form10k.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-K
(Mark
One)
T
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ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended December 31, 2008
or
£
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TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period
from to
Commission
file number: 001-31826
Centene
Corporation
(Exact
name of registrant as specified in its charter)
Delaware
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42-1406317
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(State
or other jurisdiction of
incorporation
or organization)
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(I.R.S.
Employer
Identification
Number)
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7711
Carondelet Avenue
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St.
Louis, Missouri
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63105
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code: (314) 725-4477
Securities
registered pursuant to Section 12(b) of the Act:
Common
Stock, $0.001 Par Value
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New
York Stock Exchange
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Title
of Each Class
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Name
of Each Exchange on Which
Registered
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Securities
registered pursuant to Section 12(g) of the Act:
None
(Title
of Each Class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes T No £
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes £ No T
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes T No £
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. T
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filed, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer”,
“accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange
Act. Large accelerated filer T
Accelerated filer £
Non-accelerated filer £
(do not check if a smaller reporting company) Smaller reporting
company £
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes £ No T
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant, based upon the last reported sale price of the
common stock on the New York Stock Exchange on June 30, 2008, was $713.9
million.
As of
February 6, 2009, the registrant had 43,012,236 shares of common stock
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the Proxy Statement for the registrant’s 2009 annual meeting of stockholders
are incorporated by reference in Part I, Item 1 and Part III, Items 10, 11, 12,
13 and 14.
Part
I
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Item
1.
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4
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Item
1A.
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12
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Item
1B.
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17
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Item
2.
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17
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Item
3.
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18
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Item
4.
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18
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Part
II
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Item
5.
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19
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Item
6.
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20
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Item
7.
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21
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Item 7A.
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27
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Item
8.
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27
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Item
9.
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46
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Item
9A.
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46
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Item
9B.
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48
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Part
III
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Item
10.
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48
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Item
11.
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48
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Item
12.
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48
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Item
13.
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48
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Item
14.
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48
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Part
IV
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Item 15.
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48
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50
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Our
trademark, service marks and trade names referred to in this filing
include Absolute Total Care, Bridgeway Health Solutions, Buckeye
Community Health Plan, Celtic Insurance Company, Cenpatico Behavioral Health,
Cenpatico Behavioral Health of Arizona, Centene, Managed Health
Services, MemberConnections, Nurse Response,
NurseWise, Nurtur, OptiCare, Peach State Health Plan, PhyTrust, ScriptAssist, Smart Start For
Your Baby, Sunshine State Health Plan, Superior HealthPlan, Total Carolina Care,
US Script and University Health Plans, among others.
FORWARD-LOOKING
STATEMENTS
All
statements, other than statements of current or historical fact, contained in
this filing are forward-looking statements. We have attempted to
identify these statements by terminology including “believe,” “anticipate,”
“plan,” “expect,” “estimate,” “intend,” “seek,” “target,” “goal,” “may,” “will,”
“should,” “can,” “continue” and other similar words or expressions in connection
with, among other things, any discussion of future operating or financial
performance. In particular, these statements include statements about
our market opportunity, our growth strategy, competition, expected activities
and future acquisitions, investments and the adequacy of our available cash
resources. These statements may be found in the various sections of
this filing, including those entitled “Management’s Discussion and Analysis of
Financial Condition and Results of Operations,” Part I, Item
1A. “Risk Factors,” and Part I, Item 3 “Legal
Proceedings.” Readers are cautioned that matters subject to
forward-looking statements involve known and unknown risks and uncertainties,
including economic, regulatory, competitive and other factors that may cause our
or our industry’s actual results, levels of activity, performance or
achievements to be materially different from any future results, levels of
activity, performance or achievements expressed or implied by these
forward-looking statements. These statements are not guarantees of
future performance and are subject to risks, uncertainties and
assumptions.
All
forward-looking statements included in this filing are based on information
available to us on the date of this filing. Actual results may differ
from projections or estimates due to a variety of important factors,
including:
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our
ability to accurately predict and effectively manage health benefits and
other operating expenses;
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changes
in healthcare practices;
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changes
in federal or state laws or
regulations;
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provider
contract changes;
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reduction
in provider payments by governmental
payors;
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disasters
and numerous other factors affecting the delivery and cost of
healthcare;
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the
expiration, cancellation or suspension of our Medicaid managed care
contracts by state governments;
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availability
of debt and equity financing, on terms that are favorable to us;
and
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general
economic and market conditions.
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Item 1A
“Risk Factors” of Part I of this filing contains a further discussion of these
and other 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.
PART
I
OVERVIEW
We are a
multi-line healthcare enterprise operating in two segments: Medicaid Managed
Care and Specialty Services. Our Medicaid Managed Care segment
provides Medicaid and Medicaid-related health plan coverage to individuals
through government subsidized programs, including Medicaid, the State Children’s
Health Insurance Program, or SCHIP, Foster Care, Medicare Special Needs Plans
and the Supplemental Security Income Program, also known as the Aged, Blind or
Disabled Program, or collectively ABD. Medicaid currently accounts
for 73% of our membership, while SCHIP (also including Foster Care) and ABD
(also including Medicare) account for 22% and 5%, respectively. Our
Specialty Services segment provides specialty services, including behavioral
health, individual health insurance, life and health management, long-term care
programs, managed vision, nurse triage, and pharmacy benefits management to
state programs, healthcare organizations, employer groups and other commercial
organizations, as well as to our own subsidiaries. Our Specialty
Services segment also provides a full range of healthcare solutions for the
rising number of uninsured Americans.
During
2008, we announced our intention to sell certain assets of University Health
Plans, Inc. This pending sale is discussed in detail under the
caption “Discontinued Operations” under “Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of
Operations.” Accordingly, our New Jersey health plan operations are
presented as discontinued operations for all periods in our consolidated
financial statements beginning with this Annual Report on Form
10-K. The following discussion and analysis is presented primarily in
the context of continuing operations unless otherwise identified. For
the year ended December 31, 2008, our revenues, total cash flow from operations,
and net earnings were $3.4 billion, $222.0 million and $84.2 million,
respectively.
Our
Medicaid Managed Care segment membership totaled approximately 1.2 million as of
December 31, 2008, while our Specialty Services segment external membership
totaled 163,100. We currently have health plan subsidiaries offering
healthcare services in Arizona, Georgia, Indiana, Ohio, South Carolina, Texas
and Wisconsin, as well as New Jersey. Additionally, effective in July
2007, we acquired a minority interest in Access Health Solutions, LLC, or
Access, which provides managed care on a non-risk basis for Medicaid recipients
in Florida. In February 2009, we began operations in Florida through
our wholly-owned subsidiary, Sunshine State Health Plan, Inc. We
provide member-focused services through locally based staff by assisting in
accessing care, coordinating referrals to related health and social services and
addressing member concerns and questions. We also provide education
and outreach programs to inform and assist members in accessing quality,
appropriate healthcare services.
We
believe our local approach to managing our health plans, including provider and
member services, enables us to provide accessible, quality, culturally-sensitive
healthcare coverage to our communities. Our health management,
educational and other initiatives are designed to help members best utilize the
healthcare system to ensure they receive appropriate, medically necessary
services and effective management of routine, severe and chronic health
problems, resulting in better health outcomes. We combine our
decentralized local approach for care with a centralized infrastructure of
support functions such as finance, information systems and claims
processing.
Our
initial health plan commenced operations in Wisconsin in 1984. We
were organized in Wisconsin in 1993 as a holding company for our initial health
plan and reincorporated in Delaware in 2001. Our corporate office is
located at 7711 Carondelet Avenue, St. Louis, Missouri 63105, and our telephone
number is (314) 725-4477. Our stock is publicly traded on the New
York Stock Exchange under the ticker symbol “CNC.”
INDUSTRY
We
provide our services to organizations and individuals primarily through
Medicaid, SCHIP, Foster Care and ABD programs. The federal Centers
for Medicare and Medicaid Services, or CMS, estimated the total Medicaid market
was approximately $311 billion in 2006, and estimate the market will grow to
$720 billion by 2017. According to the most recent information
provided by the Kaiser Commission on Medicaid and the Uninsured, Medicaid
spending increased by 5.3% in fiscal 2008 and states appropriated an increase of
5.8% for Medicaid in fiscal 2009 budgets.
Established
in 1965, Medicaid is the largest publicly funded program in the United States,
and provides health insurance to low-income families and individuals with
disabilities. Authorized by Title XIX of the Social Security Act,
Medicaid is an entitlement program funded jointly by the federal and state
governments and administered by the states. The majority of funding
is provided at the federal level. Each state establishes its own
eligibility standards, benefit packages, payment rates and program
administration within federal standards. As a result, there are 56
Medicaid programs— one for each U.S. state, each U.S. territory and the District
of Columbia. Many states have selected Medicaid managed care as a
means of delivering quality healthcare and controlling costs, including states
that automatically enroll Medicaid recipients who don’t select a health
plan. We refer to these states as mandated managed care
states. Eligibility is based on a combination of household income and
assets, often determined by an income level relative to the federal poverty
level. Historically, children have represented the largest
eligibility group.
Established
in 1972, and authorized by Title XVI of the Social Security Act, ABD covers
low-income persons with chronic physical disabilities or behavioral health
impairments. ABD beneficiaries represent a growing portion of all
Medicaid recipients. In addition, ABD recipients typically utilize
more services because of their critical health issues.
The
Balanced Budget Act of 1997 created SCHIP to help states expand coverage
primarily to children whose families earned too much to qualify for Medicaid,
yet not enough to afford private health insurance. Some states
include the parents of these children in their SCHIP programs. SCHIP
is the single largest expansion of health insurance coverage for children since
the enactment of Medicaid. Costs related to the largest eligibility
group, children, are primarily composed of pediatrics and family
care. These costs tend to be more predictable than other healthcare
issues which predominantly affect the adult population.
A portion
of Medicaid beneficiaries are dual eligibles, low-income seniors and people with
disabilities who are enrolled in both Medicaid and
Medicare. According to CMS, there were approximately seven million
dual eligible enrollees in 2006. These dual eligibles may receive
assistance from Medicaid for Medicaid benefits, such as nursing home care and/or
assistance with Medicare premiums and cost sharing. Dual eligibles
also use more services due to their tendency to have more chronic health
issues. We serve dual eligibles through our ABD and long-term care
programs, and beginning in 2008, through Special Needs Plans.
While
Medicaid programs have directed funds to many individuals who cannot afford or
otherwise maintain health insurance coverage, they did not initially address the
inefficient and costly manner in which the Medicaid population tends to access
healthcare. Medicaid recipients in non-managed care programs
typically have not sought preventive care or routine treatment for chronic
conditions, such as asthma and diabetes. Rather, they have sought
healthcare in hospital emergency rooms, which tends to be more
expensive. As a result, many states have found that the costs of
providing Medicaid benefits have increased while the medical outcomes for the
recipients remained unsatisfactory.
Since the
early 1980s, increasing healthcare costs, combined with significant growth in
the number of Medicaid recipients, have led many states to establish Medicaid
managed care initiatives. Additionally, a number of states are
designing programs to cover the rising number of uninsured
Americans. The US Census Bureau estimated there were 45.7 million
Americans in 2007 that lacked health insurance. Continued pressure on
states’ Medicaid budgets should cause public policy to recognize the value of
managed care as a means of delivering quality healthcare and effectively
controlling costs. A growing number of states have mandated that
their Medicaid recipients enroll in managed care plans. Other states
are considering moving to a mandated managed care approach. As a
result, a significant market opportunity exists for managed care organizations
with operations and programs focused on the distinct socio-economic, cultural
and healthcare needs of the uninsured population and the Medicaid, SCHIP, Foster
Care and ABD populations. We believe our approach and strategy enable
us to be a growing participant in this market.
OUR
COMPETITIVE STRENGTHS
Our
multi-line managed care approach is based on the following key
attributes:
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Strong Historic Operating
Performance. We have increased revenues as we have grown
in existing markets, expanded into new markets and broadened our product
offerings. We entered the Wisconsin market in 1984, the Indiana
market in 1995, the Texas market in 1999, the Ohio market in 2004, the
Georgia market in 2006, and the South Carolina market in
2007. We have increased our membership through participation in
new programs in existing states. For example, in 2008, we began
operations in the Texas Foster Care program and began serving Acute Care
members in the Yavapai county of Arizona. We have also
increased membership by acquiring Medicaid businesses, contracts and other
related assets from competitors in existing markets, most recently in
South Carolina in 2007. Our Medicaid Managed Care membership
totaled approximately 1.2 million as of December 31, 2008. For
the year ended December 31, 2008, we had revenues of $3.4 billion,
representing a 40% Compound Annual Growth Rate, or CAGR, since the year
ended December 31, 2004. We generated total cash flow from
operations of $222.0 million and net earnings of $84.2 million for the
year ended December 31, 2008.
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Medicaid
Expertise. Over the last 20 years, we have strived to
develop a specialized Medicaid expertise that has helped us establish and
maintain relationships with members, providers and state
governments. We have implemented programs developed to achieve
savings for state governments and improve medical outcomes for members by
reducing inappropriate emergency room use, inpatient days and high cost
interventions, as well as by managing care of chronic
illnesses. Our experience in working with state regulators
helps us implement and deliver programs and services efficiently and
affords us opportunities to provide input regarding Medicaid industry
practices and policies in the states in which we operate. We
work with state agencies on redefining benefits, eligibility requirements
and provider fee schedules in order to maximize the number of uninsured
individuals covered through Medicaid, SCHIP, Foster Care and ABD and
expand these types of benefits offered. Our approach is to
accomplish this while maintaining adequate levels of provider compensation
and protecting our profitability.
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Diversified Business
Lines. We continue to broaden our service offerings to
address areas that we believe have been traditionally underserved by
Medicaid managed care organizations. In addition to our
Medicaid and Medicaid-related managed care services, our service offerings
include behavioral health, individual health insurance, life and health
management, long-term care programs, managed vision, nurse triage and
pharmacy benefits management. Through the utilization of a
multi-business line approach, we are able to diversify our revenues and
help control our medical costs.
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Localized Approach with
Centralized Support Infrastructure. We take a localized
approach to managing our subsidiaries, including provider and member
services. This approach enables us to facilitate access by our
members to high quality, culturally sensitive healthcare
services. Our systems and procedures have been designed to
address these community-specific challenges through outreach, education,
transportation and other member support activities. For
example, our community outreach programs work with our members and their
communities to promote health and self-improvement through employment and
education on how best to access care. We complement this
localized approach with a centralized infrastructure of support functions
such as finance, information systems and claims processing, which allows
us to minimize general and administrative expenses and to integrate and
realize synergies from acquisitions. We believe this combined
approach allows us to efficiently integrate new business opportunities in
both Medicaid and specialty services while maintaining our local
accountability and improved access.
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Specialized and Scalable
Systems and Technology. Through our specialized
information systems, we work to strengthen relationships with providers
and states which help us grow our membership base. We continue
to develop our specialized information systems which allow us to support
our core processing functions under a set of integrated databases,
designed to be both replicable and scalable. Physicians can use
claims, utilization and membership data to manage their practices more
efficiently, and they also benefit from our timely
payments. State agencies can use data from our information
systems to demonstrate that their Medicaid populations receive quality
healthcare in an efficient manner. These systems also help
identify needs for new healthcare and specialty programs. We
have the ability to leverage our platform for one state configuration into
new states or for health plan acquisitions. Our ability to
access data and translate it into meaningful information is essential to
operating across a multi-state service area in a cost-effective
manner.
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OUR
BUSINESS STRATEGY
Our
objective is to become the leading multi-line healthcare enterprise focusing on
the uninsured population and state funded healthcare initiatives. We
intend to achieve this objective by implementing the following key components of
our strategy:
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Increase Penetration of
Existing State Markets. We seek to continue to increase
our Medicaid membership in states in which we currently operate through
alliances with key providers, outreach efforts, development and
implementation of community-specific products and
acquisitions. In 2006, we were awarded two regions in
connection with Ohio’s statewide restructuring of its Medicaid managed
care program, expanding the number of counties we serve from three to
27. We also were awarded a Medicaid ABD contract in four
regions in Ohio. In Texas, we expanded our operations to the
Corpus Christi market in 2006, began managing care for ABD recipients in
February 2007 and began operations in the Foster Care program in April
2008. In Arizona, we began serving members within a long-term
care plan in 2006 and within an acute care plan in 2008. In
2008, we began serving Medicare members within Special Needs Plans in
Arizona, Ohio, Texas and Wisconsin. We may also increase membership by
acquiring Medicaid businesses, contracts and other related assets from our
competitors in our existing markets or by enlisting additional
providers. For example, in 2005 and 2006, we acquired certain
Medicaid-related assets in Ohio.
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Diversify Business
Lines. We seek to broaden our business lines into areas
that complement our existing business to enable us to grow and diversify
our revenue. We are constantly evaluating new opportunities for
expansion both domestically and abroad. For instance, in July
2008, we completed the acquisition of Celtic Insurance Company, or Celtic,
a national individual health insurance provider, in October 2006, we
commenced operations under our managed care program contracts to provide
long-term care services in Arizona, and in January 2006, we completed the
acquisition of US Script, a pharmacy benefits manager. We are
also considering other premium based or fee-for-service lines of business
that would provide additional diversity. We employ a
disciplined acquisition strategy that is based on defined criteria
including internal rate of return, accretion to earnings per share, market
leadership and compatibility with our information systems. We
engage our executives in the relevant operational units or functional
areas to ensure consistency between the diligence and integration
process.
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Address Emerging State
Needs. We work to assist the states in which we operate
in addressing the operating challenges they face. We seek to
assist the states in balancing premium rates, benefit levels, member
eligibility, policies and practices, and provider
compensation. For example, in 2008, we began operating under a
contract with the Texas Health and Human Services Commission for
Comprehensive Health Care for Children in Foster Care, a new statewide
program providing managed care services to participants in the Texas
Foster Care program. In 2005, we began performing under our
contracts with the State of Arizona to facilitate the delivery of mental
health and substance abuse services to behavioral health recipients in
Arizona. Effective January 1, 2005, we were awarded a
behavioral health contract to serve SCHIP members in Kansas. By
helping states structure an appropriate level and range of Medicaid, SCHIP
and specialty services, we seek to ensure that we are able to continue to
provide those services on terms that achieve targeted gross margins,
provide an acceptable return and grow our
business.
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Develop and Acquire Additional
State Markets. We continue to leverage our experience to
identify and develop new markets by seeking both to acquire existing
business and to build our own operations. We expect to focus
expansion in states where Medicaid recipients are mandated to enroll in
managed care organizations, because we believe member enrollment levels
are more predictable in these states. For example, effective
June 1, 2006, we began managing care for Medicaid and SCHIP members in
Georgia. In addition, we focus our attention on states
converting to a full-risk, managed care model. For example, in
2007, we entered the South Carolina market and we participated in the
state’s conversion to at-risk managed care. In February
2009, we began managed care operations in Florida through conversion of
members in certain counties from Access Health Solutions to at-risk
managed care in Sunshine State Health Plan, through our new state
contract.
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Leverage Established
Infrastructure to Enhance Operating Efficiencies. We
intend to continue to invest in infrastructure to further drive
efficiencies in operations and to add functionality to improve the service
provided to members and other organizations at a low cost. Our
centralized functions enable us to add members and markets quickly and
economically.
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Maintain Operational
Discipline. We monitor our cost trends, operating
performance, regulatory relationships and the Medicaid political
environment in our existing markets. We seek to operate in
markets that allow us to meet our internal metrics including membership
growth, plan size, market leadership and operating
efficiency. We may divest contracts or health plans in markets
where the state’s Medicaid environment, over a long-term basis, does not
allow us to meet our targeted performance levels. We use
multiple techniques to monitor and reduce our medical costs, including
on-site hospital review by staff nurses and involvement of medical
management and finance personnel in significant cases. Our
financial management teams evaluate the financial impact of proposed
changes in provider relationships. We also conduct monthly
reviews of member demographics for each health
plan.
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MEDICAID
MANAGED CARE
Health
Plans
We have
regulated subsidiaries offering healthcare services in each state we
serve. The table below provides summary data for the state markets we
currently serve:
State
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Local
Health Plan Name
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First
Year of Operations Under the Company
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Counties
Served at December 31, 2008
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Market
Share (1)
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Membership
at
December
31, 2008
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Florida
(2)
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Sunshine
State Health Plan
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2009
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—
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—
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—
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Georgia
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Peach
State Health Plan
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2006
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90
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29.4%
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288,300
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Indiana
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Managed
Health Services
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1995
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92
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30.0%
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175,300
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New
Jersey
(3)
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University
Health Plans
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2002
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20
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6.7%
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55,200
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Ohio
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Buckeye
Community Health Plan
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2004
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43
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9.9%
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133,400
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South
Carolina
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Absolute
Total Care
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2007
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42
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9.7%
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31,300
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Texas
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Superior
HealthPlan
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1999
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242
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23.4%
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431,700
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Wisconsin
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Managed
Health Services
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1984
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33
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15.8%
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124,800
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________________________________
(1)
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Represents
Medicaid and SCHIP membership as of December 31, 2008 as a percentage of
total eligible Medicaid and SCHIP members in each state. ABD
programs are excluded.
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(2)
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We
began membership operations in Florida in February
2009.
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(3)
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In
November 2008, we announced our intention to sell University Health
Plans. As a result, this plan is presented as discontinued
operations in our consolidated financial statements, however as of
December 31, 2008, the plan was still operated by Centene
Corporation.
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All of
our revenue is derived from operations within the United States and its
territories. We generally receive a fixed premium per member per
month pursuant to our state contracts. Our medical costs have a
seasonality component due to cyclical illness, for example cold and flu season,
resulting in higher medical expenses beginning in the fourth quarter and
continuing throughout the first quarter of each year. Our managed
care subsidiaries in Georgia, Ohio, and Texas had revenues from their respective
state governments that each exceeded 10% of our consolidated total revenues in
2008. Other financial information about our segments is found in Note
20, Segment
Information, of our Notes to Consolidated Financial Statements and
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” included elsewhere in this Annual Report on Form 10-K.
Benefits
to States
Our
ability to establish and maintain a leadership position in the markets we serve
results primarily from our demonstrated success in providing quality care while
reducing and managing costs, and from our specialized programs in working with
state governments. Among the benefits we are able to provide to the
states with which we contract are:
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Significant cost savings
compared to state paid reimbursement for services. We
bring bottom-line management experience to our health plans. On
the administrative and management side, we bring experience including
quality of care improvement methods, utilization management procedures, an
efficient claims payment system, and provider performance reporting, as
well as managers and staff experienced in using these key elements to
improve the quality of and access to
care.
|
|
Data-driven approaches to
balance cost and verify eligibility. Our Medicaid health
plans have conducted enrollment processing and activities for state
programs since 1984. We seek to ensure effective enrollment
procedures that move members into the plan, then educate them and ensure
they receive needed services as quickly as possible. Our IT
department has created mapping/translation programs for loading membership
and linking membership eligibility status to all of Centene’s
subsystems.
|
|
Establishment of realistic and
meaningful expectations for quality deliverables. We
have collaborated with state agencies in redefining benefits, eligibility
requirements and provider fee schedules with the goal of maximizing the
number of individuals covered through Medicaid, SCHIP, Foster Care and ABD
programs.
|
|
Managed care expertise in
government subsidized programs. Our expertise in
Medicaid has helped us establish and maintain strong relationships with
our constituent communities of members, providers and state
governments. We provide access to services through local
providers and staff that focus on the cultural norms of their individual
communities. To that end, systems and procedures have been
designed to address community-specific challenges through outreach,
education, transportation and other member support
activities.
|
|
Improved medical
outcomes. We have implemented programs developed to
achieve savings for state governments and improve medical outcomes for
members by reducing inappropriate emergency room use, inpatient days and
high cost interventions, as well as by managing care of chronic
illness.
|
|
Timely payment of provider
claims. We are committed to ensuring that our
information systems and claims payment systems meet or exceed state
requirements. We continuously endeavor to update our systems
and processes to improve the timeliness of our provider
payments.
|
|
Cost saving outreach and
specialty programs. Our health plans have adopted a
physician-driven approach where network providers are actively engaged in
developing and implementing healthcare delivery policies and
strategies. This approach is designed to eliminate unnecessary
costs, improve services to members and simplify the administrative burdens
placed on providers.
|
|
Responsible collection and
dissemination of utilization data. We gather utilization
data from multiple sources, allowing for an integrated view of our
members’ utilization of services. These sources include
medical, vision and behavioral health claims and encounter data, pharmacy
data, dental vendor claims and authorization data from the authorization
and case management system utilized by us to coordinate
care.
|
|
Timely and accurate
reporting. Our information systems have reporting
capabilities which have been instrumental in identifying the need for new
and/or improved healthcare and specialty programs. For state
agencies, our reporting capability is important in demonstrating an
auditable program.
|
Member
Programs and Services
We
recognize the importance of member-focused delivery of quality managed care
services. Our locally-based staff assist members in accessing care,
coordinating referrals to related health and social services and addressing
member concerns and questions. While covered healthcare benefits vary
from state to state, our health plans generally provide the following
services:
Ÿ
|
primary
and specialty physician care
|
|
Ÿ
|
transportation
assistance
|
Ÿ
|
inpatient
and outpatient hospital care
|
|
Ÿ
|
vision
care
|
Ÿ
|
emergency
and urgent care
|
|
Ÿ
|
dental
care
|
Ÿ
|
prenatal
care
|
|
Ÿ
|
immunizations
|
Ÿ
|
laboratory
and x-ray services
|
|
Ÿ
|
prescriptions
and limited over-the-counter drugs
|
Ÿ
|
home
health and durable medical equipment
|
|
Ÿ
|
therapies
|
Ÿ
|
behavioral
health and substance abuse services
|
|
|
social
work services
|
Ÿ
|
24-hour
nurse advice line
|
|
|
|
We also
provide the following education and outreach programs to inform and assist
members in accessing quality, appropriate healthcare services in an efficient
manner:
Ÿ
|
MemberConnections is a community
face-to-face outreach and education program designed to create a link
between the member and the provider and help identify potential challenges
or risk elements to a member’s health, such as nutritional challenges and
health education shortcomings. MemberConnections
representatives also contact new members by phone or mail to discuss
managed care, the Medicaid program and our services. Our
MemberConnections
representatives make home visits, conduct educational programs and
represent our health plans at community events such as health
fairs.
|
Ÿ
|
Start Smart For Your Baby
is a prenatal and infant health program designed to increase the
percentage of pregnant women receiving early prenatal care, reduce the
incidence of low birth weight babies, identify high risk pregnancies,
increase participation in the federal Women, Infant and Children program,
prevent hospital admissions in the first year of life and increase
well-child visits. The program includes risk assessments,
education through face-to-face meetings and materials, behavior
modification plans, assistance in selecting a provider for the infant and
scheduling newborn follow-up
visits.
|
Ÿ
|
EPSDT Case Management
is a preventive care program designed to educate our members on the
benefits of Early and Periodic Screening, Diagnosis and Treatment, or
EPSDT, services. We have a systematic program of communicating,
tracking, outreach, reporting and follow-through that promotes state EPSDT
programs.
|
Ÿ
|
Life and Health Management
Programs are designed to help members understand their disease and
treatment plan and improve their wellness in a cost effective
manner. These programs address medical conditions that are
common within the Medicaid population such as asthma, diabetes and
pregnancy. Our Specialty Services segment manages many of our
life and health management programs. Our ABD program uses a
proprietary assessment tool that effectively identifies barriers to care,
unmet functional needs, available social supports and the existence of
behavioral health conditions that impede a member’s ability to maintain a
proper health status. Care coordinators develop individual care
plans with the member and healthcare providers ensuring the full
integration of behavioral, social and acute care
services. These care plans, while specific to an ABD member,
incorporate “Condition Specific” practices in collaboration with physician
partners and community resources.
|
Providers
For each
of our service areas, we establish a provider network consisting of primary and
specialty care physicians, hospitals and ancillary providers. As of
December 31, 2008, the health plans we operated contracted with the following
number of physicians and hospitals:
|
|
Primary
Care
Physicians
|
|
Specialty
Care
Physicians
|
|
Hospitals
|
Georgia
|
|
3,256
|
|
9,620
|
|
151
|
Indiana
|
|
914
|
|
3,209
|
|
79
|
New
Jersey (1)
|
|
1,204
|
|
4,362
|
|
63
|
Ohio
|
|
2,200
|
|
8,396
|
|
122
|
South
Carolina
|
|
592
|
|
1,095
|
|
19
|
Texas
|
|
7,633
|
|
18,373
|
|
382
|
Wisconsin
|
|
1,857
|
|
4,985
|
|
61
|
Total
|
|
17,656
|
|
50,040
|
|
877
|
(1)
|
In
November 2008, we announced our intention to sell University Health
Plans. As a result, this plan is presented as discontinued
operations in our consolidated financial statements, however as of
December 31, 2008, the plan was still operated by Centene
Corporation.
|
Our
network of primary care physicians is a critical component in care delivery,
management of costs and the attraction and retention of new
members. Primary care physicians include family and general
practitioners, pediatricians, internal medicine physicians and obstetricians and
gynecologists. Specialty care physicians provide medical care to
members generally upon referral by the primary care
physicians. Specialty care physicians include, but are not limited
to, orthopedic surgeons, cardiologists and otolaryngologists. We also
provide education and outreach programs to inform and assist members in
accessing quality, appropriate healthcare services.
Our
health plans facilitate access to healthcare services for our members primarily
through contracts with our providers. Our contracts with primary and
specialty care physicians and hospitals usually are for one to two-year periods
and renew automatically for successive one-year terms, but generally are subject
to termination by either party upon 90 to 120 days prior written
notice. In the absence of a contract, we typically pay providers at
state Medicaid reimbursement levels. We pay physicians under a
fee-for-service, capitation arrangement, or risk-sharing
arrangement.
Ÿ
|
Under
our fee-for-service contracts with physicians, particularly specialty care
physicians, we pay a negotiated fee for covered services. This
model is characterized as having no financial risk for the
physician. In addition, this model requires management
oversight because our total cost may increase as the units of services
increase or as more expensive services replace less expensive
services. We have prior authorization procedures in place that
are intended to make sure that certain high cost diagnostic and other
services are medically appropriate.
|
Ÿ
|
Under
our capitated contracts, primary care physicians are paid a monthly fee
for each of our members assigned to his or her practice and are at risk
for all costs associated with primary and specialty physician and
emergency room services. In return for this payment, these
physicians provide all primary care and preventive services, including
primary care office visits and EPSDT services. If these
physicians also provide non-capitated services to their assigned members,
they may receive payment under fee-for-service arrangements at standard
Medicaid rates.
|
Ÿ
|
Under
risk-sharing arrangements, physicians are paid under a capitated or
fee-for-service arrangement. The arrangement, however, contains
provisions for additional bonus to the physicians or reimbursement from
the physicians based upon cost and quality factors. We often
refer to these arrangements as Model 1
contracts.
|
We work
with physicians to help them operate efficiently by providing financial and
utilization information, physician and patient educational programs and disease
and medical management programs. Our programs are also designed to
help the physicians coordinate care outside of their offices. In
addition, we are governed by state prompt payment policies.
We
believe our collaborative approach with physicians gives us a competitive
advantage in entering new markets. Our physicians serve on local
committees that assist us in implementing preventive care programs, managing
costs and improving the overall quality of care delivered to our members, while
also simplifying the administrative burdens on our providers. This
approach has enabled us to strengthen our provider networks through improved
physician recruitment and retention that, in turn, have helped to increase our
membership base. The following are among the services we provide to
support physicians:
|
Ÿ
|
Customized Utilization Reports
provide certain of our contracted physicians with information that
enables them to run their practices more efficiently and focuses them on
specific patient needs. For example, quarterly detail reports
update physicians on their status within their risk
pools. Equivalency reports provide physicians with financial
comparisons of capitated versus fee-for-service
arrangements.
|
|
Ÿ
|
Case Management Support
helps the physician coordinate specialty care and ancillary
services for patients with complex conditions and direct members to
appropriate community resources to address both their health and
socio-economic needs.
|
|
Ÿ
|
Web-based Claims and
Eligibility Resources have been implemented in selected markets to
provide physicians with on-line access to perform claims and eligibility
inquiries.
|
Our
contracted physicians also benefit from several of the services offered to our
members, including the MemberConnections, EPSDT case
management and health management programs. For example, the
MemberConnections staff
facilitates doctor/patient relationships by connecting members with physicians,
the EPSDT programs encourage routine checkups for children with their physicians
and the health management programs assist physicians in managing their patients
with chronic disease.
Where
appropriate, our health plans contract with our specialty services organizations
to provide services and programs such as behavioral health, health management,
managed vision, nurse triage, pharmacy benefit management, and treatment
compliance. When necessary, we also contract with third-party
providers on a negotiated fee arrangement for physical therapy, home healthcare,
diagnostic laboratory tests, x-ray examinations, ambulance services and durable
medical equipment. Additionally, we contract with dental vendors in
markets where routine dental care is a covered benefit.
Quality
Management
Our
medical management programs focus on improving quality of care in areas that
have the greatest impact on our members. We employ strategies,
including health management and complex case management, that are adjusted for
implementation in our individual markets by a system of physician committees
chaired by local physician leaders. This process promotes physician
participation and support, both critical factors in the success of any clinical
quality improvement program.
We have
implemented specialized information systems to support our medical quality
management activities. Information is drawn from our data warehouse,
clinical databases and our membership and claims processing system, to identify
opportunities to improve care and to track the outcomes of the interventions
implemented to achieve those improvements. Some examples of these
intervention programs include:
|
appropriate
leveling of care for neonatal intensive care unit (NICU) hospital
admissions, other inpatient hospital admissions, and observation
admissions, in accordance with Interqual
criteria;
|
|
tightening
of our pre-authorization list and more stringent review of durable medical
equipment and injectibles.
|
|
emergency
department (ED) program designed to collaboratively work with hospitals to
steer non-emergency care away from the costly ED setting (through patient
education, on-site alternative urgent care settings,
etc.);
|
|
increase
emphasis on case management and clinical rounding where case managers are
nurses or social workers who are employed by the health plan to assist
selected patients with the coordination of healthcare services in order to
meet a patient's specific healthcare
needs;
|
|
incorporation
of disease management, which is a comprehensive, multidisciplinary,
collaborative approach to chronic illnesses such as asthma and
diabetes;
|
|
Smart
Start For Your Baby, a prenatal case management program aimed at helping
women with high-risk pregnancies deliver full-term, healthy
infants.
|
We
provide reporting on a regular basis using our data warehouse. State
and Health Employer Data and Information Set, or HEDIS, reporting constitutes
the core of the information base that drives our clinical quality performance
efforts. This reporting is monitored by Plan Quality Improvement
Committees and our corporate medical management team.
In an
effort to ensure the quality of our provider networks, we undertake to verify
the credentials and background of our providers using standards that are
supported by the National Committee for Quality Assurance.
Information
Technology
The
ability to access data and translate it into meaningful information is essential
to operating across a multi-state service area in a cost-effective
manner. Our centralized information systems, which are located in St.
Louis, Missouri, support our core processing functions under a set of integrated
databases and are designed to be both replicable and scalable to accommodate
organic growth and growth from acquisitions. We continue to enhance
our systems in order to leverage the platform we have developed for our existing
states for configuration into new states or health plan
acquisitions.
Our integrated approach helps to assure that consistent sources of claim and
member information are provided across all of our health plans. Our
membership and claims processing system is capable of expanding to support
additional members in an efficient manner. We have a disaster
recovery and business resumption plan developed and implemented in conjunction
with a third party. This plan allows us complete access to the
business resumption centers and hot-site facilities provided by the
plan.
SPECIALTY
SERVICES
Our
Specialty Services segment is a key component of our healthcare enterprise and
complements our core Medicaid Managed Care business. Specialty
services diversifies our revenue stream, provides higher quality health outcomes
to our membership and others, and assists in controlling costs. Our
specialty services are provided primarily through the following
businesses:
Ÿ
|
Behavioral
Health. Cenpatico Behavioral Health, or Cenpatico,
manages behavioral healthcare for members via a contracted network of
providers. Cenpatico works with providers to determine the best
course of treatment for a given diagnosis and helps ensure members and
their providers are aware of the full array of services
available. Our networks feature a range of services so that
patients can be treated at an appropriate level of care. We
also run school-based programs in Arizona that focus on students with
special needs. We acquired Cenpatico in
2003.
|
Ÿ
|
Individual Health
Insurance. Our individual health insurance company,
Celtic, is a national healthcare provider offering high-quality,
affordable health insurance to individual customers and their
families. Sold online and through independent insurance agents
nationwide, Celtic’s portfolio of major medical plans is designed to meet
the diverse needs of the uninsured at all budget and benefit levels.
Celtic also offers a standalone guaranteed-issue medical conversion
program to self-funded employer groups, stop-loss and fully-insured group
carriers, managed care plans, and HMO reinsurers. We acquired Celtic in
2008.
|
Ÿ
|
Life and Health
Management. Our life and health management company,
Nurtur Health specializes in implementing life and health management
programs that encourage healthy behaviors, promote healthier workplaces,
improve productivity and reduce healthcare costs. Specific
focuses include chronic respiratory health management, cardiac health
management, and work/life management. Through its
specialization in respiratory management, Nurtur Health uses self-care
therapies, in-home interaction and informatics processes to deliver highly
effective clinical results, enhanced patient-provider satisfaction and
greater cost reductions in respiratory management. Nurtur
Health was formed in December 2007 through the combination of three entities we
acquired from July 2005 through November
2007.
|
Ÿ
|
Long-term Care and Acute
Care. Bridgeway Health Solutions, or Bridgeway, provides
long-term care services to the elderly and people with disabilities on ABD
that meet income and resources requirements who are at risk of being or
are institutionalized. Bridgeway has members in the Maricopa,
Yuma and La Paz counties of Arizona. Bridgeway participates
with community groups to address situations that might be barriers to
quality care and independent living. Bridgeway commenced
long-term care operations in October 2006. Bridgeway also
provides acute care services to members in the Yavapai county of
Arizona. These services include emergency and physician
services, limited dental and rehabilitative services and other
maternal and child health services. Bridgeway commenced acute
care operations in October 2008.
|
Ÿ
|
Managed
Vision. OptiCare manages vision benefits for members via
a contracted network of providers. OptiCare works with
providers to provide a variety of vision plan designs and helps ensure
members and their providers are aware of the full array of products and
services available. Our networks feature a range of products
and services so that patients can be treated at an appropriate level of
care. We acquired the managed vision business of OptiCare
Health Systems, Inc. in July 2006.
|
Ÿ
|
Nurse
Triage. NurseWise and Nurse Response provide a toll-free
nurse triage line 24 hours per day, 7 days per week, 52 weeks per
year. Our members call one number and reach bilingual customer
service representatives and nursing staff who provide health education,
triage advice and offer continuous access to health plan
functions. Additionally, our representatives verify
eligibility, confirm primary care provider assignments and provide benefit
and network referral coordination for members and providers after business
hours. Our staff can arrange for urgent pharmacy refills,
transportation and qualified behavioral health professionals for crisis
stabilization assessments. Call volume is based on membership
levels and seasonal variation. NurseWise commenced operations
in 1998.
|
Ÿ
|
Pharmacy Benefits
Management. US Script is a pharmacy benefits manager
that administers pharmacy benefits and processes pharmacy claims via its
proprietary claims processing software. US Script has developed
and administers a contracted national network of retail
pharmacies. We acquired US Script in January
2006.
|
CORPORATE
COMPLIANCE
Our
Corporate Ethics and Compliance Program was first established in 1998 and
provides methods by which we further enhance operations, safeguard against fraud
and abuse, improve access to quality care and help assure that our values are
reflected in everything we do.
The two
primary standards by which corporate compliance programs in the healthcare
industry are measured are the 1991 Federal Organizational Sentencing Guidelines
and the “Compliance Program Guidance” series issued by the Office of the
Inspector General, or OIG, of the Department of Health and Human
Services. Our program contains each of the seven elements suggested
by the Sentencing Guidelines and the OIG guidance. These key
components are:
Ÿ
|
written
standards of conduct;
|
Ÿ
|
designation
of a corporate compliance officer and compliance
committee;
|
Ÿ
|
effective
training and education;
|
Ÿ
|
effective
lines for reporting and communication;
|
Ÿ
|
enforcement
of standards through disciplinary guidelines and actions;
|
Ÿ
|
internal
monitoring and auditing; and
|
Ÿ
|
prompt
response to detected offenses and development of corrective action
plans.
|
Our
internal Corporate Compliance website, accessible by all employees, contains our
Business Ethics and Conduct Policy, our Mission, Values and Philosophies and
Compliance Programs, a company-wide policy and procedure database and our
toll-free hotline to allow employees or other persons to report suspected
incidents of fraud, abuse or other violations. The audit committee
and the board of directors review a compliance report on a quarterly
basis.
COMPETITION
We
continue to face varying and increasing levels of competition as we expand in
our existing service areas or enter new markets, as federal regulations require
at least two competitors in each service area. Healthcare reform
proposals may cause a number of commercial managed care organizations to decide
to enter or exit the Medicaid market.
In our business, our principal
competitors for state contracts, members and providers consist of the following
types of organizations:
Ÿ
|
Medicaid Managed Care
Organizations focus on providing healthcare services to Medicaid
recipients. These organizations consist of national and
regional organizations, as well as smaller organizations that operate in
one city or state and are owned by providers, primarily
hospitals.
|
Ÿ
|
National and Regional
Commercial Managed Care Organizations have Medicaid members in
addition to members in private commercial plans. Some of these
organizations offer a range of specialty services including pharmacy
benefits management, behavioral health management, health management, and
nurse triage call support centers.
|
Ÿ
|
Primary Care Case Management
Programs are programs established by the states through contracts
with primary care providers. Under these programs, physicians
provide primary care services to Medicaid recipients, as well as limited
medical management oversight.
|
We
compete with other managed care organizations and specialty companies for state
contracts. In order to grant a contract, state governments consider
many factors. These factors include quality of care, financial
requirements, an ability to deliver services and establish provider networks and
infrastructure. In addition, our specialty companies also compete
with other providers, such as disease management companies, individual health
insurance companies, and pharmacy benefits managers for non-governmental
contracts.
We also
compete to enroll new members and retain existing members. People who
wish to enroll in a managed healthcare plan or to change healthcare plans
typically choose a plan based on the quality of care and services offered, ease
of access to services, a specific provider being part of the network and the
availability of supplemental benefits. In certain markets, where
recipients select a physician instead of a health plan, we are able to grow our
membership by adding new physicians to our provider base.
We also
compete with other managed care organizations to enter into contracts with
physicians, physician groups and other providers. We believe the
factors that providers consider in deciding whether to contract with us include
existing and potential member volume, reimbursement rates, medical management
programs, speed of reimbursement and administrative service
capabilities. See “Risk Factors — Competition may limit our ability
to increase penetration of the markets that we serve.”
REGULATION
Our
healthcare and specialty operations are regulated at both state and federal
levels. Government regulation of the provision of healthcare products
and services is a changing area of law that varies from jurisdiction to
jurisdiction. Regulatory agencies generally have discretion to issue
regulations and interpret and enforce laws and rules. Changes in
applicable laws and rules also may occur periodically.
Our
regulated subsidiaries are licensed to operate as health maintenance
organizations and/or insurance companies in their respective
states. In each of the jurisdictions in which we operate, we are
regulated by the relevant health, insurance and/or human services departments
that oversee the activities of managed care organizations providing or arranging
to provide services to Medicaid enrollees.
The
process for obtaining authorization to operate as a managed care organization is
complex and requires demonstration to the regulators of the adequacy of the
health plan’s organizational structure, financial resources, utilization review,
quality assurance programs, complaint procedures, provider network adequacy and
procedures for covering emergency medical conditions. Under both
state managed care organization statutes and state insurance laws, our health
plan subsidiaries, as well as our specialty companies, must comply with minimum
statutory capital requirements or other financial requirements, such as deposit
and reserve requirements. Insurance regulations may also require
prior state approval of acquisitions of other managed care organizations’
businesses and the payment of dividends, as well as notice for loans or the
transfer of funds. Our subsidiaries are also subject to periodic
reporting requirements. In addition, each health plan and individual
health insurance provider must meet criteria to secure the approval of state
regulatory authorities before implementing operational changes, including the
development of new product offerings and, in some states, the expansion of
service areas.
States
have adopted a number of regulations that may affect our business and results of
operations. These regulations in certain states include:
Ÿ
|
premium
and maintenance taxes;
|
Ÿ
|
stringent
prompt-pay laws;
|
Ÿ
|
requirements
of National Provider Identifier numbers on claim
submittals;
|
Ÿ
|
disclosure
requirements regarding provider fee schedules and coding procedures;
and
|
Ÿ
|
programs
to monitor and supervise the activities and financial solvency of provider
groups.
|
In order
to be a Medicaid Managed Care organization in each of the states in which we
operate, we must operate under a contract with the state’s Medicaid
agency. States generally use either a formal proposal process,
reviewing a number of bidders, or award individual contracts to qualified
applicants that apply for entry to the program. We receive monthly
payments based on specified capitation rates determined on an actuarial
basis. These rates differ by membership category and by state
depending on the specific benefits and policies adopted by each
state.
Our
contracts with the states and regulatory provisions applicable to us generally
set forth the requirements for operating in the Medicaid sector, including
provisions relating to:
Ÿ eligibility,
enrollment and disenrollment processes;
|
|
Ÿ health education
and wellness and prevention programs;
|
Ÿ covered
services;
|
|
Ÿ timeliness of
claims payment;
|
Ÿ eligible
providers;
|
|
Ÿ financial
standards;
|
Ÿ
subcontractors;
|
|
Ÿ safeguarding of
member information;
|
Ÿ record-keeping
and record retention;
|
|
Ÿ fraud and abuse
detection and reporting;
|
Ÿ periodic
financial and informational reporting;
|
|
Ÿ grievance
procedures; and
|
Ÿ quality
assurance;
|
|
Ÿ organization and
administrative systems.
|
A health
plan or individual health insurance providers’ compliance with these
requirements is subject to monitoring by state regulators and by
CMS. A health plan is also subject to periodic comprehensive quality
assurance evaluations by a third-party reviewing organization and generally by
the insurance department of the jurisdiction that licenses the health
plan. A health plan or individual health insurance provider must also
submit reports to various regulatory agencies, including quarterly and annual
statutory financial statements and utilization reports.
The table
below sets forth the term of our state contracts and provides details regarding
related renewal or extension and termination provisions as of January 1,
2009.
State
Contract
|
|
Expiration
Date
|
|
Renewal
or Extension by the State
|
|
Termination
by the State
|
|
|
|
|
|
|
|
Arizona
– Acute Care
|
|
September
30, 2011
|
|
May
be extended for up to two additional one-year terms.
|
|
May
be terminated for convenience or an event of default.
|
|
|
|
|
|
|
|
Arizona
– Behavioral Health
|
|
June
30, 2009
|
|
May
be extended for up to one additional year.
|
|
May
be terminated for convenience or an event of default.
|
|
|
|
|
|
|
|
Arizona
– Long-term Care
|
|
September
30, 2009
|
|
May
be extended for up to two additional years.
|
|
May
be terminated for convenience, an event of default or lack of
funding.
|
|
|
|
|
|
|
|
Arizona
– Special Needs Plan (Medicare)
|
|
December
31, 2009
|
|
Renewable
annually for successive 12-month periods.
|
|
May
be terminated by an event of default.
|
|
|
|
|
|
|
|
Florida
- Medicaid
|
|
August
31, 2009
|
|
Renewable
through the state’s recertification process.
|
|
May
be terminated for an event of default or lack of federal
funding.
|
|
|
|
|
|
|
|
Georgia
– Medicaid & SCHIP
|
|
June
30, 2009
|
|
Renewable
for three additional one-year terms.
|
|
May
be terminated for an event of default or significant changes in
circumstances.
|
|
|
|
|
|
|
|
Indiana
– Medicaid & SCHIP
|
|
December
31, 2010
|
|
May
be extended for up to two additional years.
|
|
May
be terminated for convenience or an event of default.
|
|
|
|
|
|
|
|
Kansas
– Behavioral Health
|
|
June
30, 2009
|
|
May
be extended with three one-year renewal options.
|
|
May
be terminated for cause, or without cause for lack of
funding.
|
|
|
|
|
|
|
|
New
Jersey – Medicaid, SCHIP & ABD
|
|
June
30, 2009
|
|
Renewable
annually for successive 12-month periods.
|
|
May
be terminated for convenience or an event of default.
|
|
|
|
|
|
|
|
Ohio
– Medicaid & SCHIP
|
|
June
30, 2009
|
|
Renewable
annually for successive 12-month periods.
|
|
May
be terminated for an event of default.
|
|
|
|
|
|
|
|
Ohio
– Aged, Blind or Disabled (ABD)
|
|
June
30, 2009
|
|
Renewable
annually for successive 12-month periods.
|
|
May
be terminated for an event of default.
|
|
|
|
|
|
|
|
Ohio
– Special Needs Plan (Medicare)
|
|
December
31, 2009
|
|
Renewable
annually for successive 12-month periods.
|
|
May
be terminated by an event of default.
|
|
|
|
|
|
|
|
South
Carolina – Medicaid & ABD
|
|
March
31, 2009
|
|
Renewable
annually for successive 12-month periods.
|
|
May
be terminated for convenience or an event of default.
|
|
|
|
|
|
|
|
South
Carolina – SCHIP
|
|
March
31, 2009
|
|
May
be extended for up to one additional year.
|
|
May
be terminated for convenience, an event of default or lack of federal
funding.
|
|
|
|
|
|
|
|
Texas –Medicaid,
SCHIP & ABD
|
|
August
31, 2010
|
|
May
be extended for up to four additional years.
|
|
May
be terminated for convenience, an event of default or lack of federal
funding.
|
|
|
|
|
|
|
|
Texas
– Exclusive Provider Organization (SCHIP)
|
|
August
31, 2009
|
|
May
be extended for up to one additional year.
|
|
May
be terminated upon any event of default or in the event of lack of state
or federal funding.
|
|
|
|
|
|
|
|
Texas
– Foster Care
|
|
August
31, 2010
|
|
May
be extended for up to four and a half additional years.
|
|
May
be terminated for convenience, an event of default, or non-appropriation
of funds.
|
|
|
|
|
|
|
|
Texas
– Special Needs Plan (Medicare)
|
|
December
31, 2009
|
|
Renewable
annually for successive 12-month periods.
|
|
May
be terminated by an event of default.
|
|
|
|
|
|
|
|
Wisconsin
–Medicaid & ABD
|
|
December
31, 2009
|
|
May
be extended for up to one additional year.
|
|
May
be terminated if a change in state or federal laws, rules or regulations
materially affects either party’s right or responsibilities or for an
event of default or lack of funding.
|
|
|
|
|
|
|
|
Wisconsin
– Network Health Plan Subcontract
|
|
December
31, 2011
|
|
Renews
automatically for successive five-year terms. |
|
May
be terminated upon two-years notice prior to the end of the then current
term or if a change in state or federal laws, rules or regulations
materially affects either party’s rights or responsibilities under the
contract, or if Network Health Plan’s contract with the State is
terminated.
|
|
|
|
|
|
|
|
Wisconsin
– Special Needs Plan (Medicare)
|
|
December
31, 2009
|
|
Renewable
annually for successive 12-month periods.
|
|
May
be terminated by an event of
default.
|
In 1996,
Congress enacted the Health Insurance Portability and Accountability Act of
1996, or HIPAA. The Act is designed to improve the portability and
continuity of health insurance coverage and simplify the administration of
health insurance claims. Among the main requirements of HIPAA are
standards for the processing of health insurance claims and related
transactions.
The
regulation’s requirements apply to transactions conducted using “electronic
media.” Since “electronic media” is defined broadly to include “transmissions
that are physically moved from one location to another using magnetic tape, disk
or compact disk media,” many communications are considered to be electronically
transmitted. Under the HIPAA regulations, health plans are required
to have the capacity to accept and send all covered transactions in a
standardized electronic format. Penalties can be imposed for failure
to comply with these requirements.
HIPAA
regulations also protect the privacy of medical records and other personal
health information maintained and used by healthcare providers, health plans and
healthcare clearinghouses. We have implemented processes, policies
and procedures to comply with the HIPAA privacy regulations, including education
and training for employees. In addition, the corporate privacy
officer and health plan privacy officials serve as resources to employees to
address any questions or concerns they may have. Among numerous other
requirements, the privacy regulations:
|
Ÿ
|
limit
certain uses and disclosures of private health information, and require
patient authorizations for such uses and disclosures of private health
information;
|
|
Ÿ
|
guarantee
patients rights to access their medical records and to know who else has
accessed them;
|
|
Ÿ
|
limit
most disclosure of health information to the minimum needed for the
intended purpose;
|
|
Ÿ
|
establish
procedures to ensure the protection of private health
information;
|
|
Ÿ
|
authorize
access to records by researchers and others;
and
|
|
Ÿ
|
impose
criminal and civil sanctions for improper uses or disclosures of health
information.
|
The
preemption provisions of HIPAA provide that the federal standards will not
preempt state laws that are more stringent than the related federal
requirements. In addition, the Secretary of HHS may grant exceptions
allowing state laws to prevail if one or more of a number of conditions are met,
including but not limited to the following:
Ÿ the
state law is necessary to prevent fraud and abuse associated with the provision
of and payment for healthcare;
Ÿ the
state law is necessary to ensure appropriate state regulation of insurance and
health plans;
Ÿ the
state law is necessary for state reporting on healthcare delivery or costs;
or
Ÿ the
state law addresses controlled substances.
In 2003,
HHS published final regulations relating to the security of electronic
individually identifiable health information. Compliance with these
regulations was required by April 2005. These regulations require
healthcare providers, health plans and healthcare clearinghouses to implement
administrative, physical and technical safeguards to ensure the privacy and
confidentiality of such information when it is electronically stored, maintained
or transmitted through such devices as user authentication mechanisms and system
activity audits. In addition, numerous states have adopted personal
data security laws that provide for, among other things, private rights of
action for breaches of data security and mandatory notification to persons whose
identifiable information is obtained without authorization.
Patients’
Rights Legislation
The
United States Senate and House of Representatives passed different versions of
patients’ rights legislation in 2001. Both versions included
provisions that specifically apply protections to participants in federal
healthcare programs, including Medicaid beneficiaries. Although no
such federal legislation has been enacted, patients’ rights legislation is
frequently proposed in Congress. If enacted, this type of legislation
could expand our potential exposure to lawsuits and increase our regulatory
compliance costs. Depending on the final form of any enacted
patients’ rights legislation, such legislation could, among other things, expose
us to liability for economic and punitive damages for making determinations that
deny benefits or delay beneficiaries’ receipt of benefits as a result of our
medical necessity or other coverage determinations. We cannot predict
when or whether patients’ rights legislation will be enacted into law or, if
enacted, what final form such legislation might take.
Other
Fraud and Abuse Laws
Investigating
and prosecuting healthcare fraud and abuse became a top priority for law
enforcement entities in the last decade. The focus of these efforts
has been directed at participants in public government healthcare programs such
as Medicaid. The laws and regulations relating to Medicaid fraud and
abuse and the contractual requirements applicable to health plans participating
in these programs are complex and changing and may require substantial
resources.
EMPLOYEES
As of
December 31, 2008, we had approximately 3,600 employees. None of our
employees are represented by a union. We believe our relationships
with our employees are good.
EXECUTIVE
OFFICERS OF THE REGISTRANT
The
following table sets forth information regarding our executive officers,
including their ages, at January 31, 2009:
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
Michael
F. Neidorff
|
|
66
|
|
Chairman
and Chief Executive Officer
|
Mark
W. Eggert
|
|
47
|
|
Executive
Vice President, Health Plan Business Unit
|
Carol
E. Goldman
|
|
51
|
|
Executive
Vice President and Chief Administrative Officer
|
Cary
D. Hobbs
|
|
41
|
|
Senior
Vice President, Business Management and Integration
|
Jesse
N. Hunter
|
|
33
|
|
Executive
Vice President, Corporate Development
|
Donald
G. Imholz
|
|
56
|
|
Senior
Vice President and Chief Information Officer
|
Edmund
E. Kroll
|
|
49
|
|
Senior
Vice President, Finance and Investor Relations
|
Frederick
J. Manning
|
|
61
|
|
Executive
Vice President, Celtic Insurance Company
|
William
N. Scheffel
|
|
55
|
|
Executive
Vice President, Specialty Business Unit
|
Jeffrey
A. Schwaneke
|
|
33
|
|
Vice
President, Corporate Controller and Chief Accounting
Officer
|
Eric
R. Slusser
|
|
48
|
|
Executive
Vice President, Chief Financial Officer and Treasurer
|
Keith
H. Williamson
|
|
56
|
|
Senior
Vice President, General Counsel and
Secretary
|
Michael F.
Neidorff. Mr. Neidorff has served as our Chairman and Chief
Executive Officer since May 2004. From May 1996 to May 2004, Mr.
Neidorff served as President, Chief Executive Officer and as a member of our
board of directors. From 1995 to 1996, Mr. Neidorff served as a
Regional Vice President of Coventry Corporation, a publicly-traded managed care
organization, and as the President and Chief Executive Officer of one of its
subsidiaries, Group Health Plan, Inc. From 1985 to 1995, Mr. Neidorff served as
the President and Chief Executive Officer of Physicians Health Plan of Greater
St. Louis, a subsidiary of United Healthcare Corp., a publicly-traded managed
care organization now known as UnitedHealth Group Incorporated. Mr.
Neidorff also serves as a director of Brown Shoe Company, Inc., a
publicly-traded footwear company with global operations.
Mark W.
Eggert. Mr. Eggert has served as our Executive Vice President,
Health Plan Business Unit since November 2007. From January 1999 to
November 2007, Mr. Eggert served as the Associate Vice Chancellor and Deputy
General Counsel at Washington University, where he oversaw the legal affairs of
the School of Medicine.
Carol E.
Goldman. Ms. Goldman has served as Executive Vice President
and Chief Administrative Officer since June 2007. From July 2002 to
June 2007, she served as our Senior Vice President, Chief Administrative
Officer. From September 2001 to July 2002, Ms. Goldman served as our
Plan Director of Human Resources. From 1998 to August 2001, Ms.
Goldman was Human Resources Manager at Mallinckrodt Inc., a medical device and
pharmaceutical company.
Cary D. Hobbs. Ms.
Hobbs has served as our Senior Vice President, Business Management and
Integration since September 2007. She served as our Senior Vice
President of Strategy and Business Implementation from January 2004 to September
2007. She served as our Vice President of Strategy and Business
Implementation from September 2002 to January 2004 and as our Director of
Business Implementation from 1997 to August 2002.
Jesse N.
Hunter. Mr. Hunter has served as our Executive Vice President,
Corporate Development since April 2008. He served as our Senior Vice
President, Corporate Development from April 2007 to April 2008. He
served as our Vice President, Corporate Development from December 2006 to April
2007. From October 2004 to December 2006, he served as our Vice
President, Mergers & Acquisitions. From July 2003 until October
2004, he served as the Director of Mergers & Acquisitions and from February
2002 until July 2003, he served as the Manager of Mergers &
Acquisitions.
Donald G. Imholz.
Mr. Imholz has served as our Senior Vice President and Chief Information Officer
since September 2008. From January 2008 to September 2008, Mr. Imholz
was an independent consultant working for clients across a variety of
industries. From January 1975 to January 2008, Mr. Imholz was with The Boeing
Company and served as Vice President of Information Technology from 2002 to
January 2008. In that role, Mr. Imholz was responsible for all application
development and support worldwide.
Edmund E.
Kroll. Mr. Kroll has served as our Senior Vice President,
Finance and Investor Relations since May 2007. From June 1997 to
November 2006, Mr. Kroll served as Managing Director at Cowen and Company LLC,
where his research coverage focused on the managed care industry, including the
Company.
Frederick J.
Manning. Mr. Manning has served as our Executive Vice
President, Celtic Insurance Company since July 2008. From 1978 to
July 2008, Mr. Manning served as Chief Executive Officer and Chairman of the
Board of Celtic Insurance Company.
William N.
Scheffel. Mr. Scheffel has served as our Executive Vice
President, Specialty Business Unit since June 2007. From May 2005 to June 2007,
he served as our Senior Vice President, Specialty Business Unit. From
December 2003 until May 2005, he served as our Senior Vice President and
Controller. From July 2002 to October 2003, Mr. Scheffel was a
partner with Ernst & Young LLP. From 1975 to July 2002, Mr.
Scheffel was with Arthur Andersen LLP.
Jeffrey A.
Schwaneke. Mr. Schwaneke has served as our Vice President,
Corporate Controller since July 2008 and Chief Accounting Officer since
September 2008. He previously served as Vice President, Controller
and Chief Accounting Officer at Novelis Inc. from October 2007 to July 2008, and
Assistant Corporate Controller from May 2006 to September 2007. Mr.
Schwaneke served as Segment Controller for SPX Corporation from January 2005 to
April 2006. Mr. Schwaneke served as Corporate Controller at Marley
Cooling Technologies, a segment of SPX Corporation, from March 2004 to December
2004 and Director of Financial Reporting from November 2002 to February
2004.
Eric R.
Slusser. Mr. Slusser has served as our Executive Vice
President and Chief Financial Officer since July 2007 and as our Treasurer since
February 2008. Mr. Slusser served as Executive Vice President of
Finance, Chief Accounting Officer and Controller of Cardinal Health, Inc. from
May 2006 to July 2007 and as Senior Vice President, Chief Accounting Officer and
Controller of Cardinal Health, Inc. from May 2005 to May 2006. Mr.
Slusser served as Senior Vice President-Chief Accounting Officer and Controller
for MCI, Inc. from November 2003 to May 2005, as Corporate Controller for
AES (an electric power generation and transmission company) from May 2003
to November 2003, and as Vice President-Controller from January 1996 to May 2003
for Sprint PCS.
Keith H.
Williamson. Mr. Williamson has served as our Senior Vice
President, General Counsel since November 2006 and as our Secretary since
February 2007. From 1988 until November 2006, he served at Pitney
Bowes Inc. in various legal and executive roles, the last seven years as a
Division President. Mr. Williamson also serves as a director of PPL
Corporation, a publicly-traded energy and utility holding company.
Available
Information
We are
subject to the reporting and information requirements of the Securities Exchange
Act of 1934, as amended (Exchange Act) and, as a result, we file periodic
reports and other information with the Securities and Exchange Commission, or
SEC. We make these filings available on our website free of charge, the URL of
which is http://www.centene.com, as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the SEC. The SEC
maintains a website (http://www.sec.gov) that contains our annual, quarterly and
current reports and other information we file electronically with the SEC. You
can read and copy any materials we file with the SEC at the SEC’s Public
Reference Room at 100 F Street, N.E., Room 1850,
Washington, D.C. 20549. You may obtain information on the operation of
the Public Reference Room by calling the SEC at 1-800-SEC-0330. Information on
our website does not constitute part of this Annual Report on
Form 10-K.
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 ABD funding could substantially reduce our
profitability.
Most of
our revenues come from Medicaid, SCHIP and ABD 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 ABD funding and
premium rates may be affected by continuing government efforts to contain
healthcare costs and may further be affected by state and federal budgetary
constraints. Additionally, state and federal entities may make
changes to the design of their Medicaid programs resulting in the cancellation
or modification of these programs.
For
example, in August 2007, the Centers for Medicare & Medicaid Services, or
CMS, published a final rule regarding the estimation and recovery of
improper payments made under Medicaid and SCHIP. This rule requires a
CMS contractor to sample selected states each year to estimate improper payments
in Medicaid and SCHIP and create national and state specific error
rates. States must provide information to measure improper payments
in Medicaid and SCHIP for managed care and fee-for-service. Each
state will be selected for review once every three years for each
program. States are required to repay CMS the federal share of any
overpayments identified.
The
American Reinvestment and Recovery Act of 2009, which was signed into law on
February 17, 2009, provides $87 billion in additional federal Medicaid funding
for states’ Medicaid expenditures between October 1, 2008 and December 31, 2010.
Under this Act, states meeting certain eligibility requirements will temporarily
receive additional money in the form of an increase in the federal medical
assistance percentage (FMAP). Thus, for a limited period of time, the share of
Medicaid costs that are paid for by the federal government will go up, and each
state’s share will go down. We cannot predict whether states are, or will
remain, eligible to receive the additional federal Medicaid funding, or whether
the states will have sufficient funds for their Medicaid
programs.
States
also periodically consider reducing or reallocating the amount of money they
spend for Medicaid, SCHIP, Foster Care and ABD. In recent years, the
majority of states have implemented measures to restrict Medicaid, SCHIP, Foster
Care and ABD costs and eligibility.
Changes
to Medicaid, SCHIP, Foster Care and ABD 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 these programs, all of which could have a negative impact on our
business. We believe that reductions in Medicaid, SCHIP, Foster Care
and ABD payments could substantially reduce our
profitability. Further, our contracts with the states are subject to
cancellation by the state after a short notice period in the event of
unavailability of state funds.
If
SCHIP is not reauthorized or states face shortfalls, our business could
suffer.
Federal
support for SCHIP has been authorized through 2013. We cannot be
certain that SCHIP will be reauthorized when current funding expires in
2013, and if it is,
what changes might be made to the program following
reauthorization. Thus, we cannot predict the impact that
reauthorization will have 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. Because
of funding caps, there is a risk that these states could experience shortfalls
in future years, which could have an impact on our ability to receive amounts
owed to us from states in which we have SCHIP contracts.
If
any of our state contracts are terminated or are not renewed, our business will
suffer.
We
provide managed care programs and selected services to individuals receiving
benefits under federal assistance programs, including Medicaid, SCHIP and
ABD. We provide those healthcare services under contracts with
regulatory entities in the areas in which we operate. Our contracts
with various states are generally intended to run for one or two years and may
be extended for one or two additional years if the state or its agent elects to
do so. Our current contracts are set to expire or renew between March
31, 2009 and December 31, 2010. When our contracts expire, they may
be opened for bidding by competing healthcare providers. There is no
guarantee that our contracts will be renewed or extended. For
example, on August 25, 2006, we received notification from the Kansas Health
Policy Authority that FirstGuard Health Plan Kansas, Inc.’s contract with the
State would not be renewed or extended, and as a result, our contract ended on
December 31, 2006. Further, our contracts with the states are subject
to cancellation by the state after a short notice period in the event of
unavailability of state funds. For example, the Indiana contract
under which we operate can be terminated by the State without cause. Our
contracts could also be terminated if we fail to perform in accordance with the
standards set by state regulatory agencies. If any of our contracts
are terminated, not renewed, renewed on less favorable terms, or not renewed on
a timely basis, our business will suffer, and our financial position, results of
operations or cash flows may be materially affected.
If
we are unable to participate in SCHIP programs, our growth rate may be
limited.
SCHIP is
a federal initiative designed to provide coverage for low-income children not
otherwise covered by Medicaid or other insurance programs. The
programs vary significantly from state to state. Participation in
SCHIP programs is an important part of our growth strategy. If states
do not allow us to participate or if we fail to win bids to participate, our
growth strategy may be materially and adversely affected.
Changes
in government regulations designed to protect the financial interests of
providers and members rather than our investors could force us to change how we
operate and could harm our business.
Our
business is extensively regulated by the states in which we operate and by the
federal government. The applicable laws and regulations are subject
to frequent change and generally are intended to benefit and protect the
financial interests of health plan providers and members rather than
investors. The enactment of new laws and rules or changes to existing
laws and rules or the interpretation of such laws and rules could, among other
things:
• force
us to restructure our relationships with providers within our
network;
• require
us to implement additional or different programs and systems;
• mandate
minimum medical expense levels as a percentage of premium revenues;
• restrict
revenue and enrollment growth;
• require
us to develop plans to guard against the financial insolvency of our
providers;
• increase
our healthcare and administrative costs;
• impose
additional capital and reserve requirements; and
• increase
or change our liability to members in the event of malpractice by our
providers.
For
example, Congress has previously considered various forms of patient protection
legislation commonly known as the Patients’ Bill of Rights and such legislation
may be proposed again. We cannot predict the impact of any such
legislation, if adopted, on our business.
Regulations
may decrease the profitability of our health plans.
Certain
states have enacted regulations which require us to maintain a minimum health
benefits ratio, or establish limits on our profitability. Other
states require us to meet certain performance and quality metrics in order to
receive our full contractual revenue. In certain circumstances, our
plans may be required to pay a rebate to the state in the event profits exceed
established levels. These regulatory requirements, changes in these
requirements or the adoption of similar requirements by 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, Texas and Wisconsin 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 financial
position, results of operations or cash flows. 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:
• cancellation
of our contracts;
• 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, Foster Care and ABD programs. If we were to become subject to
these penalties or exclusions as the result of our actions or omissions or our
inability to monitor the compliance of our providers, it would negatively affect
our ability to operate our business.
The
Health Insurance Portability and Accountability Act of 1996, or HIPAA, broadened
the scope of fraud and abuse laws applicable to healthcare
companies. HIPAA created civil penalties for, among other things,
billing for medically unnecessary goods or services. HIPAA
established new enforcement mechanisms to combat fraud and abuse, including
civil and, in some instances, criminal penalties for failure to comply with
specific standards relating to the privacy, security and electronic transmission
of most individually identifiable health information. It is possible
that Congress may enact additional legislation in the future to increase
penalties and to create a private right of action under HIPAA, which could
entitle patients to seek monetary damages for violations of the privacy
rules.
We
may incur significant costs as a result of compliance with government
regulations, and our management will be required to devote time to
compliance.
Many
aspects of our business are affected by government laws and
regulations. The issuance of new regulations, or judicial or
regulatory guidance regarding existing regulations, could require changes to
many of the procedures we currently use to conduct our business, which may lead
to additional costs that we have not yet identified. We do not know
whether, or the extent to which, we will be able to recover from the states our
costs of complying with these new regulations. The costs of any such
future compliance efforts could have a material adverse effect on our
business. We have already expended significant time, effort and
financial resources to comply with the privacy and security requirements of
HIPAA. We cannot predict whether states will enact stricter laws
governing the privacy and security of electronic health
information. If any new requirements are enacted at the state or
federal level, compliance would likely require additional expenditures and
management time.
In
addition, the Sarbanes-Oxley Act of 2002, as well as rules subsequently
implemented by the SEC and the New York Stock Exchange, or the NYSE, have
imposed various requirements on public companies, including requiring changes in
corporate governance practices. Our management and other personnel
will continue to devote time to these compliance initiatives.
The
Sarbanes-Oxley Act requires, among other things, that we maintain effective
internal control over financial reporting. In particular, we must
perform system and process evaluation and testing of our internal control over
financial reporting to allow management to report on the effectiveness of our
internal control 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 control over financial reporting that are deemed to be material
weaknesses. Our compliance with Section 404 causes us to incur
substantial expense and management effort. Moreover, if we are not
able to comply with the requirements of Section 404, or if we or our independent
registered public accounting firm identifies deficiencies in our internal
control over financial reporting that are deemed to be material weaknesses, the
market price of our stock could decline and we could be subject to sanctions or
investigations by the NYSE, SEC or other regulatory authorities, which would
require additional financial and management resources.
Changes
in healthcare law and benefits may reduce our profitability.
Numerous
proposals relating to changes in healthcare law have been introduced, some of
which have been passed by Congress and the states in which we operate or may
operate in the future. Changes in applicable laws and regulations are
continually being considered, and interpretations of existing laws and rules may
also change from time to time. We are unable to predict what
regulatory changes may occur or what effect any particular change may have on
our business. For example, these changes could reduce the number of
persons enrolled or eligible to enroll in Medicaid, reduce the reimbursement or
payment levels for medical services or reduce benefits included in Medicaid
coverage. We are also unable to predict whether new laws or proposals
will favor or hinder the growth of managed healthcare in
general. Legislation or regulations that require us to change our
current manner of operation, benefits provided or our contract arrangements may
seriously harm our operations and financial results.
For
example, in August 2007 CMS issued guidance that imposes requirements on states
that cover children in families with incomes above 250% of the federal poverty
level. Under these requirements, applicable states must provide
assurances to CMS that the state has enrolled at least 95% of the Medicaid and
SCHIP eligible children in the state who are in families with incomes below 200%
of the federal poverty level in Medicaid or SCHIP and that the number of
children insured through private employers has not decreased by more than two
percentage points over the prior five year period. Two states in
which we have SCHIP contracts, Georgia and New Jersey, are subject to these
requirements. If they are unable to meet these requirements, they
will be unable to continue to cover children in families with incomes above 250%
of the federal poverty level, which would likely decrease our membership in such
states. Many states object to these requirements as unduly burdensome
and likely to result in a decrease in the number of children covered by SCHIP,
and some states, including New Jersey, are pursuing legal challenges against CMS
in relation to these requirements. In the guidance, CMS stated that
it expected states to comply with the requirements within 12 months of the
issuance of the guidance. However, in August 2008, a CMS spokesperson
stated that, for the time being, CMS would not take compliance action to enforce
this requirement. Further, on February 4, 2009, President Obama
issued a memorandum to the Secretary of Health and Human Services requesting the
immediate withdrawal of the August 2007 guidance and implementation of SCHIP
without the requirements imposed by the August 2007 guidance. We cannot
predict whether legal challenges to August 2007 guidance will be successful or
whether these requirements will be rescinded by CMS. We cannot
predict the impact these requirements will have on our revenue if changes are
implemented in states in which we serve SCHIP beneficiaries.
If
a state fails to renew a required federal waiver for mandated Medicaid
enrollment into managed care or such application is denied, our membership in
that state will likely decrease.
States
may administer Medicaid managed care programs pursuant to demonstration programs
or required waivers of federal Medicaid standards. Waivers and
demonstration programs are generally approved for two year periods and can be
renewed on an ongoing basis if the state applies. We have no control
over this renewal process. If a state does not renew such a waiver or
demonstration program or the Federal government denies a state’s application for
renewal, membership in our health plan in the state could decrease and our
business could suffer.
Changes
in federal funding mechanisms may reduce our profitability.
The Bush
administration previously proposed a major long-term change in the way Medicaid
and SCHIP are funded. The proposal, if adopted, would allow states to
elect to receive, instead of federal matching funds, combined Medicaid-SCHIP
“allotments” for acute and long-term healthcare for low-income, uninsured
persons. Participating states would be given flexibility in designing
their own health insurance programs, subject to federally-mandated minimum
coverage requirements. It is uncertain whether this proposal will be
enacted. Accordingly, it is unknown whether or how many states might
elect to participate or how their participation may affect the net amount of
funding available for Medicaid and SCHIP programs. If such a proposal
is adopted and decreases the number of persons enrolled in Medicaid or SCHIP in
the states in which we operate or reduces the volume of healthcare services
provided, our growth, operations and financial performance could be adversely
affected.
On May
29, 2007, CMS issued a final rule that would reduce states’ use of
intergovernmental transfers for the states’ share of Medicaid program
funding. By restricting the use of intergovernmental transfers, this
rule may restrict some states’ funding for Medicaid, which could adversely
affect our growth, operations and financial performance. On May 25,
2007, President Bush signed an Iraq war supplemental spending bill that included
a one-year moratorium on the effectiveness of the final rule. On June
30, 2008, President Bush signed another Iraq war supplemental spending bill that
extends the moratorium on the effectiveness of the final rule until April 1,
2009. We cannot predict whether the rule will ever be implemented and
if it is, what impact it will have on our business.
Recent
legislative changes in the Medicare program may also affect our
business. For example, the Medicare Prescription Drug, Improvement
and Modernization Act of 2003 revised cost-sharing requirements for some
beneficiaries and requires states to reimburse the federal Medicare program for
costs of prescription drug coverage provided to beneficiaries who are enrolled
simultaneously in both the Medicaid and Medicare programs. In its
fiscal year 2009 budget proposal, the Bush administration has also proposed to
further reduce total federal funding for the Medicaid program by $17.4 billion
over the next five years. These changes may reduce the availability
of funding for some states’ Medicaid programs, which could adversely affect our
growth, operations and financial performance. In addition, the
Medicare prescription drug benefit interrupted the distribution of prescription
drugs to many beneficiaries simultaneously enrolled in both Medicaid and
Medicare, prompting several states to pay for prescription drugs on an
unbudgeted, emergency basis without any assurance of receiving reimbursement
from the federal Medicaid program. These expenses may cause some
states to divert funds originally intended for other Medicaid services which
could adversely affect our growth, operations and financial
performance.
If
state regulatory agencies require a statutory capital level higher than the
state regulations, we may be required to make additional capital
contributions.
Our
operations are conducted through our wholly owned subsidiaries, which include
health maintenance organizations, or HMOs, and managed care organizations, or
MCOs. HMOs and MCOs are subject to state regulations that, among
other things, require the maintenance of minimum levels of statutory capital, as
defined by each state. Additionally, state regulatory agencies may
require, at their discretion, individual HMOs to maintain statutory capital
levels higher than the state regulations. If this were to occur to
one of our subsidiaries, we may be required to make additional capital
contributions to the affected subsidiary. Any additional capital
contribution made to one of the affected subsidiaries could have a material
adverse effect on our liquidity and our ability to grow.
If
state regulators do not approve payments of dividends and distributions by our
subsidiaries to us, we may not have sufficient funds to implement our business
strategy.
We
principally operate through our health plan subsidiaries. If funds
normally available to us become limited in the future, we may need to rely on
dividends and distributions from our subsidiaries to fund our
operations. These subsidiaries are subject to regulations that limit
the amount of dividends and distributions that can be paid to us without prior
approval of, or notification to, state regulators. If these
regulators were to deny our subsidiaries’ request to pay dividends to us, the
funds available to us would be limited, which could harm our ability to
implement our business strategy.
Risks
Related to Our Business
Ineffectiveness
of state-operated systems and subcontractors could adversely affect our
business.
Our
health plans rely on other state-operated systems or sub-contractors to qualify,
solicit, educate and assign eligible members into the health
plans. The effectiveness of these state operations and
sub-contractors can have a material effect on a health plan’s enrollment in a
particular month or over an extended period. When a state implements
new programs to determine eligibility, new processes to assign or enroll
eligible members into health plans, or chooses new contractors, there is an
increased potential for an unanticipated impact on the overall number of members
assigned into the health plans.
Failure
to accurately predict our medical expenses could negatively affect our financial
position, results of operations or cash flows.
Our
medical expense includes claims reported but not yet paid, or inventory,
estimates for claims incurred but not reported, or IBNR, and estimates for the
costs necessary to process unpaid claims at the end of each
period. Our development of the medical claims liability estimate is a
continuous process which we monitor and refine on a monthly basis as claims
receipts and payment information becomes available. As more complete
information becomes available, we adjust the amount of the estimate, and include
the changes in estimates in medical expense in the period in which the changes
are identified.
We can
not be sure that our medical claims liability estimates are adequate or that
adjustments to those estimates will not unfavorably impact our results of
operations. For example, in the three months ended June 30, 2006 we
adjusted IBNR by $9.7 million for adverse medical costs development from the
first quarter of 2006.
Additionally,
when we commence operations in a new state or region, we have limited
information with which to estimate our medical claims liability. For
example, we commenced operations in South Carolina in December 2007 and began
our Foster Care program in Texas in April 2008. For a period of time
after the inception of business in these states, we based our estimates on state
provided historical actuarial data and limited actual incurred and received
claims. 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. The accuracy of our medical claims liability estimate
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.
In some
instances, our base premiums are subject to an adjustment, or risk score, based
on the acuity of our membership. Generally, the risk score is
determined by the State analyzing encounter submissions of processed claims data
to determine the acuity of our membership relative to the entire state’s
Medicaid membership. The risk score is dependent on several factors
including our providers’ completeness and quality of claims submission, our
processing of the claim, submission of the processed claims in the form of
encounters to the states’ encounter systems and the states’ acceptance and
analysis of the encounter data. If the risk scores assigned to our
premiums that are risk adjusted are not adequate or do not appropriately reflect
the acuity of our membership, our earnings will be affected
negatively.
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.
Our investment
portfolio may suffer losses from reductions in market interest rates and changes
in market conditions which could materially and adversely affect our results of
operations or liquidity.
As of
December 31, 2008, we had $480.4 million in cash, cash equivalents and
short-term investments and $341.7 million of long-term investments and
restricted deposits. We maintain an investment portfolio of cash
equivalents and short-term and long-term investments in a variety of securities
which may include commercial paper, certificates of deposit, money market funds,
municipal bonds, corporate bonds, instruments of the U.S. Treasury, insurance
contracts and equity securities. These investments are subject to
general credit, liquidity, market and interest rate
risks. Substantially all of these securities are subject to interest
rate and credit risk and will decline in value if interest rates increase or one
of the issuers’ credit ratings is reduced. As a result, we may
experience a reduction in value or loss of liquidity of our investments, which
may have a negative adverse effect on our results of operations, liquidity and
financial condition. For example, in the third quarter of 2008, we
recorded a loss on investments of approximately $4.5 million due to a loss in a
money market fund.
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
provide any assurance 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.
Acquisitions
of unfamiliar new businesses could negatively impact our business.
We are
subject to the expenditures and risks associated with entering into any new line
of business. Our failure to properly manage these expenditures and
risks could have a negative impact on our overall business. For
example, effective July 2008, we completed the previously announced acquisition
of Celtic Group, Inc., the parent company of Celtic Insurance Company, or
Celtic. Celtic is a national individual health insurance provider
that provides health insurance to individual customers and their
families. While we believe that the addition of Celtic will be
complementary to our business, we have not previously operated in the individual
health care industry.
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 financial position, results of operations or cash flows would be
materially affected by a decrease in premium revenues or profitability in any
one of those states.
Operations
in a few states have accounted for most of our premium revenues to
date. If we were unable to continue to operate in any of our current
states or if our current operations in any portion of one of those states were
significantly curtailed, our revenues could decrease materially. For
example, our Medicaid contract with Kansas, which terminated December 31, 2006,
together with our Medicaid contract with Missouri, accounted for $317.0 million
in revenue for the year ended December 31, 2006. Our reliance on
operations in a limited number of states could cause our revenue and
profitability to change suddenly and unexpectedly depending on legislative or
other governmental or regulatory actions and decisions, economic conditions and
similar factors in those states. Our inability to continue to operate
in any of the states in which we operate would harm our business.
Competition
may limit our ability to increase penetration of the markets that we
serve.
We
compete for members principally on the basis of size and quality of provider
network, benefits provided and quality of service. We compete with
numerous types of competitors, including other health plans and traditional
state Medicaid programs that reimburse providers as care is
provided. Subject to limited exceptions by federally approved state
applications, the federal government requires that there be choices for Medicaid
recipients among managed care programs. Voluntary programs and
mandated competition may limit our ability to increase our market
share.
Some of
the health plans with which we compete have greater financial and other
resources and offer a broader scope of products than we do. In
addition, significant merger and acquisition activity has occurred in the
managed care industry, as well as in industries that act as suppliers to us,
such as the hospital, physician, pharmaceutical, medical device and health
information systems businesses. To the extent that competition
intensifies in any market that we serve, our ability to retain or increase
members and providers, or maintain or increase our revenue growth, pricing
flexibility and control over medical cost trends may be adversely
affected.
In
addition, in order to increase our membership in the markets we currently serve,
we believe that we must continue to develop and implement community-specific
products, alliances with key providers and localized outreach and educational
programs. If we are unable to develop and implement these
initiatives, or if our competitors are more successful than we are in doing so,
we may not be able to further penetrate our existing markets.
If
we are unable to maintain relationships with our provider networks, our
profitability may be harmed.
Our
profitability depends, in large part, upon our ability to contract favorably
with hospitals, physicians and other healthcare providers. Our
provider arrangements with our primary care physicians, specialists and
hospitals generally may be cancelled by either party without cause upon 90 to
120 days prior written notice. We cannot provide any assurance 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
non-cancelable agreements due to alleged actions or inactions by
us. Even if these allegations represent attempts to avoid or
renegotiate contractual terms that have become economically disadvantageous to
the providers, it is possible that in the future a provider may pursue such a
claim successfully. In addition, we are aware that other managed care
organizations have been subject to class action suits by physicians with respect
to claim payment procedures, and we may be subject to similar
claims. Regardless of whether any claims brought against us are
successful or have merit, they will still be time-consuming and costly and could
distract our management’s attention. As a result, we may incur
significant expenses and may be unable to operate our business
effectively.
We will
be required to establish acceptable provider networks prior to entering new
markets. We may be unable to enter into agreements with providers in
new markets on a timely basis or under favorable terms. If we are
unable to retain our current provider contracts or enter into new provider
contracts timely or on favorable terms, our profitability will be
harmed.
We
may be unable to attract and retain key personnel.
We are
highly dependent on our ability to attract and retain qualified personnel to
operate and expand our business. If we lose one or more members of
our senior management team, including our chief executive officer, Michael F.
Neidorff, who has been instrumental in developing our business strategy and
forging our business relationships, our business and financial position, results
of operations or cash flows 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
financial position, results of operations or cash flows.
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 financial position, results of operations or
cash flows.
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 financial position, results of operations or cash flows 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 financial position, results of operations or cash flows 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 financial position, results of operations or cash
flows 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 provide any assurance 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 financial position, results of operations or
cash flows. In addition, regardless of the outcome of any litigation
or regulatory proceedings, such proceedings are costly and time
consuming and require significant attention from our
management. For example, we have in the past, or may be subject to in
the future, securities class action lawsuits, IRS examinations or similar
regulatory actions. Any such matters could harm our business and
financial position, results of operations or cash flows.
If
we are unable to complete the previously announced sale of certain of assets of
our New Jersey health plan in a timely manner, our business could
suffer.
On
November 20, 2008, we announced that we had entered into an agreement with
AMERIGROUP Corporation, or AMERIGROUP, to sell certain assets of our subsidiary
University Health Plan, Inc. in the State of New Jersey to
AMERIGROUP. The agreement contains a number of conditions to closing,
including (i) the approval of regulators in New Jersey, (ii) the lack of a
material adverse effect, and (iii) other customary conditions. On
December 31, 2008, we announced that we had received a termination notice from
AMERIGROUP relating to the New Jersey transaction. As we have
previously stated, we do not believe that there is cause to terminate the New
Jersey agreement and are prepared to pursue all available means to bring this
transaction to closure. To this end, on January 8, 2009, we announced
that, in response to AMERIGROUP’s purported termination of this agreement, we
had filed a lawsuit against AMERIGROUP in the Superior Court of New Jersey
Chancery Division. Nonetheless, if we are unable to close the New
Jersey transaction in a timely manner, our results of operations could be
negatively impacted.
Risks
related to our corporate headquarters’ project could harm our financial
position, results of operations or cash flows.
In 2008,
our capital expenditures included $27.0 million for land and fees associated
with the construction of a real estate development on the property adjoining our
corporate office, which we believe is necessary to accommodate our growing
business. We are currently negotiating our involvement as a joint
venture partner in an entity that will develop the properties. Due to
the global financial crisis and disruptions in the capital and credit markets,
we may be unable to complete this project under economically feasible
terms. If the Company is unable to complete the development or if the
Company delays or abandons the real estate project, it may have an adverse
impact on our financial position, results of operations or cash
flows. For example, in 2007 we abandoned a previously planned
redevelopment project and recorded a pre-tax impairment charge of $7.2
million. Our
operations and efficiency could also be impacted if the development is not
completed as there is limited office space for us to expand in the market near
our existing headquarters as our business continues to grow.
Item
2. Properties
We own
our corporate office headquarters building located in St. Louis,
Missouri. During 2008, our capital expenditures included land and
fees for the construction of a new real estate development on the property
adjoining our corporate office, which we believe is necessary to accommodate our
growing business. We are currently negotiating our involvement as a
joint venture partner in the entity that will develop the relevant
properties.
We
generally lease space in the states where our health plans, specialty companies
and claims processing facilities operate. We are required by various
insurance and regulatory authorities to have offices in the service areas where
we provide benefits. We believe our current facilities are adequate
to meet our operational needs for the foreseeable future.
Item
3. Legal
Proceedings
On
January 8, 2009, we filed a complaint in the Chancery Division of the Superior
Court of New Jersey, asserting a breach of contract claim against AMERIGROUP New
Jersey, or AGPNJ, and a tortuous interference with contract claim against
AMERIGROUP Corporation, in connection with AGPNJ’s refusal to proceed to closing
under its contract to purchase certain assets of University Health Plan’s or,
UHP’s, business. In December 2008, AGPNJ sent us a termination notice
claiming that a material adverse effect had occurred under the contract and
attempted to terminate the contract. We are contesting whether a
material adverse effect occurred and correspondingly the propriety and validity
of the purported termination, and are seeking to obtain specific performance of
the contract and damages.
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.
None.
PART
II
Item
5. Market for
Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Market
for Common Stock; Dividends
Our
common stock has been traded and quoted on the New York Stock Exchange under the
symbol “CNC” since October 16, 2003.
|
|
2008
Stock Price
|
|
2007
Stock Price
|
|
|
High
|
|
Low
|
|
High
|
|
Low
|
First
Quarter
|
|
$
|
28.49
|
|
$
|
13.58
|
|
$
|
26.66
|
|
$
|
20.68
|
Second
Quarter
|
|
|
21.70
|
|
|
13.10
|
|
|
24.28
|
|
|
19.35
|
Third
Quarter
|
|
|
24.67
|
|
|
16.40
|
|
|
23.79
|
|
|
17.65
|
Fourth
Quarter
|
|
|
21.61
|
|
|
15.23
|
|
|
27.73
|
|
|
21.26
|
As of
February 6, 2009, there were 49 holders of record of our common
stock.
We have
never declared any cash dividends on our capital stock and currently anticipate
that we will retain any future earnings for the development, operation and
expansion of our business.
Issuer
Purchases of Equity Securities
In
October 2008, our board of directors extended the previously adopted November
2005 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 expires October 31,
2009, but we reserve the right to suspend or discontinue the program at any
time. We have established a trading plan with a registered broker to
repurchase shares under certain market conditions. During the year
ended December 31, 2008, we repurchased 1,218,858 shares at an average price of
$19.29 and an aggregate cost of $23.5 million. During the quarter
ended December 31, 2008, with the exception of the 11,346 shares footnoted
below, we did not repurchase any shares other than through this publicly
announced program.
Issuer
Purchases of Equity Securities
Fourth
Quarter 2008
|
|
Period
|
|
Total
Number of Shares
Purchased
|
|
|
Average
Price Per
Share
|
|
Total
Number of
Shares Purchased
as Part
of Publicly Announced
Plans or
Programs
|
|
Maximum
Number
of Shares that
May Yet Be Purchased
Under the
Plans or Programs
|
|
October
1 – October 31, 2008
|
|
|
264,307 |
1 |
|
$ |
18.94 |
|
|
264,008 |
|
|
1,934,481 |
|
November
1 – November 30, 2008
|
|
|
2,597 |
2 |
|
|
17.12 |
|
|
— |
|
|
1,934,481 |
|
December
1 – December 31, 2008
|
|
|
8,450 |
2 |
|
|
16.07 |
|
|
— |
|
|
1,934,481 |
|
TOTAL
|
|
|
275,354 |
|
|
$ |
18.83 |
|
|
264,008 |
|
|
1,934,481 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
________________
1 299
shares acquired in October 2008 represent shares relinquished to the Company by
certain employees for payment of taxes upon vesting of restricted stock
units.
2 Shares
acquired in November and December 2008 represent shares relinquished to the
Company by certain employees for payment of taxes upon vesting of restricted
stock units.
Stock
Performance Graphs
The graph
below compares the cumulative total stockholder return on our common stock for
the period from December 31, 2003 to December 31, 2008 with the cumulative total
return of the New York Stock Exchange Composite Index and the Morgan Stanley
Health Care Payor Index over the same period. The graph assumes an
investment of $100 on December 31, 2003 in our common stock (at the last
reported sale price on such day), the New York Stock Exchange Composite Index
and the Morgan Stanley Health Care Payor Index and assumes the reinvestment of
any dividends.
|
|
12/31/2003
|
|
|
12/31/2004
|
|
|
12/31/2005
|
|
|
12/31/2006
|
|
|
12/31/2007
|
|
|
12/31/2008
|
|
Centene
Corporation
|
|
$ |
100.00 |
|
|
$ |
202.36 |
|
|
$ |
187.65 |
|
|
$ |
175.37 |
|
|
$ |
195.86 |
|
|
$ |
140.69 |
|
New
York Stock Exchange Composite Index
|
|
$ |
100.00 |
|
|
$ |
112.16 |
|
|
$ |
119.96 |
|
|
$ |
141.38 |
|
|
$ |
150.69 |
|
|
$ |
89.06 |
|
MS
Health Care Payor Index
|
|
$ |
100.00 |
|
|
$ |
146.27 |
|
|
$ |
200.56 |
|
|
$ |
213.90 |
|
|
$ |
248.53 |
|
|
$ |
112.32 |
|
The
following selected consolidated financial data should be read in conjunction
with the consolidated financial statements and related notes and “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations” included in our Annual Report on Form 10-K. The assets,
liabilities and results of operations of FirstGuard and University Health Plans
have been classified as discontinued operations for all periods
presented. The data for the years ended December 31, 2008, 2007 and
2006 and as of December 31, 2008 and 2007 are derived from consolidated
financial statements included elsewhere in this filing. The data for
the years ended December 31, 2005 and 2004 and as of December 31, 2006, 2005 and
2004 are derived from consolidated financial statements not included in this
filing.
|
|
Year
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In
thousands, except share data)
|
|
Consolidated
Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium
|
|
$
|
3,199,360
|
|
|
$
|
2,611,953
|
|
|
$
|
1,707,439
|
|
|
$
|
1,095,308
|
|
|
$
|
851,794
|
|
Premium
tax
|
|
|
90,202
|
|
|
|
76,567
|
|
|
|
35,848
|
|
|
|
6,079
|
|
|
|
4,911
|
|
Service
|
|
|
74,953
|
|
|
|
80,508
|
|
|
|
79,159
|
|
|
|
13,456
|
|
|
|
8,532
|
|
Total
revenues
|
|
|
3,364,515
|
|
|
|
2,769,028
|
|
|
|
1,822,446
|
|
|
|
1,114,843
|
|
|
|
865,237
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical
costs
|
|
|
2,640,335
|
|
|
|
2,190,898
|
|
|
|
1,436,371
|
|
|
|
897,077
|
|
|
|
692,348
|
|
Cost
of services
|
|
|
56,920
|
|
|
|
61,348
|
|
|
|
60,287
|
|
|
|
5,608
|
|
|
|
7,771
|
|
General
and administrative expenses
|
|
|
444,733
|
|
|
|
384,970
|
|
|
|
267,712
|
|
|
|
162,432
|
|
|
|
111,924
|
|
Premium
tax expense
|
|
|
90,966
|
|
|
|
76,567
|
|
|
|
35,848
|
|
|
|
6,079
|
|
|
|
4,911
|
|
Total
operating expenses
|
|
|
3,232,954
|
|
|
|
2,713,783
|
|
|
|
1,800,218
|
|
|
|
1,071,196
|
|
|
|
816,954
|
|
Earnings
from operations
|
|
|
131,561
|
|
|
|
55,245
|
|
|
|
22,228
|
|
|
|
43,647
|
|
|
|
48,283
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
and other income
|
|
|
21,728
|
|
|
|
24,452
|
|
|
|
15,511
|
|
|
|
8,417
|
|
|
|
6,066
|
|
Interest
expense
|
|
|
(16,673
|
)
|
|
|
(15,626
|
)
|
|
|
(10,574
|
)
|
|
|
(3,985
|
)
|
|
|
(680
|
)
|
Earnings
from continuing operations before income taxes
|
|
|
136,616
|
|
|
|
64,071
|
|
|
|
27,165
|
|
|
|
48,079
|
|
|
|
53,669
|
|
Income
tax expense
|
|
|
52,435
|
|
|
|
23,031
|
|
|
|
9,565
|
|
|
|
17,242
|
|
|
|
19,835
|
|
Net
earnings from continuing operations
|
|
|
84,181
|
|
|
|
41,040
|
|
|
|
17,600
|
|
|
|
30,837
|
|
|
|
33,834
|
|
Discontinued
operations, net of income tax (benefit) expense of $(281), $(31,563),
$12,412, $12,982, and $6,140, respectively
|
|
|
(684
|
)
|
|
|
32,362
|
|
|
|
(61,229
|
)
|
|
|
24,795
|
|
|
|
10,478
|
|
Net
earnings (loss)
|
|
$
|
83,497
|
|
|
$
|
73,402
|
|
|
$
|
(43,629
|
)
|
|
$
|
55,632
|
|
|
$
|
44,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
1.95
|
|
|
$
|
0.95
|
|
|
$
|
0.41
|
|
|
$
|
0.73
|
|
|
$
|
0.83
|
|
Discontinued
operations
|
|
|
(0.02
|
)
|
|
|
0.74
|
|
|
|
(1.42
|
)
|
|
|
0.58
|
|
|
|
0.26
|
|
Basic
earnings (loss) per common share
|
|
$
|
1.93
|
|
|
$
|
1.69
|
|
|
$
|
(1.01
|
)
|
|
$
|
1.31
|
|
|
$
|
1.09
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
1.90
|
|
|
$
|
0.92
|
|
|
$
|
0.39
|
|
|
$
|
0.69
|
|
|
$
|
0.78
|
|
Discontinued
operations
|
|
|
(0.02
|
)
|
|
|
0.72
|
|
|
|
(1.37
|
)
|
|
|
0.55
|
|
|
|
0.24
|
|
Diluted
earnings (loss) per common share
|
|
$
|
1.88
|
|
|
$
|
1.64
|
|
|
$
|
(0.98
|
)
|
|
$
|
1.24
|
|
|
$
|
1.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
43,275,187
|
|
|
|
43,539,950
|
|
|
|
43,160,860
|
|
|
|
42,312,522
|
|
|
|
40,820,909
|
|
Diluted
|
|
|
44,398,955
|
|
|
|
44,823,082
|
|
|
|
44,613,622
|
|
|
|
45,027,633
|
|
|
|
43,616,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
(In
thousands)
|
|
Consolidated
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
370,999
|
|
|
$
|
267,305
|
|
|
$
|
237,514
|
|
|
$
|
112,269
|
|
|
$
|
55,850
|
|
Investments
and restricted deposits
|
|
|
451,058
|
|
|
|
369,545
|
|
|
|
174,431
|
|
|
|
163,489
|
|
|
|
186,777
|
|
Total
assets
|
|
|
1,451,152
|
|
|
|
1,121,824
|
|
|
|
894,980
|
|
|
|
668,030
|
|
|
|
527,934
|
|
Medical
claims liability
|
|
|
373,037
|
|
|
|
313,364
|
|
|
|
232,496
|
|
|
|
123,102
|
|
|
|
121,790
|
|
Long-term
debt
|
|
|
264,637
|
|
|
|
206,406
|
|
|
|
174,646
|
|
|
|
92,448
|
|
|
|
46,973
|
|
Total
stockholders’ equity
|
|
|
501,272
|
|
|
|
415,047
|
|
|
|
326,423
|
|
|
|
352,048
|
|
|
|
271,312
|
|
The
following discussion of our financial condition and results of operations should
be read in conjunction with our consolidated financial statements and the
related notes included elsewhere in this filing. The discussion
contains forward-looking statements that involve known and unknown risks and
uncertainties, including those set forth under Item 1A. “Risk
Factors” of this Form 10-K.
OVERVIEW
We are a
multi-line healthcare enterprise operating in two segments. Our Medicaid
Managed Care segment provides Medicaid and Medicaid-related programs to
organizations and individuals through government subsidized programs, including
Medicaid, the State Children’s Health Insurance Program, or SCHIP, and,
Supplemental Security Income including Aged, Blind or Disabled programs, or ABD.
Our Specialty Services segment provides specialty services, including behavioral
health, individual health insurance, life and health management, long-term care
programs, managed vision, nurse triage, and pharmacy benefits management, to
state programs, healthcare organizations, employer groups and other commercial
organizations, as well as to our own subsidiaries. Our
Specialty Services segment also provides a full range of healthcare solutions
for the rising number of uninsured Americans.
During
2008, we announced our intention to sell certain assets of University Health
Plans, Inc, or UHP, our New Jersey health plan. In addition, our
Medicaid contract in Kansas terminated effective December 31, 2006, and we sold
the operating assets of FirstGuard Health Plan, Inc., our Missouri health plan,
effective February 1, 2007. Unless specifically noted, the
discussions below are in the context of continuing operations, and therefore,
exclude our New Jersey health plan, UHP, as well as our Kansas and Missouri
health plans, collectively referred to as FirstGuard. The results of
operations for UHP and FirstGuard are classified as discontinued operations for
all periods presented.
Our
financial performance for 2008 is summarized as follows:
—
|
Year-end
Medicaid Managed Care membership of
1,184,800.
|
—
|
Revenues
of $3.4 billion.
|
—
|
Health
Benefits Ratio, or HBR, of 82.5%.
|
—
|
General
and Administrative, or G&A, expense ratio of
13.6%.
|
—
|
Diluted
net earnings per share of $1.90.
|
—
|
Total
operating cash flows of $222.0
million.
|
The
following new contracts and acquisitions contributed to our growth over the last
two years:
—
|
In
October 2008, we began operating under our contract in Arizona to provide
Acute Care services in Yavapai county, with 14,900 members at December 31,
2008.
|
—
|
Effective
July 1, 2008, we completed the previously announced acquisition of Celtic,
a health insurance carrier focused on the individual health insurance
market.
|
—
|
In
April 2008, we began operating under our new contract in Texas to provide
statewide managed care services to participants in the Texas Foster Care
program, with 33,100 members at December 31,
2008.
|
—
|
In
2007, we acquired PhyTrust of South Carolina, LLC, as well as Physician’s
Choice, LLC, both of which managed care on a non-risk basis for Medicaid
members in South Carolina. We became licensed in 2007 to
provide risk-based managed care in the State and participated in the
transition of the State’s conversion to at-risk managed
care. We served 31,300 at-risk members in South Carolina at
December 31, 2008.
|
—
|
In July 2007, we
acquired a 49% ownership interest in Access Health Solutions, LLC,
or Access, which provides managed care for Medicaid recipients in Florida,
with 97,100 members at December 31, 2008.
|
—
|
In
February 2007, we began managing care for ABD recipients in the San
Antonio and Corpus Christi markets of Texas with 34,600 members at
December 31, 2008.
|
—
|
In
2007, we began managing care for ABD members in Ohio, with 13,900
members at December 31, 2008.
|
We have
opportunities to continue our growth through the following:
—
|
In
November 2008, we announced the planned acquisition of certain assets of
AMERIGROUP Community Care of South Carolina. We expect this
acquisition to close during the first quarter of
2009.
|
—
|
In
February 2009, we began converting membership in Florida from Access, on a
non-risk basis to our new subsidiary, Sunshine State Health Plan on an
at-risk basis.
|
RESULTS
OF CONTINUING OPERATIONS AND KEY METRICS
The
following discussion and analysis is based on our consolidated statements of
operations, which reflect our results of operations for the years ended
December 31, 2008, 2007 and 2006, as prepared in accordance with generally
accepted accounting principles in the United States, or GAAP.
Summarized
comparative financial data for 2008, 2007 and 2006 are as follows ($ in
millions):
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
%
Change
2007-2008
|
|
|
%
Change
2006-2007
|
|
Premium
|
|
$ |
3,199.3 |
|
|
$ |
2,611.9 |
|
|
$ |
1,707.4 |
|
|
|
22.5
|
% |
|
|
53.0
|
% |
Premium
tax
|
|
|
90.2 |
|
|
|
76.6 |
|
|
|
35.8 |
|
|
|
17.8
|
% |
|
|
113.6
|
% |
Service
|
|
|
75.0 |
|
|
|
80.5 |
|
|
|
79.2 |
|
|
|
(6.9
|
)
% |
|
|
1.7
|
% |
Total
revenues
|
|
|
3,364.5 |
|
|
|
2,769.0 |
|
|
|
1,822.4 |
|
|
|
21.5
|
% |
|
|
51.9
|
% |
Medical
costs
|
|
|
2,640.3 |
|
|
|
2,190.9 |
|
|
|
1,436.4 |
|
|
|
20.5
|
% |
|
|
52.5
|
% |
Cost
of services
|
|
|
56.9 |
|
|
|
61.3 |
|
|
|
60.3 |
|
|
|
(7.2
|
)% |
|
|
1.8
|
% |
General
and administrative expenses
|
|
|
444.7 |
|
|
|
385.0 |
|
|
|
267.7 |
|
|
|
15.5
|
% |
|
|
43.8
|
% |
Premium
tax expense
|
|
|
91.0 |
|
|
|
76.6 |
|
|
|
35.8 |
|
|
|
18.8
|
% |
|
|
113.6
|
% |
Earnings
from operations
|
|
|
131.6 |
|
|
|
55.2 |
|
|
|
22.2 |
|
|
|
138.1
|
% |
|
|
148.5
|
% |
Investment
and other income, net
|
|
|
5.0 |
|
|
|
8.8 |
|
|
|
5.0 |
|
|
|
(42.7
|
)% |
|
|
78.8
|
% |
Earnings
before income taxes
|
|
|
136.6 |
|
|
|
64.0 |
|
|
|
27.2 |
|
|
|
113.2
|
% |
|
|
135.9
|
% |
Income
tax expense
|
|
|
52.4 |
|
|
|
23.0 |
|
|
|
9.6 |
|
|
|
127.7
|
% |
|
|
140.8
|
% |
Net
earnings from continuing operations
|
|
|
84.2 |
|
|
|
41.0 |
|
|
|
17.6 |
|
|
|
105.1
|
% |
|
|
132.2
|
% |
Discontinued
operations, net of income tax (benefit) expense of $(0.3), $(31.6) and
$12.4 respectively
|
|
|
(0.7 |
) |
|
|
32.4 |
|
|
|
(61.2 |
) |
|
|
(102.1
|
)% |
|
|
(152.9
|
)% |
Net
earnings (loss)
|
|
$ |
83.5 |
|
|
$ |
73.4 |
|
|
$ |
(43.6 |
) |
|
|
13.8
|
% |
|
|
(268.2
|
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
1.90 |
|
|
$ |
0.92 |
|
|
$ |
0.39 |
|
|
|
106.5
|
% |
|
|
135.9
|
% |
Discontinued
operations
|
|
|
(0.02 |
) |
|
|
0.72 |
|
|
|
(1.37 |
) |
|
|
(102.8
|
)% |
|
|
(152.6
|
)% |
Total
diluted earnings (loss) per common share
|
|
$ |
1.88 |
|
|
$ |
1.64 |
|
|
$ |
(0.98 |
) |
|
|
14.6
|
% |
|
|
(267.3
|
)% |
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. In some instances, our
base premiums are subject to an adjustment, or risk score, based on the acuity
of our membership. Generally, the risk score is determined by the
State analyzing encounter submissions of processed claims data to determine the
acuity of our membership relative to the entire state’s Medicaid
membership. Some states enact premium taxes or similar assessments,
collectively, premium taxes, and these taxes are recorded as a component of
revenues as well as operating expenses. Some contracts allow for
additional premium associated with certain supplemental services provided such
as maternity deliveries. Revenues are recorded based on membership
and eligibility data provided by the states, which may be adjusted by the states
for updates to this data. These eligibility 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. Revenues are recognized when the
related services are provided or as ratably earned over the covered period of
services.
Premium
and service revenues collected in advance are recorded as unearned
revenue. For performance-based contracts, we do not recognize revenue
subject to refund until data is sufficient to measure
performance. Premium and service revenues due to us are recorded as
premium and related receivables and are recorded net of an allowance based on
historical trends and our management’s judgment on the collectibility of these
accounts. As we generally receive payments during the month in which
services are provided, the allowance is typically not significant in comparison
to total revenues and does not have a material impact on the presentation of our
financial condition or results of operations.
Our total
revenue increased in the year ended December 31, 2008 over the previous year
primarily through 1) membership growth in the Medicaid Managed Care segment, 2)
premium rate increases, and 3) growth in our Specialty Services
segment.
From
December 31, 2006 to December 31, 2008, we increased our Medicaid Managed Care
membership by 11.3%. The following table sets forth our membership by
state in our Medicaid Managed Care segment:
|
|
December
31,
|
|
|
2008
|
|
2007
|
|
2006
|
Georgia
|
|
288,300
|
|
287,900
|
|
308,800
|
Indiana
|
|
175,300
|
|
154,600
|
|
183,100
|
Ohio
|
|
133,400
|
|
128,700
|
|
109,200
|
South
Carolina
|
|
31,300
|
|
31,800
|
|
—
|
Texas
|
|
431,700
|
|
354,400
|
|
298,500
|
Wisconsin
|
|
124,800
|
|
131,900
|
|
164,800
|
Total
|
|
1,184,800
|
|
1,089,300
|
|
1,064,400
|
The
following table sets forth our membership by line of business in our Medicaid
Managed Care segment:
|
|
December
31,
|
|
|
2008
|
|
2007
|
|
2006
|
Medicaid
|
|
862,500
|
|
807,600
|
|
843,700
|
SCHIP/Foster
Care
|
|
257,300
|
|
214,600
|
|
205,800
|
ABD/Medicare
|
|
65,000
|
|
67,100
|
|
14,900
|
Total
|
|
1,184,800
|
|
1,089,300
|
|
1,064,400
|
From
December 31, 2007 to December 31, 2008 our membership increased as a result
of growth in Indiana and Texas. In Texas, we increased our
membership through organic growth of SCHIP, especially in the Exclusive Provider
Organization, or EPO, market. In addition, we increased Texas
membership through our new Foster Care program, with 33,100 members at December
31, 2008. We increased our membership in Indiana through temporary
eligibility determinations and network expansions. Our membership
decreased in Wisconsin due to the termination of certain provider
contracts. In South Carolina, we continue to add at-risk membership
as additional counties convert, with 31,300 at-risk members at December 31,
2008. Substantially all of the prior year membership in South
Carolina was on a non-risk basis. In Florida, Access served 97,100
members on a non-risk basis at December 31, 2008.
From
December 31, 2006 to December 31, 2007, our membership increased primarily as a
result of increases in Ohio, South Carolina and Texas. We increased
our Medicaid membership in Ohio by adding members under our new contract in the
Northwest region. We also increased our membership in Ohio with the commencement
of our new contract to serve Aged, Blind or Disabled members. Our
membership in South Carolina was primarily on a non-risk basis; we began
conversion to at-risk in December 2007, with 100 at-risk members at December 31,
2007. In Texas, we increased our membership through new Medicaid,
SCHIP and ABD contracts in the Corpus Christi, San Antonio, 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. In Florida, Access served 90,600
members on a non-risk basis at December 31, 2007.
The total
revenue associated with University Health Plans included in results from
discontinued operations was $150.6 million, $150.3 million, and $139.5 million
in 2008, 2007 and 2006, respectively. Our University Health Plan
membership was 55,200, 57,300 and 58,900 at December 31, 2008, 2007 and 2006,
respectively. The total revenue associated with FirstGuard included
in results from discontinued operations was $0, $6.7 million, and $317.0 million
in 2008, 2007 and 2006, respectively. Our FirstGuard membership was
138,900 at December 31, 2006.
|
2.
|
Premium
rate increases
|
In 2008,
we received premium rate increases in some markets which yield a
2.7% composite increase across all of our markets. In 2007, we
received premium rate increases in some markets which yield a
2.6% composite increase across all of our markets.
In
November 2007, we received a contract amendment from the State of
Georgia providing for an effective premium rate increase in Georgia of
approximately 3.8% effective July 1, 2007. The state also mandated service
changes, retroactively recalculated certain rate cells and adjusted for
duplicate member issues. We executed this amendment on November 16,
2007. The State of Georgia returned the fully executed contract in January
2008 and, accordingly, we recorded the additional revenue, retroactive to July
1, 2007, in the first quarter of 2008. This premium revenue, related
to the period from July 1, 2007 to December 31, 2007, totals approximately $20.8
million. Approximately $7.3 million of this amount is related to the
mandated services, rate cell changes and duplicate member issues, the remaining
$13.5 million yields the calculated 3.8% increase.
|
3.
|
Specialty
Services segment growth
|
For the
year ended December 31, 2008, Specialty Services segment revenue from external
customers was $344.3 million compared to $245.4 million for the same prior year
period. The increase is primarily attributable to the acquisition of
Celtic as well as increasing membership for both our behavioral health company,
Cenpatico, and Bridgeway.
The
following table sets forth our membership by line of business in our Specialty
Services segment:
|
|
December
31,
|
|
|
2008
|
|
2007
|
|
2006
|
Cenpatico
Behavioral Health:
|
|
|
|
|
|
|
Kansas
|
|
41,100
|
|
39,000
|
|
36,600
|
Arizona
|
|
105,000
|
|
99,900
|
|
94,500
|
Bridgeway:
|
|
|
|
|
|
|
Long-term
Care
|
|
2,100
|
|
1,600
|
|
900
|
Acute
Care
|
|
14,900
|
|
—
|
|
—
|
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. We use our judgment to determine the assumptions
to be used in the calculation of the required IBNR estimate. The
assumptions we consider include, without limitation, claims receipt and payment
experience (and variations in that experience), changes in membership, provider
billing practices, health care service utilization trends, cost trends, product
mix, seasonality, prior authorization of medical services, benefit changes,
known outbreaks of disease or increased incidence of illness such as influenza,
provider contract changes, changes to Medicaid fee schedules, and the incidence
of high dollar or catastrophic claims.
Our
development of the IBNR estimate is a continuous process which we monitor and
refine on a monthly basis as claims receipts and payment information becomes
available. As more complete information becomes available, we adjust
the amount of the estimate, and include the changes in estimates in medical
expense in the period in which the changes are identified.
Additionally,
we contract with independent actuaries to review our estimates on a quarterly
basis. The independent actuaries provide us with a review letter that
includes the results of their analysis of our medical claims
liability. We do not solely rely on their report to adjust our claims
liability. We utilize their calculation of our claims liability only as
additional information, together with management’s judgment to determine the
assumptions to be used in the calculation of our liability for medical
costs.
While we
believe our IBNR estimate is appropriate, it is possible future events could
require us to make significant adjustments for revisions to these
estimates. Accordingly, we can not assure you that healthcare claim
costs will not materially differ from our estimates.
Our
results of operations depend on our ability to manage expenses associated with
health benefits and to accurately predict costs incurred. Our health benefits
ratio, or HBR, represents medical costs as a percentage of premium revenues
(excluding premium taxes) and reflects the direct relationship between the
premium received and the medical services provided. The table below depicts our
HBR for our external membership by member category:
|
|
Year
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Medicaid
and SCHIP
|
|
|
80.6
|
% |
|
|
82.8
|
% |
|
|
84.0
|
% |
ABD
and Medicare
|
|
|
91.1 |
|
|
|
91.4 |
|
|
|
88.8 |
|
Specialty
Services
|
|
|
83.8 |
|
|
|
78.4 |
|
|
|
83.9 |
|
Total
|
|
|
82.5 |
|
|
|
83.9 |
|
|
|
84.1 |
|
Our
consolidated HBR for the year ended December 31, 2008 was 82.5%, a
decrease of 1.4% over 2007. The decrease for the year ended December
31, 2008 over 2007 is due to the effect of recording the Georgia premium rate
increase retroactive to July 1, 2007 in 2008. Our consolidated HBR for the
year ended December 31, 2007 was 83.9%, a decrease of 0.2% over
2006. The decrease is primarily attributable to increased premium
yield combined with a moderating medical cost trend particularly with a decrease
in pharmacy costs, offset by the new ABD business in Ohio and the transition of
these new members into a managed care environment.
Cost
of Services
Our cost
of services expense includes the pharmaceutical costs associated with our
pharmacy benefit manager’s external revenues. Cost of services also includes all
direct costs to support the functions responsible for generation of our services
revenues. These expenses consist of the salaries and wages of the professionals
and teachers who provide the services and expenses associated with facilities
and equipment used to provide services.
General
and Administrative Expenses
Our
general and administrative expenses, or G&A, primarily reflect wages and
benefits, including stock compensation expense, and other administrative costs
associated with our health plans, specialty companies and centralized functions
that support all of our business units. Our major centralized functions are
finance, information systems and claims processing. G&A increased in both
the years ended December 31, 2008 and December 31, 2007 primarily due to
expenses for additional facilities and staff to support our
growth. G&A also increased in 2008 as a result of the acquisition
of Celtic. G&A in 2007 also included charges totaling $12.4
million for fixed asset impairment, severance for an organizational realignment,
and a contribution to our charitable foundation with a portion of the proceeds
from the sale of FirstGuard Missouri. The fixed asset impairment
resulted from abandoning a previously planned headquarters development in
Clayton, Missouri.
Our
G&A expense ratio represents G&A expenses as a percentage of the sum of
Premium revenues and Service revenues, and reflects the relationship between
revenues earned and the costs necessary to earn those revenues. The
consolidated G&A expense ratio for the years ended December 31, 2008,
2007 and 2006 were 13.6%, 14.3% and 15.0%, respectively. The
decrease in the ratio in 2008 primarily reflects the overall leveraging of our
expenses over higher revenues, partially offset by the effect of the acquisition
of Celtic and of our start-up costs in Florida and for our Texas Foster Care
product. The decrease in the ratio in 2007 primarily reflects the
overall leveraging of our expenses over higher revenues offset by the effect of
our start-up costs in South Carolina and for our Texas Foster Care product, and
the $12.4 million charge discussed above.
Other
Income (Expense)
|
The
following table summarizes the components of investment and other income,
net:
|
|
|
Year
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Investment
income
|
|
$ |
15.3 |
|
|
$ |
23.9 |
|
|
$ |
15.5 |
|
Earnings
from equity method investee
|
|
|
6.4 |
|
|
|
0.5 |
|
|
|
— |
|
Interest
expense
|
|
|
(16.7 |
) |
|
|
(15.6 |
) |
|
|
(10.5 |
) |
Investment
and other income, net
|
|
$ |
5.0 |
|
|
$ |
8.8 |
|
|
$ |
5.0 |
|
Other
income (expense) consists principally of investment income from our cash and
investments, our equity in earnings of investments, and interest expense on our
debt. Investment income decreased $8.6 million in 2008, over the
comparable periods in 2007. The decrease in 2008 was due to a loss on
investments of $4.5 million recorded in the third quarter of 2008 and an overall
decline in market interest rates. The loss was primarily related to
investments in the Reserve Primary money market fund whose Net Asset Value fell
below $1.00 per share. The loss represents less than 1% of Centene’s
cash and investment portfolio as of December 31, 2008. We expect to
recover 95% of our Reserve Primary Fund investments. Money market
funds are generally recorded in Cash and cash equivalents in our balance sheet,
however, our investment in the Reserve Primary money market fund is recorded in
Short-term investments due to the restrictions placed on redemptions imposed by
the fund. As of December 31, 2008 we had recovered most of the investment
in the Reserve Primary Fund. These decreases were partially offset by
an increase in earnings from our equity method investee,
Access. Investment income increased $8.4 million in 2007, over
the comparable period in 2006. The increase was primarily a result of
larger investment balances. Interest expense increased in 2007, over
the comparable period in 2006 due to larger debt balances resulting from our
senior notes issuance.
Income
Tax Expense
Our
effective tax rate in 2008 was 38.4% compared to 35.9% in 2007. The
increase in the current year was due to higher state taxes as a result of a
change in the estimated benefit to be realized from New Jersey State net
operating loss carryforwards. Our 2007 effective tax
rate was 35.9% compared to 35.2% for the corresponding period in
2006. The decrease was primarily due to the effect of an increase in
tax-exempt investment income and lower state taxes.
Discontinued
Operations
In
November 2008, we announced our intention to sell certain assets of University
Health Plans, Inc, or UHP, our New Jersey health plan. Accordingly,
the results of operations for UHP are reported as discontinued operations for
all periods presented. UHP was previously reported in the Medicaid
Managed Care segment. In November 2008, we announced a definitive
agreement to sell certain assets of our New Jersey health plan to AMERIGROUP New
Jersey, or AGPNJ. In December 2008, AGPNJ sent us a termination
notice. We have filed a complaint seeking specific performance of the
contract and damages. Additional information regarding this matter is
included in “Item 3. Legal Proceedings” included elsewhere in this Annual Report
on Form 10-K.
In August
2006, FirstGuard Health Plan Kansas, Inc., or FirstGuard Kansas, our wholly
owned subsidiary, received notification from the Kansas Health Policy Authority
that its Medicaid contract scheduled to terminate December 31, 2006 would not be
renewed. In 2006, we also evaluated our strategic alternatives for
our FirstGuard Missouri health plan and decided to divest the business.
The sale of the operating assets of FirstGuard Missouri was completed
effective February 1, 2007. Accordingly, the results of operations for
FirstGuard Kansas and FirstGuard Missouri are reported as discontinued
operations for all periods presented. FirstGuard Kansas and
FirstGuard Missouri were previously reported in the Medicaid Managed
Care segment. Additionally, the assets and liabilities of the
discontinued businesses are segregated in the consolidated balance
sheet.
Net
earnings (losses) from discontinued operations were a net loss of $0.7 million
in 2008 compared to earnings of $32.4 million in 2007 and a net loss of $61.2
million in 2006. The 2008 results include a one-time charge of $3.7
million primarily for asset impairments and employee severance related to the
sale of the New Jersey health plan. At December 31, 2008, the
remaining liability for these charges was $1.1 million. In 2007, we
abandoned the stock of our FirstGuard health plans resulting in tax benefits of
$32.6 million, net of the associated asset write-offs. The 2007
results also included a gain on the sale of FirstGuard Missouri of $7.5 million,
as well as operational and exit costs associated with FirstGuard. The
2006 results included a FirstGuard goodwill impairment charge of $81.1 million,
a FirstGuard intangible asset impairment charge of $6.0 million, as well as
operational and exit costs associated with FirstGuard.
LIQUIDITY
AND CAPITAL RESOURCES
Shown
below is a condensed schedule of cash flows for the years ended December 31,
2008, 2007 and 2006, that we use throughout our discussion of liquidity and
capital resources (in millions).
|
|
Year
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Net
cash provided by operating activities
|
|
$
|
222.0
|
|
|
$
|
202.2
|
|
|
$
|
195.0
|
|
Net
cash used in investing activities
|
|
|
(153.9
|
)
|
|
|
(225.5
|
)
|
|
|
(150.2
|
)
|
Net
cash provided by financing activities
|
|
|
42.4
|
|
|
|
20.8
|
|
|
|
78.9
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
$
|
110.5
|
|
|
$
|
(2.5
|
)
|
|
$
|
123.7
|
|
We
finance our activities primarily through operating cash flows and borrowings
under our revolving credit facility. Our total operating activities
provided cash of $222.0 million in 2008, $202.2 million in 2007 and $195.0
million in 2006. Cash flow from operations in 2008 reflected an
increase in our Medical claims liability as a result of new business in Texas,
South Carolina and Arizona. Cash flow from operations also increased
by a change in our cash management procedure whereby negative book cash balances
resulting from checks issued but not yet presented to our bank for payment are
now included in Accounts payable and accrued expenses. These factors
were partially offset by a decrease in unearned revenue resulting from a timing
difference with the receipt of our December revenue for our Ohio health
plan. The Medical claims liability increased in 2007 reflecting new
business in Ohio and Texas, offset by the payment in 2007 of FirstGuard claims
incurred in 2006.
Our
investing activities used cash of $153.9 million in 2008, $225.5 million in 2007
and $150.2 million in 2006. Cash flows from investing activities in
2008 included the purchase price of Celtic which we acquired on July 1, 2008,
capital expenditures and our investment in the Reserve Primary fund previously
discussed. At December 31, 2008, our investment in the Reserve Fund
totaled $13.0 million and was included in Short-term
investments. 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. Our
investment policies are designed to provide liquidity, preserve capital and
maximize total return on invested assets within our guidelines. Net cash
provided by and used in investing activities will fluctuate from year to year
due to the timing of investment purchases, sales and maturities. As of
December 31, 2008, our investment portfolio consisted primarily of fixed-income
securities with an average duration of 2.4 years. Cash is invested in investment
vehicles such as municipal bonds, corporate bonds, instruments of the U.S.
Treasury, insurance contracts, commercial paper and equity
securities. These securities generally are actively traded in
secondary markets and the reported fair market value is determined based on
recent trading activity and other observable inputs. The states in
which we operate prescribe the types of instruments in which our regulated
subsidiaries may invest their cash.
We spent
$65.2 million, $53.9 million and $50.3 million in 2008, 2007 and 2006,
respectively, on capital assets consisting primarily of software and hardware
upgrades, and furniture, equipment and leasehold improvements associated with
office and market expansions. The expenditures in 2008 included $32.0
million for computer hardware and software. We anticipate spending
approximately $30 million on capital expenditures in 2009, primarily associated
with system enhancements and market expansions.
In 2008,
our capital expenditures included $27.0 million for land and fees associated
with the construction of a real estate development on the property adjoining our
corporate office, which we believe is necessary to accommodate our growing
business. We are currently negotiating our involvement as a joint
venture partner in an entity that will develop the properties. If the
Company is unable to complete the development or if the Company delays or
abandons the real estate project, it may have an adverse impact on our financial
position, results of operations or cash flows. Our
operations and efficiency could also be impacted if the development is not
completed as there is limited office space for us to expand in the market near
our existing headquarters as our business continues to grow.
Our
financing activities provided cash of $42.4 million in 2008, $20.8 million in
2007 and $78.9 million in 2006. During 2008, our financing activities
primarily related to proceeds from borrowings under our $300 million credit
facility and stock repurchases. During 2007, our financing activities
primarily related to proceeds from issuance of $175 million in senior notes as
discussed below.
At
December 31, 2008, we had working capital, defined as current assets less
current liabilities, of $25.4 million, as compared to $(40.5) million at
December 31, 2007. 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. Our working capital was negative at December 31, 2007 due to our
efforts to increase investment returns through purchases of investments that
have maturities of greater than one year and, therefore, are classified as
long-term.
Cash,
cash equivalents and short-term investments were $480.4 million at December 31,
2008 and $313.4 million at December 31, 2007. Long-term investments
were $341.7 million at December 31, 2008 and $323.5 million at December 31,
2007, including restricted deposits of $9.3 million and $6.4 million,
respectively. At December 31, 2008, cash and investments held by our
unregulated entities totaled $24.1 million while cash and investments held by
our regulated entities totaled $798.0 million. Additionally, we held
regulated cash and investments of $30.1 million from discontinued
operations. Upon completion of the sale of assets of UHP and the
subsequent payment of medical claims liabilites and other liabilities at the
closing date, the remaining regulated cash of UHP will be transferred to our
unregulated cash.
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 December 31, 2008, we had $63.0 million in
borrowings outstanding under the agreement and $24.1 million in letters of
credit outstanding, leaving availability of $212.9 million. As of
December 31, 2008, we were in compliance with all covenants.
In 2007,
we issued $175 million aggregate principal amount of our 7 ¼% Senior Notes due
April 1, 2014, or the Notes. 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 is paid semi-annually in April and
October. As of December 31, 2008, 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. In October 2008, the repurchase program was
extended through October 31, 2009, but we reserve the right to suspend or
discontinue the program at any time. During the year ended December
31, 2008, we repurchased 1,218,858 shares at an average price of
$19.29. We have established a trading plan with a registered broker
to repurchase shares under certain market conditions.
On July
1, 2008 we completed the acquisition of Celtic for a purchase price of
approximately $82.0 million, net of unregulated cash
acquired. Concurrent with the acquisition, we received regulatory
approval to pay a dividend from Celtic to Centene in an amount of $31.4 million,
while still maintaining a capital structure we believe to be
conservative. As a result of the dividend, the net effect on our
unregulated cash was approximately $50 million. During the year ended
December 31, 2008, we received additional dividends of $17.0 million from other
regulated subsidiaries.
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 planned acquisition of AMERIGROUP
Community Care of South Carolina, our general operations and capital
expenditures for at least 12 months from the date of this filing.
.
Our
contractual obligations at December 31, 2008 consisted of medical claims
liability, debt, operating leases, purchase obligations, interest on long-term
debt, unrecognized tax benefits and other long-term liabilities. Our
debt consists of borrowings from our credit facilities, mortgages and capital
leases. The purchase obligations consist primarily of software
purchase and maintenance contracts. The contractual obligations and
estimated period of payment over the next five years and beyond are as follows
(in thousands):
|
|
Payments
Due by Period
|
|
|
|
Total
|
|
|
Less
Than
1
Year
|
|
|
1-3
Years
|
|
|
3-5
Years
|
|
|
More
Than
5
Years
|
|
Medical
claims liability
|
|
$ |
373,037 |
|
|
$ |
373,037 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Debt
1
|
|
|
264,892 |
|
|
|
255 |
|
|
|
83,861 |
|
|
|
534 |
|
|
|
180,242 |
|
Operating
lease obligations
|
|
|
121,795 |
|
|
|
20,490 |
|
|
|
32,563 |
|
|
|
20,248 |
|
|
|
48,494 |
|
Purchase
obligations
|
|
|
38,474 |
|
|
|
19,426 |
|
|
|
13,878 |
|
|
|
3,546 |
|
|
|
1,624 |
|
Interest
on long-term debt 2
|
|
|
69,781 |
|
|
|
12,687 |
|
|
|
25,375 |
|
|
|
25,375 |
|
|
|
6,344 |
|
Unrecognized
tax benefits 3
|
|
|
4,054 |
|
|
|
— |
|
|
|
3,982 |
|
|
|
72 |
|
|
|
— |
|
Other
long-term liabilities 4
|
|
|
39,337 |
|
|
|
— |
|
|
|
10,884 |
|
|
|
8,594 |
|
|
|
19,859 |
|
Total
|
|
$ |
911,370 |
|
|
$ |
425,895 |
|
|
$ |
170,543 |
|
|
$ |
58,369 |
|
|
$ |
256,563 |
|
________________________________
1 Includes
debt related to capital lease obligations.
2 Interest
on $175,000 Senior Notes.
3 Unrecognized tax benefits relate to the provision for FASB
Interpretation No. 48.
4 Includes
$15,949 separate account liabilities
from third party reinsurance that will not be settled in cash.
REGULATORY
CAPITAL AND DIVIDEND RESTRICTIONS
Our
Medicaid Managed Care operations are conducted through our
subsidiaries. As managed care organizations, these subsidiaries are
subject to state regulations that, among other things, require the maintenance
of minimum levels of statutory capital, as defined by each state, and restrict
the timing, payment and amount of dividends and other distributions that may be
paid to us. Generally, the amount of dividend distributions that may
be paid by a regulated subsidiary without prior approval by state regulatory
authorities is limited based on the entity’s level of statutory net income and
statutory capital and surplus.
Our
subsidiaries are required to maintain minimum capital requirements prescribed by
various regulatory authorities in each of the states in which we
operate. As of December 31, 2008, our subsidiaries, including UHP,
had aggregate statutory capital and surplus of $391.4 million, compared with the
required minimum aggregate statutory capital and surplus requirements of $241.5
million and we estimate our Risk Based Capital, or RBC, percentage to be 340% of
the Authorized Control Level.
The
National Association of Insurance Commissioners has adopted rules which set
minimum risk-based capital requirements for insurance companies, managed care
organizations and other entities bearing risk for healthcare
coverage. As of December 31, 2008, each of our health plans were in
compliance with the risk-based capital requirements enacted in those
states.
RECENT
ACCOUNTING PRONOUNCEMENTS
In
December 2007, the Financial Accounting Standards Board, or FASB, issued FASB
Statement No.141 (revised 2007), Business Combinations.
The purpose of issuing the statement was to replace current guidance in FASB
Statement No.141,
Business Combinations, to better represent the economic value of a
business combination transaction. The changes to be effected with FASB Statement
No. 141R from the current guidance include, but are not limited to:
(1) acquisition costs will be recognized separately from the acquisition;
(2) known contractual contingencies at the time of the acquisition will be
considered part of the liabilities acquired and and measured at their fair
value; all other contingencies will be part of the liabilities acquired and
measured at their fair value only if it is more likely than not that they meet
the definition of a liability; (3) contingent consideration based on the
outcome of future events will be recognized and measured at the time of the
acquisition; (4) business combinations achieved in stages (step
acquisitions) will need to recognize the identifiable assets and liabilities, as
well as noncontrolling interests, in the acquiree, at the full amounts of their
fair values; and (5) a bargain purchase (defined as a business combination
in which the total acquisition-date fair value of the identifiable net assets
acquired exceeds the fair value of the consideration transferred plus any
noncontrolling interest in the acquiree) will require that excess to be
recognized as a gain attributable to the acquirer. FASB
Statement No. 141R will be effective for any business combinations
that occur after January 1, 2009.
In
December 2007, the FASB issued FASB Statement No. 160, Noncontrolling Interests in
Consolidated Financial Statements, which was issued to improve the
relevance, comparability, and transparency of financial information provided to
investors by requiring all entities to report noncontrolling (minority)
interests in subsidiaries in the same way, that is, as equity in the
consolidated financial statements. Moreover, FASB Statement No. 160
eliminates the diversity that currently exists in accounting for transactions
between an entity and noncontrolling interests by requiring they be treated as
equity transactions. FASB Statement No. 160 will be effective January
1, 2009. The adoption of FASB Statement No. 160 will not
have a material impact on our financial statements and
disclosures.
We have
determined that all other recently issued accounting pronouncements will not
have a material impact on our consolidated financial position, results of
operations and cash flows, or do not apply to our operations.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
Our
discussion and analysis of our results of operations and liquidity and capital
resources are based on our consolidated financial statements which have been
prepared in accordance with GAAP. In connection with the preparation of
our consolidated financial statements, we are required to make assumptions and
estimates about future events, and apply judgments that affect the reported
amounts of assets, liabilities, revenue, expenses, and the related disclosures.
We base our assumptions, estimates and judgments on historical experience,
current trends and other factors we believe to be relevant at the time we
prepared our consolidated financial statements. On a regular basis, we
review the accounting policies, assumptions, estimates and judgments to ensure
that our consolidated financial statements are presented fairly and in
accordance with GAAP. However, because future events and their effects
cannot be determined with certainty, actual results could differ from our
assumptions and estimates, and such differences could be material.
The
preparation of our consolidated financial statements in conformity with GAAP
requires us to make estimates and assumptions. These estimates and
assumptions affect the reported amounts of assets and liabilities and the
disclosures of contingent assets and liabilities as of the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting periods. Future events and their effects cannot be predicted with
certainty, and accordingly, our accounting estimates require the exercise of
judgment. The accounting estimates used in the preparation of our
consolidated financial statements will change as new events occur, as more
experience is acquired, as additional information is obtained and as our
operating environment changes. We evaluate and update our assumptions and
estimates on an ongoing basis and may employ outside experts to assist in our
evaluations. Actual results could differ from the estimates we have
used.
Our
significant accounting policies are more fully described in Note 2, Summary of Significant Accounting
Policies, to our consolidated financial statements included elsewhere
herein. Our accounting policies regarding medical claims liability
and intangible assets are particularly important to the portrayal of our
financial position and results of operations and require the application of
significant judgment by our management. As a result, they are subject
to an inherent degree of uncertainty. We have reviewed these critical
accounting policies and related disclosures with the Audit Committee of our
board of directors.
Medical
claims liability
Our
medical claims liability includes claims reported but not yet paid, or
inventory, estimates for claims incurred but not reported, or IBNR, and
estimates for the costs necessary to process unpaid claims at the end of each
period. We estimate our medical claims liability using actuarial
methods that are commonly used by health insurance actuaries and meet Actuarial
Standards of Practice. These actuarial methods consider factors such
as historical data for payment patterns, cost trends, product mix, seasonality,
utilization of healthcare services and other relevant
factors.
Actuarial
Standards of Practice generally require that the medical claims liability
estimates be adequate to cover obligations under moderately adverse
conditions. Moderately adverse conditions are situations in which the
actual claims are expected to be higher than the otherwise estimated value of
such claims at the time of estimate. In many situations, the claims
amounts ultimately settled will be different than the estimate that satisfies
the Actuarial Standards of Practice. We include in our IBNR an
estimate for medical claims liability under moderately adverse conditions which
represents the risk of adverse deviation of the estimates in our actuarial
method of reserving.
We use our judgment to determine the
assumptions to be used in the calculation of the required
estimates. The assumptions we consider when estimating IBNR include,
without limitation, claims receipt and payment experience (and variations in
that experience), changes in membership, provider billing practices, health care
service utilization trends, cost trends, product mix, seasonality, prior
authorization of medical services, benefit changes, known outbreaks of disease
or increased incidence of illness such as influenza, provider contract changes,
changes to Medicaid fee schedules, and the incidence of high dollar or
catastrophic claims.
We
apply various estimation methods depending on the claim type and the period for
which claims are being estimated. For more recent periods, incurred
non-inpatient claims are estimated based on historical per member per month
claims experience adjusted for known factors. Incurred hospital
inpatient claims are estimated based on known inpatient utilization data and
prior claims experience adjusted for known factors. For older
periods, we utilize an estimated completion factor based on our historical
experience to develop IBNR estimates. The completion factor is an
actuarial estimate of the percentage of claims incurred during a given period
that have been received or adjudicated as of the reporting period to the
estimate of the total ultimate incurred costs. When we commence
operations in a new state or region, we have limited information with which to
estimate our medical claims liability. See “Risk Factors – Failure to
accurately predict our medical expenses could negatively affect our financial
position, results of operations or cash flows.” These approaches are
consistently applied to each period presented.
Additionally, we contract with
independent actuaries to review our estimates on a quarterly
basis. The independent actuaries provide us with a review letter that
includes the results of their analysis of our medical claims
liability. We do not solely rely on their report to adjust our claims
liability. We utilize their calculation of our claims liability only as
additional information, together with management’s judgment to determine the
assumptions to be used in the calculation of our liability for
claims.
Our development of the medical claims
liability estimate is a continuous process which we monitor and refine on a
monthly basis as additional claims receipts and payment information becomes
available. As more complete claim information becomes available, we
adjust the amount of the estimates, and include the changes in estimates in
medical costs in the period in which the changes are identified. In
every reporting period, our operating results include the effects of more
completely developed medical claims liability estimates associated with
previously reported periods. We consistently apply our reserving
methodology from period to period. As additional information becomes
known to us, we adjust our actuarial model accordingly to establish medical
claims liability estimates.
The
completion factor, claims per member per month and per diem cost trend factors
are the most significant factors affecting the IBNR estimate. The
following table illustrates the sensitivity of these factors and the estimated
potential impact on our operating results caused by changes in these factors
based on December 31, 2008 data:
|
|
Cost
Trend Factors (2):
|
(Decrease)
Increase
in
Factors
|
|
Increase
(Decrease)
in
Medical
Claims
Liabilities
|
|
(Decrease)
Increase
in
Factors
|
|
Increase
(Decrease)
in
Medical
Claims
Liabilities
|
|
|
|
(in
thousands)
|
|
|
|
|
|
(in
thousands)
|
(3
|
)%
|
|
$
|
68,400
|
|
(3
|
)%
|
|
$
|
(17,700
|
)
|
(2
|
)
|
|
|
45,100
|
|
(2
|
)
|
|
|
(11,900
|
)
|
(1
|
)
|
|
|
22,400
|
|
(1
|
)
|
|
|
(5,900
|
)
|
1
|
|
|
|
(21,900
|
)
|
1
|
|
|
|
5,900
|
|
2
|
|
|
|
(43,300
|
)
|
2
|
|
|
|
12,000
|
|
3
|
|
|
|
(64,300
|
)
|
3
|
|
|
|
18,100
|
|
(1)
|
Reflects
estimated potential changes in medical claims liability caused by changes
in completion factors.
|
(2)
|
Reflects
estimated potential changes in medical claims liability caused by changes
in cost trend factors for the most recent
periods.
|
While we
believe our estimates are appropriate, it is possible future events could
require us to make significant adjustments for revisions to these
estimates. For example, a 1% increase or decrease in our estimated
medical claims liability would have affected net earnings by $2.3 million for
the year ended December 31, 2008. The estimates are based on our
historical experience, terms of existing contracts, our observance of trends in
the industry, information provided by our providers and information available
from other outside sources, as appropriate.
The
change in medical claims liability is summarized as follows (in
thousands):
|
|
Year
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Balance,
January 1
|
|
$
|
313,364
|
|
|
$
|
232,496
|
|
|
$
|
123,102
|
|
Acquisitions
|
|
|
15,398
|
|
|
|
—
|
|
|
|
1,788
|
|
Incurred
related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
year
|
|
|
2,659,036
|
|
|
|
2,212,901
|
|
|
|
1,450,116
|
|
Prior
years
|
|
|
(18,701
|
)
|
|
|
(22,003
|
)
|
|
|
(13,745
|
)
|
Total
incurred
|
|
|
2,640,335
|
|
|
|
2,190,898
|
|
|
|
1,436,371
|
|
Paid
related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
year
|
|
|
2,303,473
|
|
|
|
1,902,610
|
|
|
|
1,220,872
|
|
Prior
years
|
|
|
292,587
|
|
|
|
207,420
|
|
|
|
107,893
|
|
Total
paid
|
|
|
2,596,060
|
|
|
|
2,110,030
|
|
|
|
1,328,765
|
|
Balance,
December 31
|
|
$
|
373,037
|
|
|
$
|
313,364
|
|
|
$
|
232,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims
inventory, December 31
|
|
|
269,300
|
|
|
|
323,200
|
|
|
|
389,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Days
in claims payable 1
|
|
|
48.5
|
|
|
|
48.3
|
|
|
|
46.0
|
|
________________________
1 Days in
claims payable is a calculation of medical claims liability at the end of the
period divided by average expense per calendar day for the fourth quarter of
each year.
The
acquisition in 2008 includes reserves acquired in connection with our
acquisition of Celtic. The acquisition in 2006 includes reserves
acquired in connection with our acquisition of OptiCare.
Medical
claims are usually paid within a few months of the member receiving service from
the physician or other healthcare provider. As a result, the
liability generally is described as having a “short-tail,” which causes less
than 5% of our medical claims liability as of the end of any given year to be
outstanding the following year. We believe that substantially all the
development of the estimate of medical claims liability as of December 31, 2008
will be known by the end of 2009.
Changes
in estimates of incurred claims for prior years are primarily attributable to
reserving under moderately adverse conditions. Changes in medical
utilization and cost trends and the effect of medical management initiatives may
also contribute to changes in medical claim liability
estimates. While we have evidence that medical management initiatives
are effective on a case by case basis, medical management initiatives primarily
focus on events and behaviors prior to the incurrence of the medical event and
generation of a claim. Accordingly, any change in behavior, leveling
of care, or coordination of treatment occurs prior to claim generation and as a
result, the costs prior to the medical management initiative are not known by
us. Additionally, certain medical management initiatives are focused
on member and provider education with the intent of influencing behavior to
appropriately align the medical services provided with the member’s
acuity. In these cases, determining whether the medical management
initiative changed the behavior cannot be determined. Because of the
complexity of our business, the number of states in which we operate, and the
volume of claims that we process, we are unable to practically quantify the
impact of these initiatives on our changes in estimates of IBNR.
The
following medical management initiatives may have contributed to the favorable
development through lower medical utilization and cost trends:
·
|
Appropriate
leveling of care for neonatal intensive care unit (NICU) hospital
admissions, other inpatient hospital admissions, and observation
admissions, in accordance with Interqual
criteria.
|
·
|
Tightening
of our pre-authorization list and more stringent review of durable medical
equipment (DME) and injectibles.
|
·
|
Emergency
department (ED) program designed to collaboratively work with hospitals to
steer non-emergency care away from the costly ED setting (through patient
education, on-site alternative urgent care settings,
etc.)
|
·
|
Increase
emphasis on case management and clinical rounding where case managers are
nurses or social workers who are employed by the health plan to assist
selected patients with the coordination of healthcare services in order to
meet a patient's specific healthcare
needs.
|
·
|
Incorporation
of disease management which is a comprehensive, multidisciplinary,
collaborative approach to chronic illnesses such as
asthma.
|
Goodwill
and Intangible Assets
We have
made several acquisitions that have resulted in our recording of intangible
assets. These intangible assets primarily consist of customer
relationships, purchased contract rights, provider contracts, trade names and
goodwill. At December 31, 2008, we had $163.4 million of goodwill and
$17.6 million of other intangible assets.
Intangible
assets are amortized using the straight-line method over the following
periods:
Intangible
Asset
|
|
Amortization
Period
|
Purchased
contract rights
|
|
5 –
10 years
|
Provider
contracts
|
|
5 –
10 years
|
Customer
relationships
|
|
5 –
15 years
|
Trade
names
|
|
20
years
|
Our
management evaluates whether events or circumstances have occurred that may
affect the estimated useful life or the recoverability of the remaining balance
of goodwill and other identifiable intangible assets. If the events
or circumstances indicate that the remaining balance of the intangible asset or
goodwill may be impaired, the potential impairment will be measured based upon
the difference between the carrying amount of the intangible asset or goodwill
and the fair value of such asset. Our management must make
assumptions and estimates, such as the discount factor, future utility and other
internal and external factors, in determining the estimated fair
values. While we believe these assumptions and estimates are
appropriate, other assumptions and estimates could be applied and might produce
significantly different results.
Goodwill
is reviewed every year during the fourth quarter for impairment. In
addition, an impairment analysis of intangible assets would be performed based
on other factors. These factors include significant changes in
membership, state funding, medical contracts and provider networks and
contracts.
In
November 2008, as a result of our decision to divest the New Jersey health plan,
we concluded it was necessary to conduct an impairment analysis of the
identifiable intangible assts. As a result of the analysis and
expected selling price, we determined that the identifiable intangible assets
were not impaired.
In August
2006, FirstGuard Health Plan Kansas, Inc., or FirstGuard Kansas, our wholly
owned subsidiary, received notification from the Kansas Health policy Authority
that its Medicaid contract scheduled to terminate December 31, 2006 would not be
renewed. As a result of these events, we concluded it was necessary
to conduct an impairment analysis of the identifiable intangible assets and
goodwill of the FirstGuard reporting unit, which encompasses both the Kansas and
Missouri FirstGuard health plans. The fair value of our FirstGuard
reporting unit was determined using discounted expected cash flows and estimated
market value. The impairment analysis resulted in a total non-cash
intangible asset impairment charge of $87.1 million, consisting of $81.1 million
of goodwill and $6.0 million of other identifiable intangible assets, which was
recorded in discontinued operations in the consolidated statement of operations
for the year ended December 31, 2006.
INVESTMENTS
As of
December 31, 2008, we had short-term investments of $109.4 million and long-term
investments of $341.7 million, including restricted deposits of $9.3
million. The short-term investments generally consist of highly
liquid securities with maturities between three and 12 months. The
long-term investments consist of municipal, corporate and U.S. Agency bonds,
life insurance contracts, U.S. Treasury investments and equity securities and
have maturities greater than one year. Restricted deposits consist of
investments required by various state statutes to be deposited or pledged to
state agencies. Due to the nature of the states’ requirements, these
investments are classified as long-term regardless of the contractual maturity
date. Our investments are subject to interest rate risk and will
decrease in value if market rates increase. Assuming a
hypothetical and immediate 1% increase in market interest rates at December 31,
2008, the fair value of our fixed income investments would decrease by
approximately $6.2 million. Declines in interest rates over time will
reduce our investment income. For a discussion of the interest
rate risk that our investments are subject to, see "Risk Factors–Risks Related
to Our Business–Our investment portfolio may suffer losses from reductions in
market interest rates and changes in market conditions which could materially
and adversely affect our results of operations or liquidity.”
INFLATION
While
the inflation rate in 2008 for medical care costs was slightly
less than that for all items, historically inflation for medical care costs
has generally exceeded that for all items. We use various strategies
to mitigate the negative effects of healthcare cost
inflation. Specifically, our health plans try to control medical and
hospital costs through our state savings initiatives and contracts with
independent providers of healthcare services. Through these
contracted care providers, our health plans emphasize preventive healthcare and
appropriate use of specialty and hospital services.
While we
currently believe our strategies to mitigate healthcare cost inflation will
continue to be successful, competitive pressures, new healthcare and
pharmaceutical product introductions, demands from healthcare providers and
customers, applicable regulations or other factors may affect our ability to
control the impact of healthcare cost increases.
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Stockholders
Centene
Corporation:
We have
audited the accompanying consolidated balance sheets of Centene Corporation and
subsidiaries as of December 31, 2008 and 2007, and the related consolidated
statements of operations, stockholders’ equity, and cash flows for each of the
years in the three-year period ended December 31, 2008. These consolidated
financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Centene Corporation and
subsidiaries as of December 31, 2008 and 2007, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2008, in conformity with U.S. generally accepted accounting
principles.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Centene Corporation’s internal control over
financial reporting as of December 31, 2008, based on criteria established
in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO), and our report dated February 22, 2009
expressed an
unqualified opinion on the effectiveness of the operation of internal control
over financial reporting.
(signed)
KPMG LLP
St.
Louis, Missouri
February
22, 2009
CENTENE CORPORATION AND
SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(In
thousands, except share data)
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents of continuing operations
|
|
$ |
370,999 |
|
|
$ |
267,305 |
|
Cash
and cash equivalents of discontinued operations
|
|
|
8,100 |
|
|
|
1,279 |
|
Total
cash and cash equivalents
|
|
|
379,099 |
|
|
|
268,584 |
|
Premium
and related receivables, net of allowance for uncollectible accounts of
$595 and $258, respectively
|
|
|
92,531 |
|
|
|
79,492 |
|
Short-term
investments, at fair value (amortized cost $108,469 and $46,193,
respectively)
|
|
|
109,393 |
|
|
|
46,074 |
|
Other
current assets
|
|
|
75,333 |
|
|
|
39,382 |
|
Current
assets of discontinued operations other than cash
|
|
|
9,987 |
|
|
|
12,807 |
|
Total
current assets
|
|
|
666,343 |
|
|
|
446,339 |
|
Long-term
investments, at fair value (amortized cost $329,330 and $314,681,
respectively)
|
|
|
332,411 |
|
|
|
317,041 |
|
Restricted
deposits, at fair value (amortized cost $9,124 and $6,383,
respectively)
|
|
|
9,254 |
|
|
|
6,430 |
|
Property,
software and equipment, net
|
|
|
175,858 |
|
|
|
135,883 |
|
Goodwill
|
|
|
163,380 |
|
|
|
138,862 |
|
Intangible
assets, net
|
|
|
17,575 |
|
|
|
11,337 |
|
Other
long-term assets
|
|
|
59,083 |
|
|
|
36,067 |
|
Long-term
assets of discontinued operations
|
|
|
27,248 |
|
|
|
29,865 |
|
Total
assets
|
|
$ |
1,451,152 |
|
|
$ |
1,121,824 |
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Medical
claims liability
|
|
$ |
373,037 |
|
|
$ |
313,364 |
|
Accounts
payable and accrued expenses
|
|
|
219,566 |
|
|
|
102,944 |
|
Unearned
revenue
|
|
|
17,107 |
|
|
|
44,016 |
|
Current
portion of long-term debt
|
|
|
255 |
|
|
|
971 |
|
Current
liabilities of discontinued operations
|
|
|
31,013 |
|
|
|
25,505 |
|
Total
current liabilities
|
|
|
640,978 |
|
|
|
486,800 |
|
Long-term
debt
|
|
|
264,637 |
|
|
|
206,406 |
|
Other
long-term liabilities
|
|
|
43,539 |
|
|
|
13,300 |
|
Long-term
liabilities of discontinued operations
|
|
|
726 |
|
|
|
271 |
|
Total
liabilities
|
|
|
949,880 |
|
|
|
706,777 |
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Common
stock, $.001 par value; authorized 100,000,000 shares; issued and
outstanding 42,987,764 and 43,667,837 shares, respectively
|
|
|
43 |
|
|
|
44 |
|
Additional
paid-in capital
|
|
|
222,841 |
|
|
|
221,693 |
|
Accumulated
other comprehensive income:
|
|
|
|
|
|
|
|
|
Unrealized
gain on investments, net of tax
|
|
|
3,152 |
|
|
|
1,571 |
|
Retained
earnings
|
|
|
275,236 |
|
|
|
191,739 |
|
Total
stockholders’ equity
|
|
|
501,272 |
|
|
|
415,047 |
|
Total
liabilities and stockholders’ equity
|
|
$ |
1,451,152 |
|
|
$ |
1,121,824 |
|
The
accompanying notes to the consolidated financial statements are an integral part
of these statements.
CENTENE
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(In
thousands, except share data)
|
|
Year
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium
|
|
$
|
3,199,360
|
|
|
$
|
2,611,953
|
|
|
$
|
1,707,439
|
|
Premium
tax
|
|
|
90,202
|
|
|
|
76,567
|
|
|
|
35,848
|
|
Service
|
|
|
74,953
|
|
|
|
80,508
|
|
|
|
79,159
|
|
Total
revenues
|
|
|
3,364,515
|
|
|
|
2,769,028
|
|
|
|
1,822,446
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical
costs
|
|
|
2,640,335
|
|
|
|
2,190,898
|
|
|
|
1,436,371
|
|
Cost
of services
|
|
|
56,920
|
|
|
|
61,348
|
|
|
|
60,287
|
|
General
and administrative expenses
|
|
|
444,733
|
|
|
|
384,970
|
|
|
|
267,712
|
|
Premium
tax
|
|
|
90,966
|
|
|
|
76,567
|
|
|
|
35,848
|
|
Total
operating expenses
|
|
|
3,232,954
|
|
|
|
2,713,783
|
|
|
|
1,800,218
|
|
Earnings
from operations
|
|
|
131,561
|
|
|
|
55,245
|
|
|
|
22,228
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
and other income
|
|
|
21,728
|
|
|
|
24,452
|
|
|
|
15,511
|
|
Interest
expense
|
|
|
(16,673
|
)
|
|
|
(15,626
|
)
|
|
|
(10,574
|
)
|
Earnings
from continuing operations before income tax expense
|
|
|
136,616
|
|
|
|
64,071
|
|
|
|
27,165
|
|
Income
tax expense
|
|
|
52,435
|
|
|
|
23,031
|
|
|
|
9,565
|
|
Net
earnings from continuing operations
|
|
|
84,181
|
|
|
|
41,040
|
|
|
|
17,600
|
|
Discontinued
operations, net of income tax (benefit) expense of $(281), $(31,563), and
$12,412
|
|
|
(684
|
)
|
|
|
32,362
|
|
|
|
(61,229
|
)
|
Net
earnings (loss)
|
|
$
|
83,497
|
|
|
$
|
73,402
|
|
|
$
|
(43,629
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
1.95
|
|
|
$
|
0.95
|
|
|
$
|
0.41
|
|
Discontinued
operations
|
|
|
(0.02
|
)
|
|
|
0.74
|
|
|
|
(1.42
|
)
|
Basic
earnings (loss) per common share
|
|
$
|
1.93
|
|
|
$
|
1.69
|
|
|
$
|
(1.01
|
)
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
1.90
|
|
|
$
|
0.92
|
|
|
$
|
0.39
|
|
Discontinued
operations
|
|
|
(0.02
|
)
|
|
|
0.72
|
|
|
|
(1.37
|
)
|
Diluted
earnings (loss) per common share
|
|
$
|
1.88
|
|
|
$
|
1.64
|
|
|
$
|
(0.98
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
43,275,187
|
|
|
|
43,539,950
|
|
|
|
43,160,860
|
|
Diluted
|
|
|
44,398,955
|
|
|
|
44,823,082
|
|
|
|
44,613,622
|
|
The
accompanying notes to the consolidated financial statements are an integral part
of these statements
CENTENE
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
(In
thousands, except share data)
|
Common
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$.001
Par
Value
Shares
|
|
|
Amt
|
|
Additional
Paid-in
Capital |
|
Accumulated
Other Comprehensive Income |
|
Retained
Earnings |
|
Total |
|
Balance, December 31,
2005
|
42,988,230
|
|
$
|
43
|
|
$
|
191,840
|
|
$
|
(1,754
|
)
|
$
|
161,919
|
|
$
|
352,048
|
|
Net
loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(43,629
|
)
|
|
(43,629
|
)
|
Change
in unrealized investment losses, net of $306 tax
|
—
|
|
|
—
|
|
|
—
|
|
|
503
|
|
|
—
|
|
|
503
|
|
Comprehensive
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(43,126
|
)
|
Common
stock issued for stock options and employee stock purchase
plan
|
783,823
|
|
|
1
|
|
|
7,497
|
|
|
—
|
|
|
—
|
|
|
7,498
|
|
Common
stock repurchases
|
(402,135
|
)
|
|
—
|
|
|
(7,944
|
)
|
|
—
|
|
|
—
|
|
|
(7,944
|
)
|
Stock
compensation expense
|
—
|
|
|
—
|
|
|
14,904
|
|
|
—
|
|
|
—
|
|
|
14,904
|
|
Excess
tax benefits from stock compensation
|
—
|
|
|
—
|
|
|
3,043
|
|
|
—
|
|
|
—
|
|
|
3,043
|
|
Balance, December 31,
2006
|
43,369,918
|
|
$
|
44
|
|
$
|
209,340
|
|
$
|
(1,251
|
)
|
$
|
118,290
|
|
$
|
326,423
|
|
Net
earnings
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
73,402
|
|
|
73,402
|
|
Change
in unrealized investment losses, net of $1,625 tax
|
—
|
|
|
—
|
|
|
—
|
|
|
2,822
|
|
|
—
|
|
|
2,822
|
|
Comprehensive
earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76,224
|
|
Common
stock issued for stock options and employee stock purchase
plan
|
765,076
|
|
|
—
|
|
|
6,113
|
|
|
—
|
|
|
—
|
|
|
6,113
|
|
Common
stock repurchases
|
(467,157
|
)
|
|
—
|
|
|
(9,541
|
)
|
|
—
|
|
|
—
|
|
|
(9,541
|
)
|
Stock
compensation expense
|
—
|
|
|
—
|
|
|
15,781
|
|
|
—
|
|
|
—
|
|
|
15,781
|
|
Adjustment
for adoption of FASB Interpretation No. 48
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
47
|
|
|
47
|
|
Balance, December 31,
2007
|
43,667,837
|
|
$
|
44
|
|
$
|
221,693
|
|
$
|
1,571
|
|
$
|
191,739
|
|
$
|
415,047
|
|
Net
earnings
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
83,497
|
|
|
83,497
|
|
Change
in unrealized investment gains, net of $882 tax
|
—
|
|
|
—
|
|
|
—
|
|
|
1,581
|
|
|
—
|
|
|
1,581
|
|
Comprehensive
earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85,078
|
|
Common
stock issued for stock options and employee stock purchase
plan
|
538,785
|
|
|
—
|
|
|
6,229
|
|
|
—
|
|
|
—
|
|
|
6,229
|
|
Common
stock repurchases
|
(1,218,858
|
)
|
|
(1
|
)
|
|
(23,509
|
)
|
|
—
|
|
|
—
|
|
|
(23,510
|
)
|
Stock
compensation expense
|
—
|
|
|
—
|
|
|
15,328
|
|
|
—
|
|
|
—
|
|
|
15,328
|
|
Excess
tax benefits from stock compensation
|
—
|
|
|
—
|
|
|
3,100
|
|
|
—
|
|
|
—
|
|
|
3,100
|
|
Balance, December 31,
2008
|
42,987,764
|
|
$
|
43
|
|
$
|
222,841
|
|
$
|
3,152
|
|
$
|
275,236
|
|
$
|
501,272
|
|
The
accompanying notes to the consolidated financial statements are an integral part
of these statements.
CENTENE
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands)
|
|
Year
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings (loss)
|
|
$
|
83,497
|
|
|
$
|
73,402
|
|
|
$
|
(43,629
|
)
|
Adjustments
to reconcile net earnings (loss) to net cash provided by operating
activities—
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
35,414
|
|
|
|
27,807
|
|
|
|
20,600
|
|
Stock
compensation expense
|
|
|
15,328
|
|
|
|
15,781
|
|
|
|
14,904
|
|
Loss
on sale of investments, net
|
|
|
4,988
|
|
|
|
106
|
|
|
|
59
|
|
Gain
on sale of FirstGuard Missouri
|
|
|
—
|
|
|
|
(7,472
|
)
|
|
|
—
|
|
Impairment
loss
|
|
|
2,546
|
|
|
|
7,207
|
|
|
|
88,268
|
|
Deferred
income taxes
|
|
|
1,286
|
|
|
|
(10,223
|
)
|
|
|
(6,692
|
)
|
Changes
in assets and liabilities—
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium
and related receivables
|
|
|
(1,548
|
)
|
|
|
1,663
|
|
|
|
(39,765
|
)
|
Other
current assets
|
|
|
(4,244
|
)
|
|
|
(6,253
|
)
|
|
|
5,352
|
|
Other
assets
|
|
|
(2,700
|
)
|
|
|
(348
|
)
|
|
|
91
|
|
Medical
claims liability
|
|
|
46,337
|
|
|
|
56,287
|
|
|
|
108,003
|
|
Unearned
revenue
|
|
|
(36,447
|
)
|
|
|
10,085
|
|
|
|
20,035
|
|
Accounts
payable and accrued expenses
|
|
|
75,112
|
|
|
|
31,234
|
|
|
|
28,136
|
|
Other
operating activities
|
|
|
2,409
|
|
|
|
2,964
|
|
|
|
(330
|
)
|
Net
cash provided by operating activities
|
|
|
221,978
|
|
|
|
202,240
|
|
|
|
195,032
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(65,156
|
)
|
|
|
(53,937
|
)
|
|
|
(50,318
|
)
|
Purchase
of investments
|
|
|
(549,652
|
)
|
|
|
(606,366
|
)
|
|
|
(319,322
|
)
|
Sales
and maturities of investments
|
|
|
546,264
|
|
|
|
456,738
|
|
|
|
286,155
|
|
Proceeds
from asset sales
|
|
|
—
|
|
|
|
14,102
|
|
|
|
—
|
|
Investments
in acquisitions, net of cash acquired and investment in equity method
investee
|
|
|
(85,377
|
)
|
|
|
(36,001
|
)
|
|
|
(66,772
|
)
|
Net
cash used in investing activities
|
|
|
(153,921
|
)
|
|
|
(225,464
|
)
|
|
|
(150,257
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from exercise of stock options
|
|
|
5,354
|
|
|
|
5,464
|
|
|
|
6,953
|
|
Proceeds
from borrowings
|
|
|
236,005
|
|
|
|
212,000
|
|
|
|
94,359
|
|
Payment
of long-term debt and notes payable
|
|
|
(178,491
|
)
|
|
|
(181,981
|
)
|
|
|
(17,355
|
)
|
Excess
tax benefits from stock compensation
|
|
|
3,100
|
|
|
|
—
|
|
|
|
3,043
|
|
Common
stock repurchases
|
|
|
(23,510
|
)
|
|
|
(9,541
|
)
|
|
|
(7,833
|
)
|
Debt
issue costs
|
|
|
—
|
|
|
|
(5,181
|
)
|
|
|
(253
|
)
|
Net
cash provided by financing activities
|
|
|
42,458
|
|
|
|
20,761
|
|
|
|
78,914
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
110,515
|
|
|
|
(2,463
|
)
|
|
|
123,689
|
|
Cash and cash
equivalents, beginning of period
|
|
|
268,584
|
|
|
|
271,047
|
|
|
|
147,358
|
|
Cash and cash
equivalents, end of period
|
|
$
|
379,099
|
|
|
$
|
268,584
|
|
|
$
|
271,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
15,312
|
|
|
$
|
11,945
|
|
|
$
|
10,680
|
|
Income
taxes paid
|
|
$
|
36,801
|
|
|
$
|
7,348
|
|
|
$
|
16,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
acquired under capital lease obligation
|
|
$
|
—
|
|
|
$
|
1,736
|
|
|
$
|
366
|
|
The
accompanying notes to the consolidated financial statements are an integral part
of these statements.
CENTENE
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in thousands, except share data)
1.
Organization and Operations
Centene
Corporation, or Centene or the Company, is a multi-line healthcare enterprise
operating 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, Foster Care, Medicare Special Needs Plans and the
Supplemental Security Income Program, also known as the Aged, Blind or Disabled
program, or ABD. The Company’s Specialty Services segment provides
specialty services, including behavioral health, individual health insurance,
life and health management, long-term care programs, managed vision, nurse
triage, and pharmacy benefits management, to state programs, healthcare
organizations, employer groups, and other commercial organizations, as well as
to the Company’s own subsidiaries. The Company’s Specialty Services
segment also provides a full range of healthcare solutions for the rising number
of uninsured Americans.
2.
Summary of Significant Accounting Policies
Principles
of Consolidation
The
accompanying consolidated financial statements include the accounts of Centene
Corporation and all majority owned subsidiaries, majority-owned subsidiaries
over which the Company exercises control and entities in which the Company has a
controlling financial interest. All material intercompany balances
and transactions have been eliminated. As discussed below in Note 3,
Discontinued Operations:
University Health Plan and FirstGuard Health Plans, the assets,
liabilities and results of operations of FirstGuard Kansas, FirstGuard Missouri
and University Health Plans are classified as discontinued operations for all
periods presented.
The
Company uses the equity method to account for its investment in entities that it
does not control, but where it has the ability to exercise significant influence
over operating and financial policies. Consolidated net earnings
include the share of the net earnings (losses) of those entities. The
difference between consolidation and the equity method impacts certain of the
financial ratios because of the presentation of the detailed line items reported
in the consolidated financial statements for consolidation entities, compared to
a two-line presentation of equity method investments and net
earnings.
The
Company uses the cost method to account for its investment in entities that it
does not control and for which it does not have the ability to exercise
significant influence over operating and financial policies. These
investments are recorded at the lower of their cost or fair value.
Use
of Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles in the United States, or GAAP, requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Future events and their effects cannot
be predicted with certainty; accordingly, the accounting estimates require the
exercise of judgment. The accounting estimates used in the preparation of
the consolidated financial statements will change as new events occur, as more
experience is acquired, as additional information is obtained and as the
operating environment changes. The Company evaluates and updates its
assumptions and estimates on an ongoing basis and may employ outside experts to
assist in our evaluation, as considered necessary. Actual results could
differ from those estimates.
Cash
and Cash Equivalents
Investments
with original maturities of three months or less are considered to be cash
equivalents. Cash equivalents consist of commercial paper, money
market funds, repurchase agreements and bank certificates of deposit and savings
accounts.
The
Company maintains amounts on deposit with various financial institutions, which
may at times exceed federally insured limits. However, management periodically
evaluates the credit-worthiness of those institutions, and the Company has not
experienced any losses on such deposits.
Investments
Short-term
investments include securities with maturities between three months and one
year. Long-term investments include securities with maturities
greater than one year.
Short-term
and long-term investments are generally classified as available for sale and are
carried at fair value. Certain equity investments are recorded using
the cost method. Unrealized gains and losses on investments available
for sale are excluded from earnings and reported as a separate component of
stockholders’ equity, net of income tax effects. Premiums and
discounts are amortized or accreted over the life of the related security using
the effective interest method. The Company monitors the difference
between the cost and fair value of investments. Investments that
experience a decline in value that is judged to be other than temporary are
written down to fair value and a realized loss is recorded in investment and
other income. To calculate realized gains and losses on the sale of
investments, the Company uses the specific amortized cost of each investment
sold. Realized gains and losses are recorded in investment and other
income.
Restricted
Deposits
Restricted
deposits consist of investments required by various state statutes to be
deposited or pledged to state agencies. These investments are
classified as long-term, regardless of the contractual maturity date, due to the
nature of the states’ requirements. The Company is required to
annually adjust the amount of the deposit pledged to certain
states.
Fair
Value Measurements
In the
normal course of business, the Company invests in various financial assets
and incur various financial liabilities. Fair values are disclosed for all
financial instruments, whether or not such values are recognized in the
Consolidated Balance Sheets. Management obtains quoted market prices
for these disclosures. The carrying amounts reported in the
Consolidated Balance Sheets for cash and cash equivalents, premium
and related receivables, unearned revenue, accounts payable and
accrued expenses, and certain other current liabilities approximate fair value
because of their short-term nature.
The
following methods and assumptions were used to estimate the fair value of each
financial instrument:
·
|
Short-term
investments, long-term investments, and restricted deposits,
available-for-sale, at fair value: The carrying amount is stated at fair
value, based on quoted market prices, where available. For securities not
actively traded, fair values were estimated using values obtained from
independent pricing services or quoted market prices of comparable
instruments.
|
·
|
Senior
unsecured notes: Estimated based on third-party quoted market prices for
the same or similar issues.
|
·
|
Variable
rate debt: The carrying amount of our floating rate debt approximates fair
value because the interest rates adjust based on market rate
adjustments.
|
Additional
information regarding fair value measurements is included in Note 7, Fair Value
Measurements.
Property,
Software and Equipment
Property,
software and equipment are stated at cost less accumulated
depreciation. Capitalized software includes certain costs incurred in
the development of internal-use software, including external direct costs of
materials and services and payroll costs of employees devoted to specific
software development. Depreciation is calculated principally by the
straight-line method over estimated useful lives. Leasehold
improvements are depreciated using the straight-line method over the shorter of
the expected useful life or the remaining term of the
lease. Property, software and equipment are depreciated over the
following periods:
Fixed
Asset
|
|
Depreciation
Period
|
Buildings
|
|
40
years
|
Computer
hardware and software
|
|
2 –
7 years
|
Furniture
and equipment
|
|
3 –
20 years
|
Leasehold
improvements
|
|
1–
10 years
|
The
carrying amounts of all long-lived assets are evaluated periodically to
determine if adjustment to the depreciation and amortization period or to the
unamortized balance is warranted. Such evaluation is based principally on
the expected utilization of the long-lived assets.
The
Company retains fully depreciated assets in property and accumulated
depreciation accounts until it removes them from service. In the case of
sale, retirement, or disposal, the asset cost and related accumulated
depreciation balance is removed from the respective account, and the resulting
net amount, less any proceeds, is included as a component of earnings from
operations in the consolidated statements of operations.
The
Company tests for impairment of long-lived assets, including intangible assets,
whenever events or changes in circumstances indicate that the carrying value of
an asset or asset group (hereinafter referred to as “asset group”) may not be
recoverable by comparing the sum of the estimated undiscounted future cash flows
expected to result from use of the asset group and its eventual disposition to
the carrying value. Such factors include, but are not limited to,
significant changes in membership, state funding, medical contracts and provider
networks and contracts. If the sum of the estimated undiscounted
future cash flows is less than the carrying value, an impairment determination
is required. The amount of impairment is calculated by subtracting
the fair value of the asset group from the carrying value of the asset
group. An impairment charge, if any, is recognized within earnings
from operations.
Goodwill
and Intangible
Assets
Intangible
assets represent assets acquired in purchase transactions and consist primarily
of customer relationships, purchased contract rights, provider contracts, trade
names and goodwill. Intangible assets are amortized using the
straight-line method over the following periods:
Intangible
Asset
|
|
Amortization
Period
|
Purchased
contract rights
|
|
5 –
10 years
|
Provider
contracts
|
|
5 –
10 years
|
Customer
relationships
|
|
5 –
15 years
|
Trade
names
|
|
20
years
|
The
Company tests goodwill for impairment using a fair value
approach. The Company is required to test for impairment at least
annually, absent some triggering event that would require an impairment
assessment. Absent any impairment indicators, the Company performs its
goodwill impairment testing during the fourth quarter of each year.
The
Company recognizes an impairment charge for any amount by which the carrying
amount of goodwill exceeds its implied fair value. The Company
presents a goodwill impairment charge as a separate line item within earnings
from operations in the consolidated statements of operations, unless the
goodwill impairment is associated with a discontinued operation. In that
case, the Company includes the goodwill impairment charge, on a net-of-tax
basis, within the results of discontinued operations.
The
Company uses discounted cash flows to establish the fair value as of the testing
dates. The discounted cash flow approach includes many assumptions related
to future growth rates, discount factors, future tax rates, etc. Changes
in economic and operating conditions impacting these assumptions could result in
goodwill impairment in future periods. When available and as appropriate,
the Company uses comparative market multiples to corroborate discounted cash
flow results.
Medical
Claims Liability
Medical
claims liability includes claims reported but not yet paid, or inventory,
estimates for claims incurred but not reported, or IBNR, and estimates for the
costs necessary to process unpaid claims at the end of each
period. The Company estimates its medical claims liability using
actuarial methods that are commonly used by health insurance actuaries and meet
Actuarial Standards of Practice. These actuarial methods consider
factors such as historical data for payment patterns, cost trends, product mix,
seasonality, utilization of healthcare services and other relevant
factors.
Actuarial
Standards of Practice generally require that the medical claims liability
estimates be adequate to cover obligations under moderately adverse
conditions. Moderately adverse conditions are situations in which the
actual claims are expected to be higher than the otherwise estimated value of
such claims at the time of estimate. In many situations, the claims
amounts ultimately settled will be different than the estimate that satisfies
the Actuarial Standards of Practice. The Company includes in
its IBNR an estimate for medical claims liability under moderately adverse
conditions which represents the risk of adverse deviation of the estimates in
its actuarial method of reserving.
The Company uses its judgment to
determine the assumptions to be used in the calculation of the required
estimates. The assumptions it considers when estimating IBNR include,
without limitation, claims receipt and payment experience (and variations in
that experience), changes in membership, provider billing practices, health care
service utilization trends, cost trends, product mix, seasonality, prior
authorization of medical services, benefit changes, known outbreaks of disease
or increased incidence of illness such as influenza, provider contract changes,
changes to Medicaid fee schedules, and the incidence of high dollar or
catastrophic claims.
The
Company’s development of the medical claims liability estimate is a continuous
process which it monitors and refines on a monthly basis as additional claims
receipts and payment information becomes available. As more complete
claim information becomes available, the Company adjust the amount of the
estimates, and include the changes in estimates in medical costs in the period
in which the changes are identified. In every reporting period, the
operating results include the effects of more completely developed medical
claims liability estimates associated with previously reported
periods. The Company consistently applies its reserving methodology
from period to period. As additional information becomes known, it
adjusts the actuarial model accordingly to establish medical claims liability
estimates.
The Company periodically
reviews actual and anticipated experience compared to the assumptions used to
establish medical costs. The Company establishes premium deficiency
reserves if actual and anticipated experience indicates that existing policy
liabilities together with the present value of future gross premiums will not be
sufficient to cover the present value of future benefits, settlement and
maintenance costs.
Revenue
Recognition
The
Company’s Medicaid Managed Care segment generates revenues primarily from
premiums received from the states in which it operates health
plans. The Company receives a fixed premium per member per month
pursuant to its state contracts. The Company generally receives
premium payments during the month it provides services and recognizes premium
revenue during the period in which it is obligated to provide services to its
members. In some instances, the Company’s base premiums are subject
to an adjustment, or risk score, based on the acuity of its
membership. Generally, the risks score is determined by the State
analyzing encounter submissions of processed claims data to determine the acuity
of the Company’s membership relative to the entire state’s Medicaid
membership. Some states enact premium taxes or similar assessments,
collectively premium taxes, and these taxes are recorded as a separate component
of both revenues and operating expenses. Some contracts allow for
additional premium related to certain supplemental services provided such as
maternity deliveries. Revenues are recorded based on membership and
eligibility data provided by the states, which may be adjusted by the states for
updates to this data. These eligibility adjustments have been
immaterial in relation to total revenue recorded and are reflected in the period
known.
The
Company’s Specialty Services segment generates revenues under contracts with
state programs, individuals, healthcare organizations and other commercial
organizations, as well as from the Company’s own
subsidiaries. Revenues are recognized when the related services are
provided or as ratably earned over the covered period of service.
Premium
and services revenues collected in advance are recorded as unearned
revenue. For performance-based contracts the Company does not
recognize revenue subject to refund until data is sufficient to measure
performance. Premiums and service revenues due to the Company are
recorded as premium and related receivables and are recorded net of an allowance
based on historical trends and management’s judgment on the collectibility of
these accounts. As the Company generally receives payments during the
month in which services are provided, the allowance is typically not significant
in comparison to total revenues and does not have a material impact on the
presentation of the financial condition or results of
operations. Activity in the allowance for uncollectible accounts for
the years ended December 31, is summarized below:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Allowances,
beginning of year
|
|
$
|
258
|
|
|
$
|
155
|
|
|
$
|
343
|
|
Amounts
charged to expense
|
|
|
642
|
|
|
|
226
|
|
|
|
512
|
|
Write-offs
of uncollectible receivables
|
|
|
(305
|
)
|
|
|
(123
|
)
|
|
|
(700
|
)
|
Allowances,
end of year
|
|
$
|
595
|
|
|
$
|
258
|
|
|
$
|
155
|
|
Significant
Customers
Centene
receives the majority of its revenues under contracts or subcontracts with state
Medicaid managed care programs. The current contracts, which expire
on various dates between March 31, 2009 and December 31, 2011, are expected to
be renewed. States whose aggregate annual contract value exceeded 10%
of annual revenues and the respective percentage of the Company’s total revenues
for the years ended December 31, are as follows:
2008
|
|
2007
|
|
2006
|
Georgia
|
|
23%
|
|
Georgia
|
|
25%
|
|
Georgia
|
|
19%
|
Ohio
|
|
16%
|
|
Indiana
|
|
12%
|
|
Indiana
|
|
19%
|
Texas
|
|
33%
|
|
Texas
|
|
26%
|
|
Texas
|
|
21%
|
|
|
|
|
Wisconsin
|
|
11%
|
|
Wisconsin
|
|
20%
|
|
|
|
|
Ohio
|
|
17%
|
|
|
|
|
Reinsurance
Centene's
subsidiaries report reinsurance premiums as medical costs, while related
reinsurance recoveries are reported as deductions from medical costs. The
Company limits its risk of catastrophic losses by maintaining high deductible
reinsurance coverage.
Other
Income (Expense)
Other
income (expense) consists principally of investment income, interest expense and
equity method earnings from investments. Investment income is derived
from the Company’s cash, cash equivalents, restricted deposits and
investments. Interest expense relates to borrowings under the senior
notes, credit facilities, interest on capital leases and credit facility
fees.
Income
Taxes
Deferred
tax assets and liabilities are recorded for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date of the tax
rate change.
Valuation
allowances are provided when it is considered more likely than not that deferred
tax assets will not be realized. In determining if a deductible
temporary difference or net operating loss can be realized, the Company
considers future reversals of existing taxable temporary differences, future
taxable income, taxable income in prior carryback periods and tax planning
strategies.
Stock
Based Compensation
The
Company adopted Financial Accounting Standards Board, or FASB, Statement of
Financial Accounting Standards No. 123 (revised 2004), Share Based Payment, or SFAS
123R, effective January 1, 2006, using the modified-prospective transition
method. Under this method, compensation cost is recognized for awards
granted and for awards modified, repurchased or cancelled in the period after
adoption. Compensation cost is also recognized for the unvested
portion of awards granted prior to adoption. Prior year financial
statements are not restated. The fair value of the Company’s employee
share options and similar instruments are estimated using the Black-Scholes
option-pricing model. That cost is recognized over the period during
which an employee is required to provide service in exchange for the
award. Excess tax benefits related to stock compensation are
presented as a cash inflow from financing activities.
Additional
information regarding the stock option plans is included in Note 15, Stock Incentive
Plans.
Litigation
Reserve
The
Company accrues for loss contingencies associated with outstanding litigation,
claims and assessments for which it has determined it is probable that a loss
contingency exists and the amount of loss can be reasonably
estimated. The Company expenses professional fees associated
with litigation claims and assessments as incurred.
Reclassifications
Certain
amounts in the consolidated financial statements have been reclassified to
conform to the 2008 presentation. These reclassifications, primarily
related to the reclassification of UHP to discontinued operations, have no
effect on net earnings or stockholders’ equity as previously
reported.
Recent
Accounting Pronouncements
In
December 2007, the FASB issued FASB Statement No.141 (revised 2007), Business Combinations.
The purpose of issuing the statement was to replace current guidance in FASB
Statement No.141,
Business Combinations, to better represent the economic value of a
business combination transaction. The changes to be effected with FASB Statement
No. 141R from the current guidance include, but are not limited to:
(1) acquisition costs will be recognized separately from the acquisition;
(2) known contractual contingencies at the time of the acquisition will be
considered part of the liabilities acquired and and measured at their fair
value; all other contingencies will be part of the liabilities acquired and
measured at their fair value only if it is more likely than not that they meet
the definition of a liability; (3) contingent consideration based on the
outcome of future events will be recognized and measured at the time of the
acquisition; (4) business combinations achieved in stages (step
acquisitions) will need to recognize the identifiable assets and liabilities, as
well as noncontrolling interests, in the acquiree, at the full amounts of their
fair values; and (5) a bargain purchase (defined as a business combination
in which the total acquisition-date fair value of the identifiable net assets
acquired exceeds the fair value of the consideration transferred plus any
noncontrolling interest in the acquiree) will require that excess to be
recognized as a gain attributable to the acquirer. FASB
Statement No. 141R will be effective for any business combinations
that occur after January 1, 2009.
In
December 2007, the FASB issued FASB Statement No. 160, Noncontrolling Interests in
Consolidated Financial Statements, which was issued to improve the
relevance, comparability, and transparency of financial information provided to
investors by requiring all entities to report noncontrolling (minority)
interests in subsidiaries in the same way, that is, as equity in the
consolidated financial statements. Moreover, FASB Statement No. 160
eliminates the diversity that currently exists in accounting for transactions
between an entity and noncontrolling interests by requiring they be treated as
equity transactions. FASB Statement No. 160 will be effective January
1, 2009. The adoption of FASB Statement No. 160 will not
have a material impact on the Company’s financial statements and
disclosures.
The
Company has determined that all other recently issued accounting pronouncements
will not have a material impact on its consolidated financial position, results
of operations and cash flows, or do not apply to its
operations.
3.
Discontinued Operations: University Health Plan and FirstGuard Health
Plans
University
Health Plan
In
November 2008, the Company announced its intention to sell certain assets of its
New Jersey health plan, University Health Plans, Inc, or
UHP. Accordingly, the results and operations of UHP are presented as
discontinued operations for all periods presented. The assets,
liabilities and results of operations of UHP were classified as discontinued
operations for all periods presented beginning in December 2008. UHP
was previously reported in the Medicaid Managed Care segment. The
Company expects the sale to be completed within 12 months. Additional
information regarding the sale of UHP is included in Note 18, Contingencies.
In 2008,
as a result of the plan to sell certain assets of UHP, the Company conducted an
impairment analysis of the assets of UHP. The impairment analysis
resulted in an impairment charge for fixed assets of
$2,546. During the year ended December 31, 2008, the Company
incurred exit costs consisting primarily of lease termination fees and employee
severance. The change in exit cost liability for UHP is summarized as
follows:
|
|
2008
|
|
Balance,
January 1,
|
|
$
|
—
|
|
Incurred
|
|
|
1,110
|
|
Paid
|
|
|
—
|
|
Balance,
December 31,
|
|
$
|
1,110
|
|
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 assets, liabilities and results of operations of
FirstGuard Kansas and FirstGuard Missouri were classified as discontinued
operations for all periods presented beginning in December 2007, as
substantially all liabilities have been paid as of that
date. FirstGuard was previously reported in the Medicaid Managed Care
segment.
In 2006,
as a result of the notification of the Kansas contract non-renewal, the
Company conducted an impairment analysis of the identifiable intangible assets
and goodwill of the FirstGuard reporting unit, which encompasses both the
FirstGuard Kansas and FirstGuard Missouri health plans. The fair
value of the FirstGuard reporting unit was determined using discounted expected
cash flows and estimated market value. The impairment analysis
resulted in a goodwill impairment of $81,098. The Company also
recorded impairment charges for identifiable intangible assets of $5,993, and
fixed assets of $1,177. The goodwill portion of the impairment was
not deductible for tax purposes.
The sale
of the operating assets of FirstGuard Missouri was completed effective February
1, 2007 and the Company 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.
In 2007,
the Company abandoned the stock of FirstGuard Kansas and FirstGuard Missouri to
an unrelated entity. As a result of that abandonment, the Company
recognized expense of $2,298 for the write-off of the remaining assets in that
entity. The Company also recognized a $34,856 tax benefit for the tax
deduction associated with the basis of that stock.
The
Company has incurred FirstGuard exit costs consisting primarily of lease
termination fees and employee severance costs. The Company also
contributed $3,000 of the sale proceeds received in the second quarter of 2007
to its charitable foundation and recorded the contribution as General and
Administrative expense. The change in exit cost liability for FirstGuard is
summarized as follows:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Balance,
January 1,
|
|
$
|
125
|
|
|
$
|
3,027
|
|
|
$
|
—
|
|
Incurred
|
|
|
76
|
|
|
|
2,531
|
|
|
|
6,202
|
|
Paid
|
|
|
(201
|
)
|
|
|
(5,433
|
)
|
|
|
(3,175
|
)
|
Balance,
December 31,
|
|
$
|
—
|
|
|
$
|
125
|
|
|
$
|
3,027
|
|
Financial
Summary
Operating
results for the discontinued operations are as follows:
|
|
Year
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Revenues
|
|
$
|
150,638
|
|
|
$
|
156,952
|
|
|
$
|
456,574
|
|
Earnings
(loss) before income taxes
|
|
$
|
(965
|
)
|
|
$
|
799
|
|
|
$
|
(48,817
|
)
|
Net
earnings (loss)
|
|
$
|
(684
|
)
|
|
$
|
32,362
|
|
|
$
|
(61,229
|
)
|
Assets
and liabilities of the discontinued operations are as follows:
|
December
31,
|
|
|
2008
|
|
2007
|
|
Current
assets
|
$
|
18,0878
|
|
$
|
14,0866
|
|
Long
term investments and restricted deposits
|
|
22,0088
|
|
|
20,8711
|
|
Goodwill
|
|
2,1688
|
|
|
2,1688
|
|
Other
intangible assets, net
|
|
1,5522
|
|
|
1,8688
|
|
Other
assets
|
|
1,5200
|
|
|
4,9588
|
|
Assets
of discontinued operations
|
$
|
45,3355
|
|
$
|
43,9511
|
|
|
December
31,
|
|
|
2008
|
|
2007
|
|
Medical
claims liability
|
$
|
25,2900
|
|
$
|
23,2288
|
|
Accounts
payable and accrued expenses
|
|
5,7233
|
|
|
2,2777
|
|
Other
liabilities
|
|
7266
|
|
|
2711
|
|
Liabilities
of discontinued operations
|
$
|
31,7399
|
|
$
|
25,7766
|
|
4.
Restructuring
In the
fourth quarter of 2007, the Company abandoned its previously planned
redevelopment project in Clayton, Missouri, related to a corporate office
expansion. As a result, the Company conducted an impairment analysis
of the related real estate and capitalized construction costs and recorded an
impairment charge of $7,207. The impairment charges were recorded as
General and Administrative expense under the Medicaid Managed Care
segment. At December 31, 2008, the remaining liability for these
charges was $850.
Also in
the fourth quarter of 2007, the Company completed an organizational realignment,
resulting in the elimination of approximately 35
positions. Accordingly, the Company recorded $2,185 in severance
costs. This expense was recorded as General and Administrative
expense under the Medicaid Managed Care segment. At December 31,
2007, the Company did not have remaining liability for these costs.
The
Company did not recognize any restructuring charges during the year ended
December 31, 2008.
5.
Acquisitions
2008
Acquisitions
Ÿ
|
Celtic Insurance Company.
On
July 1,
2008,
the Company acquired Celtic Insurance Company, or Celtic, a health
insurance carrier focused on the individual health insurance
market. The Company paid approximately $82,100 in cash and
related transaction costs, net of unregulated cash acquired. In
conjunction with the closing of the acquisition, Celtic paid to the
Company an extraordinary dividend of $31,411 in July 2008. The
results of operations for Celtic are included in the Specialty Services
segment of the consolidated financial statements since July 1,
2008.
|
In
accordance with FASB Statement No. 141, during 2008, the Company allocated total
consideration paid to the assets acquired and liabilities assumed based on its
initial estimates of fair value using methodologies and assumptions that it
believed were reasonable. The preliminary purchase price allocation
resulted in estimated identifiable intangible assets, associated deferred tax
liabilities and goodwill of $8,600, $3,000 and $22,600,
respectively. The identifiable intangible assets have estimated
useful lives ranging from seven to 15 years. The acquired goodwill is
not deductible for income tax purposes.
To
estimate fair values, the Company considered a number of factors, including the
application of multiples to discounted cash flow estimates. There is
considerable management judgment with respect to cash flow estimates and
appropriate multiples used in determining fair value. Certain amounts
are subject to change as remaining information on the fair values is received
and valuation analysis is finalized. Specifically, the Company
continues to evaluate the valuation and useful lives of acquired tangible and
intangible assets, medical claims liability, and the income tax implications
triggered by the acquisition. The final fair values may differ
materially from the preliminary estimates described above. The
Company expects to complete its final allocation of the purchase price before
June 30, 2009. Pro forma disclosures related to the acquisition have
been excluded as immaterial.
2007
Acquisitions
Ÿ
|
Access Health Solution,
LLC. In July 2007, the Company acquired a 49% minority
ownership interest in Access Health Solutions, LLC, or Access, a
Medicaid managed care entity in Florida. Under the terms of the
transaction, the Company has an option to acquire the remaining interest
in Access at a future date. The Company accounts for its
investment in Access using the equity method of accounting. In February 2009,
the members of Access began conversion to the Company’s Florida
subsidiary, Sunshine State Health Plan, on an at-risk
basis.
|
Ÿ
|
Other 2007
Acquisitions. The Company acquired 100% of the following
entities: PhyTrust of South Carolina, LLC, effective April 20, 2007;
Physician’s Choice, LLC, effective October 2007; and Work Life
Innovations, effective November 30, 2007. The Company paid a
total of $11,300 in cash and related transaction costs for these
acquisitions. PhyTrust of South Carolina and Physician’s
Choice, LLC, both with Medicaid members in South Carolina, are included in
the Medicaid Managed Care segment. Work Life Innovations, a
health and wellness consulting company, is included in the Specialty
Services segment. For these acquisitions, goodwill of $8,343
and $2,739 was allocated to the Medicaid Managed Care segment and the
Specialty Services segment, respectively, all of which is deductible for
income tax purposes. Pro forma disclosures related to these
acquisitions have been excluded as
immaterial.
|
2006
Acquisitions
Ÿ
|
US Script, Inc.
Effective January 1, 2006, the Company acquired 100% of US Script,
Inc., a pharmacy benefits manager. The Company has paid or
accrued $46,573 in cash and related transaction costs. In
accordance with the terms of the agreement, the Company will pay up to an
additional $4,000 when US Script, Inc. achieves certain earnings targets
over the next two years. The results of operations for US
Script, Inc. are included in the Specialty Services segment and the
consolidated financial statements since January 1,
2006.
|
The
purchase price allocation resulted in identifiable intangible assets of $7,100
and associated deferred tax liabilities of $2,523 and goodwill of
$39,975. The identifiable intangible assets have an estimated useful
life of seven to 20 years. The acquired goodwill is not deductible
for income tax purposes. Pro forma disclosures related to the
acquisition have been excluded as immaterial.
Ÿ
|
Other 2006
Acquisitions. The Company acquired the assets of Nurse
Response, Inc., effective April 1, 2006, Cardium Health Services
Corporation, effective May 9, 2006, MediPlan Corporation, effective June
1, 2006, and OptiCare Managed Vision, Inc., effective July 1,
2006. The Company paid a total of $30,783 in cash and related
transaction costs for these acquisitions. The results of
operations for these acquisitions are included in the consolidated
financial statements since the respective effective
dates. Nurse Response, Inc., a provider of after hours nurse
triage services, Cardium Health Services Corporation, a chronic health
management provider, and OptiCare Managed Vision, Inc., a managed vision
provider, are included in the Specialty Services
segment. MediPlan Corporation, with Medicaid membership in
Ohio, is included in the Medicaid Managed Care segment. For
these acquisitions, goodwill of $14,756 and $7,150 was allocated to the
Specialty Services segment and Medicaid Managed Care segment,
respectively, of which $5,593 is deductible for income tax
purposes. Pro forma disclosures related to these acquisitions
have been excluded as immaterial.
|
6.
Short-term and Long-term Investments and Restricted Deposits
Short-term
and long-term investments and restricted deposits available for sale by
investment type at December 31, 2008 consist of the following:
|
|
December
31, 2008
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
U.S.
Treasury securities and obligations of U.S. government corporations and
agencies
|
|
$ |
4,054 |
|
|
$ |
130 |
|
|
$ |
— |
|
|
$ |
4,184 |
|
Corporate
securities
|
|
|
47,733 |
|
|
|
74 |
|
|
|
(1,154
|
) |
|
|
46,653 |
|
State
and municipal securities
|
|
|
360,638 |
|
|
|
5,964 |
|
|
|
(11
|
) |
|
|
366,591 |
|
Life
insurance contracts
|
|
|
14,327 |
|
|
|
— |
|
|
|
— |
|
|
|
14,327 |
|
Money
market funds
|
|
|
12,988 |
|
|
|
— |
|
|
|
— |
|
|
|
12,988 |
|
Equity
securities
|
|
|
7,183 |
|
|
|
17 |
|
|
|
(885
|
) |
|
|
6,315 |
|
Total
|
|
$ |
446,923 |
|
|
$ |
6,185 |
|
|
$ |
(2,050 |
) |
|
$ |
451,058 |
|
Short-term
and long-term investments and restricted deposits available for sale by
investment type at December 31, 2007 consist of the following:
|
|
December
31, 2007
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
U.S.
Treasury securities and obligations of U.S. government corporations and
agencies
|
|
$ |
8,171 |
|
|
$ |
74 |
|
|
$ |
(10 |
) |
|
$ |
8,235 |
|
Corporate
securities
|
|
|
33,032 |
|
|
|
14 |
|
|
|
(265
|
) |
|
|
32,781 |
|
State
and municipal securities
|
|
|
305,433 |
|
|
|
2,336 |
|
|
|
(129
|
) |
|
|
307,640 |
|
Life
insurance contracts
|
|
|
13,924 |
|
|
|
— |
|
|
|
— |
|
|
|
13,924 |
|
Equity
securities
|
|
|
6,697 |
|
|
|
354 |
|
|
|
(86 |
) |
|
|
6,965 |
|
Total
|
|
$ |
367,257 |
|
|
$ |
2,778 |
|
|
$ |
(490 |
) |
|
$ |
369,545 |
|
The
Company monitors investments for other than temporary
impairment. Certain investments have experienced a decline in fair
value due to changes in credit quality and market interest
rates. Based on management’s judgment of the credit quality of the
Company’s investments and ability to hold these investments to recovery (which
may be maturity), no other than temporary impairment has been
recorded. Investments in a gross unrealized loss position at December
31, 2008 are as follows:
|
|
|
|
|
Less
Than 12 Months
|
|
|
12
Months or More
|
|
|
Total
|
|
|
|
Amortized
Cost
|
|
|
Unrealized
Losses
|
|
|
Fair Value
|
|
|
Unrealized
Losses
|
|
|
Fair Value
|
|
|
Unrealized
Losses
|
|
|
Fair Value
|
|
Equity
|
|
$ |
3,543 |
|
|
$ |
(885 |
) |
|
$ |
2,658 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(885 |
) |
|
$ |
2,658 |
|
Corporate
|
|
|
24,124 |
|
|
|
(1,071
|
) |
|
|
20,898 |
|
|
|
(83
|
) |
|
|
2,072 |
|
|
|
(1,154
|
) |
|
|
22,970 |
|
Government
|
|
|
314 |
|
|
|
— |
|
|
|
314 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
314 |
|
Municipal
|
|
|
3,910 |
|
|
|
(9
|
) |
|
|
3,798 |
|
|
|
(2
|
) |
|
|
101 |
|
|
|
(11
|
) |
|
|
3,899 |
|
Total
|
|
$ |
31,891 |
|
|
$ |
(1,965 |
) |
|
$ |
27,668 |
|
|
$ |
(85 |
) |
|
$ |
2,173 |
|
|
$ |
(2,050 |
) |
|
$ |
29,841 |
|
Investments
in a gross unrealized loss position at December 31, 2007 are as
follows:
|
|
|
|
|
Less
Than 12 Months
|
|
|
12
Months or More
|
|
|
Total
|
|
|
|
Amortized
Cost
|
|
|
Unrealized
Losses
|
|
|
Fair Value
|
|
|
|
|
|
Fair Value
|
|
|
Unrealized
Losses
|
|
|
Fair Value
|
|
Equity
|
|
$ |
1,778 |
|
|
$ |
(86 |
) |
|
$ |
1,692 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(86 |
) |
|
$ |
1,692 |
|
Corporate
|
|
|
28,474 |
|
|
|
(7
|
) |
|
|
907 |
|
|
|
(258
|
) |
|
|
27,302 |
|
|
|
(265
|
) |
|
|
28,209 |
|
Government
|
|
|
3,735 |
|
|
|
(3
|
) |
|
|
1,632 |
|
|
|
(7
|
) |
|
|
2,093 |
|
|
|
(10
|
) |
|
|
3,725 |
|
Municipal
|
|
|
29,942 |
|
|
|
(4
|
) |
|
|
5,517 |
|
|
|
(125
|
) |
|
|
24,296 |
|
|
|
(129
|
) |
|
|
29,813 |
|
Total
|
|
$ |
63,929 |
|
|
$ |
(100 |
) |
|
$ |
9,748 |
|
|
$ |
(390 |
) |
|
$ |
53,691 |
|
|
$ |
(490 |
) |
|
$ |
63,439 |
|
The
contractual maturities of short-term and long-term investments and restricted
deposits as of December 31, 2008, are as follows:
|
|
Investments
|
|
|
Restricted
Deposits
|
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
One
year or less
|
|
$ |
108,469 |
|
|
$ |
109,393 |
|
|
$ |
6,038 |
|
|
$ |
6,044 |
|
One
year through five years
|
|
|
181,958 |
|
|
|
185,867 |
|
|
|
3,086 |
|
|
|
3,210 |
|
Five
years through ten years
|
|
|
56,936 |
|
|
|
56,188 |
|
|
|
— |
|
|
|
— |
|
Greater
than ten years
|
|
|
90,436 |
|
|
|
90,356 |
|
|
|
— |
|
|
|
— |
|
Total
|
|
$ |
437,799 |
|
|
$ |
441,804 |
|
|
$ |
9,124 |
|
|
$ |
9,254 |
|
The
contractual maturities of short-term and long-term investments and restricted
deposits as of December 31, 2007, are as follows:
|
|
Investments
|
|
|
Restricted
Deposits
|
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
One
year or less
|
|
$ |
46,193 |
|
|
$ |
46,073 |
|
|
$ |
4,844 |
|
|
$ |
4,849 |
|
One
year through five years
|
|
|
204,311 |
|
|
|
206,296 |
|
|
|
1,032 |
|
|
|
1,052 |
|
Five
years through ten years
|
|
|
29,524 |
|
|
|
29,900 |
|
|
|
507 |
|
|
|
529 |
|
Greater
than ten years
|
|
|
80,846 |
|
|
|
80,846 |
|
|
|
— |
|
|
|
— |
|
Total
|
|
$ |
360,874 |
|
|
$ |
363,115 |
|
|
$ |
6,383 |
|
|
$ |
6,430 |
|
Actual
maturities may differ from contractual maturities due to call or prepayment
options. Equity securities and life insurance contracts are included
in the five years through ten years category.
The
Company recorded realized gains and losses on investments for the years ended
December 31 as follows:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Gross
realized gains
|
|
$
|
1,364
|
|
|
$
|
325
|
|
|
$
|
9
|
|
Gross
realized losses
|
|
|
(5,654
|
)
|
|
|
(372
|
)
|
|
|
(37
|
)
|
Net
realized losses
|
|
$
|
(4,290
|
)
|
|
$
|
(47
|
)
|
|
$
|
(28
|
)
|
Investment
and other income in the third quarter of 2008 included a loss on
investments of $4,457. The loss was primarily due to investments in
the Reserve Primary money market fund (Reserve Fund) whose Net Asset Value
fell below $1.00 per share due to its holdings of securities by Lehman Brothers
Holdings, Inc. The loss represents less than 1% of Centene’s cash and
investment portfolio as of December 31, 2008. The Company
expects to recover 95% of its Reserve Fund investments. Money
market funds are generally recorded in Cash and cash equivalents in the
Company's balance sheet, however, the investment in the Reserve Fund is
recorded in Short-term investments due to the restrictions placed on redemptions
imposed by the fund. As of December 31, 2008, the Company has
received most of its investment in the Reserve Fund and the Company's short
term investment balance includes $12,988 for the Reserve Fund.
The fair
value of a cost method investment is not estimated if there are no identified
events or changes in circumstances that may have a significant adverse effect on
the fair value of the investment. The aggregate carrying amount of
all cost-method investments were $15,975 and $1,774 as of December 31, 2008 and
2007, respectively.
Additional
information regarding investments is included in Note 7, Fair Value
Measurements.
7.
Fair Value Measurements
The
Company adopted FASB Statement No. 157, Fair Value Measurements for
financial assets and liabilities on January 1, 2008. FASB Statement
No. 157 defines fair value and establishes a framework for measuring fair value
in accordance with existing GAAP, and expands disclosure about fair value
measurements. Assets and liabilities recorded at fair value in the
consolidated balance sheets are categorized based upon the level of judgment
associated with the inputs used to measure their fair value. Level
inputs, as defined by FASB Statement No.157, are as follows:
|
|
|
Level I
|
|
Inputs
are unadjusted, quoted prices for identical assets or liabilities in
active markets at the measurement date.
|
|
|
Level II
|
|
Inputs
other than quoted prices included in Level I that are observable for the
asset or liability through corroboration with market data at the
measurement date.
|
|
|
Level III
|
|
Unobservable
inputs that reflect management’s best estimate of what market participants
would use in pricing the asset or liability at the measurement
date.
|
The
following table summarizes fair value measurements by level at December 31, 2008
for assets and liabilities measured at fair value on a recurring
basis:
|
|
Level
I |
|
|
Level
II |
|
|
Level
III |
|
|
Total |
|
Investments
available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury securities and obligations of U.S. government corporations and
agencies
|
|
$ |
4,184 |
|
|
$ |
― |
|
|
$ |
― |
|
|
$ |
4,184 |
|
Corporate
securities
|
|
|
31,382 |
|
|
|
― |
|
|
|
― |
|
|
|
31,382 |
|
State
and municipal securities
|
|
|
366,591 |
|
|
|
― |
|
|
|
― |
|
|
|
366,591 |
|
Equity
securities
|
|
|
3,328 |
|
|
|
― |
|
|
|
― |
|
|
|
3,328 |
|
Total
assets
|
|
$ |
405,485 |
|
|
$ |
― |
|
|
$ |
― |
|
|
$ |
405,485 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
$ |
― |
|
|
$ |
226,829 |
|
|
$ |
― |
|
|
$ |
226,829 |
|
8.
Property, Software and Equipment
Property,
software and equipment consist of the following as of December 31:
|
|
2008
|
|
|
2007
|
|
Computer
software
|
|
$
|
97,829
|
|
|
$
|
71,350
|
|
Land
|
|
|
46,543
|
|
|
|
19,509
|
|
Building
|
|
|
32,485
|
|
|
|
36,781
|
|
Computer
hardware
|
|
|
31,897
|
|
|
|
26,264
|
|
Furniture
and office equipment
|
|
|
22,756
|
|
|
|
20,776
|
|
Leasehold
improvements
|
|
|
18,542
|
|
|
|
14,628
|
|
|
|
|
250,052
|
|
|
|
189,308
|
|
Less
accumulated depreciation
|
|
|
(74,194
|
)
|
|
|
(53,425
|
)
|
Property,
software and equipment, net
|
|
$
|
175,858
|
|
|
$
|
135,883
|
|
Depreciation
expense for the years ended December 31, 2008, 2007 and 2006 was $28,453,
$22,647 and $15,242, respectively.
9.
Goodwill and Intangible Assets
The
following table summarizes the changes in goodwill by operating
segment:
|
|
Medicaid
Managed Care
|
|
|
Specialty
Services
|
|
|
Total
|
|
Balance
as of December 31, 2006
|
|
$ |
42,804 |
|
|
$ |
86,146 |
|
|
$ |
128,950 |
|
Acquisitions
|
|
|
8,664 |
|
|
|
4,049 |
|
|
|
12,713 |
|
Other
adjustments
|
|
|
— |
|
|
|
(2,801 |
) |
|
|
(2,801 |
) |
Balance
as of December 31, 2007
|
|
|
51,468 |
|
|
|
87,394 |
|
|
|
138,862 |
|
Acquisitions
|
|
|
80 |
|
|
|
24,438 |
|
|
|
24,518 |
|
Balance
as of December 31, 2008
|
|
$ |
51,548 |
|
|
$ |
111,832 |
|
|
$ |
163,380 |
|
Goodwill
additions in 2008 and 2007 were related to the acquisitions discussed in Note 5,
Acquisitions. Goodwill
reductions in 2007 were related to the recognition of acquired net operating
loss carry forward benefits.
Intangible
assets at December 31, consist of the following:
|
|
|
|
|
|
|
Weighted
Average Life
in
Years
|
|
|
2008
|
|
|
2007
|
|
2008
|
|
2007
|
Purchased
contract rights
|
|
$
|
6,146
|
|
|
$
|
6,191
|
|
8.4
|
|
7.7
|
Provider
contracts
|
|
|
1,078
|
|
|
|
1,078
|
|
10.0
|
|
10.0
|
Customer
relationships
|
|
|
14,130
|
|
|
|
7,030
|
|
7.8
|
|
8.2
|
Trade
names
|
|
|
5,545
|
|
|
|
4,563
|
|
19.4
|
|
19.9
|
Other
intangibles
|
|
|
270
|
|
|
|
270
|
|
5.0
|
|
5.0
|
Intangible
assets
|
|
|
27,169
|
|
|
|
19,132
|
|
10.6
|
|
10.7
|
Less
accumulated amortization:
|
|
|
|
|
|
|
|
|
|
|
|
Purchased
contract rights
|
|
|
(4,672
|
)
|
|
|
(4,650
|
)
|
|
|
|
Provider
contracts
|
|
|
(405
|
)
|
|
|
(295
|
)
|
|
|
|
Customer
relationships
|
|
|
(3,566
|
)
|
|
|
(2,069
|
)
|
|
|
|
Trade
names
|
|
|
(681
|
)
|
|
|
(542
|
)
|
|
|
|
Other
identifiable intangibles
|
|
|
(270
|
)
|
|
|
(239
|
)
|
|
|
|
Total
accumulated amortization
|
|
|
(9,594
|
)
|
|
|
(7,795
|
)
|
|
|
|
Intangible
assets, net
|
|
$
|
17,575
|
|
|
$
|
11,337
|
|
|
|
|
Amortization
expense was $2,480, $1,970 and $2,105 for the years ended December 31, 2008,
2007 and 2006, respectively.
Estimated
total amortization expense related to intangible assets for each of the five
succeeding fiscal years is as follows:
Year
|
|
Expense
|
2009
|
|
$
|
2,700
|
2010
|
|
|
2,500
|
2011
|
|
|
2,300
|
2012
|
|
|
2,200
|
2013
|
|
|
1,700
|
10.
Income Taxes
The
consolidated income tax expense consists of the following for the years ended
December 31:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Current
provision:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$ |
53,543 |
|
|
$ |
31,170 |
|
|
$ |
14,290 |
|
State
and local
|
|
|
6,726 |
|
|
|
2,741 |
|
|
|
2,553 |
|
Total
current provision
|
|
|
60,269 |
|
|
|
33,911 |
|
|
|
16,843 |
|
Deferred
provision
|
|
|
(7,834
|
) |
|
|
(10,880
|
) |
|
|
(7,278 |
) |
Total
provision for income taxes
|
|
$ |
52,435 |
|
|
$ |
23,031 |
|
|
$ |
9,565 |
|
The
reconciliation of the tax provision at the U.S. Federal Statutory Rate to the
provision for income taxes is as follows:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Tax
provision at the U.S. federal statutory rate
|
|
$ |
47,816 |
|
|
$ |
22,425 |
|
|
$ |
9,508 |
|
State
income taxes, net of federal income tax benefit
|
|
|
4,938 |
|
|
|
821 |
|
|
|
(603 |
) |
Tax
exempt investment income
|
|
|
(3,727
|
) |
|
|
(2,636
|
) |
|
|
(640 |
) |
Nondeductible
incentive stock option compensation
|
|
|
1,316 |
|
|
|
1,542 |
|
|
|
1,407 |
|
Other,
net
|
|
|
2,092 |
|
|
|
879 |
|
|
|
(107 |
) |
Income
tax expense
|
|
$ |
52,435 |
|
|
$ |
23,031 |
|
|
$ |
9,565 |
|
The tax
effects of temporary differences which give rise to deferred tax assets and
liabilities are presented below for the years ended December 31:
|
|
2008
|
|
|
2007
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
Medical
claims liability and other accruals
|
|
$ |
34,222 |
|
|
$ |
12,392 |
|
Unearned
premium and other deferred revenue
|
|
|
959 |
|
|
|
3,376 |
|
Unrealized
loss on investments
|
|
|
— |
|
|
|
47 |
|
Federal
net operating loss carry forward
|
|
|
— |
|
|
|
4,102 |
|
State
net operating loss carry forward
|
|
|
1,033 |
|
|
|
2,981 |
|
Federal
tax credits
|
|
|
— |
|
|
|
188 |
|
Capital
loss carryovers and impairment losses
|
|
|
2,111 |
|
|
|
— |
|
Other
|
|
|
221 |
|
|
|
1,808 |
|
|
|
|
38,546 |
|
|
|
24,894 |
|
Valuation
allowance
|
|
|
— |
|
|
|
— |
|
Net
current deferred tax assets
|
|
$ |
38,546 |
|
|
$ |
24,894 |
|
|
|
|
|
|
|
|
|
|
Non-current
deferred tax assets:
|
|
|
|
|
|
|
|
|
Medical
claims liability and other accruals
|
|
$ |
3,092 |
|
|
$ |
593 |
|
Federal
net operating loss carry forward
|
|
|
2,444 |
|
|
|
5,580 |
|
State
net operating loss carry forward
|
|
|
3,029 |
|
|
|
1,950 |
|
Stock
compensation
|
|
|
11,796 |
|
|
|
8,671 |
|
Other
|
|
|
1,155 |
|
|
|
1,147 |
|
|
|
|
21,516 |
|
|
|
17,941 |
|
Valuation
allowance
|
|
|
(1,541
|
) |
|
|
(1,207
|
) |
Net
non-current deferred tax assets
|
|
$ |
19,975 |
|
|
$ |
16,734 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
Prepaid
assets
|
|
$ |
2,026 |
|
|
$ |
1,501 |
|
Unrealized
short term gains
|
|
|
524 |
|
|
|
— |
|
Net
current deferred tax liabilities
|
|
$ |
2,550 |
|
|
$ |
1,501 |
|
|
|
|
|
|
|
|
|
|
Non-current
deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Intangible
assets
|
|
$ |
7,969 |
|
|
$ |
4,234 |
|
Depreciation
and amortization
|
|
|
26,557 |
|
|
|
15,895 |
|
Unrealized
gain on investments
|
|
|
1,364 |
|
|
|
877 |
|
Prepaid
assets
|
|
|
1,154 |
|
|
|
— |
|
Other
|
|
|
25 |
|
|
|
— |
|
Net
non-current deferred tax liabilities
|
|
$ |
37,069 |
|
|
$ |
21,006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
deferred tax assets
|
|
$ |
18,902 |
|
|
$ |
19,121 |
|
|
|
|
|
|
|
|
|
|
The
Company's deferred tax assets include federal and state net operating losses, or
NOLs, of which $3,751 were acquired in business
combinations. Accordingly, the total and annual deduction for those
NOLs is limited by tax law. The Company's federal NOLs expire
between the years 2011 and 2027 and the state NOLs expire between the years 2009
and 2027. Valuation allowances are recorded for those NOLs the
Company believes are more-likely-than not to expire unused. During
2008 and 2007, the Company recorded valuation allowance additions in the tax
provision of $1,829 and $1,852, respectively. In 2008 and 2007, the
Company recorded valuation allowance reductions of $126 and $2,317, of which the
majority offset goodwill.
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 tax authority. A reconciliation of the beginning and
ending amount of unrecognized tax benefits is as follows:
Balance
as of January 1, 2008
|
|
$
|
817
|
|
Additions
based on tax positions during the current year
|
|
|
3,251
|
|
Additions
based on tax positions during prior years
|
|
|
397
|
|
Settlements
|
|
|
(411
|
)
|
Balance
as of December 31, 2008
|
|
$
|
4,054
|
|
The
December 31, 2008 balance includes $766 (net of federal tax benefit) that 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, 2008, interest accrued
was $223, net of federal benefit. No penalties have been
accrued. As of December 31, 2008, interest accrued was $560, net of
federal benefit.
The
federal income tax returns for 2005 through 2008 are open tax
years. The Company is currently being examined by the IRS for the
2006 and 2007 tax years. Included in their examination is the
treatment of the tax deduction associated with the abandonment of the FirstGuard
stock. As discussed in Note 3, Discontinued Operations, in
2007, the Company recognized a $34,846 tax benefit associated with the
abandonment of the FirstGuard stock. The Company files in numerous
state jurisdictions with varying statutes of limitation. The
unrecognized state tax benefits are related to returns open from 2003 through
2008.
11. Medical Claims
Liability
The
change in medical claims liability is summarized as follows:
|
|
Year
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Balance,
January 1,
|
|
$
|
313,364
|
|
|
$
|
232,496
|
|
|
$
|
123,102
|
|
Acquisitions
|
|
|
15,398
|
|
|
|
—
|
|
|
|
1,788
|
|
Incurred
related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
year
|
|
|
2,659,036
|
|
|
|
2,212,901
|
|
|
|
1,450,116
|
|
Prior
years
|
|
|
(18,701
|
)
|
|
|
(22,003
|
)
|
|
|
(13,745
|
)
|
Total
incurred
|
|
|
2,640,335
|
|
|
|
2,190,898
|
|
|
|
1,436,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid
related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
year
|
|
|
2,303,473
|
|
|
|
1,902,610
|
|
|
|
1,220,872
|
|
Prior
years
|
|
|
292,587
|
|
|
|
207,420
|
|
|
|
107,893
|
|
Total
paid
|
|
|
2,596,060
|
|
|
|
2,110,030
|
|
|
|
1,328,765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31,
|
|
$
|
373,037
|
|
|
$
|
313,364
|
|
|
$
|
232,496
|
|
Changes
in estimates of incurred claims for prior years are primarily attributable to
reserving under moderately adverse conditions. Changes in medical
utilization and cost trends and the effect of medical management initiatives may
also contribute to changes in medical claim liability
estimates. While the Company has evidence that medical management
initiatives are effective on a case by case basis, medical management
initiatives primarily focus on events and behaviors prior to the incurrence of
the medical event and generation of a claim. Accordingly, any change
in behavior, leveling of care, or coordination of treatment occurs prior to
claim generation and as a result, the costs prior to the medical management
initiative are not known by the Company. Additionally, certain
medical management initiatives are focused on member and provider education with
the intent of influencing behavior to appropriately align the medical services
provided with the member’s acuity. In these cases, determining
whether the medical management initiative changed the behavior cannot be
determined. Because of the complexity of its business, the number of
states in which it operates, and the volume of claims that it processes, the
Company is unable to practically quantify the impact of these initiatives on its
changes in estimates of IBNR.
The
Company had reinsurance recoverables related to medical claims liability of
$4,972 and $3,189 at December 31, 2008 and 2007, respectively, included in
premium and related receivables.
12.
Debt
Debt
consists of the following at December 31:
|
|
2008
|
|
|
2007
|
|
$175,000
senior notes
|
|
$ |
175,000 |
|
|
$ |
175,000 |
|
$300,000
revolving credit agreement
|
|
|
63,000 |
|
|
|
5,000 |
|
$20,500
revolving loan agreement
|
|
|
20,364 |
|
|
|
8,359 |
|
Capital
leases
|
|
|
6,528 |
|
|
|
7,017 |
|
Mortgage
notes payable
|
|
|
— |
|
|
|
12,001 |
|
Total
debt
|
|
|
264,892 |
|
|
|
207,377 |
|
Less
current maturities
|
|
|
(255
|
) |
|
|
(971
|
) |
Long-term
debt
|
|
$ |
264,637 |
|
|
$ |
206,406 |
|
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 is paid semi-annually
in April and October.
The
Company has a $300,000 five-year Revolving Credit Agreement dated September 14,
2004 with various financial institutions. Borrowings under the
agreement bear interest based upon LIBOR rates, the Federal Funds Rate or the
Prime Rate. There is a commitment fee on the unused portion of the
agreement that ranges from 0.15% to 0.275% depending on the total debt-to-EBITDA
ratio. The agreement contains non-financial and financial covenants,
including requirements of minimum fixed charge coverage ratios, maximum
debt-to-EBITDA ratios and minimum tangible net worth. The agreement
will expire in September 2011. As of December 31, 2008, the Company
had $63,000 in borrowings outstanding under the agreement and $24,100 in letters
of credit outstanding, leaving availability of $212,900. The outstanding
borrowings at December 31, 2008 bore interest at LIBOR plus 1.0%, or the prime
rate. The weighted average interest rate of outstanding borrowings
was 2.42% at December 31, 2008.
In May
2006, the Company executed a three-year $25,000 Revolving Loan
Agreement. Borrowings under the agreement bear interest based upon
LIBOR rates plus 1.0%. In November 2008, the Company executed an
amendment to this agreement to reduce the amount available under the Revolving
Loan Agreement to $20,500. Subject to the terms and conditions of the
agreement, the proceeds of the Revolving Loan may only be used for the
acquisition and financing of the Company’s corporate headquarters and certain
properties contiguous to the headquarters. The collateralized
properties had a net book value of $15,316 at December 31, 2008. The
outstanding borrowings at December 31, 2008 bore interest at 2.90%.
Aggregate
maturities for the Company’s debt are as follows:
2009
|
|
$
|
255
|
2010
|
|
|
20,611
|
2011
|
|
|
63,250
|
2012
|
|
|
261
|
2013
|
|
|
273
|
Thereafter
|
|
|
180,242
|
Total
|
|
$
|
264,892
|
The fair
value of outstanding debt was approximately $226,829 and $206,065 at December
31, 2008 and 2007, respectively.
13.
Stockholders’ Equity
The
Company has 10,000,000 authorized shares of preferred stock at $.001 par
value. At December 31, 2008, there were no preferred shares
outstanding.
In
October 2008, the Company’s board of directors extended the November 2005 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 expires October 31,
2009, but the Company reserves the right to suspend or discontinue the program
at any time. During the year ended December 31, 2008, the Company
repurchased 1,218,858 shares at an average price of $19.29 and an aggregate cost
of $23,510. During the year ended December 31, 2007, the Company
repurchased 467,157 shares at an average price of $20.42 and an aggregate cost
of $9,541.
14.
Statutory Capital Requirements and Dividend Restrictions
Various
state laws require Centene’s regulated subsidiaries to maintain minimum capital
levels specified by each state and restrict the amount of dividends that may be
paid without prior regulatory approval. At December 31, 2008 and
2007, Centene’s subsidiaries, including UHP, had aggregate statutory capital and
surplus of $391,400 and $302,100, respectively, compared with the required
minimum aggregate statutory capital and surplus of $241,500 and $192,300,
respectively.
15.
Stock Incentive Plans
The
Company’s stock incentive plans allow for the granting of restricted stock or
restricted stock unit awards and options to purchase common
stock. Both incentive stock options and nonqualified stock options
can be awarded under the plans. No option will be exercisable for
longer than ten years after the date of grant. The plans have
1,294,809 shares available for future awards. Compensation expense
for stock options and restricted stock unit awards is recognized on a
straight-line basis over the vesting period, generally three to five years for
stock options and one to ten years for restricted stock or restricted stock unit
awards. Certain restricted stock unit awards contain
performance-based as well as service-based provisions. Certain awards
provide for accelerated vesting if there is a change in control as defined in
the plans. The total compensation cost that has been charged against
income for the stock incentive plans was $15,328, $15,781 and $14,904 for the
years ended December 31, 2008, 2007 and 2006, respectively. The total
income tax benefit recognized in the income statement for stock-based
compensation arrangements was $4,771, $4,536 and $4,235 for the years ended
December 31, 2008, 2007 and 2006, respectively.
Option
activity for the year ended December 31, 2008 is summarized below:
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Aggregate
Intrinsic Value
|
|
|
Weighted
Average
Remaining Contractual
Term
|
|
Outstanding
as of December 31, 2007
|
|
|
4,340,701 |
|
|
$ |
19.60 |
|
|
|
|
|
|
|
Granted
|
|
|
242,000 |
|
|
|
18.50 |
|
|
|
|
|
|
|
Exercised
|
|
|
(400,129 |
) |
|
|
11.80 |
|
|
|
|
|
|
|
Expired
|
|
|
(22,600 |
) |
|
|
25.93 |
|
|
|
|
|
|
|
Forfeited
|
|
|
(441,600 |
) |
|
|
24.02 |
|
|
|
|
|
|
|
Outstanding
as of December 31, 2008
|
|
|
3,718,372 |
|
|
$ |
19.81 |
|
|
$ |
10,103 |
|
|
|
6.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
as of December 31, 2008
|
|
|
2,556,507 |
|
|
$ |
18.48 |
|
|
$ |
9,451 |
|
|
|
5.6 |
|
The fair
value of each option grant is estimated on the date of the grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
|
|
Year Ended December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Expected
life (in years)
|
|
|
5.8 |
|
|
|
6.1 |
|
|
|
6.5 |
|
Risk-free
interest rate
|
|
|
3.0 |
% |
|
|
4.1 |
% |
|
|
4.6 |
% |
Expected
volatility
|
|
|
50.3 |
% |
|
|
47.5 |
% |
|
|
47.8 |
% |
Expected
dividend yield
|
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
For the
years ended December 31, 2008 and 2007, the Company used a projected expected
life for each award granted based on historical experience of employees’
exercise behavior. For the year ended December 31, 2006, the expected
life of each award granted was calculated using the “simplified method” in
accordance with the SEC Staff Accounting Bulletin No. 107. For
the years ended December 31, 2008, 2007 and 2006, expected volatility is
primarily based on historical volatility levels along with the implied
volatility of exchange traded options to purchase Centene common
stock. The risk-free interest rates are based on the implied
yield currently available on U.S. Treasury zero coupon issues with a remaining
term equal to the expected life.
Other
information pertaining to option activity during the years ended December 31,
2008, 2007 and 2006 is as follows:
|
|
Year Ended December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Weighted-average
fair value of options granted
|
|
$ |
9.27 |
|
|
$ |
12.02 |
|
|
$ |
13.42 |
|
Total
intrinsic value of stock options exercised
|
|
$ |
3,529 |
|
|
$ |
9,847 |
|
|
$ |
10,495 |
|
A summary
of the status of the Company's non-vested restricted stock and
restricted stock unit shares as of December 31, 2008, and changes during the
year ended December 31, 2008, is presented below:
|
|
Shares
|
|
|
Weighted
Average
Grant
Date Fair
Value
|
|
Non-vested
balance as of December 31, 2007
|
|
|
1,572,689
|
|
|
$
|
24.74
|
|
Granted
|
|
|
500,930
|
|
|
|
17.26
|
|
Vested
|
|
|
(103,189
|
)
|
|
|
25.23
|
|
Forfeited
|
|
|
(56,300
|
)
|
|
|
25.55
|
|
Non-vested
balance as of December 31, 2008
|
|
|
1,914,130
|
|
|
$
|
22.73
|
|
The total
fair value of restricted stock and restricted stock units vested during the
years ended December 31, 2008, 2007 and 2006, was $1,822, $2,168 and $1,051,
respectively.
As of
December 31, 2008, there was $35,321 of total unrecognized compensation cost
related to non-vested share-based compensation arrangements granted under the
plans; that cost is expected to be recognized over a weighted-average period of
2.2 years. The actual tax benefit realized for the tax deductions
from stock option exercises totaled $1,127, $512, and $3,455 for the years ended
December 31, 2008, 2007 and 2006, respectively.
The
Company has reserved 900,000 shares of common stock for an employee stock
purchase plan and the Company issued 36,682 shares, 32,563 shares, and 34,357
shares in 2008, 2007 and 2006, respectively, from the employee stock purchase
plan.
16.
Retirement Plan
Centene
has a defined contribution plan which covers substantially all employees who are
at least twenty-one years of age. Under the plan, eligible employees
may contribute a percentage of their base salary, subject to certain
limitations. Centene may elect to match a portion of the employee’s
contribution. Company expense related to matching contributions to
the plan was $3,810, $2,406 and $1,847 during the years ended December 31, 2008,
2007 and 2006, respectively.
17.
Commitments
Centene
and its subsidiaries lease office facilities and various equipment under
non-cancelable operating leases which may contain escalation
provisions. The rental expense related to these leases is recorded on
a straight-line basis over the lease term, including rent
holidays. Tenant improvement allowances are recorded as a liability
and amortized against rent expense over the term of the lease. Rent
expense was $19,561, $15,108 and $10,107 for the years ended December 31, 2008,
2007 and 2006, respectively. Annual non-cancelable minimum lease
payments over the next five years and thereafter are as follows:
2009
|
|
$ |
20,490 |
|
2010
|
|
|
17,606 |
|
2011
|
|
|
14,957 |
|
2012
|
|
|
11,640 |
|
2013
|
|
|
8,608 |
|
Thereafter
|
|
|
48,494 |
|
|
|
$ |
121,795 |
|
18.
Contingencies
On
January 8, 2009, the Company filed a complaint in the Chancery Division of the
Superior Court of New Jersey, asserting a breach of contract claim against
AMERIGROUP New Jersey, or AGPNJ, and a tortuous interference with contract claim
against AMERIGROUP Corporation, in connection with AGPNJ’s refusal to proceed to
closing under its contract to purchase certain assets of UHP’s
business. In December 2008, AGPNJ sent the Company a termination
notice claiming that a material adverse effect had occurred under the contract
and attempted to terminate the contract. The Company is contesting
whether a material adverse effect occurred and correspondingly the propriety and
validity of the purported termination, and is seeking to obtain specific
performance of the contract and damages.
The
Company is routinely subjected to legal proceedings in the normal course of
business. While the ultimate resolution of such matters is uncertain,
the Company does not expect the results of any of these matters discussed above
individually, or in the aggregate, to have a material effect on its financial
position or results of operations.
19.
Earnings Per Share
The
following table sets forth the calculation of basic and diluted net earnings per
share for the years ended December 31:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Earnings:
|
|
|
|
|
|
|
|
|
|
Earnings
from continuing operations
|
|
$ |
84,181 |
|
|
$ |
41,040 |
|
|
$ |
17,600 |
|
Discontinued
operations, net of tax
|
|
|
(684
|
) |
|
|
32,362 |
|
|
|
(61,229
|
) |
Net
earnings (loss)
|
|
$ |
83,497 |
|
|
$ |
73,402 |
|
|
$ |
(43,629 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
used in computing per share amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding
|
|
|
43,275,187 |
|
|
|
43,539,950 |
|
|
|
43,160,860 |
|
Common
stock equivalents (as determined by applying the treasury stock
method)
|
|
|
1,123,768 |
|
|
|
1,283,132 |
|
|
|
1,452,762 |
|
Weighted
average number of common shares and potential dilutive common shares
outstanding
|
|
|
44,398,955 |
|
|
|
44,823,082 |
|
|
|
44,613,622 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continued
operations
|
|
$ |
1.95 |
|
|
$ |
0.95 |
|
|
$ |
0.41 |
|
Discontinued
operations
|
|
|
(0.02
|
) |
|
|
0.74 |
|
|
|
(1.42
|
) |
Earnings
(loss) per common share
|
|
$ |
1.93 |
|
|
$ |
1.69 |
|
|
$ |
(1.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
1.90 |
|
|
$ |
0.92 |
|
|
$ |
0.39 |
|
Discontinued
operations
|
|
|
(0.02
|
) |
|
|
0.72 |
|
|
|
(1.37
|
) |
Earnings
(loss) per common share
|
|
$ |
1.88 |
|
|
$ |
1.64 |
|
|
$ |
(0.98 |
) |
The
calculation of diluted earnings per common share for 2008, 2007 and 2006
excludes the impact of 2,004,778, 3,002,030 and 4,560,036 shares, respectively,
related to anti-dilutive stock options, restricted stock and restricted stock
units.
20.
Segment Information
Centene
operates in two segments: Medicaid Managed Care and Specialty
Services. The Medicaid Managed Care segment consists of Centene’s
health plans including all of the functions needed to operate
them. The Specialty Services segment consists of Centene’s specialty
companies including behavioral health, individual health, life and health
management, long-term care, managed vision, nurse triage, pharmacy benefits
management and treatment compliance functions.
Factors
used in determining the reportable business segments include the nature of
operating activities, existence of separate senior management teams, and the
type of information presented to the Company’s chief operating decision maker to
evaluate all results of operations.
Segment
information as of and for the year ended December 31, 2008,
follows:
|
|
Medicaid
Managed Care
|
|
|
Specialty
Services
|
|
|
Eliminations
|
|
|
Consolidated
Total
|
|
Revenue
from external customers
|
|
$ |
3,020,248 |
|
|
$ |
344,267 |
|
|
$ |
— |
|
|
$ |
3,364,515 |
|
Revenue
from internal customers
|
|
|
60,451 |
|
|
|
474,061 |
|
|
|
(534,512
|
) |
|
|
— |
|
Total
revenue
|
|
$ |
3,080,699 |
|
|
$ |
818,328 |
|
|
$ |
(534,512 |
) |
|
$ |
3,364,515 |
|
Earnings
from operations
|
|
$ |
108,363 |
|
|
$ |
23,198 |
|
|
$ |
— |
|
|
$ |
131,561 |
|
Total
assets
|
|
$ |
1,105,610 |
|
|
$ |
345,542 |
|
|
$ |
— |
|
|
$ |
1,451,152 |
|
Stock
compensation expense
|
|
$ |
13,840 |
|
|
$ |
1,346 |
|
|
$ |
— |
|
|
$ |
15,186 |
|
Depreciation
expense
|
|
$ |
25,271 |
|
|
$ |
3,182 |
|
|
$ |
— |
|
|
$ |
28,453 |
|
Capital
expenditures
|
|
$ |
58,856 |
|
|
$ |
4,635 |
|
|
$ |
— |
|
|
$ |
63,491 |
|
Segment
information as of and for the year ended December 31, 2007,
follows:
|
|
Medicaid
Managed Care
|
|
|
Specialty
Services
|
|
|
Eliminations
|
|
|
Consolidated
Total
|
|
Revenue
from external customers
|
|
$ |
2,523,667 |
|
|
$ |
245,361 |
|
|
$ |
— |
|
|
$ |
2,769,028 |
|
Revenue
from internal customers
|
|
|
76,637 |
|
|
|
407,563 |
|
|
|
(484,200
|
) |
|
|
— |
|
Total
revenue
|
|
$ |
2,600,304 |
|
|
$ |
652,924 |
|
|
$ |
(484,200 |
) |
|
$ |
2,769,028 |
|
Earnings
from operations
|
|
$ |
35,545 |
|
|
$ |
19,700 |
|
|
$ |
— |
|
|
$ |
55,245 |
|
Total
assets
|
|
$ |
939,012 |
|
|
$ |
182,812 |
|
|
$ |
— |
|
|
$ |
1,121,824 |
|
Stock
compensation expense
|
|
$ |
13,820 |
|
|
$ |
1,505 |
|
|
$ |
— |
|
|
$ |
15,325 |
|
Depreciation
expense
|
|
$ |
19,970 |
|
|
$ |
2,677 |
|
|
$ |
— |
|
|
$ |
22,647 |
|
Capital
expenditures
|
|
$ |
49,846 |
|
|
$ |
3,941 |
|
|
$ |
— |
|
|
$ |
53,787 |
|
Segment
information as of and for the year ended December 31, 2006,
follows:
|
|
Medicaid
Managed Care
|
|
|
Specialty
Services
|
|
|
Eliminations
|
|
|
Consolidated
Total
|
|
Revenue
from external customers
|
|
$ |
1,630,471 |
|
|
$ |
191,975 |
|
|
$ |
— |
|
|
$ |
1,822,446 |
|
Revenue
from internal customers
|
|
|
88,159 |
|
|
|
221,201 |
|
|
|
(309,360
|
) |
|
|
— |
|
Total
revenue
|
|
$ |
1,718,630 |
|
|
$ |
413,176 |
|
|
$ |
(309,360 |
) |
|
$ |
1,822,446 |
|
Earnings
from operations
|
|
$ |
15,118 |
|
|
$ |
7,110 |
|
|
$ |
— |
|
|
$ |
22,228 |
|
Total
assets
|
|
$ |
723,698 |
|
|
$ |
171,282 |
|
|
$ |
— |
|
|
$ |
894,980 |
|
Stock
compensation expense
|
|
$ |
13,636 |
|
|
$ |
919 |
|
|
$ |
— |
|
|
$ |
14,555 |
|
Depreciation
expense
|
|
$ |
12,865 |
|
|
$ |
2,377 |
|
|
$ |
— |
|
|
$ |
15,242 |
|
Capital
expenditures
|
|
$ |
44,753 |
|
|
$ |
3,872 |
|
|
$ |
— |
|
|
$ |
48,625 |
|
The
Company evaluates performance and allocates resources based on earnings from
operations. The accounting policies are the same as those described
in Note 2, Summary of
Significant Accounting Policies.
21.
Comprehensive Earnings
Differences
between net earnings and total comprehensive earnings resulted from changes in
unrealized gains on investments available for sale, as follows:
|
|
Year
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Net
earnings (loss)
|
|
$ |
83,497 |
|
|
$ |
73,402 |
|
|
$ |
(43,629 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification
adjustment, net of tax
|
|
|
252 |
|
|
|
(242
|
) |
|
|
218 |
|
Change
in unrealized gains on investments available for sale, net of
tax
|
|
|
1,329 |
|
|
|
3,064 |
|
|
|
285 |
|
Total
change
|
|
|
1,581 |
|
|
|
2,822 |
|
|
|
503 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
comprehensive earnings (loss)
|
|
$ |
85,078 |
|
|
$ |
76,224 |
|
|
$ |
(43,126 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
22.
Quarterly Selected Financial Information
(In
thousands, except share data and membership data)
(Unaudited)
|
|
For
the Quarter Ended
|
|
|
|
March
31,
2008
(1)
|
|
|
June
30,
2008
|
|
|
September
30,
2008
|
|
|
December
31,
2008
(2)
|
|
Total
revenues
|
|
$ |
779,228 |
|
|
$ |
823,930 |
|
|
$ |
858,599 |
|
|
$ |
902,758 |
|
Net
earnings from continuing operations
|
|
|
24,933 |
|
|
|
17,883 |
|
|
|
18,099 |
|
|
|
23,266 |
|
Discontinued
operations, net of tax
|
|
|
690 |
|
|
|
320 |
|
|
|
149 |
|
|
|
(1,843 |
) |
Net
earnings
|
|
$ |
25,623 |
|
|
$ |
18,203 |
|
|
$ |
18,248 |
|
|
$ |
21,423 |
|
Per
share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continued
operations
|
|
$ |
0.57 |
|
|
$ |
0.41 |
|
|
$ |
0.42 |
|
|
$ |
0.54 |
|
Discontinued
operations
|
|
|
0.02 |
|
|
|
0.01 |
|
|
|
-
|
|
|
|
(0.04 |
) |
Basic
earnings per common share
|
|
$ |
0.59 |
|
|
$ |
0.42 |
|
|
$ |
0.42 |
|
|
$ |
0.50 |
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continued
operations
|
|
$ |
0.56 |
|
|
$ |
0.40 |
|
|
$ |
0.41 |
|
|
$ |
0.53 |
|
Discontinued
operations
|
|
|
0.01 |
|
|
|
0.01 |
|
|
|
-
|
|
|
|
(0.04 |
) |
Diluted
earnings per common share
|
|
$ |
0.57 |
|
|
$ |
0.41 |
|
|
$ |
0.41 |
|
|
$ |
0.49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
end membership
|
|
|
1,100,300 |
|
|
|
1,152,300 |
|
|
|
1,174,800 |
|
|
|
1,184,800 |
|
______________________________________
(1)
|
Includes
$20.8 million pre-tax premium revenue for the Georgia premium rate
increase for July 1, 2007 – December 31,
2007.
|
(2)
|
Includes
a $3.7 million pre-tax charge primarily for asset impairments and employee
severance related to the sale of the New Jersey health plan, included in
discontinued operations.
|
|
|
For
the Quarter Ended
|
|
|
|
March
31,
2007
|
|
|
June
30,
2007
(1)
|
|
|
September
30,
2007
|
|
|
December
31,
2007
(2)
|
|
Total
revenues
|
|
$ |
627,598 |
|
|
$ |
691,171 |
|
|
$ |
710,437 |
|
|
$ |
739,822 |
|
Net
earnings from continuing operations
|
|
|
10,482 |
|
|
|
11,171 |
|
|
|
17,756 |
|
|
|
1,631 |
|
Discontinued
operations, net of tax
|
|
|
27,729 |
|
|
|
6,611 |
|
|
|
(1,820
|
) |
|
|
(158 |
) |
Net
earnings
|
|
$ |
38,211 |
|
|
$ |
17,782 |
|
|
$ |
15,936 |
|
|
$ |
1,473 |
|
Per
share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continued
operations
|
|
$ |
0.24 |
|
|
$ |
0.26 |
|
|
$ |
0.41 |
|
|
$ |
0.04 |
|
Discontinued
operations
|
|
|
0.64 |
|
|
|
0.15 |
|
|
|
(0.04
|
) |
|
|
(0.01 |
) |
Basic
earnings per common share
|
|
$ |
0.88 |
|
|
$ |
0.41 |
|
|
$ |
0.37 |
|
|
$ |
0.03 |
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continued
operations
|
|
$ |
0.23 |
|
|
$ |
0.25 |
|
|
$ |
0.40 |
|
|
$ |
0.04 |
|
Discontinued
operations
|
|
|
0.62 |
|
|
|
0.15 |
|
|
|
(0.04
|
) |
|
|
(0.01 |
) |
Diluted
earnings per common share
|
|
$ |
0.85 |
|
|
$ |
0.40 |
|
|
$ |
0.36 |
|
|
$ |
0.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
end membership
|
|
|
1,044,200 |
|
|
|
1,072,400 |
|
|
|
1,079,000 |
|
|
|
1,089,300 |
|
______________________________________
|
(1)
|
Includes
a $3.0 million pre-tax cash contribution of a portion of the FirstGuard
sale proceeds to the Company’s charitable
foundation.
|
|
(2)
|
Includes
$4.2 million pre-tax premium revenue refund to the State of Indiana and a
$9.4 million pre-tax charge for impairment and
restructuring.
|
23.
Condensed Financial Information of Registrant
Centene
Corporation (Parent Company Only)
Condensed
Balance Sheets
(In
thousands, except share data)
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
5,041 |
|
|
$ |
14,291 |
|
Short-term
investments, at fair value (amortized cost $1,516 and $5,202,
respectively)
|
|
|
1,524 |
|
|
|
5,190 |
|
Other
current assets
|
|
|
72,270 |
|
|
|
70,279 |
|
Total
current assets
|
|
|
78,835 |
|
|
|
89,760 |
|
Long-term
investments, at fair value (amortized cost $14,379 and $11,658,
respectively)
|
|
|
13,725 |
|
|
|
11,972 |
|
Investment
in subsidiaries
|
|
|
637,384 |
|
|
|
492,706 |
|
Other
long-term assets
|
|
|
17,217 |
|
|
|
6,236 |
|
Total
assets
|
|
$ |
747,161 |
|
|
$ |
600,674 |
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
$ |
7,342 |
|
|
$ |
5,527 |
|
Long-term
debt
|
|
|
238,000 |
|
|
|
180,000 |
|
Other
long-term liabilities
|
|
|
547 |
|
|
|
100 |
|
Total
liabilities
|
|
|
245,889 |
|
|
|
185,627 |
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Common
stock, $.001 par value; authorized 100,000,000 shares; issued and
outstanding 42,987,764 and 43,667,837 shares, respectively
|
|
|
43 |
|
|
|
44 |
|
Additional
paid-in capital
|
|
|
222,841 |
|
|
|
221,693 |
|
Accumulated
other comprehensive income:
|
|
|
|
|
|
|
|
|
Unrealized
loss on investments, net of tax
|
|
|
3,152 |
|
|
|
1,571 |
|
Retained
earnings
|
|
|
275,236 |
|
|
|
191,739 |
|
Total
stockholders’ equity
|
|
|
501,272 |
|
|
|
415,047 |
|
Total
liabilities and stockholders’ equity
|
|
$ |
747,161 |
|
|
$ |
600,674 |
|
See
notes to condensed financial information of registrant.
Centene
Corporation (Parent Company Only)
Condensed
Statements of Operations
(In
thousands, except share data)
|
|
Year
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
$
|
(6,153
|
)
|
|
$
|
(5,513
|
)
|
|
$
|
(3,709
|
)
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
and other income
|
|
|
(324
|
)
|
|
|
913
|
|
|
|
755
|
|
Interest
expense
|
|
|
(15,395
|
)
|
|
|
(13,627
|
)
|
|
|
(8,993
|
)
|
Loss
before income taxes
|
|
|
(21,872
|
)
|
|
|
(18,227
|
)
|
|
|
(11,947
|
)
|
Income
tax benefit
|
|
|
(7,988
|
)
|
|
|
(51,178
|
)
|
|
|
(4,504
|
)
|
Net
earnings (loss) before equity in subsidiaries
|
|
|
(13,884
|
)
|
|
|
32,951
|
|
|
|
(7,443
|
)
|
Equity
in earnings (loss) from subsidiaries
|
|
|
97,381
|
|
|
|
40,451
|
|
|
|
(36,186
|
)
|
Net
earnings (loss)
|
|
$
|
83,497
|
|
|
$
|
73,402
|
|
|
$
|
(43,629
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per common share
|
|
$
|
1.93
|
|
|
$
|
1.69
|
|
|
$
|
(1.01
|
)
|
Diluted
earnings (loss) per common share
|
|
$
|
1.88
|
|
|
$
|
1.64
|
|
|
$
|
(0.98
|
)
|
Weighted
average number of shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
43,275,187
|
|
|
|
43,539,950
|
|
|
|
43,160,860
|
|
Diluted
|
|
|
44,398,955
|
|
|
|
44,823,082
|
|
|
|
44,613,622
|
|
See
notes to condensed financial information of registrant.
Centene
Corporation (Parent Company Only)
Condensed
Statements of Cash Flows
(In
thousands)
|
|
Year
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
provided by operating activities
|
|
$
|
37,487
|
|
|
$
|
94,145
|
|
|
$
|
31,895
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
dividends from and capital contributions to subsidiaries
|
|
|
10,146
|
|
|
|
(71,813
|
)
|
|
|
(43,100
|
)
|
Purchase
of investments
|
|
|
(39,261
|
)
|
|
|
(84,088
|
)
|
|
|
(4,521
|
)
|
Sales
and maturities of investments
|
|
|
30,779
|
|
|
|
77,086
|
|
|
|
5,841
|
|
Acquisitions,
net of cash acquired
|
|
|
(91,345
|
)
|
|
|
(38,532
|
)
|
|
|
(66,772
|
)
|
Proceeds
from asset sales
|
|
|
—
|
|
|
|
14,102
|
|
|
|
—
|
|
Net
cash used in investing activities
|
|
|
(89,681
|
)
|
|
|
(103,245
|
)
|
|
|
(108,552
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from borrowings
|
|
|
224,000
|
|
|
|
212,000
|
|
|
|
86,000
|
|
Payment
of long-term debt and notes payable
|
|
|
(166,000
|
)
|
|
|
(181,000
|
)
|
|
|
(12,000
|
)
|
Proceeds
from exercise of stock options
|
|
|
5,354
|
|
|
|
5,464
|
|
|
|
6,953
|
|
Common
stock repurchases
|
|
|
(23,510
|
)
|
|
|
(9,541
|
)
|
|
|
(7,883
|
)
|
Debt
issue costs
|
|
|
—
|
|
|
|
(5,181
|
)
|
|
|
(253
|
)
|
Excess
tax benefits from stock compensation
|
|
|
3,100
|
|
|
|
—
|
|
|
|
3,043
|
|
Net
cash provided by financing activities
|
|
|
42,944
|
|
|
|
21,742
|
|
|
|
75,860
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(9,250
|
)
|
|
|
12,642
|
|
|
|
(797
|
)
|
Cash and cash
equivalents, beginning of period
|
|
|
14,291
|
|
|
|
1,649
|
|
|
|
2,446
|
|
Cash and cash
equivalents, end of period
|
|
$
|
5,041
|
|
|
$
|
14,291
|
|
|
$
|
1,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
notes to condensed financial information of registrant.
Notes
to Condensed Financial Information of Registrant
Note
A – Basis of Presentation and Significant Accounting Policies
In
Centene Corporation’s parent company only financial statements, Centene
Corporation’s investment in subsidiaries is stated at cost plus equity in
undistributed earnings of the subsidiaries. Centene Corporation’s
share of net income of its unconsolidated subsidiaries is included in income
using the equity method of accounting.
Certain
amounts presented in the parent company only financial statements are eliminated
in the consolidated financial statements of Centene Corporation. The
2007 income tax benefit reflects a $34,856 tax benefit associated with the stock
abandonment discussed in Note 3, Discontinued Operations: University
Health Plan and FirstGuard Health Plans.
Centene
Corporation’s parent company only financial statements should be read in
conjunction with Centene Corporation’s audited consolidated financial statements
and the notes to consolidated financial statements included in this Form
10-K.
Note
B – Dividends
During
2008, 2007 and 2006, the Registrant received dividends from its subsidiaries
totaling $48,411, $53,937 and $8,600, respectively.
None.
Evaluation of Disclosure Controls and
Procedures - Our management, with the participation of our Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness of
our disclosure controls and procedures as of December 31, 2008. The
term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act, means controls and other procedures of a
company that are designed to ensure that information required to be disclosed by
a company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported, within the time periods specified
in the SEC's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by a company in the reports that it files
or submits under the Exchange Act is accumulated and communicated to the
company’s management, including its principal executive and principal financial
officers, as appropriate to allow timely decisions regarding required
disclosure. Management recognizes that any controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance
of achieving their objectives and management necessarily applies its judgment in
evaluating the cost-benefit relationship of possible controls and
procedures. Based on the evaluation of our disclosure controls and
procedures as of December 31, 2008, our Chief Executive Officer and Chief
Financial Officer concluded that, as of such date, our disclosure controls and
procedures were effective at the reasonable assurance level.
Management’s Report on Internal
Control Over Financial Reporting - Our management
is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and
15d-15(f). Under the supervision and with the participation of our
management, including our principal executive officer and principal financial
officer, we conducted an evaluation of the effectiveness of our internal control
over financial reporting based on the framework in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on our evaluation under the framework in
Internal Control - Integrated
Framework, our management concluded that our internal control over
financial reporting was effective at the reasonable assurance level as of
December 31, 2008. Our management’s assessment of the effectiveness
of our internal control over financial reporting as of December 31, 2008 has
been audited by KPMG LLP, an independent registered public accounting firm, as
stated in their report which is included herein.
Changes in Internal Control Over
Financial Reporting - No change in our internal
control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) occurred during the quarter ended December 31, 2008 that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Stockholders
Centene
Corporation:
We have
audited Centene Corporation’s internal control over financial reporting as of
December 31, 2008, based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
Centene Corporation’s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in the
accompanying Management’s Report on Internal Control Over Financial Reporting.
Our responsibility is to express an opinion on the Company’s internal control
over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our
opinion, Centene Corporation maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2008, based on
criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission..
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Centene
Corporation as of December 31, 2008 and 2007, and the related consolidated
statements of operations, stockholders’ equity, and cash flows for each of the
years in the three-year period ended December 31, 2008, and our report dated
February 22, 2009 expressed an unqualified opinion on those consolidated
financial statements.
(signed)
KPMG LLP
St.
Louis, Missouri
February
22, 2009
None.
PART
III
Item 10. Directors, Executive Officers and
Corporate Governance
(a)
Directors of the Registrant
Information
concerning our directors will appear in our Proxy Statement for our 2009 annual
meeting of stockholders under “Election of Directors.” This portion of the Proxy
Statement is incorporated herein by reference.
(b)
Executive Officers of the Registrant
Pursuant
to General Instruction G(3) to Form 10-K and Instruction 3 to Item 401(b) of
Regulation S-K, information regarding our executive officers is provided in Item
1 of Part I of this Annual Report on Form 10-K under the caption “Executive
Officers of the Registrant.”
Information
concerning our executive officers’ compliance with Section 16(a) of the
Securities Exchange Act will appear in our Proxy Statement for our 2009 annual
meeting of stockholders under “Section 16(a) Beneficial Ownership Reporting
Compliance.” These portions of our Proxy Statement are incorporated herein by
reference. Information concerning our audit committee financial
expert and identification of our audit committee will appear in our Proxy
Statement for our 2009 annual meeting of stockholders under “Information about
Corporate Governance.” Information concerning our code of ethics will
appear in our Proxy Statement for our 2009 annual meeting of stockholders under
“Code of Business Conduct and Ethics.”
(c) Corporate
Governance
Information
concerning executive compensation will appear in our Proxy Statement for our
2009 annual meeting of stockholders under “Information About Executive
Compensation.” This portion of the Proxy Statement is incorporated
herein by reference. The sections entitled “Compensation Committee
Report” in our 2009 Proxy Statement are not incorporated herein by
reference.
Item
12. Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Information
concerning the security ownership of certain beneficial owners and management
and our equity compensation plans will appear in our Proxy Statement for our
2009 annual meeting of stockholders under “Information About Stock Ownership”
and “Equity Compensation Plan Information.” These portions of the Proxy
Statement are incorporated herein by reference.
Information
concerning certain relationships and related transactions will appear in our
Proxy Statement for our 2009 annual meeting of stockholders under “Related Party
Transactions.” This portion of our Proxy Statement is incorporated herein by
reference.
Information
concerning principal accountant fees and services will appear in our Proxy
Statement for our 2009 annual meeting of stockholders under “Independent Auditor
Fees.” This portion of our Proxy Statement is incorporated herein by
reference.
PART IV
(a)
|
Financial
Statements and Schedules
|
The
following documents are filed under Item 8 of this report:
1.
Financial Statements:
Report
of Independent Registered Public Accounting Firm
|
Consolidated
Balance Sheets as of December 31, 2008 and 2007
|
Consolidated
Statements of Operations for the Years Ended December 31, 2008, 2007 and
2006
|
Consolidated
Statements of Stockholders’ Equity for the Years Ended December 31, 2008,
2007 and 2006
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2008, 2007 and
2006
|
Notes
to Consolidated Financial
Statements
|
2.
Financial Statement Schedules:
None.
The
exhibits listed in the accompanying Exhibit Index are filed or incorporated by
reference as part of this filing.
EXHIBIT
INDEX
|
|
|
|
|
|
INCORPORATED
BY REFERENCE 1
|
EXHIBIT
NUMBER
|
|
DESCRIPTION
|
|
FILED WITH
THIS
FORM
10-K
|
|
FORM
|
|
FILING
DATE
WITH
SEC
|
|
EXHIBIT
NUMBER
|
3.1
|
|
Certificate
of Incorporation of Centene Corporation
|
|
|
|
S-1
|
|
October
9, 2001
|
|
3.2
|
|
|
|
|
|
|
3.1a
|
|
Certificate
of Amendment to Certificate of Incorporation of Centene Corporation, dated
November 8, 2001
|
|
|
|
S-1/A
|
|
November 13, 2001
|
|
3.2a
|
|
|
|
|
|
|
3.1b
|
|
Certificate
of Amendment to Certificate of Incorporation of Centene Corporation as
filed with the Secretary of State of the State of Delaware
|
|
|
|
10-Q
|
|
July
26, 2004
|
|
3.1b
|
|
|
|
|
|
|
3.2
|
|
By-laws
of Centene Corporation
|
|
|
|
S-1
|
|
October
9, 2001
|
|
3.4
|
|
|
|
|
|
|
4.1
|
|
Amended
and Restated Shareholders’ Agreement, dated September 23,
1998
|
|
|
|
S-1
|
|
October
9, 2001
|
|
4.2
|
|
|
|
|
|
|
4.2
|
|
Rights
Agreement between Centene Corporation and Mellon Investor Services LLC, as
Rights Agent, dated August 30, 2002
|
|
|
|
8-K
|
|
August
30, 2002
|
|
4.1
|
|
|
|
|
|
|
4.2a
|
|
Amendment
No. 1 to Rights Agreement by and between Centene Corporation and Mellon
Investor Services LLC, as right agent, dated April 23,
2007.
|
|
|
|
8-K
|
|
April
26, 2007
|
|
4.1
|
|
|
|
|
|
|
4.3
|
|
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.
|
|
|
|
S-4
|
|
May
11, 2007
|
|
4.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.1
|
|
Contract
Between the Georgia Department of Community Health and Peach State
Contract for provision of Services to Georgia Health
Families
|
|
|
|
8-K
|
|
July
22, 2005
|
|
10.1
|
|
|
|
|
|
|
|
|
|
|
|
10.1a
|
|
Amendment
#1 to the Contract No. 0653 Between Georgia Department of Community Health
and Peach State
|
|
|
|
10-Q
|
|
October
25, 2005
|
|
10.9
|
|
|
|
|
|
|
|
|
|
|
|
10.1b
|
|
Amendment
#2 to the Contract No. 0653 Between Georgia Department of Community Health
and Peach State
|
|
|
|
10-K
|
|
February
23, 2008
|
|
10.1b
|
|
|
|
|
|
|
|
|
|
|
|
10.1c
|
|
Amendment
#3 to the Contract No. 0653 Between Georgia Department of Community Health
and Peach State
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.1d
|
|
Amendment
#4 to the Contract No. 0653 Between Georgia Department of Community Health
and Peach State
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.1e
|
|
Notice
of Renewal for fiscal year 2007 between Peach State Health Plan, Inc. and
Georgia Department of Community Health.
|
|
|
|
10-Q
|
|
October
24, 2006
|
|
10.3
|
|
|
|
|
|
|
|
|
|
|
|
10.1f
|
|
Notice
of Renewal for fiscal year 2008 between Peach State Health Plan, Inc. and
Georgia Department of Community Health.
|
|
|
|
10-Q
|
|
July
24, 2007
|
|
10.4
|
|
|
|
|
|
|
|
|
|
|
|
10.1g
|
|
Notice
of Renewal for fiscal year 2009 between Peach State Health Plan, Inc. and
Georgia Department of Community Health.
|
|
|
|
10-Q
|
|
July
22, 2008
|
|
10.1
|
|
|
|
|
|
|
|
|
|
|
|
10.2
|
|
Contract
between the Texas Health and Human Services Commission and Superior
HealthPlan, Inc.
|
|
|
|
10-K
|
|
February
24, 2006
|
|
10.5
|
|
|
|
|
|
|
|
|
|
|
|
10.2a
|
|
Amendment
F (Version 1.6) to Contract between the Texas Health and Human Services
Commission and Superior HealthPlan, Inc.
|
|
|
|
10-K
|
|
February
23, 2007
|
|
10.4a
|
|
|
|
|
|
|
|
|
|
|
|
10.2b
|
|
Amendment
G (Version 1.7) to Contract between the Texas Health and Human Services
Commission and Superior HealthPlan, Inc.
|
|
|
|
10-Q
|
|
July
24, 2007
|
|
10.2
|
|
|
|
|
|
|
|
|
|
|
|
10.2c
|
|
Amendment
H (Version 1.8) to Contract between the Texas Health and Human Services
Commission and Superior HealthPlan, Inc.
|
|
|
|
10-Q
|
|
October
23, 2007
|
|
10.1
|
|
|
|
|
|
|
|
|
|
|
|
10.2d
|
|
Amendment
I (Version 1.9) to Contract between the Texas Health and Human Services
Commission and Superior HealthPlan, Inc.
|
|
|
|
10-K
|
|
February
23, 2008
|
|
10.2d
|
|
|
|
|
|
|
|
|
|
|
|
10.2e
|
|
Amendment
J (Version 1.10) to Contract between the Texas Health and Human Services
Commission and Superior HealthPlan, Inc.
|
|
|
|
10-Q
|
|
April
22, 2008
|
|
10.1
|
|
|
|
|
|
|
|
|
|
|
|
10.2f
|
|
Amendment
K (Version 1.11) to Contract between the Texas Health and Human Services
Commission and Superior HealthPlan, Inc.
|
|
|
|
10-Q
|
|
October
28, 2008
|
|
10.1
|
|
|
|
|
|
|
|
|
|
|
|
10.3
|
*
|
1996
Stock Plan of Centene Corporation, shares which are registered on Form S-8
– File Number 333-83190
|
|
|
|
S-1
|
|
October
9, 2001
|
|
10.9
|
|
|
|
|
|
|
|
|
|
|
|
10.4
|
*
|
1998
Stock Plan of Centene Corporation, shares which are registered on Form S-8
– File number 333-83190
|
|
|
|
S-1
|
|
October
9, 2001
|
|
10.10
|
|
|
|
|
|
|
|
|
|
|
|
10.5
|
*
|
1999
Stock Plan of Centene Corporation, shares which are registered on Form S-8
– File Number 333-83190
|
|
|
|
S-1
|
|
October
9, 2001
|
|
10.11
|
|
|
|
|
|
|
|
|
|
|
|
10.6
|
*
|
2000
Stock Plan of Centene Corporation, shares which are registered on Form S-8
– File Number 333-83190
|
|
|
|
S-1
|
|
October
9, 2001
|
|
10.12
|
|
|
|
|
|
|
|
|
|
|
|
10.7
|
*
|
2002
Employee Stock Purchase Plan of Centene Corporation, shares which are
registered on Form S-8 – File Number 333-90976
|
|
|
|
10-Q
|
|
April
29, 2002
|
|
10.5
|
|
|
|
|
|
|
|
|
|
|
|
10.7a
|
*
|
First
Amendment to the 2002 Employee Stock Purchase Plan
|
|
|
|
10-K
|
|
February
24, 2005
|
|
10.9a
|
|
|
|
|
|
|
|
|
|
|
|
10.7b
|
*
|
Second
Amendment to the 2002 Employee Stock Purchase Plan
|
|
|
|
10-K
|
|
February
24, 2006
|
|
10.10b
|
|
|
|
|
|
|
|
|
|
|
|
10.8
|
*
|
2003
Stock Incentive Plan, as amended
|
|
|
|
8-K
|
|
April
25, 2008
|
|
10.1
|
|
|
|
|
|
|
|
|
|
|
|
10.9
|
*
|
Centene
Corporation Non-Employee Directors Deferred Stock Compensation
Plan
|
|
|
|
10-Q
|
|
October
25, 2004
|
|
10.1
|
|
|
|
|
|
|
|
|
|
|
|
10.9a
|
*
|
First
Amendment to the Non-Employee Directors Deferred Stock Compensation
Plan
|
|
|
|
10-K
|
|
February
24, 2006
|
|
10.12a
|
|
|
|
|
|
|
|
|
|
|
|
10.10
|
*
|
Centene
Corporation Employee Deferred Compensation Plan
|
|
|
|
10-Q
|
|
April
24, 2007
|
|
10.4
|
|
|
|
|
|
|
|
|
|
|
|
10.11
|
*
|
Centene
Corporation Amended and Restated 2003 Stock Incentive Plan
|
|
|
|
8-K
|
|
April
26, 2007
|
|
10.1
|
|
|
|
|
|
|
|
|
|
|
|
10.12
|
*
|
Centene
Corporation 2007 Long-Term Incentive Plan
|
|
|
|
8-K
|
|
April
26, 2007
|
|
10.2
|
|
|
|
|
|
|
|
|
|
|
|
10.13
|
*
|
Executive
Employment Agreement between Centene Corporation and Michael
F. Neidorff, dated November 8, 2004
|
|
|
|
8-K
|
|
November
9, 2004
|
|
10.1
|
|
|
|
|
|
|
|
|
|
|
|
10.13a
|
*
|
Amendment
No. 1 to Executive Employment Agreement between Centene Corporation and
Michael F. Neidorff.
|
|
|
|
10-Q
|
|
October
28, 2008
|
|
10.2
|
|
|
|
|
|
|
|
|
|
|
|
10.14
|
*
|
Form
of Executive Severance and Change in Control Agreement
|
|
|
|
10-Q
|
|
October
28, 2008
|
|
10.3
|
|
|
|
|
|
|
|
|
|
|
|
10.15
|
*
|
Form
of Restricted Stock Unit Agreement
|
|
|
|
10-Q
|
|
October
28, 2008
|
|
10.4
|
|
|
|
|
|
|
|
|
|
|
|
10.16
|
*
|
Form
of Non-statutory Stock Option Agreement (Non-Employees)
|
|
|
|
8-K
|
|
July
28, 2005
|
|
10.3
|
|
|
|
|
|
|
|
|
|
|
|
10.17
|
*
|
Form
of Non-statutory Stock Option Agreement (Employees)
|
|
|
|
10-Q
|
|
October
28, 2008
|
|
10.5
|
|
|
|
|
|
|
|
|
|
|
|
10.18
|
*
|
Form
of Non-statutory Stock Option Agreement (Directors)
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.19
|
*
|
Form
of Incentive Stock Option Agreement
|
|
|
|
10-Q
|
|
October
28, 2008
|
|
10.6
|
|
|
|
|
|
|
|
|
|
|
|
10.20
|
*
|
Form
of Stock Appreciation Right Agreement
|
|
|
|
8-K
|
|
July
28, 2005
|
|
10.6
|
|
|
|
|
|
|
|
|
|
|
|
10.21
|
*
|
Form
of Restricted Stock Agreement
|
|
|
|
10-Q
|
|
October
25, 2005
|
|
10.8
|
|
|
|
|
|
|
|
|
|
|
|
10.22
|
*
|
Form
of Performance Based Restricted Stock Unit Agreement #1
|
|
|
|
10-Q
|
|
October
28, 2008
|
|
10.7
|
|
|
|
|
|
|
|
|
|
|
|
10.23
|
*
|
Form
of Performance Based Restricted Stock Unit Agreement #2
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.24
|
*
|
Form
of Long Term Incentive Plan Agreement
|
|
|
|
8-K
|
|
February
7, 2008
|
|
10.1
|
|
|
|
|
|
|
|
|
|
|
|
10.25
|
|
Credit
Agreement dated as of September 14, 2004 among Centene Corporation, the
various financial institutions party hereto and LaSalle Bank National
Association
|
|
|
|
10-Q
|
|
October
25, 2004
|
|
10.2
|
|
|
|
|
|
|
|
|
|
|
|
10.25a
|
|
Amendment
No. 2 to Credit Agreement dated as of September 14, 2004 among Centene
Corporation, the various financial institutions party hereto and LaSalle
Bank National Association
|
|
|
|
10-Q
|
|
October
25, 2005
|
|
10.11
|
|
|
|
|
|
|
|
|
|
|
|
10.25b
|
|
Amendment
No. 3 to Credit Agreement dated as of September 14, 2004 among Centene
Corporation, the various financial institutions party hereto and LaSalle
Bank National Association
|
|
|
|
10-K
|
|
February
24, 2006
|
|
10.22b
|
|
|
|
|
|
|
|
|
|
|
|
10.25c
|
|
Amendment
No. 4 to Credit Agreement dated as of September 14, 2004 among Centene
Corporation, the various financial institutions party hereto and LaSalle
Bank National Association
|
|
|
|
10-Q
|
|
July
25, 2006
|
|
10.2
|
|
|
|
|
|
|
|
|
|
|
|
10.25d
|
|
Amendment
No. 5 to Credit Agreement dated as of September 14, 2004 among Centene
Corporation, the various financial institutions party hereto and LaSalle
Bank National Association
|
|
|
|
10-Q
|
|
October
24, 2006
|
|
10.1
|
|
|
|
|
|
|
|
|
|
|
|
10.25e
|
|
Amendment
No. 6 to Credit Agreement dated as of September 14, 2004 among Centene
Corporation, the various financial institutions party hereto and LaSalle
Bank National Association
|
|
|
|
10-K
|
|
February
23, 2008
|
|
10.23e
|
|
|
|
|
|
|
|
|
|
|
|
10.26
|
*
|
Summary
of Board of Director Compensation
|
|
|
|
10-K
|
|
February
23, 2008
|
|
10.24
|
|
|
|
|
|
|
|
|
|
|
|
10.27
|
*
|
Summary
of Compensatory Arrangements with Executive Officers
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12.1
|
|
Computation
of ratio of earnings to fixed charges
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
|
|
List
of subsidiaries
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
|
|
Consent
of Independent Registered Public Accounting Firm incorporated by reference
in each prospectus constituting part of the Registration Statements on
Form S-8 (File Numbers 333-108467, 333-90976 and
333-83190).
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X
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31.1
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Certification
Pursuant to Rule 13a-14(a) and 15d-14(a) of the Exchange Act, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Chief Executive
Officer)
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X
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31.2
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Certification
Pursuant to Rule 13a-14(a) and 15d-14(a) of the Exchange Act, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Chief Financial
Officer)
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X
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32.1
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Certification
Pursuant to 18 U.S.C. Section 1350 (Chief Executive
Officer)
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X
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32.2
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Certification
Pursuant to 18 U.S.C. Section 1350 (Chief Financial
Officer)
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X
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1
SEC File No. 001-31826 (for filings prior to October 14, 2003, the
Registrant’s SEC File No. was 000-33395).
*
Indicates a management contract or compensatory plan or
arrangement.
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Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, as of February 23,
2009.
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CENTENE
CORPORATION
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By:
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/s/
MICHAEL
F. NEIDORFF
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Michael
F. Neidorff
Chairman
and Chief Executive Officer
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Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities as indicated, as of February 23, 2009.
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Signature
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Title
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/s/ MICHAEL F. NEIDORFF
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Chairman
and Chief Executive Officer
(principal
executive officer)
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/s/ ERIC R. SLUSSER
Eric
R. Slusser
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Executive
Vice President and Chief Financial Officer (principal financial
officer)
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/s/ JEFFREY A. SCHWANEKE
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Vice
President, Corporate Controller and Chief Accounting Officer (principal
accounting officer)
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/s/ STEVE BARTLETT
Steve
Bartlett
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Director
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/s/ ROBERT K. DITMORE
Robert
K. Ditmore
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Director
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/s/ FRED H. EPPINGER
Fred
H. Eppinger
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Director
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/s/ RICHARD A. GEPHARDT
Richard
A. Gephardt
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Director
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/s/ PAMELA A. JOSEPH
Pamela
A. Joseph
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Director
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/s/ JOHN R. ROBERTS
John
R. Roberts
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Director
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/s/ DAVID L. STEWARD
David
L. Steward
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Director
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/s/ TOMMY G. THOMPSON
Tommy
G. Thompson
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Director
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