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Coventry Health Care 10-Q 2010
form10q_06302010.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2010

OR

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________ to _________________

COMMISSION FILE NUMBER 1-16477
GRAPHIC
COVENTRY HEALTH CARE, INC.
(Exact name of registrant as specified in its charter)

Delaware
 
52-2073000
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification Number)

6705 Rockledge Drive, Suite 900, Bethesda, Maryland 20817
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code (301) 581-0600

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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yes  T No £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

          Large accelerated filer T
Accelerated filer £
          Non-accelerated filer £ (Do not check if a smaller reporting company)
Smaller reporting company £

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes £ No T

       Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class
 
Outstanding at July 30, 2010
     
Common Stock $.01 Par Value
 
148,390,177

 
 

 

COVENTRY HEALTH CARE, INC.
FORM 10-Q
TABLE OF CONTENTS



PART I. FINANCIAL INFORMATION
 
 
ITEM 1:  Financial Statements
 
   
 
   
 
   
 
   
 
 
 
 
 
 
 
PART II:  OTHER INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 



 
2

 

PART I.  FINANCIAL INFORMATION

ITEM 1: Financial Statements

CONSOLIDATED BALANCE SHEETS
(in thousands)

 
June 30, 2010
   
December 31, 2009
 
 
(unaudited)
       
ASSETS
         
Current assets:
         
Cash and cash equivalents
$ 1,495,414     $ 1,418,554  
Short-term investments
  16,011       442,106  
Accounts receivable, net
  271,108       258,993  
Other receivables, net
  499,457       496,059  
Other current assets
  338,131       234,446  
Total current assets
  2,620,121       2,850,158  
               
Long-term investments
  2,285,411       1,994,987  
Property and equipment, net
  258,503       271,931  
Goodwill
  2,546,351       2,529,284  
Other intangible assets, net
  448,948       471,693  
Other long-term assets
  32,454       48,479  
Total assets
$ 8,191,788     $ 8,166,532  
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
             
Current liabilities:
             
Medical liabilities
$ 1,353,268     $ 1,605,407  
Accounts payable and other accrued liabilities
  855,927       682,171  
Deferred revenue
  111,737       110,855  
Total current liabilities
  2,320,932       2,398,433  
               
Long-term debt
  1,599,211       1,599,027  
Other long-term liabilities
  428,155       456,518  
Total liabilities
  4,348,298       4,453,978  
               
Stockholders’ equity:
             
Common stock, $.01 par value; 570,000 authorized
190,532 issued and 148,427 outstanding in 2010
190,462 issued and 147,990 outstanding in 2009
  1,905       1,905  
             
             
Treasury stock, at cost; 42,105 in 2010; 42,472 in 2009
  (1,269,499 )     (1,282,054 )
Additional paid-in capital
  1,756,991       1,750,113  
Accumulated other comprehensive income, net
  54,563       41,406  
Retained earnings
  3,299,530       3,201,184  
Total stockholders’ equity
  3,843,490       3,712,554  
Total liabilities and stockholders’ equity
$ 8,191,788     $ 8,166,532  







See accompanying notes to the condensed consolidated financial statements.



 
3

 

CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)

   
Quarters Ended June 30,
   
Six Months Ended June 30,
 
   
2010
   
2009
   
2010
   
2009
 
Operating revenues:
                       
Managed care premiums
  $ 2,570,508     $ 3,201,919     $ 5,141,083     $ 6,442,731  
Management services
    297,633       296,455       586,036       588,538  
Total operating revenues
    2,868,141       3,498,374       5,727,119       7,031,269  
                                 
Operating expenses:
                               
Medical costs
    2,032,556       2,766,974       4,146,898       5,599,971  
Cost of sales
    64,116       58,020       123,262       115,896  
Selling, general and administrative
    454,254       535,949       949,159       1,079,969  
Charge for provider class action
    278,000       -       278,000       -  
Depreciation and amortization
    33,985       34,972       69,504       69,649  
Total operating expenses
    2,862,911       3,395,915       5,566,823       6,865,485  
                                 
Operating earnings
    5,230       102,459       160,296       165,784  
                                 
Interest expense
    20,195       21,775       40,325       43,906  
Other income, net
    18,207       31,895       38,494       51,762  
                                 
Earnings before income taxes
    3,242       112,579       158,465       173,640  
                                 
Provision for income taxes
    2,221       44,871       60,119       67,825  
                                 
Income from continuing operations
    1,021       67,708       98,346       105,815  
                                 
Loss from discontinued operations, net of tax
    -       (49,283 )     -       (43,223 )
                                 
Net earnings
  $ 1,021     $ 18,425     $ 98,346     $ 62,592  
                                 
Net earnings per share:
                               
Basic earnings per share from continuing operations
  $ 0.01     $ 0.46     $ 0.67     $ 0.72  
Basic loss per share from discontinued operations
    -       (0.33 )     -       (0.29 )
Total basic earnings per share
  $ 0.01     $ 0.13     $ 0.67     $ 0.43  
                                 
Diluted earnings per share from continuing operations
  $ 0.01     $ 0.46     $ 0.67     $ 0.72  
Diluted loss per share from discontinued operations
    -       (0.34 )     -       (0.30 )
Total diluted earnings per share
  $ 0.01     $ 0.12     $ 0.67     $ 0.42  
                                 
Weighted average common shares outstanding:
                               
Basic
    145,943       146,955       145,863       146,901  
Effect of dilutive options and restricted stock
    1,357       661       1,428       559  
Diluted
    147,300       147,616       147,291       147,460  






See accompanying notes to the condensed consolidated financial statements.


 
4

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

   
Six Months Ended June 30,
 
   
2010
   
2009
 
Cash flows from operating activities:
           
Net earnings
  $ 98,346     $ 62,592  
Adjustments to earnings:
               
Depreciation and amortization
    69,504       71,588  
Amortization of stock compensation
    21,258       23,779  
Charge for provider class action
    278,000       -  
Loss on impairment of FHSC goodwill
    -       72,373  
Gain on repurchase of debt
    -       (8,330 )
Changes in assets and liabilities:
               
Accounts receivable, net
    (2,915 )     13,344  
Medical liabilities
    (291,330 )     306,578  
Accounts payable and other accrued liabilities
    (240,155 )     17,623  
Deferred revenue
    (2,743 )     17,471  
Other operating activities
    4,007       (98,440 )
Net cash from operating activities
    (66,028 )     478,578  
                 
Cash flows from investing activities:
               
Capital expenditures, net
    (22,920 )     (23,173 )
Proceeds from sales of investments
    410,972       159,611  
Proceeds from maturities of investments
    477,123       368,475  
Purchases of investments
    (653,880 )     (312,408 )
(Payments) / proceeds for acquisitions, net of cash acquired
    (66,894 )     10,085  
Net cash from investing activities
    144,401       202,590  
                 
Cash flows from financing activities:
               
Proceeds from issuance of stock
    1,128       479  
Payments for repurchase of stock
    (3,628 )     (1,728 )
Excess tax benefit from stock compensation
    987       (3,861 )
Repayment of debt
    -       (87,020 )
Net cash from financing activities
    (1,513 )     (92,130 )
                 
Net change in cash and cash equivalents
    76,860       589,038  
                 
Cash and cash equivalents at beginning of period
    1,418,554       1,123,114  
                 
Cash and cash equivalents at end of period
  $ 1,495,414     $ 1,712,152  









See accompanying notes to the condensed consolidated financial statements.

 
5

 

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

A.BASIS OF PRESENTATION
 
The condensed consolidated financial statements of Coventry Health Care, Inc. and its subsidiaries (“Coventry” or the “Company”) contained in this report are unaudited but reflect all normal recurring adjustments which, in the opinion of management, are necessary for the fair presentation of the results of the interim periods reflected. Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted pursuant to applicable rules and regulations of the Securities and Exchange Commission (“SEC”). Therefore, it is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10–K for the year ended December 31, 2009. The results of operations for the interim periods reported herein are not necessarily indicative of results to be expected for the full year. The year end balance sheet data included in this report was derived from audited financial statements.
 
B. NEW ACCOUNTING STANDARDS>
 
In January 2010, Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2010-06, “Improving Disclosures about Fair Value Measurements” was issued.  ASU 2010-06 requires the disclosure of additional information about transfers in and out of Level 1 and Level 2 of the fair value hierarchy, requires the separate presentation (gross basis) of information about purchases, sales, issuances, and settlements of financial instruments in the roll forward of activity in fair value measurements using significant unobservable inputs (Level 3), and requires expanded disclosures regarding the determination of fair value measurements. The Company adopted the new disclosure provisions during the first quarter of 2010, except for the gross disclosures regarding purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements, which are required for the Company beginning with the filing of its quarterly filing on Form 10-Q for the quarter ended March 31, 2011.  The adoption of ASU 2010-06 did not affect the Company’s disclosures for the quarter or six months ended June 30, 2010.

C.SEGMENT INFORMATION
 
The Company has the following three reportable segments:  Health Plan and Medical Services, Specialized Managed Care, and Workers’ Compensation.  Each of these reportable segments, which the Company also refers to as “Divisions,” is separately managed and provides separate operating results that are evaluated by the Company’s chief operating decision maker.
 
The Health Plan and Medical Services Division is primarily comprised of the Company’s traditional health plan risk businesses and products.  Additionally, through this Division the Company contracts with various federal employee organizations to provide health insurance benefits under the Federal Employees Health Benefits Program (“FEHBP”) and offers managed care and administrative products to businesses that self-insure the health care benefits of their employees.  This Division also contains the dental services business. The Company did not renew its Medicare Advantage Private Fee-for-Service (“PFFS”) products effective for the 2010 plan year. Prior to the non-renewal, PFFS was part of this Division.
 
The Specialized Managed Care Division is comprised of the Company’s Medicare Part D program, its network rental business (“Network Rental”) and its mental-behavioral health benefits business.  As discussed in Note E, Discontinued Operations, to the condensed consolidated financial statements, on July 31, 2009 the Company sold its Medicaid/Public entity business, First Health Services Corporation (“FHSC”).  FHSC operations are excluded from the Company’s results of continuing operations.
 
The Workers’ Compensation Division is comprised of the Company’s workers’ compensation services businesses, which provide fee-based, managed care services such as access to the Company’s provider networks, pharmacy benefit management, and care management to underwriters and administrators of workers’ compensation insurance.
 
The tables below summarize the results from continuing operations of the Company’s reportable segments through the gross margin level, as that is the measure of profitability used by the chief operating decision maker to assess segment performance and make decisions regarding the allocation of resources.  A reconciliation of gross margin to operating earnings at a consolidated level for continuing operations is also provided.  Total assets by reportable segment are not disclosed as these assets are not reviewed separately by the Company’s chief operating decision maker.  The dollar amounts in the segment tables are presented in thousands.
 
 
 
 
 
 
 
 
6

 
 
   
Quarter Ended June 30, 2010
 
   
Health Plan and Medical Services
   
Specialized Managed Care
   
Workers’ Comp.
   
Elim.
   
Continuing Operations Total
 
Operating revenues
                             
   Managed care premiums
  $ 2,141,001     $ 448,865     $ -     $ (19,358 )   $ 2,570,508  
   Management services
    82,395       25,960       191,746       (2,468 )     297,633  
Total operating revenues
    2,223,396       474,825       191,746       (21,826 )     2,868,141  
   Medical costs
    1,653,957       397,956       -       (19,357 )     2,032,556  
   Cost of sales
    -       -       64,116       -       64,116  
Gross margin
  $ 569,439     $ 76,869     $ 127,630     $ (2,469 )   $ 771,469  
                                         
Selling, general and administrative
                                    454,254  
Charge for provider class action
                                    278,000  
Depreciation and amortization
                                    33,985  
Operating earnings
                                  $ 5,230  
 
   
Quarter Ended June 30, 2009
 
   
Health Plan and Medical Services
   
Specialized Managed Care
   
Workers’ Comp.
   
Elim.
   
Continuing Operations Total
 
Operating revenues
                             
   Managed care premiums
  $ 2,797,695     $ 420,836     $ -     $ (16,612 )   $ 3,201,919  
   Management services
    83,675       23,408       192,060       (2,688 )     296,455  
Total operating revenues
    2,881,370       444,244       192,060       (19,300 )     3,498,374  
   Medical costs
    2,403,180       380,383       -       (16,589 )     2,766,974  
   Cost of sales
    -       -       58,020       -       58,020  
Gross margin
  $ 478,190     $ 63,861     $ 134,040     $ (2,711 )   $ 673,380  
                                         
Selling, general and administrative
                                    535,949  
Depreciation and amortization
                                    34,972  
Operating earnings
                                  $ 102,459  
 
   
Six Months Ended June 30, 2010
 
   
Health Plan and Medical Services
   
Specialized Managed Care
   
Workers’ Comp.
   
Elim.
   
Continuing Operations Total
 
Operating revenues
                             
   Managed care premiums
  $ 4,231,584     $ 947,779     $ -     $ (38,280 )   $ 5,141,083  
   Management services
    165,353       49,458       376,151       (4,926 )     586,036  
Total operating revenues
    4,396,937       997,237       376,151       (43,206 )     5,727,119  
   Medical costs
    3,314,999       870,180       -       (38,281 )     4,146,898  
   Cost of sales
    -       -       123,262       -       123,262  
Gross margin
  $ 1,081,938     $ 127,057     $ 252,889     $ (4,925 )   $ 1,456,959  
                                         
Selling, general and administrative
                                    949,159  
Charge for provider class action
                                    278,000  
Depreciation and amortization
                                    69,504  
Operating earnings
                                  $ 160,296  
 
 
 
 
 
7

 
 
   
Six Months Ended June 30, 2009
 
   
Health Plan and Medical Services
   
Specialized Managed Care
   
Workers’ Comp.
   
Elim.
   
Continuing Operations Total
 
Operating revenues
                             
   Managed care premiums
  $ 5,547,344     $ 928,916     $ -     $ (33,529 )   $ 6,442,731  
   Management services
    167,485       46,667       379,694       (5,308 )     588,538  
Total operating revenues
    5,714,829       975,583       379,694       (38,837 )     7,031,269  
   Medical costs
    4,745,003       888,452       -       (33,484 )     5,599,971  
   Cost of sales
    -       -       115,896       -       115,896  
Gross margin
  $ 969,826     $ 87,131     $ 263,798     $ (5,353 )   $ 1,315,402  
                                         
Selling, general and administrative
                                    1,079,969  
Depreciation and amortization
                                    69,649  
Operating earnings
                                  $ 165,784  

D.ACQUISITIONS
 
On June 30, 2010, the Company announced that it signed a definitive agreement to acquire MHP, Inc. and its subsidiaries (“Mercy Health Plans”), currently wholly-owned by Sisters of Mercy Health System. This transaction, which is subject to regulatory approvals, is expected to close in the fourth quarter of 2010.  Mercy Health Plans is a diversified health plan with approximately 90,000 commercial risk members, 60,000 commercial self-funded members, and 30,000 Medicare Advantage Coordinated Care members throughout Missouri and northwest Arkansas.
 
On February 1, 2010, the Company completed its acquisition of Preferred Health Systems, Inc. (“PHS”) in an all-cash transaction for approximately $84.6 million, including excess statutory and working capital.  PHS is a commercial health plan based in Wichita, Kansas serving approximately 100,000 commercial group risk members and 20,000 commercial self-funded members.  The acquisition of PHS strengthens Coventry’s presence in the Kansas market and its overall health plan footprint. The acquisition was accounted for using the acquisition method of accounting and accordingly, PHS' operating results have been included in the Company's consolidated financial statements since the February 1, 2010 date of acquisition.  As part of the acquisition, the Company recognized a liability for potential contingent earn-outs that are attributed to certain performance measures by PHS.  At June 30, 2010, this liability was not significant.
 
E. DISCONTINUED OPERATIONS>
 
On July 31, 2009, the Company completed the sale of its fee-based Medicaid services subsidiary FHSC.  In accordance with FASB Accounting Standards Codification (“ASC”) 205-20 “Discontinued Operations,” FHSC’s earnings and the impairment of its goodwill for the quarter and six months ended June 30, 2009 are presented as loss from discontinued operations, net of tax in the Company’s consolidated statements of operations.  The following table summarizes FHSC discontinued operations information for the periods presented (in thousands):
 
   
Quarters Ended June 30,
   
Six Months Ended June 30,
 
   
2010
   
2009
   
2010
   
2009
 
FHSC revenues
  $ -     $ 38,576     $ -     $ 79,270  
                                 
FHSC earnings, before taxes
    -       6,866       -       16,473  
FHSC goodwill impairment, before taxes
    -       (72,373 )     -       (72,373 )
Loss from discontinued operations, before taxes
    -       (65,507 )     -       (55,900 )
Tax benefit on loss from discontinued operations
    -       16,224       -       12,677  
Loss from discontinued operations, net of tax
  $ -     $ (49,283 )   $ -     $ (43,223 )
 
 
 
 
 
8

 
F.DEBT
 
The Company’s outstanding debt consisted of the following (in thousands):
   
June 30, 2010
   
December 31, 2009
 
             
5.875% Senior notes due 1/15/12
  $ 233,903     $ 233,903  
6.125% Senior notes due 1/15/15
    228,845       228,845  
5.95% Senior notes due 3/15/17, net of unamortized discount
               
  of $951 at June 30, 2010
    382,284       382,213  
6.30% Senior notes due 8/15/14, net of unamortized discount
               
  of $947 at June 30, 2010
    374,150       374,037  
Revolving Credit Facility due 7/11/12, 0.84% weighted
               
  average interest rate for the six-month period ended June 30, 2010
    380,029       380,029  
Total Debt
  $ 1,599,211     $ 1,599,027  

The Company’s credit facility and senior notes contain covenants and restrictions regarding, among other things, additional debt, dividends or other restricted payments, transactions with affiliates, asset dispositions, and consolidations or mergers. The Company’s credit facility also requires compliance with a 3:1 leverage ratio.   The Company’s credit facility and certain of its senior notes also include as an event of default the entry of a judgment against the Company or a subsidiary in excess of a specified amount ($50 million in the case of the credit agreement and $20 million in the case of the applicable senior notes) if enforcement proceedings are commenced or if enforcement is not stayed for a period of 30 consecutive days.  The Company has filed a request for a discretionary appellate review of the judgment against First Health Group Corp. described in Note G, Contingencies, to the condensed consolidated financial statements, and enforcement of the judgment is stayed pending a determination regarding this request. The Company has sufficient funds to satisfy this judgment before enforcement proceedings would begin.  As of June 30, 2010, the Company was in compliance with all applicable covenants and restrictions under its senior notes and credit facility.

G.CONTINGENCIES
 
As described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, the Company received a subpoena from the U.S. Attorney for the District of Maryland, Northern Division, requesting information regarding the operational process for confirming Medicare eligibility for its Workers’ Compensation set-aside product. The Company is fully cooperating and is providing the requested information. The Company cannot predict what, if any, actions may be taken by the U.S. Attorney. However, based on the information known to date, the Company does not believe that the outcome of this inquiry will have a material adverse effect on its financial position or results of operations.
 
First Health Group Corp, Inc. (“FHGC”), a subsidiary of the Company, is a party to various lawsuits filed in the state and federal courts of Louisiana involving disputes between providers and workers’ compensation payors who access FHGC’s contracts with these providers to reimburse them for services rendered to injured workers. FHGC has written contracts with providers in Louisiana which expressly state that the provider agrees to accept a specified discount off their billed charges for services rendered to injured workers. The discounted rate set forth in the FHGC provider contract is less than the reimbursement amount set forth in the Louisiana Workers’ Compensation Fee Schedule. For this reason, workers’ compensation insurers and third party administrators (“TPAs”) for employers who self-insure workers’ compensation benefits, contract with FHGC to access the FHGC provider contracts. Thus, when a FHGC contracted provider renders services to an injured worker, the workers’ compensation insurer or the TPA reimburses the provider for those services in accordance with the discounted rate in the provider’s contract with FHGC. These workers’ compensation insurers and TPAs are referred to as “payors” in the FHGC provider contract and the contract expressly states that the discounted rate will apply to those payors who access the FHGC contract. Thus, the providers enter into these contracts with FHGC knowing that they will be paid the discounted rate by every payor who chooses to access the FHGC contract. So that its contracted providers know which payors are accessing their contract, FHGC sends regular written notices to its contracted providers and maintains a provider website which lists each and every payor who is accessing the FHGC contract.
 
Four providers who have contracts with FHGC filed a state court class action lawsuit against FHGC and certain payors alleging that FHGC violated Louisiana’s Any Willing Provider Act (the “Act”), which requires a payor accessing a preferred provider network contract to give a one time notice 30 days before that payor uses the discounted rate in the preferred provider network contract to pay the provider for services rendered to a member insured under that payor’s health benefit plan. These provider plaintiffs allege that the Act applies to medical bills for treatment rendered to injured workers and that the Act requires point of service written notice in the form of a benefit identification card. If a payor is found to have violated the Act’s notice provision, the court may assess up to $2,000 in damages for each instance when the provider was not given proper notice that a discounted rate would be used to pay for the services rendered. In response to the state court class action, FHGC and certain payors filed a suit in federal court against the same four provider plaintiffs in the state court class action seeking a declaratory judgment that FHGC’s contracts are valid and enforceable, that its contracts are not subject to the Act since that Act does not apply to medical services rendered to injured workers and that FHGC is exempt from the notice requirements of the Act because it has contracted directly with each provider in its network. The federal district court ruled in favor of FHGC and declared that its contracts are not subject to the Act, that FHGC was exempt from the Act’s notice provision because it contracted directly with the providers, and that FHGC’s contracts were valid and enforceable, i.e., the four provider plaintiffs were required to accept the discounted rate in accordance with the terms of their written contracts with FHGC.
 
 
9

 

Despite the federal court’s decision, the provider plaintiffs continued to pursue their state court class action against FHGC and filed a motion for partial summary judgment seeking damages of $2,000 for each provider visit where the provider was not given a benefit identification card at the time the service was performed. In response to the motion for partial summary judgment filed in the state court action, FHGC obtained an order from the federal court which enjoined, barred and prevented any of the four provider plaintiffs or their counsel from pursuing any claim against FHGC before any court or tribunal arising under the Act. Despite the issuance of this federal court injunction, the provider plaintiffs and their counsel pursued their motion for partial summary judgment in the state court action. Before the state court held a hearing on the motion for partial summary judgment, FHGC moved to decertify the class on the basis that the four named provider plaintiffs had been enjoined by the federal court from pursuing their claims against FHGC. The state court denied the motion to decertify the class but did enter an order permitting FHGC to file an immediate appeal of the state court’s denial of the motion. Even though FHGC had filed its appeal and there were no class representatives since all four named plaintiffs had been enjoined from pursuing their claims against FHGC, the state court held a hearing and granted the plaintiffs’ motion for partial summary judgment. The trial court granted the motion despite the fact that (1) the court lacked jurisdiction due to the appeal filed by FHGC challenging the denial of its motion to decertify the class; (2) there were no named class representatives because all four named plaintiffs had been enjoined from pursuing their claims against FHGC; (3) none of the providers in the class ever submitted a claim for payment to FHGC and therefore FHGC never made any discounted payments to any of the providers in the class in the absence of notice; (4) FHGC has contracted directly with every provider in the class and therefore, under the Act’s express language, FHGC was exempt from giving notice under the Act; and (5) the claims of the provider plaintiffs are time barred. The amount of the partial judgment was for $262 million. Class counsel will likely claim prejudgment interest and attorneys’ fees in addition to the $262 million judgment plus post judgment interest.  FHGC appealed both the partial summary judgment order and the denial of class decertification order to the state’s intermediate appellate court. The intermediate appellate court has denied the class decertification appeal and FHGC’s rehearing petition. FHGC will file an application for a writ of appeal on the class decertification issue with the Louisiana Supreme Court. The decision to grant or deny the application for a writ of appeal is at the discretion of the Louisiana Supreme Court.  The intermediate appellate court also denied FHGC’s appeal on the summary judgment order. FHGC’s petition for a rehearing is still pending before the intermediate appellate court. FHGC will file an application for a writ of appeal with the Louisiana Supreme Court if its rehearing petition is denied.  FHGC also filed a motion with the federal court to enforce the federal court’s prior judgments and for sanctions against the provider plaintiffs for violating those judgments which barred and enjoined them from pursuing their claims against FHGC in the state courts. That motion also sought to enjoin the state courts from proceeding in order to protect and effectuate the federal court’s judgments.  FHGC’s motion was denied by the federal court.
 
As a result of the Louisiana appellate court’s decision on July 1, 2010 to affirm the state trial court’s summary judgment order, the Company recorded a $278 million pre-tax charge to earnings during the second quarter of 2010.  This amount represents the $262 million judgment amount plus post judgment interest in the amount of $16 million and is included in “accounts payable and other accrued liabilities” in the accompanying balance sheets as of June 30, 2010.  The Company has accrued for legal fees expected to be incurred related to this case, which is included in “accounts payable and other accrued liabilities” in the accompanying balance sheets.
 
In a related matter, FHGC has filed another lawsuit in Louisiana federal district court against 85 Louisiana providers seeking a declaratory judgment that its contracts are valid and enforceable, that its contracts are not subject to the Act because its contracts pertain to payment for services rendered to injured workers, and FHGC is exempt from the notice provision of the Act because it has contracted directly with the providers. This lawsuit is assigned to the same federal district court judge who issued the decision and injunction in the lawsuit filed by FHGC against the four provider plaintiffs in the state court action.
 
On September 3, 2009, a shareholder, who owns less than 5,000 shares, filed a putative securities class action against the Company and three of its current and former officers in the federal district court of Maryland. Subsequent to the filing of the complaint, three other shareholders and/or investor groups filed motions with the court for appointment as lead plaintiff and approval of selection of lead and liaison counsel. By agreement, the four shareholders submitted a stipulation to the court regarding appointment of lead plaintiff and approval of selection of lead and liaison counsel. The court has approved the stipulation and ordered the lead plaintiff to file a consolidated and amended complaint by May 21, 2010. The amended complaint has been filed. The purported class period is February 9, 2007 to October 22, 2008. The amended complaint alleges that the Company’s public statements contained false, misleading and incomplete information regarding the Company’s profitability, particularly the profit margins for its PFFS products. The Company will vigorously defend against the allegations in the lawsuit. Although it cannot predict the outcome, the Company believes this lawsuit will not have a material adverse effect on its financial position or results of operations.
 
On October 13, 2009, two former employees and participants in the Coventry Health Care Retirement Savings Plan filed a putative ERISA class action lawsuit against the Company and several of its current and former officers, directors and employees in the U.S. District Court for the District of Maryland. Plaintiffs allege that defendants breached their fiduciary duties under ERISA by offering and maintaining Company stock in the Plan after it allegedly became imprudent to do so and by allegedly failing to provide complete and accurate information about the Company’s financial condition to plan participants in SEC filings and public statements. Three similar actions by different plaintiffs were later filed in the same court and were consolidated on December 9, 2009. As ordered by the court, the plaintiffs have filed a consolidated amended complaint. The Company intends to vigorously defend against the allegations in the consolidated complaint. Although it cannot predict the outcome, the Company believes this lawsuit will not have a material adverse effect on its financial position or results of operations.
 
There are several lawsuits filed against Vista Health Plan by non-participating providers seeking to be paid their full billed charges for services rendered to Vista's members. Vista reimburses non-participating providers at rates which are usual and customary for similar services in the same geographical area. Based on the various stages of development of these lawsuits, including discussions of settlement, the Company has recognized reserves for estimates of probable loss.  Although it cannot predict the outcome, the Company believes these lawsuits will not have a material adverse effect on its financial position or results of operations.
 
 
 
10

 
 
H.COMPREHENSIVE INCOME
 
Comprehensive income was as follows (in thousands):
 
   
Quarters Ended June 30,
   
Six Months Ended June 30,
 
   
2010
   
2009
   
2010
   
2009
 
Net earnings
  $ 1,021     $ 18,425     $ 98,346     $ 62,592  
Other comprehensive income:
                               
   Unrealized holding gains
    25,311       6,139       27,308       27,965  
   Reclassification adjustments, net
    (1,881 )     (2,344 )     (5,739 )     (4,796 )
      Other comprehensive income, before income taxes
    23,430       3,795       21,569       23,169  
   Income tax provision
    (9,139 )     (1,480 )     (8,412 )     (9,036 )
      Other comprehensive income, net of income taxes
    14,291       2,315       13,157       14,133  
Comprehensive income
  $ 15,312     $ 20,740     $ 111,503     $ 76,725  
 
The Company’s unrealized holding gains on its investment portfolio increased during the quarter and six months ended June 30, 2010 primarily due to movement in treasury yields.
 
I.INVESTMENTS AND FAIR VALUE MEASUREMENTS  
 
Investments
 
The Company considers all of its investments as available-for-sale securities and accordingly records unrealized gains and losses within accumulated other comprehensive income in the stockholders’ equity section of its consolidated balance sheets.
 
The amortized cost, gross unrealized gain or loss, and estimated fair value of short-term and long-term investments by security type were as follows at June 30, 2010 and December 31, 2009 (in thousands):
 
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
   
Cost
   
Gain
   
Loss
   
Value
 
As of June 30, 2010
                       
State and municipal bonds
  $ 922,228     $ 40,799     $ (468 )   $ 962,559  
US Treasury securities
    124,555       4,476       -       129,031  
Government-sponsored enterprise securities (1)
    321,161       8,362       -       329,523  
Residential mortgage-backed securities (2)
    290,391       13,364       (467 )     303,288  
Commercial mortgage-backed securities
    24,577       905       -       25,482  
Asset-backed securities (3)
    42,134       1,821       (410 )     43,545  
Corporate debt and other securities
    450,586       21,092       (19 )     471,659  
    $ 2,175,632     $ 90,819     $ (1,364 )   $ 2,265,087  
Equity investments (4)
                            36,335  
                            $ 2,301,422  
 
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
   
Cost
   
Gain
   
Loss
   
Value
 
As of December 31, 2009
                       
State and municipal bonds
  $ 863,561     $ 37,392     $ (1,371 )   $ 899,582  
US Treasury securities
    566,057       2,572       (32 )     568,597  
Government-sponsored enterprise securities (1)
    231,645       4,225       (330 )     235,540  
Residential mortgage-backed securities (2)
    229,665       10,581       (932 )     239,314  
Commercial mortgage-backed securities
    26,891       344       (507 )     26,728  
Asset-backed securities (3)
    48,434       4,441       (1,170 )     51,705  
Corporate debt and other securities
    357,594       12,373       (1,091 )     368,876  
    $ 2,323,847     $ 71,928     $ (5,433 )   $ 2,390,342  
Equity investments (4)
                            46,751  
                            $ 2,437,093  
(1) Includes FDIC insured Temporary Liquidity Guarantee Program securities.
(2) Agency pass-through, with the timely payment of principal and interest guaranteed.
(3) Includes auto loans, credit card debt, and rate reduction bonds.
(4) Includes investments in entities accounted for using the equity method of accounting and therefore are presented at their carrying value.
 
 
 
11

 
 
The amortized cost and estimated fair value of available for sale debt securities by contractual maturity were as follows at June 30, 2010 and December 31, 2009 (in thousands):
 
   
As of June 30, 2010
   
As of December 31, 2009
 
   
Amortized
   
Fair
   
Amortized
   
Fair
 
   
Cost
   
Value
   
Cost
   
Value
 
Maturities:
                       
Within 1 year
  $ 183,721     $ 184,957     $ 612,960     $ 616,177  
1 to 5 years
    897,182       936,078       753,697       780,908  
5 to 10 years
    498,746       524,755       440,552       459,092  
Over 10 years
    595,983       619,297       516,638       534,165  
Total
  $ 2,175,632     $ 2,265,087     $ 2,323,847     $ 2,390,342  
 
Investments with long-term option adjusted maturities, such as residential and commercial mortgage-backed securities, are included in the over 10 year category.  Actual maturities may differ due to call or prepayment rights.
 
Gross investment gains of $11.7 million and gross investment losses of $4.3 million were realized on investment sales for the six months ended June 30, 2010. This compares to gross investment gains of $5.1 million and gross investment losses of $0.4 million that were realized on sales for the six months ended June 30, 2009.  All realized gains and losses are recorded net of income taxes in other income, net in the Company’s consolidated statements of operations.
 
The following tables present the Company’s investments’ gross unrealized losses and estimated fair value, at June 30, 2010 and December 31, 2009, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position (in thousands).
 
 
At June 30, 2010
 
Less than 12 months
   
12 months or more
   
Total
 
Description of Securities
 
Fair Value
   
Unrealized Losses
   
Fair Value
   
Unrealized Losses
   
Fair Value
   
Unrealized Losses
 
State and municipal bonds
  $ 20,228     $ (251 )   $ 6,208     $ (217 )   $ 26,436     $ (468 )
US Treasury securities
    -       -       -       -       -       -  
Government sponsored enterprises
    -       -       -       -       -       -  
Residential mortgage-backed  securities
    8,797       (30 )     7,987       (437 )     16,784       (467 )
Commercial  mortgage-backed securities
    -       -       -       -       -       -  
Asset-backed securities
    -       -       2,792       (410 )     2,792       (410 )
Corporate debt and other securities
    3,441       (19 )     -       -       3,441       (19 )
Total
  $ 32,466     $ (300 )   $ 16,987     $ (1,064 )   $ 49,453     $ (1,364 )
 
At December 31, 2009
 
Less than 12 months
   
12 months or more
   
Total
 
Description of Securities
 
Fair Value
   
Unrealized Losses
   
Fair Value
   
Unrealized Losses
   
Fair Value
   
Unrealized Losses
 
State and municipal bonds
  $ 49,963     $ (833 )   $ 12,898     $ (538 )   $ 62,861     $ (1,371 )
US Treasury securities
    8,146       (32 )     -       -       8,146       (32 )
Government sponsored enterprises
    45,331       (330 )     -       -       45,331       (330 )
Residential mortgage-backed securities
    28,461       (645 )     9,658       (287 )     38,119       (932 )
Commercial  mortgage-backed securities
    2,505       (17 )     5,580       (490 )     8,085       (507 )
Asset-backed securities
    -       -       2,255       (1,170 )     2,255       (1,170 )
Corporate debt and other securities
    119,594       (1,091 )     -       -       119,594       (1,091 )
Total
  $ 254,000     $ (2,948 )   $ 30,391     $ (2,485 )   $ 284,391     $ (5,433 )
 
The unrealized losses presented in these tables do not meet the criteria for treatment as an other-than-temporary impairment.   The Company has not decided to sell and it is not more-likely-than not that the Company will be required to sell before a recovery of the amortized cost basis of these securities.
 
The Company continues to review its investment portfolios under its impairment review policy. Given the current market conditions and the significant judgments involved, there is a continuing risk that declines in fair value may occur and that other-than-temporary impairments may be recorded in future periods.
 
 
 
12

 
 
Fair Value Measurements
 
ASC Topic 820, “Fair Value Measurements and Disclosures,” defines fair value and requires a three-tier fair value hierarchy that prioritizes the inputs used in measuring fair value based on the quality and reliability of the inputs or assumptions used in fair value measurements.  These tiers include: Level 1 – defined as observable inputs such as quoted prices in active markets; Level 2 – defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3 – defined as unobservable inputs in which little or no market data exists, therefore requiring the Company to develop its own assumptions.
 
The following tables present the fair value hierarchy for the Company’s financial assets measured at fair value on a recurring basis at June 30, 2010 and December 31, 2009 (in thousands):
 
         
Quoted Prices in Active Markets for Identical Assets
   
Significant Other Observable Inputs
   
Significant Unobservable Inputs
 
At June 30, 2010
 
Total
   
Level 1
   
Level 2
   
Level 3
 
                         
Cash and cash equivalents
  $ 1,495,414     $ 219,498     $ 1,275,916     $ -  
State and municipal bonds
    962,559       -       962,559       -  
US Treasury securities
    129,031       129,031       -       -  
Government-sponsored enterprise securities
    329,523       -       329,523       -  
Residential mortgage-backed securities
    303,288       -       301,220       2,068  
Commercial mortgage-backed securities
    25,482       -       25,482       -  
Asset-backed securities
    43,545       -       43,385       160  
Corporate debt and other securities
    471,659       -       464,368       7,291  
Total
  $ 3,760,501     $ 348,529     $ 3,402,453     $ 9,519  
                                 
 
         
Quoted Prices in Active Markets for Identical Assets
   
Significant Other Observable Inputs
   
Significant Unobservable Inputs
 
At December 31, 2009
 
Total
   
Level 1
   
Level 2
   
Level 3
 
                         
Cash and cash equivalents
  $ 1,418,554     $ 398,073     $ 1,020,481     $ -  
State and municipal bonds
    899,582       -       899,582       -  
US Treasury securities
    568,597       568,597       -       -  
Government-sponsored enterprise securities
    235,540       -       235,540       -  
Residential mortgage-backed securities
    239,314       -       236,214       3,100  
Commercial mortgage-backed securities
    26,728       -       26,728       -  
Asset-backed securities
    51,705       -       47,267       4,438  
Corporate debt and other securities
    368,876       -       360,250       8,626  
Total
  $ 3,808,896     $ 966,670     $ 2,826,062     $ 16,164  
 
 
 
13

 
The following tables provide a summary of the changes in the estimated fair value of the Company’s Level 3 financial assets for the quarters and six months ended June 30, 2010 and 2009 (in thousands):
 
Quarter Ended June 30, 2010
 
   
Total Level 3
   
Municipal bonds
   
Mortgage-backed securities
   
Asset-backed securities
   
Corporate and other
 
Beginning Balance, April 1, 2010
  $ 14,476     $ -     $ 2,119     $ 5,005     $ 7,352  
Transfers to (from) Level 3
    -       -       -       -       -  
Total gains or losses (realized / unrealized)
                                       
   Included in earnings
    2,986       -       80       2,908       (2 )
   Included in other comprehensive  income
    (3,101 )     -       2       (3,044 )     (59 )
Purchases, issuances and settlements, net     (4,842     -       (133     (4,709     -  
Ending Balance, June 30, 2010   $