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
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(I.R.S.
Employer
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incorporation
or organization)
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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
Indicate
by check mark whether the registrant: (1) has filed all reports required
to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days: [X] Yes [ ] No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act.
Large
accelerated
filer [X] Accelerated
filer [
] Non-accelerated
filer [ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes [
] No [X]
As
of
July 16, 2007, the registrant had 43,646,371 shares of common stock
outstanding.
CENTENE
CORPORATION
QUARTERLY
REPORT ON FORM 10-Q
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PAGE
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Part
I
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Financial
Information
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Item
1.
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Financial
Statements
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Consolidated
Balance Sheets as of June 30, 2007 and December 31, 2006
(unaudited)
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Consolidated
Statements of Operations for the Three Months and Six Months
Ended June
30, 2007 and 2006 (unaudited)
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Consolidated
Statements of Cash Flows for the Six Months Ended June 30, 2007
and 2006
(unaudited)
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Notes
to the Consolidated Financial Statements (unaudited)
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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Quantitative
and Qualitative Disclosures About Market Risk
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Unregistered
Sales of Equity Securities and Use of Proceeds
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Submission
of Matters to a Vote of Security Holders
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PART
I
FINANCIAL
INFORMATION
ITEM
1. Financial Statements.
CENTENE
CORPORATION AND SUBSIDIARIES
(In
thousands, except share data)
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June
30, 2007
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December
31, 2006
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(Unaudited)
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ASSETS
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Current
assets:
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Cash
and cash equivalents
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$ |
236,443
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$ |
271,047
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Premium
and related receivables
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Short-term
investments, at fair value (amortized cost $43,636 and $67,199,
respectively)
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Long-term
investments, at fair value (amortized cost $288,993 and $146,980,
respectively)
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Restricted
deposits, at fair value (amortized cost $26,328 and $25,422,
respectively)
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Property,
software and equipment, net
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Other
intangible assets, net
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$ |
1,050,002
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$ |
894,980
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LIABILITIES
AND STOCKHOLDERS’ EQUITY
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Medical
claims liabilities
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$ |
295,340
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$ |
280,441
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Accounts
payable and accrued expenses
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Current
portion of long-term debt
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Total
current liabilities
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Common
stock, $.001 par value; authorized 100,000,000 shares; issued
and
outstanding 43,664,105 and 43,369,918 shares,
respectively
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Additional
paid-in capital
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Accumulated
other comprehensive income:
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Unrealized
loss on investments, net of tax
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(1,046 |
) |
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(1,251 |
) |
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Total
stockholders’ equity
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Total
liabilities and stockholders’ equity
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$ |
1,050,002
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$ |
894,980
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See
notes
to consolidated financial statements.
CENTENE
CORPORATION AND SUBSIDIARIES
(In
thousands, except share data)
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For
the Three Months Ended June 30,
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For
the Six Months Ended June 30,
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2007
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2006
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2007
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2006
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(Unaudited)
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(Unaudited)
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Revenues:
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Premium
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$
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707,723
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$
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476,079
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$
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1,356,966
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$
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911,641
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Service
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20,015
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19,214
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41,607
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38,730
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Total
revenues
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727,738
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495,293
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1,398,573
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950,371
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Expenses:
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Medical
costs
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574,862
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400,229
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1,110,268
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761,901
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Cost
of services
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16,670
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14,317
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32,300
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29,905
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General
and administrative expenses
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122,596
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74,441
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229,462
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139,663
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Gain
on sale of FirstGuard Missouri
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(3,254
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)
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—
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(7,472
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)
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—
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Total
operating expenses
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710,874
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488,987
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1,364,558
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931,469
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Earnings
from operations
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16,864
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6,306
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34,015
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18,902
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Other
income (expense):
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Investment
and other income
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5,948
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3,891
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10,449
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7,431
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Interest
expense
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(4,213
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)
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(2,456
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)
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(7,345
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)
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(4,454
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)
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Earnings
before income taxes
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18,599
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7,741
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37,119
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21,879
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Income
tax (benefit) expense |
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817 |
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2,776 |
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(18,874 |
) |
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8,148 |
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Net earnings |
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$ |
17,782 |
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$ |
4,965 |
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$ |
55,993 |
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$ |
13,731 |
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Earnings
per share:
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Basic
earnings per common share
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$
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0.41
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$
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0.12
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$
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1.29
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$
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0.32
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Diluted
earnings per common share
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$
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0.40
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$
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0.11
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$
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1.25
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$
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0.31
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Weighted
average number of shares outstanding:
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Basic
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43,617,360
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43,169,590
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43,525,848
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43,079,243
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Diluted
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44,815,369
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44,839,149
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44,871,114
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44,794,558
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See
notes
to consolidated financial statements.
CENTENE
CORPORATION AND SUBSIDIARIES
(In
thousands)
|
|
Six
Months Ended June
30,
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|
2007
|
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|
2006
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(Unaudited)
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Cash
flows from operating activities:
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Net
earnings
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$ |
55,993
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$ |
13,731
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Adjustments
to reconcile net earnings to net cash provided by operating activities
—
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Depreciation
and amortization
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Stock
compensation expense
|
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(327 |
) |
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(287 |
) |
Gain
on sale of FirstGuard Missouri
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(7,472 |
) |
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Changes
in assets and liabilities —
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Premium
and related receivables
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(21,823 |
) |
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(45,710 |
) |
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(24,583 |
) |
|
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(931 |
) |
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(1,123 |
) |
Medical
claims liabilities
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Accounts
payable and accrued expenses
|
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Other
operating activities
|
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Net
cash provided by operating activities
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Cash
flows from investing activities:
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|
|
|
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Purchases
of property, software and equipment
|
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|
(29,352 |
) |
|
|
(23,472 |
) |
|
|
|
(290,962 |
) |
|
|
(113,665 |
) |
Sales
and maturities of investments
|
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|
|
|
|
|
|
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Proceeds
from asset sales
|
|
|
|
|
|
|
|
|
Acquisitions,
net of cash acquired
|
|
|
(5,336 |
) |
|
|
(60,710 |
) |
Net
cash used in investing activities
|
|
|
(115,141 |
) |
|
|
(100,402 |
) |
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
Payment
of long-term debt
|
|
|
(165,484 |
) |
|
|
(4,487 |
) |
Excess
tax benefits from stock compensation
|
|
|
|
|
|
|
|
|
|
|
|
(3,231 |
) |
|
|
(3,180 |
) |
|
|
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(5,070 |
) |
|
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|
Net
cash provided by financing activities
|
|
|
|
|
|
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Net
decrease in cash and cash equivalents
|
|
|
(34,604 |
) |
|
|
(15,922 |
) |
Cash
and cash equivalents, beginning of period
|
|
|
|
|
|
|
|
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Cash
and cash equivalents, end of period
|
|
$ |
236,443
|
|
|
$ |
131,436
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,738
|
|
|
$ |
4,598
|
|
|
|
$ |
6,049
|
|
|
$ |
1,645
|
|
See
notes
to consolidated financial statements.
CENTENE
CORPORATION AND SUBSIDIARIES
(Dollars
in thousands, except share data)
1. Organization
and Operations
Centene
Corporation, or Centene or the Company, is a multi-line healthcare enterprise
operating primarily in two segments: Medicaid Managed Care and Specialty
Services. Centene’s Medicaid Managed Care segment provides Medicaid and
Medicaid-related health plan coverage to individuals through government
subsidized programs, including Medicaid, 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, health 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 the Company’s own subsidiaries on market-based terms.
The
unaudited interim financial statements herein have been prepared by the Company
pursuant to the rules and regulations of the Securities and Exchange Commission.
The accompanying interim financial statements have been prepared under the
presumption that users of the interim financial information have either read
or
have access to the audited financial statements for the fiscal year ended
December 31, 2006. Accordingly, footnote disclosures, which would substantially
duplicate the disclosures contained in the December 31, 2006 audited financial
statements, have been omitted from these interim financial statements where
appropriate. In the opinion of management, these financial statements reflect
all adjustments, consisting only of normal recurring adjustments, which are
necessary for a fair presentation of the results of the interim periods
presented.
Certain
2006 amounts in the consolidated financial statements have been reclassified
to
conform to the 2007 presentation. These reclassifications have no effect
on net
earnings or stockholders’ equity as previously reported.
3.
Recent Accounting Pronouncements
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. The Company is evaluating the provisions of EITF 06-3 as
it
applies to premium taxes. Premium taxes are assessed by certain states as
percentage of premiums paid to the Company by those states. Premium taxes
of $38,090 and $11,181 for the six months ended June 30, 2007 and
2006, respectively, were reported as a component of revenues and general
and
administrative expenses.
The
Company adopted the provisions of FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes”, or FIN 48, on January 1, 2007. FIN 48 clarifies
whether or not to recognize assets or liabilities for tax positions taken
that
may be challenged by a taxing authority. As a result of the implementation
of
FIN 48, the Company recognized a $47 decrease in the liability for unrecognized
tax benefits, which was accounted for as an increase to retained earnings.
As of
January 1, 2007, the Company has $3,114 of gross unrecognized tax benefits.
Of
this total, $888 (net of the federal benefit on state issues) would decrease
income tax expense, if recognized, and the remainder would reduce
goodwill.
The
Company recognizes interest accrued related to unrecognized tax benefits
in the
provision for income taxes. As of January 1, 2007, interest accrued was
approximately $293, net of federal tax benefit. No penalties have been accrued.
Additional interest accrued was $43 and $78 in the three and six months ended
June 30, 2007, respectively.
During
the first quarter of 2007, the Company's liability for unrecognized tax benefits
increased by $1,563, of which the entire amount would reduce income tax expense
if recognized. The increase was related to the allocation of stock basis
between
FirstGuard Kansas and FirstGuard Missouri for purposes of an Internal Revenue
Code, or IRC, Section 165 loss on the Company's investment in FirstGuard
Kansas'
stock to be recognized in the Company's 2007 federal and state
returns. During the second quarter of 2007, the Company also recorded
a IRC Section 165 loss for the Company’s investment in FirstGuard Missouri stock
and, accordingly, reversed the $1,563 unrecognized tax benefit as a reduction
of
income tax expense because the stock basis allocation was no longer
relevant.
The
Company's federal income tax returns for 2003 through 2006 are open tax years.
The Company files in numerous state jurisdictions with varying statutes of
limitation. The Company's unrecognized state tax benefits are related to
state
returns open from 2002 through 2006.
4. FirstGuard
Health Plans
In
2006,
FirstGuard Health Plan Kansas, Inc., or FirstGuard Kansas, a wholly owned
subsidiary, received notification that its Medicaid contract scheduled to
terminate December 31, 2006 would not be renewed. In 2006, the Company also
evaluated its strategic alternatives for its Missouri subsidiary, FirstGuard
Health Plan, Inc., or FirstGuard Missouri, and decided to divest the
business.
The
sale
of the operating assets of FirstGuard Missouri was completed effective February
1, 2007. However, the Company also received a final contingent
payment in the second quarter of 2007 resulting in a total gain on the sale
of
$7,472 in 2007. Goodwill associated with FirstGuard written off as part of
the
transaction was $5,995. The Company contributed $3,000 of the sale
proceeds received in the second quarter to its charitable foundation which
was
recorded as general and administrative expense.
In
March
2007, the Company abandoned the stock of FirstGuard Kansas to an unrelated
entity. As a result of that abandonment, the Company recognized expense of
$1,602 for the write-off of the remaining assets in that entity. The
Company also recognized a $31,482 tax benefit for the tax deduction associated
with the basis of that stock ($29,919 in the first quarter and $1,563 in
the second quarter). The asset write-off is recorded in investment and other
income. The income tax receivable associated with the tax deduction is recorded
as a component of other current assets.
In
June
2007, the Company abandoned the stock of FirstGuard Missouri to an unrelated
entity. As a result of that abandonment, the Company recognized expense of
$696
for the write-off of the remaining assets in that entity and a $4,806 tax
benefit for the tax deduction associated with the basis of that stock. The
asset
write-off is recorded in investment and other income. The income tax receivable
associated with the tax deduction is recorded as a component of other current
assets.
The
Company has incurred $8,516 of FirstGuard exit costs consisting primarily
of
lease termination fees and employee severance costs. The exit costs
included $6,202 incurred in 2006, of which $3,027 was accrued at December
31,
2006. During the six months ended June 30, 2007, the Company incurred an
additional $2,314 of exit costs and made payments of $4,493. At June 30,
2007,
the remaining accrual for these costs was $848. The Company also
contributed $3,000 of the sale proceeds received in the second quarter to
its
charitable foundation.
Effective
April 20, 2007, the Company acquired PhyTrust of South Carolina, LLC, or
PhyTrust, a physician-driven company providing service as a Medicaid Medical
Home Network. The results of operations for PhyTrust are included in
the consolidated financial statements since April 20, 2007. The
preliminary purchase price allocation resulted in goodwill of approximately
$4,900 included in the Medicaid Managed Care segment. The acquired
goodwill is deductible for income tax purposes. Pro forma disclosures
related to the acquisition have been excluded as immaterial.
In
March
2007, the Company issued $175,000 aggregate principal amount of 7 ¼% Senior
Notes due April 1, 2014, or the Notes. The Notes have been registered under
the
Securities Act of 1933, as amended, pursuant to a registration rights agreement
with the initial purchasers. The indenture governing the Notes contains
non-financial and financial covenants, including requirements of a minimum
fixed
charge coverage ratio. Interest will be paid semi-annually beginning in October
2007.
At
June
30, 2007, total debt outstanding was $201,134, including current maturities
of
$972. The total debt outstanding consisted of $175,000 under the Notes, $20,604
of debt secured by real estate and $5,530 of capital leases
The
following table sets forth the calculation of basic and diluted net earnings
per
common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended June
30,
|
|
|
Six
Months Ended June
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Net
earnings
|
|
$ |
17,782
|
|
|
$ |
4,965
|
|
|
$ |
55,993
|
|
|
$ |
13,731
|
|
Shares
used in computing per share amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding
|
|
|
43,617,360
|
|
|
|
43,169,590
|
|
|
|
43,525,848
|
|
|
|
43,079,243
|
|
Common
stock equivalents (as determined by applying the treasury stock
method)
|
|
|
1,198,009
|
|
|
|
1,669,559
|
|
|
|
1,345,266
|
|
|
|
1,715,315
|
|
Weighted
average number of common shares and potential dilutive common
shares
outstanding
|
|
|
44,815,369
|
|
|
|
44,839,149
|
|
|
|
44,871,114
|
|
|
|
44,794,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per common share
|
|
$ |
0.41
|
|
|
$ |
0.12
|
|
|
$ |
1.29
|
|
|
$ |
0.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per common share
|
|
$ |
0.40
|
|
|
$ |
0.11
|
|
|
$ |
1.25
|
|
|
$ |
0.31
|
|
The
calculation of diluted earnings per common share for the three and six months
ended June 30, 2007 excludes the impact of 2,468,843 and 2,431,539 shares,
respectively, related to anti-dilutive stock options, restricted stock and
restricted stock units. The calculation of diluted earnings per common share
for
the three and six months ended June 30, 2006 excludes the impact of 1,556,308
and 1,597,568 shares, respectively.
8. Stockholders’
Equity
In
November 2005, the Company’s board of directors adopted a stock repurchase
program authorizing the Company to repurchase up to 4,000,000 shares of common
stock from time to time on the open market or through privately negotiated
transactions. The repurchase program extends through October 31, 2007, but
the
Company reserves the right to suspend or discontinue the program at any time.
During the six months ended June 30, 2007, the Company repurchased 150,600
shares at an average price of $21.45 and an aggregate cost of
$3,231.
As
previously disclosed, two class action lawsuits were filed against the Company
and certain of its officers and directors in the United States District Court
for the Eastern District of Missouri, or Eastern District Court. The
lawsuits were consolidated on November 2, 2006 and an amended consolidated
complaint was filed in the Eastern District Court on January 17, 2007, referred
to as the Consolidated Lawsuit. The Consolidated Lawsuit alleges, on behalf
of
purchasers of the Company’s common stock from April 25, 2006 through July 17,
2006, that the Company and certain of its officers and directors violated
federal securities laws by issuing a series of materially false statements
prior
to the announcement of its fiscal 2006 second quarter results. According
to the
Consolidated Lawsuit, these allegedly materially false statements had the
effect
of artificially inflating the price of the Company’s common stock, which
subsequently dropped after the issuance of a press release announcing the
Company’s preliminary fiscal 2006 second quarter earnings and revised guidance.
The Company filed a motion to dismiss the Consolidated Lawsuit. On June
29, 2007, the motion to dismiss was granted. The period for the
filing of appeals has not yet expired.
Additionally,
in August
2006, a separate derivative action was filed on behalf of Centene Corporation
against the Company and certain of its officers and directors in the Eastern
District Court. Plaintiff purported to bring suit derivatively on behalf
of the
Company against the Company’s directors for breach of fiduciary duties, gross
mismanagement and waste of corporate assets by reason of the directors’ alleged
failure to correct the misstatements alleged in the Consolidated Lawsuit
discussed above. The derivative complaint largely repeated the allegations
in
the Consolidated Lawsuit. Based on discussions that have been held with
plaintiff’s counsel, it is the Company’s understanding that plaintiff did not
intend to pursue this action unless the Consolidated Lawsuit proceeded
past the
dismissal stage. The derivative action has been dismissed.
During
the 2007 second quarter, the Company’s subsidiary, Peach State Health Plan,
received notice from the Georgia Department of Community Health, or GDCH,
that
it was levying a $3,700 fine for alleged violations of the prior authorization
timeliness provisions contained in the Company’s Medicaid contract with the
state. The Company has appealed the sanction and expects the issue to
be resolved in the 2007 third quarter. The Company has accrued an estimate
for this matter and does not believe the ultimate resolution will have a
material effect on future results of operations.
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 individually,
or in
the aggregate, to have a material effect on its financial position or results
of
operations.
The
Company operates in two segments: Medicaid Managed Care and Specialty Services.
The Medicaid Managed Care segment consists of the Company’s health plans
including all of the functions needed to operate them. The Specialty Services
segment consists of the Company’s specialty companies including behavioral
health, health management, long-term care programs, managed vision, nurse
triage, pharmacy benefits management and treatment compliance
functions.
Factors
used in determining the reportable business segments include the nature of
operating activities, existence of separate senior management teams, and
the
type of information presented to the Company’s chief operating decision maker to
evaluate all results of operations.
Segment
information for the three months ended June 30, 2007, follows:
|
|
Medicaid
Managed Care
|
|
|
Specialty
Services
|
|
|
Eliminations
|
|
|
Consolidated
Total
|
|
Revenue
from external customers
|
|
$ |
665,265
|
|
|
$ |
62,473
|
|
|
$ |
—
|
|
|
$ |
727,738
|
|
Revenue
from internal customers
|
|
|
|
|
|
|
|
|
|
|
(126,481 |
) |
|
|
|
|
|
|
$ |
684,963
|
|
|
$ |
169,256
|
|
|
$ |
(126,481 |
) |
|
$ |
727,738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
11,679
|
|
|
$ |
5,185
|
|
|
$ |
—
|
|
|
$ |
16,864
|
|
Segment
information for the three months ended June 30, 2006, follows:
|
|
Medicaid
Managed Care
|
|
|
Specialty
Services
|
|
|
Eliminations
|
|
|
Consolidated
Total
|
|
Revenue
from external customers
|
|
$ |
452,061
|
|
|
$ |
43,232
|
|
|
$ |
—
|
|
|
$ |
495,293
|
|
Revenue
from internal customers
|
|
|
|
|
|
|
|
|
|
|
(71,033 |
) |
|
|
|
|
|
|
$ |
474,291
|
|
|
$ |
92,035
|
|
|
$ |
(71,033 |
) |
|
$ |
495,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,577
|
|
|
$ |
1,729
|
|
|
$ |
—
|
|
|
$ |
6,306
|
|
Segment
information for the six months ended June 30, 2007, follows:
|
|
Medicaid
Managed Care
|
|
|
Specialty
Services
|
|
|
Eliminations
|
|
|
Consolidated
Total
|
|
Revenue
from external customers
|
|
$ |
1,278,328
|
|
|
$ |
120,245
|
|
|
$ |
—
|
|
|
$ |
1,398,573
|
|
Revenue
from internal customers
|
|
|
|
|
|
|
|
|
|
|
(244,088 |
) |
|
|
|
|
|
|
$ |
1,316,914
|
|
|
$ |
325,747
|
|
|
$ |
(244,088 |
) |
|
$ |
1,398,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
23,162
|
|
|
$ |
10,853
|
|
|
$ |
—
|
|
|
$ |
34,015
|
|
Segment
information for the six months ended June 30, 2006, follows:
|
|
Medicaid
Managed Care
|
|
|
Specialty
Services
|
|
|
Eliminations
|
|
|
Consolidated
Total
|
|
Revenue
from external customers
|
|
$ |
863,042
|
|
|
$ |
87,329
|
|
|
$ |
—
|
|
|
$ |
950,371
|
|
Revenue
from internal customers
|
|
|
|
|
|
|
|
|
|
|
(109,483 |
) |
|
|
|
|
|
|
$ |
906,045
|
|
|
$ |
153,809
|
|
|
$ |
(109,483 |
) |
|
$ |
950,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
16,668
|
|
|
$ |
2,234
|
|
|
$ |
—
|
|
|
$ |
18,902
|
|
11.
Comprehensive Earnings
Differences
between net earnings and total comprehensive earnings resulted from changes
in
unrealized losses on investments available for sale, as follows:
|
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$
|
17,782
|
|
|
$
|
4,965
|
|
|
$
|
55,993
|
|
|
$
|
13,731
|
|
Reclassification
adjustment, net of tax
|
|
|
18
|
|
|
|
29
|
|
|
|
69
|
|
|
|
49
|
|
Change
in unrealized gain (loss) on investments, net of tax |
|
|
(139 |
) |
|
|
(157 |
) |
|
|
136 |
|
|
|
(571 |
) |
Total
comprehensive earnings
|
|
$ |
17,661 |
|
|
$ |
4,837 |
|
|
$ |
56,198 |
|
|
$ |
13,209 |
|
The
following discussion of our financial condition and results of operations
should
be read in conjunction with our consolidated financial statements and the
related notes included elsewhere in this filing, and in our annual report
on
Form 10-K for the year ended December 31, 2006. The discussion contains
forward-looking statements that involve known and unknown risks and
uncertainties, including those set forth under “Item 1A. Risk
Factors.”
OVERVIEW
We
are a
multi-line healthcare enterprise operating in two segments. Our Medicaid
Managed
Care segment provides Medicaid and Medicaid-related programs to organizations
and individuals through government subsidized programs, including Medicaid,
the
State Children’s Health Insurance Program, or SCHIP, and, Supplemental Security
Income including Aged, Blind or Disabled programs, or SSI. Our Specialty
Services segment provides specialty services, including behavioral health,
health 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
Medicaid contract in Kansas terminated effective December 31, 2006, and we
sold
the operating assets of FirstGuard Health Plan, Inc., our Missouri health
plan,
effective February 1, 2007.
Our
second quarter performance for 2007 is summarized as follows:
|
—
|
Quarter-end
Medicaid Managed Care membership of
1,131,500.
|
|
—
|
Total
revenues of $727.7 million, a 46.9% increase over the comparable
period in
2006.
|
|
—
|
Medicaid
and SCHIP health benefits ratio, or HBR, of 80.6%, SSI HBR of 87.5%,
Specialty Services HBR of 75.9%.
|
|
—
|
Medicaid
Managed Care general and administrative, or G&A, expense ratio of
14.0% and Specialty Services G&A ratio of
15.8%.
|
|
—
|
Operating
earnings of $16.9 million.
|
|
—
|
Diluted
earnings per share of $0.40 including an after-tax benefit of $5.7
million, or $0.13 per share, for FirstGuard activity and the related
foundation contribution. |
|
—
|
Operating
cash flows of $23.9 million.
|
Over
the
last year we have experienced revenue growth in our Medicaid Managed Care
segment. The following new contracts and acquisitions contributed to our
growth:
|
—
|
In
April 2007, we acquired PhyTrust of South Carolina, LLC, or PhyTrust,
a
physician-driven company providing service as a Medicaid Medical
Home
Network. At June 30, 2007, our membership in South Carolina was
31,100 members. Additionally, we plan to participate in the
rollout of the state’s conversion to at-risk managed care, which is
expected to commence in the second half of
2007.
|
|
—
|
In
February 2007, we began managing care for SSI recipients in the
San
Antonio and Corpus Christi markets of Texas with 31,400 members
at June
30, 2007.
|
|
—
|
In
January, February, March and April 2007, we began managing care
for SSI
members in the Northeast, Southwest, Northwest and East Central
regions of
Ohio, respectively, with 19,500 members at June 30,
2007.
|
|
—
|
In
September 2006, we expanded operations in Texas to include Medicaid
and
SCHIP members in the Corpus Christi, Austin and Lubbock markets,
with
24,300 members at June 30, 2007.
|
|
—
|
In
Georgia, we began managing care for Medicaid and SCHIP members
in the
Atlanta and Central regions in June 2006 and the Southwest region
in
September 2006. At June 30, 2007, our membership in Georgia was
281,400.
|
|
—
|
We
began operating under new contracts with the State of Ohio to manage
care
for Medicaid members by entering seven new counties in the East
Central
market in July 2006, and 17 new counties in the Northwest market
in
October 2006, with 41,100 members at June 30,
2007.
|
|
—
|
In
June 2006, we acquired MediPlan Corporation, or MediPlan, and began
managing care for additional Medicaid members in Ohio with 13,300
members at June 30, 2007. The results of operations of this entity
are
included in our consolidated financial statements beginning June
1,
2006.
|
We
have
been awarded the following new business opportunity to expand our
operations:
|
—
|
During
the first quarter of 2007, we finalized the contractual terms of
the
Comprehensive Health Care for Children in Foster Care program award
with
the Texas Health and Human Services Commission, or HHSC. This statewide
program will provide managed care services to participants in the
Texas
Foster Care program. Membership operations are expected to commence
in the
first quarter of 2008.
|
The
following new contracts and acquisitions contributed to growth in our
Specialty Services segment:
|
—
|
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.
|
RESULTS
OF OPERATIONS AND KEY METRICS
Summarized
comparative financial data are as follows ($ in millions except share
data):
|
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
%
Change 2006-2007
|
|
|
2007
|
|
|
2006
|
|
|
%
Change 2006-2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium
revenue
|
|
$
|
707.7
|
|
|
$
|
476.1
|
|
|
|
48.7
|
%
|
|
$
|
1,357.0
|
|
|
$
|
911.7
|
|
|
|
48.8
|
%
|
Service
revenue
|
|
20.0
|
|
|
19.2
|
|
|
4.2
|
%
|
|
41.6
|
|
|
38.7
|
|
|
7.4
|
%
|
Total
revenues
|
|
|
727.7
|
|
|
|
495.3
|
|
|
|
46.9
|
%
|
|
|
1,398.6
|
|
|
|
950.4
|
|
|
|
47.2
|
%
|
Medical
costs
|
|
|
574.8
|
|
|
|
400.2
|
|
|
|
43.6
|
%
|
|
|
1,110.3
|
|
|
|
761.9
|
|
|
|
45.7
|
%
|
Cost
of services
|
|
|
16.7
|
|
|
|
14.3
|
|
|
|
16.4
|
%
|
|
|
32.3
|
|
|
|
29.9
|
|
|
|
8.0
|
%
|
General
and administrative expenses
|
|
|
122.6
|
|
|
|
74.5
|
|
|
|
64.7
|
%
|
|
|
229.5
|
|
|
|
139.7
|
|
|
|
64.3
|
%
|
Gain
on sale of FirstGuard Missouri
|
|
(3.3
|
)
|
|
—
|
|
|
—
|
%
|
|
(7.5
|
)
|
|
—
|
|
|
—
|
%
|
Earnings
from operations
|
|
|
16.9
|
|
|
|
6.3
|
|
|
|
167.4
|
%
|
|
|
34.0
|
|
|
|
18.9
|
|
|
|
80.0
|
%
|
Investment
and other income, net
|
|
1.7
|
|
|
1.5
|
|
|
20.9
|
%
|
|
3.1
|
|
|
3.0
|
|
|
4.3
|
%
|
Earnings
before income taxes
|
|
|
18.6
|
|
|
|
7.8
|
|
|
|
140.3
|
%
|
|
|
37.1
|
|
|
|
21.9
|
|
|
|
69.7
|
%
|
Income
tax (benefit) expense
|
|
0.8
|
|
|
2.9
|
|
|
(70.6
|
)%
|
|
(18.9
|
)
|
|
8.2
|
|
|
(331.6
|
)%
|
Net earnings |
|
$ |
17.8 |
|
|
$ |
4.9 |
|
|
|
258.1 |
% |
|
$ |
56.0 |
|
|
$ |
13.7 |
|
|
$ |
307.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per common share |
|
$ |
0.40 |
|
|
$ |
0.11 |
|
|
|
263.6 |
% |
|
$ |
1.25 |
|
|
$ |
0.31 |
|
|
|
303.2 |
% |
Revenues
and Revenue Recognition
Our
Medicaid Managed Care segment generates revenues primarily from premiums
we
receive from the states in which we operate health plans. We receive a fixed
premium per member per month pursuant to our state contracts. We generally
receive premium payments during the month we provide services and recognize
premium revenue during the period in which we are obligated to provide services
to our members. Some states enact premium taxes or similar assessments,
collectively, premium taxes, and these taxes are recorded as a component
of
revenues and general and administrative expenses (gross). Premium taxes
totaled $19.9 million and $38.1 million in the three and six months ended
June
30, 2007, respectively, compared to $6.9 million and $11.2 million for the
comparable periods in 2006. 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 year over year primarily through 1) growth in the Medicaid
Managed Care segment, 2) premium rate increases, and 3) growth in our Specialty
Services segment.
|
1.
|
Medicaid
Managed Care segment growth
|
For
the
six months ended June 30, 2007, segment revenue from external customers
increased to $1,278.3 million from $863.0 million in the same prior year
period. The increase is primarily due to six months of Georgia
operations in 2007, compared to one month in 2006, and a higher mix of SSI
membership. The premium revenue for a SSI member is higher than a
Medicaid / SCHIP member. For example, in Ohio, the per member per month,
or
pmpm, premium for a SSI member averages approximately $1,000. In Texas, the
SSI pmpm averages approximately $450. The pmpm revenue for a Medicaid
member in our states’ averages approximately $190. The following table sets
forth our membership by state in our Medicaid Managed Care segment:
The
following table sets forth our membership by line of business in our Medicaid
Managed Care segment:
|
|
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
Medicaid
|
|
|
846,900
|
|
|
|
755,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kansas
and Missouri Medicaid/SCHIP members
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From
June
30, 2006 to June 30, 2007, we increased our membership through the commencement
of operations in the Southwest region of Georgia in September 2006, under
our subsidiary, Peach State Health Plan. We increased our Medicaid
membership in Ohio by adding members under our new contract in the East Central
and Northwest markets. We also increased our SSI membership in Ohio with
the
commencement of our new contract to serve Aged, Blind or Disabled members.
In
Texas, we increased our membership through new Medicaid, SCHIP and SSI 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, eligibility administration issues and
the
termination of certain physician contracts associated with a high cost hospital
system. Our membership decreased in Indiana primarily due to adjustments
made to
our provider network made in connection with our new state-wide contract
as well
as the termination of certain non-exclusive physician contracts. Our membership
in South Carolina is currently on a non-risk basis until they can be converted
to managed care under the state’s approved process. The revenue
associated with our Kansas and Missouri health plans was $77.3 million and
$153.6 million for the three and six months ended June 30, 2006,
respectively.
|
2.
|
Premium
rate increases
|
During
the six months ended June 30, 2007, we received premium rate increases ranging
from 2.5% to 10.1%, or 2.1% on a composite basis across our
markets.
|
3.
|
Specialty
Services segment growth
|
For
the
six months ended June 30, 2007, segment revenue from external customers was
$120.2 million compared to $87.3 million for the same prior year
period. This increase was primarily due to the acquisition of
OptiCare and the commencement of our long-term care contract in
Arizona. 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.
At
June 30, 2007, our behavioral health company, Cenpatico, provided behavioral
health services to 95,200 members in Arizona and 37,500 members in Kansas,
compared to 93,600 members in Arizona and 39,400 members in Kansas at June
30,
2006.
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:
|
|
Three
Months Ended June
30,
|
|
|
Six
Months Ended June
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Medicaid
and SCHIP
|
|
|
80.6
|
%
|
|
|
84.0
|
%
|
|
|
81.5
|
%
|
|
|
83.4
|
%
|
SSI
|
|
|
87.5
|
|
|
|
87.6
|
|
|
|
87.2
|
|
|
|
87.6
|
|
Specialty
Services
|
|
|
75.9
|
|
|
|
83.7
|
|
|
|
77.5
|
|
|
|
83.9
|
|
Our
Medicaid and SCHIP HBR for the three and six months ended June 30, 2007 were
80.6% and 81.5%, respectively, a decrease of 3.4% and 1.9% over 2006. The
HBR
for the three months ended June 30, 2006, includes approximately 2.2% ($9.7
million) for adverse medical cost development in estimated medical claims
liabilities from the first quarter of 2006. The decrease is primarily
attributable to the adverse development included in the prior year amounts
and
increased premium taxes. Sequentially, our Medicaid and SCHIP HBR
decreased from 82.3% in the 2007 first quarter to 80.6% because
of decreases in our Indiana, Texas, and Wisconsin markets, primarily
related to inpatient and pharmacy cost trends.
The
decrease in the SSI HBR for the three and six months ended June 30, 2007
reflects an increase in premium taxes, partially offset by the new business
in
our Ohio and Texas health plans.
The
decrease in our Specialty Services HBR for the three and six months ended
June
30, 2007 is caused by the diversification of business in that segment which
now
includes OptiCare, effective July 1, 2006, and Bridgeway, effective October
1,
2006.
Cost
of Services
Our
cost
of services expense includes the pharmaceutical costs associated with our
pharmacy benefit manager’s external revenues. Cost of services also includes all
direct costs to support the 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.
General
and Administrative Expenses
Our
general and administrative expenses, or G&A, primarily reflect wages and
benefits, including stock compensation expense, and other administrative
costs
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 increased in the three months ended June
30, 2007 over the comparable period in 2006 primarily due to premium taxes,
expenses for additional facilities and staff to support our growth, especially
in Arizona and Georgia and a $3.0 million contribution to our charitable
foundation from a portion of the proceeds received upon the sale of FirstGuard
Missouri. The second quarter G&A expense also includes our
estimate of the ultimate resolution of the sanction received from the Georgia
Department of Community Health.
Our
G&A expense ratio represents G&A expenses as a percentage of total
revenues and reflects the relationship between revenues earned and the costs
necessary to earn those revenues. The following table sets forth the G&A
expense ratios by business segment:
|
|
Three
Months Ended June
30,
|
|
|
Six
Months Ended June
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Medicaid
Managed Care
|
|
|
14.0
|
%
|
|
|
12.3
|
%
|
|
|
13.5
|
%
|
|
|
12.1
|
%
|
Specialty
Services
|
|
|
15.8
|
|
|
|
17.4
|
|
|
|
15.8
|
|
|
|
19.3
|
|
The
increase in the Medicaid Managed Care G&A expense ratio for the three and
six months ended June 30, 2007 primarily reflects increased premium taxes.
Premium taxes were $19.9 million and $38.1 million in the three and six months
ended June 30, 2007, respectively, compared to $6.9 million and $11.2 million,
respectively, for the comparable periods in 2006.
The
decrease in the Specialty Services G&A ratio for the three and six months
ended June 30, 2007 primarily reflects the overall leveraging of expense
over
higher revenues with the addition of OptiCare and Bridgeway in the last two
quarters of 2006 and the growth of US Script’s business since the acquisition in
2006.
Gain
on Sale of FirstGuard Missouri
The
sale
of the operating assets of FirstGuard Missouri was completed effective February
1, 2007. Under the terms of the asset sale agreement, we received an initial
payment upon the sale of FirstGuard Missouri resulting in a gain of $4.2
million
in the first quarter of 2007. We recognized additional gain related to a
final
contingent payment in the second quarter of 2007 of $3.3 million. The
goodwill associated with FirstGuard written off in the first quarter of 2007
as
part of the transaction was $6.0 million.
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 $2.1 million and $3.0 million in the three and six months ended
June 30, 2007, respectively, over the comparable periods in 2006. The
increase was primarily a result of an increase in market interest rates and
larger investment balances. The increases were offset by asset
write-offs associated with the abandonment of the stock of our FirstGuard
health
plans of $0.7 million and $2.3 million in the three and six months ended
June 30, 2007, respectively. Interest expense increased $1.8 million and
$2.9 million in the three and six months ended June 30, 2007, respectively,
primarily from increased debt.
Income
Tax (Benefit) Expense
During
the second quarter of 2007 we recognized a tax benefit of $6.4 million
associated with the abandonment of the stock of our Missouri health plan,
resulting in net tax expense of $0.8 million, despite having $18.6 million
of
pre-tax income. During the first quarter of 2007, we recognized a tax benefit
of
$29.9 million associated with the abandonment of the stock of our Kansas
health
plan, resulting in a net tax benefit of $19.7 million, despite having $18.5
million of pre-tax income. During the first quarter of 2007, we also
recorded $4.2 million of income tax expense associated with the sale of
FirstGuard Missouri. Excluding the effect of the Kansas and Missouri health
plans stock deduction and the gain on sale of our Missouri health plan, our
2007
effective tax rate for both the three and six months ended June 30, 2007
was 38.0% compared to 35.9% and 37.2%, respectively, for the comparable
periods in 2006. The increase was due to the recognition of certain
state tax credits in the prior year.
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 $59.9 million in the six months ended June 2007 compared to $14.4
million in the comparable period in 2006. Both periods reflect an increase
in
premium and related receivables related to the June capitation payment from
the
State of Wisconsin. The State holds this payment over their fiscal
year-end and it was received in July along with the July capitation payment
in
both years. Medical claims liabilities increased $14.9 million in the 2007
first
six months reflecting new business in Ohio and Texas, offset by the payment
of Kansas and Missouri claims incurred in 2006. We expect that the tax
benefit we recorded associated with the abandonment of the stock of our Kansas
and Missouri health plans will result in reduced income tax payments totaling
approximately $21.0 million over the next several quarters.
Our
investing activities used cash of $115.1 million in the six months ended
June 30, 2007 compared to $100.4 million in the comparable period in 2006.
Our
investing activities in 2007 consisted primarily of additions to the investment
portfolios of our regulated subsidiaries including transfers from cash and
cash
equivalents to long-term investments. During 2006, our investing activities
primarily consisted of the acquisition of US Script. Our investing activities
in
2006 also included additions to the investment portfolios of our regulated
subsidiaries. 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 June 30, 2007, our investment portfolio consisted
primarily of fixed-income securities with an average duration of 1.6 years.
Cash
is invested in investment vehicles such as municipal bonds, corporate bonds,
insurance contracts, commercial paper, equity securities 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
$29.4 million and $23.5 million on capital assets in the six months ended
June 30, 2007 and 2006, respectively, consisting primarily of software and
hardware upgrades, and furniture, equipment and leasehold improvements related
to office and market expansions. We anticipate spending an additional $35
million on additional capital expenditures in 2007 primarily related to system
upgrades and market expansions.
We
have
been pursuing a redevelopment project in the City of Clayton, Missouri to
accommodate office expansion plans associated with future company
growth. In July 2007, we announced we would consider other
alternatives due to our current inability to acquire all the real estate
necessary for the project in Clayton.
Our
financing activities provided cash of $20.7 million and $70.0 million in
the six
months ended June 30, 2007 and 2006, respectively. During 2007, our financing
activities primarily related to proceeds from issuance of $175 million in
senior
notes as discussed below. During 2006, our financing activities primarily
related to proceeds from borrowings under our credit facility. These borrowings
were used primarily for the acquisition of US Script.
At
June
30, 2007, we had negative working capital, defined as current assets less
current liabilities, of $(10.5) million, as compared to $63.9 million at
December 31, 2006. Our working capital is negative due to our efforts
to increase investment returns through purchases of investments that have
maturities of greater than one year and, therefore, are classified as long-term.
We manage our short-term and long-term investments with the goal of ensuring
that a sufficient portion is held in investments that are highly liquid and
can
be sold to fund short-term requirements as needed.
Cash,
cash equivalents and short-term investments were $279.8 million at June 30,
2007
and $338.0 million at December 31, 2006. Long-term investments were $313.9
million at June 30, 2007 and $170.7 million at December 31, 2006, including
restricted deposits of $26.2 million and $25.3 million, respectively. At
June
30, 2007, cash and investments held by our unregulated entities totaled $65.8
million while cash and investments held by our regulated entities totaled
$527.9
million.
We
have a
$300 million revolving credit agreement. Borrowings under the agreement bear
interest based upon LIBOR rates, the Federal Funds Rate or the Prime Rate.
There
is a commitment fee on the unused portion of the agreement that ranges from
0.15% to 0.275% depending on the total debt to EBITDA ratio. The agreement
contains non-financial and financial covenants, including requirements of
minimum fixed charge coverage ratios, maximum debt to EBITDA ratios and minimum
net worth. The agreement will expire in September 2011. As of June 30, 2007,
we
had no borrowings outstanding under the agreement and $24.5 million in letters
of credit outstanding, leaving availability of $275.5 million. As of June
30,
2007, we were in compliance with all covenants.
In
March
2007, we issued $175 million aggregate principal amount of our 7 ¼% Senior Notes
due April 1, 2014. In July 2007, the Notes were registered under the Securities
Act of 1933, pursuant to a registration rights agreement with the initial
purchasers. The indenture governing the Notes contains non-financial and
financial covenants, including requiring a minimum fixed charge coverage
ratio.
Interest will be paid semi-annually beginning in October 2007. We used a
portion
of the net proceeds from the offering to refinance approximately $150.0 million
of our existing indebtedness which was outstanding under our revolving credit
facility. The additional proceeds will be used for general corporate purposes.
As of June 30, 2007, 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 six months ended June 30, 2007, we repurchased 150,600 shares
at an average price of $21.45. 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.
During
the six months ended June 30, 2007, we received dividends of $38.2 million
for
the excess regulatory capital remaining in our Kansas and Missouri health
plans.
There
were no other material changes outside the ordinary course of business in
lease
obligations or other contractual obligations in the six months ended June
30,
2007. 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.
REGULATORY
CAPITAL AND DIVIDEND RESTRICTIONS
As
managed care organizations, certain of our subsidiaries are subject to state
regulations that, among other things, require the maintenance of minimum
levels
of statutory capital, as defined by each state, and restrict the timing,
payment
and amount of dividends and other distributions that may be paid to us.
Generally, the amount of dividend distributions that may be paid by a regulated
subsidiary without prior approval by state regulatory authorities is limited
based on the entity’s level of statutory net income and statutory capital and
surplus.
Our
regulated subsidiaries are required to maintain minimum capital requirements
prescribed by various regulatory authorities in each of the states in which
we
operate. As of June 30, 2007, our subsidiaries had aggregate statutory
capital and surplus of $271.4 million, compared with the required minimum
aggregate statutory capital and surplus requirements of $162.6
million.
The
National Association of Insurance Commissioners has adopted rules which set
minimum risk-based capital requirements for insurance companies, managed
care
organizations and other entities bearing risk for healthcare coverage. As
of
June 30, 2007, all of our health plans were in compliance with the risk-based
capital requirements enacted in their respective states.
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,” Item 1. “Legal Proceedings” and Item 1A. “Risk Factors.” Readers
are cautioned that matters subject to forward-looking statements involve
known
and unknown risks and uncertainties, including economic, regulatory, competitive
and other factors that may cause our or our 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 this filing contains a further discussion of these and other
additional important factors that could cause actual results to differ from
expectations. We disclaim any current intention or obligation to update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise. Due to these important factors and risks, we
cannot
give assurances with respect to our future premium levels or our ability
to
control our future medical costs.
INVESTMENTS
As
of
June 30, 2007, we had short-term investments of $43.4 million and long-term
investments of $313.9 million, including restricted deposits of $26.2 million.
The short-term investments consist of highly liquid securities with maturities
between three and twelve months. The long-term investments consist of municipal,
corporate and U.S. agency bonds, equity securities, asset-backed securities,
life insurance contracts and U.S. Treasury investments and have maturities
greater than one year. Restricted deposits consist of investments required
by
various state statutes to be deposited or pledged to state agencies. Due
to the
nature of the states’ requirements, these investments are classified as
long-term regardless of the contractual maturity date. Our investments are
subject to interest rate risk and will decrease in value if market rates
increase. Assuming a hypothetical and immediate 1% increase in market interest
rates at June 30, 2007, the fair value of our fixed income investments would
decrease by approximately $3.5 million. Declines in interest rates over time
will reduce our investment income.
INFLATION
Although
the general rate of inflation has remained relatively stable and healthcare
cost
inflation has stabilized in recent years, the national healthcare cost inflation
rate still exceeds the general inflation rate. We use various strategies
to
mitigate the negative effects of healthcare cost inflation. Specifically,
our
health plans try to control medical and hospital costs through contracts
with
independent providers of healthcare services. Through these contracted care
providers, our health plans emphasize preventive healthcare and appropriate
use
of specialty and hospital services.
While
we
currently believe our strategies to mitigate healthcare cost inflation will
be
successful, competitive pressures, new healthcare and pharmaceutical product
introductions, demands from healthcare providers and customers, applicable
regulations or other factors may affect our ability to control the impact
of
healthcare cost increases.
Evaluation
of Disclosure Controls and Procedures - Our management, with the
participation of our chief executive officer and chief financial officer,
evaluated the effectiveness of our disclosure controls and procedures as
of June
30, 2007. The term “disclosure controls and procedures,” as defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other
procedures of a company that are designed to ensure that information required
to
be disclosed by a company in the reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported, within the
time
periods specified in the SEC's rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed
to
ensure that information required to be disclosed by a company in the reports
that it files or submits under the Exchange Act is accumulated and communicated
to the company’s management, including its principal executive and principal
financial officers, as appropriate to allow timely decisions regarding required
disclosure. Management recognizes that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving their objectives and management necessarily applies its judgment
in
evaluating the cost-benefit relationship of possible controls and procedures.
Based on the evaluation of our disclosure controls and procedures as of June
30,
2007, our chief executive officer and chief financial officer concluded that,
as
of such date, our disclosure controls and procedures were effective at the
reasonable assurance level.
Changes
in Internal Control Over Financial Reporting - No change in our
internal control over financial reporting (as defined in Rules 13a-15(f)
and
15d-15(f) under the Exchange Act) occurred during the quarter ended June
30,
2007 that has materially affected, or is reasonably likely to materially
affect,
our internal control over financial reporting.
PART
II
OTHER
INFORMATION
As
previously disclosed, two class action lawsuits were filed against us and
certain of our officers and directors in the United States District Court
for
the Eastern District of Missouri, or Eastern District Court. The
lawsuits were consolidated on November 2, 2006, and an amended consolidated
complaint was filed in the Eastern District Court on January 17, 2007, which
we
refer to as the Consolidated Lawsuit. The Consolidated Lawsuit alleges, on
behalf of purchasers of our common stock from April 25, 2006 through July
17,
2006, that we and certain of our officers and directors violated federal
securities laws by issuing a series of materially false statements prior
to the
announcement of our fiscal 2006 second quarter results. According to the
Consolidated Lawsuit, these allegedly materially false statements had the
effect
of artificially inflating the price of our common stock, which subsequently
dropped after the issuance of a press release announcing our preliminary
fiscal
2006 second quarter earnings and revised guidance. We filed a motion to dismiss
the Consolidated Lawsuit. On June 29, 2007, the motion to dismiss was
granted. The period for the filing of appeals has not yet
expired.
Additionally, in August 2006, a separate derivative action was filed on behalf
of Centene Corporation against us and certain of our officers and directors
in
the Eastern District Court. Plaintiff purported to bring suit derivatively
on
behalf of the Company against the Company’s directors for breach of fiduciary
duties, gross mismanagement and waste of corporate assets by reason of
the
directors’ alleged failure to correct the misstatements alleged in the
Consolidated Lawsuit discussed above. The derivative complaint largely
repeated
the allegations in the Consolidated Lawsuit. Based on discussions that
have been
held with plaintiff’s counsel, it is our understanding that plaintiff did not
intend to pursue this action unless the Consolidated Lawsuit proceeded
past the
dismissal stage. The derivative action has been dismissed.
We
routinely are subjected to legal proceedings in the normal course of business.
While the ultimate resolution of such matters is uncertain, we do not expect
the
results of any of these matters individually, or in the aggregate, to have
a
material effect on our financial position or results of operations.
FACTORS
THAT MAY AFFECT FUTURE RESULTS AND THE
TRADING
PRICE OF OUR COMMON STOCK
You
should carefully consider the risks described below before making an investment
decision. The trading price of our common stock could decline due to any
of
these risks, in which case you could lose all or part of your investment.
You
should also refer to the other information in this filing, including our
consolidated financial statements and related notes. 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 a second 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
CMS
the federal share of any overpayments identified.
On
February 8, 2006, President Bush signed the Deficit Reduction Act of 2005
to
reduce the size of the federal deficit. The Act reduces federal spending
by
nearly $40 billion over 5 years, including a $5 billion reduction in Medicaid.
The Act reduces spending by cutting Medicaid payments for prescription drugs
and
gives states new power to reduce or reconfigure benefits. This law may also
lead
to lower Medicaid reimbursements in some states. The Bush administration’s
budget proposal for fiscal year 2008 proposes cutting Medicaid funding by
$25.7
billion in funding reductions over five years. Additionally, the Bush
administration’s 2008 budget for SCHIP provides for yearly allotments at the
fiscal year 2007 levels, plus an additional $5 billion over the five-year
period, which some believe will result in a funding shortfall. 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, we anticipate that Congress
will pass legislation that will freeze federal funding at the current 2007
levels. Congress began 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 have faced shortfalls 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 had
been predicted that two states in which we have SCHIP contracts, Georgia
and New Jersey, would spend all of their federal allocation for fiscal year
2007
prior to the end of the year. In December 2006, Congress passed legislation
that
redistributed funds that were not spent in prior years to the states that
were facing these shortfalls. The Congressional Research Service estimated
that this legislation would delay the shortfall to the first part of May
2007.
On May 25, 2007, President Bush signed a bill that allocates $650 million
to
cover the SCHIP shortfalls. It therefore does not currently appear
that any states in which we have SCHIP contracts will suffer a shortfall
in
fiscal year 2007. However, because they have funding caps, there is a
risk that these states could experience shortfalls in future years, which
could
have an impact on our ability to receive amounts owed to us from these
states.
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 August 31, 2007 and December 31, 2010.
When
our contracts expire, they may be opened for bidding by competing healthcare
providers. There is no guarantee that our contracts will be renewed or extended.
For example, on August 25, 2006, we received notification from the Kansas
Health
Policy Authority that FirstGuard Health Plan Kansas, Inc.’s contract with the
state would not be renewed or extended, and as a result, our contract ended
on
December 31, 2006. Further, our contracts with the states are subject to
cancellation by the state after a short notice period in the event of
unavailability of state funds. 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:
• force
us to restructure our relationships with providers within our
network;
• require
us to implement additional or different programs and systems;
• mandate
minimum medical expense levels as a percentage of premium revenues;
• restrict
revenue and enrollment growth;
• require
us to develop plans to guard against the financial insolvency of our
providers;
• increase
our healthcare and administrative costs;
• impose
additional capital and reserve requirements; and
• increase
or change our liability to members in the event of malpractice by our
providers.
For
example, Congress has previously considered various forms of patient protection
legislation commonly known as the Patients’ Bill of Rights and such legislation
may be proposed again. We cannot predict the impact of any such legislation,
if
adopted, on our business.
Regulations
may decrease the profitability of our health plans.
Certain
states have enacted regulations which require us to maintain a minimum health
benefits ratio, or establish limits on our profitability. Other states require
us to meet certain performance and quality metrics in order to receive our
full
contractual revenue. In certain circumstances, our plans may be required
to pay
a rebate to the state in the event profits exceed established levels. These
regulatory requirements, changes in these requirements or the adoption of
similar requirements by our other regulators may limit our ability to increase
our overall profits as a percentage of revenues. Certain states, including
but
not limited to Georgia, Indiana, New Jersey and Texas have implemented
prompt-payment laws and are enforcing penalty provisions for failure to pay
claims in a timely manner. Failure to meet these requirements can result
in
financial fines and penalties. In addition, states may attempt to reduce
their
contract premium rates if regulators perceive our health benefits ratio as
too
low. Any of these regulatory actions could harm our operating results. Certain
states also impose marketing restrictions on us which may constrain our
membership growth and our ability to increase our revenues.
We
face periodic reviews, audits and investigations under our contracts with
state
government agencies, and these audits could have adverse findings, which
may
negatively impact our business.
We
contract with various state governmental agencies to provide managed healthcare
services. Pursuant to these contracts, we are subject to various reviews,
audits
and investigations to verify our compliance with the contracts and applicable
laws and regulations. Any adverse review, audit or investigation could result
in:
• refunding
of amounts we have been paid pursuant to our contracts;
• imposition
of fines, penalties and other sanctions on us;
• loss
of our right to participate in various markets;
• increased
difficulty in selling our products and services; and
• loss
of one or more of our licenses.
Failure
to comply with government regulations could subject us to civil and criminal
penalties.
Federal
and state governments have enacted fraud and abuse laws and other laws to
protect patients’ privacy and access to healthcare. In some states, we may be
subject to regulation by more than one governmental authority, which may
impose
overlapping or inconsistent regulations. Violation of these and other laws
or
regulations governing our operations or the operations of our providers could
result in the imposition of civil or criminal penalties, the cancellation
of our
contracts to provide services, the suspension or revocation of our licenses
or
our exclusion from participating in the Medicaid, SCHIP and SSI programs.
If we
were to become subject to these penalties or exclusions as the result of
our
actions or omissions or our inability to monitor the compliance of our
providers, it would negatively affect our ability to operate our
business.
The
Health Insurance Portability and Accountability Act of 1996, or HIPAA, broadened
the scope of fraud and abuse laws applicable to healthcare companies. HIPAA
created civil penalties for, among other things, billing for medically
unnecessary goods or services. HIPAA established new enforcement mechanisms
to
combat fraud and abuse, including civil and, in some instances, criminal
penalties for failure to comply with specific standards relating to the privacy,
security and electronic transmission of most individually identifiable health
information. It is possible that Congress may enact additional legislation
in
the future to increase penalties and to create a private right of action
under
HIPAA, which could entitle patients to seek monetary damages for violations
of
the privacy rules.
We
may incur significant costs as a result of compliance with government
regulations, and our management will be required to devote time to
compliance.
Many
aspects of our business are affected by government laws and regulations.
The
issuance of new regulations, or judicial or regulatory guidance regarding
existing regulations, could require changes to many of the procedures we
currently use to conduct our business, which may lead to additional costs
that
we have not yet identified. We do not know whether, or the extent to which,
we
will be able to recover from the states our costs of complying with these
new
regulations. The costs of any such future compliance efforts could have a
material adverse effect on our business. We have already expended significant
time, effort and financial resources to comply with the privacy and security
requirements of HIPAA. We cannot predict whether states will enact stricter
laws
governing the privacy and security of electronic health information. If any
new
requirements are enacted at the state or federal level, compliance would
likely
require additional expenditures and management time.
In
addition, the Sarbanes-Oxley Act, 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.
On
May
29, 2007, CMS issued a final rule that would reduce states’ use of
intergovernmental transfers for the states’ share of Medicaid program funding.
By restricting the use of intergovernmental transfers, this rule may restrict
some states’ funding for Medicaid, which could adversely affect our growth,
operations and financial performance. On May 25, 2007, President Bush
signed an Iraq war supplemental spending bill that includes a one-year
moratorium on the effectiveness of the final rule. We cannot predict
whether the rule will ever be implemented and if it is, what impact it will
have
on our business.
Recent
legislative changes in the Medicare program may also affect our business.
For
example, the Medicare Prescription Drug, Improvement and Modernization Act
of
2003 revised cost-sharing requirements for some beneficiaries and requires
states to reimburse the federal Medicare program for costs of prescription
drug
coverage provided to beneficiaries who are enrolled simultaneously in both
the
Medicaid and Medicare programs. The Bush administration has also proposed
to
further reduce total federal funding for the Medicaid program by $25.7 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 actual incurred and received data. From time to time in the past,
our
actual results have varied from our estimates, particularly in times of
significant changes in the number of our members. Our failure to estimate
IBNR
accurately may also affect our ability to take timely corrective actions,
further harming our results.
Receipt
of inadequate or significantly delayed premiums would negatively affect our
revenues and profitability.
Our
premium revenues consist of fixed monthly payments per member and supplemental
payments for other services such as maternity deliveries. These premiums
are
fixed by contract, and we are obligated during the contract periods to provide
healthcare services as established by the state governments. We use a large
portion of our revenues to pay the costs of healthcare services delivered
to our
members. If premiums do not increase when expenses related to medical services
rise, our earnings will be affected negatively. In addition, our actual medical
services costs may exceed our estimates, which would cause our health benefits
ratio, or our expenses related to medical services as a percentage of premium
revenue, to increase and our profits to decline. In addition, it is possible
for
a state to increase the rates payable to the hospitals without granting a
corresponding increase in premiums to us. If this were to occur in one or
more
of the states in which we operate, our profitability would be harmed. In
addition, if there is a significant delay in our receipt of premiums to offset
previously incurred health benefits costs, our earnings could be negatively
impacted.
Failure
to effectively manage our medical costs or related administrative costs would
reduce our profitability.
Our
profitability depends, to a significant degree, on our ability to predict
and
effectively manage expenses related to health benefits. We have less control
over the costs related to medical services than we do over our general and
administrative expenses. Because of the narrow margins of our health plan
business, relatively small changes in our health benefits ratio can create
significant changes in our financial results. Changes in healthcare regulations
and practices, the level of use of healthcare services, hospital costs,
pharmaceutical costs, major epidemics, new medical technologies and other
external factors, including general economic conditions such as inflation
levels, are beyond our control and could reduce our ability to predict and
effectively control the costs of providing health benefits. We may not be
able
to manage costs effectively in the future. If our costs related to health
benefits increase, our profits could be reduced or we may not remain
profitable.
Difficulties
in executing our acquisition strategy could adversely affect our
business.
Historically,
the acquisition of
Medicaid and specialty services businesses, contract rights and related assets
of other health plans both in our existing service areas and in new markets
has
accounted for a significant amount of our growth. Many of the other potential
purchasers have greater financial resources than we have. In addition, many
of
the sellers are interested either in (a) selling, along with their Medicaid
assets, other assets in which we do not have an interest or (b) selling their
companies, including their liabilities, as opposed to the assets of their
ongoing businesses.
We
generally are required to obtain regulatory approval from one or more state
agencies when making acquisitions. In the case of an acquisition of a business
located in a state in which we do not currently operate, we would be required
to
obtain the necessary licenses to operate in that state. In addition, even
if we
already operate in a state in which we acquire a new business, we would be
required to obtain additional regulatory approval if the acquisition would
result in our operating in an area of the state in which we did not operate
previously, and we could be required to renegotiate provider contracts of
the
acquired business. We cannot assure you that we would be able to comply with
these regulatory requirements for an acquisition in a timely manner, or at
all.
In deciding whether to approve a proposed acquisition, state regulators may
consider a number of factors outside our control, including giving preference
to
competing offers made by locally owned entities or by not-for-profit
entities.
We
also
may be unable to obtain sufficient additional capital resources for future
acquisitions. If we are unable to effectively execute our acquisition strategy,
our future growth will suffer and our results of operations could be
harmed.
Execution
of our growth strategy may increase costs or liabilities, or create disruptions
in our business.
We
pursue
acquisitions of other companies or businesses from time to time. Although
we
review the records of companies or businesses we plan to acquire, even an
in-depth review of records may not reveal existing or potential problems
or
permit us to become familiar enough with a business to assess fully its
capabilities and deficiencies. As a result, we may assume unanticipated
liabilities or adverse operating conditions, or an acquisition may not perform
as well as expected. We face the risk that the returns on acquisitions will
not
support the expenditures or indebtedness incurred to acquire such businesses,
or
the capital expenditures needed to develop such businesses. We also face
the
risk that we will not be able to integrate acquisitions into our existing
operations effectively without substantial expense, delay or other operational
or financial problems. Integration may be hindered by, among other things,
differing procedures, including internal controls, business practices and
technology systems. We may need to divert more management resources to
integration than we planned, which may adversely affect our ability to pursue
other profitable activities.
In
addition to the difficulties we may face in identifying and consummating
acquisitions, we will also be required to integrate and consolidate any acquired
business or assets with our existing operations. This may include the
integration of:
• additional
personnel who are not familiar with our operations and corporate
culture;
• provider
networks that may operate on different terms than our existing
networks;
• existing
members, who may decide to switch to another healthcare plan; and
• disparate
administrative, accounting and finance, and information systems.
Additionally,
our growth strategy includes start-up operations in new markets or new products
in existing markets. We may incur significant expenses prior to commencement
of
operations and the receipt of revenue. As a result, these start-up operations
may decrease our profitability. In the event we pursue any opportunity to
diversify our business internationally, we would become subject to additional
risks, including, but not limited to, political risk, an unfamiliar regulatory
regime, currency exchange risk and exchange controls, cultural and language
differences, foreign tax issues, and different labor laws and
practices.
Accordingly,
we may be unable to identify, consummate and integrate future acquisitions
or
start-up operations successfully or operate acquired or new businesses
profitably.
If
competing managed care programs are unwilling to purchase specialty services
from us, we may not be able to successfully implement our strategy of
diversifying our business lines.
We
are
seeking to diversify our business lines into areas that complement our Medicaid
business in order to grow our revenue stream and balance our dependence on
Medicaid risk reimbursement. In order to diversify our business, we must
succeed
in selling the services of our specialty subsidiaries not only to our managed
care plans, but to programs operated by third-parties. Some of these third-party
programs may compete with us in some markets, and they therefore may be
unwilling to purchase specialty services from us. In any event, the offering
of
these services will require marketing activities that differ significantly
from
the manner in which we seek to increase revenues from our Medicaid programs.
Our
inability to market specialty services to other programs may impair our ability
to execute our business strategy.
Failure
to achieve timely profitability in any business would negatively affect our
results of operations.
Start-up
costs associated with a new business can be substantial. For example, in
order
to obtain a certificate of authority in most jurisdictions, we must first
establish a provider network, have systems in place and demonstrate our ability
to obtain a state contract and process claims. If we were unsuccessful in
obtaining the necessary license, winning the bid to provide service or
attracting members in numbers sufficient to cover our costs, any new business
of
ours would fail. We also could be obligated by the state to continue to provide
services for some period of time without sufficient revenue to cover our
ongoing
costs or recover start-up costs. The expenses associated with starting up
a new
business could have a significant impact on our results of operations if
we are
unable to achieve profitable operations in a timely fashion.
We
derive a majority of our premium revenues from operations in a small number
of
states, and our operating results would be materially affected by a decrease
in
premium revenues or profitability in any one of those
states.
Operations
in Georgia, Indiana, Kansas, Texas and Wisconsin have accounted for most
of our
premium revenues to date. For example, our Medicaid contract with Kansas,
which
terminated December 31, 2006, together with our Medicaid contract with Missouri
accounted for $317.0 million in revenue for the year ended December 31, 2006.
If
we were unable to continue to operate in each of these other 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. 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, in 2006, we were
named
in two securities class action lawsuits that have now been dismissed. In
addition, we may in the future be the target of similar litigation. As with
other litigation, securities litigation could be costly and time consuming,
require significant attention from our management and could harm our business
and operating results.
Issuer
Purchases of Equity Securities (1)
Second
Quarter 2007
|
|
Period
|
|
Total
Number of
Shares
Purchased
|
|
|
Average
Price
Paid
per
Share
|
|
|
Total
Number
of
Shares
Purchased
as
Part
of Publicly
Announced
Plans
or
Programs
|
|
|
Maximum
Number
of Shares
that
May Yet Be
Purchased
Under
the
Plans or
Programs
|
|
April
1 – April 30, 2007
|
|
|
41,500
|
|
|
$ |
21.52
|
|
|
|
41,500
|
|
|
|
3,523,000
|
|
May
1 – May 31, 2007
|
|
|
20,000
|
|
|
|
21.61
|
|
|
|
20,000
|
|
|
|
3,503,000
|
|
June
1 – June 30, 2007
|
|
|
51,000
|
|
|
|
20.61
|
|
|
|
51,000
|
|
|
|
3,452,000
|
|
TOTAL
|
|
|
112,500
|
|
|
$ |
21.12
|
|
|
|
112,500
|
|
|
|
3,452,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) On
November 7, 2005 our Board of Directors adopted a stock repurchase
program
of up to 4,000,000 shares, which extends through October 31, 2007.
During
the three months ended June 30, 2007, we did not repurchase any
shares
other than through this publicly announced program.
|
|
We
held
our annual meeting of stockholders on April 24, 2007. At the meeting, Steve
Bartlett and Tommy Thompson were re-elected as Class II Directors. The votes
with respect to each nominee are set forth below:
|
|
Total
Vote For
Each
Director
|
|
|
Total
Vote Withheld From Each Director
|
|
Mr.
Bartlett
|
|
|
39,761,305
|
|
|
|
751,616
|
|
Mr.
Thompson
|
|
|
35,423,568
|
|
|
|
5,089,353
|
|
Additional
directors of the Company whose terms of office continued after the meeting
are
Richard A. Gephardt, Robert K. Ditmore, Fredrick H. Eppinger, Michael F.
Neidorff, David L. Steward, and John R. Roberts.
Also
at
the meeting, the following actions were taken:
·
|
the
selection of KPMG LLP as the Company’s independent registered public
accounting firm for the fiscal year ending December 31, 2007 was
ratified;
|
·
|
amendments
to the 2003 Stock Incentive Plan were approved;
and
|
·
|
the
2007 Long-Term Incentive Plan was
approved.
|
The
votes
are set forth below:
|
|
Total
Vote For
|
|
|
Total
Vote Against
|
|
|
Total
Vote Abstain
|
|
|
Total Broker
Non-Votes
|
|
KPMG
LLP
|
|
|
40,277,416
|
|
|
|
225,228
|
|
|
|
10,277
|
|
|
|
2,958,043
|
|
2003
Stock Incentive Plan
|
|
|
31,868,172
|
|
|
|
5,173,398
|
|
|
|
18,100
|
|
|
|
6,411,294
|
|
2007
Long-Term Incentive Plan
|
|
|
32,595,557
|
|
|
|
4,452,961
|
|
|
|
11,153
|
|
|
|
6,411,293
|
|
EXHIBIT NUMBER
|
|
DESCRIPTION
|
|
|
|
4.1
|
|
Amendment
No. 1 to Rights Agreement by and between Centene Corporation and
Mellon
Investor Services LLC, as right agent, dated April 23, 2007, incorporated
herein by reference to Exhibit 4.1 of Form 8-K filed April 26,
2007.
|
|
|
|
4.2
|
|
Indenture
for the 7 ¼ % Senior Notes due 2014 dated March 22, 2007 among Centene
Corporation and The Bank of New York Trust Company, N.A., as trustee,
incorporated herein by reference to Exhibit 4.3 of Form S-4 filed
May 11,
2007.
|
|
|
|
10.1
|
|
Notice
of Renewal for fiscal year 2008 between Peach State Health Plan,
Inc. and
Georgia Department of Community Health.
|
|
|
|
10.2
|
|
Amendment
to the Contract between the Texas Health and Human Services Commission
and
Superior HealthPlan, Inc.
|
|
|
|
10.3
|
|
Centene
Corporation Amended and Restated 2003 Stock Incentive Plan, incorporated
herein by reference to Exhibit 10.1 to Form 8-K filed April 26,
2007.
|
|
|
|
10.4
|
|
Centene
Corporation 2007 Long-Term Incentive Plan, incorporated herein
by
reference to Exhibit 10.2 to Form 8-K filed April 26,
2007.
|
|
|
|
10.5
|
|
Form
of Executive Severance and Change in Control Agreement, incorporated
herein by reference to Exhibit 10.1 to Form 8-K filed May 23,
2005.
|
|
|
|
12.1
|
|
Computation
of ratio of earnings to fixed charges.
|
|
|
|
31.1
|
|
Certification
of Chairman, President and Chief Executive Officer pursuant to
Rule
13(a)-14(a) under the Securities Exchange Act of 1934, as
amended.
|
|
|
|
31.2
|
|
Certification
of Executive Vice President and Chief Financial Officer pursuant
to Rule
13(a)-14(a) under the Securities Exchange Act of 1934, as
amended.
|
|
|
|
32.1
|
|
Certification
of Chairman, President and Chief Executive Officer pursuant to
18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act
of 2002.
|
|
|
|
32.2
|
|
Certification
of Executive Vice President and Chief Financial Officer pursuant
to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized as of July 24, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
Chairman,
President and Chief Executive Officer
(principal
executive officer)
|
|
|
|
|
|
|
|
Executive Vice
President and Chief Financial Officer
(principal financial
officer)
|
|
|
|
|
|
|
|
Senior Vice
President, Chief Accounting Officer and Treasurer
(principal
accounting officer)
|