UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
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T
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ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended December 31, 2007
or
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£
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TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period
from to
Commission
file number: 001-31826
CENTENE
CORPORATION
(Exact
name of registrant as specified in its charter)
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Delaware
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42-1406317
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(State
or other jurisdiction of
incorporation
or organization)
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(I.R.S.
Employer
Identification
Number)
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7711
Carondelet Avenue
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St.
Louis, Missouri
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63105
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code: (314) 725-4477
Securities
registered pursuant to Section 12(b) of the Act:
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Common
Stock, $0.001 Par Value
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New
York Stock Exchange
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Title
of Each Class
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Name
of Each Exchange on Which
Registered
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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.
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Part
I
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Item
1.
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3
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Item
1A.
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16
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Item
1B.
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24
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Item
2.
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24
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Item
3.
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25
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Item
4.
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25
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Part
II
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Item
5.
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25
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Item
6.
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27
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Item
7.
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28
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Item 7A.
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37
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Item
8.
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38
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Item
9.
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39
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Item
9A.
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39
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Item
9B.
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41
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Part
III
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Item
10.
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41
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Item
11.
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41
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Item
12.
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41
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Item
13.
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41
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Item
14.
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41
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Part
IV
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Item 15.
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41
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68
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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:
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·
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Strong Historic Operating
Performance. We have increased revenues as we have grown
in existing markets, expanded into new markets and broadened our product
offerings. We entered the Wisconsin market in 1984, the Indiana
market in 1995, the Texas market in 1999, the New Jersey market in 2002,
the Ohio market in 2004, the Georgia market in 2006, and the South
Carolina market in 2007. We have also increased membership by
acquiring Medicaid businesses, contracts and other related assets from
competitors in existing markets, most recently in Ohio in 2005 and
2006. Our Medicaid Managed Care membership totaled
approximately 1.1 million as of December 31, 2007. For the year
ended December 31, 2007, we had revenue from continuing operations of $2.9
billion, representing a 40% CAGR since the year ended December 31,
2003. We generated cash flow from operations of $202.2 million
and net earnings of $73.4 million for the year ended December 31,
2007.
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·
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Medicaid
Expertise. Over the last 20 years, we have strived to
develop a specialized Medicaid expertise that has helped us establish and
maintain relationships with members, providers and state
governments. We have implemented programs developed to achieve
savings for state governments and improve medical outcomes for members by
reducing inappropriate emergency room use, inpatient days and high cost
interventions, as well as by managing care of chronic
illnesses. Our experience in working with state regulators
helps us implement and deliver programs and services efficiently and
affords us opportunities to provide input regarding Medicaid industry
practices and policies in the states in which we operate. We
work with state agencies on redefining benefits, eligibility requirements
and provider fee schedules in order to maximize the number of uninsured
individuals covered through Medicaid, SCHIP and SSI and expand these types
of benefits offered. Our approach is to accomplish this while
maintaining adequate levels of provider compensation and protecting our
profitability.
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·
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Diversified Business
Lines. We continue to broaden our service offerings to
address areas that we believe have been traditionally underserved by
Medicaid managed care organizations. In addition to our
Medicaid and Medicaid-related managed care services, our service offerings
include behavioral health, life and health management, long-term care
programs, managed vision, nurse triage, pharmacy benefits management and
treatment compliance. Through the utilization of a
multi-business line approach, we are able to diversify our revenue and
help control our medical costs.
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·
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Localized Approach with
Centralized Support Infrastructure. We take a localized
approach to managing our subsidiaries, including provider and member
services. This approach enables us to facilitate access by our
members to high quality, culturally sensitive healthcare
services. Our systems and procedures have been designed to
address these community-specific challenges through outreach, education,
transportation and other member support activities. For
example, our community outreach programs work with our members and their
communities to promote health and self-improvement through employment and
education on how best to access care. We complement this
localized approach with a centralized infrastructure of support functions
such as finance, information systems and claims processing, which allows
us to minimize general and administrative expenses and to integrate and
realize synergies from acquisitions. We believe this combined
approach allows us to efficiently integrate new business opportunities in
both Medicaid and specialty services while maintaining our local
accountability and improved access.
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·
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Specialized and Scalable
Systems and Technology. Through our specialized
information systems, we work to strengthen relationships with providers
and states which help us grow our membership base. Our
specialized information systems allow us to support our core processing
functions under a set of integrated databases which are designed to be
both replicable and scalable. Physicians can use claims,
utilization and membership data to manage their practices more
efficiently, and they also benefit from our timely
payments. State agencies can use data from our information
systems to demonstrate that their Medicaid populations receive quality
healthcare in an efficient manner. These systems also help
identify needs for new healthcare and specialty programs. We
have the ability to leverage our platform for one state configuration into
new states or for health plan acquisitions. Our 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.
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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:
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·
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Increase Penetration of
Existing State Markets. We seek to continue to increase
our Medicaid membership in states in which we currently operate through
alliances with key providers, outreach efforts, development and
implementation of community-specific products and
acquisitions. In 2006, we were awarded two regions in
connection with Ohio’s statewide restructuring of its Medicaid managed
care program, expanding the number of counties we serve from three to
27. We also were awarded a Medicaid ABD contract in four
regions in Ohio. In Texas, we expanded our operations to the
Corpus Christi market in 2006 and began managing care for SSI recipients
in February 2007. We may also increase membership by acquiring
Medicaid businesses, contracts and other related assets from our
competitors in our existing markets or by enlisting additional
providers. For example, in 2005 and 2006, we acquired certain
Medicaid-related assets in Ohio. In 2006, we began serving members within
a long-term care plan in Arizona. In 2008, we began serving
Medicare members within Special Needs Plans in Arizona, Ohio, Texas and
Wisconsin.
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|
·
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Diversify Business
Lines. We seek to broaden our business lines into areas
that complement our existing business to enable us to grow and diversify
our revenue. We are constantly evaluating new opportunities for
expansion both domestically and abroad. For instance, in
October 2006, we commenced operations under our managed care program
contracts to provide long-term care services in Arizona, and in January
2006, we completed the acquisition of US Script, a pharmacy benefits
manager. We are also considering other premium based or
fee-for-service lines of business that would provide additional
diversity. We employ a disciplined acquisition strategy that is
based on defined criteria including internal rate of return, accretion to
earnings per share, market leadership and compatibility with our
information systems. We engage our executives in the relevant
operational units or functional areas to ensure consistency between the
diligence and integration process.
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·
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Address Emerging State
Needs. We work to assist the states in which we operate
in addressing the operating challenges they face. We seek to
assist the states in balancing premium rates, benefit levels, member
eligibility, policies and practices, and provider
compensation. For example, in 2007, the Texas Health and Human
Services Commission awarded us a contract for Comprehensive Health Care
for Children in Foster Care, a new statewide program providing managed
care services to participants in the Texas Foster Care
program. In 2005, we began performing under our contracts with
the State of Arizona to facilitate the delivery of mental health and
substance abuse services to behavioral health recipients in
Arizona. Effective January 1, 2005, we were awarded a
behavioral health contract to serve SCHIP members in Kansas. By
helping states structure an appropriate level and range of Medicaid, SCHIP
and specialty services, we seek to ensure that we are able to continue to
provide those services on terms that achieve targeted gross margins,
provide an acceptable return and grow our
business.
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·
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Develop and Acquire Additional
State Markets where Enrollment is Mandated. We continue
to leverage our experience to identify and develop new markets by seeking
both to acquire existing business and to build our own
operations. We expect to focus expansion on states where
Medicaid recipients are mandated to enroll in managed care organizations,
because we believe member enrollment levels are more predictable in these
states. For example, effective June 1, 2006, we began managing
care for Medicaid and SCHIP members in Georgia. In addition, we
focus our attention on states converting to managed care. For
example, in 2007, we entered the South Carolina market and in December
2007, we began participating in the state’s conversion to at-risk managed
care.
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·
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Leverage Established
Infrastructure to Enhance Operating Efficiencies. We
intend to continue to invest in infrastructure to further drive
efficiencies in operations and to add functionality to improve the service
provided to members and other organizations at a low cost. Our centralized
functions enable us to add members and markets quickly and
economically. For example, during 2005, we opened an additional
claims processing facility to accommodate our planned growth initiatives
for this centralized function.
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·
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Maintain Operational
Discipline. We monitor our cost trends, operating
performance, regulatory relationships and the Medicaid political
environment in our existing markets. We seek to operate in
markets that allow us to meet our internal metrics including membership
growth, plan size, market leadership and operating
efficiency. We may divest contracts or health plans in markets
where the state’s Medicaid environment, over a long-term basis, does not
allow us to meet our targeted performance levels. We use
multiple techniques to monitor and reduce our medical costs, including
on-site hospital review by staff nurses and involvement of medical
management and finance personnel in significant cases. Our
financial management teams evaluate the financial impact of proposed
changes in provider relationships. We also conduct monthly
reviews of member demographics for each health
plan.
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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:
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State
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Local
Health Plan Name
|
|
First
Year of Operations Under the Company
|
|
Counties
Served at
December
31, 2007
|
|
Market
Share (1)
|
Membership
at
December
31, 2007
|
|
||
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Georgia
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Peach
State Health Plan
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2006
|
90
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30.0%
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287,900
|
||||||
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Indiana
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Managed
Health Services
|
1995
|
92
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27.8%
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154,600
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||||||
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New
Jersey
|
University
Health Plans
|
2002
|
20
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7.7%
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57,300
|
||||||
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Ohio
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Buckeye
Community Health Plan
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2004
|
43
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10.5%
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128,700
|
||||||
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South
Carolina
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Total
Carolina Care
|
2007
|
44
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5.0%
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31,800
|
||||||
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Texas
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Superior
HealthPlan
|
1999
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217
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21.1%
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354,400
|
||||||
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Wisconsin
|
Managed
Health Services
|
1984
|
29
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21.4%
|
131,900
|
| __________________________________________ | |
|
|
(1)
Represents Medicaid and SCHIP membership as of December 31, 2007 as a
percentage of total eligible Medicaid and SCHIP members in each
state. SSI programs are
excluded.
|
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:
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·
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Significant cost savings
compared to state paid reimbursement for services. We
bring bottom-line management experience to our health plans. On
the administrative and management side, we bring experience including
quality of care improvement methods, utilization management procedures, an
efficient claims payment system, and provider performance reporting, as
well as managers and staff experienced in using these key elements to
improve the quality of and access to
care.
|
|
·
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Data-driven approaches to
balance cost and verify eligibility. Our Medicaid health
plans have conducted enrollment processing and activities for state
programs since 1984. We seek to ensure effective enrollment
procedures that move members into the plan, then educate them and ensure
that they receive needed services as quickly as possible. Our
IT department has created mapping/translation programs for loading
membership and linking membership eligibility status to all of Centene’s
subsystems.
|
|
·
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Establishment of realistic and
meaningful expectations for quality deliverables. We
have collaborated with state agencies in redefining benefits, eligibility
requirements and provider fee schedules with the goal of maximizing the
number of individuals covered through Medicaid, SCHIP and SSI
programs.
|
|
·
|
Managed care expertise in
government subsidized programs. Our expertise in
Medicaid has helped us establish and maintain strong relationships with
our constituent communities of members, providers and state
governments. We provide access to services through local
providers and staff that focus on the cultural norms of their individual
communities. To that end, systems and procedures have been
designed to address community-specific challenges through outreach,
education, transportation and other member support
activities.
|
|
·
|
Improved medical
outcomes. We have implemented programs developed to
achieve savings for state governments and improve medical outcomes for
members by reducing inappropriate emergency room use, inpatient days and
high cost interventions, as well as by managing care of chronic
illness.
|
|
·
|
Timely payment of provider
claims. We are committed to ensuring that our
information systems and claims payment systems meet or exceed state
requirements. We continuously endeavor to update our systems
and processes to improve the timeliness of our provider
payments.
|
|
·
|
Cost saving outreach and
specialty programs. Our health plans have adopted a
physician-driven approach where network providers are actively engaged in
developing and implementing healthcare delivery policies and
strategies. This approach is designed to eliminate unnecessary
costs, improve services to members and simplify the administrative burdens
placed on providers.
|
|
·
|
Responsible collection and
dissemination of utilization data. We gather utilization
data from multiple sources, allowing for an integrated view of our
members’ utilization of services. These sources include medical
and behavioral health claims and encounter data, pharmacy data, vision and
dental vendor claims and authorization data from the authorization and
case management system utilized by us to coordinate
care.
|
|
·
|
Timely and accurate
reporting. Our information systems have reporting
capabilities which have been instrumental in identifying the need for new
and/or improved healthcare and specialty programs. For state
agencies, our reporting capability is important in demonstrating an
auditable program.
|
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:
|
Ÿ
|
primary
and specialty physician care
|
Ÿ
|
transportation
assistance
|
|
|
Ÿ
|
inpatient
and outpatient hospital care
|
Ÿ
|
vision
care
|
|
|
Ÿ
|
emergency
and urgent care
|
Ÿ
|
dental
care
|
|
|
Ÿ
|
prenatal
care
|
Ÿ
|
immunizations
|
|
|
Ÿ
|
laboratory
and x-ray services
|
Ÿ
|
prescriptions
and limited over-the-counter drugs
|
|
|
Ÿ
|
home
health and durable medical equipment
|
Ÿ
|
therapies
|
|
|
Ÿ
|
behavioral
health and substance abuse services
|
Ÿ
|
social
work services
|
|
|
Ÿ
|
24-hour
nurse advice line
|
We also
provide the following education and outreach programs to inform and assist
members in accessing quality, appropriate healthcare services in an efficient
manner:
|
·
|
CONNECTIONS is a
community face-to-face outreach and education program designed to create a
link between the member and the provider and help identify potential
challenges or risk elements to a member’s health, such as nutritional
challenges and health education shortcomings. CONNECTIONS
representatives also contact new members by phone or mail to discuss
managed care, the Medicaid program and our services. Our
CONNECTIONS representatives make home visits, conduct educational programs
and represent our health plans at community events such as health
fairs.
|
|
·
|
Start Smart For Your Baby
is a prenatal and infant health program designed to increase the
percentage of pregnant women receiving early prenatal care, reduce the
incidence of low birth weight babies, identify high risk pregnancies,
increase participation in the federal Women, Infant and Children program,
prevent hospital admissions in the first year of life and increase
well-child visits. The program includes risk assessments,
education through face-to-face meetings and materials, behavior
modification plans, assistance in selecting a provider for the infant and
scheduling newborn follow-up
visits.
|
|
·
|
EPSDT Case Management
is a preventive care program designed to educate our members on the
benefits of Early and Periodic Screening, Diagnosis and Treatment, or
EPSDT, services. We have a systematic program of communicating,
tracking, outreach, reporting and follow-through that promotes state EPSDT
programs.
|
|
·
|
Life and Health Management
Programs are designed to help members understand their disease and
treatment plan and improve their wellness in a cost effective
manner. These programs address medical conditions that are
common within the Medicaid population such as asthma, diabetes and
pregnancy. Our Specialty Services segment manages many of our
life and health management programs. Our SSI program uses a
proprietary assessment tool that effectively identifies barriers to care,
unmet functional needs, available social supports and the existence of
behavioral health conditions that impede a member’s ability to maintain a
proper health status. Care coordinators develop individual care
plans with the member and healthcare providers ensuring the full
integration of behavioral, social and acute care
services. These care plans, while specific to an SSI member,
incorporate “Condition Specific” practices in collaboration with physician
partners and community resources.
|
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:
|
|
Primary
Care
Physicians
|
|
Specialty
Care
Physicians
|
|
Hospitals
|
|
|
Georgia
|
3,734
|
12,467
|
128
|
|||
|
Indiana
|
|
790
|
|
2,935
|
|
63
|
|
New
Jersey
|
|
1,379
|
|
4,091
|
|
69
|
|
Ohio
|
|
2,412
|
|
8,088
|
|
122
|
|
South
Carolina
|
367
|
641
|
6
|
|||
|
Texas
|
|
6,092
|
|
11,019
|
|
340
|
|
Wisconsin
|
|
1,925
|
|
4,632
|
|
67
|
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.
|
Ÿ
|
Under
our fee-for-service contracts with physicians, particularly specialty care
physicians, we pay a negotiated fee for covered services. This
model is characterized as having no financial risk for the
physician. In addition, this model requires management
oversight because our total cost may increase as the units of services
increase or as more expensive services replace less expensive
services. We have prior authorization procedures in place that
are intended to make sure that certain high cost diagnostic and other
services are medically appropriate.
|
|
Ÿ
|
Under
our capitated contracts, primary care physicians are paid a monthly fee
for each of our members assigned to his or her practice and are at risk
for all costs associated with primary and specialty physician and
emergency room services. In return for this payment, these
physicians provide all primary care and preventive services, including
primary care office visits and EPSDT services. If these
physicians also provide non-capitated services to their assigned members,
they may receive payment under fee-for-service arrangements at standard
Medicaid rates.
|
|
Ÿ
|
Under
risk-sharing arrangements, physicians are paid under a capitated or
fee-for-service arrangement. The arrangement, however, contains
provisions for additional bonus to the physicians or reimbursement from
the physicians based upon cost and quality factors. We often
refer to these arrangements as Model 1
contracts.
|
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:
|
|
Ÿ
|
Customized Utilization Reports
provide certain of our contracted physicians with information that
enables them to run their practices more efficiently and focuses them on
specific patient needs. For example, quarterly detail reports
update physicians on their status within their risk
pools. Equivalency reports provide physicians with financial
comparisons of capitated versus fee-for-service
arrangements.
|
|
|
Ÿ
|
Case Management Support
helps the physician coordinate specialty care and ancillary
services for patients with complex conditions and direct members to
appropriate community resources to address both their health and
socio-economic needs.
|
|
|
|
|
|
Ÿ
|
Web-based Claims and
Eligibility Resources have been implemented in selected markets to
provide physicians with on-line access to perform claims and eligibility
inquiries.
|
|
|
|
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:
|
|
Ÿ
|
Smart
Start For Your Baby, a prenatal case management program aimed at helping
women with high-risk pregnancies deliver full-term, healthy
infants;
|
|
|
Ÿ
|
an
emergency room diversion program to reduce the number of inappropriate
emergency room visits; and
|
|
|
Ÿ
|
a
health management program to improve the ability of those with asthma and
their families to control their disease and thereby reduce the need for
emergency room visits and
hospitalizations.
|
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:
|
Ÿ
|
Behavioral
Health. Cenpatico Behavioral Health manages behavioral
healthcare for members via a contracted network of
providers. Cenpatico works with providers to determine the best
course of treatment for a given diagnosis and helps ensure members and
their providers are aware of the full array of services
available. Our networks feature a range of services so that
patients can be treated at an appropriate level of care. We
also run school-based programs in Arizona that focus on students with
special needs. We acquired Cenpatico in
2003.
|
|
Ÿ
|
Life and Health
Management. Our life and health management company,
Nurtur Health (formerly AirLogix, Cardium Health and Work/Life
Innovations), specializes in implementing life and health management
programs that encourage healthy behaviors, promote healthier workplaces,
improve productivity and reduce healthcare costs. Specific
focuses include chronic respiratory health management, cardiac health
management, and work/life management. Through its
specialization in respiratory management, Nurtur Health uses self-care
therapies, in-home interaction and informatics processes to deliver highly
effective clinical results, enhanced patient-provider satisfaction and
greater cost reductions in respiratory management. Through a
people centered, multi-disciplinary and integrated approach, Nurtur Health
also uses primary health coaches, customized care plans, and
disease-specific education to assist patients in achieving their health
goals and deliver enhanced patient-provider satisfaction and greater cost
reductions in chronic life and health management. We acquired
AirLogix in July 2005, Cardium Health in May 2006 and Work/Life
Innovations in November 2007. The combination of these
three entities was
completed in December 2007.
|
|
Ÿ
|
Long-term
Care. Bridgeway Health Solutions provides long-term care
services to the elderly and people with disabilities on SSI that meet
income and resources requirements who are at risk of being or are
institutionalized. Bridgeway has members in the Maricopa, Yuma
and La Paz counties of Arizona. Bridgeway attempts to
distinguish itself from other Medicaid and Medicare health plans through
ongoing participation with community groups to address situations that
might be barriers to quality care and independent
living. Bridgeway commenced operations in October
2006.
|
|
Ÿ
|
Managed
Vision. OptiCare manages vision benefits for members via
a contracted network of providers. OptiCare works with
providers to provide a variety of vision plan designs and helps ensure
members and their providers are aware of the full array of products and
services available. Our networks feature a range of products
and services so that patients can be treated at an appropriate level of
care. We acquired the managed vision business of OptiCare
Health Systems, Inc. in July 2006.
|
|
Ÿ
|
Nurse
Triage. NurseWise provides a toll-free nurse triage line
24 hours per day, 7 days per week, 52 weeks per year. Our
members call one number and reach bilingual customer service
representatives and nursing staff who provide health education, triage
advice and offer continuous access to health plan
functions. Additionally, our representatives verify
eligibility, confirm primary care provider assignments and provide benefit
and network referral coordination for members and providers after business
hours. Our staff can arrange for urgent pharmacy refills,
transportation and qualified behavioral health professionals for crisis
stabilization assessments. Call volume is based on membership
levels and seasonal variation. NurseWise operates in certain
areas under the name Nurse Response. NurseWise commenced
operations in 1998.
|
|
Ÿ
|
Pharmacy Benefits
Management. US Script is a pharmacy benefits manager
that administers pharmacy benefits and processes pharmacy claims via its
proprietary claims processing software. US Script has developed
and administers a contracted national network of retail
pharmacies. We acquired US Script in January
2006.
|
|
Ÿ
|
Treatment
Compliance. ScriptAssist is a treatment compliance
program that uses psychological-based tools to predict which patients are
likely to be non-compliant regarding taking their medications, and then to
motivate those at-risk patients to adhere to their doctors’
advice. ScriptAssist uses
registered nurses to educate patients about the reasons for the
medications they were prescribed, to provide accurate information about
side effects and risks of such medications, and to keep the doctors
informed of the patients’ progress between visits. We acquired
ScriptAssist in
2003.
|
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:
|
Ÿ
|
written
standards of conduct;
|
|
Ÿ
|
designation
of a corporate compliance officer and compliance
committee;
|
|
Ÿ
|
effective
training and education;
|
|
Ÿ
|
effective
lines for reporting and communication;
|
|
Ÿ
|
enforcement
of standards through disciplinary guidelines and actions;
|
|
Ÿ
|
internal
monitoring and auditing; and
|
|
Ÿ
|
prompt
response to detected offenses and development of corrective action
plans.
|
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:
|
Ÿ
|
Medicaid Managed Care
Organizations focus on providing healthcare services to Medicaid
recipients. These organizations consist of national and
regional organizations, as well as smaller organizations that operate in
one city or state and are owned by providers, primarily
hospitals.
|
|
Ÿ
|
National and Regional
Commercial Managed Care Organizations have Medicaid members in
addition to members in private commercial plans. Some of these
organizations offer a range of specialty services including pharmacy
benefits management, behavioral health management, health management, and
nurse triage call support centers.
|
|
Ÿ
|
Primary Care Case Management
Programs are programs established by the states through contracts
with primary care providers. Under these programs, physicians
provide primary care services to Medicaid recipients, as well as limited
medical management oversight.
|
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:
|
Ÿ
|
premium
and maintenance taxes;
|
|
Ÿ
|
stringent
prompt-pay laws;
|
|
Ÿ
|
requirements
of National Provider Identifier numbers on claim
submittals;
|
|
Ÿ
|
disclosure
requirements regarding provider fee schedules and coding procedures;
and
|
|
Ÿ
|
programs
to monitor and supervise the activities and financial solvency of provider
groups.
|
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:
|
Ÿ eligibility,
enrollment and disenrollment processes;
|
Ÿ health education
and wellness and prevention programs;
|
|
|
Ÿ covered
services;
|
Ÿ timeliness of
claims payment;
|
|
|
Ÿ eligible
providers;
|
Ÿ financial
standards;
|
|
|
Ÿ subcontractors;
|
Ÿ safeguarding of
member information;
|
|
|
Ÿ record-keeping
and record retention;
|
Ÿ fraud and abuse
detection and reporting;
|
|
|
Ÿ periodic
financial and informational reporting;
|
Ÿ grievance
procedures; and
|
|
|
Ÿ quality
assurance;
|
Ÿ organization and
administrative systems.
|
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.
|
State
Contract
|
|
Expiration
Date
|
|
Renewal
or Extension by the State
|
Termination
by the State
|
|
|
Arizona
– Behavioral Health
|
June
30, 2008
|
May
be extended for up to two additional years.
|
May
be terminated for convenience or an event of default.
|
|||
|
Arizona
– Long-term Care
|
September
30, 2009
|
May
be extended for up to two additional years.
|
May
be terminated for convenience, an event of default or lack of
funding.
|
|||
|
Arizona
– Special Needs Plan (Medicare)
|
December
31, 2008
|
Renewable
annually for successive 12-month periods.
|
May
be terminated by an event of default.
|
|||
|
Georgia
– Medicaid & SCHIP
|
June
30, 2008
|
Renewable
for four additional one-year terms.
|
May
be terminated for an event of default or significant changes in
circumstances.
|
|||
|
Indiana
– Medicaid & SCHIP
|
December
31, 2010
|
May
be extended for up to two additional years.
|
May
be terminated for convenience or an event of default.
|
|||
|
Kansas
– Behavioral Health
|
June
30, 2009
|
May
be extended with three one-year renewal options.
|
May
be terminated for cause, or without cause for lack of
funding.
|
|||
|
New
Jersey – Medicaid, SCHIP & SSI
|
June
30, 2008
|
Renewable
annually for successive 12-month periods.
|
May
be terminated for convenience or an event of default.
|
|||
|
Ohio
–Medicaid & SCHIP
|
June
30, 2008
|
Renewable
annually for successive 12-month periods.
|
May
be terminated for an event of default.
|
|||
|
Ohio
– Aged, Blind or Disabled (SSI)
|
June
30, 2008
|
Renewable
annually for successive 12-month periods.
|
May
be terminated for an event of default.
|
|||
|
Ohio
– Special Needs Plan (Medicare)
|
December
31, 2008
|
Renewable
annually for successive 12-month periods.
|
May
be terminated by an event of default.
|
|||
|
South
Carolina – Medicaid & SSI
|
March
31, 2008
|
Renewable
annually for successive 12-month periods.
|
May
be terminated for convenience or an event of default.
|
|||
|
Texas –Medicaid,
SCHIP & SSI
|
August
31, 2008
|
May
be extended for up to six additional years.
|
May
be terminated for convenience, an event of default or lack of federal
funding.
|
|||
|
Texas
– Exclusive Provider Organization (SCHIP)
|
August
31, 2008
|
May
be extended for up to two additional years.
|
May
be terminated upon any event of default or in the event of lack of state
or federal funding.
|
|||
|
Texas
– Foster Care
|
August
31, 2010
|
May
be extended for up to five and a half additional years.
|
May
be terminated for convenience, an event of default, or non-appropriation
of funds.
|
|||
|
Texas
– Special Needs Plan (Medicare)
|
December
31, 2008
|
Renewable
annually for successive 12-month periods.
|
May
be terminated by an event of default.
|
|||
|
Wisconsin
–Medicaid & SSI
|
December
31, 2009
|
May
be extended for up to one additional year.
|
May
be terminated if a change in state or federal laws, rules or regulations
materially affects either party’s right or responsibilities or for an
event of default or lack of funding.
|
|||
|
Wisconsin
– Network Health Plan Subcontract
|
December
31, 2011
|
Renews
automatically for successive five-year terms.
|
May
be terminated upon two-years notice prior to the end of the then current
term or if a change in state or federal laws, rules or regulations
materially affects either party’s rights or responsibilities under the
contract, or if Network Health Plan’s contract with the State is
terminated.
|
|||
|
Wisconsin
– Special Needs Plan (Medicare)
|
December
31, 2008
|
Renewable
annually for successive 12-month periods.
|
May
be terminated by an event of default.
|
|||
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:
|
|
Ÿ
|
limit
certain uses and disclosures of private health information, and require
patient authorizations for such uses and disclosures of private health
information;
|
|
|
Ÿ
|
guarantee
patients rights to access their medical records and to know who else has
accessed them;
|
|
|
Ÿ
|
limit
most disclosure of health information to the minimum needed for the
intended purpose;
|
|
|
Ÿ
|
establish
procedures to ensure the protection of private health
information;
|
|
|
Ÿ
|
authorize
access to records by researchers and others;
and
|
|
|
Ÿ
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impose
criminal and civil sanctions for improper uses or disclosures of health
information.
|
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:
|
Name
|
|
Age
|
|
Position
|
|
Michael
F. Neidorff
|
|
65
|
|
Chairman
and Chief Executive Officer
|
|
Mark
W. Eggert
|
46
|
Executive
Vice President, Health Plan Business Unit
|
||
|
Carol
E. Goldman
|
|
50
|
|
Executive
Vice President and Chief Administrative Officer
|
|
Cary
D. Hobbs
|
40
|
Senior
Vice President, Strategy and Business Implementation
|
||
|
Jesse
N. Hunter
|
32
|
Senior
Vice President, Corporate Development
|
||
|
Edmund
E. Kroll
|
48
|
Senior
Vice President, Finance and Investor Relations
|
||
|
William
N. Scheffel
|
|
54
|
|
Executive
Vice President, Specialty Business Unit
|
|
Eric
R. Slusser
|
47
|
Executive
Vice President, Chief Financial Officer and Treasurer
|
||
|
Keith
H. Williamson
|
55
|
Senior
Vice President, General Counsel and
Secretary
|
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
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.
|
|
2007
Stock Price
|
|
2006
Stock Price
|
|||||||||
|
|
High
|
|
Low
|
|
High
|
|
Low
|
|||||
|
First
Quarter
|
|
$
|
26.66
|
|
$
|
20.68
|
|
$
|
30.26
|
|
$
|
22.70
|
|
Second
Quarter
|
|
24.28
|
|
19.35
|
|
29.59
|
|
22.88
|
||||
|
Third
Quarter
|
|
23.79
|
|
17.65
|
|
23.87
|
|
13.25
|
||||
|
Fourth
Quarter
|
|
27.73
|
|
21.26
|
|
26.95
|
|
16.11
|
||||
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.
|
Issuer
Purchases of Equity Securities
Fourth
Quarter 2007
|
|||||||||||
|
Period
|
Total
Number of
Shares
Purchased
|
Average
Price
Per
Share
|
Total
Number
of
Shares
Purchased
as
Part
of Publicly
Announced
Plans
or
Programs
|
Maximum
Number
of Shares
that
May Yet Be
Purchased
Under
the
Plans or
Programs
|
|||||||
|
October
1 – October 31, 2007
|
18,000
|
$
|
22.99
|
18,000
|
3,159,400
|
||||||
|
November
1 – November 30, 2007
|
20,000
|
22.33
|
20,000
|
3,139,400
|
|||||||
| December 1 - December 31, 2007 | 3,957 | 1 | 24.96 | — | 3,139,400 | ||||||
|
TOTAL
|
|
41,957
|
|
$
|
22.86
|
|
38,000
|
3,139,400
|
|||
|
|
|
|
|
||||||||
________________
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.
|
|
Year
Ended December 31,
|
|||||||||||||||||||
|
|
2007
|
2006
|
2005
|
2004
|
2003
|
|||||||||||||||
|
(In
thousands, except share data)
|
||||||||||||||||||||
|
Statement
of Operations Data:
|
|
|||||||||||||||||||
|
Revenues:
|
|
|||||||||||||||||||
|
Premium
|
|
$
|
2,759,018
|
$
|
1,844,452
|
$
|
1,211,023
|
$
|
965,923
|
$
|
758,338
|
|||||||||
|
Premium
tax
|
79,572
|
37,961
|
7,214
|
5,503
|
1,425
|
|||||||||||||||
|
Service
|
|
80,702
|
79,581
|
13,965
|
9,267
|
9,967
|
||||||||||||||
|
Total
revenues
|
|
2,919,292
|
1,961,994
|
1,232,202
|
980,693
|
769,730
|
||||||||||||||
|
Expenses:
|
|
|||||||||||||||||||
|
Medical
costs
|
|
2,324,486
|
1,555,658
|
994,517
|
782,307
|
626,192
|
||||||||||||||
|
Cost
of services
|
|
61,454
|
60,506
|
5,851
|
8,065
|
8,323
|
||||||||||||||
|
General
and administrative expenses
|
|
399,687
|
280,067
|
172,349
|
121,045
|
86,863
|
||||||||||||||
|
Premium
tax expense
|
79,572
|
37,961
|
7,214
|
5,503
|
1,425
|
|||||||||||||||
|
Total
operating expenses
|
|
2,865,199
|
1,934,192
|
1,179,931
|
916,920
|
722,803
|
||||||||||||||
|
Earnings
from operations
|
|
54,093
|
27,802
|
52,271
|
63,773
|
46,927
|
||||||||||||||
|
Other
income (expense):
|
|
|||||||||||||||||||
|
Investment
and other income
|
|
25,169
|
16,416
|
9,106
|
6,336
|
5,160
|
||||||||||||||
|
Interest
expense
|
|
(15,626
|
)
|
(10,636
|
)
|
(3,990
|
)
|
(680
|
)
|
(194
|
)
|
|||||||||
|
Earnings
before income taxes
|
|
63,636
|
33,582
|
57,387
|
69,429
|
51,893
|
||||||||||||||
|
Income
tax expense
|
|
22,367
|
12,642
|
19,686
|
25,666
|
19,504
|
||||||||||||||
|
Minority
interest
|
|
—
|
—
|
—
|
—
|
881
|
||||||||||||||
|
Net
earnings from continuing operations
|
41,269
|
20,940
|
37,701
|
43,763
|
33,270
|
|||||||||||||||
|
Discontinued
operations, net of income tax (benefit) expense of $(30,899), $9,335,
$10,538, $309 and $0, respectively
|
32,133
|
(64,569
|
)
|
17,931
|
549
|
—
|
||||||||||||||
|
Net
earnings (loss)
|
|
$
|
73,402
|
$
|
(43,629
|
)
|
$
|
55,632
|
$
|
44,312
|
$
|
33,270
|
||||||||
|
Net
earnings (loss) per common share:
|
|
|||||||||||||||||||
|
Basic:
|
||||||||||||||||||||
|
Continuing
operations
|
|
$
|
0.95
|
$
|
0.49
|
$
|
0.89
|
$
|
1.07
|
$
|
0.93
|
|||||||||
|
Discontinued
operations
|
|
0.74
|
(1.50
|
)
|
0.42
|
0.01
|
—
|
|||||||||||||
|
Basic
earnings (loss) per common share
|
|
$
|
1.69
|
$
|
(1.01
|
)
|
$
|
1.31
|
$
|
1.09
|
$
|
0.93
|
||||||||
|
Diluted:
|
|
|||||||||||||||||||
|
Continuing
operations
|
|
$
|
0.92
|
$
|
0.47
|
$
|
0.84
|
$
|
1.00
|
$
|
0.87
|
|||||||||
|
Discontinued
operations
|
|
0.72
|
(1.45
|
)
|
0.40
|
0.01
|
—
|
|||||||||||||
|
Diluted
earnings (loss) per common share
|
|
$
|
1.64
|
$
|
(0.98
|
)
|
$
|
1.24
|
$
|
1.02
|
$
|
0.87
|
||||||||
|
Weighted
average number of common shares outstanding:
|
|
|||||||||||||||||||
|
Basic
|
|
43,539,950
|
43,160,860
|
42,312,522
|
40,820,909
|
35,704,426
|
||||||||||||||
|
Diluted
|
|
44,823,082
|
44,613,622
|
45,027,633
|
43,616,445
|
38,422,152
|
||||||||||||||
|
|
December
31,
|
|||||||||||||||||||
|
|
2007
|
2006
|
2005
|
2004
|
2003
|
|||||||||||||||
|
|
(In
thousands)
|
|||||||||||||||||||
|
Balance
Sheet Data:
|
|
|||||||||||||||||||
|
Cash
and cash equivalents
|
|
$
|
268,584
|
$
|
271,047
|
$
|
147,358
|
$
|
84,105
|
$
|
64,346
|
|||||||||
|
Investments
and restricted deposits
|
390,611
|
197,197
|
185,697
|
208,255
|
220,335
|
|||||||||||||||
|
Total
assets
|
|
1,119,122
|
894,980
|
668,030
|
527,934
|
362,692
|
||||||||||||||
|
Medical
claims liabilities
|
335,856
|
249,864
|
139,687
|
139,602
|
106,569
|
|||||||||||||||
|
Long-term
debt
|
|
206,406
|
174,646
|
92,448
|
46,973
|
7,616
|
||||||||||||||
|
Total
stockholders’ equity
|
|
415,047
|
326,423
|
352,048
|
271,312
|
220,115
|
||||||||||||||
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:
|
—
|
Year-end
Medicaid Managed Care membership of
1,146,600.
|
|
—
|
Total
revenues of $2.9 billion.
|
|
—
|
Medicaid
and SCHIP health benefits ratio, or HBR, of 83.2%, SSI HBR of 92.0%,
Specialty Services HBR of 78.2%.
|
|
—
|
Medicaid
Managed Care general and administrative, or G&A, expense ratio of
11.1% and Specialty Services G&A ratio of
15.4%.
|
|
—
|
Diluted
net earnings per share from continuing operations of
$0.92.
|
|
—
|
Total
operating cash flows of $202.2
million.
|
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:
|
|
—
|
In
2007, we acquired PhyTrust of South Carolina, LLC, or PhyTrust, as
well as Physician’s Choice, LLC, both of which manage care on a non-risk
basis for Medicaid members in South Carolina. At December 31,
2007, our non-risk membership in South Carolina was 31,700
members. We also became licensed in 2007 to provide risk-based
managed care in the state and began participating in the transition
of the state’s conversion to at-risk managed care in December 2007, with
100 members at December 31, 2007.
|
|
|
—
|
In
February 2007, we began managing care for SSI recipients in the San
Antonio and Corpus Christi markets of Texas with 33,100 members at
December 31, 2007.
|
|
|
—
|
In
2007, we began managing care for SSI members in four regions of
Ohio, with 20,300 members at December 31,
2007.
|
|
|
—
|
In
July 2006, we entered seven new counties in the East Central market
of Ohio, and in October 2006, we entered 17 new counties in the Northwest
market of Ohio with 41,700 members at December 31,
2007.
|
| — |
In
September 2006, we expanded operations in Texas to include Medicaid and
SCHIP members in the Corpus Christi, Austin and Lubbock markets, with
28,900 members at December 31,
2007.
|
|
|
—
|
In
Georgia, we began managing care for Medicaid and SCHIP members in the
Atlanta and Central regions effective June 1, 2006 and Southwest region
effective September 1, 2006. At December 31, 2007, our
membership in Georgia was 287,900.
|
We have
opportunities to expand our operations through the following acquisitions and
new contract awards:
|
—
|
In July 2007,
we
acquired a minority ownership interest in Access Health Solutions,
LLC, or Access, which provides managed care for Medicaid recipients
in Florida, with 90,600 members at December 31,
2007.
|
|
—
|
We
have been awarded a contract in Texas for the Children in Foster Care
program. This statewide program will provide managed care services to
participants in the Texas Foster Care program. The State of Texas has
indicated that membership operations are expected to commence April 1,
2008.
|
The
following new contracts and acquisitions contributed to the growth in our
Specialty Services segment during the last two years:
|
|
—
|
Effective
October 1, 2006, we began to provide long-term care services in the
Maricopa, Yuma and LaPaz counties in
Arizona.
|
|
|
—
|
Effective
July 1, 2006, we acquired the managed vision business of OptiCare Managed
Vision, Inc., or OptiCare.
|
|
|
—
|
Effective
May 9, 2006, we acquired Cardium Health Services Corporation, or Cardium,
a health management company.
|
|
|
—
|
Effective
January 1, 2006, we acquired US Script, Inc., or US Script, a pharmacy
benefits manager (PBM).
|
|
|
—
|
Effective
July 22, 2005, we acquired AirLogix, Inc., or AirLogix, a health
management provider.
|
|
|
—
|
Effective
July 1, 2005, we began to facilitate the delivery of mental health and
substance abuse services to behavioral health recipients in
Arizona.
|
RESULTS
OF CONTINUING OPERATIONS AND KEY METRICS
Summarized
comparative financial data for 2007, 2006 and 2005 are as follows ($ in
millions):
|
2007
|
2006
|
2005
|
%
Change
2006-2007
|
%
Change
2005-2006
|
||||||||||||||||
|
Premium
|
$ | 2,759.0 | $ | 1,844.4 | $ | 1,211.0 | 49.6 | % | 52.3 | % | ||||||||||
|
Premium
tax
|
79.6 | 38.0 | 7.2 | 109.6 | % | 426.2 | % | |||||||||||||
|
Service
|
80.7 | 79.6 | 14.0 | 1.4 | % | 469.9 | % | |||||||||||||
|
Total
revenues
|
2,919.3 | 1,962.0 | 1,232.2 | 48.8 | % | 59.2 | % | |||||||||||||
|
Medical
costs
|
2,324.5 | 1,555.6 | 994.5 | 49.4 | % | 56.4 | % | |||||||||||||
|
Cost
of services
|
61.4 | 60.5 | 5.9 | 1.6 | % | 934.1 | % | |||||||||||||
|
General
and administrative expenses
|
399.7 | 280.1 | 172.3 | 42.7 | % | 62.5 | % | |||||||||||||
|
Premium
tax expense
|
79.6 | 38.0 | 7.2 | 109.6 | % | 426.2 | % | |||||||||||||
|
Earnings
from operations
|
54.1 | 27.8 | 52.3 | 94.6 | % | (46.8 | )% | |||||||||||||
|
Investment
and other income, net
|
9.6 | 5.8 | 5.1 | 65.1 | % | 13.0 | % | |||||||||||||
|
Earnings
before income taxes
|
63.7 | 33.6 | 57.4 | 89.5 | % | (41.5 | )% | |||||||||||||
|
Income
tax expense
|
22.4 | 12.6 | 19.7 | 76.9 | % | (35.8 | )% | |||||||||||||
|
Net
earnings from continuing operations
|
41.3 | 21.0 | 37.7 | 97.1 | % | (44.5 | )% | |||||||||||||
|
Discontinued
operations, net of income tax (benefit) expense of $(30.9), $9.3 and $10.5
respectively
|
32.1 | (64.6 | ) | 17.9 | (149.8 | )% | (460.1 | )% | ||||||||||||
|
Net
earnings (loss)
|
$ | 73.4 | $ | (43.6 | ) | $ | 55.6 | (268.2 | )% | (178.4 | )% | |||||||||
|
Diluted
earnings (loss) per common share:
|
||||||||||||||||||||
|
Continuing
operations
|
$ | 0.92 | $ | 0.47 | $ | 0.84 | 95.7 | % | (44.0 | )% | ||||||||||
|
Discontinued
operations
|
0.72 | (1.45 | ) | 0.40 | (149.7 | )% | (462.5 | )% | ||||||||||||
|
Total
diluted earnings (loss) per common share
|
$ | 1.64 | $ | (0.98 | ) | $ | 1.24 | (267.3 | )% | (179.0 | )% | |||||||||
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.
|
|
1.
|
Membership
growth
|
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:
|
December
31,
|
||||||
|
2007
|
2006
|
2005
|
||||
|
Georgia
|
287,900
|
308,800
|
—
|
|||
|
Indiana
|
|
154,600
|
|
183,100
|
|
193,300
|
|
New
Jersey
|
|
57,300
|
|
58,900
|
|
56,500
|
|
Ohio
|
|
128,700
|
|
109,200
|
|
58,700
|
|
South
Carolina
|
31,800
|
—
|
—
|
|||
|
Texas
|
|
354,400
|
|
298,500
|
|
242,000
|
|
Wisconsin
|
|
131,900
|
|
164,800
|
|
172,100
|
|
Total
|
|
1,146,600
|
|
1,123,300
|
722,600
|
|
The
following table sets forth our membership by line of business in our Medicaid
Managed Care segment:
|
|
December
31,
|
|||||
|
|
2007
|
|
2006
|
|
2005
|
|
|
Medicaid
|
|
848,100
|
|
887,300
|
|
573,100
|
|
SCHIP
|
|
224,400
|
|
216,200
|
|
134,600
|
|
SSI
|
|
74,100
|
|
19,800
|
|
14,900
|
|
Total
|
|
1,146,600
|
|
1,123,300
|
|
722,600
|
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.
|
|
2.
|
Premium
rate increases
|
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.
|
|
3.
|
Specialty
Services segment growth
|
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:
|
Year
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Medicaid
and SCHIP
|
83.2 | % | 84.3 | % | 81.5 | % | ||||||
|
SSI
|
92.0 | 88.0 | 98.0 | |||||||||
|
Specialty
Services
|
78.2 | 82.6 | 85.0 | |||||||||
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:
|
Year
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Medicaid
Managed Care
|
11.1 | % | 11.4 | % | 11.2 | % | ||||||
|
Specialty
Services
|
15.4 | 17.1 | 36.6 | |||||||||
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 equivalents to long-term
investments. During 2006, our investing activities primarily consisted of
acquisitions. Our investing activities in 2006 also included additions to the
investment portfolios of our regulated subsidiaries. Our investment
policies are designed to provide liquidity, preserve capital and maximize total
return on invested assets within our investment guidelines. Net cash
provided by and used in investing activities will fluctuate from year to year
due to the timing of investment purchases, sales and maturities. As of
December 31, 2007, our investment portfolio consisted primarily of fixed-income
securities with an average duration of 1.9 years. Cash is invested in investment
vehicles such as municipal bonds, corporate bonds, instruments of the U.S.
Treasury, insurance contracts, commercial paper and equity securities.
The states in which we operate prescribe the types of instruments in which
our regulated subsidiaries may invest their cash.
We spent
$53.9 million, $50.3 million and $26.9 million in 2007, 2006 and 2005,
respectively, on capital assets consisting primarily of software and hardware
upgrades, and furniture, equipment and leasehold improvements associated with
office and market expansions. The expenditures in 2007 included $36.7
million for computer hardware and software. We anticipate spending
approximately $69 million on capital expenditures in 2008 primarily associated
with system enhancements and market expansions.
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. Our previous redevelopment project in Clayton, Missouri
was abandoned in the fourth quarter of 2007 and a charge for real estate
impairment was recorded to General and Administrative Expenses, as discussed
above.
Our
financing activities provided cash of $20.8 million in 2007, $78.9 million in
2006 and $45.7 million in 2005. During 2007, our financing activities
primarily related to proceeds from issuance of $175 million in senior notes as
discussed below. During 2006 and 2005, our financing activities primarily
were comprised of proceeds from borrowings under our credit
facility. The 2006 borrowings were used primarily for the acquisition
of US Script.
At
December 31, 2007, we had negative working capital, defined as current assets
less current liabilities, of $(40.5) million, as compared to $63.9 million at
December 31, 2006. Our working capital is negative due to our efforts
to increase investment returns through purchases of investments that have
maturities of greater than one year and, therefore, are classified as
long-term. We manage our short-term and long-term investments with
the goal of ensuring that a sufficient portion is held in investments that are
highly liquid and can be sold to fund short-term requirements as
needed.
Cash,
cash equivalents and short-term investments from continuing operations were
$314.9 million at December 31, 2007 and $310.2 million at December 31,
2006. Long-term investments were $344.3 million at December 31, 2007
and $140.4 million at December 31, 2006, including restricted deposits of $27.3
million and $24.4 million, respectively. At December 31, 2007, cash
and investments held by our unregulated entities totaled $33.0 million while
cash and investments held by our regulated entities totaled $626.2
million.
We have a
$300 million revolving credit agreement. Borrowings under the agreement bear
interest based upon LIBOR rates, the Federal Funds Rate or the Prime Rate.
There is a commitment fee on the unused portion of the agreement that
ranges from 0.15% to 0.275% depending on the total debt to EBITDA ratio.
The agreement contains non-financial and financial covenants, including
requirements of minimum fixed charge coverage ratios, maximum debt to EBITDA
ratios and minimum net worth. The agreement will expire in September 2011.
As of December 31, 2007, we had $5.0 million in borrowings outstanding
under the agreement and $23.0 million in letters of credit outstanding, leaving
availability of $272.0 million. As of December 31, 2007, we were in
compliance with all covenants.
In March
2007, we issued $175 million aggregate principal amount of our 7 ¼% Senior Notes
due April 1, 2014, or the Notes. In July 2007, the Notes were
registered under the Securities Act of 1933, pursuant to a registration rights
agreement with the initial purchasers. The indenture governing the Notes
contains non-financial and financial covenants, including requiring a minimum
fixed charge coverage ratio. Interest is paid semi-annually in April and
October. We used a portion of the net proceeds from the offering to
refinance approximately $150.0 million of our existing indebtedness which was
outstanding under our revolving credit facility. The additional proceeds
will be used for general corporate purposes. As of December 31, 2007, we
were in compliance with all covenants.
We have a
shelf registration statement on Form S-3 on file with the Securities and
Exchange Commission, or the SEC, covering the issuance of up to
$300 million of securities including common stock and debt securities.
No securities have been issued under the shelf registration. We may
publicly offer securities from time-to-time at prices and terms to be determined
at the time of the offering.
We have a
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. In October 2007, the repurchase program was
extended through October 31, 2008, but we reserve the right to suspend or
discontinue the program at any time. During the year ended December
31, 2007, we repurchased 467,157 shares at an average price of
$20.42. 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 received dividends of $35.4 million for the
excess regulatory capital remaining in our Kansas and Missouri health plans and
dividends of $18.5 million from other regulated subsidiaries.
Based on
our operating plan, we expect that our available cash, cash equivalents and
investments, cash from our operations and cash available under our credit
facility will be sufficient to finance our operations and capital expenditures
for at least 12 months from the date of this filing.
Our
contractual obligations at December 31, 2007 consisted of medical claims
liabilities, debt, operating leases, purchase obligations and interest on
long-term debt. Our debt consists of borrowings from our credit
facilities, mortgages and capital leases. The purchase obligations
consist primarily of software purchase and maintenance contracts. The
contractual obligations over the next five years and beyond are as follows (in
thousands):
|
Payments
Due by Period
|
||||||||||||||||||||
|
Total
|
Less
Than
1
Year
|
1-3
Years
|
3-5
Years
|
More
Than
5
Years
|
||||||||||||||||
|
Medical
claims liabilities
|
$ | 335,856 | $ | 335,856 | $ | — | $ | — | $ | — | ||||||||||
|
Debt
|
207,377 | 971 | 20,360 | 5,509 | 180,537 | |||||||||||||||
|
Operating
leases
|
132,927 | 19,046 | 32,512 | 24,437 | 56,932 | |||||||||||||||
|
Purchase
obligations
|
24,432 | 12,027 | 12,225 | 180 | — | |||||||||||||||
|
Interest
on long-term debt 1
|
82,469 | 12,688 | 25,375 | 25,375 | 19,031 | |||||||||||||||
|
Total
|
$ | 783,061 | $ | 380,588 | $ | 90,472 | $ | 55,501 | $ | 256,500 | ||||||||||
________________________________
1 Interest
on $175,000 Senior Notes.
REGULATORY
CAPITAL AND DIVIDEND RESTRICTIONS
Our
Medicaid Managed Care operations are conducted through our
subsidiaries. As managed care organizations, these subsidiaries are
subject to state regulations that, among other things, require the maintenance
of minimum levels of statutory capital, as defined by each state, and restrict
the timing, payment and amount of dividends and other distributions that may be
paid to us. Generally, the amount of dividend distributions that may
be paid by a regulated subsidiary without prior approval by state regulatory
authorities is limited based on the entity’s level of statutory net income and
statutory capital and surplus.
Our
subsidiaries are required to maintain minimum capital requirements prescribed by
various regulatory authorities in each of the states in which we
operate. As of December 31, 2007, our subsidiaries had aggregate
statutory capital and surplus of $302.1 million, compared with the required
minimum aggregate statutory capital and surplus requirements of $192.3
million.
The
National Association of Insurance Commissioners has adopted rules which set
minimum risk-based capital requirements for insurance companies, managed care
organizations and other entities bearing risk for healthcare
coverage. As of December 31, 2007, each of our health plans were in
compliance with the risk-based capital requirements enacted in those
states.
RECENT
ACCOUNTING PRONOUNCEMENTS
In
December 2007, the FASB issued SFAS No.141 (revised 2007), “Business
Combinations”, or SFAS No. 141R. The purpose of issuing the statement
is to replace current guidance in SFAS No.141 to better represent the
economic value of a business combination transaction. The changes to be effected
with SFAS No. 141R from the current guidance include, but are not
limited to: (1) acquisition costs will be recognized separately from the
acquisition; (2) known contractual contingencies at the time of the
acquisition will be considered part of the liabilities acquired measured at
their fair value; all other contingencies will be part of the liabilities
acquired measured at their fair value only if it is more likely than not that
they meet the definition of a liability; (3) contingent consideration based
on the outcome of future events will be recognized and measured at the time of
the acquisition; (4) business combinations achieved in stages (step
acquisitions) will need to recognize the identifiable assets and liabilities, as
well as noncontrolling interests, in the acquiree, at the full amounts of their
fair values; and (5) a bargain purchase (defined as a business combination
in which the total acquisition-date fair value of the identifiable net assets
acquired exceeds the fair value of the consideration transferred plus any
noncontrolling interest in the acquiree) will require that excess to be
recognized as a gain attributable to the acquirer. SFAS No. 141R will
be effective for any business combinations that occur after January 1,
2009.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests
in Consolidated Financial Statements — an amendment of ARB No. 51”, or
SFAS No. 160. SFAS No. 160 was issued to improve the
relevance, comparability, and transparency of financial information provided to
investors by requiring all entities to report noncontrolling (minority)
interests in subsidiaries in the same way, that is, as equity in the
consolidated financial statements. Moreover, SFAS No. 160 eliminates
the diversity that currently exists in accounting for transactions between an
entity and noncontrolling interests by requiring they be treated as equity
transactions. SFAS No. 160 will be effective January 1, 2009. We are
currently evaluating the impact that SFAS No. 160 will have our
financial statements and disclosures.
CRITICAL
ACCOUNTING POLICIES
Our
significant accounting policies are more fully described in Note 2 to our
consolidated financial statements included elsewhere herein. Our
accounting policies regarding medical claims liabilities and intangible assets
are particularly important to the portrayal of our financial position and
results of operations and require the application of significant judgment by our
management. As a result, they are subject to an inherent degree of
uncertainty.
Medical
Claims Liabilities
Our
medical claims liabilities include claims reported but not yet paid, or
inventory, estimates for claims incurred but not reported, or IBNR, and
estimates for the costs necessary to process unpaid claims. We,
together with our independent actuaries, estimate medical claims liabilities
using actuarial methods that are commonly used by health insurance actuaries and
meet Actuarial Standards of Practice. These actuarial methods
consider factors such as historical data for payment patterns, cost trends,
product mix, seasonality, utilization of healthcare services and other relevant
factors. These estimates are continually reviewed each period and
adjustments based on actual claim submissions and additional facts and
circumstances are reflected in the period known.
Our
management uses its judgment to determine the assumptions to be used in the
calculation of the required estimates. In developing our estimate for
IBNR, we apply various estimation methods depending on the claim type and the
period for which claims are being estimated. For more recent periods,
incurred non-inpatient claims are estimated based on historical per member per
month claims experience adjusted for known factors. Incurred hospital
claims are estimated based on authorized days and historical per diem claim
experience adjusted for known factors. For older periods, we utilize
an estimated completion factor based on our historical experience to develop
IBNR estimates. The completion factor is an actuarial estimate of the
percentage of claims incurred during a given period that have been adjudicated
as of the reporting period to the estimate of the total ultimate incurred
costs. When we commence operations in a new state or region, we have
limited information with which to estimate our medical claims
liabilities. See “Risk Factors – Failure to accurately predict our
medical expenses could negatively affect our reported results.” These approaches
are consistently applied to each period presented.
The
completion factor, claims per member per month and per diem cost trend factors
are the most significant factors affecting the IBNR estimate. The
following table illustrates the sensitivity of these factors and the estimated
potential impact on our operating results caused by changes in these factors
based on December 31, 2007 data:
|
Completion
Factors (1):
|
|
Cost
Trend Factors (2):
|
|||||||||
|
(Decrease)
Increase
in
Factors
|
|
Increase
(Decrease)
in
Medical
Claims
Liabilities
|
(Decrease)
Increase
in
Factors
|
|
Increase
(Decrease)
in
Medical
Claims
Liabilities
|
||||||
|
|
(in
thousands)
|
|
(in
thousands)
|
||||||||
|
(3
|
)%
|
$
|
54,800
|
(3
|
)%
|
$
|
(14,400
|
)
|
|||
|
(2
|
)
|
|
36,200
|
(2
|
)
|
(9,600
|
)
|
||||
|
(1
|
)
|
|
17,900
|
(1
|
)
|
(4,800
|
)
|
||||
|
1
|
|
(17,500
|
)
|
1
|
4,800
|
||||||
|
2
|
|
(34,700
|
)
|
2
|
9,700
|
||||||
|
3
|
|
(51,500
|
)
|
3
|
14,700
|
||||||
|
(1)
|
Reflects
estimated potential changes in medical claims liabilities caused by
changes in completion factors.
|
|
(2)
|
Reflects
estimated potential changes in medical claims liabilities caused by
changes in cost trend factors for the most recent
periods.
|
While we
believe our estimates are appropriate, it is possible future events could
require us to make significant adjustments for revisions to these
estimates. For example, a 1% increase or decrease in our estimated
medical claims liabilities would have affected net earnings by $2.1 million for
the year ended December 31, 2007. The estimates are based on our
historical experience, terms of existing contracts, our observance of trends in
the industry, information provided by our customers and information available
from other outside sources, as appropriate.
The
change in medical claims liabilities is summarized as follows (in
thousands):
|
|
Year
Ended December 31,
|
|||||||||||
|
|
2007
|
2006
|
2005
|
|||||||||
|
Balance,
January 1
|
|
$
|
249,864
|
$
|
139,687
|
$
|
139,602
|
|||||
|
Acquisitions
|
|
—
|
1,788
|
—
|
||||||||
|
Incurred
related to:
|
|
|||||||||||
|
Current
year
|
|
2,340,716
|
1,569,082
|
1,010,656
|
||||||||
|
Prior
years
|
|
(16,230
|
)
|
(13,424
|
)
|
(16,139
|
)
|
|||||
|
Total
incurred
|
|
2,324,486
|
1,555,658
|
994,517
|
||||||||
|
Paid
related to:
|
|
|||||||||||
|
Current
year
|
|
2,009,881
|
1,322,607
|
872,019
|
||||||||
|
Prior
years
|
|
228,613
|
124,662
|
122,413
|
||||||||
|
Total
paid
|
|
2,238,494
|
1,447,269
|
994,432
|
||||||||
|
Balance,
December 31
|
|
$
|
335,856
|
$
|
249,864
|
$
|
139,687
|
|||||
|
|
||||||||||||
|
Claims
inventory, December 31
|
|
312,700
|
267,700
|
215,000
|
||||||||
|
Days
in claims payable 1
|
|
49.1
|
46.4
|
45.0
|
||||||||
_______________________
1 Days in claims payable
is a calculation of medical claims liabilities at the end of the period divided
by average expense per calendar day for the fourth quarter of each
year.
The
acquisition in 2006 includes reserves acquired in connection with our
acquisition of OptiCare.
Medical
claims are usually paid within a few months of the member receiving service from
the physician or other healthcare provider. As a result, these
liabilities generally are described as having a “short-tail,” which causes less
than 5% of our medical claims liabilities as of the end of any given year to be
outstanding the following year. Management expects that substantially
all the development of the estimate of medical claims liabilities as of December
31, 2007 will be known by the end of 2008.
Actuarial
Standards of Practice generally require that medical claims liabilities
estimates be adequate to cover obligations under moderately adverse
conditions. Moderately adverse conditions are situations in which the
actual claims are expected to be higher than the otherwise estimated value of
such claims at the time of estimate. In many situations, the claims
amounts ultimately settled will be different than the estimate that satisfies
the Actuarial Standards of Practice.
Changes
in estimates of incurred claims for prior years were attributable to favorable
development, including changes in medical utilization and cost trends as well as
the effect of establishing the liabilities under moderately adverse
conditions. We implement various medical management initiatives in
our markets which may contribute to the favorable development of our medical
claims liabilities.
Intangible
Assets
We have
made several acquisitions since 2005 that have resulted in our recording of
intangible assets. These intangible assets primarily consist of
customer relationships, purchased contract rights, provider contracts, trade
names and goodwill. At December 31, 2007, we had $141.0 million of
goodwill and $13.2 million of other intangible assets. Purchased
contract rights are amortized using the straight-line method over periods
ranging from five to ten years. Provider contracts are amortized
using the straight-line method over periods ranging from five to ten
years. Customer relationships are amortized using the straight-line
method over periods ranging from five to fifteen years. Trade names
are amortized using the straight-line method over 20 years.
Our
management evaluates whether events or circumstances have occurred that may
affect the estimated useful life or the recoverability of the remaining balance
of goodwill and other identifiable intangible assets. If the events
or circumstances indicate that the remaining balance of the intangible asset or
goodwill may be permanently impaired, the potential impairment will be measured
based upon the difference between the carrying amount of the intangible asset or
goodwill and the fair value of such asset determined using the estimated future
discounted cash flows generated from the use and ultimate disposition of the
respective acquired entity. Our management must make assumptions and
estimates, such as the discount factor, future utility and other internal and
external factors, in determining the estimated fair values. While we
believe these assumptions and estimates are appropriate, other assumptions and
estimates could be applied and might produce significantly different
results.
Goodwill
is reviewed every year during the fourth quarter for impairment. In
addition, we will perform an impairment analysis of other intangible assets
based on other factors. These factors would include significant
changes in membership, state funding, medical contracts and provider networks
and contracts. In August 2006, FirstGuard Health Plan Kansas, Inc.,
or FirstGuard Kansas, our wholly owned subsidiary, received notification from
the Kansas Health policy Authority that its Medicaid contract scheduled to
terminate December 31, 2006 would not be renewed. As a result of
these events, we concluded it was necessary to conduct an impairment analysis of
the identifiable intangible assets and goodwill of the FirstGuard reporting
unit, which encompasses both the Kansas and Missouri FirstGuard health
plans.
The fair
value of our FirstGuard reporting unit was determined using discounted expected
cash flows and estimated market value. The impairment analysis
resulted in a total non-cash intangible asset impairment charge of $87.1
million, consisting of $81.1 million of goodwill and $6.0 million of other
identifiable intangible assets, which was recorded in discontinued operations in
the consolidated statement of operations for the year ended December 31,
2006.
FORWARD-LOOKING
STATEMENTS
All
statements, other than statements of current or historical fact, contained in
this filing are forward-looking statements. We have attempted to
identify these statements by terminology including “believe,” “anticipate,”
“plan,” “expect,” “estimate,” “intend,” “seek,” “target,” “goal,” “may,” “will,”
“should,” “can,” “continue” and other similar words or expressions in connection
with, among other things, any discussion of future operating or financial
performance. In particular, these statements include statements about
our market opportunity, our growth strategy, competition, expected activities
and future acquisitions, investments and the adequacy of our available cash
resources. These statements may be found in the various sections of
this filing, including those entitled “Management’s Discussion and Analysis of
Financial Condition and Results of Operations,” Part I, Item
1A. “Risk Factors,” and Part I, Item 3 “Legal
Proceedings.” Readers are cautioned that matters subject to
forward-looking statements involve known and unknown risks and uncertainties,
including economic, regulatory, competitive and other factors that may cause our
or our industry’s actual results, levels of activity, performance or
achievements to be materially different from any future results, levels of
activity, performance or achievements expressed or implied by these
forward-looking statements. These statements are not guarantees of
future performance and are subject to risks, uncertainties and
assumptions.
All
forward-looking statements included in this filing are based on information
available to us on the date of this filing. Actual results may differ
from projections or estimates due to a variety of important factors,
including:
|
·
|
our
ability to accurately predict and effectively manage health benefits and
other operating expenses;
|
|
·
|
competition;
|
|
·
|
changes
in healthcare practices;
|
|
·
|
changes
in federal or state laws or
regulations;
|
|
·
|
inflation;
|
|
·
|
provider
contract changes;
|
|
·
|
new
technologies;
|
|
·
|
reduction
in provider payments by governmental
payors;
|
|
·
|
major
epidemics;
|
|
·
|
disasters
and numerous other factors affecting the delivery and cost of
healthcare;
|
|
·
|
the
expiration, cancellation or suspension of our Medicaid managed care
contracts by state governments;
|
|
·
|
availability
of debt and equity financing, on terms that are favorable to us;
and
|
|
·
|
general
economic and market conditions.
|
Item 1A
“Risk Factors” of Part I of this filing contains a further discussion of these
and other additional important factors that could cause actual results to differ
from expectations. We disclaim any current intention or obligation to
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. Due to these important
factors and risks, we cannot give assurances with respect to our future premium
levels or our ability to control our future medical costs.
INVESTMENTS
As of
December 31, 2007, we had short-term investments of $46.3 million and long-term
investments of $344.3 million, including restricted deposits of $27.3
million. The short-term investments consist of highly liquid
securities with maturities between three and 12 months. The long-term
investments consist of municipal, corporate and U.S. Agency bonds, life
insurance contracts, U.S. Treasury investments and equity securities and have
maturities greater than one year. Restricted deposits consist of
investments required by various state statutes to be deposited or pledged to
state agencies. Due to the nature of the states’ requirements, these
investments are classified as long-term regardless of the contractual maturity
date. Our investments are subject to interest rate risk and will
decrease in value if market rates increase. Assuming a hypothetical
and immediate 1% increase in market interest rates at December 31, 2007, the
fair value of our fixed income investments would decrease by approximately $5.3
million. Declines in interest rates over time will reduce our
investment income.
INFLATION
Although
the general rate of inflation has remained relatively stable and healthcare cost
inflation has stabilized in recent years, the national healthcare cost inflation
rate still exceeds the general inflation rate. We use various
strategies to mitigate the negative effects of healthcare cost
inflation. Specifically, our health plans try to control medical and
hospital costs through our margin protection program and contracts with
independent providers of healthcare services. Through these
contracted care providers, our health plans emphasize preventive healthcare and
appropriate use of specialty and hospital services.
While we
currently believe our strategies to mitigate healthcare cost inflation will
continue to be successful, competitive pressures, new healthcare and
pharmaceutical product introductions, demands from healthcare providers and
customers, applicable regulations or other factors may affect our ability to
control the impact of healthcare cost increases.
Our
consolidated financial statements and related notes required by this item are
set forth on the pages indicated in Item 15.
QUARTERLY
SELECTED FINANCIAL INFORMATION
(In
thousands, except share data and membership data)
(Unaudited)
|
For
the Quarter Ended
|
||||||||||||||||
|
March
31,
2007
|
June
30,
2007
(1)
|
September
30,
2007
|
December
31,
2007
(2)
|
|||||||||||||
|
Total
revenues
|
$ | 664,234 | $ | 727,731 | $ | 749,888 | $ | 777,439 | ||||||||
|
Net
earnings from continuing operations
|
11,597 | 10,175 | 16,464 | 3,033 | ||||||||||||
|
Discontinued
operations, net of tax
|
26,614 | 7,607 | (528 | ) | (1,560 | ) | ||||||||||
|
Net
earnings
|
$ | 38,211 | $ | 17,782 | $ | 15,936 | $ | 1,473 | ||||||||
|
Per
share data:
|
||||||||||||||||
|
Basic:
|
||||||||||||||||
|
Continued
operations
|
$ | 0.27 | $ | 0.23 | $ | 0.38 | $ | 0.07 | ||||||||
|
Discontinued
operations
|
0.61 | 0.18 | (0.01 | ) | (0.04 | ) | ||||||||||
|
Basic
earnings per common share
|
$ | 0.88 | $ | 0.41 | $ | 0.37 | $ | 0.03 | ||||||||
|
Diluted:
|
||||||||||||||||
|
Continued
operations
|
$ | 0.26 | $ | 0.23 | $ | 0.37 | $ | 0.07 | ||||||||
|
Discontinued
operations
|
0.59 | 0.17 | (0.01 | ) | (0.04 | ) | ||||||||||
|
Diluted
earnings per common share
|
$ | 0.85 | $ | 0.40 | $ | 0.36 | $ | 0.03 | ||||||||
|
Period
end membership
|
1,103,300 | 1,131,500 | 1,137,300 | 1,146,600 | ||||||||||||
______________________________________
|
|
(1)
|
Includes
a $3.0 million pre-tax, cash contribution of a portion of the FirstGuard
sale proceeds to the company’s charitable
foundation.
|
|
|
(2)
|
Includes
$4.2 million pre-tax premium revenue refund to the State of Indiana and a
$9.4 million pre-tax charge for impairment and
restructuring.
|
|
For
the Quarter Ended
|
||||||||||||||||
|
March
31,
2006
(1)
|
June
30,
2006
(2)
|
September
30,
2006
|
December
31,
2006
|
|||||||||||||
|
Total
revenues
|
$ | 378,790 | $ | 417,977 | $ | 547,432 | $ | 617,795 | ||||||||
|
Net
earnings from continuing operations
|
6,554 | 439 | 4,696 | 9,251 | ||||||||||||
|
Discontinued
operations, net of tax
|
2,212 | 4,526 | (75,889 | ) | 4,582 | |||||||||||
|
Net
earnings (loss)
|
$ | 8,766 | $ | 4,965 | $ | (71,193 | ) | $ | 13,833 | |||||||
|
Per
share data:
|
||||||||||||||||
|
Basic:
|
||||||||||||||||
|
Continued
operations
|
$ | 0.15 | $ | 0.01 | $ | 0.11 | $ | 0.21 | ||||||||
|
Discontinued
operations
|
0.05 | 0.11 | (1.76 | ) | 0.11 | |||||||||||
|
Basic
earnings (loss) per common share
|
$ | 0.20 | $ | 0.12 | $ | (1.65 | ) | $ | 0.32 | |||||||
|
Diluted:
|
||||||||||||||||
|
Continued
operations
|
$ | 0.15 | $ | 0.01 | $ | 0.10 | $ | 0.21 | ||||||||
|
Discontinued
operations
|
0.05 | 0.10 | (1.72 | ) | 0.10 | |||||||||||
|
Diluted
earnings (loss) per common share
|
$ | 0.20 | $ | 0.11 | $ | (1.62 | ) | $ | 0.31 | |||||||
|
Period
end membership
|
722,100 | 951,500 | 1,025,100 | 1,123,300 | ||||||||||||
______________________________________
|
|
(1)
|
Includes
$4.7 million pre-tax implementation expenses related to
Georgia.
|
|
|
(2)
|
Includes
$8.1 million pre-tax adverse medical cost development in estimated medical
claims liabilities from continuing operations from the first quarter of
2006.
|
None.
Evaluation of Disclosure Controls and
Procedures - Our management, with the participation of our Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness of
our disclosure controls and procedures as of December 31, 2007. The
term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act, means controls and other procedures of a
company that are designed to ensure that information required to be disclosed by
a company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported, within the time periods specified
in the SEC's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by a company in the reports that it files
or submits under the Exchange Act is accumulated and communicated to the
company’s management, including its principal executive and principal financial
officers, as appropriate to allow timely decisions regarding required
disclosure. Management recognizes that any controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance
of achieving their objectives and management necessarily applies its judgment in
evaluating the cost-benefit relationship of possible controls and
procedures. Based on the evaluation of our disclosure controls and
procedures as of December 31, 2007, our Chief Executive Officer and Chief
Financial Officer concluded that, as of such date, our disclosure controls and
procedures were effective at the reasonable assurance level.
Management’s Report on Internal
Control Over Financial Reporting - Our management
is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and
15d-15(f). Under the supervision and with the participation of our
management, including our principal executive officer and principal financial
officer, we conducted an evaluation of the effectiveness of our internal control
over financial reporting based on the framework in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on our evaluation under the framework in
Internal Control - Integrated
Framework, our management concluded that our internal control over
financial reporting was effective at the reasonable assurance level as of
December 31, 2007. Our management’s assessment of the effectiveness
of our internal control over financial reporting as of December 31, 2007 has
been audited by KPMG LLP, an independent registered public accounting firm, as
stated in their report which is included herein.
Changes in Internal Control Over
Financial Reporting - No change in our internal
control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) occurred during the quarter ended December 31, 2007 that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Stockholders
Centene
Corporation:
We have
audited Centene Corporation’s internal control over financial reporting as of
December 31, 2007, based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
Centene Corporation’s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in the
accompanying Management’s Report on Internal Control Over Financial Reporting.
Our responsibility is to express an opinion on the Company’s internal control
over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our
opinion, Centene Corporation maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2007, based on
criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission..
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Centene
Corporation as of December 31, 2007 and 2006, and the related consolidated
statements of operations, stockholders’ equity, and cash flows for each of the
years in the three-year period ended December 31, 2007, and our report dated
February 25, 2008 expressed an unqualified opinion on those consolidated
financial statements.
(signed)
KPMG LLP
St.
Louis, Missouri
February
25, 2008
None.
PART
III
(a)
Directors of the Registrant
Information
concerning our directors will appear in our Proxy Statement for our 2008 annual
meeting of stockholders under “Election of Directors.” This portion of the Proxy
Statement is incorporated herein by reference.
(b)
Executive Officers of the Registrant
Pursuant
to General Instruction G(3) to Form 10-K and Instruction 3 to Item 401(b) of
Regulation S-K, information regarding our executive officers is provided in Item
1 of Part I of this Annual Report on Form 10-K under the caption “Executive
Officers.”
(c) Corporate
Governance
Information
concerning certain corporate governance matters will appear in our Proxy
Statement for our 2008 annual meeting of stockholders under “Information About
Corporate Governance -- Director Candidates”, “Information About Corporate
Governance -- Board and Committee Meetings” and “Information
About Corporate Governance -- Audit Committee.” These portions of our
Proxy Statement are incorporated herein by reference.
Information
concerning executive compensation will appear in our Proxy Statement for our
2008 annual meeting of stockholders under “Information About Executive
Compensation.” This portion of the Proxy Statement is incorporated
herein by reference. The sections entitled “Compensation Committee
Report” in our 2008 Proxy Statement are not incorporated herein by
reference.
Information
concerning the security ownership of certain beneficial owners and management
and our equity compensation plans will appear in our Proxy Statement for our
2008 annual meeting of stockholders under “Information About Stock Ownership”
and “Equity Compensation Plan Information.” These portions of the Proxy
Statement are incorporated herein by reference.
Information
concerning certain relationships and related transactions will appear in our
Proxy Statement for our 2008 annual meeting of stockholders under “Related Party
Transactions.” This portion of our Proxy Statement is incorporated herein by
reference.
Information
concerning principal accountant fees and services will appear in our Proxy
Statement for our 2008 annual meeting of stockholders under “Independent Auditor
Fees.” This portion of our Proxy Statement is incorporated herein by
reference.
PART
IV
(a) The
following documents are filed as part of this report:
|
|
Page
|
|
|
1. Consolidated
Financial Statements
|
|
|
|
|
42
|
|
|
|
43
|
|
|
|
44
|
|
|
|
45
|
|
| Consolidated Statements of Cash Flows for the Years Ended December 31, 2007, 2006 and 2005 | 46 | |
|
|
47
|
|
|
2. Financial
Statement Schedules
|
|
|
|
63
|
||
|
3. Exhibits
|
|
|
The Board
of Directors and Stockholders
Centene
Corporation:
We have
audited the accompanying consolidated balance sheets of Centene Corporation and
subsidiaries as of December 31, 2007 and 2006, and the related consolidated
statements of operations, stockholders’ equity, and cash flows for each of the
years in the three-year period ended December 31, 2007. In connection with our
audits of the consolidated financial statements, we also have audited the
financial statement schedule on pages 63-65. These consolidated
financial statements and financial statement schedule are the responsibility of
the Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Centene Corporation and
subsidiaries as of December 31, 2007 and 2006, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2007, in conformity with U.S. generally accepted accounting
principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
As
discussed in Note 2 to the consolidated financial statements, during 2006, the
Company adopted Statement of Financial Accounting Standard No. 123 (revised
2004), “Share Based Payments.”
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Centene Corporation’s internal control over
financial reporting as of December 31, 2007, based on criteria established
in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO), and our report dated February 25, 2008
expressed an
unqualified opinion on the effectiveness of the operation of internal control
over financial reporting.
(signed)
KPMG LLP
St.
Louis, Missouri
February
25, 2008
CENTENE
CORPORATION AND SUBSIDIARIES
(In
thousands, except share data)
|
December
31,
|
||||||||
|
2007
|
2006
|
|||||||
|
ASSETS
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents of continuing operations
|
$ | 268,584 | $ | 253,370 | ||||
|
Cash
and cash equivalents of discontinued operations
|
— | 17,677 | ||||||
|
Total
cash and cash equivalents
|
268,584 | 271,047 | ||||||
|
Premium
and related receivables
|
90,072 | 74,379 | ||||||
|
Short-term
investments, at fair value (amortized cost $46,392 and $57,031,
respectively)
|
46,269 | 56,790 | ||||||
|
Other
current assets
|
41,414 | 17,279 | ||||||
|
Current
assets of discontinued operations other than cash
|
— | 32,327 | ||||||
|
Total
current assets
|
446,339 | 451,822 | ||||||
|
Long-term
investments, at fair value (amortized cost $314,681 and $117,620,
respectively)
|
317,041 | 116,052 | ||||||
|
Restricted
deposits, at fair value (amortized cost $27,056 and $24,512,
respectively)
|
27,301 | 24,355 | ||||||
|
Property,
software and equipment, net
|
138,139 | 110,688 | ||||||
|
Goodwill
|
141,030 | 129,881 | ||||||
|
Other
intangible assets, net
|
13,205 | 15,555 | ||||||
|
Other
assets
|
36,067 | 9,209 | ||||||
|
Long-term
assets of discontinued operations
|
— | 37,418 | ||||||
|
Total
assets
|
$ | 1,119,122 | $ | 894,980 | ||||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
|
Current
liabilities:
|
||||||||
|
Medical
claims liabilities
|
$ | 335,856 | $ | 249,864 | ||||
|
Accounts
payable and accrued expenses
|
105,096 | 63,893 | ||||||
|
Unearned
revenue
|
44,016 | 33,816 | ||||||
|
Current
portion of long-term debt and notes payable
|
971 | 971 | ||||||
|
Current
liabilities of discontinued operations
|
861 | 39,407 | ||||||
|
Total
current liabilities
|
486,800 | 387,951 | ||||||
|
Long-term
debt
|
206,406 | 174,646 | ||||||
|
Other
liabilities
|
10,869 | 5,853 | ||||||
|
Long-term
liabilities of discontinued operations
|
— | 107 | ||||||
|
Total
liabilities
|
704,075 | 568,557 | ||||||
|
Stockholders’
equity:
|
||||||||
|
Common
stock, $.001 par value; authorized 100,000,000 shares; issued and
outstanding 43,667,837 and 43,369,918 shares, respectively
|
44 | 44 | ||||||
|
Additional
paid-in capital
|
221,693 | 209,340 | ||||||
|
Accumulated
other comprehensive income:
|
||||||||
|
Unrealized
gain (loss) on investments, net of tax
|
1,571 | (1,251 | ) | |||||
|
Retained
earnings
|
191,739 | 118,290 | ||||||
|
Total
stockholders’ equity
|
415,047 | 326,423 | ||||||
|
Total
liabilities and stockholders’ equity
|
$ | 1,119,122 | $ | 894,980 | ||||
See notes
to consolidated financial statements.
CENTENE
CORPORATION AND SUBSIDIARIES
(In
thousands, except share data)
|
Year
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Revenues:
|
||||||||||||
|
Premium
|
$
|
2,759,018
|
$
|
1,844,452
|
$
|
1,211,023
|
||||||
|
Premium
tax
|
79,572
|
37,961
|
7,214
|
|||||||||
|
Service
|
80,702
|
79,581
|
13,965
|
|||||||||
|
Total
revenues
|
2,919,292
|
1,961,994
|
1,232,202
|
|||||||||
|
Expenses:
|
||||||||||||
|
Medical
costs
|
2,324,486
|
1,555,658
|
994,517
|
|||||||||
|
Cost
of services
|
61,454
|
60,506
|
5,851
|
|||||||||
|
General
and administrative expenses
|
399,687
|
280,067
|
172,349
|
|||||||||
|
Premium
tax
|
79,572
|
37,961
|
7,214
|
|||||||||
|
Total
operating expenses
|
2,865,199
|
1,934,192
|
1,179,931
|
|||||||||
|
Earnings
from operations
|
54,093
|
27,802
|
52,271
|
|||||||||
|
Other
income (expense):
|
||||||||||||
|
Investment
and other income
|
25,169
|
16,416
|
9,106
|
|||||||||
|
Interest
expense
|
(15,626
|
)
|
(10,636
|
)
|
(3,990
|
)
|
||||||
|
Earnings
before income taxes
|
63,636
|
33,582
|
57,387
|
|||||||||
|
Income
tax expense
|
22,367
|
12,642
|
19,686
|
|||||||||
|
Net
earnings from continuing operations
|
41,269
|
20,940
|
37,701
|
|||||||||
|
Discontinued
operations, net of income tax (benefit) expense of $(30,899), $9,335 and
$10,538
|
32,133
|
(64,569
|
)
|
17,931
|
||||||||
|
Net
earnings (loss)
|
$
|
73,402
|
$
|
(43,629
|
)
|
$
|
55,632
|
|||||
|
Net
earnings (loss) per share:
|
||||||||||||
|
Basic:
|
||||||||||||
|
Continuing
operations
|
$
|
0.95
|
$
|
0.49
|
$
|
0.89
|
||||||
|
Discontinued
operations
|
0.74
|
(1.50
|
)
|
0.42
|
||||||||
|
Basic
earnings (loss) per common share
|
$
|
1.69
|
$
|
(1.01
|
)
|
$
|
1.31
|
|||||
|
Diluted:
|
||||||||||||
|
Continuing
operations
|
$
|
0.92
|
$
|
0.47
|
$
|
0.84
|
||||||
|
Discontinued
operations
|
0.72
|
(1.45
|
)
|
0.40
|
||||||||
|
Diluted
earnings (loss) per common share
|
$
|
1.64
|
$
|
(0.98
|
)
|
$
|
1.24
|
|||||
|
Weighted
average number of shares outstanding:
|
||||||||||||
|
Basic
|
43,539,950
|
43,160,860
|
42,312,522
|
|||||||||
|
Diluted
|
44,823,082
|
44,613,622
|
45,027,633
|
|||||||||
See notes
to consolidated financial statements.
CENTENE
CORPORATION AND SUBSIDIARIES
(In
thousands, except share data)
|
Common
Stock
|
|||||||||||||||||
|
$.001
Par
Value
Shares
|
Amt
|
Additional Paid-in Capital | Unrealized Gain (Loss) on Investments | Retained Earnings | Total | ||||||||||||
|
Balance, December 31,
2004
|
41,316,122
|
$
|
41
|
$
|
165,391
|
$
|
(407
|
)
|
$
|
106,287
|
$
|
271,312
|
|||||
|
Net
earnings
|
—
|
—
|
—
|
—
|
55,632
|
55,632
|
|||||||||||
|
Change
in unrealized investment losses, net of $(801) tax
|
—
|
—
|
—
|
(1,347
|
)
|
—
|
(1,347
|
)
|
|||||||||
|
Comprehensive
earnings
|
54,285
|
||||||||||||||||
|
Common
stock issued for acquisitions
|
318,735
|
1
|
8,990
|
—
|
—
|
8,991
|
|||||||||||
|
Common
stock issued for stock options and employee stock purchase
plan
|
1,353,373
|
1
|
6,016
|
—
|
—
|
6,017
|
|||||||||||
|
Stock
compensation expense
|
—
|
—
|
4,974
|
—
|
—
|
4,974
|
|||||||||||
|
Excess
tax benefits from stock compensation
|
—
|
—
|
6,469
|
—
|
—
|
6,469
|
|||||||||||
|
Balance, December 31,
2005
|
42,988,230
|
$
|
43
|
$
|
191,840
|
$
|
(1,754
|
)
|
$
|
161,919
|
$
|
352,048
|
|||||
|
Net
loss
|
—
|
—
|
—
|
—
|
(43,629
|
)
|
(43,629
|
)
|
|||||||||
|
Change
in unrealized investment losses, net of $306 tax
|
—
|
—
|
—
|
503
|
—
|
503
|
|||||||||||
|
Comprehensive
loss
|
(43,126
|
)
|
|||||||||||||||
|
Common
stock issued for stock options and employee stock purchase
plan
|
783,823
|
1
|
7,497
|
—
|
—
|
7,498
|
|||||||||||
|
Common
stock repurchases
|
(402,135
|
)
|
—
|
(7,944
|
)
|
—
|
—
|
(7,944
|
)
|
||||||||
|
Stock
compensation expense
|
—
|
—
|
14,904
|
—
|
—
|
14,904
|
|||||||||||
|
Excess
tax benefits from stock compensation
|
—
|
—
|
3,043
|
—
|
—
|
3,043
|
|||||||||||
|
Balance, December 31,
2006
|
43,369,918
|
$
|
44
|
$
|
209,340
|
$
|
(1,251
|
)
|
$
|
118,290
|
$
|
326,423
|
|||||
|
Net
earnings
|
—
|
—
|
—
|
—
|
73,402
|
73,402
|
|||||||||||
|
Change
in unrealized investment losses, net of $1,625 tax
|
—
|
—
|
—
|
2,822
|
—
|
2,822
|
|||||||||||
|
Comprehensive
earnings
|
76,224
|
||||||||||||||||
|
Common
stock issued for stock options and employee stock purchase
plan
|
765,076
|
—
|
6,113
|
—
|
—
|
6,113
|
|||||||||||
|
Common
stock repurchases
|
(467,157
|
)
|
—
|
(9,541
|
)
|
—
|
—
|
(9,541
|
)
|
||||||||
|
Stock
compensation expense
|
—
|
—
|
15,781
|
—
|
—
|
15,781
|
|||||||||||
|
Adjustment
for adoption of FIN 48
|
—
|
—
|
—
|
—
|
47
|
47
|
|||||||||||
|
Balance, December 31,
2007
|
43,667,837
|
$
|
44
|
$
|
221,693
|
$
|
1,571
|
$
|
191,739
|
$
|
415,047
|
||||||
See notes
to consolidated financial statements.
CENTENE
CORPORATION AND SUBSIDIARIES
(In
thousands)
|
Year
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Cash
flows from operating activities:
|
||||||||||||
|
Net
earnings (loss)
|
$
|
73,402
|
$
|
(43,629
|
)
|
$
|
55,632
|
|||||
|
Adjustments
to reconcile net earnings (loss) to net cash provided by operating
activities—
|
||||||||||||
|
Depreciation
and amortization
|
27,807
|
20,600
|
13,069
|
|||||||||
|
Excess
tax benefits from stock compensation
|
—
|
—
|
6,469
|
|||||||||
|
Stock
compensation expense
|
15,781
|
14,904
|
4,974
|
|||||||||
|
Gain
on sale of FirstGuard Missouri
|
(7,472
|
)
|
—
|
—
|
||||||||
|
Impairment
loss
|
7,207
|
88,268
|
—
|
|||||||||
|
Deferred
income taxes
|
(10,223
|
)
|
(6,692
|
)
|
1,786
|
|||||||
|
Changes
in assets and liabilities—
|
||||||||||||
|
Premium
and related receivables
|
1,663
|
(39,765
|
)
|
(10,305
|
)
|
|||||||
|
Other
current assets
|
(6,253
|
)
|
5,352
|
(6,177
|
)
|
|||||||
|
Other
assets
|
(348
|
)
|
91
|
(525
|
)
|
|||||||
|
Medical
claims liabilities
|
56,287
|
108,003
|
4,534
|
|||||||||
|
Unearned
revenue
|
10,085
|
20,035
|
8,182
|
|||||||||
|
Accounts
payable and accrued expenses
|
31,234
|
28,136
|
(4,215
|
)
|
||||||||
|
Other
operating activities
|
3,070
|
(271
|
)
|
624
|
||||||||
|
Net
cash provided by operating activities
|
202,240
|
195,032
|
74,048
|
|||||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Purchase
of property, software and equipment
|
(53,937
|
)
|
(50,318
|
)
|
(26,909
|
)
|
||||||
|
Purchase
of investments
|
(606,366
|
)
|
(319,322
|
)
|
(150,444
|
)
|
||||||
|
Sales
and maturities of investments
|
456,738
|
286,155
|
176,387
|
|||||||||
|
Proceeds
from asset sales
|
14,102
|
—
|
—
|
|||||||||
|
Investments
in acquisitions and equity method investee, net of cash
acquired
|
(36,001
|
)
|
(66,772
|
)
|
(55,485
|
)
|
||||||
|
Net
cash used in investing activities
|
(225,464
|
)
|
(150,257
|
)
|
(56,451
|
)
|
||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Proceeds
from exercise of stock options
|
5,464
|
6,953
|
5,621
|
|||||||||
|
Proceeds
from borrowings
|
212,000
|
94,359
|
45,000
|
|||||||||
|
Payment
of long-term debt and notes payable
|
(181,981
|
)
|
(17,355
|
)
|
(4,552
|
)
|
||||||
|
Excess
tax benefits from stock compensation
|
—
|
3,043
|
—
|
|||||||||
|
Common
stock repurchases
|
(9,541
|
)
|
(7,833
|
)
|
—
|
|||||||
|
Debt
issue costs
|
(5,181
|
)
|
(253
|
)
|
(413
|
)
|
||||||
|
Net
cash provided by financing activities
|
20,761
|
78,914
|
45,656
|
|||||||||
|
Net
(decrease) increase in cash and cash equivalents
|
(2,463
|
)
|
123,689
|
63,253
|
||||||||
|
Cash and cash
equivalents, beginning of period
|
271,047
|
147,358
|
84,105
|
|||||||||
|
Cash and cash
equivalents, end of period
|
$
|
268,584
|
$
|
271,047
|
$
|
147,358
|
||||||
|
Interest
paid
|
$
|
11,945
|
$
|
10,680
|
$
|
3,291
|
||||||
|
Income
taxes paid
|
$
|
7,348
|
$
|
16,418
|
$
|
31,287
|
||||||
|
Supplemental
schedule of non-cash investing and financing activities:
|
||||||||||||
|
Common
stock issued for acquisitions
|
$
|
—
|
$
|
—
|
$
|
8,991
|
||||||
|
Property
acquired under capital leases
|
$
|
1,736
|
$
|
366
|
$
|
5,026
|
||||||
See notes
to consolidated financial statements.
CENTENE
CORPORATION AND SUBSIDIARIES
(Dollars
in thousands, except share data)
1.
Organization and Operations
Centene
Corporation, or Centene or the Company, is a multi-line healthcare enterprise
operating primarily in two segments: Medicaid Managed Care and Specialty
Services. Centene’s 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 including Aged, Blind or
Disabled programs, or SSI. The Company’s 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 the Company’s own subsidiaries on market-based terms.
2.
Summary of Significant Accounting Policies
Principles
of Consolidation
The
accompanying consolidated financial statements include the accounts of Centene
Corporation and all majority owned subsidiaries. All material
intercompany balances and transactions have been eliminated. As
discussed below in Note 3, the assets, liabilities and results of operations of
FirstGuard Kansas and FirstGuard Missouri are classified as discontinued
operations for all periods presented.
Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those
estimates.
Cash
and Cash Equivalents
Investments
with original maturities of three months or less are considered to be cash
equivalents. Cash equivalents consist of commercial paper, money
market funds, repurchase agreements and bank savings accounts.
Investments
Short-term
investments include securities with maturities between three months and one
year. Long-term investments include securities with maturities
greater than one year.
Short-term
and long-term investments are classified as available for sale and are carried
at fair value based on quoted market prices. Unrealized gains and
losses on investments available for sale are excluded from earnings and reported
as a separate component of stockholders’ equity, net of income tax
effects. Premiums and discounts are amortized or accreted over the
life of the related security using the effective interest method. The
Company monitors the difference between the cost and fair value of
investments. Investments that experience a decline in value that is
judged to be other than temporary are written down to fair value and a realized
loss is recorded in investment and other income. To calculate
realized gains and losses on the sale of investments, the Company uses the
specific amortized cost of each investment sold. Realized gains and
losses are recorded in investment and other income.
Restricted
Deposits
Restricted
deposits consist of investments required by various state statutes to be
deposited or pledged to state agencies. These investments are
classified as long-term, regardless of the contractual maturity date, due to the
nature of the states’ requirements. The Company is required to
annually adjust the amount of the deposit pledged to certain
states.
Property,
Software and Equipment
Property,
software and equipment are stated at cost less accumulated
depreciation. Capitalized software includes certain costs incurred in
the development of internal-use software, including external direct costs of
materials and services and payroll costs of employees devoted to specific
software development. Depreciation is calculated principally by the
straight-line method over estimated useful lives ranging from 40 years for
buildings, two to seven years for software and computer equipment and five to
seven years for furniture and equipment. Leasehold improvements are
depreciated using the straight-line method over the shorter of the expected
useful life or the remaining term of the lease ranging between one and ten
years.
Intangible
Assets
Intangible
assets represent assets acquired in purchase transactions and consist primarily
of customer relationships, purchased contract rights, provider contracts, trade
names and goodwill. Purchased contract rights are amortized using the
straight-line method over periods ranging from five to ten
years. Provider contracts are amortized using the straight-line
method over periods ranging from five to ten years. Customer
relationships are amortized using the straight-line method over periods ranging
from five to fifteen years. Trade names are amortized using the
straight line method over 20 years.
Goodwill
is reviewed annually during the fourth quarter for impairment. In
addition, the Company performs an impairment analysis of other intangible assets
based on the occurrence of other factors. Such factors include, but
are not limited to, significant changes in membership, state funding, medical
contracts and provider networks and contracts. An impairment loss is
recognized if the carrying value of intangible assets exceeds the implied fair
value.
Medical
Claims Liabilities
Medical
services costs include claims paid, claims reported but not yet paid, or
inventory, estimates for claims incurred but not yet received, or IBNR, and
estimates for the costs necessary to process unpaid claims.
The
estimates of medical claims liabilities are developed using standard actuarial
methods based upon historical data for payment patterns, cost trends, product
mix, seasonality, utilization of healthcare services and other relevant factors
including product changes. These estimates are continually reviewed
and adjustments, if necessary, are reflected in the period
known. Management did not change actuarial methods during the years
presented. Management believes the amount of medical claims payable
is reasonable and adequate to cover the Company’s liability for unpaid claims as
of December 31, 2007; however, actual claim payments may differ from established
estimates.
Revenue
Recognition
The
Company’s Medicaid Managed Care segment generates revenues primarily from
premiums received from the states in which it operates health
plans. The company receives a fixed premium per member per month
pursuant to our state contracts. The company generally receives
premium payments during the month it provides services and recognizes premium
revenue during the period in which it is obligated to provide services to its
members. Some states enact premium taxes or similar assessments,
collectively premium taxes, and these taxes are recorded as a component of both
revenues and operating expenses. Premium taxes of $79,572, $37,961,
and $7,214 for the years ended December 31, 2007, 2006 and 2005, respectively,
are reported as a separate component of revenues and operating
expenses. Some contracts allow for additional premium related to
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.
The
Company’s 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 service.
Premium
and services revenues collected in advance are recorded as unearned
revenue. For performance-based contracts the company does not
recognize revenue subject to refund until data is sufficient to measure
performance. Premiums and service revenues due to the Company are
recorded as premium and related receivables and are recorded net of an allowance
based on historical trends and management’s judgment on the collectibility of
these accounts. As the Company generally receives 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 the financial condition or results of
operations. Activity in the allowance for uncollectible accounts for
the years ended December 31 is summarized below:
|
|
2007
|
2006
|
2005
|
|||||||||
|
Allowances,
beginning of year
|
|
$
|
155
|
$
|
343
|
$
|
462
|
|||||
|
Amounts
charged to expense
|
226
|
512
|
80
|
|||||||||
|
Write-offs
of uncollectible receivables
|
|
(123
|
)
|
(700
|
)
|
(199
|
)
|
|||||
|
Allowances,
end of year
|
|
$
|
258
|
$
|
155
|
$
|
343
|
|||||
|
|
||||||||||||
Significant
Customers
Centene
receives the majority of its revenues under contracts or subcontracts with state
Medicaid managed care programs. The contracts, which expire on
various dates between March 31, 2008 and December 31, 2011, are expected to be
renewed. Contracts with the states of Georgia, Indiana, Ohio, Texas
and Wisconsin accounted for 23%, 11%, 16%, 25% and 11%, respectively, of the
Company’s revenues for the year ended December 31, 2007.
Reinsurance
Centene’s
Medicaid Managed Care subsidiaries have purchased reinsurance from third parties
to cover eligible healthcare services. The current reinsurance program covers
50% of inpatient healthcare expenses between of $500 and $1,000 and covers 90%
of inpatient healthcare expenses in excess of $1,000 per member, up to a
lifetime maximum of $2,000. Centene’s Medicaid Managed Care subsidiaries are
responsible for inpatient charges in excess of an average daily per
diem.
Reinsurance
recoveries were $1,596, $2,427, and $2,931, in 2007, 2006, and 2005,
respectively. Reinsurance expenses were approximately $3,762, $3,576, and
$3,364, in 2007, 2006, and 2005, respectively. Reinsurance recoveries, net of
expenses, are included in medical costs.
Other
Income (Expense)
Other
income (expense) consists principally of investment income, interest expense and
equity method earnings from investments. Investment income is derived
from the Company’s cash, cash equivalents, restricted deposits and
investments. Interest expense relates to borrowings under our credit
facilities, mortgage interest, interest on capital leases and credit facility
fees.
Income
Taxes
Deferred
tax assets and liabilities are recorded for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date of the tax
rate change.
Valuation
allowances are provided when it is considered more likely than not that deferred
tax assets will not be realized. In determining if a deductible
temporary difference or net operating loss can be realized, the Company
considers future reversals of existing taxable temporary differences, future
taxable income, taxable income in prior carryback periods and tax planning
strategies.
Stock
Based Compensation
The
Company adopted FASB Statement of Financial Accounting Standards
No. 123 (revised 2004), “Share Based Payment,” or SFAS 123R,
effective January 1, 2006, using the modified-prospective transition
method. Under this method, compensation cost is recognized for awards
granted and for awards modified, repurchased or cancelled in the period after
adoption. Compensation cost is also recognized for the unvested
portion of awards granted prior to adoption. Prior year financial
statements are not restated. The fair value of the Company’s employee
share options and similar instruments are estimated using the Black-Scholes
option-pricing model. That cost is recognized over the period during
which an employee is required to provide service in exchange for the
award. Additionally, upon adoption of SFAS 123R, excess tax benefits
related to stock compensation are presented as a cash inflow from financing
activities.
For the
year ended December 31, 2005, the Company accounted for stock-based compensation
plans under APB Opinion No. 25, “Accounting for Stock Issued to
Employees.” Compensation cost related to stock options issued to
employees was recorded only if the grant-date market price of the underlying
stock exceeded the exercise price. The following table illustrates
the effect on net earnings and earnings per share if a fair value-based method
had been applied to all awards.
|
|
2005
|
|
||
|
Net
earnings
|
|
$
|
55,632
|
|
|
Stock-based
employee compensation expense included in net earnings, net of related tax
effects
|
|
3,084
|
|
|
|
Stock-based
employee compensation expense determined under fair value based method,
net of related tax effects
|
|
(11,988
|
)
|
|
|
Pro
forma net earnings
|
|
$
|
46,728
|
|
|
|
|
|||
|
Basic
earnings per common share:
|
|
|
||
|
As
reported
|
|
$
|
1.31
|
|
|
Pro
forma
|
|
1.10
|
|
|
|
Diluted
earnings per common share:
|
|
|
||
|
As
reported
|
|
$
|
1.24
|
|
|
Pro
forma
|
|
1.05
|
|
|
In
October 2005, the Compensation Committee approved the immediate and full
acceleration of vesting of 260,000 "out-of-the-money" stock options to certain
employees. These employees did not include any of the Company’s
executive officers or other employees at the Vice President level or
above. Each stock option issued as a part of these grants has an
exercise price greater than the closing price per share on the date of the
Compensation Committee’s action. The purpose of the acceleration was
to enable the Company to avoid recognizing compensation expense associated with
these options in future periods in our consolidated statements of operations, in
contemplation of the implementation of SFAS 123R. The pre-tax charge
avoided totals approximately $3,000 which would have been recognized over the
years 2006, 2007, 2008 and 2009. This amount is reflected in the pro
forma disclosures included above. The options that have been
accelerated had an exercise price in excess of the market value of our common
stock at the time of acceleration. Accordingly, the Compensation
Committee determined that the expense savings outweighs the objective of
incentive compensation and retention.
Additional
information regarding the stock option plans is included in Note
14.
Reclassifications
Certain
amounts in the consolidated financial statements have been reclassified to
conform to the 2007 presentation. These reclassifications have no
effect on net earnings or stockholders’ equity as previously
reported.
Recent
Accounting Pronouncements
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests
in Consolidated Financial Statements — an amendment of ARB No. 51”, or
SFAS No. 160. SFAS No. 160 was issued to improve the
relevance, comparability, and transparency of financial information provided to
investors by requiring all entities to report noncontrolling (minority)
interests in subsidiaries in the same way, that is, as equity in the
consolidated financial statements. Moreover, SFAS No. 160 eliminates
the diversity that currently exists in accounting for transactions between an
entity and noncontrolling interests by requiring they be treated as equity
transactions. SFAS No. 160 will be effective January 1, 2009. The
Company is currently evaluating the impact that SFAS No. 160 will have
on its financial statements and disclosures.
The
Company adopted the provisions of FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes”, or FIN 48, on January 1,
2007. FIN 48 clarifies whether or not to recognize assets or
liabilities for tax positions taken that may be challenged by a taxing
authority. Additional information regarding FIN 48 is included in
Note 9.
3.
Discontinued Operations: FirstGuard Health Plans
In 2006,
FirstGuard Health Plan Kansas, Inc., or FirstGuard Kansas, a wholly owned
subsidiary, received notification that its Medicaid contract scheduled to
terminate December 31, 2006 would not be renewed. In 2006, the
Company also evaluated its strategic alternatives for its Missouri subsidiary,
FirstGuard Health Plan, Inc., or FirstGuard Missouri, and decided to divest the
business. The assets, liabilities and results of operations of
FirstGuard Kansas and FirstGuard Missouri are classified as discontinued
operations for all periods presented beginning in December 2007, as
substantially all liabilities have been paid as of that date.
In 2006,
as a result of the notification of the Kansas contract non-renewal, the
Company conducted an impairment analysis of the identifiable intangible assets
and goodwill of the FirstGuard reporting unit, which encompasses both the
FirstGuard Kansas and FirstGuard Missouri health plans. The fair
value of the FirstGuard reporting unit was determined using discounted expected
cash flows and estimated market value. The impairment analysis
resulted in a goodwill impairment of $81,098. The Company also
recorded impairment charges for identifiable intangible assets of $5,993, and
fixed assets of $1,177. The goodwill portion of the impairment was
not deductible for tax purposes.
The sale
of the operating assets of FirstGuard Missouri was completed effective February
1, 2007 and the Company received a final contingent payment in the second
quarter of 2007, resulting in a total gain on the sale of $7,472 in
2007. Goodwill associated with FirstGuard written off as part of the
transaction was $5,995.
In 2007,
the Company abandoned the stock of FirstGuard Kansas and FirstGuard Missouri to
an unrelated entity. As a result of that abandonment, the Company
recognized expense of $2,298 for the write-off of the remaining assets in that
entity. The Company also recognized a $34,856 tax benefit for the tax
deduction associated with the basis of that stock.
The
Company incurred $8,733 of FirstGuard exit costs consisting primarily of lease
termination fees and employee severance costs. The exit costs
included $6,202 incurred in 2006, of which $3,027 was accrued at December 31,
2006. During the year ended December 31, 2007, the Company incurred
an additional $2,531 of exit costs and made payments of $5,433. At
December 31, 2007, the remaining accrual for these costs was
$125. The Company also contributed $3,000 of the sale proceeds
received in the second quarter to its charitable foundation and recorded the
contribution as General and Administrative expense.
Operating
results for the discontinued operations are as follows:
|
Year
Ended December 31,
|
||||||||||||
|
|
2007
|
2006
|
2005
|
|||||||||
|
Revenues
|
|
$
|
6,688
|
$
|
317,026
|
$
|
273,662
|
|||||
|
Earnings
(loss) before income taxes
|
|
$
|
1,234
|
|
$
|
(55,234
|
)
|
|
$
|
28,469
|
||
|
Net
earnings (loss)
|
|
$
|
32,133
|
|
$
|
(64,569
|
)
|
|
$
|
17,931
|
||
Assets
and liabilities of the discontinued operations are as follows:
|
December
31,
|
|||||||
|
2007
|
2006
|
||||||
|
Current
assets
|
$ | — | $ | 50,004 | |||
|
Long
term investments and restricted deposits
|
— | 30,275 | |||||
|
Goodwill
|
— | 5,995 | |||||
|
Other
intangible assets, net
|
— | 647 | |||||
|
Other
assets
|
— | 501 | |||||
|
Assets
of discontinued operations
|
$ | — | $ | 87,422 | |||
|
December
31,
|
|||||||
|
2007
|
2006
|
||||||
|
Medical
claims liabilities
|
$ | 736 | $ | 30,577 | |||
|
Accounts
payable and accrued expenses
|
125 | 8,830 | |||||
|
Other
liabilities
|
— | 107 | |||||
|
Liabilities
of discounted operations
|
$ | 861 | $ | 39,514 | |||
4.
Restructuring
In the
fourth quarter of 2007, the Company abandoned its previously planned
redevelopment project in Clayton, Missouri, related to a corporate office
expansion. As a result, the Company conducted an impairment analysis
of the related real estate and capitalized construction costs and recorded an
impairment charge of $7,207. The impairment charges were recorded as
General and Administrative expense under the Medicaid Managed Care
segment. At December 31, 2007, the remaining liability for these
charges was $1,335.
Also in
the fourth quarter of 2007, the Company completed an organizational realignment,
resulting in the elimination of approximately 35
positions. Accordingly, the Company recorded $2,185 in severance
costs. This expense was recorded as General and Administrative
expense under the Medicaid Managed Care segment. At December 31,
2007, the remaining liability for these costs was $2,185.
5.
Acquisitions
2007
Acquisitions
|
Ÿ
|
Access Health Solution,
LLC. In July 2007, the Company acquired a 49% minority
ownership interest in Access Health Solutions, LLC, or Access, a
Medicaid managed care entity in Florida. Under the terms of the
transaction, the Company has an option to acquire the remaining interest
in Access at a future date. The Company accounts for its
investment in Access using the equity method of
accounting.
|
|
Ÿ
|
Other 2007
Acquisitions. The Company acquired PhyTrust of South
Carolina, LLC, effective April 20, 2007, Physician’s Choice, LLC,
effective October 2007, and Work Life Innovations, effective November 30,
2007. The Company paid a total of $11,300 in cash and related
transaction costs for these acquisitions. PhyTrust of South
Carolina and Physician’s Choice, LLC, both with Medicaid members in South
Carolina, are included in the Medicaid Managed Care
segment. Work Life Innovations, a health and wellness
consulting company, is included in the Specialty Services
segment. For these acquisitions, goodwill of $8,323 and $2,859
was allocated to the Medicaid Managed Care segment and the Specialty
Services segment, respectively, all of which is deductible for income tax
purposes. Pro forma disclosures related to these acquisitions
have been excluded as immaterial.
|
2006
Acquisitions
|
Ÿ
|
US Script, Inc.
Effective January 1, 2006, the Company acquired 100% of US Script,
Inc., a pharmacy benefits manager. The Company has paid or
accrued $44,573 in cash and related transaction costs. In
accordance with the terms of the agreement, the Company may pay up to an
additional $6,000 if US Script, Inc. achieves certain earnings targets
over the next three years. The results of operations for US
Script, Inc. are included in the Specialty Services segment and the
consolidated financial statements since January 1,
2006.
|
The
purchase price allocation resulted in estimated identifiable intangible assets
of $7,100 and associated deferred tax liabilities of $2,523 and goodwill of
$37,975. The identifiable intangible assets have an estimated useful
life of seven to 20 years. The acquired goodwill is not deductible
for income tax purposes. Pro forma disclosures related to the
acquisition have been excluded as immaterial.
|
Ÿ
|
Other 2006
Acquisitions. The Company acquired the assets of Nurse
Response, Inc., effective April 1, 2006, Cardium Health Services
Corporation, effective May 9, 2006, MediPlan Corporation, effective June
1, 2006, and OptiCare Managed Vision, Inc., effective July 1,
2006. The Company paid a total of $30,783 in cash and related
transaction costs for these acquisitions. The results of
operations for these acquisitions are included in the consolidated
financial statements since the respective effective
dates. Nurse Response, Inc., a provider of after hours nurse
triage services, Cardium Health Services Corporation, a chronic health
management provider, and OptiCare Managed Vision, Inc., a managed vision
provider, are included in the Specialty Services
segment. MediPlan Corporation, with Medicaid membership in
Ohio, is included in the Medicaid Managed Care segment. For
these acquisitions, goodwill of $14,756 and $7,150 was allocated to the
Specialty Services segment and Medicaid Managed Care segment,
respectively, of which $5,593 is deductible for income tax
purposes. Pro forma disclosures related to these acquisitions
have been excluded as immaterial.
|
2005
Acquisitions
|
Ÿ
|
AirLogix, Inc.
Effective July 22, 2005, the Company acquired 100% of AirLogix,
Inc., a health management provider. The Company paid
approximately $36,310 in cash and related transaction
costs. The results of operations for AirLogix, Inc. are
included in the Specialty Services segment and the consolidated financial
statements since July 22, 2005.
|
The
purchase price allocation resulted in estimated identified intangible assets of
$1,900 and associated deferred tax liabilities of $997 and goodwill of
$28,747. The identifiable intangible assets have an estimated useful
life of one to five years. The acquired goodwill is not deductible
for income tax purposes. Pro forma disclosures related to the
acquisition have been excluded as immaterial.
|
Ÿ
|
SummaCare, Inc.
Effective May 1, 2005, the Company acquired certain
Medicaid-related assets from SummaCare, Inc. for a purchase price of
approximately $30,407. The purchase price and related
transaction costs consisted of $21,416 in cash and 318,735 shares of
common stock valued at $8,991. The cost to acquire the
Medicaid-related assets has been allocated to the assets acquired and
liabilities assumed according to estimated fair values. The
results of operations for SummaCare are included in the Medicaid Managed
Care segment and the consolidated financial statements since May 1,
2005.
|
The
purchase price allocation resulted in identified intangible assets of $520,
representing purchased contract rights and provider contracts and goodwill of
$29,887. The identified intangible assets are being amortized over
periods ranging from five to ten years. The acquired goodwill is
deductible for income tax purposes. Pro forma disclosures related to
the acquisition have been excluded as immaterial.
6. Short-term and Long-term
Investments and Restricted Deposits
Short-term
and long-term investments and restricted deposits available for sale by
investment type at December 31, 2007 consist of the following:
|
December
31, 2007
|
||||||||||||||||
|
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Estimated
Market
Value
|
|||||||||||||
|
U.S.
Treasury securities and obligations of U.S. government corporations and
agencies
|
$ | 28,383 | $ | 289 | $ | (27 | ) | $ | 28,645 | |||||||
|
Corporate
securities
|
33,692 | 14 | (268 | ) | 33,438 | |||||||||||
|
State
and municipal securities
|
305,433 | 2,336 | (130 | ) | 307,639 | |||||||||||
|
Life
insurance contracts
|
13,924 | — | — | 13,924 | ||||||||||||
|
Equity
securities
|
6,697 | 354 | (86 | ) | 6,965 | |||||||||||
|
Total
|
$ | 388,129 | $ | 2,993 | $ | (511 | ) | $ | 390,611 | |||||||
Short-term
and long-term investments and restricted deposits available for sale by
investment type at December 31, 2006 consist of the following:
|
December
31, 2006
|
||||||||||||||||
|
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Estimated
Market
Value
|
|||||||||||||
|
U.S.
Treasury securities and obligations of U.S. government corporations and
agencies
|
$ | 28,320 | $ | 13 | $ | (340 | ) | $ | 27,993 | |||||||
|
Corporate
securities
|
76,752 | 1 | (937 | ) | 75,816 | |||||||||||
|
State
and municipal securities
|
80,450 | — | (705 | ) | 79,745 | |||||||||||
|
Asset
backed securities
|
777 | 2 | — | 779 | ||||||||||||
|
Life
insurance contracts
|
12,864 | — | — | 12,864 | ||||||||||||
|
Total
|
$ | 199,163 | $ | 16 | $ | (1,982 | ) | $ | 197,197 | |||||||
The
Company monitors investments for other than temporary
impairment. Certain investments have experienced a decline in market
value due to changes in market interest rates. Based on the credit
quality of the Company’s investments and ability to hold these investments to
recovery (which may be maturity), no other than temporary impairment has been
recorded. Investments in a gross unrealized loss position at December
31, 2007 are as follows:
|
Less
Than 12 Months
|
12
Months or More
|
Total
|
||||||||||||||||||||||||||
|
Amortized
Cost
|
Unrealized
Losses
|
Market Value | Unrealized Losses | Market Value | Unrealized Losses |
Market
Value
|
||||||||||||||||||||||
|
Equity
|
$ | 1,778 | $ | (86 | ) | $ | 1,692 | $ | — | $ | — | $ | (86 | ) | $ | 1,692 | ||||||||||||
|
Corporate
|
28,674 | (6 | ) | 907 | (262 | ) | 27,499 | (268 | ) | 28,406 | ||||||||||||||||||
|
Government
|
8,274 | (21 | ) | 6,154 | (6 | ) | 2,093 | (27 | ) | 8,247 | ||||||||||||||||||
|
Municipal
|
29,942 | (4 | ) | 5,517 | (126 | ) | 24,295 | (130 | ) | 29,812 | ||||||||||||||||||
|
Total
|
$ | 68,668 | $ | (117 | ) | $ | 14,270 | $ | (394 | ) | $ | 53,887 | $ | (511 | ) | $ | 68,157 | |||||||||||
Investments
in a gross unrealized loss position at December 31, 2006 are as
follows:
|
Less
Than 12 Months
|
12
Months or More
|
Total | ||||||||||||||||||||||||||
|
Amortized
Cost
|
Unrealized
Losses
|
Market Value | Unrealized Losses | Market Value | Unrealized Losses | Market Value | ||||||||||||||||||||||
|
Corporate
|
$ | 68,195 | $ | (10 | ) | $ | 16,973 | $ | (927 | ) | $ | 50,285 | $ | (937 | ) | $ | 67,258 | |||||||||||
|
Government
|
27,039 | (65 | ) | 15,417 | (275 | ) | 11,282 | (340 | ) | 26,699 | ||||||||||||||||||
|
Municipal
|
61,297 | (46 | ) | 23,637 | (659 | ) | 36,955 | (705 | ) | 60,592 | ||||||||||||||||||
|
Total
|
$ | 156,531 | $ | (121 | ) | $ | 56,027 | $ | (1,861 | ) | $ | 98,522 | $ | (1,982 | ) | $ | 154,549 | |||||||||||
The
contractual maturities of short-term and long-term investments and restricted
deposits as of December 31, 2007, are as follows:
|
Investments
|
Restricted
Deposits
|
|||||||||||||||
|
Amortized
Cost
|
Estimated
Market
Value
|
Amortized
Cost
|
Estimated
Market
Value
|
|||||||||||||
|
One
year or less
|
$ | 46,392 | $ | 46,269 | $ | 15,326 | $ | 15,413 | ||||||||
|
One
year through five years
|
204,311 | 206,296 | 11,223 | 11,359 | ||||||||||||
|
Five
years through ten years
|
29,524 | 29,899 | 507 | 529 | ||||||||||||
|
Greater
than ten years
|
80,846 | 80,846 | — | — | ||||||||||||
|
Total
|
$ | 361,073 | $ | 363,310 | $ | 27,056 | $ | 27,301 | ||||||||
The
contractual maturities of short-term and long-term investments and restricted
deposits as of December 31, 2006, are as follows:
|
Investments
|
Restricted
Deposits
|
|||||||||||||||
|
Amortized
Cost
|
Estimated
Market
Value
|
Amortized
Cost
|
Estimated
Market
Value
|
|||||||||||||
|
One
year or less
|
$ | 57,031 | $ | 56,790 | $ | 12,631 | $ | 12,544 | ||||||||
|
One
year through five years
|
86,551 | 85,006 | 11,375 | 11,314 | ||||||||||||
|
Five
years through ten years
|
13,869 | 13,846 | 506 | 497 | ||||||||||||
|
Greater
than ten years
|
17,200 | 17,200 | — | — | ||||||||||||
|
Total
|
$ | 174,651 | $ | 172,842 | $ | 24,512 | $ | 24,355 | ||||||||
Actual
maturities may differ from contractual maturities due to call or prepayment
options. Asset backed securities are included in the one year through
five years category, while equity securities and life insurance contracts are
included in the five years through ten years category. The Company
has the option to redeem at amortized cost all of the securities included in the
greater than ten years category listed above.
The
Company recorded realized gains and losses on investments for the years ended
December 31 as follows:
|
|
2007
|
2006
|
2005
|
|||||||||
|
Gross
realized gains
|
|
$
|
325
|
$
|
9
|
$
|
—
|
|||||
|
Gross
realized losses
|
|
(401
|
)
|
(37
|
)
|
(65
|
)
|
|||||
|
Net
realized (losses) gains
|
|
$
|
(76
|
)
|
$
|
(28
|
)
|
$
|
(65
|
)
|
||
7.
Property, Software and Equipment
Property,
software and equipment consist of the following as of December 31:
|
|
2007
|
2006
|
||||||
|
Computer
software
|
|
$
|
72,946
|
$
|
44,292
|
|||
|
Building
|
|
36,781
|
|
34,671
|
||||
|
Computer
hardware
|
26,742
|
19,580
|
||||||
|
Furniture
and office equipment
|
|
21,545
|
16,114
|
|||||
|
Land
|
|
19,509
|
20,216
|
|||||
|
Leasehold
improvements
|
|
15,200
|
9,226
|
|||||
|
|
192,723
|
144,099
|
||||||
|
Less
accumulated depreciation
|
|
(54,584
|
)
|
(33,411
|
)
|
|||
|
Property,
software and equipment, net
|
|
$
|
138,139
|
$
|
110,688
|
|||
Depreciation
expense for the years ended December 31, 2007, 2006 and 2005 was $23,224,
$15,610 and $7,809, respectively.
8.
Intangible Assets
Goodwill
balances and the changes therein are as follows:
|
Medicaid
Managed Care
|
Specialty
Services
|
Total
|
||||||||||
|
Balance
as of December 31, 2005
|
$ | 36,792 | $ | 33,388 | $ | 70,180 | ||||||
|
Acquisitions
|
6,893 | 52,948 | 59,841 | |||||||||
|
Other
adjustments
|
50 | (190 | ) | (140 | ) | |||||||
|
Balance
as of December 31, 2006
|
43,735 | 86,146 | 129,881 | |||||||||
|
Acquisitions
|
8,663 | 4,049 | 12,712 | |||||||||
|
Other
adjustments
|
1,238 | (2,801 | ) | (1,563 | ) | |||||||
|
Balance
as of December 31, 2007
|
$ | 53,636 | $ | 87,394 | $ | 141,030 | ||||||
Goodwill
additions in 2007 and 2006 were related to the acquisitions discussed in Note
5. Goodwill reductions in 2006 and 2007 were related to the
recognition of acquired net operating loss carry forward benefits.
Other
intangible assets at December 31 consist of the following:
|
|
Weighted
Average Life
in
Years
|
|||||||||||
|
|
2007
|
2006
|
2007
|
|
2006
|
|||||||
|
Purchased
contract rights
|
|
$
|
8,591
|
$
|
8,591
|
7.7
|
|
7.6
|
||||
|
Provider
contracts
|
|
2,478
|
1,921
|
10.0
|
|
9.9
|
||||||
|
Customer
relationships
|
7,030
|
5,400
|
8.2
|
6.3
|
||||||||
|
Trade
names
|
|
4,563
|
3,750
|
19.9
|
19.7
|
|||||||
|
Other
intangibles
|
|
270
|
3,270
|
5.0
|
|
5.0
|
||||||
|
Other
intangible assets
|
|
22,932
|
22,932
|
10.7
|
|
9.2
|
||||||
|
Less
accumulated amortization:
|
|
|
||||||||||
|
Purchased
contract rights
|
|
(5,870
|
)
|
(4,830
|
)
|
|
||||||
|
Provider
contracts
|
|
(1,007
|
)
|
(729
|
)
|
|
||||||
|
Customer
relationships
|
(2,069
|
)
|
(1,025
|
)
|
||||||||
|
Trade
names
|
|
(542
|
)
|
(280
|
)
|
|
||||||
|
Other
identifiable intangibles
|
|
(239
|
)
|
(513
|
)
|
|
||||||
|
Total
accumulated amortization
|
|
(9,727
|
)
|
(7,377
|
)
|
|
||||||
|
Other
intangible assets, net
|
|
$
|
13,205
|
$
|
15,555
|
|
||||||
|
|
|
|||||||||||
Amortization
expense was $2,350, $2,484 and $1,880 for the years ended December 31, 2007,
2006 and 2005, respectively. The estimated amortization expense
for 2008, 2009, 2010, 2011 and 2012, assuming no further
acquisitions, is approximately $2,300, $2,000, $1,800, $1,500 and $1,500,
respectively.
9.
Income Taxes
The
consolidated income tax expense consists of the following for the years ended
December 31:
|
|
2007
|
2006
|
2005
|
|||||||
|
Current
provision:
|
|
|||||||||
|
Federal
|
|
$
|
30,668
|
$
|
14,898
|
$
|
17,195
|
|||
|
State
and local
|
|
3,454
|
1,845
|
744
|
||||||
|
Total
current provision
|
|
34,122
|
16,743
|
17,939
|
||||||
|
Deferred
provision
|
|
(11,755
|
)
|
(4,101
|
)
|
1,747
|
||||
|
Total
provision for income taxes
|
$
|
22,367
|
$
|
12,642
|
$
|
19,686
|
||||
The
reconciliation of the tax provision at the U.S. Federal Statutory Rate to the
provision for income taxes is as follows:
|
|
2007
|
2006
|
2005
|
|||||||
|
Tax
provision at the U.S. federal statutory rate
|
|
$
|
22,273
|
$
|
11,754
|
$
|
20,085
|
|||
|
State
income taxes, net of federal income tax benefit
|
|
449
|
137
|
(938)
|
||||||
|
Tax
exempt investment income
|
(2,641
|
)
|
(640
|
)
|
—
|
|||||
|
Nondeductible
incentive stock option compensation
|
1,542
|
1,407
|
—
|
|||||||
|
Other,
net
|
|
744
|
(16
|
)
|
539
|
|||||
|
Income
tax expense
|
|
$
|
22,367
|
$
|
12,642
|
$
|
19,686
|
|||
The tax
effects of temporary differences which give rise to deferred tax assets and
liabilities are presented below for the years ended December 31:
|
2007
|
2006
|
|||||||
|
Deferred
tax assets:
|
||||||||
|
Current:
|
||||||||
|
Medical
claims liability and other accruals
|
$ | 12,681 | $ | 7,383 | ||||
|
Unearned
premium and other deferred revenue
|
3,376 | 3,238 | ||||||
|
Unrealized
loss on investments
|
47 | 103 | ||||||
|
Federal
net operating loss carry forward
|
5,396 | 1,136 | ||||||
|
State
net operating loss carry forward
|
2,981 | 1,387 | ||||||
|
Federal
tax credits
|
188 | — | ||||||
|
Other
|
1,802 | 52 | ||||||
| 26,471 | 13,299 | |||||||
|
Valuation
allowance
|
(1,288 | ) | (1,337 | ) | ||||
|
Net
current deferred tax assets
|
$ | 25,183 | $ | 11,962 | ||||
|
Non-current
deferred tax assets:
|
||||||||
|
Medical
claims liability and other accruals
|
$ | 593 | $ | 330 | ||||
|
Unrealized
loss on investments
|
— | 635 | ||||||
|
Federal
net operating loss carry forward
|
5,652 | 5,153 | ||||||
|
State
net operating loss carry forward
|
3,979 | 1,053 | ||||||
|
Stock
compensation
|
8,671 | 5,491 | ||||||
|
State
tax credits
|
1,290 | 1,290 | ||||||
|
Other
|
1,147 | 519 | ||||||
| 21,332 | 14,471 | |||||||
|
Valuation
allowance
|
(1,038 | ) | (1,455 | ) | ||||
|
Net
non-current deferred tax assets
|
$ | 20,294 | $ | 13,016 | ||||
|
Deferred
tax liabilities:
|
||||||||
|
Current:
|
||||||||
|
Prepaid
assets
|
$ | 1,505 | $ | 1,923 | ||||
|
Net
current deferred tax liabilities
|
$ | 1,505 | $ | 1,923 | ||||
|
Non-current
deferred tax liabilities:
|
||||||||
|
Intangible
assets
|
$ | 5,012 | $ | 5,570 | ||||
|
Depreciation
and amortization
|
15,895 | 6,961 | ||||||
|
Unrealized
gain on investments
|
957 | 4 | ||||||
|
Net
non-current deferred tax liabilities
|
$ | 21,864 | $ | 12,535 | ||||
|
Net
deferred tax assets
|
$ | 22,108 | $ | 10,520 | ||||
The
Company’s deferred tax assets include federal and state net operating losses, or
NOLs, of which $6,434 were acquired in business
combinations. Accordingly, the total and annual deduction for those
NOLs is limited by tax law. The federal NOLs expire between the years
2011 and 2027 and the state NOLs expire between the years 2009 and
2027. Valuation allowances are recorded for those NOLs the Company
believes are more-likely-than-not to expire unused. During 2007 and
2006, the Company recorded valuation allowance reductions of $2,317 and $2,910,
respectively and recorded additional valuation allowances of $1,852 and $2,005,
respectively. The 2007 tax provision included $1,852 of valuation
additions and the 2006 tax provision included $422 of the valuation allowance
reductions. The remainder was recorded as an adjustment to goodwill
and other intangible assets. The Company also had an unrecorded
federal and state net operating loss deferred tax asset related to an excess
stock compensation deduction of $2,546.
We
adopted the provision of FASB Interpretation No. 48, “Accounting for Uncertainty
in Income Taxes”, or FIN 48, on January 1, 2007. FIN 48 clarifies
whether or not to recognize assets or liabilities for tax positions taken that
may be challenged by a tax authority. As a result of the
implementation of FIN 48, we recognized a $47 decrease in the liability for
unrecognized tax benefits, which was accounted for as an increase to retained
earnings. A reconciliation of the beginning and ending amount of
unrecognized tax benefits is as follows:
|
Balance
as of January 1, 2007
|
|
$
|
3,114
|
|
|
Additions
based on tax positions during the current year
|
|
106
|
||
|
Reductions
as a result of a lapse in the applicable statute of
limitations
|
(737
|
)
|
||
|
Balance
as of December 31, 2007
|
|
$
|
2,483
|
The
December 31, 2007 balance includes $532 (net of federal tax benefit) that would
decrease income tax expense, if recognized, and the remainder would reduce
goodwill. Most of the amount that would reduce income tax expense, if
recognized, related to an audit in process and is expected to be resolved in the
next twelve months.
We
recognize interest accrued related to unrecognized tax benefits in the provision
for income taxes. As of January 1, 2007, interest accrued was
approximately $293, net of federal tax benefit. No penalties have
been accrued. As of December 31, 2007, interest accrued was
approximately $249, net of federal tax benefit. The Company
recognized net reductions in accrued interest due to the lapse of certain
federal and state statutes of limitation.
The
federal income tax returns for 2004 through 2007 are open tax
years. We file in numerous state jurisdictions with varying statutes
of limitation. The unrecognized state tax benefits are related to
returns open from 2002 through 2007.
10. Medical Claims
Liabilities
The
change in medical claims liabilities is summarized as follows:
|
|
2007
|
2006
|
2005
|
|||||||||
|
Balance,
January 1
|
|
$
|
249,864
|
$
|
139,687
|
$
|
139,602
|
|||||
|
Acquisitions
|
|
—
|
1,788
|
—
|
||||||||
|
Incurred
related to:
|
||||||||||||
|
Current
year
|
|
2,340,716
|
1,569,082
|
1,010,656
|
||||||||
|
Prior
years
|
|
(16,230
|
)
|
(13,424
|
)
|
(16,139
|
)
|
|||||
|
Total
incurred
|
|
2,324,486
|
1,555,658
|
994,517
|
||||||||
|
|
||||||||||||
|
Paid
related to:
|
||||||||||||
|
Current
year
|
|
2,009,881
|
1,322,607
|
872,019
|
||||||||
|
Prior
years
|
|
228,613
|
124,662
|
122,413
|
||||||||
|
Total
paid
|
|
2,238,494
|
1,447,269
|
994,432
|
||||||||
|
Balance,
December 31
|
|
$
|
335,856
|
$
|
249,864
|
$
|
139,687
|
|||||
Changes
in estimates of incurred claims for prior years were attributable to favorable
development, including changes in medical utilization and cost
trends.
The
Company had reinsurance recoverables related to medical claims liabilities of
$3,189 and $1,244 at December 31, 2007 and 2006, respectively, included in
premium and related receivables.
11.
Debt
Debt
consists of the following at December 31:
|
2007
|
2006
|
|||||||
|
$300,000
revolving credit agreement
|
$ | 5,000 | $ | 149,000 | ||||
|
$175,000
senior notes
|
175,000 | — | ||||||
|
$25,000
revolving loan agreement
|
8,359 | 8,359 | ||||||
|
Mortgage
notes payable
|
12,001 | 12,487 | ||||||
|
Capital
leases
|
7,017 | 5,771 | ||||||
|
Total
debt
|
207,377 | 175,617 | ||||||
|
Less
current maturities
|
(971 | ) | (971 | ) | ||||
|
Long-term
debt
|
$ | 206,406 | $ | 174,646 | ||||
In March
2007, the Company issued $175,000 aggregate principal amount of 7 ¼% Senior
Notes due April 1, 2014, or the Notes. The Notes have been registered
under the Securities Act of 1933, as amended, pursuant to a registration rights
agreement with the initial purchasers. The indenture governing the
Notes contains non-financial and financial covenants, including requirements of
a minimum fixed charge coverage ratio. Interest is paid semi-annually
in April and October.
The
Company has a $300,000 five-year Revolving Credit Agreement dated September 14,
2004 with various financial institutions. Borrowings under the
agreement bear interest based upon LIBOR rates, the Federal Funds Rate or the
Prime Rate. There is a commitment fee on the unused portion of the
agreement that ranges from 0.15% to 0.275% depending on the total debt-to-EBITDA
ratio. The agreement contains non-financial and financial covenants,
including requirements of minimum fixed charge coverage ratios, maximum
debt-to-EBITDA ratios and minimum tangible net worth. The agreement
will expire in September 2011. The outstanding borrowings at December
31, 2007 bore interest at LIBOR plus 1.0%, or 6.0%.
In May
2006, the Company executed a three-year $25,000 Revolving Loan
Agreement. Borrowings under the agreement bear interest based upon
LIBOR rates plus 1.5%. Subject to the terms and conditions of the
agreement, the proceeds of the Revolving Loan may only be used for the
acquisition of certain properties contiguous to the Company’s corporate
headquarters. The collateralized properties had a net book value of
$8,543 at December 31, 2007. The outstanding borrowings at December
31, 2007 bore interest at 6.5%.
Mortgage
notes payable consists of two mortgages collateralized by the Company’s
headquarters property. The mortgages bear interest at the prevailing
prime rate less .75% (6.5% at December 31, 2007). The respective
properties had a net book value of $20,605 at December 31, 2007. The
mortgages include a financial covenant requiring a minimum rolling twelve-month
debt service coverage ratio.
Aggregate
maturities for the Company’s debt are as follows:
|
2008
|
$ | 971 | ||
|
2009
|
9,085 | |||
|
2010
|
11,275 | |||
|
2011
|
5,249 | |||
|
2012
|
260 | |||
|
Thereafter
|
180,537 | |||
|
Total
|
$ | 207,377 |
The fair
value of outstanding debt was approximately $206,065 and $175,617 at December
31, 2007 and 2006, respectively.
12.
Stockholders’ Equity
The
Company has 10,000,000 authorized shares of preferred stock at $.001 par
value. At December 31, 2007, there were no preferred shares
outstanding.
In
October 2007, the Company’s board of directors extended the November 2005 stock
repurchase program, authorizing the Company to repurchase up to 4,000,000 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 the Company reserves the right to suspend or discontinue the program
at any time. During the year ended December 31, 2007, the Company
repurchased 467,157 shares at an average price of $20.42 and an aggregate cost
of $9,541. During the year ended December 31, 2006, the Company
repurchased 402,135 shares at an average price of $19.77 and an aggregate cost
of $7,944.
13.
Statutory Capital Requirements and Dividend Restrictions
Various
state laws require Centene’s regulated subsidiaries to maintain minimum capital
levels specified by each state and restrict the amount of dividends that may be
paid without prior regulatory approval. At December 31, 2007 and
2006, Centene’s subsidiaries had aggregate statutory capital and surplus of
$302,100 and $205,700, respectively, compared with the required minimum
aggregate statutory capital and surplus of $192,300 and $120,600,
respectively.
14.
Stock Incentive Plans
The
Company’s stock incentive plans allow for the granting of restricted stock or
restricted stock unit awards and options to purchase common
stock. Both incentive stock options and nonqualified stock options
can be awarded under the plans. No option will be exercisable for
longer than ten years after the date of grant. The plans have 589,239
shares available for future awards. Compensation expense for stock
options and restricted stock unit awards is recognized on a straight-line basis
over the vesting period, generally three to five years for stock options and one
to ten years for restricted stock or restricted stock unit
awards. Certain restricted stock unit awards contain
performance-based as well as service-based provisions. Certain awards
provide for accelerated vesting if there is a change in control as defined in
the plans. The compensation cost that has been charged against income
for the stock incentive plans was $15,781, $14,904 and $4,974 for the years
ended December 31, 2007, 2006 and 2005, respectively. The total
income tax benefit recognized in the income statement for stock-based
compensation arrangements was $4,536, $4,235 and $1,890 for the years ended
December 31, 2007, 2006 and 2005, respectively.
Option
activity for the year ended December 31, 2007 is summarized below:
|
Shares
|
Weighted
Average
Exercise
Price
|
Aggregate
Intrinsic Value
|
Weighted
Average
Remaining
Contractual
Term
|
||||||||||||
|
Outstanding
as of December 31, 2006
|
4,835,963
|
$
|
17.77
|
||||||||||||
|
Granted
|
582,500
|
23.29
|
|||||||||||||
|
Exercised
|
(652,862)
|
7.29
|
|||||||||||||
|
Expired
|
(140,300)
|
26.15
|
|||||||||||||
|
Forfeited
|
(284,600)
|
21.08
|
|||||||||||||
|
Outstanding
as of December 31, 2007
|
4,340,701
|
$
|
19.60
|
$
|
34,977
|
7.0
|
|||||||||
|
Exercisable
as of December 31, 2007
|
2,440,470
|
$
|
17.23
|
$
|
25,454
|
6.1
|
|||||||||
The fair
value of each option grant is estimated on the date of the grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
|
Year Ended December
31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Expected
life (in years)
|
6.1 | 6.5 | 6.4 | |||||||||
|
Risk-free
interest rate
|
4.1 | % | 4.6 | % | 4.3 | % | ||||||
|
Expected
volatility
|
47.5 | % | 47.8 | % | 46.6 | % | ||||||
|
Expected
dividend yield
|
0 | % | 0 | % | 0 | % | ||||||
For the
year ended December 31, 2007, the Company used a projected expected life for
each award granted based on historical experience of employees’ exercise
behavior. For the years ended December 31, 2006 and 2005, the
expected life of each award granted was calculated using the “simplified method”
in accordance with Staff Accounting
Bulletin No. 107. For the years ended December 31,
2007, 2006 and 2005, expected volatility is primarily based on historical
volatility levels along with the implied volatility of exchange traded options
to purchase Centene common stock. The risk-free interest
rates are based on the implied yield currently available on U.S. Treasury
zero coupon issues with a remaining term equal to the expected
life.
Other
information pertaining to option activity during the year ended December 31,
2007, 2006 and 2005 is as follows:
|
Year Ended December
31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Weighted-average
fair value of options granted
|
$ | 12.02 | $ | 13.42 | $ | 13.77 | ||||||
|
Total
intrinsic value of stock options exercised
|
$ | 9,847 | $ | 10,495 | $ | 32,425 | ||||||
A summary
of the status of the Company's non-vested restricted stock and
restricted stock unit shares as of December 31, 2007, and changes during the
year ended December 31, 2007, is presented below:
|
Shares
|
Weighted
Average
Grant
Date
Fair
Value
|
|||||||
|
Non-vested
balance as of December 31, 2006
|
1,296,131
|
$
|
25.12
|
|||||
|
Granted
|
373,705
|
24.04
|
||||||
|
Vested
|
(78,647
|
)
|
27.11
|
|||||
|
Forfeited
|
(18,500
|
)
|
26.90
|
|||||
|
Non-vested
balance as of December 31, 2007
|
1,572,689
|
$
|
24.74
|
|||||
The
total fair value of restricted stock and restricted stock units vested during
the years ended December 31, 2007, 2006 and 2005, was $2,168, $1,051 and $0,
respectively.
As of
December 31, 2007, there was $43,176 of total unrecognized compensation cost
related to non-vested share-based compensation arrangements granted under the
plans; that cost is expected to be recognized over a weighted-average period of
2.4 years. The actual tax benefit realized for the tax deductions
from stock option exercises totaled $512, $3,455, and $6,468 for the years ended
December 31, 2007, 2006 and 2005, respectively.
The
Company has reserved 900,000 shares of common stock for an employee stock
purchase plan and the Company issued 32,563 shares, 34,357 shares, and 45,497
shares in 2007, 2006 and 2005, respectively, from the employee stock purchase
plan.
15.
Retirement Plan
Centene
has a defined contribution plan which covers substantially all employees who are
at least twenty-one years of age. Under the plan, eligible employees
may contribute a percentage of their base salary, subject to certain
limitations. Centene may elect to match a portion of the employee’s
contribution. Company expense related to matching contributions to
the plan were $2,406, $1,847 and $1,124 during the years ended December 31,
2007, 2006 and 2005, respectively.
16.
Commitments
Centene
and its subsidiaries lease office facilities and various equipment under
non-cancelable operating leases which may contain escalation
provisions. The rental expense related to these leases is recorded on
a straight-line basis over the lease term, including rent
holidays. Rent expense was $15,869, $11,414 and $7,115 for the years
ended December 31, 2007, 2006 and 2005, respectively. Annual
non-cancelable minimum lease payments over the next five years and thereafter
are as follows:
|
2008
|
$ | 19,046 | ||
|
2009
|
17,771 | |||
|
2010
|
14,741 | |||
|
2011
|
13,309 | |||
|
2012
|
11,128 | |||
|
Thereafter
|
56,932 | |||
| $ | 132,927 |
17.
Contingencies
As
previously disclosed, two class action lawsuits were filed against the Company
and certain of its 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, referred
to as the Consolidated Lawsuit. The Consolidated Lawsuit alleges, on behalf of
purchasers of the Company’s common stock from April 25, 2006 through July 17,
2006, that the Company and certain of its officers and directors violated
federal securities laws by issuing a series of materially false statements prior
to the announcement of its fiscal 2006 second quarter results. According to the
Consolidated Lawsuit, these allegedly materially false statements had the effect
of artificially inflating the price of the Company’s common stock, which
subsequently dropped after the issuance of a press release announcing the
Company’s preliminary fiscal 2006 second quarter earnings and revised guidance.
The Company 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.
Additionally,
in August 2006, a separate derivative action was filed on behalf of Centene
Corporation against the Company and certain of its 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 the Company’s
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.
The
Company's subsidiary, Peach State Health Plan, received notice from the Georgia
Department of Community Health, or GDCH, regarding the responsibility for
payment of certain dual eligibility SSI claims. GDCH claims the Company is
responsible for payment of health care claims for members while enrolled in the
Georgia Families managed care program, including hospital stays that extend into
the period where the member is covered by the State’s separate SSI
program. The Company is currently in discussions with the State regarding
coverage and premium sufficiency for the SSI eligibles. The ultimate
amount of prior claims to be paid as well as any adjustment to premiums for
these services is uncertain.
In
addition, the Company is routinely subjected to legal proceedings in the normal
course of business. While the ultimate resolution of such matters is
uncertain, the Company does not expect the results of any of these matters
discussed above individually, or in the aggregate, to have a material effect on
its financial position or results of operations.
18.
Earnings Per Share
The
following table sets forth the calculation of basic and diluted net earnings per
share for the years ended December 31:
|
2007
|
2006
|
2005
|
||||||||||
|
Earnings:
|
||||||||||||
|
Earnings
from continuing operations
|
$ | 41,269 | $ | 20,940 | $ | 37,701 | ||||||
|
Discontinued
operations, net of tax
|
32,133 | (64,569 | ) | 17,931 | ||||||||
|
Net
earnings (loss)
|
$ | 73,402 | $ | (43,629 | ) | $ | 55,632 | |||||
|
Shares
used in computing per share amounts:
|
||||||||||||
|
Weighted
average number of common shares outstanding
|
43,539,950 | 43,160,860 | 42,312,522 | |||||||||
|
Common
stock equivalents (as determined by applying the treasury stock
method)
|
1,283,132 | 1,452,762 | 2,715,111 | |||||||||
|
Weighted
average number of common shares and potential dilutive common shares
outstanding
|
44,823,082 | 44,613,622 | 45,027,633 | |||||||||
|
Net
earnings (loss) per share:
|
||||||||||||
|
Basic:
|
||||||||||||
|
Continued
operations
|
$ | 0.95 | $ | 0.49 | $ | 0.89 | ||||||
|
Discontinued
operations
|
0.74 | (1.50 | ) | 0.42 | ||||||||
|
Earnings
(loss) per common share
|
$ | 1.69 | $ | (1.01 | ) | $ | 1.31 | |||||
|
Diluted:
|
||||||||||||
|
Continuing
operations
|
$ | 0.92 | $ | 0.47 | $ | 0.84 | ||||||
|
Discontinued
operations
|
0.72 | (1.45 | ) | 0.40 | ||||||||
|
Earnings
(loss) per common share
|
$ | 1.64 | $ | (0.98 | ) | $ | 1.24 | |||||
The
calculation of diluted earnings per common share for 2007, 2006 and 2005
excludes the impact of 3,002,030, 4,560,036 and 328,250 shares, respectively,
related to anti-dilutive stock options, restricted stock and restricted stock
units.
19.
Segment Information
Centene
operates in two segments: Medicaid Managed Care and Specialty
Services. The Medicaid Managed Care segment consists of Centene’s
health plans including all of the functions needed to operate
them. The Specialty Services segment consists of Centene’s specialty
companies including behavioral health, life and health management, long-term
care, managed vision, nurse triage, pharmacy benefits management and treatment
compliance functions.
Factors
used in determining the reportable business segments include the nature of
operating activities, existence of separate senior management teams, and the
type of information presented to the Company’s chief operating decision maker to
evaluate all results of operations.
Segment
information as of and for the year ended December 31, 2007,
follows:
|
Medicaid
Managed Care
|
Specialty
Services
|
Eliminations
|
Consolidated
Total
|
|||||||||||||
|
Revenue
from external customers
|
$ | 2,673,930 | $ | 245,362 | $ | — | $ | 2,919,292 | ||||||||
|
Revenue
from internal customers
|
78,947 | 422,138 | (501,085 | ) | — | |||||||||||
|
Total
revenue
|
$ | 2,752,877 | $ | 667,500 | $ | (501,085 | ) | $ | 2,919,292 | |||||||
|
Earnings
from operations
|
$ | 31,307 | $ | 22,786 | $ | — | $ | 54,093 | ||||||||
|
Total
assets
|
$ | 936,311 | $ | 182,811 | $ | — | $ | 1,119,122 | ||||||||
|
Stock
compensation expense
|
$ | 13,974 | $ | 1,505 | $ | — | $ | 15,479 | ||||||||
|
Depreciation
expense
|
$ | 20,547 | $ | 2,677 | $ | — | $ | 23,224 | ||||||||
|
Capital
expenditures
|
$ | 49,996 | $ | 3,941 | $ | — | $ | 53,937 | ||||||||
Segment
information as of and for the year ended December 31, 2006,
follows:
|
Medicaid
Managed Care
|
Specialty
Services
|
Eliminations
|
Consolidated
Total
|
|||||||||||||
|
Revenue
from external customers
|
$ | 1,770,019 | $ | 191,975 | $ | — | $ | 1,961,994 | ||||||||
|
Revenue
from internal customers
|
94,984 | 233,263 | (328,247 | ) | — | |||||||||||
|
Total
revenue
|
$ | 1,865,003 | $ | 425,238 | $ | (328,247 | ) | $ | 1,961,994 | |||||||
|
Earnings
from operations
|
$ | 19,024 | $ | 8,778 | $ | — | $ | 27,802 | ||||||||
|
Total
assets
|
$ | 723,698 | $ | 171,282 | $ | — | $ | 894,980 | ||||||||
|
Stock
compensation expense
|
$ | 13,820 | $ | 920 | $ | — | $ | 14,740 | ||||||||
|
Depreciation
expense
|
$ | 13,233 | $ | 2,377 | $ | — | $ | 15,610 | ||||||||
|
Capital
expenditures
|
$ | 46,420 | $ | 3,872 | $ | — | $ | 50,292 | ||||||||
Segment
information as of and for the year ended December 31, 2005,
follows:
|
Medicaid
Managed Care
|
Specialty
Services
|
Eliminations
|
Consolidated
Total
|
|||||||||||||
|
Revenue
from external customers
|
$ | 1,171,871 | $ | 60,331 | $ | — | $ | 1,232,202 | ||||||||
|
Revenue
from internal customers
|
69,685 | 34,070 | (103,755 | ) | — | |||||||||||
|
Total
revenue
|
$ | 1,241,556 | $ | 94,401 | $ | (103,755 | ) | $ | 1,232,202 | |||||||
|
Earnings
from operations
|
$ | 54,919 | $ | (2,648 | ) | $ | — | $ | 52,271 | |||||||
|
Total
assets
|
$ | 601,740 | $ | 66,290 | $ | — | $ | 668,030 | ||||||||
|
Stock
compensation expense
|
$ | 4,714 | $ | 97 | $ | — | $ | 4,811 | ||||||||
|
Depreciation
expense
|
$ | 7,398 | $ | 411 | $ | — | $ | 7,809 | ||||||||
|
Capital
expenditures
|
$ | 23,974 | $ | 1,763 | $ | — | $ | 25,737 | ||||||||
The
Company evaluates performance and allocates resources based on earnings from
operations. The accounting policies are the same as those described
in the “Summary of Significant Accounting Policies” included in Note
2.
20.
Comprehensive Earnings
Differences
between net earnings and total comprehensive earnings resulted from changes in
unrealized gains on investments available for sale, as follows:
|
Year
Ended December 31,
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Net
earnings (loss)
|
|
$
|
73,402
|
$
|
(43,629
|
)
|
$
|
55,632
|
||
|
Reclassification
adjustment, net of tax
|
|
(242)
|
218
|
138
|
||||||
|
Change
in unrealized losses on investments available for sale, net of
tax
|
|
3,064
|
285
|
(1,485
|
)
|
|||||
|
Total
comprehensive earnings (loss)
|
|
$
|
76,224
|
$
|
(43,126
|
)
|
$
|
54,285
|
||
21.
Subsequent Events
In
November 2007, the Company’s subsidiary, Peach State Health Plan, received a
contract amendment from the State of Georgia for their state fiscal year
beginning July 1, 2007. The contract amendment increased the applicable
premium rates and the State also mandated service changes, retroactively
recalculated certain rate cells and adjusted for duplicate member issues.
The Company executed the amendment on November 16, 2007. In January 2008,
the State of Georgia returned a fully executed contract amendment. The
amendment contained a premium revenue increase effective July 1, 2007. The
revenue increase attributable to the period from July 1, 2007 through December
31, 2007, approximately $20,800, will be recorded in the
Company's consolidated statement of operations in the first quarter of
2008.
CONDENSED
FINANCIAL INFORMATION OF REGISTRANT
Centene
Corporation (Parent Company Only)
Condensed
Balance Sheets
(In
thousands, except share data)
|
December
31,
|
||||||||
|
2007
|
2006
|
|||||||
|
ASSETS
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 14,291 | $ | 1,649 | ||||
|
Short-term
investments, at fair value (amortized cost $5,202 and $1,749,
respectively)
|
5,190 | 1,747 | ||||||
|
Other
current assets
|
70,279 | 22,950 | ||||||
|
Total
current assets
|
89,760 | 26,346 | ||||||
|
Long-term
investments, at fair value (amortized cost $11,658 and $8,344,
respectively)
|
11,972 | 8,194 | ||||||
|
Investment
in subsidiaries
|
492,706 | 443,689 | ||||||
|
Other
assets
|
6,236 | 1,244 | ||||||
|
Total
assets
|
$ | 600,674 | $ | 479,473 | ||||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
|
Current
liabilities
|
$ | 5,527 | $ | 3,923 | ||||
|
Long-term
debt
|
180,000 | 149,000 | ||||||
|
Other
liabilities
|
100 | 127 | ||||||
|
Total
liabilities
|
185,627 | 153,050 | ||||||
|
Stockholders’
equity:
|
||||||||
|
Common
stock, $.001 par value; authorized 100,000,000 shares; issued and
outstanding 43,667,837 and 43,369,918 shares, respectively
|
44 | 44 | ||||||
|
Additional
paid-in capital
|
221,693 | 209,340 | ||||||
|
Accumulated
other comprehensive income:
|
||||||||
|
Unrealized
loss on investments, net of tax
|
1,571 | (1,251 | ) | |||||
|
Retained
earnings
|
191,739 | 118,290 | ||||||
|
Total
stockholders’ equity
|
415,047 | 326,423 | ||||||
|
Total
liabilities and stockholders’ equity
|
$ | 600,674 | $ | 479,473 | ||||
See
notes to condensed financial information of registrant.
Centene
Corporation (Parent Company Only)
Condensed
Statements of Operations
(In
thousands, except share data)
|
Year
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Expenses:
|
||||||||||||
|
General
and administrative expenses
|
$
|
(5,513
|
)
|
$
|
(3,709
|
)
|
$
|
(3,801
|
)
|
|||
|
Other
income (expense):
|
||||||||||||
|
Investment
and other income
|
913
|
755
|
743
|
|||||||||
|
Interest
expense
|
(13,627
|
)
|
(8,993
|
)
|
(3,117
|
)
|
||||||
|
Loss
before income taxes
|
(18,227
|
)
|
(11,947
|
)
|
(6,175
|
)
|
||||||
|
Income
tax benefit
|
(51,178
|
)
|
(4,504
|
)
|
(2,551
|
)
|
||||||
|
Net
earnings (loss) before equity in subsidiaries
|
32,951
|
(7,443
|
)
|
(3,624
|
)
|
|||||||
|
Equity
in earnings (loss) from subsidiaries
|
40,451
|
(36,186
|
)
|
59,256
|
||||||||
|
Net
earnings (loss)
|
$
|
73,402
|
$
|
(43,629
|
)
|
$
|
55,632
|
|||||
|
Net
earnings (loss) per share:
|
||||||||||||
|
Basic
earnings (loss) per common share
|
$
|
1.69
|
$
|
(1.01
|
)
|
$
|
1.31
|
|||||
|
Diluted
earnings (loss) per common share
|
$
|
1.64
|
$
|
(0.98
|
)
|
$
|
1.24
|
|||||
|
Weighted
average number of shares outstanding:
|
||||||||||||
|
Basic
|
43,539,950
|
43,160,860
|
42,312,522
|
|||||||||
|
Diluted
|
44,823,082
|
44,613,622
|
45,027,633
|
|||||||||
See
notes to condensed financial information of registrant.
Centene
Corporation (Parent Company Only)
Condensed
Statements of Cash Flows
(In
thousands)
|
Year
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Cash
flows from operating activities:
|
||||||||||||
|
Cash
provided by operating activities
|
$
|
94,145
|
$
|
31,895
|
$
|
11,622
|
||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Net
dividends from and capital contributions to subsidiaries
|
(71,813
|
)
|
(43,100
|
)
|
(22,300
|
)
|
||||||
|
Purchase
of investments
|
(84,088
|
)
|
(4,521
|
)
|
(4,438
|
)
|
||||||
|
Sales
and maturities of investments
|
77,086
|
5,841
|
26,697
|
|||||||||
|
Acquisitions,
net of cash acquired
|
(38,532
|
)
|
(66,772
|
)
|
(55,485
|
)
|
||||||
|
Proceeds
from asset sales
|
14,102
|
—
|
—
|
|||||||||
|
Net
cash used in investing activities
|
(103,245
|
)
|
(108,552
|
)
|
(55,526
|
)
|
||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Proceeds
from borrowings
|
212,000
|
86,000
|
45,000
|
|||||||||
|
Payment
of long-term debt and notes payable
|
(181,000
|
)
|
(12,000
|
)
|
(4,000
|
)
|
||||||
|
Proceeds
from exercise of stock options
|
5,464
|
6,953
|
5,621
|
|||||||||
|
Common
stock repurchases
|
(9,541
|
)
|
(7,883
|
)
|
—
|
|||||||
|
Debt
issue costs
|
(5,181
|
)
|
(253
|
)
|
(413
|
)
|
||||||
|
Excess
tax benefits from stock compensation
|
—
|
3,043
|
—
|
|||||||||
|
Net
cash provided by financing activities
|
21,742
|
75,860
|
46,208
|
|||||||||
|
Net
increase (decrease) in cash and cash equivalents
|
12,642
|
(797
|
)
|
2,304
|
||||||||
|
Cash and cash
equivalents, beginning of period
|
1,649
|
2,446
|
142
|
|||||||||
|
Cash and cash
equivalents, end of period
|
$
|
14,291
|
$
|
1,649
|
$
|
2,446
|
||||||
See
notes to condensed financial information of registrant.
Notes
to Condensed Financial Information of Registrant
Note
A – Basis of Presentation and Significant Accounting Policies
In
Centene Corporation’s parent company only financial statements, Centene
Corporation’s investment in subsidiaries is stated at cost plus equity in
undistributed earnings of the subsidiaries. Centene Corporation’s
share of net income of its unconsolidated subsidiaries is included in income
using the equity method of accounting.
Certain
amounts presented in the parent company only financial statements are eliminated
in the consolidated financial statements of Centene Corporation. The
income tax benefit reflects a $34,856 tax benefit associated with the stock
abandonment discussed in Note 3.
Centene
Corporation’s parent company only financial statements should be read in
conjunction with Centene Corporation’s audited consolidated financial statements
and the notes to consolidated financial statements included in this Form
10-K.
Note
B – Dividends
During
2007, 2006 and 2005, the Registrant received dividends from its subsidiaries
totaling $53,937, $8,600 and $7,000, respectively.
|
|
|
|
INCORPORATED
BY REFERENCE 1
|
|||||||||
|
EXHIBIT
NUMBER
|
|
DESCRIPTION
|
|
FILED WITH
THIS
FORM
10-K
|
|
FORM
|
|
FILING
DATE
WITH
SEC
|
|
EXHIBIT
NUMBER
|
||
|
3.1
|
|
Certificate
of Incorporation of Centene Corporation
|
|
|
S-1
|
|
October
9, 2001
|
|
3.2
|
|||
|
3.1a
|
|
Certificate
of Amendment to Certificate of Incorporation of Centene Corporation, dated
November 8, 2001
|
|
|
S-1/A
|
|
November 13, 2001
|
|
3.2a
|
|||
|
3.1b
|
|
Certificate
of Amendment to Certificate of Incorporation of Centene Corporation as
filed with the Secretary of State of the State of Delaware
|
|
|
10-Q
|
|
July
26, 2004
|
|
3.1b
|
|||
|
3.2
|
|
By-laws
of Centene Corporation
|
|
|
S-1
|
|
October
9, 2001
|
|
3.4
|
|||
|
4.1
|
|
Amended
and Restated Shareholders’ Agreement, dated September 23,
1998
|
|
|
S-1
|
|
October
9, 2001
|
|
4.2
|
|||
|
4.2
|
|
Rights
Agreement between Centene Corporation and Mellon Investor Services LLC, as
Rights Agent, dated August 30, 2002
|
|
|
8-K
|
|
August
30, 2002
|
|
4.1
|
|||
|
4.2a
|
|
Amendment
No. 1 to Rights Agreement by and between Centene Corporation and Mellon
Investor Services LLC, as right agent, dated April 23,
2007.
|
|
|
8-K
|
|
April
26, 2007
|
|
4.1
|
|||
|
4.3
|
|
Indenture
for the 7 ¼% Senior Notes due 2014 dated March 22, 2007 among Centene
Corporation and The Bank of New York Trust Company, N.A., as
trustee.
|
|
|
S-4
|
|
May
11, 2007
|
|
4.3
|
|||
|
10.1
|
Contract
Between the Georgia Department of Community Health and Peach State
Contract for provision of Services to Georgia Health
Families
|
8-K
|
July
22, 2005
|
10.1
|
||||||||
|
10.1a
|
Amendment
#1 to the Contract No. 0653 Between Georgia Department of Community Health
and Peach State Health Plan
|
10-Q
|
October
25, 2005
|
10.9
|
||||||||
|
10.1b
|
Amendment
#2 to the Contract No. 0653 Between Georgia Department of Community Health
and Peach State Health Plan
|
X
|
||||||||||
|
10.1c
|
Notice
of Renewal for fiscal year 2007 between Peach State Health Plan, Inc. and
Georgia Department of Community Health.
|
|
10-Q
|
October
24, 2006
|
10.3
|
|||||||
|
10.1d
|
Notice
of Renewal for fiscal year 2008 between Peach State Health Plan, Inc. and
Georgia Department of Community Health.
|
10-Q
|
July
24, 2007
|
10.4
|
||||||||
|
10.2
|
Contract
between the Texas Health and Human Services Commission and Superior
HealthPlan, Inc.
|
|
10-K
|
February
24, 2006
|
10.5
|
|||||||
|
10.2a
|
Amendment
F (Version 1.6) to Contract between the Texas Health and Human Services
Commission and Superior HealthPlan, Inc.
|
10-K
|
February
23, 2007
|
10.4a
|
||||||||
|
10.2b
|
Amendment
G (Version 1.7) to Contract between the Texas Health and Human Services
Commission and Superior HealthPlan, Inc.
|
10-Q
|
July
24, 2007
|
10.2
|
||||||||
|
10.2c
|
Amendment
H (Version 1.8) to Contract between the Texas Health and Human Services
Commission and Superior HealthPlan, Inc.
|
10-Q
|
October
23, 2007
|
10.1
|
||||||||
|
10.2d
|
Amendment
I (Version 1.9) to Contract between the Texas Health and Human Services
Commission and Superior HealthPlan, Inc.
|
X
|
|
|||||||||
|
10.3
|
1996
Stock Plan of Centene Corporation, shares which are registered on Form S-8
– File Number 333-83190
|
S-1
|
October
9, 2001
|
10.9
|
||||||||
|
10.4
|
1998
Stock Plan of Centene Corporation, shares which are registered on Form S-8
– File number 333-83190
|
S-1
|
October
9, 2001
|
10.10
|
||||||||
|
10.5
|
1999
Stock Plan of Centene Corporation, shares which are registered on Form S-8
– File Number 333-83190
|
S-1
|
October
9, 2001
|
10.11
|
||||||||
|
10.6
|
2000
Stock Plan of Centene Corporation, shares which are registered on Form S-8
– File Number 333-83190
|
S-1
|
October
9, 2001
|
10.12
|
||||||||
|
10.7
|
2002
Employee Stock Purchase Plan of Centene Corporation, shares which are
registered on Form S-8 – File Number 333-90976
|
10-Q
|
April
29, 2002
|
10.5
|
||||||||
|
10.7a
|
First
Amendment to the 2002 Employee Stock Purchase Plan
|
10-K
|
February
24, 2005
|
10.9a
|
||||||||
|
10.7b
|
Second
Amendment to the 2002 Employee Stock Purchase Plan
|
|
10-K
|
February
24, 2006
|
10.10b
|
|||||||
|
10.8
|
2003
Stock Incentive Plan, as amended
|
8-K
|
April
26, 2007
|
10.1
|
||||||||
|
10.9
|
Centene
Corporation Non-Employee Directors Deferred Stock Compensation
Plan
|
10-Q
|
October
25, 2004
|
10.1
|
||||||||
|
10.9a
|
First
Amendment to the Non-Employee Directors Deferred Stock Compensation
Plan
|
|
10-K
|
February
24, 2006
|
10.12a
|
|||||||
|
10.10
|
Centene
Corporation Employee Deferred Compensation Plan
|
10-Q
|
April
24, 2007
|
10.4
|
||||||||
|
|
|
|
INCORPORATED
BY REFERENCE 1
|
|||||||||
|
EXHIBIT
NUMBER
|
|
DESCRIPTION
|
|
FILED WITH
THIS
FORM
10-K
|
|
FORM
|
|
FILING
DATE
WITH
SEC
|
|
EXHIBIT
NUMBER
|
||
|
10.11
|
Centene
Corporation Amended and Restated 2003 Stock Incentive Plan
|
8-K
|
April
26, 2007
|
10.1
|
||||||||
|
10.12
|
Centene
Corporation 2007 Long-Term Incentive Plan
|
8-K
|
April
26, 2007
|
10.2
|
||||||||
|
10.13
|
Executive
Employment Agreement between Centene Corporation and Michael
F. Neidorff, dated November 8, 2004
|
8-K
|
November
9, 2004
|
10.1
|
||||||||
|
10.14
|
Form
of Executive Severance and Change in Control Agreement
|
8-K
|
May
23, 2005
|
10.1
|
||||||||
|
10.15
|
Form
of Restricted Stock Unit Agreement
|
8-K
|
April
28, 2006
|
10.1
|
||||||||
|
10.16
|
Form
of Non-statutory Stock Option Agreement (Non-Employees)
|
8-K
|
July
28, 2005
|
10.3
|
||||||||
|
10.17
|
Form
of Non-statutory Stock Option Agreement (Employees)
|
8-K
|
July
28, 2005
|
10.4
|
||||||||
|
10.18
|
Form
of Incentive Stock Option Agreement
|
8-K
|
July
28, 2005
|
10.5
|
||||||||
|
10.19
|
Form
of Stock Appreciation Right Agreement
|
8-K
|
July
28, 2005
|
10.6
|
||||||||
|
10.20
|
Form
of Restricted Stock Agreement
|
10-Q
|
October
25, 2005
|
10.8
|
||||||||
|
10.21
|
Form
of Performance Based Restricted Stock Unit Agreement
|
8-K
|
December
28, 2007
|
10.1
|
||||||||
|
10.22
|
Form
of Long Term Incentive Plan Agreement
|
8-K
|
February
7,
2008
|
10.1
|
||||||||
|
10.23
|
Credit
Agreement dated as of September 14, 2004 among Centene Corporation, the
various financial institutions party hereto and LaSalle Bank National
Association
|
10-Q
|
October
25, 2004
|
10.2
|
||||||||
|
10.23a
|
Amendment
No. 2 to Credit Agreement dated as of September 14, 2004 among Centene
Corporation, the various financial institutions party hereto and LaSalle
Bank National Association
|
10-Q
|
October
25, 2005
|
10.11
|
||||||||
|
10.23b
|
Amendment
No. 3 to Credit Agreement dated as of September 14, 2004 among Centene
Corporation, the various financial institutions party hereto and LaSalle
Bank National Association
|
|
10-K
|
February
24, 2006
|
10.22b
|
|||||||
|
10.23c
|
Amendment
No. 4 to Credit Agreement dated as of September 14, 2004 among Centene
Corporation, the various financial institutions party hereto and LaSalle
Bank National Association
|
10-Q
|
July
25, 2006
|
10.2
|
||||||||
|
10.23d
|
Amendment
No. 5 to Credit Agreement dated as of September 14, 2004 among Centene
Corporation, the various financial institutions party hereto and LaSalle
Bank National Association
|
10-Q
|
October
24, 2006
|
10.1
|
||||||||
|
10.23e
|
Amendment
No. 6 to Credit Agreement dated as of September 14, 2004 among Centene
Corporation, the various financial institutions party hereto and LaSalle
Bank National Association
|
X
|
||||||||||
|
10.24
|
Summary
of Board of Director Compensation
|
X
|
|
|||||||||
|
10.25
|
Summary
of Compensatory Arrangements with Executive Officers
|
X
|
|
|||||||||
|
12.1
|
Computation
of ratio of earnings to fixed charges
|
X
|
|
|||||||||
|
21
|
List
of subsidiaries
|
X
|
||||||||||
|
23
|
Consent
of Independent Registered Public Accounting Firm incorporated by reference
in each prospectus constituting part of the Registration Statements on
Form S-3 (File Number 333-119944) and on Form S-8 (File Numbers
333-108467, 333-90976 and 333-83190).
|
X
|
||||||||||
|
31.1
|
Certification
Pursuant to Rule 13a-14(a) and 15d-14(a) of the Exchange Act, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Chief Executive
Officer)
|
X
|
||||||||||
|
31.2
|
Certification
Pursuant to Rule 13a-14(a) and 15d-14(a) of the Exchange Act, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Chief Financial
Officer)
|
X
|
||||||||||
|
32.1
|
Certification
Pursuant to 18 U.S.C. Section 1350 (Chief Executive
Officer)
|
X
|
||||||||||
|
32.2
|
Certification
Pursuant to 18 U.S.C. Section 1350 (Chief Financial
Officer)
|
X
|
||||||||||
|
1
SEC File No. 001-31826 (for filings prior to October 14, 2003, the
Registrant’s SEC File No. was
000-33395).
|
||||||||||||
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, as of February 25,
2008.
| CENTENE CORPORATION | |||
|
|
By:
|
/s/ MICHAEL F. NEIDORFF | |
| Michael F. Neidorff | |||
| Chairman and Chief Executive Officer | |||
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons, on behalf of the registrant and in the
capacities as indicated, as of February 25, 2008.
|
Signature
|
|
Title
|
|
/s/ MICHAEL F. NEIDORFF
Michael
F. Neidorff
|
|
Chairman
and Chief Executive Officer
(principal
executive officer)
|
|
/s/ ERIC R. SLUSSER
Eric
R. Slusser
|
|
Executive
Vice President and Chief Financial Officer
(principal
financial and accounting officer)
|
|
/s/ STEVE BARTLETT
Steve
Bartlett
|
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Director
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/s/ ROBERT K. DITMORE
Robert
K. Ditmore
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Director
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/s/ FRED H. EPPINGER
Fred
H. Eppinger
|
|
Director
|
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/s/ RICHARD A. GEPHARDT
Richard
A. Gephardt
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Director
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/s/ PAMELA A. JOSEPH
Pamela
A. Joseph
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Director
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/s/ JOHN R. ROBERTS
John
R. Roberts
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|
Director
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/s/ DAVID L. STEWARD
David
L. Steward
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|
Director
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/s/ TOMMY G. THOMPSON
Tommy G. Thompson |
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Director
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