Astrana Health Inc
For the period ended Dec 31, 2023. Filed Feb 29, 2024.
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FY2023 · Filed Feb 29, 2024
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Item 8. Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Astrana Health, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Astrana Health, Inc. (formerly known as Apollo Medical Holdings, Inc.) (the Company) as of December 31, 2023 and 2022, the related consolidated statements of income, mezzanine and stockholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 2023, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 29, 2024 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Risk Pool Settlements and Related Receivables
| Description of the Matter | As described in Note 2 of the consolidated financial statements, the Company enters into hospital shared-risk capitation arrangements with certain health plans and local hospitals, where the hospital is responsible for providing, arranging and paying for institutional risk and the Company is responsible for providing, arranging and paying for professional risk. Under a hospital shared-risk pool-sharing agreement, the Company generally receives a percentage of the net surplus from the affiliated hospitals’ risk pools with health plans after deductions for the affiliated hospitals’ costs. The Company recognizes risk pool settlements relating to such arrangements using the most likely amount methodology and amounts are only included in revenues to the extent that it is probable that a significant reversal of cumulative revenue will not occur once any uncertainty is resolved. The amount of such risk pool settlements recorded is calculated by the Company using historical margin, incurred but not reported (IBNR) completion factors and constraint percentages and various data and information provided by the affiliated hospitals. Auditing management’s estimate of the risk pool settlements and related receivables involved a high degree of subjectivity used by management and the nature of the significant assumptions, which include a margin factor based on historical trends and other available information. The Company relies on data provided by other parties in its estimation model. Additionally, judgment is used to develop the margin factor used to account for the expected performance of the risk pools for each settlement year and is derived based on an evaluation of historical data provided by the affiliated hospitals and communications between the Company and the affiliated hospitals. |
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| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design, and tested the operating effectiveness of internal controls over the Company’s process for estimating risk pool settlements and related receivable amounts. For example, we tested controls over management’s review controls of the reasonableness of the data (including capitation revenue and related claims and other administrative expenses) underlying the risk pool calculations provided by the affiliated hospitals and management’s review controls analyzing the historical trends and appropriateness of the method used in determining the estimated risk pool surplus. We also reviewed relevant Service Organization Control (SOC) 1 reports to evaluate that such affiliated hospitals and administrator have effective controls over the completeness and accuracy of the data they process and provide to the Company. We also assessed and tested complementary user entity controls relevant to the SOC 1 reports.To test the Company’s estimates of risk pool settlements and related receivables, our audit procedures included, among others, confirming the external data used in the calculations of risk pools directly with the affiliated hospitals, testing the receivables amount by comparing it to subsequent cash receipts, and testing the margin factor used by the Company in its estimate. In order to test the margin factor, we evaluated historical margin trends within the risk pools, and reviewed the Company’s own volumes and margins to identify any trends which may provide contrary evidence. Additionally, we assessed the precision of the Company’s prior year estimates by comparing the Company’s prior year estimates to the final settled amounts. |
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Valuation of Incurred but not Reported (IBNR) Claims Liability
| Description of the Matter | At December 31, 2023, the Company’s medical liabilities totaled $106.7 million. As described in Note 2 of the consolidated financial statements, medical liabilities include reserves for incurred but not reported claims. The IBNR liability is an estimate that management developed using actuarial methods and is based on numerous variables, including the utilization of healthcare services, historical payment patterns, cost trends, product mix, seasonality, changes in membership, and other factors. Auditing management’s estimate of the IBNR claims liability involved a high degree of subjectivity due to the complexity of the models used by management and the nature of the significant assumptions used in the estimation of the liability. These assumptions have a significant effect on the valuation of the IBNR liability. |
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| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design, and tested the operating effectiveness of the Company’s internal controls over the process for estimating the IBNR claims liability. For example, we tested controls over management’s review controls of the completion factor and per member per month trend factor assumptions, and management’s review controls of the actuarial methods used to calculate the IBNR claims liability, including the completeness and accuracy of data inputs and outputs of those models. To test the Company’s estimate of the IBNR claims liability, our audit procedures included, among others, testing the completeness and accuracy of data used in the Company’s models by testing reconciliations of underlying claims and membership data recorded in source systems to the actuarial reserve models, and comparing claims to source documentation. We involved our actuarial specialists to assist with the testing due to the highly judgmental nature of assumptions used in the valuation process, including completion factors and per member per month trend factors. With the assistance of our actuarial specialists, we used the Company’s underlying claims and membership data to develop an independent range of IBNR estimates and compared management’s recorded IBNR claims liability to our range. Additionally, we performed a hindsight review of prior period estimates by comparing to subsequent claims development, and we evaluated the Company’s disclosures surrounding IBNR claims liability in the financial statements. |
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/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2020.
Los Angeles, California
February 29, 2024
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