established by the ACA, to promote our IFP products, and to increase membership. Any perceived uncertainty and possible changes in the Health Insurance Marketplaces could result in reduced participation from individuals seeking insurance coverage and possible non-renewal of existing policies and could materially and adversely impact our business, financial condition, and results of operations.
The ACA also established significant subsidies to support the purchase of health insurance by individuals, in the form of APTCs, available through Health Insurance Marketplaces. The American Rescue Plan Act of 2021 (“ARPA”), which was enacted March 11, 2021, made several changes to premium tax credits and APTCs, including temporarily expanded eligibility for premium tax credits for unemployment compensation beneficiaries who receive such compensation in 2021 and for households with annual incomes above 400% of the federal poverty level; temporary increases in premium tax credit amounts; and a temporary suspension of the requirement to repay excess payments of 2020 APTCs. APRA’s changes will likely result in more IFP premium funded via APTCs and could have significant effects on our business and future operations, which could affect our results of operations and financial condition. There have been efforts to eliminate cost sharing subsidies and/or refusal to fund such subsidies. For the year ended December 31, 2021, approximately 77% of the premium revenue from our Bright HealthCare consumers was subsidized by such subsidies. Although individuals would still be able to purchase coverage, possibly through marketplaces that continue to be maintained by certain states or by purchasing coverage directly from an insurer, the elimination of subsidies would make such coverage unaffordable to some individuals and could thereby reduce overall membership and impact marketplace enrollment.
We are unable to predict the ultimate impact of the CARES Act and other stimulus legislation, or the effect that such legislation and other governmental responses intended to assist providers in responding to COVID-19, may have on our business.
In response to the ongoing COVID-19 pandemic, federal and state governments have passed legislation, promulgated regulations and taken other administrative actions intended to assist healthcare providers in providing care to COVID-19 and other patients during the public health emergency and to provide financial relief. Together, the CARES Act, the Paycheck Protection Program and Health Care Enhancement Act, the Appropriations Act, and ARPA authorizethe American Rescue Plan
Act (ARPA) authorized over $186 billion in funding to be distributed to eligible healthcare providers.These funds are intended to reimburse eligible providers, including Medicare- and/or Medicaid-enrolled providers and suppliers, for lost revenues and health care related expenses attributable to COVID-19. Recipients are not required to repay these funds, provided that they attest to and comply with certain terms and conditions, including limitations on balance billing, not using funds received to reimburse expenses or losses that other sources are obligated to reimburse and audit and reporting requirements.
The CARES Act also made other forms of financial assistance available to healthcare providers, including through Medicare and Medicaid payments adjustments. The CARES Act and related legislation temporarily suspended the Medicare sequestration payment adjustment, from May 1, 2020 through March 31, 2022, which would have otherwise reduced payments to Medicare providers by 2% as required by the Budget Control Act of 2011,, but extended sequestration through 2030. Congress reduced theThe sequestration adjustment to 1% from April 1 through June 30, 2022,was phased back in and the adjustment will returnreturned to 2% on July 1, 2022. For the first six months of fiscal year 2030, the adjustment will increase to 2.25%, and for the last six months of fiscal year 2030, the adjustment will increase to 3%. ARPA, in addition to providing funding for healthcare providers, increases the federal budget deficit in a manner that triggers an additional statutorily mandated sequestration under the PAYGOPay-As-You-Go Act. As a result, an additional payment reduction of up to 4% was required to take effect in January 2022. However, Congress has delayed implementation of this 4% payment reduction untilseveral times, most recently for 2023 and 2024 in the Consolidated Appropriations Act, 2023.
Beyond financial assistance, federal and state governments have enacted legislation and established regulations intended to increase access to medical supplies and equipment and ease legal and regulatory burdens on healthcare providers. These efforts have included, for example, expanding access to and payment for telehealth services. There is still a high degree of uncertainty surrounding potential future legislation passed in response to the COVID-19 pandemic and additional future virus variants. HHS’ interpretation of such underlying terms and conditions, including auditing and reporting requirements, continues to evolve. Further, we may be subject to or incur costs from related government actions including payment recoupment, audits and inquiries by governmental authorities, and criminal, civil or administrative penalties.
Some of the federal and state legislative and regulatory measures allowing for flexibility in delivery of care and various financial supports for health care providers are available only for the duration of the COVID-19 public health emergency. Many states have ended their declared states of emergency, and it is unclear whether or for how long the HHS declaration will be extended. The current HHS declaration expires April 16, 2022. The HHS Secretary may choose to renew the declaration for successive 90-day periods for as long as the emergency continues to exist and may terminate the declaration whenever the Secretary determines that the public health emergency no longer exists.declaration is set to expire May 11, 2023. Additionally, the federal government may consider additional stimulus and relief efforts, but we are unable to predict whether any additional measures will be enacted or their impact. We are unable to assess the extent to which anticipated ongoing impacts on us arising from the COVID-19 pandemic will be offset by benefits which we may recognize or receive in the future under the CARES Act and other stimulus legislation or any future stimulus measures. Further, there can be no assurance that the terms of provider relief funding or other programs will not change in ways that affect our funding or eligibility to participate. We continue to assess the potential impact of the COVID-19 pandemic and government responses to the pandemic on our business, results of operations, financial position and cash flows.
Our MA plans, contracts with third-party MA plans and reimbursement from fee-for-service Medicare are subject to changes to the Medicare program.
We service approximately 117,000125,000 MA consumers, primarily in California. The reimbursement rates for our MA plans and contracts with third-party MA plans are based on published Medicare rates. In addition, our managed and affiliated medical groups receive fee-for-service Medicare reimbursements. As a result, government funding levels for the MA program, as well as the policies and decisions of the federal government regarding the fee-for-service Medicare program have a substantial impact on our profitability and health plan consumer satisfaction. These governmental policies and decisions, which are not within our control, include:
•administrative or legislative changes to base rates or reimbursement policies and methodologies;
•reductions or restrictions in funding of programs;
• limits on the services or types of providers for which Medicare will provide reimbursement;
•expansion of benefits under Medicare without adequate funding;
•other changes in coverage (including those related to the ongoing COVID-19 pandemic);
•changes in methodology for patient assessment and/or determination of payment levels;
•the reduction or elimination of annual rate increases; and
•changes to timing of or delays in reimbursements.
Certain of these changes will affect the premiums or other revenue we receive with respect to our MA plans, the eligibility and enrollment of consumers in our MA plans, the services we provide to our MA plan consumers and the cost of such services to such consumers, as well as other costs relating to our participation in the Medicare program. Significant reductions or significant modifications of reimbursement policies and methodologies in the fee-for-service Medicare program could reduce the profitability of our managed and affiliated medical groups. We have no control over these changes, including when or how frequently they are made. These changes may be instituted by statutes, regulations, administrative or executive orders or judicial decisions. 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 could result in substantial reductions in our revenue and operating margins with respect to our MA plans and our NeueHealthConsumer Care business. The costs of compliance with any changes could be significant, and if we fail to meet implementation requirements, we could be exposed to fines and payment reductions.
In addition, CMS issues a final rule each year to establish the benchmark MA payment rates for the following calendar year. Any reduction to MA rates may have a material adverse effect on our business, results of operations, financial condition and cash flows. The final impact of the MA rates can vary from any estimate we may have, and may be exacerbated by the rapid growth of our MA membership. If we underestimate the impact of any change to the MA rates on our business, it could have a material adverse effect on our results of operations, financial condition and cash flows.
If we fail to comply with certain healthcare laws, including fraud and abuse laws, we could face substantial penalties and our business, results of operations and financial condition could be adversely affected.
Our business is highly regulated, and we are subject to broadly applicable federal and state fraud and abuse and other federal and state healthcare laws and regulations. These laws require significant compliance oversight, which can have the effect of constraining our businesses, financial arrangements and relationships through which we conduct our operations. Laws and regulations which particularly affect our business and operations, include the following:
•the federal Anti-Kickback Statute, which prohibits, among other things, persons or entities from knowingly and willfully soliciting, offering, receiving or providing any remuneration (including any kickback, bribe or certain rebates), directly or indirectly, overtly or covertly, in cash or in kind, in return for, either the referral of an individual or the purchase, lease or order or arranging for or recommending the purchase, lease or order of any good, facility, item or service, for which payment may be made, in whole or in part, under a federal healthcare program such as Medicare. The federal Anti-Kickback Statute has been interpreted to apply to, among others, financial arrangements between entities that have the ability to refer and generate business that is subject to reimbursement under federal healthcare programs. There are a number of statutory exceptions and regulatory safe harbors protecting some common activities from prosecution. The exceptions and safe harbors are drawn narrowly and practices that involve remuneration may be subject to scrutiny if they do not qualify for an exception or safe harbor. Our practices may not in all cases meet all of the criteria for protection under a statutory exception or regulatory safe harbor. A person or entity does not need to have actual knowledge of the federal Anti-Kickback Statute or specific intent to violate it in order to have committed a violation, and 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 the FCA (described immediately below);
•the federal false claims laws, including the civil FCA, which, among other things, impose criminal and civil penalties against individuals or entities for knowingly presenting, or causing to be presented, to the federal government, claims for payment or approval that are false or fraudulent, knowingly making, using, or causing to be made or used, a false record or statement material to a false or fraudulent claim, or from knowingly making or causing to be made a false statement to avoid, decrease or conceal an obligation to pay money to the federal government. There has been increased government scrutiny and litigation involving Medicare plans under the federal FCA related to diagnosis coding and risk adjustment practices. While we believe that our risk adjustment practices and relationships with providers comply with applicable laws, we are and may be subject to audits, reviews and investigation of our practices and arrangements and the federal government might conclude that they
violate the FCA, the Anti-Kickback Statute and/or other federal and state laws governing fraud and abuse. Further, the FCA can be enforced by private citizens through civil qui tam actions. A claim includes “any request or demand” for money or property presented to the U.S. government;
•the Stark Law provides that physicians, subject to certain exceptions, cannot refer Medicare or Medicaid patients to an entity providing “designated health services” in which such physician, or its immediate family member, has an interest or any compensation arrangement. Medical groups managed by and affiliated with our NeueHealthConsumer Care business provide
one or more of these designated health services and as such are subject to the Stark Law. Those found in violation of the Stark Law are subject to denial of payment for services provided through an improper referral, civil monetary penalties and exclusion from the Medicare and Medicaid programs;
•the federal beneficiary inducement civil monetary laws, which generally prohibit giving something of value to an individual if the remuneration is likely to influence that beneficiary’s choice of a particular provider, supplier or practitioner for services covered by applicable federal healthcare programs. A violation of this statute includes fines or exclusion from federal healthcare programs;
•HIPAA, which created additional federal criminal statutes that prohibit, among other things, knowingly and willfully executing, or attempting to execute, a scheme to defraud or to obtain, by means of false or fraudulent pretenses, representations or promises, any money or property owned by, or under the control or custody of, any healthcare benefit program; willingly obstructing a criminal investigation of a healthcare offense; and knowingly and willfully falsifying, concealing or covering up by trick, scheme or device, a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services. Like the federal Anti-Kickback Statute, a person or entity need not have actual knowledge of the statute or specific intent to violate it in order to have committed a violation; and
•analogous state and foreign laws and regulations, such as state anti-kickback and false claims laws, which may be more restrictive and may apply to healthcare items or services reimbursed by non-governmental third-party payors, including private insurers or by the patients themselves.
Ensuring business arrangements with third parties comply with applicable healthcare laws and regulations is a costly endeavor. If our operations are found to be in violation of any of the federal and state healthcare laws described above or any other current or future governmental regulations that apply to us, we may be subject to penalties, including without limitation, civil, criminal and/or administrative penalties, damages, fines, disgorgement, individual imprisonment, exclusion from participation in government programs, such as Medicare, injunctions, private “qui tam” actions brought by individual whistleblowers in the name of the government, or refusal to allow us to enter into government contracts, contractual damages, reputational harm, administrative burdens, diminished profits and future earnings, additional reporting obligations and oversight if we become subject to a corporate integrity agreement or other agreement to resolve allegations of non-compliance with these laws, and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our results of operations. Any claims made against us, regardless of their merit or eventual outcome, could damage our reputation and business and our ability to attract and retain consumers and employees.
Our use and disclosure of PII and PHI is subject to federal and state privacy and security regulations, and our failure to comply with those regulations or to adequately secure the information we hold could result in significant liability or reputational harm and, in turn, a material adverse effect on our client base and revenue.
We are subject to numerous state and federal laws and regulations that govern the Processing, security, retention, destruction, confidentiality, availability and integrity of PII, including PHI. These laws and regulations include HIPAA and the CCPA. HIPAA establishes a set of basic national privacy and security standards for the protection of PHI by health plans, healthcare clearinghouses and certain healthcare providers, referred to as covered entities, which includes us, and the business associates with whom such covered entities contract for services, which also includes us.
HIPAA requires healthcare plans and providers — and we are both — 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.
Penalties for failure to comply with a requirement of HIPAA vary significantly depending on the nature of violation and could include civil monetary or criminal penalties. HIPAA also authorizes state attorneys general to file suit on behalf of their residents. Courts are able to award damages, costs and attorneys’ fees related to violations of HIPAA in such cases. While HIPAA does not create a private right of action allowing individuals to sue us in civil court for violations of HIPAA,
its standards have been used as the basis for duty of care in state civil suits such as those for negligence or recklessness in the misuse or breach 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 HIPAA. 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 fine paid by the violator under the federal Civil Monetary Penalty Statute.
HIPAA further requires that individuals 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”, though states and contractual obligations may require us to provide notice within shorter timeframes, such as five days or less. If a breach of unsecured PHI affects 500 individuals 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 individuals or more in the same state or jurisdiction must also be reported to the local media. If a breach involves fewer than 500 individuals, the covered entity must record it in a log and notify HHS at least annually.
Numerous other federal and state laws protect the Processing,processing, security, retention, destruction, confidentiality, availability and integrity of, and may otherwise limit and restrict how we can use, PII, including PHI. These laws in many cases are more restrictive than, and may not be preempted by, the HIPAA rules and may be subject to varying interpretations by courts and government agencies, creating complex compliance issues for us and our Care Partners and business associates and potentially exposing us to additional expense, adverse publicity and liability. For example, the CCPA which came into effect on January 1, 2020 requires covered businesses that collect information on California residents to inform consumers about their data collection, use and sharing practices, to allow consumers to opt out of sales of their data to third parties, and to exercise certain individual rights regarding their personal information. The CCPA also provides a cause of action for some data breaches affecting certain types of personal information. Penalties for noncompliance with the CCPA are up to $2,500 per unintentional violation, or up to $7,500 per willfulintentional violation. Regulations from the California attorney general’s office have been available for less than one year, and uncertainty remains regarding enforcement of the CCPA. It also remains unclear how much private litigation will ensue under the data breach private right of action. Additionally, a new California ballot initiative, the CPRA was approved by the California electorate via ballot initiative in November 2020, and the law will comecame into effect January 1, 2023, and apply to data collected starting January 1, 2022. Passage of the CPRA extended certain exemptions under the CCPA relating to employee data until January 1, 2023. CPRA imposesimposed additional data protection obligations on companies doing business in California, including additional consumer rights with respect to their data. It also createscreated a new California data protection agency specifically tasked with enforcing the law, which will likely result in increased regulatory scrutiny of California businesses in the areas of data protection and security. Virginia, Colorado, Connecticut and ColoradoUtah have similarly enacted comprehensive privacy laws the Consumer Data Protection Act and Colorado Privacy Act, respectively, both laws of which emulate the CCPA and CPRA in many respects. The Virginia Consumer Data Protection Act takes effect on January 1, 2023, and the Colorado Privacy Act takes effect on July 1, 2023. At the federal level, twovarious bills werehave been introduced (or reintroduced) in the United States Senate in 2021: the 2021 Data Privacy Act, which would create an agency to enforce data protection rules, ensure that data practices are fair and transparent, and promote data protection and privacy innovation, and the Setting an American Framework to Ensure Data Access, Transparency, and Accountability Act, which seekscongress seeking to establish a comprehensive privacy regime including many of the concepts found in other state and federal privacy bills/laws, such as consent requirements for sensitive data, data subject rights, and privacy policy requirements. The Information Transparency & Personal Data Control Act which was introduced in the United States House of Representatives, would require the FTC to establish requirements for entities providing services to the public that collect, store, process, use, or otherwise control sensitive personal formation. Such laws may have potentially conflicting requirements that would make compliance challenging. Such changes may also require us to modify our products and features and may limit our ability to develop new products and features that make use of the data that we collect about our consumers. We anticipate federal and state regulators to continue to enact legislation related to privacy and cyber security.
New health information standards, whether implemented pursuant to HIPAA, state or federal legislative action or otherwise, could have a significant effect on the manner in which we must handle healthcare-related data, and the cost of
complying with standards could be significant. If we do not comply with existing or new laws and regulations related to PHI, we could be subject to criminal or civil sanctions.
We also publish privacy statements to our consumers that describe how we handle and protect PII. Any failure or perceived failure by us to maintain posted privacy policies which are accurate, comprehensive and fully implemented, and any violation or perceived violation of our privacy-, data protection- or information security-related obligations to providers, consumers or other third parties could result in claims of deceptive practices brought against our Company, which could lead to significant liabilities and consequences, including, without limitation, governmental investigations or enforcement actions, costs of responding to investigations, defending against litigation, settling claims, complying with resolution, monitoring or other agreements, civil penalties, and complying with regulatory or court orders. Such liabilities and consequences could have material impacts on our revenue and operations.
Furthermore, the FTC and many state attorneys general continue to enforce federal and state consumer protection, health breach notification, and other laws against companies for online collection, use, dissemination and security practices that appear to be unfair or deceptive. For example, the FTC has taken enforcement actions based on disclosures of health information to third parties, the failure to limit third-party use of health information, the failure to implement policies and
procedures to prevent improper or unauthorized disclosures of health information, and the failure to provide notice and obtain consent before the use and disclosure of health information for advertising. There are a number of legislative proposals in the United States, at both the federal and state level, that could impose new obligations. We cannot yet determine the impact that future laws, regulations and standards may have on our business.
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 of the states in which we currently operate have laws that prohibit business entities from directly owning physician practices, 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 are 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. Other states in which we may operate in the future may also generally prohibit the corporate practice of medicine. While we endeavor to comply with state corporate practice of medicine laws and regulations as we interpret them, the laws and regulations in these areas are complex, changing, and often subject to varying interpretations. The interpretation and enforcement of these laws vary significantly from state to state. 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 revenue from payors for services rendered. For business entities such as us, violations may also bring both civil and, in more extreme cases, criminal liability for engaging in medicalthe practice of medicine 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, and state laws and regulations are subject to change. Regulatory authorities and other parties may assert that our employment of physicians in some states means that we are engaged in the prohibited corporate practice of medicine. If this were to occur, we could be subject to civil and/or criminal penalties, our employment of physicians by our medical groups and the health plans’ agreements with physicians could be found legally invalid and unenforceable (in whole or in part) or we could be required to restructure our arrangements with physicians, in each case in one or more of the jurisdictions in which we operate. Any of these outcomes may have a material adverse effect on our business, results of operations, financial condition, cash flows and reputation.
From time to time we are and may be subject to litigation, administrative proceedings or investigations, which could be costly to defend and could strain corporate resources or harm our business.
Legal proceedings and claims that may arise in the ordinary course of business, such as claims brought by consumers, Care Partners and other network participants, third-party payor clients, consultants and vendors in connection with commercial disputes or employment claims made by our current or former associates could strain corporate responses and involve significant costs. In addition, from time to time, we are and may be subject to government requests or investigations, including market conduct examinations and requests for information from, various government agencies, regulatory authorities, state attorneys generals and other governmental authorities. In particular, investigating and prosecuting healthcare and other insurance fraud, waste and abuse has been of special interest to government authorities in the United States. With respect to healthcare, fraud, waste and abuse prohibitions constitute a spectrum of activities, such as kickbacks for referral of consumers, fraudulent coding practices, billing for unnecessary medical and/or other covered services, improper marketing and violations of patient privacy rights and Stark Law violations. Regulators have recently increased their scrutiny of healthcare payors and providers under the federal FCA, in particular, and there have been a number of investigations, prosecutions, convictions and settlements in the healthcare industry.
Litigation and audits, investigations or reviews by governmental authorities or regulators or compliance with applicable laws may result in fines, substantial costs, and potentially, the loss of a license, and may divert management’s attention and strain corporate resources, which may substantially harm our business, financial condition and results of operations. While we maintain general liability, umbrella, managed care errors and omissions and employment practices liability coverage, as well as other insurance, we cannot provide assurance that such insurance will cover such claims or provide sufficient payments to cover all of the costs to resolve one or more such claims and will continue to be available on terms acceptable to us, if available at all. It is possible that resolution of some matters against us may result in our having to pay significant fines, judgments or settlements that exceed the limits of our insurance policies. Further, settlements with governmental authorities or regulators could contain additional compliance and reporting requirements as part of a consent decree or settlement agreement, such as corporate integrity agreements, which could significantly increase our regulatory and compliance costs. Additionally, governmental or regulatory authorities could review our payment practices, including as part of their market conduct oversight, which could result in fines or other enforcement actions if such authorities
determine that our payment practices do not comply with state laws and regulations. Any of the foregoing could adversely affect our results of operations and financial condition, thereby harming our business.
We are subject to a pending putative securities class action lawsuit and have received a shareholder demand to inspect books and recordslawsuit.
On January 6, 2022, a putative securities class action lawsuit was filed against us and certain of our officers and directors in the Eastern District of New York. The case is captioned Marquez v. Bright Health Group, Inc. et al., 1:22-cv-00101 (E.D.N.Y.). The lawsuit alleges, among other things, that we made materially false and misleading statements regarding our business, operations, and compliance policies, which in turn adversely affected our stock price. No specific amounts of damages have been alleged in the putative securities class action lawsuit. We intend to vigorously defend this action; but there can be no assurance that we will be successful in any defense. We expect anAn amended complaint will bewas filed later this yearon June 24, 2022, which expands on the allegations in this action. Suchthe original complaint and alleges a putative class period of June 24, 2021 through March 1, 2022. The amended complaint could assert additional or broader claims thanalso adds as defendants the current complaint. underwriters of our initial public offering. The Company has served a motion to dismiss the amended complaint, which has not yet been ruled on by the court.This and other legal proceedings could damage our reputation and adversely affect our stock price.
In addition, by letter dated January 28, 2022, we received a demand from a purported shareholder to inspect books and records pursuant to Delaware law. The demand seeks information related to the December 6, 2021 Investment Agreement that the Company entered into with New Enterprise Associates (“NEA”) and Cigna. We and the shareholder’s counsel have executed a confidentiality agreement and negotiated the scope of the production of books and records in response to the demand.
We are subject to inspections, reviews, audits and investigations under federal and state government programs and contracts. The results of any such auditsactions could adversely and negatively affect our business, including our results of operations, liquidity, financial condition and reputation.
From time to time we are subject to various state and federal governmental inspections, reviews, audits and investigations to verify our financial and/or operational compliance with governmental rules and regulations governing the products and services we sell. Care Partners may also reserve the right to conduct audits of our health plan business and third-party payors and government clients of NeueHealthour Consumer Care business will also have the right to audit NeueHealthConsumer Care businesses. We also periodically conduct internal audits and reviews of our regulatory compliance. An adverse inspection, finding, review, audit or investigation could result in:in requests for additional information, enforcement actions, corrective action
plans, monitoring agreements or other actions, including:
•refunding amounts we have been paid pursuant to the Medicaregovernment programs or from payors;
•state or federal agencies imposing fines, penalties and other sanctions on us;
•temporary suspension of payment for new consumers to the facility or agency;
•decertification, debarment, suspension or exclusion from participation in the Medicare programs or one or more payor networks;
•self-disclosure of violations to applicable regulatory authorities;
•damage to our reputation;
•the revocation of an agency’s license; and
•loss of certain rights under, or termination of, our contracts with payors or Care Partners.
The U.S. Department of Justice and the OIG have continuously increased their scrutiny of healthcare payors, providers and Medicare Advantage insurers under the FCA in particular, which has led to a number of investigations, prosecutions, convictions and settlements in the healthcare industry. We expect this trend to continue, particularly in light of the HHS’s December 4, 2020 announcement regarding the creation of a new False Claims Act Working Group aimed at enhancing HHS’s partnership with the DOJ to combat fraud and abuse. CMS and the OIG also periodically perform risk adjustment data validation (“RADV”) audits of selected Medicare Advantage health insurance plans to validate the coding practices of,
and supporting documentation maintained by healthcare providers. Certain of our health plans may be selected for such audits, which could in the future result in retrospective adjustments to payments made to our health plans, fines, corrective action plans or other adverse action by CMS. On November 24, 2020,January 30, 2023, CMS issuedreleased a final rule that amendsoutlining its audit methodology, approach to the use of extrapolation, and related policies for the contract-level MA RADV program. Under the final rule, CMS will extrapolate RADV audit findings beginning with payment year 2018. CMS will only collect the non-extrapolated overpayments identified in the RADV program by: (i) revisingaudits and HHS-OIG audits between payment years 2011 and 2017. CMS stated that after April 3, 2023, the methodology for error rate calculations beginning witheffective date of the 2019 benefit year; and (ii) changing the wayfinal rule, CMS applies RADV results to risk adjustment transfers beginning with the 2020 benefit year. According to CMS, these changes are designed to give insurers more stability and predictability with respect towill begin issuing enrollee-level audit findings from the RADV programaudits that have been completed and promote fairnessrecovering the enrollee-level improper payments identified in how health insurers receive adjustments. However,HHS-OIG audits. CMS did not adopt a specific extrapolated audit methodology in the future impactfinal rule, but stated that CMS will rely on any statistically valid method for sampling and extrapolation that is determined to be well-suited to a particular audit. CMS also stated that it is finalizing a policy whereby CMS will not apply an FFS Adjuster in RADV audits because CMS determined that an FFS Adjuster is not appropriate. The final rule also codifies the requirement that MA organizations remit improper
payments identified during RADV audits in a manner specified by CMS. The final rule is expected to be the subject of legal challenges, but if it takes effect on April 3, 2023, the final rule may have potential adverse effects, which could be material, on the Company’s operating results, financial condition, and such changes may ultimately increase financial recoveries fromcash flows, and could result in some combination of degraded plan benefits, higher monthly premiums and reduced choice for the government’s ability to retrospectively claw back or recover funds from healthpopulation served by MA insurers. In particular, there has recently been increased scrutiny by the government on health insurers’ diagnosis coding and risk adjustment practices, particularly for Medicare Advantage plans. In some proceedings involving Medicare Advantage plans, there have been allegations that certain financial arrangements with providers violate other laws governing fraud and abuse, such as the federal Anti-Kickback Statute.
We may 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. In addition, due to our reliance on third-party providers to perform many critical health plan operations, we may not be able to adequately perform pre-delegation audits of such providers’ capabilities and/or adequately monitor and oversee their day-to-day performance of our delegated functions to ensure compliance with applicable laws and regulations. The occurrence of adverse inspections, reviews, audits or investigations or any of the results noted above could have a material adverse effect on our business and operating results. Furthermore, the legal, document production and other costs associated with complying with these inspections, reviews, audits or investigations could be costly.
Our employees, independent contractors, partners, suppliers and other third parties may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements, which could expose us to liability and hurt our reputation.
We are exposed to the risk that our employees, independent contractors, Care Partners, care providers, partners, suppliers and others may engage in fraudulent conduct or other illegal activity. Misconduct by these parties could include intentional, reckless and/or negligent conduct or disclosure of unauthorized activities to us that violates laws and regulations that we are subject to, including, without limitation, healthcare fraud and abuse laws or laws that require the true, complete and accurate reporting of financial information or data. Such activities could result in regulatory sanctions and cause serious harm to our reputation. It is not always possible to identify and deter misconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. In addition, we are subject to the risk that a person or government could allege such fraud or other misconduct, even if none occurred.
If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business and financial results, including, without limitation, the imposition of significant civil, criminal and administrative penalties, damages, monetary fines, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, reputational harm, adverse impact on profitability and our operations, any of which could adversely affect our business, results of operations and financial condition.
Risks Related to our Financial Statements
We have identified material weaknesses in our internal controls over financial reporting and may identify additional material weaknesses in the future or otherwise fail to maintain an effective system of internal controls, which may result in material misstatements of our consolidated financial statements or cause us to fail to meet our periodic reporting obligations.
For the year ended December 31, 2021, we identified a material weakness in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness identified related to claims pertaining to our IFP business, which were processed by a third-party service provider. The claims were processed inaccurately according to terms of provider contracts and/or related fee schedules, or did not consistently go through claims re-pricing, where necessary, prior to payment.
In response to this material weakness, we focused on enhancing our pre-pay and post-pay claims quality assurance procedures and data mining capabilities. These capabilities have enabled early identification of overpayment issues so the issues can be addressed timely. Additionally, our provider data improvement initiatives have enhanced the accuracy of our provider rosters, determination of in-network versus out-of-network status, and alignment of providers to appropriate
contracts and fee schedules. Finally, additional front-end claims review procedures implemented in the first quarter of fiscal year 2022 have resulted in improved claims payment accuracy, based on fee schedules agreed-upon with providers.
For the year ended December 31, 2022, we identified a new material weakness related to the control activities component of the Committee Of Sponsoring Organizations (COSO) 2013 revised internal control integrated framework. The material weakness relates to the Company’s announcement in Q4 2022 to exit the IFP business effective December 31, 2022, and a subsequent decision by management to decrease its focus on performing certain control activities in accordance with policies and procedures. Relevant IFP processes and significant accounts not evaluated in Q4 2022 include, but are not limited to, revenue and membership, enrollment and eligibility, claims processing and reserving, risk adjustment, and broker commissions.
With the discontinuation of the IFP business effective December 31, 2022, management believes this new material weakness will be remediated in during the year ended December 31, 2023. We are currently undertaking and evaluating several steps to address this material weakness. However, we cannot assure you that the measures we have taken to date, and actions we may take in the future, will be sufficient to remediate the control deficiency that led to such material weakness or that they will prevent or avoid a potential future material weakness. In addition, we cannot assure you that we have identified all of our existing material weaknesses, or that we will not in the future have additional material weaknesses. Our failure to implement and maintain effective internal controls over financial reporting could result in errors in our consolidated financial statements that could result in a restatement of our financial statements, and could cause us to fail to meet our reporting obligations, any of which could diminish investor confidence in us and cause a decline in the price of our shares of common stock.
Accounting for health plan benefits is complicated and subject to foreseen and unforeseen risks.
Accounting for health plan benefits is complicated and involves the use of estimates, assumptions and judgment. While we spend considerable time establishing our estimates and assumptions, we cannot be certain they will be correct. If our estimates are incorrect or if actual circumstances differ from our assumptions, our results of operations could be negatively affected.
Risk Adjustment Programs
The IFP and Medicare Advantage markets employ risk adjustment programs that impact the revenue we recognize for our enrolled membership. Risk adjustment is a process that takes into account the underlying health status and health spending of the enrollees in an insurance plan. It is designed to compensate payors for the level of risk present in their respective members. For proper reimbursement by CMS or payment to CMS, we must ensure that our Care Providers are identifying and properly documenting chronic and severe diagnosis codes/conditions to create an accurate health profile for each
consumer. If our Care Partners do not accurately record a consumer’s health conditions, we may not be able to accurately estimate the appropriate risk adjustment reimbursement or payment; our estimate could be materially inaccurate due to the many factors that comprise our estimate. Consequently, our estimate of our health plans’ risk scores for any period, and any resulting change in our accrual of revenue related thereto, could adversely affect our results of operations, financial condition, and cash flows. Additionally, the data provided to CMS to determine the risk score are subject to audit even several years after the annual settlements occur. If the risk adjustment data we submit are found to incorrectly overstate the health risk of our consumers, we may be required to refund funds previously received and may be subject to penalties or sanctions, including potential liability under the FCA which could be significant. If the data we provide to CMS incorrectly understates the health risk of our consumers, we might be underpaid for the care that we provide to our consumers, which could have a negative impact on our results of operations and financial condition.
Incurred But Not Reported Claims
Because of the elapsed time between when medical services are actually rendered by care providers and when we receive, process and pay a claim for those medical services, our medical care costs incorporate estimates of our incurred but not reported (“IBNR”) claims. We estimate our medical cost liabilities using actuarial methods based on historical submissions and payment data, cost trends, patient and product mix, seasonality, utilization of healthcare services, contracted service rates and other relevant factors. Actual conditions could differ from the assumptions we use. We continually review and modify our cost estimation methods and the resulting accruals and make adjustments when the criteria used to determine IBNR claims change and when actual claim costs are ultimately determined. As a result of the uncertainties stemming from the factors used in these assumptions, the actual amount of medical expense that we incur may be materially higher or lower than the amount of IBNR claims originally estimated. If our estimates of IBNR claims are inadequate in the future,
our reported results of operations would be negatively impacted. Further, our inability to estimate IBNR 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. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates.”
Failure to comply with requirements to design, implement and maintain effective internal controls could adversely affect our stock price.
As a public company, we have significant requirements for financial reporting and internal controls. The process of designing and implementing effective internal controls is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a system of internal controls that is adequate to satisfy our reporting obligations as a public company. If we are unable to maintain appropriate internal financial reporting controls and procedures, it could cause us to fail to meet our reporting obligations on a timely basis, result in material misstatements in our consolidated financial statements and harm our results of operations. In addition, we are required, pursuant to Section 404, to furnish a report by management on, among other things, the effectiveness of our internal controls over financial reporting in the second annual report following the completion of our initial public offering (“IPO”). This assessment includes disclosure of any material weaknesses identified by our management in our internal controls over financial reporting. The rules governing the standards that must be met for our management to assess our internal controls over financial reporting are complex and require significant documentation, testing and possible remediation. Testing and maintaining internal controls may divert our management’s attention from other matters that are important to our business. Our independent registered public accounting firm is required to issue an attestation report on the effectiveness of our internal controls beginning for our fiscal year ending December 31, 2022.annually.
In connection with the implementation of the necessary procedures and practices related to internal controls over financial reporting, we may identify deficiencies that we may not be able to remediate in time to meet the deadline imposed by the U.S. Sarbanes-Oxley Act of 2002 (“SOX”) for compliance with the requirements of Section 404. In addition, we may encounter problems or delays in completing the remediation of any deficiencies identified by our independent registered public accounting firm in connection with the issuance of their attestation report.
If we fail to effectively remediate the material weaknessweaknesses in our internal control over financial reporting, if we identify future material weaknesses in our internal control over financial reporting or if we are unable to comply with the demands placed upon us as a public company, including the requirements of Section 404 of the SOX, in a timely manner, we may be unable to accurately report our financial results, or report them within the time frames required by the SEC. Our testing, or the subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal controls over financial reporting that could be deemed to be material weaknesses, and could result in a material misstatement of our annual or quarterly consolidated financial statements or disclosures that may not be prevented or detected. We may not be able to conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 or our independent registered public accounting firm may not issue an
unqualified opinion. If either we are unable to conclude that we have effective internal controls over financial reporting or our independent registered public accounting firm is unable to provide us with an unqualified opinion, investors could lose confidence in our reported financial information, which could have a material adverse effect on the trading price of our common stock.
We identified material weaknesses in our internal controls over financial reporting and may identify additional material weaknesses in the future or otherwise fail to maintain an effective system of internal controls, which may result in material misstatements of our consolidated financial statements or cause us to fail to meet our periodic reporting obligations.
For the year ended December 31, 2020, we identified a material weakness in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal controls over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness pertained to a lack of documentation and reconciliation controls supporting key account balances, and limited Brand New Day resources and competencies dedicated to performing the appropriate level of diligence around complex accounting and estimated balances.
In addition, we identified a material weakness in our internal controls over financial reporting related to the valuation of our common stock underlying stock options grants during the three months ended March 31, 2021, as well as the valuation of our Series E preferred stock issued as equity consideration to the seller in the Zipnosis acquisition. The material weakness was the result of a control design deficiency related to the appropriate review of the methodology and inputs used in the valuation of our common stock. This resulted in a material misstatement of our operating costs, net loss, goodwill and redeemable preferred stock and the related financial disclosures as of and for the three months ended March 31, 2021, which we restated accordingly. Following the consummation of our initial public offering in June 2021, the Company determined the fair value of its common stock based on readily determinable prices in the public market.
We have remediated the material weaknesses related to internal control over financial reporting at Brand New Day and the valuation of our common stock as of December 31, 2021.
For the year ended December 31, 2021, we identified a material weakness related to claims pertaining to our IFP business, which were processed by a third-party service provider. Claims were processed inaccurately according to terms of provider contracts and/or related fee schedules, or did not consistently go through claims re-pricing, where necessary, prior to payment.
We are currently undertaking and evaluating several steps to address the material weakness with respect to claim processing within our IFP business, including, but not limited to, strengthening claims quality assurance and audit processes, and ensuring complete and accurate loading of fee schedules and other process improvements with our third-party service provider. However, we cannot assure you that the measures we have taken to date, and actions we may take in the future, will be sufficient to remediate the control deficiency that led to such material weakness or that they will prevent or avoid a potential future material weakness. In addition, we cannot assure you that we have identified all of our existing material weaknesses, or that we will not in the future have additional material weaknesses. Our failure to implement and maintain effective internal controls over financial reporting could result in errors in our consolidated financial statements that could result in a restatement of our financial statements, and could cause us to fail to meet our reporting obligations, any of which could diminish investor confidence in us and cause a decline in the price of our shares of common stock.
Our ability to use our NOLs and research and development tax credit carryforwards to offset future taxable income may be subject to certain limitations.
As of December 31, 2021,2022, we had outstanding net operating losses (“NOLs”) of approximately $1.9$5.8 billion, which are available to reduce future taxable income. Our carryforwards are subject to review and possible adjustment by the appropriate taxing authorities. In addition, the carryforwards that may be utilized in a future period may be subject to limitations based upon changes in the ownership of our stock in a future period. In general, under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code” or “IRC”), and corresponding provisions of state law, a corporation that undergoes an “ownership change,” generally defined as a greater than 50 percentage point change (by value) in its equity ownership by certain stockholders over a three year period, is subject to limitations on its ability to utilize its pre-change NOLs, research and development tax credit carryforwards and disallowed interest expense carryforwards to offset future taxable income.
Our balance sheet includes significant amounts of goodwill and intangible assets. The impairment of a significant portion of these assets would negatively affect our results of operations.
A significant portion of our total assets consists of goodwill and intangible assets. Goodwill and intangible assets, net, together accounted for approximately 33%21.6% of total assets on our consolidated balance sheet as of December 31, 2021.2022. We evaluate goodwill for impairment annually in the fourth quarter. We also review goodwill and intangible assets for impairment whenever events or circumstances make it more likely than not that the carrying value may not be recoverable. Under current accounting rules, any determination that impairment has occurred would require us to record an impairment charge, which would adversely affect our earnings. An impairment of a significant portion of goodwill or intangible assets could adversely affect our operating results.
Risks Related to Ownership of Our Common Stock
We received notice from the New York Stock Exchange (the “NYSE”) that we were not in compliance with its continued listing standards regarding the average closing price of our common stock, and we may be subject to permanent delisting from the NYSE.
On December 6, 2022, we received notice from the NYSE that we were not in compliance with the continued listing standard set forth in Section 802.01C of the NYSE’s Listed Company Manual (the “Manual”), as the average closing price of our common stock on the NYSE was less than $1.00 per share over a consecutive 30 trading-day period ending December 2, 2022. The notice has no immediate impact on the listing of the Company’s common stock on the NYSE, subject to the Company’s compliance with the NYSE’s other continued listing requirements.
The Company has responded to the NYSE with respect to its intent to cure the deficiency. The Company intends to consider available alternatives, including, but not limited to, a reverse stock split, subject to stockholder approval no later than at the Company’s next annual meeting of stockholders, if necessary, to regain compliance. Pursuant to Section 802.01C, the Company has a period of six months following the receipt of the notice to regain compliance with the minimum share price requirement. Section 802.01C also provides for an exception to the six-month cure period if the action required to cure the price condition requires stockholder approval, in which case, the action needs to be approved by no later than the Company’s next annual meeting of stockholders. If the Company is unable to regain compliance with the $1.00 share price rule within this period, the NYSE will initiate procedures to suspend and delist our common stock. The NYSE can take accelerated delisting action in the event that it determines that our common stock trades at levels that it views to be abnormally low.
If the NYSE permanently delisted our shares, it would negatively impact us because it could, among other things: (i) reduce the liquidity and market price of our common stock; (ii) reduce the amount of news and analyst coverage for our company; (iii) reduce the number of investors willing to hold or acquire our common stock, which could negatively impact our ability to raise equity financing and the ability of our stockholders to sell our common stock; (iv) limit our ability to use a registration statement to offer and sell freely tradable securities, thereby preventing us from accessing the public capital markets; (v) impair our ability to provide liquid equity incentives to our employees; and (vi) have negative reputational impact for us with our customers, suppliers, employees and other persons with whom we have business relationships.
Our stock price has experienced significant volatility and may change significantly in the future, as a result you may not be able to resell shares of our common stock at or above the price youinvestors paid or at all, and youinvestors could lose all or part of yourtheir investment as a result.
The trading price of our common stock has been in recent months, and may continue to be, volatile. The stock market has recently experienced extreme volatility. This volatility often has been unrelated or disproportionate to the operating performance of particular companies. YouInvestors may not be able to resell yourtheir shares at or above the price youthey paid for the stock.
Broad market and industry fluctuations may materially adversely affect the market price of our common stock, regardless of our actual operating performance. In addition, price volatility may be greater if the public float and trading volume of our common stock are low.
In the past, following periods of market volatility, stockholders have instituted securities class action litigation. As described above, we are currently subject to a pending putative securities class action. This and other potential securities litigation, could have a substantial cost and divert resources and the attention of executive management from our business regardless of the outcome of such litigation.
Our quarterly operating results fluctuate and may fall short of prior periods, our projections or the expectations of securities analysts or investors, which could materially adversely affect our stock price.
Our operating results have fluctuated from quarter to quarter in the past, and they may do so in the future. Therefore, results of any one fiscal quarter are not a reliable indication of results to be expected for any other fiscal quarter or for any year. If we fail to increase our results over prior periods, to achieve our projected results or to meet the expectations of securities analysts or investors, our stock price may decline, and the decrease in the stock price may be disproportionate to the shortfall in our financial performance. Results may be affected by various factors, including those described in these risk factors.
We currently do not intend to declare dividends on our common stock in the foreseeable future and, as a result, your returns on your investment may depend solely on the appreciation of our common stock.
We currently do not expect to declare any dividends on our common stock in the foreseeable future. Instead, we anticipate that all of our earnings in the foreseeable future will be used to provide working capital, to support our operations and to finance the growth and development of our business. Any determination to declare or pay dividends in the future will be at the discretion of our board of directors, subject to applicable laws and dependent upon a number of factors, including our earnings, capacity to pay dividends under the Credit Agreement and overall financial condition. In addition, our ability to pay dividends in the future depends in part on the earnings and distributions of funds from our health insurance subsidiaries. Applicable state insurance laws restrict the ability of such health insurance subsidiaries to declare stockholder dividends and require our health insurance subsidiaries to maintain specified levels of statutory capital and surplus. Accordingly, your only opportunity to achieve a return on your investment in our company may be if the market price of our common stock appreciates and you sell your shares at a profit. The market price for our common stock may never exceed, and may fall below, the price that you pay for such common stock.
If securities analysts do not publish research or reports about our business or if they downgrade our stock or our sector, our stock price and trading volume could decline.
The trading market for our common stock relies in part on the research and reports that industry or financial analysts publish about us or our business or industry. We do not control these analysts. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, we could lose visibility in the market, which in turn could cause our stock price or trading volume to decline. Furthermore, if one or more of the analysts who do cover us were to downgrade our stock or our industry, or the stock of any of our competitors, or publish inaccurate or unfavorable research about our business or industry, the price of our stock could decline.
Our management may use the proceeds of our recent $750 million preferred stock financing2022 Capital Raises in ways with which you may disagree or that may not be profitable.
We have broad discretion as to the application of the net proceeds of our recent $750 million preferred stock financingcapital we raised in 2022 and can use them for purposes other than those contemplated by us at the time of such offerings. We utilized a portion of thethese net proceeds of our preferred stock financing to repaypay down the $155.0 million principal balance of indebtedness outstanding under our revolving credit agreement. We also utilized a portion of the proceeds to make additional capital contributions to certain regulated entities. We have not specifically identified a large single use for which to use the remainder of these net proceeds and, accordingly, we are not able to allocate these amounts for specific uses due to a variety of factors. You may not agree with the manner in which our management chooses to allocate and use these net proceeds. Our management may use the proceeds for corporate purposes that may not increase our profitability or otherwise result in the creation of stockholder value. In addition, pending our use of the proceeds, we may invest the proceeds primarily in instruments that do not produce significant income or that may lose value.
Provisions in our organizational documents could delay or prevent a change of control.
Certain provisions of our amended and restated certificate of incorporation and amended and restated bylaws may have the effect of delaying or preventing a merger, acquisition, tender offer, takeover attempt or other change of control transaction that a stockholder might consider to be in its best interest, including attempts that might result in a premium over the market price of our common stock.
These provisions will provide for, among other things:
•the authorization of undesignated preferred stock, the terms of which may be established and shares of which may be issued without stockholder approval; and
• advance notice requirements for stockholder proposals.
These provisions could make it more difficult for a third party to acquire us, even if the third party’s offer may be considered beneficial by many of our stockholders. As a result, our stockholders may be limited in their ability to obtain a premium for their shares.
Our amended and restated certificate of incorporation provides, subject to limited exceptions, that the Court of Chancery of the State of Delaware and, to the extent enforceable, the federal district courts of the United States of America will be the sole and exclusive forums for certain stockholder litigation matters, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our current and former directors, officers, employees or stockholders.
Our amended and restated certificate of incorporation provides, subject to limited exceptions, that unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall, to the fullest extent permitted by law, be the sole and exclusive forum for any (i) derivative action or proceeding brought on behalf of our company, (ii) action asserting a claim of breach of a fiduciary duty owed by any current or former director, officer, employee or stockholder of our company to the Company or our stockholders, (iii) action asserting a claim against the Company or any current or former director, officer, employee or stockholder of the Company arising pursuant to any provision of the DGCL, or our amended and restated certificate of incorporation or our amended and restated bylaws (as either might be amended from time to time) or (iv) action asserting a claim governed by the internal affairs doctrine of the State of Delaware. Unless we consent in writing to the selection of an alternative forum, the federal district courts of the United States of America shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the federal securities laws of the United States of America. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and consented to the forum provisions in our amended and restated certificate of incorporation. Although our amended and restated certificate of incorporation contains
the exclusive forum provision described above, it is possible that a court could find that such a provision is inapplicable for a particular claim or action or that such provision is unenforceable. Our exclusive forum provision does not relieve the Company of its duties to comply with the federal securities laws and the rules and regulations thereunder, and our stockholders will not be deemed to have waived our compliance with these laws, rules and regulations.
These choice of forum provisions may limit a stockholder’s ability to bring a claim in a different judicial forum, including one that it may find favorable or convenient for disputes with us or any of our directors, officers or other employees which may discourage lawsuits with respect to such claims. Alternatively, if a court were to find the choice of forum provisions that will be contained in our amended and restated certificate of incorporation to be inapplicable or unenforceable with respect to one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business, operating results and financial condition.
Risks Related to Investing in Our Common Stock
Issuance of shares of our common stock in connection with the conversion of our outstanding Preferred Stock would cause substantial dilution, which could materially affect the trading price of our common stock and earnings per share. Holders of our Preferred Stock own a significant percentage of our capital stock and may be able to influence certain corporate matters.
On December 6, 2021, we entered into an Investment Agreement (the “Investment Agreement”) with a subsidiary of Cigna Corporation and an affiliate of NEA (the “Purchasers”), relating to the issuance and sale by the Company to the Purchasers of 750,000 shares of the Company’s Series A Convertible Perpetual Preferred Stock, par value $0.0001 per share (the “Preferred Stock”), for an aggregate purchase price of $750.0 million (the “Issuance”). The closing of the Issuance occurred on January 3, 2022.
Pursuant to the Certificate of Designations designating the shares of our Series A Convertible Perpetual Preferred Stock and the Certificate of Designations designating the shares of our Series B Convertible Perpetual Preferred Stock (collectively, the “Preferred Stock”) each of which we filed with the Secretary of State of the State of Delaware (the(together, the “Certificate of Designations”) in connection with the Issuance,, the Preferred Stock ranks senior to our shares of common stock with respect to dividend rights and rights on the distribution of assets on any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company. The Preferred Stock is convertible into common stock and is entitled to an initial liquidation preference, in each case subject to certain limitations outlined in the CertificateCertificates of Designations. Further, holders of Preferred Stock are entitled to vote with the holders of common stock on an as-converted basis, solely with respect to (i) a change of control transaction (to the extent such change of control transaction is submitted to a vote of the holders of common stock) or (ii) the issuance of capital stock by the Company in connection with an acquisition by the Company (to the extent such issuance is submitted to a vote of the holders of common stock), subject to certain restrictions. Holders of the Preferred Stock are entitled to a separate class vote with respect to, among other things, amendments to the Company’s organizational documents that have an adverse effect on the Preferred Stock, authorizations or issuances by the Company
of securities that are senior to the Preferred Stock, increases or decreases in the number of authorized shares of Preferred Stock, and issuances of shares of the Preferred Stock.
Any conversion of the Preferred Stock into common stock would dilute the ownership interest of existing holders of our common stock, and any sales in the public market of common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock. In addition, we granted the Purchasersholders of Preferred Stock registration rights in respect of the Preferred Stock and any shares of common stock issued upon conversion thereof. These registration rights could facilitate the resale of such securities into the public market, and any resale of these securities would increase the number of shares of our common stock available for public trading. Sales of a substantial number of shares of our common stock in the public market, or the perception that such sales might occur, could have a material adverse effect on the price of our common stock.
The interests of the Purchasersholders of these shares may not always coincide with the interests of our other stockholders. Because of the potential degree of concentration of voting power upon the conversion of Preferred Stock into common stock, the concentration of ownership by the Purchasersthese holders may have the effect of adversely impacting actions favored by our other stockholders and could depress our stock price.
Our board of directors is authorized to issue and designate shares of our preferred stock in additional series without stockholder approval.
Our amended and restated certificate of incorporation authorizes our board of directors, without the approval of our stockholders, to issue 100,000,000 shares of our preferred stock, subject to limitations prescribed by applicable law, rules and regulations and the provisions of our amended and restated certificate of incorporation, as shares of preferred stock in series, to establish from time to time the number of shares to be included in each such series and to fix the designation, powers, preferences and rights of the shares of each such series and the qualifications, limitations or restrictions thereof. The powers, preferences and rights of these additional series of preferred stock may be senior to or on parity with our common stock, which may reduce its value.
We incur increased costs as a result of operating as a publicly traded company, and our management is required to devote substantial time to new compliance initiatives.
As a publicly traded company, we incur additional legal, accounting, and other expenses that we did not previously incur. Although we are currently unable to estimate these costs with any degree of certainty, they may be material in amount. In addition, the SOX, the Dodd-Frank Wall Street Reform and Consumer Protection Act, and the rules of the SEC, and the NYSE stock exchange on which our shares of common stock are listed, have imposed various requirements on public companies. Our management and other personnel will need to devote a substantial amount of time to these compliance initiatives as well as investor relations. Moreover, these rules and regulations result in increased legal and financial compliance costs and will make some activities more time-consuming and costly. For example, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to incur additional costs to maintain the same or similar coverage.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
We have eleven13 corporate offices across the U.S., including our corporate headquarters in Minneapolis, Minnesota and key offices in New York, New York; Tempe, Arizona; WestminsterCalifornia and Diamond Bar, California; Austin, Texas; and Albuquerque, New Mexico.Florida. We lease or sublease all of our corporate offices, which serve both our NeueHealthConsumer Care and Bright HealthCare segments. We also lease 7482 properties in three states for our medical offices and clinics aligned to our NeueHealth segment.clinics.
We believe that our facilities are adequate for our operationsoperations. As we proceed with our restructuring plan we are continuously assessing the facilities necessary to support our ongoing business and that suitable additional space will be available if needed.seeking to sublet or negotiate lease terminations for any locations we may deem redundant.
ITEM 3. LEGAL PROCEEDINGS
The information required by this item is incorporated herein by reference to the information included under the caption “Legal Proceedings” in Note 1517 of the Notes to Consolidated Financial Statements included in Part II, Item 8 – Financial Statements.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
INFORMATION ABOUT OUR EXECUTIVE OFFICERS
The following sets forth certain information regarding our executive officers as of March 14, 2022,6, 2023, including the business experience of each executive officer during the past five years:
| | | | | | | | |
| Name | Age | Position |
| G. Mike Mikan | 5051 | Chief Executive Officer, President and Director |
| Catherine R. Smith | 5859 | Chief Financial and Administrative Officer |
Keith Nelsen Jeff Cook(1)
| 5852 | Chief Operating Officer |
| Jeff Craig | 40 | General Counsel and Corporate Secretary |
Sam K. Srivastava | 54 | Chief Executive Officer, NeueHealth |
Tomás Valdivia | 59 | Chief Health and Equity Officer |
(1) As announced on March 15, 2022, Keith Nelsen is retiring from his role with the Company effective March 18, 2022, but will remain employed by the Company in an advisory capacity through June 30, 2022.
G. Mike Mikan has served as our Chief Executive Officer and President since April 2020. Mr. Mikan joined as our Vice Chairman and President in January 2019. Prior to joining Bright Health, Mr. Mikan served as Chairman and Chief Executive Officer of Shot-Rock Capital, LLC, a private investment firm, from January 2015 until December 2018. From January 2013 until December 2014, he served as President of ESL Investments, Inc. Mr. Mikan served as the Interim Chief Executive Officer of Best Buy Co., Inc. from April 2012 until September 2012. From November 1998 through February 2012, he served in various executive positions at UnitedHealth Group, Inc., including as Chief Financial Officer and as Chief Executive Officer of UnitedHealth Group’s Optum subsidiary. Mr. Mikan serves as a director of AutoNation, Inc. and Princeton Private Investments Access Fund, and as a Trustee of Ellington Income Opportunities Fund. Mr. Mikan was selected to serve on our board of directors because of his management experience and expertise in the healthcare sector.
Catherine R. Smith has served as our Chief Financial and Administrative Officer since January 2020. Prior to joining Bright Health, Ms. Smith was Executive Vice President and Chief Financial Officer of Target Corporation, a customer-centric, omni-channel retailer, from September 2015 to November 2019. From February to December 2014, Ms. Smith was Executive Vice President and Chief Financial Officer of Express Scripts Holding Company, a Fortune 20 company. Prior to Express Scripts, Ms. Smith held Chief Financial Officer positions at Walmart International, GameStop Corp., Centex Corp. and others. Ms. Smith currently serves as the audit committee chair of PPG Industries, Inc., and Baxter International Inc.
Keith NelsenJeff Cook has served as our Chief Operating Officer since November 2022, and served as chief executive officer of Consumer Care, our personalized care delivery business, from June 2022 to November 2022. Prior to Bright Health, he served as national Vice President of CVS Health HUBs, CVS’ suite of HUB clinical services, from May 2020 to June 2022. Before that, Mr. Cook was the South Central Regional President of CVS Health/Aetna, where he led the commercial and Medicare Advantage business in Texas, Oklahoma, and New Mexico from January 2018 to January 2020, and was the Chief Executive Officer of Texas Health Aetna from 2016 to May 2020, during which time he led the development of a joint venture between Texas Health Resources and Aetna to create a joint health plan from the ground up. Prior to those roles, he held various leadership positions at Ascension Health and UnitedHealthcare. Mr. Cook has broad health care experience leading initiatives at the forefront of value-based care and consumer-driven healthcare, and holds a Bachelor of Business Administration from Baylor University and a Masters of Science in Health Administration from Texas State University.
Jeff Craig has served as General Counsel and Corporate Secretary since MayMarch 2022, and before that served as Vice President, Consumer Care Legal, and Assistant Vice President, Legal since March 2020. Mr. Nelsen served as Executive Vice President, General Counsel at Best Buy Co. Inc. from May 2011 until May 2019. Mr. Nelsen also served as SVP General Counsel, International at Best Buy Co. Inc. from September 2006 until May 2011, where he oversaw the company’s equity-related investments. Prior to joining Best Buy Co. Inc., Mr. Nelsen served as Chief Administrative Officer and General Counsel of Danka Office Imaging Co. from September 1997 until September 2006.
Sam K. Srivastava serves as our Chief Executive Officer of NeueHealth as of March 2021, previously serving as our enterprise Chief Operating Officer since September 2019. Prior to joining Bright Health, Mr. Srivastava served as Chief Executive Officer of Magellan HealthCare from September 2013 to December 2018. From October 2007 to September 2013, Mr. Srivastava served as Cigna Healthcare’s President of National and Senior Segments, and led strategy and business development for the United States. Prior to Cigna, he held various executive positions at UnitedHealth Group, Inc. and Health Net, Inc. from January 1995 to September 2005 and October 2005 to October 2007, respectively, and served as a management consultant developing risk-based delivery systems for providers, insurers and governments in the U.S. and Europe. Mr. Srivastava is the Chairman of the Yale School of Public Health Advisory Board and a director for the Recovery Centers of America.
Dr. Tomás Valdivia is one of our co-founders and has served as our Chief Health and Equity Officer since September 2015. Dr. Valdivia co-founded and served as the Chief Executive Officer of Valquist, LLC from March 2012 until March 2015. Dr. Valdivia co-founded and served as Chief Executive Officer of Luminat LLC from March 2012 until February 2015. Prior to Luminat LLC, Dr. Valdivia co-founded and served as the President of Carol Corporation from January 2007 until March 2012. In addition, Dr. ValdiviaCraig previously served as the Chief Health Consumer Officer of Definity Health
Vice President, Legal, as well as in other senior legal roles, at MGM Resorts International since 2013. Prior to MGM, Jeff was an in-house attorney with Western Digital Corporation, from March 2000 until May 2006. Dr. Valdivia is Chairman of the Board of Trustees of Intermountain Homecarea Fortune 500 hard drive manufacturer, and Hospice, is senior advisor to InTandem Capital Partners LLC and serves on the board of ClinicianNexus Inc.a corporate transactional attorney with Gibson Dunn, a leading international law firm.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELEASED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock is traded on the New York Stock Exchange (NYSE) under the symbol “BHG”.
Holders of our Common Stock
As of March 7, 2022,6, 2023, there were 267201 holders of record of our common stock. The actual number of stockholders is greater than this number of holders of record, and includes stockholders who are beneficial owners, but whose shares are held in street name by brokers and other nominees. This number of holders of record also does not include stockholders whose shares may be held in trust by other entities.
Dividends
We have never declared or paid dividends, and we currently do not expect to declare any dividends on our common stock in the foreseeable future. Instead, we anticipate that all of our earnings in the foreseeable future will be used to provide working capital, to support our operations and to finance the growth and development of our business. Any determination to declare dividends in the future will be at the discretion of our board of directors, subject to applicable laws, and will be dependent on a number of factors, including our earnings, capacity to pay dividends under the Credit Agreement, capital requirements and overall financial condition. In addition, our ability to pay dividends in the future depends in part on the earnings and distributions of funds from our health insurance subsidiaries. Applicable state insurance laws restrict the ability of such health insurance subsidiaries to declare stockholder dividends and require our health insurance subsidiaries to maintain specified levels of statutory capital and surplus. If we elect to pay dividends in the future, we may reduce or discontinue entirely the payment of such dividends at any time.
Stock Performance Graph
The following graph and related information shows a comparison of the cumulative total return for our common stock, Standard & Poor’s 500 Index (“S&P 500 Index”) and the Standard & Poor’s Health Care Index (“S&P Health Care Index”) between June 24, 2021 (the date our common stock commenced trading on the NYSE) through December 31, 2021.2022. All values assume an initial investment of $100 and reinvestment of any dividends. The comparisons are based on historical data and are not indicative of, nor intended to forecast, the future performance of our common stock.
| | | 6/24/2021 | 6/30/2021 | 7/31/2021 | 8/31/2021 | 9/30/2021 | 10/31/2021 | 11/30/2021 | 12/31/2021 | | 6/24/2021 | 6/30/2021 | 9/30/2021 | 12/31/21 | 3/31/2022 | 6/30/2022 | 9/30/2022 | 12/31/22 |
| Bright Health Group | Bright Health Group | $ | 100.00 | | $ | 103.13 | | $ | 66.59 | | $ | 55.65 | | $ | 49.04 | | $ | 52.58 | | $ | 20.01 | | $ | 20.67 | | Bright Health Group | $ | 100.00 | | $ | 103.13 | | $ | 49.04 | | $ | 20.67 | | $ | 11.60 | | $ | 10.94 | | $ | 6.31 | | $ | 3.91 | |
| S&P 500 Index | S&P 500 Index | $ | 100.00 | | $ | 100.74 | | $ | 103.13 | | $ | 106.27 | | $ | 101.33 | | $ | 108.43 | | $ | 107.67 | | $ | 112.50 | | S&P 500 Index | $ | 100.00 | | $ | 100.74 | | $ | 101.33 | | $ | 112.50 | | $ | 107.33 | | $ | 90.05 | | $ | 85.65 | | $ | 92.13 | |
| S&P Health Care Index | S&P Health Care Index | $ | 100.00 | | $ | 100.66 | | $ | 105.59 | | $ | 108.10 | | $ | 102.11 | | $ | 107.38 | | $ | 104.16 | | $ | 113.51 | | S&P Health Care Index | $ | 100.00 | | $ | 100.66 | | $ | 102.11 | | $ | 113.51 | | $ | 110.59 | | $ | 104.05 | | $ | 98.66 | | $ | 111.30 | |
Sales of Unregistered Securities
On December 6, 2021 the CompanyWe entered into an Investment Agreementinvestment agreement as of October 10, 2022 with certain purchasers (as amended through the date hereof, the “Investment“Series B Investment Agreement”) with certain subsidiaries of Cigna Corporation and certain affiliates of New Enterprise Associatespurchasers (collectively, the ““Series B Purchasers”), relating to the issuance and sale by the Company to the Series B Purchasers of 750,000175,000 shares of the Company’s Series B Convertible Perpetual Preferred Stock, par value $0.0001 per share (the “Series B Preferred Stock”), for an aggregate purchase price of $175.0 million, or $1,000 per share (the “Series B Issuance”). On October 17, 2022, the Series B Issuance was consummated. In connection with the closing of the Series B Issuance, the Certificate of Designations for the Company’s Series A Convertible Perpetual Preferred Stock, par value $0.0001 per share (the “Preferred“Series A Preferred Stock”), was amended to provide for an aggregatea weighted average anti-dilution adjustment in connection with issuances of equity-linked securities with a purchase or conversion price less than the optional conversion price of $750.0 million, or $1,000 per share (the “Issuance”).the Series A Preferred Stock. The Series B Issuance was consummated on January 3, 2022. The Issuance of the Preferred Stock pursuant to the Investment Agreement was undertaken in reliance upon an exemption from the registration requirements of the Securities Act, pursuant to Section 4(a)(2) thereof. No advertising or general solicitation was employed relating to the Series B Issuance.
Issuer Purchases of Equity Securities
None.
ITEM 6. [Reserved]
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion summarizes the significant factors affecting our operating results, financial condition, liquidity, and cash flows as of and for the periods presented below. The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and the Notes to Consolidated Financial Statements included elsewhere in this Annual Report. The statements in this discussion regarding industry outlook, our expectations regarding our future performance, liquidity, and capital resources, and all other non-historical statements in this discussion are forward-looking statements and are based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management. Actual results could differ materially from those discussed in or implied by forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Annual Report, particularly under “Forward-Looking Statements” and Item 1A – Risk Factors.
Business Overview
Bright Health Group, Inc. (“Bright Health,” “we,” “our,” “us,” or the “Company”) was founded in 2015 to transform healthcare. OurAlthough 2022 was a year of significant transition for our business, our mission ofremains the same: Making Healthcare Right. Together.It is built upon the belief that by connecting and aligning the best local resources in healthcare delivery with the financing of care, leveraging what we call the “Value Layer” of healthcare, we can drive a superior consumer experience, reduce systemic waste, lower costs, and optimize clinical outcomes. We believe that for too long, U.S. healthcare, primarily designed to cater to employers and large institutions, has failed the consumer through unnecessary complexity, a lack of transparency, and rising costs. We are making healthcare simple, personal, and affordable.
To execute on our mission, we have developed a model for healthcare transformation built upon the delivery, financing, and optimization of care. By bringing these three core pillars together, we aim to build the national, integrated healthcare system of the future, designed to break down historical barriers and create an environment in which all stakeholders – from the consumer, to the provider, to the payor – can win.
Bright Health Group consists of two reportable segments: NeueHealthsegments within our continuing operations: Consumer Care and Bright HealthCare:HealthCare. Additionally, we have one reportable segment in our discontinued operations: Bright HealthCare – Commercial.
NeueHealth is criticalConsumer Care. Our value-driven care delivery business that manages risk in partnership with external payors. Consumer Care, aims to our differentiated, aligned model of care. While Bright HealthCare is currently a larger contributor to revenue, due in part to the significant health plan premium revenue contribution from our consumers, we believe NeueHealth has a disproportional impact on our enterprise today and anticipate it will become increasingly important to our business, contributing an increasing percentage of our overall revenue in the long-term. We have presented NeueHealth first in the following discussion, consistent with management’s view of our business.
NeueHealth. Our healthcare enablement and technology business, NeueHealth, is developing the next generation, integrated healthcare system. NeueHealth significantly reducesreduce the friction and current lack of coordination between payors and providers to enable a truly consumer-centric healthcare experience. As of December 2021, NeueHealth works with over 260,000 care provider partners and2022, Consumer Care delivers high-quality virtual and in-person clinical care through its 5274 owned primary care clinics within itsan integrated care delivery system. Through thosethese risk-bearing clinics NeueHealth maintainsand our affiliated network of care providers, Consumer Care maintained over 200,000579,000 unique patient relationships as of December 31, 2021, over 175,0002022, approximately 530,000 of which are served through value-based arrangements, across multiple payors. In addition to our directly owned clinics, NeueHealth manages care for an additional 128 clinics through its affiliated clinics.
NeueHealth engages in local, personalized care delivery in multiple ways, including:
•Integrated Care Delivery – NeueHealth operates clinics providing comprehensive care to all populations.
•Bright Health Networks – A key component of our NeueHealth business is our ecosystem of Care Partners with whom we contract in service of Bright HealthCare today.
•Value Services Organization – NeueHealth empowers high-performing primary care practices and care delivery organizations to succeed in their evolution towards risk-bearing care delivery.
NeueHealth receives network rental fees from Bright HealthCare for the delivery of NeueHealth’s Care Partner and network services. In addition, NeueHealth contracts directly with Bright HealthCare to provide care through its managed and affiliated clinics. Other NeueHealth customers include external payors and third-party administrators, affiliated providers and direct-to-government programs.
Bright HealthCareHealthCare.. Our healthcare financing and distributiondelegated senior managed care business that partners with a tight group of aligned providers in California. Bright HealthCare delivers simple, personal, and affordable financing solutions to integrate thethat are focused on consumer intoretail healthcare and delivered through Bright Health’s alignment model. Bright HealthCare currently aggregates and delivers healthcare benefits to over 727,000 consumers through its various offerings, serving consumers across multiple product lines in 14 states and 99 markets. We also participate in a numberAs of specialized plans and offer employer group plans.
December 31, 2022, Bright HealthCare’s customers include commercial health plans across 11 states, which serve approximately 611,000 individuals, as well as MA products in 11 states, which serve approximately 117,000served over 125,000 lives and generally focus on higher risk, special needs, or other traditionally underserved populations.
Bright HealthCare – Commercial. Included in our discontinued operations, our Commercial healthcare financing and distribution business focused on commercial plans. In October 2022, we announced that we will no longer offer commercial health plans in 2023.
Key Factors Affecting Our Performance
We believe that the growth and future success of our business depends on a number of factors described below. While each of these factors presents significant opportunities for our business, they also pose important challenges that we must successfully address to sustain our growth and continue to improve results of operations.
Consumer Care’s ability to deliver and enable high-quality, value-based care drives revenue
Our Consumer Care business supports and manages providers in value-based and fee-for-service contracts with payors. We help organizations enter value-based arrangements designed around their needs, while simultaneously empowering them with the tools and capabilities necessary to maximize their success. In order to drive financial performance, our Consumer Care business must effectively manage risk and continue to develop and deliver tools and services supporting both managed and affiliated providers.
Consumer Care’s ability to identify and align with high-performing care delivery partners drives performance
Our Consumer Care business engages providers through a variety of alignment options ranging from having providers participate in our networks to having providers employed by us. We must continue to build and maintain an ecosystem of care delivery assets capable of supporting our third-party payors.
Consumer Care’s ability to grow our consumer base, inclusive of growth in our ACO Reach membership
Consumer Care grows its consumer base through contractual relationships with third party payors, alignment of consumers participating in the ACO Reach program as well as patient satisfaction.
Bright HealthCare’s ability to grow membership and retain consumers drives revenue growth
Bright HealthCare MA products are primarily sold for the following year through an annual selling season, which includes the open enrollment period for IFP products and annual enrollment period for MA.period. Outside of an annual selling season, IFP and MA products typically can only be sold during SEPsSpecial Enrollment Periods (“SEPs”) based on the consumer’s eligibility status and certain life events. It is critical to effectively engage both prospective and existing consumers through our multi-channel distribution strategy. For both IFP and MA products, weWe aim to offer competitive benefits at an affordable price to meet the needs of our consumers. Our IFP products’ membership typically peaks after the open enrollment period and experiences modest levels of attrition until year-end. WeHistorically, we have historically increased our MA consumer base during SEPs, given our consumers' eligibility to enroll during those periods.
Our MA business is afforded additional in-year growth opportunity due to its focus on serving low-income seniors and special needs individuals, who can enroll in and change MA health plans at any time. Therefore, constant engagement with this population is critical to effectively retain membership and drive in-year growth. MA products are generally associated with higher revenue and higher MCR as compared to IFP products, particularly with respect to special needs plans.
Bright HealthCare’s ability to capture complete and accurate risk adjustment data affects revenue
Portions of premium revenue from our IFP products and MA plans are determined by the applicable CMS risk adjustment models, which compensate insurers based on the underlying health status (acuity) of insured consumers. CMS requires that a consumer’s health status be documented annually and accurately submitted to CMS to determine the appropriate risk adjustment. Ensuring that complete and accurate health conditions of our consumers are captured within documentation submitted to CMS is critical to recognizing accurate risk adjustment, which is reflected in our revenue year-over-year. See “Risk Factors – Risks Related to Our Business – Our health plan products are subject to risk adjustment programs, which if not managed properly can result in risk adjustment transfers that do not reflect our true risk profile, which could adversely impact our financial results and cash flows.”
Bright HealthCare’s ability to drive lower unit costs and medical utilization reduces medical costs and MCRMedical Cost Ratio (“MCR”)
Bright HealthCare utilizes our Bright Health Networks to provide healthcare services primarily within its exclusive provider networks under capitated contracts and fee-for-service arrangements. Certain provider and payor contracts include value-based incentive compensation based on providers meeting contractually defined quality and financial performance metrics. To effectively manage medical costs, Bright HealthCare must ensure a consumer’s healthcare needs are primarily delivered through its Care Partners to recognize discounted contracted rates, which limits the amount of out-of-network utilization that can have an adverse financial impact on medical costs and MCR. Out-of-network utilization is typically higher upon entry into new markets, which increases medical costs during periods of market expansion.
Our business is generally affected by the seasonal patterns of medical expenses. With respect to IFP products, medical costs tend to be lower early in the year and increase toward the end of year, driven by high deductible plan designs and out-
of-pocket maximums over the course of the policy year, which shift more costs to us in the second half of the year as we pay a higher proportion of claims. With respect to MA plans, medical costs are impacted by the severity of the flu season, generally from December to March, and we typically experience slightly higher Part D medical costs early in the year, which decline toward the end of year due to standard plan design.
NeueHealth’s ability to identify and align with high-performing care delivery partners drives performance
NeueHealth engages providers through a variety of alignment options ranging from having providers participate in our networks to having providers employed by us. As we enter new markets and expand our offerings, we must build an ecosystem of care delivery assets capable of supporting both our Bright HealthCare business as well as third-party payors.
NeueHealth’s ability to deliver and enable high-quality, value-based care drives revenue
NeueHealth supports and manages providers in fee-for-service and value-based contracts with payors. We help organizations enter value-based arrangements designed around their needs, while simultaneously empowering them with the tools and capabilities necessary to maximize their success. In order to drive financial performance, NeueHealth must effectively manage risk and continue to develop and deliver tools and services supporting both managed and affiliated providers.
Bright Health Group’s ability to achieve operating cost efficiencies and scale profitably
Bright Health Group, including Bright HealthCare and NeueHealth, will needConsumer Care, needs to continue investing in operating platforms, processes, people, and resources to enableadjust our businessescosts to scale profitably.our more focused business. We leverage centralized shared services for operational, clinical, technological, and administrative functionsmust continue to supportact on our restructuring plan, aligning our expenses with the segments in a cost-effective and efficient manner.business over the course of the run-out period of the exited markets.
Components of Our Results of Operations
Revenue
We generate revenue from premiums, including value-based provider revenue, and fee-for-service provider revenue received from consumers and payors, Direct Contracting revenue as well as income from our investments.
Premium revenue
Premium revenue within continuing operations is derived primarily from Bright HealthCare IFP and MA plans sold to consumers, as well as NeueHealthConsumer Care value-based capitation revenue from serving patients.
Bright HealthCare Commercial premium revenue
The sources of commercial premium revenue are primarily IFP products which are comprised of APTC subsidies that are based on consumers’ income levels and compensated directly by the federal government, as well as billed consumer premiums. IFP products reflect adjustments related to the ACA risk adjustment program, which adjusts premium revenue based on the demographic factors and health status of each consumer as derived from current-year medical diagnoses.
Bright HealthCare MA premium revenue
The sources of MA premium revenue are Medicare Part C premiums related to consumers’ medical benefit coverage and Part D premiums related to consumers’ prescription drug benefit coverage. Medicare Part C premiums are comprised of CMS monthly capitation premiums that are risk adjusted based on CMS defined formulas using consumers’ demographics and prior-year medical diagnoses. Medicare Part D premiums are comprised of CMS monthly capitation premiums that are risk adjusted, consumer billed premiums and CMS low-income premium subsidies for the Company’s insurance risk coverage. Medicare Part D premiums are subject to risk sharing with CMS under the risk corridor provisions based on profitability of the Part D benefit. As a percentage of our total consolidated revenue, premium revenues from CMS were 32%, 40% and 13% for the years ended December 31, 2021, 2020 and 2019, respectively, which are included in our Bright HealthCare segment.
NeueHealthConsumer Care premium revenue
NeueHealthConsumer Care premium revenue represents revenue under value-based arrangements entered into by NeueHealth’sConsumer Care’s Value Services Organization and affiliated medical groups in which the responsibility for control of an attributed patient’s medical care is wholly transferred in part or wholly, to such medical groups. Such revenue includes capitation payments, as well as quality incentive payments, and shared savings distributions payable upon achievement of certain financial and quality metrics. Value-based revenue shifts responsibility for control over the medical care delivered to attributed patients to the Company and aligns incentives around the overall well-being of the payor’s consumers.
We expect that asDirect Contracting revenue
Direct Contracting revenue represents the revenue from participation in CMS’ Global and Professional Direct Contracting model (“DC Model”) on our NeueHealth business continues to grow, NeueHealth premium revenue will become an increasing proportionConsumer Care segment. Our two Direct Contracting Entities (“DCE’s”) participate in the DC Model through the global risk arrangement and assuming full risk for the total cost of care of aligned beneficiaries. As part of our overall revenue.participation in the DC Model, we are guaranteeing the performance of our care network of participating and preferred providers. The intention of the DC Model is to enhance the quality of care for Medicare FFS beneficiaries while reducing the administrative burden, supporting a focus on complex, chronically ill patients, and encouraging physician organizations that have not typically participated in Medicare FFS programs to serve Medicare FFS beneficiaries. Our Direct Contracting revenue is presented net of reinsurance costs. CMS redesigned the DC Model and renamed the model the ACO Realizing Equity, Access, and Community Health (REACH) Model (“ACO REACH Model”) effective January 1, 2023.
Service revenue
Service revenue primarily represents revenue from fee-for-service payments received by NeueHealth’sConsumer Care’s affiliated medical groups. These include patient copayments and deductibles collected directly from patients and payments from private and government payors based upon contractual terms that define the fee-for-service reimbursement for specific procedures performed.
In addition,Investment income
The sources of investment income are interest income and realized gains and losses derived from the Company’s investment portfolio that is comprised of debt securities of the U.S. government and other government agencies, corporate
investment grade, money market funds and various other securities, as well as realized and unrealized gains and losses from equity securities.
Operating Expenses
Medical costs
Medical costs consist of reimbursements to providers for medical services, costs of prescription drugs, supplemental benefits, risk share payments to payors, and quality incentive, management fees and shared savings compensation to providers net of any reinsurance recoveries. The Company contracts with hospitals, physicians and other providers of healthcare primarily within its exclusive provider networks under fee-for-service and value-based arrangements. Emergency medical services incurred out-of-network are a covered benefit to consumers and reimbursed to providers according to the Company’s payment policies that are based on applicable regulations. Prescription drug costs are determined based on the contracts with our pharmacy benefits managers, which includes pharmacy rebates that are received for certain drug utilization levels or contracted minimums. Dental, vision, and other supplemental medical services are provided to consumers under capitated arrangements. Reinsurance arrangements enable us to cede a specified percent of our premiums and claims to our third-party reinsurers. Under such contracts, the reinsurer is paid to cover claims-related losses over a specified amount, which mitigates catastrophic risk. We make quality incentive and shared savings compensation payments to certain providers in accordance with the terms of the contractual arrangement upon the achievement of certain financial and quality metrics.
For value-based arrangements in which we bear limited risk, we recognize revenue on a net basis. Medical costs incurred from these arrangements are presented net of the associated premium revenue.
Operating Costs
Operating costs are comprised of the expenses necessary to execute the Company’s business operations. These include employee compensation for salaries and related benefit costs, share-based compensation, outsourced vendor contracted service revenue includes networkand technology fees, professional services, technological infrastructure and service revenue generated by NeueHealth’s Bright Health Networks.fees, facilities costs and other administrative expenses. We expect operating costs to decrease with our exit of the Commercial market beginning with the 2023 plan year and the restructuring of our operations.
Restructuring Charges
Restructuring charges are comprised of contract termination costs and severance costs as part of a workforce reduction in 2022. The charges included within our continuing operations are those not directly attributable to our decision to exit the Commercial business for the 2023 plan year.
Goodwill Impairment
Goodwill impairment within our continuing operations is primarily comprised of the impairment of our Bright HealthCare reporting unit, formerly Medicare Advantage, that was primarily driven by an increase in the discount rate, which was impacted by higher interest rates and other market factors.
Intangible Assets Impairment
The intangible assets impairment within our continuing operations is currentlyprimarily related to a full impairment of Centrum’s reacquired contract with Bright HealthCare Florida as a result of our announcement that we will no longer offer Commercial products for the only2023 plan year.
Depreciation and Amortization
Depreciation and amortization consist of depreciation of property, equipment and capitalized software, as well as amortization of definite-lived intangible assets acquired in business combinations, including customer relationships, trade names, reacquired contracts and developed technology.
Other Income and Expenses
Interest Expense
Interest expense consists of interest payments on credit facilities, as well as amortization of debt issuance costs.
Income Tax Expense (Benefit)
Income tax expense (benefit) consists primarily of changes to our current and deferred federal tax assets and liabilities net of applicable valuation allowances.
Loss from Discontinued Operations
Commercial premium revenue
Premium revenue within discontinued operations is derived from commercial plans sold to consumers. The sources of commercial premium revenue are primarily IFP products which are comprised of APTC subsidies that are based on consumers’ income levels and compensated directly by the federal government, as well as billed consumer premiums. IFP products reflect adjustments related to the ACA risk adjustment program, which adjusts premium revenue based on the demographic factors and health status of each consumer as derived from current-year medical diagnoses.
Investment income
The sources of investment income are interest income and realized gains and losses derived from the Company’s investment portfolio that is comprised of debt securities of the U.S. government and other government agencies, corporate investment grade, money market funds and various other securities, as well as realized and unrealized gains and losses from equity securities.
Operating Expenses Impairments recognized on our investments are also included within investment income of our discontinued operations.
Medical costs
Medical costs consist of reimbursements to providers for medical services, costs of prescription drugs, supplemental benefits, reinsurance and quality incentive and shared savings compensation to providers.providers in relation to our Commercial products. The Company contracts with hospitals, physicians and other providers of healthcare primarily within its exclusive provider networks under fee-for-service and value-based arrangements. Emergency medical services incurred out-of-network are a covered benefit to consumers and reimbursed to providers according to the Company’s payment policies that are based on applicable regulations. Prescription drug costs are determined based on the contracts with our pharmacy benefits managers, which includes pharmacy rebates that are received for certain drug utilization levels or contracted minimums. Dental, vision, and other supplemental medical services are provided to consumers under capitated arrangements. Reinsurance arrangements enable us to cede a specified percent of our premiums and claims to our third-party reinsurers. Under such contracts, the reinsurer is paid to cover claims-related losses over a specified amount, which mitigates catastrophic risk. We make quality incentive and shared savings compensation payments to certain providers in accordance with the terms of the contractual arrangement upon the achievement of certain financial and quality metrics.
Operating Costs
Operating costs within discontinued operations are compriseddirect expenses incurred in the operation of the expenses necessary to execute the Company’s business operations.our Commercial business. These include employee compensation for salaries and related benefit costs, share-based compensation, outsourced vendor contracted service and technology fees, professional services, technological infrastructure and service fees facilities costs and other administrative expenses. Operating costs also include payments made by Bright HealthCarethe discontinued operations to NeueHealthConsumer Care for the provision of Bright Health Networks services; selling and marketing expenses from external broker commissions and advertising, primarily related to consumer acquisition; and premium taxes, exchange fees and other regulatory costs, which are primarily based on premium revenue. Additionally, in prior years, the premium deficiency reserve expense for expected future losses in certain markets is included in operating costs.
in certain markets is included in operating costs. We expect operating costs to increase in absolute amounts as our business grows, but to decrease as a percentage of our revenue in the long-term.Restructuring Charges
DepreciationRestructuring charges are comprised of contract termination costs and Amortizationseverance costs as part of a workforce reduction in 2022 and impairment of long-lived assets. The charges included within our discontinued operations are those directly attributable to our decision to exit the Commercial business for the 2023 plan year.
Depreciation and amortization consist of depreciation of property, equipment and capitalized software, as well as amortization of definite-lived intangible assets acquired in business combinations, including customer relationships, trade names, reacquired contracts and developed technology.Goodwill Impairment
Other Income and ExpensesGoodwill impairment within our discontinued operations is comprised of the impairment of our Bright HealthCare — Commercial reporting unit, specifically Commercial business, that was driven by our decision to exit the Commercial markets beginning for the 2023 plan year.
Interest ExpenseIntangible Assets Impairment
Interest expense consistsIntangible assets impairment within our discontinued operations is comprised of interest payments on credit facilities, as well as amortizationthe impairment of debt issuance costs.
Income Tax (Benefit) Expense
Income tax (benefit) expense consists primarily of changesintangible assets related to our current and deferred federal tax assets and liabilities net of applicable valuation allowances.
Initial Public Offering
On June 23, 2021,TrueHealth New Mexico (“THNM”) acquisition, that was driven by our decision to exit the Company’s Registration Statement on Form S-1Commercial markets beginning for the initial public offering of shares of common stock was declared effective by the U.S. Securities & Exchange Commission. The Company’s common stock began trading on the NYSE under the ticker symbol “BHG” on June 24, 2021. The IPO closed on June 28, 2021 and the Company sold 51,350,000 shares of common stock at a price of $18.00 per share. In aggregate, the shares issued in the offering generated $887.3 million in net proceeds, the amount of which is net of $37.0 million in underwriters’ discounts and commissions. Immediately effective upon the closing of our IPO, all 167,731,830 shares of our then outstanding preferred stock were converted into 427,897,381 shares of common stock, causing the Company to reclassify $1.8 billion from redeemable preferred stock within temporary equity to common stock and additional paid-in capital on our consolidated balance sheet.
We utilized a portion of the net proceeds to repay the $200.0 million principal balance of indebtedness outstanding under our revolving credit agreement originally entered into on March 1, 2021 and the associated interest and other costs of $3.2 million. Additionally, we used a portion of the proceeds to fund the acquisition of Centrum Medical Holdings, LLC (“Centrum”) as described in Note 3 of the Notes to Consolidated Financial Statements. The remainder of the net proceeds were used for general corporate purposes.
See further discussion related to the IPO as described in Note 1 of the Notes to Consolidated Financial Statements.2023 plan year.
COVID-19 Impact
The ongoing COVID-19 pandemic, including its effect on the macroeconomic environment, and the response of local, state, and federal governments to contain and manage the virus, continues to impact our business. The emergence of COVID-19 variants in the United States and abroad continues to prolong the risk of additional surges of the virus. In addition, somecertain new variants have emerged that appear more transmissible and more resistant to current vaccines. Some individuals have also delayed or are not seeking routine medical care to avoid COVID-19 exposure. These and other responses to the COVID-19 pandemic have meant that our MCR may be subject to additional uncertainty as certain segments of the economy and workforce come back on line, members resume care that may have been foregone, and the broader population becomes vaccinated.
We have experienced impacts to our business from COVID-19, which have varied as the pandemic progressed. Initially, as a result of the suspension of elective surgeries and deferral of medical care, we experienced decreased medical utilization, particularly in the second quarter of 2020. Since then, medical utilization has returned to more normal levels and adverse financial impacts from inpatient admissions emerged primarily due to increased average length of stays.
In 2021, our results were more significantly impacted by COVID-19 than in 2020. We experienced increased COVID-19 related costs throughout 2021, with a more significant increase in the second half of 2021, particularly due to negative
trends in the Southeast United States, which includes two of our largest markets – Florida and North Carolina. For the years ended December 31, 2022, 2021, and 2020 the impact of COVID-19 increased our MCR by 530 basis points and 400 basis points, respectively, reflecting an increase in medical costs of $208.0by $36.4 million, $59.4 million, and $46.6$30.2 million respectively.
Overall measures to contain the COVID-19 outbreak may remain in place for a significant period of time, as certain geographic regions have experienced a resurgence of COVID-19 infections and new strains of COVID-19 that appear to be more transmissible and may potentially evade vaccines have emerged. Although the number of people who have been vaccinated has been increasing, theThe duration and severity of this pandemic is unknown and the extent of the business disruption and financial impact depends on factors beyond our knowledge and control.
Business Update
Our mission – Making Healthcare Right. Together. – is built on the belief that by connecting and aligning the best local resources in healthcare delivery with the financing of care, we can deliver better outcomes, at a lower cost, for all consumers. Bright Health Group is building a truly unique model that we believe will transform how healthcare is delivered. We believe when healthcare is delivered in a Fully Aligned and Integrated Care model, we can bend the cost curve and, most importantly, enhance value for both consumers and providers.
We achieved substantial growth in 2021, reaching over $4.0 billion in revenue,In October 2022, we announced that our business will be focused on delivering affordable healthcare for aging and we are enthusiastic about our positioning for 2022. As we executed on our strategy to quickly gain scaleunderserved populations in the business, we expected some variabilitylargest healthcare markets in our results,the country and we saw that play out as we closed 2021. The meaningful revenue growth we delivered in 2021, which was drivencontinuing to a combination of higher than anticipated growth to start the year and additional growth from the Special Enrollment Period, outpaced our operational and system capabilities.
Unique factors in 2021, including the COVID-19 pandemic and our large group of new members without risk scores, combined with scaling up our organizational capabilities and enterprise technologies, impacted our results into the fourth quarter more significantly than anticipated. These factors impacted our ability to engage with our members in order to accurately capture their underlying health conditions and impacted prior period medical costs as we caught up on claims processing.
Despite the challenges we faced 2021, we believe our larger base of business along with continued growth into 2022, provides a solid platform to continue executing on our strategy. We anticipate that throughleverage our Fully Aligned Care Model with external payor partners and affiliate care providers. We will continue to build on the value-driven care model that we can drive differentiated results and we are taking specific actions to focushave been advancing since the Company, improve our systems and processes, and drive toward profitable growth. We are continuing to invest in building our NeueHealth business and have successfully expanded NeueHealth owned clinics outsidestart of the Florida market, while also continuing to build our affiliated Care Partner network across the country.
Many of the challenges we encountered this past year can be attributed to specific areas that were already on our list for improvement, but the growth we experienced exacerbated the gaps in performance. We made significant progress correcting these issues in our operational capabilities in 2021, which we expect will help drive improved 2022 performance along with opportunities we see for further improvement over the course of 2022.company.
We have takenstarted implementing restructuring plans to adjust our costs to our more focused business in order to achieve our 2023 gross margin and operating expense targets. We will continue to take steps to adjust our expenses in-line with milestones in the following specific actions against several areas that we believe will impact near-term performance, which include:marketplace business over the course of the run-out period of the exited markets.
1.Net Pricing Action in Core Markets: We took pricing action in excess of our expectation for underlying medical cost trends for the majority of our membership in legacy IFP markets, while still being able to demonstrate meaningful growth. In addition,As we priced in potential COVID related costs to reflect the risk of future COVID related expenses. We alsomove forward into 2023, we are focusing our business on pricing as an important leverour Consumer Care care delivery business and our Medicare Advantage health plans in 2023, as we continue our path to profitability.
2.Unit CostCalifornia. We have a scaled Medicare Advantage business in California, the largest market for seniors and Medical Management Reduction Initiatives: In 2021, we identified several unit costunderserved populations, and medical management opportunities across our IFP and MA businesses that we were unable to capitalize on in 2021, which are expected to drive value in 2022. These medical cost efforts are in addition to the net pricing actions we have taken. As we gained scalebuilt a high performing Fully Aligned Care Model with our Care Partners. In Florida and optimizedTexas, our processes, we were ableConsumer Care risk-bearing care delivery and provider affiliate management business continues to renegotiate ancillary and pharmacy contracts, reduce out of network rates, optimize existing contract structures, more closely manage high-cost cases, and improve our specialty provider network.deliver differentiated results. We expect that optimizingto expand our footprint over time serving the care network will be anaging and
ongoing process that requires dataunderserved consumers in Medicare and the consumer marketplace, together with our key health plan partners. We will also continue to grow our Direct Contracting business in the new ACO Reach program, building on our members2022 performance.
While we wind down the marketplace business, we will remain focused on the growth opportunities for our Bright HealthCare and volume,Consumer Care businesses. We believe both of whichbusinesses are in attractive markets with strong tailwinds, where we now have significantly more of,differentiated offerings. We intend to manage each business to maximize operating profitability in 2023, as well as better systems to provide visibility.
3.Risk Adjustment Actions: Accurate risk adjustment was a challenge due to several structural issues in 2021; however, those challenges drove us to make significant investment in our capabilities. We are working on faster attribution of our members to a larger network of owned and affiliated physicians that have better ability to engage with their members earlier in the year. We have also made technology and operational investments in suspecting analytics, outreach and engagement teams, and our end-to-end risk adjustment process in order to accurately capturing the risk of the population we manage. We are also working to help members better manage and navigate their care, which we expect will drive better in-network trends.
4.Claims and Clinical Platform Stabilization: Our growth significantly challenged the capacity of our fully aligned provider networks, as well as the capacity of our administrative, operational, and clinical systems. This growth occurred while we were building BiOS and transitioning from numerous vendor solutionscorporate expenses to BiOS, our end state operating platform. In 2022, we transitioned to new finance and people systems. In addition, 70% of our membership is on our proprietary clinical system, Panorama, and all of our new market membership is on our new claims administration platform with the remainder of our IFP membership expected to migrate in January 2023. BiOS provides us greater visibility and efficiency, the benefits of which include faster claims processing times, more accurate payments, industry standard denial rates, and more timely and complete consumer data.
5.We are Addressing Talent and Cost Structure: A high performing team is critical to our ability to improve performance and drive sustainable results. We continue to evolve our team, adding expertise as needed, and have taken specific actions to reduce the cost structure, eliminate redundancies, and drive efficiencies across the organization.
We also believe the following Company and industry factors will have an impact of our performance in 2022:
1.Scale and Diversification: We achieved growth in the 2022 Annual and Open Enrollment Periods, which provides improved scale, at more than 1 million health plan members, and 400,000 lives under risk-based contracts. This scale not only allows us to better manage population risk and reduce volatility, but our density in specific markets such as California, Texas, Florida, and North Carolina, allows us to better engage with providers and be a more meaningful portion of their overall business.
2.Higher Retained Membership: Inclusive of the impact of the 2021 SEP, approximately 85% of our IFP membership was new in 2021. To begin 2022, including new markets, approximately 55% of our enrollment is new. We also benefit from strong renewal rates, with a retention rate of 79% in our mature markets – those existing for more than two years. This has multiple benefits, including more data and information on our members to help us better manage the population and accurately capture member risk.
3.Normalized Special Enrollment Period: The 2021 SEP, while providing us with continued growth over the course of the year, came with unique challenges with regards to performance. The shorter member duration and higher acute care costs for those members, all against the backdrop of COVID, made it very difficult to engage with this population and accurately capture their risk. We expect a much more normalized SEP this year.
4.Reduced Operational Backlog: The operational challenges driven by our 2021 growth caused us to spend significant time and effort working through an operational backlog. We have made significant investments in the team and systems and we believe we are far better prepared for the growth we expect in 2022. This will allow us to better engage and respond to issues and more effectively manage performance within our population.
5.Endemic COVID: We believe COVID will continue in some capacity for the foreseeable future; however, do not expect it to be nearly as acute as it was in 2021. With the increase in vaccination rates, while cases of COVID may continue, we expect direct COVID costs will be more manageable.maximize consolidated Adjusted EBITDA profitability.
We believe the near-term steps that we are taking to improve our performance will optimize the business for long-term success.
Key Metrics and Non-GAAP Financial Measures
In addition to our GAAP financial information, we review a number of operating and financial metrics, including the following key metrics, to evaluate our business, measure our performance, identify trends affecting our business, formulate our business plan and make strategic decisions.
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| Bright HealthCare Consumers Served | | | | | |
Commercial (1) | 611,078 | | | 145,459 | | | 54,782 | |
| Medicare Advantage | 116,621 | | | 61,663 | | | 4,146 | |
| | | | | |
| NeueHealth Patients | | | | | |
| Value-Based Care Patient Lives | 175,587 | | | 21,126 | | | — | |
(1) Commercial includes IFP and employer plans. Prior to 2021, our Commercial business was solely comprised of IFP products. | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Bright HealthCare Consumers Served | | | | | |
| Medicare Advantage | 125,000 | | | 117,000 | | | 62,000 | |
| | | | | |
| Consumer Care Patients | | | | | |
| Value-Based Care Consumers | 530,000 | | | 170,000 | | | 21,000 | |
Key Metrics
Bright HealthCare Consumers Served
Consumers served include Bright HealthCare individual lives served via health insurance policies across multiple lines of business, primarily attributable to IFP products and MA plans in markets across the country. We believehistorically believed growth in the number of consumers isfor both our Commercial plans and Medicare Advantage plans was a key indicator of the performance of our Bright HealthCare business. ItHowever, given Bright HealthCare’s decision to exit the commercial marketplace for the 2023 plan year, we expect Commercial consumers to decline to zero, and we will focus on growth in our Medicare Advantage consumers in California. The number of consumers served also informs our management of the operational, clinical, technological and administrative functional area needs that will require further investment to support expected future consumer growth.
Value-Based Care Patient LivesConsumers
Value-based care patientsconsumers are patientsconsumers attributed to providers contracted under varied value-based care delivery models in which the responsibility for control of an attributed patient’s medical care is transferred, in part or wholly, to our NeueHealthConsumer Care managed medical groups. We believe growth in the number of value-based care patientsconsumers is a key indicator of the performance of our NeueHealthConsumer Care business. It also informs our management of the operational, clinical, technological and administrative functional area needs that will require further investment to support expected future patient growth. Over time,While we expect ourthe number of value-based careconsumers Consumer Care supports in 2023 to decline compared to 2022 due to Bright HealthCare’s commercial market exits, we expect external value-based payor contracts as well as the conversion of fee for service patients into value-based patients, will increase as we convert fee-for-servicethe number of patients managed in value-based arrangements into value-based care financial arrangements.over time.
| | | Year Ended December 31, | | Year Ended December 31, |
| ($ in thousands) | ($ in thousands) | 2021 | | 2020 | | 2019 | ($ in thousands) | 2022 | | 2021 | | 2020 |
| Net Loss | Net Loss | $ | (1,178,365) | | | (248,442) | | | (125,337) | | Net Loss | $ | (1,359,880) | | | (1,178,365) | | | (248,442) | |
Adjusted EBITDA(1) | Adjusted EBITDA(1) | $ | (1,080,906) | | | (238,912) | | | (121,091) | | Adjusted EBITDA (1) | $ | (233,489) | | | (321,317) | | | (151,692) | |
(1)See “Non-GAAP Financial Measures” below for reconciliations to the most directly comparable financial measures calculated in accordance with GAAP and related disclosures.
Non-GAAP Financial Measures
Adjusted EBITDA
We define Adjusted EBITDA as net loss excluding loss from discontinued operations, interest expense, income taxes, depreciation and amortization, any impairment of goodwill or intangible assets, adjusted for the impact of acquisition and financing-related transaction costs, share-based compensation, changes in the fair value of equity securities, changes in the fair value of contingent consideration, and contract termination costs and restructuring costs. Adjusted EBITDA has been presented in this Annual Report as a supplemental measure of financial performance that is not required by, or presented in accordance with, GAAP, because we believe it assists management and investors in comparing our operating performance across reporting periods ona
consistent basis by excluding items that we do not believe are indicative of our core operating performance. Management believes Adjusted EBITDA is useful to investors in highlighting trends in our operating performance, while other measures can differ significantly depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which we operate and capital investments. Management uses Adjusted EBITDA to supplement GAAP measures of performance in the evaluation of the effectiveness of our business strategies, to make budgeting decisions, to establish discretionary annual incentive compensation and to compare our performance against that of other peer companies using similar measures. Management supplements GAAP results with non-GAAP financial measures to provide a more complete understanding of the factors and trends affecting the business than GAAP results alone.
Adjusted EBITDA is not a recognized term under GAAP and should not be considered as an alternative to net income (loss) as a measure of financial performance or cash provided by operating activities as a measure of liquidity, or any other performance measure derived in accordance with GAAP. Additionally, this measure is not intended to be a measure of free cash flow available for management’s discretionary use as we do not consider certain cash requirements such as interest payments, tax payments and debt service requirements. The presentation of this measure has limitations as an analytical tool and should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP. Because not all companies use identical calculations, the presentation of this measure may not be comparable to other similarly titled measures of other companies and can differ significantly from company to company.
The following table provides a reconciliation of net loss to Adjusted EBITDA for the periods presented:
| | | Year Ended December 31, | | Year Ended December 31, |
| (in thousands) | (in thousands) | 2021 | | 2020 | | 2019 | (in thousands) | 2022 | | 2021 | | 2020 |
| Net loss | Net loss | $ | (1,178,365) | | | $ | (248,442) | | | $ | (125,337) | | Net loss | $ | (1,359,880) | | | $ | (1,178,365) | | | $ | (248,442) | |
Loss from discontinued operations (a) | | Loss from discontinued operations (a) | 721,915 | | | 855,255 | | | 87,220 | |
| EBITDA adjustments from continuing operations: | | EBITDA adjustments from continuing operations: | |
| Interest expense | Interest expense | 7,956 | | | — | | | — | | Interest expense | 12,821 | | | 7,230 | | | — | |
| Income tax (benefit) expense | (26,521) | | | (9,161) | | | — | | |
| Income tax expense (benefit) | | Income tax expense (benefit) | 3,680 | | | (26,521) | | | (9,161) | |
| Depreciation and amortization | Depreciation and amortization | 35,484 | | | 8,289 | | | 1,134 | | Depreciation and amortization | 50,430 | | | 35,049 | | | 8,289 | |
Transaction costs (a) | 6,338 | | | 4,950 | | | 1,248 | | |
Share-based compensation expense (b) | 68,423 | | | 5,452 | | | 1,864 | | |
Change in fair value of contingent consideration (c) | (4,221) | | | — | | | — | | |
Contract termination costs (d) | 10,000 | | | — | | | — | | |
| Goodwill impairment | | Goodwill impairment | 71,225 | | | — | | | — | |
| Intangible assets impairment | | Intangible assets impairment | 42,611 | | | — | | | — | |
Transaction costs (b) | | Transaction costs (b) | 1,661 | | | 2,064 | | | 4,950 | |
Share-based compensation expense (c) | | Share-based compensation expense (c) | 109,713 | | | 68,423 | | | 5,452 | |
Change in fair value of equity securities (d) | | Change in fair value of equity securities (d) | 80,231 | | | (80,231) | | | $ | — | |
Change in fair value of contingent consideration (e) | | Change in fair value of contingent consideration (e) | 332 | | | (4,221) | | | — | |
Contract termination costs (f) | | Contract termination costs (f) | 1,241 | | | — | | | — | |
Restructuring costs (g) | | Restructuring costs (g) | 30,531 | | | — | | | — | |
| EBITDA adjustments from continuing operations | | EBITDA adjustments from continuing operations | 404,476 | | | 1,793 | | | 9,530 | |
| Adjusted EBITDA | Adjusted EBITDA | $ | (1,080,906) | | | $ | (238,912) | | | $ | (121,091) | | Adjusted EBITDA | $ | (233,489) | | | $ | (321,317) | | | $ | (151,692) | |
(a)Beginning in the fourth quarter of 2022, Adjusted EBITDA excludes the impact of discontinued operations. The comparable period in 2021 has been recast to exclude these impacts. Loss from discontinued operations represents losses associated with the Commercial business segment that we exited at the end of 2022. The loss from discontinued operations includes over $180 million of investment impairments, restructuring costs, goodwill and intangibles impairments and other exit related costs for the twelve months ended December 31, 2022, respectively.
(b)Transaction costs include accounting, tax, valuation, consulting, legal and investment banking fees directly relating to business combinations and certain costs associated with our IPO.initial public offering. These costs can vary from period to period and impact comparability, and we do not believe such transaction costs reflect the ongoing performance of our business.
(b)(c)Represents non-cash compensation expense related to stock option and restricted stock unit and performance-based restricted stock unitaward grants, which can vary from period to period based on a number of factors, including the timing, quantity and grant date fair value of the awards.
(c)(d)Beginning in 2022, Adjusted EBITDA excludes the impact of changes in unrealized gains and losses on equity securities. The comparable prior periods have been recast to exclude changes in unrealized gains and losses on equity securities.
(e)Represents the non-cash change in the fair value of contingent consideration from business combinations, which is remeasured at fair value each reporting period. There was no material activity for periods prior to the first quarter of 2021.
(d)(f)Represents amountamounts paid for early termination of an existing vendor contract.contracts.
(g)Restructuring costs represent severance costs as part of a workforce reduction in 2022 and impairment of certain long-lived assets relating to our decision to exit the Commercial business for the 2023 plan year.
Acquisitions
Effective December 31, 2019, we acquired substantially all of the assets of Associates in Family Practice of Broward, L.L.C., a Florida limited liability corporation, renaming it to AssociatesMD Medical Group, Inc. (“AMD”). This NeueHealth acquisition was completed to enhance our clinical capabilities to better serve enrollees as part of our planned Florida market entrance in 2020.
Effective April 30, 2020, we acquired Universal Care, Inc. (d.b.a. Brand New Day) (“BND”), which is focused on serving primarily MA special needs consumers. This Bright HealthCare acquisition was completed to bolster our MA platform and provide entry into California.
Effective December 31, 2020, we acquired a 62% controlling interest in Premier Medical Associates of Florida, LLC (“PMA”). This NeueHealthConsumer Care acquisition was completed to enhance our clinical capabilities to better serve enrollees as part of our Florida market expansion in 2021.
Effective March 31, 2021, we acquired THNM, which offers policies available through the commercial market for individual on- and off-exchange and employer-sponsored health coverage. This Bright HealthCareIncluded in our discontinued operations, this acquisition was completed to enter into a new state of strategic interest and to leverage THNM’s strong local clinical model of care.
Effective March 31, 2021, we acquired Zipnosis, Inc. (“Zipnosis”), which is a telehealth platform that offers virtual care to health systems around the U.S. This NeueHealthConsumer Care acquisition was completed to enhance our proprietary technology platform, DocSquad, and our consumer and provider connectivity with Zipnosis’ virtual care capabilities.
Effective April 1, 2021, we acquired Central Health Plan of California, Inc. (“CHP”), an insurance provider of MA health maintenance organization (“HMO”) services. This Bright HealthCare acquisition was completed to gain synergies from leveraging CHP’s clinical model and California consumer expertise to continue to expand our MA business in the California market.
Effective July 1, 2021, we acquired Centrum, a value-based primary care focused, multi-specialty medical group, serving Commercial, Medicare, and Medicaid consumers across multiple payors. This NeueHealthConsumer Care acquisition was completed for the incremental financial benefits achievable through our integrated care delivery model,Fully Aligned Care Model, whereby Bright HealthCare membersCommercial, Medicare, and Medicaid consumers across multiple payors are cared for under value-based arrangements with Centrum. This model brings together the financing, distribution, and delivery of high-quality healthcare and provides the opportunity to enhance our overall margin potential.healthcare.
See Note 3 in the Notes to Consolidated Financial Statements for more information regarding our business combinations.
Results of Operations
The following table summarizes our audited consolidated statements of income (loss) data for the years ended December 31, 2022, 2021 2020 and 2019.2020.
| | (in thousands) | (in thousands) | Year Ended December 31, | (in thousands) | Year Ended December 31, |
| Consolidated Statements of Income (loss) and operating data: | Consolidated Statements of Income (loss) and operating data: | 2021 | | 2020 | | 2019 | Consolidated Statements of Income (loss) and operating data: | 2022 | | 2021 | | 2020 |
| Revenue: | Revenue: | | | | | | Revenue: | | | | | |
| Premium revenue | Premium revenue | $ | 3,902,714 | | $ | 1,180,338 | | $ | 272,323 | Premium revenue | $ | 1,764,949 | | $ | 1,390,330 | | $ | 487,905 |
| Direct Contracting revenue | | Direct Contracting revenue | 654,087 | | — | | — |
| Service revenue | Service revenue | 42,701 | | 18,514 | | — | Service revenue | 48,013 | | 42,469 | | 18,514 |
| Investment income | 83,974 | | 8,468 | | 8,350 | |
| Investment income (loss) | | Investment income (loss) | (55,019) | | 80,234 | | 8,468 |
| Total revenue | Total revenue | 4,029,389 | | 1,207,320 | | 280,673 | Total revenue | 2,412,030 | | 1,513,033 | | 514,887 |
| Operating costs | Operating costs | | | | | | Operating costs | |
| Medical costs | Medical costs | 3,953,674 | | 1,047,300 | | 224,387 | Medical costs | 2,206,243 | | 1,294,158 | | 451,918 |
| Operating costs | Operating costs | 1,238,387 | | 409,334 | | 180,489 | Operating costs | 632,030 | | 527,453 | | 225,063 |
| Restructuring charges | | Restructuring charges | 31,739 | | — | | — |
| Goodwill impairment | | Goodwill impairment | 71,225 | | — | | — |
| Intangibles impairment | | Intangibles impairment | 42,611 | | — | | — |
| Depreciation and amortization | Depreciation and amortization | 35,484 | | 8,289 | | 1,134 | Depreciation and amortization | 50,430 | | 35,049 | | 8,289 |
| Total operating costs | Total operating costs | 5,227,545 | | 1,464,923 | | 406,010 | Total operating costs | 3,034,278 | | 1,856,660 | | 685,270 |
| Operating loss | Operating loss | (1,198,156) | | (257,603) | | (125,337) | Operating loss | (622,248) | | (343,627) | | (170,383) |
| Interest expense | Interest expense | 7,956 | | — | | — | Interest expense | 12,821 | | 7,230 | | — |
| Other income | Other income | (1,226) | | — | | — | Other income | (784) | | (1,226) | | — |
| Loss before income taxes | (1,204,886) | | (257,603) | | (125,337) | |
| Income tax (benefit) expense | (26,521) | | (9,161) | | — | |
| Loss from continuing operations before income taxes | | Loss from continuing operations before income taxes | (634,285) | | (349,631) | | (170,383) |
| Income tax expense (benefit) | | Income tax expense (benefit) | 3,680 | | (26,521) | | (9,161) |
| Net loss from continuing operations | | Net loss from continuing operations | (637,965) | | (323,110) | | (161,222) |
| Loss from discontinued operations, net of tax (Note 4) | | Loss from discontinued operations, net of tax (Note 4) | (721,915) | | (855,255) | | (87,220) |
| Net loss | Net loss | (1,178,365) | | (248,442) | | (125,337) | Net loss | (1,359,880) | | (1,178,365) | | (248,442) |
| Net earnings attributable to non-controlling interest | (6,497) | | — | | — | |
| Net earnings from continuing operations attributable to noncontrolling interests | | Net earnings from continuing operations attributable to noncontrolling interests | (95,664) | | (6,497) | | — |
| Series A preferred stock dividend accrued | | Series A preferred stock dividend accrued | (37,889) | | — | | — |
| Series B preferred stock dividend accrued | | Series B preferred stock dividend accrued | (1,798) | | — | | — |
| Net loss attributable to Bright Health Group, Inc. common shareholders | Net loss attributable to Bright Health Group, Inc. common shareholders | $ | (1,184,862) | | $ | (248,442) | | $ | (125,337) | Net loss attributable to Bright Health Group, Inc. common shareholders | $ | (1,495,231) | | $ | (1,184,862) | | $ | (248,442) |
| Adjusted EBITDA | Adjusted EBITDA | $ | (1,080,906) | | $ | (238,912) | | $ | (121,091) | Adjusted EBITDA | $ | (233,489) | | $ | (321,317) | | $ | (151,692) |
Medical Cost Ratio (MCR) (1) | 101.3 | % | | 88.7 | % | | 82.4 | % | |
Operating Cost Ratio (2) | 30.7 | % | | 33.9 | % | | 64.3 | % | |
Operating Cost Ratio (1) | | Operating Cost Ratio (1) | 26.2 | % | | 34.9 | % | | 43.7 | % |
_______________________
(1)Medical Cost Ratio is defined as medical costs divided by premium revenue.
(2)Operating Cost Ratio is defined as operating costs divided by total revenue.
2022 Compared to 2021
Total revenue increased by $899.0 million, or 59.4%, for the year ended December 31, 2022 as compared to the same period in 2021. The increase is largely attributable to our two DCEs aligned with our Consumer Care segment that began participating in the DC Model effective January 1, 2022, which contributed $654.1 million of the increase in total revenue. In addition, premium revenue increased $374.6 million, or 26.9%, due to organic growth of our Bright HealthCare business as well as a full year of CHP operations that was acquired on April 1, 2021. Also contributing to the premium revenue increase was an increase of over 360,000 value-based care consumers as well as organic increases in consumers served by our Bright HealthCare business. The increases in premium revenue and Direct Contracting revenue were partially offset by a reduction in investment income driven by changes in the fair value of investments in equity securities.
Medical costs increased by $912.1 million, or 70.5%, for the year ended December 31, 2022, as compared to the same period in 2021. Medical costs incurred associated with beneficiaries aligned to our DCEs contributed to the increase as well as organic growth in our Bright HealthCare business. In 2022, we also had a full year of medical costs from CHP that was acquired on April 1, 2021.
Operating costs increased by $104.6 million, or 19.8%, for the year ended December 31, 2022 as compared to the same period in 2021. The increase in operating costs was primarily due to a $97.3 million increase in compensation and fringe benefits inclusive of share-based compensation expense. This increase is partially offset by the release of the $9.4 million premium deficiency reserve in the year ended December 31, 2022 that was accrued in the year ended December 31, 2021 for the then future expected losses in certain markets in 2022 in our Bright HealthCare segment.
Our operating cost ratio of 26.2% for the year ended December 31, 2022 improved 870 basis points as compared to the same period in 2021. The decrease was primarily due to operating costs increasing at a slower rate than the increased premium revenues earned due to consumer growth and participating in the DC Model, as we gain leverage on our operating costs as we grow.
We recognized $31.7 million of restructuring costs for the year ended December 31, 2022 for employee termination benefits, contract termination costs and long-lived asset impairments incurred in relation to the actions we have taken to restructure the Company’s workforce and reduce expenses based on our updated business model. There were no restructuring costs in the year ended December 31, 2021.
We recognized $71.2 million of non-cash goodwill impairment for the year ended December 31, 2022, which included $70.0 million in our Bright HealthCare segment. We also recognized $42.6 million of non-cash intangible assets impairment for the year ended December 31, 2022, which included impairments at our Consumer Care segment. There were no impairments of goodwill or intangibles in the year end December 31, 2021.
Depreciation and amortization increased by $15.4 million, or 43.9%, for the year ended December 31, 2022 as compared to the same period in 2021. The increase is primarily due to a full year of amortization expense from 2021 acquisitions in the 2022 period compared to only portions of the 2021 period specifically the acquisition of CHP on April 1, 2021 and Centrum on July 1, 2021. Additionally, depreciation expense increased in 2022 due to depreciation related to capitalized software projects completed in the past year.
Interest expense increased $5.6 million, or 77.3%, for the year ended December 31, 2022 as compared to the same period in 2021 due to increased borrowings on the credit agreement we entered into March 1, 2021.
Income tax expense was $3.7 million for the year ended December 31, 2022 as compared to the $26.5 million income tax benefit for the year ended December 31, 2021. The impact from income taxes varies from the federal statutory rate of 21.0% due to state income taxes, changes in the valuation allowance for deferred tax assets and adjustments for permanent differences. The expense for the year ended December 31, 2022 largely relates to amortization of originating goodwill from asset acquisitions and estimated state income taxes attributable to income earned in separate filing states without state net operating loss carryforwards. The overall tax benefit recognized during the year ended December 31, 2021 primarily relates to adjustments to the valuation allowance for federal and state deferred tax assets, as well as the effect of deferred taxes recorded as part of business combination accounting for the BND, Zipnosis, and CHP acquisitions
2021 Compared to 2020
Total revenue increased by $2.8$1.0 billion, or 233.7%193.9%, for the year ended December 31, 2021 as compared to the same period in 2020. The increase was largely driven by an increase in Bright HealthCareour Medicare Advantage consumers of approximately 520,00055,000 consumer lives, or 251.3%88.7%, primarily from organic growth in IFP within our Commercial business, including the 2021 Special Enrollment Period, as well asthrough both organic and inorganic contributions from the MA business. Increases in our risk adjustment liability partially offset the total revenue increases.growth. The year ended December 31, 2021 also included $906.1$781.8 million from the acquisitions of PMA, THNM, Zipnosis, CHP and Centrum and a full year of Brand New Day,BND, which was acquired on April 30, 2020. These acquisitions were the primary driver of the increase in service revenue contributing $23.8 million for the year ended December 31, 2021. In addition, investment income increased due to unrealized gains from investments in equity securities of $80.2 million.
Medical costs increased by $2.9 billion,$842.2 million, or 277.5%,186.4% for the year ended December 31, 2021 as compared to the same period in 2020. The increase in medical costs was driven by an increase in consumers through both organic growth in our Commercial and MA businesses
Bright HealthCare business and inorganic growth attributable to the acquisitions of PMA, THNM, CHP and Centrum, as well as a full year of Brand New Day.BND. We also experienced an increase in medical costs from COVID-19 during the year ended December 31, 2021.
Our MCR of 101.3% for the year ended December 31, 2021, increased 1,260 basis points as compared to the same period in 2020. The 2021 Special Enrollment Period and our overall growth created challenges for capturing underlying risk, and we were more significantly impacted by COVID-19 related costs, particularly given the significant portion of our consumers in Florida. Our MCR for the year ended December 31, 2021 included a 530 basis point unfavorable impact from COVID-19 costs, and a 90 basis point unfavorable impact from non-COVID prior period development (“PPD”).
Operating costs increased by $829.1$302.4 million, or 202.5%134.4%, for the year ended December 31, 2021 as compared to the same period in 2020. The increase in operating costs was primarily due to increases in operating costs from new market entry, increased marketing and selling expenses related to the 2021 special enrollment period in our Commercial business and increased compensation and benefit costs driven by an increase in employees and an increase in share-based compensation costs. In addition, the year ended December 31, 2021 also includes $102.8 million of premium deficiency reserve expense due to expected future losses in certain markets in 2022 in our Bright HealthCare segment.
Our operatingOperating cost ratio of 30.7%34.9% for the year ended December 31, 2021 improved 320880 basis points as compared to the same period in 2020. The decreaseThis was primarily due to operating costs increasing at a slower rate than revenue increases as the increased premium revenues earned due to consumer growth, as we continue to gain leverage on our operating costs as we grow, partially offset by an increase in broker commission costs associated with new membership growth.Company grew.
Depreciation and amortization increased by $27.2$26.8 million, or 328.1%322.8%, for the year ended December 31, 2021 as compared to the same period in 2020. The increase was primarily due to a $25.5 millionan increase in amortization expense resulting from intangible assets acquired in the PMA, THNM, Zipnosis, CHP, and Centrum acquisitions, for which there were no comparable amounts in 2020.
Interest expense was $8.0 million for the year ended December 31, 2021, which was due to interest on the Credit Agreement we entered into in March 2021,2020 as well as the full year of amortization expense of debt issuance costs. We did not have any interest expense for the years ended December 31, 2020 and 2019.intangible assets acquired as part of the BND acquisition on April 30, 2020.
Income tax benefit was $26.5 million and $9.2 million for the yearyears ended December 31, 2021.2021 and 2020 respectively. The overall tax benefit recognized during the year isended December 31, 2021 was primarily duerelated to adjustments to the release of valuation allowance in connection with newfor federal and state deferred tax liabilitiesassets, as well as the effect of deferred taxes recorded on identifiable intangibles as part of business combination accounting for the BND, Zipnosis, THNM, and CHP stock acquisitions, as well as a measurement period adjustment related to the BND acquisition.
2020 Compared to 2019
Total revenue increased by $926.6 million, or 330.2%, to $1.2 billion for the year ended December 31, 2020 as compared to the same period in 2019. The increase in revenue was driven by an increase in Bright HealthCare consumers of 251% from organic growth and inorganic contributions from the Brand New Day Acquisition, as well as the creation of the NeueHealth segment with the acquisition of AMD.
Medical costs increased by $822.9 million, or 366.7%, to $1.0 billion for the year ended December 31, 2020 as compared to the same period in 2019. This was primarily due to an increase in consumers through both organic and inorganic growth, increased MA product mix at a higher MCR primarily due to the Brand New Day Acquisition and the adverse financial impacts of the COVID-19 pandemic on MA and IFP inpatient admissions. In certain new IFP markets, we experienced increased medical costs due to greater out-of-network utilization in 2020.
Medical Cost Ratio of 88.7% for year ended December 31, 2020 increased 630 basis points as compared to the same period in 2019. This was primarily due to the increased medical costs from COVID-19, increased MA product mix as the result of the Brand New Day Acquisition and an increase in out-of-network utilization in certain new IFP markets.
Operating costs increased by $228.8 million, or 126.8%, to $409.3 million for the year ended December 31, 2020 as compared to the same period in 2019. This was primarily due to increased compensation and benefit costs from more employees, outsourced vendor fees, broker commissions, marketing, premium taxes and fees in support of consumer growth, acquisitions and business segment expansion.
Operating cost ratio of 33.9% for the year ended December 31, 2020 improved 3,040 basis points as compared to the same period in 2019. This was primarily due to operating costs increasing at a slower rate than revenue increases as the Company grows.
Depreciation and amortization increased by $7.2 million, or 631.0%, to $8.3 million for the year ended December 31, 2020 as compared to the same period in 2019. This was primarily due to $5.4 million of amortization expense resulting from intangibles assets acquired in our acquisition of AMD and the Brand New Day Acquisition. There was no amortization expense in 2019.
Income tax benefit was $9.2 million for the year ended December 31, 2020.acquisitions. The overall tax benefit recognized during the year ended December 31, 2020 was primarily due to the tax impact of goodwill and intangible assets acquired as part of the Brand New Day AcquisitionBND acquisition in 2020.
| | | | | | | | | | | | | | | | | |
| Bright HealthCare | | | | | |
| (in thousands) | Year Ended December 31, |
| Statements of income (loss) and operating data: | 2022 | | 2021 | | 2020 |
| | | | | |
| Revenue: | | | | | |
| Premium revenue | 1,652,045 | | 1,297,273 | | 480,112 |
| Investment income (loss) | 410 | | (80) | | 8,468 |
| Total revenue | 1,652,455 | | 1,297,193 | | 488,580 |
| Operating expenses | | | | | |
| Medical costs | 1,550,934 | | 1,262,407 | | 454,858 |
| Operating costs | 187,636 | | 189,648 | | 75,879 |
| Goodwill impairment | 70,017 | | — | | — |
| Depreciation and amortization | 17,702 | | 14,245 | | 1,477 |
| Total operating expenses | 1,826,289 | | 1,466,300 | | 532,214 |
| Operating loss | $ | (173,834) | | $ | (169,107) | | $ | (43,634) |
| Medical Cost Ratio (MCR) | 93.9 | % | | 97.3 | % | | 94.7 | % |
2022 Compared to 2021
Premium revenue increased by $355.3 million, or 27.4%, for the year ended December 31, 2022 as compared to the same period in 2021. The increase was driven by favorable premium rates and an increase in consumer lives of approximately 15,000 year over year. Additionally, the increase is attributable to a full year of revenue from our acquisition of CHP, which occurred on April 1, 2021
Medical costs increased by $288.5 million, or 22.9%, for the year ended December 31, 2022 as compared to the same period in 2021. The impact of COVID-19 increased our medical costs $36.4 million and $59.4 million for the years ended December 31, 2022 and 2021, respectively. The increase in medical costs was primarily driven by an increase in members,
partially offset by favorable medical cost rates. Additionally, the increase is attributable to a full year of medical costs from our acquisition of CHP, which occurred on April 1, 2021
Our MCR of 93.9% for the year ended December 31, 2022 decreased 340 basis points as compared to the same period in 2021. Our California Medicare Advantage operations achieved a MCR of 92.0%, excluding prior period claims; this metric excludes the MA markets that we have exited as of December 31, 2022. Our MCR for the year ended December 31, 2022 included a 220 basis point unfavorable impact from COVID-19 related costs as compared to 460 basis point unfavorable impact from COVID-19 included in our MCR for the year ended December 31, 2021.
Operating costs decreased by $2.0 million, or 1.1%, for the year ended December 31, 2022 as compared to the same period in 2021. Operating costs remained relatively flat year over year due to increases in costs as a result of consumer growth and compensation and benefit costs that were offset by the release of the PDR.
We did not have any income tax (benefit)recognized a $70.0 million non-cash impairment of goodwill during the year ended December 31, 2022 which was primarily driven by an increase in the discount rate due to higher interest rates and other market factors.
Depreciation and amortization increased by $3.5 million, or 24.3%, for the year ended December 31, 2022 as compared to the same period in 2021. The increase was primarily due to a full year of amortization expense of the intangible assets acquired in 2019.
| | | | | | | | | | | | | | | | | |
| Bright HealthCare | | | | | |
| (in thousands) | Year Ended December 31, |
| Statements of income (loss) and operating data: | 2021 | | 2020 | | 2019 |
| | | | | |
| Bright HealthCare: | | | | | |
| Revenue: | | | | | |
| Commercial premium revenue | $ | 2,512,624 | | $ | 692,433 | | $ | 236,290 |
| Medicare Advantage premium revenue | 1,297,273 | | 480,112 | | 36,033 |
| Investment income | 3,739 | | 8,468 | | 8,350 |
| Total revenue | 3,813,636 | | 1,181,013 | | 280,673 |
| Operating expenses: | | | | | |
| Medical costs | 3,766,897 | | 1,047,300 | | 224,387 |
| Operating costs | 1,140,842 | | 376,215 | | 180,489 |
| Depreciation and amortization | 17,068 | | 6,394 | | 1,134 |
| Total operating expenses | 4,924,807 | | 1,429,909 | | 406,010 |
| Operating loss | $ | (1,111,171) | | $ | (248,896) | | $ | (125,337) |
| Medical Cost Ratio (MCR) | 98.9 | % | | 89.3 | % | | 82.4 | % |
2021 Compared to 2020
Commercial revenue increased by $1.8 billion, or 262.9%, for the year ended December 31, 2021 as compared to the same period in 2020. The increase in revenue was driven by an increase in consumer lives of approximately 520,000 due to organic growth and inorganic growth from the acquisition of THNM, as well as higher net premium rates in certain markets and plan mix, which were partially offset by an increase in risk adjustment payables.
MAPremium revenue increased by $817.2 million, or 170.2%, for the year ended December 31, 2021 as compared to the same period in 2020. The year ended December 31, 2021 included $679.1 million of revenue from our acquisition of CHP on April 1, 2021, and the impact of a full year of revenue from Brand New Day,BND, which was acquired on April 30, 2020. We also experienced volume increases due to organic growth.
Medical costs increased by $2.7 billion,$807.5 million, or 259.7%177.5%, for the year ended December 31, 2021 as compared to the same period in 2020. For the years ended December 31, 2021 and 2020, the impact of COVID-19 increased our medical costs by $208.0$59.4 million and $46.6$30.2 million, respectively. The increase in 2021 is also due to an increase in consumers driven by organic growth, unfavorable medical cost rates and inorganic growth as a result of acquisitions.the acquisition of CHP.
Our MCR of 98.9%97.3% for the year ended December 31, 2021 increased 960260 basis points as compared to the same period in 2020. Our MCR for the year ended December 31, 2021 includedincluded a 530 basis460 basis point unfavorable impact from COVID-19 related costs and a 90 basis point unfavorable impact from non-COVID PPD.COVID-19. Our MCR for the year ended December 31, 2020 included a 400 basis 630 basis point unfavorable impact from COVID-19 costs, a 110 basis point favorable impact from non-COVID PPD and a 110 basis point favorable impact from deferred utilization.costs. Our MCR for the year ended December 31, 2021, was also impacted by an increase in medical costs from product mix as a result of a full year of activity from BND and the acquisition of CHP.
Operating costs increased by $113.8 million, or 149.9%, for the year ended December 31, 2021 as compared to the same period in 2020. The increase in operating costs was primarily a result of higher compensation and benefit costs driven by an increase in employees to support the growing business. Additionally, operating costs increased from a full year of operating costs related to BND and the CHP acquisition.
Depreciation and amortization increased by $12.8 million, or 864.5%, for the year ended December 31, 2021 as compared to the same period in 2020. The increase was primarily due to a full year of amortization expense of the intangible assets acquired in the BND acquisition as well as nine months of amortization expense of the intangible assets acquired in the CHP acquisition.
| | | | | | | | | | | | | | | | | |
| Consumer Care | | | | | |
| ($ in thousands) | Year Ended December 31, |
| Statements of income (loss) data: | 2022 | | 2021 | | 2020 |
| | | | | |
| Revenue: | | | | | |
| Premium revenue | $ | 1,141,936 | | $ | 338,391 | | $ | 7,793 |
| Direct Contracting revenue | 654,087 | | — | | — |
| Service revenue | 48,013 | | 42,469 | | 29,354 |
| Investment income (loss) | (55,429) | | 80,314 | | — |
| Total revenue | 1,788,607 | | 461,174 | | 37,147 |
| Operating expenses | | | | | |
| Medical costs | 1,844,578 | | 432,318 | | — |
| Operating costs | 191,702 | | 125,444 | | 43,959 |
| Goodwill impairment | 1,208 | | — | | — |
| Intangible assets impairment | 42,611 | | — | | — |
| Depreciation and amortization | 24,252 | | 18,333 | | 1,895 |
| Total operating expenses | 2,104,351 | | 576,095 | | 45,854 |
| Operating loss | $ | (315,744) | | $ | (114,921) | | $ | (8,707) |
2022 Compared to 2021
Consumer Care premium revenue increased by $803.5 million, or 237.5%. for the year ended December 31, 2022 as compared to the same period in 2021. The increase in premium revenue is primarily due to the full risk transfer for a portion of our commercial business in Florida and Texas to our Consumer Care segment. Also contributing to the increase is the full year of revenue from Centrum, acquired on July 1, 2021.
We began participating in the DC Model beginning in January 2022 through two DCEs aligned with our Consumer Care business. Direct Contracting revenue was $654.1 million for the year ended December 31, 2022. This revenue was attributable to the alignment of beneficiaries to our DCE entities, which numbered approximately 46,000 at December 31, 2022.
Service Revenue increased by $5.5 million, or 13.1%, for the year ended December 31, 2022 as compared to the same period in 2021. The acquisition of Zipnosis on March 31, 2021 contributed to the year-over-year increase in service revenue.
We had investment loss of $55.4 million for the year ended December 31, 2022 as compared to investment income of $80.3 million for the year ended December 31, 2021. The investment income and loss in both periods was due to gains and losses on equity securities. As of December 31, 2022 we hold no equity securities, so we do not expect investment income or losses within the Consumer Care segment going forward.
Medical costs increased by $1.4 billion, or 326.7%, for the year ended December 31, 2022 as compared to the same period in 2021. The increase in medical costs was primarily driven by an increase in patient lives as a result of the Centrum acquisition, new market expansion and our participation in Direct Contracting beginning in January 2022.
Operating costs increased $66.3 million, or 52.8%, for the year ended December 31, 2022 as compared to the same period in 2021. The increase in operating costs was primarily due to higher compensation and benefit costs as a result of more employees and outsourced vendor fees in support of consumer growth. In addition, the year ended December 31, 2022 included two additional quarters of costs from Centrum as a result of the acquisition on July 1, 2021.
We recognized $42.6 million of intangible assets impairment during the year ended December 31, 2022, which related to a full impairment of Centrum’s reacquired contract with Bright HealthCare Florida as a result of our decision to no longer
offer Commercial products for the 2023 plan year. We also recognized a $1.2 million goodwill disposition during the year ended December 31, 2022.
Depreciation and amortization increased $5.9 million, or 32.3%, for the year ended December 31, 2022 as compared to the same period in 2021. The increase was primarily due to the full year of amortization expense resulting from intangible assets acquired as part of the Centrum acquisition, which occurred on July 1, 2021.
2021 Compared to 2020
Premium revenue increased by $330.6 million, or 4,242.2%, for the year ended December 31, 2021 as compared to the same period in 2020. The increase in premium revenue for the year ended December 31, 2021 includes $262.4 million of premium revenue from the acquisitions of PMA and Centrum, as well as an organic increase in patient lives.
Service revenue increased by $13.1 million, or 44.7%, for the year ended December 31, 2021 as compared to the same period in 2020. The acquisitions of PMA, Zipnosis and Centrum contributed $23.7 million to the year-over-year increase in service revenue.
Investment income was $80.3 million for the year ended December 31, 2021 due to unrealized gains on equity securities acquired in 2021. Our Consumer Care business did not hold any investments during the year ended December 31, 2020.
Medical costs were $432.3 million for the year ended December 31, 2021, which were primarily driven by an increase in patient lives as a result of the PMA and Centrum acquisitions, as well as organic growth in our value-based arrangements.
Operating costs increased by $81.5 million, or 185.4%, for the year ended December 31, 2021 as compared to the same period in 2020. The increase was primarily due to higher compensation and benefit costs as a result of additional employees and outsourced vendor fees in support of consumer growth, as well as costs from the PMA, Zipnosis and Centrum acquisitions.
Depreciation and amortization increased by $16.4 million for the year ended December 31, 2021 as compared to the same period in 2020. The increase was primarily due to amortization expense of $15.9 million resulting from intangible assets acquired for which there were no comparable amounts in 2020.
| | | | | | | | | | | | | | | | | |
| Discontinued Operations | | | | | |
| ($ in thousands) | Year Ended December 31, |
| Statements of income (loss) data: | 2022 | | 2021 | | 2020 |
| | | | | |
| Revenue: | | | | | |
| Premium revenue | $ | 3,998,622 | | $ | 2,512,384 | | $ | 692,433 |
| Service revenue | 147 | | 232 | | — |
| Investment income (loss) | (41,221) | | 3,740 | | — |
| Total revenue | 3,957,548 | | 2,516,356 | | 692,433 |
| Operating expenses | | | | | |
| Medical costs | 3,732,755 | | 2,659,516 | | 595,382 |
| Operating costs | 883,318 | | 710,934 | | 184,271 |
| Restructuring costs | 50,704 | | — | | — |
| Goodwill impairment | 4,147 | | — | | — |
| Intangible assets impairment | 6,720 | | — | | — |
| Depreciation and amortization | 145 | | 435 | | — |
| Total operating expenses | 4,677,789 | | 3,370,885 | | 779,653 |
| Operating loss | $ | (720,241) | | $ | (854,529) | | $ | (87,220) |
| Medical Cost Ratio (MCR) | 93.4 | % | | 105.9 | % | | 86.0 | % |
In October 2022, we announced that we will no longer offer commercial plans through Bright HealthCare in 2023. As a result, we exited the Commercial marketplace effective December 31, 2022. We determined this exit represented a strategic shift that will have a material impact on our business and financial results that requires presentation as discontinued operations. The discontinued operations presentation has been retrospectively applied to all periods presented.
2022 Compared to 2021
Premium revenue increased by $1.5 billion, or 59.2%, for the year ended December 31, 2022 as compared to the same period in 2021. The increase in revenue, was driven by an increase in consumer lives of approximately 410,000 due to organic growth and entry into new markets in 2022 – particularly entry into Texas. The increase was partially offset by increases in risk adjustment of $1.1 billion, inclusive of a $93.1 million increase in risk adjustment based on final settlement of the 2021 risk adjustment payable.
Service revenue was immaterial to the Bright HealthCare – Commercial segment for the years ended December 31, 2022 and 2021.
Investment income for the year ended December 31, 2022 was a loss of $41.2 million compared to income of $3.7 million due to a $67.7 million impairment of our available-for-sale securities portfolio resulting from our conclusion, as of December 31, 2022, that it was more likely than not that we would have to sell some of the securities before recovering the amortized cost basis due to our decision to exit the commercial business. This impairment is related to the decrease in the fair value of debt securities primarily driven by an increase in market interest rates since the time the securities were purchased.
Medical costs increased by $1.1 billion, or 40.4%, for the year ended December 31, 2022 as compared to the same period in 2021. For the years ended December 31, 2022 and 2021, the impact of COVID-19 increased our medical costs $81.7 million and $148.5 million, respectively. The remaining increase is due to an increase in consumers, partially offset by favorable medical cost rates.
Our MCR of 93.4% for the year ended December 31, 2022 decreased 1,250 basis points compared to the same period in 2021. Our MCR for the year ended December 31, 2022 included a 200 basis point unfavorable impact from COVID-19 costs. Our MCR for the year ended December 31, 2021 included a 590 basis point unfavorable impact from COVID-19 costs. The decrease in MCR in 2022 compared to 2021, was primarily due to improved utilization and care management as well as the risk transfer agreement with our Consumer Care segment for the Florida and Texas markets.
Operating costs increased by $172.4 million, or 24.2%, for the year ended December 31, 2022 as compared to the same period in 2021. The increase in operating costs was driven by increases in operating costs from new market entry and increased marketing and selling expenses, partially offset by a net release of $93.4 million of PDR.
We recognized $50.7 million of restructuring costs for the year ended December 31, 2022 for employee termination benefits, contract termination costs and long-lived asset impairments incurred in relation to the actions we have taken to restructure the Company’s workforce and reduce expenses based on our updated business model. There were no restructuring costs in the year ended December 31, 2021.
We recognized non-cash impairments of goodwill and intangible assets of $4.1 million and $6.7 million, respectively, for the year ended December 31, 2022, as a result of our decision to exit the Commercial market for the 2023 plan year.
Depreciation and amortization was immaterial to the Bright HealthCare – Commercial segment for the years ended December 31, 2022 and 2021.
2021 Compared to 2020
Premium revenue increased $1.8 billion, or 262.8%, for the year ended December 31, 2022 compared to the same period in 2021. The increase in revenue was driven by an increase in consumer lives of approximately 520,000 due to organic growth and inorganic growth from the acquisition of THNM, as well as higher net premium rates in certain markets and plan mix, which were partially offset by an increase in risk adjustment payables.
Medical costs increased by $2.1 billion, or 346.7%, for the year ended December 31, 2021 as compared to the same period in 2020. For the years ended December 31, 2021 and 2020, the impact of COVID-19 increased our medical costs by $148.5 million and $16.4 million, respectively. The increase in 2021 is also due to an increase in consumers driven by organic growth, unfavorable medical cost rates and inorganic growth as a result of acquisitions
Our MCR of 105.9% for the year ended December 31, 2021 increased 1,990 basis points as compared to the same period in 2020. Our MCR for the year ended December 31, 2021 included a 590 basis point unfavorable impact from COVID-19 related costs as compared to a 240 basis point unfavorable impact from COVID-19 related costs in our MCR for the year ended December 31, 2020. Our MCR for the year ended December 31, 2021, was also impacted by an increase in risk adjustment payable and medical costs from MA product mix as a result of a full year of activity from Brand New Day and the acquisition of CHP.payable.
Operating costs increased by $764.6$526.7 million, or 203.2%285.8%, for the year ended December 31, 2021 as compared to the same period in 2020. The increase was primarily due to increases in operating costs from new market entry, increased marketing and selling expenses related to the 2021 SEP in our Commercial business and increased compensation and benefit costs driven by an increase in employees and an increase in share-based compensation costs.employees. In addition, the year ended December 31, 2021 also includes $102.8$93.4 million of premium deficiency reserve expense due to expected future losses in certain markets in 2022, as well as increased operating costs from the acquisitionsacquisition of THNM and CHP, which do not have a comparable prior year impact.THNM.
Depreciation and amortization increased by $10.7 million, or 166.9%,was immaterial to the Bright HealthCare – Commercial segment for the yearyears ended December 31, 2021 as compared to the same period inand 2020. The increase was primarily due to amortization expense of $9.6 million resulting primarily from intangible assets acquired in 2021 for which there were no comparable amounts in the 2020 period.
2020 Compared to 2019
Commercial revenue increased by $456.1 million, or 193.0%, to $692.4 million for the year ended December 31, 2020 as compared to the same period in 2019. This was primarily driven by a 166% increase in consumers, with the remainder primarily attributable to higher premium rates in certain new markets.
MA revenue increased by $444.1 million to $480.1 million for the year ended December 31, 2020 as compared to the same period in 2019. This was primarily driven by the Brand New Day acquisition, which contributed $426.3 million of the revenue increase, and other organic growth, which together helped drive consumer growth of 1,387%.
Medical costs increased by $822.9 million, or 366.7%, to $1.0 billion for the year ended December 31, 2020 as compared to the same period in 2019. This was primarily due to increased consumers, impacts from the COVID-19 pandemic and the Brand New Day Acquisition driving increased MA product mix. In addition, certain new IFP markets experienced increased levels of out-of-network utilization in 2020.
MCR increased from 82.4% for the year ended December 31, 2019 to 89.3% for the year ended December 31, 2020, representing a 690 basis points increase. This was primarily due to the increased medical costs from COVID-19, increased MA product mix as a result of the Brand New Day Acquisition and an increase in out-of-network medical claims utilization in certain new IFP markets.
Operating costs increased by $195.7 million, or 108.4%, to $376.2 million for the year ended December 31, 2020 as compared to the same period in 2019. This was primarily due to an increase in employee headcount leading to increased compensation and benefit costs, as well as an increase in outsourced vendor fees, broker commissions, marketing, premium taxes and fees in support of consumer growth and the Brand New Day acquisition.
Depreciation and amortization increased by $5.3 million, or 463.8%, to $6.4 million for the year ended December 31, 2020 as compared to the same period in 2019. This was primarily due to $3.2 million of amortization expense resulting from intangibles assets acquired in our Brand New Day Acquisition, as well as depreciation expense from the acquired property, equipment and capitalized software. There was no amortization expense in 2019.
| | | | | | | | | | | | | | | | | |
| NeueHealth | | | | | |
| ($ in thousands) | Year Ended December 31, |
| Statements of income (loss) data: | 2021 | | 2020 | | 2019 |
| | | | | |
| NeueHealth: | | | | | |
| Revenue: | | | | | |
| Premium revenue | $ | 338,254 | | $ | 7,793 | | $ | — |
| Service revenue | 74,690 | | 29,354 | | — |
| Investment income | 80,235 | | — | | — |
| Total revenue | 493,179 | | 37,147 | | — |
| Operating expenses: | | | | | |
| Medical costs | 432,318 | | — | | — |
| Operating costs | 129,430 | | 43,959 | | — |
| Depreciation and amortization | 18,416 | | 1,895 | | — |
| Total operating expenses | 580,164 | | 45,854 | | — |
| Operating loss | $ | (86,985) | | $ | (8,707) | | $ | — |
| Medical Cost Ratio (MCR) | 127.8 | % | | — | % | | — | % |
No activity reflected in 2019 due to establishment of segment in 2020.
2021 Compared to 2020
Premium revenue increased by $330.5 million for the year ended December 31, 2021 as compared to the same period in 2020. The increase in premium revenue for the year ended December 31, 2021 includes $262.4 million from the acquisitions of PMA and Centrum, as well as an organic increase in patient lives.
Service revenue increased by $45.3 million, or 154.4%, for the year ended December 31, 2021 as compared to the same period in 2020. The increase in service revenue is primarily driven by increased intercompany network contract service revenue with our Bright HealthCare segment, which is charged on a per consumer per month basis and has increased due to market expansion and an increase in consumer lives. The acquisitions of PMA, Zipnosis and Centrum also contributed $23.7 million to the year-over-year increase in service revenue.
Investment income was $80.2 million for the year ended December 31, 2021 due to unrealized gains on equity securities acquired in 2021. NeueHealth did not hold any investments during the year ended December 31, 2020.
Medical costs were $432.3 million for the year ended December 31, 2021, which were primarily driven by an increase in patient lives as a result of the PMA and Centrum acquisitions, as well as organic growth in our value-based arrangements. MCR was 127.8% for the year ended December 31, 2021. There were no medical costs in the year ended December 31, 2020.
Operating costs increased by $85.5 million, or 194.4%, for the year ended December 31, 2021 as compared to the same period in 2020. The increase was primarily due to increased compensation and benefit costs from more employees, and outsourced vendor fees in support of consumer growth, as well as costs from the PMA, Zipnosis and Centrum acquisitions.
Depreciation and amortization increased by $16.5 million for the year ended December 31, 2021 as compared to the same period in 2020. The increase was primarily due to amortization expense of $15.9 million resulting from intangible assets acquired for which there were no comparable amounts in 2020.
2020 Compared to 2019
Our NeueHealth segment was created in 2020 through the acquisition of AMD and the establishment of our Bright Health Network service. Service revenue reflects fee-for-service revenue attributable to AMD service patients and internal revenue generated by Bright Health Networks for network contract services with Bright HealthCare. Premium revenue reflects
AMD revenue related to capitation payments and other value-based revenue from third-party payors. There was no comparable activity in 2019.
Liquidity and Capital Resources
We assess our liquidity in terms of our ability to generate adequate amounts of cash to meet current and future needs. Our expected primary uses on a short-term and long-term basis are for geographic and service offering expansion, acquisitions, and other general corporate purposes. We have historically funded our operations and acquisitions primarily through the sale of preferred stock and more recently, through sales of our common stock, which generated cash proceeds of $887.3 million upon closing of our IPO on June 28, 2021.stock.
We expect to continue to incur operating losses and generate negative cash flows from operations for the foreseeable future due to the investments we intend to continue to make in expanding our operations and due to additional general and administrative costs we expect to incur in connection with operating as a public company. We believe that existing cash on hand, investments and amounts available under our Credit Agreement described below willmay not be sufficient to satisfy our anticipated cash requirements for the next twelve months for items such as risk adjustment payable associated with the IFP business we are exiting, medical costs payable, accounts payable and other current liabilities. However, we may seekWe are evaluating additional capital to support our future growth plans andsources through other strategic opportunities to ensure we have the liquidity to satisfy these obligations. The Company is actively engaged with the Board of Directors and outside advisors to evaluate additional financing. However, the Company may not be able to obtain financing on acceptable terms, as any potential financing will be subject to market conditions that may arise, as well as anticipated cash requirements beyond that period for long-term obligations such as operating leases and redeemable noncontrolling interest.are not within the Company’s control.
As of December 31, 2022, we had $1.9 billion in cash and cash equivalents, $290.9 million in short-term investments and $849.1 million long-term investments on the Consolidated Balance Sheet. As of December 31, 2021, we had $1.1 billion in cash and cash equivalents, $193.8 million in short-term investments and $675.2 million long-term investments on the Consolidated Balance Sheet. As of December 31, 2020, we had $488.4 million in cash and cash equivalents, $499.9 million in short-term investments and $175.2 million long-term investments. Our cash and investments are held at non-regulated entities and regulated insurance entities.
As of December 31, 2022, we had non-regulated cash and cash equivalents of $275.5 million and short-term investments of $1.6 million. As of December 31, 2021, we had non-regulated cash and cash equivalents of $76.3 million and short-term investments of $121.5 million.
As of December 31, 2020,2022, we had non-regulatedregulated insurance entity cash and cash equivalents of $133.3 million,$1.7 billion, short-term investments of $385.6$289.3 million of which $1.1 million was restricted, and long-term investments of $5.6$849.1 million.
As of December 31, 2021, we had regulated insurance entity cash and cash equivalents of $984.9 million, short-term investments of $72.4 million and long-term investments of $675.2 million. As of December 31, 2020, we had regulated insurance entity cash and cash equivalents of $355.1 million, short-term investments of $114.3 million and long-term investments of $169.5 million.
Cash and investment balances held at regulated insurance entities are subject to regulatory restrictions and can only be accessed through dividends declared to the non-regulated parent company or through reimbursements from administrative services agreements with the parent company. The Company declared twono dividends from the regulated insurance entities to the parent company during the year ended December 31, 2021,2022, and declared notwo dividends during 2020.2021. The regulated legal entities are required to hold certain minimum levels of risk-based capital and surplus to meet regulatory requirements. As of December 31, 2022 and 2021, and 2020, $398.5$42.1 million and $235.8$398.5 million, respectively, was held in risk-based capital and
surplus at regulated insurance legal entities, which was in excessentities. We are out of compliance with the minimum requirements in each year.levels for certain of our regulated insurance legal entities.
Indebtedness
On March 1, 2021, we entered into a $350.0 million revolving credit agreement with a syndicate of banks (the “Credit Agreement”). On August 2, 2021, the Credit Agreement was amended to change the definition of “Qualified IPO” by reducing the net proceeds required to be received by the Company from $1.0 billion to $850.0 million (the “Amendment”). In addition, prior to such amendment, the Credit Agreement contained a covenant that required the Company to maintain a total debt to capitalization ratio of (a) 0.25 to 1.00 prior to a Qualified IPO, and (b) 0.30 to 1.00 after a Qualified IPO. The Amendment changed this covenant by removing the increase in the ratio after a Qualified IPO such that the Company is now required to maintain a total debt to capitalization ratio of 0.25 to 1.00. On August 4, 2021, we elected to extend the maturity date of the Credit Agreement from February 28, 2022 to February 28, 2024. As of December 31, 2021,2022, we had $155.0$303.9 million borrowed on the Credit Agreement at an effective annual interest rate of 7.25%. The8.41% as well as $46.1 million of outstanding, undrawn letters of credit under the Credit Agreement, also containswhich reduce the amount available to borrow. Further to the undrawn letters of credit under the Credit Agreement, we had an additional $7.5 million of unused letters of credit as of December 31, 2022.
On November 8, 2022, we executed an amendment to the Credit Agreement pursuant to which certain collateral related defaults were waived and, in addition, it was agreed that we would (i) not be required to test our debt to capitalization ratio covenant during and including the four quarter test period ending September 30, 2022 through and including the four quarter test period ending September 30, 2023, (ii) be required to maintain a covenant that requires usminimum liquidity of $200.0 million from November 8, 2022 through and including September 30, 2023 and (iii) be required to maintain a minimum liquidity of $150.0 million.million after September 30, 2023.
TableOn March 1, 2023, the Company disclosed that that during the First Quarter of Contents2023, the Company breached the minimum liquidity covenant of the Credit Agreement. The Company entered into a limited waiver and consent (the “Waiver”) under the Credit Agreement, which, among other matters, provides for a temporary waiver for the period from January 25, 2023 through April 30, 2023 (the “Waiver Period”) of compliance with the minimum liquidity covenant set forth in Section 11.12.2 of the Credit Agreement. During the Waiver Period, the Company will be subject to a minimum liquidity covenant of not less than $75 million until March 3, 2023, and not less than $85 million thereafter until the end of the Waiver Period. In addition, during the Waiver Period, the Company will not have access to certain negative covenant baskets and will be subject to additional cash-flow and cash balance reporting requirements. Any non-compliance with the covenants under the Credit Agreement or the Waiver may result in the obligations under the Credit Agreement being accelerated.
The obligations under the Credit Agreement are secured by substantially all of the assets of the Company and its wholly owned subsidiaries that are designated as guarantors, including a pledge of the equity of each of its subsidiaries. Borrowings under the Credit Agreement accrue interest at the Company’s election either at a rate of: the (i) the sum of (a) the greatest of (1) the Prime Rate (as defined in the Credit Agreement), (2) the rate of the Federal Reserve Bank of New York in effect plus 1∕2 of 1.0% per annum, and (3) London interbank offered rate (“LIBOR”), plus 1% per annum, and (b) a margin of 4.0%; or (ii) the sum of (a) the LIBOR multiplied by a statutory reserve rate and (b) a margin of 5.0%. In addition, the commitment fee is 0.75% of the unused amount of the Credit Agreement.
Furthermore, the Credit Agreement contains covenants that, among other things, restrict the ability of the Company and its subsidiaries to make dividends or other distributions, incur additional debt, engage in certain asset sales, mergers, acquisitions or similar transactions, create liens on assets, engage in certain transactions with affiliates, change its business or make investments. In addition, the Credit Agreement contains other customary covenants, representations and events of default.
Preferred Stock Financing
On January 3, 2022, we issued 750,000 shares of the Company’s Series A Convertible Perpetual Preferred Stock, par value $0.0001 per share, for an aggregate purchase price of $750.0 million. We used a portion of the proceeds to repay in full our $155.0 million of outstanding borrowings under the Credit Agreement on January 4, 2022.
On October 10, 2022, we issued 175,000 shares of the Company’s Series B Convertible Perpetual Preferred Stock, par value $0.0001 per share, for an aggregate purchase price of $175.0 million.
Cash Flows
The following table presents a summary of our cash flows for the periods shown:
| | | Year Ended December 31, | | Year Ended December 31, |
| (in thousands) | (in thousands) | 2021 | | 2020 | | 2019 | (in thousands) | 2022 | | 2021 | | 2020 |
| Net cash provided by (used in) operating activities | Net cash provided by (used in) operating activities | $ | 82,059 | | | $ | (57,238) | | | $ | (8,208) | | Net cash provided by (used in) operating activities | $ | 234,466 | | | $ | 82,059 | | | $ | (57,238) | |
| Net cash used in investing activities | Net cash used in investing activities | (552,892) | | | (689,742) | | | (94,643) | | Net cash used in investing activities | (429,723) | | | (552,892) | | | (689,742) | |
| Net cash provided by financing activities | Net cash provided by financing activities | 1,043,641 | | | 712,441 | | | 424,060 | | Net cash provided by financing activities | 1,066,368 | | | 1,043,641 | | | 712,441 | |
| Net increase (decrease) in cash and cash equivalents | Net increase (decrease) in cash and cash equivalents | $ | 572,808 | | | $ | (34,539) | | | $ | 321,209 | | Net increase (decrease) in cash and cash equivalents | $ | 871,111 | | | $ | 572,808 | | | $ | (34,539) | |
| Cash and cash equivalents at beginning of year | Cash and cash equivalents at beginning of year | 488,371 | | | 522,910 | | | 201,701 | | Cash and cash equivalents at beginning of year | 1,061,179 | | | 488,371 | | | 522,910 | |
| Cash and cash equivalents at end of year | Cash and cash equivalents at end of year | $ | 1,061,179 | | | $ | 488,371 | | | $ | 522,910 | | Cash and cash equivalents at end of year | $ | 1,932,290 | | | $ | 1,061,179 | | | $ | 488,371 | |
Operating Activities
During the year ended December 31, 2022, cash provided by operating activities increased by $152.4 million as compared to the same period in 2021. This was primarily driven by an increase of our risk adjustment payable of $270.6 million as compared to 2021 as well as a $121.6 million year over year reduction in cash used for the purchase of other current assets. The increases were partially offset by more timely payment of our medical cost liabilities resulting in a reduction of cash generated from medical costs payable and an increase in our net loss.
During the year ended December 31, 2021, net cash provided by operating activities increased by $139.3was $82.1 million as compared to $57.2 million cash used in the same period in 2020. This was primarily driven by the increase in consumer growth driving the increased medical costs and risk adjustment payables, as well as accounts payables and other liabilities, and increased medical costs in the MA business driven by a full year of activity from Brand New DayBND and the acquisition of CHP. These increases were partially offset by an increase in our net loss.
Investing Activities
During the year ended December 31, 2020,2022, net cash used in operatinginvesting activities increaseddecreased by $49.0$123.2 million as compared to the same period in 2019. This2021. The decrease was primarily driven by the year-over-year increaseattributable to a decrease in our net loss, which wascash used in acquisitions partially offset by consumer growth drivingan increase in the increased medical costs and risk adjustment payables.
Investing Activitiescash used in purchases of investments.
During the year ended December 31, 2021, net cash used in investing activities decreased by $136.9 million as compared to the same period in 2020. The decrease was primarily attributable to a decrease in purchases of investments, net of proceeds from sales, paydowns and maturities of investments of $362.2 million, which was partially offset by a $201.5 millionan increase in cash used for acquisitions.
Financing Activities
During the year ended December 31, 2020,2022, net cash used in investingprovided by financing activities increased by $595.1$22.7 million as compared to the same period in 2019. 2021. The increase was primarily attributabledue to growth of$920.4 million in preferred stock financing during 2022 as compared to $887.3 million in proceeds from our investment portfolio, as purchases more
than offset sales and maturities of investment in 2020. In addition, we used $230.3 million of cash to acquire Brand New Day and PMA in 2020.
Financing Activities
During the year ended December 31, 2021, net cash provided by financing activities increased by $331.2 million as compared to the same period in 2020. million. The increase was due to $887.3 million of proceeds from our IPO in June 2021, offset by $6.7 million of cash paid for IPO offering costs, and a $155.0 million increase in net proceeds from short-term borrowings. These increases were partially offset by a $711.2 million decrease in proceeds from preferred stock financings in 2020, for which there were no similar offerings in 2021.
Our net cash provided by financing activities was primarily related to cash received from our preferred stock financings in 2020 and 2019. See Note 10 in the Notes to Consolidated Financial Statements for additional detail on our preferred stock.
Critical Accounting Policies and Estimates
Our management’s discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make judgments and estimates that affect the reported amounts of assets, liabilities, revenue, and expenses and the disclosure of contingent assets and liabilities in our consolidated financial statements. We base our estimates on historical experience, known trends and events, and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. On an ongoing basis, we evaluate our judgments and estimates in light of changes in circumstances, facts, and experience. The effects of material revisions in estimates, if any, are reflected in the consolidated financial statements prospectively from the date of change in estimates.
While our significant accounting policies are described in more detail in the notes to the consolidated financial statements appearing elsewhere in this Annual Report, we believe the following accounting policies used in the preparation of our consolidated financial statements require the most significant judgments and estimates.
Medical Costs Payable
Medical costs payable includes estimates for the costs of healthcare services consumers have received but for which claims have not yet been received or processed. Depending on the healthcare professional and type of service, the typical billing lag for services can be up to 90 days from the date of service. Approximately80% of claims related to medical care services are known and settled within 90 days from the date of service and substantially all within twelveeighteen to twenty-four months.
In each reporting period, our operating results include the effects of more completely developed medical costs payable estimates associated with previously reported periods. If the revised estimate of prior period medical costs is less than the previous estimate, we will decrease reported medical costs in the current period (favorable development). If the revised estimate of prior period medical costs is more than the previous estimate, we will increase reported medical costs in the current period (unfavorable development). Medical costs in 2022, 2021, and 2020 included unfavorable medical cost development related to prior years of $9.5 million. In 2020 and 2019 medical costs included favorable development related to prior years of $8.6$7.5 million, $3.5 million and $7.4$6.9 million, respectively. Depending on the healthcare professional and type of service, the typical billing lag for services canbe at least 90 days from the date of service.
In developing our medical costs payable estimates, we apply different estimation methods depending on the month for which incurred claims are being estimated. For example, for the most recent months, we estimate claim costs incurred by applying observed medical cost trend factors to the average per consumer (member) per month (“PMPM”) medical costs incurred in prior months for which more complete claim data is available, supplemented by a review of near-term completion factors.
Completion Factors: A completion factor is an actuarial estimate, based upon historical experience and analysis of current trends, ofmeasures the percentage of paid claims completion relative to an estimate of the total expected ultimate claims at a given point in time for medical services incurred claims in a given period adjudicated by us at the date of estimation.month. Completion factors are the most significant assumptions we useused in developing our estimate of medical costs payable. For periods prior to the three most recent months, completion factors include judgments related to claim submissionsare typically more complete and deemed credible for reliance in estimating unpaid medical claims. For the most recent three months, the completion factors are deemed less credible for reliance, and estimates of incurred claims are derived from prior incurred medical PMPM claims experience and adjusted as appropriate for other considerations such as seasonality, to arrive at forecasted incurred PMPM medical costs to generate estimates of ultimate incurred claims for the time from datemost recent three months. In certain instances, when there is unusual disruption to claims processing, such as for CHP and BND during 2022, it may be warranted to apply PMPM overrides to completion factors exceeding the 75% threshold when it appears they may be overstating completion when a review of service tothe claim receipt, claim levels,processing indicates a backlog has been building, and processing cycles, as well as other factors. If actual claims submissionthe completion factors may be overstating completion.
rates from providers (which can be influenced by a number of factors, including provider mix and electronic versus manual submissions) or our claim processing patterns are different than estimated, our reserve estimates may be significantly impacted. For the most recent three months, the completion factors are informed primarily from forecasted PMPM claims projections developed from our historical experience and adjusted by emerging experience data in the preceding months which may include adjustments for known changes in estimates of recent hospital and drug utilization data, provider contracting changes, changes in benefit levels, changes in consumer cost sharing, changes in medical management processes, product mix, and workday seasonality.
The following table illustrates the sensitivity of the completion factors and the estimated potential impact on our medical costs payable estimates as of December 31, 2021:2022:
| Completion Factors
(Decrease) Increase in Factors | Completion Factors
(Decrease) Increase in Factors | | Increase (Decrease) in Medical Costs Payable | Completion Factors
(Decrease) Increase in Factors | | Increase (Decrease) in Medical Costs Payable |
| | | (in thousands) | | | (in thousands) |
| (3.00)% | (3.00)% | | $ | 89,100 | | (3.00)% | | $ | 22,218 | |
| (2.00)% | (2.00)% | | 58,794 | | (2.00)% | | 14,661 | |
| (1.00)% | (1.00)% | | 29,100 | | (1.00)% | | 7,256 | |
| 1.00% | 1.00% | | (28,524) | | 1.00% | | (7,113) | |
| 2.00% | 2.00% | | (56,488) | | 2.00% | | (14,086) | |
| 3.00% | 3.00% | | (83,910) | | 3.00% | | (20,924) | |
The completion factors analysis above includes a wide range of possible outcomes based on the early stage of development, combined with strong growth, that may drive additional volatility. Management believes the amount of medical costs payable is reasonable and adequate to cover our liability for unpaid claims as of December 31, 2021;2022; however, actual claim payments may differ from established estimates as discussed above.
Assuming a hypothetical 1% difference between our December 31, 20212022 estimates of continuing operations medical costs payable and actual continuing operations medical costs payable net earnings would have increased or decreased by approximately $8.2$4.1 million.
See Note 2 and Note 810 in the Notes to Consolidated Financial Statements for additional detail on our medical costs payable.
Risk Adjustment
The risk adjustment programs in theour MA line of business in our continuing operations and our IFP and MA linesline of business in our discontinued operations, are designed to mitigate the potential impact of adverse selection and provide stability for health insurers.
Continuing operations:In the MA risk adjustment program, each consumer is assigned a risk score based on their demographic and prior year medical encounters information submitted to CMS that reflects the consumer’s predicted health costs based on the CMS risk adjustment methodology. Plans receive higher payments for consumers with higher risk scores than consumers with lower risk scores. As of December 31, 2022 the MA risk adjustment receivable was $1.2 million.
Discontinued operations:Under the individual and small group risk adjustment program, each plan is assigned a risk score based upon demographic and current year medical encounters information that is submitted to CMS for its consumers and calculated based on the CMS risk adjustment methodology. Plans with a plan level risk score that is lower than the State average risk scores will generally pay into the pool, while plans with a plan level risk score higher than State average risk scores will generally receive distributions.
In As of December 31, 2022 the MAIFP risk adjustment program, each consumer is assigned a risk score based on their demographic and prior year medical encounters information submitted to CMS that reflects the consumer’s predicted health costs based on the CMS risk adjustment methodology. Plans receive higher payments for consumers with higher risk scores than consumers with lower risk scores.payable was $1.9 billion.
For both IFP, and MA, we utilize external sources to help determine market risk scores, and we estimate the amount of risk adjustment payable or receivable based upon the processed claims and medical diagnosis data submitted and expected to be submitted to CMS. We refine our estimate as new information becomes available.
Premium Deficiency Reserves
Premium deficiency reserve (“PDR”) liabilities are established when it is probable that expected future claims and maintenance expenses will exceed future premium and reinsurance recoveries on existing medical insurance contracts, including consideration of investment income. We assess if a PDR liability is needed through review of current results and forecasts. For purposes of determining premium deficiency losses, contracts are grouped consistent with our method of acquiring, servicing, and measuring the profitability of such contracts.
Goodwill
WeHistorically, we test goodwill for impairment annually at the beginning of the fourth quarter or whenever events or circumstances indicate the carrying value may not be recoverable. We test for goodwill impairment at the reporting unit level. When testing goodwill for impairment, we may first assess qualitative factors to determine if it is more likely than not that the carrying value of a reporting unit exceeds its estimated fair value. During a qualitative analysis, we consider the
impact of changes, if any, to the following factors: macroeconomic trends, industry and market factors, cost factors, changes in overall financial performance, and any other relevant events and uncertainties impacting a reporting unit. If our qualitative assessment indicates that goodwill impairment is more likely than not, we perform additional quantitative analyses. We may also elect to skip the qualitative testing and proceed directly to the quantitative testing. For reporting units where a quantitative analysis is performed, we perform a test measuring the fair values of the reporting units and comparing them to their aggregate carrying values, including goodwill. If the fair value of the reporting unit is greater than its carrying value, no goodwill impairment is recognized. If the carryingfair value of the reporting unit is less than its calculated faircarrying value, we recognize an impairment equal to the difference between the carrying value of the reporting unit and its calculated fair value.
WeFor our two reporting units within our continuing operations, Bright HealthCare and Consumer Care, we estimate the fair values of our reporting units using a combination of discounted cash flows and comparable market multiples, which includemultiples. For the one reporting unit within our discontinued operations, Bright HealthCare - Commercial, we estimate the fair value of the reporting unit using discounted cash flows. Our estimation methodology includes assumptions about a wide variety of internal and external factors. Significant assumptions used in the impairment analysis include financial projections of free cash flow (including significant assumptions about revenue growth rates, operating margins, capital requirements and income taxes), long-term growth rates for determining terminal value beyond the discretely forecasted periods and discount rates. Underperformance to the financial projections used in the impairment analysis could negatively impact the fair value of our reporting units. Additionally, the passage of time and the availability of additional information regarding areas of uncertainty with respect to the reporting units’ operations could cause these assumptions to change in the future.
We determined that our decision to exit the Commercial markets and the decrease in our enterprise market capitalization due to a decrease in the price of our common stock, represented events that indicated the carrying values of our reporting units may not be recoverable. As such, we performed an interim impairment test as of September 30, 2022. We estimated the fair values of our reporting units using a combination of discounted cash flows and comparable market multiples, which include assumptions about a wide variety of internal and external factors. As a result of our interim impairment test, we recognized a non-cash impairment loss of $70.0 million in our Bright HealthCare reporting unit. The impairment of our Bright HealthCare reporting unit was primarily driven by an increase in the discount rate, which was impacted by higher interest rates and other market factors. We estimated the fair value of our, now discontinued, Bright HealthCare – Commercial reporting unit using an adjusted balance sheet approach as a result of our decision to exit the Commercial business for the 2023 plan year. We recognized a $4.1 million non-cash impairment loss related to our Bright HealthCare – Commercial reporting unit, which represented all of the goodwill associated with the Bright HealthCare – Commercial reporting unit.
Given the proximity of our interim impairment measurement date (last day of our fiscal third quarter - September 30, 2022) to our annual goodwill impairment measurement date (first day of our fiscal fourth quarter - October 1, 2022), we performed a qualitative assessment to determine whether it was more likely than not that the fair value of any of our reporting units was less than the carrying value. As material changes in the business that occurred during the valuation procedures but subsequent to our interim impairment measurement date were taken into consideration during our interim impairment assessment, we concluded that there would be no reasonable expectation of changes in estimates or the reporting unit fair values and carrying values between our interim impairment and annual impairment measurement dates.
As of October 1, 2021,December 31, 2022, we completedrecognized a $1.2 million goodwill disposition related to our annual impairment tests forConsumer Care reporting unit. Additionally, we determined that the sustained decline in our stock price triggered a qualitative assessment of our goodwill with allto determine if it was more likely than not that the fair value of our reporting units havingwere less than their respective carrying values. Through our assessment of our reporting units, we concluded that it was not more likely than not that the fair value of our reporting units were less than their respective carrying values significantly in excessas of their carrying values.December 31, 2022. We will continue to closely monitor the operational performance of our reporting units as it relates to goodwill impairment.
Recently Adopted and Issued Accounting Standards
See Note 2 in the Notes to Consolidated Financial Statements for a discussion of accounting pronouncements recently adopted and recently issued accounting pronouncements not yet adopted and their potential impact to our financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our earnings and financial position are exposed to financial market risk, including those resulting from changes in interest rates.
Interest Risk
The level of our pretax earnings is subject to market risk due to changes in interest rates and the resulting impact on investment income and interest expense. We invest in a professionally managed portfolio of securities, which includes debt securities of publicly traded companies, obligations of the U.S. government, domestic government agencies, and state and political subdivisions. Interest rate risk is highly sensitive due to many factors, including U.S. monetary and tax policies and other factors outside of our control. Assuming a hypothetical and immediate 1% increase in interest rates across the entire U.S. Treasury curve at December 31, 2021,2022, the aggregate market value decrease to our regulated and unregulated portfolios would be approximately $16.0$33.4 million.
Bright Health Group, Inc. and Subsidiaries
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Bright Health Group, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Bright Health Group, Inc. and subsidiaries as of December 31, 20212022 and 2020,2021, the related consolidated statements of income (loss), comprehensive income (loss), changes in redeemable preferred stock and shareholders'shareholders’ equity (deficit), and cash flows for each of the twothree years in the period ended December 31, 2021,2022, and the related notes (collectively referred to as the "financial statements"“financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20212022 and 2020,2021, and the results of its operations and its cash flows for each of the twothree years in the period ended December 31, 2021,2022, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 16, 2023 expressed an adverse opinion on the Company’s internal control over financial reporting because of a material weakness.
Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has a history of operating losses and insufficient cash flow to meet its obligations, that raises substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company'sCompany’s management. Our responsibility is to express an opinion on the Company'sCompany’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Incurred but not Reported (IBNR) Claim Liability – Refer to Notes 2 and 810 to the Financial Statements
Critical Audit Matter Description
Medical costs payable includes the Company’s estimates for the costs of healthcare services consumers have received but for which claims have not yet been received or processed. At December 31, 2021, the Company’s IBNR balance was $660 million. The IBNR claims are developed using an actuarial process that
requires management to make judgments. These judgments include applying observed medical cost trend factors to the average per memberconsumer (member) per month (“PMPM”) medical costs as well as using completion factors that include judgments related to claim submissions such as the time from datapercentage of servicepaid claims completion relative to claim receipt, claim levels, and processing cycles, as well as other factors.an estimate of the total expected ultimate claims at a given point in time.
We identified the IBNR claim liability as a critical audit matter because of the significant assumptions made by management in estimating the liability. This required complex auditor judgment and an increased extent of effort, including the involvement of actuarial specialists in performing procedures to evaluate the reasonableness of management’s methods, assumptions and judgments in developing the liability.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to IBNR included the following, among others:
•We evaluatedtested the design and implementationeffectiveness of controls over management’s estimate of the IBNR claim liability balance, including controls over the judgements made in the actuarial estimation process, as well as controls over the claims data used in the estimation process.
•We tested the underlying claims, membership data, and other information that served as the basis for the actuarial analysis, to test that the inputs to the actuarial estimate were complete and accurate.
•With the assistance of actuarial specialists, we evaluated the reasonableness of the actuarial methods and assumptions used by management to estimate the IBNR claim liability by:
–Performing an overlay of the historical claims data used in management’s current year model to the data used in prior periods to validate that there were no material changes to the claims data tested in prior periods.
–Developing an independent estimate of the IBNR claim liability and comparing our estimate to management’s estimate.
–Performing a retrospective review comparing management’s prior year estimate of IBNR to claims processed in 20212022 with dates of service in 20202021 or prior to identify potential bias in the determination of the IBNR claims liability.
Affordable Care Act (ACA) Risk Adjustment – Refer to NoteNotes 2 and 4 to the Financial Statements
Critical Audit Matter Description
The Company records adjustments for changes to the risk adjustment balances for its individual and small group policies in premium revenue. The risk adjustment program adjusts premiums based on the demographic factors and health status of each consumer as derived from current-year medical diagnoses in accordance with Section 1343 of the ACA. Risk score information is calculated at the consumer level in order to determine an average risk score for each legal entity participating in a particular state market, which are then compared to the overall risk score for the state market. The risk adjustment amount is determined based on how each of the Company’s average risk scores compare to the state’s average risk score. The nature of the program requires significant assumptions from the Company in estimating both the final risk scores of its members as well as state average risk scores. The ACA risk adjustment liability balance was $931M as of 12/31/2021.
We identified the ACA risk adjustment liability as a critical audit matter because of the significant judgement and assumptions management makes to estimate its risk adjustment liability. This requires complex auditor judgment, and an increased extent of audit effort, including the involvement of our actuarial specialists, when performing audit procedures to evaluate the reasonableness of management’s assumptions and methods.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to ACA risk adjustmentRisk Adjustment included the following, among others:
•We evaluated the design and implementation of controls over management’s estimate of the ACA Risk Adjustment liability balance.
•We assessed the Company’s process to estimate the ACA risk adjustment balance by performing a retrospective review of the Company’s prior year balance against final settlement amounts.
•With the assistance of our actuarial specialists, we evaluated the model used to develop the risk adjustment estimates, including the mathematical accuracy of calculations, and tested certain significant assumptions and inputs.
•We obtained the report issued by management’s third-party specialist and compared to management’s recorded estimate.
Premium Deficiency Reserve (PDR) – Refer to Note 2 to the Financial Statements
Critical Audit Matter Description
PDR liabilities are established when it is probable that expected future claims and maintenance expenses will exceed future premium and reinsurance recoveries on existing medical insurance contracts. The Company assesses if a PDR liability is needed through review of current results and forecasts. For purposes of determining premium deficiency losses, contracts are grouped consistent with the Company’s method of acquiring, servicing, and measuring the profitability of such contracts. The PDR balance was $103M as of 12/31/2021.
We identified Premium Deficiency Reserve as a critical audit matter because of the significant assumptions management makes when forecasting the expected performance of its insurance contracts. These assumptions include forecasts of the expected premium revenues, reinsurance recoveries, claim expenses, and maintenance costs of each contract grouping. The evaluation of the assumptions used by management to develop its PDR forecasts require complex auditor judgement and an increased extent of audit effort, including the involvement of our actuarial specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to PDR included the following, among others:
•We evaluated the design and implementation of the control over the review of the significant business and valuation assumptions included in the forecast used in the PDR analysis.
•We evaluated the reasonableness of management’s forecasts by comparing the forecasts used in the PDR model to (1) historical results, (2) internal communications to management and the Board of Directors, and (3) forecasted information included in Company press releases as well as in analyst and industry reports of the Company and companies in its peer group.
•With the assistance of our actuarial specialists, we evaluated the model used to develop the PDR estimates, including the mathematical accuracy of calculations, and tested certain significant assumptions and inputs.
Goodwill – Bright Healthcare MA and NeueHealth Reporting Units– Refer to Notes 2, 3, and 78 to the Financial Statements
Critical Audit Matter Description
The Company’s evaluation of goodwill for impairment involves the comparison of the fair value of each reporting unit to its carrying value. The Company determines the fair value of its reporting units using a combination of discounted cash flows and comparable market multiples. The determination of fair value using discounted cash flows requires management to make significant estimates and assumptions related to forecasts of revenue growth rates, profit margins, and discount rates. The determination of fair value using comparable market multiples requires management to make significant assumptions related to revenue multiples, including the determination of an appropriate group of peer companies. TheIn 2022, the Company recognized an impairment of goodwill balance was $839 millionprimarily due to an increase in interest rates and other market factors, as ofwell as the Company’s decision to exit its Commercial business effective December 31, 2021. The fair values of all three reporting units exceeded their carrying values as of the measurement date and, therefore, no impairment was recognized.2022.
We identified goodwill as a critical audit matter because of the significant estimates and assumptions management makes to estimate the fair value of its reporting units. This required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists, when performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to forecasts of future revenue growth rates, profit margins, revenue multiples, and selection of discount rates.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to Goodwill included the following, among others:
•We evaluatedtested the design and implementationeffectiveness of controls over management’s goodwill impairment evaluation, including those over the determination of the fair value of its reporting units.units and development of management’s forecasts.
•We evaluated the reasonableness of management’s forecasts by evaluating historical forecasts to actual results and comparing the forecasts used in the income approach to (1) historical results, (2) internal communications to management and the Board of Directors, and (3) forecasted information included in Company press releases as well as in analyst and industry reports of the Company and companies in its peer group.
•With the assistance of our fair value specialists, we evaluated the discount rates, including testing the underlying source information and the mathematical accuracy of the calculations used in the income approach, developing a range of independent estimates and comparing those to the discount rates selected by management.
•With the assistance of our fair value specialists, we evaluated the revenue multiples used in the market approach, including testing the underlying source information and mathematical accuracy of the calculations, comparing the multiples selected by management to its guideline companies, and evaluating management’s determination of appropriate guideline companies.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
March 18, 202216, 2023
We have served as the Company's auditor since 2020.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Bright Health Group, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of income (loss), comprehensive income (loss), changes in redeemable preferred stock and shareholders’ equity (deficit) and cash flows for the year ended December 31, 2019, and the related notes to the consolidated financial statements (collectively, the financial statements) of Bright Health Group, Inc. and its subsidiaries (formerly known as Bright Health Inc.) (the “Company”). In our opinion, the financial statements present fairly, in all material respects, the results of the Company’s operations and its cash flows for the year ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ RSM US LLP
We served as the Company’s auditor from 2016 to 2021.
Chicago, Illinois
March 17, 2021, except for the effects of the stock split as discussed in the second paragraph in Note 1 as to which the date is June 4, 2021.
Bright Health Group, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share and per share data)
| | | December 31, | | December 31, |
| | 2021 | | 2020 | | 2022 | | 2021 |
| Assets | Assets | | | | Assets | | | |
| Current assets: | Current assets: | | | | Current assets: | | | |
| Cash and cash equivalents | Cash and cash equivalents | $ | 1,061,179 | | $ | 488,371 | Cash and cash equivalents | $ | 466,325 | | $ | 289,283 |
| Short-term investments | Short-term investments | 193,835 | | 499,928 | Short-term investments | 13,206 | | 144,477 |
| Accounts receivable, net of allowance of $4,074 and $2,602, respectively | 113,474 | | 60,522 | |
| Accounts receivable, net of allowance of $6,098 and $3,417, respectively | | Accounts receivable, net of allowance of $6,098 and $3,417, respectively | 73,605 | | 98,882 |
| Direct contracting performance year receivable | | Direct contracting performance year receivable | 99,181 | | — |
| Current assets of discontinued operations (Note 4) | | Current assets of discontinued operations (Note 4) | 2,783,474 | | 1,027,345 |
| Prepaids and other current assets | Prepaids and other current assets | 291,712 | | 130,986 | Prepaids and other current assets | 134,843 | | 100,213 |
| Total current assets | Total current assets | 1,660,200 | | 1,179,807 | Total current assets | 3,570,634 | | 1,660,200 |
| Other assets: | Other assets: | | | | Other assets: | | | |
| Long-term investments | Long-term investments | 675,192 | | 175,176 | Long-term investments | 5,401 | | 18,608 |
| Property, equipment and capitalized software, net | Property, equipment and capitalized software, net | 38,344 | | 12,264 | Property, equipment and capitalized software, net | 42,596 | | 38,344 |
| Goodwill | Goodwill | 835,140 | | 263,035 | Goodwill | 760,078 | | 830,992 |
| Intangible assets, net | Intangible assets, net | 343,860 | | 152,211 | Intangible assets, net | 249,083 | | 336,995 |
| Long-term assets of discontinued operations (Note 4) | | Long-term assets of discontinued operations (Note 4) | — | | 668,695 |
| Other non-current assets | Other non-current assets | 45,603 | | 28,309 | Other non-current assets | 37,260 | | 44,505 |
| Total other assets | Total other assets | 1,938,139 | | 630,995 | Total other assets | 1,094,418 | | 1,938,139 |
| Total assets | Total assets | $ | 3,598,339 | | $ | 1,810,802 | Total assets | $ | 4,665,052 | | $ | 3,598,339 |
| Liabilities, Redeemable Noncontrolling Interests, Redeemable Preferred Stock and Shareholders’ Equity (Deficit) | Liabilities, Redeemable Noncontrolling Interests, Redeemable Preferred Stock and Shareholders’ Equity (Deficit) | | | | Liabilities, Redeemable Noncontrolling Interests, Redeemable Preferred Stock and Shareholders’ Equity (Deficit) | | | |
| Current liabilities: | Current liabilities: | | | | Current liabilities: | | | |
| Medical costs payable | Medical costs payable | $ | 817,975 | | $ | 249,777 | Medical costs payable | $ | 411,753 | | $ | 263,187 |
| Accounts payable | Accounts payable | 118,140 | | 57,252 | Accounts payable | 67,854 | | 57,888 |
| | Unearned revenue | Unearned revenue | 53,295 | | 34,628 | Unearned revenue | 242 | | 2,585 |
| Risk adjustment payable | 931,170 | | 187,777 | |
| | Short-term borrowings | Short-term borrowings | 155,000 | | — | Short-term borrowings | 303,947 | | 155,000 |
| Current liabilities of discontinued operations (Note 4) | | Current liabilities of discontinued operations (Note 4) | 2,783,474 | | 1,696,040 |
| Other current liabilities | Other current liabilities | 207,238 | | 35,847 | Other current liabilities | 121,424 | | 108,849 |
| Total current liabilities | Total current liabilities | 2,282,818 | | 565,281 | Total current liabilities | 3,688,694 | | 2,283,549 |
| Other liabilities | Other liabilities | 41,994 | | 28,578 | Other liabilities | 36,673 | | 41,263 |
| Total liabilities | Total liabilities | 2,324,812 | | 593,859 | Total liabilities | 3,725,367 | | 2,324,812 |
| Commitments and contingencies (Note 15) | 0 | | 0 | |
| Commitments and contingencies (Note 17) | | Commitments and contingencies (Note 17) | | | |
| Redeemable noncontrolling interests | Redeemable noncontrolling interests | 128,407 | | 39,600 | Redeemable noncontrolling interests | 219,758 | | 128,407 |
| Redeemable preferred stock, $0.0001 par value; 100,000,000 and 166,307,087 shares authorized in 2021 and 2020, respectively; — and 164,244,893 shares issued and outstanding in 2021 and 2020, respectively | — | | 1,681,015 | |
| Redeemable Series A preferred stock, $0.0001 par value; 750,000 and — shares authorized in 2022 and 2021, respectively; 750,000 and — shares issued and outstanding in 2022 and 2021, respectively | | Redeemable Series A preferred stock, $0.0001 par value; 750,000 and — shares authorized in 2022 and 2021, respectively; 750,000 and — shares issued and outstanding in 2022 and 2021, respectively | 747,481 | | — |
| Redeemable Series B preferred stock, $0.0001 par value; 175,000 shares authorized in 2022 and 2021, respectively; 175,000 and — shares issued and outstanding in 2022 and 2021, respectively | | Redeemable Series B preferred stock, $0.0001 par value; 175,000 shares authorized in 2022 and 2021, respectively; 175,000 and — shares issued and outstanding in 2022 and 2021, respectively | 172,936 | | — |
| Shareholders’ equity (deficit): | Shareholders’ equity (deficit): | | | | Shareholders’ equity (deficit): | | | |
| Common stock, $0.0001 par value; 3,000,000,000 and 658,993,725 shares authorized in 2021 and 2020, respectively; 628,622,872 and 137,662,698 shares issued and outstanding in 2021 and 2020, respectively | 63 | | 14 | |
| Common stock, $0.0001 par value; 3,000,000,000 shares authorized in 2022 and 2021; 630,271,508 and 628,622,872 shares issued and outstanding in 2022 and 2021, respectively | | Common stock, $0.0001 par value; 3,000,000,000 shares authorized in 2022 and 2021; 630,271,508 and 628,622,872 shares issued and outstanding in 2022 and 2021, respectively | 63 | | 63 |
| Additional paid-in capital | Additional paid-in capital | 2,861,243 | | 9,877 | Additional paid-in capital | 2,972,271 | | 2,861,243 |
| Accumulated deficit | Accumulated deficit | (1,700,851) | | (515,989) | Accumulated deficit | (3,156,395) | | (1,700,851) |
| Accumulated other comprehensive (loss) income | Accumulated other comprehensive (loss) income | (3,335) | | 2,426 | Accumulated other comprehensive (loss) income | (4,429) | | (3,335) |
| Treasury stock, at cost, 2,522,148 and — shares at December 31, 2021 and 2020, respectively | (12,000) | | — | |
| Treasury stock, at cost, 2,522,148 shares at December 31, 2022 and 2021 | | Treasury stock, at cost, 2,522,148 shares at December 31, 2022 and 2021 | (12,000) | | (12,000) |
| Total shareholders’ equity (deficit) | Total shareholders’ equity (deficit) | 1,145,120 | | (503,672) | Total shareholders’ equity (deficit) | (200,490) | | 1,145,120 |
| Total liabilities, redeemable noncontrolling interests, redeemable preferred stock and shareholders’ equity (deficit) | Total liabilities, redeemable noncontrolling interests, redeemable preferred stock and shareholders’ equity (deficit) | $ | 3,598,339 | | $ | 1,810,802 | Total liabilities, redeemable noncontrolling interests, redeemable preferred stock and shareholders’ equity (deficit) | $ | 4,665,052 | | $ | 3,598,339 |
See accompanying Notes to Consolidated Financial Statements
Bright Health Group, Inc. and Subsidiaries
Consolidated Statements of Income (Loss)
(in thousands, except share and per share data)
| | | For the Years Ended December 31, | | For the Years Ended December 31, |
| | 2021 | | 2020 | | 2019 | | 2022 | | 2021 | | 2020 |
| Revenue: | Revenue: | | | | | | Revenue: | | | | | |
| Premium revenue | Premium revenue | $ | 3,902,714 | | $ | 1,180,338 | | $ | 272,323 | Premium revenue | $ | 1,764,949 | | $ | 1,390,330 | | $ | 487,905 |
| Direct Contracting revenue | | Direct Contracting revenue | 654,087 | | — | | — |
| Service revenue | Service revenue | 42,701 | | 18,514 | | — | Service revenue | 48,013 | | 42,469 | | 18,514 |
| Investment income | 83,974 | | 8,468 | | 8,350 | |
| Investment income (loss) | | Investment income (loss) | (55,019) | | 80,234 | | 8,468 |
| Total revenue | Total revenue | 4,029,389 | | 1,207,320 | | 280,673 | Total revenue | 2,412,030 | | 1,513,033 | | 514,887 |
| Operating expenses: | Operating expenses: | | | | | | Operating expenses: | | | | | |
| Medical costs | Medical costs | 3,953,674 | | 1,047,300 | | 224,387 | Medical costs | 2,206,243 | | 1,294,158 | | 451,918 |
| Operating costs | Operating costs | 1,238,387 | | 409,334 | | 180,489 | Operating costs | 632,030 | | 527,453 | | 225,063 |
| Restructuring charges | | Restructuring charges | 31,739 | | — | | — |
| Goodwill impairment | | Goodwill impairment | 71,225 | | — | | — |
| Intangible assets impairment | | Intangible assets impairment | 42,611 | | — | | — |
| Depreciation and amortization | Depreciation and amortization | 35,484 | | 8,289 | | 1,134 | Depreciation and amortization | 50,430 | | 35,049 | | 8,289 |
| Total operating expenses | Total operating expenses | 5,227,545 | | 1,464,923 | | 406,010 | Total operating expenses | 3,034,278 | | 1,856,660 | | 685,270 |
| Operating loss | Operating loss | (1,198,156) | | (257,603) | | (125,337) | Operating loss | (622,248) | | (343,627) | | (170,383) |
| Interest expense | Interest expense | 7,956 | | — | | — | Interest expense | 12,821 | | 7,230 | | — |
| Other income | Other income | (1,226) | | — | | — | Other income | (784) | | (1,226) | | — |
| Loss before income taxes | (1,204,886) | | (257,603) | | (125,337) | |
| Income tax (benefit) expense | (26,521) | | (9,161) | | — | |
| Loss from continuing operations before income taxes | | Loss from continuing operations before income taxes | (634,285) | | (349,631) | | (170,383) |
| Income tax expense (benefit) | | Income tax expense (benefit) | 3,680 | | (26,521) | | (9,161) |
| Net loss from continuing operations | | Net loss from continuing operations | (637,965) | | (323,110) | | (161,222) |
| Loss from discontinued operations, net of tax (Note 4) | | Loss from discontinued operations, net of tax (Note 4) | (721,915) | | (855,255) | | (87,220) |
| Net loss | Net loss | (1,178,365) | | (248,442) | | (125,337) | Net loss | (1,359,880) | | (1,178,365) | | (248,442) |
| Net earnings attributable to noncontrolling interests | (6,497) | | — | | — | |
| Net earnings from continuing operations attributable to noncontrolling interests | | Net earnings from continuing operations attributable to noncontrolling interests | (95,664) | | (6,497) | | — |
| Series A preferred stock dividend accrued | | Series A preferred stock dividend accrued | (37,889) | | — | | — |
| Series B preferred stock dividend accrued | | Series B preferred stock dividend accrued | (1,798) | | — | | — |
| Net loss attributable to Bright Health Group, Inc. common shareholders | Net loss attributable to Bright Health Group, Inc. common shareholders | $ | (1,184,862) | | $ | (248,442) | | $ | (125,337) | Net loss attributable to Bright Health Group, Inc. common shareholders | $ | (1,495,231) | | | $ | (1,184,862) | | | $ | (248,442) | |
| | Basic and diluted loss per share attributable to Bright Health Group, Inc. common shareholders | Basic and diluted loss per share attributable to Bright Health Group, Inc. common shareholders | $ | (3.02) | | $ | (1.82) | | $ | (0.93) | Basic and diluted loss per share attributable to Bright Health Group, Inc. common shareholders | |
| Continuing operations | | Continuing operations | $ | (1.23) | | | $ | (0.84) | | | $ | (1.18) | |
| Discontinued operations | | Discontinued operations | (1.15) | | | (2.18) | | | (0.64) | |
| Basic and diluted loss per share | | Basic and diluted loss per share | (2.38) | | | (3.02) | | | (1.82) | |
| | Basic and diluted weighted-average common shares outstanding | Basic and diluted weighted-average common shares outstanding | 392,243 | | 136,193 | | 134,486 | Basic and diluted weighted-average common shares outstanding | 629,459 | | | 392,243 | | | 136,193 | |
See accompanying Notes to Consolidated Financial Statements
Bright Health Group, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
| | | For the Years Ended December 31, | | For the Years Ended December 31, |
| | 2021 | | 2020 | | 2019 | | 2022 | | 2021 | | 2020 |
| Net loss | Net loss | $ | (1,178,365) | | $ | (248,442) | | $ | (125,337) | Net loss | $ | (1,359,880) | | $ | (1,178,365) | | $ | (248,442) |
Other comprehensive (loss) income: | Other comprehensive (loss) income: | | | | | | Other comprehensive (loss) income: | | | | | |
Unrealized investment holding (losses) gains arising during the year, net of tax of $—, $—, and $—, respectively | (6,163) | | 1,556 | | 1,211 | |
Less: reclassification adjustments for investment (losses) gains, net of tax of $—, $—, and $—, respectively | (402) | | 112 | | 38 | |
Unrealized investment holding gains (losses) arising during the year, net of tax of $—, $—, and $—, respectively | | Unrealized investment holding gains (losses) arising during the year, net of tax of $—, $—, and $—, respectively | (5,267) | | (6,163) | | 1,556 |
Less: reclassification adjustments for investment gains (losses), net of tax of $—, $—, and $—, respectively | | Less: reclassification adjustments for investment gains (losses), net of tax of $—, $—, and $—, respectively | (4,173) | | (402) | | 112 |
| Other comprehensive (loss) income | Other comprehensive (loss) income | (5,761) | | 1,444 | | 1,173 | Other comprehensive (loss) income | (1,094) | | (5,761) | | 1,444 |
| Comprehensive loss | Comprehensive loss | (1,184,126) | | (246,998) | | (124,164) | Comprehensive loss | (1,360,974) | | (1,184,126) | | (246,998) |
| Comprehensive income attributable to noncontrolling interests | Comprehensive income attributable to noncontrolling interests | (6,497) | | — | | — | Comprehensive income attributable to noncontrolling interests | (95,664) | | (6,497) | | — |
| Comprehensive loss attributable to Bright Health Group, Inc. common shareholders | Comprehensive loss attributable to Bright Health Group, Inc. common shareholders | $ | (1,190,623) | | $ | (246,998) | | $ | (124,164) | Comprehensive loss attributable to Bright Health Group, Inc. common shareholders | $ | (1,456,638) | | $ | (1,190,623) | | $ | (246,998) |
See accompanying Notes to Consolidated Financial Statements
Bright Health Group, Inc. and Subsidiaries
Consolidated Statements of Changes in Redeemable Preferred Stock and Shareholders’ Equity (Deficit)
(in thousands)
| | | Redeemable Preferred Stock | | Common Stock | | Additional
Paid-In
Capital | | Retained
Earnings
(Deficit) | | Accumulated
Other
Comprehensive
Income (Loss) | | Treasury Stock | | Total | | Redeemable Preferred Stock | | Common Stock | | Additional
Paid-In
Capital | | Retained
Earnings
(Deficit) | | Accumulated
Other
Comprehensive
Income (Loss) | | Treasury Stock | | Total |
| | Shares | | Amount | | Shares | | Amount | | | Shares | | Amount | | Shares | | Amount | |
| Balance at January 1, 2019 | 90,782 | | | $ | 444,690 | | | 134,126 | | | $ | 13 | | | $ | 1,060 | | | $ | (142,139) | | | $ | (191) | | | $ | — | | | $ | (141,257) | | |
| | Impact of adoption of Accounting Standards | — | | | — | | | — | | | — | | | — | | | (71) | | | — | | | — | | | (71) | | |
| Net loss | — | | | — | | | — | | | — | | | — | | | (125,337) | | | — | | | — | | | (125,337) | | |
| Issuance of preferred stock | 28,440 | | | 427,300 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | |
| Issuance of common stock | — | | | — | | | 1,383 | | | 1 | | | 260 | | | — | | | — | | | — | | | 261 | | |
| Share-based compensation | — | | | — | | | — | | | — | | | 1,864 | | | — | | | — | | | — | | | 1,864 | | |
| Other comprehensive gain | — | | | — | | | — | | | — | | | — | | | — | | | 1,173 | | | — | | | 1,173 | | |
| Balance at December 31, 2019 | Balance at December 31, 2019 | 119,222 | | | 871,990 | | | 135,509 | | | $ | 14 | | | $ | 3,184 | | | $ | (267,547) | | | $ | 982 | | | $ | — | | | $ | (263,367) | | Balance at December 31, 2019 | 119,222 | | | 871,990 | | | 135,509 | | | $ | 14 | | | $ | 3,184 | | | $ | (267,547) | | | $ | 982 | | | $ | — | | | $ | (263,367) | |
| | Net loss | Net loss | — | | | — | | | — | | | — | | | — | | | (248,442) | | | — | | | — | | | (248,442) | | Net loss | — | | | — | | | — | | | — | | | — | | | (248,442) | | | — | | | — | | | (248,442) | |
| Issuance of preferred stock | Issuance of preferred stock | 45,023 | | | 809,025 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Issuance of preferred stock | 45,023 | | | 809,025 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Issuance of common stock | Issuance of common stock | — | | | — | | | 2,154 | | | — | | | 1,241 | | | — | | | — | | | — | | | 1,241 | | Issuance of common stock | — | | | — | | | 2,154 | | | — | | | 1,241 | | | — | | | — | | | — | | | 1,241 | |
| Share-based compensation | Share-based compensation | — | | | — | | | — | | | — | | | 5,452 | | | — | | | — | | | — | | | 5,452 | | Share-based compensation | — | | | — | | | — | | | — | | | 5,452 | | | — | | | — | | | — | | | 5,452 | |
| Other comprehensive gain | Other comprehensive gain | — | | | — | | | — | | | — | | | — | | | — | | | 1,444 | | | — | | | 1,444 | | Other comprehensive gain | — | | | — | | | — | | | — | | | — | | | — | | | 1,444 | | | — | | | 1,444 | |
| Balance at December 31, 2020 | Balance at December 31, 2020 | 164,245 | | | 1,681,015 | | | 137,663 | | | $ | 14 | | | $ | 9,877 | | | $ | (515,989) | | | $ | 2,426 | | | $ | — | | | $ | (503,672) | | Balance at December 31, 2020 | 164,245 | | | 1,681,015 | | | 137,663 | | | $ | 14 | | | $ | 9,877 | | | $ | (515,989) | | | $ | 2,426 | | | $ | — | | | $ | (503,672) | |
| | Net loss | Net loss | — | | | — | | | — | | | — | | | — | | | (1,184,862) | | | — | | | — | | | (1,184,862) | | Net loss | — | | | — | | | — | | | — | | | — | | | (1,184,862) | | | — | | | — | | | (1,184,862) | |
| Issuance of preferred stock | Issuance of preferred stock | 3,487 | | | 134,944 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Issuance of preferred stock | 3,487 | | | 134,944 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Conversion of preferred stock to common stock | Conversion of preferred stock to common stock | (167,732) | | | (1,815,959) | | | 427,897 | | | 43 | | | 1,815,916 | | | — | | | — | | | — | | | 1,815,959 | | Conversion of preferred stock to common stock | (167,732) | | | (1,815,959) | | | 427,897 | | | 43 | | | 1,815,916 | | | — | | | — | | | — | | | 1,815,959 | |
| Issuance of common stock | Issuance of common stock | — | | | — | | | 14,235 | | | 1 | | | 86,390 | | | — | | | — | | | — | | | 86,391 | | Issuance of common stock | — | | | — | | | 14,235 | | | 1 | | | 86,390 | | | — | | | — | | | — | | | 86,391 | |
| Sale of common stock from IPO, net of offering costs | Sale of common stock from IPO, net of offering costs | — | | | — | | | 51,350 | | | 5 | | | 880,637 | | | — | | | — | | | — | | | 880,642 | | Sale of common stock from IPO, net of offering costs | — | | | — | | | 51,350 | | | 5 | | | 880,637 | | | — | | | — | | | — | | | 880,642 | |
| Share-based compensation | Share-based compensation | — | | | — | | | — | | | — | | | 68,423 | | | — | | | — | | | — | | | 68,423 | | Share-based compensation | — | | | — | | | — | | | — | | | 68,423 | | | — | | | — | | | — | | | 68,423 | |
| Other comprehensive loss | Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | — | | | (5,761) | | | — | | | (5,761) | | Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | — | | | (5,761) | | | — | | | (5,761) | |
| Return of common stock from escrow settlement | Return of common stock from escrow settlement | — | | | — | | | (2,522) | | | — | | | — | | | — | | | — | | | (12,000) | | | (12,000) | | Return of common stock from escrow settlement | — | | | — | | | (2,522) | | | — | | | — | | | — | | | — | | | (12,000) | | | (12,000) | |
| Balance at December 31, 2021 | Balance at December 31, 2021 | — | | | $ | — | | | 628,623 | | | $ | 63 | | | $ | 2,861,243 | | | $ | (1,700,851) | | | $ | (3,335) | | | $ | (12,000) | | | $ | 1,145,120 | | Balance at December 31, 2021 | — | | | — | | | 628,623 | | | 63 | | | $ | 2,861,243 | | | $ | (1,700,851) | | | $ | (3,335) | | | $ | (12,000) | | | $ | 1,145,120 | |
| | Net loss | | Net loss | — | | | — | | | — | | | — | | | — | | | (1,455,544) | | | — | | | — | | | (1,455,544) | |
| Issuance of Series A preferred stock | | Issuance of Series A preferred stock | 750 | | | 747,481 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Issuance of Series B preferred stock | | Issuance of Series B preferred stock | 175 | | | 172,936 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Issuance of common stock | | Issuance of common stock | — | | | — | | | 1,649 | | | — | | | 1,315 | | | — | | | — | | | — | | | 1,315 | |
| Share-based compensation | | Share-based compensation | — | | | — | | | — | | | — | | | 109,713 | | | — | | | — | | | — | | | 109,713 | |
| Other comprehensive loss | | Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | — | | | (1,094) | | | — | | | (1,094) | |
| Balance at December 31, 2022 | | Balance at December 31, 2022 | 925 | | | $ | 920,417 | | | 630,272 | | | $ | 63 | | | $ | 2,972,271 | | | $ | (3,156,395) | | | $ | (4,429) | | | $ | (12,000) | | | $ | (200,490) | |
See Notes to Consolidated Financial Statements
Bright Health Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
| Cash flows from operating activities: | | | | | |
| Net loss | $ | (1,184,862) | | $ | (248,442) | | $ | (125,337) |
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | | | | | |
| Depreciation and amortization | 35,484 | | 8,289 | | 1,134 |
| Share-based compensation | 68,423 | | 5,452 | | 1,864 |
| Deferred income taxes | (25,654) | | — | | — |
| Unrealized gain on equity securities | (80,231) | | — | | — |
| Other, net | 20,254 | | 2,667 | | (1,331) |
| Changes in assets and liabilities, net of acquired assets and liabilities: | | | | | |
| Accounts receivable | (32,941) | | 24,631 | | (201) |
| Other assets | (143,463) | | (44,061) | | (8,788) |
| Medical cost payable | 475,461 | | 78,591 | | 21,826 |
| Risk adjustment payable | 742,075 | | 100,974 | | 70,137 |
| Accounts payable and other liabilities | 192,611 | | (3,962) | | 25,553 |
| Unearned revenue | 14,902 | | 18,623 | | 6,935 |
| Net cash provided by (used in) operating activities | 82,059 | | (57,238) | | (8,208) |
| Cash flows from investing activities: | | | | | |
| Purchases of investments | (1,017,588) | | (916,823) | | (300,325) |
| Proceeds from sales, paydown, and maturities of investments | 926,901 | | 463,887 | | 238,330 |
| Purchases of property and equipment | (30,414) | | (6,474) | | (793) |
| Business acquisitions, net of cash acquired | (431,791) | | (230,332) | | (31,855) |
| Net cash used in investing activities | (552,892) | | (689,742) | | (94,643) |
| Cash flows from financing activities: | | | | | |
| Proceeds from issuance of preferred stock | — | | 711,200 | | 423,800 |
| Proceeds from issuance of common stock | 11,390 | | 1,241 | | 260 |
| Proceeds from short-term borrowings | 355,000 | | — | | — |
| Repayments of short-term borrowings | (200,000) | | — | | — |
| Payments for debt issuance costs | (3,391) | | — | | — |
| Proceeds from IPO | 887,328 | | — | | — |
| Payments for IPO offering costs | (6,686) | | — | | — |
| Net cash provided by financing activities | 1,043,641 | | 712,441 | | 424,060 |
| Net increase (decrease) in cash and cash equivalents | 572,808 | | (34,539) | | 321,209 |
| Cash and cash equivalents – beginning of year | 488,371 | | 522,910 | | 201,701 |
| Cash and cash equivalents – end of year | $ | 1,061,179 | | $ | 488,371 | | $ | 522,910 |
| Supplemental disclosures of cash flow information: | | | | | |
| Changes in unrealized (loss) gain on available-for-sale securities in OCI | $ | (5,761) | | $ | 1,444 | | $ | 1,173 |
| Cash paid for interest | 4,592 | | — | | — |
| Supplemental schedule of non-cash activities: | | | | | |
| Redeemable convertible preferred stock issued for acquisitions | $ | 134,944 | | $ | 97,825 | | $ | 3,500 |
| Contingent consideration | (4,221) | | — | | 5,716 |
| Conversion of redeemable convertible preferred stock to common stock upon initial public offering | 1,815,916 | | — | | — |
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Cash flows from operating activities: | | | | | |
| Net loss | $ | (1,359,880) | | $ | (1,184,862) | | $ | (248,442) |
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | | | | | |
| Depreciation and amortization | 50,575 | | 35,484 | | 8,289 |
| Impairment of intangible assets | 49,331 | | — | | — |
| Impairment of goodwill | 75,372 | | — | | — |
| Share-based compensation | 109,713 | | 68,423 | | 5,452 |
| Deferred income taxes | 2,027 | | (25,654) | | — |
| Unrealized loss (gain) on equity securities | 55,449 | | (80,231) | | — |
| Impairment of investments | 67,723 | | — | | — |
| Other, net | 24,163 | | 20,254 | | 2,667 |
| Changes in assets and liabilities, net of acquired assets and liabilities: | | | | | |
| Accounts receivable | 28,787 | | (32,941) | | 24,631 |
| Direct Contracting performance year receivable | (99,181) | | — | | — |
| Other assets | (21,832) | | (143,463) | | (44,061) |
| Medical cost payable | 279,563 | | 475,461 | | 78,591 |
| Risk adjustment payable | 1,012,720 | | 742,075 | | 100,974 |
| Accounts payable and other liabilities | 2,696 | | 192,611 | | (3,962) |
| Unearned revenue | (42,760) | | 14,902 | | 18,623 |
| Net cash provided by (used in) operating activities | 234,466 | | 82,059 | | (57,238) |
| Cash flows used in investing activities: | | | | | |
| Purchases of investments | (1,457,444) | | (1,017,588) | | (916,823) |
| Proceeds from sales, paydown, and maturities of investments | 1,055,479 | | 926,901 | | 463,887 |
| Purchases of property and equipment | (27,448) | | (30,414) | | (6,474) |
| Business acquisitions, net of cash acquired | (310) | | (431,791) | | (230,332) |
| Net cash used in investing activities | (429,723) | | (552,892) | | (689,742) |
| Cash flows from financing activities: | | | | | |
| Proceeds from issuance of preferred stock | 920,417 | | — | | 711,200 |
| Proceeds from issuance of common stock | 1,315 | | 11,390 | | 1,241 |
| Proceeds from short-term borrowings | 303,947 | | 355,000 | | — |
| Repayments of short-term borrowings | (155,000) | | (200,000) | | — |
| Payments for debt issuance costs | — | | (3,391) | | — |
| Distribution to noncontrolling interest holders | (4,311) | | — | | — |
| Proceeds from IPO | — | | 887,328 | | — |
| Payments for IPO offering costs | — | | (6,686) | | — |
| Net cash provided by financing activities | 1,066,368 | | 1,043,641 | | 712,441 |
| Net increase (decrease) in cash and cash equivalents | 871,111 | | 572,808 | | (34,539) |
| Cash and cash equivalents of continuing and discontinued operations– beginning of year | 1,061,179 | | 488,371 | | 522,910 |
| Cash and cash equivalents of continuing and discontinued operations– end of year | $ | 1,932,290 | | $ | 1,061,179 | | $ | 488,371 |
| Supplemental disclosures of cash flow information: | | | | | |
| Changes in unrealized gain (loss) on available-for-sale securities in OCI | $ | (1,094) | | $ | (5,761) | | $ | 1,444 |
| Cash paid for interest | 10,303 | | 4,592 | | — |
| Supplemental schedule of non-cash activities: | | | | | |
| Redeemable convertible preferred stock issued for acquisitions | $ | — | | $ | 134,944 | | $ | 97,825 |
| Contingent consideration | 332 | | (4,221) | | — |
| Conversion of redeemable convertible preferred stock to common stock upon initial public offering | — | | 1,815,916 | | — |
See Notes to Consolidated Financial Statements
Bright Health Group, Inc.
Notes to Consolidated Financial Statements
NOTE 1. ORGANIZATION AND OPERATIONS
Organizational Structure: Bright Health Group, Inc. and subsidiaries (collectively, “Bright Health,” “we,” “our,” “us,” or the “Company”) iswas founded in 2015 to transform healthcare. Our mission of Making Healthcare Right. Together. is built upon the belief that by aligning the best local resources in healthcare delivery with the financing of care we can drive a superior consumer experience, optimize clinical outcomes, reduce systemic waste, and lower costs. We are a healthcare company building a national Integrated System of Care in close partnership with our Care Partners. Our differentiated approach is built on alignment, focused on the consumer, and powered by technology. We have two market facing businesses: NeueHealthour Consumer Care business and Bright HealthCare. Through NeueHealth, we deliver high-quality virtualConsumer Care provides care delivery and in-person clinical care to patients under value-based contractsenablement services through our owned and affiliated primary care clinics. Through Bright HealthCare we offer Commercial andoffers Medicare health plan products to consumers in 14 states and 99 markets. Bright HealthCare acquired Brand New Day on April 30, 2020, True Health New Mexico on March 31, 2021 and Central Health Plan of California on April 1, 2021. NeueHealth acquired Premier Medical Associates of Florida on December 31, 2020, Zipnosis on March 31, 2021 and Centrum on July 1, 2021. Refer to Note 3, Business Combinations, for more information.across the nation.
Stock Split: On June 2, 2021, we effected a stock split ofBeginning January 1, 2022, two Direct Contracting Entities (“DCEs”) aligned with our Consumer Care segment began participating in the Company’s common stock on a 1-for-3 basis (the “Stock Split”Centers for Medicare and Medicaid Services' (“CMS”) Global and Professional Direct Contracting model (“DC Model”). In connection with the Stock Split, the conversion rateBoth DCEs assume full risk for the Company’s preferred stock was proportionately adjusted suchtotal cost of care of aligned beneficiaries.
In October 2022, we announced that the common stock issuable upon conversionBright HealthCare will no longer offer Commercial products in 2023 or offer MA products outside of such preferred stock was increased in proportion to the Stock Split. Accordingly, all common stock share and per share amountsCalifornia. We have presented our Commercial business within discontinued operations for all periods presented in thesewithin the consolidated financial statements have been retroactively adjusted to reflect this Stock Split.
Initial Public Offering:statements. See Note 4, On June 28, 2021, we completed our IPO in which we issued and sold 51,350,000 shares of common stock, par value $0.0001 per share, at an offering price of $18.00 per share. We received net proceeds of $887.3 million from the sale of our common stock, after deducting underwriting discounts and commissions of $37.0 million. We used a portion of the net proceeds from our IPO to repay in full our outstanding borrowings under our revolving credit facility as of the IPO date, as well as to fund the acquisition of Centrum. Refer to Note 3, Business CombinationsDiscontinued Operations, and Note 9, Short-Term Borrowings,for more information.further discussion of discontinued operations.
The Company’s Common Stockcommon stock is traded on the New York Stock Exchange (the “NYSE”) under the symbol “BHG”.
We incurred $6.7 million of deferred offering costs consisting primarily of accounting, legal and other fees related to our IPO, which were recorded against IPO proceeds within additional paid-in capital upon closing of our IPO.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The consolidated financial statements include the accounts of Bright Health Group, Inc. and all subsidiaries and controlled companies. The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). All intercompany balances and transactions are eliminated upon consolidation.
Use of Estimates: The preparation of our consolidated financial statements in conformance with GAAP requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Our most significant estimates include medical costs payable, risk adjustment revenue and associated payables and receivables, premium deficiency reserve and valuation and impairment of goodwill and other intangible assets. Actual results could differ from these estimates.
Business Combinations: We account for business combinations under the acquisition method of accounting. This method requires the recording of acquired assets and assumed liabilities at their acquisition date fair values. The excess of the purchase price over the fair value of assets acquired and liabilities assumed is recorded as goodwill. Results of operations related to business combinations are included prospectively beginning with the date of acquisition and transaction costs related to business combinations are recorded within operating costs.
Revenue Recognition: Premium revenue includes revenue derived from insurance contracts of Bright HealthCare, within the scope of FASBthe Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) 944, Financial Services - Insurance, as well as revenue earned by our
Bright Health Group, Inc.
Notes to Consolidated Financial Statements
NeueHealth business under capitated agreements recorded in accordance with ASC 606, Revenue from Contracts With Customers. Premium revenue is recognized in the period for which services are covered. Individual policies can be terminated by a consumer without advance notice to the Company. Consumers that have unpaid premium balances for the coverage period are subject to certain termination requirements depending on whether the premium is subsidized or nonsubsidized by CMS. The Company estimates the portion of unpaid balances that will not be collected from consumers and records an allowance accordingly.
We record adjustments for changes to the risk adjustment balances for individual policies in premium revenue. The risk adjustment program adjusts premiums based on the demographic factors and health status of each consumer as derived from current-year medical diagnoses as reported throughout the year. Under the risk adjustment program, a risk score is assigned to
Bright Health Group, Inc.
Notes to Consolidated Financial Statements
each covered consumer to determine an average risk score at the individual and small-group level by legal entity in a particular market in a state. Additionally, an average risk score is determined for the entire subject population for each market in each state. Settlements are determined on a net basis by legal entity and state and are made in the middle of the year following the end of the contract year. Each health insurance issuer’s average risk score is compared to the state’s average risk score. Risk adjustment is subject to audit by HHS, which could result in future payments applicable to benefit years. Risk adjustment payable was $931.2 million and $187.8 million at December 31, 2021 and 2020, respectively.
Premium revenue under the MA program includes CMS monthly premiums that are risk adjusted based on CMS defined formulas using consumer demographics and hierarchical condition category codes (“HCC risk scores”) calculated based on historical data submitted to CMS on a lagged basis. RAF-relatedRisk Adjustment Factor-related (“RAF”) premiums settle between CMS and the Company during both a midyear and final reconciliation process. Due to the lagged nature of the reconciliation and settlement, RAF-related premiums are estimated based on the lagged information that we submitted to CMS. The accuracy of the data submissions to CMS used in the RAF reconciliation are subject to CMS audit under the RADV audits and could result in future adjustments to premiums. As of December 31, 20212022 and 2020,2021, our MA risk adjustment receivable was $75.3$62.2 million and $40.6$75.3 million, respectively, recorded in accounts receivable.
The Company, in conjunction with the MA program, covers prescription drug benefits under the Medicare Prescription Drug Benefit (Medicare(“Medicare Part D)D”) program. Premium revenue includes CMS monthly premiums, consumer premium and CMS low-income premium subsidy for our insurance risk coverage. Premiums are recognized ratably over the period in which eligible individuals are entitled to receive covered benefits.
CMS covers 80% of allowed claims costs above the defined standard true out-of-pocket (“TrOOP”) threshold of $7,050 for any individual beneficiary enrolled in a Medicare Advantage plan (“MAO”). The reinsurance calculation is based on the benefit actually offered (i.e. basic or enhanced) and with CMS covering 80% of a member’s drug costs in the catastrophic phase. CMS provides upfront subsidies to MAO’s through a monthly payment in the Monthly Membership Report to cover the estimated cost of federal reinsurance on a per-member-per-month basis. Reinsurance subsidies in excess of federal reinsurance claims are paid back to CMS (a payable). If the MAO does not have enough federal reinsurance revenue to cover the federal reinsurance claims, CMS will pay the shortfall to the MAO.
Our monthly payment from CMS includes prospective subsidies to cover catastrophic reinsurance and low-income cost subsidies, and the Medicare Part D coverage gap discount that the Company must cover at the point-of-sale for prescription drugs. We are not at risk for these portions of the Medicare Part D benefit design. We account for these CMS-provided subsidies and related costs on the Consolidated Balance Sheets and ultimately settle with CMS and pharmaceutical companies during the final Medicare Part D reconciliation subsequent to the plan year. As of December 31, 20212022 and 2020,2021, we had receivables of $24.1$6.7 million and $6.6$24.1 million, respectively, recorded as prepaid and other current assets, and payables of $9.8$24.6 million and $0.5$9.8 million, respectively, recorded as other current liabilities related to these programs.
Our Medicare Part D premiums are subject to risk sharing with CMS under the risk corridor provisions. The risk corridor provisions compare costs targeted in our annual bid to actual prescription drug costs incurred. Our profit or loss is shared with or covered by CMS depending on the relative position within the risk corridor band. Changes in the risk corridor payable or receivable are recognized in premium revenue. As of December 31, 2022 and 2021, we had a risk corridor payable of $15.2 million and $4.1 million, which isrespectively, included in other current liabilities. We had no material risk corridor receivable or payable as of December 31, 2020.2022 and 2021, respectively. Additionally, our individual policy premiums, MA and Medicare Part D prescription drug plans are subject to MLR requirements under the ACA. Plans with medical loss ratios that fall below certain targets are required to rebate ratable portions of premiums annually. As of December 31, 2022 and 2021, we had MLR rebates payable of $0.5 million and $1.1 million, respectively, which are included in other current liabilities. We had no rebates payable as of December 31, 2020.
As part of our NeueHealthConsumer Care business, we are party to capitation arrangements that generate capitated revenue in the form of a predetermined per member per month fee in exchange for providing all defined healthcare services needed by an eligible member of the health plan, that is the other party to the arrangement. Per ASC 606, Revenue from Contracts With Customers, the capitated revenue and corresponding medical costs are presented gross aswhen we are acting as a principal in these arrangements,
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Notes to Consolidated Financial Statements
bearingbear the primary responsibilityfull financial risk for the delivery of the defined healthcare services and directing the performance of care activities in the fulfillment of our obligation.obligation and net when we bear limited financial risk.
We generate service revenue from providing primary care services to patients in our medical clinics. Our service revenues include net patient service revenues that we bill the consumer or their insurance plan on a fee-for-service basis. We recognize revenue as medical services are rendered.
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Notes to Consolidated Financial Statements
Unearned Revenue: Payments received prior to the datefulfillment of coverageservice are recorded as unearned revenue.
Medical Costs and Medical Costs Payable: Medical costs payable on the Consolidated Balance Sheets consists primarily of the liability for claims processed but not yet paid, estimates for claims received but not yet processed, estimates for the costs of health care services that enrollees have received but for which claims have not yet been submitted, capitation payable to providers and liabilities for physician, hospital and other medical cost disputes.
The estimates for IBNR claims whichincurred but not received (“IBNR”) includes estimates for claims which have not been received or fully processed, are developed using an actuarial process that is consistently applied and centrally controlled. The actuarial models consider factors such as historical submission and payment data, cost trends, customer and product mix, seasonality, utilization of health care services, contracted service rates and other relevant factors.
In developing our medical costs payable estimates, we apply different estimation methods depending on the month for which incurred claims are being estimated. For the most recent months, we estimate claim costs incurred by applying observed medical cost trend factors to the average per consumer per month medical costs incurred in prior months for which more complete claim data is available, supplemented by a review of near-term completion factors. For months prior to the most recent months, we apply the completion factors to actual claims adjudicated-to-date to estimate the expected amount of ultimate incurred claims for those months. These estimates may change as actuarial methods change or as underlying facts upon which the estimates are based change. Management believes the amount of medical costs payable is the best estimate of our liability as of December 31, 2021;2022; however, actual payments may differ from those established estimates. Note 8,10, Medical Costs Payable, discusses the development of paid and incurred claims and provides a rollforward of medical costs payable.
We contract with hospitals, physicians and other providers of health care primarily within our exclusive provider networks under discounted fee-for-service arrangements, including case rates and hospital per diems, and capitated agreements to provide medical care to enrollees. Dental, vision, and other supplemental medical services are provided to consumers under capitated arrangements, and these providers are at risk for the cost of medical care services provided to our enrollees; however, we are ultimately responsible for the provision of services should the capitated provider be unable to provide the contracted services.
Quality incentive and shared savings payables to providers are calculated under the contractual terms of each respective agreement. Medical costs payable included $13.9$37.8 million and $9.6$74.2 million under these contracts at December 31, 20212022 and 2020,2021, respectively.
We estimated a claims adjustment expense liability of $14.1$10.6 million and $2.5$5.1 million as of December 31, 20212022 and 2020,2021, respectively, based on the termshistorical cost of the contract held with the third-party claims administrator.adjudication.
Cash and Cash Equivalents: Cash and cash equivalents include cash and investments with original maturities of three months or less when purchased.
Investments:Investments: We invest in equity securities and debt securities of the U.S. government and other government agencies, corporate investment grade, money market funds and various other securities.
We determine the appropriate classification of investments at the time they are acquired and evaluate the appropriateness of such classifications at each balance sheet date. We classify our investments in individual debt securities as available-for-sale securities or held-to-maturity securities. All available-for-sale investments maturing less than one year from the statement date that management intends to liquidate within the next year are reflected as short-term investments. Available-for-sale investments with a maturity date greater than one year are classified as long-term investments. All available-for-sale
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Notes to Consolidated Financial Statements
investments are measured and carried at fair value. Changes in unrealized holding gains and losses on available-for-sale securities are reflected in other comprehensive income (loss).
Equity investments are classified as short-term investments and measured and carried at fair value. The changes in fair value of our equity securities are reflected in investment income within our Consolidated Statements of Income (Loss).
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Notes to Consolidated Financial Statements
Realized gains and losses for all investments are included in investment income. The basis for determining realized gains and losses is the specific-identification method. Interest on debt securities is recognized in investment income when earned. Premiums and discounts are amortized/accreted using methods that result in a constant yield over the securities’ expected lives.
Prior to 2020, we applied the other-than-temporary impairment (“OTTI”) model for securities in an unrealized loss position, which did not result in any material impairments for the year ended December 31, 2019. Beginning January 1, 2020, we adopted the new current expected credit losses (“CECL”) model. The CECL model retained many similarities from the previous OTTI model, except it eliminated the length of time over which the fair value had been less than cost from consideration in the impairment analysis. Also, under the CECL model, expected losses on available-for-sale debt securities are recognized through an allowance for credit losses rather than as a reduction in the amortized cost of the securities. For debt securities whose fair value is less than their amortized cost which we do not intend to sell or are not required to sell, we evaluate the expected cash flows to be received as compared to amortized cost and determine if an expected credit loss has occurred. In the event of an expected credit loss, only the amount of the impairment associated with the expected credit loss is recognized in income with the remainder, if any, of the loss recognized in other comprehensive income (loss). To the extent we have the intent to sell the debt security, or it is more likely than not we will be required to sell the debt security, before recovery of our amortized cost basis, we recognize an impairment loss in income in an amount equal to the full difference between the amortized cost basis and the fair value.
Potential expected credit loss impairment is considered using a variety of factors, including the extent to which the fair value has been less than cost; adverse conditions specifically related to the industry, geographic area or financial condition of the issuer or underlying collateral of a debt security; changes in the quality of the debt security's credit enhancement; payment structure of the debt security; changes in credit rating of the debt security by the rating agencies; failure of the issuer to make scheduled principal or interest payments on the debt security and changes in prepayment speeds. For debt securities, we take into account expectations of relevant market and economic data. We estimate the amount of the expected credit loss component of a debt security as the difference between the amortized cost and the present value of the expected cash flows of the security. The present value is determined using the best estimate of future cash flows discounted at the implicit interest rate at the date of purchase. The expected credit loss cannot exceed the full difference between the amortized cost basis and the fair value.
Accrued interest receivable relating to our debt securities is presented within prepaids and other current assets in the accompanying Consolidated Balance Sheets. We do not measure an allowance for credit losses on accrued interest receivable. We recognize interest receivable write offs as a reversal of interest income. No accrued interest was written off during the years ended December 31, 2021 and 2020.
Credit Risk Concentration: We maintain cash in bank accounts that frequently exceed federally insured limits. To date, we have not experienced any losses on such accounts.
Restricted Investments and Statutory Deposits: We hold pledged certificates of deposit for certain vendors and lease requirements. Restricted investments are carried at amortized cost. At December 31, 20212022 and 2020,2021, pledged certificates of deposit totaled $1.4$1.9 million and $1.1$1.4 million, respectively, and are included in short-term investments in the Consolidated Balance Sheets.
The regulated insurance entities of Bright Health are required to, among other things, hold certain statutory deposits and comply with certain minimum capital requirements, such as risk-based capital requirements, under applicable state regulations, as further described in Note 15,17, Commitments and Contingencies. Statutory deposits are classified as held-to-maturity investments and are carried at cost. The Company’s regulated legal entities held the required deposit amounts at December 31, 2022 and 2021, and 2020, totaling $8.0$9.1 million and $7.0$1.4 million, respectively. The statutory deposits are principally held in U.S. Treasury securities within a custodial or controlled account with a custodial trustee and are included primarily in short-term investments and long-term investments, consistent with classification of other similar invested assets, in the Consolidated Balance Sheets.
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Accounts Receivable, Net of Allowance: Receivables are reported net of amounts for expected credit loss. The allowance for doubtful accounts is based on historical collection trends, future forecasts and our judgment regarding the ability to collect specific accounts. Accounts receivable include unpaid health insurance premiums from consumers and government sponsors. Balances are carried at original invoice amount less an estimate made for doubtful accounts based on a review of all outstanding amounts on a monthly basis. Management determines the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering a customer’s financial condition and credit history, and current economic conditions. Accounts receivable are written off when deemed uncollectible. Recoveries of accounts receivable previously written off are
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recorded when received. At December 31, 2022 and 2021, accounts receivable was reported net of allowance of $6.1 million and $3.4 million, respectively.
Reinsurance Recoveries: We seek to limit the risk of loss on insurance contracts through the use of reinsurance agreements. These agreements do not relieve us of our primary obligation to policyholders.
We have an agreement with Swiss Re Life & Health America, Inc. (“Swiss Re”) in which Swiss Re provides excess loss reinsurance coverage to the Company on individuals covered under our individual and small group policies. Effective January 1, 2021 we entered an agreement with RGA Reinsurance Company (“RGA”)(“Barbados”) in which RGA provides loss reinsurance coverage to the Company on individuals covered under our MA polices.
We have a quota share agreement with RGA, an alien unauthorized reinsurer, which cedes proportional percentages of premiums and medical costs of covered business of the Company, with the difference as an experience refund of ceded premiums, less a ceding fee paid to the reinsurer. Coverage includes comprehensive individual commercial policies in Colorado, Nebraska, Oklahoma and Florida. Effective January 1, 2021, we entered into a quota share agreement with the Canada Life Assurance Company (“CLAUS”),an alien unauthorized reinsurer, which cedes proportional percentages of premiums and medical costs of covered business of the Company, with the difference as an experience refund of ceded premiums, less a ceding fee paid to the reinsurer. Coverage includes comprehensive individual commercial policies in Florida. Deposit accounting is used for this arrangement and only ceding fees are recognized in the Consolidated Statements of Income (Loss) for the years ended December 31, 2021 and 2020, respectively.
Effective January 1, 2020, the state of Colorado instituted its own reinsurance program in which insurers are reimbursed at varying coinsurance rates based on the rating area of its consumers for the consumers’ aggregate claims between the attachment point and program maximum.
Receivables from reinsurers under these agreements totaled $91.5$14.9 million and $26.9$3.4 million as of December 31, 20212022 and 2020,2021, respectively, and are recorded in prepaids and other current assets in the Consolidated Balance Sheets. Payables for reinsurance premiums and ceding fees of $9.8$4.7 million and $2.4$9.8 million are recorded as other current liabilities in the Consolidated Balance Sheets as of December 31, 20212022 and 2020,2021, respectively.
Net reinsurance recoveries (net ceded premiums) of $19.2 million;$9.5 million, $(1.5) million, and $4.0 million; and $5.9 million were recorded as a reduction of medical costs in the Consolidated Statements of Income (Loss) for the years ended December 31, 2022, 2021, 2020, and 2019,2020, respectively. In addition, quota share ceding fees and reimbursable administrative expenses under reinsurance contracts recorded as operating costs in the Consolidated Statements of Income (Loss) totaled $8.8$— million; $1.5$0.6 million; and $0.7$1.5 million for the years ended December 31, 2022, 2021, 2020, and 20192020 respectively.
Provider Risk Sharing: Our MA insurance business in California maintains a risk-sharing program with contracted primary care providers and hospitals. Additionally, agreements between our provider practices and insurers contain risk-sharing provisions based on the terms of the contracts. Additional revenues which we estimate to be earned or payments we expect to make under these arrangements are recorded in prepaids and other current assets or medical costs payable, respectively, in the Consolidated Balance Sheets.
Risk sharing payables of $40.5$30.6 million and $7.4$68.5 million for our MA insurance business in California and risk-sharing receivables of $5.9$17.8 million and $4.7$12.7 million for agreements between our provider practices and insurers were recorded as of December 31, 20212022 and 2020,2021, respectively.
Premium Deficiency Reserve: Premium deficiency reserve (“PDR”) liabilities are established when it is probable that expected future claims and maintenance expenses will exceed future premium and reinsurance recoveries on existing medical insurance contracts, including consideration of investment income. We assess if a PDR liability is needed through review of current results and forecasts. For purposes of determining premium deficiency losses, contracts are grouped consistent with our method
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of acquiring, servicing, and measuring the profitability of such contracts. As of December 31, 2022 we accrued no PDR liability; as of December 31, 2021 we accrued a PDR liability of $102.8$9.4 million in other current liabilities. There was no PDR accrual as of December 31, 2020.
Prepaids and Other Current Assets: Prepaids and other current assets primarily include prepaid operating expenses, pharmacy rebates receivable and, as of December 31, 2020, the escrow receivable related to business acquisitions as further described in Note 3, Business Combinations.
Performance Guarantees: Through our participation in the DC Model, we determined that our arrangements with the providers of our DCE beneficiaries require us to guarantee their performance to CMS. We recognized our obligation to guarantee their performance for the duration of the performance year on the Consolidated Balance Sheets. As we fulfill our obligation we ratably amortize the guarantee for the amount that represents the completed portion of the performance obligation as Direct Contracting revenue on the Consolidated Statements of Income (Loss). Direct Contracting revenue is derived from the estimated annual sum of the capitation payments made to the DCEs for services within the scope of the capitation arrangement with CMS and fee-for-service (“FFS”) payments from CMS made directly to third-party providers for our aligned beneficiaries. For each performance year, the final consideration due to the DCEs by CMS (shared savings) or the consideration due to CMS by the DCEs (shared loss) is reconciled in the year following the performance year. Periodically during the performance year, CMS will measure the shared savings or loss and adjust the performance benchmark and thus the remaining performance obligation if we are in a probable shared loss position.
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Notes to Consolidated Financial Statements
Property, Equipment and Capitalized Software: Property, equipment and capitalized software are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are recognized using the straight-line method over the estimated useful life, ranging from 3 to 10 years. Leasehold improvements are depreciated over the shorter of the lease term or their useful life. We capitalize costs incurred related to certain software projects for internal use incurred during the application development stage. Costs related to planning activities and post implementation activities are expensed as incurred.
Impairment of Long-Lived Assets: Property, equipment, capitalized software and other long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. When evaluating long-lived assets with impairment indicators for potential impairment, we first compare the carrying value of the asset to its estimated undiscounted future cash flows. If the sum of the estimated undiscounted future cash flows is less than the carrying value of the asset, we calculate an impairment loss. The impairment loss calculation compares the carrying value of the asset to its estimated fair value, which is typically based on estimated discounted future cash flows. We recognize an impairment loss if the amount of the asset’s carrying value exceeds the asset’s estimated fair value. During the year ended December 31, 2022, we recorded an impairment loss to long-lived assets of $43.5 million as a result of Bright HealthCare’s decision to no longer offer commercial products for the 2023 plan year and our exit of select MA marketplaces. There was no impairment of long-lived assets for the years ended December 31, 2021 2020 and 2019.2020.
Operating Leases: We lease facilities and equipment under long-term operating leases that are non-cancelable and expire on various dates. At the lease commencement date, lease right-of-use (“ROU”) assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term, which includes all fixed obligations arising from the lease contract. We include options to extend or terminate an operating lease in the measurement of the ROU asset and lease liability when it is reasonably certain that such options will be exercised. For operating leases, the liability is amortized using the effective interest method and the asset is reduced in a manner so that rent is expensed on a straight-line basis, with all cash flows included within operating activities in the Consolidated Statements of Cash Flows. Rent expense for operating leases is recognized on a straight-line basis over the lease term, net of any applicable lease incentives. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
When an interest rate is not implicit in a lease, we utilize our incremental borrowing rate for a period that closely matches the lease term. We determine our incremental borrowing rate as the interest rate needed to finance a similar asset over a similar period of time as the lease term. Our ROU assets are included in other non-current assets, and lease liabilities are included in other current liabilities and other liabilities in the Consolidated Balance Sheets.
We have elected the short-term lease exception for all classes of assets and do not apply recognition requirements for leases of 12 months or less. Expense related to short-term leases of 12 months or less is recognized on a straight-line basis over the lease term. See Note 15,17, Commitments and Contingencies, for additional information on our operating leases.
Goodwill and Other Intangible Assets: Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in a business combination. We test goodwill for impairment annually at the beginning of the fourth quarter or whenever events or circumstances indicate the carrying value may not be recoverable. We test for goodwill impairment at the reporting unit level. Reporting units are determined by identifying components of operating segments which constitute businesses for which discrete financial information is available and regularly reviewed by segment management. We have 3two reporting units – Bright Healthcare Commercial, Bright Healthcare MA,HealthCare and NeueHealthConsumer Care – with goodwill allocated to alleach of the reporting units.
Our goodwill impairment testing involves a multi-step process. We may first assess qualitative factors to determine if it is more likely than not that the carrying value of a reporting unit exceeds its estimated fair value. We may also elect to skip the qualitative assessment and proceed directly to the quantitative testing. When performing the quantitative testing, we calculate the fair value of the reporting unit and compare it with its carrying value, including goodwill. We estimate the fair values of our reporting units using a combination of discounted cash flows and comparable market multiples, which include assumptions
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Notes to Consolidated Financial Statements
about a wide variety of internal and external factors. Significant assumptions usedWe recognized a non-cash impairment loss of $70.0 million in the impairment analysis include financial projections of free cash flow (including assumptions about revenue growth rates, medical cost ratios, operating costs, capital requirements and income taxes), long-term growth rates for determining terminal value beyond the discretely forecasted periods and discount rates. If the fair value of the reporting unit is greater than its carrying value, no goodwill impairment is recognized. If the carrying value of the reporting unit is less than its calculated fair value, we recognize an impairment equal to the difference between the carrying value of theour Bright HealthCare reporting unit and its calculated fair value.a $1.2 million goodwill disposition related to our Consumer Care reporting unit for the year ended December 31, 2022. There was no goodwill impairment during the years ended December 31, 2021 2020, and 2019.2020.
Our valuation of identifiable intangible assets acquired is based on information and assumptions available to us at the time of acquisition, using income and market approaches to determine fair value, as appropriate. Intangible assets are amortized over
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Notes to Consolidated Financial Statements
their estimated useful lives using the straight-line method. We evaluate the recoverability of identifiable intangible assets whenever events or changes in circumstances indicate that an intangible asset’s carrying amount may not be recoverable.
Operating Costs: Operating costs are recognized as incurred and relate to selling, general and administrative costs not related to medical costs. Additionally, the expense from the change in our PDR liability is included in operating costs. Policy acquisition costs, other than capitalized broker commissions, are expensed in the period incurred. Our operating costs, by functional classification for the years ended December 31, 2022, 2021 2020 and 2019,2020, are as follows (in thousands):
| | | 2021 | | 2020 | | 2019 | | 2022 | | 2021 | | 2020 |
| Compensation and fringe benefits | Compensation and fringe benefits | $ | 348,240 | | | $ | 133,009 | | | $ | 50,325 | | Compensation and fringe benefits | $ | 355,084 | | | $ | 257,815 | | | $ | 92,863 | |
| Professional fees | Professional fees | 200,189 | | | 78,740 | | | 40,601 | | Professional fees | 69,711 | | | 70,472 | | | 50,699 | |
| Marketing and selling expenses | Marketing and selling expenses | 287,755 | | | 96,942 | | | 49,711 | | Marketing and selling expenses | 82,340 | | | 76,923 | | | 34,561 | |
| Premium taxes and fees | Premium taxes and fees | 170,458 | | | 40,599 | | | 15,475 | | Premium taxes and fees | 4,288 | | | 5,801 | | | 1,182 | |
| Premium deficiency reserve | Premium deficiency reserve | 102,785 | | | — | | | — | | Premium deficiency reserve | (9,357) | | | 9,357 | | | — | |
| General and administrative expenses | General and administrative expenses | 77,930 | | | 37,629 | | | 13,296 | | General and administrative expenses | 77,045 | | | 60,266 | | | 25,409 | |
| Other operating expenses | Other operating expenses | 51,030 | | | 22,415 | | | 11,081 | | Other operating expenses | 52,919 | | | 46,819 | | | 20,349 | |
| Total operating costs | Total operating costs | $ | 1,238,387 | | | $ | 409,334 | | | $ | 180,489 | | Total operating costs | $ | 632,030 | | | $ | 527,453 | | | $ | 225,063 | |
Share-Based Compensation: We recognize compensation expense for share-based awards, including stock options, restricted stock units (“RSUs”), performance-based restricted stock units (“PSUs”) and restricted stock awards (“RSAs”) on a straight-line basis over the related service period (generally the vesting period) of the award. Compensation expense related to stock options is based on the fair value on the date of grant, which is estimated using a Black-Scholes option valuation model. The fair value of RSUs is determined based on the closing market price of our common stock on the date of grant and the fair value of PSUs is determined using a Monte-Carlo simulation. Share-based compensation expense is recognized in operating costs in the Consolidated Statements of Income (Loss).
Contingent Consideration: As part of the consideration in the acquisition of AMD, we are required to make a performance-based payment equal to 15% of AMD’s earnings before interest, taxes, depreciation and amortization for the calendar year ending December 31, 2023, adjusted per the terms of the contract, multiplied by 8. We remeasure the fair value of the earnout liability at each reporting period based on our current estimates of the expected future financial performance of the business. The fair value of the earnout liability was $1.5 million and $5.7 million at December 31, 2021 and 2020, and is recorded in other liabilities on the Consolidated Balance Sheets. Changes in the fair value of the earnout liability are recognized in the Consolidated Statements of Income (Loss). We recognized a gain of $4.2 million in operating costs in the Consolidated Statements of Income (Loss) for the year ended December 31, 2021. We did not recognize any gain or loss based on changes in fair value for the years ended December 31, 2020 and 2019.
Income Taxes: The federal income tax returns of Bright Health are completed as a consolidated return. A tax-sharing agreement allocates the consolidated federal tax liability to each company in proportion to the tax liability that would have resulted for each company if computed on a separate return basis.
Deferred taxes are provided on a liability method, whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards, and deferred tax liabilities are recognized for taxable temporary
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Notes to Consolidated Financial Statements
differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The guidance on accounting for uncertainty in income taxes also addresses derecognition, classification, interest and penalties on income taxes, and accounting in interim periods. Management evaluated the Company’s tax positions and concluded that for the years ended December 31, 2022, 2021 2020 and 2019,2020, the Company had taken no uncertain tax positions that require adjustment to the consolidated financial statements to comply with the provisions of this guidance. As of the consolidated financial statement date, open tax years subject to potential audit by the taxing authorities are 20182019 through 20202021 for the federal tax returns and 20172018 through 20202021 for the state tax returns. We recognize interest and penalties related to income tax matters in income tax expense (benefit) expense..
Redeemable Noncontrolling Interest: Redeemable noncontrolling interest in our subsidiaries whose redemption is outside of our control are classified as temporary equity.
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Notes to Consolidated Financial Statements
Net Loss per Share: Basic net loss per share attributable to common stockholders is computed by dividing the net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding for the period. Diluted net loss attributable to common stockholders is computed by adjusting net losses attributable to common stockholders to reallocate undistributed earnings based on the potential impact of dilutive securities. Diluted net loss per share attributable to common stockholders is computed by dividing the diluted net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding for the period, including potential dilutive common shares.
Concentration Risk: Going Concern:Our IFP business The consolidated financial statements have been prepared in Florida comprised 34%accordance with GAAP applicable to a going concern, which contemplates the realization of total revenuesassets and our IFP businessthe satisfaction of liabilities in North Carolina comprised 12%the normal course of total revenuesbusiness.
The Company has a history of operating losses, and we generated a net loss from continuing operations of $638.0 million for the year ended December 31, 2021. For2022. These losses, as well as significant additional expenses and future projected cash outflows in our discontinued Bright HealthCare – Commercial segment has required the Company to infuse additional cash to satisfy statutory capital requirements and reduced the cash available to fund operations.
In addition, the Company’s $350.0 million revolving credit agreement with a syndicate of banks (the “Credit Agreement”), matures on February 28, 2024. On March 1, 2023, the Company disclosed that during the First Quarter of 2023, the Company breached the minimum liquidity covenant of the Credit Agreement. The Company entered into a limited waiver and consent (the “Waiver”) under the Credit Agreement, which, among other matters, provides for a temporary waiver for the period from January 25, 2023 through April 30, 2023 (the “Waiver Period”) of compliance with the minimum liquidity covenant set forth in Section 11.12.2 of the Credit Agreement. During the Waiver Period, the Company will be subject to a minimum liquidity covenant of not less than $75 million until March 3, 2023, and not less than $85 million thereafter until the end of the Waiver Period. In addition, during the Waiver Period, the Company will not have access to certain negative covenant baskets and will be subject to additional cash-flow and cash balance reporting requirements. Based on our projected cash flows and absent any other action, the Company may not meet certain covenants under the Credit Agreement or the Waiver which may result in the obligations under the Credit Agreement being accelerated. The Company will require additional liquidity to meet its obligations as they come due in the 12 months following the date the consolidated financial statements are issued. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.
In response to these conditions, management has implemented a restructuring plan to reduce capital needs and our operating expenses in the future to drive positive operating cash flow and increase liquidity. The Company’s Bright HealthCare business has exited the Commercial marketplace at the end of the 2022 plan year ended December 31, 2020 our IFPand is focusing on its Medicare Advantage business in FloridaCalifornia. This exit will impact all insurance products currently offered by the Company in all states where insurance policies are currently offered. In addition to our market exits, management is in the process of implementing additional restructuring activities, which include reducing our workforce, exiting excess office space, and North Carolina comprised 12%terminating or restructuring contracts. The Company also closed on a $175.0 million capital raise in October 2022 to capitalize our continuing operations as further described in Note 12, Preferred Stock.
Additionally, the Company is actively engaged with the Board of Directors and 9%outside advisors to evaluate additional financing. However, the Company may not be able to obtain financing on acceptable terms, as any potential financing will be subject to market conditions that are not within the Company’s control.
In the event the Company is unable to obtain additional financing or take other management actions, among other potential consequences, we forecast we will be unable to satisfy our obligations. As a result, the Company has concluded that management’s plans do not alleviate substantial doubt about the Company’s ability to continue as a going concern.
The consolidated financial statements do not include any adjustments relating to the recoverability and classification of total revenues, respectively. Our MA business in California comprised 31%recorded asset amounts or the amounts and 36%classification of total revenues forliabilities that might result from the years ended December 31, 2021 and 2020, respectively. There were no other individual commercial customers or governmental contracts that individually comprised more than 10%outcome of total revenues for the years ended December 31, 2021, 2020 or 2019.this uncertainty.
Recently Issued and Adopted Accounting Pronouncements Not Yet Adopted:Pronouncements: In August 2020, the Financial Accounting Standards Board (“FASB”)FASB issued Accounting Standards Update (“ASU”) No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), which simplifies the accounting for convertible instruments by reducing the number of accounting models available for convertible debt instruments. This guidance eliminates the treasury stock method to calculate diluted earnings per share for convertible instruments and requires the use of the if-converted method. This guidance will be effective for us in the first quarterWe adopted ASU 2020-06 on January 1, 2022. The adoption did not have a material impact on our financial condition, results of 2022 onoperations or cash flows.
Bright Health Group, Inc.
Notes to Consolidated Financial Statements
There were no other accounting pronouncements that were recently issued and not yet adopted or adopted that had, or are expected to have, a full or modified retrospective basis, with early adoption permitted. We are currently evaluating thematerial impact of the new guidance on our consolidated financial statements.position, results of operations, or cash flows.
NOTE 3. BUSINESS COMBINATIONS
Centrum Acquisition: On July 1, 2021, we acquired 75% of the outstanding equity interests of Centrum for cash consideration of $222.4 million and $75.0 million of common stock, for total purchase consideration of $296.2 million, net of $1.2 million of cash acquired. Centrum is a value-based primary care focused, multi-specialty medical group based in Florida. Centrum primarily operates health centers in Florida Texas and North CarolinaTexas serving Commercial, Medicare, and Medicaid consumers across multiple payors. Centrum is included in our NeueHealthConsumer Care reportable segment. Transaction costs of $1.0 million incurred in
Bright Health Group, Inc.
Notes to Consolidated Financial Statements
connection with the acquisition are included in operating costs in the Consolidated Statements of Income (Loss) for the year ended December 31, 2021.
The total preliminary purchase consideration for the Centrum acquisition is allocated to tangible and intangible assets acquired and liabilities assumed based on their respective fair values as of the acquisition date. The excess of the purchase price over the net assets acquired is recorded as goodwill, which is predominantly attributable to the incremental financial benefits achievable through Bright Health Group’s integrated care delivery model, whereby Bright HealthCare members are cared for under value-based arrangements with Centrum. This model brings together the financing, distribution, and delivery of high-quality healthcare and provides the opportunity to enhance overall margin potential for the Company. The goodwill from the Centrum acquisition is expected to be deductible for tax purposes.
The following table discloses the preliminary estimated fair values of assets and liabilities acquired by the Company in the Centrum acquisition (in thousands):
| | | | | |
| Accounts receivable | $ | 1,874 | |
| Prepaids and other current assets | 627 | |
| Property and equipment | 2,557 | |
| Intangible assets | 102,370 | |
| Other assets | 8,917 | |
| Total assets | 116,345 | |
| Medical payables | 19 | |
| Accounts payable | 359 | |
| Other current liabilities | 861 | |
| Other liabilities | 11,636 | |
| Total liabilities | 12,875 | |
| Net identified assets acquired | 103,470 | |
| Goodwill | 275,066 | |
| Redeemable noncontrolling interest | (82,310) | |
| Total purchase consideration | $ | 296,226 | |
The preliminary fair values of acquired assets and liabilities assumed represent management’s estimate of fair value and are subject to change if additional information, such as post-close working capital adjustments, becomes available. The fair values of the redeemable noncontrolling interest changed from previous disclosure with the adjustment resulting in an equivalent change to the goodwill assigned to Centrum.
Our preliminary estimate of intangible assets related to the Centrum acquisition consistsconsist of trade names with a 15-year useful life, customer relationships with 2-2 to 15-year useful lives, and a reacquired contract between Bright HealthCare and Centrum with a useful life of 4.5 years. In the third quarter of 2022, we fully impaired the reacquired contract as a result of our decision to no longer offer commercial products for the 2023 plan year. The value of the trade name was determined using the relief of royalty method and the excess earnings method was used to value the customer relationships; both methods are considered Level 3 fair value measurements. The fair value of noncontrolling interest was determined using a market approach and included a discount to account for the lack of marketability of the noncontrolling interest.
The acquisition of Centrum would not have had a material impact on our revenue or net loss from continuing operations had it been included in the consolidated results of the Company for the yearsyear ended December 31, 2021 and 2020.2021.
Bright Health Group, Inc.
Notes to Consolidated Financial Statements
Central Health Plan Acquisition: On April 1, 2021, we acquired all of the outstanding shares of CHP for cash consideration of $276.0 million, $79.8 million in Series E preferred stock and $12.9$13.9 million of estimated working capital adjustments, for total purchase consideration of $271.7$285.6 million, net of $84.1 million of cash acquired. CHP is an insurance provider of MA HMO services. CHP is included in our Bright HealthCare reportable segment. Transaction costs of $0.2 million incurred in
Bright Health Group, Inc.
Notes to Consolidated Financial Statements
connection with the acquisition are included in operating costs in the Consolidated Statements of Income (Loss) for the year ended December 31, 2021, out of $1.4 million of total transaction costs we have incurred.
The total preliminary purchase consideration for the CHP acquisition is allocated to tangible and intangible assets acquired and liabilities assumed based on their respective fair values as of the acquisition date. The excess of the purchase price over the net assets acquired is recorded as goodwill. The goodwill for CHP is attributable to synergies from leveraging CHP’s clinical model and California consumer expertise to continue to expand our MA business in the California market. The goodwill is not deductible for tax purposes.
The following table discloses the preliminary estimated fair values of assets and liabilities acquired by the Company in the CHP acquisition as well as measurement adjustments made during the year ended December 31, 2021 to the amounts previously reported (in thousands):
| | | | | | | | | | | | | | | | | |
| Amount Recognized as of
Acquisition Date
(as previously reported) | | Measurement
Period
Adjustments | | Amounts Recognized as of
Acquisition Date
(as adjusted) |
| Accounts receivable | $ | 16,361 | | | $ | 879 | | | $ | 17,240 | |
| Short-term investments | 19,041 | | | — | | | 19,041 | |
| Prepaids and other current assets | 25,520 | | | 10 | | | 25,530 | |
| Property and equipment | 370 | | | — | | | 370 | |
| Intangible assets | 102,000 | | | — | | | 102,000 | |
| Other assets | — | | | 1,249 | | | 1,249 | |
| Total assets | 163,292 | | | 2,138 | | | 165,430 | |
| Medical costs payable | 79,450 | | | (2,771) | | — | | 76,679 | |
| Accounts payable | 2,371 | | | — | | | 2,371 | |
| Other current liabilities | 17,212 | | | (9,229) | | | 7,983 | |
| Other liabilities | 28,622 | | | (2,347) | | | 26,275 | |
| Total liabilities | 127,655 | | | (14,347) | | | 113,308 | |
| Net identified assets acquired | 35,637 | | | 16,485 | | | 52,122 | |
| Goodwill | 236,037 | | | (3,595) | | | 232,442 | |
| Total purchase consideration | $ | 271,674 | | | $ | 12,890 | | | $ | 284,564 | |
The measurement period adjustments above primarily resulted from obtaining additional information for the valuation of deferred taxes included in other liabilities, to estimate the fair value of the right-of-use lease asset and liability included within other assets and other liabilities, and to recognize post-close working capital true-ups based on additional information. The preliminary fair values of acquired assets and liabilities assumed represent management’s estimate of fair value and are subject to change if additional information, such as post-close working capital adjustments, becomes available. | | | | | |
| Accounts receivable | $ | 17,240 | |
| Short-term investments | 19,041 | |
| Prepaids and other current assets | 25,530 | |
| Property and equipment | 370 | |
| Intangible assets | 102,000 | |
| Other assets | 1,249 | |
| Total assets | 165,430 | |
| Medical costs payable | 75,643 | |
| Accounts payable | 2,371 | |
| Other current liabilities | 7,984 | |
| Other liabilities | 26,275 | |
| Total liabilities | 112,273 | |
| Net identified assets acquired | 53,157 | |
| Goodwill | 232,442 | |
| Total purchase consideration | $ | 285,599 | |
Our preliminary estimate of intangible assets related to the CHP acquisition consists of customer relationships with a 10-year useful life, trade names with a 15-year useful life and the provider network with a 7-year useful life. The value of the trade name was determined using the relief from royalty method and the excess earnings method was used to value the customer relationships; both methods are considered Level 3 fair value measurements.
Bright Health Group, Inc.
Notes to Consolidated Financial Statements
The following pro forma financial information presents our revenue and net loss as ifIf CHP had been included in the consolidated results of the Company for the yearsyear ended December 31, 2021, our pro forma revenue from continuing operations would have been $1.6 billion and 2020 (in thousands):
| | | | | | | | | | | | | | |
| | Pro Forma Consolidated Statements of Income (Loss) |
| (Unaudited) |
| | Year Ended December 31, |
| | 2021 | | 2020 |
| Revenue | | $ | 4,158,259 | | | $ | 1,766,527 | |
| Net Loss | | (1,173,453) | | | (221,023) | |
True Health New Mexico and Zipnosis Acquisitions: On March 31, 2021, we acquired all of the outstanding equity interests of THNM for cash consideration of $27.5 million, and $8.1 million of favorable risk-based capital adjustments, net of cash acquired of $24.1 million, for total purchase consideration of $3.4$(4.7) million. THNM is a physician-led health insurance company offering policies available through the commercial market for individual on- and off-exchange and employer-sponsored health coverage. THNM is included in our Bright HealthCare reportable segment.discontinued operations. In addition, on March 31, 2021, we acquired Zipnosis, Inc. (“Zipnosis”), which is a telehealth platform that offers virtual care to health systems around the U.S., for aggregate consideration of $73.0 million, including $55.1 million in Series E preferred stock and adjusted for $0.5 million of tangible net equity adjustments. We acquired $3.2 million of cash as part of the Zipnosis acquisition, for net total purchase consideration of $69.8 million. Zipnosis is included in our NeueHealthConsumer Care reportable segment. Transaction costs of $0.5 million incurred in connection with these acquisitions are included in operating costs in the Consolidated Statements of Income (Loss) for the year ended December 31, 2021.
The total preliminary purchase consideration for the THNM and Zipnosis acquisitions is allocated to tangible and intangible assets acquired and liabilities assumed based on their respective fair values as of the acquisition date. The excess of the purchase price over the net assets acquired is recorded as goodwill. The goodwill for THNM is attributable to synergies from leveraging THNM’s
Bright Health Group, Inc.
Notes to Consolidated Financial Statements
strong local clinical model of care and the ability to enter into a new state of strategic interest for future growth and expansion. The goodwill from the Zipnosis acquisition is attributable to benefits from the ability to enhance our proprietary technology platform, DocSquad, and Zipnosis’ attractive virtual care capabilities to enhance Bright Health’s consumer and provider connectivity. The goodwill from the THNM and Zipnosis acquisitions is not deductible for tax purposes.
Bright Health Group, Inc.
Notes to Consolidated Financial Statements
The following table discloses the preliminary estimated fair values of assets and liabilities acquired by the Company in the THNM and Zipnosis acquisitions (in thousands):
| | | THNM | | Zipnosis | | THNM | | Zipnosis |
| Accounts receivable | Accounts receivable | $ | 714 | | | $ | 1,062 | | Accounts receivable | $ | 714 | | | $ | 1,062 | |
| Short-term investments | Short-term investments | 4,705 | | | — | | Short-term investments | 4,705 | | | — | |
| Prepaids and other current assets | Prepaids and other current assets | 8,337 | | | 141 | | Prepaids and other current assets | 8,337 | | | 141 | |
| Property and equipment | Property and equipment | — | | | 232 | | Property and equipment | — | | | 232 | |
| Intangible assets | Intangible assets | 7,300 | | | 9,180 | | Intangible assets | 7,300 | | | 9,180 | |
| Long-term investments | Long-term investments | 13,644 | | | — | | Long-term investments | 13,644 | | | — | |
| Other non-current assets | Other non-current assets | 1,324 | | | 766 | | Other non-current assets | 1,324 | | | 766 | |
| Total assets | Total assets | 36,023 | | | 11,381 | | Total assets | 36,024 | | | 11,381 | |
| Medical costs payable | Medical costs payable | 13,268 | | | — | | Medical costs payable | 12,617 | | | — | |
| Accounts payable | Accounts payable | 14,663 | | | 136 | | Accounts payable | 14,663 | | | 136 | |
| Unearned revenue | Unearned revenue | 3,645 | | | 120 | | Unearned revenue | 3,645 | | | 120 | |
| Other current liabilities | Other current liabilities | 2,682 | | | 665 | | Other current liabilities | 11,406 | | | 665 | |
| Other liabilities | Other liabilities | 2,499 | | | 2,730 | | Other liabilities | 2,499 | | | 2,730 | |
| Total liabilities | Total liabilities | 36,757 | | | 3,651 | | Total liabilities | 44,830 | | | 3,651 | |
| Net identified assets acquired | Net identified assets acquired | (733) | | | 7,730 | | Net identified assets acquired | (8,806) | | | 7,730 | |
| Goodwill | Goodwill | 4,148 | | | 62,067 | | Goodwill | 4,148 | | | 62,067 | |
| Total purchase consideration | Total purchase consideration | $ | 3,415 | | | $ | 69,797 | | Total purchase consideration | $ | (4,658) | | | $ | 69,797 | |
The preliminary fair values of acquiredIntangible assets and liabilities assumed represent management’s estimate of fair value and are subject to change if additional information, such as post-close working capital adjustments, becomes available. The fair values of certain assets and liabilities have changed from previous disclosure. We obtained additional information on the fair value of THNM’s short-term and long-term investments resulting in a change in the net identified assets acquired and valuation of goodwill assigned to THNM. Additionally, we updated the fair value of Zipnosis’ intangible assets based on the methodologies described below.
Our preliminary estimate of intangible assetsinitially recognized related to the THNM acquisition consistsconsisted of customer relationships with 10-to 14-year useful lives, trade names with a 15-year useful life and the provider network with a 7-year useful life. In the first quarter of 2022, we fully impaired the intangible assets related to THNM as a result of our decision to no longer offer Commercial products in New Mexico for the 2023 plan year and exit the employer business as contracts expire. For the Zipnosis acquisition, our preliminary estimate of intangible assets consists of customer relationships with a 15-year useful life, trade names with a 5-year useful life and developed technology with a 7-year useful life. For these acquisitions the value of the trade names and developed technology was determined using the relief from royalty method and the excess earnings method was used to value the customer relationships; both methods are considered Level 3 fair value measurements.
The following pro forma financial information presents our revenue and net loss as ifIf THNM and Zipnosis had been included in the consolidated results of the Company for the yearsyear ended December 31, 2021, our pro forma revenue from continuing operations would have been $1.5 billion and 2020 (in thousands):our pro forma net loss from continuing operations would have been $324.2 million.
| | | | | | | | | | | |
| Pro Forma Consolidated Statements of Income (Loss) |
| (Unaudited) |
| Year Ended December 31, |
| 2021 | | 2020 |
| Revenue | $ | 4,077,288 | | | 922,457 | |
| Net Loss | $ | (1,186,833) | | | (27,133) | |
PMA Acquisition: On December 31, 2020, we acquired a 62% controlling interest in PMA in exchange for $59.6 million in cash and $17.8 million in Bright Health Series E preferred stock for total purchase consideration transferred, net of cash acquired of $3.2 million, of $74.2 million. PMA provides care services to Medicare and Medicaid patients in Florida through a
Bright Health Group, Inc.
Notes to Consolidated Financial Statements
network of primary care providers and population health-focused specialists. Transaction costs of $0.7 million incurred in connection with the acquisition are included in operating costs in the Consolidated Statements of Income (Loss) for the year ended December 31, 2021. If PMA had been included in the consolidated results of the Company for the year ended December 31, 2020, our pro forma revenue would have been $1.3 billion, and our pro forma net loss would have been $(239.9) million.
The total purchase consideration for the PMA acquisition was allocated to tangible and intangible assets acquired and liabilities assumed based on their respective fair values as of the acquisition date. The excess of the purchase price over the net assets acquired was recorded as goodwill. The goodwill is attributable to benefits from the ability to enhance our clinical capabilities
Bright Health Group, Inc.
Notes to Consolidated Financial Statements
to better serve enrollees as part of our Florida market expansion. The full amount of goodwill from the PMA acquisition is expected to be deductible for tax purposes.
The following table discloses the fair values of assets and liabilities acquired by the Company in the PMA acquisition (in thousands):
| | | | | |
| Accounts receivable | $ | 10,238 | |
| Prepaids and other current assets | 76 | |
| Property and equipment | 1,071 | |
| Intangible assets | 66,300 | |
| Other non-current assets | 6,468 | |
| Total Assets | 84,153 | |
| Medical costs payable | 6,973 | |
| Other current liabilities | 3,004 | |
| Other liabilities | 5,534 | |
| Total liabilities | 15,511 | |
| Net identified assets acquired | 68,642 | |
| Goodwill | 45,142 | |
| Redeemable noncontrolling interest | (39,600) | |
| Total purchase consideration | $ | 74,184 | |
We recognized intangible assets related to the PMA acquisition, which consist of the PMA trade name of $5.8 million with an estimated useful life of 15 years and customer relationships valued at $60.5 million with 7 to 10 year useful lives. The value of the trade name was determined using the relief from royalty method and the excess earnings method was used to value the customer relationships, both approaches are considered Level 3 fair value measurements. The fair value of the noncontrolling interest was determined using an income approach and market approach and included a discount to account for the lack of marketability of the noncontrolling interest shares.
BND Acquisition: On April 30, 2020, we acquired all of the outstanding shares of BND. BND is a leader in providing healthcare services in California and serves Medicare eligible seniors and special needs populations through their extensive network of primary care providers and specialists. BND combines analytics and evidence-based clinical programs with aligned provider relationships to provide high quality, affordable care for complex and vulnerable populations. The total consideration included $206.9 million in cash and $80.0 million in Bright Health Series D preferred stock. We have since applied indemnity escrow adjustments of $44.0 million to the acquisition price, bringing total consideration to $210.1 million, net of cash acquired of $32.8 million. Transaction costs of $3.8 million incurred in connection with the acquisition are included in operating costs in the Consolidated Statements of Income (Loss) for the year ended December 31, 2020. If BND had been included in the consolidated results of the Company for the year ended December 31, 2020, our pro forma revenue would have been $1.4 billion, and our pro forma net loss would have been $(264.4) million.
The total purchase consideration for the BND acquisition was allocated to tangible and intangible assets acquired and liabilities assumed based on their respective fair values as of the acquisition date. The excess of the purchase price over the net assets acquired was recorded as goodwill. The goodwill is attributable to synergies from leveraging BND’s strong clinical model of care to drive growth in our MA business outside of California. The goodwill from the BND acquisition is not deductible for tax purposes.
Bright Health Group, Inc.
Notes to Consolidated Financial Statements
The following table discloses the fair values of assets and liabilities acquired by the Company in the BND acquisition, as well as measurement adjustments made during the year ended December 31, 2021 to the amounts initially recorded in 2020 (in thousands):
| | | | | | | | | | | | | | | | | |
| Amount Recognized as of
Acquisition Date
(as previously reported) | | Measurement
Period
Adjustments | | Amounts Recognized as of
Acquisition Date
(as adjusted) |
| Accounts receivable | $ | 74,128 | | | $ | — | | | $ | 74,128 | |
| Prepaid and other currents assets | 30,583 | | | — | | | 30,583 | |
| Property and equipment | 4,375 | | | — | | | 4,375 | |
| Intangible assets | 72,600 | | | 1,900 | | | 74,500 | |
| Other non-current assets | 2,906 | | | — | | | 2,906 | |
| Total assets | 184,592 | | | 1,900 | | | 186,492 | |
| Medical costs payable | 119,408 | | | — | | | 119,408 | |
| Other current liabilities | 42,356 | | | 174 | | | 42,530 | |
| Other liabilities | 10,624 | | | 108 | | | 10,732 | |
| Total liabilities | 172,388 | | | 282 | | | 172,670 | |
| Net identified assets acquired | 12,204 | | | 1,618 | | | 13,822 | |
| Goodwill | 197,886 | | | (1,618) | | | 196,268 | |
| Total purchase consideration | $ | 210,090 | | | $ | — | | | $ | 210,090 | |
| | | | | | | | |
| Accounts receivable | | $ | 74,128 | |
| Prepaid and other currents assets | | 30,583 | |
| Property and equipment | | 4,375 | |
| Intangible assets | | 74,500 | |
| Other non-current assets | | 2,906 | |
| Total assets | | 186,492 | |
| Medical costs payable | | 119,408 | |
| Other current liabilities | | 42,530 | |
| Other liabilities | | 10,732 | |
| Total liabilities | | 172,670 | |
| Net identified assets acquired | | 13,822 | |
| Goodwill | | 196,268 | |
| Total purchase consideration | | $ | 210,090 | |
The measurement period adjustments above primarily resulted from completing valuations for certain intangible assets. The related impact to net earnings that would have been recognized in previous periods if the adjustments were recognized as of the acquisition date is immaterial to the consolidated financial statements. We recognized intangible assets related to the BND acquisition, which consist of $25.6 million for the BND trade name with an estimated useful life of 15 years, customer relationships valued at $46.9 million with a 12-year useful life, and $2.0 million of other intangibles related to the provider network with a 10-year useful life. The value of the trade name was determined using the relief from royalty method and the excess earnings method was used to value the customer relationships; both methods are considered Level 3 fair value measurements.
Bright Health Group, Inc.
Notes to Consolidated Financial Statements
NOTE 4. INVESTMENTSDISCONTINUED OPERATIONS
Fixed Maturity Securities
In October 2022, we announced that we will no longer offer commercial plans through our Bright HealthCare - Commercial segment in 2023. As a result, we exited the Commercial marketplace effective December 31, 2022. We determined this exit represented a strategic shift that will have a material impact on our business and financial results that requires presentation as discontinued operations. The discontinued operations presentation has been retrospectively applied to all prior periods presented.
While we are no longer offering plans in the Commercial marketplace as of December 31, 2022, we will continue to have involvement in the states as we support run out activities of medical claims incurred in the 2022 plan year and perform other activities necessary to wind down our operations in each state, including making final payments of 2022 risk adjustment payable liabilities during the third quarter of 2023. We expect these activities to be substantially complete by the end of 2023.
Available-for-sale securities are reported at fair value asThe financial results of discontinued operations by major line item for the years ended December 31 2021 and 2020. Held-to-maturity securities are reported at amortized costwere as of December 31, 2021 and 2020. The following is a summary of our investment securities as of December 31follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| 2021 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Carrying Value |
| Cash equivalents | $ | 192,623 | | | $ | — | | | $ | — | | | $ | 192,623 | |
| Available for sale: | | | | | | | |
| U.S. government and agency obligations | 311,936 | | | 259 | | | (2,200) | | | 309,995 | |
| Corporate obligations | 313,965 | | | 326 | | | (1,104) | | | 313,187 | |
| State and municipal obligations | 16,122 | | | 33 | | | (38) | | | 16,117 | |
| Certificates of deposit | 18,752 | | | — | | | — | | | 18,752 | |
| Mortgage-backed securities | 38,558 | | | 63 | | | (67) | | | 38,554 | |
| Other | 42,889 | | | 13 | | | (30) | | | 42,872 | |
| Total available-for-sale securities | 742,222 | | | 694 | | | (3,439) | | | 739,477 | |
| Held to maturity: | | | | | | | |
| U.S. government and agency obligations | 7,739 | | | — | | | — | | | 7,739 | |
| Certificates of deposit | 1,447 | | | — | | | — | | | 1,447 | |
| Total held-to-maturity securities | 9,186 | | | — | | | — | | | 9,186 | |
| Total investments | $ | 944,031 | | | $ | 694 | | | $ | (3,439) | | | $ | 941,286 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| 2020 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Carrying Value |
| Cash equivalents | $ | 153,743 | | | $ | — | | | $ | (3) | | | $ | 153,740 | |
| Available for sale: | | | | | | | |
| U.S. government and agency obligations | 291,834 | | | 1,246 | | | (1) | | | 293,079 | |
| Corporate obligations | 280,557 | | | 1,104 | | | (30) | | | 281,631 | |
| State and municipal obligations | 18,459 | | | 107 | | | — | | | 18,566 | |
| Commercial paper | 14,990 | | | 1 | | | — | | | 14,991 | |
| Certificates of deposit | 53,504 | | | 2 | | | (1) | | | 53,505 | |
| Other | 5,534 | | | 2 | | | — | | | 5,536 | |
| Total available-for-sale securities | 664,878 | | | 2,462 | | | (32) | | | 667,308 | |
| Held to maturity: | | | | | | | |
| U.S. government and agency obligations | 6,677 | | | — | | | — | | | 6,677 | |
| Certificates of deposit | 1,119 | | | — | | | — | | | 1,119 | |
| Total held-to-maturity securities | $ | 7,796 | | | $ | — | | | $ | — | | | $ | 7,796 | |
| Total investments | $ | 826,417 | | | $ | 2,462 | | | $ | (35) | | | $ | 828,844 | |
| | | | | | | | | | | | | | | | | |
| For the years ending December 31, |
| 2022 | | 2021 | | 2020 |
| Revenue: | | | | | |
| Premium revenue | $ | 3,998,622 | | | $ | 2,512,384 | | | $ | 692,433 | |
| Service revenue | 147 | | | 232 | | | — | |
| Investment income (loss) | (41,221) | | | 3,740 | | | — | |
| Total revenue from discontinued operations | 3,957,548 | | 2,516,356 | | 692,433 |
| Operating expenses: | | | | | |
| Medical costs | 3,732,755 | | | 2,659,516 | | | 595,382 | |
| Operating costs | 883,318 | | | 710,934 | | | 184,271 | |
| Restructuring charges | 50,704 | | | — | | | — | |
| Goodwill impairment | 4,147 | | | — | | | — | |
| Intangible assets impairment | 6,720 | | | — | | | — | |
| Depreciation and amortization | 145 | | | 435 | | | — | |
| Total operating expenses from discontinued operations | 4,677,789 | | 3,370,885 | | 779,653 |
| Operating loss from discontinued operations | (720,241) | | | (854,529) | | | (87,220) | |
| Interest expense | — | | | 726 | | | — | |
| Loss from discontinued operations before income taxes | (720,241) | | | (855,255) | | | (87,220) | |
| Income tax expense (benefit) | 1,674 | | | — | | | — | |
| Net loss from discontinued operations | $ | (721,915) | | | $ | (855,255) | | | $ | (87,220) | |
The following table presents cash flows from operating and investing activities for discontinued operations (in thousands):
| | | | | | | | | | | | | | | | | |
| For the years ending December 31, |
| 2022 | | 2021 | | 2020 |
| Cash used in operating activities - discontinued operations | $ | (1,798,234) | | | $ | (2,334,534) | | | $ | (313,924) | |
| Cash used in investing activities - discontinued operations | (466,286) | | | (131,305) | | | (427,378) | |
Bright Health Group, Inc.
Notes to Consolidated Financial Statements
Assets and liabilities of discontinued operations were as follows (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Assets | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 1,465,965 | | $ | 771,896 |
| Short-term investments | 1,121,435 | | 49,358 |
| Accounts receivable, net of allowance of $906 and $657, respectively | 11,082 | | 14,592 |
| Prepaids and other current assets | 184,992 | | 191,499 |
| Current assets of discontinued operations | 2,783,474 | | 1,027,345 |
| Other assets: | | | |
| Long-term investments | — | | 656,584 |
| Goodwill | — | | 4,148 |
| Intangible assets, net | — | | 6,865 |
| Other non-current assets | — | | 1,098 |
| Long-term assets of discontinued operations | — | | 668,695 |
| Total assets of discontinued operations | $ | 2,783,474 | | $ | 1,696,040 |
| Liabilities | | | |
| Current liabilities: | | | |
| Medical costs payable | $ | 685,785 | | $ | 554,788 |
| Accounts payable | 122,425 | | 60,252 |
| Unearned revenue | — | | 50,710 |
| Risk adjustment payable | 1,943,890 | | 931,170 |
| Other current liabilities | 31,374 | | 99,120 |
| Current liabilities of discontinued operations | 2,783,474 | | 1,696,040 |
| Total liabilities of discontinued operations | 2,783,474 | | 1,696,040 |
Revenue Recognition: We record adjustments for changes to the risk adjustment balances for individual policies in premium revenue. The risk adjustment program adjusts premiums based on the demographic factors and health status of each consumer as derived from current-year medical diagnoses as reported throughout the year. Under the risk adjustment program, a risk score is assigned to each covered consumer to determine an average risk score at the individual and small-group level by legal entity in a particular market in a state. Additionally, an average risk score is determined for the entire subject population for each market in each state. Settlements are determined on a net basis by legal entity and state and are made in the middle of the year following the end of the contract year. Each health insurance issuer’s average risk score is compared to the state’s average risk score. Risk adjustment is subject to audit by HHS, which could result in future payments applicable to benefit years.
Reinsurance Recoveries: We have a quota share agreement with RGA, an alien unauthorized reinsurer, which cedes proportional percentages of premiums and medical costs of covered business of the Company, with the difference as an experience refund of ceded premiums, less a ceding fee paid to the reinsurer. Coverage includes comprehensive individual commercial policies in Colorado, Nebraska, Oklahoma and Florida. Effective January 1, 2021, we entered into a quota share agreement with the Canada Life Assurance Company (“CLAUS”),an alien unauthorized reinsurer, which cedes proportional percentages of premiums and medical costs of covered business of the Company, with the difference as an experience refund of ceded premiums, less a ceding fee paid to the reinsurer. Coverage includes comprehensive individual commercial policies in Florida. Deposit accounting is used for this arrangement and only ceding fees are recognized in the Consolidated Statements of Income (Loss) for the years ended December 31, 2022 and 2021, respectively.
Effective January 1, 2020, the state of Colorado instituted its own reinsurance program in which insurers are reimbursed at varying coinsurance rates based on the rating area of its consumers for the consumers’ aggregate claims between the attachment point and program maximum.
Bright Health Group, Inc.
Notes to Consolidated Financial Statements
Restructuring Charges: As a result of the strategic changes, we announced and have taken actions to restructure the Company’s workforce and reduce expenses based on our updated business model.
There were no restructuring charges for the years ended December 31, 2021 and 2020. Restructuring charges within our discontinued operations for the year ended December 31, 2022 were as follows (in thousands):
| | | | | |
| Employee termination benefits | 16,053 | |
| Long-lived asset impairments | 5,054 | |
| Contract termination and other costs | 29,597 | |
| Total discontinued operations restructuring charges | $ | 50,704 | |
We expect to incur additional discontinued operations pre-tax restructuring charges of $5.0 million to $10.0 million. We expect the restructuring activities to be substantially completed by the fourth quarter of 2023.
There was no restructuring accrual activity for the year ended December 31, 2021. Restructuring accrual activity recorded by major type for the year ended December 31, 2022 was as follows; employee termination benefits are within Other current
Bright Health Group, Inc.
Notes to Consolidated Financial Statements
liabilities of discontinued operations while contract termination costs are within Accounts payable of discontinued operations (in thousands):
| | | | | | | | | | | | | | | | | |
| Employee Termination Benefits | | Contract Termination Costs | | Total |
| Balance at January 1, 2022 | $ | — | | | $ | — | | | $ | — | |
| Charges | 16,053 | | | 28,538 | | | 44,591 | |
| Cash payments | — | | | — | | | — | |
| Balance at December 31, 2022 | $ | 16,053 | | | $ | 28,538 | | | $ | 44,591 | |
Fixed Maturity Securities: Available-for-sale securities within our discontinued operations are reported at fair value as of December 31, 2022 and 2021. Held-to-maturity securities are reported at amortized cost as of December 31, 2022 and 2021. The following is a summary of our investment securities as of December 31 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| 2022 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Carrying Value |
| Cash equivalents | $ | 622,267 | | | $ | 24 | | | $ | — | | | $ | 622,291 | |
| Available for sale: | | | | | | | |
| U.S. government and agency obligations | 365,040 | | | 1 | | | (2,956) | | | 362,085 | |
| Corporate obligations | 520,097 | | | 523 | | | (623) | | | 519,997 | |
| State and municipal obligations | 9,653 | | | — | | | (80) | | | 9,573 | |
| Certificates of deposit | 8,760 | | | — | | | (2) | | | 8,758 | |
| Mortgage-backed securities | 154,864 | | | 46 | | | (157) | | | 154,753 | |
| Asset backed securities | 59,557 | | | — | | | — | | | 59,557 | |
| Other | 387 | | | — | | | (14) | | | 373 | |
| Total available-for-sale securities | 1,118,358 | | | 570 | | | (3,832) | | | 1,115,096 | |
| Held to maturity: | | | | | | | |
| U.S. government and agency obligations | 5,974 | | | — | | | (159) | | | 5,815 | |
| Total held-to-maturity securities | 5,974 | | | — | | | (159) | | | 5,815 | |
| Total investments | $ | 1,746,599 | | | $ | 594 | | | $ | (3,991) | | | $ | 1,743,202 | |
Bright Health Group, Inc.
Notes to Consolidated Financial Statements
| | | | | | | | | | | | | | | | | | | | | | | |
| 2021 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Carrying Value |
| Cash equivalents | $ | 190,159 | | | $ | — | | | $ | — | | | $ | 190,159 | |
| Available for sale: | | | | | | | |
| U.S. government and agency obligations | 297,912 | | | 237 | | | (2,121) | | | 296,028 | |
| Corporate obligations | 303,754 | | | 308 | | | (1,073) | | | 302,989 | |
| State and municipal obligations | 14,024 | | | 29 | | | (35) | | | 14,018 | |
| Mortgage backed securities | 38,133 | | | 62 | | | (66) | | | 38,129 | |
| Other | 42,417 | | | 13 | | | (30) | | | 42,400 | |
| Total available-for-sale securities | 696,240 | | | 649 | | | (3,325) | | | 693,564 | |
| Held to maturity: | | | | | | | |
| U.S. government and agency obligations | 6,313 | | | 20 | | | (27) | | | 6,306 | |
| Total held-to-maturity securities | $ | 6,313 | | | $ | 20 | | | $ | (27) | | | $ | 6,306 | |
| Total investments | $ | 892,712 | | | $ | 669 | | | $ | (3,352) | | | $ | 890,029 | |
As of December 31, 2022, we concluded that it was more likely than not that we would have to sell some of the securities before recovering the amortized cost basis due to our decision to exit the commercial business. We recognized an impairment of $67.7 million in our available-for-sale securities portfolio. This impairment is related to the decrease in the fair value of debt securities primarily driven by an increase in market interest rates since the time the securities were purchased.
Fair Value Measurements: As of December 31, 2022, investments and cash equivalents within our discontinued operations were comprised of $940.5 million and $802.7 million with fair value measurements of Level 1 and Level 2, respectively. As of December 31, 2021, the investments and cash equivalents within our discontinued operations were comprised of $412.1 million and $477.9 million with fair value measurements of Level 1 and Level 2, respectively. See Note 6, Fair Value Measurements for additional discussion of methods and assumptions used to determine the fair value hierarchy classification of each class of financial instrument.
Medical Costs Payable: The table below details the components making up the medical costs payable within current liabilities of discontinued operations as of December 31 (in thousands):
| | | | | | | | | | | |
| 2022 | | 2021 |
| Claims unpaid | $ | 60,477 | | | $ | 19,773 | |
| Provider incentive payable | 3,446 | | | 11,352 | |
| Claims adjustment expense liability | 45,932 | | | 9,786 | |
| Incurred but not reported (IBNR) | 575,930 | | | 513,877 | |
| Total medical costs payable of discontinued operations | $ | 685,785 | | | $ | 554,788 | |
The prior period development included in medical costs of discontinued operations for the year ended December 31, 2022 was favorable by $50.2 million.
Risk Adjustment: We record adjustments for changes to the risk adjustment balances for individual policies in premium revenue. The risk adjustment program adjusts premiums based on the demographic factors and health status of each consumer as derived from current-year medical diagnoses as reported throughout the year. Under the risk adjustment program, a risk score is assigned to each covered consumer to determine an average risk score at the individual and small-group level by legal entity in a particular market in a state. Additionally, an average risk score is determined for the entire subject population for each market in each state. Settlements are determined on a net basis by legal entity and state and are made in the middle of the year following the end of the contract year. Each health insurance issuer’s average risk score is compared to the state’s average risk
Bright Health Group, Inc.
Notes to Consolidated Financial Statements
score. Risk adjustment is subject to audit by HHS, which could result in future payments applicable to benefit years. Risk adjustment payable for our discontinued operations was estimated to be $1.9 billion and $931.2 million at December 31, 2022 and 2021, respectively.
Accounts Payable: As of December 31, 2022, the Accounts payable of discontinued operations balance included $47.1 million of premium taxes payable, $21.1 million of broker commissions payable as well as the $28.5 million of contract termination costs related to restructuring. As of December 31, 2021, the Accounts payable of discontinued operations balance included $40.7 million of premium taxes payable and no broker commissions payable or contract termination costs related to restructuring.
Restricted Capital and Surplus: Our regulated insurance legal entities are required by statute to meet and maintain a minimum level of capital as stated in applicable state regulations, such as risk-based capital requirements. These balances are monitored regularly to ensure compliance with these regulations. Our regulated subsidiaries had statutory capital and surplus of $(12.9) million and $310.2 million as of December 31, 2022 and 2021, respectively. We are out of compliance with the minimum levels for certain of our regulated insurance legal entities of our discontinued operations.
NOTE 5. INVESTMENTS
Fixed Maturity Securities
Available-for-sale securities are reported at fair value as of December 31, 2022 and 2021. Held-to-maturity securities are reported at amortized cost as of December 31, 2022 and 2021. The following is a summary of our investment securities as of December 31 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| 2022 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Carrying Value |
| Cash equivalents | $ | 340,795 | | | $ | 8 | | | $ | — | | | $ | 340,803 | |
| Available for sale: | | | | | | | |
| U.S. government and agency obligations | 8,742 | | | — | | | (301) | | | 8,441 | |
| Corporate obligations | 3,401 | | | 1 | | | (95) | | | 3,307 | |
| State and municipal obligations | 712 | | | — | | | (17) | | | 695 | |
| Certificates of deposit | 3,318 | | | — | | | — | | | 3,318 | |
| Mortgage-backed securities | 156 | | | — | | | — | | | 156 | |
| Asset-backed securities | 60 | | | — | | | — | | | 60 | |
| Other | 1 | | | — | | | — | | | 1 | |
| Total available-for-sale securities | 16,390 | | | 1 | | | (413) | | | 15,978 | |
| Held to maturity: | | | | | | | |
| U.S. government and agency obligations | 685 | | | — | | | — | | | 685 | |
| Certificates of deposit | 1,947 | | | — | | | — | | | 1,947 | |
| Total held-to-maturity securities | 2,632 | | | — | | | — | | | 2,632 | |
| Total investments | $ | 359,817 | | | $ | 9 | | | $ | (413) | | | $ | 359,413 | |
Bright Health Group, Inc.
Notes to Consolidated Financial Statements
| | | | | | | | | | | | | | | | | | | | | | | |
| 2021 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Carrying Value |
| Cash equivalents | $ | 2,464 | | | $ | — | | | $ | — | | | $ | 2,464 | |
| Available for sale: | | | | | | | |
| U.S. government and agency obligations | 14,024 | | | 21 | | | (79) | | | 13,966 | |
| Corporate obligations | 10,210 | | | 18 | | | (31) | | | 10,197 | |
| State and municipal obligations | 2,098 | | | 5 | | | (3) | | | 2,100 | |
| Certificates of deposit | 18,752 | | | — | | | — | | | 18,752 | |
| Mortgage backed securities | 425 | | | 1 | | | (1) | | | 425 | |
| Other | 473 | | | — | | | — | | | 473 | |
| Total available-for-sale securities | 45,982 | | | 45 | | | (114) | | | 45,913 | |
| Held to maturity: | | | | | | | |
| U.S. government and agency obligations | 1,426 | | | — | | | — | | | 1,426 | |
| Certificates of deposit | 1,447 | | | — | | | — | | | 1,447 | |
| Total held-to-maturity securities | $ | 2,873 | | | $ | — | | | $ | — | | | $ | 2,873 | |
| Total investments | $ | 51,319 | | | $ | 45 | | | $ | (114) | | | $ | 51,250 | |
The fair value of available-for-sale investments, including those that are cash equivalents, with gross unrealized losses by major security type and length of time that individual securities have been in a continuous unrealized loss position at December 31 were as follows (in thousands):
| | | December 31, 2021 | | December 31, 2022 |
| | Less Than 12 Months | | 12 Months or Greater | | Total | | Less Than 12 Months | | 12 Months or Greater | | Total |
| Description of Investments | Description of Investments | Fair
Value | | Unrealized
Losses | | Fair
Value | | Unrealized
Losses | | Fair Value | | Unrealized
Losses | Description of Investments | Fair
Value | | Unrealized
Losses | | Fair
Value | | Unrealized
Losses | | Fair Value | | Unrealized
Losses |
| U.S. government and agency obligations | U.S. government and agency obligations | $ | 286,823 | | | $ | (2,200) | | | $ | — | | | $ | — | | | $ | 286,823 | | | $ | (2,200) | | U.S. government and agency obligations | $ | 1,316 | | | $ | (31) | | | $ | 6,808 | | | $ | (270) | | | $ | 8,124 | | | $ | (301) | |
| Corporate obligations | Corporate obligations | 234,070 | | | (1,104) | | | — | | | — | | | 234,070 | | | (1,104) | | Corporate obligations | 740 | | | (9) | | | 2,061 | | | (86) | | | 2,801 | | | (95) | |
| State and municipal obligations | State and municipal obligations | 10,442 | | | (38) | | | — | | | — | | | 10,442 | | | (38) | | State and municipal obligations | 340 | | | (2) | | | 344 | | | (15) | | | 684 | | | (17) | |
| Mortgage-backed securities | Mortgage-backed securities | 32,715 | | | (67) | | | — | | | — | | | 32,715 | | | (67) | | Mortgage-backed securities | 2 | | | — | | | — | | | — | | | 2 | | | — | |
| Other | Other | 29,115 | | | (30) | | | — | | | — | | | 29,115 | | | (30) | | Other | — | | | — | | | 1 | | | — | | | 1 | | | — | |
| Total bonds | Total bonds | $ | 593,165 | | | $ | (3,439) | | | $ | — | | | $ | — | | | $ | 593,165 | | | $ | (3,439) | | Total bonds | $ | 2,398 | | | $ | (42) | | | $ | 9,214 | | | $ | (371) | | | $ | 11,612 | | | $ | (413) | |
| | | December 31, 2020 | | December 31, 2021 |
| | Less Than 12 Months | | 12 Months or Greater | | Total | | Less Than 12 Months | | 12 Months or Greater | | Total |
| Description of Investments | Description of Investments | Fair
Value | | Unrealized
Losses | | Fair
Value | | Unrealized
Losses | | Fair Value | | Unrealized
Losses | Description of Investments | Fair
Value | | Unrealized
Losses | | Fair
Value | | Unrealized
Losses | | Fair Value | | Unrealized
Losses |
| Cash equivalents | $ | 25,007 | | | $ | (3) | | | $ | — | | | $ | — | | | $ | 25,007 | | | $ | (3) | | |
| U.S. government and agency obligations | U.S. government and agency obligations | 12,507 | | | (1) | | | — | | | — | | | 12,507 | | | (1) | | U.S. government and agency obligations | 10,688 | | | (79) | | | — | | | — | | | 10,688 | | | (79) | |
| Corporate obligations | Corporate obligations | 121,006 | | | (30) | | | — | | | — | | | 121,006 | | | (30) | | Corporate obligations | 7,324 | | | (31) | | | — | | | — | | | 7,324 | | | (31) | |
| Commercial paper | 999 | | | — | | | — | | | — | | | 999 | | | — | | |
| Certificates of deposit | 14,003 | | | (1) | | | — | | | — | | | 14,003 | | | (1) | | |
| State and municipal obligations | | State and municipal obligations | 1,227 | | | (3) | | | — | | | — | | | 1,227 | | | (3) | |
| Mortgage-backed securities | | Mortgage-backed securities | 361 | | | (1) | | | — | | | — | | | 361 | | | (1) | |
| Other | | Other | 321 | | | — | | | — | | | — | | | 321 | | | — | |
| Total bonds | Total bonds | $ | 173,522 | | | $ | (35) | | | $ | — | | | $ | — | | | $ | 173,522 | | | $ | (35) | | Total bonds | $ | 19,921 | | | $ | (114) | | | $ | — | | | $ | — | | | $ | 19,921 | | | $ | (114) | |
Bright Health Group, Inc.
Notes to Consolidated Financial Statements
As of December 31, 2022, we had 721 investment positions out of 2,432 that were in an unrealized loss position. As of December 31, 2021, we had 1,343 investment positions out of 1,836 that were in an unrealized loss position. As of December 31, 2020, we had 117 investment positions out of 1,917 that were in an unrealized loss position. We believe that we will collect the principal and interest due on our debt securities that have an amortized cost in excess of fair value. The unrealized losses were primarily caused by interest rate increases and not by unfavorable changes in the credit quality associated with these securities. At each reporting period, we evaluate securities for impairment when the fair value of the investment is less than its amortized cost. We evaluated the underlying credit quality and credit ratings of the issuers, noting no significant deterioration since purchase. As of December 31, 2021, we did not have the intentRefer to sell anyNote 4 Discontinued Operations for discussion of the impairment of securities in an unrealized loss position. Therefore, we believe these losses to be temporary.recognized within discontinued operations.
As of December 31, 2021,2022, the maturity of available-for-sale securities, by contractual maturity, reflected at amortized cost and fair value were as follows (in thousands):
| | | 2021 | | 2022 |
| | Amortized
Cost | | Fair
Value | | Amortized
Cost | | Fair
Value |
| Due in one year or less | Due in one year or less | $ | 80,504 | | | $ | 80,626 | | Due in one year or less | $ | 10,756 | | | $ | 10,592 | |
| Due after one year through five years | Due after one year through five years | 514,221 | | | 511,550 | | Due after one year through five years | 5,288 | | | 5,039 | |
| Due after five years through 10 years | Due after five years through 10 years | 141,308 | | | 141,120 | | Due after five years through 10 years | 342 | | | 343 | |
| Due after 10 years | Due after 10 years | 6,189 | | | 6,181 | | Due after 10 years | 4 | | | 4 | |
| Total debt securities | Total debt securities | $ | 742,222 | | | $ | 739,477 | | Total debt securities | $ | 16,390 | | | $ | 15,978 | |
Investment income for our available-for-sale securities in the Consolidated Statements of Income (Loss) for the years ended December 31, 2022, 2021 and 2020, and 2019, was $3.7$25.2 million, $8.5$— million and $8.3$8.5 million, respectively. The gross proceeds from the sale of available-for-sale securities
Bright Health Group, Inc.
Notes to Consolidated Financial Statements
for the years ended December 31, 2022, 2021 and 2020 and 2019 were $641.9$14.3 million, $80.0$19.8 million and $38.9$4.3 million, respectively. Realized gains (losses) of $(0.4)$24.8 million, $0.1$(0.1) million and $0.0 million are included within total investment income, and reclassified out of accumulated other comprehensive income (loss), for the years ended December 31, 2022, 2021 2020 and 2019,2020, respectively.
Equity Securities
On April 1, 2021 we completed the purchase of 1.6 million shares of equity securities for aggregate cash consideration of $40.1 million. As of December 31, 2021, the equity securities had a carrying value of $120.4 million which is included in short-term investments in the Consolidated Balance Sheet. During the year, the Company sold all equity securities for aggregate gross proceeds of approximately $64.9 million We recognized an unrealizeda realized gain of $80.3$24.8 million in investment income in the Consolidated Statements of Income (Loss) for the year ended December 31, 2021.2022.
NOTE 5.6. FAIR VALUE MEASUREMENTS
Fair value measurement: The Fair Value Measurements and Disclosures topic in FASB ASC 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures of fair value measurements, which applies to all assets and liabilities measured on a fair value basis. The standard establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).
Basis of fair value measurement:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities
Level 2: Quoted prices for similar assets or liabilities in active markets or quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity)
Bright Health Group, Inc.
Notes to Consolidated Financial Statements
There were no transfers in or out of Level 3 financial assets or liabilities during the years ended December 31, 20212022 or 2020.2021.
Nonfinancial assets and liabilities or financial assets and liabilities that are measured at fair value on a nonrecurring basis are subject to fair value adjustments only in certain circumstances, such as when the Company records an impairment. There were no significant fair value adjustments for these assets and liabilities recorded during the years ended December 31, 20212022 or 2020.2021.
A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
The following methods and assumptions were used to estimate the fair value and determine the fair value hierarchy classification of each class of financial instrument included in the tables below:
Cash and Cash equivalents — The carrying value of cash and cash equivalents approximates fair value as maturities are less than three months. Fair values of cash equivalent investments outside of money- market funds and U.S treasury securities are classified as Level 2.
Debt Securities — The fair values of debt securities are based on quoted market prices, where available. We obtain one price for each security primarily from its custodian, or if unavailable, securities evaluations, prices received from a secondary pricing source, or other third-party calculated prices based on observable inputs in the market are used to price securities. If these are unavailable, we are able to provide pricing overrides from other acceptable sources or methods; however, based upon the relatively high rating of our investments, this is generally not required.
Equity Securities — The fair value of the equity securities was determined based on the quoted market price of the underlying securities in an active market.
Bright Health Group, Inc.
Notes to Consolidated Financial Statements
We are ultimately responsible for determining fair value, as well as the appropriate level within the fair value hierarchy, based on the significance of unobservable inputs. At the end of each reporting period, we review third-party pricing services’ pricing methodologies, data sources and pricing inputs to ensure the fair values obtained are reasonable.
There are no investments in Level 3 securities as of December 31, 20212022 or 2020.
Contingent Consideration — The fair value of contingent consideration recorded as part of the AMD acquisition is determined using a discounted future benefit method based on projections developed using unobservable inputs and is thus classified as Level 3.2021.
The following tables set forth our fair value measurements as of December 31, 20212022 and 2020,2021, for assets measured at fair value on a recurring basis (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| 2021 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| Assets | | | | | | | |
| Cash equivalents | $ | 192,063 | | | $ | 250 | | | $ | — | | | $ | 192,313 | |
| Fixed maturity securities, available for sale: | | | | | | | |
| U.S. government and agency obligations | 220,801 | | | 89,194 | | | — | | | 309,995 | |
| Corporate obligations | 2,323 | | | 310,864 | | | — | | | 313,187 | |
| State and municipal obligations | — | | | 16,117 | | | — | | | 16,117 | |
| Commercial paper | — | | | — | | | — | | | — | |
| Certificates of deposit | — | | | 18,752 | | | — | | | 18,752 | |
| Mortgage-backed securities | 2,404 | | | 36,150 | | | — | | | 38,554 | |
| Other | — | | | 42,872 | | | — | | | 42,872 | |
| Total fixed maturity securities, available for sale: | 225,528 | | | 513,949 | | | — | | | 739,477 | |
| Equity securities | 120,364 | | | — | | | — | | | 120,364 | |
| Total assets at fair value | $ | 537,955 | | | $ | 514,199 | | | $ | — | | | $ | 1,052,154 | |
| Liabilities | | | | | | | |
| Contingent consideration | $ | — | | | $ | — | | | $ | 1,495 | | | $ | 1,495 | |
| | | 2020 | | 2022 |
| | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets | Assets | | | | | | | | Assets | | | | | | | |
| Cash equivalents | Cash equivalents | $ | 149,499 | | | $ | 4,019 | | | $ | — | | | $ | 153,518 | | Cash equivalents | $ | 316,752 | | | $ | 15,601 | | | $ | — | | | $ | 332,353 | |
| Fixed maturity securities, available for sale: | Fixed maturity securities, available for sale: | | Fixed maturity securities, available for sale: | |
| U.S. government and agency obligations | U.S. government and agency obligations | 197,886 | | | 95,193 | | | — | | | 293,079 | | U.S. government and agency obligations | 6,354 | | | 2,087 | | | — | | | 8,441 | |
| Corporate obligations | Corporate obligations | — | | | 281,631 | | | — | | | 281,631 | | Corporate obligations | — | | | 3,307 | | | — | | | 3,307 | |
| State and municipal obligations | State and municipal obligations | — | | | 18,566 | | | — | | | 18,566 | | State and municipal obligations | — | | | 695 | | | — | | | 695 | |
| Commercial paper | — | | | 14,991 | | | — | | | 14,991 | | |
| | Certificates of deposit | Certificates of deposit | — | | | 53,505 | | | — | | | 53,505 | | Certificates of deposit | — | | | 3,318 | | | — | | | 3,318 | |
| Mortgage-backed securities | | Mortgage-backed securities | — | | | 156 | | | — | | | 156 | |
| Asset-backed securities | | Asset-backed securities | — | | | 60 | | | — | | | 60 | |
| Other | Other | — | | | 5,536 | | | — | | | 5,536 | | Other | — | | | 1 | | | — | | | 1 | |
| Total fixed maturity securities, available for sale: | | Total fixed maturity securities, available for sale: | 6,354 | | | 9,624 | | | — | | | 15,978 | |
| | Total assets at fair value | Total assets at fair value | $ | 347,385 | | | $ | 473,441 | | | $ | — | | | $ | 820,826 | | Total assets at fair value | $ | 323,106 | | | $ | 25,225 | | | $ | — | | | $ | 348,331 | |
| Liabilities | | | | | | | | |
| Contingent consideration | $ | — | | | $ | — | | | $ | 5,716 | | | $ | 5,716 | | |
Bright Health Group, Inc.
Notes to Consolidated Financial Statements
| | | | | | | | | | | | | | | | | | | | | | | |
| 2021 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| Assets | | | | | | | |
| Cash equivalents | $ | 2,450 | | | $ | 3 | | | $ | — | | | $ | 2,453 | |
| Fixed maturity securities, available for sale: | | | | | | | |
| U.S. government and agency obligations | 9,575 | | | 4,391 | | | — | | | 13,966 | |
| Corporate obligations | 26 | | | 10,172 | | | — | | | 10,198 | |
| State and municipal obligations | — | | | 2,100 | | | — | | | 2,100 | |
| Certificates of deposit | — | | | 18,752 | | | — | | | 18,752 | |
| Mortgage-backed securities | 26 | | | 398 | | | — | | | 424 | |
| Other | — | | | 473 | | | — | | | 473 | |
| Total fixed maturity securities, available for sale: | $ | 9,627 | | | $ | 36,286 | | | $ | — | | | $ | 45,913 | |
| Equity securities | 120,364 | | | — | | | — | | | 120,364 | |
| Total assets at fair value | $ | 132,441 | | | $ | 36,289 | | | $ | — | | | $ | 168,730 | |
The following tables set forth the Company’s fair value measurements as of December 31, 20212022 and 2020,2021, for certain financial instruments not measured at fair value on a recurring basis (in thousands):
| | | 2021 | | 2022 |
| | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
| Cash equivalents, held to maturity | Cash equivalents, held to maturity | $ | 310 | | | $ | — | | | $ | — | | | $ | 310 | | Cash equivalents, held to maturity | $ | 8,450 | | | $ | — | | | $ | — | | | $ | 8,450 | |
| Fixed maturity securities, held to maturity: | Fixed maturity securities, held to maturity: | | Fixed maturity securities, held to maturity: | |
| U.S. government and agency obligations | U.S. government and agency obligations | 7,732 | | | — | | | — | | | 7,732 | | U.S. government and agency obligations | 685 | | | — | | | — | | | 685 | |
| Certificates of deposit | Certificates of deposit | — | | | 1,447 | | | — | | | 1,447 | | Certificates of deposit | — | | | 1,947 | | | — | | | 1,947 | |
| Total held to maturity | Total held to maturity | $ | 8,042 | | | $ | 1,447 | | | $ | — | | | $ | 9,489 | | Total held to maturity | $ | 9,135 | | | $ | 1,947 | | | $ | — | | | $ | 11,082 | |
| | | 2020 | | 2021 |
| | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
| Cash equivalents | Cash equivalents | $ | 222 | | | $ | — | | | $ | — | | | $ | 222 | | Cash equivalents | $ | 12 | | | $ | — | | | $ | — | | | $ | 12 | |
| Held to Maturity: | Held to Maturity: | | Held to Maturity: | |
| U.S. government and agency obligations | U.S. government and agency obligations | 6,732 | | | — | | | — | | | 6,732 | | U.S. government and agency obligations | 1,425 | | | — | | | — | | | 1,425 | |
| Certificates of deposit | Certificates of deposit | — | | | 1,119 | | | — | | | 1,119 | | Certificates of deposit | — | | | 1,447 | | | — | | | 1,447 | |
| Total held to maturity | Total held to maturity | $ | 6,954 | | | $ | 1,119 | | | $ | — | | | $ | 8,073 | | Total held to maturity | $ | 1,437 | | | $ | 1,447 | | | $ | — | | | $ | 2,884 | |
There have been no transfers of assets or liabilities into or out of Level 3 of the fair value hierarchy during the years ended December 31, 2021 and 2020. The contingent consideration liability related to the acquisition of AssociatesMD Medical Group, Inc. is measured using Level 3 inputs based on a formulaic multiple of forecasted 2023 EBITDA per the terms of the purchase agreement discounted back to net present value. The following table presents the changes in fair value of the contingent consideration liability for the years ended December 31, 2021 and 2020 (in thousands):
| | | | | | | | | | | |
| 2021 | | 2020 |
| Balance at beginning of period | $ | 5,716 | | | $ | 5,716 | |
| Change in fair value of contingent consideration | (4,221) | | | — | |
| Balance at end of period | $ | 1,495 | | | $ | 5,716 | |
The carrying amounts reported on the Consolidated Balance Sheets for other current financial assets and liabilities approximate fair value due to their short-term nature. These assets and liabilities are not included in the tables above.
NOTE 6.7. PROPERTY, EQUIPMENT AND CAPITALIZED SOFTWARE
Property, equipment and capitalized software at December 31, 20212022 and 2020,2021, consists of the following (in thousands):
| | | | | | | | | | | |
| 2021 | | 2020 |
| Software | $ | 38,800 | | | $ | 13,202 | |
| Leasehold improvements | 7,135 | | | 3,604 | |
| Medical equipment | 586 | | | 705 | |
| Other equipment | 504 | | | — | |
| Gross property and equipment | 47,025 | | | 17,511 | |
| Less accumulated depreciation | (8,681) | | | (5,247) | |
| Property and equipment, net | $ | 38,344 | | | $ | 12,264 | |
Depreciation expense of $4.4 million, $2.9 million and $1.1 million was recognized for the years ended December 31, 2021, 2020 and 2019, respectively. | | | | | | | | | | | |
| 2022 | | 2021 |
| Software | $ | 50,000 | | | $ | 38,800 | |
| Leasehold improvements | 9,585 | | | 7,135 | |
| Medical equipment | 586 | | | 586 | |
| Other equipment | 652 | | | 504 | |
Gross property, equipment, and capitalized software
| 60,823 | | | 47,025 | |
| Less accumulated depreciation | (18,227) | | | (8,681) | |
| Property, equipment, and capitalized software, net | $ | 42,596 | | | $ | 38,344 | |
Bright Health Group, Inc.
Notes to Consolidated Financial Statements
Depreciation expense of $12.2 million, $4.4 million and $2.9 million was recognized for the years ended December 31, 2022, 2021 and 2020, respectively.
NOTE 7.8. GOODWILL AND INTANGIBLE ASSETS
Changes in the carrying value of goodwill by reportable segment were as follows (in thousands):
| | | Bright HealthCare | | NeueHealth | | Bright HealthCare | | Consumer Care |
| | Gross Carrying Amount | | Cumulative
Impairment | | Gross Carrying Amount | | Cumulative Impairment | | Gross Carrying
Amount | | Cumulative
Impairment | | Gross Carrying
Amount | | Cumulative
Impairment |
| Balance at January 1, 2020 | $ | — | | | $ | — | | | $ | 20,125 | | | $ | — | | |
| Acquisitions | 197,886 | | | — | | | 45,142 | | | — | | |
| Purchase adjustments | — | | | — | | | (118) | | | — | | |
| Balance at December 31, 2020 | 197,886 | | | — | | | 65,149 | | | — | | |
| Balance at January 1, 2021 | | Balance at January 1, 2021 | $ | 197,886 | | | $ | — | | | $ | 65,149 | | | $ | — | |
| Impairment losses | | Impairment losses | — | | | — | | | — | | | — | |
| Acquisitions | Acquisitions | 240,185 | | | — | | | 337,133 | | | — | | Acquisitions | 236,037 | | | — | | | 337,133 | | | — | |
| Purchase adjustments | Purchase adjustments | (5,213) | | | — | | | — | | | — | | Purchase adjustments | (5,213) | | | — | | | — | | | — | |
| Balance at December 31, 2021 | Balance at December 31, 2021 | $ | 432,858 | | | $ | — | | | $ | 402,282 | | | $ | — | | Balance at December 31, 2021 | 428,710 | | | — | | | 402,282 | | | — | |
| Impairment losses | | Impairment losses | — | | | 70,017 | | | — | | | — | |
| Acquisitions | | Acquisitions | — | | | — | | | 310 | | | — | |
| Goodwill dispositions | | Goodwill dispositions | — | | | — | | | (1,207) | | | — | |
| Balance at December 31, 2022 | | Balance at December 31, 2022 | $ | 428,710 | | | $ | 70,017 | | | $ | 401,385 | | | $ | — | |
Historically, we test goodwill for impairment annually at the beginning of the fourth quarter or whenever events or circumstances indicate the carrying value may not be recoverable. During the three months ended September 30, 2022, we determined that our decision to exit the Commercial markets and the decrease in our enterprise market capitalization due to a decrease in the price of our common stock, represented events that indicated the carrying values of our reporting units may not be recoverable. As such, we performed an interim impairment test as of September 30, 2022.
We estimated the fair values of our Bright HealthCare and Consumer Care reporting units using a combination of discounted cash flows and comparable market multiples, which include assumptions about a wide variety of internal and external factors. As a result of our interim impairment test, we recognized a non-cash impairment loss of $70.0 million in our Bright HealthCare reporting unit, specifically to Medicare Advantage, which had a goodwill carrying amount of $358.7 million after impairment. The impairment of our Bright HealthCare reporting unit was primarily driven by an increase in the discount rate, which was impacted by higher interest rates and other market factors.
Given the proximity of our interim impairment measurement date (last day of our fiscal third quarter - September 30, 2022) to our annual goodwill impairment measurement date (first day of our fiscal fourth quarter - October 1, 2022), we performed a qualitative assessment to determine whether it was more likely than not that the fair value of any of our reporting units was less than the carrying value. As material changes in the business that occurred during the valuation procedures but subsequent to our interim impairment measurement date were taken into consideration during our interim impairment assessment, we concluded that there would be no reasonable expectation of changes in estimates or the reporting unit fair values and carrying values between our interim impairment and annual impairment measurement dates.
As of December 31, 2022, we recognized a $1.2 million goodwill disposition related to our Consumer Care reporting unit. Additionally, we determined that the sustained decline in our stock price triggered a qualitative assessment of our goodwill to determine if it was more likely than not that the fair value of our reporting units were less than their respective carrying values. Through our assessment of our reporting units, we concluded that it was not more likely than not that the fair value of our reporting units were less than their respective carrying values as of December 31, 2022. We will continue to closely monitor the operational performance of our reporting units as it relates to goodwill impairment.
The gross carrying value and accumulated amortization for definite-lived intangible assetsassets were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| Gross Carrying Amount | | Accumulated
Amortization | | Gross Carrying Amount | | Accumulated
Amortization |
| Customer relationships | $ | 209,421 | | | $ | 21,728 | | | $ | 117,451 | | | $ | 3,664 | |
| Trade names | 99,241 | | | 6,738 | | | 38,161 | | | 1,604 | |
| Provider networks | 59,000 | | | 6,556 | | | — | | | — | |
| Developed technology | 6,300 | | | 675 | | | — | | | — | |
| Other | 6,400 | | | 805 | | | 2,000 | | | 133 | |
| Total | $ | 380,362 | | | $ | 36,502 | | | $ | 157,612 | | | $ | 5,401 | |
The acquisition date fair values and weighted average useful lives assigned to definite-lived intangible assets consisted of the following by year of acquisition (in thousands, except years):
| | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | | 2020 |
| Fair Value | | Weighted- Average Useful Life (in years) | | Fair Value | | Weighted- Average Useful Life (in years) |
| Customer relationships | $ | 90,770 | | | 10.2 | | $ | 106,200 | | | 10.6 |
| Trade names | 60,380 | | | 14.9 | | 30,700 | | | 15.0 |
| Provider networks | 59,000 | | | 4.5 | | — | | | |
| Developed technology | 6,300 | | | 7.0 | | — | | | |
| Other | 4,400 | | | 7.0 | | 2,000 | | | 10.0 |
| Total | $ | 220,850 | | | 9.5 | | $ | 138,900 | | | 11.6 |
Amortization expense relating to intangible assets for the years ended December 31, 2021 and 2020 was $31.1 million and $5.4 million, respectively. We did not have any amortization expense for the year ended December 31, 2019.
Bright Health Group, Inc.
Notes to Consolidated Financial Statements
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| Gross Carrying Amount | | Accumulated
Amortization | | Gross Carrying Amount | | Accumulated
Amortization |
| Customer relationships | $ | 204,221 | | | $ | 41,604 | | | $ | 206,321 | | | $ | 21,560 | |
| Trade names | 95,261 | | | 12,812 | | | 96,041 | | | 6,578 | |
| Provider networks | — | | | — | | | 59,000 | | | 6,556 | |
| Developed technology | — | | | — | | | 6,300 | | | 675 | |
| Other | 5,400 | | | 1,383 | | | 5,400 | | | 698 | |
| Total | $ | 304,882 | | | $ | 55,799 | | | $ | 373,062 | | | $ | 36,067 | |
Amortization expense relating to intangible assets of $38.2 million, $30.6 million, and $5.4 million was recognized for the years ended December 31, 2022, 2021 and 2020, respectively.
Impairment expense relating to intangible assets for the year ended December 31, 2022 was $42.6 million as a result of the impairment of the reacquired contract between our discontinued Bright HealthCare - Commercial business and Centrum due to our decision to no longer offer commercial products for the 2023 plan year. We used the income approach in our assessment of the fair value of the impaired intangible assets. We did not have any impairment expense for the years ended December 31, 2021 and 2020, respectively.
Estimated full year amortization expense relating to intangible assets for each of the next five years ending December 31 is as follows (in thousands):
| | 2022 | $ | 56,299 | | |
| 2023 | 2023 | $ | 42,052 | | 2023 | $ | 27,164 | |
| 2024 | 2024 | $ | 41,913 | | 2024 | $ | 27,025 | |
| 2025 | 2025 | $ | 41,913 | | 2025 | $ | 27,025 | |
| 2026 | 2026 | $ | 28,685 | | 2026 | $ | 27,025 | |
| 2027 | | 2027 | $ | 27,025 | |
Bright Health Group, Inc.
Notes to Consolidated Financial Statements
NOTE 9. RESTRUCTURING CHARGES
In October 2022, we announced our decision to further focus our business on our Fully Aligned Care Model, and that we will no longer offer commercial plans through Bright HealthCare, or Medicare Advantage products outside of California in 2023. As a result of these strategic changes, we announced and have taken actions to restructure the Company’s workforce and reduce expenses based on our updated business model.
There were no restructuring charges for the years ended December 31, 2021 and 2020. Restructuring charges by reportable segment and corporate for the year ended December 31, 2022 were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Bright HealthCare | | Consumer Care | | Corporate & Eliminations | | Total |
| Employee termination benefits | $ | — | | | $ | 44 | | | $ | 24,033 | | | $ | 24,077 | |
| Long-lived asset impairments | — | | | 2,072 | | | — | | | 2,072 | |
| Contract termination and other costs | 445 | | | — | | | 5,145 | | | 5,590 | |
| Total restructuring charges | $ | 445 | | | $ | 2,116 | | | $ | 29,178 | | | $ | 31,739 | |
There was no restructuring accrual activity for the year ended December 31, 2021. Restructuring accrual activity recorded by major type for the year ended December 31, 2022 was as follows; employee termination benefits are within Other current liabilities while contract termination costs are within Accounts payable (in thousands):
| | | | | | | | | | | | | | | | | |
| Employee Termination Benefits | | Contract Termination Costs | | Total |
| Balance at January 1, 2022 | $ | — | | | $ | — | | | $ | — | |
| Charges | 24,077 | | | 515 | | | 24,592 | |
| Cash payments | — | | | — | | | — | |
| Balance at December 31, 2022 | $ | 24,077 | | | $ | 515 | | | $ | 24,592 | |
Bright Health Group, Inc.
Notes to Consolidated Financial Statements
NOTE 8.10. MEDICAL COSTS PAYABLE
The following table shows the components of the change in medical costs payable for the years ended December 31 (in thousands):
| | | 2021 | | 2020 | | 2019 | | 2022 | | 2021 | | 2020 |
| Medical costs payable – January 1 | Medical costs payable – January 1 | $ | 249,777 | | | $ | 44,804 | | | $ | 22,978 | | Medical costs payable – January 1 | $ | 263,187 | | | $ | 121,309 | | | $ | 4,458 | |
| Incurred related to: | Incurred related to: | | | | | | Incurred related to: | | | | | |
| Current year | Current year | 3,955,146 | | | 1,057,064 | | | 233,447 | | Current year | 2,201,937 | | | 1,298,264 | | | 445,620 | |
| Prior year | Prior year | 9,549 | | | (8,622) | | | (7,427) | | Prior year | 7,456 | | | 3,510 | | | 6,877 | |
| Total incurred | Total incurred | 3,964,695 | | | 1,048,442 | | | 226,020 | | Total incurred | 2,209,393 | | | 1,301,774 | | | 452,497 | |
| Paid related to: | Paid related to: | | | | | | Paid related to: | | | | | |
| Current year | Current year | 3,242,674 | | | 941,401 | | | 188,919 | | Current year | 1,793,613 | | | 1,114,903 | | | 458,678 | |
| Prior year | Prior year | 246,560 | | | 33,479 | | | 15,275 | | Prior year | 267,214 | | | 124,462 | | | 8,379 | |
| Total paid | Total paid | 3,489,234 | | | 974,880 | | | 204,194 | | Total paid | 2,060,827 | | | 1,239,365 | | | 467,057 | |
| | Acquired claims liabilities | Acquired claims liabilities | 92,737 | | | 131,411 | | | — | | Acquired claims liabilities | — | | | 79,469 | | | 131,411 | |
| Medical costs payable – December 31 | Medical costs payable – December 31 | $ | 817,975 | | | $ | 249,777 | | | $ | 44,804 | | Medical costs payable – December 31 | $ | 411,753 | | | $ | 263,187 | | | $ | 121,309 | |
Medical costs payable attributable to prior years increased by $9.5$7.5 million, $3.5 million and decreased by $8.6 million and $7.4$6.9 million for the years ended December 31, 2022, 2021 and 2020, and 2019, respectively, as a result ofresulting from claim settlements being lessmore than original estimates. Medical costs payable estimates are adjusted as additional information becomes known regarding claims. There were no significant changes to estimation methodologies in 20212022 or 2020.2021.
The table below details the components making up the medical costs payable as of December 31 (in thousands):
| | | 2021 | | 2020 | | 2022 | | 2021 |
| Claims unpaid | Claims unpaid | $ | 36,874 | | | $ | 23,269 | | Claims unpaid | $ | 41,567 | | | $ | 17,101 | |
| Provider incentive payable | Provider incentive payable | 85,544 | | | 16,963 | | Provider incentive payable | 37,771 | | | 74,191 | |
| Claims adjustment expense liability | Claims adjustment expense liability | 14,131 | | | 2,487 | | Claims adjustment expense liability | 7,290 | | | 4,346 | |
| Incurred but not reported (IBNR) | Incurred but not reported (IBNR) | 681,426 | | | 207,058 | | Incurred but not reported (IBNR) | 325,125 | | | 167,549 | |
| Total medical costs payable | Total medical costs payable | $ | 817,975 | | | $ | 249,777 | | Total medical costs payable | $ | 411,753 | | | $ | 263,187 | |
Medical costs payable are primarily related to the current year. There are no reinsurance recovery amounts assumed in medical costs payable at December 31, 20212022 and 2020.2021. The Company has recorded claims adjustment expense as a component of operating costs in the Consolidated Statements of Income (Loss).
The following is information about incurred and cumulative paid claims development as of December 31, 2021,2022, net of reinsurance, and the total claims payable plus expected development on reported claims included within the net incurred claims amounts. The information about incurred and paid claims development for the years ended December 31, 20192020 through 20212022 is presented as supplementary information as follows and is inclusive of claims incurred and paid related to Brand New Day,BND, PMA, THNM, CHP and Centrum prior and subsequent to the acquisition dates (in thousands):
Bright Health Group, Inc.
Notes to Consolidated Financial Statements
| | | Incurred Claims and Allocated Claim Adjustment
Expenses, Net of Reinsurance (in thousands) | Total Incurred but
Not Reported
Liabilities Plus
Expected
Development on
Reported Claims | | Incurred Claims and Allocated Claim Adjustment
Expenses, Net of Reinsurance (in thousands) | Total Incurred but
Not Reported
Liabilities Plus
Expected
Development on
Reported Claims |
| | For the Years Ended December 31, | | | For the Years Ended December 31, | |
| | (Unaudited) | | (Unaudited) | | | | (Unaudited) | | (Unaudited) | | |
| Accident Year | Accident Year | 2019 | | 2020 | | 2021 | | Accident Year | 2020 | | 2021 | | 2022 | |
| 2019 | 1,322,197 | | | 1,305,816 | | | 1,312,836 | | | 32 | | |
| 2020 | 2020 | — | | | 1,888,151 | | | 1,881,026 | | | 5,393 | | 2020 | 1,180,234 | | | 1,180,196 | | | 1,182,477 | | | 1,190 | |
| 2021 | 2021 | — | | | — | | | 4,120,436 | | | 675,931 | | 2021 | | 1,408,909 | | | 1,416,365 | | | 2,255 | |
| 2022 | | 2022 | | 2,201,937 | | | 397,100 | |
| Total | Total | | $ | 7,314,298 | | | Total | | $ | 4,800,779 | | |
| | | Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance (in thousands) | | Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance (in thousands) |
| | For the Years Ended December 31, | | For the Years Ended December 31, |
| | (Unaudited) | | (Unaudited) | | | (Unaudited) | | (Unaudited) | |
| Accident Year | Accident Year | | 2019 | | 2020 | | 2021 | Accident Year | | 2020 | | 2021 | | 2022 |
| 2019 | | 1,145,194 | | | 1,299,119 | | | 1,304,658 | | |
| 2020 | 2020 | | — | | | 1,564,863 | | | 1,876,061 | | 2020 | | 979,099 | | | 1,176,014 | | | 1,181,287 | |
| 2021 | 2021 | | — | | | — | | | 3,370,286 | | 2021 | | 1,150,523 | | | 1,414,110 | |
| 2022 | | 2022 | | 1,804,837 | |
| Total | Total | | $ | 6,551,005 | | Total | | $ | 4,400,234 | |
| All outstanding liabilities before 2019, net of reinsurance | | 3 | | |
| All outstanding liabilities before 2020, net of reinsurance | | All outstanding liabilities before 2020, net of reinsurance | | 16 | |
| Liabilities for claim and claim adjustment expenses, net of reinsurance | Liabilities for claim and claim adjustment expenses, net of reinsurance | | $ | 763,296 | | Liabilities for claim and claim adjustment expenses, net of reinsurance | | $ | 400,561 | |
| | | | | |
| December 31, 20212022 |
| Net outstanding liabilities | $ | 763,296400,561 | |
| Reinsurance recoverable on unpaid claims | 54,67911,192 | |
| Total gross liability for unpaid claims and claims | $ | 817,975411,753 | |
NOTE 9.11. SHORT-TERM BORROWINGS
On March 1, 2021, we entered into a $350.0 million revolving credit agreement with a syndicate of banks. On August 2, 2021, the Credit Agreement was amended to change the definition of “Qualified IPO” by reducing the net proceeds required to be received by the Company from $1.0 billion to $850.0 million. In addition, prior to such amendment, the Credit Agreement contained a covenant that required the Company to maintain a total debt to capitalization ratio of (a) 0.25 to 1.00 prior to a Qualified IPO, and (b) 0.30 to 1.00 after a Qualified IPO. The Amendment changed this covenant by removing the increase in the ratio after a Qualified IPO such that the Company is now required to maintain a total debt to capitalization ratio of 0.25 to 1.00.
On August 4, 2021, we elected to extend the maturity date of the Credit Agreement from February 28, 2022 to February 28, 2024. AsDuring the twelve months ended December 31, 2022, we repaid the $155.0 million outstanding under the Credit Agreement as of December 31, 2021,2021. In addition, during the twelve months ended December 31, 2022, we had $155.0borrowed $303.9 million borrowed onunder the Credit Agreement at an effective annual interest rate of 7.25%.8.41%, which remains outstanding as of December 31, 2022. Refer to Note 17, Commitments and Contingencies for more information on the undrawn letters of credit of $46.1 million under the Credit Agreement, which reduce the amount available to borrow.
On November 8, 2022, we executed an amendment to the Credit Agreement pursuant to which certain collateral related defaults were waived and, in addition, it was agreed that we would (i) not be required to test our debt to capitalization ratio covenant during and including the four quarter test period ending September 30, 2022 through and including the four quarter test period ending September 30, 2023, (ii) be required to maintain a minimum liquidity of $200.0 million from November 8, 2022
Bright Health Group, Inc.
Notes to Consolidated Financial Statements
through and including September 30, 2023 and (iii) be required to maintain a minimum liquidity of $150.0 million after September 30, 2023.
On March 1, 2023, the Company disclosed that that during the First Quarter of 2023, the Company breached the minimum liquidity covenant of the Credit Agreement. The Company entered into a limited waiver and consent (the “Waiver”) under the Credit Agreement, which, among other matters, provides for a temporary waiver for the period from January 25, 2023 through April 30, 2023 (the “Waiver Period”) of compliance with the minimum liquidity covenant set forth in Section 11.12.2 of the Credit Agreement. During the Waiver Period, the Company will be subject to a minimum liquidity covenant of not less than $75 million until March 3, 2023, and not less than $85 million thereafter until the end of the Waiver Period. In addition, during the Waiver Period, the Company will not have access to certain negative covenant baskets and will be subject to additional cash-flow and cash balance reporting requirements. Any non-compliance with the covenants under the Credit Agreement or the Waiver may result in the obligations under the Credit Agreement being accelerated.
NOTE 10.12. PREFERRED STOCK
Series A Convertible Preferred Stock
On December 6, 2021, we entered into an investment agreement with certain subsidiaries of Cigna Corporation (“Cigna”) and certain affiliates of New Enterprise Associates (“NEA”) (collectively, the “Series A Purchasers”) relating to the issuance of 750,000 shares of Series A Preferred Stock, par value $0.0001 per share, for an aggregate purchase price of $750.0 million, or $1,000 per share (the “Series A Issuance”). The close of the Series A Issuance occurred on January 3, 2022 (the “Closing Date”).
The Series A Preferred Stock ranks senior to the shares of the Company’s common stock with respect to dividend rights and rights on the distribution of assets on any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company. The Series A Preferred Stock has an initial liquidation preference of $1,000 per share, which shall increase by accumulated quarterly dividends that are not paid in cash (“compounded dividends”). Holders of the Series A Preferred Stock are entitled to a dividend at the rate of 5.0% per annum, accruing daily and payable quarterly in arrears and subject to certain adjustments, as set forth in the Certificate of Designations. Dividends will be payable in cash, by increasing the amount of liquidation preference (compounded dividends) with respect to a share of Series A Preferred Stock, or any combination thereof, at the sole discretion of the Company. The Series A Preferred Stock had accrued compounded dividends of $37.9 million as of December 31, 2022.
The Series A Preferred Stock will be convertible at the option of the holders into (I) the number of shares of common stock equal to the quotient of (a) the sum of (x) the liquidation preference (reflecting increases for compounded dividends) plus (y) the accrued dividends with respect to each share of Series A Preferred Stock as of the applicable conversion date divided by (b) the conversion price (initially approximately $4.55 per share) as of the applicable conversion date plus (II) cash in lieu of fractional shares, subject to certain anti‑dilution adjustments. At any time after the third anniversary of the Closing Date, if the closing price per share of common stock on the NYSE was greater than $7.96 for (x) each of at least twenty (20) trading days in any period of thirty (30) consecutive trading days and (y) the last trading day immediately before the Company provides the holders with notice of its election to convert all of the Series A Preferred Stock into the relevant number of shares of common stock, the Company may elect to convert all of the Series A Preferred Stock into the relevant number of shares of common stock.
Under the Certificate of Designations, holders of the Series A Preferred Stock are entitled to vote with the holders of the common stock on an as‑converted basis, solely with respect to (i) a change of control transaction (to the extent such change of control transaction is submitted to a vote of the holders of the common stock) or (ii) the issuance of capital stock by the Company in connection with an acquisition by the Company (to the extent such issuance is submitted to a vote of the holders of the common stock), subject to certain restrictions. Holders of the Series A Preferred Stock are entitled to a separate class vote with respect to, among other things, amendments to the Company’s organizational documents that have an adverse effect on the Series A Preferred Stock, authorizations or issuances by the Company of securities that are senior to the Series A Preferred Stock, increases or decreases in the number of authorized shares of Preferred Stock, and issuances of shares of the Series A Preferred Stock after the Closing Date.
At any time following the fifth anniversary of the original issuance date, the Company may redeem all of the Series A Preferred Stock for a per share amount in cash equal to: (i) the sum of (A) the liquidation preference (reflecting increases for compounded
Bright Health Group, Inc.
Notes to Consolidated Financial Statements
dividends) thereof plus (B) all accrued dividends as of the applicable redemption date, multiplied by (ii) (A) 105% if the redemption occurs at any time prior to the seventh anniversary of the Closing Date and (B) 100% if the redemption occurs at any time on or after the seventh anniversary of the Closing Date. Upon certain change of control events involving the Company, the holders of the Series A Preferred Stock may, at such holder’s election, convert their shares of Series A Preferred Stock into common stock at the then‑current conversion price or require the Company to purchase all or a portion of such holder’s shares of Preferred Stock that have not been so converted at a purchase price per share of Preferred Stock, payable in cash, equal to the greater of (I) (A) if the change of control effective date occurs at any time prior to the seventh anniversary of the Closing Date, the product of 105% multiplied by the sum of (x) the liquidation preference of such share of Series A Preferred Stock (reflecting increases for compounded dividends) plus (y) the accrued dividends in respect of such share of Series A Preferred Stock as of the change of control purchase date and (B) if the change of control effective date occurs on or after the seventh anniversary of the Closing Date, the sum of (x) the liquidation preference (reflecting increases for compounded dividends) of such share of Series A Preferred Stock plus (y) the accrued dividends in respect of such share of Series A Preferred Stock as of the change of control purchase date and (II) the consideration that would have been payable in connection with such change of control if such share of Series A Preferred Stock had been converted into common stock immediately prior to the change of control.
In connection with the closing of the issuance of our Series B Convertible Preferred Stock, the Certificate of Designations for the Company’s Series A Convertible Perpetual Preferred Stock was amended to provide for a weighted average anti-dilution adjustment in connection with issuances of equity-linked securities with a purchase or conversion price less than the optional conversion price of the Series A Preferred Stock.
Series B Convertible Preferred Stock
On October 10, 2022, we entered into an investment agreement with certain purchasers relating to the issuance of 175,000 shares of Series B Preferred Stock, par value $0.0001 per share, for an aggregate purchase price of $175.0 million, or $1,000 per share (the “Series B Issuance”). The close of the Issuance occurred on October 17, 2022 (the “Series B Closing Date”).
The Series B Preferred Stock ranks senior to the shares of the Company’s common stock with respect to dividend rights and rights on the distribution of assets on any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company. The Preferred Stock has an initial liquidation preference of $1,000 per share, which shall increase by compounded dividends. Holders of the Series B Preferred Stock are entitled to a dividend at the rate of 5.0% per annum, accruing daily and payable quarterly in arrears and subject to certain adjustments, as set forth in the Certificate of Designations. Dividends will be payable in cash, by increasing the amount of liquidation preference (compounded dividends) with respect to a share of Series B Preferred Stock, or any combination thereof, at the sole discretion of the Company. The Series B Preferred Stock had accrued compounded dividends of $1.8 million as of December 31, 2022.
The Series B Preferred Stock will be convertible at the option of the holders into (I) the number of shares of common stock equal to the quotient of (a) the sum of (x) the liquidation preference (reflecting increases for compounded dividends) plus (y) the accrued dividends with respect to each share of Series B Preferred Stock as of the applicable conversion date divided by (b) the conversion price (initially approximately $1.42 per share) as of the applicable conversion date plus (II) cash in lieu of fractional shares, subject to certain anti‑dilution adjustments. At any time after the third anniversary of the Closing Date, if the closing price per share of common stock on the NYSE was greater than 287% of the then effective Conversion Price for (x) each of at least twenty (20) trading days in any period of thirty (30) consecutive trading days and (y) the last trading day immediately before the Company provides the holders with notice of its election to convert all of the Series B Preferred Stock into the relevant number of shares of common stock, the Company may elect to convert all of the Series B Preferred Stock into the relevant number of shares of common stock.
Under the Certificate of Designations, holders of the Series B Preferred Stock are entitled to vote with the holders of the common stock on an as‑converted basis, solely with respect to (i) a change of control transaction (to the extent such change of control transaction is submitted to a vote of the holders of the common stock) or (ii) the issuance of capital stock by the Company in connection with an acquisition by the Company (to the extent such issuance is submitted to a vote of the holders of the common stock), subject to certain restrictions. Holders of the Series B Preferred Stock are entitled to a separate class vote with respect to, among other things, amendments to the Company’s organizational documents that have an adverse effect on the Series B Preferred Stock, authorizations or issuances by the Company of securities that are senior to the Series B Preferred
Bright Health Group, Inc.
Notes to Consolidated Financial Statements
Stock, increases or decreases in the number of authorized shares of Preferred Stock, and issuances of shares of the Series B Preferred Stock after the Closing Date.
At any time following the fifth anniversary of the original issuance date, the Company may redeem all of the Series B Preferred Stock for a per share amount in cash equal to: (i) the sum of (A) the liquidation preference (reflecting increases for compounded dividends) thereof plus (B) all accrued dividends as of the applicable redemption date, multiplied by (ii) (A) 105% if the redemption occurs at any time prior to the seventh anniversary of the Closing Date and (B) 100% if the redemption occurs at any time on or after the seventh anniversary of the Closing Date. Upon certain change of control events involving the Company, the holders of the Series B Preferred Stock may, at such holder’s election, convert their shares of Series B Preferred Stock into common stock at the then‑current conversion price or require the Company to purchase all or a portion of such holder’s shares of Preferred Stock that have not been so converted at a purchase price per share of Preferred Stock, payable in cash, equal to the greater of (I) (A) if the change of control effective date occurs at any time prior to the seventh anniversary of the Closing Date, the product of 105% multiplied by the sum of (x) the liquidation preference of such share of Series B Preferred Stock (reflecting increases for compounded dividends) plus (y) the accrued dividends in respect of such share of Series B Preferred Stock as of the change of control purchase date and (B) if the change of control effective date occurs on or after the seventh anniversary of the Closing Date, the sum of (x) the liquidation preference (reflecting increases for compounded dividends) of such share of Series B Preferred Stock plus (y) the accrued dividends in respect of such share of Series B Preferred Stock as of the change of control purchase date and (II) the consideration that would have been payable in connection with such change of control if such share of Series B Preferred Stock had been converted into common stock immediately prior to the change of control.
We have applied the guidance in ASC 480‑10‑S99‑3A, SEC Staff Announcement: Classification and Measurement of Redeemable Securities, and have therefore classified the Series A and Series B Preferred Stock outside of shareholders’ equity on the Consolidated Balance Sheet because the shares contain liquidation features that are not solely within the Company's control. The Series A and Series B Preferred Stock were recorded at their fair value on the date of issuance net of $4.6 million of issuance costs. The Company has elected not to adjust the carrying value of the Series A and Series B Preferred Stock to the liquidation preference of such shares because of the uncertainty of whether or when such an event would occur. Subsequent adjustments to increase the carrying value to the liquidation preferences will be made only when it becomes probable that such a liquidation event will occur.
2021 Preferred Stock
Post-IPO
Immediately prior to the consummation of our IPO on June 28, 2021, all outstanding shares of our preferred stock were converted to shares of our common stock. During the remainder of 2021, we did not issue any additional preferred stock, andWe had no preferred stock outstanding as of December 31, 2021.
Pre-IPO
In March 2021, the Company issued 1.4 million shares of Series E Stock at a value of $55.1 million as part of the Zipnosis acquisition. During April 2021, the Company issued 2.1 million shares of Series E Stock at a value of $79.8 million as part of the CHP acquisition.
The Company closed the Series E fundraise in October 2020 in which we issued 24.5 million shares of Series E Convertible preferred stock (“Series E Stock”) at a per share price of $20.4177 for an aggregate amount of approximately $500 million. We also issued 0.9 million shares of Series E Stock at a value of $17.8 million as part of the PMA acquisition.
The Company closed the first tranche of the Series D fundraise in December 2019, in which the Company issued 28.2 million shares of Series D Convertible preferred stock (“Series D Stock”) at a per share price of $15.025 for an aggregate amount of approximately $423.8 million. We closed the second tranche of the Series D fundraise in April 2020, in which the Company issued 14.1 million shares of Series D Stock at a per share price of $15.025 for an aggregate amount of approximately $211.2 million. We also issued 5.6 million shares of Series D Stock at a value of $80.0 million and 0.2 million shares at a value of $3.5 million dollars as part of the Brand New Day acquisition and AMD acquisition, respectively.
The Company closed the Series C fundraise in November 2018 in which we issued 26.1 million shares of Series C Convertible Preferred Stock (“Series C Stock”) at a per share price of $7.673 for an aggregate amount of approximately $200 million. The Company also issued an additional 0.6 million shares of Series B Convertible preferred stock in September 2018 at a per share price of $5.0499 for an aggregate amount of approximately $3.0 million.
Prior to 2018, the Company issued Series A and Series B preferred stock. The Series A Stock, Series B Stock, Series C Stock, Series D Stock and Series E Stock are collectively referred to herein as the “Preferred Stock”. The Preferred Stock is classified outside of Shareholders’ Equity (Deficit) on the Consolidated Balance Sheets because the holders of such stock have liquidation rights in the event of a deemed liquidation that, in certain situations, is not solely within our control and would require redemption of the then- outstanding Preferred Stock. The Preferred Stock is not redeemable, except in the event of a deemed liquidation at the liquidation preference amounts.
The detail of our Preferred Stock as of December 31, 2020 is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Preferred Stock Series | Preferred Shares Authorized | | Preferred Shares Issued | | Preferred Shares Outstanding | | Carrying Value | | Liquidation Preference | | Common Stock Issuable Upon Conversion |
| A | 32,439 | | | 32,439 | | | 32,439 | | | $ | 81,690 | | | $ | 82,718 | | | 22,018 | |
| B | 32,278 | | | 32,278 | | | 32,278 | | | 163,000 | | | 163,000 | | | 96,834 | |
| C | 26,065 | | | 26,065 | | | 26,065 | | | 200,000 | | | 200,000 | | | 78,196 | |
| D | 48,101 | | | 48,101 | | | 48,101 | | | 718,500 | | | 722,710 | | | 144,304 | |
| E | 27,424 | | | 25,362 | | | 25,362 | | | 517,825 | | | 517,825 | | | 76,085 | |
| Total | 166,307 | | | 164,245 | | | 164,245 | | | $ | 1,681,015 | | | $ | 1,686,253 | | | 417,437 | |
Bright Health Group, Inc.
Notes to Consolidated Financial Statements
The detail of our preferred stock as of December 31, 2019 is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Preferred Stock Series | Preferred Shares Authorized | | Preferred Shares Issued | | Preferred Shares Outstanding | | Carrying Value | | Liquidation Preference | | Common Stock Issuable Upon Conversion |
| A | 39,778 | | | 32,439 | | | 32,439 | | | $ | 81,690 | | | $ | 82,718 | | | 22,018 | |
| B | 32,278 | | | 32,278 | | | 32,278 | | | 163,000 | | | 163,000 | | | 96,834 | |
| C | 26,065 | | | 26,065 | | | 26,065 | | | 200,000 | | | 200,000 | | | 78,196 | |
| D | 54,757 | | | 28,440 | | | 28,440 | | | 427,300 | | | 427,300 | | | 85,319 | |
| Total | 152,878 | | | 119,222 | | | 119,222 | | | $ | 871,990 | | | $ | 873,018 | | | 282,367 | |
Voting: Each holder of outstanding shares of Preferred Stock votes with the holders of shares of common stock, as a single class, and shall be entitled to the number of votes in respect of their shares of Preferred Stock equal to the number of shares of common stock into which the shares of Preferred Stock held by such holder could be converted as of the record date.
Dividends: The Company shall not declare, pay or set aside any dividends on shares of any other class or series of capital stock of the Company unless the holders of Preferred Stock (firstly, the holders of Series E Preferred Stock, secondly, the holders of Series D Preferred Stock, and thereafter the holders of Series C, Series B and Series A Preferred Stock) then outstanding shall first receive, or simultaneously receive, a dividend on each outstanding share of such series of Preferred Stock in an amount equal to the quotient obtained by dividing (a) the aggregate amount of any such dividend on shares of such other class or series of capital stock of the Company by (b) the total number of shares of Preferred Stock then outstanding.
Liquidation: In the event of a liquidation, voluntary or involuntary, dissolution or winding up of the Company or deemed liquidation event, the holders of the Series E Stock will be entitled to receive (i) an amount per share equal to the applicable Liquidation Price plus (ii) any dividends declared but unpaid (the “Series E Liquidation Amount”). In the event that proceeds are not sufficient to permit payment of the Series E Liquidation Amount, the proceeds will be ratably distributed among the holders of the Series E Stock. After the payment of the Series E Liquidation Amount in full, the holders of the Series D Stock will be entitled to receive (i) an amount per share equal to the applicable Liquidation Price plus (ii) any dividends declared but unpaid (the “Series D Liquidation Amount”). In the event that proceeds are not sufficient to permit payment of the Series D Liquidation Amount, the proceeds will be ratably distributed among the holders of the Series D Stock. After the payment of the Series E Liquidation Amount and Series D Liquidation Amount in full, the holders of the Junior Preferred Stock will be entitled to receive (i) an amount per share equal to the applicable Liquidation Price for each class plus (ii) any dividends declared but unpaid (the “Junior Preferred Liquidation Amount”). In the event that proceeds are not sufficient to permit payment of the Junior Preferred Liquidation Amount, the proceeds will be ratably distributed among the holders of the Junior Preferred Stock.
After payments have been made in full to the holders of Preferred Stock, then, to the extent available, the remaining assets of the Company available for distribution to its stockholders will be distributed ratably among the holders of common stock.
Conversion: Each share of Preferred Stock shall automatically be converted into such number of shares of common stock as is determined by dividing the applicable Liquidation Price (subject to appropriate adjustment from time to time as set forth elsewhere herein), by the applicable Conversion Price then applicable to such shares (such quotient is referred to herein as the “Conversion Rate”), upon the earlier of: (i) the vote or written consent of the Major Investors, and each class of Preferred Stock other than the Series A, and (ii) an initial public offering which results in aggregate net cash proceeds to the Company of not less than $200 million (before underwriting discounts, fees and commissions).
NOTE 11.13. SHARE-BASED COMPENSATION
2016 Incentive Plan
The Company adopted its 2016 Stock Incentive Plan (the “2016 Incentive Plan”) in March 2016. The 2016 Incentive Plan allowed for the Company to grant stock options, RSUs, and RSAs to certain employees, consultants and non-employee directors. The 2016 Incentive Plan was initially adopted on March 25, 2016, and most recently amended in December 2020. Following the effectiveness of our 2021 Omnibus Plan (the “2021 Incentive Plan”), no further awards will be granted under the 2016 Incentive Plan. However, all outstanding awards granted under the 2016 Incentive Plan will continue to be governed by the existing terms of the 2016 Incentive Plan and the applicable award agreements.
2021 Incentive Plan
Bright Health Group, Inc.
Notes to Consolidated Financial Statements
2021 Incentive Plan
The 2021 Incentive Plan was adopted by our Board of Directors on May 21, 2021 and approved by our stockholders on May 25, 2021 and June 5, 2021. The 2021 Incentive Plan allows the Company to grant stock options, RSAs, RSUs, stock appreciation rights, other equity based awards, and cash based incentive awards to certain employees, consultants and non-employee directors. There are 42.073.4 million shares of common stock authorized for issuance under the 2021 Incentive Plan. As of December 31, 2021, a total of 11.318.1 million shares of common stock were available for future issuance under the 2021 Incentive Plan.
Share-Based Compensation Expense
We recognized share-based compensation expense of $109.7 million, $68.4 million, $5.5 million, and $1.9$5.5 million for the years ended December 31, 2022, 2021 2020 and 2019,2020, respectively, which is included in operating costs in the Consolidated Statements of Income (Loss).
Stock Options
The Board of Directors or the Compensation Committee of the Board of Directors determines the exercise price, vesting periods and expiration date at the time of the grant. Stock options granted prior to the third quarter of 2021 generally vest 25% at one year from the grant date, then ratably over the next 36 months with continuous employee service. Stock options granted after the beginning of the third quarter of 2021 generally vest ratably over three years. Option grants generally expire 10 years from the date of grant.
The calculated value of each option award is estimated on the date of grant using a Black- Scholes option valuation model that used the following assumptions for options granted during 2022, 2021 2020 and 2019:2020:
| | | 2021 | | 2020 | | 2019 | | 2022 | | 2021 | | 2020 |
| Risk-free interest rate | Risk-free interest rate | 0.8 | % | | 0.9 | % | | 2.2 | % | Risk-free interest rate | 1.9 | % | | 0.8 | % | | 0.9 | % |
| Expected volatility | Expected volatility | 33.4 | % | | 31.3 | % | | 28.3 | % | Expected volatility | 54.3 | % | | 33.4 | % | | 31.3 | % |
| Expected dividend rate | Expected dividend rate | 0.0 | % | | 0.0 | % | | 0.0 | % | Expected dividend rate | 0.0 | % | | 0.0 | % | | 0.0 | % |
| Forfeiture rate | Forfeiture rate | 14.4 | % | | 14.5 | % | | 14.5 | % | Forfeiture rate | 10.2 | % | | 14.4 | % | | 14.5 | % |
| Expected life in years | Expected life in years | 6.1 | | 6.1 | | 6.1 | Expected life in years | 6.0 | | 6.1 | | 6.1 |
Risk-free interest rates are based on U.S. Treasury yields in effect at the time of grant. Expected volatilities are based on the historical volatility of our publicly traded industry peers. We use historical data to estimate option forfeitures within the valuation model. The expected lives of options granted represent the period of time that the awards granted are expected to be outstanding based on historical exercise patterns.
The activity for the stock options for the year ended December 31, 20212022 is as follows (in thousands, except exercise price and contractual life):
| | | Shares | Weighted-
Average
Exercise
Price | | Weighted-Average
Remaining
Contractual Life
(In Years) | | Aggregate
Intrinsic Value | | Shares | Weighted-
Average
Exercise
Price | | Weighted-Average
Remaining
Contractual Life
(In Years) | | Aggregate
Intrinsic Value |
| Outstanding at January 1, 2021 | 63,925 | | 1.47 | | | 8.7 | | $ | 53,573 | | |
| Outstanding at January 1, 2022 | | Outstanding at January 1, 2022 | 69,244 | | 1.84 | | | 8.2 | | $ | 113,908 | |
| Granted | Granted | 20,648 | | 2.63 | | | Granted | 8,479 | | 1.83 | | |
| Exercised | Exercised | (9,871) | | 1.12 | | | Exercised | (1,232) | | 1.07 | | |
| Forfeited | Forfeited | (5,447) | | 1.80 | | | Forfeited | (10,156) | | 2.05 | | |
| Expired | Expired | (11) | | 1.09 | | | Expired | (2,044) | | 2.02 | | |
| Outstanding at December 31, 2021 | 69,244 | | $ | 1.84 | | | 8.2 | | $ | 113,908 | | |
| Outstanding at December 31, 2022 | | Outstanding at December 31, 2022 | 64,291 | | $ | 1.82 | | | 6.7 | | $ | 82 | |
The weighted-average grant-date fair value of stock options granted during the years ended December 31, 2022, 2021 and 2020, was $0.96, $10.79 and 2019, was $10.79, $0.61 and $0.40,, respectively, per share. The aggregate intrinsic value of stock options (the amount by which the market price of the stock on the date of exercise exceeded the exercise price of the option) exercised during the years ended December 31, 2022, 2021 and 2020, and 2019, was $1.1 million, $21.0 million $2.7 million and $3.7$2.7 million, respectively. At December 31, 2021,
Bright Health Group, Inc.
Notes to Consolidated Financial Statements
2022, there was $141.6$81.6 million of unrecognized compensation expense related to stock options that is expected to be recognized over a weighted-average period of 3.12.1 years.
Restricted Stock Units
RSUs represent the right to receive shares of our common stock at a specified date in the future and generally vest over a three-year period. The fair value of RSUs is determined based on the closing market price of our common stock on the date of grant.
The following table summarizes RSU award activity for the year ended December 31, 20212022 (in thousands, except weighted average grant date fair value):
| | | RSU | | RSU |
| | Number of RSUs | | Weighted Average Grant Date Fair Value | | Number of RSUs | | Weighted Average Grant Date Fair Value |
| Unvested RSUs at January 1, 2021 | — | | $ | — | | |
| Unvested RSUs at January 1, 2022 | | Unvested RSUs at January 1, 2022 | 15,651 | | $ | 3.98 | |
| RSUs granted | RSUs granted | 15,687 | | | 3.99 | | RSUs granted | 30,272 | | | 1.74 | |
| RSUs vested | | RSUs vested | (391) | | | 5.04 | |
| RSUs canceled | RSUs canceled | (36) | | | 9.01 | | RSUs canceled | (7,965) | | | 2.97 | |
| Unvested RSUs at December 31, 2021 | 15,651 | | | $ | 3.98 | | |
| Unvested RSUs at December 31, 2022 | | Unvested RSUs at December 31, 2022 | 37,567 | | | $ | 2.37 | |
We recognized share-based compensation expense related to RSUs of $23.6 million and $1.3 million for the yearyears ended December 31, 2022 and 2021, whichrespectively, and is included in operating costs in the Consolidated Statements of Income (Loss). No share-based compensation expense related to RSUs was recognized as of December 31, 2020. As of December 31, 2021,2022 , there was $47.7$54.7 million of unrecognized compensation expense related to the RSU grants, which is expected to be recognized over a weighted-average period of 2.92.1 years.
Performance-based Restricted Stock Units
In connection with our IPO, our Board of Directors approved the grant of PSUs to members of our executive leadership team. The grant encompasses a total of 14.7 million PSUs, separated into 4four equal tranches, each of which are eligible to vest based on the achievement of predetermined stock price goals and a minimum service period of 3 years. This grant is intended to retain and incentivize our executive leadership to lead the Company to sustained, long-term financial and operational performance. The fair value of the PSUs was determined using a Monte-Carlo simulation.
The following table summarizes PSU award activity for the year ended December 31, 20212022 (in thousands, except weighted average grant date fair value):
| | | PSU | | PSU |
| | Number of PSUs | | Weighted Average Grant Date Fair Value | | Number of PSUs | | Weighted Average Grant Date Fair Value |
| Unvested PSUs at January 1, 2021 | — | | $ | — | | |
| Unvested PSUs at January 1, 2022 | | Unvested PSUs at January 1, 2022 | 14,700 | | $ | 9.30 | |
| PSUs granted | PSUs granted | 14,700 | | | 9.30 | | PSUs granted | — | | | — | |
| PSUs canceled | PSUs canceled | — | | | — | | PSUs canceled | (4,200) | | | 9.30 | |
| Unvested PSUs at December 31, 2021 | 14,700 | | | $ | 9.30 | | |
| Unvested PSUs at December 31, 2022 | | Unvested PSUs at December 31, 2022 | 10,500 | | | $ | 9.30 | |
We recognized share-based compensation expense related to the PSU grant of $34.8 million and $20.5 million for the yearyears ended December 31, 2022 and 2021, whichrespectively, and is included in operating costs in the Consolidated Statements of Income (Loss). No share-based compensation expenses related to RSUs was recognized as of December 31, 2020. At December 31, 2021,2022, there was $99.8$35.1 million of unrecognized compensation expense related to the PSU grant, which is expected to be recognized over a weighted-average period of 2.51.5 years.
Bright Health Group, Inc.
Notes to Consolidated Financial Statements
NOTE 12.14. NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted net loss per share attributable to common stockholders for the years ended December 31 (in thousands, except for per share amounts):
| | | 2021 | | 2020 | | 2019 | | 2022 | | 2021 | | 2020 |
| Net loss | $ | (1,184,862) | | | $ | (248,442) | | | $ | (125,337) | | |
| Loss from continuing operations, net noncontrolling interests and accrued preferred stock dividends | | Loss from continuing operations, net noncontrolling interests and accrued preferred stock dividends | $ | (773,316) | | | $ | (329,607) | | | $ | (161,222) | |
| Loss from discontinued operations | | Loss from discontinued operations | (721,915) | | | (855,255) | | | (87,220) | |
| Net loss attributable to Bright Health Group, Inc. common shareholders | | Net loss attributable to Bright Health Group, Inc. common shareholders | $ | (1,495,231) | | | $ | (1,184,862) | | | $ | (248,442) | |
| Weighted-average number of shares outstanding used to compute net loss per share attributable to common stockholders, basic and diluted | Weighted-average number of shares outstanding used to compute net loss per share attributable to common stockholders, basic and diluted | 392,243 | | | 136,193 | | | 134,486 | | Weighted-average number of shares outstanding used to compute net loss per share attributable to common stockholders, basic and diluted | 629,459 | | | 392,243 | | | 136,193 | |
| Basic and diluted loss per share attributable to Bright Health Group, Inc. common shareholders | | Basic and diluted loss per share attributable to Bright Health Group, Inc. common shareholders |
| Continuing operations | | Continuing operations | $ | (1.23) | | | $ | (0.84) | | | $ | (1.18) | |
| Discontinued operations | | Discontinued operations | $ | (1.15) | | | $ | (2.18) | | | $ | (0.64) | |
| Net loss per share attributable to common stockholders, basic and diluted | Net loss per share attributable to common stockholders, basic and diluted | $ | (3.02) | | | $ | (1.82) | | | $ | (0.93) | | Net loss per share attributable to common stockholders, basic and diluted | $ | (2.38) | | | $ | (3.02) | | | $ | (1.82) | |
The following outstanding shares of potentially dilutive securities were excluded from the computation of diluted net loss per share because including them would have had an anti-dilutive effect for the years ended December 31 (in thousands):
| | | 2021 | | 2020 | | 2019 | | 2022 | | 2021 | | 2020 |
| Redeemable preferred stock | Redeemable preferred stock | — | | | 417,437 | | | 282,367 | | Redeemable preferred stock | 318,531 | | | — | | | 417,437 | |
| Stock options to purchase common stock | Stock options to purchase common stock | 69,244 | | | 63,925 | | | 37,872 | | Stock options to purchase common stock | 64,291 | | | 69,244 | | | 63,925 | |
| Restricted stock units | Restricted stock units | 15,651 | | | — | | | — | | Restricted stock units | 37,567 | | | 15,651 | | | — | |
| Total | Total | 84,895 | | | 481,362 | | | 320,239 | | Total | 420,389 | | | 84,895 | | | 481,362 | |
NOTE 13.15. BENEFIT PLANS
The Company has a 401(k) retirement salary savings plan (“the 401(k) Plan”) for all eligible employees. We made safe harbor nonelective matching contributions equal to 3%100% of the first 2% and 50% of the next 4% of employee compensationcontributions to the 401(k) Plan. The Company’s matching contribution expense was $7.0 million, $4.4 million and $1.9 million for 2022, 2021 and $0.9 million for 2021, 2020, and 2019, respectively, and was included in operating costs in the Consolidated Statements of Income (Loss).
NOTE 14.16. INCOME TAXES
The components of income tax benefitexpense (benefit) for the years ended December 31, 2022, 2021 2020 and 20192020 are as follows (in thousands):
| | | 2021 | | 2020 | | 2019 | | 2022 | | 2021 | | 2020 |
| Current | Current | $ | 84 | | | $ | — | | | $ | — | | Current | $ | 1,648 | | | $ | 84 | | | $ | — | |
| Deferred | Deferred | (26,605) | | | (9,161) | | | — | | Deferred | 2,032 | | | (26,605) | | | (9,161) | |
| Total income tax (benefit) expense | $ | (26,521) | | | $ | (9,161) | | | $ | — | | |
| Total income tax expense (benefit) | | Total income tax expense (benefit) | $ | 3,680 | | | $ | (26,521) | | | $ | (9,161) | |
Bright Health Group, Inc.
Notes to Consolidated Financial Statements
A reconciliation of the statutory tax rate (21%) to the effective income tax rate for the years ended December 31, 2022, 2021 2020 and 2019,2020, is as follows (in thousands):
| | | 2021 | | 2020 | | 2019 | | 2022 | | 2021 | | 2020 |
| Tax benefit at federal statutory rate | Tax benefit at federal statutory rate | $ | (254,391) | | | $ | (52,173) | | | $ | (26,321) | | Tax benefit at federal statutory rate | $ | (153,289) | | | $ | (254,391) | | | $ | (52,173) | |
| Increase (decrease) in income taxes resulting from: | Increase (decrease) in income taxes resulting from: | | Increase (decrease) in income taxes resulting from: | |
| Adjustment to deferred tax valuation allowance | Adjustment to deferred tax valuation allowance | 219,478 | | | 43,012 | | | 26,321 | | Adjustment to deferred tax valuation allowance | 98,695 | | | 219,478 | | | 43,012 | |
| Permanent adjustments - book NCI reversal adjustment | | Permanent adjustments - book NCI reversal adjustment | 20,089 | | | 1,364 | | | — | |
| Permanent adjustments - impairment | | Permanent adjustments - impairment | 17,239 | | | — | | | — | |
| Permanent adjustments - compensation related | Permanent adjustments - compensation related | 13,342 | | | — | | | — | | Permanent adjustments - compensation related | 16,644 | | | 13,342 | | | — | |
| Permanent adjustments | 2,180 | | | — | | | — | | |
| Permanent adjustments - other | | Permanent adjustments - other | 2,520 | | | 816 | | | — | |
| State income taxes, net of federal benefit | State income taxes, net of federal benefit | (9,158) | | | — | | | — | | State income taxes, net of federal benefit | 1,714 | | | (9,158) | | | — | |
| Prior year adjustments | Prior year adjustments | (306) | | | — | | | — | | Prior year adjustments | (57) | | | (306) | | | — | |
| Other, net | Other, net | 2,334 | | | — | | | — | | Other, net | 125 | | | 2,334 | | | — | |
| Income tax benefit | $ | (26,521) | | | $ | (9,161) | | | $ | — | | |
| Income tax expense (benefit) | | Income tax expense (benefit) | $ | 3,680 | | | $ | (26,521) | | | $ | (9,161) | |
| Effective tax rate | Effective tax rate | 2.2 | % | | 3.6 | % | | 0.0 | % | Effective tax rate | (0.5 | %) | | 2.2 | % | | 3.6 | % |
The tax effects of temporary differences related to deferred tax assets and liabilities for the years ended December 31, 2022 and 2021, are as follows (in thousands):
| | | | | | | | | | | |
| 2022 | | 2021 |
| Deferred tax assets: | | | |
| Net operating loss carryforward | $ | 687,867 | | | $ | 364,574 | |
| Premiums received in advance | 536 | | | 2,314 | |
| Accrued salaries and benefits | 39,112 | | | 11,194 | |
| Section 195 startup expenditures | 2,661 | | | 2,164 | |
| Adjustment for noncontrolling interest | — | | | 5,209 | |
| Intangible amortization | 23,427 | | | 2,798 | |
| Transaction costs | 2,255 | | | 1,472 | |
| Depreciation expense | 3,579 | | | 653 | |
| Investment loss | — | | | 232 | |
| Unrealized loss | 15,292 | | | — | |
| Claims Incurred but not Reported (IBNR) | 34,267 | | | 1,994 | |
| Other | 6,186 | | | 1,273 | |
| Total deferred tax assets | 815,182 | | | 393,877 | |
| Less valuation allowance | (729,683) | | | (331,625) | |
| Total deferred tax assets, net valuation allowance | 85,499 | | | 62,252 | |
| Deferred tax liabilities: | | | |
| Prepaid expenses | (11,291) | | | (7,972) | |
| Fixed assets | (458) | | | (458) | |
| Goodwill and intangible assets | (64,336) | | | (38,712) | |
| Unrealized gains | — | | | (16,147) | |
| Adjustment for noncontrolling interest | (3,237) | | | — | |
| Investment income | (9,241) | | | — | |
| Total deferred tax liabilities | (88,563) | | | (63,289) | |
| Net deferred tax liabilities | $ | (3,064) | | | $ | (1,037) | |
Bright Health Group, Inc.
Notes to Consolidated Financial Statements
The tax effects of temporary differences related to deferred tax assets and liabilities for the years ended December 31, 2021 and 2020, are as follows (in thousands):
| | | | | | | | | | | |
| 2021 | | 2020 |
| Deferred tax assets: | | | |
| Net operating loss carryforward | $ | 364,574 | | | $ | 107,002 | |
| Premiums received in advance | 2,314 | | | 1,454 | |
| Accrued salaries and benefits | 11,194 | | | 5,246 | |
| Section 195 startup expenditures | 2,164 | | | 2,164 | |
| Adjustment for noncontrolling interest | 5,209 | | | — | |
| Intangible amortization | 2,798 | | | — | |
| Transaction costs | 1,472 | | | — | |
| Depreciation expense | 653 | | | — | |
| Investment loss | 232 | | | — | |
| Other | 3,268 | | | 1,173 | |
| Total deferred tax assets | 393,878 | | | 117,039 | |
| Less valuation allowance | (331,625) | | | (99,537) | |
| Total deferred tax assets, net valuation allowance | 62,253 | | | 17,502 | |
| Deferred tax liabilities: | | | |
| Prepaid expenses | (7,972) | | | (1,195) | |
| Fixed assets | (458) | | | (628) | |
| Goodwill and intangible assets | (38,712) | | | (15,447) | |
| Unrealized gains | (16,147) | | | (509) | |
| Investment income | — | | | (3) | |
| Total deferred tax liabilities | (63,289) | | | (17,782) | |
| Net deferred tax liabilities | $ | (1,036) | | | $ | (280) | |
Net operating losses (NOLs) were $1.9$5.8 billion and $483.1 million$1.9 billion as of December 31, 20212022 and 2020,2021, respectively. These NOLs start to expire in 2036.
Of the operating loss carryforwards noted, a portion of them may not be available after the application of IRC Section 382 limitations. The IRC Section 382 imposes restrictions on the utilization of various carryforward tax attributes in the event of a change in ownership of the Company, as defined by IRC Section 382. In addition, IRC Section 382 may limit the Company’s built-in items of deduction, including capitalized start-up costs.
In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which those temporary differences become deductible. Based on the level of historical taxable losses and projections of future taxable income (losses) over the periods in which the deferred tax assets can be realized, management currently believes that it is not more likely than not that the Company will be able to realize the benefits of these deductible differences. Accordingly, a valuation allowance has been established to reserve for potential benefits of the remaining carryforwards and tax credits in our consolidated financial statements to reflect the uncertainty of future taxable income required to utilize available tax loss carryforwards and other deferred tax assets.
As of December 31, 2021,2022, there were no unrecognized tax benefits recorded.
The Company files income tax returns in the U.S. federal jurisdiction and all state jurisdictions as necessary. The Company’s U.S. federal returns are no longer subject to income tax examinations for taxable years before 2018.2019. State tax returns for taxable years before 20172018 are no longer subject to examination.
The Company’s effective income tax rate varies from the federal statutory rate of 21% due to state income taxes, changes in the valuation allowance for deferred tax assets and adjustments for permanent differences and purchase accounting.differences. The overall tax benefitexpense for the year ended December 31, 2022 is
Bright Health Group, Inc.
Notes to Consolidated Financial Statements
primarily due to amortization of originating goodwill from asset acquisitions and estimated state income taxes attributable to income earned in separate filing states without state net operating loss carryforwards. In the year ended December 31, 2021, the overall tax benefit was attributable to the release of a valuation allowance in connection with new deferred tax liabilities recorded on identifiable intangibles as part of business combination accounting for BND, Zipnosis, THNM, and CHP stock acquisitions occurring in the year ended December 31, 2021. Similarly, in the year ended December 31, 2020, the overall tax benefit was also attributable to the release of a valuation allowance in connection with new deferred tax liabilities recorded on identifiable intangibles as part of business combination accounting for BND. The Centrum acquisition was treated as an asset acquisition, and accordingly, no deferred tax assets or liabilities were recorded as part of business combination accounting.
NOTE 15.17. COMMITMENTS AND CONTINGENCIES
Leases: We lease our facilities under operating leases that are noncancelable and expire on various dates with options to renew. Operating lease costs were $18.3 million, $13.3 million $5.7 million and $1.9$5.7 million for the years ended December 31, 2022, 2021 2020 and 2019,2020, respectively. The years ended December 31, 20212022 and 20202021 included immaterial short-term lease costs and sublease income. Operating lease costs are includingincluded in operating costs in the Consolidated Statements of Income (Loss).
At December 31, 20212022 and 2020,2021, the assets and liabilities related to operating leases in our Consolidated Balance Sheets are as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Balance Sheet Location | | 2021 | | 2020 |
| Assets | | | | | |
| Operating lease ROU assets | Other non-current assets | | $ | 45,345 | | | $ | 26,965 | |
| Liabilities | | | | | |
| Operating lease liabilities — current | Other current liabilities | | 13,227 | | | 6,569 | |
| Operating lease liabilities — non-current | Other liabilities | | 37,039 | | | 21,851 | |
| Total lease liabilities | | | $ | 50,266 | | | $ | 28,420 | |
Supplemental cash flow and noncash information related to our operating leases was as follows (in thousands):
| | | | | | | | | | | |
| 2021 | | 2020 |
| Operating cash flows from operating leases | $ | 16,616 | | $ | 6,131 |
| ROU assets obtained in exchange for new lease liabilities | 14,932 | | 7,793 |
| ROU assets obtained from acquisitions | 11,956 | | 8,392 |
| Weighted-average remaining lease term (in years) | 5.2 | | 5.6 |
| Weighted-average discount rate | 6.0% | | 6.0% |
At December 31, 2021, future minimum annual lease payments under all noncancelable operating leases are as follows (in thousands):
| | | | | |
| Minimum Lease
Payments |
| Years ending December 31: | |
| 2022 | $ | 13,649 | |
| 2023 | 12,038 | |
| 2024 | 10,688 | |
| 2025 | 7,956 | |
| 2026 | 5,864 | |
| Thereafter | 8,868 | |
| Undiscounted future minimum payments | 59,063 | |
| Imputed interest | (8,797) | |
| Total reported lease liability | $ | 50,266 | |
| | | | | | | | | | | | | | | | | |
| Balance Sheet Location | | 2022 | | 2021 |
| Assets | | | | | |
| Operating lease ROU assets | Other non-current assets | | $ | 39,066 | | | $ | 45,345 | |
| Liabilities | | | | | |
| Operating lease liabilities — current | Other current liabilities | | 12,660 | | | 13,227 | |
| Operating lease liabilities — noncurrent | Other liabilities | | 33,451 | | | 37,039 | |
| Total lease liabilities | | | $ | 46,111 | | | $ | 50,266 | |
Bright Health Group, Inc.
Notes to Consolidated Financial Statements
Supplemental cash flow and noncash information related to our operating leases was as follows (in thousands):
| | | | | | | | | | | |
| 2022 | | 2021 |
| Operating cash flows from operating leases | $ | 20,385 | | | $ | 16,616 | |
| ROU assets obtained in exchange for new lease liabilities | 7,417 | | | 14,932 | |
| ROU assets obtained from acquisitions | — | | | 11,956 | |
| Weighted-average remaining lease term (in years) | 5.0 | | 5.2 |
| Weighted-average discount rate | 6.0 | % | | 6.0 | % |
At December 31, 2022, future minimum annual lease payments under all noncancelable operating leases are as follows (in thousands):
| | | | | |
| Minimum Lease Payments |
| Years ending December 31: | |
| 2023 | $ | 13,067 | |
| 2024 | 11,842 | |
| 2025 | 9,242 | |
| 2026 | 7,271 | |
| 2027 | 4,780 | |
| Thereafter | 7,636 | |
| Undiscounted future minimum payments | 53,838 | |
| Imputed interest | (7,727) | |
| Total reported lease liability | $ | 46,111 | |
Legal proceedings: In the normal course of business, the Companywe could be involved in various legal proceedings such as, but not limited to, the following: lawsuits alleging negligence in care or general liability, violation of regulatory bodies’ rules and regulations, or violation of federal and/or state laws. Where appropriate,
On January 6, 2022, a putative securities class action lawsuit was filed against us and certain of our officers and directors in the Eastern District of New York. The case is captioned Marquez v. Bright Health Group, Inc. et al., 1:22-cv-00101 (E.D.N.Y.). The lawsuit alleges, among other things, that we make accrualsmade materially false and misleading statements regarding our business, operations, and compliance policies, which in turn adversely affected our stock price. An amended complaint was filed on June 24, 2022, which expands on the allegations in the original complaint and alleges a putative class period of June 24, 2021 through March 1, 2022. The amended complaint also adds as defendants the underwriters of our initial public offering. The Company has served a motion to dismiss the amended complaint, which has not yet been ruled on by the court.
We intend to vigorously defend the Company in the above actions, but there can be no assurance that we will be successful in any defense.
By letter dated January 28, 2022, we received a demand from a purported stockholder to inspect our books and records pursuant to Delaware law. The demand sought information related to the December 6, 2021 Investment Agreement that the Company entered into with NEA and Cigna. The Company and the stockholder’s counsel executed a confidentiality agreement, and we produced certain books and records in response to the demand. On June 3, 2022, the purported stockholder filed a putative class action complaint against us and our Board of Directors alleging that the standstill provisions and certain transfer restrictions in the Investment Agreement breached fiduciary duties to stockholders. The case is captioned Berger v. Adkins et al., 2022-0487 (Del. Ch.). The complaint sought declaratory and injunctive relief, and an award of attorneys’ fees, but did not allege damages. The Company settled this matter in the fourth quarter of 2022 and is negotiating the amount of attorneys’ fees to be included in the settlement. We have accrued a liability of $0.8 million in relation to this matter.
Based on our assessment of the facts underlying the claims and the degree to which we intend to defend the Company in these matters, which are reflected in the consolidated financial statements. However, there are cases where liability is not probable orother than as set forth above, the amount or range of reasonably possible losses, if any, cannot be reasonably estimated and, therefore, accrualsestimated. As a
Bright Health Group, Inc.
Notes to Consolidated Financial Statements
result, other than as set forth above, we have not been made. We provide disclosureaccrued for any potential loss as of matters where we believe it is reasonably possible the impact may be material to our consolidated financial statements. At December 31, 2021 and 2020, there2022 for these actions. There were no material known contingent liabilities.liabilities as of December 31, 2021.
Other commitments: As of December 31, 2022, we had $46.1 million outstanding, undrawn letters of credit under the Credit Agreement. Further to the undrawn letters of credit under the Credit Agreement, we had an additional $7.5 million of unused letters of credit as of December 31, 2022.
Restricted capital and surplus: Our regulated insurance legal entities are required by statute to meet and maintain a minimum level of capital as stated in applicable state regulations, such as risk-based capital requirements. These balances are monitored regularly to ensure compliance with these regulations. Our regulated subsidiaries had statutory capital and surplus of $398.5$55.0 million and $235.8$88.3 million as of December 31, 20212022 and 2020,2021, respectively. The estimated statutory capital and surplus required to satisfy these regulatory requirements was $290.0$63.1 million and $106.3$33.3 million as of December 31, 2022 and 2021, respectively. We were out of compliance with the minimum level for one of our regulated insurance legal entities of our continuing operations, and 2020, respectively.have since contributed additional capital to remediate the deficiency.
The amount of ordinary dividends that may be paid out of the regulated legal entities’ unassigned surplus during any given period is subject to certain restrictions as specified by state statutes, which generally require prior-year net income or sufficient statutory capital and surplus. The regulated legal entities paid two dividends during 2021, and did not pay any dividends during 20202022, and paid two dividends during 2021 to the parent holding company.
NOTE 16.18. SEGMENTS AND GEOGRAPHIC INFORMATION
Factors used to determine our reportable segments include the nature of operating activities, economic characteristics, existence of separate senior management teams and the type of information used by the Company’s chief operating decision maker (“CODM”) to evaluate its results of operations. We have identified 3three operating segments based on our primary product and service offerings: Bright HealthCare, - Commercial,formerly Medicare Advantage, and Consumer Care, formerly NeueHealth, within our continuing operations and Bright HealthCare - MA and NeueHealth. We have aggregated– Commercial within our commercial and MA operating segments into the Bright HealthCare reportable segment.discontinued operations.
The following is a description of the types of products and services from which our 2the two reportable segments of our continuing operations derive their revenues:
Bright HealthCare: Our delegated senior managed care business that partners with a tight group of aligned providers in California. Our healthcare financing and distribution business focused on serving aging and underserved populations with unmet clinical needs through a Fully-Aligned Care Model. As of December 31, 2022, Bright HealthCare delivers simple, personal, and affordable solutions to integrate the consumer into Bright Health’s alignment model. Bright HealthCare currently aggregates and delivers healthcare benefits to consumers through its various offerings, serving consumers across multiple product lines in 14 states and 99 markets. We also participate in a number of specialized plans and recently began offering employer group plans.
Bright HealthCare’s customers include commercial health plans across 11 states, as well asincludes MA products in 11in 6 states, which serve over 125,000 lives and generally focus on higher risk, special needs, or other traditionally underserved populations.
NeueHealth:Consumer Care: Our healthcare enablement and technologyvalue-driven care delivery business NeueHealth, is developing the next generation, integrated healthcare system. NeueHealththat manages risk in partnership with external payors, Consumer Care, aims to significantly reducesreduce the friction and current lack of coordination between payors and providers to enable a truly consumer-centric healthcare experience. NeueHealth worksby delivering on our Fully-Aligned Care Model with care provider partners andmultiple payors. Our Consumer Care business delivers high-quality virtual and in-person clinical care through ourits approximately 74 owned primary care clinics within itsan integrated care delivery system. In addition toThrough these risk-bearing clinics and our directly owned clinics, NeueHealth managesaffiliated network of care for additional affiliated clinics. NeueHealth receivesproviders, Consumer Care maintains over 579,000 unique patient relationships as of December 31, 2022, approximately 530,000 of which are served through value-based arrangements, across multiple payors. Through 2022, Consumer Care received network rental fees from our discontinued Bright HealthCare – Commercial segment for the delivery of NeueHealth’sConsumer Care’s Care Partner and network services. In addition, NeueHealth contractsConsumer Care contracted directly with Bright HealthCare – Commercial to provide care through its managed and affiliated clinics. Other NeueHealthConsumer Care customers include external payors, third party administrators, affiliated providers and direct-to-government programs. Beginning in 2023, our discontinued Bright HealthCare – Commercial segment will no longer be a customer of the Consumer Care business with external payors becoming the primary customers of the segment.
The Company’s accounting policies for reportable segment operations are consistent with those described in Note 2, Summary of Significant Accounting Policies.Transactions between reportable segments principally consist of care management and local care delivery provided by NeueHealthConsumer Care to Bright HealthCare. We utilize operating income (loss) before income taxes as the profitability metric for our reportable segments.
As a percentage of our total consolidated revenues, premium revenues from CMS were 32%, 40% and 13% for the years ended December 31, 2021, 2020 and 2019, respectively, which are included in our Bright HealthCare segment. For all periods presented, all of our long-lived assets were located in the United States, and all revenues were earned in the United States.
Bright Health Group, Inc.
Notes to Consolidated Financial Statements
The following tables present the reportable segment financial information for the years ended December 31, 2022, 2021 and 2020 (in thousands):
| | Year Ended December 31, 2021 | Bright HealthCare | | NeueHealth | | Eliminations | | Consolidated | |
| Year Ended December 31, 2022 | | Year Ended December 31, 2022 | Bright HealthCare | | Consumer Care | | Corporate & Eliminations | | Consolidated |
| Premium revenue | Premium revenue | $ | 3,809,794 | | | $ | 92,920 | | | $ | — | | | $ | 3,902,714 | | Premium revenue | $ | 1,652,045 | | | $ | 112,904 | | | $ | — | | | $ | 1,764,949 | |
| Direct Contracting revenue | | Direct Contracting revenue | — | | | 654,087 | | | — | | | 654,087 | |
| Service revenue | Service revenue | 103 | | | 42,598 | | | — | | | 42,701 | | Service revenue | — | | | 48,013 | | | — | | | 48,013 | |
| Investment income | Investment income | 3,739 | | | 80,235 | | | — | | | 83,974 | | Investment income | 410 | | | (55,429) | | | — | | | (55,019) | |
| Total unaffiliated revenue | Total unaffiliated revenue | 3,813,636 | | | 215,753 | | | — | | | 4,029,389 | | Total unaffiliated revenue | 1,652,455 | | | 759,575 | | | — | | | 2,412,030 | |
| Affiliated revenue | Affiliated revenue | — | | | 277,426 | | | (277,426) | | | — | | Affiliated revenue | — | | | 1,029,032 | | | (1,029,032) | | | — | |
| Total segment revenue | Total segment revenue | 3,813,636 | | | 493,179 | | | (277,426) | | | 4,029,389 | | Total segment revenue | 1,652,455 | | | 1,788,607 | | | (1,029,032) | | | 2,412,030 | |
| Operating loss | Operating loss | (1,111,171) | | | (86,985) | | | — | | | (1,198,156) | | Operating loss | (173,834) | | | (315,744) | | | (132,670) | | | (622,248) | |
| Depreciation and amortization | Depreciation and amortization | $ | 17,068 | | | $ | 18,416 | | | $ | — | | | $ | 35,484 | | Depreciation and amortization | $ | 17,702 | | | $ | 24,252 | | | $ | 8,476 | | | $ | 50,430 | |
| Goodwill Impairment | | Goodwill Impairment | 70,017 | | | 1,208 | | | — | | | 71,225 | |
| Intangible Assets Impairment | | Intangible Assets Impairment | — | | | 42,611 | | | — | | | 42,611 | |
| Restructuring charges | | Restructuring charges | 445 | | | 2,116 | | | 29,178 | | | 31,739 | |
| | Year Ended December 31, 2020 | Bright HealthCare | | NeueHealth | | Eliminations | | Consolidated | |
| Year Ended December 31, 2021 | | Year Ended December 31, 2021 | Bright HealthCare | | Consumer Care | | Corporate & Eliminations | | Consolidated |
| Premium revenue | Premium revenue | $ | 1,172,545 | | | $ | 7,793 | | | $ | — | | | $ | 1,180,338 | | Premium revenue | $ | 1,297,273 | | | $ | 93,057 | | | $ | — | | | $ | 1,390,330 | |
| Service revenue | Service revenue | — | | | 18,514 | | | — | | | 18,514 | | Service revenue | — | | | 42,469 | | | — | | | 42,469 | |
| Investment income | Investment income | 8,468 | | | — | | | — | | | 8,468 | | Investment income | (80) | | | 80,314 | | | — | | | 80,234 | |
| Total unaffiliated revenue | Total unaffiliated revenue | 1,181,013 | | | 26,307 | | | — | | | 1,207,320 | | Total unaffiliated revenue | 1,297,193 | | | 215,840 | | | — | | | 1,513,033 | |
| Affiliated revenue | Affiliated revenue | — | | | 10,840 | | | (10,840) | | | — | | Affiliated revenue | — | | | 245,334 | | | (245,334) | | | — | |
| Total segment revenue | Total segment revenue | 1,181,013 | | | 37,147 | | | (10,840) | | | 1,207,320 | | Total segment revenue | 1,297,193 | | | 461,174 | | | (245,334) | | | 1,513,033 | |
| Operating loss | Operating loss | (248,896) | | | (8,707) | | | — | | | (257,603) | | Operating loss | (169,107) | | | (114,921) | | | (59,599) | | | (343,627) | |
| Depreciation and amortization | Depreciation and amortization | $ | 6,394 | | | $ | 1,895 | | | $ | — | | | $ | 8,289 | | Depreciation and amortization | $ | 14,245 | | | $ | 18,333 | | | $ | 2,471 | | | $ | 35,049 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2020 | Bright HealthCare | | Consumer Care | | Corporate & Eliminations | | Consolidated |
| Premium revenue | $ | 480,112 | | | $ | 7,793 | | | $ | — | | | $ | 487,905 | |
| Service revenue | — | | | 18,514 | | | — | | | 18,514 | |
| Investment income | 8,468 | | | — | | | — | | | 8,468 | |
| Total unaffiliated revenue | 488,580 | | | 26,307 | | | — | | | 514,887 | |
| Affiliated revenue | — | | | 10,840 | | | (10,840) | | | — | |
| Total segment revenue | 488,580 | | | 37,147 | | | (10,840) | | | 514,887 | |
| Operating loss | (43,634) | | | (8,707) | | | (118,042) | | | (170,383) | |
| Depreciation and amortization | $ | 1,477 | | | $ | 1,895 | | | $ | 4,917 | | | $ | 8,289 | |
We do not include asset information by reportable segment in the reporting provided to the CODM. Our NeueHealth segment was created in 2020 with our acquisition of AMD on December 31, 2019 and the establishment of our Bright Health Networks service. As such, all activity included in the Consolidated Statements of Income (Loss) for the year ended December 31, 2019 related to our Bright HealthCare reportable segment.
NOTE 17.19. REDEEMABLE NONCONTROLLING INTEREST
As part of the PMA acquisition, we entered into a put/call agreement with respect to the equity interests in PMA held by the controlling interest holder. The call options allow for the Company to purchase the 38% noncontrolling interest equity beginning on the fifth anniversary of the transaction date and each subsequent anniversary thereafter, or under certain other accelerating events as defined in the agreement, solely at the Company’s discretion. The put option allows the noncontrolling interest holder the ability to cause the Company to purchase their noncontrolling equity interest beginning on the seventh anniversary of the transaction date and each subsequent anniversary thereafter.
Bright Health Group, Inc.
Notes to Consolidated Financial Statements
Based on the nature of the put option redemption feature, which is outside the control of the Company, the noncontrolling interests are classified as redeemable in the accompanying Consolidated Balance Sheets. The put option redemption feature that is outside the control of the Company is settled at a multiple of EBITDA, which is an other than fair value settlement amount. As such, we will make a measurement adjustment when the put option redemption price exceeds the carrying amount as calculated under ASC 810, Consolidation.
As part of the Centrum acquisition, we entered into put/call agreements with respect to the equity interests in Centrum held by the controlling interest holder. The call options allow for the Company to purchase the 25% noncontrolling interest equity over time beginning on September 30, 2022, or under certain other accelerating events as defined in the agreement, solely at the Company’s discretion. The put options allow the noncontrolling interest holder the ability to cause the Company to purchase their noncontrolling equity interest on consistent terms with the call options.
Based on the nature of the put option redemption feature, which is outside the control of the Company, each of these noncontrolling interests are classified as redeemable in the accompanying Consolidated Balance Sheets at December 31, 2021.2022. The put option redemption feature that is outside the control of the Company is settled at a multiple of EBITDA, which is an
Bright Health Group, Inc.
Notes to Consolidated Financial Statements
other than fair value settlement amount. As such, we will make a measurement adjustment when the put option redemption price exceeds the carrying amount as calculated under ASC 810, Consolidation.
The following table provides details of our redeemable noncontrolling interest activity for the years ended December 31, 20212022 and 20202021 (in thousands):
| | | | | |
| Redeemable Noncontrolling Interest |
Balance at January 1, 2020 | $ | — | |
Acquisitions | 39,600 | |
| Balance at December 31, 2020 | $ | 39,600 | |
| Acquisitions | 82,310 | |
| Loss attributable to noncontrolling interest | (29,263) | |
| Measurement adjustment | 35,760 | |
| Balance at December 31, 2021 | $ | 128,407 | |
| Earnings attributable to noncontrolling interest | 29,883 | |
| Distributions | (4,311) | |
| Measurement adjustment | 65,779 | |
| Balance at December 31, 2022 | $ | 219,758 | |
NOTE 20. DIRECT CONTRACTING
Beginning January 1, 2022, we began participating in CMS’ DC Model with two DCEs participating through the global risk arrangement and assuming full risk for the total cost of care of aligned beneficiaries. As part of our participation in the DC Model, we are guaranteeing the performance of our care network of participating and preferred providers. The intention of the DC Model is to enhance the quality of care for Medicare FFS beneficiaries while reducing the administrative burden, supporting a focus on complex, chronically ill patients, and encouraging physician organizations that have not typically participated in Medicare FFS programs to serve Medicare FFS beneficiaries. CMS redesigned the DC Model and renamed the model the ACO Realizing Equity, Access, and Community Health (REACH) Model (“ACO REACH Model”) effective January 1, 2023.
Key components of the financial agreement for the DC Model include:
•Performance Year Benchmark: The target amount for Medicare expenditures on covered services (Medicare Part A and B) furnished to a DCE’s aligned beneficiaries during a performance year. The Performance Year Benchmark will be compared to the DCE’s performance year expenditures. This comparison will be used to calculate shared savings and shared losses. The Performance Year Benchmark is established at the beginning of the performance year utilizing prospective trend estimates and is subject to retrospective trend adjustments, if warranted, before the Financial Reconciliation.
Bright Health Group, Inc.
Notes to Consolidated Financial Statements
•Risk-Sharing Arrangements: Used in determining the percent of savings and losses that DCEs are eligible to receive as shared savings or may be required to repay as shared losses.
•Financial Reconciliation: The process by which CMS determines shared savings or shared losses by comparing the calculated total benchmark expenditures for a given DCE’s aligned population to the actual expenditures of that DCE’s aligned beneficiaries over the course of a performance year that includes various risk-mitigation options such as stop-loss reinsurance and risk corridors.
•Risk-Mitigation Options: Both DCEs elected to participate in a “stop-loss arrangement” for the current performance year offered by CMS. The “stop-loss arrangement” is designed to reduce the financial uncertainty associated with high-cost expenditures of individual beneficiaries. Additionally, CMS has created a mandatory risk corridor program that allocates the DCE’s shared savings and losses in bands of percentage thresholds, after a deviation of greater than 25.0% of the Performance Year Benchmark.
Performance Guarantees
Through our participation in the DC Model, we determined that our arrangements with the providers of our DCE beneficiaries require us to guarantee their performance to CMS. At the beginning of the performance year, we recognized the Direct Contracting performance year obligation and receivable for the duration of the performance year. This receivable and obligation are measured at an amount equivalent to the Performance Year Benchmark per CMS that is representative of the expected Medicare expenditures for beneficiaries aligned to our DCEs. As we fulfill our obligation, we amortize the guarantee on a straight-line basis for the amount that represents the completed portion of the performance obligation. The receivable is reduced as we receive payments from CMS for in-network claims or receive CMS reporting detailing out-of-network claims paid by CMS on behalf of our aligned beneficiaries. At the end of each reporting period, we estimate both in-network claims and out-of-network claims incurred by beneficiaries aligned to our DCEs but not yet reported and record a reserve for the estimated amount which is included in medical costs payable on the Consolidated Balance Sheets. For each performance year, the final consideration due to the DCEs by CMS (shared savings) or the consideration due to CMS by the DCEs (shared loss) is reconciled in the year following the performance year. On a quarterly basis CMS adjusts the Performance Year Benchmark based upon revised trend assumptions and changes in attributed membership. CMS will also estimate the shared savings or loss for the DCE on a quarterly basis based upon this revised Performance Year Benchmark, changes to membership, payments made to the DCE for in-network claims, out-of-network claims paid on behalf of the DCE and various other assumptions including incurred but not reported reserves. The Performance Year Benchmark is our best estimate of our obligation as we are unable to estimate the potential shared savings or loss due to the “stop-loss arrangement”, risk corridor components of the agreement, and a number of variables including but not limited to risk ratings and benchmark trends that could have an inestimable impact on estimated future payments.
There were no financial statement impacts of the performance guarantee at December 31, 2021 or for the years ended December 31, 2021 or 2020. The tables below include the financial statement impacts of the performance guarantee at December 31, 2022 and for the year then ended (in thousands):
| | | | | |
| December 31, 2022 |
Direct contracting performance year receivable(1)(2) | $ | 99,181 | |
Direct contracting performance year obligation(2) | — | |
(1) We estimate there to be $97.1 million in in-network and out-of-network claims incurred by beneficiaries aligned to our DCE but not reported as of December 31, 2022; this is included in medical costs payable on the Consolidated Balance Sheet.
(2) Our CMS benchmark was reduced by $71.6 million during the year ended December 31, 2022.
Bright Health Group, Inc.
Notes to Consolidated Financial Statements
| | | | | |
| 2022 |
| Amortization of Direct contracting performance year receivable | $ | 554,905 | |
| Amortization of Direct contracting performance year obligation | 654,087 | |
| Direct contracting revenue | 654,087 | |
NOTE 21. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Correction of prior period financial statements
Subsequent to the issuance of the condensed consolidated financial statements for the quarter ended September 30, 2022, we identified an error in the accounting for gross versus net revenue recognition conclusion from certain value-based care arrangements. As a result, Premium revenue and Medical costs have been reduced by $23.3 million, $30.4 million for the quarters ended March 31 and June 30, 2022, respectively. There is no impact on Operating loss or Net loss. There was no impact to the condensed consolidated balance sheets, condensed consolidated statements of comprehensive income (loss), condensed consolidated statements of changes in redeemable preferred stock and shareholders’ equity (deficit) and condensed consolidated statements of cash flows.
For the quarter ended September 30, 2022 we also identified an error in the data used to account for RAF, as a result of this error as well as the previously noted error in accounting for gross versus net revenue recognition conclusion from certain value-based care arrangements, Premium revenue decreased $49.9 million, Medical costs decreased $39.2 million, and Operating loss and Net loss increased $10.8 million. As of September 30, 2022 there were corresponding decreases of $17.9 million in Accounts receivable and $7.2 million in medical costs payable on the condensed consolidated balance sheets. The impact on net loss, accounts receivable and medical costs payable had corresponding impacts on condensed consolidated statements of comprehensive income (loss), condensed consolidated statements of changes in redeemable preferred stock and shareholders’ equity (deficit) and condensed consolidated statements of cash flows.
The Company determined that the correction of these errors was not material to the condensed consolidated financial statements.
The following tables provide details of our quarterly financial information for the years ended December 31, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| | | | | | | |
| Operating Revenues | $ | 644,559 | | | $ | 599,222 | | | $ | 598,875 | | | $ | 569,374 | |
| Operating Income (Loss) from continuing operations, net of tax | (77,062) | | | (182,648) | | | (200,790) | | | (177,465) | |
| Operating Income (Loss) from discontinued operations, net of tax | (17,115) | | | (155,134) | | | (69,339) | | | (480,327) | |
| Less: Income attributable to non-controlling interests | (1,413) | | | (36,528) | | | (46,711) | | | (11,012) | |
| Less: Preferred Stock Dividends Accrued | (8,938) | | | (9,461) | | | (9,684) | | | (11,604) | |
| Income (Loss) attributable to Bright Health Group, Inc. common shareholders | $ | (104,528) | | | $ | (383,771) | | | $ | (326,524) | | | $ | (680,408) | |
| | | | | | | |
| Basic and diluted loss per share attributable to Bright Health Group, Inc. common shareholders | | |
| Continuing operations | $ | (0.14) | | | $ | (0.36) | | | $ | (0.41) | | | $ | (0.32) | |
| Discontinued operations | (0.03) | | | (0.25) | | | (0.11) | | | (0.76) | |
| Basic and diluted loss per share | (0.17) | | | (0.61) | | | (0.52) | | | (1.08) | |
Bright Health Group, Inc.
Notes to Consolidated Financial Statements
| | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| Operating Revenues | $ | 252,748 | | | $ | 415,105 | | | $ | 464,957 | | | $ | 380,223 | |
| Operating Income (Loss) from continuing operations, net of tax | (47,620) | | | (29,442) | | | (76,643) | | | (169,405) | |
| Operating Income (Loss) from discontinued operations, net of tax | 23,075 | | | (14,281) | | | (217,288) | | | (646,761) | |
| Less: Income attributable to non-controlling interests | (617) | | | (795) | | | (3,942) | | | (1,143) | |
| Less: Preferred Stock Dividends Accrued | — | | | — | | | — | | | — | |
| Income (Loss) attributable to Bright Health Group, Inc. common shareholders | $ | (25,162) | | | $ | (44,518) | | | $ | (297,873) | | | $ | (817,309) | |
| | | | | | | |
| Basic and diluted loss per share attributable to Bright Health Group, Inc. common shareholders | | |
| Continuing operations | $ | (0.34) | | | $ | (0.19) | | | $ | (0.13) | | | $ | (0.27) | |
| Discontinued operations | 0.16 | | | (0.09) | | | (0.34) | | | (1.03) | |
| Basic and diluted loss per share | (0.18) | | | (0.28) | | | (0.47) | | | (1.30) | |
NOTE 18.22. SUBSEQUENT EVENTS
On December 6, 2021 we entered into an Investment Agreement with a subsidiary of Cigna Corporation and an affiliate of New Enterprise Associates (the “Purchasers”), relating to the issuance and sale by the Company to the Purchasers of 750,000 shares of the Company’s Series A Convertible Perpetual Preferred Stock, par value $0.0001 per share, for an aggregate purchase price of $750.0 million, or $1,000 per share (the “Issuance”). On January 3, 2022, the Issuance was consummated. We used2023, we granted 27.1 million RSUs that will vest in two years. On March 6, 2023 we granted 26.8 million RSUs that will vest ratably over a portion of the proceeds to repay in full our outstanding borrowings under our revolving credit facility on January 4, 2022.
On January 6, 2022, a putative securities class action lawsuit was filed against us and certain of our officers and directors in the Eastern District of New York. The case is captioned Marquez v. Bright Health Group, Inc. et al., 1:22-cv-00101 (E.D.N.Y.). The lawsuit alleges, among other things, that we made materially false and misleading statements regarding our business, operations, and compliance policies, which in turn adversely affected our stock price. No specific amounts of damages have been alleged in the putative securities class action lawsuit. We expect an amended complaint will be filed later this year in this action. Such amended complaint could assert additional or broader claims than the current complaint. We intend to vigorously defend this action; but there can be no assurance that we will be successful in any defense. Based on our assessment of the facts underlying the claims and the degree to which we intend to defend our company in these matters, the amount or range of reasonably possible losses, if any, cannot be estimated.three-year period.
We have evaluated the events and transactions that have occurred through March 18, 2022, the date at which the consolidated financial statements were issued. Other than those described above, no additional events or transactions have occurred that may require adjustment to the consolidated financial statements or disclosures.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
ITEM 9A. CONTROLS AND PROCEDURES
Limitations of Effectiveness of Disclosure Controls and Procedures
In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated, as of the end of the period covered by this Annual Report on Form 10-K,December 31, 2022, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2021,2022, our disclosure controls and procedures were not effective due to thea material weakness in our internal control over financial reporting, as described below. In light of this fact, our management has performed additional analyses, reconciliations, and other post-closing procedures and has concluded that, notwithstanding the material weaknesses in our internal control over financial reporting, the consolidated financial statements for the periods covered by and included in this Annual Report on Form 10-K fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with U.S. GAAP.
Management's Annual Report on Internal Control over Financial Reporting
This Annual Report on Form 10-K does not include a report of management's assessment regardingOur management is responsible for establishing and maintaining adequate internal control over financial reporting, or an attestation reportas defined in 13a-15(f) of the Exchange Act and based upon the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“the COSO framework”).
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have conducted an evaluation of the effectiveness of our internal control over financial reporting based on the COSO framework. Based on an evaluation under these criteria, and the existence of the material weakness described below, management determined that we did not maintain effective internal control over financial reporting as of December 31, 2022. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.
As of December 31, 2022, management identified a material weakness in the control activities component of internal control over financial reporting as defined by the COSO framework. Specifically, multiple deficiencies constituted a material weakness, in the aggregate, relating to deployment of control activities through internal control policies that establish what is expected and procedures that put policies into action.
The following factors contributed to the identified material weakness in the Company’s control activities component. The Company announced in the fourth quarter of 2022 plans to exit the IFP business effective December 31, 2022. The Company decreased its focus on performing certain control activities in accordance with policies and procedures. This resulted in our inability to fully validate remediation of the material weakness identified in the prior year for claims pertaining to our IFP business, due to new controls and processes that were implemented that did not have a sufficient period of time to operate effectively. These IFP processes and significant accounts in the fourth quarter of 2022 include, but are not limited to, revenue and membership, enrollment and eligibility, and claims processing.
The effectiveness of our internal control over financial reporting as of December 31, 2022 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, due to a transition period established by the rules of the SEC for newly public companies.as stated in their report included in this Annual Report.
Changes
Change in Internal Control Overover Financial Reporting
Other than as described below, there were no changes in our internal control over financial reporting identified(as defined in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of13a-15(f) and 15d-15(f) under the Exchange Act during the quarter ended December 31, 20212022 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. As described below, we have implemented changes
Remediation Efforts to our internal control over financial reporting to remediateAddress the material weakness identified below.Material Weaknesses
Newly Identified Material Weakness
ForIn response to the year ended December 31, 2021, we identified a material weakness in our internal control over financial reporting. A material weakness is a deficiency, or a combinationreporting identified as of deficiencies, inDecember 31, 2021, our management, with the oversight of the audit committee of our Board of Directors, has dedicated resources and efforts to improve our internal control over financial reporting such that there is a reasonable possibility that aand has taken action to remediate the material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.weakness. The material weakness identified related to claims pertaining to our IFP business, which were processed by a third-party service provider. The claims were processed inaccurately according to terms of provider contracts and/or related fee schedules, or did not consistently go through claims re-pricing, where necessary, prior to payment.
Management is strengtheningIn response to this material weakness, we focused on enhancing our pre-pay and post-pay claims quality assurance procedures and audit processes for IFP claimsdata mining capabilities. These capabilities have enabled early identification of overpayment issues so the issues can be addressed timely. Additionally, our provider data improvement initiatives have enhanced the accuracy of our provider rosters, determination of in-network versus out-of-network status, and alignment of providers to validate claims are adjudicated with our third-party service provider according to agreed-upon contract terms and current fee schedules (including any changes toappropriate contracts and fee schedules). Management is also strengthening controls to ensure complete and accurate loadingschedules. Finally, additional front-end claims review procedures implemented in the first quarter of fiscal year 2022 have resulted in improved claims payment accuracy, based on fee schedules and processesagreed-upon with providers. While the Company has made significant progress in its remediation efforts, a material weakness remains relating to re-pricethe Company’s IFP claimsbusiness as of December 31, 2022, as noted above in Management's Annual Report on a more timely basis (e.g., prior to claims payment).
Internal Control over Financial Reporting.
Remediation Efforts on Previously Identified Material Weaknesses
ForIn response to the year ended December 31, 2020, we identified a material weakness in our internal control over financial reporting. The material weaknessreporting identified related to Brand New Day’s internal control over financial reporting due to: (1) lack of documentation or reconciliation controls supporting key account balances, and (2) limited Brand New Day resources and competencies dedicated to performing the appropriate level of diligence around complex accounting and estimated balances.
In response to this material weakness, we have taken a number of remediation steps to enhance the control environment at Brand New Day, including actions to further centralize accounting and other financial responsibilities, enhance controls, procedures and documentation supporting key accounts and processes, and hire additional resources to oversee accounting, reporting and other activities occurring within Brand New Day. Additionally, we migrated Brand New Day’s financial accounting and reporting activities over to Bright Health’s legacy enterprise resource planning system in the third quarter of 2021.
In addition, we identified a material weakness in our internal controls over financial reporting related to the valuation of our common stock underlying stock options grants during the three months ended March 31, 2021, as well as the valuation of our Series E preferred stock issued as equity consideration to the seller in the Zipnosis acquisition. The material weakness was the result of a control design deficiency related to the appropriate review of the methodology and inputs used in the valuation of our common stock, which resulted in using a combined market and income approach to value our common stock instead of utilizing market-only approach given the potential for an IPO. This resulted in a material misstatement of our operating costs, net loss, goodwill and redeemable preferred stock and the related financial disclosures as of and for the three months ended March 31, 2021, which we restated accordingly.
In response to this material weakness, we have implemented a control to ensure the proper valuation methodology is utilized for determining the fair value of equity-based awards. We also implemented a review of the significant inputs used in the valuation, including a review to ensure the common stock fair value used in the valuations is consistent with the market price of our common stock as traded in the public market following our IPO.
We believe our efforts resulted in the remediation of the previously identified material weaknesses as of December 31, 2021. While these material weaknesses have been remediated, we cannot assure you that we have identified all2022, our management, with the oversight of the audit committee of our existing material weaknesses, or that we will not in the future have additional material weaknesses. We have dedicated resources to the design, implementation, documentation and testingBoard of our internal control over financial reporting. WeDirectors, will continue to evaluate the effectiveness ofdedicate resources and efforts to improve our internal control over financial reporting and will continue to make changes that we believetake actions to remediate the material weakness, including the reinforcement of the importance of performing control activities, assigning responsibility to perform those control activities timely, consistently and comprehensively, and addressing issues of non-compliance timely. This will strengthen ouralso include performing control activities over the run out of the IFP business in 2023 due to the discontinuation of the IFP business effective December 31, 2022.
Once the applicable controls have operated for a sufficient period of time, management will test the design and operating effectiveness of the controls to determine if the material weakness has been remediated.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Bright Health Group, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting to ensure that our financial statements continue to be fairly statedof Bright Health Group, Inc. and subsidiaries (the “Company”) as of December 31, 2022, based on criteria established in all material respects.
Neither we nor our independent registered public accounting firm has performed an evaluation issued by the Committee of Sponsoring Organizations of the effectivenessTreadway Commission (COSO). In our opinion, because of ourthe effect of the material weakness identified below on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting during any periodas of December 31, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the provisionsstandards of the Sarbanes-Oxley Act. In lightPublic Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2022, of the material weaknesses that were previously identified as a result of the limited procedures performed, we believe that it is possible that, had weCompany and our independent registered public accounting firm performedreport dated March 16, 2023, expressed an evaluation of the effectiveness of ourunqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting in accordance with the provisionsand for its assessment of the Sarbanes-Oxley Act, additional material weaknesses or significant deficiencies may have been identified.
Limitations on Effectivenesseffectiveness of Controls and Procedures
Our management, including our principal executive officer and principal financial officer, do not expect that our disclosure controls and procedures or our internal control over financial reporting, will prevent all errorsincluded in the accompanying Management’s Annual Report on Internal Control over Financial Reporting as of December 31, 2022. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and all fraud. A control system, no matter how well designedare required to be independent with respect to the Company in accordance with the U.S. federal securities laws and operated, can provide only reasonable, not absolute, assurance that the objectivesapplicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control system are met. Further,over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The designreasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any systemevaluation of controls is also based in part upon certain assumptions abouteffectiveness to future periods are subject to the likelihood of future events, and there can be no assurancerisk that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Due to inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Material Weaknesses
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management's assessment: The Company identified a material weakness in the control activities component of internal
control over financial reporting as defined by the COSO framework. Specifically, multiple deficiencies constituted a material weakness, in the aggregate, relating to deploying control activities through internal control policies that establish what is expected and procedures that put policies into action. The material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the consolidated financial statements as of and for the year ended December 31, 2022, of the Company, and this report does not affect our report on such financial statements.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
March 16, 2023
ITEM 9B. OTHER INFORMATION
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information regarding our executive officers is provided in Part I under the heading “Information About our Executive Officers.”
BOARD OF DIRECTORS AND CORPORATE GOVERNANCE
Board of Directors
Our business and affairs are managed under the direction of our Board. Our Board currently consists of 12 members. Our amended and restated certificate of incorporation provides that our Board will initially be classified and will transition to an annually elected Board through a gradual phase-out process. At the 2024 annual meeting of stockholders and each annual meeting of stockholders thereafter, all directors shall be elected to hold office for a one-year term expiring at the next annual meeting of stockholders. Pursuant to such procedures, effective as of the conclusion of the 2024 annual meeting of stockholders, the Board will no longer be classified and directors shall no longer be divided into three classes.
Presented below is information with respect to our four Class II director nominees to be elected as directors at this year's Annual Meeting, our Class I directors and our Class III directors. The information presented below for each director includes the specific experience, qualifications, attributes and skills that led us to the conclusion that such director should serve on the Board.
Class II Directors – Terms expire in 2023
Linda Gooden, age 69, has served as a director since November 2020. Ms. Gooden has served over 30 years in various senior leadership roles with Lockheed Martin Corporation (“Lockheed”), most recently as Executive Vice President, Information Systems & Global Solutions (“IS&GS”) from 2007 to 2013. Under her leadership as Executive Vice President of IS&GS, Lockheed expanded systems integration, security and transformation capabilities beyond government customers to international and commercial markets. She also served as Lockheed’s Deputy Executive Vice President, Information and Technology Services from October to December 2006 and its President, Information Technology from 1997 to December 2006. In her role as President of Lockheed’s IT division, Ms. Gooden founded and grew the business over a 10-year period to become a multi-billion dollar business. In the past eight years, Ms. Gooden has served on the Board of General Motors Company, The Home Depot, Inc., Automatic Data Processing, Inc., WGL Holdings, Inc. and Washington Gas & Light Company, a subsidiary of Alta Gas.
We believe that Ms. Gooden contributes to our Board her executive and boardroom experience at numerous publicly-held companies and her extensive experience with information technology and information security matters.
Jeffery R. Immelt, age 67, has served as a director since April 2020. Since 2018, Mr. Immelt has served as a venture partner on the technology and healthcare investing teams for New Enterprise Associates, a venture capital firm. From 2001 to 2017, Mr. Immelt served as the Chairman and Chief Executive Officer of General Electric Company. Mr. Immelt joined General Electric in 1982 and held various roles within the company before assuming his position as Chief Executive Officer. Mr. Immelt currently serves on the boards of Collective Health, Inc., Twilio Inc., where he is also a member of the compensation committee, Desktop Metal, Inc., where he is also a member of the audit committee, and Bloom Energy Cooperation, where he is also a member of the audit committee.
We believe Mr. Immelt contributes to our Board his executive and boardroom experience at numerous publicly-held companies.
Manuel Kadre, age 57, has served as a director since November 2020. Mr. Kadre is Chairman and Chief Executive Officer of MBB Auto Group, a premium luxury retail automotive group with a number of dealerships in the Northeast, a position he has held since 2012. Prior to his current role, Mr. Kadre was the Chief Executive Officer of Gold Coast Caribbean Importers, LLC from July 2009 until 2014. From 1995 until July 2009, Mr. Kadre served in various roles, including President, Vice President, General Counsel and Secretary, for CC1 Companies, Inc., a distributor of beverage products in markets throughout the Caribbean. Mr. Kadre is currently a member of the board of directors of Florida Free Trade Area of the Americas, Miami International Airport Blue Ribbon Aviation Panel and Florida Self-Insurers Guaranty Association, and is Chairman of the United Way Alexis de Tocqueville Society. Mr. Kadre serves as Chairman of the Board of Republic Services, Inc. and serves on the boards of directors of The Home Depot, Inc., Mednax Services, Inc. and the Board of Trustees of the University of Miami.
We believe Mr. Kadre contributes to our Board his significant chief executive and senior management experience leading large companies, as well as his experience as a director of companies, including service as chairman and lead independent director of three public companies.
Stephen Kraus, age 46, has served as a director since March 2016. Mr. Kraus has served as an investment professional at Bessemer Venture Partners, a venture capital firm, since 2004 and has been a partner since 2011. Mr. Kraus currently serves on the boards of directors of various privately held companies. Mr. Kraus also serves as an advisor to various organizations, including but not limited to Boston Children’s Hospital and the Harvard Business School's Center for Entrepreneurship, and on the investment committees of various organizations, including but not limited to Blue Cross Blue Shield of Massachusetts.
We believe Mr. Kraus is qualified to serve on our Board due to his experience as a venture capitalist and his service on the boards of directors of other healthcare companies.
Class I Directors - Terms expire in 2024
Naomi Allen, age 49, has served as a director since February 2020. Since October 2019, Ms. Allen has served as the Chief Executive Officer and Co-founder of Brightline, Inc. From April 2018 until October 2019, Ms. Allen served as the Chief Growth Officer at Livongo Health, Inc., overseeing key strategic growth initiatives. Prior to Livongo Health, Inc., Ms. Allen was a category designer at Play Bigger from February 2017 to April 2018. Prior to joining Play Bigger, Ms. Allen was on sabbatical from December 2015 until February 2017, and also held various executive positions at Castlight Health, Inc. from April 2008 until December 2015.
We believe Ms. Allen contributes to our Board because of her experience advising healthcare companies as an executive officer.
Matthew G. Manders, age 61, has served as a director since March 2022. Mr. Manders served as the president of Cigna Corporation’s (“Cigna”) Government and Solutions organization from January 2021 through December 2021, building on his successful 30-plus-year career with the company. From November 2018 to January 2021, Mr. Manders served as the President of Cigna’s Strategy and Solutions organization. Prior those roles, he served as Cigna’s President of Government & Individual Programs & Group Insurance from February 2017 to November 2017, and as President US Markets from June 2014 to February 2017. Mr. Manders has served as a Trustee of Eisenhower Fellowships since 2013, is the Chair of its Administration and Finance Committee, and is a member of its Audit, Compensation and Executive Committees.
We believe Mr. Manders contributes to our Board because of his financial expertise and his experience supervising healthcare companies as an executive officer.
Adair Newhall, age 44, has served as a director since May 2017. Mr. Newhall is a Partner at StepStone Group, which acquired Greenspring Associates in 2021, where he served in various position since January 2015. Prior to Greenspring Associates, Mr. Newhall served as a principal at Domain Associates, LLC from August 2009 until December 2014. Prior to joining Domain Associates, LLC, Mr. Newhall worked in the business development group at Esprit Pharma, Inc., where he assisted with multiple product acquisitions and the subsequent sale of the company to Allergan plc. Before that, Mr. Newhall worked at ESP Pharma, Inc., which was acquired by PDL BioPharma, Inc. Mr. Newhall currently serves on the Board of Crown Laboratories, Inc. and is a board observer at Aetion, Inc. and Paladina Health LLC.
We believe Mr. Newhall contributes to our Board through his experience investing in and advising healthcare companies, as well as his experience as a director of companies.
Andrew Slavitt, age 56, has served as a director since August 2021. He previously served as a director of the Company form April 2018 until January 2021, when he was appointed as President Biden’s White House Senior Advisor for the COVID-19 response effort. Mr. Slavitt is the founder and General Partner of Town Hall Ventures, which invests in healthcare innovations in vulnerable communities, a position he has held since 2018. Prior to that, he served as the Acting Administrator for the Centers for Medicare & Medicaid Services from 2015 to 2017, and as Group Executive Vice President of Optum, UnitedHealth Group's health services platform, from 2012 to 2014. From 2006 through 2011, Mr. Slavitt was the CEO of OptumInsight (formerly Ingenix), a UnitedHealth Group subsidiary. He serves on the Board of Directors of private companies Cityblock Health, Inc. and Equality Health, LLC, is co-chair of the Future of Healthcare Initiative at the Bipartisan Policy Center, and previously served as a director of Capella Education Company, an education services company (formerly Nasdaq: CPLA). Mr. Slavitt received his MBA from Harvard Business School and Bachelor of Arts and Bachelor of Science degrees from the University of Pennsylvania.
Mr. Slavitt brings to our Board of Directors extensive executive and leadership experience in the healthcare industry. His leadership at Centers for Medicare & Medicaid Services and within the healthcare insurance industry provides a valuable perspective to our Board.
Class III Directors - Terms expire in 2024
Robert J. Sheehy, age 65, is one of our co-founders and served as Chief Executive Officer from September 2015 until April 2020, and served as our Executive Chairman from April 2020 to May 2021. From 1986 to 2008, Mr. Sheehy held various executive positions at UnitedHealth Group, Inc., including as Chief Executive Officer of UnitedHealthcare, Inc. Mr. Sheehy currently serves on the Board of Directors for Radiology Partners, Inc. and the University of Michigan Health System. Following UnitedHealth Group, Inc. Mr. Sheehy served as an Operating Partner at Genstar Capital LLC, an Executive Partner at Flare Capital Partner, and a Strategic Advisor at Cimarron Healthcare Capital. Mr. Sheehy also continues to serve as an Executive Partner at Flare Capital Partners.
We believe that Mr. Sheehy brings leadership and a wealth of experience in healthcare to the Board, as well as knowledge of regulations and issues facing healthcare providers and medical companies.
G. Mike Mikan, age 51, has served as our Chief Executive Officer and President since April 2020. Mr. Mikan joined as our Vice Chairman and President in January 2019. Prior to joining Bright Health, Mr. Mikan served as Chairman and Chief Executive Officer of Shot-Rock Capital, LLC, a private investment firm, from January 2015 until December 2018. From January 2013 until December 2014, he served as President of ESL Investments, Inc. Mr. Mikan served as the Interim Chief Executive Officer of Best Buy Co., Inc. from April 2012 until September 2012. From November 1998 through February 2012, he served in various executive positions at UnitedHealth Group, Inc., including as Chief Financial Officer and as Chief Executive Officer of UnitedHealth Group’s Optum subsidiary. Mr. Mikan serves as a director of AutoNation, Inc.
We believe that Mr. Mikan contributes to our Board his management experience and expertise in the healthcare sector.
Kedrick D. Adkins Jr., age 70, has served as a director since February 2020. Mr. Adkins served as the Chief Financial Officer for the Mayo Clinic from 2014 through his retirement at the end of 2017. He also served as the President of Integrated Services of Trinity Health Care from 2007 to 2014. Prior to his service at Trinity Health Care, Mr. Adkins had a 30-year tenure at Accenture, a global management consulting firm. Mr. Adkins is a certified public accountant. Mr. Adkins currently serves as a director and member of the audit committee for ProAssurance Corporation. Mr. Adkins currently serves on the Advisory Board of Welsh, Carson, Anderson & Stowe, an investment firm specializing in healthcare and technology, and the board of directors for CHRISTUS Health, the University of Michigan Hospital System, and Medical Memory, a medical technology startup.
We believe Mr. Adkins contributes to our Board his experience as an executive at major healthcare companies as well as his experience in boardrooms for healthcare companies.
Mohamad Makhzoumi, age 43, has served as a director since March 2016. Mr. Makhzoumi is a General Partner and Head of Global Healthcare at New Enterprise Associates, where he has served in various positions since 2005. Prior to joining New Enterprise Associates, Mr. Makhzoumi served as an associate at Summit Partners, L.P. and as an analyst at UBS Group AG, concentrating on leveraged finance and sponsor-led transactions. Mr. Makhzoumi currently serves on the board of directors of private companies Aetion, Inc., American Pathology Partners, Inc., Collective Health, Inc., Comprehensive Pharmacy Services, Inc., Nuvolo Technologies Corp, and Radiology Partners, Inc.
We believe Mr. Makhzoumi contributes to our Board his extensive experience investing in and advising healthcare companies, as well as his experience as a director of companies.
Corporate Governance
Our business and affairs are managed under the direction of our Board. Our Board currently consists of 12 directors divided into three classes. The Board and its committees meet throughout the year on a set schedule and hold special meetings and act by written resolution from time to time, as appropriate. For the year ended December 31, 2022, our Board held ten meetings. Our Audit Committee, Compensation and Human Capital Committee (“Compensation Committee”), and Nominating and Corporate Governance Committees held four, four, and one meeting(s), respectively, during 2022. In 2022, each director attended at least 75% of the meetings of the Board during such director’s tenure and substantially all of the total number of meetings held by any of the committees of the Board on which the director served. Members of our Board are encouraged to attend our annual meetings of stockholders.
Board Leadership Structure
Our Board is led by Mr. Sheehy, the Chairman of the Board. Mr. Kadre, our Lead Director, provides effective independent oversight of management. Our Board selects its Chairperson and the Company’s Chief Executive Officer in the manner it considers in the best interests of the Company, and thus has no policy with respect to the separation of the offices of Chairperson and Chief Executive Officer. The Board believes that this issue should be considered periodically as part of the succession planning process, however, and that it is in the best interests of our company to make a determination regarding this issue each time it appoints a new Chief Executive Officer. Accordingly, the Board may determine that it is appropriate in the future to combine the roles of Chairperson and Chief Executive Officer.
When the Chairperson of the Board is not independent, our Board elects a Lead Director. The Lead Director helps coordinate the efforts of the independent and non-management directors in the interest of ensuring that objective judgment is brought to bear on sensitive issues involving the management of the Company and, in particular, the performance of senior management. The Lead Director presides at Board meetings at which the Chairperson is not present and, among other things, collaborates with our Chief Executive Officer on Board matters, and acts as a liaison between the independent directors, on one hand, and stockholders or the Chairperson, on the other.
Role of Board of Directors in Risk Oversight
The Board has extensive involvement in the oversight of risk management related to us and our business and accomplishes this oversight through the regular reporting by the Audit Committee. Through its regular meetings with management, including the finance, legal and internal audit functions, the Audit Committee reviews and discusses all significant areas of our business and summarizes for the Board all areas of risk and the appropriate mitigating factors.
Committees of the Board of Directors
The standing committees of our Board consist of an Audit Committee, a Compensation and Human Capital Committee and a Nominating and Corporate Governance Committee.
Our Chief Executive Officer and other executive officers regularly report to the non-executive directors and the Audit, the Compensation, and the Nominating and Corporate Governance Committee to ensure effective and efficient oversight of our activities and to assist in proper risk management and the ongoing evaluation of management controls. The internal audit function reports functionally and administratively to our Chief Financial Officer and directly to the Audit Committee. We believe that the leadership structure of our Board provides appropriate risk oversight of our activities.
Audit Committee
The members of our Audit Committee are Kedrick Adkins, who serves as the Chair, Manuel Kadre and Linda Gooden, each of whom qualifies as an independent director under the NYSE corporate governance standards and independence requirements of Rule 10A-3 of the Exchange Act. Our Board has determined that Kedrick D. Adkins, Manuel Kadre and Linda Gooden each qualifies as an “audit committee financial expert” as such term is defined in Item 407(d)(5) of Regulation S-K.
The purpose of the Audit Committee is to prepare the audit committee report required by the SEC to be included in our proxy statement and to assist our Board in overseeing and monitoring (1) the quality and integrity of our financial statements, including oversight of our accounting and financial reporting processes, internal controls and financial statement audits, (2) our compliance with legal and regulatory requirements, (3) our independent registered public accounting firm’s qualifications, performance and independence, (4) our corporate compliance program, including our code of conduct and anti-corruption compliance policy, and investigating possible violations thereunder, (5) our risk management policies and procedures and (6) the performance of our internal audit function.
Our Board has adopted a written charter for the Audit Committee, which is available on our website investors.brighthealthgroup.com.
Compensation and Human Capital Committee
The members of our Compensation Committee are Jeffery R. Immelt, who serves as the Chair, Mohamad Makhzoumi and Manuel Kadre, each of whom meets the NYSE’s independence requirements applicable to compensation committee members.
The purpose of the Compensation Committee is to assist the Board in discharging its responsibilities relating to, among other things, (1) setting our compensation program and the compensation of our executive officers and directors, (2) administering our incentive and equity-based compensation plans and (3) preparing the Compensation Committee report required to be included in our proxy statement under the rules and regulations of the SEC.
Our Board has adopted a written charter for the Compensation Committee, which is available on our website investors.brighthealthgroup.com.
Compensation Committee Interlocks and Insider Participation
None of our current or former executive officers or employees currently serves, or has served during our last completed fiscal year, as a member of our Compensation Committee and, during that period, none of our executive officers served as a member of the compensation committee (or other committee serving an equivalent function) of any other entity whose executive officers served as a member of our Board. No member of our Compensation Committee has a material interest in any transaction described in the section titled “Certain Relationships and Related Party Transactions” below.
Nominating and Corporate Governance Committee
The members of our Nominating and Corporate Governance Committee are Manuel Kadre, who serves as the Chair, Stephen Kraus and Naomi Allen, each of whom qualifies as an independent director.
The purpose of our Nominating and Corporate Governance Committee is to assist our Board in discharging its responsibilities relating to (1) identifying individuals qualified to become new board members, consistent with criteria approved by the Board, (2) reviewing the qualifications of incumbent directors to determine whether to recommend them for reelection and selecting, or recommending that the Board select, the director nominees for the next annual meeting of stockholders, (3) identifying board members qualified to fill vacancies on any committee of the Board and recommending that the Board appoint the identified member or members to the applicable committee, (4) reviewing and recommending to the Board corporate governance principles applicable to us, (5) overseeing the evaluation of the Board and management and (6) handling such other matters that are specifically delegated to the committee by the Board from time to time.
Our Board has adopted a written charter for the Nominating and Corporate Governance Committee, which is available on our website investors.brighthealthgroup.com.
Background and Experience of Directors; Board Diversity
In accordance with our Corporate Governance Guidelines, the Nominating and Corporate Governance Committee is responsible for reviewing the qualifications of potential director candidates and recommending for the Board’s selection those candidates to be nominated for election to the Board, subject to any obligations and procedures governing the nomination of directors to the Board that may be set forth in any stockholders agreement or investor rights agreement to which the Company is party.
The Nominating and Corporate Governance Committee is expected to consider (a) minimum individual qualifications, including strength of character, mature judgment, industry knowledge or experience and an ability to work collegially with the other members of the Board and (b) all other factors it considers appropriate, which may include age, diversity of background, existing commitments to other businesses, service on other boards of directors or similar governing bodies of public or private companies or committees thereof, potential conflicts of interest with other pursuits, legal considerations such as antitrust issues, corporate governance background, financial and accounting background, executive compensation background and the size, composition and combined expertise of the existing Board.
The Board is expected to monitor the mix of specific experience, qualifications and skills of its directors in order to assure that the Board, as a whole, has the necessary tools to perform its oversight function effectively in light of the Company’s business and structure.
Stockholder Communications Policy
Stockholders and other interested parties may communicate directly and confidentially with the Board or the independent directors by sending a letter addressed to the intended recipients, c/o Corporate Secretary, 8000 Norman Center Drive, Suite 900, Minneapolis, Minnesota 55437. The secretary will review such communications and, if appropriate, forward them only to the intended recipients. Communications that do not relate to the responsibilities of the intended recipients as
directors of Bright Health (such as communications that are commercial or frivolous in nature) will not be forwarded. In addition, communications that appear to be unduly hostile, intimidating, threatening, illegal or similarly inappropriate will not be forwarded.
Stockholder Recommendations of Director Candidates
Stockholders who would like to recommend a director candidate for consideration by our Nominating and Corporate Governance Committee must send notice to Bright Health Group, Inc., Attn: Corporate Secretary, 8000 Norman Center Drive, Suite 900, Minneapolis, Minnesota 55437, by registered, certified or express mail, and provide us with a brief biographical sketch of the recommended candidate, a document indicating the recommended candidate’s willingness to serve if elected, and evidence of the stock ownership of the person recommending such candidate. The Nominating and Corporate Governance Committee or its chair will then consider the recommended director candidate in accordance with the same criteria applied to other director candidates, including those described in our corporate governance guidelines and the charter of the Nominating and Corporate Governance Committee.
Hedging Transactions
Pursuant to our Insider Trading Policy, we prohibit our employees, directors and officers from engaging in any transactions (including prepaid variable forward contracts, equity swaps, collars and exchange funds) that are designed to hedge or offset any decrease in the market value of the Company’s equity securities. Additionally, directors, officers and other employees are prohibited from holding our securities in a margin account or otherwise pledging our securities as collateral for a loan without first obtaining pre-clearance from our General Counsel or his or her designee. None of our executive officers or directors pledged any of our securities during 2022.
Code of Conduct
We have adopted a codeCode of ethicsConduct applicable to our principalall employees, executive officerofficers and other senior financial officers, who include our principal financial officer, principal accounting officer, controllerdirectors that addresses legal and persons performing similar functions.ethical issues that may be encountered in carrying out their duties and responsibilities, including the requirement to report any conduct they believe to be a violation of the Code of Conduct. The code of ethics, entitled Code of Conduct is posted under “Governance”available on the Investor Relations section of our website, at www.brighthealthgroup.com.investors.brighthealthgroup.com. For information about how to obtain the Code of Conduct, see Part I, Item 1, “Business.” WeIf our Board were to amend our Code of Conduct or waive any provision of our Code of Conduct for a director or executive officer of the Company, we intend to satisfy the SEC’sour disclosure requirements regarding amendmentsobligations with respect to any such waiver or waivers of, the code of ethics for our senior financial officersamendment by posting such information on our website indicatedset forth above.
The remaining information required by this item will be included under the headings “Corporate Governance” and “Proposal 1 – Election of Directors” in our definitive proxy statement for our 2022 Annual Meeting of Shareholders, and such required information is incorporated herein by reference.Delinquent Section 16 (a) Reports
Section 16(a) of the Exchange Act requires our executive officers, directors and persons who beneficially own more than 10% of our common stock to file initial reports of ownership and reports of changes in ownership with the SEC. Such executive officers, directors and greater than 10% beneficial owners are required by the regulations of the SEC to furnish us with copies of all Section 16(a) reports they file.
Based solely upon a review of copies of reports on Forms 3 and 4 and amendments thereto filed electronically with the SEC during, and reports on Form 5 and amendments thereto filed electronically with the SEC with respect to, the year ended December 31, 2022, and based further upon written representations received by us with respect to the need to file reports on Form 5, no persons filed late reports required by Section 16(a) of the Exchange Act during the year ended December 31, 2022 other than (i) a late Form 4 for Jeffrey Scherman for a transaction on March 7, 2022 and (ii) a late Form 4 for Jeffrey Scherman for a transaction on May 9, 2022.
ITEM 11. EXECUTIVE AND DIRECTOR COMPENSATION
EXECUTIVE COMPENSATION
COMPENSATION DISCUSSION AND ANALYSIS
This Compensation Discussion and Analysis provides an overview of our executive compensation philosophy, the overall objectives of our executive compensation program, and each material element of compensation for the fiscal year ended December 31, 2022, which we also refer to as 2022.
We have provided this information for each person who served as our principal executive officer, our principal financial officer and our two most highly compensated executive officers employed in 2022 (other than our principal executive officers and our principal financial officer), all of whom we refer to collectively as our Named Executive Officers. We have also included this information for two former executive officers who would have been included based on their compensation for 2022 if they had continued to serve as executive officers at the end of the fiscal year.
Our Named Executive Officers for 2022 were:
•G. Mike Mikan, President and Chief Executive Officer
•Cathy Smith, Chief Financial and Administrative Officer
•Jeff Cook, Chief Operating Officer
•Jeff Craig, General Counsel
•Michael Carson, Former Chief Executive Officer-Bright HealthCare
•Sam Srivastava, Former Chief Executive Officer – NeueHealth
The information requiredCompensation Philosophy and Objectives
As a healthcare company, we operate in responsea highly competitive business environment, which is characterized by rapidly changing market requirements and the emergence of new market entrants. To succeed in this environment, we must continually develop and refine new and existing products and services and demonstrate an ability to quickly identify and capitalize on new business opportunities. We recognize that our success in this item will be included underenvironment is in large part dependent on our ability to attract and retain talented employees. Therefore, we maintain, and modify as necessary, an executive compensation and benefits program designed to attract, retain, and incentivize a highly talented, deeply qualified, and committed team of executive officers to share our vision and desire to work toward these goals.
We endeavor to create and maintain compensation programs that reward performance and serve to align the headings “Executiveinterests of our executive officers and Director Compensation,” “Executive Compensation –stockholders. Pursuant to our compensation philosophy, we seek to attract, retain and engage the best talent by:
Fostering a pay-for-performance culture, where compensation is directly linked to company and individual goal achievement;
Providing “Total Rewards” (which includes compensation, benefits, work-life balance, recognition, and perquisites) that are competitive with the external market and reward performance that supports our mission, vision and values (Be Brave. Be Brilliant. Be Accountable. Be Inclusive. Be Collaborative.);
Awarding equity compensation that supports sustained performance and growth and aligns with the long-term interests of our stockholders; and
Ensuring equal pay for work of equal value, so that differences in pay are based on factors such as job, experience, education, performance and location.
Our Compensation Committee Interlockscontinues to be guided by this philosophy. We intend to continue to evaluate our philosophy and Insider Participation”objectives and “Compensationcompensation programs as circumstances require, and, at a minimum, our Compensation Committee Report”will review our executive compensation philosophy and objectives annually.
Process for Setting Compensation
Role of Compensation Committee and Management Team
The Compensation Committee is responsible for overseeing our executive compensation program, as well as determining and approving the compensation of our Chief Executive Officer and other Named Executive Officers.
Annual Compensation Review. The Compensation Committee reviews the compensation levels for our executive officers annually. For executive officers other than our Chief Executive Officer, our Compensation Committee considers input from our Chief Executive Officer regarding such executive officers’ responsibilities, performance and compensation. Specifically, our Chief Executive Officer recommends changes to base salary, target levels for cash incentive awards, incentive and equity awards and advises the Compensation Committee regarding the executive compensation program’s ability to attract, retain and motivate talented executive officers. These recommendations reflect compensation levels that our Chief Executive Officer believes are qualitatively commensurate with an executive officer’s individual qualifications, experience, responsibility level, functional role, knowledge, skills, and individual performance, as well as the performance of our business. The Compensation Committee considers our Chief Executive Officer’s recommendations but may adjust components of compensation up or down as it determines in its discretion. The Compensation Committee makes the final compensation and equity decisions for all the executive officers.
Role of Compensation Consultant
The Compensation Committee engages Willis Towers Watson (“WTW”) as its executive compensation consultant to advise on the establishment and review of our definitive proxy statementcompensation programs, related policies and marketplace compensation trends. The Compensation Committee reviewed the independence of WTW under NYSE and SEC rules. Based on its review and information provided by WTW regarding the provision of its services, fees, policies and procedures, presence (if any) of any conflicts of interest, ownership of Bright Health stock, and other relevant factors, the Compensation Committee concluded that the work of WTW has not raised any conflicts of interest and deemed them to be an independent advisor to the Compensation Committee. The executive compensation consultant reports directly to the Committee and does not provide any additional services to management.
Use of Competitive Data
For purposes of comparing our executive compensation against the competitive market, the Compensation Committee established market pay references using multiple third party published surveys including:
•Equilar Top 25 Executive Compensation Survey
•Mercer IHP and Executive Compensation Survey
•Radford Technology and Life Sciences Survey
For each Named Executive Officer, the Compensation Committee sets annual base salary and the target level of annual and long-term incentives, with the intention that such target amounts, together with base salary, provide market competitive total annual target compensation. The target compensations levels for our Named Executive Officers are not intended to align with a specific percentile of the market surveys. These comparisons are part of the total mix of information used to evaluate base salary, short-term and long-term incentive compensation for each Names Executive Officer.
The Compensation Committee, with input from our independent compensation consultant, did not establish a peer group for 2022, but intends to again evaluate whether an appropriate executive officer compensation peer group can be established for any market-based analysis conducted during 2023.
Executive Compensation Practices
We incorporated the following executive compensation and governance principles when making decisions on compensation for the Named Executive Officers in 2022, which we believe are based on industry leading practices. We avoid practices that do not align with the goals of the Company and our stockholders.
| | | | | |
| What We Do | What We Don’t Do |
•Pay-for-performance: A significant portion of the total compensation for our Named Executive Officers is designed to encourage focus on both our short-term and long-term strategic, financial, and operational success and to reward outstanding individual performance. •Align incentives with stockholders: Our executive compensation program is designed to focus our Named Executive Officers on our key strategic, financial and operational goals that will translate into long-term value-creation for our stockholders. •Limited perquisites: We provide limited, reasonable perquisites that we believe are consistent with our overall compensation philosophy. •Clawback policy: We maintain a robust clawback policy providing the Compensation Committee the ability to cover incentive compensation from any Named Executive Officer in the event of certain restatements of financial results. •Change in control: We require a ‘double trigger’ of both a change in control of the Company and resulting loss of employment. •Ownership guidelines: We maintain stock ownership guidelines in order to increase alignment with stockholders. | •No supplemental retirement plans: We do not maintain any supplemental retirement plans. •No tax gross-ups: We do not provide tax gross-ups under our change in control provisions or deferred compensation programs. •Repricing: We prohibit re-pricing of underwater stock options without stockholder approval. •No hedging or pledging: We prohibit Named Executive Officers from hedging or pledging Company stock to discourage misalignment between our executives and the Company and its stockholders. •No uncapped incentive plans: All of our incentive plans have maximum payouts to avoid excessive risk taking. |
Say on Pay
At the 2022 Annual Meeting of Shareholders,Stockholders, 97% of the votes were cast in favor of the advisory vote to approve executive compensation. The Compensation Committee considers the results of the Say on Pay advisory vote from the previous year when reviewing the elements of our executive compensation program and determined not to make changes to the compensation design in 2023 based on the overall support of our executive compensation program.
Elements of 2022 Compensation Program
We provide our executive officers with a mix of pay that reflects our belief that executive compensation should be tied to an appropriate balance of both short- and long-term performance. The primary elements of our executive compensation program are base salary, annual cash incentive, equity-based compensation and certain employee benefits and perquisites. Brief descriptions of each principal element of our executive compensation program are summarized in the following table and described in more detail below. Bright’s executive compensation program is designed to provide compensation to our executives for performance on corporate financial and strategic objectives as well as individual performance and level of responsibility.
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| Compensation Element | | Description | | Objectives |
| Base Salary | | Fixed compensation provided for service during the fiscal year | | Provide a competitive, fixed level of cash compensation to attract and retain talented and skilled executives
Rewards the scope of the job, experience, and performance |
| | | | |
| Annual Cash Incentive | | At-risk compensation based on company financial and strategic objectives.
Discretionary annual cash incentive determined after considering financial and individual performance | | Retain and motivate executives to achieve or exceed financial goals and company objectives without taking excessive risks. |
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| | | | | | | | | | | | | | |
| Equity Awards | | Equity-based compensation that is subject to vesting based on continued employment or tied to specific performance objectives | | The value of equity is directly related to the appreciation in value delivered to our stockholders over time, aligning the interests of our executives with those of our stockholders
Promotes long-term retention of talent |
| | | | |
| Employee Benefits and Perquisites | | Participation in all broad-based employee health and welfare programs and retirement plans | | Aid in retention of key executives in a highly competitive market for talent by providing an overall market competitive benefits package |
Base Salary
Base salaries compensate our Named Executive Officers for fulfilling the requirements of their respective positions and are intended to reflect the scope of their responsibilities, performance, skills and experience as well as competitive market practices. The base salaries of our Named Executive Officers are reviewed annually by our Compensation Committee.
For 2022, our Board approved new hire base salaries of $600,000 for Mr. Cook, $850,000 for Mr. Carson and a promotion base salary of $425,000 for Mr. Craig. Our Compensation Committee reviewed market compensation data from the surveys cited above with references reflecting annual revenues comparable to the Company’s estimated annual revenues and made no base salary increase in 2022 to Mr. Mikan or Ms.Smith.
The following table summarizes the base salaries for 2021 and 2022 of the Named Executive Officers who remained employed with us on December 31, 2022. The actual salary amounts earned by such required informationNamed Executive Officers for 2022 are reported in the Summary Compensation Table below.
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| Name | | Fiscal Year End 2022 Base Salary ($) | | Fiscal Year End 2021 Base Salary ($) | | Percentage Increase (%) |
| G. Mike Mikan | | 1,300,000 | | 1,300,000 | | - |
| Cathy Smith | | 650,000 | | 650,000 | | - |
| Jeff Cook | | 600,000 | | - | | - |
| Jeff Craig | | 425,000 | | 231,000 | | 84 |
2022 Discretionary Annual Cash Incentive Plan (“AIP”)
We believe it is incorporated hereinimportant to motivate our key leaders to achieve our short-term performance goals by referencelinking a portion of their annual cash compensation to the achievement of our approved operating plan by providing the opportunity to earn a discretionary annual cash individual incentive award if the approved operating plan is achieved. We provide a discretionary annual cash incentive award opportunity to key members of management, including our Named Executive Officers, under the terms and conditions of our annual incentive plan for 2022. The AIP supports the Company’s compensation philosophy by providing market-competitive incentive compensation designed to reward employees for Company profitability, individual performance, and overall collaboration.
The incentive provided to a participant under the AIP is termed an “individual incentive award” or “IIA” and refers to the amount that may be awarded to a participant as a cash award. The AIP sets out the terms under which an individual incentive award may be granted and payable to a participant.
The AIP is interpreted and administered by the Compensation Committee. The actions of the Compensation Committee are final and binding on all persons, including the participants and any beneficiary. The Compensation Committee, in its sole discretion, has the power, subject to, and within the limitations of, the express provisions of the AIP to: (i) determine from time to time which employees of the Company will be designated as eligible to participate in the AIP and the terms under which they will be entitled to participate; (ii) establish, change and adjust, in its sole discretion, an eligible employee’s individual incentive award; and (iii) interpret all plan provisions and decide all disputes concerning eligibility and payment under the AIP.
An employee must satisfy the following requirements in order to be granted an individual incentive award: | | | | | |
| • | Minimum Service. The employee must have been employed by the Company for at least two consecutive months ending on the last day of the fiscal year in which the individual incentive award is granted. |
| | | | | |
| • | Employment. To be eligible to be granted an individual incentive award, the employee must have been employed by the Company continuously until the incentive award payment date. |
An overall AIP pool is determined by the Compensation Committee based on (i) each eligible employee’s annual earnings, multiplied by (ii) the employee’s target individual incentive award amount, multiplied by (iii) the company performance factor (based on achievement of our operating plan). A participant’s incentive award takes into consideration individual, team and Company performance results. At the end of each fiscal year, our Compensation Committee determines, in its discretion, the individual incentive award amount for our Chief Executive Officer and our other Named Executive Officers.
Individual incentive awards are paid as cash awards on a date that is after the end of the fiscal year in which the individual incentive award is granted. For 2022 awards, 50% of the anticipated awards were paid in January 2023 and the balance was paid in March 2023. Individual incentive awards are prorated for time employed during the fiscal year.
Determination of 2022 Individual Incentive Awards under our AIP
For 2022, the Compensation Committee approved the following financial and strategic metrics that they believed best incent our executives to execute on the Company’s strategy and drive performance:
•gross revenue;
•adjusted EBITDA;
•medical cost ratio;
•transitioning to a fully aligned care delivery in Florida and Texas; and
•achieving specified technology milestones.
When determining the 2022 Individual Incentive Awards, the Compensation Committee evaluated the Company’s overall execution against these performance metrics, as well as the execution of our updated business model to exit the Affordable Care Act Marketplace as an insurer at the end of 2022, thereby ceasing offering of IFP products nationwide and MA products outside of California. Although performance against the metrics as a whole suggested a performance factor of 130% of target, in light of the Company’s significant transition in 2022, its failure to meet certain performance metrics, and the need to continue to implement our restructuring plan and align expenses with our updated business model, the Compensation Committee approved a performance factor of 100% of target.
The following table summarizes the amount paid to each Named Executive Officer under the AIP in 2022 (other than Mr. Srivastava, who was not eligible for a bonus as he left the Company in May 2022), as compared to the target opportunity.
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| Name | | 2022 Base Salary Paid ($) | | Target IIA (%) | | Target IIA Amount ($) | | Actual IIA Paid ($)(1) |
| G. Mike Mikan | | 1,300,000 | | 130 | | 1,690,000 | | 1,690,000 | |
| Cathy Smith | 0 | 650,000 | | 90 | | 585,000 | | 585,000 | |
Jeff Cook(2) | | 300,000 | | 90 | | 540,000 | | 540,000 | |
| Jeff Craig | | 380,231 | | 50 | | 190,115 | | | 190,115 | |
Michael Carson(3) | | 418,462 | | | 90 | | 765,000 | | | 765,000 | |
| | | | | |
| (1) | Individual incentive awards under the AIP in 2022 were calculated by multiplying each Named Executive Officer’s 2022 actual salary paid by the target individual incentive award percentage by the 100% performance factor described above as adjusted based on individual performance. |
| (2) | Mr. Cook’s target incentive award was based on a full year’s earnings in accordance with his offer letter. |
| (3) | Mr. Carson’s target incentive award was based on a full year’s earnings, in accordance with our severance plan and his offer letter. |
Long-Term Equity Incentive Compensation
We use equity awards to incentivize and reward our executive officers, including our Named Executive Officers, for long-term corporate performance based on the value of our common stock and, thereby, to align the interests of our executive officers with those of our stockholders. Equity awards have been granted pursuant to the terms of our 2016 Stock Incentive Plan, as amended (the “2016 Equity Plan”) and the 2021 Omnibus Incentive Plan, which became effective June 5, 2021 (the “2021 Equity Plan”). No further awards will be granted under the 2016 Equity Plan. However, all outstanding awards granted under the 2016 Equity Plan will continue to be governed by the existing terms of the 2016 Equity Plan and the applicable award agreements.
We use equity awards in the form of restricted stock units (“RSUs”) and stock options to deliver long-term incentive compensation opportunities to our executive officers, including the Named Executive Officers, and to address special situations as they may arise from time to time.
The Compensation Committee determines the amount of annual equity awards for our executive officers after taking into consideration the recommendations of our Chief Executive Officer (except with respect to his own long-term incentive compensation), the external market benchmarks, outstanding equity holdings of each executive officer, criticality of position and individual performance (both historical and expected future performance).
In 2022, the Compensation Committee adopted an Equity Award Policy that provides that annual equity awards shall be granted on the third business day after the Company’s release of its annual earnings for the previous fiscal year, subject to limited exceptions.
2022 Option Grants to Named Executive Officers
On March 7, 2022, the Compensation Committee authorized annual equity grants to our Named Executive Officers (other than Messrs. Cook and Carson, whose employment had not yet commenced). Except in the case of Mr. Craig, the 2022 annual equity grants were 50% non-qualified stock options and 50% restricted stock units. The 2022 grants to all Named Executive Officers were as follows:
| | | | | | | | | | | | | | |
| Name | | Number of Options Granted | | Number of RSUs Granted |
| G. Mike Mikan | | 3,458,367 | | 1,815,642 |
| Cathy Smith | | 1,489,758 | | 782,123 |
Jeff Cook (1) | | — | | | 1,142,132 | |
Jeff Craig (2) | | — | | | 139,665 | |
Michael Carson (1) | | 1,113,861 | | | 571,066 |
| Sam Srivastava | | 478,851 | | | 251,397 |
| | | | | |
| (1) | Mr. Cook and Mr. Carson’s equity grants were made on August 15, 2022 to coincide with the commencement of their employment. |
| (2) | Mr. Craig was not a Named Executive Officer at the time of the annual grant and thus his grant was based on his then current role of Vice President, Senior Managing Counsel. |
Other Compensation
Retirement Benefits
We maintain the Bright Health Management, Inc. 401(k) Plan (the “401(k) plan”), which is intended to be qualified under Section 401(a) of the Code, with the 401(k) plan’s related trust intended to be tax exempt under Section 501(a) of the Code. Our 401(k) plan provides eligible employees, including the Named Executive Officers, with an opportunity to save for retirement on a tax-advantaged basis. Under our 401(k) plan, eligible employees may defer eligible compensation subject to applicable annual contribution limits imposed by the Code. As a tax-qualified retirement plan, contributions to the 401(k) plan and earnings on those contributions are not taxable to the employees until distributed from the plan. Employees who are at least 18 years old and have completed three months of service are eligible to join the 401(k) plan immediately. Eligible participants of the 401(k) plan may contribute any amount up to 100% of their pay, with a maximum of $20,500 for 2022, and eligible participants who are 50 years or older may qualify to make additional pre-tax or “catch-up” deferrals of up to $6,500. The Roth 401(k) deferral option gives participants the flexibility to designate all or part of their 401(k) elective deferrals as Roth contributions, all of which are made with after-tax dollars. We make a safe harbor matching contribution equal to 100% of each eligible participant’s first 2% of compensation and 50% of the next 4% of compensation for a maximum company match of 4%. Participants are fully vested in the matching contribution after 1 year of service.
Health and Welfare Benefits
We provide various employee benefit programs to our Named Executive Officers, including medical, dental, vision, employee assistance program, flexible spending accounts, health savings accounts, lifestyle spending accounts, disability insurance, supplemental income replacement plans and life and accidental death and dismemberment insurance. These benefit programs are available to all of our full-time employees. We design our employee benefits programs to be affordable and competitive in relation to the market, as well as compliant with applicable laws and practices. We adjust our employee benefits programs as needed based upon regular monitoring of applicable laws and practices and the competitive market.
Perquisites and Other Benefits
We provide employer matching contributions under the 401(k) plan to all participating employees, including our Named Executive Officers. In 2022, Mr. Mikan was permitted a limited amount of personal use of the Company’s leased aircraft upon approval by the Chair of the Compensation Committee. We do not reimburse any taxes for imputed income associated with any such personal travel. All future practices with respect to perquisites or other personal benefits will be approved and subject to periodic review by our Compensation Committee.
No Pension Benefits
Other than with respect to our 401(k) plan, our employees, including the Named Executive Officers, do not participate in any plan that provides for retirement payments and benefits, or payments and benefits that will be provided primarily following retirement.
No Nonqualified Deferred Compensation
During 2022, none of our Named Executive Officers contributed to, or earn any amounts with respect to, any defined contribution or other plan sponsored by us that provides for the deferral of compensation on a basis that is not tax-qualified.
Compensation Policies and Practices
Ownership Guidelines
Our Stock Ownership Guidelines (the “Guidelines”) are designed to align our directors' and executives' interests with our stockholders' interests and to encourage directors and executives to make decisions that will be in our long-term best interests—through all industry cycles and market conditions. The Guidelines require non-employee directors and executive officers to achieve and maintain ownership of our shares equal to five times base salary for the CEO, three times base salary for all other executive leadership team members and three times the annual cash retainer for non-employee directors. The ownership requirement is based on the participant's base salary or annual retainer (as applicable) and the average daily closing share price for the previous 12 months through October 31 of each calendar year.
During any year in which a participant is not in compliance with the ownership requirement, the Compensation Committee may require such participant to retain at least 50% of net shares delivered through our equity incentive plans (“net shares” means the shares remaining after deducting shares for the payment of taxes and, in the case of stock options, after deducting shares for payment of the exercise price of stock options).
Clawback Policy
Pursuant to our Clawback Policy for executive officers, the Compensation Committee may recover cash-based and performance-based-equity incentive compensation paid to any current or former officer (as defined by Rule 16a-1(f) of the Exchange Act) in the event of a restatement of our financial results caused by or contributed to by such officer's fraud, willful misconduct, or gross negligence if the incentive compensation received by such officer exceeded the amount that such officer would have received based on the restated financial results.
Policy on Hedging and Prohibited Transactions
Our Insider Trading Policy prohibits employees, non-employee directors and related persons from engaging in any transactions (including prepaid variable forward contracts, equity swaps, collars and exchange funds) that are designed to hedge or offset any decrease in the market value of the Company’s equity securities. Additionally, directors, officers and other employees are prohibited from holding our securities in a margin account or otherwise pledging our securities as collateral for a loan without first obtaining pre-clearance from our General Counsel or his or her designee.
Compensation Policies as they relate to Risk Management
The Compensation Committee believes that our compensation programs are appropriately designed to provide a level of incentives that does not encourage our executive officers and employees to take unnecessary risks in managing their business operations or functions and in carrying out their employment responsibilities. Specifically:
•a substantial portion of our executive officers' compensation is performance-based, consistent with our approach to executive compensation;
•our annual incentive award program is designed to reward annual financial and/or strategic performance in areas considered critical to our short and long-term success;
•our long-term incentive awards are directly aligned with long-term stockholder interests through their link to our stock price and multi-year ratable vesting schedules; and
•our executive stock ownership guidelines further provide a long-term focus by requiring our executives to personally hold significant levels of our stock.
The Compensation Committee believes that the various elements of our executive compensation program sufficiently incentivize our executives to act based on the sustained long-term growth and performance of our company.
Severance Arrangements and Change in Control Vesting
Effective January 1, 2021, our Board adopted the Bright Health Management Inc. Severance Benefits Plan (amended effective as of June 1, 2021, the “2021 Severance Plan”) (as described in further detail below under “Potential Payments upon Termination or Change in Control”), which supersedes the severance provisions of the employment agreements for all the Named Executive Officers except for Mr. Mikan, who is entitled to severance benefits pursuant to his employment agreement. We provide these severance benefits in order to offer an overall compensation package that is competitive with that offered by the companies with whom we compete for executive talent. Severance benefits allow our executives to focus on our objectives without concern for their employment security in the event of a termination.
Mr. Mikan’s employment agreement, (amended as September 23, 2021) provides for severance benefits and accelerated vesting of a portion of his equity awards (as described in further detail below under “Potential Payments upon Termination or Change in Control”).
Tax and Accounting Implications
Our Board operates its compensation programs with the good faith intention of complying with Section 409A of the Code. We account for equity-based payments with respect to our long-term equity incentive award programs in accordance with the requirements of FASB Accounting Standards Codification Topic 718, Compensation — Stock Compensation, or FASB ASC Topic 718.
COMPENSATION AND HUMAN CAPITAL COMMITTEE REPORT
The Compensation and Human Capital Committee reviewed and discussed with management of the Company the foregoing Compensation Discussion and Analysis. Based on such review and discussion, the Compensation and Human Capital Committee has recommended to the Board that the Compensation Discussion and Analysis be included in this Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
Respectfully submitted by:
Jeffery R. Immelt, Chair
Mohamad Makhzoumi
Manuel Kadre
Notwithstanding any statement in any of our filings with the SEC that might incorporate part or all of any filings with the SEC by reference, including this Proxy Statement, the foregoing Compensation and Human Capital Committee Report is not incorporated into any such filings.
2022 SUMMARY COMPENSATION TABLE
The following table summarizes the total compensation earned by our Named Executive Officers in the fiscal years ended December 31, 2022 and 2021.
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| Name and Principal Position | | Year | | Salary ($) | | Bonus ($) (1) | | Stock Awards ($) (2) | | Option Awards ($)(3) | | All Other Compensation ($)(4) | | Total ($) |
G. Mike Mikan CEO | | 2022 | | 1,300,000 | | | 1,690,000 | | | 3,249,999 | | | 3,249,236 | | | 503,934 | | | 9,993,169 | |
| 2021 | | 1,033,077 | | | 1,275,850 | | | 94,815,000 | | | 83,679,502 | | | 10,420 | | | 180,813,849 | |
| | | | | | | | | | | | | | |
Cathy Smith CFO and CAO | | 2022 | | 650,000 | | | 585,000 | | | 1,400,000 | | | 1,399,671 | | | 14,780 | | | 4,049,451 | |
| 2021 | | 578,269 | | | 494,420 | | | 16,191,000 | | | 12,887,760 | | | 10,420 | | | 30,161,869 | |
| | | | | | | | | | | | | | |
Jeff Cook(5) COO | | 2022 | | 300,000 | | | 540,000 | | | 2,250,000 | | | — | | — | | 6,100 | | | 3,096,100 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Jeff Craig(6) General Counsel | | 2022 | | 380,231 | | | 190,115 | | | 250,000 | | | — | | | 12,200 | | | 832,546 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Michael Carson(7) Former CEO, Bright HealthCare | | 2022 | | 418,462 | | | 765,000 | | | 1,125,000 | | | 1,125,056 | | | 105,373 | | | 3,538,891 | |
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| | | | | | | | | | | | | | |
Sam Srivastava(8) Former CEO, NeueHealth | | 2022 | | 247,692 | | | — | | | 450,000 | | | 449,894 | | | 12,200 | | | 1,159,786 | |
| 2021 | | 504,423 | | | 359,401 | | | 14,301,000 | | | 12,887,760 | | | 8,700 | | | 28,061,284 | |
| | | | | | | | | | | | | | |
___________________
(1)The amounts reported in this column represent individual incentive awards awarded pursuant to our AIP in 2022. These awards are discussed in further detail under “Compensation Discussion and Analysis—Elements of 2022 Compensation Program—2022 Discretionary Cash Incentive Plan (“AIP”).” Mr. Carson was paid an individual incentive award that was not pro-rated, in accordance with our severance plan and his offer letter.
(2)Represents the aggregate grant date fair value of RSU grants made during each fiscal year, as calculated in accordance with accounting guidance applicable for the type of award, disregarding an estimate of forfeitures. For RSUs, fair value was calculated using the closing price of our common stock on the date of grant. The valuation assumptions used in determining such amounts are described in note 13 to our audited consolidated financial statements in this Form 10-K.
(3)The amounts reported in this column reflect the grant date fair value of the option awards granted to our Named Executive Officers calculated in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718. The valuation assumptions used in determining such amounts are described in note 13 to our audited consolidated financial statements in this Form 10-K.
(4)All Other Compensation includes an employer matching contribution by the Company under the 401(k) plan for each named executive officer, and parking costs for Messrs. Mikan and Ms. Smith. All Other Compensation also includes $367,647 reimbursed to Mr. Mikan for life insurance premiums in 2022. The Company did not reimburse Mr. Mikan for life insurance premiums in 2021 but made two reimbursements in 2022 that related to 2021 and 2022. For Mr. Mikan, All Other Compensation also includes an incremental cost of $121,507 for use of the leased aircraft, which amount includes variable operating costs, fuel changes and landing fees and does not include fixed operating costs that do not change based on usage. Mr. Carson received $93,173 of severance payments in 2022
(5)Mr. Cook joined the Company on May 17, 2022.
(6)Mr. Craig was promoted into his role as General Counsel and Corporate Secretary on March 18, 2022.
(7)Mr. Carson joined the Company on May 17, 2022 and left the Company on December 2, 2022.
(8)Mr. Srivastava left the Company on May 11, 2022.
GRANTS OF PLAN BASED AWARDS IN 2022
The following table provides information with regards to each grant of plan-based awards made to a Named Executive Officer under any plan during the fiscal year ended December 31, 2022. For additional information regarding equity incentive plan awards, see “Long-Term Equity Incentive Compensation.”
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| | | | | | Estimated Future Payouts under Equity Incentive Plan awards(1) | | All Other Stock Awards: Number of Shares of Stock or Units (#)(1) | | All Other Option Awards: Number of Securities Underlying Options (#)(1) | | Exercise or Base Price of Option Awards ($/share) | | Grant Date Fair Value of Stock and Option Awards ($)(2) |
| Name | | Grant Date | | Approval Date | | Threshold (#) | | Target (#) | | Maximum (#) | | | | |
| G. Mike Mikan | | 3/7/2022 | | 3/7/2022 | | — | | — | | — | | 1,815,642 | | 3,458,367 | | 1.79 | | 6,499,235 |
| | | | | | | | | | | | | | | | | | |
| Cathy Smith | | 3/7/2022 | | 3/7/2022 | | — | | — | | — | | 782,123 | | 1,489,758 | | 1.79 | | 2,799,671 |
| | | | | | | | | | | | | | | | | | |
| Jeff Cook | | 8/15/2022 | | 8/15/2022 | | — | | — | | — | | 1,142,132 | | — | | | | 2,250,000 |
| | | | | | | | | | | | | | | | | | |
| Jeff Craig | | 3/7/2022 | | 3/7/2022 | | — | | — | | — | | 139,665 | | — | | | | 250,000 |
| | | | | | | | | | | | | | | | | | |
| Michael Carson | | 8/15/2022 | | 8/15/2022 | | — | | — | | — | | 571,066 | | 1,113,861 | | 1.97 | | 2,250,056 |
| | | | | | | | | | | | | | | | | | |
| Sam Srivastava | | 3/7/2022 | | 3/7/2022 | | — | | — | | — | | 251,397 | | 478,851 | | 1.79 | | 899,895 |
____________________
(1)The vesting schedule applicable to each award is set forth in the “— Outstanding Equity Awards at Fiscal Year End Table.”
(2)The amounts reported in this column do not reflect the actual economic value realized by the Named Executive Officer. The amounts reported in this column represent the grant date fair value of the awards granted to each of the Named Executive Officers in 2022 calculated in accordance with FASB Accounting Standards Codification Topic 718. The valuation assumptions used in determining such amounts are described in note 13 to our audited consolidated financial statements in this Form 10-K.
NARRATIVE DISCLOSURE TO SUMMARY COMPENSATION TABLE AND GRANTS OF PLAN- BASED AWARDS TABLE
Information regarding the elements of our executive compensation program for 2022 is provided above under “Compensation Discussion and Analysis.” The following is a discussion of material factors necessary to obtain an understanding of information disclosed under “—2022 Summary Compensation Table” and “Grants of Plan-Based Awards in 2022” that is not otherwise discussed in the Compensation Discussion and Analysis.
Employment Agreement
Pursuant to Mr. Mikan’s amended and restated employment agreement, effective as of September 23, 2021 (the “Mikan Employment Agreement”), Mr. Mikan serves as our President, Chief Executive Officer and Vice Chair of our Board. Mr. Mikan is entitled to a base salary of $1,300,000, which may be increased at the discretion of the Board. In addition, he is eligible to participate in the AIP, pursuant to which he has a target individual incentive opportunity equal to 130% of his annual base salary. The Mikan Employment Agreement also provides that Mr. Mikan is entitled to reimbursement from the Company up to $100,000 annually for the costs of a life insurance policy (plus the amount of any incremental tax liabilities resulting from such reimbursement). The reimbursement for premiums in 2021 and 2022 were both made in 2022.
Pursuant to the Mikan Employment Agreement, Mr. Mikan is also entitled the severance and change of control benefits described below under “—Potential Payments Upon Termination or Change in Control.”
Personal Aircraft Use
In 2022, Mr. Mikan was permitted a limited amount of personal use of the Company’s leased aircraft upon approval by the Chair of the Compensation Committee. We do not reimburse any taxes for imputed income associated with any such personal travel. All future practices with respect to perquisites or other personal benefits will be approved and subject to periodic review by our Compensation Committee.
OUTSTANDING EQUITY AWARDS AT 2022 FISCAL YEAR END
The following table provides information with regard to each outstanding equity award held by the Named Executive Officers on December 31, 2022. The market value of the RSUs and PSUs is based on the closing market price of our stock on December 30, 2022, which was $0.65.
Outstanding Equity Awards at Fiscal Year End Table
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| | | | Option Awards(1) | | Stock Awards |
| Name | | Grant Date | | Number of Securities Underlying Unexercised Options # Exercisable | | Number of Securities Underlying Unexercised Options # Unexercisable | | Option Exercise/ Grant Price | | Option Expiration Date | | Grant Date | | Number of Shares or Units of Stock That have not vested (#)(2) | | Market Value of Shares or Units of Stock That have not vested ($) | | Equity Incentive Plan Awards: Number of Unearned Shares or Units That Have Not vested (#)(3) | | Equity Incentive Plan Awards: Market Value of Unearned Shares or Units That Have Not vested ($) |
| G. Mike Mikan | | 1/23/2019 | | 11,059,687 | | 235,313 | | $ | 1.04 | | | 1/23/2029 | | 6/28/2021 | | 0 | | 0 | | | 7,350,000 | | 4,776,765 | |
| | 2/19/2020 | | 3,708,123 | | 1,526,877 | | $ | 1.77 | | | 2/19/2030 | | 12/14/2021 | | 7,000,000 | | 4,549,300 | | | 0 | | 0 | |
| | 11/19/2020 | | 859,374 | | 790,626 | | $ | 2.30 | | | 11/19/2030 | | 3/7/2022 | | 1,815,642 | | 1,179,986 | | | 0 | | 0 | |
| | 2/10/2021 | | 3,580,632 | | 4,321,656 | | $ | 2.30 | | | 2/10/2031 | | | | | | | | | | |
| | 3/7/2022 | | 0 | | 3,458,367 | | $ | 1.79 | | | 3/7/2032 | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| Cathy Smith | | 11/4/2019 | | 1,004,250 | | 690,627 | | $ | 1.77 | | | 11/4/2029 | | 6/28/2021 | | 0 | | 0 | | | 1,050,000 | | 682,395 | |
| | 2/19/2020 | | 237,498 | | 175,002 | | $ | 1.77 | | | 2/19/2030 | | 12/14/2021 | | 1,700,000 | | 1,104,830 | | | 0 | | 0 | |
| | 11/19/2020 | | 225,000 | | 225,000 | | $ | 2.30 | | | 11/19/2030 | | 3/7/2022 | | 782,123 | | 508,302 | | | 0 | | 0 | |
| | 2/19/2021 | | 450,000 | | 750,000 | | $ | 2.30 | | | 2/19/2031 | | | | | | | | | | |
| | 3/7/2022 | | 0 | | 1,489,758 | | $ | 1.79 | | | 3/7/2032 | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| Jeff Cook | | | | | | | | | | | | 8/15/2022 | | 1,142,132 | | 742,272 | | | 0 | | 0 | |
| | | | | | | | | | | | | | | | | | | | |
| Jeff Craig | | 5/28/2020 | | 13,125 | | 9,375 | | $ | 1.77 | | | 5/28/2030 | | 3/7/2022 | | 139,665 | | 90,768 | | | 0 | | 0 | |
| | 11/19/2020 | | 8,124 | | 6,876 | | $ | 2.30 | | | 11/19/2030 | | | | | | | | | | |
| | 2/19/2021 | | 11,250 | | 18,750 | | $ | 2.30 | | | 2/19/2031 | | | | | | | | | | |
| | 3/5/2021 | | 7,185 | | 7,815 | | $ | 2.30 | | | 3/5/2031 | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Michael Carson(4) | | 8/15/2022 | | 0 | | 1,113,861 | | $ | 1.97 | | | 8/15/2032 | | 8/15/2022 | | 571,066 | | 371,136 | | | | | |
____________________
(1)25% of these option awards vest on the one year anniversary of the vesting commencement date, and 1/48th of the options vest each month for three years thereafter. 3,600,000 options granted to Mr. Mikan on January 23, 2019 were transferred to Mikan Family Enterprise, LLC in 2021, all of which are exercisable.
(2)60% of the RSUs granted on December 14, 2021 vest on the 2nd anniversary of the grant date and 40% on the 3rd anniversary of the grant date.
(3)The PSUs listed in this column vest if the following performance conditions are met: (a) if a price per share goal is achieved before June 28, 2027 and the Named Executive Officer remains employed through such date, the corresponding PSUs vest, and (b) if a price per share goal is achieved after such date, the corresponding PSUs shall vest upon the achievement of such price per share goal. As of December 31, 2022, the price per share goal had not been achieved with respect to any such PSUs.
(4)Pursuant to the 2021 Severance Plan, these awards are subject to continued time-based vesting for 78 weeks following the date of Mr. Carson’s separation.
OPTION EXERCISES AND STOCK VESTED
Our Named Executive Officers did not exercise any options in 2022. No stock awards held by our Named Executive Officers vested in 2022.
POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL
Each Named Executive Officer is entitled to potential payments and benefits in connection with a qualifying termination of employment or a change in control. The information below describes and estimates potential payments and benefits to
which the Named Executive Officers would be entitled under existing arrangements if a qualifying termination of employment or change in control occurred on December 30, 2022. These arrangements include:
•the 2021 Severance Plan;
•the 2016 Plan and the 2021 Plan; and
•Mr. Mikan’s employment agreement.
These benefits are in addition to benefits available generally to salaried employees. Due to the number of factors that affect the nature and amount of any benefits provided upon the events discussed below, any actual amounts paid or distributed may be different from those estimated below. Factors that could affect these amounts include the timing during the year of any such event and our valuation at that time. There can be no assurance that a qualifying termination or change in control would produce the same or similar results as those described below if any assumption used to prepare this information is not correct in fact. We have calculated the acceleration value of all equity awards using the market value of shares of our common stock of $0.65 as of December 30, 2022.
2021 Severance Plan
The 2021 Severance Plan provides severance benefits to all the Named Executive Officers except Mr. Mikan, who is entitled to severance benefits pursuant to his employment agreement, described below. The 2021 Severance Plan is administered by our Chief People Officer (or such other person or persons as determined by our Board). Each Named Executive Officer, other than Mr. Mikan, is eligible to severance benefits if such employee is terminated for reasons determined by the administrator to be an “involuntary termination” of employment by the Company for reasons beyond the participant’s control or by the participant for Good Reason, defined below.
For purposes of the 2021 Severance Plan, a participant’s termination of employment is not an involuntary termination if such termination is:
•a termination by the Company or affiliate for Cause, defined below;
•a voluntary termination by a participant other than for Good Reason;
•a termination by the participant prior to the date specified by the Company for a participant’s involuntary termination of the participant’s active employment with the Company; or
•a termination on account of the participant’s death or disability.
Severance pay under the 2021 Severance Plan will be paid to our eligible Named Executive Officers for 52 or 78 weeks (the “Severance Period”). Severance pay will generally be paid at regular payroll intervals following the participant’s last day worked. Ms. Smith, Mr. Cook, and Mr. Carson are entitled to 78 weeks of base pay plus an amount equal to 1.5 times their target individual incentive award, paid over the Severance Period. Mr. Craig is entitled to 52 weeks of base pay plus an amount equal to 1.0 times his target individual incentive award, paid over the Severance Period.
In addition, the 2021 Severance Plan provides that our Named Executive Officers are entitled to elect and pay for 12 or 18 months of continued coverage under the Company’s group medical, dental and/or vision plans pursuant to COBRA, in accordance with ordinary plan practices. If a participant was enrolled in the Company’s group medical, dental and/or vision plans at the time of the participant’s termination of employment and timely elects continuation coverage under COBRA, the Company will, on a monthly basis, directly pay for the amount of the COBRA coverage cost for medical plan coverage that is in excess of the cost of coverage payable by an active employee of the Company for the “benefit subsidy period.” The benefit subsidy period begins immediately following the month active employee coverage terminates on account of the participant’s termination of employment.
Eligible Named Executive Officers will also be paid a prorated portion of the individual incentive award, if any, payable in accordance with the terms of the applicable Company AIP for the calendar year in which the participant’s termination of employment occurs (other than any requirement that participant remain employed through the end of the calendar year or at the time of payment), with such proration based on the full calendar months of the participant’s employment during such year. The prorated individual incentive award will be based on Company performance impacting individual incentive award eligible employees and will be paid at the time the Company pays the individual incentive award to other employees, but not later than March 15th of calendar year following the end of the calendar year in which the participant’s employment terminated. In accordance with the terms of his employment, Mr. Carson’s individual incentive award was not pro-rated during his first year of employment.
In addition, the 2021 Severance Plan provides that our eligible Named Executive Officers are entitled to continued vesting of any unvested outstanding equity awards subject to time-based vesting during the Severance Period.
In the event of a termination of employment within 12 months following the occurrence of a Change in Control, defined below, the following provisions will apply to eligible Named Executive Officers:
•The severance pay will be paid in a single lump sum as soon as practicable, but not later than 60 days, following the participant’s termination of employment.
•The individual incentive award will be equal to 100% of the participant’s target individual incentive award amount, and will be paid in a lump sum within 60 days following the participant’s termination of employment.
•Any unvested outstanding equity award subject to time-based vesting will vest in full at the time of the participant’s termination of employment.
In order to be entitled to any severance benefits under the 2021 Severance Plan, a participant must sign a release of claims and restrictive covenant agreement, which will include non-competition, non-solicitation and non-disparagement provisions.
Under the 2021 Severance Plan, the Company may recover, or “claw back,” from a participant any amounts previously paid pursuant to the 2021 Severance Plan if, following such payment, the administrator becomes aware of circumstances existing on the date of payment that could reasonably have been grounds for the participant’s termination of employment for Cause or if the participant violates the terms of the restrictive covenant agreement and/or release of claims.
Pursuant to the 2021 Severance Plan:
•“Cause” means that in the Company’s exclusive judgment, (i) conduct or statements that violate the Company’s employee and member relations standards, including those which require that Company employees treat each other with dignity and respect, (ii) violation of the Company’s standards, policies, or individual directives, regarding the prohibition of unlawful discrimination, harassment or retaliation, (iii) unsatisfactory attendance, conduct, or performance, (iv) violation of the Company’s standards of conduct, (v) violation of any Company or regulatory standard regarding protection of confidential information, and trade secrets, (vi) refusal to satisfactorily perform the duties, responsibilities and obligations of an employee’s position, (vii) dishonesty or other breach of an employee’s duty of loyalty affecting the Company or any customer, vendor or other Company employee, (viii) use of alcohol or prohibited substances in a manner that adversely affects the employee’s performance of the employee’s duties, responsibilities, and obligations as a Company employee, (ix) the employee’s conviction of any crime which has a nexus with the employee’s position, (x) commission of any other willful or intentional act the Company believes may injure the reputation, business or business relationships of the Company and/or the employee, (xi) the existence of any court order or settlement agreement prohibiting the employee’s continued employment with the Company, (xii) insubordination, (xiii) violation of any statutory or regulatory standard applicable to the Company, or violation of any Company policy or procedure, which adversely affects the Company’s legal rights.
•“Good Reason” means, without the express written consent of the participant:
(a)the assignment to the participant of any duties that results in a material diminution in such participant’s position, authority or responsibilities or any other substantial adverse change in such position, authority or responsibilities, that results in a reduction of the participant’s grade level, excluding an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company as set forth below;
(b)the material diminution in the participant’s total compensation (including Base Salary and incentive pay), other than (i) an insubstantial and inadvertent failure remedied by the Company as set forth below, or (ii) a reduction in compensation which is applied to all similarly situated employees of the Company in the same dollar amount or percentage; or
(c)the Company’s requiring the participant to be based or to perform services at any office or location that is in excess of 50 miles from the principal location of the participant’s work, except for travel reasonably required in the performance of the participant’s responsibilities.
Before a termination by the participant will constitute termination for Good Reason, (i) the participant must give the Company written notice of the termination within sixty (60) calendar days of the initial occurrence of the event that constitutes Good Reason, (ii) the Company is provided an opportunity to remedy the event or events constituting Good Reason within thirty (30) days after receipt of the notice from the participant, (iii) the Company fails to cure the event or
events constituting Good Reason, and (iv) the participant terminates employment within sixty (60) days of the end of the Company’s cure period.
2016 Plan and 2021 Plan
The 2016 Equity Plan provides that upon a participant’s termination of service, the Board may, in its sole discretion (which may be exercised at any time on or after the date of grant, including following such termination) cause options (or any part thereof) then held by such participant to terminate, to vest and become exercisable, or to continue to vest and become exercisable or to remain exercisable following such termination of service, and restricted stock awards, restricted stock units or other share-based awards then held by such participant to terminate, vest or become free of restrictions and conditions to payment, as the case may be, following such termination of service, in each case in the manner determined by the Board; however (a) no Option may remain exercisable beyond its expiration date and (b) any such action adversely affecting any outstanding incentive award may not be effective without the consent of the affected participant.
In connection with a change in control, unless provision is made in connection with the change in control in the sole discretion of the parties to the change in control for the assumption or continuation by the successor entity of incentive awards theretofore granted, all outstanding incentive awards granted under this 2016 Equity Plan, whether or not exercisable or vested, as the case may be, will be canceled and terminated and that in connection with such cancellation and termination the holder of any vested incentive award will receive for each share of common stock subject to such incentive award a cash payment (or the delivery of shares of stock, other securities or a combination of cash, stock and securities with a fair market value (as determined by the Board in good faith) equivalent to such cash payment) equal to the difference, if any, between the consideration received by stockholders of the Company in respect of a share of common stock in connection with such change in control and the purchase price per share, if any, under the incentive award, multiplied by the number of shares of common stock subject to such incentive award that were vested at the time of cancellation (or in which such incentive award is denominated); however, if such product is zero ($0) or less or to the extent that the incentive award is not then vested or exercisable, the incentive award may be canceled and terminated without payment therefor. If any portion of the consideration pursuant to a change in control may be received by holders of shares of common stock on a contingent or delayed basis, the Board may, in its sole discretion, determine the fair market value per share of such consideration as of the time of the change in control on the basis of the Board’ good faith estimate of the present value of the probable future payment of such consideration. The 2016 Equity Plan further provides that no incentive award may include the acceleration of the vesting or exercisability of such incentive award in connection with a change in control, unless such acceleration provision is approved by the Board.
In connection with any change in control under the 2021 Equity Plan, the Compensation Committee may, in its sole discretion, provide for any one or more of the following: (i) a substitution or assumption of awards, or to the extent the surviving entity does not substitute or assume the awards, full acceleration of vesting of, exercisability of, or lapse of restrictions on, as applicable, any awards, provided that (unless the applicable award agreement provides for different treatment upon a change in control) with respect to any performance-vested awards, any such acceleration will be based on (A) the target level of performance if the applicable performance period has not ended prior to the date of such change in control and (B) the actual level of performance attained during the performance period of the applicable performance period has ended prior to the date of such change in control; and (ii) cancellation of any one or more outstanding awards and payment to the holders of such awards that are vested as of such cancellation (including any awards that would vest as a result of the occurrence of such event but for such cancellation) the value of such awards, if any, as determined by the Compensation Committee (which value, if applicable, may be based upon the price per share of common stock received or to be received by other holders of our common stock in such event), including, in the case of options and stock appreciation rights, a cash payment equal to the excess, if any, of the fair market value of the shares of common stock subject to the option or stock appreciation right over the aggregate exercise price or strike price thereof.
Potential Payments to Mr. Mikan
Mr. Mikan is not entitled to any cash severance payments upon termination due to death, disability, or for Cause (as defined in the Mikan Employment Agreement).
Pursuant to the Mikan Employment Agreement, if the Company terminates Mr. Mikan’s employment without Cause or Mr. Mikan voluntarily terminates his employment for Good Reason, then subject to his continued material compliance with the Mikan Employment Agreement and his timely execution, without revocation, of an effective release of claims in favor of the Company and its affiliates, the Company will pay him an amount equal to (x) two times the sum of his then applicable annual base salary, (y) two times the then applicable target annual individual incentive award payment and (z) the full year target annual individual incentive award for the year in which he was terminated, less all applicable
withholdings and deductions. The payment of the severance amount will be in substantially equal installments in accordance with the Company’s payroll practice over 24 months commencing within 60 days after the termination date.
In addition, Mr. Mikan will receive health and welfare benefits continuation for 24 months following the termination date. Finally, the number of unvested equity awards granted to him under the Company’s equity incentive plans as of the termination date which would have vested over the 24 month period commencing on the termination date (assuming continued employment throughout such period) in accordance with the terms of the applicable grant agreements will automatically vest in full.
The Mikan Employment Agreement also provides that in the event that the Mr. Mikan’s employment is terminated involuntarily or Mr. Mikan voluntarily terminates his employment for Good Reason within 24 months of a Change of Control, Mr. Mikan shall receive a lump sum equal to (x) two times the sum of his then applicable annual base salary, (y) two times the then applicable target annual individual incentive award payment and (z) the full year target annual individual incentive award for the year in which he was terminated, less all applicable withholdings and deductions. In addition, Mr. Mikan will receive full acceleration of vesting on all outstanding equity awards, provided that the Special IPO PSU Grant will only be accelerated to the extent then vested.
The Mikan Employment Agreement further provides that in the event of Mr. Mikan’s death, a number of unvested equity awards granted to him under the Company’s equity incentive plans will become vested as follows: (i) if, at the time of his death, fewer than one half of the equity awards have vested, then such number of shares will become vested in full automatically such that one half of the equity awards will be vested; and (ii) if, at the time of his death, one half or more of the equity awards have vested, then the number of unvested equity awards as of the date of his death which would have vested over the twelve month period commencing on the date of his death (assuming continued employment throughout such period) in accordance with the terms of the applicable grant agreements will automatically vest in full.
Definitions
Under the Mikan Employment Agreement, “Cause” is defined as one or more of the following: (i) a material breach of the Mikan Employment Agreement by the executive and the executive’s failure to cure such breach within 10 business days following written notice by the Company; (ii) a breach of the executive’s duty of loyalty to the Company; (iii) the indictment or charging of the executive of, or the plea by the executive of nolo contendere to, a felony or a misdemeanor involving moral turpitude or other willful act or omissions causing material harm to the standing and reputation of the Company; (iv) the executive’s repeated failure to perform in any material respect his duties under the Mikan Employment Agreement, and the executive’s failure to cure such failures within 10 business days following written notice by the Company; (v) theft, embezzlement, or willful misappropriation of funds or property of the Company by the executive; (vi) a material violation by the executive of the Company’s written employment policies, and the executive’s failure to cure such violation within 10 business days following written notice by the Company; or (vii) failure to cooperate with a bona fide internal investigation or an investigation by regulatory or law enforcement authorities, after being instructed by the Company to cooperate, or the willful destruction or willful failure to preserve documents or other materials known to be relevant to such investigation or the inducement of others to fail to cooperate or to produce documents or other materials in connection with such investigation. Notwithstanding the foregoing, the executive will not be deemed to have been terminated for Cause unless and until there has been delivered to executive a written statement, executed by the Chairman of our Board (after reasonable notice to the executive and an opportunity for the executive to be heard by the Board), stating that in the good faith opinion of the Chairman of our Board the executive was guilty of conduct constituting “Cause” as set forth above and specifying the particulars thereof in reasonable detail.
Under the Mikan Employment Agreement, “Good Reason” means the executive’s voluntary termination of employment with the Company or the acquiror following the occurrence of any of the following without the executive’s written consent: (i) a material reduction or change in job duties, responsibilities or requirements inconsistent with the executive’s position, provided that a mere change in title following a sale of the Company will not constitute For Good Reason, so long as the executive is assigned to a position that is substantially equivalent to the position held prior to the Change of Control terms of job duties, responsibilities and requirements; (ii) a material reduction in the executive’s compensation; (iii) the executive’s refusal to relocate the principal place for performance of his duties to a location more than 50 miles from the location at which he performed his duties at the time of the sale of the Company.
The following tables provide, for the specified Named Executive Officers, as of December 31, 2022, the potential severance amount they are eligible for under the scenarios discussed above.
Potential Payments to Mr. Mikan upon Termination
| | | | | | | | | | | | | | | | | | | | | | | |
| Benefit | | Termination other than in connection with Change of Control ($) | | Death ($) | | Termination within 24 months of Change of Control ($) | |
| Cash Severance | | 7,670,000 | | | — | | | 7,670,000 | | |
Health Benefits(1) | | 52,143 | | | — | | | — | | |
| Accelerated Equity Awards | | 5,335,957 | | (2) | 2,864,643 | | (3) | 5,729,286 | | (4) |
| Total | | 13,058,100 | | | 2,864,643 | | | 13,399,286 | | |
____________________
(1)Calculated by multiplying 100% of the employer and employee monthly premiums payable with respect to the health care coverage elected by the executive as of December 30, 2022, by 24.
(2)Continued vesting of Mr. Mikan’s 8,210,428 unvested RSUs for an additional 24 months would have an estimated value of $5,335,957. In addition, continued vesting of Mr. Mikan’s unvested options for an additional 24 months would have an estimated value of $0 on December 31, 2022. PSUs are excluded since vesting was uncertain as of December 30, 2022.
(3)Since less than 50% of Mr. Mikan’s December 14, 2021 and March 7, 2022 RSU awards were vested as of December 31, 2022, 50% of his equity awards would vest as of that date. 4,407,821 unvested RSUs would have an estimated value of $2,864,643 if vested. In addition, vesting of Mr. Mikan’s unvested options would have an estimated value of $0 on December 30, 2022. PSUs are excluded since vesting was uncertain as of December 30, 2022.
(4)An acceleration of Mr. Mikan’s 8,815,642 unvested RSUs would have an estimated value of $5,729,286. In addition, an acceleration of Mr. Mikan’s unvested options would have an estimated value of $0 on December 30, 2022. PSUs are excluded since vesting was uncertain as of December 31, 2022.
Potential Payments to other Named Executive Officers Who Remained employed on December 30, 2022
| | | | | | | | | | | | | | | | | | | | | | | |
| Payment Type | | Cathy Smith | | Jeff Craig | | Jeff Cook | |
| Termination other than in connection with Change of Control | | | | | | | |
| Cash Severance | | $ | 2,437,500 | | | $ | 850,000 | | | $ | 2,250,000 | | |
Health Benefits(1) | | $ | 26,725 | | | $ | 17,206 | | | $ | 26,725 | | |
| Additional Equity Vesting | | $ | 1,001,766 | | (2) | $ | 30,256 | | (3) | $ | 247,423 | | (4) |
| Total | | $ | 3,465,991 | | | $ | 897,462 | | | $ | 2,524,148 | | |
| Termination within 12 months of a Change of Control | | | | | | | |
| Cash Severance | | $ | 2,437,500 | | | $ | 850,000 | | | $ | 2,250,000 | | |
| Health Benefits | | $ | 26,725 | | | $ | 17,206 | | | $ | 26,725 | | |
| Accelerated Equity Awards | | $ | 1,613,132 | | (5) | $ | 90,768 | | (6) | $ | 742,272 | | (7) |
| Total | | $ | 4,077,357 | | | $ | 957,974 | | | $ | 3,018,997 | | |
____________________
(1)In the case of an involuntary termination without Cause or for Good Reason, calculated by multiplying 100% of the employer and employee monthly premiums payable with respect to the health care coverage elected by the executive as of December 30, 2022, by 18 for Ms. Smith and Mr. Cook and by 12 for Mr. Craig.
(2)An additional 18 months vesting of Ms. Smith’s unvested RSUs would include 1,541,415 RSUs for an estimated value of $1,001,766 on December 30, 2022. PSUs are excluded since vesting is not time based.
(3)An additional 12 months vesting of Mr. Craig’s unvested RSUs would include 46,555 RSUs for an estimated value of $30,256 on December 30, 2022.
(4)An additional 18 months vesting of Mr. Cook’s unvested RSUs would include 380,710 RSUs for an estimated value of $247,423 on December 30, 2022.
(5)An acceleration of Ms. Smith's 2,482,123 unvested RSUs would have an estimated value of $1,613,132 on December 30, 2022. PSUs are excluded since vesting is not time-based.
(6)An acceleration of Mr. Craig’s 139,665 unvested RSUs would have an estimated value of $90,768.
(7)An acceleration of Mr. Cook’s 1,142,132 unvested RSUs would have an estimated value of $742,272.
CEO Pay Ratio
As required by Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, we are providing the following information about the relationship between the annual total compensation of our median employee and the annual total compensation of our CEO. Our identified median compensated employee was $71,500 and Mr. Mikan’s compensation was $9,993,169. Accordingly, our CEO to median employee pay ratio is 140:1.
To determine our median compensated employee, we reviewed our employee population, consisting of approximately 2,840 full-time U.S. employees who were employed by us as of December 31, 2022. To identify our median compensated employee from the selected employee population, we used total annualized base pay, plus the target bonus percent to determine total cash compensation for all full-time employees. We then determine equity value and the employer-paid health insurance contributions.
DIRECTOR COMPENSATION
Our Corporate Governance Guidelines provide for compensation for our non-employee directors' services, in recognition of their time and skills. Directors who are also our officers or employees do not receive additional compensation for serving on the Board. Annual compensation for our non-employee directors comprises cash and stock-based equity compensation. Under our director compensation policy, each non-employee director is entitled to an annual cash retainer of $80,000 (other than any non-employee Chairman of the Board, who is entitled to an additional $100,000 cash retainer) and an annual RSU award having a fair market value of $175,000 as of the date of grant. In addition, the Audit Committee chair receives an additional cash retainer of $25,000, the Compensation Committee Chair receives an additional cash retainer of $20,000 and the chair of the Nominating and Corporate Governance Committee receives an additional cash retainer of $15,000. All other committee members receive an additional cash retainer of $10,000. Amounts are paid pro rata for any partial year of service.
DIRECTOR COMPENSATION TABLE FOR 2022
The following table contains information concerning the compensation of our non-employee directors in 2022. Messrs. Mikan and Sheehy did not receive any additional compensation for services as a director in 2022.
| | | | | | | | | | | | | | | | | | | | |
| Name | | Fees Earned or Paid in Cash ($) | | RSU Awards ($)(1) | | Total ($) |
| Kedrick D. Adkins Jr | | 105,000 | | | 175,000 | | | 280,000 | |
| Naomi Allen | | 90,000 | | | 175,000 | | | 265,000 | |
| Linda Gooden | | 90,000 | | | 175,000 | | | 265,000 | |
| Jeffrey R. Immelt | | 100,000 | | | 175,000 | | | 275,000 | |
| Manuel Kadre | | 115,000 | | | 175,000 | | | 290,000 | |
| Stephen Kraus | | 67,500 | | | 175,000 | | | 242,500 | |
| Mohamed Makhzoumi | | 90,000 | | | 175,000 | | | 265,000 | |
| Adair Newhall | | 80,000 | | | 175,000 | | | 255,000 | |
| Andrew Slavitt | | 80,000 | | | 175,000 | | | 255,000 | |
Matthew Manders(2) | | 66,600 | | | 218,750 | | | 285,350 | |
____________________
(1)95,109 RSUs were granted to each independent director on May 13, 2022. 100% of the RSUs vest on the first anniversary of the grant date.
(2)Mr. Manders received a grant which was pro-rated for his partial service in the prior year.
As of December 31, 2022, non-executive directors held the following options and RSUs:
| | | | | | | | | | | | | | |
| Name | | Options | | RSUs |
| Kedrick D. Adkins Jr | | 540,000 | | 95,109 |
| Naomi Allen | | 540,000 | | 95,109 |
| Linda Gooden | | 540,000 | | 95,109 |
| Jeffrey R. Immelt | | 540,000 | | 95,109 |
| Manuel Kadre | | 540,000 | | 95,109 |
| Andrew Slavitt | | 280,404 | | 95,109 |
| Stephen Kraus | | | | 95,109 |
| Mohamed Makhzoumi | | | | 95,109 |
| Adair Newhall | | | | 95,109 |
| Matthew Manders | | | | 118,886 |
Directors Stock Ownership Policy
In November 2021, our Board adopted a stock ownership policy for our non-employee directors. The policy requires each non-employee director to hold shares of Company common stock having an aggregate market value of at least three times their annual cash retainer.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information about the beneficial ownership of our common stock as of March 1, 2023 for:
•each person or group known to us who beneficially owns more than 5% of our common stock;
•each of our directors;
•each of our Named Executive Officers; and
•all of our directors, director nominees and executive officers as a group.
The number of shares and percentages of beneficial ownership set forth below are based on the 630,331,300 shares of our common stock issued and outstanding as of March 1, 2023. Beneficial ownership for the purposes of the following table is determined in accordance with the rules and regulations of the SEC. A person is a “beneficial owner” of a security if that person has or shares “voting power,” which includes the power to vote or to direct the voting of the security, or “investment power,” which includes the power to dispose of or to direct the disposition of the security or has the right to acquire such powers within 60 days. Securities that can be so acquired are deemed to be outstanding for purposes of computing such person’s ownership percentage, but not for purposes of computing any other person’s percentage. Under these rules, more than one person may be deemed to be a beneficial owner of the same securities and a person may be deemed to be a beneficial owner of securities as to which such person has no economic interest.
Unless otherwise noted in the footnotes to the following table, and subject to applicable community property laws, the persons named in the table have sole voting and investment power with respect to their beneficially owned common stock. Except as otherwise indicated in the footnotes below, the address of each beneficial owner is c/o Bright Health Group, Inc., 8000 Norman Center Drive, Suite 900, Minneapolis, Minnesota 55437.
| | | | | | | | | | | | | | | | | | | | |
| Name of Beneficial Owner | | Shares | | Percent |
| 5% OR MORE BENEFICIAL OWNERS: | | | | |
New Enterprise Associates and affiliated funds(1) | | 368,001,007 | | | 47.2 | % |
Bessemer Venture Partners and affiliated funds(2) | | 85,998,211 | | | 13.5 | % |
StepStone Group LP and affiliated funds(3) | | 43,517,440 | | | 6.9 | % |
| DIRECTORS, DIRECTOR NOMINEES AND NAMED EXECUTIVE OFFICERS | | | | |
G. Mike Mikan(4) | | 22,425,906 | | | 3.4 | % |
Catherine R. Smith(5) | | 4,116,667 | | | * |
Jeff Craig(6) | | 101,240 | | | * |
| Jeff Cook | | — | | * |
Robert J. Sheehy(7) | | 23,681,357 | | | 3.7 | % |
Kedrick D. Adkins Jr(8) | | 427,500 | | | * |
Naomi Allen(9) | | 427,500 | | | * |
Linda Gooden(10) | | 281,250 | | | * |
Jeffery R. Immelt(11) | | 991,762 | | | * |
Manuel Kadre(12) | | 1,691,250 | | | * |
Steve Kraus(2)(13) | | — | | | * |
Mohamad Makhzoumi(1)(14) | | 368,001,007 | | | 47.2 | % |
| Matthew G. Manders | | — | | * |
Adair Newhall(15) | | 43,566,134 | | | 6.9 | % |
Andrew Slavitt(16) | | 10,584,352 | | | 1.7 | % |
| ALL DIRECTORS, DIRECTOR NOMINEES AND EXECUTIVE OFFICERS AS A GROUP (15 persons) | | 476,295,925 | | | 58.4 | % |
| * | Indicates beneficial ownership of less than 1%. | |
| | | | | |
| (1) | | The following information is based on a Schedule 13D as amended, filed by New Enterprise Associates 15, L.P. and other reporting persons named therein. Consists of (i) 107,041,762 shares of common stock held by New Enterprise Associates 15, L.P., or NEA 15, (ii) 3,494,244 shares of common stock held by NEA 15 Opportunity Fund, L.P., or NEA 15 OF, (iii) 47,925,199 shares of common stock held by New Enterprise Associates 16, L.P., or NEA 16, (iv) 23,983,073 shares of common stock held by New Enterprise Associates 17, L.P., or NEA 17, (v) 25,817,487 shares of common stock held by NEA BH SPV, L.P., or BH SPV and (vi) 9,891,858 shares of common stock held by NEA BH SPV, II L.P., or BH SPV II. Also includes 51,667,555 shares of common stock issuable as of March 1, 2023 upon conversion of an aggregate of 200,000 shares of Series A Convertible Perpetual Preferred Stock held by NEA 17 and NEA 18 Venture Growth Equity, L.P., or NEA 18 VGE, and 98,179,829 shares of common stock issuable as of March 1, 2023 upon conversion of an aggregate of 137,700 shares of Series B Convertible Perpetual Preferred Stock held by NEA 17 and NEA 18 VGE. The shares directly held by NEA 15 are indirectly held by NEA Partners 15, L.P., or NEA Partners 15, the sole general partner of NEA 15, NEA 15 GP, LLC, or NEA 15 LLC, the sole general partner of NEA Partners 15, and each of the individual managers of NEA 15 LLC. The individual managers, or collectively, the NEA 15 Managers, of NEA 15 LLC are Forest Baskett, Anthony A. Florence, Jr., Mohamad Makhzoumi, Scott D. Sandell and Peter Sonsini. The NEA 15 Managers share voting and dispositive power with regard to the shares held by NEA 15. The shares directly held by NEA 15 OF are indirectly held by NEA Partners 15-OF, L.P., or NEA Partners 15-OF, the sole general partner of NEA 15 OF, NEA 15 LLC, the sole general partner of NEA Partners 15-OF, and each of the NEA 15 Managers. The NEA 15 Managers share voting and dispositive power with regard to the shares held by NEA 15 OF. The shares directly held by NEA 16 are indirectly held by NEA Partners 16, L.P., or NEA Partners 16, the sole general partner of NEA 16, NEA 16 GP, LLC, or NEA 16 LLC, the sole general partner of NEA Partners 16, and each of the individual managers of NEA 16 LLC. The individual managers, or collectively, the NEA 16 Managers, of NEA 16 LLC are Forest Baskett, Ali Behbahani, Carmen Chang, Anthony A. Florence, Jr., Mohamad Makhzoumi, Scott D. Sandell, Paul Walker, and Peter Sonsini. The NEA 16 Managers share voting and dispositive power with regard to the shares held by NEA 16. The shares directly held by NEA 17 are indirectly held by NEA Partners 17, L.P., or NEA Partners 17, the sole general partner of NEA 17, NEA 17 GP, LLC, or NEA 17 LLC, the sole general partner of NEA Partners 17, and each of the individual managers of NEA 17 LLC. The individual managers, or collectively, the NEA 17 Managers, of NEA 17 LLC are Forest Baskett, Ali Behbahani, Carmen Chang, Anthony A. Florence, Jr., Edward Mathers, Mohamad Makhzoumi, Scott D. Sandell, Paul Walker, Rick Yang, and Peter Sonsini. The NEA 17 Managers share voting and dispositive power with regard to the shares held by NEA 17. The shares directly held by NEA 18 VGE are indirectly held by NEA Partners 18 VGE, L.P., or NEA Partners 18 VGE, the sole general partner of NEA 18 VGE, NEA 18 VGE GP, LLC, or NEA 18 VGE LLC, the sole general partner of NEA Partners 18 VGE, and each of the individual managers of NEA 18 VGE LLC. The individual managers, or collectively, the NEA 18 VGE Managers, of NEA 18 VGE LLC are Ali Behbahani, Carmen Chang, Anthony A. Florence, Jr., Edward Mathers, Mohamad Makhzoumi, Scott D. Sandell, Paul Walker, Rick Yang, and Peter Sonsini. The NEA 18 VGE Managers share voting and dispositive power with regard to the shares held by NEA 18 VGE. The shares directly held by BH SPV are indirectly held by NEA BH SPV GP, LLC ,or SPV LLC, the sole general partner of BH SPV, and each of the NEA 17 Managers. The NEA 17 Managers share voting and dispositive power with regard to the shares held by BH SPV. The shares directly held by BH SPV II are indirectly held by SPV LLC, the sole general partner of BH SPV II, and each of the NEA 17 Managers. The NEA 17 Managers share voting and dispositive power with regard to the shares held by BH SPV II. All indirect holders of the above referenced shares disclaim beneficial ownership of all applicable shares except to the extent of their actual pecuniary interest therein. The address for the above referenced entities is 1954 Greenspring Drive, Suite 600, Timonium, Maryland 21093. |
| (2) | The following information is based on a Schedule 13G filed by Deer X & Co. Ltd. and other reporting persons named therein. Consists of (i) 35,891,981 shares of common stock held by Bessemer Venture Partners IX L.P., or Bessemer IX, (ii) 28,754,956 shares of common stock held by Bessemer Venture Partners IX Institutional L.P., or Bessemer Institutional, (iii) 2,090,325 shares of common stock held by Bessemer Venture Partners Century Fund L.P., or Bessemer Century, (iv) 13,189,833 shares of common stock held by Bessemer Venture Partners Century Fund Institutional L.P., or Bessemer Century Institutional and (v) 10,629 shares of common stock issuable held by 15 Angels II LLC, or 15 Angels (together with Bessemer IX, Bessemer Institutional, Bessemer Century and Bessemer Century Institutional, the “Bessemer Entities”). Also includes 6,060,487 shares of common stock issuable as of March 1, 2023 upon conversion of an aggregate of 8,500 shares of Series B Convertible Perpetual Preferred Stock held by Bessemer IX, Bessemer Institutional, Bessemer Century, Bessemer Century Institutional and 15 Angels. 15 Angels is wholly owned by Bessemer Venture Partners VIII Institutional L.P., or Bessemer VIII Institutional. Deer VIII & Co. L.P., or Deer VIII L.P. is the general partner of Bessemer VIII Institutional. Deer VIII & Co. Ltd., or Deer VIII Ltd., is the general partner of Deer VIII L.P. Robert P. Goodman, David Cowan, Jeremy Levine, Byron Deeter and Robert M. Stavis are the directors of Deer VIII Ltd. and hold the voting and dispositive power for 15 Angels. Deer IX & Co. L.P., or Deer IX L.P., is the general partner of Bessemer IX and Bessemer Institutional. Deer IX & Co. Ltd., or Deer IX Ltd., is the general partner of Deer IX L.P. David Cowan, Byron Deeter, Adam Fisher, Robert P. Goodman, Jeremy Levine and Robert M. Stavis are the directors of Deer IX Ltd. and hold the voting and dispositive power for Bessemer IX and Bessemer Institutional. Investment and voting decisions with respect to the shares held by Bessemer IX and Bessemer Institutional are made by the directors of Deer IX Ltd. acting as an investment committee. Deer X & Co. L.P., or Deer X L.P., is the general partner of Bessemer Century and Bessemer Century Institutional. Deer X & Co. Ltd., or Deer X Ltd., is the general partner of Deer X L.P. Pursuant to a proxy arrangement between Deer X L.P. and Deer IX L.P., Deer IX L.P., its general partner Deer IX Ltd., and the aforementioned directors of Deer IX Ltd. make voting decisions with respect to the shares of the Company held by Bessemer Century and Bessemer Century Institutional. Such voting decisions are made by the directors of Deer IX Ltd. acting as an investment committee. Mr. Kraus disclaims beneficial ownership of the securities held by the Bessemer Entities except to the extent of his pecuniary interest, if any, in such securities by virtue of his indirect interest in the Bessemer Entities. The address for each of these entities is c/o Bessemer Venture Partners, 1865 Palmer Avenue, Suite 104, Larchmont, New York 10538. |
| | | | | |
| (3) | | The following information is based on a Schedule 13D/A filed by StepStone Group LP and other reporting persons named therein. Consists of (i) 5,358,000 shares of common stock held by StepStone VC Global Partners VII-A, L.P. (“StepStone VII-A”), (ii) 516,912 shares of common stock held by StepStone VC Global Partners VII-C, L.P. (“StepStone VII-C”), (iii) 21,059,052 shares of common stock held by StepStone VC Opportunities IV, L.P. (“StepStone IV”), (iv) 2,290,572 shares of common stock held by StepStone Master G, L.P. (“StepStone Master”), (v) 8,246,418 shares of common stock held by AU Special Investments, L.P. (“AU”), (vi) 3,305,300 shares of common stock held by StepStone VC Opportunities VI, L.P. (“StepStone VI”), (vii) 188,884 shares of common held by StepStone VC Opportunities VI-D, L.P. (“StepStone VI-D”), (viii) 969,477 shares of common stock held by StepStone VC Opportunities V, L.P. (“StepStone V”) and (ix) 85,529 shares of common stock held by StepStone VC Opportunities V-D, L.P (“StepStone V-D”). Also includes 1,488,205 shares of common stock issuable as of March 1, 2023 upon conversion of an aggregate of 2,100 shares of Series B Convertible Perpetual Preferred Stock held by StepStone V, StepStone V-D, StepStone VI and StepStone VI-D. StepStone Group LP (“StepStone”) is the investment manager of several direct shareholders of Bright Health Group, Inc., including StepStone VII-A, StepStone VII-C, AU, StepStone IV, StepStone VI, StepStone VI-D, StepStone Master, StepStone V, and StepStone V-D (collectively, the “StepStone Funds”). StepStone has voting, investment and dispositive power over the shares held by the StepStone Funds pursuant to each StepStone Fund’s limited partnership agreement and certain investment management agreements to which StepStone and such StepStone Funds are parties. The address for StepStone and the StepStone Funds is 4225 Executive Square, Suite 1600, La Jolla, CA 92037. |
| | | | | |
| (4) | | Consists of (i) 18,220,692 options held by Mr. Mikan that are exercisable within 60 days of March 1, 2023, (ii) 605,214 restricted stock units that vest within 60 days of March 1, 2023 and (iii) 3,600,000 options held by Mikan Family Enterprise, LLC that are exercisable within 60 days of March 1, 2023. |
| | | | | |
| (5) | | Consists of (i) 142,623 shares of common stock, (ii) 2,813,337 options held by Ms. Smith that are exercisable within 60 days of March 1, 2023, (iii) 260,707 restricted stock units that vest within 60 days of March 1, 2023 and (iv) 900,000 shares of common stock held by The Smith Family Grantor Retained Annuity Trust. Catherine R. Smith and Ryan T. Smith are the sole trustees of The Smith Family Grantor Retained Annuity Trust and have voting and investment power over the shares of common stock held by The Smith Family Grantor Retained Annuity Trust. |
| | | | | |
| (6) | | Consists of (i) 7,500 shares of common stock, (ii) 47,185 options that are exercisable within 60 days of March 1, 2023 and (iii) 46,555 restricted stock units that vest within 60 days of March 1, 2023. |
| (7) | | Consists of (i) 3,626,121 options that are exercisable within 60 days of March 1, 2023 held by Mr. Sheehy and (ii) 20,055,236 shares of common stock held by the Robert J. Sheehy Revocable Trust. Robert J. Sheehy is the sole trustee of the Robert J. Sheehy Revocable Trust and has voting and investment power over the shares of common stock and Series A preferred stock held by the Robert J. Sheehy Revocable Trust. |
| | | | | |
| (8) | | Consists of 427,500 options that are exercisable within 60 days of March 1, 2023. |
| | | | | |
| (9) | | Consists of 427,500 options that are exercisable within 60 days of March 1, 2023. |
| | | | | |
| (10) | | Consists of 281,250 options that are exercisable within 60 days of March 1, 2023. |
| | | | | |
| (11) | | Consists of (i) 598,012 shares of common stock and (ii) 393,750 options that are exercisable within 60 days of March 1, 2023. |
| | | | | |
| (12) | | Consists of (i) 1,070,112 shares of common stock, (ii) 326,250 options that are exercisable within 60 days of March 1, 2023, (iii) 294,888 shares of common stock held by the Kadre Family Partnership, L.P. of which Mr. Kadre is the general partner. |
| |
| (13) | | Does not include 85,998,211 shares beneficially owned by the Bessemer Entities, as described under footnote (2). Mr. Kraus is a director of Deer X Ltd. and has an indirect, passive economic interest in the shares held by Bessemer IX, Bessemer Institutional and 15 Angels. Mr. Kraus disclaims beneficial ownership of the securities held by the Bessemer Entities except to the extent of his pecuniary interest, if any, in such securities by virtue of his indirect interest in the Bessemer Entities. |
| | | | | |
| (14) | | Consists of shares held by NEA 15, NEA 15 OF, NEA 16, NEA 17, NEA 18 VGE, BH SPV and BH SPV II described under footnote (1), over which Mr. Makhzoumi shares voting and dispositive power. Mr. Makhzoumi has no voting or dispositive power with regard to any shares held by NEA. In addition, Mr. Makhzoumi disclaims beneficial ownership of above-referenced shares held by entities affiliated with NEA described in footnote (1) except to the extent of his actual pecuniary interest therein. |
| | | | | |
| (15) | | Consists of (i) 48,694 shares of common stock held by The 2016 Adair Newhall Trust in respect of which Mr. Newhall is one of three trustees and (ii) shares held by the StepStone funds described under footnote (3), over which Mr. Newhall shares voting and dispositive power. Mr. Newhall disclaims beneficial ownership of the above-referenced shares held by the StepStone Funds except to the extent of his actual pecuniary interest therein. |
| | | | | |
| (16) | | Consists of (i) 166,887 shares of common stock, (ii) 280,404 options that are exercisable within 60 days of March 1, 2023 and (iii) 450,000 shares of common stock held by Slavitt Holdings LLC. Mr. Slavitt is the sole manager and member of Slavitt Holdings LLC and has voting and investment power over the shares of common stock held by Slavitt Holdings LLC. Also includes 2,454,972 shares held by Town Hall Ventures II LP and 4,237,497 shares held by Town Hall Ventures LP, in respect of each of which Mr. Slavitt serves as a managing member and its General Partner. Also includes 2,994,592 shares of common stock issuable as of March 1, 2023 upon conversion of 4,200 shares of Series B Convertible Perpetual Preferred Stock held by Town Hall Ventures II LP. Mr. Slavitt disclaims beneficial ownership over the shares held by the Town Hall entities except to the extent of his pecuniary interest therein. |
Securities Authorized for Issuance Under Equity Compensation Plans
Information about our common stock that may be issued under our equity compensation plans as of December 31, 2021,2022, was as follows:
| | Plan Category | Plan Category | | Number of Securities to be Issued Upon Exercise of Outstanding Options and Rights(1) | | Weighted-Average Exercise Price per Share of Outstanding Options and Rights(2) | | Number of Securities Available for Future Issuance Under Equity Compensation Plans(3) | Plan Category | | Number of Securities to be Issued Upon Exercise of Outstanding Options and Rights(1) | | Weighted-Average Exercise Price per Share of Outstanding Options and Rights(2) | | Number of Securities Available for Future Issuance Under Equity Compensation Plans(3) |
| Equity compensation plans approved by shareholders | Equity compensation plans approved by shareholders | | 99,595,339 | | | $ | 1.84 | | | 11,326,129 | | Equity compensation plans approved by shareholders | | 112,358,000 | | | $ | 1.82 | | | 18,050,748 | |
(1)Includes grants of stock options and restricted stock units (which may be time-based or market-based) granted under the 2021 Incentive Plan and the 2016 Incentive Plan.
(2)Includes weighted-average exercise price per share of outstanding stock options only.
(3)Consists of shares of common stock available for future issuance under the 2021 Incentive Plan as of December 31, 2021.2022. Excludes securities to be issued upon exercise of outstanding options and rights. Shares available under the 2021 Incentive Plan may granted as future awards in the form of stock options, stock appreciation rights, restricted shares, restricted stock units and other equity-based awards.
The remaining information required by this item will be included under the heading “Security Ownership of Certain Beneficial Owners and Management” in our definitive proxy statement for our 2022 Annual Meeting of Shareholders, and such required information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item will be included under the headings “Certain Relationships and Related Party Transactions” and “Corporate Governance” in our definitive proxy statement for our 2022 Annual Meeting of Shareholders, and such required information is incorporated herein by reference.Registration Rights Agreement
We are party to a registration rights agreement with certain of our stockholders including New Enterprise Associates, Bessemer Venture Partners, StepStone, Town Hall Ventures, and certain subsidiaries of Cigna and certain of their respective affiliates. Each of New Enterprise Associates, Bessemer Venture Partners and StepStone beneficially owned more than 5% of our outstanding common stock as of the Record Date.
The registration rights agreement, as amended, contains provisions that entitle the stockholder parties thereto to certain rights to have their securities registered by us under the Securities Act. New Enterprise Associates and Bessemer Venture Partners will be entitled to three “demand” registrations in the aggregate, subject to certain limitations. In addition, the stockholder parties to the registration rights agreement, including New Enterprise Associates, Bessemer Venture Partners, StepStone, and certain subsidiaries of Cigna are entitled to customary “piggyback” registration rights. The registration rights agreement provides that we will pay certain expenses of the stockholder parties relating to such registrations and indemnify them against certain liabilities which may arise under the Securities Act.
Investment Agreement
On October 10, 2022, we entered into an Investment Agreement (the “Investment Agreement”) with affiliates of New Enterprise Associates, Bessemer Venture Partners, StepStone Group LP, and Town Hall Ventures (the “Purchasers”), among others, relating to the issuance and sale by the Company to the Purchasers of 175,000 shares of the Company’s Series B Convertible Perpetual Preferred Stock, par value $0.0001 per share (the “Series B Preferred Stock”), for a purchase price of $1,000 per share. Pursuant to the Investment Agreement, the Purchasers acquired 152,500 shares of the Series B Preferred Stock for an aggregate purchase price of $152.5 million. The terms of the Preferred Stock are set forth in the Certificate of Designations designating the Preferred Stock, a copy of which is attached as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2022. We granted the Purchasers registration rights in respect of the Preferred Stock and any shares of common stock issued upon conversion thereof.
Certain of our directors have current or former relationships with New Enterprise Associates, Bessemer Venture Partners, StepStone, and Townhall Ventures. For information about these relationships see the section titled “Board of Directors and Corporate Governance-Board of Directors”.
Related Persons Transaction Policy
Our Board has adopted a written policy on transactions with related persons, which we refer to as our “related person policy.” Our related person policy requires that all “related persons” (as defined in paragraph (a) of Item 404 of Regulation S-K) must promptly disclose to our general counsel any “related person transaction” (defined as any transaction that is anticipated would be reportable by us under Item 404(a) of Regulation S-K in which we were or are to be a participant and the amount involved exceeds $120,000 and in which any related person had or will have a direct or indirect material interest) and all material facts with respect thereto. Our general counsel will communicate that information to our Board or to a duly authorized committee thereof. Our related person policy provides that no related person transaction entered into will be executed without the approval or ratification of our Board or a duly authorized committee thereof. It will be our policy that any directors interested in a related person transaction must recuse themselves from any vote on a related person transaction in which they have an interest.
Director Independence
Pursuant to the corporate governance listing standards of the NYSE, a director employed by us cannot be deemed to be an independent director. Each other director will qualify as independent only if our Board affirmatively determines that he or she has no material relationship with us, either directly or as a partner, stockholder or officer of an organization that has a relationship with us. Ownership of a significant amount of our stock, by itself, does not constitute a material relationship.
The Board has affirmatively determined that each of our directors, other than G. Mike Mikan and Robert J. Sheehy, qualifies as independent in accordance with the NYSE rules. In making its independence determinations, our Board considered and reviewed all information known to it (including information identified through directors’ questionnaires).
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
FEES BILLED BY DELOITTE & TOUCHE LLP
The information requiredAudit Committee has direct oversight of the independent registered public accounting firm that audits our financial statements, including their appointment, compensation and evaluation. The Audit Committee has appointed Deloitte & Touche LLP as our independent registered public accounting firm for the year ending December 31, 2023. Services provided to the Company and its subsidiaries by this item will be includedDeloitte & Touche LLP for the year ended December 31, 2021 are described below and under “Audit Committee Report.”
Fees and Services
The following table summarizes the heading “Disclosureaggregate fees for professional audit services and other services rendered by Deloitte & Touche LLP for the years ended December 31, 2022 and 2021:
| | | | | | | | | | | |
| 2022 | | 2021 |
| Audit Fees(1) | $ | 3,737,356 | | | $ | 3,243,831 | |
| Audit-Related Fees(2) | $ | — | | | $ | 490,021 | |
| Tax Fees(3) | $ | 74,830 | | | $ | 60,375 | |
| Total | $ | 3,812,186 | | | $ | 3,794,227 | |
____________________
(1)The Audit fees listed above for 2022 were billed in connection with the audit of Fees Paid to Independent Registered Public Accounting Firm”our annual consolidated financial statements in our definitive proxy statement for our 2022 Annual MeetingReport, the reviews of Shareholders,our interim consolidated financial statements included in our quarterly reports on Forms 10-Q and other professional services related to our statutory audits. The Audit fees listed above for 2021 were billed in connection with the audit of our annual consolidated financial statements in our 2021 Annual Report, the reviews of our interim consolidated financial statements included in our quarterly reports on Forms 10-Q and other professional services related to our statutory audits, including in relation to our registration statement on Form S-1.
(2)Audit-Related fees listed above include due diligence services for acquisitions during 2021.
(3)Tax fees listed above consist of professional fees primarily for tax compliance services.
In considering the nature of the services provided by the independent auditor, the Audit Committee determined that such services are compatible with the provision of independent audit services. The Audit Committee discussed these services with the independent auditor and Bright Health management to determine that they are permitted under the rules and regulations concerning auditor independence promulgated by the SEC to implement the Sarbanes-Oxley Act of 2002, as well as the American Institute of Certified Public Accountants.
AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES
The Audit Committee has adopted a policy that requires advance approval of all audit services as well as non-audit services, regardless of cost, to the extent required informationby the Exchange Act and the Sarbanes-Oxley Act of 2002. Unless the specific service has been previously pre-approved with respect to that year, the Audit Committee must approve the permitted service before the independent auditor is incorporated hereinengaged to perform it. The Audit Committee may consider the amount or range of estimated fees as a factor in determining whether a proposed service would impair the registered public accounting firm’s independence. Requests or applications to provide services that require separate approval by reference.the Audit Committee will be submitted to the Audit Committee by both the independent registered public accounting firm and the Company’s Chief Financial Officer or the Chief Accounting Officer and must include a joint statement as to whether, in their view, the request or application is consistent with the SEC’s and the Public Company Accounting Oversight Board (“PCAOB”)’s rules on registered public accounting firm independence.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this report:
(a)1. Financial Statements. The financial statements are included under Item 8 of this report:
(•)ReportsReport of Independent Registered Public Accounting Firms.Firm.
(•)Consolidated Balance Sheets as of December 31, 2022 and 2021.
(•)Consolidated Statements of Income (Loss) for the years ended December 31, 2022, 2021 and 2020.
(•)Consolidated Statements of OperationsComprehensive Income (Loss) for the years ended December 31, 2022, 2021 2020 and 2019.
(•)Consolidated Statements of Comprehensive Income for the years ended December 31, 2021, 2020 and 2019.2020.
(•)Consolidated Statements of Changes in Redeemable Preferred Stock and Shareholders’ Equity (Deficit) for the years ended December 31, 2022, 2021 2020 and 2019.2020.
(•)Consolidated Statements of Cash Flows for years ended December 31, 2022, 2021 2020 and 2019.2020.
(•)Notes to the Consolidated Financial Statements.
2. Financial Statement Schedules. The following statement schedule of the Company is included in Item 15(c)
(•)Schedule I - Condensed Financial Information of Registrant (Parent Company Only).
All other schedules for which provision is made in the applicable accounting regulations of the SEC are not required under the related instructions, are inapplicable, or the required information is included in the consolidated financial statements, and therefore have been omitted.
(b)Exhibits. See Exhibit Index, which is incorporated by reference as if fully set forth herein.
EXHIBIT INDEX
| | | | | | | | |
| Exhibit Number | | Description |
| 3.1 | | |
| 3.2 | | |
| 3.3 | | |
| 3.4 | | |
| 3.5 | | |
4.1*4.1 | | |
| 10.1 | |
|
| | | | | | | | |
| 10.4 | | |
10.5 | | |
10.6 | | |
10.7† | | |
10.8†10.5† | | |
10.9†10.6† | | |
10.10†10.7† | | |
10.11†10.8† | | |
10.12†10.9† | | |
10.13†10.10† | | |
10.14†10.11† | | |
10.15†*10.12† | | |
10.16†10.13† | | |
10.17† | | |
10.18† | | |
10.19† | | |
10.20† | | |
10.21†10.14† | | |
| | | | | | | | |
10.22† | | |
10.23† | | |
10.24† | | |
10.25†10.15† | | |
10.26†10.16† | | |
10.27†10.17† | | |
| 10.19† | | |
| 10.20 | | |
| 10.21 | | |
| | | | | | | | |
| 10.22 | | |
| 10.23 | | |
| 10.24 | | |
| 10.25* | | |
| 10.26*† | | |
| 10.27*† | | |
| 21.1* | | |
| 23.1* | | |
23.2* | | |
| 31.1* | | |
| 31.2* | | |
| 32.1* | | |
| 32.2* | | |
| 101* | | The following financial information from our Annual Report on Form 10-K for the year ended December 31, 2021,2022, filed with the SEC on March 18, 2022,16, 2023, formatted in Inline Extensible Business Reporting Language (“iXBRL”) |
| 104* | | Cover Page Interactive Data File (formatted as Inline XBRL and embedded within Exhibit 101) |
_______________
* Filed herewith.
† Management contract or compensatory plan or arrangement.
(1) The certifications in Exhibit 32.1 to this Annual Report on Form 10-K shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document.
(c) Financial Statement Schedule. Schedule I - Condensed Financial Information of Registrant (Parent Company Only).
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON FINANCIAL STATEMENT SCHEDULE
To the shareholders and the Board of Directors of Bright Health Group, Inc.
We have audited the consolidated financial statements of Bright Health Group, Inc. and subsidiaries (the "Company") as of December 31, 20212022 and 20202021 and for each of the twothree years in the period ended December 31, 2021,2022, and the Company’s internal control over financial reporting as of December 31, 2022, and have issued our report thereon dated March 18, 2022,16, 2023, which contained an unqualified opinion on those consolidated financial statements.statements and included an explanatory paragraph regarding going concern, and an adverse opinion on the Company’s internal control over financial reporting due to the identification of a material weakness.
The financial statement schedule of the Company listed in the Index at Item 15 has been subjected to audit procedures performed in conjunction with the audit of the Company's consolidated financial statements. The financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statement schedule based on our audits. In our opinion, the financial statement schedule, when considered in relation to the consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
March 18, 2022
Condensed Financial Information of Registrant
(Parent Company Only)
Bright Health Group, Inc.
Parent Company Condensed Balance Sheets
| | | As of December 31, | | As of December 31, |
| | 2021 | | 2020 | | 2022 | | 2021 |
| Assets | Assets | | | | Assets | | | |
| Current assets: | Current assets: | | Current assets: | |
| Cash and cash equivalents | Cash and cash equivalents | $ | 971 | | | $ | 1,708 | | Cash and cash equivalents | $ | 335 | | | $ | 971 | |
| Short-term investments | Short-term investments | 1,119 | | | 1,119 | | Short-term investments | 1,619 | | | 1,119 | |
| Investment in subsidiaries | Investment in subsidiaries | 1,301,937 | | | 1,172,126 | | Investment in subsidiaries | 1,037,067 | | | 1,301,937 | |
| Other assets | Other assets | 2,885 | | | 64 | | Other assets | 73 | | | 2,885 | |
| Total assets | Total assets | 1,306,912 | | | 1,175,017 | | Total assets | 1,039,094 | | | 1,306,912 | |
| | Liabilities, Redeemable Preferred Stock and Shareholders’ Equity (Deficit) | Liabilities, Redeemable Preferred Stock and Shareholders’ Equity (Deficit) | | Liabilities, Redeemable Preferred Stock and Shareholders’ Equity (Deficit) | |
| Current liabilities: | Current liabilities: | | Current liabilities: | |
| Related-party payable, net | Related-party payable, net | 988 | | | 100 | | Related-party payable, net | 4,527 | | | 988 | |
| Short-term borrowings | Short-term borrowings | 155,000 | | | — | | Short-term borrowings | 303,947 | | | 155,000 | |
| Other current liabilities | Other current liabilities | 2,469 | | | — | | Other current liabilities | 6,264 | | | 2,469 | |
| Total liabilities | Total liabilities | 158,457 | | | 100 | | Total liabilities | 314,738 | | | 158,457 | |
| | Commitments and contingencies (Note 15) | Commitments and contingencies (Note 15) | 0 | | 0 | Commitments and contingencies (Note 15) | |
| Redeemable preferred stock, $0.0001 par value; — and 166,307,087 shares authorized in 2021 and 2020, respectively; — and 164,244,893 shares issued and outstanding in 2021 and 2020, respectively | — | | | 1,681,015 | | |
| Redeemable Series A preferred stock, $0.0001 par value; 750,000 and — shares authorized in 2022 and 2021, respectively; 750,000 and — shares issued and outstanding in 2022 and 2021, respectively | | Redeemable Series A preferred stock, $0.0001 par value; 750,000 and — shares authorized in 2022 and 2021, respectively; 750,000 and — shares issued and outstanding in 2022 and 2021, respectively | 747,481 | | — |
| Redeemable Series B preferred stock, $0.0001 par value; 175,000 shares authorized in 2022 and 2021, respectively; 175,000 and — shares issued and outstanding in 2022 and 2021, respectively | | Redeemable Series B preferred stock, $0.0001 par value; 175,000 shares authorized in 2022 and 2021, respectively; 175,000 and — shares issued and outstanding in 2022 and 2021, respectively | 172,936 | | — |
| | Shareholders’ equity (deficit): | Shareholders’ equity (deficit): | | Shareholders’ equity (deficit): | |
| Common stock, $0.0001 par value; 3,000,000,000 and 658,993,725 shares authorized in 2021 and 2020, respectively; 628,622,872 and 137,662,698 shares issued and outstanding in 2021 and 2020, respectively | 63 | | | 14 | | |
| Common stock, $0.0001 par value; 3,000,000,000 and 3,000,000,000 shares authorized in 2022 and 2021, respectively; 630,271,508 and 628,622,872 shares issued and outstanding in 2022 and 2021, respectively | | Common stock, $0.0001 par value; 3,000,000,000 and 3,000,000,000 shares authorized in 2022 and 2021, respectively; 630,271,508 and 628,622,872 shares issued and outstanding in 2022 and 2021, respectively | 63 | | | 63 | |
| Additional paid-in capital | Additional paid-in capital | 2,861,243 | | | 9,877 | | Additional paid-in capital | 2,972,271 | | | 2,861,243 | |
| Retained earnings (deficit) | Retained earnings (deficit) | (1,700,851) | | | (515,989) | | Retained earnings (deficit) | (3,156,395) | | | (1,700,851) | |
| Treasury stock, at cost, 2,522,148 and — shares at December 31, 2021 and 2020, respectively | (12,000) | | | — | | |
| Treasury stock, at cost, 2,522,148 shares at December 31, 2022 and 2021 | | Treasury stock, at cost, 2,522,148 shares at December 31, 2022 and 2021 | (12,000) | | | (12,000) | |
| Total shareholders’ equity (deficit) | Total shareholders’ equity (deficit) | 1,148,455 | | | (506,098) | | Total shareholders’ equity (deficit) | (196,061) | | | 1,148,455 | |
| Total liabilities, redeemable preferred stock and shareholders’ equity (deficit) | Total liabilities, redeemable preferred stock and shareholders’ equity (deficit) | $ | 1,306,912 | | | $ | 1,175,017 | | Total liabilities, redeemable preferred stock and shareholders’ equity (deficit) | $ | 1,039,094 | | | $ | 1,306,912 | |
Condensed Financial Information of Registrant
(Parent Company Only)
Bright Health Group, Inc.
Parent Company Condensed Statements of Income (Loss) and Comprehensive Income (Loss)
| | | For the Years Ended December 31, | | For the Years Ended December 31, |
| | 2021 | | 2020 | | 2019 | | 2022 | | 2021 | | 2020 |
| Revenue: | Revenue: | | | | | | Revenue: | | | | | |
| Investment income | Investment income | $ | 30 | | | $ | 26 | | | $ | 16 | | Investment income | $ | (36) | | | $ | 30 | | | $ | 26 | |
| Total revenue | Total revenue | 30 | | | 26 | | | 16 | | Total revenue | (36) | | | 30 | | | 26 | |
| | Operating costs: | Operating costs: | | Operating costs: | |
| Operating costs | Operating costs | 69,170 | | | 5,867 | | | 2,194 | | Operating costs | 112,867 | | | 69,170 | | | 5,867 | |
| Total operating costs | Total operating costs | 69,170 | | | 5,867 | | | 2,194 | | Total operating costs | 112,867 | | | 69,170 | | | 5,867 | |
| Interest expense | Interest expense | 7,732 | | | — | | | — | | Interest expense | 12,822 | | | 7,732 | | | — | |
| Loss before income taxes and equity in net loss of subsidiaries | Loss before income taxes and equity in net loss of subsidiaries | (76,872) | | | (5,841) | | | (2,178) | | Loss before income taxes and equity in net loss of subsidiaries | (125,725) | | | (76,872) | | | (5,841) | |
| Income tax expense (benefit) | Income tax expense (benefit) | 17 | | | — | | | (123) | | Income tax expense (benefit) | 43 | | | 17 | | | — | |
| Loss before equity in net loss of subsidiaries | Loss before equity in net loss of subsidiaries | (76,889) | | | (5,841) | | | (2,055) | | Loss before equity in net loss of subsidiaries | (125,768) | | | (76,889) | | | (5,841) | |
| Equity in net loss of subsidiaries | Equity in net loss of subsidiaries | (1,107,973) | | | (242,601) | | | (123,282) | | Equity in net loss of subsidiaries | (1,329,776) | | | (1,107,973) | | | (242,601) | |
| Net loss | Net loss | (1,184,862) | | | (248,442) | | | (125,337) | | Net loss | (1,455,544) | | | (1,184,862) | | | (248,442) | |
| | Unrealized investment holding (losses) gains | Unrealized investment holding (losses) gains | (6,163) | | | 1,556 | | | 1,211 | | Unrealized investment holding (losses) gains | (5,267) | | | (6,163) | | | 1,556 | |
| Less: reclassification adjustments for investment (losses) gains | Less: reclassification adjustments for investment (losses) gains | (402) | | | 112 | | | 38 | | Less: reclassification adjustments for investment (losses) gains | (4,173) | | | (402) | | | 112 | |
| Other comprehensive (loss) income | Other comprehensive (loss) income | (5,761) | | | 1,444 | | | 1,173 | | Other comprehensive (loss) income | (1,094) | | | (5,761) | | | 1,444 | |
| | Comprehensive loss | Comprehensive loss | $ | (1,190,623) | | | $ | (246,998) | | | $ | (124,164) | | Comprehensive loss | $ | (1,456,638) | | | $ | (1,190,623) | | | $ | (246,998) | |
Condensed Financial Information of Registrant
(Parent Company Only)
Bright Health Group, Inc.
Parent Company Condensed Statements of Cash Flows
| | | For the Years Ended December 31, | | For the Years Ended December 31, |
| | 2021 | | 2020 | | 2019 | | 2022 | | 2021 | | 2020 |
| Net cash provided by (used in) operating activities | Net cash provided by (used in) operating activities | (4,888) | | | (168) | | | (557) | | Net cash provided by (used in) operating activities | (5,910) | | | (4,888) | | | (168) | |
| Cash flows from investing activities: | Cash flows from investing activities: | | Cash flows from investing activities: | |
| Purchases of investments | Purchases of investments | — | | | (1,119) | | | (1,191) | | Purchases of investments | (500) | | | — | | | (1,119) | |
| Proceeds from sales, paydown, and maturities of investments. | Proceeds from sales, paydown, and maturities of investments. | — | | | 1,191 | | | 455 | | Proceeds from sales, paydown, and maturities of investments. | — | | | — | | | 1,191 | |
| Capital contributions to operating subsidiaries | Capital contributions to operating subsidiaries | (607,699) | | | (480,869) | | | (390,945) | | Capital contributions to operating subsidiaries | (1,064,595) | | | (607,699) | | | (480,869) | |
| Business acquisition, net of cash acquired | Business acquisition, net of cash acquired | (431,791) | | | (230,331) | | | (31,855) | | Business acquisition, net of cash acquired | (310) | | | (431,791) | | | (230,331) | |
| Net cash used in investing activities | Net cash used in investing activities | (1,039,490) | | | (711,128) | | | (423,536) | | Net cash used in investing activities | (1,065,405) | | | (1,039,490) | | | (711,128) | |
| Cash flows from financing activities: | Cash flows from financing activities: | | | | | | Cash flows from financing activities: | | | | | |
| Proceeds from issuance of preferred stock | Proceeds from issuance of preferred stock | — | | | 711,200 | | | 423,800 | | Proceeds from issuance of preferred stock | 920,417 | | | — | | | 711,200 | |
| Proceeds from issuance of common stock | Proceeds from issuance of common stock | 11,390 | | | 1,241 | | | 260 | | Proceeds from issuance of common stock | 1,315 | | | 11,390 | | | 1,241 | |
| Proceeds from short-term borrowings | Proceeds from short-term borrowings | 355,000 | | | — | | | — | | Proceeds from short-term borrowings | 303,947 | | | 355,000 | | | — | |
| Repayments of short-term borrowings | Repayments of short-term borrowings | (200,000) | | | — | | | — | | Repayments of short-term borrowings | (155,000) | | | (200,000) | | | — | |
| Payments for debt issuance costs | Payments for debt issuance costs | (3,391) | | | — | | | — | | Payments for debt issuance costs | — | | | (3,391) | | | — | |
| Proceeds from IPO | Proceeds from IPO | 887,328 | | | — | | | — | | Proceeds from IPO | — | | | 887,328 | | | — | |
| Payments for IPO offering costs | Payments for IPO offering costs | (6,686) | | | — | | | — | | Payments for IPO offering costs | — | | | (6,686) | | | — | |
| Net cash provided by financing activities | Net cash provided by financing activities | 1,043,641 | | | 712,441 | | | 424,060 | | Net cash provided by financing activities | 1,070,679 | | | 1,043,641 | | | 712,441 | |
| Net increase (decrease) in cash and cash equivalents | Net increase (decrease) in cash and cash equivalents | (737) | | | 1,145 | | | (33) | | Net increase (decrease) in cash and cash equivalents | (636) | | | (737) | | | 1,145 | |
| Cash and cash equivalents – beginning of year | Cash and cash equivalents – beginning of year | 1,708 | | | 563 | | | 596 | | Cash and cash equivalents – beginning of year | 971 | | | 1,708 | | | 563 | |
| Cash and cash equivalents – end of year | Cash and cash equivalents – end of year | $ | 971 | | | $ | 1,708 | | | $ | 563 | | Cash and cash equivalents – end of year | $ | 335 | | | $ | 971 | | | $ | 1,708 | |
Condensed Financial Information of Registrant
(Parent Company Only)
Bright Health Group, Inc.
Notes to Condensed Financial Statements
NOTE 1. BASIS OF PRESENTATION
The Bright Health Group, Inc. (the “Parent Company”) condensed financial statements should be read in conjunction with our consolidated financial statements. The condensed financial statements include the activity of the Parent Company and reflect its subsidiaries using the equity method of accounting. Under the equity method, the investment in consolidated subsidiaries is stated at cost plus equity in undistributed earnings of consolidated subsidiaries. The following summarizes the major categories of the Parent Company’s financial statements (in thousands, except share and per share data):
NOTE 2. SUBSIDIARY TRANSACTIONS
Investment in Subsidiaries: The Parent Company’s investment in subsidiaries is stated at cost plus equity in undistributed earnings of subsidiaries.
Dividends and Capital Distributions: Cash dividends from unregulated subsidiaries and included in the Cash Flows from Operating Activities in the Parent Company Condensed Statements of Cash Flows were $— million, $65.1$— million and $349.9$65.1 million for the years ended December 31, 2022, 2021 2020 and 2019,2020, respectively.
NOTE 3. SHORT-TERM BORROWINGS
Discussion of short-term borrowings can be found in Note 911 of the Notes to the Consolidated Financial Statements included in Part II, Item 8, “Financial Statements.”
NOTE 4. COMMITMENTS AND CONTINGENCIES
Certain regulated subsidiaries are guaranteed by the Parent Company in the event of insolvency.
For a summary of commitments and contingencies, see Note 1517 of the Notes to the Consolidated Financial Statements included in Part II, Item 8, “Financial Statements.”
ITEM 16. FORM 10-K SUMMARY
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | |
| Bright Health Group, Inc. |
| | |
Date: March 18, 202216, 2023 | By: | /s/ G. Mike Mikan |
| | Name: G. Mike Mikan |
| | Title: Chief Executive Officer and President |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant in the capacities indicated on March 18, 2022.16, 2023.
| | | | | | | | |
| SIGNATURE | | TITLE |
| | |
| /s/ G. Mike Mikan | | Chief Executive Officer, President and Director
(Principal Executive Officer) |
| G. Mike Mikan | |
| | |
| /s/ Catherine R. Smith | | Chief Administrative and Financial Officer
(Principal Financial Officer) |
| Catherine R. Smith | |
| | |
| /s/ Jeffrey J. Scherman | | Chief Accounting Officer
(Principal Accounting Officer) |
| Jeffrey J. Scherman | |
| | |
| /s/ Robert J. Sheehy | | |
| Robert J. Sheehy | | Chairman |
| | |
| /s/ Kedrick D. Adkins Jr. | | |
| Kedrick D. Adkins Jr. | | Director |
| | |
| /s/ Naomi Allen | | |
| Naomi Allen | | Director |
| | |
| /s/ Linda Gooden | | |
| Linda Gooden | | Director |
| | |
| /s/ Jeffery R. Immelt | | |
| Jeffery R. Immelt | | Director |
| | |
| /s/ Manuel Kadre | | |
| Manuel Kadre | | Director |
| | |
| /s/ Steve Kraus | | |
| Steve Kraus | | Director |
| | |
| /s/ Mohamad Makhzoumi | | |
| Mohamad Makhzoumi | | Director |
| | |
| /s/ Matthew Manders | | |
| Matthew Manders | | Director |
| | |
| /s/ Adair Newhall | | |
| Adair Newhall | | Director |
| | |
| /s/ Andrew M. Slavitt | | |
| Andrew M. Slavitt | | Director |
