form10q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-Q
(Mark
One)
[X]
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
|
For the
quarterly period ended June 30, 2008
OR
[
]
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
|
For the
transition period from to
Commission
file number 001-31826
CENTENE
CORPORATION
(Exact
name of registrant as specified in its charter)
Delaware
|
42-1406317
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
incorporation
or organization)
|
Identification
Number)
|
|
|
7711
Carondelet Avenue
|
|
St.
Louis, Missouri
|
63105
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant’s
telephone number, including area code:
(314)
725-4477
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: [X] Yes [ ] No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filed, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer”,
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer T
Accelerated filer £
Non-accelerated filer £
Smaller reporting company £
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes [
] No [X]
As of
July 14, 2008, the registrant had 43,233,059 shares of common stock
outstanding.
CENTENE
CORPORATION
QUARTERLY
REPORT ON FORM 10-Q
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PAGE
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Part
I
|
Financial
Information
|
Item
1.
|
Financial
Statements
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PART
I
FINANCIAL
INFORMATION
ITEM
1. Financial
Statements.
CENTENE
CORPORATION AND SUBSIDIARIES
(In
thousands, except share data)
|
|
June
30,
2008
|
|
|
December
31,
2007
|
|
ASSETS
|
|
(Unaudited)
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
357,488 |
|
|
$ |
268,584 |
|
Premium
and related receivables
|
|
|
113,233 |
|
|
|
90,072 |
|
Short-term
investments, at fair value (amortized cost $69,205 and $46,392,
respectively)
|
|
|
69,524 |
|
|
|
46,269 |
|
Other
current assets
|
|
|
38,602 |
|
|
|
41,414 |
|
Total
current assets
|
|
|
578,847 |
|
|
|
446,339 |
|
Long-term
investments, at fair value (amortized cost $252,441 and $314,681,
respectively)
|
|
|
254,578 |
|
|
|
317,041 |
|
Restricted
deposits, at fair value (amortized cost $28,023 and $27,056,
respectively)
|
|
|
28,283 |
|
|
|
27,301 |
|
Property,
software and equipment, net
|
|
|
157,775 |
|
|
|
138,139 |
|
Goodwill
|
|
|
141,009 |
|
|
|
141,030 |
|
Other
intangible assets, net
|
|
|
12,177 |
|
|
|
13,205 |
|
Other
assets
|
|
|
42,396 |
|
|
|
36,067 |
|
Total
assets
|
|
$ |
1,215,065 |
|
|
$ |
1,119,122 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Medical
claims liabilities
|
|
$ |
363,708 |
|
|
$ |
335,856 |
|
Accounts
payable and accrued expenses
|
|
|
148,535 |
|
|
|
105,096 |
|
Unearned
revenue
|
|
|
5,266 |
|
|
|
44,016 |
|
Current
portion of long-term debt
|
|
|
338 |
|
|
|
971 |
|
Current
liabilities of discontinued operations
|
|
|
200 |
|
|
|
861 |
|
Total
current liabilities
|
|
|
518,047 |
|
|
|
486,800 |
|
Long-term
debt
|
|
|
221,757 |
|
|
|
206,406 |
|
Other
liabilities
|
|
|
15,493 |
|
|
|
10,869 |
|
Total
liabilities
|
|
|
755,297 |
|
|
|
704,075 |
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Common
stock, $.001 par value; authorized 100,000,000 shares; issued and
outstanding 43,261,883 and 43,667,837 shares, respectively
|
|
|
43 |
|
|
|
44 |
|
Additional
paid-in capital
|
|
|
222,438 |
|
|
|
221,693 |
|
Accumulated
other comprehensive income:
|
|
|
|
|
|
|
|
|
Unrealized
gain on investments, net of tax
|
|
|
1,722 |
|
|
|
1,571 |
|
Retained
earnings
|
|
|
235,565 |
|
|
|
191,739 |
|
Total
stockholders’ equity
|
|
|
459,768 |
|
|
|
415,047 |
|
Total
liabilities and stockholders’ equity
|
|
$ |
1,215,065 |
|
|
$ |
1,119,122 |
|
See notes
to consolidated financial statements.
CENTENE
CORPORATION AND SUBSIDIARIES
(In
thousands, except share data)
|
|
Three
Months Ended
June
30,
|
|
|
Six
Months Ended
June
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium
|
|
$
|
819,409
|
|
|
$
|
687,842
|
|
|
$
|
1,592,887
|
|
|
$
|
1,312,668
|
|
Premium
tax
|
|
|
22,192
|
|
|
|
19,874
|
|
|
|
44,823
|
|
|
|
37,690
|
|
Service
|
|
|
18,466
|
|
|
|
20,015
|
|
|
|
38,996
|
|
|
|
41,607
|
|
Total
revenues
|
|
|
860,067
|
|
|
|
727,731
|
|
|
|
1,676,706
|
|
|
|
1,391,965
|
|
Expenses:
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
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|
Medical
costs
|
|
|
682,589
|
|
|
|
575,146
|
|
|
|
1,324,208
|
|
|
|
1,103,666
|
|
Cost
of services
|
|
|
14,437
|
|
|
|
16,670
|
|
|
|
30,613
|
|
|
|
32,300
|
|
General
and administrative expenses
|
|
|
113,199
|
|
|
|
102,007
|
|
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|
212,482
|
|
|
|
188,474
|
|
Premium
tax
|
|
|
22,192
|
|
|
|
19,874
|
|
|
|
44,823
|
|
|
|
37,690
|
|
Total
operating expenses
|
|
|
832,417
|
|
|
|
713,697
|
|
|
|
1,612,126
|
|
|
|
1,362,130
|
|
Earnings
from operations
|
|
|
27,650
|
|
|
|
14,034
|
|
|
|
64,580
|
|
|
|
29,835
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Investment
and other income
|
|
|
5,600
|
|
|
|
6,588
|
|
|
|
13,369
|
|
|
|
12,605
|
|
Interest
expense
|
|
|
(4,065
|
)
|
|
|
(4,213
|
)
|
|
|
(8,059
|
)
|
|
|
(7,345
|
)
|
Earnings
before income taxes
|
|
|
29,185
|
|
|
|
16,409
|
|
|
|
69,890
|
|
|
|
35,095
|
|
Income
tax expense
|
|
|
11,146
|
|
|
|
6,234
|
|
|
|
26,314
|
|
|
|
13,323
|
|
Net
earnings from continuing operations
|
|
|
18,039
|
|
|
|
10,175
|
|
|
|
43,576
|
|
|
|
21,772
|
|
Discontinued
operations, net of income tax expense (benefit) of $101, $(5,417), $153
and $(32,197), respectively
|
|
|
164
|
|
|
|
7,607
|
|
|
|
250
|
|
|
|
34,221
|
|
Net
earnings
|
|
$
|
18,203
|
|
|
$
|
17,782
|
|
|
$
|
43,826
|
|
|
$
|
55,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
0.42
|
|
|
$
|
0.23
|
|
|
$
|
1.00
|
|
|
$
|
0.50
|
|
Discontinued
operations
|
|
|
|
|
|
|
0.18
|
|
|
|
0.01
|
|
|
|
0.79
|
|
Basic
earnings per common share
|
|
$
|
0.42
|
|
|
$
|
0.41
|
|
|
$
|
1.01
|
|
|
$
|
1.29
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
0.41
|
|
|
$
|
0.23
|
|
|
$
|
0.98
|
|
|
$
|
0.49
|
|
Discontinued
operations
|
|
|
|
|
|
|
0.17
|
|
|
|
0.01
|
|
|
|
0.76
|
|
Diluted
earnings per common share
|
|
$
|
0.41
|
|
|
$
|
0.40
|
|
|
$
|
0.98
|
|
|
$
|
1.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
43,375,944
|
|
|
|
43,617,360
|
|
|
|
43,457,076
|
|
|
|
43,525,848
|
|
Diluted
|
|
|
44,275,601
|
|
|
|
44,815,369
|
|
|
|
44,516,890
|
|
|
|
44,871,114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes
to consolidated financial statements.
CENTENE
CORPORATION AND SUBSIDIARIES
(In
thousands)
|
|
Six Months Ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
earnings
|
|
$ |
43,826 |
|
|
$ |
55,993 |
|
Adjustments
to reconcile net earnings to net cash provided by operating activities
—
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
16,229 |
|
|
|
12,991 |
|
Stock
compensation expense
|
|
|
7,839 |
|
|
|
7,837 |
|
|
|
|
11,879 |
|
|
|
(327
|
) |
Gain
on sale of FirstGuard Missouri
|
|
|
— |
|
|
|
(7,472
|
) |
Changes
in assets and liabilities —
|
|
|
|
|
|
|
|
|
Premium
and related receivables
|
|
|
(23,144
|
) |
|
|
(21,823
|
) |
|
|
|
(4,294
|
) |
|
|
(24,583
|
) |
|
|
|
(1,671
|
) |
|
|
(931
|
) |
Medical
claims liabilities
|
|
|
27,316 |
|
|
|
15,035 |
|
|
|
|
(38,753
|
) |
|
|
8,203 |
|
Accounts
payable and accrued expenses
|
|
|
45,907 |
|
|
|
11,832 |
|
Other
operating activities
|
|
|
1,542 |
|
|
|
3,119 |
|
Net
cash provided by operating activities
|
|
|
86,676 |
|
|
|
59,874 |
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases
of property, software and equipment
|
|
|
(34,581
|
) |
|
|
(29,352
|
) |
|
|
|
(172,873
|
) |
|
|
(290,962
|
) |
Sales
and maturities of investments
|
|
|
210,277 |
|
|
|
196,407 |
|
Proceeds
from asset sales
|
|
|
— |
|
|
|
14,102 |
|
Investments
in acquisitions and equity method investee, net of cash
acquired
|
|
|
(7,818
|
) |
|
|
(5,336
|
) |
Net
cash used in investing activities
|
|
|
(4,995
|
) |
|
|
(115,141
|
) |
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from exercise of stock options
|
|
|
3,029 |
|
|
|
2,651 |
|
|
|
|
56,005 |
|
|
|
191,000 |
|
Payment
of long-term debt
|
|
|
(41,287
|
) |
|
|
(165,484
|
) |
Excess
tax benefits from stock compensation
|
|
|
2,792 |
|
|
|
797 |
|
|
|
|
(13,316
|
) |
|
|
(3,231
|
) |
|
|
|
— |
|
|
|
(5,070
|
) |
Net
cash provided by financing activities
|
|
|
7,223 |
|
|
|
20,663 |
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
88,904 |
|
|
|
(34,604
|
) |
Cash and cash
equivalents, beginning of period
|
|
|
268,584 |
|
|
|
271,047 |
|
Cash and cash
equivalents, end of period
|
|
$ |
357,488 |
|
|
$ |
236,443 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
7,590 |
|
|
$ |
3,738 |
|
|
|
$ |
15,966 |
|
|
$ |
6,049 |
|
See notes
to consolidated financial statements.
CENTENE
CORPORATION AND SUBSIDIARIES
(Dollars
in thousands, except share data)
1. Organization
and Operations
|
Centene
Corporation, or Centene or the Company, is a multi-line healthcare enterprise
operating primarily in two segments: Medicaid Managed Care and Specialty
Services. Centene’s Medicaid Managed Care segment provides Medicaid
and Medicaid-related health plan coverage to individuals through government
subsidized programs, including Medicaid, Medicare (Special Needs Plans), the
State Children’s Health Insurance Program, or SCHIP, Foster Care and
Supplemental Security Income including Aged, Blind or Disabled programs, or
SSI. The Company’s Specialty Services segment provides specialty
services, including behavioral health, life and health management, long-term
care programs, managed vision, nurse triage, pharmacy benefits management and
treatment compliance, to state programs, healthcare organizations, employer
groups, and other commercial organizations, as well as to the Company’s own
subsidiaries on market-based terms.
The
unaudited interim financial statements herein have been prepared by the Company
pursuant to the rules and regulations of the Securities and Exchange Commission.
The accompanying interim financial statements have been prepared under the
presumption that users of the interim financial information have either read or
have access to the audited financial statements for the fiscal year ended
December 31, 2007. Accordingly, footnote disclosures, which would substantially
duplicate the disclosures contained in the December 31, 2007 audited financial
statements, have been omitted from these interim financial statements where
appropriate. In the opinion of management, these financial statements reflect
all adjustments, consisting only of normal recurring adjustments, which are
necessary for a fair presentation of the results of the interim periods
presented.
Certain
2007 amounts in the consolidated financial statements have been reclassified to
conform to the 2008 presentation. These reclassifications have no effect on net
earnings or stockholders’ equity as previously reported.
3.
Recent Accounting Pronouncements
In
December 2007, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards No.141 (revised 2007), “Business
Combinations”, or SFAS No. 141R. The purpose of issuing the statement
was to replace current guidance in SFAS No.141 to better represent the
economic value of a business combination transaction. The changes to be effected
with SFAS No. 141R from the current guidance include, but are not
limited to: (1) acquisition costs will be recognized separately from the
acquisition; (2) known contractual contingencies at the time of the
acquisition will be considered part of the liabilities acquired and measured at
their fair value; all other contingencies will be part of the liabilities
acquired and measured at their fair value only if it is more likely than not
that they meet the definition of a liability; (3) contingent consideration
based on the outcome of future events will be recognized and measured at the
time of the acquisition; (4) business combinations achieved in stages (step
acquisitions) will need to recognize the identifiable assets and liabilities, as
well as noncontrolling interests, in the acquiree, at the full amounts of their
fair values; and (5) a bargain purchase (defined as a business combination
in which the total acquisition-date fair value of the identifiable net assets
acquired exceeds the fair value of the consideration transferred plus any
noncontrolling interest in the acquiree) will require that excess to be
recognized as a gain attributable to the acquirer. SFAS No. 141R will
be effective for any business combinations that occur after January 1,
2009.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests
in Consolidated Financial Statements — an amendment of ARB No. 51”, or
SFAS No. 160. SFAS No. 160 was issued to improve the
relevance, comparability, and transparency of financial information provided to
investors by requiring all entities to report noncontrolling (minority)
interests in subsidiaries in the same way, that is, as equity in the
consolidated financial statements. Moreover, SFAS No. 160 eliminates
the diversity that currently exists in accounting for transactions between an
entity and noncontrolling interests by requiring they be treated as equity
transactions. SFAS No. 160 will be effective January 1, 2009. The
Company is currently evaluating the impact that SFAS No. 160 will have
on its financial statements and disclosures.
The
Company adopted SFAS No. 157, “Fair Value Measurements” for financial assets and
liabilities on January 1, 2008. Short-term investments, long-term
investments and restricted deposits are classified as available for sale and are
carried at fair value based on quoted market prices for identical securities
(Level 1 inputs). Additionally, fair value of debt disclosures are
based on quoted market prices of the Company’s debt securities or, for variable
rate debt, fair value is considered equal to book value (Level 2
inputs).
4. Discontinued
Operations: FirstGuard Health Plans
In 2006,
FirstGuard Health Plan Kansas, Inc., or FirstGuard Kansas, a wholly owned
subsidiary, received notification that its Medicaid contract scheduled to
terminate December 31, 2006 would not be renewed. In 2006, the
Company also evaluated its strategic alternatives for its Missouri subsidiary,
FirstGuard Health Plan, Inc., or FirstGuard Missouri, and decided to divest the
business. FirstGuard Missouri was sold in February
2007. The assets, liabilities and results of operations of FirstGuard
Kansas and FirstGuard Missouri are classified as discontinued operations for all
periods presented beginning in December 2007, as substantially all liabilities
had been paid as of that date.
5.
Restructuring
In the
fourth quarter of 2007, the Company abandoned its previously planned original
redevelopment project in Clayton, Missouri, related to a corporate office
expansion. As a result, the Company conducted an impairment analysis
of the related real estate and capitalized construction costs and recorded an
impairment charge of $7,207 at December 31, 2007. The impairment
charges were recorded as General and Administrative expense under the Medicaid
Managed Care segment. At June 30, 2008, the remaining liability for
these charges was $850.
Also in
the fourth quarter of 2007, the Company completed an organizational realignment,
resulting in the elimination of approximately 35
positions. Accordingly, the Company recorded $2,185 in severance
costs at December 31, 2007. This expense was recorded as General and
Administrative expense under the Medicaid Managed Care segment. At
June 30, 2008, the remaining liability for these costs was $153.
At June
30, 2008, total debt outstanding was $222,095, including current maturities of
$338. The total debt outstanding consisted of $175,000 of senior notes due 2014,
$20,364 of debt secured by real estate under the Company’s $25,000 Revolving
Loan Agreement discussed below, $20,000 under the Company’s $300,000
Revolving Credit Agreement and $6,731 of capital leases. At June 30, 2008,
the fair value of outstanding debt was approximately $212,033.
In
February 2008, the Company refinanced its mortgage notes payable through the
execution of an amendment to its $25,000 Revolving Loan
Agreement. The amendment extends the maturity date to January 1, 2010
and borrowings under the agreement were amended to bear interest based upon
LIBOR rates plus 1.0%.
The
following table sets forth the calculation of basic and diluted net earnings per
common share:
|
|
Three
Months Ended
June
30,
|
|
|
Six
Months Ended
June
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
from continuing operations
|
|
$
|
18,039
|
|
|
$
|
10,175
|
|
|
$
|
43,576
|
|
|
$
|
21,772
|
|
Discontinued
operations, net of tax
|
|
|
|
|
|
|
7,607
|
|
|
|
250
|
|
|
|
34,221
|
|
Net
earnings
|
|
$
|
18,203
|
|
|
$
|
17,782
|
|
|
$
|
43,826
|
|
|
$
|
55,993
|
|
Shares
used in computing per share amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding
|
|
|
43,375,944
|
|
|
|
43,617,360
|
|
|
|
43,457,076
|
|
|
|
43,525,848
|
|
Common
stock equivalents (as determined by applying the treasury stock
method)
|
|
|
899,657
|
|
|
|
1,198,009
|
|
|
|
1,059,814
|
|
|
|
1,345,266
|
|
Weighted
average number of common shares and potential dilutive common shares
outstanding
|
|
|
44,275,601
|
|
|
|
44,815,369
|
|
|
|
44,516,890
|
|
|
|
44,871,114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.42
|
|
|
|
0.23
|
|
|
|
1.00
|
|
|
|
0.50
|
|
|
|
|
—
|
|
|
|
0.18
|
|
|
|
0.01
|
|
|
|
0.79
|
|
Earnings
per common share
|
|
|
0.42
|
|
|
|
0.41
|
|
|
|
1.01
|
|
|
|
1.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.41
|
|
|
|
0.23
|
|
|
|
0.98
|
|
|
|
0.49
|
|
|
|
|
—
|
|
|
|
0.17
|
|
|
|
0.01
|
|
|
|
0.76
|
|
Earnings
per common share
|
|
|
0.41
|
|
|
|
0.40
|
|
|
|
0.98
|
|
|
|
1.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
calculation of diluted earnings per common share for the three and six months
ended June 30, 2008 excludes the impact of 3,127,400 and 2,824,000 shares,
respectively, related to anti-dilutive stock options, restricted stock and
restricted stock units. The calculation of diluted earnings per common share for
the three and six months ended June 30, 2007 excludes the impact of 2,468,843
and 2,431,539 shares, respectively.
8. Stockholders’
Equity
In
November 2005, the Company’s board of directors adopted a stock repurchase
program authorizing the Company to repurchase up to 4,000,000 shares of common
stock from time to time on the open market or through privately negotiated
transactions. In October 2007, the repurchase program was extended through
October 31, 2008, but the Company reserves the right to suspend or discontinue
the program at any time. During the six months ended June 30, 2008,
the Company repurchased 697,764 shares at an average price of $19.08 and an
aggregate cost of $13,316.
As
previously disclosed, two class action lawsuits were filed against the Company
and certain of its officers and directors in the United States District Court
for the Eastern District of Missouri, or Eastern District Court. The
lawsuits were consolidated on November 2, 2006 and an amended consolidated
complaint was filed in the Eastern District Court on January 17, 2007, referred
to as the Consolidated Lawsuit. The Consolidated Lawsuit alleges, on behalf of
purchasers of the Company’s common stock from April 25, 2006 through July 17,
2006, that the Company and certain of its officers and directors violated
federal securities laws by issuing a series of materially false statements prior
to the announcement of its fiscal 2006 second quarter results. According to the
Consolidated Lawsuit, these allegedly materially false statements had the effect
of artificially inflating the price of the Company’s common stock, which
subsequently dropped after the issuance of a press release announcing the
Company’s preliminary fiscal 2006 second quarter earnings and revised guidance.
The Company filed a motion to dismiss the Consolidated Lawsuit. On June
29, 2007, the motion to dismiss was granted. The plaintiffs have
appealed the order of dismissal, and briefing on the appeal has been
completed. Oral argument on the appeal was held on April 18,
2008. A final judgment has not been rendered.
Additionally,
in August 2006, a separate derivative action was filed on behalf of Centene
Corporation against the Company and certain of its officers and directors in the
Eastern District Court. Plaintiff purported to bring suit
derivatively on behalf of the Company against the Company’s directors for breach
of fiduciary duties, gross mismanagement and waste of corporate assets by reason
of the directors’ alleged failure to correct the misstatements alleged in the
Consolidated Lawsuit discussed above. The derivative complaint
largely repeated the allegations in the Consolidated Lawsuit. Based
on discussions that have been held with plaintiff’s counsel, it is the Company’s
understanding that plaintiff did not intend to pursue this action unless the
Consolidated Lawsuit proceeded past the dismissal stage. The
derivative action has been dismissed.
The
Company's subsidiary, Peach State Health Plan, received notice from the Georgia
Department of Community Health, or GDCH, regarding the responsibility for
payment of certain dual eligibility SSI claims. GDCH claims the Company is
responsible for payment of health care claims for members while enrolled in the
Georgia Families managed care program, including hospital stays that extend into
the period where the member is covered by the State’s separate SSI
program. The Company clarified the issue with the state and recorded to
Medical costs expense the estimated amount to settle the outstanding
claims. This accrual is included in Medical claims liabilities at
June 30, 2008.
In
addition, the Company is routinely subjected to legal proceedings in the normal
course of business. While the ultimate resolution of such matters is
uncertain, the Company does not expect the results of any of these matters
discussed above individually, or in the aggregate, to have a material effect on
its financial position or results of operations.
The
Company operates in two segments: Medicaid Managed Care and Specialty Services.
The Medicaid Managed Care segment consists of the Company’s health plans
including all of the functions needed to operate them. The Specialty Services
segment consists of the Company’s specialty companies including behavioral
health, health management, long-term care programs, managed vision, nurse
triage, pharmacy benefits management and treatment compliance
functions.
Factors
used in determining the reportable business segments include the nature of
operating activities, existence of separate senior management teams, and the
type of information presented to the Company’s chief operating decision maker to
evaluate all results of operations.
Segment
information for the three months ended June 30, 2008, follows:
|
|
Medicaid
Managed Care
|
|
|
Specialty
Services
|
|
|
Eliminations
|
|
|
Consolidated
Total
|
|
Revenue
from external customers
|
|
$ |
789,144 |
|
|
$ |
70,923 |
|
|
$ |
— |
|
|
$ |
860,067 |
|
Revenue
from internal customers
|
|
|
15,718 |
|
|
|
125,545 |
|
|
|
(141,263
|
) |
|
|
— |
|
|
|
$ |
804,862 |
|
|
$ |
196,468 |
|
|
$ |
(141,263 |
) |
|
$ |
860,067 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
22,800 |
|
|
$ |
4,850 |
|
|
$ |
— |
|
|
$ |
27,650 |
|
Segment
information for the three months ended June 30, 2007, follows:
|
|
Medicaid
Managed Care
|
|
|
Specialty
Services
|
|
|
Eliminations
|
|
|
Consolidated
Total
|
|
Revenue
from external customers
|
|
$ |
665,258 |
|
|
$ |
62,473 |
|
|
$ |
— |
|
|
$ |
727,731 |
|
Revenue
from internal customers
|
|
|
19,698 |
|
|
|
106,783 |
|
|
|
(126,481
|
) |
|
|
— |
|
|
|
$ |
684,956 |
|
|
$ |
169,256 |
|
|
$ |
(126,481 |
) |
|
$ |
727,731 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
9,073 |
|
|
$ |
4,961 |
|
|
$ |
— |
|
|
$ |
14,034 |
|
Segment
information for the six months ended June 30, 2008, follows:
|
|
Medicaid
Managed Care
|
|
|
Specialty
Services
|
|
|
Eliminations
|
|
|
Consolidated
Total
|
|
Revenue
from external customers
|
|
$ |
1,535,234 |
|
|
$ |
141,472 |
|
|
$ |
— |
|
|
$ |
1,676,706 |
|
Revenue
from internal customers
|
|
|
31,104 |
|
|
|
235,825 |
|
|
|
(266,929
|
) |
|
|
— |
|
|
|
$ |
1,566,338 |
|
|
$ |
377,297 |
|
|
$ |
(266,929 |
) |
|
$ |
1,676,706 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
52,602 |
|
|
$ |
11,978 |
|
|
$ |
— |
|
|
$ |
64,580 |
|
Segment
information for the six months ended June 30, 2007, follows:
|
|
Medicaid
Managed Care
|
|
|
Specialty
Services
|
|
|
Eliminations
|
|
|
Consolidated
Total
|
|
Revenue
from external customers
|
|
$ |
1,271,720 |
|
|
$ |
120,245 |
|
|
$ |
— |
|
|
$ |
1,391,965 |
|
Revenue
from internal customers
|
|
|
38,586 |
|
|
|
205,502 |
|
|
|
(244,088
|
) |
|
|
— |
|
|
|
$ |
1,310,306 |
|
|
$ |
325,747 |
|
|
$ |
(244,088 |
) |
|
$ |
1,391,965 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
19,188 |
|
|
$ |
10,647 |
|
|
$ |
— |
|
|
$ |
29,835 |
|
11.
Comprehensive Earnings
Differences
between net earnings and total comprehensive earnings resulted from changes in
unrealized losses and gains on investments available for sale, as
follows:
|
|
Three Months Ended June
30,
|
|
|
Six
Months Ended June
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$
|
18,203
|
|
|
$
|
17,782
|
|
|
$
|
43,826
|
|
|
$
|
55,993
|
|
Reclassification
adjustment, net of tax
|
|
|
126
|
|
|
|
18
|
|
|
|
151
|
|
|
|
69
|
|
Change
in unrealized (loss) gain on investments, net of tax
|
|
(1,514
|
)
|
|
(139
|
)
|
|
|
|
|
136
|
|
Total
comprehensive earnings
|
|
$
|
16,815
|
|
|
$
|
17,661
|
|
|
$
|
43,977
|
|
|
$
|
56,198
|
|
12.
Subsequent Events
On July 1, 2008, the
Company completed the previously announced acquisition of Celtic
Insurance Company, or Celtic, a health insurance carrier focused on the
individual health insurance market. The Company paid a total of
$80,000 in cash plus additional transaction costs. The preliminary
purchase price allocation will be determined during the third quarter of
2008. The results of operations of Celtic will be included in the
Specialty Services segment of the consolidated financial statements beginning
July 1, 2008. The Company received regulatory approval from the
Illinois Division of Insurance to realize an extraordinary dividend of $31,411
from Celtic which was paid in July 2008.
The
following discussion of our financial condition and results of operations should
be read in conjunction with our consolidated financial statements and the
related notes included elsewhere in this filing, and in our annual report on
Form 10-K for the year ended December 31, 2007. The discussion contains
forward-looking statements that involve known and unknown risks and
uncertainties, including those set forth under “Item 1A. Risk
Factors.”
OVERVIEW
We are a
multi-line healthcare enterprise operating in two segments. Our Medicaid
Managed Care segment provides Medicaid and Medicaid-related programs to
organizations and individuals through government subsidized programs, including
Medicaid, Medicare (Special Needs Plans), the State Children’s Health Insurance
Program, or SCHIP, Foster Care and Supplemental Security Income including Aged,
Blind or Disabled programs, or SSI. Our Specialty Services segment
provides specialty services, including behavioral health, life and health
management, long-term care programs, managed vision, nurse triage, pharmacy
benefits management and treatment compliance, to state programs, healthcare
organizations, employer groups and other commercial organizations, as well as to
our own subsidiaries on market-based terms. Effective July 1, 2008,
our Specialty Services segment also includes the individual health insurance
market through our acquisition of Celtic Insurance Company, or
Celtic.
Our
Medicaid contract in Kansas terminated effective December 31, 2006, and we sold
the operating assets of FirstGuard Health Plan, Inc., our Missouri health plan,
effective February 1, 2007. Unless specifically noted, the
discussions below are in the context of continuing operations, and therefore,
exclude the Kansas and Missouri health plans, collectively referred to as
FirstGuard. The results of operations for FirstGuard are classified
as discontinued operations for all periods presented.
Our
second quarter performance for 2008 is summarized as follows:
|
—
|
Quarter-end
Medicaid and
Medicare Managed Care membership of
1,207,400.
|
|
—
|
Total
revenues of $860.1 million, an 18.2% increase over the comparable period
in 2007.
|
|
—
|
Health
Benefits Ratio, or HBR, of 83.3%.
|
|
—
|
General
and Administrative, or G&A, expense ratio of
13.5%.
|
|
—
|
Operating
earnings of $27.7 million.
|
|
—
|
Diluted
earnings per share of $0.41.
|
|
—
|
Operating
cash flows of $60.0 million.
|
The
following new contracts and acquisitions contributed to our growth during the
last year:
|
—
|
In
April 2008, we began operating under our new contract in Texas to provide
statewide managed care services to participants in the Texas Foster Care
program, with 32,400 members at June 30,
2008.
|
|
—
|
In
2007, we acquired PhyTrust of South Carolina, LLC, or PhyTrust, as
well as Physician’s Choice, LLC, both of which managed care on a non-risk
basis for Medicaid members in South Carolina. We became
licensed in 2007 to provide risk-based managed care in the State
and began participating in the transition of the State’s conversion
to at-risk managed care in December 2007. We served 22,500
at-risk members in South Carolina at June 30,
2008.
|
|
—
|
In July 2007,
we
acquired a 49% ownership interest in Access Health Solutions, LLC,
or Access, which provides managed care for Medicaid recipients in
Florida, with 97,000 members at June 30,
2008.
|
We have
opportunities to increase profitability through the following:
|
—
|
Effective
July 1, 2008, we completed the previously announced acquisition of Celtic,
a health insurance carrier focused on the individual health insurance
market.
|
|
—
|
Effective
June 30, 2008, we concluded operations for SSI recipients in the Northwest
region of Ohio. At June 30, 2008, this region represented 3,600
members.
|
|
—
|
During
the second quarter of 2008, Bridgeway Health Solutions was awarded a
contract with the Arizona Health Care Cost Containment System to provide
Acute Care services to Medicaid recipients in the Yavapai service
area. Membership operations are expected to commence on October
1, 2008.
|
RESULTS
OF OPERATIONS AND KEY METRICS
Summarized
comparative financial data are as follows ($ in millions, except share
data):
|
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
%
Change 2007-2008
|
|
|
2008
|
|
|
2007
|
|
|
%
Change 2007-2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium
|
|
$
|
819.4
|
|
|
$
|
687.8
|
|
|
|
19.1
|
%
|
|
$
|
1,592.9
|
|
|
$
|
1,312.7
|
|
|
|
21.3
|
%
|
Premium
tax
|
|
22.2
|
|
|
19.9
|
|
|
11.7
|
%
|
|
44.8
|
|
|
37.7
|
|
|
18.9
|
%
|
Service
|
|
18.5
|
|
|
20.0
|
|
|
(7.7
|
)%
|
|
39.0
|
|
|
41.6
|
|
|
(6.3
|
)%
|
Total
revenues
|
|
|
860.1
|
|
|
|
727.7
|
|
|
|
18.2
|
%
|
|
|
1,676.7
|
|
|
|
1,392.0
|
|
|
|
20.5
|
%
|
Medical
costs
|
|
|
682.6
|
|
|
|
575.1
|
|
|
|
18.7
|
%
|
|
|
1,324.2
|
|
|
|
1,103.7
|
|
|
|
20.0
|
%
|
Cost
of services
|
|
|
14.4
|
|
|
|
16.7
|
|
|
|
(13.4
|
)%
|
|
|
30.6
|
|
|
|
32.3
|
|
|
|
(5.2
|
)%
|
General
and administrative expenses
|
|
|
113.2
|
|
|
|
102.0
|
|
|
|
11.0
|
%
|
|
|
212.5
|
|
|
|
188.5
|
|
|
|
12.7
|
%
|
Premium
tax
|
|
22.2
|
|
|
19.9
|
|
|
11.7
|
%
|
|
44.8
|
|
|
37.7
|
|
|
18.9
|
%
|
Earnings
from operations
|
|
|
27.7
|
|
|
|
14.0
|
|
|
|
97.0
|
%
|
|
|
64.6
|
|
|
|
29.8
|
|
|
|
116.5
|
%
|
Investment
and other income, net
|
|
1.5
|
|
|
2.4
|
|
|
(35.4
|
)%
|
|
5.3
|
|
|
5.3
|
|
|
1.0
|
%
|
Earnings
before income taxes
|
|
|
29.2
|
|
|
|
16.4
|
|
|
|
77.9
|
%
|
|
|
69.9
|
|
|
|
35.1
|
|
|
|
99.1
|
%
|
Income
tax expense
|
|
11.2
|
|
|
6.2
|
|
|
78.8
|
%
|
|
26.3
|
|
|
13.3
|
|
|
97.5
|
%
|
Net
earnings from continuing operations
|
|
18.0
|
|
|
10.2
|
|
|
77.3
|
%
|
|
43.6
|
|
|
21.8
|
|
|
100.1
|
%
|
Discontinued
operations, net of income tax expense (benefit) of $0.1, $(5.4), $0.2 and
$(32.2), respectively
|
|
0.2
|
|
|
7.6
|
|
|
(97.8
|
)%
|
|
0.2
|
|
|
34.2
|
|
|
(99.3
|
)%
|
Net
earnings
|
|
$ |
18.2
|
|
|
$ |
17.8
|
|
|
|
2.4 |
%
|
|
$ |
43.8
|
|
|
$
|
56.0
|
|
|
|
(21.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
0.41 |
|
|
$ |
0.23 |
|
|
|
78.3 |
% |
|
$ |
0.98 |
|
|
$ |
0.49 |
|
|
|
100.0 |
% |
Discontinued
operations
|
|
|
—
|
|
|
|
0.17 |
|
|
|
(100.0 |
)% |
|
|
0.01 |
|
|
|
0.76 |
|
|
|
(98.7 |
)% |
Total
diluted earnings per common share
|
|
$ |
0.41 |
|
|
$ |
0.40 |
|
|
|
2.5 |
% |
|
$ |
0.98 |
|
|
$ |
1.25 |
|
|
|
(21.6 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
and Revenue Recognition
Our
Medicaid Managed Care segment generates revenues primarily from premiums we
receive from the states in which we operate health plans. We receive
a fixed premium per member per month pursuant to our state
contracts. We generally receive premium payments during the month we
provide services and recognize premium revenue during the period in which we are
obligated to provide services to our members. Some states enact
premium taxes or similar assessments, collectively, premium taxes, and these
taxes are recorded as a component of revenue as well as operating
expenses. Some contracts allow for additional premium associated with
certain supplemental services provided such as maternity
deliveries. Revenues are recorded based on membership and eligibility
data provided by the states, which may be adjusted by the states for updates to
this data. These adjustments have been immaterial in relation to
total revenue recorded and are reflected in the period known.
Our
Specialty Services segment generates revenues under contracts with state
programs, healthcare organizations, and other commercial organizations, as well
as from our own subsidiaries on market-based terms. Revenues are
recognized when the related services are provided or as ratably earned over the
covered period of services.
Premium
and service revenues collected in advance are recorded as unearned
revenue. For performance-based contracts, we do not recognize revenue
subject to refund until data is sufficient to measure
performance. Premium and service revenues due to us are recorded as
premium and related receivables and are recorded net of an allowance based on
historical trends and our management’s judgment on the collectibility of these
accounts. As we generally receive payments during the month in which
services are provided, the allowance is typically not significant in comparison
to total revenues and does not have a material impact on the presentation of our
financial condition or results of operations.
Our total
revenue increased in the three and six months ended June 30, 2008 over the
previous year primarily through 1) membership growth in the Medicaid Managed
Care segment, 2) premium rate increases, and 3) growth in our Specialty Services
segment.
From June
30, 2007 to June 30, 2008, we increased our Medicaid Managed Care membership by
6.7%. The following table sets forth our membership by state in our
Medicaid Managed Care segment:
|
|
June
30,
|
|
|
|
2008
|
|
|
2007
|
|
Georgia
|
|
|
278,800 |
|
|
|
281,400 |
|
Indiana
|
|
|
161,700 |
|
|
|
161,700 |
|
New
Jersey
|
|
|
55,100 |
|
|
|
59,100 |
|
Ohio
|
|
|
137,300 |
|
|
|
128,200 |
|
South
Carolina
|
|
|
22,500 |
|
|
|
31,100 |
|
Texas
|
|
|
427,200 |
|
|
|
333,900 |
|
Wisconsin
|
|
|
124,800 |
|
|
|
136,100 |
|
Total
|
|
|
1,207,400 |
|
|
|
1,131,500 |
|
The
following table sets forth our membership by line of business in our Medicaid
Managed Care segment:
|
|
June
30,
|
|
|
|
2008
|
|
|
2007
|
|
Medicaid
|
|
|
866,700 |
|
|
|
846,900 |
|
SCHIP/Foster
Care
|
|
|
267,000 |
|
|
|
216,500 |
|
SSI/Medicare
|
|
|
73,700 |
|
|
|
68,100 |
|
Total
|
|
|
1,207,400 |
|
|
|
1,131,500 |
|
From June
30, 2007 to June 30, 2008, our membership increased as a result of growth in
Ohio and Texas. We increased our SSI membership in Ohio with the
commencement of our new contract to serve Aged, Blind or Disabled members.
In Texas, we increased our membership through organic growth of SCHIP,
especially in the EPO market. In addition, we increased Texas
membership through our new Foster Care program, with 32,400 members at June 30,
2008. Our membership decreased in Wisconsin due to the
termination of certain physician contracts associated with a high cost hospital
system and medical group. In South Carolina, we continue to add
at-risk membership as additional counties convert, with 22,500 at-risk members
at June 30, 2008. The prior year membership in South Carolina was entirely
on a non-risk basis. In Florida, Access served 97,000 members on a
non-risk basis at June 30, 2008.
|
2.
|
Premium
rate increases
|
During
the six months ended June 30, 2008, we received premium rate increases in some
markets which yield a 2.1% composite increase across all of our
markets. During the six months ended June 30, 2007, we received
premium rate increases in some markets which yield a 2.1% composite
increase across all of our markets.
In
November 2007, we received a contract amendment from the State of
Georgia providing for an effective premium rate increase in Georgia of
approximately 3.8% effective July 1, 2007. The State also mandated service
changes, retroactively recalculated certain rate cells and adjusted for
duplicate member issues. We executed this amendment on November 16,
2007. The State of Georgia returned the fully executed contract in January
2008 and, accordingly, we recorded the additional premium revenue, retroactive
to July 1, 2007, in the first quarter of 2008. This premium revenue,
related to the period from July 1, 2007 to December 31, 2007, totals
approximately $20.8 million. Approximately $7.3 million of this amount is
related to the mandated services, rate cell changes and duplicate member issues,
the remaining $13.5 million yields the calculated 3.8% increase.
|
3.
|
Specialty
Services segment growth
|
For the
three and six months ended June 30, 2008, Specialty Services segment
revenue from external customers was $70.9 million and $141.5 million,
respectively, compared to $62.5 million and $120.2 million for the same prior
year periods. The increase is primarily attributable to increasing
membership for both our behavioral health company, Cenpatico, and our long-term
care program, Bridgeway. At June 30, 2008, Cenpatico provided
behavioral health services to 99,400 members in Arizona and 40,000 members in
Kansas, compared to 95,200 members in Arizona and 37,500 members in Kansas at
June 30, 2007. At June 30, 2008, Bridgeway provided long-term
care services to 1,800 members, compared to 1,300 members at June 30,
2007.
Medical
Costs
Our
medical costs include payments to physicians, hospitals, and other providers for
healthcare and specialty services claims. Medical costs also include estimates
of medical expenses incurred but not yet reported, or IBNR, and estimates of the
cost to process unpaid claims. Monthly, we estimate our IBNR based on a number
of factors, including inpatient hospital utilization data and prior claims
experience. As part of this review, we also consider the costs to process
medical claims and estimates of amounts to cover uncertainties associated with
fluctuations in physician billing patterns, membership, products and inpatient
hospital trends. These estimates are adjusted as more information becomes
available. We employ actuarial professionals and use the services of independent
actuaries who are contracted to review our estimates quarterly. While we believe
that our process for estimating IBNR is actuarially sound, we cannot assure you
that healthcare claim costs will not materially differ from our
estimates.
Our
results of operations depend on our ability to manage expenses associated with
health benefits and to accurately predict costs incurred. Our health benefits
ratio, or HBR, represents medical costs as a percentage of premium revenues
(excluding premium taxes) and reflects the direct relationship between the
premium received and the medical services provided. The table below depicts our
HBR for our external membership by member category:
|
|
Three
Months Ended
June
30,
|
|
|
Six
Months Ended
June
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Medicaid
and SCHIP
|
|
|
81.7
|
%
|
|
|
83.2
|
%
|
|
|
80.6
|
%
|
|
|
83.9
|
%
|
SSI
and Medicare
|
|
|
89.8
|
|
|
|
90.2
|
|
|
|
93.7
|
|
|
|
89.6
|
|
Specialty
Services
|
|
|
85.8
|
|
|
|
76.4
|
|
|
|
85.0
|
|
|
|
77.9
|
|
Total
|
|
|
83.3
|
|
|
|
83.6
|
|
|
|
83.1
|
|
|
|
84.1
|
|
Our
consolidated HBR for the three and six months ended June 30, 2008 were 83.3% and
83.1%, respectively, decreases of 0.3% and 1.0% over 2007. The
decrease for the second quarter of 2008 over 2007 is due to overall increased
premium yield. The decrease for the six months ended June 30, 2008 over
2007 is due to the aforementioned factor as well as the effect of recording the
Georgia premium rate increase retroactive to July 1, 2007. Sequentially,
our consolidated HBR increased from 83.0% in the 2008 first quarter to 83.3% due
to the effect of the Georgia rate increase, offset by moderating medical cost
trends, especially related to SSI members in Ohio. The additional
Georgia premium revenue of $20.8 million recorded in the first quarter of 2008
had the effect of decreasing our first quarter consolidated HBR by
2.2%.
Cost
of Services
Our cost
of services expense includes the pharmaceutical costs associated with our
pharmacy benefit manager’s external revenues. Cost of services also includes all
direct costs to support the functions responsible for generation of our services
revenues. These expenses consist of the salaries and wages of the teachers and
other professionals who provide the services and expenses associated with
facilities and equipment used to provide services.
General
and Administrative Expenses
Our
general and administrative expenses, or G&A, primarily reflect wages and
benefits, including stock compensation expense, and other administrative costs
associated with our health plans, specialty companies and centralized functions
that support all of our business units. Our major centralized functions are
finance, information systems and claims processing. G&A increased in the
three and six months ended June 30, 2008 over the comparable period in 2007
primarily due to expenses for additional facilities and staff to support our
growth.
Our
G&A expense ratio represents G&A expenses as a percentage of the sum of
Premium revenue and Service revenue, and reflects the relationship between
revenues earned and the costs necessary to earn those revenues. The
consolidated G&A expense ratio for the three and six months ended June
30, 2008 were 13.5% and 13.0%, respectively, compared to 14.4% and 13.9%
for the same periods in 2007. The ratio continues to reflect the
overall leveraging of our expenses over higher revenues, partially offset by the
effect of our start-up costs in Florida, South Carolina and for our Texas
Foster Care product.
Other
Income (Expense)
Other
income (expense) consists principally of investment income from our cash and
investments, our equity in earnings of Access, and interest expense on our
debt. Investment and other income decreased $1.0 million and
increased $0.8 million in the three and six months ended June 30, 2008,
respectively, over the comparable period in 2007. The decrease in the
second quarter was primarily due to an overall decline in investment interest
rates. The increase for the six months was due to increased equity in
earnings of unconsolidated subsidiaries resulting from our investment in Access,
partially offset by an overall decline in investment interest
rates. Realized gains on the sale of investments were $201 thousand
for the six months ended June 30, 2008 compared to realized losses of $47
thousand for the six months ended June 30, 2007.
Income
Tax Expense
Our
effective tax rates for the three and six months ended June 30, 2008 were 38.2%
and 37.7%, respectively, compared to 38.0% for both the three and six months
ended June 30, 2007.
Discontinued
Operations
Net earnings from discontinued
operations were $164 thousand and $250 thousand in the three and six months
ended June 30, 2008, respectively compared to net earnings of $7.6 million and
$34.2 million in the three and six months ended June 30, 2007,
respectively. In the first half of 2007, we abandoned the stock of our
FirstGuard health plans resulting in tax benefits of $34.0 million, net of the associated asset
write-offs. The 2007 results also included exit costs associated with
FirstGuard and one month of FirstGuard Missouri operations.
LIQUIDITY
AND CAPITAL RESOURCES
We
finance our activities primarily through operating cash flows and borrowings
under our revolving credit facility. Our total operating activities
provided cash of $86.7 million in the six months ended June 30, 2008 compared to
$59.9 million in the comparable period in 2007. The increase
was primarily due to a change in our cash management procedure whereby negative
book cash balances resulting from checks issued but not yet presented to our
bank for payment are now included in Accounts payable and accrued
expenses. Additonally, consistent with prior years, both periods
reflect an increase in premium and related receivables related to the June
capitation payment from the State of Wisconsin. The State holds this
payment over their fiscal year-end and it was received in July along with the
July capitation payment in both years.
Our
investing activities used cash of $5.0 million in the six months ended June 30,
2008 compared to $115.1 million in the comparable period in 2007. Net
cash provided by and used in investing activities will fluctuate from year to
year due to the timing of investment purchases, sales and maturities. Our
investment policies are designed to provide liquidity, preserve capital and
maximize total return on invested assets within our investment guidelines.
As of June 30, 2008, our investment portfolio consisted primarily of
fixed-income securities with an average duration of 1.6 years. Cash is invested
in investment vehicles such as municipal bonds, corporate bonds, instruments of
the U.S. Treasury, insurance contracts, commercial paper and equity
securities. These securities generally are actively traded in
secondary markets and the reported fair market value is determined based on
recent trading activity. The states in which we operate prescribe the
types of instruments in which our regulated subsidiaries may invest their
cash.
We spent
$34.6 million and $29.4 million in the six months ended June 30, 2008 and 2007,
respectively, on capital assets consisting primarily of property, software and
hardware upgrades, furniture, equipment, and leasehold improvements associated
with office and market expansions. We anticipate spending
approximately an additional $38 million on capital expenditures in 2008
primarily associated with system enhancements and market
expansions.
Our
financing activities provided cash of $7.2 million and $20.7 million in the six
months ended June 30, 2008 and 2007, respectively. During 2008, our
financing activities primarily related to proceeds from borrowings under our
$300 million credit facility and stock repurchases. During 2007, our
financing activities primarily related to proceeds from issuance of $175 million
in senior notes.
At June
30, 2008, we had working capital, defined as current assets less current
liabilities, of $60.8 million, as compared to $(40.5) million at December 31,
2007. Our working capital was negative at December 31, 2007 due to
our efforts to increase investment returns through purchases of investments that
have maturities of greater than one year and, therefore, were classified as
long-term. We manage our short-term and long-term investments with
the goal of ensuring that a sufficient portion is held in investments that are
highly liquid and can be sold to fund short-term requirements as
needed.
Cash,
cash equivalents and short-term investments were $427.0 million at June 30, 2008
and $314.9 million at December 31, 2007. Long-term investments were
$282.9 million at June 30, 2008 and $344.3 million at December 31, 2007,
including restricted deposits of $28.3 million and $27.3 million,
respectively. At June 30, 2008, cash and investments held by our
unregulated entities totaled $29.0 million while cash and investments held by
our regulated entities totaled $680.9 million.
We have a
$300 million Revolving Credit Agreement. Borrowings under the agreement bear
interest based upon LIBOR rates, the Federal Funds Rate or the Prime
Rate. There is a commitment fee on the unused portion of the
agreement that ranges from 0.15% to 0.275% depending on the total debt to EBITDA
ratio. The agreement contains non-financial and financial covenants,
including requirements of minimum fixed charge coverage ratios, maximum debt to
EBITDA ratios and minimum net worth. The agreement will expire in
September 2011. As of June 30, 2008, we had $20.0 million in
borrowings outstanding under the agreement and $23.6 million in letters of
credit outstanding, leaving availability of $256.4 million. As of
June 30, 2008, we were in compliance with all covenants.
On July
1, 2008 we completed the acquisition of Celtic for a purchase price of $80.0
million plus additional transaction costs. Concurrent with the
acquisition, we received regulatory approval to pay a dividend from Celtic to
Centene in an amount of $31.4 million, while still maintaining a capital
structure we believe to be conservative. As a result of the dividend, the
net effect on our unregulated cash was approximately $50 million.
We have a
shelf registration statement on Form S-3 on file with the Securities and
Exchange Commission, or the SEC, covering the issuance of up to
$300 million of securities including common stock and debt securities.
No securities have been issued under the shelf registration. We may
publicly offer securities from time-to-time at prices and terms to be determined
at the time of the offering.
We have a
stock repurchase program authorizing us to repurchase up to four million shares
of common stock from time to time on the open market or through privately
negotiated transactions. In October 2007, the repurchase program was
extended through October 31, 2008, but we reserve the right to suspend or
discontinue the program at any time. During the six months ended June
30, 2008, we repurchased 697,764 at an average price of $19.08. We
have established a trading plan with a registered broker to repurchase shares
under certain market conditions.
There
were no other material changes outside the ordinary course of business in lease
obligations or other contractual obligations in the six months ended June 30,
2008. Based on our operating plan, we expect that our available cash, cash
equivalents and investments, cash from our operations and cash available under
our credit facility will be sufficient to finance our operations, planned
acquisition of Celtic Insurance Company and capital expenditures for at least 12
months from the date of this filing.
REGULATORY
CAPITAL AND DIVIDEND RESTRICTIONS
As
managed care organizations, certain of our subsidiaries are subject to state
regulations that, among other things, require the maintenance of minimum levels
of statutory capital, as defined by each state, and restrict the timing, payment
and amount of dividends and other distributions that may be paid to us.
Generally, the amount of dividend distributions that may be paid by a
regulated subsidiary without prior approval by state regulatory authorities is
limited based on the entity’s level of statutory net income and statutory
capital and surplus.
Our
regulated subsidiaries are required to maintain minimum capital requirements
prescribed by various regulatory authorities in each of the states in which we
operate. As of June 30, 2008, our subsidiaries had aggregate
statutory capital and surplus of $341.0 million, compared with the required
minimum aggregate statutory capital and surplus requirements of $207.5
million.
The
National Association of Insurance Commissioners has adopted rules which set
minimum risk-based capital requirements for insurance companies, managed care
organizations and other entities bearing risk for healthcare coverage. As
of June 30, 2008, all of our health plans were in compliance with the risk-based
capital requirements enacted in their respective states.
RECENT
ACCOUNTING PRONOUNCEMENTS
In
December 2007, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting standards No.141 (revised 2007), “Business
Combinations”, or SFAS No. 141R. The purpose of issuing the statement
was to replace current guidance in SFAS No.141 to better represent the
economic value of a business combination transaction. The changes to be effected
with SFAS No. 141R from the current guidance include, but are not
limited to: (1) acquisition costs will be recognized separately from the
acquisition; (2) known contractual contingencies at the time of the
acquisition will be considered part of the liabilities acquired and and measured
at their fair value; all other contingencies will be part of the liabilities
acquired and measured at their fair value only if it is more likely than not
that they meet the definition of a liability; (3) contingent consideration
based on the outcome of future events will be recognized and measured at the
time of the acquisition; (4) business combinations achieved in stages (step
acquisitions) will need to recognize the identifiable assets and liabilities, as
well as noncontrolling interests, in the acquiree, at the full amounts of their
fair values; and (5) a bargain purchase (defined as a business combination
in which the total acquisition-date fair value of the identifiable net assets
acquired exceeds the fair value of the consideration transferred plus any
noncontrolling interest in the acquiree) will require that excess to be
recognized as a gain attributable to the acquirer. SFAS No. 141R will
be effective for any business combinations that occur after January 1,
2009.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests
in Consolidated Financial Statements — an amendment of ARB No. 51”, or
SFAS No. 160. SFAS No. 160 was issued to improve the
relevance, comparability, and transparency of financial information provided to
investors by requiring all entities to report noncontrolling (minority)
interests in subsidiaries in the same way, that is, as equity in the
consolidated financial statements. Moreover, SFAS No. 160 eliminates
the diversity that currently exists in accounting for transactions between an
entity and noncontrolling interests by requiring they be treated as equity
transactions. SFAS No. 160 will be effective January 1, 2009. We are
currently evaluating the impact that SFAS No. 160 will have on our
financial statements and disclosures.
We
adopted SFAS No. 157, “Fair Value Measurements” for financial assets and
liabilities on January 1, 2008. Short-term investments, long-term
investments and restricted deposits are classified as available for sale and are
carried at fair value based on quoted market prices for identical securities
(Level 1 inputs). Additionally, fair value of debt disclosures are
based on quoted market prices of the Company’s debt securities or, for variable
rate debt, fair value is considered equal to book value (Level 2
inputs).
FORWARD-LOOKING
STATEMENTS
All
statements, other than statements of current or historical fact, contained in
this filing are forward-looking statements. We have attempted to
identify these statements by terminology including “believe,” “anticipate,”
“plan,” “expect,” “estimate,” “intend,” “seek,” “target,” “goal,” “may,” “will,”
“should,” “can,” “continue” and other similar words or expressions in connection
with, among other things, any discussion of future operating or financial
performance. In particular, these statements include statements about
our market opportunity, our growth strategy, competition, expected activities
and future acquisitions, investments and the adequacy of our available cash
resources. These statements may be found in the various sections of
this filing, including those entitled “Management’s Discussion and Analysis of
Financial Condition and Results of Operations,” Part II, Item
1A. “Risk Factors,” and Part II, Item 1. “Legal
Proceedings.” Readers are cautioned that matters subject to
forward-looking statements involve known and unknown risks and uncertainties,
including economic, regulatory, competitive and other factors that may cause our
or our industry’s actual results, levels of activity, performance or
achievements to be materially different from any future results, levels of
activity, performance or achievements expressed or implied by these
forward-looking statements. These statements are not guarantees of
future performance and are subject to risks, uncertainties and
assumptions.
All
forward-looking statements included in this filing are based on information
available to us on the date of this filing. Actual results may differ
from projections or estimates due to a variety of important factors,
including:
·
|
our
ability to accurately predict and effectively manage health benefits and
other operating expenses;
|
·
|
changes
in healthcare practices;
|
·
|
changes
in federal or state laws or
regulations;
|
·
|
provider
contract changes;
|
·
|
reduction
in provider payments by governmental
payors;
|
·
|
disasters
and numerous other factors affecting the delivery and cost of
healthcare;
|
·
|
the
expiration, cancellation or suspension of our Medicaid managed care
contracts by state governments;
|
·
|
availability
of debt and equity financing, on terms that are favorable to us;
and
|
·
|
general
economic and market conditions.
|
Item 1A
“Risk Factors” of Part II of this filing contains a further discussion of these
and other additional important factors that could cause actual results to differ
from expectations. We disclaim any current intention or obligation to
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. Due to these important
factors and risks, we cannot give assurances with respect to our future premium
levels or our ability to control our future medical costs.
INVESTMENTS
As of
June 30, 2008, we had short-term investments of $69.5 million and long-term
investments of $282.9 million, including restricted deposits of $28.3
million. The short-term investments consist of highly liquid
securities with maturities between three and 12 months. The long-term
investments consist of municipal, corporate and U.S. Agency bonds, life
insurance contracts, U.S. Treasury investments and equity securities and have
maturities greater than one year. Restricted deposits consist of
investments required by various state statutes to be deposited or pledged to
state agencies. Due to the nature of the states’ requirements, these
investments are classified as long-term regardless of the contractual maturity
date. Our investments are subject to interest rate risk and will
decrease in value if market rates increase. Assuming a hypothetical
and immediate 1% increase in market interest rates at June 30, 2008, the fair
value of our fixed income investments would decrease by approximately $4.6
million. Declines in interest rates over time will reduce our
investment income.
INFLATION
Although
healthcare cost inflation has stabilized in recent years, the national
healthcare cost inflation rate still exceeds the general inflation
rate. Additionally, recent economic indicators suggest an accelerated
rise of the general inflation rate. We use various strategies to
mitigate the negative effects of healthcare cost
inflation. Specifically, our health plans try to control medical and
hospital costs through our margin protection program and contracts with
independent providers of healthcare services. Through these
contracted care providers, our health plans emphasize preventive healthcare and
appropriate use of specialty and hospital services.
While we
currently believe our strategies to mitigate healthcare cost inflation will
continue to be successful, competitive pressures, new healthcare and
pharmaceutical product introductions, demands from healthcare providers and
customers, applicable regulations or other factors may affect our ability to
control the impact of healthcare cost increases.
Evaluation of Disclosure Controls and
Procedures - Our management, with the participation of our Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness of
our disclosure controls and procedures as of June 30, 2008. The term
“disclosure controls and procedures,” as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act, means controls and other procedures of a
company that are designed to ensure that information required to be disclosed by
a company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported, within the time periods specified
in the SEC's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by a company in the reports that it files
or submits under the Exchange Act is accumulated and communicated to the
company’s management, including its principal executive and principal financial
officers, as appropriate to allow timely decisions regarding required
disclosure. Management recognizes that any controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance
of achieving their objectives and management necessarily applies its judgment in
evaluating the cost-benefit relationship of possible controls and
procedures. Based on the evaluation of our disclosure controls and
procedures as of June 30, 2008, our Chief Executive Officer and Chief Financial
Officer concluded that, as of such date, our disclosure controls and procedures
were effective at the reasonable assurance level.
Changes in Internal Control Over
Financial Reporting - No change in our internal
control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) occurred during the quarter ended June 30, 2008 that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
PART
II
OTHER
INFORMATION
As
previously disclosed, two class action lawsuits were filed against us and
certain of our officers and directors in the United States District Court for
the Eastern District of Missouri, or Eastern District Court. The
lawsuits were consolidated on November 2, 2006, and an amended consolidated
complaint was filed in the Eastern District Court on January 17, 2007, which we
refer to as the Consolidated Lawsuit. The Consolidated Lawsuit alleges, on
behalf of purchasers of our common stock from April 25, 2006 through July 17,
2006, that we and certain of our officers and directors violated federal
securities laws by issuing a series of materially false statements prior to the
announcement of our fiscal 2006 second quarter results. According to the
Consolidated Lawsuit, these allegedly materially false statements had the effect
of artificially inflating the price of our common stock, which subsequently
dropped after the issuance of a press release announcing our preliminary fiscal
2006 second quarter earnings and revised guidance. We filed a motion to dismiss
the Consolidated Lawsuit. On June 29, 2007, the motion to dismiss was
granted. The plaintiffs have appealed the order of dismissal, and
briefing on the appeal has been completed. Oral argument on the
appeal was held on April 18, 2008. We anticipate receiving a decision
on the appeal during 2008.
Additionally,
in August 2006, a separate derivative action was filed on behalf of Centene
Corporation against us and certain of our officers and directors in the Eastern
District Court. Plaintiff purported to bring suit derivatively on behalf
of the Company against the Company’s directors for breach of fiduciary duties,
gross mismanagement and waste of corporate assets by reason of the directors’
alleged failure to correct the misstatements alleged in the Consolidated Lawsuit
discussed above. The derivative complaint largely repeated the allegations in
the Consolidated Lawsuit. Based on discussions that have been held with
plaintiff’s counsel, it is our understanding that plaintiff did not intend to
pursue this action unless the Consolidated Lawsuit proceeded past the dismissal
stage. The derivative action has been dismissed.
In
addition, we routinely are subjected to legal proceedings in the normal course
of business. While the ultimate resolution of such matters is uncertain, we do
not expect the results of any of these matters individually, or in the
aggregate, to have a material effect on our financial position or results of
operations.
FACTORS
THAT MAY AFFECT FUTURE RESULTS AND THE
TRADING
PRICE OF OUR COMMON STOCK
You
should carefully consider the risks described below before making an investment
decision. The trading price of our common stock could decline due to
any of these risks, in which case you could lose all or part of your
investment. You should also refer to the other information in this
filing, including our consolidated financial statements and related notes, and
in our annual report on Form 10-K for the year ended December 31, 2007 and our
quarterly report on Form 10-Q for the quarterly period ended March 31,
2008. The risks and uncertainties described below are those that we
currently believe may materially affect our Company. Additional risks
and uncertainties that we are unaware of or that we currently deem immaterial
also may become important factors that affect our Company.
Risks
Related to Being a Regulated Entity
Reduction
in Medicaid, SCHIP and SSI funding could substantially reduce our
profitability.
Most of
our revenues come from Medicaid, SCHIP and SSI premiums. The base
premium rate paid by each state differs, depending on a combination of factors
such as defined upper payment limits, a member’s health status, age, gender,
county or region, benefit mix and member eligibility
categories. Future levels of Medicaid, SCHIP and SSI funding and
premium rates may be affected by continuing government efforts to contain
healthcare costs and may further be affected by state and federal budgetary
constraints. Additionally, state and federal entities may make
changes to the design of their Medicaid programs resulting in the cancellation
or modification of these programs.
For
example, in August 2007, the Centers for Medicare & Medicaid Services, or
CMS, published a final rule regarding the estimation and recovery of
improper payments made under Medicaid and SCHIP. This rule requires a
CMS contractor to sample selected states each year to estimate improper payments
in Medicaid and SCHIP and create national and state specific error
rates. States must provide information to measure improper payments
in Medicaid and SCHIP for managed care and fee-for-service. Each
state will be selected for review once every three years for each
program. States are required to repay CMS the federal share of any
overpayments identified.
On
February 8, 2006, President Bush signed the Deficit Reduction Act of 2005 to
reduce the size of the federal deficit. The Act reduces federal
spending by nearly $40 billion over 5 years, including a $5 billion reduction in
Medicaid. The Act reduces spending by cutting Medicaid payments for
prescription drugs and gives states new power to reduce or reconfigure
benefits. This law may also lead to lower Medicaid reimbursements in
some states. The Bush administration’s budget proposal for fiscal
year 2009 proposes cutting Medicaid funding by $17.4 billion in funding
reductions over five years. States also periodically consider
reducing or reallocating the amount of money they spend for Medicaid, SCHIP and
SSI. In recent years, the majority of states have implemented
measures to restrict Medicaid, SCHIP and SSI costs and eligibility.
Changes
to Medicaid, SCHIP and SSI programs could reduce the number of persons enrolled
in or eligible for these programs, reduce the amount of reimbursement or payment
levels, or increase our administrative or healthcare costs under those programs,
all of which could have a negative impact on our business. We believe
that reductions in Medicaid, SCHIP and SSI payments could substantially reduce
our profitability. Further, our contracts with the states are subject
to cancellation by the state after a short notice period in the event of
unavailability of state funds.
If
SCHIP is not reauthorized or states face shortfalls, our business could
suffer.
SCHIP was
initially authorized for a period of ten years through 2007. In late
2007, Congress passed two separate SCHIP reauthorization bills that would have
expanded SCHIP coverage, however President Bush vetoed each of these
bills. Since they could not come to agreement on long-term SCHIP
reauthorization terms, President Bush and Congress agreed to extend SCHIP
funding through June 30, 2009. We cannot be certain that SCHIP will
be reauthorized when current funding expires in 2009, and if it is, what changes
might be made to the program following reauthorization. There are
differing views as to what should be contained in an SCHIP reauthorization
bill. It is unclear how and when these differences will be resolved
and therefore we cannot predict the impact that reauthorization will have on our
business, assuming SCHIP is reauthorized.
States
receive matching funds from the federal government to pay for their SCHIP
programs, which matching funds have a per state annual cap. Because
of funding caps, there is a risk that these states could experience shortfalls
in future years, which could have an impact on our ability to receive amounts
owed to us from states in which we have SCHIP contracts.
If
any of our state contracts are terminated or are not renewed, our business will
suffer.
We
provide managed care programs and selected services to individuals receiving
benefits under federal assistance programs, including Medicaid, SCHIP and
SSI. We provide those healthcare services under contracts with
regulatory entities in the areas in which we operate. Our contracts
with various states are generally intended to run for one or two years and may
be extended for one or two additional years if the state or its agent elects to
do so. Our current contracts are set to expire or renew between
August 31, 2008 and December 31, 2010. When our contracts expire,
they may be opened for bidding by competing healthcare
providers. There is no guarantee that our contracts will be renewed
or extended. For example, on August 25, 2006, we received
notification from the Kansas Health Policy Authority that FirstGuard Health Plan
Kansas, Inc.’s contract with the State would not be renewed or extended, and as
a result, our contract ended on December 31, 2006. Further, our
contracts with the states are subject to cancellation by the state after a short
notice period in the event of unavailability of state funds. For
example, the Indiana contract under which we operate can be terminated by the
State without cause. Our contracts could also be terminated if we fail to
perform in accordance with the standards set by state regulatory
agencies. If any of our contracts are terminated, not renewed,
renewed on less favorable terms, or not renewed on a timely basis, our business
will suffer, and our operating results may be materially affected.
If
we are unable to participate in SCHIP programs, our growth rate may be
limited.
SCHIP is
a federal initiative designed to provide coverage for low-income children not
otherwise covered by Medicaid or other insurance programs. The
programs vary significantly from state to state. Participation in
SCHIP programs is an important part of our growth strategy. If states
do not allow us to participate or if we fail to win bids to participate, our
growth strategy may be materially and adversely affected.
Changes
in government regulations designed to protect the financial interests of
providers and members rather than our investors could force us to change how we
operate and could harm our business.
Our
business is extensively regulated by the states in which we operate and by the
federal government. The applicable laws and regulations are subject
to frequent change and generally are intended to benefit and protect the
financial interests of health plan providers and members rather than
investors. The enactment of new laws and rules or changes to existing
laws and rules or the interpretation of such laws and rules could, among other
things:
• force
us to restructure our relationships with providers within our
network;
• require
us to implement additional or different programs and systems;
• mandate
minimum medical expense levels as a percentage of premium revenues;
• restrict
revenue and enrollment growth;
• require
us to develop plans to guard against the financial insolvency of our
providers;
• increase
our healthcare and administrative costs;
• impose
additional capital and reserve requirements; and
• increase
or change our liability to members in the event of malpractice by our
providers.
For
example, Congress has previously considered various forms of patient protection
legislation commonly known as the Patients’ Bill of Rights and such legislation
may be proposed again. We cannot predict the impact of any such
legislation, if adopted, on our business.
Regulations
may decrease the profitability of our health plans.
Certain
states have enacted regulations which require us to maintain a minimum health
benefits ratio, or establish limits on our profitability. Other
states require us to meet certain performance and quality metrics in order to
receive our full contractual revenue. In certain circumstances, our
plans may be required to pay a rebate to the state in the event profits exceed
established levels. These regulatory requirements, changes in these
requirements or the adoption of similar requirements by our other regulators may
limit our ability to increase our overall profits as a percentage of
revenues. Certain states, including but not limited to Georgia,
Indiana, New Jersey and Texas have implemented prompt-payment laws and are
enforcing penalty provisions for failure to pay claims in a timely
manner. Failure to meet these requirements can result in financial
fines and penalties. In addition, states may attempt to reduce their
contract premium rates if regulators perceive our health benefits ratio as too
low. Any of these regulatory actions could harm our operating
results. Certain states also impose marketing restrictions on us
which may constrain our membership growth and our ability to increase our
revenues.
We
face periodic reviews, audits and investigations under our contracts with state
government agencies, and these audits could have adverse findings, which may
negatively impact our business.
We
contract with various state governmental agencies to provide managed healthcare
services. Pursuant to these contracts, we are subject to various
reviews, audits and investigations to verify our compliance with the contracts
and applicable laws and regulations. Any adverse review, audit or
investigation could result in:
• refunding
of amounts we have been paid pursuant to our contracts;
• imposition
of fines, penalties and other sanctions on us;
• loss
of our right to participate in various markets;
• increased
difficulty in selling our products and services; and
• loss
of one or more of our licenses.
Failure
to comply with government regulations could subject us to civil and criminal
penalties.
Federal
and state governments have enacted fraud and abuse laws and other laws to
protect patients’ privacy and access to healthcare. In some states,
we may be subject to regulation by more than one governmental authority, which
may impose overlapping or inconsistent regulations. Violation of
these and other laws or regulations governing our operations or the operations
of our providers could result in the imposition of civil or criminal penalties,
the cancellation of our contracts to provide services, the suspension or
revocation of our licenses or our exclusion from participating in the Medicaid,
SCHIP and SSI programs. If we were to become subject to these
penalties or exclusions as the result of our actions or omissions or our
inability to monitor the compliance of our providers, it would negatively affect
our ability to operate our business.
The
Health Insurance Portability and Accountability Act of 1996, or HIPAA, broadened
the scope of fraud and abuse laws applicable to healthcare
companies. HIPAA created civil penalties for, among other things,
billing for medically unnecessary goods or services. HIPAA
established new enforcement mechanisms to combat fraud and abuse, including
civil and, in some instances, criminal penalties for failure to comply with
specific standards relating to the privacy, security and electronic transmission
of most individually identifiable health information. It is possible
that Congress may enact additional legislation in the future to increase
penalties and to create a private right of action under HIPAA, which could
entitle patients to seek monetary damages for violations of the privacy
rules.
We
may incur significant costs as a result of compliance with government
regulations, and our management will be required to devote time to
compliance.
Many
aspects of our business are affected by government laws and
regulations. The issuance of new regulations, or judicial or
regulatory guidance regarding existing regulations, could require changes to
many of the procedures we currently use to conduct our business, which may lead
to additional costs that we have not yet identified. We do not know
whether, or the extent to which, we will be able to recover from the states our
costs of complying with these new regulations. The costs of any such
future compliance efforts could have a material adverse effect on our
business. We have already expended significant time, effort and
financial resources to comply with the privacy and security requirements of
HIPAA. We cannot predict whether states will enact stricter laws
governing the privacy and security of electronic health
information. If any new requirements are enacted at the state or
federal level, compliance would likely require additional expenditures and
management time.
In
addition, the Sarbanes-Oxley Act of 2002, as well as rules subsequently
implemented by the SEC and the New York Stock Exchange, or the NYSE, have
imposed various requirements on public companies, including requiring changes in
corporate governance practices. Our management and other personnel
will continue to devote time to these compliance initiatives.
The
Sarbanes-Oxley Act requires, among other things, that we maintain effective
internal control over financial reporting. In particular, we must
perform system and process evaluation and testing of our internal controls over
financial reporting to allow management to report on the effectiveness of our
internal controls over our financial reporting as required by Section 404 of the
Sarbanes-Oxley Act. Our testing, or the subsequent testing by our
independent registered public accounting firm, may reveal deficiencies in our
internal controls over financial reporting that are deemed to be material
weaknesses. Our compliance with Section 404 requires that we incur
substantial accounting expense and expend significant management
efforts. Moreover, if we are not able to comply with the requirements
of Section 404, or if we or our independent registered public accounting firm
identifies deficiencies in our internal control over financial reporting that
are deemed to be material weaknesses, the market price of our stock could
decline and we could be subject to sanctions or investigations by the NYSE, SEC
or other regulatory authorities, which would require additional financial and
management resources.
Changes
in healthcare law and benefits may reduce our profitability.
Numerous
proposals relating to changes in healthcare law have been introduced, some of
which have been passed by Congress and the states in which we operate or may
operate in the future. Changes in applicable laws and regulations are
continually being considered, and interpretations of existing laws and rules may
also change from time to time. We are unable to predict what
regulatory changes may occur or what effect any particular change may have on
our business. For example, these changes could reduce the number of
persons enrolled or eligible to enroll in Medicaid, reduce the reimbursement or
payment levels for medical services or reduce benefits included in Medicaid
coverage. We are also unable to predict whether new laws or proposals
will favor or hinder the growth of managed healthcare in
general. Legislation or regulations that require us to change our
current manner of operation, benefits provided or our contract arrangements may
seriously harm our operations and financial results.
For
example, in August 2007 CMS issued guidance that imposes new requirements on
states that cover children in families with incomes above 250% of the federal
poverty level. Under these new requirements, applicable states must
provide assurances to CMS that the state has enrolled at least 95% of the
Medicaid and SCHIP eligible children in the state who are in families with
incomes below 200% of the federal poverty level in Medicaid or SCHIP and that
the number of children insured through private employers has not decreased by
more than two percentage points over the prior five year
period. Three states in which we have SCHIP contracts, Georgia, New
Jersey and Wisconsin, are subject to these new regulations. If they
are unable to meet these new requirements, they will be unable to continue to
cover children in families with incomes above 250% of the federal poverty level,
which would likely decrease our membership in such states. Many
states object to these new requirements as unduly burdensome and likely to
result in a decrease in the number of children covered by SCHIP, and some
states, including New Jersey, are pursuing legal challenges against CMS in
relation to these new requirements. CMS expects states to comply with
the new requirements within 12 months of the issuance of the
guidance. On May 7, 2008, CMS issued a letter that clarifies its
interpretation of several parts of the August 17, 2007 letter, but it does not
change any of the requirements. The May 7, 2008 letter also confirms
that CMS will negotiate compliance with the directive on a state-by-state
basis. We cannot
predict whether legal challenges to the new policy will be successful or whether
the reauthorized version of SCHIP will expressly address these new
requirements. We cannot predict the impact these requirements will
have on our revenue if changes are implemented in states in which we serve SCHIP
beneficiaries.
If
a state fails to renew a required federal waiver for mandated Medicaid
enrollment into managed care or such application is denied, our membership in
that state will likely decrease.
States
may administer Medicaid managed care programs pursuant to demonstration programs
or required waivers of federal Medicaid standards. Waivers and
demonstration programs are generally approved for two year periods and can be
renewed on an ongoing basis if the state applies. We have no control
over this renewal process. If a state does not renew such a waiver or
demonstration program or the Federal government denies a state’s application for
renewal, membership in our health plan in the state could decrease and our
business could suffer.
Changes
in federal funding mechanisms may reduce our profitability.
The Bush
administration previously proposed a major long-term change in the way Medicaid
and SCHIP are funded. The proposal, if adopted, would allow states to
elect to receive, instead of federal matching funds, combined Medicaid-SCHIP
“allotments” for acute and long-term healthcare for low-income, uninsured
persons. Participating states would be given flexibility in designing
their own health insurance programs, subject to federally-mandated minimum
coverage requirements. It is uncertain whether this proposal will be
enacted. Accordingly, it is unknown whether or how many states might
elect to participate or how their participation may affect the net amount of
funding available for Medicaid and SCHIP programs. If such a proposal
is adopted and decreases the number of persons enrolled in Medicaid or SCHIP in
the states in which we operate or reduces the volume of healthcare services
provided, our growth, operations and financial performance could be adversely
affected.
On May
29, 2007, CMS issued a final rule that would reduce states’ use of
intergovernmental transfers for the states’ share of Medicaid program
funding. By restricting the use of intergovernmental transfers, this
rule may restrict some states’ funding for Medicaid, which could adversely
affect our growth, operations and financial performance. On May 25,
2007, President Bush signed an Iraq war supplemental spending bill that included
a one-year moratorium on the effectiveness of the final rule. On June
30, 2008, President Bush signed another Iraq war supplemental spending bill that
extends the moratorium on the effectiveness of the final rule until April 1,
2009. We cannot predict whether the rule will ever be implemented and
if it is, what impact it will have on our business.
Recent
legislative changes in the Medicare program may also affect our
business. For example, the Medicare Prescription Drug, Improvement
and Modernization Act of 2003 revised cost-sharing requirements for some
beneficiaries and requires states to reimburse the federal Medicare program for
costs of prescription drug coverage provided to beneficiaries who are enrolled
simultaneously in both the Medicaid and Medicare programs. In its
fiscal year 2009 budget proposal, the Bush administration has also proposed to
further reduce total federal funding for the Medicaid program by $17.4 billion
over the next five years. These changes may reduce the availability of funding
for some states’ Medicaid programs, which could adversely affect our growth,
operations and financial performance. In addition, the Medicare
prescription drug benefit interrupted the distribution of prescription drugs to
many beneficiaries simultaneously enrolled in both Medicaid and Medicare,
prompting several states to pay for prescription drugs on an unbudgeted,
emergency basis without any assurance of receiving reimbursement from the
federal Medicaid program. These expenses may cause some states to
divert funds originally intended for other Medicaid services which could
adversely affect our growth, operations and financial performance.
If
state regulatory agencies require a statutory capital level higher than the
state regulations, we may be required to make additional capital
contributions.
Our
operations are conducted through our wholly owned subsidiaries, which include
health maintenance organizations, or HMOs, and managed care organizations, or
MCOs. HMOs and MCOs are subject to state regulations that, among
other things, require the maintenance of minimum levels of statutory capital, as
defined by each state. Additionally, state regulatory agencies may
require, at their discretion, individual HMOs to maintain statutory capital
levels higher than the state regulations. If this were to occur to
one of our subsidiaries, we may be required to make additional capital
contributions to the affected subsidiary. Any additional capital
contribution made to one of the affected subsidiaries could have a material
adverse effect on our liquidity and our ability to grow.
If
state regulators do not approve payments of dividends and distributions by our
subsidiaries to us, we may not have sufficient funds to implement our business
strategy.
We
principally operate through our health plan subsidiaries. If funds
normally available to us become limited in the future, we may need to rely on
dividends and distributions from our subsidiaries to fund our
operations. These subsidiaries are subject to regulations that limit
the amount of dividends and distributions that can be paid to us without prior
approval of, or notification to, state regulators. If these
regulators were to deny our subsidiaries’ request to pay dividends to us, the
funds available to us would be limited, which could harm our ability to
implement our business strategy.
Risks
Related to Our Business
Ineffectiveness
of state-operated systems and subcontractors could adversely affect our
business.
Our
health plans rely on other state-operated systems or sub-contractors to qualify,
solicit, educate and assign eligible members into the health
plans. The effectiveness of these state operations and
sub-contractors can have a material effect on a health plan’s enrollment in a
particular month or over an extended period. When a state implements
new programs to determine eligibility, new processes to assign or enroll
eligible members into health plans, or chooses new contractors, there is an
increased potential for an unanticipated impact on the overall number of members
assigned into the health plans.
Failure
to accurately predict our medical expenses could negatively affect our reported
results.
Our
medical expenses include estimates of medical expenses incurred but not yet
reported, or IBNR. We estimate our IBNR medical expenses monthly
based on a number of factors. Adjustments, if necessary, are made to
medical expenses in the period during which the actual claim costs are
ultimately determined or when criteria used to estimate IBNR
change. We cannot be sure that our IBNR estimates are adequate or
that adjustments to those estimates will not harm our results of
operations. For example, in the three months ended June 30, 2006 we
adjusted our IBNR by $9.7 million for adverse medical cost development from the
first quarter of 2006. In addition, when we commence operations in a
new state or region, we have limited information with which to estimate our
medical claims liabilities. For example, we commenced operations in
the Atlanta and Central regions of Georgia on June 1, 2006 and the Southwest
region of Georgia on September 1, 2006 and, for a period of time, based our
estimates on state provided historical actuarial data and limited actual
incurred and received data. From time to time in the past, our actual
results have varied from our estimates, particularly in times of significant
changes in the number of our members. Our failure to estimate IBNR
accurately may also affect our ability to take timely corrective actions,
further harming our results.
Receipt
of inadequate or significantly delayed premiums would negatively affect our
revenues and profitability.
Our
premium revenues consist of fixed monthly payments per member and supplemental
payments for other services such as maternity deliveries. These
premiums are fixed by contract, and we are obligated during the contract periods
to provide healthcare services as established by the state
governments. We use a large portion of our revenues to pay the costs
of healthcare services delivered to our members. If premiums do not
increase when expenses related to medical services rise, our earnings will be
affected negatively. In addition, our actual medical services costs
may exceed our estimates, which would cause our health benefits ratio, or our
expenses related to medical services as a percentage of premium revenue, to
increase and our profits to decline. In addition, it is possible for
a state to increase the rates payable to the hospitals without granting a
corresponding increase in premiums to us. If this were to occur in
one or more of the states in which we operate, our profitability would be
harmed. In addition, if there is a significant delay in our receipt
of premiums to offset previously incurred health benefits costs, our earnings
could be negatively impacted.
Failure
to effectively manage our medical costs or related administrative costs would
reduce our profitability.
Our
profitability depends, to a significant degree, on our ability to predict and
effectively manage expenses related to health benefits. We have less
control over the costs related to medical services than we do over our general
and administrative expenses. Because of the narrow margins of our
health plan business, relatively small changes in our health benefits ratio can
create significant changes in our financial results. Changes in
healthcare regulations and practices, the level of use of healthcare services,
hospital costs, pharmaceutical costs, major epidemics, new medical technologies
and other external factors, including general economic conditions such as
inflation levels, are beyond our control and could reduce our ability to predict
and effectively control the costs of providing health benefits. We
may not be able to manage costs effectively in the future. If our
costs related to health benefits increase, our profits could be reduced or we
may not remain profitable.
Difficulties
in executing our acquisition strategy could adversely affect our
business.
Historically,
the acquisition of Medicaid and specialty services businesses, contract rights
and related assets of other health plans both in our existing service areas and
in new markets has accounted for a significant amount of our
growth. Many of the other potential purchasers have greater financial
resources than we have. In addition, many of the sellers are
interested either in (a) selling, along with their Medicaid assets, other assets
in which we do not have an interest or (b) selling their companies, including
their liabilities, as opposed to the assets of their ongoing
businesses.
We
generally are required to obtain regulatory approval from one or more state
agencies when making acquisitions. In the case of an acquisition of a
business located in a state in which we do not currently operate, we would be
required to obtain the necessary licenses to operate in that
state. In addition, even if we already operate in a state in which we
acquire a new business, we would be required to obtain additional regulatory
approval if the acquisition would result in our operating in an area of the
state in which we did not operate previously, and we could be required to
renegotiate provider contracts of the acquired business. We cannot
assure you that we would be able to comply with these regulatory requirements
for an acquisition in a timely manner, or at all. In deciding whether
to approve a proposed acquisition, state regulators may consider a number of
factors outside our control, including giving preference to competing offers
made by locally owned entities or by not-for-profit entities.
We also
may be unable to obtain sufficient additional capital resources for future
acquisitions. If we are unable to effectively execute our acquisition
strategy, our future growth will suffer and our results of operations could be
harmed.
Execution
of our growth strategy may increase costs or liabilities, or create disruptions
in our business.
We pursue
acquisitions of other companies or businesses from time to
time. Although we review the records of companies or businesses we
plan to acquire, even an in-depth review of records may not reveal existing or
potential problems or permit us to become familiar enough with a business to
assess fully its capabilities and deficiencies. As a result, we may
assume unanticipated liabilities or adverse operating conditions, or an
acquisition may not perform as well as expected. We face the risk
that the returns on acquisitions will not support the expenditures or
indebtedness incurred to acquire such businesses, or the capital expenditures
needed to develop such businesses. We also face the risk that we will
not be able to integrate acquisitions into our existing operations effectively
without substantial expense, delay or other operational or financial
problems. Integration may be hindered by, among other things,
differing procedures, including internal controls, business practices and
technology systems. We may need to divert more management resources
to integration than we planned, which may adversely affect our ability to pursue
other profitable activities.
In
addition to the difficulties we may face in identifying and consummating
acquisitions, we will also be required to integrate and consolidate any acquired
business or assets with our existing operations. This may include the
integration of:
• additional
personnel who are not familiar with our operations and corporate
culture;
• provider
networks that may operate on different terms than our existing
networks;
• existing
members, who may decide to switch to another healthcare plan; and
• disparate
administrative, accounting and finance, and information systems.
Additionally,
our growth strategy includes start-up operations in new markets or new products
in existing markets. We may incur significant expenses prior to
commencement of operations and the receipt of revenue. As a result,
these start-up operations may decrease our profitability. In the
event we pursue any opportunity to diversify our business internationally, we
would become subject to additional risks, including, but not limited to,
political risk, an unfamiliar regulatory regime, currency exchange risk and
exchange controls, cultural and language differences, foreign tax issues, and
different labor laws and practices.
Accordingly,
we may be unable to identify, consummate and integrate future acquisitions or
start-up operations successfully or operate acquired or new businesses
profitably.
If
competing managed care programs are unwilling to purchase specialty services
from us, we may not be able to successfully implement our strategy of
diversifying our business lines.
We are
seeking to diversify our business lines into areas that complement our Medicaid
business in order to grow our revenue stream and balance our dependence on
Medicaid risk reimbursement. In order to diversify our business, we
must succeed in selling the services of our specialty subsidiaries not only to
our managed care plans, but to programs operated by
third-parties. Some of these third-party programs may compete with us
in some markets, and they therefore may be unwilling to purchase specialty
services from us. In any event, the offering of these services will
require marketing activities that differ significantly from the manner in which
we seek to increase revenues from our Medicaid programs. Our
inability to market specialty services to other programs may impair our ability
to execute our business strategy.
Failure
to achieve timely profitability in any business would negatively affect our
results of operations.
Start-up
costs associated with a new business can be substantial. For example,
in order to obtain a certificate of authority in most jurisdictions, we must
first establish a provider network, have systems in place and demonstrate our
ability to obtain a state contract and process claims. If we were
unsuccessful in obtaining the necessary license, winning the bid to provide
service or attracting members in numbers sufficient to cover our costs, any new
business of ours would fail. We also could be obligated by the state
to continue to provide services for some period of time without sufficient
revenue to cover our ongoing costs or recover start-up costs. The
expenses associated with starting up a new business could have a significant
impact on our results of operations if we are unable to achieve profitable
operations in a timely fashion.
We
derive a majority of our premium revenues from operations in a small number of
states, and our operating results would be materially affected by a decrease in
premium revenues or profitability in any one of those states.
Operations
in a few states have accounted for most of our premium revenues to
date. If we were unable to continue to operate in any of our current
states or if our current operations in any portion of one of those states were
significantly curtailed, our revenues could decrease materially. For
example, our Medicaid contract with Kansas, which terminated December 31, 2006,
together with our Medicaid contract with Missouri accounted for $317.0 million
in revenue for the year ended December 31, 2006. Our reliance on
operations in a limited number of states could cause our revenue and
profitability to change suddenly and unexpectedly depending on legislative or
other governmental or regulatory actions and decisions, economic conditions and
similar factors in those states. Our inability to continue to operate
in any of the states in which we operate would harm our business.
Competition
may limit our ability to increase penetration of the markets that we
serve.
We
compete for members principally on the basis of size and quality of provider
network, benefits provided and quality of service. We compete with
numerous types of competitors, including other health plans and traditional
state Medicaid programs that reimburse providers as care is
provided. Subject to limited exceptions by federally approved state
applications, the federal government requires that there be choices for Medicaid
recipients among managed care programs. Voluntary programs and
mandated competition may limit our ability to increase our market
share.
Some of
the health plans with which we compete have greater financial and other
resources and offer a broader scope of products than we do. In
addition, significant merger and acquisition activity has occurred in the
managed care industry, as well as in industries that act as suppliers to us,
such as the hospital, physician, pharmaceutical, medical device and health
information systems businesses. To the extent that competition
intensifies in any market that we serve, our ability to retain or increase
members and providers, or maintain or increase our revenue growth, pricing
flexibility and control over medical cost trends may be adversely
affected.
In
addition, in order to increase our membership in the markets we currently serve,
we believe that we must continue to develop and implement community-specific
products, alliances with key providers and localized outreach and educational
programs. If we are unable to develop and implement these
initiatives, or if our competitors are more successful than we are in doing so,
we may not be able to further penetrate our existing markets.
If
we are unable to maintain relationships with our provider networks, our
profitability may be harmed.
Our
profitability depends, in large part, upon our ability to contract favorably
with hospitals, physicians and other healthcare providers. Our
provider arrangements with our primary care physicians, specialists and
hospitals generally may be cancelled by either party without cause upon 90 to
120 days prior written notice. We cannot assure you that we will be
able to continue to renew our existing contracts or enter into new contracts
enabling us to service our members profitably.
From time
to time providers assert or threaten to assert claims seeking to terminate
noncancelable agreements due to alleged actions or inactions by
us. Even if these allegations represent attempts to avoid or
renegotiate contractual terms that have become economically disadvantageous to
the providers, it is possible that in the future a provider may pursue such a
claim successfully. In addition, we are aware that other managed care
organizations have been subject to class action suits by physicians with respect
to claim payment procedures, and we may be subject to similar
claims. Regardless of whether any claims brought against us are
successful or have merit, they will still be time-consuming and costly and could
distract our management’s attention. As a result, we may incur
significant expenses and may be unable to operate our business
effectively.
We will
be required to establish acceptable provider networks prior to entering new
markets. We may be unable to enter into agreements with providers in
new markets on a timely basis or under favorable terms. If we are
unable to retain our current provider contracts or enter into new provider
contracts timely or on favorable terms, our profitability will be
harmed.
We
may be unable to attract and retain key personnel.
We are
highly dependent on our ability to attract and retain qualified personnel to
operate and expand our business. If we lose one or more members of
our senior management team, including our chief executive officer, Michael F.
Neidorff, who has been instrumental in developing our business strategy and
forging our business relationships, our business and operating results could be
harmed. Our ability to replace any departed members of our senior
management or other key employees may be difficult and may take an extended
period of time because of the limited number of individuals in the Medicaid
managed care and specialty services industry with the breadth of skills and
experience required to operate and successfully expand a business such as
ours. Competition to hire from this limited pool is intense, and we
may be unable to hire, train, retain or motivate these personnel.
Negative
publicity regarding the managed care industry may harm our business and
operating results.
The
managed care industry has received negative publicity. This publicity
has led to increased legislation, regulation, review of industry practices and
private litigation in the commercial sector. These factors may
adversely affect our ability to market our services, require us to change our
services, and increase the regulatory burdens under which we
operate. Any of these factors may increase the costs of doing
business and adversely affect our operating results.
Claims
relating to medical malpractice could cause us to incur significant
expenses.
Our
providers and employees involved in medical care decisions may be subject to
medical malpractice claims. In addition, some states, including
Texas, have adopted legislation that permits managed care organizations to be
held liable for negligent treatment decisions or benefits coverage
determinations. Claims of this nature, if successful, could result in
substantial damage awards against us and our providers that could exceed the
limits of any applicable insurance coverage. Therefore, successful
malpractice or tort claims asserted against us, our providers or our employees
could adversely affect our financial condition and
profitability. Even if any claims brought against us are unsuccessful
or without merit, they would still be time consuming and costly and could
distract our management’s attention. As a result, we may incur
significant expenses and may be unable to operate our business
effectively.
Loss
of providers due to increased insurance costs could adversely affect our
business.
Our
providers routinely purchase insurance to help protect themselves against
medical malpractice claims. In recent years, the costs of maintaining
commercially reasonable levels of such insurance have increased dramatically,
and these costs are expected to increase to even greater levels in the
future. As a result of the level of these costs, providers may decide
to leave the practice of medicine or to limit their practice to certain areas,
which may not address the needs of Medicaid participants. We rely on
retaining a sufficient number of providers in order to maintain a certain level
of service. If a significant number of our providers exit our
provider networks or the practice of medicine generally, we may be unable to
replace them in a timely manner, if at all, and our business could be adversely
affected.
Growth
in the number of Medicaid-eligible persons during economic downturns could cause
our operating results to suffer if state and federal budgets decrease or do not
increase.
Less
favorable economic conditions may cause our membership to increase as more
people become eligible to receive Medicaid benefits. During such
economic downturns, however, state and federal budgets could decrease, causing
states to attempt to cut healthcare programs, benefits and rates. We
cannot predict the impact of changes in the United States economic environment
or other economic or political events, including acts of terrorism or related
military action, on federal or state funding of healthcare programs or on the
size of the population eligible for the programs we operate. If
federal funding decreases or remains unchanged while our membership increases,
our results of operations will suffer.
Growth
in the number of Medicaid-eligible persons may be countercyclical, which could
cause our operating results to suffer when general economic conditions are
improving.
Historically,
the number of persons eligible to receive Medicaid benefits has increased more
rapidly during periods of rising unemployment, corresponding to less favorable
general economic conditions. Conversely, this number may grow more
slowly or even decline if economic conditions improve. Therefore,
improvements in general economic conditions may cause our membership levels to
decrease, thereby causing our operating results to suffer, which could lead to
decreases in our stock price during periods in which stock prices in general are
increasing.
If
we are unable to integrate and manage our information systems effectively, our
operations could be disrupted.
Our
operations depend significantly on effective information systems. The
information gathered and processed by our information systems assists us in,
among other things, monitoring utilization and other cost factors, processing
provider claims, and providing data to our regulators. Our providers
also depend upon our information systems for membership verifications, claims
status and other information.
Our
information systems and applications require continual maintenance, upgrading
and enhancement to meet our operational needs and regulatory
requirements. Moreover, our acquisition activity requires frequent
transitions to or from, and the integration of, various information
systems. We regularly upgrade and expand our information systems’
capabilities. If we experience difficulties with the transition to or
from information systems or are unable to properly maintain or expand our
information systems, we could suffer, among other things, from operational
disruptions, loss of existing members and difficulty in attracting new members,
regulatory problems and increases in administrative expenses. In
addition, our ability to integrate and manage our information systems may be
impaired as the result of events outside our control, including acts of nature,
such as earthquakes or fires, or acts of terrorists.
We
rely on the accuracy of eligibility lists provided by state
governments. Inaccuracies in those lists would negatively affect our
results of operations.
Premium
payments to us are based upon eligibility lists produced by state
governments. From time to time, states require us to reimburse them
for premiums paid to us based on an eligibility list that a state later
discovers contains individuals who are not in fact eligible for a government
sponsored program or are eligible for a different premium category or a
different program. Alternatively, a state could fail to pay us for
members for whom we are entitled to payment. Our results of
operations would be adversely affected as a result of such reimbursement to the
state if we had made related payments to providers and were unable to recoup
such payments from the providers.
We
may not be able to obtain or maintain adequate insurance.
We
maintain liability insurance, subject to limits and deductibles, for claims that
could result from providing or failing to provide managed care and related
services. These claims could be substantial. We believe
that our present insurance coverage and reserves are adequate to cover currently
estimated exposures. We cannot assure you that we will be able to
obtain adequate insurance coverage in the future at acceptable costs or that we
will not incur significant liabilities in excess of policy limits.
From
time to time, we may become involved in costly and time-consuming litigation and
other regulatory proceedings, which require significant attention from our
management.
We are a
defendant from time to time in lawsuits and regulatory actions relating to our
business. Due to the inherent uncertainties of litigation and
regulatory proceedings, we cannot accurately predict the ultimate outcome of any
such proceedings. An unfavorable outcome could have a material
adverse impact on our business and operating results. In addition,
regardless of the outcome of any litigation or regulatory proceedings, such
proceedings are costly and require significant attention from our
management. For example, in 2006, we were named in two securities
class action lawsuits. In addition, we may in the future be the
target of similar litigation. As with other litigation, securities
litigation could be costly and time consuming, require significant attention
from our management and could harm our business and operating
results.
Issuer
Purchases of Equity Securities (1)
Second
Quarter 2008
|
Period
|
|
Total
Number of
Shares
Purchased
|
|
Average
Price
Paid
per
Share
|
|
Total
Number
of
Shares
Purchased
as
Part
of Publicly
Announced
Plans
or
Programs
|
|
Maximum
Number
of Shares
that
May Yet Be
Purchased
Under
the
Plans or
Programs
|
April
1 – April 30, 2008
|
|
|
48,465
|
|
$
|
13.68
|
|
|
48,400
|
|
|
2,742,809
|
May
1 – May 31, 2008
|
|
|
109,400
|
|
|
18.40
|
|
|
109,400
|
|
|
2,633,409
|
June
1 – June 30, 2008
|
|
|
189,567
|
|
|
19.45
|
|
|
189,567
|
|
|
2,443,842
|
TOTAL
|
|
|
347,432
|
|
$
|
18.32
|
|
|
347,367
|
|
|
2,443,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) On
November 7, 2005 our Board of Directors adopted a stock repurchase program
of up to 4,000,000 shares, which extends through October 31, 2008. During
the three months ended June 30, 2008, we repurchased 65 shares outside of
this publicly announced program.
|
We held
our annual meeting of stockholders on April 22, 2008. At the meeting,
Michael F. Neidorff, Richard A. Gephardt and John R. Roberts were re-elected as
Class I Directors. The votes with respect to each nominee are set
forth below:
|
|
Total
Vote For
Each
Director
|
|
Total
Vote Withheld From Each Director
|
Mr.
Neidorff
|
|
34,159,963
|
|
5,246,170
|
Mr.
Gephardt
|
|
33,970,921
|
|
5,435,212
|
Mr.
Roberts
|
|
34,446,002
|
|
4,960,131
|
Additional
directors of the Company whose terms of office continued after the meeting are
Steve Bartlett, Robert K. Ditmore, Fredrick H. Eppinger, Pamela A. Joseph, David
L. Steward and Tommy G. Thompson.
Also at
the meeting, the following actions were taken:
·
|
the
selection of KPMG LLP as the Company’s independent registered public
accounting firm for the fiscal year ending December 31, 2008 was
ratified; and
|
·
|
amendments
to the 2003 Stock Incentive Plan were
approved.
|
The votes
are set forth below:
|
|
Total
Vote For
|
|
Total
Vote Against
|
|
Total
Vote Abstain
|
|
Total Broker
Non-Votes
|
KPMG
LLP
|
|
39,164,926
|
|
230,844
|
|
10,362
|
|
-
|
2003
Stock Incentive Plan
|
|
28,738,749
|
|
6,674,894
|
|
20,322
|
|
3,972,168
|
EXHIBIT NUMBER
|
|
DESCRIPTION
|
|
|
|
10.1
|
|
Notice
of Renewal for fiscal year 2009 between Peach State Health Plan, Inc. and
Georgia Department of Community Health.
|
|
|
|
10.2
|
|
2003
Stock Incentive Plan, as amended, incorporated herein by reference to
Exhibit 10.1 to Form 8-K filed April 25, 2008.
|
|
|
|
12.1
|
|
Computation
of ratio of earnings to fixed charges.
|
|
|
|
31.1
|
|
Certification
of Chairman, President and Chief Executive Officer pursuant to Rule
13(a)-14(a) under the Securities Exchange Act of 1934, as
amended.
|
|
|
|
31.2
|
|
Certification
of Executive Vice President and Chief Financial Officer pursuant to Rule
13(a)-14(a) under the Securities Exchange Act of 1934, as
amended.
|
|
|
|
32.1
|
|
Certification
of Chairman, President and Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
|
|
|
|
32.2
|
|
Certification
of Executive Vice President and Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized as of July 22, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
Chairman,
President and Chief Executive Officer
(principal
executive officer)
|
|
|
|
|
|
|
|
Executive Vice
President and Chief Financial Officer
(principal financial
and accounting officer)
|