Annual Report for Fiscal Year Ending December 31, 2025 (Form 10-K)

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following management's discussion and analysis should be read in conjunction with the audited consolidated financial statements and the notes thereto included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.

In this section, "we," "our," "ours," and "us" refer to Astrana Health, Inc. ("Astrana") and its consolidated subsidiaries and affiliated entities, as appropriate, including its consolidated variable interest entities ("VIEs").

Overview

Astrana Health, Inc. is a leading physician-centric, technology-powered, risk-bearing healthcare management company. Leveraging its proprietary population health management and healthcare delivery platform, Astrana operates an integrated, value-based healthcare model, that aims to empower the providers in its network to deliver the highest quality of care to its patients in a cost-effective manner. Together with our affiliated physician groups and consolidated entities, we cost-effectively provide coordinated outcomes-based medical care.

Through our risk-bearing organizations ("RBOs") with more than 20,000 contracted physicians, we were responsible for coordinating the care for approximately 1.6 million patients, primarily in California, as of December 31, 2025. These covered patients are managed care members whose health coverage is provided either through their employers, directly from a health plan, or as a result of their eligibility for Medicaid or Medicare benefits. Our managed patients benefit from an integrated approach that places physicians at the center of patient care and utilizes sophisticated risk management techniques and clinical protocols to deliver high-quality, cost-effective care.

Industry Trends

The One Big Beautiful Bill Act (the "OBBBA"), signed on July 4, 2025, introduces Medicaid work-requirement pilots and tighter provider tax rules beginning in 2026. We expect to see tax impacts from the following changes, including the restoration of 100% bonus depreciation, allowing the current year deduction of research and development expenses, and changing the 163j interest limitation from earnings before tax to EBITDA. We anticipate the OBBBA will not have a material impact on tax expense and did not identify a material impact in 2025. While we are still evaluating the full downstream effects, we believe Astrana is well-positioned to navigate these changes and view these headwinds as manageable. Our diversified footprint, strong track record of Medicaid performance, and investment in care-enablement infrastructure provide meaningful insulation. We remain focused on maintaining continuity of care and supporting our state partners through this policy transition.

On January 26, 2026, the Centers for Medicare & Medicaid Services ("CMS") issued an advance notice detailing proposed 2027 Medicare Advantage payment rates (the "2027 Advance Notice"). CMS accepted comments on the 2027 Advance Notice until February 25, 2026 and intends to publish the final 2027 rate announcement no later than April 6, 2026. If the proposed rates are finalized, we anticipate impact to the Medicare line of business. We expect the impact of the proposed risk adjustment model changes to be materially less significant for Astrana than for the broader Medicare Advantage market. While we are still evaluating the full downstream effects, we believe Astrana is well-positioned to navigate these changes and view these headwinds as manageable.

2025 Highlights

Acquired Businesses and Assets

Certain businesses and assets of Prospect Medical Holdings, Inc. (collectively, "Prospect") (such acquisition, the "Prospect Acquisition")

On July 1, 2025, we completed our previously announced acquisition of Prospect, including its California-licensed health plan (Prospect Health Plan), its medical groups in multiple states (Prospect Medical Groups), its management service organization (Prospect Medical Systems), its pharmacy (RightRx), and Foothill Regional Medical Center ("FRMC"). Prospect is a physician-centric, risk-bearing healthcare company that operates an integrated healthcare delivery platform, enabling a network of over 11,000 providers to participate in value-based care arrangements, and empowering them to deliver accessible, high-quality care to patients in a cost-effective manner. Prospect enables physicians to deliver payer-agnostic, patient-centered care across Medicare Advantage, Medicaid, and Commercial lines of business. The acquisition significantly expanded our provider network and enhanced our ability to offer increased access, quality, and value to our members (see Note 3 - "Business Combinations and Goodwill" to our consolidated financial statements under Item 8 in this Annual Report on Form 10-K).

Second Amended and Restated Credit Agreement

On February 26, 2025, we amended and restated our credit agreement with Truist Bank, in its capacities as administrative agent for the lenders (the "Second Amended and Restated Credit Agreement"). The Second Amended and Restated Credit Agreement provides for (a) a five-year revolving credit facility ("Revolver Loan") to us of $300.0 million, which includes a letter of credit sub-facility of up to $100.0 million and a swingline loan sub-facility of $25.0 million, (b) a five-year term loan A credit facility ("Term Loan") to us of $250.0 million, and (c) a five-year delayed draw term loan credit facility ("DDTL A" and, together with the Term Loan, the "Term Loans") to us of $745.0 million of which $707.3 million was drawn to fund the Prospect Acquisition. The Term Loan and Revolver Loan were used to, among other things, refinance certain existing indebtedness of ours and certain subsidiaries, pay transaction costs and expenses arising in connection with the Second Amended and Restated Credit Agreement, and provide for working capital needs and other general corporate purposes. The DDTL A was used to fund the Prospect Acquisition, and, in addition to the foregoing, the Revolver Loan was used to finance certain future permitted acquisitions and permitted investments and capital expenditures (see Note 10 - "Credit Facility and Bank Loans" to our consolidated financial statements under Item 8 in this Annual Report on Form 10-K).

Partnerships

We partnered with a provider group in Southern California and with Intermountain Health across southern Nevada with the collaboration goal to expand access to coordinated, high-quality care, enhance primary care access, improve patient outcomes, and advance the healthcare infrastructure through shared technology and care management programs.

Key Financial Measures and Indicators

Operating Revenues

Our revenue, which is recorded in the period during which services are rendered and earned, generally on a monthly basis, primarily consists of capitation revenue, risk pool settlements and incentives, management fee income, fee-for-services ("FFS") revenue, and other revenue primarily consisting of revenues earned from maternity care and Hospital Quality Assurance Fee Program ("HQAF"). The form of billing and related collection risk for such services may vary by revenue type and customer.

Operating Expenses

Our largest expenses consist of the cost of: (i) patient care paid to contracted providers; (ii) information technology equipment and software; and (iii) hiring staff to provide management and administrative support services to our affiliated physician groups, as further described in the following sections. These services include claims processing, utilization management, contracting, accounting, credentialing, and administrative oversight.

Adjusted EBITDA and Adjusted EBITDA Margin

Our Adjusted EBITDA and Adjusted EBITDA margin are supplemental performance measures of our operations for financial and operational decision-making, and are used as a supplemental means of evaluating period-to-period comparisons on a consistent basis. Adjusted EBITDA is calculated as earnings before interest expense, interest income, income taxes, depreciation, and amortization, excluding income or loss from equity method investments, non-recurring and non-cash transactions, and stock-based compensation. We define Adjusted EBITDA margin as Adjusted EBITDA over total revenue.

Adjusted Net Income Attributable to Astrana and Adjusted Earnings Per Share ("EPS") - Diluted

Our adjusted EPS - diluted is a supplemental performance measure of our operations for financial and operational decision-making and is used as a supplemental means of evaluating period-to-period comparisons on a consistent basis. We define adjusted EPS - diluted as adjusted net income attributable to Astrana over weighted average shares of common stock outstanding - diluted. Adjusted net income attributable to Astrana is calculated as net income, excluding income or loss from equity method investments, non-recurring and non-cash transactions, stock-based compensation, amortization of intangibles, certain tax adjustments, and amounts related to non-controlling interest.

Free Cash Flow

Our free cash flow is a supplemental performance measure of our operations for financial and operational decision-making and is used as a supplemental means of evaluating period-to-period comparisons on a consistent basis and reflects the cash flow trends in our business. We define free cash flow as net cash provided by operating activities minus cash used in purchases of property and equipment.

Results of Operations

2025 Compared to 2024

Our consolidated operating results for the year ended December 31, 2025, as compared to the year ended December 31, 2024, were as follows:

Astrana Health, Inc.

Consolidated Statements of Income (in thousands)

Risk-Bearing Organizations and Patients

As of December 31, 2025 and 2024, we managed a total of 28 and 20 independent risk-bearing organizations, including both affiliated and non-affiliated, respectively, and the total number of patients for whom we managed the delivery of healthcare services was approximately 1.6 million and 1.1 million, respectively.

Revenue

Our total revenue in 2025 was $3,181.8 million, as compared to $2,034.5 million in 2024, an increase of $1,147.2 million or 56%. The increase in total revenue was partially attributable to the acquisition of Prospect, which contributed approximately $616.3 million of revenue from the acquisition date. In addition, capitation revenue increased by $539.0 million primarily as a result of our 2024 acquisitions within our Care Partners segment, along with enrollees transitioning to full risk through our Restricted Knox-Keene plans.

Cost of Services, Excluding Depreciation and Amortization

Expenses related to the cost of services, excluding depreciation and amortization, in 2025 were $2,840.2 million, compared to $1,763.2 million in 2024, an increase of $1,077.1 million or 61%. The overall increase was primarily due to increased participation in a value-based Medicare FFS model and medical costs associated with both professional and institutional risk of our Restricted Knox-Keene licensed health plan as a result of our recent acquisitions, of which Prospect contributed approximately $538.3 million from the date of acquisition.

General and Administrative Expenses

General and administrative expenses in 2025 were $217.3 million, compared to $154.1 million in 2024, an increase of $63.1 million or 41%. This increase was primarily due to approximately $30.9 million from the inclusion of Prospect's results of operations from the date of acquisition, transaction costs related to our acquisitions that were driven by the Prospect Acquisition in 2025, as well as other general and administrative expenses to support operational growth.

Depreciation and Amortization

Depreciation and amortization expenses were $45.7 million and $27.9 million for the years ended December 31, 2025 and 2024, respectively, an increase of $17.8 million driven by $17.3 million due to the Prospect Acquisition. This amount includes depreciation of property and equipment and the amortization of intangible assets.

Income from Equity Method Investments

Income from equity method investments in 2025 was $1.7 million, compared to $4.5 million in 2024, a decrease of $2.7 million. This amount includes the Company's portion of the equity method investment's net earnings or losses. The decrease was primarily due to APC's equity method investment in LaSalle Medical Associates and reduced income pickup due to the sale of our equity method investment in CAIPA MSO, LLC.

Interest Expense

Interest expense in 2025 was $49.9 million, compared to $33.1 million in 2024, an increase of $16.8 million. The increase in interest expense for the year was primarily due to the increased borrowings under the Second Amended and Restated Credit Facility to finance the Prospect Acquisition, partially offset by a decrease in interest rates on our floating-rate debt, including the interest rate swap agreement entered to manage our interest. Our outstanding borrowings, as of December 31, 2025, increased to $1,052.2 million on the Second Amended and Restated Credit Facility from $428.2 million borrowed under the facility as of December 31, 2024. The interest rate on the Term Loans and $100.0 million of the Revolver Loan was 5.72%, and the interest rate on $22.0 million of the Revolver Loan was 5.77%, as of December 31, 2025. The interest rate swap has a fixed rate of 3.179% and covers $200.0 million of our credit facility. As of December 31, 2024, the interest rates for the Term Loan and Revolver were 6.67% and 6.23%, respectively.

Interest Income

Interest income in 2025 was $12.2 million, compared to $14.5 million in 2024, a decrease of $2.4 million. Interest income reflects interest earned on cash held in bank accounts, money market and certificate of deposit accounts, and on our loans receivable. The change in interest income was primarily due to decreases in interest rates related to cash held in interest-bearing bank accounts.

Other (Loss) Income

Other loss in 2025 was $2.8 million, as compared to other income of $4.9 million in 2024, a decrease of $7.7 million. The decrease was primarily due to a $5.3 million reimbursement in 2024 from Allied Pacific Holdings Investment Management, LLC, with no similar transaction occurring in 2025 and $5.0 million of debt issuance costs that were expensed in connection with the Second Amended and Restated Credit Facility in 2025. The decrease was partially offset by a $3.6 million employee retention tax credit related to COVID-19 relief.

Provision for Income Taxes

Provision for income taxes was $15.5 million in 2025, as compared to $30.9 million in 2024, a decrease of $15.4 million. The decrease in provision for income taxes was primarily due to a decrease in pre-tax income.

Net Income Attributable to Noncontrolling Interests

Net income attributable to non-controlling interests was $1.6 million in 2025, as compared to a net income of $6.8 million in 2024, a decrease of $5.2 million. The decrease was primarily driven by a decrease in net income.

Net Income Attributable to Astrana Health, Inc.

Net income attributable to Astrana Health, Inc. was $22.5 million in 2025, as compared to net income of $43.1 million in 2024, a decrease of $20.7 million, driven by a decrease in our operating income and an increase in our interest expense, partially offset by a decrease in our provision for income taxes and a decrease in net income attributable to noncontrolling interests.

Adjusted EBITDA

Adjusted EBITDA was $205.4 million, as compared to $170.4 million in 2024, an increase of $35.1 million. The increase was primarily due to the acquisition of Prospect, partially offset by a decrease in operating income as a result of higher utilization and an increase in general and administrative expenses.

2024 Compared to 2023

See Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations-Results of Operations" of our Annual Report on Form 10-K for the year ended December 31, 2024filed with the SEC on March 14, 2025, for a discussion of our results of operations during the year ended December 31, 2024, compared to the year ended December 31, 2023.

Segment Financial Performance

We have three reportable segments: Care Partners, Care Delivery, and Care Enablement. We evaluate the performance of our operating segments based on segment revenue growth and operating income. Management uses revenue growth and total segment operating income as measures of the performance of operating businesses, separate from non-operating factors. We integrated the Prospect Acquisition into our three reportable segments. For more information about our segments, see Note 1 - "Description of Business" and Note 20 - "Segments" to our consolidated financial statements under Item 8 in this Annual Report on Form 10-K for additional information.

2025 Segments Compared to 2024 Segments

The following table sets forth our revenue and operating income by segment for the year ended December 31, 2025, as compared to the year ended December 31, 2024:

* Percentage change of over 500%

Care Partners Segment

Revenue increased $1,073.6 million and operating income increased $13.7 million for the year ended December 31, 2025, compared to the corresponding period in 2024. The increases in revenue and operating income were primarily due to $542.3 million of revenue from the Prospect Acquisition, other recent acquisitions within our Care Partners segment, and members transitioning to full risk through our Restricted Knox-Keene plans. The increase in operating income was partially offset by recognition of a $13.0 million loss contingency in the third quarter of 2025.

Care Delivery Segment

Revenue increased $114.1 million and operating income decreased $2.1 million for the year ended December 31, 2025, compared to the corresponding period in 2024. The increase in revenue was primarily driven by $105.1 million from the inclusion of Prospect, as well as an increased volume in patient visits at our primary, multi-specialty, and ancillary Care Delivery entities. Operating income decreased $2.1 million due to an increase in expenses incurred to support growth in our Care Delivery segment, including new clinic locations and related lease costs.

Care Enablement Segment

Revenue increased $91.2 million and operating income increased $21.4 million for the year ended December 31, 2025, compared to the corresponding period in 2024. The increase in revenue was primarily due to managing more IPAs in our Care Partners segment, including $83.8 million from Prospect. As of December 31, 2025, and 2024, the total number of affiliated physician groups we managed was 28 groups and 20 groups, respectively. The increase in operating income was primarily due to the acquisition of Prospect, partially offset by higher costs incurred by the Care Enablement segment as a result of an increase in the workforce that provides management and administrative services.

2024 Segments Compared to 2023 Segments

See Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations-Segment Financial Performance" of our Annual Report on Form 10-K for the year ended December 31, 2024filed with the SEC on March 14, 2025, for a discussion of our segment financial performance during the year ended December 31, 2024, compared to the year ended December 31, 2023.

Reconciliation of Net Income to EBITDA, Adjusted EBITDA, and Adjusted EBITDA Margin

Set forth below are reconciliations of Net Income to EBITDA and Adjusted EBITDA for the years ended December 31, 2025 and 2024.

Reconciliation of Net Income to Adjusted Net Income Attributable to Astrana and Adjusted EPS - Diluted

Set forth below are reconciliations of net income to adjusted net income attributable to Astrana as well as the reconciliation to adjusted EPS - diluted for years ended December 31, 2025 and 2024.

Reconciliation of Net Cash Provided by Operating Activities to Free Cash Flow

The following table provides a reconciliation of net cash provided by operating activities to free cash flow for the years ended December 31, 2025 and 2024 (in thousands):

Use of Non-GAAP Financial Measures

This Annual Report on Form 10-K contains the non-GAAP financial measures EBITDA, Adjusted EBITDA, Adjusted EBITDA margin, adjusted net income attributable to Astrana, and adjusted EPS - diluted, of which the most directly comparable financial measure presented in accordance with U.S. generally accepted accounting principles ("GAAP") is net income. This Annual Report on Form 10-K also contains the non-GAAP financial measure free cash flow, of which the most directly comparable financial measure presented in accordance with U.S. GAAP is net cash provided by operating activities. These measures are not in accordance with, or alternatives to, GAAP, and may be calculated differently from similar non-GAAP financial measures used by other companies. We use Adjusted EBITDA, Adjusted EPS - diluted, and free cash flow as supplemental performance measures of our operations, for financial and operational decision-making, and as supplemental means of evaluating period-to-period comparisons on a consistent basis and, for free cash flow, to reflect the cash flow trends in our business. Adjusted EBITDA is calculated as earnings before interest expense, interest income, income taxes, depreciation, and amortization, excluding income or loss from equity method investments, non-recurring and non-cash transactions, and stock-based compensation. We define Adjusted EBITDA margin as Adjusted EBITDA over total revenue. Adjusted net income attributable to Astrana is calculated as net income, excluding income or loss from equity method investments, non-recurring and non-cash transactions, stock-based compensation, amortization of intangibles, certain tax adjustments, and amounts related to non-controlling interest. We define adjusted EPS - diluted as adjusted net income attributable to Astrana over weighted average shares of common stock outstanding - diluted. We define free cash flow as net cash provided by operating activities minus cash used in purchases of property and equipment.

We believe the presentation of these non-GAAP financial measures provides investors with relevant and useful information, as it allows investors to evaluate the operating performance of the business activities without having to account for differences recognized because of non-core or non-recurring financial information. When GAAP financial measures are viewed in conjunction with non-GAAP financial measures, investors are provided with a more meaningful understanding of our ongoing operating performance. In addition, these non-GAAP financial measures are among those indicators we use as a basis for evaluating operational performance, allocating resources, and planning and forecasting future periods. Non-GAAP financial measures are not intended to be considered in isolation, or as a substitute for, GAAP financial measures. Other companies may calculate EBITDA, Adjusted EBITDA, adjusted net income attributable to Astrana, adjusted EPS - diluted, and free cash flow differently, limiting the usefulness of these measures for comparative purposes. To the extent this Form 10-K contains historical or future non-GAAP financial measures, we have provided corresponding GAAP financial measures for comparative purposes. The reconciliation between certain GAAP and non-GAAP measures is provided above.

Liquidity and Capital Resources

Cash, cash equivalents at December 31, 2025, totaled $429.5 million. Working capital totaled $248.0 million at December 31, 2025, compared to $272.9 million at December 31, 2024, a decrease of $24.9 million.

We have historically financed our operations primarily through internally generated funds and borrowings on long-term debt. We generate cash primarily from capitation contracts, risk pool settlements and incentives, fees for medical management services provided to our affiliated physician groups, FFS reimbursements, and other revenues. We generally invest cash in money market accounts, which are classified as cash and cash equivalents. In February 2025, we entered into the Second Amended and Restated Credit Agreement, which amended and restated our prior amended credit agreement and provided for a five-year revolving credit facility of $300.0 million, a term loan of $250.0 million, and a delayed-draw term loan of $745.0 million, which were primarily used to refinance certain existing indebtedness and to fund the costs associated with the Prospect Acquisition. In July 2025, we drew down the delayed-draw term loan for $707.3 million to fund the Prospect Acquisition and terminated the remaining commitment. In addition, we have a current shelf registration statement filed with the SEC under which we may issue common stock, preferred stock, debt securities, and other securities in one or more offerings on terms to be determined at the time of each offering. We believe we have sufficient liquidity to fund our operations through at least the next 12 months and the foreseeable future.

Cash Flow Activities

Our cash flows for the years ended December 31, 2025 and 2024 are summarized as follows (in thousands):

* Percentage change of over 500%

Operating Activities

Cash provided by operating activities during the year ended December 31, 2025, was $114.6 million, as compared to $52.2 million during the year ended December 31, 2024. The increase in cash provided by operating activities was primarily driven by favorable changes in working capital relative to 2024 and higher adjusted net income. The change in working capital for the 2025 and 2024 periods included the timing of claims payments related to our medical liabilities, and a decrease in cash paid for income taxes. For the year ended December 31, 2025, net income, exclusive of depreciation and amortization, amortization of debt issuance costs, share-based compensation, non-cash lease expense, deferred tax, and other was $117.7 million, as compared to $115.8 million for the year ended December 31, 2024.

Investing Activities

Cash used in investing activities during the year ended December 31, 2025, was $539.0 million, primarily due to payments for business and asset acquisitions, net of cash acquired for $548.6 million, purchases of property and equipment for $10.1 million, and issuance of loans for $1.7 million. The cash used in investing activities was partially offset by proceeds from the sale of an equity method investment for $15.1 million and other investing activities of $6.3 million, including proceeds from repayment of loans and sales of marketable securities. Cash used in investing activities during the year ended December 31, 2024, was $192.4 million, primarily due to payments for business and asset acquisitions, net of cash acquired, of $146.3 million, issuance of loans receivable of $26.0 million, purchases of property and equipment of $8.0 million, purchases of investments - equity method of $6.0 million, purchase of a call option issued in conjunction with an equity method investment of $3.9 million, and other investing activities of $2.2 million mainly related to a $2.5 million purchase of a privately held investment.

Financing Activities

Cash provided by financing activities during the year ended December 31, 2025, was $569.3 million, primarily due to borrowings of long-term debt of $1,119.3 million, partially offset by repayments of debt of $495.3 million, payment of deferred financing costs of $19.2 million, repurchase of treasury shares of $15.4 million, payment of contingent liabilities for $8.3 million, dividend payments of $7.9 million, and tax payments from net share settlement of restricted stock awards and units of $6.2 million. Cash provided by financing activities during the year ended December 31, 2024, was $135.1 million, primarily attributable to borrowings on long-term debt totaling $171.9 million. This was partially offset by repayments of debt of $18.5 million, payment of a financing obligation of $8.5 million, tax payments from net share settlement of restricted stock awards and units of $4.7 million, and dividend payments of $4.0 million.

Credit Facilities

Our debt balance consisted of the following (in thousands):

The following are the future commitments of our debt for the years ending December 31 (in thousands):

Second Amended and Restated Credit Agreement

The Second Amended and Restated Credit Agreement provides for (a) Revolver Loan to us of $300.0 million, which includes a letter of credit sub-facility of up to $100.0 million and a swingline loan sub-facility of $25.0 million, (b) Term Loan to the Company of $250.0 million, and (c) DDTL A to us of $745.0 million, of which $707.3 million was drawn down, and the remainder of the commitment terminated, in connection with closing the Prospect Acquisition. As a result, as of December 31, 2025, we had a combined borrowing of $930.2 million on our Term Loans and $122.0 million under the Revolver Loan under the Second Amended and Restated Credit Agreement. The maturity of the Term Loans and the Revolver Loan remains February 26, 2030.

See Note 10 - "Credit Facility and Bank Loans" to our consolidated financial statements under Item 8 in this Annual Report on Form 10-K for additional information on the Second Amended and Restated Credit Agreement.

Effective Interest Rate

Our average effective interest rate on our total debt during the years ended December 31, 2025, 2024, and 2023 was 6.18%, 7.05%, and 6.19%, respectively. Interest expense in the consolidated statements of income included amortization of deferred debt issuance costs for the years ended December 31, 2025, 2024, and 2023 of $4.1 million, $1.8 million, and $1.1 million, respectively.

Standby Letters of Credit

We established irrevocable standby letters of credit with Truist Bank under the Second Amended and Restated Credit Agreement, totaling $25.7 million for the benefit of CMS and certain health plans as of December 31, 2025. Unless the institution provides notification that the standby letters of credit will be terminated prior to the expiration date, the letters will be automatically extended without amendment for additional one-year periods from the present or any future expiration date.

Certain affiliated IPAs consolidated by us established irrevocable standby letters of credit for a total of $2.1 million for the benefit of certain health plans as of December 31, 2025. The loan under which the standby letters of credit can be issued had an original loan availability of $4.1 million. The standby letters of credit are automatically extended without amendment for additional one-year periods from the present or any future expiration date, unless notified by the institution in advance of the expiration date that the letter will be terminated.

See Note 14 - "Commitments and Contingencies" to our consolidated financial statements under Item 8 in this Annual Report on Form 10-K for additional information on our standby letters of credit.

Critical Accounting Policies and Estimates

The consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America ("U.S. GAAP"), which require management to make a number of estimates and assumptions relating to the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and to the reported amounts of revenues and expenses during the period. We base our estimates on historical experience and various other assumptions we believe are reasonable under the circumstances. Changes in estimates are recorded if and when better information becomes available. Actual results could differ from those estimates under different assumptions and conditions. We believe that the accounting policies discussed below are the most important to the presentation of its financial condition and results of operations, and that they require our management's most difficult, subjective, and complex judgments. Our significant accounting policies are described in Note 2 - "Basis of Presentation and Summary of Significant Accounting Policies" to our consolidated financial statements under Item 8 in this Annual Report on Form 10-K.

Principles of Consolidation

The consolidated balance sheets as of December 31, 2025 and 2024 and consolidated statements of income for the years ended December 31, 2025, 2024, and 2023 include Astrana's wholly owned subsidiaries and consolidated variable interest entities ("VIEs").

Use of Estimates

The preparation of the consolidated financial statements and related disclosures in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates, and assumptions include collectability of receivables, recoverability of long-lived and intangible assets, business combination and goodwill valuation and impairment assessment, accrual of medical liabilities (incurred but not reported ("IBNR") claims), determination of hospital shared-risk and health plan shared-risk revenue and receivables (including estimations of affiliated hospitals' claims costs which involves assumptions for IBNR, such as utilization of healthcare services, historical payment patterns, cost trends, seasonality, changes in membership, and other factors), income tax-valuation allowance, share-based compensation, right-of-use assets and lease liabilities. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, and makes adjustments when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ materially from those estimates and assumptions.

Receivables, Other Receivables, and Loans Receivable

Our receivables are comprised of capitation receivables, fee-for-service receivables, risk pool settlements, incentive receivables, management fee income, and receivables from related parties. The Company's receivables are recorded and stated as the amount expected to be collected.

Capitation receivables relate to each health plan's capitation revenue and are usually received by us in the month following the month of service. Capitation receivables also include receivables from CMS related to our participation in the ACO REACH model. Fee-for-service receivable involves our hospital and clinics. Both our hospital and the clinics receive amounts from third-party payers and patients for patient care services, while the clinics additionally receive amounts from hospitals. Risk pool settlements and incentive receivables mainly consist of our hospital shared-risk pool receivable, which is recorded based on reports received from our hospital partners and management's estimate of our portion of the estimated risk pool surplus for open performance years. Settlement of risk pool surplus or deficits occurs within 6 to 12 months after the risk pool performance year is completed. Other receivables consist of amounts due from the seller associated with acquisitions and stop-loss insurance premium reimbursements. Loans receivable consist of promissory notes that accrue interest per annum and are recorded and stated at amortized cost plus accrued interest. Receivables from related parties primarily consist of hospital-shared risk pool settlements from AHMC Healthcare Inc., of which one of our directors is an officer. These amounts are recorded quarterly based on reports received from our hospital partners and management's estimate of our portion of the estimated risk pool surplus for open performance years. Final settlement occurs within 18 months after the risk pool performance year is completed.

We maintain reserves for potential credit losses on the receivables. Management reviews the composition of our receivables and analyzes historical bad debts, customer concentrations, customer creditworthiness, current economic trends, and changes in customer payment patterns to evaluate the adequacy of these reserves. We also regularly analyze the ultimate collectability of accounts receivable after certain stages of the collection cycle using a look-back analysis to determine the amount of receivables subsequently collected, and adjustments are recorded when necessary. Reserves are recorded based on historical trends. Any change in such an estimate of reserves is recorded in the period when such a change is identified.

Receivables are recorded when we are able to determine amounts receivable under applicable contracts and agreements based on information provided, and collection is reasonably likely to occur. Regarding the credit loss standard, we continuously monitor our collections of receivables. Our expectation is that the historical credit loss experienced across our receivable portfolio is materially similar to any current expected credit losses that would be estimated under the current expected credit losses ("CECL") model.

We assess outstanding loans receivable under the CECL model by evaluating the party's ability to pay, which involves reviewing quarterly interest payment history, annually reviewing financial history, assessing the value of any collateral, and reassessing any identified insolvency risk.

Fair Value Measurements

Our financial instruments include cash and cash equivalents, restricted cash, investment in marketable securities, receivables, loans receivable, accounts payable, certain accrued expenses, lines of credit, long-term debt, and certain other liabilities. The carrying values of the financial instruments classified as current in the accompanying consolidated balance sheets are considered to be at their fair values due to the short maturity of these instruments. The carrying amount of the loans receivable, net of current portion, lines of credit, and long-term debt approximates fair value as they bear interest at rates that approximate current market rates for debt with similar maturities and credit quality. The FASB's Accounting Standards Codification ("ASC") 820, "Fair Value Measurement" ("ASC 820"), applies to all financial assets and financial liabilities that are measured and reported on a fair value basis and requires disclosure that establishes a framework for measuring fair value and expands disclosure about fair value measurements. ASC 820 establishes a fair value hierarchy for disclosures of the inputs to valuations used to measure fair value.

This hierarchy prioritizes the inputs into three broad levels as follows:

Level 1 - Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that can be accessed at the measurement date.

Level 2 - Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates and yield curves), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).

Level 3 - Unobservable inputs that reflect assumptions about what market participants would use in pricing the asset or liability. These inputs would be based on the best information available, including our own data.

Business Combinations

We use the acquisition method of accounting for all business combinations, which requires assets and liabilities of the acquiree to be recorded at fair value, to measure the fair value of the consideration transferred, including contingent consideration, to be determined on the acquisition date, and to account for acquisition-related costs separately from the business combination, which are expensed as incurred.

Intangible Assets and Long-Lived Assets

Intangible assets with finite lives include network relationships, management contracts, member relationships, patient management platform, tradename/trademarks, and developed technology. The valuations of these intangible assets are based on the multi-period excess earnings method, the cost to recreate method, or the relief from royalty method. Network relationships and management contracts are amortized using an accelerated method based on expected patterns of economic benefit or using the straight-line method. Patient management platform, tradename/trademarks, and developed technology are amortized using the straight-line method. Member relationships are amortized using an accelerated method based on expected patterns of economic benefit. Intangible assets are net of accumulated amortization and impairment losses, if any.

Finite-lived intangibles and long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the expected future cash flows from the use of such assets (undiscounted and without interest charges) are less than the carrying value, a write-down would be recorded to reduce the carrying value of the asset to its estimated fair value. Fair value is determined based on appropriate valuation techniques.

Goodwill and Intangible Assets

Under ASC 350, "Intangibles - Goodwill and Other",goodwill and indefinite-lived intangible assets are reviewed at least annually for impairment under a two-step process.

We may also elect to skip the qualitative testing and proceed directly to quantitative testing. Our five reporting units consist of the following:

An impairment loss is recognized if the carrying value of a reporting unit exceeds its fair value. If this event arises, the impairment loss recorded is equal to the excess of the carrying value of the reporting unit over its fair value.

At least annually, indefinite-lived intangible assets are tested for impairment. Impairment for intangible assets with indefinite lives exists if the carrying value of the intangible asset exceeds its fair value. The fair values of indefinite-lived intangible assets are determined using valuation techniques that rely on estimates, judgments, and assumptions that management believes are appropriate in the circumstances.

Accrual of Medical Liabilities

Our Care Partners segment is responsible for integrated care provided by the associated physicians and contracted hospitals to their enrollees. Our Care Partners segment provides integrated care to HMOs, Medicare, and Medi-Cal enrollees through a network of contracted providers under sub-capitation and direct patient service arrangements. Medical costs for professional and institutional services rendered by contracted providers are recorded as cost of services, excluding depreciation and amortization, in the accompanying consolidated statements of income.

An estimate of amounts due to contracted physicians, hospitals, and other professional providers is included in medical liabilities in the accompanying consolidated balance sheets. Medical liabilities include claims reported as of the balance sheet date and estimated IBNR claims. Such estimates are developed using actuarial methods and are based on numerous variables, including the utilization of healthcare services, historical payment patterns, cost trends, product mix, seasonality, changes in membership, and other factors. The estimation methods and the resulting reserves are periodically reviewed and updated. Many medical contracts are complex and may be subject to differing interpretations of amounts due for the provision of various services. Such differing interpretations may not come to light until a substantial period of time has passed following the contract implementation.

Capitation, Net

We participate in the ACO REACH model with CMS. By entering into a contract with CMS, an ACO voluntarily assumes operational, financial, and legal responsibilities and risks that no party, individually or collectively, has under the existing FFS model. For each performance year, CMS will pay a total benchmark amount, determined unilaterally by CMS in advance and subject to prospective adjustments throughout the year, for the totality of care provided to the ACO's population of aligned beneficiaries during that year. The benchmark is net of a quality withholding applied by CMS. At the end of each performance year, a portion, or all, of the quality withholding can be earned based on the ACO's performance. ACO REACH capitation revenue is recognized based on the estimated transaction price to transfer the service for a distinct increment of the series (i.e., month) and is recognized net of quality incentives/penalties. We recognize revenue related to the ACO Reach Model within capitation revenue in our consolidated statements of income because of the similar shared characteristics to our other capitation revenue. Revenue is recorded on a gross basis and is comprised of capitated fees for medical services provided, for which we are assigned the responsibility and management.

Risk Pool Settlements and Incentives

Certain IPAs enter into hospital shared-risk capitation arrangements with certain health plans and local hospitals, where the hospital is responsible for providing, arranging, and paying for institutional risk, and the IPA is responsible for providing, arranging, and paying for professional risk. Under a hospital shared-risk pool-sharing agreement, the IPA generally receives a percentage of the net surplus from the affiliated hospital's risk pools with health plans after deductions for the affiliated hospital's costs. Advance settlement payments are typically made quarterly in arrears if there is a surplus. Our risk pool settlements under hospital shared-risk capitation arrangements are recognized using the most likely amount methodology, and amounts are included in revenue only to the extent that it is probable that a significant reversal of cumulative revenue will not occur once any uncertainty is resolved. The receivables related to these risk pool arrangements incorporate estimates of the affiliated hospitals' claims costs, including IBNR claims, which include actuarial methods based on utilization of healthcare services, historical payment patterns, cost trends, seasonality, changes in membership, and other factors.

Under capitated arrangements with certain HMOs, certain IPAs participate in one or more health plan shared-risk arrangements relating to the provision of institutional services to enrollees and thus can earn additional revenue or incur losses based upon the enrollee utilization of institutional services. Health plan shared-risk arrangements are entered into with certain health plans, which are administered by the health plan, where the IPA is responsible for rendering professional services, but the health plan does not enter into a capitation arrangement with a hospital, and therefore, the health plan retains the institutional risk. Health plan shared-risk deficits, if any, are not payable until and unless (and only to the extent) risk-sharing surpluses are generated. At the termination of the HMO contract, any accumulated deficit will be extinguished. Final settlement of health plan shared-risk for prior contract years generally occurs in the third or fourth quarter of the following year. We have limited insight into the amount and timing of the health plans' shared-risk payments. These amounts are considered to be fully constrained and only recorded when such payments can be reasonably estimated, and to the extent that it is probable that a significant reversal will not occur once such settlement occurs.

We also receive incentives under "pay-for-performance" programs for quality medical care, based on various criteria. As an incentive to promote quality care, certain HMOs have designed quality incentive programs and commercial generic pharmacy incentive programs to compensate us for our efforts to improve the quality of services and efficient and effective use of pharmacy supplemental benefits provided to HMO members. The incentive programs track specific performance measures and calculate payments to us based on the performance measures. Our incentives under "pay-for-performance" programs are recognized using the most likely methodology.

Share-Based Compensation

We maintain a stock-based compensation program for employees, non-employee directors, and consultants. From time to time, we issue shares of its common stock to its employees, directors, and consultants, which shares may be subject to our repurchase right (but not obligation), that vest based on time-based and/or performance-based vesting schedules. The value of share-based awards is recognized as compensation expense and adjusted for forfeitures as they occur. Compensation expenses for time-based awards are recognized on a cumulative straight-line basis over the vesting period of the awards. Share-based awards with performance conditions are recognized to the extent that the performance conditions are probable to be achieved. Compensation expenses for performance-based awards are recognized on an accelerated attribution method. The grant date fair value of the restricted stock awards is the grant date's closing market price of our common stock. The fair value of options granted is determined using the Black-Scholes option pricing model and includes several assumptions, including the expected term, expected volatility, expected dividends, and the risk-free rate. The expected term is presumed to be the midpoint between the vesting date and the end of the contractual term. The expected stock price volatility is determined based on an average of historical volatility. The expected dividend yield is based on our expected dividend payouts. The risk-free interest rate is based on the U.S. Constant Maturity curve over the expected term of the option at the time of grant.

Leases

We determine if an arrangement is a lease at its inception. The expected term of the lease used for computing the lease liability and the right-of-use asset, and for determining the classification of the lease as operating or financing, may include options to extend or terminate the lease when it is reasonably certain that we will exercise those options. We elected practical expedients for ongoing accounting that were provided by the new standard, which is comprised of the following:

The present value of the lease payments is calculated using a rate implicit in the lease, when readily determinable. However, as most of our leases do not provide an implicit rate, we use our incremental borrowing rate to determine the present value of the lease payments for the majority of its leases.

Variable Interest Model

If an entity is determined to be a VIE, we evaluate whether we are the primary beneficiary. The primary beneficiary analysis is a qualitative analysis based on power and economics. We consolidate a VIE if both power and benefits belong to us - that is, we have:

We consolidates VIEs whenever it is determined that we are the primary beneficiary.

Investments in Other Entities - Equity Method

We account for certain investments using the equity method of accounting when it is determined that the investment provides us with the ability to exercise significant influence, but not control, over the investee. Significant influence is generally deemed to exist if we have an ownership interest in the voting stock of the investee of between 20% and 50%, although other factors, such as representation on the investee's Board of Directors, are considered in determining whether the equity method of accounting is appropriate. Under the equity method of accounting, the investment, originally recorded at cost, is adjusted to recognize our share of net earnings or losses of the investee and is recognized in the accompanying consolidated statements of income under "Income from equity method investments" and is also adjusted by contributions to and distributions from the investee. During the year ended December 31, 2025, we recognized no impairment loss.

Non-controlling Interests

We consolidate entities in which we have a controlling financial interest. We consolidate subsidiaries in which we hold, directly or indirectly, more than 50% of the voting rights, and VIEs in which we are the primary beneficiary. Non-controlling interests represent third-party equity ownership interests (including equity ownership interests held by certain VIEs) in our consolidated entities. Net income attributable to non-controlling interests is disclosed in the consolidated statements of income.

Mezzanine Deficit

Pursuant to APC's shareholder agreements, in the event of a disqualifying event, as defined in the agreements, APC could be required to repurchase its shares from the respective shareholders based on certain triggers outlined in the shareholder agreements. As the redemption feature of the shares is not solely within the control of APC, the equity of APC does not qualify as permanent equity and has been classified as mezzanine or temporary equity. Accordingly, we recognize non-controlling interests in APC as mezzanine deficit in the consolidated financial statements. APC's shares were not redeemable, and it was not probable that the shares would become redeemable as of December 31, 2025 and 2024.

Income Taxes

Federal and state income taxes are computed at currently enacted tax rates, less tax credits, using the asset and liability method. Deferred taxes are adjusted for both items that do not have tax consequences and for the cumulative effect of any changes in tax rates from those previously used to determine deferred tax assets or liabilities. Tax provisions include amounts that are currently payable, changes in deferred tax assets and liabilities that arise because of temporary differences between the timing of when items of income and expense are recognized for financial reporting and income tax purposes, changes in recognition of tax positions, and any changes in the valuation allowance caused by a change in judgment about the realizability of the related deferred tax assets. A valuation allowance is established when necessary to reduce deferred tax assets to amounts expected to be realized.

We use a recognition threshold of "more-likely-than-not" and a measurement attribute on all tax positions taken, or expected to be taken, in a tax return in order to be recognized in the consolidated financial statements. Once the recognition threshold is met, the tax position is measured to determine the actual amount of benefit to recognize in the consolidated financial statements.

Effect of New Accounting Standards

See "Recent Accounting Pronouncements" under Note 2 - "Basis of Presentation and Summary of Significant Accounting Policies" to our consolidated financial statements under Item 8 in this Annual Report on Form 10-K for additional information.