This excerpt taken from the MGLN 10-K filed Mar 3, 2005.
Reliance on Customer ContractsThe Companys inability to renegotiate or extend expiring customer contracts, or the termination of customer contracts, could adversely affect the Companys liquidity, profitability and financial condition.
Substantially all of the Companys net revenue is derived from contracts with payors of behavioral healthcare benefits. Substantially all of these contracts may be terminated immediately with cause and many, including some of the Companys most significant contracts, are terminable without cause by the customer upon notice and the passage of a specified period of time (typically between 60 and 180 days), or upon the occurrence of certain other specified events. The Companys ten largest customers accounted for 61.6 percent and 70.3 percent of the Companys net revenue in the fiscal years ended December 31, 2003 and 2004, respectively. Loss of all of these contracts or customers would, and loss of any one of these contracts or customers could, materially reduce the Companys revenues and have a material adverse effect on the Companys liquidity, profitability and financial condition. One of these contracts was a subcontract
with a health plan under which the Company managed the mental health and substance abuse services for certain beneficiaries of TRICARE, which subcontract expired on September 30, 2004 and was not renewed. Also, as previously discussed in BusinessEmergence From Chapter 11, the contract with Aetna, which is one of the Companys largest customers, will terminate on December 31, 2005. The Company recorded net revenue from Aetna of $228.1 million for the fiscal year ended December 31, 2004.
The Companys largest customer is the State of Tennessees TennCare program. The TennCare program provides health and other related benefits to the Medicaid recipients in the State of Tennessee as well as to certain other uninsured individuals. The Company, through its wholly owned subsidiary, Tennessee Behavioral Health, and through Premier, a joint venture in which the Company has a 50 percent interest, contracts with the State of Tennessee (the State) to manage the behavioral healthcare benefits for the TennCare program. The creditors (or other beneficial interest holders) of Premier have no recourse to the general credit of the Company, as the primary beneficiary of Premier. Effective July 1, 2004, the State divided the TennCare program into three regions. Tennessee Behavioral Health has a contract to serve the East Region with an initial term that runs through December 31, 2005 and includes a provision for annual extensions at the States option through December 31, 2008. Each of Tennessee Behavioral Health and Premier has a contract with respect to the West and Central regions that runs through December 31, 2005. All three contracts are subject to appropriations funding on July 1, 2005. For the fiscal year ended December 31, 2004, the Company recorded revenues from this customer under these contracts of approximately $431.5 million.
On January 10, 2005, the Governor of Tennessee stated that, because of the increased costs of the TennCare program, the State will cease providing coverage to approximately 323,000 adults who do not qualify for Medicaid and limit benefits to be delivered under the TennCare program. The Governor stated that he wishes to begin implementing such membership and benefit changes in March 2005 and complete them by the end of 2005. Certain advocacy groups have filed suits in attempts to prevent the Governor from implementing any membership and benefits reductions. A reduction in membership would, and benefit changes could adversely affect the Companys revenues and profitability. However, because of the opposition to the Governors plan, and because, even if the Governor were to prevail the Company does not yet know which members would be eliminated from the program, the timing of the membership reductions, the benefit changes being proposed or the timing of those changes, it cannot estimate the impact of these potential developments at this time.
In addition, the TennCare contracts might not be extended or successfully renegotiated beyond December 31, 2005, or, if renewed or renegotiated, the terms of any new contracts might not be comparable to those of existing contracts. If this happens, the Companys liquidity, financial condition, prospects and profitability may be adversely affected.