mponder@centene.com
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
T
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the fiscal year ended December 31, 2006
or
£
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the transition period
from to
Commission
file number: 000-33395
CENTENE
CORPORATION
(Exact
name of registrant as specified in its charter)
Delaware
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42-1406317
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(State
or other jurisdiction of
incorporation
or organization)
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(I.R.S.
Employer
Identification
Number)
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7711
Carondelet Avenue
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St.
Louis, Missouri
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63105
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code: (314) 725-4477
Securities
registered pursuant to Section 12(b) of the Act:
Common
Stock, $0.001 Par Value
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New
York Stock Exchange
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Title
of Each Class
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Name
of Each Exchange on Which
Registered
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Securities
registered pursuant to Section 12(g) of the Act:
None
(Title
of Each Class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act.
Yes T No £
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes £ No T
Indicate
by check mark whether the registrant: (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. Yes T No £
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K. £
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filed, 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 T
Accelerated
filer £
Non-accelerated filer £
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes £ No T
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant, based upon the last reported sale price of
the
common stock on the New York Stock Exchange on June 30, 2006, was $995,902,615.
As
of
December 31, 2006 the registrant had 43,369,918 shares of common stock
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the Proxy Statement for the registrant’s 2007 annual meeting of stockholders
are incorporated by reference in Part II, Item 5 and Part III, Items 10, 11,
12,
13 and 14.
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Part
I
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Item
1.
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3
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Item
1A.
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17
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Item
1B.
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25
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Item
2.
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25
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Item
3.
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25
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Item
4.
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26
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Part
II
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Item
5.
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26
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Item
6.
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27
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Item
7.
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28
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Item 7A.
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37
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Item
8.
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38
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Item
9.
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39
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Item
9A.
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39
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Item
9B.
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41
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Part
III
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Item
10.
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41
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Item
11.
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41
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Item
12.
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41
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Item
13.
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41
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Item
14.
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41
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Part
IV
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Item 15.
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41
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68
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Our
trademark, service marks and trade names referred to in this filing include
AirLogix, Bridgeway, Buckeye Community Health Plan, Cardium Health, Cenpatico
Behavioral Health, Cenpatico Behavioral Health of Arizona, Centene, FirstGuard
Health Plan, Managed Health Services, NurseWise, OptiCare, ScriptAssist,
Smart Start For Your Baby, US Script and University Health Plans, among others.
PART
I
OVERVIEW
We
are a
multi-line healthcare enterprise operating primarily in two segments: Medicaid
Managed Care and Specialty Services. Our Medicaid Managed Care segment provides
Medicaid and Medicaid-related health plan coverage to individuals through
government subsidized programs, including Medicaid, the State Children’s Health
Insurance Program, or SCHIP, and Supplemental Security Income, or SSI. Medicaid
currently accounts for 79% of our membership, while SCHIP and SSI account for
19% and 2%, respectively. Our Specialty Services segment provides specialty
services, including behavioral health, disease management, long-term care
programs, managed vision, nurse triage, pharmacy benefits management and
treatment compliance, to state programs, healthcare organizations and other
commercial organizations, as well as to our own subsidiaries on market-based
terms. Our FirstGuard health plans exited the Kansas and Missouri markets
effective January 1 and February 1, 2007, respectively.
Our
Medicaid Managed Care membership totaled approximately 1.3 million as of
December 31, 2006, an increase of 45% from December 31, 2005. That membership
includes 107,000 and 31,900 members in Kansas and Missouri, respectively. We
currently have six health plan subsidiaries offering healthcare services in
Georgia, Indiana, New Jersey, Ohio, Texas and Wisconsin. We provide
member-focused services through locally based staff by assisting in accessing
care, coordinating referrals to related health and social services and
addressing member concerns and questions. We also provide education and outreach
programs to inform and assist members in accessing quality, appropriate
healthcare services.
We
believe our local approach to managing our subsidiaries, including provider
and
member services, enables us to provide accessible, quality, culturally-sensitive
healthcare coverage to our communities. Our disease management, educational
and
other initiatives are designed to help members best utilize the healthcare
system to ensure they receive appropriate, medically necessary services and
effective management of routine, severe and chronic health problems, resulting
in better health outcomes. We combine our decentralized local approach for
care
with a centralized infrastructure of support functions such as finance,
information systems and claims processing.
Our
initial health plan commenced operations in Wisconsin in 1984. We were organized
in Wisconsin in 1993 as a holding company for our initial health plan and
reincorporated in Delaware in 2001. Our corporate office is located at 7711
Carondelet Avenue, St. Louis, Missouri 63105, and our telephone number is (314)
725-4477.
We
maintain a website with the address www.centene.com.
We
are
not including the information contained on our website as part of, or
incorporating it by reference into, this filing. We make available, free of
charge through our website, our Section 16 filings, annual reports on Form
10-K,
quarterly reports on Form 10-Q and current reports on Form 8-K, and any
amendments to these reports filed or furnished pursuant to Section 13(a) or
15(d) of the Exchange Act as soon as reasonably practicable after we
electronically file such material with, or furnish such material to, the SEC.
INDUSTRY
We
provide our services to organizations and individuals primarily through
Medicaid, SCHIP and SSI programs. The Congressional Budget Office, or CBO,
estimated the total Medicaid market was approximately $330 billion in 2005,
and
the federal Centers for Medicare and Medicaid Services, or CMS, estimate the
market will grow to over $450 billion by 2010. According to the most recent
information provided by the Kaiser Commission on Medicaid and the Uninsured,
Medicaid spending increased by 2.8% in fiscal 2006 and states appropriated
an
increase of 5.0% for Medicaid in fiscal 2007 budgets.
Established
in 1965, Medicaid is the largest publicly funded program in the United States,
providing health insurance to low-income families and individuals with
disabilities. Authorized by Title XIX of the Social Security Act, Medicaid
is an
entitlement program funded jointly by the federal and state governments and
administered by the states. The majority of funding is provided at the federal
level. Each state establishes its own eligibility standards, benefit packages,
payment rates and program administration within federal standards. As a result,
there are 56 Medicaid programs—one for each U.S. state, each U.S. territory and
the District of Columbia. A growing number of states have mandated that their
Medicaid recipients enroll in managed care plans as a means of delivering
quality healthcare and controlling costs. Currently, 37 of the 56 programs,
including each of the six states in which we operate health plans, have mandated
managed care for some or all of their Medicaid recipients. Eligibility is based
on a combination of household income and assets, often determined by an income
level relative to the federal poverty level. Historically, children have
represented the largest eligibility group.
Established
in 1972, and authorized by Title XVI of the Social Security Act, SSI covers
low-income persons with chronic physical disabilities or behavioral health
impairments. SSI beneficiaries represent a growing portion of all Medicaid
recipients. In addition, SSI recipients typically utilize more services because
of their critical health issues.
The
Balanced Budget Act of 1997 created SCHIP to help states expand coverage
primarily to children whose families earned too much to qualify for Medicaid,
yet not enough to afford private health insurance. Some states include the
parents of these children in their SCHIP programs. SCHIP is the single largest
expansion of health insurance coverage for children since the enactment of
Medicaid. Costs related to the largest eligibility group, children, are
primarily composed of pediatrics and family care. These costs tend to be more
predictable than other healthcare issues which predominantly affect the adult
population.
A
portion
of Medicaid beneficiaries are dual eligibles, low-income seniors and people
with
disabilities who are enrolled in both Medicaid and Medicare. According to
information provided by the Kaiser Commission on Medicaid and the Uninsured,
dual eligibles account for 14% of Medicaid enrollees. These dual eligibles
may
receive assistance from Medicaid for Medicaid benefits, such as nursing home
care and/or assistance with Medicare premiums and cost sharing. Dual eligibles
also use more services due to their tendency to have more chronic health issues.
We serve dual eligibles through our SSI and long-term care programs.
While
Medicaid programs have directed funds to many individuals who cannot afford
or
otherwise maintain health insurance coverage, they did not initially address
the
inefficient and costly manner in which the Medicaid population tends to access
healthcare. Medicaid recipients in non-managed care programs typically have
not
sought preventive care or routine treatment for chronic conditions, such as
asthma and diabetes. Rather, they have sought healthcare in hospital emergency
rooms, which tends to be more expensive. As a result, many states have found
that the costs of providing Medicaid benefits have increased while the medical
outcomes for the recipients remained unsatisfactory.
Since
the
early 1980s, increasing healthcare costs, combined with significant growth
in
the number of Medicaid recipients, have led many states to establish Medicaid
managed care initiatives. Continued pressure on states’ Medicaid budgets should
cause public policy to recognize the value of managed care as a means of
delivering quality health care and effectively controlling costs. A growing
number of states, including each of the six states in which we operate health
plans, have mandated that their Medicaid recipients enroll in managed care
plans. Other states are considering moving to a mandated managed care approach.
As a result, a significant market opportunity exists for managed care
organizations with operations and programs focused on the distinct
socio-economic, cultural and healthcare needs of the Medicaid, SCHIP and SSI
populations. We believe our approach and strategy enable us to be a growing
participant in this market.
OUR
COMPETITIVE STRENGTHS
Our
multi-line managed care approach is based on the following key attributes:
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Sustained
Historic Operating Performance.
We have a historical trend of increasing revenues as we have grown
in
existing markets and expanded into new markets. We entered the Wisconsin
market in 1984, the Indiana market in 1995, the Texas market in 1999,
the
New Jersey market in 2002, the Ohio market in 2004 and the Georgia
market
in 2006. We have also increased membership by acquiring Medicaid
businesses, contracts and other related assets from competitors in
existing markets, most recently in Ohio in 2005 and 2006. We have
increased our total membership from 409,600 in 2002 to 1,262,200
as of
December 31, 2006, a 32% Compound Annual Growth Rate, or CAGR. For
the
year ended December 31, 2006, we had revenue of $2.3 billion, representing
a 49% CAGR since the year ended December 31, 2002. We generated total
cash
flow from operations of $195.0 million during the year ended December
31,
2006.
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Medicaid
Expertise. Over
the last 20 years, we have strived to develop a specialized Medicaid
expertise that has helped us establish and maintain relationships
with
members, providers and state governments. We have implemented programs
developed to achieve savings for state governments and improve medical
outcomes for members by reducing inappropriate emergency room use,
inpatient days and high cost interventions, as well as by managing
care of
chronic illnesses. Our experience in working with state regulators
helps
us implement and deliver programs and services efficiently and affords
us
opportunities to provide input regarding Medicaid industry practices
and
policies in the states in which we operate. We work with state agencies
on
redefining benefits, eligibility requirements and provider fee schedules
in order to maximize the number of uninsured individuals covered
through
Medicaid, SCHIP and SSI and expand these types of benefits offered.
Our
approach is to accomplish this while maintaining adequate levels
of
provider compensation and protecting our profitability.
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Diversified
Business Lines. We
continue to broaden our service offerings to address areas that we
believe
have been traditionally underserved by Medicaid managed care
organizations. In addition to our Medicaid and Medicaid-related managed
care services, our service offerings include behavioral health, disease
management, long-term care programs, managed vision, nurse triage,
pharmacy benefits management and treatment compliance. Through the
utilization of a multi-business line approach, we are able to diversify
our revenue and help control our medical costs.
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Localized
Approach with Centralized Support Infrastructure. We
take a localized approach to managing our subsidiaries, including
provider
and member services. This approach enables us to facilitate access
by our
members to high quality, culturally sensitive healthcare services.
Our
systems and procedures have been designed to address these
community-specific challenges through outreach, education, transportation
and other member support activities. For example, our community outreach
programs work with our members and their communities to promote health
and
self-improvement
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through
employment
and education on how best to access care. We complement this localized approach
with a centralized infrastructure of support functions such as finance,
information systems and claims processing, which allows us to minimize general
and administrative expenses and to integrate and realize synergies from
acquisitions. We believe this combined approach allows us to efficiently
integrate new business opportunities in both Medicaid and specialty services
while maintaining our local accountability and improved access.
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Specialized
and Scalable Systems and Technology.
Through our specialized information systems, we work to strengthen
relationships with providers and states which help us grow our membership
base. Our specialized information systems allow us to support our
core
processing functions under a set of integrated databases which are
designed to be both replicable and scalable. Physicians can use claims,
utilization and membership data to manage their practices more
efficiently, and they also benefit from our timely payments. State
agencies can use data from our information systems to demonstrate
that
their Medicaid populations receive quality health care in an efficient
manner. These systems also help identify needs for new healthcare
and
specialty programs. We have the ability to leverage our platform
for one
state configuration into new states or for health plan acquisitions.
Our
ability to access data and translate it into meaningful information
is
essential to operating across a multi-state service area in a
cost-effective manner.
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Experienced
Management Team.
We have a management team who possess significant industry experience.
Michael Neidorff, our Chairman and CEO, has been with us since 1996
and
has over 20 years of experience in all aspects of managed care. Per
Brodin, our Senior Vice President and Chief Financial Officer, has
extensive experience as a financial and accounting officer both at
Centene
and other organizations. The other members of our senior management
team
are well-seasoned professionals with a broad range of capabilities
including industry experience and functional expertise. This team
has
successfully managed the growth of our health plans and specialty
businesses, while maintaining operational
discipline.
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OUR
STRATEGY
Our
objective is to become the leading multi-line healthcare enterprise focusing
on
Medicaid and Medicaid-related services. We intend to achieve this objective
by
implementing the following key components of our strategy:
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Increase
Penetration of Existing State Markets. We
seek to continue to increase our Medicaid membership in states in
which we
currently operate through alliances with key providers, outreach
efforts,
development and implementation of community-specific products and
acquisitions. In 2006, we were awarded two regions in connection
with
Ohio’s statewide restructuring of its Medicaid managed care program,
expanding the number of counties we serve from three to 27. We also
were
awarded a Medicaid Aged, Blind or Disabled, or ABD, contract in four
regions in Ohio. In Texas, we expanded our operations to the Corpus
Christi market in 2006 and began managing care for SSI recipients
in
February 2007. We may also increase membership by acquiring Medicaid
businesses, contracts and other related assets from our competitors
in our
existing markets or by enlisting additional providers. For example,
in
2005 and 2006, we acquired certain Medicaid-related assets in Ohio.
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Diversify
Business Lines. We
seek to broaden our business lines into areas that complement our
existing
business to enable us to grow and diversify our revenue. For instance,
in
October 2006, we commenced operations under our managed care program
contracts to provide long-term care services in Arizona, and in January
2006, we completed the acquisition of US Script, a pharmacy benefits
manager. We are also considering other premium-based or fee-for-service
lines of business that would provide additional diversity. We employ
a
disciplined acquisition strategy that is based on defined criteria
including internal rate of return, accretion to earnings per share,
market
leadership and compatibility with our information systems. We engage
our
executives in the relevant operational units or functional areas
to ensure
consistency between the diligence and integration process.
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Address
Emerging State Needs. We
work to assist the states in which we operate in addressing the operating
challenges they face. We seek to assist the states in balancing premium
rates, benefit levels, member eligibility, policies and practices,
and
provider compensation. For example, in 2005 we began performing under
our
contracts with the State of Arizona to facilitate the delivery of
mental
health and substance abuse services to behavioral health recipients
in
Arizona. Effective January 1, 2005, we were awarded a behavioral
health
contract to serve SCHIP members in Kansas. By helping states structure
an
appropriate level and range of Medicaid, SCHIP and specialty services,
we
seek to ensure that we are able to continue to provide those services
on
terms that achieve targeted gross margins, provide an acceptable
return
and grow our business.
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Develop
and Acquire Additional State Markets. We
continue to leverage our experience to identify and develop new markets
by
seeking both to acquire existing business and to build our own operations.
We expect to focus expansion on states where Medicaid recipients
are
mandated to enroll in managed care organizations because we believe
member
enrollment levels are more predictable in these states. For example,
effective June 1, 2006, we began managing care for Medicaid and SCHIP
members in Georgia.
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Leverage
Established Infrastructure to Enhance Operating
Efficiencies.
We
intend to continue to invest in infrastructure to further drive
efficiencies in operations and to add functionality to improve
the service
provided to members and other organizations at a low cost. Our
centralized
functions enable us to add members and markets quickly and economically.
For example, during 2005, we opened an additional claims processing
facility to accommodate our planned growth initiatives for this
centralized function.
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Maintain
Operational Discipline. We
monitor our cost trends, operating performance, regulatory relationships
and the Medicaid political environment in our existing markets. We
seek to
operate in markets that allow us to meet our internal metrics including
membership growth, plan size, market leadership and operating efficiency.
We may divest contracts or health plans in markets where the state’s
Medicaid environment, over a long-term basis, does not allow us to
meet
our targeted performance levels. We use multiple techniques to monitor
and
reduce our medical costs, including on-site hospital review by staff
nurses and involvement of medical management and finance personnel
in
reviewing significant cases. Our health economics unit and health
plan
controllers evaluate the financial impact of proposed changes in
provider
relationships. We also conduct monthly reviews of member demographics
for
each health plan.
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MEDICAID
MANAGED CARE
Health
Plans
We
have
regulated subsidiaries offering healthcare services in each state we serve.
The
table below provides summary data for the state markets we currently serve:
State
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Local
Health Plan Name
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First
Year of Operations Under the Company
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Counties
Served at
December
31, 2006
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Market
Share(1)
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Membership
at
December
31, 2006
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Georgia
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Peach
State Health Plan
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2006
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90
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30.6%
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308,800
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Indiana
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Managed
Health Services
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1995
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92
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33.4%
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183,100
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New
Jersey
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University
Health Plans
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2002
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20
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8.1%
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58,900
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Ohio
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Buckeye
Community Health Plan
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2004
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27
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11.3%
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109,200
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Texas
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Superior
HealthPlan
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1999
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217
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21.0%
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298,500
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Wisconsin
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Managed
Health Services
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1984
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29
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32.9%
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164,800
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(1) |
Represents
Medicaid and SCHIP membership as of December 31, 2006 as a percentage
of
total eligible Medicaid and SCHIP members in each state, based on
data
provided by each state. SSI programs are
excluded.
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Benefits
to States
Our
ability to establish and maintain a leadership position in the markets we serve
results primarily from our demonstrated success in providing quality care while
reducing and managing costs, and from our specialized programs in working with
state governments. Among the benefits we are able to provide to the states
with
which we contract are:
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Significant
cost savings compared to state paid reimbursement for
services.
We bring bottom-line management experience to our health plans.
On the
administrative and management side, we bring experience including
quality
of care improvement methods, utilization management procedures,
an
efficient claims payment system, and provider performance reporting,
as
well as managers and staff experienced in using these key elements
to
improve the quality of and access to
care.
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Data-driven
approaches to balance cost and verify eligibility.
Our Medicaid health plans have conducted enrollment processing
and
activities for state programs since 1984. We ensure effective enrollment
procedures that move members into the plan, then educate them and
ensure
that they receive needed services as quickly as possible. Our IT
department has created mapping/translation programs for loading
membership
and linking membership eligibility status to all of Centene’s subsystems.
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Establishment
of realistic and meaningful expectations for quality deliverables.
We
have collaborated with state agencies in redefining benefits, eligibility
requirements and provider fee schedules with the goal of maximizing
the
number of uninsured individuals covered through Medicaid and SSI
programs.
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Managed
care expertise in government subsidized programs.
Our expertise in Medicaid has helped us establish and maintain
strong
relationships with our constituent communities of members, providers
and
state governments. We provide access to services through local
providers
and staff that focus on the cultural norms of their individual
communities. To that end, systems and procedures have been designed
to
address community-specific challenges through outreach, education,
transportation and other member support activities.
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Improved
medical outcomes.
We have implemented programs developed to achieve savings for state
governments and improve medical outcomes for members by reducing
inappropriate emergency room use, inpatient days and high cost
interventions, as well as by managing care of chronic
illness.
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Timely
payment of provider claims.
We are committed to ensuring that our information systems and claims
payment systems meet or exceed state requirements. We continuously
endeavor to update our systems and processes to improve the timeliness
of
our provider payments.
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Cost
saving outreach and specialty programs.
Our health plans have adopted a physician-driven approach where
network
providers are actively engaged in developing and implementing healthcare
delivery policies and strategies. This approach is designed to
eliminate
unnecessary costs, improve services to members and simplify the
administrative burdens placed on providers. The combination of
a
decentralized local approach to health plan operations and a centralized
approach to administrative functions such as finance, information
systems
and claims processing allows us to quickly and economically integrate
new
business opportunities in both the Medicaid Managed Care and Specialty
Services segments.
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Responsible
collection and dissemination of utilization data.
We gather utilization data from multiple sources, allowing for
an
integrated view of our members’ utilization of services. These sources
include medical and behavioral health claims and encounter data,
pharmacy
data, vision and dental vendor claims and authorization data from
Care
Enhanced Case Management Systems, or CCMS, the authorization and
case
management system utilized by us to coordinate care.
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Timely
and accurate reporting.
Our information systems have robust reporting capabilities which
have been
instrumental in identifying the need for new and/or improved healthcare
and specialty programs. For state agencies, our reporting capability
is
instrumental in demonstrating an auditable program.
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Member
Programs and Services
We
recognize the importance of member-focused delivery of quality managed care
services. Our locally-based staff assist members in accessing care, coordinating
referrals to related health and social services and addressing member concerns
and questions. While covered healthcare benefits vary from state to state,
our
health plans generally provide the following services:
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primary
and specialty physician care
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24-hour
nurse advice line
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inpatient
and outpatient hospital care
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transportation
assistance
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emergency
and urgent care
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vision
care
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prenatal
care
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dental
care
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laboratory
and x-ray services
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immunizations
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home
health and durable medical equipment
|
|
Ÿ
|
prescriptions
and limited over-the-counter drugs
|
|
|
|
|
|
Ÿ
|
behavioral
health and substance abuse services
|
|
|
|
We
also
provide the following education and outreach programs to inform and assist
members in accessing quality, appropriate healthcare services in an efficient
manner:
|
Ÿ
|
CONNECTIONS
is
a community face-to-face outreach and education program designed
to create
a link between the member and the provider and help identify potential
challenges or risk elements to a member’s health, such as nutritional
challenges and health education shortcomings. CONNECTIONS representatives
also contact new members by phone or mail to discuss managed care,
the
Medicaid program and our services. Our CONNECTIONS representatives
make
home visits, conduct educational programs and represent our health
plans
at community events such as health fairs.
|
|
Ÿ
|
Start
Smart For Your Baby
is
a prenatal and infant health program designed to increase the percentage
of pregnant women receiving early prenatal care, reduce the incidence
of
low birth weight babies, identify high risk pregnancies, increase
participation in the federal Women, Infant and Children program,
and
increase well-child visits. The program includes risk assessments,
education through face-to-face meetings and materials, behavior
modification plans, assistance in selecting a provider for the infant
and
scheduling newborn follow-up visits.
|
|
Ÿ
|
EPSDT
Case Management
is
a preventive care program designed to educate our members on the
benefits
of Early and Periodic Screening, Diagnosis and Treatment, or EPSDT,
services. We have a systematic program of communicating, tracking,
outreach, reporting and follow-through that promotes state EPSDT
programs.
|
|
Ÿ
|
Disease
Management Programs
are designed to help members understand their disease and treatment
plan
and improve their health outcomes in a cost effective manner. These
programs address medical conditions that are common within
the
|
Medicaid population such as asthma, diabetes and prenatal care. Our Specialty
Services segment manages many of our disease management programs. Our SSI
program uses a proprietary assessment tool that effectively identifies barriers
to care, unmet functional needs, available social supports and the existence
of
behavioral health conditions that impede a member’s ability to maintain a proper
health status. Care coordinators develop individual care plans with the member
and healthcare providers ensuring the full integration of behavioral, social
and
acute care services. These care plans, while specific to an SSI member,
incorporate “Condition Specific” practices in collaboration with physician
partners and community resources.
Providers
For
each
of our service areas, we establish a provider network consisting of primary
and
specialty care physicians, hospitals and ancillary providers. As of December
31,
2006, the health plans we currently serve contracted with the following number
of physicians and hospitals:
|
|
Primary
Care
Physicians
|
|
Specialty
Care
Physicians
|
|
Hospitals
|
Georgia
|
|
2,379
|
|
7,112
|
|
128
|
Indiana
|
|
738
|
|
1,422
|
|
42
|
New
Jersey
|
|
1,732
|
|
5,283
|
|
73
|
Ohio
|
|
1,026
|
|
2,387
|
|
35
|
Texas
|
|
5,646
|
|
10,487
|
|
335
|
Wisconsin
|
|
2,118
|
|
4,793
|
|
65
|
Our
network of primary care physicians is a critical component in care delivery,
management of costs and the attraction and retention of new members. Primary
care physicians include family and general practitioners, pediatricians,
internal medicine physicians and obstetricians and gynecologists. Specialty
care
physicians provide medical care to members generally upon referral by the
primary care physicians. Specialty care physicians include orthopedic surgeons,
cardiologists and otolaryngologists. We also provide education and outreach
programs to inform and assist members in accessing quality, appropriate
healthcare services.
Our
health plans facilitate access to healthcare services for our members primarily
through contracts with our providers. Our contracts with primary and specialty
care physicians and hospitals usually are for one to two-year periods and
renew
automatically for successive one-year terms, but generally are subject to
termination by either party upon 90 to 120 days prior written notice. In
the
absence of a contract, we typically pay providers at state Medicaid
reimbursement levels. We pay physicians under a fee-for-service or capitation
arrangement.
|
Ÿ
|
Under
our fee-for-service contracts with physicians, particularly specialty
care
physicians, we pay a negotiated fee for covered services. This
model is
characterized as having no financial risk for the physician. In
addition,
this model requires management oversight because our total cost
may
increase as the units of services increase or as more expensive
services
are replaced for less expensive services. We have prior authorization
procedures in place that are intended to make sure that certain
high cost
diagnostic and other services are medically appropriate.
|
|
Ÿ
|
Under
our capitated contracts, primary care physicians are paid a monthly
fee
for each of our members assigned to his or her practice and are
at risk
for all costs related to primary and specialty physician and emergency
room services. In return for this payment, these physicians provide
all
primary care and preventive services, including primary care office
visits
and EPSDT services. If these physicians also provide non-capitated
services to their assigned members, they may receive payment under
fee-for-service arrangements at Medicaid rates.
|
We
work with physicians
to help them operate efficiently by providing financial and utilization
information, physician and patient educational programs and disease and medical
management programs. Our programs are also designed to help the physicians
coordinate care outside of their offices. In addition, we are governed by state
prompt payment policies.
We
believe our collaborative approach with physicians gives us a competitive
advantage in entering new markets. Our physicians serve on local committees
that
assist us in implementing preventive care programs, managing costs and improving
the overall quality of care delivered to our members. This approach is designed
to eliminate unnecessary costs, improve services to our members and simplify
the
administrative burdens on our providers. It has enabled us to strengthen our
provider networks through improved physician recruitment and retention that,
in
turn, have helped to increase our membership base. The following are among
the
services we provide to support physicians:
|
Ÿ
|
Customized
Utilization Reports
provide certain of our contracted physicians with information that
enables
them to run their practices more efficiently and focuses them on
specific
patient needs. For example, quarterly detail reports update physicians
on
their status within their risk pools. Equivalency reports provide
physicians with financial comparisons of capitated versus fee-for-service
arrangements.
|
|
Ÿ
|
Case
Management Support
helps the physician coordinate specialty care and ancillary services
for
patients with complex conditions and direct members to appropriate
community resources to address both their health and socio-economic
needs.
|
|
Ÿ
|
Web-based
Claims and Eligibility Resources
have been implemented in selected markets to provide physicians with
on-line access to perform claims and eligibility inquiries.
|
Our
contracted physicians also benefit from several of the services offered to
our
members, including the CONNECTIONS, EPSDT case management and disease management
programs. For example, the CONNECTIONS staff facilitates doctor/patient
relationships by connecting members with physicians, the EPSDT programs
encourage routine checkups for children with their physicians and the disease
management programs assist physicians in managing their patients with chronic
disease.
Where
appropriate, our health plans contract with our specialty services organizations
to provide services and programs such as behavioral health, disease management,
managed vision, nurse triage, pharmacy benefit management, and treatment
compliance. When necessary, we also contract with third-party providers on
a
negotiated fee arrangement for physical therapy, home healthcare, vision care,
diagnostic laboratory tests, x-ray examinations, ambulance services and durable
medical equipment. Additionally, we contract with dental vendors in markets
where routine dental care is a covered benefit.
Quality
Management
Our
medical management programs focus on improving quality of care in areas that
have the greatest impact on our members. We employ strategies, including disease
management and complex case management, that are adjusted for implementation
in
our individual markets by a system of physician committees chaired by local
physician leaders. This process promotes physician participation and support,
both critical factors in the success of any clinical quality improvement
program.
We
have
implemented specialized information systems to support our medical quality
management activities. Information is drawn from our data warehouse, clinical
databases and our membership and claims processing system, to identify
opportunities to improve care and to track the outcomes of the interventions
implemented to achieve those improvements. Some examples of these intervention
programs include:
|
Ÿ
|
a
prenatal case management program aimed at helping women with high-risk
pregnancies deliver full-term, healthy infants;
|
|
Ÿ
|
a
program to reduce the number of inappropriate emergency room visits;
and
|
|
Ÿ
|
a
disease management program to improve the ability of those with asthma
and
their families to control their disease and thereby reduce the need
for
emergency room visits and hospitalizations.
|
We
provide reporting on a regular basis using our data warehouse. State and Health
Employer Data and Information Set, or HEDIS, reporting constitutes the core
of
the information base that drives our clinical quality performance efforts.
This
reporting is monitored by Plan Quality Improvement Committees and our corporate
medical management team.
In
an
effort to ensure the quality of our provider networks, we undertake to verify
the credentials and background of our providers using standards that are
supported by the National Committee for Quality Assurance.
Information
Technology
The
ability to access data and translate it into meaningful information is essential
to operating across a multi-state service area in a cost-effective manner.
Our
centralized information systems which are located in St. Louis, Missouri,
support our core processing functions under a set of integrated databases and
are designed to be both replicable and scalable to accommodate organic
growth and growth from acquisitions. We believe we have the ability to leverage
the platform we have developed for our existing states for configuration into
new states or health plan acquisitions.
Our
integrated approach helps to assure that consistent sources of claim and member
information are provided across all of our health plans. Our membership and
claims processing system is capable of expanding to support additional members
in an efficient manner as needed.
We
have a
disaster recovery and business resumption plan developed and implemented in
conjunction with a third party. This plan allows us complete access to the
business resumption centers and hot-site facilities provided by the plan.
SPECIALTY
SERVICES
Our
Specialty
Services segment is a key component of our healthcare enterprise and complements
our core Medicaid Managed Care business. The specialty services diversify
our
revenue stream, provide higher quality health outcomes to our membership
and
others, and assist in controlling costs. Our specialty services are provided
primarily through the following interrelated businesses:
|
Ÿ
|
Behavioral
Health.
Cenpatico Behavioral Health manages behavioral healthcare for members
via
a contracted network of providers. Cenpatico works with providers
to
determine the best course of treatment for a given diagnosis and
helps
ensure members and their providers are aware of the full array
of services
available. Our networks feature a range of services so that patients
can
be treated at an appropriate level of care. We also run school-based
programs in Arizona that focus on students with special needs.
We acquired
Cenpatico in 2003.
|
|
Ÿ
|
Disease
Management. Our
disease management providers, AirLogix and Cardium, specialize
in chronic
respiratory disease management and cardiac disease management.
Through
their specialization in respiratory management, AirLogix uses self-care
therapies, in-home interaction and informatics processes to deliver
highly
effective clinical results, enhanced patient-provider satisfaction
and
greater cost reductions in respiratory management. We acquired
AirLogix in
July 2005. Through a people-centered, multi-disciplinary and integrated
approach, Cardium uses primary health coaches, customized care
plans, and
disease-specific education to assist patients in achieving their
health
goals and deliver enhanced patient-provider satisfaction and greater
cost
reductions in chronic disease management. We acquired Cardium in
May
2006.
|
|
Ÿ
|
Long-term
Care.
Bridgeway Health Solutions provides long-term care services to
the elderly
and people with disabilities on SSI that meet income and resources
requirements who are at risk of being or are institutionalized.
Bridgeway
has members in the Maricopa, Yuma and La Paz counties of Arizona.
Bridgeway attempts to distinguish itself from other Medicaid and
Medicare
health plans through ongoing participation with community groups
to
address situations that might be barriers to quality care and independent
living. Bridgeway commenced operations in October
2006.
|
|
Ÿ
|
Managed
Vision. OptiCare manages
vision benefits for members via a contracted network of providers.
OptiCare works with providers to provide a variety of vision plan
designs
and helps ensure members and their providers are aware of the full
array
of products and services available. Our networks feature a range
of
products and services so that patients can be treated at an appropriate
level of care. We acquired the managed vision business of OptiCare
Health
Systems, Inc. in July 2006.
|
|
Ÿ
|
Nurse
Triage. NurseWise
provides a toll-free nurse triage line 24 hours per day, 7 days
per week,
52 weeks per year. Our members call one number and reach customer
service
representatives and bilingual nursing staff who provide health
education,
triage advice and offer continuous access to health plan functions.
Additionally, our representatives verify eligibility, confirm primary
care
provider assignments and provide benefit and network referral coordination
for members and providers after business hours. Our staff can arrange
for
urgent pharmacy refills, transportation and qualified behavioral
health
professionals for crisis stabilization assessments. Call volume
is based
on membership levels and seasonal variation. NurseWise commenced
operations in 1998.
|
|
Ÿ
|
Pharmacy
Benefits Management.
US Script is
a pharmacy benefits manager that administers pharmacy benefits
and
processes pharmacy claims via its proprietary claims processing
software.
US Script has developed and administers a contracted national network
of
retail pharmacies. We acquired US Script in January
2006.
|
|
Ÿ
|
Treatment
Compliance.
ScriptAssist
is a treatment compliance program that uses psychological-based
tools to
predict which patients are likely to be non-compliant regarding
taking
their medications, and then to motivate those at-risk patients
to adhere
to their doctors’ advice.
ScriptAssist
uses registered nurses to educate patients about the reasons for
the
medications they were prescribed, to provide accurate information
about
side effects and risks of such medications, and to keep the doctors
informed of the patients’ progress between visits. We acquired
ScriptAssist
in 2003.
|
CORPORATE
COMPLIANCE
Our
Corporate Ethics and Compliance Program was first established in 1998 and
provides methods by which we further enhance operations, safeguard against
fraud
and abuse, improve access to quality care and helps assure that our values
are
reflected in everything we do.
The
two
primary standards by which corporate compliance programs in the healthcare
industry are measured are the 1991 Federal Organizational Sentencing Guidelines
and the “Compliance Program Guidance” series issued by the Office of the
Inspector General, or OIG, of the Department of Health and Human
Services.
Our
program contains each of the seven elements suggested by the Sentencing
Guidelines and the OIG guidance. These key components are:
|
Ÿ
|
written
standards of conduct;
|
|
Ÿ
|
designation
of a corporate compliance officer and compliance committee;
|
|
Ÿ
|
effective
training and education;
|
|
Ÿ
|
effective
lines for reporting and communication;
|
|
Ÿ
|
enforcement
of standards through disciplinary guidelines and actions;
|
|
Ÿ
|
internal
monitoring and auditing; and
|
|
Ÿ
|
prompt
response to detected offenses and development of corrective action
plans.
|
Our
internal Corporate Compliance website, accessible by all employees, contains
our
Business Ethics and Conduct Policy, our Mission, Values and Philosophies and
Compliance Programs, a company-wide policy and procedure database and our
toll-free hotline to allow employees or other persons to report suspected
incidents of fraud, abuse or other violations. The audit committee and the
board
of directors review a full compliance report, including an incident log, on
a
quarterly basis.
COMPETITION
We
continue to face varying and increasing levels of competition as we expand
in
our existing service areas or enter new markets as federal regulations require
at least two competitors in each service area. Healthcare reform proposals
may
cause a number of commercial managed care organizations to decide to enter
or
exit the Medicaid market.
In
our
business, our principal competitors for state contracts, members and providers
consist of the following types of organizations:
|
Ÿ
|
Medicaid
Managed Care Organizations
focus solely on providing healthcare services to Medicaid recipients.
Many
of these operate in one city or state and are owned by providers,
primarily hospitals.
|
|
Ÿ
|
National
and Regional Commercial Managed Care Organizations
have Medicaid members in addition to members in private commercial
plans.
Some of these organizations offer a range of specialty services including
pharmacy benefits management, behavioral health management, disease
management, and nurse triage call support
centers.
|
|
Ÿ
|
Primary
Care Case Management Programs
are programs established by the states through contracts with primary
care
providers. Under these programs, physicians provide primary care
services
to Medicaid recipients, as well as limited medical management oversight.
|
We
compete with other managed care organizations and specialty companies for state
contracts. In order to grant a contract, state governments consider many
factors. These factors include quality of care, financial requirements, an
ability to deliver services and establish provider networks and infrastructure.
In addition, our specialty companies also compete with other providers, such
as
disease management companies and pharmacy benefits managers for non-governmental
contracts.
We
also
compete to enroll new members and retain existing members. People who wish
to
enroll in a managed healthcare plan or to change healthcare plans typically
choose a plan based on the quality of care and services offered, ease of access
to services, a specific provider being part of the network and the availability
of supplemental benefits. In certain markets, where recipients select a
physician instead of a health plan, we are able to grow our membership by adding
new physicians to our provider base.
We
also
compete with other managed care organizations to enter into contracts with
physicians, physician groups and other providers. We believe the factors that
providers consider in deciding whether to contract with us include existing
and
potential member volume, reimbursement rates, medical management programs,
speed
of reimbursement and administrative service capabilities. See “Risk Factors -
Competition May Limit Our Ability to Increase Penetration of the Markets That
We
Serve.”
FINANCIAL
INFORMATION
All
of
our revenue is derived from operations within the United States and its
territories. Our managed care subsidiaries in Georgia, Indiana, Kansas, Texas
and Wisconsin had revenues from their respective state governments that each
exceeded 10% of our consolidated total revenues in 2006. Other financial
information about our segments is found in Note 18 of our Notes to Consolidated
Financial Statements and “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” included elsewhere in this Form
10-K.
REGULATION
Our
healthcare and specialty operations are regulated at both state and federal
levels. Government regulation of the provision of healthcare products and
services is a changing area of law that varies from jurisdiction to
jurisdiction. Regulatory agencies generally have discretion to issue regulations
and interpret and enforce laws and rules. Changes in applicable laws and rules
also may occur periodically.
Our
regulated subsidiaries are licensed to operate as health maintenance
organizations and/or insurance companies in their respective states. In each
of
the jurisdictions in which we operate, we are regulated by the relevant health,
insurance and/or human services departments that oversee the activities of
managed care organizations providing or arranging to provide services to
Medicaid enrollees.
The
process for obtaining authorization to operate as a managed care organization
is
complex and requires demonstration to the regulators of the adequacy of the
health plan’s organizational structure, financial resources, utilization review,
quality assurance programs, complaint procedures, provider network adequacy
and
procedures for covering emergency medical conditions. Under both state managed
care organization statutes and state insurance laws, our health plan
subsidiaries must comply with minimum statutory capital requirements and other
financial requirements, such as deposit and reserve requirements. Insurance
regulations may also require prior state approval of acquisitions of other
managed care organizations’ businesses and the payment of dividends, as well as
notice for loans or the transfer of funds. Our subsidiaries are also subject
to
periodic reporting requirements. In addition, each health plan must meet
criteria to secure the approval of state regulatory authorities before
implementing operational changes, including the development of new product
offerings and, in some states, the expansion of service areas.
States
have adopted a number of regulations that may affect our business and results
of
operations. These regulations in certain states include:
|
Ÿ
|
premium
and maintenance taxes;
|
|
Ÿ
|
stringent
prompt-pay laws;
|
|
Ÿ
|
requirements
of National Provider Identifier numbers on claim
submittals;
|
|
Ÿ
|
disclosure
requirements regarding provider fee schedules and coding procedures;
and
|
|
Ÿ
|
programs
to monitor and supervise the activities and financial solvency
of provider
groups.
|
State
Contracts
In
order
to be a Medicaid Managed Care organization in each of the states in which we
operate, we must operate under a contract with the state’s Medicaid agency.
States generally use either a formal proposal process, reviewing a number of
bidders, or award individual contracts to qualified applicants that apply for
entry to the program. We receive monthly payments based on specified capitation
rates determined on an actuarial basis. These rates differ by membership
category and by state depending on the specific benefits and policies adopted
by
each state.
Our
contracts with the states and regulatory provisions applicable to us generally
set forth the requirements for operating in the Medicaid sector, including
provisions relating to:
Ÿ eligibility,
enrollment and disenrollment processes;
|
|
Ÿ health
education and wellness and prevention programs;
|
|
|
|
Ÿ covered
services;
|
|
Ÿ timeliness
of claims payment;
|
|
|
|
Ÿ eligible
providers;
|
|
Ÿ financial
standards;
|
|
|
|
Ÿ subcontractors;
|
|
Ÿ safeguarding
of
member information;
|
|
|
|
Ÿ record-keeping
and record retention;
|
|
Ÿ fraud
and abuse
detection and reporting;
|
|
|
|
Ÿ periodic
financial
and informational reporting;
|
|
Ÿ grievance
procedures; and
|
|
|
|
Ÿ quality
assurance;
|
|
Ÿ organization
and administrative systems.
|
A
health
plan’s compliance with these requirements is subject to monitoring by state
regulators and by CMS. A health plan is also subject to periodic comprehensive
quality assurance evaluations by a third-party reviewing organization and
generally by the insurance department of the jurisdiction that licenses the
health plan. A health plan must also submit reports to various regulatory
agencies, including quarterly and annual statutory financial statements and
utilization reports.
The
table
below sets forth the term of our state contracts and provides details regarding
related renewal or extension and termination provisions as of December 31,
2006.
State
Contract
|
|
Expiration
Date
|
|
Renewal
or Extension by the State
|
|
Termination
by the State
|
|
|
|
|
|
|
|
Arizona
- Behavioral Health
|
|
June
30, 2008
|
|
May
be extended for up to two additional years.
|
|
May
be terminated for convenience or an event of default.
|
|
|
|
|
|
|
|
Arizona
- Long-term Care
|
|
September
30, 2009
|
|
May
be extended for up to two additional years.
|
|
May
be terminated for convenience or an event of default.
|
|
|
|
|
|
|
|
Georgia
|
|
June
30, 2007
|
|
Renewable
for five additional one-year terms.
|
|
May
be terminated for an event of default or significant changes in
circumstances.
|
|
|
|
|
|
|
|
Indiana
|
|
December
31, 2010
|
|
May
be extended for up to two additional years.
|
|
May
be terminated for convenience or an event of default.
|
|
|
|
|
|
|
|
Kansas
- Behavioral Health
|
|
June
30, 2008
|
|
May
be extended with four one-year renewal options.
|
|
May
be terminated for cause, or without cause for lack of funding.
|
|
|
|
|
|
|
|
Missouri
|
|
June
30, 2007
|
|
Contract
rights sold effective February 1, 2007.
|
|
|
|
|
|
|
|
|
|
New
Jersey
|
|
June
30, 2007
|
|
Renewable
annually for successive 12-month periods.
|
|
May
be terminated for convenience or an event of default.
|
|
|
|
|
|
|
|
Ohio
|
|
June
30, 2007
|
|
Renewable
annually for successive 12-month periods.
|
|
May
be terminated for an event of default.
|
|
|
|
|
|
|
|
Ohio
- ABD
|
|
June
30, 2007
|
|
Renewable
annually for successive 12-month periods.
|
|
May
be terminated for an event of default.
|
|
|
|
|
|
|
|
Texas
|
|
August
31, 2008
|
|
May
be extended for up to six additional years.
|
|
May
be terminated for convenience, an event of default or lack of federal
funding.
|
|
|
|
|
|
|
|
Texas
- Exclusive Provider Organization
|
|
August
31, 2007
|
|
May
be extended for up to three additional years.
|
|
May
be terminated upon any event of default or in the event of lack of
state
or federal funding.
|
|
|
|
|
|
|
|
Wisconsin
|
|
December
31, 2007
|
|
Renewable
through the states’ periodic recertification process.
|
|
May
be terminated if a change in state or federal laws, rules or regulations
materially affects either party’s right or responsibilities or for an
event of default or lack of funding.
|
|
|
|
|
|
|
|
Wisconsin
- Network Health Plan Subcontract
|
|
December
31, 2011
|
|
Renews
automatically for successive five-year terms.
|
|
May
be terminated upon two-years notice prior to the end of the then
current
term or if a change in state or federal laws, rules or regulations
materially affects either party’s rights or responsibilities under the
contract, or if Network Health Plan’s contract with the State is
terminated.
|
|
|
|
|
|
|
|
Wisconsin
SSI
|
|
December
31, 2007
|
|
Renewable
through the states’ periodic recertification process.
|
|
May
be terminated for convenience, if a change in state or federal laws,
rules
or regulations materially affects either party’s rights or
responsibilities, or an event of default or lack of
funding.
|
HIPAA
In
1996,
Congress enacted the Health Insurance Portability and Accountability Act of
1996, or HIPAA. The Act is designed to improve the portability and continuity
of
health insurance coverage and simplify the administration of health insurance
claims. Among the main requirements of HIPAA are standards for the processing
of
health insurance claims and related transactions.
The
regulation’s requirements apply to transactions conducted using “electronic
media.” Since “electronic media” is defined broadly to include “transmissions
that are physically moved from one location to another using magnetic tape,
disk
or compact disk media,” many communications are considered to be electronically
transmitted. Under the HIPAA regulations, health plans are required to have
the
capacity to accept and send all covered transactions in a standardized
electronic format. Penalties can be imposed for failure to comply with these
requirements.
HIPAA
regulations also protect the privacy of medical records and other personal
health information maintained and used by healthcare providers, health plans
and
healthcare clearinghouses. We have implemented processes, policies and
procedures to comply with the HIPAA privacy regulations, including education
and
training for employees. In addition, the corporate privacy officer and health
plan privacy officials serve as resources to employees to address any questions
or concerns they may have. Among numerous other requirements, the privacy
regulations:
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limit
certain uses and disclosures of private health information, and require
patient authorizations for such uses and disclosures of private health
information;
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guarantee
patients rights to access their medical records and to know who else
has
accessed them;
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limit
most disclosure of health information to the minimum needed for the
intended purpose;
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establish
procedures to ensure the protection of private health
information;
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authorize
access to records by researchers and others;
and
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impose
criminal and civil sanctions for improper uses or disclosures of
health
information.
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The
preemption provisions of HIPAA provide that the federal standards will not
preempt state laws that are more stringent than the related federal
requirements. In addition, the Secretary of HHS may grant exceptions allowing
state laws to prevail if one or more of a number of conditions are met,
including but not limited to the following:
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the
state law is necessary to prevent fraud and abuse related to the
provision
of and payment for healthcare;
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the
state law is necessary to ensure appropriate state regulation of
insurance
and health plans;
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the
state law is necessary for state reporting on healthcare delivery
or
costs; or
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the
state law addresses controlled
substances.
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In
2003,
HHS published final regulations relating to the security of electronic
individually identifiable health information. Compliance was required by April
2005. These rules require healthcare providers, health plans and healthcare
clearinghouses to implement administrative, physical and technical safeguards
to
ensure the privacy and confidentiality of such information when it is
electronically stored, maintained or transmitted through such devices
as user authentication mechanisms and system activity audits. In addition,
numerous states have adopted personal data security laws that provide for,
among
other things, private rights of action for breaches of data security and
mandatory notification to persons whose identifiable information is obtained
without authorization.
Patients’
Rights Legislation
The
United States Senate and House of Representatives passed different versions
of
patients’ rights legislation in June and August 2001, respectively. Both
versions included provisions that specifically apply protections to participants
in federal healthcare programs, including Medicaid beneficiaries. Although
no
such federal legislation has been enacted, patients’ rights legislation is
frequently proposed in Congress. If enacted, this type of legislation could
expand our potential exposure to lawsuits and increase our regulatory compliance
costs. Depending on the final form of any patients’ rights legislation, such
legislation could, among other things, expose us to liability for economic
and
punitive damages for making determinations that deny benefits or delay
beneficiaries’ receipt of benefits as a result of our medical necessity or other
coverage determinations. We cannot predict when or whether patients’ rights
legislation will be enacted into law or, if enacted, what final form such
legislation might take.
Other
Fraud and Abuse Laws
Investigating
and prosecuting healthcare fraud and abuse became a top priority for law
enforcement entities in the last decade. The focus of these efforts has been
directed at participants in public government healthcare programs such as
Medicaid. The laws and regulations relating to Medicaid fraud and abuse and
the
contractual requirements applicable to health plans participating in these
programs are complex and changing and may require substantial
resources.
EMPLOYEES
As
of
December 31, 2006, we had approximately 2,600 employees. Our employees are
not
represented by a union. We believe our relationships with our employees are
good.
EXECUTIVE
OFFICERS
The
following table sets forth information regarding our executive officers,
including their ages at January 31, 2007:
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Name
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Age
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Position
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Michael
F. Neidorff
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64
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Chairman
and Chief Executive Officer
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J.
Per Brodin
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45
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Senior
Vice President, Chief Financial Officer and Treasurer
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Patti
J. Darnley
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47
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Senior
Vice President, Operations
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Marie
J. Glancy
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48
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Senior
Vice President, Operational Services and Regulatory
Affairs
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Carol
E. Goldman
|
|
49
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Senior
Vice President and Chief Administration Officer
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Jesse
N. Hunter
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31
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Vice
President, Corporate
Development
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Mary V. Mason |
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38 |
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Senior Vice President and
Chief
Medical Officer |
William
N. Scheffel
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53
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Senior
Vice President, Specialty Business Unit
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Keith
H. Williamson
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54
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Senior
Vice President, General Counsel and Secretary
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Karey
L. Witty
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42
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Senior
Vice President, Health Plan Business
Unit
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Michael
F. Neidorff. Mr.
Neidorff has served as our Chairman and Chief Executive Officer since May 2004.
From May 1996 to May 2004, Mr. Neidorff served as President, Chief Executive
Officer and as a member of our board of directors. From 1995 to 1996, Mr.
Neidorff served as a Regional Vice President of Coventry Corporation, a publicly
traded managed care organization, and as the President and Chief Executive
Officer of one of its subsidiaries, Group Health Plan, Inc. From 1985 to 1995,
Mr. Neidorff served as the President and Chief Executive Officer of Physicians
Health Plan of Greater St. Louis, a subsidiary of United Healthcare Corp.,
a
publicly traded managed care organization now known as UnitedHealth Group
Incorporated. Effective March 2006, Mr. Neidorff serves as a director of Brown
Shoe Company, Inc., a footwear company with global operations.
J.
Per Brodin. Mr.
Brodin has served as our Senior Vice President and Chief Financial Officer
since
April 2006. Mr. Brodin served as our Vice President and Chief Accounting Officer
from November 2005 to April 2006. From March 2002 to November 2005, Mr. Brodin
served as Vice President, Accounting and Reporting for the May Department Stores
Company. From 1989 to February 2002, Mr. Brodin was with the Audit and Business
Advisory Practice of Arthur Andersen, LLP, the final two years as Senior Manager
with their Professional Standards Group.
Patti
J. Darnley. Ms.
Darnley has served as our Senior Vice President, Operations since September
2006. From
March 2006 to September 2006, she served as our Regional Vice President of
University Health Plans, Inc., or UHP, and Managed Health Services Insurance
Corporation. From August 2004 to March 2006, she served as our Plan President
of
UHP. From June 1997 to August 2004, she served as Chief Financial Officer and
Chief Operating Officer for University of Pittsburgh Medical
Center.
Marie
J. Glancy. Ms.
Glancy has
served as our Senior Vice President, Operational Services and Regulatory Affairs
since February 2006. Ms. Glancy served as our Senior Vice President, Government
Relations from January 2005 to February 2006 and as our Vice President,
Government Relations from July 2003 to January 2005. From 1996 to July 2003,
Ms.
Glancy served as a public policy executive for Deere and Company.
Carol
E. Goldman. Ms.
Goldman has served as Senior Vice President and Chief Administration Officer
since July 2002. From September 2001 to July 2002, Ms. Goldman served as our
Plan Director of Human Resources. From 1998 to August 2001, Ms. Goldman was
Human Resources Manager at Mallinckrodt Inc., a medical device and
pharmaceutical company.
Jesse
N. Hunter. Mr.
Hunter has served as our Vice President, Corporate Development since December
2006. From October 2004 to December 2006, he served as our Vice President,
Mergers & Acquisitions. From July 2003 until October 2004, he served as the
Director of Mergers & Acquisitions and from February 2002 until July 2003,
he served as the Manager of Mergers & Acquisitions.
Mary V. Mason, M.D. Dr.
Mason
was chosen to be our Senior Vice President and Chief Medical Officer in February
2007, effective March 1, 2007. From April 2006 to February 2007, she served
as our Vice President, Medical Affairs- Health Plans. From January 2006 to
April
2006 she served as our National Medical Director. From September 2001 to
December 2005, Dr. Mason was with Healthcare USA, a Medicaid Managed Care
Company owned by Coventry Health Care, Inc. She served as Chief Medical Director
in 2005 and as
Medical
Director from September 2001 through December 2004. Dr. Mason was also
in
private practice as a board certified internal medicine physician from
1999 to
December 2004.
William
N. Scheffel.
Mr. Scheffel has served as our Senior Vice President, Specialty Business
Unit
since May 2005 and as our Senior Vice President and Controller from December
2003 to May 2005. From July 2002 to October 2003, Mr. Scheffel was a partner
with Ernst & Young LLP. From 1975 to July 2002, Mr. Scheffel was with Arthur
Andersen, LLP.
Keith
H. Williamson.
Mr.
Williamson has served as our Senior Vice President and General Counsel since
November 2006. From 1988 until November 2006, he served at Pitney Bowes Inc.
in
various legal and executive roles, the last seven years as a Division
President.
Karey
L. Witty. Mr.
Witty
has served as our Senior Vice President, Health Plan Business Unit since April
2006. From August 2000 until April 2006, he served as our Senior Vice President
and Chief Financial Officer. From March 1999 to August 2000, Mr. Witty served
as
our Vice President of Health Plan Accounting. From 1996 to March 1999, Mr.
Witty
was Controller of Heritage Health Systems, Inc., a healthcare company in
Nashville, Tennessee.
Information
concerning our executive officers’ compliance with Section 16(a) of the
Securities Exchange Act will appear in our Proxy Statement for our 2007 annual
meeting of stockholders under “Section 16(a) Beneficial Ownership Reporting
Compliance.” These portions of our Proxy Statement are incorporated herein by
reference. Information concerning our audit committee financial expert and
identification of our audit committee will appear in our Proxy Statement for
our
2007 annual meeting of stockholders under “Information about Corporate
Governance.” Information concerning our code of ethics will appear in our Proxy
Statement for our 2007 annual meeting of stockholders under “Code of Business
Conduct and Ethics.”
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 member’s health status, age, gender, county or
region, benefit mix and member eligibility categories. Future levels of
Medicaid, SCHIP and SSI funding and premium rates may be affected by continuing
government efforts to contain healthcare costs and may further be affected
by
state and federal budgetary constraints. Additionally, state and federal
entities may make changes to the design of their Medicaid programs resulting
in
the cancellation or modification of these programs.
For
example, in August 2006, 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. States
must provide information to measure improper payments in Medicaid managed care,
as well as in fee-for-service Medicaid. 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
administration’s 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
SCHIP is not reauthorized, our business could suffer.
The
authorization for SCHIP expires at the end of federal fiscal year 2007. We
cannot guarantee that federal funding of SCHIP will be reauthorized and if
it
is, what changes might be made to the program following reauthorization. If
SCHIP is not reauthorized, by September 30, 2007, it will continue to be funded
at the current 2006 federal funding levels. We expect Congress to begin the
reauthorization process in early February, 2007. At this time, it is not clear
whether the relevant congressional committees of jurisdiction over this program
will be able to reach agreement on an SCHIP reauthorization package that could
cost $50 billion in additional federal spending.
Several
states face a shortfall in federal SCHIP funding, which could have an impact
on
our business.
States
receive matching funds from the federal government to pay for their SCHIP
programs, which matching funds have a per state annual cap. It is predicted
that
two states in which we have SCHIP contracts, Georgia and New Jersey, will spend
all of their federal allocation for fiscal year 2007 prior to the end of the
year. In December 2006, Congress passed legislation that will redistribute
funds
that were not spent in prior years to the states that are facing these
shortfalls. The Congressional Research Service estimates that this legislation
will delay the shortfall to the first part of May 2007. We cannot predict
whether the U.S. Congress will appropriate additional funds or take other
legislative action to cover the shortfalls. Further, we cannot predict if states
will provide additional funding to cover the federal shortfall. Our contracts
with Georgia and New Jersey expire at the end of June and we cannot guarantee
that they will be renewed and if renewed, whether the terms will be modified.
If
either of the contracts is not renewed or if either state delays paying us
or
fails to pay the full amount owed due to the shortfall, our business could
suffer.
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 June 30, 2007 and September 30, 2011. When
our contracts expire, they may be opened for bidding by competing healthcare
providers. There is no guarantee that our contracts will be renewed or extended.
For example, on August 25, 2006, we received notification from the Kansas Health
Policy Authority that FirstGuard Health Plan Kansas, Inc.’s contract with the
state would not be renewed or extended, and as a result, our contract ended
on
December 31, 2006. Further, our contracts with the states are subject to
cancellation by the state after a short notice period in the event of
unavailability of state funds. 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 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:
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force
us to restructure our relationships with providers within our
network;
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require
us to implement additional or different programs and
systems;
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mandate
minimum medical expense levels as a percentage of premium
revenues;
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restrict
revenue and enrollment growth;
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require
us to develop plans to guard against the financial insolvency of
our
providers;
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increase
our healthcare and administrative costs;
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impose
additional capital and reserve requirements;
and
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increase
or change our liability to members in the event of malpractice by
our
providers.
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For
example, Congress has previously considered various forms of patient protection
legislation commonly known as the Patients’ Bill of Rights and such legislation
may be proposed again. We cannot predict the impact of any such legislation,
if
adopted, on our business.
Regulations
may decrease the profitability of our health plans.
Certain
states have enacted regulations which require us to maintain a minimum health
benefits ratio, or establish limits on our profitability. Other states require
us to meet certain performance and quality metrics in order to receive our
full
contractual revenue. For example, our Texas plan is required to pay a rebate
to
the State of Texas in the event profits exceed established levels. These
regulatory requirements, changes in these requirements or the adoption of
similar requirements by our other regulators may limit our ability to increase
our overall profits as a percentage of revenues. Certain states, including
but
not limited to Georgia, Indiana, New Jersey and Texas have implemented
prompt-payment laws and are enforcing penalty provisions for failure to pay
claims in a timely manner. Failure to meet these requirements can result in
financial fines and penalties. In addition, states may attempt to reduce their
contract premium rates if regulators perceive our health benefits ratio as
too
low. Any of these regulatory actions could harm our operating
results.
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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.
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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:
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refunding
of amounts we have been paid pursuant to our
contracts;
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imposition
of fines, penalties and other sanctions on
us;
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loss
of our right to participate in various markets;
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increased
difficulty in selling our products and services;
and
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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 regulations. The
issuance of new regulations, or judicial or regulatory guidance regarding
existing regulations, could require changes to many of the procedures we
currently use to conduct our business, which may lead to additional costs that
we have not yet identified. We do not know whether, or the extent to which,
we
will be able to recover from the states our costs of complying with these new
regulations. The costs of any such future compliance efforts could have a
material adverse effect on our business.
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 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 state’s application for renewal, membership in our
health plan in the state could decrease and our business could
suffer.
Changes
in federal funding mechanisms may reduce our
profitability.
The
Bush
administration previously proposed a major long-term change in the way Medicaid
and SCHIP are funded. The proposal, if adopted, would allow states to elect
to
receive, instead of federal matching funds, combined Medicaid-SCHIP “allotments”
for acute and long-term healthcare for low-income, uninsured persons.
Participating states would be given flexibility in designing their own health
insurance programs, subject to federally-mandated minimum coverage requirements.
It is uncertain whether this proposal will be enacted. Accordingly, it is
unknown whether or how many states might elect to participate or how their
participation may affect the net amount of funding available for Medicaid and
SCHIP programs. If such a proposal is adopted and decreases the number of
persons enrolled in Medicaid or SCHIP in the states in which we operate or
reduces the volume of healthcare services provided, our growth, operations
and
financial performance could be adversely affected.
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 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 plan’s enrollment in a particular month or over an extended
period. When a state implements new programs to determine eligibility, new
processes to assign or enroll eligible 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 the Atlanta and Central regions of
Georgia on June 1, 2006 and the Southwest region of Georgia on September 1,
2006
and have based our estimates on state provided historical actuarial data and
limited 2006 actual incurred and received data. From time to time in the past,
our actual results have varied from our estimates, particularly in times of
significant changes in the number of our members. Our failure to estimate IBNR
accurately may also affect our ability to take timely corrective actions,
further harming our results.
Receipt
of inadequate or significantly delayed premiums would negatively affect
our revenues
and profitability.
Our
premium revenues consist of fixed monthly payments per member and supplemental
payments for other services such as maternity deliveries. These premiums are
fixed by contract, and we are obligated during the contract periods to provide
healthcare services as established by the state governments. We use a large
portion of our revenues to pay the costs of healthcare services delivered to
our
members. If premiums do not increase when expenses related to medical services
rise, our earnings will be affected negatively. In addition, our actual medical
services costs may exceed our estimates, which would cause our health benefits
ratio, or our expenses related to medical services as a percentage of premium
revenue, to increase and our profits to decline. In addition, it is possible
for
a state to increase the rates payable to the hospitals without granting a
corresponding increase in premiums to us. If this were to occur in one or more
of the states in which we operate, our profitability would be harmed. In
addition, if there is a significant delay in our receipt of premiums to offset
previously incurred health benefits costs, our earnings could be negatively
impacted.
Failure
to effectively manage our medical costs or related administrative costs
would reduce
our profitability.
Our
profitability depends, to a significant degree, on our ability to predict and
effectively manage expenses related to health benefits. We have less control
over the costs related to medical services than we do over our general and
administrative expenses. Because of the narrow margins of our health plan
business, relatively small changes in our health benefits ratio can create
significant changes in our financial results. Changes in healthcare regulations
and practices, the level of use of healthcare services, hospital costs,
pharmaceutical costs, major epidemics, new medical technologies and other
external factors, including general economic conditions such as inflation
levels, are beyond our control and could reduce our ability to predict and
effectively control the costs of providing health benefits. We may not be able
to manage costs effectively in the future. If our costs related to health
benefits increase, our profits could be reduced or we may not remain
profitable.
Difficulties
in executing our acquisition strategy could adversely affect
our business.
Historically,
the acquisition of Medicaid and specialty services businesses, contract rights
and related assets of other health plans both in our existing service areas
and
in new markets has accounted for a significant amount of our growth. Many of
the
other potential purchasers have greater financial resources than we have. In
addition, many of the sellers are interested either in (a) selling, along
with their Medicaid assets, other assets in which we do not have an interest
or
(b) selling their companies, including their liabilities, as opposed to the
assets of their ongoing businesses.
We
generally are required to obtain regulatory approval from one or more state
agencies when making acquisitions. In the case of an acquisition of a business
located in a state in which we do not currently operate, we would be required
to
obtain the necessary licenses to operate in that state. In addition, even if
we
already operate in a state in which we acquire a new business, we would be
required to obtain additional regulatory approval if the acquisition would
result in our operating in an area of the state in which we did not operate
previously, and we could be required to renegotiate provider contracts of the
acquired business. We cannot assure you that we would be able to comply with
these regulatory requirements for an acquisition in a timely manner, or at
all.
In deciding whether to approve a proposed acquisition, state regulators may
consider a number of factors outside our control, including giving preference
to
competing offers made by locally owned entities or by not-for-profit
entities.
We
also
may be unable to obtain sufficient additional capital resources for future
acquisitions. If we are unable to effectively execute our acquisition strategy,
our future growth will suffer and our results of operations could be
harmed.
Our
acquisitions may increase costs ,increase 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:
Ÿ |
additional
personnel who are not familiar with our operations and corporate
culture;
|
Ÿ |
provider
networks that may operate on different terms than our existing
networks;
|
Ÿ |
existing
members, who may decide to switch to another healthcare plan;
and
|
Ÿ |
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.
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 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, our Medicaid contract with Kansas
terminated December 31, 2006. Our inability to continue to operate in any of
the
states in which we operate would harm our business.
Competition
may limit our ability to increase penetration of the markets that
we serve.
We
compete for members principally on the basis of size and quality of provider
network, benefits provided and quality of service. We compete with numerous
types of competitors, including other health plans and traditional state
Medicaid programs that reimburse providers as care is provided. Subject to
limited exceptions by federally approved state applications, the federal
government requires that there be choices for Medicaid recipients among managed
care programs. Voluntary programs and mandated competition may limit our ability
to increase our market share.
Some
of
the health plans with which we compete have greater financial and other
resources and offer a broader scope of products than we do. In addition,
significant merger and acquisition activity has occurred in the managed care
industry, as well as in industries that act as suppliers to us, such as the
hospital, physician, pharmaceutical, medical device and health information
systems businesses. To the extent that competition intensifies in any market
that we serve, our ability to retain or increase members and providers, or
maintain or increase our revenue growth, pricing flexibility and control over
medical cost trends may be adversely affected.
In
addition, in order to increase our membership in the markets we currently serve,
we believe that we must continue to develop and implement community-specific
products, alliances with key providers and localized outreach and educational
programs. If we are unable to develop and implement these initiatives, or if
our
competitors are more successful than we are in doing so, we may not be able
to
further penetrate our existing markets.
If
we are unable to maintain relationships with our provider networks,
our profitability
may be harmed.
Our
profitability depends, in large part, upon our ability to contract favorably
with hospitals, physicians and other healthcare providers. Our provider
arrangements with our primary care physicians, specialists and hospitals
generally may be cancelled by either party without cause upon 90 to
120 days prior written notice. We cannot assure you that we will be able to
continue to renew our existing contracts or enter into new contracts enabling
us
to service our members profitably.
From
time
to time providers assert or threaten to assert claims seeking to terminate
noncancelable agreements due to alleged actions or inactions by us. Even if
these allegations represent attempts to avoid or renegotiate contractual terms
that have become economically disadvantageous to the providers, it is possible
that in the future a provider may pursue such a claim successfully. In addition,
we are aware that other managed care organizations have been subject to class
action suits by physicians with respect to claim payment procedures, and we
may
be subject to similar claims. Regardless of whether any claims brought against
us are successful or have merit, they will still be time-consuming and costly
and could distract our management’s attention. As a result, we may incur
significant expenses and may be unable to operate our business
effectively.
We
will
be required to establish acceptable provider networks prior to entering new
markets. We may be unable to enter into agreements with providers in new markets
on a timely basis or under favorable terms. If we are unable to retain our
current provider contracts or enter into new provider contracts timely or on
favorable terms, our profitability will be harmed.
We
may be unable to attract and retain key personnel.
We
are
highly dependent on our ability to attract and retain qualified personnel to
operate and expand our business. If we lose one or more members of our senior
management team, including our chief executive officer, Michael Neidorff, who
has been instrumental in developing our business strategy and forging our
business relationships, our business and operating results could be harmed.
Our
ability to replace any departed members of our senior management or other key
employees may be difficult and may take an extended period of time because
of
the limited number of individuals in the Medicaid managed care and specialty
services industry with the breadth of skills and experience required to operate
and successfully expand a business such as ours. Competition to hire from this
limited pool is intense, and we may be unable to hire, train, retain or motivate
these personnel.
Negative
publicity regarding the managed care industry may harm our business
and operating
results.
The
managed care industry has received negative publicity. This publicity has led
to
increased legislation, regulation, review of industry practices and private
litigation in the commercial sector. These factors may adversely affect our
ability to market our services,
require
us to change our services, and increase the regulatory burdens under which
we
operate. Any of these factors may increase the costs of doing business and
adversely affect our operating results.
Claims
relating to medical malpractice could cause us to incur significant
expenses.
Our
providers and employees involved in medical care decisions may be subject to
medical malpractice claims. In addition, some states, including Texas, have
adopted legislation that permits managed care organizations to be held liable
for negligent treatment decisions or benefits coverage determinations. Claims
of
this nature, if successful, could result in substantial damage awards against
us
and our providers that could exceed the limits of any applicable insurance
coverage. Therefore, successful malpractice or tort claims asserted against
us,
our providers or our employees could adversely affect our financial condition
and profitability. Even if any claims brought against us are unsuccessful or
without merit, they would still be time-consuming and costly and could distract
our management’s attention. As a result, we may incur significant expenses and
may be unable to operate our business effectively.
Loss
of providers due to increased insurance costs could adversely affect
our business.
Our
providers routinely purchase insurance to help protect themselves against
medical malpractice claims. In recent years, the costs of maintaining
commercially reasonable levels of such insurance have increased dramatically,
and these costs are expected to increase to even greater levels in the future.
As a result of the level of these costs, providers may decide to leave the
practice of medicine or to limit their practice to certain areas, which may
not
address the needs of Medicaid participants. We rely on retaining a sufficient
number of providers in order to maintain a certain level of service. If a
significant number of our providers exit our provider networks or the practice
of medicine generally, we may be unable to replace them in a timely manner,
if
at all, and our business could be adversely affected.
Growth
in the number of Medicaid-eligible persons during economic downturns
could cause
our operating results to suffer if state and federal
budgets decrease
or do not increase.
Less
favorable economic conditions may cause our membership to increase as more
people become eligible to receive Medicaid benefits. During such economic
downturns, however, state and federal budgets could decrease, causing states
to
attempt to cut healthcare programs, benefits and rates. We cannot predict the
impact of changes in the United States economic environment or other economic or
political events, including acts of terrorism or related military action, on
federal or state funding of healthcare programs or on the size of the population
eligible for the programs we operate. If federal funding decreases or remains
unchanged while our membership increases, our results of operations will
suffer.
Growth
in the number of Medicaid-eligible persons may be countercyclical, which
could cause
our operating results to suffer when general economic conditions
are improving.
Historically,
the number of persons eligible to receive Medicaid benefits has increased more
rapidly during periods of rising unemployment, corresponding to less favorable
general economic conditions. Conversely, this number may grow more slowly or
even decline if economic conditions improve. Therefore, improvements in general
economic conditions may cause our membership levels to decrease, thereby causing
our operating results to suffer, which could lead to decreases in our stock
price during periods in which stock prices in general are
increasing.
If
we are unable to integrate and manage our information systems effectively,
our operations
could be disrupted.
Our
operations depend significantly on effective information systems. The
information gathered and processed by our information systems assists us in,
among other things, monitoring utilization and other cost factors, processing
provider claims, and providing data to our regulators. Our providers also depend
upon our information systems for membership verifications, claims status and
other information.
Our
information systems and applications require continual maintenance, upgrading
and enhancement to meet our operational needs and regulatory requirements.
Moreover, our acquisition activity requires frequent transitions to or from,
and
the integration of, various information systems. We regularly upgrade and expand
our information systems’ capabilities. If we experience difficulties with the
transition to or from information systems or are unable to properly maintain
or
expand our information systems, we could suffer, among other things, from
operational disruptions, loss of existing members and difficulty in attracting
new members, regulatory problems and increases in administrative expenses.
In
addition, our ability to integrate and manage our information systems may be
impaired as the result of events outside our control, including acts of nature,
such as earthquakes or fires, or acts of terrorists.
We
rely on the accuracy of eligibility lists provided by state
governments. Inaccuracies
in those lists would negatively affect our results of
operations.
Premium
payments to us are based upon eligibility lists produced by state governments.
From time to time, states require us to reimburse them for premiums paid to
us
based on an eligibility list that a state later discovers contains individuals
who are not in fact eligible for a government sponsored program or are eligible
for a different premium category or a different program. Alternatively,
a
state
could fail to pay us for members for whom we are entitled to payment. Our
results of operations would be adversely affected as a result of such
reimbursement to the state if we had made related payments to providers and
were
unable to recoup such payments from the providers.
We
may not be able to obtain or maintain adequate
insurance.
We
maintain liability insurance, subject to limits and deductibles, for claims
that
could result from providing or failing to provide managed care and related
services. These claims could be substantial. We believe that our present
insurance coverage and reserves are adequate to cover currently estimated
exposures. We cannot assure you that we will be able to obtain adequate
insurance coverage in the future at acceptable costs or that we will not incur
significant liabilities in excess of policy limits.
From
time to time, we may become involved in costly and time-consuming litigation
and other
regulatory proceedings, which require significant attention from
our management.
We
are a
defendant from time to time in lawsuits and regulatory actions relating to
our
business. Due to the inherent uncertainties of litigation and regulatory
proceedings, we cannot accurately predict the ultimate outcome of any such
proceedings. An unfavorable outcome could have a material adverse impact on
our
business and operating results. In addition, regardless of the outcome of any
litigation or regulatory proceedings, such proceedings are costly and require
significant attention from our management. For example, we have been named
in
two recently-filed securities class action lawsuits that are now consolidated.
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.
None.
Our
corporate office headquarters building is located in St. Louis, Missouri. The
real estate we own surrounding this building is adequate to accommodate office
expansion needs to support future company growth. Effective December 30, 2005,
we executed an agreement with the City of Clayton, Missouri, a suburb of St.
Louis, for the redevelopment of certain properties surrounding our corporate
offices. Our primary purpose for the agreement is to accommodate office
expansion needs for future company growth. The total scope of the project
includes building two new office towers and street-level retail space. We plan
to occupy a portion of those towers. The total expected cost of the project
is
approximately $190 million. It is not our intent to serve as developer of the
project or finance the project construction costs. We operate claims processing
facilities in Missouri and Montana. We lease space in the states where our
health plans and specialty companies operate. We are required by various
insurance and regulatory authorities to have offices in the service areas where
we provide benefits. We believe our current facilities are adequate to meet
our
operational needs for the foreseeable future.
As
previously disclosed, two class action lawsuits were filed against us and
certain of our officers and directors in the United States District Court for
the Eastern District of Missouri, one in July 2006, or the July Class Action
Lawsuit, and one in August 2006, or the August Class Action Lawsuit. The July
Class Action Lawsuit and the August Class Action Lawsuit were consolidated
on
November 2, 2006 and an amended consolidated complaint was filed in the United
States District Court for the Eastern District of Missouri on January 17, 2007,
which we refer to as the Consolidated Class Action Lawsuit. The Consolidated
Class Action Lawsuit alleges, on behalf of purchasers of our common stock from
April 25, 2006 through July 17, 2006, that we and certain of our officers and
directors violated federal securities laws by issuing a series of materially
false statements prior to the announcement of our fiscal 2006 second quarter
results. According to the Consolidated Class Action Lawsuit, these allegedly
materially false statements had the effect of artificially inflating the price
of our common stock, which subsequently dropped after the issuance of a press
release announcing our preliminary fiscal 2006 second quarter earnings and
revised guidance.
We
believe the case is without merit and have filed a motion to dismiss the
Consolidated Class Action Lawsuit.
Additionally,
in August 2006, a separate derivative action was filed on behalf of Centene
Corporation against us and certain of our officers and directors in the United
States District Court for the Eastern District of Missouri. Plaintiff purports
to bring suit derivatively on behalf of the Company against our directors for
breach of fiduciary duties, gross mismanagement and waste of corporate assets
by
reason of the directors’ alleged failure to correct the misstatements alleged in
the Consolidated Class Action Lawsuits discussed above. The derivative complaint
largely repeats the allegations in the Consolidated Class Action Lawsuits.
Based
on discussions that have been held with plaintiff’s counsel, it is our
understanding that plaintiff does not intend to pursue this action until the
Consolidated Class Action Lawsuits proceed past the dismissal stage. Although
this matter is in its early stages and no precise prediction of its outcome
can
be made, we believe the case is without merit and plan to vigorously defend
against this lawsuit.
In
addition, we routinely are subjected to legal proceedings in the normal course
of business. While the ultimate resolution of such matters is uncertain,
we do
not expect the results of any of these matters discussed
above individually, or in the aggregate, to have a material effect on our
financial position or results of operations.
Item
4. Submission
of Matters to a Vote of Security Holders
None.
PART
II
Item
5. Market
for Registrant’s Common Equity, Related Stockholder
Matters and
Issuer Purchases of Equity Securities
Market
for Common Stock; Dividends
Our
common stock has been traded and quoted on the New York Stock Exchange under
the
symbol “CNC” since October 16, 2003.
|
|
2006
Stock Price
|
|
2005
Stock Price
|
|
|
High
|
|
Low
|
|
High
|
|
Low
|
First
Quarter
|
|
$
|
30.26
|
|
$
|
22.70
|
|
$
|
35.38
|
|
$
|
26.50
|
Second
Quarter
|
|
|
29.59
|
|
|
22.88
|
|
|
34.38
|
|
|
24.86
|
Third
Quarter
|
|
|
23.87
|
|
|
13.25
|
|
|
37.91
|
|
|
22.60
|
Fourth
Quarter
|
|
|
26.95
|
|
|
16.11
|
|
|
27.76
|
|
|
16.76
|
As
of
December 31, 2006 there were 57 holders of record of our common stock.
We
have
never declared any cash dividends on our capital stock and currently anticipate
that we will retain any future earnings for the development, operation and
expansion of our business.
Issuer
Purchases of Equity Securities
In
November 2005, our board of directors adopted a stock repurchase program
authorizing us to repurchase up to four million shares of common stock from
time
to time on the open market or through privately negotiated transactions. The
repurchase program extends through October 31, 2007, but we reserve the right
to
suspend or discontinue the program at any time. During the year ended December
31, 2006, we repurchased 397,400 shares at an average price of $19.71 and an
aggregate cost of $7.8 million. We have established a trading plan with a
registered broker to repurchase shares under certain market conditions. During
the year ended December 31, 2006, we did not repurchase any shares other than
through this publicly announced program.
Issuer
Purchases of Equity Securities
Fourth
Quarter 2006
|
Period
|
|
Total
Number of
Shares
Purchased
|
|
Average
Price
per
Share
|
|
Total
Number
of
Shares
Purchased
as
Part
of Publicly
Announced
Plans
or
Programs
|
|
Maximum
Number
of Shares
that
May Yet Be
Purchased
Under
the
Plans or
Programs
|
October
1 - October 31, 2006
|
|
16,500
|
|
$
|
19.06
|
|
|
16,500
|
|
|
3,615,600
|
November
1 - November 30, 2006
|
|
13,000
|
|
|
23.40
|
|
|
13,000
|
|
|
3,602,600
|
December
1 - December 31, 2006
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,602,600
|
TOTAL
|
|
29,500
|
|
$
|
20.97
|
|
|
29,500
|
|
|
3,602,600
|
Securities
Authorized for Issuance Under Equity Compensation Plans
Information
concerning our equity compensation plans will appear in our Proxy Statement
for
our 2007 annual meeting of stockholders under “Equity Compensation Plan
Information.” This portion of our Proxy Statement is incorporated herein by
reference.
Item
6. Selected
Financial Data
The
following selected consolidated financial data should be read in connection
with
the consolidated financial statements and related notes and “Management’s
Discussion and Analysis of Financial Condition and Results of Operations”
appearing elsewhere in this filing. The data for the years ended December 31,
2006, 2005 and 2004 and as of December 31, 2006 and 2005 are derived from
consolidated financial statements included elsewhere in this filing. The data
for the years ended December 31, 2003 and 2002 and as of December 31, 2004,
2003
and 2002 are derived from audited consolidated financial statements not included
in this filing.
|
|
Year
Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(In
thousands, except share data)
|
|
Statement
of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium
|
|
$
|
2,199,439
|
|
|
$
|
1,491,899
|
|
|
$
|
991,673
|
|
|
$
|
759,763
|
|
|
$
|
461,030
|
|
Service
|
|
|
79,581
|
|
|
|
13,965
|
|
|
|
9,267
|
|
|
|
9,967
|
|
|
|
457
|
|
Total
revenues
|
|
|
2,279,020
|
|
|
|
1,505,864
|
|
|
|
1,000,940
|
|
|
|
769,730
|
|
|
|
461,487
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical
costs
|
|
|
1,819,811
|
|
|
|
1,226,909
|
|
|
|
800,476
|
|
|
|
626,192
|
|
|
|
379,468
|
|
Cost
of services
|
|
|
60,735
|
|
|
|
5,851
|
|
|
|
8,065
|
|
|
|
8,323
|
|
|
|
341
|
|
General
and administrative expenses
|
|
|
346,284
|
|
|
|
193,913
|
|
|
|
127,863
|
|
|
|
88,288
|
|
|
|
50,072
|
|
Impairment
loss
|
|
|
81,098
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
operating expenses
|
|
|
2,307,928
|
|
|
|
1,426,673
|
|
|
|
936,404
|
|
|
|
722,803
|
|
|
|
429,881
|
|
Earnings
(loss) from operations
|
|
|
(28,908
|
)
|
|
|
79,191
|
|
|
|
64,536
|
|
|
|
46,927
|
|
|
|
31,606
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
and other income
|
|
|
17,892
|
|
|
|
10,655
|
|
|
|
6,431
|
|
|
|
5,160
|
|
|
|
9,575
|
|
Interest
expense
|
|
|
(10,636
|
)
|
|
|
(3,990
|
)
|
|
|
(680
|
)
|
|
|
(194
|
)
|
|
|
(45
|
)
|
Earnings
(loss) before income taxes
|
|
|
(21,652
|
)
|
|
|
85,856
|
|
|
|
70,287
|
|
|
|
51,893
|
|
|
|
41,136
|
|
Income
tax expense
|
|
|
21,977
|
|
|
|
30,224
|
|
|
|
25,975
|
|
|
|
19,504
|
|
|
|
15,631
|
|
Minority
interest
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
881
|
|
|
|
116
|
|
Net
earnings (loss)
|
|
$
|
(43,629
|
)
|
|
$
|
55,632
|
|
|
$
|
44,312
|
|
|
$
|
33,270
|
|
|
$
|
25,621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per common share
|
|
$
|
(1.01
|
)
|
|
$
|
1.31
|
|
|
$
|
1.09
|
|
|
$
|
0.93
|
|
|
$
|
0.82
|
|
Diluted
earnings (loss) per common share
|
|
$
|
(1.01
|
)
|
|
$
|
1.24
|
|
|
$
|
1.02
|
|
|
$
|
0.87
|
|
|
$
|
0.73
|
|
Weighted
average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
43,160,860
|
|
|
|
42,312,522
|
|
|
|
40,820,909
|
|
|
|
35,704,426
|
|
|
|
31,432,080
|
|
Diluted
|
|
|
43,160,860
|
|
|
|
45,027,633
|
|
|
|
43,616,445
|
|
|
|
38,422,152
|
|
|
|
34,932,232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
(In
thousands)
|
|
Balance
Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
271,047
|
|
|
$
|
147,358
|
|
|
$
|
84,105
|
|
|
$
|
64,346
|
|
|
$
|
59,656
|
|
Investments
and restricted deposits
|
|
|
237,603
|
|
|
|
202,916
|
|
|
|
233,257
|
|
|
|
220,335
|
|
|
|
104,999
|
|
Total
assets
|
|
|
894,980
|
|
|
|
668,030
|
|
|
|
527,934
|
|
|
|
362,692
|
|
|
|
210,327
|
|
Medical
claims liabilities
|
|
|
280,441
|
|
|
|
170,514
|
|
|
|
165,980
|
|
|
|
106,569
|
|
|
|
91,181
|
|
Long-term
debt
|
|
|
174,646
|
|
|
|
92,448
|
|
|
|
46,973
|
|
|
|
7,616
|
|
|
|
—
|
|
Total
stockholders’ equity
|
|
|
326,423
|
|
|
|
352,048
|
|
|
|
271,312
|
|
|
|
220,115
|
|
|
|
102,183
|
|
Item
7. Management’s
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. The discussion contains
forward-looking statements that involve known and unknown risks and
uncertainties, including those set forth under Item 1A. Risk Factors of this
Form 10-K.
OVERVIEW
We
are a
multi-line healthcare enterprise operating in two segments. Our Medicaid Managed
Care segment provides Medicaid and Medicaid-related programs to organizations
and individuals through government subsidized programs, including Medicaid,
the
State Children’s Health Insurance Program, or SCHIP, and, Supplemental Security
Income, or SSI. Our Specialty Services segment provides specialty services,
including behavioral health, disease management, long-term care programs,
managed vision, nurse triage, pharmacy benefits management and treatment
compliance, to
state
programs, healthcare organizations and other commercial organizations, as well
as to our own subsidiaries on market-based terms.
During
2006, we were notified by the Kansas Health Policy Authority that our Medicaid
contract in Kansas would not be renewed beyond December 31, 2006, and
we
reached
a definitive agreement to sell the operating assets of FirstGuard Health Plan,
Inc., our Missouri
health
plan. This development is discussed below under the caption “Impairment Loss.”
Our
financial performance for 2006 is summarized as follows:
|
—
|
Year-end
Medicaid Managed Care membership of 1,262,200, including 138,900
members
in Kansas and Missouri.
|
|
—
|
Total
revenues of $2.3 billion.
|
|
—
|
Medicaid
and SCHIP health benefits ratio, or HBR, of 82.6%, SSI HBR
of 87.6%,
Specialty Services HBR of 82.5%.
|
|
—
|
Medicaid
Managed Care general and administrative, or G&A, expense ratio of
12.6% and Specialty Services G&A ratio of
16.9%.
|
|
—
|
Diluted
net loss per share of $1.01, including $94.5 million pre-tax,
or
$2.04 per share, charges for intangible asset impairment and costs
to
exit Kansas and Missouri.
|
|
—
|
Total
operating cash flows of $195.0
million.
|
Over
the
last two years we have experienced membership and revenue growth in our Medicaid
Managed Care segment including membership growth of 63.3%. Excluding our
membership in Kansas and Missouri from the total membership as of December
31,
2006, our membership growth was 45.4%. The following new contracts and
acquisitions contributed to our growth:
|
—
|
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 December 31, 2006, our membership
in
Georgia was 308,800.
|
|
—
|
We
began operating under new contracts with the State of Ohio to manage
care
for 37,200 Medicaid members by entering seven new counties in the
East
Central market on July 1, 2006, and 17 new counties in the Northwest
market on October 1, 2006.
|
|
—
|
Effective
June 1, 2006, we acquired MediPlan Corporation, or 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.
|
|
—
|
Effective
May 1, 2005, we acquired the operating assets of SummaCare, Inc.
The
results of operations of this entity are included in our consolidated
financial statements beginning May 1,
2005.
|
We
have
been awarded the following new contracts to expand our operations in Ohio
and
Texas:
|
—
|
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 commenced in February 2007.
|
|
—
|
During
2006, we received notification of an award in Ohio to provide managed
care
for Medicaid Aged, Blind or Disabled, or ABD, members in four regions.
Operations commenced in the Northeast and Southwest regions on
January 1
and February 1, 2007, respectively. Implementation is expected
to take
place in the Northwest region in March 2007 and in the East Central
region
in April 2007.
|
Our
Specialty Services segment has experienced significant year over year growth
largely because of the acquisition of US Script. The following new contracts
and
acquisitions contributed to our growth:
|
—
|
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., or 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, or
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., or 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., or 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.
|
RESULTS
OF OPERATIONS AND KEY METRICS
Summarized
comparative financial data for 2006, 2005 and 2004 are as follows ($ in
millions):
|
|
2006
|
|
2005
|
|
2004
|
|
%
Change
2005-2006
|
|
%
Change
2004-2005
|
|
Premium
revenue
|
|
$
|
2,199.4
|
|
$
|
1,491.9
|
|
$
|
991.7
|
|
|
47.4
|
%
|
|
50.4
|
%
|
Service
revenue
|
|
|
79.6
|
|
|
14.0
|
|
|
9.2
|
|
|
469.9
|
%
|
|
50.7
|
%
|
Total
revenues
|
|
|
2,279.0
|
|
|
1,505.9
|
|
|
1,000.9
|
|
|
51.3
|
%
|
|
50.4
|
%
|
Medical
costs
|
|
|
1,819.8
|
|
|
1,226.9
|
|
|
800.5
|
|
|
48.3
|
%
|
|
53.3
|
%
|
Cost
of services
|
|
|
60.7
|
|
|
5.9
|
|
|
8.1
|
|
|
938.0
|
%
|
|
(27.5
|
)%
|
General
and administrative expenses
|
|
|
346.3
|
|
|
193.9
|
|
|
127.8
|
|
|
78.6
|
%
|
|
51.7
|
%
|
Impairment
loss
|
|
|
81.1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Earnings
(loss) from operations
|
|
|
(28.9
|
)
|
|
79.2
|
|
|
64.5
|
|
|
(136.5
|
)%
|
|
22.7
|
%
|
Investment
and other income, net
|
|
|
7.3
|
|
|
6.6
|
|
|
5.8
|
|
|
8.9
|
%
|
|
15.9
|
%
|
Earnings
(loss) before income taxes
|
|
|
(21.6
|
)
|
|
85.8
|
|
|
70.3
|
|
|
(125.2
|
)%
|
|
22.2
|
%
|
Income
tax expense
|
|
|
22.0
|
|
|
30.2
|
|
|
26.0
|
|
|
(27.3
|
)%
|
|
16.4
|
%
|
Net
earnings (loss)
|
|
$
|
(43.6
|
)
|
$
|
55.6
|
|
$
|
44.3
|
|
|
(178.4
|
)%
|
|
25.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings (loss) per common share
|
|
$
|
(1.01
|
)
|
$
|
1.24
|
|
$
|
1.02
|
|
|
(181.5
|
)%
|
|
21.6
|
%
|
Revenues
and Revenue Recognition
Our
Medicaid Managed Care segment generates revenues primarily from premiums we
receive from the states in which we operate health plans. We receive a fixed
premium per member per month pursuant to our state contracts. We generally
receive premium payments during the month we provide services and recognize
premium revenue during the period in which we are obligated to provide services
to our members. Some states enact premium taxes or similar assessments,
collectively, premium taxes, and these taxes are recorded as G&A expenses.
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 state
programs, healthcare organizations, and other commercial organizations, as
well
as from our own subsidiaries on market-based terms. Revenues are recognized
when
the related services are provided or as ratably earned over the covered period
of services.
Premium
and service revenues collected in advance are recorded as unearned revenue.
For
performance-based contracts, we do not recognize revenue subject to refund
until
data is sufficient to measure performance. Premium and service revenues due
to
us are recorded as premium and related receivables and are recorded net of
an
allowance based on historical trends and our management’s judgment on the
collectibility of these accounts. As we generally receive payments during the
month in which services are provided, the allowance is typically not significant
in comparison to total revenues and does not have a material impact on the
presentation of our financial condition or results of operations.
Our
total
revenue increased in the year ended December 31, 2006 over the previous year
primarily through 1) membership growth in the Medicaid Managed Care segment,
2)
premium rate increases, and 3) growth in our Specialty Services segment.
From
December 31, 2004 to December 31, 2006, we increased our total membership by
63.3% or 45.4% if we exclude our membership in Kansas and Missouri at December
31, 2006. The following table sets forth our membership by state in our Medicaid
Managed Care segment:
|
|
December
31,
|
|
|
2006
|
|
2005
|
|
2004
|
Georgia
|
|
308,800
|
|
—
|
|
—
|
Indiana
|
|
183,100
|
|
193,300
|
|
150,600
|
New
Jersey
|
|
58,900
|
|
56,500
|
|
52,800
|
Ohio
|
|
109,200
|
|
58,700
|
|
23,800
|
Texas
|
|
298,500
|
|
242,000
|
|
244,300
|
Wisconsin
|
|
164,800
|
|
172,100
|
|
165,800
|
Subtotal
|
|
1,123,300
|
|
722,600
|
|
637,300
|
|
|
|
|
|
|
|
Kansas
|
|
107,000
|
|
113,300
|
|
94,200
|
Missouri
|
|
31,900
|
|
36,000
|
|
41,200
|
Total
|
|
1,262,200
|
|
871,900
|
|
772,700
|
The
following table sets forth our membership by line of business in our Medicaid
Managed Care segment:
|
|
December
31,
|
|
|
2006
|
|
2005
|
|
2004
|
Medicaid
|
|
887,300
|
|
573,100
|
|
484,700
|
SCHIP
|
|
216,200
|
|
134,600
|
|
142,200
|
SSI
|
|
19,800
|
|
14,900
|
|
10,400
|
Subtotal
|
|
1,123,300
|
|
722,600
|
|
637,300
|
|
|
|
|
|
|
|
Kansas
and Missouri Medicaid/SCHIP members
|
|
138,900
|
|
149,300
|
|
135,400
|
Total
|
|
1,262,200
|
|
871,900
|
|
772,700
|
During
2006, our subsidiary, Peach State Health Plan, commenced operations in the
Atlanta and Central regions of Georgia in June and in the Southwest region
in
September. We increased our membership in Ohio through the MediPlan acquisition
while also adding members under our new contract in the East Central and
Northwest markets. In Texas, we increased our membership through new contracts
in the Corpus Christi, Austin, and Lubbock markets. Our membership decreased
in
Wisconsin because of more stringent state eligibility requirements for the
Medicaid and SCHIP programs and eligibility administration issues. Our
membership decreased in Indiana primarily due to provider terminations. The
revenue associated with our Kansas and Missouri health plans was $317.0 and
$273.7 million in 2006 and 2005, respectively.
In
2005,
we increased our membership in Ohio through our acquisition of the
Medicaid-related assets of SummaCare, Inc. Our membership increased in Indiana,
New Jersey and Wisconsin from additions to our provider networks, expansion
into
SSI in Wisconsin, increases in counties served and growth in the overall number
of Medicaid beneficiaries. In Kansas, we increased our membership by eliminating
a ceiling on our membership total with the State. Our membership decreased
in
Missouri and Texas because of more stringent eligibility requirements for the
Medicaid and SCHIP programs.
|
2.
|
Premium
rate increases
|
In
2006,
we received premium rate increases ranging from 1.8% to 9.5%, or 5.6% on a
composite basis across our markets. In 2005, we received premium rate increases
ranging from 0.6% to 8.7%, or 3.2% 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. In July 2005, we began offering disease management services
through our acquisition of AirLogix. In January 2006, we began offering pharmacy
benefits management through our acquisition of US Script, representing most
of
the 2006 increase in service revenue. 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. In
October 2006, our subsidiary, Bridgeway Health Solutions began performing under
our long-term care contract in Arizona. The increase in service revenue reflects
the acquisitions of US Script AirLogix, and Cardium. At December 31, 2006,
our
behavioral health company, Cenpatico, provided behavioral health services
to
94,500
members in Arizona and 36,600 members in Kansas, compared to 94,700 members
in
Arizona and 38,800 members in Kansas, at December 31, 2005.
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. Monthly, we estimate our IBNR based on a number
of factors, including inpatient hospital utilization data and prior claims
experience. As part of this review, we also consider the costs to process
medical claims and estimates of amounts to cover uncertainties related to
fluctuations in physician billing 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 health benefits ratio,
or
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:
|
|
Year
Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Medicaid
and SCHIP
|
|
|
82.6
|
%
|
|
81.8
|
%
|
|
80.4
|
%
|
SSI
|
|
|
87.6
|
|
|
97.5
|
|
|
93.8
|
|
Specialty
Services
|
|
|
82.5
|
|
|
85.0
|
|
|
—
|
|
Our
Medicaid and SCHIP HBR for the year ended December 31, 2006 was 82.6%, an
increase of 0.8% over 2005. The HBR for the year ended December 31, 2005
included $4.5 million for settlement of a lawsuit with Aurora Health Care,
Inc.,
or Aurora, a provider of medical professional services to our Wisconsin health
plan. This settlement increased the HBR 0.3% for the year ended December 31,
2005. The increase in HBR for the year ended December 31, 2006 is caused
primarily by increased cost trends for maternity related costs including
neonatal intensive care costs, increased physician costs, and increased pharmacy
costs.
Our
Specialty Services HBR for 2006 includes twelve months of the behavioral health
contracts in Arizona and Kansas, six months of OptiCare and three months of
Bridgeway. The 2005 results include twelve months of our behavioral health
contract in Kansas and six months of Arizona results.
Our
Medicaid and SCHIP HBR increased in 2005 due to our settlement of a lawsuit
with
Aurora and expansion into new markets previously unmanaged by us. For example,
we experienced higher cost trends in Indiana where we added membership in 2005
as the state expanded their Medicaid managed care program to include all
Medicaid and SCHIP enrollees.
Cost
of Services
Our
cost
of services expense includes all direct costs to support the local functions
responsible for generation of our services 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 pharmaceutical
costs associated with our PBM's external revenues. Cost of services
rose $54.9 million for the year ended December 31, 2006, over the comparable
period in 2005. The increase in cost of services reflects the acquisitions
of US
Script, AirLogix, and Cardium.
General
and Administrative Expenses
Our
general and administrative, or G&A, expenses primarily reflect wages and
benefits, including stock compensation expense, and other administrative costs
related to our health plans, specialty companies and centralized functions
that
support all of our business units. Our major centralized functions are finance,
information systems and claims processing. Premium taxes are also classified
as
G&A expenses. G&A expenses increased in the year ended December 31, 2006
over the comparable period 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, the adoption of SFAS 123R on January 1, 2006
and
the exit costs for our FirstGuard operations. Premium taxes totaled $42.5
million in the year ended December 31, 2006, compared to $9.8 million for the
comparable period in 2005. The results for the year ended December 31, 2006,
include $13.9 million of implementation expenses in Georgia, $9.9 million of
additional stock compensation expense and $13.4 million of FirstGuard exit
costs.
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:
|
|
Year
Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Medicaid
Managed Care
|
|
|
12.6
|
%
|
|
10.5
|
%
|
|
10.7
|
%
|
Specialty
Services
|
|
|
16.9
|
|
|
35.4
|
|
|
52.3
|
|
The
increase in the Medicaid Managed Care G&A expense ratio in 2006 primarily
reflects the increase in premium taxes, the adoption of SFAS 123R and exit
costs
of our FirstGuard operations offset by the overall leveraging of our expenses
over higher revenues.
The
decrease in the Medicaid Managed Care G&A expense ratio in 2005 reflects the
overall leveraging of our expenses over higher revenues and lower compensation
costs related to our performance bonus plans. These factors were partially
offset by implementation costs in Georgia of $6.2 million, higher spending
on
information systems process improvements and increased charitable contributions.
The
Specialty Services G&A 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 2006 results 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 year ended December 31, 2006 include approximately
$0.7 million in implementation costs related to our long-term care contract
in
Arizona. The 2005 results reflect the operations of our behavioral health
company in Arizona, including $1.5 million in implementation costs, and $0.2
million in Georgia implementation costs.
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 $13.6 million
to
the Medicaid Managed Care segment for the year ended December 31, 2006 than
would have been allocated under the previous formulas.
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 $7.2 million in 2006 primarily as a result of an
increase in market interest rates and larger investment balances. Interest
expense increased $6.6 million primarily from increased borrowings under our
credit facilities.
Income
Tax Expense
We
recorded $22.0 million of income tax expense in 2006 despite having a $21.6
million pre-tax loss because the $81.1 million goodwill impairment loss is
not
deductible for income tax purposes. Excluding the goodwill impairment, our
2006 effective tax rate was 37.0% compared to 35.2% for the corresponding
period in 2005. 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.
Impairment
Loss
In
August
2006, FirstGuard Health Plan Kansas, Inc., or FirstGuard Kansas, our wholly
owned subsidiary, received notification from the Kansas Health Policy Authority
that its Medicaid contract scheduled to terminate December 31, 2006 would not
be
renewed. We appealed this decision and initiated litigation in an attempt to
renew this Medicaid contract. These actions were unsuccessful and the
contract terminated December 31, 2006. In 2006, we also evaluated the
strategic alternatives for our FirstGuard Missouri health plan and decided
to
divest the business. The sale of the operating assets of FirstGuard
Missouri was completed effective February 1, 2007. FirstGuard Kansas and
FirstGuard Missouri are reported in the Medicaid Managed Care
segment.
As
a
result of the notification from the Kansas Health Policy Authority, we conducted
an impairment analysis of the identifiable intangible assets and goodwill of
the
FirstGuard reporting unit, which encompassed both the FirstGuard Kansas and
FirstGuard Missouri 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 a goodwill impairment of
$81.1 million recorded as impairment loss in the consolidated statement of
operations. The goodwill impairment is not deductible for tax
purposes; however, a tax benefit for the stock of FirstGuard Kansas may be
realized in 2007. The cash proceeds in 2007 from the FirstGuard Missouri
sale and tax benefit for the stock of FirstGuard Kansas are estimated to total
between $30 and $40 million.
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.
LIQUIDITY
AND CAPITAL RESOURCES
We
finance our activities primarily through operating cash flows and borrowings
under our revolving credit facility. Our total operating activities provided
cash of $195.0 million in 2006, $74.0 million in 2005 and $99.4 million in
2004.
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. Those
increases are partially offset by an increase in premium and related receivables
in 2006 that reflect an increase in maternity delivery receivables,
reimbursements due to us from providers including amounts due under capitated
risk-sharing contracts and the inclusion of US Script receivables. Cash flow
from operations in 2005 reflects an increase in premium and related receivables
and a $4.5 million increase in medical claims liabilities. The increase in
receivables resulted primarily from the timing of delivery receivable
collections. The increase in medical claims liabilities, lower than in prior
years, reflects the $9.5 million payment made to Aurora to settle a lawsuit,
information systems improvements to reduce our claims processing cycle time
and
the effect of our behavioral health contract in Arizona.
Our
investing activities used cash of $150.3 million in 2006, $56.4 million in
2005
and $122.5 million in 2004. During 2006, our investing activities primarily
consisted of the acquisitions of US Script, Cardium, MediPlan, and OptiCare.
Our
investing activities in 2006 also included additions to the investment
portfolios of our regulated subsidiaries. During 2005, our investing activities
primarily consisted of the acquisitions of AirLogix and the operating assets
of
SummaCare, Inc. 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 December 31, 2006, our investment portfolio
consisted primarily of fixed-income securities with an average duration of
1.2
years. Cash is invested in investment vehicles such as 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
$50.3 million, $26.9 million and $25.0 million in 2006, 2005 and 2004,
respectively, on capital assets consisting primarily of software and hardware
upgrades, and furniture, equipment and leasehold improvements related to office
and market expansions. The expenditures in 2006 included $27.7 million for
computer hardware and software. We anticipate spending $60 million on additional
capital expenditures in 2007 primarily related to system upgrades and market
expansions.
The
expenditures in 2006 also included $9.5 million to purchase 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 non-recourse revolving credit facility to finance the
property already acquired or expected to be acquired under the redevelopment
agreement. As of December 31, 2006 we had $8.4 million in borrowings outstanding
under this credit facility.
Our
primary purpose for the redevelopment agreement is to accommodate office
expansion needs for future company growth. The total scope of the project
includes building two new office towers and street-level retail space. We plan
to occupy a portion of those towers. The total expected cost of the project
is
approximately $190 million. It is not our intent to serve as developer of the
project or finance the project construction costs.
Our
financing activities provided cash of $78.9 million in 2006, $45.7 million
in
2005 and $42.8 million in 2004. During 2006 and 2005, our financing activities
primarily related to proceeds from borrowings under our credit facility. These
borrowings were used primarily for our investing activities in conjunction
with
the acquisition of SummaCare, AirLogix, US Script, Cardium and
MediPlan.
At
December 31, 2006, we had working capital, defined as current assets less
current liabilities, of $63.9 million as compared to $58.0 million at December
31, 2005. 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 $338.0 million at December
31,
2006 and $204.1 million at December 31, 2005. Long-term investments were $170.7
million at December 31, 2006 and $146.2 million at December 31, 2005, including
restricted deposits of $25.3 million and $22.6 million, respectively. At
December 31, 2006, cash and investments held by our unregulated entities totaled
$28.9 million while cash and investments held by our regulated entities totaled
$479.8 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 December 31, 2006, we had $149.0 million in
borrowings outstanding under the agreement and $15.6 million in letters of
credit outstanding, leaving availability of $135.4 million. As of December
31,
2006, we were in compliance with all covenants.
We
have a
stock repurchase program authorizing us to repurchase up to four million shares
of common stock from time to time on the open market or through privately
negotiated transactions. The repurchase program extends through October 31,
2007, but we reserve the right to suspend or discontinue the program at any
time. During the year ended December 31, 2006, we repurchased 397,400 shares
at
an average price of $19.71. We have established a trading plan with a registered
broker to repurchase shares under certain market conditions.
We
have a
shelf registration statement on Form S-3 on file with the Securities and
Exchange Commission, or the SEC, covering the issuance of up to
$300 million of securities including common stock and debt securities. No
securities have been issued under the shelf registration. We may publicly offer
securities from time-to-time at prices and terms to be determined at the time
of
the offering.
Based
on
our operating plan, we expect that our available cash, cash equivalents and
investments, cash from our operations and cash available under our credit
facility will be sufficient to finance our operations and capital expenditures
for at least 12 months from the date of this filing. Additionally, the cash
and
investments in our Kansas and Missouri health plans are sufficient to satisfy
the remaining liabilities. We expect the excess funds will become available
to
us for general corporate purposes when our regulatory obligations have been
satisfied.
Our
principal contractual obligations at December 31, 2006 consisted of medical
claims liabilities, debt, operating leases and purchase obligations. Our debt
consists of borrowings from our credit facilities, mortgages and capital leases.
The purchase obligations consist primarily of software purchase and maintenance
contracts in addition to agreements pertaining to the expansion of our corporate
headquarters. The contractual obligations over the next five years and beyond
are as follows (in thousands):
|
|
Payments
Due by Period
|
|
|
Total
|
|
Less
Than
1
Year
|
|
1-3
Years
|
|
3-5
Years
|
|
More
Than
5
Years
|
Medical
claims liabilities
|
|
$
|
280,441
|
|
$
|
280,441
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
Debt
|
|
|
175,617
|
|
|
971
|
|
|
9,923
|
|
|
160,372
|
|
|
4,351
|
Operating
leases
|
|
|
55,676
|
|
|
12,232
|
|
|
19,610
|
|
|
14,522
|
|
|
9,312
|
Purchase
obligations
|
|
|
17,589
|
|
|
5,819
|
|
|
10,021
|
|
|
1,749
|
|
|
—
|
Total
|
|
$
|
529,323
|
|
$
|
299,463
|
|
$
|
39,554
|
|
$
|
176,643
|
|
$
|
13,663
|
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
entity’s 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
December 31, 2006, our subsidiaries had aggregate statutory capital and surplus
of $248.9 million, compared with the required minimum aggregate statutory
capital and surplus requirements of $154.0 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
December 31, 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. Had Kansas or Missouri adopted risk-based capital requirements,
we believe we would be in compliance at December 31, 2006.
RECENT
ACCOUNTING PRONOUNCEMENTS
In
July
2006, the Financial Accounting Standards Board, or FASB, issued Interpretation
48, or FIN 48, “Accounting for Uncertainty in Income Taxes,” an interpretation
of FASB Statement No. 109, “Accounting for Income Taxes.” FIN 48 clarifies
whether or not to recognize assets or liabilities for tax positions taken that
may be challenged by the taxing authority. The adoption of FIN 48 on January
1,
2007 is not expected to have a material effect on our financial condition or
results of operations.
In
June
2006, the FASB ratified the consensus reached on Emerging Issues Task Force,
or
EITF, Issue No. 06-3, “How Sales Taxes Collected from Customers and
Remitted to Governmental Authorities Should Be Presented in the Income Statement
(That is, Gross Versus Net Presentation)”, or EITF 06-3. The EITF reached
a consensus that the presentation of taxes on either a gross or net
basis
is
an accounting policy decision. Premium taxes and similar assessments are within
the scope of EITF 06-3. We plan to adopt EITF 06-3 effective January 1, 2007
and
will report premium revenues net of premium taxes and similar assessments.
The
adoption of EITF 06-3 is expected to result in lower revenue and general and
administrative expenses with no effect on our net earnings, statement of
financial position or stockholders’ equity. The amount of premium taxes and
similar assessments reported in 2006 was $42.5 million.
CRITICAL
ACCOUNTING POLICIES
Our
significant accounting policies are more fully described in Note 2 to our
consolidated financial statements included elsewhere herein. Our accounting
policies regarding medical claims liabilities and intangible assets are
particularly important to the portrayal of our financial position and results
of
operations and require the application of significant judgment by our
management. As a result, they are subject to an inherent degree of uncertainty.
Medical
Claims Liabilities
Our
medical claims liabilities include claims reported but not yet paid, or
inventory, estimates for claims incurred but not reported, or IBNR, and
estimates for the costs necessary to process unpaid claims. We, together with
our independent actuaries, estimate medical claims liabilities using actuarial
methods that are commonly used by health insurance actuaries and meet Actuarial
Standards of Practice. These actuarial methods consider factors such as
historical data for payment patterns, cost trends, product mix, seasonality,
utilization of healthcare services and other relevant factors. These estimates
are continually reviewed each period and adjustments based on actual claim
submissions and additional facts and circumstances are reflected in the period
known.
Our
management uses its judgment to determine the assumptions to be used in the
calculation of the required estimates. In developing our estimate for IBNR,
we
apply various estimation methods depending on the claim type and the period
for
which claims are being estimated. For more recent periods, incurred
non-inpatient claims are estimated based on historical per member per month
claims experience adjusted for known factors. Incurred hospital claims are
estimated based on authorized days and historical per diem claim experience
adjusted for known factors. For older periods, we utilize an estimated
completion factor based on our historical experience to develop IBNR estimates.
When we commence operations in a new state or region, we have limited
information with which to estimate our medical claims liabilities. See “Risk
Factors - Failure to accurately predict our medical expenses could negatively
affect our reported results.” The completion factor is an actuarial estimate of
the percentage of claims incurred during a given period that have been
adjudicated as of the reporting period to the estimate of the total ultimate
incurred costs. These approaches are consistently applied to each period
presented.
The
completion factor, claims per member per month and per diem cost trend factors
are the most significant factors affecting the IBNR estimate. The following
table illustrates the sensitivity of these factors and the estimated potential
impact on our operating results caused by changes in these factors based on
December 31, 2006 data:
Completion
Factors (1):
|
|
Cost
Trend Factors (2):
|
(Decrease)
Increase
in
Factors
|
|
Increase
(Decrease)
in
Medical
Claims
Liabilities
|
|
(Decrease)
Increase
in
Factors
|
|
Increase
(Decrease)
in
Medical
Claims
Liabilities
|
|
|
|
(in
thousands)
|
|
|
|
|
|
(in
thousands)
|
(3
|
)%
|
|
$
|
38,100
|
|
(3
|
)%
|
|
$
|
(12,900
|
)
|
(2
|
)
|
|
|
25,100
|
|
(2
|
)
|
|
|
(8,600
|
)
|
(1
|
)
|
|
|
12,100
|
|
(1
|
)
|
|
|
(4,300
|
)
|
1
|
|
|
|
(12,200
|
)
|
1
|
|
|
|
4,300
|
|
2
|
|
|
|
(24,100
|
)
|
2
|
|
|
|
8,700
|
|
3
|
|
|
|
(35,800
|
)
|
3
|
|
|
|
13,200
|
|
(1)
|
Reflects
estimated potential changes in medical claims liabilities caused
by
changes in completion factors.
|
(2)
|
Reflects
estimated potential changes in medical claims liabilities caused
by
changes in cost trend factors for the most recent periods.
|
While
we
believe our estimates are appropriate, it is possible future events could
require us to make significant adjustments for revisions to these estimates.
For
example, a 1% increase or decrease in our estimated medical claims liabilities
would have affected net earnings by $1.8 million for the year ended December
31,
2006. The estimates are based on our historical experience, terms of existing
contracts, our observance of trends in the industry, information provided by
our
customers and information available from other outside sources, as appropriate.
The
change in medical claims liabilities is summarized as follows (in thousands):
|
|
Year
Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Balance,
January 1
|
|
$
|
170,514
|
|
$
|
165,980
|
|
$
|
106,569
|
|
Acquisitions
|
|
|
1,788
|
|
|
—
|
|
|
24,909
|
|
Incurred
related to:
|
|
|
|
|
|
|
|
|
|
|
Current
year
|
|
|
1,832,096
|
|
|
1,244,600
|
|
|
816,418
|
|
Prior
years
|
|
|
(12,285
|
)
|
|
(17,691
|
)
|
|
(15,942
|
)
|
Total
incurred
|
|
|
1,819,811
|
|
|
1,226,909
|
|
|
800,476
|
|
Paid
related to:
|
|
|
|
|
|
|
|
|
|
|
Current
year
|
|
|
1,555,074
|
|
|
1,075,204
|
|
|
681,780
|
|
Prior
years
|
|
|
156,598
|
|
|
147,171
|
|
|
84,194
|
|
Total
paid
|
|
|
1,711,672
|
|
|
1,222,375
|
|
|
765,974
|
|
Balance,
December 31
|
|
$
|
280,441
|
|
$
|
170,514
|
|
$
|
165,980
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims
inventory, December 31
|
|
|
296,000
|
|
|
255,000
|
|
|
150,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Days
in claims payable (1)
|
|
|
46.4
|
|
|
45.4
|
|
|
66.5
|
|
(1)
|
Days
in claims payable is a calculation of medical claims liabilities
at the
end of the period divided by average expense per calendar day for
the
fourth quarter of each year. Days in claims payable decreased in
2005 due
to the settlement of a lawsuit with Aurora, information systems
improvements to reduce our claims processing cycle time and the effect
of
our behavioral health contract in Arizona.
|
Acquisitions
in 2006 and 2004 include reserves acquired in connection with our acquisition
of
OptiCare and FirstGuard, respectively.
Medical
claims are usually paid within a few months of the member receiving service
from
the physician or other healthcare provider. As a result, these liabilities
generally are described as having a “short-tail,” which causes less than 5% of
our medical claims liabilities as of the end of any given year to be outstanding
the following year. Management expects that substantially all the development
of
the estimate of medical claims liabilities as of December 31, 2006 will be
known
by the end of 2007.
Actuarial
Standards of Practice generally require that medical claims liabilities
estimates be adequate to cover obligations under moderately adverse conditions.
Moderately adverse conditions are situations in which the actual claims are
expected to be higher than the otherwise estimated value of such claims at
the
time of estimate. In many situations, the claims amounts ultimately settled
will
be different than the estimate that satisfies the Actuarial Standards of
Practice.
Changes
in estimates of incurred claims for prior years were attributable to favorable
development, including changes in medical utilization and cost trends. These
changes in medical utilization and cost trends can be attributable to our
“margin protection” programs and changes in our member demographics. For all of
our membership, we routinely implement new or modified policies that we refer
to
as our “margin protection” programs that assist with the control of medical
utilization and cost trends such as emergency room policies. While we try to
predict the savings from these programs, actual savings have proven to be better
than anticipated, which has contributed to the favorable development of our
medical claims liabilities.
Intangible
Assets
We
have
made several acquisitions since 2004 that have resulted in our recording of
intangible assets. These intangible assets primarily consist of customer
relationships, purchased contract rights, provider contracts, trade names and
goodwill. At December 31, 2006 we had $135.9 million of goodwill and $16.2
million of other intangible assets. Purchased contract rights are amortized
using the straight-line method over periods ranging from five to ten years.
Provider contracts are amortized using the straight-line method over periods
ranging from five to ten years. Customer relationships are amortized using
the
straight-line method over periods ranging from five to seven years. Trade names
are amortized using the straight-line method over 20 years.
Our
management evaluates whether events or circumstances have occurred that may
affect the estimated useful life or the recoverability of the remaining balance
of goodwill and other identifiable intangible assets. If the events or
circumstances indicate that the remaining balance of the intangible asset or
goodwill may be permanently impaired, the potential impairment will be measured
based upon the difference between the carrying amount of the intangible asset
or
goodwill and the fair value of such asset determined using the estimated future
discounted cash flows generated from the use and ultimate disposition of the
respective acquired entity. Our management must make assumptions and estimates,
such as the discount factor, future utility and other internal and external
factors, in determining the estimated fair values. While we believe these
assumptions and estimates are appropriate, other assumptions and estimates
could
be applied and might produce significantly different results.
Goodwill
is reviewed every year during the fourth quarter for impairment. In addition,
we
will perform an impairment analysis of other intangible assets based on other
factors. These factors would include significant changes in membership, state
funding, medical contracts and provider networks and contracts. In August 2006,
FirstGuard Health Plan Kansas, Inc., or FirstGuard Kansas, our wholly owned
subsidiary, received notification from the Kansas Health policy Authority that
its Medicaid contract scheduled to terminate December 31, 2006 would not be
renewed. 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.
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
total non-cash intangible asset impairment charge of $87.1 million, consisting
of $81.1 million of goodwill and $6.0 million of other identifiable intangible
assets, is recorded in the consolidated statement of operations for the year
ended December 31, 2006.
FORWARD-LOOKING
STATEMENTS
All
statements, other than statements of current or historical fact, contained
in
this filing are forward-looking statements. We have attempted to identify these
statements by terminology including “believe,” “anticipate,” “plan,” “expect,”
“estimate,” “intend,” “seek,” “target,” “goal,” “may,” “will,” “should,” “can,”
“continue” and other similar words or expressions in connection with, among
other things, any discussion of future operating or financial performance.
In
particular, these statements include statements about our market opportunity,
our growth strategy, competition, expected activities and future acquisitions,
investments and the adequacy of our available cash resources. These statements
may be found in the various sections of this filing, including those entitled
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” Part I, Item 1A. “Risk Factors,” and Part I, Item 3 “Legal
Proceedings.” Readers are cautioned that matters subject to forward-looking
statements involve known and unknown risks and uncertainties, including
economic, regulatory, competitive and other factors that may cause our or our
industry’s actual results, levels of activity, performance or achievements to be
materially different from any future results, levels of activity, performance
or
achievements expressed or implied by these forward-looking statements. These
statements are not guarantees of future performance and are subject to risks,
uncertainties and assumptions.
All
forward-looking statements included in this filing are based on information
available to us on the date of this filing. Actual results may differ from
projections or estimates due to a variety of important factors, including:
· |
our
ability to accurately predict and effectively manage health benefits
and
other operating expenses;
|
· |
changes
in healthcare practices;
|
· |
changes
in federal or state laws or
regulations;
|
· |
provider
contract changes;
|
· |
reduction
in provider payments by governmental
payors;
|
· |
disasters
and numerous other factors affecting the delivery and cost of
healthcare;
|
· |
the
expiration, cancellation or suspension of our Medicaid managed care
contracts by state governments;
|
· |
availability
of debt and equity financing, on terms that are favorable to us;
and
|
· |
general
economic and market conditions.
|
Item
1A
“Risk Factors” of Part I of this filing contains a further discussion of these
and other additional important factors that could cause actual results to differ
from expectations. We disclaim any current intention or obligation to update
or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise. Due to these important factors and risks, we cannot
give assurances with respect to our future premium levels or our ability to
control our future medical costs.
Item
7A. Quantitative
and Qualitative Disclosures About Market Risk
INVESTMENTS
As
of
December 31, 2006, we had short-term investments of $66.9 million and long-term
investments of $170.7 million, including restricted deposits of $25.3 million.
The short-term investments consist of highly liquid securities with maturities
between three and 12 months. The long-term investments consist of municipal,
corporate and U.S. Agency bonds, life insurance contracts 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 December 31, 2006, the fair value of our fixed income investments
would
decrease by approximately $2.3 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 our margin
protection program and contracts with independent providers of healthcare
services. Through these contracted care providers, our health plans emphasize
preventive healthcare and appropriate use of specialty and hospital services.
While
we
currently believe our strategies to mitigate healthcare cost inflation will
continue to be successful, competitive pressures, new healthcare and
pharmaceutical product introductions, demands from healthcare providers and
customers, applicable regulations or other factors may affect our ability to
control the impact of healthcare cost increases.
Item
8. Financial
Statements and Supplementary Data
Our
consolidated financial statements and related notes required by this item are
set forth on the pages indicated in Item 15.
QUARTERLY
SELECTED FINANCIAL INFORMATION
(In
thousands, except share data and membership data)
(Unaudited)
|
|
For
the Quarter Ended
|
|
|
March
31,
2006
(1)
|
|
June
30,
2006
(2)
|
|
September
30,
2006
(3)
|
|
December
31,
2006
(4)
|
Total
revenues
|
|
$
|
455,078
|
|
$
|
495,293
|
|
$
|
631,249
|
|
$
|
697,400
|
Earnings
(loss) from operations
|
|
|
12,596
|
|
|
6,306
|
|
|
(66,556
|
)
|
|
18,746
|
Earnings
(loss) before income taxes
|
|
|
14,138
|
|
|
7,741
|
|
|
(65,013
|
)
|
|
21,482
|
Net
earnings (loss)
|
|
$
|
8,766
|
|
$
|
4,965
|
|
$
|
(71,193
|
)
|
$
|
13,833
|
Per
share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per common share
|
|
$
|
0.20
|
|
$
|
0.12
|
|
$
|
(1.65
|
)
|
$
|
0.32
|
Diluted
earnings (loss) per common share
|
|
$
|
0.20
|
|
$
|
0.11
|
|
$
|
(1.65
|
)
|
$
|
0.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
end membership
|
|
|
874,800
|
|
|
1,101,500
|
|
|
1,169,700
|
|
|
1,262,200
|
|
(1)
|
Includes
$4.7 million pre-tax implementation expenses related to
Georgia
|
|
(2)
|
Includes
$9.7 million pre-tax adverse medical cost development in estimated
medical
claims liabilities from the first quarter of
2006.
|
|
(3)
|
Includes
$87.1 million pre-tax, non-cash impairment charge related to the
FirstGuard reporting unit.
|
|
(4)
|
Includes
$7.4 million pre-tax exit costs related to the FirstGuard reporting
unit.
|
|
|
For
the Quarter Ended
|
|
|
March
31,
2005
|
|
June
30,
2005
|
|
September
30,
2005
(1)
|
|
December
31,
2005
(2)
|
Total
revenues
|
|
$
|
332,376
|
|
$
|
349,628
|
|
$
|
400,642
|
|
$
|
423,218
|
Earnings
from operations
|
|
|
21,318
|
|
|
22,320
|
|
|
15,140
|
|
|
20,413
|
Earnings
before income taxes
|
|
|
22,876
|
|
|
24,209
|
|
|
16,768
|
|
|
22,003
|
Net
earnings
|
|
$
|
14,411
|
|
$
|
15,249
|
|
$
|
12,106
|
|
$
|
13,866
|
Per
share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per common share
|
|
$
|
0.35
|
|
$
|
0.36
|
|
$
|
0.28
|
|
$
|
0.32
|
Diluted
earnings per common share
|
|
$
|
0.32
|
|
$
|
0.34
|
|
$
|
0.27
|
|
$
|
0.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
end membership
|
|
|
777,300
|
|
|
825,400
|
|
|
847,700
|
|
|
871,900
|
|
(1)
|
Includes
$4.5 million pre-tax expense related to the settlement with Aurora
Health
Care, Inc. and $2.5 million pre-tax implementation expenses related
to
Georgia.
|
|
(2)
|
Includes
$2.9 million pre-tax implementation expenses related to
Georgia.
|
Item
9. Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
None.
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 December 31, 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 SEC's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by
a
company in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the company’s management, including its
principal executive and principal financial officers, as appropriate to allow
timely decisions regarding required disclosure. Management recognizes that
any
controls and procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving their objectives and management
necessarily applies its judgment in evaluating the cost-benefit relationship
of
possible controls and procedures. Based on the evaluation of our disclosure
controls and procedures as of December 31, 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.
Management’s
Report on Internal Control Over Financial Reporting
- Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rules
13a-15(f) and 15d-15(f). Under the supervision and with the participation of
our
management, including our principal executive officer and principal financial
officer, we conducted an evaluation of the effectiveness of our internal control
over financial reporting based on the framework in
Internal Control
- Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission. Based
on our evaluation under the framework in Internal
Control - Integrated Framework,
our
management concluded that our internal control over financial reporting was
effective at the reasonable assurance level as of December 31, 2006. Our
management’s assessment of the effectiveness of our internal control over
financial reporting as of December 31, 2006 has been audited by KPMG LLP, an
independent registered public accounting firm, as stated in their report which
is included herein.
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 December 31, 2006 that has materially affected, or is reasonably likely
to
materially affect, our internal control over financial reporting.
Report
of Independent Registered Public Accounting Firm
The
Board
of Directors and Stockholders
Centene
Corporation:
We
have
audited management's assessment, included in the accompanying Management’s
Report on Internal Control over Financial Reporting,
that
Centene Corporation (the Company) maintained effective internal control over
financial reporting as of December 31, 2006, based on the criteria established
in
Internal Control—Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). The
Company's management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion
on
management's assessment and an opinion on the effectiveness of the Company’s
internal control over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control
over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing
such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company's internal control over financial reporting is a process designed
to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control
over
financial reporting includes those policies and procedures that (1) pertain
to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary
to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company
are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention or
timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may
become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In
our
opinion, management's assessment that Centene Corporation maintained effective
internal control over financial reporting as of December 31, 2006, is fairly
stated, in all material respects, based on the criteria established in
Internal
Control—Integrated Framework issued
by
COSO. Also, in our opinion, Centene Corporation maintained, in all material
respects, effective internal control over financial reporting as of December
31,
2006, based on the criteria
established in
Internal Control—Integrated Framework issued
by
COSO.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Centene
Corporation and subsidiaries as of December 31, 2006 and 2005, and the related
consolidated statements of operations, stockholders’ equity, and cash flows for
the years then ended, and our report dated February 22, 2007,
expressed
an unqualified opinion on those consolidated financial statements.
/s/
KPMG
LLP
St.
Louis, Missouri
February
22, 2007
None.
PART
III
Item
10. Directors,
Executive Officers of the Registrant and
Corporate Governance
(a)
Directors of the Registrant
Information
concerning our directors will appear in our Proxy Statement for our 2007 annual
meeting of stockholders under “Election of Directors.” This portion of the Proxy
Statement is incorporated herein by reference.
(b)
Executive Officers of the Registrant
Pursuant
to General Instruction G(3) to Form 10-K and Instruction 3 to Item 401(b) of
Regulation S-K, information regarding our executive officers is provided in
Item
1 of Part I of this Annual Report on Form 10-K under the caption “Executive
Officers.”
(c)
Corporate Governance
Information
concerning executive compensation will appear in our Proxy Statement for our
2007 annual meeting of stockholders under “Information About Executive
Compensation.” This portion of the Proxy Statement is incorporated herein by
reference. The
sections entitled “Compensation Committee Report” in our 2007 Proxy Statement
are not incorporated herein by reference.
Item
12. Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Information
concerning the security ownership of certain beneficial owners and management
and our equity compensation plans will appear in our Proxy Statement for our
2007 annual meeting of stockholders under “Information About Stock Ownership”
and “Equity Compensation Plan Information.” These portions of the Proxy
Statement are incorporated herein by reference.
Item
13.Certain
Relationships and Related Transactions,
and
Director Independence
Information
concerning certain relationships and related transactions will appear in our
Proxy Statement for our 2007 annual meeting of stockholders under “Related Party
Transactions.” This portion of our Proxy Statement is incorporated herein by
reference.
Item
14. Principal
Accountant Fees and Services
Information
concerning principal accountant fees and services will appear in our Proxy
Statement for our 2007 annual meeting of stockholders under “Independent Auditor
Fees.” This portion of our Proxy Statement is incorporated herein by reference.
PART
IV
Item
15. Exhibits
and Financial Statement Schedules
(a)
The
following documents are filed as part of this report:
|
|
Page
|
1.
Consolidated Financial Statements
|
|
|
|
|
|
|
42
|
|
|
44
|
|
|
45
|
|
|
46
|
|
|
47
|
|
|
48
|
|
|
2.
Financial Statement Schedules
|
|
|
|
|
|
|
62
|
|
|
3.
Exhibits
|
|
|
|
|
|
The
exhibits listed in the accompanying Exhibit Index are filed or
incorporated by reference as part of this filing.
|
|
|
The
Board
of Directors and Stockholders
Centene
Corporation:
We
have
audited the accompanying consolidated balance sheets of Centene Corporation
and
subsidiaries as of December 31, 2006 and 2005, and the related consolidated
statements of operations, stockholders’ equity, and cash flows for the years
then ended. In
connection with our audits of the consolidated financial statements, we also
have audited the accompanying financial statement schedule as of and for
the
years ended December 31, 2006 and 2005. These consolidated financial statements
and financial statement schedule are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated
financial statements and financial statement schedule based on our
audits.
We
conducted our audits in accordance with the standards
of
the
Public Company Accounting Oversight Board (United
States).
Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In
our
opinion, the consolidated financial statements referred to above present
fairly,
in all material respects, the financial position of Centene Corporation and
subsidiaries as of December 31, 2006 and 2005, and the results of their
operations and their cash flows for the years then ended in conformity with
U.S.
generally
accepted accounting
principles.
Also
in
our opinion, the related financial statement schedule as of and for the years
ended December 31, 2006 and 2005, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
As
discussed in Note 2 to the consolidated financial statements, during 2006,
the
Company adopted Statement of Financial Accounting Standard No. 123 (revised
2004), “Share Based Payments.”
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of internal control over
financial reporting of Centene Corporation as of December 31, 2006, based
on the
criteria
established in
Internal Control—Integrated Framework issued
by
the Committee of Sponsoring Organizations of the Treadway Commission
(COSO),
and our
report dated February 22, 2007 expressed an unqualified opinion on management’s
assessment of, and the effective operation of, internal control over financial
reporting.
/s/
KPMG
LLP
St.
Louis, Missouri
February
22, 2007
Report
of Independent Registered Public Accounting Firm
To
the
Board of Directors and Stockholders of Centene Corporation:
In
our
opinion, the accompanying consolidated statements of earnings, stockholders'
equity and cash flows for the year ended December 31, 2004 present fairly,
in
all material respects, the results of operations and cash flows of Centene
Corporation and its subsidiaries for the year ended December 31, 2004, in
conformity with accounting principles generally accepted in the United States
of
America. In addition, in our opinion, the financial statement schedule for
the
year ended December 31, 2004 presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audit. We conducted our audit of
these
statements in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
/s/
PricewaterhouseCoopers LLP
St.
Louis, Missouri
February
24, 2005
CONSOLIDATED
BALANCE SHEETS
(In
thousands, except share data)
|
|
December
31,
|
|
|
2006
|
|
2005
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
271,047
|
$
|
147,358
|
|
Premium
and related receivables, net of allowances of $155 and $343,
respectively
|
|
|
91,664
|
|
44,108
|
|
Short-term
investments, at fair value (amortized cost $67,199 and $56,863,
respectively)
|
|
|
66,921
|
|
56,700
|
|
Other
current assets
|
|
|
22,189
|
|
24,439
|
|
Total
current assets
|
|
|
451,821
|
|
272,605
|
|
Long-term
investments, at fair value (amortized cost $146,980 and $126,039,
respectively)
|
|
|
145,417
|
|
123,661
|
|
Restricted
deposits, at fair value (amortized cost $25,422 and $22,821,
respectively)
|
|
|
25,265
|
|
22,555
|
|
Property,
software and equipment, net
|
|
|
110,688
|
|
67,199
|
|
Goodwill
|
|
|
135,877
|
|
157,278
|
|
Other
intangible assets, net
|
|
|
16,202
|
|
17,368
|
|
Other
assets
|
|
|
9,710
|
|
7,364
|
|
Total
assets
|
|
$
|
894,980
|
$
|
668,030
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
Medical
claims liabilities
|
|
$
|
280,441
|
$
|
170,514
|
|
Accounts
payable and accrued expenses
|
|
|
72,723
|
|
29,790
|
|
Unearned
revenue
|
|
|
33,816
|
|
13,648
|
|
Current
portion of long-term debt
|
|
|
971
|
|
699
|
|
Total
current liabilities
|
|
|
387,951
|
|
214,651
|
|
Long-term
debt
|
|
|
174,646
|
|
92,448
|
|
Other
liabilities
|
|
|
5,960
|
|
8,883
|
|
Total
liabilities
|
|
|
568,557
|
|
315,982
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
Common
stock, $.001 par value; authorized 100,000,000 shares; issued and
outstanding 43,369,918 and 42,988,230 shares, respectively
|
|
|
44
|
|
43
|
|
Additional
paid-in capital
|
|
|
209,340
|
|
191,840
|
|
Accumulated
other comprehensive income:
|
|
|
|
|
|
|
Unrealized
loss on investments, net of tax
|
|
|
(1,251
|
)
|
(1,754
|
)
|
Retained
earnings
|
|
|
118,290
|
|
161,919
|
|
Total
stockholders’ equity
|
|
|
326,423
|
|
352,048
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
894,980
|
$
|
668,030
|
|
See
notes
to consolidated financial statements.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(In
thousands, except share data)
|
|
Year
Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium
|
|
$
|
2,199,439
|
|
|
$
|
1,491,899
|
|
|
$
|
991,673
|
|
Service
|
|
|
79,581
|
|
|
|
13,965
|
|
|
|
9,267
|
|
Total
revenues
|
|
|
2,279,020
|
|
|
|
1,505,864
|
|
|
|
1,000,940
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical
costs
|
|
|
1,819,811
|
|
|
|
1,226,909
|
|
|
|
800,476
|
|
Cost
of services
|
|
|
60,735
|
|
|
|
5,851
|
|
|
|
8,065
|
|
General
and administrative expenses
|
|
|
346,284
|
|
|
|
193,913
|
|
|
|
127,863
|
|
Impairment
loss
|
|
|
81,098
|
|
|
|
—
|
|
|
|
—
|
|
Total
operating expenses
|
|
|
2,307,928
|
|
|
|
1,426,673
|
|
|
|
936,404
|
|
Earnings
(loss) from operations
|
|
|
(28,908
|
)
|
|
|
79,191
|
|
|
|
64,536
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
and other income
|
|
|
17,892
|
|
|
|
10,655
|
|
|
|
6,431
|
|
Interest
expense
|
|
|
(10,636
|
)
|
|
|
(3,990
|
)
|
|
|
(680
|
)
|
Earnings
(loss) before income taxes
|
|
|
(21,652
|
)
|
|
|
85,856
|
|
|
|
70,287
|
|
Income
tax expense
|
|
|
21,977
|
|
|
|
30,224
|
|
|
|
25,975
|
|
Net
earnings (loss)
|
|
$
|
(43,629
|
)
|
|
$
|
55,632
|
|
|
$
|
44,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per common share
|
|
$
|
(1.01
|
)
|
|
$
|
1.31
|
|
|
$
|
1.09
|
|
Diluted
earnings (loss) per common share
|
|
$
|
(1.01
|
)
|
|
$
|
1.24
|
|
|
$
|
1.02
|
|
Weighted
average number of shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
43,160,860
|
|
|
|
42,312,522
|
|
|
|
40,820,909
|
|
Diluted
|
|
|
43,160,860
|
|
|
|
45,027,633
|
|
|
|
43,616,445
|
|
See
notes
to consolidated financial statements.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
(In
thousands, except share data)
|
|
Common
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$.001
Par
Value
Shares
|
|
|
Amt
|
|
|
Additional
Paid-in
Capital
|
|
|
Unrealized
Gain
(Loss)
on
Investments
|
|
|
Retained
Earnings
|
|
|
Total
|
|
Balance,
December 31, 2003
|
|
40,263,848
|
|
|
$
|
40
|
|
|
$
|
157,360
|
|
|
$
|
740
|
|
|
$
|
61,975
|
|
|
$
|
220,115
|
|
Net
earnings
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
44,312
|
|
|
|
44,312
|
|
Change
in unrealized investment gains, net of $(703) tax
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,147
|
)
|
|
|
—
|
|
|
|
(1,147
|
)
|
Comprehensive
earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,165
|
|
Common
stock issued for stock options and employee stock purchase
plan
|
|
1,052,274
|
|
|
|
1
|
|
|
|
4,065
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,066
|
|
Stock
compensation expense
|
|
—
|
|
|
|
—
|
|
|
|
650
|
|
|
|
—
|
|
|
|
—
|
|
|
|
650
|
|
Tax
benefits from stock options
|
|
—
|
|
|
|
—
|
|
|
|
3,316
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,316
|
|
Balance,
December 31, 2004
|
|
41,316,122
|
|
|
$
|
41
|
|
|
$
|
165,391
|
|
|
$
|
(407
|
)
|
|
$
|
106,287
|
|
|
$
|
271,312
|
|
Net
earnings
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
55,632
|
|
|
|
55,632
|
|
Change
in unrealized investment losses, net of $(801) tax
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,347
|
)
|
|
|
—
|
|
|
|
(1,347
|
)
|
Comprehensive
earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54,285
|
|
Common
stock issued for acquisitions
|
|
318,735
|
|
|
|
1
|
|
|
|
8,990
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8,991
|
|
Common
stock issued for stock options and employee stock purchase
plan
|
|
1,353,373
|
|
|
|
1
|
|
|
|
6,016
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,017
|
|
Stock
compensation expense
|
|
—
|
|
|
|
—
|
|
|
|
4,974
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,974
|
|
Tax
benefits from stock options
|
|
—
|
|
|
|
—
|
|
|
|
6,469
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,469
|
|
Balance,
December 31, 2005
|
|
42,988,230
|
|
|
$
|
43
|
|
|
$
|
191,840
|
|
|
$
|
(1,754
|
)
|
|
$
|
161,919
|
|
|
$
|
352,048
|
|
Net
loss
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(43,629
|
)
|
|
|
(43,629
|
)
|
Change
in unrealized investment losses, net of $306 tax
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
503
|
|
|
|
—
|
|
|
|
503
|
|
Comprehensive
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(43,126
|
)
|
Common
stock issued for stock options and employee stock purchase
plan
|
|
779,088
|
|
|
|
1
|
|
|
|
7,497
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,498
|
|
Common
stock repurchases
|
|
(397,400
|
)
|
|
|
—
|
|
|
|
(7,944
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(7,944
|
)
|
Stock
compensation expense
|
|
—
|
|
|
|
—
|
|
|
|
14,904
|
|
|
|
—
|
|
|
|
—
|
|
|
|
14,904
|
|
Tax
benefits from stock options
|
|
—
|
|
|
|
—
|
|
|
|
3,043
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,043
|
|
Balance,
December 31, 2006
|
|
43,369,918
|
|
|
$
|
44
|
|
|
$
|
209,340
|
|
|
$
|
(1,251
|
)
|
|
$
|
118,290
|
|
|
$
|
326,423
|
|
See
notes
to consolidated financial statements.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands)
|
|
Year
Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings (loss)
|
|
$
|
(43,629
|
)
|
|
$
|
55,632
|
|
|
$
|
44,312
|
|
Adjustments
to reconcile net earnings (loss) to net cash provided by operating
activities—
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
20,600
|
|
|
|
13,069
|
|
|
|
10,014
|
|
Excess
tax benefits from stock compensation
|
|
|
—
|
|
|
|
6,469
|
|
|
|
3,316
|
|
Stock
compensation expense
|
|
|
14,904
|
|
|
|
4,974
|
|
|
|
650
|
|
Impairment
loss
|
|
|
88,268
|
|
|
|
—
|
|
|
|
—
|
|
Deferred
income taxes
|
|
|
(6,692
|
)
|
|
|
1,786
|
|
|
|
(1,638
|
)
|
Changes
in assets and liabilities—
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium
and related receivables
|
|
|
(39,765
|
)
|
|
|
(10,305
|
)
|
|
|
(425
|
)
|
Other
current assets
|
|
|
5,352
|
|
|
|
(6,177
|
)
|
|
|
(786
|
)
|
Other
assets
|
|
|
91
|
|
|
|
(525
|
)
|
|
|
(728
|
)
|
Medical
claims liabilities
|
|
|
108,003
|
|
|
|
4,534
|
|
|
|
34,501
|
|
Unearned
revenue
|
|
|
20,035
|
|
|
|
8,182
|
|
|
|
283
|
|
Accounts
payable and accrued expenses
|
|
|
28,136
|
|
|
|
(4,215
|
)
|
|
|
9,951
|
|
Other
operating activities
|
|
|
(271
|
)
|
|
|
624
|
|
|
|
(45
|
)
|
Net
cash provided by operating activities
|
|
|
195,032
|
|
|
|
74,048
|
|
|
|
99,405
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of property, software and equipment
|
|
|
(50,318
|
)
|
|
|
(26,909
|
)
|
|
|
(25,009
|
)
|
Purchase
of investments
|
|
|
(319,322
|
)
|
|
|
(150,444
|
)
|
|
|
(254,358
|
)
|
Sales
and maturities of investments
|
|
|
286,155
|
|
|
|
176,387
|
|
|
|
243,623
|
|
Acquisitions,
net of cash acquired
|
|
|
(66,772
|
)
|
|
|
(55,485
|
)
|
|
|
(86,739
|
)
|
Net
cash used in investing activities
|
|
|
(150,257
|
)
|
|
|
(56,451
|
)
|
|
|
(122,483
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from exercise of stock options
|
|
|
6,953
|
|
|
|
5,621
|
|
|
|
4,066
|
|
Proceeds
from borrowings
|
|
|
94,359
|
|
|
|
45,000
|
|
|
|
45,860
|
|
Payment
of long-term debt and notes payable
|
|
|
(17,355
|
)
|
|
|
(4,552
|
)
|
|
|
(6,596
|
)
|
Excess
tax benefits from stock compensation
|
|
|
3,043
|
|
|
|
—
|
|
|
|
—
|
|
Common
stock repurchases
|
|
|
(7,833
|
)
|
|
|
—
|
|
|
|
—
|
|
Other
financing activities
|
|
|
(253
|
)
|
|
|
(413
|
)
|
|
|
(493
|
)
|
Net
cash provided by financing activities
|
|
|
78,914
|
|
|
|
45,656
|
|
|
|
42,837
|
|
Net
increase in cash and cash equivalents
|
|
|
123,689
|
|
|
|
63,253
|
|
|
|
19,759
|
|
Cash
and cash equivalents,
beginning of period
|
|
|
147,358
|
|
|
|
84,105
|
|
|
|
64,346
|
|
Cash
and cash equivalents,
end of period
|
|
$
|
271,047
|
|
|
$
|
147,358
|
|
|
$
|
84,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
10,680
|
|
|
$
|
3,291
|
|
|
$
|
494
|
|
Income
taxes paid
|
|
$
|
16,418
|
|
|
$
|
31,287
|
|
|
$
|
20,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
schedule of non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued for acquisitions
|
|
$
|
—
|
|
|
$
|
8,991
|
|
|
$
|
—
|
|
Property
acquired under capital leases
|
|
$
|
366
|
|
|
$
|
5,026
|
|
|
$
|
—
|
|
See
notes
to consolidated financial statements.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in thousands, except share data)
1.
Organization and Operations
Centene
Corporation, or Centene or the Company, is a multi-line healthcare enterprise
operating primarily in two segments: Medicaid Managed Care and Specialty
Services. Centene’s Medicaid Managed Care segment provides Medicaid and
Medicaid-related health plan coverage to individuals through government
subsidized programs, including Medicaid, the State Children’s Health Insurance
Program, or SCHIP, and Supplemental Security Income, or SSI. The Company’s
Specialty Services segment provides specialty services, including behavioral
health, disease management, long-term care programs, managed vision, nurse
triage, pharmacy benefits management and treatment compliance, to state
programs, healthcare organizations, and other commercial organizations, as
well
as to our own subsidiaries on market-based terms.
2.
Summary of Significant Accounting Policies
Principles
of Consolidation
The
accompanying consolidated financial statements include the accounts of Centene
Corporation and all majority owned subsidiaries. All material intercompany
balances and transactions have been eliminated.
Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash
and Cash Equivalents
Investments
with original maturities of three months or less are considered to be cash
equivalents. Cash equivalents consist of commercial paper, money market funds,
repurchase agreements and bank savings accounts.
Investments
Short-term
investments include securities with maturities between three months and one
year. Long-term investments include securities with maturities greater than
one
year.
Short-term
and long-term investments are classified as available for sale and are carried
at fair value based on quoted market prices. Unrealized gains and losses on
investments available for sale are excluded from earnings and reported as a
separate component of stockholders’ equity, net of income tax effects. Premiums
and discounts are amortized or accreted over the life of the related security
using the effective interest method. The Company monitors the difference between
the cost and fair value of investments. Investments that experience a decline
in
value that is judged to be other than temporary are written down to fair value
and a realized loss is recorded in investment and other income. To calculate
realized gains and losses on the sale of investments, the Company uses the
specific amortized cost of each investment sold. Realized gains and losses
are
recorded in investment and other income.
Restricted
Deposits
Restricted
deposits consist of investments required by various state statutes to be
deposited or pledged to state agencies. These investments are classified as
long-term, regardless of the contractual maturity date, due to the nature of
the
states’ requirements. The Company is required to annually adjust the amount of
the deposit pledged to certain states.
Property,
Software and Equipment
Property,
software and equipment is stated at cost less accumulated depreciation.
Capitalized software includes certain costs incurred in the development of
internal-use software, including external direct costs of materials and services
and payroll costs of employees devoted to specific software development.
Depreciation is calculated principally by the straight-line method over
estimated useful lives ranging from 40 years for buildings, two to seven years
for software and computer equipment and five to seven years for furniture and
equipment. Leasehold improvements are depreciated using the straight-line method
over the shorter of the expected useful life or the remaining term of the lease
ranging between one and ten years.
Intangible
Assets
Intangible
assets represent assets acquired in purchase transactions and consist primarily
of customer relationships, purchased contract rights, provider contracts, trade
names and goodwill. Purchased contract rights are amortized using the
straight-line method over periods ranging from five to ten years. Provider
contracts are amortized using the straight-line method over periods ranging
from
five to ten years. Customer relationships are amortized using the straight-line
method over periods ranging from five to seven years. Trade names are amortized
using the straight line method over 20 years.
Goodwill
is reviewed annually during the fourth quarter for impairment. In addition,
the
Company performs an impairment analysis of other intangible assets based on
the
occurrence of other factors. Such factors include, but are not limited to,
significant changes in membership, state funding, medical contracts and provider
networks and contracts. An impairment loss is recognized if the carrying value
of intangible assets exceeds the implied fair value.
Medical
Claims Liabilities
Medical
services costs include claims paid, claims reported but not yet paid, or
inventory, estimates for claims incurred but not yet received, or IBNR, and
estimates for the costs necessary to process unpaid claims.
The
estimates of medical claims liabilities are developed using standard actuarial
methods based upon historical data for payment patterns, cost trends, product
mix, seasonality, utilization of healthcare services and other relevant factors
including product changes. These estimates are continually reviewed and
adjustments, if necessary, are reflected in the period known. Management did
not
change actuarial methods during the years presented. Management believes the
amount of medical claims payable is reasonable and adequate to cover the
Company’s liability for unpaid claims as of December 31, 2006; however, actual
claim payments may differ from established estimates.
Revenue
Recognition
The
Company’s Medicaid Managed Care segment generates revenues primarily from
premiums received from the states in which it operates health plans. The company
receives a fixed premium per member per month pursuant to our state contracts.
The company generally receives premium payments during the month it provides
services and recognizes premium revenue during the period in which it is
obligated to provide services to its members. Some states enact premium taxes
or
similar assessments, collectively premium taxes, and these taxes are recorded
as
General and Administrative expenses. 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.
The
Company’s Specialty Services segment generates revenues under contracts with
state programs, healthcare organizations and other commercial organizations,
as
well as from our own subsidiaries on market-based terms. Revenues are
recognized when the related services are provided or as ratably earned over
the
covered period of service.
Premium
and services revenues collected in advance are recorded as unearned revenue.
For
performance-based contracts the company does not recognize revenue subject
to
refund until data is sufficient to measure performance. Premiums and service
revenues due to the Company are recorded as premium and related receivables
and
are recorded net of an allowance based on historical trends and management’s
judgment on the collectibility of these accounts. As the Company generally
receives 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 the financial condition or results of
operations. Activity in the allowance for uncollectible accounts for the years
ended December 31 is summarized below:
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Allowances,
beginning of year
|
|
$
|
343
|
|
|
$
|
462
|
|
|
$
|
607
|
|
Amounts
charged to expense
|
|
|
512
|
|
|
|
80
|
|
|
|
407
|
|
Write-offs
of uncollectible receivables
|
|
|
(700
|
)
|
|
|
(199
|
)
|
|
|
(552
|
)
|
Allowances,
end of year
|
|
$
|
155
|
|
|
$
|
343
|
|
|
$
|
462
|
|
Significant
Customers
Centene
receives the majority of its revenues under contracts or subcontracts with
state
Medicaid managed care programs. The contracts, which expire on various dates
between June 30, 2007 and December 31, 2011 are expected to be renewed.
Contracts with the states of Georgia, Indiana, Kansas, Texas and Wisconsin
each
accounted for 15%, 15%, 10%, 17% and 16%, respectively, of the Company’s
revenues for the year ended December 31, 2006.
Reinsurance
Centene
has purchased reinsurance from third parties to cover eligible healthcare
services. The current reinsurance program covers 90% of inpatient healthcare
expenses in excess of annual deductibles of $300 to $500 per member, up to
an
annual maximum of $2,000. Centene’s Medicaid Managed Care subsidiaries are
responsible for inpatient charges in excess of an average daily per diem. In
addition, Bridgeway
participates in a risk- sharing program as part of its contract with the State
of Arizona for the reimbursement of certain contract service costs beyond a
monetary threshold.
Reinsurance
recoveries were $3,674, $4,014, and $3,730, in 2006, 2005, and 2004,
respectively. Reinsurance expenses were approximately $4,842, $4,105, and $6,724
in 2006, 2005, and 2004, respectively. Reinsurance recoveries, net of expenses,
are included in medical costs.
Other
Income (Expense)
Other
income (expense) consists principally of investment income and interest expense.
Investment income is derived from the Company’s cash, cash equivalents,
restricted deposits and investments.
Interest
expense relates to borrowings under our credit facilities, mortgage interest,
interest on capital leases and credit facility fees.
Income
Taxes
Deferred
tax assets and liabilities are recorded for the future tax consequences
attributable to differences between the financial statement carrying amounts
of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply
to
taxable income in the years in which those temporary differences are expected
to
be recovered or settled. The effect on deferred tax assets and liabilities
of a
change in tax rates is recognized in income in the period that includes the
enactment date of the tax rate change.
Valuation
allowances are provided when it is considered more likely than not that deferred
tax assets will not be realized. In determining if a deductible temporary
difference or net operating loss can be realized, the Company considers future
reversals of existing taxable temporary differences, future taxable income,
taxable income in prior carryback periods and tax planning
strategies.
Stock
Based Compensation
The
Company adopted FASB Statement of Financial Accounting Standards No. 123
(revised 2004), “Share Based Payment,” or 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 fair value of the Company’s
employee share options and similar instruments are estimated using the
Black-Scholes option-pricing model. That cost is recognized over the period
during which an employee is required to provide service in exchange for the
award. The Company’s results for the year ended December 31, 2006
reflected the following changes as a result of adopting SFAS 123R:
|
|
|
Year
Ended
December
31, 2006
|
|
Earnings
before income taxes
|
|
|
$
|
(9,926
|
)
|
Net
earnings
|
|
|
$
|
(7,628
|
)
|
Basic
earnings per common share
|
|
|
$
|
(0.18
|
)
|
Diluted
earnings per common share
|
|
|
$
|
(0.18
|
)
|
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 $3,043 for the year ended December 31, 2006.
For
the
years ended December 31, 2005 and 2004, 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.
|
|
2005
|
|
2004
|
|
Net
earnings
|
|
$
|
55,632
|
|
$
|
44,312
|
|
Stock-based
employee compensation expense included in net earnings, net of
related tax effects
|
|
|
3,084
|
|
|
403
|
|
Stock-based
employee compensation expense determined under fair value based method,
net of related tax effects
|
|
|
(11,988
|
)
|
|
(3,893
|
)
|
Pro
forma net earnings
|
|
$
|
46,728
|
|
$
|
40,822
|
|
|
|
|
|
|
|
|
|
Basic
earnings per common share:
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
1.31
|
|
$
|
1.09
|
|
Pro
forma
|
|
|
1.10
|
|
|
1.00
|
|
Diluted
earnings per common share:
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
1.24
|
|
$
|
1.02
|
|
Pro
forma
|
|
|
1.05
|
|
|
0.94
|
|
In
October 2005, the Compensation Committee approved the immediate and full
acceleration of vesting of 260,000 "out-of-the-money" stock options to certain
employees. These employees did not include any of the Company’s executive
officers or other employees at the Vice President level or above. Each stock
option issued as a part of these grants has an exercise price greater than
the
closing price per share on the date of the Compensation Committee’s action. The
purpose of the acceleration was to enable the Company to avoid recognizing
compensation expense associated with these options in future periods in our
consolidated statements of operations, in contemplation of the implementation
of
SFAS 123R. The pre-tax charge avoided totals approximately $3.0 million which
would have been recognized over the years 2006, 2007, 2008 and 2009. This amount
is reflected in the pro forma disclosures included above. The options that
have
been accelerated had an exercise price in excess of the market value of our
common stock at the time of acceleration. Accordingly, the Compensation
Committee determined that the expense savings outweighs the objective of
incentive compensation and retention.
Additional
information regarding the stock option plans is included in Note 13.
Reclassifications
Certain
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.
Recent
Accounting Pronouncements
In
July
2006, the Financial Accounting Standards Board, or FASB, issued Interpretation
48, or FIN 48, “Accounting for Uncertainty in Income Taxes,” an interpretation
of FASB Statement No. 109, “Accounting for Income Taxes.” FIN 48 clarifies
whether or not to recognize assets or liabilities for tax positions taken that
may be challenged by the taxing authority. The adoption of FIN 48 on January
1,
2007 is not expected to have a material effect on the Company’s financial
condition or results of operations.
In
June
2006, the FASB ratified the consensus reached on Emerging Issues Task Force,
or
EITF, Issue No. 06-3, “How Sales Taxes Collected from Customers and
Remitted to Governmental Authorities Should Be Presented in the Income Statement
(That is, Gross Versus Net Presentation)”, or EITF 06-3. The EITF reached
a consensus that the presentation of taxes on either a gross or net basis is
an
accounting policy decision. Premium taxes and similar assessments are within
the
scope of EITF 06-3. The Company plans to adopt EITF 06-3 effective January
1,
2007 and will report premium revenues net of premium taxes and similar
assessments. The adoption of EITF 06-3 is expected to result in lower revenue
and general and administrative expenses with no effect on the Company’s net
earnings, statement of financial position or stockholders’ equity. The amount of
premium taxes and similar assessments reported in 2006 was $42,453.
3.
FirstGuard Health Plans
In
August
2006, FirstGuard Health Plan Kansas, Inc., or FirstGuard Kansas, a wholly owned
subsidiary, received notification from the Kansas Health Policy Authority that
its Medicaid contract scheduled to terminate December 31, 2006 would not be
renewed. The Company appealed this decision and initiated litigation in an
attempt to renew this Medicaid contract. These actions were unsuccessful and
the
contract terminated effective December 31, 2006. In 2006, the Company also
evaluated its strategic alternatives for its Missouri subsidiary, FirstGuard
Health Plan, Inc., or FirstGuard Missouri, and decided to divest the business.
The sale of the operating assets of FirstGuard Missouri was completed effective
February 1, 2007.
As
a
result of the notification from the Kansas Health Policy Authority, the Company
conducted an impairment analysis of the identifiable intangible assets and
goodwill of the FirstGuard reporting unit, which encompasses both the FirstGuard
Kansas and FirstGuard Missouri 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 a goodwill impairment of
$81,098 recorded as impairment loss
in
the
consolidated statement of operations. The Company also recorded impairment
charges for identifiable intangible assets of $5,993, and fixed assets of
$1,177
recorded as general and administrative expenses in the consolidated statement
of
operations. The goodwill portion of the impairment is not deductible for
tax
purposes.
The
Company incurred $6,202 of other FirstGuard exit costs in 2006 consisting
primarily of lease termination fees and employee severance costs. At December
31, 2006 the remaining accrual for these costs was $3,027. Our FirstGuard
reporting unit had total revenues of $317,027, $273,662 and $20,247 for the
years ended December 31, 2006, 2005 and 2004, respectively. FirstGuard had
138,900 members (unaudited) at December 31, 2006.
4.
Acquisitions
US
Script
Effective
January 1, 2006, the Company acquired 100% of US Script, Inc., a pharmacy
benefits manager. The Company paid $40,573 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. US Script met its earnings target for the first year of
the
five year period and the company accrued $2,000 of additional purchase price,
which will be paid in 2007. The results of operations for US Script, Inc. are
included in the Specialty Services segment and the consolidated financial
statements since January 1, 2006.
The
purchase price allocation resulted in estimated identifiable intangible assets
of $7,100 and associated deferred tax liabilities of $3,321 and goodwill of
$36,200. The identifiable intangible assets have an estimated useful life of
seven to 20 years. The acquired goodwill is not deductible for income tax
purposes. Pro forma disclosures related to the acquisition have been excluded
as
immaterial.
Other
2006 Acquisitions
The
Company acquired Health Dimensions of Florida, Inc., effective April 1, 2006,
Cardium Health Services Corporation, effective May 9, 2006, MediPlan
Corporation, effective June 1, 2006, and OptiCare Managed Vision, Inc.,
effective July 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. Health Dimensions of Florida, Inc., a provider
of
after hours nurse triage services, Cardium Health Services Corporation, a
chronic disease management provider, and OptiCare Managed Vision, Inc., a
managed vision provider, are included in the Specialty Services segment.
MediPlan Corporation, with Medicaid membership in Ohio, is included in the
Medicaid Managed Care segment. For these acquisitions, goodwill of $18,094
and
$7,150 was allocated to the Specialty Services segment and Medicaid Managed
Care
segment, respectively, of which $6,944 is deductible for income tax purposes.
Pro forma disclosures related to these acquisitions 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
Specialty Services segment and the consolidated financial statements since
July
22, 2005.
The
purchase price allocation resulted in estimated identified intangible assets
of
$1,900 and associated deferred tax liabilities of $997 and goodwill of $28,767.
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.
SummaCare
Effective
May 1, 2005, the Company acquired certain Medicaid-related assets from
SummaCare, Inc. for a purchase price of approximately $30,407. The cost to
acquire the Medicaid-related assets has been allocated to the assets acquired
and liabilities assumed according to estimated fair values. The results of
operations for SummaCare are included in the consolidated financial statements
since May 1, 2005.
The
purchase price allocation resulted in identified intangible assets of $520,
representing purchased contract rights and provider contracts and goodwill
of
$29,887. The identified intangible assets are being amortized over periods
ranging from five to ten years. The acquired goodwill is deductible for
income tax purposes. Pro forma disclosures related to the acquisition have
been
excluded as immaterial.
5.
Short-term and Long-term Investments and Restricted Deposits
Short-term
and long-term investments and restricted deposits available for sale by
investment type at December 31, 2006 consist of the following:
|
|
December
31, 2006
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Market
Value
|
U.S.
Treasury securities and obligations of U.S. government corporations
and
agencies
|
|
$
|
37,441
|
|
$
|
14
|
|
$
|
(374
|
)
|
|
$
|
37,081
|
Corporate
securities
|
|
|
79,665
|
|
|
1
|
|
|
(940
|
)
|
|
|
78,726
|
State
and municipal securities
|
|
|
107,711
|
|
|
6
|
|
|
(706
|
)
|
|
|
107,011
|
Asset
backed securities
|
|
|
2,720
|
|
|
3
|
|
|
(2
|
)
|
|
|
2,721
|
Life
insurance contracts
|
|
|
12,064
|
|
|
—
|
|
|
—
|
|
|
|
12,064
|
Total
|
|
$
|
239,601
|
|
$
|
24
|
|
$
|
(2,022
|
)
|
|
$
|
237,603
|
Short-term
and long-term investments and restricted deposits available for sale by
investment type at December 31, 2005 consist of the following:
|
|
December
31, 2005
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Market
Value
|
U.S.
Treasury securities and obligations of U.S. government corporations
and
agencies
|
|
$
|
38,648
|
|
$
|
32
|
|
$
|
(660
|
)
|
|
$
|
38,020
|
Corporate
securities
|
|
|
98,508
|
|
|
20
|
|
|
(1,368
|
)
|
|
|
97,160
|
State
and municipal securities
|
|
|
58,446
|
|
|
18
|
|
|
(849
|
)
|
|
|
57,615
|
Life
insurance contracts
|
|
|
10,121
|
|
|
—
|
|
|
—
|
|
|
|
10,121
|
Total
|
|
$
|
205,723
|
|
$
|
70
|
|
$
|
(2,877
|
)
|
|
$
|
202,916
|
The
Company monitors investments for other than temporary impairment. Certain
investments have experienced a decline in market value due to changes in market
interest rates. The Company recognized an other than temporary impairment loss
of $31 in 2006 for investments in the FirstGuard Kansas portfolio which the
Company expects to sell prior to recovery. Based on the credit quality of the
Company’s other investments and ability to hold these investments to recovery
(which may be maturity), no other impairment has been recorded for investments.
Investments in a gross unrealized loss position at December 31, 2006 are as
follows:
|
|
|
|
|
Less
Than 12 Months
|
|
12
Months or More
|
|
Total
|
|
|
Amortized
Cost
|
|
Unrealized
Losses
|
|
Market
Value
|
|
Unrealized
Losses
|
|
Market
Value
|
|
Unrealized
Losses
|
|
Market
Value
|
Corporate
|
|
$
|
70,379
|
|
$
|
(11
|
)
|
|
$
|
17,594
|
|
$
|
(932
|
)
|
|
$
|
51,842
|
|
$
|
(943
|
)
|
|
$
|
69,436
|
Government
|
|
|
34,439
|
|
|
(65
|
)
|
|
|
16,326
|
|
|
(309
|
)
|
|
|
17,739
|
|
|
(374
|
)
|
|
|
34,065
|
Municipal
|
|
|
63,281
|
|
|
(46
|
)
|
|
|
25,621
|
|
|
(659
|
)
|
|
|
36,955
|
|
|
(705
|
)
|
|
|
62,576
|
Total
|
|
$
|
168,099
|
|
$
|
(122
|
)
|
|
$
|
59,541
|
|
$
|
(1,900
|
)
|
|
$
|
106,536
|
|
$
|
(2,022
|
)
|
|
$
|
166,077
|
Investments
in a gross unrealized loss position at December 31, 2005 are as
follows:
.
|
|
|
|
|
Less
Than 12 Months
|
|
12
Months or More
|
|
Total
|
|
|
Amortized
Cost
|
|
Unrealized
Losses
|
|
Market
Value
|
|
Unrealized
Losses
|
|
Market
Value
|
|
Unrealized
Losses
|
|
Market
Value
|
Corporate
|
|
$
|
67,549
|
|
$
|
(313
|
)
|
|
$
|
26,151
|
|
$
|
(1,055
|
)
|
|
$
|
40,030
|
|
$
|
(1,368
|
)
|
|
$
|
66,181
|
Government
|
|
|
36,472
|
|
|
(110
|
)
|
|
|
13,309
|
|
|
(549
|
)
|
|
|
22,504
|
|
|
(659
|
)
|
|
|
35,813
|
Municipal
|
|
|
53,343
|
|
|
(196
|
)
|
|
|
27,646
|
|
|
(654
|
)
|
|
|
24,8477
|
|
|
(850
|
)
|
|
|
52,493
|
Total
|
|
$
|
157,364
|
|
$
|
(619
|
)
|
|
$
|
67,106
|
|
$
|
(2,258
|
)
|
|
$
|
87,381
|
|
$
|
(2,877
|
)
|
|
$
|
154,487
|
The
contractual maturities of short-term and long-term investments and restricted
deposits as of December 31, 2006, are as follows:
|
|
Investments
|
|
Restricted
Deposits
|
|
|
Amortized
Cost
|
|
Estimated
Market
Value
|
|
Amortized
Cost
|
|
Estimated
Market
Value
|
One
year or less
|
|
$
|
67,199
|
|
$
|
66,921
|
|
$
|
13,541
|
|
$
|
13,454
|
One
year through five years
|
|
|
98,326
|
|
|
96,786
|
|
|
11,374
|
|
|
11,314
|
Five
years through ten years
|
|
|
14,579
|
|
|
14,556
|
|
|
507
|
|
|
497
|
Greater
than ten years
|
|
|
34,075
|
|
|
34,075
|
|
|
-
|
|
|
-
|
Total
|
|
$
|
214,179
|
|
$
|
212,338
|
|
$
|
25,422
|
|
$
|
25,265
|
The
contractual maturities of short-term and long-term investments and restricted
deposits as of December 31, 2005, are as follows:
|
|
Investments
|
|
Restricted
Deposits
|
|
|
Amortized
Cost
|
|
Estimated
Market
Value
|
|
Amortized
Cost
|
|
Estimated
Market
Value
|
One
year or less
|
|
$
|
56,863
|
|
$
|
56,700
|
|
$
|
16,681
|
|
$
|
16,532
|
One
year through five years
|
|
|
112,623
|
|
|
110,311
|
|
|
5,310
|
|
|
5,177
|
Five
years through ten years
|
|
|
13,416
|
|
|
13,350
|
|
|
830
|
|
|
846
|
Total
|
|
$
|
182,902
|
|
$
|
180,361
|
|
$
|
22,821
|
|
$
|
22,555
|
Actual
maturities may differ from contractual maturities due to call or prepayment
options. Asset backed securities are included in the one year through five
years
category, and life insurance contracts are included in the five years through
ten years category. The Company has the option to redeem at Amortized Cost
all
of the securities included in the Greater than ten years category listed
above.
The
Company recorded realized gains and losses on investments for the years ended
December 31 as follows:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Gross
realized gains
|
$
|
9
|
|
$
|
—
|
|
$
|
861
|
|
Gross
realized losses
|
|
(68
|
)
|
|
(70
|
)
|
|
(723
|
)
|
Net
realized (losses) gains
|
$
|
(59
|
)
|
$
|
(70
|
)
|
$
|
138
|
|
6.
Property, Software and Equipment
Property,
software and equipment consist of the following as of December 31:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
Computer
software
|
|
$
|
44,292
|
|
|
$
|
21,510
|
|
Building
|
|
|
34,671
|
|
|
|
25,376
|
|
Land
|
|
|
20,216
|
|
|
|
11,815
|
|
Computer
hardware
|
|
|
19,580
|
|
|
|
11,717
|
|
Furniture
and office equipment
|
|
|
16,114
|
|
|
|
10,163
|
|
Leasehold
improvements
|
|
|
9,226
|
|
|
|
6,125
|
|
|
|
|
144,099
|
|
|
|
86,706
|
|
Less
accumulated depreciation
|
|
|
(33,411
|
)
|
|
|
(19,507
|
)
|
Property,
software and equipment, net
|
|
$
|
110,688
|
|
|
$
|
67,199
|
|
Depreciation
expense for the years ended December 31, 2006, 2005 and 2004 was $16,019, $8,134
and $5,149, respectively.
7.
Intangible Assets
Goodwill
balances and the changes therein are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Medicaid
Managed Care
|
|
Specialty
Services
|
|
Total
|
|
Balance
as of December 31, 2004
|
|
$
|
97,891
|
|
$
|
3,740
|
|
$
|
101,631
|
|
Acquisitions
|
|
|
30,158
|
|
|
30,033
|
|
|
60,191
|
|
Other
adjustments
|
|
|
(4,159
|
)
|
|
(385
|
)
|
|
(4,544
|
) |
Balance
as of December 31, 2005
|
|
|
123,890
|
|
|
33,388
|
|
|
157,278
|
|
Acquisitions
|
|
|
7,176
|
|
|
52,948
|
|
|
60,124
|
|
Other
adjustments
|
|
|
(237
|
)
|
|
(190
|
)
|
|
(427
|
) |
Impairment
loss
|
|
|
(81,098
|
)
|
|
—
|
|
|
(81,098
|
) |
Balance
as of December 31, 2006
|
|
$
|
49,731
|
|
$
|
86,146
|
|
$
|
135,877
|
|
Goodwill
additions in 2006 and 2005 were related to the acquisitions discussed in Note
4.
Goodwill reductions in 2005 were related to the recognition of acquired net
operating loss carry forward benefits.
Other
intangible assets at December 31 consist of the following:
|
|
|
|
|
|
|
|
Weighted
Average Life
in
Years
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
2005
|
Purchased
contract rights
|
|
$
|
10,072
|
|
|
$
|
14,543
|
|
|
6.6
|
|
11.1
|
Provider
contracts
|
|
|
2,247
|
|
|
|
3,021
|
|
|
8.8
|
|
10.0
|
Customer
relationships
|
|
|
5,400
|
|
|
|
—
|
|
|
6.3
|
|
—
|
Trade
names
|
|
|
3,750
|
|
|
|
—
|
|
|
19.7
|
|
—
|
Other
intangibles
|
|
|
3,270
|
|
|
|
5,300
|
|
|
5.0
|
|
5.0
|
Other
intangible assets
|
|
|
24,739
|
|
|
|
22,864
|
|
|
8.6
|
|
10.0
|
Less
accumulated amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased
contract rights
|
|
|
(5,799
|
)
|
|
|
(4,305
|
)
|
|
|
|
|
Provider
contracts
|
|
|
(920
|
)
|
|
|
(654
|
)
|
|
|
|
|
Customer
relationships
|
|
|
(1,025
|
)
|
|
|
—
|
|
|
|
|
|
Trade
names
|
|
|
(280
|
)
|
|
|
—
|
|
|
|
|
|
Other
identifiable intangibles
|
|
|
(513
|
)
|
|
|
(537
|
)
|
|
|
|
|
Total
accumulated amortization
|
|
|
(8,537
|
)
|
|
|
(5,496
|
)
|
|
|
|
|
Other
intangible assets, net
|
|
$
|
16,202
|
|
|
$
|
17,368
|
|
|
|
|
|
Amortization
expense was $3,041, $2,416 and $1,481 for the years ended December 31, 2006,
2005 and 2004, respectively. The estimated amortization expense for 2007, 2008,
2009, 2010 and 2011, assuming no further acquisitions, is approximately $3,600,
$2,700, $2,400, $2,100 and $1,600, respectively.
8.
Income Taxes
The
consolidated income tax expense consists of the following for the years ended
December 31:
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Current
provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
26,703
|
|
|
$
|
26,884
|
|
|
$
|
23,652
|
|
State
and local
|
|
|
2,552
|
|
|
|
1,661
|
|
|
|
3,038
|
|
Total
current provision
|
|
|
29,255
|
|
|
|
28,545
|
|
|
|
26,690
|
|
Deferred
provision
|
|
|
(7,278
|
)
|
|
|
1,679
|
|
|
|
(715
|
)
|
Total
provision for income taxes
|
|
$
|
21,977
|
|
|
$
|
30,224
|
|
|
$
|
25,975
|
|
The
reconciliation of the tax provision at the U.S. Federal Statutory Rate to the
provision for income taxes is as follows:
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Tax
provision at the U.S. federal statutory rate
|
|
$
|
(7,578
|
)
|
|
$
|
30,050
|
|
|
$
|
24,600
|
|
Non-deductible
goodwill impairment charge
|
|
|
28,384
|
|
|
|
—
|
|
|
|
—
|
|
Non-deductible
incentive stock option compensation
|
|
|
1,407
|
|
|
|
—
|
|
|
|
—
|
|
State
income taxes, net of federal income tax benefit
|
|
|
376
|
|
|
|
1,230
|
|
|
|
1,975
|
|
Other,
net
|
|
|
(612
|
)
|
|
|
(1,056
|
)
|
|
|
(600
|
)
|
Income
tax expense
|
|
$
|
21,977
|
|
|
$
|
30,224
|
|
|
$
|
25,975
|
|
The
tax
effects of temporary differences which give rise to deferred tax assets and
liabilities are presented below for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
|
Medical
claims liability and other accruals
|
|
$
|
3,286
|
|
$
|
1,383
|
|
Unearned
premium and other deferred revenue
|
|
|
3,238
|
|
|
4,890
|
|
Unrealized
loss
on investments
|
|
|
746
|
|
|
1,053
|
|
Federal
net operating loss carry forward
|
|
|
6,289
|
|
|
5,452
|
|
State
net operating loss carry forward
|
|
|
3,157
|
|
|
3,205
|
|
State
tax credits
|
|
|
1,290
|
|
|
925
|
|
Stock
compensation
|
|
|
5,621
|
|
|
2,126
|
|
Other
|
|
|
5,502
|
|
|
2,675
|
|
Total
gross deferred tax assets
|
|
|
29,129
|
|
|
21,709
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
Intangible
assets
|
|
|
5,789
|
|
|
6,202
|
|
Prepaid
assets
|
|
|
1,923
|
|
|
1,621
|
|
Depreciation
and amortization
|
|
|
6,962
|
|
|
4,864
|
|
Total
gross
deferred tax liabilities
|
|
|
14,674
|
|
|
12,687
|
|
Valuation
allowance |
|
|
(2,792
|
) |
|
(3,697
|
) |
Net
deferred tax assets
|
|
$
|
11,663
|
|
$
|
5,325
|
|
The
Company’s deferred tax assets include federal and state net operating losses, or
NOLs, the majority of which were acquired in business combinations. Accordingly,
the total and annual deduction for those NOLs is limited by tax law. The federal
NOLs expire between the years 2011 and 2025 and the state NOLs expire between
the years 2007 and 2027. Valuation allowances are recorded for those NOLs the
Company believes are more-likely-than-not to expire unused. During 2006 and
2005, the Company recorded valuation allowance reductions of $2,910 and $5,340,
respectively and recorded additional valuation allowances of $2,005 and $2,048,
respectively. The 2006 and 2005 tax provision included $422 and $790 of the
valuation allowance reductions. The remainder was recorded as a reduction of
goodwill and other intangible assets or was due to a change in state filing
positions.
9. Medical
Claims Liabilities
The
change in medical claims liabilities is summarized as follows:
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Balance,
January 1
|
|
$
|
170,514
|
|
|
$
|
165,980
|
|
|
$
|
106,569
|
|
Acquisitions
|
|
|
1,788
|
|
|
|
—
|
|
|
|
24,909
|
|
Incurred
related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
year
|
|
|
1,832,096
|
|
|
|
1,244,600
|
|
|
|
816,418
|
|
Prior
years
|
|
|
(12,285
|
)
|
|
|
(17,691
|
)
|
|
|
(15,942
|
)
|
Total
incurred
|
|
|
1,819,811
|
|
|
|
1,226,909
|
|
|
|
800,476
|
|
Paid
related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
year
|
|
|
1,555,074
|
|
|
|
1,075,204
|
|
|
|
681,780
|
|
Prior
years
|
|
|
156,598
|
|
|
|
147,171
|
|
|
|
84,194
|
|
Total
paid
|
|
|
1,711,672
|
|
|
|
1,222,375
|
|
|
|
765,974
|
|
Balance,
December 31
|
|
$
|
280,441
|
|
|
$
|
170,514
|
|
|
$
|
165,980
|
|
Changes
in estimates of incurred claims for prior years were attributable to favorable
development, including changes in medical utilization and cost trends.
The
Company had reinsurance recoverables related to medical claims liabilities
of
$1,269 and $261 at December 31, 2006 and 2005, respectively, included in premium
and related receivables.
10.
Debt
Debt
consists of the following at December 31:
|
2006
|
|
2005
|
|
$300,000
revolving credit agreement
|
$
|
149,000
|
|
$
|
75,000
|
|
$25,000
revolving loan agreement
|
|
8,359
|
|
|
—
|
|
Mortgage
notes payable
|
|
12,487
|
|
|
12,974
|
|
Capital
leases
|
|
5,771
|
|
|
5,173
|
|
Total
debt
|
|
175,617
|
|
|
93,147
|
|
Less
current maturities
|
|
(971
|
)
|
|
(699
|
)
|
Long-term
debt
|
$
|
174,646
|
|
$
|
92,448
|
|
In
September 2006, the Company executed an amendment to the five-year Revolving
Credit Agreement dated September 14, 2004 with various financial institutions.
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 December 31, 2006 bore interest at LIBOR plus 1.25%, or 6.7%.
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 Company’s corporate headquarters. The collateralized
properties had a net book value of $9,435 at December 31, 2006. The outstanding
borrowings at December 31, 2006 bore interest at 6.8%.
Mortgage
notes payable consists of two mortgages collateralized by the Company’s
headquarters property. The mortgages bear interest at the prevailing prime
rate
less .75% (7.5% at December 31, 2006). The respective properties had a net
book
value of $21,180 at December 31, 2006. The mortgages include a financial
covenant requiring a minimum rolling twelve-month debt service coverage ratio.
Aggregate
maturities for the Company’s debt are as follows:
2007
|
|
$
|
971
|
2008
|
|
|
917
|
2009
|
|
|
9,006
|
2010
|
|
|
11,197
|
2011
|
|
|
149,175
|
Thereafter
|
|
|
4,351
|
Total
|
|
$
|
175,617
|
11.
Stockholders’ Equity
The
Company has 10,000,000 authorized shares of preferred stock at $.001 par value.
At December 31, 2006, there were no preferred shares outstanding.
In
November 2005, the Company’s board of directors adopted a stock repurchase
program authorizing the Company to repurchase up to 4,000,000 shares of common
stock from time to time on the open market or through privately negotiated
transactions. The repurchase program extends through October 31, 2007 but the
Company reserves the right to suspend or discontinue the program at anytime.
During the year ended December 31, 2006, the Company repurchased 397,400 shares
at an average price of $19.71 and an aggregate cost of $7,833.
12.
Statutory Capital Requirements and Dividend Restrictions
Various
state laws require Centene’s regulated subsidiaries to maintain minimum capital
levels specified by each state and restrict the amount of dividends that may
be
paid without prior regulatory approval. At December 31, 2006 and 2005, Centene’s
subsidiaries had aggregate statutory capital and surplus of $248,900 and
$183,500, respectively, compared with the required minimum aggregate statutory
capital and surplus of $154,000 and $87,700, respectively.
13.
Stock Incentive Plans
The
Company’s 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 319,044 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.
Option
activity for the year ended December 31, 2006 is summarized below:
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
Aggregate
Intrinsic Value
|
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
Outstanding
as of December 31, 2005
|
|
|
5,273,571
|
|
|
$
|
15.79
|
|
|
|
|
|
|
|
|
Granted
|
|
|
655,000
|
|
|
|
24.99
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(702,468)
|
|
|
|
8.74
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(44,200)
|
|
|
|
23.38
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(345,940)
|
|
|
|
18.87
|
|
|
|
|
|
|
|
|
Outstanding
as of December 31, 2006
|
|
|
4,835,963
|
|
|
$
|
17.77
|
|
$
|
35,631
|
|
|
7.2
|
|
|
Exercisable
as of December 31, 2006
|
|
|
2,323,579
|
|
|
$
|
14.59
|
|
$
|
24,176
|
|
|
6.2
|
|
|
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:
|
|
Year
Ended December
31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Expected
life (in years)
|
|
|
6.5
|
|
|
6.4
|
|
|
6.0
|
|
Risk-free
interest rate
|
|
|
4.6
|
%
|
|
4.3
|
%
|
|
3.7
|
%
|
Expected
volatility
|
|
|
47.8
|
%
|
|
46.6
|
%
|
|
57.5
|
%
|
Expected
dividend yield
|
|
|
0
|
%
|
|
0
|
%
|
|
0
|
%
|
For
the
years ended December 31, 2006 and 2005, the expected life of each award granted
was calculated using the “simplified method” in accordance with Staff Accounting
Bulletin No. 107. For the year ended December 31, 2004, the Company
used a projected expected life for each award granted based on historical
experience of employees’ exercise behavior. For the years ended December 31,
2006 and 2005, 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 year ended December 31, 2004, expected volatility
is based on historical volatility levels. The risk-free interest rates are
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 year ended December 31,
2006, 2005 and 2004 is as follows:
|
|
Year
Ended December
31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Weighted-average
fair value of options granted
|
|
$
|
13.42
|
|
$
|
13.77
|
|
$
|
12.25
|
|
Total
intrinsic value of stock options exercised
|
|
$
|
10,495
|
|
$
|
32,425
|
|
$
|
15,249
|
|
A
summary
of the status of the Company's non-vested restricted stock and
restricted stock unit shares as of December 31, 2006, and changes during the
year ended December 31, 2006, is presented below:
|
|
Shares
|
|
|
Weighted
Average
Grant
Date
Fair
Value
|
|
Non-vested
balance as of December 31, 2005
|
|
|
1,153,655
|
|
|
$
|
25.20
|
|
Granted
|
|
|
192,465
|
|
|
|
25.50
|
|
Vested
|
|
|
(42,389
|
)
|
|
|
29.19
|
|
Forfeited
|
|
|
(7,600
|
)
|
|
|
25.55
|
|
Non-vested
balance as of December 31, 2006
|
|
|
1,296,131
|
|
|
$
|
25.12
|
|
The
total fair value of restricted stock and restricted stock units vested during
the years ended December 31, 2006, 2005 and 2004, was $1,051, $0 and $0,
respectively.
As
of
December 31, 2006, there was $45,263 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
2.5 years.
During
2002, Centene implemented an employee stock purchase plan. The Company has
reserved 900,000 shares of common stock and issued 34,357 shares, 45,497 shares,
and 20,676 shares in 2006, 2005 and 2004, respectively, related to the employee
stock purchase plan.
14.
Retirement Plan
Centene
has a defined contribution plan which covers substantially all employees who
work at least 1,000 hours in a twelve consecutive month period and are at least
twenty-one years of age. Under the plan, eligible employees may contribute
a
percentage of their base salary, subject to certain limitations. Centene may
elect to match a portion of the employee’s contribution. Company expense related
to matching contributions to the plan were $1,847, $1,124 and $822 during the
years ended December 31, 2006, 2005 and 2004, respectively.
15.
Commitments
Centene
and its subsidiaries lease office facilities and various equipment under
non-cancelable operating leases which may contain escalation provisions. The
rental expense related to these leases is recorded on a straight-line basis
over
the lease term, including rent holidays. Rent expense was $14,960, $7,623 and
$5,482 for the years ended December 31, 2006, 2005 and 2004, respectively.
Annual non-cancelable minimum lease payments over the next five years and
thereafter are as follows:
|
|
|
|
2007
|
|
$
|
12,232
|
2008
|
|
|
10,624
|
2009
|
|
|
8,986
|
2010
|
|
|
7,755
|
2011
|
|
|
6,767
|
Thereafter
|
|
|
9,312
|
|
|
$
|
55,676
|
16.
Contingencies
As
previously disclosed, two class action lawsuits were filed against us and
certain of our officers and directors in the United States District Court for
the Eastern District of Missouri, one in July 2006, or the July Class Action
Lawsuit, and one in August 2006, or the August Class Action Lawsuit. The July
Class Action Lawsuit and the August Class Action Lawsuit were consolidated
on
November 2, 2006 and an amended consolidated complaint was filed in the United
States District Court for the Eastern District of Missouri on January 17, 2007,
which we refer to as the Consolidated Class Action Lawsuit. The Consolidated
Class Action Lawsuit alleges, on behalf of purchasers of our common stock from
April 25, 2006 through July 17, 2006, that we and certain of our officers and
directors violated federal securities laws by issuing a series of materially
false statements prior to the announcement of our fiscal 2006 second quarter
results. According to the Consolidated Class Action Lawsuit, these allegedly
materially false statements had the effect of artificially inflating the price
of the Company's common stock, which subsequently dropped after the
issuance of a press release announcing the Company's preliminary
fiscal 2006 second quarter earnings and revised guidance.
The
Company believes the case is without merit and has filed a motion to
dismiss the Consolidated Class Action Lawsuit.
Additionally,
in August 2006, a separate derivative action was filed on behalf of Centene
Corporation against the Company and certain of its officers and directors
in the
United States District Court for the Eastern District of Missouri. Plaintiff
purports to bring suit derivatively on behalf of the Company against the
Company’s directors for breach of fiduciary duties, gross mismanagement and
waste of corporate assets by reason of the directors’ alleged failure to correct
the misstatements alleged in the Consolidated Class Action Lawsuits discussed
above. The derivative complaint largely repeats the allegations in the
Consolidated Class Action Lawsuits. Based on discussions that have been held
with plaintiff’s counsel, it is the Company's understanding that
plaintiff does not intend to pursue this action until the Consolidated Class
Action Lawsuits proceed past the dismissal stage. Although this matter is
in its
early stages and no precise prediction of its outcome can be made, the
Company believes the case is without merit and plans to vigorously defend
against this lawsuit.
In
addition, the Company is routinely subjected to legal proceedings in the
normal course of business. While
the
ultimate resolution of such matters is uncertain, the Company does not expect
the results of any of these matters discussed above individually, or in the
aggregate, to have a material effect on its financial position or results
of
operations.
17.
Earnings Per Share
The
following table sets forth the calculation of basic and diluted net earnings
per
share for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Net
earnings (loss)
|
|
$
|
(43,629
|
)
|
$
|
55,632
|
|
$
|
44,312
|
|
Shares
used in computing per share amounts:
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding
|
|
|
43,160,860
|
|
|
42,312,522
|
|
|
40,820,909
|
|
Common
stock equivalents (as determined by applying the treasury stock method)
|
|
|
—
|
|
|
2,715,111
|
|
|
2,795,536
|
|
Weighted
average number of common shares and potential dilutive common shares
outstanding
|
|
|
43,160,860
|
|
|
45,027,633
|
|
|
43,616,445
|
|
Basic
earnings (loss) per common share
|
|
$
|
(1.01
|
)
|
$
|
1.31
|
|
$
|
1.09
|
|
Diluted
earnings (loss) per common share:
|
|
$
|
(1.01
|
)
|
$
|
1.24
|
|
$
|
1.02
|
|
The
calculation of diluted earnings per common share for 2006 excludes the effect
of
any outstanding stock awards which would be anti-dilutive to net earnings.
The calculation of diluted earnings per common share for 2005 and 2004 excludes
the impact of 328,250 and 0 shares, respectively, related to anti-dilutive
stock
options, restricted stock and restricted stock units.
18.
Segment Information
Centene
operates in two segments: Medicaid Managed Care and Specialty Services. The
Medicaid Managed Care segment consists of Centene’s health plans including all
of the functions needed to operate them. The Specialty Services segment consists
of Centene’s 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 Company’s chief operating decision maker to
evaluate all results of operations.
Segment
information as of and for the year ended December 31, 2006, follows:
|
|
Medicaid
Managed Care
|
|
Specialty
Services
|
|
Eliminations
|
|
Consolidated
Total
|
|
Revenue
from external customers
|
|
$
|
2,087,045
|
|
$
|
191,975
|
|
$
|
—
|
|
$
|
2,279,020
|
|
Revenue
from internal customers
|
|
|
94,984
|
|
|
233,263
|
|
|
(328,247
|
)
|
|
—
|
|
Total
revenue
|
|
$
|
2,182,029
|
|
$
|
425,238
|
|
$
|
(328,247
|
)
|
$
|
2,279,020
|
|
Earnings
from operations
|
|
$
|
(39,951
|
)
|
$
|
11,043
|
|
$
|
—
|
|
$
|
(28,908
|
)
|
Total
assets
|
|
$
|
723,698
|
|
$
|
171,282
|
|
$
|
—
|
|
$
|
894,980
|
|
Stock
compensation expense
|
|
$
|
13,984
|
|
$
|
920
|
|
$
|
—
|
|
$
|
14,904
|
|
Depreciation
expense
|
|
$
|
13,642
|
|
$
|
2,377
|
|
$
|
—
|
|
$
|
16,019
|
|
Capital
expenditures
|
|
$
|
46,446
|
|
$
|
3,872
|
|
$
|
—
|
|
$
|
50,318
|
|
Segment
information as of and for the year ended December 31, 2005, follows:
|
|
Medicaid
Managed Care
|
|
Specialty
Services
|
|
Eliminations
|
|
|
Consolidated
Total
|
Revenue
from external customers
|
|
$
|
1,445,533
|
|
$
|
60,331
|
|
$
|
—
|
|
|
$
|
1,505,864
|
Revenue
from internal customers
|
|
|
71,967
|
|
|
37,374
|
|
|
(109,341
|
)
|
|
|
—
|
Total
revenue
|
|
$
|
1,517,500
|
|
$
|
97,705
|
|
$
|
(109,341
|
)
|
|
$
|
1,505,864
|
Earnings
from operations
|
|
$
|
79,189
|
|
$
|
2
|
|
$
|
—
|
|
|
$
|
79,191
|
Total
assets
|
|
$
|
601,740
|
|
$
|
66,290
|
|
$
|
—
|
|
|
$
|
668,030
|
Stock
compensation expense
|
|
$
|
4,877
|
|
$
|
97
|
|
$
|
—
|
|
|
$
|
4,974
|
Depreciation
expense
|
|
$
|
7,723
|
|
$
|
411
|
|
$
|
—
|
|
|
$
|
8,134
|
Capital
expenditures
|
|
$
|
25,146
|
|
$
|
1,763
|
|
$
|
—
|
|
|
$
|
26,909
|
Segment
information as of and for the year ended December 31, 2004, follows:
|
|
Medicaid
Managed Care
|
|
Specialty
Services
|
|
Eliminations
|
|
|
Consolidated
Total
|
Revenue
from external customers
|
|
$
|
993,304
|
|
$
|
7,636
|
|
$
|
—
|
|
|
$
|
1,000,940
|
Revenue
from internal customers
|
|
|
60,329
|
|
|
21,923
|
|
|
(82,252
|
)
|
|
|
—
|
Total
revenue
|
|
$
|
1,053,633
|
|
$
|
29,559
|
|
$
|
(82,252
|
)
|
|
$
|
1,000,940
|
Earnings
from operations
|
|
$
|
66,084
|
|
$
|
(1,548
|
)
|
$
|
—
|
|
|
$
|
64,536
|
Total
assets
|
|
$
|
519,823
|
|
$
|
8,111
|
|
$
|
—
|
|
|
$
|
527,934
|
Stock
compensation expense
|
|
$
|
640
|
|
$
|
10
|
|
$
|
—
|
|
|
$
|
650
|
Depreciation
expense
|
|
$
|
4,682
|
|
$
|
467
|
|
$
|
—
|
|
|
$
|
5,149
|
Capital
expenditures
|
|
$
|
24,726
|
|
$
|
283
|
|
$
|
—
|
|
|
$
|
25,009
|
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 year
ended December 31, 2006, the altered percentages resulted in the allocation
of an additional $13,551, to the Medicaid Managed Care segment than would have
been allocated under the previous formulas.
The
Company evaluates performance and allocates resources based on earnings from
operations. The accounting policies are the same as those described in the
“Summary of Significant Accounting Policies” included in Note 2.
19.
Comprehensive Earnings
Differences
between net earnings and total comprehensive earnings resulted from changes
in
unrealized gains on investments available for sale, as follows:
|
|
Year
Ended December
31,
|
|
|
|
2006
|
|
|
2005
|
|
Net
earnings (loss)
|
|
$
|
(43,629
|
)
|
|
$
|
55,632
|
|
Reclassification
adjustment, net of tax
|
|
|
218
|
|
|
|
138
|
|
Change
in unrealized losses on investments available for sale, net of
tax
|
|
|
285
|
|
|
|
(1,485
|
)
|
Total
comprehensive earnings (loss)
|
|
$
|
(43,126
|
)
|
|
$
|
54,285
|
|
CONDENSED
FINANCIAL INFORMATION OF REGISTRANT
Centene
Corporation (Parent Company Only)
Condensed
Balance Sheets
(In
thousands, except share data)
|
|
December
31,
|
|
|
2006
|
|
2005
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,649
|
$
|
2,446
|
|
Short-term
investments, at fair value (amortized cost $1,749 and $3,957,
respectively)
|
|
|
1,747
|
|
3,904
|
|
Other
current assets
|
|
|
22,950
|
|
18,970
|
|
Total
current assets
|
|
|
26,346
|
|
25,320
|
|
Long-term
investments, at fair value (amortized cost $8,349 and $7,681,
respectively)
|
|
|
8,194
|
|
7,486
|
|
Investment
in subsidiaries
|
|
|
444,848
|
|
397,208
|
|
Other
assets
|
|
|
1,244
|
|
1,671
|
|
Total
assets
|
|
$
|
480,632
|
$
|
431,685
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
Current
liabilities
|
|
$
|
3,923
|
$
|
3,007
|
|
Long-term
debt
|
|
|
149,000
|
|
75,000
|
|
Other
liabilities
|
|
|
127
|
|
—
|
|
Total
liabilities
|
|
|
153,050
|
|
78,007
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
Common
stock, $.001 par value; authorized 100,000,000 shares; issued and
outstanding 43,369,918 and 42,988,230 shares, respectively
|
|
|
44
|
|
43
|
|
Additional
paid-in capital
|
|
|
209,340
|
|
191,840
|
|
Accumulated
other comprehensive income:
|
|
|
|
|
|
|
Unrealized
loss on investments, net of tax
|
|
|
(92
|
)
|
(124
|
)
|
Retained
earnings
|
|
|
118,290
|
|
161,919
|
|
Total
stockholders’ equity
|
|
|
327,582
|
|
353,678
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
480,632
|
$
|
431,685
|
|
See
notes to condensed financial information of registrant.
Centene
Corporation (Parent Company Only)
Condensed
Statements of Operations
(In
thousands, except share data)
|
|
Year
Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
$
|
(3,709
|
)
|
|
$
|
(3,801
|
)
|
|
$
|
(2,902
|
)
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
and other income
|
|
|
755
|
|
|
|
743
|
|
|
|
3,450
|
|
Interest
expense
|
|
|
(8,993
|
)
|
|
|
(3,117
|
)
|
|
|
(307
|
)
|
Earnings
(loss) before income taxes
|
|
|
(11,947
|
)
|
|
|
(6,175
|
)
|
|
|
241
|
|
Income
tax expense
|
|
|
(4,504
|
)
|
|
|
(2,551
|
)
|
|
|
(224
|
)
|
Net
income (loss) before equity in subsidiaries
|
|
|
(7,443
|
)
|
|
|
(3,624
|
)
|
|
|
465
|
|
Equity
in earnings (loss) from subsidiaries
|
|
|
(36,186
|
)
|
|
|
59,256
|
|
|
|
43,847
|
|
Net
earnings (loss)
|
|
$
|
(43,629
|
)
|
|
$
|
55,632
|
|
|
$
|
44,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per common share
|
|
$
|
(1.01
|
)
|
|
$
|
1.31
|
|
|
$
|
1.09
|
|
Diluted
earnings (loss) per common share
|
|
$
|
(1.01
|
)
|
|
$
|
1.24
|
|
|
$
|
1.02
|
|
Weighted
average number of shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
43,160,860
|
|
|
|
42,312,522
|
|
|
|
40,820,909
|
|
Diluted
|
|
|
43,160,860
|
|
|
|
45,027,633
|
|
|
|
43,616,445
|
|
See
notes to condensed financial information of registrant.
Centene
Corporation (Parent Company Only)
Condensed
Statements of Cash Flows
(In
thousands)
|
|
Year
Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
provided by (used in) operating activities
|
|
$
|
31,895
|
|
|
$
|
11,622
|
|
|
$
|
(7,831
|
)
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
dividends from and capital contributions to subsidiaries
|
|
|
(43,100
|
)
|
|
|
(22,300
|
)
|
|
|
(20,800
|
)
|
Purchase
of investments
|
|
|
(4,521
|
)
|
|
|
(4,438
|
)
|
|
|
(32,207
|
)
|
Sales
and maturities of investments
|
|
|
5,841
|
|
|
|
26,697
|
|
|
|
110,024
|
|
Acquisitions,
net of cash acquired
|
|
|
(66,772
|
)
|
|
|
(55,485
|
)
|
|
|
(86,739
|
)
|
Net
cash used in investing activities
|
|
|
(108,552
|
)
|
|
|
(55,526
|
)
|
|
|
(29,722
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from borrowings
|
|
|
86,000
|
|
|
|
45,000
|
|
|
|
40,000
|
|
Payment
of long-term debt and notes payable
|
|
|
(12,000
|
)
|
|
|
(4,000
|
)
|
|
|
(6,000
|
)
|
Other
financing activities
|
|
|
1,860
|
|
|
|
5,208
|
|
|
|
3,573
|
|
Net
cash provided by financing activities
|
|
|
75,860
|
|
|
|
46,208
|
|
|
|
37,573
|
|
Net
increase in cash and cash equivalents
|
|
|
(797
|
)
|
|
|
2,304
|
|
|
|
20
|
|
Cash
and cash equivalents,
beginning of period
|
|
|
2,446
|
|
|
|
142
|
|
|
|
122
|
|
Cash
and cash equivalents,
end of period
|
|
$
|
1,649
|
|
|
$
|
2,446
|
|
|
$
|
142
|
|
See
notes to condensed financial information of registrant.
Notes
to Condensed Financial Information of Registrant
Note
A - Basis of Presentation and Significant Accounting
Policies
In
Centene Corporation’s parent company only financial statements, Centene
Corporation’s investment in subsidiaries is stated at cost plus equity in
undistributed earnings of the subsidiaries. Centene Corporation’s share of net
income of its unconsolidated subsidiaries is included in income using the equity
method of accounting.
Certain
amounts presented in the parent company only financial statements are eliminated
in the consolidated financial statements of Centene Corporation.
Centene
Corporation’s parent company only financial statements should be read in
conjunction with Centene Corporation’s audited consolidated financial statements
and the notes to consolidated financial statements included in this Form
10-K.
Note
B - Dividends
During
2006, 2005 and 2004, the Registrant received dividends from its subsidiaries
totaling $8,600, $7,000 and $0, respectively.
EXHIBIT
INDEX
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCORPORATED
BY REFERENCE
|
EXHIBIT
NUMBER
|
|
DESCRIPTION
|
|
FILED WITH
THIS
FORM
10-K
|
|
FORM
|
|
FILING
DATE
WITH
SEC
|
|
EXHIBIT
NUMBER
|
|
|
|
|
|
|
|
|
|
|
|
3.1
|
|
Certificate
of Incorporation of Centene Corporation
|
|
|
|
S-1
|
|
October
9, 2001
|
|
3.2
|
|
|
|
|
|
|
3.1a
|
|
Certificate
of Amendment to Certificate of Incorporation of Centene Corporation,
dated
November 8, 2001
|
|
|
|
S-1/A
|
|
November 13, 2001
|
|
3.2a
|
|
|
|
|
|
|
3.1b
|
|
Certificate
of Amendment to Certificate of Incorporation of Centene Corporation
as
filed with the Secretary of State of the State of Delaware
|
|
|
|
10-Q
|
|
July
26, 2004
|
|
3.1b
|
|
|
|
|
|
|
3.2
|
|
By-laws
of Centene Corporation
|
|
|
|
S-1
|
|
October
9, 2001
|
|
3.4
|
|
|
|
|
|
|
4.1
|
|
Amended
and Restated Shareholders’ Agreement, dated September 23,
1998
|
|
|
|
S-1
|
|
October
9, 2001
|
|
4.2
|
|
|
|
|
|
|
4.2
|
|
Rights
Agreement between Centene Corporation and Mellon Investor Services
LLC, as
Rights Agent, dated August 30, 2002
|
|
|
|
8-K
|
|
August
30, 2002
|
|
4.1
|
|
|
|
|
|
|
10.1
|
|
Contract
for Medicaid/ Badger Care HMO Services between Managed Health
Services
Insurance Corp. and Wisconsin Department of Health and Family
Services.
|
|
|
|
10-K
|
|
February
24, 2006
|
|
10.1
|
|
|
|
|
|
|
10.1a
|
|
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-Q
|
|
October
24, 2006
|
|
10.2
|
|
|
|
|
|
|
|
|
|
|
|
10.1b
|
|
Second
Amendment to the contract for Medicaid/ Badger Care HMO Services
between
Managed Health Services Insurance Corp. and Wisconsin Department
of Health
and Family Services.
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.2
|
|
Contract
between the Office of the Medicaid Policy and Planning, the Office
of the
Children’s Health Insurance Program and Coordinated Care Corporation
Indiana, Inc.
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.3
|
|
Contract
Between the Georgia Department of Community Health and Peach
State
Contract for provision of Services to Georgia Health
Families
|
|
|
|
8-K
|
|
July
22, 2005
|
|
10.1
|
|
|
|
|
|
|
|
|
|
|
|
10.3a
|
|
Amendment
#1 to the Contract No. 0653 Between Georgia Department of Community
Health
and Peach State
|
|
|
|
10-Q
|
|
October
25, 2005
|
|
10.9
|
|
|
|
|
|
|
|
|
|
|
|
10.3b
|
|
Notice
of Renewal for fiscal year 2007 between Peach State Health Plan,
Inc. and
Georgia Department of Community Health.
|
|
|
|
10-Q
|
|
October
24, 2006
|
|
10.3
|
|
|
|
|
|
|
|
|
|
|
|
10.4
|
|
Contract
between the Texas Health and Human Services Commission and Superior
HealthPlan, Inc.
|
|
|
|
10-K
|
|
February
24, 2006
|
|
10.5
|
|
|
|
|
|
|
|
|
|
|
|
10.4a
|
|
Amendment
to Contract between the Texas Health and Human Services Commission
and
Superior HealthPlan, Inc.
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.5
|
|
1996
Stock Plan of Centene Corporation, shares which are registered
on Form S-8
- File Number 333-83190
|
|
|
|
S-1
|
|
October
9, 2001
|
|
10.9
|
|
|
|
|
|
|
|
|
|
|
|
10.6
|
|
1998
Stock Plan of Centene Corporation, shares which are registered
on Form S-8
- File number 333-83190
|
|
|
|
S-1
|
|
October
9, 2001
|
|
10.10
|
10.7
|
|
1999
Stock Plan of Centene Corporation, shares which are registered
on Form S-8
- File Number 333-83190
|
|
|
|
S-1
|
|
October
9, 2001
|
|
10.11
|
|
|
|
|
|
|
|
|
|
|
|
10.8
|
|
2000
Stock Plan of Centene Corporation, shares which are registered
on Form S-8
- File Number 333-83190
|
|
|
|
S-1
|
|
October
9, 2001
|
|
10.12
|
|
|
|
|
|
|
|
|
|
|
|
10.9
|
|
2002
Employee Stock Purchase Plan of Centene Corporation, shares which
are
registered on Form S-8 - File Number 333-90976
|
|
|
|
10-Q
|
|
April
29, 2002
|
|
10.5
|
|
|
|
|
|
|
|
|
|
|
|
10.9a
|
|
First
Amendment to the 2002 Employee Stock Purchase Plan
|
|
|
|
10-K
|
|
February
24, 2005
|
|
10.9a
|
|
|
|
|
|
|
|
|
|
|
|
10.9b
|
|
Second
Amendment to the 2002 Employee Stock Purchase Plan
|
|
|
|
10-K
|
|
February
24, 2006
|
|
10.10b
|
|
|
|
|
|
|
|
|
|
|
|
10.10
|
|
2003
Stock Incentive Plan, as amended
|
|
|
|
8-K
|
|
July
28, 2005
|
|
10.1
|
|
|
|
|
|
|
|
|
|
|
|
10.11
|
|
Centene
Corporation Non-Employee Directors Deferred Stock Compensation
Plan
|
|
|
|
10-Q
|
|
October
25, 2004
|
|
10.1
|
|
|
|
|
|
|
|
|
|
|
|
10.11a
|
|
First
Amendment to the Non-Employee Directors Deferred Stock Compensation
Plan
|
|
|
|
10-K
|
|
February
24, 2006
|
|
10.12a
|
|
|
|
|
|
|
|
|
|
|
|
10.12
|
|
Executive
Employment Agreement between Centene Corporation and Michael
F. Neidorff,
dated November 8, 2004
|
|
|
|
8-K
|
|
November
9, 2004
|
|
10.1
|
|
|
|
|
|
|
|
|
|
|
|
10.13
|
|
Form
of Executive Severance and Change in Control Agreement
|
|
|
|
8-K
|
|
May
23, 2005
|
|
10.1
|
|
|
|
|
|
|
|
|
|
|
|
10.14
|
|
Form
of Restricted Stock Unit Agreement
|
|
|
|
8-K
|
|
April
28, 2006
|
|
10.1
|
|
|
|
|
|
|
|
|
|
|
|
10.15
|
|
Form
of Non-statutory Stock Option Agreement (Non-Employees)
|
|
|
|
8-K
|
|
July
28, 2005
|
|
10.3
|
|
|
|
|
|
|
|
|
|
|
|
10.16
|
|
Form
of Non-statutory Stock Option Agreement (Employees)
|
|
|
|
8-K
|
|
July
28, 2005
|
|
10.4
|
|
|
|
|
|
|
|
|
|
|
|
10.17
|
|
Form
of Incentive Stock Option Agreement
|
|
|
|
8-K
|
|
July
28, 2005
|
|
10.5
|
|
|
|
|
|
|
|
|
|
|
|
10.18
|
|
Form
of Stock Appreciation Right Agreement
|
|
|
|
8-K
|
|
July
28, 2005
|
|
10.6
|
|
|
|
|
|
|
|
|
|
|
|
10.19
|
|
Form
of Restricted Stock Agreement
|
|
|
|
10-Q
|
|
October
25, 2005
|
|
10.8
|
|
|
|
|
|
|
|
|
|
|
|
10.20
|
|
Credit
Agreement dated as of September 14, 2004 among
Centene Corporation, the various financial institutions party
hereto
and LaSalle Bank National Association
|
|
|
|
10-Q
|
|
October
25, 2004
|
|
10.2
|
|
|
|
|
|
|
|
|
|
|
|
10.20a
|
|
Amendment
No. 2 to Credit Agreement dated as of September 14, 2004 among
Centene
Corporation, the various financial institutions party hereto
and LaSalle
Bank National Association
|
|
|
|
10-Q
|
|
October
25, 2005
|
|
10.11
|
|
|
|
|
|
|
|
|
|
|
|
10.20b
|
|
Amendment
No. 3 to Credit Agreement dated as of September 14, 2004 among
Centene
Corporation, the various financial institutions party hereto
and LaSalle
Bank National Association
|
|
|
|
10-K
|
|
February
24, 2006
|
|
10.22b
|
|
|
|
|
|
|
|
|
|
|
|
10.20c
|
|
Amendment
No. 4 to Credit Agreement dated as of September 14, 2004 among
Centene
Corporation, the various financial institutions party hereto
and LaSalle
Bank National Association
|
|
|
|
10-Q
|
|
July
25, 2006
|
|
10.2
|
|
|
|
|
|
|
|
|
|
|
|
10.20d
|
|
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-Q
|
|
October
24, 2006
|
|
10.1
|
10.21
|
|
Redevelopment
Agreement for the Forsyth / Hanley Redevelopment Area between
the City of
Clayton, Missouri and Centene Plaza Redevelopment Corporation
dated
December 30, 2005
|
|
|
|
8-K
|
|
December
30, 2005
|
|
10.1
|
|
|
|
|
|
|
|
|
|
|
|
10.22
|
|
Summary
of Board of Director Compensation
|
|
|
|
10-K
|
|
February
24, 2006
|
|
10.24
|
|
|
|
|
|
|
|
|
|
|
|
10.23
|
|
Summary
of Compensatory Arrangements with Executive Officers
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.24
|
|
Lease
Agreement between MHS Consulting Corporation and AVN Air, LLC,
dated
December 24, 2003
|
|
|
|
10-K
|
|
February
25, 2004
|
|
10.31
|
|
|
|
|
|
|
|
|
|
|
|
12.1
|
|
Computation
of ratio of earnings to fixed charges
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
|
|
List
of subsidiaries
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
|
|
Consent
of Independent Registered Public Accounting Firm incorporated
by reference
in each prospectus constituting part of the Registration Statements
on
Form S-3 (File Number 333-119944) and on Form S-8 (File Numbers
333-108467, 333-90976 and 333-83190).
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23a
|
|
Consent
of Independent Registered Public Accounting Firm incorporated
by reference
in each prospectus constituting part of the Registration Statements
on
Form S-3 (File Number 333-119944) and on Form S-8 (File Numbers
333-108467, 333-90976 and 333-83190).
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31.1
|
|
Certification
Pursuant to Rule 13a-14(a) and 15d-14(a) of the Exchange Act,
as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Chief
Executive
Officer)
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31.2
|
|
Certification
Pursuant to Rule 13a-14(a) and 15d-14(a) of the Exchange Act,
as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Chief
Financial
Officer)
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32.1
|
|
Certification
Pursuant to 18 U.S.C. Section 1350 (Chief Executive
Officer)
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32.2
|
|
Certification
Pursuant to 18 U.S.C. Section 1350 (Chief Financial
Officer)
|
|
X
|
|
|
|
|
|
|
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized, as of February 23, 2007.
CENTENE
CORPORATION
|
|
|
By:
|
|
/s/ MICHAEL
F. NEIDORFF
|
|
|
Michael
F. Neidorff
Chairman
and Chief Executive Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons, on behalf of the registrant and in the
capacities as indicated, as of February 23, 2007.
|
|
|
Signature
|
|
Title
|
|
|
/s/ MICHAEL
F. NEIDORFF
Michael
F. Neidorff
|
|
Chairman
and Chief Executive Officer
(principal
executive officer)
|
|
|
/s/ J.
PER
BRODIN
J.
Per Brodin
|
|
Senior
Vice President, Chief Financial Officer and Treasurer (principal
financial
and accounting officer)
|
|
|
/s/ STEVE
BARTLETT
Steve
Bartlett
|
|
Director
|
|
|
/s/ ROBERT
K.
DITMORE
Robert
K. Ditmore
|
|
Director |
|
|
|
/s/ RICHARD
A.
GEPHARDT
Richard
A. Gephardt
|
|
Director
|
|
|
|
/s/ FRED
H.
EPPINGER
Fred
H. Eppinger
|
|
Director
|
|
|
/s/ JOHN
R.
ROBERTS
John
R. Roberts
|
|
Director
|
|
|
/s/ DAVID
L.
STEWARD
David
L. Steward
|
|
Director
|
|
|
/s/ TOMMY
G.
THOMPSON
Tommy
G. Thompson
|
|
Director
|