FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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þ |
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended December 31, 2008
OR
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o |
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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)
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Delaware
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47-0937650 |
(State or Other Jurisdiction of Incorporation
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(I.R.S. Employer |
Organization)
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Identification No.) |
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8725 Henderson Road, Renaissance One |
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Tampa, Florida
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33634 |
(Address of Principal Executive Offices)
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(Zip Code) |
(813) 290-6200
Registrants telephone number, including area
code
Securities registered pursuant to Section 12(b) of the Exchange Act:
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Common Stock, par value $0.01 per share |
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New York Stock Exchange |
(Title of Class)
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(Name of Each Exchange on which |
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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 o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 of
Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes o No þ
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 registrants knowledge,
in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller
reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer þ |
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Accelerated filer o |
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Non-accelerated filer o
(Do not check if a smaller reporting company) |
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
The aggregate market value of Common Stock held by non-affiliates of the registrant (33,887,747
shares) on June 30, 2008 was $1,225,042,054 (based on the closing price of $36.15 per share on June
30, 2008 as reported on the New York Stock Exchange). Solely for purposes of this computation, all officers, directors and 10% beneficial owners of the
registrant are deemed to be affiliates. Such determination should not be deemed to be an admission
that such officers, directors or 10% beneficial owners are, in fact, affiliates of the registrant.
As of
March 12, 2009, there were outstanding 42,234,313 shares of the registrants Common Stock, par
value $0.01 per share.
Documents
Incorporated by Reference: Portions of the registrants
definitive Proxy Statement for the
2009 Annual Meeting of
Stockholders are incorporated by reference into Part III of this
Form 10-K.
TABLE OF CONTENTS
References to the Company, WellCare, we, our, and us in this Annual Report on Form
10-K for the fiscal year ended December 31, 2008 (the 2008 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.
1
PART I
Item 1. Business.
Overview
We provide managed care services targeted exclusively to government-sponsored health care
programs, focused on Medicaid and Medicare, including prescription drug plans and health plans for
families, children and the aged, blind and disabled. As of December 31, 2008, we served
approximately 2.5 million members. We believe that this broad range of experience and exclusive
government focus allows us to serve efficiently and effectively our members and providers and to
manage our operations.
Through our licensed subsidiaries, as of December 31, 2008, we operated our Medicaid health
plans in Florida, New York, Illinois, Missouri, Ohio and Georgia, our Medicare Advantage
coordinated care plans (CCPs) in Florida, New York, Connecticut, Illinois, Indiana, Louisiana,
Missouri, New Jersey, Ohio, Georgia and Texas, and our pilot Medicare preferred provider
organizations (PPOs) in Georgia and Ohio. We also operated as a stand-alone Medicare
prescription drug plan (PDP) in all 50 states and the District of Columbia and offered Medicare
Advantage private fee-for-service (PFFS) plans to Medicare beneficiaries in approximately 1,590
counties and 43 states and the District of Columbia as of December 31, 2008.
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.
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State |
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Brand Name(s) |
Florida
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Staywell; HealthEase |
Georgia
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WellCare |
Hawaii
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Ohana |
Illinois
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Harmony |
Missouri
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Harmony |
New York
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WellCare |
Ohio
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WellCare |
Key Developments
We discuss below some key developments that have occurred since January 1, 2008 through the
date of the filing of this 2008 Form 10-K.
Special Committee Investigation
As previously disclosed, on October 24, 2007, certain federal and state agencies executed a
search warrant at our headquarters in Tampa, Florida. Our Board of Directors (the Board) formed
a special committee (the Special Committee) then comprised of independent directors to, among other
things, investigate independently and otherwise assess the facts and circumstances raised in any
federal or state regulatory or enforcement inquiries (including, without limitation, any matters
relating to accounting and operational issues) and in any private party proceedings, and develop
and recommend remedial measures to the Board for its consideration. For a discussion of the
Special Committee, its investigation and the various legal proceedings arising from, or related to, the
investigations described above, please see Part I
Item 3 Legal Proceedings and Part III
Item 13 Certain Relationships and Related Transactions, and
Director Independence.
In July 2008, upon consideration of certain issues identified in the Special Committee
investigation and after discussions with management and our independent registered public
accounting firm, the Audit Committee of the Board (the Audit Committee) recommended to the Board,
and the Board thereafter concluded, that we should restate our previously issued consolidated
financial statements for the years ended December 31, 2004, 2005 and 2006, including the quarterly
periods contained therein, and the three-month period ended March 31, 2007 and the three- and
six-month periods ended June 30, 2007, which were included in our Annual Report on Form 10-K for
the fiscal year ended December 31, 2007 (the 2007 Form 10-K) that we filed with the U.S.
Securities and Exchange Commission (the SEC) on January 26, 2009. For a discussion of the
restatement of our historical financial statements described above, please see the section entitled
Explanatory Note that appears at the beginning of the 2007 Form 10-K.
2
New Leadership
New Senior Management Team
On January 25, 2008, Todd Farha, our former Chief Executive Officer, President and Chairman of
the Board, Paul Behrens, our former Senior Vice President and Chief Financial Officer, and Thaddeus
Bereday, our former Senior Vice President, General Counsel and Secretary, resigned from their
respective officer and director positions with us and our subsidiaries. In connection with the
resignations of these individuals, the Board elected Charles G. Berg as our new Executive Chairman
of the Board and Heath G. Schiesser, who previously had served as our Senior Vice President for
Marketing and Sales and President of WellCare Prescription Insurance, one of our subsidiaries, as
our new President and Chief Executive Officer. Mr. Schiesser was also elected as a director.
Further, we made the following changes or additions to the senior management team:
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in April 2008, we appointed Thomas F. ONeil III as our Senior Vice President, General Counsel and Secretary; |
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in July 2008, we appointed Thomas L. Tran as our Senior Vice President and Chief Financial Officer; |
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in July 2008, we appointed William S. White, who had served as our Vice President,
Finance, as our Chief Accounting Officer; |
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in August 2008, we appointed Jonathan P. Rich as our Senior Vice President and Chief Compliance Officer; and |
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in September 2008, we appointed Rex M. Adams as our Senior Vice President and Chief Operating Officer. |
Business Organizational Changes
In 2008, we reorganized the senior management team by, among other things, separating the
positions of (i) Chairman and Chief Executive Officer, (ii) General Counsel and Chief Compliance
Officer and (iii) Chief Financial Officer and Chief Accounting Officer. Our new Chief Compliance
Officer reports directly to the Chief Executive Officer as well as the Boards new Regulatory
Compliance Committee, which is described below.
In April 2008, the Board formed a Regulatory Compliance Committee to oversee our compliance
activities and programs, and a new Health Care Quality and Access Committee to focus on the quality
and accessibility of the health care services our members receive through our plans. In July 2008,
the Board adopted a new charter for our management Disclosure Committee as well as new disclosure
controls, policies and procedures, which provide more comprehensive procedures for the review of
our financial statement disclosures.
In addition, in 2008, we realigned our leadership structure in a number of ways. We
consolidated our state operations into four regions, each with a regional leader who reports
directly to our Chief Executive Officer, and named a head of our national Medicare business. We
also consolidated oversight of operations and information technology under one executive, our
recently appointed Chief Operating Officer, and appointed a national head of regulatory and
government affairs.
Business Initiatives / Exits
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In 2008, we launched CCPs in Indiana, Missouri, New Jersey, Ohio and Texas and PPOs in
Georgia and Ohio. We did not have significant membership in our pilot PPO plans in 2008 and
have reduced our PPO offerings in 2009 to just one county in Ohio. |
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Due to higher than expected medical costs for the Ohio Medicaid program, particularly
for our Medicaid aged, blind and disabled (ABD), members, we withdrew from the ABD
program effective August 31, 2008. We continue to participate in the Ohio covered family
and children program. |
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In 2008, we expanded the number of counties in which we offer PFFS plans from 793 to
1,590 in 43 states and the District of Columbia, although we withdrew from three states in
2009. |
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In August 2008, we were notified by the federal Centers for Medicare & Medicaid Services
(CMS) that our bids for the PDP 2009 plan year were below the CMS regional benchmark premium
rate in 12 of the 34 CMS regions, which allows us to serve auto-assigned dual-eligible
Medicare beneficiaries in those 12 counties. As of January 1, 2009, approximately 252,000
auto-assigned dual-eligible members were assigned away from our PDP plans. In addition,
approximately 28,000 low-income subsidized members disenrolled from our plans in January
2009. |
3
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In January and February 2009, we commenced providing CCP services to Medicare
beneficiaries and Medicaid services to the ABD population, respectively, in Hawaii. |
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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 Medicaid reform programs. Accordingly, we notified the State
of Florida that we were withdrawing from these programs effective July 1, 2009, which will result in a loss of
approximately 80,000 members. |
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In February 2009, CMS notified us that, effective
March 7, 2009, we have been sanctioned through a suspension of marketing to Medicare beneficiaries and enrollments into
all lines of our Medicare business. The suspension will remain in effect until CMS has
determined that it should be lifted. |
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 2008 Form 10-K.
Rates
Most
of the states in which we operate are experiencing fiscal challenges
which have led to
budget cuts and reductions in Medicaid premiums. 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 recently announced preliminary 2010 Medicare Advantage payment rates that are
significantly below 2009 rates.
Political initiatives
In January 2009, the new presidential administration took office. Although the new
administration and recently elected U.S. 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, although the
U.S. Congress approved the childrens health bill which, among things, increases federal funding to
the State Childrens Health Insurance Program (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. It is
possible that the ultimate impact of these initiatives could be
negative.
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 include entering new lines of business or markets, exiting existing lines of business or
markets and/or disposing of assets depending on various factors, including changes in our business
and regulatory environment, competitive position and financial resources. We also continue to
rationalize our operations to make sure that our ongoing business is profitable.
On an ongoing basis, we assess the ability of our existing operations to support our current
and future business needs. We currently intend to divert some
resources in the near term to strengthen our compliance and
operating capabilities, which could result in our incurring substantial costs to improve our
operations and services.
Our Segments
We have two reportable business segments: Medicaid and Medicare.
Medicaid
Medicaid was established to provide medical assistance to low income and disabled persons. It
is state operated and implemented, although it is funded and regulated by both the state and
federal governments. Our Medicaid segment includes plans for individuals who are dually eligible
for both Medicare and Medicaid, and beneficiaries of the Temporary Assistance to Needy Families
program (TANF), Supplemental Security Income Program (SSI), S-CHIP and the Family Health Plus
program (FHP). TANF generally provides assistance to low-income families with children and SSI
generally provides assistance to low-income aged, blind or disabled individuals. Our Medicaid
segment also includes other programs which are not part of the Medicaid program, such as S-CHIP and
4
FHP for qualifying families who are not eligible for Medicaid because they exceed the
applicable income thresholds.
As
of December 31, 2008, we had approximately 1.3 million Medicaid members. The following table
summarizes our Medicaid segment membership by line of business as of December 31, 2008 and 2007.
Medicaid Membership
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For the Year Ended December 31, |
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2008 |
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2007 |
Medicaid |
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TANF |
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1,039,000 |
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927,000 |
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S-CHIP |
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164,000 |
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203,000 |
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SSI |
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75,000 |
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72,000 |
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FHP |
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22,000 |
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30,000 |
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Total |
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1,300,000 |
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1,232,000 |
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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 2007 and 2008: 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 2007 and 2008, as well as all other states on an
aggregate basis.
Medicaid Segment Revenues
(Dollars in thousands)
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For the Year Ended December 31, 2008 |
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For the Year Ended December 31, 2007 |
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Percentage of Total |
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Percentage of Total |
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Line of Business |
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Revenue |
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Segment Revenue |
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Revenue |
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Segment Revenue |
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Florida |
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$ |
978,709 |
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32.7 |
% |
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$ |
909,671 |
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33.8 |
% |
Georgia |
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1,226,940 |
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41.0 |
% |
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1,086,773 |
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40.4 |
% |
All other states* |
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785,400 |
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26.3 |
% |
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695,337 |
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25.8 |
% |
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Total |
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$ |
2,991,049 |
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100.0 |
% |
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$ |
2,691,781 |
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100.0 |
% |
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* |
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All other states consists of Connecticut, Illinois, Missouri, New York and
Ohio. As previously noted, we ceased offering Medicaid plans in Connecticut in March
2008. |
Our Medicaid contracts with government agencies have terms of between one and four years with
varying expiration dates. We currently provide Medicaid plans under seventeen separate contracts,
including seven contracts in New York, five 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
2007 and 2008.
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Expiration Date of |
State |
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Line of Business |
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Term of Contract |
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Current Term |
Florida
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Staywell Medicaid
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3 year term
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8/31/09 |
Florida
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HealthEase Medicaid
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3 year term
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8/31/09 |
Florida
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Healthy Kids
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1 year term
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9/30/09 |
Georgia
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Medicaid
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1 year term w/ 6 one-year renewals*
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6/30/09 |
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* |
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Our Georgia contract commenced in July 2005; we are currently in our third renewal
term. |
Medicare
Medicare is a federal program that provides eligible persons age 65 and over, and some
disabled persons, a variety of hospital, medical insurance and prescription drug benefits.
Medicare is administered and funded by CMS. Our Medicare plans include stand-alone PDP and Medicare
Advantage plans, which includes CCP, PFFS and PPO plans. Medicare Advantage is Medicares managed
care alternative to original Medicare fee-for-service (Original Medicare), which provides
individuals standard Medicare benefits directly through CMS. CCPs are administered through a
health maintenance organization (HMO) and generally require members to seek health care services
from a network of health care providers. PFFS plans are offered by insurance companies and are
open-
5
access plans that allow members to be seen by any physician or facility that participates in
the Original Medicare program and agrees to bill, and otherwise accepts the terms and conditions
of, the sponsoring insurance company. PPO plans are also offered by insurance companies and provide
both in-network and out-of-network benefits for Medicare beneficiaries.
As
of December 31, 2008, we had approximately 1.2 million Medicare members. The following table
summarizes our Medicare segment membership by line of business as of December 31, 2008 and 2007.
Medicare Membership
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For the Year Ended December 31, |
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2008 |
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2007 |
Medicare |
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PDP |
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986,000 |
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983,000 |
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Medicare Advantage |
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246,000 |
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158,000 |
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Total |
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1,232,000 |
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1,141,000 |
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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: PDP and Medicare Advantage plans. The following table sets forth
information relating to the total premium revenues from each of our PDP and Medicare Advantage lines of
business in our Medicare segment for the years ended December 31, 2008 and 2007.
Medicare Segment Revenues
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For the Year Ended December 31, 2008 |
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For the Year Ended December 31, 2007 |
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Percentage of Total |
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Percentage of Total |
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Customer |
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Revenue |
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Segment Revenue |
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Revenue |
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Segment Revenue |
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(Dollars in thousands) |
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PDP |
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$ |
1,055,796 |
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30.2 |
% |
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1,026,842 |
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39.3 |
% |
Medicare Advantage |
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2,436,225 |
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69.8 |
% |
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1,586,266 |
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60.7 |
% |
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|
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|
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|
|
|
|
|
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Total |
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$ |
3,492,021 |
|
|
|
100.0 |
% |
|
$ |
2,613,108 |
|
|
|
100.0 |
% |
|
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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 2008. Florida represented 21.6% and 25.0% of our total Medicare segment revenue
for the years ended December 31, 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 plans under separate contracts with CMS for each of the
states in, and programs under, which we offer such plans. Our current contracts with CMS expire on
December 31, 2009.
Our Health and Prescription Drug Plans
Membership Concentration
The following table sets forth, as of December 31, 2008, 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
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Medicare |
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Medicaid |
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Medicare |
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Total |
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Percent of Total |
State |
|
Members |
|
PDP |
|
Advantage |
|
Membership |
|
Membership |
Florida |
|
|
473,000 |
|
|
|
79,000 |
|
|
|
82,000 |
|
|
|
634,000 |
|
|
|
25.0 |
% |
Georgia |
|
|
483,000 |
|
|
|
27,000 |
|
|
|
11,000 |
|
|
|
521,000 |
|
|
|
20.6 |
% |
California |
|
|
|
|
|
|
200,000 |
|
|
|
7,000 |
|
|
|
207,000 |
|
|
|
8.2 |
% |
New York |
|
|
102,000 |
|
|
|
58,000 |
|
|
|
32,000 |
|
|
|
192,000 |
|
|
|
7.6 |
% |
Illinois |
|
|
135,000 |
|
|
|
36,000 |
|
|
|
14,000 |
|
|
|
185,000 |
|
|
|
7.3 |
% |
Ohio |
|
|
94,000 |
|
|
|
41,000 |
|
|
|
14,000 |
|
|
|
149,000 |
|
|
|
5.9 |
% |
All other states(1) |
|
|
13,000 |
|
|
|
545,000 |
|
|
|
86,000 |
|
|
|
644,000 |
|
|
|
25.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total |
|
|
1,300,000 |
|
|
|
986,000 |
|
|
|
246,000 |
|
|
|
2,532,000 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
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|
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Represents the aggregate of all states constituting individually less than 5% of total
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Premiums
We receive premiums from state and federal agencies for the members that are assigned to, or
have selected, us to provide health care services under Medicaid and Medicare. The premiums we
receive for each member varies according to the specific government program and may vary according
to many other factors, including the members geographic location, age, gender, medical history or
condition, or the services rendered to the member. The premiums we receive under each of our
government benefit plans are generally determined at the beginning of the contract period. These
premiums are subject to adjustment throughout the term of the contract, although such adjustments
are typically made at the commencement of each new contract period. The premium payments we
receive are based upon eligibility lists produced by the government. From time to time, our
regulators require us to reimburse them for premiums we received based on an eligibility list that
the regulator later discovers contains individuals who were not eligible for any
government-sponsored program or are eligible for a different premium category or a different
program. As a result of these periodic premium rate adjustments and member eligibility
determinations, we cannot predict with certainty what our future revenues will be under each of our
government contracts even when we believe membership will remain constant.
For further detail about the CMS reimbursement methodology under the PDP program, see Part II
Item 7 Managements Discussion and Analysis of Financial Condition and Results of
Operations.
Services/Coverage
Medicaid
The Medicaid programs and services we offer to our members vary by state and county and are
designed to serve effectively our 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 a members medical needs, and
generally must receive a referral from their primary care physician (PCP) in order to receive
health care from a specialist, such as an orthopedic surgeon or neurologist. Members do not pay
any premiums, deductibles or co-payments for most of our Medicaid plans.
Medicare
Through our Medicare Advantage plans, we also cover a wide spectrum of medical services. We
provide additional benefits not covered by Original Medicare, such as vision, dental and hearing
services. Through these enhanced benefits, the out-of-pocket expenses incurred by our members are
reduced, which allows our members to better manage their health care costs.
Most of our Medicare Advantage plans require members to pay a co-payment, which varies
depending on the services and level of benefits provided. Typically, members of our CCPs are
required to use our network of providers except in cases such as emergencies, transition of care or
when specialty providers are unavailable to meet a members medical needs. CCP members may see an
out-of-network specialist if they receive a referral from their PCP and may pay incremental
cost-sharing. PFFS plans are open-access plans that allow members to be seen by any physician or
facility that participates in the Medicare program, is willing to bill us for reimbursement and
accepts our terms and conditions. We have some flexibility in designing benefits packages and we
offer benefits that Original Medicare fee-for-service coverage does not offer. Our pilot PPO plans
offer members the option to seek any services outside of our contracted network but, in such case,
they are subject to higher cost sharing. We also offer special needs plans for those who are
dually eligible for Medicare and Medicaid (D-SNPs), which are CCPs, in most of our markets.
D-SNPs are designed to provide specialized care and support for Medicare beneficiaries, including
those who are dually eligible for both Medicare and Medicaid, with frailties or serious chronic
conditions. We believe that our D-SNPs are attractive to these beneficiaries due to the enhanced
benefit offerings and clinical support programs.
The Medicare Part D benefit, which provides prescription drug benefits, is available to
Medicare Advantage enrollees as well as Original Medicare enrollees. We offer Part D coverage in
many forms, including stand-alone PDPs and as a component of many of our Medicare Advantage plans.
Depending on medical coverage type, a beneficiary has various options for accessing drug
coverage. Beneficiaries enrolled in Original Medicare can either join a stand-alone PDP or forego
Part D drug coverage. PFFS beneficiaries can join a PFFS plan that has Part D drug coverage or join
a plan without such coverage and choose either to obtain a drug benefit from a stand-alone PDP or
forego Part D drug coverage. Beneficiaries enrolled in CCPs or PPOs can join a plan with Part D
coverage or forego Part D coverage.
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Provider Networks
We contract with a wide variety of health care providers to provide our members with access to
medically necessary services. Our contracted providers deliver a variety of services to our
members, including: primary and specialty physician care; laboratory and imaging; inpatient,
outpatient, home health and skilled facility care; medication and injectable drug therapy;
ancillary services; durable medical equipment services; mental health and chemical dependency
counseling and treatment; transportation; and dental, hearing and vision care.
The following are the types of providers in our Medicaid and CCP contracted networks:
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Professionals such as PCPs, specialty care physicians, psychologists and licensed
master social workers; |
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Facilities such as hospitals with inpatient, outpatient and emergency services,
skilled nursing facilities, outpatient surgical facilities, diagnostic imaging centers
and laboratory providers; |
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Ancillary providers such as home health, physical therapy, speech therapy,
occupational therapy, ambulance providers and transportation providers; and |
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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 CCP
products. This coordination includes delivering preventive services as well as referring members
to other providers for medically necessary services. PCPs are typically trained in internal
medicine, pediatrics, family practice, general practice and, in some markets, obstetrics and
gynecology. In rare instances, a physician trained in sub-specialty care will perform primary care
services for a member with a chronic condition.
To help ensure quality of care, we credential and recredential all professional providers,
including physicians, psychologists, licensed master social workers, certified nurse midwifes,
advanced registered nurse practitioners and physician assistants who provide care under the
supervision of a physician, directly or through delegated arrangements. This credentialing and
recredentialing is performed in accordance with standards required by CMS and consistent with the
standards of the National Committee for Quality Assurance (NCQA).
Our typical professional and ancillary agreements provide for coverage of medically necessary
care and have terms of one year. These contracts automatically renew for successive one-year
periods unless otherwise specified in writing by either party. These contracts 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, or
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, 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
members receipt of services.
In all instances, we require providers to submit data reporting all direct encounters with
members. This data helps us to monitor
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the amount and level of medical treatment provided to our members and to improve our compliance
with regulatory reporting requirements to ensure our contracted providers are providing appropriate
medical care. Our regulators use the encounter data that we submit, as well as data submitted by
other health plans, to set reimbursement rates, assign membership, assess the quality of care being
provided to members and evaluate contractual and regulatory compliance. We are reviewing our
payment and data collection methods, particularly under capitated arrangements, to improve the
accuracy and completeness of our encounter data.
PCPs in our CCP products and, in rare instances, in our Medicaid products, are eligible for a
specialized risk arrangement to further align our interests with those of the PCPs. Under these
arrangements, we establish a risk fund for each provider based on a percentage of premium received.
We periodically evaluate and monitor this fund on an individual or group basis to determine
whether these providers are eligible for additional payments or, in the alternative, whether they
should pay us. Payments due to us are carried forward and offset against future payments.
Specialty care providers and, in some cases, PCPs, are typically reimbursed a specified fee
for the service performed, which is known as fee-for-service. The specified fee is set as a
percentage of the amount Medicaid or Medicare would pay under the fee-for-service program. In rare
instances, specialty care provider groups in certain regions are paid a capitation rate to provide
specialty care services to members in those regions.
For the year ended December 31, 2008, approximately 17% of our payments to physicians serving
our Medicaid members were on a capitated basis and approximately 83% were on a fee-for-service
basis. During the year ended December 31, 2008, approximately 7% of our payments to physicians
serving our Medicare members in 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 members
admission, known as a per diem. This payment varies based upon the intensity of services provided
to the member during admission, such as intensive care, which is reimbursed at a higher rate than
general medical services.
Facility Outpatient Services
Facility outpatient services are reimbursed either as a percentage of charges or based on a
fixed fee schedule for the services rendered, in accordance with ambulatory payment groups or
ambulatory payment categories, both as defined by CMS. Outpatient services for diagnostic imaging
and laboratory services are reimbursed on a fixed fee schedule as a percentage of the applicable
Medicare or Medicaid fee-for-service schedule or a capitation payment.
Ancillary Providers
Ancillary providers, who provide services such as home health, physical, speech and
occupational therapy, and ambulance and transportation services, are reimbursed on a capitation or
fee-for-service basis.
Pharmacy Services
Pharmacy services are reimbursed based on a fixed fee for dispensing medication and a separate
payment for the ingredients. Ingredients produced by multiple manufacturers are reimbursed based on
a maximum allowable cost for the ingredient. Ingredients produced by a single manufacturer are
reimbursed as a percentage of the average wholesale price. In certain instances, we contract
directly with the sole source manufacturer of an ingredient to receive a rebate, which may vary
based upon volumes dispensed during the year.
Out-of-Network Providers
When our members receive services for which we are responsible from a provider outside our
network, such as in the case of emergency room services from non-contracted hospitals, we generally
attempt to negotiate a rate with that provider. In most cases, when a member is treated by a
non-contracted provider, we are obligated to pay only the amount that the provider would have
received from traditional Medicaid or Medicare.
Sales and Marketing Programs
As
of December 31, 2008 and March 13, 2009, our employed sales
force consisted of approximately 800 and 700 associates, respectively.
We have developed our sales and marketing programs on a localized basis with a focus on the
communities in which our members reside. We often conduct our sales programs in community settings
and in coordination with government agencies. We regularly participate in local events and
organize
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community health fairs to promote our products and the benefits of preventive care. We also
utilize traditional marketing methods such as direct mail, mass media and cooperative advertising
with participating medical groups to generate leads. Consistent with our community-focused
approach, we employ a culturally diverse sales staff, which allows us to better serve a broader set
of beneficiaries, including markets requiring specific language skills and cultural knowledge. In
addition, we have fee-for-service relationships with independently licensed insurance agents to
help us promote our Medicare plans in most markets.
Our Medicaid marketing efforts are heavily regulated by the states in which we operate, each
of which imposes different requirements for, or restrictions on, Medicaid sales and marketing.
These requirements and restrictions can be revised from time to time. In addition, local market
program design and competitive dynamics affect our sales efforts. For example, the State of
Georgia does not permit direct sales by Medicaid health plans. In Georgia, we rely primarily on
member selection and auto-assignment of Medicaid members into our plans.
Florida also auto-assigns Medicaid recipients into participating health plans, but
historically has permitted direct sales of Medicaid plans as well. However, effective January 1,
2009, the Florida Agency for Health Care Administration (AHCA), which oversees the Medicaid
program, began prohibiting direct sales to Medicaid recipients for all plans participating in the
Florida Medicaid program. Primarily as a result of this change, in September 2008 we eliminated
approximately one hundred positions in Florida, most of which were in sales or sales support roles.
Our Medicare marketing and sales activities are also heavily regulated by CMS and the states.
CMS has oversight over all, and in some cases has imposed advance approval requirements with
respect to, marketing materials used by Medicare Advantage plans, and our sales activities are
limited to activities such as conveying information regarding benefits, describing the operations
of managed care plans and providing information about eligibility requirements. The activities of
our independently licensed insurance agents are also covered by CMSs regulations. As stated
above, in February 2009, CMS notified us that, effective
March 7, 2009, we have been sanctioned
through a suspension of marketing to Medicare beneficiaries and enrollments into all lines of our
Medicare business.
On July 15, 2008, The Medicare Improvements for Patients and Providers Act (MIPPA) became
law and, in September 2008, CMS promulgated enabling regulations. MIPPA impacts a broad range of
Medicare marketing activities, including those relating to telemarketing, means of approaching
potential members, cross-selling of products and compensation. Our marketing efforts for Medicare
Advantage plans historically have focused on direct mail, outbound telemarketing and print
advertising initiatives in conjunction with our sales force and our network of independently
licensed insurance agents. However, we modified our use of outbound telemarketing and other
Medicare marketing practices to comply with MIPPA. Although we utilized alternative marketing
methods during the most recent Medicare enrollment period, we are continuing to evaluate and assess
how these MIPPA changes will affect our ability to obtain Medicare Advantage members and how we
will use the most effective alternative marketing methods allowed under MIPPA to educate potential
members regarding our products and services.
In addition, our PDP business also benefits from the auto-assignment of members, which is
subject to a bid process whereby we submit to CMS our estimated costs to provide services in the
next fiscal year. Based on our experience, we expect that the number of members auto-assigned to
us will vary year over year. For example, as previously described, we bid above the CMS benchmark
in 22 of the 34 CMS regions for plan year 2009 and are ineligible to receive auto-assigned members
in these 22 regions. As a result, 252,000 auto-assigned dual-eligible members were assigned away
from our plans and approximately 28,000 low-income subsidized members disenrolled from our plans in
January 2009.
For further detail regarding restrictions on marketing and sales activities, particularly
those to be implemented under the MIPPA,
see Part I Item 1 Business Regulation.
Quality Improvement
We continually seek to improve the quality of care delivered by our network providers to our
members and our ability to measure the quality of care provided. Our Quality Improvement Program
provides the basis for our quality and utilization management functions and outlines specific,
ongoing processes and services designed to improve the delivery of quality health care services to
our members, as well as to ensure compliance with regulatory and accreditation standards. Each of
our health plans has a Quality Improvement Committee, which is comprised of senior members of
management, medical directors and other key Company associates. These committees report directly
to the health plan Board of Directors which has oversight responsibilities for the quality of care
rendered to our members. The Quality Improvement Committees also have a number of subcommittees
that are charged with monitoring certain aspects of care and service, such as health care
utilization, pharmacy services and provider credentialing and recredentialing. Several of our
subcommittees include physicians as members.
Elements of our Quality Improvement Program include the following: evaluation of the effects
of particular preventive measures; member satisfaction surveys; grievance and appeals processes for
members and providers; orientation visits to, and site audits of, select providers; provider
credentialing and recredentialing; ongoing member education programs; ongoing provider education
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programs; health plan accreditation; and medical record audits.
Several of our health plans are also accredited by independent organizations that are designed
to promote health care quality. Our Florida HMOs are accredited by the Accreditation Association
for Ambulatory Health Care (AAAHC). Our behavioral health subsidiary is accredited by URAC
(formerly known as the Utilization Review Accreditation Commission) and our Georgia HMO was
recently accredited by NCQA.
As part of our Quality Improvement Program, at times we have implemented changes to our
reimbursement methods to reward those providers who encourage preventive care, such as well-child
check-ups, prenatal care and/or adoption of evidence-based guidelines for members with chronic
conditions. In addition, we have specialized systems to support our quality improvement
activities. We gather information from our systems to identify opportunities to improve care and
to track the outcomes of the services provided to achieve those improvements. Some examples of our
intervention programs include: a prenatal case management program to help women with high-risk
pregnancies deliver full-term, healthy infants; a program to reduce the number of inappropriate
emergency room visits; and a disease management program to decrease the need for emergency room
visits and hospitalizations.
As previously noted, in April 2008, the Board formed the Health Care Quality and Access
Committee. The principal purpose of this committee is to assist the Board by providing general
oversight of our policies and procedures governing health care quality and access for our members,
which will provide overall direction and guidance to our Quality Improvement Committees.
Competition
Competitive environment. We operate in a highly competitive environment to manage the cost and
quality of services that are delivered to government health care program beneficiaries. We
currently compete in this environment by offering Medicaid and Medicare health plans in which we
accept all or nearly all of the financial risk for management of beneficiary care under these
programs.
We typically must be awarded a contract by the government agency with responsibility for a
program in order to offer our services in a particular location. Some government programs choose to
limit the number of plans that may offer services to beneficiaries, while other agencies allow an
unlimited number of plans to serve a program, subject to each plan meeting certain contract
requirements. When the number of plans participating in a program is limited, an agency generally
employs a bidding process to select the participating plans.
As a result, the number of companies with whom we compete varies significantly depending on
the geographic market, business segment and line of business. For example, in Florida, the Medicaid
program does not specifically restrict the number of participating plans. In contrast, the Georgia
Families and PeachCare program awards contracts to just three plans. We currently compete with one
or two other plans in each of the six regions in Georgia. Likewise, in our Medicare business, the
number of competitors varies significantly by geography. In most cases, there are numerous other
CCP, PFFS and PDP plans and other competitors. We believe a number of our competitors in both
Medicare and Medicaid have strengths that may match or exceed our own with respect to one or more
of the criteria on which we compete with them. 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 plans 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 plans rates, the outcome of a bidding process, or similar
factors. For example, we receive auto-assignment of PDP members based on
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whether our bids during the annual renewal process are above or below the CMS benchmark. In
most states, our Medicaid health plans also benefit from auto-assignment of individuals who do not
choose a plan upfront but are mandatory participants in managed care programs. Each state differs
in their approach to auto-assignment, but may use some of the following criteria in their
auto-assignment algorithms: a Medicaid beneficiarys 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 plans quality or performance status, a plans network and enrollment size,
awarding all auto-assignments to a plan with the lowest bid in a county or region, and equal
assignment of non-choosers across all plans in a specified county or region. For more information
about how we obtain our members, see Part I Item 1 Business Sales and Marketing Programs.
Marketing. Other government programs permit plan sponsors to market their plans to
beneficiaries, resulting in ongoing competition among the plans to enroll members. We believe a
beneficiary selects a plan for membership based on several criteria. These criteria generally
include a plans 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:
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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. |
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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:
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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. |
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Medicare Advantage and Prescription Drug Plans. Medicare Advantage and stand-alone
Part D plans are offered by national, regional and local MCOs that serve Medicare
beneficiaries. |
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Employer Sponsored Coverage. Employers and unions may subsidize Medicare benefits for
their retirees in their commercial group. The group sponsor solicits proposals from
Medicare Advantage plans and may select an HMO, PPO, PFFS and/or PDP plan. |
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Medicare Supplements. Original Medicare pays for many, but not all, health care
services and supplies. A Medicare supplement policy is private health insurance designed
to supplement Original Medicare by covering the cost of items such as co-payments,
coinsurance and deductibles. Some Medicare supplements cover extra benefits for an
additional cost. Medicare supplement plans can be used to cover costs not otherwise
covered by Original Medicare, but cannot be used to supplement Medicare Advantage plans. |
Regulation
Our health care operations are highly regulated by both state and federal government agencies.
Regulation of managed care products and health care services is an evolving area of law that
varies from jurisdiction to jurisdiction. Regulatory agencies generally have discretion to issue
regulations and interpret and enforce laws and rules. Changes in applicable laws, 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, 2008, our
health plans were licensed to operate as HMOs in Florida, New York, Connecticut, Illinois, Indiana,
Georgia, New Jersey, Ohio, Louisiana, Texas and Missouri.
To offer Medicare PFFS or PPO coverage, we must be licensed under state law as a risk-bearing
entity eligible to offer health insurance or health benefits coverage in each state in which the
organization wishes to offer PFFS or PPO plans. We have three
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subsidiaries licensed as health indemnity insurers in the 40 states and the District of
Columbia in which we offer PFFS or PPO plans as of March 1, 2009. We also offer our Hawaii
plans through one of these health indemnity insurers.
To offer Medicare prescription drug coverage, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (MMA) generally requires PDP sponsors to be licensed under state law as
a risk-bearing entity eligible to offer health insurance or health benefits coverage in each state
in which the sponsor wishes to offer a PDP. However, CMS has implemented a waiver process to allow
PDP sponsors to operate prior to obtaining state licensure if, among other reasons, the state has
not acted on a sponsors 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 PDP plans are
currently licensed in 48 states plus the District of Columbia as of March 1, 2009. In the
remaining states, we operate under one of the previously mentioned CMS waivers or other
arrangements, which are approved through December 2009.
As HMOs and insurance companies, our business is regulated by both the state insurance
departments and, in some cases in respect of our HMOs, another state agency with responsibility for
oversight of HMOs. Generally, the licensing requirements are the same for us as they are for
commercial managed health care organizations. We generally must demonstrate to the state that,
among other things:
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we have an adequate provider network; |
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our quality and utilization management processes comply with state requirements; |
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we have procedures in place for responding to member and provider complaints and
grievances; |
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our systems are capable of processing providers claims in a timely fashion and for
collecting and analyzing the information needed to manage our business; |
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our management is competent and trustworthy; |
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we comply with the states sales and marketing regulations; and |
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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.
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, 2008, our
Connecticut, Georgia, Illinois, Indiana, Louisiana, Missouri, Ohio 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 entitys
business. For states
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in which the RBC requirements have been adopted, the regulated entity typically must maintain
a minimum of the greater of the required CAL or the minimum statutory net worth requirement
calculated pursuant to pre-RBC guidelines. In addition to the foregoing requirements, our regulated
subsidiaries are subject to restrictions on their ability to make dividend payments, loans and
other transfers of cash.
The statutory framework for our regulated subsidiaries minimum net worth changes over time.
For instance, RBC requirements may be adopted by more of the states in which we operate. These
subsidiaries are also subject to their state regulators overall oversight powers. For example,
New York enacted regulations that increase the reserve requirement by 150% over an eight-year
period. In addition, regulators could require our subsidiaries to maintain minimum levels of
statutory net worth in excess of the amount required under the applicable state laws if the
regulators determine that maintaining such additional statutory net worth is in the best interest
of our members. For instance, because the Georgia Medicaid program is still new, all plans
operating in Georgia are required to maintain required statutory capital at an RBC level of 125% of
CAL. Moreover, as we expand our plan offerings in new states or pursue new business opportunities,
such as our PFFS products, we may be required to make additional statutory capital contributions.
Each of our operating subsidiaries is required to be licensed by each of the states in which
it conducts business. Each insurance company is licensed and regulated by the DOI in its domestic
state as well as the DOI in each other state, commonly referred to as foreign jurisdiction, in
which it operates. For example, two of our insurance companies that offer our PFFS products are licensed
as domestic insurance companies in Arizona and Illinois and operate as foreign insurers
in between 38 and 44 other states plus the District of Columbia. Further, each of our HMOs is
licensed by the DOI in its domestic state as well as the department of health, or similar agency.
In addition, our Medicaid and S-CHIP activities are regulated by each states 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.
Medicaid
As previously described, Medicaid, which was established under the U.S. Social Security Act of
1965, is state-operated and implemented, although it is funded by both the state and federal
governments. Within broad guidelines established by the federal government, each state:
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establishes its own eligibility standards; |
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determines the type, amount, duration and scope of services; |
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sets the rate of payment for services; and |
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administers its own program. |
Some of the states in which we operate award contracts to applicants that can demonstrate that
they meet the states 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 states 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:
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we must measure provider access and availability in terms of the time needed for a
member to reach the doctors office; |
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our quality improvement programs must emphasize member education and outreach and
include measures designed to promote utilization of preventive services; |
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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; |
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we must have the capability to meet the needs of disabled members; |
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our providers and member service representatives must be able to communicate with
members who do not speak English or who are hearing impaired; and |
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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 four years.
Most of these contracts provide for renewal upon mutual agreement of the parties and both parties
have certain early termination rights. In addition to the operating requirements listed above,
state contract requirements and regulatory provisions applicable to us generally set forth detailed
provisions relating to subcontractors, marketing, safeguarding of member information, fraud and
abuse reporting and grievance procedures.
Our Medicaid plans are subject to periodic financial and informational reporting and
comprehensive quality assurance evaluations. We regularly submit periodic utilization reports,
operations reports and other information to the appropriate Medicaid program regulatory agencies.
Medicare
Medicare is a federal program that provides eligible persons age 65 and over and some disabled
persons a variety of hospital, medical insurance and prescription drug benefits. Medicare
beneficiaries have the option to enroll in a Medicare Advantage plan, such as a CCP, PFFS or PPO
benefit plan, in areas where such a plan is offered. Under Medicare Advantage, managed care plans
contract with CMS to provide benefits that are comparable to, or that may be more attractive to
Medicare beneficiaries than, an Original Medicare plan in exchange for a fixed monthly payment per
member that varies based on the county in which a member resides, the demographics of the member
and the members health condition.
The MMA made numerous changes to the Medicare program, including expanding the Medicare
program to include a prescription drug benefit. Since 2006, Medicare beneficiaries have had the
option of selecting the new prescription drug benefit from an existing Medicare Advantage plan or
through a stand-alone PDP. The drug benefit, available to beneficiaries for a monthly premium, is
subject to certain cost sharing depending upon the specific benefit design of the selected plan.
Plans are not required to offer the same benefits, but are required to provide coverage that is at
least actuarially equivalent to the standard drug coverage delineated in the MMA.
Along with other Part D plans, including PDPs and Medicare Advantage plans that offer a Part D
benefit, or MA-PD, we bid on the Part D benefits in June of each year. Based on the bids
submitted, CMS establishes a national benchmark. CMS pays the Part D plans a percentage of the
benchmark on a 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 qualified for the
federal low income subsidy, through which the federal government helps pay the members Part D
premium and certain other cost sharing expenses.
On July 15, 2008, MIPPA became law and, in September 2008, CMS promulgated enabling
regulations. MIPPA impacts a broad range of Medicare activities and impacts all types of Medicare
managed care plans. The following are some of the requirements under MIPPA which will impact our
business:
PFFS plans: MIPPA revises requirements for Medicare Advantage PFFS plans, which may have
the effect of ending some of these plans in plan year 2011 where such plans are not able to
comply with these new requirements. In particular, MIPPA requires all PFFS plans that
operate in markets with two or more networked-based plans must be offered on a networked
basis. Currently, we do not have provider networks in the majority of the markets where we
offer PFFS plans. We are currently evaluating alternative solutions to establishing a
network in targeted areas to meet these requirements, including building a contracted
network, contracting with a third party network or withdrawing from certain counties where it
is not economically or otherwise feasible to establish networks for this line of business.
Sales and Marketing: MIPPA places prohibitions and limitations on specified sales and
marketing activities under Medicare Advantage and prescription drug plans. Among other
things, Medicare plans are no longer permitted to make unsolicited contact with potential
members by way of outbound telemarketing and community marketing, offer other types of
Medicare products to existing members, provide meals to potential enrollees or approach
potential members in common or public
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areas. These changes are likely to increase our administrative costs of enrolling an
individual, and could increase the risk of compliance violations and could have a material
adverse effect on our ability to enroll new Medicare members particularly because we have
historically relied to a large extent on outbound telemarketing and community marketing to
sell our products. Although we utilized alternative marketing methods during the most recent
Medicare enrollment period, we are continuing to evaluate and assess how these MIPPA changes
will affect our continued ability to obtain Medicare Advantage members and how we will use
the most effective alternative marketing methods allowed under MIPPA to educate potential
members regarding our products and services.
Special Needs Plans: A significant portion of our coordinated care plan membership is
enrolled in our D-SNPs. Under MIPPA, D-SNPs such as ours are required to contract with state
Medicaid agencies to coordinate benefits. The scope of the D-SNP contract with the state
Medicaid agency will depend greatly on what eligibility categories, cost-sharing
responsibilities and payment limitations each state has included in its state plan. The
contracting process under MIPPA provides an opportunity for D-SNPs and states to improve the
coordination of benefits, including defining the overlap between Medicaid and Medicare
benefits, eligibility verification processes, payment and coverage responsibilities,
marketing and enrollment standards, appeals and grievances procedures and other important
operational considerations. Collaboration between states and D-SNPs is expected to create
administrative efficiencies and improve beneficiary health outcomes. However, the requirement
to contract with state Medicaid agencies imposes potential risk for D-SNP providers such as
us because MIPPA does not allow expansion in 2010 or continued operation of a D-SNP after
2010 if a state and the D-SNP provider cannot come to agreement on terms.
Compensation: MIPPA also establishes limits on agent and broker compensation. The CMS
implementing regulations require that plans that pay commissions do so by paying for an
initial year commission and residual commissions for each of the five subsequent renewal
years, thereby creating a six year commission cycle for members moving from Original Medicare
and a five year commission cycle for members moving from another Medicare Advantage plan.
S-CHIP Programs
S-CHIP is a health insurance program that is funded jointly by the federal government and
states 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. 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. In January
2009, the U.S. Congress approved the childrens health bill which, among things, reauthorizes and
increases federal funding to S-CHIP.
HIPAA and State Privacy Laws
In 1996, Congress enacted the Health Insurance Portability and Accountability Act of 1996
(HIPAA) and thereafter, the Secretary of Health and Human Services issued regulations
implementing HIPAA. HIPAA is intended to improve the portability and continuity of health
insurance coverage and simplify the administration of health insurance claims and related
transactions. All health plans, including ours, are subject to HIPAA. HIPAA generally requires
health plans to:
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protect the privacy and security of patient health information through the
implementation of appropriate administrative, technical and physical safeguards; and |
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establish the capability to receive and transmit electronically certain
administrative health care transactions, such as claims payments, in a standardized
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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
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these public-sector programs are complex and subject to change. For example, the new Medicare
Part D benefit is likely to lead to increased scrutiny by enforcement officials of managed care
providers operating PDP plans and MA-PD plans. Although we believe that we have structured our
compliance program with care in an effort to meet all statutory and regulatory requirements, we are
continuing to improve our education and training programs, and we expect to invest significant
resources to enhance our compliance efforts.
Federal and State Laws and Regulations Governing Submission of Information and Claims to Agencies
We are subject to federal and state laws and regulations that apply to the submission of
information and claims to various agencies. For example, the federal False Claims Act provides, in
part, that the federal government may bring a lawsuit against any person or entity who it believes
has knowingly presented, or caused to be presented, a false or fraudulent request for payment from
the federal government, or who has made a false statement or used a false record to get a claim
approved. The federal government has taken the position that claims presented in violation of the
federal anti-kickback statute may be considered a violation of the federal False Claims Act.
Violations of the False Claims Act are punishable by treble damages and penalties of up to a
specified dollar amount per false claim. In addition, a special provision under the False Claims
Act allows a private person (for example, a whistleblower such as a disgruntled former associate,
competitor or member) to bring an action under the False Claims Act on behalf of the government
alleging that an entity has defrauded the federal government and permits the private person to
share in any settlement of, or judgment entered in, the lawsuit.
A number of states, including states in which we operate, have adopted false claims acts, as
well as their own laws whereby, under certain conditions, a private party may file a civil lawsuit
in state court on behalf of the state government.
Marketing
Our Medicaid marketing efforts are highly regulated by the states in which we operate and CMS,
each of which imposes different requirements and restrictions on Medicaid marketing. In general,
the states can impose a variety of sanctions for marketing violations, including fines, a
suspension of marketing and/or a suspension of new enrollment. For more information about our
marketing programs, see Part I Item 1 Business Sales and Marketing Programs.
The marketing activities of Medicare managed care plans are strictly regulated by CMS. CMS
must approve all marketing materials before they can be used. While current federal law preempts
state law except with respect to licensure and solvency requirements, the MIPPA and CMS proposed
rules will require additional coordination among health plans, states and CMS. For example, in
order for us to be able to continue to offer D-SNPs for those who are dually eligible for both
Medicare and Medicaid after 2010, we will have to negotiate contracts with all applicable state
Medicaid agencies. For more information about regulations governing our marketing activities, see
Part I Item 1 Business Regulation Medicare.
Technology
A foundation of providing managed care services is the accurate and timely capture, processing
and analysis of critical data. Focusing on data is essential to operating our business in a cost
effective manner. Data processing and data-driven decision making are key components of both
administrative efficiency and medical cost management. We use our information system for premium
billing, claims processing, utilization management, reporting, medical cost trending, planning and
analysis. The system also supports member and provider service functions, including enrollment,
member eligibility verification, primary care and specialist physician roster access, claims status
inquiries, and referrals and authorizations.
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 to an acceptable level of
business functionality within stated timelines. Due to ongoing document retention requirements,
our ability to recover all business functionality in a timely manner may be impaired. We have a
cold-site and business recovery site agreement with a nationally-recognized third party vendor to
provide for the restoration of our general support systems at a remote processing center. In 2008,
we successfully performed our annual disaster recovery testing for critical business applications
defined in our plan.
Employees
We refer to our employees as associates. As of December 31, 2008, we had approximately 4,100
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.
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Executive Officers of the Company
The following are our executive officers and their ages:
Charles G. Berg (age 51) has served as our Executive Chairman and as a member of our Board
since January 2008. Prior to joining WellCare, Mr. Berg has been senior advisor to Welsh, Carson,
Anderson & Stowe, a private equity firm, since January 2007. 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.
Heath G. Schiesser (age 41) has served as our President and Chief Executive Officer and as a
member of our Board since January 2008. Mr. Schiesser originally joined WellCare in 2002 as Senior
Vice President of Marketing and Sales. From January 2005 to July 2006, Mr. Schiesser also served
as President of WellCare Prescription Insurance. From July 2006 to January 2008, Mr. Schiesser
served as Senior Advisor to WellCare. Prior to joining WellCare, Mr. Schiesser worked at the
management consulting firm of McKinsey & Company, co-founded an online pharmacy for Express
Scripts, and worked in the development of new ventures. A cum laude graduate of Trinity
University, Mr. Schiesser received a Master of Business
Administration from Harvard Business School.
Rex M. Adams (age 47) 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 Incorporateds
East Region, from January 2007 to March 2008. In such capacity, Mr. Adams was responsible for
consumer and business sales and service, network operations, profit and loss accountability, and
the management of over 5,000 employees. For the period prior to AT&Ts acquisition of BellSouth,
Mr. Adams was an officer of BellSouth Corporation from July 2001 to December 2006, serving in
various leadership positions. During the merger transition period from February 2006 to
December 2006, Mr. Adams served as Web Development Officer. From December 2004 to January 2006,
Mr. Adams was the President of BellSouth Wholesale Services, and had similar responsibilities as
President and Chief Executive Officer of AT&T East Region. From January 2004 to November 2004,
Mr. Adams was Vice-President, Product Development and Management of BellSouth Corporation, where he
was responsible for product profitability, development and commercialization. From July 2001 to
November 2004, Mr. Adams was President of BellSouth Long Distance Services, where he was
responsible for profit and loss and all areas of BellSouths long distance business. From
September 2007 to October 2008, Mr. Adams has 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 B.S. from the United States Military Academy at West Point and a
Masters in Business Administration from the Harvard Business School.
William Kerr. M.D. (age 43) has served as our Senior Vice President and Chief Medical Officer
since August 2007. Prior to joining WellCare, Dr. Kerr served as Vice President of Care Management
and eventually Chief Medical Officer of Blue Cross and Blue Shield from November 2004 to
August 2007. From September 2000 to November 2004, Dr. Kerr served as Vice President, Professional
Networks for Independence Blue Cross. From November 1998 to August 2000, Dr. Kerr served as
Regional Medical Director for AmeriHealth of Texas, Inc. Dr. Kerr received his undergraduate
degree from the University of Arkansas, magna cum laude, a medical degree from the University of
Arkansas for Medical Sciences, and has conducted research at Oxford University.
Adam Miller (age 42) has served as our President, National Medicare since March 2008. Prior
to this, Mr. Miller served as Chief Operating Officer of our Medicare Prescription Drug Plan
business from January 2006 and our Private Fee-For-Service business from January 2007. From
July 2001 to November 2005, Mr. Miller ran UnitedHealth Groups Arizona Medicaid and a related
Medicare Special Needs program. Earlier in his career, Mr. Miller was with General Electric in
their Medical Systems business in a series of strategy, business development and operational roles,
from May 1997 to June 2001. Mr. Miller served as Vice President and General Manager of their
global Cardiology Systems division. Prior to this, Mr. Miller was with the Boston Consulting Group
where he worked with clients in the pharmaceutical, managed care and medical device industries on
issues of growth and profitability enhancement, from 1993 to 1997. Mr. Miller is a graduate of
Harvard Business School and the Wharton School of Business at The University of Pennsylvania, where
he earned summa cum laude honors.
Thomas F. ONeil III (age 51) has served as our Senior Vice President, General Counsel and
Secretary since April 2008. Prior to joining WellCare, Mr. ONeil was a partner of the law firm
DLA Piper US LLP and its predecessor from June 2002 through March 2008. From December 1995 to
June 2002, Mr. ONeil served as Vice President, Chief Litigation Counsel of MCI Communications
Corp., Senior Vice President, Chief Counsel of MCI WorldCom, Inc. and General Counsel of The MCI
Group. Earlier in his career Mr. ONeil was a partner of the law firm of Hogan & Hartson LLP and
he served as Assistant U.S. Attorney at the U.S. Department of Justice from March 1986 to
December 1989. Mr. ONeil received his A.B., magna cum laude, from Dartmouth College and his Juris
Doctorate from Georgetown University Law Center. Mr. ONeil is a member of the Board of Regents of
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Georgetown University and the Board of Visitors of Georgetown University Law Center.
Jonathan P. Rich (age 47) 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 Columbia University Law School, where he served on the Columbia Law Review, and of the
University of North Carolina, where he earned summa cum laude honors.
Thomas Tran (age 52) 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 publicly-traded population health management company,
from June 2007 to June 2008. In such capacities, Mr. Tran was responsible for profit and loss
accountability for all business lines, field operations, clinical management, centralized service
support, technology, network management, finance (including SEC reporting and Sarbanes-Oxley
compliance) and investor relations. 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, where he was
responsible for overseeing financial reporting, business and financial planning, strategic cost
management, actuarial, underwriting, customer banking, business development, business risk
management, real estate and procurement. 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, that company was merged into a Delaware corporation and we changed our name to WellCare
Health Plans, Inc. Our principal executive offices are located at 8725 Henderson Road, Renaissance
One, Tampa, Florida 33634, and our telephone number is (813) 290-6200. Our website is
www.wellcare.com. Information contained on our website is not incorporated by reference into this
2008 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 SEC.
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FORWARD-LOOKING STATEMENTS
Statements contained in this 2008 Form 10-K which are not historical fact may be
forward-looking statements within the meaning of the Private Securities Litigation Reform Act of
1995 and Section 21E of the Exchange Act, and we intend such statements to be covered by the safe
harbor provisions for forward-looking statements contained therein. Such statements, which may
address, among other things, market acceptance of our products and services, expansion into new
targeted markets, product development, our ability to finance growth opportunities, our ability to
respond to changes in governance regulations, sales and marketing strategies, projected capital
expenditures, liquidity and the availability of additional funding sources may be found in the
sections of this report entitled Business, Risk Factors, Managements 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 managements current expectations and beliefs about future events and circumstances. We
undertake no obligation beyond that required by law to update publicly any forward-looking
statements for any reason, even if new information becomes available or other events occur in the
future.
Our actual results may differ materially from those indicated by forward-looking statements as
a result of various important factors including the expiration, cancellation or suspension of our
state and federal contracts. In addition, our results of operations and projections of future
earnings depend, in large part, on accurately predicting and effectively managing health benefits
and other operating expenses. A variety of factors, including competition, changes in health care
practices, changes in federal or state laws and regulations or their interpretations, inflation,
provider contract changes, changes in or terminations of our contracts with government agencies,
new technologies, government-imposed surcharges, taxes or assessments, reduction in provider
payments by governmental payors, major epidemics, disasters and numerous other factors affecting
the delivery and cost of health care, such as major health care providers inability to maintain
their operations, may in the future affect our ability to control our medical costs and other
operating expenses. Governmental action or business conditions could result in premium revenues
not increasing to offset any increase in medical costs and other operating expenses. Once set,
premiums are generally fixed for one-year periods and, accordingly, unanticipated costs during such
periods cannot be recovered through higher premiums. Furthermore, if we are unable to estimate
accurately incurred but not reported medical costs in the current period, our future profitability
may be affected. Due to these factors and risks, we cannot provide any assurance regarding our
future premium levels or our ability to control our future medical costs.
From time to time, at the federal and state government levels, legislative and regulatory
proposals have been made related to, or potentially affecting, the health care industry, including
but not limited to limitations on managed care organizations, including benefit mandates, and
reform of the Medicaid and Medicare programs. Any such legislative and regulatory action,
including benefit mandates and reform of the Medicaid and Medicare programs, could have the effect
of reducing the premiums paid to us by governmental programs, increasing our medical or
administrative costs or requiring us to materially alter the manner in which we operate. We are
unable to predict the specific content of any future legislation, action or regulation that may be
enacted or when any such future legislation or regulation will be adopted. Therefore, we cannot
predict accurately the effect or ramifications of such future legislation, action or regulation on
our business.
Item 1A. Risk Factors.
You should carefully consider the following factors, together with all the other information
included in this report, in evaluating our company and our business. If any of the following risks
actually occur, our business, financial condition and results of operations could be materially and
adversely affected, and the value of our stock could decline. The risks and uncertainties
described below are those that we currently believe may materially affect our company. Additional
risks and uncertainties not presently known to us or that we currently deem immaterial also may
impair our business operations. As such, you should not consider this list to be a complete
statement of all potential risks or uncertainties.
Risks Related to Pending Governmental Investigations and Litigation
Any resolution of the ongoing investigations being conducted by certain federal and state agencies
could have a material adverse effect on our business, financial condition, results of operations
and cash flows.
We are currently under investigation by federal and state authorities, including AHCA, the
U.S. Attorneys Office for the Middle District of Florida (the USAO), the Civil Division of the
U.S. Department of Justice (the Civil Division), the Office of Inspector General of the U.S.
Department of Health and Human Services (the OIG) and the Florida Attorney Generals Medicaid
Fraud Control Unit (MFCU). Pursuant to an agreement dated August 18, 2008 with AHCA, the USAO
and MFCU, two of our subsidiaries, WellCare of Florida, Inc. and HealthEase of Florida, Inc.
(together, the WellCare Florida HMOs), agreed to transmit
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$35.2 million (the Transmitted Amount) to the Financial Litigation Unit of the USAO. The
Transmitted Amount was based on our best estimate, as of the effective date of the agreement, of
the total potential amount of Medicaid behavioral health capitation refunds that the WellCare
Florida HMOs owe or may owe to AHCA for calendar years 2002 through 2006, but did not include any
interest, fines, penalties or other assessments that may be imposed against us. Of the total
Transmitted Amount, we acknowledged and agreed that the WellCare Florida HMOs would make payment of
not less than a total amount of $24.5 million, and therefore we authorized the USAO, AHCA and MFCU
to access and distribute the $24.5 million to the appropriate federal and state agencies in
accordance with applicable federal and state law. In addition, the parties to the agreement
acknowledged and agreed that $10.7 million of the Transmitted Amount would be held in an escrow
account pending resolution of all federal and related state claims by the United States or the
State of Florida for monetary damages or other financial impositions of any kind arising from, or
related to, the investigation by MFCU or the USAO. The amount held in escrow does not limit in any
way the ability of federal or state authorities to recover additional amounts, including interest,
civil or criminal fines, penalties or other assessments that may be imposed against us, and we
cannot make any assurances that the federal or state authorities will not seek or be entitled to
recover amounts in excess of the escrowed amounts. The agreement did not, nor should it be
construed to, operate as a settlement or release of any criminal, civil or administrative claims
for monetary, injunctive or other relief against us, whether under federal, state or local
statutes, regulations or common law. Furthermore, the agreement does not operate, nor should it be
construed, as a concession that we are entitled to any limitation of our potential federal, state
or local civil or criminal liability.
We are engaged in resolution discussions as to matters under review with the USAO, the Civil
Division, the OIG and the State of Florida. 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. Based on the current status of matters and all
information known to us to date, in the year ended December 31, 2007
we recorded selling, general and administrative expense and accrued
a liability in the amount of $50.0 million in connection with the resolution of these matters, which is
included in the Other accrued expenses item within our Consolidated Balance Sheets as of December 31,
2007, and 2008, respectively. We believe that it is probable that the actual resolution amount for
all such matters under review will be more than the amounts that have already been reflected in our
financial statements; however, 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 USAO, the Civil Division, the OIG or the
State of Florida.
We have responded to subpoenas issued by the State of Connecticut Attorney Generals Office
involving transactions between us and our affiliates and their potential impact on the costs of
Connecticuts Medicaid program. In addition, the SEC is conducting an informal investigation.
We do not know whether, or the extent to which, any pending investigations will result in the
imposition of operating restrictions on our business. If we were to plead guilty to or be
convicted of a health care related charge, potential adverse consequences could include revocation
of our licenses, termination of one or more of our contracts and/or exclusion from further
participation in Medicare or Medicaid programs. In addition, we could be required to operate under
a corporate integrity agreement or under the supervision of a monitor, either of which could
require us to operate under significant restrictions, place substantial burdens on our management,
hinder our ability to attract and retain qualified associates and cause us to incur significant
costs. Further, the majority of our contracts pursuant to which we provide Medicare and Medicaid
services contain provisions that grant the regulator broad authority to terminate at will contracts
with any entity affiliated with a convicted entity or for other reasons. Any such outcomes would
have a material adverse effect on our business, financial condition, results of operations and cash
flows.
The pendency of these investigations as well as the litigation described below could also
impair our ability to raise additional capital, which may be needed to pay any resulting interest,
civil or criminal fines, penalties or other assessments.
We and certain of our past officers and directors are defendants in litigation relating to our
participation in federal health care programs, accounting practices and other related matters, and
the outcome of these lawsuits may have a material adverse effect on our business, financial
condition, results of operations and cash flows.
Putative class action complaints were filed against us, as well as certain of our past and
present officers and directors on October 26, 2007 and on November 2, 2007, 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. Subsequent developments in these cases are
described below in Part I Item 3 Legal Proceedings.
In addition, in a letter dated October 15, 2008, the Civil Division informed counsel to the
Special Committee that as part of the pending civil inquiry, the Civil Division is investigating a
number of qui tam complaints filed by relators against us under the whistleblower provisions of the
False Claims Act, 31 U.S.C. sections 3729-3733. The seal in those cases has been partially lifted
for
21
the purpose of authorizing the Civil Division to disclose to us the existence of the qui tam
complaints. The complaints otherwise remain under seal as required by 31 U.S.C. section
3730(b)(3). We and the Special Committee are undertaking to discuss with the Civil Division, and
address, allegations by the qui tam relators.
We also learned from a docket search that a former employee filed a qui tam action on October
25, 2007 in state court for Leon County, Florida against several defendants, including us and one
of our subsidiaries. Because qui tam actions brought under federal and state false claims acts are
sealed by the court at the time of filing, we are unable to determine the nature of the allegations
and, therefore, we do not know whether this action relates to the subject matter of the federal
investigations. It is possible that additional qui tam actions have been filed against us and are
under seal. Thus, it is possible that we are subject to liability exposure under the False Claims
Act, or similar state statutes, based on qui tam actions other than those discussed in this 2008
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 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 $120.0 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 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, building or
maintaining our network of providers, or business in the future. For example, when making award
determinations, states frequently consider the plans 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 are expected to continue to divert,
managements attention, which may have a material adverse effect on our business.
In addition to the challenges of the various government investigations and extensive
litigation we face, our management team has spent considerable time and effort with regard to the
internal and external investigations involving our historical accounting practices
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and internal controls, disclosure controls and procedures and corporate governance policies
and procedures. In particular, our Chief Executive Officer, Chief Financial Officer and General
Counsel, as well as senior members of our finance and legal departments, have spent considerable
time and effort with regard to the investigations, the restatement and related matters. The
significant time and effort spent by our management team on these matters has diverted, and is
expected to continue to divert, its attention, which has, and could continue to have, a material
adverse effect on our business.
Risks Related to Our Business
We have expended, and expect to continue to expend, significant financial resources as a result of
the government and Special Committee investigations, which will reduce our cash available to meet
statutory reserve requirements, debt service payments and other corporate obligations for our
operations and could have a material adverse effect on our business, financial condition and cash
flows.
Through December 31, 2008, we had incurred a total of approximately $124.1 million in
administrative expenses associated with, or consequential to, the government and Special Committee
investigations, including legal fees, accounting fees, consulting fees, employee recruitment and
retention costs and similar expenses. Approximately $103.0 million of these investigation related
costs were incurred in 2008.
We expect to continue incurring significant additional costs as a result of the federal and
state investigations and pending civil actions, including administrative expenses similar to those
discussed above, and costs necessary to improve our corporate governance and address other issues
that were identified through the restatement and remediation processes. We may also be required to
pay significant damages or other amounts in the event of an adverse judgment or settlement. A
substantial amount of these costs will not be covered by, or may exceed the limits of, our
insurance. If we are unable to obtain additional financing, such payments may limit cash available
for our operations and could impair our ability to meet certain statutory capital reserve
requirements. Further, if we cannot obtain additional financing, our cash generated by operations
may not be sufficient to meet these obligations.
We are engaged in resolution discussions as to matters under review with the USAO, the Civil
Division, the OIG and the State of Florida. Based on the current status of matters and all
information known to us to date, in the year ended December 31, 2007
we recorded selling, general and administrative expense and accrued
a liability in the amount of $50.0 million in connection with the resolution of these matters, which is
included in the Other accrued expenses line item within our Consolidated Balance Sheets as of December 31,
2007, and 2008, respectively. We believe that it is probable that the actual resolution amount for
all such matters under review will be more than the amounts that have already been reflected in our
financial statements; however, 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 USAO, the Civil Division, the OIG or the
State of Florida. If we were required to pay a significant amount as
restitution and/or a fine or penalty in the near term as part of any
resolution, it could have a material adverse effect on our business,
financial condition and cash flows. For more information related to
this accrual, see Note 11 to the consolidated financial
statements included in this 2008 Form 10-K.
If we identify a material weakness in our internal control over financial reporting in future
periods, it could require us to incur substantial costs and divert management resources in
connection with our efforts to remediate these material weaknesses and to comply with Section 404
of the Sarbanes-Oxley Act of 2002.
We identified material weaknesses in our internal control over financial reporting as of
December 31, 2007. Specifically, we concluded that (a) former senior management set an
inappropriate tone in connection with the Companys efforts to comply with the regulatory
requirements related to certain Medicaid contracts that led to a deficiency in the design in our
internal controls, and therefore a material weakness existed in a portion of the control
environment and control activities components of our internal controls, and (b) former senior
managements failure to ensure effective communications regarding certain Medicaid contracts with,
among others, our Board and certain regulators resulted in a material weakness in the information
and communication system. Solely as a result of the material weaknesses described above, our
management also concluded that our disclosure controls and procedures were not effective as of
December 31, 2007.
We cannot be certain that any remedial measures we have taken or
intend to take will ensure that we design, implement and maintain adequate controls over our
financial processes and reporting in the future and, accordingly, additional material weaknesses
may occur in the future. It is possible that additional control deficiencies may be identified in
addition to, or that are unrelated to, our review of the work of the Special Committee. These
control deficiencies may represent one or more material weaknesses. Our inability to remedy any
additional deficiencies or material weaknesses that may be identified in the future could, among
other things, cause us to fail to file timely our periodic reports with the SEC; result in the need
to further restate our historical financial statements; prevent us from providing reliable and
accurate financial information and forecasts or from avoiding or detecting fraud; or require us to
incur additional costs or divert management resources to, among other things, comply with Section
404 of the Sarbanes-Oxley Act of 2002.
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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, our business, financial
condition, results of operations and cash flows could be materially adversely affected.
We provide our Medicaid, Medicare, S-CHIP and other services through a limited number of
contracts with state, federal or local government agencies. These contracts generally have terms
of one to four years and are subject to non-renewal by the applicable government agency. All of
our government contracts are terminable for cause if we breach a material provision of the contract
or violate relevant laws or regulations.
Our 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 or 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 2008, we were subject to a 60-day Medicaid marketing freeze in three counties
in Florida resulting from the states allegation of wrongful marketing practices. Further, in
February 2009, CMS notified us that, effective March 7,
2009, we have been sanctioned through a
suspension of marketing to Medicare beneficiaries and enrollments into all lines of our Medicare
business. This suspension will remain in effect until CMS has determined that the suspension
should be lifted. At this time, we cannot provide any assurances regarding the duration of the
suspension and are evaluating the impact that it could have on our results of operations and our
business. Nonetheless, we anticipate that our inability to perform marketing activities to, or
enroll new Medicare members, as well as any actions that we take in response to the sanction, will
have a material negative affect on our results of operations and business in 2009 and potentially
beyond. Further, we cannot provide any assurances that we will be able to take appropriate
corrective action or that, despite any corrective measures taken on our part, that we will not
incur additional penalties, fines or other operating restrictions which could have an additional
material adverse affect on our results of operations. In response to the CMS suspension in March
2009, we have made certain changes to our Medicare marketing sales force and are continuing to
assess the impact of ceasing marketing activities and the resulting loss of membership to determine
what effect, if any, this action will have on our staffing needs and other operational capabilities
to effectively and efficiently meet the needs of the members we serve.
Some of our contracts are also subject to termination or are only eligible for renewal through
annual competitive bidding processes. For example, renewal of our PDP business is subject to an
annual bidding process. As previously described, we bid above the CMS benchmark in 22 of the 34
CMS regions for plan year 2009 and are ineligible to receive auto-assigned members in these
regions. As a result, 252,000 auto-assigned dual-eligible members were assigned away from our
plans and approximately 28,000 low-income subsidized members disenrolled from our plans in January
2009. If we are unable to renew or to rebid or compete successfully for any of our existing or
potential government contracts, if any of our contracts are terminated, or if any limitations or
restrictions are imposed, our business, financial condition, results of operations and cash flows
could be materially adversely affected.
Our encounter data may be inaccurate or incomplete, which could have a material adverse effect on
our results of operations, cash flows and ability to bid for, and continue to participate in,
certain programs.
We use administrative, claim and clinical data, known as encounter data, to identify members
who may benefit from preventive or increased coordination of care or who otherwise need to maintain
health status in association with a chronic condition or complex clinical situation. This data may
also be aggregated and shared with specific health care providers to determine the effectiveness of
care delivered to our members.
We are required to report encounter data to our regulators who use the data to monitor what
services we provide to our members, determine if services are being under- or over-utilized and
evaluate the quality of the services we provide. To do so, our regulators compare our encounter
data to certain defined quality metrics such as the Health Effectiveness Data and Information Set
(HEDIS®) or unique metrics defined by the particular regulator. Our regulators may also use our
encounter data, as well as data submitted by other health plans, to set reimbursement rates, assign
membership, assess the quality of care being provided to members and evaluate contractual and
regulatory compliance. For example, New York uses encounter data to measure and rate the quality
of services health plans offer. Plans that score well on the quality measures as well as certain
other performance standards are rewarded with additional premiums and auto-assigned members. Plans
that fail to meet the standards for this additional premium and auto-assigned members, including
established quality measures, for three consecutive years could be excluded from participation in
the New York Medicaid program. Further, Florida has indicated a desire to implement a
quality-based auto-assignment program by September 2009. The formula used to determine health plan
assignment may utilize, in part, encounter data submissions.
Failure by our providers to submit key data elements or to conform their submissions to
required formats results in deficiencies in our encounter data. We are currently working closely
with several states to ascertain or improve the accuracy or completeness of our encounter data.
Where we have inaccurate or incomplete encounter data, we are required to expend additional effort
to collect or correct this data and we are exposed to regulatory risk for noncompliance. We expect
states to increase their reliance on encounter
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data. Our inability to obtain, or submit in a timely manner, complete and accurate encounter
data could significantly affect the premium rates we receive and how membership is assigned to us,
which could have a material adverse effect on our results of operations, cash flows and ability to
bid for, and continue to participate in, certain programs.
Our estimate of medical benefits expense and medical benefits payable are subject to greater
variability when there is more limited claims payment experience or information available to us,
which could cause our reported results of operations to be materially different than expected.
The factors and assumptions that are used to develop our estimate of medical benefits expense
and medical benefits payable inherently are subject to greater variability when there is more
limited claims payment experience or information available to us. For example, from 2004 to 2008,
we grew at a rapid pace, through the expansion of existing products and introduction of new
products, such as Part D and PFFS, and entry into new geographic areas, such as Georgia. The
ultimate claims payment amounts, patterns and trends for new products and geographic areas can not
be precisely predicted at their onset, since we, the providers and the members do not have
experience in these products or geographic areas. Standard accepted actuarial methodologies
require the use of key assumptions consisting of trend and completion factors using an assumption
of moderately adverse conditions that would allow for this inherent variability. This can result
in larger differences between the originally estimated medical benefits payable and the actual
claims amounts paid. Medical cost trends can be volatile and management is required to use
considerable judgment in the selection of medical benefits expense trends and other actuarial model
inputs. Actual conditions, however, could differ from those assumed in the estimation process.
Due to the uncertainties associated with the factors used in the assumptions discussed above,
the actual amount of medical benefits expense that we incur may be materially different than the
amount of medical benefits payable originally estimated. If our estimates of medical benefits
payable are inaccurate in the future, our reported results of operations could be favorably or
unfavorably impacted. Further, our inability to estimate medical benefits payable accurately may
also materially adversely affect our ability to take timely corrective actions, further
exacerbating the extent of any material adverse effect on our results of operations. Factors that
may cause medical benefits expense to exceed our estimates include, among others:
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lack of experience estimating medical benefits expense for new products and/or in new
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an increase in the cost of health care services and supplies, including
pharmaceuticals, whether as a result of inflation or otherwise; |
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higher than expected utilization of health care services; |
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periodic renegotiation of hospital, physician and other provider contracts; |
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the occurrence of catastrophes, major epidemics, terrorism or bio-terrorism; |
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changes in the demographics of our members and medical trends affecting them; |
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new mandated benefits or other changes in health care laws, regulations and/or
practices; and |
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unanticipated adverse selection by high cost members. |
We manage our medical benefits expense through a variety of techniques, including various
payment methods to primary care physicians and other providers, advance approval for hospital
services and referral requirements, medical management and quality management programs, upgraded
information systems and reinsurance arrangements. However, we may not be able to manage these
expenses effectively in the future. For example, a hypothetical 1.0% increase in our medical
benefits ratio (MBR), the ratio of our medical expenses to the premiums we receive and a measure
of our profitability, would have reduced our earnings before income taxes for the years ended
December 31, 2007 and 2008 by approximately $53.0 million and $64.8 million, respectively. If our
medical benefits expense increases, our profitability and results of operations could be materially
adversely affected.
We derive a large portion of our Medicaid revenues and profits from operations in Florida and
Georgia, and legislative or regulatory actions, economic conditions or other factors that
materially adversely affect those operations could have a material adverse effect on our
profitability and results of operations.
For the year ended December 31, 2008, our Florida and Georgia Medicaid health plans accounted
for approximately 32.7% and 41.0% of our total Medicaid segment premium revenues, respectively. If
we are unable to continue to operate in Florida and Georgia,
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if our current operations in Florida and Georgia are significantly curtailed, or either
Florida or Georgia are unable or unwilling to pay current rates for Medicaid health plans, our
revenues and profits will decrease materially. Our reliance on our Medicaid operations in Florida and Georgia
could cause our revenues and profitability to change suddenly and unexpectedly, depending on
legislative or regulatory actions, economic conditions and similar factors. For example, in 2009,
Florida implemented Medicaid rates that made it economically unfeasible for us to continue to
provide services in the Medicaid reform programs. As a result, we notified the State of Florida
that we were withdrawing from these programs effective July 1, 2009, which will
result in a loss of approximately 80,000 members. These recent and possible future rate reductions
will require us to evaluate our medical benefits and administrative expenses. In Georgia, managed
care legislation enacted on July 1, 2008 has resulted in program changes designed to address issues
raised by health care providers during program implementation. These changes related to payment of
claims, eligibility determination and provider contracting, and may negatively impact revenues and
profits for the plan. Further, continued economic slowdowns in Florida and Georgia have negatively
impacted state revenues. Consequently, in order to meet state budgetary requirements, Florida or
Georgia or both may develop future Medicaid capitation rates that are insufficient to keep pace
with our medical trends or inflation, therefore reducing our profitability in those markets and
materially adversely affecting our results of operations. Similarly, although the U.S. Congress
approved the childrens health bill which, among things, increases federal funding to the 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. It is possible that the ultimate impact of
these initiatives could be negative.
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. These factors may have a material adverse effect on our ability to market our
products and services, require us to change our products and services and increase regulatory or
legal burdens under which we operate, further increasing the costs of doing business and materially
adversely affecting our business, financial condition, results of operations and cash flows.
The government agencies that regulate us can impose restrictions on our operations, which could
have a material adverse effect on our profitability, results of operations and cash flows.
The government agencies that regulate us may limit or impose restrictions on us, or suspend
our right to market to or add new members if it finds deficiencies in our provider network or
operations, compliance violations or for other reasons. For example, during 2008, we were subject
to a 60-day Medicaid marketing freeze in three counties in Florida resulting from the states
allegation of wrongful marketing practices. Further, in February 2009, we were notified by CMS
that, effective March 7, 2009, we have been sanctioned through a suspension of marketing to
Medicare beneficiaries and enrollments into all lines of our Medicare business. This suspension
will remain in effect until CMS has determined that it should be lifted. At this time, we cannot
provide any assurances regarding the duration of the suspension and we are evaluating the impact
that it could have on our results of operations and our business. Nonetheless, we anticipate that
our inability to perform marketing activities to, or enroll new Medicare members, as well as any
actions that we take in response to the sanction, will have a material negative affect on our
results of operations and business in 2009 and potentially beyond. Further, we cannot provide any
assurances that we will be able to take appropriate corrective action or that, despite any
corrective measures taken on our part, that we will not incur additional penalties, fines or other
operating restrictions which could have an additional material adverse affect on our results of
operations. In response to the CMS suspension in March 2009, we made certain changes to our
Medicare marketing sales force and are continuing to assess the
impact of suspending marketing
activities and the resulting loss of membership to determine what effect, if any, this action will
have on our staffing needs and other operational capabilities to effectively and efficiently meet
the needs of the members we serve.
In addition, a governmental entity may take unilateral action to limit or suspend our ability
to enter into additional contracts with that entity in the future, which could constrain our
ability to expand our business. For example, in 2009 we terminated our contract with CMS to offer
PPO plans in Georgia and, as a consequence, under the terms of our contract with CMS, we are not
allowed to re-enter Georgia to offer PPO plans for a period of two years.
When we enter new markets, regulators may place certain limitations on our license or may
impose restrictions or additional requirements on our operations. For example, the North Carolina
Department of Insurance imposed a limitation on the number of PFFS members we can enroll until we
have operated in the state for a certain amount of time. Further, when we commenced operations in
Ohio, the Ohio Department of Insurance required us to maintain 300% RBC, which is higher than would
be required of a plan that had been operating in the state for a longer period of time. These
limitations and additional requirements can restrict our ability to grow our membership in new
markets and may require us to make additional capital contributions to new plans which could have a
material adverse effect on our profitability, cash flows and results of operations.
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Because our premiums, which generate most of our revenues, are fixed by contract, we are unable to
increase our premiums during the contract term if our corresponding medical benefits expense
exceeds our estimates, which could have a material adverse effect on our results of operations.
Most of our revenues are generated by premiums consisting of fixed monthly payments per
member. These payments are fixed by contract, and we are obligated during the contract period,
which is generally one to four years, to provide or arrange for the provision of health care
services as established by state and federal governments. We have less control over costs related
to the provision of health care services than we do over our selling, general and administrative
expense. Historically, our medical benefits expense as a percentage of premium revenue has
fluctuated within a relatively narrow band. For example, our medical benefits expense was 81.1%,
79.4% and 85.3% for the years ended December 31, 2006, 2007 and 2008, respectively. Further, our
regulators set premiums using actuarial methods based on historical data. Actual experience,
however, could differ from those assumed in the premium-setting process, which could result in
premiums being insufficient to cover our medical benefits expense. If our medical benefits expense
exceeds our estimates or our regulators actuarial pricing assumptions, we will be unable to adjust
the premiums we receive under our current contracts, which could have a material adverse effect on
our results of operations.
Changes in our member mix may have a material adverse effect on our cash flow, profitability and
results of operations.
Our revenues, costs and margins vary based on changes to our membership mix, product mix and
the demographics of our membership. Our revenues are generally comprised of fixed payments that
are determined by the type of member in our plans. The payments are generally set based on an
estimation of the medical costs required to serve members with various demographic and health risk
profiles. As such, there are sometimes wide variations in the established rates per member in both
our Medicaid and Medicare lines of business. For instance, the rates we receive for a Medicaid ABD
member are generally significantly higher than for a non-ABD member who is otherwise similarly
situated. As the result of the previously described CMS suspension of marketing of, enrollments
into, all lines of our Medicare business, we may encounter membership mix changes within our
Medicare membership which could negatively impact our results of operations. As the composition of
our membership base changes as the result of programmatic, competitive, regulatory, benefit design,
economic or other changes, there is a corresponding change to our premium revenue, costs and
margins, which may have a material adverse effect on our cash flow, profitability and results of
operations.
Our failure to make acquisitions or divestitures on terms favorable to us, or at all, or to
successfully integrate the businesses and product lines we acquire, could have a material adverse
effect on our financial condition, results of operations and growth prospects.
In addition to organic growth, acquisitions of other health plans remains an element of our
growth strategy. However, the ongoing turmoil in the credit markets has made obtaining financing
very challenging, and we may not have sufficient available cash to finance an acquisition.
Therefore, we may be unable to identify, finance and complete appropriate acquisitions. Similarly,
our ability to dispose of our assets may be hindered by our inability to find a suitable purchaser
as the result of these market conditions, the pendency of the investigations and related matters or
other factors. In addition to general market and financing risks, we are generally required to
obtain regulatory approval from one or more state or federal agencies when acquiring or disposing
of a health plan, which may require a public hearing. We may be unable to comply with the
regulatory requirements for an acquisition or disposition in a timely manner, or at all. Even if
we identify suitable acquisition targets or purchasers for our assets, we may be unable to complete
these types of transactions on terms favorable to us, or at all.
Further, if we complete acquisitions, we may be unable to realize the anticipated benefits
from acquisitions because of operational factors or difficulties in integrating the acquisitions
with our existing businesses. To the extent that we complete acquisitions, we are likely to incur
additional costs or administrative challenges associated with entering into geographic areas in
which we do not currently operate or expand into new lines of business. Our rate of expansion into
other geographic areas or other product lines may also be inhibited by:
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the time and costs associated with obtaining the necessary license to operate in the
new geographic area or new line of business, if necessary; |
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our inability to develop a network of physicians, hospitals and other health care
providers that meets our requirements and those of government regulators; |
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competition, which can increase the costs of recruiting members; |
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the cost of providing health care services in those geographic areas or lines of
business; |
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increased administrative and operational efforts and costs consequential to our
establishing new operations for, or our inexperience with, a new line of business or
geographic area; and |
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demographics and population density. |
Accordingly, we may be unsuccessful in entering other geographic areas, counties, states or
lines of business, which could have a material adverse effect on our financial condition, results
of operations and growth prospects.
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 services functions, provider and member administrative functions and support tracking
and extensive analysis of medical expenses and outcome data. These systems remain subject to
unexpected interruptions resulting from occurrences such as hardware failures or increased demand.
There can be no assurance that such interruptions will not occur in the future, and any such
interruptions could have a material adverse effect on our business and results of operations.
Moreover, operating and other issues can lead to data problems that affect the performance of
important functions, including, but not limited to, claims payment, customer service and accurate
financial reporting and customer service.
There can also be no assurance that our process of improving existing systems, developing new
systems to support our operations and improving service levels will not be delayed or that system
issues will not arise in the future. Our information systems and applications require continual
maintenance, upgrading and enhancement to meet our operational needs. If we are unable to maintain
or expand our systems, we could suffer from, among other things, operational disruptions, such as
the inability to pay claims or to make claims payments on a timely basis, loss of members,
difficulty in attracting new members, regulatory problems and increases in administrative expenses.
Additionally, events outside our control, including acts of nature such as hurricanes,
earthquakes, fires or terrorism, could significantly impair our information systems and
applications. To help ensure continued operations in the event that our primary data center
operations are rendered inoperable, we have a disaster recovery plan that addresses how we recover
to an acceptable level of business functionality within stated timelines. Due to ongoing document
retention requirements, our ability to recover all business functionality in a timely manner may be
impaired. Therefore, our disaster plan may not operate effectively during an actual disaster and our
operations could be disrupted, which would have a material adverse effect on our results of
operations.
Our business requires the secure transmission of confidential information over public
networks. Advances in computer capabilities, new discoveries in the field of cryptography or other
events or developments could result in compromises or breaches of our security systems and client
data stored in our information systems. Anyone who circumvents our security measures could
misappropriate our confidential information or cause interruptions in services or operations. The
Internet is a public network, and data is sent over this network from many sources. In the past,
computer viruses or software programs that disable or impair computers have been distributed and
have rapidly spread over the Internet. Computer viruses could be introduced into our systems, or
those of our providers or regulators, which could disrupt our operations, or make our systems
inaccessible to our providers or regulators. We may be required to expend significant capital and
other resources to protect against the threat of security breaches or to alleviate problems caused
by breaches. Because of the confidential health information we store and transmit, security
breaches could expose us to a risk of regulatory action, litigation, fines and penalties, possible
liability and loss. Our security measures may be inadequate to prevent security breaches, and our
results of operations could be materially adversely affected by cancellation of contracts and loss
of members if such breaches are not prevented.
We rely on a number of vendors, and failure of any one of the key vendors to perform in accordance
with our contracts could have a material adverse effect on our business and results of operations.
We have contracted with a number of vendors to provide significant assistance in our
operational support including, but not limited to, certain enrollment, billing, call center,
benefit administration, claims processing functions, sales and marketing and certain aspects of
utilization management. Our dependence on these vendors makes our operations vulnerable to such
third parties failure to perform adequately under our contracts with them. Significant failure by
a vendor to perform in accordance with the terms of our contracts could have a material adverse
effect on our results of operations. Further, due to our growth, business changes or legal
proceedings, our ability to manage these vendors may be impacted. In addition, due to these
factors, our vendors may request changes
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in pricing, payment terms or other contractual obligations between the parties which could
have a material adverse effect on our business and results of operations.
We encounter significant competition for program participation, network providers and members, and
our failure to compete successfully may limit our ability to increase or maintain membership in the
markets we serve, which may have a material adverse effect on our growth prospects and results of
operations.
We operate in a highly competitive environment and in an industry that is currently subject to
significant changes due to business consolidations, changes in regulation that could affect
competitors differently, new strategic alliances and aggressive marketing practices by other
managed care organizations. We compete principally on the basis of premiums and cost-sharing
terms, provider network composition, benefits and medical services provided, effectiveness of
resolution of calls and complaints, and other factors. For a discussion of the competitive
environment in which we operate, see Part I Item 1 Business Competition. A number of
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.
Although some of our officers have entered into employment agreements with us, these
agreements may not provide sufficient incentives for those officers to continue their employment
with us. The loss of the leadership, knowledge and experience of our management teams could have a
material adverse effect on our business. Replacing one or more of the members of our management
team might be difficult or take an extended period of time.
We
may not be able to retain our executive officers, other members of
management or associates due to some limitations in our compensation
arrangements. Historically, the focus of our
compensation program has been on equity awards in the form of restricted stock and stock options.
Following the commencement of the governmental investigations in October 2007 and the subsequent
decline in our stock price, our ability to attract and retain our associates, including our
executive officers, whether through equity awards or more generally, became more challenging. To
address our retention issues, among other things, we implemented a retention program that expired
at the end of 2008, and a severance program that will terminate at the end of 2009. The remaining
severance program may not provide sufficient incentives to retain our officers and other associates
and we have not established a new severance program to follow after
the current program expires in 2009. Additionally, we
have not established a similar retention program to replace the prior program that expired at the
end of 2008 although we have implemented other programs that are designed to have a retentive
affect. Our success is also dependent on our ability to hire and retain qualified management, and
technical and medical personnel. The pendency of the ongoing governmental investigations,
litigation and related matters and any ongoing restrictions under which we must operate, such as a
corporate integrity agreement or third party monitor, could hinder our ability to attract and
retain qualified associates. Accordingly, all of these factors may impair our ability to recruit
and retain qualified personnel, which could have a material adverse effect on our business.
We do not expect to sustain the rapid rate of growth we have achieved during the past five years,
which could be viewed unfavorably by investors.
Over the past five years we have experienced a rapid rate of growth in our business. We do
not foresee growth at the same level of prior years primarily because (i) we believe that our
historic rates of growth are unsustainable; (ii) at this time we do not foresee large, one-time
opportunities to expand our business, such as the launch of PDPs and the privatization of Georgia
Medicaid; and (iii) we intend to divert some resources to strengthen our compliance and operating
capabilities. Furthermore, pressure on premium rates or margins could lead us to selectively exit
some markets or products. For example, in 2008 we withdrew from the Ohio ABD program and in early
2009 we withdrew from the Florida Medicaid reform counties, in both cases because the premiums we
received were insufficient to cover our medical expenses. Finally, recent regulatory changes
designed to limit the use of direct and other marketing techniques could cause our rate of
membership growth to decline. Accordingly, our business may experience a period of slower growth
or contraction in 2009 and beyond, which may be viewed unfavorably by investors.
Ineffective or unsuccessful management of our growth, either generally or with respect to specific
products or geographic areas, may have a material adverse effect on our business, results of
operations and financial condition.
29
We had total revenue of approximately $1.4 billion and $6.5 billion in 2004 and 2008,
respectively. Management of our past and future potential growth, either generally or with respect
to specific products or geographic areas, could place a significant strain on our management team
and other resources. Our ability to manage our growth may depend on our ability to retain and
strengthen our management team and attract, train and retain skilled associates, and our ability to
implement and improve operational, financial and management information systems on a timely basis.
We may need to enhance and augment our current systems and operating environment to ensure system
and operational reliability as well as compliance with our current and future contracts. If we are
unable to manage our growth effectively, our financial condition and results of operations could be
materially and adversely affected. In addition, the initial substantial costs related to growth
could have a material adverse effect on our business, results of operations and financial
condition.
If we are unable to maintain satisfactory relationships with our providers, we may be precluded
from operating in some markets, which could have a material adverse effect on our results of
operations and profitability.
Our profitability depends, in large part, on our ability to enter into cost-effective
contracts with hospitals, physicians and other health care providers in appropriate numbers and at
locations convenient for our members in each of the markets in which we operate. In any particular
market, however, providers could refuse to contract, demand higher payments or take other actions
that could result in higher medical benefits expense. In some markets, certain providers,
particularly hospitals, physician/hospital organizations or multi-specialty physician groups, may
have significant market positions. If such a provider or any of our other providers refused to
contract with us, use their market position to negotiate contracts that might not be cost-effective
or otherwise place us at a competitive disadvantage, those activities could have a material adverse
effect on our operating results in that market. Also, in some rural areas, it is difficult to
maintain a provider network sufficient to meet regulatory requirements. In the long term, our
ability to contract successfully with a sufficiently large number of providers in a particular
geographic market will affect the relative attractiveness of our managed care products in that
market. If we are unsuccessful in negotiating satisfactory contracts with our network providers,
it could preclude us from renewing our Medicaid or Medicare contracts in those markets, from being
able to enroll new members or from entering into new markets. Also, in situations where we have a
deficiency in our provider network, regulators require us to allow members to obtain care from
out-of-network providers at no additional cost, which could have a material adverse effect on our
ability to manage expenses.
Our provider contracts with network primary care physicians and specialists generally have
terms of one to four years, with automatic renewal for successive one-year terms. We may be unable
to continue to renew such contracts or enter into new contracts enabling us to serve our members
profitably. We are also required to establish acceptable provider networks prior to entering new
markets. Further, under MIPPA, we are required to have a network of providers for all of our PFFS
plans that operate in markets with two or more networked-based plans. Currently, we do not have
provider networks in the majority of the markets where we offer PFFS plans. We are currently
evaluating alternative solutions to establishing a network in targeted areas to meet these
requirements, including building a contracted network, contracting with a third party network or
withdrawing from certain counties where it is not economically or otherwise feasible to establish
networks for this line of business. However, if we are unable to establish adequate networks, we
will be required to cease offering PFFS plans in these areas. Finally, we may be unable to
maintain our relationships with our network providers or enter into agreements with providers in
new markets on a timely basis or on favorable terms. If we are unable to retain our current
provider contracts or enter into new provider contracts timely or on favorable terms, our results
of operations and profitability could be materially adversely affected.
Our inability to obtain or maintain adequate intellectual property rights in our brand names for
our health plans or enforce such rights may have a material adverse effect on our business, results
of operations and cash flows.
Our success depends, in part, upon our ability to market our health plans under our brand
names, including WellCare, HealthEase, Staywell, and Harmony. We hold a federal trademark
registration for the WellCare trademark, and we are pursuing applications with the U.S. Patent
and Trademark Office to register HealthEase and Harmony. We use the Staywell trademark only
in the State of Florida, and, pursuant to an agreement in August 2008 with The Staywell Company, a
health education company based in St. Paul, Minnesota, we will co-exist with their use of that term
for very different kinds of services and will not pursue a federal registration of that trademark.
It is possible that other businesses may have actual or purported rights in the same names or
similar names to those under which we market our health plans, which could limit or prevent our
ability to use these names, or our ability to prevent others from using these names. If we are
unable to prevent others from using our brand names, if others prohibit us from using such names or
if we incur significant costs to protect our intellectual property rights in such brand names, our
business, results of operations and cash flows may be materially adversely affected.
Several members of our management team have been recently appointed to their positions, and a lack
of familiarity with our Company or our industry could have a material adverse effect on our
business.
During the past year, our management team has undergone a number of changes, including the
appointment of several members of senior management, some of whom have limited prior experience
with our Company or our industry. Our operations are highly
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dependent on the experience and skills of our management team. Our new managements team
overall lack of familiarity and experience with the Company or our industry could have a material
adverse effect on our business.
Failure of our state regulators to approve payments of dividends and/or distributions from certain
of our regulated subsidiaries to us or our non-regulated subsidiaries may have a material adverse
effect on our liquidity, cash flows, business and financial condition.
On December 31, 2008, three of our Florida regulated subsidiaries declared dividends to one of
our non-regulated subsidiaries in the aggregate amount of $105.1 million, two of which were paid on
December 31, 2008 and one of which was paid on January 2, 2009. In addition, we currently intend
to cause certain of our other regulated subsidiaries to declare dividends and/or distributions to
us or certain of our non-regulated subsidiaries in an effort to increase our unregulated cash
balances. In most states, we are required to seek the prior approval of state regulatory
authorities to transfer money or pay dividends from our regulated subsidiaries in excess of
specified amounts or, in some states, any amount. The discretion of the state regulators, if any,
in approving or disapproving a dividend or intercompany transaction is often not clearly defined.
Health plans that declare non-extraordinary dividends usually must provide notice to the regulators
in advance of the intended distribution date of such dividend. If our state regulators do not
approve payments of dividends and/or distributions by certain of our regulated subsidiaries to us
or our non-regulated subsidiaries, our liquidity, cash flows, business and financial condition may
be materially adversely affected.
Claims relating to medical malpractice and other litigation could cause us to incur significant
expenses, which could have a material adverse effect on our financial condition and cash flows.
Our providers involved in medical care decisions and associates involved in coverage decisions
may be exposed to the risk of medical malpractice claims. Some states have passed or are
considering legislation that permits managed care organizations to be held liable for negligent
treatment decisions or benefits coverage determinations, or eliminates the requirement that
providers carry a minimum amount of professional liability insurance. This kind of legislation has
the effect of shifting the liability for medical decisions or adverse outcomes to the managed care
organization. This could result in substantial damage awards against us and our providers that
could exceed the limits of our insurance coverage or could cause us to pay additional premiums to
increase our insurance coverage. Therefore, successful malpractice or tort claims asserted against
us, our providers or our associates could have a material adverse effect on our financial condition
and cash flows.
From time to time, we are party to various other litigation matters (including the matters
discussed in Part I Item 3 Legal Proceedings), some of which seek monetary damages. We
cannot predict with certainty the outcome of any pending litigation or potential future litigation,
and we may incur substantial expense in defending these lawsuits or indemnifying third parties with
respect to the results of such litigation, which could have a material adverse effect on our
financial condition and cash flows.
We maintain errors and omissions policies as well as other insurance coverage. However,
potential liabilities may not be covered by insurance, our insurers may dispute coverage or may be
unable to meet their obligations, or the amount of our insurance coverage may be inadequate. We
cannot assure you that we will be able to obtain insurance coverage in the future or that insurance
will continue to be available to us on a cost-effective basis. Moreover, even if claims brought
against us are unsuccessful or without merit, we would have to defend ourselves against such
claims. The defense of any such actions may be time-consuming and costly and may distract our
managements attention. As a result, we may incur significant expenses and may be unable to
effectively operate our business.
Risks Related to Our Financial Condition
Our senior secured credit facility, which is currently in default and subject to acceleration by
the lenders, will become due and payable on May 13, 2009, and we cannot provide any assurances that
adverse developments will not arise that would impede our ability to pay the outstanding balance of
approximately $152.8 million when it becomes due.
Our senior secured credit facility with Wachovia Bank, as Administrative Agent, and a
syndicate of lenders, which has a term loan facility with an outstanding balance of approximately
$152.8 million as of December 31, 2008, is currently in default and subject to acceleration by the
lenders and, absent acceleration by the lenders, will become due and payable on May 13, 2009. Our
senior secured credit facility also included a revolving credit facility that expired in May 2008.
Although we are not in payment default, we are in default of a number of covenants contained in the
credit agreement (including our failure to provide the lenders with audited financial statements,
our budgets and other requested reports and information, and our inability to maintain certain
leverage ratios), some of which cannot be cured prior to maturity of the senior secured credit
facility (such as our entry into intercompany loan transactions, which are described in
Managements Discussion and Analysis of Financial Condition and Results of Operation, that were
not effected in compliance with the credit agreement). As of the date hereof, our payment
obligations under the credit agreement have not been accelerated and the rate of interest has not
been increased. However, we cannot provide any assurance that such obligations will not be
accelerated or the rate of interest increased in the future or that the lenders will not exercise
other remedies for default.
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We cannot provide any assurances that adverse developments will not arise that impede our
ability to repay in full the outstanding balance under the credit facility when it becomes due. In
particular, the timing and amount of any potential resolution of pending investigations by the
USAO, the Civil Division, the OIG and the State of Florida are uncertain and could materially and
adversely affect our ability to meet our near-term obligations, including repayment of the
outstanding balance under the credit facility. Also, our ability to repay in full the outstanding
balance under the credit facility could be materially and adversely affected if, among other
things, Florida regulators were to require certain of our intercompany loan arrangements which
total approximately $50 million to be terminated. In addition, there may be other potential
adverse developments that could impede our ability to repay in full the outstanding balance under
the credit facility.
Based on third-party information, we believe that Fairholme Capital Management, L.L.C.
(Fairholme), who also is our largest shareholder, has purchased approximately 67% of the
outstanding balance under our term loan facility. As a holder of a majority of the outstanding
balance under our term loan facility, Fairholme has the ability to require the exercise of remedies
for default, including accelerating our payment obligations and/or increasing the rate of interest.
If we are unsuccessful in our initiative to raise additional unregulated cash, our unregulated cash
balances could deteriorate, which could have a material adverse effect on our cash flows, business,
financial condition, results of operations and growth prospects.
We are pursuing financing alternatives to, among other things, increase our unregulated cash
balances. Financing alternatives that we are pursuing include, but are not limited to, seeking
dividends from certain of our regulated subsidiaries to the extent that we are able to access
available excess capital and pursuing external financing sources. One or more factors may cause us
to be unable to raise additional unregulated cash, including, among others:
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continued turmoil in the financial markets and general adverse economic conditions
make it unlikely that we will be able to obtain financing and also may make it more
difficult or prohibitively costly for us to raise capital through the issuance of debt
or common stock; |
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the uncertainty created by the ongoing state and federal investigations is adversely
affecting our ability to obtain financing; |
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required capital contributions to our regulated subsidiaries are greater than
anticipated, resulting from, among other things, lower than expected profitability in
our regulated subsidiaries or the imposition of greater capital requirements by state
insurance regulators such as the recent request by one of our regulators to contribute a
total of approximately $30.0 million in additional statutory capital into two of our HMOs; |
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we are unable to obtain the approval of state regulatory authorities to cause certain
of our regulated subsidiaries to declare and pay dividends to us or our non-regulated
subsidiaries; |
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management fees received by our non-regulated third-party administrator subsidiary
are less than anticipated as a result of lower than expected premium revenues in our
regulated subsidiaries; |
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the lenders under our senior secured credit facility accelerate repayment of the
outstanding indebtedness thereunder; |
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Florida regulators require the regulated subsidiaries to terminate certain
intercompany loan arrangements in the amount of $50.0 million, as discussed in
Managements Discussion and Analysis of Financial Condition and Results of Operation,
necessitating the borrowing subsidiary to repay in full the amount owed to the Florida
regulated subsidiaries, or other restrictions are placed on the use of proceeds from
such loans; and/or |
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we are required to pay significant fines or penalties in the near term to resolve one
or more of the federal or state investigations or we do not prevail in one or more of
the actions described under Part I Item 3 Legal Proceedings. |
If we are unsuccessful in our initiative to raise additional unregulated cash, our unregulated
cash balances could deteriorate, which could have a material adverse effect on our cash flows,
business, financial condition and results of operations.
Recent disruptions in the financial markets and the general economic slowdown could cause us to be
unable to obtain financing and expose us to risks related to the overall macro-economic
environment, which could have a material adverse effect on our business, financial condition and
results of operations.
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The United States equity and credit markets have recently experienced significant price
volatility, dislocations and liquidity disruptions, which have caused market prices of many
equities to fluctuate substantially and the spreads on prospective debt financings to widen
considerably. These circumstances have materially impacted liquidity in the financial markets,
making terms for certain financings less attractive, and in some cases have resulted in the
unavailability of financing, even for companies who are otherwise qualified to obtain financing.
These events make it unlikely that we will be able to obtain financing and also may make it more
difficult or prohibitively costly for us to raise capital through the issuance of debt or common
stock.
In addition, due to the general economic slowdown, we may be exposed to risks related to the
overall macro-economic environment, including a lower rate of return than we have historically
experienced on our invested assets, being limited in our ability to sell or liquidate our invested
assets, such as our auction rate securities, and receiving inadequate premium payments from our
government payors due to state budget constraints. Such risks, if realized, could have a material
adverse effect on our business, financial condition and results of operations.
Our significant debt obligations, the restrictions under which we operate as set forth in our
senior secured credit facility, and our default status under our senior secured credit facility
could have a material adverse effect on our results of operations, financial condition, business
strategy, liquidity and cash flow position.
We have outstanding indebtedness as of December 31, 2008 of approximately $152.8 million under
our senior secured credit facility. As noted above, our senior secured credit facility is
currently in default and the lenders have the right to exercise remedies for default, including,
among others, accelerating the amounts due under the credit facility, increasing the rate of
interest and preventing us from accessing funds held by certain of our regulated subsidiaries. As
of the date hereof, the lenders have not exercised any such remedies for default, but we cannot
provide any assurance that they will not do so in the future. In the absence of the exercise of
remedies by the lenders, our senior secured credit facility becomes due and payable on May 13,
2009. The required repayment of the outstanding balance will
materially reduce our outstanding cash balances unless we are able to
refinance this debt.
Our current default status and near term obligation to repay in full the outstanding balance
under the credit facility also may have a material adverse effect on our results of operations,
financial condition and business strategy resulting from, among others, the following:
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increasing our vulnerability to adverse economic, regulatory and industry conditions,
and placing us at a disadvantage to our competitors; |
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limiting our ability to compete and our flexibility in planning for, or reacting to,
changes in our business and the industry in which we operate; and |
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limiting our ability to fund capital expenditures, capital reserve requirements,
acquisitions, and general, corporate and other operating purposes. |
In addition, restrictions and covenants in the documents governing our senior secured credit
facility including prescribed fixed charge coverage and leverage ratios and limitations on
capital expenditures and acquisitions may cause our financial and operating flexibility to be
limited by, among other things, restricting our ability to (i) engage in certain transactions, (ii)
incur liens, (iii) declare dividends to shareholders without lender approval, (iv) fund capital
expenditures, capital reserve requirements, acquisitions, and general, corporate and other
operating purposes, and (v) incurring indebtedness.
Our failure to comply with covenants in our debt instruments could result in our indebtedness being
immediately due and payable and the loss of our assets, which could have a material adverse effect
on our business, financial condition and cash flows.
Our credit facility is secured by a pledge of substantially all of the assets of our
non-regulated entities, which includes the stock of our regulated subsidiaries directly held by our
non-regulated entities. If we fail to pay any of our indebtedness when due, or if we breach any of
the other covenants in the instruments governing our indebtedness, such as the obligation to
provide the lenders audited financial statements, it may result in one or more events of default.
As a result of the on-going investigations discussed in Note 11, the Company has been unable to
satisfy a number of its obligations under the Credit Agreement, including providing audited
financial statements, annual financial plans and other information sought by the lenders under the
Credit Agreement. Consequently, since November 2007 the Company has been in technical default
under the terms of this Credit Agreement. In addition, since September 30, 2008, the Company was
in default of certain covenants set forth in the Credit Agreement requiring the Company to maintain
certain leverage ratios. The Company continues to make payments as required, and consequently,
there has been no payment default under the terms of the Credit Agreement. To date, the lenders
have not accelerated any amounts outstanding under the credit facility, proceeded against the
collateral securing the indebtedness or exercised other remedies, but we cannot assure you that
they will not do
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so in the future. If the lenders accelerate the amounts outstanding under the credit
facility, proceed against the collateral securing the indebtedness or exercise other remedies, our
business, financial condition and cash flows could be materially adversely affected.
Downgrades in our debt ratings may have a material adverse effect on our business, financial
condition, access to capital markets, and our ability to obtain alternative financing options.
Claims paying ability, financial strength and debt ratings by recognized rating organizations
are an increasingly important factor in establishing the competitive position of managed-care
insurance companies. Ratings information is broadly disseminated and generally used throughout our
industry. We believe our claims paying ability and financial strength ratings are an important
factor in promoting our services to certain of our constituents. Our debt ratings impact both the
cost and availability of future borrowings. Each of the rating agencies reviews its ratings
periodically and there can be no assurance that current ratings will be maintained in the future.
Our ratings reflect each rating agencys opinion of our financial strength, operating performance,
and ability to meet our debt obligations or obligations to providers. Downgrades in our ratings,
should they occur, may have a material adverse effect on our business, financial condition, access
to capital markets, and our ability to obtain alternative financing options.
Our investments in auction rate securities are subject to risks that may cause losses and have a
material adverse effect on our liquidity.
As of December, 31, 2008, 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 anywhere
from seven to 35 days. Recently, auctions for some of these auction rate securities have failed
and there is no assurance that auctions on the remaining auction rate securities in our investment
portfolio will continue to succeed. An auction failure means that the parties wishing to sell
their securities could not be matched with an adequate volume of buyers. The securities for which
auctions have failed will continue to accrue interest at the contractual rate and be auctioned
every seven, 14, 28 or 35 days, as the case may be, until the auction succeeds, the issuer calls
the securities, or they mature. As a result, our ability to liquidate and fully recover the
carrying value of our auction rate securities in the near term may be limited or 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 31 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
CMSs risk adjustment payment system makes our revenue and profitability difficult to predict and
could result in material retroactive adjustments that have a material adverse effect on our results
of operations.
CMS has implemented a risk adjustment payment system for Medicare health plans to improve the
accuracy of payments and establish incentives for Medicare plans to enroll and treat less healthy
Medicare beneficiaries. CMSs risk adjustment model bases a portion of the total CMS reimbursement
payments on various clinical and demographic factors including hospital inpatient diagnoses,
diagnosis data from ambulatory treatment settings, including hospital outpatient facilities and
physician visits, gender, age, and Medicaid eligibility. CMS requires all managed care companies
to capture, collect, and report the necessary diagnosis code information to CMS. Because 100% of
Medicare Advantage premiums are now risk-based, it is more difficult to predict with certainty our
future revenue or profitability.
In addition, CMS establishes premium payments to Medicare plans generally at the beginning of
the calendar year and then adjusts premium levels on two separate occasions during the year on a
retroactive basis. The first such adjustments update the risk scores for the current year based on
prior years 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 CMSs retroactive payment could be
materially more or less than our estimates. Consequently, our estimate of our plans risk scores
for any period and our accrual of premiums related thereto may result in adjustments to our
Medicare premium revenue and, accordingly, could have a material adverse effect on our results of
operations.
On February 22, 2008, CMS published preliminary results of a study designed to assess the
degree of coding pattern differences between Original Medicare and Medicare Advantage and the
extent to which any such differences could be appropriately addressed by an adjustment to risk
scores. CMSs study of risk scores for Medicare populations from 2004 through 2006 found that
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Medicare Advantage member risk scores increased substantially more than the risk scores for
the general Medicare fee-for-service population. CMS found that the overall risk scores of
stayers (a CMS term referring to those persons who were enrolled either in the same Medicare
Advantage plan or in Original Medicare during the study periods) in Medicare Advantage increased
more than those of Original Medicare stayers. Accordingly, in the 2009 Advance Notice of
Methodological Changes for Calendar Year 2009 for Medicare Advantage Capitation Rates and Part D
Payment Policies, CMS summarized findings from its analysis of risk scores over the 2004-2006 time
period and proposed to apply a coding difference adjustment to contracts whose disease scores for
stayers exceeded fee-for-service by twice the industry average. The agency proposed to apply an
adjustment 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.
On February 20, 2009, CMS published the 45-day advance notice for the
2010 preliminary rating methodology. For calendar year 2010, a
negative coding intensity adjustment factor will apply to all managed
care plans. Plans will receive final rates for 2010 in April
2009. If the coding intensity adjustment factor is implemented as
proposed, this would result in a significant decrease in our Medicare
revenues.
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 members health
status, age, gender, county or region, benefit mix and member eligibility categories. Future
Medicaid premium rate levels may be affected by continued government efforts to contain medical
costs or state and federal budgetary constraints. Some of the states in which we operate have
experienced fiscal challenges leading to significant budget deficits. According to the National
Association of State Budget Officers, Medicaid spending consumes approximately one-quarter of the
average states budget, representing the second largest expenditure. Health care spending
increases appear to be more limited than in the past, states continue to look at Medicaid programs
as opportunities for budget savings and some states may find it difficult to continue paying
current rates to Medicaid health plans.
Changes in Medicaid funding may lead to reductions in the number of persons enrolled in or
eligible for Medicaid, reductions in the amount of reimbursement or elimination of coverage for
certain benefits such as pharmacy, behavioral health or other benefits. In some cases, changes in
funding could be made retroactive, in which case we may be required to return premiums already
received or receive reduced future payments. In the recent past, all of the states in which we
operate have implemented or considered legislation or regulations that would reduce reimbursement
rates, payment levels, benefits covered or the number of persons eligible for Medicaid. Reductions
in Medicaid payments could reduce our profitability if we are unable to reduce our expenses at the
same rate.
Further, continued economic slowdowns in our markets have negatively impacted state revenues.
The number of persons eligible to receive Medicaid benefits may grow more slowly or even decline
more rapidly or in tandem with declining economic conditions. For example, the governments that
oversee the Medicaid programs could choose to limit program eligibility in an effort to reduce the
portion of their respective state budgets attributable to Medicaid, which would cause our
membership and revenues to decrease. Therefore, declining general economic conditions may cause
our membership levels to decrease even further, which could have a material adverse effect on our
results of operations. The states may also develop future Medicaid capitation rates that, while
actuarially sound, are insufficient to keep pace with medical trends or inflation, therefore
reducing our profitability in those markets and materially adversely affecting our results of
operations.
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 participate in the
Medicaid reform programs.
As a result, we notified the State of Florida that we were
withdrawing from these programs effective July 1, 2009, which will result in a loss of approximately 80,000 members. New
legislation in Georgia related to payment of claims, eligibility determination and provider
contracting, may negatively impact revenues and profits for the plan in 2009 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.
Similar to Medicaid, reductions in payments under Medicare or the other programs under which
we offer health plans could likewise reduce our profitability. The MMA permits premium levels for
certain Medicare plans to be established through competitive bidding, with Congress retaining the
ability to limit increases in premium levels established through bidding from year to year. The
federal government also has passed legislation that phases out Medicare Advantage budget neutrality
payments through 2011, which impacts premium increases over that
timeframe. The U.S. 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. CMS recently announced preliminary 2010
Medicare Advantage payment rates which are between 4% and 5% below 2009 rates. Assuming the 20%
physician rate cut implicit in the rates is not enacted, the following are among the events that
are likely to occur: member benefits will be reduced; member
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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 new presidential administration took office. Although the new
administration and recently elected U.S. 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 under Medicare and other government programs. Similarly,
although the U.S. Congress approved the childrens 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:
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forfeiture or recoupment of amounts we have been paid pursuant to our government contracts; |
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imposition of significant civil or criminal penalties, fines or other sanctions on us and/or our key associates; |
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loss of our right to participate in government-sponsored programs, including Medicaid and Medicare; |
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damage to our reputation in various markets; |
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increased difficulty in marketing our products and services; |
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inability to obtain approval for future service or geographic expansion; and |
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suspension or loss of one or more of our licenses to act as an insurer, HMO or third
party administrator or to otherwise provide a service. |
We are currently undergoing standard periodic audits by several Departments of Insurance and
CMS to verify compliance with our contracts and applicable laws and regulations. In 2008, CMS
completed its routine comprehensive audit of all of our Medicare operations. CMSs audit report
indicates that we are deficient in a number of areas. We implemented corrective action plans to
address CMSs findings, but in February 2009, CMS notified us that, effective March 7, 2009, we
have been sanctioned through a suspension of marketing to Medicare beneficiaries and enrollments
into all lines of our Medicare business. This suspension will remain in effect until CMS
determines that the suspension should be lifted. Among other areas, CMSs decision was based on
findings of deficiencies in our enrollment and disenrollment operations; appeals and grievances;
timely and proper responses to beneficiary complaints and requests for assistance; and marketing
and agent/broker oversight activities. We are working closely with CMS to address their concerns.
At this time, we cannot provide any assurances regarding the duration of the suspension or the
ultimate impact it will have on our results of operations and our
business. Nonetheless, we anticipate that our inability to perform
marketing activities to Medicare beneficiaries, or enroll new Medicare members into our plans, as well as
any actions that we take in response to the sanctions, will have a
material adverse affect on our results of operations and business in
2009 and potentially beyond.
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.
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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 and the Special Committee are undertaking to discuss with the Civil Division, and
address, allegations by the qui tam relators.
We also learned from a docket search that a former employee filed a qui tam action on October
25, 2007 in state court for Leon County, Florida against several defendants, including us and one
of our subsidiaries. Because qui tam actions brought under federal and state false claims acts are
sealed by the court at the time of filing, we are unable to determine the nature of the allegations
and, therefore, we do not know at this time whether this action relates to the subject matter of
the federal investigations. It is possible that additional qui tam actions have been filed against
us and are under seal. Thus, it is possible that we are subject to liability exposure under the
False Claims Act, or similar state statutes, based on qui tam actions other than those discussed in
this 2008 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
adopted regulations that increase the capital reserve requirement by 150% over an eight-year
period. The phased-in increase in reserve requirements to which our New York plan is subject will,
over time, materially increase our reserve requirements in New York. Other states may elect to
adopt risk-based capital requirements based on guidelines adopted by the NAIC. As of December 31,
2008, our operations in Connecticut, Georgia, Illinois, Indiana, Louisiana, Missouri and Ohio, and
our PDP and PFFS operations, were subject to such guidelines.
Our subsidiaries also may be required to maintain higher levels of statutory net worth due to
the adoption of risk-based capital requirements by other states in which we operate. Our
subsidiaries are subject to their state regulators general oversight powers. Regardless of
whether a state adopts the risk-based capital requirements, the states regulators can require our
subsidiaries to maintain minimum levels of statutory net worth in excess of amounts required under
the applicable state laws if they determine that maintaining such additional statutory net worth is
in the best interests of our members. In addition, as we continue to expand our plan offerings in
new states or pursue new business opportunities, we may be required to make additional statutory
capital contributions. In either case, any additional capital contribution made to one or more of
the affected subsidiaries could have a material adverse effect on our
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liquidity, cash flows and growth potential, which could harm our ability to implement our
business strategy by, for example, hindering our ability to make debt service payments on amounts
drawn from our credit facilities. In addition, increases of statutory capital requirements could
cause us to withdraw from certain programs or markets where it becomes economically difficult to
continue to be profitable. For example, we recently evaluated the capitalization requirement for
our PFFS plans and determined that it was economically prudent to withdraw from participation in
these plans in Texas, Florida and Wisconsin since the capital requirements for these states applied
to the subsidiary as a whole, effectively increasing the capital requirements for several other
states operating under the same license. If we restructure our insurance licenses for Florida,
Texas and Wisconsin such that the capital requirements apply only to the business in those states,
we may re-consider our interest in offering products in those states. Accordingly, effective
January 1, 2009 we exited the PFFS business in these three states in which we provided services to
approximately 10,000 members.
Additionally, one or more of our regulators could require one or more of our subsidiaries to
maintain minimum levels of statutory net worth in excess of the amount required under the
applicable state laws if the regulators were to determine that such a requirement were in the
interest of our members. For example, a state regulator recently notified us that in its view,
notwithstanding a parental guarantee that has been in place since 2006, two of our HMOs should
contribute a total of approximately $30.0 million in additional statutory capital. We are
currently discussing this request with the regulator.
We derive a substantial portion of our Medicare revenues from our PDP operations, and legislative
or regulatory actions, economic conditions, bidding results or other factors that adversely affect
those PDP operations could have a material adverse effect on our profitability and results of
operations.
We derive a substantial portion of our Medicare revenues from our PDP operations. Our ability
to operate our PDP plans profitably depends on our ability to attract members, to price our plans
appropriately, to continue to develop core systems and processes, to manage our medical expenses
related to these plans and other factors. We do not know whether we will be able to sustain our
PDP operations profitability over the long-term, and our failure to do so could have a material
adverse effect on our profitability and results of operations. There are numerous factors that
could have a materially adverse effect on our PDP operations, as well our Medicare Part D and other
plans in general. Those that are particularly applicable to our PDP operations include:
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Risk corridors: The MMA provides for risk corridors that are designed to limit to
some extent the losses PDP plans would incur if the medical expenses exceed the
reimbursement to be received from CMS. These risk corridors are designed to widen over
time. The risk corridors for 2006 and 2007 provided more protection against excess
losses than are available for 2008 and future years as the thresholds increase and the
reimbursement percentages decrease. Reimbursement or other reconciliations from CMS
could be delayed, which could cause us to incur more up-front costs for operating the
program. |
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Annual Bidding: Along with other Part D plans, including PDPs and MA-PDs, we bid on
Part D benefits in June each year. Based on the bids submitted, CMS establishes a
national benchmark. Plans that bid below the benchmark are eligible to have members
automatically assigned to them. Consequently, our ability to bid below the benchmark
impacts our ability to receive automatically assigned members. As previously described,
we bid above the CMS benchmark in 22 of the 34 CMS regions for plan year 2009 and are
ineligible to receive auto-assigned members in these regions. As a result, 252,000
auto-assigned dual-eligible members were assigned away from our plans and approximately
28,000 low-income subsidized members disenrolled from our plans in January 2009. |
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Competition: We have encountered competition from other PDP plans, some of which may
have significantly greater resources and brand recognition than we do, and new PDP plans
are entering the business. During the annual bidding process described above, we
compete with other plans to bid below the CMS benchmark for auto-assigned members.
During the annual open-enrollment period, we compete with other PDP plans to obtain
members who can select their PDP plan. We cannot predict whether we will be able to
continue to compete effectively in this market. |
Those factors that apply to all of our Medicare plans, including PDP and Part D, include:
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Membership: Medicare beneficiaries who are dual-eligibles generally are able to
disenroll and choose another PDP plan at any time, and certain other Medicare
beneficiaries also may have a limited ability to disenroll from the plan they initially
select and choose a different PDP plan. All Medicare beneficiaries are able to change
PDP plans during the annual open enrollment period. We may not be able to retain the
auto-assigned members or those members who affirmatively choose our PDP plans, and we
may not be able to attract new PDP members. |
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Benefits expense: We may experience higher benefits expense as a result of an
increase in the cost of pharmaceuticals, possible changes in our pharmacy rebate program
with drug manufacturers, higher than expected utilization and new mandated benefits or
other regulatory changes that increase our costs. |
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Regulatory and administration: CMS may alter the Medicare Part D program in a manner
that could be detrimental to us. |
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Utilization of benefits: We make actuarial assumptions about the utilization of
benefits in our PDP plans. Because our membership mix changes in this program from year
to year, our assumptions are based on data that may not be applicable to our current PDP
membership base and we cannot assure you that these assumptions will prove to be correct
or that premiums will be sufficient to cover the benefits provided. |
Several changes to the Medicare program resulting from the MIPPA legislation that became effective
in 2008 could increase competition for our existing and prospective members and have a material
adverse effect on our results of operations.
On July 15, 2008, MIPPA became law and in September 2008 CMS promulgated enabling regulations.
MIPPA impacts a broad range of Medicare activities and impacts all types of Medicare managed care
plans. All of the changes imposed on us by MIPPA, including those discussed below, have the
potential to cause us to incur additional administrative expense, lose membership and ultimately
reduce our Medicare revenues, all of which could have a material adverse effect on our results of
operations:
PFFS plans: MIPPA revises requirements for Medicare Advantage PFFS plans, which may have the
effect of ending some of these plans in plan year 2011 where such plans are not able to
comply with these new requirements. In particular, MIPPA requires all PFFS plans that
operate in markets with two or more networked-based plans must be offered on a networked
basis. Currently, we do not have provider networks in the majority of the markets where we
offer PFFS plans. We are currently evaluating alternative solutions to establishing a
network in targeted areas to meet these requirements, including building a contracted
network, contracting with a third party network or withdrawing from certain counties where it
is not economically or otherwise feasible to establish networks for this line of business.
Sales and Marketing: MIPPA places prohibitions and limitations on specified sales and
marketing activities under Medicare Advantage and prescription drug plans. Among other
things, Medicare plans are no longer permitted to make unsolicited contact with potential
members by way of outbound telemarketing and community marketing, offer other types of
Medicare products to existing members, provide meals to potential enrollees or approach
potential members in common or public areas. These changes are likely to increase our
administrative costs of enrolling an individual, and could increase the risk of compliance
violations and could have a material adverse effect on our ability to enroll new Medicare
members particularly because we have historically relied to a large extent on outbound
telemarketing and community marketing to sell our products. Although we utilized alternative
marketing methods during the most recent Medicare enrollment period, we are continuing to
evaluate and assess how these MIPPA changes will affect our ability to obtain Medicare
Advantage members and how we will use the most effective alternative marketing methods
allowed under MIPPA to educate potential members regarding our products and services.
Special Needs Plans: A significant portion of our coordinated care plan membership is
enrolled in our D-SNPs. Under MIPPA, D-SNPs such as ours are required to contract with state
Medicaid agencies to coordinate benefits. The scope of the D-SNP contract with the state
Medicaid agency will depend greatly on what eligibility categories, cost-sharing
responsibilities and payment limitations each state has included in its state plan. The
contracting process under MIPPA provides an opportunity for D-SNPs and states to improve the
coordination of benefits, including defining the overlap between Medicaid and Medicare
benefits, eligibility verification processes, payment and coverage responsibilities,
marketing and enrollment standards, appeals and grievances procedures and other important
operational considerations. Collaboration between states and D-SNPs is expected to create
administrative efficiencies and improve beneficiary health outcomes. However, the
requirement to contract with state Medicaid agencies imposes potential risk for D-SNP
providers such as us because MIPPA does not allow expansion in 2010 or continued operation of
a D-SNP after 2010 if a state and the D-SNP provider cannot come to agreement on terms.
Compensation: MIPPA also establishes limits on agent and broker compensation. The CMS
implementing regulations require that plans that pay commissions do so by paying for an
initial year commission and residual commissions for each of the five subsequent renewal
years, thereby creating a six year commission cycle for members moving from Original Medicare
and a five year commission cycle for members moving from another Medicare Advantage plan.
Reductions or delays in federal and state funding for health care programs could have a material
adverse effect on our profitability and results of operations.
The federal government and many states from time to time consider reducing the level of
funding for government health care programs, including Medicare and Medicaid, which could have a
material adverse effect on our profitability and results of operations. For example, the Deficit
Reduction Act of 2005, signed into law on February 8, 2006, includes reductions in federal Medicaid
spending by approximately $4.8 billion and reductions to Medicare spending by approximately $6.4
billion over a period of five years, according to the Congressional Budget Office. The Act reduces
spending by cutting Medicaid payments for prescription drugs and
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gives states new power to reduce or reconfigure benefits. This law may also lead to lower
Medicaid reimbursements in some states. States also periodically consider reducing or reallocating
the amount of money they spend for Medicaid and other programs. In recent years, the majority of
states have implemented measures to restrict Medicaid and other health care programs costs and
eligibility.
Changes to Medicaid and other health care programs could reduce the number of persons enrolled
in or eligible for these programs, reduce the amount of reimbursement or payment levels, or
increase our administrative or health care costs under those programs, all of which could have a
negative impact on our business. We believe that reductions in Medicaid and other health care
program payments could substantially reduce our profitability and have a material adverse effect on
our results of operations. Further, our contracts with the states are subject to cancellation by
the state after a short notice period in the event of unavailability of state funds; such
cancellations could have a material adverse affect on our results of operations.
Premiums are contractually payable to us before or during the month for services that we are
obligated to provide to our members. Our cash flow would be negatively impacted if premium
payments are delayed or not made according to contract terms.
Our contracts with the states in which we operate are subject to cancellation by the state in the
event of inadequate program funding contained within such states budget, and are also subject to
decreases or limited increases in premiums, all of which could have a material adverse effect on
our profitability and free cash available for operations and capital reserve requirements.
If a state in which we operate approves a budget that includes inadequate program funding, our
contracts with that state are subject to cancellation by the state. In some jurisdictions, such
cancellation may be immediate and in other jurisdictions a notice period is required. State
governments generally are experiencing tight budgetary conditions within their Medicaid programs.
Budget problems in the states in which we operate could result in decreases or limited increases in
the premiums paid to us by the states. In some instances, it may result in the postponement of
payment until additional funding sources are available. For example and as described above, in
February 2009, we determined that it was economically unfeasible for us to continue participating
in the Medicaid reform program after Florida notified us that it was reducing our reimbursement
rates. Consequently, we notified the State of Florida that we were withdrawing from the Medicaid
Reform program effective July 1, 2009, which will result in a loss of approximately 80,000 members.
If any state in which we operate were to decrease premiums paid to us, or pay us less than the
amount necessary to keep pace with our cost trends, it could have a material adverse effect on our
profitability and free cash available for operations and capital reserve requirements.
We are required to comply with laws governing the transmission, security and privacy of health
information, and we have not yet determined what our total compliance costs will be; however, such
costs, when determined, could be more than anticipated, which could have a material adverse effect
on our results of operations.
Regulations under HIPAA require us to comply with standards regarding the exchange of health
information within our company and with third parties, such as health care providers, business
associates and our members. These regulations include standards for common health care
transactions, such as claims information, plan eligibility, and payment information; unique
identifiers for providers and employers; security; privacy; and enforcement. HIPAA also provides
that to the extent that state laws impose stricter privacy standards than HIPAA privacy
regulations, a state seeks and receives an exception from the Department of Health and Human
Services regarding certain state laws, or state laws concern certain specified areas, such state
standards and laws will not be preempted.
We have implemented and are continuing to implement security policies and procedures to strive
to achieve and maintain compliance with the security standards. Given HIPAAs complexity and the
possibility that the regulations may change and may be subject to changing and perhaps conflicting
interpretation, our ongoing ability to comply with any of the HIPAA requirements is uncertain.
Furthermore, a states ability to promulgate stricter laws, and uncertainty regarding many aspects
of such state requirements, make compliance with applicable health information laws more difficult.
Normal health plan operations require that we transmit protected health information via electronic
or other means, often at the direction of and based on information provided by third parties, such
as our providers, that could result in inadvertent violations of HIPAA privacy or security rules.
In March 2008, management learned that, in accordance with a contractual requirement, a Company web
developer had transmitted a document folder containing reports for the Georgia Department of
Community Health (DCH) to two production ports, one of which, unbeknownst to the web developer,
was not secure. Consequently, data, including protected information, unintentionally was made
accessible through the Internet. We incurred considerable remediation expenses in this matter and,
on June 11, 2008, we paid $725,000 in response to a Notification of Breach and Assessment of
Liquidated Damages issued by DCH. Our efforts to comply with HIPAA and to remediate any violations
of HIPAA, including any fines and penalties, could cause us to incur substantial costs which could
have a material adverse effect on our cash flows and results of operations.
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Future changes in health care law may have a material adverse effect on our results of operations
or liquidity.
Health care laws and regulations, and their interpretations, are subject to frequent change.
Changes in existing laws or regulations, or their interpretations, or the enactment of new laws or
the issuance of new regulations could materially reduce our profitability, among other things, by:
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imposing additional license, registration and/or capital requirements; |
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increasing our administrative and other costs; |
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requiring us to undergo a corporate restructuring; |
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increasing mandated benefits; |
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limiting our ability to engage in intra-company transactions with our affiliates
and subsidiaries; |
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requiring us to develop plans to guard against the financial insolvency of our
providers; |
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restricting our revenue and enrollment growth; |
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requiring us to restructure our relationships with providers; or |
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requiring us to implement additional or different programs and systems. |
Changes in state law, regulations and rules also may materially adversely affect our
profitability. Requirements relating to managed care consumer protection standards, including
increased plan information disclosure, limits to premium increases, expedited appeals and grievance
procedures, third party review of certain medical decisions, health plan liability, access to
specialists, clean claim payment timing, physician collective bargaining rights and confidentiality
of medical records either have been enacted or continue to be under discussion. New health care
reform legislation may require us to change the way we operate our business, which may be costly.
Further, although we strive to exercise care in structuring our operations to attempt to comply in
all material respects with the laws and regulations applicable to us, government officials charged
with responsibility for enforcing such laws and/or regulations have in the past asserted and may in
the future assert that we or transactions in which we are involved are in violation of these laws,
or courts may ultimately interpret such laws in a manner inconsistent with our interpretation.
Therefore, it is possible that future legislation and regulation and the interpretation of laws and
regulations could have a material adverse effect on our ability to operate under the Medicaid,
Medicare and S-CHIP programs and to continue to serve our members and attract new members, which
could have a material adverse effect on our results of operations.
State regulatory restrictions on our marketing activities may constrain our membership growth and
our ability to increase our revenues, which could have a material adverse effect in our results of
operations.
Although we enroll some of our new members through automatic enrollment programs and voluntary
member enrollment, we rely on our marketing and sales efforts for a significant portion of our
membership growth. All of the states in which we currently operate permit advertising and, in most
cases, direct sales but impose strict requirements and limitations as to the types of marketing
activities that are permitted. For example, in Florida, we were recently subject to a 60-day
marketing freeze in three counties resulting from the states allegation of wrongful marketing
practices. In addition, the State of Georgia does not permit direct sales by Medicaid health
plans. In Georgia, we advertise our plans, but we rely on member selection and auto-assignment of
Medicaid members into our plans. Effective January 1, 2009, all plans participating in the Florida
Medicaid program are prohibited from directly selling their plans to Medicaid recipients. In
circumstances where our marketing efforts are prohibited or curtailed, we may incur additional
administrative expense in trying to obtain members and our ability to increase or sustain
membership could be harmed, which could have a material adverse effect on our results of
operations.
If a state fails to renew its federal waiver application for mandated Medicaid enrollment into
managed care or such application is denied, our membership in that state will likely decrease,
which could have a material adverse effect on our results of operations.
A significant percentage of our Medicaid plan enrollment results from mandatory Medicaid
enrollment in managed care plans. States may mandate Medicaid enrollment into managed care through
CMS-approved plan amendments or, for certain groups, through federal waivers or demonstrations.
Waivers and programs under demonstrations are generally approved for two- to five-year periods, and
can be renewed on an ongoing basis if the state applies and the waiver request is approved or
renewed by CMS. We have no control over this renewal process. If a state in which we operate does
not mandate managed care enrollment in its state
41
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 profitability.
Premium payments that we receive are based upon eligibility lists produced by the government.
From time to time, states require us to reimburse them for premiums that we received from the
states based on an eligibility list that a state later discovers contains individuals who were not
eligible for any government-sponsored program or have been enrolled twice in the same program or
are eligible for a different premium category or a different program. For example, in July 2008,
we continued to receive premiums from the State of Florida for members that had become eligible for
both Medicaid and Medicare benefits. Once a recipient becomes dually eligible, their premium is
primarily remitted by CMS rather than the State. In this case, the State of Florida had not
properly reduced the amount of premium they paid to us to reflect that CMS was now the primary
payor. Our review of all remittance files to identify potential duplicate members, members that
should be terminated and members for which we have been paid an incorrect rate may not identify all
such members.
In addition to recoupment of premiums previously paid, we also face the risk that a state
could fail to pay us for members for whom we are entitled to payment. Our profitability would be
reduced as a result of the states failure to pay us for related payments to providers we made and
we were unable to recoup such payments from the providers. We have established a reserve in
anticipation of recoupment by the states of previously paid premiums, but ultimately our reserve
may not be sufficient to cover the amount, if any, of recoupments. If the amount of any
recoupments exceeds our reserves, our revenues and profits could be materially reduced and have a
material adverse effect on our results of operations.
Our failure to maintain accreditations could disqualify us from participation in the certain state
Medicaid programs, which would have a material adverse effect on our results of operations.
Several of our Medicaid contracts require that our plans or subcontracted providers be
accredited by independent accrediting organizations that are focused on improving the quality of
health care services. Accreditation by AAAHC or comparable accreditation is a requirement for
participation in the Florida Medicaid program. Further, Florida Medicaid plans can only
subcontract behavioral health services to a URAC-accredited organization. Accreditation by NCQA is
a requirement for participation in the Georgia Medicaid managed care program and the Hawaii
Medicaid program requires that participating plans be either NCQA or URAC accredited.
Our Florida health plans are accredited by the AAAHC and our behavioral health subsidiary to
which we subcontract behavioral health services is accredited by URAC. In July 2008, as required
by the terms of our Medicaid contract, our Georgia health plan was awarded accredited status by
NCQA. Under the terms of our Medicaid contract, we have until January 1, 2012 to obtain NCQA
accreditation in Hawaii.
Failure to maintain our AAAHC or URAC accreditations in Florida or NCQA accreditation in
Georgia could disqualify us from participation in the Florida and Georgia Medicaid businesses,
respectively.
Similarly, failure to obtain NCQA accreditation in Hawaii by January 1, 2012 could disqualify
us from participation in the Hawaii Medicaid program. There can be no assurance that we will
maintain, or obtain, our NCQA, URAC or AAAHC accreditations, and the loss of, or failure to obtain,
these accreditations could adversely our ability to participate in certain Medicaid programs, which
could have a material adverse effect on our results of operations.
Risks Related to Our Common Stock
Future sales, or the availability for sale, of our common stock may have a material adverse effect
on the market price of our common stock.
Sales of substantial amounts of our common stock in the public market, or the perception that
such sales could occur, could have a material adverse effect the market price of our common stock
and could materially impair our future ability to raise capital through offerings of our common
stock.
As of December 31, 2008, we had outstanding options to purchase 4,278,118 shares of our common
stock, of which 1,463,630 were exercisable, at a weighted average exercise price of $39.26 per
share. From time to time, we may issue additional options to associates, non-employee directors,
consultants and others pursuant to our equity incentive plans.
42
The provisions in our charter documents and under Delaware law could discourage a takeover that
stockholders may consider favorable and make it more difficult for a stockholder to elect directors
of its choosing.
The provisions of our certificate of incorporation, bylaws and provisions of applicable
Delaware law may discourage, delay or prevent a merger or other change in control that a
stockholder may consider favorable. These provisions could also discourage proxy contests, make it
more difficult for stockholders to elect directors of their choosing and cause us to take other
corporate actions that stockholders may consider unfavorable.
Item 1B. Unresolved Staff Comments.
By letter dated October 25, 2007, the SECs Division of Corporation Finance provided us with
comments relating to our Annual Report on Form 10-K for the fiscal year ended December 31, 2006
filed by us on February 17, 2007. The SECs comments relate principally to our disclosures
regarding our Medicare Part D business. We believe that our disclosures were appropriate, although
we agreed to provide additional disclosure in future filings. We responded to this letter on
November 16, 2007. To date, we have not received a response to our November 16, 2007 letter.
Item 2. Properties.
Our principal administrative, sales and marketing facilities are located at our headquarters
in Tampa, Florida. We currently occupy approximately 389,000 square feet of office space in the
Tampa facility under a lease whose term is scheduled to expire in various phases from 2011 through
2016. Our corporate headquarters in Tampa, Florida are used in all of our lines of business. We
also lease office space for our health plans in Florida, New York, Illinois, Indiana, Connecticut,
Georgia, Ohio, Louisiana, Hawaii, New Jersey, Missouri and Texas. We believe these facilities are
suitable and provide the appropriate level of capacity for our current operations.
Item 3. Legal Proceedings.
Set forth below is a description of the current status of the investigations, actions and
lawsuits arising from or consequential to the Restatement and Special Committee investigation:
Government Investigations
We are currently under investigation by several federal and state authorities, including AHCA, the USAO, the Civil Division, the OIG and MCFU.
We are engaged in resolution discussions as to matters under review with the USAO, the Civil
Division, the OIG and the State of Florida. Based on the current status of matters and all
information known to us to date, in the year ended December 31, 2007
we recorded selling, general and administrative expense and accrued
a liability in the amount of $50.0 million in connection with the resolution of these matters, which is
included in the Other accrued expenses line item within our Consolidated Balance Sheets as of December 31,
2007, and 2008, respectively. We believe that it is probable that the actual resolution amount for
all such matters under review will be more than the amounts that have already been reflected in our
financial statements; however, 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 USAO, the Civil Division, the OIG or the
State of Florida. For more information related to this accrual, see Note 11
to the consolidated financial statements included in this 2008 Form 10-K.
In addition to the federal and state governmental investigations referenced above, as
previously disclosed, the SEC is conducting an informal investigation. We also are responding to
subpoenas issued by the State of Connecticut Attorney Generals Office involving transactions
between the Company and its affiliates and their potential impact on the costs of Connecticuts
Medicaid program. We have communicated with regulators in states in which our HMO and insurance
operating subsidiaries are domiciled regarding the investigations. We are cooperating with federal
and state regulators and enforcement officials in these matters. We do not know whether, or the
extent to which, any pending investigations might lead to the payment of fines, penalties or
operating restrictions.
In addition, in a letter dated October 15, 2008, the Civil Division informed counsel to the
Special Committee that as part of the pending civil inquiry, the Civil Division is investigating a
number of qui tam complaints filed by relators against us under the whistleblower provisions of the
False Claims Act, 31 U.S.C. sections 3729-3733. The seal in those cases has been partially lifted
for the purpose of authorizing the Civil Division to disclose to us the existence of the qui tam
complaints. The complaints otherwise remain under seal as required by 31 U.S.C. section
3730(b)(3). We and the Special Committee are undertaking to discuss with the Civil Division, and
address, allegations by the qui tam relators.
We also learned from a docket search that a former employee filed a qui tam action on October
25, 2007 in state court for Leon County, Florida against several defendants, including us and one
of our subsidiaries. Because qui tam actions brought under federal and state false claims acts are
sealed by the court at the time of filing, we are unable to determine the nature of the allegations
and,
43
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 2008 Form 10-K.
Class Action and Derivative Lawsuits
Putative class action complaints were filed on October 26, 2007 and November 2, 2007. These
putative class actions, entitled Eastwood Enterprises, L.L.C. v. Farha, et al. and Hutton v.
WellCare Health Plans, Inc. et al., respectively, were filed in the United States District Court
for the Middle District of Florida against the Company, Todd Farha, the Companys former chairman
and chief executive officer, and Paul Behrens, the Companys former senior vice president and chief
financial officer. Messrs. Farha and Behrens were also officers of various subsidiaries of the
Company. The Eastwood Enterprises complaint alleges that the defendants materially misstated the
Companys reported financial condition by, among other things, purportedly overstating revenue and
understating expenses in amounts unspecified in the pleading in violation of the Securities
Exchange Act of 1934, as amended. The Hutton complaint alleges that various public statements
supposedly issued by defendants were materially misleading because they failed to disclose that the
Company was purportedly operating its business in a potentially illegal and improper manner in
violation of applicable federal guidelines and regulations. The complaint asserts claims under the
Securities Exchange Act of 1934, as amended. Both complaints seek, among other things,
certification as a class action and damages. The two actions have been consolidated, and various
parties and law firms filed motions seeking to be designated as Lead Plaintiff and Lead Counsel.
In an Order issued on March 11, 2008, the Court appointed a group of five public pension funds from
New Mexico, Louisiana and Chicago as Lead Plaintiffs. On October 31, 2008, an amended consolidated
complaint was
filed in this class action against the Company, Messrs. Farha and Behrens, and adding Thaddeus
Bereday, the Companys former senior vice president and general counsel, as a defendant. On
January 23, 2009, the Company 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 the Companys 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. Briefing on this motion is continuing. The
Company intends to defend itself vigorously against these claims. At this time, neither the
Company nor any of its subsidiaries can predict the probable outcome of these claims. Accordingly,
no amounts have been accrued in the Companys consolidated financial statements for these claims.
Five putative shareholder derivative actions were filed between October 29, 2007 and November
15, 2007. The first two actions, entitled Rosky v. Farha, et al. and Rooney v. Farha, et al.,
respectively, are purportedly brought on behalf of the Company and were filed in the United States
District Court for the Middle District of Florida. Two additional actions, entitled Intermountain
Ironworkers Trust Fund v. Farha, et al., and Myra Kahn Trust v. Farha, et al., were filed in
Circuit Court for Hillsborough County, Florida. All four of these actions are asserted against all
Company directors (and former director Todd Farha) except for D. Robert Graham, Heath Schiesser and
Charles G. Berg and also name the Company as a nominal defendant. A fifth action, entitled Irvin
v. Behrens, et al., was filed in the United States District Court for the Middle District of
Florida and asserts claims against all Company directors (and former director Todd Farha) except
Heath Schiesser and Charles G. Berg and against two former Company officers, Paul Behrens and
Thaddeus Bereday. All five actions contend, among other things, that the defendants allegedly
allowed or caused the Company to misrepresent its reported financial results, in amounts
unspecified in the pleadings, and seek damages and equitable relief for, among other things, the
defendants supposed breach of fiduciary duty, waste and unjust enrichment. The three actions in
federal court have been consolidated. Subsequent to that consolidation, an additional derivative
complaint entitled City of Philadelphia Board of Pensions and Retirement Fund v. Farha, et al. was
filed in the same federal court, but thereafter was consolidated into the existing consolidated
action. A motion to consolidate the two state court actions, to which all parties consented, was
granted, and plaintiffs filed a consolidated complaint on April 7, 2008. On October 31, 2008,
amended complaints were filed in the federal court and the state court derivative actions. On
December 30, 2008, the Company filed substantially similar motions to dismiss both actions,
contesting, among other things, the standing of the plaintiffs in each of these derivative actions
to prosecute the purported claims in the Companys name. Briefing on these motions is continuing.
At this time, neither the Company nor any of its subsidiaries can predict the probable outcome of
these claims. Accordingly, no amounts have been accrued in the Companys consolidated financial
statements for these claims.
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.
44
PART II
Item 5. Market for Registrants 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 |
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 |
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
|
|
|
|
|
|
First Quarter ended March 31, 2007 |
|
$ |
90.49 |
|
|
$ |
68.25 |
|
Second Quarter ended June 30, 2007 |
|
$ |
94.25 |
|
|
$ |
78.89 |
|
Third Quarter ended September 30, 2007 |
|
$ |
110.94 |
|
|
$ |
88.34 |
|
Fourth Quarter ended December 31, 2007 |
|
$ |
128.42 |
|
|
$ |
20.81 |
|
The
last reported sale price of our common stock on the New York Stock
Exchange on March 13,
2009 was $8.37. As of March 12, 2009, we had approximately 36 holders of record of our common
stock.
Performance Graph
The following graph compares the cumulative total stockholder return on our common stock for
the period from July 1, 2004, the date shares of our common stock began trading on the NYSE, to
December 31, 2008 with the cumulative total return on the stocks included in the Standard & Poors
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 July 1, 2004. The
graph also assumes the reinvestment of dividends and is weighted according to the respective
companys 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.
45
COMPARISON OF 53 MONTH CUMULATIVE TOTAL RETURN*
Among WellCare Health Plans, Inc., The S&P 500 Index,
The Custom Composite Index (12 Stocks)
*$100 invested on 7/1/04 in stock & 6/30/04 in index-including reinvestment of dividends.
Fiscal year ending December 31.
Copyright © 2009 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7/1/04(1) |
|
|
12/31/04 |
|
|
12/31/05 |
|
|
12/31/06 |
|
|
12/31/07 |
|
|
12/31/08 |
|
|
WellCare Health Plans, Inc. |
|
|
$ |
100 |
|
|
|
$ |
191 |
|
|
|
$ |
240 |
|
|
|
$ |
405 |
|
|
|
$ |
249 |
|
|
|
$ |
76 |
|
|
|
S&P 500 Index |
|
|
$ |
100 |
|
|
|
$ |
108 |
|
|
|
$ |
114 |
|
|
|
$ |
132 |
|
|
|
$ |
139 |
|
|
|
$ |
87 |
|
|
|
Custom Composite Index (12
stocks) |
|
|
$ |
100 |
|
|
|
$ |
137 |
|
|
|
$ |
195 |
|
|
|
$ |
183 |
|
|
|
$ |
210 |
|
|
|
$ |
95 |
|
|
|
|
|
|
(1) |
|
The beginning of the measurement period corresponds with the closing
of our initial public offering in July 2004. |
Dividends
We have never paid cash dividends on our common stock. We currently intend to retain any
future earnings to fund our business, and we do not anticipate paying any cash dividends in the
future.
Our ability to pay dividends is partially dependent on, among other things, our receipt of
cash dividends from our regulated subsidiaries. The ability of our regulated subsidiaries to pay
dividends to us is limited by the state departments of insurance in the states in which we operate
or may operate, as well as
requirements of the government-sponsored health programs in which we participate. In
addition, the terms of our credit facility limit our ability to pay dividends. Any future
determination to pay dividends will be at the discretion of our Board and will depend upon, among
other factors, our results of operations, financial condition, capital requirements and contractual
restrictions. For more information regarding restrictions on the ability of our regulated
subsidiaries to pay dividends to us, please see Item 7
Managements Discussion and Analysis of
Financial Condition and Results of Operations Regulatory Capital and Restrictions on Dividends
and Management Fees.
46
Unregistered Issuances of Equity Securities
During the quarterly period ended December 31, 2008, we sold the following securities in
transactions that were not registered under the Securities Act of 1933, as amended (the Act):
|
|
|
On November 3, 2008, we issued 10,000 restricted shares of our common stock to Timothy
Susanin in connection with his appointment as our Vice President & Chief Counsel, Dispute
Management. The issuance was made pursuant to the exemption provided under Section 4(2)
of the Act, based on representations made by Mr. Susanin. A nominal sum was paid by Mr.
Susanin to cover the par value of the shares. |
Issuer Purchases of Equity Securities
We do not have a stock repurchase program. However, during the quarter ended December 31,
2008, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number |
|
Maximum |
|
|
|
|
|
|
|
|
|
|
|
of Shares |
|
Number of |
|
|
|
|
|
|
|
|
|
|
|
Purchased as |
|
Shares that |
|
|
|
|
|
|
|
|
|
|
|
Part of |
|
May Yet Be |
|
|
|
|
|
|
|
|
|
|
|
Publicly |
|
Purchased |
|
|
|
Total Number |
|
Average |
|
Announced |
|
Under the |
|
|
|
of Shares |
|
Price Paid |
|
Plans or |
|
Plans or |
|
Period |
|
Purchased(1) |
|
Per Share(1) |
|
Programs |
|
Programs |
|
October 1, 2008
through October 31,
2008 |
|
|
11,716 |
|
|
$ |
27.55 |
(2) |
|
|
N/A |
|
|
|
N/A |
|
|
|
November 1, 2008
through November
30, 2008 |
|
|
2,373 |
|
|
$ |
16.20 |
(3) |
|
|
N/A |
|
|
|
N/A |
|
|
|
December 1, 2008
through December
31, 2008 |
|
|
1,214 |
|
|
$ |
11.35 |
(4) |
|
|
N/A |
|
|
|
N/A |
|
|
|
Total during
quarter ended
December 31, 2008 |
|
|
15,303 |
|
|
$ |
21.61 |
(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 $21.69. |
|
(3) |
|
The weighted average price paid per share during the period was $19.98. |
|
(4) |
|
The weighted average price paid per share during the period was $11.64. |
|
(5) |
|
The weighted average price paid per share during the period was $20.41. |
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 Managements Discussion and
Analysis of Financial Condition and Results of Operations included elsewhere in this 2008 Form
10-K. The data for the years ended December 31, 2006, 2007 and 2008, and as of December 31, 2007
and 2008 is derived from consolidated financial statements included elsewhere in this 2008 Form
10-K. The data for the years ended December 31, 2004 and 2005 and as of December 31, 2004, 2005,
and 2006 is derived from audited financial statements not included in this 2008 Form 10-K.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Year Ended |
|
|
Year Ended |
|
|
Year Ended |
|
|
Year Ended |
|
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|
|
2004 |
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
|
(in thousands, except share data) |
|
Consolidated and Combined
Statements of
Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medicaid |
|
$ |
1,042,026 |
|
|
$ |
1,343,800 |
|
|
$ |
1,906,391 |
|
|
$ |
2,691,781 |
|
|
$ |
2,991,049 |
|
Medicare |
|
|
334,760 |
|
|
|
504,501 |
|
|
|
1,679,652 |
|
|
|
2,613,108 |
|
|
|
3,492,021 |
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Year Ended |
|
|
Year Ended |
|
|
Year Ended |
|
|
Year Ended |
|
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|
|
2004 |
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
|
(in thousands, except share data) |
|
Other(1) |
|
|
1,137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total premium |
|
|
1,377,923 |
|
|
|
1,848,301 |
|
|
|
3,586,043 |
|
|
|
5,304,889 |
|
|
|
6,483,070 |
|
Investment and other income |
|
|
4,307 |
|
|
|
17,042 |
|
|
|
49,919 |
|
|
|
85,903 |
|
|
|
38,837 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
1,382,230 |
|
|
|
1,865,343 |
|
|
|
3,635,962 |
|
|
|
5,390,792 |
|
|
|
6,521,907 |
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical benefits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medicaid |
|
|
849,333 |
|
|
|
1,093,180 |
|
|
|
1,555,819 |
|
|
|
2,136,710 |
|
|
|
2,537,422 |
|
Medicare |
|
|
275,347 |
|
|
|
412,208 |
|
|
|
1,351,471 |
|
|
|
2,076,674 |
|
|
|
2,992,794 |
|
Other(1) |
|
|
(940 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total medical benefits |
|
|
1,123,740 |
|
|
|
1,505,388 |
|
|
|
2,907,290 |
|
|
|
4,213,384 |
|
|
|
5,530,216 |
|
Selling, general and
administrative |
|
|
171,257 |
|
|
|
259,491 |
|
|
|
496,396 |
|
|
|
766,648 |
|
|
|
933,418 |
|
Depreciation and amortization |
|
|
7,715 |
|
|
|
9,204 |
|
|
|
17,170 |
|
|
|
18,757 |
|
|
|
21,324 |
|
Interest |
|
|
10,165 |
|
|
|
13,562 |
|
|
|
14,087 |
|
|
|
14,035 |
|
|
|
11,780 |
|
Goodwill impairment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78,339 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
1,312,877 |
|
|
|
1,787,645 |
|
|
|
3,434,943 |
|
|
|
5,012,824 |
|
|
|
6,575,077 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income
taxes |
|
|
69,353 |
|
|
|
77,698 |
|
|
|
201,019 |
|
|
|
377,968 |
|
|
|
(53,170 |
) |
Income tax expense (benefit) |
|
|
26,906 |
|
|
|
30,330 |
|
|
|
79,790 |
|
|
|
161,732 |
|
|
|
(16,337 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
42,447 |
|
|
$ |
47,368 |
|
|
$ |
121,229 |
|
|
$ |
216,236 |
|
|
$ |
(36,833 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per
share basic |
|
$ |
1.46 |
|
|
$ |
1.26 |
|
|
$ |
3.08 |
|
|
$ |
5.31 |
|
|
$ |
(0.89 |
) |
Net income (loss) per
share diluted |
|
$ |
1.34 |
|
|
$ |
1.21 |
|
|
$ |
2.98 |
|
|
$ |
5.16 |
|
|
$ |
(0.89 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
2004 |
|
2005 |
|
2006 |
|
2007 |
|
2008 |
Operating Statistics: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical benefits ratio
consolidated(2)(3)(4) |
|
|
81.6 |
% |
|
|
81.4 |
% |
|
|
81.1 |
% |
|
|
79.4 |
% |
|
|
85.3 |
% |
Medical benefits ratio
Medicaid(2) |
|
|
81.3 |
% |
|
|
81.3 |
% |
|
|
81.6 |
% |
|
|
79.4 |
% |
|
|
84.8 |
% |
Medical benefits ratio
Medicare(2) |
|
|
82.3 |
% |
|
|
81.7 |
% |
|
|
80.5 |
% |
|
|
79.5 |
% |
|
|
85.7 |
% |
Medical benefit ratio
other(1)(2) |
|
|
(82.7 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and
administrative expense
ratio(5) |
|
|
12.4 |
% |
|
|
13.9 |
% |
|
|
13.7 |
% |
|
|
14.2 |
% |
|
|
14.3 |
% |
Members consolidated |
|
|
747,000 |
|
|
|
855,000 |
|
|
|
2,258,000 |
|
|
|
2,373,000 |
|
|
|
2,532,000 |
|
Members Medicaid |
|
|
701,000 |
|
|
|
786,000 |
|
|
|
1,245,000 |
|
|
|
1,232,000 |
|
|
|
1,300,000 |
|
Members Medicare |
|
|
46,000 |
|
|
|
69,000 |
|
|
|
1,013,000 |
|
|
|
1,141,000 |
|
|
|
1,232,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
2004 |
|
2005 |
|
2006 |
|
2007 |
|
2008 |
|
|
(In thousands) |
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
397,627 |
|
|
|
421,766 |
|
|
|
964,542 |
|
|
|
1,008,409 |
|
|
|
1,181,922 |
|
Total assets |
|
|
803,386 |
|
|
|
896,343 |
|
|
|
1,664,298 |
|
|
|
2,082,731 |
|
|
|
2,203,461 |
|
Long-term debt (including
current maturities) |
|
|
183,501 |
|
|
|
182,061 |
|
|
|
155,621 |
|
|
|
154,581 |
|
|
|
152,741 |
|
Total liabilities |
|
|
501,558 |
|
|
|
535,793 |
|
|
|
1,127,239 |
|
|
|
1,274,840 |
|
|
|
1,397,632 |
|
Total
stockholders/members
equity |
|
|
301,828 |
|
|
|
360,550 |
|
|
|
537,059 |
|
|
|
807,891 |
|
|
|
805,829 |
|
|
|
|
(1) |
|
Other premium revenue and other medical benefits relates to our commercial business, which
ceased operations beginning May 2004. |
|
(2) |
|
Medical benefits ratio represents medical benefits expense as a percentage of premium revenue. |
|
(3) |
|
As a result of the restatement and investigation, we were delayed in filing our 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 |
48
|
|
|
|
|
actual claims paid for this period and the
amount that would have resulted from using our original actuarially determined estimate is
approximately $92.9 million, or a decrease of 1.8% in the 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. |
|
(4) |
|
As discussed above, due to the delay in filing our 2007 Form 10-K, the Company was 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. |
|
(5) |
|
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. |
Item 7. Managements 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 2008 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 managements
expectations. Factors that could cause such differences include those set forth under Risk
Factors, Forward-Looking Statements, Business and elsewhere in this 2008 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 pending investigations and related
litigation discussed above under Part I Item 3 Legal Proceedings will result in our payment
of 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 these matters 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.
We are engaged in resolution discussions as to matters under review with the USAO, the Civil
Division, the OIG and the State of Florida. Based on the current status of matters and all
information known to us to date, in the year ended December 31, 2007
we recorded selling, general and administrative expense and accrued
a liability in the amount of $50.0 million in connection with the resolution of these matters, which is
included in the Other accrued expenses line item within our Consolidated Balance Sheets as of December 31,
2007, and 2008, respectively. We believe that it is probable that the actual resolution amount for
all such matters under review will be more than the amounts that have already been reflected in our
financial statements; however, 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 USAO, the Civil Division, the OIG or the
State of Florida.
As discussed in more detail below, investigations and related matters have caused us to expend
significant financial resources. As of December 31, 2008, we had spent a cumulative amount of
approximately $124.1 million on administrative expenses associated with, or consequential to, the
government and Special Committee investigations, including legal fees, accounting fees, consulting
fees, employee recruitment and retention costs and similar expenses. Approximately $21.1 million
of these investigation related costs were incurred in 2007 and approximately $103.0 million were
incurred in 2008. We expect to continue incurring significant additional costs in 2009 as a result
of the federal and state investigations and pending civil actions, including administrative
expenses and costs necessary to improve our corporate governance and address other issues that were
identified.
Current Cash Position
As of December 31, 2008, our consolidated cash and cash equivalents were approximately
$1,181.9 million. As of December 31, 2008, our consolidated investments were approximately $125.1
million. As
of December 31, 2008, we had unregulated cash of approximately $147.7 million and unregulated
investments of approximately $4.9 million.
On December 31, 2008, three of our Florida regulated subsidiaries declared dividends to one of
our non-regulated subsidiaries in the aggregate amount of $105.1 million, two of which were paid on
December 31, 2008 and one of which was paid on January 2, 2009. The proceeds of such dividends are
reflected in our unregulated cash balances as of December 31, 2008, with the exception of the
dividends received on January 2, 2009.
49
Our Credit Facility and Near-Term Cash Obligations
As previously disclosed, our senior secured credit facility with Wachovia Bank, as
Administrative Agent, and a syndicate of lenders, which has a term loan facility with an
outstanding balance of approximately $152.8 million as of December 31, 2008, is currently in
default and subject to acceleration by the lenders and, absent acceleration by the lenders, will
become due and payable on May 13, 2009. Our senior secured credit facility also included a
revolving credit facility that expired in May 2008. Taking into account, among other things, the
increase in our unregulated cash balances as a result of our receipt of the $105.1 million in
dividends described above, we currently expect that we will be able to repay in full the
outstanding balance under the credit facility when it becomes due. However, we cannot provide any
assurances that adverse developments will not arise that impede our ability to repay in full the
outstanding balance under the credit facility when it becomes due. In particular, the timing and
amount of any potential resolution of pending investigations by the USAO, the Civil Division, the
OIG and the State of Florida are uncertain and could materially and adversely affect our ability to
meet our near-term obligations, including repayment of the outstanding balance under the credit
facility. Also, our ability to repay in full the outstanding balance under the credit facility
could be materially and adversely affected if, among other things, Florida regulators were to
require certain of our intercompany loan arrangements, which total approximately $50.0 million, to
be terminated. In addition, there may be other potential adverse developments that could impede our
ability to repay in full the outstanding balance under the credit facility.
We also have a number of other near-term obligations, including currently anticipated capital
contributions to certain of our regulated subsidiaries or the imposition of greater capital
requirements by state insurance regulators such as the recent request by one of our regulators to
contribute a total of approximately $30.0 million in additional statutory capital into two of our
HMOs. In addition, we anticipate significant costs associated with the government and Special
Committee investigations, including legal, accounting and consulting fees, and employee recruitment
and retention costs. For a detailed discussion of our financing needs, the financing challenges we
face and the initiatives we are pursuing to increase our unregulated
cash, see Part II Item 7
Managements Discussion and Analysis of Financial
Condition and Results of Operations
Liquidity and Capital Resources.
Business
and Financial Outlook
General Economic, Political and Financial Market Conditions
As a result of economic uncertainty, many of the states in which we operate have experienced
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. On February 20, 2009, CMS
published the 45-day advance notice for the 2010 preliminary rating methodology. For calendar
year 2010, a negative coding intensity adjustment factor will apply to all managed care plans.
Plans will receive final rates for 2010 in April 2009. If the coding intensity adjustment factor
is implemented as proposed, this would result in a significant decrease in our Medicare revenues.
These events are likely to have a negative effect on our 2010
operating results 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 has
significantly limited our ability to access external capital, which has, and is likely to continue
to 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. Some of the states in which we operate have experienced fiscal challenges leading to
significant budget deficits. 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 notified the State of Florida that
we were withdrawing from the Medicaid reform programs effective July 1, 2009, which will result in a loss of
approximately 80,000 members. New or proposed legislation in Georgia related to
50
payment of claims,
program design, eligibility determination and provider contracting, may negatively impact revenues
and profits for the plan in 2009 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 new presidential administration took office. Although the new
administration and recently elected U.S. 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 the U.S. Congress approved the childrens health bill which, among things, increases
federal funding to the 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. It is possible that the ultimate
impact of these initiatives could be negative.
Medicare Competition; PDP Outlook
In our Medicare segment, we are experiencing increased competition. As the result of the Part
D bidding process for plan year 2009, we bid above the benchmark in 22 of the 34 regions. As a
result, as of December 31, 2008, approximately 252,000 auto-assigned dual-eligible members were
assigned away from our plans. In addition, approximately 28,000 low income subsidized members
disenrolled from our plans in January 2009. We estimate that, based on these factors as well as new
members choosing to enroll in our plans, new auto-assignment of members and other factors, our
revenues generated from our PDP plans will decrease significantly for 2009. In addition, several
changes to the Medicare program resulting from MIPPA that became effective in 2008 could increase
competition for our existing and prospective members, which could adversely affect our revenues.
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 make sure 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, as we did during 2008 and early
2009, our revenues 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
also intend to divert some resources to strengthening compliance and operating capabilities. These
factors, when combined with the rationalization of our operations and the operational challenges we
face, could cause us to not sustain the rapid growth we have achieved in the recent past.
Membership and Trends
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, 2008, we served
approximately 2,532,000 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 2009
will be higher than in prior periods due to the changes in the numbers and demographic mix of
membership principally occurring in our Medicare Advantage plans and Ohio Medicaid market, and,
effective in 2009, in Hawaii. 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.
In
February 2009, CMS notified us that, effective March 7,
2009, we have been sanctioned
through a suspension of marketing of, and enrollment into, all lines of our Medicare business. This
suspension will remain in effect until CMS determines that it should be lifted. Among other areas,
CMSs determination was based on findings of deficiencies in our enrollment and disenrollment
operations, appeals and grievances, timely and proper responses to beneficiary complaints and
requests for assistance and marketing and agent/broker oversight activities. We are working closely
with CMS to address their concerns. At this time, we cannot estimate
the duration of the suspension or the ultimate impact it will have on our results of
operations and our business. Nonetheless, we anticipate that our inability to enroll new Medicare
members will have a material negative affect on our results of operations and
51
business in 2009 and
potentially beyond. Further, we cannot provide any assurances that we will be able to take
appropriate corrective action or that, despite any corrective measures taken on our part, that we
will not incur additional penalties, fines or other operating restrictions which could have an
additional material adverse effect on our results of operations. In response to the CMS suspension
in March 2009, we made certain changes to our Medicare marketing
sales force and are continuing to assess the impact of suspending marketing
activities and the resulting loss of membership to determine what effect, if any, this action will
have on our staffing needs and other operational capabilities to effectively and efficiently meet
the needs of the members we serve.
Encounter Data
To the extent that our encounter data is inaccurate or incomplete, we may incur additional
costs to collect or correct this data and could be exposed to regulatory risk for noncompliance.
The accurate and timely reporting of encounter data is crucial to the success of our programs
because more states are using encounter data to determine compliance with performance standards
which are partly used by such states to set premium rates. As states increase their reliance on
encounter data, our inability to obtain complete and accurate encounter data could significantly
affect the premium rates we receive and how membership is assigned to us, which could have a
material adverse effect on our results of operations, cash flows and our ability to bid for, and
continue to participate in, certain programs.
Basis of Presentation
The
consolidated balance sheets, statements of operations, changes in stockholders and members
equity and comprehensive income and cash flows include the accounts of the Company and all of its
wholly-owned subsidiaries. Intercompany accounts and transactions have been eliminated.
Our Segments
We have two reportable business segments: Medicaid and Medicare.
Medicaid
Medicaid was established to provide medical assistance to low income and disabled persons, 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, 2008, we had approximately 1,300,000 Medicaid
members. The following table summarizes our Medicaid segment membership by line of business as of
December 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
Medicaid Membership |
|
|
|
As of December 31, |
|
|
|
2008 |
|
|
2007 |
|
Medicaid |
|
|
|
|
|
|
|
|
TANF |
|
|
1,039,000 |
|
|
|
927,000 |
|
S-CHIP |
|
|
164,000 |
|
|
|
203,000 |
|
SSI |
|
|
75,000 |
|
|
|
72,000 |
|
FHP |
|
|
22,000 |
|
|
|
30,000 |
|
|
|
|
|
|
|
|
Total |
|
|
1,300,000 |
|
|
|
1,232,000 |
|
|
|
|
|
|
|
|
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 2007 and 2008, we had two customers, the states of Florida and Georgia, from
which we received 10% or more of our Medicaid segment premiums revenues.
Medicare
Medicare is a federal program that provides eligible persons age 65 and over and some disabled
persons a variety of hospital, medical insurance and prescription drug benefits, and is
administered and funded by CMS. For a more detailed description of our Medicare segment, please see
Item 1 Business Our Segments. As of December 31, 2008, we had approximately 1,232,000
Medicare members.
52
|
|
|
|
|
|
|
|
|
|
|
Medicare Membership |
|
|
|
As of December 31, |
|
|
|
2008 |
|
|
2007 |
|
Medicare |
|
|
|
|
|
|
|
|
PDP |
|
|
986,000 |
|
|
|
983,000 |
|
Medicare Advantage |
|
|
246,000 |
|
|
|
158,000 |
|
|
|
|
|
|
|
|
Total |
|
|
1,232,000 |
|
|
|
1,141,000 |
|
|
|
|
|
|
|
|
In our Medicare segment, we have just one customer, CMS, from which we receive substantially
all of our Medicare segment premium revenue.
Our Health and Prescription Drug Plans
Premiums
We receive premiums from state and federal agencies for the members who are assigned to us, or
who have selected us to provide health care services under Medicaid and Medicare. The premiums we
receive under each of our government benefit plans are generally determined at the beginning of the
contract period and we are generally unable to change the premium rates during the contract year.
The premiums we receive vary according to the specific government program and vary according to
many factors, including the members geographic location, age, gender, medical history or
condition, or the services rendered to the member. These premiums are subject to adjustment by our
government clients 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. As a result of these periodic premium rate
adjustments and member eligibility determinations, we cannot predict with certainty what our future
revenues will be under each of our government contracts even when we believe membership is
remaining constant.
For further detail about the CMS reimbursement methodology under the PDP program, see
Critical Accounting Policies below.
Services/Coverage
Medicaid
The Medicaid programs and services we offer to our members vary by state and county and are
designed to serve effectively our various constituencies in the communities we serve. Although our
Medicaid contracts determine to a large extent the type and scope of health care services that we
arrange for our members, in certain markets we customize our benefits in ways that we believe make
our products more attractive. Our Medicaid plans provide our members with access to a broad
spectrum of medical benefits from many facets of primary care and preventive programs to full
hospitalization and tertiary care.
In general, members are required to use our network, except in cases of emergencies,
transition of care or when network providers are unavailable to meet a members medical needs, and
generally must receive a referral from their primary care physician in order to receive health care
from a specialist, such as an orthopedic surgeon or neurologist. Members do not pay any premiums,
deductibles or co-payments for most of our Medicaid plans.
Medicare
Through our Medicare Advantage plans, we also cover a wide spectrum of medical services. We
provide additional benefits not covered by Original Medicare, such as vision, dental and hearing
services. Through these enhanced benefits, the out-of-pocket expenses incurred by our members are
reduced, which allows our members to better manage their health care costs.
Most of our Medicare Advantage plans require members to pay a co-payment, which varies
depending on the services and level of benefits provided. Typically, members of our CCPs are
required to use our network of providers except in cases such as emergencies, transition of care or
when specialty providers are unavailable to meet a members medical needs. CCP members may see an
out-of-network specialist if they receive a referral from their PCP and may pay incremental
cost-sharing. PFFS plans are open-access plans that allow members to be seen by any physician or
facility that participates in the Medicare program, is willing to bill us for reimbursement and
accepts our terms and conditions. Our pilot PPO plans offer members the option to seek any services
outside of our contracted network but, in such case, they are subject to higher cost sharing. We
also offer special needs plans 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.
53
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. PFFS beneficiaries can join a PFFS plan that has Part D drug coverage or join
a plan without such coverage and choose either to obtain a drug benefit from a stand-alone PDP or
forego Part D drug coverage. Beneficiaries enrolled in CCPs or PPOs can join a plan with Part D
coverage or forego Part D coverage.
Medical Benefits Expense
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. Other components of medical benefits expense are variable and require
estimation and ongoing cost management. Capitation payments represented 11.0% and 12.0% of our
total medical benefits expense for the years ended December 31, 2007 and 2008, respectively. Other
components of medical benefits expense are variable and require estimation and ongoing cost
management.
Estimation of medical benefits payable is our most significant critical accounting estimate.
See Critical Accounting Policies below.
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. 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 discussed below are those that are most important to the
portrayal of our financial condition and results and require managements 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.
54
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. 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 our customers.
From time to time, the states or CMS may 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. These adjustments reflect changes
in the number of and eligibility status of enrollees subsequent to when revenue was received. We
estimate the amount of outstanding retroactivity each period and adjust premium revenue
accordingly; if appropriate the estimates of retroactive adjustments are based on historical
trends, premiums billed, the volume of member and contract renewal activity and other information.
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. For example, CMS has implemented
a risk adjustment model which apportions premiums paid to all Medicare plans according to the
health status of each beneficiary enrolled.
CMS transitioned to the risk adjustment model while the old demographic model was being phased
out. The demographic model based the monthly premiums paid to Medicare plans on factors such as
age, gender and disability status. The monthly premium amount for each member was separately
determined under both the risk adjustment and demographic model, and these separate payment amounts
were blended according to a transition schedule. The first year in which risk-adjusted payment for
health plans was fully phased in was 2007. The PDP payment methodology is based 100% on the
risk-adjustment model which began in 2006. Under the risk adjustment model, the settlement payment
is based on each members preceding year 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 and the phasing in of the
risk-adjustment model, 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.
Under this risk-adjustment methodology, 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
continually estimate risk-adjusted revenues based upon membership claim activity and the diagnosis
data submitted to CMS, as well as the data which is 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, our actual results may differ from the amounts that we have 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.
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 the Company
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. The Company estimates the amounts due to the state as a return of
premium each period based on the terms of the Companys 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 cost of
medical benefits that have been incurred but not yet reported (IBNR). 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, 2006, 2007 and 2008 were approximately 13.0%,
11.0% and 12.0% of total medical benefits expense, respectively.
55
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 managements 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. For example, from 2004 to 2008, we
grew at a rapid pace, through the expansion of existing products and introduction of new products,
such as Part D and PFFS, and entry into new geographic areas, such as Georgia. The ultimate claims
payment amounts, patterns and trends for new products and geographic areas 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 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.
Medical cost trends can be volatile and management is required to use considerable judgment in
the selection of medical benefits expense trends and other actuarial model inputs. In developing
the estimate, 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
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.
56
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, 2008, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
2008 |
|
|
Total |
|
|
2007 |
|
|
Total |
|
|
2006 |
|
|
Total |
|
|
|
(Dollars in thousands) |
|
|
|
|
Claims adjudicated, but not yet paid |
|
$ |
77,117 |
|
|
|
10 |
% |
|
$ |
68,948 |
|
|
|
13 |
% |
|
$ |
43,066 |
|
|
|
9 |
% |
IBNR |
|
|
689,062 |
|
|
|
90 |
% |
|
|
469,198 |
|
|
|
87 |
% |
|
|
417,662 |
|
|
|
91 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Medical benefits payable |
|
$ |
766,179 |
|
|
|
|
|
|
$ |
538,146 |
|
|
|
|
|
|
$ |
460,728 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides a reconciliation of the beginning and ending balance of medical
benefits payable for the following periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
|
|
|
|
2007 |
|
|
|
|
|
|
2006 |
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
Balances as of beginning of period |
|
$ |
538,146 |
|
|
|
|
|
|
$ |
460,728 |
|
|
|
|
|
|
$ |
223,674 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical benefits incurred related to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current period |
|
|
5,538,262 |
|
|
|
|
|
|
|
4,313,581 |
|
|
|
|
|
|
|
2,954,427 |
|
Prior periods |
|
|
(8,046 |
) |
|
|
|
|
|
|
(100,197 |
) |
|
|
|
|
|
|
(47,137 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
5,530,216 |
|
|
|
|
|
|
|
4,213,384 |
|
|
|
|
|
|
|
2,907,290 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical benefits paid related to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current period |
|
|
(4,848,440 |
) |
|
|
|
|
|
|
(3,781,425 |
) |
|
|
|
|
|
|
(2,492,992 |
) |
Prior periods |
|
|
(453,743 |
) |
|
|
|
|
|
|
(354,541 |
) |
|
|
|
|
|
|
(177,244 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
(5,302,183 |
) |
|
|
|
|
|
|
(4,135,966 |
) |
|
|
|
|
|
|
(2,670,236 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of end of period |
|
$ |
766,179 |
|
|
|
|
|
|
$ |
538,146 |
|
|
|
|
|
|
$ |
460,728 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57
Medical benefits payable recorded at December 31, 2005, 2006 and 2007 developed favorably by
approximately $47.1 million, $100.2 million and $8.0 million, respectively. The decreases in medical
benefits payable are the amounts incurred related to prior years; 2008 related to 2007, 2007
related to 2006, and 2006 related to 2005, which were primarily attributable to favorable
development in our key assumptions consisting of trend factors and completion factors using an
assumption of moderately adverse conditions.
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.
During 2006, we acquired 100% of the stock of three companies through which we operate our
Medicare PFFS business. The purchase price allocated to intangible assets consisted of state
licenses in the amount of $4.3 million.
We evaluate whether events or circumstances have occurred that may affect the estimated useful
life or the recoverability of the remaining balance of goodwill and other identifiable intangible
assets. 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. Based
on the current general economic conditions and outlook, we performed an 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. 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.
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, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Statement of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
Premium |
|
|
99.4 |
% |
|
|
98.4 |
% |
|
|
98.6 |
% |
Investment and other income |
|
|
0.6 |
% |
|
|
1.6 |
% |
|
|
1.4 |
% |
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Medical benefits expense |
|
|
84.8 |
% |
|
|
78.2 |
% |
|
|
80.0 |
% |
Selling, general and administrative |
|
|
14.3 |
% |
|
|
14.2 |
% |
|
|
13.7 |
% |
Depreciation and amortization |
|
|
0.3 |
% |
|
|
0.3 |
% |
|
|
0.5 |
% |
Interest |
|
|
0.2 |
% |
|
|
0.3 |
% |
|
|
0.4 |
% |
Goodwill impairment |
|
|
1.2 |
% |
|
|
|
% |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
100.8 |
% |
|
|
93.0 |
% |
|
|
94.6 |
% |
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
(0.8 |
)% |
|
|
7.0 |
% |
|
|
5.4 |
% |
Income tax expense |
|
|
(0.2 |
)% |
|
|
3.0 |
% |
|
|
2.2 |
% |
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
(0.6 |
)% |
|
|
4.0 |
% |
|
|
3.2 |
% |
|
|
|
|
|
|
|
|
|
|
One of our primary management tools for measuring profitability is our MBR. 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 IBNR claims. 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 be
willing to 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.
58
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.
|
|
|
|
|
|
|
|
|
|
|
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.
59
|
|
|
|
|
|
|
|
|
|
|
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 |
% |
|
|
81.2 |
% |
|
|
|
(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 |
% |
|
|
80.8 |
% |
|
|
|
(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 |
60
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 off set 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 both the Medicaid and 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 |
) |
|
|
53.4 |
|
|
|
|
|
|
|
|
Medicare Medical Benefits
Expense as adjusted |
|
$ |
2,939.4 |
|
|
$ |
2,130.1 |
|
|
|
|
|
|
|
|
MBR as reported |
|
|
85.7 |
% |
|
|
79.5 |
% |
MBR as adjusted |
|
|
84.2 |
% |
|
|
81.5 |
% |
|
|
|
(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. |
61
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 expense. For the year ended December 31, 2008, income tax decreased $178.0
million, or 110.1%, 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 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
income (loss). Net income decreased approximately
$253.0 million, or 117.0%, 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
Income (Loss) |
|
|
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 |
|
Comparison of Year Ended December 31, 2007 to Year Ended December 31, 2006
Premium revenue. For the year ended December 31, 2007, total premium revenue increased
$1,718.9 million, or 47.9%, to $5,304.9 million from $3,586.0 million for the same period in the
prior year due to increases in premium revenue in both the Medicaid
62
and Medicare segments, as discussed below. Total membership grew by 115,000 members, or 5.1%,
from 2,258,000 at December 31, 2006 to 2,373,000 at December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
Premium Revenues and Membership |
|
|
For the Year Ended December 31, |
|
|
2007 |
|
2006 |
|
|
(Dollars in millions) |
|
|
|
Revenues |
|
$ |
5,304.9 |
|
|
$ |
3,586.0 |
|
Membership |
|
|
2,373,000 |
|
|
|
2,258,000 |
|
Medicaid. For the year ended December 31, 2007, Medicaid segment premium revenue increased
$785.4 million, or 41.2%, to $2,691.8 million from $1,906.4 million for the same period in the
prior year. The increase in Medicaid segment revenue was primarily due to increases in premium
rates in certain markets and a full year of operating in Georgia in 2007 compared to seven months
in 2006. Georgia premium revenue for 2007 totaled $1,086.8 million compared to $496.9 million in
2006. The increase also resulted from our entry into the Ohio market in 2007 in which we had
revenues of approximately $161.0 million. This increase was partially offset by a decrease
resulting from the aggregate membership in the Medicaid segment decreasing slightly by 13,000
members, or 1%, from 1,245,000 members at December 31, 2006 to 1,232,000 at December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
Medicaid Revenues and Membership |
|
|
For the Year Ended December 31, |
|
|
2007 |
|
2006 |
|
|
(Dollars in millions) |
|
|
|
Revenues |
|
$ |
2,691.8 |
|
|
$ |
1,906.4 |
|
% of Total Premium Revenues |
|
|
50.7 |
% |
|
|
53.2 |
% |
|
|
|
|
|
|
|
|
|
Membership |
|
|
1,232,000 |
|
|
|
1,245,000 |
|
% of Total Membership |
|
|
51.9 |
% |
|
|
55.1 |
% |
Medicare. For the year ended December 31, 2007, Medicare segment premium revenue increased
$933.4 million, or 55.6%, to $2,613.1 million from $1,679.7 million for the same period in the
prior year. Growth in premium revenue within the Medicare segment was primarily the result of our
PFFS product launch and premium increases associated with the demographic mix of our Medicare
Advantage membership. Membership within the Medicare segment grew by 128,000 members, or 12.6%,
from 1,013,000 members at December 31, 2006 to 1,141,000 members at December 31, 2007, principally
due to the new PFFS product.
|
|
|
|
|
|
|
|
|
|
|
Medicare Revenues and Membership |
|
|
For the Year Ended December 31, |
|
|
2007 |
|
2006 |
|
|
(Dollars in millions) |
|
|
|
Revenues |
|
$ |
2,613.1 |
|
|
$ |
1,679.7 |
|
% of Total Premium Revenues |
|
|
49.3 |
% |
|
|
46.8 |
% |
|
|
|
|
|
|
|
|
|
Membership |
|
|
1,141,000 |
|
|
|
1,013,000 |
|
% of Total Membership |
|
|
48.1 |
% |
|
|
44.9 |
% |
Investment and other income. For the year ended December 31, 2007, investment and other
income increased $36.0 million, or 72.1%, to $85.9 million from $49.9 million for the same period
in the prior year. The increase was due to our increased cash and investment balances held
throughout 2007 primarily from our PFFS product launch and a full year of operations in Georgia in
2007 compared to only seven months in 2006. Higher interest rates accounted for approximately
$12.2 million of the increase.
Medical benefits expense. For the year ended December 31, 2007, total medical benefits
expense increased $1,306.1 million, or 44.9%, to $4,213.4 million from $2,907.3 million for the
same period in the prior year due to the increases in medical benefits expense in both the Medicaid
and Medicare segments, as discussed below. Our MBR was 79.4% for the year ended December 31, 2007
compared to 81.1% for the same period in the prior year.
|
|
|
|
|
|
|
|
|
|
|
Medical Benefits Expense |
|
|
For the Year Ended December 31, |
|
|
2007 |
|
|
2006 |
|
|
(Dollars in millions) |
|
Medical Benefits Expense |
|
$ |
4,213.4 |
|
|
$ |
2,907.3 |
|
Non-recurring IBNR adjustment |
|
|
92.9 |
|
|
|
N/A |
|
|
|
|
|
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
Medical Benefits Expense |
|
|
For the Year Ended December 31, |
|
|
2007 |
|
|
2006 |
|
|
(Dollars in millions) |
|
Medical Benefits Expense as adjusted(1) |
|
$ |
4,306.3 |
|
|
|
N/A |
|
|
|
|
|
|
|
|
MBR as reported |
|
|
79.4 |
% |
|
|
81.1 |
% |
MBR as adjusted |
|
|
81.2 |
% |
|
|
N/A |
|
|
|
|
(1) |
|
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 of 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 of our 2007 Form 10-K. Consequently, the amounts we recorded in accordance
with GAAP for medical benefits expense for the 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, or a 1.8% decrease in the MBR. 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, 2007, medical benefits expense increased $580.9
million, or 37.3%, to $2,136.7 million from $1,555.8 million for the same period in the prior year.
Our Medicaid MBR was 79.4% for the year ended December 31, 2007 compared to 81.6% for the same
period in the prior year.
|
|
|
|
|
|
|
|
|
|
|
Medicaid Medical Benefits Expense |
|
|
For the Year Ended December 31, |
|
|
2007 |
|
|
2006 |
|
|
(Dollars in millions) |
|
Medicaid Medical Benefits Expense |
|
$ |
2,136.7 |
|
|
$ |
1,555.8 |
|
Non-recurring IBNR adjustment |
|
|
39.5 |
|
|
|
N/A |
|
|
|
|
|
|
|
|
Medicaid Medical Benefits
Expense as adjusted(1) |
|
$ |
2,176.2 |
|
|
|
N/A |
|
|
|
|
|
|
|
|
MBR as reported |
|
|
79.4 |
% |
|
|
81.6 |
% |
MBR as adjusted |
|
|
80.8 |
% |
|
|
N/A |
|
|
|
|
(1) |
|
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 had become available as of the date of filing of our 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 Medicaid Medical Benefits Expense for the year ended December 31,
2007 were based on actual claims paid. The difference between Medicaid Medical Benefits
Expense and Medicaid 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 Medicaid Medical Benefits Expense. |
For the year ended December 31, 2007, Medicaid medical benefits expense as adjusted increased
$580.9 million, or 37.3%, to $2,176.2 million from $1,555.8 million for the same period in the
prior year. The membership increase, principally in our Georgia and Ohio markets, accounted for
$417.7 million and $143.4 million of the increase, respectively. Increased health care costs and
the demographic change in membership accounted for the remaining $19.8 million of the increase.
For the year ended December 31, 2007, the Medicaid MBR as adjusted was 80.8% compared to 81.6% for
the same period in the prior year. This increase resulted from changes in the health care
utilization pattern of our members and the demographic mix of our members in our 2006 existing
markets.
Medicare. For the year ended December 31, 2007, medical benefits expense increased $725.2
million, or 53.7%, to $2,076.7 million from $1,351.5 million for the same period in the prior year
due to the increases in medical benefits expense in both the Medicaid and Medicare segments, as
discussed below. Our MBR was 79.5% for the year ended December 31, 2007 compared to 80.5% for the
same period in the prior year.
64
|
|
|
|
|
|
|
|
|
|
|
Medicare Medical Benefits Expense |
|
|
For the Year Ended December 31, |
|
|
2007 |
|
|
2006 |
|
|
(Dollars in millions) |
|
|
|
|
Medicare Medical Benefits Expense |
|
$ |
2,076.7 |
|
|
$ |
1,351.5 |
|
Non-recurring IBNR adjustment |
|
|
53.4 |
|
|
|
N/A |
|
|
|
|
|
|
|
|
Medicare Medical Benefits
Expense as adjusted(1) |
|
$ |
2,130.1 |
|
|
|
N/A |
|
|
|
|
|
|
|
|
MBR as reported |
|
|
79.5 |
% |
|
|
80.5 |
% |
MBR as adjusted |
|
|
81.5 |
% |
|
|
N/A |
|
|
|
|
(1) |
|
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 of 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 of our 2007 Form 10-K. Consequently, the amounts we
recorded in accordance with GAAP for Medicare Medical Benefits Expense for the year ended
December 31, 2007 were based on actual claims paid. The difference between Medicare Medical
Benefits Expense and Medicare 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 Medicare 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, 2007, Medicare medical benefits expense as adjusted increased
$778.6 million, or 57.6%, to $2,130.1 million from $1,351.5 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 $384.2 million of the increase, and growth in our PDP market,
which contributed an additional $98.9 million. Increased health care costs and the demographic
change in membership accounted for the remaining $295.5 million of the increase. For the year
ended December 31, 2007, the Medicare MBR as adjusted was 81.5% compared to 80.5% for the same
period in the prior year.
Selling, general and administrative expense. For the year ended December 31, 2007, SG&A
expense increased $270.2 million, or 54.4%, to $766.6 million from $496.4 million for the same
period in the prior year. Our SG&A ratio was 14.2% and 13.7% for the years ended December 31, 2007
and 2006, respectively. The increase in SG&A expense was primarily due to the costs related to the
investigations, investments in information technology, investments in sales and marketing
activities, and increased spending necessary to support and sustain our membership growth. Our
SG&A ratio increased in 2007 as a result of recording a $50.0 million accrual for our potential
liability in connection with the ultimate resolution of the investigation related matters discussed
in Note 11 to the Consolidated Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
Selling, General and Administrative Expense |
|
|
For the Year Ended December 31, |
|
|
2007 |
|
2006 |
|
|
(Dollars in millions) |
|
|
|
SG&A |
|
$ |
766.6 |
|
|
$ |
496.4 |
|
SG&A expense to total revenue ratio |
|
|
14.2 |
% |
|
|
13.7 |
% |
Interest expense. Interest expense was $14.0 million and $14.1 million for the years ended
December 31, 2007 and 2006, respectively. The decrease relates to the reduced amount of debt
outstanding due to the settlement of the related party note, partially off-set by the higher cost
of borrowing due to higher interest rates in 2007.
Income tax expense. Income tax expense for the year ended December 31, 2007 was $161.7
million with an effective tax rate of 42.8% as compared to $79.8 million with an effective tax rate
of 39.7% for the same period in the prior year. The increase in the effective tax rate is
principally attributed to the non-deductible expense that was recorded in the amount of $50.0
million in connection with the ultimate resolution of the investigation related matters discussed
in Note 11 to the Consolidated Financial Statements. The ultimate terms and structure of any
potential resolution of pending enforcement investigations is still unknown; therefore, we have
assumed that the potential resolution amount will not be tax deductible.
|
|
|
|
|
|
|
|
|
|
|
Income Tax Expense |
|
|
For the Year Ended December 31, |
|
|
2007 |
|
2006 |
|
|
(Dollars in millions) |
|
|
|
Income tax expense |
|
$ |
161.7 |
|
|
$ |
79.8 |
|
Effective tax rate |
|
|
42.8 |
% |
|
|
39.7 |
% |
Net income. For the year ended December 31, 2007, net income was $216.2 million compared to
$121.2 million for the same period in the prior year, representing an increase of $95.0 million or
78.4%. Net income increased as a result of the favorable
65
adjustment that was recorded to medical benefits expense to reflect the difference between the
actual claims paid and the Companys actuarially determined estimate which accounted for $53.1
million of the increase. This increase was off-set by the increase in
non-tax-deductible expense
that was recorded in the amount of $50.0 million in connection with the potential resolution of the
investigation related matters discussed in Note 11 to the Consolidated Financial Statements. The
remaining $91.9 million increase is a result of significant premium growth as discussed above.
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
For the Year Ended December 31, |
|
|
2007 |
|
2006 |
|
|
(In millions, except per share data) |
Net income |
|
$ |
216.2 |
|
|
$ |
121.2 |
|
Net income per diluted share |
|
$ |
5.16 |
|
|
$ |
2.98 |
|
Comparison of Year Ended December 31, 2006 to Year Ended December 31, 2005
Premium revenue. For the year ended December 31, 2006, premium revenue increased $1,737.7
million, or 94.0%, to $3,586.0 million from $1,848.3 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 1,403,000 members, or 164.1%, from 855,000 at December 31, 2005 to
2,258,000 at December 31, 2006.
Medicaid. For the year ended December 31, 2006, Medicaid segment premium revenue increased
$562.6 million, or 41.8%, to $1,906.4 million from $1,343.8 million for the same period in the
prior year. The increase in Medicaid segment revenue is due to growth in membership, principally
as a result of the addition of the Georgia market, coupled with increases in premium rates in
certain markets. Aggregate membership in the Medicaid segment grew by 459,000 members, or 58.4%,
from 786,000 members at December 31, 2005 to 1,245,000 at December 31, 2006 principally due to the
addition of the Georgia market which accounted for $496.9 million, and premium increases associated
with the demographic mix of our membership accounted for $52.2 million of the increase. The
remaining increase was attributed to organic membership growth in our other markets.
|
|
|
|
|
|
|
|
|
|
|
Medicaid Revenues and Membership |
|
|
For the Year Ended December 31, |
|
|
2006 |
|
2005 |
|
|
(Dollars in millions) |
|
|
|
Revenues |
|
$ |
1,906.4 |
|
|
$ |
1,343.8 |
|
% of Total Premium Revenues |
|
|
53.2 |
% |
|
|
72.7 |
% |
|
|
|
|
|
|
|
|
|
Membership |
|
|
1,245,000 |
|
|
|
786,000 |
|
% of Total Membership |
|
|
55.1 |
% |
|
|
91.9 |
% |
Medicare. For the year ended December 31, 2006, Medicare segment premium revenue increased
$1,175.2 million, or 232.9%, to $1,679.7 million from $504.5 million for the same period in the
prior year. Growth in premium revenue within the Medicare segment was primarily the result of the
new PDP business that we launched in 2006 and the related membership growth of 923,000 members,
which accounted for $909.6 million, and premium increases associated with the demographic mix of
our Medicare Coordinated Care membership. Membership within the Medicare segment grew by 944,000
members, or 1,368.1%, from 69,000 members at December 31, 2005 to 1,013,000 members at December 31,
2006, principally due to our new PDP business.
|
|
|
|
|
|
|
|
|
|
|
Medicare Revenues and Membership |
|
|
For the Year Ended December 31, |
|
|
2006 |
|
2005 |
|
|
(Dollars in millions) |
|
|
|
Revenues |
|
$ |
1,679.7 |
|
|
$ |
504.5 |
|
% of Total Premium Revenues |
|
|
46.8 |
% |
|
|
27.3 |
% |
|
|
|
|
|
|
|
|
|
Membership |
|
|
1,013,000 |
|
|
|
69,000 |
|
% of Total Membership |
|
|
44.9 |
% |
|
|
8.1 |
% |
Investment and other income. For the year ended December 31, 2006, investment and other
income increased $32.9 million, or 193.5%, to $49.9 million from $17.0 million for the same period
in the prior year. The increase was due to increased cash and investment positions held throughout
2006 primarily from the new PDP and Georgia businesses, as well as the higher interest rate
environment. The higher average cash and investment balances accounted for approximately $14.4
million of the increase and the higher interest rate environment accounted for approximately $18.5
million of the increase.
66
Medical benefits expense. For the year ended December 31, 2006, medical benefits expense
increased $1,401.9 million, or 93.1%, to $2,907.3 million from $1,505.4 million for the same period
in the prior year due to the increases in medical benefits expense in both the Medicaid and
Medicare segments, as discussed below. The MBR was 81.1% for the year ended December 31, 2006
compared to 81.4% for the same period in the prior year.
Medicaid. For the year ended December 31, 2006, Medicaid medical benefits expense increased
$462.6 million, or 42.3%, to $1,555.8 million from $1,093.2 million for the same period in the
prior year. The increase in our Medicaid membership, principally as a result of our Georgia
market, accounted for $439.1 million of the increase while increased health care costs and the
demographic change in membership accounted for $23.5 million of the increase. For the year ended
December 31, 2006, the Medicaid MBR was 81.6% compared to 81.3% for the same period in the prior
year. This decline resulted from premium rate increases, changes in the health care utilization
pattern of our members and the demographic mix of our members in our 2005 existing markets,
partially off set by the higher medical costs associated with our Georgia launch.
|
|
|
|
|
|
|
|
|
|
|
Medicaid Medical Benefits Expense |
|
|
For the Year Ended December 31, |
|
|
2006 |
|
2005 |
|
|
(Dollars in millions) |
|
|
|
Medical Benefits |
|
$ |
1,555.8 |
|
|
$ |
1,093.2 |
|
MBR |
|
|
81.6 |
% |
|
|
81.3 |
% |
Medicare. For the year ended December 31, 2006, Medicare medical benefits expense increased
$939.3 million, or 227.9%, to $1,351.5 million from $412.2 million for the same period in the prior
year. The increase was primarily due to the growth in membership, principally as a result of our
new PDP business, which accounted for $715.7 million of the increase. Increased health care costs
and the demographic change in membership accounted for $223.6 million of the increase. For the
year ended December 31, 2006, the Medicare MBR was 80.5% compared to 81.7% for the same period in
the prior year.
|
|
|
|
|
|
|
|
|
|
|
Medicare Medical Benefits Expense |
|
|
For the Year Ended December 31, |
|
|
2006 |
|
2005 |
|
|
(Dollars in millions) |
|
|
|
Medical Benefits |
|
$ |
1,351.5 |
|
|
$ |
412.2 |
|
MBR |
|
|
80.5 |
% |
|
|
81.7 |
% |
Selling, general and administrative expense. For the year ended December 31, 2006, SG&A
expense increased $236.9 million, or 91.3%, to $496.4 million from $259.5 million for the same
period in the prior year. Our SG&A ratio was 13.7% and 13.9% for the years ended December 31, 2006
and 2005, respectively. The increase in SG&A expense was primarily due to investments in
information technology, investments in sales and marketing strategies and increased spending
necessary to support and sustain our membership growth.
|
|
|
|
|
|
|
|
|
|
|
Selling, General and Administrative Expense |
|
|
For the Year Ended December 31, |
|
|
2006 |
|
2005 |
SG&A |
|
$ |
496.4 |
|
|
$ |
259.5 |
|
SG&A expense to total revenue ratio |
|
|
13.7 |
% |
|
|
13.9 |
% |
Interest expense. Interest expense was $14.1 million and $13.6 million for the years ended
December 31, 2006 and 2005, respectively. The increase relates to higher borrowing costs due to
the rising interest rate environment, partially off-set by the reduced amount of debt outstanding
due to the settlement of the related party note.
Income tax expense. Income tax expense for the year ended December 31, 2006 was $79.8 million
with an effective tax rate of 39.7% as compared to $30.3 million with an effective tax rate of
39.0% for the same period in the prior year.
|
|
|
|
|
|
|
|
|
|
|
Income Tax Expense |
|
|
For the Year Ended December 31, |
|
|
2006 |
|
2005 |
|
|
(Dollars in millions) |
|
|
|
Income tax expense |
|
$ |
79.8 |
|
|
$ |
30.3 |
|
Effective tax rate |
|
|
39.7 |
% |
|
|
39.0 |
% |
67
Net income. For the year ended December 31, 2006, net income was $121.2 million compared to
$47.4 million for the same period in the prior year, representing an increase of $73.8 million or
156.0%. The increase is due to increased revenues generated by our membership growth while
maintaining a relatively consistent MBR.
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
For the Year Ended December 31, |
|
|
2006 |
|
2005 |
|
|
(In millions, except per share data) |
|
|
|
Net income |
|
$ |
121.2 |
|
|
$ |
47.4 |
|
Net income per diluted share |
|
$ |
2.98 |
|
|
$ |
1.21 |
|
Liquidity and Capital Resources
Overview
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 cash received from debt or equity offerings.
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 repayment of debt. We refer collectively to the cash and investment balances
available in our non-regulated subsidiaries as unregulated cash and unregulated investments,
respectively.
Cash Positions
At December 31, 2008 and 2007, cash and cash equivalents were $1,181.9 million and $1,008.4
million, respectively. We also had short-term investments of $70.1 million and $253.9 million at
December 31, 2008 and 2007, respectively. Of these short-term investments, $66.2 million and $33.8
million had maturities of three to 12 months as of December 31, 2008 and 2007, respectively. As of
December 31, 2008 and 2007, 94.4% and 12.3% of our investments were invested in certificates of
deposit with a weighted average maturity of 50 days and 98 days, respectively. The annualized tax
equivalent portfolio yield for the years ended December 31, 2008 and 2007 was 2.4% and 5.0%,
respectively.
On December 31, 2008, three of our Florida regulated subsidiaries declared dividends to one of
our non-regulated subsidiaries in the aggregate amount of $105.1 million, two of which were paid on
December 31, 2008 and one of which was paid on January 2, 2009. As of December 31 2008, we had
unregulated cash of approximately $147.7 million and unregulated investments of approximately $4.9
million. The proceeds from the intercompany dividends discussed above are reflected in our
unregulated cash balances as of December 31, 2008 with the exception of the dividends received on
January 2, 2009.
Our Credit Facility and Significant Near-Term Cash Requirements
Our senior secured credit facility with Wachovia Bank, as Administrative Agent, and a
syndicate of lenders, which has a term loan facility with an outstanding balance of approximately
$152.8 million as of December 31, 2008, is currently in default and subject to acceleration by the
lenders and, absent acceleration by the lenders, will become due and payable on May 13, 2009.
Taking into account, among other things, the increase in our unregulated cash balances as a result
of our receipt of the $105.1 million in dividends described above, we currently expect that we will
be able to repay in full the outstanding balance under the credit facility when it becomes due.
However, we cannot provide any assurances that adverse developments will not arise that impede our
ability to repay in full the outstanding balance under the credit facility when it becomes due. In
particular, the timing and amount of any potential resolution with the USAO, the Civil Division,
the OIG and the State of Florida is uncertain and could materially and adversely affect
68
our ability to meet our near-term obligations, including repayment of the outstanding balance
under the credit facility. Also, our ability to repay in full the outstanding balance under the
credit facility could be materially and adversely affected if, among other things, Florida
regulators were to require certain of our intercompany loan arrangements, which total approximately
$50.0 million, to be terminated. Additionally, one or more of our regulators could require one or
more of our subsidiaries to maintain minimum levels of statutory net worth in excess of the amount
required under the applicable state laws if the regulators were to determine that such a
requirement were in the interest of our members. For example, a state regulator recently notified
us that, in its view, notwithstanding a parental guarantee that has been in place since 2006, we
should contribute a total of approximately $30.0 million in additional statutory capital to two of
our HMOs. We are currently in discussions with the regulator to determine the necessity of a
capital contribution, if any, into these regulated entities. In addition, there may be other
potential adverse developments that could impede our ability to repay in full the outstanding
balance under the credit facility.
In addition to our senior secured credit facility, we have other significant near-term cash
requirements, principally costs associated with the ongoing investigations. As of December 31,
2008, we had spent a cumulative amount of approximately $124.1 million on administrative expenses
associated with, or consequential to, the government and Special Committee investigations,
including legal fees, accounting fees, consulting fees, employee recruitment and retention costs
and similar expenses. Approximately $21.1 million of these investigation related costs were
incurred in 2007 and approximately $103.0 million were incurred in 2008. We expect to continue
incurring significant additional costs in 2009 as a result of the federal and state investigations
and pending civil actions, including administrative expenses and costs necessary to improve our
corporate governance and address other issues that were identified.
As noted elsewhere we accrued a liability in the amount of
$50.0 million in connection with the resolution of these matters
which is reflected in our Consolidated Balance Sheets as of
December 31, 2007 and 2008, respectively. We believe that it is probable that the actual resolution
amount for all such matters under review will be more than the amounts that have been reflected in
our financial statements; however, the timing, term and conditions of such costs remain uncertain.
In addition, in 2007, one of our non-regulated subsidiaries borrowed $50.0 million from two of our
Florida regulated subsidiaries through intercompany loan arrangements for the purpose of commencing
a new business. The borrowing subsidiary ultimately did not commence the new business and the
borrowing subsidiary still holds approximately $50.0 million, which we intend to use to the extent
necessary to meet our general corporate obligations. We currently do not intend to cause the loans
to be repaid until at least September 2010. However, the Florida regulators could require the
regulated subsidiaries to terminate the intercompany loan arrangements, necessitating the borrowing
subsidiary to repay in full the amount owed to the Florida regulated subsidiaries. If the
borrowing subsidiary were required to repay the intercompany loans, or other restrictions were
placed on the use of proceeds from such loans, our unregulated cash balance could be reduced by up
to $50.0 million plus any accrued interest.
Initiatives to Increase Our Unregulated Cash
We are pursuing financing alternatives to raise additional unregulated cash. Some of these
initiatives include, but are not limited to, seeking additional dividends from certain of our
regulated subsidiaries to the extent that we are able to access available excess capital. For
example, as discussed above, on December 31, 2008, three of our Florida regulated subsidiaries
declared dividends to one of our non-regulated subsidiaries in the aggregate amount of $105.1
million, two of which were paid on December 31, 2008 and one of which was paid on January 2, 2009.
We are currently considering other intercompany dividends to increase our unregulated cash
balances. However, we cannot provide any assurances that any other applicable state regulatory
authorities will approve, to the extent such approvals are required, the payment of 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. The required repayment of the outstanding balance due under our credit facility will materially
reduce our outstanding cash balances unless we are able to refinance the debt.
Auction Rate Securities
As of December 31, 2008, 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 report, auctions have failed for $50.6 million of
our auction rate securities and there is no assurance that auctions on the remaining auction rate
securities in our investment portfolio will continue to succeed. An auction failure means that the
parties wishing to sell their securities could not be matched with an adequate volume of buyers.
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 short-term 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 31 years. The weighted-average life of the underlying securities
for our auction rate securities portfolio is 22 years. We currently have the ability and intent to
hold our auction rate securities until market stability is restored with respect to these
securities.
69
Regulatory Capital and Restrictions on Dividends and Management Fees
Each of our HMO 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 HMOs capital structure, ownership,
financial condition, certain intercompany transactions and business operations. From time to time,
each of our plans 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
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, 2008,
our Connecticut, Georgia, Illinois, Indiana, Louisiana, Missouri, Ohio and PFFS operations are
subject to RBC requirements. The RBC requirements may be modified as each state legislature deems
appropriate for that state. The RBC formula, based on asset risk, underwriting risk, credit risk,
business risk and other factors, generates the authorized company action level, or CAL, which
represents the amount of net worth believed to be required to support the regulated entitys
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, such as the Medicare private-fee-for-service programs, we may be
required to make additional statutory capital contributions.
In addition, our Medicaid and S-CHIP activities are regulated by each states 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, 2008 and 2007, 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, 2008, we believe our subsidiaries were in compliance with the minimum capital
requirements. However, a state regulator recently notified us that, in its view, notwithstanding a parental
guarantee that has been in place since 2006, two of our HMOs should contribute a total of
approximately $30.0 million in additional statutory capital. We are currently discussing this
request with the regulator.
70
Overview of Cash Flow Activities For the years ended December 31, 2008, 2007 and 2006 our
cash flows from operations are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, |
|
|
2008 |
|
2007 |
|
2006 |
|
|
(In millions) |
|
|
|
Net cash provided by operations |
|
$ |
296.4 |
|
|
$ |
277.6 |
|
|
$ |
507.7 |
|
Net cash used in investing activities |
|
|
(91.1 |
) |
|
|
(186.2 |
) |
|
|
(88.1 |
) |
Net cash (used in) provided by financing activities |
|
|
(31.8 |
) |
|
|
(47.5 |
) |
|
|
123.0 |
|
Net cash provided by operations
The net cash inflow from operations for the years ended December 31, 2008, 2007 and 2006 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 used in investing activities
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.
In 2008, 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.
In 2006, investing activities consisted primarily of the investment of excess cash generated
by operations totaling approximately $32.3 million in various short-term investment instruments. An
additional $31.7 million was invested in capitalized assets, which included expansion costs related
to our corporate headquarters in Tampa, and investments needed for our new product offerings.
Additionally, $31.0 million was invested in restricted investment accounts to satisfy the
requirements of various state statutes.
Net cash provided by (used in) financing activities
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.
In 2006, financing activities consisted of proceeds from options exercised totaling $9.0
million and proceeds from our follow-on offering of $22.0 million, partially offset by payments on
our related-party note of $25.6 million.
Also included in financing activities are funds held for the benefit of others, which totaled
approximately $113.7 million as of December 31, 2006. These funds are PDP member subsidies and
represent pass-through payments from government partners and are
71
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.
Debt and Credit Facilities
Credit Agreement
As discussed above, our senior secured credit facility with Wachovia Bank, as Administrative
Agent, and a syndicate of lenders, which has a term loan facility with an outstanding balance of
approximately $152.8 million as of December 31, 2008, is currently in default and subject to
acceleration by the lenders and will, absent acceleration by the lenders, become due and payable on
May 13, 2009. Our senior secured credit facility also included a revolving credit facility that
expired in May 2008. Although we are not in payment default, we are in default of a number of
covenants contained in the credit agreement (including our failure to provide the lenders with
audited financial statements, our 2008 budget and other requested information, and our inability to
maintain certain leverage ratios), some of which cannot be cured prior to maturity of the senior
secured credit facility (such as our entry into intercompany loan transactions that were not
effected in compliance with the credit agreement). As of the date hereof, our payment obligations
under the credit agreement have not been accelerated and the rate of interest has not been
increased. However, we cannot provide any assurance that such obligations will not be accelerated
or the rate of interest increased in the future or that the lenders will not exercise other
remedies for default.
The term loan is secured by a pledge of substantially all of the assets of our non-regulated
entities, which includes the stock of our operating subsidiaries directly held by our non-regulated
entities. Interest is payable quarterly, currently at a rate equal to the sum of a rate based upon
the applicable Prime rate plus a rate equal to 1.50%. If we fail to pay any of our indebtedness
when due, or if we breach any of the other covenants in the instruments governing our indebtedness,
it may result in additional events of default.
Working Capital
As of December 31, 2008, our credit ratings were as follows:
|
|
|
|
|
Agency |
|
Outlook |
|
Credit Rating |
Moodys
|
|
Rating Under Review/Possible Downgrade
|
|
Ba2 |
Standard & Poors
|
|
Credit Watch Negative
|
|
B |
Consequently, if we seek to raise funds in capital markets transactions, our ability to do so
will be limited to issuing additional non-investment grade debt or issuing equity and/or
equity-linked instruments.
We expect to fund our working capital requirements and capital expenditures during the next
several years from our existing cash balances, our cash flow from operations, public offerings or
other possible future capital markets transactions. We have taken a number of steps to increase our
internally generated cash flow, including reducing our health care expenses by, among other things,
exiting from unprofitable markets and undertaking cost savings initiatives.
We also may be required to take additional actions to reduce our cash flow requirements,
including the deferral of planned investments aimed at reducing our selling, general and
administrative expenses. The deferral or cancellation of any investments could have a material
adverse impact on our ability to meet our short-term business objectives. We regularly evaluate
cash requirements for current operations and commitments, and for capital acquisitions and other
strategic transactions. We may elect to raise additional funds for these purposes either through
additional debt or equity, the sale of investment securities or otherwise as appropriate.
Off Balance Sheet Arrangements
At December 31, 2008, 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.
72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due to period |
|
Contractual Obligations at |
|
|
|
|
|
Less Than |
|
|
1-3 |
|
|
3-5 |
|
|
More than |
|
December 31, 2008(1) |
|
Total |
|
|
1 Year |
|
|
Years |
|
|
Years |
|
|
5 Years |
|
|
|
(in millions) |
|
|
|
|
Current portion of debt |
|
$ |
152.8 |
|
|
$ |
152.8 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Operating leases |
|
|
78.3 |
|
|
|
16.9 |
|
|
|
29.4 |
|
|
|
15.1 |
|
|
|
16.9 |
|
Purchase obligations |
|
|
42.3 |
|
|
|
31.4 |
|
|
|
10.8 |
|
|
|
0.1 |
|
|
|
|
|
Unrecognized tax benefit |
|
|
26.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
300.0 |
|
|
$ |
201.1 |
|
|
$ |
40.2 |
|
|
$ |
15.2 |
|
|
$ |
43.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
We are engaged in resolution discussions as to matters under review with the USAO, the Civil
Division, the OIG and the State of Florida. Based on the current status of matters and all
information known to us to date, in the year ended December 31, 2007
we recorded selling, general and administrative expense and accrued
a liability in the amount of $50.0 million in connection with the resolution of these matters, which is
included in the Other accrued expenses line item within our Consolidated Balance Sheets as of December 31,
2007, and 2008, respectively. We believe that it is probable that the actual resolution amount for
all such matters under review will be more than the amounts that have already been reflected in our
financial statements; however, 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 USAO, the Civil Division, the OIG or the
State of Florida. Accordingly, the amount has been excluded from the table above. |
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 Adopted Accounting Standards
In
September 2006, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards
(FAS) No. 157, Fair Value Measurements (FAS 157). FAS 157
defines fair value, establishes a framework for measuring fair value in GAAP and requires enhanced
disclosures about fair value measurements. FAS 157 does not require any new fair value measurements.
The pronouncement is effective for fiscal years beginning after November 15, 2007. In February
2008, the FASB issued FASB Staff Position FAS 157-2, Effective Date of FASB Statement No. 157 (FSP
157-2). FSP 157-2 delayed the effective date of FAS 157 for all non-financial assets and
liabilities for one year, except those that are measured at fair value in the financial statements
on at least an annual basis. We adopted FAS 157 as of January 1, 2008, except for those provisions
deferred under FSP 157-2. The deferred provisions of FAS 157, which apply primarily to goodwill and
other intangible assets for annual impairment testing purposes, will be effective in 2009. We
adopted the new standard during the first quarter of 2008 as required. There was no cumulative
effect of adopting FAS 157 for 2008.
In
February 2007, the FASB issued FAS No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities (FAS 159). FAS 159 permits an
entity to measure certain financial assets and financial liabilities at fair value. Under FAS 159,
entities that elect the fair value option will report unrealized gains and losses in earnings at
each subsequent reporting date. The pronouncement is effective for fiscal years beginning after
November 15, 2007. The Company adopted FAS 159 as of January 1, 2008 as required, but did not elect
the fair value option.
Recently Issued Accounting Standards
In April 2008, the FASB issued FASB Staff Position FAS 142-3, Determination of the Useful Life
of Intangible Assets (FSP 142-3). FSP 142-3 amends the factors to be considered in developing
renewal and extension assumptions used to determine the useful life of a recognized intangible
asset accounted for under FAS No. 142, Goodwill and Other Intangible Assets. FSP 142-3 is effective
for our fiscal year 2009 and must be applied prospectively to intangible assets acquired after
January 1, 2009. Early adoption is not permitted. We do not expect the adoption of FSP 142-3 will
have a material impact on its Consolidated Financial Statements.
In March 2008, the FASB issued FAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities an amendment of FASB Statement No. 133 (FAS 161). FAS 161 amends and
expands the disclosure requirements of FAS No. 133, Accounting for Derivative Instruments and
Hedging Activities (FAS 133), to require qualitative disclosure about objectives and strategies
for using derivatives; quantitative disclosures about fair value amounts and gains and losses on
derivative instruments; and disclosures about credit-risk-related contingent features in derivative
agreements. FAS 161 is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008. We do not expect that the adoption of FAS 160 will have
an impact on our Consolidated Financial Statements.
In December 2007, the FASB issued FAS No. 141 (revised 2007), Business Combinations (FAS
141R). FAS 141R replaces current guidance in FAS 141 to better represent the economic value of a
business combination transaction. FAS 141 establishes principles and requirements for how an
acquiring entity recognizes and measures all identifiable assets acquired, liabilities assumed, any
non-controlling interest in the acquired entity and the goodwill acquired. The changes to be
effected with FAS 141R from the current guidance include, but are not limited to treatment of
certain specific items such as expensing transaction and restructuring costs and adjusting earnings
in periods subsequent to the acquisition for changes in deferred tax asset valuation allowances and
income tax uncertainties as well as changes in the fair value of acquired contingent liabilities.
FAS 141R also includes a substantial number of new disclosure requirements that will enable users
of financial statements to evaluate the nature and financial effect of
73
business combination. FAS 141R must be applied prospectively to all new acquisitions closing
on or after January 1, 2009. The impact of this pronouncement will depend on future acquisition
activity by us, if any.
In December 2007, the FASB issued FAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements An Amendment of ARB No. 51 (FAS 160). FAS 160 requires that accounting
and reporting for minority interests be recharacterized as noncontrolling interests and classified
as a component of equity. The standard is effective for fiscal year 2009 and must be applied
prospectively. We do not expect that the adoption of FAS 160 will have an impact on its
consolidated financial statements.
Item 7A. Qualitative and Quantitative Disclosures about Market Risk.
As of December 31, 2008 and 2007, we had short-term investments of $70.1 million and $253.9
million, respectively. At December 31, 2008, we had investments classified as long-term in the
amount of $55.0 million. We also had restricted investments of $199.3 million and $89.2 million, at
December 31, 2008 and 2007, 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, 2008, the fair
value of our fixed income investments would decrease by less than $0.8 million. Similarly, a 1%
decrease in market interest rates at December 31, 2008 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) Special Committee Investigation and Restatement
Upon consideration of certain issues identified in the Special Committee investigation
discussed elsewhere in this 2008 Form 10-K, and after discussions with management and our
independent registered public accounting firm, the Audit Committee recommended to the Board, and
the Board thereafter concluded, that we should restate our previously issued consolidated financial
statements for the Years ended December 31, 2004, 2005 and 2006,
and the three and six-month periods ended March 31, 2007 and
June 30, 2007. The restatements related to accounting errors identified in
connection with our compliance with the refund requirements under (a) the behavioral health
component of our contract with AHCA to provide behavioral health care services for our Florida
Medicaid members, (b) our Healthy Kids contract with the Florida Healthy Kids Corporation
pursuant to which we provide health benefits for children whose family income renders them
ineligible for Medicaid, and (c) our Medicaid contract with the Illinois Department of Health and
Family Services to provide health care services to our Illinois Medicaid members.
(b) 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 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 2008 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
74
CFO concluded that, as of
December 31, 2008, our Disclosure Controls were effective in timely alerting them to material
information required to be included in our reports filed with the SEC.
(c) Managements 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, 2008. 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, 2008, that is included herein.
75
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, 2008, based on criteria established in Internal
Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. The Companys 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 Managements Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion on the Companys 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 companys internal control over financial reporting is a process designed by, or under the
supervision of, the companys principal executive and principal financial officers, or persons
performing similar functions, and effected by the companys 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 companys 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
companys 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, 2008, 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, 2008, of the Company and our report dated March 16, 2009
expressed an unqualified opinion on those financial statements and financial statement schedules.
/S/ Deloitte & Touche LLP
Certified Public Accountants
Tampa, Florida
March 16, 2009
76
(d) 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, 2008 that has materially
affected, or is reasonably likely to materially affect, those controls.
(e) Remedial Measures
To remediate the material weaknesses in our internal control over financial reporting that
were previously identified as of December 31, 2007, we completed the following measures by March
31, 2008:
Beginning in October 2007, management retained outside legal and consulting firms to assist
the Company in calculating, submitting and reserving for estimated self-reported prospective
settlements with state agencies with which certain of our subsidiaries were contracted to provide
Medicaid services. Additionally, the Company has sought more clarifying information from state
regulators to ensure compliance with applicable state laws.
On January 25, 2008, Todd Farha, our former Chief Executive Officer, President and Chairman of
the Board, Paul Behrens, our former Senior Vice President and Chief Financial Officer, and Thaddeus
Bereday, our former Senior Vice President, General Counsel and Secretary, resigned from their
respective officer and director positions with us and our subsidiaries. The Board thereafter
elected Charles G. Berg as our new Executive Chairman of the Board and Heath G. Schiesser, who
previously had served as our Senior Vice President for Marketing and Sales and President of
WellCare Prescription Insurance, one of our subsidiaries, as our new President and Chief Executive
Officer. Mr. Schiesser was also elected as a director. We reorganized the senior management team
by, among other things, separating the positions of (i) Chairman and Chief Executive Officer, (ii)
General Counsel and Chief Compliance Officer and (iii) Chief Financial Officer and Chief Accounting
Officer. Our new Chief Compliance Officer reports directly to the Chief Executive Officer. Based on our completion of the remedial measures described above, we determined that, as of
March 31, 2008, our controls were effective.
Internal
Control Enhancements.
In addition, since March 31, 2008, we have completed,
or are in the process of completing, the following initiatives to strengthen our internal control
over financial reporting and Disclosure Controls:
Senior Management Changes. In addition to the appointment of Messrs. Berg and
Schiesser described above, we also made the following changes or additions to our senior management
team during 2008:
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in April 2008, we appointed Thomas F. ONeil III as our Senior Vice President, General
Counsel and Secretary; |
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in July 2008, we appointed Thomas L. Tran as our Senior Vice President and Chief
Financial Officer; |
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in July 2008, we appointed William S. White, who had served as our Vice President,
Finance, as our Chief Accounting Officer; |
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in August 2008, we appointed Jonathan P. Rich as our Senior Vice President and Chief
Compliance Officer. Mr. Rich, who will report directly to the Chief Executive Officer and
the Boards new Regulatory Compliance Committee, will be responsible for, among other
things, monitoring regulatory reporting and communications; |
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In September 2008, we appointed Rex M. Adams as our Chief Operating Officer; and |
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In February 2009, we appointed Timothy Ramsey as our Vice President and Chief Auditor. |
Other Personnel Changes. As a result of the initiatives already underway to address
the material weaknesses described above, and having considered the Special Committees findings
thus far, we have effected various personnel changes and may take additional actions in
the future.
Redesign of Corporate and Regulatory Compliance Programs. Under the direction of our
Chief Compliance Officer and our General Counsel, we have redesigned and enhanced our corporate and
regulatory compliance programs. As part of our redesigned programs, we have begun to implement and
intend to continue implementing, among other things, enhanced reporting procedures, improved
reporting channels, enhanced communication of our non-retaliation policies, more frequent and
comprehensive compliance training and more frequent analysis of potential compliance risk areas.
These items are discussed in more detail below.
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Formation of Regulatory Compliance Committee. In April 2008, our Board formed a
Regulatory Compliance Committee to oversee our compliance activities and programs. In
accordance with the Regulatory Compliance Committees charter, the Committee has
established a policy for the Committee to receive periodic reports from our Chief
Compliance Officer. The Regulatory Compliance Committee now has responsibility for
oversight of the activities of managements Corporate Compliance Committee discussed below. |
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Appointment of Chief Compliance Officer. Our new Chief Compliance Officer reports
directly to the Chief Executive Officer and the Regulatory Compliance Committee. The Chief
Compliance Officer is responsible for monitoring regulatory reporting and regulatory
communications, affiliated company arrangements, political contributions and fund-raising,
provider and vendor contracting, bidding, premium reconciliation and enrollment and
disenrollment practices. In addition, we separated the compliance function from the Legal
Department and created a standalone Compliance Department under the supervision of our
Chief Compliance Officer. |
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Reorganization of the Compliance Department. We have substantially increased the budget
for compliance activities and staffing, and as the date of this report, we have
approximately 65 associates in our Compliance Department. In addition, under the leadership
of our Chief Compliance Officer, the Compliance Department has been reorganized into six
lines: Business Analytics, Compliance Investigations Unit, Special Investigations Unit,
Medicare, Privacy, Medicaid & Corporate Compliance and Regulatory Affairs. |
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Enhanced Corporate Compliance Committee. In 2008, the Regulatory Compliance Committee
approved a charter for our Corporate Compliance Committee, which expanded the Corporate
Compliance Committees composition and sets forth its role and responsibilities. The
reconstituted Corporate Compliance Committee is chaired by our Chief Compliance Officer and
comprised of other members of senior management, including, among others, our General
Counsel, Chief Operating Officer, Chief Medical Officer and leaders of our Medicare and
Medicaid businesses. The Corporate Compliance Committee is currently redesigning and
enhancing our existing corporate ethics and compliance program for all of the Companys
lines of business and corporate functions. The Corporate Compliance Committee will review,
at least quarterly and more frequently as necessary, areas of legal, regulatory and
compliance risk throughout the Company and, under the oversight of the Regulatory
Compliance Committee, develop effective policies and procedures to address such risks. |
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Communications With Regulators. We continue to implement a comprehensive program to
facilitate the identification of regulatory reporting issues and the reporting of such
issues to the appropriate regulator (including federal and state health care regulators).
The program, which will be administered under the supervision of our Chief Compliance
Officer, is designed to ensure the reliability of the information we communicate to
regulators. To that end, we are establishing mandatory procedures
requiring internal certifications of accuracy and completeness by
associates involved in the compilation of data and preparation of the
reports that we file with
regulators. In addition, we will conduct audits
of a sampling of reports we have filed with state regulators to confirm that such reports
were prepared in compliance with applicable law and are otherwise accurate and complete. |
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Effective Compliance Training. In 2009, we launched iCare, an enhanced compliance
program that includes mandatory compliance training programs, or training modules, for all
associates. Thus far, we have implemented a training module on fraud, waste and abuse, and
intend to add new training modules from time to time. These training modules are designed
to strengthen our associates competency, independent judgment and identification of
potential violations of applicable law or company policy (including those newly implemented
policies discussed herein). |
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Enhanced Communication of Non-Retaliation Policies and Improved Reporting Channels. As
an integral part of the iCare program described above, we are re-emphasizing to all of our
associates that any form of employee retaliation or retribution is prohibited and will
result in disciplinary action, including possible termination. We are also continuing to
encourage our associates to express concerns or report violations of which they have become
aware or have observed through an anonymous
telephonic hotline, via the Companys Compliance intranet, to the Chief Compliance Officer
directly or to any member of the Legal Services Department. |
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Enhancement of Existing and Adoption of New Written Policies and Procedures. We have
adopted, and will continue to adopt as warranted, new or revised written policies and procedures to describe a clear commitment to corporate
integrity and compliance and a duty to report. In addition, in February 2009, the Board
adopted a new Code of Conduct and Business Ethics, which superseded our previous standards
of conduct. Collectively, these written policies will serve as guiding principles that
emphasize, among other things, our commitment to financial reporting integrity. |
Revised Disclosure Controls and Procedures. In 2008, in light of a number of factors,
including the growth of the Company, we revised our disclosure controls and procedures to, among
other things, provide more comprehensive procedures for the review of our financial statement
disclosures. The Board adopted a new charter for managements Disclosure Committee, which expanded
the Disclosure Committees membership to include our Chief Executive Officer, Chief Financial
Officer, General Counsel, Chief Compliance Officer, Chief Accounting Officer, Director of Internal
Audit, Vice President of Actuarial Services and certain other key officers. The expansion of our
Disclosure Committee is designed to ensure that adequate expertise across numerous corporate and
business unit functions is represented on the Disclosure Committee and that there is a more
broad-based review of our disclosures. In accordance with the Disclosure Committees new charter,
our Chief Financial Officer and our General Counsel co-chair the reconstituted Disclosure
Committee, and the Audit Committee was conferred the sole authority to add or remove members from
the Disclosure Committee. The new Disclosure Committee charter also provides more explicit
descriptions of the responsibilities of certain members of the Disclosure Committee.
We believe that the measures described above that either have been implemented or are in the
process of being implemented since March 31, 2008 will continue to strengthen our controls and
reaffirm our commitment to the highest standards of compliance. Under the direction of the Audit
Committee, management will continue to review and revise as warranted the overall design and
operation of our internal control environment, as well as policies and procedures to improve the
overall effectiveness of our internal control over financial reporting. As we continue to evaluate
and work to improve our internal control over financial reporting, we may determine to take
additional measures to address control deficiencies or determine to modify, or in appropriate
circumstances not to complete, certain of the measures described above.
(f) 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.
Item 9B. Other Information.
None.
79
PART III
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Item 10. |
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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 2008 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
2009 Annual Meeting of Stockholders.
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Item 11. |
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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 2009 Annual
Meeting of Stockholders.
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Item 12. |
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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 2009 Annual
Meeting of Stockholders.
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Item 13. |
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Certain Relationships and Related Transactions, and Director Independence |
Except as provided below, 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 2009 Annual Meeting of Stockholders.
RELATED PERSON TRANSACTIONS
Policy & Procedures with Respect to Related Person Transactions
We have a written policy for reviewing transactions between us and our executive officers,
directors and certain of their immediate family members and other related persons, including those
required to be reported under Item 404 of Regulation S-K. Under this policy, the Nominating and
Corporate Governance Committee must approve any transaction between us and any related person that
involves more than $100,000. Furthermore, related person transactions that involve executive
compensation or compensation for the members of our Board must be approved by the Compensation
Committee. We enter into a transaction with such related persons only if the transaction is on
terms comparable to those that could be obtained in arms length dealings with an unrelated third
party and is otherwise fair to us.
Related Person Transactions
In
August 2008, Mr. King-Shaw, a member of our Board of
Directors, became the chief executive officer of All-Med Services,
Inc. (All-Med), a Florida corporation. Since December 2002, our two Florida HMO subsidiaries have
been parties to agreements with All-Med pursuant to which All-Med provides durable medical
equipment to members of our Florida health plans on a modified capitated basis. Under these
agreements, our subsidiaries paid All-Med an aggregate amount of approximately $6.9 million in 2008.
The Nominating and Corporate Governance Committee of the Board has reviewed the All-Med
transactions pursuant to our Policy & Procedures with Respect to Related Person Transactions,
discussed above, and determined they are on terms comparable to those that could be obtained in
arms length dealings with an unrelated third party and is otherwise fair to us.
80
DIRECTOR INDEPENDENCE
Our corporate governance guidelines provide that a majority of the members of our Board must
meet the criteria of independence as required by the listing standards of the NYSE. In addition,
each member of our Audit Committee, Compensation Committee and Nominating and Corporate Governance
Committee must be independent. No director qualifies as independent unless the Board determines
that the director has no direct or indirect material relationship with the Company. The Board
assesses the independence of its members by requiring that each member complete disclosure and
independence questionnaires and by considering all transactions and relationships between each
director or any member of his or her immediate family and the Company and its subsidiaries. In
making independence determinations, the Board applies the standards of the NYSE as follows, in
addition to any other relevant facts and circumstances:
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A director, who is, or has been within the last three years, an employee of the Company
or any subsidiary, or whose immediate family member is, or has been within the last three
years, an executive officer of the Company, is not independent until three years after the
end of such employment relationship; |
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A director who has received, or has an immediate family member who has received, more
than $120,000 per year in direct compensation from the Company or any subsidiary, other
than director and committee fees and pension or other forms of deferred compensation for
prior service (provided such compensation is not contingent in any way on continued
service), is not independent until three years after he or she ceases to receive more than
$120,000 per year in such compensation; |
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A director who is a current partner or employee of the firm that is the internal or
external auditor of the Company or any subsidiary; a director who has an immediate family
member who is a current partner of such firm; a director who has an immediate family
member who is a current employee of such firm and who personally worked on the Companys
audit; or a director or an immediate family member was, within the last three years, a
partner or employee of such firm and personally worked on the Companys audit within that
time, is not independent; |
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A director or an immediate family member who is, or has been within the last three
years, employed as an executive officer of another company where any of our present
executives at the same time serves or served on that companys Compensation Committee, is
not independent until three years after the end of such service or the employment
relationship; and |
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A director who, or whose immediate family member, is a current executive officer of a
company that has made payments to, or received payments from, our company or any of our
subsidiaries for property or services in an amount which, in any of the last three fiscal
years, exceeds the greater of $1 million or 2% of such other companys consolidated gross
revenues, is not independent until three years after such payments fall below such
threshold. |
In August 2008, Mr. King-Shaw, who was previously determined by the Board to be
independent, became the chief executive officer of All-Med. Mr. King-Shaw was not an employee
of All-Med prior to his appointment as chief executive officer. The Company recently learned that,
since December 2002, our two Florida HMO subsidiaries have been parties to agreements with All-Med
pursuant to which All-Med provides durable medical equipment to members of our Florida health plans
on a modified capitated basis. Under these agreements, our subsidiaries paid All-Med an aggregate
amount of approximately $6.9 million in 2008. The payments made to
All-Med in 2008 exceeded both $1 million and 2% of All-Meds consolidated gross revenues.
Therefore, the Board has determined that Mr. King-Shaw is no longer independent.
Since its formation in October 2007, Mr. King-Shaw has served on the Special Committee of the
Board. In light of this recent finding regarding Mr. King-Shaws independence, the Board is
assessing the
81
composition of the Special Committee which, pursuant to its charter, is to be comprised solely
of independent directors.
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Item 14. |
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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 2009 Annual
Meeting of Stockholders.
82
PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a) Financial Statements and Financial Statement Schedules
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Financial Statements are listed in the Index to Consolidated Financial Statements on page F-1 of this report. |
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Financial Statement Schedules are listed in the Index to Consolidated Financial Statements on Page F-1 of this report. |
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Exhibits See the Exhibit Index of this report which is incorporated herein by this reference. |
(b) Exhibits
In the past, we have elected to file with the SEC substantially all of our Medicaid and Medicare contracts and amendments thereto (the Operational Contracts). As
our business has developed, we have concluded that this approach does not provide our investors with an understanding as to which of our Operational Contracts, if
any, are material to our business. As a result, we have decided to modify our practice with respect to the filing of contracts and amendments as discussed below.
We believe that our modified practice will provide greater clarity to our investors regarding the Operational Contracts that management believes are material to
our business.
As discussed elsewhere, we have two reportable business segments: Medicaid and Medicare. In 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. We enter into contracts with the states or state
agencies in the ordinary course of our business pursuant to which we provide Medicaid programs and services to beneficiaries in each of the states in which our
Medicaid plans operate. In certain states in which we offer numerous programs or operate in multiple regions, we may operate under several contracts, all or
substantially all of which are with a single governmental agency that has common control over the contracts under which we operate in that particular state. In
determining whether our Medicaid business is substantially dependent on any contract, we have considered collectively all of the contracts that are under common
control in each particular state. Further, we consider our Medicaid business to be substantially dependent on the operations in any particular state, and
consequently file with the SEC all of the related contracts under common control in any such state, if we derive 10% or greater of our annual Medicaid segment
revenues from, or have 10% or greater of our total Medicaid membership in, any such state. With respect to states from which we derive less than 10% of our annual
Medicaid segment revenues or have less than 10% of our total Medicaid membership, we take into account any qualitative factors before determining whether our
business is substantially dependent on the operations in such states.
In our Medicare segment, we have just one customer, CMS, from which we receive substantially all of our Medicare segment premium revenues. We enter into separate
contracts with CMS pursuant to which we offer our CCP, PFFS, PPO and PDP Medicare programs. Accordingly, we offer our Medicare plans under multiple contracts with
CMS. Because we believe that CMS has common control over all of our Medicare contracts, we consider our Medicare segment business to be substantially dependent on
our contracts with CMS and, as a result, file them with the SEC.
For a list of exhibits to this 2008 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.
83
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.
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WellCare Health Plans, Inc.
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By: |
/s/ Heath Schiesser
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Heath Schiesser |
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President and Chief Executive Officer |
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Date: March 16, 2009
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:
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Signature |
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Date |
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/s/ Heath Schiesser
Heath Schiesser
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President, Chief Executive Officer and Director (Principal Executive
Officer)
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March 16, 2009 |
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/s/ Thomas L. Tran
Thomas L. Tran
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Senior Vice President, Chief Financial Officer (Principal Financial
Officer)
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March 16, 2009 |
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/s/ William S. White
William S. White
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Chief Accounting Officer
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March 16, 2009 |
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/s/ Charles G. Berg
Charles G. Berg
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Director
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March 16, 2009 |
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/s/ D. Robert Graham
D. Robert Graham
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Director
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March 16, 2009 |
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/s/ Regina E. Herzlinger
Regina E. Herzlinger
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Director
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March 16, 2009 |
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/s/ Kevin F. Hickey
Kevin F. Hickey
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Director
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March 16, 2009 |
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/s/ Alif A. Hourani
Alif A. Hourani
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Director
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March 16, 2009 |
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Director
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/s/ Christian P. Michalik
Christian P. Michalik
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Director
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March 16, 2009 |
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/s/ Neal Moszkowski
Neal Moszkowski
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Director
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March 16, 2009 |
84
Index to Consolidated Financial Statements and Schedules
WellCare Health Plans, Inc.
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F-2 |
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F-3 |
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F-4 |
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F-5 |
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F-6 |
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F-7 |
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Financial Statement Schedules |
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F-30 |
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F-33 |
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F-1
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 2007 and the related consolidated statements of
operations, stockholders equity and comprehensive income, and cash flows for each of the three
years in the period ended December 31, 2008. 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 Companys 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 as of December 31, 2008 and 2007 and the results of
its operations and its cash flows for each of the three years in the period ended December 31,
2008, 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.
As discussed in Note 12 to the consolidated financial statements, the Company changed its method of
accounting for income taxes in 2007.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the Companys internal control over financial reporting as of December 31,
2008, based on the criteria established in Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 16,
2009 expressed an unqualified opinion on the Companys internal control over financial reporting.
/S/ Deloitte & Touche LLP
Certified Public Accountants
Tampa, Florida
March 16, 2009
F-2
WELLCARE HEALTH PLANS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2008 |
|
|
2007 |
|
Assets |
|
|
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
1,181,922 |
|
|
$ |
1,008,409 |
|
Short-term investments |
|
|
70,112 |
|
|
|
253,881 |
|
Premium and other receivables, net |
|
|
215,525 |
|
|
|
307,513 |
|
Other receivables from government partners, net |
|
|
825 |
|
|
|
2,464 |
|
Funds
receivable for the benefit of members |
|
|
86,542 |
|
|
|
|
|
Prepaid expenses and other current assets, net |
|
|
129,490 |
|
|
|
112,246 |
|
Income taxes receivable |
|
|
|
|
|
|
6,429 |
|
Deferred income taxes |
|
|
20,154 |
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
1,704,570 |
|
|
|
1,690,942 |
|
Property, equipment, and capitalized software, net |
|
|
66,588 |
|
|
|
66,560 |
|
Goodwill |
|
|
111,131 |
|
|
|
189,470 |
|
Other intangible assets, net |
|
|
14,493 |
|
|
|
16,286 |
|
Long-term investments |
|
|
54,972 |
|
|
|
|
|
Restricted investment assets |
|
|
199,339 |
|
|
|
89,236 |
|
Deferred tax asset |
|
|
23,263 |
|
|
|
|
|
Other assets |
|
|
29,105 |
|
|
|
30,237 |
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
2,203,461 |
|
|
$ |
2,082,731 |
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity |
|
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
|
Medical benefits payable |
|
$ |
766,179 |
|
|
$ |
538,146 |
|
Unearned premiums |
|
|
81,197 |
|
|
|
19,838 |
|
Accounts payable |
|
|
5,138 |
|
|
|
7,979 |
|
Other accrued expenses |
|
|
338,340 |
|
|
|
324,116 |
|
Other payables to government partners |
|
|
8,100 |
|
|
|
119,013 |
|
Taxes payable |
|
|
12,187 |
|
|
|
|
|
Deferred income taxes |
|
|
|
|
|
|
5,985 |
|
Debt |
|
|
152,741 |
|
|
|
154,581 |
|
Funds held for the benefit of members |
|
|
|
|
|
|
31,782 |
|
Other current liabilities |
|
|
674 |
|
|
|
556 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
1,364,556 |
|
|
|
1,201,996 |
|
Other liabilities |
|
|
33,076 |
|
|
|
72,844 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
1,397,632 |
|
|
|
1,274,840 |
|
|
|
|
|
|
|
|
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, 42,261,345 and 41,912,236, shares
issued and outstanding at December 31, 2008 and
2007, respectively) |
|
|
423 |
|
|
|
419 |
|
Paid-in capital |
|
|
390,526 |
|
|
|
352,030 |
|
Retained earnings |
|
|
418,641 |
|
|
|
455,474 |
|
Accumulated other comprehensive expense |
|
|
(3,761 |
) |
|
|
(32 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
805,829 |
|
|
|
807,891 |
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity |
|
$ |
2,203,461 |
|
|
$ |
2,082,731 |
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-3
WELLCARE HEALTH PLANS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Premium |
|
$ |
6,483,070 |
|
|
$ |
5,304,889 |
|
|
$ |
3,586,043 |
|
Investment and other income |
|
|
38,837 |
|
|
|
85,903 |
|
|
|
49,919 |
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
6,521,907 |
|
|
|
5,390,792 |
|
|
|
3,635,962 |
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Medical benefits |
|
|
5,530,216 |
|
|
|
4,213,384 |
|
|
|
2,907,290 |
|
Selling, general and administrative |
|
|
933,418 |
|
|
|
766,648 |
|
|
|
496,396 |
|
Depreciation and amortization |
|
|
21,324 |
|
|
|
18,757 |
|
|
|
17,170 |
|
Interest |
|
|
11,780 |
|
|
|
14,035 |
|
|
|
14,087 |
|
Goodwill impairment |
|
|
78,339 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
6,575,077 |
|
|
|
5,012,824 |
|
|
|
3,434,943 |
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes |
|
|
(53,170 |
) |
|
|
377,968 |
|
|
|
201,019 |
|
Income tax (benefit) expense |
|
|
(16,337 |
) |
|
|
161,732 |
|
|
|
79,790 |
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(36,833 |
) |
|
$ |
216,236 |
|
|
$ |
121,229 |
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share (see Note 3): |
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share basic |
|
$ |
(0.89 |
) |
|
$ |
5.31 |
|
|
$ |
3.08 |
|
Net (loss) income per share diluted |
|
$ |
(0.89 |
) |
|
$ |
5.16 |
|
|
$ |
2.98 |
|
See notes to consolidated financial statements.
F-4
WELLCARE HEALTH PLANS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
AND COMPREHENSIVE INCOME
(In thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
Total |
|
|
|
Common Stock |
|
|
Paid in |
|
|
Retained |
|
|
Comprehensive |
|
|
Stockholders |
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Earnings |
|
|
Income (Loss) |
|
|
Equity |
|
Balance at January 1, 2006 |
|
|
39,428,032 |
|
|
$ |
394 |
|
|
$ |
242,125 |
|
|
$ |
118,009 |
|
|
$ |
22 |
|
|
$ |
360,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for stock options |
|
|
554,192 |
|
|
|
6 |
|
|
|
8,994 |
|
|
|
|
|
|
|
|
|
|
|
9,000 |
|
Issuance of common stock |
|
|
580,205 |
|
|
|
6 |
|
|
|
21,989 |
|
|
|
|
|
|
|
|
|
|
|
21,995 |
|
Purchase of treasury stock |
|
|
(17,037 |
) |
|
|
(1 |
) |
|
|
(721 |
) |
|
|
|
|
|
|
|
|
|
|
(722 |
) |
Restricted stock grants net of forfeitures |
|
|
354,742 |
|
|
|
4 |
|
|
|
6,847 |
|
|
|
|
|
|
|
|
|
|
|
6,851 |
|
Other equity-based compensation expense |
|
|
|
|
|
|
|
|
|
|
13,348 |
|
|
|
|
|
|
|
|
|
|
|
13,348 |
|
Incremental tax benefit from option exercises |
|
|
|
|
|
|
|
|
|
|
4,769 |
|
|
|
|
|
|
|
|
|
|
|
4,769 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
121,229 |
|
|
|
|
|
|
|
121,229 |
|
Change in unrealized gain (loss) on
investments, net of deferred taxes of $165 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39 |
|
|
|
39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
121,268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006 |
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-5
WELLCARE HEALTH PLANS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Cash from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(36,833 |
) |
|
$ |
216,236 |
|
|
$ |
121,229 |
|
Adjustments to reconcile net income to net cash provided by
operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense |
|
|
21,324 |
|
|
|
18,757 |
|
|
|
17,170 |
|
Goodwill impairment |
|
|
78,339 |
|
|
|
|
|
|
|
|
|
Disposal of property and equipment |
|
|
|
|
|
|
25 |
|
|
|
1,658 |
|
Gain on extinguishment of debt |
|
|
|
|
|
|
|
|
|
|
(1,000 |
) |
Gain on marketable securities |
|
|
|
|
|
|
(93 |
) |
|
|
41 |
|
Equity-based compensation expense |
|
|
38,614 |
|
|
|
18,737 |
|
|
|
18,438 |
|
Incremental tax benefit received for option exercises |
|
|
(3,686 |
) |
|
|
(23,108 |
) |
|
|
(4,769 |
) |
Accreted interest |
|
|
160 |
|
|
|
160 |
|
|
|
160 |
|
Deferred taxes, net |
|
|
(49,402 |
) |
|
|
(7,707 |
) |
|
|
8,996 |
|
Provision for doubtful receivables |
|
|
27,313 |
|
|
|
38,941 |
|
|
|
17,429 |
|
Changes in operating accounts, net of effect of acquisitions: |
|
|
|
|
|
|
|
|
|
|
|
|
Premiums and other receivables |
|
|
70,513 |
|
|
|
(226,677 |
) |
|
|
(71,088 |
) |
Other receivables from government partners |
|
|
(4,780 |
) |
|
|
20,705 |
|
|
|
(42,502 |
) |
Prepaid expenses and other current assets |
|
|
(16,663 |
) |
|
|
(26,565 |
) |
|
|
(65,863 |
) |
Medical benefits payable |
|
|
228,033 |
|
|
|
77,418 |
|
|
|
237,054 |
|
Unearned premiums |
|
|
61,359 |
|
|
|
16,525 |
|
|
|
(9,293 |
) |
Accounts payables and other accrued expenses |
|
|
11,383 |
|
|
|
131,413 |
|
|
|
140,225 |
|
Other payables to government partners |
|
|
(110,913 |
) |
|
|
(29,593 |
) |
|
|
112,276 |
|
Taxes, net |
|
|
20,179 |
|
|
|
15,548 |
|
|
|
26,497 |
|
Other, net |
|
|
(38,513 |
) |
|
|
36,879 |
|
|
|
1,071 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operations |
|
|
296,427 |
|
|
|
277,601 |
|
|
|
507,729 |
|
|
|
|
|
|
|
|
|
|
|
Cash from (used in) investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of business, net of cash acquired |
|
|
|
|
|
|
|
|
|
|
(7,976 |
) |
Purchases of investments |
|
|
(135,607 |
) |
|
|
(205,283 |
) |
|
|
(145,798 |
) |
Proceeds from sale and maturities of investments |
|
|
260,413 |
|
|
|
77,824 |
|
|
|
113,536 |
|
Purchases of restricted investments |
|
|
(120,116 |
) |
|
|
(39,321 |
) |
|
|
(31,015 |
) |
Proceeds from sale and maturities of restricted investments |
|
|
10,274 |
|
|
|
3,467 |
|
|
|
14,941 |
|
Additions to property, equipment, and capitalized software |
|
|
(19,559 |
) |
|
|
(22,892 |
) |
|
|
(31,741 |
) |
Funds receivable for the benefit of members |
|
|
(86,542 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(91,137 |
) |
|
|
(186,205 |
) |
|
|
(88,053 |
) |
|
|
|
|
|
|
|
|
|
|
Cash from (used in) financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from options exercised |
|
|
1,039 |
|
|
|
17,679 |
|
|
|
9,000 |
|
Purchase of treasury stock |
|
|
(2,720 |
) |
|
|
(4,845 |
) |
|
|
(722 |
) |
Incremental tax benefit from option exercises |
|
|
3,686 |
|
|
|
23,108 |
|
|
|
4,769 |
|
Payments on debt |
|
|
(2,000 |
) |
|
|
(1,600 |
) |
|
|
(25,600 |
) |
Proceeds from initial and secondary public offerings, net |
|
|
|
|
|
|
|
|
|
|
21,995 |
|
Funds held for the benefit of members |
|
|
(31,782 |
) |
|
|
(81,871 |
) |
|
|
113,652 |
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
(31,777 |
) |
|
|
(47,529 |
) |
|
|
123,094 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
Increase during year |
|
|
173,513 |
|
|
|
43,867 |
|
|
|
542,776 |
|
Balance at beginning of year |
|
|
1,008,409 |
|
|
|
964,542 |
|
|
|
421,766 |
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
$ |
1,181,922 |
|
|
$ |
1,008,409 |
|
|
$ |
964,542 |
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for taxes |
|
$ |
53,911 |
|
|
$ |
116,634 |
|
|
$ |
50,266 |
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
10,150 |
|
|
$ |
12,690 |
|
|
$ |
13,539 |
|
|
|
|
|
|
|
|
|
|
|
Non-cash additions to property, equipment, and capitalized software |
|
$ |
2,084 |
|
|
$ |
2,285 |
|
|
$ |
4,192 |
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-6
WELLCARE HEALTH PLANS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 2008, 2007, and 2006
(In thousands, except member and share data)
1. ORGANIZATION AND BASIS OF PRESENTATION
WellCare Health Plans, Inc., a Delaware corporation (the Company), provides managed care
services exclusively to government-sponsored health care programs, focusing on Medicaid and
Medicare, including health plans for families, children, the aged, blind and disabled and
prescription drug plans, serving approximately 2,532,000 members nationwide as of December 31,
2008. The Companys Medicaid plans include plans for individuals who are dually eligible for both
Medicare and Medicaid, recipients of the Temporary Assistance to Needy Families programs,
Supplemental Security Income programs, State Childrens Health Insurance programs and the Family
Health Plus programs. Through its licensed subsidiaries, as of December 31, 2008 the Company
operated its Medicaid health plans in Florida, Georgia, Illinois, Missouri, New York and Ohio. The
Companys Medicare plans include stand-alone prescription drug plans (PDP) and Medicare Advantage
plans, which include both Medicare coordinated care (MCC) plans and Medicare private
fee-for-service (PFFS) plans. As of December 31, 2008, the Company offered its MCC plans in
Connecticut, Florida, Georgia, Illinois, Indiana, Louisiana, Missouri, New Jersey, New York, Ohio
and Texas, and its PDP plans in all 50 states and the District of Columbia and its PFFS plans in 39
states and the District of Columbia.
Public Stock Offerings
In March 2006, the Company completed a public offering of common stock whereby 500,000 shares
were sold by the Company and 4,350,000 shares were sold by selling stockholders. The Company
received net proceeds of approximately $18,800 from this offering. Subsequently, in April 2006,
the over-allotment option of 727,500 shares was fully exercised, of which 75,000 were sold by the
Company and 652,500 were sold by selling stockholders. The Company received net proceeds of
approximately $2,800 from this over-allotment transaction. The Company did not receive any
proceeds from the sale of shares of common stock by the selling stockholders in either transaction.
Basis of Presentation
The
consolidated balance sheets, statements of operations, changes in stockholders and members
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
The Companys 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. Investments are
stated at amortized cost, which approximates fair value.
The Companys 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
F-7
WELLCARE HEALTH PLANS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 2008, 2007, and 2006
(In thousands, except member and share data)
the determination of fair values. The assessment of whether impairments have occurred is based on
managements 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 managements evaluation of the security are
assumptions and estimates about the operations of the issuer and its future earnings potential.
Considerations used by the Company 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 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.
Premium and Other Receivables, net
Premiums and other receivables consist primarily of premiums due from federal and state
agencies. The Company performs an analysis of collectability on its outstanding premium receivables
from federal and state agencies and members based on historical trends and other factors. An
allowance is established for the estimated amount that may not be collectible. The Companys
allowance for uncollectible premiums and other receivables was approximately $12,485 and $39,537 at
December 31, 2008 and 2007, respectively.
Other Receivables from Government Partners, net
Other receivables from government partners represent amounts due from government agencies, and
other participating plans, acting under the Centers for Medicare
&
Medicaid Services PDP program design. The Company estimates the
amounts due from such third parties and amounts estimated to be uncollectible are included in the
Companys results of operations as an adjustment to medical benefits expense. The Companys
allowance for uncollectible other receivables from government
partners was approximately $6,400 and $19,334 at December 31,
2008 and 2007, 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 the Company to provide
medical services to members. These advances provide funding to providers for medical benefits
payable. The Company performs an analysis of collectability on its 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. 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. The Companys allowance for uncollectible medical and sales commission advances was
approximately $4,575 and $5,156 at December 31, 2008 and 2007, 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, the Company reviews 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
F-8
WELLCARE HEALTH PLANS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 2008, 2007, and 2006
(In thousands, except member and share data)
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.
The Companys goodwill and its other intangible assets were obtained as a result of its purchase
transactions and include provider networks, membership contracts, trademark, non-compete
agreements, state contracts, licenses and permits. The Companys other intangible assets are
amortized over their estimated useful lives ranging from
approximately one to 26 years.
The Company reviews 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. The Company has selected the second quarter of each year for its
annual impairment test, which generally coincides with the finalization of contract negotiations
and the Companys 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.
The Company contracts with various health care providers for the provision of certain medical care
services to the Companys members and generally compensates 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 the Companys capitation agreements, capitation payments the Company makes to capitated
providers alleviate any further obligation the Company has to pay the capitated provider for the
actual medical expenses of the member. Participating physician capitation payments for the years
ended December 31, 2008, 2007 and 2006, were 12%, 11% and 13% 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 the Companys financial statements. The Company has historically used, and
continues to use, a consistent methodology for estimating its medical benefits expense and medical
benefits payable. The Companys policy is to record managements best estimate of medical benefits
payable based on the experience and information available to the Company 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 the Companys 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 the Company. For example, from
2004 to 2008, the Company grew at a rapid pace, through the expansion of existing products and
introduction of new products, such as Part D and PFFS, and entry into new geographic areas, such as
Georgia. The ultimate claims payment amounts, patterns and trends for new products and geographic
areas cannot be precisely predicted at their onset, since the Company, 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 the Companys products and
geographies are more stable and mature, the Company uses more reliable claims payment patterns and
trend experience. With more reliable data, the Company should be able to more closely estimate the
ultimate claims payment amounts; therefore, the Company may experience smaller differences between
its original estimate of medical benefits payable and the actual claim amounts paid.
Medical cost trends can be volatile and management is required to use considerable judgment in
the selection of medical benefits expense trends and other actuarial model inputs. In developing
the estimate, the Company also applies 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, the Company estimates claims incurred by
applying observed trend factors to the PMPM
F-9
WELLCARE HEALTH PLANS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 2008, 2007, and 2006
(In thousands, except member and share data)
costs for prior months, which costs have been estimated using completion factors, in order to
estimate the PMPM costs for the most recent months. The Company validates 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.
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.
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, the Company
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. The Company records
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, the Company 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 medical benefits ratio
(MBR) in such periods.
The Company has 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, the
Company was 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. The Company 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 the
Company 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 the Companys actual
claims paid for the year ended December 31, 2007 and the amount that would have resulted from
using the Companys 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, and
other participating plans under various contractual and plan arrangements. The Company estimates
the amounts due to or from CMS for risk protection under the risk corridor provisions of the
Companys contract with CMS each period based on pharmacy claims experience and such amounts are
included in the Companys 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 the Company 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
F-10
WELLCARE HEALTH PLANS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 2008, 2007, and 2006
(In thousands, except member and share data)
expense, the Company is required to refund all or some portion of the difference between the
minimum and our actual allowable medical expense. The Company estimates the amounts due to the
state as a return of premium each period based on the terms of the Companys contract with the
applicable state agency and such amounts are also included in the Companys 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 the Company does not bear underwriting risk, these funds are not included in the Companys
results of operations since such funds represent pass-through payments from the Companys
government partners to fund deductibles, co-payments and other participant benefits. At the end of
the contract year, CMS will settle with the Company 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 the Company.
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
The Companys Medicaid contracts with state governments are generally multi-year contracts
subject to annual renewal provisions. The Companys Medicare Advantage and PDP contracts with CMS
generally have terms of one year. The Company generally receives premiums in advance of providing
services, and recognizes premium revenue during the period in which the Company is obligated to
provide services to the Companys 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. The Company estimates, 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 the Company receives monthly from CMS for the
Companys PDP program generally represents the Companys bid amount for providing prescription drug
insurance coverage. The Company recognizes premium revenue for providing this insurance coverage
ratably over the term of the Companys annual contract. Premiums collected in advance are deferred
and reported as unearned premiums in the accompanying condensed 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 the Company receives are based upon eligibility lists produced by the
government. From time to time, the states or CMS may require the Company 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. The
Company records 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. The Company estimates the amount of outstanding retroactivity each period and
adjusts 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. Our changes for member retroactivity estimates had a minimal impact on member
retroactivity 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. For example, CMS has implemented a risk adjustment
model which apportions premiums paid to all Medicare plans according to the health status of each
beneficiary enrolled.
CMS transitioned to the risk adjustment model while the old demographic model was being phased
out. The demographic model based the monthly premiums paid to Medicare plans on factors such as
age, gender and disability status. The monthly premium amount for each member was separately
determined under both the risk adjustment and demographic model, and these separate payment amounts
were blended according to a transition schedule. The first year in which risk adjusted payment for
health plans was fully phased in was 2007. The PDP payment methodology is based 100% on the risk
adjustment model which began in 2006. Under the risk adjustment model, the settlement payment is
based on each members preceding years 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 and the phasing in of the risk
adjustment model, our CMS monthly premium
F-11
WELLCARE HEALTH PLANS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 2008, 2007, and 2006
(In thousands, except member and share data)
payments per member may change materially, either favorably or unfavorably.
The CMS risk adjustment model pays more for Medicare members with predictably higher costs.
Under this risk adjustment methodology, 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 adjustment 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, our actual results may differ from the
amounts that the Company 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.
Reinsurance
Certain premiums and medical benefits are ceded to other insurance companies under various
reinsurance agreements. The ceded reinsurance agreements provide the Company with increased
capacity to write larger risks and maintain its exposure to loss within its capital resources. The
Company is 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. The Company
made premium payments of $1,729, $1,286 and $5,084 for the years ended December 31, 2008, 2007 and
2006, respectively. The Company had recoveries of $174, $315 and $1,051 for the years ended
December 31, 2008, 2007 and 2006, respectively.
Member Acquisition Costs
Member acquisition costs consist of both internal and external agent commissions, policy
issuance and other administrative costs that the Company incurs to acquire new members. Member
acquisition costs are expensed in the period in which they are incurred.
Advertising
The Company expenses 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 $12,330, $11,583 and $14,670 for the years ended December 31, 2008, 2007 and 2006,
respectively.
Premium Taxes Remitted to Governmental Authorities
Certain state agencies assess a tax on premiums remitted to the Company which are recorded as
expense when incurred. The amounts of these taxes were $90,200, $81,971 and $35,316 for the years
ended December 31, 2008, 2007 and 2006, respectively.
Equity-Based Employee Compensation
The Company had four equity-based compensation plans, three of which are active. The Company
adopted FAS 123(R), effective January 1, 2006, using the modified-prospective transition method.
Under this method, compensation cost is recognized for awards granted and for awards modified,
repurchased or cancelled in the period after adoption. Compensation cost is also recognized for
the unvested portion of awards granted prior to adoption. This cost was based on the grant-date
fair value estimated in accordance with the original provisions of FAS No. 123, Accounting for
Stock-Based Compensation (FAS 123). The cost for all equity-based compensation awards granted
subsequent to December 31, 2005 represents the grant-date fair value that was estimated in
accordance with the provisions of FAS 123(R).
The
Company uses the Black-Scholes model for valuing the shares granted under
equity-based compensation plans. Compensation cost for all awards is recognized in earnings,
net of estimated forfeitures, on a straight-line basis.
Cash received from option exercises under all share-based payment arrangements for the year
ended December 31, 2008, 2007 and 2006 was $1,039, $17,679 and $9,000, respectively. The Company
currently expects to satisfy equity-based compensation awards with registered shares available to
be issued.
F-12
WELLCARE HEALTH PLANS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 2008, 2007, and 2006
(In thousands, except member and share data)
Equity compensation plans
The Company had four equity-based compensation plans during the periods presented, three of
which remain active. These plans are described below. The compensation cost that has been charged
against income for those plans was $38,614, $18,737 and $18,438 for the years ended December 31,
2008, 2007, and 2006, respectively. The total income tax benefit recognized in the income
statement for equity-based compensation arrangements was $15,272, $7,410 and $7,292 for the years
ended December 31, 2008, 2007, and 2006, respectively. The tax benefit realized by the Company
reflects the exercise value of options and vesting share awards. There were no capitalized
equity-based compensation costs at December 31, 2008.
In September 2002, the Board adopted two equity plans, the 2002 Senior Executive Equity Plan
and the 2002 Employee Option Plan which authorized the Company to grant restricted shares and
non-qualified and incentive stock options, respectively. Both plans permit senior executives and
other key associates selected to participate to acquire ownership interests in the Company. The
Company does not currently intend to issue any additional awards under either of these plans.
In June 2004, the Board adopted, and its shareholders subsequently approved, the Companys
2004 Equity Incentive Plan which authorizes the Company to grant non-qualified stock options,
incentive stock options, restricted shares and other equity awards. An aggregate of 4,688,532
shares of the Companys common stock was initially reserved for issuance to the Companys
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 1,182,840 shares effective January 1, 2006, 1,200,000 shares
effective January 1, 2007, and 1,200,000 shares effective January 1, 2008. The Companys policy is
to grant options with an exercise price equal to the closing market price of the Companys 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 the Companys 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. The Company has 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, |
|
|
2008 |
|
2007 |
|
2006 |
Weighted average
risk-free interest rate |
|
|
2.51 |
% |
|
|
4.55 |
% |
|
|
4.89 |
% |
Range of risk-free rates |
|
|
1.76%-3.41 |
% |
|
|
3.94%-5.08 |
% |
|
|
4.28%-5.22 |
% |
Expected term (in years) |
|
|
4.55 |
|
|
|
2.49 |
|
|
|
3.91 |
|
Expected dividend yield |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
Expected volatility |
|
|
42.49 |
% |
|
|
39.88 |
% |
|
|
41.61 |
% |
The following tables summarize option activity for the year ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
Weighted- |
|
Remaining |
|
|
|
|
|
|
|
|
Average |
|
Contractual |
|
Aggregate |
|
|
|
|
|
|
Exercise |
|
Life |
|
Intrinsic |
|
|
Shares |
|
Price |
|
(Years) |
|
Value |
Outstanding at January 1, 2008 |
|
|
2,534,998 |
|
|
$ |
45.88 |
|
|
|
|
|
|
|
|
|
Options granted |
|
|
3,164,298 |
|
|
|
42.76 |
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
(225,084 |
) |
|
|
21.70 |
|
|
|
|
|
|
|
|
|
Options forfeited |
|
|
(1,196,094 |
) |
|
|
53.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008 |
|
|
4,278,118 |
|
|
|
42.75 |
|
|
|
5.7 |
|
|
$ |
940 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2008 |
|
|
1,463,630 |
|
|
$ |
39.26 |
|
|
|
5.3 |
|
|
$ |
940 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant date fair value of options granted during the years ended December
31, 2008, 2007, and 2006 were $16.32, $24.29, and $18.55, respectively. The total intrinsic value
of options exercised during the years ended December 31, 2008, 2007, and 2006 was $4,057, $52,622,
19,387, respectively.
F-13
WELLCARE HEALTH PLANS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 2008, 2007, and 2006
(In thousands, except member and share data)
The following table summarizes share award activity for the year ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Grant-Date |
|
|
|
Shares |
|
|
Fair Value |
|
Nonvested balance at January 1, 2008 |
|
|
879,009 |
|
|
$ |
60.42 |
|
Changes during the period: |
|
|
|
|
|
|
|
|
Shares granted |
|
|
1,003,900 |
|
|
|
42.76 |
|
Shares vested |
|
|
(318,098 |
) |
|
|
53.40 |
|
Shares forfeited |
|
|
(398,995 |
) |
|
|
50.41 |
|
|
|
|
|
|
|
|
Nonvested balance at December 31, 2008 |
|
|
1,165,816 |
|
|
$ |
50.53 |
|
|
|
|
|
|
|
|
The fair value of share awards are based on the closing trading price of the Companys shares
on the grant date. The weighted-average grant-date fair value of shares granted during the year
ended December 31, 2008, 2007, and 2006 were $42.76, $90.67 and
$45.36, respectively. As of December 31, 2008,
there was $75,444 of unrecognized compensation costs related to non-vested equity-based
compensation arrangements that is expected to be recognized over a weighted-average period of 2.6
years. The total fair value of shares vested during the year ended December 31, 2008 was $16,986.
The Company generally repurchases vested shares to satisfy tax withholding requirements. Those
shares repurchased are then retired.
Performance Share Award
Under the 2004 Equity Incentive Plan, the Company granted 240,279 shares to its 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 the Companys stock on the date of
grant, which was $34.95. Based upon the Companys 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 the Company, issuance of those
shares is subject to certain conditions including the outcome of legal proceeding that may be
brought against the Company 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 rights to receive any such shares, at which time, the recorded
compensation cost of $4,683 would be reversed. As of December 31, 2008, there was no unrecognized
compensation cost related to the performance share award.
Stock purchase plan
In November 2004, the Board approved the Companys 2005 Employee Stock Purchase Plan (ESPP).
The ESPP was subsequently approved by the Companys shareholders in June 2005. A maximum of
387,714 shares of common stock is reserved for issuance under the plan. The ESPP allows Company
associates to purchase common stock of the Company 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.
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 and members equity. The Companys components of accumulated other comprehensive
income include net unrealized gain/(losses) on available-for-sale securities, net of taxes.
Fair Value Information
The Companys 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 the Companys term loan approximates its fair
value due to the loan being in default and, as a result, the lender has the ability to accelerate
the payment of the remaining amounts due from the Company, which amounts are equal to the term loan
carrying amounts. Additionally, because the term of the agreement expires on May 13, 2009, the
carrying amount of the term loan would approximate its fair value due to the relatively short
period of time between December 31, 2008 and the expiration of the term loan agreement.
F-14
WELLCARE HEALTH PLANS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 2008, 2007, and 2006
(In thousands, except member and share data)
Recently Adopted Accounting Standards
In September 2006, the FASB issued FAS No. 157, Fair Value Measurements (FAS 157). FAS 157
defines fair value, establishes a framework for measuring fair value in GAAP and requires enhanced
disclosures about fair value measurements. FAS 157 does not require any new fair value
measurements. The pronouncement is effective for fiscal years beginning after November 15, 2007.
In February 2008, the FASB issued FASB Staff Position FAS 157-2,
Effective Date of FASB Statement
No. 157 (FSP 157-2). FSP 157-2 delayed the effective date of FAS 157 for all non-financial assets
and liabilities for one year, except those that are measured at fair value in the financial
statements on at least an annual basis. The Company adopted FAS 157 as of January 1, 2008, except
for those provisions deferred under FSP 157-2. The deferred provisions of FAS 157, which apply
primarily to goodwill and other intangible assets for annual impairment testing purposes, will be
effective in 2009. The Company adopted the new standard during the first quarter of 2008 as
required. There was no cumulative effect of adopting FAS 157 for 2008.
In
February 2007, the FASB issued FAS No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities (FAS 159). FAS 159 permits an
entity to measure certain financial assets and financial liabilities at fair value. Under FAS 159,
entities that elect the fair value option will report unrealized gains and losses in earnings at
each subsequent reporting date. The pronouncement is effective for fiscal years beginning after
November 15, 2007. The Company adopted FAS 159 as of January 1, 2008 as required, but did not elect
the fair value option.
Recently Issued Accounting Standards
In April 2008, the FASB issued FASB Staff Position FAS 142-3, Determination of the Useful Life
of Intangible Assets (FSP 142-3). FSP 142-3 amends the factors to be considered in developing
renewal and extension assumptions used to determine the useful life of a recognized intangible
asset accounted for under FAS No. 142, Goodwill and Other Intangible Assets. FSP 142-3 is
effective for the Companys fiscal year 2009 and must be applied prospectively to intangible assets
acquired after January 1, 2009. Early adoption is not permitted. The Company does not expect the
adoption of FSP 142-3 will have a material impact on its Consolidated Financial Statements.
In March 2008, the FASB issued FAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities an amendment of FASB Statement No. 133 (FAS 161). FAS 161 amends and
expands the disclosure requirements of FAS No. 133, Accounting for Derivative Instruments and
Hedging Activities (FAS 133), to require qualitative disclosure about objectives and strategies
for using derivatives; quantitative disclosures about fair value amounts and gains and losses on
derivative instruments; and disclosures about credit-risk-related contingent features in derivative
agreements. FAS 161 is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008. The Company does not expect that the adoption of FAS
160 will have an impact on its Consolidated Financial Statements.
In December 2007, the FASB issued FAS No. 141 (revised 2007), Business Combinations (FAS
141R). FAS 141R replaces current guidance in FAS 141 to better represent the economic value of a
business combination transaction. FAS 141 establishes principles and requirements for how an
acquiring entity recognizes and measures all identifiable assets acquired, liabilities assumed, any
non-controlling interest in the acquired entity and the goodwill acquired. The changes to be
effected with FAS 141R from the current guidance include, but are not limited to treatment of
certain specific items such as expensing transaction and restructuring costs and adjusting earnings
in periods subsequent to the acquisition for changes in deferred tax asset valuation allowances and
income tax uncertainties as well as changes in the fair value of acquired contingent liabilities.
FAS 141R also includes a substantial number of new disclosure requirements that will enable users
of financial statements to evaluate the nature and financial effect of business combination. FAS
141R must be applied prospectively to all new acquisitions closing on or after January 1, 2009.
The impact of this pronouncement will depend on future acquisition activity of the Company, if any.
In December 2007, the FASB issued FAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements An Amendment of ARB No. 51 (FAS 160). FAS 160 requires that accounting
and reporting for minority interests be recharacterized as noncontrolling interests and classified
as a component of equity. The standard is effective for fiscal year 2009 and must be applied
prospectively. The Company does not expect that the adoption of FAS 160 will have an impact on its
consolidated financial statements.
3. NET (LOSS) INCOME PER COMMON SHARE
The Company computes basic net (loss) income per common share on the basis of the weighted
average number of unrestricted common shares outstanding. Diluted net
(loss) income 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 (loss) income per common share basic and
diluted:
F-15
WELLCARE HEALTH PLANS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 2008, 2007, and 2006
(In thousands, except member and share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Year Ended |
|
|
Year Ended |
|
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income basic and diluted |
|
$ |
(36,833 |
) |
|
$ |
216,236 |
|
|
$ |
121,229 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding basic |
|
|
41,396,116 |
|
|
|
40,705,454 |
|
|
|
39,335,313 |
|
Adjustment for unvested restricted common shares |
|
|
|
|
|
|
377,786 |
|
|
|
486,262 |
|
Dilutive effect of stock options (as determined by the treasury stock method) |
|
|
|
|
|
|
857,368 |
|
|
|
799,896 |
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding diluted |
|
|
41,396,116 |
|
|
|
41,940,608 |
|
|
|
40,621,471 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income per common share basic |
|
$ |
(0.89 |
) |
|
$ |
5.31 |
|
|
$ |
3.08 |
|
Net
(loss) income per common share diluted |
|
$ |
(0.89 |
) |
|
$ |
5.16 |
|
|
$ |
2.98 |
|
Certain options to purchase common stock were not included in weighted-average common shares
outstandingdiluted and therefore are not included in the
calculation of diluted net (loss) income per
common share because their exercise prices were greater than the average market price of the
Companys common stock for the period and, therefore, the effect would be anti-dilutive. 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 years ended December 31, 2007 and 2006, approximately 512,600 and 92,000 shares,
respectively, were excluded from diluted weighted average common shares outstanding.
4. MEDICAL BENEFITS PAYABLE
The following table provides a reconciliation of the beginning and ending balance of medical
benefits payable for the following periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Year Ended |
|
|
Year Ended |
|
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Balances as of beginning of period |
|
$ |
538,146 |
|
|
$ |
460,728 |
|
|
$ |
223,674 |
|
|
|
|
|
|
|
|
|
|
|
Medical benefits incurred related to: |
|
|
|
|
|
|
|
|
|
|
|
|
Current period |
|
|
5,538,262 |
|
|
|
4,313,581 |
|
|
|
2,954,427 |
|
Prior periods |
|
|
(8,046 |
) |
|
|
(100,197 |
) |
|
|
(47,137 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
5,530,216 |
|
|
|
4,213,384 |
|
|
|
2,907,290 |
|
|
|
|
|
|
|
|
|
|
|
Medical benefits paid related to: |
|
|
|
|
|
|
|
|
|
|
|
|
Current period |
|
|
(4,848,440 |
) |
|
|
(3,781,425 |
) |
|
|
(2,492,992 |
) |
Prior periods |
|
|
(453,743 |
) |
|
|
(354,541 |
) |
|
|
(177,244 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
(5,302,183 |
) |
|
|
(4,135,966 |
) |
|
|
(2,670,236 |
) |
|
|
|
|
|
|
|
|
|
|
Balances as of end of period |
|
$ |
766,179 |
|
|
$ |
538,146 |
|
|
$ |
460,728 |
|
|
|
|
|
|
|
|
|
|
|
Medical benefits payable recorded at December 31, 2007, 2006 and 2005 developed favorably by
approximately $8,046, $100,197 and $47,137, respectively. These decreases in medical benefits
payable in the amounts incurred related to prior years; 2008 related to 2007, 2007 related to
2006, and 2006 related to 2005, were primarily attributable to favorable development in our key
assumptions consisting of trend factors and completion factors, using
an assumption of moderately adverse conditions.
5. GOODWILL AND INTANGIBLE ASSETS
a) Goodwill
Goodwill balances and the changes therein are as follows:
|
|
|
|
|
Balance as of December 31, 2006 |
|
$ |
189,470 |
|
Goodwill increase during the year ended 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
Goodwill represents the excess of the cost over the fair market value of net assets acquired.
The Company reviews Goodwill for
F-16
WELLCARE HEALTH PLANS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 2008, 2007, and 2006
(In thousands, except member and share data)
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. The Company has selected the second quarter of each year for its annual impairment test,
which generally coincides with the finalization of contract negotiations and the Companys initial
budgeting process. Based on the current general economic conditions and outlook, the Company
performed an analysis of the underlying valuation of Goodwill at December 31, 2008. Based on the
valuation performed, which determined the fair value associated with each reporting unit based on a
market pricing analysis, the Company concluded that Goodwill associated with its Medicare reporting
unit was impaired. The impairment to the 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 future operating trends. The Company 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, 2008 and 2007, goodwill of $111,131 was assigned to the Medicaid reporting
unit for each year, and $78,339 was assigned to the Medicare
reporting unit at December 31, 2007. There was no
goodwill assigned to the Medicare reporting unit at December 31, 2008.
b) Intangibles
We obtained 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.
In 2006 the Company also acquired 100% of the stock of three licensed insurance companies
which had limited or no activity prior to the Companys ownership. The Company operates its PFFS
business through these companies. The purchase price allocated to intangible assets for the
acquired companies consisted of state licenses in the amount of
$4,300 with a useful life of 26
years.
In August 2006, the Company was notified by the Indiana Office of Medicaid Policy and Planning
(OMPP) that it was not selected for a new contract to provide managed care benefits to Indiana
Medicaid recipients in 2007. The contract with the state expired on December 31, 2006 and the
Company concluded that it would not provide future Medicaid services in Indiana under the
associated license. As a result, Indiana market intangible assets were deemed to have no further
economic value. Accordingly, the remaining amortization on the assets with a net value of $2,500
that were purchased in 2004 was accelerated. Expense of $2,500 is included in depreciation and
amortization expense in the Companys 2006 statement of
operations.
The following is a summary of the acquired intangible assets resulting from business
acquisitions as of December 31, 2008 and 2007 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Carrying |
|
|
Accumulated |
|
|
Carrying |
|
|
Accumulated |
|
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
|
Amortization |
|
Provider network |
|
$ |
4,878 |
|
|
$ |
(3,647 |
) |
|
$ |
4,878 |
|
|
$ |
(3,385 |
) |
Membership contracts |
|
|
11,960 |
|
|
|
(11,960 |
) |
|
|
11,960 |
|
|
|
(11,893 |
) |
Trademark |
|
|
10,443 |
|
|
|
(4,022 |
) |
|
|
10,443 |
|
|
|
(3,326 |
) |
Non-compete agreements |
|
|
3,972 |
|
|
|
(3,972 |
) |
|
|
3,972 |
|
|
|
(3,778 |
) |
Licenses and permits |
|
|
5,270 |
|
|
|
(1,103 |
) |
|
|
5,270 |
|
|
|
(752 |
) |
State contracts |
|
|
3,336 |
|
|
|
(662 |
) |
|
|
3,336 |
|
|
|
(439 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
39,859 |
|
|
$ |
(25,366 |
) |
|
$ |
39,859 |
|
|
$ |
(23,573 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for the years ended December 31, 2008, 2007 and 2006 was $1,793, $2,569
and $7,098, respectively. Amortization expense expected to be recognized during fiscal years
subsequent to December 31, 2008 is as follows:
|
|
|
|
|
2009 |
|
$ |
1,532 |
|
2010 |
|
|
1,532 |
|
2011 |
|
|
1,532 |
|
2012 |
|
|
1,414 |
|
2013 |
|
|
1,413 |
|
2014 and thereafter |
|
|
7,070 |
|
|
|
|
|
|
|
$ |
14,493 |
|
|
|
|
|
The weighted-average amortization periods of the acquired intangible assets resulting from the
business acquisitions are as follows:
F-17
WELLCARE HEALTH PLANS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 2008, 2007, and 2006
(In thousands, except member and share data)
|
|
|
|
|
|
|
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
a) 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, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Estimated |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal variable rate bonds |
|
$ |
222,677 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
222,677 |
|
Certificates of deposit |
|
|
31,204 |
|
|
|
|
|
|
|
|
|
|
|
31,204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
253,881 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
253,881 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual maturities of available-for-sale short-term investments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within |
|
|
1 Through 5 |
|
|
5 Through 10 |
|
|
|
|
|
|
Total |
|
|
1 Year |
|
|
Years |
|
|
Years |
|
|
Thereafter |
|
December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal variable rate bonds |
|
$ |
3,925 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3,925 |
|
Certificates of deposit |
|
|
66,187 |
|
|
|
66,187 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
70,112 |
|
|
$ |
66,187 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3,925 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal variable rate bonds |
|
$ |
222,677 |
|
|
$ |
2,690 |
|
|
$ |
|
|
|
$ |
6,700 |
|
|
$ |
213,287 |
|
Certificates of deposit |
|
|
31,204 |
|
|
|
31,088 |
|
|
|
116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
253,881 |
|
|
$ |
33,778 |
|
|
$ |
116 |
|
|
$ |
6,700 |
|
|
$ |
213,287 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2008 and 2007, bond investments totaling $254,353 and $67,410,
respectively, were sold. There were no realized gains recorded for the years ended December 31,
2008, 2007, or 2006.
Excluding investments in U.S. Treasury securities, the Company is not exposed to any
significant concentration of credit risk in its fixed maturities portfolio.
F-18
WELLCARE HEALTH PLANS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 2008, 2007, and 2006
(In thousands, except member and share data)
b) 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, 2008 as summarized below. The Company had no
long-term investments at December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Estimated |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within |
|
|
1 Through 5 |
|
|
5 Through 10 |
|
|
|
|
|
|
Total |
|
|
1 Year |
|
|
Years |
|
|
Years |
|
|
Thereafter |
|
December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal
auction rate securities |
|
$ |
54,972 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
6,236 |
|
|
$ |
48,736 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
54,972 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
6,236 |
|
|
$ |
48,736 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual maturities may differ from contractual maturities due to the exercise of pre-payment
options.
Excluding investments in U.S. Treasury securities, the Company is not exposed to any
significant concentration of credit risk in its fixed maturities portfolio. However, as of December
31, 2008, all of our long-term investments were comprised of municipal notes 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. These notes carry investment grade credit ratings. The Company has not realized any
losses associated with selling its auction rate securities for the year ended December 31, 2008.
There was $6,428 of unrealized losses recorded for the year ended December 31, 2008.
7. RESTRICTED INVESTMENT ASSETS
As a condition for licensure, the Company is 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, 2008 and 2007, the amortized cost, gross unrealized gains, gross unrealized losses and fair
value of these securities are summarized below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Estimated |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-19
WELLCARE HEALTH PLANS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 2008, 2007, and 2006
(In thousands, except member and share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Estimated |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
$ |
3,881 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3,881 |
|
Certificates of deposit |
|
|
1,639 |
|
|
|
|
|
|
|
|
|
|
|
1,639 |
|
Money market funds |
|
|
64,467 |
|
|
|
|
|
|
|
|
|
|
|
64,467 |
|
Treasury bills |
|
|
18,867 |
|
|
|
391 |
|
|
|
(9 |
) |
|
|
19,249 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
88,854 |
|
|
$ |
391 |
|
|
$ |
(9 |
) |
|
$ |
89,236 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-20
WELLCARE HEALTH PLANS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 2008, 2007, and 2006
(In thousands, except member and share data)
Contractual maturities of available-for-sale restricted investments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within |
|
|
1 Through 5 |
|
|
5 Through 10 |
|
|
|
|
|
|
Total |
|
|
1 Year |
|
|
Years |
|
|
Years |
|
|
Thereafter |
|
December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
$ |
5,894 |
|
|
$ |
5,894 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Certificates of deposit |
|
|
1,713 |
|
|
|
1,713 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
|
171,967 |
|
|
|
171,967 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury bills |
|
|
19,765 |
|
|
|
12,261 |
|
|
|
6,828 |
|
|
|
676 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
199,339 |
|
|
$ |
191,835 |
|
|
$ |
6,828 |
|
|
$ |
676 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
$ |
3,881 |
|
|
$ |
3,881 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Certificates of deposit |
|
|
1,639 |
|
|
|
1,639 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
|
64,467 |
|
|
|
64,467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury bills |
|
|
19,249 |
|
|
|
4,956 |
|
|
|
13,468 |
|
|
|
825 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
89,236 |
|
|
$ |
74,943 |
|
|
$ |
13,468 |
|
|
$ |
825 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No realized gains or (losses) were recorded for the years ended December 31, 2008, 2007, or
2006.
8. FAIR VALUE MEASUREMENTS
The Companys 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 the Companys term loan approximates its fair
value due to the loan being in default and, as a result, the lender has the ability to accelerate
the payment of the remaining amounts due from the Company, which amounts are equal to the term loan
carrying amounts. Additionally, because the term of the agreement expires on May 13, 2009, the
carrying amount of the term loan would approximate its fair value due to the relatively short
period of time between December 31, 2008 and the expiration of the term loan agreement.
The Company adopted FAS 157 for its 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.
As of December 31, 2008,
the Companys investments were comprised of $61,400 of auction rate securities. Liquidity for these
auction rate
F-21
WELLCARE HEALTH PLANS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 2008, 2007, and 2006
(In thousands, except member and share data)
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. The Companys auction rate securities are designated as available-for-sale
securities and are reflected at fair value. The fair values of these securities were estimated
using discounted cash flow analysis as of December 31, 2008. 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. Prior to January 1, 2008, these securities were recorded at fair value based on quoted
prices in active markets (i.e., FAS 157 Level 1 data).
As of December 31, 2007, the Company had $204,700 par value auction rate securities, of which
$143,300 were settled at par during the year ended December 31, 2008. The remaining auction rate
securities at December 31, 2008 had auctions that failed during the year ended December 31, 2008.
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 short-term instruments. The securities for
which auctions have failed 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, the Companys ability to liquidate and fully recover the carrying value of
its remaining auction rate securities in the near term may be limited or non-existent. The final
maturity of the underlying auction rate securities could be as long as 31 years with a
weighted-average life of 22 years for Companys auction rate securities portfolio. The Company
does not believe its auction rate securities are impaired, primarily due to government guarantees
or municipal bond insurance and, as a result, the Company did not record any impairment
losses for its auction rate securities during the year ended December 31, 2008. At December 31,
2008, the Company had $54,972 of auction rate securities and has the ability and the present intent
to hold the securities until market stability is restored.
The Companys assets measured at fair value on a recurring basis subject to the disclosure
requirements of FAS 157 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2008 Using: |
|
|
|
|
|
|
|
Quoted Prices in |
|
|
|
|
|
|
Significant |
|
|
|
|
|
|
|
Active Markets for |
|
|
Significant Other |
|
|
Unobservable |
|
|
|
December 31, |
|
|
Identical Assets |
|
|
Observable Inputs |
|
|
Inputs |
|
Description |
|
2008 |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(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 |
|
$ |
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, 2008. 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
F-22
WELLCARE HEALTH PLANS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 2008, 2007, and 2006
(In thousands, except member and share data)
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
(Level 3) as defined in FAS 157:
|
|
|
|
|
|
|
Fair Value Measurements |
|
|
|
Using Significant |
|
|
|
Unobservable Inputs |
|
|
|
(Level 3) |
|
Beginning balance at January 1, 2008 |
|
$ |
|
|
Total gains or losses (realized or unrealized) |
|
|
|
|
Included in earnings (or changes in net assets) |
|
|
|
|
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 |
|
|
|
|
|
As a result of the declines in fair value for our investments in auction rate securities,
which the Company deems to be temporary and attributable to liquidity issues rather than to credit
issues, the Company recorded a net unrealized loss of $6,428 to Accumulated other comprehensive
income in year ended December 31, 2008. If the Company determines that any future valuation
adjustment was other than temporary, a charge to earnings would be recorded as appropriate.
9. PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Leasehold improvements |
|
$ |
16,104 |
|
|
$ |
10,457 |
|
Computer equipment and software |
|
|
77,657 |
|
|
|
69,062 |
|
Furniture and equipment |
|
|
25,677 |
|
|
|
20,360 |
|
|
|
|
|
|
|
|
|
|
|
119,438 |
|
|
|
99,879 |
|
Less accumulated depreciation |
|
|
(52,850 |
) |
|
|
(33,319 |
) |
|
|
|
|
|
|
|
|
|
$ |
66,588 |
|
|
$ |
66,560 |
|
|
|
|
|
|
|
|
The Company recognized depreciation expense on property and equipment of $19,531, $16,188 and
$10,072 for the years ended December 31, 2008, 2007, and 2006, respectively. The Company had $2,084
and $2,285 of non-cash property, equipment and capitalized software additions at December 31, 2008
and 2007, respectively.
F-23
WELLCARE HEALTH PLANS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 2008, 2007, and 2006
(In thousands, except member and share data)
10. DEBT
The Companys outstanding debt was $152,741 and $154,581 at December 31, 2008 and 2007,
respectively.
Credit Agreement
The Company and certain of its subsidiaries are parties to a credit agreement, dated as of May
13, 2004, which was subsequently amended in September 2005, September 2006 and January 2008 (as
amended, the Credit Agreement).
As of December 31, 2008, the credit facilities under the Credit Agreement currently
consists of a senior secured term loan facility in the outstanding principal amount of
approximately $152,741, which matures in May 2009. The term loan is secured by a pledge of
substantially all of the assets of the Companys non-regulated entities, which includes the stock
of its operating subsidiaries directly held by its non-regulated entities. Interest is payable
quarterly, currently at a rate equal to the sum of a rate based upon the Prime rate plus a rate
equal to 1.50%. The Company is a party to this agreement for the purpose of guaranteeing the
indebtedness of its subsidiaries that are parties to the agreement. The Credit Agreement previously
included a revolving credit facility in the amount of $125,000 which expired in May 2008. The
revolving credit facility had not been utilized before its expiration.
The Credit Agreement contains various restrictive covenants which limit, among other
things, the Companys ability to incur indebtedness and liens, enter into business combination
transactions and cause its regulated subsidiaries to declare and pay dividends to the Company or
its non-regulated subsidiaries. As a result of the on-going investigations discussed in Note 11,
the Company has been unable to satisfy a number of its obligations under the Credit Agreement,
including providing audited financial statements, annual financial plans, and other information
sought by the lenders under the Credit Agreement. Consequently, since November 2007 the Company has
been in technical default under the terms of this Credit Agreement. In addition, as of December 31,
2008, the Company was in default of certain covenants set forth in the Credit Agreement requiring
the Company to maintain certain leverage ratios. The Company continues to make payments as
required, and consequently, there has been no payment default under the terms of the Credit
Agreement. As of the date of this 2008 10-K, the Companys direct financial obligations under the
Credit Agreement have not been accelerated or increased; however, the lenders have the right to do
so at any time.
Maturities of Debt
The
Companys debt, including the accreted amount of the senior discount notes, is scheduled to
mature in May, 2009. Accordingly, the Companys outstanding debt has been presented as a
short-term obligation in the Companys Consolidated Balance Sheet.
11. COMMITMENTS AND CONTINGENCIES
Government Investigations
The Company is currently under investigation by several federal and state authorities,
including the Florida Agency for Health Care Administration (AHCA), the U.S. Attorneys Office
for the Middle District of Florida (the USAO), the Civil Division of the U.S. Department of
Justice (the Civil Division), the Office of Inspector General of the U.S. Department of Health
and Human Services (the OIG) and the Florida Attorney Generals Medicaid Fraud Control Unit
(MFCU). Pursuant to an agreement dated August 18, 2008 with AHCA, the USAO and MFCU, two of the
Companys subsidiaries, WellCare of Florida, Inc. and HealthEase of Florida, Inc. (collectively,
the WellCare Florida HMOs), agreed to transmit $35,200 (the Transmitted Amount) to the
Financial Litigation Unit of the USAO. The Transmitted Amount was based upon the Companys best
estimate, as of the effective date of the agreement, of the total potential amount of Medicaid
behavioral health capitation refunds that the WellCare Florida HMOs owe or may owe to AHCA for
calendar years 2002 through 2006, but did not include any interest, fines, penalties or other
assessments that may be imposed against the Company. Of the total Transmitted Amount, the Company
acknowledged and agreed that the WellCare Florida HMOs would make payment of not less than a total
amount of $24,500, and therefore the Company authorized the USAO, AHCA and MFCU to access and
distribute the $24,500 to the appropriate federal and state agencies in accordance with applicable
federal and state law. In addition, the parties to the agreement acknowledged and agreed that
$10,700 of the Transmitted Amount would be held in an escrow account pending resolution of all
federal and related state claims by the United States or the State of Florida for monetary damages
or other financial impositions of any kind arising from, or related to, the investigation by MFCU
or the USAO. The amount held in escrow does not limit in any way the ability of federal or state
authorities to recover additional amounts, including interest, civil or criminal fines, penalties
or other assessments that may be imposed against the Company, and the Company cannot make any
assurances that the federal or state authorities will not seek or be entitled to recover amounts in
excess of the escrowed amounts. The agreement did not, nor should it be construed to, operate as a
settlement or release of any criminal, civil or administrative claims for monetary, injunctive or
other relief against the Company, whether under federal, state or local statutes, regulations or
common law. Furthermore, the agreement does not operate, nor should it be construed, as a
concession that the
F-24
WELLCARE HEALTH PLANS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 2008, 2007, and 2006
(In thousands, except member and share data)
Company is entitled to any limitation of its potential federal, state or local civil or
criminal liability.
The Company is engaged in resolution discussions as to matters under review with the USAO, the
Civil Division, the OIG and the State of Florida. Based on the current status of matters and all
information known to the Company to date, in the year ended
December 31, 2007 the Company recorded selling, general and administrative
expense and accrued a liability in the amount of $50,000 in connection with the resolution of these
matters, which is included in the Other accrued expenses line item within the Companys Consolidated
Balance Sheets as of December 31, 2008, and 2007, respectively. The Company believes that it is
probable that the actual resolution amount for all such matters will be more than the amounts that
have already been reflected in the Companys financial statements; however, the Company cannot
provide an estimable range of additional amounts, if any, nor can the Company provide assurances
regarding the timing, terms and conditions of any potential negotiated resolution of pending
investigations by the USAO, the Civil Division, the OIG or the State of Florida.
In addition to the federal and state governmental investigations referenced above, as
previously disclosed, the U.S. Securities and Exchange Commission is conducting an informal
investigation. In addition, the Company is responding to subpoenas issued by the State of
Connecticut Attorney Generals Office involving transactions between the Company and its affiliates
and their potential impact on the costs of Connecticuts Medicaid program. The Company has
communicated with regulators in states in which the Companys HMO and insurance operating
subsidiaries are domiciled regarding the investigations. The Company is cooperating with federal
and state regulators and enforcement officials in these matters. It does not know whether, or the
extent to which, any pending investigations might lead to the payment of fines, penalties or
operating restrictions.
In
addition, in a letter dated October 15, 2008, the Civil Division
informed the Company that as part of the pending civil inquiry, the Civil Division is investigating a
number of qui tam complaints filed by relators against the Company 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 the Company the
existence of the qui tam complaints. The complaints otherwise remain under seal as required by 31
U.S.C. section 3730(b)(3). The Company is undertaking to discuss with
the Civil Division, and address, allegations by the qui tam relators.
The Company 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 the
Company and one of its subsidiaries. Because qui tam actions brought under federal and state false
claims acts are sealed by the court at the time of filing, the Company is unable to determine the
nature of the allegations and, therefore, the Company does not know at this time whether this
action relates to the subject matter of the federal investigations. In addition, it is possible
that additional qui tam actions have been filed against the Company and are under seal. Thus, it
is possible that the Company is subject to liability exposure under the False Claims Act, or
similar state statutes, based on qui tam actions other than those discussed in this 2008 Form 10-K.
Class Action and Derivative Lawsuits
Putative class action complaints were filed on October 26, 2007 and on November 2,
2007. These putative class actions, entitled Eastwood Enterprises, L.L.C. v. Farha, et al. and
Hutton v. WellCare Health Plans, Inc. et al., respectively, were filed in the United States
District Court for the Middle District of Florida against the Company, Todd Farha, the Companys
former chairman and chief executive officer, and Paul Behrens, the Companys former senior vice
president and chief financial officer. Messrs. Farha and Behrens were also officers of various
subsidiaries of the Company. The Eastwood Enterprises complaint alleges that the defendants
materially misstated the Companys reported financial condition by, among other things, purportedly
overstating revenue and understating expenses in amounts unspecified in the pleading in violation
of the Securities Exchange Act of 1934, as amended. The Hutton complaint alleges that various
public statements supposedly issued by defendants were materially misleading because they failed to
disclose that the Company was purportedly operating its business in a potentially illegal and
improper manner in violation of applicable federal guidelines and regulations. The complaint
asserts claims under the Securities Exchange Act of 1934, as amended. Both complaints seek, among
other things, certification as a class action and damages. The two actions were consolidated, and
various parties and law firms filed motions seeking to be designated as Lead Plaintiff and Lead
Counsel. In an Order issued on March 11, 2008, the Court appointed a group of five public pension
funds from New Mexico, Louisiana and Chicago (the Public Pension Fund Group) as Lead
Plaintiffs. On October 31, 2008, an amended consolidated complaint was filed in this class action
against the Company, Messrs. Farha and Behrens, and adding Thaddeus Bereday, the Companys former
senior vice president and general counsel, as a defendant. On January 23, 2009, the Company 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 the Companys 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. Briefing on this motion is continuing. The Company intends
to defend itself vigorously against these claims. At this time, neither the Company nor any of its
subsidiaries can predict the probable outcome of these claims. Accordingly, no amounts have been
accrued in the Companys consolidated financial statements.
Five putative shareholder derivative actions were filed between October 29, 2007 and
November 15, 2007. The first two of these putative shareholder derivative actions, entitled Rosky
v. Farha, et al. and Rooney v. Farha, et al., respectively, are supposedly brought
F-25
WELLCARE HEALTH PLANS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 2008, 2007, and 2006
(In thousands, except member and share data)
on behalf of the Company and were filed in the United States District Court for the Middle
District of Florida. Two additional actions, entitled Intermountain Ironworkers Trust Fund v.
Farha, et al., and Myra Kahn Trust v. Farha, et al., were filed in Circuit Court for Hillsborough
County, Florida. All four of these actions are asserted against all Company directors (and former
director Todd Farha) except for D. Robert Graham, Heath Schiesser and Charles G. Berg and also name
the Company as a nominal defendant. A fifth action, entitled Irvin v. Behrens, et al., was filed
in the United States District Court for the Middle District of Florida and asserts claims against
all Company directors (and former director Todd Farha) except Heath Schiesser and Charles G. Berg
and against two former Company officers, Paul Behrens and Thaddeus Bereday. All five actions
contend, among other things, that the defendants allegedly allowed or caused the Company to
misrepresent its reported financial results, in amounts unspecified in the pleadings, and seek
damages and equitable relief for, among other things, the defendants supposed breach of fiduciary
duty, waste and unjust enrichment. The three actions in federal court have been
consolidated. Subsequent to that consolidation, an additional derivative complaint entitled City
of Philadelphia Board of Pensions and Retirement Fund v. Farha, et al. was filed in the same
federal court, but thereafter was consolidated into the existing consolidated action. A motion to
consolidate the two state court actions, to which all parties consented, was granted, and
plaintiffs filed a consolidated complaint on April 7, 2008. On October 31, 2008, amended
complaints were filed in the federal court and the state court derivative actions. On December 30,
2008, the Company filed substantially similar motions to dismiss both actions, contesting, among
other things, the standing of the plaintiffs in each of these derivative actions to prosecute the
purported claims in the Companys name. Briefing on these motions is continuing. At this time,
neither the Company nor any of its subsidiaries can predict the probable outcome of these claims.
Accordingly, no amounts have been accrued in the Companys consolidated financial statements for
these claims.
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
The Company has operating leases for office space. Rental expense totaled $17,994, $14,731 and
$12,217 for the years ended December 31, 2008, 2007 and 2006, respectively. Future minimum lease
payments under non-cancelable operating leases with initial or remaining lease terms in excess of
one year at December 31, 2008 were:
|
|
|
|
|
2009 |
|
$ |
16,938 |
|
2010 |
|
|
15,356 |
|
2011 |
|
|
14,037 |
|
2012 |
|
|
8,529 |
|
2013 |
|
|
6,484 |
|
2014 and thereafter |
|
|
16,926 |
|
|
|
|
|
|
|
$ |
78,270 |
|
|
|
|
|
12. INCOME TAXES
The Company and its subsidiaries file a consolidated federal income tax return. The Company
and the subsidiaries file separate state franchise, income and premium tax returns as applicable.
The
following table provides components of income tax (benefit) expense for the following periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ending December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
39,989 |
|
|
$ |
157,396 |
|
|
$ |
54,703 |
|
State |
|
|
8,932 |
|
|
|
20,770 |
|
|
|
8,705 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48,921 |
|
|
|
178,166 |
|
|
|
63,408 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
(57,794 |
) |
|
|
(15,846 |
) |
|
|
14,529 |
|
State |
|
|
(7,464 |
) |
|
|
(588 |
) |
|
|
1,853 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(65,258 |
) |
|
|
(16,434 |
) |
|
|
16,382 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(16,337 |
) |
|
$ |
161,732 |
|
|
$ |
79,790 |
|
|
|
|
|
|
|
|
|
|
|
F-26
WELLCARE HEALTH PLANS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 2008, 2007, and 2006
(In thousands, except member and share data)
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, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Income tax (benefit) expense at statutory rate |
|
$ |
(18,610 |
) |
|
$ |
132,289 |
|
|
$ |
70,357 |
|
Increase (reduction) resulting from: |
|
|
|
|
|
|
|
|
|
|
|
|
State income tax, net of federal benefit |
|
|
(2,241 |
) |
|
|
12,913 |
|
|
|
9,522 |
|
Provision to return differences |
|
|
|
|
|
|
51 |
|
|
|
(154 |
) |
Non-deductible executive compensation |
|
|
2,805 |
|
|
|
|
|
|
|
|
|
Investigation expense |
|
|
|
|
|
|
17,500 |
|
|
|
|
|
Interest on
unrecognized tax benefits |
|
|
1,604 |
|
|
|
|
|
|
|
|
|
Other, net |
|
|
105 |
|
|
|
(1,021 |
) |
|
|
65 |
|
|
|
|
|
|
|
|
|
|
|
Total income
tax (benefit) expense |
|
$ |
(16,337 |
) |
|
$ |
161,732 |
|
|
$ |
79,790 |
|
|
|
|
|
|
|
|
|
|
|
The significant components of the Companys deferred tax assets and liabilities are as
follows:
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2008 |
|
|
2007 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Medical and other benefits discounting |
|
$ |
8,845 |
|
|
$ |
|
|
Unearned premium discounting |
|
|
7,981 |
|
|
|
3,127 |
|
Tax basis assets |
|
|
6,131 |
|
|
|
5,272 |
|
Unrecognized tax benefits |
|
|
25,554 |
|
|
|
66,154 |
|
Accrued expenses and other |
|
|
33,788 |
|
|
|
15,089 |
|
|
|
|
|
|
|
|
|
|
|
82,299 |
|
|
|
89,642 |
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Goodwill, other intangibles and other |
|
|
|
|
|
|
22,990 |
|
Medical and other benefits discounting |
|
|
|
|
|
|
29,473 |
|
Software development costs |
|
|
13,329 |
|
|
|
13,566 |
|
Prepaid liabilities |
|
|
|
|
|
|
992 |
|
|
|
|
|
|
|
|
|
|
|
13,329 |
|
|
|
67,021 |
|
|
|
|
|
|
|
|
Net deferred tax asset |
|
$ |
68,970 |
|
|
$ |
22,621 |
|
|
|
|
|
|
|
|
The
Company adopted FASB Interpretation (FIN) No. 48,
Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109
(FIN 48) on January 1, 2007. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as
follows:
|
|
|
|
|
|
|
2008 |
|
Gross unrecognized tax benefits, January 1, 2008 |
|
$ |
67,247 |
|
Gross increases: |
|
|
|
|
Prior year tax positions |
|
|
|
|
Current year tax positions |
|
|
6,981 |
|
Gross decreases: |
|
|
|
|
Prior year settlements |
|
|
|
|
Prior year tax positions |
|
|
(47,581 |
) |
Statute of limitations lapses |
|
|
|
|
|
|
|
|
Gross unrecognized tax benefits, December 31, 2008 |
|
$ |
26,647 |
|
|
|
|
|
The Company classifies interest and penalties associated with uncertain income tax positions
as Income taxes within its Consolidated Financial Statements. The liability is recorded in
Other liabilities. During the year ended December 31, 2008 and 2007, the Company recognized
interest expense of $1,604 and $0, respectively. No amount was accrued for penalties for the year
end December 31, 2008 and 2007. As of December 31, 2008 and 2007, the total amount of unrecognized
tax benefits that, if recognized, would affect the effective tax rate was $1,093.
The Company currently files income tax returns in the U.S. federal jurisdiction and various
states. The Internal Revenue Service (IRS) is currently completing its exams on the consolidated
income tax returns for the 2004 through 2006 tax years. The Company is no longer subject to income
tax examinations prior to 2004 in major state jurisdictions. The Company does not believe any
adjustments that may result from these examinations will be significant.
The Company believes it is reasonably possible that its 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.
F-27
WELLCARE HEALTH PLANS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 2008, 2007, and 2006
(In thousands, except member and share data)
13. RELATED-PARTY TRANSACTIONS
Bay Area Primary Care and Bay Area Multi Specialty Group
The Company conducts business with Bay Area Primary Care and Bay Area Multi Specialty Group,
which provide medical and professional services to a portion of the Companys 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 and 2006, the Company purchased $738 and $1,222 in
services, respectively, in the aggregate from Bay Area Primary Care and Bay Area Multi Specialty
Group.
D2Hawkeye
The Company conducts business with D2Hawkeye pursuant to which D2Hawkeye has developed an
internet-based portal for certain of our health care providers. A member of the Board is a senior
advisor to D2Hawkeye, where he previously served as president until January 2007. In 2008 and 2007,
respectively, the Company purchased $394 and $368 of services in the aggregate from D2Hawkeye. The
Company did not have any purchases of services from D2Hawkeye in 2006.
The Graham Companies
The Company conducts business with The Graham Companies pursuant to which the Company leases
office space in South Florida. A member of the Board has a 23% ownership interest in The Graham
Companies. In 2008, 2007 and 2006, the Company paid $359, $374 and $332 in rental expense to The
Graham Companies, respectively.
All-Med
The Company conducts 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 member of the Board has been the Chief Executive Officer of All-Med since August 2008. In 2008,
the Company purchased $6,853 of services in the aggregate from All-Med.
Davita
The
Company conducts business with Davita Inc. (Davita) pursuant to
which Davita provides medical services to a portion of its member base.
The Executive Chairman of the Companys Board is also a member
of Davitas board of directors. In 2008,
the Company purchased $5,300 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, 2008, the
Companys HMO and insurance subsidiaries were in compliance with these minimum compulsory surplus
requirements. The combined statutory capital and surplus of the Companys HMO and insurance
subsidiaries was $585,000 and $564,000 at December 31, 2008 and 2007, respectively, compared to the
required surplus of $312,000 and $264,000 at December 31, 2008 and 2007, respectively.
Dividends paid by the Companys 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.
On December 31, 2008, three of the Companys Florida regulated subsidiaries declared dividends
to one of its non-regulated subsidiaries in the aggregate amount of $105,100, two of which
were paid on December 31, 2008 and one of which was paid on January 2, 2009. No dividends were
paid during the years ended December 31, 2007 or 2006.
15. EMPLOYEE BENEFIT PLAN
The Company offers a defined contribution 401(k) plan. The amount of matching contribution
expense incurred in the years ended December 31, 2008, 2007 and 2006 was $3,592, $2,216 and $817,
respectively.
16. SEGMENT REPORTING
The Company has 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.
F-28
WELLCARE HEALTH PLANS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 2008, 2007, and 2006
(In thousands, except member and share data)
The Medicaid segment includes operations to provide health care services to recipients that
are eligible for state supported programs including Medicaid and childrens health programs. In the
Medicaid segment, the Company had two customers from which it received 10% or more of its Medicaid
segment premium revenue for 2008, 2007, and 2006. Florida revenues were 32.7%, 33.8% and 45.7% of
total Medicaid revenues in each year, respectively. Georgia revenues were 41.0%, 40.4%, and 26.1%
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 the Company.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Premium revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
Medicaid |
|
$ |
2,991,049 |
|
|
$ |
2,691,781 |
|
|
$ |
1,906,391 |
|
Medicare |
|
|
3,492,021 |
|
|
|
2,613,108 |
|
|
|
1,679,652 |
|
|
|
|
|
|
|
|
|
|
|
Total Premium revenue |
|
|
6,483,070 |
|
|
|
5,304,889 |
|
|
|
3,586,043 |
|
Investment and other income |
|
|
38,837 |
|
|
|
85,903 |
|
|
|
49,919 |
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
6,521,907 |
|
|
|
5,390,792 |
|
|
|
3,635,962 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical benefits expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Medicaid |
|
|
2,537,422 |
|
|
|
2,136,710 |
|
|
|
1,555,819 |
|
Medicare |
|
|
2,992,794 |
|
|
|
2,076,674 |
|
|
|
1,351,471 |
|
|
|
|
|
|
|
|
|
|
|
Total Medical benefits expense |
|
|
5,530,216 |
|
|
|
4,213,384 |
|
|
|
2,907,290 |
|
|
|
|
|
|
|
|
|
|
|
Other expense |
|
|
1,044,861 |
|
|
|
799,440 |
|
|
|
527,653 |
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes |
|
$ |
(53,170 |
) |
|
$ |
377,968 |
|
|
$ |
201,019 |
|
|
|
|
|
|
|
|
|
|
|
17. QUARTERLY FINANCIAL INFORMATION
The Company recorded a large adjustment in the three-month period ended December 31, 2008 to record the Goodwill impairment in the amount of $78,339. For more
information related to this adjustment, see Note 5.
Selected unaudited quarterly financial data in 2008 and 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three-Month Period Ended |
|
|
|
March 31, |
|
|
June 30, |
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2008 |
|
|
2008 |
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three-Month Period Ended |
|
|
|
March 31, |
|
|
June 30, |
|
|
September 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2007 |
|
|
2007 |
|
|
2007 |
|
Total revenues |
|
$ |
1,306,321 |
|
|
$ |
1,327,052 |
|
|
$ |
1,358,426 |
|
|
$ |
1,398,993 |
|
Gross margin |
|
|
193,421 |
|
|
|
238,976 |
|
|
|
355,585 |
|
|
|
303,523 |
|
Income before income taxes |
|
|
37,407 |
|
|
|
88,815 |
|
|
|
161,058 |
|
|
|
90,688 |
|
Net income |
|
$ |
22,803 |
|
|
$ |
54,850 |
|
|
$ |
79,346 |
|
|
$ |
59,237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per share basic |
|
$ |
0.57 |
|
|
$ |
1.35 |
|
|
$ |
1.94 |
|
|
$ |
1.44 |
|
Income per share diluted |
|
$ |
0.55 |
|
|
$ |
1.31 |
|
|
$ |
1.88 |
|
|
$ |
1.41 |
|
Period end membership |
|
|
2,272,000 |
|
|
|
2,302,000 |
|
|
|
2,336,000 |
|
|
|
2,373,000 |
|
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.
F-29
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, |
|
|
|
2008 |
|
|
2007 |
|
Assets |
|
|
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
88,629 |
|
|
$ |
42,157 |
|
Investments |
|
|
4,540 |
|
|
|
5,284 |
|
Deferred income taxes |
|
|
30,695 |
|
|
|
9,663 |
|
Affiliate receivables and other current assets |
|
|
102,369 |
|
|
|
140,851 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
226,233 |
|
|
|
197,955 |
|
Investment in subsidiaries |
|
|
734,536 |
|
|
|
675,493 |
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
960,769 |
|
|
$ |
873,448 |
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity |
|
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
|
Taxes payable |
|
$ |
1,381 |
|
|
$ |
3,114 |
|
Other current liabilities |
|
|
141,679 |
|
|
|
62,443 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
143,060 |
|
|
|
65,557 |
|
|
|
|
|
|
|
|
Deferred
taxes |
|
|
11,880 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities |
|
|
154,940 |
|
|
|
65,557 |
|
|
|
|
|
|
|
|
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, 42,261,345, and 41,912,236 shares
issued and outstanding at December 31, 2008 and
2007, respectively |
|
|
423 |
|
|
|
419 |
|
Paid-in capital |
|
|
390,526 |
|
|
|
352,030 |
|
Retained earnings |
|
|
418,641 |
|
|
|
455,474 |
|
Accumulated other comprehensive (expense) income |
|
|
(3,761 |
) |
|
|
(32 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
805,829 |
|
|
|
807,891 |
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity |
|
$ |
960,769 |
|
|
$ |
873,448 |
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-30
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
WELLCARE HEALTH PLANS, INC. (Parent Company Only)
STATEMENTS OF OPERATIONS
(In thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Year Ended |
|
|
Year Ended |
|
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Investment and other income |
|
$ |
1,002 |
|
|
$ |
12,321 |
|
|
$ |
4,340 |
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
1,002 |
|
|
|
12,321 |
|
|
|
4,340 |
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
|
42,469 |
|
|
|
23,280 |
|
|
|
19,639 |
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
42,469 |
|
|
|
23,280 |
|
|
|
19,639 |
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(41,467 |
) |
|
|
(10,959 |
) |
|
|
(15,299 |
) |
Income tax benefit |
|
|
16,008 |
|
|
|
3,741 |
|
|
|
5,622 |
|
|
|
|
|
|
|
|
|
|
|
Loss before equity in subsidiaries |
|
|
(25,459 |
) |
|
|
(7,218 |
) |
|
|
(9,677 |
) |
Equity in earnings from subsidiaries |
|
|
(11,374 |
) |
|
|
223,454 |
|
|
|
130,906 |
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(36,833 |
) |
|
$ |
216,236 |
|
|
$ |
121,229 |
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-31
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, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Cash from (used in) operating activities: |
|
$ |
114,161 |
|
|
$ |
59,861 |
|
|
$ |
(62,272 |
) |
|
|
|
|
|
|
|
|
|
|
Cash from (used in) investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale and maturities of investments, net |
|
|
744 |
|
|
|
34,743 |
|
|
|
53,881 |
|
Capital contributions to subsidiaries |
|
|
(70,438 |
) |
|
|
(95,645 |
) |
|
|
(33,546 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities |
|
|
(69,694 |
) |
|
|
(68,120 |
) |
|
|
10,658 |
|
|
|
|
|
|
|
|
|
|
|
Cash from (used in) financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from options exercised and other, net |
|
|
1,039 |
|
|
|
17,679 |
|
|
|
9,000 |
|
Purchase of treasury stock |
|
|
(2,720 |
) |
|
|
(4,845 |
) |
|
|
(722 |
) |
Incremental tax benefit from option exercises |
|
|
3,686 |
|
|
|
23,108 |
|
|
|
4,769 |
|
Proceeds from initial and secondary public offerings,
net |
|
|
|
|
|
|
|
|
|
|
21,995 |
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
2,005 |
|
|
|
35,942 |
|
|
|
35,042 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
Increase during year |
|
|
46,472 |
|
|
|
34,901 |
|
|
|
(6,895 |
) |
Balance at beginning of year |
|
|
42,157 |
|
|
|
7,256 |
|
|
|
14,151 |
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
$ |
88,629 |
|
|
$ |
42,157 |
|
|
$ |
7,256 |
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-32
Schedule II Valuation and Qualifying Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning |
|
|
Charged to |
|
|
|
|
|
|
Balance at |
|
|
|
of |
|
|
Costs and |
|
|
|
|
|
|
End of |
|
|
|
Period |
|
|
Expenses |
|
|
Deduction |
|
|
Period |
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted from assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for uncollectible accounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical Advances |
|
$ |
5,939 |
|
|
$ |
|
|
|
$ |
2,265 |
|
|
$ |
3,674 |
|
Premiums receivable |
|
|
1,718 |
|
|
|
18,094 |
|
|
|
|
|
|
|
19,812 |
|
Other receivables from government partners |
|
|
|
|
|
|
1,600 |
|
|
|
|
|
|
|
1,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
7,657 |
|
|
$ |
19,694 |
|
|
$ |
2,265 |
|
|
$ |
25,086 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-33
Exhibit Index
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCORPORATED BY REFERENCE |
Exhibit |
|
|
|
|
|
Filing Date |
|
Exhibit |
Number |
|
Description |
|
Form |
|
with SEC |
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
3.2
|
|
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 Restricted Stock Agreement under
Registrants 2004 Equity Incentive Plan*
|
|
8-K
|
|
March 17, 2005
|
|
|
10.1 |
|
|
|
|
|
|
|
|
|
|
|
|
10.6
|
|
Form of Director Subscription Agreement*
|
|
10-K
|
|
February 14, 2006
|
|
|
10.14 |
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Registrants 2004 Equity Incentive Plan*
|
|
10-Q
|
|
August 13, 2004
|
|
|
10.4 |
|
|
|
|
|
|
|
|
|
|
|
|
10.10
|
|
Form of Non-Qualified Stock Option Agreement under
Registrants 2004 Equity Incentive Plan*
|
|
10-Q
|
|
August 13, 2004
|
|
|
10.5 |
|
|
|
|
|
|
|
|
|
|
|
|
10.11
|
|
Form of Incentive Stock Option Agreement under
Registrants 2004 Equity Incentive Plan*
|
|
10-Q
|
|
August 13, 2004
|
|
|
10.6 |
|
|
|
|
|
|
|
|
|
|
|
|
10.12
|
|
Form of Non-Plan Time Vesting Option Agreement*
|
|
10-K
|
|
February 14, 2006
|
|
|
10.20 |
|
|
|
|
|
|
|
|
|
|
|
|
10.13
|
|
2005 Employee Stock Purchase Plan (No. 333-120257)*
|
|
S-8
|
|
November 5, 2004
|
|
|
4.7 |
|
|
|
|
|
|
|
|
|
|
|
|
10.14
|
|
Amendment Number 1 to 2005 Employee Stock Purchase
Plan*
|
|
8-K
|
|
September 29, 2006
|
|
|
10.1 |
|
|
|
|
|
|
|
|
|
|
|
|
10.15
|
|
Registrants Special Retention Bonus Plan*
|
|
10-Q
|
|
March 2, 2009
|
|
|
10.41 |
|
|
|
|
|
|
|
|
|
|
|
|
10.16
|
|
Amended and Restated Employment Agreement, dated as
of June 6, 2005, by and among the Registrant,
Comprehensive Health Management, Inc. and Todd S.
Farha*
|
|
8-K
|
|
June 9, 2005
|
|
|
10.1 |
|
|
|
|
|
|
|
|
|
|
|
|
10.17
|
|
Separation Agreement and General Release for All
Claims by and among the Registrant, Comprehensive
Health Management, Inc. and Todd S. Farha*
|
|
8-K
|
|
January 31, 2008
|
|
|
10.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCORPORATED BY REFERENCE |
Exhibit |
|
|
|
|
|
Filing Date |
|
Exhibit |
Number |
|
Description |
|
Form |
|
with SEC |
|
Number |
10.18
|
|
Non-Qualified Stock Option Agreement, dated as of
June 6, 2005, by and between the Registrant and Todd
S. Farha*
|
|
8-K
|
|
June 9, 2005
|
|
|
10.2 |
|
|
|
|
|
|
|
|
|
|
|
|
10.19
|
|
Restricted Stock Award Agreement, dated as of June
6, 2005, by and between the Registrant and Todd S.
Farha*
|
|
8-K
|
|
June 9, 2005
|
|
|
10.3 |
|
|
|
|
|
|
|
|
|
|
|
|
10.20
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
10.21
|
|
Employment Agreement, dated as of November 18, 2002,
among the Registrant, Comprehensive Health
Management, Inc. and Thaddeus Bereday*
|
|
S-1/A
|
|
June 29, 2004
|
|
|
10.22 |
|
|
|
|
|
|
|
|
|
|
|
|
10.22
|
|
Separation Agreement and General Release for All
Claims by and among the Registrant, Comprehensive
Health Management, Inc. and Thaddeus Bereday*
|
|
8-K
|
|
January 31, 2008
|
|
|
10.3 |
|
|
|
|
|
|
|
|
|
|
|
|
10.23
|
|
Employment Agreement dated as of September 15, 2003,
among the Registrant, Comprehensive Health
Management, Inc. and Paul Behrens*
|
|
S-1/A
|
|
June 29, 2004
|
|
|
10.23 |
|
|
|
|
|
|
|
|
|
|
|
|
10.24
|
|
Separation Agreement and General Release for All
Claims by and among the Registrant, Comprehensive
Health Management, Inc. and Paul Behrens*
|
|
8-K
|
|
January 31, 2008
|
|
|
10.2 |
|
|
|
|
|
|
|
|
|
|
|
|
10.25
|
|
Form of Indemnification Agreement*
|
|
S-1/A
|
|
June 8, 2004
|
|
|
10.24 |
|
|
|
|
|
|
|
|
|
|
|
|
10.26
|
|
Offer letter to Imtiaz (MT) Sattaur, dated December
5, 2003*
|
|
10-Q
|
|
May 10, 2005
|
|
|
10.18 |
|
|
|
|
|
|
|
|
|
|
|
|
10.27
|
|
Employment Agreement 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 |
|
|
|
|
|
|
|
|
|
|
|
|
10.28
|
|
Letter Agreement dated January 25, 2008 between the
Registrant and Charles Berg*
|
|
8-K
|
|
January 31, 2008
|
|
|
10.5 |
|
|
|
|
|
|
|
|
|
|
|
|
10.29
|
|
Restricted Stock Agreement effective January 25,
2008 by and between the Registrant and Heath
Schiesser*
|
|
8-K
|
|
January 31, 2008
|
|
|
10.6 |
|
|
|
|
|
|
|
|
|
|
|
|
10.30
|
|
Restricted Stock Agreement effective January 25,
2008 by and between the Registrant and Charles Berg*
|
|
8-K
|
|
January 31, 2008
|
|
|
10.7 |
|
|
|
|
|
|
|
|
|
|
|
|
10.31
|
|
Non-Qualified Stock Option Agreement effective
January 25, 2008 by and between the Registrant and
Heath Schiesser*
|
|
8-K
|
|
January 31, 2008
|
|
|
10.8 |
|
|
|
|
|
|
|
|
|
|
|
|
10.32
|
|
Non-Qualified Stock Option Agreement effective
January 25, 2008 by and between the Registrant and
Charles Berg*
|
|
8-K
|
|
January 31, 2008
|
|
|
10.9 |
|
|
|
|
|
|
|
|
|
|
|
|
10.33
|
|
Amendment to Non-Qualified Stock Option Agreement
effective January 25, 2008 by and between the
Registrant and Charles Berg* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.34
|
|
Offer letter to Anil Kottoor, dated December 18,
2006*
|
|
10-Q
|
|
March 2, 2009
|
|
|
10.39 |
|
|
|
|
|
|
|
|
|
|
|
|
10.35
|
|
Letter Agreement to Anil Kottoor, dated July 2, 2008*
|
|
10-Q
|
|
March 2, 2009
|
|
|
10.27 |
|
|
|
|
|
|
|
|
|
|
|
|
10.36
|
|
Offer letter to Adam Miller, dated January 17, 2006*
|
|
10-Q
|
|
March 2, 2009
|
|
|
10.40 |
|
|
|
|
|
|
|
|
|
|
|
|
10.37
|
|
Employment Agreement effective as of April 1, 2008
by and among the Registrant, Comprehensive Health
Management, Inc. and Thomas F. ONeil III*
|
|
8-K
|
|
April 3, 2008
|
|
|
10.1 |
|
|
|
|
|
|
|
|
|
|
|
|
10.38
|
|
Amendment No. 1 to Employment Agreement effective as
of April 1, 2008 by and among the Registrant,
Comprehensive Health Management, Inc. and Thomas F.
ONeil III* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.39
|
|
Restricted Stock Agreement effective as of April 1,
2008 by and between the Registrant and Thomas F.
ONeil III*
|
|
8-K
|
|
April 3, 2008
|
|
|
10.2 |
|
|
|
|
|
|
|
|
|
|
|
|
10.40
|
|
Non-Qualified Stock Option Agreement effective as of
|
|
8-K
|
|
April 3, 2008
|
|
|
10.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCORPORATED BY REFERENCE |
Exhibit |
|
|
|
|
|
Filing Date |
|
Exhibit |
Number |
|
Description |
|
Form |
|
with SEC |
|
Number |
|
|
April 1, 2008 by and between the Registrant and
Thomas F. ONeil III* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.41
|
|
Employment Agreement by and among Thomas L. Tran,
the Registrant and Comprehensive Health Management,
Inc.*
|
|
8-K
|
|
July 17, 2008
|
|
|
10.1 |
|
|
|
|
|
|
|
|
|
|
|
|
10.42
|
|
Amendment No. 1 to Employment Agreement by and among
Thomas L. Tran, the Registrant and Comprehensive
Health Management, Inc.* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.43
|
|
Form of Restricted Stock Agreement between Thomas L.
Tran and the Registrant*
|
|
8-K
|
|
July 17, 2008
|
|
|
10.3 |
|
|
|
|
|
|
|
|
|
|
|
|
10.44
|
|
Form of Non-Qualified Stock Option Agreement between
Thomas L. Tran and the Registrant*
|
|
8-K
|
|
July 17, 2008
|
|
|
10.4 |
|
|
|
|
|
|
|
|
|
|
|
|
10.45
|
|
Employment Agreement by and among Jonathan P. Rich,
the Registrant and Comprehensive Health Management,
Inc.*
|
|
8-K
|
|
August 13, 2008
|
|
|
10.1 |
|
|
|
|
|
|
|
|
|
|
|
|
10.46
|
|
Amendment No. 1 to Employment Agreement by and among
Jonathan P. Rich, the Registrant and Comprehensive
Health Management, Inc.* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.47
|
|
Form of Restricted Stock Agreement between Jonathan
P. Rich and the Registrant*
|
|
8-K
|
|
August 13, 2008
|
|
|
10.3 |
|
|
|
|
|
|
|
|
|
|
|
|
10.48
|
|
Form of Non-Qualified Stock Option Agreement between
Jonathan P. Rich and the Registrant*
|
|
8-K
|
|
August 13, 2008
|
|
|
10.4 |
|
|
|
|
|
|
|
|
|
|
|
|
10.49
|
|
Employment Agreement by and among Rex M. Adams, the
Registrant and Comprehensive Health Management, Inc.
|
|
8-K
|
|
September 2, 2008
|
|
|
10.1 |
|
|
|
|
|
|
|
|
|
|
|
|
10.50
|
|
Restricted Stock Agreement between Rex M. Adams and
the Registrant*
|
|
8-K
|
|
September 2, 2008
|
|
|
10.3 |
|
|
|
|
|
|
|
|
|
|
|
|
10.51
|
|
Non-Qualified Stock Option Agreement between Rex M.
Adams and the Registrant*
|
|
8-K
|
|
September 2, 2008
|
|
|
10.4 |
|
|
|
|
|
|
|
|
|
|
|
|
10.52
|
|
Credit Agreement, dated as of May 13, 2004, by and
among WellCare Holdings, LLC, the Registrant, 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 |
|
|
|
|
|
|
|
|
|
|
|
|
10.53
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
10.54
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
10.55
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
10.56
|
|
Agreement, by and among the Registrant, the United
States Attorneys Office for the Middle District of
Florida, the Agency for Health Care Administration
and the Florida Attorney Generals Medicaid Fraud
Control Unit, dated as of August 18, 2008.
|
|
8-K
|
|
August 18, 2008
|
|
|
10.1 |
|
|
|
|
|
|
|
|
|
|
|
|
10.57
|
|
Contract No. FAR001 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 |
|
|
|
|
|
|
|
|
|
|
|
|
10.58
|
|
Amendment to Contract No. FAR001 between the State
of Florida, Agency for Healthcare Administration and
|
|
8-K
|
|
September 18, 2006
|
|
|
10.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCORPORATED BY REFERENCE |
Exhibit |
|
|
|
|
|
Filing Date |
|
Exhibit |
Number |
|
Description |
|
Form |
|
with SEC |
|
Number |
|
|
HealthEase of Florida, Inc. (Medicaid Reform
2006-2009) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.59
|
|
Amendment to Contract No. FAR001 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 |
|
|
|
|
|
|
|
|
|
|
|
|
10.60
|
|
Amendment to Contract No. FAR001 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 |
|
|
|
|
|
|
|
|
|
|
|
|
10.61
|
|
Amendment to Contract No. FAR001 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 |
|
|
|
|
|
|
|
|
|
|
|
|
10.62
|
|
Amendment to Contract No. FAR001 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 |
|
|
|
|
|
|
|
|
|
|
|
|
10.63
|
|
Amendment to Contract No. FAR001 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 |
|
|
|
|
|
|
|
|
|
|
|
|
10.64
|
|
Amendment to Contract No. FAR001 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 |
|
|
|
|
|
|
|
|
|
|
|
|
10.65
|
|
Amendment to Contract No. FAR001, dated June 26,
2006, between the State of Florida, Agency for
Health Care Administration and HealthEase Health
Plan of Florida, Inc. (Medicaid Reform 2006-2009)
|
|
8-K
|
|
September 12, 2008
|
|
|
10.1 |
|
|
|
|
|
|
|
|
|
|
|
|
10.66
|
|
Amendment to Contract No. FAR001, dated June 26,
2006, between the State of Florida, Agency for
Health Care Administration and HealthEase Health
Plan of Florida, Inc. (Medicaid Reform 2006-2009)
|
|
8-K
|
|
September 12, 2008
|
|
|
10.2 |
|
|
|
|
|
|
|
|
|
|
|
|
10.67
|
|
Contract No. FAR009 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 |
|
|
|
|
|
|
|
|
|
|
|
|
10.68
|
|
Amendment to Contract No. FAR009 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
|
|
|
10.2 |
|
|
|
|
|
|
|
|
|
|
|
|
10.69
|
|
Amendment to Contract No. FAR009 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 |
|
|
|
|
|
|
|
|
|
|
|
|
10.70
|
|
Amendment to Contract No. FAR009 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 |
|
|
|
|
|
|
|
|
|
|
|
|
10.71
|
|
Amendment to Contract No. FAR009 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 |
|
|
|
|
|
|
|
|
|
|
|
|
10.72
|
|
Amendment to Contract No. FAR009 between the State
of Florida, Agency for Healthcare Administration and
|
|
8-K
|
|
December 28, 2007
|
|
|
10.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCORPORATED BY REFERENCE |
Exhibit |
|
|
|
|
|
Filing Date |
|
Exhibit |
Number |
|
Description |
|
Form |
|
with SEC |
|
Number |
|
|
WellCare of Florida, Inc. d/b/a/ Staywell Health
Plan of Florida (Medicaid Reform 2006-2009) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.73
|
|
Amendment to Contract No. FAR009 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 |
|
|
|
|
|
|
|
|
|
|
|
|
10.74
|
|
Amendment to Contract No. FAR009 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 |
|
|
|
|
|
|
|
|
|
|
|
|
10.75
|
|
Amendment to Contract No. FAR009, dated June 26,
2006, 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 |
|
|
|
|
|
|
|
|
|
|
|
|
10.76
|
|
Amendment to Contract No. FAR009, dated June 26,
2006, 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 |
|
|
|
|
|
|
|
|
|
|
|
|
10.77
|
|
Contract No. FA619 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 |
|
|
|
|
|
|
|
|
|
|
|
|
10.78
|
|
Amendment to Contract No. FA619 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 |
|
|
|
|
|
|
|
|
|
|
|
|
10.79
|
|
Amendment to Contract No. FA619 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 |
|
|
|
|
|
|
|
|
|
|
|
|
10.80
|
|
Amendment to Contract No. FA619 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 |
|
|
|
|
|
|
|
|
|
|
|
|
10.81
|
|
Amendment to Contract No. FA619 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 |
|
|
|
|
|
|
|
|
|
|
|
|
10.82
|
|
Amendment to Contract No. FA619, dated September 1,
2006, between the State of Florida, Agency for
Health Care Administration and HealthEase of
Florida, Inc. (Medicaid Non-Reform Contract
2006-2009)
|
|
8-K
|
|
September 12, 2008
|
|
|
10.7 |
|
|
|
|
|
|
|
|
|
|
|
|
10.83
|
|
Contract No. FA615 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 |
|
|
|
|
|
|
|
|
|
|
|
|
10.84
|
|
Amendment to Contract No. FA615 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 |
|
|
|
|
|
|
|
|
|
|
|
|
10.85
|
|
Amendment to Contract No. FA615 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 |
|
|
|
|
|
|
|
|
|
|
|
|
10.86
|
|
Amendment to Contract No. FA615 between the State
|
|
8-K
|
|
December 28, 2007
|
|
|
10.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCORPORATED BY REFERENCE |
Exhibit |
|
|
|
|
|
Filing Date |
|
Exhibit |
Number |
|
Description |
|
Form |
|
with SEC |
|
Number |
|
|
of Florida, Agency for Healthcare Administration and
WellCare of Florida, Inc. d/b/a/ Staywell Health
Plan of Florida (Medicaid Non-Reform 2006-2009) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.87
|
|
Amendment to Contract No. FA 615 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 |
|
|
|
|
|
|
|
|
|
|
|
|
10.88
|
|
Amendment to Contract FA615 between the State of
Florida, Agency for Health Care Administration and
WellCare of Florida, Inc. d/b/a Staywell Health Plan
of Florida
|
|
8-K
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May 7, 2008
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10.2 |
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10.89
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Amendment to Contract No. FA615, dated September 1,
2006, 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)
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8-K
|
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September 12, 2008
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10.5 |
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10.90
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Amendment to Contract No. FA615, dated September 1,
2006, between the State of Florida, Agency for
Health Care Administration and WellCare of Florida,
Inc. d/b/a Staywell Health
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8-K
|
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September 12. 2008
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10.6 |
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10.91
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Medical Services Agreement between Florida Healthy
Kids Corporation and HealthEase of Florida, Inc. and
WellCare of Florida, Inc. (f/k/a WellCare HMO, Inc.)
d/b/a Staywell Health Plan of Florida
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8-K
|
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October 4, 2005
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10.1 |
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10.92
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Amendment to Medical Services Agreement between
Florida Healthy Kids Corporation and HealthEase of
Florida, Inc. and WellCare of Florida, Inc. (f/k/a
WellCare HMO, Inc.) d/b/a Staywell Health Plan of
Florida
|
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8-K
|
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January 12, 2007
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10.4 |
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10.93
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Amendment to Medical Services Agreement between
Florida Healthy Kids Corporation and HealthEase of
Florida, Inc. and WellCare of Florida, Inc. (f/k/a
WellCare HMO, Inc.) d/b/a Staywell Health Plan of
Florida
|
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8-K
|
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December 10, 2007
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10.1 |
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10.94
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Medical Services Agreement between the Florida
Healthy Kids Corporation and HealthEase of Florida,
Inc. and WellCare of Florida, Inc. (f/k/a WellCare
HMO, Inc.) d/b/a Staywell Health Plan of Florida.
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8-K
|
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August 20, 2008
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10.1 |
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10.95
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Amendment number 1 to Medical Services Agreement
between the Florida Healthy Kids Corporation and
HealthEase of Florida, Inc. and WellCare of Florida,
Inc. (f/k/a WellCare HMO, Inc.) d/b/a Staywell
Health Plan of Florida
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8-K
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October 14, 2008
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10.2 |
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10.96
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Department of Elder Affairs Standard Contract
(XQ744), between the State of Florida Department of
Elder Affairs and WellCare of Florida, Inc.
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8-K
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September 7, 2007
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10.1 |
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10.97
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Amendment number 1 to Department of Elder Affairs
Standard Contract (XQ744), between the State of
Florida Department of Elder Affairs and WellCare of
Florida, Inc.
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8-K
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February 21, 2008
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10.1 |
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10.98
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Contract No. 0654 between The Georgia Department of
Community Health and WellCare of Georgia, Inc. for
Provision of Services to Georgia Healthy Families
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10-Q
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August 4, 2005
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10.19 |
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10.99
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Amendment number 1 to Contract 0654 between The
Georgia Department of Community Health and WellCare
of Georgia, Inc. for Provision of Services to
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8-K
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April 25, 2007
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10.1 |
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INCORPORATED BY REFERENCE |
Exhibit |
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Filing Date |
|
Exhibit |
Number |
|
Description |
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Form |
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with SEC |
|
Number |
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Georgia Healthy Families |
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10.100
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Amendment number 2 to Contract 0654 between the
Georgia Department of Community Health and WellCare
of Georgia, Inc. for Provision of Services to
Georgia Healthy Families
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8-K
|
|
January 30, 2008
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10.2 |
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10.101
|
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Amendment number 3 to Contract 0654 between the
Georgia Department of Community Health and WellCare
of Georgia, Inc. for Provision of Services to
Georgia Healthy Families
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8-K
|
|
October 30, 2008
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10.1 |
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10.102
|
|
Amendment number 4 to Contract 0654 between the
Georgia Department of Community Health and WellCare
of Georgia, Inc. for Provision of Services to
Georgia Healthy Families
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8-K
|
|
October 30, 2008
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10.2 |
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10.103
|
|
Amendment number 5 to Contract 0654 between the
Georgia Department of Community Health and WellCare
of Georgia, Inc. for Provision of Services to
Georgia Healthy Families
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8-K
|
|
October 30, 2008
|
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10.3 |
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10.104
|
|
Contract (H0712) between Centers for Medicare &
Medicaid Services and WellCare of Connecticut, Inc.
(2006)
|
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8-K
|
|
November 2, 2005
|
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10.4 |
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10.105
|
|
Contract (H1032) between Centers for Medicare &
Medicaid Services and WellCare of Florida, Inc.
(2006)
|
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8-K
|
|
November 2, 2005
|
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10.5 |
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10.106
|
|
Contract (H1112) between Centers for Medicare &
Medicaid Services and WellCare of Georgia, Inc.
(2006)
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8-K
|
|
November 2, 2005
|
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10.6 |
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10.107
|
|
Contract (H1416) between Centers for Medicare &
Medicaid Services and Harmony Health Plan of
Illinois, Inc. (2006)
|
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8-K
|
|
November 2, 2005
|
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10.7 |
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10.108
|
|
Contract (H1903) between Centers for Medicare &
Medicaid Services and WellCare of Louisiana, Inc.
(2006)
|
|
8-K
|
|
November 2, 2005
|
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|
10.8 |
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10.109
|
|
Contract (H3361) between Centers for Medicare &
Medicaid Services and WellCare of New York, Inc.
(2006)
|
|
8-K
|
|
November 2, 2005
|
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|
10.9 |
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10.110
|
|
Contract with Approved Entity Pursuant to Sections
1860D-1 through 1860D-42 of the Social Security Act
for the Operation of a Voluntary Medicare
Prescription Drug Plan between Centers for Medicare
& Medicaid Services and WellCare Prescription
Insurance, Inc. (2006)
|
|
8-K
|
|
November 2, 2005
|
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|
10.3 |
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|
10.111
|
|
Amendment to Contract with Approved Entity Pursuant
to Sections 1860D-1 through 1860D-42 of the Social
Security Act for the Operation of a Voluntary
Medicare Prescription Drug Plan between Centers for
Medicare & Medicaid Services and WellCare
Prescription Insurance, Inc. (2007)
|
|
10-Q
|
|
November 3, 2006
|
|
|
10.13 |
|
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|
|
|
|
|
|
|
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|
|
10.112
|
|
Renewal Notice regarding Contract S5967 between the
Centers for Medicare and Medicaid Services and
WellCare Prescription Insurance, Inc. with Addendum
(2008)
|
|
8-K
|
|
September 29, 2008
|
|
|
10.1 |
|
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|
|
|
|
|
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|
|
|
|
10.113
|
|
Contract (H0967) between the Centers for Medicare &
Medicaid Services and WellCare Health Insurance of
Illinois, Inc.
|
|
8-K
|
|
November 9, 2007
|
|
|
10.1 |
|
|
|
|
|
|
|
|
|
|
|
|
10.114
|
|
Contract (H1216) 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 |
|
|
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|
|
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|
|
INCORPORATED BY REFERENCE |
Exhibit |
|
|
|
|
|
Filing Date |
|
Exhibit |
Number |
|
Description |
|
Form |
|
with SEC |
|
Number |
10.115
|
|
Contract (H1264) between the Centers for Medicare &
Medicaid Services and WellCare of Texas, Inc.
|
|
8-K
|
|
November 9, 2007
|
|
|
10.3 |
|
|
|
|
|
|
|
|
|
|
|
|
10.116
|
|
Contract (H0913) between the Centers for Medicare &
Medicaid Services and WellCare Health Plans of New
Jersey, Inc.
|
|
8-K
|
|
November 9, 2007
|
|
|
10.4 |
|
|
|
|
|
|
|
|
|
|
|
|
10.117
|
|
Contract (H0117) between the Centers for Medicare &
Medicaid Services and WellCare of Ohio, Inc.
|
|
8-K
|
|
November 9, 2007
|
|
|
10.5 |
|
|
|
|
|
|
|
|
|
|
|
|
10.118
|
|
Contract (H3292) between the Centers for Medicare &
Medicaid Services and WellCare Health Insurance of
Arizona, Inc.
|
|
8-K
|
|
November 28, 2007
|
|
|
10.1 |
|
|
|
|
|
|
|
|
|
|
|
|
10.119
|
|
Contract (#H6499) between Centers for Medicare &
Medicaid Services and Stone Harbor Insurance Company
|
|
10-Q
|
|
November 3, 2006
|
|
|
10.14 |
|
|
|
|
|
|
|
|
|
|
|
|
10.120
|
|
Contract (#1340) between Centers for Medicare &
Medicaid Services and Advance / WellCare PFFS
Insurance, Inc.
|
|
10-Q
|
|
November 3, 2006
|
|
|
10.15 |
|
|
|
|
|
|
|
|
|
|
|
|
10.121
|
|
Contract (#H2491) between the Centers for Medicare &
Medicaid Services and WellCare Health Insurance of
Arizona, Inc.
|
|
8-K
|
|
December 23, 2008
|
|
|
10.1 |
|
|
|
|
|
|
|
|
|
|
|
|
10.122
|
|
Contract (#4577) between Centers for Medicare &
Medicaid and Home Owners / WellCare PFFS Insurance,
Inc.
|
|
10-Q
|
|
November 3, 2006
|
|
|
10.16 |
|
|
|
|
|
|
|
|
|
|
|
|
10.123
|
|
Contract (H1657) 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 |
|
|
|
|
|
|
|
|
|
|
|
|
21.1
|
|
List of subsidiaries |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23.1
|
|
Consent of Deloitte & Touche LLP |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
31.1
|
|
Certification of Chief Executive Officer pursuant to
Section 302 of Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to
Section 302 of Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32.1
|
|
Certification of Chief Executive Officer pursuant to
Section 906 of Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32.2
|
|
Certification of Chief Financial Officer pursuant to
Section 906 of Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
|
|
|
|
|
|
* |
|
Denotes a management contract or compensatory plan, contract or arrangement
|
|
|
|
Filed herewith |