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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

x   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2007

OR

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

For the Transition Period From                      to                     

Commission File Number 001-32209

WellCare Health Plans, Inc.

(Exact Name of Registrant as Specified in Its Charter)

(813) 290-6200

Registrant’s telephone number, including area
code

Securities registered pursuant to Section 12(b) of the Exchange Act:

Securities registered pursuant to Section 12(g) of the Exchange Act:

NONE

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  o  No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 of Section 15(d) of the Act. Yes  o No x

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  o   No  x

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) 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.  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large Accelerated Filer x  Accelerated Filer o   Non-Accelerated Filer o Smaller Reporting Company o (Do not check if a smaller reporting company)

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

The aggregate market value of Common Stock held by non-affiliates of the registrant (33,887,747 shares) on June 30, 2008 was $1,225,042,054 (based on the closing price of $36.15 per share on June 30, 2008 as reported on the New York Stock Exchange).  Solely for purposes of this computation, all officers, directors and 10% beneficial owners of the registrant are deemed to be affiliates. Such determination should not be deemed to be an admission that such officers, directors or 10% beneficial owners are, in fact, affiliates of the registrant.

As of January 20, 2009, there were outstanding 42,245,657 shares of the registrant’s Common Stock, par value $0.01 per share.

Documents Incorporated by Reference: None

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Certain statements in this report, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected performance, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  These forward-looking statements generally may be identified by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “targets,” “potential,” or “continue” or the negative of these terms or other comparable terminology. Such forward-looking statements are necessarily estimates based on current information and involve a number of risks and uncertainties. Actual events or results may differ materially from the results anticipated in these forward-looking statements as a result of a variety of important factors. While it is impossible to identify all such factors, those that could cause actual results to differ materially from those estimated by us include each of the important factors discussed in this report in the section entitled “Part I – Item 1A – Risk Factors.”

The cautionary statements referred to in this section also should be considered in connection with any subsequent written or oral forward-looking statements that may be issued by us or persons acting on our behalf. We undertake no duty to update these forward-looking statements, even though our situation may change in the future. Furthermore, we cannot guarantee future results, events, levels of activity, performance or achievements.

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EXPLANATORY NOTE

In this Annual Report on Form 10-K for the year ended December 31, 2007 (the “2007 Form 10-K”), WellCare Health Plans, Inc. is restating its financial statements for the years ended December 31, 2004, 2005 and 2006, including the quarterly periods contained therein. References to the “Company,” “WellCare,” “we,” “our” and “us” in this 2007 Form 10-K refer to WellCare Health Plans, Inc. together, in each case, with our subsidiaries and any predecessor entities unless the context suggests otherwise.

This 2007 Form 10-K reflects the restatement and reclassifications of “Selected Financial Data” in Item 6 for the fiscal years ended December 31, 2003, 2004, 2005 and 2006, Note 19 “Quarterly Financial Information” in Item 8 for the fiscal years ended December 31, 2004, 2005, 2006 and 2007, and the amendment of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in both tabular and textual form presented in this 2007 Form 10-K as it related to the fiscal years ended December 31, 2004, 2005 and 2006.

The filing of this 2007 Form 10-K was delayed due to, among other things, the time required for the Special Committee to conduct its investigation, for us to review the issues identified in the Special Committee investigation, and for us to restate our previously issued audited consolidated financial statements for the years ended December 31, 2004, 2005 and 2006, including each of the quarterly periods contained therein.

We also will restate our financial statements for the three-month period ended March 31, 2007 and the three- and six-month periods ended June 30, 2007.  Other than our Quarterly Reports on Form 10-Q for the three-month period ended March 31, 2007 and the three- and six-month periods ended June 30, 2007, we do not plan to amend previously filed reports in connection with the restatement as we believe the expenditure of resources required to produce this information is not justified by any related benefit that would result.

Background and Overview

As previously disclosed, on October 24, 2007, certain federal and state agencies executed a search warrant at our headquarters in Tampa, Florida. Our Board of Directors (the “Board”) formed a special committee (the “Special Committee”) comprised of independent directors to, among other things, investigate independently and otherwise assess the facts and circumstances raised in any federal or state regulatory or enforcement inquiries (including, without limitation, any matters relating to accounting and operational issues) and in any private party proceedings, and develop and recommend remedial measures to the Board for its consideration. The Special Committee and the Company are cooperating fully with federal and state regulators and enforcement officials in these matters. The Special Committee’s review is ongoing and we cannot provide assurances as to when it will be completed. Based on the issues referred to date to the Special Committee, other than those discussed below, we currently do not believe that the work of the Special Committee will result in any material adjustments to the accompanying financial statements.

Restatement

Upon consideration of certain issues identified in the Special Committee investigation and after discussions with management and our independent registered public accounting firm, the Audit Committee of the Board (the “Audit Committee”) recommended to the Board, and the Board thereafter concluded, that our previously issued consolidated financial statements for the years ended December 31, 2004, 2005 and 2006, including the quarterly periods contained therein, and the three-month period ended March 31, 2007 and the three- and six-month periods ended June 30, 2007 (the “Restatement Period”), be restated. Accordingly, our previously issued consolidated financial statements for the Restatement Period and the corresponding report of our independent registered public accounting firm, Deloitte & Touche LLP, included in our previously filed Annual Report on Form 10-K for the year ended December 31, 2006, should no longer be relied upon.

The restatement relates to accounting errors identified in connection with our compliance with the refund requirements under (a) the behavioral health component of our contract with the Florida Agency for Health Care Administration  (“AHCA”) to provide behavioral health care services for our Florida Medicaid members (the “AHCA contract”), (b) our “Healthy Kids” contract with the Florida Healthy Kids Corporation to provide health benefits for children whose family income renders them ineligible for Medicaid, and (c) our Medicaid contract with the Illinois Department of Health and Family Services to provide health care services to our Illinois Medicaid members.

Set forth below and in Note 3 of the Notes to Consolidated Financial Statements is the impact of the restatement on our previously issued consolidated financial statements for the Restatement Period:

·    Premium revenues for the years ended December 31, 2004, 2005 and 2006 and the three-month periods ended March 31 and June 30, 2007 were reduced (increased) by approximately $13 million (1%) from $1,391 million to $1,378 million; $14 million (1%) from $1,862 million to $1,848 million; $127 million (3%) from $3,713 million to $3,586 million; ($67) million (5%) from $1,222 million to $1,289 million; and $13 million (1%) from $1,321 million to $1,308 million from the previously reported premium revenues for those periods, respectively.

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·    Income before income taxes for the years ended December 31, 2004, 2005 and 2006 and the three-month periods ended March 31 and June 30, 2007 were reduced by approximately $12 million (15%) from $81 million to $69 million; $7 million (9%) from $85 million to $78 million; $26 million (11%) from $227 million to $201 million; $4 million (10%) from $41 million to $37 million; and less than $0.2 million from $89 million to $89 million from the previously reported income before income taxes for those periods, respectively.

·    Net income for the years ended December 31, 2004, 2005 and 2006 and the three-month periods ended March 31 and June 30, 2007 were reduced by approximately $7 million (14%) from $49 million to $42 million; $5 million (9%) from $52 million to $47 million; $18 million (13%) from $139 million to $121 million; $2 million (9%) from $25 million to $23 million; and $0 from $55 million to $55 million from the previously reported net income for those periods, respectively.

·    Diluted earnings per share (“EPS”) for the years ended December 31, 2004, 2005 and 2006 and the three-month periods ended March 31 and June 30, 2007 were reduced by approximately $0.22 (14%) from $1.56 to $1.34; $0.11 (9%) from $1.32 to $1.21; $0.45 (13%) from $3.43 to $2.98; $0.05 (8%) from $0.60 to $0.55; and increased by approximately $0.01 (1%) from $1.30 to $1.31 from the previously reported diluted EPS for those periods, respectively.

·    Other payables to government partners as of December 31, 2004, 2005 and 2006 and as of March 31 and June 30, 2007 were increased by approximately $23 million from $0 to $23 million; $36 million from $0 to $36 million; $45 million from $104 million to $149 million; $42 million from $36 million to $78 million; and $42 million from $50 million to $92 million from the previously reported other payables to government partners for those dates, respectively.

In addition, certain immaterial adjustments that were not made or reflected in the previously issued consolidated financial statements for the years ended December 31, 2004, 2005 and 2006, and in the unaudited condensed consolidated financial statements for the three-month period ended March 31, 2007 and the three- and six-month periods ended June 30, 2007, are reflected in the restated consolidated financial statements as a result of the restatement.

For further detail on the financial statement impacts of the restatement, please see Note 3 of the Notes to Consolidated Financial Statements, “Part II – Item 6 – Selected Financial Data” and “Part II – Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Internal Control over Financial Reporting

As a result of our ongoing review of issues identified in the Special Committee investigation, we have determined that certain material weaknesses existed at the Company as of December 31, 2007.  Specifically, we have determined that (a) former senior management set an inappropriate tone in connection with the Company’s efforts to comply with the regulatory requirements related to the AHCA and Healthy Kids contracts that led to a deficiency in the design in our internal controls, and therefore a material weakness existed in a portion of the control environment and control activities components of our internal controls, and (b) former senior management’s failure to ensure effective communications regarding the AHCA and Healthy Kids contracts with, among others, our Board and certain regulators resulted in a material weakness in the information and communication system. A detailed description of these material weaknesses is provided in “Part II – Item 9A–Controls and Procedures.”  Because of the material weaknesses described above, management has concluded, taking into consideration the Special Committee’s findings, that the Company did not maintain effective internal control over financial reporting as of December 31, 2007.

Disclosure Controls and Procedures

Solely as a result of the material weaknesses described above, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as of December 31, 2007.

Remedial Measures

Our Board, various Board committees and our new senior management team are developing and implementing new processes and procedures to remediate, among other things, the material weaknesses that existed in our internal control over financial reporting as of December 31, 2007 as described in “Part II – Item 9A – Controls and Procedures.”

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PART I

Item 1.  Business.

Overview

We provide managed care services targeted exclusively to government-sponsored health care programs, focused on Medicaid and Medicare, including prescription drug plans and health plans for families, children and the aged, blind and disabled. As of December 31, 2007, we served approximately 2,373,000 members. We believe that this broad range of experience and exclusive government focus allows us to serve efficiently and effectively our members and providers and to manage our operations.

Through our licensed subsidiaries, as of December 31, 2007, we operated our Medicaid health plans in Florida, New York, Connecticut, Illinois, Missouri, Ohio and Georgia, and our Medicare Advantage coordinated care plans (“CCPs”) in Florida, New York, Connecticut, Illinois, Louisiana and Georgia. We also operated as a stand-alone Medicare prescription drug plan (“PDP”) in all 50 states and the District of Columbia and offered Medicare Advantage private fee-for-service (“PFFS”) plans to Medicare beneficiaries in approximately 793 counties in 39 states and the District of Columbia as of December 31, 2007.

All of our Medicare plans are offered under the WellCare name, for which we hold a federal trademark registration, with the exception of our Hawaii CCP, which we offer under the name ‘Ohana beginning in January 2009.  Conversely, we offer or offered our Medicaid plans under several brand names depending on the state, as set forth in the table below.

Key Developments

We discuss below some key developments that have occurred since January 1, 2007 through the date of the filing of this 2007 Form 10-K.

Special Committee Investigation and Restatement Summary

For a discussion of the Special Committee investigation and summary of the restatement adjustments, we refer you to the section entitled “Explanatory Note” that appears at the beginning of this 2007 Form 10-K. For a discussion of the various legal proceedings arising from, or related to, the investigations described above, please see “Part I – Item 3 – Legal Proceedings.”

New Leadership

New Senior Management Team

On January 25, 2008, Todd Farha, our former Chief Executive Officer, President and Chairman of the Board, Paul Behrens, our former Senior Vice President and Chief Financial Officer, and Thaddeus Bereday, our former Senior Vice President, General Counsel and Secretary, resigned from their respective officer and director positions with us and our subsidiaries. In connection with the resignations of these individuals, the Board elected Charles G. Berg as our new Executive Chairman of the Board and Heath G. Schiesser, who previously had served as our Senior Vice President for Marketing and Sales and President of WellCare Prescription Insurance, one of our subsidiaries, as our new President and Chief Executive Officer. Mr. Schiesser was also elected as a director.

Further, we made the following changes or additions to the senior management team:

·                  in April 2008, we appointed Thomas F. O’Neil III as our Senior Vice President, General Counsel and Secretary;

·                  in July 2008, we appointed Thomas L. Tran as our Senior Vice President and Chief Financial Officer;

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·                  in July 2008, we appointed William S. White, who had served as our Vice President, Finance, as our Chief Accounting Officer;

·                  in August 2008, we appointed Jonathan P. Rich as our Senior Vice President and Chief Compliance Officer; and

·                  in September 2008, we appointed Rex M. Adams as our Senior Vice President and Chief Operating Officer.

Business Organizational Changes

Following commencement of the government and Special Committee investigations, we reorganized the senior management team by, among other things, separating the positions of (i) Chairman and Chief Executive Officer, (ii) General Counsel and Chief Compliance Officer and (iii) Chief Financial Officer and Chief Accounting Officer. Our new Chief Compliance Officer reports directly to the Chief Executive Officer as well as the Board’s new Regulatory Compliance Committee, which is described below.

In April 2008, the Board formed a Regulatory Compliance Committee, currently comprised solely of independent directors, to oversee our compliance activities and programs, and a new Health Care Quality and Access Committee to focus on the quality and accessibility of the health care services our members receive through our plans. In July 2008, the Board adopted a new charter for our management Disclosure Committee as well as new disclosure controls, policies and procedures, which provide more comprehensive procedures for the review of our financial statement disclosures. For a discussion of the Company’s new disclosure controls and procedures, please see “Part II – Item 9A – Controls and Procedures.”

In addition, in 2008, we realigned our leadership structure in a number of ways. We consolidated our state operations into four regions, each with a regional leader who reports directly to our Chief Executive Officer, and named a head of our national Medicare business. We also consolidated oversight of operations and information technology under one executive, our recently appointed Chief Operating Officer, and appointed a national head of regulatory and government affairs.

Business Initiatives / Exits

During 2007, we launched our Medicare PFFS product in 39 states and the District of Columbia. Following the decision by the Connecticut Department of Social Services (“DSS”) to amend all risk-based Medicaid contracts, such as ours, in December 2007, we notified DSS that we intended to terminate our Connecticut Medicaid contracts. Under the terms of the termination arrangement, we did not bear risk for these members as of January 1, 2008, but continued to provide administrative services for such members through June 1, 2008.  We continue to offer our Medicare plans in Connecticut. Further, due to medical costs for the Ohio Medicaid program being greater than expected, particularly for our aged, blind and disabled, or ABD, members, we withdrew from the ABD program effective August 31, 2008.  We continue to participate in the Ohio covered family and children program.

In 2008, we launched CCPs in Indiana, Missouri, New Jersey, Ohio and Texas and pilot Medicare preferred provider organizations (“PPOs”) in Georgia and Ohio. We did not have significant membership in our pilot PPO plans in 2008 and have reduced our PPO offerings in 2009 to just one county in Ohio. Additionally, in 2008, we expanded the number of counties in which we offer PFFS plans from 793 to 1,590 in 43 states and the District of Columbia, although we withdrew from three states in 2009.  Further, in 2008 we were awarded a contract, which will commence in February 2009, to provide services under the Hawaii Medicaid program for the ABD population. Further, we started offering CCPs in Hawaii in January 2009.

In August 2008, we were notified by the federal Centers for Medicare & Medicaid Services (“CMS”) that our bids for the 2009 plan year were below the CMS regional benchmark premium rate in 12 of the 34 CMS regions, which allows us to serve auto-assigned dual-eligible Medicare beneficiaries. As of January 1, 2009, approximately 252,000 auto-assigned dual-eligible members were assigned away from our plans. In addition to this known membership loss, in 2009 we expect that a portion of the 153,000 low-income subsidized members who previously chose our plans will choose a new plan in 2009.  We estimate that, based on these factors as well as new members choosing to enroll in our plans, new auto-assignment of members and other factors, our revenues generated from our PDP plans will decrease for 2009.

Adoption of Retention Program

In light of our concerns relating to retention of our associates, in November 2007 the Compensation Committee of the Board (the “Compensation Committee”) approved a special cash retention bonus, which was paid to non-bonus eligible associates in May 2008 and bonus-eligible associates in January 2009 who were employed on October 31, 2007.  In addition, due to retention risk, in March 2008 the Compensation Committee approved the grant of additional stock option retention awards to all members of our senior management team and restricted stock units to other eligible associates. For a more detailed discussion of this program and our severance programs, including our expenses associated with them, please see “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Part III – Item 11 – Executive Compensation.”

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Business Strategy

We are committed to operating our business in a manner that serves our key constituents – members, providers, regulators and associates – and also delivers competitive returns for our investors. Our goal is to be a leading provider of managed care services for government-sponsored health care programs. To achieve this goal, we continue to look for economically viable opportunities to expand our business within our existing markets, expand our current service territory and develop new product initiatives. However, we are also evaluating various strategic alternatives, which may include entering new lines of business or markets, exiting existing lines of business or markets and/or disposing of assets depending on various factors, including changes in our business and regulatory environment, competitive position and financial resources. We also continue to rationalize our operations to make sure that our ongoing business is profitable.

On an ongoing basis, we assess the ability of our existing operations to support our current and future business needs. This assessment may result in enhancing or replacing current systems and/or processes, which could result in our incurring substantial costs to improve our operations and services.

Our Segments

We have two reportable business segments: Medicaid and Medicare.

Medicaid

Medicaid was established to provide medical assistance to low income and disabled persons. It is state operated and implemented, although it is funded and regulated by both the state and federal governments. Our Medicaid segment includes plans for individuals who are dually eligible for both Medicare and Medicaid, and beneficiaries of the Temporary Assistance to Needy Families program (“TANF”), Supplemental Security Income program (“SSI”), State Children’s Health Insurance program (“S-CHIP”) and the Family Health Plus program (“FHP”).  The TANF program generally provides assistance to low-income families with children and the SSI program generally provides assistance to low-income aged, blind or disabled individuals. Our Medicaid segment also includes other programs which are not part of the Medicaid program, such as S-CHIP and FHP for qualifying families who are not eligible for Medicaid because they exceed the applicable income thresholds.

As of December 31, 2007, we had approximately 1,232,000 Medicaid members. The following table summarizes our Medicaid segment membership by line of business as of December 31, 2007 and 2006.

Medicaid Membership

For purposes of our Medicaid segment, we define our customer as the state and related governmental agencies that have common control over the contracts under which we operate in that particular state. In our Medicaid segment, we have two customers from which we received 10% or more of our Medicaid segment premium revenue for 2006 and 2007: the State of Florida and the State of Georgia. The following table sets forth information relating to the premium revenues received from the State of Florida and the State of Georgia in 2006 and 2007, as well as all other states on an aggregate basis.

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Medicaid Segment Revenues

(Dollars in thousands)

* All other states consists of Connecticut, Illinois, Missouri, New York, Ohio and, for the year ended December 31, 2006 only, Indiana. We ceased offering Medicaid plans in Connecticut in March 2008.

Our Medicaid contracts with government agencies have terms of between one and four years with varying expiration dates. We currently provide Medicaid plans under sixteen separate contracts, including seven contracts in New York, five contracts in Florida and one contract in each of Georgia, Illinois, Ohio and Missouri. The following table sets forth the term and expiration dates of our Medicaid contracts with the State of Florida and the State of Georgia, the two customers that accounted for greater than 10% of our Medicaid segment premium revenue during 2006 and 2007.

*                 Our Georgia contract commenced in July 2005; we are currently in our third renewal term.

Medicare

Medicare is a federal program that provides eligible persons age 65 and over and some disabled persons a variety of hospital, medical insurance and prescription drug benefits. Medicare is administered and funded by CMS. Our Medicare plans include stand-alone PDP and Medicare Advantage plans, which includes CCP, PFFS and PPO plans. Medicare Advantage is Medicare’s managed care alternative to original Medicare fee-for-service (“Original Medicare”), which provides individuals standard Medicare benefits directly through CMS. CCPs are administered through a health maintenance organization (“HMO”) and generally require members to seek health care services from a network of health care providers. PFFS plans are offered by insurance companies and are open-access plans that allow members to be seen by any physician or facility that participates in the Original Medicare program and agrees to bill, and otherwise accepts the terms and conditions of, the sponsoring insurance company. PPO plans are also offered by insurance companies and provide both in-network and out-of-network benefits for Medicare beneficiaries.

As of December 31, 2007, we had approximately 1,141,000 Medicare members. The following table summarizes our Medicare segment membership by line of business as of December 31, 2007 and 2006.

Medicare Membership

In our Medicare segment, we have just one customer, CMS, from which we receive 100% of our Medicare segment premium revenue. However, we have two distinct lines of business within our Medicare segment: PDP and Medicare Advantage plans. The following table sets forth information relating to the total premium revenues from our PDP and Medicare Advantage lines of business in our Medicare segment for the years ended December 31, 2007 and 2006.

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Medicare Segment Revenues

(Dollars in thousands)

In reviewing our Medicare segment across each state in which we operate, we had only one state, Florida, which represented 10% or more of our Medicare segment revenue. Florida represented 25.0% and 30.4% of our Medicare segment revenue for the years ended December 31, 2007 and 2006, respectively.

Our Medicare contracts with CMS all have terms of one year and expire at the end of each calendar year. We currently offer Medicare plans under separate contracts with CMS for each of the states in, and programs under, which we offer such plans. Our current contracts with CMS expire on December 31, 2009.

Our Health and Prescription Drug Plans

Membership Concentration

The following table sets forth, as of December 31, 2007, a summary of our membership for all lines of business in each state in which we have more than 5% of our total membership as well as all other states in the aggregate.

Membership Concentration

(1) Represents the aggregate of all states constituting individually less than 5% of total membership.

Premiums

We receive premiums from state and federal agencies for the members that are assigned to, or have selected, us to provide health care services under Medicaid and Medicare. The premium we receive for each member varies according to the specific government program and may vary according to many other factors, including the member’s geographic location, age, gender, medical history or condition, or the services rendered to the member. The premiums we receive under each of our government benefit plans are generally determined at the beginning of the contract period. These premiums are subject to adjustment throughout the term of the contract, although such adjustments are typically made at the commencement of each new contract period. The premium payments we receive are based upon eligibility lists produced by the government. From time to time, our regulators require us to reimburse them for premiums we received based on an eligibility list that the regulator later discovers contains individuals who were not eligible for any government-sponsored program or are eligible for a different premium category or a different program. As a result of these periodic premium rate adjustments and member eligibility determinations, we cannot predict with certainty what our future revenues will be under each of our government contracts even when we believe membership will remain constant.

For further detail about the CMS reimbursement methodology under the PDP program, see “Part II – Item 7 – Management’s Discussion and Analysis of Financial Condition and Operating Results.”

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Services/Coverage

Medicaid

The Medicaid programs and services we offer to our members vary by state and county and are designed to serve effectively our various constituencies in the communities we serve. Although our Medicaid contracts determine to a large extent the type and scope of health care services that we arrange for our members, in certain markets we customize our benefits in ways that we believe make our products more attractive. Our Medicaid plans provide our members with access to a broad spectrum of medical benefits from many facets of primary care and preventive programs to full hospitalization and tertiary care.

In general, members are required to use our network, except in cases of emergencies, transition of care or when network providers are unavailable to meet a member’s medical needs, and generally must receive a referral from their primary care physician (“PCP”) in order to receive health care from a specialist, such as an orthopedic surgeon or neurologist. Members do not pay any premiums, deductibles or co-payments for most of our Medicaid plans.

Medicare

Through our Medicare Advantage plans, we also cover a wide spectrum of medical services. We provide additional benefits not covered by Original Medicare, such as vision, dental and hearing services. Through these enhanced benefits, the out-of-pocket expenses incurred by our members are reduced, which allows our members to better manage their health care costs.

Most of our Medicare Advantage plans require members to pay a co-payment, which varies depending on the services and level of benefits provided. In addition, the majority of our plans do not require a deductible for services. Typically, members of our CCPs are required to use our network of providers except in cases such as emergencies, transition of care or when specialty providers are unavailable to meet a member’s medical needs. CCP members may see an out-of-network specialist if they receive a referral from their PCP and may pay incremental cost-sharing. PFFS plans are open-access plans that allow members to be seen by any physician or facility that participates in the Medicare program, is willing to bill us for reimbursement and accepts our terms and conditions. We have some flexibility in designing benefits packages and we offer benefits that Original Medicare fee-for-service coverage does not offer. Our pilot PPO plans offer members the option to seek any services outside of our contracted network but, in such case, they are subject to higher cost sharing. We also offer special needs plans for those who are dually eligible for Medicare and Medicaid (“D-SNPs”), which are CCPs, in most of our markets. D-SNPs are designed to provide specialized care and support for Medicare beneficiaries, including those who are dually eligible for both Medicare and Medicaid, with frailties or serious chronic conditions. We believe that our D-SNPs are attractive to these beneficiaries due to the enhanced benefit offerings and clinical support programs.

The Medicare Part D benefit, which provides prescription drug benefits, is available to Medicare Advantage enrollees as well as Original Medicare enrollees. We offer Part D coverage in many forms, including stand-alone PDPs and as a component of many of our Medicare Advantage plans.

Depending on medical coverage type, a beneficiary has various options for accessing drug coverage. Beneficiaries enrolled in Original Medicare can either join a stand-alone PDP or forego Part D drug coverage. PFFS beneficiaries can join a PFFS plan that has Part D drug coverage or join a plan without such coverage and choose either to obtain a drug benefit from a stand-alone PDP or forego Part D drug coverage. Beneficiaries enrolled in CCPs or PPOs can join a plan with Part D coverage or forego Part D coverage.

Provider Networks

We contract with a wide variety of health care providers to provide our members with access to medically necessary services. Our contracted providers deliver a variety of services to our members, including: primary and specialty physician care; laboratory and imaging; inpatient, outpatient, home health and skilled facility care; medication and injectable drug therapy; ancillary services; durable medical equipment services; mental health and chemical dependency counseling and treatment; transportation; and dental, hearing and vision care.

The following are the types of providers in our Medicaid and CCP contracted networks:

·                  Professionals such as PCPs, specialty care physicians, psychologists and licensed master social workers;

·                  Facilities such as hospitals with inpatient, outpatient and emergency services, skilled nursing facilities, outpatient surgical facilities, diagnostic imaging centers and laboratory providers;

·                  Ancillary providers such as home health, physical therapy, speech therapy, occupational therapy, ambulance providers and transportation providers; and

·                  Pharmacies, including retail pharmacies, mail order pharmacies and specialty pharmacies.

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These providers are contracted through a variety of mechanisms, including agreements with individual providers, groups of providers, independent provider associations, integrated delivery systems and local and national provider chains such as hospitals, surgical centers and ancillary providers. We also contract with other companies who provide access to contracted providers, such as pharmacy, dental, hearing, vision, transportation and mental health benefit managers.

PCPs play an important role in coordinating and managing the care of our Medicaid and CCP products. This coordination includes delivering preventive services as well as referring members to other providers for medically necessary services. PCPs are typically trained in internal medicine, pediatrics, family practice, general practice and, in some markets, obstetrics and gynecology. In rare instances, a physician trained in sub-specialty care will perform primary care services for a member with a chronic condition.

To help ensure quality of care, we credential and recredential all professional providers, including physicians, psychologists, licensed master social workers, certified nurse midwifes, advanced registered nurse practitioners and physician assistants who provide care under the supervision of a physician, directly or through delegated arrangements. This credentialing and recredentialing is performed in accordance with standards required by CMS and consistent with the standards of the National Committee for Quality Assurance (“NCQA”).

Our typical professional and ancillary agreements provide for coverage of medically necessary care and have terms of one year. These contracts automatically renew for successive one-year periods unless otherwise specified in writing by either party. These contracts can typically be cancelled by either party, without cause, upon 90 days written notice.

Facility, pharmacy, dental, vision and behavioral health contracts cover medically necessary services and, under some of our plans, enhanced benefits. These contracts typically have terms of one to four years. These agreements may also automatically renew at the end of the contract period unless otherwise specified in writing by either party. During the contract period, these agreements typically can be terminated without cause upon written notice by either party, but the notification period may range from 90 to 180 days and early termination may impose financial penalties on the terminating party.

The contract terms require providers to participate fully with our quality improvement and utilization review programs, which we may modify from time to time, as well as applicable state and federal regulations.

Provider Reimbursement Methods

Physicians and Provider Groups

We reimburse some of our PCPs a fixed fee per member per month. This type of reimbursement methodology is commonly referred to as capitation. The reimbursement covers care provided directly by the PCP as well as coordination of care from other providers as described above. In certain markets, services such as vaccinations, laboratory or screening services delivered by the PCP may warrant reimbursement in addition to the capitation payment. Further, in some markets, PCPs may also be eligible for incentive payments for achieving certain measurable levels of compliance with our clinical guidelines covering prevention and health maintenance. These incentive payments may be paid as a periodic bonus or when submitting documentation of a member’s receipt of services.

In all instances, we require providers to submit data reporting all direct encounters with members. This data helps us to monitor the amount and level of medical treatment provided to our members and to improve our compliance with regulatory reporting requirements to ensure our contracted providers are providing appropriate medical care. Our regulators use the encounter data that we submit, as well as data submitted by other health plans, to set reimbursement rates, assign membership, assess the quality of care being provided to members and evaluate contractual and regulatory compliance. We are reviewing our payment and data collection methods, particularly under capitated arrangements, to improve the accuracy and completeness of our encounter data.

PCPs in our CCP products and, in rare instances, in our Medicaid products, are eligible for a specialized risk arrangement to further align our interests with those of the PCPs. Under these arrangements, we establish a risk fund for each provider based on a percentage of premium received. We periodically evaluate and monitor this fund on an individual or group basis to determine whether these providers are eligible for additional payments or, in the alternative, whether they should pay us. Payments due to us are carried forward and offset against future payments.

Specialty care providers and, in some cases, PCPs, are typically reimbursed a specified fee for the service performed, which is known as fee-for-service. The specified fee is set as a percentage of the amount Medicaid or Medicare would pay under the fee-for-service program. In rare instances, specialty care provider groups in certain regions are paid a capitation rate to provide specialty care services to members in those regions.

For the year ended December 31, 2007, approximately 15% of our payments to physicians serving our Medicaid members were on a capitated basis and approximately 85% were on a fee-for-service basis. During the year ended December 31, 2007,

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approximately 8% of our payments to physicians serving our Medicare members in CCPs were on a capitated basis and approximately 92% were on a fee-for-service basis.

Facilities

Inpatient services are typically reimbursed as a fixed global payment for an admission based on the associated diagnosis related group, or DRG, as defined by CMS. In many instances, certain services, such as implantable devices or particularly expensive admissions, are reimbursed as a percentage of hospital charges either in addition to, or in lieu of, the DRG payment. Certain facilities in our networks are reimbursed on a negotiated rate paid for each day of the member’s admission, known as a per diem. This payment varies based upon the intensity of services provided to the member during admission, such as intensive care, which is reimbursed at a higher rate than general medical services.

Facility Outpatient Services

Facility outpatient services are reimbursed either as a percentage of charges or based on a fixed fee schedule for the services rendered, in accordance with ambulatory payment groups or ambulatory payment categories, both as defined by CMS. Outpatient services for diagnostic imaging and laboratory services are reimbursed on a fixed fee schedule as a percentage of the applicable Medicare or Medicaid fee-for-service schedule or a capitation payment.

Ancillary Providers

Ancillary providers, who provide services such as home health, physical, speech and occupational therapy, and ambulance and transportation services, are reimbursed on a capitation or fee-for-service basis.

Pharmacy Services

Pharmacy services are reimbursed based on a fixed fee for dispensing medication and a separate payment for the ingredients. Ingredients produced by multiple manufacturers are reimbursed based on a maximum allowable cost for the ingredient. Ingredients produced by a single manufacturer are reimbursed as a percentage of the average wholesale price. In certain instances, we contract directly with the sole source manufacturer of an ingredient to receive a rebate, which may vary based upon volumes dispensed during the year.

Out-of-Network Providers

When our members receive services for which we are responsible from a provider outside our network, such as in the case of emergency room services from non-contracted hospitals, we generally attempt to negotiate a rate with that provider. In most cases, when a member is treated by a non-contracted provider, we are obligated to pay only the amount that the provider would have received from traditional Medicaid or Medicare.

Sales and Marketing Programs

As of December 31, 2007 and 2008, our employed sales force consisted of approximately 900 and 800 associates, respectively. We have developed our sales and marketing programs on a localized basis with a focus on the communities in which our members reside. We often conduct our sales programs in community settings and in coordination with government agencies. We regularly participate in local events and organize community health fairs to promote our products and the benefits of preventive care. We also utilize traditional marketing methods such as direct mail, mass media and cooperative advertising with participating medical groups to generate leads. Consistent with our community-focused approach, we employ a culturally diverse sales staff, which allows us to better serve a broader set of beneficiaries, including markets requiring specific language skills and cultural knowledge. In addition, we have fee-for-service relationships with independently licensed insurance agents to help us promote our Medicare plans in most markets.

Our Medicaid marketing efforts are heavily regulated by the states in which we operate, each of which imposes different requirements for, or restrictions on, Medicaid sales and marketing. These requirements and restrictions can be revised from time to time. In addition, local market program design and competitive dynamics affect our sales efforts. For example, the State of Georgia does not permit direct sales by Medicaid health plans. In Georgia, we rely primarily on member selection and auto-assignment of Medicaid members into our plans.

Florida also auto-assigns Medicaid recipients into participating health plans, but historically has permitted direct sales of Medicaid plans as well. However, effective January 1, 2009, AHCA, which oversees the Medicaid program, began prohibiting direct sales to Medicaid recipients for all plans participating in the Florida Medicaid program. Primarily as a result of this change, in September 2008 we eliminated approximately one hundred positions in Florida, most of which were in sales or sales support roles.

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Our Medicare marketing and sales activities are also heavily regulated by CMS and the states. On July 15, 2008, The Medicare Improvements for Patients and Providers Act (“MIPPA”) became law and, in September 2008, CMS promulgated enabling regulations. MIPPA impacts a broad range of Medicare marketing activities, including those relating to telemarketing, means of approaching potential members, cross-selling of products and compensation. CMS has oversight over all, and in some cases has imposed advance approval requirements with respect to, marketing materials used by Medicare Advantage plans, and our sales activities are limited to activities such as conveying information regarding benefits, describing the operations of managed care plans and providing information about eligibility requirements. The activities of our independently licensed insurance agents are also covered by CMS’s regulations.

Our marketing efforts for Medicare Advantage plans have historically focused on direct mail, outbound telemarketing and print advertising initiatives in conjunction with our sales force and our network of independently licensed insurance agents. However, we modified our use of outbound telemarketing and other Medicare marketing practices to comply with MIPPA. We continue to evaluate how this will affect our ability to obtain Medicare Advantage members and how we will use the most effective alternative marketing methods allowed under MIPPA to educate potential members regarding our products and services.

In addition, our PDP business also benefits from the auto-assignment of members, which is subject to a bid process whereby we submit to CMS our estimated costs to provide services in the next fiscal year. Based on our experience, we expect that the number of members auto-assigned to us will vary year over year. For example, as previously described, we bid above the CMS benchmark in 22 of the 34 CMS regions for plan year 2009 and will be ineligible to receive auto-assigned members in these regions. We expect that at least a portion of the low income subsidized members in these regions who previously chose us may choose alternative plans.

For further detail regarding restrictions on marketing and sales activities, particularly those to be implemented under the MIPPA, see “Part I – Item 1 – Business – Regulation.”

Quality Improvement

We continually seek to improve the quality of care delivered by our network providers to our members and our ability to measure the quality of care provided. Our Quality Improvement Program provides the basis for our quality and utilization management functions and outlines specific, ongoing processes and services designed to improve the delivery of quality health care services to our members, as well as to ensure compliance with regulatory and accreditation standards. Each of our health plans has a Quality Improvement Committee, which is comprised of senior members of management, medical directors and other key Company associates. These committees report directly to the health plan Board of Directors which has oversight responsibilities for the quality of care rendered to our members. The Quality Improvement Committees also have a number of subcommittees that are charged with monitoring certain aspects of care and service, such as health care utilization, pharmacy services and provider credentialing and recredentialing. Several of our subcommittees include physicians as members.

Elements of our Quality Improvement Program include the following:  evaluation of the effects of particular preventive measures; member satisfaction surveys; grievance and appeals processes for members and providers; orientation visits to, and site audits of, select providers; provider credentialing and recredentialing; ongoing member education programs; ongoing provider education programs; health plan accreditation; and medical record audits.

Several of our health plans are also accredited by independent organizations that are designed to promote health care quality. Our Florida HMOs are accredited by the Accreditation Association for Ambulatory Health Care (“AAAHC”).  Our behavioral health subsidiary is accredited by URAC (formerly known as the Utilization Review Accreditation Commission) and our Georgia HMO was recently accredited by NCQA.

As part of our Quality Improvement Program, at times we have implemented changes to our reimbursement methods to reward those providers who encourage preventive care, such as well-child check-ups, prenatal care and/or adoption of evidence-based guidelines for members with chronic conditions. In addition, we have specialized systems to support our quality improvement activities. We gather information from our systems to identify opportunities to improve care and to track the outcomes of the services provided to achieve those improvements. Some examples of our intervention programs include:  a prenatal case management program to help women with high-risk pregnancies deliver full-term, healthy infants; a program to reduce the number of inappropriate emergency room visits; and a disease management program to decrease the need for emergency room visits and hospitalizations.

As previously noted, in April 2008, the Board formed the Health Care Quality and Access Committee. The principal purpose of this committee is to assist the Board by providing general oversight of our policies and procedures governing health care quality and access for our members, which will provide overall direction and guidance to our Quality Improvement Committees.

Competition

Competitive environment. We operate in a highly competitive environment to manage the cost and quality of services that are delivered to government health care program beneficiaries. We currently compete in this environment by offering Medicaid and Medicare health plans in which we accept all or nearly all of the financial risk for management of beneficiary care under these programs.

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We typically must be awarded a contract by the government agency with responsibility for a program in order to offer our services in a particular location. Some government programs choose to limit the number of plans that may offer services to beneficiaries, while other agencies allow an unlimited number of plans to serve a program, subject to each plan meeting certain contract requirements. When the number of plans participating in a program is limited, an agency generally employs a bidding process to select the participating plans.

As a result, the number of companies with whom we compete varies significantly depending on the geographic market, business segment and line of business. For example, in Florida, the Medicaid program does not specifically restrict the number of participating plans. In contrast, the Georgia Families and PeachCare program awards contracts to just three plans. We currently compete with one or two other plans in each of the six regions in Georgia. Likewise, in our Medicare business, the number of competitors varies significantly by geography. In most cases, there are numerous other CCP, PFFS and PDP plans and other competitors. We believe a number of our competitors in both Medicare and Medicaid have strengths that may match or exceed our own with respect to one or more of the criteria on which we compete with them.

Competitive factors – program participation. Regardless of whether the number of health plans serving a program is limited, we believe government agencies determine program participation based on several criteria. These criteria generally include the terms of the bids as well as the breadth and depth of a plan’s provider network; quality and utilization management processes; responsiveness to member complaints and grievances; timeliness and accuracy of claims payment; financial resources; historical contractual and regulatory compliance; references and accreditation; and other factors.

Competitive factors – network providers. In addition, we compete with other health plans to contract with hospitals, physicians, pharmacies and other providers for inclusion in our networks that serve government program beneficiaries. We believe providers select plans in which they participate based on several criteria. These criteria generally include reimbursement rates; timeliness and accuracy of claims payment; potential to deliver new patient volume and/or retain existing patients; effectiveness of resolution of calls and complaints; and other factors.

Auto-assignment. When establishing a contract, the agency with responsibility for the program determines the approach by which a beneficiary becomes a member of one of the plans serving the program. Generally, a government program uses either automatic assignment of members or permits marketing to members by a plan, though some programs employ both approaches.

Some programs assign members to a plan automatically based on predetermined criteria. These criteria frequently are based on a plan’s rates, the outcome of a bidding process, or similar factors. For example, we receive auto-assignment of PDP members based on whether our bids during the annual renewal process are above or below the CMS benchmark. In most states, our Medicaid health plans also benefit from auto-assignment of individuals who do not choose a plan upfront but are mandatory participants in managed care programs. Each state differs in their approach to auto-assignment, but may use some of the following criteria in their auto-assignment algorithms: a Medicaid beneficiary’s previous enrollment with a health plan or experience with a particular provider contracted with a health plan, enrolling family members in the same plan, a plan’s quality or performance status, a plan’s network and enrollment size, awarding all auto-assignments to a plan with the lowest bid in a county or region, and equal assignment of non-choosers across all plans in a specified county or region. For more information about how we obtain our members, see “Part I – Item 1 – Business – Sales and Marketing Programs.”

Marketing. Other government programs permit plan sponsors to market their plans to beneficiaries, resulting in ongoing competition among the plans to enroll members. We believe a beneficiary selects a plan for membership based on several criteria. These criteria generally include a plan’s premiums and cost-sharing terms; provider network composition; benefits and medical services; effectiveness of resolution of calls and complaints; and other factors.

Medicaid segment competitors. In the Medicaid managed care market, our principal competitors for state contracts, members and providers include the following types of organizations:

·                  MCOs. Managed care organizations (“MCOs”) that, like us, receive state funding to provide Medicaid benefits to members. Many of these competitors operate in a single or small number of geographic locations. There are a few multi-state Medicaid-only organizations that tend to be larger in size and therefore are able to leverage their infrastructure over a larger membership base. Competitors include private and public companies, which can be either for-profit or non-profit organizations, with varying degrees of focus on serving Medicaid populations.

·                  Medicaid Fee-For-Service. Traditional Medicaid offered directly by the states or a modified version whereby the state administers a primary care case management model.

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Medicare segment competitors. In the Medicare market, our primary competitors for contracts, members and providers include the following types of competitors:

·                  Original Fee-For-Service Medicare. Original Medicare is available nationally and is a fee-for-service plan managed by the federal government. Beneficiaries enrolled in Original Medicare can go to any doctor, supplier, hospital or other facility that accepts Medicare and is accepting new Medicare patients.

·                  Medicare Advantage and Prescription Drug Plans. Medicare Advantage and stand-alone Part D plans are offered by national, regional and local MCOs that serve Medicare beneficiaries.

·                  Employer Sponsored Coverage. Employers and unions may subsidize Medicare benefits for their retirees in their commercial group. The group sponsor solicits proposals from Medicare Advantage plans and may select an HMO, PPO, PFFS and/or PDP plan.

·                  Medicare Supplements. Original Medicare pays for many, but not all, health care services and supplies. A Medicare supplement policy is private health insurance designed to supplement Original Medicare by covering the cost of items such as co-payments, coinsurance and deductibles. Some Medicare supplements cover extra benefits for an additional cost. Medicare supplement plans can be used to cover costs not otherwise covered by Original Medicare, but cannot be used to supplement Medicare Advantage plans.

Regulation

Our health care operations are highly regulated by both state and federal government agencies. Regulation of managed care products and health care services is an evolving 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 occur frequently.

To operate a health plan, we must apply for and obtain a certificate of authority or license from each state in which we intend to operate. As of December 31, 2007, our health plans were licensed to operate as HMOs in Florida, New York, Connecticut, Illinois, Indiana, Georgia, New Jersey, Ohio, Louisiana, Texas and Missouri.

To offer Medicare PFFS coverage, we must be licensed under state law as a risk-bearing entity eligible to offer health insurance or health benefits coverage in each state in which the organization wishes to offer PFFS plans. We have three subsidiaries licensed as health indemnity insurers in the 40 states and the District of Columbia where we offer PFFS plans as of January 2009.

To offer Medicare prescription drug coverage, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (“MMA”) generally requires PDP sponsors to be licensed under state law as a risk-bearing entity eligible to offer health insurance or health benefits coverage in each state in which the sponsor wishes to offer a PDP. However, CMS has implemented a waiver process to allow PDP sponsors to begin operations prior to obtaining state licensure or certification in all states in which they do business, even if the state already has in place a licensing process for PDP sponsors. The entity through which we operate our PDP plans currently is licensed as a domestic insurance company in the State of Florida and as a foreign insurer in 40 states plus the District of Columbia as of January 2009.  In the remaining states, the PDP entity is currently operating under one of the previously mentioned CMS waivers, which are approved through December 2009, but has applied for authority to conduct business as a foreign insurer.

As HMOs and insurance companies, we are regulated by both the state insurance departments and, in some cases in respect of our HMOs, another state agency with responsibility for oversight of HMOs. Generally, the licensing requirements are the same for us as they are for commercial managed health care organizations. We generally must demonstrate to the state that, among other things:

·                  we have an adequate provider network;

·                  our quality and utilization management processes comply with state requirements;

·                  we have procedures in place for responding to member and provider complaints and grievances;

·                  our systems are capable of processing providers’ claims in a timely fashion and for collecting and analyzing the information needed to manage our business;

·                  our management is competent and trustworthy;

·                  we comply with the state’s sales and marketing regulations; and

·                  we have the financial resources necessary to pay our anticipated medical care expenses and the infrastructure needed to account for our costs.

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State Regulation and Required Statutory Capital

Though generally governed by federal law, each of our regulated subsidiaries, including our HMO and insurance subsidiaries, is licensed in the markets in which it operates and is subject to the rules and regulations of, and oversight by, the applicable state department of insurance (“DOI”) in the areas of licensing and solvency. Each of our regulated subsidiaries is required to report regularly on its operational and financial performance to the appropriate regulatory agency in the state in which it is licensed. These reports describe each of our regulated subsidiaries’ capital structure, ownership, financial condition, certain intercompany transactions and business operations. From time to time, any of our regulated subsidiaries may be selected to undergo periodic audits, examinations or reviews by the applicable state to review our operational and financial assertions.

Our regulated subsidiaries generally must obtain approval from, or provide notice to, the state in which it is domiciled before entering into certain transactions such as declaring dividends in excess of certain thresholds or paying dividends to a related party, entering into other arrangements with related parties, and acquisitions or similar transactions involving an HMO or insurance company, or any other change in control. For purposes of these laws, in general, control commonly is presumed to exist when a person, group of persons or entity, directly or indirectly, owns, controls or holds the power to vote 10% or more of the voting securities of another entity.

Each of our HMO and insurance subsidiaries must maintain a minimum statutory net worth in an amount determined by statute or regulation and we may only invest in types of investments approved by the state. The minimum statutory net worth requirements differ by state and are generally based on a percentage of annualized premium revenue, a percentage of annualized health care costs, a percentage of certain liabilities, a statutory minimum or risk-based capital (“RBC”) requirements. The RBC requirements are based on guidelines established by the National Association of Insurance Commissioners, or NAIC, and are administered by the states. As of December 31, 2007, our Connecticut, Georgia, Illinois, Indiana, Louisiana, Missouri, Ohio and PFFS operations are subject to RBC requirements. The RBC requirements may be modified as each state legislature deems appropriate for that state. The RBC formula, based on asset risk, underwriting risk, credit risk, business risk and other factors, generates the authorized company action level, or CAL, which represents the amount of net worth believed to be required to support the regulated entity’s business. For states in which the RBC requirements have been adopted, the regulated entity typically must maintain a minimum of the greater of the required CAL or the minimum statutory net worth requirement calculated pursuant to pre-RBC guidelines. In addition to the foregoing requirements, our regulated subsidiaries are subject to restrictions on their ability to make dividend payments, loans and other transfers of cash.

The statutory framework for our regulated subsidiaries’ minimum net worth changes over time. For instance, RBC requirements may be adopted by more of the states in which we operate. These subsidiaries are also subject to their state regulators’ overall oversight powers. For example, New York enacted regulations that increase the reserve requirement by 150% over an eight-year period. In addition, regulators could require our subsidiaries to maintain minimum levels of statutory net worth in excess of the amount required under the applicable state laws if the regulators determine that maintaining such additional statutory net worth is in the best interest of our members. For instance, because the Georgia Medicaid program is new, all plans operating in Georgia are required to maintain required statutory capital at an RBC level of 125% of CAL. Moreover, as we expand our plan offerings in new states or pursue new business opportunities, such as our PFFS products, we may be required to make additional statutory capital contributions.

Each of our operating subsidiaries is required to be licensed by each of the states in which it conducts business. Each insurance company is licensed and regulated by the DOI in its domestic state as well as the DOI in each other state, commonly referred to as foreign jurisdiction, in which it operates. For example, our insurance companies that offer our PFFS products are licensed as domestic insurance companies in Arizona, Illinois and New York and operate as foreign insurers in between 38 and 44 other states plus the District of Columbia. Further, each of our HMOs is licensed by the DOI in its domestic state as well as the department of health, or similar agency.

In addition, our Medicaid and S-CHIP activities are regulated by each state’s Medicaid, S-CHIP or equivalent agency, and our Medicare activities are regulated by CMS. These agencies typically require demonstration of the same capabilities mentioned above and perform periodic audits of performance, usually annually.

State enforcement authorities, including state attorneys general and Medicaid fraud control units, have become increasingly active in recent years in their review and scrutiny of various sectors of the health care industry, including health insurers and managed care organizations. We routinely respond to subpoenas and requests for information from these entities and, more generally, we endeavor to cooperate fully with all government agencies that regulate our business. For a discussion of our material pending legal proceedings, see “Part I – Item 3 – Legal Proceedings.”

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Medicaid

As previously described, Medicaid, which was established under the U.S. Social Security Act of 1965, is state-operated and implemented, although it is funded by both the state and federal governments. Within broad guidelines established by the federal government, each state:

·                  establishes its own eligibility standards;

·                  determines the type, amount, duration and scope of services;

·                  sets the rate of payment for services; and

·                  administers its own program.

Some of the states in which we operate award contracts to applicants that can demonstrate that they meet the state’s requirements. Other states engage in a competitive bidding process for all or certain programs. We must demonstrate to the satisfaction of the state Medicaid program that we are able to meet the state’s operational and financial requirements. These requirements are in addition to those required for a license and are targeted to the specific needs of the Medicaid population. For example:

·                  we must measure provider access and availability in terms of the time needed for a member to reach the doctor’s office;

·                  our quality improvement programs must emphasize member education and outreach and include measures designed to promote utilization of preventive services;

·                  we must have linkages with schools, city or county health departments, and other community-based providers of health care, in order to demonstrate our ability to coordinate all of the sources from which our members may receive care;

·                  we must have the capability to meet the needs of disabled members;

·                  our providers and member service representatives must be able to communicate with members who do not speak English or who are hearing impaired; and

·                  our member handbook, newsletters and other communications must be written at the prescribed reading level and must be available in languages other than English.

In addition, we must demonstrate that we have the systems required to process enrollment information, report on care and services provided and process claims for payment in a timely fashion. We must also have adequate financial resources needed to protect the state, our providers and our members against the risk of our insolvency.

Once awarded, our Medicaid government contracts generally have terms of one to three years. Most of these contracts provide for renewal upon mutual agreement of the parties and both parties have certain early termination rights. In addition to the operating requirements listed above, state contract requirements and regulatory provisions applicable to us generally set forth detailed provisions relating to subcontractors, marketing, safeguarding of member information, fraud and abuse reporting and grievance procedures.

Our Medicaid plans are subject to periodic financial and informational reporting and comprehensive quality assurance evaluations. We regularly submit periodic utilization reports, operations reports and other information to the appropriate Medicaid program regulatory agencies.

Medicare

Medicare is a federal program that provides eligible persons age 65 and over and some disabled persons a variety of hospital, medical insurance and prescription drug benefits. Medicare beneficiaries have the option to enroll in a Medicare Advantage plan, such as a CCP, PFFS or PPO benefit plan, in areas where such a plan is offered. Under Medicare Advantage, managed care plans contract with CMS to provide benefits which are comparable to, or that may be more attractive to Medicare beneficiaries than, an Original Medicare plan in exchange for a fixed monthly payment per member that varies based on the county in which a member resides, the demographics of the member and the member’s health condition.

The MMA made numerous changes to the Medicare program, including expanding the Medicare program to include a prescription drug benefit. Since 2006, Medicare beneficiaries have had the option of selecting the new prescription drug benefit from an existing Medicare Advantage plan or through a stand-alone PDP. The drug benefit, available to beneficiaries for a monthly premium, is subject to certain cost sharing depending upon the specific benefit design of the selected plan. Plans are not required to

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offer the same benefits, but are required to provide coverage that is at least actuarially equivalent to the standard drug coverage delineated in the MMA.

Along with other Part D plans, including PDPs and Medicare Advantage plans that offer a Part D benefit, or MA-PD, we bid on the Part D benefits in June of each year. Based on the bids submitted, CMS establishes a national benchmark. CMS pays the Part D plans a percentage of the benchmark on a per member per month basis with the remaining portion of the premium being paid by the Medicare member. Members whose income falls below 150% of the federal poverty level qualified for the federal low income subsidy, through which the federal government helps pay the member’s Part D premium and certain other cost sharing expenses.

On July 15, 2008, MIPPA became law and, in September 2008, CMS promulgated enabling regulations. MIPPA impacts a broad range of Medicare activities and impacts all types of Medicare managed care plans. The following are some of the requirements under MIPPA which will impact our business:

PFFS plans:   MIPPA revises requirements for Medicare Advantage PFFS plans, which may have the effect of ending some of these plans in plan year 2011 where such plans are not able to comply with these new requirements. In particular, MIPPA requires all PFFS plans that operate in markets with two or more networked-based plans must be offered on a networked basis. Currently, we do not have provider networks in the majority of the markets where we offer PFFS plans. We are currently evaluating alternative solutions to establishing a network in targeted areas to meet these requirements, including building a contracted network, contracting with a third party network or withdrawing from certain counties where it is not economically or otherwise feasible to establish networks for this line of business.

Sales and Marketing:  MIPPA places prohibitions and limitations on specified sales and marketing activities under Medicare Advantage and prescription drug plans. Among other things, Medicare plans are no longer permitted to make unsolicited contact with potential members by way of outbound telemarketing and community marketing, offer other types of Medicare products to existing members, provide meals to potential enrollees or approach potential members in common or public areas. These changes are likely to increase our administrative costs of enrolling an individual, and could increase the risk of compliance violations and could have a material adverse effect on our ability to enroll new Medicare members particularly because we have historically relied to a large extent on outbound telemarketing and community marketing to sell our products.

Special Needs Plans: A significant portion of our coordinated care plan membership is enrolled in our D-SNPs. Under MIPPA, D-SNPs such as ours are required to contract with state Medicaid agencies to coordinate benefits. The scope of the D-SNP contract with the state Medicaid agency will depend greatly on what eligibility categories, cost-sharing responsibilities and payment limitations each state has included in its state plan. The contracting process under MIPPA provides an opportunity for D-SNPs and states to improve the coordination of benefits, including defining the overlap between Medicaid and Medicare benefits, eligibility verification processes, payment and coverage responsibilities, marketing and enrollment standards, appeals and grievances procedures and other important operational considerations. Collaboration between states and D-SNPs is expected to create administrative efficiencies and improve beneficiary health outcomes. However, the requirement to contract with state Medicaid agencies imposes potential risk for D-SNP providers such as us because MIPPA does not allow expansion in 2010 or continued operation of a D-SNP after 2010 if a state and the D-SNP provider cannot come to agreement on terms.

Compensation:  MIPPA also establishes limits on agent and broker compensation. The CMS implementing regulations require that plans that pay commissions do so by paying for an initial year commission and residual commissions for each of the five subsequent renewal years, thereby creating a six year commission cycle for members moving from Original Medicare and a five year commission cycle for members moving from another Medicare Advantage plan.

S-CHIP Programs

S-CHIP is a federal and state matching program designed to help states expand health insurance coverage to children whose families earn too much to qualify for traditional Medicaid, yet not enough to afford private health insurance. States have the option of administering S-CHIP through their existing Medicaid programs, creating separate programs, or combining both strategies. Currently, all 50 states, the District of Columbia and all U.S. territories have approved S-CHIP or similar plans, and many states continue to submit plan amendments to further expand coverage under S-CHIP.

HIPAA and State Privacy Laws

In 1996, Congress enacted the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) and thereafter, the Secretary of Health and Human Services issued regulations implementing HIPAA. HIPAA is intended to improve the portability and continuity of health insurance coverage and simplify the administration of health insurance claims and related transactions. All health plans, including ours, are subject to HIPAA. HIPAA generally requires health plans to:

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·                  protect the privacy and security of patient health information through the implementation of appropriate administrative, technical and physical safeguards; and

·                  establish the capability to receive and transmit electronically certain administrative health care transactions, such as claims payments, in a standardized format.

We are also subject to state laws that are not preempted by HIPAA, including those that provide for greater privacy of individuals’ health information.

Fraud and Abuse Laws

Federal and state enforcement authorities have prioritized the investigation and prosecution of health care fraud, waste and abuse. Fraud, waste and abuse prohibitions encompass a wide range of operating activities, including kickbacks or other inducements for referral of members or for the coverage of products (such as prescription drugs) by a plan, billing for unnecessary medical services by a provider, improper marketing and violation of patient privacy rights. Companies involved in public health care programs such as Medicaid and Medicare are required to maintain compliance programs to detect and deter fraud, waste and abuse, and are often the subject of fraud, waste and abuse investigations and audits. The regulations and contractual requirements applicable to participants in these public-sector programs are complex and subject to change. For example, the new Medicare Part D benefit is likely to lead to increased scrutiny by enforcement officials of managed care providers operating PDP plans and MA-PD plans. Although we believe that we have structured our compliance program with care in an effort to meet all statutory and regulatory requirements, we are continuing to improve our education and training programs, and we expect to invest significant resources to enhance our compliance efforts.

Federal and State Laws and Regulations Governing Submission of Information and Claims to Agencies

We are subject to federal and state laws and regulations that apply to the submission of information and claims to various agencies. For example, the federal False Claims Act provides, in part, that the federal government may bring a lawsuit against any person or entity who it believes has knowingly presented, or caused to be presented, a false or fraudulent request for payment from the federal government, or who has made a false statement or used a false record to get a claim approved. The federal government has taken the position that claims presented in violation of the federal anti-kickback statute may be considered a violation of the federal False Claims Act. Violations of the False Claims Act are punishable by treble damages and penalties of up to a specified dollar amount per false claim. In addition, a special provision under the False Claims Act allows a private person (for example, a “whistleblower” such as a disgruntled former associate, competitor or member) to bring an action under the False Claims Act on behalf of the government alleging that an entity has defrauded the federal government and permits the private person to share in any settlement of, or judgment entered in, the lawsuit.

A number of states, including states in which we operate, have adopted false claims acts, as well as their own laws whereby, under certain conditions, a private party may file a civil lawsuit in state court on behalf of the state government.

Marketing

Our Medicaid marketing efforts are highly regulated by the states in which we operate and CMS, each of which imposes different requirements and restrictions on Medicaid marketing. In general, the states can impose a variety of sanctions for marketing violations, including fines, a suspension of marketing and/or a suspension of new enrollment. For more information about our marketing programs, see “Part I – Item 1 – Business – Sales and Marketing Programs.”

The marketing activities of Medicare managed care plans are strictly regulated by CMS. CMS must approve all marketing materials before they can be used. While current federal law preempts state law, with the exception of licensure and solvency requirements, the MIPPA and CMS proposed rules will require additional coordination among health plans, states and CMS. For example, in order for us to be able to continue to offer D-SNPs for those who are dually eligible for both Medicare and Medicaid after 2010, we will have to negotiate contracts with all applicable state Medicaid agencies. For more information about regulations governing our marketing activities, see “Part I – Item 1 – Business – Regulation – Medicare.”

Technology

A foundation of providing managed care services is the accurate and timely capture, processing and analysis of critical data. Focusing on data is essential to operating our business in a cost effective manner. Data processing and data-driven decision making are key components of both administrative efficiency and medical cost management. We use our information system for premium billing, claims processing, utilization management, reporting, medical cost trending, planning and analysis. The system also supports member and provider service functions, including enrollment, member eligibility verification, primary care and specialist physician roster access, claims status inquiries, and referrals and authorizations.

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On an ongoing basis, we evaluate the ability of our existing operations to support our current and future business needs. This evaluation may result in enhancing or replacing current systems and/or processes which could result in our incurring substantial costs to improve our operations and services.

We have a disaster recovery plan that addresses how we recover to an acceptable level of business functionality within stated timelines. We have a cold-site and business recovery site agreement with a nationally-recognized third party vendor to provide for the restoration of our general support systems at a remote processing center. In 2008, we successfully performed our annual disaster recovery testing for critical business applications defined in our plan.

Employees

We refer to our employees as associates. As of December 31, 2007 and 2008, we had approximately 3,900 and 4,100 full-time associates, respectively. Our associates are not represented by any collective bargaining agreement, and we have never experienced a work stoppage. We believe we have good relations with our associates.

About WellCare

We were formed in May 2002 when we acquired our Florida, New York and Connecticut health plans. From inception to July 2004, we operated through a holding company that was a Delaware limited liability company. In July 2004, immediately prior to the closing of our initial public offering, that company was merged into a Delaware corporation and we changed our name to WellCare Health Plans, Inc. Our principal executive offices are located at 8725 Henderson Road, Renaissance One, Tampa, Florida 33634, and our telephone number is (813) 290-6200.  Our website is www.wellcare.com. Information contained on our website is not incorporated by reference into this report and such information should not be considered to be part of this report. We make available our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports on our website, free of charge, to individuals interested in acquiring such reports. The reports can be accessed at our website as soon as reasonably practicable after they are electronically filed with the U.S. Securities and Exchange Commission (the “SEC”).

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FORWARD-LOOKING STATEMENTS

Statements contained in this 2007 Form 10-K which are not historical fact may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Exchange Act, and we intend such statements to be covered by the safe harbor provisions for forward-looking statements contained therein.  Such statements, which may address, among other things, market acceptance of our products and services, expansion into new targeted markets, product development, our ability to finance growth opportunities, our ability to respond to changes in governance regulations, sales and marketing strategies, projected capital expenditures, liquidity and the availability of additional funding sources may be found in the sections of this report entitled “Business,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report generally. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “targets,” “predicts,” “potential,” “continues” or the negative of such terms or other comparable terminology.  You are cautioned that matters subject to forward-looking statements involve risks and uncertainties, including economic, regulatory, competitive and other factors that may affect our business.  These forward-looking statements are inherently susceptible to uncertainty and changes in circumstances, as they are based on management’s current expectations and beliefs about future events and circumstances.  We undertake no obligation beyond that required by law to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.

Our actual results may differ materially from those indicated by forward-looking statements as a result of various important factors including the expiration, cancellation or suspension of our state and federal contracts.  In addition, our results of operations and projections of future earnings depend, in large part, on accurately predicting and effectively managing health benefits and other operating expenses.  A variety of factors, including competition, changes in health care practices, changes in federal or state laws and regulations or their interpretations, inflation, provider contract changes, changes in or terminations of our contracts with government agencies, new technologies, government-imposed surcharges, taxes or assessments, reduction in provider payments by governmental payors, major epidemics, disasters and numerous other factors affecting the delivery and cost of health care, such as major health care providers’ inability to maintain their operations, may in the future affect our ability to control our medical costs and other operating expenses.  Governmental action or business conditions could result in premium revenues not increasing to offset any increase in medical costs and other operating expenses.  Once set, premiums are generally fixed for one-year periods and, accordingly, unanticipated costs during such periods cannot be recovered through higher premiums.  Furthermore, if we are unable to estimate accurately incurred but not reported medical costs in the current period, our future profitability may be affected.  Due to these factors and risks, we cannot provide any assurance regarding our future premium levels or our ability to control our future medical costs.

From time to time, at the federal and state government levels, legislative and regulatory proposals have been made related to, or potentially affecting, the health care industry, including but not limited to limitations on managed care organizations, including benefit mandates, and reform of the Medicaid and Medicare programs.  Any such legislative and regulatory action, including benefit mandates and reform of the Medicaid and Medicare programs, could have the effect of reducing the premiums paid to us by governmental programs, increasing our medical or administrative costs or requiring us to materially alter the manner in which we operate.  We are unable to predict the specific content of any future legislation, action or regulation that may be enacted or when any such future legislation or regulation will be adopted.  Therefore, we cannot predict accurately the effect or ramifications of such future legislation, action or regulation on our business.

Item 1A.  Risk Factors.

You should carefully consider the following factors, together with all the other information included in this report, in evaluating our company and our business.  If any of the following risks actually occur, our business, financial condition and results of operations could be materially and adversely affected, and the value of our stock could decline.  The risks and uncertainties described below are those that we currently believe may materially affect our company.  Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations.  As such, you should not consider this list to be a complete statement of all potential risks or uncertainties.

Risks Related to our Failure to File Timely Periodic Reports with the SEC and Certain Regulatory Filings with State Agencies, and the State of our Internal Control over Financial Reporting.

Our failure to prepare and file timely our periodic reports with the SEC limits us from accessing the public markets to raise debt or equity capital.

We did not file this 2007 Form 10-K within the timeframe required by the SEC, and we have not yet filed our Form 10-Q/A for the first and second quarters of 2007 or our Form 10-Q for the first, second and third quarters of 2008.  Because we are not current in our reporting requirements with the SEC, we are limited in our ability to access the public markets to raise debt or equity capital.  Our limited ability to access the public markets could prevent us from pursuing transactions or implementing business strategies that we believe would be beneficial to our business.

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Based on third-party information, we believe that our largest shareholder is also the holder of approximately 67% of our outstanding debt, which currently is in default, and, therefore, has the ability to take certain actions that would be adverse to our other shareholders.

Based on third-party information, we believe that Fairholme Capital Management LLP (“Fairholme”), who also is our largest shareholder, recently purchased approximately 67% of the outstanding balance under our term loan facility discussed below.  As a holder of a majority of the outstanding balance under our term loan facility, Fairholme has the ability to require the exercise of remedies for default, including accelerating our payment obligations and/or increasing the rate of interest, which would be adverse to our other shareholders.

Our failure to file certain reports with state regulatory authorities can result in, among other things, the imposition of sanctions and penalties against us, which could have a material adverse effect on our financial condition, results of operations and cash flows.

Our regulated subsidiaries are required to file annual audited financial statements with the applicable regulatory authorities in the states in which they operate.  As a result of the investigations and resulting restatement, we did not timely file the required annual audited financial statements for our regulated subsidiaries with applicable state regulators.  Our failure to timely file such financial statements can result in, among other things, the imposition of sanctions and penalties against us, including operating restrictions.  For example, the Illinois Department of Insurance fined us $100 per day that each required filing remained past due.  In addition, the Ohio Department of Insurance would have prohibited us from writing new business in the State of Ohio if we had not filed our annual audited financial statements by a specified date.  If we fail to timely file the required financial statements for our regulated subsidiaries, our regulators could impose sanctions or penalties against us, including operating restrictions, which could have a material adverse effect on our financial condition, results of operations and cash flows.

We have identified, and may identify in the future, material weaknesses in our internal control over financial reporting, which will require us to incur substantial costs and divert management resources in connection with our efforts to remediate these material weaknesses and to comply with Section 404 of the Sarbanes-Oxley Act of 2002.

As a result of our ongoing review of issues identified in the Special Committee investigation, we have determined that certain material weaknesses existed at the Company as of December 31, 2007.  Specifically, we have determined that (a) former senior management set an inappropriate tone in connection with the Company’s efforts to comply with the regulatory requirements related to the AHCA contract and Healthy Kids contract that led to a deficiency in the design of our internal controls, and therefore a material weakness existed in a portion of the control environment and control activities components of our internal controls, and (b) former senior management’s failure to ensure effective communications regarding the AHCA and Healthy Kids contracts with, among others, our Board and certain regulators resulted in a material weakness in the information and communication system.  A detailed description of these material weaknesses is provided in “Part II – Item 9A – Controls and Procedures.”  Due to these material weaknesses, management has concluded that we did not maintain effective internal control over financial reporting as of December 31, 2007.  These material weaknesses caused significant accounting errors requiring the restatement of our previously issued consolidated financial statements for the years ended December 31, 2004, 2005 and 2006, including the quarterly periods contained therein, and of our previously issued unaudited condensed consolidated financial statements for the three-month periods ended March 31 and June 30, 2007.

We cannot be certain that any remedial measures we have taken or intend to take will ensure that we design, implement and maintain adequate controls over our financial processes and reporting in the future and, accordingly, additional material weaknesses may occur in the future.  It is possible that additional control deficiencies may be identified in addition to, or that are unrelated to, our review of the work of the Special Committee.  These control deficiencies may represent one or more material weaknesses.  Our inability to remedy any additional deficiencies or material weaknesses that may be identified in the future could, among other things, cause us to fail to file timely our periodic reports with the SEC; result in the need to further restate financial results for prior periods; prevent us from providing reliable and accurate financial information and forecasts or from avoiding or detecting fraud; or require us to incur additional costs or divert management resources to, among other things, comply with Section 404 of the Sarbanes-Oxley Act of 2002.

Risks Related to Pending Governmental Investigations and Litigation

Any resolution of the ongoing investigations being conducted by certain federal and state agencies could have a material adverse effect on our business, financial condition, results of operations and cash flows.

We are currently under investigation by federal and state authorities, including AHCA; the U.S. Attorney’s Office for the Middle District of Florida (“USAO”); the Civil Division of the U.S. Department of Justice (the “Civil Division”); the Office of Inspector General of the U.S. Department of Health and Human Services (the “OIG”); and the Florida Attorney General’s Medicaid Fraud Control Unit (“MFCU”).  Pursuant to an agreement dated August 18, 2008 with AHCA, the USAO and MFCU, two of our subsidiaries, WellCare of Florida, Inc. and HealthEase of Florida, Inc. (collectively, the “WellCare Florida HMOs”), agreed to transmit $35.2 million (the “Transmitted Amount”) to the Financial Litigation Unit of the USAO.  The Transmitted Amount was based upon our best estimate, as of the effective date of the agreement, of the total potential amount of Medicaid behavioral health capitation refunds that the WellCare Florida HMOs owe or may owe to AHCA for calendar years 2002 through 2006, but did not include any interest, fines, penalties or other assessments that may be imposed against us.  Of the total Transmitted Amount, we acknowledged and agreed that the WellCare Florida HMOs would make payment of not less than a total amount of $24.5 million, and therefore we authorized the USAO, AHCA and MFCU to access and distribute the $24.5 million to the appropriate federal and state agencies in accordance with applicable federal and state law.  In addition, the parties to the agreement acknowledged and agreed that $10.7 million of the Transmitted Amount would be held in an escrow account pending resolution of all federal and related state claims by the United States or the State of Florida for monetary damages or other financial impositions of any kind arising from, or related to, the investigation by MFCU or the USAO.  The amount held in escrow does not limit in any way the ability of federal or state authorities to recover additional amounts, including interest, civil or criminal fines, penalties or other assessments that may be imposed against us, and we cannot make any assurances that the federal or state authorities will not seek or be entitled to recover amounts in excess of the escrowed amounts. The agreement did not, nor should it be construed to, operate as a settlement or release of any criminal, civil or administrative claims for monetary, injunctive or other relief against us, whether under federal, state or local statutes, regulations or common law.  Furthermore, the agreement does not operate, nor should it be construed, as a concession that we are entitled to any limitation of our potential federal, state or local civil or criminal liability.

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Any resolution of the ongoing investigations being conducted by certain federal and state agencies could have a material adverse effect on our business, financial condition, results of operations and cash flows.  We are engaged in resolution discussions as to matters under review with the USAO, the Civil Division, the OIG and the State of Florida.  Based on the current status of matters and all information known to us to date, we have accrued a liability in the amount of $50.0 million in our financial statements for the year ended December 31, 2007 in connection with the ultimate resolution of these matters.  However, we cannot provide assurances regarding the likelihood, timing or terms and conditions of any potential negotiated resolution of pending investigations by the USAO, the Civil Division, the OIG or the State of Florida.  For more information related to this accrual, see Notes 3 and 11 to the consolidated financial statements included in this 2007 Form 10-K.

We do not know whether, or the extent to which, any pending investigations will result in the imposition of operating restrictions on our business.  If we were to plead guilty to or be convicted of a health care related charge, potential adverse consequences could include revocation of our licenses, termination of one or more of our contracts and/or exclusion from further participation in Medicare or Medicaid programs.  In addition, we could be required to operate under a corporate integrity agreement or under the supervision of a monitor, either of which could require us to operate under significant restrictions, place substantial burdens on our management, hinder our ability to attract and retain qualified associates and cause us to incur significant costs.  Further, the majority of our contracts pursuant to which we provide Medicare and Medicaid services contain provisions that grant the regulator broad authority to terminate at will contracts with any entity affiliated with a convicted entity or for other reasons.  Any such outcomes would have a material adverse effect on our business, financial condition, results of operations and cash flows.

We have responded to subpoenas issued by the State of Connecticut Attorney General’s Office involving transactions between us and our affiliates and their potential impact on the costs of Connecticut’s Medicaid program.  In addition to these federal and state governmental investigations, the SEC is conducting an informal investigation.

The pendency of these investigations as well as the litigation described below could also impair our ability to raise additional capital, which may be needed to pay any resulting interest, civil or criminal fines, penalties or other assessments.

We and certain of our past officers and directors are defendants in litigation relating to our participation in federal health care programs, accounting practices and other related matters, and the outcome of these lawsuits may have a material adverse effect on our business, financial condition, results of operations and cash flows.

Putative class action complaints were filed against us, as well as certain of our past and present officers and directors on October 26, 2007 and on November 2, 2007, relating to, among other things, allegations of numerous violations of securities laws.  Subsequent developments in these cases are described below in “Part I – Item 3 – Legal Proceedings.”

In addition, five putative shareholder derivative actions were filed between October 29, 2007 and November 15, 2007.  All five actions contend, among other things, that the defendants allegedly allowed or caused us to misrepresent our reported financial results, in amounts unspecified in the pleadings, and seek damages and equitable relief for, among other things, the defendants’ supposed breach of fiduciary duty, waste and unjust enrichment.  Subsequent developments in these cases are described below in “Part I – Item 3 – Legal Proceedings.”

In addition, in a letter dated October 15, 2008, the Civil Division informed counsel to the Special Committee that as part of the pending civil inquiry, the Civil Division is investigating a number of qui tam complaints filed by relators against us under the whistleblower provisions of the False Claims Act, 31 U.S.C. sections 3729-3733.  The seal in those cases has been partially lifted for the purpose of authorizing the Civil Division to disclose to us the existence of the qui tam complaints.  The complaints otherwise remain under seal as required by 31 U.S.C. section 3730(b)(3).  We and the Special Committee are undertaking to discuss with the Civil Division, and address, allegations by the qui tam relators. 

We also learned from a docket search that a former employee filed a qui tam action on October 25, 2007 in state court for Leon County, Florida against several defendants, including us and one of our subsidiaries.  Because qui tam actions brought under federal and state false claims acts are sealed by the court at the time of filing, we are unable to determine the nature of the allegations and, therefore, we do not know whether this action relates to the subject matter of the federal investigations.  It is possible that additional qui tam actions have been filed against us and are under seal.  Thus, it is possible that we are subject to liability exposure under the False Claims Act based on qui tam actions other than those discussed in this 2007 Form 10-K.

At this time, we cannot predict the probable outcome of these claims.  These and other potential actions that may be filed against us, whether with or without merit, may divert the attention of management from our business, harm our reputation and otherwise have

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a material adverse effect on our business, financial condition, results of operations and cash flows.  For a discussion of the aforementioned proceedings, see “Part I – Item 3 – Legal Proceedings.”

Our indemnification obligations and limitations of our director and officer liability insurance may have a material adverse effect on our financial condition, results of operations and cash flows.

Under Delaware law, our charter and bylaws and certain indemnification agreements to which we are a party, we have an obligation to indemnify, or we have otherwise agreed to indemnify, certain of our current and former directors, officers and associates with respect to current and future investigations and litigation, including the matters discussed in “Part I – Item 3 – Legal Proceedings.”  In connection with some of these pending matters, we are required to, or we have otherwise agreed to, advance, and have advanced, significant legal fees and related expenses to several of our current and former directors, officers and associates and expect to continue to do so while these matters are pending.  Certain of these obligations may not be “covered matters” under our directors and officers’ liability insurance, or there may be insufficient coverage available.  Further, in the event the directors, officers and associates are ultimately determined to not be entitled to indemnification, we may not be able to recover the amounts we previously advanced to them.

In addition, we have incurred significant expenses in connection with the pending investigations and litigation.  We maintain directors and officers liability insurance in the amounts of $45 million for indemnifiable claims and $10 million for non-indemnifiable securities claims.  We have met the retention limits under these policies.  We cannot provide any assurances that pending claims, or claims yet to arise, will not exceed the limits of our insurance policies, that such claims are covered by the terms of our insurance policies or that our insurance carrier will be able to cover our claims.  Due to these insurance coverage limitations, we may incur significant unreimbursed costs to satisfy our indemnification and other obligations, which may have a material adverse effect on our financial condition, results of operations and cash flows.

Continuing negative publicity regarding the investigations may have a material adverse effect on our business, financial condition, cash flows and results of operations.

As a result of the ongoing federal and state investigations, shareholder and derivative litigation, restatement of our financial statements and related matters, we have been the subject of negative publicity.  This negative publicity may harm our relationships with current and future investors, government regulators, associates, members, vendors and providers.  For example, it is possible that the negative publicity and its effect on our work environment could cause our associates to terminate their employment or, if they remain employed by us, result in reduced morale that could have a material adverse effect on our business.  In addition, negative publicity may adversely affect our stock price and, therefore, associates and prospective associates may also consider our stability and the value of any equity incentives when making decisions regarding employment opportunities.  Additionally, negative publicity may adversely affect our reputation, which could harm our ability to obtain new membership, building or maintaining our network of providers, or business in the future.  For example, when making award determinations, states frequently consider the plan’s historical regulatory compliance and reputation.  As a result, our business, financial condition, cash flows and results of operations may be materially adversely affected.

The investigations, the restatement and related matters have diverted, and are expected to continue to divert, management’s attention, which may have a material adverse effect on our business.

In addition to the challenges of the various government investigations and extensive litigation we face, our management team has spent considerable time and effort with regard to the internal and external investigations involving our historical accounting practices and internal controls, disclosure controls and procedures and corporate governance policies and procedures.  In particular, our Chief Executive Officer, Chief Financial Officer and General Counsel, as well as senior members of our finance and legal departments, have spent considerable time and effort with regard to the investigations, the restatement and related matters.  The significant time and effort spent by our management team on these matters has diverted, and is expected to continue to divert, its attention, which has, and could continue to have, a material adverse effect on our business.

Risks Related to Our Business

We have expended, and expect to continue to expend, significant financial resources as a result of the federal and state investigations, which will reduce our cash available to meet statutory reserve requirements, debt service payments and other corporate obligations for our operations and could have a material adverse effect on our business, financial condition and cash flows.

Through December 31, 2008, we had incurred a total of approximately $124.1 million in administrative expenses associated with, or consequential to, the government and Special Committee investigations, including legal fees, accounting fees, consulting fees, employee recruitment and retention costs and similar expenses.  Approximately $21.1 million of these investigation related costs were incurred in 2007 and approximately $103.0 million were incurred in 2008. 

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We expect to continue incurring significant additional costs as a result of the federal and state investigations and pending civil actions, including administrative expenses similar to those discussed above, and costs necessary to remediate our internal controls, improve our corporate governance and address other issues that may be identified through the restatement and remediation process.  We may also be required to pay significant damages or other amounts in the event of an adverse judgment or settlement.  A substantial amount of these costs will not be covered by, or may exceed the limits of, our insurance.  If we are unable to obtain additional financing, such payments may limit cash available for our operations and could impair our ability to meet certain statutory capital reserve requirements.  Further, if we cannot obtain additional financing, our cash generated by operations may not be sufficient to meet these obligations.

In addition, we are engaged in resolution discussions as to matters under review with the USAO, the Civil Division, the OIG and the State of Florida.  Based on the current status of matters and all information known to us to date, we have accrued a liability in the amount of $50.0 million in our financial statements for the year ended December 31, 2007 in connection with the ultimate resolution of these matters.  However, we cannot provide assurances regarding the likelihood, timing or terms and conditions of any potential negotiated resolution of pending investigations by the USAO, the Civil Division, the OIG or the State of Florida.  If we were required to pay a significant amount as restitution and/or a fine or penalty in the near term as part of any resolution, it could have a material adverse effect on our business, financial condition and cash flows.  For more information related to this accrual, see Notes 3 and 11 to the consolidated financial statements included in this 2007 Form 10-K.

If our government contracts are not renewed or are renewed on substantially different terms, are terminated or become subject to an enrollment freeze, our business, financial condition, results of operations and cash flows could be materially adversely affected.

We provide our Medicaid, Medicare, S-CHIP and other services through a limited number of contracts with state, federal or local government agencies.  These contracts generally have terms of one to four years and are subject to non-renewal by the applicable government agency.  All of our government contracts are terminable for cause if we breach a material provision of the contract or violate relevant laws or regulations.

Our contracts with the states in which we operate are generally subject to cancellation, non-renewal or a potential freeze on enrollment by the state in the event of the unavailability of adequate program funding or for other reasons.  For example, during 2008, we were subject to a 60-day marketing freeze in three counties in Florida resulting from the state’s allegation of wrongful marketing practices.  In some jurisdictions, a cancellation or enrollment freeze may be immediate, while in other jurisdictions a notice period is required.

Some of our contracts are also subject to termination or are only eligible for renewal through annual competitive bidding processes.  For example, renewal of our PDP business is subject to an annual bidding process.  As the result of this process, for plan year 2009, we bid above the benchmark in 22 of the 34 regions and as of December 31, 2008, approximately 252,000 auto-assigned dual-eligible members were assigned away from our plans.  In addition to this known membership loss, in 2009 we expect that a portion of the 153,000 low-income subsidized members who previously chose our plans will choose a new plan in 2009.  We estimate that, based on these factors as well as new members choosing to enroll in our plans, new auto-assignment of members and other factors, our revenues generated from our PDP plans will decrease for 2009.  If we are unable to renew or to rebid or compete successfully for any of our existing or potential government contracts, if any of our contracts are terminated, or if any limitations or restrictions are imposed, our business, financial condition, results of operations and cash flows could be materially adversely affected.

Our encounter data may be inaccurate or incomplete, which could have a material adverse effect on our results of operations, cash flows and ability to bid for, and continue to participate in, certain programs.

We use administrative, claim and clinical data, known as encounter data, to identify members who may benefit from preventive or increased coordination of care or who otherwise need to maintain health status in association with a chronic condition or complex clinical situation.  This data may also be aggregated and shared with specific health care providers to determine the effectiveness of care delivered to our members.

We are required to report encounter data to our regulators who use the data to monitor what services we provide to our members, determine if services are being under- or over-utilized and evaluate the quality of the services we provide.  To do so, our regulators compare our encounter data to certain defined quality metrics such as the Health Employer Data Information Set (HEDIS®) or unique metrics defined by the particular regulator.  Our regulators may also use our encounter data, as well as data submitted by other health plans, to set reimbursement rates, assign membership, assess the quality of care being provided to members and evaluate contractual and regulatory compliance.  For example, New York uses encounter data to measure and rate the quality of services health plans offer.  Plans that score well on the quality measures as well as certain other performance standards are rewarded with additional premiums and auto-assigned members.  Plans that fail to meet the standards for this additional premium and auto-assigned members, including established quality measures, for three consecutive years could be excluded from participation in the New York Medicaid program.

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Failure by our providers to submit key data elements or to conform their submissions to required formats results in deficiencies in our encounter data.  We are currently working closely with several states to ascertain or improve the accuracy or completeness of our encounter data.  Where we have inaccurate or incomplete encounter data, we are required to expend additional effort to collect or correct this data and we are exposed to regulatory risk for noncompliance.  We expect states to increase their reliance on encounter data.  Our inability to obtain complete and accurate encounter data could significantly affect the premium rates we receive and how membership is assigned to us, which could have a material adverse effect on our results of operations, cash flows and ability to bid for, and continue to participate in, certain programs.

Because our medical benefits expense and medical benefits ratio in 2007 was determined based on substantially complete claims data that subsequently became available due to the lapse of time between December 31, 2007 and the date of filing of this 2007 Form 10-K, we currently anticipate that there will be an adverse off-setting impact on our medical benefits expense  and medical benefits ratio in 2008.

We historically have used an estimate of medical benefits expense and medical benefits payable because substantially complete claims data is typically not available at the required date to timely file our annual and interim reports.  However, for the year ended December 31, 2007, we were able to review substantially complete claims information that has become available due to the substantial lapse in time between December 31, 2007 and the date of filing of this 2007 Form 10-K.  We have determined that the claims information that has become available provides additional evidence about conditions that existed with respect to medical benefits payable at the December 31, 2007 balance sheet date and has been considered in accordance with GAAP.  Consequently, the amounts we recorded for medical benefits payable and medical benefits expense for the year ended December 31, 2007 are based on actual claims paid.  The difference between our actual claims paid for this period and the amount that would have resulted from using our original actuarially determined estimate is approximately $92.9 million, or a decrease of 1.8% in the medical benefits ratio (“MBR”), the ratio of our medical benefits expense to the premiums we receive and a measure of our profitability.  Thus, medical benefits expense, medical benefits payable and the MBR for the year ended December 31, 2007 include the effect of using actual claims paid.  Conversely, we anticipate that medical benefits expense and MBRs in 2008 will be unfavorably impacted because they will not have the off-setting benefit of the prior period development that otherwise would have been recorded in 2008 if we were filing timely.

Our estimate of medical benefits expense and medical benefits payable are subject to greater variability when there is more limited claims payment experience or information available to us, which could cause our reported results of operations to be materially different than expected.

The factors and assumptions that are used to develop our estimate of medical benefits expense and medical benefits payable inherently are subject to greater variability when there is more limited claims payment experience or information available to us.  For example, from 2004 to 2007, we grew at a rapid pace, through the expansion of existing products and introduction of new products, such as Part D and PFFS, and entry into new geographic areas, such as Georgia.  The ultimate claims payment amounts, patterns and trends for new products and geographic areas can not be precisely predicted at their onset, since we, the providers and the members do not have experience in these products or geographic areas.  Standard accepted actuarial methodologies require the use of key assumptions consisting of trend and completion factors using an assumption of moderately adverse conditions that would allow for this inherent variability.  This can result in larger differences between the originally estimated medical benefits payable and the actual claims amounts paid.  Medical cost trends can be volatile and management is required to use considerable judgment in the selection of medical benefits expense trends and other actuarial model inputs.  Actual conditions, however, could differ from those assumed in the estimation process.

Due to the uncertainties associated with the factors used in the assumptions discussed above, the actual amount of medical benefits expense that we incur may be materially different than the amount of medical benefits payable originally estimated.  If our estimates of medical benefits payable are inaccurate in the future, our reported results of operations could be favorably or unfavorably impacted.  Further, our inability to estimate medical benefits payable accurately may also materially adversely affect our ability to take timely corrective actions, further exacerbating the extent of any material adverse effect on our results of operations.  Factors that may cause medical benefits expense to exceed our estimates include, among others:

·                  lack of experience estimating medical benefits expense for new products and/or in new geographic areas;

·                  an increase in the cost of health care services and supplies, including pharmaceuticals, whether as a result of inflation or otherwise;

·                  higher than expected utilization of health care services;

·                  periodic renegotiation of hospital, physician and other provider contracts;

·                  the occurrence of catastrophes, major epidemics, terrorism or bio-terrorism;

·                  changes in the demographics of our members and medical trends affecting them;

·                  new mandated benefits or other changes in health care laws, regulations and/or practices; and

·                  unanticipated adverse selection by high cost members.

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We manage our medical benefits expense through a variety of techniques, including various payment methods to primary care physicians and other providers, advance approval for hospital services and referral requirements, medical management and quality management programs, upgraded information systems and reinsurance arrangements.  However, we may not be able to manage these expenses effectively in the future.  For example, a hypothetical 1% increase in our MBR would have reduced our earnings before income taxes for the years ended December 31, 2006 and 2007 by approximately $36.0 million and $53.0 million, respectively.  If our medical benefits expense increases, our profitability and results of operations could be materially adversely affected.

We derive a large portion of our Medicaid revenues and profits from operations in Florida and Georgia, and legislative or regulatory actions, economic conditions or other factors that materially adversely affect those operations could have a material adverse effect on our profitability and results of operations.

For the year ended December 31, 2007, our Florida and Georgia Medicaid health plans accounted for approximately 33.8% and 40.4% of our total Medicaid segment premium revenues, respectively.  If we are unable to continue to operate in Florida and Georgia, if our current operations in Florida and Georgia are significantly curtailed, or either Florida or Georgia are unable or unwilling to pay current rates for Medicaid health plans, our revenues will decrease materially.  Our reliance on our Medicaid operations in Florida and Georgia could cause our revenues and profitability to change suddenly and unexpectedly, depending on legislative or regulatory actions, economic conditions and similar factors.  For example, in 2008, Florida proposed Medicaid rates that were significantly below our expectations which, if implemented, would have caused us to withdraw from several counties.  While the rates were subsequently revised to make it economically feasible for us to continue to operate in all counties, there was an overall 3% rate reduction.  In addition to the 2008 rate reduction, in January 2009, the Florida legislature passed a 3% reduction to the State’s 2008-09 fiscal year budget for Medicaid prepaid health plans, effective March 1, 2009 through June 30, 2009.  Although AHCA, which administers the Florida Medicaid program, has yet to determine how to implement the reductions and the budget is still subject to gubernatorial scrutiny, it is possible that AHCA will propose a substantial reduction to our Florida Medicaid premiums.  These recent and possible future rate reductions will require us to evaluate our medical benefits and administrative expenses. Further, effective January 1, 2009, all plans participating in the Florida Medicaid program are prohibited from directly selling their plans to Medicaid recipients.  We continue to evaluate how we will be impacted by this change but it could result in changes in our Florida Medicaid membership, including changes in the demographics of our members or our product mix.  In Georgia, managed care legislation enacted on July 1, 2008 has resulted in program changes designed to address issues raised by health care providers during program implementation.  These changes related to payment of claims, eligibility determination and provider contracting, and may negatively impact revenues and profits for the plan.  Further, continued economic slowdowns in Florida and Georgia have negatively impacted state revenues.  Consequently, in order to meet state budgetary requirements, Florida or Georgia or both may develop future Medicaid capitation rates that, while actuarially sound, are insufficient to keep pace with medical trends or inflation, therefore reducing our profitability in those markets and materially adversely affecting our results of operations.

Negative publicity regarding the managed care industry may have a material adverse effect on our business, financial condition, results of operations and cash flows.

The managed care industry has historically been subject to negative publicity.  This publicity may result in increased legislation, regulation and review of industry practices and, in some cases, litigation.  These factors may have a material adverse effect on our ability to market our products and services, require us to change our products and services and increase regulatory or legal burdens under which we operate, further increasing the costs of doing business and materially adversely affecting our business, financial condition, results of operations and cash flows.

The government agencies that regulate us can impose restrictions on our operations, particularly in new markets, which could have a material adverse effect on our profitability, results of operations and cash flows.

The government agencies that regulate us may limit or impose restrictions on us, particularly in new markets, or suspend our right to market to or add new members if it finds deficiencies in our provider network or operations or for other reasons.  In addition, a state may take unilateral action to limit or suspend our ability to enter into additional government contracts with that state in the future, which could constrain our ability to expand our business.  For example, in 2009 we terminated our contract with CMS to offer PPO plans in Georgia and, as a consequence, under the terms of our contract with CMS, we are not allowed to re-enter Georgia to offer PPO plans for a period of two years.

When we enter new markets, regulators may place certain limitations on our license or may impose restrictions or additional requirements on our operations.  For example, the North Carolina Department of Insurance imposed a limitation on the number of PFFS members we can enroll until we have operated in the state for a certain amount of time.  Further, when we commenced operations in Ohio, the Ohio Department of Insurance required us to maintain 300% RBC, which is higher than would be required of a plan that had been operating in the state for a longer period of time.  These limitations and additional requirements can restrict our ability to grow our membership in new markets and may require us to make additional capital contributions to new plans which could have a material adverse effect on our profitability, cash flows and results of operations.

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Because our premiums, which generate most of our revenues, are fixed by contract, we are unable to increase our premiums during the contract term if our corresponding medical benefits expense exceeds our estimates, which could have a material adverse effect on our results of operations.

Most of our revenues are generated by premiums consisting of fixed monthly payments per member.  These payments are fixed by contract, and we are obligated during the contract period, which is generally one to four years, to provide or arrange for the provision of health care services as established by state and federal governments.  We have less control over costs related to the provision of health care services than we do over our selling, general and administrative expense.  Historically, our medical benefits expense as a percentage of premium revenue has fluctuated within a relatively narrow band.  For example, our medical benefits expense was 81.6%, 81.4%, 81.1% and 79.4% for the years ended December 31, 2004, 2005, 2006 and 2007, respectively.  Further, our regulators set premiums using actuarial methods based on historical data.  Actual experience, however, could differ from those assumed in the premium-setting process, which could result in premiums being insufficient to cover our medical benefits expense.  If our medical benefits expense exceeds our estimates or our regulators’ actuarial pricing assumptions, we will be unable to adjust the premiums we receive under our current contracts, which could have a material adverse effect on our results of operations.

Changes in our member mix could have a material adverse effect on our cash flow, profitability and results of operations.

Our revenues, costs and margins vary based on changes to our membership mix, product mix and the demographics of our membership.  Our revenues are generally comprised of fixed payments that are determined by the type of member in our plans.  The payments are generally set based on an estimation of the medical costs required to serve members with various demographic and health risk profiles.  As such, there are sometimes wide variations in the established rates per member.  For instance, the rates we receive for an ABD member are generally significantly higher than for a non-ABD member who is otherwise similarly situated.  As the composition of our membership base changes as the result of programmatic, competitive, regulatory, benefit design, economic or other changes, there is a corresponding change to our premium revenue, costs and margins which may have a material adverse effect on our cash flow, profitability and results of operations.

Our failure to make acquisitions or divestitures on terms favorable to us, or at all, or to successfully integrate the businesses and product lines we acquire, could have a material adverse effect on our financial condition, results of operations and growth prospects.

In addition to organic growth, acquisitions of other health plans remains an element of our growth strategy.  However, the ongoing turmoil in the credit markets has made obtaining financing very challenging, and we may not have sufficient available cash to finance an acquisition.  Therefore, we may be unable to identify, finance and complete appropriate acquisitions.  Similarly, our ability to dispose of our assets may be hindered by our inability to find a suitable purchaser as the result of these market conditions, the pendency of the investigations and related matters or other factors.  In addition to general market and financing risks, we are generally required to obtain regulatory approval from one or more state or federal agencies when acquiring or disposing of a health plan, which may require a public hearing.  We may be unable to comply with the regulatory requirements for an acquisition or disposition in a timely manner, or at all.  Even if we identify suitable acquisition targets or purchasers for our assets, we may be unable to complete these types of transactions on terms favorable to us, or at all.

Further, if we complete acquisitions, we may be unable to realize the anticipated benefits from acquisitions because of operational factors or difficulties in integrating the acquisitions with our existing businesses.  To the extent that we complete acquisitions, we are likely to incur additional costs or administrative challenges associated with entering into geographic areas in which we do not currently operate or expand into new lines of business.  Our rate of expansion into other geographic areas or other product lines may also be inhibited by:

·                  the time and costs associated with obtaining the necessary license to operate in the new geographic area or new line of business, if necessary;

·                  our inability to develop a network of physicians, hospitals and other health care providers that meets our requirements and those of government regulators;

·                  competition, which can increase the costs of recruiting members;

·                  the cost of providing health care services in those geographic areas or lines of business;

·                  increased administrative and operational efforts and costs consequential to our establishing new operations for, or our inexperience with, a new line of business or geographic area; and

·                  demographics and population density.

Accordingly, we may be unsuccessful in entering other geographic areas, counties, states or lines of business, which could have a material adverse effect on our financial condition, results of operations and growth prospects.

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The inability or failure to maintain effective and secure management information systems and applications, successfully update or expand processing capability or develop new capabilities to meet our business needs could result in operational disruptions and other materially adverse consequences.

Our business depends on effective and secure information systems, applications and operations.  The information gathered and processed by our management information systems assists us in, among other things, marketing and sales and membership tracking, underwriting, billing, claims processing, medical management, medical care cost and utilization trending, financial and management accounting, reporting, planning and analysis and e-commerce.  These systems also support our customer services functions, provider and member administrative functions and support tracking and extensive analysis of medical expenses and outcome data.  These systems remain subject to unexpected interruptions resulting from occurrences such as hardware failures or increased demand.  There can be no assurance that such interruptions will not occur in the future, and any such interruptions could have a material adverse effect on our business and results of operations.  Moreover, operating and other issues can lead to data problems that affect the performance of important functions, including, but not limited to, claims payment, customer service and accurate financial reporting and customer service.

There can also be no assurance that our process of improving existing systems, developing new systems to support our operations and improving service levels will not be delayed or that system issues will not arise in the future.  Our information systems and applications require continual maintenance, upgrading and enhancement to meet our operational needs.  If we are unable to maintain or expand our systems, we could suffer from, among other things, operational disruptions, such as the inability to pay claims or to make claims payments on a timely basis, loss of members, difficulty in attracting new members, regulatory problems and increases in administrative expenses.

Additionally, events outside our control, including acts of nature such as hurricanes, earthquakes, fires or terrorism, could significantly impair our information systems and applications.  To help ensure continued operations in the event that our primary data center operations are rendered inoperable, we have a disaster recovery plan that addresses how we recover to an acceptable level of business functionality within stated timelines.  However, our disaster plan may not operate effectively during an actual disaster and our operations could be disrupted, which would have a material adverse effect on our results of operations.

Our business requires the secure transmission of confidential information over public networks.  Advances in computer capabilities, new discoveries in the field of cryptography or other events or developments could result in compromises or breaches of our security systems and client data stored in our information systems.  Anyone who circumvents our security measures could misappropriate our confidential information or cause interruptions in services or operations.  The Internet is a public network, and data is sent over this network from many sources.  In the past, computer viruses or software programs that disable or impair computers have been distributed and have rapidly spread over the Internet.  Computer viruses could be introduced into our systems, or those of our providers or regulators, which could disrupt our operations, or make our systems inaccessible to our providers or regulators.  We may be required to expend significant capital and other resources to protect against the threat of security breaches or to alleviate problems caused by breaches.  Because of the confidential health information we store and transmit, security breaches could expose us to a risk of regulatory action, litigation, fines and penalties, possible liability and loss.  Our security measures may be inadequate to prevent security breaches, and our results of operations could be materially adversely affected by cancellation of contracts and loss of members if such breaches are not prevented.

We rely on a number of vendors, and failure of any one of the key vendors to perform in accordance with our contracts could have a material adverse effect on our business and results of operations.

We have contracted with a number of vendors to provide significant assistance in our operational support including, but not limited to, certain enrollment, billing, call center, benefit administration, claims processing functions, sales and marketing and certain aspects of utilization management.  Our dependence on these vendors makes our operations vulnerable to such third parties’ failure to perform adequately under our contracts with them.  Significant failure by a vendor to perform in accordance with the terms of our contracts could have a material adverse effect on our results of operations.  Further, due to our growth, business changes or legal proceedings, our ability to manage these vendors may be impacted.  In addition, due to these factors, our vendors may request changes in pricing, payment terms or other contractual obligations between the parties which could have a material adverse effect on our business and results of operations.

We encounter significant competition for program participation, network providers and members, and our failure to compete successfully may limit our ability to increase or maintain membership in the markets we serve, which may have a material adverse effect on our growth prospects and results of operations.

We operate in a highly competitive environment and in an industry that is currently subject to significant changes due to business consolidations, changes in regulation that could affect competitors differently, new strategic alliances and aggressive marketing practices by other managed care organizations.  We compete principally on the basis of premiums and cost-sharing terms, provider network composition, benefits and medical services provided, effectiveness of resolution of calls and complaints, and other factors.  For a discussion of the competitive environment in which we operate, see “Part I – Item 1 – Business – Competition.”  A number of

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these competitive elements are partially dependent on, and can be positively affected, by financial resources available to a health plan.  Many other organizations with which we compete have substantially greater financial and other resources than we do.  Further, we operate in or may attempt to acquire business in programs or markets in which premiums are determined on the basis of a competitive bidding process.  In these programs or markets, funding levels established by bidders with significantly different cost structures, target profitability margins or aggressive bidding strategies could negatively impact our ability to maintain or acquire profitable business which could hurt our results of operations.  In addition, regulatory reform or other initiatives may bring additional competitors into our markets.  Failure to compete successfully in the markets we serve may have a material adverse effect on our growth prospects and results of operations.

We may not be able to retain or replace our executive officers, other members of management and associates, and the loss of any one or more members of management and their managed care expertise, or large numbers of associates, could have a material adverse effect on our business.

Although some of our officers have entered into employment agreements with us, these agreements may not provide sufficient incentives for those officers to continue their employment with us.  The loss of the leadership, knowledge and experience of our management teams could have a material adverse effect on our business.  Replacing one or more of the members of our management team might be difficult or take an extended period of time.  In November 2007, our Board implemented retention and severance programs.  The retention program expired at the end of 2008, and the severance program will terminate at the end of 2009.  The remaining severance program may not provide sufficient incentives to retain our officers and other associates.  Additionally, we may not establish a new retention program to replace the program that expired at the end of 2008, and we may not establish a new severance program after it expires in 2009.  We may incur substantial attrition following the expiration of these programs which could negatively affect our business.  Our success is also dependent on our ability to hire and retain qualified management, and technical and medical personnel.  The pendency of the ongoing governmental investigations, litigation and related matters and any ongoing restrictions under which we must operate, such as a corporate integrity agreement or third party monitor, could hinder our ability to attract and retain qualified associates.  Accordingly, we may be unsuccessful in recruiting and retaining such personnel, which could have a material adverse effect on our business.

We may not sustain the rapid rate of growth we have achieved during the past five years, which could be viewed unfavorably by investors.

Over the past five years we have experienced a rapid rate of growth in our business.  We do not foresee growth at the same level of prior years primarily because (i) we believe that our historic rates of growth are unsustainable; (ii) at this time we do not foresee large, one-time opportunities to expand our business, such as the launch of PDPs and the privatization of Georgia Medicaid; and (iii) we intend to divert some resources to strengthen our compliance and operating capabilities.  Furthermore, pressure on premium rates or margins could lead us to selectively exit some markets or products.  For example, in 2008 we elected to withdraw from the Ohio ABD program under which the premiums we received were insufficient to cover our medical expenses.  Finally, recent regulatory changes designed to limit the use of direct marketing, particularly in Florida, could cause our rate of membership growth to decline.  Accordingly, our business may experience a period of slower growth or contraction in 2009 and beyond, which may be viewed unfavorably by investors.

Ineffective or unsuccessful management of our historical or future potential growth, either generally or with respect to specific products or geographic areas, may have a material adverse effect on our business, results of operations and financial condition.

We strive to increase our revenues and to expand into new profitable markets.  We had total revenue of approximately $3.6 billion and $5.4 billion in 2006 and 2007, respectively.  Management of our past and future potential growth, either generally or with respect to specific products or geographic areas, could place a significant strain on our management team and other resources.  Our ability to manage our growth may depend on our ability to retain and strengthen our management team and attract, train and retain skilled associates, and our ability to implement and improve operational, financial and management information systems on a timely basis.  We may need to enhance and augment our current systems and operating environment to ensure system and operational reliability as well as compliance with our current and future contracts.  If we are unable to manage our growth effectively, our financial condition and results of operations could be materially and adversely affected.  In addition, the initial substantial costs related to growth could have a material adverse effect on our business, results of operations and financial condition.

If we are unable to maintain satisfactory relationships with our providers, we may be precluded from operating in some markets, which could have a material adverse effect on our results of operations and profitability.

Our profitability depends, in large part, on our ability to enter into cost-effective contracts with hospitals, physicians and other health care providers in appropriate numbers and at locations convenient for our members in each of the markets in which we operate.  In any particular market, however, providers could refuse to contract, demand higher payments or take other actions that could result in higher medical benefits expense.  In some markets, certain providers, particularly hospitals, physician/hospital organizations or multi-specialty physician groups, may have significant market positions.  If such a provider or any of our other providers refused to

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contract with us, use their market position to negotiate contracts that might not be cost-effective or otherwise place us at a competitive disadvantage, those activities could have a material adverse effect on our operating results in that market.  Also, in some rural areas, it is difficult to maintain a provider network sufficient to meet regulatory requirements.  In the long term, our ability to contract successfully with a sufficiently large number of providers in a particular geographic market will affect the relative attractiveness of our managed care products in that market.  If we are unsuccessful in negotiating satisfactory contracts with our network providers, it could preclude us from renewing our Medicaid or Medicare contracts in those markets, from being able to enroll new members or from entering into new markets.  Also, in situations where we have a deficiency in our provider network, regulators require us to allow members to obtain care from out-of-network providers at no additional cost, which could have a material adverse effect on our ability to manage expenses.

Our provider contracts with network primary care physicians and specialists generally have terms of one to four years, with automatic renewal for successive one-year terms.  We may be unable to continue to renew such contracts or enter into new contracts enabling us to serve our members profitably.  We are also required to establish acceptable provider networks prior to entering new markets.  Further, under MIPPA, we are required to have a network of providers for all of our PFFS plans that operate in markets with two or more networked-based plans.  Currently, we do not have provider networks in the majority of the markets where we offer PFFS plans.  We are currently evaluating alternative solutions to establishing a network in targeted areas to meet these requirements, including building a contracted network, contracting with a third party network or withdrawing from certain counties where it is not economically or otherwise feasible to establish networks for this line of business.  However, if we are unable to establish adequate networks, we will be required to cease offering PFFS plans in these areas.  Finally, we may be unable to maintain our relationships with our network providers or enter into agreements with providers in new markets on a timely basis or on favorable terms.  If we are unable to retain our current provider contracts or enter into new provider contracts timely or on favorable terms, our results of operations and profitability could be materially adversely affected.

Our inability to obtain or maintain adequate intellectual property rights in our brand names for our health plans or enforce such rights may have a material adverse effect on our business, results of operations and cash flows.

Our success depends, in part, upon our ability to market our health plans under our brand names, including “WellCare,” “HealthEase,” “Staywell,” and “Harmony.”  We hold a federal trademark registration for the “WellCare” trademark, and we are pursuing applications with the U.S. Patent and Trademark Office to register “HealthEase” and “Harmony.”  We use the “Staywell” trademark only in the State of Florida, and, pursuant to an agreement in August 2008 with The Staywell Company, a health education company based in St. Paul, Minnesota, we will co-exist with their use of that term for very different kinds of services and will not pursue a federal registration of that trademark.  It is possible that other businesses may have actual or purported rights in the same names or similar names to those under which we market our health plans, which could limit or prevent our ability to use these names, or our ability to prevent others from using these names.  If we are unable to prevent others from using our brand names, if others prohibit us from using such names or if we incur significant costs to protect our intellectual property rights in such brand names, our business, results of operations and cash flows may be materially adversely affected.

Several members of our management team have been recently appointed to their positions, and a lack of familiarity with our Company or our industry could have a material adverse effect on our business.

During the past year, our management team has undergone a number of changes, including the appointment of several members of senior management, some of whom have limited prior experience with our Company or our industry.  Our operations are highly dependent on the experience and skills of our management team.  Our new management’s team overall lack of familiarity and experience with the Company or our industry could have a material adverse effect on our business.

 Failure of our state regulators to approve payments of dividends and/or distributions from certain of our regulated subsidiaries to us or our non-regulated subsidiaries may have a material adverse effect on our liquidity, cash flows, business and financial condition.

On December 31, 2008, three of our Florida regulated subsidiaries declared dividends to one of our non-regulated subsidiaries in the aggregate amount of $105.1 million, two of which were paid on December 31, 2008 and one of which was paid on January 2, 2009.  In addition, we currently intend to cause certain of our other regulated subsidiaries to declare dividends and/or distributions to us or certain of our non-regulated subsidiaries in an effort to increase our unregulated cash balances.  In most states, we are required to seek the prior approval of state regulatory authorities to transfer money or pay dividends from our regulated subsidiaries in excess of specified amounts or, in some states, any amount.  The discretion of the state regulators, if any, in approving or disapproving a dividend or intercompany transaction is often not clearly defined.  Health plans that declare non-extraordinary dividends usually must provide notice to the regulators in advance of the intended distribution date of such dividend.  If our state regulators do not approve payments of dividends and/or distributions by certain of our regulated subsidiaries to us or our non-regulated subsidiaries, our liquidity, cash flows, business and financial condition may be materially adversely affected.

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Claims relating to medical malpractice and other litigation could cause us to incur significant expenses, which could have a material adverse effect on our financial condition and cash flows.

Our providers involved in medical care decisions and associates involved in coverage decisions may be exposed to the risk of medical malpractice claims.  Some states have passed or are considering legislation that permits managed care organizations to be held liable for negligent treatment decisions or benefits coverage determinations, or eliminates the requirement that providers carry a minimum amount of professional liability insurance.  This kind of legislation has the effect of shifting the liability for medical decisions or adverse outcomes to the managed care organization.  This could result in substantial damage awards against us and our providers that could exceed the limits of our insurance coverage or could cause us to pay additional premiums to increase our insurance coverage.  Therefore, successful malpractice or tort claims asserted against us, our providers or our associates could have a material adverse effect on our financial condition and cash flows.

From time to time, we are party to various other litigation matters (including the matters discussed in “Part I - Item 3 – Legal Proceedings”), some of which seek monetary damages.  We cannot predict with certainty the outcome of any pending litigation or potential future litigation, and we may incur substantial expense in defending these lawsuits or indemnifying third parties with respect to the results of such litigation, which could have a material adverse effect on our financial condition and cash flows.

We maintain errors and omissions policies as well as other insurance coverage.  However, potential liabilities may not be covered by insurance, our insurers may dispute coverage or may be unable to meet their obligations, or the amount of our insurance coverage may be inadequate.  We cannot assure you that we will be able to obtain insurance coverage in the future or that insurance will continue to be available to us on a cost-effective basis.  Moreover, even if claims brought against us are unsuccessful or without merit, we would have to defend ourselves against such claims.  The defense of any such actions may be time-consuming and costly and may distract our management’s attention.  As a result, we may incur significant expenses and may be unable to effectively operate our business.

Risks Related to Our Financial Condition

Our senior secured credit facility, which is currently in default and subject to acceleration by the lenders, will become due and payable on May 13, 2009, and we cannot provide any assurances that adverse developments will not arise that would impede our ability to pay the outstanding balance of approximately $152.8 million when it becomes due.

Our senior secured credit facility with Wachovia Bank, as Administrative Agent, and a syndicate of lenders, which has a term loan facility with an outstanding balance of approximately $152.8 million as of December 31, 2008, is currently in default and subject to acceleration by the lenders and, absent acceleration by the lenders, will become due and payable on May 13, 2009.  Our senior secured credit facility also included a revolving credit facility that expired in May 2008.  Although we are not in payment default, we are in default of a number of covenants contained in the credit agreement (including our failure to provide the lenders with audited financial statements, our 2008 budget and other requested reports and information), some of which cannot be cured prior to maturity of the senior secured credit facility (such as our entry into intercompany loan transactions, which are described in “Management’s Discussion and Analysis of Financial Condition and Results of Operation,” that were not effected in compliance with the credit agreement).  As of the date hereof, our payment obligations under the credit agreement have not been accelerated and the rate of interest has not been increased.  However, we cannot provide any assurance that such obligations will not be accelerated or the rate of interest increased in the future or that the lenders will not exercise other remedies for default.

We cannot provide any assurances that adverse developments will not arise that impede our ability to repay in full the outstanding balance under the credit facility when it becomes due.  In particular, the timing and amount of any potential resolution of pending investigations by the USAO, the Civil Division, the OIG and the State of Florida are uncertain and could materially and adversely affect our ability to meet our near-term obligations, including repayment of the outstanding balance under the credit facility.  Also, our ability to repay in full the outstanding balance under the credit facility could be materially and adversely affected if, among other things, Florida regulators were to require certain of our intercompany loan arrangements which total approximately $50 million to be terminated.  In addition, there may be other potential adverse developments that could impede our ability to repay in full the outstanding balance under the credit facility.

Based on third-party information, we believe that Fairholme, who also is our largest shareholder, recently purchased approximately 67% of the outstanding balance under our term loan facility.  As a holder of a majority of the outstanding balance under our term loan facility, Fairholme has the ability to require the exercise of remedies for default, including accelerating our payment obligations and/or increasing the rate of interest.

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If we are unsuccessful in our initiative to raise additional unregulated cash, our unregulated cash balances could deteriorate, which could have a material adverse effect on our cash flows, business, financial condition, results of operations and growth prospects.

We are pursuing financing alternatives to, among other things, increase our unregulated cash balances.  Financing alternatives that we are pursuing include, but are not limited to, seeking dividends from certain of our regulated subsidiaries to the extent that we are able to access available excess capital and pursuing external financing sources. One or more factors may cause us to be unable to raise additional unregulated cash, including, among others:

·                  continued turmoil in the financial markets and general adverse economic conditions make it unlikely that we will be able to obtain financing and also may make it more difficult or prohibitively costly for us to raise capital through the issuance of debt or common stock;

·                  the uncertainty created by the ongoing state and federal investigations is adversely affecting our ability to obtain financing;

·                  required capital contributions to our regulated subsidiaries are greater than anticipated, resulting from, among other things, lower than expected profitability in our regulated subsidiaries or the imposition of greater capital requirements by state insurance regulators;

·                  we are unable to obtain the approval of state regulatory authorities to cause certain of our regulated subsidiaries to declare and pay dividends to us or our non-regulated subsidiaries;

·                  management fees received by our non-regulated third-party administrator subsidiary are less than anticipated as a result of lower than expected premium revenues in our regulated subsidiaries;

·                  the lenders under our senior secured credit facility accelerate repayment of the outstanding indebtedness thereunder;

·                  Florida regulators require the regulated subsidiaries to terminate certain intercompany loan arrangements in the amount of $50.0 million, as discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operation,” necessitating the borrowing subsidiary to repay in full the amount owed to the Florida regulated subsidiaries, or other restrictions are placed on the use of proceeds from such loans; and/or

·                  we are required to pay significant fines or penalties in the near term to resolve one or more of the federal or state investigations or we do not prevail in one or more of the actions described under “Part I – Item 3 – Legal Proceedings.”

 If we are unsuccessful in our initiative to raise additional unregulated cash, our unregulated cash balances could deteriorate, which could have a material adverse effect on our cash flows, business, financial condition and results of operations.

Recent disruptions in the financial markets and the general economic slowdown could cause us to be unable to obtain financing and expose us to risks related to the overall macro-economic environment, which could have a material adverse effect on our business, financial condition and results of operations.

The United States equity and credit markets have recently experienced significant price volatility, dislocations and liquidity disruptions, which have caused market prices of many equities to fluctuate substantially and the spreads on prospective debt financings to widen considerably.  These circumstances have materially impacted liquidity in the financial markets, making terms for certain financings less attractive, and in some cases have resulted in the unavailability of financing, even for companies who are otherwise qualified to obtain financing.  These events make it unlikely that we will be able to obtain financing and also may make it more difficult or prohibitively costly for us to raise capital through the issuance of debt or common stock.

In addition, due to the general economic slowdown, we may be exposed to risks related to the overall macro-economic environment, including a lower rate of return than we have historically experienced on our invested assets, being limited in our ability to sell or liquidate our invested assets, such as our auction rate securities, and receiving inadequate premium payments from our government payors due to state budget constraints.  Such risks, if realized, could have a material adverse effect on our business, financial condition and results of operations.

Our significant debt obligations, the restrictions under which we operate as set forth in our senior secured credit facility, and our default status under our senior secured credit facility could have a material adverse effect on our results of operations, financial condition, business strategy, liquidity and cash flow position.

We have outstanding indebtedness as of December 31, 2008 of approximately $152.8 million under our senior secured credit facility.  As noted above, our senior secured credit facility is currently in default and the lenders have the right to exercise remedies for default, including, among others, accelerating the amounts due under the credit facility, increasing the rate of interest and preventing us from accessing funds held by certain of our regulated subsidiaries.  As of the date hereof, the lenders have not exercised any such remedies for default, but we cannot provide any assurance that they will not do so in the future. In the absence of the exercise of remedies by the lenders, our credit facility becomes due and payable on May 13, 2009.

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  Our current default status and near term obligation to repay in full the outstanding balance under the credit facility also may have a material adverse effect on our results of operations, financial condition and business strategy resulting from, among others, the following:

·                  increasing our vulnerability to adverse economic, regulatory and industry conditions, and placing us at a disadvantage to our competitors;

·                  limiting our ability to compete and our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and

·                  limiting our ability to fund capital expenditures, capital reserve requirements, acquisitions, and general, corporate and other operating purposes.

In addition, restrictions and covenants in the documents governing our senior secured credit facility – including prescribed fixed charge coverage and leverage ratios and limitations on capital expenditures and acquisitions – may cause our financial and operating flexibility to be limited by, among other things, restricting our ability to (i) engage in certain transactions, (ii) incur liens, (iii) declare dividends to shareholders without lender approval, (iv) fund capital expenditures, capital reserve requirements, acquisitions, and general, corporate and other operating purposes, and (v) incurring indebtedness.

Our failure to comply with covenants in our debt instruments could result in our indebtedness being immediately due and payable and the loss of our assets, which could have a material adverse effect on our business, financial condition and cash flows.

Our credit facility is secured by a pledge of substantially all of the assets of our non-regulated entities, which includes the stock of our regulated subsidiaries directly held by our non-regulated entities.  If we fail to pay any of our indebtedness when due, or if we breach any of the other covenants in the instruments governing our indebtedness, such as the obligation to provide the lenders audited financial statements, it may result in one or more events of default.  As a result of the investigations and, among other things, our inability to provide the lenders with audited financial statements on a timely basis, we are in default under the terms of the credit agreement.  We have also defaulted on certain other obligations under the credit agreement, which will not be cured even if we file all of our delinquent SEC reports.  These events of default permit our creditors to declare all amounts owing to be immediately due and payable, proceed against the collateral securing such indebtedness, and exercise other remedies.  To date, the lenders have not accelerated any amounts outstanding under the credit facility, proceeded against the collateral securing the indebtedness or exercised other remedies, but we cannot assure you that they will not do so in the future.  If the lenders accelerate the amounts outstanding under the credit facility, proceed against the collateral securing the indebtedness or exercise other remedies, our business, financial condition and cash flows could be materially adversely affected.

Downgrades in our debt ratings may have a material adverse effect on our business, financial condition, access to capital markets, and our ability to obtain alternative financing options.

Claims paying ability, financial strength and debt ratings by recognized rating organizations are an increasingly important factor in establishing the competitive position of managed-care insurance companies.  Ratings information is broadly disseminated and generally used throughout our industry.  We believe our claims paying ability and financial strength ratings are an important factor in promoting our services to certain of our constituents.  Our debt ratings impact both the cost and availability of future borrowings.  Each of the rating agencies reviews its ratings periodically and there can be no assurance that current ratings will be maintained in the future.  Our ratings reflect each rating agency’s opinion of our financial strength, operating performance, and ability to meet our debt obligations or obligations to providers.  Downgrades in our ratings, should they occur, may have a material adverse effect on our business, financial condition, access to capital markets, and our ability to obtain alternative financing options.

Our investments in auction rate securities are subject to risks that may cause losses and have a material adverse effect on our liquidity.

As of December, 31, 2007, $204.7 million of our total $253.9 million in short-term investments were comprised of municipal note investments with an auction reset feature (“auction rate securities”).  These notes are issued by various state and local municipal entities for the purpose of financing student loans, public projects and other activities; they carry investment grade credit ratings.  Liquidity for these auction rate securities is typically provided by an auction process which allows holders to sell their notes and resets the applicable interest rate at pre-determined intervals, usually anywhere from seven to 35 days.  Recently, auctions for some of these auction rate securities have failed and there is no assurance that auctions on the remaining auction rate securities in our investment portfolio will continue to succeed.  An auction failure means that the parties wishing to sell their securities could not be matched with an adequate volume of buyers.  The securities for which auctions have failed will continue to accrue interest at the contractual rate and be auctioned every seven, 14, 28 or 35 days, as the case may be, until the auction succeeds, the issuer calls the securities, or they mature.  As a result, our ability to liquidate and fully recover the carrying value of our auction rate securities in the near term may be limited or not exist.  We may be required to wait until market stability is restored for these instruments or until the final maturity of the

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underlying notes (up to 33 years) to realize our investments’ recorded value.  All of these investments are classified as short-term investments but these developments may result in the classification of some or all of these securities as long-term investments in our consolidated financial statements in the future.

If the issuers of these auction rate securities are unable to successfully close future auctions and their credit ratings deteriorate, we may in the future be required to record an impairment charge on these investments, which could have a material adverse effect on our liquidity.

Risks Related to Being a Regulated Entity

CMS’s risk adjustment payment system and budget neutrality factors make our revenue and profitability difficult to predict and could result in material retroactive adjustments that have a material adverse effect on our results of operations.

CMS has implemented a risk adjustment payment system for Medicare health plans to improve the accuracy of payments and establish incentives for Medicare plans to enroll and treat less healthy Medicare beneficiaries.  CMS’s risk adjustment model bases a portion of the total CMS reimbursement payments on various clinical and demographic factors including hospital inpatient diagnoses, diagnosis data from ambulatory treatment settings, including hospital outpatient facilities and physician visits, gender, age, and Medicaid eligibility.  CMS requires all managed care companies to capture, collect, and report the necessary diagnosis code information to CMS.  Because 100% of Medicare Advantage premiums are now risk-based, it is more difficult to predict with certainty our future revenue or profitability.

In addition, CMS establishes premium payments to Medicare plans generally at the beginning of the calendar year and then adjusts premium levels on two separate occasions during the year on a retroactive basis.  The first such adjustments update the risk scores for the current year based on prior year’s dates of service.  The second such adjustment is a final retroactive risk premium settlement for the prior year.  As a result of the variability of factors, including plan risk scores, that determine such estimates, the actual amount of CMS’s retroactive payment could be materially more or less than our estimates.  Consequently, our estimate of our plans’ risk scores for any period and our accrual of premiums related thereto may result in adjustments to our Medicare premium revenue and, accordingly, could have a material adverse effect on our results of operations.

On February 22, 2008, CMS published preliminary results of a study designed to assess the degree of coding pattern differences between Original Medicare and Medicare Advantage and the extent to which any such differences could be appropriately addressed by an adjustment to risk scores.  CMS’s study of risk scores for Medicare populations from 2004 through 2006 found that Medicare Advantage member risk scores increased substantially more than the risk scores for the general Medicare fee-for-service population.  CMS found that the overall risk scores of “stayers” (a CMS term referring to those persons who were enrolled either in the same Medicare Advantage plan or in Original Medicare during the study periods) in Medicare Advantage increased more than those of Original Medicare stayers.  Accordingly, in the 2009 Advance Notice of Methodological Changes for Calendar Year 2009 for Medicare Advantage Capitation Rates and Part D Payment Policies, CMS summarized findings from its analysis of risk scores over the 2004-2006 time period and proposed to apply a coding difference adjustment to contracts whose disease scores for stayers exceeded fee-for-service by twice the industry average.  The agency proposed to apply an adjustment calculated based on those contracts that fell above the threshold.  In response to the Advance Notice, CMS received a significant number of comments on the proposed adjustment for Medicare Advantage coding differences, most of which disagreed with the view that CMS had identified differences in coding patterns between Medicare Advantage and fee-for-service Medicare.  CMS then decided not to make a coding intensity adjustment for 2009.  The agency said it hopes to be able to reach a more definitive conclusion as to whether differences in risk scores are attributable to differences in coding patterns prior to the Rate Announcement for 2010.

We are in the early stages of evaluating the CMS study and additional research the agency is conducting regarding differences in risk scores.  Until CMS releases more information, we will not be able to determine whether any of our plans will be subject to a negative adjustment in premiums in 2010 or thereafter.  If any of our plans are subject to a risk score adjustment, such adjustment, depending on its size, could have a material adverse effect on the affected plan’s results of operations.

Payments to Medicare Advantage plans are also adjusted by a “budget neutrality” factor that was implemented in 2003 by Congress and CMS to prevent health plan payments from being reduced overall while, at the same time, directing risk adjusted payments to plans with more chronically ill enrollees.  In general, this adjustment favorably impacted payments to Medicare Advantage plans.  In February 2006, the President signed legislation that reduced federal funding for Medicare Advantage plans by approximately $6.5 billion over five years.  Among other changes, the legislation provided for an accelerated phase-out of budget neutrality for risk adjusted payments made to Medicare Advantage plans.  These legislative changes have the effect of reducing payments to Medicare Advantage plans in general.  Consequently, our plans’ premiums will be reduced over the phase-out period unless our risk scores increase in a manner sufficient, when considered together with inflation-related increases in rates, to offset the elimination of this adjustment.  There is no assurance that our risk scores will increase or, if such scores do increase, such increases will be large enough to offset the elimination of this adjustment.

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Reductions in funding for government health care programs could have a material adverse effect on our results of operations.

All of the health care services we offer are through government-sponsored programs, such as Medicaid and Medicare.  As a result, our profitability is dependent, in large part, on continued funding for government health care programs at or above current levels.  For example, the premium rates paid by each state to health plans like ours differ depending on a combination of factors such as upper payment limits established by the state and federal governments, a member’s health status, age, gender, county or region, benefit mix and member eligibility categories.  Future Medicaid premium rate levels may be affected by continued government efforts to contain medical costs or state and federal budgetary constraints.  Some of the states in which we operate have experienced fiscal challenges leading to significant budget deficits.  According to the National Association of State Budget Officers, Medicaid spending consumes approximately one-quarter of the average state’s budget, representing the second largest expenditure.  Health care spending increases appear to be more limited than in the past, states continue to look at Medicaid programs as opportunities for budget savings and some states may find it difficult to continue paying current rates to Medicaid health plans.

Changes in Medicaid funding may lead to reductions in the number of persons enrolled in or eligible for Medicaid, reductions in the amount of reimbursement or elimination of coverage for certain benefits such as pharmacy, behavioral health or other benefits.  In some cases, changes in funding could be made retroactive, in which case we may be required to return premiums already received or receive reduced future payments.  In the recent past, all of the states in which we operate have implemented or considered legislation or regulations that would reduce reimbursement rates, payment levels, benefits covered or the number of persons eligible for Medicaid.  Reductions in Medicaid payments could reduce our profitability if we are unable to reduce our expenses at the same rate.

Further, continued economic slowdowns in our markets have negatively impacted state revenues.  The number of persons eligible to receive Medicaid benefits may grow more slowly or even decline more rapidly or in tandem with declining economic conditions.  For example, the governments that oversee the Medicaid programs could choose to limit program eligibility in an effort to reduce the portion of their respective state budgets attributable to Medicaid, which would cause our membership and revenues to decrease.  Therefore, declining general economic conditions may cause our membership levels to decrease even further, which could have a material adverse effect on our results of operations.  The states may also develop future Medicaid capitation rates that, while actuarially sound, are insufficient to keep pace with medical trends or inflation, therefore reducing our profitability in those markets and materially adversely affecting our results of operations.

Similar to Medicaid, reductions in payments under Medicare or the other programs under which we offer health plans could likewise reduce our profitability.  The MMA permits premium levels for certain Medicare plans to be established through competitive bidding, with Congress retaining the ability to limit increases in premium levels established through bidding from year to year.  The federal government also has passed legislation that phases out Medicare Advantage budget neutrality payments through 2011, which impacts premium increases over that timeframe.  The Congress is considering other reductions to rates or other changes to Medicare Part D which could also have a material adverse effect on our results of operations.

In addition, in January 2009, the new presidential administration took office.  The new administration and recently elected U.S. Congress have indicated support for measures intended to expand the number of citizens covered by health insurance and other changes within the health care system.  Although the ultimate impact of any such proposals remains uncertain, the costs of implementing some of these proposals could be financed, in part, by reductions in the payments made to health care providers under Medicare and other government programs.  If such reductions are significant, our revenues and cash flows could be materially adversely affected.

We are subject to extensive government regulation, and any violation by us of applicable laws and regulations could have a material adverse effect on our results of operations.

Our business is extensively regulated by the federal government and the states in which we operate.  The laws and regulations governing our operations are generally intended to benefit and protect health plan members and providers rather than stockholders.  The government agencies administering these laws and regulations have broad latitude to enforce them.  These laws and regulations, along with the terms of our government contracts, regulate how we do business, what services we offer, and how we interact with our members, providers and the public.  Any violation by us of applicable laws and regulations could reduce our revenues and profitability, thereby having a material adverse effect on our results of operations.

We are subject to periodic reviews and audits under our contracts with state government agencies, and these audits could have adverse findings which may have a material adverse effect on our business.

We contract with various governmental agencies to provide managed health care 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:

·                  forfeiture or recoupment of amounts we have been paid pursuant to our government contracts;

·                  imposition of significant civil or criminal penalties, fines or other sanctions on us and/or our key associates;

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·                  loss of our right to participate in government-sponsored programs, including Medicaid and Medicare;

·                  damage to our reputation in various markets;

·                  increased difficulty in marketing our products and services;

·                  inability to obtain approval for future service or geographic expansion; and

·                  suspension or loss of one or more of our licenses to act as an insurer, HMO or third party administrator or to otherwise provide a service.

We are currently undergoing standard periodic audits by several Departments of Insurance and CMS to verify compliance with our contracts and applicable laws and regulations.  In 2008, CMS completed its routine comprehensive audit of all of our Medicare operations.  CMS’s audit report indicates that we are deficient in a number of areas, including enrollment and disenrollment, appeals and grievances and marketing.  CMS also has indicated that we will be subject to additional audits and reporting requirements in 2009.  We are implementing corrective action plans to address all of CMS’s findings.  There can be no assurance that we will be able to take appropriate corrective action or that, despite any corrective measures taken on our part, that we will not incur substantial penalties, fines or other operating restrictions which could have a material adverse effect on our results of operations.

We are subject to laws and government regulations that may delay, deter or prevent a change of control of our Company, which could have a material adverse effect on our ability to enter into transactions favorable to shareholders.

We are subject to state laws regarding insurers and HMOs that are subsidiaries of insurance holding companies that require prior regulatory approval for any change of control of an HMO or insurance subsidiary.  For purposes of these laws, in most states “control” is presumed to exist when a person, group of persons or entity acquires the power to vote 10% or more of the voting securities of another entity, subject to certain exceptions.  These laws may discourage potential acquisition proposals and may delay, deter or prevent a change of control of our Company, including through transactions, and in particular through unsolicited transactions, which could have a material adverse effect on our ability to enter transactions that some or all of our shareholders find favorable.

We are subject to extensive fraud and abuse laws which may give rise to lawsuits and claims against us, the outcome of which may have a material adverse effect on our financial position, results of operations and cash flows.

Because we receive payments from federal and state governmental agencies, we are subject to various laws commonly referred to as “fraud and abuse” laws, including the federal False Claims Act, which permit agencies and enforcement authorities to institute suit against us for violations and, in some cases, to seek treble damages, penalties and assessments.  Liability under such federal and state statutes and regulations may arise if we know or it is found that we should have known that information we provide to form the basis for a claim for government payment is false or fraudulent, and some courts have permitted False Claims Act suits to proceed if the claimant was out of compliance with program requirements.  “Qui tam” actions under federal and state law can be brought by any individual on behalf of the government.  Qui tam actions have increased significantly in recent years, causing greater numbers of health care companies to have to defend a false claim action, pay fines or be excluded from the Medicare, Medicaid or other state or federal health care programs as a result of an investigation arising out of such action.  Many states, including states where we currently operate, have enacted parallel legislation.

In a letter dated October 15, 2008, the Civil Division informed counsel to the Special Committee that as part of the pending civil inquiry, the Civil Division is investigating a number of qui tam complaints filed by relators against us under the whistleblower provisions of the False Claims Act, 31 U.S.C. sections 3729-3733.  The seal in those cases has been partially lifted for the purpose of authorizing the Civil Division to disclose to us the existence of the qui tam complaints.  The complaints otherwise remain under seal as required by 31 U.S.C. section 3730(b)(3).  We and the Special Committee are undertaking to discuss with the Civil Division, and address, allegations by the qui tam relators.

We also learned from a docket search that a former employee filed a qui tam action on October 25, 2007 in state court for Leon County, Florida against several defendants, including us and one of our subsidiaries.  Because qui tam actions brought under federal and state false claims acts are sealed by the court at the time of filing, we are unable to determine the nature of the allegations and, therefore, we do not know at this time whether this action relates to the subject matter of the federal investigations.  It is possible that additional qui tam actions have been filed against us and are under seal.  Thus, it is possible that we are subject to liability exposure under the False Claims Act based on qui tam actions other than those discussed in this 2007 Form 10-K.

We can give no assurances that we will not be subject to civil actions and enforcement proceedings under these federal and state statutes and regulations in the future.  Any such claims, proceedings or violations could have a material adverse effect on our financial position, results of operations and cash flows.

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If state regulatory agencies require a higher statutory capital level for our existing operations or if we become subject to additional capital requirements, we may be required to make additional capital contributions to our regulated subsidiaries, which would have a material adverse effect on our cash flows and liquidity.

Our operations are conducted through licensed HMO and insurance subsidiaries.  These subsidiaries are subject to state regulations that, among other things, require the maintenance of minimum levels of statutory capital and maintenance of certain financial ratios, as defined by each state.  One or more of these states may raise the statutory capital level from time to time, which could have a material adverse effect on our cash flows and liquidity.  For example, New York adopted regulations that increase the capital reserve requirement by 150% over an eight-year period.  The phased-in increase in reserve requirements to which our New York plan is subject will, over time, materially increase our reserve requirements in New York.  Other states may elect to adopt risk-based capital requirements based on guidelines adopted by the NAIC.  As of December 31, 2007, our operations in Connecticut, Georgia, Illinois, Indiana, Louisiana, Missouri and Ohio, and our PDP and PFFS operations, were subject to such guidelines.

Our subsidiaries also may be required to maintain higher levels of statutory net worth due to the adoption of risk-based capital requirements by other states in which we operate.  Our subsidiaries are subject to their state regulators’ general oversight powers.  Regardless of whether a state adopts the risk-based capital requirements, the state’s regulators can require our subsidiaries to maintain minimum levels of statutory net worth in excess of amounts required under the applicable state laws if they determine that maintaining such additional statutory net worth is in the best interests of our members.  In addition, as we continue to expand our plan offerings in new states or pursue new business opportunities, we may be required to make additional statutory capital contributions.  In either case, any additional capital contribution made to one or more of the affected subsidiaries could have a material adverse effect on our liquidity, cash flows and growth potential, which could harm our ability to implement our business strategy by, for example, hindering our ability to make debt service payments on amounts drawn from our credit facilities.  In addition, increases of statutory capital requirements could cause us to withdraw from certain programs or markets where it becomes economically difficult to continue to be profitable.  For example, we recently evaluated the capitalization requirement for our PFFS plans and determined that it was economically prudent to withdraw from participation in these plans in Texas, Florida and Wisconsin since the capital requirements for these states applied to the subsidiary as a whole, effectively increasing the capital requirements for several other states operating under the same license.  If we restructure our insurance licenses for Florida, Texas and Wisconsin such that the capital requirements apply only to the business in those states, we may re-consider our interest in offering products in those states.  Accordingly, effective January 1, 2009 we exited the PFFS business in these three states in which we provided services to approximately 10,000 members.

We derive a substantial portion of our Medicare revenues from our PDP operations, and legislative or regulatory actions, economic conditions, bidding results or other factors that adversely affect those PDP operations could have a material adverse effect on our profitability and results of operations.

We derive a substantial portion of our Medicare revenues from our PDP operations.  Our ability to operate our PDP plans profitably depends on our ability to attract members, to price our plans appropriately, to continue to develop core systems and processes, to manage our medical expenses related to these plans and other factors.  We do not know whether we will be able to sustain our PDP operations profitability over the long-term, and our failure to do so could have a material adverse effect on our profitability and results of operations.  There are numerous factors that could have a materially adverse effect on our PDP operations, as well our Medicare Part D and other plans in general.  Those that are particularly applicable to our PDP operations include:

·                  Risk corridors:  The MMA provides for “risk corridors” that are designed to limit to some extent the losses PDP plans would incur if the medical expenses exceed the reimbursement to be received from CMS.  These risk corridors are designed to widen over time.  The risk corridors for 2006 and 2007 provided more protection against excess losses than are available for 2008 and future years as the thresholds increase and the reimbursement percentages decrease.  Reimbursement or other reconciliations from CMS could be delayed, which could cause us to incur more up-front costs for operating the program.

·                  Annual Bidding: Along with other Part D plans, including PDPs and MA-PDs, we bid on Part D benefits in June each year.  Based on the bids submitted, CMS establishes a national benchmark.  Plans that bid below the benchmark are eligible to have members automatically assigned to them.  Consequently, our ability to bid below the benchmark impacts our ability to receive automatically assigned members.  For example, our PDP business is subject to an annual bidding process.  As the result of this process, for plan year 2009, we bid above the benchmark in 22 of the 34 regions and as of December 31, 2008, approximately 252,000 auto-assigned dual-eligible members were assigned away from our plans.  In addition to this known membership loss, in 2009 we expect that a portion of the 153,000 low-income subsidized members who previously chose our plans will choose a new plan in 2009.  We estimate that, based on these factors as well as new members choosing to enroll in our plans, new auto-assignment of members and other factors, our revenues generated from our PDP plans will decrease for 2009.

·                  Competition:  We have encountered competition from other PDP plans, some of which may have significantly greater resources and brand recognition than we do, and new PDP plans are entering the business.  During the annual bidding process described above, we compete with other plans to bid below the CMS benchmark for auto-assigned members.  During the annual open-enrollment period, we compete with other PDP plans to obtain members who can select their PDP plan.  We cannot predict whether we will be able to continue to compete effectively in this market.

Those factors that apply to all of our Medicare plans, including PDP and Part D, include:

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·                  Membership:  Medicare beneficiaries who are dual-eligibles generally are able to disenroll and choose another PDP plan at any time, and certain other Medicare beneficiaries also may have a limited ability to disenroll from the plan they initially select and choose a different PDP plan.  All Medicare beneficiaries are able to change PDP plans during the annual open enrollment period.  We may not be able to retain the auto-assigned members or those members who affirmatively choose our PDP plans, and we may not be able to attract new PDP members.

·                  Benefits expense:  We may experience higher benefits expense as a result of an increase in the cost of pharmaceuticals, possible changes in our pharmacy rebate program with drug manufacturers, higher than expected utilization and new mandated benefits or other regulatory changes that increase our costs.

·                  Regulatory and administration:  CMS may alter the Medicare Part D program in a manner that could be detrimental to us.

·                  Utilization of benefits:  We make actuarial assumptions about the utilization of benefits in our PDP plans.  Because our membership mix changes in this program from year to year, our assumptions are based on data that may not be applicable to our current PDP membership base and we cannot assure you that these assumptions will prove to be correct or that premiums will be sufficient to cover the benefits provided.

Several changes to the Medicare program resulting from the MIPPA legislation that became effective in 2008 could increase competition for our existing and prospective members and have a material adverse effect on our results of operations.

On July 15, 2008, MIPPA became law and in September 2008 CMS promulgated enabling regulations.  MIPPA impacts a broad range of Medicare activities and impacts all types of Medicare managed care plans.  All of the changes imposed on us by MIPPA, including those discussed below, have the potential to cause us to incur additional administrative expense, lose membership and ultimately reduce our Medicare revenues, all of which could have a material adverse effect on our results of operations:

PFFS plans:  MIPPA revises requirements for Medicare Advantage PFFS plans, which may have the effect of ending some of these plans in plan year 2011 where such plans are not able to comply with these new requirements.  In particular, MIPPA requires all PFFS plans that operate in markets with two or more networked-based plans must be offered on a networked basis.  Currently, we do not have provider networks in the majority of the markets where we offer PFFS plans.  We are currently evaluating alternative solutions to establishing a network in targeted areas to meet these requirements, including building a contracted network, contracting with a third party network or withdrawing from certain counties where it is not economically or otherwise feasible to establish networks for this line of business.

Sales and Marketing:  MIPPA places prohibitions and limitations on specified sales and marketing activities under Medicare Advantage and prescription drug plans.  Among other things, Medicare plans are no longer permitted to make unsolicited contact with potential members by way of outbound telemarketing and community marketing, offer other types of Medicare products to existing members, provide meals to potential enrollees or approach potential members in common or public areas.  These changes are likely to increase our administrative costs of enrolling an individual, and could increase the risk of compliance violations and could have a material adverse effect on our ability to enroll new Medicare members particularly because we have historically relied to a large extent on outbound telemarketing and community marketing to sell our products.

Special Needs Plans:  A significant portion of our coordinated care plan membership is enrolled in our D-SNPs.  Under MIPPA, D-SNPs such as ours are required to contract with state Medicaid agencies to coordinate benefits.  The scope of the D-SNP contract with the state Medicaid agency will depend greatly on what eligibility categories, cost-sharing responsibilities and payment limitations each state has included in its state plan.  The contracting process under MIPPA provides an opportunity for D-SNPs and states to improve the coordination of benefits, including defining the overlap between Medicaid and Medicare benefits, eligibility verification processes, payment and coverage responsibilities, marketing and enrollment standards, appeals and grievances procedures and other important operational considerations.  Collaboration between states and D-SNPs is expected to create administrative efficiencies and improve beneficiary health outcomes.  However, the requirement to contract with state Medicaid agencies imposes potential risk for D-SNP providers such as us because MIPPA does not allow expansion in 2010 or continued operation of a D-SNP after 2010 if a state and the D-SNP provider cannot come to agreement on terms.

Compensation:  MIPPA also establishes limits on agent and broker compensation.  The CMS implementing regulations require that plans that pay commissions do so by paying for an initial year commission and residual commissions for each of the five subsequent renewal years, thereby creating a six year commission cycle for members moving from Original Medicare and a five year commission cycle for members moving from another Medicare Advantage plan.

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Reductions or delays in federal and state funding for health care programs could have a material adverse effect on our profitability and results of operations.

The federal government and many states from time to time consider reducing the level of funding for government health care programs, including Medicare and Medicaid, which could have a material adverse effect on our profitability and results of operations.  For example, the Deficit Reduction Act of 2005, signed into law on February 8, 2006, includes reductions in federal Medicaid spending by approximately $4.8 billion and reductions to Medicare spending by approximately $6.4 billion over a period of five years, according to the Congressional Budget Office.  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.  States also periodically consider reducing or reallocating the amount of money they spend for Medicaid and other programs.  In recent years, the majority of states have implemented measures to restrict Medicaid and other health care programs costs and eligibility.

Changes to Medicaid and other health care 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 health care costs under those programs, all of which could have a negative impact on our business.  We believe that reductions in Medicaid and other health care program payments could substantially reduce our profitability and have a material adverse effect on our results of operations.  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; such cancellations could have a material adverse affect on our results of operations.

Premiums are contractually payable to us before or during the month for services that we are obligated to provide to our members.  Our cash flow would be negatively impacted if premium payments are delayed or not made according to contract terms.

Our contracts with the states in which we operate are subject to cancellation by the state in the event of inadequate program funding contained within such state’s budget, and are also subject to decreases or limited increases in premiums, all of which could have a material adverse effect on our profitability and free cash available for operations and capital reserve requirements.

If a state in which we operate approves a budget that includes inadequate program funding, our contracts with that state are subject to cancellation by the state.  In some jurisdictions, such cancellation may be immediate and in other jurisdictions a notice period is required.  State governments generally are experiencing tight budgetary conditions within their Medicaid programs.  Budget problems in the states in which we operate could result in decreases or limited increases in the premiums paid to us by the states.  In some instances, it may result in the postponement of payment until additional funding sources are available.  If any state in which we operate were to decrease premiums paid to us, or pay us less than the amount necessary to keep pace with our cost trends, it could have a material adverse effect on our profitability and free cash available for operations and capital reserve requirements.

We are required to comply with laws governing the transmission, security and privacy of health information, and we have not yet determined what our total compliance costs will be; however, such costs, when determined, could be more than anticipated, which could have a material adverse effect on our results of operations.

Regulations under HIPAA require us to comply with standards regarding the exchange of health information within our company and with third parties, such as health care providers, business associates and our members.  These regulations include standards for common health care transactions, such as claims information, plan eligibility, and payment information; unique identifiers for providers and employers; security; privacy; and enforcement.  HIPAA also provides that to the extent that state laws impose stricter privacy standards than HIPAA privacy regulations, a state seeks and receives an exception from the Department of Health and Human Services regarding certain state laws, or state laws concern certain specified areas, such state standards and laws will not be preempted.

We have implemented and are continuing to implement security policies and procedures to strive to achieve and maintain compliance with the security standards.  Given HIPAA’s complexity and the possibility that the regulations may change and may be subject to changing and perhaps conflicting interpretation, our ongoing ability to comply with any of the HIPAA requirements is uncertain.  Furthermore, a state’s ability to promulgate stricter laws, and uncertainty regarding many aspects of such state requirements, make compliance with applicable health information laws more difficult.  Normal health plan operations require that we transmit protected health information via electronic or other means, often at the direction of and based on information provided by third parties, such as our providers, that could result in inadvertent violations of HIPAA privacy or security rules. In March 2008, management learned that, in accordance with a contractual requirement, a Company web developer had transmitted a document folder containing reports for the Georgia Department of Community Health (“DCH”) to two production ports, one of which, unbeknownst to the web developer, was not secure.  Consequently, data, including protected information, unintentionally was made accessible through the Internet.  We incurred considerable remediation expenses in this matter and, on June 11, 2008, we paid $725,000 in response to a Notification of Breach and Assessment of Liquidated Damages issued by DCH.  Our efforts to comply with HIPAA and to remediate any violations of HIPAA, including any fines and penalties, could cause us to incur substantial costs which could have a material adverse effect on our cash flows and results of operations.

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Future changes in health care law may have a material adverse effect on our results of operations or liquidity.

Health care laws and regulations, and their interpretations, are subject to frequent change.  Changes in existing laws or regulations, or their interpretations, or the enactment of new laws or the issuance of new regulations could materially reduce our profitability, among other things, by:

·                  imposing additional license, registration and/or capital requirements;

·                  increasing our administrative and other costs;

·                  requiring us to undergo a corporate restructuring;

·                  increasing mandated benefits;

·                  limiting our ability to engage in intra-company transactions with our affiliates and subsidiaries;

·                  requiring us to develop plans to guard against the financial insolvency of our providers;

·                  restricting our revenue and enrollment growth;

·                  requiring us to restructure our relationships with providers; or

·                  requiring us to implement additional or different programs and systems.

Changes in state law, regulations and rules also may materially adversely affect our profitability.  Requirements relating to managed care consumer protection standards, including increased plan information disclosure, limits to premium increases, expedited appeals and grievance procedures, third party review of certain medical decisions, health plan liability, access to specialists, clean claim payment timing, physician collective bargaining rights and confidentiality of medical records either have been enacted or continue to be under discussion.  New health care reform legislation may require us to change the way we operate our business, which may be costly.  Further, although we strive to exercise care in structuring our operations to attempt to comply in all material respects with the laws and regulations applicable to us, government officials charged with responsibility for enforcing such laws and/or regulations have in the past asserted and may in the future assert that we or transactions in which we are involved are in violation of these laws, or courts may ultimately interpret such laws in a manner inconsistent with our interpretation.  Therefore, it is possible that future legislation and regulation and the interpretation of laws and regulations could have a material adverse effect on our ability to operate under the Medicaid, Medicare and S-CHIP programs and to continue to serve our members and attract new members, which could have a material adverse effect on our results of operations.

State regulatory restrictions on our marketing activities may constrain our membership growth and our ability to increase our revenues, which could have a material adverse effect in our results of operations.

Although we enroll some of our new members through automatic enrollment programs and voluntary member enrollment, we rely on our marketing and sales efforts for a significant portion of our membership growth.  All of the states in which we currently operate permit advertising and, in most cases, direct sales but impose strict requirements and limitations as to the types of marketing activities that are permitted.  For example, in Florida, we were recently subject to a 60-day marketing freeze in three counties resulting from the state’s allegation of wrongful marketing practices.  In addition, the State of Georgia does not permit direct sales by Medicaid health plans.  In Georgia, we advertise our plans, but we rely on member selection and auto-assignment of Medicaid members into our plans.  Effective January 1, 2009, all plans participating in the Florida Medicaid program are prohibited from directly selling their plans to Medicaid recipients.  In circumstances where our marketing efforts are prohibited or curtailed, we may incur additional administrative expense in trying to obtain members and our ability to increase or sustain membership could be harmed, which could have a material adverse effect on our results of operations.

If a state fails to renew its federal waiver application for mandated Medicaid enrollment into managed care or such application is denied, our membership in that state will likely decrease, which could have a material adverse effect on our results of operations.

A significant percentage of our Medicaid plan enrollment results from mandatory Medicaid enrollment in managed care plans.  States may mandate Medicaid enrollment into managed care through CMS-approved plan amendments or, for certain groups, through federal waivers or demonstrations.  Waivers and programs under demonstrations are generally approved for two- to five-year periods, and can be renewed on an ongoing basis if the state applies and the waiver request is approved or renewed by CMS.  We have no control over this renewal process.  If a state in which we operate does not mandate managed care enrollment in its state plan or does not renew an existing managed care waiver, our membership would likely decrease, which could have a material adverse effect on our results of operations.

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We rely on the accuracy of eligibility lists provided by the government to collect premiums, and any inaccuracies in those lists cause states to recoup premium payments from us, which could materially reduce our revenues and profitability.

Premium payments that we receive are based upon eligibility lists produced by the government.  From time to time, states require us to reimburse them for premiums that we received from the states based on an eligibility list that a state later discovers contains individuals who were not eligible for any government-sponsored program or have been enrolled twice in the same program or are eligible for a different premium category or a different program.  For example, in July 2008, we continued to receive premiums from the State of Florida for members that had become eligible for both Medicaid and Medicare benefits.  Once a recipient becomes dually eligible, their premium is primarily remitted by CMS rather than the State.  In this case, the State of Florida had not properly reduced the amount of premium they paid to us to reflect that CMS was now the primary payor.  Our review of all remittance files to identify potential duplicate members, members that should be terminated and members for which we have been paid an incorrect rate may not identify all such members.

In addition to recoupment of premiums previously paid, we also face the risk that a state could fail to pay us for members for whom we are entitled to payment.  Our profitability would be reduced as a result of the state’s failure to pay us for related payments to providers we made and we were unable to recoup such payments from the providers.  We have established a reserve in anticipation of recoupment by the states of previously paid premiums, but ultimately our reserve may not be sufficient to cover the amount, if any, of recoupments.  If the amount of any recoupments exceeds our reserves, our revenues and profits could be materially reduced and have a material adverse effect on our results of operations.

Our failure to maintain accreditations could disqualify us from participation in the certain state Medicaid programs, which would have a material adverse effect on our results of operations.

Several of our Medicaid contracts require that our plans or subcontracted providers be accredited by independent accrediting organizations that are focused on improving the quality of health care services.  Accreditation by AAAHC or comparable accreditation is a requirement for participation in the Florida Medicaid program.  Further, Florida Medicaid plans can only subcontract behavioral health services to a URAC-accredited organization.  Accreditation by NCQA is a requirement for participation in the Georgia Medicaid managed care program and the Hawaii Medicaid program requires that participating plans be either NCQA or URAC accredited.

Our Florida health plans are accredited by the AAAHC and our behavioral health subsidiary to which we subcontract behavioral health services is accredited by URAC.  In July 2008, as required by the terms of our Medicaid contract, our Georgia health plan was awarded accredited status by NCQA.  Under the terms of our Medicaid contract, we have until January 1, 2012 to obtain NCQA accreditation in Hawaii.

Failure to maintain our AAAHC or URAC accreditations in Florida or NCQA accreditation in Georgia could disqualify us from participation in the Florida and Georgia Medicaid businesses, respectively.  Similarly, failure to obtain NCQA accreditation in Hawaii by January 1, 2012 could disqualify us from participation in the Hawaii Medicaid program.  There can be no assurance that we will maintain, or obtain, our NCQA, URAC or AAAHC accreditations, and the loss of, or failure to obtain, these accreditations could adversely our ability to participate in certain Medicaid programs, which could have a material adverse effect on our results of operations.

Risks Related to Our Common Stock

Future sales, or the availability for sale, of our common stock may have a material adverse effect on the market price of our common stock.

Sales of substantial amounts of our common stock in the public market, or the perception that such sales could occur, could have a material adverse effect the market price of our common stock and could materially impair our future ability to raise capital through offerings of our common stock.

As of December 31, 2007, we had outstanding options to purchase 2,534,998 shares of our common stock, of which 1,044,988 were exercisable, at a weighted average exercise price of $34.13 per share.  From time to time, we may issue additional options to associates, non-employee directors, consultants and others pursuant to our equity incentive plans.

The provisions in our charter documents and under Delaware law could discourage a takeover that stockholders may consider favorable and make it more difficult for a stockholder to elect directors of its choosing.

The provisions of our certificate of incorporation, bylaws and provisions of applicable Delaware law may discourage, delay or prevent a merger or other change in control that a stockholder may consider favorable.  These provisions could also discourage proxy contests, make it more difficult for stockholders to elect directors of their choosing and cause us to take other corporate actions that stockholders may consider unfavorable.

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Item 1B.  Unresolved Staff Comments.

By letter dated October 25, 2007, the SEC’s Division of Corporation Finance provided us with comments relating to our annual report on Form 10-K for the fiscal year ended December 31, 2006 filed by us on February 17, 2007.  The SEC’s comments relate principally to our disclosures regarding our Medicare Part D business.  We believe that our disclosures were appropriate, although we agreed to provide additional disclosure in future filings.  We responded to this letter on November 16, 2007.  To date, we have not received a response to our November 16, 2007 letter.

Item 2.  Properties.

Our principal administrative, sales and marketing facilities are located at our headquarters in Tampa, Florida.  We currently occupy approximately 377,000 square feet of office space in the Tampa facility under a lease whose term is scheduled to expire in various phases from 2011 through 2016.  Our corporate headquarters in Tampa, Florida are used in all of our lines of business. We also lease office space for our health plans in Florida, New York, Illinois, Indiana, Connecticut, Georgia, Ohio, Louisiana, Hawaii, New Jersey, Missouri and Texas.  We believe these facilities are suitable and provide the appropriate level of capacity for our current operations.

Item 3.  Legal Proceedings.

Set forth below is a description of the current status of the investigations, actions and lawsuits arising from or consequential to the Restatement and Special Committee investigation:

Government Investigations

We are currently under investigation by several federal and state authorities, including AHCA, the USAO, the Civil Division, the OIG and the MFCU.  We are engaged in resolution discussions as to matters under review with the USAO, the Civil Division, the OIG and the State of Florida.  Based on the current status of matters and all information known to us to date, we have accrued a liability in the amount of $50.0 million in our financial statements for the year ended December 31, 2007 in connection with the ultimate resolution of these matters.  However, we cannot provide any assurances regarding the likelihood, timing or terms and conditions of any potential negotiated resolution of pending investigations by the USAO, the Civil Division, the OIG or the State of Florida.  However, the timing and amount of any potential resolution are uncertain.  For more information related to this accrual, see Notes 3 and 11 to the consolidated financial statements included in this 2007 Form 10-K.

In addition to the federal and state governmental investigations referenced above, as previously disclosed, the SEC is conducting an informal investigation.  We also are responding to subpoenas issued by the State of Connecticut Attorney General’s Office involving transactions between the Company and its affiliates and their potential impact on the costs of Connecticut’s Medicaid program.  We have communicated with regulators in states in which our HMO and insurance operating subsidiaries are domiciled regarding the investigations.  We are cooperating with federal and state regulators and enforcement officials in these matters.  We do not know whether, or the extent to which, any pending investigations might lead to the payment of fines, penalties or operating restrictions.

In addition, in a letter dated October 15, 2008, the Civil Division informed counsel to the Special Committee that as part of the pending civil inquiry, the Civil Division is investigating a number of qui tam complaints filed by relators against us under the whistleblower provisions of the False Claims Act, 31 U.S.C. sections 3729-3733.  The seal in those cases has been partially lifted for the purpose of authorizing the Civil Division to disclose to us the existence of the qui tam complaints.  The complaints otherwise remain under seal as required by 31 U.S.C. section 3730(b)(3).  We and the Special Committee are undertaking to discuss with the Civil Division, and address, allegations by the qui tam relators.

We also learned from a docket search that a former employee filed a qui tam action on October 25, 2007 in state court for Leon County, Florida against several defendants, including us and one of our subsidiaries.  Because qui tam actions brought under federal and state false claims acts are sealed by the court at the time of filing, we are unable to determine the nature of the allegations and, therefore, we do not know at this time whether this action relates to the subject matter of the federal investigations.  It is possible that additional qui tam actions have been filed against us and are under seal.  Thus, it is possible that we are subject to liability exposure under the False Claims Act based on qui tam actions other than those discussed in this 2007 Form 10-K.

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Class Action and Derivative Lawsuits

Putative class action complaints were filed on October 26, 2007 and on November 2, 2007.  These putative class actions, entitled Eastwood Enterprises, L.L.C. v. Farha, et al. and Hutton v. WellCare Health Plans, Inc. et al., respectively, were filed in the United States District Court for the Middle District of Florida against the Company, Todd Farha, the Company’s former chairman and chief executive officer, and Paul Behrens, the Company’s former senior vice president and chief financial officer.  Messrs. Farha and Behrens were also officers of various subsidiaries of the Company.  The Eastwood Enterprises complaint alleges that the defendants materially misstated the Company’s reported financial condition by, among other things, purportedly overstating revenue and understating expenses in amounts unspecified in the pleading in violation of the Securities Exchange Act of 1934, as amended.  The Hutton complaint alleges that various public statements supposedly issued by defendants were materially misleading because they failed to disclose that the Company was purportedly operating its business in a potentially illegal and improper manner in violation of applicable federal guidelines and regulations.  The complaint asserts claims under the Securities Exchange Act of 1934, as amended.  Both complaints seek, among other things, certification as a class action and damages.  The two actions were consolidated, and various parties and law firms filed motions seeking to be designated as Lead Plaintiff and Lead Counsel.  In an Order issued on March 11, 2008, the Court appointed a group of five public pension funds from New Mexico, Louisiana and Chicago (the “Public Pension Fund Group”) as Lead Plaintiffs.  On October 31, 2008, an amended consolidated complaint was filed in this class action against the Company, Messrs. Farha and Behrens, and adding Thaddeus Bereday, the Company’s former senior vice president and general counsel, as a defendant.  The response to the amended complaint was filed in January 2009.  The Company intends to defend itself vigorously against these claims.  At this time, neither the Company nor any of its subsidiaries can predict the probable outcome of these claims.  Accordingly, no amounts have been accrued in the Company’s consolidated financial statements.

Five putative shareholder derivative actions were filed between October 29, 2007 and November 15, 2007.  The first two of these putative shareholder derivative actions, entitled Rosky v. Farha, et al. and Rooney v. Farha, et al., respectively, are supposedly brought on behalf of the Company and were filed in the United States District Court for the Middle District of Florida.  Two additional actions, entitled Intermountain Ironworkers Trust Fund v. Farha, et al., and Myra Kahn Trust v. Farha, et al., were filed in Circuit Court for Hillsborough County, Florida.  All four of these actions are asserted against all Company directors (and former director Todd Farha) except for D. Robert Graham, Heath Schiesser and Charles G. Berg and also name the Company as a nominal defendant.  A fifth action, entitled Irvin v. Behrens, et al., was filed in the United States District Court for the Middle District of Florida and asserts claims against all Company directors (and former director Todd Farha) except Heath Schiesser and Charles G. Berg and against two former Company officers, Paul Behrens and Thaddeus Bereday.  All five actions contend, among other things, that the defendants allegedly allowed or caused the Company to misrepresent its reported financial results, in amounts unspecified in the pleadings, and seek damages and equitable relief for, among other things, the defendants’ supposed breach of fiduciary duty, waste and unjust enrichment.  The three actions in federal court have been consolidated.  Subsequent to that consolidation, an additional derivative complaint entitled City of Philadelphia Board of Pensions and Retirement Fund v. Farha, et al. was filed in the same federal court, but thereafter was consolidated into the existing consolidated action.  A motion to consolidate the two state court actions, to which all parties consented, was granted, and plaintiffs filed a consolidated complaint on April 7, 2008.  On October 31, 2008, amended complaints were filed in the federal court and the state court derivative actions.  On December 30, 2008, the Company filed substantially similar motions to dismiss both actions, contesting, among other things, the standing of the plaintiffs in each of these derivative actions to prosecute the purported claims in the Company’s name.  At this time, neither the Company nor any of its subsidiaries can predict the probable outcome of these claims.  Accordingly, no amounts have been accrued in the Company’s consolidated financial statements.

Other Lawsuits and Claims

Separate and apart from the legal matters described above, we are also involved in other legal actions that are in the normal course of our business, some of which seek monetary damages, including claims for punitive damages, which are not covered by insurance.  We currently believe that none of these actions, when finally concluded and determined, will, in our opinion, have a material adverse effect on our financial position, results of operations or cash flows.

ITEM 4.  Submission of Matters to a Vote of Security Holders.

None.

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PART II

Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market for Common Stock

Our common stock is listed on the New York Stock Exchange under the symbol “WCG.”  The following table sets forth the high and low closing sales prices of our common stock, as reported on the New York Stock Exchange, for each of the periods listed.

The last reported sale price of our common stock on the New York Stock Exchange on January 22, 2009 was $11.97.  As of January 20, 2009, we had approximately 32 holders of record of our common stock.

Performance Graph

The following graph compares the cumulative total stockholder return on our common stock for the period from July 1, 2004, the date shares of our common stock began trading on the NYSE, to December 31, 2008 with the cumulative total return on the stocks included in the Standard & Poor’s 500 Stock Index and two custom composite indexes over the same period.  The two custom composite indexes are the Old Custom Composite Index consisting of 8 stocks and the New Custom Composite Index consisting of 12 stocks as indicated in the table below.  We revised the Old Custom Composite Index used in our prior Forms 10-K to include Cigna Corp., HealthSpring, Inc. and Universal American Corp.  We believe that the New Custom Composite Index better reflects the group of companies to which the investment community compares us when measuring our performance.  The graph assumes an investment of $100 made in our common stock and each index on July 1, 2004.  The graph also assumes the reinvestment of dividends and is weighted according to the respective company’s stock market capitalization at the beginning of each of the periods indicated.  We did not pay any dividends during the period reflected in the graph.  Further, our common stock price performance shown below should not be viewed as being indicative of future performance.

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COMPARISON OF 53 MONTH CUMULATIVE TOTAL RETURN*

Among WellCare Health Plans, Inc., The S&P 500 Index,
The Old Custom Composite Index (8 Stocks) And The New Custom Composite Index (12 Stocks)

*$100 invested on 7/1/04 in stock & 6/30/04 in index-including reinvestment of dividends. Fiscal year ending December 31.

Copyright © 2009 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.

Dividends

We have never paid cash dividends on our common stock.  We currently intend to retain any future earnings to fund our business, and we do not anticipate paying any cash dividends in the future.

Our ability to pay dividends is partially dependent on, among other things, our receipt of cash dividends from our regulated subsidiaries.  The ability of our regulated subsidiaries to pay dividends to us is limited by the state departments of insurance in the states in which we operate or may operate, as well as requirements of the government-sponsored health programs in which we participate.  In addition, the terms of our credit facility limit our ability to pay dividends.  Any future determination to pay dividends will be at the discretion of our Board and will depend upon, among other factors, our results of operations, financial condition, capital requirements and contractual restrictions.  For more information regarding restrictions on the ability of our regulated subsidiaries to pay dividends to us, please see “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Regulatory Capital and Restrictions on Dividends and Management Fees.”

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Unregistered Issuances of Equity Securities

None.

Initial Public Offering

In connection with our initial public offering of our common stock, the SEC declared our Registration Statement on Form S-1 (No. 333-112829), filed under the Securities Act of 1933, effective on June 30, 2004.

Upon the completion of our initial public offering, we invested the net proceeds from the offering in short-term, interest-bearing, investment-grade securities.  As of December 31, 2007, we have used all of our offering proceeds in the original amount of $157.5 million.  Of the proceeds used, $24.0 million was used to pay off a related-party note discussed below under “Part II – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources,” $18.0 million was used to pay investigation-related costs, and the remaining $115.5 million was used to fund other expansion opportunities, including the required statutory capital for our new markets.

Item 6.  Selected Financial Data.

The following table sets forth our summary financial data.  This information should be read in conjunction with our financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this 2007 Form 10-K.  The data for the years ended December 31, 2004, 2005, 2006 and 2007, and as of December 31, 2006 and 2007 is derived from consolidated financial statements included elsewhere in this 2007 Form 10-K.  The data for the year ended and as of December 31, 2003 is derived from audited financial statements not included in this 2007 Form 10-K.

The data for the years ended December 31, 2004, 2005 and 2006 have been restated to reflect the effects of the accounting errors discussed in the Explanatory Note on page 5 of this 2007 Form 10-K, as well as reclassifications that do not affect Net income for the years ended December 31, 2003, 2004, 2005 and 2006.

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