10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on October 24, 2006
Table of Contents
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2006
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 000-33395
Centene Corporation
(Exact name of registrant as specified in its charter)
Delaware | 42-1406317 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification Number) | |
7711 Carondelet Avenue, Suite 800 | ||
St. Louis, Missouri | 63105 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code:
(314) 725-4477
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days:
þ Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Yes o No þ
As of October 16, 2006, the registrant had 43,168,018 shares of common stock outstanding.
CENTENE CORPORATION
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
PAGE | ||||||
Item 1. | ||||||
1 | ||||||
2 | ||||||
3 | ||||||
4 | ||||||
Item 2. | 12 | |||||
Item 3. | 21 | |||||
Item 4. | 21 | |||||
Item 1. | 23 | |||||
Item 1A. | 23 | |||||
Item 2. | 34 | |||||
Item 3. | 34 | |||||
Item 4. | 34 | |||||
Item 5. | 34 | |||||
Item 6. | 35 | |||||
Signatures | 36 |
Table of Contents
PART I
FINANCIAL INFORMATION
ITEM 1. Financial Statements.
CENTENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(In thousands, except share data)
September 30, | December 31, | |||||||
2006 | 2005 | |||||||
(Unaudited) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 200,480 | $ | 147,358 | ||||
Premium and related receivables, net of allowances of $125 and $343, respectively |
86,108 | 44,108 | ||||||
Short-term investments, at fair value (amortized cost $67,679 and $56,863, respectively) |
67,392 | 56,700 | ||||||
Other current assets |
20,776 | 24,439 | ||||||
Total current assets |
374,756 | 272,605 | ||||||
Long-term investments, at fair value (amortized cost $148,415 and $126,039, respectively) |
146,666 | 123,661 | ||||||
Restricted deposits, at fair value (amortized cost $25,691 and $22,821, respectively) |
25,565 | 22,555 | ||||||
Property, software and equipment, net |
103,175 | 67,199 | ||||||
Goodwill |
136,519 | 157,278 | ||||||
Other intangible assets, net |
14,949 | 17,368 | ||||||
Other assets |
12,211 | 7,364 | ||||||
Total assets |
$ | 813,841 | $ | 668,030 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Medical claims liabilities |
$ | 246,669 | $ | 170,514 | ||||
Accounts payable and accrued expenses |
67,957 | 29,790 | ||||||
Unearned revenue |
18,597 | 13,648 | ||||||
Current portion of long-term debt and notes payable |
1,032 | 699 | ||||||
Total current liabilities |
334,255 | 214,651 | ||||||
Long-term debt |
168,429 | 92,448 | ||||||
Other liabilities |
5,252 | 8,883 | ||||||
Total liabilities |
507,936 | 315,982 | ||||||
Stockholders equity: |
||||||||
Common stock, $.001 par value; authorized 100,000,000 shares; issued and outstanding
43,168,505 and 42,988,230 shares, respectively |
44 | 43 | ||||||
Additional paid-in capital |
202,760 | 191,840 | ||||||
Accumulated other comprehensive income: |
||||||||
Unrealized loss on investments, net of tax |
(1,356 | ) | (1,754 | ) | ||||
Retained earnings |
104,457 | 161,919 | ||||||
Total stockholders equity |
305,905 | 352,048 | ||||||
Total liabilities and stockholders equity |
$ | 813,841 | $ | 668,030 | ||||
See notes to consolidated financial statements.
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Table of Contents
CENTENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(In thousands, except share data)
(In thousands, except share data)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Revenues: |
||||||||||||||||
Premium |
$ | 610,661 | $ | 395,667 | $ | 1,522,302 | $ | 1,075,027 | ||||||||
Service |
20,588 | 4,975 | 59,318 | 7,619 | ||||||||||||
Total revenues |
631,249 | 400,642 | 1,581,620 | 1,082,646 | ||||||||||||
Expenses: |
||||||||||||||||
Medical costs |
501,350 | 331,050 | 1,263,251 | 881,021 | ||||||||||||
Cost of services |
15,373 | 2,002 | 45,278 | 3,573 | ||||||||||||
General and administrative expenses |
93,991 | 52,450 | 233,654 | 139,274 | ||||||||||||
Impairment loss |
87,091 | | 87,091 | | ||||||||||||
Total operating expenses |
697,805 | 385,502 | 1,629,274 | 1,023,868 | ||||||||||||
Earnings (loss) from operations |
(66,556 | ) | 15,140 | (47,654 | ) | 58,778 | ||||||||||
Other income (expense): |
||||||||||||||||
Investment and other income |
4,625 | 2,818 | 12,056 | 7,461 | ||||||||||||
Interest expense |
(3,082 | ) | (1,190 | ) | (7,536 | ) | (2,386 | ) | ||||||||
Earnings (loss) before income taxes |
(65,013 | ) | 16,768 | (43,134 | ) | 63,853 | ||||||||||
Income tax expense |
6,180 | 4,662 | 14,328 | 22,087 | ||||||||||||
Net earnings (loss) |
$ | (71,193 | ) | $ | 12,106 | $ | (57,462 | ) | $ | 41,766 | ||||||
Earnings (loss) per share: |
||||||||||||||||
Basic earnings (loss) per common share |
$ | (1.65 | ) | $ | 0.28 | $ | (1.33 | ) | $ | 0.99 | ||||||
Diluted earnings (loss) per common share |
$ | (1.65 | ) | $ | 0.27 | $ | (1.33 | ) | $ | 0.93 | ||||||
Weighted average number of shares
outstanding: |
||||||||||||||||
Basic |
43,219,053 | 42,582,129 | 43,126,062 | 42,120,149 | ||||||||||||
Diluted |
43,219,053 | 45,278,328 | 43,126,062 | 45,078,852 |
See notes to consolidated financial statements.
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Table of Contents
CENTENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(In thousands)
Nine Months Ended | ||||||||
September 30, | ||||||||
2006 | 2005 | |||||||
(Unaudited) | ||||||||
Cash flows from operating activities: |
||||||||
Net earnings (loss) |
$ | (57,462 | ) | $ | 41,766 | |||
Adjustments to reconcile net earnings (loss) to net
cash provided by operating activities |
||||||||
Depreciation and amortization |
15,286 | 9,658 | ||||||
Excess tax benefits from stock compensation |
| 4,511 | ||||||
Stock compensation expense |
11,168 | 3,557 | ||||||
Impairment loss |
87,091 | | ||||||
Loss on sale of investments |
33 | 58 | ||||||
Deferred income taxes |
(4,493 | ) | (3,567 | ) | ||||
Changes in assets and liabilities |
||||||||
Premium and related receivables |
(34,209 | ) | (9,396 | ) | ||||
Other current assets |
2,705 | (1,990 | ) | |||||
Other assets |
(455 | ) | (1,380 | ) | ||||
Medical claims liabilities |
74,367 | (17,091 | ) | |||||
Unearned revenue |
4,816 | 5,892 | ||||||
Accounts payable and accrued expenses |
25,929 | 11,798 | ||||||
Other operating activities |
(221 | ) | 1,096 | |||||
Net cash provided by operating activities |
124,555 | 44,912 | ||||||
Cash flows from investing activities: |
||||||||
Purchase of property, software and equipment |
(39,494 | ) | (16,837 | ) | ||||
Purchase of investments |
(235,501 | ) | (108,630 | ) | ||||
Sales and maturities of investments |
200,155 | 129,095 | ||||||
Acquisitions, net of cash acquired |
(66,921 | ) | (55,410 | ) | ||||
Net cash used in investing activities |
(141,761 | ) | (51,782 | ) | ||||
Cash flows from financing activities: |
||||||||
Proceeds from exercise of stock options |
4,594 | 3,925 | ||||||
Proceeds from borrowings |
83,359 | 45,000 | ||||||
Payment of long-term debt and notes payable |
(12,505 | ) | (4,323 | ) | ||||
Excess tax benefits from stock compensation |
2,094 | | ||||||
Common stock repurchases |
(7,214 | ) | | |||||
Other financing activities |
| (413 | ) | |||||
Net cash provided by financing activities |
70,328 | 44,189 | ||||||
Net increase in cash and cash equivalents |
53,122 | 37,319 | ||||||
Cash and cash equivalents, beginning of period |
147,358 | 84,105 | ||||||
Cash and cash equivalents, end of period |
$ | 200,480 | $ | 121,424 | ||||
Interest paid |
$ | 7,582 | $ | 2,184 | ||||
Income taxes paid |
$ | 5,223 | $ | 19,658 | ||||
Supplemental schedule of non-cash financing activities: |
||||||||
Common stock issued for acquisitions |
$ | | $ | 8,991 |
See notes to consolidated financial statements.
3
Table of Contents
CENTENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
(Dollars in thousands, except share data)
1. Organization
Centene Corporation
(Centene or the Company) is a multi-line healthcare enterprise operating primarily in two segments.
The government services Medicaid Managed Care segment
provides Medicaid and Medicaid-related programs to organizations and individuals through government
subsidized programs, including Medicaid, the State
Childrens Health Insurance Program (SCHIP) and Supplemental Security Income
(SSI) . The Specialty Services segment provides specialty
services, including behavioral health, disease management, managed vision, nurse triage, pharmacy
benefits management and treatment compliance, to Centene companies,
state programs, commercial organizations and other healthcare
organizations. The Company, through long-term care programs,
also serves individuals who are dually eligible under Medicaid and Medicare.
2. Basis of Presentation
The unaudited interim financial statements herein have been prepared by the Company pursuant
to the rules and regulations of the Securities and Exchange Commission. The accompanying interim
financial statements have been prepared under the presumption that users of the interim financial
information have either read or have access to the audited financial statements for the fiscal year
ended December 31, 2005. Accordingly, footnote disclosures, which would substantially duplicate the
disclosures contained in the December 31, 2005 audited financial statements, have been omitted from
these interim financial statements where appropriate. In the opinion of management, these financial
statements reflect all adjustments, consisting only of normal recurring adjustments, which are
necessary for a fair presentation of the results of the interim periods presented.
Certain 2005 amounts in the consolidated financial statements have been reclassified to
conform to the 2006 presentation. These reclassifications have no effect on net earnings or
stockholders equity as previously reported.
3. Recent Accounting Pronouncements
In
July 2006, the Financial Accounting Standards Board (FASB) issued Interpretation 48 (FIN 48), Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement No. 109, Accounting for Income Taxes. FIN 48
clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial
statements in accordance with FASB Statement No. 109. FIN 48 describes a recognition threshold and
measurement attribute for financial statement recognition and measurement of a tax position taken
or expected to be taken in a tax return and also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods, disclosure and transition.
The Interpretation is effective for fiscal years beginning after December 15, 2006. The Company is
currently assessing the estimated effect of FIN 48 on the financial condition and results of
operations upon adoption on January 1, 2007.
4
Table of Contents
4. Stock Incentive Plans
In
December 2004, the FASB issued Statement of
Financial Accounting Standards No. 123 (revised 2004), Share Based Payment, (SFAS 123R). SFAS
123R establishes the accounting for transactions in which an entity pays for employee services in
share-based payment transactions. SFAS 123R requires companies to measure the cost of employee
services received in exchange for an award of equity instruments based on the grant-date fair value
of the award. The fair value of employee share options and similar instruments is estimated using
option-pricing models adjusted for the unique characteristics of those instruments. That cost is
recognized over the period during which an employee is required to provide service in exchange for
the award. The Company adopted SFAS 123R effective January 1, 2006, using the
modified-prospective transition method. Under this method, compensation cost is recognized for
awards granted and for awards modified, repurchased or cancelled in the period after adoption.
Compensation cost is also recognized for the unvested portion of awards granted prior to adoption.
Prior year financial statements are not restated. The Companys results for the three and nine
months ended September 30, 2006 reflected the following changes as a result of adopting SFAS 123R:
Three Months Ended | Nine Months Ended | |||||||
September 30, 2006 | September 30, 2006 | |||||||
General and administrative expenses |
$ | 2,664 | $ | 7,566 | ||||
Net earnings |
$ | (2,454 | ) | $ | (5,891 | ) | ||
Basic earnings per common share |
$ | (0.06 | ) | $ | (0.14 | ) | ||
Diluted earnings per common share |
$ | (0.06 | ) | $ | (0.14 | ) |
Additionally, upon adoption of SFAS 123R, excess tax benefits related to stock compensation
are presented as a cash inflow from financing activities. This change had the effect of decreasing
cash flows from operating activities and increasing cash flows from financing activities by $117
and $2,094 in the three and nine months ended September 30, 2006, respectively.
For the nine months ended September 30, 2005, the Company accounted for stock-based
compensation plans under APB Opinion No. 25, Accounting for Stock Issued to Employees.
Compensation cost related to stock options issued to employees was recorded only if the grant-date
market price of the underlying stock exceeded the exercise price. The following table illustrates
the effect on net earnings and earnings per share if a fair value-based method had been applied to
all awards.
Three Months Ended | Nine Months Ended | |||||||
September 30, 2005 | September 30, 2005 | |||||||
Net earnings |
$ | 12,106 | $ | 41,766 | ||||
Stock-based employee compensation
expense included in net earnings,
net of related tax effects |
777 | 2,206 | ||||||
Stock-based employee compensation
expense determined under fair
value based method, net of
related tax effects |
(2,003 | ) | (6,035 | ) | ||||
Pro forma net earnings |
$ | 10,880 | $ | 37,937 | ||||
Basic earnings per common share: |
||||||||
As reported |
$ | 0.28 | $ | 0.99 | ||||
Pro forma |
$ | 0.26 | $ | 0.90 | ||||
Diluted earnings per common share: |
||||||||
As reported |
$ | 0.27 | $ | 0.93 | ||||
Pro forma |
$ | 0.24 | $ | 0.85 |
The Companys stock incentive plans allow for the granting of restricted stock or restricted
stock unit awards and options to purchase common stock. Both incentive stock options and
nonqualified stock options can be awarded under the plans. No option will be exercisable for
longer than ten years after the date of grant. The plans have 876,679 shares available for future
awards. Compensation expense for stock options and restricted stock unit awards is recognized on a
straight-line basis over the vesting period,
generally three to five years for stock options and one to ten years for restricted stock or
restricted stock unit awards. Certain awards provide for accelerated vesting if there is a change
in control as defined in the plans.
5
Table of Contents
Option activity for the nine months ended September 30, 2006 is summarized below:
Weighted | ||||||||||||||||
Weighted | Average | |||||||||||||||
Average | Aggregate | Remaining | ||||||||||||||
Exercise | Intrinsic | Contractual | ||||||||||||||
Shares | Price | Value | Term | |||||||||||||
Outstanding as of
December 31, 2005 |
5,273,571 | $ | 15.79 | |||||||||||||
Granted |
94,500 | 26.11 | ||||||||||||||
Exercised |
(497,768 | ) | 7.94 | |||||||||||||
Expired |
(25,500 | ) | 23.83 | |||||||||||||
Forfeited |
(198,000 | ) | 18.20 | |||||||||||||
Outstanding as of
September 30, 2006 |
4,646,803 | $ | 16.70 | $ | 14,894 | 7.2 | ||||||||||
Exercisable as of
September 30, 2006 |
2,125,445 | $ | 13.10 | $ | 11,183 | 6.3 | ||||||||||
The fair value of each option grant is estimated on the date of the grant using the
Black-Scholes option-pricing model with the following assumptions:
Nine Months Ended | ||||||||
September 30, | ||||||||
2006 | 2005 | |||||||
Expected life (in years) |
6.5 | 6.0 | ||||||
Risk-free interest rate |
4.7 | % | 4.0 | % | ||||
Expected volatility |
44.2 | % | 54.1 | % | ||||
Expected dividend yield |
0 | % | 0 | % |
For the nine months ended September 30, 2006, the expected life of each award granted was
calculated using the simplified method in accordance with Staff Accounting Bulletin No. 107. For
the nine months ended September 30, 2005, the Company used a projected expected life for each award
granted based on historical experience of employees exercise behavior. For the nine months ended
September 30, 2006, expected volatility is primarily based on historical volatility levels along
with the implied volatility of exchange traded options to purchase Centene common stock. For the
nine months ended September 30, 2005, expected volatility is based on historical volatility levels.
The risk-free interest rate is based on the implied yield currently available on U.S. Treasury
zero coupon issues with a remaining term equal to the expected life.
Other information pertaining to option activity during the three and nine months ended
September 30, 2006 and 2005 was as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
Weighted-average fair value of options granted |
$ | 8.52 | $ | 17.63 | $ | 13.36 | $ | 17.61 | ||||||||
Total intrinsic value of stock options exercised |
$ | 1,567 | $ | 3,723 | $ | 7,607 | $ | 27,533 |
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Table of Contents
Non-vested restricted stock and restricted stock unit activity for the nine months ended
September 30, 2006 is summarized below:
Weighted | ||||||||
Average | ||||||||
Grant Date | ||||||||
Shares | Fair Value | |||||||
Non-vested balance as of December 31, 2005 |
1,153,655 | $ | 25.20 | |||||
Granted |
46,490 | 27.59 | ||||||
Vested |
(27,189 | ) | 31.32 | |||||
Forfeited |
(3,400 | ) | 25.50 | |||||
Non-vested balance as of September 30, 2006 |
1,169,556 | $ | 25.16 | |||||
As of September 30, 2006, there was $44,152 of total unrecognized compensation cost related to
non-vested share-based compensation arrangements granted under the plans; that cost is expected to
be recognized over a weighted-average period of four years.
5. Acquisitions
US Script
Effective January 1, 2006, the Company acquired 100% of US Script, Inc., a pharmacy benefits
manager. The Company paid approximately $40,600 in cash and related transaction costs. In
accordance with the terms of the agreement, the Company may pay up to an additional $10,000 if US
Script, Inc. achieves certain earnings targets over a five-year period. The results of operations
for US Script, Inc. are included in the consolidated financial statements since January 1, 2006.
The preliminary purchase price allocation resulted in estimated identifiable intangible assets
of $5,000 and associated deferred tax liabilities of $2,000 and goodwill of approximately $36,900.
The identifiable intangible assets have an estimated useful life of five years. The acquired
goodwill is not deductible for income tax purposes. Pro forma disclosures related to the
acquisition have been excluded as immaterial.
AirLogix
Effective July 22, 2005, the Company acquired 100% of AirLogix, Inc., a disease management
provider. The Company paid approximately $36,310 in cash and related transaction costs. The
results of operations for AirLogix, Inc. are included in the consolidated financial statements
since July 22, 2005.
The purchase price allocation resulted in estimated identified intangible assets of $2,550 and
associated deferred tax liabilities of $997 and goodwill of $28,727. The identifiable intangible
assets have an estimated useful life of one to five years. The acquired goodwill is not deductible
for income tax purposes. Pro forma disclosures related to the acquisition have been excluded as
immaterial.
Other
The Company acquired Opticare Managed Vision, Inc., effective July 1, 2006, MediPlan
Corporation, effective June 1, 2006, Cardium Health Services Corporation, effective May 9, 2006,
and Health Dimensions of Florida, Inc., effective April 1, 2006. The Company paid a total of $30,800
in cash and related transaction costs for these acquisitions. The results of operations for these
acquisitions are included in the consolidated financial statements since the respective effective
dates. MediPlan Corporation, with Medicaid membership in Ohio, is included in the Medicaid Managed
Care segment. OptiCare Managed Vision, Inc., a managed vision provider, Cardium Health Services
Corporation, a chronic disease management provider, and Health Dimensions of Florida, Inc., a
provider of after hours nurse triage services, are included in the Specialty Services segment. For
these acquisitions, goodwill of $7,150 and $17,929 was allocated to the Medicaid Managed Care
segment and Specialty Services segment, respectively. Pro forma disclosures related to these
acquisitions have been excluded as immaterial. Acquired goodwill,
totaling $6,714, is deductible for
income tax purposes.
7
Table of Contents
6. Impairment Loss
In August 2006, FirstGuard Health Plan Kansas, Inc. (FirstGuard Kansas), a wholly owned
subsidiary, received notification from the Kansas Health Policy Authority that its Medicaid
contract scheduled to terminate December 31, 2006 will not be renewed. The Company appealed this
decision and the administrative appeal was denied. The Company is currently reviewing all
available remedies and will continue to pursue its active pending petition in Kansas state court.
As a result of these events, the Company concluded it was necessary to conduct an impairment
analysis of the identifiable intangible assets and goodwill of the FirstGuard reporting unit, which
encompasses both the Kansas and Missouri FirstGuard health plans.
The fair value of the FirstGuard reporting unit was determined using discounted expected cash
flows and estimated market value. The impairment analysis resulted in an impairment of $87,091
recorded as impairment loss in the consolidated statement of earnings. The impaired identifiable
intangible assets of $5,993 and goodwill of $81,098 were reported under the Medicaid Managed Care
segment. The goodwill portion of the impairment loss is not deductible for tax purposes.
Goodwill balances and the changes therein are as follows:
Medicaid | Specialty | |||||||||||
Managed Care | Services | Total | ||||||||||
Balance as of December 31, 2005 |
$ | 123,890 | $ | 33,388 | $ | 157,278 | ||||||
Acquisitions |
7,150 | 54,829 | 61,979 | |||||||||
Impairment loss |
(81,098 | ) | | (81,098 | ) | |||||||
Other adjustments |
(263 | ) | (1,377 | ) | (1,640 | ) | ||||||
Balance as of September 30, 2006 |
$ | 49,679 | $ | 86,840 | $ | 136,519 | ||||||
7. Debt
At September 30, 2006, total debt outstanding was $169,461, including current maturities of
$1,032. The total debt outstanding consisted of $142,500 under the Companys $300,000 five-year
Revolving Credit Agreement discussed below, $12,609 of mortgage notes payable, $8,359 under the
three-year Revolving Loan Agreement discussed below and $5,993 of capital leases and other debt.
In May 2006, the Company executed a three-year $25,000 Revolving Loan Agreement. Borrowings
under the agreement bear interest based upon LIBOR rates plus 1.5%. Subject to the terms and
conditions of the agreement, the proceeds of the Revolving Loan may only be used for the
acquisition of certain properties contiguous to the Companys corporate headquarters. The
outstanding borrowings at September 30, 2006 bore interest at 6.8%.
In September 2006, the Company executed an amendment to the five-year Revolving Credit
Agreement dated September 14, 2004 with various financial institutions, for which LaSalle Bank
National Association serves as administrative agent and co-lead arranger. The amendment increases
the total amount available under the credit agreement to $300,000 from $200,000, including a
sub-facility for letters of credit in an aggregate amount up to $75,000. Borrowings under the
agreement bear interest based upon LIBOR rates, the Federal Funds Rate or the Prime Rate. There is
a commitment fee on the unused portion of the agreement that ranges from 0.15% to 0.275% depending
on the total debt-to-EBITDA ratio. The agreement contains non-financial and financial covenants,
including requirements of minimum fixed charge coverage ratios, maximum debt-to-EBITDA ratios and
minimum tangible net worth. The agreement will expire in September 2011. The outstanding borrowings at September 30,
2006 bore interest at LIBOR plus 1.25%, or 6.6%.
8
Table of Contents
8. Earnings Per Share
The following table sets forth the calculation of basic and diluted net earnings per common
share:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
Net earnings (loss) |
$ | (71,193 | ) | $ | 12,106 | $ | (57,462 | ) | $ | 41,766 | ||||||
Shares used in computing per share amounts: |
||||||||||||||||
Weighted average number of common shares
outstanding |
43,219,053 | 42,582,129 | 43,126,062 | 42,120,149 | ||||||||||||
Common stock equivalents (as determined by
applying the treasury stock method) |
| 2,696,199 | | 2,958,703 | ||||||||||||
Weighted average number of common shares and
potential dilutive common shares outstanding |
43,219,053 | 45,278,328 | 43,126,062 | 45,078,852 | ||||||||||||
Basic earnings (loss) per common share |
$ | (1.65 | ) | $ | 0.28 | $ | (1.33 | ) | $ | 0.99 | ||||||
Diluted earnings (loss) per common share |
$ | (1.65 | ) | $ | 0.27 | $ | (1.33 | ) | $ | 0.93 |
The calculation of diluted earnings per common share for the three months and nine months
ended September 30, 2005 excludes the impact of 197,500 and 265,155, respectively, related to
anti-dilutive stock options, restricted stock and restricted stock units.
9. Stockholders Equity
In November 2005, the Companys board of directors adopted a stock repurchase program
authorizing the Company to repurchase up to 4,000,000 shares of common stock from time to time on
the open market or through privately negotiated transactions. The repurchase program extends
through October 31, 2007, but the Company reserves the right to suspend or discontinue the program
at any time. During the nine months ended September 30, 2006, the Company repurchased 367,900
shares at an average price of $19.61 and an aggregate cost of $7,214.
10. Contingencies
Two
class action lawsuits were filed against the Company and certain of
its officers and directors in the United States District Court for
the Eastern District of Missouri, one in July, or the July Class
Action Lawsuit, and one in August, or the August Class Action Lawsuit
and collectively, the Class Action Lawsuits, on behalf of purchases
of the Companys common stock from June 21, 2006 through
July 17, 2006. The Class Action Lawsuits allege that the Company
and certain of its officers and directors violated federal securities
laws by issuing a series of materially false statements prior to the
announcement of its fiscal 2006 second quarter results. According to
the Class Action Lawsuits, these allegedly materially false
statements had the effect of artificially inflating the price of the
Companys common stock, which subsequently dropped after the
issuance of a press release announcing the Companys preliminary
fiscal 2006 second quarter earnings and revised guidance. All parties
have sought consolidation of the Class Action Lawsuits. In addition,
the Company routinely is subjected to legal proceedings in the normal
course of business. While the ultimate resolution of such matters is
uncertain, the Company does not expect the results of these matters
to have a material effect on its financial position or results of
operations.
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11. Segment Information
Centene operates in two segments: Medicaid Managed Care and Specialty Services. The Medicaid
Managed Care segment consists of Centenes health plans including all of the functions needed to
operate them. The Specialty Services segment consists of Centenes specialty companies including
behavioral health, disease management, managed vision, nurse triage, pharmacy benefits management
and treatment compliance functions.
Factors used in determining the reportable business segments include the nature of operating
activities, existence of separate senior management teams, and the type of information presented to
the Companys chief operating decision maker to evaluate all results of operations.
Segment information for the three months ended September 30, 2006, follows:
Medicaid | Specialty | Consolidated | ||||||||||||||
Managed Care | Services | Eliminations | Total | |||||||||||||
Revenue
from external
customers |
$ | 581,371 | $ | 49,878 | $ | | $ | 631,249 | ||||||||
Revenue from
internal
customers |
24,511 | 73,620 | (98,131 | ) | | |||||||||||
Total revenue |
$ | 605,882 | $ | 123,498 | $ | (98,131 | ) | $ | 631,249 | |||||||
Earnings (loss)
from operations |
$ | (69,008 | ) | $ | 2,452 | $ | | $ | (66,556 | ) | ||||||
Segment information for the three months ended September 30, 2005, follows:
Medicaid | Specialty | Consolidated | ||||||||||||||
Managed Care | Services | Eliminations | Total | |||||||||||||
Revenue from external customers |
$ | 373,589 | $ | 27,053 | $ | | $ | 400,642 | ||||||||
Revenue from internal customers |
18,488 | 9,475 | (27,963 | ) | | |||||||||||
Total revenue |
$ | 392,077 | $ | 36,528 | $ | (27,963 | ) | $ | 400,642 | |||||||
Earnings (loss) from operations |
$ | 15,542 | $ | (402 | ) | $ | | $ | 15,140 | |||||||
Segment information for the nine months ended September 30, 2006, follows:
Medicaid | Specialty | Consolidated | ||||||||||||||
Managed Care | Services | Eliminations | Total | |||||||||||||
Revenue from external
customers |
$ | 1,444,413 | $ | 137,207 | $ | | $ | 1,581,620 | ||||||||
Revenue from internal customers |
67,513 | 140,100 | (207,613 | ) | | |||||||||||
Total revenue |
$ | 1,511,926 | $ | 277,307 | $ | (207,613 | ) | $ | 1,581,620 | |||||||
Earnings (loss) from operations |
$ | (52,339 | ) | $ | 4,685 | $ | | $ | (47,654 | ) | ||||||
Segment information for the nine months ended September 30, 2005, follows:
Medicaid | Specialty | Consolidated | ||||||||||||||
Managed Care | Services | Eliminations | Total | |||||||||||||
Revenue from external customers |
$ | 1,052,102 | $ | 30,544 | $ | | $ | 1,082,646 | ||||||||
Revenue from internal customers |
53,306 | 26,108 | (79,414 | ) | | |||||||||||
Total revenue |
$ | 1,105,408 | $ | 56,652 | $ | (79,414 | ) | $ | 1,082,646 | |||||||
Earnings (loss) from operations |
$ | 60,194 | $ | (1,416 | ) | $ | | $ | 58,778 | |||||||
At
September 30, 2006, the Medicaid Managed Care and Specialty
Services segment had total assets of $756,108 and $57,733,
respectively.
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In 2006, the Company reassessed the calculations used to determine the appropriate proportion
of certain costs allocated to each of our two segments. This assessment included an evaluation of
whether the costs should be allocated based on revenue, number of claims, or headcount measures and
altered the proportion of certain general and administrative expenses. For the three months and
nine months ended September 30, 2006, the altered percentages resulted in the allocation of an
additional $3,510 and $9,679, respectively, to the Medicaid Managed Care segment than would have
been allocated under the previous formulas.
12. Comprehensive Earnings
Differences between net earnings and total comprehensive earnings resulted from changes in
unrealized losses on investments available for sale, as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
Net earnings (loss) |
$ | (71,193 | ) | $ | 12,106 | $ | (57,462 | ) | $ | 41,766 | ||||||
Reclassification adjustment, net of tax |
8 | 25 | 71 | 92 | ||||||||||||
Change in unrealized gain (loss) on investments,
net of tax |
912 | ( 738 | ) | 327 | (1,207 | ) | ||||||||||
Total comprehensive earnings (loss) |
$ | (70,273 | ) | $ | 11,393 | $ | (57,064 | ) | $ | 40,651 | ||||||
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ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion of our financial condition and results of operations should be read
in conjunction with our consolidated financial statements and the related notes included elsewhere
in this filing, and in our annual report on Form 10-K for the year ended December 31, 2005. The
discussion contains forward-looking statements that involve known and unknown risks and
uncertainties, including those set forth below under Item 1A. Risk Factors.
OVERVIEW
We are a multi-line healthcare enterprise operating primarily in
two segments. Our government services Medicaid Managed Care segment provides Medicaid and Medicaid-related programs to
organizations and individuals through government subsidized programs,
including Medicaid, the State Childrens Health Insurance Program (SCHIP)
and Supplemental Security Income (SSI). Our Specialty Services
segment provides specialty services, including behavioral health plans, disease
management, managed vision, nurse triage, pharmacy benefits management and treatment compliance to
our own subsidiaries at market-based rates, state programs,
commercial organizations and other healthcare
organizations. We also serve individuals, through long-term care programs, who are
dually eligible under Medicaid and Medicare.
Our 2006 third quarter performance is summarized as follows:
| Quarter-end Medicaid Managed Care membership of 1,169,700. | ||
| Revenues of $631.2 million, an increase of 57.6%. | ||
| Medicaid and SCHIP health benefits ratio (HBR) of 82.0%, SSI HBR of 84.1% and Specialty Services HBR of 82.9%. | ||
| Medicaid Managed Care general and administrative (G&A) expense ratio of 12.1% and Specialty Services G&A ratio of 17.0%. | ||
| Operating loss of $66.6 million, including a pre-tax, non-cash intangible asset impairment charge of $87.1 million recognized as a result of the contract non-renewal notification from the state of Kansas. | ||
| Diluted net loss per share of $1.65 (including a $1.96 after-tax non-cash impairment charge as described above). | ||
| Operating cash flows of $110.1 million for the three months ended September 30, 2006. |
Over the last year we have experienced membership and revenue growth in our Medicaid Managed
Care segment including membership growth of 38.0% since
September 30, 2005. Our membership growth would have been 24.7%
if we exclude our membership in Kansas from the total membership as
of September 30, 2006. Driving our growth are the following new
contracts and acquisitions:
| Effective September 1, 2006, we began operating under a new contract and expanded operations in Texas to include 11,500 Medicaid and SCHIP members in the Corpus Christi, Austin and Lubbock markets. | ||
| In Georgia, we began managing care for Medicaid and SCHIP members in the Atlanta and Central regions effective June 1, 2006 and Southwest region effective September 1, 2006. At September 30, 2006, our membership in Georgia was 252,600. | ||
| Beginning July 1, 2006, we began operating under new contracts with the State of Ohio to manage care for 15,800 Medicaid members by entering seven new counties in the East Central market. This expansion is part of the State of Ohios efforts to regionalize its Medicaid program. | ||
| Effective June 1, 2006, we acquired MediPlan Corporation (MediPlan) and began managing care for an additional 13,600 members in Ohio. The results of operations of this entity are included in our consolidated financial statements beginning June 1, 2006. | ||
| We increased our membership by 12.4% in Indiana. | ||
| We increased our membership by 16.1% in New Jersey. |
During the third quarter of 2006, we were notified by the Kansas Health Policy Authority that
our Medicaid contract in Kansas will not be renewed beyond December 31, 2006. This development is
discussed below under the caption Impairment Loss. As of
September 30, 2006, our membership in Kansas was 112,400.
We
have the following new contracts or
preliminary contract awards to expand our operations in Ohio and
Texas:
| During 2006, we were awarded a contract in Ohio to provide managed care for Medicaid members in the Northwest market. Transition of these members to our health plan commenced in October 2006. This expansion is part of the State of Ohios efforts to regionalize its Medicaid program. |
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| During the second quarter of 2006, we were awarded a contract in Texas to provide managed care for SSI recipients in the San Antonio and Corpus Christi markets. Membership operations are scheduled to commence in January 2007. | ||
| During 2006, we received preliminary notification of an award in Ohio to provide managed care for Medicaid Aged, Blind and Disabled (ABD) members in four regions. If the award receives regulatory approval, implementation is expected to take place on a region-by-region basis commencing in 2007. |
Our Specialty Services segment has experienced significant year over year growth largely
because of the following acquisitions and contract awards:
| Effective October 1, 2006, we began performing under our contract with the Arizona Health Care Cost Containment System to provide long term care services in the Maricopa, Yuma and LaPaz counties in Arizona. | ||
| Effective July 1, 2006, we acquired the managed vision business of OptiCare Managed Vision, Inc. (OptiCare). The results of operations of this entity are included in our consolidated financial statements beginning July 1, 2006. | ||
| Effective May 9, 2006, we acquired Cardium Health Services Corporation (Cardium), a disease management company. The results of operations of this entity are included in our consolidated financial statements beginning May 9, 2006. | ||
| Effective January 1, 2006, we acquired US Script, Inc. (US Script), a pharmacy benefits manager (PBM). The results of operations of this entity are included in our consolidated financial statements beginning January 1, 2006. | ||
| Effective July 22, 2005, we acquired AirLogix, Inc. (AirLogix), a disease management provider. The results of operations of this entity are included in our consolidated financial statements since July 22, 2005. | ||
| Effective July 1, 2005, we began performing under our contract with the State of Arizona to facilitate the delivery of mental health and substance abuse services to behavioral health recipients in Arizona. |
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RESULTS OF OPERATIONS AND KEY METRICS
Summarized comparative financial data are as follows ($ in millions except share data):
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
September 30, | September 30, | |||||||||||||||||||||||
% Change | % Change | |||||||||||||||||||||||
2006 | 2005 | 2005-2006 | 2006 | 2005 | 2005-2006 | |||||||||||||||||||
Premium |
$ | 610.6 | $ | 395.6 | 54.3 | % | $ | 1,522.3 | $ | 1,075.0 | 41.6 | % | ||||||||||||
Service |
20.6 | 5.0 | | 59.3 | 7.6 | | ||||||||||||||||||
Total revenues |
631.2 | 400.6 | 57.6 | % | 1,581.6 | 1,082.6 | 46.1 | % | ||||||||||||||||
Medical costs |
501.3 | 331.1 | 51.4 | % | 1,263.3 | 881.0 | 43.4 | % | ||||||||||||||||
Cost of services |
15.4 | 2.0 | | 45.3 | 3.6 | | ||||||||||||||||||
General and administrative expenses |
94.0 | 52.4 | 79.2 | % | 233.7 | 139.2 | 67.8 | % | ||||||||||||||||
Impairment loss |
87.1 | | | 87.1 | | | ||||||||||||||||||
Earnings
(loss) from operations |
(66.6 | ) | 15.1 | | (47.8 | ) | 58.8 | | ||||||||||||||||
Investment and other income, net |
1.5 | 1.6 | (5.2 | )% | 4.6 | 5.1 | (10.9 | )% | ||||||||||||||||
Earnings (loss) before income taxes |
(65.1 | ) | 16.7 | | (43.2 | ) | 63.9 | | ||||||||||||||||
Income tax expense |
6.1 | 4.6 | 32.6 | % | 14.3 | 22.1 | (35.1 | )% | ||||||||||||||||
Net earnings (loss) |
$ | (71.2 | ) | $ | 12.1 | | $ | (57.5 | ) | $ | 41.8 | | ||||||||||||
Diluted earnings (loss) per common share |
$ | (1.65 | ) | $ | 0.27 | | $ | (1.33 | ) | $ | 0.93 | | ||||||||||||
Revenues and Revenue Recognition
Our Medicaid Managed Care segment generates revenues primarily from premiums we receive
from the states in which we operate health plans. We receive a fixed premium per member per month
pursuant to our state contracts. We generally receive premium payments during the month we provide
services and recognize premium revenue during the period in which we are obligated to provide
services to our members. Some contracts allow for additional premium related to certain
supplemental services provided such as maternity deliveries. Revenues are recorded based on
membership and eligibility data provided by the states, which may be adjusted by the states for
updates to this data. These adjustments have been immaterial in relation to total revenue recorded and
are reflected in the period known.
Our
Specialty Services segment generates revenues under contracts with
our own subsidiaries at market-based terms, as well as to state
programs, commercial organizations, and other healthcare
organizations. Revenues are recognized when the
related services are provided or as ratably earned over the covered period of service. For
performance-based contracts, we do not recognize revenue subject to refund until data is sufficient
to measure performance.
Premium and service revenues collected in advance are recorded as unearned revenue.
Premium and service revenues due to us are recorded as premium and related receivables and are
recorded net of an allowance based on historical trends and our managements judgment on the
collectibility of these accounts. As we generally receive payments during the month in which
services are provided, the allowance is typically not significant in comparison to total revenues
and does not have a material impact on the presentation of our financial condition or results of
operations.
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Our total revenue increased year over year primarily because of 1) membership growth in
the Medicaid Managed Care segment, 2) premium rate increases, and 3) growth in our Specialty
Services segment.
1. Membership growth
From September 30, 2005 to September 30, 2006, we increased our membership by 38.0%. The
following table sets forth our membership by state in our Medicaid Managed Care segment:
September 30, | ||||||||
2006 | 2005 | |||||||
Georgia |
252,600 | | ||||||
Indiana |
198,100 | 176,300 | ||||||
Kansas |
112,400 | 107,600 | ||||||
Missouri |
32,200 | 37,300 | ||||||
New Jersey |
59,100 | 50,900 | ||||||
Ohio |
88,300 | 58,100 | ||||||
Texas |
259,900 | 243,600 | ||||||
Wisconsin |
167,100 | 173,900 | ||||||
Total |
1,169,700 | 847,700 | ||||||
The following table sets forth our membership by line of business:
September 30, | ||||||||
2006 | 2005 | |||||||
Medicaid |
922,300 | 657,500 | ||||||
SCHIP |
229,400 | 176,900 | ||||||
SSI |
18,000 | 13,300 | ||||||
Total |
1,169,700 | 847,700 | ||||||
Our operations commenced in the Atlanta and Central regions of Georgia on June 1, 2006 and the
Southwest region on September 1, 2006. We expect our total membership in Georgia to increase in
the fourth quarter of 2006 as the State continues to assign members to health plans in the
Southwest region. From September 30, 2005 to September 30, 2006, we increased our membership in
Ohio through the MediPlan acquisition while also adding members under our new contract in the East
Central market. Our membership increased in Indiana and New Jersey from additions to our provider
networks, service of additional counties and growth in the overall number of Medicaid
beneficiaries. In Texas, we increased our membership through new contracts in the Corpus Christi,
Austin, and Lubbock markets. In Kansas, we increased our membership by eliminating a ceiling on
our total membership with the State. Our membership decreased in Wisconsin and Missouri because of
more stringent state eligibility requirements for the Medicaid and SCHIP programs and eligibility
administration issues in Wisconsin.
2. Premium rate increases
During the nine months ended September 30, 2006, we received premium rate increases, net of
increases related to premium tax enactments, ranging from 1.8% to 9.5%, or 5.5% on a composite
basis across our markets.
3. Specialty Services segment growth
In 2005, we began performing under our behavioral health contracts with the states of Arizona
and Kansas. At September 30, 2006, our behavioral health company, Cenpatico, provided behavioral
health services to 94,500 members in Arizona, 37,500 members in Kansas and 998,200 members through
contracts with our health plans compared to 94,300 members in Arizona, 37,500 members in Kansas and
652,000 members through contracts with our health plans at September 30, 2005. In July 2005, we
began offering disease management services through our acquisition of AirLogix. In January 2006,
we began offering pharmacy benefits management services through our acquisition of US Script.
Additionally, in May 2006, we expanded our disease management services through our acquisition of
Cardium. In July 2006, we began offering managed vision care through our acquisition of OptiCare.
The increase in service revenue reflects the acquisitions of AirLogix, US Script, and Cardium.
For the three months ended September 30, 2006, total Specialty Services revenue (before
inter-company eliminations) was $123.5 million compared to $36.5 million for the comparable period
in 2005. Approximately 40% of this 2006 revenue was to external customers as compared to 74% in
the third quarter of 2005.
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Operating Expenses
Medical Costs
Our medical
costs include payments to physicians, hospitals, and other providers for
healthcare and specialty services claims. Medical costs also include estimates of medical expenses
incurred but not yet reported, or IBNR, and estimates of the cost to process unpaid claims. Each
month we estimate our IBNR based on a number of factors, including inpatient hospital utilization
data and prior claims experience. When we commence operations in a
new state or region, we estimate our medical claims liabilities on
state provided historical actuarial data and limited actual claims
data. As part of our review, we also consider the costs to process
medical claims and estimates of amounts to cover uncertainties related to fluctuations in physician
billing patterns, membership, products and inpatient hospital trends. These estimates are adjusted
as more information becomes available. We employ actuarial professionals and use the services of
independent actuaries who are contracted to review our estimates quarterly. While we believe that
our process for estimating IBNR is actuarially sound, we cannot assure you that healthcare claim
costs will not materially differ from our estimates.
Our results
of operations depend on our ability to manage expenses related to health
benefits and to accurately predict costs incurred. Our HBR represents medical costs as a percentage
of premium revenues and reflects the direct relationship between the premium received and the
medical services provided. The table below depicts our HBR for our external membership by member
category:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
Medicaid and SCHIP |
82.0 | % | 83.1 | % | 82.8 | % | 81.6 | % | ||||||||
SSI |
84.1 | 96.2 | 86.2 | 92.6 | ||||||||||||
Specialty Services |
82.9 | 87.2 | 83.5 | 88.7 |
Our Medicaid and SCHIP HBR for the three and nine months ended September 30, 2006 were 82.0%
and 82.8%, respectively, a decrease of 1.1% and increase of 1.2% over the comparable 2005 periods.
The HBR for the three and nine months ended September 30, 2005 included $4.5 million for
settlement of a lawsuit with Aurora Health Care, Inc. (Aurora), a
provider of medical professional services to our Wisconsin health
plan. This settlement increased the HBR
by 1.2% and 0.5% for the three and nine months ended September 30, 2005, respectively. The decrease
for the three months ended September 30, 2006 was caused by premium rate increases in certain
markets, an increase in maternal delivery revenue, and the effect of the Aurora settlement offset
by a 8.9% increase in average in-patient days and higher physician costs. The HBR for the three
months ended September 30, 2006 did not include any significant adverse medical cost development.
The increase in HBR for the nine months ended September 30, 2006 is caused primarily by increased
cost trends for maternity related costs including neonatal, increased physician costs, and
increased costs associated with injectibles such as Synagis and Somatropin.
Our Specialty Services HBR for 2006 includes nine months of the behavioral health contracts in
Arizona and Kansas and three months of OptiCare. The 2005 results include nine months of our
behavioral health contract in Kansas and three months of Arizona results.
Cost of Services
Our cost of services expense includes all direct costs to support the local functions
responsible for generation of our service revenues. These expenses consist of the salaries and
wages of the professionals and teachers who provide the services and expenses related to facilities
and equipment used to provide services. Cost of services also includes the pharmacy costs incurred
by our PBM related to its external business. Cost of services rose $13.4 and $41.7 million for the
three and nine months ended September 30, 2006, respectively, over the comparable periods in 2005.
The increase in cost of services reflects the acquisitions of AirLogix, US Script and Cardium.
General and Administrative Expenses
Our G&A expenses primarily reflect wages and benefits, including stock compensation expense,
and other administrative costs related to health plans, specialty companies and our centralized
functions that support all of our business units. Our major centralized functions are finance,
information systems and claims processing. Premium tax or similar assessments (collectively,
premium taxes) are also classified as G&A expenses. G&A expenses increased for the three and nine
months ended September 30, 2006 over the comparable periods in 2005 primarily due to expenses for
additional facilities and staff to support our growth, especially in Arizona and Georgia, an
increase in premium taxes, and the adoption of SFAS 123R on January 1, 2006. Premium taxes totaled
$13.8 million and $25.0 million in the three and nine months ended September 30, 2006,
respectively, compared to $1.8 million and $5.3 million,
respectively, for the comparable periods in 2005. The results for the three and nine months
ended September 30, 2006 include $0.8 million and $10.2 million, respectively, of implementation
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expenses in Georgia. The results for the three
and nine months ended September 30, 2006 include
$2.7 million and $7.6 million, respectively, of stock compensation expense as a result of adopting
SFAS 123R on January 1, 2006.
Our G&A expense ratio represents G&A expenses as a percentage of total revenues and reflects
the relationship between revenues earned and the costs necessary to earn those revenues. The
following table sets forth the G&A expense ratios by business segment:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
Medicaid Managed Care |
12.1 | % | 10.6 | % | 12.1 | % | 10.6 | % | ||||||||
Specialty Services |
17.0 | 30.2 | 18.3 | 38.9 |
The increase in the Medicaid Managed Care G&A expense ratio in the nine months ended September
30, 2006 reflects the effect of the enactment of new premium taxes. Premium taxes had the effect
of increasing the Medicaid Managed Care G&A ratio by 2.1% and 1.5% in the three and nine months ended September 30, 2006,
respectively, compared to 0.4% in the three and nine months ended September 30, 2005.
The
Specialty Services G&A expense ratio varies depending on the nature of the services provided and
will generally be higher than the Medicaid Managed Care G&A
expense ratio. The results for the
three and nine months ended September 30, 2006 reflect the operations of our behavioral health
company in Arizona, the acquisitions of US Script and AirLogix, as well as the acquisition of
Cardium effective May 9, 2006, and OptiCare effective July 1, 2006. The results for the nine
months ended September 30, 2006 include approximately $0.7 million in start-up costs related to our
long-term care contract in Arizona. The results for the nine months ended September 30, 2005
included approximately $1.5 million in start-up costs related to our behavioral health contract in
Arizona.
In 2006, we reassessed the calculations used to determine the proportion of certain costs
allocated among each of our two segments. This assessment included an evaluation of whether the
costs should be allocated based on revenue, number of claims, or headcount measures and altered the
proportion of certain G&A costs. The altered percentages resulted in the allocation of an
additional $3.5 million and $9.7 million to the Medicaid Managed Care segment in the three and nine
months ended September 30, 2006 than would have been allocated under the previous formulas.
Impairment Loss
In August 2006, FirstGuard Health Plan Kansas, Inc. (FirstGuard Kansas), our wholly owned
subsidiary, received notification from the Kansas Health Policy Authority that its Medicaid
contract scheduled to terminate December 31, 2006 will not be renewed. We appealed this decision
and the initial administrative appeal was denied. We are currently reviewing all available remedies
and will continue to pursue our active pending petition in Kansas state court. There is a state
court hearing scheduled on October 26th to review our request for judicial review and injunctive
relief. As a result of these events, we concluded it was necessary to conduct an impairment
analysis of the identifiable intangible assets and goodwill of the FirstGuard reporting unit, which
encompasses both the Kansas and Missouri FirstGuard health plans as
part of our preparation of financial statements for the period ended
September 20, 2006.
The fair value of our FirstGuard reporting unit was determined using discounted expected cash
flows and estimated market value. The impairment analysis resulted in
a pre-tax, non-cash impairment charge
of $87.1 million recorded as impairment loss in the consolidated statement of earnings. The
impaired identifiable intangible assets of $6.0 million
and goodwill of $81.1 million, respectively, were reported under the Medicaid Managed Care segment. We continue to monitor the
status of the appeal. Various scenarios could trigger further impairment of goodwill and other
assets, or other shutdown costs such as severance. As of September 30, 2006, our FirstGuard
reporting unit had goodwill and net intangible assets of $6.8 million. Our Kansas health plan
contributed $63.7 million and $174.6 million of revenue for the three and nine months ended
September 30, 2006, respectively.
Other Income (Expense)
Other income (expense) consists principally of investment income from our cash and
investments and interest expense on our debt. Investment and other income increased $1.8
and $4.6 million for the three and nine months ended September 30, 2006 over the comparable period
in 2005 primarily as a result of an increase in market interest rates and larger investment
balances. Interest expense increased $1.9 million and $5.2 million for the three and nine months
ended September 30, 2006 over the comparable period in 2005 primarily from increased borrowings
under our credit facilities.
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Income Tax Expense
Our effective tax rate for the nine months ended September 30, 2006 was (33.2)% compared
to 34.6% for the corresponding period in 2005. The change was primarily due to the 2006
non-deductible goodwill impairment charge. Excluding the intangible asset impairment, our 2006 estimated effective
tax rate is 38%. The 2005 effective tax rate included
lower expense resulting from the resolution of state income tax examinations and the recognition of
deferred tax benefits related to a change in law. If we are ultimately unsuccessful in our attempts to renew our Kansas Medicaid contract,
any potential tax deduction would be based on the stock basis of the applicable subsidiary, not its individual assets. The potential timing
of such a deduction can not be determined at this time.
Earnings
Per Share and Shares Outstanding
Our
earnings per share calculations in 2006 reflect lower diluted weighted
average shares outstanding resulting from the exclusion of the effect of outstanding stock
awards which would be anti-dilutive to net earnings.
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LIQUIDITY AND CAPITAL RESOURCES
We finance
our activities primarily through operating cash flows and borrowings under our
revolving credit facility. Our operating activities provided cash of $124.6 million in the nine
months ended September 30, 2006 compared to $44.9 million in the comparable period in 2005. The
increase in cash flow from operations in 2006 reflects an increase in medical claims liabilities
primarily from the commencement of our operations in Georgia and an increase in accounts payable
and accrued expenses. The increase in premium and related receivables in 2006 reflects an increase
in maternal delivery receivables, reimbursements due to us from providers including amounts due
under capitated risk-sharing contracts and the acquisition of US Script.
Our investing
activities used cash of $141.8 million and $51.8 million in the nine months
ended September 30, 2006 and 2005, respectively. During 2006, our investing activities primarily
consisted of the acquisitions of US Script, Cardium, MediPlan, and
OptiCare. Based on the environment in the state of Missouri, we are
evaluating potential strategic alternatives for our health plan in
Missouri. Our investing activities in 2006 also included additions to
our investment portfolio. Our investment policies are designed to provide liquidity,
preserve capital and maximize total return on invested assets within our investment guidelines. Net
cash provided by and used in investing activities will fluctuate from year to year due to the
timing of investment purchases, sales and maturities. As of September 30, 2006, our investment
portfolio consisted primarily of fixed-income securities with an average duration of 1.3 years.
Cash is invested in investment vehicles such as asset-backed securities, municipal bonds, corporate
bonds, insurance contracts, commercial paper and instruments of the U.S. Treasury. The states in
which we operate prescribe the types of instruments in which our regulated subsidiaries may invest
their cash.
We spent
$39.5 million and $16.8 million on capital assets in the nine months ended September
30, 2006 and 2005, respectively. The expenditures in 2006 included
$21.4 million for computer
hardware and software. We anticipate spending an additional $12 million on capital expenditures in
2006 primarily related to information systems.
The expenditures in
2006 also included $9.5 million for several properties contiguous to our
corporate headquarters as part of our redevelopment agreement with
the City of Clayton, Missouri. We
anticipate spending approximately $20 million for additional
property in Clayton, Missouri related to
this agreement. In the second quarter of 2006, our subsidiary
executed a three-year, $25 million revolving credit
facility to finance the property already acquired or expected to be acquired under the
redevelopment agreement. As of September 30, 2006 we had $8.4 million in borrowings outstanding
under this credit facility.
Our financing activities provided cash of $70.3 million in the nine months ended September 30,
2006 compared to $44.2 million in the nine months ended September 30, 2005. During 2006, our
financing activities primarily related to proceeds from borrowings under our Revolving Credit
Agreement. These borrowings were used primarily for our investing activities in conjunction with
the acquisition of US Script, Cardium and MediPlan.
At September 30, 2006, we had working capital, defined as current assets less current
liabilities, of $40.5 million as compared to $58.0 million at December 31, 2005. Our investment
policies are 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 short-term capital requirements as needed.
Cash, cash equivalents and short-term investments were $267.9 million at September 30, 2006
and $204.1 million at December 31, 2005. Long-term investments were $172.2 million at September 30,
2006 and $146.2 million at December 31, 2005, including restricted deposits of $25.6 million and
$22.6 million, respectively. At September 30, 2006, cash and investments held by our unregulated
entities totaled $29.0 million while cash and investments held by our regulated entities totaled
$411.1 million.
In
September 2006, we executed an amendment to our revolving credit
agreement. The amendment increases the total amount
available under the credit agreement to $300 million from $200 million, including a sub-facility
for letters of credit in an aggregate amount up to $75 million. Borrowings under the agreement
bear interest based upon LIBOR rates, the Federal Funds Rate or the
Prime Rate. There is a
commitment fee on the unused portion of the agreement that ranges from 0.15% to 0.275% depending on
the total debt to EBITDA ratio. The agreement contains non-financial and financial covenants,
including requirements of minimum fixed charge coverage ratios,
maximum debt to EBITDA ratios and
minimum tangible net worth. The agreement will expire in September 2011. As of September 30, 2006, we had $142.5
million in borrowings outstanding under the agreement and $15.6 million in letters of credit
outstanding, leaving an availability of $141.9 million. As of September 30, 2006, we were in
compliance with all covenants.
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Our board of directors adopted a stock repurchase program authorizing us to repurchase up to
4,000,000 shares of common stock from time to time on the open market or through privately
negotiated transactions. The repurchase program extends through October 31, 2007, but we reserve
the right to suspend or discontinue the program at any time. During the nine months ended
September 30, 2006, we repurchased 367,900 shares at an average price of $19.61. We have
established a trading plan with a registered broker to repurchase shares under certain market
conditions.
We have filed a shelf registration statement on Form S-3 with the Securities and Exchange
Commission, or the SEC, covering the issuance of up to $300 million of securities including common
stock and debt securities. No securities have been issued under the shelf registration. We may
publicly offer securities from time-to-time at prices and terms to be determined at the time of the
offering.
There were no other material changes outside the ordinary course of our business in lease
obligations or other contractual obligations in the nine months ended September 30, 2006. Based on
our operating plan, we expect that our available funding will be sufficient to finance our
operations and capital expenditures for at least 12 months from the date of this filing.
REGULATORY CAPITAL AND DIVIDEND RESTRICTIONS
Our Medicaid
Managed Care operations are conducted through our subsidiaries. As managed care
organizations, these subsidiaries are subject to state regulations that, among other things,
require the maintenance of minimum levels of statutory capital, as defined by each state, and
restrict the timing, payment and amount of dividends and other distributions that may be paid to
us. Generally, the amount of dividend distributions that may be paid by a regulated subsidiary
without prior approval by state regulatory authorities is limited based on the entitys level of
statutory net income and statutory capital and surplus.
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 September 30, 2006, our
subsidiaries had aggregate statutory capital and surplus of $214.3 million, compared with the
required minimum aggregate statutory capital and surplus requirements
of $133.4 million.
The National Association of Insurance Commissioners has adopted rules which set minimum
risk-based capital requirements for insurance companies, managed care organizations and other
entities bearing risk for healthcare coverage. As of September 30, 2006, our Georgia, Indiana, New
Jersey, Ohio, Texas and Wisconsin health plans were in compliance with the risk-based capital
requirements enacted in those states. If adopted by Kansas or Missouri, we believe we would be in
compliance with the risk-based capital requirements for these subsidiaries. We continue to monitor
the requirements in Kansas and Missouri and do not expect that they will have a material impact on
our results of operations, financial position or cash flows.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2006, the FASB issued Interpretation 48 (FIN 48), Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement No. 109, Accounting for Income Taxes. FIN 48
clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial
statements in accordance with FASB Statement No. 109. FIN 48 describes a recognition threshold and
measurement attribute for financial statement recognition and measurement of a tax position taken
or expected to be taken in a tax return and also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods, disclosure and transition.
The Interpretation is effective for fiscal years beginning after
December 15, 2006. We are
currently assessing the estimated effect of FIN 48 on the financial condition and results of
operations upon adoption on January 1, 2007.
FORWARD-LOOKING STATEMENTS
This filing 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, investments and the adequacy of our available cash
resources. These statements may be found in the section of this filing entitled Managements
Discussion and Analysis of Financial Condition and Results of Operations and Item 1A. Risk
Factors. 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 industrys 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 healthcare 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 Medicaid managed care
contracts by the state governments would also
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negatively affect 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.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.
INVESTMENTS
As of September 30, 2006, we had short-term investments of $67.4 million and long-term
investments of $172.2 million, including restricted deposits of $25.6 million. The short-term
investments consist of highly liquid securities with maturities between three and twelve months.
The long-term investments consist of municipal, corporate and U.S. agency bonds, asset-backed
securities, life insurance contracts and U.S. Treasury investments and have maturities greater than
one year. Restricted deposits consist of investments required by various state statutes to be
deposited or pledged to state agencies. Due to the nature of the states requirements, these
investments are classified as long-term regardless of the contractual maturity date. Our
investments are subject to interest rate risk and will decrease in value if market rates increase.
Assuming a hypothetical and immediate 1% increase in market interest rates at September 30, 2006,
the fair value of our fixed income investments would decrease by approximately $2.5 million.
Declines in interest rates over time will reduce our investment income.
INFLATION
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 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.
COMPLIANCE COSTS
Federal and state regulations governing standards for electronic transactions, data security
and confidentiality of patient information have been issued in recent years. Due to the uncertainty
surrounding the regulatory requirements, we cannot be sure that the systems and programs that we
have implemented will comply adequately with the security regulations that are ultimately adopted.
Implementation of additional systems and programs may be required. 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 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures Our management, with the participation of
our chief executive officer and chief financial officer, evaluated the effectiveness of our
disclosure controls and procedures as of September 30, 2006. The term disclosure controls and
procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and
other procedures of a company that are designed to ensure that information required to be disclosed
by a company in the reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the SECs rules and forms.
Disclosure controls and procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by a company in the reports that it files or
submits under the Exchange Act is accumulated and communicated to the companys management,
including its principal executive and principal financial officers, as appropriate to allow timely
decisions regarding required disclosure. Management recognizes that any controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance of achieving their
objectives and management necessarily applies its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. Based on the evaluation of our disclosure
controls and procedures as of September 30, 2006, our chief executive officer and chief financial
officer concluded that, as of such date, our disclosure controls and procedures were effective at
the reasonable assurance level.
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Changes in Internal Control Over Financial Reporting No change in our internal control
over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
occurred during the quarter ended September 30, 2006 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
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PART II
OTHER INFORMATION
ITEM 1. Legal Proceedings.
Two
class action lawsuits were filed against us and certain of our
officers and directors in the United States District Court for the
Eastern District of Missouri, one in July, or the July Class Action
Lawsuit, and one in August, or the August Class Action Lawsuit and
collectively, the Class Action Lawsuits, on behalf of purchases of
our common stock from June 21, 2006 through July 17, 2006.
The Class Action Lawsuits allege that we and certain of our officers
and directors violated federal securities laws by issuing a series
of materially false statements prior to the announcement of our
fiscal 2006 second quarter results. According to the Class Action
Lawsuits, these allegedly materially false statements had the effect
of artificially inflating the price of our common stock, which
subsequently dropped after the issuance of a press release announcing
our preliminary fiscal 2006 second quarter earnings and revised
guidance. All parties have sought consolidation of the Class Action
Lawsuits. In addition, we routinely are subjected to legal
proceedings in the normal course of business. While the ultimate
resolution of such matters is uncertain, we do not expect the results
of these matters to have a material effect on our financial position
or results of operations.
ITEM 1A. Risk Factors.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND THE
TRADING PRICE OF OUR COMMON STOCK
TRADING PRICE OF OUR COMMON STOCK
You should carefully consider the risks described below before making an investment decision.
The trading price of our common stock could decline due to any of these risks, in which case you
could lose all or part of your investment. You should also refer to the other information in this
filing, including our consolidated financial statements and related notes. The risks and
uncertainties described below are those that we currently believe may materially affect our
Company. Additional risks and uncertainties that we are unaware of or that we currently deem
immaterial also may become important factors that affect our Company.
Risks
Related to Being a Regulated Entity
Reduction
in Medicaid, SCHIP and SSI funding could substantially reduce
our profitability.
Most of our revenues come from Medicaid, SCHIP and SSI premiums.
The base premium rate paid by each state differs, depending on a
combination of factors such as defined upper payment limits, a
members health status, age, gender, county or region,
benefit mix and member eligibility categories. Future levels of
Medicaid, SCHIP and SSI funding and premium rates may be
affected by continued government efforts to contain healthcare
costs and may further be affected by state and federal budgetary
constraints.
For example, in October 2005, the Centers for
Medicare & Medicaid Services, or CMS, published an
interim final rule regarding the estimation and recovery of
improper payments made under Medicaid and SCHIP. This rule
requires a CMS contractor to sample selected states each year to
estimate improper payments in Medicaid and SCHIP and create
national and state specific error rates. Each state will be
selected for review once every three years for each program.
States are required to repay to CMS the federal share of any
overpayments identified.
On February 8, 2006, President Bush signed the Deficit
Reduction Act of 2005 to reduce the size of the federal deficit.
The Act reduces federal spending by nearly $40 billion over
the next 5 years, including a $5 billion reduction in
Medicaid. The Act reduces spending by cutting Medicaid payments
for prescription drugs and gives states new power to reduce or
reconfigure benefits. This law may also lead to lower Medicaid
reimbursements in some states. The Bush administrations
budget proposal also seeks to further reduce total federal
funding for the Medicaid program by $14 billion over the
next five years. In addition, the Bush administration has
proposed freezing federal spending for SCHIP at the levels set
in 2007 for ten years. States also periodically consider
reducing or reallocating the amount of money they spend for
Medicaid, SCHIP and SSI. In recent years, the majority of states
have implemented measures to restrict Medicaid, SCHIP and SSI
costs and eligibility.
Changes to Medicaid, SCHIP and SSI programs could reduce the
number of persons enrolled in or eligible for these programs,
reduce the amount of reimbursement or payment levels, or
increase our administrative or healthcare costs under those
programs. We believe that reductions in Medicaid, SCHIP and SSI
payments could substantially reduce our profitability. Further,
our contracts with the states are subject to cancellation by the
state after a short notice period in the event of unavailability
of state funds.
If our
Medicaid and SCHIP contracts are terminated or are not renewed,
our business will suffer.
We provide managed care programs and selected services to
individuals receiving benefits under federal assistance
programs, including Medicaid, SCHIP and SSI. We provide those
healthcare services under contracts with regulatory entities in
the areas in which we operate. Our contracts with various states
are generally intended to run for one or two years and may be
extended for one or two additional years if the state or its
agent elects to do so. Our current contracts are set to expire
between December 31, 2006 and September 30, 2009. When
our contracts expire, they may be opened for bidding by
competing healthcare providers. There is no guarantee that our
contracts will be renewed or extended. For example, on
August 25, 2006, we received notification from the Kansas
Health Policy Authority that FirstGuard Health Plan Kansas,
Inc.s contract with the state ending on December 31,
2006 will not be renewed or extended. Further, our contracts
with the states are subject to cancellation by the state after a
short notice period in the event of unavailability of state
funds. Our contracts could also be terminated if we fail to
perform in accordance with the standards set by state regulatory
agencies. For example, the Indiana contract under which we
operate can
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be terminated by the state without cause. If any of our
contracts are terminated, not renewed, or renewed on less
favorable terms, our business will suffer, and our operating
results may be materially affected.
Changes
in government regulations designed to protect the financial
interests of providers and members rather than our investors
could force us to change how we operate and could harm our
business.
Our business is extensively regulated by the states in which we
operate and by the federal government. The applicable laws and
regulations are subject to frequent change and generally are
intended to benefit and protect the financial interests of
health plan providers and members rather than investors. The
enactment of new laws and rules or changes to existing laws and
rules or the interpretation of such laws and rules could, among
other things:
| force us to restructure our relationships with providers within our network; | |
| require us to implement additional or different programs and systems; | |
| mandate minimum medical expense levels as a percentage of premium revenues; | |
| restrict revenue and enrollment growth; | |
| require us to develop plans to guard against the financial insolvency of our providers; | |
| increase our healthcare and administrative costs; | |
| impose additional capital and reserve requirements; and | |
| increase or change our liability to members in the event of malpractice by our providers. |
For example, Congress has previously considered various forms of
patient protection legislation commonly known as the
Patients Bill of Rights and such legislation may be
proposed again. We cannot predict the impact of any such
legislation, if adopted, on our business.
Regulations
may decrease the profitability of our health
plans.
Our Texas plan is required to pay a rebate to the State of Texas
in the event profits exceed established levels. Similarly, our
New Jersey plan is required to pay a rebate to the State of New
Jersey in the event its health benefits ratio is less than 80%.
These regulatory requirements, changes in these requirements or
the adoption of similar requirements by our other regulators may
limit our ability to increase our overall profits as a
percentage of revenues. Certain states, including but not
limited to Indiana, New Jersey and Texas have implemented
prompt-payment laws and are enforcing penalty provisions for
failure to pay claims in a timely manner. Failure to meet these
requirements can result in financial fines and penalties. In
addition, states may attempt to reduce their contract premium
rates if regulators perceive our health benefits ratio as too
low. Any of these regulatory actions could harm our operating
results.
We
face periodic reviews, audits and investigations under our
contracts with state government agencies, and these audits could
have adverse findings which may negatively impact our
business.
We contract with various state governmental agencies to provide
managed health care services. Pursuant to these contracts, we
are subject to various reviews, audits and investigations to
verify our compliance with the contracts and applicable laws and
regulations. Any adverse review, audit or investigation could
result in:
| refunding of amounts we have been paid pursuant to our contracts; | |
| imposition of fines, penalties and other sanctions on us; | |
| loss of our right to participate in various markets; | |
| increased difficulty in selling our products and services; and | |
| loss of one or more of our licenses. |
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Failure
to comply with government regulations could subject us to civil
and criminal penalties.
Federal and state governments have enacted fraud and abuse laws
and other laws to protect patients privacy and access to
healthcare. In some states, we may be subject to regulation by
more than one governmental authority, which may impose
overlapping or inconsistent regulations. Violation of these and
other laws or regulations governing our operations or the
operations of our providers could result in the imposition of
civil or criminal penalties, the cancellation of our contracts
to provide services, the suspension or revocation of our
licenses or our exclusion from participating in the Medicaid,
SCHIP and SSI programs. If we were to become subject to these
penalties or exclusions as the result of our actions or
omissions or our inability to monitor the compliance of our
providers, it would negatively affect our ability to operate our
business.
The Health Insurance Portability and Accountability Act of 1996,
or HIPAA, broadened the scope of fraud and abuse laws applicable
to healthcare companies. HIPAA created civil penalties for,
among other things, billing for medically unnecessary goods or
services. HIPAA established new enforcement mechanisms to combat
fraud and abuse, including civil and, in some instances,
criminal penalties for failure to comply with specific standards
relating to the privacy, security and electronic transmission of
most individually identifiable health information. It is
possible that Congress may enact additional legislation in the
future to increase penalties and to create a private right of
action under HIPAA, which could entitle patients to seek
monetary damages for violations of the privacy rules.
We may
incur significant costs as a result of compliance with
government regulations, and our management will be required to
devote time to compliance.
Many aspects of our business are affected by government laws and
regulation. The issuance of new regulations, or judicial or
regulatory guidance regarding existing regulations, could
require changes to many of the procedures we currently use to
conduct our business, which may lead to additional costs that we
have not yet identified. We do not know whether, or the extent
to which, we will be able to recover from the states our costs
of complying with these new regulations. The costs of any such
future compliance efforts could have a material adverse effect
on our business.
In addition, the Sarbanes-Oxley Act, as well as rules
subsequently implemented by the SEC and the New York Stock
Exchange, or the NYSE, have imposed various requirements on
public companies, including requiring changes in corporate
governance practices. Our management and other personnel will
continue to devote time to these new compliance initiatives.
The Sarbanes-Oxley Act requires, among other things, that we
maintain effective internal control over financial reporting. In
particular, we must perform system and process evaluation and
testing of our internal controls over financial reporting to
allow management to report on the effectiveness of our internal
controls over our financial reporting as required by
Section 404 of the Sarbanes-Oxley Act. Our testing, or the
subsequent testing by our independent registered public
accounting firm, may reveal deficiencies in our internal
controls over financial reporting that are deemed to be material
weaknesses. Our compliance with Section 404 requires that
we incur substantial accounting expense and expend significant
management efforts. Moreover, if we are not able to comply with
the requirements of Section 404, or if we or our
independent registered public accounting firm identifies
deficiencies in our internal control over financial reporting
that are deemed to be material weaknesses, the market price of
our stock could decline and we could be subject to sanctions or
investigations by the NYSE, SEC or other regulatory authorities,
which would require additional financial and management
resources.
Changes
in healthcare law and benefits may reduce our
profitability.
Numerous proposals relating to changes in healthcare law have
been introduced, some of which have been passed by Congress and
the states in which we operate or may operate in the future.
Changes in applicable laws and regulations are continually being
considered, and interpretations of existing laws and rules may
also change from time to time. We are unable to predict what
regulatory changes may occur or what effect any particular
change may have on our business. For example, these changes
could reduce the number
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of persons enrolled or eligible to enroll in Medicaid, reduce
the reimbursement or payment levels for medical services or
reduce benefits included in Medicaid coverage. We are also
unable to predict whether new laws or proposals will favor or
hinder the growth of managed healthcare in general. Legislation
or regulations that require us to change our current manner of
operation, benefits provided or our contract arrangements may
seriously harm our operations and financial results.
If a
state fails to renew a required federal waiver for mandated
Medicaid enrollment into managed care or such application is
denied, our membership in that state will likely
decrease.
States may administer Medicaid managed care programs pursuant to
demonstration programs or required waivers of federal Medicaid
standards. Waivers and demonstration programs are generally
approved for two-year periods and can be renewed on an ongoing
basis if the state applies. We have no control over this renewal
process. If a state does not renew such a waiver or
demonstration program or the Federal government denies a
states application for renewal, membership in our health
plan in the state could decrease and our business could suffer.
Changes
in federal funding mechanisms may reduce our
profitability.
The Bush administration previously proposed a major long-term
change in the way Medicaid and SCHIP are funded. The proposal,
if adopted, would allow states to elect to receive, instead of
federal matching funds, combined Medicaid-SCHIP
allotments for acute and long-term healthcare for
low-income, uninsured persons. Participating states would be
given flexibility in designing their own health insurance
programs, subject to federally-mandated minimum coverage
requirements. It is uncertain whether this proposal will be
enacted. Accordingly, it is unknown whether or how many states
might elect to participate or how their participation may affect
the net amount of funding available for Medicaid and SCHIP
programs. If such a proposal is adopted and decreases the number
of persons enrolled in Medicaid or SCHIP in the states in which
we operate or reduces the volume of healthcare services
provided, our growth, operations and financial performance could
be adversely affected.
In April 2004, the Bush administration adopted a policy that
seeks to reduce states use of intergovernmental transfers
for the states share of Medicaid program funding. By
restricting the use of intergovernmental transfers, this policy,
if continued, may restrict some states funding for
Medicaid, which could adversely affect our growth, operations
and financial performance.
Recent legislative changes in the Medicare program may also
affect our business. For example, the Medicare Prescription
Drug, Improvement and Modernization Act of 2003 revised
cost-sharing requirements for some beneficiaries and requires
states to reimburse the federal Medicare program for costs of
prescription drug coverage provided to beneficiaries who are
enrolled simultaneously in both the Medicaid and Medicare
programs. The Bush administration has also proposed to further
reduce total federal funding for the Medicaid program by
$14 billion over the next five years. These changes may
reduce the availability of funding for some states
Medicaid programs, which could adversely affect our growth,
operations and financial performance. In addition, the new
Medicare prescription drug benefit is interrupting the
distribution of prescription drugs to many beneficiaries
simultaneously enrolled in both Medicaid and Medicare, prompting
several states to pay for prescription drugs on an unbudgeted,
emergency basis without any assurance of receiving reimbursement
from the federal Medicaid program. These expenses may cause some
states to divert funds originally intended for other Medicaid
services which could adversely affect our growth, operations and
financial performance.
If
state regulatory agencies require a statutory capital level
higher than the state regulations, we may be required to make
additional capital contributions.
Our operations are conducted through our wholly owned
subsidiaries, which include health maintenance organizations, or
HMOs, and managed care organizations, or MCOs. HMOs and MCOs are
subject to state regulations that, among other things, require
the maintenance of minimum levels of statutory capital, as
defined by each state. Additionally, state regulatory agencies
may require, at their discretion, individual HMOs
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to maintain statutory capital levels higher than the state
regulations. If this were to occur to one of our subsidiaries,
we may be required to make additional capital contributions to
the affected subsidiary. Any additional capital contribution
made to one of the affected subsidiaries could have a material
adverse effect on our liquidity and our ability to grow.
If we
are unable to participate in SCHIP programs, our growth rate may
be limited.
SCHIP is a federal initiative designed to provide coverage for
low-income children not otherwise covered by Medicaid or other
insurance programs. The programs vary significantly from state
to state. Participation in SCHIP programs is an important part
of our growth strategy. If states do not allow us to participate
or if we fail to win bids to participate, our growth strategy
may be materially and adversely affected.
If
state regulators do not approve payments of dividends and
distributions by our subsidiaries to us, we may not have
sufficient funds to implement our business
strategy.
We principally operate through our health plan subsidiaries. If
funds normally available to us become limited in the future, we
may need to rely on dividends and distributions from our
subsidiaries to fund our operations. These subsidiaries are
subject to regulations that limit the amount of dividends and
distributions that can be paid to us without prior approval of,
or notification to, state regulators. If these regulators were
to deny our subsidiaries request to pay dividends to us,
the funds available to us would be limited, which could harm our
ability to implement our business strategy.
Risks
Related to Our Business
Ineffectiveness
of state-operated systems and subcontractors could adversely
affect our business.
Our health plans rely on other state-operated systems or
sub-contractors to qualify, solicit, educate and assign eligible
clients into the health plans. The effectiveness of these state
operations and sub-contractors can have a material effect on a
health plans enrollment in a particular month or over an
extended period. When a state implements new programs to
determine eligibility, new processes to assign or enroll
eligible clients into health plans, or chooses new contractors,
there is an increased potential for an unanticipated impact on
the overall number of members assigned into the health plans.
Failure
to accurately predict our medical expenses could negatively
affect our reported results.
Our medical expenses include estimates of medical expenses
incurred but not yet reported, or IBNR. We estimate our IBNR
medical expenses monthly based on a number of factors.
Adjustments, if necessary, are made to medical expenses in the
period during which the actual claim costs are ultimately
determined or when criteria used to estimate IBNR change. We
cannot be sure that our IBNR estimates are adequate or that
adjustments to those estimates will not harm our results of
operations. For example, in the three months ended June 30,
2006 we adjusted our IBNR by $9.7 million for adverse
medical cost development from the first quarter of 2006. In
addition, when we commence operations in a new state or region, we
have limited information with which to estimate our medical
claims liabilities. For example, we commenced operations in
Georgia on June 1, 2006 and have based our estimates on
state provided historical actuarial data and limited claims
data. From time to time in the past, our actual results have
varied from our estimates, particularly in times of significant
changes in the number of our members. Our failure to estimate
IBNR accurately may also affect our ability to take timely
corrective actions, further harming our results.
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Receipt
of inadequate or significantly delayed premiums would negatively
affect our revenues and profitability.
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 members. If
premiums do not increase when expenses related to medical
services rise, our earnings will be affected negatively. In
addition, our actual medical services costs may exceed our
estimates, which would cause our health benefits ratio, or our
expenses related to medical services as a percentage of premium
revenue, to increase and our profits to decline. In addition, it
is possible for a state to increase the rates payable to the
hospitals without granting a corresponding increase in premiums
to us. If this were to occur in one or more of the states in
which we operate, our profitability would be harmed. In
addition, if there is a significant delay in our receipt of
premiums to offset previously incurred health benefits costs,
our earnings could be negatively impacted.
Failure
to effectively manage our medical costs or related
administrative costs would reduce our
profitability.
Our profitability depends, to a significant degree, on our
ability to predict and effectively manage expenses related to
health benefits. We have less control over the costs related to
medical services than we do over our general and administrative
expenses. Because of the narrow margins of our health plan
business, relatively small changes in our health benefits ratio
can create significant changes in our financial results. Changes
in healthcare regulations and practices, the level of use of
healthcare services, hospital costs, pharmaceutical costs, major
epidemics, new medical technologies and other external factors,
including general economic conditions such as inflation levels,
are beyond our control and could reduce our ability to predict
and effectively control the costs of providing health benefits.
We may not be able to manage costs effectively in the future. If
our costs related to health benefits increase, our profits could
be reduced or we may not remain profitable.
Difficulties
in executing our acquisition strategy could adversely affect our
business.
Historically, the acquisition of Medicaid businesses, contract
rights and related assets of other health plans both in our
existing service areas and in new markets has accounted for a
significant amount of our growth. Many of the other potential
purchasers of Medicaid assets have greater financial resources
than we have. In addition, many of the sellers are interested
either in (a) selling, along with their Medicaid assets,
other assets in which we do not have an interest or
(b) selling their companies, including their liabilities,
as opposed to the assets of their ongoing businesses.
We generally are required to obtain regulatory approval from one
or more state agencies when making acquisitions. In the case of
an acquisition of a business located in a state in which we do
not currently operate, we would be required to obtain the
necessary licenses to operate in that state. In addition, even
if we already operate in a state in which we acquire a new
business, we would be required to obtain additional regulatory
approval if the acquisition would result in our operating in an
area of the state in which we did not operate previously, and we
could be required to renegotiate provider contracts of the
acquired business. We cannot assure you that we would be able to
comply with these regulatory requirements for an acquisition in
a timely manner, or at all. In deciding whether to approve a
proposed acquisition, state regulators may consider a number of
factors outside our control, including giving preference to
competing offers made by locally owned entities or by
not-for-profit
entities.
We also may be unable to obtain sufficient additional capital
resources for future acquisitions. If we are unable to
effectively execute our acquisition strategy, our future growth
will suffer and our results of operations could be harmed.
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Our
acquisitions may increase costs, liabilities, or create
disruptions in our business.
We pursue acquisitions of other companies or businesses from
time to time. Although we review the records of companies or
businesses we plan to acquire, even an in-depth review of
records may not reveal existing or potential problems or permit
us to become familiar enough with a business to assess fully its
capabilities and deficiencies. As a result, we may assume
unanticipated liabilities or adverse operating conditions, or an
acquisition may not perform as well as expected. We face the
risk that the returns on acquisitions will not support the
expenditures or indebtedness incurred to acquire such
businesses, or the capital expenditures needed to develop such
businesses. We also face the risk that we will not be able to
integrate acquisitions into our existing operations effectively
without substantial expense, delay or other operational or
financial problems. Integration may be hindered by, among other
things, differing procedures, including internal controls,
business practices and technology systems. We may need to divert
more management resources to integration than we planned, which
may adversely affect our ability to pursue other profitable
activities.
In addition to the difficulties we may face in identifying and
consummating acquisitions, we will also be required to integrate
and consolidate any acquired business or assets with our
existing operations. This may include the integration of:
| additional personnel who are not familiar with our operations and corporate culture; | |
| provider networks that may operate on different terms than our existing networks; | |
| existing members, who may decide to switch to another healthcare plan; and | |
| disparate administrative, accounting and finance, and information systems. |
Accordingly, we may be unable to identify, consummate and
integrate future acquisitions successfully or operate acquired
businesses profitably.
If
competing managed care programs are unwilling to purchase
specialty services from us, we may not be able to successfully
implement our strategy of diversifying our business
lines.
We are seeking to diversify our business lines into areas that
complement our Medicaid business in order to grow our revenue
stream and balance our dependence on Medicaid risk
reimbursement. In order to diversify our business, we must
succeed in selling the services of our specialty subsidiaries
not only to our managed care plans, but to programs operated by
third-parties. Some of these third-party programs may compete
with us in some markets, and they therefore may be unwilling to
purchase specialty services from us. In any event, the offering
of these services will require marketing activities that differ
significantly from the manner in which we seek to increase
revenues from our Medicaid programs. Our inability to market
specialty services to other programs may impair our ability to
execute our business strategy.
Failure
to achieve timely profitability in any business would negatively
affect our results of operations.
Start-up
costs associated with a new business can be substantial. For
example, in order to obtain a certificate of authority in most
jurisdictions, we must first establish a provider network, have
systems in place and demonstrate our ability to obtain a state
contract and process claims. If we were unsuccessful in
obtaining the necessary license, winning the bid to provide
service or attracting members in numbers sufficient to cover our
costs, any new business of ours would fail. We also could be
obligated by the state to continue to provide services for some
period of time without sufficient revenue to cover our ongoing
costs or recover
start-up
costs. The expenses associated with starting up a new business
could have a significant impact on our results of operations if
we are unable to achieve profitable operations in a timely
fashion.
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We
derive a majority of our premium revenues from operations in a
small number of states, and our operating results would be
materially affected by a decrease in premium revenues or
profitability in any one of those states.
Operations in Georgia, Indiana, Kansas, Texas and Wisconsin
historically have accounted for most of our premium revenues to
date. 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 could
decrease materially. Our reliance on operations in a limited
number of states could cause our revenue and profitability to
change suddenly and unexpectedly depending on legislative or
other governmental or regulatory actions and decisions, economic
conditions and similar factors in those states. For example, in
2006, we were notified by the Kansas Health Policy Authority
that our Medicaid contract scheduled to terminate
December 31, 2006 will not be renewed. Our inability to
continue to operate in any of the states in which we operate
would harm our business.
Competition
may limit our ability to increase penetration of the markets
that we serve.
We compete for members principally on the basis of size and
quality of provider network, benefits provided and quality of
service. We compete with numerous types of competitors,
including other health plans and traditional state Medicaid
programs that reimburse providers as care is provided. Subject
to limited exceptions by federally approved state applications,
the federal government requires that there be choices for
Medicaid recipients among managed care programs. Voluntary
programs and mandated competition may limit our ability to
increase our market share.
Some of the health plans with which we compete have greater
financial and other resources and offer a broader scope of
products than we do. In addition, significant merger and
acquisition activity has occurred in the managed care industry,
as well as in industries that act as suppliers to us, such as
the hospital, physician, pharmaceutical, medical device and
health information systems businesses. To the extent that
competition intensifies in any market that we serve, our ability
to retain or increase members and providers, or maintain or
increase our revenue growth, pricing flexibility and control
over medical cost trends may be adversely affected.
In addition, in order to increase our membership in the markets
we currently serve, we believe that we must continue to develop
and implement community-specific products, alliances with key
providers and localized outreach and educational programs. If we
are unable to develop and implement these initiatives, or if our
competitors are more successful than we are in doing so, we may
not be able to further penetrate our existing markets.
If we
are unable to maintain relationships with our provider networks,
our profitability may be harmed.
Our profitability depends, in large part, upon our ability to
contract favorably with hospitals, physicians and other
healthcare providers. Our provider arrangements with our primary
care physicians, specialists and hospitals generally may be
cancelled by either party without cause upon 90 to 120 days
prior written notice. We cannot assure you that we will be able
to continue to renew our existing contracts or enter into new
contracts enabling us to service our members profitably.
From time to time providers assert or threaten to assert claims
seeking to terminate noncancelable agreements due to alleged
actions or inactions by us. Even if these allegations represent
attempts to avoid or renegotiate contractual terms that have
become economically disadvantageous to the providers, it is
possible that in the future a provider may pursue such a claim
successfully. In addition, we are aware that other managed care
organizations have been subject to class action suits by
physicians with respect to claim payment procedures, and we may
be subject to similar claims. Regardless of whether any claims
brought against us are successful or have merit, they will still
be time-consuming and costly and could distract our
managements attention. As a result, we may incur
significant expenses and may be unable to operate our business
effectively.
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We will be required to establish acceptable provider networks
prior to entering new markets. We may be unable to enter into
agreements with providers in new markets on a timely basis or
under favorable terms. If we are unable to retain our current
provider contracts or enter into new provider contracts timely
or on favorable terms, our profitability will be harmed.
We may
be unable to attract and retain key personnel.
We are highly dependent on our ability to attract and retain
qualified personnel to operate and expand our business. If we
lose one or more members of our senior management team,
including our chief executive officer, Michael Neidorff, who has
been instrumental in developing our business strategy and
forging our business relationships, our business and operating
results could be harmed. Our ability to replace any departed
members of our senior management or other key employees may be
difficult and may take an extended period of time because of the
limited number of individuals in the Medicaid managed care and
specialty services industry with the breadth of skills and
experience required to operate and successfully expand a
business such as ours. Competition to hire from this limited
pool is intense, and we may be unable to hire, train, retain or
motivate these personnel.
Negative
publicity regarding the managed care industry may harm our
business and operating results.
The managed care industry has received negative publicity. This
publicity has led to increased legislation, regulation, review
of industry practices and private litigation in the commercial
sector. These factors may adversely affect our ability to market
our services, require us to change our services, and increase
the regulatory burdens under which we operate. Any of these
factors may increase the costs of doing business and adversely
affect our operating results.
Claims
relating to medical malpractice could cause us to incur
significant expenses.
Our providers and employees involved in medical care decisions
may be subject to medical malpractice claims. In addition, some
states, including Texas, have adopted legislation that permits
managed care organizations to be held liable for negligent
treatment decisions or benefits coverage determinations. Claims
of this nature, if successful, could result in substantial
damage awards against us and our providers that could exceed the
limits of any applicable insurance coverage. Therefore,
successful malpractice or tort claims asserted against us, our
providers or our employees could adversely affect our financial
condition and profitability. Even if any claims brought against
us are unsuccessful or without merit, they would still be
time-consuming and costly and could distract our
managements attention. As a result, we may incur
significant expenses and may be unable to operate our business
effectively.
Loss
of providers due to increased insurance costs could adversely
affect our business.
Our providers routinely purchase insurance to help protect
themselves against medical malpractice claims. In recent years,
the costs of maintaining commercially reasonable levels of such
insurance have increased dramatically, and these costs are
expected to increase to even greater levels in the future. As a
result of the level of these costs, providers may decide to
leave the practice of medicine or to limit their practice to
certain areas, which may not address the needs of Medicaid
participants. We rely on retaining a sufficient number of
providers in order to maintain a certain level of service. If a
significant number of our providers exit our provider networks
or the practice of medicine generally, we may be unable to
replace them in a timely manner, if at all, and our business
could be adversely affected.
Growth
in the number of Medicaid-eligible persons during economic
downturns could cause our operating results 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. We cannot predict the
impact of changes in the United States economic environment or
other economic or political events, including
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acts of terrorism or related military action, on federal or
state funding of healthcare programs or on the size of the
population eligible for the programs we operate. If federal
funding decreases or remains unchanged while our membership
increases, our results of operations will suffer.
Growth
in the number of Medicaid-eligible persons may be
countercyclical, which could cause our operating results to
suffer when general economic conditions are
improving.
Historically, the number of persons eligible to receive Medicaid
benefits has increased more rapidly during periods of rising
unemployment, corresponding to less favorable general economic
conditions. Conversely, this number may grow more slowly or even
decline if economic conditions improve. Therefore, improvements
in general economic conditions may cause our membership levels
to decrease, thereby causing our operating results to suffer,
which could lead to decreases in our stock price during periods
in which stock prices in general are increasing.
If we
are unable to integrate and manage our information systems
effectively, our operations could be disrupted.
Our operations depend significantly on effective information
systems. The information gathered and processed by our
information systems assists us in, among other things,
monitoring utilization and other cost factors, processing
provider claims, and providing data to our regulators. Our
providers also depend upon our information systems for
membership verifications, claims status and other information.
Our information systems and applications require continual
maintenance, upgrading and enhancement to meet our operational
needs and regulatory requirements. Moreover, our acquisition
activity requires frequent transitions to or from, and the
integration of, various information systems. We regularly
upgrade and expand our information systems capabilities.
If we experience difficulties with the transition to or from
information systems or are unable to properly maintain or expand
our information systems, we could suffer, among other things,
from operational disruptions, loss of existing members and
difficulty in attracting new members, regulatory problems and
increases in administrative expenses. In addition, our ability
to integrate and manage our information systems may be impaired
as the result of events outside our control, including acts of
nature, such as earthquakes or fires, or acts of terrorists.
We
rely on the accuracy of eligibility lists provided by state
governments. Inaccuracies in those lists would negatively affect
our results of operations.
Premium payments to us are based upon eligibility lists produced
by state governments. From time to time, states require us to
reimburse them for premiums paid to us based on an eligibility
list that a state later discovers contains individuals who are
not in fact eligible for a government sponsored program or are
eligible for a different premium category or a different
program. Alternatively, a state could fail to pay us for members
for whom we are entitled to payment. Our results of operations
would be adversely affected as a result of such reimbursement to
the state if we had made related payments to providers and were
unable to recoup such payments from the providers.
We may
not be able to obtain or maintain adequate
insurance.
We maintain liability insurance, subject to limits and
deductibles, for claims that could result from providing or
failing to provide managed care and related services. These
claims could be substantial. We believe that our present
insurance coverage and reserves are adequate to cover currently
estimated exposures. We cannot assure you that we will be able
to obtain adequate insurance coverage in the future at
acceptable costs or that we will not incur significant
liabilities in excess of policy limits.
From
time to time, we may become involved in costly and
time-consuming litigation and other regulatory proceedings,
which require significant attention from our
management.
We are a defendant from time to time in lawsuits and regulatory
actions relating to our business. Due to the inherent
uncertainties of litigation and regulatory proceedings, we
cannot accurately predict the ultimate
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outcome of any such proceedings. An unfavorable outcome could
have a material adverse impact on our business and operating
results. In addition, regardless of the outcome of any
litigation or regulatory proceedings, such proceedings are
costly and may require significant attention from our
management. For example, we have been named in a number of
recently-filed securities class action lawsuits. In addition,
we may in the future be the target of similar litigation. As
with other litigation, securities litigation could be costly and
time consuming, require significant attention from our
management and could harm our business and operating results.
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ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Issuer Purchases of Equity Securities (1) | ||||||||||||||||
Third Quarter 2006 | ||||||||||||||||
Total Number | Maximum | |||||||||||||||
of Shares | Number of | |||||||||||||||
Purchased as | Shares | |||||||||||||||
Part of | that May Yet Be | |||||||||||||||
Average | Publicly | Purchased | ||||||||||||||
Total Number of | Price | Announced | Under | |||||||||||||
Shares | Paid per | Plans | the Plans or | |||||||||||||
Period | Purchased | Share | or Programs | Programs | ||||||||||||
July 1 July 31, 2006 |
10,000 | $ | 15.59 | 10,000 | 3,810,300 | |||||||||||
August 1 August 31, 2006 |
138,200 | 15.85 | 138,200 | 3,672,100 | ||||||||||||
September 1 September
30, 2006 |
40,000 | 15.56 | 40,000 | 3,632,100 | ||||||||||||
TOTAL |
188,200 | $ | 15.78 | 188,200 | 3,632,100 | |||||||||||
(1) | On November 7, 2005 our Board of Directors adopted a stock repurchase program of up to 4,000,000 shares, which extends through October 31, 2007. During the three months ended September 30, 2006, we did not repurchase any shares other than through this publicly announced program. |
ITEM 3. Defaults Upon Senior Securities.
None.
ITEM 4. Submission of Matters to a Vote of Security Holders.
None.
ITEM 5. Other Information.
None.
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ITEM 6. Exhibits.
Exhibits.
EXHIBIT | ||
NUMBER | DESCRIPTION | |
10.1
|
Amendment No. 5 to Credit Agreement dated as of September 14, 2004 among Centene Corporation, the various financial institutions party hereto and LaSalle Bank National Association. | |
10.2
|
First Amendment to the contract for Medicaid/Badger Care HMO Services between Managed Health Services Insurance Corp. and Wisconsin Department of Health and Family Services. | |
10.3
|
Notice of Renewal for fiscal year 2007 between Peach State Health Plan, Inc. and Georgia Department of Community Health. | |
12.1
|
Computation of ratio of earnings to fixed charges. | |
31.1
|
Certification of Chairman and Chief Executive Officer pursuant to Rule 13(a)-14(a) under the Securities Exchange Act of 1934, as amended. | |
31.2
|
Certification of Senior Vice President, Chief Financial Officer, Secretary and Treasurer pursuant to Rule 13(a)-14(a) under the Securities Exchange Act of 1934, as amended. | |
32.1
|
Certification of Chairman and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2
|
Certification of Senior Vice President, Chief Financial Officer, Secretary and Treasurer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized as of
October 24, 2006.
CENTENE CORPORATION |
||||
By: | /s/ Michael F. Neidorff | |||
Michael F. Neidorff | ||||
Chairman and Chief Executive Officer (principal executive officer) |
||||
By: | /s/ J. Per Brodin | |||
J. Per Brodin | ||||
Senior Vice President, Chief Financial
Officer, Secretary and Treasurer (principal financial and accounting officer) |
||||
36