form10k.htm
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
R
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
|
|
For
the Fiscal Year Ended December 31, 2009
|
|
|
|
OR
|
|
|
£
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
|
|
For
the Transition Period
From to
|
________________
Commission
File Number 001-32209
WellCare
Health Plans, Inc.
(Exact
Name of Registrant as Specified in Its Charter)
Delaware
|
47-0937650
|
(State
or Other Jurisdiction of Incorporation
|
(I.R.S.
Employer
|
Organization)
|
Identification
No.)
|
|
|
8725
Henderson Road, Renaissance One
|
|
Tampa,
Florida
|
33634
|
(Address
of Principal Executive Offices)
|
(Zip
Code)
|
(813)
290-6200
Registrant’s
telephone number, including area code
Securities
registered pursuant to Section 12(b) of the Exchange Act:
Common
Stock, par value $0.01 per share
|
New
York Stock Exchange
|
(Title
of Class)
|
(Name
of Each Exchange on which
|
|
Registered)
|
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 £ No R
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 £ No R
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 R No £
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes£ No £
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. £
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. (Check one):
Large
accelerated filer R
|
Accelerated
filer £
|
Non-accelerated
filer £
|
Smaller
reporting company £
|
|
|
(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 £ No R
The
aggregate market value of Common Stock held by non-affiliates of the registrant
(assuming solely for the purposes of this calculation that all directors and
executive officers of the registrant are “affiliates”) as of June 30, 2009 was
approximately $765,852,823 (based on the closing sale price of the registrant's
Common Stock on that date as reported on the New York Stock
Exchange).
As
of February 16, 2010, there were outstanding 42,344,109 shares of the
registrant’s Common Stock, par value $0.01 per share.
Documents
Incorporated by Reference: Portions of the registrant’s definitive Proxy
Statement for the 2010 Annual Meeting of Stockholders are incorporated by
reference into Part III of this Form 10-K.
|
|
Page
|
PART
I
|
|
Item
1: Business
|
3
|
Item
1A: Risk Factors
|
22
|
Item
1B: Unresolved Staff Comments
|
40
|
Item
2: Properties
|
40
|
Item
3: Legal Proceedings
|
40
|
Item
4: Submission of Matters to a Vote of Security Holders
|
43
|
|
|
PART
II
|
|
Item
5: Market for Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
|
44
|
Item
6: Selected Financial Data
|
47
|
Item
7: Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
48
|
Item
7A: Qualitative and Quantitative Disclosures About Market
Risk
|
71
|
Item
8: Financial Statements and Supplementary Data
|
71
|
Item
9: Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
|
71
|
Item
9A: Controls and Procedures
|
71
|
Item
9B: Other Information
|
74
|
|
|
PART
III
|
|
Item
10: Directors, Executive Officers and Corporate Governance
|
75
|
Item
11: Executive Compensation
|
75
|
Item
12: Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
75
|
Item
13: Certain Relationships and Related Transactions, and Director
Independence
|
75
|
Item
14: Principal Accountant Fees and Services
|
75
|
|
|
PART
IV
|
76
|
Item
15: Exhibits and Financial Statement Schedules
|
|
References
to the “Company,” “WellCare,” “we,” “our,” and “us” in this Annual Report on
Form 10-K for the fiscal year ended December 31, 2009 (the “2009 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.
PART
I
Item
1. Business
Overview
We
provide managed care services 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, 2009, we served approximately 2.3 million members. We believe that
this broad range of experience and exclusive government focus allows us to
efficiently and effectively serve our members and providers and to manage our
operations.
Through
our licensed subsidiaries, as of December 31, 2009, we operated our Medicaid
health plans in Florida, New York, Illinois, Hawaii, Missouri, Ohio and Georgia,
and our Medicare Advantage (“MA”) coordinated care plans (“CCPs”) in Florida,
New York, Connecticut, Illinois, Indiana, Hawaii, Louisiana, Missouri, New
Jersey, Ohio, Georgia and Texas. We also operated a stand-alone Medicare
prescription drug plan (“PDP”) in all 50 states and the District of Columbia and
offered MA private fee-for-service (“PFFS”) plans to Medicare beneficiaries in
approximately 1,783 counties and 42 states and the District of Columbia as of
December 31, 2009. As of January 1, 2010, we are no longer offering MA PFFS
plans in any states or the District of Columbia, nor are we offering a PDP
program in Wisconsin.
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. Conversely, we offer our Medicaid plans under a
number of brand names depending on the state, as set forth in the table
below.
State
|
Brand
Name(s)
|
Florida
|
Staywell;
HealthEase
|
Georgia
|
WellCare
|
Hawaii
|
‘Ohana
|
Illinois
|
Harmony
|
Missouri
|
Harmony
|
New
York
|
WellCare
|
Ohio
|
WellCare
|
Key
Developments
We
discuss below some key developments that have occurred since January 1, 2009
through the date of the filing of this 2009 Form 10-K.
|
Business Initiatives /
Exits
|
|
•
|
In
January and February 2009, we commenced providing MA CCP services to
Medicare beneficiaries and Medicaid services to the aged, blind and
disabled (“ABD”) population, respectively, in
Hawaii.
|
|
•
|
In
January 2009, we were notified that our Florida Medicaid rates would be
reduced, which made it economically unfeasible for us to continue to
operate in the Florida Medicaid reform programs. Accordingly, our
withdrawal from these programs in July 2009, resulted in a loss of
approximately 80,000 members.
|
|
•
|
During
2009, the Centers for Medicare & Medicaid Services (“CMS”) imposed a
marketing sanction against us that prohibited us from the marketing of,
and enrollment of new members into, all lines of our Medicare business
from March until the sanction was released. CMS released us
from the sanction in November 2009, in time for us to begin enrolling
beneficiaries for the 2010 contract year on November 15, 2009, which is
the first day that plans were permitted to begin enrolling
participants. However, as a result of the sanction, we were not
eligible to receive auto-assignments of low-income subsidy (“LIS”),
dual-eligible beneficiaries into our PDP program, for January 2010
enrollment. Although we are eligible to receive
auto-assignments of these members in subsequent months, auto-assignment
volume in other months is typically much less than in January, the
beginning of the plan year.
|
|
•
|
We
have concluded that continued participation in the MA PFFS plans is not in
our best interest due to future provider network requirements and
potential reductions in the premium rates and benefits. As a
result, we ceased offering MA PFFS plans as of January 1,
2010. Our MA PFFS business represents approximately 31.4% of
our Medicare segment revenue and 16.5% of our total
premium revenue for the year ended December 31, 2009. Accordingly, our
exit of this line of business will cause our revenue and consolidated net
income to decline in
2010.
|
New
Leadership
Effective
December 28, 2009, our Board of Directors, (the “Board”) elected Alexander R.
Cunningham as our Chief Executive Officer to succeed Heath G. Schiesser, who
resigned as an officer and director of the Company.
|
General
Economic and Political Environment
|
The
current economic and political environment is affecting our business in a number
of ways, as more fully described throughout this 2009 Form 10-K.
|
Premium
Rates and Payments
|
The
states in which we operate are experiencing fiscal challenges which have led to
budget cuts and reductions in Medicaid premiums in certain states or rate
increases that are below medical cost trends that the industry is experiencing.
In particular, we are experiencing pressure on rates in Florida and Georgia, two
states from which we derive a substantial portion of our revenue. In addition,
CMS implemented 2010 MA payment rates that are at or slightly below 2009 rates.
Although premiums are contractually payable to us before or during the
month in which we are obligated to provide services to our members, we have
experienced delays in premium payments from certain states of up to five months.
Given the budget shortfalls in many states that we contract with, payment delays
may reoccur in the future.
In
January 2009, the Obama Administration took office. Although the new
administration and the recently elected Congress have expressed some support for
measures intended to expand the number of citizens covered by health insurance
and other changes within the health care system, the costs of implementing any
of these proposals could be financed, in part, by reductions in the payments
made to Medicare and other government programs. Similarly, Congress approved the
children’s health bill which, among things, increases federal funding to the
State Children’s Health Insurance Program (“S-CHIP”), and President Obama signed
the American Recovery and Reinvestment Act of 2009 (“ARRA”) providing funding
for, among other things, state Medicaid programs and aid to states to help
defray budget cuts. Nonetheless, because of the unsettled nature of
these initiatives, the numerous steps required to implement them and the
substantial amount of state flexibility for determining how Medicaid and S-CHIP
funds will be used, we are currently unable to assess the ultimate impact that
they will have on our business. It is possible that the ultimate impact of these
initiatives could be negative.
Currently,
the Obama Administration and Congress are debating various alternatives for
reforming the American health care system, including the reduction of payments
under MA. As part of this debate, they are reviewing alternative
structures for MA payments. While the legislative and regulatory process
is continuing to progress and new as well as modified proposals are being
presented in Congress, we expect any revisions to the current system to put
pressure on operating results, decrease benefits and/or increase member
premiums.
Additionally,
health reforms proposed by the Obama Administration and being considered by
Congress could contain several challenges as well as opportunities for our
Medicaid business. We anticipate that the proposed reforms, if ultimately
adopted by Congress, could significantly increase the number of citizens who are
eligible to enroll in our Medicaid products. However, state budgets are strained
due to economic conditions and existing federal financing for current
populations. As a result, the effects of any potential future
expansions are uncertain, making it difficult to determine whether these reform
efforts will have a positive or negative impact on our Medicaid
business.
Business
Strategy
We are
committed to operating our business in a manner that serves our key constituents
– members, providers, regulators and associates – while delivering 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 seek 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 result in 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.
On an ongoing basis, we assess the ability of our existing operations to support
our current and future business needs. We continue to focus our resources on
strengthening our compliance and operating capabilities, which could result in
our incurring substantial costs to improve our operations and
services.
Segments
We have
two reportable business segments: Medicaid and Medicare. Financial
information related to these segments for the years ended December 31, 2009,
2008 and 2007 are set forth in the notes to our consolidated financial
statements in this 2009 Form 10-K.
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 for Needy Families
(“TANF”) programs, Supplemental Security Income (“SSI”) programs, ABD programs,
S-CHIP and the Family Health Plus (“FHP”) programs. TANF generally provides
assistance to low-income families with children, while SSI and ABD generally
provide assistance to low-income aged, blind or disabled individuals. Our
Medicaid segment also includes other state health care programs, such as S-CHIP
and FHP, that are for qualifying families who are not eligible for Medicaid
because they exceed the applicable income thresholds.
Medicaid
Membership
As of
December 31, 2009, we had approximately 1.3 million members in our Medicaid
segment plans. The following table summarizes our Medicaid segment membership by
line of business as of December 31, 2009 and 2008.
|
For the Year Ended December 31,
|
|
2009
|
|
2008
|
Medicaid
|
|
|
|
TANF
|
1,094,000
|
|
1,039,000
|
S-CHIP
|
163,000
|
|
164,000
|
SSI
and ABD
|
79,000
|
|
75,000
|
FHP
|
13,000
|
|
22,000
|
Total
|
1,349,000
|
|
1,300,000
|
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 had two
customers from which we received 10% or more of our Medicaid segment premium
revenue in 2009, 2008 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 2009, 2008 and
2007, as well as all other states on an aggregate basis.
Medicaid
Segment Revenues
(Dollars
in thousands)
|
|
For the Year Ended December 31,
2009
|
|
|
For the Year Ended December 31,
2008
|
|
|
|
For the Year Ended December 31,
2007
|
Line of Business
|
|
Revenue
|
|
|
Percentage
of Total Segment Revenue |
|
|
Revenue
|
|
|
Percentage
of Total Segment Revenue |
|
|
Revenue
|
|
|
Percentage
of Total Segment Revenue |
Florida
|
|
$ |
917,000 |
|
|
|
|
|
28.2 |
% |
|
|
$ |
979,000 |
|
|
|
|
|
32.7 |
% |
|
|
|
$ |
910,000 |
|
|
|
|
|
33.8 |
% |
Georgia
|
|
|
1,330,000 |
|
|
|
|
|
40.8 |
% |
|
|
|
1,227,000 |
|
|
|
|
|
41.0 |
% |
|
|
|
|
1,087,000 |
|
|
|
|
|
40.4 |
% |
All
other states*
|
|
|
1,010,000 |
|
|
|
|
|
31.0 |
% |
|
|
|
785,000 |
|
|
|
|
|
26.3 |
% |
|
|
|
|
695,000 |
|
|
|
|
|
25.8 |
% |
Total
|
|
$ |
3,257,000 |
|
|
|
|
|
100.0 |
% |
|
|
$ |
2,991,000 |
|
|
|
|
|
100.0 |
% |
|
|
|
$ |
2,692,000 |
|
|
|
|
|
100.0 |
% |
____________
*
|
“All
other states” consists of Connecticut (2008 and 2007 only), Hawaii (2009
only), Illinois, Missouri, New York and
Ohio.
|
Our Medicaid contracts with government agencies have terms of between one and
five years with varying expiration dates. We currently provide Medicaid plans
under fifteen separate contracts, including seven contracts in New York, three
contracts in Florida and one contract in each of Georgia, Hawaii, Illinois, Ohio
and Missouri. The following table sets forth the terms and expiration dates of
our Medicaid contracts with the State of Florida and the State of Georgia, the
two customers that each accounted for greater than 10% of our Medicaid segment
premium revenue during 2009, 2008 and 2007.
State
|
|
Line of
Business
|
|
Term of
Contract
|
|
Expiration
Date of
Current
Term
|
Florida
|
|
• Staywell
Medicaid
|
|
3
year term
|
|
8/31/12
|
Florida
|
|
• HealthEase
Medicaid
|
|
3
year term
|
|
8/31/12
|
Florida
|
|
• Healthy
Kids
|
|
1
year term
|
|
9/30/10
|
Georgia
|
|
•
Medicaid
|
|
1
year term w/ 6 one-year renewals*
|
|
6/30/10
|
____________
*
|
Our
Georgia contract commenced in July 2005; we are currently in our fourth
renewal term.
|
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 funded by Congress and administered by CMS. Our Medicare
plans include stand-alone PDPs and MA plans. We offer prescription drug benefit
coverage through these stand-alone PDPs and as a component of many of our MA
plans. MA is Medicare’s managed care alternative to original Medicare
fee-for-service (“Original Medicare”), which provides individuals standard
Medicare benefits directly through CMS. In 2009, we offered both MA
CCPs and MA PFFS plans. MA CCPs are administered through health
maintenance organizations (“HMOs”) 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. We did not renew our contracts with CMS to offer
MA PFFS plans in 2010. Our PFFS business represents approximately
31.4% of our Medicare segment revenue for the twelve months ended December 31,
2009. Accordingly our exit of the PFFS line of business will cause
our Medicare revenue to materially decline in 2010. For further
discussion of the MA PFFS exit, refer to the discussion under 2010 PFFS Plan
Exit, below.
2010
PFFS Plan Exit
In July
2008, the Medicare Improvements for Patients and Providers Act (“MIPPA”) became
law and, in September 2008, CMS promulgated implementing
regulations. MIPPA revised requirements for MA PFFS
plans. In particular, MIPPA requires all PFFS plans that operate in
markets with two or more network-based plans be offered on a networked
basis. As we do not have provider networks in the majority of markets
where PFFS plans are offered and given the higher costs associated with building
the required networks, as of January 1, 2010, we did not renew our contracts to
participate in the PFFS program, resulting in a loss of approximately 95,000
members.
The PFFS
line of business shares resources with other lines of business including
physical facilities, employees, marketing, and market distribution
systems. These costs are reflected in the administrative expense
components of our results of operations. As a result of this operational
structure, the exit from PFFS will not result in a decrease in our
administrative expense ratio and in fact may increase our administrative expense
ratio in 2010, relative to 2009.
The PFFS
line of business contributed approximately $1,133.5 million, $983.5
million and $497.9 million to Premium revenues for the year ended December 31,
2009, 2008 and 2007, respectively. Excluding PFFS, total Premium revenues for
the corresponding periods are $5,733.7 million, $5,499.5 million and
$4,807.0 million respectively. Similarly, excluding PFFS, Medicare Premium
revenues for the corresponding periods are $2,477.0 million, $2,508.5
million and $2,115.1 million, respectively.
Medical
benefits expense for the PFFS line of business was approximately $984.1
million, $850.6 million and $383.7 million for the year ended December 31, 2009,
2008 and 2007, respectively. Excluding PFFS, total Medical benefits expense for
the corresponding periods are $4,878.4 million, $4,679.6 million and
$3,829.6 million, respectively. Similarly, excluding PFFS, Medicare Medical
benefits expense for the corresponding periods are $2,067.8 million, $2,142.2
million and $1,692.9 million, respectively.
Medicare
Membership
As of
December 31, 2009, we had approximately 1.0 million Medicare members. The
following table summarizes our Medicare segment membership by line of business
as of December 31, 2009 and 2008.
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Medicare
|
|
|
|
|
|
|
PDP
|
|
|
747,000 |
|
|
|
986,000 |
|
MA
|
|
|
225,000 |
|
|
|
246,000 |
|
Total
|
|
|
972,000 |
|
|
|
1,232,000 |
|
In our
Medicare segment, we have just one customer, CMS, from which we receive
substantially all of our Medicare segment premium revenue. However, we have two
distinct lines of business within our Medicare segment: PDPs and MA plans. The
following table sets forth information relating to the total premium revenues
from each of our PDP and MA lines of business in our Medicare segment for the
years ended December 31, 2009, 2008 and 2007.
Medicare
Segment Revenues
(Dollars
in thousands)
|
|
For the Year Ended December 31,
2009
|
|
|
For the Year Ended December 31, 2008
|
|
|
For the Year Ended December 31, 2007
|
Customer
|
|
Revenue
|
|
|
Percentage
of Total
Segment Revenue
|
|
|
Revenue
|
|
|
Percentage
of Total
Segment Revenue
|
|
|
Revenue
|
|
|
Percentage
of Total Segment Revenue |
PDP
|
|
$ |
835,000 |
|
|
|
23.1 |
% |
|
|
$ |
1,056,000 |
|
|
|
30.2 |
% |
|
|
$ |
1,027,000 |
|
|
|
|
39.3 |
% |
MA
|
|
|
2,776,000 |
|
|
|
76.9 |
% |
|
|
|
2,436,000 |
|
|
|
69.8 |
% |
|
|
|
1,586,000 |
|
|
|
|
60.7 |
% |
Total
|
|
$ |
3,611,000 |
|
|
|
100.0 |
% |
|
|
$ |
3,492,000 |
|
|
|
100.0 |
% |
|
|
$ |
2,613,000 |
|
|
|
|
100.0 |
% |
In
reviewing our Medicare segment across each state in which we operate, we had
only one state, Florida, in which we generated revenue representing 10% or more
of our total Medicare segment revenue in 2009. Florida represented 23.6%, 21.6%
and 25.0% of our total Medicare segment revenue for the years ended December 31,
2009, 2008 and 2007, 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 MA plans under separate
contracts with CMS for each of the states in, and programs under, which we offer
such plans. We offer our PDPs under a single contract with CMS. All
of our current contracts with CMS expire on December 31, 2010.
Health
and Prescription Drug Plans
The
following table sets forth, as of December 31, 2009, 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
|
|
|
|
|
Medicare
|
|
|
|
|
|
|
|
State
|
|
Medicaid
Members
|
|
|
PDP
|
|
|
MA
|
|
|
Total
Membership
|
|
|
Percent
of Total
Membership
|
|
Georgia
|
|
|
546,000 |
|
|
|
29,000 |
|
|
|
10,000 |
|
|
|
585,000 |
|
|
|
25.2 |
% |
Florida
|
|
|
425,000 |
|
|
|
42,000 |
|
|
|
72,000 |
|
|
|
539,000 |
|
|
|
23.2 |
% |
California
|
|
|
— |
|
|
|
199,000 |
|
|
|
7,000 |
|
|
|
206,000 |
|
|
|
8.9 |
% |
Illinois
|
|
|
149,000 |
|
|
|
21,000 |
|
|
|
13,000 |
|
|
|
183,000 |
|
|
|
7.8 |
% |
New
York
|
|
|
89,000 |
|
|
|
20,000 |
|
|
|
26,000 |
|
|
|
135,000 |
|
|
|
5.9 |
% |
Ohio
|
|
|
100,000 |
|
|
|
20,000 |
|
|
|
12,000 |
|
|
|
132,000 |
|
|
|
5.7 |
% |
All
other states(1)
|
|
|
40,000 |
|
|
|
416,000 |
|
|
|
85,000 |
|
|
|
541,000 |
|
|
|
23.3 |
% |
Total
|
|
|
1,349,000 |
|
|
|
747,000 |
|
|
|
225,000 |
|
|
|
2,321,000 |
|
|
|
100.0 |
% |
____________
(1)
|
Represents
the aggregate of all states constituting individually less than 5% of
total membership.
|
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 premiums 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 provided by the agency that it 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. CMS employs a
risk-adjustment model that apportions premiums paid to all Medicare plans
according to the health status of each beneficiary enrolled. The CMS
risk-adjustment model pays more for Medicare members with predictably higher
costs. We collect claim and encounter data from providers, who we
rely on to properly code and document this data, and submit the necessary
diagnosis data and coding to CMS within the prescribed deadlines, and CMS then
determines the final risk score based on its interpretation and acceptance of
the data we provided. The claims and encounter data provided to
determine the risk score are subject to subsequent audit by
CMS. These audits may result in the refund of premiums to
CMS that were previously received by us. While our experience to
date has not resulted in a material refund, this refund could be significant in
the future, which would reduce our premium revenue in the year that CMS requires
repayment from us. These periodic premium rate adjustments,
risk-adjusted premiums and member eligibility determinations, adversely impact
our ability to predict what our future revenues will be under each of our
government contracts even when we believe membership will remain constant.
CMS has
begun a program to perform audits of selected MA plans to validate the provider
coding practices under the risk-adjustment model used to calculate the premium
paid for each MA member. Our Florida HMO contract has been selected by CMS for
audit for the 2007 contract year and we anticipate that CMS will conduct
additional audits of other contract and contract years on an ongoing basis. The
CMS audit of this data involves a review of a sample of provider medical records
for the contract under audit. We are unable to estimate the financial impact of
any audit that is underway or that may be conducted in the future. We are also
unable to determine whether any conclusions that CMS may make, based on the
audit of our plan and others, will cause us to change our revenue estimation
process. At this time, we do not know whether CMS will require retroactive or
subsequent payment adjustments to be made using an audit methodology that may
not compare the coding of our providers to the coding of Original Medicare and
other MA plan providers, and how, if at all, CMS will extrapolate its findings
to the entire contract. However, it is reasonably possible that a payment
adjustment as a result of these audits could occur, and that any such adjustment
could have a material adverse effect on our results of operations, financial
position, and cash flows, possibly in 2010 and beyond.
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 Results of Operations.”
The
Medicaid programs and services we offer to our members vary by state and county
and are designed to serve effectively our constituencies in the communities in
which we operate. 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 their medical needs. In addition, members 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.
We also
cover a wide spectrum of medical services through our MA plans. 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 MA plans require members to pay a co-payment, which varies depending on the
services and level of benefits provided. Typically, members of our MA CCPs are
required to use our network of providers except in specific cases such as
emergencies, transition of care or when specialty providers are unavailable to
meet their medical needs. MA CCP members may see an out-of-network specialist if
they receive a referral from their PCP and may pay incremental cost-sharing. We
have some flexibility in designing benefit packages and we offer benefits that
Original Medicare fee-for-service coverage does not offer. We also offer special
needs plans for those who are dually eligible for Medicare and Medicaid
(“D-SNPs”), in most of our markets. D-SNPs are MA CCPs designed to provide
specialized care and support for beneficiaries 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. Another type of Medicare plan is the PFFS
plan. 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 the plan for reimbursement and accepts the plan’s terms and
conditions. We ceased offering PFFS plans as of January 1, 2010.
The
Medicare Part D prescription drug benefit is available to MA enrollees as well
as Original Medicare enrollees. We offer Part D coverage through stand-alone
PDPs and as a component of many of our MA 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 MA CCPs 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 and related 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 MA 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.
|
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 MA
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 with whom we contract, including physicians, psychologists, licensed
master social workers, certified nurse midwives, 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 typically can 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 on a fixed fee per member per month (“PMPM”) basis.
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 and 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 to help improve the quality of care being
provided and improve our compliance with regulatory reporting requirements. 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 MA CCP products and, in limited 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 reimburse 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 limited 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, 2009, approximately 16% of our payments to physicians
serving our Medicaid members were on a capitated basis and approximately 84%
were on a fee-for-service basis. During the year ended December 31, 2009,
approximately 7% of our payments to physicians serving our Medicare members in
MA CCPs were on a capitated basis and approximately 93% 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 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.
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, 2009, our employed sales force consisted of approximately 565
associates. 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 some
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 on member
selection and auto-assignment of Medicaid members into our
plans. Florida also auto-assigns Medicaid recipients into
participating health plans, but historically also permitted direct sales of
Medicaid plans as well. However, effective January 1, 2009, the Florida Agency
for Health Care Administration (“AHCA”), which oversees the Florida Medicaid
program, prohibited direct sales to Medicaid recipients for all plans
participating in the Florida Medicaid program.
AHCA
changed its method of assigning beneficiaries to plans effective August
2009. Previously, the assignment algorithm allocated beneficiaries
among all individual plans to each of our two subsidiaries in counties in
Florida in which both subsidiaries operate. The revised algorithm
will provide for the auto-assignment of members to only one of the two
subsidiaries in these Florida counties. This change will reduce the
number of beneficiaries auto-assigned to our plans.
Our
Medicare marketing and sales activities are also heavily regulated by CMS and
the states in which we operate. CMS has oversight over all, and in some cases
has imposed advance approval requirements with respect to, marketing materials
used by MA 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 regulated by
CMS. As stated above, we were sanctioned through a suspension of marketing to
and enrollment of members into all lines of our Medicare business from March
2009 until the sanction was released in November 2009. We were
released from the sanction in time for us to begin enrolling beneficiaries for
the 2010 contract year on November 15, 2009, which was the first day MA plans
were permitted to begin enrolling participants.
Enrollment
into our PDP program is impacted by 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. For example, we bid above the CMS benchmark in
15 of the 34 CMS regions for plan year 2010 and are therefore ineligible to
receive auto-assigned members in these 15 regions at any time during 2010.
Ordinarily we would have been eligible to receive auto-assigned members in the
remaining 19 regions at the beginning of the plan year, which is when a large
number of members are auto-assigned into new plans as a result of the
reallocation of members from those plans that bid above the benchmark to those
plans that bid at or below the benchmark. However, the marketing and
enrollment sanction against us in 2009 prevented us from receiving any January
1, 2010 auto-assignments in those regions. We are eligible to receive
and have received auto-assigned members subsequent to the initial benchmark
reassignment. Due to factors such as these, the number of members auto-assigned
to us has varied from year to year.
For
further detail regarding restrictions on marketing and sales activities,
particularly those to be implemented under 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 ongoing processes designed to
improve the delivery of quality health care services to our members, as well as
to enhance 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 associates of ours. Each
of these committees report directly to the applicable health plan board of
directors which has ultimate oversight responsibility 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 these 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; 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 have
been established to promote health care quality. For example, our Florida HMOs
are currently accredited by the Accreditation Association for Ambulatory Health
Care (“AAAHC”) and our Georgia HMO is 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.
The
principal purpose of the board’s Health Care Quality and Access 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 helps 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.
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 Medicare 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. Further, some of our competitors may be better positioned
than us to withstand rate compression.
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, CMS auto-assigns PDP members based on
whether a plan’s bids during the annual renewal process are above or below the
CMS benchmark. However, as a result of the marketing and enrollment sanction
against us in 2009, we were not eligible to receive auto-assignments of LIS dual
eligible beneficiaries into our PDPs in the month of January 2010, which is the
month in which most auto-assignment occurs. We are eligible to
receive auto-assigned members in subsequent months, although the level of
auto-assignment in subsequent months is typically well below January
levels. In most states, our Medicaid health plans benefit from
auto-assignment of individuals who do not choose a plan upfront but for whom
participation in managed care programs is mandatory. Each state differs in its
approach to auto-assignment, but one or more of the following criteria is
typical in 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 individuals who do not choose a plan in a
specified county or region. AHCA changed its method of assigning beneficiaries
to plans effective August 2009. Previously, the assignment algorithm
allocated beneficiaries among all individual plans to each of our two
subsidiaries in counties in Florida in which both subsidiaries
operate. The revised algorithm will provide for the auto-assignment
of members to only one of the two subsidiaries in these Florida
counties. This change will reduce the number of beneficiaries
auto-assigned to our plans. For more information about how we obtain
our members, see “Part I – Item 1 – Business – Sales and Marketing
Programs.”
Marketing. Some 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.
|
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. MA 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 MA plans and may select an HMO, preferred provider
organization (“PPO”), PFFS and/or
PDP.
|
|
•
|
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 additional 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 MA
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, statutes, regulations and
rules occur frequently.
To offer
Medicare and Medicaid HMO coverage, 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, 2009, our health plans were licensed to operate as HMOs in Florida,
New York, Connecticut, Illinois, Indiana, Georgia, Louisiana, Missouri, New
Jersey, Ohio and Texas.
To offer
Medicare prescription drug coverage, the Medicare Prescription Drug, Improvement
and Modernization Act of 2003 (“MMA”) generally requires a PDP sponsor 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 operate prior to obtaining state licensure if, among other reasons,
the state has not acted on a sponsor’s application within a reasonable period of
time or does not have a PDP licensing process available to a sponsor. The
entities through which we offer our PDPs are currently licensed in 48 states
plus the District of Columbia. In the remaining states, we operate under one of
the previously mentioned CMS waivers or other arrangements, which are approved
through December 2010.
As HMOs
and insurance companies, our businesses are regulated by state insurance
departments and, in the case of some of our HMOs, another state agency with
responsibility for oversight of HMOs in addition to the insurance department.
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.
|
|
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.
Each of
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, 2009, our Connecticut, Georgia,
Illinois, Indiana, Louisiana, Missouri, Ohio, Texas and PFFS operations were
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, the state of New York has
adopted 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 managed care program is still relatively
new, all plans operating in Georgia are required to maintain statutory capital
at an RBC level equal to 125% of the applicable CAL. Moreover, if we expand our
plan offerings in new states or pursue new business opportunities, 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, one of our insurance companies that offers our PDP product is licensed
as a domestic insurance company in Florida and operates as a foreign insurer in
40 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.”
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
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 five
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
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 MA plan, such as
a CCP, PFFS or PPO benefit plan, in areas where such a plan is offered. Under
MA, managed care plans contract with CMS to provide benefits that are comparable
to, or that may be more attractive to Medicare beneficiaries than, Original
Medicare 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 a new prescription drug benefit
from an existing MA plan that offers it (an “MA-PD”) 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 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, both PDPs and MA-PDs, we bid on providing 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
PMPM 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
qualify for the federal LIS, 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 implementing
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 that impact our business:
Sales and Marketing: MIPPA
and subsequent CMS guidance place prohibitions and limitations on certain sales
and marketing activities of MA and PDPs. Among other things, MA and PDPs are not
permitted to: make unsolicited outbound calls to potential members or engage in
other forms of unsolicited contact; cross-sell non-Medicare products to existing
members during MA or Part D sales interactions; establish appointments without
documented consent from potential members; provide meals to potential enrollees
at sales events; or conduct sales events in certain provider-based settings. In
response, we have focused on more formal marketing methods (e.g., advertising
and other media-generated activity) during the most recent Medicare enrollment
period, which has served to increase our acquisition costs and slowed our
sales. Further, the new MIPPA guidelines, along with the rapid and
rigorous requirements to implement them, resulted in the violations that were
the subject of the CMS sanction that suspended our marketing and selling ability
noted earlier.
Special Needs Plans: A
significant portion of our MA CCP membership is enrolled in our D-SNPs. Under
MIPPA and subsequent CMS guidance, D-SNPs such as ours are required to contract
with state Medicaid agencies to coordinate care. The scope of the D-SNP contract
with the state Medicaid agency varies greatly based 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 continued operation of a D-SNP after 2010 if a state and the D-SNP
provider cannot come to agreement on terms. Currently we have
contracted with 4 of the 11 states in which we currently offer
D-SNPs. While we are pursuing contracts with the remaining states, we
are unable to provide assurances that our efforts will be successful or will
result in terms that are favorable or acceptable to us.
Compensation: MIPPA also
establishes restrictions 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 with respect to
members moving from Original Medicare and a five year commission cycle with
respect to members moving from another MA plan. CMS has established
specific limits on agent and broker compensation, set forth in agency guidance
documents.
S-CHIP is
a health insurance program that is 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. It is
funded jointly by the federal government and the states. 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:
|
•
|
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.
Although 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 to review and update our policies and
procedures. We have invested significant resources to enhance our
compliance efforts, and we expect to continue to do so.
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
that are similar to the federal False Claims Act.
Our
Medicaid marketing efforts are highly regulated by both CMS and the states in
which we operate, 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. For example, CMS must approve all marketing materials before they can be
used. Other
examples include: MIPPA prohibiting Medicare plans like ours from making
unsolicited contact with potential members by way of outbound telemarketing and
community marketing, offering other types of Medicare products to existing
members, providing meals to potential enrollees and approaching potential
members in common or public areas.
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.
On an
ongoing basis, we evaluate the ability of our existing operations to support our
current and future business needs and to maintain our compliance requirements.
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 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
2009, we successfully performed our annual disaster recovery testing for those
business applications that we consider critical.
Employees
We refer
to our employees as associates. As of December 31, 2009, we had approximately
3,419 full-time associates. 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.
Executive
Officers
The
following are our executive officers and their ages:
Charles G. Berg (age 52) has
served as our Executive Chairman and as a member of our Board since January
2008. Mr. Berg also served as senior advisor to Welsh, Carson, Anderson &
Stowe, a private equity firm, from January 2007 until April 2009. From July 2004
to September 2006, Mr. Berg served as an executive of UnitedHealth Group. From
April 1998 to July 2004, Mr. Berg held various executive positions with Oxford
Health Plans Inc., which included Chief Executive Officer from November 2002 to
July 2004, President and Chief Operating Officer from March 2001 to November
2002, and Executive Vice President, Medical Delivery, from April 1998 to March
2001. Mr. Berg serves as a director of DaVita, Inc. Mr. Berg received his
undergraduate degree from Macalester College and a Juris Doctorate from the
Georgetown University Law Center.
Alexander R. Cunningham (age
43) joined us in January 2005. As of December 28, 2009, Mr.
Cunningham became our Chief Executive Officer. Prior to being elected Chief
Executive Officer, Mr. Cunningham held several positions within WellCare,
including Vice President of Business Development, Senior Vice President of
Government Relations, and, most recently, President, Florida and Hawaii
Division. Prior to joining us, Mr. Cunningham held several positions with
WellPoint Health Networks, Inc. from September 1996 to December 2004, most
recently Vice President of Business Development and Compliance. From August 1994
to September 1996, Mr. Cunningham worked for the Oklahoma Health Care Authority
developing a statewide Medicaid managed care program. Mr. Cunningham received
his undergraduate degree from Oklahoma State University and his Master in
Business Administration from the University of Southern California.
Rex M. Adams (age 48) has
served as our Chief Operating Officer since September 2008. Prior to joining
WellCare, Mr. Adams was the President and Chief Executive Officer of AT&T
Incorporated’s East Region, from January 2007 to March 2008. For the period
prior to AT&T’s acquisition of BellSouth, Mr. Adams was an officer of
BellSouth Corporation from July 2001 to December 2006, serving in various
leadership positions. From September 2007 to October 2008, Mr. Adams served on
the board of trustees for Yale-New Haven Hospital, a premier teaching and
research hospital, and as a member of its Finance and Audit Committee. Mr. Adams
holds a Bachelor of Science from the United States Military Academy at West
Point and a Masters in Business Administration from the Harvard Business
School.
Christina C. Cooper (Age 39)
currently serves as our President, Florida and Hawaii Division. Ms.
Cooper originally joined WellCare in September 2006 and has served us in various
roles of increasing responsibility, including her most recent role as our Chief
Operating Officer, Florida and Hawaii Division. From February 2002
through August 2006, Ms. Cooper served in various capacities with PacifiCare
Health Systems, Inc., most recently as its Regional Vice President,
Finance. Prior to joining PacifiCare, Ms. Cooper was with
UnitedHealthcare of Colorado, Inc. Ms. Cooper holds a Bachelor of
Arts and a Master of Public Administration, Financial Management, both from the
University of Arizona.
Walter W. Cooper (age 46)
joined us in October 2006 as Senior Vice President of Strategic
Initiatives. He currently holds the position of Senior Vice President
of Marketing and Sales. Prior to joining WellCare, Mr. Cooper served in
senior-level positions with UnitedHealth Group, including positions as Senior
Vice President of United Retiree Solutions, Vice President of Marketing and
Product and Vice President of Strategic Initiatives for Specialized Care
Services from November 2004 to September 2006. Mr. Cooper received
his Bachelor of Science in Mechanical Engineering and his Masters in Business
Administration degrees from Gannon University.
Michael L. Cotton (age 48)
joined us in December 2005 and holds the position of President, South Division.
Prior to joining the Company, Mr. Cotton was World Wide Partner and Managing
Director for Mercer Human Resources Consulting from October 2001 to December
2005. Prior to joining Mercer, Mr. Cotton was President and Chief Executive
Officer of Mid-Valley CareNet, a physician hospital organization, from November
1998 to October 2001. Mr. Cotton attended the Ohio State University and received
his undergraduate degree from Franklin University and a Masters in Business
Administration from Cleveland State University.
Scott D. Law (age 46) has
served as our Senior Vice President, Health Care Delivery, since October 2009.
From August 2004 to October 2009, Mr. Law was with Health Net, Inc., most
recently as its National Healthcare Delivery Officer. Prior to joining Health
Net, Mr. Law served as Atlantic Regional Vice President, Contracting and Network
Management, for CIGNA Healthcare Corporation, from January 1999 to August 2004.
Mr. Law holds a Bachelor of Science from the University of South Florida and a
Masters of Business Administration with a concentration in Health Services
Management from the Florida Institute of Technology. Mr. Law is a
graduate of the Executive Development Program at the Haas School of Business at
the University of California, Berkeley
Jonathan P. Rich (age 48) has
served as our Senior Vice President and Chief Compliance Officer since August
2008. From July 2006 to July 2008, Mr. Rich was the General Counsel and Chief
Compliance Officer for health insurer Aveta Inc. From 1998 to 2006, Mr. Rich was
a senior executive at Oxford Health Plans, serving first as Vice President and
Director of Litigation and Legal Affairs and later as Senior Vice President and
General Counsel. From 1989 to 1998, Mr. Rich was an associate at the law firm of
Simpson, Thacher & Bartlett in New York. Mr. Rich is a graduate of the
University of North Carolina and of Columbia University Law School, where he
served on the Columbia Law Review. Mr. Rich's employment with the Company is
expected to terminate on February 26, 2010.
Daniel M. Parietti (age 46)
joined us in September 2002 and has served in various capacities, currently as
President, North Division. From September 2001 to January 2002, Mr. Parietti
served as Chief Operating Officer of La Cruz Azul de Puerto Rico, a Puerto Rican
health plan. From May 2000 to September 2001, Mr. Parietti served as Vice
President, Network and Delivery Systems Management for Health Net, Inc. From
September 1993 to May 2000, Mr. Parietti worked in various leadership positions
for Humana, Inc. Mr. Parietti received his undergraduate degree from the United
States Military Academy at West Point, and a Masters in Business Administration
from George Mason University.
Timothy S. Susanin (age 46)
joined WellCare in November 2008 as our Vice President and Chief Counsel —
Dispute Management. Since June 2009 Mr. Susanin has been our Senior
Vice President, General Counsel and Secretary. Prior to joining
WellCare, Mr. Susanin was with the Gibbons law firm from 2001 to October 2008,
first as counsel and then as partner. Mr. Susanin was an Assistant
U.S. Attorney for the District of Columbia and the Eastern District of
Pennsylvania from 1992 to 1998 and an Associate Independent Counsel on the
Whitewater investigation from 1998 to 2000. He also served in the
U.S. Navy Judge Advocate General’s Corps from 1988 to 1992. Mr.
Susanin received his undergraduate degree from Franklin & Marshall College
and his Juris Doctorate from the Villanova University School of
Law.
Thomas L. Tran (age 53) has
served as our Senior Vice President and Chief Financial Officer since July 2008.
Prior to joining WellCare, Mr. Tran was the President, Chief Operating Officer
and Chief Financial Officer of CareGuide, Inc., a population health management
company, from June 2007 to June 2008. From July 2005 to June 2007, Mr. Tran was
Senior Vice President and Chief Financial Officer of Uniprise, one of the
principal operating businesses of UnitedHealth Group that manages health care
benefits programs for employers. From December 1998 to July 2005, Mr. Tran
served as Chief Financial Officer of ConnectiCare, Inc., an HMO based in
Connecticut. Prior to ConnectiCare, Mr. Tran was Chief Financial Officer of Blue
Cross Blue Shield of Massachusetts from May 1996 to July 1997, and Vice
President of Finance and Controller of CIGNA HealthCare from February 1993 to
May 1996. Mr. Tran holds a degree in accounting from Seton Hall University and a
Masters in Business Administration in Finance from New York
University.
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, the limited liability 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 2009 Form
10-K 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 United States Securities & Exchange Commission
(“SEC”).
FORWARD-LOOKING
STATEMENTS
Statements
contained in this 2009 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, 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 inaction could result in premium revenues not increasing
to offset any increase in medical costs or other operating expenses. Once set,
premiums are generally fixed for one-year periods and, accordingly,
unanticipated costs during such periods generally 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 or regulatory action, including benefit
mandates or 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. In addition,
although for ease of reading we have categorized our risk factors as relating to
pending governmental investigations and litigation, business, being a regulated
entity, and our common stock, it is important to recognize that as a regulated
entity, many of these risks are necessarily related to each other and should not
be viewed as separate and distinct.
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.
In 2009
we entered into a Deferred Prosecution Agreement (the “DPA”) with the United
States Attorney’s Office for the Middle District of Florida (the “USAO”) and the
Florida Attorney General’s Office. The DPA resolved previously
disclosed investigations by those offices. In 2009 we also consented
to the entry of a final judgment against us in the U.S. District Court for the
Middle District of Florida (the “Consent and Final Judgment”) to resolve the
previously disclosed informal investigation conducted by the
SEC. However, we remain under investigation by the Civil Division of
the U.S. Department of Justice (the “Civil Division”) and the Office of
Inspector General of the U.S. Department of Health and Human Services (the
“OIG”). For more information regarding the DPA and the Consent and
Final Judgment, please see “Part I – Item 3 – Legal Proceedings.”
We remain
engaged in resolution discussions as to matters under review with the Civil
Division and the OIG. Any resolution of the ongoing investigations being
conducted by these agencies could have a material adverse effect on our
business, financial condition, results of operations, and cash flows. As
previously disclosed, we have paid the USAO a total of $80.0 million pursuant to
the terms of the DPA. Pursuant to the Consent and Final Judgment, we
agreed to pay a penalty of $10.0 million to the SEC. Based on the
current status of matters and all information known to us to date, management
estimates that we have a liability of approximately $60.0 million plus interest
associated with the matters remaining under investigation. We anticipate these
amounts will be payable in installments over a period of four to five
years. In accordance with fair value accounting guidance, we
discounted the liability and recorded it at its current fair value of
approximately $55.9 million. This amount remains accrued in our
Consolidated Balance Sheet as of December 31, 2009 within the short and long
term portions of Amounts accrued related to investigation resolution line
items. The final timing, terms and conditions of a resolution of
these matters may differ from those currently anticipated, which may result in
an adjustment to our recorded amounts. These adjustments may be
material. We cannot provide an estimable range of additional amounts,
if any, nor can we provide assurances regarding the timing, terms and conditions
of any potential negotiated resolution of pending investigations by the Civil
Division or the OIG.
In
addition, 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.
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, 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.
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.
The
DPA requires us to retain an independent monitor at our expense for a period of
18 months which could divert management’s time from the operation of our
business and which could materially adversely affect our results of
operations.
We have
retained an independent monitor (the “Monitor”), at our expense, for a period of
18 months from his retention in August 2009. The Monitor was selected by the
USAO after consultation with us. Operating under the oversight of the Monitor
may result in substantial burdens on our management, as well as hinder our
ability to attract and retain qualified associates. We currently cannot estimate
the costs that we are likely to incur in connection with the retention of the
Monitor, including costs related to implementing any remedial measures
recommended by the Monitor. In addition, the Monitor may recommend significant
changes to our policies and procedures, the consequences of which we are unable
to predict. Our business and results of operations could be materially adversely
affected by any such costs, remedial measures and/or changes to our policies and
procedures.
If we commit a material
breach of the DPA, we will likely be convicted of one or more criminal offenses,
including health care fraud, which would cause us to be excluded from certain
programs and would result in the revocation or termination of contracts and/or
licenses potentially having a material adverse affect on our results of
operations.
Pursuant
to the DPA, the USAO filed a one-count criminal information (the “Information”)
in the United States District Court for the Middle District of Florida (the
“Court”), charging us with conspiracy to commit health care fraud against the
Florida Medicaid Program in connection with reporting of expenditures under
certain community behavioral health contracts, and against the Florida Healthy
Kids programs, under certain contracts, in violation of 18 U.S.C. Section 1349.
The USAO recommended to the Court that the prosecution of us be deferred during
the duration of the DPA. In the event of a knowing and willful
material breach of a provision of the DPA, the USAO has broad discretion to
prosecute us through the filed Information or otherwise. We could also be
prosecuted by the Florida Attorney General’s office under such circumstances. In
light of the provisions of the DPA, any such proceeding would likely result in
one or more criminal convictions, including for health care fraud, which, in
turn, would cause us to be excluded from certain programs and could result in
the revocation or termination of contracts and/or licenses potentially having a
material adverse affect on our results of operations.
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,
alleging, among other things, 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. In April 2009,
the Board formed a Special Litigation Committee, comprised of a newly-appointed
independent director, to investigate the facts and circumstances underlying the
claims asserted in the federal and state derivative cases and to take such
action with respect to such claims as the Special Litigation Committee
determines to be in our best interests. In November 2009, the Special
Litigation Committee filed a report with the Court finding, among other things,
that we should pursue an action against three of our former
officers. Additional information with respect to these cases is
described below in “Part I – Item 3 – Legal Proceedings.”
In
addition, in a letter dated October 15, 2008, the Civil Division informed
counsel to a special committee formed by the Board (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 are discussing with the Civil Division the 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, or similar state statutes, based
on qui tam actions
other than those discussed in this 2009 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 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
the 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 $45.0 million for indemnifiable claims and $10.0
million for non-indemnifiable securities claims. We have met the retention
limits under these policies. We also maintain insurance in the amount of $175.0
million which provides coverage for our independent directors and officers hired
after January 24, 2008 for certain potential matters to the extent they occur
after October 2007. 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 during 2009 of our previously issued
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, build or maintain 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, continuing negative publicity regarding
the investigations may have a material adverse effect on our business, financial
condition, cash flows and results of operations.
The investigations and related
matters have diverted, and could divert in the future, 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 internal and external investigations involving our
historical accounting practices and internal controls, disclosure controls and
procedures and corporate governance policies and procedures. It is possible that
our Chief Executive Officer, Chief Financial Officer and General Counsel, in
particular, as well as senior members of our finance and legal departments, will
spend considerable time and effort with regard to the investigations and related
matters. The significant time and effort spent by our management team on these
matters has diverted, and could divert in the future, its attention, which may
have a material adverse effect on our business.
Risks
Related to Our Business
If our government contracts are not
renewed or are renewed on substantially different terms, are terminated or
become subject to an enrollment or marketing freeze, are canceled by the
state due to, among other reasons, inadequate program funding
contained within such state’s budget, or are subjected to decreases or limited
increases in premiums, 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 five 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
federal and state government contracts are generally subject to cancellation,
non-renewal or a potential freeze on marketing or enrollment in the event of the
unavailability of adequate program funding, compliance violations and for other
reasons. In some jurisdictions, a cancellation or enrollment freeze may be
immediate, while in other jurisdictions a notice period is required. For
example, during 2009, CMS imposed an immediate, nine-month marketing sanction
against us that prohibited us from the marketing of, and enrollment of members
into, all lines of our Medicare business. This sanction reduced our revenue as
we were unable to enroll new members during this period and the sanction has
prevented us from receiving auto-assigned membership in January 2010, which
is
generally the month with the most auto-assigned members as it is the start of
the Medicare plan year. In addition, we incurred additional administrative costs
to correct and remediate areas in which CMS determined we were
deficient.
The risk
of program cancellation or decreases in premium is heightened during economic
environments such as we are now experiencing as state governments generally are
experiencing tight budgetary conditions within their Medicaid programs. Budget
problems in the states in which we operate could result in premium rates that
are inadequate to fund the required benefits. States may also postpone payment
until additional funding sources are available, which to the extent we have paid
amounts to providers, would materially and adversely impact our liquidity. In
some jurisdictions cancellation may be immediate and in other jurisdictions a
notice period is required.
In the
event a state imposes additional contract terms on us or otherwise makes changes
to the contract that impact the economic feasibility of the contract, we may
decide to terminate the contract. For example, in January 2009, we determined
that it was economically infeasible for us to continue participating in the
Florida Medicaid reform program after Florida notified us that it was reducing
our reimbursement rates. Consequently, we withdrew from the Florida
Medicaid reform program effective July 1, 2009, which resulted in a loss of
approximately 80,000 members. However, we may not be able to
terminate our state contracts without a lengthy notice period. Some of the
states in which we operate have extended the period in which we are obligated to
serve our members after we notify the state that we intend to exit. For example,
Ohio has recently extended the required exit period in our contract from 120
days to 240 days. If any state in which we operate were to decrease premiums
paid to us, pay us less than the amount necessary to keep pace with our cost
trends, or amend the contract to our detriment, it could have a material adverse
effect on our profitability, cash available for operations and compliance with
capital reserve requirements.
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. For 2010, we bid above the CMS
benchmark in 15 of the 34 CMS regions and are ineligible to receive
auto-assigned members in these regions in 2010. As a comparison, we bid above
the CMS benchmark in 22 of the regions in 2009. If we are unable to
renew, re-bid or compete successfully for any of our existing or potential
government contracts, or 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.
To the
extent that our encounter data is inaccurate or incomplete, we have expended and
may continue to expend additional effort and incur significant additional costs
to collect or correct this data and have been and could be exposed to operating
sanctions and financial fines and penalties potentially including regulatory
risk for noncompliance. The accurate and timely reporting of
encounter data is increasingly important to the success of our programs because
more states are using encounter data to determine compliance with performance
standards, which are partly used by states to set premium rates. In some
instances, our government clients have established retroactive requirements for
the encounter data we must submit. On other occasions, there may be a
period of time in which we are unable to meet existing
requirements. In either case, it may be prohibitively expensive or
impossible for us to collect or reconstruct this historical data. For
example, the Georgia Department of Community Health (“DCH”) requires all plans
to satisfy specific requirements regarding the quality and volume of encounter
data, including a requirement that all plans submit at least 98% of their
encounters based on value of claims paid. Failure to satisfy these
requirements could result in the imposition of fines, penalties or other
operating restrictions until such time as all requirements have been
met. DCH has engaged a third party to conduct an audit and
reconciliation of our encounter submissions to determine our current and
on-going level of compliance with contractual encounter submission
requirements. During 2009, DCH fined our Georgia plan an aggregate of
$0.7 million due to our continued failure to submit encounter data as
required. It is likely that our compliance will take additional time
during which regulators may impose additional fines or penalties or take other
action against us as a result of our lack of encounter data submission
compliance.
As states
increase their reliance on encounter data, challenges in obtaining complete and
accurate encounter data could 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 our ability to bid for, and continue to
participate in, certain programs.
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 historically has been subject to negative publicity. This
publicity may result in increased legislation, regulation and review of industry
practices and, in some cases, litigation. For example, the Obama Administration
and certain members of Congress have been questioning the profits of health
insurance plans and the percentage of premiums paid that are going directly to
health care benefits. These inquiries have resulted in news reports that are
generally negative to the health insurance industry. 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.
CMS
will subject us to targeted monitoring and heightened surveillance and oversight
of all of our operational areas during the upcoming open enrollment periods,
which could subject us to new sanctions or penalties that could have a material
adverse effect on us.
In connection with its removal of the marketing and enrollment
sanction, CMS informed us that it would subject us to targeted monitoring and
heightened surveillance and oversight of all of our operational areas during the
2010 open enrollment periods (i.e., the Annual Open Election Period (AEP) and
the Medicare Advantage Open Enrollment Period (OEP)). In addition, CMS stated
that it will be frequently asking us for specific data to provide CMS with
assurance that the deficiencies that were the basis for the sanction are not
likely to recur. Such surveillance, oversight and requests may impose
additional administrative burdens on us to provide the information necessary to
allow CMS to evaluate our ongoing compliance, which could ultimately increase
our selling, general and administrative (“SG&A”) expenses. If any of
the underlying deficiencies that formed the basis for the CMS sanction recur,
including if we fail to be responsive to CMS or to comply with CMS timeliness
requirements for responding to beneficiary complaints or CMS identifies new
deficiencies, we will be subject to the remedies available to CMS under law,
including the imposition of additional sanctions or penalties, contract
nonrenewal or termination, as described in 42 C.F.R. Parts 422 and 423, Subparts
K and O, which could have a material adverse effect on us. Moreover, as a result
of the CMS sanction and its targeted monitoring and heightened surveillance of
us, the recurrence of deficiencies that in prior periods resulted in fines or
penalties to us that were not significant could result in increased fines and
penalties and any such increases could be material.
Because our Medicaid premiums, which
generate a significant portion of our total revenues, are fixed by contract, we are unable to increase
our premiums during the contract term despite our corresponding medical benefits
expense exceeding our estimates, which could have a material adverse effect on our
results of operations.
Most of
our Medicaid 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 five 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 79.4%, 85.3% and 85.4% for the years ended December 31,
2007, 2008 and 2009, 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 nonetheless be unable to adjust the premiums we
receive under our current contracts, which could have a material adverse effect
on ur results of operations.
Relatively
small changes in our medical benefits ratio (“MBR”), can create significant
changes in our financial results. Accordingly, the failure to adequately predict
and control medical expenses and to make reasonable estimates and maintain
adequate accruals for incurred but not reported, or IBNR, claims, may have a
material adverse effect on our financial condition, results of operations, or
cash flows.
Historically,
our medical expenses as a percentage of premium revenue have fluctuated. Factors
that may cause medical expenses to exceed our estimates include:
• an
increase in the cost of healthcare services and supplies, including prescription
drugs, whether as a result of inflation or otherwise;
|
•
|
higher
than expected utilization of healthcare services, particularly in-patient
hospital services, or unexpected utilization
patterns;
|
• periodic
renegotiation of hospital, physician, and other provider contracts;
• changes
in the demographics of our members and medical trends affecting
them;
• new
mandated benefits or other changes in healthcare laws, regulations, and
practices;
• new
treatments and technologies; and
• contractual
disputes with providers, hospitals, or other service providers.
We
attempt to control these costs through a variety of techniques, including
capitation and other risk-sharing payment methods, collaborative relationships
with PCPs and other providers, case and disease management and quality assurance
programs, and preventive and wellness visits for members. Despite our efforts
and programs to manage our medical expenses, we may not be able to continue to
manage these expenses effectively in the future. If our medical expenses
increase, our profits could be reduced or we may not remain
profitable.
Changes in our member mix may have a
material adverse effect on our cash flow 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 in both
our Medicaid and Medicare lines of business. For instance, the rates we receive
for an SSI member are generally significantly higher than for a non-SSI 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 and results of operations.
Reduction, delay or the inability of
federal or state funding for health care programs could have a material adverse effect
on our profitability, cash flows 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 (the “DRA”), 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 DRA 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.
Stimulus
funds for Medicaid in ARRA are anticipated to end in 2010 leaving certain states
with sizable projected budget gaps in their Medicaid programs. Absent
additional federal assistance, these states may be under pressure to raise
revenue, reduce provider payments, and reduce benefits or a combination of the
above. We continue to evaluate the impact proposed alternatives could
have on our business and will take action as appropriate. For
example, one state that might be affected is Florida. According to
the State of Florida’s Long Range Financial Outlook Fiscal Year 2010-2011
through 2012-2013 report, the state anticipates a number of budget challenges in
the coming years. This report notes that, “Overall, the General
Revenue Fund is solvent for Fiscal Year 2009-10, but has projected shortfalls in
each of the three planning years despite the significant revenue growth
projected for those years.” Florida is one of our two largest
Medicaid customers.
Although premiums are contractually payable to us before or during the month in
which we are obligated to provide services to our members, we have experienced
delays in premium payments from certain states of up to five months. Given the
budget shortfalls in many states that we contract with, payment delays may
reoccur in the future. For example, the State of Hawaii's Department of Human
Services ("Hawaii DHS") recently announced that as a result of Hawaii's budget
shortfall during its current fiscal year, Hawaii DHS intends to withhold
payments to plans offering services under the QUEST and QUEST Expanded
Access programs, including ours, for a period of approximately three
to four months. While we and other affected health plans are urging
Hawaii DHS to reconsider its intention to defer payment, we can offer no
assurance that our efforts will be successful or that any such delay
would not ultimately go beyond four months. Our monthly premium on
the Hawaii Medicaid program averages approximatley $25.0
million.
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, processed and stored 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 service 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.
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 to recover business functionality within stated timelines. 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 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, increased regulatory
scrutiny, strategic alliances and growing revenue and cost pressures. 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 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. Competitors with greater financial resources
than us may be better positioned than us to withstand rate compression. 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 effectively replace our executive officers, other
members of management or 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.
The loss
of the leadership, knowledge and experience of our management team 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 addition, we may not be able to hire and retain our executive officers,
other members of management or associates for a number of reasons, including,
but not limited to the:
|
•
|
uncertainty
about government health care policies and funding and the potential impact
on us;
|
|
•
|
uncertainty
about potential future regulatory actions similar to the CMS
sanction;
|
|
•
|
uncertainty
surrounding ongoing governmental and Company investigations and
litigation; and
|
|
•
|
decline
of our stock price in light of the importance of equity in many of our
compensation packages.
|
Accordingly, all of these factors may impair our ability to recruit and retain
qualified personnel, which could have a material adverse effect on our
business.
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 contract with us or used
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 PCP 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. 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 federal trademark registrations for the “WellCare,” "HealthEase" and
"Harmony" trademarks, and we are pursuing an application with the U.S. Patent
and Trademark Office to register "Ohana Health Plan, Inc. & Design.” 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 resignation of our chief executive officer, the elimination of the position
of President of National Medicare and 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. The lack of familiarity and experience with us or
our industry by some members of our management team 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, non-regulated cash flows, business and
financial condition.
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
ordinary dividends usually must provide notice to the regulators in advance of
the intended distribution date of such dividend. Extraordinary dividends require
approval by state regulators prior to declaration. 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, non-regulated cash flows, business and financial condition may be
materially adversely affected.
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, results of operations 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, results of operations 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
We
may be unable to raise additional unregulated cash, if needed, in the current
economic environment.
Although,
from time to time, we have maintained a line of credit to facilitate
unregulated cash flows, we currently do not have a loan facility in place.
Continued turmoil in the financial markets and general adverse economic
conditions make it more difficult, and perhaps prohibitively costly, for us to
raise capital through the issuance of debt, publicly or privately.
If we are
unable to raise additional unregulated cash when needed, our unregulated cash
balances will deteriorate, which could have a material adverse effect on our
cash flows, business condition and results of operations.
An
intercompany loan arrangement currently in place could be terminated by
insurance regulators, which would have a material adverse effect on our
unregulated cash position and liquidity.
Two of
our regulated Florida subsidiaries currently have intercompany loan arrangements
in place lending a total of $50.0 million to one of our non-regulated
subsidiaries. The intercompany loan arrangement was for the purpose of
commencing a new business that ultimately did not occur. The loan
arrangements require repayment in September 2012 and we do not intend to repay
the loan until that time. However, the Florida regulators could require the
regulated subsidiaries to terminate the intercompany loan arrangements before
the due date, necessitating the borrowing subsidiary to repay in full the amount
owed to the regulated Florida subsidiaries. If the borrowing subsidiary were
required to repay the intercompany loans, or other restrictions were placed on
the use of the loan proceeds, our unregulated cash balance could be reduced by
up to $50.0 million plus any accrued interest.
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, 2009, our long-term investments had an amortized cost of $57.0
million and an estimated fair value of $51.7 million, and 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, which 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. Auctions for
these auction rate securities have continued to fail and there is no assurance
that auctions on the remaining auction rate securities in our investment
portfolio will succeed in the near future. 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 non-existent. We may be required to wait until market stability is
restored for these instruments or until the final maturity of the underlying
notes (up to 30 years) to realize our investments’ recorded value.
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.
Risks
Related to Being a Regulated Entity
CMS’s risk adjustment payment system
makes our revenue and results of operations 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 its 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 Medicare 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
and results of operations.
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 adjustment
updates 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, financial position and cash flows. The data
provided to CMS to determine the risk score is subject to audit by CMS even
after the annual settlements occur. These audits may result in the refund of
premiums to CMS previously received by us. While our experience to
date has not resulted in a material refund, this refund could be significant in
the future, which would reduce our premium revenue in the year that CMS requires
repayment.
In
February 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 intensity adjustment to contracts whose
disease scores for stayers exceeded fee-for-service by twice the industry
average. The agency proposed to apply an adjustment that was 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. For calendar year 2010, a negative coding
intensity adjustment factor of 3.41% will apply to all managed care plans. The
coding intensity adjustment factor would be applied to beneficiaries and risk
scores, resulting in a decrease in our Medicare revenue.
CMS has
begun a program to perform audits of selected MA plans to validate the provider
coding practices under the risk-adjustment model used to calculate the premium
paid for each MA member. Our Florida HMO contract has been selected by CMS for
audit for the 2007 contract year and we anticipate that CMS will conduct
additional audits of other contracts and contract years on an ongoing basis. The
CMS audit of this data involves a review of a sample of provider medical records
for the contract under audit. We are unable to estimate the financial impact of
any audit that is underway or that may be conducted in the future. We are also
unable to determine whether any conclusions that CMS may make, based on the
audit of our plan and others, will cause us to change our revenue estimation
process. At this time, we do not know whether CMS will require retroactive or
subsequent payment adjustments to be made using an audit methodology that may
not compare the coding of our providers to the coding of Original Medicare and
other MA plan providers, and how, if at all, CMS will extrapolate its findings
to the entire contract. However, it is reasonably possible that a payment
adjustment as a result of these audits could occur, and that any such adjustment
could have a material adverse effect on our results of operations, financial
position, and cash flows, possibly in 2010 and beyond.
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 a significant portion of the average
state’s budget. Health care spending increases appear to be more limited than in
the past, as 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 or
stagnating 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
or stagnating general economic conditions may cause our membership levels to
decrease even further, which could have a material adverse effect on our results
of operations. Historically, the number of persons eligible to receive Medicaid
benefits has increased more rapidly during periods of rising unemployment,
corresponding to less favorable general economic
conditions. Conversely, this number may grow more slowly or even
decline if economic conditions improve. Therefore, improvements in
general economic conditions may cause our membership levels to decrease, thereby
causing our financial position, results of operations or cash flows to suffer,
which could lead to decreases in our stock price during periods in which stock
prices in general are increasing. In addition, 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.
We are
experiencing pressure in many states and specifically on rates in Florida and
Georgia, two states from which we derive a substantial portion of our revenue.
In 2009, Florida implemented Medicaid rates that made it economically unfeasible
for us to continue to participate in the Medicaid reform programs. As a result,
we withdrew from these programs effective July 1, 2009, which resulted in a loss
of approximately 80,000 members. Current regulation in Georgia related to
payment of claims, eligibility determination and provider contracting, has
negatively impacted expenses for the plan in 2009 and this may continue in the
future. Further, continued economic slowdowns in Florida and Georgia, as well as
other states, could result in additional state actions that could adversely
affect our revenues.
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. 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. Legislation has been enacted to postpone a planned 21% reduction
in the physician fee schedule until February 28, 2010. We expect that
the physician fee schedule cut implicit in the premium rates will not be enacted
in 2010 and that the following are among the events that are likely to occur:
member benefits will be reduced; member premiums will be increased; and margins
will decline. These events are likely to have a negative affect on our 2010
operating results and membership.
In
January 2009, the Obama Administration took office. Although the new
administration and Congress have expressed some support for measures intended to
expand the number of citizens covered by health insurance and other changes
within the health care system, the costs of implementing any of these proposals
could be financed, in part, by reductions in the payments made under Medicare
and other government programs. Similarly, although Congress approved the
children’s health bill which, among things, increases federal funding to S-CHIP
and President Obama signed the American Recovery and Reinvestment Act that
provides funding for, among other things, state Medicaid programs and aid to
states to help defray budget cuts, because of the unsettled nature of these
initiatives, the numerous steps required to implement them and the substantial
amount of state flexibility for determining how Medicaid and S-CHIP funds will
be used, we are currently unable to assess the ultimate impact that they will
have on our business.
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;
|
|
•
|
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. See “CMS’s risk adjustment payment system makes our revenue and
results of operations difficult to predict and could result in material
retroactive adjustments that have a material adverse effect on our results of
operations” for additional risks associated with a current CMS audit of one of
our plans.
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 into 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 are discussing with the Civil Division the
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, or similar
state statutes, based on qui tam actions other than those discussed in this 2009
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.
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
state adopted regulations that increase the capital reserve requirement by 150%
over an eight-year period that will be fully implemented in 2012. The phased-in
increase in reserve requirements to which our New York plan is subject has, over
time, materially increased our reserve requirements in one of our subsidiaries
domiciled in New York. Other states may elect to adopt risk-based capital
requirements based on guidelines adopted by the NAIC. As of December 31, 2009,
our HMO operations in Connecticut, Georgia, Illinois, Indiana, Louisiana,
Missouri and Ohio, and our 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. For
example, if premium rates are inadequate, reduced profits or losses in our
regulated subsidiaries may cause regulators to increase the amount of capital
required. 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. 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
have decided to exit the Medicare PDP program in Wisconsin for 2010 due to that
state’s capital requirements, and auto-assigned PDP membership in Wisconsin will
be re-assigned to other plans.
Several changes to the Medicare
program resulting from the MIPPA legislation could increase competition for our
existing and prospective
members and have a material adverse effect on our results of operations.
MIPPA was
enacted in 2008 and impacts a broad range of Medicare activities and 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:
Sales and Marketing: MIPPA
and subsequent CMS guidance place prohibitions and limitations on certain sales
and marketing activities of MA and PDPs. Among other things, MA and PDPs are not
permitted to: make unsolicited outbound calls to potential members or engage in
other forms of unsolicited contact; cross-sell non-Medicare products to existing
members during MA or Part D sales interactions; establish appointments without
documented consent from potential members; provide meals to potential enrollees
at
sales
events; or conduct sales events in certain provider-based settings. In response,
we have focused on more formal marketing methods (e.g., advertising and other
media-generated activity) during the most recent Medicare enrollment period,
which has served to increase our acquisition costs and slowed our
sales. Further, the new MIPPA guidelines, along with the rapid and
rigorous requirements to implement them, contributed to the violations that
resulted in CMS sanction that suspended our marketing and selling ability noted
earlier.
Special Needs Plans: A
significant portion of our MA CCP membership is enrolled in our D-SNPs. Under
MIPPA and subsequent CMS guidance, D-SNPs such as ours are required to contract
with state Medicaid agencies to coordinate care. The scope of the D-SNP contract
with the state Medicaid agency varies greatly based 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 continued operation of a D-SNP after 2010 if a state and the D-SNP
provider cannot come to agreement on terms. Currently we have
contracted with 4 of the 11 states in which we currently offer
D-SNPs. While we are pursuing contracts with the remaining states, we
are unable to provide assurances that our efforts will be successful or will
result in terms that are favorable or acceptable to us.
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 with respect to
members moving from Original Medicare and a five year commission cycle with
respect to members moving from another Medicare Advantage plan.
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.
Enacted into law in February 2009, ARRA expanded and strengthened privacy
and security requirements under HIPAA, which applies to us.
ARRA imposes many HIPAA security and privacy requirements
directly on business associates that were previously only directly applicable to
health plans, certain providers and healthcare clearinghouses. In addition, ARRA
further limits our use and disclosure of protected health information (“PHI”).
Among other things, these limitations include prohibitions on exchanging PHI for
remuneration, restrictions on marketing to individuals, and the promise of new
standards for the de-identification of data. ARRA also imposed new obligations
on us to provide individuals with electronic copies of their health information,
to agree to certain restrictions requested by individuals and eventually to
provide individuals an accounting of virtually all disclosures of their health
information. Most of these provisions became effective in February 2010 and
many will be further clarified by regulations promulgated by the Department of
Health and Human Services (“HHS”). The earliest compliance date for limitations
on exchanging PHI for remuneration and providing expanded accounting to
individuals is in 2011.
Civil penalties for violations by either covered entities or business
associates are increased up to an annual maximum of $1.5 million for
uncorrected violations based on willful neglect. Imposition of these penalties
is more likely because ARRA strengthens enforcement. For example, commencing
February 2010, HHS is required to conduct periodic audits to confirm
compliance. Investigations of violations that indicate willful neglect, for
which penalties are mandatory beginning in February 2011, are statutorily
required. In addition, state attorneys general are authorized to bring civil
actions seeking either injunctions or damages in response to violations of HIPAA
privacy and security regulations that threaten the privacy of state residents.
Initially monies collected will be transferred to a division of HHS for further
enforcement, and within three years, a methodology will be adopted for
distributing a percentage of those monies to affected individuals to fund
enforcement and provide incentive for individuals to report
violations.
In
addition, commencing September 2009, ARRA requires us to notify affected
individuals, HHS, and in some cases the media when unsecured personal health
information is subject to a security breach.
ARRA also contains a number of provisions that provide incentives for states to
initiate certain programs related to health care and health care technology,
such as electronic health records. While provisions such as these do not apply
to us directly, states wishing to apply for grants under ARRA, or otherwise
participating in such programs, may impose new health care technology
requirements on us through our contracts with state Medicaid agencies. We are
unable to predict what such requirements may entail or what their effect on our
business may be.
We are currently evaluating ARRA for its specific
impact on us and our customers. We will continue to assess our compliance
obligations as regulations under ARRA are promulgated and more information
becomes available from HHS and other federal agencies. The new privacy and
security requirements, however, may require substantial operational and systems
changes, employee education and resources and there is no guarantee that we be
able to implement them adequately or prior to their compliance date. Given
HIPAA’s complexity and the anticipated new regulations, which may be subject to
changing and perhaps conflicting interpretation, our ongoing ability to comply
with any of the HIPAA requirement is uncertain, which may expose us to the
criminal and increased civil penalties provided under ARRA and may require us to
incur significant costs in order to seek to comply with its requirements.
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 by, among other things:
|
•
|
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 rely on direct marketing and sales efforts in a few of our states, the
majority of our new members are obtained through voluntary selection and
automatic enrollment programs. 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, 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. Similarly,
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.
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 results of
operations.
Premium
payments that we receive are based upon eligibility lists produced by our
government clients. A state will require us to reimburse it for premiums that we
received from the state based on an eligibility list that it later discovers
contains individuals who were not eligible for any government-sponsored program,
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 recipients become dually
eligible, their premiums are primarily remitted by CMS rather than the state. In
this case, the State of Florida had not properly reduced the amount of premium
it 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 or members for which we have been paid an incorrect rate may not
identify all such members and could result in repayment of premiums in years
subsequent to the year in which the revenue was recovered.
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
results of operations 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 recoupment exceeds our reserves, our revenues could be materially reduced
and it would have a material adverse effect on our results of
operations.
Our failure to maintain
accreditations could disqualify us from participation in 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 Georgia health plan is
accredited 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 on the market
price of our common stock and could materially impair our ability to raise
capital through future offerings of our common stock.
As of
December 31, 2009, we had outstanding options to purchase 1,919,535 shares of
our common stock, of which 1,259,897 were exercisable, at a weighted average
exercise price of $38.60 per share. In addition, as of December 31,
2009, we had outstanding 883,266 restricted stock units, which will vest at
various times over approximately the next four years. From time to
time, we may issue additional options and restricted stock units to associates,
non-employee directors, consultants and others pursuant to our equity incentive
plans.
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 and 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.
Item 1B. Unresolved Staff
Comments
None.
Item
2. Properties
Our
principal administrative, sales and marketing facilities are located at our
leased corporate headquarters in Tampa, Florida. Our corporate headquarters is
used in all of our lines of business. We also lease office space for the
administration of our health plans in Connecticut, Florida, Georgia, Hawaii,
Illinois, Indiana, Louisiana, Missouri, New Jersey, New York, Ohio and Texas.
These properties are all in good condition and are well
maintained. 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
|
As
previously disclosed, in May 2009, we entered into the DPA with the USAO and the
Florida Attorney General’s Office, resolving previously disclosed investigations
by those offices.
Under the
Information filed with the Court by the USAO pursuant to the DPA, we were
charged with one count of conspiracy to commit health care fraud against the
Florida Medicaid Program in connection with reporting of expenditures under
certain community behavioral health contracts, and against the Florida Healthy
Kids programs, under certain contracts, in violation of 18 U.S.C. Section
1349. The USAO recommended to the Court that the prosecution of us be
deferred for the duration of the DPA. Within five days of the
expiration of the DPA the USAO will seek dismissal with prejudice of the
Information, provided we have complied with the DPA.
The term
of the DPA is thirty-six months, but such term may be reduced by the USAO to
twenty-four months upon consideration of certain factors set forth in the DPA,
including our continued remedial actions and compliance with all federal and
state health care laws and regulations.
In
accordance with the DPA, the USAO has filed with the Court a statement of facts
relating to this matter. As a part of the DPA, we have retained a Monitor for a
period of 18 months from his retention in August 2009. The Monitor
was selected by the USAO after consultation with us and is retained at our
expense. In addition, we agreed to continue undertaking remedial
measures to ensure full compliance with all federal and state health care
laws. Among other things, the Monitor will review our compliance with
the DPA and all applicable federal and state health care laws, regulations and
programs. The Monitor also will review, evaluate and, as necessary,
make written recommendations concerning certain of our policies and
procedures. The DPA provides that the Monitor will undertake to avoid
the disruption of our ordinary business operations or the imposition of
unnecessary costs or expenses.
The DPA
does not, nor should it be construed to, operate as a settlement or release of
any 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 DPA 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 administrative
liability. Pursuant to the terms of the DPA, we have paid the USAO a
total of $80.0 million.
In May
2009, we resolved the previously disclosed investigation by the
SEC. Under the terms of the Consent and Final Judgment, without
admitting or denying the allegations in the complaint filed by the SEC, we
consented to the entry of a permanent injunction against any future violations
of certain specified provisions of the federal securities laws. In
addition, we agreed to pay, in four quarterly installments, a civil penalty in
the aggregate amount of $10.0 million and disgorgement in the amount of one
dollar plus post-judgment interest, of which the first three payments have been
made.
As
previously disclosed, we remain engaged in resolution discussions as to matters
under review with the Civil Division and the OIG. Management
currently estimates that the remaining liability associated with these matters
is approximately $60.0 million, plus interest. We anticipate these amounts will
be payable in installments over a period of four to five years.
In
October 2008, the Civil Division informed us 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). In connection with the
ongoing resolution discussions with the Civil Division, we are addressing the
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, or similar state
statutes, based on qui
tam actions other than those discussed in this 2009 Form
10-K.
In
addition, we are responding 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. We have communicated with regulators in states in which our
health maintenance organization and insurance operating subsidiaries are
domiciled regarding the investigations, and we are cooperating with federal and
state regulators and enforcement officials in all of these
matters. We do not know whether, or the extent to which, any pending
investigations might lead to the payment of fines or penalties, the imposition
of injunctive relief and/or operating restrictions.
|
Class
Action and Derivative Lawsuits
|
Putative
class action complaints were filed in October 2007 and in November
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 us, Todd Farha, our former chairman and chief
executive officer, and Paul Behrens, our former senior vice president and chief
financial officer. Messrs. Farha and Behrens were also officers of
various subsidiaries of ours. The Eastwood Enterprises complaint
alleges that the defendants materially misstated our 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 “Exchange Act”). The
Hutton complaint alleges that various public statements supposedly issued by
defendants were materially misleading because they failed to disclose that we
were purportedly operating our business in a potentially illegal and improper
manner in violation of applicable federal guidelines and
regulations. The complaint asserts claims under the Exchange
Act. 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 in March 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. In
October 2008, an amended consolidated complaint was filed in this class action
against us, Messrs. Farha and Behrens, and adding Thaddeus Bereday, our former
senior vice president and general counsel, as a defendant. In January
2009, we and certain other defendants filed a joint motion to dismiss the
amended consolidated complaint, arguing,
among other things, that the complaint failed
to allege a material misstatement by defendants with respect to our compliance
with marketing and other health care regulations and failed to plead
facts raising a strong inference of scienter with respect to all aspects of the
purported fraud claim. The court denied the motion in September 2009
and we and the other defendants filed our answer to the amended consolidated
complaint in November 2009, and discovery is ongoing. Separately, in
October 2009, an action was filed against us in the Court of Chancery of the
State of Delaware entitled Behrens, et al. v. WellCare Health Plans, Inc. in
which the plaintiffs, Messrs. Behrens, Bereday, and Farha, seek an order
requiring us to pay their respective expenses, including attorney fees, in
connection with litigation and investigations in which the plaintiffs are
involved by reason of their service as our directors and officers. Plaintiffs
further challenge our right, prior to advancing such expenses, to first submit
their expense invoices to our directors’ and officers’ insurance carrier for
their preliminary review and evaluation of the adequacy of the description of
services in the invoices and of the reasonableness of those expenses. We intend
to defend ourselves vigorously against these claims. At this time,
neither we nor any of our subsidiaries can predict the probable outcome of these
claims. Accordingly, no amounts have been accrued in our consolidated
financial statements in respect to these matters.
Five
putative shareholder derivative actions were filed between October and November
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 us 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 of our
directors (and former director Todd Farha) except for Charles Berg, David
Gallitano, D. Robert Graham and Glenn D. Steele, Jr. and also name us 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 of our directors (and former director Todd Farha)
except Charles Berg, David Gallitano and Glenn D. Steele, Jr. and against two of
our former officers, Paul Behrens and Thaddeus Bereday. 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. 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 with 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 in April
2008. In October 2008, amended complaints were filed in the federal
court and the state court derivative actions. In December 2008, we
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 our name. In an Order entered in
March 2009 in the consolidated federal action, the court denied the motions to
dismiss the second amended consolidated complaint. In April 2009, in
the consolidated state action, the court denied the motion to dismiss the second
amended consolidated complaint. In April 2009, upon the
recommendation of the Nominating and Corporate Governance Committee of the
Board, the Board adopted a resolution forming a Special Litigation Committee,
comprised of a newly-appointed independent director, to investigate the facts
and circumstances underlying the claims asserted in the federal and state
derivative cases and to take such action with respect to such claims as the
Special Litigation Committee determines to be in our best
interests. In May 2009, the Special Litigation Committee filed in the
consolidated federal action a motion to stay the matter until November 2009 to
allow the Special Litigation Committee to complete its investigation, and
following a hearing in May 2009, the court granted that motion and stayed the
federal action. The Special Litigation Committee filed a substantially identical
motion in the consolidated state action, and the plaintiffs in that action
withdrew their request for a hearing to contest that motion. Also, in October
2009, the judge overseeing the consolidated federal action granted a motion that
had been filed by several of the individual defendants to transfer
responsibility for the case to the judge within the same Court who is overseeing
the class action case described in the preceding paragraph. In November 2009,
the Special Litigation Committee filed a report with the Court determining,
among other things, that we should pursue an action against three of our former
officers. In December 2009, the Special Litigation Committee filed a
motion to dismiss the claims against the director defendants, and to realign us
as a plaintiff for purposes of pursuing claims against the three former
officers. That motion remains pending. At this time,
neither we nor any of our subsidiaries can predict the probable outcome of these
claims. In addition, derivative actions, by their nature, do not seek to recover
damages from the companies on whose behalf the plaintiff shareholders are
purporting to act.
|
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 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.
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 sales prices of our common
stock, as reported on the New York Stock Exchange, for each of the periods
listed.
|
High
|
|
Low
|
2009
|
|
|
|
First
Quarter ended March 31, 2009
|
$ 16.82
|
|
$ 6.23
|
Second
Quarter ended June 30, 2009
|
$ 20.91
|
|
$ 10.86
|
Third
Quarter ended September 30, 2009
|
$ 27.50
|
|
$ 16.55
|
Fourth
Quarter ended December 31, 2009
|
$ 39.12
|
|
$ 24.00
|
2008
|
|
|
|
First
Quarter ended March 31, 2008
|
$ 58.73
|
|
$ 31.30
|
Second
Quarter ended June 30, 2008
|
$ 55.73
|
|
$ 34.01
|
Third
Quarter ended September 30, 2008
|
$ 45.65
|
|
$ 26.30
|
Fourth
Quarter ended December 31, 2008
|
$ 35.86
|
|
$ 6.12
|
The last
reported sale price of our common stock on the New York Stock Exchange on February
16, 2010 was $31.72. As of February 16, 2010, we had approximately 33
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 December 31, 2004, to December 31, 2009 with the
cumulative total return on the stocks included in the Standard & Poor’s 500
Stock Index and the custom composite index over the same period. The Custom
Composite Index includes the stock of Aetna, Inc., Amerigroup Corporation,
Centene Corporation, Cigna Corp., Coventry Health Care Inc., Health Net Inc.,
HealthSpring, Inc., Humana, Inc., Molina Healthcare, Inc., Unitedhealth Group,
Inc., Universal American Corp. and WellPoint, Inc. The graph assumes an
investment of $100 made in our common stock and the custom composite index on
December 31, 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.
|
|
|
|
12/31/04
|
|
12/31/05
|
|
12/31/06
|
|
12/31/07
|
|
12/31/08
|
|
12/31/09
|
WellCare
Health Plans, Inc.
|
|
|
|
$100
|
|
$126
|
|
$212
|
|
$130
|
|
$ 40
|
|
$ 113
|
S&P
500 Index
|
|
|
|
$100
|
|
$105
|
|
$121
|
|
$128
|
|
$ 81
|
|
$ 102
|
Custom
Composite Index (12 stocks)
|
|
|
|
$100
|
|
$142
|
|
$134
|
|
$154
|
|
$ 69
|
|
$ 88
|
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. 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.”
Unregistered
Issuances of Equity Securities
None.
Issuer
Purchases of Equity Securities
We do not
have a stock repurchase program. However, during the quarter ended December 31,
2009, certain of our employees were deemed to have surrendered shares of our
common stock to satisfy their withholding tax obligations associated with the
vesting of shares of restricted common stock. The following table summarizes
these repurchases:
Period
|
|
Total
Number
of Shares
Purchased(1)
|
|
|
Average
Price Paid
Per Share (1)
|
|
|
Total
Number
of Shares
Purchased
as
Part of
Publicly
Announced
Plans or
Programs
|
|
|
Maximum
Number
of
Shares
that
May
Yet Be
Purchased
Under
the
Plans or
Programs
|
October
1, 2009 through October 31, 2009
|
|
12,779
|
|
|
$25.15
(2)
|
|
|
N/A
|
|
|
N/A
|
November
1, 2009 through November 30, 2009
|
|
1,157
|
|
|
$29.15
(3)
|
|
|
N/A
|
|
|
N/A
|
December
1, 2009 through December 31, 2009
|
|
27,431
|
|
|
$38.30
(4)
|
|
|
N/A
|
|
|
N/A
|
Total
during quarter ended December 31, 2009
|
|
41,367
|
|
|
$33.38
(5)
|
|
|
N/A
|
|
|
N/A
|
____________
(1)
|
The
number of shares purchased represent the number of shares of our common
stock deemed surrendered by our employees to satisfy their withholding tax
obligations due to the vesting of shares of restricted common stock. For
the purposes of this table, we determined the average price paid per share
based on the closing price of our common stock as of the date of the
determination of the withholding tax amounts (i.e., the date that the
shares of restricted stock vested). We do not currently have a stock
repurchase program. We did not pay any cash consideration to repurchase
these shares.
|
(2)
|
The
weighted average price paid per share during the period was
$25.56.
|
(3)
|
The
weighted average price paid per share during the period was
$31.64.
|
(4)
|
The
weighted average price paid per share during the period was
$36.48.
|
(5)
|
The
weighted average price paid per share during the period was
$28.78.
|
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 2009 Form 10-K. The data for the years
ended December 31, 2007, 2008 and 2009, and as of December 31, 2008 and 2009 is
derived from consolidated financial statements included elsewhere in this 2009
Form 10-K. The data for the years ended December 31, 2005 and 2006 and as of
December 31, 2005, 2006, and 2007 is derived from audited financial statements
not included in this 2009 Form 10-K.
|
|
Year
Ended
December
31, 2005
|
|
|
Year
Ended
December
31, 2006
|
|
|
Year
Ended
December
31, 2007
|
|
|
Year
Ended
December
31,
2008
|
|
|
Year
Ended
December
31, 2009
|
|
|
|
(in
thousands, except share data)
|
|
Consolidated
and Combined Statements of Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medicaid
|
|
$ |
1,343,800 |
|
|
$ |
1,906,391 |
|
|
$ |
2,691,781 |
|
|
$ |
2,991,049 |
|
|
$ |
3,256,731 |
|
Medicare
|
|
|
504,501 |
|
|
|
1,679,652 |
|
|
|
2,613,108 |
|
|
|
3,492,021 |
|
|
|
3,610,521 |
|
Total
premium
|
|
|
1,848,301 |
|
|
|
3,586,043 |
|
|
|
5,304,889 |
|
|
|
6,483,070 |
|
|
|
6,867,252 |
|
Investment
and other income
|
|
|
17,042 |
|
|
|
49,919 |
|
|
|
85,903 |
|
|
|
38,837 |
|
|
|
10,912 |
|
Total
revenues
|
|
|
1,865,343 |
|
|
|
3,635,962 |
|
|
|
5,390,792 |
|
|
|
6,521,907 |
|
|
|
6,878,164 |
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical
benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medicaid
|
|
|
1,093,180 |
|
|
|
1,555,819 |
|
|
|
2,136,710 |
|
|
|
2,537,422 |
|
|
|
2,810,611 |
|
Medicare
|
|
|
412,208 |
|
|
|
1,351,471 |
|
|
|
2,076,674 |
|
|
|
2,992,794 |
|
|
|
3,051,846 |
|
Total
medical benefits
|
|
|
1,505,388 |
|
|
|
2,907,290 |
|
|
|
4,213,384 |
|
|
|
5,530,216 |
|
|
|
5,862,457 |
|
Selling,
general and administrative
|
|
|
259,491 |
|
|
|
496,396 |
|
|
|
766,648 |
|
|
|
933,418 |
|
|
|
892,940 |
|
Depreciation
and amortization
|
|
|
9,204 |
|
|
|
17,170 |
|
|
|
18,757 |
|
|
|
21,324 |
|
|
|
23,336 |
|
Interest
|
|
|
13,562 |
|
|
|
14,087 |
|
|
|
14,035 |
|
|
|
11,780 |
|
|
|
6,411 |
|
Goodwill
impairment
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
78,339 |
|
|
|
— |
|
Total
expenses
|
|
|
1,787,645 |
|
|
|
3,434,943 |
|
|
|
5,012,824 |
|
|
|
6,575,077 |
|
|
|
6,785,144 |
|
Income
(loss) before income taxes
|
|
|
77,698 |
|
|
|
201,019 |
|
|
|
377,968 |
|
|
|
(53,170 |
) |
|
|
93,020 |
|
Income
tax expense (benefit)
|
|
|
30,330 |
|
|
|
79,790 |
|
|
|
161,732 |
|
|
|
(16,337 |
) |
|
|
53,149 |
|
Net
income (loss)
|
|
$ |
47,368 |
|
|
$ |
121,229 |
|
|
$ |
216,236 |
|
|
$ |
(36,833 |
) |
|
$ |
39,871 |
|
Net
income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share — basic
|
|
$ |
1.26 |
|
|
$ |
3.08 |
|
|
$ |
5.31 |
|
|
$ |
(0.89 |
) |
|
$ |
0.95 |
|
Net
income (loss) per share — diluted
|
|
$ |
1.21 |
|
|
$ |
2.98 |
|
|
$ |
5.16 |
|
|
$ |
(0.89 |
) |
|
$ |
0.95 |
|
|
|
As of December
31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
Operating
Statistics:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical
benefits ratio — consolidated(1)(2)(3)
|
|
|
81.4 |
% |
|
|
81.1 |
% |
|
|
79.4 |
% |
|
|
85.3 |
% |
|
|
85.4 |
% |
Medical
benefits ratio — Medicaid(1)
|
|
|
81.3 |
% |
|
|
81.6 |
% |
|
|
79.4 |
% |
|
|
84.8 |
% |
|
|
86.3 |
% |
Medical
benefits ratio — Medicare(1)
|
|
|
81.7 |
% |
|
|
80.5 |
% |
|
|
79.5 |
% |
|
|
85.7 |
% |
|
|
84.5 |
% |
Selling,
general and administrative expense ratio(4)
|
|
|
13.9 |
% |
|
|
13.7 |
% |
|
|
14.2 |
% |
|
|
14.3 |
% |
|
|
13.0 |
% |
Members
— consolidated
|
|
|
855,000 |
|
|
|
2,258,000 |
|
|
|
2,373,000 |
|
|
|
2,532,000 |
|
|
|
2,321,000 |
|
Members
— Medicaid
|
|
|
786,000 |
|
|
|
1,245,000 |
|
|
|
1,232,000 |
|
|
|
1,300,000 |
|
|
|
1,349,000 |
|
Members
— Medicare
|
|
|
69,000 |
|
|
|
1,013,000 |
|
|
|
1,141,000 |
|
|
|
1,232,000 |
|
|
|
972,000 |
|
|
|
As of December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(In
thousands)
|
|
Balance
Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
421,766 |
|
|
$ |
964,542 |
|
|
$ |
1,008,409 |
|
|
$ |
1,181,922 |
|
|
$ |
1,158,131 |
|
Total
assets
|
|
|
896,343 |
|
|
|
1,664,298 |
|
|
|
2,082,731 |
|
|
|
2,203,461 |
|
|
|
2,118,447 |
|
Long-term
debt (including current maturities)
|
|
|
182,061 |
|
|
|
155,621 |
|
|
|
154,581 |
|
|
|
152,741 |
|
|
|
— |
|
Total
liabilities
|
|
|
535,793 |
|
|
|
1,127,239 |
|
|
|
1,274,840 |
|
|
|
1,397,632 |
|
|
|
1,237,547 |
|
Total
stockholders’ equity
|
|
|
360,550 |
|
|
|
537,059 |
|
|
|
807,891 |
|
|
|
805,829 |
|
|
|
880,900 |
|
____________
(1)
|
Medical
benefits ratio represents medical benefits expense as a percentage of
premium revenue.
|
(2)
|
As
a result of the restatement and investigation, we were delayed in filing
our Annual Report on Form 10-K for the fiscal year ended December 31, 2007
(the “2007 Form 10-K”). Due to the substantial lapse in time between
December 31, 2007 and the date of filing of our 2007 Form 10-K, we were
able to review substantially complete claims information that had become
available due to the substantial lapse in time between December 31, 2007
and the date of filing of our 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 were based on actual claims paid. The difference between our
actual claims paid for the 2007 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 MBR. 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.
|
(3)
|
As
discussed above, due to the delay in filing our 2007 Form 10-K, we were
able to review substantially complete claims information that had become
available due to the substantial lapse in time between December 31, 2007
and the date we filed our 2007 Form 10-K; therefore, the favorable
development was reported in 2007 instead of 2008 as it otherwise would
have been. Therefore, our recorded amounts for Medical Benefits Expense
and MBR for the year ended December 31, 2008 is approximately $92.9
million, or 1.4%, higher than it otherwise would have been if we had filed
our 2007 Form 10-K on time.
|
(4)
|
Selling,
general and administrative expense ratio represents selling, general and
administrative expense as a percentage of total revenue and excludes
depreciation and amortization expense for purposes of determining the
ratio.
|
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.
Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations
The following discussion and
analysis of our financial condition and results of operations should be read
in conjunction with “Selected Financial Data” beginning on Page 47 and our combined and consolidated
financial statements
and related notes appearing elsewhere in this 2009 Form 10-K. The following discussion contains
forward-looking statements that involve risks, uncertainties and assumptions that
could cause our actual results to differ materially from management’s
expectations. Factors that could cause such differences include those set forth
under “Risk Factors,” “Forward-Looking Statements,” “Business” and
elsewhere in this 2009 Form 10-K.
Overview
|
Current
Financial Condition
|
Financial
Impact of Government Investigations and Litigation
We do not
know whether, or the extent to which, any investigations that remain unresolved
and any investigation-related litigation or any of the class actions discussed
above under “Part I – Item 3 – Legal Proceedings” will result in our payment of
additional fines, penalties or damages, any of which would require us to incur
additional expenses and could have an adverse affect on our results of
operations. Furthermore, if as a result of the resolution of the investigations
we are subject to operating restrictions, revocation of our licenses,
termination of one or more of our contracts and/or exclusion from further
participation in Medicare or Medicaid programs, our revenues and net income
could be adversely affected.
As
discussed above, we have resolved our previously disclosed matters under
investigation by the USAO and the State of Florida but remain in resolution
discussions as to matters under review with the Civil Division and the OIG. Any
resolution of the ongoing investigations being conducted by these agencies could
have a material adverse effect on our business, financial condition, results of
operations, and cash flows. As previously disclosed, we have paid the USAO a
total of $80.0 million pursuant to the terms of the DPA. Pursuant to
the Consent and Final Judgment, we agreed to pay a penalty of $10.0 million to
the SEC, of which $2.5 million remains to be paid during the first quarter of
2010. Based on the current status of matters and all information
known to us to date, management estimates that we have a liability of
approximately $60.0 million plus interest associated with the matters remaining
under investigation. We anticipate these amounts will be payable in installments
over a period of four to five years. In accordance with fair value
accounting guidance, we discounted the liability and recorded it at its current
fair value of approximately $55.9 million. This amount remains
accrued in our Consolidated Balance Sheet as of December 31, 2009 within the
short and long term portions of Amounts accrued related to investigation
resolution line items. The final timing, terms and conditions of a
resolution of these matters may differ from those currently anticipated, which
may result in an adjustment to our recorded amounts. These
adjustments may be material. We cannot provide an estimable range of
additional amounts, if any, nor can we provide assurances regarding the timing,
terms and conditions of any potential negotiated resolution of pending
investigations by the Civil Division or the OIG.
We have
expended significant financial resources in connection with the investigations
and related matters. Since the inception of these investigations
through December 31, 2009, we have incurred a total of approximately $165.4
million for administrative expenses associated with, or consequential to, these
governmental and Company investigations for legal fees, accounting fees,
consulting fees, employee recruitment and retention costs and other similar
expenses. Approximately $21.1 million of these investigation related
costs were incurred in 2007, approximately $103.0 million were incurred in 2008
and approximately $41.3 million were incurred in 2009. We expect to
continue incurring additional costs in connection with the governmental and
Company investigations, compliance with the DPA and related matters during its
term. Although investigation related costs overall have gradually
declined, we can provide no assurance that such costs will not be significant or
increase in the future. These include, among others, anticipated
costs associated with the retention of the Monitor and implementation of any
recommendations, as discussed above, as well as anticipated costs related to the
class action lawsuit and efforts of the Special Litigation Committee in
connection with the ongoing shareholder derivative actions.
As of
December 31, 2009, our consolidated cash and cash equivalents were approximately
$1,158.1 million. As of December 31, 2009, our consolidated investments were
approximately $114.4 million. As of December 31, 2009, we had unregulated cash
of approximately $117.6 million and unregulated investments of approximately
$2.8 million.
Business
and Financial Outlook
|
General
Economic, Political and Financial Market
Conditions
|
As a
result of economic uncertainty, the states in which we operate are experiencing
significant fiscal challenges, which are likely to result in budget deficits. In
light of these budgetary challenges, the Medicaid segment premiums we receive
likely will not keep pace with anticipated medical expense increases. While the
economic downturn may increase the number of Medicaid recipients under current
eligibility criteria, states may revise the eligibility criteria to reduce the
number of people who are eligible for our plans. In February 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 intensity adjustment to contracts whose disease
scores for stayers exceeded fee-for-service by twice the industry average. CMS
proposed to apply an adjustment that was calculated based on those contracts
that fell above this 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 expressed disagreement 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. For calendar year 2010, a negative coding
intensity adjustment factor of 3.41% will apply to all managed care plans. The
coding intensity adjustment factor would be applied to beneficiaries and risk
scores, resulting in a decrease in our Medicare revenue and
membership. Furthermore, federal budgetary challenges or policy
changes could result in rates that do not keep pace with anticipated medical
expense increases, which could have a material adverse effect on our performance
in the Medicaid or Medicare segments.
In
addition, increasing market volatility and the tightening of the credit markets
have significantly limited our ability to access external capital, which may
have an adverse effect on our ability to execute our business strategy. However,
we continue to pursue financing alternatives to raise additional unregulated
cash, including seeking dividends from certain of our regulated subsidiaries and
accessing the public and private equity and debt markets.
Government
funding continues to be a significant challenge to our business, particularly in
light of the current economic conditions. Because the health care services we
offer are through government-sponsored programs, our profitability is largely
dependent on continued funding for government health care programs at or above
current levels. Future Medicaid premium rate levels may be affected by continued
government efforts to contain medical costs or state and federal budgetary
constraints. Health care spending increases appear to be more limited than in
the past as 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.
In
particular, we are experiencing pressure on rates in Florida and Georgia, two
states from which we derive a substantial portion of our revenue. In 2009,
Florida implemented Medicaid rates that made it economically unfeasible for us
to continue to provide services in certain counties and programs. As a result,
we withdrew from the Medicaid reform programs effective July 1, 2009, which
resulted in a loss of approximately 80,000 members. New or proposed legislation
in Georgia related to payment of claims, program design, eligibility
determination and provider contracting may negatively impact revenues and
administrative expenses for the plan in 2010 and beyond. Further, continued
economic slowdowns in Florida and Georgia, as well as other states, could result
in additional state actions that could adversely affect our
revenues.
In January 2009, the Obama Administration took office. Although the Obama
Administration and Congress have expressed some support for measures intended to
expand the number of citizens covered by health insurance and other changes
within the health care system, the costs of implementing any of these proposals
could be financed, in part, by reductions in the payments made to Medicare
Advantage and other government programs. Similarly, although Congress approved
the children’s health bill which, among things, increases federal funding to the
S-CHIP and President Obama signed the ARRA that provides funding for, among
other things, state Medicaid programs and aid to states to help defray budget
cuts, because of the unsettled nature of these initiatives, the numerous steps
required to implement them and the substantial amount of state flexibility for
determining how Medicaid and S-CHIP funds will be used, we are currently unable
to assess the ultimate impact that they will have on our business. It is
possible that the ultimate impact of these initiatives could be
negative.
Execution
of Business Strategy
To
achieve our business strategy, 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. We also are,
however, 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 enhance the
likelihood that our ongoing business is profitable. To the extent that we expand
our current service territory or product offerings, we expect to generate
additional revenues. On the other hand, if we decide to exit certain markets,
such as our exit from certain Florida counties in 2009 and the 2010 exit from
PFFS, our revenues and net income could decrease.
We
currently do not foresee large, one-time opportunities to expand our business,
such as prior efforts like the launch of PDPs in 2006 and the privatization of
Georgia Medicaid in 2006. We continue to focus our resources on strengthening
compliance and operating capabilities. These factors, when combined with the
rationalization of our operations and the operational challenges we face, will
cause us to be unable to sustain the rapid growth we have achieved in the recent
past.
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, 2009, we served approximately 2,321,000 members.
Most of our revenues are generated by premiums consisting of fixed monthly
payments per member.
We currently anticipate that our revenues and medical benefits expenses for
fiscal years 2010 will be lower than in prior periods due to the previously
discussed exit from our MA PFFS business and certain Florida counties. As the
composition of our membership base continues to change as the result of
programmatic, competitive, regulatory, benefit design, economic or other
changes, we expect 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.
During
2009, CMS imposed a marketing sanction against us that prohibited us from the
marketing of, and enrollment into, all lines of our Medicare business from March
until the sanction was released in November. CMS released us from the
sanction in November 2009, in time to begin enrolling beneficiaries for the 2010
contract year on November 15, 2009, which is the first day that plans may begin
enrolling participants. However, as a result of the sanction, we were
not eligible to receive auto-assignments of LIS dual-eligible beneficiaries into
our PDP program, for January 2010 enrollment. We are eligible to
receive auto-assignments of these members in subsequent months, although such
assignments are expected to be at levels well below the level we typically
experience in the month of January.
We did
not renew our contracts to participate in the MA PFFS program in 2010 or
beyond. Our MA PFFS business represents approximately 31.4% of our
Medicare segment revenue and 16.5% of our total premium revenue for the year
ended December 31, 2009; accordingly our exit of this line of business will
cause our Medicare revenue and consolidated net income to decline in
2010. We anticipate that the withdrawal from the MA PFFS business may
provide approximately $40.0 million to $60.0 million of excess capital in the
insurance companies that underwrite this line of business, which we may be able
to dividend to our unregulated subsidiaries. However, we currently
believe we will not have the benefit of these dividends prior to 2011, if at
all. Any dividend of surplus capital of our applicable insurance
subsidiaries, including the timing and amount of any dividend, would be subject
to a variety of factors, which could materially change the aforementioned timing
and amount. Those factors include the ultimate financial performance of the MA
PFFS business as well as the financial performance of other lines of business
that operate in those insurance subsidiaries, approval from regulatory agencies
and potential changes in regulatory capital requirements. For example, our
current estimate of $40.0 million to $60.0 million has declined from previous
estimates of $80.0 million to $100.0 million, because the financial performance
of these insurance subsidiaries worsened during 2009.
In 2010, we will continue to serve our current members in our PDP program in 49
states and the District of Columbia, and our MA CCP in 12 states. For 2010, we
will be below the CMS benchmarks in 19 regions, including the following eight
new regions: Arizona, Central New England (Connecticut, Massachusetts, Rhode
Island and Vermont), Louisiana, Mississippi, Missouri, New York, Oklahoma and
Virginia. As mentioned previously, during the CMS sanction period, we
were precluded from marketing our plans and enrolling new members, including low
income subsidy auto-assignments, into our stand-alone PDPs. In addition, as a
result of the sanction, we were not eligible to be auto-assigned LIS dual
eligible beneficiaries for January 2010 membership. Accordingly, our
revenues generated from our stand-alone PDPs may decrease significantly in
2010. With the sanctions resolved, we became eligible for new
voluntary enrollment for January 1, 2010 and we became eligible for LIS
auto-assigned membership beginning in February 2010. Unrelated to the CMS
sanctions, we decided to exit the Medicare PDP program in Wisconsin for 2010,
and auto-assigned PDP membership in Wisconsin will be re-assigned to other
plans.
Basis
of Presentation
The
consolidated balance sheets, statements of operations, changes in stockholders’
equity and comprehensive income and cash flows include accounts of ours and all
of our wholly-owned subsidiaries. Intercompany accounts and transactions have
been eliminated.
Segments
We have
two reportable business segments: Medicaid and Medicare.
Medicaid
was established to provide medical assistance to low income and disabled
persons, and is state operated and implemented, although it is funded and
regulated by both the state and federal governments. For a more detailed
description of our Medicaid segment, please see “Item 1 – Business – Our
Segments.” As of December 31, 2009, we had approximately 1,349,000 Medicaid
members. The following table summarizes our Medicaid segment membership by line
of business as of December 31, 2009 and 2008:
|
|
Medicaid Membership
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Medicaid
|
|
|
|
|
|
|
TANF
|
|
|
1,094,000 |
|
|
|
1,039,000 |
|
S-CHIP
|
|
|
163,000 |
|
|
|
164,000 |
|
SSI
and ABD
|
|
|
79,000 |
|
|
|
75,000 |
|
FHP
|
|
|
13,000 |
|
|
|
22,000 |
|
Total
|
|
|
1,349,000 |
|
|
|
1,300,000 |
|
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 2008 and 2009, we had two
customers, the states of Florida and Georgia, from which we received 10% or more
of our Medicaid segment premiums revenues.
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, and is funded by Congress and administered by CMS. For a more detailed
description of our Medicare segment, please see “Item 1 – Business – Our
Segments.” As of December 31, 2009, we had approximately 972,000 Medicare
members.
|
|
Medicare Membership
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Medicare
|
|
|
|
|
|
|
PDP
|
|
|
747,000 |
|
|
|
986,000 |
|
Medicare
Advantage
|
|
|
225,000 |
|
|
|
246,000 |
|
Total
|
|
|
972,000 |
|
|
|
1,232,000 |
|
In our
Medicare segment, we have just one customer, CMS, from which we receive
substantially all of our Medicare segment premium revenue.
Health
and Prescription Drug Plans
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 premiums 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. CMS employs a risk-adjustment
model that apportions premiums paid to all Medicare plans according to the
health status of each beneficiary enrolled. The CMS risk-adjustment
model pays more for Medicare members with predictably higher
costs. We collect claim and encounter data from providers, who we
rely on to properly code and document this data, and submit the necessary
diagnosis data and coding to CMS within the prescribed deadlines and CMS
determines the final risk score based on its interpretation and acceptance of
the data we provided. The claims and encounter data provided to
determine the risk score are subject to subsequent audit by
CMS. These audits may result in the refund of premiums to CMS that
were previously received by us. While our experience to date has not
resulted in a material refund, this refund could be significant in the future,
which would reduce our premium revenue in the year that CMS requires repayment
from us. See "Risk Factors - CMS’s risk adjustment payment system makes our
revenue and results of operations difficult to predict and could result in
material retroactive adjustments that have a material adverse effect on our
results of operations” for additional risks associated with a current CMS audit
of one of our plans. These periodic premium rate adjustments,
risk-adjusted premiums and member eligibility determinations, adversely impact
our ability to predict 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 “Critical Accounting
Policies” below.
The
Medicaid programs and services we offer to our members vary by state and county
and are designed to serve our various constituencies effectively 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
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.
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. Typically, members of
our MA 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. MA CCP members may see an out-of-network
specialist if they receive a referral from their PCP and may pay incremental
cost-sharing. MA 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
also offer special needs plans to individuals who are dually eligible for
Medicare and Medicaid, or D-SNPs, in most of our markets. D-SNPs are designed to
provide specialized care and support for beneficiaries who are dually eligible
for both Medicare and Medicaid. 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 as 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. MA PFFS beneficiaries can join a
MA 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 MA CCPs can join a plan with Part D
coverage or forego Part D coverage.
Our
largest expense is the cost of medical benefits that we provide, which is based
primarily on our arrangements with health care providers and utilization of
health care services by our members. Our profitability depends on our ability to
predict and effectively manage medical benefits expense relative to the
primarily fixed premiums we receive. Our arrangements with providers primarily
fall into two broad categories: capitation arrangements, pursuant to which we
pay the capitated providers a fixed fee per member and fee-for-service as well
as risk-sharing arrangements, pursuant to which the provider assumes a portion
of the risk of the cost of the health care provided. Capitation payments
represented 11.0%, 12.0% and 11.0% of our total medical benefits expense for the
years ended December 31, 2009, 2008 and 2007, respectively. Other components of
medical benefits expense are variable and require estimation and ongoing cost
management.
We use a
variety of techniques to manage our medical benefits expense, including payment
methods to providers, referral requirements, quality and disease management
programs, reinsurance and member co-payments and premiums for some of our
Medicare plans. National health care costs have been increasing at a higher rate
than the general inflation rate; however, relatively small changes in our
medical benefits expense relative to premiums that we receive can create
significant changes in our financial results. Changes in health care laws,
regulations and practices, levels of use of health care services, competitive
pressures, hospital costs, major epidemics, terrorism or bio-terrorism, new
medical technologies and other external factors could reduce our ability to
manage our medical benefits expense effectively.
One of
our primary tools for measuring profitability is our MBR, the ratio of our
medical benefits expense to the premiums we receive. Changes in the MBR from
period to period result from, among other things, changes in Medicaid and
Medicare funding, changes in the mix of Medicaid and Medicare membership, our
ability to manage medical costs and changes in accounting estimates related to
incurred but not reported claims (“IBNR”). Estimation of medical benefits
expense and medical benefits payable is our most significant critical accounting
estimate. See “Critical Accounting Policies” below. We use MBRs both to monitor
our management of medical benefits expense and to make various business
decisions, including what health care plans to offer, what geographic areas to
enter or exit and the selection of health care providers. Although MBRs play an
important role in our business strategy, we may, for example, be willing to
enter into new geographical markets and/or enter into provider arrangements that
might produce a less favorable MBR if those arrangements, such as capitation or
risk-sharing, would likely lower our exposure to variability in medical costs
and for other reasons.
Critical
Accounting Policies
In the
ordinary course of business, we make a number of estimates and assumptions
relating to the reporting of our results of operations and financial condition
in conformity with accounting principles generally accepted in the United
States. We base our estimates on historical experience and on various other
assumptions that we believe to be reasonable under the circumstances. Actual
results could differ significantly from those estimates under different
assumptions and conditions. We believe that the accounting policies relating to
revenue recognition, medical benefits expense and medical benefits payable, and
goodwill and intangible assets are those that are most important to the
portrayal of our financial condition and results and require management’s most
difficult, subjective and complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently
uncertain.
Revenue recognition. Our
Medicaid contracts with state governments are generally multi-year contracts
subject to annual renewal provisions. Our Medicare Advantage and PDP contracts
with CMS generally have terms of one year. We recognize premium revenues in the
period in which we are obligated to provide services to our members. We
estimate, on an ongoing basis, the amount of member billings that may not be
fully collectible or that will be returned based on historical trends,
anticipated or actual MBRs, and other factors. An allowance is established for
the estimated amount that may not be collectible and a liability is established
for premium expected to be returned. Historically, the allowance has not been
significant relative to premium revenue. The payment we receive monthly from CMS
for our PDP program generally represents our bid amount for providing
prescription drug insurance coverage. We recognize premium revenue for providing
this insurance coverage ratably over the term of our annual contract. Premiums
collected in advance are deferred and reported as unearned premiums in the
accompanying consolidated balance sheets and amounts that have not been received
by the end of the period remain on the balance sheet classified as premium
receivables.
Premium
payments that we receive are based upon eligibility lists produced by our
customers. From time to time, the states or CMS require us to reimburse them for
premiums that we received based on an eligibility list that a state or CMS later
discovers contains individuals who were not eligible for any
government-sponsored program or are eligible for a different premium category,
different program, or belong to a different plan other than ours. We record
adjustments to revenues based on member retroactivity, if deemed material. These
adjustments reflect changes in the number of and eligibility status of enrollees
subsequent to when revenue was billed. We estimate the amount of outstanding
retroactivity adjustments each period and adjust premium revenue accordingly; if
appropriate, the estimates of retroactivity adjustments are based on historical
trends, premiums billed, the volume of member and contract renewal activity and
other information. Changes to member retroactivity adjustment estimates had a
minimal impact on adjustments recorded during the periods presented. Our
government contracts establish monthly rates per member, but may have additional
amounts due to us based on items such as age, working status or medical
history.
CMS
employs a risk-adjustment model to determine the premium amount for each
member. This model apportions premiums paid to all MA plans according
to the health status of each beneficiary enrolled. Under the risk adjustment
model, the settlement payment is based on each member’s preceding year’s medical
diagnosis data. The final settlement payment amount under the risk adjustment
model is made in August of the following year, allowing for the majority of
medical claim run out. As a result of this process, our CMS monthly premium
payments per member may change materially, either favorably or
unfavorably.
The CMS
risk adjustment model pays more for Medicare members with predictably higher
costs. Diagnosis data from inpatient and ambulatory treatment settings are used
to calculate the risk adjusted premium payment to us. We collect claims and
encounter data and submit the necessary diagnosis data to CMS within prescribed
deadlines. We estimate risk adjustments to revenues based upon the diagnosis
data submitted to CMS and ultimately accepted by CMS, and record such
adjustments in our results of operations. However, due to the variability of the
assumptions that we use in our estimates, the actual results may differ from the
amounts that management estimated. If our estimates are materially incorrect, it
may have an adverse effect on our results of operations in future periods.
Historically, we have not experienced significant differences between the
amounts that we have recorded and the revenues that we actually
received. The claims and encounter data submitted to CMS to determine
our risk-adjusted premium are subject to audit by CMS subsequent to the annual
settlement.
CMS has
begun a program to perform audits of selected MA plans to validate the provider
coding practices under the risk-adjustment model used to calculate the premium
paid for each MA member. Our Florida HMO contract has been selected by CMS for
audit for the 2007 contract year and we anticipate that CMS will conduct
additional audits of other contract and contract years on an ongoing basis. The
CMS audit of this data involves a review of a sample of provider medical records
for the contract under audit. We are unable to estimate the financial impact of
any audit that is underway or that may be conducted in the future. We are also
unable to determine whether any conclusions that CMS may make, based on the
audit of our plan and others, will cause us to change our revenue estimation
process. At this time, we do not know whether CMS will require retroactive or
subsequent payment adjustments to be made using an audit methodology that may
not compare the coding of our providers to the coding of Original Medicare and
other MA plan providers, and how, if at all, CMS will extrapolate its findings
to the entire contract. However, it is reasonably possible that a payment
adjustment as a result of these audits could occur, and that any such adjustment
could have a material adverse effect on our results of operations, financial
position, and cash flows, possibly in 2010 and beyond.
Other
amounts included in this balance as a reduction of premium revenue represent the
return of premium associated with certain of our Medicaid contracts. These
contracts require us to expend a minimum percentage of premiums on eligible
medical expense, and to the extent that we expend less than the minimum
percentage of the premiums on eligible medical expense, we are required to
refund all or some portion of the difference between the minimum and our actual
allowable medical expense. We estimate the amounts due to the state as a return
of premium each period based on the terms of our contract with the applicable
state agency.
Estimating medical benefits expense
and medical benefits payable. The cost of medical benefits is recognized
in the period in which services are provided and includes an estimate of the
IBNR cost of medical benefits. We contract with various health care providers
for the provision of certain medical care services to our members and generally
compensate those providers on a fee-for-service or capitated basis or pursuant
to certain risk-sharing arrangements. Capitation represents fixed payments
generally on a PMPM basis to participating physicians and other medical
specialists as compensation for providing comprehensive health care services.
Generally, by the terms of most of our capitation agreements, capitation
payments we make to capitated providers alleviate any further obligation we have
to pay the capitated provider for the actual medical expenses of the member.
Participating physician capitation payments for the years ended December 31,
2007, 2008 and 2009 were approximately 11.0%, 12.0% and 11.0% of total medical
benefits expense, respectively.
Medical
benefits expense has two main components: direct medical expenses and
medically-related administrative costs. Direct medical expenses include amounts
paid to hospitals, physicians and providers of ancillary services, such as
laboratory and pharmacy. Medically-related administrative costs include items
such as case and disease management, utilization review services, quality
assurance and on-call nurses. Medical benefits payable represents amounts for
claims fully adjudicated awaiting payment disbursement and estimates for
IBNR.
The
medical benefits payable estimate has been and continues to be the most
significant estimate included in our financial statements. We historically have
used and continue to use a consistent methodology for estimating our medical
benefits expense and medical benefits payable. Our policy is to record
management’s best estimate of medical benefits payable based on the experience
and information available to us at the time. This estimate is determined
utilizing standard actuarial methodologies based upon historical experience and
key assumptions consisting of trend factors and completion factors using an
assumption of moderately adverse conditions, which vary by business segment.
These standard actuarial methodologies include using, among other factors,
contractual requirements, historic utilization trends, the interval between the
date services are rendered and the date claims are paid, denied claims activity,
disputed claims activity, benefits changes, expected health care cost inflation,
seasonality patterns, maturity of lines of business and changes in
membership.
The factors and assumptions described above 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 experience or
information available to us. The ultimate claims payment amounts, patterns and
trends for new products and geographic areas cannot 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,
discussed above, would allow for this inherent variability, which could result
in larger differences between the originally estimated medical benefits payable
and the actual claims amounts paid. Conversely, during periods where our
products and geographies are more stable and mature, we have more reliable
claims payment patterns and trend experience. With more reliable data, we should
be able to more closely estimate the ultimate claims payment amounts; therefore,
we may experience smaller differences between our original estimate of medical
benefits payable and the actual claim amounts paid.
In
developing our estimates, we apply different estimation methods depending on the
month for which incurred claims are being estimated. For the more recent months,
which constitute the majority of the amount of the medical benefits payable, we
estimate claims incurred by applying observed trend factors to the PMPM costs
for prior months, which costs have been estimated using completion factors, in
order to estimate the PMPM costs for the most recent months. We validate our
estimates of the most recent PMPM costs by comparing the most recent months’
utilization levels to the utilization levels in prior months and actuarial
techniques that incorporate a historical analysis of claim payments, including
trends in cost of care provided and timeliness of submission and processing of
claims.
Many
aspects of the managed care business are not predictable. These aspects include
the incidences of illness or disease state (such as cardiac heart failure cases,
cases of upper respiratory illness, the length and severity of the flu season,
diabetes, the number of full-term versus premature births and the number of
neonatal intensive care babies). Therefore, we must rely upon historical
experience, as continually monitored, to reflect the ever-changing mix, needs
and growth of our membership in our trend assumptions. Among the factors
considered by management are changes in the level of benefits provided to
members, seasonal variations in utilization, identified industry trends and
changes in provider reimbursement arrangements, including changes in the
percentage of reimbursements made on a capitation as opposed to a
fee-for-service basis. These considerations are aggregated in the trend in
medical benefits expense. Other external factors such as government-mandated
benefits or other regulatory changes, catastrophes and epidemics may impact
medical cost trends. Other internal factors such as system conversions and
claims processing interruptions may impact our ability to accurately predict
estimates of historical completion factors or medical cost trends. Medical cost
trends potentially are more volatile than other segments of the economy.
Management is required to use considerable judgment in the selection of medical
benefits expense trends and other actuarial model inputs.
Also
included in medical benefits payable are estimates for provider settlements due
to clarification of contract terms, out-of-network reimbursement, claims payment
differences as well as amounts due to contracted providers under risk-sharing
arrangements. We record reserves for estimated referral claims related to health
care providers under contract with us who are financially troubled or insolvent
and who may not be able to honor their obligations for the costs of medical
services provided by other providers. In these instances, we may be required to
honor these obligations for legal or business reasons. Based on our current
assessment of providers under contract with us, such losses have not been and
are not expected to be significant.
Changes
in medical benefits payable estimates are primarily the result of obtaining more
complete claims information and medical expense trend data over time. Volatility
in members’ needs for medical services, provider claims submissions and our
payment processes result in identifiable patterns emerging several months after
the causes of deviations from assumed trends occur. Since our estimates are
based upon PMPM claims experience, changes cannot typically be explained by any
single factor, but are the result of a number of interrelated variables, all
influencing the resulting experienced medical cost trend. Differences in our
financial statements between actual experience and estimates used to establish
the liability, which we refer to as prior period developments, are recorded in
the period when such differences become known, and have the effect of increasing
or decreasing the reported medical benefits expense and resulting MBR in such
periods.
The
following table provides a reconciliation of the total medical benefits payable
balances as of December 31, 2009, 2008 and 2007:
|
|
As of December 31,
|
|
|
2009
|
|
%
of
Total
|
|
2008
|
|
%
of
Total
|
|
2007
|
|
%
of
Total
|
|
|
(Dollars in thousands)
|
|
Claims
adjudicated, but not yet paid
|
|
$ |
53,006 |
|
7 |
% |
|
$ |
77,117 |
|
10 |
% |
|
$ |
68,948 |
|
13 |
% |
IBNR
|
|
|
749,509 |
|
93 |
% |
|
|
689,062 |
|
90 |
% |
|
|
469,198 |
|
87 |
% |
Total
Medical benefits payable
|
|
$ |
802,515 |
|
|
|
|
$ |
766,179 |
|
|
|
|
$ |
538,146 |
|
|
|
Medical benefits payable includes reserves for claims adjudicated, but
not yet paid, an estimate of claims incurred but not
reported, reserves for medically-related administrative costs and
other liabilities, including estimates for provider settlements due to
clarification of contract terms, out-of-network reimbursement, claims payment
differences and amounts due to contracted providers under
risk-sharing arrangements. The following table provides a
reconciliation of the beginning and ending balance of medical benefits payable
for the following periods:
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
Balances
as of beginning of period
|
|
$ |
766,179 |
|
|
$ |
538,146 |
|
|
$ |
460,728 |
|
Medical
benefits incurred related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
period
|
|
|
5,983,537 |
|
|
|
5,538,262 |
|
|
|
4,313,581 |
|
Prior
periods
|
|
|
(121,080 |
) |
|
|
(8,046 |
) |
|
|
(100,197 |
) |
Total
|
|
|
5,862,457 |
|
|
|
5,530,216 |
|
|
|
4,213,384 |
|
Medical
benefits paid related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
period
|
|
|
(5,250,859 |
) |
|
|
(4,848,440 |
) |
|
|
(3,781,425 |
) |
Prior
periods
|
|
|
(575,262 |
) |
|
|
(453,743 |
) |
|
|
(354,541 |
) |
Total
|
|
|
(5,826,121 |
) |
|
|
(5,302,183 |
) |
|
|
(4,135,966 |
) |
Balances
as of end of period
|
|
$ |
802,515 |
|
|
$ |
766,179 |
|
|
$ |
538,146 |
|
Changes
in medical benefits payable estimates are primarily the result of obtaining more
complete claims information and medical expense trend data over time.
Differences in our financial statements between actual experience and estimates
used to establish the liability, which we refer to as prior period developments,
are recorded in the period when such differences become known, and have the
effect of increasing or decreasing the reported medical benefits expense and
resulting MBR in such periods.
Medical
benefits payable recorded at December 31, 2008, 2007 and 2006 developed
favorably by approximately $121.1 million, $8.0 million and $100.2 million in
2009, 2008 and 2007, respectively. These prior period developments were
primarily attributable to the release of the provision for moderately adverse
conditions, which is included as part of the assumptions, and favorable
variances between actual experience and key assumptions relating
to trend factors and completion factors for claims incurred in prior
years. The release of the provision for moderately adverse conditions was
substantially offset by the provision for moderately adverse conditions
established for claims incurred in the current year. Accordingly, the
change in the amount of the incurred claims related to prior years in the
Medical benefits payable does not directly correspond to an
increase in net income recognized during the
period.
We
consistently recognize the actuarial best estimate of the ultimate medical
benefits payable within a level of confidence, as required by
actuarial standards of practice, which require that the medical benefits
payable be adequate under moderately adverse conditions. As we establish
the liability for each year, we ensure that our assumptions appropriately
consider moderately
adverse conditions. When a portion of the development related to the prior year
incurred claims is offset by an increase
determined appropriate to address moderately adverse conditions for the current
year incurred claims, we do not consider that offset amount as having any impact
on net income during the period.
Goodwill and intangible assets.
We obtained goodwill and intangible assets as a result of the
acquisitions of our subsidiaries. Goodwill represents the excess of the cost
over the fair market value of net assets acquired. Intangible assets include
provider networks, membership contracts, trademarks, non-compete agreements,
state contracts, licenses and permits. Our intangible assets are amortized over
their estimated useful lives ranging from approximately one to 26
years.
We review
goodwill and intangible assets for impairment at least annually, or more
frequently if events or changes in circumstances occur that may affect the
estimated useful life or the recoverability of the remaining balance of goodwill
or intangible assets. Events or changes in circumstances would
include significant changes in membership, state funding, medical contracts and
provider networks. We evaluate the impairment of goodwill and
intangible assets using both the income and market approach. In doing
so, we must make assumptions and estimates, such as the discount factor, in
determining the estimated fair values. While we believe these assumptions and
estimates are appropriate, other assumptions and estimates could be applied and
might produce significantly different results. An impairment loss is recognized
for goodwill and intangible assets if the carrying value of such costs exceeds
its fair value. We select the second quarter of each year for our
annual impairment test, which generally coincides with the finalization of state
and federal contract negotiations and our initial budgeting
process. Accordingly, we have assessed the book value of goodwill and
other intangible assets and believe that such assets have not been impaired as
of December 31, 2009.
Based on
the general economic conditions and outlook during 2008, we performed a similar
analysis of the underlying valuation of Goodwill at December 31, 2008. Based on
the valuation performed, we determined that the Goodwill associated with our
Medicare reporting unit was impaired. The impairment to our Medicare reporting
unit was due to, among other things, the anticipated operating environment
resulting from regulatory changes and new health care legislation, and the
resulting effects on our future membership trends. In 2008, we recorded an
expense of $78.3 million to Goodwill impairment, and a corresponding amount to
Goodwill to reflect its fair value as presented in the Consolidated Balance
Sheet.
In
addition, we have evaluated the intangible assets in connection with the PFFS
exit in 2010, which primarily consisted of state licenses for the insurance
companies. As we continue to use these company licenses for other lines of
business and the licenses have a market value, we determined that these assets
have not been impaired as of December 31, 2009.
Results
of Operations
The
following table sets forth our consolidated statements of income data, expressed
as a percentage of total revenues for each period indicated. The historical
results are not necessarily indicative of results to be expected for any future
period.
|
|
Percentage
of Total Revenues
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Statement
of Operations Data:
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Premium
|
|
|
99.8 |
% |
|
|
99.4 |
% |
|
|
98.4 |
% |
Investment
and other income
|
|
|
0.2 |
% |
|
|
0.6 |
% |
|
|
1.6 |
% |
Total
revenues
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical
benefits
|
|
|
85.2 |
% |
|
|
84.8 |
% |
|
|
78.2 |
% |
Selling,
general and administrative
|
|
|
13.0 |
% |
|
|
14.3 |
% |
|
|
14.2 |
% |
Depreciation
and amortization
|
|
|
0.3 |
% |
|
|
0.3 |
% |
|
|
0.3 |
% |
Interest
|
|
|
0.1 |
% |
|
|
0.2 |
% |
|
|
0.3 |
% |
Goodwill
impairment
|
|
|
— |
% |
|
|
1.2 |
% |
|
|
— |
% |
Total
expenses
|
|
|
98.6 |
% |
|
|
100.8 |
% |
|
|
93.0 |
% |
Income
(loss) before income taxes
|
|
|
1.4 |
% |
|
|
(0.8 |
)% |
|
|
7.0 |
% |
Income
tax expense (benefit)
|
|
|
0.8 |
% |
|
|
(0.2 |
)% |
|
|
3.0 |
% |
Net
income (loss)
|
|
|
0.6 |
% |
|
|
(0.6 |
)% |
|
|
4.0 |
% |
Comparison
of Year Ended December 31, 2009 to Year Ended December 31, 2008
Premium revenue.
For the year ended December 31, 2009, total premium revenue increased
$384.1 million, or 5.9%, to $6,867.2 million from $6,483.1 million for the same
period in the prior year due to increases in premium revenue in both the
Medicaid and Medicare segments, as discussed below. Total membership decreased
by 211,000 members, or 8.3%, from 2,532,000 at December 31, 2008 to 2,321,000 at
December 31, 2009.
|
|
Premium Revenues and Membership
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in millions)
|
|
Revenues
|
|
$ |
6,867.2 |
|
|
$ |
6,483.1 |
|
Membership
|
|
|
2,321,000 |
|
|
|
2,532,000 |
|
Medicaid. For the year ended
December 31, 2009, Medicaid segment premium revenue increased $265.6 million, or
8.9%, to $3,256.7 million from $2,991.1 million for the same period in the prior
year. The increase in Medicaid segment revenue is primarily due to the inclusion
of operations for the Hawaii ABD program, which was not present for the same
period in the prior year. This increase was partially offset by the
impact of a loss of membership in Florida and the Ohio ABD program, with the
remaining change due to a change in the demographic mix of our
members. Aggregate membership in our Medicaid segment grew from
1,300,000 members at December 31, 2008 to 1,349,000 at December 31,
2009.
|
Medicaid Revenues and Membership
|
|
For the Year Ended December 31,
|
|
2009
|
|
|
2008
|
|
|
(Dollars in millions)
|
|
Revenues
|
|
$ |
3,256.7 |
|
|
$ |
2,991.1 |
|
%
of Total Premium Revenues
|
|
|
47.4 |
% |
|
|
46.1 |
% |
Membership
|
|
|
1,349,000 |
|
|
|
1,300,000 |
|
%
of Total Membership
|
|
|
58.1 |
% |
|
|
51.3 |
% |
Medicare. For the year ended
December 31, 2009, Medicare segment premium revenue increased $118.5 million, or
3.4%, to $3,610.5 million from $3,492.0 million for the same period in the prior
year. The increase in Medicare segment revenue is primarily due to a change in
the demographic mix of our members, partially offset by a loss in PDP membership
of approximately 239,000 members. Aggregate membership within the
Medicare segment declined by 260,000 members, or 21.1%, from 1,232,000 members
at December 31, 2008 to 972,000 members at December 31, 2009.
|
|
Medicare Revenues and Membership
|
|
|
For the Year Ended December 31,
|
|
|
2009
|
|
|
2008
|
|
|
(Dollars in millions)
|
|
Revenues
(in millions)
|
|
$ |
3,610.5 |
|
|
|
$ |
3,492.0 |
|
%
of Total Premium Revenues
|
|
|
52.6 |
% |
|
|
|
53.9 |
% |
Membership
|
|
|
972,000 |
|
|
|
|
1,232,000 |
|
%
of Total Membership
|
|
|
41.9 |
% |
|
|
|
48.7 |
% |
Investment and
other income. For the year ended December 31, 2009, investment and other
income decreased approximately $27.9 million, or 71.9%, to $10.9 million from
$38.8 million for the same period in the prior year. The decrease was primarily
due to reduced market rates on lower average investment and cash
balances.
Medical benefits
expense. For the year ended December 31, 2009, total medical benefits
expense increased $332.3 million, or 6.0%, to $5,862.5 million from $5,530.2
million for the same period in the prior year due to membership increases,
primarily in our Medicaid segment, partially offset by our loss in PDP
membership. The change in the demographic mix of our members and overall
increased utilization patterns and costs of our members accounted for the
majority of the remaining change. Our MBR was 85.4% for the year ended December
31, 2009 compared to 85.3% for the same period in the prior year.
|
|
Medical Benefits Expense
|
|
|
For the Year Ended December 31,
|
|
|
2009
|
|
|
2008
|
|
|
(Dollars
in millions)
|
|
Medical
Benefits Expense
|
|
$ |
5,862.5 |
|
|
|
$ |
5,530.2 |
|
Non-recurring
IBNR adjustment
|
|
|
|
|
|
|
|
(92.9 |
)(1) |
Medical
Benefits Expense as adjusted
|
|
|
|
|
|
|
$ |
5,437.3 |
|
MBR
as reported
|
|
|
85.4 |
% |
|
|
|
85.3 |
% |
MBR
as adjusted
|
|
|
|
|
|
|
|
83.9 |
%(1) |
____________
(1)
|
Medical
Benefits Expense as adjusted for the year ended December 31, 2008 is a
non-GAAP financial measure because it reflects the favorable development
that otherwise would have been recognized in the year ended December 31,
2008 if we had timely filed our 2007 Form 10-K. Due to the delay in filing
our 2007 Form 10-K, we were able to review substantially complete claims
information that had become available due to the substantial lapse in time
between December 31, 2007 and the date we filed our 2007 Form 10-K;
therefore, the favorable development was reported in 2007 instead of 2008
as it otherwise would have been. The most directly comparable GAAP measure
is Medical Benefits Expense, which has been determined based on the
actuarially determined methods. Thus, our recorded amounts for Medical
Benefits Expense and MBR for the year ended December 31, 2008 is
approximately $92.9 million higher than it otherwise would have been if we
had filed our 2007 Form 10-K on time, which resulted in an unfavorable
impact on MBR. Consequently, we believe that Medical Benefits Expense as
adjusted for the year ended December 31, 2008 will better facilitate a
year over year comparison of our Medical Benefits
Expense.
|
Medicaid. For the year ended
December 31, 2009, Medicaid medical benefits expense increased $273.2 million,
or 10.8%, to $2,810.6 million from $2,537.4 million for the same period in the
prior year. Our Medicaid MBR was 86.3% for the year ended December 31, 2009
compared to 84.8% for the same period in the prior year. The Medicaid segment
medical benefits expense for the year ended December 31, 2009, increased $312.7
million, or 12.5%, to approximately $2,810.6 million from approximately $2,497.9
million, as adjusted, for the same period in the prior year. This increase was
due to the growth in membership primarily in the Hawaii ABD
program. The changes in the utilization patterns of our members in
our other markets accounted for the remaining change. The Medicaid MBR for the
twelve months ended December 31, 2009, was 86.3% compared to 83.5% as adjusted
for the same period in the prior year. The increase in MBR is primarily the
result of higher costs associated with the Hawaii business as well as premium
rate increases during the past year that were below our medical cost trend, or
in some cases, rate decreases.
|
|
Medicaid Medical Benefits Expense
|
|
|
For the Year Ended December 31,
|
|
|
2009
|
|
|
2008
|
|
|
(Dollars
in millions)
|
|
Medicaid
Medical Benefits Expense
|
|
$ |
2,810.6 |
|
|
$ |
2,537.4 |
|
Non-recurring
IBNR adjustment
|
|
|
|
|
|
|
(39.5 |
)(1) |
Medicaid
Medical Benefits Expense as adjusted
|
|
|
|
|
|
$ |
2,497.9 |
|
MBR
as reported
|
|
|
86.3 |
% |
|
|
84.8 |
% |
MBR
as adjusted
|
|
|
|
|
|
|
83.5 |
%(1) |
____________
(1)
|
Medicaid
Medical Benefits Expense as adjusted for the year ended December 31, 2008
is a non-GAAP financial measure because it reflects the favorable
development that otherwise would have been recognized in year ended
December 31, 2008 if we had timely filed our 2007 Form 10-K. Due to the
delay in filing our 2007 Form 10-K, we were able to review substantially
complete claims information that had become available due to the
substantial lapse in time between December 31, 2007 and the date we filed
our 2007 Form 10-K; therefore, the favorable development was reported in
2007 instead of 2008 as it otherwise would have been. The most directly
comparable GAAP measure is Medicaid Medical Benefits Expense, which has
been determined based on the actuarially determined methods. Thus, our
recorded amounts for Medicaid Medical Benefits Expense and MBR for the
year ended December 31, 2008 is approximately $39.5 million higher than it
otherwise would have been if we had filed our 2007 Form 10-K on time,
which resulted in an unfavorable impact on MBR. Consequently, we believe
that Medicaid Medical Benefits Expense as adjusted for the year ended
December 31, 2008 will better facilitate a year over year comparison of
our Medical Benefits Expense.
|
Medicare. For the year ended
December 31, 2009, Medicare medical benefits expense increased $59.1 million, or
2.0%, to $3,051.9 million from $2,992.8 million for the same period in the prior
year. Our Medicare MBR was 84.5% for the year ended December 31, 2009 compared
to 85.7% for the same period in the prior year. Medicare medical benefits
expense for the year ended December 31, 2009, increased $112.5 million, or 3.8%,
to $3,051.9 million from $2,939.4 million, as adjusted, for the same period in
the prior year. The decrease was driven primarily by an unfavorable variance in
PDP MBR. As previously discussed, we withdrew from offering PFFS
plans as of January 1, 2010. The overall decrease was partially
offset by a favorable change in the demographic mix of our
members. For the year ended December 31, 2009, the Medicare MBR was
84.5% compared to 84.2% as adjusted for the same period in the prior year,
primarily due to the increasing MBR in our PDP product.
|
|
Medicare Medical Benefits Expense
|
|
|
For the Year Ended December 31,
|
|
|
2009
|
|
|
2008
|
|
|
(Dollars
in millions)
|
|
Medicare
Medical Benefits Expense
|
|
$ |
3,051.9 |
|
|
$ |
2,992.8 |
|
Non-recurring
IBNR adjustment
|
|
|
|
|
|
|
(53.4 |
)(1) |
Medicare
Medical Benefits Expense as adjusted
|
|
|
|
|
|
$ |
2,939.4 |
|
MBR
as reported
|
|
|
84.5 |
% |
|
|
85.7 |
% |
MBR
as adjusted
|
|
|
|
|
|
|
84.2 |
%(1) |
____________
(1)
|
Medicare
Medical Benefits Expense as adjusted for the year ended December 31, 2008
is a non-GAAP financial measure because it reflects the favorable
development that otherwise would have been recognized in year ended
December 31, 2008 if we had timely filed our 2007 Form 10-K. Due to the
delay in filing our 2007 Form 10-K, we were able to review substantially
complete claims information that had become available due to the
substantial lapse in time between December 31, 2007 and the date we filed
our 2007 Form 10-K; therefore, the favorable development was reported in
2007 instead of 2008 as it otherwise would have been. The most directly
comparable GAAP measure is Medicare Medical Benefits Expense, which has
been determined based on the actuarially determined methods. Thus, our
recorded amounts for Medicare Medical Benefits Expense and MBR for the
year ended December 31, 2008 is approximately $53.4 million higher than it
otherwise would have been if we had filed our 2007 Form 10-K on time.
Consequently, we believe that Medicare Medical Benefits Expense as
adjusted for the year ended December 31, 2008 will better facilitate a
year over year comparison of our Medicare Medical Benefits
Expense.
|
Selling, general
and administrative expense. For the year ended December 31, 2009,
selling, general and administrative (“SG&A”) expenses decreased
approximately $40.5 million, or 4.3%, to $892.9 million from $933.4 million for
the same period in the prior year. The reduction in SG&A expense was
primarily driven by decreased legal, professional and retention expenses
consequential to the governmental and Company investigations of $61.7 million
for the twelve months ended December 31, 2009, as well as lower sales and
marketing costs
caused by the CMS sanction and
reduced Florida Medicaid sales costs. The lower SG&A expense was
partially offset by an increase in expense related to the resolution of certain
of the government investigations in the amount of approximately $59.7 million
for the twelve months ended December 31, 2009, as well as investments to improve
operating efficiency and effectiveness and to remediate issues in conjunction
with the CMS sanction. Our SG&A expense to total revenue ratio
(“SG&A ratio”) was 13.0% and 14.3% for the years ended December 31, 2009 and
2008, respectively.
|
|
|
Selling, General and Administrative
Expense
|
|
|
|
For the Year Ended December
31,
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
(Dollars in millions)
|
|
SG&A
(in millions)
|
|
|
$ |
892.9 |
|
|
|
$ |
933.4 |
|
SG&A
expense to total revenue ratio
|
|
|
|
13.0 |
% |
|
|
|
14.3 |
% |
Interest
expense. Interest
expense decreased $5.4 million, or 45.8%, to $6.4 million for the year ended
December 31, 2009 from $11.8 million for the same period in the prior year. The
decrease resulted from our repayment in full of the outstanding balance under
our senior secured credit facility in May 2009.
Income tax
expense (benefit). For the year ended December 31, 2009, income tax
increased $69.5 million to an expense of $53.1 million from a benefit of
$(16.3) million for the same period in the prior year. The tax effective rate
was approximately 57.1% and (30.7)% in the years ended December 31, 2009
and 2008, respectively. The increase in the effective tax rate
was primarily attributable to non-deductible
amounts accrued in 2009 related to certain government
investigation related matters and the tax benefit of the goodwill
impairment incurred in 2008.
|
|
|
Income Tax Expense (Benefit)
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in millions)
|
|
Income
tax expense (benefit)
|
|
|
$ |
53.1 |
|
|
|
$ |
(16.3 |
) |
Effective
tax rate
|
|
|
|
57.1 |
% |
|
|
|
(30.7 |
%) |
Net income
(loss). Net income increased approximately $76.7 million to $39.9 million
in the year ended December 31, 2009 from a net loss of $36.8 million in the
prior year period. The increase in net income is due primarily to decreased
SG&A expenses and an impairment charge of goodwill for the Medicare
reporting unit, that was recorded in 2008 and did not recur 2009.
|
|
|
Net Income (Loss)
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In
millions, except per share data)
|
|
Net
income (loss)
|
|
|
$ |
39.9 |
|
|
$ |
(36.8 |
) |
Net
income (loss) per diluted share
|
|
|
$ |
0.95 |
|
|
$ |
(0.89 |
) |
Comparison
of Year Ended December 31, 2008 to Year Ended December 31, 2007
Premium revenue.
For the year ended December 31, 2008, total premium revenue increased
$1,178.2 million, or 22.2%, to $6,483.1 million from $5,304.9 million for the
same period in the prior year due to increases in premium revenue in both the
Medicaid and Medicare segments, as discussed below. Total membership grew by
159,000 members, or 6.7%, from 2,373,000 at December 31, 2007 to 2,532,000 at
December 31, 2008.
|
|
|
Premium Revenues and Membership
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(Dollars in millions)
|
|
Revenues
|
|
|
$ |
6,483.1 |
|
|
$ |
5,304.9 |
|
Membership
|
|
|
|
2,532,000 |
|
|
|
2,373,000 |
|
Medicaid. For the year ended
December 31, 2008, Medicaid segment premium revenue increased $299.3 million, or
11.1%, to $2,991.1 million from $2,691.8 million for the same period in the
prior year. The increase in Medicaid segment revenue was primarily due to
increases in membership, as well as premium rate increases in certain of our
markets. Medicaid membership grew from 1,232,000 members at December 31, 2007 to
1,300,000 at December 31, 2008.
|
|
|
Medicaid Revenues and Membership
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2008
|
|
|
|
2007
|
|
|
|
(Dollars in millions)
|
|
Revenues
|
|
|
$ |
2,991.1 |
|
|
|
$ |
2,691.8 |
|
%
of Total Premium Revenues
|
|
|
|
46.1 |
% |
|
|
|
50.7 |
% |
Membership
|
|
|
|
1,300,000 |
|
|
|
|
1,232,000 |
|
%
of Total Membership
|
|
|
|
51.3 |
% |
|
|
|
51.9 |
% |
Medicare. For the year ended
December 31, 2008, Medicare segment premium revenue increased $878.9 million, or
33.6%, to $3,492.0 million from $2,613.1 million for the same period in the
prior year. Growth in our PFFS product contributed $865.0 million of the change
in revenue. Membership within the Medicare segment grew by 91,000 members, or
8.0%, from 1,141,000 members at December 31, 2007 to 1,232,000 members at
December 31, 2008, principally due to growth in the PFFS product launched in
2007. As previously disclosed, we withdrew from offering PFFS plans
as of January 1, 2010.
|
|
|
Medicare Revenues and Membership
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2008
|
|
|
|
2007
|
|
|
|
(Dollars in millions)
|
|
Revenues
(in millions)
|
|
|
$ |
3,492.0 |
|
|
|
$ |
2,613.1 |
|
%
of Total Premium Revenues
|
|
|
|
53.9 |
% |
|
|
|
49.3 |
% |
Membership
|
|
|
|
1,232,000 |
|
|
|
|
1,141,000 |
|
%
of Total Membership
|
|
|
|
48.7 |
% |
|
|
|
48.1 |
% |
Investment and
other income. For the year ended December 31, 2008, investment and other
income decreased approximately $47.1 million, or 54.8%, to $38.8 million from
$85.9 million for the same period in the prior year. The decrease is primarily
due to an overall decrease in invested assets, coupled with a lower interest
rate environment. The decrease is also attributable to the non-recurring gain
from the settlement of a legal matter in the amount of approximately $9.0
million, which was recorded 2007. A similar gain did not occur in the fiscal
year 2008.
Medical benefits
expense. For the year ended December 31, 2008, total medical benefits
expense increased $1,316.8 million, or 31.3%, to $5,530.2 million from $4,213.4
million for the same period in the prior year due to membership increases,
primarily in our Medicare Advantage products. The demographic mix of our members
and overall increased utilization patterns and costs of our members accounted
for the majority of the remaining change. Our MBR was 85.3% for the year ended
December 31, 2008 compared to 79.4% for the same period in the prior
year.
|
|
|
|
Medical Benefits Expense
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(Dollars
in millions)
|
Medical
Benefits Expense
|
|
|
|
$ |
5,530.2 |
|
|
|
$ |
4,213.4 |
|
Non-recurring
IBNR adjustment
|
|
|
|
|
(92.9 |
)(1) |
|
|
|
92.9 |
(2) |
Medical
Benefits Expense as adjusted
|
|
|
|
$ |
5,437.3 |
|
|
|
$ |
4,306.3 |
|
MBR
as reported
|
|
|
|
|
85.3 |
% |
|
|
|
79.4 |
% |
MBR
as adjusted
|
|
|
|
|
83.9 |
%(1) |
|
|
|
81.2 |
%(2) |
____________
(1)
|
We
believe that Medical Benefits Expense as adjusted for the year ended
December 31, 2008 is a non-GAAP financial measure because it reflects the
favorable development that otherwise would have been recognized in the
year ended December 31, 2008 if we had timely filed our 2007 Form 10-K.
Due to the delay in filing our 2007 Form 10-K, we were able to review
substantially complete claims information that had become available due to
the substantial lapse in time between December 31, 2007 and the date we
filed our 2007 Form 10-K; therefore, the favorable development was
reported in 2007 instead of 2008 as it otherwise would have been. The most
directly comparable GAAP measure is Medical Benefits Expense, which has
been determined based on the actuarially determined methods. Thus, our
recorded amounts for Medical Benefits Expense and MBR for the year ended
December 31, 2008 is approximately $92.9 million higher than it otherwise
would have been if we had filed our 2007 Form 10-K on time. Consequently,
we believe that Medical Benefits Expense as adjusted for the year ended
December 31, 2008 will better facilitate a year over year comparison of
our Medical Benefits Expense.
|
(2)
|
We
believe that Medical Benefits Expense as adjusted for the year ended
December 31, 2007 is a non-GAAP financial measure because it does not take
into account the claims information that has become available as of the
date of filing our 2007 Form 10-K. The most directly comparable GAAP
measure is Medical Benefits Expense, which was determined based on the
substantially complete claims information that had subsequently become
available as of the date of filing the 2007 Form 10-K.
Consequently,
|
|
the
amounts we recorded in accordance with GAAP for medical benefits expense
for year ended December 31, 2007 were based on actual claims paid. The
difference between Medical Benefits Expense and Medical Benefits Expense
as adjusted is approximately $92.9 million. Thus, our recorded amounts for
Medical Benefits Expense and MBR for the year ended December 31, 2007 both
include the effect of using actual claims paid. Consequently, we believe
that Medical Benefits Expense as adjusted for the year ended December 31,
2007, which was based on our actuarially determined estimate, will better
facilitate a year over year comparison of our Medical Benefits
Expense.
|
Medicaid. For the year ended
December 31, 2008, medical benefits expense increased $400.7 million, or 18.8%,
to $2,537.4 million from $2,136.7 million for the same period in the prior year.
Our Medicaid MBR was 84.8% for the year ended December 31, 2008 compared to
79.4% for the same period in the prior year.
|
|
|
Medicaid Medical Benefits Expense
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars
in millions)
|
Medicaid
Medical Benefits Expense
|
|
|
$ |
2,537.4 |
|
|
|
$ |
2,136.7 |
|
Non-recurring
IBNR adjustment
|
|
|
|
(39.5 |
)(1) |
|
|
|
39.5 |
(2) |
Medicaid
Medical Benefits Expense as adjusted
|
|
|
$ |
2,497.9 |
|
|
|
$ |
2,176.2 |
|
MBR
as reported
|
|
|
|
84.8 |
% |
|
|
|
79.4 |
% |
MBR
as adjusted
|
|
|
|
83.5 |
%(1) |
|
|
|
80.8 |
%(2) |
____________
(1)
|
We
believe that Medicaid Medical Benefits Expense as adjusted for the year
ended December 31, 2008 is a non-GAAP financial measure because it
reflects the favorable development that otherwise would have been
recognized in year ended December 31, 2008 if we had timely filed our 2007
Form 10-K. Due to the delay in filing our 2007 Form 10-K, we were able to
review substantially complete claims information that had become available
due to the substantial lapse in time between December 31, 2007 and the
date we filed our 2007 Form 10-K; therefore, the favorable development was
reported in 2007 instead of 2008 as it otherwise would have been. The most
directly comparable GAAP measure is Medicaid Medical Benefits Expense,
which has been determined based on the actuarially determined methods.
Thus, our recorded amounts for Medicaid Medical Benefits Expense and MBR
for the year ended December 31, 2008 is approximately $39.5 million higher
than it otherwise would have been if we had filed our 2007 Form 10-K on
time. Consequently, we believe that Medicaid Medical Benefits Expense as
adjusted for the year ended December 31, 2008 will better facilitate a
year over year comparison of our Medical Benefits
Expense.
|
(2)
|
We
believe that Medicaid Medical Benefits Expense as adjusted for the year
ended December 31, 2007 is a non-GAAP financial measure because it does
not take into account the claims information that has become available as
of the date of filing the 2007 Form 10-K. The most directly comparable
GAAP measure is Medicaid Medical Benefits Expense, which was determined
based on the substantially complete claims information that had
subsequently become available as of the date of filing our 2007 Form 10-K.
Consequently, the amounts we recorded in accordance with GAAP for medical
benefits expense for year ended December 31, 2007 were based on actual
claims paid. The difference between Medicaid Medical Benefits Expense and
Medical Benefits Expense as adjusted is approximately $39.5 million. Thus,
our recorded amounts for Medicaid Medical Benefits Expense and MBR for the
year ended December 31, 2007 both include the effect of using actual
claims paid. Consequently, we believe that Medicaid Medical Benefits
Expense as adjusted for the year ended December 31, 2007, which was based
on our actuarially determined estimate, will better facilitate a year over
year comparison of our Medical Benefits
Expense.
|
For the
year ended December 31, 2008, Medicaid medical benefits expense as adjusted
increased $321.7 million, or 14.8%, to $2,497.9 million from $2,176.2 million
for the same period in the prior year. Membership growth in our Medicaid segment
accounted for $212.9 million of the increase, partially offset by the decrease
in medical benefits expense resulting from our Connecticut Medicaid withdrawal
totaling approximately $62.8 million. The remaining change is attributed to the
demographic mix of our members and overall increased utilization patterns and
costs. Absent the adjustment that was recorded in 2007 for the favorable medical
benefits development, our MBR would have been 83.5% and 80.8% for the years
ended December 31, 2008 and 2007, respectively.
Medicare. For the year ended
December 31, 2008, medical benefits expense increased $916.1 million, or 44.1%,
to $2,992.8 million from $2,076.7 million for the same period in the prior year
due to the increases in medical benefits expense in the Medicare segments, as
discussed below. Our Medicare MBR was 85.7% for the year ended December 31, 2008
compared to 79.5% for the same period in the prior year.
|
|
|
Medicare Medical Benefits Expense
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars
in millions)
|
|
Medicare
Medical Benefits Expense
|
|
|
$ |
2,992.8 |
|
|
|
$ |
2,076.7 |
|
Non-recurring
IBNR adjustment
|
|
|
|
(53.4 |
)(1) |
|
|
|
53.4 |
(2) |
Medicare
Medical Benefits Expense as adjusted
|
|
|
$ |
2,939.4 |
|
|
|
$ |
2,130.1 |
|
MBR
as reported
|
|
|
|
85.7 |
% |
|
|
|
79.5 |
% |
MBR
as adjusted
|
|
|
|
84.2 |
%(1) |
|
|
|
81.5 |
%(2) |
____________
(1)
|
We
believe that Medicare Medical Benefits Expense as adjusted for the year
ended December 31, 2008 is a non-GAAP financial measure because it
reflects the favorable development that otherwise would have been
recognized in year ended December 31, 2008 if we had timely filed our 2007
Form 10-K. Due to the delay in filing our 2007 Form 10-K, we were able to
review substantially complete claims information that had become available
due to the substantial lapse in time between December 31, 2007 and the
date we filed our 2007 Form 10-K; therefore, the favorable development was
reported in 2007 instead of 2008 as it otherwise would have been. The most
directly comparable GAAP measure is Medicare Medical Benefits Expense,
which has been determined based on the actuarially determined methods.
Thus, our recorded amounts for Medicare Medical Benefits Expense and MBR
for the year ended December 31, 2008 is approximately $53.4 million higher
than it otherwise would have been if we had filed our 2007 Form 10-K on
time. Consequently, we believe that Medicare Medical Benefits Expense as
adjusted for the year ended December 31, 2008 will better facilitate a
year over year comparison of our Medicare Medical Benefits
Expense.
|
(2)
|
We
believe that Medicare Medical Benefits Expense as adjusted for the year
ended December 31, 2007 is a non-GAAP financial measure because it does
not take into account the claims information that had become available as
of the date of filing our 2007 Form 10-K. The most directly comparable
GAAP measure is Medicare Medical Benefits Expense, which was determined
based on the substantially complete claims information that had
subsequently become available as of the date of filing the 2007 Form 10-K.
Consequently, the amounts we recorded in accordance with GAAP for medical
benefits expense for year ended December 31, 2007 were based on actual
claims paid. The difference between Medicare Medical Benefits Expense and
Medical Benefits Expense as adjusted is approximately $53.4 million. Thus,
our recorded amounts for Medicare Medical Benefits Expense and MBR for the
year ended December 31, 2007 both include the effect of using actual
claims paid. Consequently, we believe that Medicaid Medical Benefits
Expense as adjusted for the year ended December 31, 2007, which was based
on our actuarially-determined estimate, will better facilitate a year over
year comparison of our Medicare Medical Benefits
Expense.
|
For the
year ended December 31, 2008, Medicare medical benefits expense as adjusted
increased $809.3 million, or 38.0%, to $2,939.4 million from $2,130.1 million
for the same period in the prior year. The increase was primarily due to the
growth in membership, principally with the launch of PFFS, which accounted for
$431.0 million of the increase. Increased health care costs and the demographic
change in membership accounted for the remaining increase. For the year ended
December 31, 2008, the Medicare MBR as adjusted was 84.2% compared to 81.5% for
the same period in the prior year, primarily due to the increasing MBR in our
PDP product.
Selling, general
and administrative expense. For the year ended December 31, 2008,
selling, general and administrative (“SG&A”) expenses increased
approximately $166.8 million, or 21.8%, to $933.4 million from $766.6 million
for the same period in the prior year. Administrative expenses associated with,
or consequential to, the government and Special Committee investigations,
including legal fees, consulting fees, employee recruitment and retention costs,
and similar expenses were approximately $103.0 and $21.1 million in the years
ended December 31, 2008 and 2007, respectively. The increase in SG&A expense
resulting from the substantially higher government and Special Committee
investigation costs incurred in 2008 were partially off set by the $50.0 million
accrual that was recorded in 2007 for our potential liability in connection with
the ultimate resolution of the investigation related matters. The remaining
increase was primarily due to our investments in information technology and
sales and marketing activities, as well as increased spending necessary to
support and sustain our membership growth. Our SG&A expense to total revenue
ratio (“SG&A ratio”) was 14.3% and 14.2% for the years ended December 31,
2008 and 2007, respectively.
|
|
|
Selling, General and Administrative
Expense
|
|
|
|
For the Year Ended December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in millions)
|
|
SG&A
(in millions)
|
|
|
$ |
933.4 |
|
|
|
$ |
766.6 |
|
SG&A
expense to total revenue ratio
|
|
|
|
14.3 |
% |
|
|
|
14.2 |
% |
Interest expense.
Interest expense decreased $2.2 million, or 15.7%, to $11.8 million for the year
ended December 31, 2008 from $14.0 million for the same period in the prior
year. The decrease relates to the reduced amount of debt outstanding and the
lower cost of borrowing given the lower interest rate environment in 2008 versus
higher interest rates in 2007.
Income tax
(benefit) expense. For the year ended December 31, 2008, income tax
decreased $178.0 million to a benefit of $16.3 million from expense of $161.7
million for the same period in the prior year. The tax effective rate was
approximately (30.7)% and 42.8% in the years ended December 31, 2008 and 2007,
respectively. The decrease in the effective tax rate was attributed to the tax
benefit of the goodwill impairment and, to a lesser extent, tax-exempt
investment income on certain investments, offset by the non-deductibility of
certain compensation costs related to changes in senior management and state
taxes.
|
|
|
Income Tax (Benefit) Expense
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(Dollars in millions)
|
Income
tax (benefit) expense
|
|
|
$ |
(16.3 |
) |
|
$ |
161.7 |
|
Effective
tax rate
|
|
|
|
(30.7 |
%) |
|
|
42.8 |
% |
Net (loss)
income. Net income decreased approximately $253.0 million to a net loss
of $36.8 million in the year ended December 31, 2008 from net income of $216.2
in the prior year period. The decrease is primarily due to the
period-over-period increase in MBR, as medical benefits expense grew at a faster
pace than premium revenues during year ended December 31, 2008, the goodwill
impairment recorded in 2008 and the increase in SG&A expenses associated
with, or consequential to, the government and Special Committee
investigations.
|
|
|
Net (Loss) Income
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(In
millions, except per share data)
|
|
Net
(loss) income
|
|
|
$ |
(36.8 |
) |
|
$ |
216.2 |
|
Net
(loss) income per diluted share
|
|
|
$ |
(0.89 |
) |
|
$ |
5.16 |
|
Liquidity
and Capital Resources
|
Cash
Generating Activities
|
Our
business consists of operations conducted by our regulated subsidiaries,
including HMOs and insurance subsidiaries, and our non-regulated
subsidiaries. The primary sources of cash for our regulated
subsidiaries include premium revenue, investment income and capital
contributions made by us to our regulated subsidiaries. Our regulated
subsidiaries are each subject to applicable state regulations that, among other
things, require the maintenance of minimum levels of capital and
surplus. Our regulated subsidiaries’ primary uses of cash include
payment of medical expenses, management fees to our non-regulated third-party
administrator subsidiary (the “TPA”) and direct administrative costs, which are
not covered by the agreement with the TPA, such as selling expenses and legal
costs. We refer collectively to the cash and investment balances
maintained by our regulated subsidiaries as “regulated cash” and “regulated
investments,” respectively.
The primary sources of cash for our non-regulated subsidiaries are management
fees received from our regulated subsidiaries, investment income and dividends
from our regulated subsidiaries. Our non-regulated subsidiaries’
primary uses of cash include payment of administrative costs not charged to our
regulated subsidiaries for corporate functions, including administrative
services related to claims payment, member and provider services and information
technology. Other primary uses include capital contributions made by
our non-regulated subsidiaries to our regulated subsidiaries and the repayment
of our credit facility. We refer collectively to the cash and
investment balances available in our non-regulated subsidiaries as “unregulated
cash” and “unregulated investments,” respectively.
At
December 31, 2009 and 2008, cash and cash equivalents were $1,158.1 million and
$1,181.9 million, respectively. We also had short-term investments of $62.7
million and $70.1 million at December 31, 2009 and 2008, respectively. Of these
short-term investments, $58.9 million and $66.2 million had maturities of three
to 12 months as of December 31, 2009 and 2008, respectively. As of December 31,
2009 and 2008, 93.9% and 94.4% of our investments were invested in certificates
of deposit with a weighted average maturity of 40 days and 98 days,
respectively. The annualized tax equivalent portfolio yield for the years ended
December 31, 2009 and 2008 was 0.6% and 2.4%, respectively.
During
2009, three of our Florida regulated subsidiaries declared and paid dividends to
one of our non-regulated subsidiaries in the aggregate amount of $44.4
million. On December 31, 2008, the same three Florida regulated
subsidiaries of ours, declared dividends to one of our non-regulated
subsidiaries in the aggregate amount of $105.1 million, of which two dividends
were paid in December 2008 and one dividend which was paid in January
2009.
|
Initiatives
to Increase Our Unregulated Cash
|
We are
pursuing alternatives to raise additional unregulated cash. Some of these
initiatives include, but are not limited to, consideration of obtaining
dividends from certain of our regulated subsidiaries to the extent that we are
able to access any available excess capital and accessing the credit markets.
However, we cannot provide any assurances that we will obtain applicable state
regulatory approvals for dividends to our non-regulated subsidiaries by our
regulated subsidiaries. In addition to dividends, our strategies include
accessing the public and private debt and equity markets and potentially selling
assets.
Our
ability to obtain financing has been and continues to be materially and
negatively affected by a number of factors. The recent turmoil in the credit
markets, market volatility, the deterioration in the soundness of certain
financial institutions and general adverse economic conditions have caused the
cost of prospective debt financings to increase considerably. These
circumstances have materially adversely affected liquidity in the financial
markets, making terms for certain financings unattractive, and in some cases
have resulted in the unavailability of financing. We also believe the
uncertainty created by the ongoing state and federal investigations is affecting
our ability to obtain financing. In light of the current and evolving credit
market crisis and the uncertainty created by the ongoing investigations, we may
not be able to obtain financing. Even if we are able to obtain financing under
these circumstances, the cost to us likely will be high and the terms and
conditions likely will be onerous.
As of
December 31, 2009, all of our long-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, which
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 every seven, 14, 28 or 35 days. As of the date of this Form
10-K, auctions have failed for $57.0 million of our auction rate securities and
there is no assurance that auctions on the remaining auction rate securities in
our investment portfolio will succeed in the future. An auction failure means
that the parties wishing to sell their securities could not be matched with an
adequate volume of buyers. In the event that there is a failed auction the
indenture governing the security requires the issuer to pay interest at a
contractually defined rate that is generally above market rates for other types
of similar instruments. 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 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 remaining auction rate securities in the near
term may be limited or non-existent. In addition, while all of our auction rate
securities currently carry investment grade ratings, if the issuers 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.
We
believe we will be able to liquidate our auction rate securities without
significant loss, and we currently believe these securities are not impaired,
primarily due to government guarantees or municipal bond insurance; however, it
could take until the final maturity of the underlying securities to realize our
investments’ recorded value. The final maturity of the underlying securities
could be as long as 30 years. The weighted-average life of the underlying
securities for our auction rate securities portfolio is 21 years. We currently
have the ability and intent to hold our auction rate securities until market
stability is restored with respect to these securities.
|
Investigation
and Litigation Related Costs
|
We have
expended significant financial resources in connection with the ongoing
investigations and related matters. Since the inception of the investigations
through December 31, 2009, we have incurred approximately $165.4 million for
administrative expenses associated with, or consequential to, these governmental
and Company investigations for legal fees, accounting fees, consulting fees,
employee recruitment and retention costs and other similar expenses.
Approximately $8.4 million and $41.3 million were incurred in the three months
and year ended December 31, 2009, respectively. In addition, we have paid $87.5
million to resolve matters with certain government agencies, of which $52.3
million was paid during 2009. We currently estimate that we will pay
approximately $60.0 million in installments over a period of four to five years
to resolve matters with the Civil Division and the OIG. The final timing, terms
and conditions of a civil resolution may differ from those current anticipated,
which may results in an adjustment to our recorded amounts. These adjustments
may be material.
We may be required to pay significant damages or other amounts in the event of
an adverse judgment or settlement of the shareholder actions against us. A
substantial amount of these costs will not be covered by, or may exceed the
limits of, our insurance. We are unable to provide an estimate or range of
amounts that we may pay, if any, to resolve the outstanding shareholder actions.
If we were required to pay a significant amount to resolves these matters, it
could have a material adverse effect on our business, financial condition and
cash flows.
We expect
to continue incurring additional administrative costs in connection with the
governmental and Company investigations, defending the class-action lawsuits
against us, compliance with the DPA and other related matters into 2010.
Although costs related to the investigations have declined in recent periods, we
can provide no assurance that such costs will not be significant or increase in
the future. These costs include, among others, costs associated with the
retention of the Monitor and implementation of any recommendations as well as
costs related to the class-action lawsuit and efforts of the Special Litigation
Committee in connection with the ongoing shareholder derivative
actions.
Regulatory
Capital and Restrictions on Dividends and Management Fees
Each of
our HMO and insurance company subsidiaries is licensed in the markets in which
it operates and is subject to the rules, regulations and oversight by the
applicable state DOI in the areas of licensing and solvency. Each of our health
and prescription drug plans is required to report regularly on its operational
and financial performance to the appropriate regulatory agency in the state in
which it is licensed, which describes our HMO’s and insurance companies’ capital
structure, ownership, financial condition, certain intercompany transactions and
business operations. From time to time, each of our subsidiaries is selected to
undergo periodic examinations and reviews by the applicable state to review our
operational and financial assertions.
The plans
that we operate 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 RBC requirements. The
RBC requirements are based on guidelines established by the NAIC and are
administered by the states. As of December 31, 2009, our Connecticut, Georgia,
Illinois, Indiana, Louisiana, Missouri, Ohio, Texas 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 may change
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 example, our
Ohio HMO is required to maintain required statutory capital at an RBC level of
150% of CAL. Moreover, as we expand our plan offerings in new states or pursue
new business opportunities, we may be required to make additional statutory
capital contributions. At
December 31, 2009, our consolidated RBC ratio for these states is estimated
to be over 333% which is in excess of the required CAL of
223%. However, two of our subsidiaries were individually below
the required CAL at December 31, 2009. These two subsidiaries
underwrote our PFFS product and one also underwrote our products in Hawaii. As
we are no longer offering PFFS plans, the amount of RBC required is
substantially reduced in 2010 and we anticipate that these two subsidiaries will
be in compliance in 2010.
In
addition, our Medicaid and S-CHIP activities are regulated by each state’s
department of health 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 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 – Item 3 – Legal
Proceedings.”
At
December 31, 2009 and 2008, all of our restricted assets consisted of cash and
cash equivalents, money market accounts, certificates of deposits, and U.S.
Government Securities. As of December 31, 2009, we believe our subsidiaries were
in compliance with the minimum capital requirements.
Overview of Cash
Flow Activities – For the years ended December 31, 2009, 2008 and 2007
our cash flows from operations are summarized as follows:
|
|
For the Years Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
(In millions)
|
Net
cash provided by operations
|
|
$ |
57.9 |
|
|
$ |
296.4 |
|
|
$ |
277.6 |
|
Net
cash provided by (used in) investing activities
|
|
|
63.6 |
|
|
|
(91.1 |
) |
|
|
(186.2 |
) |
Net
cash used in financing activities
|
|
|
(145.4 |
) |
|
|
(31.8 |
) |
|
|
(47.5 |
) |
|
Net
cash provided by operations
|
The net
cash inflow from operations for the years ended December 31, 2009, 2008 and 2007
was primarily due to increased revenues from increased membership and changes in
the receivables and liabilities due to timing of cash receipts and payments.
Because we generally receive premium revenue in advance of payment for the
related medical care costs, our cash typically has increased during periods of
premium revenue growth.
|
Net
cash provided by (used in) investing
activities
|
In 2009,
investing activities consisted primarily of net proceeds from the maturity of
restricted investments totaling approximately $68.4 million and the net proceeds
from the sale and maturities of investments totaling approximately $11.4
million, partially offset by increases in property, equipment and capitalized
software totaling approximately $16.1 million.
In 2008,
investing activities consisted primarily of $124.8 million in proceeds from the
sale and maturity of investments, net of investment purchases. An additional
$109.8 million was used in investing activities to purchase restricted
investments, net of proceeds received from the sale of restricted investments.
Additions to property, equipment and capitalized software used approximately
$19.6 million. Investing activities also consisted primarily of net cash used in
Funds receivable for the benefit of members totaling $86.5 million. These funds,
which represent PDP member subsidies and pass-through payments from government
partners, are not accounted for in our results of operations since they
represent pass-through payments from our government partners to fund
deductibles, co-payments and other member benefits for certain of our
members.
In 2007,
investing activities consisted primarily of the investment of excess cash
generated by operations totaling approximately $127.5 million in various
short-term investment instruments, and an additional $39.3 million was invested
in restricted investment accounts to satisfy the requirements of various state
statutes. An additional $22.9 million was invested in capitalized
assets.
|
Net
cash used in financing activities
|
In 2009,
financing activities consisted primarily of the repayment in full of the
outstanding amount of $152.8 million under the credit facility on its due
date.
In 2008,
financing activities consisted primarily of net cash used in funds held for the
benefit of members totaling $31.8 million. These funds, which represent PDP
member subsidies and pass-through payments from government partners, are not
accounted for in our results of operations since they represent pass-through
payments from our government partners to fund deductibles, co-payments and other
member benefits for certain of our members
In 2007,
financing activities consisted of net proceeds from options exercised totaling
$12.8 million, and the incremental tax benefit from options exercised of $23.1
million. Also included in financing activities are funds held for the
benefit of others, which used approximately $81.9 million of cash as of December
31, 2007. These funds, which represent PDP member subsidies and pass-through
payments from government partners, are not accounted for in our results of
operations since they represent pass-through payments from our government
partners to fund deductibles, co-payments and other member benefits for certain
of our members.
Off
Balance Sheet Arrangements
At
December 31, 2009, we did not have any off-balance sheet financing arrangements
except for operating leases as described in the table below.
Commitments
and Contingencies
The
following table sets forth information regarding our contractual
obligations.
|
|
Payments due to period
|
Contractual
Obligations at
December 31,
2009(1)
|
Total
|
|
|
Less
Than
1
Year
|
|
|
1-3
Years
|
|
|
3-5
Years
|
|
|
More
than
5
Years
|
|
|
(in millions)
|
Operating
leases
|
|
$ |
61.7 |
|
|
$ |
15.6 |
|
|
$ |
22.6 |
|
|
$ |
12.0 |
|
|
$ |
11.5 |
Purchase
obligations
|
|
|
78.4 |
|
|
|
48.9 |
|
|
|
18.7 |
|
|
|
9.7 |
|
|
|
1.1 |
Unrecognized
tax benefit
|
|
|
12.0 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
12.0 |
Total
|
|
$ |
152.1 |
|
|
$ |
64.5 |
|
|
$ |
41.3 |
|
|
$ |
21.7 |
|
|
$ |
24.6 |
____________
(1) We
have resolved our matters under investigation by the USAO and the State of
Florida but remain in resolution discussions as to matters under review with the
Civil Division and the OIG. Pursuant to the Consent and Final Judgment, we
agreed to pay a penalty of $10.0 million to the SEC, of which $2.5 million
remains to be paid. Based on the current status of matters and all
information known to us to date, management estimates that we have a liability
of approximately $60.0 million plus interest associated with the matters
remaining under investigation. We anticipate these amounts will be payable in
installments over a period of four to five years. In accordance with
fair value accounting guidance, we discounted the liability and recorded it at
its current fair value of approximately $55.9 million. This amount is
accrued in our Consolidated Balance Sheet as of December 31, 2009 within the
short and long term portions of Amounts accrued related to investigation
resolution line items. The final timing, terms and conditions of a
resolution of these matters may differ from those currently anticipated, which
may result in a material adjustment to our recorded amounts. We
cannot provide an estimable range of additional amounts, if any, nor can we
provide assurances regarding the timing, terms and conditions of any potential
negotiated resolution of pending investigations by the Civil Division or the
OIG. In addition, putative class action complaints were filed against us, as
well as certain of our past and present officers and directors in October and
November 2007, alleging, among other things, numerous violations of securities
laws. At this time, neither we nor any of our subsidiaries can predict the
probable outcome of these claims. In addition, derivative actions, by their
nature, do not seek to recover damages from the companies on whose behalf the
plaintiff shareholders are purporting to act.
We are
not an obligor under or guarantor of any indebtedness of any other party;
however, we may have to pay referral claims of health care providers under
contract with us who are not able to pay costs of medical services provided by
other providers.
Recently
Issued Accounting Standards
In
January 2010, the Financial Accounting Standards Board (“FASB”) issued
authoritative guidance related to improving disclosures about fair value
measurements. This standard requires reporting entities to make new
disclosures about recurring or nonrecurring fair-value measurements including
significant transfers into and out of Level 1 and Level 2 fair value
measurements and information on purchases, sales, issuances and settlements on a
gross basis in the reconciliation of Level 3 fair value measurements. This
standard is effective for annual reporting periods beginning after December 15,
2009, except for Level 3 reconciliation disclosures which are effective for
annual periods beginning after December 15, 2010. The adoption will not have a
material impact on our financial statements in 2010.
In
December 2009, the FASB issued an update to codify standards in the
authoritative guidance it previously issued in June 2009, which addressed the
modification of financial reporting by enterprises involved with variable
interest entities (“VIE”). This update requires a qualitative approach to
identifying a controlling financial interest in a VIE, and requires ongoing
assessments of whether an entity is a VIE and whether an interest in a VIE makes
the holder the primary beneficiary of the VIE. This pronouncement is effective
for annual reporting periods beginning after November 15, 2009. The
adoption of this guidance is not currently expected to have a material effect on
our financial statements.
In August
2009, the FASB issued authoritative guidance surrounding the fair value
measurements and disclosures of liabilities. This guidance provides
clarification in circumstances where a quoted market price in an active market
for an identical liability is not available, a reporting entity is required to
measure the fair value of the liability using either: (1) the quoted price of
the identical liability when traded as an asset; (2) the quoted prices for
similar liabilities or similar liabilities when traded as assets; or (3) another
valuation technique, such as a present value calculation or the amount that the
reporting entity would pay to transfer the identical liability or would receive
to enter into the identical liability. This statement becomes effective for the
first reporting period (including interim periods) beginning after issuance. We
adopted this guidance during the third quarter of 2009, as
required. The adoption did not have a material impact on our
financial statements.
In June
2009, the FASB issued authoritative guidance serving as the single source of
authoritative non-governmental U.S. GAAP (the “Codification”), superseding
various existing authoritative accounting pronouncements. The Codification now
establishes one level of authoritative GAAP. All other literature is considered
non-authoritative. This Codification was launched on July 1, 2009 and is
effective for financial statements issued for interim and annual periods ending
after September 15, 2009. We have adopted the Codification during the third
quarter of 2009. However, there were no changes to our consolidated financial
statements due to the implementation of the Codification other than changes in
reference to various authoritative accounting pronouncements in our consolidated
financial statements.
In June
2009, the FASB issued authoritative guidance to modify financial reporting by
enterprises involved with variable interest entities by addressing the effects
on certain provisions of previously issued guidance on the consolidation of a
VIE, as a result of eliminating the qualifying special-purpose entity (“SPE”)
concept in accounting for transfers of financial assets, and (2) constituent
concerns about the application of certain key provisions of previously issued
guidance on VIEs, including those in which the accounting and disclosures do not
always provide timely and useful information about an enterprise’s involvement
in a VIE. This guidance shall be effective as of January 1, 2010, our first
annual reporting period beginning after November 15, 2009. Earlier
application is prohibited. The adoption of this guidance is not
currently expected to have a material effect on our financial
statements.
In June
2009, the FASB issued authoritative guidance modifying the relevance,
representational faithfulness and comparability of the information that a
reporting entity provides in its financial statements about a transfer of
financial assets; the effects of a transfer on its financial position, financial
performance, and cash flows; and a transferor’s continuing involvement, if any,
in transferred financial assets. The FASB undertook this project to
address: (1) practices that have developed since the issuance of previous
guidance concerning the accounting for transfers and servicing of financial
assets and extinguishments of liabilities, that are not consistent with the
original intent and key requirements of that statement and (2) concerns of
financial statement users that many of the financial assets (and related
obligations) that have been derecognized should continue to be reported in the
financial statements of transferors. This guidance must be applied as of
January 1, 2010, the beginning of our first annual reporting period after
November 15, 2009. Earlier application is prohibited. This guidance must
also be applied to transfers occurring on or after the effective
date. Additionally, on and after the effective date, the concept of a
qualifying SPE is no longer relevant for accounting purposes. Therefore, a
formerly qualifying SPE should be evaluated for consolidation by reporting
entities on and after the effective date in accordance with the applicable
consolidation guidance. If the evaluation on the effective date results in
consolidation, the reporting entity should apply the transition guidance
provided in the pronouncement that requires consolidation. The disclosure
provisions of this guidance should be applied to transfers that occurred both
before and after the effective date of this statement. The adoption is not
currently expected to have a material effect on our financial
statements.
In May
2009, the FASB issued authoritative guidance that provides general standards of
accounting for and disclosure of events that occur after the balance sheet date
but before financial statements are issued or are available to be issued. The
guidance sets forth the period after the balance sheet date during which
management of a reporting entity should evaluate events or transactions that may
occur for potential recognition or disclosure in the financial statements. The
guidance also sets forth the circumstances under which an entity should
recognize events or transactions occurring after the balance sheet date in its
financial statements. Furthermore, this guidance identifies the
disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. We adopted this guidance as required in
the second quarter of 2009.
In April
2009, the FASB issued authoritative guidance on the recognition and presentation
of other-than-temporary impairments (“OTTI”) modifying previous OTTI guidance
for debt securities through increased consistency in the timing of impairment
recognition and enhanced disclosures related to the credit and noncredit
components of impaired debt securities that are not expected to be
sold. In addition, increased disclosures are required for both debt
and equity securities regarding expected cash flows, credit losses, and an aging
of securities with unrealized losses. We adopted this guidance during
the second quarter of 2009, as required. The adoption did not have a
material impact on our financial statements.
In April
2009, the FASB issued authoritative guidance that requires fair value
disclosures for financial instruments that are not reflected in the Consolidated
Balance Sheets at fair value. Prior to the issuance of this guidance,
the fair values of those assets and liabilities were disclosed only once each
year. We now disclose this information on a quarterly basis,
providing quantitative and qualitative information about fair value estimates
for all financial instruments not measured in the Consolidated Balance Sheets at
fair value. We adopted this guidance during the second quarter of
2009, as required. The adoption did not have a material impact on our
financial statements.
In April
2009, the FASB issued authoritative guidance in regard to (1) determining fair
value when the volume and level of activity for the asset or liability has
significantly decreased and (2) identifying transactions that are considered not
orderly. This guidance specifically clarifies the methodology used to
determine fair value when there is no active market or where the price inputs
being used represent distressed sales. The guidance also reaffirms
the objective of a fair value measurement, which is to reflect how much an asset
would be sold for in an orderly transaction. It also reaffirms the
need to use judgment to determine if a formerly active market has become
inactive, as well as to determine fair values when markets have become
inactive. This guidance was adopted and applied prospectively during
the second quarter of 2009, as required. The adoption did not have a
material impact on our financial statements.
Item 7A. Qualitative and Quantitative
Disclosures about Market Risk
As of
December 31, 2009 and 2008, we had short-term investments of $62.7 million and
$70.1 million, respectively. At December 31, 2009 and 2008, we had investments
classified as long-term in the amount of $51.7 million and $55.0 million,
respectively. We also had restricted investments of $130.5 million and $199.3
million, at December 31, 2009 and 2008, respectively, which consist principally
of restricted deposits in accordance with regulatory requirements. The
short-term investments consist of highly liquid securities with maturities
between three and 12 months as well as longer term bonds with floating interest
rates that are considered available for sale. Restricted assets consist of cash
and cash equivalents and U.S. Treasury instruments deposited or pledged to state
agencies in accordance with state rules and regulations. These restricted assets
are classified as long-term regardless of the contractual maturity date due to
the nature of the states’ requirements. The investments classified as long term
are subject to interest rate risk and will decrease in value if market rates
increase. Because of their short-term nature, however, we would not expect the
value of these investments to decline significantly as a result of a sudden
change in market interest rates. Assuming a hypothetical and immediate 1%
increase in market interest rates at December 31, 2009, the fair value of our
fixed income investments would decrease by less than $0.7 million. Similarly, a
1% decrease in market interest rates at December 31, 2009 would result in an
increase of the fair value of our investments by less than $0.1
million.
Item
8. Financial Statements and Supplementary Data
Our
consolidated financial statements and related notes required by this item are
set forth in the WellCare Health Plans, Inc. financial statements included in
Part IV of this filing.
Item 9. Changes In and Disagreements
with Accountants on Accounting and Financial
Disclosure
None.
Item 9A. Controls and
Procedures
|
(a)
Evaluation of Disclosure
Controls and Procedures
|
Management,
under the leadership of our Chief Executive Officer (“CEO”) and our Chief
Financial Officer (“CFO”), is responsible for maintaining disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
Act) that are designed to ensure that information required to be disclosed in
reports filed or submitted under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC rules and
forms and that such information is accumulated and communicated to management,
including our CEO and CFO, to allow timely decisions regarding required
disclosures.
In
connection with the preparation of this 2009 Form 10-K, our management, under
the leadership of our CEO and CFO, evaluated the effectiveness of our disclosure
controls and procedures (“Disclosure Controls”). Based on that evaluation, our
CEO and CFO concluded that, as of December 31, 2009, our Disclosure Controls
were effective in timely alerting them to material information required to be
included in our reports filed with the SEC.
|
(b)
|
Management’s
Report on Internal Control Over Financing
Reporting
|
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting (as such term is defined in Rule 13a-15(f)
under the Exchange Act). An evaluation was performed under the supervision and
with the participation of our management, including our CEO and CFO, of the
effectiveness of our internal control over financial reporting based on the
framework in Internal Control
— Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the “COSO Framework”). Based on our
evaluation under the COSO Framework, our management concluded that our internal
control over financial reporting was effective as of December 31, 2009. Our
independent registered public accounting firm, Deloitte & Touche LLP, has
issued an attestation report on the effectiveness of our internal control over
financial reporting as of December 31, 2009, that is included
herein.
|
(c)
Changes in Internal
Controls
|
There has
not been any change in our internal control over financial reporting (as defined
in Rule 13a-15(f) of the Exchange Act) identified in connection with the
evaluation required by Rule 13a-15(d) under the Exchange Act during the quarter
ended December 31, 2009 that has materially affected, or is reasonably likely to
materially affect, those controls.
|
(d)
Limitations on the
Effectiveness of Controls
|
Our
management, including our CEO and CFO, does not expect that our Disclosure
Controls and internal controls will prevent all error and all fraud. A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been detected. These
inherent limitations include the realities that judgments in decision-making can
be faulty and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people or by management override of the
controls.
The
design of any system of controls also is based in part upon certain assumptions
about the likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future
conditions; over time, a control may become inadequate because of changes in
conditions or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and may not be
detected.
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Stockholders of
WellCare
Health Plans, Inc. and Subsidiaries
Tampa,
Florida
We have
audited the internal control over financial reporting of WellCare Health Plans,
Inc. and subsidiaries (the "Company") as of December 31, 2009, based on criteria
established in Internal
Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. The Company's management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management’s Report on Internal Control
over Financial Reporting. Our responsibility is to express an opinion on the
Company's internal control over financial reporting based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A
company's internal control over financial reporting is a process designed by, or
under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.
Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2009, based on the criteria
established in Internal
Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board
(United States), the consolidated financial statements and financial statement
schedules as of and for the year ended December 31, 2009 of the Company and our
report dated February 18,
2010 expressed an unqualified opinion on those consolidated financial
statements and financial statement schedules.
/s/
Deloitte & Touche LLP
CERTIFIED
PUBLIC ACCOUNTANTS
Tampa, Florida
February 18, 2010
Item 9B. Other
Information
None.
PART
III
Item
10. Directors, Executive Officers and
Corporate Governance
Except in
respect of information regarding our executive officers which is set forth in
Part I, Item 1 of this 2009 Form 10-K under the caption “Executive Officers of
the Company,” the information required by this Item is incorporated herein by
reference to the definitive Proxy Statement to be filed pursuant to Regulation
14A of the Securities Exchange Act of 1934 for our 2010 Annual Meeting of
Stockholders.
Item
11. Executive
Compensation
The
information required by this Item is incorporated herein by reference to the
definitive Proxy Statement to be filed pursuant to Regulation 14A of the
Exchange Act for our 2010 Annual Meeting of Stockholders.
Item 12.
|
Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder
Matters
|
The
information required by this Item is incorporated herein by reference to the
definitive Proxy Statement to be filed pursuant to Regulation 14A of the
Exchange Act for our 2010 Annual Meeting of Stockholders.
Item 13.
|
Certain Relationships and
Related Transactions, and Director Independence
|
The
information required by this Item is incorporated herein by reference to the
definitive Proxy Statement to be filed pursuant to Regulation 14A of the
Exchange Act for our 2010 Annual Meeting of Stockholders.
Item
14. Principal Accountant Fees and
Services
The
information required by this Item is incorporated herein by reference to the
definitive Proxy Statement to be filed pursuant to Regulation 14A of the
Exchange Act for our 2010 Annual Meeting of Stockholders.
PART
IV
Item
15. Exhibits and Financial Statement Schedules
(a)
Financial Statements and Financial Statement Schedules
(1)
|
Financial
Statements are listed in the Index to Consolidated Financial Statements on
page F-1 of this report.
|
(2)
|
Financial
Statement Schedules are listed in the Index to Consolidated Financial
Statements on Page F-1 of this
report.
|
(3)
|
Exhibits
– See the Exhibit Index of this report which is incorporated herein by
this reference.
|
(b)
Exhibits
For a
list of exhibits to this 2009 Form 10-K, see the Exhibit Index which is
incorporated herein by reference.
(c)
Financial Statements
We file
as part of this report the financial schedules listed on the index immediately
preceding the financial statements at the end of this report.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
|
|
WellCare
Health Plans, Inc. |
|
|
|
By:
/s/
Alexander Cunningham |
|
|
|
Alexander Cunningham |
|
|
|
Chief Executive Officer |
|
Date:
February
18, 2010
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons in the capacities and on the dates
indicated:
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/
Alexander Cunningham
|
|
Chief
Executive Officer (Principal Executive Officer)
|
|
February
18, 2010
|
Alexander Cunningham
|
|
|
|
|
|
|
|
|
|
/s/
Thomas L. Tran
|
|
Senior
Vice President and Chief Financial Officer (Principal Financial
Officer)
|
|
February
18, 2010
|
Thomas
L. Tran
|
|
|
|
|
|
|
|
|
|
/s/
Maurice Hebert
|
|
Chief
Accounting Officer (Principal Accounting Officer)
|
|
February
18, 2010
|
Maurice Hebert
|
|
|
|
|
|
|
|
|
|
/s/
Charles G. Berg
|
|
Director
|
|
February
18, 2010
|
Charles
G. Berg
|
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
February
18, 2010
|
|
|
|
|
|
|
|
|
|
|
/s/
Regina E. Herzlinger
|
|
Director
|
|
February
18, 2010
|
Regina
E. Herzlinger
|
|
|
|
|
|
|
|
|
|
/s/
Kevin F. Hickey
|
|
Director
|
|
February
18, 2010
|
Kevin
F. Hickey
|
|
|
|
|
|
|
|
|
|
/s/
Alif A. Hourani
|
|
Director
|
|
February
18, 2010
|
Alif
A. Hourani
|
|
|
|
|
|
|
|
|
|
/s/
Christian P. Michalik
|
|
Director
|
|
February
18, 2010
|
Christian
P. Michalik
|
|
|
|
|
|
|
|
|
|
/s/
Neal Moszkowski
|
|
Director
|
|
February
18, 2010
|
Neal
Moszkowski
|
|
|
|
|
|
|
|
|
|
/s/
David J. Gallitano |
|
Director |
|
February
18, 2010 |
David
J. Gallitano |
|
|
|
|
|
|
|
|
|
/s/
Glenn D. Steele. Jr.
|
|
Director
|
|
February
18, 2010
|
Glenn
D. Steele, Jr.
|
|
|
|
|
|
|
|
|
|
|
|
Director |
|
February
18, 2010 |
William
L. Trubeck |
|
|
|
|
|
|
|
|
|
|
|
Director |
|
February
18, 2010 |
Paul
E. Weaver
|
|
|
|
|
Index
to Consolidated Financial Statements and Schedules
WellCare
Health Plans, Inc.
|
Page
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
Consolidated
Balance Sheets as of December 31, 2009 and 2008
|
F-3
|
Consolidated
Statements of Operations for the years ended
December 31, 2009, 2008 and 2007
|
F-4
|
Consolidated
Statements of Changes in Stockholders’ Equity and Comprehensive Income for
the years ended December 31, 2009, 2008 and 2007
|
F-5
|
Consolidated
Statements of Cash Flows for the year ended December 31, 2009, 2008 and
2007
|
F-6
|
Notes
to Consolidated Financial Statements
|
F-7
|
Financial
Statement Schedules
|
|
|
|
Schedule
I — Condensed Financial Information of Registrant
|
F-32
|
Schedule
II — Valuation and Qualifying Accounts
|
F-35
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of
WellCare
Health Plans, Inc. and Subsidiaries
Tampa,
Florida
We have
audited the accompanying consolidated balance sheets of WellCare Health Plans,
Inc. and subsidiaries (the "Company") as of December 31, 2008 and 2009, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 2009. Our audits
also included the financial statement schedules listed in the Index at Item 15.
These consolidated financial statements and financial statement schedules are
the responsibility of the Company's management. Our responsibility is to express
an opinion on the consolidated financial statements and financial statement
schedules based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of the Company and subsidiaries as of December
31, 2009 and 2008, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2009, in conformity
with accounting principles generally accepted in the United States of America.
Also, in our opinion, such financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth
therein.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company's internal control over financial
reporting as of December 31, 2009, based on the criteria established in Internal Control—Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated February 18, 2010 expressed an unqualified opinion on the Company's
internal control over financial reporting.
/s/
Deloitte & Touche LLP
CERTIFIED
PUBLIC ACCOUNTANTS
Tampa,
Florida
February 18, 2010
WELLCARE
HEALTH PLANS, INC.
CONSOLIDATED
BALANCE SHEETS
(In
thousands, except share data)
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Assets
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
1,158,131 |
|
|
$ |
1,181,922 |
|
Investments
|
|
|
62,722 |
|
|
|
70,112 |
|
Premium
and other receivables, net
|
|
|
285,808 |
|
|
|
215,525 |
|
Other
receivables from government partners, net
|
|
|
— |
|
|
|
825 |
|
Funds
receivable for the benefit of members
|
|
|
77,851 |
|
|
|
86,542 |
|
Prepaid
expenses and other current assets, net
|
|
|
104,079 |
|
|
|
129,490 |
|
Deferred
income taxes
|
|
|
28,874 |
|
|
|
20,154 |
|
Total
current assets
|
|
|
1,717,465 |
|
|
|
1,704,570 |
|
Property,
equipment and capitalized software, net
|
|
|
61,785 |
|
|
|
66,588 |
|
Goodwill
|
|
|
111,131 |
|
|
|
111,131 |
|
Other
intangible assets, net
|
|
|
12,961 |
|
|
|
14,493 |
|
Long-term
investments
|
|
|
51,710 |
|
|
|
54,972 |
|
Restricted
investments
|
|
|
130,550 |
|
|
|
199,339 |
|
Deferred
tax asset
|
|
|
18,745 |
|
|
|
23,263 |
|
Other
assets
|
|
|
14,100 |
|
|
|
29,105 |
|
Total
Assets
|
|
$ |
2,118,447 |
|
|
$ |
2,203,461 |
|
Liabilities
and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Medical
benefits payable
|
|
$ |
802,515 |
|
|
$ |
766,179 |
|
Unearned
premiums
|
|
|
90,496 |
|
|
|
81,197 |
|
Accounts
payable
|
|
|
5,270 |
|
|
|
5,138 |
|
Other
accrued expenses and liabilities
|
|
|
219,691 |
|
|
|
288,340 |
|
Current
portion of amounts accrued related to investigation
resolution
|
|
|
18,192 |
|
|
|
50,000 |
|
Other
payables to government partners
|
|
|
38,147 |
|
|
|
8,100 |
|
Taxes
payable
|
|
|
4,888 |
|
|
|
12,187 |
|
Debt
|
|
|
— |
|
|
|
152,741 |
|
Other
current liabilities
|
|
|
871 |
|
|
|
674 |
|
Total
current liabilities
|
|
|
1,180,070 |
|
|
|
1,364,556 |
|
Amounts
accrued related to investigation resolution
|
|
|
40,205 |
|
|
|
— |
|
Other
liabilities
|
|
|
17,272 |
|
|
|
33,076 |
|
Total
liabilities
|
|
|
1,237,547 |
|
|
|
1,397,632 |
|
Commitments
and contingencies (see Note 11)
|
|
|
— |
|
|
|
— |
|
Stockholders’
Equity:
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.01 par value (20,000,000 authorized, no shares issued or
outstanding)
|
|
|
— |
|
|
|
— |
|
Common
stock, $0.01 par value (100,000,000 authorized, 42,361,207 and 42,261,345,
shares issued and outstanding at December 31, 2009 and 2008,
respectively)
|
|
|
424 |
|
|
|
423 |
|
Paid-in
capital
|
|
|
425,083 |
|
|
|
390,526 |
|
Retained
earnings
|
|
|
458,512 |
|
|
|
418,641 |
|
Accumulated
other comprehensive loss
|
|
|
(3,119 |
) |
|
|
(3,761 |
) |
Total
stockholders’ equity
|
|
|
880,900 |
|
|
|
805,829 |
|
Total
Liabilities and Stockholders’ Equity
|
|
$ |
2,118,447 |
|
|
$ |
2,203,461 |
|
See
notes to consolidated financial statements.
WELLCARE
HEALTH PLANS, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(In
thousands, except per share data)
|
|
For the year ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Premium
|
|
$ |
6,867,252 |
|
|
$ |
6,483,070 |
|
|
$ |
5,304,889 |
|
Investment
and other income
|
|
|
10,912 |
|
|
|
38,837 |
|
|
|
85,903 |
|
Total
revenues
|
|
|
6,878,164 |
|
|
|
6,521,907 |
|
|
|
5,390,792 |
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical
benefits
|
|
|
5,862,457 |
|
|
|
5,530,216 |
|
|
|
4,213,384 |
|
Selling,
general and administrative
|
|
|
892,940 |
|
|
|
933,418 |
|
|
|
766,648 |
|
Depreciation
and amortization
|
|
|
23,336 |
|
|
|
21,324 |
|
|
|
18,757 |
|
Interest
|
|
|
6,411 |
|
|
|
11,780 |
|
|
|
14,035 |
|
Goodwill
impairment
|
|
|
— |
|
|
|
78,339 |
|
|
|
— |
|
Total
expenses
|
|
|
6,785,144 |
|
|
|
6,575,077 |
|
|
|
5,012,824 |
|
Income
(loss) before income taxes
|
|
|
93,020 |
|
|
|
(53,170 |
) |
|
|
377,968 |
|
Income
tax expense (benefit)
|
|
|
53,149 |
|
|
|
(16,337 |
) |
|
|
161,732 |
|
Net
income (loss)
|
|
$ |
39,871 |
|
|
$ |
(36,833 |
) |
|
$ |
216,236 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share (see Note 3):
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.95 |
|
|
$ |
(0.89 |
) |
|
$ |
5.31 |
|
Diluted
|
|
$ |
0.95 |
|
|
$ |
(0.89 |
) |
|
$ |
5.16 |
|
See
notes to consolidated financial statements.
WELLCARE
HEALTH PLANS, INC.
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
AND
COMPREHENSIVE INCOME
(In
thousands, except share data)
|
|
Common Stock
|
|
|
Paid in
|
|
|
Retained
|
|
|
Accumulated
Other
Comprehensive
|
|
|
Total
Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
Equity
|
|
Balance
at January 1, 2007
|
|
|
40,900,134 |
|
|
$ |
409 |
|
|
$ |
297,351 |
|
|
$ |
239,238 |
|
|
$ |
61 |
|
|
$ |
537,059 |
|
Common
stock issued for stock options
|
|
|
786,109 |
|
|
|
8 |
|
|
|
17,191 |
|
|
|
|
|
|
|
|
|
|
|
17,199 |
|
Issuance
of common stock
|
|
|
5,529 |
|
|
|
— |
|
|
|
488 |
|
|
|
|
|
|
|
|
|
|
|
488 |
|
Purchase
of treasury stock
|
|
|
(58,742 |
) |
|
|
(1 |
) |
|
|
(4,845 |
) |
|
|
|
|
|
|
|
|
|
|
(4,846 |
) |
Restricted
stock grants net of forfeitures
|
|
|
279,206 |
|
|
|
3 |
|
|
|
7,831 |
|
|
|
|
|
|
|
|
|
|
|
7,834 |
|
Other
equity-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
10,906 |
|
|
|
|
|
|
|
|
|
|
|
10,906 |
|
Incremental
tax benefit from option exercises
|
|
|
|
|
|
|
|
|
|
|
23,108 |
|
|
|
|
|
|
|
|
|
|
|
23,108 |
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
216,236 |
|
|
|
|
|
|
|
216,236 |
|
Change
in unrealized gain (loss) on investments, net of deferred taxes of
$327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(93 |
) |
|
|
(93 |
) |
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
216,143 |
|
Balance
at December 31, 2007
|
|
|
41,912,236 |
|
|
$ |
419 |
|
|
$ |
352,030 |
|
|
$ |
455,474 |
|
|
$ |
(32 |
) |
|
$ |
807,891 |
|
Common
stock issued for stock options
|
|
|
108,268 |
|
|
|
2 |
|
|
|
1,039 |
|
|
|
|
|
|
|
|
|
|
|
1,041 |
|
Purchase
of treasury stock
|
|
|
(77,257 |
) |
|
|
(1 |
) |
|
|
(2,720 |
) |
|
|
|
|
|
|
|
|
|
|
(2,721 |
) |
Restricted
stock grants net of forfeitures
|
|
|
318,098 |
|
|
|
3 |
|
|
|
20,935 |
|
|
|
|
|
|
|
|
|
|
|
20,938 |
|
Other
equity-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
17,679 |
|
|
|
|
|
|
|
|
|
|
|
17,679 |
|
Incremental
tax benefit from option exercises
|
|
|
|
|
|
|
|
|
|
|
1,563 |
|
|
|
|
|
|
|
|
|
|
|
1,563 |
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(36,833 |
) |
|
|
|
|
|
|
(36,833 |
) |
Change
in unrealized gain (loss) on investments, net of deferred taxes of
$2,439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,729 |
) |
|
|
(3,729 |
) |
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(40,562 |
) |
Balance
at December 31, 2008
|
|
|
42,261,345 |
|
|
$ |
423 |
|
|
$ |
390,526 |
|
|
$ |
418,641 |
|
|
$ |
(3,761 |
) |
|
$ |
805,829 |
|
Common
stock issued for stock options
|
|
|
80,054 |
|
|
|
1 |
|
|
|
1,167 |
|
|
|
|
|
|
|
|
|
|
|
1,168 |
|
Purchase
of treasury stock
|
|
|
(154,807 |
) |
|
|
(2 |
) |
|
|
(2,413 |
) |
|
|
|
|
|
|
|
|
|
|
(2,415 |
) |
Restricted
stock grants and RSU vesting, net of forfeitures
|
|
|
174,615 |
|
|
|
2 |
|
|
|
25,674 |
|
|
|
|
|
|
|
|
|
|
|
25,676 |
|
Other
equity-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
18,475 |
|
|
|
|
|
|
|
|
|
|
|
18,475 |
|
Incremental
tax benefit (decrement) from option exercises
|
|
|
|
|
|
|
|
|
|
|
(8,346 |
) |
|
|
|
|
|
|
|
|
|
|
(8,346 |
) |
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,871 |
|
|
|
|
|
|
|
39,871 |
|
Change
in unrealized gain (loss) on investments, net of deferred taxes of
$1,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
642 |
|
|
|
642 |
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,513 |
|
Balance
at December 31, 2009
|
|
|
42,361,207 |
|
|
$ |
424 |
|
|
$ |
425,083 |
|
|
$ |
458,512 |
|
|
$ |
(3,119 |
) |
|
$ |
880,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
notes to consolidated financial statements.
WELLCARE
HEALTH PLANS, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands)
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Cash
from (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
39,871 |
|
|
$ |
(36,833 |
) |
|
$ |
216,236 |
|
Adjustments
to reconcile net income (loss) to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
23,336 |
|
|
|
21,324 |
|
|
|
18,757 |
|
Goodwill
impairment
|
|
|
— |
|
|
|
78,339 |
|
|
|
— |
|
Equity-based
compensation expense
|
|
|
44,149 |
|
|
|
38,614 |
|
|
|
18,737 |
|
Incremental
tax benefit from option exercises
|
|
|
— |
|
|
|
(3,686 |
) |
|
|
(23,108 |
) |
Deferred
taxes, net
|
|
|
(4,202 |
) |
|
|
(49,402 |
) |
|
|
(7,707 |
) |
Provision
for doubtful receivables
|
|
|
1,945 |
|
|
|
27,313 |
|
|
|
38,941 |
|
Changes
in operating accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium
and other receivables, net
|
|
|
(74,014 |
) |
|
|
70,513 |
|
|
|
(226,677 |
) |
Other
receivables from government partners, net
|
|
|
(564 |
) |
|
|
(4,780 |
) |
|
|
20,705 |
|
Prepaid
expenses and other current assets, net
|
|
|
28,586 |
|
|
|
(16,663 |
) |
|
|
(26,565 |
) |
Medical
benefits payable
|
|
|
36,336 |
|
|
|
228,033 |
|
|
|
77,418 |
|
Unearned
premiums
|
|
|
9,299 |
|
|
|
61,359 |
|
|
|
16,525 |
|
Accounts
payables and other accrued expenses
|
|
|
(69,440 |
) |
|
|
(38,617 |
) |
|
|
131,413 |
|
Other
payables to government partners
|
|
|
30,047 |
|
|
|
(110,913 |
) |
|
|
(29,593 |
) |
Amounts
accrued related to investigation resolution
|
|
|
8,397 |
|
|
|
50,000 |
|
|
|
— |
|
Taxes,
net
|
|
|
(15,645 |
) |
|
|
20,179 |
|
|
|
15,548 |
|
Other,
net
|
|
|
(176 |
) |
|
|
(38,353 |
) |
|
|
36,971 |
|
Net
cash provided by operations
|
|
|
57,925 |
|
|
|
296,427 |
|
|
|
277,601 |
|
Cash
from (used in) investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of investments
|
|
|
(16,115 |
) |
|
|
(135,607 |
) |
|
|
(205,283 |
) |
Proceeds
from sale and maturities of investments
|
|
|
27,466 |
|
|
|
260,413 |
|
|
|
77,824 |
|
Purchases
of restricted investments
|
|
|
(65,299 |
) |
|
|
(120,116 |
) |
|
|
(39,321 |
) |
Proceeds
from maturities of restricted investments
|
|
|
133,665 |
|
|
|
10,274 |
|
|
|
3,467 |
|
Additions
to property, equipment and capitalized software, net
|
|
|
(16,078 |
) |
|
|
(19,559 |
) |
|
|
(22,892 |
) |
Funds
receivable for the benefit of members
|
|
|
— |
|
|
|
(86,542 |
) |
|
|
— |
|
Net
cash provided by (used in) investing activities
|
|
|
63,639 |
|
|
|
(91,137 |
) |
|
|
(186,205 |
) |
Cash
from (used in) financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from option exercises and other
|
|
|
1,167 |
|
|
|
1,039 |
|
|
|
17,679 |
|
Purchase
of treasury stock
|
|
|
(2,413 |
) |
|
|
(2,720 |
) |
|
|
(4,845 |
) |
Incremental
tax benefit from option exercises
|
|
|
— |
|
|
|
3,686 |
|
|
|
23,108 |
|
Payments
on debt
|
|
|
(152,800 |
) |
|
|
(2,000 |
) |
|
|
(1,600 |
) |
Funds
held for the benefit of members
|
|
|
8,691 |
|
|
|
(31,782 |
) |
|
|
(81,871 |
) |
Net
cash used in financing activities
|
|
|
(145,355 |
) |
|
|
(31,777 |
) |
|
|
(47,529 |
) |
Cash
and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease)
increase during year
|
|
|
(23,791 |
) |
|
|
173,513 |
|
|
|
43,867 |
|
Balance
at beginning of year
|
|
|
1,181,922 |
|
|
|
1,008,409 |
|
|
|
964,542 |
|
Balance
at end of year
|
|
$ |
1,158,131 |
|
|
$ |
1,181,922 |
|
|
$ |
1,008,409 |
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for taxes
|
|
$ |
80,621 |
|
|
$ |
53,911 |
|
|
$ |
116,634 |
|
Cash
paid for interest
|
|
$ |
2,642 |
|
|
$ |
10,150 |
|
|
$ |
12,690 |
|
Non-cash
additions to property, equipment, and capitalized software
|
|
$ |
923 |
|
|
$ |
2,084 |
|
|
$ |
2,285 |
|
See
notes to consolidated financial statements.
WELLCARE
HEALTH PLANS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Year
ended December 31, 2009, 2008, and 2007
(In
thousands, except member and share data)
1.
ORGANIZATION AND BASIS OF PRESENTATION
WellCare
Health Plans, Inc., a Delaware corporation (the “Company,” “we,” “us,” or
“our”), provides managed care services exclusively to government-sponsored
health care programs, focusing on Medicaid and Medicare, including health plans
for families, children, and the aged, blind and disabled, serving approximately
2,321,000 members nationwide as of December 31, 2009. Our Medicaid
plans include plans for recipients of the Temporary Assistance for Needy
Families (“TANF”) programs, Supplemental Security Income (“SSI”) programs, Aged
Blind and Disabled (“ABD”) programs, Children’s Health Insurance Programs
(“CHIP”) and the Family Health Plus (“FHP”) programs. Through our
licensed subsidiaries, as of December 31, 2009, we operated our Medicaid health
plans in Florida, Georgia, Hawaii, Illinois, Missouri, New York and
Ohio. Our Medicare plans include stand-alone prescription drug plans
(“PDP”) and Medicare Advantage (“MA”) plans, which include both Medicare
coordinated care plans (“CCP”) and Medicare private fee-for-service (“PFFS”)
plans. As of December 31, 2009, we offered our CCP plans in
Connecticut, Florida, Georgia, Hawaii, Illinois, Indiana, Louisiana, Missouri,
New Jersey, New York, Ohio and Texas, our PDPs in 50 states and the
District of Columbia and our PFFS plans in 42 states and the District of
Columbia.
Basis
of Presentation
The
consolidated balance sheets, statements of operations, changes in stockholders’
equity and comprehensive income and cash flows include the accounts of WellCare
Health Plans, Inc. and all of its majority-owned subsidiaries. Inter-company
accounts and transactions have been eliminated.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use
of Estimates
The
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America
(“GAAP”). The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying notes. These
estimates are based on knowledge of current events and anticipated future events
and accordingly, actual results may differ from those estimates.
Cash
and Cash Equivalents
Cash and
cash equivalents include cash and short-term investments with original
maturities of three months or less. These amounts are recorded at cost, which
approximates fair value.
Investments
Our fixed
maturity securities are classified as available-for-sale and are reported at
their estimated fair value. Unrealized investment gains and losses on securities
are recorded as a separate component of other comprehensive income or loss, net
of deferred income taxes. The cost of fixed maturity securities is adjusted for
impairments in value deemed to be other-than-temporary. These adjustments are
recorded as investment losses. Investment gains and losses on sales of
securities are determined on a specific identification basis. Our short-term and
restricted investments, excluding treasury bills, are stated at amortized cost,
which approximates fair value. Our long-term investments, which are
comprised of municipal note investments with an auction reset feature (“auction
rate securities”), are stated at market value using a discounted cash flow
analysis.
Our fixed
maturity investments are exposed to four primary sources of investment risk:
credit, interest rate, liquidity and market valuation. The financial statement
risks are those associated with the recognition of impairments and income, as
well as the determination of fair values. The assessment of whether impairments
have occurred is based on management’s case-by-case evaluation of the underlying
reasons for the decline in fair value. Management considers a wide range of
factors about the security issuer and uses its best judgment in evaluating the
cause of the decline in the estimated fair value of the security and in
assessing the prospects for near-term recovery. Inherent in management’s
evaluation of the security are assumptions and estimates about the operations of
the issuer and its future earnings potential. Considerations used by us in the
impairment evaluation process include, but are not
limited to:
(i) the length of time and the extent to which the market value has been below
cost; (ii) the potential for impairments of securities when the issuer is
experiencing significant
financial difficulties; (iii) the potential for impairments in an entire
industry sector or sub-sector; (iv) the potential for impairments in certain
economically depressed geographic locations; (v) the potential for impairments
of securities where the issuer, series of issuers or industry has suffered a
catastrophic type of loss or has exhausted natural resources; (vi) unfavorable
changes in forecasted cash flows on asset-backed securities; and (vii) other
subjective factors, including concentrations and information obtained from
regulators and rating agencies. In addition, the earnings on certain investments
are dependent upon market conditions, which could result in prepayments and
changes in amounts to be earned due to changing interest rates or equity
markets.
Restricted
Investment Assets
Restricted
investment assets consist of cash, cash equivalents, and other short-term
investments required by various state statutes or regulations to be deposited or
pledged to state agencies. Restricted investment assets are classified as
long-term, regardless of the contractual maturity date due to the nature of the
states’ requirements, and are stated at fair value.
Premium
and Other Receivables, net
Premiums
and other receivables consist primarily of premiums due from federal and state
agencies. We perform an analysis of our ability to collect outstanding premium
receivables from federal and state agencies and members based on historical
trends and other factors. Management estimates, on an ongoing basis, the amount
of member billings that may not be fully collectible based on historical trends
and other factors. An allowance is established for the estimated amount that may
not be collectible. Our allowance for uncollectible premiums and other
receivables was approximately $16,216 and $12,485 at December 31, 2009 and 2008,
respectively.
Other
Receivables from Government Partners, net
Other
receivables from government partners represent amounts due from government
agencies acting under the Centers for Medicare & Medicaid Services (“CMS”)
PDP program design. We estimate the amounts due from such third parties and
amounts estimated to be uncollectible are included in our results of operations
as an adjustment to medical benefits expense. Our allowance for uncollectible
other receivables from government partners was approximately $7,789 and $6,400
at December 31, 2009 and 2008, respectively.
Prepaids
and Other Current Assets, net
Prepaids
and other current assets consist of prepaid expenses, sales commission advances,
pharmaceutical rebates receivable, and medical advances. Pharmaceutical rebates
receivable are recorded based upon actual rebate receivables and an estimate of
receivables based upon historical utilization of specific pharmaceuticals,
current utilization and contract terms. Pharmaceutical rebates are recorded as
contra-expense within Medical benefits expense. Medical advances are amounts
advanced to health care providers that are under contract with us to provide
medical services to members. These advances provide funding to providers for
medical benefits payable. We perform an analysis of our ability to collect
outstanding advances and records a provision for these accounts which are judged
to be a collection risk based upon a review of the financial condition and
solvency of the provider. An allowance is established for the estimated amount
that may not be collectible. Our allowance for uncollectible medical and sales
commission advances was approximately $1,400 and $4,575 at December 31, 2009 and
2008, respectively.
Property, Equipment and Capitalized
Software, net
Property,
equipment and capitalized software is stated at cost, less accumulated
depreciation. Capitalized software consists of certain costs incurred in the
development of internal-use software, including external direct costs of
materials and services and payroll costs of employees devoted to specific
software development. Depreciation for financial reporting purposes is computed
using the straight-line method over the estimated useful lives of the related
assets, which is five years for computer equipment, software, furniture and
other equipment. Maintenance and repairs are charged to operating expense when
incurred. Major improvements that extend the useful lives of the assets are
capitalized. On an ongoing basis, we review events or changes in circumstances
that may indicate that the carrying value of an asset may not be recoverable. If
the carrying value of an asset exceeds the sum of estimated undiscounted future
cash flows, then an impairment loss is recognized in the current period for the
difference between estimated fair value and carrying value. If assets are
determined to be recoverable, and the useful lives are shorter than originally
estimated, the net book value of the asset is depreciated over the newly
determined remaining useful lives.
Goodwill
and Other Intangible Assets, net
Goodwill
represents the excess of the cost over the fair market value of net assets
acquired. Our Goodwill and Other intangible assets were obtained as a result of
our purchase transactions and our intangible assets include provider networks,
membership contracts, trademark, non-compete agreements, state contracts,
licenses and permits. Our Other intangible assets are amortized over their
estimated useful lives ranging from approximately one to 26 years.
We review
Goodwill for impairment at least annually, or more frequently if events or
changes in circumstances occur that may affect the estimated useful life or the
recoverability of the remaining balance of goodwill. Events or changes in
circumstances would include significant changes in membership, state funding,
medical contracts and provider networks. We evaluate the impairment
of goodwill and intangible assets using both the income and market
approach. In doing so, we must make assumptions and estimates, such
as the discount factor, in determining the estimated fair values. While we
believe these assumptions and estimates are appropriate, other assumptions and
estimates could be applied and might produce significantly different results. An
impairment loss is recognized for Goodwill and Other intangible assets if the
carrying value of these assets exceeds its fair value. We have
selected the second quarter of each year for our annual impairment test, which
generally coincides with the finalization of contract negotiations and our
initial budgeting process.
Medical
Benefits
The cost
of medical benefits is recognized in the period in which services are provided
and includes an estimate of the cost of medical benefits that have been incurred
but not yet reported. We contract with various health care providers for the
provision of certain medical care services to our members and generally
compensate those providers on a fee-for-service or capitated basis or pursuant
to certain risk-sharing arrangements. Capitation represents fixed payments
generally on a per-member-per-month, or PMPM, basis to participating physicians
and other medical specialists as compensation for providing comprehensive
healthcare services. By the terms of our capitation agreements, capitation
payments we make to capitated providers alleviate any further obligation we have
to pay the capitated provider for the actual medical expenses of the member.
Participating physician capitation payments for the years ended December 31,
2009, 2008 and 2007, were 11%, 12% and 11% of total medical benefits expense,
respectively.
Medical
benefits expense has two main components: direct medical expenses and
medically-related administrative costs. Direct medical expenses include amounts
paid to hospitals, physicians and providers of ancillary services, such as
laboratory and pharmacy. Medically-related administrative costs include items
such as case and disease management, utilization review services, quality
assurance and on-call nurses.
The
medical benefits payable estimate has been and continues to be the most
significant estimate included in our financial statements. We have historically
used, and continues to use, a consistent methodology for estimating our medical
benefits expense and medical benefits payable. Our policy is to record
management’s best estimate of medical benefits payable based on the experience
and information available to us at the time. This estimate is determined
utilizing standard actuarial methodologies based upon historical experience and
key assumptions consisting of trend factors and completion factors using an
assumption of moderately adverse conditions, which vary by business segment.
These standard actuarial methodologies include using, among other factors,
contractual requirements, historic utilization trends, the interval between the
date services are rendered and the date claims are paid, denied claims activity,
disputed claims activity, benefits changes, expected health care cost inflation,
seasonality patterns, maturity of lines of business and changes in
membership.
The factors and assumptions described above 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 experience or
information available to us. The ultimate claims payment amounts, patterns and
trends for new products and geographic areas cannot 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. Conversely, during periods where our products and geographies are more
stable and mature, we use more reliable claims payment patterns and trend
experience. With more reliable data, we should be able to more closely estimate
the ultimate claims payment amounts; therefore, we may experience smaller
differences between our original estimate of medical benefits payable and the
actual claim amounts paid.
In
developing the estimate, we also apply different estimation methods depending on
the month for which incurred claims are being estimated. For the more recent
months, which constitute the majority of the amount of the medical benefits
payable, we estimate claims incurred by applying observed trend factors to the
PMPM costs for prior months, which costs have been estimated using completion
factors, in order to estimate the PMPM costs for the most recent months. We
validate the estimates of the most recent PMPM costs by comparing the most
recent months’ utilization levels to the utilization levels in older months and
actuarial techniques that incorporate a historical analysis of claim payments,
including trends in cost of care provided and timeliness of submission and
processing of claims.
Many
aspects of the managed care business are not predictable. These aspects include
the incidences of illness or disease state (such as cardiac heart failure cases,
cases of upper respiratory illness, the length and severity of the flu season,
diabetes, the number of full-term versus premature births and the number of
neonatal intensive care babies). Therefore, we must rely upon historical
experience, as continually monitored, to reflect the ever-changing mix, needs
and growth of our membership in our trend assumptions. Among the factors
considered by management are changes in the level of benefits provided to
members, seasonal variations in utilization, identified industry trends and
changes in provider reimbursement arrangements, including changes in the
percentage of reimbursements made on a capitation as opposed to a
fee-for-service basis. These considerations are aggregated in the trend in
medical benefits expense. Other external factors such as government-mandated
benefits or other regulatory changes, catastrophes and epidemics may impact
medical cost trends. Other internal factors such as system conversions and
claims processing interruptions may impact our ability to accurately predict
estimates of historical completion factors or medical cost trends. Medical cost
trends potentially are more volatile than other segments of the economy.
Management is required to use considerable judgment in the selection of medical
benefits expense trends and other actuarial model inputs.
Also
included in medical benefits payable are estimates for provider settlements due
to clarification of contract terms, out-of-network reimbursement, claims payment
differences as well as amounts due to contracted providers under risk-sharing
arrangements. We record reserves for estimated referral claims related to health
care providers under contract with us who are financially troubled or insolvent
and who may not be able to honor their obligations for the costs of medical
services provided by other providers. In these instances, we may be required to
honor these obligations for legal or business reasons. Based on our current
assessment of providers under contract with us, such losses have not been and
are not expected to be significant.
Changes
in medical benefits payable estimates are primarily the result of obtaining more
complete claims information and medical expense trend data over time. Volatility
in members’ needs for medical services, provider claims submissions and our
payment processes result in identifiable patterns emerging several months after
the causes of deviations from assumed trends occur. Since our estimates are
based upon PMPM claims experience, changes cannot typically be explained by any
single factor, but are the result of a number of interrelated variables, all
influencing the resulting experienced medical cost trend. Differences in our
financial statements between actual experience and estimates used to establish
the liability, which we refer to as prior period developments, are recorded in
the period when such differences become known, and have the effect of increasing
or decreasing the reported medical benefits expense and resulting MBR in such
periods.
We have
historically 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 became available due to the substantial lapse in time
between December 31, 2007 and the date of filing of the 2007 Form 10-K. We
determined that the claims information that became available provided additional
evidence about conditions that existed with respect to medical benefits payable
at the December 31, 2007 balance sheet date and was 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 were
substantially based on actual claims paid. The difference between our
substantially complete claims information for the year ended December 31, 2007
and the amount that would have resulted from using the Company’s original
actuarially determined estimate was approximately $92,900. Thus, Medical
benefits expense and medical benefits payable for the year ended December 31,
2007 include the effect of using actual claims paid.
Other
Payables Due to Government Partners
Other
payables due to government partners represent amounts due to government agencies
under various contractual and plan arrangements. We estimate the amounts due to
or from CMS for risk protection under the risk corridor provisions of our
contract with CMS each period based on pharmacy claims experience and such
amounts are included in our results of operations as adjustments to premium
revenues. Risk corridor estimates may result in CMS making additional payments
to us or require us to refund to CMS a portion of the premiums we received, both
of which are included in Other payables due to government partners. Other
amounts included in this balance represent the return of premium associated with
certain of our Medicaid contracts. These contracts require us to expend a
minimum percentage of premiums on eligible medical expense, and to the extent
that we expend less than the minimum percentage of the premiums on eligible
medical expense, we are required to refund all or some portion of the difference
between the minimum and our actual allowable medical expense. We estimate the
amounts due to the state as a return of premium each period based on the terms
of our contract with the applicable state agency and such amounts are also
included in our results of operations as reductions of premium
revenues.
Funds
Receivable/Held for the Benefit of Members
Funds
held or receivable for the benefit of members represent government payments
received or to be received to subsidize the member portion of medical payments
for certain of our PDP members. As we do not bear underwriting risk, these funds
are not included in our results of operations since such funds represent
pass-through payments from our government partners to fund deductibles,
co-payments and other participant benefits. At the end of the contract year, CMS
will settle with us for the difference in amounts actually used for these
enhanced benefits versus amounts received from CMS, which may result in the
return of funds to CMS or receipt of additional funds by us.
Income
Taxes
Deferred
tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis. Deferred tax assets and liabilities are measured using tax rates expected
to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. A valuation allowance is recognized when,
based on available evidence, it is more likely than not that the deferred tax
assets may not be realized.
Revenue
Recognition
Our
Medicaid contracts with state governments are generally multi-year contracts
subject to annual renewal provisions. Our Medicare Advantage and PDP contracts
with CMS generally have terms of one year. We generally receive premiums in
advance of providing services, and recognize premium revenue during the period
in which we are obligated to provide services to our members. Premiums are
billed monthly for coverage in the following month and are recognized as revenue
in the month for which insurance coverage is provided. We estimate, on an
ongoing basis, the amount of member billings that may not be fully collectible
or that will be returned based on historical trends anticipated and actual MBRs
and other factors. An allowance is established for the estimated amount that may
not be collectible and a liability established for premiums expected to be
returned. The allowance has not been significant to premium revenue. The payment
we receive monthly from CMS for our PDP program generally represents our bid
amount for providing prescription drug insurance coverage. We recognize premium
revenue for providing this insurance coverage ratably over the term of our
annual contract. Premiums collected in advance are deferred and reported as
unearned premiums in the accompanying consolidated balance sheets and amounts
that have not been received by the end of the period remain on the balance sheet
classified as premium receivables.
Premium payments that we receive are based upon eligibility lists produced by
the government. From time to time, the states or CMS require us to reimburse
them for premiums that we received based on an eligibility list that a state or
CMS later discovers contains individuals who were not eligible for any
government-sponsored program or are eligible for a different premium category,
different program, or belong to a different plan other than ours. We record
adjustments to revenues based on member retroactivity, if deemed material. These
adjustments reflect changes in the number of and eligibility status of enrollees
subsequent to when revenue was billed. We estimate the amount of outstanding
retroactivity adjustments each period and adjust premium revenue accordingly; if
appropriate, the estimates of retroactivity adjustments are based on historical
trends, premiums billed, the volume of member and contract renewal activity and
other information. Changes in member retroactivity adjustment estimates had a
minimal impact on adjustments recorded during the periods presented. Our
government contracts establish monthly rates per member, but may have additional
amounts due to us based on items such as age, working status or medical
history.
CMS
employs a risk-adjustment model to determine the premium amount for each
member. This model apportions premiums paid to all MA plans according
to the health status of each beneficiary enrolled. Under the risk-adjustment
model, the settlement payment is based on each member’s preceding year’s medical
diagnosis data. The final settlement payment amount under the risk-adjustment
model is made in August of the following year, allowing for the majority of
medical claims for that year to be adjudicated and paid. As a result of this
process, the CMS monthly premium payments per member may change materially,
either favorably or unfavorably.
The CMS
risk adjustment model pays more for Medicare members with predictably higher
costs. Diagnosis data from inpatient and ambulatory treatment settings are used
to calculate the risk adjusted premium payment to us. We collect claims and
encounter data and submit the necessary diagnosis data to CMS within prescribed
deadlines. We estimate risk adjustments to revenues based upon the diagnosis
data submitted to CMS and ultimately accepted by CMS, and record such
adjustments in our results of operations. However, due to the variability of the
assumptions that we use in our estimates, the actual results may differ from the
amounts that management estimated. If our estimates are materially incorrect, it
may have an adverse effect on our results of operations in future periods.
Historically, we have not experienced significant differences between the
amounts that we have recorded and the revenues that we actually
received. The claims and encounter data submitted to CMS to determine
our risk-adjusted premium are subject to audit by CMS subsequent to the annual
settlement.
CMS has
begun a program to perform audits of selected MA plans to validate the provider
coding practices under the risk-adjustment model used to calculate the premium
paid for each MA member. Our Florida HMO contract has been selected by CMS for
audit for the 2007 contract year and we anticipate that CMS will conduct
additional audits of other contract and contract years on an ongoing basis. The
CMS audit of this data involves a review of a sample of provider medical records
for the contract under audit. We are unable to estimate the financial impact of
any audit that is underway or that may be conducted in the future. We are also
unable to determine whether any conclusions that CMS may make, based on the
audit of our plan and others, will cause us to change our revenue estimation
process. At this time, we do not know whether CMS will require retroactive or
subsequent payment adjustments to be made using an audit methodology that may
not compare the coding of our providers to the coding of Original Medicare and
other MA plan providers, and how, if at all, CMS will extrapolate its findings
to the entire contract. However, it is reasonably possible that a payment
adjustment as a result of these audits could occur, and that any such adjustment
could have a material adverse effect on our results of operations, financial
position, and cash flows, possibly in 2010 and beyond.
Reinsurance
Certain
premiums and medical benefits are ceded to other insurance companies under
various reinsurance agreements. The ceded reinsurance agreements provide us with
increased capacity to write larger risks and maintain our exposure to loss
within our capital resources. We are contingently liable in the event that the
reinsurers do not meet their contractual obligations.
Reinsurance
premiums and medical expense recoveries are accounted for consistently with the
accounting for the underlying contract and other terms of the reinsurance
contracts. We made premium payments of $1,580, $1,729 and $1,286 for the years
ended December 31, 2009, 2008 and 2007, respectively. We had recoveries of $821,
$174 and $315 for the years ended December 31, 2009, 2008 and 2007,
respectively.
Member
Acquisition Costs
Member
acquisition costs consist of both internal and external agent commissions,
policy issuance and other administrative costs that we incur to acquire new
members. Member acquisition costs are expensed in the period in which they are
incurred.
Advertising
We
expense the production costs of advertising as incurred. Costs of communicating
an advertising campaign are expensed in the period the advertising takes place.
Advertising expense was $8,028, $12,330 and $11,583 for the years ended December
31, 2009, 2008 and 2007, respectively.
Premium
Taxes Remitted to Governmental Authorities
Certain
state agencies assess a tax on premiums remitted to us which are recorded as
expense when incurred. As of September 2009, the state of Georgia no longer
assesses taxes on premiums remitted to us, which results in a corresponding
reduction to Premium revenues and Selling, general and administrative
expenses. However, we are assessed and remit taxes on premiums in
Hawaii, Ohio and Missouri. The amounts of these taxes were $91,026,
$90,200 and $81,971 for the years ended December 31, 2009, 2008 and 2007,
respectively.
Equity-Based
Employee Compensation
We
recognize equity-based compensation using the fair value provisions as outlined
in the authoritative guidance prescribed by the Financial Accounting Standards
Board (“FASB”). Accordingly, compensation cost for stock options, restricted
stock and performance shares is calculated based on the fair value at the time
of the grant and is recognized as expense over the vesting period of the
instrument.
Accumulated
Other Comprehensive Income
Accumulated
other comprehensive income consists of unrealized gains and losses on
investments that are not recorded in the statements of operations but instead
are recorded directly to stockholders’ equity. Our components of Accumulated
other comprehensive income include net unrealized gains/(losses) on
available-for-sale securities, net of taxes.
Fair
Value Information
Our
Consolidated Balance Sheets include the following financial instruments: cash
and cash equivalents, receivables, investments, accounts payable, medical
benefits payable and notes payable. The carrying amounts of current assets and
liabilities approximate their fair value because of the relatively short period
of time between the origination of these instruments and their expected
realization. The carrying value of our term loan approximated its fair value and
was repaid in full during 2009.
Recently
Issued Accounting Standards
In
January 2010, the FASB issued authoritative guidance related to improving
disclosures about fair value measurements. This standard requires
reporting entities to make new disclosures about recurring or nonrecurring
fair-value measurements including significant transfers into and out of Level 1
and Level 2 fair value measurements and information on purchases, sales,
issuances and settlements on a gross basis in the reconciliation of Level 3 fair
value measurements. This standard is effective for annual reporting periods
beginning after December 15, 2009, except for Level 3 reconciliation disclosures
which are effective for annual periods beginning after December 15, 2010. The
adoption will not have a material impact on our financial statements in
2010.
In
December 2009, the FASB issued an update to codify standards in the
authoritative guidance it previously issued in June 2009, which addressed the
modification of financial reporting by enterprises involved with variable
interest entities (“VIE”). This update requires a qualitative approach to
identifying a controlling financial interest in a VIE, and requires ongoing
assessments of whether an entity is a VIE and whether an interest in a VIE makes
the holder the primary beneficiary of the VIE. This pronouncement is effective
for annual reporting periods beginning after November 15, 2009. The
adoption of this guidance is not currently expected to have a material effect on
our financial statements.
In August
2009, the FASB issued authoritative guidance surrounding the fair value
measurements and disclosures of liabilities. This guidance provides
clarification in circumstances where a quoted market price in an active market
for an identical liability is not available, a reporting entity is required to
measure the fair value of the liability using either: (1) the quoted price of
the identical liability when traded as an asset; (2) the quoted prices for
similar liabilities or similar liabilities when traded as assets; or (3) another
valuation technique, such as a present value calculation or the amount that the
reporting entity would pay to transfer the identical liability or would receive
to enter into the identical liability. This statement becomes effective for the
first reporting period (including interim periods) beginning after issuance. We
adopted this guidance during the third quarter of 2009, as
required. The adoption did not have a material impact on our
financial statements.
In June
2009, the FASB issued authoritative guidance serving as the single source of
authoritative non-governmental U.S. GAAP (the “Codification”), superseding
various existing authoritative accounting pronouncements. The Codification now
establishes one level of authoritative GAAP. All other literature is considered
non-authoritative. This Codification was launched on July 1, 2009 and is
effective for financial statements issued for interim and annual periods ending
after September 15, 2009. We have adopted the Codification during the third
quarter of 2009. However, there were no changes to our consolidated financial
statements due to the implementation of the Codification other than changes in
reference to various authoritative accounting pronouncements in our consolidated
financial statements.
In June
2009, the FASB issued authoritative guidance to modify financial reporting by
enterprises involved with variable interest entities by addressing the effects
on certain provisions of previously issued guidance on the consolidation of
variable interest entities (“VIE”), as a result of eliminating the qualifying
special-purpose entity (“SPE”) concept in accounting for transfers of financial
assets, and (2) constituent concerns about the application of certain key
provisions of previously issued guidance on VIEs, including those in which the
accounting and disclosures do not always provide timely and useful information
about an enterprise’s involvement in a VIE. This guidance shall be effective as
of January 1, 2010, our first annual reporting period beginning after November
15, 2009. Earlier application is prohibited. The adoption of
this guidance is not currently expected to have a material effect on our
financial statements.
In June
2009, the FASB issued authoritative guidance modifying the relevance,
representational faithfulness and comparability of the information that a
reporting entity provides in its financial statements about a transfer of
financial assets; the effects of a transfer on its financial position, financial
performance, and cash flows; and a transferor’s continuing involvement, if any,
in transferred financial assets. The FASB undertook this project to
address: (1) practices that have developed since the issuance of previous
guidance concerning the accounting for transfers and servicing of financial
assets and extinguishments of liabilities, that are not consistent with the
original intent and key requirements of that statement and (2) concerns of
financial statement users that many of the financial assets (and related
obligations) that have been derecognized should continue to be reported in the
financial statements of transferors. This guidance must be applied as of
January 1, 2010, the beginning of our first annual reporting period after
November 15, 2009. Earlier application is prohibited. This guidance must
also be applied to transfers occurring on or after the effective
date. Additionally, on and after the effective date, the concept of a
qualifying SPE is no longer relevant for accounting purposes. Therefore, a
formerly qualifying SPE should be evaluated for consolidation by reporting
entities on and after the effective date in accordance with the applicable
consolidation guidance. If the evaluation on the effective date results in
consolidation, the reporting entity should apply the transition guidance
provided in the pronouncement that requires consolidation. The disclosure
provisions of this guidance should be applied to transfers that occurred both
before and after the effective date of this statement. The adoption is not
currently expected to have a material effect on our financial
statements.
In May
2009, the FASB issued authoritative guidance that provides general standards of
accounting for and disclosure of events that occur after the balance sheet date
but before financial statements are issued or are available to be issued. The
guidance sets forth the period after the balance sheet date during which
management of a reporting entity should evaluate events or transactions that may
occur for potential recognition or disclosure in the financial statements. The
guidance also sets forth the circumstances under which an entity should
recognize events or transactions occurring after the balance sheet date in its
financial statements. Furthermore, this guidance identifies the
disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. We adopted this guidance as required in
the second quarter of 2009.
In April
2009, the FASB issued authoritative guidance on the recognition and presentation
of other-than-temporary impairments (“OTTI”) modifying previous OTTI guidance
for debt securities through increased consistency in the timing of impairment
recognition and enhanced disclosures related to the credit and noncredit
components of impaired debt securities that are not expected to be
sold. In addition, increased disclosures are required for both debt
and equity securities regarding expected cash flows, credit losses, and an aging
of securities with unrealized losses. We adopted this guidance during
the second quarter of 2009, as required. The adoption did not have a
material impact on our financial statements.
In April
2009, the FASB issued authoritative guidance that requires fair value
disclosures for financial instruments that are not reflected in the Consolidated
Balance Sheets at fair value. Prior to the issuance of this guidance,
the fair values of those assets and liabilities were disclosed only once each
year. We now disclose this information on a quarterly basis,
providing quantitative and qualitative information about fair value estimates
for all financial instruments not measured in the Consolidated Balance Sheets at
fair value. We adopted this guidance during the second quarter of
2009, as required. The adoption did not have a material impact on our
financial statements.
In
April 2009, the FASB issued authoritative guidance in regard to (1) determining
fair value when the volume and level of activity for the asset or liability has
significantly decreased and (2) identifying transactions that are considered not
orderly. This guidance specifically clarifies the methodology used to
determine fair value when there is no active market or where the price inputs
being used represent distressed sales. The guidance also reaffirms
the objective of a fair value measurement, which is to reflect how much an asset
would be sold for in an orderly transaction. It also reaffirms the
need to use judgment to determine if a formerly active market has become
inactive, as well as to determine fair values when markets have become
inactive. This guidance was adopted and applied prospectively during
the second quarter of 2009, as required. The adoption did not have a
material impact on our financial statements.
3.
NET INCOME (LOSS) PER COMMON SHARE
We
compute basic net income (loss) per common share on the basis of the weighted
average number of unrestricted common shares outstanding. Diluted net income
(loss) per common share is computed on the basis of the weighted average number
of unrestricted common shares outstanding plus the dilutive effect of
outstanding stock options and share awards using the treasury stock
method.
The
following table presents the calculation of net income (loss) per common share —
basic and diluted:
|
|
Year
Ended
December
31,
2009
|
|
|
Year
Ended
December
31,
2008
|
|
|
Year
Ended
December
31,
2007
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net
income (loss)— basic and diluted
|
|
$ |
39,871 |
|
|
$ |
(36,833 |
) |
|
$ |
216,236 |
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding — basic
|
|
|
41,823,497 |
|
|
|
41,396,116 |
|
|
|
40,705,454 |
|
Dilutive
effect of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested
restricted common shares and units
|
|
|
248,275 |
|
|
|
— |
|
|
|
377,786 |
|
Stock
options
|
|
|
78,405 |
|
|
|
— |
|
|
|
857,368 |
|
Weighted
average common shares outstanding — diluted
|
|
|
42,150,777 |
|
|
|
41,396,116 |
|
|
|
41,940,608 |
|
Net
income (loss) per common share — basic
|
|
$ |
0.95 |
|
|
$ |
(0.89 |
) |
|
$ |
5.31 |
|
Net
income (loss) per common share — diluted
|
|
$ |
0.95 |
|
|
$ |
(0.89 |
) |
|
$ |
5.16 |
|
Certain
options to purchase common stock were not included in weighted-average common
shares outstanding—diluted and therefore are not included in the calculation of
diluted net income (loss) per common share because their exercise prices were
greater than the average market price of our common stock for the period and,
therefore, the effect would be anti-dilutive. For the twelve months ended
December 31, 2009, approximately 648,893 restricted equity awards as well as
1,702,657 options with exercise prices ranging from $19.38 to $91.64 per share
were excluded from diluted weighted-average common shares outstanding. Due to
the net loss for the year ended December 31, 2008, the assumed exercise of
5,443,934 equity awards had an antidilutive effect and are therefore excluded
from the computation of diluted loss per share. For the year ended December 31,
2007, approximately 512,600 shares were excluded from diluted weighted average
common shares outstanding.
4.
MEDICAL BENEFITS PAYABLE
Medical
benefits payable includes reserves for claims adjudicated, but not yet
paid, an estimate of claims incurred but not reported, reserves
for medically-related administrative costs and other
liabilities, including estimates for provider settlements due to
clarification of contract terms, out-of-network reimbursement, claims payment
differences and amounts due to contracted providers under
risk-sharing arrangements. The following table provides a
reconciliation of the beginning and ending balance of medical benefits payable
for the following periods:
|
|
Year
Ended
December
31, 2009
|
|
|
Year
Ended
December
31,
2008
|
|
|
Year
Ended
December
31,
2007
|
|
Balances
as of beginning of period
|
|
$ |
766,179 |
|
|
$ |
538,146 |
|
|
$ |
460,728 |
|
Medical
benefits incurred related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
period
|
|
|
5,983,537 |
|
|
|
5,538,262 |
|
|
|
4,313,581 |
|
Prior
periods
|
|
|
(121,080 |
) |
|
|
(8,046 |
) |
|
|
(100,197 |
) |
Total
|
|
|
5,862,457 |
|
|
|
5,530,216 |
|
|
|
4,213,384 |
|
Medical
benefits paid related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
period
|
|
|
(5,250,859 |
) |
|
|
(4,848,440 |
) |
|
|
(3,781,425 |
) |
Prior
periods
|
|
|
(575,262 |
) |
|
|
(453,743 |
) |
|
|
(354,541 |
) |
Total
|
|
|
(5,826,121 |
) |
|
|
(5,302,183 |
) |
|
|
(4,135,966 |
) |
Balances
as of end of period
|
|
$ |
802,515 |
|
|
$ |
766,179 |
|
|
$ |
538,146 |
|
Changes in Medical benefits payable estimates are primarily the result of
obtaining more complete claims information and medical expense trend data over
time. Differences in our financial statements between actual experience and
estimates used to establish the liability, which we refer to as prior period
developments, are recorded in the period when such differences become known, and
have the effect of increasing or decreasing the reported Medical benefits
expense and resulting MBR in such periods.
Medical
benefits payable recorded at December 31, 2008, 2007 and 2006 developed
favorably by approximately $121,080, $8,046 and $100,197 in 2009, 2008 and 2007,
respectively. These prior period developments were primarily attributable
to the release of the provision for moderately adverse conditions, which is
included as part of the assumptions, and favorable variances between actual
experience and key assumptions relating to trend factors and
completion factors for claims incurred in prior years. The release of
the provision for moderately adverse conditions was substantially offset by
the provision for moderately adverse conditions established for claims
incurred in the current year. Accordingly, the change in the amount of
the incurred claims related to prior years in the Medical benefits
payable does not directly correspond to an increase in net income
recognized during the period.
We
consistently recognize the actuarial best estimate of the ultimate Medical
benefits payable within a level of confidence, as required by
actuarial standards of practice, which require that the Medical benefits
payable be adequate under moderately adverse conditions. As we establish
the liability for each year, we ensure that our assumptions appropriately
consider moderately
adverse conditions. When a portion of the development related to the prior year
incurred claims is offset by an increase
determined appropriate to address moderately adverse conditions for the current
year incurred claims, we do not consider that offset amount as having any impact
on net income during the period.
5.
|
GOODWILL AND INTANGIBLE
ASSETS
|
Goodwill
Goodwill
balances and the changes therein are as follows:
Balance
as of December 31, 2007
|
|
$ |
189,470 |
|
Goodwill
impairment during the year ended 2008
|
|
|
(78,339 |
) |
Balance
as of December 31, 2008
|
|
|
111,131 |
|
Change
in Goodwill during the year ended 2009
|
|
|
— |
|
Balance
as of December 31, 2009
|
|
$ |
111,131 |
|
Based on
the general economic conditions and outlook, we performed an analysis of the
underlying valuation of Goodwill at December 31, 2009 and 2008, respectively.
Based on the valuation performed, we have assessed the book value of Goodwill
and believe that such assets have not been impaired as of December 31, 2009.
However, in 2008, we determined that the Goodwill associated with our Medicare
reporting unit was impaired. The impairment to our Medicare reporting unit was
due to, among other things, the anticipated operating environment resulting from
regulatory changes and new health care legislation, and the resulting effects on
our future membership trends. We recorded expense of $78,339 to Goodwill
impairment included in the Statement of operations, and a corresponding amount
to Goodwill to reflect its fair value as presented in the Consolidated Balance
Sheet. At December 31, 2009 and 2008, Goodwill of $111,131 was solely assigned
to the Medicaid reporting unit for each year.
Intangibles
We
acquired intangible assets as a result of the acquisitions of our subsidiaries.
Intangible assets include provider networks, membership contracts, trademark,
non-compete agreements, government contracts, licenses and permits.
The following is a summary of the acquired intangible assets resulting from
business acquisitions as of December 31, 2009 and 2008 as follows:
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
Provider
network
|
|
$ |
4,878 |
|
|
$ |
(3,909 |
) |
|
$ |
4,878 |
|
|
$ |
(3,647 |
) |
Membership
contracts
|
|
|
11,960 |
|
|
|
(11,960 |
) |
|
|
11,960 |
|
|
|
(11,960 |
) |
Trademark
|
|
|
10,443 |
|
|
|
(4,718 |
) |
|
|
10,443 |
|
|
|
(4,022 |
) |
Non-compete
agreements
|
|
|
3,972 |
|
|
|
(3,972 |
) |
|
|
3,972 |
|
|
|
(3,972 |
) |
Licenses
and permits
|
|
|
5,270 |
|
|
|
(1,455 |
) |
|
|
5,270 |
|
|
|
(1,103 |
) |
State
contracts
|
|
|
3,336 |
|
|
|
(884 |
) |
|
|
3,336 |
|
|
|
(662 |
) |
|
|
$ |
39,859 |
|
|
$ |
(26,898 |
) |
|
$ |
39,859 |
|
|
$ |
(25,366 |
) |
Amortization
expense for the years ended December 31, 2009, 2008 and 2007 was $1,532, $1,793
and $2,569, respectively. Amortization expense expected to be recognized during
fiscal years subsequent to December 31, 2009 is as follows:
2010
|
|
$ |
1,532 |
|
2011
|
|
|
1,532 |
|
2012
|
|
|
1,413 |
|
2013
|
|
|
1,413 |
|
2014
|
|
|
1,413 |
|
2015 and
thereafter
|
|
|
5,658 |
|
|
|
$ |
12,961 |
|
The
weighted-average amortization periods of the acquired intangible assets
resulting from the business acquisitions are as follows:
|
Weighted-Average
|
|
Amortization
Period
|
|
(in
Years)
|
Provider
network
|
11.2
|
Membership
contracts
|
4.5
|
Trademark
|
15.1
|
Non-compete
agreements
|
4.9
|
Licenses
and permits
|
15.0
|
State
contracts
|
15.0
|
Total
intangibles
|
10.4
|
6.
INVESTMENTS
Short
– term investments
The
amortized cost, gross unrealized gains, gross unrealized losses and fair value
of available-for-sale short-term investments are as follows at December 31, 2009
and 2008.
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair Value
|
|
December
31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal
variable rate bonds
|
|
$ |
3,815 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
3,815 |
|
Certificates
of deposit
|
|
|
58,907 |
|
|
|
— |
|
|
|
— |
|
|
|
58,907 |
|
|
|
$ |
62,722 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
62,722 |
|
December
31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal
variable rate bonds
|
|
$ |
3,925 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
3,925 |
|
Certificates
of deposit
|
|
|
66,187 |
|
|
|
— |
|
|
|
— |
|
|
|
66,187 |
|
|
|
$ |
70,112 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
70,112 |
|
Contractual
maturities of available-for-sale short-term investments are as
follows:
|
|
Total
|
|
|
Within
1
Year
|
|
|
1
Through 5
Years
|
|
|
5
Through 10
Years
|
|
|
Thereafter
|
|
December
31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal
variable rate bonds
|
|
$ |
3,815 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
1,150 |
|
|
$ |
2,665 |
|
Certificates
of deposit
|
|
|
58,907 |
|
|
|
58,785 |
|
|
|
122 |
|
|
|
— |
|
|
|
— |
|
|
|
$ |
62,722 |
|
|
$ |
58,785 |
|
|
$ |
122 |
|
|
$ |
1,150 |
|
|
$ |
2,665 |
|
Actual
maturities may differ from contractual maturities due to the exercise of
pre-payment options.
Available-for-sale
investments are accounted for using a specific identification basis. During the
years ended December 31, 2009 and 2008, bond investments totaling $4,500 and
$254,353, respectively, were sold. There were no realized gains or losses
recorded as of December 31, 2009 and 2008, and a $93 realized gain was recorded
in 2007.
Excluding
investments in U.S. Treasury securities, we are not exposed to any significant
concentration of credit risk in our fixed maturities portfolio.
Long
– term investments
The
amortized cost, gross unrealized gains, gross unrealized losses and fair value
of available-for-sale long-term investments are as follows at December 31, 2009
and 2008, as summarized below.
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair Value
|
|
December
31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal
auction rate securities
|
|
$ |
57,000 |
|
|
$ |
— |
|
|
$ |
5,290 |
|
|
$ |
51,710 |
|
|
|
$ |
57,000 |
|
|
$ |
— |
|
|
$ |
5,290 |
|
|
$ |
51,710 |
|
December
31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal
auction rate securities
|
|
$ |
61,400 |
|
|
$ |
— |
|
|
$ |
6,428 |
|
|
$ |
54,972 |
|
|
|
$ |
61,400 |
|
|
$ |
— |
|
|
$ |
6,428 |
|
|
$ |
54,972 |
|
Contractual
maturities of available-for-sale long-term investments are as
follows:
|
|
Total
|
|
|
Within
1 Year
|
|
|
1
Through 5
Years
|
|
|
5
Through 10
Years
|
|
|
Thereafter
|
|
December
31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal
auction rate securities
|
|
$ |
51,710 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
6,433 |
|
|
$ |
45,277 |
|
|
|
$ |
51,710 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
6,433 |
|
|
$ |
45,277 |
|
Actual
maturities may differ from contractual maturities due to the exercise of
pre-payment options.
Excluding
investments in U.S. Treasury securities, we are not exposed to any significant
concentration of credit risk in our fixed maturities portfolio. However, as of
December 31, 2009, all of our long-term investments were comprised of 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. These notes carry investment grade credit ratings. We have not
realized any losses associated with selling our auction rate securities for the
years ended December 31, 2009, 2008 and 2007. There were
$5,290 and $6,428 of unrealized losses recorded for the years ended December 31,
2009 and 2008, respectively.
7.
RESTRICTED INVESTMENT ASSETS
As a
condition for licensure, we are required to maintain certain funds on deposit or
pledged to various state agencies. Due to the nature of the states’
requirements, these assets are classified as long-term regardless of their
contractual maturity dates. Accordingly, at December 31, 2009 and 2008, the
amortized cost, gross unrealized gains, gross unrealized losses and fair value
of these securities are summarized below.
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair Value
|
|
December
31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$ |
4,651 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
4,651 |
|
Certificates
of deposit
|
|
|
1,051 |
|
|
|
— |
|
|
|
— |
|
|
|
1,051 |
|
Money
market funds
|
|
|
103,873 |
|
|
|
— |
|
|
|
— |
|
|
|
103,873 |
|
Treasury
bills
|
|
|
20,756 |
|
|
|
219 |
|
|
|
— |
|
|
|
20,975 |
|
|
|
$ |
130,331 |
|
|
$ |
219 |
|
|
$ |
— |
|
|
$ |
130,550 |
|
December
31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$ |
5,894 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
5,894 |
|
Certificates
of deposit
|
|
|
1,713 |
|
|
|
— |
|
|
|
— |
|
|
|
1,713 |
|
Money
market funds
|
|
|
171,967 |
|
|
|
— |
|
|
|
— |
|
|
|
171,967 |
|
Treasury
bills
|
|
|
19,123 |
|
|
|
642 |
|
|
|
— |
|
|
|
19,765 |
|
|
|
$ |
198,697 |
|
|
$ |
642 |
|
|
$ |
— |
|
|
$ |
199,339 |
|
Contractual
maturities of available-for-sale restricted investments are as
follows:
|
|
Total
|
|
|
Within
1
Year
|
|
|
1
Through 5
Years
|
|
|
5
Through 10
Years
|
|
|
Thereafter
|
|
December
31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$ |
4,651 |
|
|
$ |
4,651 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Certificates
of deposit
|
|
|
1,051 |
|
|
|
1,051 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Money
market funds
|
|
|
103,873 |
|
|
|
103,873 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Treasury
bills
|
|
|
20,975 |
|
|
|
9,688 |
|
|
|
10,662 |
|
|
|
625 |
|
|
|
— |
|
|
|
$ |
130,550 |
|
|
$ |
119,263 |
|
|
$ |
10,662 |
|
|
$ |
625 |
|
|
$ |
— |
|
No
realized gains or losses were recorded for the years ended December 31, 2009,
2008, or 2007.
8.
FAIR VALUE MEASUREMENTS
Our
Consolidated Balance Sheets include the following financial instruments: cash
and cash equivalents, receivables, investments, accounts payable, medical
benefits payable and notes payable. The carrying amounts of current assets and
liabilities approximate their fair value because of the relatively short period
of time between the origination of these instruments and their expected
realization. The carrying value of our term loan approximated its fair value due
to the loan being in default and, as a result, the lender had the ability to
accelerate the payment of the remaining amounts due from us, which amounts are
equal to the term loan carrying amounts. Additionally, because the term of the
agreement expired in May 2009, the carrying amount of the term loan approximated
its fair value due to the relatively short period of time between December 31,
2008 and the expiration of the term loan agreement. The term loan was
repaid in full on its due date.
We
adopted fair value accounting guidance for our financial assets and financial
liabilities as of January 1, 2008. This standard defines fair value, establishes
a framework for measuring fair value and expands disclosures about fair value
measurements. The fair value hierarchy is as follows:
Level 1 — Quoted (unadjusted)
prices for identical assets or liabilities in active markets.
Level 2 — Inputs other than
quoted prices included within Level 1 that are observable for the asset or
liability, either directly or indirectly, including:
|
•
|
Quoted
prices for similar assets/liabilities in active
markets;
|
|
•
|
Quoted
prices for identical or similar assets in non-active markets (few
transactions, limited information, non-current prices, high variability
over time);
|
|
•
|
Inputs
other than quoted prices that are observable for the asset/liability
(e.g., interest rates, yield curves, volatilities, default rates, etc.);
and
|
|
•
|
Inputs
that are derived principally from or corroborated by other observable
market data.
|
Level 3 — Unobservable inputs
that cannot be corroborated by observable market data.
Our
long-term investments were comprised of $57,000 and $61,400 of auction rate
securities, at amortized cost, as of December 31, 2009 and 2008, respectively.
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 every seven, 14, 28 or 35
days. These auction rate securities had auctions that failed during the twelve
months ended December 31, 2009. An auction failure means that the
parties wishing to sell their securities could not be matched with an adequate
volume of buyers. As a result, our ability to liquidate and fully recover the
carrying value of our remaining auction rate securities in the near term may be
limited or non-existent. However, in the event that there is a failed
auction, the indenture governing the security requires the issuer to pay
interest at a contractually defined rate that is generally above market rates
for other types of similar instruments. Accordingly, we do not
believe our auction rate securities are impaired, primarily due to government
guarantees or municipal bond insurance and, as a result, we have not recorded
any impairment losses for our auction rate securities. We have the
ability and the present intent to hold the securities until market stability is
restored, but as these securities are believed to be in an inactive market, we
have estimated the fair value of these securities using a discounted cash flow
model. This model considered, among other things, the
collateralization underlying the securities, the creditworthiness of the
counterparty, the timing of expected future cash flows, and the expectation of
the next time the security would be expected to have a successful
auction. The estimated values of these securities were also compared,
when possible, to valuation data with respect to similar securities held by
other parties.
Our
assets measured at fair value on a recurring basis subject to the disclosure
requirements of fair value accounting guidance were as follows:
|
|
|
|
|
Fair Value Measurements at December 31, 2009
Using:
|
|
Description
|
|
December
31, 2009
|
|
|
Quoted
Prices in
Active
Markets for
Identical
Assets(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates
of deposit
|
|
$ |
58,907 |
|
|
$ |
58,907 |
|
|
$ |
— |
|
|
$ |
— |
|
Auction
rate securities
|
|
|
51,710 |
|
|
|
— |
|
|
|
— |
|
|
|
51,710 |
|
Other
municipal variable rate bonds
|
|
|
3,815 |
|
|
|
3,815 |
|
|
|
— |
|
|
|
— |
|
Total
investments
|
|
$ |
114,432 |
|
|
$ |
62,722 |
|
|
$ |
— |
|
|
$ |
51,710 |
|
Restricted
investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
4,651 |
|
|
$ |
4,651 |
|
|
$ |
— |
|
|
$ |
— |
|
Certificates
of deposit
|
|
|
1,051 |
|
|
|
1,051 |
|
|
|
— |
|
|
|
— |
|
U.S.
Government securities
|
|
|
20,975 |
|
|
|
20,975 |
|
|
|
— |
|
|
|
— |
|
Money
market funds
|
|
|
103,873 |
|
|
|
103,873 |
|
|
|
— |
|
|
|
— |
|
Total
restricted investments
|
|
$ |
130,550 |
|
|
$ |
130,550 |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
accrued related to investigation resolution(1)
|
|
$ |
58,397 |
|
|
$ |
— |
|
|
$ |
58,397 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
____________
|
(1)
These amounts are included in the short- and long-term portions of amounts
accrued related to investigation resolution line items in our Consolidated
Balance Sheet as of December 31,
2009.
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2008
Using:
|
|
Description
|
|
|
|
December
31,
2008
|
|
|
Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates
of deposit
|
|
|
|
$ |
66,187 |
|
|
$ |
66,187 |
|
|
$ |
— |
|
|
$ |
— |
|
Auction
rate securities
|
|
|
|
|
54,972 |
|
|
|
— |
|
|
|
— |
|
|
|
54,972 |
|
Other
municipal variable rate bonds
|
|
|
|
|
3,925 |
|
|
|
3,925 |
|
|
|
— |
|
|
|
— |
|
Total
investments
|
|
|
|
$ |
125,084 |
|
|
$ |
70,112 |
|
|
$ |
— |
|
|
$ |
54,972 |
|
Restricted
investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
|
$ |
5,894 |
|
|
$ |
5,894 |
|
|
$ |
— |
|
|
$ |
— |
|
Certificates
of deposit
|
|
|
|
|
1,713 |
|
|
|
1,713 |
|
|
|
— |
|
|
|
— |
|
U.S.
Government securities
|
|
|
|
|
19,765 |
|
|
|
19,765 |
|
|
|
— |
|
|
|
— |
|
Money
market funds
|
|
|
|
|
171,967 |
|
|
|
171,967 |
|
|
|
— |
|
|
|
— |
|
Total
restricted investments
|
|
|
|
$ |
199,339 |
|
|
$ |
199,339 |
|
|
$ |
— |
|
|
$ |
— |
|
The
following methods and assumptions were used to estimate the fair value of each
class of financial instrument:
Certificates of Deposit. The
carrying value of cash and cash equivalents approximates fair value as
maturities are less than three months.
Auction Rate Securities. All
auction rate securities are held as available-for-sale investments. The fair
values of these securities were estimated using discounted cash flow analysis as
of December 31, 2009 and 2008, respectively. These analyses considered, among
other things, the collateralization underlying the securities, the
creditworthiness of the counterparty, the timing of expected future cash flows,
and the expectation of the next time the security would be expected to have a
successful auction. The estimated values of these securities were also compared,
when possible, to valuation data with respect to similar securities held by
other parties. The fair values use an approach that relies heavily on management
assumptions and qualitative observations and are therefore considered to be
Level 3 fair values.
Other municipal variable rate bonds.
The estimated fair values of U.S. Government securities held as
available-for-sale are based on quoted market prices and/or other market data
for the same or comparable instruments and transactions in establishing the
prices.
Cash and Cash Equivalents.
The carrying value of cash and cash equivalents approximates fair value
as maturities are less than three months.
U.S. Government Securities.
The estimated fair values of U.S. Government securities held as
available-for-sale are based on quoted market prices and/or other market data
for the same or comparable instruments and transactions in establishing the
prices.
Money Market Funds. The
carrying value of money market funds approximates fair value as maturities are
less than three months.
The
following table presents our auction rate securities measured at fair value on a
recurring basis using significant unobservable inputs (i.e., Level 3
data):
|
|
Fair
Value Measurements
Using Significant
Unobservable
Inputs(Level 3)
|
|
Beginning
balance at January 1, 2009
|
|
$ |
54,972 |
|
Realized
gains (losses) in earnings (or changes in net assets)
|
|
|
— |
|
Unrealized
gains (losses) included in other comprehensive income(a)
|
|
|
1,138 |
|
Purchases,
issuances and settlements
|
|
|
— |
|
Transfers
in and/or out of Level 3(b)
|
|
|
(4,400 |
) |
Ending
balance at December 31, 2009
|
|
$ |
51,710 |
|
____________
(a) As a result of the increase in the fair value of our investments in
auction rate securities, we recorded a net unrealized gain of $1,138 to
Accumulated other comprehensive loss during 2009. The increase in
unrealized gain was driven by the stabilization and improvement within the
municipal bond market during 2009.
|
(b)
A $4,400 auction rate security tranche was redeemed by the issuer at par
in February 2009. Accordingly, we recorded an adjustment to the fair
market valuation of the issuer’s auction rate securities during the first
quarter of 2009.
|
|
|
Fair
Value Measurements
Using Significant
Unobservable
Inputs
(Level 3)
|
|
Beginning
balance at January 1, 2008
|
|
$ |
— |
|
Realized
gains (losses) in earnings (or changes in net assets)
|
|
|
— |
|
Unrealized
gains (losses) included in other comprehensive income
|
|
|
(6,428 |
) |
Purchases,
issuances and settlements
|
|
|
— |
|
Transfers
in and/or out of Level 3
|
|
|
61,400 |
|
Ending
balance at December 31, 2008
|
|
$ |
54,972 |
|
9.
PROPERTY AND EQUIPMENT
Property
and equipment is summarized as follows:
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Leasehold
improvements
|
|
$ |
16,534 |
|
|
$ |
16,104 |
|
Computer
equipment and software
|
|
|
92,931 |
|
|
|
77,657 |
|
Furniture
and equipment
|
|
|
24,457 |
|
|
|
25,677 |
|
|
|
|
133,922 |
|
|
|
119,438 |
|
Less
accumulated depreciation
|
|
|
(72,137 |
) |
|
|
(52,850 |
) |
|
|
$ |
61,785 |
|
|
$ |
66,588 |
|
We
recognized depreciation expense on property and equipment of $21,804, $19,531
and $16,188 for the years ended December 31, 2009, 2008, and 2007, respectively.
We had $923 and $2,084 of non-cash property, equipment and capitalized software
additions at December 31, 2009 and 2008, respectively.
10.
DEBT
We and
certain of our subsidiaries were parties to a credit agreement, which was repaid
in full, on its due date, in May 2009.
11.
COMMITMENTS AND CONTINGENCIES
As
previously disclosed, in May 2009, we entered into a Deferred Prosecution
Agreement (the “DPA”) with the United States Attorney’s Office for the Middle
District of Florida (the “USAO”) and the Florida Attorney General’s Office,
resolving previously disclosed investigations by those offices.
Under the
one-count criminal information (the “Information”) filed with the United States
District Court for the Middle District of Florida (the “Court”) by the USAO
pursuant to the DPA, we were charged with one count of conspiracy to commit
health care fraud against the Florida Medicaid Program in connection with
reporting of expenditures under certain community behavioral health contracts,
and against the Florida Healthy Kids programs, under certain contracts, in
violation of 18 U.S.C. Section 1349. The USAO recommended to the
Court that the prosecution of us be deferred for the duration of the
DPA. Within five days of the expiration of the DPA the USAO will seek
dismissal with prejudice of the Information, provided we have complied with the
DPA.
The term
of the DPA is thirty-six months, but such term may be reduced by the USAO to
twenty-four months upon consideration of certain factors set forth in the DPA,
including our continued remedial actions and compliance with all federal and
state health care laws and regulations.
In
accordance with the DPA, the USAO has filed with the Court a statement of facts
relating to this matter. As a part of the DPA, we have retained a Monitor for a
period of 18 months from his retention in August 2009. The Monitor
was selected by the USAO after consultation with us and is retained at our
expense. In addition, we agreed to continue undertaking remedial
measures to ensure full compliance with all federal and state health care
laws. Among other things, the Monitor will review our compliance with
the DPA and all applicable federal and state health care laws, regulations and
programs. The Monitor also will review, evaluate and, as necessary,
make written recommendations concerning certain of our policies and
procedures. The DPA provides that the Monitor will undertake to avoid
the disruption of our ordinary business operations or the imposition of
unnecessary costs or expenses.
The DPA
does not, nor should it be construed to, operate as a settlement or release of
any 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 DPA 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 administrative
liability. Pursuant to the terms of the DPA, we have paid the USAO a
total of $80.0 million.
In May
2009, we resolved the previously disclosed investigation by the United States
Securities & Exchange Commission (“SEC”). Under the terms of the
Consent and Final Judgment, without admitting or denying the allegations in the
complaint filed by the SEC, we consented to the entry of a permanent injunction
against any future violations of certain specified provisions of the federal
securities laws. In addition, we agreed to pay, in four quarterly
installments, a civil penalty in the aggregate amount of $10.0 million and
disgorgement in the amount of one dollar plus post-judgment interest, of which
the first three payments have been made.
As
previously disclosed, we remain engaged in resolution discussions as to matters
under review with the Civil Division and the OIG. Management
currently estimates that the remaining liability associated with these matters
is approximately $60.0 million, plus interest. This amount has been included in
the current and long-term portions of amounts accrued related to the
investigation resolution in our Consolidated Balance Sheet as of December 31,
2009. We anticipate these amounts will be payable in installments over a period
of four to five years.
In
October 2008, the Civil Division informed us 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). In connection with the
ongoing resolution discussions with the Civil Division, we are addressing the
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, or similar state
statutes, based on qui
tam actions other than those discussed in this 2009 Form
10-K.
In
addition, we are responding 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. We have communicated with regulators in states in which our
health maintenance organization and insurance operating subsidiaries are
domiciled regarding the investigations, and we are cooperating with federal and
state regulators and enforcement officials in all of these
matters. We do not know whether, or the extent to which, any pending
investigations might lead to the payment of fines or penalties, the imposition
of injunctive relief and/or operating restrictions.
|
Class
Action and Derivative Lawsuits
|
Putative
class action complaints were filed in October 2007 and in November
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 us, Todd Farha, our former chairman and chief
executive officer, and Paul Behrens, our former senior vice president and chief
financial officer. Messrs. Farha and Behrens were also officers of
various subsidiaries of ours. The Eastwood Enterprises complaint
alleges that the defendants materially misstated our 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 (“Exchange Act”). The
Hutton complaint alleges that various public statements supposedly issued by
defendants were materially misleading because they failed to disclose that we
were purportedly operating our business in a potentially illegal and improper
manner in violation of applicable federal guidelines and
regulations. The complaint asserts claims under the Exchange
Act. 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 in March 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. In
October 2008, an amended consolidated complaint was filed in this class action
against us, Messrs. Farha and Behrens, and adding Thaddeus Bereday, our former
senior vice president and general counsel, as a defendant. In January
2009, we and certain other defendants filed a joint motion to dismiss the
amended consolidated compliant, arguing,
among other things, that the complaint failed to allege a
material misstatement by defendants with respect to our compliance with
marketing and other health care regulations and failed to plead facts raising a
strong inference of scienter with respect to all aspects of the purported fraud
claim. The court denied the motion in September 2009 and we and the
other defendants filed our answer to the amended consolidated complaint in
November 2009, and discovery is ongoing. Separately, in October 2009,
an action was filed against us in the Court of Chancery of the State of Delaware
entitled Behrens, et al. v. WellCare Health Plans, Inc. in which the plaintiffs,
Messrs. Behrens, Bereday, and Farha, seek an order requiring us to pay their
respective expenses, including attorney fees, in connection with litigation and
investigations in which the plaintiffs are involved by reason of their service
as our directors and officers. Plaintiffs further challenge our right, prior to
advancing such expenses, to first submit their expense invoices to our
directors’ and officers’ insurance carrier for their preliminary review and
evaluation of the adequacy of the description of services in the invoices and of
the reasonableness of those expenses. We intend to defend ourselves vigorously
against these claims. At this time, neither we nor any of our
subsidiaries can predict the probable outcome of these
claims. Accordingly, no amounts have been accrued in our consolidated
financial statements in respect to these matters.
Five
putative shareholder derivative actions were filed for these claims between
October and November 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 us 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 of our directors (and former director Todd
Farha) except for Charles Berg, David Gallitano, D. Robert Graham and Glenn D.
Steele, Jr. and also name us 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 of our
directors (and former director Todd Farha) except Charles Berg, David Gallitano
and Glenn D. Steele, Jr. and against two of our former officers, Paul Behrens
and Thaddeus Bereday. 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. 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 with 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 in April 2008. In October 2008, amended complaints were
filed in the federal court and the state court derivative actions. In
December 2008, we 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 our name. In
an Order entered in March 2009 in the consolidated federal action, the court
denied the motions to dismiss the second amended consolidated
complaint. In April 2009, in the consolidated state action, the court
denied the motion to dismiss the second amended consolidated
complaint. In April 2009, upon the recommendation of the Nominating
and Corporate Governance Committee of our Board of Directors, the Board adopted
a resolution forming a Special Litigation Committee, comprised of a
newly-appointed independent director, to investigate the facts and circumstances
underlying the claims asserted in the federal and state derivative cases and to
take such action with respect to such claims as the Special Litigation Committee
determines to be in our best interests. In May 2009, the Special
Litigation Committee filed in the consolidated federal action a motion to stay
the matter until November 2009 to allow the Special Litigation Committee to
complete its investigation, and following a hearing in May 2009, the court
granted that motion and stayed the federal action. The Special Litigation
Committee filed a substantially identical motion in the consolidated state
action, and the plaintiffs in that action withdrew their request for a hearing
to contest that motion. Also, in October 2009, the judge overseeing the
consolidated federal action granted a motion that had been filed by several of
the individual defendants to transfer responsibility for the case to the judge
within the same Court who is overseeing the class action case described in the
preceding paragraph. In November 2009, the Special Litigation Committee filed a
report with the Court determining, among other things, that we should pursue an
action against three of our former officers. In December 2009, the
Special Litigation Committee filed a motion to dismiss the claims against the
director defendants, and to realign us as a plaintiff for purposes of pursuing
claims against the three former officers. That motion remains
pending. At this time, neither we nor any of our subsidiaries can
predict the probable outcome of these claims. Derivative actions, by their
nature, do not seek to recover damages from the companies on whose behalf the
plaintiff shareholders are purporting to act.
|
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 have a material adverse effect on our financial
position, results of operations or cash flows.
Operating
Leases
We have
operating leases for office space. Rental expense totaled $18,159, $17,994 and
$14,731 for the years ended December 31, 2009, 2008 and 2007, respectively.
Future minimum lease payments under non-cancelable operating leases with initial
or remaining lease terms in excess of one year at December 31, 2009
were:
2010
|
|
$ |
15,581 |
|
2011
|
|
|
13,537 |
|
2012
|
|
|
9,124 |
|
2013
|
|
|
6,614 |
|
2014
|
|
|
5,356 |
|
2015 and
thereafter
|
|
|
11,526 |
|
|
|
$ |
61,738 |
|
12.
INCOME TAXES
We and
our subsidiaries file a consolidated federal income tax return. In addition, we
and our subsidiaries file separate state franchise, income and premium tax
returns as applicable.
The
following table provides components of income tax expense (benefit) for the
following periods:
|
|
For the year ending December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Current:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$ |
45,567 |
|
|
$ |
39,989 |
|
|
$ |
157,396 |
|
State
|
|
|
8,611 |
|
|
|
8,932 |
|
|
|
20,770 |
|
|
|
|
54,178 |
|
|
|
48,921 |
|
|
|
178,166 |
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(885 |
) |
|
|
(57,794 |
) |
|
|
(15,846 |
) |
State
|
|
|
(144 |
) |
|
|
(7,464 |
) |
|
|
(588 |
) |
|
|
|
(1,029 |
) |
|
|
(65,258 |
) |
|
|
(16,434 |
) |
Total
|
|
$ |
53,149 |
|
|
$ |
(16,337 |
) |
|
$ |
161,732 |
|
A
reconciliation of income tax at the effective rate to income tax at the
statutory federal rate is as follows:
|
|
For the year ending December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Income
tax expense (benefit) at statutory rate
|
|
$ |
32,557 |
|
|
$ |
(18,610 |
) |
|
$ |
132,289 |
|
Increase
(reduction) resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
State
income tax, net of federal benefit
|
|
|
6,286 |
|
|
|
(2,241 |
) |
|
|
12,913 |
|
Provision
to return differences
|
|
|
(4,663 |
) |
|
|
— |
|
|
|
51 |
|
Non-deductible
executive compensation
|
|
|
802 |
|
|
|
2,805 |
|
|
|
— |
|
Investigation
expense
|
|
|
19,584 |
|
|
|
— |
|
|
|
17,500 |
|
Interest
on unrecognized tax benefits
|
|
|
(1,081 |
) |
|
|
1,604 |
|
|
|
— |
|
Other,
net
|
|
|
(336 |
) |
|
|
105 |
|
|
|
(1,021 |
) |
Total
income tax expense (benefit)
|
|
$ |
53,149 |
|
|
$ |
(16,337 |
) |
|
$ |
161,732 |
|
The
significant components of our deferred tax assets and liabilities are as
follows:
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
Medical
and other benefits discounting
|
|
$ |
15,775 |
|
|
$ |
8,760 |
|
Unearned
premium discounting
|
|
|
8,487 |
|
|
|
7,981 |
|
Tax
basis assets
|
|
|
6,245 |
|
|
|
6,131 |
|
Unrecognized
tax benefits
|
|
|
10,909 |
|
|
|
25,554 |
|
Goodwill,
other intangibles and other
|
|
|
— |
|
|
|
6,735 |
|
Allowance
for doubtful accounts
|
|
|
2,967 |
|
|
|
— |
|
Accrued
expenses and other
|
|
|
32,597 |
|
|
|
27,138 |
|
|
|
|
76,980 |
|
|
|
82,299 |
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
|
Goodwill,
other intangibles and other
|
|
|
1,128 |
|
|
|
— |
|
Software
development costs
|
|
|
15,873 |
|
|
|
13,329 |
|
Prepaid
liabilities
|
|
|
1,451 |
|
|
|
— |
|
|
|
|
18,452 |
|
|
|
13,329 |
|
Net
deferred tax asset
|
|
$ |
58,528 |
|
|
$ |
68,970 |
|
We
adopted authoritative accounting guidance for the uncertainty in income taxes on
January 1, 2007. A reconciliation of the beginning and ending amount of
unrecognized tax benefits is as follows:
|
|
2009
|
|
|
2008
|
|
Gross
unrecognized tax benefits, beginning of period
|
|
$ |
26,647 |
|
|
$ |
67,247 |
|
Gross
increases:
|
|
|
|
|
|
|
|
|
Prior
year tax positions
|
|
|
2,731 |
|
|
|
— |
|
Current
year tax positions
|
|
|
— |
|
|
|
6,981 |
|
Gross
decreases:
|
|
|
|
|
|
|
|
|
Prior
year settlements
|
|
|
(7,099 |
) |
|
|
— |
|
Prior
year tax positions
|
|
|
(10,277 |
) |
|
|
(47,581 |
) |
Statute
of limitations lapses
|
|
|
— |
|
|
|
— |
|
Gross
unrecognized tax benefits, end of period
|
|
$ |
12,002 |
|
|
$ |
26,647 |
|
We
classify interest and penalties associated with uncertain income tax positions
as income taxes within our Consolidated Financial Statements. The unrecognized
tax benefit is recorded in other liabilities. During the year ended
December 31, 2009 and 2008, we recognized interest (benefit) expense of
$(1,081) and $1,604, respectively. No amount was accrued for
penalties for the year end December 31, 2009 and 2008. As of
December 31, 2009 and 2008, the total amount of unrecognized tax benefits
that, if recognized, would affect the effective tax rate was
$1,093.
We
currently file income tax returns in the U.S. federal jurisdiction and various
states. During 2009, the Internal Revenue Service (the “IRS”) completed its
exams on our consolidated income tax returns for the 2004 through 2007 tax
years. The IRS verbally communicated with us that they are going to perform a
“limited scope” audit on our consolidated income tax return for the 2008 tax
year. We are no longer subject to income tax examinations prior to 2004 in major
state jurisdictions. We do not believe any adjustments that may result from the
2008 tax year exam will be material.
We
believe it is reasonably possible that our liability for unrecognized tax
benefits will not significantly increase or decrease in the next twelve months
as a result of audit settlements and the expiration of statutes of limitations
in certain major jurisdictions.
13.
RELATED-PARTY TRANSACTIONS
Bay
Area Primary Care and Bay Area Multi Specialty Group
We
conduct business with Bay Area Primary Care and Bay Area Multi Specialty Group,
which provide medical and professional services to a portion of our membership
base. These entities are owned and controlled by a former stockholder of the
Florida HMOs, who also served as a director of the Florida HMOs. In 2007, we
purchased $738 in services, in the aggregate from Bay Area Primary Care and Bay
Area Multi Specialty Group.
D2Hawkeye
We
conduct business with D2Hawkeye pursuant to which D2Hawkeye has developed an
internet-based portal for certain of our health care providers. A member of our
Board of Directors is a senior advisor to D2Hawkeye, where he previously served
as president until January 2007. We purchased $431, $394 and $368 of services in
the aggregate from D2Hawkeye in 2009, 2008 and 2007, respectively.
The
Graham Companies
We
conduct business with The Graham Companies pursuant to which we lease office
space. A member of the Board of Directors has a 23% ownership interest in The
Graham Companies. In 2009, 2008 and 2007, we paid $361, $359 and $374 in rental
expense to The Graham Companies, respectively.
All-Med
We
conduct business with All-Med Services of Florida, Inc. (“All-Med”) pursuant to
which All-Med provides medical supplies and medical services to a portion of its
membership base. A former member of our Board of Directors has been the Chief
Executive Officer of All-Med since August 2008. In 2009 and 2008, we purchased
$6,912 and $6,853, respectively, of services in the aggregate from
All-Med.
Davita
We
conduct business with Davita Inc. (“Davita”) pursuant to which Davita provides
medical services to a portion of its member base. The Executive Chairman of our
Board of Directors is also a member of Davita’s board of directors. In 2009 and
2008, we purchased $3,511 and $5,300, respectively, of services in the aggregate
from Davita.
14.
STATUTORY CAPITAL AND DIVIDEND RESTRICTIONS
State
insurance laws and regulations prescribe accounting practices for determining
statutory net income and surplus for HMOs and insurance companies and require,
among other matters, the filing of financial statements prepared in accordance
with statutory accounting practices prescribed or permitted for HMOs and
insurance companies. State insurance regulations also require the maintenance of
a minimum compulsory surplus based on various factors. At
December 31, 2009, our HMO and insurance subsidiaries were in compliance with
these minimum compulsory surplus requirements. The combined statutory
capital and surplus of our HMO and insurance subsidiaries was $638,000
and $585,000 at December 31, 2009 and 2008, respectively, compared to the
required surplus of $393,000
and $312,000 at December 31, 2009 and 2008, respectively. However,
two of our subsidiaries were individually below the required CAL at December 31,
2009. These two subsidiaries underwrote our PFFS product and one also
underwrote our products in Hawaii. As we are no longer offering
PFFS plans, the amount of RBC required is substantially reduced in 2010 and we
anticipate that these two subsidiaries will be in compliance in
2010.
Dividends
paid by our HMO and insurance subsidiaries are limited by state insurance
regulations. The insurance regulator in each state of domicile may disapprove
any dividend that, together with other dividends paid by a subsidiary in the
prior twelve months, exceeds the regulatory maximum as computed for the
subsidiary based on its statutory surplus and net income.
During
2009, three of our Florida regulated subsidiaries declared and paid dividends to
one of our non-regulated subsidiaries in the aggregate amount of
$44,400. On December 31, 2008, the same three Florida regulated
subsidiaries of ours declared dividends to one of our non-regulated subsidiaries
in the aggregate amount of $105,100, of which two dividends were paid in
December 2008 and one dividend which was paid in January 2009. No dividends were
paid during the year ended December 31, 2007.
15.
EMPLOYEE BENEFIT PLAN
We offer
a defined contribution 401(k) plan. During the second quarter of 2009, as a part
of a cost reduction initiative, we discontinued providing matching
contributions. We resumed our matching contribution to the defined
contribution 401(k) plan as of January 2010. The amount of matching contribution
expense incurred in the years ended December 31, 2009, 2008 and 2007 was $877,
$3,592 and $2,216, respectively.
16.
EQUITY-BASED COMPENSATION
Equity
Compensation Plans
We have
two active equity-based compensation plans. These plans are described below. The
compensation cost that has been charged against income for those plans was
$44,149, $38,614 and $18,737 for the years ended December 31, 2009, 2008, and
2007, respectively. The total income tax benefit recognized in the income
statement for equity-based compensation arrangements was $16,997, $15,272 and
$7,410 for the years ended December 31, 2009, 2008, and 2007, respectively. The
tax benefit realized by us reflects the exercise value of options and vesting
share awards. There were no capitalized equity-based compensation costs at
December 31, 2009.
In June
2004, the Board adopted, and its shareholders subsequently approved, our 2004
Equity Incentive Plan which authorizes us to grant non-qualified stock options,
incentive stock options, restricted shares and other equity awards. An aggregate
of 4,688,532 shares of our common stock was initially reserved for issuance to
our directors, associates and others under this plan. The number of shares
reserved for issuance is subject to an annual increase effective on January 1 of
each year, commencing on January 1, 2005 and ending on January 1, 2013 in an
amount equal to the lesser of 3% of the number of shares of common stock
outstanding on each such date, 1,200,000 shares, or such lesser amount
determined by our Board. The total number of shares of common stock subject to
the granting of awards under our 2004 Equity Plan was increased by 1,200,000
shares effective January 1, 2007, 2008, and 2009, respectively. Our policy is to
grant options with an exercise price equal to the closing market price of our
stock on the date of grant; those option awards generally vest based on four
years of continuous service and have seven-year contractual terms.
The fair
value of each option award is estimated on the date of grant using a
Black-Scholes option pricing model that uses the assumptions noted in the table
below. Expected volatilities are based on historical volatility of our stock as
well as the volatility of shares of other companies with similar trading
longevity and operating similar businesses. The expected term of options granted
is determined using historical and industry data to estimate option exercise
patterns and forfeitures resulting from employee terminations. We have not
historically declared dividends, nor does it intend to in the foreseeable
future. The risk-free rate for options granted is based on the rate for
zero-coupon U.S. Treasury bonds with terms commensurate with the expected term
of the granted option.
|
|
Year Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
Weighted
average risk-free interest rate
|
|
|
1.99 |
% |
|
|
2.51 |
% |
|
|
4.55 |
% |
Range
of risk-free rates
|
|
|
1.60%-2.55 |
% |
|
|
1.76%-3.41 |
% |
|
|
3.94%-5.08 |
% |
Expected
term (in years)
|
|
|
4.75 |
|
|
|
4.55 |
|
|
|
2.49 |
|
Expected
dividend yield
|
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
Expected
volatility
|
|
|
56.85 |
% |
|
|
42.49 |
% |
|
|
39.88 |
% |
A summary
of our restricted stock, restricted stock unit (“RSU”) and option activity for
the twelve months ended December 31, 2009 is presented in the table
below.
|
|
Restricted
Stock
and
RSU
|
|
|
Weighted-Average
Grant
Date
Fair Value
|
|
|
Options
|
|
|
Weighted-
Average
Exercise
Price
|
|
Outstanding
as of January 1, 2009
|
|
|
1,165,816 |
|
|
$ |
50.53 |
|
|
|
4,278,118 |
|
|
$ |
29.30 |
|
Granted
|
|
|
889,594 |
|
|
|
21.40 |
|
|
|
373,000 |
|
|
|
22.41 |
|
Exercised
|
|
|
|
|
|
|
|
|
(80,054 |
) |
|
|
14.87 |
|
Vested
|
|
|
(584,329 |
) |
|
|
46.42 |
|
|
|
|
|
|
|
Forfeited
and expired
|
|
|
(400,362 |
) |
|
|
46.70 |
|
|
|
(1,573,569 |
) |
|
|
44.50 |
|
Option
exchange (1)
|
|
|
269,262 |
|
|
|
26.55 |
|
|
|
(1,077,960 |
) |
|
|
48.59 |
|
Outstanding
at December 31, 2009
|
|
|
1,339,981 |
|
|
|
29.30 |
|
|
|
1,919,535 |
|
|
|
35.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at December 31, 2009
|
|
|
n/a |
|
|
|
n/a |
|
|
|
1,259,897 |
|
|
|
38.60 |
|
(1)
|
Certain
eligible employees were offered the opportunity to voluntarily exchange
any vested or unvested outstanding options with an exercise price of
greater than $40.00 per share, for a number of RSUs, which are subject to
a new vesting schedule, based
on the exchange ratios set forth on Schedule TO, filed on August 17, 2009
with the SEC. This option exchange was a value-for-value
modification and accordingly, incremental compensation expense was not
incurred.
|
The
weighted-average grant date fair value of options granted during the years ended
December 31, 2009, 2008, and 2007 were $8.14, $16.32, and $24.29, respectively.
The total intrinsic value of options exercised during the years ended December
31, 2009, 2008, and 2007 was $826, $4,057, $52,622, respectively.
The fair
value of share awards is based on the closing trading price of our shares on the
grant date. The weighted-average grant-date fair value of shares granted during
the year ended December 31, 2009, 2008, and 2007 were $21.40, $42.76 and $90.67
respectively. As of December 31, 2009, there was $42,619 of unrecognized
compensation costs related to non-vested equity-based compensation arrangements
that is expected to be recognized over a weighted-average period of 2.2 years.
The total fair value of shares vested during the year ended December 31, 2009
was $27,135. We generally repurchase vested shares to satisfy tax withholding
requirements. Those shares repurchased are then retired.
Cash
received from option exercises under all share-based payment arrangements for
the year ended December 31, 2009, 2008 and 2007 was $1,167, $1,039 and $17,679,
respectively. We currently expect to satisfy equity-based compensation awards
with registered shares available to be issued.
Performance
Share Award
Under the
2004 Equity Incentive Plan, we granted 240,279 shares to our former Chief
Executive Officer, the vesting of which and the amount of shares to be awarded
was contingent upon achievement of an earnings per share target over three- and
five-year performance periods. The fair value of this grant was based on the
closing price of our stock on the date of grant, which was $34.95. Based upon
our earnings, these shares have been accounted for as if the former CEO earned
the full 130,000 shares for the first performance period. However, in accordance
with the separation agreement between the former CEO and us, issuance of those
shares is subject to certain conditions, including the outcome of legal
proceedings that may be brought against us in connection with the on-going
pending investigation (See Note 11). All of the conditions stipulated in the
separation agreement must be satisfied by June 6, 2010 or the former CEO will
relinquish the right to receive any such shares, at which time, the recorded
compensation cost of $4,683 would be reversed. As of December 31, 2009, there
was no unrecognized compensation cost related to the performance share
award.
Stock
Purchase Plan
In
November 2004, the Board approved our 2005 Employee Stock Purchase Plan
(“ESPP”). The ESPP was subsequently approved by our shareholders in June 2005. A
maximum of 387,714 shares of common stock is reserved for issuance under the
plan. The ESPP allows our associates to purchase our common stock each quarter
at a 5% discount from the closing market price on the date of purchase. No
compensation cost was incurred for common stock issued under the
plan.
17.
SEGMENT REPORTING
We have
two reportable segments: Medicaid and Medicare. The segments were determined
based upon the type of governmental administration and funding of the health
plans. Accounting policies of the segments are the same as those described in
Note 2.
The
Medicaid segment includes operations to provide health care services to
recipients that are eligible for state supported programs including Medicaid and
children’s health programs. In the Medicaid segment, we had two customers from
which we received 10% or more of our Medicaid segment premium revenue for 2009,
2008, and 2007. Florida revenues were 28.1%, 32.7% and 33.8% of total Medicaid
revenues in each year, respectively. Georgia revenues were 40.8%, 41.0%, and
40.4% in each year, respectively.
The
Medicare segment includes operations to provide health care services and
prescription drug benefits to recipients who are eligible for the federally
supported Medicare program.
Balance
sheet, investment and other income, and other expense details by segment have
not been disclosed, as they are not reported internally by us.
|
|
For the year ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Premium
revenue:
|
|
|
|
|
|
|
|
|
|
Medicaid
|
|
$ |
3,256,731 |
|
|
$ |
2,991,049 |
|
|
$ |
2,691,781 |
|
Medicare
|
|
|
3,610,521 |
|
|
|
3,492,021 |
|
|
|
2,613,108 |
|
Total
Premium revenue
|
|
|
6,867,252 |
|
|
|
6,483,070 |
|
|
|
5,304,889 |
|
Investment
and other income
|
|
|
10,912 |
|
|
|
38,837 |
|
|
|
85,903 |
|
Total
revenues
|
|
|
6,878,164 |
|
|
|
6,521,907 |
|
|
|
5,390,792 |
|
Medical
benefits expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Medicaid
|
|
|
2,810,611 |
|
|
|
2,537,422 |
|
|
|
2,136,710 |
|
Medicare
|
|
|
3,051,846 |
|
|
|
2,992,794 |
|
|
|
2,076,674 |
|
Total
Medical benefits expense
|
|
|
5,862,457 |
|
|
|
5,530,216 |
|
|
|
4,213,384 |
|
Other
expense
|
|
|
922,687 |
|
|
|
1,044,861 |
|
|
|
799,440 |
|
Income
(loss) before income taxes
|
|
$ |
93,020 |
|
|
$ |
(53,170 |
) |
|
$ |
377,968 |
|
Medicare
Segment – 2010 PFFS Plan Exit
In July
2008, the Medicare Improvements for Patients and Providers Act (“MIPPA”) became
law and, in September 2008, CMS promulgated implementing
regulations. MIPPA revised requirements for MA PFFS
plans. In particular, MIPPA requires all PFFS plans that operate in
markets with two or more network-based plans be offered on a networked
basis. As we do not have provider networks in the majority of markets
where PFFS plans are offered and given the higher costs associated with building
the required networks, as of January 1, 2010, we did not renew our contracts to
participate in the PFFS program, resulting in a loss of approximately 95,000
members.
The PFFS
line of business contributed approximately $1,133,545, $983,543 and $497,932 to
Premium revenues for the year ended December 31, 2009, 2008 and 2007,
respectively. Excluding PFFS, total Premium revenue for the corresponding
periods are $5,733,707, $5,499,527 and $4,806,957, respectively. Similarly,
excluding PFFS, Medicare Premium revenue for the corresponding periods are
$2,476,976, $2,508,478 and $2,115,176, respectively.
Medical
benefits expense for the PFFS line of business was approximately $984,068,
$850,604 and $383,746 to Medical benefits expense for the year ended December
31, 2009, 2008 and 2007, respectively. Excluding PFFS, total Medical benefits
expense for the corresponding periods are $4,878,389, $4,679,612 and $3,829,638,
respectively. Similarly, excluding PFFS, Medicare Medical benefits expense for
the corresponding periods are $2,067,778, $2,142,190 and $1,692,928,
respectively.
18.
QUARTERLY FINANCIAL INFORMATION
Selected
unaudited quarterly financial data in 2009 and 2008 are as follows:
|
|
For the Three-Month Period
Ended
|
|
|
|
March
31,
2009
|
|
|
June 30,
2009
|
|
|
September
30,
2009
|
|
|
December
31,
2009
|
|
Total
revenues
|
|
$ |
1,795,261 |
|
|
$ |
1,791,278 |
|
|
$ |
1,667,645 |
|
|
$ |
1,623,980 |
|
Gross
margin
|
|
|
238,929 |
|
|
|
283,832 |
|
|
|
245,838 |
|
|
|
236,196 |
|
Income
(loss) before income taxes
|
|
|
(37,283 |
) |
|
|
65,203 |
|
|
|
45,932 |
|
|
|
19,168 |
|
Net
income (loss)
|
|
$ |
(36,933 |
) |
|
$ |
37,005 |
|
|
$ |
28,660 |
|
|
$ |
11,139 |
|
Income
(loss) per share — basic
|
|
$ |
(0.89 |
) |
|
$ |
0.89 |
|
|
$ |
0.68 |
|
|
$ |
0.27 |
|
Income
(loss) per share — diluted
|
|
$ |
(0.89 |
) |
|
$ |
0.88 |
|
|
$ |
0.68 |
|
|
$ |
0.26 |
|
Period
end membership
|
|
|
2,456,000 |
|
|
|
2,388,000 |
|
|
|
2,330,000 |
|
|
|
2,321,000 |
|
|
|
For the Three-Month Period
Ended
|
|
|
|
March
31,
2008
|
|
|
June 30,
2008
|
|
|
September
30,
2008
|
|
|
December
31,
2008
|
|
Total
revenues
|
|
$ |
1,636,921 |
|
|
$ |
1,645,418 |
|
|
$ |
1,637,432 |
|
|
$ |
1,602,136 |
|
Gross
margin
|
|
|
223,802 |
|
|
|
259,079 |
|
|
|
185,564 |
|
|
|
284,409 |
|
Income
(loss) before income taxes
|
|
|
3,158 |
|
|
|
26,564 |
|
|
|
(43,468 |
) |
|
|
(39,424 |
) |
Net
income (loss)
|
|
$ |
1,320 |
|
|
$ |
11,105 |
|
|
$ |
(18,169 |
) |
|
$ |
(31,089 |
) |
Income
(loss) per share — basic
|
|
$ |
0.03 |
|
|
$ |
0.27 |
|
|
$ |
(0.44 |
) |
|
$ |
(0.75 |
) |
Income
(loss) per share — diluted
|
|
$ |
0.03 |
|
|
$ |
0.26 |
|
|
$ |
(0.44 |
) |
|
$ |
(0.75 |
) |
Period
end membership
|
|
|
2,446,000 |
|
|
|
2,523,000 |
|
|
|
2,530,000 |
|
|
|
2,532,000 |
|
The sum of the quarterly earnings per share amounts do not equal the amount
reported for the full year since per share amounts are computed independently
for each quarter and for the full year based on respective weighted-average
shares outstanding and other dilutive potential shares and
units.
Schedule
I
CONDENSED
FINANCIAL INFORMATION OF REGISTRANT
WELLCARE
HEALTH PLANS, INC. (Parent Company Only)
BALANCE
SHEETS
(In
thousands, except share data)
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Assets
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
1,562 |
|
|
$ |
88,629 |
|
Investments
|
|
|
2,384 |
|
|
|
4,540 |
|
Deferred
income taxes
|
|
|
10,478 |
|
|
|
30,695 |
|
Affiliate
receivables and other current assets
|
|
|
138,969 |
|
|
|
102,369 |
|
Total
current assets
|
|
|
153,393 |
|
|
|
226,233 |
|
Deferred
tax asset
|
|
|
23,156 |
|
|
|
— |
|
Investment
in subsidiaries
|
|
|
806,261 |
|
|
|
734,536 |
|
Total
Assets
|
|
$ |
982,810 |
|
|
$ |
960,769 |
|
Liabilities
and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Taxes
payable
|
|
$ |
113 |
|
|
$ |
1,381 |
|
Other
current liabilities
|
|
|
101,797 |
|
|
|
141,679 |
|
Total
current liabilities
|
|
|
101,910 |
|
|
|
143,060 |
|
Deferred
taxes
|
|
|
— |
|
|
|
11,880 |
|
Total
liabilities
|
|
|
101,910 |
|
|
|
154,940 |
|
Commitments
and contingencies (see Note 11)
|
|
|
— |
|
|
|
— |
|
Stockholders’
Equity:
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.01 par value (20,000,000 authorized, no shares issued or
outstanding)
|
|
|
— |
|
|
|
— |
|
Common
stock, $0.01 par value (100,000,000 authorized, 42,361,207, and 42,261,345
shares issued and outstanding at December 31, 2009 and 2008,
respectively
|
|
|
424 |
|
|
|
423 |
|
Paid-in
capital
|
|
|
425,083 |
|
|
|
390,526 |
|
Retained
earnings
|
|
|
458,512 |
|
|
|
418,641 |
|
Accumulated
other comprehensive loss
|
|
|
(3,119 |
) |
|
|
(3,761 |
) |
Total
stockholders’ equity
|
|
|
880,900 |
|
|
|
805,829 |
|
Total
Liabilities and Stockholders’ Equity
|
|
$ |
982,810 |
|
|
$ |
960,769 |
|
See notes to consolidated financial
statements.
CONDENSED
FINANCIAL INFORMATION OF REGISTRANT
WELLCARE
HEALTH PLANS, INC. (Parent Company Only)
STATEMENTS
OF OPERATIONS
(In
thousands, except share data)
|
|
Year
Ended
December
31, 2009
|
|
|
Year
Ended
December
31, 2008
|
|
|
Year
Ended
December
31, 2007
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Investment
and other income
|
|
$ |
— |
|
|
$ |
1,002 |
|
|
$ |
12,321 |
|
Total
revenues
|
|
|
— |
|
|
|
1,002 |
|
|
|
12,321 |
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
46,587 |
|
|
|
42,469 |
|
|
|
23,280 |
|
Total
expenses
|
|
|
46,587 |
|
|
|
42,469 |
|
|
|
23,280 |
|
Loss
before income taxes
|
|
|
(46,587 |
) |
|
|
(41,467 |
) |
|
|
(10,959 |
) |
Income
tax benefit
|
|
|
14,809 |
|
|
|
16,008 |
|
|
|
3,741 |
|
Loss
before equity in subsidiaries
|
|
|
(31,778 |
) |
|
|
(25,459 |
) |
|
|
(7,218 |
) |
Equity
in earnings from subsidiaries
|
|
|
71,649 |
|
|
|
(11,374 |
) |
|
|
223,454 |
|
Net
income (loss)
|
|
$ |
39,871 |
|
|
$ |
(36,833 |
) |
|
$ |
216,236 |
|
See notes to consolidated financial
statements.
CONDENSED
FINANCIAL INFORMATION OF REGISTRANT
WELLCARE
HEALTH PLANS, INC. (Parent Company Only)
STATEMENTS
OF CASH FLOWS
(In
thousands, except share data)
|
|
For
the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Net
cash (used in) from operating activities
|
|
$ |
(48,053 |
) |
|
$ |
114,161 |
|
|
$ |
59,861 |
|
Cash
from (used in) investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from sale and maturities of investments, net
|
|
|
2,432 |
|
|
|
744 |
|
|
|
34,743 |
|
Capital
contributions to subsidiaries
|
|
|
(31,854 |
) |
|
|
(70,438 |
) |
|
|
(95,645 |
) |
Net
cash used in investing activities
|
|
|
(29,422 |
) |
|
|
(69,694 |
) |
|
|
(68,120 |
) |
Cash
from (used in) financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from options exercised and other, net
|
|
|
1,167 |
|
|
|
1,039 |
|
|
|
17,679 |
|
Purchase
of treasury stock
|
|
|
(2,413 |
) |
|
|
(2,720 |
) |
|
|
(4,845 |
) |
Incremental
tax benefit from option exercises
|
|
|
(8,346 |
) |
|
|
3,686 |
|
|
|
23,108 |
|
Proceeds
from initial and secondary public offerings, net
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Net
cash (used in) provided by financing activities
|
|
|
(9,592 |
) |
|
|
2,005 |
|
|
|
35,942 |
|
Cash
and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
during year
|
|
|
(87,067 |
) |
|
|
46,472 |
|
|
|
34,901 |
|
Balance
at beginning of year
|
|
|
88,629 |
|
|
|
42,157 |
|
|
|
7,256 |
|
Balance
at end of year
|
|
$ |
1,562 |
|
|
$ |
88,629 |
|
|
$ |
42,157 |
|
See notes to consolidated financial
statements.
Schedule
II — Valuation and Qualifying Accounts
|
|
Balance
at
Beginning
of
Period
|
|
|
Charged
to
Costs
and
Expenses
|
|
|
Deduction
|
|
|
Balance
at
End of
Period
|
|
Year
Ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted
from assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for uncollectible accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical
Advances
|
|
$ |
3,205 |
|
|
$ |
— |
|
|
$ |
1,855 |
|
|
$ |
1,350 |
|
Premiums
receivable
|
|
|
12,485 |
|
|
|
18,392 |
|
|
|
14,661 |
|
|
|
16,216 |
|
Other
receivables from government partners
|
|
|
6,400 |
|
|
|
1,389 |
|
|
|
— |
|
|
|
7,789 |
|
Sales
Commissions
|
|
|
1,370 |
|
|
|
16 |
|
|
|
1,336 |
|
|
|
50 |
|
|
|
$ |
23,460 |
|
|
$ |
19,797 |
|
|
$ |
17,852 |
|
|
$ |
25,405 |
|
Year
Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted
from assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for uncollectible accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical
Advances
|
|
$ |
3,847 |
|
|
$ |
— |
|
|
$ |
642 |
|
|
$ |
3,205 |
|
Premiums
receivable
|
|
|
39,537 |
|
|
|
21,475 |
|
|
|
48,527 |
|
|
|
12,485 |
|
Other
receivables from government partners
|
|
|
19,334 |
|
|
|
6,409 |
|
|
|
19,343 |
|
|
|
6,400 |
|
Sales
Commissions
|
|
|
1,309 |
|
|
|
196 |
|
|
|
135 |
|
|
|
1,370 |
|
|
|
$ |
64,027 |
|
|
$ |
28,080 |
|
|
$ |
68,647 |
|
|
$ |
23,460 |
|
Year
Ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted
from assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for uncollectible accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical
Advances
|
|
$ |
3,674 |
|
|
$ |
173 |
|
|
$ |
— |
|
|
$ |
3,847 |
|
Premiums
receivable
|
|
|
19,812 |
|
|
|
19,725 |
|
|
|
— |
|
|
|
39,537 |
|
Other
receivables from government partners
|
|
|
1,600 |
|
|
|
17,734 |
|
|
|
— |
|
|
|
19,334 |
|
Sales
Commissions
|
|
|
— |
|
|
|
1,309 |
|
|
|
— |
|
|
|
1,309 |
|
|
|
$ |
25,086 |
|
|
$ |
38,941 |
|
|
$ |
— |
|
|
$ |
64,027 |
|
Exhibit
Index
|
|
|
INCORPORATED BY REFERENCE
|
Exhibit
Number
|
|
Description
|
|
Form
|
|
Filing
Date
With
SEC
|
|
Exhibit
Number
|
2.1
|
|
Agreement
and Plan of Merger, dated as of February 12, 2004, between WellCare
Holdings, LLC and WellCare Group, Inc.
|
|
S-1/A
|
|
June
8, 2004
|
|
2.1
|
3.1
|
|
Amended
and Restated Certificate of Incorporation of the
Registrant
|
|
10-Q
|
|
August 13,
2004
|
|
3.1
|
3.1.1
|
|
Amendment
to Amended and Restated Certificate of Incorporation
|
|
10-Q
|
|
November
4. 2009
|
|
3.1.1
|
3.2
|
|
Amended
and Restated Bylaws of the Registrant
|
|
10-Q
|
|
August 13,
2004
|
|
3.2
|
3.2.1
|
|
Amendment
No. 1 to the Amended and Restated Bylaws of the
Registrant
|
|
8-K
|
|
January
31, 2008
|
|
3.2
|
4.1
|
|
Specimen
common stock certificate
|
|
S-1/A
|
|
June 29,
2004
|
|
4.1
|
10.1
|
|
Purchase
Agreement, dated as of May 17, 2002, by and among WellCare Holdings,
LLC, WellCare Acquisition Company, the stockholders listed on the
signature page thereto, WellCare HMO, Inc., HealthEase of
Florida, Inc., Comprehensive Health Management of Florida, Inc.
and Comprehensive Health Management, L.C.
|
|
S-1
|
|
February 13,
2004
|
|
10.5
|
10.2
|
|
Registration
Rights Agreement, dated as of September 6, 2002, by and among
WellCare Holdings, LLC and certain equity holders
|
|
S-1
|
|
February 13,
2004
|
|
10.13
|
10.3
|
|
WellCare
Holdings, LLC 2002 Senior Executive Equity Plan*
|
|
S-1
|
|
February 13,
2004
|
|
10.14
|
10.4
|
|
Form of
Subscription Agreement under 2002 Senior Executive Equity
Plan*
|
|
S-1
|
|
February 13,
2004
|
|
10.15
|
10.5
|
|
Form of
Director Subscription Agreement*
|
|
10-K
|
|
February 14,
2006
|
|
10.14
|
10.6
|
|
Form of
Non-Plan Time Vesting Option Agreement*
|
|
10-K
|
|
February 14,
2006
|
|
10.20
|
10.7
|
|
WellCare
Holdings, LLC 2002 Employee Option Plan*
|
|
S-1
|
|
February 13,
2004
|
|
10.16
|
10.8
|
|
Form of
Time Vesting Option Agreement under 2002 Employee Option
Plan*
|
|
S-1
|
|
February 13,
2004
|
|
10.17
|
10.9
|
|
Registrant’s
2004 Equity Incentive Plan*
|
|
10-Q
|
|
August 13,
2004
|
|
10.4
|
10.10
|
|
Form of
Non-Qualified Stock Option Agreement under Registrant’s 2004 Equity
Incentive Plan*
|
|
10-Q
|
|
August 13,
2004
|
|
10.5
|
10.11
|
|
Form of
Incentive Stock Option Agreement under Registrant’s 2004 Equity Incentive
Plan*
|
|
10-Q
|
|
August 13,
2004
|
|
10.6
|
10.12
|
|
Form of
Restricted Stock Agreement under Registrant’s 2004 Equity Incentive
Plan*
|
|
8-K
|
|
March 17,
2005
|
|
10.1
|
10.13
|
|
Form
of Restricted Stock Agreement under the Registrant’s 2004 Equity Incentive
Plan (associate version) (adopted May 28, 2009)*
|
|
8-K
|
|
June
3, 2009
|
|
10.1
|
10.14
|
|
Form
of Restricted Stock Agreement under the Registrant’s 2004 Equity Incentive
Plan (director version) (adopted May 28, 2009)*
|
|
8-K
|
|
June
3, 2009
|
|
10.2
|
10.15
|
|
Form
of Restricted Stock Unit Agreement under the Registrant’s 2004 Equity
Incentive Plan (associate version) (adopted May 28, 2009)*
|
|
8-K
|
|
June
3, 2009
|
|
10.3
|
10.16
|
|
Form
of Stock Option Agreement under the Registrant’s 2004 Equity Incentive
Plan (associate version) (adopted May 28, 2009)*
|
|
8-K
|
|
June
3, 2009
|
|
10.4
|
10.17
|
|
2005
Employee Stock Purchase Plan (No. 333-120257)*
|
|
S-8
|
|
November 5,
2004
|
|
4.7
|
10.17.1
|
|
Amendment
Number 1 to 2005 Employee Stock Purchase Plan*
|
|
8-K
|
|
September 29,
2006
|
|
10.1
|
10.18
|
|
Registrant’s
Special Retention Bonus Plan*
|
|
10-Q
|
|
March
2, 2009
|
|
10.41
|
10.19
|
|
Registrant’s
2009 Long Term Cash Bonus Plan*
|
|
8-K
|
|
March
10, 2009
|
|
10.1
|
10.20
|
|
Non-Employee
Director Compensation Policy*
|
|
10-Q
|
|
May
11, 2009
|
|
10.21
|
10.20.1
|
|
Non-Employee
Director Compensation Policy (as amended)*
|
|
10-Q
|
|
July
29,2009
|
|
10.8
|
10.21
|
|
Separation
Agreement and General Release for All Claims, dated as of January 25,
2008, by and among the Registrant, Comprehensive Health Management, Inc.
and Todd S. Farha*
|
|
8-K
|
|
January
31, 2008
|
|
10.1
|
10.22
|
|
Performance
Share Award Agreement, dated as of June 6, 2005, by and between the
Registrant and Todd S. Farha*
|
|
8-K
|
|
June 9,
2005
|
|
10.4
|
10.23
|
|
Employment
Agreement, made effective as of January 25, 2008, by and among the
Registrant, Comprehensive Health Management, Inc. and Heath
Schiesser*
|
|
8-K
|
|
January
31, 2008
|
|
10.4
|
10.24
|
|
Transition
and Separation Agreement, made effective as of September 17,
2009, by and among the Registrant, Comprehensive Health
Management, Inc. and Heath Schiesser*
|
|
8-K
|
|
September
23, 2009
|
|
10.1
|
10.25
|
|
Restricted
Stock Agreement, made effective as of January 25, 2008, by and
between the Registrant and Heath Schiesser*
|
|
8-K
|
|
January
31, 2008
|
|
10.6
|
10.26
|
|
Non-Qualified
Stock Option Agreement, dated as of January 25, 2008, by and between the
Registrant and Heath Schiesser*
|
|
8-K
|
|
January
31, 2008
|
|
10.8
|
10.27
|
|
Indemnification
Agreement, dated as of May 8, by and between the Registrant and
Heath Schiesser*
|
|
8-K
|
|
May
14, 2009
|
|
10.2
|
10.28
|
|
Letter
Agreement, dated as of January 25, 2008, by and between the
Registrant and Charles Berg*
|
|
8-K
|
|
January
31, 2008
|
|
10.5
|
10.28.1
|
|
Amended
and Restated Letter Agreement, dated as of August 10, 2009, by and among
the Registrant, Comprehensive Health Management, Inc. and Charles
Berg*
|
|
10-Q
|
|
November
4, 2009
|
|
10.2
|
10.29
|
|
Restricted
Stock Agreement, made effective as of January 25, 2008, by and
between the Registrant and Charles Berg*
|
|
8-K
|
|
January
31, 2008
|
|
10.7
|
10.30
|
|
Restricted
Stock Agreement, made effective as of August 10, 2009, by and between the
Registrant and Charles Berg*
|
|
10-Q
|
|
November
4, 2009
|
|
10.4
|
10.31
|
|
Non-Qualified
Stock Option Agreement, dated as of January 25, 2008, by and between the
Registrant and Charles Berg*
|
|
8-K
|
|
January
31, 2008
|
|
10.9
|
10.31.1
|
|
Amended
and Restated Non-Qualified Stock Option Agreement, dated as of August 10,
2009, by and between the Registrant and Charles
Berg*
|
|
10-Q
|
|
November
4, 2009
|
|
10.3
|
10.31.2
|
|
Amended
and Restated Non-Qualified Stock Option Agreement, dated as of February
16, 2009, by and between the Registrant and Charles Berg*
|
|
10-K
|
|
March
16, 2009
|
|
10.33
|
10.32
|
|
Indemnification
Agreement, dated as of May 14, 2009, by and between the Registrant and
Charles Berg*
|
|
8-K
|
|
May
14, 2009
|
|
10.3
|
10.33
|
|
Separation
Agreement and General Release, dated as of December 19,
2008, by and between Comprehensive Health Management, Inc. and
Anil Kottoor*
|
|
10-K/A
|
|
April
30, 2009
|
|
10.125
|
10.34
|
|
Offer
letter to Adam Miller, dated January 17, 2006*
|
|
10-Q
|
|
March
2, 2009
|
|
10.40
|
10.35
|
|
Severance
Agreement, dated as of July 30, 2009, by and among the
Registrant, Comprehensive Health Management, Inc. and Adam Miller
*
|
|
8-K
|
|
August
3, 2009
|
|
10.1
&
10.2
|
10.36
|
|
Employment
Agreement, dated as of April 1, 2008, by and among the Registrant,
Comprehensive Health Management, Inc. and Thomas F. O’Neil
III*
|
|
8-K
|
|
April
3, 2008
|
|
10.1
|
10.36.1
|
|
Amendment
No. 1 to Employment Agreement, made effective as of February 23, 2009, by
and among the Registrant, Comprehensive Health Management, Inc. and Thomas
F. O’Neil III*
|
|
10-K
|
|
March
16, 2009
|
|
10.38
|
10.36.2
|
|
Amended
and Restated Employment Agreement, dated as of June 3, 2009, by and among
the Registrant, Comprehensive Health Management, Inc. and Thomas F. O’Neil
III*
|
|
8-K
|
|
June
4, 2009
|
|
10.1
|
10.37
|
|
Restricted
Stock Agreement, made effective as of April 1, 2008, by and between
the Registrant and Thomas F. O’Neil III*
|
|
8-K
|
|
April
3, 2008
|
|
10.2
|
10.38
|
|
Non-Qualified
Stock Option Agreement, dated as of April 1, 2008, by and between the
Registrant and Thomas F. O’Neil III*
|
|
8-K
|
|
April
3, 2008
|
|
10.3
|
10.39
|
|
Letter
Agreement, dated December 16, 2009, among Thomas F. O’Neil III, WellCare
Health Plans, Inc. and Comprehensive Health Management,
Inc.
|
|
8-K
|
|
December
18, 2009
|
|
10.1
|
10.40
|
|
Employment
Agreement, dated as of July 17, 2008, by and among the Registrant,
Comprehensive Health Management, Inc. and Thomas L. Tran*
|
|
8-K
|
|
July
17, 2008
|
|
10.1
|
10.40.1
|
|
Amendment
No. 1 to Employment Agreement, made effective as of March 10, 2009, by and
among the Registrant, Comprehensive Health Management, Inc. and Thomas L.
Tran*
|
|
10-K
|
|
March
16, 2009
|
|
10.42
|
|
|
|
|
|
|
|
|
|
10.41
|
|
Form
of Restricted Stock Agreement between the Registrant and Thomas L.
Tran*
|
|
8-K
|
|
July
17, 2008
|
|
10.3
|
10.42
|
|
Form
of Non-Qualified Stock Option Agreement between the Registrant and Thomas
L. Tran*
|
|
8-K
|
|
July
17, 2008
|
|
10.4
|
10.43
|
|
Employment
Agreement, dated as of September 2, 2008, by and among the Registrant,
Comprehensive Health Management, Inc. and Rex M. Adams*
|
|
8-K
|
|
September
2, 2008
|
|
10.1
|
10.43.1
|
|
Amendment
No. 1 to Employment Agreement, dated as of September 30, 2009, by and
among the Registrant, Comprehensive Health Management, Inc. and Rex M.
Adams*
|
|
10-Q
|
|
November
4, 2009
|
|
10.6
|
10.44
|
|
Restricted
Stock Agreement, made effective as of September 2, 2008, between the
Registrant and Rex M. Adams*
|
|
8-K
|
|
September
2, 2008
|
|
10.3
|
10.45
|
|
Non-Qualified
Stock Option Agreement, dated as of September 2, 2008, between the
Registrant and Rex M. Adams*
|
|
8-K
|
|
September
2, 2008
|
|
10.4
|
10.46
|
|
Form
of Severance Agreement*
|
|
10-Q
|
|
November
4, 2009
|
|
10.13
|
10.47
|
|
Form of
Indemnification Agreement*
|
|
S-1/A
|
|
June 8,
2004
|
|
10.24
|
10.48
|
|
Form of
Indemnification Agreement (adopted May 8, 2009)*
|
|
8-K
|
|
May
14, 2009
|
|
10.1
|
10.49
|
|
Credit
Agreement, dated as of May 13, 2004, by and among the Registrant,
WellCare Holdings, LLC, The WellCare Management Group, Inc.,
Comprehensive Health Management, Inc. and Credit Suisse First Boston,
as Administrative Agent
|
|
S-1/A
|
|
June 8,
2004
|
|
10.29
|
10.49.1
|
|
First
Amendment to Credit Agreement, dated as of September 1, 2005, by and
among the Registrant, certain subsidiaries of the Registrant, certain
lenders and Wachovia Bank, National Association
|
|
8-K
|
|
September 1,
2005
|
|
10.1
|
10.49.2
|
|
Second
Amendment to Credit Agreement, dated as of September 28, 2006, by and
among the Registrant, certain subsidiaries of the Registrant, certain
lenders and Wachovia Bank, National Association
|
|
8-K
|
|
September 29,
2006
|
|
10.2
|
10.49.3
|
|
Third
Amendment to Credit Agreement, dated as of January 31, 2008, by and among
the Registrant, certain subsidiaries of the Registrant, certain lenders
and Wachovia Bank, National Association
|
|
10-Q
|
|
March
2, 2009
|
|
10.37
|
10.49.4
|
|
Agreement,
dated as of August 18, 2008, by and among the Registrant, the United
States Attorney’s Office for the Middle District of Florida, the Agency
for Health Care Administration and the Florida Attorney General’s Medicaid
Fraud Control Unit
|
|
8-K
|
|
August
18, 2008
|
|
10.1
|
10.50
|
|
Deferred
Prosecution Agreement, made effective as of May 5, 2009, by and among the
Registrant, certain subsidiaries and affiliates of the Registrant, the
United States Attorney’s Office for the Middle District of Florida and the
Florida Attorney General’s Office
|
|
8-K
|
|
May
5, 2009
|
|
10.1
|
10.51
|
|
Consent
of Registrant dated May 13, 2009 with respect to Complaint filed by the
Securities and Exchange Commission and form of Final Judgment entered by
the court on June 1, 2009
|
|
8-K
|
|
May
18, 2009
|
|
10.1
|
10.52
|
|
Contract
No. FAR001 by and between the State of Florida, Agency for Healthcare
Administration and HealthEase of Florida, Inc. (Medicaid Reform
2006-2009)
|
|
8-K
|
|
September 1,
2006
|
|
10.1
|
10.52.1
|
|
Amendment
No. 1 to Contract No. FAR001 by and between the State of Florida,
Agency for Healthcare Administration and HealthEase of Florida, Inc.
(Medicaid Reform 2006-2009)
|
|
8-K
|
|
September 18,
2006
|
|
10.3
|
10.52.2
|
|
Amendment
No. 2 to Contract No. FAR001 by and between the State of Florida,
Agency for Healthcare Administration and HealthEase of Florida, Inc.
(Medicaid Reform 2006-2009)
|
|
10-Q
|
|
May
9, 2007
|
|
10.12
|
10.52.3
|
|
Amendment
No. 3 to Contract No. FAR001 by and between the State of Florida,
Agency for Healthcare Administration and HealthEase of Florida, Inc.
(Medicaid Reform 2006-2009)
|
|
8-K
|
|
June 22,
2007
|
|
10.1
|
10.52.4
|
|
Amendment
No. 4 to Contract No. FAR001 by and between the State of Florida,
Agency for Healthcare Administration and HealthEase of Florida, Inc.
(Medicaid Reform 2006-2009)
|
|
8-K
|
|
July 30,
2007
|
|
10.1
|
10.52.5
|
|
Amendment
No. 5 to Contract No. FAR001 by and between the State of Florida,
Agency for Healthcare Administration and HealthEase of Florida, Inc.
(Medicaid Reform 2006-2009)
|
|
8-K
|
|
October 4,
2007
|
|
10.3
|
10.52.6
|
|
Amendment
No. 6 to Contract No. FAR001 by and between the State of Florida,
Agency for Healthcare Administration and HealthEase of Florida, Inc.
(Medicaid Reform 2006-2009)
|
|
8-K
|
|
December 28,
2007
|
|
10.3
|
10.52.7
|
|
Amendment
No. 7 to Contract No. FAR001 by and between the State of Florida,
Agency for Healthcare Administration and HealthEase of Florida, Inc.
(Medicaid Reform 2006-2009)
|
|
8-K
|
|
February
6, 2008
|
|
10.3
|
10.52.8
|
|
Amendment
No. 8 to Contract No. FAR001 by and between the State of Florida,
Agency for Healthcare Administration and HealthEase of Florida, Inc.
(Medicaid Reform 2006-2009)
|
|
8-K
|
|
February
6, 2008
|
|
10.4
|
10.52.9
|
|
Amendment
No.9 to Contract No. FAR001 by and between the State of Florida,
Agency for Health Care Administration and HealthEase of Florida, Inc.
(Medicaid Reform 2006-2009)
|
|
8-K
|
|
September
12, 2008
|
|
10.1
|
10.52.10
|
|
Amendment
No. 10 to Contract No. FAR001 by and between the State of Florida,
Agency for Health Care Administration and HealthEase of Florida, Inc.
(Medicaid Reform 2006-2009)
|
|
8-K
|
|
September
12, 2008
|
|
10.2
|
10.52.11
|
|
Amendment
No. 11 to Contract No. FAR001 by and between the State of Florida, Agency
for Health Care Administration and HealthEase of Florida, Inc. (Medicaid
Reform 2006-2009)
|
|
10-Q
|
|
July
29, 2009
|
|
10.19
|
10.52.12
|
|
Amendment
No. 12 to Contract No. FAR001 by and between the State of Florida, Agency
for Health Care Administration and HealthEase of Florida, Inc. (Medicaid
Reform 2006-2009)
|
|
8-K
|
|
May
1, 2009
|
|
10.1
|
10.53
|
|
Contract
No. FAR009 by and between the State of Florida, Agency for Healthcare
Administration and WellCare of Florida, Inc. d/b/a/ Staywell Health
Plan of Florida (Medicaid Reform 2006-2009)
|
|
8-K
|
|
September 1,
2006
|
|
10.2
|
10.53.1
|
|
Amendment
No. 1 to Contract No. FAR009 by and between the State of Florida,
Agency for Healthcare Administration and WellCare of Florida, Inc.
d/b/a/ Staywell Health Plan of Florida (Medicaid Reform
2006-2009)
|
|
8-K
|
|
September 18,
2006
|
|
10.4
|
10.53.2
|
|
Amendment
No. 2 to Contract No. FAR009 by and between the State of Florida,
Agency for Healthcare Administration and WellCare of Florida, Inc.
d/b/a/ Staywell Health Plan of Florida (Medicaid Reform
2006-2009)
|
|
10-Q
|
|
May
9, 2009
|
|
10.13
|
10.53.3
|
|
Amendment
No. 3 to Contract No. FAR009 by and between the State of Florida,
Agency for Healthcare Administration and WellCare of Florida, Inc.
d/b/a/ Staywell Health Plan of Florida (Medicaid Reform
2006-2009)
|
|
8-K
|
|
June 22,
2007
|
|
10.2
|
10.53.4
|
|
Amendment
No. 4 to Contract No. FAR009 by and between the State of Florida,
Agency for Healthcare Administration and WellCare of Florida, Inc.
d/b/a/ Staywell Health Plan of Florida (Medicaid Reform
2006-2009)
|
|
8-K
|
|
July
30, 2007
|
|
10.2
|
10.53.5
|
|
Amendment
No. 5 to Contract No. FAR009 by and between the State of Florida,
Agency for Healthcare Administration and WellCare of Florida, Inc.
d/b/a/ Staywell Health Plan of Florida (Medicaid Reform
2006-2009)
|
|
8-K
|
|
October 4,
2007
|
|
10.4
|
10.53.6
|
|
Amendment
No. 6 to Contract No. FAR009 by and between the State of Florida,
Agency for Healthcare Administration and WellCare of Florida, Inc.
d/b/a/ Staywell Health Plan of Florida (Medicaid Reform
2006-2009)
|
|
8-K
|
|
December 28,
2007
|
|
10.4
|
10.53.7
|
|
Amendment
No.7 to Contract No. FAR009 by and between the State of Florida,
Agency for Healthcare Administration and WellCare of Florida, Inc. d/b/a
Staywell Health Plan of Florida (Medicaid Reform
2006-2009)
|
|
8-K
|
|
February
6, 2008
|
|
10.5
|
10.53.8
|
|
Amendment
No. 8 to Contract No. FAR009 by and between the State of Florida,
Agency for Healthcare Administration and WellCare of Florida, Inc. d/b/a
Staywell Health Plan of Florida (Medicaid Reform
2006-2009)
|
|
8-K
|
|
February
6, 2008
|
|
10.6
|
10.53.9
|
|
Amendment
No. 9 to Contract No. FAR009 by and between the State of Florida,
Agency for Health Care Administration and WellCare of Florida, Inc. d/b/a
Staywell Health Plan of Florida (Medicaid Reform
2006-2009)
|
|
8-K
|
|
September
12, 2008
|
|
10.3
|
10.53.10
|
|
Amendment
No. 10 to Contract No. FAR009 by and between the State of Florida,
Agency for Health Care Administration and WellCare of Florida, Inc. d/b/a
Staywell Health Plan of Florida (Medicaid Reform
2006-2009)
|
|
8-K
|
|
September
12, 2008
|
|
10.4
|
10.53.11
|
|
Amendment
No. 11 to Contract No. FAR009 by and between the State of Florida, Agency
for Health Care Administration and WellCare of Florida, Inc. d/b/a
Staywell Health Plan of Florida (Medicaid Reform
2006-2009)
|
|
10-Q
|
|
July
29, 2009
|
|
10.21
|
10.53.12
|
|
Amendment
No. 12 to Contract No. FAR009 by and between the State of Florida, Agency
for Health Care Administration and WellCare of Florida, Inc. d/b/a
Staywell Health Plan of Florida (Medicaid Reform
2006-2009)
|
|
8-K
|
|
May
1, 2009
|
|
10.2
|
10.54
|
|
Contract
No. FA619 by and between the State of Florida, Agency for Healthcare
Administration and HealthEase of Florida, Inc. (Medicaid Non-Reform
2006-2009)
|
|
8-K
|
|
September 18,
2006
|
|
10.2
|
10.54.1
|
|
Amendment
No. 1 to Contract No. FA619 by and between the State of Florida,
Agency for Healthcare Administration and HealthEase of Florida, Inc.
(Medicaid Non-Reform 2006-2009)
|
|
8-K
|
|
October 4,
2007
|
|
10.1
|
10.54.2
|
|
Amendment
No. 2 to Contract No. FA619 by and between the State of Florida,
Agency for Healthcare Administration and HealthEase of Florida, Inc.
(Medicaid Non-Reform 2006-2009)
|
|
8-K
|
|
December 28,
2007
|
|
10.1
|
10.54.3
|
|
Amendment
No. 3 to Contract No. FA619 by and between the State of Florida,
Agency for Healthcare Administration and HealthEase of Florida, Inc.
(Medicaid Non-Reform 2006-2009)
|
|
8-K
|
|
February
6, 2008
|
|
10.1
|
10.54.4
|
|
Amendment
No. 4 to Contract No. FA619 by and between the State of Florida,
Agency for Health Care Administration and HealthEase of Florida, Inc.
(Medicaid Non-Reform 2006-2009)
|
|
8-K
|
|
May
7, 2008
|
|
10.1
|
10.54.5
|
|
Amendment
No. 5 to Contract No. FA619 by and between the State of Florida,
Agency for Health Care Administration and HealthEase of Florida, Inc.
(Medicaid Non-Reform 2006-2009)
|
|
8-K
|
|
September
12, 2008
|
|
10.7
|
10.54.6
|
|
Amendment
No. 6 to Contract No. FA619 by and between the State of Florida, Agency
for Healthcare Administration and HealthEase of Florida, Inc. (Medicaid
Non-Reform 2006-2009)
|
|
8-K
|
|
March
9, 2009
|
|
10.2
|
10.54.7
|
|
Amendment
No. 7 to Contract No. FA619 by and between the State of Florida, Agency
for Healthcare Administration and HealthEase of Florida, Inc. (Medicaid
Non-Reform 2006-2009)
|
|
10-Q
|
|
July
29, 2009
|
|
10.17
|
10.54.8
|
|
Amendment
No. 8 to Contract No. FA619 by and between the State of Florida, Agency
for Healthcare Administration and HealthEase of Florida, Inc. (Medicaid
Non-Reform 2006-2009)
|
|
8-K
|
|
May
1, 2009
|
|
10.3
|
10.54.9
|
|
Amendment
No. 9 to Contract No. FA619 by and between the State of Florida, Agency
for Healthcare Administration and HealthEase of Florida, Inc. (Medicaid
Non-Reform 2006-2009)
|
|
8-K
|
|
July
15, 2009
|
|
10.2
|
10.55
|
|
Contract
No. FA905 by and between the State of Florida, Agency for Healthcare
Administration and HealthEase of Florida, Inc. (Medicaid Non-Reform
2009-2012)
|
|
8-K
|
|
September 16,
2009
|
|
10.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.56
|
|
Contract
No. FA615 by and between the State of Florida, Agency for Healthcare
Administration and WellCare of Florida, Inc. d/b/a/ Staywell Health
Plan of Florida (Medicaid Non-Reform 2006-2009)
|
|
8-K
|
|
September 18,
2006
|
|
10.1
|
10.56.1
|
|
Amendment
No. 1 to Contract No. FA615 by and between the State of Florida,
Agency for Healthcare Administration and WellCare of Florida, Inc.
d/b/a/ Staywell Health Plan of Florida (Medicaid Non-Reform
2006-2009)
|
|
8-K
|
|
June 29,
2007
|
|
10.3
|
10.56.2
|
|
Amendment
No. 2 to Contract No. FA615 by and between the State of Florida,
Agency for Healthcare Administration and WellCare of Florida, Inc.
d/b/a/ Staywell Health Plan of Florida (Medicaid Non-Reform
2006-2009)
|
|
8-K
|
|
October 4,
2007
|
|
10.2
|
10.56.3
|
|
Amendment
No. 3 to Contract No. FA615 by and between the State of Florida,
Agency for Healthcare Administration and WellCare of Florida, Inc.
d/b/a/ Staywell Health Plan of Florida (Medicaid Non-Reform
2006-2009)
|
|
8-K
|
|
December 28,
2007
|
|
10.2
|
10.56.4
|
|
Amendment
No. 4 to Contract No. FA615 by and between the State of Florida,
Agency for Healthcare Administration and WellCare of Florida, Inc. d/b/a
Staywell Health Plan of Florida (Medicaid Non-Reform
2006-2009)
|
|
8-K
|
|
February
6, 2008
|
|
10.2
|
10.56.5
|
|
Amendment
No. 5 to Contract No. FA615 by and between the State of Florida, Agency
for Health Care Administration and WellCare of Florida, Inc. d/b/a
Staywell Health Plan of Florida (Medicaid Non-Reform
2006-2009)
|
|
8-K
|
|
May
7, 2008
|
|
10.2
|
10.56.6
|
|
Amendment
No. 6 to Contract No. FA615 by and between the State of Florida,
Agency for Health Care Administration and WellCare of Florida, Inc. d/b/a
Staywell Health Plan of Florida (Medicaid Non-Reform Contract
2006-2009)
|
|
8-K
|
|
September
12, 2008
|
|
10.5
|
10.56.7
|
|
Amendment
No. 7 to Contract No. FA615 by and between the State of Florida,
Agency for Health Care Administration and WellCare of Florida, Inc. d/b/a
Staywell Health Plan of Florida (Medicaid Non-Reform Contract
2006-2009)
|
|
8-K
|
|
September
12. 2008
|
|
10.6
|
10.56.8
|
|
Amendment
No. 8 to Contract No. FA615 by and between the State of Florida, Agency
for Healthcare Administration and WellCare of Florida, Inc. d/b/a/
Staywell Health Plan of Florida (Medicaid Non-Reform
2006-2009)
|
|
8-K
|
|
March
9, 2009
|
|
10.1
|
10.56.9
|
|
Amendment
No. 9 to Contract No. FA615 by and between the State of Florida, Agency
for Health Care Administration and WellCare of Florida, Inc. d/b/a
Staywell Health Plan of Florida (Medicaid Non-Reform
2006-2009)
|
|
10-Q
|
|
July
29, 2009
|
|
10.15
|
10.56.10
|
|
Amendment
No. 10 to Contract No. FA615 by and between the State of Florida, Agency
for Health Care Administration and WellCare of Florida, Inc. d/b/a
Staywell Health Plan of Florida (Medicaid Non-Reform
2006-2009)
|
|
8-K
|
|
May
1, 2009
|
|
10.4
|
10.56.11
|
|
Amendment
No. 11 to Contract No. FA615 by and between the State of Florida, Agency
for Health Care Administration and WellCare of Florida, Inc. d/b/a
Staywell Health Plan of Florida (Medicaid Non-Reform
2006-2009)
|
|
8-K
|
|
July
15, 2009
|
|
10.1
|
10.57
|
|
Contract
No. FA904 by and between the State of Florida, Agency for Health Care
Administration and WellCare of Florida, Inc. d/b/a Staywell Health Plan of
Florida (Medicaid Non-Reform 2009-2012)
|
|
8-K
|
|
September 16,
2009
|
|
10.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.58
|
|
Non-Institutional
Medicaid Provider Agreement by and between the State of Florida, Agency
for Health Care Administration and WellCare of Florida,
Inc.
|
|
8-K
|
|
April
9, 2009
|
|
10.1
|
10.59
|
|
Contract
to Provide Comprehensive Medical Services by and among the Florida Healthy
Kids Corporation, HealthEase of Florida, Inc. and WellCare of
Florida, Inc. (f/k/a WellCare HMO, Inc.) d/b/a Staywell Health Plan of
Florida.(2008-2009)
|
|
8-K
|
|
August
20, 2008
|
|
10.1
|
10.59.1
|
|
Amendment
#1 to Contract to Provide Comprehensive Medical Services by and among the
Florida Healthy Kids Corporation, HealthEase of Florida, Inc.
and WellCare of Florida, Inc. (f/k/a WellCare HMO, Inc.) d/b/a Staywell
Health Plan of Florida.(2008-2009)
|
|
8-K
|
|
October
14, 2008
|
|
10.2
|
10.60
|
|
Contract
to Provide Comprehensive Medical Services by and among the Florida Healthy
Kids Corporation, HealthEase of Florida, Inc. and WellCare of Florida,
Inc. (2009-2010)
|
|
8-K
|
|
October
5, 2009
|
|
10.1
|
10.61
|
|
Contract
No. 0654 by and between the Georgia Department of Community Health
and WellCare of Georgia, Inc. for Provision of Services to Georgia
Healthy Families
|
|
10-Q
|
|
August 4,
2005
|
|
10.19
|
10.61.1
|
|
Amendment
#1 to Contract 0654 by and between the Georgia Department of Community
Health and WellCare of Georgia, Inc. for Provision of Services to
Georgia Healthy Families
|
|
8-K
|
|
April 25,
2007
|
|
10.1
|
10.61.2
|
|
Amendment
#2 to Contract 0654 by and between the Georgia Department of Community
Health and WellCare of Georgia, Inc. for Provision of Services to Georgia
Healthy Families
|
|
8-K
|
|
January
30, 2008
|
|
10.2
|
10.61.3
|
|
Amendment
#3 to Contract 0654 by and between the Georgia Department of Community
Health and WellCare of Georgia, Inc. for Provision of Services to Georgia
Healthy Families
|
|
8-K
|
|
October
30, 2008
|
|
10.1
|
10.61.4
|
|
Amendment
#4 to Contract 0654 by and between the Georgia Department of Community
Health and WellCare of Georgia, Inc. for Provision of Services to Georgia
Healthy Families
|
|
8-K
|
|
October
30, 2008
|
|
10.2
|
10.61.5
|
|
Amendment
#5 to Contract 0654 by and between the Georgia Department of Community
Health and WellCare of Georgia, Inc. for Provision of Services to Georgia
Healthy Families
|
|
8-K
|
|
October
30, 2008
|
|
10.3
|
10.61.6
|
|
Amendment
#7 to Contract 0654 by and between the Georgia Department of Community
Health and WellCare of Georgia, Inc. for Provision of Services to Georgia
Healthy Families
|
|
8-K
|
|
October
29, 2009
|
|
10.1
|
10.62
|
|
Contract
(#H0712) by and between the Centers for Medicare & Medicaid
Services and WellCare of Connecticut, Inc.
|
|
8-K
|
|
November 2,
2005
|
|
10.4
|
10.62.1
|
|
Plan
Benefit Package attachment to 2009 renewal of Contract (#H0712) by and
between the Centers for Medicare & Medicaid Services and WellCare
of Connecticut, Inc.
|
|
10-Q
|
|
May
11, 2009
|
|
10.4
|
10.62.2
|
|
Plan
Benefit Package attachment to 2010 renewal of Contract (#H0712) by and
between the Centers for Medicare & Medicaid Services and WellCare
of Connecticut, Inc.
|
|
8-K
|
|
November
12, 2009
|
|
10.5
|
10.63
|
|
Contract
(#H1032) by and between the Centers for Medicare & Medicaid
Services and WellCare of Florida, Inc.
|
|
8-K
|
|
November 2,
2005
|
|
10.5
|
10.63.1
|
|
Plan
Benefit Package attachment to 2009 renewal of Contract (#H1032) by and
between the Centers for Medicare & Medicaid Services and WellCare
of Florida, Inc.
|
|
10-Q
|
|
May
11, 2009
|
|
10.5
|
10.63.2
|
|
Plan
Benefit Package attachment to 2010 renewal of Contract (#H1032) by and
between the Centers for Medicare & Medicaid Services and WellCare
of Florida, Inc.
|
|
8-K
|
|
November
12, 2009
|
|
10.9
|
10.64
|
|
Contract
(#H1112) by and between the Centers for Medicare & Medicaid
Services and WellCare of Georgia, Inc.
|
|
8-K
|
|
November 2,
2005
|
|
10.6
|
10.64.1
|
|
Plan
Benefit Package attachment to 2009 renewal of Contract (#H1112) by and
between the Centers for Medicare & Medicaid Services and WellCare
of Georgia, Inc.
|
|
10-Q
|
|
May
11, 2009
|
|
10.6
|
10.64.2
|
|
Plan
Benefit Package attachment to 2010 renewal of Contract (#H1112) by and
between the Centers for Medicare & Medicaid Services and WellCare
of Georgia, Inc.
|
|
8-K
|
|
November
12, 2009
|
|
10.11
|
10.65
|
|
Contract
(#H1416) by and between the Centers for Medicare & Medicaid
Services and Harmony Health Plan of Illinois, Inc.
|
|
8-K
|
|
November 2,
2005
|
|
10.7
|
10.65.1
|
|
Plan
Benefit Package attachment to 2009 renewal of Contract (#H1416) by and
between the Centers for Medicare & Medicaid Services and Harmony
Health Plan of Illinois, Inc.
|
|
10-Q
|
|
May
11, 2009
|
|
10.3
|
10.65.2
|
|
Plan
Benefit Package attachment to 2010 renewal of Contract (#H1416) by and
between the Centers for Medicare & Medicaid Services and Harmony
Health Plan of Illinois, Inc.
|
|
8-K
|
|
November
12, 2009
|
|
10.18
|
10.66
|
|
Contract
(#H1903) by and between the Centers for Medicare & Medicaid
Services and WellCare of Louisiana, Inc.
|
|
8-K
|
|
November 2,
2005
|
|
10.8
|
10.66.1
|
|
Plan
Benefit Package attachment to 2009 renewal of Contract (#H1903) by and
between the Centers for Medicare & Medicaid Services and WellCare
of Louisiana, Inc.
|
|
10-Q
|
|
May
11, 2009
|
|
10.7
|
10.66.2
|
|
Plan
Benefit Package attachment to 2010 renewal of Contract (#H1903) by and
between the Centers for Medicare & Medicaid Services and WellCare
of Louisiana, Inc.
|
|
8-K
|
|
November
12, 2009
|
|
10.22
|
10.67
|
|
Contract
(#H3361) by and between the Centers for Medicare & Medicaid
Services and WellCare of New York, Inc.
|
|
8-K
|
|
November 2,
2005
|
|
10.9
|
10.67.1
|
|
Plan
Benefit Package attachment to 2009 renewal of Contract (#H3361) by and
between the Centers for Medicare & Medicaid Services and WellCare
of New York, Inc.
|
|
10-Q
|
|
May
11, 2009
|
|
10.8
|
10.67.2
|
|
Plan
Benefit Package attachment to 2010 renewal of Contract (#H3361) by and
between the Centers for Medicare & Medicaid Services and WellCare
of New York, Inc.
|
|
8-K
|
|
November
12, 2009
|
|
10.26
|
10.68
|
|
Form
of addenda accompanying notices of 2009 renewals with respect to contracts
by and between the Centers for Medicare & Medicaid Services and each
of: WellCare of Connecticut, Inc. (#H0712); WellCare of Florida, Inc.
(#H1032); WellCare of Georgia, Inc. (#H1112); Harmony Health Plan of
Illinois, Inc. (#H1416); WellCare of Louisiana, Inc. (#H1903); and
WellCare of New York, Inc. (#H3361)
|
|
10-Q
|
|
May
11, 2009
|
|
10.2
|
10.69
|
|
Contract
(#H1216) by and between the Centers for Medicare & Medicaid
Services and Harmony Health Plan of Illinois, Inc. (d/b/a Harmony
Health Plan of Missouri)
|
|
8-K
|
|
November 9,
2007
|
|
10.2
|
10.69.1
|
|
Plan
Benefit Package attachment to 2009 renewal of Contract (#H1216) by and
between the Centers for Medicare & Medicaid Services and Harmony
Health Plan of Illinois, Inc. (d/b/a Harmony Health Plan of
Missouri)
|
|
8-K
|
|
April
14, 2009
|
|
10.2
|
10.69.2
|
|
Plan
Benefit Package attachment to 2010 renewal of Contract (#H1216) by and
between the Centers for Medicare & Medicaid Services and Harmony
Health Plan of Illinois, Inc. (d/b/a Harmony Health Plan of
Missouri)
|
|
8-K
|
|
November
12, 2009
|
|
10.13
|
10.70
|
|
Contract
(#H1264) by and between the Centers for Medicare & Medicaid
Services and WellCare of Texas, Inc.
|
|
8-K
|
|
November 9,
2007
|
|
10.3
|
10.70.1
|
|
Addendum
accompanying notice of 2009 renewal of Contract (#H1264) by and between
the Centers for Medicare & Medicaid Services and WellCare of Texas,
Inc., with Plan Benefit Package addendum
|
|
10-Q
|
|
May
11, 2009
|
|
10.1
|
10.70.2
|
|
Plan
Benefit Package attachment to 2010 renewal of Contract (#H1264) by and
between the Centers for Medicare & Medicaid Services and WellCare
of Texas, Inc.
|
|
8-K
|
|
November
12, 2009
|
|
10.16
|
10.71
|
|
Contract
(#H0913) by and between the Centers for Medicare & Medicaid
Services and WellCare Health Plans of New
Jersey, Inc.
|
|
8-K
|
|
November 9,
2007
|
|
10.4
|
10.71.1
|
|
Plan
Benefit Package attachment to 2009 renewal of Contract (#H0913) by and
between the Centers for Medicare & Medicaid Services and WellCare
Health Plans of New Jersey, Inc.
|
|
8-K
|
|
April
14, 2009
|
|
10.3
|
10.71.2
|
|
Plan
Benefit Package attachment to 2010 renewal of Contract (#H0913) by and
between the Centers for Medicare & Medicaid Services and WellCare
Health Plans of New Jersey, Inc.
|
|
8-K
|
|
November
12, 2009
|
|
10.7
|
10.72
|
|
Contract
(#H0117) by and between the Centers for Medicare & Medicaid
Services and WellCare of Ohio, Inc.
|
|
8-K
|
|
November 9,
2007
|
|
10.5
|
10.72.1
|
|
Notice
of 2009 renewal from the Centers for Medicare & Medicaid Services
(“CMS”) of Contract (#H0117) by and between CMS and WellCare of Ohio, Inc.
with addendum and Plan Benefit attestation (also form of 2009 renewal
notice and addendum to contracts by and between CMS and each of: Harmony
Health Plan of Illinois, Inc. (d/b/a Harmony Health Plan of Indiana)
(#H1657); Harmony Health Plan of Illinois, Inc. (d/b/a Harmony Health Plan
of Missouri) (#H1216); and WellCare Health Plans of New Jersey, Inc.
(#H0913))
|
|
8-K
|
|
April
7, 2009
|
|
10.1
|
10.72.2
|
|
Plan
Benefit Package attachment to 2010 renewal of Contract (#H0117) by and
between the Centers for Medicare & Medicaid Services and WellCare
of Ohio, Inc.
|
|
8-K
|
|
November
12. 2009
|
|
10.3
|
10.73
|
|
Contract
(#H2491) by and between the Centers for Medicare & Medicaid Services
and WellCare Health Insurance of Arizona, Inc.
|
|
8-K
|
|
December
23, 2008
|
|
10.1
|
10.73.1
|
|
Plan
Benefit Package attachment to 2010 renewal of Contract (#H2491) by and
between the Centers for Medicare & Medicaid Services and WellCare
Health Insurance of Arizona, Inc.
|
|
8-K
|
|
November
12, 2009
|
|
10.24
|
10.74
|
|
Contract
(#H1657) by and between the Centers for Medicare & Medicaid Services
and Harmony Health Plan of Illinois, Inc. d/b/a Harmony Health Plan of
Indiana
|
|
8-K
|
|
February
21, 2008
|
|
10.2
|
10.74.1
|
|
Plan
Benefit Package attachment to 2009 renewal of Contract (#H1657) by and
between the Centers for Medicare & Medicaid Services and Harmony
Health Plan of Illinois, Inc. (d/b/a Harmony Health Plan of
Indiana)
|
|
8-K
|
|
April
14, 2009
|
|
10.1
|
10.74.2
|
|
Plan
Benefit Package attachment to 2010 renewal of Contract (#H1657) by and
between the Centers for Medicare & Medicaid Services and Harmony
Health Plan of Illinois, Inc. (d/b/a Harmony Health Plan of
Indiana)
|
|
8-K
|
|
November
12, 2009
|
|
10.20
|
10.75
|
|
Form
of 2010 renewal notice from the Centers for Medicare & Medicaid
Services (“CMS”) regarding contracts by and between CMS and each of:
WellCare of Ohio, Inc. (#H0117); WellCare of Connecticut, Inc. (#H0712);
WellCare Health Insurance Plans of New Jersey, Inc. (#H0913); WellCare of
Florida, Inc. (#H1032); WellCare of Georgia, Inc. (#H1112); Harmony Health
Plan of Illinois, Inc. (d/b/a Harmony Health Plan of Missouri) (#H1216);
WellCare of Texas, Inc. (#H1264); Harmony Health Plan of Illinois, Inc.
(#H1416); Harmony Health Plan of Illinois, Inc. (d/b/a Harmony Health Plan
of Indiana) (#H1657); WellCare of Louisiana, Inc. (#H1903); WellCare
Health Insurance of Arizona, Inc.(#H2491); and WellCare of New York, Inc.
(#H3361)
|
|
8-K
|
|
November
12. 2009
|
|
10.1
|
10.76
|
|
Contract
(#H0967) by and between the Centers for Medicare & Medicaid
Services and WellCare Health Insurance of
Illinois, Inc.
|
|
8-K
|
|
November 9,
2007
|
|
10.1
|
10.76.1
|
|
Plan
Benefit Package attachment to 2009 renewal of Contract (#H0967) by and
between the Centers for Medicare & Medicaid Services and WellCare
Health Insurance of Illinois, Inc.
|
|
10-Q
|
|
May
11, 2009
|
|
10.11
|
10.77
|
|
Contract
(#H6499) by and between the Centers for Medicare & Medicaid
Services and WellCare Health Insurance of New York, Inc. (f/k/a Stone
Harbor Insurance Company)
|
|
10-Q
|
|
November 3,
2006
|
|
10.14
|
10.77.1
|
|
Plan
Benefit Package attachment to 2009 renewal of Contract (#H6499) by and
between the Centers for Medicare & Medicaid Services and WellCare
Health Insurance of New York, Inc.
|
|
10-Q
|
|
May
11, 2009
|
|
10.13
|
10.78
|
|
Contract
(#H1340) by and between the Centers for Medicare & Medicaid
Services and WellCare Health Insurance of Arizona, Inc. (f/k/a Advance /
WellCare PFFS Insurance, Inc.)
|
|
10-Q
|
|
November 3,
2006
|
|
10.15
|
10.78.1
|
|
Plan
Benefit Package attachment to 2009 renewal of Contract (#H1340) by and
between the Centers for Medicare & Medicaid Services and WellCare
Health Insurance of Arizona, Inc.
|
|
10-Q
|
|
May
11, 2009
|
|
10.10
|
10.79
|
|
Contract
(#H4577) by and between the Centers for Medicare & Medicaid and
WellCare Health Insurance of Illinois, Inc. (f/k/a Home Owners / WellCare
PFFS Insurance, Inc.)
|
|
10-Q
|
|
November 3,
2006
|
|
10.16
|
10.79.1
|
|
Plan
Benefit Package attachment to 2009 renewal of Contract (#H4577) by and
between the Centers for Medicare & Medicaid Services and WellCare
Health Insurance of Illinois, Inc.
|
|
10-Q
|
|
May
11, 2009
|
|
10.12
|
10.80
|
|
Form
of addendum accompanying notice of renewal for 2009 with respect to
contracts between the Centers for Medicare & Medicaid Services and
each of the following to operate private fee-for-service plans: WellCare
Health Insurance of Arizona, Inc. (#H1340); WellCare Health Insurance of
Illinois, Inc. (#H0967 and #H4577); and WellCare Health Insurance of New
York, Inc. (#H6499).
|
|
10-Q
|
|
May
11, 2009
|
|
10.9
|
10.81
|
|
Contract
(#S5967) by and between the Centers for Medicare & Medicaid
Services and WellCare Prescription Insurance, Inc.
|
|
8-K
|
|
November 2,
2005
|
|
10.3
|
10.81.1
|
|
Addendum
to Contract (#S5967) by and between the Centers for Medicare &
Medicaid Services and WellCare Prescription
Insurance, Inc.
|
|
10-Q
|
|
November 3,
2006
|
|
10.13
|
10.81.2
|
|
2009
renewal of Contract (#S5967) by and between the Centers for Medicare &
Medicaid Services and WellCare Prescription Insurance, Inc., with
Addendum
|
|
8-K
|
|
September
29, 2008
|
|
10.1
|
10.81.3
|
|
2010
renewal of Contract (#S5967) by and between the Centers for Medicare &
Medicaid Services and WellCare Prescription Insurance, Inc. with Plan
Benefit Package attachment
|
|
8-K
|
|
September
16, 2009
|
|
10.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Denotes
a management contract or compensatory plan, contract or arrangement
† Filed
herewith