Cano Health, Inc. ("Cano Health" or the "Company"), a prominent value-based primary care provider and population health company, recently released its financial results for the second quarter ended June 30, 2023. These results have unveiled a series of challenges the company is currently facing, leading to significant strategic changes and layoffs.

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Financial Results and Challenges

The second quarter of 2023 showcased both positive and concerning financial trends for Cano Health. While the total membership increased by an impressive 35% year-over-year, reaching 381,066 members, the company reported a net loss of $(270.7) million. This substantial loss can be attributed to several factors, including lower-than-expected Medicare Risk Adjustment ("MRA") revenue, higher third-party medical costs, and changes in various financial parameters.

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Lower MRA Revenue and Higher Costs

The primary contributor to the financial turmoil was the unexpected decrease in MRA revenue. During the second quarter, MRA revenue fell approximately $58 million below the previously estimated guidance, mainly due to lower MRA payments received and expected for 2023. Furthermore, third-party medical costs increased by approximately $44 million due to higher medical utilization and costs linked to health plan benefits. The company witnessed higher utilization of health plans' supplemental benefits across several partner networks.

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Strategic Changes and Layoffs

To address these challenges and position itself for a more stable financial future, Cano Health took decisive steps during the second quarter of 2023. The company decided to exit operations in California, New Mexico, Illinois, and Puerto Rico. Additionally, there will be a consolidation of medical centers in Texas and Nevada. These actions, coupled with other strategic and operational measures, aim to enhance efficiency, reduce costs, and ultimately improve financial performance.

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As part of this restructuring, Cano Health plans to reduce its workforce by approximately 700 employees, which amounts to 17% of its total workforce. These reductions will be achieved through a combination of exiting certain markets, consolidation efforts, and other administrative adjustments. These steps are expected to generate about $50 million in annualized cost reductions starting in the third quarter of 2023.

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Pursuit of Sale and Liquidity Challenges

Cano Health also announced its intention to pursue a comprehensive process to identify potential buyers for the company or its assets. This decision is in line with the terms and conditions of the 2023 Side-Car Amendment. The company engaged advisors to assist with this process, although no specific timeline for completion has been set.

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Liquidity has also been a concern for Cano Health. As of June 30, 2023, the company's total liquidity stood at approximately $125 million. However, it was not in compliance with its financial maintenance covenant, leading to a waiver and amendment to the Side-Car Credit Agreement. The company acknowledges the need for a more substantial liquidity buffer to cover its operating, investing, and financing needs over the next year.

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Cano Health, Inc.'s second-quarter financial results have prompted a series of significant strategic changes and workforce reductions. The challenges stemming from lower-than-expected revenue and higher costs have compelled the company to restructure its operations, exit certain markets, and pursue potential sale options. The future of Cano Health hinges on its ability to execute these strategies effectively while addressing its liquidity challenges.