Primary care business Cano Health lays off 700 employees, now exploring sale as its cash dwindles

Primary care company Cano Health is exploring a sale as its cash dwindles and is laying off 700 employees, or 17% of its workforce, the company announced Thursday.

"We have already been working with advisors and are encouraged with the progress made so far," Mark Kent, Cano Health's interim chief executive officer, told investors during Cano Health's second-quarter earnings call Thursday.

Management said in a press release that the company has not set a timetable for the conclusion of a sale of some or all of its operations.

Cano Health shares tumbled in after-hours trading Thursday, down 50.90% at 75 cents per share.

It marks the second time that the value-based primary care company has reportedly pursued a sale. Bloomberg reported in September that CVS Health was reportedly among several potential buyers weighing bids for the Miami-based company. 

A month later, in October, it was reported that CVS Health backed out of talks to potentially buy Cano Health.

"We are accelerating our strategy to enhance operational efficiency and executing our plan to improve the management of our medical costs to realize the embedded value within our business," Kent said. "Since becoming interim CEO in June, I have worked with the team to conduct a thorough review of all aspects of our business. While our mission and vision remain the same, the strategy and tactics needed to realize the profitability embedded in our business require a refreshed approach built upon a stronger operational foundation."

In March, Cano Health announced it took out a $150 million loan. Its losses have ballooned to $331 million in 2023.

The company reported that it had $125 million in financial liquidity available on June 30, including $15 million in cash and $110 million under a line of credit. As of August 9, the company had approximately $101 million of cash on hand and its line of credit was fully drawn.

Management also warned that the company may run out of cash in the next 12 months.

"The company currently believes that this amount of liquidity is not sufficient to cover the company's operating, investing and financing uses for the next 12 months. Management has concluded that there is substantial doubt about the company's ability to continue as a going concern within one year," management said in the press release.

Cano Health management said in a press release the company is working to restructure its operations to streamline the organization and improve efficiency and reduce costs, and the layoffs are part of the restructuring plan. About 40% of the planned workforce reductions will be attributable to exiting operations in certain markets, with the remainder attributable to consolidation efforts and other administrative operations, the company said in the press release.

Kent said the layoffs took place in early August.

These actions are expected to yield approximately $50 million of annualized cost reductions beginning in the third quarter of 2023 and through the end of 2024. 

Cano Health went public in 2020 through a SPAC deal backed by real estate investor Barry Sternlicht and runs value-based primary care centers and provides support to other primary care practices treating senior patients.

Kent was tapped to step in as interim CEO in June after the previous CEO, Marlow Hernandez, D.O., agreed to step down. Hernandez had held the CEO position since 2014. The company has been mired in an internal boardroom drama the past few months as three former directors, led Sternlicht, set their sights on a leadership overhaul and attempted a board shakeup

The company operates 172 medical centers in Florida, Texas, Nevada, Illinois, New Mexico, California and Puerto Rico. It opened 24 new medical centers in 2022 and added eight centers through acquisitions.

The company is taking steps to narrow its operating focus to providing primary care services for Medicare Advantage and ACO REACH members in its core Florida market, through both its medical centers and affiliated networks, Kent said.

The company is looking to shed most of its non-core assets and business lines.

To this end, Cano Health plans to divest the majority of its Florida Medicaid operations. It also plans to exit operations in California, New Mexico and Illinois by this fall. These geographies accounted for approximately 5,000 total members and 17 medical centers across the three states. The company began notifying members, physicians, employees and payer partners about the decision a month ago, Kent said.

It also plans to exit its Puerto Rico operations by January 1, 2024, which has approximately 8,000 members cared for by affiliates.  

"Cano Health remains committed to supporting our members as they transition to new providers to ensure they receive the highest possible quality of care," Kent said.

The company is consolidating its operations in Texas and Nevada by closing about half of its medical centers in each state to "improve profitability and cash flow," Kent said. At the same time, Cano Health also is evaluating offers to potentially divest these assets, he said.

"With such actions, our Texas and Nevada medical centers will be highly attractive with the capacity to efficiently and effectively serve the growing Medicare Advantage population," Kent said in prepared remarks. "Further, we review taking actions on other non-Medicare lines of business in Cano Health, such as Medicaid, behavioral health, pharmacy operations and occupational health. Each of these lines of business is attractive on a standalone basis. We have received interest from multiple parties for these assets and are engaging in active discussions."

The layoffs will result in a $4 million restructuring charge consisting primarily of employee-related costs, such as severance, retention and other contractual termination benefits, management said.

'Challenging and disappointing quarter'

Cano Health chief financial officer Brian Koppy said the company is taking strategic steps to "accelerate the organization's path to significantly improve financial performance" but acknowledged the second quarter was a "challenging and disappointing quarter."

The company brought in revenue of $767 million, up 11% compared to $689 million a year ago. Total capitated revenue in the quarter was approximately $743 million, up 13% from $655 million in the second quarter of 2022.

But, capitated revenue was lower than expected, primarily driven by Medicare Risk Adjustment (MRA) revenue, representing a shortfall of about $58 million, Koppy told investors.

Capitated revenue per member per month, or PMPM, was down 19% primarily driven by lower-than-expected MRA revenue.

The company's medical cost ratio in Q2 was higher, at 103.5%, compared to 82.6% in the second quarter of 2022, Koppy said, primarily driven by the reduction in MRA revenue, and higher third-party medical costs due to higher utilization and higher costs associated with supplemental health plan benefits, such as over-the-counter flex cards and healthy food cards.

"The medical cost ratio increase was primarily driven by an increase in our Medicare Advantage MCR. The year over year increase in the MCR was primarily driven by lower capitated revenue due to the reduction in MRA revenue discussed previously and higher third party medical costs due to higher utilization and higher costs associated with OTC flex cards offered by our health plan partners," Koppy said.

The higher utilization of the health plans' supplemental benefits occurred across nearly all our health plan partners, he said.

In the first quarter, Cano Health realized $13 million of third-party medical costs related to these benefits, and realized $51 million in the second quarter of 2023, of which $18 million was unfavorable prior period development from the first quarter, management said.

But Cano Health's losses grew to $271 million in the second quarter compared to a loss of $14.6 million the same quarter a year ago.

The significant quarterly losses were primarily driven by a higher operating loss, due to lower-than-expected MRA revenue, higher third-party medical costs, a change in the reserve for other assets related to MSP Recovery Class A common stock, a change in fair value of warrant liabilities, and higher interest expense, management said.

The company also reported an adjusted EBITDA loss of $149.7 million, compared to $9.9 million in the prior year.

Cano Health's membership grew 35% to reach 381,000 members, including 205,700 Medicare-capitated members, up 25%.

The company withdrew its fiscal year 2023 guidance. The company expects its financial performance to improve in the second half of the year.