10-K405: Annual report [Sections 13 and 15(d), S-K Item 405]
Published on March 29, 2002
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
[ ] 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: 000-33395
(Exact name of registrant as specified in its charter)
Registrant's telephone number, including area code: (314) 725-4477
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.001 PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the last reported sale price of the common stock on the
Nasdaq National Market on February 28, 2002, was $116,989,762.
As of February 28, 2002, registrant had 10,091,812 shares of common stock
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for registrant's 2002 annual meeting of
stockholders are incorporated by reference in Part III, Items 10, 11, 12 and 13.
TABLE OF CONTENTS
ITEM 1. BUSINESS
We provide managed care programs and related services to individuals
receiving benefits under Medicaid, including Supplemental Security Income or
SSI, and the State Children's Health Insurance Program or SCHIP. We have health
plans in Wisconsin, Indiana and Texas. In each of our service areas we have more
Medicaid members than any other managed care entity. We believe our local
approach to managing our health plans, including provider and member services,
enables us to provide accessible, high quality, culturally-sensitive healthcare
services to our members. Our disease management, educational and other
initiatives are designed to help members best utilize the healthcare system to
ensure they receive appropriate, medically necessary services and effective
management of routine health problems, as well as more severe acute and chronic
conditions. We combine our decentralized local approach with centralized
finance, information systems, claims processing and medical management support
functions. In order to focus on Medicaid and the State Children's Health
Insurance Program, we do not offer Medicare or commercial products.
We were organized in Wisconsin in 1993 as Coordinated Care Corporation.
We initially were formed to serve as a holding company for a Medicaid managed
care line of business that has been operating in Wisconsin since 1984. We
changed our corporate name to Centene Corporation in 1997 and reincorporated in
Delaware in November 2001.
Medicaid provides health insurance to low-income families and
individuals with disabilities. Each state establishes its own eligibility
standards, benefit packages, payment rates and program administration within
federal standards. As a result, there are 56 Medicaid programs - one for each
state, each territory and the District of Columbia. Medicaid eligibility is
based on a combination of income and asset requirements subject to federal
guidelines. Financial requirements are most often determined by an income level
relative to the federal poverty level. In 2001 Medicaid covered 44.0 million
individuals in the United States. Historically, children have represented the
largest eligibility group for Medicaid.
SSI covers low-income aged, blind and disabled persons. SSI
beneficiaries represent a growing portion of all Medicaid recipients, and SSI
recipients typically utilize more services because of their more critical health
SCHIP was established in 1997 to provide coverage for low-income
children not otherwise covered by Medicaid or other insurance programs. All
states have adopted SCHIP.
Over the past decade, the increasing healthcare costs combined with
significant growth in the number of Medicaid recipients have led many states to
turn to managed care to deliver services. According to the federal government's
Centers for Medicare and Medicaid Services or CMS, the number of Medicaid
recipients enrolled in managed care plans has increased from 9% in 1991, to 55%
in 2000. Medicaid's premium payments to managed care plans are financed in part
by the federal government and have increased from $700 million in 1988 to $111
billion in 2000. A growing number of states, including each of the states in
which we operate, have mandated that their Medicaid recipients enroll in managed
Our approach to managed care is based on the following key attributes:
o MEDICAID EXPERTISE. Over the last 18 years, we have developed
a specialized Medicaid expertise that has helped us establish
and maintain strong relationships with our constituent
communities of members, providers and state governments. We
have implemented programs developed to achieve savings for
state governments and improve medical outcomes for members by
reducing inappropriate emergency room use, inpatient days and
high cost interventions, as well as by managing care of
chronic illnesses. We do this primarily by providing nurse
case managers who support our physicians in implementing
disease management programs and by providing incentives for
our physicians to provide preventive care on a regular basis.
We recruit and train staff and providers who are attentive to
the needs of our members and who are experienced in working
with culturally diverse, low income Medicaid populations. Our
experience in working with state regulators helps us to
efficiently implement and deliver our programs and services
and affords us opportunities to provide input on Medicaid
industry practices and policies in the states in which we
o LOCALIZED SERVICES, SUPPORT AND BRANDING. We provide access to
healthcare services through local networks of providers and
staff who focus on the cultural norms of their individual
communities. Our systems and procedures have been designed to
address these community-specific challenges through outreach,
education, transportation and other member support activities.
For example, our community outreach program employs former
Medicaid recipients to work with our members and their
communities to promote health, and to promote self-improvement
through employment and higher education. We use locally
recognized plan names, and we tailor our materials and
processes to meet the needs of the communities and the state
programs we serve. Our approach to community-based service
results in local accountability and solidifies our
decentralized management and operational structure.
o PHYSICIAN-DRIVEN APPROACH. We have implemented a
physician-driven approach in which our physicians are actively
engaged in developing and implementing our healthcare delivery
policies and strategies. Our local boards of directors, which
help shape the character and quality of our organization, have
significant provider representation in each of our principal
geographic markets. This approach is designed to eliminate
unnecessary costs, improve service to our members and simplify
the administrative burdens on our providers. It has enabled us
to strengthen our provider networks through improved physician
recruitment and retention that, in turn, have helped to
increase our membership base.
o EFFICIENCY OF BUSINESS MODEL. We designed our business model
to allow us to readily add new members in our existing markets
and expand into new regions in which we may choose to operate.
The combination of our decentralized local approach to
operating our health plans and our centralized finance,
information systems, claims processing and medical management
support functions allows us to quickly and economically
integrate new business opportunities. For example, we
integrated 65,000 former Humana members within 75 days after
acquiring Humana's Medicaid contracts in Wisconsin and Texas.
Because of our business model, we believe we would be able to
quickly recover from a disaster in one of our plan locations
by moving member and physician services to one of our other
o SPECIALIZED SYSTEMS AND TECHNOLOGY. Through our specialized
information systems, we are able to strengthen our
relationships with providers and states, which helps us to
grow our membership base. These systems also help us identify
needs for new healthcare programs. Physicians can use our
claims, utilization and membership data to manage their
practices more efficiently, and they benefit from our timely
and accurate payments. State agencies can use data from our
information systems to demonstrate that their Medicaid
populations are receiving quality healthcare in an efficient
o COMPLEMENTARY BUSINESS LINES. We have begun to broaden our
service offerings to address areas that we believe have been
traditionally underserved by Medicaid managed care
organizations. We believe other business lines, such as our
NurseWise triage program, will allow us to expand our services
and diversify our sources of revenue.
Our objective is to become the leading national Medicaid managed care
organization. We intend to achieve this objective by implementing the following
key components of our strategy:
o INCREASE PENETRATION OF EXISTING STATE MARKETS. We intend to
increase our membership in states in which we currently
operate through alliances with key providers, outreach
efforts, development and implementation of community-specific
products and acquisitions. For example, in Indiana, where the
state assigns members to physicians, we have increased our
membership by recruiting additional physicians. We may also
increase membership by acquiring Medicaid contracts and other
related assets from our competitors in our existing markets.
o DEVELOP AND ACQUIRE ADDITIONAL STATE MARKETS. We intend to
leverage our experience in identifying and developing new
markets by seeking both to acquire existing businesses and to
build our own operations. We expect to focus our expansion on
states where Medicaid recipients are mandated to enroll in
managed care organizations and in which we believe we can be
the market leader.
o DIVERSIFY OUR BUSINESS LINES. We seek to broaden our business
lines into areas that complement our business to enable us to
grow our revenue stream and decrease our dependence on
Medicaid reimbursement. In addition to NurseWise, we are
considering services such as behavioral health and
transportation. We believe we may have opportunities to offer
these services to other managed care organizations and states.
o LEVERAGE OUR INFORMATION TECHNOLOGIES TO ENHANCE OPERATING
EFFICIENCIES. We intend to continue to invest in our
centralized information systems to further streamline our
processes and drive efficiencies in our operations and to add
functionality to improve the service we provide to our
members. Our information systems enable us to add members and
markets quickly and economically.
MEMBER PROGRAMS AND SERVICES
We recognize the importance of member-focused services in the delivery
of quality managed care services. Our locally based staff assists members in
accessing care, coordinating referrals to related health and social services,
and addressing member concerns and questions. Our health plans provide the
o primary and specialty physician care;
o inpatient and outpatient hospital care;
o emergency and urgent care;
o prenatal care;
o laboratory and x-ray services;
o home health and durable medical equipment;
o behavioral health and substance abuse services;
o after hours nurse advice line;
o transportation assistance;
o health status calls to coordinate care;
o vision care; and
o prescriptions and limited over-the-counter drugs and
We also provide the following education and outreach programs to inform
and assist members in accessing quality, appropriate healthcare services in an
o CONNECTIONS is designed to create a link between the member
and the provider and help identify potential challenges or
risk elements to a member's health, such as abuse risks,
nutritional challenges and health education shortcomings.
CONNECTIONS representatives, many of whom are former Medicaid
enrollees, also contact new members by phone or mail to
discuss managed care, the Medicaid program and our services.
They make home visits, conduct educational programs and
represent the plan at community events such as health fairs.
o NurseWise provides a toll-free nurse triage line between the
hours of 5:00 p.m. and 8:00 a.m. each weekday and 24 hours on
weekends and holidays. Our members can call one number and
reach a bilingual nursing staff who can provide triage advice
and referrals, and if necessary, arrange for treatment and
transportation and contact qualified behavioral health
professionals for assessments.
o START SMART For Your Baby is a prenatal and infant health
program designed to increase the percentage of pregnant women
receiving early prenatal care, reduce the incidence of low
birth weight babies, identify high risk pregnancies, increase
participation in the federal Women, Infant, and Children
program, and increase well-child visits. The program includes
risk assessments, education through face-to-face meetings and
materials, behavior modification plans and assistance in
selecting a provider for the infant and scheduling newborn
o EPSDT Case Management is a preventive care program designed to
educate our members on the benefits of Early and Periodic
Screening, Diagnosis and Treatment, or EPSDT, services. We
have a systematic program of communication, tracking,
outreach, reporting, and follow-through that promotes state
o Disease Management Programs are designed to help members
understand their disease and treatment plan, and improve or
maintain their quality of life. These programs address medical
conditions that are common within the Medicaid population such
as asthma, diabetes and prenatal care.
For each of our service areas, we establish a provider network
consisting of primary and specialty care physicians, hospitals and ancillary
providers. As of February 28, 2002, our health plans had the following numbers
of physicians and hospitals:
The primary care physician is a critical component in care delivery,
and also in the management of costs and the attraction and retention of new
members. Primary care physicians include family and general practitioners,
pediatricians, internal medicine physicians and OB/GYNs. Specialty care
physicians provide medical care to members generally upon referral by the
primary care physicians.
We work closely with physicians to help them operate efficiently by
providing financial and utilization information, physician and patient
educational programs and disease and medical management programs, as well as
adhering to a prompt payment policy. Our programs are also designed to help the
physicians coordinate care outside of their offices.
We believe our collaborative approach with physicians gives us a
competitive advantage in entering new markets. Our physicians serve on local
committees that assist us in implementing preventive care methods, managing
costs and improving the overall quality of care delivered to our members, while
assuming responsibility for medical policy decision-making. The following are
among the services we provide to support physicians:
o Customized Utilization Reports provide our contracted
physicians with information that enables them to run their
practices more efficiently and focuses them on specific
patient needs. For example, quarterly fund-detail reports
update physicians on their status within their risk pools.
Equivalency reports provide physicians with financial
comparisons of capitated versus fee-for-service arrangements.
o Case Management Support helps the physician coordinate
specialty care and ancillary services for patients with
complex conditions and direct members to appropriate community
resources to address both their health and socio-economic
o Web-based Claims and Eligibility Resources have been
implemented in a pilot group in selected markets to provide
physicians with on-line access to perform claims and
Our physicians also benefit from several of the services offered to our
members, including the CONNECTIONS, EPSDT case management and disease management
programs. For example, the CONNECTIONS staff facilitate the doctor/patient
relationship by connecting the member with the physician, the EPSDT programs
encourage routine checkups for children with their physician and the disease
management programs assist physicians in managing their patients with chronic
We provide access to healthcare services for our members primarily
through non-exclusive contracts with our providers. Our contracts with primary
and specialty care physicians and hospitals usually are for one to two year
periods and automatically renew for successive one year terms, but generally are
subject to termination by either party upon 90 to 120 days' prior written
notice. In the absence of a contract, we typically pay providers at state
Medicaid reimbursement levels. We pay physicians under a capitated or
o Under our capitated contract, primary care physicians are paid
a monthly capitation rate for each of our members assigned to
his or her practice and are at risk for all costs related to
primary and specialty physician and emergency room services.
In return for this payment, these physicians provide all
primary care and preventive services, including primary care
office visits and EPSDT services. If these physicians also
provide non-capitated services to their assigned members, they
may bill and be paid under fee-for-service arrangements at
o Under our fee-for-service contracts with physicians,
particularly specialty care physicians, we pay the physicians
a negotiated fee for covered services. This model is
characterized as having no financial risk for the physician.
We also contract with ancillary providers on a negotiated fee
arrangement for physical therapy, mental health and chemical dependency care,
home healthcare, vision care, diagnostic laboratory tests, x-ray examinations,
ambulance services and durable medical equipment. Additionally, we contract with
dental vendors in markets where routine dental care is a covered benefit. We
have a capitated arrangement with a national pharmacy vendor that provides a
pharmacy network in our markets where prescription and limited over-the-counter
drugs are a covered benefit.
We have three health plan subsidiaries offering healthcare services in
Wisconsin, Indiana and Texas. We have never been denied a contract renewal from
the states in which we do business. The table below provides certain highlights
to the markets we currently serve.
We acquired 39% of Superior in 1998, an additional 51% effective
January 1, 2001, and the remaining 10% in December 2001. For additional
information about Superior, see "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations--Overview--Other Income."
Until we discontinued operating commercial plans in 1999, we operated
in two reportable segments, Medicaid and commercial. See Note 21 to our
consolidated financial statements for additional information about segment
Our ability to establish and maintain our position as a leader in the
markets we serve results primarily from our demonstrated success in providing
quality care while reducing and managing costs for, and our customer-focused
approach to working with, state governments. Among the benefits we are able to
provide to the states with which we contract are:
o expertise in Medicaid managed care;
o improved medical outcomes;
o timely and accurate reporting;
o cost saving outreach and disease management programs; and
o responsible collection and dissemination of encounter data.
Our medical management program focuses on improving quality of care in
areas that have the greatest impact on our members. We employ strategies
including disease management and complex case management that are fine-tuned for
implementation in our individual markets by a system of physician committees
chaired by local physician leaders. This process promotes physician
participation and support, both critical factors in the success of any clinical
quality improvement program.
We have implemented specialized information systems to support our
medical quality management activities. Information is drawn from our data
warehouse, the clinical databases and AMISYS as sources to identify
opportunities to improve care and to track the outcomes of the interventions
implemented to achieve those improvements. Some examples of these intervention
o a prenatal case management program to help women with
high-risk pregnancies deliver full-term, healthy infants;
o a program to reduce the number of inappropriate emergency room
o a disease management program to decrease the need for
emergency room visits and hospitalizations for asthma
Additionally, we provide extensive quality reporting on a regular basis
using our data warehouse. State and Health Employer Data and Information Set, or
HEDIS, reporting constitutes the core of the information base that drives our
clinical quality performance efforts. This reporting is monitored by Plan
Quality Improvement Committees and our corporate medical management team.
In order to ensure the quality of our provider networks, we verify the
credentials and background of our providers using standards that are supported
by the National Committee for Quality Assurance. Additionally, we provide
feedback and evaluations to our providers on quality and medical management in
order to improve the quality of care, increase their support of our programs and
enhance our ability to attract and retain providers.
MANAGEMENT INFORMATION SYSTEMS
The ability to access data and translate them into meaningful
information is essential to operating across a multi-state service area in a
cost-effective manner. Our centralized information systems located in Saint
Louis, Missouri, support our core processing functions under a set of integrated
databases and are designed to be both replicable and scalable to accommodate
internal growth and growth from acquisitions. We have the ability to leverage
the platform we have developed for one state for configuration into new states
or health plan acquisitions. This integrated approach helps to assure that
consistent sources of claim and member information are provided across all of
our health plans. The system is currently configured and is supporting claims
auto adjudication rates of approximately 85% in all markets. Our AMISYS
production system is capable of supporting over a million members.
We have a disaster recovery and business resumption plan developed and
implemented in conjunction with a third party. This plan allows us complete
access to the business resumption centers and hot-site facilities provided by
it. We have contracted with the third party to provide us with annual plan
updates through 2005.
Our Corporate Ethics and Compliance Programs are concrete methods by
which we further enhance operations, safeguard against fraud and abuse, improve
access to quality care, and help assure that our values are reflected in
everything we do.
The two primary standards by which corporate compliance programs in the
health care industry are measured are the 1991 Federal Organizational Sentencing
Guidelines, and the "Compliance Program Guidance" issued by the Office of the
Inspector General, or OIG, of the Department of Health and Human Services.
Our program contains each of the seven elements suggested by the
Sentencing Guidelines and the OIG Guidance. These key components are:
o written standards of conduct;
o designation of a corporate compliance officer and compliance
o effective training and education;
o effective lines for reporting and communication;
o enforcement of standards through disciplinary guidelines and
o internal monitoring and auditing, and
o prompt response to detected offenses and development of
corrective action plans.
Centene's internal Corporate Compliance website, accessible by all
employees, contains Centene's Business Ethics and Conduct Policy; its Missions,
Values and Philosophies (MVP) and Compliance Programs, a company-wide policy and
procedure database and our toll-free hotline to allow employees or other persons
to anonymously report suspected incidents of fraud, abuse or other violations of
our corporate compliance program.
In the Medicaid business, our principal competitors for state
contracts, members and providers consist of the following types of
Primary Care Case Management Programs are programs established by the
states through contracts with primary care providers. Under these programs,
physicians provide primary care services to the Medicaid recipient, as well as
limited oversight over other services.
National and Regional Commercial Managed Care Organizations have
Medicaid and Medicare members in addition to members in private commercial
Medicaid Managed Care Organizations focus solely on providing
healthcare services to Medicaid recipients, the vast majority of which operate
in one city or state. Providers, especially hospitals, own many of these plans.
Their membership is small relative to the infrastructure that is required for
them to do business. There are a few multi-state Medicaid-only organizations
that tend to be larger in size and therefore are able to leverage their
infrastructure over larger membership.
We will continue to face varying levels of competition as we expand in
our existing service areas or enter new markets. Healthcare reform proposals may
cause a number of commercial managed care organizations already in our service
areas to decide to enter or exit the Medicaid market. However, the licensing
requirements and bidding and contracting procedures in some states present
barriers to entry into the Medicaid managed healthcare industry.
We compete with other managed care organizations for state contracts.
In order to win a bid for or be awarded a state contract, state governments
consider many factors, which include providing quality care, satisfying
financial requirements, demonstrating an ability to deliver services, and
establishing provider networks and infrastructure. Some of the factors may be
outside our control.
We also compete to enroll new members and retain existing members.
People who wish to enroll in a managed healthcare plan or to change healthcare
plans typically choose a plan based on the quality of care and service offered,
ease of access to services, a specific provider being part of the network and
the availability of supplemental benefits.
We also compete with other managed care organizations to enter into
contracts with physicians, physician groups and other providers. We believe the
factors that providers consider in deciding whether to contract with us include
existing and potential member volume, reimbursement rates, medical management
programs, timeliness of reimbursement and administrative service capabilities.
Our healthcare operations are regulated at both state and federal
levels. Government regulation of the provision of healthcare products and
services is a changing area of law that varies from jurisdiction to
jurisdiction. Regulatory agencies generally have discretion to issue regulations
and interpret and enforce laws and rules. Changes in applicable laws and rules
also may occur periodically.
MANAGED CARE ORGANIZATIONS
Our three health plan subsidiaries are licensed to operate as health
maintenance organizations in each of Wisconsin, Indiana and Texas. In each of
the jurisdictions in which we operate, we are regulated by the relevant health,
insurance and/or human services departments that oversee the activities of
managed care organizations providing or arranging to provide services to
The process for obtaining authorization to operate as a managed care
organization is lengthy and involved and requires demonstration to the
regulators of the adequacy of the health plan's organizational structure,
financial resources, utilization review, quality assurance programs and
complaint procedures. Under both state managed care organization statutes and
state insurance laws, our health plan subsidiaries must comply with minimum net
worth requirements and other financial requirements, such as minimum capital,
deposit and reserve requirements. Insurance regulations may also require the
prior state approval of acquisitions of other managed care organizations'
businesses and the payment of dividends, as well as notice requirements for
loans or the transfer of funds. Our subsidiaries are also subject to periodic
reporting requirements. In addition, each health plan must meet numerous
criteria to secure the approval of state regulatory authorities before
implementing operational changes, including the development of new product
offerings and, in some states, the expansion of service areas.
In order to be a Medicaid managed care organization in each of the
states in which we operate, we must operate under a contract with the state's
Medicaid agency. States generally use either a formal proposal process,
reviewing a number of bidders, or award individual contracts to qualified
applicants that apply for entry to the program.
We have entered into a contract with the Wisconsin Department of Health
and Family Services to provide Medicaid services. The contract commenced January
1, 2002 and has a scheduled termination of December 31, 2003. We expect to renew
this contract for an additional one-year term prior to its expiration. The
contract can be terminated if a change in state or federal laws, rules or
regulations materially affects either party's rights or responsibilities under
the contract. We receive monthly payments under the contract based on specified
capitation rates calculated on an actuarial basis.
We have also entered into an agreement with Network Health Plan of
Wisconsin, Inc. pursuant to which Network Health Plan subcontracts to us their
Medicaid services under their contract with the State of Wisconsin. The
agreement commenced January 1, 2001 and has a scheduled termination of January
1, 2007. The agreement automatically renews for successive five-year terms and
can be terminated by either party upon two years notice prior to the end of the
then current term. The agreement may also be terminated if a change in state or
federal laws, rules or regulations materially affects either party's rights or
responsibilities under the contract, or if Network Health Plan's contract with
the State of Wisconsin is terminated. We receive a monthly payment based on a
percentage of all premium and supplemental payments and other compensation
received by Network Health Plan from the State of Wisconsin.
We have entered into a contract with the State of Indiana to provide
Indiana Medicaid and Indiana Children's Health Insurance Program services. The
contract commenced January 1, 2001 and has a scheduled termination of December
31, 2002. The agreement is renewable, at the option of the state, for up to two
additional one-year terms. This contract may be terminated by the state without
cause upon sixty days prior written notice. We are paid based on specified
capitation rates for our services.
We presently are party to three contracts with the Texas Health and
Human Services Commission to provide Medicaid managed care services in our Texas
markets through our Superior HealthPlan, Inc. subsidiary. Each of our Texas
contracts commenced August 30, 1999 and has a scheduled termination of August
31, 2002. Each contract is renewable for an additional one-year period. The
contracts generally may be terminated upon any event of default or in the event
state or federal funding for Medicaid programs is no longer available. We
receive monthly payments under each of our Texas contracts based on specified
capitation rates calculated on an actuarial basis.
Our contracts with the states and regulatory provisions applicable to
us generally set forth in great detail the requirements for operating in the
Medicaid sector including provisions relating to:
o eligibility, enrollment and disenrollment processes;
o covered services;
o eligible providers;
o record-keeping and record retention;
o periodic financial and informational reporting;
o quality assurance;
o financial standards;
o timeliness of claims payment;
o health education and wellness and prevention programs;
o safeguarding of member information;
o fraud and abuse detection and reporting;
o grievance procedures; and
o organization and administrative systems.
A health plan's compliance with these requirements is subject to
monitoring by state regulators and by the CMS. A health plan is subject to
periodic comprehensive quality assurance evaluation by a third party reviewing
organization and generally by the insurance department of the jurisdiction that
licenses the health plan. A health plan must also submit many reports to various
regulatory agencies, including quarterly and annual statutory financial
statements and utilization reports.
In 1996, Congress enacted the Health Insurance Portability and
Accountability Act of 1996, or HIPAA. The Act is designed to improve the
portability and continuity of health insurance coverage and simplify the
administration of health insurance claims. One of the main requirements of HIPAA
is the implementation of standards for the processing of health insurance claims
and for the security and privacy of individually identifiable health
In August 2000, the Department of Health and Human Services, or HHS,
issued new standards for submitting electronic claims and other administrative
healthcare transactions. The new standards were designed to
streamline the processing of claims, reduce the volume of paperwork and provide
better service. The administrative and financial healthcare transactions covered
o health claims and equivalent encounter information;
o enrollment and disenrollment in a health plan;
o eligibility for a health plan;
o healthcare payment and remittance advice;
o health plan premium payments;
o healthcare claim status; and
o referral certification and authorization.
In general, healthcare organizations will be required to comply with
the new standards by October 2002. The regulation's requirements apply only when
a transaction is transmitted using "electronic media." Because "electronic
media" is defined broadly to include "transmissions that are physically moved
from one location to another using magnetic tape, disk or compact disk media,"
many communications will be considered electronically transmitted. In addition,
health plans will be required to have the capacity to accept and send all
standard transactions in a standardized electronic format. The regulation sets
forth other rules that apply specifically to health plans as follows:
o a plan may not delay processing of a standard transaction
(that is, it must complete transactions using the new
standards at least as quickly as it had prior to
implementation of the new standards);
o there should be "no degradation in the transmission of,
receipt of, processing of, and response to" a standard
transaction as compared to the handling of a non-standard
o if a plan uses a healthcare clearinghouse to process a
standard request, the other party to the transaction may not
be charged more or otherwise disadvantaged as a result of
using the clearinghouse;
o a plan may not reject a standard transaction on the grounds
that it contains data that is not needed or used by the plan;
o a plan may not adversely affect (or attempt to adversely
affect) the other party to a transaction for requesting a
standard transaction; and
o if a plan coordinates benefits with another plan, then upon
receiving a standard transaction, it must store the
coordination of benefits data required to forward the
transaction to the other plan.
On December 28, 2000, HHS published a final regulation setting forth
new standards for protecting the privacy of individually identifiable health
information in any medium. Compliance with these rules will be required by April
2003. The new regulation is designed to protect medical records and other
personal health information maintained and used by healthcare providers,
hospitals, health plans and health insurers, and healthcare clearinghouses.
Among numerous other requirements, the new standards:
o limit certain non-consensual uses and releases of private
health information, and require patient authorizations for
such uses and disclosures of private health information;
o give patients new rights to access their medical records and
to know who else has accessed them;
o limit most disclosure of health information to the minimum
needed for the intended purpose;
o establish procedures to ensure the protection of private
health information; and
o establish new requirements for access to records by
researchers and others.
The preemption provisions of HIPAA provide that the federal standards
will generally preempt contrary state law. However, the Secretary of HHS may
grant an exception to this general rule if one or more of a number of conditions
are met, including but not limited to the following:
o the state law is necessary to prevent fraud and abuse related
to the provision of and payment for healthcare;
o the state law is necessary to ensure appropriate state
regulation of insurance and health plans;
o the state law is necessary for state reporting on healthcare
delivery or costs; or
o the state law addresses controlled substances.
In addition, contrary state laws relating to private health information are not
preempted if the state law is more stringent than the related federal
requirement requirements.The HIPAA law also established new criminal and civil
sanctions for improper use or disclosure of health information.
In addition, on August 12, 1998, HHS published proposed regulations
relating to the security of individually identifiable health information. These
rules would require healthcare providers, health plans and healthcare
clearinghouses to ensure the privacy and confidentiality of such information
when it is electronically stored, maintained or transmitted through such devices
as user authentication mechanisms and system activity audits. These regulations
have not been finalized.
We are in the process of assessing the impact that these new
regulations will have on us, given their complexity and the likelihood that they
will be subject to changing, and perhaps conflicting, interpretations.
NEW MEDICAID MANAGED CARE REGULATIONS
On January 19, 2001, HHS issued final Medicaid managed care regulations
to implement certain provisions of the Balanced Budget Act of 1997, or BBA.
Since the publication of this final rule, CMS delayed the rule's effective date
three times; the most recent of which delays the effective date of the final
rule to August 16, 2002. In addition, on August 20, 2001, CMS proposed a new
Medicaid managed care rule that is intended to eventually replace the final rule
published on January 19, 2001.
The proposed rule would implement BBA provisions intended to (1) give
states the flexibility to enroll certain Medicaid recipients in managed care
plans without a federal waiver if the state provides the recipients with a
choice of managed care plans; (2) establish protections for members in areas
such as quality assurance, grievance rights and coverage of emergency services;
and (3) eliminate certain requirements viewed by the states as impediments to
the growth of managed care programs, such as the enrollment composition
requirement, the right to disenroll without cause at any time, and the
prohibition against enrollee cost-sharing. The rule would also establish
requirements intended to ensure that state Medicaid managed care capitation
rates are actuarially sound. According to HHS, this requirement would eliminate
the generally outdated regulatory ceiling on what states may pay managed care
plans, a particularly important provision as more state Medicaid programs
include people with chronic illnesses and disabilities in managed care. CMS
accepted comments on the proposed rule until October 16, 2001, and the Secretary
of HHS has indicated an intent to finalize the regulations in 2002.
Because the final content of the rule has not yet been determined, we
cannot predict what requirements it will ultimately entail, nor when such
requirements will become effective. Changes to the regulations affecting our
business, including these proposed regulations, could increase our healthcare
costs and administrative expenses, reduce our reimbursement rates, and otherwise
adversely affect our business, results of operations, and financial condition.
PATIENTS' RIGHTS LEGISLATION
The United States Senate and House of Representatives passed different
versions of patients' rights legislation in June and August 2001, respectively.
Both versions include provisions that specifically apply protections to
participants in federal healthcare programs, including Medicaid beneficiaries.
Either version of this legislation could expand our potential exposure to
lawsuits and increase our regulatory compliance costs. Congress will need to
reconcile the differences between the two proposals before it can become law.
Depending on the final form of any patients' rights legislation, such
legislation could, among other things, expose us to liability for economic and
punitive damages for making determinations that deny benefits or delay
beneficiaries' receipt of benefits as a result of our medical necessity or other
coverage determinations. The differences include such matters as the amount of
allowable damages, whether cases would be governed by federal or state law, and
whether such actions could be brought in federal or state courts. We cannot
predict whether patients' rights legislation will be enacted into law or, if
enacted, what final form such legislation might take.
OTHER FRAUD AND ABUSE LAWS
Investigating and prosecuting healthcare fraud and abuse became a top
priority for law enforcement entities in the last decade. The focus of these
efforts has been directed at participants in public government healthcare
programs such as Medicaid. The laws and regulations relating to Medicaid fraud
and abuse and the contractual requirements applicable to plans participating in
these programs are complex and changing and will require substantial resources.
As of February 28, 2002, we had 440 employees, of whom 198 were
employed at our Saint Louis headquarters and at our Farmington claims center, 56
by our Indiana plan, 98 by our Wisconsin plan and 88 by our Texas plan. Our
employees are not represented by a union. We believe our relationships with our
employees are good.
ITEM 2. PROPERTIES
Our headquarters occupy approximately 36,000 square feet of office
space in Saint Louis, Missouri under a lease expiring in 2010. We currently are
subleasing approximately 4,000 square feet of this space. Our claims center
occupies approximately 14,000 square feet of office space in Farmington,
Missouri under a lease expiring in 2009. We also lease space in Wisconsin,
Indiana and Texas where our health plans are located. We are required by various
insurance and Medicaid regulatory authorities to have offices in the service
areas where we provide Medicaid benefits. We believe our current facilities are
adequate to meet our operational needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
In the normal course of our business, we may be a party to legal
proceedings. We are not currently a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our stockholders met on November 12, 2001 to consider and vote upon a
proposal to reincorporate Centene Corporation in Delaware. Prior to the
re-incorporation, we were a Wisconsin corporation. At the meeting, holders of
52,734 shares of common stock and 4,282,350 shares of preferred stock voted to
approve the re-incorporation and no shares were voted against the proposal.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET FOR COMMON STOCK; DIVIDENDS
Our common stock has been traded and quoted on the Nasdaq National Market
under the symbol "CNTE" since December 13, 2001. The reported high and low last
sale prices for our common stock on the Nasdaq National Market between December
13 and December 31, 2001 were $23.10 and $14.27, respectively. On February 28,
2002, the last reported sale price for our common stock was $18.75. As of
February 28, 2002, there were 37 holders of record of our common stock.
We have never declared or paid any cash dividends on our capital stock,
and currently anticipate that we will retain any future earnings for the
development, operation and expansion of our business.
USE OF PROCEEDS OF INITIAL PUBLIC OFFERING
Pursuant to a registration statement filed with the SEC, we sold an
aggregate of 3,250,000 shares of our common stock at a price of $14.00 per share
on December 13, 2001. One of our stockholders sold 250,000 shares of common
stock in the offering, and other selling stockholders sold an aggregate of an
additional 525,000 shares of common stock upon exercise by the underwriters of
their over-allotment option, all at $14.00 per share. S.G. Cowen Securities
Corporation, Thomas Weisel Partners LLC and CIBC World Markets Corp. acted as
representatives of the underwriters for the offering.
Our net proceeds from our initial public offering, after deduction of
underwriting discounts and commissions of $3.2 million and expenses of $1.3
million, were $41.0 million. The expenses were paid directly to persons other
than (a) our directors or officers, (b) their associates or (c) persons owning
10% or more of any class of our equity securities. In December 2001, we used
$4.0 million of our net proceeds to repay the entire principal amount on our
outstanding subordinated notes. The balance of our net proceeds has been added
to our working capital.
The subordinated notes accrued interest at a fixed rate of 8.5% per year
and matured in two equal installments in September 2003 and 2004. We had the
right to repay the notes at any time without premium or penalty. We issued the
notes in September 1998 to refinance notes that had been issued in 1993 to fund
expansion opportunities and statutory net worth requirement needs. An aggregate
of $2.5 million of the subordinated notes were held by Greylock Limited
Partnership which owned 21.1% of our common stock at the time of repayment and
is an affiliate of our director, Howard E. Cox, Jr.; $660,746 of the notes were
held by the Elizabeth A. Brinn Foundation, which is an affiliate of our
directors, Samuel E. Bradt, Claire W. Johnson and Richard P. Wiederhold; and
$235,499, $205,352 and $7,980 of the notes, respectively, were held by Mr.
Johnson, Mr. Wiederhold and Michael F. Neidorff, each of whom is one of our
directors. Mr. Neidorff is also our President and Chief Executive Officer.
UNREGISTERED SALE OF SECURITIES
In 2001, prior to the time we became subject to the reporting
requirements of the Securities Exchange Act of 1934, we granted options to
purchase 89,500 shares of common stock to employees pursuant to our 2000 Stock
Plan, and sold an aggregate of 19,100 shares of common stock to employees upon
exercise of options outstanding under our various stock plans at exercise prices
ranging from $1.00 to $2.40. All of the shares purchased and options granted
were exempt from registration under Rule 701 under the Securities Act.
In December 2001, we sold an aggregate of 46,003 shares of common stock
to 14 purchasers upon exercise of warrants. The warrants had exercise prices of
$2.40 and $5.00 per share. The sales were made in reliance upon the exemptions
from registration under Section 4(2) of the Securities Act and, in particular,
Regulation D under the Securities Act.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in
connection with, and are qualified by reference to, the consolidated financial
statements and related notes and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere in this
report. The data for the years ended December 31, 1999, 2000, and 2001 and as of
December 31, 2000 and 2001 are derived from consolidated financial statements
audited by Arthur Andersen LLP and included elsewhere in this filing. The data
for the years ended December 31, 1997 and 1998 and as of December 31, 1997, 1998
and 1999 are derived from audited consolidated financial statements not included
in this filing. The pro forma share information included in the consolidated
statement of earnings data assumes that as of the first day of the period, (i)
our initial public offering was completed, (ii) all classes of our preferred and
common stock were converted into a single class of common stock, (iii) our
subordinated notes of $4.0 million were repaid with a portion of the net
proceeds of $41.0 million from our initial public offering and (iv) the balance
of the net proceeds were invested in short-term instruments bearing interest of
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
We provide managed care programs and related services to individuals
receiving benefits under Medicaid, including Supplemental Security Income, and
the State Children's Health Insurance Program. We have health plans in
Wisconsin, Indiana and Texas.
We generate revenues primarily from premiums we receive from the states
in which we operate to provide health benefits to our members. We receive a
fixed premium per member per month pursuant to our state contracts. We generally
receive premiums in advance of providing services and recognize premium revenue
during the period in which we are obligated to provide services to our members.
We also generate administrative services fees for providing services to SSI
members on a non-risk basis.
The primary driver of our increasing revenues has been membership growth.
We have increased our membership through both internal growth and acquisitions.
From December 31, 1998 to December 31, 2001, we have grown our membership by
73.4%. The following table sets forth our membership by state, excluding members
related to the commercial operations that we discontinued in 1999:
For the year ended December 31, 2001, our membership in Indiana
declined due to a subcontracting provider organization terminating a
percent-of-premium arrangement, which was our only contract of that type.
Separately, we entered into agreements with Humana that resulted in the transfer
to us of 35,000 members in Wisconsin and 30,000 members in Texas.
In 2000, a competitor in our Wisconsin market terminated its
participation in the Medicaid program benefiting our enrollment growth. Our
membership growth in the northern and central regions of Indiana was offset by
our decision to reduce our participation in the southern region. Our El Paso
health plan achieved sizable growth because we were named the default health
plan in this area and enrolled a majority of the members who failed to select a
In 1999, we terminated our commercial operations in Wisconsin and Indiana
to further concentrate our efforts in government supported health care. Changes
effected by the Balanced Budget Act of 1997 enabled us to terminate these
operations. Our El Paso market became operational as the state of Texas
converted the fee-for-service market to a mandatory Medicaid managed care
market. Also, we sold our Illinois operation to focus our business on states
where Medicaid enrollment in managed care is mandatory.
Our operating expenses include medical services costs and general and
Our medical services costs include payments to physicians, hospitals, and
other providers for healthcare and specialty product claims. Medical service
costs also include estimates of medical expenses incurred but not yet reported,
or IBNR. 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 related to fluctuations in physician billing
membership, products and inpatient hospital trends. These estimates are adjusted
as more information becomes available. We utilize the services of independent
actuarial consultants who are contracted to review our estimates quarterly.
While we believe that our process for estimating IBNR is actuarily sound, we
cannot assure you that healthcare claim costs will not exceed our estimates.
Our results of operations depend on our ability to manage expenses
related to health benefits and to accurately predict costs incurred. The table
below depicts our medical loss ratio, which represents medical services costs as
a percentage of premium revenues and reflects the direct relationship between
the premium received and the medical services provided. Our stabilization in the
ratio primarily reflects improved provider contract terms, premium rate
increases in our markets served and member reductions in our southern Indiana
Our general and administrative expenses primarily reflect wages and
benefits and other administrative costs related to our employee base, including
those fees incurred to provide services to our members. These expenses are
funded by our management contract fees. Some of these services are provided
locally, while others are delivered to our health plans from a centralized
location. This approach provides the opportunity to control both direct and
indirect costs. The major centralized functions are claims processing,
information systems, finance, medical management support and administration. The
following table sets forth the general and administrative expense ratio, which
represents general and administrative expenses as a percent of total revenues
and reflects the relationship between revenues earned and the costs necessary to
drive those revenues. The improvement in the ratio reflects growth in membership
and leveraging of our overall infrastructure.
Other income consists principally of investment and other income,
interest expense, and equity in earnings (losses) from joint ventures.
o Investment income is derived from our cash, cash equivalents
and investments. Information about our investments is
presented below under "Liquidity and Capital Resources."
o Interest expense primarily reflected interest paid on our
subordinated notes, which we repaid in full in December 2001.
o Equity in earnings (losses) from joint ventures principally
represented our share of operating results from Superior
HealthPlan, which we formed with Community Health Centers
Network in 1997. From 1998 through 2000, we owned 39% of
Superior, and therefore accounted for the investment under the
equity method of accounting. Effective January 1, 2001, we
entered into an agreement to purchase an additional 51% of
Superior. We also agreed to purchase from TACHC GP, Inc. a
term note pursuant to which Superior owed TACHC $160,000. As a
result of entering into this agreement, we began accounting
for our investment in Superior using consolidation accounting.
We therefore no longer reflect any operations of Superior in
equity in earnings (losses) from joint ventures and we
eliminate in consolidation all administrative fees from
Superior. In addition, in December 2001 we acquired the
remaining 10% equity interest in Superior in exchange for
7,143 shares of our common stock.
CRITICAL ACCOUNTING POLICY
Our significant accounting policies are more fully described in Note 3
to our consolidated financial statements. However, one of our accounting
policies is particularly important to the portrayal of our financial position
and results of operations and requires the application of significant judgment
by our management; as a result it is subject to an inherent degree of
Our medical services costs include estimates for claims received but
not yet adjudicated, estimates for claims incurred but not yet received and
estimates for the costs necessary to process unpaid claims. We, together with
our independent actuaries, estimate medical claims liabilities using actuarial
methods based upon historical data for payment patterns, cost trends, product
mix, seasonality, utilization of healthcare services and other relevant factors.
These estimates are continually reviewed and adjustments, if necessary, are
reflected in the period known.
In applying this policy, our management uses its judgment to determine
the appropriate assumptions to be used in the determination of the required
estimates. While we believe our estimates are adequate, it is possible future
events could require us to make significant adjustments for revisions to these
estimates. The estimates are based on our historical experience, terms of
existing contracts, our observance of trends in the industry, information
provided by our customers and information available from other outside sources,
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
Premiums for the year ended December 31, 2001 increased $109.8 million,
or 50.7%, to $326.2 million from $216.4 million in 2000. This increase was due
to the Humana contract purchases, the consolidation of our El Paso market and
membership growth, net of the termination of our Indiana sub-contract
Administrative services fees for the year ended December 31, 2001
decreased $4.6 million, or 92.2%, to $385,000 from $4.9 million in 2000 as a
result of our acquisition of a majority share of Superior HealthPlan, as
Medical services costs. Medical services costs for the year ended
December 31, 2001 increased $87.7 million, or 48.0%, to $270.2 million from
$182.5 million in 2000. This increase was due to the Humana contract purchases,
the consolidation of our El Paso market and membership growth, net of the
termination of our Indiana sub-contract arrangement.
General and administrative expenses. General and administrative
expenses for the year ended December 31, 2001 increased $5.6 million, or 17.4%,
to $37.9 million from $32.3 million in 2000. This increase primarily was due to
a higher level of wages and related expenses for additional staff to support our
Other income for the year ended December 31, 2001 increased $2.9
million, or 434.4%, to $3.6 million from $665,000 in 2000. This primarily
reflected a significant increase in investment income due to an increase in
cash, cash equivalents and investments. The increase also reflected the
consolidation of our El Paso market due to our increased ownership.
INCOME TAX EXPENSE
For the year ended December 31, 2001, we recorded income tax expense of
$9.1 million based on a 41.5% effective tax rate. For the year ended December
31, 2000, we recorded an income tax benefit of $543,000 as a result of the
reversal of our valuation allowance related to deferred tax assets.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Premiums for the year ended December 31, 2000 increased $15.9 million,
or 7.9%, to $216.4 million from $200.5 million in 1999. This increase was
primarily due to membership growth in our Wisconsin market and rate increases in
Wisconsin and Indiana.
Administrative services fees for the year ended December 31, 2000
increased $4.0 million, or 460.9%, to $4.9 million from $880,000 in 1999 due to
membership increases in our El Paso market.
Medical services costs. Medical services costs increased $4.2 million,
or 2.4%, to $182.5 million for the year ended December 31, 2000 from $178.3
million in 1999. The increase was primarily due to the net increase in
General and administrative expenses. General and administrative
expenses for the year ended December 31, 2000 increased $2.6 million, or 8.7%,
to $32.3 million from $29.8 million in 1999. The increase was primarily due to a
higher level of wages and related expenses for additional staff to support our
Other income for the year ended December 31, 2000 decreased $463,000,
or 41.0%, to $665,000 from $1.1 million in 1999. This decrease primarily
reflected an increase in equity in losses from our El Paso start-up market.
INCOME TAX BENEFIT
In 2000, we recorded an income tax benefit of $543,000 as a result of
the reversal of our valuation allowance related to deferred tax assets, as it
became apparent that it was more likely than not that the benefits of our net
operating losses would be realized. In 1999, we recorded a tax benefit offset by
a valuation allowance, resulting in no benefit or provision for the year.
LIQUIDITY AND CAPITAL RESOURCES
On December 18, 2001, we closed our initial public offering of
3,250,000 shares of common stock at $14 per share. We received net proceeds of
$41.0 million. Prior to this offering, we financed our operations and growth
through private equity and debt financings and internally generated funds,
raising $22.4 million between 1993 and 1994. This consisted of $18.4 million
through the issuance of equity securities and $4.0 million through subordinated
debt financing. Our liquidity requirements have arisen primarily from statutory
capital requirements in the states in which we operate.
Our operating activities provided cash of $5.1 million in 1999, $13.5
million in 2000 and $30.2 million in 2001. The growth in 2000 was due to
increased membership and improved profitability. The increase in 2001 was due to
further improved profitability, an increase in membership and the timing of
Our investing activities used cash of $2.9 million in 1999 and $14.6
million in 2000, and provided cash of $2.7 million in 2001. Our investment
policies are designed to provide liquidity, preserve capital and maximize total
return on invested assets. As of December 31, 2001, our investment portfolio
consisted primarily of fixed-income securities with an average maturity of 2.4
years. Cash is invested in investment vehicles such as municipal bonds,
commercial paper, U.S. government-backed agencies and U.S. Treasury instruments.
The states in which we operate prescribe the types of instruments in which our
subsidiaries may invest their cash. The average portfolio yield was 7.3% as of
December 31, 2000 and 5.6% as of December 31, 2001.
Our financing activities provided cash of $2.5 million in 1999, used
cash of $2.4 million in 2000 and provided cash of $37.0 million in 2001. During
1999 and 2000 financing cash flows consisted of borrowings and repayments under
a credit facility and issuances of preferred stock. During 2001 financing cash
flows primarily consisted of the issuance of common stock through our initial
public offering net of the repayment of subordinated notes with $4.0 million of
In addition, we have raised capital from time to time to fund planned
geographic and product expansion, necessary regulatory reserves, and
acquisitions of healthcare contracts. In 2001, we purchased the rights to the
Humana Medicaid contracts with the states of Texas and Wisconsin for $1.2
million and spent $3.6 million on purchases of furniture, equipment and
leasehold improvements due to the addition of the Austin and San Antonio markets
and the expansion of the Wisconsin market. For the year ended December 31, 2002,
we anticipate purchasing $3.6 million of new software, software and hardware
upgrades, and furniture, equipment and leasehold improvements related to office
and market expansions.
Our principal contractual obligations at December 31, 2001 consisted of
obligations under operating leases. The significant annual noncancelable lease
payments over the next five years and beyond are as follows (in thousands):
At December 31, 2001, we had working capital of $34.8 million as
compared to $(5.3) million at December 31, 2000 and $(7.2) million at December
31, 1999. Our working capital was negative at times due to our efforts to
increase investment returns through purchases of long-term investments, which
have maturities of greater than one year. Our investment policies are also
designed to provide liquidity and preserve capital. We manage our short-term and
long-term investments to ensure that a sufficient portion is held in investments
that are highly liquid and can be sold to fund working capital as needed.
Cash, cash equivalents and short-term investments were $90.0 million at
December 31, 2001 and $26.4 million at December 31, 2000. Long-term investments
were $22.3 million at December 31, 2001 and $14.5 million at December 31, 2000.
Based on our operating plan, we expect that our available cash, cash equivalents
and investments, and cash from our operations will be sufficient to finance our
operations and capital expenditures for at least 12 months from the date of this
report. Additionally, in March 2002 we obtained a commitment from a financial
institution to provide a $25 million revolving line of credit.
REGULATORY CAPITAL AND DIVIDEND RESTRICTIONS
Our operations are conducted through our subsidiaries. As managed care
organizations, our subsidiaries are subject to state regulations that, among
other things, may 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.
Our subsidiaries are required to maintain minimum capital requirements
prescribed by various regulatory authorities in each of the states in which we
operate. As of December 31, 2001, our subsidiaries had aggregate
statutory capital and surplus of $16.3 million, compared with the required
minimum aggregate statutory capital and surplus requirements of $9.1 million.
In 1998, the National Association of Insurance Commissioners adopted
guidelines which, to the extent that they are implemented by the states, will
set new minimum capitalization requirements for insurance companies, managed
care organizations and other entities bearing risk for healthcare coverage. New
risk-based capital rules for managed care organizations, which may vary from
state to state, are currently being considered for adoption. Wisconsin and Texas
adopted various forms of the rules as of December 31, 1999. The managed care
organization rules, if adopted by Indiana in their proposed form, may increase
the minimum capital required for our subsidiary.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, Statement of Financial Accounting Standards (SFAS) No.
141, Business Combinations, was issued which requires that the purchase method
of accounting be used for all business combinations completed after June 30,
2001. We have adopted SFAS 141.
In July 2001, SFAS No. 142, Goodwill and Other Intangible Assets, was
issued which requires that goodwill and intangible assets with indefinite useful
lives no longer be amortized, but instead tested at least annually for
impairment. We have adopted SFAS No. 142 effective January 1, 2002. Goodwill
amortization will be discontinued. For the year ended December 31, 2001,
goodwill amortization was $471.
In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 provides updated
guidance concerning the recognition and measurement of an impairment loss for
certain types of long-lived assets. It also expands the scope of a discontinued
operation to include a component of an entity. SFAS No. 144 is effective for
financial statements issued for fiscal years beginning after December 15, 2001,
and interim periods within those years. The adoption of the provisions of SFAS
No. 144 is not expected to have a material impact on our results of operations,
financial position or cash flows.
This report contains forward-looking statements that relate to future
events or our future financial performance. We have attempted to identify these
statements by terminology including "believe," "anticipate," "plan," "expect,"
"estimate," "intend," "seek," "goal," "may," "will," "should," "can," "continue"
or the negative of these terms or other comparable terminology. These statements
include statements about our market opportunity, our growth strategy,
competition, expected activities and future acquisitions and investments, and
the adequacy of our available cash resources. These statements may be found in
the sections of this report entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business." 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.
Actual results may differ from projections or estimates due to a variety
of important factors. Our results of operations and projections of future
earnings depend in large part on accurately predicting and effectively managing
health benefits and other operating expenses. A variety of factors, including
competition, changes in health care practices, changes in federal or state laws
and regulations or their interpretations, inflation, provider contract changes,
new technologies, government-imposed surcharges, taxes or assessments, reduction
in provider payments by governmental payers, major epidemics, disasters and
numerous other factors affecting the delivery and cost of healthcare, such as
major healthcare providers' inability to maintain their operations, may in the
future affect our ability to control our medical costs and other operating
expenses. Governmental action or business conditions could result in premium
revenues not increasing to offset any increase in medical costs and other
operating expenses. Once set, premiums are generally fixed for one year periods
and, accordingly, unanticipated costs during such periods cannot be recovered
through higher premiums. The expiration, cancellation or suspension of our
managed care contracts by the state governments would also negatively impact us.
Due to these factors and risks, we cannot give assurances with respect to our
future premium levels or our ability to control our future medical costs.
FACTORS THAT MAY AFFECT FUTURE RESULTS
RISKS RELATED TO BEING A REGULATED ENTITY
REDUCTIONS IN MEDICAID FUNDING COULD SUBSTANTIALLY REDUCE OUR
Nearly all of our revenues come from Medicaid 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 premium rates may be affected by continued government efforts to
contain medical costs and may further be affected by state and federal budgetary
constraints. Changes to Medicaid programs could reduce the number of persons
enrolled or eligible, reduce the amount of reimbursement or payment levels, or
increase our administrative or healthcare costs under those programs. States
periodically consider reducing or reallocating the amount of money they spend
for Medicaid. We believe that additional reductions in Medicaid payments could
substantially reduce our profitability. Further, our contracts with the states
are subject to cancellation by the state immediately or after a short notice
period in the event of unavailability of state funds.
IF OUR MEDICAID AND SCHIP CONTRACTS ARE TERMINATED OR ARE NOT RENEWED,
OUR BUSINESS WILL SUFFER.
We provide healthcare services under five contracts with regulatory
entities in the areas in which we operate. The contracts expire on various dates
between December 31, 2002 and December 31, 2003. Our contracts with the states
of Indiana and Wisconsin accounted for 73% of our revenues for the year ended
December 31, 2001. Our contracts may be terminated if we fail to perform up to
the standards set by state regulatory agencies. In addition, the Indiana
contract under which we operate can be terminated by the state without cause.
Our contracts are generally intended to run for two years and may be extended
for one or two additional years if the state or its contractor elects to do so.
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. If any of our contracts is terminated, not renewed, or renewed on
less favorable terms, our business will suffer, and our operating results may be
CHANGES IN GOVERNMENT REGULATIONS DESIGNED TO PROTECT PROVIDERS AND
MEMBERS RATHER THAN OUR STOCKHOLDERS 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 health plan
providers and members rather than stockholders. Changes in existing laws and
rules, the enactment of new laws and rules, and changing interpretations of
these laws and rules could, among other things:
o force us to restructure our relationships with providers
within our network;
o require us to implement additional or different programs and
o mandate minimum medical expense levels as a percentage of
o restrict revenue and enrollment growth;
o require us to develop plans to guard against the financial
insolvency of our providers;
o increase our healthcare and administrative costs; impose
additional capital and reserve requirements; and
o increase or change our liability to members in the event of
malpractice by our providers.
For example, Congress currently is considering various forms of patient
protection legislation commonly known as Patients' Bills of Rights. We cannot
predict the impact of this legislation, if adopted, on our business.
REGULATIONS MAY DECREASE THE PROFITABILITY OF OUR HEALTH PLANS.
Our Texas plans are required to pay a rebate to the state in the event
profits exceed established levels. This regulatory requirement, changes in this
requirement or the adoption of similar requirements by our other regulators may
limit our ability to increase our overall profits as a percentage of revenues.
The State of Texas has implemented and is enforcing a penalty provision for
failure to pay claims in a timely manner. Failure to meet this requirement can
result in financial fines and penalties. In addition, states may attempt to
reduce their contract premium rates if regulators perceive our medical loss
ratio as too low. Any of these regulatory actions could harm our operating
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. Violation of
the laws or regulations governing our operations 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, SSI, and SCHIP programs. These penalties or
exclusions, were they to occur, would negatively impact our ability to operate
our business. For example, failure to pay our providers promptly could result in
the imposition of fines and other penalties.
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 a whistle blower program.
Further, a new regulation promulgated pursuant to HIPAA imposes civil and
criminal penalties for failure to comply with the privacy standards for
individually-identifiable health records. Congress may enact additional
legislation to increase penalties and to create a private right of action under
HIPAA, which would entitle patients to seek monetary damages for violations of
the privacy rules.
COMPLIANCE WITH NEW GOVERNMENT REGULATIONS MAY REQUIRE US TO MAKE
In August 2000, the Department of Health and Human Services, or HHS,
issued a new regulation under HIPAA requiring the use of uniform electronic data
transmission standards for healthcare claims and payment transactions submitted
or received electronically. We are required to comply with the new regulation by
October 2002, and Texas has indicated that it may impose an earlier compliance
deadline. In August 1998, HHS proposed a regulation that would require
healthcare participants to implement organizational and technical practices to
protect the security of electronically maintained or transmitted health-related
information. In December 2000, HHS issued a new regulation mandating heightened
privacy and confidentiality protections under HIPAA that became effective on
April 14, 2001. Compliance with this regulation will be required by April 14,
2003, unless the Bush Administration revises the regulation or defers the
In January 2001, the federal Centers for Medicare and Medicaid
Services, or CMS (then the Health Care Financing Administration), published new
regulations regarding Medicaid managed care. CMS subsequently delayed the
effective date of these regulations until August 16, 2002. In August 2001, CMS
proposed new regulations that would modify the January regulations. If adopted,
these regulations would implement the requirements of the Balanced Budget Act of
1997 that are intended to give states more flexibility in their administration
of Medicaid managed care programs, provide new patient protections for Medicaid
managed care enrollees and require states to meet new actuarial soundness
The Bush Administration's issuance of new regulations, its review of
the existing HIPAA rules and other newly published regulations, the states'
ability to promulgate stricter rules, and uncertainty regarding many aspects of
the regulations may make compliance with the relatively new regulatory landscape
difficult. Our existing programs and systems would not enable us to comply in
all respects with these new regulations. In order to comply with the regulatory
requirements, we will be required to employ additional or different programs and
systems, the costs of which are unknown to us at this time. Further, compliance
with these regulations would 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 our costs of
complying with these new regulations from the states. The new regulations and
the related compliance costs could have a material adverse effect on our
CHANGES IN HEALTHCARE LAW 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. These changes could reduce the number of persons enrolled or
eligible for Medicaid and reduce the reimbursement or payment levels for medical
services. More generally, we are unable to predict whether new laws or proposals
will favor or hinder the growth of managed healthcare.
A recent example is state and federal legislation that would enable
physicians to collectively bargain with managed healthcare organizations. In
2000, the U.S. House of Representatives approved a collective bargaining
proposal that contained an exemption for public sector managed healthcare
organizations. If legislation of this type is enacted without such an exemption,
it would negatively impact our bargaining position with many of our providers
and might result in an increase in our cost of providing medical benefits.
We cannot predict the outcome of these legislative or regulatory
proposals or the effect that they will have on us. Legislation or regulations
that require us to change our current manner of operation, provide additional
benefits or change our contract arrangements may seriously harm our operations
and financial results.
IF WE ARE UNABLE TO PARTICIPATE IN SCHIP PROGRAMS OUR GROWTH RATE MAY
The State Children's Health Insurance Program is a relatively new
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.
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 our company as a whole would be
limited, which could harm our ability to implement our business strategy.
RISKS RELATED TO OUR BUSINESS
RECEIPT OF INADEQUATE PREMIUMS WOULD NEGATIVELY AFFECT OUR REVENUES AND
Nearly all of our revenues are generated by premiums consisting of
fixed monthly payments per member. 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 customers. If premiums do
not increase when expenses related to medical services rise, our earnings would
be affected negatively. In addition, our actual medical services costs may
exceed our estimates, which would cause our medical loss ratio, or our expenses
related to medical services as a percentage of premium revenues, 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.
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. Historically, our medical loss ratio has
fluctuated. For example, our medical loss ratio was 82.8% for the year ended
December 31, 2001 and 84.3% for 2000, but was 88.9% for 1999 and 88.4% for 1998.
Because of the narrow margins of our health plan business, relatively small
changes in our medical loss 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.
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. 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 accurately estimate IBNR may also affect
our ability to take timely corrective actions, further harming our results.
DIFFICULTIES IN EXECUTING OUR ACQUISITION STRATEGY COULD ADVERSELY
AFFECT OUR BUSINESS.
Historically, the acquisition of Medicaid 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. For example, our
acquisition of contract rights from Humana in February 2001 accounted for 88.0%
of the increase in our net premium revenues for the year ended December 31, 2001
compared to 2000. Many of the other potential purchasers of Medicaid assets have
greater financial resources than we have. In addition, many of the sellers are
interested either in (1) selling, along with their Medicaid assets, other assets
in which we do not have an interest or (2) 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 may 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. 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.
Furthermore, we expect to enter into a credit facility that will prohibit some
acquisitions without the consent of our bank lender.
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:
o additional personnel who are not familiar with our operations
and corporate culture;
o existing provider networks, which may operate on different
terms than our existing networks;
o existing members, who may decide to switch to another
healthcare plan; and
o disparate administrative, accounting and finance, and
For example, in the Humana acquisition, the configuration of new provider
contracts temporarily extended our claims payment process.
Accordingly, we may be unable to successfully identify, consummate and
integrate future acquisitions or operate acquired businesses profitably. 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.
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. In addition, we may not be able to
effectively commercialize any new programs or services we seek to market to
third parties. 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 ALL OF OUR REVENUES FROM OPERATIONS IN THREE STATES, AND OUR
OPERATING RESULTS WOULD BE MATERIALLY AFFECTED BY A DECREASE IN REVENUES OR
PROFITABILITY IN ANY ONE OF THOSE STATES.
Operations in Wisconsin, Indiana and Texas account for all of our
revenues. If we were unable to continue to operate in each of those states or if
our current operations in any portion of one of those states were significantly
curtailed, our revenues would decrease materially. In the first half of 2001,
our membership in Indiana declined by approximately 46,000 due to a
subcontracting provider organization terminating a percent-of-premium
arrangement. In 2000, we reduced our service area in Wisconsin from 36 to 18
counties. In 1999 and 2000, we terminated our services to most of the southern
counties of Indiana. Our reliance on operations in a limited number of states
could cause our revenue and profitability to change suddenly and unexpectedly,
depending on legislative actions, 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 industries. 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 SATISFACTORY RELATIONSHIPS WITH OUR
PROVIDER NETWORKS, OUR PROFITABILITY WILL 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. 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
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 Medicaid managed care 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
mission and forging our business relationships, our business and operating
results could be harmed. We do not have an employment agreement with Mr.
Neidorff, and we cannot assure you that we will be able to retain his services.
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 industry with
the breadth of skills and experience required to operate and expand successfully
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.
Recently, 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
CLAIMS RELATING TO MEDICAL MALPRACTICE COULD CAUSE US TO INCUR
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
GROWTH IN THE NUMBER OF MEDICAID-ELIGIBLE PERSONS DURING ECONOMIC
DOWNTURNS COULD CAUSE OUR OPERATING RESULTS AND STOCK PRICES 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. In particular,
the terrorist acts of September 11, 2001 have created an uncertain economic
environment, and we cannot predict the impact of these events, other acts of
terrorism or related military action on federal or state funding of healthcare
programs or on the size of the Medicaid-eligible population. If federal funding
were decreased or unchanged while our membership was increasing, our results of
operations would 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.
WE INTEND TO EXPAND PRIMARILY INTO MARKETS WHERE MEDICAID RECIPIENTS
ARE REQUIRED TO ENROLL IN MANAGED CARE PLANS.
We expect to continue to focus our business in states in which Medicaid
enrollment in managed care is mandatory. Currently, approximately two-thirds of
the states require health plan enrollment for Medicaid eligible participants in
all or a portion of their counties. The programs are voluntary in other states.
Because we concentrate on markets with mandatory enrollment, we expect the
geographic expansion of our business to be limited to those states.
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
Our information systems and applications require continual maintenance,
upgrading and enhancement to meet our operational needs. 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of December 31, 2001, we had short-term investments of $1.2 million and
long-term investments of $22.3 million. The short-term investments consist of
highly liquid securities with maturities between three and 12 months. The
long-term investments consist of municipal bonds, commercial paper, U.S.
government-backed agencies and U.S. Treasury investments, and have original
maturities greater than one year. These investments are subject to interest rate
risk and will decrease in value if market rates increase. We have the ability to
hold these short-term investments to maturity, and as a result, we would not
expect the value of these investments to decline significantly as a result of a
sudden change in market interest rates. Assuming a hypothetical and immediate 1%
increase in market interest rates at December 31, 2001, the fair value of our
fixed income investments would decrease by approximately $1.2 million.
Similarly, a 1% decrease in market interest rates at December 31, 2001 would
result in an increase of the fair value of our investments of approximately $1.2
million. Declines in interest rates over time will reduce our investment income.
Although the general rate of inflation has remained relatively stable and
healthcare cost inflation has stabilized in recent years, the national
healthcare cost inflation rate still exceeds the general inflation rate. We use
various strategies to mitigate the negative effects of healthcare cost
inflation. Specifically, our health plans try to control medical and hospital
costs through 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.
Federal and state regulations governing standards for electronic
transactions, data security and confidentiality of patient information have been
issued recently and are subject to change and conflicting interpretation, making
certainty of compliance impossible at this time. Due to the uncertainty
surrounding the regulatory requirements, we cannot be sure that the systems and
programs that we plan to implement will comply adequately with the regulations
that are ultimately adopted. Implementation of additional systems and programs
will be required, the cost of which we estimate not to exceed $1.5 million in
2002. Further, compliance with these regulations would 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 our costs of complying with these
new regulations from the states.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements and related notes thereto required
by this item are set forth on the pages indicated in Item 14.
QUARTERLY SELECTED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT SHARE DATA AND MEMBERSHIP DATA)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning our directors will appear in our Proxy Statement
for our 2002 annual meeting of stockholders under "Election of Directors." This
portion of the Proxy Statement is incorporated herein by reference.
(b) EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth information regarding our executive
officers and key employees, including their ages at February 28, 2002:
* Commencing April 4, 2002.
MICHAEL F. NEIDORFF has served as our President, Chief Executive
Officer and as a member of our board of directors since May 1996. From May 1996
to November 2001, Mr. Neidorff also served as our Treasurer. From 1995 to 1996,
Mr. Neidorff served as a Regional Vice President of Coventry Corporation, a
publicly traded managed care organization, and as the President and Chief
Executive Officer of one of its subsidiaries, Group Health Plan, Inc. From 1985
to 1995, Mr. Neidorff served as the President and Chief Executive Officer of
Physicians Health Plan of Greater St. Louis, a subsidiary of United Healthcare
Corp., a publicly traded managed care organization now known as UnitedHealth
JOSEPH P. DROZDA, JR., M.D. has served as our Senior Vice President,
Medical Affairs since November 2000 and served as our part-time Medical Director
from January 2000 through October 2000. From June 1999 to October 2000, Dr.
Drozda was self-employed as a consultant to managed care organizations,
physician groups, hospital networks and employer groups on a variety of managed
care delivery and financing issues. From 1996 to April 1999, Dr. Drozda served
as the Vice President of Medical Management of SSM Health Care, a health
services network. From 1994 to 1996, Dr. Drozda was the Vice President and Chief
Medical Officer of PHP, Inc., a health maintenance organization based in North
Carolina. From 1987 until 1994, Dr. Drozda served as Medical Director of
Physicians Health Plan of Greater St. Louis, a health plan that he co-founded.
CATHERINE M. HALVERSON has served as our Senior Vice President,
Business Development since September 2001. From March 2001 to September 2001,
Ms. Halverson was self-employed as a consultant to a pharmaceutical benefit
management company and Medicaid managed care plans. From 1993 to March 2001, Ms.
Halverson was the Vice President and Director of Medicaid Programs of
UnitedHealth Group Incorporated.
MARY O'HARA has served as our Senior Vice President, Operations
Services since January 1999. From December 1998 to January 1999, Ms. O'Hara
served as our Chief Contracting Officer. From March 1997 to October 1998, Ms.
O'Hara was the Chief Contracting Officer of Unity Health Network, a network of
hospitals and physicians in Missouri and Illinois. From 1990 to February 1997,
Ms. O'Hara was the Director of Managed Care for Virginia Mason Medical Center,
an integrated healthcare delivery system, in Seattle, Washington.
BRIAN G. SPANEL has served as our Senior Vice President and Chief
Information Officer since December 1996. From 1988 to 1996, Mr. Spanel served as
President of GBS Consultants, a healthcare consulting and help desk software
developer. From 1987 to 1988, Mr. Spanel was Director of Information Services
for CompCare, a managed care organization. From 1984 to 1987, Mr. Spanel was
Director of Information Services for Peak Health Care, a managed care
KAREY L. WITTY has served as our Senior Vice President and Chief
Financial Officer since August 2000, as our Secretary since February 2000 and as
our Treasurer since November 2001. From March 1999 to August 2000, Mr. Witty
served as our Vice President of Health Plan Accounting. From 1996 to March 1999,
Mr. Witty was Controller of Heritage Health Systems, Inc., a healthcare company
in Nashville, Tennessee. From 1994 to 1996, Mr. Witty served as Director of
Accounting for Healthwise of America, Inc., a publicly traded managed care
CHRISTOPHER BOWERS will begin serving as our President and Chief
Executive Officer of Superior HealthPlan, our health plan in Texas, in April
2002. From October 2000 to March 2002, Mr. Bowers was the Vice President of
Operations for Physicians Health Plan of Southwest Michigan, Inc. (PHP) and IBA
Health & Life Assurance Company, which are wholly owned subsidiaries of the
Bronson Healthcare Group. From 1996 to September 2000, Mr. Bowers served as the
Director of Government Programs for UnitedHealth Care Group. While directly
working for Bronson Healthcare Group, Mr. Bowers served as the Assistant Vice
President of Community Relations and the Assistant Vice President of Strategic
Planning and Development.
KATHLEEN R. CRAMPTON has served as the President and Chief Executive
Officer of Managed Health Services Insurance Corp., our health plan in
Wisconsin, since June 2000. From November 1999 to May 2000, Ms. Crampton was a
Senior Consultant for PricewaterhouseCoopers LLC. From June 1996 to October
1999, Ms. Crampton served as Vice President of the Patterson Group, a private
consulting firm serving health maintenance organizations and their service
providers and medical manufacturers. From 1993 to 1996, Ms. Crampton served as
Vice President of Marketing for Healthtech Services Corporation, a home care
robotics and telemedicine information systems company.
RITA JOHNSON-MILLS has served as the President and Chief Executive
Officer of Managed Health Services Indiana, Inc., our health plan in Indiana,
since April 2001. From March 2000 to April 2001, Ms. Johnson-Mills served as the
Chief Operating Officer of Managed Health Services Indiana, Inc. From July 1999
to March 2000, Ms. Johnson-Mills was a Senior Vice President and the Chief
Operating Officer of Medical Diagnostic Management. From 1995 to March 1999, Ms.
Johnson-Mills served as Senior Vice President and Chief Operating Officer of DC
Chartered Health Plan, Inc., a health maintenance organization.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation will appear in our Proxy
Statement for our 2002 annual meeting of stockholders under "Executive
Compensation" and "Employment Agreements." This portion of the Proxy Statement
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning the security ownership of certain beneficial
owners and management will appear in our Proxy Statement for our 2002 annual
meeting of stockholders under "Principal Stockholders." This portion of the
Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions
will appear in our Proxy Statement for our 2002 annual meeting of stockholders
under "Transactions with Management." This portion of our Proxy Statement is
incorporated herein by reference.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The following documents are filed as part of this report:
1. CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Centene Corporation:
We have audited the accompanying consolidated balance sheets of Centene
Corporation (a Delaware corporation) and subsidiaries as of December 31, 2001
and 2000, and the related consolidated statements of earnings, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 2001. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Centene Corporation
and subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.
/s/ ARTHUR ANDERSEN LLP
St. Louis, Missouri
February 1, 2002
CENTENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2001 AND 2000
(In thousands, except share data)
(Continued on following page)
The accompanying notes are an integral part of these balance sheets.
CENTENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(In thousands, except share data)
The accompanying notes are an integral part of these statements.
CENTENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(In thousands, except share data)
The accompanying notes are an integral part of these statements.
CENTENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
The accompanying notes are an integral part of these statements.
CENTENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
1. ORGANIZATION AND OPERATIONS:
Centene Corporation (Centene or the Company) provides managed care programs and
related services to individuals receiving benefits under Medicaid, including
Supplemental Security Income (SSI), and State Children's Health Insurance
Program (SCHIP). Centene operates under its own state licenses in Wisconsin,
Indiana and Texas, and contracts with other managed care organizations to
provide risk and nonrisk management services.
Centene's managed care organization (MCO) subsidiaries include Managed Health
Services Insurance Corp. (MHSIC), a wholly owned Wisconsin corporation;
Coordinated Care Corporation Indiana, Inc. (CCCI), a wholly owned Indiana
corporation; Superior HealthPlan, Inc. (Superior), a wholly owned Texas
corporation (39% before January 1, 2001); and MHS Behavioral Health of Texas,
Inc., a wholly owned Texas corporation that was incorporated in October of 2001.
2. INITIAL PUBLIC OFFERING:
On December 13, 2001, the Company completed an initial public offering (IPO) of
3,250,000 shares of its common stock at $14.00 per share. The net proceeds,
after paying the underwriting discount and expenses associated with the
offering, were $41.0 million. In conjunction with the IPO all outstanding shares
of preferred stock were converted into shares of common stock in accordance with
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accompanying consolidated financial statements include the accounts of
Centene Corporation and all majority owned subsidiaries. All material
intercompany balances and transactions have been eliminated. The investments in
minority owned joint ventures are accounted for under the equity method.
Cash and Cash Equivalents
Investments with original maturities of three months or less at the date of
acquisition are considered to be cash equivalents. Cash equivalents consist of
commercial paper, money market mutual funds and bank savings accounts.
Short-term and long-term investments available for sale are carried at market
value. Any changes in fair value due to market conditions are reflected as a
separate component of equity, net of any tax benefit or expense.
Short-term investments include securities with original maturities between three
months and one year. Long-term investments include securities with original
maturities greater than one year.
Property and Equipment
Furniture, equipment and leasehold improvements are carried at cost less
accumulated depreciation. Depreciation for furniture and equipment, other than
computer equipment, is calculated using the
straight-line method based on the estimated useful lives of the assets ranging
between five and seven years. Depreciation for computer equipment is calculated
using the straight-line method based on a three-year life. Software is stated at
cost and is amortized over its estimated useful life of three years using the
straight-line method. Depreciation for leasehold improvements is calculated
using the straight-line method based on the shorter of the estimated useful
lives of the asset or the term of the respective leases, ranging between three
and ten years.
Intangible assets consist primarily of purchased contract rights and goodwill.
Goodwill represents the excess of aggregate purchase price over the estimated
fair value of net assets acquired. Intangible assets are amortized using the
straight-line method over a 60-month period. Accumulated amortization of
intangibles as of December 31, 2001 and 2000, was $1,478 and $754, respectively.
Amortization expense was $648, $224 and $235 for the years ended December 31,
2001, 2000 and 1999, respectively.
The Company reviews goodwill and other long-lived assets annually for
impairment. The Company recognizes impairment losses if expected undiscounted
future cash flows of the related assets are less than their carrying value. An
impairment loss represents the amount by which the carrying value of an asset
exceeds the fair value of the asset. The Company did not recognize any
impairment losses for the periods presented.
Medical Claims Liabilities
Medical services costs include claims paid, claims adjudicated but not yet paid,
estimates for claims received but not yet adjudicated, estimates for claims
incurred but not yet received and estimates for the costs necessary to process
The estimates of medical claims liabilities are developed using actuarial
methods based upon historical data for payment patterns, cost trends, product
mix, seasonality, utilization of healthcare services and other relevant factors
including product changes. These estimates are continually reviewed and
adjustments, if necessary, are reflected in the period known.
Premium revenue is received monthly based on fixed rates per member as
determined by the state contracts. The revenue is recognized as earned over the
covered period of services. Premiums collected in advance are recorded as
unearned premiums. There are no contractual allowances related to Centene's
Centene receives the majority of its revenues under contracts or subcontracts
with state Medicaid managed care programs. The contracts, which expire on
various dates between December 31, 2002, and December 31, 2003, are expected to
Centene's MCO subsidiaries have purchased reinsurance to cover eligible
healthcare services. The current reinsurance agreements generally cover 80% of
healthcare expenses in excess of an annual deductible of $50 to $100 per member,
up to a lifetime maximum of $2,000. The subsidiaries are responsible for
inpatient charges in excess of an average daily per diem.
Reinsurance recoveries were approximately $3,958, $1,454 and $1,182 in 2001,
2000 and 1999, respectively. Reinsurance expenses were approximately $10,252,
$3,391 and $2,708 in 2001, 2000 and 1999, respectively. Reinsurance recoveries,
net of expenses, are included in medical services costs.
Centene recognizes deferred tax assets and liabilities for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date of the tax rate change.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Risks and Uncertainties
The Company's profitability depends in large part on accurately predicting and
effectively managing medical services costs. The Company continually reviews its
premium and benefit structure to reflect its underlying claims experience and
revised actuarial data; however, several factors could adversely affect the
medical services costs. Certain of these factors, which include changes in
healthcare practices, inflation, new technologies, major epidemics, natural
disasters and malpractice litigation, are beyond any health plan's control and
could adversely affect the Company's ability to accurately predict and
effectively control healthcare costs. Costs in excess of those anticipated could
have a material adverse effect on the Company's results of operations.
Recent Accounting Pronouncements
In July 2001, Statement of Financial Accounting Standards (SFAS) No. 141,
Business Combinations, was issued which requires that the purchase method of
accounting be used for all business combinations completed after June 30, 2001.
The Company has adopted SFAS 141.
In July 2001, SFAS No. 142, Goodwill and Other Intangible Assets, was issued
which requires that goodwill and intangible assets with indefinite useful lives
no longer be amortized, but instead tested at least annually for impairment. The
Company will adopt SFAS No. 142 effective January 1, 2002. Goodwill amortization
will be discontinued. For the year ended December 31, 2001, goodwill
amortization was $471.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS No. 144 provides updated guidance
concerning the recognition and measurement of an impairment loss for certain
types of long-lived assets. It also expands the scope of a discontinued
operation to include a component of an entity. SFAS No. 144 is effective for
financial statements issued for fiscal years beginning after December 15, 2001,
and interim periods within those years. The adoption of the provisions of SFAS
No. 144 is not expected to have a material impact on the Company's results of
operations, financial position or cash flows.
4. DISCONTINUED OPERATIONS:
During 1999, the Company decided to exit its commercial line of business. The
results of these activities have been reflected as discontinued operations in
the accompanying consolidated financial statements for all periods presented.
The operating results of discontinued operations as of December 31, 1999, are as
Investments available for sale by investment type consist of the following:
The contractual maturity of investments as of December 31, 2001, is as follows:
Following is a summary of net investment income for the years ended December 31:
Various state statutes require MCOs to deposit or pledge minimum amounts of
investments to state agencies. Securities with a book value of $1,204 and $693
were deposited or pledged to state agencies by Centene's MCO subsidiaries at
December 31, 2001 and 2000, respectively.
6. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following as of December 31:
Depreciation expense for the years ended December 31, 2001, 2000 and 1999 was
$1,199, $810, and $846, respectively.
7. INCOME TAXES:
Centene files a consolidated federal income tax return while Centene and each
subsidiary file separate state income tax returns.
The consolidated income tax expense (benefit) consists of the following for the
years ended December 31:
The following is a reconciliation of the expected income tax expense (benefit)
as calculated by multiplying pretax income by federal statutory rates and
Centene's actual income tax benefit for the years ended December 31:
Temporary differences that give rise to deferred tax assets and liabilities are
presented below for the years ended December 31:
The Company is required to record a valuation allowance when it is more likely
than not that some portion or all of the deferred tax assets will not be
realized. Management determined that a valuation allowance was no longer
necessary for its federal net operating loss carryforward as of December 31,
2000. As a result, the income tax benefit recorded for 2000 includes the
reversal of $3,764 of deferred tax valuation allowance.
8. NOTE PAYABLE AND SUBORDINATED DEBT:
In September 2000, the Company entered into a $1,500 unsecured revolving credit
agreement with a bank. The agreement bore interest at a rate of prime due and
payable monthly. The agreement expired in September 2001. Borrowings under this
agreement totaled $-0- at December 31, 2001 and 2000.
Subordinated debt as of December 31 consists of the following:
During 1999 and 2000, the Company was in default due to late interest payments
and, therefore, recorded interest at the 10.5% rate. In February 2001, all
accrued interest was paid and the interest rate reverted back to 8.5%. In
December 2001, all of the notes and accrued interest were paid in full.
9. REDEEMABLE PREFERRED STOCK:
Upon completion of the Company's IPO in December 2001, all outstanding shares of
Series D redeemable preferred stock were converted into 3,716,000 shares of
Series D preferred stock was convertible, at the option of the holder, into
common stock at an initial conversion rate of one common share for each
preferred share and was automatically converted at an initial public offering.
Series D preferred stock was entitled to an initial liquidation preference in
the amount of $5.00 per share.
Redeemable preferred stock is summarized as follows:
10. STOCKHOLDERS' EQUITY:
Upon completion of the Company's IPO in December 2001, each outstanding share of
each class of common stock and preferred stock was converted into one share of a
single class of $.001 par value common stock.
Holders of common stock are entitled to one vote for each share of common stock
Effective November 2001, the Company changed its state of incorporation from
Wisconsin to Delaware. Under the Delaware Certificate of Incorporation, the
Company has 10,000,000 authorized shares of preferred stock at $.001 par value
and 40,000,000 authorized shares of common stock at $.001 par value. At December
31, 2001, there were no preferred shares outstanding.
11. STATUTORY NET WORTH REQUIREMENTS:
Various state laws require Centene's MCO subsidiaries to maintain a minimum
statutory net worth. At December 31, 2001 and 2000, Centene's MCO subsidiaries
are in compliance with the various required minimum statutory net worth
12. DIVIDEND RESTRICTIONS:
Under the laws of the states of which the Company operates, managed care
subsidiaries are required to obtain approval for dividends from the appropriate
state regulatory body. No dividends were declared in 2001, 2000 or 1999.
Prior to completion of the Company's IPO, all outstanding warrants were
Prior to the IPO, Centene had warrants outstanding to purchase 60,000 shares of
the Company's Series D preferred stock at an exercise price of $5.00 per share.
These warrants would have expired upon the earlier of the following: 1)
September 23, 2003, 2) the date of "change in control" or 3) the date on which
the Company effects an initial public offering.
Prior to the IPO, there were warrants outstanding to purchase 7,432 shares of
the Company's common stock at an exercise price of $2.40 per share. These
warrants would have expired upon the earlier of the following: 1) September 7,
2002, 2) the date of "change in control" or 3) the date on which the Company
effected an initial public offering.
14. STOCK OPTION PLANS:
As of December 31, 2001, Centene has five stock option plans (the Plans) for
issuance of common stock. The Plans allow for the granting of options to
purchase common stock at the market price at the date of grant for key
employees, consultants, and other individual contributors of or to Centene. Both
incentive options and nonqualified stock options can be awarded under the Plans.
Each option awarded under the Plans is exercisable as determined by the Board of
Directors upon grant. Further, depending on the type of grant, no option will be
exercisable for longer than either five (incentive options) or ten (all other
options) years after date of grant. The Plans have reserved 2,200,000 shares for
option grants. Options granted generally vest over a five-year period. Vesting
generally begins on the anniversary of the date of grant and annually
Option activity for the years ended December 31 is summarized below:
The following table summarizes information about options outstanding as of
December 31, 2001:
The Company accounts for the Plans in accordance with the intrinsic value based
method of Accounting Principles Board Opinion No. 25 as permitted by SFAS No.
123. Accordingly, compensation cost related to stock options issued to employees
is calculated on the date of grant only if the current market price of the
underlying stock exceeds the exercise price. Compensation expense is then
recognized on a straight-line basis over the years the employees' services are
received (over the vesting period), generally five years. No compensation cost
related to the Plans was charged against income during 1999 or 2000. During
2001, the Company recognized $6 in noncash compensation expense related to the
issuance of stock options to employees. Had compensation cost for the Plans been
determined based on the fair value method at the grant dates as specified in
SFAS No. 123, Centene's net earnings would have decreased $665, $110 and $76 in
2001, 2000 and 1999, respectively. Diluted net earnings (losses) per common
share would have been $1.53, $1.12 and $(10.53) in 2001, 2000 and 1999,
The fair value of each option grant is estimated on the date of grant using an
option pricing model with the following assumptions: no dividend yield and
expected volatility of 1% through the date of the IPO and 50% thereafter,
risk-free interest rate of 4.9%, 5.3% and 6.4%, and expected lives of 7.6, 7.7
and 7.3 for the years ended December 31, 2001, 2000 and 1999, respectively.
15. RETIREMENT PLAN:
Centene has a defined contribution plan (Retirement Plan) which covers
substantially all employees who work at least 1,000 hours in a twelve
consecutive month period and are at least twenty-one years of age. Under the
Retirement Plan, eligible employees may contribute a percentage of their base
salary, subject to certain limitations. Centene may elect to match a portion of
the employee's contribution. In addition, Centene may make a profit sharing
contribution to the Retirement Plan covering all eligible employees. Expenses
under the Retirement Plan were $306, $203 and $144 during the years ended
December 31, 2001, 2000 and 1999, respectively.
16. RELATED-PARTY TRANSACTIONS:
Certain members of Centene's Board of Directors performed consulting services
for the Company. Consulting fees paid in 2001, 2000, 1999 totaled $3, $36 and
$5, respectively. Legal fees of $94, $48 and $50 were paid in 2001, 2000 and
1999, respectively, to a law firm affiliated through a stockholder of the
Centene and its subsidiaries lease office facilities and various equipment under
noncancellable operating leases. In addition to base rental costs, Centene and
its subsidiaries are responsible for property taxes and maintenance for both
facility and equipment leases. Rental expense was $1,704, $1,383 and $1,268 for
the years ended December 31, 2001, 2000 and 1999, respectively. The significant
annual noncancelable lease payments over the next five years and thereafter are
The Company is a party to various legal actions normally associated with the
managed care industry, the aggregate effect of which, in management's opinion
after consultation with legal counsel, will have no material adverse impact on
the financial position or results of operations of Centene.
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of cash and cash equivalents, investments in
marketable securities and accounts receivable. The Company invests its excess
cash in interest bearing deposits with major banks, commercial paper, government
and agency securities, and money market funds. Investments in marketable
securities are managed within guidelines established by the Company's Board of
Directors. The Company carries these investments at fair value.
Concentrations of credit risk with respect to accounts receivable are limited
due to the significant customers paying as services are rendered. Significant
customers include the federal government and the states in which Centene
operates. The Company has a risk of incurring loss if its allowance for doubtful
accounts is not adequate. As discussed in Note 3 to the consolidated financial
statements, the Company has reinsurance agreements with insurance companies. The
Company monitors the insurance companies' financial ratings to determine
compliance with standards set by state law. The Company has a credit risk
associated with these reinsurance agreements to the extent the reinsurers are
unable to pay valid reinsurance claims of the Company.
19. JOINT VENTURES:
From 1998 through 2000, Centene owned 39% of Superior and, therefore, accounted
for the investment under the equity method of accounting. Superior participates
in the state of Texas medical assistance program. Superior had no enrolled
membership during 1998, but became fully operational on December 1, 1999.
Centene has provided surplus notes to Superior to fund its initial operations
and meet the net worth requirements of the state of Texas. Surplus notes
outstanding to Superior at December 31, 2000 and 1999, totaled $ 3,000 and
$2,041, respectively, and are included in investment in joint venture. Interest
accrues on the surplus notes at a rate of the greater of Prime + 2% or 10%, and
is payable to Centene quarterly upon regulatory approval. Interest receivable is
included in accrued investment income and totaled $352 and $52 at December 31,
2000 and 1999, respectively. Under the terms of a management agreement, a wholly
owned subsidiary of Centene performs third-party administrative services for
Superior. This agreement generated $4,936 and $72 of administrative service fees
during 2000 and 1999, respectively.
Summary financial information for Superior as of and for the years ended
December 31 follows:
Effective January 1, 2001, Centene purchased an additional 51% of Superior for
$290 in cash, increasing Centene's ownership to 90%. Centene began consolidating
Superior's operations from that point forward. When the change in ownership
occurred, goodwill of $1,200 was recorded as part of the transaction. In
December 2001, Centene purchased the remaining shares of Superior for $100 in
stock, increasing Centene's ownership to 100%. The goodwill is being amortized
on a straight-line basis over five years. At December 31, 2001, all intercompany
transactions between Centene and Superior have been eliminated in consolidation.
The following unaudited pro forma summary information presents the consolidated
statement of earnings information as if the aforementioned transaction had been
consummated on January 1, 2000, and does not purport to be indicative of what
would have occurred had the acquisition been made at that date or of the results
which may occur in the future.
Centene sold its interest in another joint venture, Community Health Choice of
Illinois, Inc. (Choice) to American HealthCare Providers (AHCP) on August 10,
1999. Choice was a participant in the state of Illinois medical assistance
program. Choice contracted directly with healthcare providers on a
fee-for-service, per diem and capitation basis. Centene maintained a 49% equity
interest in Choice and accounted for the venture using the equity method. Under
the terms of a management agreement, a wholly owned subsidiary of Centene
performed third-party administrative services for Choice which generated $-0-,
$-0- and $808 of administrative service fees during 2001, 2000 and 1999,
respectively. Centene retained the risk for claims incurred prior to May 1,
1999, and consequently established an escrow account for the estimated claims.
At December 31, 2001, there is no remaining claims exposure. Centene reflected a
net loss on the sale of Choice totaling $377 in 1999, which is included in
equity in earnings from joint ventures.
20. EARNINGS PER SHARE:
The following table sets forth the calculation of basic and diluted net earnings
(losses) per share for the years ended December 31:
21. SEGMENT REPORTING:
Segment information has been prepared in accordance with SFAS No. 131,
Disclosure about Segments of an Enterprise and Related Information. In 1999
Centene had two reportable segments: Medicaid and commercial. The segments were
determined based upon types of services provided by each segment. Segment
performance is evaluated based upon earnings from operations after income taxes.
Accounting policies of the segments are the same as those described in the
Summary of Significant Accounting Policies (Note 3).
The Medicaid segment included operations to provide healthcare services to
Medicaid eligible recipients through various federal and state supported
The commercial segment included group accident and health managed care coverage.
Effective December 31, 1999, the commercial line of business was discontinued.
22. CONTRACT ACQUISITIONS:
In December 2000, MHSIC and Superior entered into agreements with Humana Inc. to
transfer Humana's Medicaid contract with the state of Wisconsin to MHSIC and
Humana's Medicaid contract with the state of Texas to Superior. Effective
February 1, 2001, the state of Wisconsin approved the agreement, thereby
allowing MHSIC to serve approximately 35,000 additional members in the state.
Effective February 1, 2001, the state of Texas approved a management agreement
between Superior and Humana Inc., thereby allowing Superior to manage
approximately 30,000 additional members in Texas.
As a result of the above transactions, $1,250 was recorded as an intangible
asset purchased contract rights. Centene is amortizing the contract rights on a
straight-line basis over five years, the period expected to be benefited.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Centene Corporation:
We have audited in accordance with auditing standards generally accepted in the
United States, the financial statements of Centene Corporation and subsidiaries
included in this Form 10-K and have issued our report thereon dated February 1,
2002. Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. Schedule II is the responsibility of the
Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
/s/ ARTHUR ANDERSEN LLP
St. Louis, Missouri
February 1, 2002
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
* Previously filed as an exhibit to Centene Corporation's Registration
Statement on Form S-1, number 333-71258, and incorporated herein by
** Previously filed. Confidential treatment has been granted for a portion of
this Exhibit pursuant to Rule 406 promulgated under the Securities Act.
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, as of March 28, 2002.
By: /s/ MICHAEL F. NEIDORFF
Michael F. Neidorff
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons, on behalf of the
registrant and in the capacities and indicated, as of March 28, 2002.