1life Healthcare (ONEM) 10-Q2022 Q1 Quarterly report

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1Life Healthcare, Inc. (“1Life”) was incorporated in Delaware on July 25, 2002. 1Life’s headquarters are located in San Francisco, California. 1Life has developed a modernized healthcare membership model based on direct consumer enrollment and third-party sponsorship across commercially insured and Medicare populations. Our membership model includes access to 24/7 digital health services paired with in-office care routinely covered by most health care payers, and allows the Company to engage in value-based care across all age groups, including through At-Risk arrangements as defined in Note 2 “Summary of Significant Accounting Policies” with Medicare Advantage payers and the Center for Medicare & Medicaid Services ("CMS"), in which the Company is responsible for managing a range of healthcare services and associated costs of its members. 1Life is also an administrative and managerial services company that provides services pursuant to contracts with physician-owned professional corporations (“One Medical PCs”) that provide medical services virtually and in-office.

On September 1, 2021, 1Life completed the acquisition of Iora Health, Inc. ("Iora Health"), a human-centered, value-based primary care group with built-for-purpose technology focused on serving the Medicare population.

Iora Health and Iora Senior Health, Inc. (“Iora Senior Health”) are administrative and managerial service companies that provide services pursuant to contracts with physician-owned professional corporations (“Iora PCs”, together with the One Medical PCs, the “PCs”) that provide medical services virtually and in-office.

Iora Health is an administrative and managerial services company that provides services pursuant to contracts with Iora Health NE DCE, LLC, a limited liability company that participates in the Center for Medicare and Medicaid Services’ direct contracting model (the “DCE entity”). Iora Health, Iora Senior Health, the Iora PCs and the DCE entity are collectively referred to herein as “Iora”. See Note 7 "Business Combinations" to the unaudited condensed consolidated financial statements.

1Life, Iora Health, Iora Senior Health, the PCs and the DCE entity are collectively referred to herein as the “Company”. 1Life and the One Medical PCs operate under the brand name One Medical.

The preparation of condensed consolidated financial statements and related disclosures in conformity with U.S. GAAP and regulations of the SEC requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Estimates include, but are not limited to, revenue recognition, liability for medical claims incurred in the period but not yet reported (“IBNR”), valuation of certain assets and liabilities acquired from business combinations, and stock-based compensation. Actual results could differ from these estimates and may result in material effects on the Company’s operating results and financial position.

The Company considers all short-term, highly liquid investments purchased with an original maturity of three months or less at the date of purchase to be cash equivalents. Cash deposits are all in financial institutions in the United States. Cash and cash equivalents consist of cash on deposit, investments in money market funds and commercial paper. Restricted cash represents cash held under letters of credit for various leases and certain At-Risk arrangements. The expected duration of restrictions on the Company’s restricted cash generally ranges from 1 to 8 years.

The reconciliation of cash, cash equivalents and restricted cash reported within the applicable balance sheet line items that sum to the total of the same such amount shown in the condensed consolidated statements of cash flows is as follows:

The table below presents the customers or payers that individually represented 10% or more of the Company’s accounts receivable, net balance as of March 31, 2022 and December 31, 2021. 

The table below presents the customers or payers that individually represented 10% or more of the Company’s net revenue for the three months ended March 31, 2022 and 2021.

The Company’s significant accounting policies are discussed in Note 2 “Summary of Significant Accounting Policies” in Item 15 of its Form 10-K for the fiscal year ended December 31, 2021.

In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance which requires annual disclosures that increase the transparency of transactions involving government grants, including (1) the types of transactions, (2) the accounting for those transactions, and (3) the effect of those transactions on an entity’s financial statements. The amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2021. The Company adopted the standard on January 1, 2022 on a prospective basis. The adoption did not have a material impact to the Company's condensed consolidated financial statements.

There have been no recent accounting pronouncements or changes in accounting pronouncements that are of significance or potential significance to the Company as of March 31, 2022.

1Life, Iora Health and Iora Senior Health's agreements with the PCs generally consist of both Administrative Services Agreements (“ASAs”), which provide for various administrative and management services to be provided by 1Life, Iora Health or Iora Senior Health, respectively, to the PCs, and succession agreements, which provide for transition of ownership of the PCs under certain conditions ("Succession Agreements").

The contractual arrangement to provide management services allows 1Life, Iora Health or Iora Senior Health to direct the economic activities that most significantly affect the PCs. Accordingly, 1Life, Iora Health or Iora Senior Health is the primary beneficiary of the PCs and consolidates the PCs under the VIE model. Furthermore, as a direct result of nominal initial equity contributions by the physicians, the financial support 1Life, Iora Health or Iora Senior Health provides to the PCs (e.g. loans) and the provisions of the nominee shareholder succession arrangements described above, the interests held by noncontrolling interest holders lack economic substance and do not provide them with the ability to participate in the residual

The following tables present information about the Company’s financial assets measured at fair value on a recurring basis:

Our financial assets are valued using market prices on both active markets (Level 1) and less active markets (Level 2). Level 1 instrument valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets. Level 2 instrument valuations are obtained from readily available pricing sources for comparable instruments, identical instruments in less active markets, or models using market observable inputs.

During the three months ended March 31, 2022 and 2021, there were no transfers between Level 1, Level 2 and Level 3.

The fair value of the 2025 Notes was $275,210 and $288,461 as of March 31, 2022 and December 31, 2021, respectively. The fair value was determined based on the closing trading price of the 2025 Notes as of the last day of trading for the period. The fair value of the 2025 Notes is primarily affected by the trading price of the Company's common stock and market interest rates. The fair value of the 2025 Notes is considered a Level 2 measurement as they are not actively traded.

At March 31, 2022 and December 31, 2021, the Company’s cash equivalents and marketable securities were as follows:

The following table summarizes the Company’s net revenue by primary source:

The CARES Act was enacted on March 27, 2020 to provide economic relief to those impacted by the COVID-19 pandemic. The CARES Act includes various tax and lending provisions, among others. Under the CARES Act, the Company received an income grant of $1,763 from the Provider Relief Fund administered by the Health and Human Services ("HHS") during the three months ended March 31, 2021. The Company did not receive any income grants from the HHS for the three months ended March 31, 2022. Management has concluded that the Company met conditions of the grant funds and has recognized it as Grant income for the three months ended March 31, 2021.

During the three months ended March 31, 2022, the Company recognized revenue of $19,015, which was included in the beginning deferred revenue balances as of January 1, 2022. During the three months ended March 31, 2021, the Company recognized revenue of $14,321, which was included in the beginning deferred revenue balances as of January 1, 2021.

As of March 31, 2022, a total of $5,571 is included within deferred revenue related to variable consideration, of which $4,425 is classified as non-current as it will not be recognized within the next twelve months. The estimate of variable consideration is based on the Company’s assessment of historical, current, and forecasted performance.

As summarized in the table below, the Company recorded contract assets and deferred revenue as a result of timing differences between the Company’s performance and the customer’s payment.

Capitated accounts receivable and payable related to At-Risk arrangements are recorded net in the condensed consolidated balance sheets when a legal right of offset exists. A right of offset exists when all of the following conditions are met: 1) each of two parties (the Company and the third-party payer) owes the other determinable amounts; 2) the reporting party (the Company) has the right to offset the amount owed with the amount owed by the other party (the third-party payer); 3) the reporting party (the Company) intends to offset; and 4) the right of offset is enforceable by law. All of the aforementioned conditions were met as of March 31, 2022.

Components of capitated accounts payable, net is summarized below:

The Company does not disclose the value of remaining performance obligations for (i) contracts with an original contract term of one year or less, (ii) contracts for which the Company recognizes revenue at the amount to which it has the right to invoice when that amount corresponds directly with the value of services performed, and (iii) variable consideration allocated entirely to a wholly unsatisfied performance obligation or to a wholly unsatisfied distinct service that forms part of a single performance obligation. For those contracts that do not meet the above criteria, the Company’s remaining performance obligation as of March 31, 2022, is expected to be recognized as follows:

Most leases contain clauses for renewal at the Company’s option with renewal terms that generally extend the lease term from 1 to 7 years. Certain lease agreements contain options to terminate the lease before maturity. The Company does not have any lease contracts with the option to purchase as of March 31, 2022. The Company’s lease agreements do not contain any significant residual value guarantees or material restrictive covenants imposed by the leases.

Certain of the Company’s furniture and fixtures and lab equipment are held under finance leases. Finance-lease-related assets are included in property and equipment, net in the condensed consolidated balance sheets and are immaterial as of March 31, 2022.

The components of operating lease costs were as follows:

Other information related to leases was as follows:

At the lease commencement date, the discount rate implicit in the lease is used to discount the lease liability if readily determinable. If not readily determinable or leases do not contain an implicit rate, the Company’s incremental borrowing rate is used as the discount rate. Management determines the appropriate incremental borrowing rates for each of its leases based on the remaining lease term at lease commencement.

Future minimum lease payments under non-cancellable operating leases as of March 31, 2022 were as follows (excluding the effect of lease incentives to be received that are recorded in other current assets of $13,990 which serve to reduce total lease payments):

On September 1, 2021 ("Acquisition Date"), 1Life acquired all outstanding equity and capital stock of Iora Health, a human-centered, value-based primary care group with built-for-purpose technology focused on serving the Medicare population, for an aggregate purchase consideration of $1,424,836, which was paid through the issuance of 1Life common shares with a fair value of $1,313,312, in part by cash of $62,881, and in part by stock options of Iora assumed by 1Life towards pre-combination services of $48,643. The acquisition was accounted for as a business combination. Subsequent to the Acquisition Date, the Company recorded $2,370 decrease to goodwill during the measurement period in the first quarter of 2022. The preliminary purchase price allocations resulted in $1,117,913 of goodwill and $363,031 of acquired identifiable intangible assets related to Iora trade name and contracts in existing geographies valued using the income method. Goodwill recorded in the acquisition is not expected to be deductible for tax purposes. Goodwill was primarily attributable to the planned growth in new geographies, synergies expected to be achieved in the combined operations of 1Life and Iora, and assembled workforce of Iora.

The acquisition expanded the Company's reach to become a premier national human-centered, technology-powered, value-based primary care platform across all age groups. The acquisition allows the Company to participate in At-Risk arrangements with Medicare Advantage payers and CMS, in which the Company is responsible for managing a range of healthcare services and associated costs of its members.

The following table presents the preliminary purchase price allocation recorded in the Company's unaudited condensed consolidated balance sheet as of the Acquisition Date:

The Company allocated the purchase price to tangible and identified intangible assets acquired and liabilities assumed based on the preliminary estimates of fair values, which were determined primarily using the income method based on estimates and assumptions made by management at the time of the Iora acquisition and are subject to change during the measurement period which is not expected to exceed one year. The primary tasks that are required to be completed include valuation of certain assets and liabilities, including any related tax impacts. Any adjustments to the preliminary purchase price allocation identified during the measurement period will be recognized in the period in which the adjustments are determined.

The Company recognized a net deferred tax liability of $80,537 in this business combination that is included in long-term liabilities in the accompanying condensed consolidated balance sheet. This primarily related to identified intangible assets recorded in acquisition for which there is no tax basis.

Identifiable intangible assets are comprised of the following:

Net tangible assets were valued at their respective carrying amounts as of the Acquisition Date, which approximated their fair values. Medicare Advantage contracts and CMS Direct Contracting contract represent the At-Risk arrangements that Iora has with Medicare Advantage plans or directly with CMS. Trade names represent the Company’s right to the Iora trade names and associated design.

The following unaudited pro forma financial information summarizes the combined results of operations for 1Life and Iora as if the companies were combined as of the beginning of fiscal year 2020. The unaudited pro forma information includes transaction and integration costs, adjustments to amortization and depreciation for intangible assets and property and equipment acquired, stock-based compensation costs and tax effects.

The table below reflects the impact of material adjustments to the unaudited pro forma results for the three months ended March 31, 2021 that are directly attributable to the acquisition:

The unaudited pro forma information presented below is for informational purposes only and is not necessarily indicative of our condensed consolidated results of operations of the combined business had the acquisition actually occurred at the beginning of fiscal year 2020 or the results of our future operations of the combined businesses.

As of March 31, 2022 and December 31, 2021, goodwill was $1,145,094 and $1,147,464, respectively. Due to the recent decline in the Company's stock price and uncertainties in general economic conditions, the Company considered the recoverability of its goodwill and determined, during three months ended March 31, 2022, there were no events or circumstances that have changed since the last annual test that could more likely than not reduce the fair value of the Company's reporting unit below its carrying value. No goodwill impairments were recorded during the three months ended March 31, 2022. Changes in economic and operating conditions and any further decline in the Company's stock price could result in potential goodwill impairment in future periods.

Goodwill balances as of March 31, 2022 and December 31, 2021 were as follows:

The following summarizes the Company’s intangible assets and accumulated amortization as of March 31, 2022:

The following summarizes the Company’s intangible assets and accumulated amortization as of December 31, 2021:

The Company did not record any amortization expense of intangible assets for the three months ended March 31, 2021.

Purchased intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable.

As of March 31, 2022, estimated future amortization expense related to intangible assets were as follows:

In May 2020, the Company issued and sold $275,000 aggregate principal amount of 3.0% convertible senior notes due 2025 in a private offering exempt from the registration requirements of the Securities Act of 1933, and in June 2020, the Company issued an additional $41,250 aggregate principal amount of such notes pursuant to the exercise in full of the over-allotment option by the initial purchasers of the notes (the “2025 Notes”). The 2025 Notes are unsecured obligations and bear interest at a fixed rate of 3.0% per annum, payable semi-annually in arrears on June 15 and December 15 of each year, commencing on December 15, 2020. The 2025 Notes will mature on June 15, 2025, unless earlier converted, redeemed or repurchased. The total net proceeds from the debt offering, after deducting the initial purchasers’ commissions and other issuance costs, were $306,868. 

Each $1 principal amount of the 2025 Notes will initially be convertible into 0.0225052 shares of the Company’s common stock, which is equivalent to an initial conversion price of $44.43 per share, subject to adjustment upon the occurrence of specified events but not for any accrued and unpaid interest.

Holders may convert the 2025 Notes at their option at any time prior to the close of business on the business day immediately preceding March 15, 2025 only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on September 30, 2020 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the 5 business day period after any 10 consecutive trading day period (the “measurement period”) in which the trading price (as defined below) per $1 principal amount of the 2025 Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day; (3) if the Company calls such 2025 Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the

On or after March 15, 2025 until the close of business on the business day immediately preceding the maturity date, holders may convert all or any portion of their 2025 Notes at any time, regardless of the foregoing circumstances. Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election and in accordance with the terms of the indenture governing the 2025 Notes. If the Company satisfies its conversion obligation solely in cash or through payment and delivery, as the case may be, of a combination of cash and shares of the Company’s common stock, the amount of cash and shares of common stock, if any, due upon conversion will be based on a daily conversion value calculated on a proportionate basis for each trading day in a 40 trading day observation period. In addition, following certain corporate events that occur prior to the maturity date or if the Company delivers a notice of redemption, the Company will, in certain circumstances, increase the conversion rate for a holder who elects to convert its 2025 Notes in connection with such a corporate event or notice of redemption, as the case may be. If the Company undergoes a fundamental change prior to the maturity date, holders of the 2025 Notes may require the Company to repurchase for cash all or any portion of their notes at a repurchase price equal to 100% of the principal amount of the 2025 Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.

In addition, if specific corporate events occur prior to the applicable maturity date, the Company will increase the conversion rate for a holder who elects to convert their 2025 Notes in connection with such a corporate event in certain circumstances. The Company may not redeem the 2025 Notes prior to June 20, 2023. The Company may redeem for cash all or any portion of the 2025 Notes, at the Company’s option, on or after June 20, 2023 and prior to March 15, 2025, if the last reported sale price of the Company’s common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption at a redemption price equal to 100% of the principal amount of the 2025 Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the notes. During the three months ended March 31, 2022, the conditions allowing holders of the 2025 Notes to convert have not been met. The 2025 Notes are therefore not convertible as of March 31, 2022 and are classified in long term liabilities in the condensed consolidated balance sheet.

The following table sets forth the interest expense recognized related to the 2025 Notes:

The Company has the following stock-based compensation plans: the 2007 Equity Incentive Plan (the “2007 Plan”), the 2017 Equity Incentive Plan (the “2017 Plan”), and the 2020 Equity Incentive Plan (the “2020 Plan”, and, together with the 2007 Plan and the 2017 Plan, the “Plans”).

At March 31, 2022, 2,950 shares were available for future grants.

The following table summarizes stock option activity under the Plans:

At March 31, 2022 and 2021, there was $24,640 and $17,897, respectively, in unrecognized compensation expense related to service-based options, net of forfeitures, that is expected to be recognized over a weighted-average period of 1.6 and 1.9 years, respectively.

The fair value of stock option grants with service-based vesting conditions was $11,598 and $12,168 for the three months ended March 31, 2022 and 2021, respectively.

During the year ended December 31, 2020, the Board of Directors (“Board”) approved the grant of a long-term market-based stock option (the “Performance Stock Option”) to the Company’s Chief Executive Officer and President. The Performance Stock Option was granted to acquire up to 8,645 shares of the Company’s common stock upon exercise. The Performance Stock Option consists of 4 separate tranches and each tranche will vest over a seven-year time period and only if the Company’s stock price sustains achievement of pre-determined increases for a period of 90 consecutive calendar days and the Chief Executive Officer remains employed with the Company. The exercise price per share of the Stock Option is the closing price of a share of the Company’s common stock on the date of grant. The vesting of the Performance Stock Option can also be triggered upon a change in control. The following table presents additional information relating to each tranche of the Performance Stock Option:

As of March 31, 2022, no stock price milestones have been achieved. Consequently, no shares subject to the Performance Stock Option have vested as of the date of this filing. The entire 8,645 shares granted are excluded from options vested and expected to vest from the options activity table presented above.

The following table summarizes restricted stock unit activity under the 2020 Plan:

Stock-based compensation expense was classified in the condensed consolidated statements of operations as follows:

A tax benefit of $1,938 and $30,394 for the three months ended March 31, 2022 and 2021, respectively, was included in the Company’s net operating loss carry-forward that could potentially reduce future tax liabilities.

The Company recorded an income tax benefit of $6,732 and an income tax provision of $4,199 for the three months ended March 31, 2022 and 2021, respectively. This represents an effective tax rate for the respective periods of 6.9% and (12.0)%, respectively. The Company reassessed the ability to realize deferred tax assets by considering the available positive and negative evidence. As of March 31, 2022, the Company maintains a full valuation allowance against its net deferred tax assets. Amortization of book identified intangibles from that acquisition resulted in a decrease to deferred tax liabilities; the associated income tax benefit during the period was $6,745. The effective tax rate differs in 2022 from the federal statutory rate due to the change in need for valuation allowance and amortization of identified intangibles. The effective tax rate differs in 2021 from the federal statutory rate due to increased taxable income in profitable entities and the change in need for valuation allowance.

Basic and diluted net loss per share were calculated as follows:

The Company’s potentially dilutive securities, which include stock options, unvested RSUs, 2025 Notes and shares held in special indemnity escrow account in connection with Iora acquisition, have been excluded from the computation of diluted net loss per share as the effect would be to reduce the net loss per share. Therefore, the weighted average number of common shares outstanding used to calculate both basic and diluted net loss per share is the same. The Company excluded the following

In May 2018, a class action complaint was filed by 2 former members against the Company in the Superior Court of California for the County of San Francisco, or the Court, alleging that the Company made certain misrepresentations resulting in them paying the Annual Membership Fee, or AMF, in violation of California’s Consumers Legal Remedies Act, California’s False Advertising Law and California’s Unfair Competition Law, and seeking damages and injunctive relief. Following certain trial court proceedings and certain appeals, arbitration proceedings, and court-ordered mediation proceedings, in June 2021, the parties filed a joint notice of settlement and request for a six month stay before the appellate court in light of reaching a settlement in principle. The parties later executed a class action settlement agreement and release effective June 30, 2021, which requires trial court approval. A preliminary class settlement approval hearing was scheduled to take place in August 2021, but the trial court requested supplemental briefing and vacated the previously scheduled hearing. Plaintiffs filed their supplemental brief and supporting documents on October 12, 2021. The trial court granted the motion for preliminary approval on November 12, 2021. Under the terms of the settlement and the trial court’s order, the settlement will proceed to the class notice phase, which is expected to happen in early 2022. The final approval hearing on the settlement is currently set for July 25, 2022.

The settlement amount of $11,500 was recorded as other current liabilities in the condensed consolidated balance sheets as of June 30, 2021. The Company's insurers committed to pay $5,950 towards the settlement amount. The settlement amount, net of expected insurance recovery, of which $5,550 was recorded as general and administrative expenses in the condensed consolidated statements of operations for the three months ended June 30, 2021. Class payout is expected to occur in 2022. There was no material change to the liability amount or any incremental expenses incurred during the three months ended March 31, 2022.

During 2017 and 2018, a state jurisdiction engaged in an audit of 1Life’s sales and use tax records applicable to that jurisdiction from March 2011 through February 2017. The Company disputed the finding representing the majority of the state's proposed audit change and successfully overturned the sales tax assessment resulting from the audit in December 2021. As of March 31, 2022, the audit was closed and the payment remitted was not material.

Certain of the Company’s investors are also affiliated with customers of the Company. Revenue recognized under contractual obligations from such customers was immaterial for the three months ended March 31, 2022 and March 31, 2021, respectively. The outstanding receivable balance from such customers was immaterial as of March 31, 2022 and December 31, 2021, respectively.

In connection with the Iora acquisition, on June 21, 2021, 1Life and Iora entered into a loan agreement under which the Company may advance secured loans to Iora to fund working capital, at Iora's request from time to time, in outstanding amounts not to exceed $75,000 in the aggregate. Amounts drawn under the loan agreement are secured by all assets of Iora and were subordinated to Iora's obligations under its then-existing credit facility with SVB. The loan agreement is effective through the maturity date of borrowed amounts under the loan agreement. Such maturity date is the later of 90 days following the earliest of certain maturity dates set forth in the SVB Facility. Amounts drawn bear interest at a rate equal to 10% per year, payable monthly.

As of the Acquisition Date, there was $30,000 drawn and outstanding under the loan agreement. Pursuant to the consummation of Iora's acquisition by 1Life, this note receivable was eliminated as part of intercompany eliminations. $30,253 of note receivable including accrued interests prior to the Acquisition Date was treated as purchase consideration. See Note 7 "Business Combinations" for additional details.

Our mission is to transform health care for all through our human-centered, technology-powered model. Our vision is to delight millions of members with better health and better care while reducing the total cost of care. We are a membership-based primary care platform with seamless digital health and inviting in-office care, convenient to where people work, shop, live and click. We are disrupting health care from within the existing ecosystem by simultaneously addressing the frustrations and unmet needs of key stakeholders, which include consumers, employers, providers, and health networks.

We have developed a modernized healthcare membership model based on direct consumer enrollment and third-party sponsorship across commercially insured and Medicare populations. Our membership model includes seamless access to 24/7 digital health services paired with inviting in-office care routinely covered by most health care payers. Our technology drives high monthly active usage within our membership, promoting ongoing and longitudinal patient relationships for better health outcomes and high member retention. Our technology also helps our service-minded team in building trust and rapport with our members by facilitating proactive digital health outreach as well as responsive on-demand virtual and in-office care. Our digital health services and our well-appointed offices, which tend to be located in highly convenient locations, are staffed by a team of clinicians who are not paid on a fee-for-service basis, and therefore free of misaligned compensation incentives prevalent in health care. Additionally, we have developed clinically and digitally integrated partnerships with health networks, better coordinating more timely access to specialty care when needed by members. Together, this approach allows us to engage in value-based care across all age groups, including through At-Risk arrangements with Medicare Advantage payers and CMS, in which One Medical is responsible for managing a range of healthcare services and associated costs of our members.

Our focus on simultaneously addressing the unfulfilled needs and frustrations of key stakeholders has allowed us to consistently grow the number of members we serve. As of March 31, 2022, we have grown to approximately 767,000 total members including 728,000 Consumer and Enterprise members and 39,000 At-Risk members, 188 medical offices in 25 markets, and have greater than 8,500 enterprise clients across the United States.

The COVID-19 pandemic has impacted and may continue to impact our operations, and net revenues, expenses, collectability of accounts receivables and other money owed, capital expenditures, liquidity, and overall financial condition.

While we experienced negative impacts to our business from the COVID-19 pandemic during the first half of 2020, beginning in the second half of 2020 and through 2021, we believe the COVID-19 pandemic helped drive an increase in Consumer and Enterprise membership and increase in commercial revenue due to new and expanded service offerings, and an increase in our aggregate billable services primarily driven by COVID-19 related visits.

For example, we believe COVID-19 caused our value proposition to resonate with a broader audience of consumers seeking access to primary care, as well as with a broader audience of employers focusing on safely reopening their workplaces and managing the ongoing health and well-being of employees and their families. As a result, we experienced increased demand for our memberships beginning in the second half of 2020 and through 2021.

In addition, we expanded our service offering in part as a response to COVID-19 and launched several new billable services, including:

Towards the tail end of 2021, we started to experience a decline in COVID-related visits while we have not yet seen non-COVID-related primary care visits return to their pre-COVID levels, which negatively impacted our commercial revenue. Starting in the fourth quarter of 2021, the Omicron variant caused a spike in COVID-19 cases. This caused an increase in hospitalizations among At-Risk members, which negatively impacted our medical claims expense. We also saw an increase in the number of providers who were required to quarantine as a result of potential exposure to the virus, which caused some supply constraint in our ability to meet member demand for appointments. The effects of the Omicron variant appeared to peak in mid-January 2022, and the impact has since decreased. However, future COVID-19 outbreaks or variants may cause additional reductions in visits and increased hospitalizations of At-Risk members, which may negatively impact our results of operations and cause our revenue and margins to fluctuate across periods.

We believe some of the precautionary measures and challenges resulting from the COVID-19 pandemic may continue or be reinstated upon the occurrence of future outbreaks of variants. Such actions or events may present additional challenges to our business, financial condition and results of operations. As a result, we cannot assure you that any increase in membership, aggregate reimbursement and revenue or reduction in medical claims expense, or any increased trends in visits, are indicative of future results or will be sustained, including following the COVID-19 pandemic, or that we will not experience additional impacts associated with COVID-19, which could be significant. Our results may also continue to fluctuate across periods due to the future COVID-19 outbreaks or variants. Additionally, it is unclear what the impact of the COVID-19 pandemic will be on future utilization, medical expense patterns, and the associated impact on our business and results of operations.

Our business is driven by growth in Consumer and Enterprise members, and At-Risk members (see also "Key Metrics and Non-GAAP Financial Measures"). We have developed a modernized membership model based on direct consumer enrollment and third-party sponsorship. Our membership model includes seamless access to 24/7 digital health paired with inviting in-office care routinely covered by most health care payers. Consumer and Enterprise members join either individually as consumers by paying an annual membership fee or are sponsored by a third party. At-Risk members are members for whom we are responsible for managing a range of healthcare services and associated costs. Digital health services are delivered via our mobile app and website, through such modalities as video and voice encounters, chat and messaging. Our in-office care is delivered in our medical offices, and as of March 31, 2022, we had 188 medical offices, compared to 110 medical offices as of March 31, 2021.

We derive net revenue, consisting of Medicare revenue and commercial revenue, from multiple stakeholders, including consumers, employers and health networks such as health systems and government and private payers.

Medicare revenue consists of (i) Capitated Revenue and (ii) fee-for-service and other revenue that is not generated from Consumer and Enterprise members.

We generate Capitated Revenue from At-Risk arrangements with Medicare Advantage payers and CMS. Under these At-Risk arrangements, we generally receive capitated payments, consisting of each eligible member’s risk adjusted health care premium per member per month ("PMPM"), for managing a range of healthcare services and associated costs for such members. The risk adjusted health care premium PMPM is determined by payers and based on a variety of patients' factors such as age and demographic benchmarks, and further adjusted to reflect the underlying complexity of a member’s health conditions. These fees give us revenue economics that are contractually recurring in nature for a majority of our Medicare revenue. Capitated Revenue represents 98% of Medicare revenue and 49% of total net revenue, respectively, for the three months ended March 31, 2022.

Commercial revenue consists of (i) partnership revenue (ii) net fee-for-service revenue and (iii) membership revenue.

We generate our partnership revenue from (i) our health network partners with whom we have clinically and digitally integrated, on a PMPM basis, (ii) largely fixed price or fixed price per employee contracts with enterprise clients for medical services and (iii) COVID-19 on-site testing services for enterprise clients, schools and universities where we typically bill such customers a fixed price per service performed. For our health network arrangements that provide for PMPM payments, when our medical offices provide professional clinical services to covered members, we, as administrator, perform billing and collection services on behalf of the health network, and the health network receives the fees for services provided, including those paid by members’ insurance plans. In those circumstances, we earn and receive PMPM payments from the health network partners in lieu of per visit fees for services from member office visits.

Our net fee-for-service revenue primarily consists of reimbursements received from our members' or other patients' health insurance plans or those with billing rates based on our agreements with our health network partners for healthcare services delivered to Consumer and Enterprise members on a fee-for-service basis.

We generate our membership revenue through the annual membership fees charged to either consumer members or enterprise clients, as well as fees paid for our One Medical Now service offering. As of March 31, 2022, our list price for new members for an annual consumer membership was $199. Our enterprise clients typically pay a discounted fee collected in advance, based on a rate per employee per month.

We review a number of operating and financial metrics, including members, Medical Claims Expense Ratio, Care Margin and Adjusted EBITDA, to evaluate our business, measure our performance, identify trends affecting our business, formulate our business plan and make strategic decisions. These key metrics are presented for supplemental informational purposes only and should not be considered a substitute for financial information presented in accordance with GAAP. Care Margin and Adjusted EBITDA are not financial measures of, nor do they imply, profitability. We have not yet achieved profitability and, even in periods when our net revenue exceeds our cost of care, exclusive of depreciation and amortization, we may not be able to achieve or maintain profitability. The relationship of operating loss to cost of care, exclusive of depreciation and amortization is also not necessarily indicative of future performance.

Other companies may not publish similar metrics, or may present similarly titled key metrics that are calculated differently. As a result, similarly titled measures presented by other companies may not be directly comparable to ours and these key metrics should be considered in addition to, not as a substitute for, or in isolation from, measures prepared in accordance with GAAP, such as net loss. We provide investors and other users of our financial information with a reconciliation of Care Margin and Adjusted EBITDA to their most closely comparable GAAP financial measure. We encourage investors and others to review our financial information in its entirety, not to rely on any single financial measure and to view Care Margin and Adjusted EBITDA in conjunction with loss from operations and net loss, respectively.

Members include both Consumer and Enterprise members as well as At-Risk members as defined below. Our number of members depends, in part, on our ability to successfully market our services directly to consumers including Medicare-eligible as well as non-Medicare eligible individuals, to Medicare Advantage health plans and Medicare Advantage enrollees, to employers that are not yet enterprise clients, as well as our activation rate within existing enterprise clients. We define estimated activation rate for any enterprise client at a given time as the percentage of eligible lives enrolled as members. While growth in the number of members is an important indicator of expected revenue growth, it also informs our management of the areas of our business that will require further investment to support expected future member growth. Member numbers as of the end of each period are rounded to the thousands.

A Consumer and Enterprise member is a person who has registered with us and has paid for membership for a period of at least one year or whose membership has been sponsored by an enterprise or other third party under an agreement having a term of at least one year. Consumer and Enterprise members do not include trial memberships, our virtual only One Medical Now users, or any temporary users. Our number of Consumer and Enterprise members depends, in part, on our ability to successfully market our services directly to consumers and to employers that are not yet enterprise clients and our activation rate within existing clients. Consumer and Enterprise members may include individuals who are: (i) Medicare-eligible and (ii) have paid for a membership or whose membership has been sponsored by an enterprise or other third party. Consumer and Enterprise members do not include any At-Risk members as defined below. Consumer and Enterprise members help drive commercial revenue. As of March 31, 2022, we had 728,000 Consumer and Enterprise members.

An At-Risk member is a person for whom we are responsible for managing a range of healthcare services and associated costs. At-Risk members help drive Medicare revenue. As of March 31, 2022, we had 39,000 At-Risk members.

An “Other Patient” is a person who is neither a Consumer and Enterprise member nor an At-Risk member, and who has received digital or in-person care from us over the last twelve months. As of December 31, 2021, we had 21,000 Other Patients.

We define Medical Claims Expense Ratio as medical claims expense divided by Capitated Revenue. The nature of our contracting with Medicare Advantage payers and CMS requires us to be financially responsible for a range of healthcare services of our At-Risk members. Our care model focuses on leveraging the primary care setting as a means of reducing unnecessary or avoidable health care costs and balancing our cost of care with the impact of our service levels on medical claims expense. We are liable for potentially large medical claims should we not effectively manage our At-Risk members’ health. We therefore consider the Medical Claims Expense Ratio to be an important measure to monitor our performance. As we sign up new At-Risk members or open new offices to serve these members, our Medical Claims Expense Ratio is likely to increase initially due to a potential increase in medical claims expense from a lag in improvement in health outcomes with member tenure. Similarly, there may be a lag in adequately documenting the health status of our members, resulting in different Capitated Revenue compared to what is indicated by the health status of an At-Risk member. We believe that the Medical Claims Expense Ratio for a given set of At-Risk members can improve over time as we help improve their health outcomes relative to their underlying health conditions, though the ratio may fluctuate for any given customers or cohort of customers depending on future outbreaks or variants of COVID-19 and associated increases in medical claims expense.

The following table provides a calculation of the Medical Claims Expense Ratio for the three months ended March 31, 2022 and 2021.

We define Care Margin as income or loss from operations excluding depreciation and amortization, general and administrative expense and sales and marketing expense. We consider Care Margin to be an important measure to monitor our performance, specific to the direct costs of delivering care. We believe this margin is useful to both us and investors to measure whether we are effectively pricing our services and managing the health care and associated costs, including medical claims expense and cost of care, of our At-Risk members successfully. 

The following table provides a reconciliation of loss from operations, the most closely comparable GAAP financial measure, to Care Margin: