EHEALTH, INC. Please read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes included under Part II, Item 8 of this Annual Report on Form 10-K. Overview We are a leading private health insurance marketplace powered by a technology and service platform that provides consumer engagement, education, and health insurance enrollment solutions. Our mission is to connect every person with the highest quality, most affordable health insurance and Medicare plans for their life circumstances. Our platform leverages technology to solve a critical problem in a large and growing market by aiding consumers in what has traditionally been a complex, confusing, and opaque health insurance purchasing process. Our omnichannel consumer engagement platform enables consumers to use our services online, by telephone with a licensed insurance agent, or through a hybrid online assisted interaction. We have created a consumer-centric marketplace that offers a broad choice of insurance products including thousands of Medicare Advantage, Medicare Supplement, Medicare Part D prescription drug, individual and family, small business, and other ancillary health insurance products from over 200 health insurance carriers across all fifty states and theDistrict of Columbia . Our plan recommendation tool curates this broad plan selection by analyzing customer health-related information against plan data for insurance coverage fit. This tool is supported by a unified data platform and is available to our ecommerce customers and our licensed agents.
2021 Business Initiatives
During 2021, we made a number of changes to our telesales and online capabilities with a focus on driving performance and improving enrollment quality, especially in the third quarter in preparation for the annual enrollment period in the fourth quarter. We shifted the mix of our telesales capacity towards full-time internal agents and away from third party vendor agents. InOctober 2021 , we entered the Medicare annual enrollment period with internal agents comprising over 95% of our total agents, the largest number of full-time employed agents in our history and compared to approximately 50% at the same time in 2020. We also made other important changes across our call centers to improve the effectiveness of our agents and further enhance consumer experience. These changes include the migration of our call center technology to a cloud-based contact center and upgraded routing tools. We believe these improvements and new tools provided better support to our agents in their interactions with consumers as we entered into the most critical selling season of the year. Enrollment quality has been our focus since the launch of our retention program in 2020, which helps ensure that we present Medicare beneficiaries with choices that best align with their eligibility status, lifestyle, health conditions and economic means with the goal of minimal disruption in existing provider relationships. We have been seeking additional ways to improve our customer experience, enhance accuracy of plan recommendations and reduce disenrollment. In the third quarter of 2021, we introduced additional mandatory training for our agents, added a new customer care function to verify certain Medicare enrollments prior to submission to the carrier, and expanded other quality assurance efforts. We restructured agent compensation incentives to place more focus on addressing the longer-term coverage needs of customers. As part of the recent migration of our call center technology to a cloud-based contact center, we also implemented a new cloud-based agent monitoring system, which is expected to provide new robust capabilities to train agents and monitor their performance in real time. While we expect these initiatives will enhance the quality of our enrollments generally, the introduction of these efforts to date has resulted in lower conversion rates and longer average talk times for telephonic enrollments. 53 -------------------------------------------------------------------------------- We continuously look for ways to improve the user experience of our online tools. Prior to the annual enrollment period, or AEP, which began inNovember 2021 for enrollment effective 2022, we enhanced our online capabilities by launching an updated recommendation engine. This engine is designed to improve the accuracy of personalized plan-matching. It has machine-learning capabilities and leverages data from online customer interactions to provide recommendations, which we believe improves the online shopping experience and helps Medicare eligible consumers navigate increasingly broad and complex plan choices. Our online Customer Center continues to strengthen and support our relationships with consumers and to help retain their business when it's time to review their plan coverage choices. The Customer Center enables members to create a secure personal profile that stores their prescription drug regimen, preferred doctors and pharmacies, current coverage, and other relevant data, and makes this data available to the member and our licensed agents that they contact. The accessibility of the information facilitates plan selection for our agents and members with accounts and also incentivizes members to return to us when their needs change. Although the investments in our telesales operations, technology and enrollment quality assurance negatively impacted our financial results in the second half of the year endedDecember 31, 2021 , we believe that they will create long-term competitive advantages for us as carriers place an increasing value on enrollment quality and reduction in beneficiary complaints.
Changes in Senior Management
InSeptember 2021 , we announced the appointment ofChristine Janofsky as our senior vice president, chief financial officer, effectiveSeptember 20, 2021 . We also announced the resignation ofScott Flanders from his positions as a member of our board of directors and chief executive officer, effectiveOctober 31, 2021 , and the appointment ofFrancis Soistman as a member of our board of directors and our chief executive officer, effectiveNovember 1, 2021 .Mr. Flanders provided consulting services to us throughDecember 31, 2021 to assist with the transition of his duties and responsibilities. These executive changes resulted in lower general and administrative expenses in the second half of 2021, primarily due to the reversal of stock-based compensation expense related toMr. Flanders' forfeited equity awards. Severance and other personnel costs related toMr. Flanders' separation are included in restructuring and reorganization charges on our Consolidated Statement of Comprehensive Income (Loss) for the year endedDecember 31, 2021 . InJanuary 2022 , we announced the termination of chief revenue officer,Timothy C. Hannan , effectiveJanuary 31, 2022 , and the appointment ofRobert S. Hurley as interim chief revenue officer effectiveFebruary 1, 2022 .Mr. Hurley previously served as an executive officer of the Company for over 20 years until his retirement inMarch 2020 .
In
Impact from COVID-19
We experienced a number of changes in our business related to the impacts from the COVID-19 pandemic during 2020 and 2021. During the first quarter of 2020, we closed our offices inthe United States andChina and shifted our employees to a work-from-home model in response to the virus outbreak. Our office inChina has reopened since the second quarter of 2020 given the improvements in the situation in the region where our office is located. As ofDecember 31, 2021 , all of ourU.S. offices are open at reduced capacity and with additional safety and social distancing measures. We currently plan to operate with a combination of remote and in-office work inthe United States at least through the first quarter of 2022. We plan to increase the number of in-office employees in the future depending upon the COVID-19 vaccination status of our employees as we intend to have only vaccinated employees in the office to promote the health and safety of our employees. Due to the surge of COVID-19 cases caused by the COVID-19 Omicron variant, employees in ourCalifornia offices are still required by county order to 54 -------------------------------------------------------------------------------- wear masks while in our offices regardless of vaccination status. The emergence of Omicron and other variants could cause us to alter our operations and plans for in-office and remote work.
Based on our success in shifting existing agents to work from home in 2020, we launched a remote agent model, tapping into nationwide agent talent to hire full-time customer care agents. We expect this model to provide us with geographic hiring flexibility.
In addition, we believe the COVID-19 pandemic had an impact on consumer behavior when it comes to selecting and utilizing health insurance. We believe that more seniors have become more likely to shop for Medicare products online or over the phone versus a face-to-face meeting with a traditional broker, which could have a positive impact on comparison Medicare platforms such as ours. The extent of the impact of the COVID-19 pandemic on our operational and financial performance will depend on future developments, including the duration, spread and severity of the pandemic, the availability, effectiveness and uptake of vaccines for COVID-19, the emergence of new variants of COVID-19 and whether existing vaccines are effective with respect to such variants, the actions to contain the disease or mitigate its impact, and the duration, timing and severity of the impact on consumer behavior, including any recession resulting from the pandemic, all of which are unpredictable. See Risk Factors in Part I, Item 1A of this Annual Report on Form 10-K for a discussion of risks related to the COVID-19 pandemic.
2022 Business Initiatives
Transformation Initiatives - We plan to implement a multi-year transformation initiative to right-size our cost structure and drive future profitability. These initiatives include targeted reductions in fixed expenses and vendor-related spend outside of mission critical areas, as well as changes to variable cost management. Through this program, we expect to achieve ongoing significant cost savings while preserving our competitive edge and focusing on initiatives with highest in-period returns on investment. We expect to achieve over$60 million in annualized cost savings, excluding restructuring costs in 2022 of approximately$10 million to$20 million . We expect the variable cost reduction to lead to a temporary decline in our Medicare enrollments and revenue in 2022 before a return to growth in 2023 on a significantly improved operational and cost foundation. These initiatives are intended to improve our operations through re-engineering, reorganizing, and better deployment of marketing expenses. 55 --------------------------------------------------------------------------------
Summary of Selected Metrics
We rely upon certain metrics to estimate and recognize commission revenue, evaluate our business performance and facilitate strategic planning. Our commission revenue is influenced by a number of factors including but not limited to:
•the number of individuals on applications for Medicare-related, individual and family, small business and ancillary health insurance plans that are approved by the relevant health insurance carriers; •the number of approved members for Medicare-related, individual and family, small business and ancillary health insurance plans from whom we have received an initial commission payment; and
•the constrained lifetime value, or LTV, of approved members for Medicare-related, individual and family and ancillary health insurance plans we sell as well as the estimated annual value of approved members for small business plans we sell.
Approved Members Approved members represent the number of individuals on submitted applications that were approved by the relevant insurance carrier for the identified product during the current period. The applications may be submitted in either the current period or prior periods. Not all approved members ultimately become paying members.
The following table shows approved members for the years presented:
Year Ended December 31,
2021 2020 2019
Medicare
Medicare Advantage 399,758 387,652
279,561
Medicare Supplement 28,020 40,551 42,688 Medicare Part D 73,292 74,357 112,677 Total Medicare 501,070 502,560 434,926 Individual and Family 42,711 33,328 32,186 Ancillary 97,694 114,946 146,698 Small Business 11,432 14,809 16,685 Total Approved Members 652,907 665,643
630,495
2021 compared to 2020 - Medicare approved members remained flat in 2021 compared to 2020 due to a 3% growth in Medicare Advantage plan approved members, offset by decreased Medicare Supplement and Medicare Part D plan approved members. The increase in approved Medicare Advantage members was primarily due to our investments in customer care and enrollment and marketing, and an increase in online enrollment, partially offset by a decline in telesales conversion rate during the second half of 2021. Although the investment in our telesales operations, technology and enrollment quality assurance have negatively impacted our second half results, we believe that they will create long-term competitive advantages for us as carriers place an increasing value on enrollment quality and reduction in beneficiary complaints. Individual and Family Plan approved members grew 28% in 2021 compared to 2020 primarily due to a 57% increase in approved members for qualified health plans and an 8% increase in non-qualified health plan approved members. The individual and family health insurance market benefited from the passage of the American Rescue Plan Act adopted inMarch 2021 . This legislation expanded access to premium credits making individual and family major medical plans more affordable, which allows a larger 56 --------------------------------------------------------------------------------
population to get the coverage that our major medical plans offer. The credits cover the 2021 and 2022 plan years, after which the credit subsidies expire.
Ancillary plan approved members declined 15% in 2021 compared to 2020 primarily
due to a decrease in short-term health insurance plans and other ancillary plans
approved members. Small business group health insurance approved members
declined 23% in 2021 compared to 2020 mainly due to the shift of our focus away
from the sale of small business products.
2020 compared to 2019 - Medicare approved members increased 16% in 2020 compared
to 2019. The increase in total Medicare approved members was primarily
attributable to a 39% growth in Medicare Advantage plan members, partially
offset by a 34% decline in Medicare Part D plan members. The increase in
approved Medicare Advantage members was primarily driven by strong online
enrollment growth, increased marketing efforts, an increase in our internal
agent productivity and the COVID-19 related special enrollment period in the
second quarter of 2020. During this special enrollment period, certain
individuals were permitted to enroll, disenroll or switch their Medicare
Advantage and Medicare Part D prescription drug plans. However, our approved
application growth was less than expected primarily due to the underperformance
of our outsourced external agent force and, to a lesser extent, increased
competition in our direct television marketing channel during the fourth quarter
2020 AEP. We also believe that external factors, including the pandemic and the
prolonged election cycle, impacted consumer demand on our platform during the
2020 AEP. To address the underperformance of our external agents, we have
determined to shift our agent salesforce to a predominantly internal full-time
agent model as our internal agents have generally experienced stronger
performance and productivity than our outsourced agents. We began this shift
towards the increased utilization of internal agents near the end of the 2020
AEP.
Individual and Family Plan approved members grew 4% in 2020 compared to 2019
primarily due to a 15% increase in approved members for qualified health plans.
Ancillary plan approved members declined 22% in 2020 compared to 2019 primarily
due to a decrease in short-term health insurance approved members. Small
business group health insurance approved members declined 11% in 2020 compared
to 2019 mainly due to the shift of our focus on our Medicare business.
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--------------------------------------------------------------------------------New Paying Members
New Paying Members consist of approved members from the period presented and any periods prior to the period presented from whom we have received an initial commission payment during the period presented. Not all approved members become paying members for various reasons. In addition, for any given period, the rate at which approved members become new paying members is impacted by the time lag between carrier approval and our receipt of the commission payment from the carrier. The difference in our metrics between the number of approved members and new paying members tends to vary, especially in the first and fourth quarters given this time lag and given that plans we sell in the fourth quarter do not begin generating commissions until the first quarter when they become effective.
The following table shows our new paying members for the years presented:
Year Ended December 31,
2021 2020 2019
Medicare
Medicare Advantage 366,827 324,916 235,978
Medicare Supplement 25,429 35,649 37,069
Medicare Part D 65,193 104,833 84,369
Total Medicare 457,449 465,398 357,416
Individual and Family 40,658 30,657 30,997
Ancillary 100,068 111,252 147,496
Small Business 11,008 14,362 17,606
Total New Paying Members 609,183 621,669 553,515
2021 compared to 2020 - Medicare total new paying members declined 2% in 2021
compared to 2020, due primarily to a 38% decrease in Medicare Part D
prescription drug plan new paying members and a 29% decrease in Medicare
Supplement plan new paying members, partially offset by a 13% increase in
Medicare Advantage plan new paying members. Overall, the total Medicare new
paying members were negatively impacted primarily by a reduced telephonic
enrollment conversion rate in the second half of 2021. Individual and family
plan new paying members grew 33% in 2021 compared to 2020 due to a 55% increase
in new paying members for qualified plans and an 18% increase in new paying
members for non-qualified plans. Ancillary new paying members declined 10% in
2021 compared 2020 due primarily to a decline in approved members for short-term
health plans and other ancillary plans. Small business new paying members
declined 23% in 2021 compared to 2020 primarily due to a decrease in approved
members for small business plans.
2020 compared to 2019 - Medicare total new paying members grew 30% in 2020
compared to 2019, primarily driven by a 38% increase in Medicare Advantage plan
new paying members and a 24% increase in Medicare Part D prescription drug plan
new paying members. Individual and family plan new paying members declined 1% in
2020 compared to 2019 due to a decrease in new paying members for non-qualified
plans, partially offset by an increase in new paying members for qualified
plans. Ancillary new paying members declined 25% in 2020 compared 2019 due
primarily to a decline in approved members across all ancillary plans. Small
business new paying members declined 18% in 2020 compared to 2019 primarily due
to a decrease in approved members for small business plans.
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--------------------------------------------------------------------------------Estimated Constrained Lifetime Value of Commissions Per Approved Member
The following table shows our estimated constrained LTV, of commissions per approved member by product for the years presented:
Year Ended December 31,
2021 2020 2019
Medicare:
Medicare Advantage (1) $ 979 $ 952 $ 1,013
Medicare Supplement (1) 993 1,125 979
Medicare Part D (1) 203 215 238
Individual and Family:
Non-Qualified Health Plans (1) 274 203 213
Qualified Health Plans (1) 311 265 217
Ancillaries:
Short-term (1) 169 162 101
Dental (1) 96 79 70
Vision (1) 61 55 56
Small Business (2) 182 157 159
__________
(1)Constrained LTV of commissions per approved member represents commissions
estimated to be collected over the estimated life of an approved member's policy
after applying constraints in accordance with our revenue recognition policy.
The estimate is driven by multiple factors, including but not limited to,
contracted commission rates, carrier mix, estimated average plan duration, the
regulatory environment, and cancellations of insurance plans offered by health
insurance carriers with which we have a relationship. These factors may result
in varying values from period to period. For additional information on
constrained LTV, see Critical Accounting Policies and Estimates.
(2)For small business, the amount represents the estimated commissions we expect
to collect from the plan over the following 12 months. The estimate is driven by
multiple factors, including but not limited to, contracted commission rates,
carrier mix, estimated average plan duration, the regulatory environment, and
cancellations of insurance plans offered by health insurance carriers with which
we have a relationship and applied constraints. These factors may result in
varying values from period to period.
Medicare
2021 compared to 2020 - The constrained LTV of commissions per approved member
for Medicare Advantage plans increased by 3% and decreased by 12% and 6%,
respectively, for Medicare Supplement and Medicare Part D prescription drug
plans in 2021 compared to 2020. The increase in constrained LTV of Medicare
Advantage plans was primarily due to higher commissions rates. The decline in
constrained LTV of commissions per approved member for Medicare Supplement and
Medicare Part D prescription drug plans was primarily due to shorter estimated
average plan durations for both products.
2020 compared to 2019 - The constrained LTV of commissions per Medicare
Supplement approved member increased by 15% in 2020 compared to 2019, primarily
as a result of an increase in estimated average plan duration. The constrained
LTV of commissions per approved member for Medicare Advantage and Medicare Part
D prescription drug plans declined by 6% and 10%, respectively, in 2020 compared
to 2019, primarily due to a decrease in estimated average plan duration.
59
--------------------------------------------------------------------------------Individual and Family and Ancillaries
2021 compared to 2020 - The constrained LTV of commissions per approved
qualified health plan member increased by 17% in 2021 compared to 2020 primarily
due to increased estimates of average plan duration and a lower constraint for
non-qualified health insurance plans. The constrained LTV of commissions per
approved member for short-term health insurance, dental, vision, and small
business insurance plans increased 4%, 22%, 11%, and 16%, respectively, in 2021
compared to 2020 primarily as a result of an increase in estimated average plan
duration.
2020 compared to 2019 - The constrained LTV of commissions per approved
qualified health plan member increased by 22% in 2020 compared to 2019 primarily
due to increased estimates of average plan duration. The constrained LTV of
commissions per short-term health insurance approved member increased 60% in
2020 compared to 2019 primarily as a result of selling plans with higher premium
and an increase in estimated average plan duration. The constrained LTV of
commission per approved member for dental plans increased by 13% in 2020
compared to 2019 primarily due to an increase in estimated average plan duration
and lower constraints as a result of reduced volatility based on historical
trends.
The constraints applied to the total estimated lifetime commissions we expect to
receive for selling the plan after the carrier approves an application in order
to derive the constrained LTV of commissions for approved members recognized for
the periods presented below are summarized as follows:
Year Ended December 31,
2021 2020
Medicare
Medicare Advantage 7 % 7 %
Medicare Supplement 9 % 5 %
Medicare Part D 7 % 5 %
Individual and Family
Non-Qualified Health Plans 7 % 15 %
Qualified Health Plans 4 % 4 %
Certain Ancillary Products
Short-term 20 % 20 %
Dental 5 % 10 %
Vision 5 % 5 %
Small Business 5 % - %
The constraints for Medicare Supplement and Medicare Part D prescription drug
plans increased during the year ended December 31, 2021 , as compared to the same
period in the prior year, due to declining LTV trends for these products. The
constraints for non-qualified health plans decreased during the year ended
December 31, 2021 , as compared to the same period in the prior year, due to
stabilization of market conditions and increases in LTV values. The constraints
for dental and vision plans decreased during the year ended December 31, 2021 ,
as compared to the same period in the prior year, due to improved LTV trends.
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--------------------------------------------------------------------------------Estimated Membership
Estimated membership represents the estimated number of members active as of the date indicated based on the number of members for whom we have received or applied a commission payment during the period of estimation. The following table shows estimated membership as of the periods presented below:
As of December 31,
2021 2020 2019
Medicare (1)
Medicare Advantage 632,574 533,282 404,694
Medicare Supplement 101,794 104,188 93,477
Medicare Part D 225,129 238,503 212,478
Total Medicare 959,497 875,973 710,649
Individual and Family (2) 105,211 116,247 128,487
Ancillaries (3) 235,017 247,355 264,341
Small Business (4) 46,650 45,771 42,638
Total Estimated Membership 1,346,375 1,285,346 1,146,115
__________________
(1)To estimate the number of members on Medicare-related health insurance plans,
we take the sum of (i) the number of members for whom we have received or
applied a commission payment for a month that may be up to three months prior to
the date of estimation (after reducing that number using historical experience
for assumed member cancellations over the period being estimated); and (ii) the
number of approved members over that period (after reducing that number using
historical experience for an assumed number of members who do not accept their
approved policy and for estimated member cancellations through the date of the
estimate). To the extent we determine we have received substantially all of the
commission payments related to a given month during the period being estimated,
we will take the number of members for whom we have received or applied a
commission payment during the month of estimation.
(2)To estimate the number of members on Individual and Family health insurance
plans ("IFP"), we take the sum of (i) the number of IFP members for whom we have
received or applied a commission payment for a month that may be up to three
months prior to the date of estimation (after reducing that number using
historical experience for assumed member cancellations over the period being
estimated); and (ii) the number of approved members over that period (after
reducing that number using historical experience for an assumed number of
members who do not accept their approved policy and for estimated member
cancellations through the date of the estimate). To the extent we determine we
have received substantially all of the commission payments related to a given
month during the period being estimated, we will take the number of members for
whom we have received or applied a commission payment during the month of
estimation.
(3)To estimate the number of members on ancillary health insurance plans (such
as short-term, dental and vision insurance), we take the sum of (i) the number
of members for whom we have received or applied a commission payment for a month
that may be up to three months prior to the date of estimation (after reducing
that number using historical experience for assumed member cancellations over
the period being estimated); and (ii) the number of approved members over that
period (after reducing that number using historical experience for an assumed
number of members who do not accept their approved policy and for estimated
member cancellations through the date of the estimate). To the extent we
determine we have received substantially all of the commission payments related
to a given month during the period being estimated, we will take the number of
members for whom we have received or applied a commission payment during the
month of estimation. The one to three-month period varies by insurance product
and is largely dependent upon the timeliness of commission payment and related
reporting from the related carriers.
(4)To estimate the number of members on small business health insurance plans,
we use the number of initial members at the time the group was approved, and we
update this number for changes in membership if such changes are reported to us
by the group or carrier. However, groups generally notify the carrier directly
of policy cancellations and increases or decreases in group size without
informing us. Health insurance carriers often do not communicate policy
cancellation information or group size changes to us. We often are made aware of
policy cancellations and group size changes at the time of annual renewal and
update our membership statistics accordingly in the period they are reported.
61
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Health insurance carriers bill and collect insurance premiums paid by our
members. The carriers do not report to us the number of members that we have as
of a given date. The majority of our members who terminate their plans do so by
discontinuing their premium payments to the carrier and do not inform us of the
cancellation. Also, some of our members pay their premiums less frequently than
monthly. Given the number of months required to observe non-payment of
commissions in order to confirm cancellations, we estimate the number of members
who are active on insurance policies as of a specified date.
After we have estimated membership for a period, we may receive information from
health insurance carriers that would have impacted the estimate if we had
received the information prior to the date of estimation. We may receive
commission payments or other information that indicates that a member who was
not included in our estimates for a prior period was in fact an active member at
that time, or that a member who was included in our estimates was in fact not an
active member of ours. For instance, we reconcile information carriers provide
to us and may determine that we were not historically paid commissions owed to
us, which would cause us to have underestimated membership. Conversely, carriers
may require us to return commission payments paid in a prior period due to
policy cancellations for members we previously estimated as being active. We do
not update our estimated membership numbers reported in previous periods.
Instead, we reflect updated information regarding our historical membership in
the membership estimate for the current period. As a result of the delay in our
receipt of information from insurance carriers, actual trends in our membership
are most discernible over periods longer than from one quarter to the next. As a
result of the delay we experience in receiving information about our membership,
it is difficult for us to determine with any certainty the impact of current
conditions on our membership retention. Various circumstances could cause the
assumptions and estimates that we make in connection with estimating our
membership to be inaccurate, which would cause our membership estimates to be
inaccurate. A member who purchases and is active on multiple standalone
insurance plans will be counted as a member more than once. For example, a
member who is active on both an individual and family health insurance plan and
a standalone dental plan will be counted as two continuing members.
2021 compared to 2020 - Medicare estimated membership grew 10% as of December
31, 2021 compared to December 31, 2020 driven by a 19% increase in Medicare
Advantage, offset by 6% and 2% decreases in Medicare Part D prescription drug
plan and Medicare Supplement plan estimated membership, respectively. The
overall growth in Medicare estimated membership reflected new enrollments we
generated during the year, net of estimated attrition. Individual and family
plan estimated membership declined by 9% as of December 31, 2021 compared to
December 31, 2020 due to our previous decision to shift our investment to our
Medicare business. Ancillary plan estimated membership as of December 31, 2021
declined 5% compared to estimated membership as of December 31, 2020 primarily
as a result of the decline of estimated membership of dental, short-term health
plans, and other ancillary plans.
2020 compared to 2019 - Medicare estimated membership grew 23% as of December
31, 2020 compared to December 31, 2019 driven by a 32% increase in Medicare
Advantage, as well as 12% and 11% increases in Medicare Part D prescription drug
plan and Medicare Supplement plan estimated membership, respectively. The
overall growth in Medicare estimated membership was due to our investment in our
Medicare business. Individual and family plan estimated membership declined by
10% as of December 31, 2020 compared to December 31, 2019 due to market
conditions in the individual and family plan market and our decision to shift
our investment to our Medicare business. Ancillary plan estimated membership as
of December 31, 2020 declined 6% compared to estimated membership as of December
31, 2019 primarily as a result of the decline of estimated membership of dental,
short-term health plans, and vision plans.
62
--------------------------------------------------------------------------------Member Acquisition
Marketing initiatives are an important component of our strategy to increase
revenue and are primarily designed to encourage consumers to complete an
application for health insurance. Variable marketing cost represents direct
costs incurred in member acquisition from our direct, marketing partners and
online advertising channels. In addition, we incur customer care and enrollment
expenses ("CC&E") in assisting applicants during the enrollment process.
Variable marketing costs exclude fixed overhead costs, such as personnel related
costs, consulting expenses, facilities and other operating costs allocated to
the marketing and advertising department.
The following table shows the estimated variable marketing cost per approved
member and the estimated customer care and enrollment expense per approved
member metrics for the years presented below. The numerator used to calculate
each metric is the portion of the respective operating expenses for marketing
and advertising and customer care and enrollment that is directly related to
member acquisition for our sale of Medicare Advantage, Medicare Supplement and
Medicare Part D prescription drug plans (collectively, "Medicare Plans") and for
all individual and family major medical plans and short-term health insurance
(collectively, "IFP Plans"), respectively. The denominator used to calculate
each metric is based on a derived metric that represents the relative value of
the new members acquired. For Medicare Plans, we call this derived metric
Medicare Advantage ("MA")-equivalent members, and for IFP Plans, we call this
derived metric IFP-equivalent members. The calculations for MA-equivalent
members and for IFP-equivalent members are based on the weighted number of
approved members for Medicare Plans and IFP Plans during the year, with the
number of approved members adjusted based on the relative LTV of the product
they are purchasing. Since the LTV for any product fluctuates from year to year,
the weight given to each product was determined based on their relative LTVs at
the time of our adoption of ASC 606.
Year Ended December 31,
2021 2020 2019
Medicare:Estimated CC&E cost per approved MA-equivalent approved member (1)
$ 383
523 384 330
Total Medicare estimated cost per approved member $ 906 $ 752 $ 685
Individual and Family Plan:
Estimated CC&E cost per IFP-equivalent approved member (2) $ 91
67 83 67
Total IFP estimated cost per approved member $ 158 $ 175 $ 169
_____________
(1)MA-equivalent approved members is a derived metric with a Medicare Part D
approved member being weighted at 25% of a Medicare Advantage member and a
Medicare Supplement member based on their relative LTVs at the time of our
adoption of ASC 606. We calculate the number of approved MA-equivalent members
by adding the total number of approved Medicare Advantage and Medicare
Supplement members and 25% of the total number of approved Medicare Part D
members during the years presented.
(2)IFP-equivalent approved members is a derived metric with a short-term
approved member being weighted at 33% of a major medical individual and family
health insurance plan member based on their relative LTVs at the time of our
adoption of ASC 606. We calculate the number of approved IFP-equivalent members
by adding the total number of approved qualified and non-qualified health plan
members and 33% of the total number of short-term approved members during the
years presented.
2021 compared to 2020 - Estimated CC&E costs per approved MA-equivalent member
increased 4% in 2021 compared to 2020, due to lower enrollment volume resulting
from enrollment quality initiatives, a decline in our telesales conversion rate,
and an earlier start to our staffing increase for the Medicare annual enrollment
period in 2021. Estimated variable marketing costs per approved MA-
63
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equivalent member increased by 36% in 2021 compared to 2020, primarily due to a
decline in telesales conversion rates leading to a reduced return on our
marketing spend and an increase in cost of leads in certain marketing channels,
such as direct television and direct mail. In addition, a greater focus on our
online advertising channel also contributed to the increase as it carries higher
per enrollment marketing costs but lower customer care and enrollment costs.
Based on what we learned from this recent AEP, we will continue to improve the
marketing strategy and the structure of our telesales organization to address
the changing market environment.
Estimated variable CC&E cost per approved IFP-equivalent member decreased 1% in
2021 compared to 2020 due primarily to a decrease in costs and an increase in
the number of approved members. Estimated variable marketing cost per approved
IFP-equivalent member decreased by 19% in 2021 compared to 2020 due primarily to
a decrease in online marketing spend and an increase in the number of approved
members.
2020 compared to 2019 - Estimated CC&E costs per approved MA-equivalent member
increased 4% in 2020 compared to 2019, due to underperformance of vendor agents
which led to lower than expected approved members. Estimated variable marketing
costs per approved MA-equivalent member increased by 16% in 2020 compared to
2019, due to a larger portion of applications originating from our online
marketing channels which tend to have higher average marketing costs, and it was
also impacted by underperformance of vendor agents which resulted in lower than
expected approved members.
Estimated variable CC&E cost per approved IFP-equivalent member decreased 10% in
2020 compared to 2019 due primarily to a decrease in personnel-related costs and
an increase in the number of approved members. Estimated variable marketing cost
per approved IFP-equivalent member increased by 24% in 2020 compared to 2019
primarily driven by an increase in variable marketing costs.
64
--------------------------------------------------------------------------------Results of Operations
The following table sets forth our operating results and related percentage of total revenues for the years presented below (dollars in thousands):
Year Ended
2021 2020 2019
Revenue:
Commission $ 493,119 92 % $ 508,189 87 % $ 466,676 92 %
Other 45,080 8 % 74,585 13 % 39,525 8 %
Total revenue 538,199 100 % 582,774 100 % 506,201 100 %
Operating costs and expenses (1)
Cost of revenue 1,992 - % 4,083 1 % 2,738 1 %
Marketing and advertising 271,300 50 % 209,340 36 % 150,249 30 %
Customer care and enrollment 179,295 33 % 172,895 30 % 134,304 27 %
Technology and content 83,800 16 % 65,188 11 % 47,085 9 %
General and administrative 75,699 14 % 76,452 13 % 64,150 13 %
Change in fair value of earnout liability - - % - - % 24,079 4 %
Amortization of intangible assets 536 - % 1,493 - % 2,187 - %
Restructuring and reorganization charges 4,878 1 % - - % - - %
Impairment charges 46,344 9 % - - % - - %
Total operating costs and expenses 663,844 114 % 529,451 91 % 424,792 84 %
Income (loss) from operations (125,645) (14) % 53,323 9 % 81,409 16 %
Other income, net 755 - % 666 - % 2,090 - %
Income (loss) before income taxes (124,890) (14) % 53,989 9 % 83,499 16 %
Provision for (benefit from) income taxes (20,515) (4) % 8,539 1 % 16,612 3 %
Net income (loss) $ (104,375) (10) % $ 45,450 8 % $ 66,887 13 %
____________
(1) Operating costs and expenses include the following amounts of stock-based compensation expense (in thousands):
Year Ended December 31,
2021 2020 2019
Marketing and advertising $ 8,660 $ 5,102 $ 4,230
Customer care and enrollment 2,836 2,723 1,451
Technology and content 10,013 5,460 3,611
General and administrative 11,348 11,887 13,278
Total stock-based compensation expense
65
--------------------------------------------------------------------------------Revenue
Our commission revenue, other revenue and total revenue are summarized as follows (dollars in thousands):
Change Change
2021 $ % 2020 $ % 2019
Commission $ 493,119 $ (15,070) (3)% $ 508,189 $ 41,513 9% $ 466,676
% of total revenue 92 % 87 % 92 %
Other 45,080 (29,505) (40)% 74,585 35,060 89% 39,525
% of total revenue 8 % 13 % 8 %
Total revenue $ 538,199 $ (44,575) (8)% $ 582,774 76,573 15% $ 506,201
2021 compared to 2020 - Commission revenue decreased $15.1 million , or 3% in
2021 compared to 2020 due to a $17.1 million decrease in commission revenue from
the Medicare segment, offset by a $2.0 million increase in commission revenue
from the Individual, Family and Small Business segment. The decrease in
commission revenue from the Medicare segment for the year ended December 31,
2021 compared to 2020 was primarily due to a decrease in net adjustment revenue
and a decline in the estimated constrained LTV and lower enrollment volume for
Medicare Supplement and Medicare Part D prescription drug plans, partially
offset by an increase in constrained LTV and enrollment volume for Medicare
Advantage plans. The increase in commission revenue from the Individual, Family
and Small Business segment was primarily driven by a 28% increase in individual
and family plan approved members. See Segment Information below for further
discussion.
Net adjustment revenue consists of increases in revenue for certain prior period
cohorts as well as reductions in revenue for certain prior period cohorts. We
recognize positive adjustments to revenue to the extent that it is probable that
a significant reversal in the amount of cumulative revenue recognized will not
occur. Net adjustment revenue for our Medicare segment in 2021 and 2020 was
$(8.4) million and $5.7 million , respectively. For our Individual, Family and
Small Business segment net adjustment revenue in 2021 and 2020 was $30.2 million
and $33.1 million , respectively. See Note 2 - Revenue in our Notes to
Consolidated Financial Statements for more information.
Other revenue decreased
2020 compared to 2019 - Commission revenue increased$41.5 million , or 9% in 2020 compared to 2019 due to a$35.2 million increase in commission revenue from the Medicare segment and a$6.3 million increase in commission revenue from the Individual, Family and Small Business segment. The increase in commission revenue from the Medicare segment was driven by a 16% increase in Medicare plan approved members, primarily attributable to a 39% growth in Medicare Advantage plan approved members, partially offset by a decrease in net adjustment revenue for the year endedDecember 31, 2020 compared to 2019 and a decline in the estimated constrained LTV for Medicare Advantage plans. Excluding$42.3 million revenue recorded in the fourth quarter of 2019 related to a change in estimate of expected cash commission collections for Medicare Advantage plans since we began selling such products through the third quarter of 2019, commission revenue increased 20% in 2020 as compared to 2019. The increase in commission revenue from Individual, Family and Small Business segment was primarily driven by a 21% increase in adjustment revenue and a 4% increase in individual and family plan approved members. See Segment Information below for further discussion. Net adjustment revenue consists of increases in revenue for certain prior period cohorts as well as reductions in revenue for certain prior period cohorts. We recognize positive adjustments to revenue to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized 66 -------------------------------------------------------------------------------- will not occur. Net adjustment revenue for our Medicare segment in 2020 and 2019 was$5.7 million and$55.3 million , respectively. For our Individual, Family and Small Business segment net adjustment revenue in 2020 and 2019 was$39.8 million and$32.9 million , respectively. See Note 2 - Revenue in our Notes to Consolidated Financial Statements for more information.
Other revenue increased
We anticipate a reduction in revenue in 2022 as we reset our strategy, improve the structure of our telesales organization, and focus on driving volume from marketing channels that offer more favorable return on our investments.
Cost of Revenue
Cost of revenue consists of payments related to health insurance plans sold to members who were referred to our website by marketing partners with whom we have revenue-sharing arrangements. In order to enter into a revenue-sharing arrangement, marketing partners must be licensed to sell health insurance in the state where the policy is sold. Costs related to revenue-sharing arrangements are expensed as the related revenue is recognized. Additionally, cost of revenue includes the amortization of consideration we paid to certain broker partners in connection with the transfer of their health insurance members to us as the new broker of record on the underlying plans. These transfers include primarily Medicare plan members. Consideration for all book-of-business transfers is being amortized to cost of revenue as we recognize commission revenue related to the transferred members.
Our cost of revenue is summarized as follows (dollars in thousands):
Change Change
2021 $ % 2020 $ % 2019
Cost of revenue
1 % 1 %
2021 compared to 2020 - Cost of revenue decreased $2.1 million in 2021, compared
to $4.1 million in 2020, primarily due to decreased activity from our revenue
sharing arrangements.
2020 compared to 2019 - Cost of revenue increased $1.3 million in 2020, compared
to $2.7 million in 2019, primarily due to increased activity from our revenue
sharing arrangements.
Marketing and Advertising
Marketing and advertising expenses consist primarily of member acquisition
expenses associated with our direct, marketing partner, and online advertising
member acquisition channels, in addition to compensation and other expenses
related to marketing, business development, partner management, public relations
and carrier relations personnel who support our offerings. We recognize expenses
in our direct member acquisition channel in the period in which they are
incurred. We generally compensate our marketing partners for referrals based on
the consumer submitting a health insurance application on our platform,
regardless of whether the consumer's application is approved by the health
insurance carrier, or for the referral of a Medicare-related lead to us by the
marketing partner. Some of our partners such as pharmacies and hospital networks
are not compensated for referrals to us as a result of legal requirements. These
organizations have relationships with us to provide their customers and patients
with
67
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our consumer experience and to help them find the plan that best meets their
needs. Some of our marketing partners have tiered arrangements where the amount
we pay the marketing partner per submitted application increases as the volume
of submitted applications we receive from the marketing partner increases. We
recognize these expenditures in the period when a marketing partner's referral
results in the submission of a health insurance application. In our Medicare
business, our current emphasis is on reducing the contribution from the lead
aggregator marketing channel that is characterized by high acquisition costs and
emphasizing strategic partnerships including relationships with health care
industry participants, such as pharmacies and hospital networks, and with
affiliate organizations where our acquisition costs may be significantly lower.
Since the total volume of submitted applications that we receive from our
marketing partners is largely outside of our control, particularly during any
short-term period, and because of our tiered marketing partner arrangements, we
could incur expenses in excess of, or below, the amounts we had planned in
periods of rapid change in the volume of submitted applications from marketing
partner referrals. Similar to our marketing partner channel, expenses in our
online advertising channel will increase or decrease in relation to any increase
or decrease in consumers referred to our website as a result of search engine
advertising or retargeting campaigns. We recognize expenses in our online
advertising member acquisition channels in the period in which the consumer
clicks on the advertisement. Increases in submitted applications resulting from
marketing partner referrals or visitors to our website from our online
advertising channel has in the past, and could in the future, result in
marketing and advertising expenses significantly higher than our expectations.
Our marketing and advertising expenses are summarized as follows (dollars in
thousands):
Change Change
2021 $ % 2020 $ % 2019
Marketing and advertising $ 271,300 $ 61,960 30 % $ 209,340 $ 59,091 39 % $ 150,249
% of total revenue 50 % 36 % 30 %
2021 compared to 2020 - Marketing and advertising expenses increased by $62.0
million or 30% in 2021, compared to 2020, primarily due to a $60.4 million
increase in variable advertising costs, $3.6 million increase in stock-based
compensation, and $0.7 million increase in facilities and operating costs,
partially offset by decreases in consulting and personnel related costs. The
increase in variable advertising expenses was due to an increase in our
advertising expense through our affiliate lead generation partner and online
channels. The increase in expense as a percentage of revenue reflects lower than
expected volume driven by underperformance of certain marketing channels.
2020 compared to 2019 - Marketing and advertising expenses increased by $59.1
million or 39% in 2020, compared to 2019, primarily driven by a $56.3 million
increase in Medicare plan related variable advertising costs, and $2.4 million
increase in consulting costs. The increase in variable advertising expenses was
due to an increase in our investment for Medicare enrollment growth and the
increase in expense as a percentage of revenue reflects lower than expected
volumes driven by underperformance of certain marketing channels.
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--------------------------------------------------------------------------------Customer Care and Enrollment
Customer care and enrollment expenses primarily consist of compensation, benefits, and licensing costs for personnel engaged in assistance to applicants who call our customer care center and for enrollment personnel who assist applicants during the enrollment process.
Our customer care and enrollment expenses are summarized as follows (dollars in
thousands):
Change Change
2021 $ % 2020 $ % 2019
Customer care and
enrollment $ 179,295 $ 6,400 4 % $ 172,895 $ 38,591 29 % $ 134,304
% of total revenue 33 % 30 % 27 %
2021 compared to 2020 - Customer care and enrollment expenses increased by $6.4
million , or 4%, in 2021 compared to 2020. This increase was primarily driven by
a $36.4 million increase in personnel costs associated with an increase in
customer care and enrollment headcount and a $3.3 million increase in facilities
and other operating expenses, partially offset by a $27.5 million decrease in
spending on external call center and agents, and a $6.6 million decrease in
licensing costs. The decrease in licensing costs was primarily due to previously
over-recognized licensing costs that were adjusted during the first quarter of
2021.
In 2021, we have shifted to a predominantly internal agent model and intend to
employ and maintain the majority of our health insurance agent force year-round.
We started internal agent hiring and training earlier in 2021 compared to 2020,
with the largest headcount increase in the second and third quarters. In October
2021 , we entered the annual enrollment period with over 95% of our sales force
consisting of internal agents, the largest number of full-time agents in our
company's history. We also incurred more spending on agent training and the
expansion of our customer service team in the second half of 2021, including the
addition of a new customer care role to verify Medicare enrollments prior to
submission and expanding our quality assurance efforts.
2020 compared to 2019 - Customer care and enrollment expenses increased by $38.6
million , or 29%, in 2020 compared to 2019. This increase was primarily driven by
$27.5 million increase in personnel costs associated with an increase in
customer care and enrollment headcount, $5.1 million increase in consulting
expenses, $2.8 million increase in facilities and other operating expenses, $1.3
million increase in stock-based compensation and $1.0 million increase in
licensing costs.
Technology and Content
Technology and content expenses consist primarily of compensation and benefits
costs for personnel associated with developing and enhancing our website
technology as well as maintaining our website. A portion of our technology and
content group is located at our wholly-owned subsidiary in China , where
technology development costs are generally lower than in the United States .
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Our technology and content expenses are summarized as follows (dollars in
thousands):
Change Change
2021 $ % 2020 $ % 2019
Technology and content
$ 18,103 38 %$ 47,085 % of total revenue 16 % 11 % 9 % 2021 compared to 2020 - Technology and content expenses increased$18.6 million , or 29%, in 2021 compared to 2020, primarily driven by increases of$6.9 million in personnel and compensation costs,$5.1 million in amortization of internally developed software,$4.6 million in stock-based compensation expense,$0.9 million in depreciation and amortization, and$0.9 million in facilities and other operating costs. The increase reflects an implementation of a cloud-based call center technology platform and further enhancements to our online user experience in 2021. 2020 compared to 2019 - Technology and content expenses increased$18.1 million , or 38%, in 2020 compared to 2019, primarily driven by increases of$8.4 million in personnel and compensation costs,$5.8 million in facilities and other operating costs,$3.9 million in amortization of internally developed software and$1.8 in stock-based compensation expense, partially offset by$2.1 million decrease in consulting expense.
General and Administrative
General and administrative expenses include compensation and benefits costs for
personnel working in our executive, finance, investor relations, government
affairs, legal, human resources, internal audit, facilities, and internal
information technology departments. These expenses also include fees paid for
outside professional services, including audit, tax, legal, government affairs,
and information technology fees.
Our general and administrative expenses are summarized as follows (dollars in
thousands):
Change Change
2021 $ % 2020 $ % 2019
General and administrative $ 75,699 $ (753) (1) % $ 76,452 $ 12,302 19 % $ 64,150
% of total revenue 14 % 13 % 13 %
2021 compared to 2020 - General and administrative expenses decreased by $0.8
million , or 1%, in 2021 compared to 2020, primarily due to decreases of $2.8
million in compensation and personnel costs and $1.1 million in consulting
expense, partly offset by a $2.7 million increase in professional fees. The
decrease in stock-based compensation expenses in 2021 compared to 2020 was
primarily attributable to a one-time reversal related to forfeited equity awards
due to our former chief executive officer's separation.
2020 compared to 2019 - General and administrative expenses increased by $12.3
million , or 19%, in 2020 compared to 2019, primarily driven by increases of $5.2
million in compensation and personnel costs, $3.0 million in consulting expense,
and $2.8 million in facilities and other operating costs.
70
--------------------------------------------------------------------------------Amortization of Intangible Assets
Our intangible asset amortization expense is summarized as follows (dollars in
thousands):
Change Change
2021 $ % 2020 $ % 2019
Amortization of intangible assets $ 536 $ (957) (64) % $ 1,493 $ (694) (32) % $ 2,187
% of total revenue - % - % - %
2021 compared to 2020 - Amortization expense was primarily related to intangible
assets purchased through our acquisitions. Amortization expense decreased in
2021 compared to 2020 due to certain intangible assets being fully amortized in
2021.
2020 compared to 2019 - Amortization expense was primarily related to intangible
assets purchased through our acquisitions. Amortization expense decreased in
2020 compared to 2019 due to certain intangible assets being fully amortized in
2020.
Restructuring and Reorganization Charges
Our restructuring and reorganization charges consist primarily of severance, transition and other related costs. We incurred$4.9 million in restructuring and reorganization charges in 2021, which primarily consisted of the severance and other personnel related costs related to the restructuring that took place in the first quarter of 2021 and the severance and other personnel related cost related to the separation arrangement with our former chief executive officer inSeptember 2021 . We did not incur any restructuring and reorganization costs in 2020 and 2019. We expect to incur higher restructuring and reorganization charges in 2022 in connection with our transformation initiatives.
Impairment Charges
Our impairment charges consist of goodwill and intangible asset impairment. We reviewed for impairment because events or changes in circumstances indicated a potential reduction in the fair values of goodwill and intangible assets below their respective carrying amounts as ofDecember 31, 2021 and recorded an impairment charge of$40.2 million and$6.1 million regarding our goodwill and intangible assets, respectively, primarily due to the recent change in our market valuation and financial performance. There were no impairment charges record during the years endedDecember 31, 2020 and 2019.
Other Income, Net
Other income, net, primarily consisted of interest income, sublease income, and margin earned on commissions received from Medicare plan members transferred to us in 2010 through 2012 by a broker partner, partially offset by interest expense on finance leases and debt and other bank fees.
Our other income, net is summarized as follows (dollars in thousands):
Change Change
2021 $ % 2020 $ % 2019
Other income, net $ 755 $ 89 13 % $ 666 $ (1,424) (68) % $ 2,090
% of total revenue - % - % - %
71--------------------------------------------------------------------------------
2021 compared to 2020 - Other income, net, increased by
2020 compared to 2019 - Other income, net, decreased by
Provision for (Benefit from) Income Taxes
The following table presents our provision for (benefit from) income taxes for the years presented below (dollars in thousands):
Change Change
2021 $ % 2020 $ % 2019
Provision for (benefit $ (20,515) $ (29,054) (340) % $ 8,539 $ (8,073) (49) % $ 16,612
from) income taxes
Effective tax rate 16.4 % 15.8 % 19.9 %
2021 compared to 2020 - For the year ended December 31, 2021 , we recorded a
benefit from income taxes of $20.5 million representing an effective tax rate
of 16.4%. A benefit was recorded in 2021 due to the pretax loss. In 2021, the
effective tax rate was lower than the statutory tax rate due to stock-based
compensation adjustments, a valuation allowance of $3.2 million recorded on net
California state deferred tax assets, offset by research and development tax
credits. The 2020 effective tax rate was lower than the statutory tax rate
primarily due to stock-based compensation adjustments and research and
development credits, offset by state tax and lobbying expenses.
2020 compared to 2019 - For the year ended December 31, 2020 , we recorded a
provision for income taxes of $8.5 million representing an effective tax rate of
15.8%, which is lower than the effective tax rate of 19.9% in 2019 primarily due
to increased impact from stock-based compensation tax benefits and higher
research and development tax credits as compared to 2019.
Segment Information
We report segment information based on how our chief executive officer, who is our chief operating decision maker, or CODM, regularly reviews our operating results, allocates resources, and makes decisions regarding our business operations. The performance measures of our segments include total revenue and profit. Our business structure is comprised of two operating segments: •Medicare; and •Individual, Family and Small Business.
Our CODM does not separately evaluate assets by segment, with the exception of commissions receivable, by segment, and therefore assets by segment are not presented.
The Medicare segment consists primarily of amounts earned from our sale of
Medicare-related health insurance plans, including Medicare Advantage, Medicare
Supplement and Medicare Part D prescription drug plans, fees for the performance
of administrative services and to a lesser extent, amounts from our sale of
ancillary products to our Medicare-eligible customers, including but not limited
to, dental and vision plans, as well as amounts we are paid in connection with
our Medicare plan advertising program that allows Medicare-related carriers to
purchase advertising on a separate website developed, hosted and maintained by
us or pursuant to which we perform other services such as marketing and our
delivery and sale to third parties of Medicare-related health insurance leads
generated by our ecommerce platforms and our marketing activities.
72
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The Individual, Family and Small Business segment consists primarily of amounts
earned from our sale of individual, family and small business health insurance
plans and ancillary products sold to our non-Medicare-eligible customers,
including but not limited to, dental, vision, and short-term health insurance.
To a lesser extent, the Individual, Family and Small Business segment consists
of amounts earned from our online sponsorship program that allows carriers to
purchase advertising space in specific markets in a sponsorship area on our
website, our licensing to third parties the use of our health insurance
ecommerce technology, and our delivery and sale to third parties of individual
and family health insurance leads generated by our ecommerce platforms and our
marketing activities.
Marketing and advertising, customer care and enrollment, technology and content
and general and administrative operating expenses that are directly attributable
to a segment are reported within the applicable segment. Indirect marketing and
advertising, customer care and enrollment and technology and content operating
expenses are allocated to each segment based on usage. Other indirect general
and administrative operating expenses are managed in a corporate shared services
environment and, since they are not the responsibility of segment operating
management, are not allocated to the operating segments and instead reported
within Corporate.
Segment profit (loss) is calculated as total revenue for the applicable segment
less direct and allocated marketing and advertising, customer care and
enrollment, technology and content and general and administrative operating
expenses, excluding stock-based compensation expense, change in fair value of
earnout liability, depreciation and amortization expense, restructuring and
reorganization charges, and amortization of intangible assets.
73
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Our operating segment revenue and profit are summarized as follows (in
thousands):
Change Change
2021 $ % 2020 $ % 2019
Revenue
Medicare $ 471,217 $ (45,545) (9) % $ 516,762 $ 69,801 16 % $ 446,961
Individual, Family and Small
Business 66,982 970 1 % 66,012 6,772 11 % 59,240
Total revenue $ 538,199 (44,575) (8) % $ 582,774 76,573 15 % $ 506,201
Segment profit
Medicare segment profit (loss) (1) $ (12,079) (120,866) (111) % $ 108,787 (49,274) (31) % $ 158,061
Individual, Family and Small
Business segment profit (1) 45,705 5,390 13 % 40,315 15,954 65 % 24,361
Total segment profit (loss) 33,626 (115,476) (77) % 149,102 (33,320) (18) % 182,422
Corporate (56,325) 1,339 (2) % (57,664) (12,290) 27 % (45,374)
Stock-based compensation expense (32,857) (7,685) 31 % (25,172) (2,602) 12 % (22,570)
Depreciation and amortization(2) (18,331) (6,881) 60 % (11,450) (4,647) 68 %
(6,803)
Restructuring and reorganization charges (4,878) (4,878) * - - - %
-
Amortization of intangible assets (536) 957 (64) % (1,493) 694 (32) % (2,187) Other income, net 755 89 13 % 666 (1,424) (68) % 2,090
Income (loss) before income taxes
(331) %$ 53,989 $ (29,510) (35) %$ 83,499 _______ * Percentage calculated is not meaningful. (1) During the first quarter of 2021, we revised the calculation of segment profit by excluding amortization of capitalized software development costs to enhance comparability of our financial metrics with peer companies. The amortization of capitalized software was$12.9 million ,$7.8 million and$3.8 million for the years endedDecember 31, 2021 , 2020 and 2019, respectively. (2) Depreciation and amortization has been adjusted to include amortization of software development costs. Segment Revenue 2021 compared to 2020 - Medicare segment revenue declined$45.5 million or 9% in 2021 compared to 2020, primarily attributable to a$28.5 million decrease in sponsorship and advertising revenue and a$17.1 million decrease in Medicare segment commission revenue. The decrease in Medicare segment commission revenue was primarily due to a decrease in commission revenue for Medicare Supplement plans of$24.3 million and Medicare Part D prescription drug plans of$5.5 million , partially offset by an increase of$18.9 million in Medicare Advantage plan commission revenue. The increase in Medicare Advantage plan commission revenue was driven by 3% growth in Medicare Advantage approved members and higher constrained LTVs. The decrease in commission revenue for Medicare Supplement and Medicare Part D prescription drug plans was attributable to a decline in enrollment volume and a negative net adjustment of$8.4 million for the year endedDecember 31, 2021 , primarily due to lower LTVs. Revenue from the Individual, Family and Small Business segment grew$1.0 million , or 1% in 2021 compared to 2020, primarily attributable to a$2.0 million increase in commission revenue. The increase in commission revenue from Individual, Family and Small Business segment was primarily due to an increase in commission revenue from members approved during the period of$3.1 million , partially 74 -------------------------------------------------------------------------------- offset by adjustment revenue of$3.0 million in 2021 compared to 2020. We recognized$30.2 million adjustment revenue in 2021 due to stronger retention rates for earlier period cohorts of certain products based on our latest LTV assessment. 2020 compared to 2019 - Medicare segment revenue grew$69.8 million or 16% in 2020 compared to 2019, primarily attributable to an increase in Medicare Advantage plan related commission revenue of$35.2 million and an increase in other revenue of$34.6 million . Excluding$42.3 million revenue resulting from a change in estimate recorded in the fourth quarter of 2019 regarding expected cash commission collections for Medicare Advantage plans since we began selling such products through the third quarter of 2019, Medicare segment revenue increased 28% in 2020 compared to 2019.The increase in Medicare Advantage commission revenue was driven by 39% growth in Medicare Advantage approved members. The overall growth of our Medicare business was a result of our investment and marketing efforts in this segment and the increases in approved application volume due to the open enrollment period in the first quarter and the COVID-19 related special enrollment period introduced in the second quarter. The increase in other revenue was driven by an increase in advertising revenue due to increases in size and number of advertising arrangements. Revenue from Individual, Family and Small Business segment grew$6.8 million , or 11% in 2020 compared to 2019, primarily attributable to$6.3 million increase in commission revenue. The increase in commission revenue from Individual, Family and Small Business segment was primarily due to an increase in adjustment revenue of$7.0 million in 2020 compared to 2019, partially offset by$0.6 million decrease in commission revenue from members approved during the period. We recognized$39.8 million adjustment revenue in 2020 due to stronger retention rates for earlier period cohorts of certain products based on our latest LTV assessment. Segment Profit (Loss) 2021 compared to 2020 - Our Medicare segment loss was$12.1 million in 2021, a decrease of$120.9 million or 111%, compared to 2020. This was primarily due to a$75.3 million increase in operating expenses, excluding stock-based compensation expense, depreciation and amortization expenses, restructuring and reorganization charges, and amortization of intangible assets and by a$45.5 million decrease in revenue. The increase in operating expenses was mostly attributable to increases in marketing costs and customer care and enrollment costs as we continued to invest in telesales capacity, internal agent counts, agent productivity tools and incentives, customer engagement and retention initiatives, and enhancements to our technology platform. Our Medicare segment profit (loss) was negatively impacted by the underperformance of our internal agent force and certain of our marketing channels during the fourth quarter 2021 AEP. Our Individual, Family and Small Business segment profit was$45.7 million in 2021, an increase of$5.4 million or 13% compared to 2020. The increase was primarily driven by a$4.4 million decrease in operating expenses, excluding stock-based compensation expense, change in earnout liability, depreciation and amortization expenses, restructuring and reorganization charges, and amortization of intangible assets, and a$1.0 million increase in revenue. 2020 compared to 2019 - Our Medicare segment profit was$102.0 million in 2020, a decrease of$53.3 million or 34%, compared to 2019. This was primarily due to a$123.1 million increase in operating expenses, excluding stock-based compensation expense, change in earnout liability, depreciation and amortization expenses, and amortization of intangible assets, partially offset by a$69.8 million increase in revenue. The increase in operating expenses was mostly attributable to increases in marketing costs and customer care and enrollment costs as we continued to invest in telesales capacity, internal agent counts, agent productivity tools and incentives, customer engagement and retention initiatives, and enhancements to our technology platform. Our Medicare segment profit was negatively impacted by the underperformance of our outsourced external agent force and certain of our marketing 75 -------------------------------------------------------------------------------- channels during the fourth quarter 2020 AEP. We also believe that some external factors, including the COVID-19 pandemic and, to a lesser extent, the prolonged election cycle, might have influenced consumer demand. Our Individual, Family and Small Business segment profit was$39.4 million in 2020, an increase of$16.0 million or 69% compared to 2019. The increase was primarily driven by a$6.8 million increase in revenue and a$9.2 million decrease in operating expenses, excluding stock-based compensation expense, change in earnout liability, depreciation and amortization expenses, and amortization of intangible assets.
Liquidity and Capital Resources
Material Cash Requirements
Our material cash requirements include our operating leases and service and licensing obligations. See Note 10 - Leases in our Notes to Consolidated Financial Statements for the details of our operating lease obligations. We have entered into service and licensing agreements with third party vendors to provide various services, including network access, equipment maintenance and software licensing. The terms of these services and licensing agreements are generally up to three years. We record the related service and licensing expenses on a straight-line basis, although actual cash payment obligations under certain of these agreements fluctuate over the terms of the agreements. Short-term obligations were$7.7 million for leases and$10.5 million for service and licensing as ofDecember 31, 2021 . Long-term obligations were$43.3 million for leases and$11.0 million for service and licensing. We expect to fund these obligations through our existing cash and cash equivalents and cash generated from operations. Our future capital requirements will depend on many factors, including our enrollment volume, membership, retention rates, telesales conversion rates, and our level of investment in technology and content, marketing and advertising, customer care and enrollment, and other initiatives. In addition, our cash position could be impacted by the level of investments we make to pursue our strategy. To the extent that available funds are insufficient to fund our future activities or to execute our financial strategy, we may raise additional capital through bank debt, or public or private equity or debt financing to the extent such funding sources are available. Alternatively, we may decide to reduce expenses in order to manage liquidity. These reductions could adversely impact the growth of membership and revenue. We believe our current cash and cash equivalents, along with the proceeds from the term loan we obtained onFebruary 28, 2022 , and expected cash collections will be sufficient to fund our operations for at least twelve months after the filing date of this Annual Report on Form 10-K. Our cash, cash equivalents, and short-term marketable securities are summarized as follows (in thousands): December 31, 2021 December 31, 2020 Cash and cash equivalents $ 81,926 $ 43,759 Short-term marketable securities 41,306 49,620 Total cash, cash equivalents, and short-term marketable securities $ 123,232 $ 93,379 As ofDecember 31, 2021 and 2020, our cash and cash equivalents totaled$81.9 million and$43.8 million , respectively. Cash equivalents, which are comprised of financial instruments with an original maturity of 90 days or less from the date of purchase, primarily consist of money market funds. The 76 -------------------------------------------------------------------------------- increase in cash and cash equivalents reflects$213.2 million of net cash provided by financing activities, partially offset by$12.6 million of net cash used in investing activities and$162.6 million of net cash used in operating activities.
Our cash flows are summarized as follows (in thousands):
Year Ended December 31,
2021 2020 2019
Net cash used in operating activities
(16,944)
Net cash provided by financing activities 213,241 201,249
102,141 Operating Activities Net cash used in operating activities primarily consists of net loss, adjusted for certain non-cash items, including change in fair value of earnout liability, deferred income taxes, stock-based compensation expense, depreciation and amortization, amortization of intangible assets and internally developed software, other non-cash items, and the effect of changes in working capital and other activities. Collection of commissions receivable depends upon the timing of our receipt of commission payments and associated commission reports from health insurance carriers. If we were to experience a delay in receiving a commission payment from a health insurance carrier within a quarter, our operating cash flows for that quarter could be adversely impacted. While we recognize constrained LTV as revenue at the time applications are approved, our collection of the cash commissions resulting from approved applications generally occurs over a number of years. The expense associated with approved applications, however, is generally incurred at the time of enrollment. As a result, the net cash flow resulting from approved applications is generally negative in the period of revenue recognition and generally becomes positive over the lifetime of the member. In periods of membership growth, cash receipts associated with new and continuing members may be less than the cash outlays to acquire new members. A significant portion of our marketing and advertising expenses is driven by the number of health insurance applications submitted on our ecommerce platforms. Since our marketing and advertising costs are expensed and generally paid as incurred, and since commission revenue is recognized upon approval of a member but commission payments are paid to us over time, our operating cash flows could be adversely impacted by a substantial increase in the volume of applications submitted during a quarter or positively impacted by a substantial decline in the volume of applications submitted during a quarter. During the Medicare AEP which takes place during the last quarter of each year, we experience an increase in the number of submitted Medicare-related health insurance applications and marketing and advertising expenses compared to outside of Medicare annual enrollment periods. Similarly, during open enrollment periods for individual and family health insurance plans which takes place during the first quarter of each year, we experience an increase in the number of submitted individual and family plan health insurance applications and marketing and advertising expenses compared to outside of open enrollment periods. The timing of open enrollment periods for individual and family health insurance and the Medicare AEP and open enrollment period for Medicare-related health insurance can positively or negatively affect our cash flows during each quarter. Year EndedDecember 31, 2021 - Net cash used in operating activities was$162.6 million during the year endedDecember 31, 2021 , primarily driven by cash used from changes in net operating assets and liabilities of$136.3 million and by a net loss of$104.4 million , partly offset by adjustments for non-cash items of$78.0 million . Cash used from changes in net operating assets and liabilities during the year endedDecember 31, 2021 primarily consisted of an increase of$116.0 million in contract assets - commissions receivable, a decrease of$23.1 million in accounts payables, an increase of$7.9 million in 77 -------------------------------------------------------------------------------- prepaid expenses, and a decrease of$4.1 million in accrued compensation and benefits, partially offset by increases of$18.6 million in accrued marketing expenses. Adjustments for non-cash items primarily consisted of$32.9 million of stock-based compensation expense,$12.9 million of amortization of internally-developed software, and$0.5 million of amortization of intangible assets, partially offset by a$21.5 million decline in deferred income taxes. Year EndedDecember 31, 2020 - Net cash used in operating activities was$107.9 million during the year endedDecember 31, 2020 , primarily driven by cash used from changes in net operating assets and liabilities of$201.3 million , partially offset by net income of$45.5 million and adjustments for non-cash items of$48.0 million . Cash used from changes in net operating assets and liabilities during the year endedDecember 31, 2020 primarily consisted of an increase of$205.2 million in contract assets - commissions receivable, a decrease of$9.0 million in accrued compensation and benefits, an increase of$6.2 million in prepaid expenses and other assets and a decrease of$2.3 million in deferred revenue, partially offset by increases of$12.3 million in accounts payable,$5.7 million in accrued marketing expenses, and$2.8 million in accrued expenses and other liabilities. Adjustments for non-cash items primarily consisted of$25.2 million of stock-based compensation expense,$8.8 million change in deferred income taxes,$7.8 million of amortization of internally-developed software, and$1.5 million of amortization of intangible assets. Year EndedDecember 31, 2019 - Net cash used in operating activities was$71.5 million in 2019, consisted of cash used for working capital needs and other activities of$209.5 million , partially offset by net income of$66.9 million and adjustments for non-cash items totaling$71.1 million . Adjustments for non-cash items primarily consisted of$24.1 million change in fair value of earnout liabilities,$22.6 million of stock-based compensation expense,$16.2 million increase in deferred income taxes,$3.8 million of amortization of internally-developed software,$3.0 million of depreciation and amortization, and$2.2 million of amortization of intangible assets. The cash decrease resulting from changes in working capital in 2019 primarily consisted of$243.4 million increase in commissions receivable, partially offset by increases of$19.7 million in accounts payable,$8.8 million in accrued compensation and benefits,$1.9 million in accrued expenses and other liabilities,$1.7 million in deferred revenue, and$1.0 million in accrued marketing expenses.
Investing Activities
Our investing activities primarily consist of purchases and redemption of marketable securities, purchases of computer hardware and software to enhance our website and customer care operations, leasehold improvements related to facilities expansion, internal-use software and the purchase of certain intangible assets.
Year EndedDecember 31, 2021 - Net cash used in investing activities of$12.6 million during 2021 mainly consisted of$103.1 million used to purchase marketable securities,$17.0 million of capitalized internal-use software and website development costs, and$3.9 million used to purchase property and equipment and other assets, partially offset by$111.3 million of proceeds from redemption and maturities of marketable securities. Year EndedDecember 31, 2020 - Net cash used in investing activities of$73.3 million during 2020 mainly consisted of$180.5 million used to purchase marketable securities,$16.0 million of capitalized internal-use software and website development costs, and$7.8 million used to purchase property and equipment and other assets, partially offset by$131.0 million of proceeds from redemption and maturities of marketable securities. Year EndedDecember 31, 2019 - Net cash used in investing activities of$16.9 million during 2019 mainly consisted of$10.2 million of capitalized internal-use software and website development costs and$6.6 million used to purchase property and equipment and other assets. 78 --------------------------------------------------------------------------------
Financing Activities
Year Ended
Year EndedDecember 31, 2020 - Net cash provided by financing activities of$201.2 million during 2020 was primarily attributable to$228.0 million proceeds from issuance of common stock, net of issuance costs and$1.9 million of net proceeds from exercise of common stock options, partially offset by$19.8 million cash used for share repurchases to satisfy employee tax withholding obligations and$8.8 million of acquisition-related contingent consideration payments. Year EndedDecember 31, 2019 - Net cash provided by financing activities of$102.1 million during 2019 was primarily attributable to$126.1 million proceeds from issuance of common stock, net of issuance costs and$5.5 million of net proceeds from exercise of common stock options, partially offset by$14.3 million cash used for share repurchases to satisfy employee tax withholding obligations,$9.5 million of acquisition-related contingent payments, and$5.0 million repayment of debt. See Note 5 - Equity and Note 6 - Convertible Preferred Stock in our Notes to Consolidated Financial Statements for information regarding our equity offering in 2020 and our preferred stock transaction in 2021, respectively. We also had$3.2 million and$3.4 million in restricted cash as ofDecember 31, 2021 andDecember 31, 2020 , respectively. As ofDecember 31, 2021 and 2020, we had 1.3 million and 1.2 million shares held in treasury stock, respectively, that were shares repurchased to satisfy tax withholding obligations. As ofDecember 31, 2021 and 2020, we had a total of 12.0 million and 11.8 million shares held in treasury stock, respectively, including 10.7 million shares previously repurchased.
Common Stock Issuance
InJanuary 2019 , we entered into an underwriting agreement to issue and sell a total of 2,760,000 shares of our common stock in a public offering, which total included the exercise in full of the underwriters' option to purchase 360,000 additional shares of common stock, at a price to the public of$48.50 per share, for total net proceeds of$126.2 million , after deducting underwriting discounts, commissions and offering expenses. InMarch 2020 , we entered into an underwriting agreement to issue and sell a total of 2,070,000 shares of common stock, which total included the exercise in full of the underwriters' option to purchase 270,000 additional shares of common stock, at a price to the public of$115.00 per share. Net proceeds from the offering were approximately$228.0 million after deducting underwriting discounts, commissions and expenses of the offering.
Convertible Preferred Stock
OnApril 30, 2021 (the "Closing Date"), we issued and sold 2,250,000 shares of our newly designated Series A preferred stock at an aggregate purchase price of$225.0 million to H.I.G., at a price of$100 (the "Stated Value" per share of Series A preferred stock) per share (the "Private Placement"). We received$214.0 million net proceeds from the Private Placement with H.I.G., net of sales commissions and certain transaction fees. 79 -------------------------------------------------------------------------------- Dividends on our outstanding shares of Series A preferred stock accrue daily at 8% per annum on the Stated Value per share and compound semiannually, payable in kind untilApril 30, 2023 , which is the second anniversary of the Closing Date onJune 30 andDecember 31 of each year, beginning onJune 30, 2021 , and will thereafter 6% payable in kind and 2% payable in cash in arrears onJune 30 andDecember 31 of each year, beginning onJune 30, 2023 (each, a "Cash Dividend Payment Date"). Dividends payable in kind will be cumulative. The Series A preferred stock also participates, on an as-converted basis (without regard to conversion limitations) in all dividends paid to the holders of our common stock. If we fail to declare and pay full cash dividend payments as required by the certificate of designations for the Series A preferred stock for two consecutive Cash Dividend Payment Dates, the cash dividend rate then in effect shall increase one time by 2%, retroactive to the first day of the semiannual period immediately preceding the first Cash Dividend Payment Date at which we failed to pay such accrued cash dividends, until such failure to pay full cash dividends is cured (at which time the dividend rate shall return to the rate prior to such increase). The dividend rights of the Series A preferred stock are senior to all of our other equity securities. Beginning onApril 30, 2027 , which is the sixth anniversary of the Closing Date, each holder of Series A preferred stock will have the right to require us to redeem all or any portion of the Series A preferred stock for cash at a price calculated as set forth in the certificate of designations. In addition, upon certain change of control events, holders of Series A preferred stock can require us, subject to certain exceptions, to repurchase any or all of their Series A preferred stock. See Note 6 - Convertible Preferred Stock of the Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K for more information. Term Loan Credit Agreement We entered into the Term Loan Credit Agreement withBlue Torch Finance LLC , as administrative agent and collateral agent, and the other lenders party thereto inFebruary 2022 . The Term Loan Credit Agreement provides for a$70.0 million secured term loan credit facility, which term loans were made available to us onFebruary 28, 2022 . We terminated our credit agreement with Royal Bank of Canada ("RBC"), pursuant to which we had an up to$75 million revolving credit facility in connection with our receiving the loan under the Term Loan Credit Agreement. See Note 12 - Debt in our Notes to Consolidated Financial Statements regarding our credit agreement with RBC. The proceeds of the loans under the Term Loan Credit Agreement may be used for working capital and general corporate purposes, to refinance our credit agreement with Royal Bank of Canada and to pay fees and expenses in connection with the entry into the Term Loan Credit Agreement. The term loan bears interest, at our option, at either a rate based on the London Interbank Offered Rate ("LIBOR") for the applicable interest period or a base rate, in each case plus a margin. The base rate is the highest of the prime rate, the federal funds rate plus 0.50% and one month adjusted LIBOR plus 1.0%. The margin is 7.50% for LIBOR loans and 6.50% for base rate loans and the Term Loan Credit Agreement includes customary "fallback" provisions with respect to potential transition from the LIBOR. The outstanding obligations under the Term Loan Credit Agreement are payable in full on the maturity date. The Term Loan Credit Agreement matures in February of 2025. We have the right to prepay the loans under the Term Loan Credit Agreement in whole or in part at any time, subject, in the case of certain mandatory prepayments or any voluntary prepayment of the loans under the Term Loan Credit Agreement afterFebruary 28, 2023 , to an exit fee. Our obligations under the Term Loan Credit Agreement are guaranteed by certain of our material domestic subsidiaries and substantially all of our assets and the assets of such guarantors, in each case, subject to customary exclusions. We are obligated to pay administration fees in connection with the Term Loan Credit Agreement. 80 --------------------------------------------------------------------------------
Acquisition
OnJanuary 22, 2018 , we completed our acquisition of Wealth, Health andLife Advisors, LLC , more commonly known as GoMedigap, a technology-enabled provider of Medicare Supplement enrollment services. The acquisition price paid at closing of the transaction consisted of cash of$15.0 million , less$0.1 million cash acquired, and approximately 294,637 shares of our common stock. In addition, we were obligated to pay an additional$20.0 million in cash and 589,275 shares of our common stock, subject to the terms of the acquisition agreement and upon final determination of the achievement of certain milestones in 2018 and 2019. The first and second earnout liability payments were made inFebruary 2019 andJanuary 2020 , respectively. See Note 4 - Fair Value Measurements of our Notes to Consolidated Financial Statements for the discussion on the milestone payments.
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity withU.S. generally accepted accounting principles, orU.S. GAAP, requires us to make judgments, assumptions, and estimates that affect the amounts reported in the consolidated financial statements and the accompanying notes. These estimates and assumptions are based on current facts, historical experience, and various other factors that we believe are reasonable under the circumstances to determine reported amounts of assets, liabilities, revenue and expenses that are not readily apparent from other sources. To the extent there are material differences between our estimates and the actual results, our future consolidated results of comprehensive income (loss) may be affected.
Among our significant accounting policies, which are described in Note 1 - Summary of Business and Significant Accounting Policies in our Notes to Consolidated Financial Statements, the following accounting policies and specific estimates involve a greater degree of judgments and complexity:
•Revenue recognition and contract assets - commission receivable; •Stock-based compensation; and •Accounting for income taxes.
During the year ended
Revenue Recognition and Contract Assets - Commission Receivable
Commission Revenue - Our commission revenue results from approval of an
application from health insurance carriers, which we define as our customers
under ASC 606. Our commission revenue is primarily comprised of commissions from
health insurance carriers which is computed using the estimated constrained
lifetime values as the "constrained LTVs" of commission payments that we expect
to receive. Our commissions include regular payments with respect to
administrative services we perform. Our Medicare Supplement plan commissions
include certain bonus payments, which are generally based on our attaining
predetermined target sales levels or other objectives, as determined by the
health insurance carriers.
We estimate commission revenue for each insurance product by using a portfolio
approach to a group of approved members by plan type and the effective month of
the relevant plan, which we refer to as "cohorts". We estimate the commissions
we expect to collect for each approved member cohort by evaluating various
factors, including but not limited to, commission rates, carrier mix, estimated
average plan duration, the regulatory environment, and cancellations of
insurance plans offered by health insurance carriers with which we have a
relationship. Contract assets - commissions receivable represent the variable
consideration for policies that have not renewed yet and therefore are subject
to the same assumptions, judgements and estimates used when recognizing revenue
as noted above.
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For Medicare-related, individual and family and ancillary health insurance
plans, our services are complete once a submitted application is approved by the
relevant health insurance carrier. Accordingly, we recognize commission revenue
based upon the total estimated lifetime commissions we expect to receive for
selling the plan after the carrier approves an application, net of an estimated
constraint. We refer to these as estimated and constrained LTVs for the plan. We
provide annual services in selling and renewing small business health insurance
plans; therefore, we recognize small business health insurance plan commission
revenue at the time the plan is approved by the carrier, and when it renews each
year thereafter, equal to the estimated commissions we expect to collect from
the plan over the following 12 months. Our estimate of commission revenue for
each product line is based on a number of assumptions, which include, but are
not limited to, estimating conversion of an approved member to a paying member,
forecasting average plan duration and forecasting the commission amounts likely
to be received per member. These assumptions are based on our analysis of
historical trends for the different cohorts and incorporate management's
judgment in interpreting those trends to apply the constraints discussed below.
The estimated average plan duration used to calculate Medicare health insurance
plan LTVs historically has been approximately 3-5 years, while the estimated
average plan duration used to calculate the LTV for major medical individual and
family health insurance plans historically has been approximately 1.5 to 2
years. To the extent we make changes to the assumptions we use to calculate
constrained LTVs, we recognize any material impact of the changes to commission
revenue in the reporting period in which the change is made, including revisions
of estimated lifetime commissions either below or in excess of previously
estimated constrained LTV recognized as revenue.
We recognize revenue for members approved during the period by applying the
latest estimated constrained LTV for that product. We recognize adjustment
revenue for members approved in prior periods when our cash collections are
different from the estimated constrained LTVs. Adjustment revenue is a result of
a change in estimate of expected cash collections when actual cash collections
have indicated a trend that is different from the estimated constrained LTV for
the revenue recognized at the time of approval. Adjustment revenue can be
positive or negative and we recognize adjustment revenue when we do not believe
there is a probable reversal. We assess the risk of reversal based on
statistical analysis given historical information and consideration of the
constraints used at the time of approval.
Adjustment revenue can have a significant favorable or unfavorable impact on our
revenue and we seek to enhance our LTV estimation models to improve the accuracy
and to reduce the fluctuations of our LTV estimates.
Other Revenue - Sponsorship, Advertising and Other Services - Our sponsorship
and advertising program allows carriers to purchase non-Medicare advertising
space in specific markets in a sponsorship area on our website. In return, we
are typically paid a fee, which is recognized over the period that advertising
is displayed, and often a performance fee based on metrics such as submitted
health insurance applications, which is recognized when control has been
transferred. We also offer Medicare plan related advertising and other services,
which include website development, hosting and maintenance. In these instances,
we are typically paid a fixed, up-front fee, which we recognize as revenue as
the service is rendered ratably over the service period.
Stock-Based Compensation
We recognize stock-based compensation expense in the accompanying Consolidated
Statements of Comprehensive Income (Loss) based on the fair value of our
stock-based awards over their respective vesting periods, which is generally
four years. The estimated attainment of performance-based awards and related
expense is based on the expectations of revenue and earnings target achievement.
The estimated fair value of performance awards with market conditions is
determined using the Monte-Carlo simulation model. The assumptions used in
calculating the fair value of stock-based payment awards and expected attainment
of performance-based awards represent our best estimates,
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but these estimates involve inherent uncertainties and the application of
management judgment. We will continue to use judgment in evaluating the expected
term and volatility related to our own stock-based awards on a prospective
basis, and incorporating these factors into the model. Changes in key
assumptions could significantly impact the valuation of such instruments. The
estimated grant date fair value of our stock options is determined using the
Black-Scholes-Merton pricing model and a single option award approach. The
weighted-average expected term for stock options granted is calculated using
historical option exercise behavior. The dividend yield is determined by
dividing the expected per share dividend during the coming year by the grant
date stock price. Through December 31, 2021 , we had not declared or paid any
cash dividends to common stockholders, and we do not expect to pay any in the
foreseeable future. We base the risk-free interest rate on the implied yield
currently available on U.S. Treasury zero-coupon issues with a remaining term
equal to the expected term of our stock options. Expected volatility is
determined using a combination of the implied volatility of publicly traded
options in our stock and historical volatility of our stock price.
Accounting for Income Taxes
We account for income taxes using the liability method. Deferred income taxes
are determined based on the differences between the financial reporting and tax
bases of assets and liabilities, using enacted statutory tax rates in effect for
the year in which the differences are expected to reverse.
Since tax laws and financial accounting standards differ in their recognition
and measurement of assets, liabilities, equity, revenues, expenses, gains and
losses, differences arise between the amount of taxable income and pretax
financial income for a year and between the tax bases of assets or liabilities
and their reported amounts in our financial statements. Because we assume that
the reported amounts of assets and liabilities will be recovered and settled,
respectively, a difference between the tax basis of an asset or a liability and
its reported amount in the balance sheet will result in a taxable or a
deductible amount in some future years when the related liabilities are settled
or the reported amounts of the assets are recovered, which gives rise to a
deferred tax asset or liability. We must then assess the likelihood that our
deferred tax assets will be recovered from future taxable income and to the
extent we believe that recovery does not meet the more likely than not criteria,
we must establish a valuation allowance. Management judgment is required in
determining any valuation allowance recorded against our net deferred tax
assets.
As part of the process of preparing our consolidated financial statements, we
are required to estimate our income taxes. This process involves estimating our
actual current tax expense together with assessing temporary differences that
may result in deferred tax assets.
Assessing the realizability of our deferred tax assets is dependent upon several
factors, including the likelihood and amount, if any, of future taxable income
in relevant jurisdictions during the periods in which those temporary
differences become deductible. We forecast taxable income by considering all
available positive and negative evidence, including our history of operating
income and losses and our financial plans and estimates that we use to manage
the business. These assumptions require significant judgment about future
taxable income. As a result, the amount of deferred tax assets considered
realizable is subject to adjustment in future periods if estimates of future
taxable income change.
Future changes in various factors, such as the amount of stock-based
compensation we record during the period and the related tax benefit we realize
upon the exercise of employee stock options, potential limitations on the use of
our federal and state net operating loss credit carry forwards, pending or
future tax law changes including rate changes and the tax benefit from or
limitations on our ability to utilize research and development credits, the
amount of non-deductible lobbying and acquisition-related costs, changes in our
valuation allowance and state and foreign taxes, would impact our estimates, and
as a result, could affect our effective tax rate and the amount of income tax
expense we record, and pay, in future periods.
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See Note 1 - Summary of Business and Significant Accounting Policies in the Notes to Consolidated Financial Statements for the recently issued accounting standards that could have an effect on us.
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