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Centene 10-K 2008 Documents found in this filing:
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
For
the fiscal year ended December 31, 2007
or
For
the transition period
from to
Commission
file number: 001-31826
CENTENE
CORPORATION
(Exact
name of registrant as specified in its charter)
Registrant’s
telephone number, including area code: (314) 725-4477
Securities
registered pursuant to Section 12(b) of the Act:
Securities
registered pursuant to Section 12(g) of the Act:
None
(Title
of Each Class)
Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes T No £
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes £ No T
Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90
days. Yes T No £
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. T
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filed, a non-accelerated filer, or a smaller reporting
company. See definition of “accelerated filer and large accelerated
filer” in rule 12b-2 of the Exchange Act.
Large
accelerated filer T
Accelerated filer £
Non-accelerated filer £
Smaller reporting company £
Indicate by
check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Act). Yes £ No T
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant, based upon the last reported sale price of the
common stock on the New York Stock Exchange on June 30, 2007, was $915.9
million.
As of
February 8, 2008, the registrant had 43,663,248 shares of common stock
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the Proxy Statement for the registrant’s 2008 annual meeting of stockholders
are incorporated by reference in Part I, Item 1 and Part III, Items 10, 11, 12,
13 and 14.
Our
trademark, service marks and trade names referred to in this filing include
AirLogix, Bridgeway Health Solutions, Buckeye Community Health Plan, Cardium,
Cenpatico Behavioral Health, Cenpatico Behavioral Health of Arizona, Centene,
FirstGuard Health Plan, Managed Health Services, NurseWise, Nurtur, OptiCare,
Peach State Health Plan, PhyTrust, ScriptAssist, Smart Start For
Your Baby, Superior HealthPlan, Total Carolina Care, US Script and University
Health Plans, among others.
PART
I
OVERVIEW
We are a
multi-line healthcare enterprise operating in two segments: Medicaid Managed
Care and Specialty Services. Our Medicaid Managed Care segment
provides Medicaid and Medicaid-related health plan coverage to individuals
through government subsidized programs, including Medicaid, the State Children’s
Health Insurance Program, or SCHIP, and Supplemental Security Income Program, or
SSI. Medicaid currently accounts for 74% of our membership, while
SCHIP and SSI account for 20% and 6%, respectively. Our Specialty
Services segment provides specialty services, including behavioral health, life
and health management, long-term care programs, managed vision, nurse triage,
pharmacy benefits management and treatment compliance, to state programs,
healthcare organizations, employer groups and other commercial organizations, as
well as to our own subsidiaries on market-based terms. For the year
ended December 31, 2007, our revenues from continuing operations, cash flow from
operations, and net earnings were $2.9 billion, $202.2 million and $73.4
million, respectively.
Our
Medicaid Managed Care membership totaled approximately 1.1 million as of
December 31, 2007. We currently have seven health plan subsidiaries
offering healthcare services in Georgia, Indiana, New Jersey, Ohio, South
Carolina, Texas and Wisconsin. Additionally, effective in July 2007,
we acquired a minority interest in Access Health Solutions, LLC, or Access,
which provides managed care on a non-risk basis for Medicaid recipients in
Florida. We provide member-focused services through locally based
staff by assisting in accessing care, coordinating referrals to related health
and social services and addressing member concerns and questions. We
also provide education and outreach programs to inform and assist members in
accessing quality, appropriate healthcare services.
We
believe our local approach to managing our health plans, including provider and
member services, enables us to provide accessible, quality, culturally-sensitive
healthcare coverage to our communities. Our health management,
educational and other initiatives are designed to help members best utilize the
healthcare system to ensure they receive appropriate, medically necessary
services and effective management of routine, severe and chronic health
problems, resulting in better health outcomes. We combine our
decentralized local approach for care with a centralized infrastructure of
support functions such as finance, information systems and claims
processing.
Our
initial health plan commenced operations in Wisconsin in 1984. We
were organized in Wisconsin in 1993 as a holding company for our initial health
plan and reincorporated in Delaware in 2001. Our corporate office is
located at 7711 Carondelet Avenue, St. Louis, Missouri 63105, and our telephone
number is (314) 725-4477. Our stock is publicly traded on the New
York Stock Exchange under the ticker symbol “CNC.”
We
maintain a website with the address www.centene.com. We
are not including the information contained on our website as part of, or
incorporating it by reference into, this filing. We make available,
free of charge through our website, our Section 16 filings, annual reports on
Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and
any amendments to these reports, filed or furnished pursuant to Section 13(a) or
15(d) of the Exchange Act as soon as reasonably practicable after we
electronically file such material with, or furnish such material to, the
SEC.
INDUSTRY
We
provide our services to organizations and individuals primarily through
Medicaid, SCHIP and SSI programs. The federal Centers for Medicare
and Medicaid Services, or CMS, estimated the total Medicaid market was
approximately $313 billion in 2005, and estimate the market will grow to $680
billion by 2016. According to the most recent information provided by
the Kaiser Commission on Medicaid and the Uninsured, Medicaid spending increased
by 2.9% in fiscal 2007 and states appropriated an increase of 6.3% for Medicaid
in fiscal 2008 budgets.
Established
in 1965, Medicaid is the largest publicly funded program in the United States,
and provides health insurance to low-income families and individuals with
disabilities. Authorized by Title XIX of the Social Security Act,
Medicaid is an entitlement program funded jointly by the federal and state
governments and administered by the states. The majority of funding
is provided at the federal level. Each state establishes its own
eligibility standards, benefit packages, payment rates and program
administration within federal standards. As a result, there are 56
Medicaid programs— one for each U.S. state, each U.S. territory and the District
of Columbia. Many states have selected Medicaid managed care as a
means of delivering quality healthcare and controlling costs, including states
that automatically enroll Medicaid recipients who don’t select a health
plan. We refer to these states as mandated managed care
states. Currently, 44 of the 56 programs, including each of the seven
states in which we operate health plans, have mandated managed care for some or
all of their Medicaid recipients. Eligibility is based on a
combination of household income and assets, often determined by an income level
relative to the federal poverty level. Historically, children have
represented the largest eligibility group.
Established
in 1972, and authorized by Title XVI of the Social Security Act, SSI covers
low-income persons with chronic physical disabilities or behavioral health
impairments. SSI beneficiaries, including Aged, Blind or Disabled, or
ABD, program beneficiaries, represent a growing portion of all Medicaid
recipients. In addition, SSI recipients typically utilize more
services because of their critical health issues.
The
Balanced Budget Act of 1997 created SCHIP to help states expand coverage
primarily to children whose families earned too much to qualify for Medicaid,
yet not enough to afford private health insurance. Some states
include the parents of these children in their SCHIP programs. SCHIP
is the single largest expansion of health insurance coverage for children since
the enactment of Medicaid. Costs related to the largest eligibility
group, children, are primarily composed of pediatrics and family
care. These costs tend to be more predictable than other healthcare
issues which predominantly affect the adult population.
A portion
of Medicaid beneficiaries are dual eligibles, low-income seniors and people with
disabilities who are enrolled in both Medicaid and
Medicare. According to the Centers for Medicare and Medicaid
Services, there were approximately seven million dual eligible enrollees in
2006. These dual eligibles may receive assistance from Medicaid for
Medicaid benefits, such as nursing home care and/or assistance with Medicare
premiums and cost sharing. Dual eligibles also use more services due
to their tendency to have more chronic health issues. We serve dual
eligibles through our SSI and long-term care programs, and beginning in 2008,
through Special Needs Plans.
While
Medicaid programs have directed funds to many individuals who cannot afford or
otherwise maintain health insurance coverage, they did not initially address the
inefficient and costly manner in which the Medicaid population tends to access
healthcare. Medicaid recipients in non-managed care programs
typically have not sought preventive care or routine treatment for chronic
conditions, such as asthma and diabetes. Rather, they have sought
healthcare in hospital emergency rooms, which tends to be more
expensive. As a result, many states have found that the costs of
providing Medicaid benefits have increased while the medical outcomes for the
recipients remained unsatisfactory.
Since the
early 1980s, increasing healthcare costs, combined with significant growth in
the number of Medicaid recipients, have led many states to establish Medicaid
managed care initiatives. Continued pressure on states’ Medicaid
budgets should cause public policy to recognize the value of managed care as a
means of delivering quality healthcare and effectively controlling
costs. A growing number of states, including each of the seven states
in which we operate health plans, have mandated that their Medicaid recipients
enroll in managed care plans. Other states are considering moving to
a mandated managed care approach. As a result, a significant market
opportunity exists for managed care organizations with operations and programs
focused on the distinct socio-economic, cultural and healthcare needs of the
Medicaid, SCHIP and SSI populations. We believe our approach and
strategy enable us to be a growing participant in this market.
OUR
COMPETITIVE STRENGTHS
Our
multi-line managed care approach is based on the following key
attributes:
OUR
BUSINESS STRATEGY
Our
objective is to become the leading multi-line healthcare enterprise focusing on
Medicaid and Medicaid-related services. We intend to achieve this
objective by implementing the following key components of our
strategy:
MEDICAID
MANAGED CARE
Health
Plans
We have
regulated subsidiaries offering healthcare services in each state we
serve. The table below provides summary data for the state markets we
currently serve:
All of
our revenue is derived from operations within the United States and its
territories. We generally receive a fixed premium per member per
month pursuant to our state contracts. Our medical costs have a
seasonality component due to cyclical illness, for example cold and flu season,
resulting in higher medical expenses beginning in the fourth quarter and
continuing throughout the first quarter of each year. Our managed
care subsidiaries in Georgia, Indiana, Ohio, Texas and Wisconsin had revenues
from their respective state governments that each exceeded 10% of our
consolidated total revenues in 2007. Other financial information
about our segments is found in Note 19 of our Notes to Consolidated Financial
Statements and “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” included elsewhere in this Form 10-K.
Benefits
to States
Our
ability to establish and maintain a leadership position in the markets we serve
results primarily from our demonstrated success in providing quality care while
reducing and managing costs, and from our specialized programs in working with
state governments. Among the benefits we are able to provide to the
states with which we contract are:
Member
Programs and Services
We
recognize the importance of member-focused delivery of quality managed care
services. Our locally-based staff assist members in accessing care,
coordinating referrals to related health and social services and addressing
member concerns and questions. While covered healthcare benefits vary
from state to state, our health plans generally provide the following
services:
We also
provide the following education and outreach programs to inform and assist
members in accessing quality, appropriate healthcare services in an efficient
manner:
Providers
For each
of our service areas, we establish a provider network consisting of primary and
specialty care physicians, hospitals and ancillary providers. As of
December 31, 2007, the health plans we currently serve contracted with the
following number of physicians and hospitals:
Our
network of primary care physicians is a critical component in care delivery,
management of costs and the attraction and retention of new
members. Primary care physicians include family and general
practitioners, pediatricians, internal medicine physicians and obstetricians and
gynecologists. Specialty care physicians provide medical care to
members generally upon referral by the primary care
physicians. Specialty care physicians include, but are not limited
to, orthopedic surgeons, cardiologists and otolaryngologists. We also
provide education and outreach programs to inform and assist members in
accessing quality, appropriate healthcare services.
Our
health plans facilitate access to healthcare services for our members primarily
through contracts with our providers. Our contracts with primary and
specialty care physicians and hospitals usually are for one to two-year periods
and renew automatically for successive one-year terms, but generally are subject
to termination by either party upon 90 to 120 days prior written
notice. In the absence of a contract, we typically pay providers at
state Medicaid reimbursement levels. We pay physicians under a
fee-for-service, capitation arrangement, or risk-sharing
arrangement.
We work
with physicians to help them operate efficiently by providing financial and
utilization information, physician and patient educational programs and disease
and medical management programs. Our programs are also designed to
help the physicians coordinate care outside of their offices. In
addition, we are governed by state prompt payment policies.
We
believe our collaborative approach with physicians gives us a competitive
advantage in entering new markets. Our physicians serve on local
committees that assist us in implementing preventive care programs, managing
costs and improving the overall quality of care delivered to our members, while
also simplifying the administrative burdens on our providers. This
approach has enabled us to strengthen our provider networks through improved
physician recruitment and retention that, in turn, have helped to increase our
membership base. The following are among the services we provide to
support physicians:
Our
contracted physicians also benefit from several of the services offered to our
members, including the CONNECTIONS, EPSDT case management and health management
programs. For example, the CONNECTIONS staff facilitates
doctor/patient relationships by connecting members with physicians, the EPSDT
programs encourage routine checkups for children with their physicians and the
health management programs assist physicians in managing their patients with
chronic disease.
Where
appropriate, our health plans contract with our specialty services organizations
to provide services and programs such as behavioral health, health management,
managed vision, nurse triage, pharmacy benefit management, and treatment
compliance. When necessary, we also contract with third-party
providers on a negotiated fee arrangement for physical therapy, home healthcare,
diagnostic laboratory tests, x-ray examinations, ambulance services and durable
medical equipment. Additionally, we contract with dental vendors in
markets where routine dental care is a covered benefit.
Quality
Management
Our
medical management programs focus on improving quality of care in areas that
have the greatest impact on our members. We employ strategies,
including health management and complex case management, that are adjusted for
implementation in our individual markets by a system of physician committees
chaired by local physician leaders. This process promotes physician
participation and support, both critical factors in the success of any clinical
quality improvement program.
We have
implemented specialized information systems to support our medical quality
management activities. Information is drawn from our data warehouse,
clinical databases and our membership and claims processing system, to identify
opportunities to improve care and to track the outcomes of the interventions
implemented to achieve those improvements. Some examples of these
intervention programs include:
We
provide reporting on a regular basis using our data warehouse. State
and Health Employer Data and Information Set, or HEDIS, reporting constitutes
the core of the information base that drives our clinical quality performance
efforts. This reporting is monitored by Plan Quality Improvement
Committees and our corporate medical management team.
In an
effort to ensure the quality of our provider networks, we undertake to verify
the credentials and background of our providers using standards that are
supported by the National Committee for Quality Assurance.
Information
Technology
The
ability to access data and translate it into meaningful information is essential
to operating across a multi-state service area in a cost-effective
manner. Our centralized information systems which are located in St.
Louis, Missouri, support our core processing functions under a set of integrated
databases and are designed to be both replicable and scalable to accommodate
organic growth and growth from acquisitions. We believe we have the
ability to leverage the platform we have developed for our existing states for
configuration into new states or health plan acquisitions.
Our
integrated approach helps to assure that consistent sources of claim and member
information are provided across all of our health plans. Our
membership and claims processing system is capable of expanding to support
additional members in an efficient manner. We have a disaster
recovery and business resumption plan developed and implemented in conjunction
with a third party. This plan allows us complete access to the
business resumption centers and hot-site facilities provided by the
plan.
SPECIALTY
SERVICES
Our
Specialty Services segment is a key component of our healthcare enterprise and
complements our core Medicaid Managed Care business. The specialty
services diversify our revenue stream, provide higher quality health outcomes to
our membership and others, and assist in controlling costs. Our
specialty services are provided primarily through the following
businesses:
CORPORATE
COMPLIANCE
Our
Corporate Ethics and Compliance Program was first established in 1998 and
provides methods by which we further enhance operations, safeguard against fraud
and abuse, improve access to quality care and helps assure that our values are
reflected in everything we do.
The two
primary standards by which corporate compliance programs in the healthcare
industry are measured are the 1991 Federal Organizational Sentencing Guidelines
and the “Compliance Program Guidance” series issued by the Office of the
Inspector General, or OIG, of the Department of Health and Human
Services. Our program contains each of the seven elements suggested
by the Sentencing Guidelines and the OIG guidance. These key
components are:
Our
internal Corporate Compliance website, accessible by all employees, contains our
Business Ethics and Conduct Policy, our Mission, Values and Philosophies and
Compliance Programs, a company-wide policy and procedure database and our
toll-free hotline to allow employees or other persons to report suspected
incidents of fraud, abuse or other violations. The audit committee
and the board of directors review a compliance report on a quarterly
basis.
COMPETITION
We
continue to face varying and increasing levels of competition as we expand in
our existing service areas or enter new markets, as federal regulations require
at least two competitors in each service area. Healthcare reform
proposals may cause a number of commercial managed care organizations to decide
to enter or exit the Medicaid market.
In our business, our principal
competitors for state contracts, members and providers consist of the following
types of organizations:
We
compete with other managed care organizations and specialty companies for state
contracts. In order to grant a contract, state governments consider
many factors. These factors include quality of care, financial
requirements, an ability to deliver services and establish provider networks and
infrastructure. In addition, our specialty companies also compete
with other providers, such as disease management companies and pharmacy benefits
managers for non-governmental contracts.
We also
compete to enroll new members and retain existing members. People who
wish to enroll in a managed healthcare plan or to change healthcare plans
typically choose a plan based on the quality of care and services offered, ease
of access to services, a specific provider being part of the network and the
availability of supplemental benefits. In certain markets, where
recipients select a physician instead of a health plan, we are able to grow our
membership by adding new physicians to our provider base.
We also
compete with other managed care organizations to enter into contracts with
physicians, physician groups and other providers. We believe the
factors that providers consider in deciding whether to contract with us include
existing and potential member volume, reimbursement rates, medical management
programs, speed of reimbursement and administrative service
capabilities. See “Risk Factors — Competition may limit our ability
to increase penetration of the markets that we serve.”
REGULATION
Our
healthcare and specialty operations are regulated at both state and federal
levels. Government regulation of the provision of healthcare products
and services is a changing area of law that varies from jurisdiction to
jurisdiction. Regulatory agencies generally have discretion to issue
regulations and interpret and enforce laws and rules. Changes in
applicable laws and rules also may occur periodically.
Our
regulated subsidiaries are licensed to operate as health maintenance
organizations and/or insurance companies in their respective
states. In each of the jurisdictions in which we operate, we are
regulated by the relevant health, insurance and/or human services departments
that oversee the activities of managed care organizations providing or arranging
to provide services to Medicaid enrollees.
The
process for obtaining authorization to operate as a managed care organization is
complex and requires demonstration to the regulators of the adequacy of the
health plan’s organizational structure, financial resources, utilization review,
quality assurance programs, complaint procedures, provider network adequacy and
procedures for covering emergency medical conditions. Under both
state managed care organization statutes and state insurance laws, our health
plan subsidiaries must comply with minimum statutory capital requirements and
other financial requirements, such as deposit and reserve
requirements. Insurance regulations may also require prior state
approval of acquisitions of other managed care organizations’ businesses and the
payment of dividends, as well as notice for loans or the transfer of
funds. Our subsidiaries are also subject to periodic reporting
requirements. In addition, each health plan must meet criteria to
secure the approval of state regulatory authorities before implementing
operational changes, including the development of new product offerings and, in
some states, the expansion of service areas.
States
have adopted a number of regulations that may affect our business and results of
operations. These regulations in certain states include:
State
Contracts
In order
to be a Medicaid Managed Care organization in each of the states in which we
operate, we must operate under a contract with the state’s Medicaid
agency. States generally use either a formal proposal process,
reviewing a number of bidders, or award individual contracts to qualified
applicants that apply for entry to the program. We receive monthly
payments based on specified capitation rates determined on an actuarial
basis. These rates differ by membership category and by state
depending on the specific benefits and policies adopted by each
state.
Our
contracts with the states and regulatory provisions applicable to us generally
set forth the requirements for operating in the Medicaid sector, including
provisions relating to:
A health
plan’s compliance with these requirements is subject to monitoring by state
regulators and by CMS. A health plan is also subject to periodic
comprehensive quality assurance evaluations by a third-party reviewing
organization and generally by the insurance department of the jurisdiction that
licenses the health plan. A health plan must also submit reports to
various regulatory agencies, including quarterly and annual statutory financial
statements and utilization reports.
The table below sets
forth the term of our state contracts and provides details regarding related
renewal or extension and termination provisions as of December 31,
2007.
HIPAA
In 1996,
Congress enacted the Health Insurance Portability and Accountability Act of
1996, or HIPAA. The Act is designed to improve the portability and
continuity of health insurance coverage and simplify the administration of
health insurance claims. Among the main requirements of HIPAA are
standards for the processing of health insurance claims and related
transactions.
The
regulation’s requirements apply to transactions conducted using “electronic
media.” Since “electronic media” is defined broadly to include “transmissions
that are physically moved from one location to another using magnetic tape, disk
or compact disk media,” many communications are considered to be electronically
transmitted. Under the HIPAA regulations, health plans are required
to have the capacity to accept and send all covered transactions in a
standardized electronic format. Penalties can be imposed for failure
to comply with these requirements.
HIPAA
regulations also protect the privacy of medical records and other personal
health information maintained and used by healthcare providers, health plans and
healthcare clearinghouses. We have implemented processes, policies
and procedures to comply with the HIPAA privacy regulations, including education
and training for employees. In addition, the corporate privacy
officer and health plan privacy officials serve as resources to employees to
address any questions or concerns they may have. Among numerous other
requirements, the privacy regulations:
The
preemption provisions of HIPAA provide that the federal standards will not
preempt state laws that are more stringent than the related federal
requirements. In addition, the Secretary of HHS may grant exceptions
allowing state laws to prevail if one or more of a number of conditions are met,
including but not limited to the following:
Ÿ the
state law is necessary to prevent fraud and abuse associated with the provision
of and payment for healthcare;
Ÿ the
state law is necessary to ensure appropriate state regulation of insurance and
health plans;
Ÿ the
state law is necessary for state reporting on healthcare delivery or costs;
or
Ÿ the
state law addresses controlled substances.
In 2003,
HHS published final regulations relating to the security of electronic
individually identifiable health information. Compliance with these
regulations was required by April 2005. These regulations require
healthcare providers, health plans and healthcare clearinghouses to implement
administrative, physical and technical safeguards to ensure the privacy and
confidentiality of such information when it is electronically stored, maintained
or transmitted through such devices as user authentication mechanisms and system
activity audits. In addition, numerous states have adopted personal
data security laws that provide for, among other things, private rights of
action for breaches of data security and mandatory notification to persons whose
identifiable information is obtained without authorization.
Patients’
Rights Legislation
The
United States Senate and House of Representatives passed different versions of
patients’ rights legislation in 2001. Both versions included
provisions that specifically apply protections to participants in federal
healthcare programs, including Medicaid beneficiaries. Although no
such federal legislation has been enacted, patients’ rights legislation is
frequently proposed in Congress. If enacted, this type of legislation
could expand our potential exposure to lawsuits and increase our regulatory
compliance costs. Depending on the final form of any enacted
patients’ rights legislation, such legislation could, among other things, expose
us to liability for economic and punitive damages for making determinations that
deny benefits or delay beneficiaries’ receipt of benefits as a result of our
medical necessity or other coverage determinations. We cannot predict
when or whether patients’ rights legislation will be enacted into law or, if
enacted, what final form such legislation might take.
Other
Fraud and Abuse Laws
Investigating
and prosecuting healthcare fraud and abuse became a top priority for law
enforcement entities in the last decade. The focus of these efforts
has been directed at participants in public government healthcare programs such
as Medicaid. The laws and regulations relating to Medicaid fraud and
abuse and the contractual requirements applicable to health plans participating
in these programs are complex and changing and may require substantial
resources.
EMPLOYEES
As of
December 31, 2007, we had approximately 3,100 employees. Our
employees are not represented by a union. We believe our
relationships with our employees are good.
EXECUTIVE
OFFICERS
The
following table sets forth information regarding our executive officers,
including their ages at January 31, 2008:
Michael F.
Neidorff. Mr. Neidorff has served as our Chairman and Chief
Executive Officer since May 2004. From May 1996 to May 2004, Mr.
Neidorff served as President, Chief Executive Officer and as a member of our
board of directors. From 1995 to 1996, Mr. Neidorff served as a
Regional Vice President of Coventry Corporation, a publicly-traded managed care
organization, and as the President and Chief Executive Officer of one of its
subsidiaries, Group Health Plan, Inc. From 1985 to 1995, Mr. Neidorff served as
the President and Chief Executive Officer of Physicians Health Plan of Greater
St. Louis, a subsidiary of United Healthcare Corp., a publicly-traded managed
care organization now known as UnitedHealth Group Incorporated. Mr.
Neidorff also serves as a director of Brown Shoe Company, Inc., a
publicly-traded footwear company with global operations.
Mark W.
Eggert. Mr. Eggert has served as our Executive Vice President,
Health Plans since November 2007. From January 1999 to November 2007,
Mr. Eggert served as the Associate Vice Chancellor and Deputy General Counsel at
Washington University, where he oversaw the legal affairs of the School of
Medicine.
Carol E.
Goldman. Ms. Goldman has served as Executive Vice President,
Chief Administrative Officer since June 2007. From July 2002 to June
2007, she served as our Senior Vice President, Chief Administrative
Officer. From September 2001 to July 2002, Ms. Goldman served as our
Plan Director of Human Resources. From 1998 to August 2001, Ms.
Goldman was Human Resources Manager at Mallinckrodt Inc., a medical device and
pharmaceutical company.
Cary D. Hobbs. Ms.
Hobbs has served as our Senior Vice President of Strategy and Business
Implementation since January 2004. She served as our Vice President
of Strategy and Business Implementation from September 2002 to January 2004 and
as our Director of Business Implementation from 1997 to August
2002.
Jesse N.
Hunter. Mr. Hunter has served as our Senior Vice President,
Corporate Development since April 2007. He served as our Vice
President, Corporate Development from December 2006 to April
2007. From October 2004 to December 2006, he served as our Vice
President, Mergers & Acquisitions. From July 2003 until October
2004, he served as the Director of Mergers & Acquisitions and from February
2002 until July 2003, he served as the Manager of Mergers &
Acquisitions.
Edmund E.
Kroll. Mr. Kroll has served as our Senior Vice President,
Finance and Investor Relations since May 2007. From June 1997 to
November 2006, Mr. Kroll served as Managing Director at Cowen and Company LLC,
where his research coverage focused on the managed care industry, including the
Company.
William N.
Scheffel. Mr. Scheffel has served as our Executive Vice
President, Specialty Business Unit since June 2007. From May 2005 to June 2007,
he served as our Senior Vice President, Specialty Business Unit. From
December 2003 until May 2005, he served as our Senior Vice President and
Controller. From July 2002 to October 2003, Mr. Scheffel was a
partner with Ernst & Young LLP. From 1975 to July 2002, Mr.
Scheffel was with Arthur Andersen LLP.
Eric R.
Slusser. Mr. Slusser has served as our Executive Vice
President and Chief Financial Officer since July 2007 and as our Treasurer since
February 2008. Mr. Slusser served as Executive Vice President of
Finance, Chief Accounting Officer and Controller of Cardinal Health, Inc. from
May 2006 to July 2007 and as Senior Vice President, Chief Accounting Officer and
Controller of Cardinal Health, Inc. from May 2005 to May 2006. Mr.
Slusser served as Senior Vice President-Chief Accounting Officer and Controller
for MCI, Inc. from November 2003 to May 2005, as Corporate Controller for
AES (an electric power generation and transmission company) from May 2003
to November 2003, and as Vice President-Controller from January 1996 to May 2003
for Sprint PCS.
Keith H.
Williamson. Mr. Williamson has served as our Senior Vice
President, General Counsel since November 2006 and as our Secretary since
February 2007. From 1988 until November 2006, he served at Pitney
Bowes Inc. in various legal and executive roles, the last seven years as a
Division President. Mr. Williamson also serves as a director of PPL
Corporation, a publicly-traded energy and utility holding company.
Information
concerning our executive officers’ compliance with Section 16(a) of the
Securities Exchange Act will appear in our Proxy Statement for our 2008 annual
meeting of stockholders under “Section 16(a) Beneficial Ownership Reporting
Compliance.” These portions of our Proxy Statement are incorporated herein by
reference. Information concerning our audit committee financial
expert and identification of our audit committee will appear in our Proxy
Statement for our 2008 annual meeting of stockholders under “Information about
Corporate Governance.” Information concerning our code of ethics will
appear in our Proxy Statement for our 2008 annual meeting of stockholders under
“Code of Business Conduct and Ethics.”
You
should carefully consider the risks described below before making an investment
decision. The trading price of our common stock could decline due to
any of these risks, in which case you could lose all or part of your
investment. You should also refer to the other information in this
filing, including our consolidated financial statements and related
notes. The risks and uncertainties described below are those that we
currently believe may materially affect our Company. Additional risks
and uncertainties that we are unaware of or that we currently deem immaterial
also may become important factors that affect our Company.
Risks
Related to Being a Regulated Entity
Reduction
in Medicaid, SCHIP and SSI funding could substantially reduce our
profitability.
Most of
our revenues come from Medicaid, SCHIP and SSI premiums. The base
premium rate paid by each state differs, depending on a combination of factors
such as defined upper payment limits, a member’s health status, age, gender,
county or region, benefit mix and member eligibility
categories. Future levels of Medicaid, SCHIP and SSI funding and
premium rates may be affected by continuing government efforts to contain
healthcare costs and may further be affected by state and federal budgetary
constraints. Additionally, state and federal entities may make
changes to the design of their Medicaid programs resulting in the cancellation
or modification of these programs.
For
example, in August 2007, the Centers for Medicare & Medicaid Services, or
CMS, published a final rule regarding the estimation and recovery of
improper payments made under Medicaid and SCHIP. This rule requires a
CMS contractor to sample selected states each year to estimate improper payments
in Medicaid and SCHIP and create national and state specific error
rates. States must provide information to measure improper payments
in Medicaid and SCHIP for managed care and fee-for-service. Each
state will be selected for review once every three years for each
program. States are required to repay CMS the federal share of any
overpayments identified.
On
February 8, 2006, President Bush signed the Deficit Reduction Act of 2005 to
reduce the size of the federal deficit. The Act reduces federal
spending by nearly $40 billion over 5 years, including a $5 billion reduction in
Medicaid. The Act reduces spending by cutting Medicaid payments for
prescription drugs and gives states new power to reduce or reconfigure
benefits. This law may also lead to lower Medicaid reimbursements in
some states. The Bush administration’s budget proposal for fiscal
year 2009 proposes cutting Medicaid funding by $17.4 billion in funding
reductions over five years. States also periodically consider
reducing or reallocating the amount of money they spend for Medicaid, SCHIP and
SSI. In recent years, the majority of states have implemented
measures to restrict Medicaid, SCHIP and SSI costs and eligibility.
Changes
to Medicaid, SCHIP and SSI programs could reduce the number of persons enrolled
in or eligible for these programs, reduce the amount of reimbursement or payment
levels, or increase our administrative or healthcare costs under those programs,
all of which could have a negative impact on our business. We believe
that reductions in Medicaid, SCHIP and SSI payments could substantially reduce
our profitability. Further, our contracts with the states are subject
to cancellation by the state after a short notice period in the event of
unavailability of state funds.
If
SCHIP is not reauthorized or states face shortfalls, our business could
suffer.
SCHIP was
initially authorized for a period of ten years through 2007. In late
2007, Congress passed two separate SCHIP reauthorization bills that would have
expanded SCHIP coverage, however President Bush vetoed each of these
bills. Since they could not come to agreement on long-term SCHIP
reauthorization terms, President Bush and Congress agreed to extend SCHIP
funding through March 31, 2009. We cannot be certain that SCHIP will
be reauthorized when current funding expires in 2009, and if it is, what changes
might be made to the program following reauthorization. There are
differing views as to what should be contained in an SCHIP reauthorization
bill. It is unclear how and when these differences will be resolved
and therefore we cannot predict the impact that reauthorization will have on our
business, assuming SCHIP is reauthorized.
States
receive matching funds from the federal government to pay for their SCHIP
programs, which matching funds have a per state annual cap. Because
of funding caps, there is a risk that these states could experience shortfalls
in future years, which could have an impact on our ability to receive amounts
owed to us from states in which we have SCHIP contracts.
If
any of our state contracts are terminated or are not renewed, our business will
suffer.
We
provide managed care programs and selected services to individuals receiving
benefits under federal assistance programs, including Medicaid, SCHIP and
SSI. We provide those healthcare services under contracts with
regulatory entities in the areas in which we operate. Our contracts
with various states are generally intended to run for one or two years and may
be extended for one or two additional years if the state or its agent elects to
do so. Our current contracts are set to expire between March 31, 2008
and December 31, 2010. When our contracts expire, they may be opened
for bidding by competing healthcare providers. There is no guarantee
that our contracts will be renewed or extended. For example, on
August 25, 2006, we received notification from the Kansas Health Policy
Authority that FirstGuard Health Plan Kansas, Inc.’s contract with the State
would not be renewed or extended, and as a result, our contract ended on
December 31, 2006. Further, our contracts with the states are subject
to cancellation by the state after a short notice period in the event of
unavailability of state funds. Our contracts could also be terminated
if we fail to perform in accordance with the standards set by state regulatory
agencies. For example, the Indiana contract under which we operate
can be terminated by the State without cause. If any of our contracts
are terminated, not renewed, or renewed on less favorable terms, our business
will suffer, and our operating results may be materially affected.
If
we are unable to participate in SCHIP programs, our growth rate may be
limited.
SCHIP is
a federal initiative designed to provide coverage for low-income children not
otherwise covered by Medicaid or other insurance programs. The
programs vary significantly from state to state. Participation in
SCHIP programs is an important part of our growth strategy. If states
do not allow us to participate or if we fail to win bids to participate, our
growth strategy may be materially and adversely affected.
Changes
in government regulations designed to protect the financial interests of
providers and members rather than our investors could force us to change how we
operate and could harm our business.
Our
business is extensively regulated by the states in which we operate and by the
federal government. The applicable laws and regulations are subject
to frequent change and generally are intended to benefit and protect the
financial interests of health plan providers and members rather than
investors. The enactment of new laws and rules or changes to existing
laws and rules or the interpretation of such laws and rules could, among other
things:
• force
us to restructure our relationships with providers within our
network;
• require
us to implement additional or different programs and systems;
• mandate
minimum medical expense levels as a percentage of premium revenues;
• restrict
revenue and enrollment growth;
• require
us to develop plans to guard against the financial insolvency of our
providers;
• increase
our healthcare and administrative costs;
• impose
additional capital and reserve requirements; and
• increase
or change our liability to members in the event of malpractice by our
providers.
For
example, Congress has previously considered various forms of patient protection
legislation commonly known as the Patients’ Bill of Rights and such legislation
may be proposed again. We cannot predict the impact of any such
legislation, if adopted, on our business.
Regulations
may decrease the profitability of our health plans.
Certain
states have enacted regulations which require us to maintain a minimum health
benefits ratio, or establish limits on our profitability. Other
states require us to meet certain performance and quality metrics in order to
receive our full contractual revenue. In certain circumstances, our
plans may be required to pay a rebate to the state in the event profits exceed
established levels. These regulatory requirements, changes in these
requirements or the adoption of similar requirements by our other regulators may
limit our ability to increase our overall profits as a percentage of
revenues. Certain states, including but not limited to Georgia,
Indiana, New Jersey and Texas have implemented prompt-payment laws and are
enforcing penalty provisions for failure to pay claims in a timely
manner. Failure to meet these requirements can result in financial
fines and penalties. In addition, states may attempt to reduce their
contract premium rates if regulators perceive our health benefits ratio as too
low. Any of these regulatory actions could harm our operating
results. Certain states also impose marketing restrictions on us
which may constrain our membership growth and our ability to increase our
revenues.
We
face periodic reviews, audits and investigations under our contracts with state
government agencies, and these audits could have adverse findings, which may
negatively impact our business.
We
contract with various state governmental agencies to provide managed healthcare
services. Pursuant to these contracts, we are subject to various
reviews, audits and investigations to verify our compliance with the contracts
and applicable laws and regulations. Any adverse review, audit or
investigation could result in:
• refunding
of amounts we have been paid pursuant to our contracts;
• imposition
of fines, penalties and other sanctions on us;
• loss
of our right to participate in various markets;
• increased
difficulty in selling our products and services; and
• loss
of one or more of our licenses.
Failure
to comply with government regulations could subject us to civil and criminal
penalties.
Federal
and state governments have enacted fraud and abuse laws and other laws to
protect patients’ privacy and access to healthcare. In some states,
we may be subject to regulation by more than one governmental authority, which
may impose overlapping or inconsistent regulations. Violation of
these and other laws or regulations governing our operations or the operations
of our providers could result in the imposition of civil or criminal penalties,
the cancellation of our contracts to provide services, the suspension or
revocation of our licenses or our exclusion from participating in the Medicaid,
SCHIP and SSI programs. If we were to become subject to these
penalties or exclusions as the result of our actions or omissions or our
inability to monitor the compliance of our providers, it would negatively affect
our ability to operate our business.
The
Health Insurance Portability and Accountability Act of 1996, or HIPAA, broadened
the scope of fraud and abuse laws applicable to healthcare
companies. HIPAA created civil penalties for, among other things,
billing for medically unnecessary goods or services. HIPAA
established new enforcement mechanisms to combat fraud and abuse, including
civil and, in some instances, criminal penalties for failure to comply with
specific standards relating to the privacy, security and electronic transmission
of most individually identifiable health information. It is possible
that Congress may enact additional legislation in the future to increase
penalties and to create a private right of action under HIPAA, which could
entitle patients to seek monetary damages for violations of the privacy
rules.
We
may incur significant costs as a result of compliance with government
regulations, and our management will be required to devote time to
compliance.
Many
aspects of our business are affected by government laws and
regulations. The issuance of new regulations, or judicial or
regulatory guidance regarding existing regulations, could require changes to
many of the procedures we currently use to conduct our business, which may lead
to additional costs that we have not yet identified. We do not know
whether, or the extent to which, we will be able to recover from the states our
costs of complying with these new regulations. The costs of any such
future compliance efforts could have a material adverse effect on our
business. We have already expended significant time, effort and
financial resources to comply with the privacy and security requirements of
HIPAA. We cannot predict whether states will enact stricter laws
governing the privacy and security of electronic health
information. If any new requirements are enacted at the state or
federal level, compliance would likely require additional expenditures and
management time.
In
addition, the Sarbanes-Oxley Act of 2002, as well as rules subsequently
implemented by the SEC and the New York Stock Exchange, or the NYSE, have
imposed various requirements on public companies, including requiring changes in
corporate governance practices. Our management and other personnel
will continue to devote time to these compliance initiatives.
The
Sarbanes-Oxley Act requires, among other things, that we maintain effective
internal control over financial reporting. In particular, we must
perform system and process evaluation and testing of our internal controls over
financial reporting to allow management to report on the effectiveness of our
internal controls over our financial reporting as required by Section 404 of the
Sarbanes-Oxley Act. Our testing, or the subsequent testing by our
independent registered public accounting firm, may reveal deficiencies in our
internal controls over financial reporting that are deemed to be material
weaknesses. Our compliance with Section 404 requires that we incur
substantial accounting expense and expend significant management
efforts. Moreover, if we are not able to comply with the requirements
of Section 404, or if we or our independent registered public accounting firm
identifies deficiencies in our internal control over financial reporting that
are deemed to be material weaknesses, the market price of our stock could
decline and we could be subject to sanctions or investigations by the NYSE, SEC
or other regulatory authorities, which would require additional financial and
management resources.
Changes
in healthcare law and benefits may reduce our profitability.
Numerous
proposals relating to changes in healthcare law have been introduced, some of
which have been passed by Congress and the states in which we operate or may
operate in the future. Changes in applicable laws and regulations are
continually being considered, and interpretations of existing laws and rules may
also change from time to time. We are unable to predict what
regulatory changes may occur or what effect any particular change may have on
our business. For example, these changes could reduce the number of
persons enrolled or eligible to enroll in Medicaid, reduce the reimbursement or
payment levels for medical services or reduce benefits included in Medicaid
coverage. We are also unable to predict whether new laws or proposals
will favor or hinder the growth of managed healthcare in
general. Legislation or regulations that require us to change our
current manner of operation, benefits provided or our contract arrangements may
seriously harm our operations and financial results.
For
example, in August 2007 CMS issued guidance that imposes new requirements on
states that cover children in families with incomes above 250% of the federal
poverty level. Under these new requirements, applicable states must
provide assurances to CMS that the state has enrolled at least 95% of the
Medicaid and SCHIP eligible children in the state who are in families with
incomes below 200% of the federal poverty level in Medicaid or SCHIP and that
the number of children insured through private employers has not decreased by
more than two percentage points over the prior five year
period. Three states in which we have SCHIP contracts, Georgia, New
Jersey and Wisconsin, are subject to these new regulations. If they
are unable to meet these new requirements, they will be unable to continue to
cover children in families with incomes above 250% of the federal poverty level,
which would likely decrease our membership in such states. Many
states object to these new requirements as unduly burdensome and likely to
result in a decrease in the number of children covered by SCHIP, and some
states, including New Jersey, are pursuing legal challenges against CMS in
relation to these new requirements. CMS expects states to comply with
the new requirements within 12 months of the issuance of the
guidance. We cannot predict whether legal challenges to the new
policy will be successful or whether the reauthorized version of SCHIP will
expressly address these new requirements. We cannot predict the
impact these requirements will have on our revenue if changes are implemented in
states in which we serve SCHIP beneficiaries.
If
a state fails to renew a required federal waiver for mandated Medicaid
enrollment into managed care or such application is denied, our membership in
that state will likely decrease.
States
may administer Medicaid managed care programs pursuant to demonstration programs
or required waivers of federal Medicaid standards. Waivers and
demonstration programs are generally approved for two year periods and can be
renewed on an ongoing basis if the state applies. We have no control
over this renewal process. If a state does not renew such a waiver or
demonstration program or the Federal government denies a state’s application for
renewal, membership in our health plan in the state could decrease and our
business could suffer.
Changes
in federal funding mechanisms may reduce our profitability.
The Bush
administration previously proposed a major long-term change in the way Medicaid
and SCHIP are funded. The proposal, if adopted, would allow states to
elect to receive, instead of federal matching funds, combined Medicaid-SCHIP
“allotments” for acute and long-term healthcare for low-income, uninsured
persons. Participating states would be given flexibility in designing
their own health insurance programs, subject to federally-mandated minimum
coverage requirements. It is uncertain whether this proposal will be
enacted. Accordingly, it is unknown whether or how many states might
elect to participate or how their participation may affect the net amount of
funding available for Medicaid and SCHIP programs. If such a proposal
is adopted and decreases the number of persons enrolled in Medicaid or SCHIP in
the states in which we operate or reduces the volume of healthcare services
provided, our growth, operations and financial performance could be adversely
affected.
On May
29, 2007, CMS issued a final rule that would reduce states’ use of
intergovernmental transfers for the states’ share of Medicaid program
funding. By restricting the use of intergovernmental transfers, this
rule may restrict some states’ funding for Medicaid, which could adversely
affect our growth, operations and financial performance. On May 25,
2007, President Bush signed an Iraq war supplemental spending bill that includes
a one-year moratorium on the effectiveness of the final rule. We
cannot predict whether the rule will ever be implemented and if it is, what
impact it will have on our business.
Recent
legislative changes in the Medicare program may also affect our
business. For example, the Medicare Prescription Drug, Improvement
and Modernization Act of 2003 revised cost-sharing requirements for some
beneficiaries and requires states to reimburse the federal Medicare program for
costs of prescription drug coverage provided to beneficiaries who are enrolled
simultaneously in both the Medicaid and Medicare programs. In its
fiscal year 2009 budget proposal, the Bush administration has also proposed to
further reduce total federal funding for the Medicaid program by $17.4 billion
over the next five years. These changes may reduce the availability of funding
for some states’ Medicaid programs, which could adversely affect our growth,
operations and financial performance. In addition, the new Medicare
prescription drug benefit is interrupting the distribution of prescription drugs
to many beneficiaries simultaneously enrolled in both Medicaid and Medicare,
prompting several states to pay for prescription drugs on an unbudgeted,
emergency basis without any assurance of receiving reimbursement from the
federal Medicaid program. These expenses may cause some states to
divert funds originally intended for other Medicaid services which could
adversely affect our growth, operations and financial performance.
If
state regulatory agencies require a statutory capital level higher than the
state regulations, we may be required to make additional capital
contributions.
Our
operations are conducted through our wholly owned subsidiaries, which include
health maintenance organizations, or HMOs, and managed care organizations, or
MCOs. HMOs and MCOs are subject to state regulations that, among
other things, require the maintenance of minimum levels of statutory capital, as
defined by each state. Additionally, state regulatory agencies may
require, at their discretion, individual HMOs to maintain statutory capital
levels higher than the state regulations. If this were to occur to
one of our subsidiaries, we may be required to make additional capital
contributions to the affected subsidiary. Any additional capital
contribution made to one of the affected subsidiaries could have a material
adverse effect on our liquidity and our ability to grow.
If
state regulators do not approve payments of dividends and distributions by our
subsidiaries to us, we may not have sufficient funds to implement our business
strategy.
We
principally operate through our health plan subsidiaries. If funds
normally available to us become limited in the future, we may need to rely on
dividends and distributions from our subsidiaries to fund our
operations. These subsidiaries are subject to regulations that limit
the amount of dividends and distributions that can be paid to us without prior
approval of, or notification to, state regulators. If these
regulators were to deny our subsidiaries’ request to pay dividends to us, the
funds available to us would be limited, which could harm our ability to
implement our business strategy.
Risks
Related to Our Business
Ineffectiveness
of state-operated systems and subcontractors could adversely affect our
business.
Our
health plans rely on other state-operated systems or sub-contractors to qualify,
solicit, educate and assign eligible clients into the health
plans. The effectiveness of these state operations and
sub-contractors can have a material effect on a health plan’s enrollment in a
particular month or over an extended period. When a state implements
new programs to determine eligibility, new processes to assign or enroll
eligible clients into health plans, or chooses new contractors, there is an
increased potential for an unanticipated impact on the overall number of members
assigned into the health plans.
Failure
to accurately predict our medical expenses could negatively affect our reported
results.
Our
medical expenses include estimates of medical expenses incurred but not yet
reported, or IBNR. We estimate our IBNR medical expenses monthly
based on a number of factors. Adjustments, if necessary, are made to
medical expenses in the period during which the actual claim costs are
ultimately determined or when criteria used to estimate IBNR
change. We cannot be sure that our IBNR estimates are adequate or
that adjustments to those estimates will not harm our results of
operations. For example, in the three months ended June 30, 2006 we
adjusted our IBNR by $9.7 million for adverse medical cost development from the
first quarter of 2006. In addition, when we commence operations in a
new state or region, we have limited information with which to estimate our
medical claims liabilities. For example, we commenced operations in
the Atlanta and Central regions of Georgia on June 1, 2006 and the Southwest
region of Georgia on September 1, 2006 and have based our estimates on state
provided historical actuarial data and limited actual incurred and received
data. From time to time in the past, our actual results have varied
from our estimates, particularly in times of significant changes in the number
of our members. Our failure to estimate IBNR accurately may also
affect our ability to take timely corrective actions, further harming our
results.
Receipt
of inadequate or significantly delayed premiums would negatively affect our
revenues and profitability.
Our
premium revenues consist of fixed monthly payments per member and supplemental
payments for other services such as maternity deliveries. These
premiums are fixed by contract, and we are obligated during the contract periods
to provide healthcare services as established by the state
governments. We use a large portion of our revenues to pay the costs
of healthcare services delivered to our members. If premiums do not
increase when expenses related to medical services rise, our earnings will be
affected negatively. In addition, our actual medical services costs
may exceed our estimates, which would cause our health benefits ratio, or our
expenses related to medical services as a percentage of premium revenue, to
increase and our profits to decline. In addition, it is possible for
a state to increase the rates payable to the hospitals without granting a
corresponding increase in premiums to us. If this were to occur in
one or more of the states in which we operate, our profitability would be
harmed. In addition, if there is a significant delay in our receipt
of premiums to offset previously incurred health benefits costs, our earnings
could be negatively impacted.
Failure
to effectively manage our medical costs or related administrative costs would
reduce our profitability.
Our
profitability depends, to a significant degree, on our ability to predict and
effectively manage expenses related to health benefits. We have less
control over the costs related to medical services than we do over our general
and administrative expenses. Because of the narrow margins of our
health plan business, relatively small changes in our health benefits ratio can
create significant changes in our financial results. Changes in
healthcare regulations and practices, the level of use of healthcare services,
hospital costs, pharmaceutical costs, major epidemics, new medical technologies
and other external factors, including general economic conditions such as
inflation levels, are beyond our control and could reduce our ability to predict
and effectively control the costs of providing health benefits. We
may not be able to manage costs effectively in the future. If our
costs related to health benefits increase, our profits could be reduced or we
may not remain profitable.
Difficulties
in executing our acquisition strategy could adversely affect our
business.
Historically,
the acquisition of Medicaid and specialty services businesses, contract rights
and related assets of other health plans both in our existing service areas and
in new markets has accounted for a significant amount of our
growth. Many of the other potential purchasers have greater financial
resources than we have. In addition, many of the sellers are
interested either in (a) selling, along with their Medicaid assets, other assets
in which we do not have an interest or (b) selling their companies, including
their liabilities, as opposed to the assets of their ongoing
businesses.
We
generally are required to obtain regulatory approval from one or more state
agencies when making acquisitions. In the case of an acquisition of a
business located in a state in which we do not currently operate, we would be
required to obtain the necessary licenses to operate in that
state. In addition, even if we already operate in a state in which we
acquire a new business, we would be required to obtain additional regulatory
approval if the acquisition would result in our operating in an area of the
state in which we did not operate previously, and we could be required to
renegotiate provider contracts of the acquired business. We cannot
assure you that we would be able to comply with these regulatory requirements
for an acquisition in a timely manner, or at all. In deciding whether
to approve a proposed acquisition, state regulators may consider a number of
factors outside our control, including giving preference to competing offers
made by locally owned entities or by not-for-profit entities.
We also
may be unable to obtain sufficient additional capital resources for future
acquisitions. If we are unable to effectively execute our acquisition
strategy, our future growth will suffer and our results of operations could be
harmed.
Execution
of our growth strategy may increase costs or liabilities, or create disruptions
in our business.
We pursue
acquisitions of other companies or businesses from time to
time. Although we review the records of companies or businesses we
plan to acquire, even an in-depth review of records may not reveal existing or
potential problems or permit us to become familiar enough with a business to
assess fully its capabilities and deficiencies. As a result, we may
assume unanticipated liabilities or adverse operating conditions, or an
acquisition may not perform as well as expected. We face the risk
that the returns on acquisitions will not support the expenditures or
indebtedness incurred to acquire such businesses, or the capital expenditures
needed to develop such businesses. We also face the risk that we will
not be able to integrate acquisitions into our existing operations effectively
without substantial expense, delay or other operational or financial
problems. Integration may be hindered by, among other things,
differing procedures, including internal controls, business practices and
technology systems. We may need to divert more management resources
to integration than we planned, which may adversely affect our ability to pursue
other profitable activities.
In
addition to the difficulties we may face in identifying and consummating
acquisitions, we will also be required to integrate and consolidate any acquired
business or assets with our existing operations. This may include the
integration of:
• additional
personnel who are not familiar with our operations and corporate
culture;
• provider
networks that may operate on different terms than our existing
networks;
• existing
members, who may decide to switch to another healthcare plan; and
• disparate
administrative, accounting and finance, and information systems.
Additionally,
our growth strategy includes start-up operations in new markets or new products
in existing markets. We may incur significant expenses prior to
commencement of operations and the receipt of revenue. As a result,
these start-up operations may decrease our profitability. In the
event we pursue any opportunity to diversify our business internationally, we
would become subject to additional risks, including, but not limited to,
political risk, an unfamiliar regulatory regime, currency exchange risk and
exchange controls, cultural and language differences, foreign tax issues, and
different labor laws and practices.
Accordingly,
we may be unable to identify, consummate and integrate future acquisitions or
start-up operations successfully or operate acquired or new businesses
profitably.
If
competing managed care programs are unwilling to purchase specialty services
from us, we may not be able to successfully implement our strategy of
diversifying our business lines.
We are
seeking to diversify our business lines into areas that complement our Medicaid
business in order to grow our revenue stream and balance our dependence on
Medicaid risk reimbursement. In order to diversify our business, we
must succeed in selling the services of our specialty subsidiaries not only to
our managed care plans, but to programs operated by
third-parties. Some of these third-party programs may compete with us
in some markets, and they therefore may be unwilling to purchase specialty
services from us. In any event, the offering of these services will
require marketing activities that differ significantly from the manner in which
we seek to increase revenues from our Medicaid programs. Our
inability to market specialty services to other programs may impair our ability
to execute our business strategy.
Failure
to achieve timely profitability in any business would negatively affect our
results of operations.
Start-up
costs associated with a new business can be substantial. For example,
in order to obtain a certificate of authority in most jurisdictions, we must
first establish a provider network, have systems in place and demonstrate our
ability to obtain a state contract and process claims. If we were
unsuccessful in obtaining the necessary license, winning the bid to provide
service or attracting members in numbers sufficient to cover our costs, any new
business of ours would fail. We also could be obligated by the state
to continue to provide services for some period of time without sufficient
revenue to cover our ongoing costs or recover start-up costs. The
expenses associated with starting up a new business could have a significant
impact on our results of operations if we are unable to achieve profitable
operations in a timely fashion.
We
derive a majority of our premium revenues from operations in a small number of
states, and our operating results would be materially affected by a decrease in
premium revenues or profitability in any one of those states.
Operations
in a few states have accounted for most of our premium revenues to
date. For example, our Medicaid contract with Kansas, which
terminated December 31, 2006, together with our Medicaid contract with Missouri
accounted for $317.0 million in revenue for the year ended December 31,
2006. If we were unable to continue to operate in any of our current
states or if our current operations in any portion of one of those states were
significantly curtailed, our revenues could decrease materially. Our
reliance on operations in a limited number of states could cause our revenue and
profitability to change suddenly and unexpectedly depending on legislative or
other governmental or regulatory actions and decisions, economic conditions and
similar factors in those states. Our inability to continue to operate
in any of the states in which we operate would harm our business.
Competition
may limit our ability to increase penetration of the markets that we
serve.
We
compete for members principally on the basis of size and quality of provider
network, benefits provided and quality of service. We compete with
numerous types of competitors, including other health plans and traditional
state Medicaid programs that reimburse providers as care is
provided. Subject to limited exceptions by federally approved state
applications, the federal government requires that there be choices for Medicaid
recipients among managed care programs. Voluntary programs and
mandated competition may limit our ability to increase our market
share.
Some of
the health plans with which we compete have greater financial and other
resources and offer a broader scope of products than we do. In
addition, significant merger and acquisition activity has occurred in the
managed care industry, as well as in industries that act as suppliers to us,
such as the hospital, physician, pharmaceutical, medical device and health
information systems businesses. To the extent that competition
intensifies in any market that we serve, our ability to retain or increase
members and providers, or maintain or increase our revenue growth, pricing
flexibility and control over medical cost trends may be adversely
affected.
In
addition, in order to increase our membership in the markets we currently serve,
we believe that we must continue to develop and implement community-specific
products, alliances with key providers and localized outreach and educational
programs. If we are unable to develop and implement these
initiatives, or if our competitors are more successful than we are in doing so,
we may not be able to further penetrate our existing markets.
If
we are unable to maintain relationships with our provider networks, our
profitability may be harmed.
Our
profitability depends, in large part, upon our ability to contract favorably
with hospitals, physicians and other healthcare providers. Our
provider arrangements with our primary care physicians, specialists and
hospitals generally may be cancelled by either party without cause upon 90 to
120 days prior written notice. We cannot assure you that we will be
able to continue to renew our existing contracts or enter into new contracts
enabling us to service our members profitably.
From time
to time providers assert or threaten to assert claims seeking to terminate
noncancelable agreements due to alleged actions or inactions by
us. Even if these allegations represent attempts to avoid or
renegotiate contractual terms that have become economically disadvantageous to
the providers, it is possible that in the future a provider may pursue such a
claim successfully. In addition, we are aware that other managed care
organizations have been subject to class action suits by physicians with respect
to claim payment procedures, and we may be subject to similar
claims. Regardless of whether any claims brought against us are
successful or have merit, they will still be time-consuming and costly and could
distract our management’s attention. As a result, we may incur
significant expenses and may be unable to operate our business
effectively.
We will
be required to establish acceptable provider networks prior to entering new
markets. We may be unable to enter into agreements with providers in
new markets on a timely basis or under favorable terms. If we are
unable to retain our current provider contracts or enter into new provider
contracts timely or on favorable terms, our profitability will be
harmed.
We
may be unable to attract and retain key personnel.
We are
highly dependent on our ability to attract and retain qualified personnel to
operate and expand our business. If we lose one or more members of
our senior management team, including our chief executive officer, Michael F.
Neidorff, who has been instrumental in developing our business strategy and
forging our business relationships, our business and operating results could be
harmed. Our ability to replace any departed members of our senior
management or other key employees may be difficult and may take an extended
period of time because of the limited number of individuals in the Medicaid
managed care and specialty services industry with the breadth of skills and
experience required to operate and successfully expand a business such as
ours. Competition to hire from this limited pool is intense, and we
may be unable to hire, train, retain or motivate these personnel.
Negative
publicity regarding the managed care industry may harm our business and
operating results.
The
managed care industry has received negative publicity. This publicity
has led to increased legislation, regulation, review of industry practices and
private litigation in the commercial sector. These factors may
adversely affect our ability to market our services, require us to change our
services, and increase the regulatory burdens under which we
operate. Any of these factors may increase the costs of doing
business and adversely affect our operating results.
Claims
relating to medical malpractice could cause us to incur significant
expenses.
Our
providers and employees involved in medical care decisions may be subject to
medical malpractice claims. In addition, some states, including
Texas, have adopted legislation that permits managed care organizations to be
held liable for negligent treatment decisions or benefits coverage
determinations. Claims of this nature, if successful, could result in
substantial damage awards against us and our providers that could exceed the
limits of any applicable insurance coverage. Therefore, successful
malpractice or tort claims asserted against us, our providers or our employees
could adversely affect our financial condition and
profitability. Even if any claims brought against us are unsuccessful
or without merit, they would still be time consuming and costly and could
distract our management’s attention. As a result, we may incur
significant expenses and may be unable to operate our business
effectively.
Loss
of providers due to increased insurance costs could adversely affect our
business.
Our
providers routinely purchase insurance to help protect themselves against
medical malpractice claims. In recent years, the costs of maintaining
commercially reasonable levels of such insurance have increased dramatically,
and these costs are expected to increase to even greater levels in the
future. As a result of the level of these costs, providers may decide
to leave the practice of medicine or to limit their practice to certain areas,
which may not address the needs of Medicaid participants. We rely on
retaining a sufficient number of providers in order to maintain a certain level
of service. If a significant number of our providers exit our
provider networks or the practice of medicine generally, we may be unable to
replace them in a timely manner, if at all, and our business could be adversely
affected.
Growth
in the number of Medicaid-eligible persons during economic downturns could cause
our operating results to suffer if state and federal budgets decrease or do not
increase.
Less
favorable economic conditions may cause our membership to increase as more
people become eligible to receive Medicaid benefits. During such
economic downturns, however, state and federal budgets could decrease, causing
states to attempt to cut healthcare programs, benefits and rates. We
cannot predict the impact of changes in the United States economic environment
or other economic or political events, including acts of terrorism or related
military action, on federal or state funding of healthcare programs or on the
size of the population eligible for the programs we operate. If
federal funding decreases or remains unchanged while our membership increases,
our results of operations will suffer.
Growth
in the number of Medicaid-eligible persons may be countercyclical, which could
cause our operating results to suffer when general economic conditions are
improving.
Historically,
the number of persons eligible to receive Medicaid benefits has increased more
rapidly during periods of rising unemployment, corresponding to less favorable
general economic conditions. Conversely, this number may grow more
slowly or even decline if economic conditions improve. Therefore,
improvements in general economic conditions may cause our membership levels to
decrease, thereby causing our operating results to suffer, which could lead to
decreases in our stock price during periods in which stock prices in general are
increasing.
If
we are unable to integrate and manage our information systems effectively, our
operations could be disrupted.
Our
operations depend significantly on effective information systems. The
information gathered and processed by our information systems assists us in,
among other things, monitoring utilization and other cost factors, processing
provider claims, and providing data to our regulators. Our providers
also depend upon our information systems for membership verifications, claims
status and other information.
Our
information systems and applications require continual maintenance, upgrading
and enhancement to meet our operational needs and regulatory
requirements. Moreover, our acquisition activity requires frequent
transitions to or from, and the integration of, various information
systems. We regularly upgrade and expand our information systems’
capabilities. If we experience difficulties with the transition to or
from information systems or are unable to properly maintain or expand our
information systems, we could suffer, among other things, from operational
disruptions, loss of existing members and difficulty in attracting new members,
regulatory problems and increases in administrative expenses. In
addition, our ability to integrate and manage our information systems may be
impaired as the result of events outside our control, including acts of nature,
such as earthquakes or fires, or acts of terrorists.
We
rely on the accuracy of eligibility lists provided by state
governments. Inaccuracies in those lists would negatively affect our
results of operations.
Premium
payments to us are based upon eligibility lists produced by state
governments. From time to time, states require us to reimburse them
for premiums paid to us based on an eligibility list that a state later
discovers contains individuals who are not in fact eligible for a government
sponsored program or are eligible for a different premium category or a
different program. Alternatively, a state could fail to pay us for
members for whom we are entitled to payment. Our results of
operations would be adversely affected as a result of such reimbursement to the
state if we had made related payments to providers and were unable to recoup
such payments from the providers.
We
may not be able to obtain or maintain adequate insurance.
We
maintain liability insurance, subject to limits and deductibles, for claims that
could result from providing or failing to provide managed care and related
services. These claims could be substantial. We believe
that our present insurance coverage and reserves are adequate to cover currently
estimated exposures. We cannot assure you that we will be able to
obtain adequate insurance coverage in the future at acceptable costs or that we
will not incur significant liabilities in excess of policy limits.
From
time to time, we may become involved in costly and time-consuming litigation and
other regulatory proceedings, which require significant attention from our
management.
We are a
defendant from time to time in lawsuits and regulatory actions relating to our
business. Due to the inherent uncertainties of litigation and
regulatory proceedings, we cannot accurately predict the ultimate outcome of any
such proceedings. An unfavorable outcome could have a material
adverse impact on our business and operating results. In addition,
regardless of the outcome of any litigation or regulatory proceedings, such
proceedings are costly and require significant attention from our
management. For example, in 2006, we were named in two securities
class action lawsuits. The status of these lawsuits is discussed
below under “Item 3. Legal Proceedings.” In addition, we may in the
future be the target of similar litigation. As with other litigation,
securities litigation could be costly and time consuming, require significant
attention from our management and could harm our business and operating
results.
None.
We own
our corporate office headquarters building located in St. Louis,
Missouri. In September 2007, we announced the signing of a letter of
intent to locate our corporate headquarters in downtown St. Louis,
Missouri. We are currently negotiating our involvement as a joint
venture partner in the entity that will develop the relevant properties.
We expect that the other partners will serve as project developers and
coordinate the project financing.
We lease
claims processing facilities in Missouri and Montana. We generally
lease space in the states where our health plans and specialty companies
operate. We are required by various insurance and regulatory
authorities to have offices in the service areas where we provide
benefits. We believe our current facilities are adequate to meet our
operational needs for the foreseeable future.
As
previously disclosed, two class action lawsuits were filed against us and
certain of our officers and directors in the United States District Court for
the Eastern District of Missouri, or Eastern District Court. The
lawsuits were consolidated on November 2, 2006, and an amended consolidated
complaint was filed in the Eastern District Court on January 17, 2007, which we
refer to as the Consolidated Lawsuit. The Consolidated Lawsuit alleges, on
behalf of purchasers of our common stock from April 25, 2006 through July 17,
2006, that we and certain of our officers and directors violated federal
securities laws by issuing a series of materially false statements prior to the
announcement of our fiscal 2006 second quarter results. According to the
Consolidated Lawsuit, these allegedly materially false statements had the effect
of artificially inflating the price of our common stock, which subsequently
dropped after the issuance of a press release announcing our preliminary fiscal
2006 second quarter earnings and revised guidance. We filed a motion to dismiss
the Consolidated Lawsuit. On June 29, 2007, the motion to dismiss was
granted. The plaintiffs have appealed the order of dismissal, and
briefing on the appeal has been completed. Oral argument on the
appeal has not yet been held. We anticipate receiving a decision on
the appeal during 2008.
Additionally,
in August 2006, a separate derivative action was filed on behalf of Centene
Corporation against us and certain of our officers and directors in the Eastern
District Court. Plaintiff purported to bring suit derivatively on behalf
of the Company against the Company’s directors for breach of fiduciary duties,
gross mismanagement and waste of corporate assets by reason of the directors’
alleged failure to correct the misstatements alleged in the Consolidated Lawsuit
discussed above. The derivative complaint largely repeated the allegations in
the Consolidated Lawsuit. Based on discussions that have been held with
plaintiff’s counsel, it is our understanding that plaintiff did not intend to
pursue this action unless the Consolidated Lawsuit proceeded past the dismissal
stage. The derivative action has been dismissed.
In
addition, we routinely are subjected to legal proceedings in the normal course
of business. While the ultimate resolution of such matters is uncertain, we do
not expect the results of any of these matters individually, or in the
aggregate, to have a material effect on our financial position or results of
operations.
None.
PART
II
Item
5. Market for
Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities>
Market
for Common Stock; Dividends
Our
common stock has been traded and quoted on the New York Stock Exchange under the
symbol “CNC” since October 16, 2003.
As of
February 8, 2008, there were 54 holders of record of our common
stock.
We have
never declared any cash dividends on our capital stock and currently anticipate
that we will retain any future earnings for the development, operation and
expansion of our business.
Issuer
Purchases of Equity Securities
In October 2007, our
board of directors extended the previously adopted November 2005 stock
repurchase program, authorizing us to repurchase up to four million shares of
common stock from time to time on the open market or through privately
negotiated transactions. The repurchase program expires October 31,
2008, but we reserve the right to suspend or discontinue the program at any
time. We have established a trading plan with a registered broker to
repurchase shares under certain market conditions. During the year
ended December 31, 2007, we repurchased 467,157 shares at an average price of
$20.42 and an aggregate cost of $9.5 million. During the year ended
December 31, 2007, with the exception of the 3,957 shares footnoted below, we
did not repurchase any shares other than through this publicly announced
program.
________________
1 Shares
acquired in December 2007 represent shares relinquished to the Company by
certain employees for payment of taxes upon vesting of Restricted Stock
Units.
Stock
Performance Graphs
The graph
below compares the cumulative total stockholder return on our common stock for
the period from December 31, 2002 to December 31, 2007 with the cumulative total
return of the New York Stock Exchange Composite Index and the Morgan Stanley
Health Care Payor Index over the same period. The graph assumes an
investment of $100 on December 31, 2002 in our common stock (at the last
reported sale price on such day), the New York Stock Exchange Composite Index
and the Morgan Stanley Health Care Payor Index and assumes the reinvestment of
any dividends.
 The
following selected consolidated financial data should be read in connection with
the consolidated financial statements and related notes and “Management’s
Discussion and Analysis of Financial Condition and Results of Operations”
appearing elsewhere in this filing. The assets, liabilities and
results of operations of FirstGuard have been classified as discontinued
operations for all periods presented. The data for the years ended
December 31, 2007, 2006 and 2005 and as of December 31, 2007 and 2006 are
derived from consolidated financial statements included elsewhere in this
filing. The data for the years ended December 31, 2004 and 2003 and
as of December 31, 2005, 2004 and 2003 are derived from consolidated financial
statements not included in this filing.
The
following discussion of our financial condition and results of operations should
be read in conjunction with our consolidated financial statements and the
related notes included elsewhere in this filing. The discussion
contains forward-looking statements that involve known and unknown risks and
uncertainties, including those set forth under Item 1A. Risk Factors
of this Form 10-K.
OVERVIEW
We are a
multi-line healthcare enterprise operating in two segments. Our Medicaid Managed
Care segment provides Medicaid and Medicaid-related programs to organizations
and individuals through government subsidized programs, including Medicaid, the
State Children’s Health Insurance Program, or SCHIP, and, Supplemental Security
Income including Aged, Blind or Disabled programs, or SSI. Our Specialty
Services segment provides specialty services, including behavioral health, life
and health management, long-term care programs, managed vision, nurse triage,
pharmacy benefits management and treatment compliance, to state programs,
healthcare organizations, employer groups and other commercial organizations, as
well as to our own subsidiaries on market-based terms.
Our
Medicaid contract in Kansas terminated effective December 31, 2006, and we sold
the operating assets of FirstGuard Health Plan, Inc., our Missouri health plan,
effective February 1, 2007. Unless specifically noted, the
discussions below are in the context of continuing operations, and therefore,
exclude the Kansas and Missouri health plans, collectively referred to as
FirstGuard, health plans. The results of operations for FirstGuard
are classified as discontinued operations for all periods
presented.
Our
financial performance for 2007 is summarized as follows:
Over the
last two years we have experienced membership and revenue growth in our Medicaid
Managed Care segment including membership growth of 58.7%. The
following new contracts and acquisitions contributed to our growth:
We have
opportunities to expand our operations through the following acquisitions and
new contract awards:
The
following new contracts and acquisitions contributed to the growth in our
Specialty Services segment during the last two years:
RESULTS
OF CONTINUING OPERATIONS AND KEY METRICS
Summarized
comparative financial data for 2007, 2006 and 2005 are as follows ($ in
millions):
Revenues
and Revenue Recognition
Our
Medicaid Managed Care segment generates revenues primarily from premiums we
receive from the states in which we operate health plans. We receive
a fixed premium per member per month pursuant to our state
contracts. We generally receive premium payments during the month we
provide services and recognize premium revenue during the period in which we are
obligated to provide services to our members. Some states enact
premium taxes or similar assessments, collectively, premium taxes, and these
taxes are recorded as a component of revenue as well as operating
expenses. Some contracts allow for additional premium associated with
certain supplemental services provided such as maternity
deliveries. Revenues are recorded based on membership and eligibility
data provided by the states, which may be adjusted by the states for updates to
this data. These adjustments have been immaterial in relation to
total revenue recorded and are reflected in the period known.
Our
Specialty Services segment generates revenues under contracts with state
programs, healthcare organizations, and other commercial organizations, as well
as from our own subsidiaries on market-based terms. Revenues are
recognized when the related services are provided or as ratably earned over the
covered period of services.
Premium
and service revenues collected in advance are recorded as unearned
revenue. For performance-based contracts, we do not recognize revenue
subject to refund until data is sufficient to measure
performance. Premium and service revenues due to us are recorded as
premium and related receivables and are recorded net of an allowance based on
historical trends and our management’s judgment on the collectibility of these
accounts. As we generally receive payments during the month in which
services are provided, the allowance is typically not significant in comparison
to total revenues and does not have a material impact on the presentation of our
financial condition or results of operations.
Our total
revenue increased in the year ended December 31, 2007 over the previous year
primarily through 1) membership growth in the Medicaid Managed Care segment, 2)
premium rate increases, and 3) growth in our Specialty Services
segment.
From
December 31, 2005 to December 31, 2007, we increased our Medicaid Managed Care
membership by 58.7%. The following table sets forth our membership by
state in our Medicaid Managed Care segment:
The
following table sets forth our membership by line of business in our Medicaid
Managed Care segment:
From
December 31, 2006 to December 31, 2007, our membership increased primarily as a
result of increases in Ohio, South Carolina and Texas. We increased our
Medicaid membership in Ohio by adding members under our new contract in the
Northwest region. We also increased our SSI membership in Ohio with the
commencement of our new contract to serve Aged, Blind or Disabled
members. Our membership in South Carolina is primarily on a non-risk
basis; we began conversion to at-risk in December 2007, with 100 at-risk members
at December 31, 2007. In Texas, we increased our membership through new
Medicaid, SCHIP and SSI contracts in the Corpus Christi, San Antonio, Austin,
and Lubbock markets. Our membership decreased in Wisconsin because of more
stringent state eligibility requirements for the Medicaid and SCHIP programs,
eligibility administration issues and the termination of certain physician
contracts associated with a high cost hospital system. Our membership decreased
in Indiana primarily due to adjustments made to our provider network made in
connection with our new state-wide contract as well as the termination of
certain non-exclusive physician contracts. In Florida, Access served
90,600 members on a non-risk basis at December 31, 2007.
During
2006, our subsidiary, Peach State Health Plan, commenced operations in the
Atlanta and Central regions of Georgia in June and in the Southwest region in
September. We increased our membership in Ohio through the MediPlan
acquisition while also adding members under our new contract in the East Central
and Northwest markets. In Texas, we increased our membership through
new contracts in the Corpus Christi, Austin, and Lubbock markets. Our
membership decreased in Wisconsin because of more stringent state eligibility
requirements for the Medicaid and SCHIP programs and eligibility administration
issues. Our membership decreased in Indiana primarily due to provider
terminations.
The total
revenue associated with FirstGuard included in results from discontinued
operations was $6.7 million, $317.0 million and $273.7 million in 2007, 2006 and
2005, respectively. Our FirstGuard membership was 138,900 and 149,300
at December 31, 2006 and 2005, respectively.
In 2007,
we received premium rate increases ranging from 1.9% to 10.1%, or 2.7% on a
composite basis across our markets. In 2006, we received premium rate
increases ranging from 1.8% to 9.5%, or 5.8% on a composite basis across our
markets.
In
November 2007, we received a contract amendment from the State of
Georgia providing for an effective premium rate increase in Georgia of
approximately 3.8% effective July 1, 2007. The state also mandated service
changes, retroactively recalculated certain rate cells and adjusted for
duplicate member issues. We executed this amendment on November 16,
2007. The State of Georgia returned the fully executed contract in January
2008 and, accordingly, we will record the additional revenue, retroactive to
July 1, 2007, in the first quarter of 2008. This revenue, related to
the period from July 1, 2007 to December 31, 2007, totals approximately $20.8
million. Approximately $7.3 million of this amount is related to the
mandated services, rate cell changes and duplicate member issues, the remaining
$13.5 million yields the calculated 3.8% increase.
For the
year ended December 31, 2007, Specialty Services segment revenue from external
customers was $245.4 million compared to $192.0 million for the same prior year
period. The increase is primarily attributable to a full year of
operations in 2007 of our acquisition of OptiCare in July 2006 and the
commencement of operations of Bridgeway Health Solutions in October
2006. At December 31, 2007, our behavioral health company, Cenpatico,
provided behavioral health services to 99,900 members in Arizona and
39,000 members in Kansas, compared to 94,500 members in Arizona and 36,600
members in Kansas at December 31, 2006.
In
January 2006, we began offering pharmacy benefits management through our
acquisition of US Script, representing most of the 2006 increase in consolidated
service revenue. Additionally, in May 2006, we expanded our life and
health management services through our acquisition of Cardium. In
July 2006, we began offering managed vision care through our acquisition of
OptiCare. In October 2006, our subsidiary, Bridgeway Health Solutions
began performing under our long-term care contract in Arizona.
Operating
Expenses
Medical
Costs
Our
medical costs include payments to physicians, hospitals, and other providers for
healthcare and specialty services claims. Medical costs also include estimates
of medical expenses incurred but not yet reported, or IBNR, and estimates of the
cost to process unpaid claims. Monthly, we estimate our IBNR based on a number
of factors, including inpatient hospital utilization data and prior claims
experience. As part of this review, we also consider the costs to process
medical claims and estimates of amounts to cover uncertainties associated with
fluctuations in physician billing patterns, membership, products and inpatient
hospital trends. These estimates are adjusted as more information becomes
available. We employ actuarial professionals and use the services of independent
actuaries who are contracted to review our estimates quarterly. While we believe
that our process for estimating IBNR is actuarially sound, we cannot assure you
that healthcare claim costs will not materially differ from our
estimates.
Our
results of operations depend on our ability to manage expenses associated with
health benefits and to accurately predict costs incurred. Our health benefits
ratio, or HBR, represents medical costs as a percentage of premium revenues
(excluding premium taxes) and reflects the direct relationship between the
premium received and the medical services provided. The table below depicts our
HBR for our external membership by member category:
Our
Medicaid and SCHIP HBR for the year ended December 31, 2007 was 83.2%, a
decrease of 1.1% over 2006. The decrease is primarily attributable to increased
premium yield combined with a moderating medical cost trend particularly with a
decrease in retail pharmacy costs.
Our
Medicaid and SCHIP HBR for the year ended December 31, 2006 was 84.3%, an
increase of 2.8% over 2005. The increase in HBR for the year ended
December 31, 2006 is caused primarily by increased cost trends for maternity
related costs including neonatal intensive care costs, increased physician
costs, and increased pharmacy costs.
The
increase in the SSI HBR for the year ended December 31, 2007 is a result of the
new SSI business in Ohio and the transition of these new members into a managed
care environment.
The
decrease in our Specialty Services HBR for year ended December 31, 2007 is
caused by the diversification of business in that segment. Our Specialty Services
HBR for 2006 includes twelve months of the behavioral health contracts in
Arizona and Kansas, six months of OptiCare and three months of
Bridgeway. The 2005 results include twelve months of our behavioral
health contract in Kansas and six months of Arizona results.
Cost
of Services
Our cost
of services expense includes the pharmaceutical costs associated with our
pharmacy benefit manager’s external revenues. Cost of services also includes all
direct costs to support the functions responsible for generation of our services
revenues. These expenses consist of the salaries and wages of the professionals
and teachers who provide the services and expenses associated with facilities
and equipment used to provide services.
General
and Administrative Expenses
Our
general and administrative expenses, or G&A, primarily reflect wages and
benefits, including stock compensation expense, and other administrative costs
associated with our health plans, specialty companies and centralized functions
that support all of our business units. Our major centralized functions are
finance, information systems and claims processing. G&A increased in the
year ended December 31, 2007 over the comparable period in 2006 primarily due to
expenses for additional facilities and staff to support our
growth. G&A in 2007 also included charges totaling $12.4 million
for fixed asset impairment, severance for an organizational realignment, and a
contribution to our charitable foundation with a portion of the proceeds from
the sale of FirstGuard Missouri. The fixed asset impairment resulted
from abandoning our previously planned headquarters development in Clayton,
Missouri. G&A expenses increased in the year ended December 31,
2006 over the comparable period in 2005 primarily due to expenses for additional
facilities and staff to support our growth, especially in Arizona and Georgia,
and the adoption of SFAS 123R on January 1, 2006. The results for the
year ended December 31, 2006, include $13.9 million of implementation expenses
in Georgia and $9.9 million of additional stock compensation
expense.
Our
G&A expense ratio represents G&A expenses as a percentage of the sum of
Premium revenue and Service revenue, and reflects the relationship between
revenues earned and the costs necessary to earn those revenues. The following
table sets forth the G&A expense ratios by business segment:
The
decrease in the Medicaid Managed Care G&A expense ratio in 2007
primarily reflects the overall leveraging of our expenses over higher revenues
offset by the effect of our start-up costs in South Carolina and for our Texas
Foster Care product, and the $12.4 million charge discussed above. The increase in the
Medicaid Managed Care G&A expense ratio in 2006 primarily reflects the
adoption of SFAS 123R offset by the overall leveraging of our expenses over
higher revenues.
The decrease in the Specialty Services
G&A expense ratio in
2007 primarily reflects
the overall leveraging of expenses over higher revenues with the
additions of Bridgeway and OptiCare, and the growth of US Script’s business
since the acquisition in January 2006. The 2006 results reflect the
operations of our behavioral health company in Arizona, the acquisitions of US
Script and AirLogix, as well as the acquisition of Cardium effective May 9,
2006, and OptiCare effective July 1, 2006. The results for the year
ended December 31, 2006 include approximately $0.7 million in implementation
costs associated with our long-term care contract in Arizona. The
2005 results reflect the operations of our behavioral health company in Arizona,
including $1.5 million in implementation costs, and $0.2 million in Georgia
implementation costs.
Other
Income (Expense)
Other
income (expense) consists principally of investment income from our cash and
investments, our equity in earnings of investments, and interest expense on our
debt. Investment and other income increased $8.8 million in 2007, over
the comparable periods in 2006. The increase was primarily a result
of larger investment balances. Interest expense increased $5.0
million in 2007, primarily from increased debt.
Income
Tax Expense
Our
effective tax rate in 2007 was 35.1% compared to 37.6% in 2006. The
decrease was primarily due to the effect of an increase in tax-exempt investment
income and lower state taxes. Our 2006 effective tax rate was 37.6%
compared to 34.3% for the corresponding period in 2005.
Discontinued
Operations
Net
earnings from discontinued operations were $32.1 million in 2007 compared to a
net loss of $64.6 million in 2006. In 2007 we abandoned the stock of
our FirstGuard health plans resulting in tax benefits of $32.6 million, net of
the associated asset write-offs. The 2007 results also included a
gain on the sale of FirstGuard Missouri of $7.5 million, as well as operational
and exit costs associated with FirstGuard. The 2006 results included
a goodwill impairment charge of $81.1 million, an intangible asset impairment
charge of $6.0 million, as well as operational and exit costs.
LIQUIDITY
AND CAPITAL RESOURCES
We
finance our activities primarily through operating cash flows and borrowings
under our revolving credit facility. Our total operating activities
provided cash of $202.2 million in 2007, $195.0 million in 2006 and $74.0
million in 2005. Medical claims liabilities increased in 2007
reflecting new business in Ohio and Texas, offset by the payment in 2007 of
FirstGuard claims incurred in 2006. The increase in cash flow from
operations in 2006 reflects an increase in medical claims liabilities primarily
from the commencement of our operations in Georgia and an increase in accounts
payable and accrued expenses. Those increases are partially offset by
an increase in premium and related receivables in 2006 that reflect an increase
in maternity delivery receivables, reimbursements due to us from providers
including amounts due under capitated risk-sharing contracts and the inclusion
of US Script receivables.
Our
investing activities used cash of $225.5 million in 2007, $150.3 million in 2006
and $56.5 million in 2005. Our investing activities in 2007 consisted
primarily of additions to the investment portfolios of our regulated
subsidiaries including transfers from cash and cash equiva | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||