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Filed Pursuant to Rule 424(b)(4)
Registration Statement No. 333-239818

 

15,625,000 Shares

 

 

LOGO

COMMON STOCK

 

 

This is an initial public offering of Oak Street Health, Inc. We are selling 15,625,000 shares of our common stock.

Prior to this offering, there has been no public market for the common stock. The initial public offering price is $21.00 per share. Our common stock has been approved for listing on the New York Stock Exchange (the “NYSE”) under the symbol “OSH.”

We are an “emerging growth company” as defined under the federal securities laws, and as such, we have elected to comply with certain reduced reporting requirements for this prospectus and may elect to do so in future filings.

 

 

See “Risk Factors” beginning on page 21 to read about factors you should consider before buying shares of our common stock.

Immediately after this offering, assuming an offering size as set forth above, we expect to be a “controlled company” within the meaning of the corporate governance standards of the NYSE. See “Management—Controlled Company Status.”

 

 

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

     Per Share      Total  

Initial public offering price

   $ 21.00      $ 328,125,000  

Underwriting discount(1)

   $ 1.26      $ 19,687,500  

Proceeds, before expenses, to Oak Street Health, Inc.

   $ 19.74      $ 308,437,500  

 

(1)

See “Underwriting” for a description of compensation payable to the underwriters.

We have granted the underwriters the option for a period of 30 days after the date of this prospectus to purchase up to an additional 2,343,750 shares of our common stock at the initial public offering price less the underwriting discount.

The underwriters expect to deliver the shares of common stock against payment in New York, New York on August 10, 2020.

 

 

 

J.P. Morgan   Goldman Sachs & Co. LLC   Morgan Stanley
William Blair  
  Piper Sandler
Baird   Truist Securities

Prospectus dated August 5, 2020.


Table of Contents

TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1  

Risk Factors

     21  

Forward-Looking Statements

     65  

Market and Industry Data

     68  

Use of Proceeds

     69  

Dividend Policy

     70  

Organizational Transactions

     71  

Capitalization

     74  

Dilution

     76  

Selected Consolidated Financial Data

     78  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     81  

Business

     110  

Management

     142  

Executive Compensation

     151  

Principal Shareholders

     161  

Certain Relationships and Related Party Transactions

     163  

Description of Capital Stock

     167  

Shares Eligible for Future Sale

     173  

Material U.S. Federal Income Tax Consequences to Non-U.S. Holders

     175  

Underwriting

     179  

Legal Matters

     190  

Experts

     191  

Where you Can Find More Information

     192  

Index to Consolidated Financial Statements

     F-1  

 

 

We and the underwriters have not authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. We and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may provide you. We are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the common stock.

For investors outside of the United States, neither we nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about, and to observe any restrictions relating to, this offering and the distribution of this prospectus outside of the United States.

Through and including August 30, 2020 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

 

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BASIS OF PRESENTATION

In connection with the consummation of this offering, we will effect certain organizational transactions. Unless otherwise stated or the context otherwise requires, all information in this prospectus reflects the consummation of the organizational transactions and this offering, which we refer to collectively as the “Organizational Transactions.” See “Organizational Structure” for a description of the Organizational Transactions and a diagram depicting our anticipated structure after giving effect to the Organizational Transactions, including this offering.

Unless we state otherwise or the context otherwise requires, the terms “we,” “us,” “our,” “our business” and “our company” and similar references refer: (1) on or following the consummation of the Organizational Transactions, including this offering, to Oak Street Health, Inc. and its consolidated subsidiaries, including Oak Street Health, LLC and its affiliated medical groups, and (2) prior to the consummation of the Organizational Transactions, including this offering, to Oak Street Health, LLC and its consolidated subsidiaries, including its affiliated medical groups.

We will be a holding company and upon consummation of this offering and the application of net proceeds therefrom our sole asset will be the capital stock of our wholly owned subsidiaries, including Oak Street Health, LLC. Oak Street Health, Inc. will operate and control all of the business and affairs and consolidate the financial results of Oak Street Health, LLC. Oak Street Health, LLC will be the predecessor of the issuer, Oak Street Health, Inc., for financial reporting purposes. Accordingly, this prospectus contains the historical financial statements of Oak Street Health, LLC and its consolidated subsidiaries. Oak Street Health, Inc. will be the reporting entity following this offering.

 

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PROSPECTUS SUMMARY

This summary highlights selected information contained elsewhere in this prospectus. This summary does not contain all of the information that you should consider before investing in our common stock. For a more complete understanding of us and this offering, you should read and carefully consider the entire prospectus, including the more detailed information set forth under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes. Some of the statements in this prospectus are forward-looking statements. See “Forward-Looking Statements.”

Overview

Since our founding in 2012, our mission has been to build a primary care delivery platform that directly addresses rising costs and poor outcomes, two of the most pressing challenges facing the United States healthcare industry. Our patient-centered approach focuses on meaningfully improving the quality of care for the most at-risk populations. It represents the frontline implementation of the solutions addressing the most powerful trends in healthcare, mainly the shift towards value-based care and increasing patient consumerism. Our approach disrupts the current state of care delivery for Medicare-eligible patients and aligns the incentives of our patients, our providers and our payors by simultaneously improving health outcomes and care quality, lowering medical costs and improving the patient experience.

To pursue our mission, we created a technology-enabled, integrated platform, which we refer to as the Oak Street Platform, to deliver value-based care focused exclusively on Medicare patients. The key attributes that differentiate the Oak Street Platform include:

 

   

Our patient focus. We are focused on the Medicare-eligible population, which generally has consistent, clinically cohesive needs and which we believe represents the greatest potential for cost savings, while still benefiting patient health outcomes, in our current healthcare system.

 

   

Our technology-enabled model. We leverage technology that compiles and analyzes comprehensive patient data and provides actionable health insights through applications that are embedded in care delivery workflows, including at the point of patient-provider interaction.

 

   

Our integrated approach to care delivery. We integrate a personalized approach to primary care, proactive management of our patients’ health needs and expanded preventive services to keep our patient population healthy, reducing the number of hospitalizations and other expensive and unnecessary utilization of the healthcare system. As such, we focus on delivering what we believe to be the right care in the right setting, encouraging our patients to visit us in our centers, while also offering robust virtual and digital engagement options.

 

   

Our value-based relationships. Our value-based capitation contracts reward us for providing high-quality care rather than driving a high volume of services.

According to the Centers for Medicare & Medicaid Services (“CMS”), healthcare spending in the United States reached nearly $3.6 trillion in 2018 and Medicare accounted for more than $700 billion of spending in 2019. We believe the core addressable market for the Oak Street Platform is the approximately 27 million Medicare eligibles in our target demographic, which we believe represents an approximately $325 billion annual industry revenue opportunity. We determine the core addressable market by multiplying an average annual revenue of $12,000 per member, which is derived from our experience and industry knowledge and which we believe represents a reasonable national assumption, by the number of Medicare eligibles in our target markets. Average spending on Medicare is projected by CMS to grow approximately 7% annually, driven primarily by the aging United States population as well as the high prevalence of chronic conditions and the associated cost of care for these conditions among the Medicare eligible population.



 

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We reimagined the approach to caring for a patient population with a high prevalence of chronic conditions and purpose-built the Oak Street Platform to improve health outcomes and combat wasteful spending. The Oak Street Platform consists of (i) Our Centers, (ii) Our Interdisciplinary Care Teams, (iii) Canopy: Our Purpose-Built, End-to-End Technology and (iv) Our Care Delivery Approach. Based on our patients’ health metrics, we believe that the Oak Street Platform provides a measurably higher-quality alternative to the status quo, including an approximately 51% reduction in hospital admissions, 42% reduction in 30-day readmission rates and 51% reduction in emergency department visits, all while maintaining a Net Promoter Score of 90 across our patients based on survey data we gathered from patients after their physician visits from June 2018 until March 2020. For information on how these statistics are calculated, see “Market and Industry Data.” Additionally, the Oak Street Platform is engineered to be scalable and we have demonstrated our ability to grow our model rapidly across multiple markets.

Although we have incurred net losses since inception, we believe that the Oak Street Platform has enabled us to create a healthcare model where all constituencies involved have the ability to “Win.” Our patients, payors and providers are incentivized to adopt the Oak Street Platform and each has the potential to benefit in a meaningful way.

 

   

Patients. We leverage our differentiated care delivery model to improve the health of our patients, effectively manage their chronic conditions and avoid unnecessary hospitalizations while greatly improving their patient experience.

 

   

Payors. We enter into arrangements with Medicare Advantage (“MA”) plans to manage the care of our patients, allowing us to control the plans’ medical costs, increase the plans’ Medicare quality scoring, improve the plans’ profit margin and help the plans grow membership.

 

   

Providers. We enable our providers to focus on improving the lives of their patients and improve their job satisfaction by providing them with meaningful clinical support and customized technology resources.

We believe we can translate these “Wins” into economic benefits. Since 2016, our performance has been driven by our multi-year, contractual arrangements with payors on a per patient, per month ("PPPM") basis, which create recurring revenue streams and provide significant visibility into our financial growth trajectory. By focusing on interventions that keep our patients healthy, we can capture the cost savings the Oak Street Platform creates and reinvest them in our care model. We believe these investments lead to better outcomes and improved patient experiences, which will drive further cost savings, power patient retention and enable us to attract new patients. We believe increasing cost savings over a growing patient population will deliver an even greater surplus to the organization, enabling us to reinvest to scale and fund new centers, progress our care model and enhance our technology. This virtuous cycle has created compelling economics at the center level, with our four centers with more than 2,000 at-risk patients for at least the last three months as of March 31, 2020 operating at 86% weighted average capacity and generating total revenues, excluding capitated revenue associated with Medicare Part D, of $32.3 million and weighted average center-level contribution margins (defined as (i) patient revenue, excluding Medicare Part D revenue minus (ii) the sum of (a) medical claims expense, excluding Medicare Part D related expenses, and (b) cost of care, excluding depreciation and amortization) of 28%. As of March 31, 2020, those four centers, as well as an additional 30 of our 54 centers, had positive center-level contribution margins, and the overall average center-level contribution margin across all of our centers was 12%.

We have demonstrated an ability to rapidly scale, expanding our model to a network of 54 centers, in 13 markets across 8 states, which provided care for approximately 85,000 patients as of March 31, 2020, of which approximately 65% are under capitation arrangements (which we refer to as “at-risk patients”) and approximately 35% are fee-for-service, although fee-for-service accounted for less than 1% of our revenue for the three months ended March 31, 2020. As of March 31, 2020, we, together with our affiliated physician entities, employed approximately 2,300 team members, including approximately 260 primary care providers. For the three months ended March 31, 2019 and 2020, our total revenues were $117.4 million and $201.8 million,



 

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respectively, representing a year-over-year growth rate of 72%. We believe we have significant growth opportunities available to us, with less than 50% of our current aggregate center capacity utilized due to our recent center openings and a substantial opportunity to increase the number of centers we operate in new and existing markets.

The U.S. healthcare system is at a transition point in its evolution

Unsustainable and rising healthcare costs

Healthcare spending in the United States reached nearly $3.6 trillion in 2018 according to CMS, representing approximately 17.9% of U.S. GDP, an all-time high. According to a 2017 study, the United States spends $10,209 per person on healthcare each year, more than any other country in the world and twice the OECD average. Healthcare expenditures are particularly concentrated in the Medicare-eligible population due to the high rate of chronic conditions. While representing only 15% of the United States population, the 65 and older age group accounted for 34% of all healthcare spending in 2014, with an average spend of $19,098 per person. Additionally, two-thirds of the Medicare population lives with two or more chronic health conditions, and treatment of these conditions represents 96% of Medicare spending.

Prevalence of wasteful spending and sub-optimal outcomes

A 2019 study estimated that approximately 25% of all healthcare spending is for unnecessary services, excessive administrative costs, fraud and other problems creating waste, implying approximately $760 billion to $935 billion of annual wasteful spending at current levels.

In 2017, hospital care accounted for the largest portion of healthcare spending in the United States, representing 33% of the total. In 2018, over 60% of Medicare expenditures (including both Medicare Part A spend and Medicare Part B institutional spend), or approximately $455 billion, were dedicated to hospitalization, compared to only approximately 3% dedicated to primary care. Proper management of chronic conditions can significantly reduce the incidence of acute episodes, which are the main drivers of trips to the emergency room and hospitalization, particularly among the elderly.

Despite high levels of spending, the United States healthcare system struggles to produce better health outcomes and to keep doctors and patients satisfied. Life expectancy in the United States was 78.6 years in 2017, compared to 82.2 years in comparable developed countries, and patient satisfaction with the healthcare system is low, as evidenced by a Net Promoter Score of 3 for the average provider, as shown in a 2015 Advisory Board survey.

New payment structures have begun to address the problem

Policymakers and healthcare experts generally acknowledge the fundamental challenges and opportunities for improvement in the delivery of healthcare in the United States. Historically, healthcare delivery was centered around reactive care to acute events, which resulted in the development of a fee-for-service payment model. By linking payments to volume of encounters and pricing for higher complexity interventions, the fee-for-service model does not reward prevention, but rather unintentionally incentivizes the treatment of acute care episodes as they occur. Policymakers have responded by creating programs like MA and pushing for transitions to value-based reimbursements.

 

   

Medicare Advantage. MA works as an alternative to traditional fee-for-service Medicare. In MA, CMS pays health plans a monthly sum per member to manage all health expenses of a participating member. This provides the health plans with an incentive to deliver lower-cost, high-quality care.

 

   

Value-based payments. Value-based refers to the goal of incentivizing healthcare providers to simultaneously increase quality while lowering the cost of care. In January 2015, the United States Department of Health and Human Services (“HHS”) announced a goal of tying 30% and 50% of all



 

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Medicare payments to value through alternative payment models by the end of 2016 and 2018, respectively. In addition, while not a policy-setting body, the Health Care Payment Learning & Action Network, an active group of public and private healthcare leaders, indicated in October of 2019 its desire to move 100% of Medicare payments to being tied to value-based care by 2025. Additionally, the Center for Medicare and Medicaid Innovation recently announced a Direct Contracting Model set to begin in 2021 to create value-based payment arrangements directly with provider groups for their current Medicare fee-for-service patients similar to the value-based contracts that we enter into with our MA partners.

Legacy healthcare delivery infrastructure has been unable to transition from reactive and episodic care to proactive and comprehensive care models

In order for shifts to value-based payment models to drive meaningful results, there must be a corresponding shift in care delivery models. To date, such care delivery models have been slow to develop. While there has been significant investment by providers, payors and technology companies in developing solutions to drive higher quality and lower cost of care, these investments have not resulted in meaningful change within a healthcare delivery infrastructure that remains optimized for the fee-for-service model.

In order to maintain economically viable practices in a fee-for-service payment model, typical primary care providers:

 

   

need to see an ever-increasing number of patients per day with limited support from staff, which limits time spent with each patient during office visits;

 

   

experience time constraints that restrict their ability to engage with patients outside of office visits, which is a key component of ensuring that patients continue to proactively manage their health and do not fall through the cracks of the healthcare system; and

 

   

experience financial constraints that limit their ability to invest in technology and provide patients with many of the supplemental services they need, such as home-based primary care, medication management and behavioral health services.

Advances in technology have disrupted multiple industries when the technology was thoughtfully applied and integrated. These new business models, systems and approaches have replaced legacy offerings and driven significant changes in consumer behavior. We believe that an integrated, value-based care platform enabled by data and technology has the potential to similarly revolutionize the healthcare industry.

The COVID-19 pandemic has highlighted challenges with the current legacy healthcare delivery system. As healthcare providers were faced with dwindling fee-for-service visits in light of the stay-at-home orders and general patient fear, the revenues of traditional healthcare providers plummeted thereby putting a strain on those providers and their ability to provide needed care for their patients.

Our Market Opportunity

We have designed the Oak Street Platform to bring technology-enabled, value-based care to the Medicare-eligible population, which represents the highest proportion of healthcare spending in the United States. We target populations of Medicare beneficiaries in high-density urban and suburban areas and further refine our target markets by utilizing socioeconomic data to target areas suffering from poor care quality and higher unnecessary spend. As of 2018, there were approximately 60 million Medicare beneficiaries in the United States, with an additional 10,000 individuals reaching the age of eligibility every day. Healthcare spending in the United States reached nearly $3.6 trillion in 2018 and Medicare accounted for more than $700 billion of spending in 2019. We estimate our addressable market of Medicare eligibles, based on the criteria set out above, to be 27 million patients. Based upon our experience and industry knowledge, we estimate average annual revenue of $12,000 per member. Multiplying this figure by the number of Medicare eligibles in our target markets, we arrive at what we believe is an annual total addressable market size of approximately $325 billion.



 

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The Oak Street Platform is Re-Defining Primary Care

We reimagined the approach to caring for a patient population with a high prevalence of chronic conditions and purpose-built the Oak Street Platform to improve our patients’ health outcomes and combat wasteful spending, providing a higher-quality alternative to the status quo. Our Oak Street Platform consists of (i) Our Centers, (ii) Our Interdisciplinary Care Teams, (iii) Canopy: Our Purpose-Built, End-to-End Technology and (iv) Our Care Delivery Approach.

Our Centers

Our novel approach starts with retail-like, community-based centers that implement a branded and consumer-focused design to create a welcoming environment that engages our patients. These centers are leased or licensed by Oak Street Health MSO, LLC or an affiliated entity and, pursuant to the terms of certain contractual relationships between Oak Street Health MSO, LLC and our affiliated medical practices, made available for use by the medical practices in the provision of primary care services. While traditional healthcare facilities are often located in medical office buildings that are removed from where patients spend a majority of their time, we target locations in highly accessible, convenient locations close to where our patients live. Each of our centers has a consistent look and feel, which we believe differentiates Oak Street and contributes to our success in acquiring patients.

Our Interdisciplinary Care Teams

We utilize a team-based approach in our patient-focused primary care delivery model and staff interdisciplinary Care Teams to execute our model. Each Care Team is led by a Primary Care Physician or Nurse Practitioner who is partnered with a Registered Nurse, a Medical Assistant and a Scribe to deliver value-based, coordinated care. As a center grows, we increase the number of Care Teams serving that center in order to keep the average number of patients per Care Team low to ensure optimal care quality and patient experience.

Our Care Teams are trained in preventive and comprehensive care designed to address the whole person, across medical, social and behavioral attributes, in a welcoming and friendly manner. Our Care Teams meet daily to discuss their approach for each patient they will see that day and have weekly and monthly planning and review sessions for their sickest patients to assess their progress and determine the next steps in improving their health. Care is provided in several different ways, including face-to-face visits, telehealth visits, remote patient monitoring and in-home care.

Canopy: Our Purpose-Built, End-to-End Technology

Canopy is a key driver of the success of our care model and underlies every aspect of our day-to-day patient engagement and workflows. Canopy comprises internally developed software that connects a suite of population health analytics and technology applications designed to fit seamlessly into our care delivery model and Care Team virtual and in-person workflows.

Our position in the healthcare ecosystem allows Canopy to access and capture an immense amount of data about our patients from a broad set of sources, including payor claims data, pharmacy data and medical records from hospitals and specialists. Canopy enhances our ability to quickly structure and sort these disparate data sets to develop a comprehensive view of both our patients and our target demographic across medical, behavioral and social health attributes. We leverage artificial intelligence and machine learning capabilities to create and refine our clinical rules engine (predictive models and prescriptive algorithms) that informs care delivery and addresses hospital admissions and readmissions, medical costs and patient retention. Our algorithms are internally developed and optimized for the primary care setting, undergo rapid iteration cycles and benefit from clinician partnership and input.



 

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When paired with our operational expertise, we believe Canopy is a key driver in our ability to scale our platform quickly and consistently, while delivering evidence-based care in a value-based model.

Our Care Delivery Approach

Our care delivery approach consists of three core components:

 

   

Personalized Primary Care. We provide preventative care addressing the needs of the whole person—medical, social and behavioral. Upon joining Oak Street, our patients undergo a structured geriatric assessment to understand their care needs. We input these assessments, along with other available data, into Canopy, which analyzes multiple patient risk factors using our internally developed algorithms to stratify patients by the risk of their experiencing an acute event. Based on this analysis we create a tailored, individualized care plan that determines the ideal frequency of primary care visits and use of disease-specific programs. Our patients experience the results of this differentiated approach through approximately eight physician visits per year, significantly more visits than a patient can expect with a typical primary care physician, with our sickest patients being seen even more frequently. In addition, we manage the total number of patients assigned to a Care Team at each center to allow each Care Team to spend more time with their patients and reduce wait times.

 

   

Proactive Patient Health Management. In addition to spending more time with our patients, our smaller ratio of patients to Care Teams allows our physicians to reserve time daily to review their patients’ care plans and each week conduct a deeper dive on high-risk patients. The Oak Street Platform leverages Canopy’s robust data and analytics to generate insights, which are fed into our custom-built workflow applications in order to identify additional actions to take, gaps to close and interventions to perform on our patients. This systematic review of each of our patients is designed to ensure that once a Medicare member becomes an Oak Street patient, they stay current with their recommended health management plan, do not fall through the cracks of the healthcare systems and therefore remain on the path to better health.

 

   

Enhanced Clinical Services. Using Canopy’s internally developed algorithms, we identify high-risk patients with specific needs outside of primary care and provide multi-disciplinary interventions to improve outcomes and reduce cost. We offer a number of programs that are integrated into our care model and that would not typically be available to patients under legacy fee-for-service models, including behavioral health, home-based primary care by dedicated provider teams, virtual digital offerings, medication management, social determinant support, 24x7 live phone support by our clinical call center and transitional care support to help our patients navigate the care journey outside of our centers.

Our Impact

Our care model has consistently demonstrated outstanding clinical results, removed costs and delivered an industry-leading patient experience.

 

   

Improving clinical outcomes, driving reduction of costs. In 2018, over 60% of Medicare expenditures (including both Medicare Part A spend and Medicare Part B institutional spend), or approximately $455 billion, were dedicated to hospitalization, compared to only approximately 3% dedicated to primary care. Compared to a Medicare fee-for-service benchmark, we have been able to drive an approximately 51% reduction in hospital admissions, 42% reduction in 30-day readmission rates and 51% reduction in emergency department visits.

 

   

Patient experience. We have highly satisfied and loyal patients, as evidenced by our Net Promoter Score of 90.



 

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Our care model has created a rare instance where high-quality care and a positive customer experience come at a lower cost to the healthcare system. By reducing utilization of high-cost, and often unnecessary, episodes of care and focusing on providing less expensive preventive care to our patients, we are able to reduce instances of expensive emergency care and hospitalization, which lowers the overall cost of care in the healthcare system. As we deliver on keeping our patients healthier, we capture the cost savings, driving our profitability. As of March 31, 2020, our four centers with more than 2,000 at-risk patients for at least the last three months were operating at 86% weighted average capacity and generated total revenues, excluding capitated revenue associated with Medicare Part D, of $32.3 million and weighted average center-level contribution margins (defined as (i) patient revenue, excluding Medicare Part D revenue, minus (ii) the sum of (a) medical claims expense, excluding Medicare Part D related expenses, and (b) cost of care, excluding depreciation and amortization) of 28%. As of March 31, 2020, those four centers, as well as an additional 30 of our 54 centers, had positive center-level contribution margins, and the overall average center-level contribution margin across all of our centers was 12%.

We Are Engineered to be Scalable

We have proven our ability to execute our model, evidenced by the consistency of our performance as we have grown to date. Our performance has improved each year and we have seen our model work across all of our markets. Since opening our initial centers in 2013:

 

   

Our center-level contribution ramp has nearly uniformly improved across each subsequent vintage, driven by:

 

   

patient-level contribution continuing to trend upward by vintage, both overall and when adjusted by tenure; and

 

   

steady patient growth across vintages.

 

   

We have generated consistent center-level contribution ramps across all of our markets, driven by both core drivers of center contribution:

 

   

consistent patient contribution across markets; and

 

   

steady patient growth across markets.

This consistent performance gives us the conviction to continue to invest in identifying and building centers, hiring top-tier talent and attracting patients in existing and new markets in order to drive long-term value creation.

We believe that we have created a repeatable, data-driven playbook to expand our brand and presence across the United States and we have made substantial investments to support each key component of our approach. The fundamental aspects of our playbook include an algorithmic approach to site selection based on our key criteria, a focused approach to recruiting and developing talent (including physicians, nurse practitioners, Care Team members and regional leaders) and an efficient go-to-market model with grassroots community outreach to engage and attract patients.

Our Value Proposition

We believe that, despite a history of net losses, our healthcare ecosystem provides all constituencies involved in our care delivery model with the opportunity to “Win.” The Oak Street Platform incentivizes our patients, our payors and our providers to adopt our vision and rewards them each in a meaningful way.

Our Patients “Win” due to Measurably Better Health Outcomes and Patient Experience

Our patients have complex health needs. As of 2017, the average income of our patient base, as self-reported to us, was approximately $20,700. Approximately 42% of our patients are dual eligible for both



 

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Medicare and Medicaid. Approximately 40% of our patients have a behavioral health diagnosis and approximately 50% struggle with one or more social risk factors like isolation and lack of access to housing and food that are considered social determinants of health. Approximately 86% of our at-risk patients have one or more chronic conditions, with the average at-risk patient having three or more chronic conditions. We currently provide care to this population in at least seven different languages. The Oak Street Platform is designed to address their needs and drive top-rated quality performance, outstanding health outcomes and an experience our patients love. This is evidenced by our strong track record of quality outcomes and patient experience metrics, as evidenced by our Net Promoter Score of 90 and by our patient health metrics, including an approximately 51% reduction in hospital admissions (based on our hospital admission rates per thousand patients of 183 as of March 31, 2020, compared to the Medicare benchmark of 370), 42% reduction in 30-day readmission rates (based on our rate of hospital readmissions within 30 days per thousand patients of 11% as of March 31, 2020, compared to the Medicare benchmark of 19%) and 51% reduction in emergency department visits (based on our rate of emergency department “treat and release” claims per thousand patients of 535 as of December 31, 2019, compared to the Medicare benchmark of 1,091). See the section titled “Business-Overview” for a description of how we derive the above Medicare benchmarks.

Our Payors “Win” as Medical Costs Decline, Membership Volumes Increase, and Medicare Quality Metrics Improve

Although we have limited experience managing contracts with full risk, since entering into our first fully capitated contracts in 2016 we have worked closely with key payors to improve outcomes for patients. Our demonstrated track record of improving patient outcomes enables payors to become net beneficiaries when we open centers in locations where they have insured Medicare members or desire to grow. Payors dedicate a large share of their efforts to reducing medical costs and they have a strong desire to engage with solutions proven to achieve that goal. We believe that our ability to remove unnecessary costs through a comprehensive approach to patient care makes us a partner of choice for payors and allows payors to lock in improved medical cost performance. Also, our strong performance in Medicare quality metrics, as demonstrated by our achievements in addressing Healthcare Effectiveness Data and Information Set (“HEDIS”) gaps and adherence to evidence-based care guidelines, supports improvements in payors’ quality score, which increases their revenue. On the whole, we believe we represent an attractive opportunity for payors to meaningfully improve their financial results.

As of March 31, 2020, we had contractual relationships with 23 payor partners, including all of the top five national MA payors. A significant portion of our revenue is concentrated with three large payors, Humana, WellCare and Cigna HealthSpring, which together comprised approximately 72% of our capitated revenue for the three months ended March 31, 2020, with 49% from Humana, 12% from WellCare and 11% from Cigna HealthSpring.

Our Providers “Win” because the Oak Street Platform Allows Them to Focus on Improving the Lives of Their Patients

Our providers are supported by integrated Care Teams that partner together to take care of patients and allow providers to spend more time with patients. Additionally, the Oak Street Platform is enabled by technology that our providers leverage to ensure they are aware of each patient’s health history and potential risks, helping to inform proper diagnoses. The Oak Street Platform is designed to reward quality, not quantity, of care. Provider compensation is determined by quality measures across the population of patients for which they are responsible and is not linked to visit volume. This dynamic is valued by providers because it reduces the potential for burnout and rewards them for making decisions in the best interest of their patients.

The net result of our model is that our providers have a smaller number of patients to care for, more time with patients, more support from our Care Teams and better technology to help them care for patients.



 

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We “Win” through a Virtuous Cycle that Promotes Growth across All Facets of Our Business and Drives Our Financial Results

The Oak Street Platform generates a positive feedback loop that can drive our expansion and can perpetuate growth, unlocking the embedded economics of our business as we add centers and those centers mature. We built Oak Street Health to serve patients and provide measurably better health in all communities we serve. By reducing overall cost by increasing the investment in primary and preventive care, we put the dollars where they better serve our patients and increase their overall wellbeing. We have created a model that incentivizes all constituencies to work together, because everyone “Wins.” When all constituencies benefit, we can share in the value. By structuring the majority of our contracts with MA plans as fully capitated arrangements for managing their members, we capture the meaningful value we create by increasing care quality, improving health outcomes and saving the healthcare system money. This potential surplus can then be reinvested in the business to expand and improve our care model which leads to more savings, powering a self-driven cycle of investment and growth that we believe allows us to scale nationally and rebuild healthcare as it should be.

Our Competitive Advantages

We Purpose-Built the Oak Street Platform from the Ground Up

The Oak Street Platform was designed to manage Medicare-eligible patients’ total cost of care through capitated, value-based payments. We designed a brand-new model because the existing primary care infrastructure was not built to be able to provide the type of care necessary to drive the massive improvements in cost and quality the health system needs. We decided to focus on the Medicare market due to its size, growth tailwinds and largely clinically cohesive population. We designed the Oak Street Platform to take risk in managing patients’ health below an agreed-upon baseline cost because we believed there was a meaningful opportunity to generate system-wide cost savings and we saw an opportunity to capture the value we created by delivering those results. The purposeful design of the Oak Street Platform against a specific population with similar clinical needs differentiates it from the majority of other players in the healthcare delivery system.

We Have a First Mover Advantage

Our care delivery model is the result of years of research, observation, iteration and enhancement, and we continue to invest in improving our approach. Due to our existing scale, growth trajectory and demonstrated ability to drive improving center-level financials, we believe we have access to more capital and operational expertise than potential new entrants, meaning we will be able to continue to improve our model more quickly than new entrants are able to develop their models, build scale and become our competitors.

Positive Feedback Loop Accelerates Our Business

We have created an environment in which our strong performance in one dimension accelerates performance in another, which, in turn, leads to growth in yet another aspect of our business.

Custom-Designed, Integrated End-to-End Technology

Canopy is designed to fit seamlessly into our care delivery model and Care Team workflows. As we scale, so does our technology. With the benefit of larger data pools as our business grows, Canopy will be able to produce increasingly powerful data insights that will equip us with more tools to improve the health of our patients. We believe that we have only begun to unlock the value of our data assets, which are growing rapidly as we open new centers and add more patients.



 

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Organic, Community-Based Marketing and Patient Recruitment

We employ a multichannel marketing strategy that goes directly to our target customer. We fundamentally control our own destiny and can scale the number of centers on our platform rapidly and fill them with any interested patients we attract.

Highly Recurring Customer Base Creates Subscription-Like Revenue Model

Our patients benefit from our offering and they rarely leave. Because we generate the majority of our revenue on a PPPM basis and we are able to consistently retain patients, we have significant visibility into our future financial performance. This provides us the flexibility to quickly adapt to changing circumstances and deliver what we believe to be the right care in the right setting, as we did with telehealth in the spring of 2020, without having an immediate adverse impact to our revenue.

A Flexible Model Able to Match Patient Needs and Preferences

The COVID-19 pandemic is creating difficulties for traditional fee-for-service model providers to provide care while causing changes to patient’s preferred means of engagement. The changes in preference are not uniform, with some patients preferring traditional in-person visits while others would prefer leveraging telehealth. It is unknown how these preferences will evolve both during and after the pandemic. Additionally, clinical needs of patients vary. Given the high disease burden of our patients, we believe in-person care will remain a necessity for the vast majority, with our sickest patients generally requiring more in-person care. However, we believe we have been able to effectively complement in-person care with telehealth visits and can continue to do so. For reasons of both patient preference and clinical need, we believe our model’s adaptability and our ability to effectively engage our patients in numerous ways without negatively impacting our capitated revenue will be an advantage for Oak Street.

Mission-Driven Team with Unique “Oaky” Culture

Our team has a steadfast commitment to executing on the mission and vision of our business. To achieve our goals, we have developed an “Oaky” culture centered around creating an unmatched patient experience, driving clinical excellence, taking ownership, fostering innovation and radiating positive energy.

Our Growth Strategy

The key elements of our growth strategy include:

 

   

increase patient enrollment within existing centers;

 

   

add additional centers in existing markets;

 

   

expand into new markets;

 

   

movement of current patients from fee-for-service to value-based arrangements; and

 

   

continue to optimize the Oak Street Platform.

Impact of the COVID-19 Pandemic on Our Operations

The severity, magnitude and duration of the current COVID-19 pandemic is uncertain and rapidly changing. As of the date of this prospectus, the extent to which the COVID-19 pandemic may impact our business, results of operations and financial condition remains uncertain. Furthermore, because of our business model, the full impact of the COVID-19 pandemic may not be fully reflected in our results of operations and overall financial condition until future periods.



 

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The ultimate impact of the COVID-19 pandemic on our business, results of operations and financial condition will depend on certain developments, including: the duration and spread of the outbreak; government responses to the pandemic; its impact on the health and welfare of our patients, our employees and their families; its impact on patient, industry, or employee events; delays in hiring and onboarding new employees; and effects on our partners and supply chain, some of which are uncertain, difficult to predict, and not within our control.

In response to the COVID-19 pandemic, in the first and second quarters of 2020, we took the following actions to ensure the safety of our employees and their families and to address the physical, mental and social health of our patients:

 

   

Temporarily closed all of our corporate offices and enabled our entire corporate work force to work remotely;

 

   

Implemented travel restrictions for non-essential business;

 

   

Transitioned much of our center-based care to be delivered by our providers virtually through newly developed telehealth capabilities, including video and telephone which has enabled us to increase our visits per center per day by 12% from February 2020 to April 2020;

 

   

Made operational changes to the staffing and operations of our centers, which remain open as “essential” businesses, to minimize potential exposure to and transmission of COVID-19;

 

   

Temporarily delayed planned openings of new centers;

 

   

Temporarily halted community outreach and other marketing initiatives which drive new patients to our platform;

 

   

Acquired and deployed significantly greater amounts of personal protective equipment (“PPE”) to ensure the safety of our employees and patients;

 

   

Created a program called “COVID Care” to actively monitor our patients for suspected COVID-19 infections with the goal of managing those symptoms to keep our patients safely out of the hospital unless and until necessary due to the potential infection risks in the hospital environment; and

 

   

Redeployed our contracted and employed drivers, who typically transport patients to our centers, to deliver food from food pantries to our patients to address food supply issues or challenges.

These changes remain in effect and could extend into future quarters. It is critical to note that, as detailed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Components of Results of Operations—Revenue,” over 97% of our total revenues are recurring, consisting of fixed monthly per-patient-per-month capitation payments we receive from MA plans. Due to our recurring revenue base, we experienced minimal impact to our revenue in the first quarter of 2020 and expect minimal impact to revenue on our existing patient base in 2020. The contracted nature of our revenue allowed us to rapidly transition our business from delivering the majority of our care via our retail-based centers to virtual care/telehealth modalities without concern for any changes to reimbursement or revenue impact to our business, as we are paid the same to care for our at-risk patients regardless of how we deliver care services to our patients. Our business model and its underlying economics align our interests with our patients’ health and wellbeing needs; therefore, we quickly invested to address those needs to ensure the safety and health of our patients without material financial impact to our company. Furthermore, as we continue to leverage our employed base of healthcare providers, we are able to continue to assess and meet the clinical needs of our patients, without concern for how the vast majority of those services may be reimbursed, as only 1.1% of our total revenues for the year ended December 31, 2019 (a pre-COVID-19 period) was related to fee-for-service payments and represented only minimal incremental cost to our organization. During April and May 2020, we engaged with 80% of our patients in some form, with 62% of our patients completing an audio, in-person or video visit, and the remaining 18% receiving a non-visit touch point such as a call with a social worker to discuss social determinants of health needs.



 

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We expect COVID-19 to affect our medical claims expense. Measuring from the beginning of the pandemic until May 31, 2020, we estimate that approximately 1,906 of our at-risk patients had symptoms that suggested possible COVID-19 infection, representing 3% of our at-risk patients. As we are financially responsible for essentially all of the healthcare costs associated with those patients whether we provide that care or a third party provides that care, we suspect that the healthcare costs of these patients will be greater than had COVID-19 not occurred. It is impossible, however, to know what other healthcare issues these patients may have encountered in their pre-COVID-19 lives and whether the COVID-19 costs are or will be greater or lesser than the costs these patients would otherwise incur. Additionally, because of the extraordinary measures taken by local governments in our markets, all of our patients had more limited access to healthcare services, including healthcare specialists such as cardiologists or orthopedists, to schedule both inpatient and outpatient surgeries, and to some hospital care. We expect that beginning in late March 2020 and extending through most of the second quarter of 2020, our patients who were not infected with COVID-19, which represents over 97% of our at-risk patients, incurred lower healthcare costs than we would have otherwise expected, which will result in lower medical claims expense that we incur. We expect the vast majority of these costs are just delayed and will be incurred at future points in time and it is possible that the deferral of healthcare services could cause additional health problems in our existing patients, which could increase our costs in the future. We cannot accurately estimate the net potential impact, positive or negative, to medical claims expense at this time. Furthermore, given the time it takes for medical claims to be submitted to MA plans, adjudicated, and sent to us, we believe it will be several quarters before we will be able to accurately calculate the impact on medical claims expense from the COVID-19 pandemic. We do not believe, however, that the impact of medical claims related to COVID-19 that we have experienced to date will have a materially detrimental effect on our long-term financial performance. This belief is based on several indicators that the Company regularly tracks, including:

 

   

Hospital admission rates — inpatient hospital costs represent approximately 48% of our at-risk patients’ medical claims. Therefore, we closely monitor the number of our patients that are admitted to the hospital. Through May 31, 2020, our hospital admission rates are within the normal bounds of what we have historically experienced and are at approximately the same levels we experienced in 2019.

 

   

Approximately 90% of our patients are in an HMO-like product, which generally requires a referral from our providers to see specialists. The cost of specialist visits, independent lab work, ambulatory surgery centers, and hospital outpatient expenses, all of which are impacted by specialists’ visits, account for approximately 30% of our at-risk patients’ medical claims. Our specialist referral volumes declined approximately 70% when we compare our providers’ weekly ordering patterns for the first full 10 weeks of 2020 to the subsequent 12 weeks.

Although we plan to increase our efforts in summer 2020, we expect the temporary cessation of our outbound marketing efforts to be a potential headwind on growth in 2020 and potentially beyond. We believe one of the effects of COVID-19 has been increased focus on health and wellbeing across all patients and therefore there is still strong demand for the type of quality care we deliver and a desire to receive that care in our centers. In light of that, we have developed, and continue to develop, new methods of outreach that we believe will be effective in the current environment. For example, we are engaging community partners, such as senior living facilities and faith-based organizations, to obtain referrals of older adults who could benefit from our services and care model. Given, however, that much of our historic growth has come from in-person meetings and events, our historical growth is not necessarily a reliable indicator of our future growth.

The impact, if any, of these and any additional operational changes we may implement is uncertain, but changes we have implemented to date have not affected and are not expected to materially affect our ability to maintain operations, including financial reporting systems, internal control over financial reporting, and disclosure controls and procedures. See “Risk Factors” for further discussion of the possible impact of the COVID-19 pandemic on our business and the section titled “Business—Impact of the COVID-19 Pandemic.”



 

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Recent Unaudited Operating Results

Set forth below are certain preliminary estimates of our operating results for the three months ended June 30, 2020 compared to our actual operating results for the three months ended June 30, 2019. We have not yet finalized our operating results for the three months ended June 30, 2020, and our consolidated statements of operations and related notes as of and for the three months ended June 30, 2020 are not expected to be available until after this offering is completed. Consequently, our final operating results for the three months ended June 30, 2020 will not be available to you prior to investing in this offering. While we are currently unaware of any items that would require us to make adjustments to the financial information set forth below, it is possible that we or our independent registered public accounting firm may identify such items as we complete our interim financial statements and any resulting changes could be material. Accordingly, undue reliance should not be placed on these preliminary estimates. These preliminary estimates are not necessarily indicative of any future period and should be read together with “Risk Factors,” “Forward-Looking Statements” and our consolidated financial statements and related notes included in this Registration Statement.

The preliminary financial data included below has been prepared by, and is the responsibility of, our management. Our independent auditors have not audited, reviewed, compiled or performed any procedures with respect to such preliminary financial data or the accounting treatment thereof. Accordingly, our independent auditors express no opinion or any other form of assurance with respect thereto.

We are providing the following preliminary estimates of our operating results for the three months ended June 30, 2020:

     For the Three Months Ended June 30,  
     2019     2020  
           Low     High  

Financial Results

      

Total revenues

   $ 126.5     $ 209.0     $ 215.0  

Medical claims expense

   $ 84.3     $ 154.0     $ 160.0  

Cost of care, excluding depreciation & amortization

   $ 31.4     $ 39.0     $ 45.0  

Net loss attributable to Oak Street Health, LLC

   $ (20.2   $ (26.0   $ (33.0

Key Metrics

 

   

Centers

     44       54       54  

Total Patients

     64,000       86,500       86,500  

At-Risk

     63%       66%       66%  

Fee-for-service

     37%       34%       34%  

Patient Contribution

   $ 38.7     $ 48.0     $ 53.0  

Platform Contribution

   $ 10.8     $ 14.0     $ 20.0  

Comparison of the Three Months Ended June 30, 2020 and 2019

The estimated increase in total revenues of 65% to 70% is primarily attributable to patient growth of 35%, as well as an increase in total revenues per patient and $6 million of revenues resulting from prior period adjustments. Total revenues per patient increased by a range of 22% to 26% (19% to 22%, excluding prior period adjustments) due to a shift in patient mix toward higher-premium at-risk patients that had a higher level of acuity on average and thus higher capitation payments.

The estimated increase in medical claims expense of 83% to 90% is primarily attributable to patient growth of 35%, as well as an increase in medical claims expense per patient driven by medical costs trends and mix shift of patients to higher cost markets and an increase in medical claims expense related to prior periods.



 

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Excluding the increase in the medical claims expense related to prior period adjustments, the estimated increase in medical claims expense was 64% to 71%.

The estimated cost of care, excluding depreciation and amortization increased during the period by a range of 24% to 43% compared to the three months ended June 30, 2019, primarily due to increases in salaries and benefits, occupancy, transportation, and medical supply costs related to our 35% growth in patients and growth of centers of 10.

The estimated net loss attributable to Oak Street Health, LLC changed during the period by a range of $6 million to $13 million from the three months ended June 30, 2019 primarily due to increases in total operating expenses for the period compared to the three months ended June 30, 2019, partially offset by higher revenues. The increase in total operating expenses was primarily due to medical claims expense and salaries and benefits, including stock-based compensation, as we continued to expand our team to support our growth and prepared to become a public company.

Risks Associated with Our Business

There are a number of risks related to our business, this offering and our common stock that you should consider before you decide to participate in this offering. You should carefully consider all the information presented in the section entitled “Risk Factors” in this prospectus. Some of the principal risks related to our business include the following:

 

   

our history of net losses, with an accumulated deficit of $369.4 million as of March 31, 2020, and our ability to achieve or maintain profitability;

 

   

the impact of the COVID-19 pandemic on our business;

 

   

difficulty evaluating our current business and future prospects given our limited operating history;

 

   

the success of our growth strategy and our ability to achieve expected results;

 

   

our ability to attract new patients;

 

   

the dependence of our revenues and operations on a limited number of key payors;

 

   

the risk of termination or non-renewal of the Medicare Advantage contracts held by the health plans with which we contract, or of our contracts with those plans;

 

   

changes in the payor mix of our patients and potential decreases in our reimbursement rates;

 

   

the risk that the cost of providing our services will exceed our compensation;

 

   

risks related to regulation, as we operate in a highly regulated industry;

 

   

the fact that the Lead Sponsors control us, and their interests may conflict with ours or yours; and

 

   

the other factors set forth under “Risk Factors.”

These and other risks are more fully described in the section entitled “Risk Factors” in this prospectus. If any of these risks actually occurs, our business, financial condition, results of operations, cash flows and prospects could be materially and adversely affected. As a result, you could lose all or part of your investment in our common stock.

General Corporate Information

Oak Street Health, Inc. was incorporated as a Delaware corporation on October 22, 2019 in anticipation of this offering. Our principal executive offices are located at 30 W. Monroe Street, Suite 1200, Chicago, Illinois



 

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60603. Our telephone number is (312) 733-9730. Our website address is www.oakstreethealth.com. The information contained on, or that can be accessed through, our website is not incorporated by reference into this prospectus, and you should not consider any information contained on, or that can be accessed through, our website as part of this prospectus or in deciding whether to purchase our common stock. We are a holding company and all of our business operations are conducted through our subsidiaries and affiliated medical groups.

This prospectus includes our trademarks and service marks such as “Oak Street Health”, which are protected under applicable intellectual property laws and are the property of us or our subsidiaries. This prospectus also contains trademarks, service marks, trade names and copyrights of other companies, such as “Humana,” “WellCare,” and “Cigna HealthSpring,” which are the property of their respective owners. Solely for convenience, trademarks and trade names referred to in this prospectus may appear without the ® or symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names.

Implications of Being an Emerging Growth Company

We qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year following the fifth anniversary of the completion of this offering, (2) the last day of the fiscal year in which we have total annual gross revenue of at least $1.07 billion, (3) the date on which we are deemed to be a large accelerated filer (this means the market value of common that is held by non-affiliates exceeds $700.0 million as of the end of the second quarter of that fiscal year), or (4) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period.

An emerging growth company may take advantage of reduced reporting requirements that are otherwise applicable to public companies. These provisions include, but are not limited to:

 

   

not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended (the “Sarbanes-Oxley Act”);

 

   

reduced disclosure obligations regarding executive compensation in our periodic reports, proxy statements and registration statements; and

 

   

exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.

We have elected to take advantage of certain of the reduced disclosure obligations regarding financial statements and executive compensation in this prospectus and expect to elect to take advantage of other reduced burdens in future filings. As a result, the information that we provide to our shareholders may be different than you might receive from other public reporting companies in which you hold equity interests.

In addition, under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We intend to take advantage of the longer phase-in periods for the adoption of new or revised financial accounting standards under the JOBS Act until we are no longer an emerging growth company. Our election to use the phase-in periods permitted by this election may make it difficult to compare our financial statements to those of non-emerging growth companies and other emerging growth companies that have opted out of the longer phase-in periods permitted under the JOBS Act and who will comply with new or revised financial accounting standards. If we were to subsequently elect instead to comply with public company effective dates, such election would be irrevocable pursuant to the JOBS Act.



 

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THE OFFERING

 

Common stock offered

15,625,000 shares.

 

Option to purchase additional shares

2,343,750 shares.

 

Common stock to be outstanding after this offering

238,535,856 shares (or 240,879,606 shares if the underwriters’ option to purchase additional shares from us is exercised in full).

 

Use of proceeds

We estimate that our net proceeds from this offering will be approximately $305.4 million, or approximately $351.7 million if the underwriters’ option to purchase additional shares is exercised in full, after deducting the underwriting discount and estimated offering expenses payable by us.

 

  The principal purposes of this offering are to increase our capitalization and financial flexibility, create a public market for our common stock and enable access to the public equity markets for us and our shareholders. We expect to use approximately $86.2 million of the net proceeds of this offering to repay outstanding borrowings, including fees and expenses, under our $90.0 million loan agreement with Hercules Capital, Inc. (the “Loan Agreement”), under which $80.0 million in principal amount was outstanding and which had an interest rate of 9.75% as of March 31, 2020, and the remainder of such net proceeds will be used for general corporate purposes. See “Use of Proceeds” for additional information.

 

Controlled company

After this offering, assuming an offering size as set forth in this section, we expect to be a controlled company within the meaning of the corporate governance standards of the NYSE. See “Management—Controlled Company Status.”

 

Directed share program

At our request, the underwriters have reserved up to 781,250 shares of common stock, or 5% of the shares of common stock to be offered by this prospectus for sale, at the initial public offering price, through a directed share program. Shares purchased through the directed share program will not be subject to a lock-up restriction, except in the case of shares purchased by any of our directors or officers and certain of our employees and existing equityholders. The number of shares of common stock available for sale to the general public will be reduced to the extent these individuals or entities purchase such reserved shares. Any reserved shares that are not so purchased will be offered by the underwriters to the general public on the same basis as the other shares offered by this prospectus.

 

Risk factors

Investing in our common stock involves a high degree of risk. See “Risk Factors” elsewhere in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our common stock.


 

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Proposed trading symbol

“OSH.”

The number of shares of common stock to be outstanding following this offering is based on 222,910,856 shares of common stock outstanding as of March 31, 2020 on a pro forma basis after giving effect to the Organizational Transactions, and excludes:

 

   

11,934,375 shares of common stock, plus future increases, reserved for future issuance under our Omnibus Incentive Plan (the “2020 Plan”), including (1) 151,644 restricted stock units (“RSUs”) that may be settled for an equal number of shares of common stock that we will issue to certain employees and directors upon completion of this offering and that vest in accordance with the schedule described under “Organizational Transactions”, and (2) options to purchase an aggregate of 694,799 shares of common stock that we will issue to approximately seven existing unitholders upon completion of this offering, with an exercise price set at the initial public offering price, and that vest in accordance with the schedule described under “Organizational Transactions”;

 

   

Options to purchase an aggregate of 14,316,334 shares of common stock at a strike price equal to the initial public offering price and that vest in accordance with the schedule described under “Organizational Transactions” that we will issue in exchange for profits interests in Oak Street Health, LLC in connection with the Organizational Transactions; and

 

   

2,386,875 shares of common stock, plus future increases, reserved for issuance under our 2020 Employee Stock Purchase Plan (the “ESPP”).

Unless otherwise indicated, all information in this prospectus assumes:

 

   

the completion of the Organizational Transactions, as described under “Organizational Transactions”;

 

   

the filing of our amended and restated certificate of incorporation and the adoption of our bylaws, each in connection with the closing of this offering; and

 

   

no exercise by the underwriters of their option to purchase up to 2,343,750 additional shares of common stock.



 

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Summary Consolidated Financial Data

The following tables summarize our consolidated financial data. The summary consolidated statement of operations data for the years ended December 31, 2018 and 2019 are derived from our audited consolidated financial statements that are included elsewhere in this prospectus. The summary consolidated statement of operations data for the three months ended March 31, 2019 and 2020 and the summary consolidated balance sheet data as of March 31, 2020 are derived from our unaudited interim consolidated financial statements that are included elsewhere in this prospectus. The unaudited interim consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, that are necessary for the fair statement of our unaudited interim consolidated financial statements.

Our historical results are not necessarily indicative of the results that may be expected in the future. You should read the summary historical financial data below in conjunction with the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and related notes included elsewhere in this prospectus.

Oak Street Health, Inc. was formed as a Delaware corporation on October 22, 2019 in anticipation of this offering and has not, to date, conducted any activities other than those incident to its formation, the Organizational Transactions and the preparation of the prospectus and the registration statement of which this prospectus forms a part.

 

     Year Ended December 31,     Three Months Ended
March 31,
 
     2018     2019     2019     2020  
(dollars in thousands)                (unaudited)  

Revenues:

        

Capitated revenue

   $ 309,594     $ 539,909     $ 115,329     $ 196,590  

Other patient service revenue

     8,344       16,695       2,047       5,195  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     317,938       556,604       117,376       201,785  

Operating expenses:

        

Medical claims expense

     227,566       385,998       77,274       132,285  

Cost of care, excluding depreciation and amortization

     85,958       140,853       27,644       43,769  

Sales and marketing

     25,470       46,189       8,675       11,871  

Corporate, general and administrative expenses

     50,799       79,592       11,911       24,379  

Depreciation and amortization

     4,182       7,848       1,724       2,505  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     393,975       660,480       127,228       214,809  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (76,037     (103,876     (9,852     (13,024

Other income (expense):

        

Interest expense, net

     (3,688     (5,651     (9     (2,426

Other

     10       84       62       95  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense)

     (3,678     (5,567     53       (2,331
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (79,715     (109,443     (9,799     (15,355

Net loss attributable to noncontrolling interests

     171       1,581       (196     355  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to the Company

   $ (79,544   $ (107,862   $ (9,995 )    $ (15,000 ) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Undeclared and deemed dividends on Investor Units

     (39,118     (29,370     (7,114     (9,572
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common unitholders

   $ (118,662   $ (137,232   $ (17,109 )    $ (24,572 ) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average number of common units outstanding - basic and diluted

     689,957       620,068       620,068       620,068  

Net loss per unit - basic and diluted

   $ (171.98   $ (221.32   $ (27.59 )    $ (39.63 ) 


 

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     Year Ended December 31,     Three Months Ended
March 31,
 
     2018      2019     2019      2020  
(dollars in thousands)                 (unaudited)  

Pro Forma Per Share Data(1)(2):

                                                                              

Pro forma net income (loss) per share:

          

Basic and Diluted

      $ (0.65      $ (0.11
     

 

 

      

 

 

 

Pro forma weighted-average shares used in computing net income (loss) per share:

          

Basic and Diluted

        204,098,479          204,098,479  

 

(1)

Unaudited pro forma per share information gives effect to the Organizational Transactions, our sale of 15,625,000 shares of common stock in this offering and after deducting the underwriting discount and estimated offering expenses payable by us and the application of the net proceeds from this offering to repay $80.0 million in principal amount of outstanding borrowings under our Loan Agreement as set forth under “Use of Proceeds.” For the year ended December 31, 2019, the pro forma net loss is computed by decreasing the net loss by $5.7 million of interest expense, net and increasing the net loss by $0.6 million of compensation expense associated with the 2020 Tender Offer as if the transactions had occurred on January 1, 2019. For the three months ended March 31, 2020, the pro forma net loss is computed by decreasing the net loss by $2.4 million of interest expense, net and increasing the net loss by $0.6 million of compensation expense associated with the 2020 Tender Offer as if the transactions had occurred on January 1, 2020. Pro forma weighted-average shares outstanding is computed by increasing the weighted-average shares outstanding by 3,809,524, which represents the $80.0 million principal balance of indebtedness being repaid with the proceeds of this offering divided by the initial public offering price per share. The principal balance does not include the associated interest and repayment penalties of $4.9 million and $4.5 million that we expect to incur in connection with the repayment of the outstanding indebtedness for the year ended December 31, 2019 and three months ended March 31, 2020, respectively. In conjunction with the conversion, all of our outstanding equity interests will be converted into shares of common stock. For purposes of the diluted net loss per share calculation, unvested restricted shares, RSUs and stock options are considered to be common stock equivalents, but have been excluded from the calculation of diluted net loss per share, as their effect would be anti-dilutive for all periods presented. Therefore, basic and diluted net loss per share applicable to common stockholders were the same for all periods presented. This pro forma data is presented for informational purposes only and does not purport to represent what our net income (loss) or net income (loss) per share actually would have been had the offering and use of proceeds therefrom occurred on January 1, 2019 or to project our net income (loss) or net income (loss) per share for any future period.

(2)

Reflects the 2020 Tender Offer (as defined herein) completed on April 27, 2020. 107,208 Founders’ Units, 1,142 Incentive Units and 22,801 Profits Interests were tendered for a purchase price of $20.0 million.



 

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     March 31, 2020  
     Actual      Pro Forma As
Adjusted(1)(4)
 
     (dollars in thousands)  

Consolidated Balance Sheets Data:

     

Cash(2)

   $ 226,342      $ 425,548  

Working capital(3)

   $ 209,432      $ 408,638  

Total assets

   $ 541,484      $ 740,690  

Long-term debt, net of current portion

   $ 81,731        —    

Redeemable Investor Units

   $ 545,001        —    

Total members’ deficit

   $ (358,412    $ 474,453  

 

(1)

Reflects our sale of 15,625,000 shares of common stock in this offering and after deducting the underwriting discount and estimated offering expenses payable by us and the application of the net proceeds from this offering to repay $80.0 million in principal amount of outstanding borrowings under our Loan Agreement as set forth under “Use of Proceeds.” The Organizational Transactions have no impact on the line items presented.

(2)

Includes $10,391 of restricted cash.

(3)

We define working capital as current assets less current liabilities.

(4)

Reflects the 2020 Tender Offer (as defined herein) completed on April 27, 2020. 107,208 Founders’ Units, 1,142 Incentive Units and 22,801 Profits Interests were tendered for a purchase price of $20.0 million.



 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information contained in this prospectus, including our consolidated financial statements and the related notes thereto, before making a decision to invest in our common stock. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that affect us. If any of the following risks occur, our business, financial condition, operating results and prospectus could be materially and adversely affected. In that event, the price of our common stock could decline, and you could lose all or part of your investment.

Risks Related to Our Business

We have a history of net losses, we anticipate increasing expenses in the future, and we may not be able to achieve or maintain profitability.

We have incurred net losses on an annual basis since our inception. We incurred net losses of $79.5 million and $107.9 million for the years ended December 31, 2018 and 2019 and of $10.0 million and $15.0 million for the three months ended March 31, 2019 and 2020, respectively. Our accumulated deficit as of March 31, 2020 was $369.4 million. We expect our aggregate costs will increase substantially in the foreseeable future and our losses will continue as we expect to invest heavily in increasing our patient base, expanding our operations, hiring additional employees and operating as a public company. These efforts may prove more expensive than we currently anticipate, and we may not succeed in increasing our revenue sufficiently to offset these higher expenses. To date, we have financed our operations principally from the sale of our equity, revenue from our patient services and the incurrence of indebtedness. Our cash flow from operations was negative for the years ended December 31, 2018 and 2019 and for the three months ended March 31, 2019 and 2020. We may not generate positive cash flow from operations or profitability in any given period, and our limited operating history may make it difficult for you to evaluate our current business and our future prospects.

We have encountered and will continue to encounter risks and difficulties frequently experienced by growing companies in rapidly changing industries, including increasing expenses as we continue to grow our business. We expect our operating expenses to increase significantly over the next several years as we continue to hire additional personnel, expand our operations and infrastructure, and continue to expand to reach more patients. In addition to the expected costs to grow our business, we also expect to incur additional legal, accounting and other expenses as a newly public company. These investments may be more costly than we expect, and if we do not achieve the benefits anticipated from these investments, or if the realization of these benefits is delayed, they may not result in increased revenue or growth in our business. If our growth rate were to decline significantly or become negative, it could adversely affect our financial condition and results of operations. If we are not able to achieve or maintain positive cash flow in the long term, we may require additional financing, which may not be available on favorable terms or at all and/or which would be dilutive to our stockholders. If we are unable to successfully address these risks and challenges as we encounter them, our business, results of operations and financial condition would be adversely affected. Our failure to achieve or maintain profitability could negatively impact the value of our common stock.

A pandemic, epidemic or outbreak of an infectious disease in the United States or worldwide, including the outbreak of the novel strain of coronavirus disease, COVID-19, could adversely affect our business.

If a pandemic, epidemic or outbreak of an infectious disease occurs in the United States or worldwide, our business may be adversely affected. The severity, magnitude and duration of the current COVID-19 pandemic is uncertain and rapidly changing. As of the date of this prospectus, the extent to which the COVID-19 pandemic may impact our business, results of operations and financial condition remains uncertain. Furthermore, because of our business model, the full impact of the COVID-19 pandemic may not be fully reflected in our results of operations and overall financial condition until future periods.

 

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Adverse market conditions resulting from the spread of COVID-19 could materially adversely affect our business and the value of our common stock. Numerous state and local jurisdictions, including all markets where we operate, have imposed, and others in the future may impose, “shelter-in-place” orders, quarantines, executive orders and similar government orders and restrictions for their residents to control the spread of COVID-19. Such orders or restrictions have resulted in largely remote operations at our headquarters and centers, work stoppages among some vendors and suppliers, slowdowns and delays, travel restrictions and cancellation of events and have restricted the ability of our front-line outreach teams to host and attend community events, among other effects, thereby significantly and negatively impacting our operations. Other disruptions or potential disruptions include restrictions on the ability of our personnel to travel; inability of our suppliers to manufacture goods and to deliver these to us on a timely basis, or at all; inventory shortages or obsolescence; delays in actions of regulatory bodies; diversion of or limitations on employee resources that would otherwise be focused on the operations of our business, including because of sickness of employees or their families or the desire of employees to avoid contact with groups of people; business adjustments or disruptions of certain third parties; and additional government requirements or other incremental mitigation efforts. The extent to which the COVID-19 pandemic impacts our business will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity and spread of COVID-19 and the actions to contain COVID-19 or treat its impact, among others. In addition, the COVID-19 virus disproportionately impacts older adults, especially those with chronic illnesses, which describes many of our patients.

It is not currently possible to reliably project the direct impact of COVID-19 on our operating revenues and expenses. Key factors include the duration and extent of the outbreak in our service areas as well as societal and governmental responses. Patients may continue to be reluctant to seek necessary care given the risks of the COVID-19 pandemic. This could have the effect of deterring healthcare costs that we will need to incur to later periods and may also affect the health of patients who defer treatment, which may cause our costs to increase in the future. Further, as a result of the COVID-19 pandemic, we may experience slowed growth or a decline in new patient demand. We also may experience increased internal and third-party medical costs as we provide care for patients suffering from COVID-19. This increase in costs may be particularly significant given the number of our patients who are under capitation agreements. Further, we may face increased competition due to changes to our competitors’ products and services, including modifications to their terms, conditions, and pricing that could materially adversely impact our business, results of operations, and overall financial condition in future periods.

In response to the COVID-19 pandemic, in the first quarter of 2020, we temporarily closed all of our corporate offices, and enabled our entire corporate work force to work remotely. We also made operational changes to the staffing and operations of our centers to minimize potential exposure to COVID-19. We have also implemented travel restrictions for non-essential business. If the COVID-19 pandemic worsens, especially in regions where we have offices or centers, our business activities originating from affected areas could be adversely affected. Disruptive activities could include business closures in impacted areas, further restrictions on our employees’ and service providers’ ability to travel, impacts to productivity if our employees or their family members experience health issues, and potential delays in hiring and onboarding of new employees. We may take further actions that alter our business operations as may be required by local, state, or federal authorities or that we determine are in the best interests of our employees. Such measures could negatively affect our sales and marketing efforts, sales cycles, employee productivity, or customer retention, any of which could harm our financial condition and business operations.

Due to the COVID-19 pandemic, we may not be able to document the health conditions of our patients as completely as we have in the past. Medicare pays capitation using a “risk adjustment model,” which compensates providers based on the health status (acuity) of each individual patient. Payors with higher acuity patients receive more, and those with lower acuity patients receive less. Medicare requires that a patient’s health issues be documented annually regardless of the permanence of the underlying causes. Historically, this documentation was required to be completed during an in-person visit with a patient. As part of the Coronavirus Aid, Relief and Economic Security Act, or CARES Act, Medicare is allowing documentation for conditions identified during video visits with patients. However, given the disruption caused by COVID-19, it is unclear whether we will be

 

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able to document the health conditions of our patients as comprehensively as we did in 2019, which may adversely impact our revenue in future periods.

The COVID-19 pandemic could also cause our third-party data center hosting facilities and cloud computing platform providers, which are critical to our infrastructure, to shut down their business, experience security incidents that impact our business, delay or disrupt performance or delivery of services, or experience interference with the supply chain of hardware required by their systems and services, any of which could materially adversely affect our business. Further, 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, and if the network and infrastructure of internet providers becomes overburdened by increased usage or is otherwise unreliable or unavailable, our employees’, and our customers’ and vendors’ employees’, access to the internet to conduct business could be negatively impacted. Limitations on access or disruptions to services or goods provided by or to some of our suppliers and vendors upon which our platform and business operations relies, could interrupt our ability to provide our platform, decrease the productivity of our workforce, and significantly harm our business operations, financial condition, and results of operations.

Our platform and the other systems or networks used in our business may experience an increase in attempted cyber-attacks, targeted intrusion, ransomware, and phishing campaigns seeking to take advantage of shifts to employees working remotely using their household or personal internet networks and to leverage fears promulgated by the COVID-19 pandemic. The success of any of these unauthorized attempts could substantially impact our platform, the proprietary and other confidential data contained therein or otherwise stored or processed in our operations, and ultimately our business. Any actual or perceived security incident also may cause us to incur increased expenses to improve our security controls and to remediate security vulnerabilities.

The extent and continued impact of the COVID-19 pandemic on our business will depend on certain developments, including: the duration and spread of the outbreak; government responses to the pandemic; the impact on our customers and our sales cycles; the impact on customer, industry, or employee events; and the effect on our partners and supply chains, all of which are uncertain and cannot be predicted. Because of our business model, the full impact of the COVID-19 pandemic may not be fully reflected in our results of operations and overall financial condition until future periods.

To the extent the COVID-19 pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in this “Risk Factors” section, including but not limited to those relating to cyber-attacks and security vulnerabilities, interruptions or delays due to third-parties, or our ability to raise additional capital or generate sufficient cash flows necessary to fulfill our obligations under our existing indebtedness or to expand our operations.

Our relatively limited operating history makes it difficult to evaluate our current business and future prospects and increases the risk of your investment.

Our relatively limited operating history makes it difficult to evaluate our current business and prospectus and plan for our future growth. We opened our first center in Chicago in 2013, with all of our growth occurring in recent years. We entered into our first fully capitated agreements with health plans in 2016, and we have limited experience managing contracts with full risk. We have encountered and will continue to encounter significant risks and uncertainties frequently experienced by new and growing companies in rapidly changing industries, such as determining appropriate investments for our limited resources, competition from other providers, acquiring and retaining patients, hiring, integrating, training and retaining skilled personnel, determining prices for our services, unforeseen expenses and challenges in forecasting accuracy. Although we have successfully expanded our centers’ footprint outside of the Midwest and intend to continue to expand into new geographical locations, we cannot provide assurance that any new centers we open or new geographical locations we enter will be successful. If we are unable to increase our patient enrollment, successfully manage our third-party medical costs or successfully expand into new patient services, our revenue and our ability to

 

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achieve and sustain profitability would be impaired. Additional risks include our ability to effectively manage growth, process, store, protect and use personal data in compliance with governmental regulation, contractual obligations and other legal obligations related to privacy and security and manage our obligations as a provider of healthcare services under Medicare and Medicaid. If our assumptions regarding these and other similar risks and uncertainties, which we use to plan our business, are incorrect or change as we gain more experience operating our business or due to changes in our industry, or if we do not address these challenges successfully, our operating and financial results could differ materially from our expectations and our business could suffer.

We expect to continue to increase our headcount and to hire more physicians, nurses and other specialized medical personnel in the future as we grow our business and open new centers. We will need to continue to hire, train and manage additional qualified information technology, operations and marketing staff, and improve and maintain our technology and information systems to properly manage our growth. If our new hires perform poorly, or if we are unsuccessful in hiring, training, managing and integrating these new employees, or if we are not successful in retaining our existing employees, our business may be adversely affected.

Our growth strategy may not prove viable and we may not realize expected results.

Our business strategy is to grow rapidly by expanding our network of primary care centers and is significantly dependent on opening new centers in our existing markets, expanding into new geographical locations, recruiting new patients and partnering or contracting with payors, existing medical practices or other healthcare providers to provide primary care services. We seek growth opportunities both organically and through alliances with payors or other primary care providers. Our ability to grow organically depends upon a number of factors, including recruiting new patients, entering into contracts with additional payors, identifying appropriate facilities, obtaining leases, completing internal build-outs of new facilities within proposed timelines and budgets and hiring care teams and other employees. We cannot guarantee that we will be successful in pursuing our growth strategy. If we fail to evaluate and execute new business opportunities properly, we may not achieve anticipated benefits and may incur increased costs.

Our growth strategy involves a number of risks and uncertainties, including that:

 

   

we may not be able to successfully enter into contracts with local payors on terms favorable to us or at all. In addition, we compete for payor relationships with other potential players, some of whom may have greater resources than we do. This competition may intensify due to the ongoing consolidation in the healthcare industry, which may increase our costs to pursue such opportunities;

 

   

we may not be able to recruit or retain a sufficient number of new patients to execute our growth strategy, and we may incur substantial costs to recruit new patients and we may be unable to recruit a sufficient number of new patients to offset those costs;

 

   

we may not be able to hire sufficient numbers of physicians and other staff and may fail to integrate our employees, particularly our medical personnel, into our care model;

 

   

when expanding our business into new states, we may be required to comply with laws and regulations that may differ from states in which we currently operate; and

 

   

depending upon the nature of the local market, we may not be able to implement our business model in every local market that we enter, which could negatively impact our revenues and financial condition.

There can be no assurance that we will be able to successfully capitalize on growth opportunities, which may negatively impact our business model, revenues, results of operations and financial condition.

If we are unable to attract new patients, our revenue growth will be adversely affected.

To increase our revenue, our business strategy is to expand the number of primary care centers in our network. In order to support such growth, we must continue to recruit and retain a sufficient number of new

 

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patients. We are focused on the Medicare-eligible population and face competition from other primary healthcare providers in the recruitment of Medicare-eligible potential patients. If we are unable to convince the Medicare-eligible population of the benefits of our Oak Street Platform 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 electing to move from fee-for-service to capitation arrangements and selecting us as their primary care provider under their MA plan. Plan enrollment selections for MA are made during an annual enrollment period from November into December of each year; therefore, our ability to grow our patient population with capitation arrangements is dependent in part on our ability to successfully recruit MA patients during the annual enrollment period and to convince MA patients to select us as their primary care provider and not subsequently change that election. Our inability to recruit new patients and retain existing patients, particularly those under capitation arrangements, would harm our ability to execute our growth strategy and may have a material adverse effect on our business operations and financial position.

Our revenues and operations are dependent upon a limited number of key payors.

Our operations are dependent on a concentrated number of payors with whom we contract to provide services to patients. We generally manage our payor contracts on a state by state basis, entering into a separate contract in each state with the local affiliate of the relevant payor such that no one local payor contract accounts for a majority of our revenue. When aggregating the revenue associated with each payor through its local affiliates, however, Humana, WellCare and Cigna HealthSpring accounted for a total of approximately 74% and 72% of our capitated revenue for the year ended December 31, 2019 and the three months ended March 31, 2020, respectively, and Humana alone accounted for approximately 57% and 49% of our capitated revenue for the year ended December 31, 2019 and the three months ended March 31, 2020, respectively. We believe that a majority of our revenues will continue to be derived from a limited number of key payors, which may terminate their contracts with us or our physicians credentialed by them upon the occurrence of certain events. The sudden loss of any of our payor partners or the renegotiation of any of our payor contracts could adversely affect our operating results. In the ordinary course of business we engage in active discussions and renegotiations with payors in respect of the services we provide and the terms of our payor agreements. As the payors’ businesses respond to market dynamics and financial pressures, and as payors make strategic business decisions in respect of the lines of business they pursue and programs in which they participate, certain of our payors may seek to renegotiate or terminate their agreements with us. These discussions could result in reductions to the fees and changes to the scope of services contemplated by our original payor contracts and consequently could negatively impact our revenues, business and prospects.

Because we rely on a limited number of payors for a significant portion of our revenues, we depend on the creditworthiness of these payors. Our payors are subject to a number of risks including reductions in payment rates from governmental programs, higher than expected health care costs and lack of predictability of financial results when entering new lines of business, particularly with high-risk populations. If the financial condition of our payor partners declines, our credit risk could increase. Should one or more of our significant payor partners declare bankruptcy, be declared insolvent or otherwise be restricted by state or federal laws or regulation from continuing in some or all of their operations, this could adversely affect our ongoing revenues, the collectability of our accounts receivable, our bad debt reserves and our net income.

Although we have long-term contracts with many payors, these contracts may be terminated before their term expires for various reasons, such as changes in the regulatory landscape and poor performance by us, subject to certain conditions. Certain of our contracts are terminable immediately upon the occurrence of certain events. Certain of our contracts may be terminated immediately by the partner if we lose applicable licenses, go bankrupt, lose our liability insurance or receive an exclusion, suspension or debarment from state or federal government authorities. Additionally, if a payor 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 such payor could in effect be terminated. In addition, certain of

 

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our contracts may be terminated immediately if we become insolvent or file for bankruptcy. If any of our contracts with our payors is terminated, we may not be able to recover all fees due under the terminated contract, which may adversely affect our operating results.

The termination or non-renewal of the Medicare Advantage contracts held by the health plans with which we contract, or the termination or non-renewal of our contracts with those plans, could have a material adverse effect on our revenue and our operations.

In addition to contracting directly with the Centers for Medicare and Medicaid Services (“CMS”) to participate in Medicare, we also contract with other health plans to provide capitated care services with respect to certain of their MA and commercial members. Our contracts with Humana to provide capitated care services for their members accounted for approximately 57% and 49% of our capitated revenue for the year ended December 31, 2019 and the three months ended March 31, 2020, respectively. If a plan with which we contract for these services loses its Medicare contracts with CMS, receives reduced or insufficient government reimbursement under the Medicare program, decides to discontinue its MA and/or commercial plans, decides to contract with another company to provide capitated care services to its members, or decides to directly provide care, our contract with that plan could be at risk and we could lose revenue. In addition, certain of our contracts with health plans are terminable without cause. If any of these contracts were terminated, certain patients covered by such plans may choose to shift to another primary care provider within their health plan’s network. Moreover, our inability to maintain our agreements with health plans, in particular with key payors such as Humana, with respect to their MA members or to negotiate favorable terms for those agreements in the future, could result in the loss of patients and could have a material adverse effect on our profitability and business.

Changes in the payor mix of patients and potential decreases in our reimbursement rates as a result of consolidation among plans could adversely affect our revenues and results of operation.

The amounts we receive for services provided to patients are determined by a number of factors, including the payor mix of our patients and the reimbursement methodologies and rates utilized by our patients’ plans. Reimbursement rates are generally higher for capitation agreements than they are under fee-for-service arrangements, and capitation agreements provide us with an opportunity to capture any additional surplus we create by investing in preventive care to keep a particular patient’s third-party medical expenses low. Under a capitation plan such as MA, we receive a fixed fee PPPM for services. Under a fee-for-service payor arrangement, we collect fees directly from the payor as services are provided. Fee-for-service arrangements accounted for approximately 1.9% and 1.1% of our revenue for the years ended December 31, 2018 and 2019, respectively, and approximately 1.3% and 0.6% of our revenue for the three months ended March 31, 2019 and 2020, respectively. Capitation arrangements accounted for approximately 97.4% and 97.0% of our revenue for the years ended December 31, 2018 and 2019, respectively, and approximately 98.3% and 97.4% of our revenue for each of the three-month periods ended March 31, 2019 and 2020. A significant decrease in the number of capitation arrangements could adversely affect our revenues and results of operation.

The healthcare industry has also experienced a trend of consolidation, resulting in fewer but larger payors that have significant bargaining power, given their market share. Payments from payors are the result of negotiated rates. These rates may decline based on renegotiations and larger payors have significant bargaining power to negotiate higher discounted fee arrangements with healthcare providers. As a result, payors increasingly are demanding discounted fee structures or the assumption by healthcare providers of all or a portion of the financial risk related to paying for care provided through capitation agreements.

If we fail to manage our growth effectively, we may be unable to execute our business plan, maintain high levels of service and patient satisfaction or adequately address competitive challenges.

We have experienced, and may continue to experience, rapid growth and organizational change, which has placed, and may continue to place, significant demands on our management and our operational and financial

 

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resources. Additionally, our organizational structure may become more complex as we improve our operational, financial and management controls, as well as our reporting systems and procedures. We may require significant capital expenditures and the allocation of valuable management resources to grow and change in these areas. We must effectively increase our headcount and continue to effectively train and manage our employees. We will be unable to manage our business effectively if we are unable to alleviate the strain on resources caused by growth in a timely and successful manner. If we fail to effectively manage our anticipated growth and change, the quality of our services may suffer, which could negatively affect our brand and reputation and harm our ability to attract and retain patients and employees.

In addition, as we expand our business, it is important that we continue to maintain a high level of patient service and satisfaction. As our patient base continues to grow, we will need to expand our medical, patient services and other personnel, and our network of partners, to provide personalized patient service. If we are not able to continue to provide high quality medical care with high levels of patient satisfaction, our reputation, as well as our business, results of operations and financial condition could be adversely affected.

The healthcare industry is highly competitive.

We compete directly with national, regional and local providers of healthcare for patients and physicians. There are many other companies and individuals currently providing healthcare services, many of which have been in business longer and/or have substantially more resources. Since there are virtually no substantial capital expenditures required for providing healthcare services, there are few financial barriers to entry in the healthcare industry. Other companies could enter the healthcare industry in the future and divert some or all of our business. Our ability to compete successfully varies from location to location and depends on a number of factors, including the number of competing primary care facilities in the local market and the types of services available at those facilities, our local reputation for quality care of patients, the commitment and expertise of our medical staff, our local service offerings and community programs, the cost of care in each locality, and the physical appearance, location, age and condition of our facilities. If we are unable to attract patients to our centers, our revenue and profitability will be adversely affected. Some of our competitors may have greater recognition and be more established in their respective communities than we are, and may have greater financial and other resources than we have. Competing primary care providers may also offer larger facilities or different programs or services than we do, which, combined with the foregoing factors, may result in our competitors being more attractive to our current patients, potential patients and referral sources. Furthermore, while we budget for routine capital expenditures at our facilities to keep them competitive in their respective markets, to the extent that competitive forces cause those expenditures to increase in the future, our financial condition may be negatively affected. In addition, our relationships with governmental and private third-party payors are not exclusive and our competitors have established or could seek to establish relationships with such payors to serve their covered patients. Additionally, as we expand into new geographies, we may encounter competitors with stronger relationships or recognition in the community in such new geography, which could give those competitors an advantage in obtaining new patients. Individual physicians, physician groups and companies in other healthcare industry segments, including those with which we have contracts, and some of which have greater financial, marketing and staffing resources, may become competitors in providing health care services, and this competition may have a material adverse effect on our business operations and financial position.

New physicians and other providers must be properly enrolled in governmental healthcare programs before we can receive reimbursement for their services, and there may be delays in the enrollment process.

Each time a new physician joins us, we must enroll the physician under our applicable group identification number for Medicare and Medicaid programs and for certain managed care and private insurance programs before we can receive reimbursement for services the physician renders to beneficiaries of those programs. The estimated time to receive approval for the enrollment is sometimes difficult to predict. These practices result in delayed reimbursement that may adversely affect our cash flows.

 

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With respect to Medicare, providers can retrospectively bill Medicare for services provided 30 days prior to the effective date of the enrollment. In addition, the enrollment rules provide that the effective date of the enrollment will be the later of the date on which the enrollment application was filed and approved by the Medicare contractor, or the date on which the provider began providing services. If we are unable to properly enroll physicians and other applicable healthcare professionals within the 30 days after the provider begins providing services, we will be precluded from billing Medicare for any services which were provided to a Medicare beneficiary more than 30 days prior to the effective date of the enrollment. With respect to Medicaid, new enrollment rules and whether a state will allow providers to retrospectively bill Medicaid for services provided prior to submitting an enrollment application varies by state. Failure to timely enroll providers could reduce our physician services segment total revenues and have a material adverse effect on the business, financial condition or results of operations of our physician services segment.

The Affordable Care Act of 2010 (the “ACA”), as currently structured, added additional enrollment requirements for Medicare and Medicaid, which have been further enhanced through implementing regulations and increased enforcement scrutiny. Every enrolled provider must revalidate its enrollment at regular intervals and must update the Medicare contractors and many state Medicaid programs with significant changes on a timely basis. If we fail to provide sufficient documentation as required to maintain our enrollment, Medicare and Medicaid could deny continued future enrollment or revoke our enrollment and billing privileges.

The requirements for enrollment, licensure, certification, and accreditation may include notification or approval in the event of a transfer or change of ownership or certain other changes. Other agencies or payors with which we have contracts may have similar requirements, and some of these processes may be complex. Failure to provide required notifications or obtain necessary approvals may result in the delay or inability to complete an acquisition or transfer, loss of licensure, lapses in reimbursement, or other penalties. While we make reasonable efforts to substantially comply with these requirements, we cannot assure you that the agencies that administer these programs or have awarded us contracts will not find that we have failed to comply in some material respects. A finding of non-compliance and any resulting payment delays, refund demands or other sanctions could have a material adverse effect on our business, financial condition or results of operations.

Reductions in Medicare reimbursement rates or changes in the rules governing the Medicare program could have a material adverse effect on our financial condition and results of operations.

We receive the majority of our revenue from Medicare, either directly or through MA plans, and revenue from Medicare accounted for 97% of our revenue for each of the years ended December 31, 2018 and 2019, respectively, and for 97% and 98% of our revenue for each of the three-month periods ended March 31, 2019 and 2020, respectively. In addition, many private payors base their reimbursement rates on the published Medicare rates or are themselves reimbursed by Medicare for the services we provide. As a result, our results of operations are, in part, dependent on government funding levels for Medicare programs, particularly MA programs. Any changes that limit or reduce MA or general Medicare reimbursement levels, such as reductions in or limitations of reimbursement amounts or rates under programs, reductions in funding of programs, expansion of benefits without adequate funding, elimination of coverage for certain benefits, or elimination of coverage for certain individuals or treatments under programs, could have a material adverse effect on our business, results of operations, financial condition and cash flows.

The Medicare program and its reimbursement rates and rules are subject to frequent change. These include statutory and regulatory changes, rate adjustments (including retroactive adjustments), administrative or executive orders and government funding restrictions, all of which may materially adversely affect the rates at which Medicare reimburses us for our services. Budget pressures often lead the federal government to reduce or place limits on reimbursement rates under Medicare. Implementation of these and other types of measures has in the past and could in the future result in substantial reductions in our revenue and operating margins. For example, due to the federal sequestration, an automatic 2% reduction in Medicare spending took effect beginning in April 2013. The CARES Act, which was signed into law on March 27, 2020, designed to provide financial

 

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support and resources to individuals and businesses affected by the COVID-19 pandemic, temporarily suspended these reductions from May 1, 2020 through December 31, 2020, and extended the sequester by one year, through 2030.

Each year, CMS issues a final rule to establish the MA benchmark payment rates for the following calendar year. Any reduction to MA rates impacting us that is greater compared to the industry average rate 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 further impacted by the relative growth of our MA patient volumes across markets as well as by the benefit plan designs submitted. It is possible that we may underestimate the impact of the MA rates on our business, which could have a material adverse effect on our business, results of operations, financial condition and cash flows. In addition, our MA revenues may continue to be volatile in the future, which could have a material adverse impact on our business, results of operations, financial condition and cash flows.

In addition, CMS often changes the rules governing the Medicare program, including those governing reimbursement. Changes that could adversely affect our business include:

 

   

administrative or legislative changes to base rates or the bases of payment;

 

   

limits on the services or types of providers for which Medicare will provide reimbursement;

 

   

changes in methodology for patient assessment and/or determination of payment levels;

 

   

the reduction or elimination of annual rate increases; or

 

   

an increase in co-payments or deductibles payable by beneficiaries.

Recent legislative, judicial and executive efforts to enact further healthcare reform legislation have caused the future state of the exchanges, other reforms under the ACA, and many core aspects of the current U.S. health care system to be unclear. While specific changes and their timing are not yet apparent, enacted reforms and future legislative, regulatory, judicial, or executive changes, particularly any changes to the MA program, could have a material adverse effect on our business, results of operations, financial condition and cash flows.

Among the important statutory changes that are being implemented by CMS include provisions of the IMPACT Act. This law imposes a stringent timeline for implementing benchmark quality measures and data metrics across post-acute care providers. The enactment also mandates specific actions to design a unified payment methodology for post-acute providers. CMS is in the process of promulgating regulations to implement provisions of this enactment. Depending on the final details, the costs of implementation could be significant. The failure to meet implementation requirements could expose providers to fines and payment reductions.

There is also uncertainty regarding both MA payment rates and beneficiary enrollment, which, if reduced, would reduce our overall revenues and net income. For example, although the Congressional Budget Office (“CBO”) predicted in 2010 that MA participation would drop substantially by 2020, the CBO has more recently predicted, without taking into account potential future reforms, that enrollment in MA (and other contracts covering Medicare Parts A and B) could reach 31 million by 2027. Although MA enrollment increased by approximately 5.6 million, or by 50%, between the enactment of the ACA in 2010 and 2015, there can be no assurance that this trend will continue. Further, fluctuation in MA payment rates are evidenced by CMS’s annual announcement of the expected average change in revenue from the prior year: for 2018, CMS announced an average increase of 0.45%; and for 2019, 3.4%. Uncertainty over MA enrollment and payment rates present a continuing risk to our business.

According to the Kaiser Family Foundation (“KFF”), MA enrollment continues to be highly concentrated among a few payors, both nationally and in local regions. In 2018, the KFF reported that three payors together accounted for more than half of MA enrollment and seven firms accounted for approximately 75% of the lives.

 

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Consolidation among MA plans in certain regions, or the Medicare program’s failure to attract additional plans to participate in the MA program, could have a material adverse effect on our business, results of operations, financial condition and cash flows.

Reductions in reimbursement rates or the scope of services being reimbursed could have a material, adverse effect on our financial condition and results of operations or even result in reimbursement rates that are insufficient to cover our operating expenses. Additionally, any delay or default by the government in making Medicare reimbursement payments could materially and adversely affect our business, financial condition and results of operations.

We primarily depend on reimbursements by third-party payors, as well as payments by individuals, which could lead to delays and uncertainties in the reimbursement process.

The reimbursement process is complex and can involve lengthy delays. Although we recognize revenue when we provide services to our patients, we may from time to time experience delays in receiving the associated capitation payments or, for our patients on fee-for-service arrangements, the reimbursement for the service provided. In addition, third-party payors may disallow, in whole or in part, requests for reimbursement based on determinations that the patient is not eligible for coverage, certain amounts are not reimbursable under plan coverage or were for services provided that were not medically necessary or additional supporting documentation is necessary. Retroactive adjustments may change amounts realized from third-party payors. As described below, we are subject to audits by such payors, including governmental audits of our Medicare claims, and may be required to repay these payors if a finding is made that we were incorrectly reimbursed. Delays and uncertainties in the reimbursement process may adversely affect accounts receivable, increase the overall costs of collection and cause us to incur additional borrowing costs. Third-party payors are also increasingly focused on controlling healthcare costs, and such efforts, including any revisions to reimbursement policies, may further complicate and delay our reimbursement claims.

In addition, certain of our patients are covered under health plans that require the patient to cover a portion of their own healthcare expenses through the payment of copayments or deductibles. We may not be able to collect the full amounts due with respect to these payments that are the patient’s financial responsibility, or in those instances where physicians provide services to uninsured individuals. To the extent permitted by law, amounts not covered by third-party payors are the obligations of individual patients for which we may not receive whole or partial payment. Any increase in cost shifting from third-party payors to individual patients, including as a result of high deductible plans for patients, increases our collection costs and reduces overall collections. We have a financial assistance policy in which we assess patients for financial hardship and other criteria that are used to make a good-faith determination of financial need. If a patient is deemed to meet these criteria, we will waive or reduce that patient’s obligation to pay copayments, coinsurance or deductible amounts owed for the services we provide to them. If we were to experience a substantial increase in the number of patients qualifying for such waivers or reductions or in the volume of patient receivables deemed uncollectible, our costs could increase significantly and we may not be able to offset such additional costs with sufficient revenue. In such an event, our earnings and cash flow would be adversely affected, potentially affecting our ability to maintain compliance with the financial covenant in our Loan Agreement and meet our financial obligations.

In response to the COVID-19 pandemic, CMS has made several changes in the manner in which Medicare will pay for telehealth visits, many of which relax previous requirements, including site requirements for both the providers and patients, telehealth modality requirements and others. State law applicable to telehealth, particularly licensure requirements, has also been relaxed in many jurisdictions as a result of the COVID-19 pandemic. These relaxed regulations have allowed us to continue operating our business and delivering care to our patients predominantly through telehealth modalities. It is unclear which, if any, of these changes will remain in place permanently and which will be rolled-back following the COVID-19 pandemic. If regulations change to restrict our ability to or prohibit us from delivering care through telehealth modalities, our financial condition and results of operations may be adversely affected.

 

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Under most of our agreements with health plans, we assume some or all of the risk that the cost of providing services will exceed our compensation.

Approximately 97.4% and 97.0% of our revenue for the years ended December 31, 2018 and 2019, respectively, and approximately 98.3% and 97.4% of our revenue for each of the three-month periods ended March 31, 2019 and 2020, is derived from fixed fees paid by health plans under capitation agreements with us. While there are variations specific to each agreement, we generally contract with health plans to receive a fixed fee per month for professional services and assume the financial responsibility for the healthcare expenses of our patients. This type of contract is referred to as a “capitation” contract. To the extent that patients require more care than is anticipated and/or the cost of care increases, aggregate fixed compensation amounts, or capitation payments, may be insufficient to cover the costs associated with treatment. If medical costs and expenses exceed estimates, except in very limited circumstances, we will not be able to increase the fee received under these risk agreements during their then-current terms and we could suffer losses with respect to such agreements.

Changes in our anticipated ratio of medical expense to revenue can significantly impact our financial results. Accordingly, the failure to adequately predict and control medical costs and expenses and to make reasonable estimates and maintain adequate accruals for incurred but not reported claims, could have a material adverse effect on our business, results of operations, financial condition and cash flows. Additionally, the Medicare expenses of our patients may be outside of our control in the event that patients take certain actions that increase such expenses, such as unnecessary hospital visits.

Historically, our medical costs and expenses as a percentage of revenue have fluctuated. Factors that may cause medical expenses to exceed estimates include:

 

   

the health status of patients and higher levels of hospitalization;

 

   

higher than expected utilization of new or existing healthcare services or technologies;

 

   

an increase in the cost of healthcare services and supplies, whether as a result of inflation or otherwise;

 

   

changes to mandated benefits or other changes in healthcare laws, regulations and practices;

 

   

increased costs attributable to specialist physicians, hospitals and ancillary providers;

 

   

changes in the demographics of our patients and medical trends;

 

   

contractual or claims disputes with providers, hospitals or other service providers within and outside a health plan’s network;

 

   

the occurrence of catastrophes, major epidemics or acts of terrorism; and

 

   

the reduction of health plan premiums.

Renegotiation, non-renewal or termination of capitation agreements with health plans could have a material adverse effect on our business, results operations, financial condition and cash flows.

Under most of our capitation agreements with health plans, the health plan is generally permitted to modify the benefit and risk obligations and compensation rights from time to time during the terms of the agreements. If a health plan exercises its right to amend its benefit and risk obligations and compensation rights, we are generally allowed a period of time to object to such amendment. If we so object, under some of the risk agreements, the relevant health plan may terminate the applicable agreement upon 90 to 180 days written notice. If we enter into capitation contracts with unfavorable economic terms, or a capitation contract is amended to include unfavorable terms, we could suffer losses with respect to such contract. Since we do not negotiate with CMS or any health plan regarding the benefits to be provided under their MA plans, we often have just a few months to familiarize ourselves with each new annual package of benefits we are expected to offer. Depending on the health plan at issue and the amount of revenue associated with the health plan’s capitation agreement, the renegotiated terms or termination could have a material adverse effect on our business, results of operations, financial condition and cash flows.

 

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There are significant risks associated with estimating the amount of revenue that we recognize under our risk agreements with health plans, and if our estimates of revenue are materially inaccurate, it could impact the timing and the amount of our revenue recognition or have a material adverse effect on our business, results of operations, financial condition and cash flows.

There are significant risks associated with estimating the amount of revenues that we recognize under our risk agreements with health plans in a reporting period. The billing and collection process is complex due to ongoing insurance coverage changes, geographic coverage differences, differing interpretations of contract coverage and other payor issues, such as ensuring appropriate documentation. Determining applicable primary and secondary coverage for our patients, together with the changes in patient coverage that occur each month, requires complex, resource-intensive processes. Errors in determining the correct coordination of benefits may result in refunds to payors. Revenues associated with Medicare and Medicaid programs are also subject to estimating risk related to the amounts not paid by the primary government payor that will ultimately be collectible from other government programs paying secondary coverage, the patient’s commercial health plan secondary coverage or the patient. Collections, refunds and payor retractions typically continue to occur for up to three years and longer after services are provided. If our estimates of revenues are materially inaccurate, it could impact the timing and the amount of our revenues recognition and have a material adverse impact on our business, results of operations, financial condition and cash flows.

Security breaches, loss of data and other disruptions could compromise sensitive information related to our business or our patients, or prevent us from accessing critical information and expose us to liability, which could adversely affect our business and our reputation.

In the ordinary course of our business, we collect, store, use and disclose sensitive data, including protected health information (“PHI”), and other types of personal data or personally identifiable information (“PII”) relating to our employees, patients and others. We also process and store, and use third-party service providers to process and store, sensitive information, including intellectual property, confidential information and other proprietary business information. We manage and maintain such sensitive data and information utilizing a combination of on-site systems, managed data center systems and cloud-based computing center systems.

We are highly dependent on information technology networks and systems, including the internet, to securely process, transmit and store this sensitive data and information. Security breaches of this infrastructure, including physical or electronic break-ins, computer viruses, attacks by hackers and similar breaches, and employee or contractor error, negligence or malfeasance, can create system disruptions, shutdowns or unauthorized disclosure or modifications of such sensitive data or information, causing PHI or other PII to be accessed or acquired without authorization or to become publicly available. We utilize third-party service providers for important aspects of the collection, storage, processing and transmission of employee, user and patient information, and other confidential and sensitive information, and therefore rely on third parties to manage functions that have material cybersecurity risks. Because of the sensitivity of the PHI, other PII and other sensitive information we and our service providers collect, store, transmit, and otherwise process, the security of our technology platform and other aspects of our services, including those provided or facilitated by our third-party service providers, are important to our operations and business strategy. We take certain administrative, physical and technological safeguards to address these risks, such as by requiring contractors and other third-party service providers who handle this PHI, other PII and other sensitive information for us to enter into agreements that contractually obligate them to use reasonable efforts to safeguard such PHI, other PII, and other sensitive information. Measures taken to protect our systems, those of our contractors or third-party service providers, or the PHI, other PII, or other sensitive information we or contractors or third-party service providers process or maintain, may not adequately protect us from the risks associated with the collection, storage, processing and transmission of such sensitive data and information. We may be required to expend significant capital and other resources to protect against security breaches or to alleviate problems caused by security breaches. Despite our implementation of security measures, cyber-attacks are becoming more sophisticated and frequent. As a result, we or our third-party service providers may be unable to anticipate these techniques or to implement adequate protective measures.

A security breach or privacy violation that leads to disclosure or unauthorized use or modification of, or that prevents access to or otherwise impacts the confidentiality, security, or integrity of, patient information,

 

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including PHI or other PII, or other sensitive information we or our contractors or third-party service providers maintain or otherwise process, could harm our reputation, compel us to comply with breach notification laws, cause us to incur significant costs for remediation, fines, penalties, notification to individuals and for measures intended to repair or replace systems or technology and to prevent future occurrences, potential increases in insurance premiums, and require us to verify the accuracy of database contents, resulting in increased costs or loss of revenue. If we are unable to prevent or mitigate such security breaches or privacy violations or implement satisfactory remedial measures, or if it is perceived that we have been unable to do so, our operations could be disrupted, we may be unable to provide access to our systems, and we could suffer a loss of patients, and we may as a result suffer loss of reputation, adverse impacts on patient and investor confidence, financial loss, governmental investigations or other actions, regulatory or contractual penalties, and other claims and liability. In addition, security breaches and other inappropriate access to, or acquisition or processing of, information can be difficult to detect, and any delay in identifying such incidents or in providing any notification of such incidents may lead to increased harm.

Any such breach or interruption of our systems or those of any of our third-party service providers could compromise our networks or data security processes and sensitive information could be made inaccessible or could be accessed by unauthorized parties, publicly disclosed, lost or stolen. Any such interruption in access, improper access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws and regulations that protect the privacy of member information or other personal information, such as the Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009 (the “HITECH Act”), and their implementing regulations (collectively known as “HIPAA”), and regulatory penalties. Unauthorized access, loss or dissemination could also disrupt our operations, including our ability to perform our services, access patient health information, collect, process, and prepare company financial information, provide information about our current and future services and engage in other patient and clinician education and outreach efforts. Any such breach could also result in the compromise of our trade secrets and other proprietary information, which could adversely affect our business and competitive position. While we maintain insurance covering certain security and privacy damages and claim expenses, we may not carry insurance or maintain coverage sufficient to compensate for all liability and in any event, insurance coverage would not address the reputational damage that could result from a security incident.

As a result of becoming a public company, we will be obligated to develop and maintain proper and effective internal control over financial reporting in order to comply with Section 404 of the Sarbanes-Oxley Act. We may not complete our analysis of our internal control over financial reporting in a timely manner, or these internal controls may not be determined to be effective, which may adversely affect investor confidence in us and, as a result, the value of our common stock. In addition, because of our status as an emerging growth company, you will not be able to depend on any attestation from our independent registered public accountants as to our internal control over financial reporting for the foreseeable future.

When we become a public company following this initial public offering, we will be required by Section 404 of the Sarbanes-Oxley Act to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting in our second annual report following the completion of this offering. The process of designing and implementing internal control over financial reporting required to comply with this requirement will be time-consuming, costly and complicated. If during the evaluation and testing process we identify one or more other material weaknesses in our internal control over financial reporting or determine that existing material weaknesses have not been remediated, our management will be unable to assert that our internal control over financial reporting is effective. See “—Our independent registered public accountants have identified several material weaknesses in our internal control over financial reporting. If we are unable to remediate the material weaknesses, or if other control deficiencies are identified, we may not be able to report our financial results accurately, prevent fraud or file our periodic reports as a public company in a timely manner.” In addition, if we fail to achieve and maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to

 

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ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act.

Even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm may issue a report that is qualified if it is not satisfied with our controls or the level at which our controls are documented, designed, operated or reviewed. However, our independent registered public accounting firm will not be required to attest formally to the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act until the later of the filing of our second annual report following the completion of this offering or the date we are no longer an “emerging growth company,” as defined in the JOBS Act. Accordingly, you will not be able to depend on any attestation concerning our internal control over financial reporting from our independent registered public accountants for the foreseeable future.

We cannot be certain as to the timing of completion of our evaluation, testing and any remediation actions or the impact of the same on our operations. If we are not able to implement the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner or with adequate compliance, our independent registered public accounting firm may issue an adverse opinion due to ineffective internal controls over financial reporting, and we may be subject to sanctions or investigation by regulatory authorities, such as the SEC. As a result, there could be a negative reaction in the financial markets due to a loss of confidence in the reliability of our financial statements. In addition, we may be required to incur costs in improving our internal control system and the hiring of additional personnel. Any such action could negatively affect our results of operations and cash flows.

Disruptions in our disaster recovery systems or management continuity planning could limit our ability to operate our business effectively.

Our information technology systems facilitate our ability to conduct our business. While we have disaster recovery systems and business continuity plans in place, any disruptions in our disaster recovery systems or the failure of these systems to operate as expected could, depending on the magnitude of the problem, adversely affect our operating results by limiting our capacity to effectively monitor and control our operations. Despite our implementation of a variety of security measures, our information technology systems could be subject to physical or electronic break-ins, and similar disruptions from unauthorized tampering or any weather-related disruptions where our headquarters is located. In addition, in the event that a significant number of our management personnel were unavailable in the event of a disaster, our ability to effectively conduct business could be adversely affected.

We may be subject to legal proceedings and litigation, including intellectual property and privacy disputes, which are costly to defend and could materially harm our business and results of operations.

We may be party to lawsuits and legal proceedings in the normal course of business. These matters are often expensive and disruptive to normal business operations. We may face allegations, lawsuits and regulatory inquiries, audits and investigations regarding data privacy, security, labor and employment, consumer protection and intellectual property infringement, including claims related to privacy, patents, publicity, trademarks, copyrights and other rights. We may also face allegations or litigation related to our acquisitions, securities issuances or business practices, including public disclosures about our business. Litigation and regulatory proceedings may be protracted and expensive, and the results are difficult to predict. Certain of these matters may include speculative claims for substantial or indeterminate amounts of damages and include claims for injunctive relief. Additionally, our litigation costs could be significant. Adverse outcomes with respect to litigation or any of these legal proceedings may result in significant settlement costs or judgments, penalties and fines, or require us to modify our services or require us to stop serving certain patients or geographies, all of which could negatively impact our geographical expansion and revenue growth. We may also become subject to periodic audits, which would likely increase our regulatory compliance costs and may require us to change our business practices, which could negatively impact our revenue growth. Managing legal proceedings, litigation and audits, even if we achieve favorable outcomes, is time-consuming and diverts management’s attention from our business.

 

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The results of regulatory proceedings, litigation, claims, and audits cannot be predicted with certainty, and determining reserves for pending litigation and other legal, regulatory and audit matters requires significant judgment. There can be no assurance that our expectations will prove correct, and even if these matters are resolved in our favor or without significant cash settlements, these matters, and the time and resources necessary to litigate or resolve them, could harm our reputation, business, financial condition, results of operations and the market price of our common stock.

We also may be subject to lawsuits under the False Claims Act (the “FCA”) and comparable state laws for submitting allegedly fraudulent or otherwise inappropriate bills for services to the Medicare and Medicaid programs. These lawsuits, which may be initiated by government authorities as well as private party relators, can involve significant monetary damages, fines, attorney fees and the award of bounties to private plaintiffs who successfully bring these suits, as well as to the government programs. In recent years, government oversight and law enforcement have become increasingly active and aggressive in investigating and taking legal action against potential fraud and abuse.

Furthermore, our business exposes us to potential medical malpractice, professional negligence or other related actions or claims that are inherent in the provision of healthcare services. These claims, with or without merit, could cause us to incur substantial costs, and could place a significant strain on our financial resources, divert the attention of management from our core business, harm our reputation and adversely affect our ability to attract and retain patients, any of which could have a material adverse effect on our business, financial condition and results of operations.

Although we maintain third-party professional liability insurance coverage, it is possible that claims against us may exceed the coverage limits of our insurance policies. Even if any professional liability loss is covered by an insurance policy, these policies typically have substantial deductibles for which we are responsible. Professional liability claims in excess of applicable insurance coverage could have a material adverse effect on our business, financial condition and results of operations. In addition, any professional liability claim brought against us, with or without merit, could result in an increase of our professional liability insurance premiums. Insurance coverage varies in cost and can be difficult to obtain, and we cannot guarantee that we will be able to obtain insurance coverage in the future on terms acceptable to us or at all. If our costs of insurance and claims increase, then our earnings could decline.

Reductions in the quality ratings of the health plans we serve could have a material adverse effect on our business, results of operations, financial condition and cash flows.

As a result of the ACA, the level of reimbursement each health plan receives from CMS is dependent, in part, upon the quality rating of the Medicare plan. Such ratings impact the percentage of any cost savings rebate and any bonuses earned by such health plan. Since a significant portion of our revenue is expected to be calculated as a percentage of CMS reimbursements received by these health plans with respect to our patients, reductions in the quality ratings of a health plan that we serve could have a material adverse effect on our business, results of operations, financial condition and cash flows.

Given each health plan’s control of its plans and the many other providers that serve such plans, we believe that we will have limited ability to influence the overall quality rating of any such plan. The Balanced Budget Act passed in February 2018 implemented certain changes to prevent artificial inflation of star ratings for MA plans offered by the same organization. In addition, CMS has terminated plans that have had a rating of less than three stars for three consecutive years, whereas MA plans with five stars are permitted to conduct enrollment throughout almost the entire year. Because low quality ratings can potentially lead to the termination of a plan that we serve, we may not be able to prevent the potential termination of a contracting plan or a shift of patients to other plans based upon quality issues which could, in turn, have a material adverse effect on our business, results of operations, financial condition and cash flows.

 

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If our agreements or arrangements with any physician equity holder of our practices are deemed invalid under state law, including laws against the corporate practice of medicine, or federal law, or are terminated as a result of changes in state law, or if there is a change in accounting standards by the Financial Accounting Standards Board (“FASB”) or the interpretation thereof affecting consolidation of entities, it could have a material adverse effect on our consolidation of total revenues derived from such practices.

Our financial statements are consolidated in accordance with applicable accounting standards and include the accounts of our majority-owned subsidiaries and certain non-owned associated and managed practices. Such consolidation for accounting and/or tax purposes does not, is not intended to, and should not be deemed to, imply or provide us any control over the medical or clinical affairs of such practices. In the event of a change in accounting standards promulgated by FASB or in interpretation of its standards, or if there is an adverse determination by a regulatory agency or a court, or a change in state or federal law relating to the ability to maintain present agreements or arrangements with such practices, we may not be permitted to continue to consolidate the total revenues of such practices.

If we are not able to maintain and enhance our reputation and brand recognition, including through the maintenance and protection of trademarks, our business and results of operations will be harmed.

We believe that maintaining and enhancing our reputation and brand recognition is critical to our relationships with both patients and payors and to our ability to attract new patients. The promotion of our brand may require us to make substantial investments and we anticipate that, as our market becomes increasingly competitive, these marketing initiatives may become increasingly difficult and expensive. Our marketing activities may not be successful or yield increased revenue, and to the extent that these activities yield increased revenue, the increased revenue may not offset the expenses we incur and our results of operations could be harmed. In addition, any factor that diminishes our reputation or that of our management, including failing to meet the expectations of or provide quality medical care for our patients, or any adverse publicity or litigation involving or surrounding us, one of our centers or our management, could make it substantially more difficult for us to attract new patients. Similarly, because our existing patients often act as references for us with prospective new patients, any existing patient that questions the quality of our care could impair our ability to secure additional new patients. In addition, negative publicity resulting from any adverse government payor audit could injure our reputation. If we do not successfully maintain and enhance our reputation and brand recognition, our business may not grow and we could lose our relationships with patients, which would harm our business, results of operations and financial condition.

The registered or unregistered trademarks or trade names that we own or license may be challenged, infringed, circumvented, declared generic, lapsed or determined to be infringing on or dilutive of other marks. We may not be able to protect our rights in these trademarks and trade names, which we need in order to build name recognition with patients, payors and other partners. In addition, third parties may in the future file for registration of trademarks similar or identical to our trademarks. If they succeed in registering or developing common law rights in such trademarks, and if we are not successful in challenging such third-party rights, we may not be able to use these trademarks to commercialize our technologies in certain relevant jurisdictions. If we are unable to establish name recognition based on our trademarks and trade names, we may not be able to compete effectively and our brand recognition, reputation and results of operations may be adversely affected.

Our business depends on our ability to effectively invest in, implement improvements to and properly maintain the uninterrupted operation and data integrity of our information technology and other business systems.

Our business is highly dependent on maintaining effective information systems as well as the integrity and timeliness of the data we use to serve our patients, support our care teams and operate our business. Because of the large amount of data that we collect and manage, it is possible that hardware failures or errors in our systems could result in data loss or corruption or cause the information that we collect to be incomplete or contain inaccuracies that our partners regard as significant. If our data were found to be inaccurate or unreliable due to

 

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fraud or other error, or if we, or any of the third-party service providers we engage, were to fail to maintain information systems and data integrity effectively, we could experience operational disruptions that may impact our patients and care teams and hinder our ability to provide services, establish appropriate pricing for services, retain and attract patients, manage our patient risk profiles, establish reserves, report financial results timely and accurately and maintain regulatory compliance, among other things.

Our information technology strategy and execution are critical to our continued success. We must continue to invest in long-term solutions that will enable us to anticipate patient needs and expectations, enhance the patient experience, act as a differentiator in the market and protect against cybersecurity risks and threats. Our success is dependent, in large part, on maintaining the effectiveness of existing technology systems and continuing to deliver and enhance technology systems that support our business processes in a cost-efficient and resource-efficient manner. Increasing regulatory and legislative changes will place additional demands on our information technology infrastructure that could have a direct impact on resources available for other projects tied to our strategic initiatives. In addition, recent trends toward greater patient engagement in health care require new and enhanced technologies, including more sophisticated applications for mobile devices. Connectivity among technologies is becoming increasingly important. We must also develop new systems to meet current market standards and keep pace with continuing changes in information processing technology, evolving industry and regulatory standards and patient needs. Failure to do so may present compliance challenges and impede our ability to deliver services in a competitive manner. Further, because system development projects are long-term in nature, they may be more costly than expected to complete and may not deliver the expected benefits upon completion. Our failure to effectively invest in, implement improvements to and properly maintain the uninterrupted operation and data integrity of our information technology and other business systems could adversely affect our results of operations, financial position and cash flow.

If we are unable to obtain, maintain and enforce intellectual property protection for our technology or if the scope of our intellectual property protection is not sufficiently broad, others may be able to develop and commercialize technology substantially similar to ours, and our ability to successfully commercialize our technology may be adversely affected.

Our business depends on internally developed technology and content, including software, databases, confidential information and know-how, the protection of which is crucial to the success of our business. We rely on a combination of trademark, trade-secret, and copyright laws and confidentiality procedures and contractual provisions to protect our intellectual property rights in our internally developed technology and content. We may, over time, increase our investment in protecting our intellectual property through additional trademark, patent and other intellectual property filings that could be expensive and time-consuming. Effective trademark, trade-secret and copyright protection is expensive to develop and maintain, both in terms of initial and ongoing registration requirements and the costs of defending our rights. These measures, however, may not be sufficient to offer us meaningful protection. Additionally, we do not currently hold a patent or other registered or applied for intellectual property protection for Canopy. If we are unable to protect our intellectual property and other rights, particularly with respect to Canopy, our competitive position and our business could be harmed, as third parties may be able to commercialize and use technologies and software products that are substantially the same as ours without incurring the development and licensing costs that we have incurred. Any of our owned or licensed intellectual property rights could be challenged, invalidated, circumvented, infringed or misappropriated, our trade secrets and other confidential information could be disclosed in an unauthorized manner to third parties, or our intellectual property rights may not be sufficient to permit us to take advantage of current market trends or otherwise to provide us with competitive advantages, which could result in costly redesign efforts, discontinuance of certain offerings or other competitive harm.

Monitoring unauthorized use of our intellectual property is difficult and costly. From time to time, we seek to analyze our competitors’ services, and may in the future seek to enforce our rights against potential infringement. However, the steps we have taken to protect our intellectual property rights may not be adequate to prevent infringement or misappropriation of our intellectual property. We may not be able to detect unauthorized

 

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use of, or take appropriate steps to enforce, our intellectual property rights. Any inability to meaningfully protect our intellectual property rights could result in harm to our ability to compete and reduce demand for our technology. Moreover, our failure to develop and properly manage new intellectual property could adversely affect our market positions and business opportunities. Also, some of our services rely on technologies and software developed by or licensed from third parties, and we may not be able to maintain our relationships with such third parties or enter into similar relationships in the future on reasonable terms or at all.

Uncertainty may result from changes to intellectual property legislation and from interpretations of intellectual property laws by applicable courts and agencies. Accordingly, despite our efforts, we may be unable to obtain and maintain the intellectual property rights necessary to provide us with a competitive advantage. Our failure to obtain, maintain and enforce our intellectual property rights could therefore have a material adverse effect on our business, financial condition and results of operations.

Third parties may initiate legal proceedings alleging that we are infringing or otherwise violating their intellectual property rights, the outcome of which would be uncertain and could have a material adverse effect on our business, financial condition and results of operations.

Our commercial success depends on our ability to develop and commercialize our services and use our internally developed technology without infringing the intellectual property or proprietary rights of third parties. Intellectual property disputes can be costly to defend and may cause our business, operating results and financial condition to suffer. As the market for healthcare in the United States expands and more patents are issued, the risk increases that there may be patents issued to third parties that relate to our technology of which we are not aware or that we must challenge to continue our operations as currently contemplated. Whether merited or not, we may face allegations that we, our partners or parties indemnified by us have infringed or otherwise violated the patents, trademarks, copyrights or other intellectual property rights of third parties. Such claims may be made by competitors seeking to obtain a competitive advantage or by other parties. Additionally, in recent years, individuals and groups have begun purchasing intellectual property assets for the purpose of making claims of infringement and attempting to extract settlements from companies like ours. We may also face allegations that our employees have misappropriated the intellectual property or proprietary rights of their former employers or other third parties. It may be necessary for us to initiate litigation to defend ourselves in order to determine the scope, enforceability and validity of third-party intellectual property or proprietary rights, or to establish our respective rights. We may not be able to successfully settle or otherwise resolve such adversarial proceedings or litigation. If we are unable to successfully settle future claims on terms acceptable to us we may be required to engage in or to continue claims, regardless of whether such claims have merit, that can be time-consuming, divert management’s attention and financial resources and can be costly to evaluate and defend. Results of any such litigation are difficult to predict and may require us to stop commercializing or using our technology, obtain licenses, modify our services and technology while we develop non-infringing substitutes or incur substantial damages, settlement costs or face a temporary or permanent injunction prohibiting us from marketing or providing the affected services. If we require a third-party license, it may not be available on reasonable terms or at all, and we may have to pay substantial royalties, upfront fees or grant cross-licenses to intellectual property rights for our services. We may also have to redesign our services so they do not infringe third-party intellectual property rights, which may not be possible or may require substantial monetary expenditures and time, during which our technology may not be available for commercialization or use. Even if we have an agreement to indemnify us against such costs, the indemnifying party may be unable to uphold its contractual obligations. If we cannot or do not obtain a third-party license to the infringed technology at all, license the technology on reasonable terms or obtain similar technology from another source, our revenue and earnings could be adversely impacted.

From time to time, we may be subject to legal proceedings and claims in the ordinary course of business with respect to intellectual property. We are not currently subject to any claims from third parties asserting infringement of their intellectual property rights. Some third parties may be able to sustain the costs of complex litigation more effectively than we can because they have substantially greater resources. Even if resolved in our

 

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favor, litigation or other legal proceedings relating to intellectual property claims may cause us to incur significant expenses, and could distract our technical and management personnel from their normal responsibilities. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments, and if securities analysts or investors perceive these results to be negative, it could have a material adverse effect on the price of our common stock. Moreover, any uncertainties resulting from the initiation and continuation of any legal proceedings could have a material adverse effect on our ability to raise the funds necessary to continue our operations. Assertions by third parties that we violate their intellectual property rights could therefore have a material adverse effect on our business, financial condition and results of operations.

If we are unable to protect the confidentiality of our trade secrets, know-how and other proprietary and internally developed information, the value of our technology could be adversely affected.

We may not be able to protect our trade secrets, know-how and other internally developed information, including in relation to the Canopy platform, adequately. Although we use reasonable efforts to protect this internally developed information and technology, our employees, consultants and other parties (including independent contractors and companies with which we conduct business) may unintentionally or willfully disclose our information or technology to competitors. Enforcing a claim that a third party illegally disclosed or obtained and is using any of our internally developed information or technology is difficult, expensive and time-consuming, and the outcome is unpredictable. In addition, courts outside the United States are sometimes less willing to protect trade secrets, know-how and other proprietary information. We rely, in part, on non-disclosure, confidentiality and assignment-of-invention agreements with our employees, independent contractors, consultants and companies with which we conduct business to protect our trade secrets, know-how and other intellectual property and internally developed information. These agreements may not be self-executing, or they may be breached and we may not have adequate remedies for such breach. Moreover, third parties may independently develop similar or equivalent proprietary information or otherwise gain access to our trade secrets, know-how and other internally developed information.

Any restrictions on our use of, or ability to license, data, or our failure to license data and integrate third-party technologies, could have a material adverse effect on our business, financial condition and results of operations.

We depend upon licenses from third parties for some of the technology and data used in Canopy, our technology platform, and for the platform upon which Canopy is built and operates. We expect that we may need to obtain additional licenses from third parties in the future in connection with the development of our services. In addition, we obtain a portion of the data that we use from government entities, public records and from our partners for specific partner engagements. We believe that we have all rights necessary to use the data that is incorporated into our services. We cannot, however, assure you that our licenses for information will allow us to use that information for all potential or contemplated applications. In addition, our ability to continue to offer integrated healthcare to our patients depends on maintaining Canopy, which is partially populated with data disclosed to us by our partners with their consent. If these partners revoke their consent for us to maintain, use, de-identify and share this data, consistent with applicable law, our data assets could be degraded.

In the future, data providers could withdraw their data from us or restrict our usage for any reason, including if there is a competitive reason to do so, if legislation is passed restricting the use of the data or if judicial interpretations are issued restricting use of the data that we currently use to support our services. In addition, data providers could fail to adhere to our quality control standards in the future, causing us to incur additional expense to appropriately utilize the data. If a substantial number of data providers were to withdraw or restrict their data, or if they fail to adhere to our quality control standards, and if we are unable to identify and contract with suitable alternative data suppliers and integrate these data sources into our service offerings, our ability to provide appropriate services to our patients would be materially adversely impacted, which could have a material adverse effect on our business, financial condition and results of operations.

 

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We also integrate into our internally developed applications and use third-party software to support our technology infrastructure. Some of this software is proprietary and some is open source software. These technologies may not be available to us in the future on commercially reasonable terms or at all and could be difficult to replace once integrated into our own internally developed applications. Most of these licenses can be renewed only by mutual consent and may be terminated if we breach the terms of the license and fail to cure the breach within a specified period of time. Our inability to obtain, maintain or comply with any of these licenses could delay development until equivalent technology can be identified, licensed and integrated, which would harm our business, financial condition and results of operations.

Most of our third-party licenses are non-exclusive and our competitors may obtain the right to use any of the technology covered by these licenses to compete directly with us. Our use of third-party technologies exposes us to increased risks, including, but not limited to, risks associated with the integration of new technology into our solutions, the diversion of our resources from development of our own internally developed technology and our inability to generate revenue from licensed technology sufficient to offset associated acquisition and maintenance costs. In addition, if our data suppliers choose to discontinue support of the licensed technology in the future, we might not be able to modify or adapt our own solutions.

Our use of “open source” software could adversely affect our ability to offer our services and subject us to possible litigation.

We may use open source software in connection with our services. Companies that incorporate open source software into their technologies have, from time to time, faced claims challenging the use of open source software and/or compliance with open source license terms. As a result, we could be subject to suits by parties claiming ownership of what we believe to be open source software or claiming noncompliance with open source licensing terms. Some open source software licenses require users who distribute software containing open source software to publicly disclose all or part of the source code to such software and/or make available any derivative works of the open source code, which could include valuable proprietary code of the user, on unfavorable terms or at no cost. While we monitor the use of open source software and try to ensure that none is used in a manner that would require us to disclose our internally developed source code or that would otherwise breach the terms of an open source agreement, such use could inadvertently occur, in part because open source license terms are often ambiguous. Any requirement to disclose our internally developed source code or pay damages for breach of contract could have a material adverse effect on our business, financial condition and results of operations and could help our competitors develop services that are similar to or better than ours.

We depend on our senior management team and other key employees, and the loss of one or more of these employees or an inability to attract and retain other highly skilled employees could harm our business.

Our success depends largely upon the continued services of our senior management team and other key employees. We rely on our leadership team in the areas of operations, provision of medical services, information technology and security, marketing, and general and administrative functions. From time to time, there may be changes in our executive management team resulting from the hiring or departure of executives, which could disrupt our business. Our employment agreements with our executive officers and other key personnel do not require them to continue to work for us for any specified period and, therefore, they could terminate their employment with us at any time. The loss of one or more of the members of our senior management team, or other key employees, could harm our business. In particular, the loss of the services of our co-founder and Chief Executive Officer, Mike Pykosz, could significantly delay or prevent the achievement of our strategic objectives. Changes in our executive management team may also cause disruptions in, and harm to, our business.

Our primary care centers are concentrated in Illinois, Indiana, Michigan and Ohio, and we may not be able to successfully establish a presence in new geographic markets.

A substantial portion of our revenue is driven by our primary care centers in Illinois, Indiana, Michigan and Ohio. As a result, our exposure to many of the risks described herein are not mitigated by a diversification of

 

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geographic focus. Furthermore, due to the concentration of our operations in these states, our business may be adversely affected by economic conditions that disproportionately affect these states as compared to other states. To continue to expand our operations to other regions of the United States, we will have to devote resources to identifying and exploring such perceived opportunities. Thereafter, we will have to, among other things, recruit and retain qualified personnel, develop new primary care centers and establish new relationships with physicians and other healthcare providers. In addition, we would be required to comply with laws and regulations of states that may differ from the ones in which we currently operate, and could face competitors with greater knowledge of such local markets. We anticipate that further geographic expansion will require us to make a substantial investment of management time, capital and/or other resources. There can be no assurance that we will be able to continue to successfully expand our operations in any new geographic markets.

Our overall business results may suffer from an economic downturn.

During periods of high unemployment, governmental entities often experience budget deficits as a result of increased costs and lower than expected tax collections. These budget deficits at federal, state and local government entities have decreased, and may continue to decrease, spending for health and human service programs, including Medicare, Medicaid and similar programs, which represent significant payor sources for our centers. Other risks we face during periods of high unemployment include potential declines in the population covered under capitation agreements, potential increases in the uninsured and underinsured populations and further difficulties in our collecting patient co-payment and deductible receivables.

We must attract and retain highly qualified personnel in order to execute our growth plan.

Competition for highly qualified personnel is intense, especially for physicians and other medical professionals who are experienced in providing care services to older adults. We have, from time to time, experienced, and we expect to continue to experience, difficulty in hiring and retaining employees with appropriate qualifications. Many of the companies and healthcare providers with which we compete for experienced personnel have greater resources than we have. If we hire employees from competitors or other companies or healthcare providers, their former employees may attempt to assert that these employees or we have breached certain legal obligations, resulting in a diversion of our time and resources. If we fail to attract new personnel or fail to retain and motivate our current personnel, our business and future growth prospects could be harmed.

Our management team has limited experience managing a public company.

Most members of our management team have limited experience managing a publicly traded company, interacting with public company investors and complying with the increasingly complex laws pertaining to public companies. Our management team may not successfully or efficiently manage us as a public company that is subject to significant regulatory oversight and reporting obligations under the federal securities laws and the continuous scrutiny of securities analysts and investors. These new obligations and constituents require significant attention from our senior management and could divert their attention away from the day-to-day management of our business, which could adversely affect our business, results of operations and financial condition.

We lease all of our facilities and may experience risks relating to lease termination, lease expense escalators, lease extensions and special charges.

We currently lease or license all of our centers, including a significant minority that are leased from Humana. Our leases are typically on terms ranging from seven to 15 years. Each of our lease or license agreements provides that the lessor may terminate the lease, subject to applicable cure provisions, for a number of reasons, including the defaults in any payment of rent, taxes or other payment obligations, the breach of any other covenant or agreement in the lease or, for centers leased from Humana, the termination of our payor

 

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contracts with Humana. Termination of certain of our lease agreements could result in a cross-default under our debt agreements or other lease agreements. If a lease agreement is terminated, there can be no assurance that we will be able to enter into a new lease agreement on similar or better terms or at all.

Our lease obligations often include annual fixed rent escalators ranging between 2% and 3% or variable rent escalators based on a consumer price index. These escalators could impact our ability to satisfy certain obligations and financial covenants. If the results of our operations do not increase at or above the escalator rates, it would place an additional burden on our results of operations, liquidity and financial position.

As we continue to expand and have leases or licenses with different start dates, it is likely that some number of our leases and licenses will expire each year. Our lease or license agreements often provide for renewal or extension options. There can be no assurance that these rights will be exercised in the future or that we will be able to satisfy the conditions precedent to exercising any such renewal or extension. In addition, if we are unable to renew or extend any of our leases or licenses, we may lose all of the facilities subject to that master lease agreement. If we are not able to renew or extend our leases or licenses at or prior to the end of the existing lease terms, or if the terms of such options are unfavorable or unacceptable to us, our business, financial condition and results of operation could be adversely affected.

Leasing facilities pursuant to binding lease or license agreements may limit our ability to exit markets. For instance, if one facility under a lease or license becomes unprofitable, we may be required to continue operating such facility or, if allowed by the landlord to close such facility, we may remain obligated for the lease payments on such facility. We could incur special charges relating to the closing of such facility, including lease termination costs, impairment charges and other special charges that would reduce our profits and could have a material adverse effect on our business, financial condition or results of operations.

Our failure to pay the rent or otherwise comply with the provisions of any of our lease agreements could result in an “event of default” under such lease agreement and also could result in a cross default under other lease agreements and agreements for our indebtedness. Upon an event of default, remedies available to our landlords generally include, without limitation, terminating such lease agreement, repossessing and reletting the leased properties and requiring us to remain liable for all obligations under such lease agreement, including the difference between the rent under such lease agreement and the rent payable as a result of reletting the leased properties, or requiring us to pay the net present value of the rent due for the balance of the term of such lease agreement. The exercise of such remedies would have a material adverse effect on our business, financial position, results of operations and liquidity.

If certain of our suppliers do not meet our needs, if there are material price increases on supplies, if we are not reimbursed or adequately reimbursed for drugs we purchase or if we are unable to effectively access new technology or superior products, it could negatively impact our ability to effectively provide the services we offer and could have a material adverse effect on our business, results of operations, financial condition and cash flows.

We have significant suppliers that may be the sole or primary source of products critical to the services we provide, or to which we have committed obligations to make purchases, sometimes at particular prices. If any of these suppliers do not meet our needs for the products they supply, including in the event of a product recall, shortage or dispute, and we are not able to find adequate alternative sources, if we experience material price increases from these suppliers that we are unable to mitigate, or if some of the drugs that we purchase are not reimbursed or not adequately reimbursed by commercial or government payors, it could have a material adverse impact on our business, results of operations, financial condition and cash flows. In addition, the technology related to the products critical to the services we provide is subject to new developments which may result in superior products. If we are not able to access superior products on a cost-effective basis or if suppliers are not able to fulfill our requirements for such products, we could face patient attrition and other negative consequences which could have a material adverse effect on our business, results of operations, financial condition and cash flows.

 

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Our corporate culture has contributed to our success, and if we cannot maintain this culture as we grow, we could lose the innovation, creativity and teamwork fostered by our culture and our business may be harmed.

We believe that our culture has been and will continue to be a critical contributor to our success. We expect to continue to hire aggressively as we expand, and we believe our corporate culture has been crucial in our success and our ability to attract highly skilled personnel. If we do not continue to develop our corporate culture or maintain and preserve our core values as we grow and evolve, we may be unable to foster the innovation, curiosity, creativity, focus on execution, teamwork and the facilitation of critical knowledge transfer and knowledge sharing we believe we need to support our growth. Moreover, liquidity available to our employee securityholders following this offering could lead to disparities of wealth among our employees, which could adversely impact relations among employees and our culture in general. Our anticipated headcount growth and our transition from a private company to a public company may result in a change to our corporate culture, which could harm our business.

Competition for physicians and nurses, shortages of qualified personnel or other factors could increase our labor costs and adversely affect our revenue, profitability and cash flows.

Our operations are dependent on the efforts, abilities and experience of our physicians and clinical personnel. We compete with other healthcare providers, primarily hospitals and other facilities, in attracting physicians, nurses and medical staff to support our centers, recruiting and retaining qualified management and support personnel responsible for the daily operations of each of our centers and in contracting with payors in each of our markets. In some markets, the lack of availability of clinical personnel, such as nurses and mental health professionals, has become a significant operating issue facing all healthcare providers. This shortage may require us to continue to enhance wages and benefits to recruit and retain qualified personnel or to contract for more expensive temporary personnel. We also depend on the available labor pool of semi-skilled and unskilled workers in each of the markets in which we operate.

If our labor costs increase, we may not be able to raise rates to offset these increased costs. Because a significant percentage of our revenue consists of fixed, prospective payments, our ability to pass along increased labor costs is limited. In particular, if labor costs rise at an annual rate greater than our net annual consumer price index basket update from Medicare, our results of operations and cash flows will likely be adversely affected. Any union activity at our facilities that may occur in the future could contribute to increased labor costs. Certain proposed changes in federal labor laws and the National Labor Relations Board’s modification of its election procedures could increase the likelihood of employee unionization attempts. Although none of our employees are currently represented by a collective bargaining agreement, to the extent a significant portion of our employee base unionizes, it is possible our labor costs could increase materially. Our failure to recruit and retain qualified management and medical personnel, or to control our labor costs, could have a material adverse effect on our business, prospects, results of operations and financial condition.

Our revenues and profits could be diminished if we fail to retain and attract the services of key primary care physicians.

Key primary care physicians with large patient enrollment could retire, become disabled, terminate their provider contracts, get lured away by a competing independent physician association or medical group, or otherwise become unable or unwilling to continue practicing medicine or continue working with our practices. As a result, patients who have been served by such physicians could choose to enroll with competitors’ physician organizations or could seek medical care elsewhere, which could reduce our revenues and profits. Moreover, we may not be able to attract new physicians to replace the services of terminating physicians or to service our growing membership.

We have employment contracts with physicians and other health professionals in many states. Some of these contracts include provisions preventing these physicians and other health professionals from competing with us

 

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both during and after the term of our contract with them. The law governing non-compete agreements and other forms of restrictive covenants varies from state to state. Some jurisdictions prohibit us from using non-competition covenants with our professional staff. Other states are reluctant to strictly enforce non-compete agreements and restrictive covenants applicable to physicians and other healthcare professionals. 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.

Our records and submissions to a health plan may contain inaccurate or unsupportable information regarding risk adjustment scores of members, which could cause us to overstate or understate our revenue and subject us to various penalties.

The claims and encounter records that we submit to health plans may impact data that support the Medicare Risk Adjustment Factor (“RAF”) scores attributable to members. These RAF scores determine, in part, the revenue to which the health plans and, in turn, we are entitled for the provision of medical care to such members. The data submitted to CMS by each health plan is based, in part, on medical charts and diagnosis codes that we prepare and submit to the health plans. Each health plan generally relies on us and our affiliated physicians to appropriately document and support such RAF data in our medical records. Each health plan also relies on us and our affiliated physicians to appropriately code claims for medical services provided to members. Erroneous claims and erroneous encounter records and submissions could result in inaccurate revenue and risk adjustment payments, which may be subject to correction or retroactive adjustment in later periods. This corrected or adjusted information may be reflected in financial statements for periods subsequent to the period in which the revenue was recorded. We might also need to refund a portion of the revenue that we received, which refund, depending on its magnitude, could damage our relationship with the applicable health plan and could have a material adverse effect on our business, results of operations, financial condition and cash flows.

Additionally, CMS audits MA plans for documentation to support RAF-related payments for members chosen at random. The Medicare Advantage plans ask providers to submit the underlying documentation for members that they serve. It is possible that claims associated with members with higher RAF scores could be subject to more scrutiny in a CMS or plan audit. There is a possibility that a Medicare Advantage plan may seek repayment from us should CMS make any payment adjustments to the Medicare Advantage plan as a result of its audits. The plans also may hold us liable for any penalties owed to CMS for inaccurate or unsupportable RAF scores provided by us or our affiliated physicians. In addition, we could be liable for penalties to the government under the FCA 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 January 29, 2018, the DOJ issued a final rule announcing adjustments to FCA penalties, under which the per claim penalty range increases to a range from $11,181 to $22,363 for penalties assessed after January 29, 2018, so long as the underlying conduct occurred after November 2, 2015.

CMS has indicated that payment adjustments will not be limited to RAF scores for the specific MA enrollees for which errors are found but may also be extrapolated to the entire MA plan subject to a particular CMS contract. CMS has described its audit process as plan-year specific and stated that it will not extrapolate audit results for plan years prior to 2011. Because CMS has not stated otherwise, there is a risk that payment adjustments made as a result of one plan year’s audit would be extrapolated to prior plan years after 2011.

There can be no assurance that a health plan 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 the plan is accurate and supportable.

 

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A failure to accurately estimate incurred but not reported medical expense could adversely affect our results of operations.

Patient care costs include estimates of future medical claims that have been incurred by the patient but for which the provider has not yet billed. These claim estimates are made utilizing actuarial methods and are continually evaluated and adjusted by management, based upon our historical claims experience and other factors, including an independent assessment by a nationally recognized actuarial firm. Adjustments, if necessary, are made to medical claims expense and capitated revenues when the assumptions used to determine our claims liability change and when actual claim costs are ultimately determined.

Due to the inherent uncertainties associated with the factors used in these estimates and changes in the patterns and rates of medical utilization, materially different amounts could be reported in our financial statements for a particular period under different conditions or using different, but still reasonable, assumptions. It is possible that our estimates of this type of claim may be inadequate in the future. In such event, our results of operations could be adversely impacted. Further, the inability to estimate these claims accurately may also affect our ability to take timely corrective actions, further exacerbating the extent of any adverse effect on our results of operations.

Negative publicity regarding the managed healthcare industry generally could adversely affect our results of operations or business.

Negative publicity regarding the managed healthcare industry generally, or the Medicare Advantage program in particular, may result in increased regulation and legislative review of industry practices that further increase our costs of doing business and adversely affect our results of operations or business by:

 

   

requiring us to change our products and services;

 

   

increasing the regulatory, including compliance, burdens under which we operate, which, in turn, may negatively impact the manner in which we provide services and increase our costs of providing services;

 

   

adversely affecting our ability to market our products or services through the imposition of further regulatory restrictions regarding the manner in which plans and providers market to Medicare Advantage enrollees; or

 

   

adversely affecting our ability to attract and retain patients.

State and federal efforts to reduce Medicaid spending could adversely affect our financial condition and results of operations.

Certain of our patients are dual-eligible, meaning their coverage comes from both Medicare and Medicaid. In addition, a very small portion of our patients (under 2%) are fully covered by Medicaid. As a result, a small portion of our revenue comes from Medicaid, accounting for approximately 3% of our revenue for each of the years ended December 31, 2018 and 2019, respectively, and 3% and 2% of our revenue for each of the three-month periods ended March 31, 2019 and 2020, respectively. Medicaid is a joint federal-state program purchasing healthcare services for the low income and indigent as well as certain higher-income individuals with significant health needs. Under broad federal criteria, states establish rules for eligibility, services and payment. Medicaid is a state-administered program financed by both state funds and matching federal funds. Medicaid spending has increased rapidly in recent years, becoming a significant component of state budgets. This, combined with slower state revenue growth, has led both the federal government and many states to institute measures aimed at controlling the growth of Medicaid spending, and in some instances reducing aggregate Medicaid spending.

For example, a number of states have adopted or are considering legislation designed to reduce their Medicaid expenditures, such as financial arrangements commonly referred to as provider taxes. Under provider

 

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tax arrangements, states collect taxes from healthcare providers and then use the revenue to pay the providers as a Medicaid expenditure, which allows the states to then claim additional federal matching funds on the additional reimbursements. Current federal law provides for a cap on the maximum allowable provider tax as a percentage of the provider’s total revenue. There can be no assurance that federal law will continue to provide matching federal funds on state Medicaid expenditures funded through provider taxes, or that the current caps on provider taxes will not be reduced. Any discontinuance or reduction in federal matching of provider tax-related Medicaid expenditures could have a significant and adverse effect on states’ Medicaid expenditures, and as a result could have an adverse effect on our business.

In addition, CMS has recently approved demonstration waivers for the Indiana Medicaid program that, among other things, imposes work or community engagement and income based premiums on certain adult Medicaid beneficiaries, and similar waivers may be applied in other states. Also, as part of the movement to repeal, replace or modify the ACA and as a means to reduce the federal budget deficit, there are renewed congressional efforts to move Medicaid from an open-ended program with coverage and benefits set by the federal government to one in which states receive a fixed amount of federal funds, either through block grants or per capita caps, and have more flexibility to determine benefits, eligibility or provider payments. If those changes are implemented, we cannot predict whether the amount of fixed federal funding to the states will be based on current payment amounts, or if it will be based on lower payment amounts, which would negatively impact those states that expanded their Medicaid programs in response to the ACA.

We expect these state and federal efforts to continue for the foreseeable future. The Medicaid program and its reimbursement rates and rules are subject to frequent change at both the federal and state level. These include statutory and regulatory changes, rate adjustments (including retroactive adjustments), administrative or executive orders and government funding restrictions, all of which may materially adversely affect the rates at which our services are reimbursed by state Medicaid plans.

Our primary care centers may be negatively impacted by weather and other factors beyond our control.

Our results of operations may be adversely impacted by adverse conditions affecting our centers, including severe weather events such as tornadoes and widespread winter storms, public health concerns such as contagious disease outbreaks, violence or threats of violence or other factors beyond our control that cause disruption of patient scheduling, displacement of our patients, employees and Care Teams, or force certain of our centers to close temporarily. In certain geographic areas, we have a large concentration of centers that may be simultaneously affected by adverse weather conditions or other events. Our future operating results may be adversely affected by these and other factors that disrupt the operation of our centers.

Risks Related to Regulation

If we fail to adhere to all of the complex government laws and regulations that apply to our business, we could suffer severe consequences that could have a material adverse effect on our business, results of operations, financial condition, cash flows, reputation and stock price.

Our operations are subject to extensive federal, state and local government laws and regulations, such as:

 

   

Medicare and Medicaid reimbursement rules and regulations;

 

   

federal and state anti-kickback laws, which prohibits the knowing and willful offer, payment, solicitation or receipt of any bribe, kickback, rebate or other remuneration for referring an individual, in return for ordering, leasing, purchasing or recommending or arranging for or to induce the referral of an individual or the ordering, purchasing or leasing of items or services covered, in whole or in part, by any federal healthcare program, such as Medicare and Medicaid;

 

   

the Self-Referral Law and analogous state self-referral prohibition statutes, which, subject to limited exceptions, prohibits physicians from referring Medicare or Medicaid patients to an entity for the

 

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provision of certain “designated health services” if the physician or a member of such physician’s immediate family has a direct or indirect financial relationship (including an ownership interest or a compensation arrangement) with an entity, and prohibit the entity from billing Medicare or Medicaid for such “designated health services”;

 

   

the FCA and associated regulations, that imposes civil and criminal liability on individuals or entities that knowingly submit false or fraudulent claims for payment to the government or knowingly making, or causing to be made, a false statement in order to have a false claim paid, including qui tam or whistleblower suits;

 

   

the Civil Monetary Penalty statute and associated regulations, which authorizes the government agent to impose civil money penalties, an assessment, and program exclusion for various forms of fraud and abuse involving the Medicare and Medicaid programs;

 

   

federal and state laws regarding the collection, use and disclosure of patient health information (e.g., HIPAA) and the storage, handling, shipment, disposal and/or dispensing of pharmaceuticals and blood products and other biological materials and many other applicable state and federal laws and requirements;

 

   

state and federal statutes and regulations that govern workplace health and safety;

 

   

federal and state laws and policies that require healthcare providers to maintain licensure, certification or accreditation to enroll and participate in the Medicare and Medicaid programs, to report certain changes in their operations to the agencies that administer these programs and, in some cases, to re-enroll in these programs when changes in direct or indirect ownership occur; and

 

   

federal and state laws pertaining to the provision of services by nurse practitioners and physician assistants certain settings, physician supervision of those services, and reimbursement requirements that depend on the types of services provided and documented and relationships between physician supervisors and nurse practitioners and physician assistants.

In addition to the above laws, Medicare and Medicaid regulations, manual provisions, local coverage determinations, national coverage determinations and agency guidance also impose complex and extensive requirements upon healthcare providers. Moreover, the various laws and regulations that apply to our operations are often subject to varying interpretations and additional laws and regulations potentially affecting providers continue to be promulgated that may impact us. A violation or departure from any of the legal requirements implicated by our business may result in, among other things, government audits, lower reimbursements, significant fines and penalties, the potential loss of certification, recoupment efforts or voluntary repayments. These legal requirements are civil, criminal and administrative in nature depending on the law or requirement.

We endeavor to comply with all legal requirements. We further endeavor to structure all of our relationships with physicians and providers to comply with state and federal anti-kickback physician and Stark laws and other applicable healthcare laws. We utilize considerable resources to monitor laws and regulations and implement necessary changes. However, the laws and regulations in these areas are complex, changing and often subject to varying interpretations. As a result, there is no guarantee that we will be able to adhere to all of the laws and regulations that apply to our business, and any failure to do so could have a material adverse impact on our business, results of operations, financial condition, cash flows and reputation. For example, if an enforcement agency were to challenge the level of compensation that we pay our medical directors or the number of medical directors whom we engage, or otherwise challenge these arrangements, we could be required to change our practices, face criminal or civil penalties, pay substantial fines or otherwise experience a material adverse impact on our business, results of operations, financial condition, cash flows and reputation as a result. Similarly, we may face penalties under the FCA, the federal Civil Monetary Penalty statute or otherwise related to failure to report and return overpayments within 60 days of when the overpayment is identified and quantified. These obligations to report and return overpayments could subject our procedures for identifying and processing overpayments to greater scrutiny. We have made investments in resources to decrease the time it takes to identify, quantify and process overpayments, and may be required to make additional investments in the future.

 

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Additionally, the federal government has used the FCA to prosecute a wide variety of alleged false claims and fraud allegedly perpetrated against Medicare, Medicaid and other federally funded health care programs. Moreover, amendments to the federal Anti-Kickback Statute in the ACA make claims tainted by anti-kickback violations potentially subject to liability under the FCA, including qui tam or whistleblower suits. The penalties for a violation of the FCA range from $5,500 to $11,000 (adjusted for inflation) for each false claim plus three times the amount of damages caused by each such claim which generally means the amount received directly or indirectly from the government. On January 29, 2018, the Department of Justice (“DOJ”) issued a final rule announcing adjustments to FCA penalties, under which the per claim penalty range increases to a range from $11,181 to $22,363 for penalties assessed after January 29, 2018, so long as the underlying conduct occurred after November 2, 2015. Given the high volume of claims processed by our various operating units, the potential is high for substantial penalties in connection with any alleged FCA violations.

In addition to the provisions of the FCA, which provide for civil enforcement, the federal government can use several criminal statutes to prosecute persons who are alleged to have submitted false or fraudulent claims for payment to the federal government.

If any of our operations are found to violate these or other government laws or regulations, we could suffer severe consequences that would have a material adverse effect on our business, results of operations, financial condition, cash flows, reputation and stock price, including:

 

   

suspension or termination of our participation in government payment programs;

 

   

refunds of amounts received in violation of law or applicable payment program requirements dating back to the applicable statute of limitation periods;

 

   

loss of our required government certifications or exclusion from government payment programs;

 

   

loss of our licenses required to operate healthcare facilities or administer pharmaceuticals in the states in which we operate;

 

   

criminal or civil liability, fines, damages or monetary penalties for violations of healthcare fraud and abuse laws, including the federal Anti-Kickback Statute, Civil Monetary Penalties Law, Stark Law and FCA, or other failures to meet regulatory requirements;

 

   

enforcement actions by governmental agencies and/or state law claims for monetary damages by patients who believe their PHI has been used, disclosed or not properly safeguarded in violation of federal or state patient privacy laws, including HIPAA and the Privacy Act of 1974;

 

   

mandated changes to our practices or procedures that significantly increase operating expenses;

 

   

imposition of and compliance with corporate integrity agreements that could subject us to ongoing audits and reporting requirements as well as increased scrutiny of our billing and business practices which could lead to potential fines, among other things;

 

   

termination of various relationships and/or contracts related to our business, including joint venture arrangements, medical director agreements, real estate leases and consulting agreements with physicians; and

 

   

harm to our reputation which could negatively impact our business relationships, affect our ability to attract and retain patients and physicians, affect our ability to obtain financing and decrease access to new business opportunities, among other things.

We are, and may in the future be, a party to various lawsuits, demands, claims, qui tam suits, governmental investigations and audits (including investigations or other actions resulting from our obligation to self-report suspected violations of law) and other legal matters, any of which could result in, among other things, substantial financial penalties or awards against us, mandated refunds, substantial payments made by us, required changes to our business practices, exclusion from future participation in Medicare, Medicaid and other healthcare programs

 

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and possible criminal penalties, any of which could have a material adverse effect on our business, results of operations, financial condition, cash flows and materially harm our reputation.

We may in the future be subject to investigations and audits by state or federal governmental agencies and/or private civil qui tam complaints filed by relators and other lawsuits, demands, claims and legal proceedings, including investigations or other actions resulting from our obligation to self-report suspected violations of law.

Responding to subpoenas, investigations and other lawsuits, claims and legal proceedings as well as defending ourselves in such matters will continue to require management’s attention and cause us to incur significant legal expense. Negative findings or terms and conditions that we might agree to accept as part of a negotiated resolution of pending or future legal or regulatory matters could result in, among other things, substantial financial penalties or awards against us, substantial payments made by us, harm to our reputation, required changes to our business practices, exclusion from future participation in the Medicare, Medicaid and other healthcare programs and, in certain cases, criminal penalties, any of which could have a material adverse effect on us. It is possible that criminal proceedings may be initiated against us and/or individuals in our business in connection with investigations by the federal government.

We, our affiliated physicians and the facilities in which we operate are subject to various federal, state and local licensing and certification laws and regulations and accreditation standards and other laws, relating to, among other things, the adequacy of medical care, equipment, privacy of patient information, physician relationships, personnel and operating policies and procedures. Failure to comply with these licensing, certification and accreditation laws, regulations and standards could result in our services being found non-reimbursable or prior payments being subject to recoupment, requirements to make significant changes to our operations and can give rise to civil or, in extreme cases, criminal penalties. We routinely take the steps we believe are necessary to retain or obtain all requisite licensure and operating authorities. While we have made reasonable efforts to substantially comply with federal, state and local licensing and certification laws and regulations and standards as we interpret them, we cannot assure you that agencies that administer these programs will not find that we have failed to comply in some material respects.

If we are unable to effectively adapt to changes in the healthcare industry, including changes to laws and regulations regarding or affecting the U.S. healthcare reform, our business may be harmed.

Due to the importance of the healthcare industry in the lives of all Americans, federal, state, and local legislative bodies frequently pass legislation and promulgate regulations relating to healthcare reform or that affect the healthcare industry. As has been the trend in recent years, it is reasonable to assume that there will continue to be increased government oversight and regulation of the healthcare industry in the future. We cannot assure our stockholders as to the ultimate content, timing or effect of any new healthcare legislation or regulations, nor is it possible at this time to estimate the impact of potential new legislation or regulations on our business. It is possible that future legislation enacted by Congress or state legislatures, or regulations promulgated by regulatory authorities at the federal or state level, could adversely affect our business or could change the operating environment of our primary care centers. It is possible that the changes to the Medicare, Medicaid or other governmental healthcare program reimbursements may serve as precedent to possible changes in other payors’ reimbursement policies in a manner adverse to us. Similarly, changes in private payor reimbursements could lead to adverse changes in Medicare, Medicaid and other governmental healthcare programs, which could have a material adverse effect on our business, financial condition and results of operations.

While we believe that we have structured our agreements and operations in material compliance with applicable healthcare laws and regulations, there can be no assurance that we will be able to successfully address changes in the current regulatory environment. We believe that our business operations materially comply with applicable healthcare laws and regulations. However, some of the healthcare laws and regulations applicable to us are subject to limited or evolving interpretations, and a review of our business or operations by a court, law

 

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enforcement or a regulatory authority might result in a determination that could have a material adverse effect on us. Furthermore, the healthcare laws and regulations applicable to us may be amended or interpreted in a manner that could have a material adverse effect on our business, prospects, results of operations and financial condition.

Our use, disclosure, and other processing of personally identifiable information, including health information, is subject to HIPAA and other 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 patient base and revenue.

Numerous state and federal laws and regulations govern the collection, dissemination, use, privacy, confidentiality, security, availability, integrity, and other processing of PHI and PII. These laws and regulations include HIPAA. HIPAA establishes a set of national privacy and security standards for the protection of PHI by health plans, healthcare clearinghouses and certain healthcare providers, referred to as covered entities, and the business associates with whom such covered entities contract for services.

HIPAA requires covered entities, such as ourselves, and their business associates to develop and maintain policies and procedures with respect to PHI that is used or disclosed, including the adoption of administrative, physical and technical safeguards to protect such information. HIPAA also implemented the use of standard transaction code sets and standard identifiers that covered entities must use when submitting or receiving certain electronic healthcare transactions, including activities associated with the billing and collection of healthcare claims.

HIPAA imposes mandatory penalties for certain violations. Penalties for violations of HIPAA and its implementing regulations start at $100 per violation and are not to exceed $50,000 per violation, subject to a cap of $1.5 million for violations of the same standard in a single calendar year. However, a single breach incident can result in violations of multiple standards. HIPAA also authorizes state attorneys general to file suit on behalf of their residents. Courts may award damages, costs and attorneys’ fees related to violations of HIPAA in such cases. 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 the Department of Health and Human Services (“HHS”) conduct periodic compliance audits of HIPAA covered entities and business associates for compliance with the HIPAA Privacy and Security Standards. It also tasks HHS with establishing a methodology whereby harmed individuals who were the victims of breaches of unsecured PHI may receive a percentage of the Civil Monetary Penalty fine paid by the violator.

HIPAA further requires that patients be notified of any unauthorized acquisition, access, use or disclosure of their unsecured PHI that compromises the privacy or security of such information, with certain exceptions related to unintentional or inadvertent use or disclosure by employees or authorized individuals. HIPAA specifies that such notifications must be made “without unreasonable delay and in no case later than 60 calendar days after discovery of the breach.” If a breach affects 500 patients or more, it must be reported to HHS without unreasonable delay, and HHS will post the name of the breaching entity on its public web site. Breaches affecting 500 patients or more in the same state or jurisdiction must also be reported to the local media. If a breach involves fewer than 500 people, the covered entity must record it in a log and notify HHS at least annually.

In addition to HIPAA, numerous other federal and state laws and regulations protect the confidentiality, privacy, availability, integrity and security of PHI and other types of PII, including the Illinois Biometric Information Privacy Act. State statutes and regulations vary from state to state, and these laws and regulations in many cases are more restrictive than, and may not be preempted by, HIPAA and its implementing rules. These laws and regulations are often uncertain, contradictory, and subject to changed or differing interpretations, and we expect new laws, rules and regulations regarding privacy, data protection, and information security to be

 

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proposed and enacted in the future. In the event that new data security laws are implemented, we may not be able to timely comply with such requirements, or such requirements may not be compatible with our current processes. Changing our processes could be time consuming and expensive, and failure to timely implement required changes could subject us to liability for non-compliance. Some states may afford private rights of action to individuals who believe their PII has been misused. This complex, dynamic legal landscape regarding privacy, data protection, and information security creates significant compliance issues for us and potentially restricts our ability to collect, use and disclose data and exposes us to additional expense, adverse publicity and liability. While we have implemented data privacy and security measures in an effort to comply with applicable laws and regulations relating to privacy and data protection, some PHI and other PII or confidential information is transmitted to us by third parties, who may not implement adequate security and privacy measures, and it is possible that laws, rules and regulations relating to privacy, data protection, or information security may be interpreted and applied in a manner that is inconsistent with our practices or those of third parties who transmit PHI and other PII or confidential information to us. If we or these third parties are found to have violated such laws, rules or regulations, it could result in government-imposed fines, orders requiring that we or these third parties change our or their practices, or criminal charges, which could adversely affect our business. Complying with these various laws and regulations could cause us to incur substantial costs or require us to change our business practices, systems and compliance procedures in a manner adverse to our business.

We also publish statements to our patients and partners that describe how we handle and protect PHI. If federal or state regulatory authorities or private litigants consider any portion of these statements to be untrue, we may be subject to claims of deceptive practices, which could lead to significant liabilities and consequences, including, without limitation, costs of responding to investigations, defending against litigation, settling claims, and complying with regulatory or court orders. Any of the foregoing consequences could seriously harm our business and our financial results. Any of the foregoing consequences could have a material adverse impact on our business and our financial results.

Laws regulating the corporate practice of medicine could restrict the manner in which we are permitted to conduct our business, and the failure to comply with such laws could subject us to penalties or require a restructuring of our business.

Some states have laws that prohibit business entities, such as us, from practicing medicine, employing physicians to practice medicine, exercising control over medical decisions by physicians or engaging in certain arrangements, such as fee-splitting, with physicians (such activities generally referred to as the “corporate practice of medicine”). In some states these prohibitions are expressly stated in a statute or regulation, while in other states the prohibition is a matter of judicial or regulatory interpretation. All of the states in which we currently operate generally prohibit the corporate practice of medicine, and other states may as well.

Penalties for violations of the corporate practice of medicine vary by state and may result in physicians being subject to disciplinary action, as well as to forfeiture of revenues from payors for services rendered. For lay entities, violations may also bring both civil and, in more extreme cases, criminal liability for engaging in medical practice without a license.

Some of the relevant laws, regulations and agency interpretations in states with corporate practice of medicine restrictions have been subject to limited judicial and regulatory interpretation. Moreover, state laws are subject to change. Regulatory authorities and other parties may assert that, despite the management agreements and other arrangements through which we operate, we are engaged in the prohibited corporate practice of medicine or that our arrangements constitute unlawful fee-splitting. If this were to occur, we could be subject to civil and/or criminal penalties, our agreements could be found legally invalid and unenforceable (in whole or in part) or we could be required to restructure our contractual arrangements. In markets where the corporate practice of medicine is prohibited, we have historically operated by maintaining long-term management contracts with multiple associated professional organizations which, in turn, employ or contract with physicians to provide those professional medical services required by the enrollees of the payors with which the professional

 

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organizations contract. Under these management agreements, Oak Street Health MSO, LLC performs only non-medical administrative services, does not represent that it offers medical services and does not exercise influence or control over the practice of medicine by the physicians or the associated physician groups with which it contracts. In addition, the professional organizations are all 100% owned by Dr. Griffin Myers, one of our founders, a member of our board of directors (the “Board”) and our Chief Medical Officer. In the event of Dr. Myers’ death or disability or upon certain other triggering events, we maintain the right to direct the transfer of the ownership of the professional organizations to another licensed physician.

In addition to the above management arrangements, we have certain contractual rights relating to the orderly transfer of equity interests in our physician practices through succession agreements and other arrangements with their physician equity holders. Such equity interests cannot, however, be transferred to or held by us or by any non-professional organization. Accordingly, neither we nor our direct subsidiaries directly own any equity interests in any of our physician practices. In the event that any of the physician owners of our practices fail to comply with the management arrangement, if any management arrangement is terminated and/or we are unable to enforce our contractual rights over the orderly transfer of equity interests in any of our physician practices, such events could have a material adverse effect on our business, results of operations, financial condition and cash flows.

It is possible that a state regulatory agency or a court could determine that our agreements with physician equity holders of our practices and the way we carry out these arrangements as described above, either independently or coupled with the management services agreements with such associated physician practices, are in violation of prohibitions on the corporate practice of medicine. As a result, these arrangements could be deemed invalid, potentially resulting in a loss of revenues and an adverse effect on results of operations derived from such practices. Such a determination could force a restructuring of our management arrangements with the affected practices, which might include revisions of the management services agreements, including a modification of the management fee and/or establishing an alternative structure that would permit us to contract with a physician network without violating prohibitions on the corporate practice of medicine. There can be no assurance that such a restructuring would be feasible, or that it could be accomplished within a reasonable time frame without a material adverse effect on our business, results of operations, financial condition and cash flows.

If our agreements or arrangements with Dr. Myers or our affiliated physician groups are deemed invalid under state corporate practice of medicine and similar laws or federal law, or are terminated as a result of changes in state law, it could have a material impact on our results of operations and financial condition.

There are various state laws, including in the states in which we operate, regulating the corporate practice of medicine that prohibit us from directly owning certain types of healthcare entities. These prohibitions are intended to prevent unlicensed persons from interfering with or inappropriately influencing a physician’s professional judgment. Corporate practice of medicine regulations and other similar laws may also prevent fee-splitting, or the sharing of professional service income with non-professional or business interests. The interpretation and enforcement of these laws vary significantly from state to state. Although we have structured our agreements and arrangements with our affiliated physician groups to avoid breaching corporate practice of medicine regulations, such as having Dr. Myers hold shares in the physician groups as our nominee shareholder, we cannot guarantee that these agreements and arrangements will not be held to be invalid under state laws prohibiting the corporate practice of medicine. If these agreements and arrangements were deemed to be invalid, a significant portion of our revenues could be affected, which may result in a material adverse effect on our results of operations and financial condition. In addition, these agreements and arrangements may not be as effective in providing control as direct ownership. Any changes to Federal or state law that prohibited such agreements or arrangements could also have a material adverse effect upon our results of operations and financial condition.

 

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If we lost the services of Dr. Myers for any reason, the contractual arrangements with our VIEs could be in jeopardy.

Because of regulations preventing the corporate practice of medicine, many of our affiliated physician practice groups are wholly owned or primarily owned by Dr. Myers as our nominee shareholder. Although we retain the right to direct the transfer of these ownership arrangements to another licensed physician, if Dr. Myers died, was incapacitated or otherwise was no longer affiliated with us, there could be a material adverse effect on the relationship between us and each of those variable interest entities (“VIEs”) and, therefore, our business as a whole could be adversely affected.

The contractual arrangements we have with our VIEs is not as secure as direct ownership of such entities.

Because of laws prohibiting the corporate practice of medicine, we enter into contractual arrangements to manage certain of our affiliated physician practice groups, which allows us to consolidate those groups with Oak Street Health, LLC for financial reporting purposes. If we were to hold such groups directly, we would be able to exercise our rights as an equity holder directly to effect changes in the boards of directors of those entities, which could effect changes at the management and operational level. In contrast, under our current contractual arrangements with our physician groups, we may not be able to directly change the members of the boards of directors of these entities and would have to rely on the entities and the entities’ equity holders to perform their obligations in order to exercise our control over the entities. If any of these affiliated entities or their equity holders fail to perform their respective obligations under the contractual arrangements, we may have to incur substantial costs and expend additional resources to enforce such arrangements.

We face inspections, reviews, audits and investigations under federal and state government programs and contracts. These audits could have adverse findings that may negatively affect our business, including our results of operations, liquidity, financial condition and reputation.

As a result of our participation in the Medicare and Medicaid programs, we are subject to various governmental inspections, reviews, audits and investigations to verify our compliance with these programs and applicable laws and regulations. Payors may also reserve the right to conduct audits. We also periodically conduct internal audits and reviews of our regulatory compliance. An adverse inspection, review, audit or investigation could result in:

 

   

refunding amounts we have been paid pursuant to the Medicare or Medicaid programs or from payors;

 

   

state or federal agencies imposing fines, penalties and other sanctions on us;

 

   

temporary suspension of payment for new patients to the facility or agency;

 

   

decertification or exclusion from participation in the Medicare or Medicaid programs or one or more payor networks;

 

   

self-disclosure of violations to applicable regulatory authorities;

 

   

damage to our reputation;

 

   

the revocation of a facility’s or agency’s license; and

 

   

loss of certain rights under, or termination of, our contracts with payors.

We have in the past and will likely in the future be required to refund amounts we have been paid and/or pay fines and penalties as a result of these inspections, reviews, audits and investigations. If adverse inspections, reviews, audits or investigations occur and any of the results noted above occur, it could have a material adverse effect on our business and operating results. Furthermore, the legal, document production and other costs associated with complying with these inspections, reviews, audits or investigations could be significant.

 

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Our income tax treatment will change as a result of the Organizational Transactions and our future effective income tax rates could be subject to volatility.

Oak Street Health, LLC is currently classified as a partnership for U.S. federal income tax purposes and consequently does not generally pay any U.S. federal, state or local income taxes. Oak Street Health, Inc. is classified as a corporation for U.S. federal income tax purposes. As a corporation, Oak Street Health, Inc. will be subject to U.S. federal, state, and local income taxes with respect to its taxable income.

Oak Street Health, Inc.’s future effective income tax rates could be subject to volatility or adversely affected by a number of factors, including:

 

   

changes in tax laws (including statutory changes that increase the applicable U.S. federal corporate tax rate from its current 21%);

 

   

changes in the valuation of our deferred tax assets and liabilities;

 

   

expected timing and amount of the release of any tax valuation allowances;

 

   

structural changes in our business;

 

   

tax effects of equity-based compensation; or

 

   

changes in tax regulations or other interpretations of applicable tax law.

In addition, as a corporation, Oak Street Health, Inc. may be subject to audits by U.S. federal, state, and local tax authorities. Outcomes from these audits may adversely affect the operating results and financial condition of Oak Street Health, Inc.

We may incur certain tax liabilities attributable to our pre-IPO investors as a result of the Organizational Transactions.

In connection with the Organizational Transactions, the entities through which the Lead Sponsors hold their ownership interests in Oak Street Health will engage in a series of transactions that will result in each of these entities becoming wholly owned subsidiaries of Oak Street Health, Inc. See “Organizational Transactions.” As the parent company to these entities, Oak Street Health, Inc. will generally succeed to and, subject to certain rights to be indemnified, be responsible for any tax liabilities of the entities prior to the Organizational Transactions and, subject to certain rights to be indemnified, be responsible for costs incurred in defending any audits or other proceedings with respect to such taxes. Any such liabilities for which Oak Street Health, Inc. is responsible could have an adverse effect on our operating results and financial condition.

We may incur certain tax liabilities attributable to the pre-IPO taxable income or taxable loss of Oak Street Health, LLC.

Oak Street Health, LLC is currently classified as a partnership for U.S. federal income tax purposes. As a partnership, Oak Street Health, LLC does not directly pay any federal, state or local income taxes with respect to the taxable income shown on its tax returns. Rather, items of income, gain, loss, deduction, and credit are allocated among its partners and such persons are liable for any of the resulting income taxes.

Pursuant to certain provisions of the Internal Revenue Code of 1986, as amended (the “Code”) enacted as part of the Bipartisan Budget Act of 2015 (such provisions, the “Partnership Tax Audit Rules”), partnerships (and not the partners of the partnerships) can be subject to U.S. federal income taxes (and any related interest and penalties) resulting from adjustments made pursuant to an IRS audit or judicial proceedings to the items of income, gain, loss, deduction, or credit shown on the partnership’s tax return (or how such items are allocated among the partners). For example, such an adjustment could include the reduction of a loss allocated in periods prior to the Organizational Transactions, which in turn increases the taxable income reportable for periods after the Organizational Transactions. The Partnership Tax Audit Rules apply to Oak Street Health, LLC for each of its taxable years ending after December 31, 2017.

 

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Under the Partnership Tax Audit Rules, a partnership’s liability for taxes can be reduced or avoided in certain circumstances depending on the status or actions of its partners. For example, if partners agree to amend their tax returns and pay the resulting taxes, the partnership’s liability can be reduced. Partnerships can also make elections to “push out” the tax liability resulting from the adjustment to its partners and, as a result, have the partners and not the partnerships pay the income taxes. Under current authority, partnerships that cease to exist can be considered to automatically have made this “push out” election. Whether a partnership ceases to exist is currently based on a determination by the IRS.

Following the Organizational Transactions, Oak Street Health, LLC will remain a partnership for U.S. federal income tax purposes, and thus will continue to exist for purposes of the Partnership Tax Audit Rules. Accordingly, unless there is a change in structure following the Organizational Transactions or the closing of this offering, it does not appear that Oak Street Health, LLC will be required to make the “push out” election. Further, following the Organizational Transactions, there is no obligation to make any “push out” election and the prior partners of Oak Street Health, LLC are not obligated to file any amended returns to reduce or avoid any tax that would otherwise be imposed on Oak Street Health, LLC. If a “push out” election is made or is required, some of the resulting taxes may be payable by the entities through which the Lead Sponsors hold their ownership interests and, thus, be the responsibility of Oak Street Health, Inc. Following the Organizational Transactions, whether or not a “push out” election is made or required, Oak Street Health, Inc. would bear the costs of defending any actions to make adjustments to the income tax returns of Oak Street Health, LLC for periods prior to the Organizational Transactions (including in respect of tax losses allocated prior to the Organizational Transactions). If no “push out” election is made, Oak Street Health, Inc. would also economically incur any taxes, interest, or penalties associated with any adjustments to these returns (including in respect of such allocated tax losses). If no “push out” election is made or required, the resulting taxes will be economically borne entirely by Oak Street Health, Inc. Any such liabilities for which Oak Street Health, Inc. is responsible could have an adverse effect on our operating results and financial condition.

We will not have control of any IRS audit or related proceeding pursuant to the Partnership Tax Audit Rules.

Under the Partnership Tax Audit Rules, the partnership (including Oak Street Health, LLC) is required to appoint one person (the “partnership representative”) to act on its behalf in connection with IRS audits and related proceedings. Under the Partnership Tax Audit Rules, this person does not need to be a partner of the partnership (including Oak Street Health, LLC). As described above, the partnership representative’s actions, including the partnership representative’s agreement to adjustments of the partnership’s income in settlement of an IRS audit of the partnership, will bind all partners of the partnership, and opt-out rights available to certain partners in connection with certain actions of the tax matters partner under the Partnership Tax Audit Rules for tax years beginning before January 1, 2018 will no longer be available.

The current “partnership representative” for Oak Street Health, LLC is an individual that is a member of Oak Street Health Care, LLC and will be an officer of Oak Street Health Care, Inc. at the time of the Organizational Transactions. As a result, Oak Street Health, LLC (and following the Organizational Transactions, Oak Street Health, Inc.) may not have any control over any IRS audit or related proceeding. However, as described above, depending on the actions of the person acting as “partnership representative,” Oak Street Health, Inc. may still be held liable for any tax which results from an adjustment made pursuant to an IRS audit or judicial proceedings to the items of income, gain, loss, deduction, or credit shown on Oak Street Health, LLC’s income tax return.

Risks Related to Our Indebtedness

Our existing indebtedness could adversely affect our business and growth prospects.

As of March 31, 2020, we had $80.0 million in principal amount outstanding under our Loan Agreement. Our indebtedness, or any additional indebtedness we may incur, could require us to divert funds identified for

 

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other purposes for debt service and impair our liquidity position. If we cannot generate sufficient cash flow from operations to service our debt, we may need to refinance our debt, dispose of assets or issue equity to obtain necessary funds. We do not know whether we will be able to take any of these actions on a timely basis, on terms satisfactory to us or at all.

Our indebtedness and the cash flow needed to satisfy our debt have important consequences, including:

 

   

limiting funds otherwise available for financing our capital expenditures by requiring us to dedicate a portion of our cash flows from operations to the repayment of debt and the interest on this debt;

 

   

making us more vulnerable to rising interest rates; and

 

   

making us more vulnerable in the event of a downturn in our business.

Our level of indebtedness may place us at a competitive disadvantage to our competitors that are not as highly leveraged. Fluctuations in interest rates can increase borrowing costs. Increases in interest rates may directly impact the amount of interest we are required to pay and reduce earnings accordingly. In addition, developments in tax policy, such as the disallowance of tax deductions for interest paid on outstanding indebtedness, could have an adverse effect on our liquidity and our business, financial conditions and results of operations.

We expect to use cash flow from operations to meet current and future financial obligations, including funding our operations, debt service requirements and capital expenditures. The ability to make these payments depends on our financial and operating performance, which is subject to prevailing economic, industry and competitive conditions and to certain financial, business, economic and other factors beyond our control.

We may not be able to generate sufficient cash flow to service all of our indebtedness, and may be forced to take other actions to satisfy our obligations under such indebtedness, which may not be successful.

Our ability to make scheduled payments or to refinance outstanding debt obligations depends on our financial and operating performance, which will be affected by prevailing economic, industry and competitive conditions and by financial, business and other factors beyond our control. We may not be able to maintain a sufficient level of cash flow from operating activities to permit us to pay the principal, premium, if any, and interest on our indebtedness. Any failure to make payments of interest and principal on our outstanding indebtedness on a timely basis would likely result in penalties or defaults, which would also harm our ability to incur additional indebtedness.

If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell assets, seek additional capital or seek to restructure or refinance our indebtedness. Any refinancing of our indebtedness could be at higher interest rates and may require us to comply with more onerous covenants. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. In the absence of such cash flows and resources, we could face substantial liquidity problems and might be required to sell material assets or operations to attempt to meet our debt service obligations. If we cannot meet our debt service obligations, the holders of our indebtedness may accelerate such indebtedness and, to the extent such indebtedness is secured, foreclose on our assets. In such an event, we may not have sufficient assets to repay all of our indebtedness.

We may be unable to refinance our indebtedness.

We may need to refinance all or a portion of our indebtedness before maturity. We cannot assure you that we will be able to refinance any of our indebtedness on commercially reasonable terms or at all. There can be no assurance that we will be able to obtain sufficient funds to enable us to repay or refinance our debt obligations on commercially reasonable terms, or at all.

 

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The terms of the Loan Agreement restrict our current and future operations, particularly our ability to respond to changes or to take certain actions.

The Loan Agreement contains a number of restrictive covenants that impose significant operating and financial restrictions on us and may limit our ability to engage in acts that may be in our long-term best interests, including restrictions on our ability to:

 

   

incur additional indebtedness or other contingent obligations;

 

   

create liens;

 

   

make investments, acquisitions, loans and advances;

 

   

consolidate, merge, liquidate or dissolve;

 

   

sell, transfer or otherwise dispose of our assets;

 

   

pay dividends on our equity interests or make other payments in respect of capital stock; and

 

   

materially alter the business we conduct.

You should read the discussion under the heading “Description of Certain Indebtedness” for further information about these covenants.

The restrictive covenants in the Loan Agreement require us to satisfy certain financial condition tests. Our ability to satisfy those tests can be affected by events beyond our control.

A breach of the covenants or restrictions under the Loan Agreement could result in an event of default under such document. Such a default may allow the creditors to accelerate the related debt, which may result in the acceleration of any other debt to which a cross-acceleration or cross-default provision applies. In the event the holders of our indebtedness accelerate the repayment, we may not have sufficient assets to repay that indebtedness or be able to borrow sufficient funds to refinance it. Even if we are able to obtain new financing, it may not be on commercially reasonable terms or on terms acceptable to us. As a result of these restrictions, we may be:

 

   

limited in how we conduct our business;

 

   

unable to raise additional debt or equity financing to operate during general economic or business downturns; or

 

   

unable to compete effectively or to take advantage of new business opportunities.

These restrictions, along with restrictions that may be contained in agreements evidencing or governing other future indebtedness, may affect our ability to grow in accordance with our growth strategy.

Our failure to raise additional capital or generate cash flows necessary to expand our operations and invest in new technologies in the future could reduce our ability to compete successfully and harm our results of operations.

We may need to raise additional funds, and we may not be able to obtain additional debt or equity financing on favorable terms or at all. If we raise additional equity financing, our security holders may experience significant dilution of their ownership interests. If we engage in additional debt financing, we may be required to accept terms that restrict our ability to incur additional indebtedness, force us to maintain specified liquidity or other ratios or restrict our ability to pay dividends or make acquisitions. In addition, the covenants in our Loan Agreement may limit our ability to obtain additional debt, and any failure to adhere to these covenants could result in penalties or defaults that could further restrict our liquidity or limit our ability to obtain financing. If we

 

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need additional capital and cannot raise it on acceptable terms, or at all, we may not be able to, among other things:

 

   

develop and enhance our patient services;

 

   

continue to expand our organization;

 

   

hire, train and retain employees;

 

   

respond to competitive pressures or unanticipated working capital requirements; or

 

   

pursue acquisition opportunities.

In addition, if we issue additional equity to raise capital, your interest in us will be diluted.

Risks Related to Our Common Stock and This Offering

The Lead Sponsors control us, and their interests may conflict with ours or yours in the future.

Immediately following this offering, investment entities affiliated with General Atlantic LLC (collectively, “General Atlantic”) and Newlight Partners LP (“Newlight” and, together with General Atlantic, the “Lead Sponsors”) will, collectively, beneficially own approximately 52.9% of our common stock, or 52.4% if the underwriters exercise in full their option to purchase additional shares, which means that, based on their combined percentage voting power held after the offering, the Lead Sponsors together will control the vote of all matters submitted to a vote of our shareholders, which will enable them to control the election of the members of the Board and all other corporate decisions. Even when the Lead Sponsors cease to own shares of our stock representing a majority of the total voting power, for so long as the Lead Sponsors continue to own a significant percentage of our stock, the Lead Sponsors will still be able to significantly influence the composition of our Board and the approval of actions requiring shareholder approval. Accordingly, for such period of time, the Lead Sponsors will have significant influence with respect to our management, business plans and policies, including the appointment and removal of our officers, decisions on whether to raise future capital and amending our charter and bylaws, which govern the rights attached to our common stock. In particular, for so long as the Lead Sponsors continue to own a significant percentage of our stock, the Lead Sponsors will be able to cause or prevent a change of control of us or a change in the composition of our Board and could preclude any unsolicited acquisition of us. The concentration of ownership could deprive you of an opportunity to receive a premium for your shares of common stock as part of a sale of us and ultimately might affect the market price of our common stock.

In addition, in connection with this offering, we will enter into the Sponsor Director Nomination Agreement (defined herein) that provides each Lead Sponsor the right to designate: (i) three of the nominees for election to our Board for so long as each beneficially owns at least 20% of our common stock then outstanding; (ii) two of the nominees for election to our Board for so long as each beneficially owns less than 20% but at least 10% of our common stock then outstanding; and (iii) one of the nominees for election to our Board for so long as each beneficially owns less than 10% but at least 5% of our common stock then outstanding. The Lead Sponsors may also assign such right to their affiliates. The Sponsor Director Nomination Agreement will also prohibit us from increasing or decreasing the size of our Board without the prior written consent of the Lead Sponsors. See “Certain Relations and Related Party Transactions—Director Nomination Agreements” for more details with respect to the Sponsor Director Nomination Agreement.

The Lead Sponsors and their affiliates engage in a broad spectrum of activities, including investments in the healthcare industry generally. In the ordinary course of their business activities, the Lead Sponsors and their affiliates may engage in activities where their interests conflict with our interests or those of our other shareholders, such as investing in or advising businesses that directly or indirectly compete with certain portions of our business or are suppliers or customers of ours. Our certificate of incorporation to be effective in connection with the closing of this offering will provide that none of the Lead Sponsors, any of their affiliates or any director who is not employed by us (including any non-employee director who serves as one of our officers

 

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in both his director and officer capacities) or its affiliates will have any duty to refrain from engaging, directly or indirectly, in the same business activities or similar business activities or lines of business in which we operate. The Lead Sponsors also may pursue acquisition opportunities that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us. In addition, the Lead Sponsors may have an interest in pursuing acquisitions, divestitures and other transactions that, in its judgment, could enhance its investment, even though such transactions might involve risks to you.

Upon listing of our shares on the NYSE, we will be a “controlled company” within the meaning of the rules of the NYSE and, as a result, we will qualify for, and intend to rely on, exemptions from certain corporate governance requirements. You will not have the same protections as those afforded to stockholders of companies that are subject to such governance requirements.

After completion of this offering, the Lead Sponsors together will continue to control a majority of the voting power of our outstanding common stock. As a result, we will be a “controlled company” within the meaning of the corporate governance standards of the NYSE. Under these rules, a company of which more than 50% of the voting power for the election of directors is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements, including:

 

   

the requirement that a majority of our Board consist of independent directors;

 

   

the requirement that we have a nominating and corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities;

 

   

the requirement that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

 

   

the requirement for an annual performance evaluation of the nominating and corporate governance and compensation committees.

Following this offering, we intend to utilize these exemptions. As a result, we may not have a majority of independent directors on our Board, our Compensation and our Nominating and Corporate Governance Committees may not consist entirely of independent directors and our Compensation and our Nominating and Corporate Governance Committees may not be subject to annual performance evaluations. Accordingly, you will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the NYSE.

We are an “emerging growth company” and we expect to elect to comply with reduced public company reporting requirements, which could make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act. For as long as we continue to be an emerging growth company, we are eligible for certain exemptions from various public company reporting requirements. These exemptions include, but are not limited to, (i) not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, (ii) reduced disclosure obligations regarding executive compensation in our periodic reports, proxy statements and registration statements, (iii) exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved, (iv) not being required to provide audited financial statements for the year ended December 31, 2016, or five years of Selected Consolidated Financial Data in this prospectus and (v) an extended transition period to comply with new or revised accounting standards applicable to public companies. We could be an emerging growth company for up to five years after the first sale of our common stock pursuant to an effective registration statement under the Securities Act, which fifth anniversary will occur in 2024. If, however, certain events occur prior to the end of such five-year period, including if we become a “large accelerated filer,” our annual gross revenue exceeds $1.07 billion or we issue more than $1.0 billion of non- convertible debt in any three-year period, we would cease to be an emerging growth company prior to the end of such five-year period. We have made certain elections with regard to the

 

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reduced disclosure obligations regarding executive compensation in this prospectus and may elect to take advantage of other reduced disclosure obligations in future filings. In addition, we will choose to take advantage of the extended transition period to comply with new or revised accounting standards applicable to public companies. As a result, the information that we provide to holders of our common stock may be different than you might receive from other public reporting companies in which you hold equity interests. We cannot predict if investors will find our common stock less attractive as a result of reliance on these exemptions. If some investors find our common stock less attractive as a result of any choice we make to reduce disclosure, there may be a less active trading market for our common stock and the market price for our common stock may be more volatile.

The requirements of being a public company may strain our resources and distract our management, which could make it difficult to manage our business, particularly after we are no longer an “emerging growth company.”

As a public company, we will incur legal, accounting and other expenses that we did not previously incur. We will become subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and the Sarbanes-Oxley Act, the listing requirements of the NYSE and other applicable securities rules and regulations. Compliance with these rules and regulations will increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and increase demand on our systems and resources, particularly after we are no longer an “emerging growth company.” The Exchange Act requires that we file annual, quarterly and current reports with respect to our business, financial condition and results of operations. The Sarbanes-Oxley Act requires, among other things, that we establish and maintain effective internal controls and procedures for financial reporting. Furthermore, the need to establish the corporate infrastructure demanded of a public company may divert our management’s attention from implementing our growth strategy, which could prevent us from improving our business, financial condition and results of operations. We have made, and will continue to make, changes to our internal controls and procedures for financial reporting and accounting systems to meet our reporting obligations as a public company. However, the measures we take may not be sufficient to satisfy our obligations as a public company. In addition, these rules and regulations will increase our 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 substantial costs to maintain the same or similar coverage. These additional obligations could have a material adverse effect on our business, financial condition and results of operations.

In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of our management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us and there could be a material adverse effect on our business, financial condition and results of operations.

Provisions of our corporate governance documents could make an acquisition of us more difficult and may prevent attempts by our shareholders to replace or remove our current management, even if beneficial to our shareholders.

In addition to the Lead Sponsors’ beneficial ownership of a combined 52.9% of our common stock after this offering (or 52.4% if the underwriters exercise in full their option to purchase additional shares), our certificate

 

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of incorporation and bylaws to be effective in connection with the closing of this offering and the Delaware General Corporation Law (the “DGCL”), contain provisions that could make it more difficult for a third party to acquire us, even if doing so might be beneficial to our shareholders. Among other things, these provisions:

 

   

allow us to authorize the issuance of undesignated preferred stock, the terms of which may be established and the shares of which may be issued without shareholder approval, and which may include supermajority voting, special approval, dividend, or other rights or preferences superior to the rights of shareholders;

 

   

provide for a classified board of directors with staggered three-year terms;

 

   

prohibit shareholder action by written consent from and after the date on which the Lead Sponsors beneficially own, in the aggregate, less than 40% of our common stock then outstanding;

 

   

provide that any amendment, alteration, rescission or repeal of our bylaws by our shareholders will require the affirmative vote of the holders of at least 66 2/3% in voting power of all the then-outstanding shares of our stock entitled to vote thereon, voting together as a single class; and

 

   

establish advance notice requirements for nominations for elections to our Board or for proposing matters that can be acted upon by shareholders at shareholder meetings, provided, however, that at any time when a Lead Sponsor beneficially owns, in the aggregate, at least 5% of our common stock then outstanding, such advance notice procedure will not apply to that Lead Sponsor.

Our certificate of incorporation to be effective in connection with the closing of this offering will contain a provision that provides us with protections similar to Section 203 of the DGCL, and will prevent us from engaging in a business combination with a person (excluding the Lead Sponsors and any of their direct or indirect transferees and any group as to which such persons are a party) who acquires at least 15% of our common stock for a period of three years from the date such person acquired such common stock, unless board or shareholder approval is obtained prior to the acquisition. See “Description of Capital Stock—Anti-Takeover Effects of Our Certificate of Incorporation and Our Bylaws.” These provisions could discourage, delay or prevent a transaction involving a change in control of our company. These provisions could also discourage proxy contests and make it more difficult for you and other shareholders to elect directors of your choosing and cause us to take other corporate actions you desire, including actions that you may deem advantageous, or negatively affect the trading price of our common stock. In addition, because our Board is responsible for appointing the members of our management team, these provisions could in turn affect any attempt by our shareholders to replace current members of our management team.

These and other provisions in our certificate of incorporation, bylaws and Delaware law could make it more difficult for shareholders or potential acquirers to obtain control of our Board or initiate actions that are opposed by our then-current Board, including delay or impede a merger, tender offer or proxy contest involving our company. The existence of these provisions could negatively affect the price of our common stock and limit opportunities for you to realize value in a corporate transaction.

For information regarding these and other provisions, see “Description of Capital Stock.”

Our certificate of incorporation will designate the Court of Chancery of the State of Delaware as the exclusive forum for certain litigation that may be initiated by our shareholders, which could limit our shareholders’ ability to obtain a favorable judicial forum for disputes with us.

Pursuant to our certificate of incorporation to be effective in connection with the closing of this offering, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for (1) any derivative action or proceeding brought on our behalf, (2) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other

 

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employees to us or our shareholders, (3) any action asserting a claim against us arising pursuant to any provision of the DGCL, our certificate of incorporation or our bylaws or (4) any other action asserting a claim against us that is governed by the internal affairs doctrine; provided that for the avoidance of doubt, the forum selection provision that identifies the Court of Chancery of the State of Delaware as the exclusive forum for certain litigation, including any “derivative action”, will not apply to suits to enforce a duty or liability created by the Securities Act, the Exchange Act or any other claim for which the federal courts have exclusive jurisdiction. Our certificate of incorporation will further provide that any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock is deemed to have notice of and consented to the provisions of our certificate of incorporation described above. See “Description of Capital Stock—Exclusive Forum.” The forum selection clause in our certificate of incorporation may have the effect of discouraging lawsuits against us or our directors and officers and may limit our shareholders’ ability to obtain a favorable judicial forum for disputes with us.

If you purchase shares of common stock in this offering, you will suffer immediate and substantial dilution of your investment.

The initial public offering price of our common stock is substantially higher than the net tangible book value per share of our common stock. Therefore, if you purchase shares of our common stock in this offering, you will pay a price per share that substantially exceeds our net tangible book value per share after this offering. You will experience immediate dilution of $19.09 per share, representing the difference between our pro forma net tangible book value per share after giving effect to this offering and the initial public offering price. In addition, purchasers of common stock in this offering will have contributed 37.6% of the aggregate price paid by all purchasers of our common stock but will own only approximately 6.6% of our common stock outstanding after this offering. See “Dilution” for more detail.

An active, liquid trading market for our common stock may not develop, which may limit your ability to sell your shares.

Prior to this offering, there was no public market for our common stock. Although our common stock has been approved for listing on the NYSE under the symbol “OSH,” an active trading market for our shares may never develop or be sustained following this offering. The initial public offering price will be determined by negotiations between us and the underwriters and may not be indicative of market prices of our common stock that will prevail in the open market after the offering. A public trading market having the desirable characteristics of depth, liquidity and orderliness depends upon the existence of willing buyers and sellers at any given time, such existence being dependent upon the individual decisions of buyers and sellers over which neither we nor any market maker has control. The failure of an active and liquid trading market to develop and continue would likely have a material adverse effect on the value of our common stock. The market price of our common stock may decline below the initial public offering price, and you may not be able to sell your shares of our common stock at or above the price you paid in this offering, or at all. An inactive market may also impair our ability to raise capital to continue to fund operations by issuing shares and may impair our ability to acquire other companies or technologies by using our shares as consideration.

Our operating results and stock price may be volatile, and the market price of our common stock after this offering may drop below the price you pay.

Our quarterly operating results are likely to fluctuate in the future. In addition, securities markets worldwide have experienced, and are likely to continue to experience, significant price and volume fluctuations. This market volatility, as well as general economic, market or political conditions, could subject the market price of our shares to wide price fluctuations regardless of our operating performance. Our operating results and the trading price of our shares may fluctuate in response to various factors, including:

 

   

market conditions in our industry or the broader stock market;

 

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actual or anticipated fluctuations in our quarterly financial and operating results;

 

   

introduction of new solutions or services by us or our competitors;

 

   

issuance of new or changed securities analysts’ reports or recommendations;

 

   

sales, or anticipated sales, of large blocks of our stock;

 

   

additions or departures of key personnel;

 

   

regulatory or political developments;

 

   

litigation and governmental investigations;

 

   

changing economic conditions;

 

   

investors’ perception of us;

 

   

events beyond our control such as weather and war; and

 

   

any default on our indebtedness.

These and other factors, many of which are beyond our control, may cause our operating results and the market price and demand for our shares to fluctuate substantially. Fluctuations in our quarterly operating results could limit or prevent investors from readily selling their shares and may otherwise negatively affect the market price and liquidity of our shares. In addition, in the past, when the market price of a stock has been volatile, holders of that stock have sometimes instituted securities class action litigation against the company that issued the stock. If any of our shareholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit. Such a lawsuit could also divert the time and attention of our management from our business, which could significantly harm our profitability and reputation.

A significant portion of our total outstanding shares are restricted from immediate resale but may be sold into the market in the near future. This could cause the market price of our common stock to drop significantly, even if our business is doing well.

Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock. After this offering, we will have 238,535,856 outstanding shares of common stock based on the number of shares outstanding as of March 31, 2020. This includes shares that we are selling in this offering, which may be resold in the public market immediately. Following the consummation of this offering, shares that are not being sold in this offering will be subject to a 180-day lock-up period provided under lock-up agreements executed in connection with this offering described in “Underwriting” and restricted from immediate resale under the federal securities laws as described in “Shares Eligible for Future Sale.” All of these shares will, however, be able to be resold after the expiration of the lock-up period, as well as pursuant to customary exceptions thereto or upon the waiver of the lock-up agreement by J.P. Morgan Securities LLC on behalf of the underwriters. We also intend to register shares of common stock that we may issue under our equity compensation plans. Once we register these shares, they can be freely sold in the public market upon issuance, subject to the lock-up agreements. As restrictions on resale end, the market price of our stock could decline if the holders of currently restricted shares sell them or are perceived by the market as intending to sell them.

Because we have no current plans to pay regular cash dividends on our common stock following this offering, you may not receive any return on investment unless you sell your common stock for a price greater than that which you paid for it.

We do not anticipate paying any regular cash dividends on our common stock following this offering. Any decision to declare and pay dividends in the future will be made at the discretion of our Board and will depend on, among other things, our results of operations, financial condition, cash requirements, contractual restrictions

 

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and other factors that our Board may deem relevant. In addition, our ability to pay dividends is, and may be, limited by covenants of existing and any future outstanding indebtedness we or our subsidiaries incur. Therefore, any return on investment in our common stock is solely dependent upon the appreciation of the price of our common stock on the open market, which may not occur. See “Dividend Policy” for more detail.

If securities or industry analysts do not publish research or reports about our business, if they adversely change their recommendations regarding our shares or if our results of operations do not meet their expectations, our stock price and trading volume could decline.

The trading market for our shares will be influenced by the research and reports that industry or securities analysts publish about us or our business. We do not have any control over these analysts. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. Moreover, if one or more of the analysts who cover us downgrade our stock, or if our results of operations do not meet their expectations, our stock price could decline.

We may issue shares of preferred stock in the future, which could make it difficult for another company to acquire us or could otherwise adversely affect holders of our common stock, which could depress the price of our common stock.

Our certificate of incorporation will authorize us to issue one or more series of preferred stock. Our Board will have the authority to determine the preferences, limitations and relative rights of the shares of preferred stock and to fix the number of shares constituting any series and the designation of such series, without any further vote or action by our shareholders. Our preferred stock could be issued with voting, liquidation, dividend and other rights superior to the rights of our common stock. The potential issuance of preferred stock may delay or prevent a change in control of us, discouraging bids for our common stock at a premium to the market price, and materially adversely affect the market price and the voting and other rights of the holders of our common stock.

 

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FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical fact included in this prospectus are forward-looking statements. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “plan,” “intend,” “believe,” “may,” “will,” “should,” “can have,” “likely” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. For example, all statements we make relating to our estimated and projected costs, expenditures, cash flows, growth rates and financial results, our plans and objectives for future operations, growth or initiatives, strategies or the expected outcome or impact of pending or threatened litigation are forward-looking statements. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expected, including:

 

   

our history of net losses, and our ability to achieve or maintain profitability in an environment of increasing expenses;

 

   

the impact of the COVID-19 pandemic or any other pandemic, epidemic or outbreak of an infectious disease in the United States or worldwide on our business, financial condition and results of operation;

 

   

the effect of our relatively limited operating history on investors’ ability to evaluate our current business and future prospects;

 

   

the viability of our growth strategy and our ability to realize expected results;

 

   

our ability to attract new patients;

 

   

the dependence of our revenue and operations on a limited number of key payors;

 

   

the risk of termination or non-renewal of the Medicare Advantage contracts held by the health plans with which we contract, or the termination or non-renewal of our contracts with those plans;

 

   

the impact on our business from changes in the payor mix of our patients and potential decreases in our reimbursement rates;

 

   

our ability to manage our growth effectively, execute our business plan, maintain high levels of service and patient satisfaction and adequately address competitive challenges;

 

   

our ability to compete in the healthcare industry;

 

   

our ability to timely enroll new physicians and other providers in governmental healthcare programs before we can receive reimbursement for their services;

 

   

the impact on our business of reductions in Medicare reimbursement rates or changes in the rules governing the Medicare program;

 

   

our dependence on reimbursements by third-party payors and payments by individuals;

 

   

our assumption under most of our agreements with health plans of some or all of the risk that the cost of providing services will exceed our compensation;

 

   

the impact on our business of renegotiation, non-renewal or termination of capitation agreements with health plans;

 

   

risks associated with estimating the amount of revenues and refund liabilities that we recognize under our risk agreements with health plans;

 

   

the impact on our business of security breaches, loss of data or other disruptions causing the compromise of sensitive information or preventing us from accessing critical information;

 

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our ability to develop and maintain proper and effective internal control over financial reporting;

 

   

the impact on our business of disruptions in our disaster recovery systems or management continuity planning;

 

   

the potential adverse impact of legal proceedings and litigation;

 

   

the impact of reductions in the quality ratings of the health plans we serve;

 

   

the risk of our agreements with the physician equity holder of our practices being deemed invalid;

 

   

our ability to maintain and enhance our reputation and brand recognition;

 

   

our ability to effectively invest in, implement improvements to and properly maintain the uninterrupted operation and data integrity of our information technology and other business systems;

 

   

our ability to obtain, maintain and enforce intellectual property protection for our technology;

 

   

the potential adverse impact of claims by third parties that we are infringing on or otherwise violating their intellectual property rights;

 

   

our ability to protect the confidentiality of our trade secrets, know-how and other internally developed information;

 

   

the impact of any restrictions on our use of or ability to license data or our failure to license data and integrate third-party technologies;

 

   

risks associated with our use of “open-source” software;

 

   

our dependence on our senior management team and other key employees;

 

   

the concentration of our primary care centers in Illinois, Indiana, Michigan and Ohio;

 

   

the impact on our business of an economic downturn;

 

   

our ability to attract and retain highly qualified personnel;

 

   

our management team’s limited experience managing a public company;

 

   

the impact on our business of the termination of our leases, increases in rent or inability to renew or extend leases;

 

   

the impact of failures by our suppliers, material price increases on supplies, lack of reimbursement for drugs we purchase or limitations on our ability to access new technology or products;

 

   

our ability to maintain our corporate culture;

 

   

the impact of competition for physicians and nurses, shortages of qualified personnel and related increases in our labor costs;

 

   

our ability to attract and retain the services of key primary care physicians;

 

   

the risk that our submissions to health plans may contain inaccurate or unsupportable information regarding risk adjustment scores of members;

 

   

our ability to accurately estimate incurred but not reported medical expense;

 

   

the impact of negative publicity regarding the managed healthcare industry;

 

   

the impact of state and federal efforts to reduce Medicaid spending;

 

   

the impact on our centers of adverse weather conditions and other factors beyond our control; and

 

   

other factors disclosed in the section entitled “Risk Factors” and elsewhere in this prospectus.

 

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We derive many of our forward-looking statements from our operating budgets and forecasts, which are based on many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results. Important factors that could cause actual results to differ materially from our expectations, or cautionary statements, are disclosed under the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this prospectus. All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by these cautionary statements as well as other cautionary statements that are made from time to time in our other SEC filings and public communications. You should evaluate all forward-looking statements made in this prospectus in the context of these risks and uncertainties.

We caution you that the important factors referenced above may not contain all of the factors that are important to you. In addition, we cannot assure you that we will realize the results or developments we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our operations in the way we expect. The forward-looking statements included in this prospectus are made only as of the date hereof. We undertake no obligation to update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.

 

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MARKET AND INDUSTRY DATA

Unless otherwise indicated, information in this prospectus concerning economic conditions, our industry, our markets and our competitive position is based on a variety of sources, including information from independent industry analysts and publications, as well as our own estimates and research. This information involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. While we believe the information presented in this prospectus is generally reliable, forecasts, assumptions, expectations, beliefs, estimates and projects involve risk and uncertainties and are subject to change based on various factors, including those described under “Forward-Looking Statements” and “Risk Factors.”

Throughout this prospectus, all references to “Net Promoter Score” are to a measure of patient satisfaction widely used in the healthcare industry. We calculate Net Promoter Score based on responses to patient surveys, administered as paper surveys following a patient’s appointment at one of our centers, that ask the patient to rank, on a scale of one to 10, how likely the patient would be to recommend Oak Street Health to a friend. We assign the designation of “Promoter” to respondents who provide a score of 9 or 10, the designation of “Passive” to respondents who provide a score of 7 or 8, and the designation of “Detractor” to respondents who provide a score of 0 to 6. We then subtract the percentage of Detractors from Promoters to determine our overall Net Promoter Score. We believe that this method of calculation aligns with industry standards and that this metric is meaningful for investors because of the correlation between Net Promoter Score and patient satisfaction.

Throughout this prospectus, we present certain statistics regarding our performance against Medicare benchmarks. These Medicare benchmarks are derived from a blended average of dual-eligible (meaning the patient’s coverage comes from both Medicare and Medicaid) and non-dual-eligible Medicare Part A benchmarks reported by the sources set forth below, so as to be comparable with the patient population that we serve. The blended average benchmarks are calculated as the sum of (i) the product of (a) the percentage of our patient population that is dual-eligible and (b) the reported dual-eligible benchmark and (ii) the product of (a) the percentage of our patient population that is non-dual eligible and (b) the reported non-dual eligible benchmark. The Medicare hospital admission benchmark of 370 is derived from publicly available CMS data from 2018. The Medicare hospital readmission benchmark of 19% is derived from a 2015 study in the Journal of Rural Health analyzing 2009 data and a 2017 Healthcare Cost and Utilization Project study analyzing 2014 data. The Medicare emergency department benchmark of 1,090 emergency department “treat and release” visits is derived from a 2019 Avalere study analyzing 2015 data.

 

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USE OF PROCEEDS

We estimate that our net proceeds from this offering will be approximately $305.4 million (or approximately $351.7 million if the underwriters’ option to purchase additional shares is exercised in full), after deducting the underwriting discount and estimated offering expenses payable by us.

The principal purposes of this offering are to increase our capitalization and financial flexibility, create a public market for our common stock and enable access to the public equity markets for us and our shareholders. We expect to use approximately $86.2 million of the net proceeds of this offering to repay outstanding borrowings, including fees and expenses, under our Loan Agreement, under which $80.0 million in principal amount was outstanding and which had an interest rate of 9.75% as of March 31, 2020, and the remainder of such net proceeds will be used for general corporate purposes. At this time, other than repayment of our indebtedness under the Loan Agreement, we have not specifically identified a large single use for which we intend to use the net proceeds, and, accordingly, we are not able to allocate the net proceeds among any of these potential uses in light of the variety of factors that will impact how such net proceeds are ultimately utilized by us. Pending use of the proceeds from this offering, we intend to invest the proceeds in a variety of capital preservation investments, including short-term, investment-grade and interest-bearing instruments.

We may also use a portion of our net proceeds to acquire or invest in complementary businesses, products, services or technologies. However, we do not have agreements or commitments for any acquisitions or investments at this time.

 

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DIVIDEND POLICY

We currently intend to retain all available funds and any future earnings to fund the development and growth of our business and to repay indebtedness and, therefore, we do not anticipate paying any cash dividends in the foreseeable future. Additionally, because we are a holding company, our ability to pay dividends on our common stock may be limited by restrictions on the ability of our subsidiaries to pay dividends or make distributions to us. Any future determination to pay dividends will be at the discretion of our Board, subject to compliance with covenants in current and future agreements governing our and our subsidiaries’ indebtedness, and will depend on our results of operations, financial condition, capital requirements and other factors that our Board may deem relevant.

 

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ORGANIZATIONAL TRANSACTIONS

Oak Street Health, Inc. was incorporated in Delaware on October 22, 2019 to serve as a holding company that will wholly own Oak Street Health, LLC and its operating subsidiaries. Oak Street Health, Inc. has not engaged in any business or other activities other than those incident to its formation, the Organizational Transactions and the preparation of this prospectus and the registration statement of which this prospectus forms a part. Following this offering, Oak Street Health, Inc. will remain a holding company, its sole asset will be the capital stock of its wholly owned subsidiaries, including Oak Street Health, LLC, and it will operate and control all of the business and affairs and consolidate the financial results of Oak Street Health, LLC.

Prior to the closing of this offering, we, and the other direct and indirect equityholders of Oak Street Health, LLC, will effect a series of transactions that will result in (i) Oak Street Health, Inc. becoming the ultimate parent company of Oak Street Health, LLC and (ii) the current equityholders in Oak Street Health, LLC exchanging their interests in Oak Street Health, LLC for common stock of Oak Street Health, Inc. We refer to these transactions as the “Organizational Transactions.”

 

   

Each of our Lead Sponsors will, through a series of transactions, contribute their respective interests in the entities through which they currently hold interests in Oak Street Health, LLC (“Sponsor Blockers”) to Oak Street Health, Inc. in exchange for 126,278,767 shares of common stock in Oak Street Health, Inc.

 

   

OSH Management Holdings, LLC (“OSH MH LLC”), the entity through which our employees currently own profits interests in Oak Street Health, LLC, will merge (the “Management Merger”) with and into a newly formed subsidiary of Oak Street Health, Inc., with OSH MH LLC surviving as a wholly owned subsidiary of Oak Street Health, Inc. Pursuant to the Management Merger, our employees will receive a total of 38,164,950 shares of common stock, 22,621,901 of which are subject to vesting as described below, and 14,316,334 options to purchase common stock of Oak Street Health, Inc. at a strike price equal to the initial public offering price in exchange for their profits interests in OSH MH LLC.

 

   

Oak Street Health, LLC will merge (the “Company Merger”) with and into a newly formed subsidiary of Oak Street Health, Inc., with Oak Street Health, LLC surviving as a wholly owned subsidiary of Oak Street Health, Inc. Pursuant to the Company Merger, the investors in Oak Street Health, LLC will receive a total of 58,467,139 shares of common stock in Oak Street Health, Inc. in exchange for their LLC units in Oak Street Health, LLC.

 

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The following diagram shows our organizational structure immediately prior to giving effect to the Organizational Transactions.

 

LOGO

The shares of common stock to be issued to our existing equityholders in connection with the Organizational Transactions will be restricted securities as defined in Rule 144 under the Securities Act. In addition, the restricted shares and options to be issued to employees in connection with the Organizational Transactions in exchange for existing time-vesting profits interests will vest in accordance with the vesting schedule of the profits interests being exchanged, which generally are issued with four-year vesting periods, resulting in a current range from one to four years depending on the date of grant. The restricted shares and options to be issued in exchange for performance-vesting profits interests will be subject to cliff vesting as follows: (i) two years following the consummation of this offering, to the extent the profits interests for which such restricted shares or options are being exchanged were granted at least two years prior to the consummation of this offering, (ii) between two and three years following the consummation of this offering, to the extent the profits interests for which such restricted shares or options are being exchanged were granted between one and two years prior to the consummation of this offering and (iii) three years following the consummation of this offering, to the extent the profits interests for which such restricted shares or options are being exchanged were granted less than one year prior to the consummation of this offering. Replacement or new common stock, restricted shares and options are of equal value to the original profits interests. If the vesting conditions for the restricted shares are not satisfied, such restricted shares will be forfeited and cancelled.

 

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The following diagram shows our organizational structure immediately following completion of the Organizational Transactions.

 

LOGO

The purpose of the Organizational Transactions is to reorganize our corporate structure so that the top-tier entity in our corporate structure—the entity that is offering common stock to the public in this offering—is a corporation rather than a limited liability company and so that our existing investors will own our common stock rather than equity interests in a limited liability company.

Except as otherwise noted herein, the consolidated financial statements included elsewhere in this prospectus are those of Oak Street Health, LLC and its consolidated subsidiaries and affiliated medical groups.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents, marketable securities and our capitalization as of March 31, 2020:

 

   

on an actual basis;

 

   

on a pro forma basis to give effect to (1) the 2020 Tender Offer (as defined herein) completed on April 27, 2020, (2) the Organizational Transactions, and (3) the effectiveness of our certificate of incorporation upon the closing of this offering; and

 

   

on a pro forma as adjusted basis to give further effect to our issuance and sale of shares of our common stock in this offering, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us and the application of the net proceeds of this offering as set forth under “Use of Proceeds.”

Our capitalization following the closing of this offering will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. You should read this table together with our consolidated financial statements and the related notes appearing at the end of this prospectus and the sections of this prospectus titled “Selected Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Description of Capital Stock.”

 

     As of March 31, 2020  
     Actual     Pro Forma     Pro Forma
As Adjusted
 
     (in thousands, except unit/share data)  

Cash(1)

   $ 226,342     $ 206,342     $ 425,548  
  

 

 

   

 

 

   

 

 

 

Long-term debt, net of current portion(2)

   $ 81,731     $ 81,731     $ —    

Commitments and Contingencies:

      

Redeemable Investor Units, aggregate liquidation preference of $630,943, actual; no units authorized, issued or outstanding pro forma and pro forma as adjusted

     545,001       —         —    

Member’s deficit / Stockholders’ equity:

      

Members’ capital, $0.01 par value, 2,790,395 units issued, actual; no units authorized, issued or outstanding pro forma and pro forma as adjusted

     6,013       —         —    

Preferred stock, $0.001 par value; no shares authorized, issued or outstanding, actual; 50,000,000 shares authorized and no shares issued or outstanding, pro forma and pro forma as adjusted

     —         —         —    

Common stock, no shares issued and outstanding, actual; 500,000,000 shares authorized, 222,910,856 shares issued and outstanding, pro forma; 500,000,000 shares authorized, 238,535,856 shares issued and outstanding, pro forma as adjusted

     —         545,055     $ 850,493  

Accumulated deficit

     (369,355     (380,970     (380,970

Noncontrolling interests

     4,930       4,930       4,930  
  

 

 

   

 

 

   

 

 

 

Total members’ deficit / stockholders’ equity

     (358,412     169,015     $ 474,453  
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ 268,320     $ 250,746     $ 474,453  
  

 

 

   

 

 

   

 

 

 

 

(1)

Includes $10,391 of restricted cash.

(2)

We expect to use approximately $86.2 million of the net proceeds of this offering to repay outstanding borrowings, including fees and expenses, under our Loan Agreement.

The table above excludes:

 

   

11,934,375 shares of common stock, plus future increases, reserved for future issuance under the 2020 Plan, including (1) 161,532 RSUs that may be settled for an equal number of shares of common stock

 

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that we will issue to certain employees and directors upon completion of this offering and that vest in accordance with the schedule described under “Organizational Transactions”, and (2) options to purchase an aggregate of 694,799 shares of common stock that we will issue to approximately seven existing unitholders upon completion of this offering, with an exercise price set at the initial public offering price, and that vest in accordance with the schedule described under “Organizational Transactions”;

 

   

Options to purchase an aggregate of 14,316,334 shares of common stock at a strike price equal to the initial public offering price and that vest in accordance with the schedule described under “Organizational Transactions” that we will issue in exchange for profits interests in Oak Street Health, LLC in connection with the Organizational Transactions; and

 

   

2,386,875 shares of common stock, plus future increases, reserved for issuance under the ESPP.

 

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DILUTION

If you invest in our common stock in this offering, your interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock in this offering and the as adjusted net tangible book value per share of our common stock immediately after this offering.

As of March 31, 2020, we had a pro forma net tangible book value of $153.7 million, or $0.69 per share of common stock. Our pro forma net tangible book value per share represents the amount of our total tangible assets reduced by the amount of our total liabilities and divided by the total number of shares of our common stock outstanding as of March 31, 2020, after giving effect to the Organizational Transactions and the 2020 Tender Offer.

After giving effect to the sale of shares of common stock in this offering, after deducting the underwriting discount and estimated offering expenses payable by us and the application of the net proceeds of this offering to repay $80.0 million in principal amount in outstanding borrowings under our Loan Agreement as set forth under “Use of Proceeds,” our pro forma as adjusted net tangible book value as of March 31, 2020 would have been approximately $454.6 million, or approximately $1.91 per share of common stock. This represents an immediate increase in pro forma as adjusted net tangible book value of $1.22 per share to our existing shareholders and an immediate dilution in pro forma as adjusted net tangible book value of $19.09 per share to investors participating in this offering at the assumed initial public offering price.

The following table illustrates this per share dilution:

 

Initial public offering price per share

      $ 21.00  

Pro forma net tangible book value per share as of March 31, 2020

   $ 0.69     

Increase in pro forma net tangible book value per share attributable to the investors in this offering

   $ 1.22     
  

 

 

    

 

 

 

Pro forma as adjusted net tangible book value per share after giving effect to this offering

      $ 1.91  

Dilution in pro forma as adjusted net tangible book value per share to the investors in this offering

      $ 19.09  
  

 

 

    

 

 

 

If the underwriters exercise their option to purchase additional shares in full, the pro forma as adjusted net tangible book value per share after this offering would be $2.08, and the dilution in pro forma as adjusted net tangible book value per share to new investors in this offering would be $18.92.

The following table presents, on a pro forma as adjusted basis as of March 31, 2020, after giving effect to the Organizational Transactions and the 2020 Tender Offer, the differences between our existing shareholders and the investors purchasing shares of our common stock in this offering, with respect to the number of shares purchased, the total consideration paid to us, and the average price per share paid by our existing shareholders or to be paid to us by investors purchasing shares in this offering at the public offering price of $21.00 per share, before deducting the underwriting discount and estimated offering expenses payable by us.

 

     Shares Purchases     Total Consideration     Average
Price
per
Share
 
     Number      Percentage     Amount      Percentage  

Existing shareholders

     222,910,856        93.4   $ 545,055,444        64.1   $ 2.45  

New investors

     15,625,000        6.6     $ 328,125,000        35.9       21.00  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

     238,535,856        100   $ 873,180,444        100   $ 3.66  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Except as otherwise indicated, the above discussion and tables assume no exercise of the underwriters’ option to purchase additional shares. After giving effect to sales of shares in this offering, assuming the

 

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underwriters’ option to purchase additional shares is exercised in full, our existing shareholders would own 92.5% and our new investors would own 7.5% of the total number of shares of our common stock outstanding after this offering.

In addition, to the extent we issue any stock options or any stock options are exercised, or we issue any other securities or convertible debt in the future, investors participating in this offering may experience further dilution.

Except as otherwise indicated, the above discussion and tables are based on 222,910,856 shares of our common stock outstanding as of March 31, 2020, after giving effect to the Organizational Transactions, and exclude:

 

   

11,934,375 shares of common stock, plus future increases, reserved for future issuance under the 2020 Plan, including (1) 151,644 RSUs that may be settled for an equal number of shares of common stock that we will issue to certain employees and directors upon completion of this offering and that vest in accordance with the schedule described under “Organizational Transactions”, and (2) options to purchase an aggregate of 694,799 shares of common stock that we will issue to approximately seven existing unitholders upon completion of this offering, with an exercise price set at the initial public offering price, and that vest in accordance with the schedule described under “Organizational Transactions”;

 

   

Options to purchase an aggregate of 14,316,334 shares of common stock at a strike price equal to the initial public offering price that we will issue in exchange for profits interests in Oak Street Health, LLC in connection with the Organizational Transactions and that vest in accordance with the schedule described under “Organizational Transactions”; and

 

   

2,386,875 shares of common stock, plus future increases, reserved for issuance under the ESPP.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

The following tables present our selected consolidated financial data. The selected consolidated statement of operations data for the years ended December 31, 2018 and 2019 and the selected consolidated balance sheets data as of December 31, 2018 and 2019 are derived from our audited consolidated financial statements that are included elsewhere in this prospectus. The selected consolidated statement of operations data for the three months ended March 31, 2019 and 2020 and the selected consolidated balance sheet data as of March 31, 2020 are derived from our unaudited interim consolidated financial statements that are included elsewhere in this prospectus. The unaudited interim consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, that are necessary for the fair statement of our unaudited interim consolidated financial statements.

Our historical results are not necessarily indicative of the results that may be expected in the future. You should read the selected historical financial data below in conjunction with the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and related notes included elsewhere in this prospectus.

Oak Street Health, Inc. was formed as a Delaware corporation on October 22, 2019 in anticipation of this offering and has not, to date, conducted any activities other than those incident to its formation, the Organizational Transactions and the preparation of the prospectus and the registration statement of which this prospectus forms a part.

 

     Year Ended
December 31,
    Three Months Ended
March 31,
 
   2018     2019     2019     2020  
(dollars in thousands)                (unaudited)  

Revenues:

        

Capitated revenue

   $ 309,594     $ 539,909     $ 115,329     $ 196,590  

Other patient service revenue

     8,344       16,695       2,047       5,195  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     317,938       556,604       117,376       201,785  

Operating expenses:

        

Medical claims expense

     227,566       385,998       77,274       132,285  

Cost of care, excluding depreciation and amortization

     85,958       140,853       27,644       43,769  

Sales and marketing

     25,470       46,189       8,675       11,871  

Corporate, general and administrative expenses

     50,799       79,592       11,911       24,379  

Depreciation and amortization

     4,182       7,848       1,724       2,505  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     393,975       660,480       127,228       214,809  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (76,037     (103,876     (9,852     (13,024

Other income (expense):

        

Interest expense, net

     (3,688     (5,651     (9     (2,426

Other

     10       84       62       95  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense)

     (3,678     (5,567     53       (2,331
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (79,715     (109,443     (9,799     (15,355

Net loss attributable to noncontrolling interests

     171       1,581       (196     355  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to the Company

   $ (79,544   $ (107,862   $ (9,995   $ (15,000
  

 

 

   

 

 

   

 

 

   

 

 

 

Undeclared and deemed dividends on Investor Units

     (39,118     (29,370     (7,114     (9,572
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common unitholders

   $ (118,662   $ (137,232   $ (17,109   $ (24,572
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average number of common units outstanding - basic and diluted

     689,957       620,068       620,068       620,068  

Net loss per unit - basic and diluted

   $ (171.98   $ (221.32   $ (27.59   $ (39.63

 

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     Year Ended December 31,     Three Months Ended
March 31,
 
   2018      2019     2019      2020  
(dollars in thousands)                 (unaudited)  

Pro Forma Per Share Data(1)(2):

          

Pro forma net income (loss) per share:

                                                                              

Basic and Diluted

      $ (0.65      $ (0.11
     

 

 

      

 

 

 

Pro forma weighted-average shares used in computing net income (loss) per share:

          

Basic and Diluted

        204,098,479          204,098,479  

 

(1)

Unaudited pro forma per share information gives effect to the Organizational Transactions, our sale of shares of common stock in this offering and after deducting the underwriting discount and estimated offering expenses payable by us and the application of the net proceeds from this offering to repay $80.0 million in principal amount of outstanding borrowings under our Loan Agreement as set forth under “Use of Proceeds.” For the year ended December 31, 2019, the pro forma net loss is computed by decreasing the net loss by $5.7 million of interest expense, net and increasing the net loss by $0.6 million of compensation expense associated with the 2020 Tender Offer as if the transactions had occurred on January 1, 2019. For the three months ended March 31, 2020, the pro forma net loss is computed by decreasing the net loss by $2.4 million of interest expense, net and increasing the net loss by $0.6 million of compensation expense associated with the 2020 Tender Offer as if the transactions had occurred on January 1, 2020. Pro forma weighted-average shares outstanding is computed by increasing the weighted-average shares outstanding by 4,102,564, which represents the $80.0 million principal balance of indebtedness being repaid with the proceeds of this offering divided by the initial public offering price per share. The principal balance does not include the associated interest and repayment penalties of $4.9 million and $4.5 million that we expect to incur in connection with the repayment of the outstanding indebtedness for the year ended December 31, 2019 and three months ended March 31, 2020, respectively. In conjunction with the conversion, all of our outstanding equity interests will be converted into shares of common stock. For purposes of the diluted net loss per share calculation, unvested restricted shares, RSUs and stock options are considered to be common stock equivalents, but have been excluded from the calculation of diluted net loss per share, as their effect would be anti-dilutive for all periods presented. Therefore, basic and diluted net loss per share applicable to common stockholders were the same for all periods presented. This pro forma data is presented for informational purposes only and does not purport to represent what our net income (loss) or net income (loss) per share actually would have been had the offering and use of proceeds therefrom occurred on January 1, 2019 or to project our net income (loss) or net income (loss) per share for any future period.

(2)

Reflects the 2020 Tender Offer (as defined herein) completed on April 27, 2020. 107,208 Founders’ Units, 1,142 Incentive Units and 22,801 Profits Interests were tendered for a purchase price of $20.0 million.

 

     March 31, 2020  
     Actual      Pro Forma As
Adjusted(1)(4)
 
     (dollars in thousands)  

Consolidated Balance Sheets Data:

     

Cash(2)

   $ 226,342      $ 425,548  

Working capital(3)

   $ 209,432      $ 408,638  

Total assets

   $ 541,484      $ 740,690  

Long-term debt, net of current portion

   $ 81,731        —    

Redeemable Investor Units

   $ 545,001        —    

Total members’ deficit

   $ (358,412    $ 474,453  

 

(1)

Reflects our sale of 15,625,000 shares of common stock in this offering and after deducting the underwriting discount and estimated offering expenses payable by us and the application of the net proceeds from this offering to repay $80.0 million in principal amount of outstanding borrowings under our Loan Agreement. The Organizational Transactions have no impact on the line items presented.

 

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(2)

Includes $10,391 of restricted cash.

(3)

We define working capital as current assets less current liabilities.

(4)

Reflects the 2020 Tender Offer (as defined herein) completed on April 27, 2020. 107,208 Founders’ Units, 1,142 Incentive Units and 22,801 Profits Interests were tendered for a purchase price of $20.0 million.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis summarizes the significant factors affecting the consolidated operating results, financial condition, liquidity and cash flows of our company as of and for the periods presented below. The following discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes thereto included elsewhere in this prospectus. The discussion contains forward-looking statements that are based on the beliefs of 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 prospectus, particularly in the sections entitled “Risk Factors” and “Forward-Looking Statements.”

Overview

Since our founding in 2012, our mission has been to build a primary care delivery platform that directly addresses rising costs and poor outcomes, two of the most pressing challenges facing the United States healthcare industry. Our patient-centered approach focuses on meaningfully improving the quality of care for the most at-risk populations. It represents the frontline implementation of the solutions addressing the most powerful trends in healthcare, mainly the shift towards value-based care and increasing patient consumerism. Our approach disrupts the current state of care delivery for Medicare-eligible patients and aligns the incentives of our patients, our providers and our payors by simultaneously improving health outcomes and care quality, lowering medical costs and improving the patient experience.

Although we have incurred net losses since inception, we believe that the Oak Street Platform has enabled us to create a healthcare model where all constituencies involved have the ability to “Win.” Our patients, payors and providers are incentivized to adopt the Oak Street Platform and each has the potential to benefit in a meaningful way.

 

   

Patients. We leverage our differentiated care delivery model to improve the health of our patients, effectively manage their chronic conditions and avoid unnecessary hospitalizations while greatly improving their patient experience.

 

   

Payors. We enter into arrangements with MA plans to manage the care of our patients, allowing us to control the plans’ medical costs, increase the plans’ Medicare quality scoring, improve the plans’ profit margin and help the plans grow membership.

 

   

Providers. We enable our providers to focus on improving the lives of their patients and improve their job satisfaction by providing them with meaningful clinical support and customized technology resources.

We believe we can translate these “Wins” into economic benefits. Since 2016, our performance has been driven by our multi-year, contractual arrangements with payors on a PPPM basis, which create recurring revenue streams independent of the number of visits or the reimbursement level of the visits we complete and provide significant visibility into our financial growth trajectory. By focusing on interventions that keep our patients healthy, we can capture the cost savings the Oak Street Platform creates and reinvest them in our care model. We believe these investments lead to better outcomes and improved patient experiences, which will drive further cost savings, power patient retention and enable us to attract new patients. We believe increasing cost savings over a growing patient population will deliver an even greater surplus to the organization, enabling us to reinvest to scale and fund new centers, progress our care model and enhance our technology. This virtuous cycle has created compelling economics at the center level, with our four centers with more than 2,000 at-risk patients for at least the last three months as of March 31, 2020 operating at 86% weighted average capacity and generating total revenues, excluding capitated revenue associated with Medicare Part D, of $32.3 million and weighted average center-level contribution margins (defined as (i) patient revenue, excluding Medicare Part D revenue, minus (ii) the sum of (a) medical claims expense, excluding Medicare Part D related expenses, and (b) cost of care, excluding depreciation and amortization) of 28%. As of March 31, 2020, those four centers, as well as an additional 30 of our 54 centers, had positive center-level contribution margins, and the overall average center-level contribution margin across all of our centers was 12%.

 

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We have demonstrated an ability to rapidly scale, expanding our model to a network of 54 centers, in 13 markets across 8 states, which provide care for approximately 85,000 patients as of March 31, 2020, of which approximately 65% are at-risk and approximately 35% are fee-for-service, although fee-for-service accounted for less than 1% of our revenue for the three months ended March 31, 2020. As of March 31, 2020, we, together with our affiliated physician entities, employed approximately 2,300 team members, including approximately 260 primary care providers. For the three months ended March 31, 2019 and 2020, our total revenues were $117.4 million and $201.8 million, respectively, representing a year-over-year growth rate of 72%. Our net loss increased from $10.0 million for the three months ended March 31, 2019 to $15.0 million for the three months ended March 31, 2020. We believe we have significant growth opportunities available to us, with less than 50% of our current aggregate center capacity utilized due to our recent center openings and a substantial opportunity to increase the number of centers we operate in new and existing markets.

Key Factors Affecting Our Performance

Our Patients

Our centers typically accept most Medicare patients, whether those patients are enrolled in an MA plan or traditional Medicare.

MA patients are those individuals enrolled in an MA plan that has contracted with us. As of March 31, 2020, we managed the health and wellbeing for nearly 100% of our MA patients on an at-risk basis, where we have been selected as the patient’s primary care provider and are financially responsible for all of their medical costs, including but not limited to emergency room and hospital visits, post-acute care admissions, prescription drugs, specialist physician spend (e.g., orthopedics) and primary care spend. For these patients we receive an agreed percentage of the premium the MA plan receives from CMS (typically the substantial majority of such premium given the risk borne by us). Our value proposition to these patients and their MA plan is to improve these patients’ health and reduce these patients’ healthcare costs by providing a more comprehensive patient experience via the Oak Street Platform, whereby we invest more heavily in primary care to avoid more expensive downstream costs, such as hospital admissions. Because we are at-risk for the entirety of a patient’s medical expense, investing more heavily in preventative primary care makes economic sense given the relative costs to acute, episodic hospital-based care. In the three months ended March 31, 2020, we derived 97.4% of our revenue from our at-risk patient base, while only 65% of our patients are at-risk patients, and expect at-risk patients to constitute the majority of our revenue going forward. Overall our at-risk patients are profitable at the center level, with a per-patient center-level contribution, taking into account third party and center-level costs, of approximately $234 per month overall. The contribution increases to approximately $419 per month for at-risk patients that have been with us for three or more years. For a discussion of how we allocate our center-level costs among our fee-for-service and at-risk patients, see “—Components of Results of Operations—Revenue.” Overall, our per-patient center-level contribution for at-risk patients increases by tenure as patients have longer experience in our model. The improvement of contribution from the average at-risk patient to a tenured at-risk patient is driven by spreading costs over a larger base of patients, as tenured patients tend to be in more mature centers, and improved results driven by our clinical model.

Traditional Medicare patients are those enrolled in traditional Medicare (i.e., are not enrolled in an MA plan). For these patients, we are reimbursed directly by CMS for the cost of our services based upon the Medicare fee schedule. Because we do not assume the risk of the total cost of medical care for these patients, the revenue we generate for our fee-for-service patients is significantly less than the revenue associated with our at-risk MA patients. We count fee-for-service patients as those that have completed a welcome visit at one of our centers and verbally communicated a desired interest in continuing to receive care at our centers. A fee-for-service patient remains active until one of the following occurs: (1) it has been 12 months since a patient’s last visit; (2) a patient communicates a desire to stop receiving care at an Oak Street Health center; or (3) a patient passes away. Given the investment we make in care for our patients and the economics of fee-for-service Medicare, we generally experience a loss on Medicare fee-for-service patients, with a per-patient center-level contribution, after taking into account center costs, of approximately negative $184 per month. As centers mature, however, these losses decrease, as we are able to spread center costs over a larger patient base. However, we continue to experience a negative contribution in our tenured fee-for-service patients in earlier vintage centers, with a per-patient center-level

 

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contribution of approximately negative $164 per month for fee-for-service patients that have been with us for three or more years. For a discussion of how we allocate our center-level costs among our fee-for-service and at-risk patients, see “—Components of Results of Operations—Revenue.” We also care for a very limited number of MA patients (approximately 1% of our total MA patients) for whom we are reimbursed on a fee-for-service basis via their health plan in situations where we do not have a capitation relationship with that particular health plan.

Our fee-for-service revenue, whether received directly from Medicare or from Medicare Advantage plans, on a per patient basis is lower than our per patient revenue for at-risk patients basis in part because our fee-for-service revenue covers only the primary care services that we directly provide to the patient, while the capitation revenue is intended to compensate us for the services directly performed by us as well as the financial risk that we assume related to the third-party medical expenses of at-risk patients.

In terms of the total expense of services provided internally, approximately 40% of our services were provided to patients covered by traditional Medicare for the year ended December 31, 2019 and approximately 44% for the three months ended March 31, 2020. Approximately 60% of our internally provided services in terms of total expense were provided to patients enrolled in MA plans covered by capitation arrangements for the year ended December 31, 2019 and approximately 56% for the three months ended March 31, 2020. Our patients covered by traditional Medicare had on average approximately 7.4 visits to our centers for the year ended December 31, 2019, and our patients enrolled in MA plans covered by capitation arrangements had on average approximately 7.9 visits for the year ended December 31, 2019.

Despite the difference in patient economics between these two groups, we continue to serve both. We do this for a few reasons: (1) we are focused on providing the best healthcare for and improving the wellbeing of all Medicare patients; (2) we are hopeful that in some future period there will be new programs through CMS that allow us to achieve risk-like patient economics on our traditional Medicare patients such as the Direct Contracting program CMS is currently establishing and for which we have applied and been accepted to participate when it begins on April 1, 2021; and (3) our fee-for-service patients often enroll in MA plans at some point in time. We will educate our patients on the different components of Medicare and how they relate to one another. If patients are interested, we will introduce them to an unaffiliated insurance agent who can help them decide the appropriate plan for them based on their individual health needs. If our fee-for-service patients enroll in MA, we are better positioned to continue to serve them as at-risk patients as we are already familiar with their health conditions, they are familiar with our care model and we receive additional data from payors and third-party medical providers to help us care for them once they join a capitation arrangement.

Medicare provides an annual enrollment period during the fall of each year to allow patients to select an MA program or instead select traditional Medicare, with only limited ability for patients to make that selection during other periods of the year. Once patients have selected MA, they can change the selection of their primary care provider at any time. Accordingly, while the annual enrollment period is important to us, we are able to attract new at-risk patients at any time during the year from the existing pool of MA patients and we must work to retain our patients throughout the year.

Our historical financial performance has been, and we expect our financial performance in the future to be, driven by our ability to:

Add New Patients in Existing Centers

We believe our ability to add new patients is a key indicator of the market’s recognition of the attractiveness of the Oak Street Platform, both to our patients and payor partners, and a key growth driver for the business. We have a large embedded growth opportunity within our existing center base. With an average capacity of 3,500 patients, our 54 centers as of March 31, 2020 can support approximately 189,000 patients, compared to our patient base as of March 31, 2020 of approximately 85,000. We also believe that even after COVID-19 subsides, we will continue to conduct a portion of visits by telehealth based on patient preference and clinical need, which could potentially increase the average capacity of our centers beyond 3,500 patients. Additionally, as we add patients to our existing centers, we expect these patients to contribute significant incremental economics to Oak Street Health as we leverage our fixed cost base at each center.

 

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We utilize a proactive strategy to drive growth to our centers. We employ a grassroots approach to patient engagement led by our Outreach team and supplemented by more traditional marketing, including television, digital and social media, print, mail and telemarketing. We leverage our Outreach Team to ensure we are connecting with Medicare-eligible patients across a number of channels to make them aware of their healthcare choices and the services we offer. These efforts have historically included hosting events within our centers and participating in community events. Each of our centers has a community room; a space designated and available for our patients’ use whenever the center is open. We also utilize this space to provide fitness and health education classes to our patients and often open-up events to any older adults in the community regardless of their affiliation with Oak Street Health. In 2019, we hosted approximately 18,700 local events in the communities surrounding our centers. At the present time, we are leveraging our community centers as extra waiting room space as needed which allows easier social distancing for patients or their companions. We are continuing to leverage our community-based marketing approach with less focus on in-person interactions and more focus on working with our community partners to identify older adults who need our services. It is our belief that the enhanced awareness of the importance of managing chronic illnesses as well as patient varied preferences on preferred method to interact with providers will continue to drive demand for Oak Street Health amongst older adults. The ultimate effect of our marketing efforts is increased awareness of Oak Street Health and additional patients choosing us as their primary care provider, regardless of whether that patient is covered under MA or traditional Medicare. We believe that our outreach efforts also help to grow our payor partners’ membership base as we grow our own patient base and help educate patients about their choices on Medicare, further aligning our model with that of healthcare payers.

Our payor partners will also direct patients to Oak Street. They do this either by assigning patients who have not yet selected a primary care provider to Oak Street Health or through insurance agents who will tell their clients about Oak Street Health, which we believe results in the patient selecting us as their primary care provider when they select an MA plan. Payors dedicate a large share of their internal efforts to reducing medical costs and they have a nearly unlimited desire to engage with solutions proven to achieve that goal. Due to our care delivery model’s patient-centric focus, we have been able to consistently help payors manage their costs while raising the quality of their plans, affording them STARS quality bonuses that increase their revenue. We believe that we represent an attractive opportunity for payors to meaningfully improve their overall membership growth in a given market without assuming any financial downside.

Patient Satisfaction

Once we bring on new patients we focus on engagement around a care plan and satisfaction. The result is a high patient satisfaction. Our model provides visibility on our financial and growth trajectory given the recurring nature of the revenue we collect from our MA partners once their members begin utilizing the Oak Street Platform. The following table sets out the growth in patients since 2013.

Total Patients at Period End

 

 

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CMS allows for MA enrollees to be risk-adjusted in order to compensate the MA plan for the greater medical costs associated with sicker patients, so long as the health plan appropriately and accurately documents the patients’ health conditions. Our patients often have historically not engaged with the healthcare system, and therefore their health conditions are poorly documented. Through our care model, we organically determine and assess the health needs of our patients and create a care plan consistent with those needs. We capture and document health conditions as a part of this process. We believe our model is the best aligned with the risk adjustment framework as we scale the clinical intensity of our care model based upon the needs of the individual patient—we invest more dollars and resources towards our sicker patients.

Expand our Center Base within Existing and New Markets

We believe that we currently serve less than 3% of the total patients in the markets where we currently have centers. As a result, there is significant opportunity to expand in our existing markets through the acquisition of new patients to existing centers and addition of new centers (“infills”). For the long term, these strategically developed new sites allow us to access additional neighborhoods while leveraging our established brand and infrastructure in a market. We believe our existing markets can support an incremental 450 centers based upon the number of Medicare patients in these markets and the capacity of our current centers.

 

 

 

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(Year-end unless otherwise indicated)

  2013     2014     2015     2016     2017     2018     2019     3/31/2020  

Centers

    2       7       15       19       24       39       51       54  

Markets

    1       1       4       6       6       8       12       13  

Patients1

    300       3,300       12,000       24,000       35,000       50,000       80,000       85,000  

At-risk

    0     0     0     49     52     60     61     65

Fee-for-Service

    100     100     100     51     48     40     39     35

 

  1 

Patient numbers are approximate.

We estimate that our core addressable market for the Oak Street Platform is approximately 27 million Medicare eligibles in our target demographic. We believe this market represents approximately $325 billion of annual healthcare spend based on multiplying an average annual revenue of $12,000 per member, which is derived from our experience and industry knowledge and which we believe represents a reasonable national assumption, by the number of Medicare

 

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eligibles in our target markets. Our existing markets today represent a small fraction of this massive market opportunity. Based upon our experience to date, we believe our innovative care model can scale nationally, and we therefore expect to

selectively and strategically expand into new geographies. As we continue this expansion, our success will depend on the competitive dynamics in those markets, and our ability to attract patients and deploy our care model in those markets.

Once we have identified a location for a new center, our typical center takes 9-12 months to open and, after taking into account tenant improvement allowances, landlord or developer work and similar items, our historical upfront capital expenditures average approximately $1 million, inclusive of licensing, center construction, center furnishing, purchase of medical equipment and supplies, talent recruiting and initial marketing efforts. We typically enter into long-term triple net leases with our landlords and do not own any real estate, enabling us to more quickly identify and build new centers with a capital efficient model.

By adding new patients to our existing centers, retaining our existing patients, and strategically opening new centers in existing and new geographies, we have generated significant revenue growth over all of our cohorts. The below chart reflects the total revenues generated for our facilities based upon the year in which those facilities were open.

Total Revenues* by Year Center Opened ($M)

 

 

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*

Excludes capitated revenue associated with Medicare Part D

 

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Contract with Payors

Our economic model relies on our capitated partnerships with payors which manage and market MA plans across the United States. In our short history, we have been able to establish strategic value-based relationships with 18 different payors, including each of the top five national payors by number of MA patients. These existing contracts and relationships and our partners’ understanding of the value of our model reduces the risk of entering into new markets as we typically have payor contracts before entering a new market. Maintaining, supporting, and growing these relationships, particularly as we enter new geographies, is critical to our long-term success. Our model is well-aligned with our payor partners—we drive better health outcomes for their patients, enhancing patient satisfaction, while driving incremental patient and revenue growth. We believe this alignment of interests and our highly effective care model will ensure our continued success with our payor partners.

Effectively Manage the Cost of Care for Our Patients

The capitated nature of our contracting with payors requires us to prudently manage the medical expense of our patients. Our medical claims expense is our largest expense category, representing 62% of our total operating expenses for the three months ended March 31, 2020. Our care model focuses on leveraging the primary care setting as a means of avoiding costly downstream healthcare costs, such as acute hospital admissions. The results have been impressive, as we have been able to drive an approximately 51% reduction in hospital admissions (based on our hospital admission rates per thousand patients of 183 as of March 31, 2020, compared to the Medicare benchmark of 370), 42% reduction in 30-day readmission rates (based on our rate of hospital readmissions within 30 days per thousand patients of 11% as of March 31, 2020, compared to the Medicare benchmark of 19%) and 51% reduction in emergency department visits (based on our rate of emergency department “treat and release” claims per thousand patients of 535 as of December 31, 2019, compared to the Medicare benchmark of 1,091). Our patients, however, retain the freedom to seek care at emergency rooms or hospitals; we do not restrict their access to care. Therefore, we are liable for potentially large medical claims should we not effectively manage our patients’ health. We utilize stop-loss insurance for our patients, protecting us for medical claims per episode in excess of certain levels.

Center-Level Contribution Margin

We endeavor to expand our number of centers and number of patients at each center over time. Due to the significant fixed costs associated with operating and managing our centers, we generate significantly better center-level contribution margins as the patient base within our centers increases and our costs decrease as a percentage of revenue. As a result, the value of a center to our business increases over time. However, due to the significant upfront costs initially required to open a center and the proportion of new centers opened during the last three years, our business generates a net loss today. These consolidated financials, however do not reflect the strong unit economics of our more mature centers.

To illustrate how we expect our centers to ramp, the below data details how our centers opened in 2013, 2014 and 2015 have performed. We believe our centers opened in 2015 are a particularly good representation of the growth ramp of our model given the number of centers opened in 2015 (eight); the relative maturity of the 2015 vintage compared to centers from 2016-2019; the fact that the vast majority of the time the centers were open was after we transitioned the majority of our MA contracts to capitation on January 1, 2016; and the number of geographic markets represented by those centers. Our centers opened in 2015 represented 20,376 patients as of March 31, 2020, compared to 10,080 patients as of December 31, 2016. Approximately 70% of these patients are at-risk patients and the remainder fee-for-service patients. These centers are at approximately 70% of capacity after four full years of operation.

 

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Total Patients by Period (2013 Center Cohort)

 

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Total Patients by Period (2014 Center Cohort)

 

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Total Patients by Period (2015 Center Cohort)

 

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The chart and table below illustrate the financial performance and center-level contribution margins associated with our centers opened in 2013, 2014 and 2015, which we have chosen because we believe those cohorts present a better picture of long term center performance than the relatively less developed later cohorts. Our centers typically operate at a loss for three years before they become profitable as we grow our at-risk patient base at the center. In our experience, our center-level profitability improves quickly over subsequent years, as can be seen in the center-level contribution margin data below. Based upon our experience, we expect these margins will continue to improve over time. Our four centers with more than 2,000 at-risk patients for at least the last three months as of March 31, 2020 were operating at 86% weighted average capacity and generated total revenues, excluding capitated revenue associated with Medicare Part D, of $32.3 million and weighted average center-level contribution margins of 28%. As of March 31, 2020, those four centers, as well as an additional 30 of our 54 centers, had positive center-level contribution margins, and the overall average center-level contribution margin across all of our centers was 12%. We define center-level contribution margin as (i) patient revenue, excluding Medicare Part D revenue minus (ii) the sum of (a) medical claims expense, excluding Medicare Part D related expenses, and (b) cost of care, excluding depreciation and amortization. When allocating our sales and marketing expenses and corporate overhead expenses, excluding stock-based compensation and costs related to our fundraising, ratably based upon the number of centers open as of March 31, 2020, the weighted average center-level margin for our centers with more than 2,000 at-risk patients for at least the last three months was 20%.

 

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Center-Level Contribution Margin by Cohort

 

 

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*

Excludes capitated revenue associated with Medicare Part D

Seasonality to our Business

Our operational and financial results will experience some variability depending upon the time of year in which they are measured. This variability is most notable in the following areas:

At-Risk Patient Growth

We experience the largest portion of our at-risk patient growth during the first quarter, when plan enrollment selections made during the prior Annual Enrollment Period (“AEP”) from October 7th through December 7th of the prior year take effect. While we also add patients throughout the year, including during Special Enrollment Periods when certain eligible individuals can enroll in MA midyear, we would expect to see approximately half of our at-risk patient growth occur in connection with the annual enrollment period.

Per-Patient Revenue

Our revenue derived from our at-risk patients is a function of the percent of premium we have negotiated with our payor partners as well as our ability to accurately and appropriately document the acuity of a patient. We experience some seasonality with respect to our per-patient revenue as it will generally decline over the course of the year. In January of each year, CMS revises the risk adjustment factor for each patient based upon health conditions documented in the prior year, leading to an overall increase in per-patient revenue. As the year progresses, our per-patient revenue declines as new patients join us typically with less complete or accurate documentation (and therefore lower risk-adjustment scores) and patient mortality disproportionately impacts our higher-risk (and therefore greater revenue) patients.

Medical Costs

Medical costs will vary seasonally depending on a number of factors, but most significantly the weather. Certain illnesses, such as the influenza virus, are far more prevalent during colder months of the year, which will result in an increase in medical expenses during these time periods. We would therefore expect to see higher levels of per-patient medical costs in the first and fourth quarters. Medical costs also depend upon the number of business days in a period. Shorter periods will have lesser medical costs due to fewer business days. Business days can also create year-over-year comparability issues if one year has a different number of business days

 

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compared to another. We would also expect to experience an impact should there be a pandemic such as COVID-19, which may result in increased or decreased total medical costs depending upon the severity of the infection, the duration of the infection and the impact to the supply and availability of healthcare services for our patients.

Investments in Growth

We expect to continue to focus on long-term growth through investments in our centers, care model, and marketing. In addition, we expect our corporate, general and administrative expenses to increase in absolute dollars for the foreseeable future to support our growth and because of additional costs as we become a public company, including expenses related to compliance with the rules and regulations of the SEC and the listing standards of NYSE, additional corporate and director and officer insurance expenses, greater investor relations expenses and increased legal, audit and consulting fees. While our net loss may increase for the year ended December 31, 2020 because of these activities, we plan to balance these investments in future growth with a continued focus on managing our results of operations and investing judiciously. Accordingly, in the short term we expect these activities to increase our net losses, but in the longer term we anticipate that these investments will positively impact our business and results of operations.

Key Business Metrics

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 business plans, and make strategic decisions.

 

     As of December 31,     As of March 31,  
     2018     2019     2019     2020  

Centers

     39       51       40       54  

Total Patients1

     50,000       80,000       55,000       85,000  

At-risk

     60     61     63     65

Fee-for-service

     40     39     37     35

Patient Contribution ($M)

   $ 82.0     $ 153.9     $ 38.1     $ 64.3  

Platform Contribution ($M)

   $ 4.4     $ 29.8     $ 12.5     $ 25.7  

 

  1 

Patient numbers are approximate.

Centers

We define our centers as those primary care centers open for business and attending to patients at the end of a particular period. Our centers are leased or licensed by Oak Street Health MSO, LLC or an affiliated entity and, pursuant to the terms of certain contractual relationships between Oak Street Health MSO, LLC and our affiliated medical practices, made available for use by the medical practices in the provision of primary care services.

Total Patients

Total patients includes both at-risk MA patients (those patients for whom we are financially responsible for their total healthcare costs) as well as fee-for-service Medicare patients (those patients for whom our affiliated medical groups submit claims to the federal government for direct reimbursement under the Medicare program). We defined our total at-risk patients as at-risk patients who have selected one of our affiliated medical groups as their provider of primary care medical services as of the end of a particular period. We define our total fee-for-service Medicare patients as fee-for-service Medicare patients who come to one of our centers for medical care at least once per year. A fee-for-service patient continues to be included in our patient count until the earlier to occur of (a) more than one year since the patient’s last visit, (b) the patient communicates a desire to stop receiving care from us or (c) the patient passes away.

 

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Patient Contribution

We define patient contribution as capitated revenue less the sum of medical claims expense. We view patient contribution as all of the dollars available for us to manage our business, including providing care to our patients, investing in marketing to attract new patients to the Oak Street Platform, and supporting the organization through our central corporate infrastructure. We expect that patient contribution will grow year-over-year in absolute dollars as our at-risk patient base continues to grow. We would also expect that our patient contribution per-patient-per-month economics on our at-risk patients will continue to improve the longer our patients are part of the Oak Street Platform as we better understand their health conditions and the patients better engage with our care model. We would expect, however, that our aggregate patient contribution per-patient-per-month economics on our at-risk patients may decrease at an aggregate level to the extent our patient growth skews our mix of patients towards patients newer to the Oak Street Platform. We would also expect to experience seasonality in patient contribution with Q1 generally generating the greatest patient contribution, decreasing for the rest of the year. This seasonality is primarily driven by our adding new patients to the Oak Street Platform throughout the year, who generally have lower per-patient capitated revenue compared to our existing patient base.

Platform Contribution

We define platform contribution as total revenues less the sum of (i) medical claims expense and (ii) cost of care, excluding depreciation and amortization. We believe this metric best reflects the economics of our care model as it includes all medical claims expense associated with our patients’ care as well as the costs we incur to care for our patients via the Oak Street Platform. As a center matures, we expect the platform contribution from that center to increase both in terms of absolute dollars as well as a percent of capitated revenue. This increase will be driven by improving patient contribution economics over time as well as our ability to generate operating leverage on the costs of our centers. Our aggregate platform contribution may not increase despite improving economics at our existing centers should we open new centers at a pace that skews our mix of centers towards newer centers. We would expect to experience seasonality in platform contribution due to seasonality in our patient contribution.

Impact of COVID-19

The rapid spread of COVID-19 around the world and throughout the United States has altered the behavior of businesses and people, with significant negative effects on federal, state and local economies, the duration of which is unknown at this time. The virus disproportionately impacts older adults, especially those with chronic illnesses, which describes many of our patients. To ensure a coordinated response to the pandemic, we created a COVID-19 Response Team that is supported by team members from across the organization. It is not currently possible to predict the ultimate financial impact COVID-19 will have on our business, results of operations and financial condition. Key factors will include the duration and extent of the outbreak in our service areas and those variables are dependent on the success of federal, state, and city government-imposed emergency measures. To date, we have experienced or expect to experience the following impacts on our business model due to COVID-19:

 

   

Care Model. We have transitioned much of our care to telehealth services, while increasing patient visit volume and maintaining continuity of care. Our average daily visits have increased 6% in April 2020 compared to February 2020. Additionally, we leveraged our transportation infrastructure to provide food delivery to our most at-risk patients to address their social determinants of health, making over 8,000 deliveries since our markets were first impacted in March 2020. During April and May 2020, we engaged with 80% of our patients in some form, with 62% of our patients completing an audio, in-person or video visit, and the remaining 18% receiving a non-visit touch point such as a call with a social worker to discuss social determinants of health needs. We created a “COVID-Care” approach to care for our patients who had a confirmed or suspected care of COVID-19. Our COVID-Care model was published in the New England Journal of Medicine’s Catalyst publication as an example to other primary care organizations of how to provide virtual outpatient care to COVID-19 patients. We have also experienced significant increases in visits with our behavioral health specialists. As our revenues

 

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are not determined or earned based upon the number of times we interact with our patients, and as we were already incurring the cost associated with the employees responsible for assisting our patients across all of these dimensions, these care model changes have not had a material financial impact on our revenue or our costs.

 

   

Other Patient Service Revenue. Other patient service revenue includes revenue received for care we provide and bill on a fee-for-service basis. While our centers remained open during the COVID-19 pandemic, we restricted our in-center visits to those patients with the most urgent needs. These restrictions resulted in our performing fewer fee-for-service visits, resulting in lower dollar values of claims. However, while our fee-for-service patients represented approximately 35% of our patients as of March 31, 2020, fee-for-service revenue represented less than 1% of our total revenues for the three months ended March 31, 2020 and 1.1% of total revenues for the fiscal year ended December 31, 2019.

 

   

Growth. At the end of March 2020, we made the decision to suspend community-based outreach events and scale back our central marketing efforts due to safety concerns for our employees and our communities and to comply with local government ordinances. As a result, we expect our growth to be adversely impacted in 2020 and potentially 2021 as we do not expect to resume our community events until later in 2020 at the earliest. However, we have used this pause in our traditional marketing efforts to reassess and realign our marketing strategy to focus on other growth channels. For example, we are engaging community partners, such as senior living facilities and faith-based organizations, through an account management model to gain referrals of older adults who could benefit from our services and care model.

 

   

Medical Claims Expense. Because our patient demographic has been and continues to be disproportionately impacted from the effects of COVID-19, we expect to experience a material increase in medical claims expense as we are fully at-risk for the medical costs the majority of our patients incur. We also expect to experience a reduction in non-COVID-19 related medical costs as many healthcare facilities in our markets were closed or access was severely limited during the pandemic resulting in our patients not receiving care they ordinarily would have received and us not incurring the associated costs of that care. Some of these costs will likely be incurred at a later date, resulting in increased medical claims expense in the future. We cannot accurately estimate the net potential impact, positive or negative, to medical claims expense at this time. Furthermore, given the time it takes for medical claims to be submitted to MA healthcare payors, adjudicated, and sent to us, we believe it will be several months before we will be able to accurately calculate the impact on medical claims expense from the COVID-19 pandemic.

 

   

Risk-adjustment. Medicare pays capitation using a “risk adjustment model,” which compensates providers based on the health status (acuity) of each individual patient. Payors with higher acuity patients receive more, and those with lower acuity patients receive less. Medicare requires that a patient’s health issues be documented annually regardless of the permanence of the underlying causes. Historically, this documentation was required to be completed during an in-person visit with a patient. As part of the CARES Act, Medicare is allowing documentation for conditions identified during video visits with patients. Given the disruption caused by COVID-19, it is unclear whether we will be able to document the health conditions of our patients as comprehensively as we did in 2019, which may adversely impact our revenue in future periods.

 

   

Cost of Care, Excluding Depreciation and Amortization (Medical Supplies). The United States continues to experience shortages of PPE and other medical supplies used to prevent transmission of COVID-19. During 2020, we have had to acquire significantly greater quantities of medical supplies at significantly higher prices to ensure the safety of our employees and our patients. These incremental costs represent less than 1% of our 2019 cost of care expense, excluding depreciation and amortization. While the price of these items may remain higher than historical levels for the foreseeable future, we do not expect these incremental costs to be material.

 

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Components of Results of Operations

Revenue

Capitated Revenue. Our capitated revenue consists primarily of fees for medical services provided or managed by our affiliated medical groups under a capitation arrangement made directly with various MA payors. Capitation is a fixed amount of money per patient per month paid in advance for the delivery of health care services, whereby we are generally liable for medical costs in excess of the fixed payment and are able to retain any surplus created if medical costs are less than the fixed payment. A portion of our capitated revenues are typically prepaid monthly to us based on the number of MA patients selecting us as their primary care provider. Our capitated rates are determined as a percent of the premium the MA plan receives from CMS for our at-risk members. Those premiums are determined via a competitive bidding process with CMS and are based upon the cost of care in a local market and the average utilization of services by the patients enrolled. Medicare pays capitation using a “risk adjustment model,” which compensates providers based on the health status (acuity) of each individual patient. Payors with higher acuity patients receive more, and those with lower acuity patients receive less. Under the risk adjustment model, capitation is paid on an interim basis based on enrollee data submitted for the preceding year and is adjusted in subsequent periods after the final data is compiled. As premiums are adjusted via this risk adjustment model, our capitation payments will change in unison with how our payor partners’ premiums change with CMS. Risk adjustment in future periods (e.g., fiscal 2021) may be impacted by COVID-19 and our inability to accurately document the health needs of our patients in a compliant manner, which may have an adverse impact on our revenue.

We determined the transaction price for these contracts is variable as it primarily includes PPPM fees which can fluctuate throughout the contract based on the health status (acuity) of each individual enrollee. Our capitated revenues included $11.4 million and $9.0 million for the years ended December 31, 2018 and 2019, respectively, and $1.5 million and $23.5 million for the three months ended March 31, 2019 and 2020, respectively, as a result of acuity-related adjustments received in subsequent periods. In certain contracts, PPPM fees also include adjustments for items such as performance incentives or penalties based on the achievement of certain clinical quality metrics as contracted with payors. There were no PPPM adjustments related to performance incentives or penalties for quality-related metrics for the years ended December 31, 2018 and 2019 or for the three months ended March 31, 2019 and 2020. The capitated revenues are recognized based on the estimated PPPM earned net of projected acuity adjustments and performance incentives or penalties because we are able to reasonably estimate the ultimate PPPM payment of these contracts. We recognize revenue in the month in which eligible members are entitled to receive healthcare benefits. Subsequent changes in PPPM fees and the amount of revenue to be recognized are reflected through subsequent period adjustments to properly recognize the ultimate capitation amount.

We measure the incremental cost of our capitation agreements by starting with our center-level expenses, which are calculated based upon actual expenses incurred at a specific center for a given period of time and expenses that are incurred centrally and allocated to centers on a ratable basis. These expenses are allocated to our at-risk patients based upon the number of visit slots these patients utilized compared to the total slots utilized by all of our patients. All visits, however, are not identical and do not require the same level of effort and expense on our part. Certain types of visits are more time and resource intensive and therefore result in higher expenses for services provided internally. Generally, patients who are earlier in their tenure with Oak Street utilize a higher percentage of these more intensive visits as we get to know the patient and properly assess and document their health condition. Because a significant portion of fee-for-service patients elect to switch to a capitation arrangement as they get more comfortable with our services and care model and learn about the potential benefits of MA, our fee-for-service patients, as a whole, tend to be less tenured and therefore, as a group, higher utilizers of these more intensive visits. This phenomenon explains why the proportionate expense for internally provided services does not follow the same proportion of at-risk visits and fee-for-service visits.

Revenues and expenses from our physician groups are consolidated with other clinical and MSO expenses to determine profitability for our at-risk and fee-for-service arrangements. Physician group economics are not evaluated on a stand-alone basis, as certain non-clinical expenses need to be consolidated to consider profitability.

 

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See “—Critical Accounting Policies—Capitated Revenue” for more information. We expect capitated revenue will increase as a percentage of total revenues over time because of the greater revenue economics associated with at-risk patients compared to fee-for-service patients.

Other Patient Service Revenue. Other patient service revenue is comprised of ancillary fees earned under contracts with certain payors for the provision of certain care coordination and other care management services. These services are provided to patients covered by these payors regardless of whether those patients receive their care from our affiliated medical groups.

Operating Expenses

Medical Claims Expense. Medical claims expense consists primarily of the cost for providing medical care by non-Oak Street Health providers. The estimated reserve for incurred but not reported claims is included in the liability for unpaid claims. Actual claims expense will differ from the estimated liability due to factors in estimated and actual patient utilization of health care services, the amount of charges, and other factors. We typically reconcile our medical claims expense with our payor partners on a quarterly basis and adjust our estimate of incurred but not reported claims if necessary. To the extent we revise our estimates of incurred but not reported claims for prior periods up or down, there would be a correspondingly favorable or unfavorable effect on our current period results that may or may not reflect changes in long term trends in our performance. Medical claims expense also includes supplemental external costs of providing medical care such as administrative health plan fees, fees to perform payor delegated activities, and provider excess insurance costs. We expect our medical claims expenses to increase in both absolute dollar terms as well as on a PPPM basis given the healthcare spending trends within the Medicare population and the increasing disease burden of our patients as they age.

Cost of Care, Excluding Depreciation and Amortization. Cost of care, excluding depreciation and amortization includes the costs we incur to operate our centers, including care team and patient support employee-related costs, occupancy costs, patient transportation, medical supplies, insurance and other operating costs. These costs exclude any expenses associated with sales and marketing activities incurred at a local level to support our patient growth strategies and any allocation of our corporate, general and administrative expenses. Care team employees include medical doctors, nurse practitioners, physician assistants, registered nurses, scribes, medical assistants, and phlebotomists. Patient support employees include practice managers, welcome coordinators and patient relationship managers. A significant portion of our cost of care, excluding depreciation and amortization, such as occupancy and insurance, are fixed relative to the number of patients we serve; the remainder of our costs, including our employee-related costs, are directly related to the number of patients cared for by a center. As a result, as revenue increases due to a greater number of patients at a center or improved per patient pricing, cost of care, excluding depreciation and amortization as a percentage of revenue typically decreases. As we open new centers, we expect cost of care, excluding depreciation and amortization to increase in absolute dollars.

Sales and Marketing. Sales and marketing expenses consist of employee-related expenses, including salaries, commissions, and employee benefits costs, for all of our employees, engaged in marketing, sales, community outreach, and sales support. These employee-related expenses capture all costs for both our field-based and corporate sales and marketing teams. Sales and marketing expenses also includes central and community-based advertising to generate greater awareness, engagement, and retention among our current and prospective patients as well as the infrastructure required to support all of our marketing efforts. We expect these costs to increase in absolute dollars over time as we continue to grow our patient panels. We evaluate our sales and marketing expense relative to our patient growth and will invest more heavily in sales and marketing from time-to-time to the extent we believe we can accelerate our growth without materially negatively affecting our unit economics.

Corporate, General and Administrative Expenses. Corporate, general and administrative expenses include employee-related expenses, including salaries and related costs and stock-based compensation for our executive, technology infrastructure, operations, clinical and quality support, finance, legal, human resources, and

 

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development departments. In addition, general and administrative expenses include all corporate technology and occupancy costs. We expect our general and administrative expenses to increase over time following the closing of this offering due to the additional legal, accounting, insurance, investor relations and other costs that we will incur as a public company, as well as other costs associated with continuing to grow our business. We also expect our general and administrative expenses to increase in absolute dollars in the foreseeable future. However, we anticipate general and administrative expenses to decrease as a percentage of revenue over the long term, although they may fluctuate as a percentage of revenue from period to period due to the timing and amount of these expenses. For purposes of determining center-level economics, we allocate a portion of our corporate, general and administrative expenses to our centers. The relative allocation of corporate, general and administrative expenses to each center depends upon a number of metrics, including (i) the number of centers open during a given period of time; (ii) the number of clinicians at each center at a given period of time; or (iii) if determinable, the center where the expense was incurred.

Depreciation and Amortization. Depreciation and amortization expenses are primarily attributable to our capital investment and consist of fixed asset depreciation, amortization of intangibles considered to have definite lives, and amortization of capitalized internal-use software costs. We do not allocate depreciation and amortization expenses when determining center-level economics.

Other Income (Expense)

Interest Expense. Interest expense consists primarily of interests payments on our outstanding borrowings under our note payable. See “—Liquidity and Capital Resources—Note Payable.”

Results of Operations

The following table sets forth our consolidated statements of operations data for the periods indicated:

 

     Year Ended December 31,      Three Months Ended
March 31,
 
     2018      2019      2019      2020  
(dollars in thousands)           (unaudited)  

Revenues:

           

Capitated revenue

   $ 309,594      $ 539,909      $ 115,329      $ 196,590  

Other patient service revenue

     8,344        16,695        2,047        5,195  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

     317,938        556,604        117,376        201,785  

Operating expenses:

           

Medical claims expense

     227,566        385,998        77,274        132,285  

Cost of care, excluding depreciation and amortization

     85,958        140,853        27,644        43,769  

Sales and marketing

     25,470        46,189        8,675        11,871  

Corporate, general and administrative expenses

     50,799        79,592        11,911        24,379  

Depreciation and amortization

     4,182        7,848        1,724        2,505  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating expenses

     393,975        660,480        127,228        214,809  
  

 

 

    

 

 

    

 

 

    

 

 

 

Loss from operations

     (76,037      (103,876      (9,852      (13,024

Other income (expense):

           

Interest expense, net

     (3,688      (5,651      (9      (2,426

Other

     10        84        62        95  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other income (expense)

     (3,678      (5,567      53        (2,331
  

 

 

    

 

 

    

 

 

    

 

 

 

Net loss

     (79,715      (109,443      (9,799      (15,355

Net loss attributable to noncontrolling interests

     171        1,581        (196      355  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net loss attributable to the Company

   $ (79,544    $ (107,862    $ (9,995    $ (15,000
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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The following table sets forth our consolidated statements of operations data expressed as a percentage of total revenues for the periods indicated:

 

     Year Ended
December 31,
    Three Months
Ended
March 31,
 
         2018             2019             2019             2020      

Revenues:

        

Capitated revenue

     97     97     98     97

Other patient service revenue

     3       3       2       3  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     100       100       100       100  

Operating expenses:

        

Medical claims expense

     72       69       66       66  

Cost of care, excluding depreciation and amortization

     27       25       24       22  

Sales and marketing

     8       8       7       6  

Corporate, general and administrative expenses

     16       14       10       12  

Depreciation and amortization

     1       1       1       1  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     124       119       108       106  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (24     (19     (8     (6

Other expense:

        

Interest expense, net

     (1     (1     —         (1

Other

     —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense

     (1     (1     —         (1
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (25     (20     (8     (8

Net loss attributable to noncontrolling interests

     —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to the Company

     (25 )%      (19 )%      (9 )%      (7 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Comparison of the Three Months Ended March 31, 2019 and 2020

Revenue

 

     Three Months Ended
March 31,
     $ Change      % Change  
     2019      2020  
     (in thousands)         

Revenue:

     

Capitated revenue

   $ 115,329      $ 196,590      $ 81,261        70

Other patient service revenue

     2,047        5,195        3,148        154
  

 

 

    

 

 

    

 

 

    

Total revenues

   $ 117,376      $ 201,785      $ 84,409        72
  

 

 

    

 

 

    

 

 

    

Capitated Revenue. Capitated revenue was $196.6 million for the three months ended March 31, 2020, an increase of $81.3 million, or 70%, compared to $115.3 million for the three months ended March 31, 2019. This increase was driven primarily by a 65% increase in the total number of at-risk patients, and an increase of approximately 3% in PPPM rates. Our cost for internally providing medical care to our at-risk patients was $23.1 million for the three months ended March 31, 2020, an increase of $6.6 million, or 40%, compared to $16.5 million for the three months ended March 31, 2019.

 

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Other Patient Service Revenue. Other patient service revenue was $5.2 million for the three months ended March 31, 2020, an increase of $3.2 million, or 154%, compared to $2.0 million for the three months ended March 31, 2019. The increase was primarily driven by increased care coordination and care management services revenue.

Operating Expenses

 

     Three Months Ended
March 31,
     $ Change      % Change  
     2019      2020  
     (in thousands)         

Operating expenses:

           

Medical claims expense

   $ 77,274      $ 132,285      $ 55,011        71

Cost of care, excluding depreciation and amortization

     27,644        43,769        16,125        58

Sales and marketing

     8,675        11,871        3,196        37

Corporate, general and administrative expenses

     11,911        24,379        12,468        105

Depreciation and amortization

     1,724        2,505        781        45
  

 

 

    

 

 

    

 

 

    

Total operating expenses

   $ 127,228      $ 214,809      $ 87,581        69
  

 

 

    

 

 

    

 

 

    

Medical Claims Expense. Medical claims expense was $132.3 million for the three months ended March 31, 2020, an increase of $55.0 million, or 71%, compared to $77.3 million for the three months ended March 31, 2019. The increase was primarily due to a 65% increase in total at-risk patients and a 4% increase in costs per patient.

Cost of care, excluding depreciation and amortization. Cost of care, excluding depreciation and amortization was $43.8 million for the three months ended March 31, 2020, an increase of $16.2 million, or 58%, compared to $27.6 million for the three months ended March 31, 2019. The increase was driven by increases in salaries and benefits of $12.4 million and occupancy costs of $2.6 million, medical supplies of $0.8 million and transportation cost of $0.6 million to support our patient growth, offset by a decrease in other costs of $0.3 million.

Sales and Marketing. Sales and marketing expense was $11.9 million for the three months ended March 31, 2020, an increase of $3.2 million, or 37%, compared to $8.7 million for the three months ended March 31, 2019. The increase was driven by greater headcount of $1.9 million and greater advertising spend of $1.3 million.

Corporate, General and Administrative Expenses. Corporate, general and administrative expenses were $24.4 million for the three months ended March 31, 2020, an increase of $12.5 million, or 105%, compared to $11.9 million for the three months ended March 31, 2019. The increase was primarily driven by higher salaries and benefits of $7.3 million, which includes an increase in stock-based compensation expense of $1.6 million, legal and professional services of $3.1 million , occupancy costs of $1.0 million and other costs of $1.1 million to support the growth of our business.

Depreciation and Amortization. Depreciation and amortization expense was $2.5 million for the three months ended March 31, 2020, an increase of $0.8 million, or 45%, compared to $1.7 million for the three months ended March 31, 2019. The increase was primarily due to an increase in property, plant and equipment associated with opening new centers.

Other Income (Expense)

Interest Expense. Interest expense was $2.4 million for the three months ended March 31, 2020, an increase of $2.4 million compared to $0.0 million for the three months ended March 31, 2019. The increase was primarily due to increases in the balance outstanding under the Loan Agreement and additional accrued interest.

 

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Comparison of the Year Ended December 31, 2018 and 2019

Revenue

 

    Year Ended
December 31,
    $ Change     % Change  
    2018     2019  
    (in thousands)        

Revenue:

   

Capitated revenue

  $ 309,594     $ 539,909     $ 230,315       74

Other patient service revenue

    8,344       16,695       8,351       100
 

 

 

   

 

 

   

 

 

   

Total revenues

  $ 317,938     $ 556,604     $ 238,666       75
 

 

 

   

 

 

   

 

 

   

Capitated Revenue. Capitated revenue was $539.9 million for the year ended December 31, 2019, an increase of $230.3 million, or 74%, compared to $309.6 million for the year ended December 31, 2018. This increase was driven primarily by a 57% increase in total at-risk patients, which increased our costs of internally provided medical services by 64%. This was supplemented by a 11% increase related to higher per-patient revenue due to a shift in patient mix toward higher-premium patients that had a higher level of acuity on average and thus higher capitation payments. Our cost for internally providing medical care to our at-risk patients was $79.7 million for the year ended December 31, 2019, an increase of $29.8 million, or 60%, compared to $49.9 million for the year ended December 31, 2018.

Other Patient Service Revenue. Other patient service revenue was $16.7 million for the year ended December 31, 2019, an increase of $8.4 million, or 100%, compared to $8.3 million for the year ended December 31, 2018. This increase was driven primarily by care coordination and care management services revenue.

Operating Expenses

 

    Year Ended
December 31,
    $ Change     % Change  
    2018     2019  
    (in thousands)        

Operating expenses:

       

Medical claims expense

  $ 227,566     $ 385,998     $ 158,432       70

Cost of care, excluding depreciation and amortization

    85,958       140,853       54,895       64

Sales and marketing

    25,470       46,189       20,719       81

Corporate, general and administrative expenses

    50,799       79,592       28,793       57

Depreciation and amortization

    4,182       7,848       3,666       88
 

 

 

   

 

 

   

 

 

   

Total operating expenses

  $ 393,975     $ 660,480     $ 266,505       68
 

 

 

   

 

 

   

 

 

   

Medical Claims Expense. Medical claims expense was $386.0 million for the year ended December 31, 2019, an increase of $158.4 million, or 70%, compared to $227.6 million for the year ended December 31, 2018. The increase was primarily due to a 57% increase in total at-risk patients and a 8% increase in cost per patient.

Cost of care, excluding depreciation and amortization. Cost of care, excluding depreciation and amortization was $140.9 million for the year ended December 31, 2019, an increase of $54.9 million, or 64%, compared to $86.0 million for the year ended December 31, 2018. The increase was driven by increases in salaries and benefits of $35.1 million, occupancy costs of $12.2 million, transportation costs of $3.4 million, medical supplies of $2.9 million, travel and entertainment of $1.7 million, offset by a reduction in other costs of $0.4 million, to support the growth of our patient base.

 

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Sales and Marketing. Sales and marketing expense was $46.2 million for the year ended December 31, 2019, an increase of $20.7 million, or 81%, compared to $25.5 million for the year ended December 31, 2018. The increase was driven by greater headcount of $9.2 million and greater advertising spend of $11.7 million.

Corporate, General and Administrative Expenses. Corporate, general and administrative expense was $79.6 million for the year ended December 31, 2019, an increase of $28.8 million, or 57%, compared to $50.8 million for the year ended December 31, 2018. The increase was primarily driven by higher salaries and benefits of $16.4 million, which includes a decrease in stock-based compensation expense of $8.9 million and an increase in accrued bonuses of $12.2 million; legal and professional fees of $10.8 million, including $4.9 million of expense related to our fundraising in Q1 2020; travel and entertainment costs of $1.3 million; occupancy costs of $0.9 million; technology costs of $0.6 million; and human resources of $0.5 million; offset by a reduction in and other costs of $1.8 million. The increase in our total corporate, general and administrative expense was to support the continued growth of our business.

Depreciation and Amortization. Depreciation and amortization expense was $7.8 million for the year ended December 31, 2019, an increase of $3.6 million, or 88%, compared to $4.2 million for the year ended December 31, 2018. The increase was primarily due to a $21.9 million increase in property, plant and equipment.

Other Income (Expense)

Interest Expense. Interest expense was $5.7 million for the year ended December 31, 2019, an increase of $2.0 million, or 53%, compared to $3.7 million for the year ended December 31, 2018. The increase was primarily due to increases in the balance outstanding under the Loan Agreement and additional accrued interest.

 

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Quarterly Results of Operations and Other Data

The following table sets forth our unaudited condensed consolidated statement of operations data for each of the last nine quarters in the period ended March 31, 2020. The unaudited quarterly statements of operations data set forth below have been prepared on a basis consistent with our audited annual consolidated financial statements included elsewhere in this prospectus and include, in our opinion, all normal recurring adjustments necessary for the fair statement of the results of operations for the periods presented. Our historical quarterly results are not necessarily indicative of the results that may be expected in the future. The following quarterly financial data should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus.

 

    March 31,
2018
    June 30,
2018
    September 30,
2018
    December 31,
2018
    March 31,
2019
    June 30,
2019
    September 30,
2019
    December 31,
2019
    March 31,
2020
 

Revenues

                 

Capitated revenue

  $ 71,367       74,258       79,057       84,912       115,329       123,054       133,073       168,453       196,590  

Other patient service revenue

    1,850       1,934       1,988       2,571       2,047       3,434       6,067       5,147       5,195  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    73,217       76,192       81,045       87,483       117,376       126,488       139,140       173,600       201,785  

Operating expenses

                 

Medical claims expense

    50,408       54,804       56,900       65,454       77,274       84,345       98,003       126,376       132,285  

Cost of care, excluding depreciation and amortization

    17,950       18,626       21,874       27,508       27,644       31,429       36,997       44,783       43,769  

Sales and marketing

    3,967       5,326       7,705       8,471       8,675       11,253       12,002       14,258       11,871  

Corporate, general and administrative(1)

    9,312       21,416       10,441       9,630       11,911       16,045       21,671       29,966       24,379  

Depreciation and amortization

    786       840       977       1,579       1,724       1,856       2,053       2,215       2,505  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    82,423       101,012       97,897       112,642       127,228       144,928       170,726       217,598       214,809  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (9,206     (24,820     (16,852     (25,159     (9,852     (18,440     (31,586     (43,998     (13,024
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense)

                 

Interest expense, net

    (758     (584     (1,067     (1,279     (9     (1,867     (1,813     (1,963     (2,426

Other

    248       38       (291     14       62       22       (25     25       95  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense)

    (510     (546     (1,358     (1,265     53       (1,845     (1,838     (1,938     (2,331
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (9,716     (25,366     (18,210     (26,424     (9,799     (20,285     (33,424     (45,936     (15,355

Net loss (gain) attributable to noncontrolling interests

      368       (140     (56     (196     124       224       1,429       355  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to OSH

    (9,716     (24,998     (18,350     (26,480     (9,995     (20,161     (33,200     (44,507     (15,000
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Includes stock-based compensation, as follows:

 

    March 31,
2018
    June 30,
2018
    September 30,
2018
    December 31,
2018
    March 31,
2019
    June 30,
2019
    September 30,
2019
    December 31,
2019
    March 31,
2020
 

Corporate, general and administrative

    70       12,267       169       404       256       543       1,405       1,895       1,878  

In April 2018, we completed the 2018 Tender Offer to repurchase certain eligible units for cash. We purchased 244,408 Common Units (including Incentive Units) for total consideration of $14.4 million. The tender offer price paid for the Common Units (including Incentive Units) was repurchased at an amount per unit

 

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significantly in excess of the fair value of those units repurchased, so an allocation of the repurchase price to other elements of the 2018 Tender Offer was necessary. There is a presumption that a significant excess amount paid over the fair value represents an element other than only a treasury unit repurchase. We determined that the excess represents compensation expense and recorded $12.1 million within corporate, general and administrative in the consolidated statements of operations related to the excess paid over fair value.

 

(% of revenues)

  March 31,
2018
    June 30,
2018
    September 30,
2018
    December 31,
2018
    March 31,
2019
    June 30,
2019
    September 30,
2019
    December 31,
2019
    March 31,
2020
 

Revenues

                 

Capitated revenue

    97     97     98     97     98     97     96     97     97

Other patient service revenue

    3       3       2       3       2       3       4       3       3  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    100       100       100       100       100       100       100       100       100  

Operating expenses

                 

Medical claims expense

    69     72     70     75     66     67     70     73     66

Cost of care, excluding depreciation and amortization

    25       24       27       31       24       25       27       26       22  

Sales and marketing

    5       7       10       10       7       9       9       8       6  

Corporate, general and administrative(1)

    13       28       13       11       10       13       16       17       12  

Depreciation and amortization

    1       1       1       2       1       1       1       1       1  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    113       133       121       129       108       115       123       125       106  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (13     (33     (21     (29     (8     (15     (23     (25     (6
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense)

                 

Interest expense, net

    (1     (1     (1     (1     —         (1     (1     (1     (1

Other

    —         —         —         —         —         —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense)

    (1     (1     (2     (1     —         (1     (1     (1     (1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (13     (33     (22     (30     (8     (16     (24     (26     (8

Net loss (gain) attributable to noncontrolling interests

    —         —         —         —         —         —         —         1       —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to OSH

    (13 %)      (33 %)      (23 %)      (30 %)      (9 %)      (16 %)      (24 %)      (26 %)      (7 %) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Quarterly Trends

Total revenues generally increase with patient growth. We expect seasonality related to our capitated revenue per at-risk patient as, over the course of the year, longer-tenured patients will leave the Oak Street Platform either due to attrition or mortality and be replaced with newer patients. We typically generate greater revenue per at-risk patient for patients that have been on the Oak Street Platform for longer periods of time. Additionally, we expect a disproportionate share of our patient growth in a year will occur in the fourth quarter, resulting in a significant increase in at-risk patients in the first quarter of the following year.

We evaluate our medical claims expense as a percent of our capitated revenue. There are several factors that may drive seasonal variation in medical claims expense as a percent of capitated revenue, including the benefit design of our patients’ health plans; the number of business days in a period; the seasonal occurrence of influenza; and the timing of new patients to the Oak Street Platform. Benefit design tends to result in greater

 

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expenses later in the calendar year, as patients’ financial responsibility for their healthcare tends to decrease over the course of the year as limits such as deductibles and out-of-pocket maximums are met, resulting in us bearing more of these costs. Most outpatient healthcare services are provided during the work week; therefore, depending on the number of business days in a quarter, there may be more or fewer days for our patients to receive care, which will impact the amount of our medical claims expense. Influenza, particularly dangerous for older patients, tends to occur during the colder months of the year, in the first and fourth quarters. Depending upon the severity of influenza in a given year, we may expect medical claims expense as a percent of capitated revenue to be greater in these periods. Finally, as our patients become more engaged in our care model, we are better able to manage their medical costs incurred outside of our facilities. As the average tenure of our patients declines during the course of the year, we would expect greater medical costs as a percent of capitated revenue as the year progresses. The combination of these factors creates a general trend where our medical costs as a percent of capitated revenue increase during the year.

We monitor and evaluate our cost of care, excluding depreciation and amortization, as a percent of total revenues. Our cost of care, excluding depreciation and amortization, as a percentage of total revenues has fluctuated from quarter to quarter, driven by the timing of opening new centers. As our centers age and grow their patient panels, we expect the cost of care, excluding depreciation and amortization as a percent of total revenues to decline as we leverage fixed and semi-fixed costs. However, given our newer centers represent a large portion of our total centers, that trend may not be visible in our quarterly financials. We expect the dollars associated with our cost of care, excluding depreciation and amortization, to continue to grow as we add new centers and new patients to our platform, but we expect these dollars as a percent of our total revenues to decline. We believe that our cost of care, excluding depreciation and amortization as a percent of total revenues during the three months ended December 31, 2018 was unusually high due to the CityLife acquisition and the timing of the opening of our new centers in 2018, which opened in the second half of the calendar year.

Our sales and marketing expenses fluctuate quarter to quarter based on the timing of outreach and advertising campaigns. Given patients typically enroll in MA plans during the annual open enrollment period (from mid-October through early December), we expect to incur greater sales and marketing expenses in the second half of the year to increase patient awareness of the Oak Street Platform. We will also experience quarterly fluctuations in this spend depending upon our ability to economically attract new patients to the Oak Street Platform.

Our corporate, general and administrative expenses have fluctuated from quarter to quarter. This fluctuation is driven by the growth of our team, start dates of new hires, seasonality of certain operational expenses and changes in stock-based compensation, particularly during the three months ended June 30, 2018, when the 2018 Tender Offer was completed. We expect quarter to quarter fluctuations to continue.

Liquidity and Capital Resources

General

To date, we have financed our operations principally through private placements of our equity securities, payments received from various payors and through the issuance of a note payable to Hercules Capital, Inc. As of March 31, 2020, we had cash and cash equivalents of $216.0 million. Our cash and cash equivalents primarily consist of highly liquid investments in money market funds and cash. Since our inception, we have generated significant operating losses from our operations as reflected in our accumulated deficit of $369.4 million as of March 31, 2020 and negative cash flows from operations.

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 sales and marketing and due to additional general and administrative costs we expect to incur in connection with operating as a public company. As a result, we may require additional capital resources to execute strategic initiatives to grow our business.

 

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We believe that following the offering, our cash and cash equivalents will be sufficient to fund our operating and capital needs for at least the next 12 months. Our assessment of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement and involves risks and uncertainties. Our actual results could vary because of, and our future capital requirements will depend on, many factors, including our growth rate, the timing and extent of spending to open new centers and expand into new markets and the expansion of sales and marketing activities. We may in the future enter into arrangements to acquire or invest in complementary businesses, services and technologies, including intellectual property rights. We have based this estimate on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. We may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, or if we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, results of operations, and financial condition would be adversely affected.

On August 7, 2017, we entered into a loan agreement with Hercules Capital, Inc. Under this agreement, as of March 31, 2020, we had borrowed $80 million in a note payable. Borrowings under the loan agreement bear a floating interest rate of the greater of (a) 9.75% or (b) the sum of the prime rate plus 5.00%. The interest rate as of December 31, 2018 and 2019 was 10.5% and 9.75%, respectively, and as of March 31, 2020 was 9.75%. The loan agreement requires interest-only payments through October 1, 2021, followed by monthly installments on an amortization schedule with the remaining principal and an end-of-term charge when the loan agreement matures on December 1, 2022, provided. The interest-only period may be extended to January 1, 2021 if we meet performance conditions outlined in the loan agreement.

Cash Flows

The following table presents a summary of our consolidated cash flows from operating, investing and financing activities for the periods indicated.

 

     Year Ended
December 31,
    Three Months Ended
March 31,
 
     2018     2019     2019     2020  

Net cash used in operating activities

   $ (75,365   $ (55,547   $ (29,619   $ (36,891

Net cash used in investing activities

     (39,755     (27,871     (5,626     (3,382

Net cash provided by financing activities

     157,251       53,603       2,646       224,362  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net change in cash

     42,131       (29,815     (32,599     184,089  

Cash at beginning of year/period

     29,936 (1)      72,067 (2)      72,067 (2)      42,253 (3) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash at end of year/period

   $ 72,067 (2)    $ 42,252 (3)    $ 39,468 (4)    $ 226,342 (5) 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Includes $6,720 of restricted cash.

(2)

Includes $7,326 of restricted cash.

(3)

Includes $8,266 of restricted cash.

(4)

Includes $7,326 of restricted cash.

(5)

Includes $10,391 of restricted cash.

Operating Activities

For the three months ended March 31, 2020, net cash used in operating activities was $36.9 million, an increase of $7.3 million compared to net cash used in operating activities of $29.6 million for the three months ended March 31, 2019. Significant changes impacting net cash used in operating activities for the three months ended March 31, 2020 as compared to the three months ended March 31, 2019 were as follows:

 

   

net loss for the three months ended March 31, 2020 of $15.4 million compared to net loss for the three months ended March 31, 2019 of $9.8 million;

 

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increases in accounts receivable for the three months ended March 31, 2020 of $58.3 million compared to increases in accounts receivable for the three months ended March 31, 2019 of $42.7 million due to the growth in the number of at-risk patients;

 

   

increases in accrued compensation and benefits for the three months ended March 31, 2020 of $13.0 million compared to an increase in accrued compensation and benefits for the three months ended March 31, 2019 of $4.3 million due to the payment of employee bonuses; and

 

   

changes in fair value of derivative, other current liabilities and deferred rent expense for the three months ended March 31, 2020 of $0.2 million compared to the three months ended March 31, 2019 of $3.1 million;

 

   

offset by increases in liability for unpaid claims for the three months ended March 31, 2020 of $41.0 million compared to the three months ended March 31, 2019 of $25.0 million, due to growth in the number of at-risk patients;

 

   

further offset by changes in depreciation and amortization, unit-based compensation, prepaid expenses and other current assets, accounts payable, and other long-term liabilities for the three months ended March 31, 2020 of $8.1 million compared to the three months ended March 31, 2019 of $(1.1) million.

For the year ended December 31, 2019, net cash used in operating activities was $55.5 million, a decrease of $19.9 million compared to net cash used in operating activities of $75.4 million for the year ended December 31, 2018. Significant changes impacting net cash used in operating activities for the year ended December 31, 2019 as compared to the year ended December 31, 2018 were as follows:

 

   

increases in other current liabilities for the year ended December 31, 2019 of $107.1 million compared to increases in other current liabilities for the year ended December 31, 2018 of $33.1 million, primarily driven by increases in liability for unpaid claims related to the growth in the number of at-risk patients;

 

   

increases in accrued compensation and benefits for the year ended December 31, 2019 of $15.4 million compared to increases in accrued compensation and benefits for the year ended December 31, 2018 of $2.7 million, primarily driven by employee bonuses;

 

   

changes in depreciation and amortization, unit-based compensation, deferred rent expense, accounts payable, and other long-term liabilities for the year ended December 31, 2019 of $21.4 million compared to the year ended December 31, 2018 of $7.8 million related to changes in depreciation and amortization, unit-based compensation, deferred rent expense, accounts payable, and other long-term liabilities;

 

   

offset by net loss for the year ended December 31, 2019 of $109.4 million compared to net loss for the year ended December 31, 2018 of $79.7 million;

 

   

further offset by increases in accounts receivable for the year ended December 31, 2019 of $86.4 million compared to increases in accounts receivable for the year ended December 31, 2018 of $36.3 million; and

 

   

further offset by changes in fair value of derivative, prepaid expenses and other current assets and other long term assets for the year ended December 31, 2019 of $(4.8) million compared to changes for the year ended December 31, 2018 of $(2.9) million.

Investing Activities

For the three months ended March 31, 2020, net cash used in investing activities was $3.4 million, a decrease of $2.2 million compared to net cash used in investing activities of $5.6 million for the three months ended March 31, 2019 due to a decrease in purchases of property and equipment.

 

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For the year ended December 31, 2019, net cash used in investing activities was $27.9 million, a decrease of $11.9 million compared to net cash used in investing activities of $39.8 million for the year ended December 31, 2018. The decrease was driven by lower expenditures from purchases of business of $13.7 million due to the to the acquisition of Ampersand Health-PA, LLC in 2018, offset by an increase of $1.7 million in purchases of property and equipment.

Financing Activities

Cash provided by financing activities was $224.4 million and $2.6 million for the three months ended March 31, 2020 and 2019, respectively, an increase of $222.8 million. The increase primarily relates to capital contributions from our equity issuance in the first fiscal quarter of 2020.

Cash provided by financing activities was $53.6 million and $157.3 million during the years ended December 31, 2019 and 2018, respectively, a decrease of $103.7 million. The net decrease primarily relates to capital contributions from Humana’s investment during the year ended December 31, 2018, offset by the 2018 Tender Offer (as defined herein) completed during the year ended December 31, 2018 and an increase from proceeds of long term debt of $39.5 million.

Subsequent to the three months ended March 31, 2020, we completed the 2020 Tender Offer (as defined herein) on April 27, 2020 in which 107,208 Founders’ Units, 1,142 Incentive Units and 22,801 Profits Interests were tendered for a purchase price of $20.0 million.

Contractual Obligations and Commitments

Our principal commitments consist of obligations under operating leases for our centers and repayments of long-term debt.

The following table summarizes our contractual obligations as of March 31, 2020:

 

     Payments due by Period  
     Total      Less than
1 year
     1-3
years
     3-5
years
     More than
5 years
 
     (in thousands)  

Note Payable—principal(1)

   $ 80,000      $ —        $ 80,000      $ —        $ —    

Note Payable—interest(1)

     17,263        7,908        9,355        —          —    

End-of-term charge(2)

     4,760        —          4,760        —          —    

Operating lease obligations

     128,649        11,475        23,074        20,460        73,640  

Other obligations(3)

     11,229        2,684        5,170        2,399        976