
Readers know that since the initial coronavirus-related outbreak in the U.S. in March 2020, I have been tracking the COVID-related securities suit filings. Even though the four-year mark since the initial outbreak recently passed, and even though it has now been a considerable amount of time since businesses fully reopened from government shutdowns, COVID-related securities suits continue to be filed. Earlier this week, a plaintiff shareholder filed a securities lawsuit against health services management company Agilon Health, in which the plaintiff alleged that the company had understated the impact of the COVID-19 on patient utilization rates, thereby overstating key financial metrics. A copy of the April 2, 2024, complaint can be found here.
Background
Agilon completed an IPO in April 2021, and completed subsequent registered offerings thereafter. Agilon operates as an aggregator of medical services providers. Under its model, it contracts with physicians’ practice groups, and, pursuant to arrangements with medical services payors, it pays the physicians for their services. Under this arrangement, the company profits if the aggregate costs of the provision of medical services are less than assumed in the arrangements with the payors. On the other hand, the company bears the risk that the medical services are more costly than assumed. The physicians share in the profits, if any, as an incentive for the efficient provision of medical services.
Because of the transfer of financial risk to Agilon, it is important that Agilon accurately track medical claims and medical utilization rates. One of the company’s key financial metrics is medical margin, which represents the amount earned from medical services after medical services expenses are deducted.
The complaint alleges that Agilon claimed that its business model allowed it to avoid upticks in utilizations and medical care costs and achieve better outcomes. Even as other healthcare providers reported upticks in utilizations, the company allegedly was denying that it suffered the same adverse trends. The company’s share prices rose to more than over $40 per share, and corporate executives and offering underwriters profitably sold billions of dollars’ worth of the company’s stock, including in three post-IPO registered offerings.
The plaintiff alleges that unbeknownst to investors, the company’s business model did not offer the cost savings as the company had represented, and that it was in fact suffering the same uptick in utilizations and medical claims as other healthcare providers, “as patients who had delayed elective procedures and otherwise utilizing medical benefits during COVID-19 pandemic sought treatment.” The plaintiff also alleges that the company was experiencing higher costs in 2023 compared to 2022, including costs related to supplemental benefits, specialist costs, and outpatient surgeries. The company also allegedly failed to disclose millions of dollars of prior year adverse development. The complaint alleges that following the disclosure of these matters, the company’s share price declined to $6 per share, below the IPO price and more than 85% below the class period high.
The Lawsuit
On April 2, 2024, a plaintiff shareholder filed a securities class action lawsuit in the Southern District of New York against the company, certain of its directors and officers, and its offering underwriters. The complaint purports to be filed on behalf of a class of investors who purchased the company’s securities between April 15, 2021, and February 27, 2024, including investors who purchased shares traceable to the company’s April 2021 IPO.
The complaint alleges that in its registration statements and other documents and public statements, the company failed to disclose: “(a) that Agilon’s business model, purportedly focused on patient care rather than fee-for-service, was unable to provide the cost savings and the mitigation of medical expenses represented to investors; (b) that Agilon’s purported historical cost savings portrayed to investors in connection with the IPO and the September 2021 SPO were short-term effects of the COVID-19 pandemic and not indicative of the cost controls and incentives ostensibly inherent in Agilon’s business model; and (c) that as a result of (a)-(b) above, Agilon suffered from a material, undisclosed risk of higher utilization and medical claims rates once the short-term effects of the COVID-19 pandemic waned and the providers in Agilon’s network were poised to experience an upsurge in patient demand for medical services materially above the historical rate portrayed in the Registration Statement.”
The complaint also contains allegations that the company was experiencing higher costs in 2023 than in 2022 and had excessive costs that had not been revealed to investors; that the company had failed to disclose millions of dollars of prior year adverse development; and that its medical margin was running hundreds of millions of dollars below what was represented to investors.
The plaintiffs allege that the defendants violated Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint also alleges that the alleged misrepresentation and omission in the registration statements violated Item 303 of Regulation S-K. The complaint seeks to recover damages on behalf of the class.
Discussion
Ever since the pandemic wound down and businesses re-opened, I have been assuming that the COVID-related litigation would come to an end as well. And the pace of COVID-related securities suit filings has in fact declined somewhat over time. Yet, surprisingly to me, the COVID-related cases continue to be filed.
It occurs to me that while the pandemic has ended and while business has returned to normal, the lingering effects of the pandemic’s disruptive impact are far more pervasive than I think I had been assuming and are continuing to reverberate throughout the business environment.
This company’s experience underscores the point about the pandemic’s impact. It clearly seems to be the case that the pandemic so distorted the medical environment in which the company’s business operated that it affected fundamental aspects of its business model; the company’s results were distorted both during the pandemic and in its aftermath. The extent and duration of the impact makes me think that there may be many other companies for whom the pandemic’s distortive impact also continues to affect their operations and key components of their business model.
All of this makes me think that, contrary to my assumptions, we may continue to see further pandemic-related securities suits for some time to come, after all. In any event, the filing of pandemic-related securities suits has at least continued this year. By my count, this lawsuit is the fifth pandemic-related securities suit to be filed so far this year, and the 76th to be filed since the initial COVID-19 outbreak in the U.S. in March 2020.
As I noted early on as the COVID-related securities suits first started coming in, they generally fell into one of three categories: cases involving companies that had experienced an outbreak in their facilities (such as passenger cruise lines); cases involving companies that try to portray themselves as positioned to profit from the pandemic (such as diagnostic testing companies and vaccine development companies); and cases against companies whose business operations were disrupted by the pandemic (such as real estate development firms). As the pandemic evolved, so did the securities litigation, and a fourth category of cases emerged: cases involving companies that prospered at the outset of the pandemic, but whose fortunes waned as conditions changed. A good example of this is Peloton.
This new lawsuit is clearly an example of the one of these fourth category kinds of cases. Indeed, almost all of the more recently files cases are fourth category kinds of cases. If I had to guess, going forward we are not likely to see many cases from the first three categories. The likelihood is that, to the extent we do indeed so more cases, it will involve the fourth category kinds of cases.
It is probably worth noting that as a general matter, the COVID-related securities suits have not fared particularly well. Just within the past few days, the Ninth Circuit affirmed the dismissal of the COVID-related securities suit that had been filed against the vaccine development firm, Sorrento Therapeutics (about which refer here), and the Third Circuit affirmed the dismissal of the COVID-related lawsuit that had been filed against biopharmaceutical firm Ocugen (about which refer here).
To be sure, there have been some notable cases where the motions to dismiss have been denied, including, for example, in in the securities lawsuit pending against the vaccine development company Novavax (as discussed here). Indeed, two of the cases involving vaccine development companies where the dismissal motions were denied have settled. In August 2022, Inovio Pharmaceuticals announced that it had reached an agreement to settle the COVID-19-related securities suit that had been filed against the company for cash and stock totaling $44 million. Also in August, Vaxart announced that it had agreed to settle the COVID-19 related securities suit pending against the company for $12 million.
It remains to be seen how the more recently filed COVID-related cases will fare, as the kinds of allegations in the more recent cases are different from the allegations in the earlier filed cases.
Health Services Management Company Hit with COVID-19 Related Securities Suit
Readers know that since the initial coronavirus-related outbreak in the U.S. in March 2020, I have been tracking the COVID-related securities suit filings. Even though the four-year mark since the initial outbreak recently passed, and even though it has now been a considerable amount of time since businesses fully reopened from government shutdowns, COVID-related securities suits continue to be filed. Earlier this week, a plaintiff shareholder filed a securities lawsuit against health services management company Agilon Health, in which the plaintiff alleged that the company had understated the impact of the COVID-19 on patient utilization rates, thereby overstating key financial metrics. A copy of the April 2, 2024, complaint can be found here.
Background
Agilon completed an IPO in April 2021, and completed subsequent registered offerings thereafter. Agilon operates as an aggregator of medical services providers. Under its model, it contracts with physicians’ practice groups, and, pursuant to arrangements with medical services payors, it pays the physicians for their services. Under this arrangement, the company profits if the aggregate costs of the provision of medical services are less than assumed in the arrangements with the payors. On the other hand, the company bears the risk that the medical services are more costly than assumed. The physicians share in the profits, if any, as an incentive for the efficient provision of medical services.
Because of the transfer of financial risk to Agilon, it is important that Agilon accurately track medical claims and medical utilization rates. One of the company’s key financial metrics is medical margin, which represents the amount earned from medical services after medical services expenses are deducted.
The complaint alleges that Agilon claimed that its business model allowed it to avoid upticks in utilizations and medical care costs and achieve better outcomes. Even as other healthcare providers reported upticks in utilizations, the company allegedly was denying that it suffered the same adverse trends. The company’s share prices rose to more than over $40 per share, and corporate executives and offering underwriters profitably sold billions of dollars’ worth of the company’s stock, including in three post-IPO registered offerings.
The plaintiff alleges that unbeknownst to investors, the company’s business model did not offer the cost savings as the company had represented, and that it was in fact suffering the same uptick in utilizations and medical claims as other healthcare providers, “as patients who had delayed elective procedures and otherwise utilizing medical benefits during COVID-19 pandemic sought treatment.” The plaintiff also alleges that the company was experiencing higher costs in 2023 compared to 2022, including costs related to supplemental benefits, specialist costs, and outpatient surgeries. The company also allegedly failed to disclose millions of dollars of prior year adverse development. The complaint alleges that following the disclosure of these matters, the company’s share price declined to $6 per share, below the IPO price and more than 85% below the class period high.
The Lawsuit
On April 2, 2024, a plaintiff shareholder filed a securities class action lawsuit in the Southern District of New York against the company, certain of its directors and officers, and its offering underwriters. The complaint purports to be filed on behalf of a class of investors who purchased the company’s securities between April 15, 2021, and February 27, 2024, including investors who purchased shares traceable to the company’s April 2021 IPO.
The complaint alleges that in its registration statements and other documents and public statements, the company failed to disclose: “(a) that Agilon’s business model, purportedly focused on patient care rather than fee-for-service, was unable to provide the cost savings and the mitigation of medical expenses represented to investors; (b) that Agilon’s purported historical cost savings portrayed to investors in connection with the IPO and the September 2021 SPO were short-term effects of the COVID-19 pandemic and not indicative of the cost controls and incentives ostensibly inherent in Agilon’s business model; and (c) that as a result of (a)-(b) above, Agilon suffered from a material, undisclosed risk of higher utilization and medical claims rates once the short-term effects of the COVID-19 pandemic waned and the providers in Agilon’s network were poised to experience an upsurge in patient demand for medical services materially above the historical rate portrayed in the Registration Statement.”
The complaint also contains allegations that the company was experiencing higher costs in 2023 than in 2022 and had excessive costs that had not been revealed to investors; that the company had failed to disclose millions of dollars of prior year adverse development; and that its medical margin was running hundreds of millions of dollars below what was represented to investors.
The plaintiffs allege that the defendants violated Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint also alleges that the alleged misrepresentation and omission in the registration statements violated Item 303 of Regulation S-K. The complaint seeks to recover damages on behalf of the class.
Discussion
Ever since the pandemic wound down and businesses re-opened, I have been assuming that the COVID-related litigation would come to an end as well. And the pace of COVID-related securities suit filings has in fact declined somewhat over time. Yet, surprisingly to me, the COVID-related cases continue to be filed.
It occurs to me that while the pandemic has ended and while business has returned to normal, the lingering effects of the pandemic’s disruptive impact are far more pervasive than I think I had been assuming and are continuing to reverberate throughout the business environment.
This company’s experience underscores the point about the pandemic’s impact. It clearly seems to be the case that the pandemic so distorted the medical environment in which the company’s business operated that it affected fundamental aspects of its business model; the company’s results were distorted both during the pandemic and in its aftermath. The extent and duration of the impact makes me think that there may be many other companies for whom the pandemic’s distortive impact also continues to affect their operations and key components of their business model.
All of this makes me think that, contrary to my assumptions, we may continue to see further pandemic-related securities suits for some time to come, after all. In any event, the filing of pandemic-related securities suits has at least continued this year. By my count, this lawsuit is the fifth pandemic-related securities suit to be filed so far this year, and the 76th to be filed since the initial COVID-19 outbreak in the U.S. in March 2020.
As I noted early on as the COVID-related securities suits first started coming in, they generally fell into one of three categories: cases involving companies that had experienced an outbreak in their facilities (such as passenger cruise lines); cases involving companies that try to portray themselves as positioned to profit from the pandemic (such as diagnostic testing companies and vaccine development companies); and cases against companies whose business operations were disrupted by the pandemic (such as real estate development firms). As the pandemic evolved, so did the securities litigation, and a fourth category of cases emerged: cases involving companies that prospered at the outset of the pandemic, but whose fortunes waned as conditions changed. A good example of this is Peloton.
This new lawsuit is clearly an example of the one of these fourth category kinds of cases. Indeed, almost all of the more recently files cases are fourth category kinds of cases. If I had to guess, going forward we are not likely to see many cases from the first three categories. The likelihood is that, to the extent we do indeed so more cases, it will involve the fourth category kinds of cases.
It is probably worth noting that as a general matter, the COVID-related securities suits have not fared particularly well. Just within the past few days, the Ninth Circuit affirmed the dismissal of the COVID-related securities suit that had been filed against the vaccine development firm, Sorrento Therapeutics (about which refer here), and the Third Circuit affirmed the dismissal of the COVID-related lawsuit that had been filed against biopharmaceutical firm Ocugen (about which refer here).
To be sure, there have been some notable cases where the motions to dismiss have been denied, including, for example, in in the securities lawsuit pending against the vaccine development company Novavax (as discussed here). Indeed, two of the cases involving vaccine development companies where the dismissal motions were denied have settled. In August 2022, Inovio Pharmaceuticals announced that it had reached an agreement to settle the COVID-19-related securities suit that had been filed against the company for cash and stock totaling $44 million. Also in August, Vaxart announced that it had agreed to settle the COVID-19 related securities suit pending against the company for $12 million.
It remains to be seen how the more recently filed COVID-related cases will fare, as the kinds of allegations in the more recent cases are different from the allegations in the earlier filed cases.