form10q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-Q
(Mark
One)
[X]
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
|
For the
quarterly period ended June 30, 2009
OR
[
]
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
|
For the
transition period from to
Commission
file number 001-31826
CENTENE
CORPORATION
(Exact
name of registrant as specified in its charter)
Delaware
|
42-1406317
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
incorporation
or organization)
|
Identification
Number)
|
|
|
7711
Carondelet Avenue
|
|
St.
Louis, Missouri
|
63105
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant’s
telephone number, including area code:
(314)
725-4477
Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days: T
Yes £
No
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). £ Yes £ No
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, 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 Exchange Act).
Yes £ No T
As of
July 17, 2009, the registrant had 45,357,834 shares of common stock
outstanding.
CENTENE
CORPORATION
QUARTERLY
REPORT ON FORM 10-Q
|
|
PAGE
|
|
|
|
Part
I
|
Financial
Information
|
Item
1.
|
Financial
Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PART
I
FINANCIAL
INFORMATION
ITEM
1. Financial
Statements.
CENTENE
CORPORATION AND SUBSIDIARIES
(In
thousands, except share data)
(Unaudited)
|
|
June
30,
2009
|
|
|
December
31,
2008
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents of continuing operations
|
|
$ |
382,700 |
|
|
$ |
370,999 |
|
Cash
and cash equivalents of discontinued operations
|
|
|
1,799 |
|
|
|
8,100 |
|
Total
cash and cash equivalents
|
|
|
384,499 |
|
|
|
379,099 |
|
Premium
and related receivables, net of allowance for uncollectible accounts of
$48 and $595, respectively
|
|
|
157,863 |
|
|
|
92,531 |
|
Short-term
investments, at fair value (amortized cost $60,749 and $108,469,
respectively)
|
|
|
61,217 |
|
|
|
109,393 |
|
Other
current assets
|
|
|
73,686 |
|
|
|
75,333 |
|
Current
assets of discontinued operations other than cash
|
|
|
8,499 |
|
|
|
9,987 |
|
Total
current assets
|
|
|
685,764 |
|
|
|
666,343 |
|
Long-term
investments, at fair value (amortized cost $387,166 and $329,330,
respectively)
|
|
|
394,395 |
|
|
|
332,411 |
|
Restricted
deposits, at fair value (amortized cost $14,436 and $9,124,
respectively)
|
|
|
14,526 |
|
|
|
9,254 |
|
Property,
software and equipment, net of accumulated depreciation of $88,469 and
$74,194, respectively
|
|
|
194,277 |
|
|
|
175,858 |
|
Goodwill
|
|
|
218,121 |
|
|
|
163,380 |
|
Intangible
assets, net
|
|
|
22,714 |
|
|
|
17,575 |
|
Other
long-term assets
|
|
|
28,957 |
|
|
|
59,083 |
|
Long-term
assets of discontinued operations
|
|
|
27,455 |
|
|
|
27,248 |
|
Total
assets
|
|
$ |
1,586,209 |
|
|
$ |
1,451,152 |
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Medical
claims liability
|
|
$ |
394,787 |
|
|
$ |
373,037 |
|
Accounts
payable and accrued expenses
|
|
|
181,605 |
|
|
|
219,566 |
|
Unearned
revenue
|
|
|
62,958 |
|
|
|
17,107 |
|
Current
portion of long-term debt
|
|
|
243 |
|
|
|
255 |
|
Current
liabilities of discontinued operations
|
|
|
23,851 |
|
|
|
31,013 |
|
Total
current liabilities
|
|
|
663,444 |
|
|
|
640,978 |
|
Long-term
debt
|
|
|
288,513 |
|
|
|
264,637 |
|
Other
long-term liabilities
|
|
|
48,678 |
|
|
|
43,539 |
|
Long-term
liabilities of discontinued operations
|
|
|
557 |
|
|
|
726 |
|
Total
liabilities
|
|
|
1,001,192 |
|
|
|
949,880 |
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Common
stock, $.001 par value; authorized 100,000,000 shares; issued and
outstanding 45,344,717 and 45,071,179 shares, respectively
|
|
|
45 |
|
|
|
45 |
|
Additional
paid-in capital
|
|
|
273,029 |
|
|
|
263,835 |
|
Accumulated
other comprehensive income:
|
|
|
|
|
|
|
|
|
Unrealized
gain on investments, net of tax
|
|
|
5,081 |
|
|
|
3,152 |
|
Retained
earnings
|
|
|
313,924 |
|
|
|
275,236 |
|
Treasury
stock, at cost (2,369,133 and 2,083,415 shares,
respectively)
|
|
|
(46,405 |
) |
|
|
(40,996 |
) |
Total
Centene stockholders’ equity
|
|
|
545,674 |
|
|
|
501,272 |
|
Noncontrolling
interest
|
|
|
39,343 |
|
|
|
— |
|
Total
stockholders’ equity
|
|
|
585,017 |
|
|
|
501,272 |
|
Total
liabilities and stockholders’ equity
|
|
$ |
1,586,209 |
|
|
$ |
1,451,152 |
|
The
accompanying notes to the consolidated financial statements are an integral part
of these statements.
CENTENE
CORPORATION AND SUBSIDIARIES
(In
thousands, except share data)
(Unaudited)
|
Three
Months Ended
June
30,
|
|
Six
Months Ended
June
30,
|
|
|
2009
|
|
2008
|
|
2009
|
|
|
2008
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium
|
$
|
909,698
|
|
$
|
783,996
|
|
$
|
1,794,704
|
|
|
$
|
1,520,810
|
|
Service
|
|
21,591
|
|
|
18,466
|
|
|
45,440
|
|
|
|
38,996
|
|
Premium
and service revenues
|
|
931,289
|
|
|
802,462
|
|
|
1,840,144
|
|
|
|
1,559,806
|
|
Premium
tax
|
|
108,180
|
|
|
21,468
|
|
|
131,760
|
|
|
|
43,352
|
|
Total
revenues
|
|
1,039,469
|
|
|
823,930
|
|
|
1,971,904
|
|
|
|
1,603,158
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical
costs
|
|
755,706
|
|
|
650,878
|
|
|
1,495,046
|
|
|
|
1,260,252
|
|
Cost
of services
|
|
14,559
|
|
|
14,437
|
|
|
30,521
|
|
|
|
30,613
|
|
General
and administrative expenses
|
|
129,221
|
|
|
109,270
|
|
|
251,500
|
|
|
|
204,763
|
|
Premium
tax
|
|
108,548
|
|
|
21,468
|
|
|
132,490
|
|
|
|
43,352
|
|
Total
operating expenses
|
|
1,008,034
|
|
|
796,053
|
|
|
1,909,557
|
|
|
|
1,538,980
|
|
Earnings
from operations
|
|
31,435
|
|
|
27,877
|
|
|
62,347
|
|
|
|
64,178
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
and other income
|
|
4,418
|
|
|
5,434
|
|
|
8,031
|
|
|
|
13,016
|
|
Interest
expense
|
|
(4,160
|
)
|
|
(4,065
|
)
|
|
(8,146
|
)
|
|
|
(8,059
|
)
|
Earnings
from continuing operations, before income tax expense
|
|
31,693
|
|
|
29,246
|
|
|
62,232
|
|
|
|
69,135
|
|
Income
tax expense
|
|
11,789
|
|
|
11,363
|
|
|
22,634
|
|
|
|
26,319
|
|
Earnings
from continuing operations, net of income tax expense
|
|
19,904
|
|
|
17,883
|
|
|
39,598
|
|
|
|
42,816
|
|
Discontinued
operations, net of income tax (benefit) expense of $(196), $(116), $(356)
and $148, respectively
|
|
(485
|
)
|
|
320
|
|
|
(934
|
)
|
|
|
1,010
|
|
Net
earnings
|
|
19,419
|
|
|
18,203
|
|
|
38,664
|
|
|
|
43,826
|
|
Noncontrolling
interest (loss)
|
|
(811
|
)
|
|
―
|
|
|
(24
|
)
|
|
|
―
|
|
Net
earnings attributable to Centene Corporation
|
$
|
20,230
|
|
$
|
18,203
|
|
$
|
38,688
|
|
|
$
|
43,826
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
attributable to Centene Corporation common shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
from continuing operations, net of income tax expense
|
$
|
20,715
|
|
$
|
17,883
|
|
$
|
39,622
|
|
|
$
|
42,816
|
|
Discontinued
operations, net of income tax (benefit) expense
|
|
(485
|
)
|
|
320
|
|
|
(934
|
)
|
|
|
1,010
|
|
Net
earnings
|
$
|
20,230
|
|
$
|
18,203
|
|
$
|
38,688
|
|
|
$
|
43,826
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings (loss) per share attributable to Centene
Corporation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
$
|
0.48
|
|
$
|
0.41
|
|
$
|
0.92
|
|
|
$
|
0.99
|
|
Discontinued
operations
|
|
(0.01
|
)
|
|
0.01
|
|
|
(0.02
|
)
|
|
|
0.02
|
|
Earnings
per common share
|
$
|
0.47
|
|
$
|
0.42
|
|
$
|
0.90
|
|
|
$
|
1.01
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
$
|
0.47
|
|
$
|
0.40
|
|
$
|
0.90
|
|
|
$
|
0.96
|
|
Discontinued
operations
|
|
(0.01
|
)
|
|
0.01
|
|
|
(0.02
|
)
|
|
|
0.02
|
|
Earnings
per common share
|
$
|
0.46
|
|
$
|
0.41
|
|
$
|
0.88
|
|
|
$
|
0.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
43,001,157
|
|
|
43,375,944
|
|
|
43,034,390
|
|
|
|
43,457,076
|
|
Diluted
|
|
44,242,339
|
|
|
44,275,601
|
|
|
44,240,071
|
|
|
|
44,516,890
|
|
The
accompanying notes to the consolidated financial statements are an integral part
of these statements.
CENTENE
CORPORATION AND SUBSIDIARIES
(In
thousands, except share data)
(Unaudited)
|
|
Centene
Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury
Stock
|
|
|
|
|
|
|
|
|
|
|
$.001
Par
Value
Shares
|
|
|
Amt
|
|
|
Additional
Paid-in
Capital
|
|
|
Accumulated
Other
Comprehensive
Income
|
|
Retained
Earnings
|
|
$.001
Par
Value
Shares
|
|
Amt
|
|
Non
controlling
Interest
|
|
|
Total
|
|
Balance, December 31,
2008
|
|
45,071,179
|
|
|
$
|
45
|
|
|
$
|
263,835
|
|
|
$
|
3,152
|
|
$
|
275,236
|
|
2,083,415
|
|
$
|
(40,996)
|
|
$
|
—
|
|
|
$
|
501,272
|
|
Consolidation
of Access Health Solutions LLC
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
29,144
|
|
|
|
29,144
|
|
Consolidation
of Centene Center LLC
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
17,400
|
|
|
|
17,400
|
|
Comprehensive
Earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
38,688
|
|
—
|
|
|
—
|
|
|
(24)
|
|
|
|
38,664
|
|
Change
in unrealized investment gains, net of $1,322 tax
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,929
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
1,929
|
|
Total
comprehensive earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,593
|
|
Common
stock issued for employee stock compensation and employee stock purchase
plan
|
|
273,538
|
|
|
|
—
|
|
|
|
1,568
|
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
|
1,568
|
|
Common
stock repurchases
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
287,718
|
|
|
(5,447)
|
|
|
—
|
|
|
|
(5,447
|
)
|
Treasury
stock issued for compensation
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
(2,000)
|
|
|
38
|
|
|
|
|
|
|
38
|
|
Stock
compensation expense
|
|
—
|
|
|
|
—
|
|
|
|
7,611
|
|
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
7,611
|
|
Excess
tax benefits from stock compensation
|
|
—
|
|
|
|
—
|
|
|
|
15
|
|
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
15
|
|
Conversion
fee1
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
(5,428)
|
|
|
|
(5,428
|
)
|
Dividend
paid to noncontrolling interest
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
(1,749)
|
|
|
|
(1,749
|
)
|
Balance, June 30,
2009
|
|
45,344,717
|
|
|
$
|
45
|
|
|
$
|
273,029
|
|
|
$
|
5,081
|
|
$
|
313,924
|
|
2,369,133
|
|
$
|
(46,405)
|
|
$
|
39,343
|
|
|
$
|
585,017
|
|
(1)
|
Conversion
fee represents additional purchase price to noncontrolling holders of
Access Health Solutions LLC for the transfer of membership to
the Company’s wholly-owned subsidiary, Sunshine State Health Plan,
Inc.
|
The
accompanying notes to the consolidated financial statements are an integral part
of these statements.
CENTENE
CORPORATION AND SUBSIDIARIES
(In
thousands)
(Unaudited)
|
|
Six Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
earnings
|
|
$ |
38,664 |
|
|
$ |
43,826 |
|
Adjustments
to reconcile net earnings to net cash provided by operating
activities
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
20,892 |
|
|
|
16,229 |
|
Stock
compensation expense
|
|
|
7,611 |
|
|
|
7,839 |
|
Loss
(gain) on sale of investments, net
|
|
|
450 |
|
|
|
(201 |
) |
|
|
|
1,512 |
|
|
|
11,879 |
|
Changes
in assets and liabilities —
|
|
|
|
|
|
|
|
|
Premium
and related receivables
|
|
|
(23,327
|
) |
|
|
(23,144
|
) |
|
|
|
1,357 |
|
|
|
(4,294
|
) |
|
|
|
(608
|
) |
|
|
(1,671
|
) |
Medical
claims liabilities
|
|
|
16,369 |
|
|
|
27,316 |
|
|
|
|
44,129 |
|
|
|
(38,753
|
) |
Accounts
payable and accrued expenses
|
|
|
(48,653
|
) |
|
|
45,907 |
|
Other
operating activities
|
|
|
3,723 |
|
|
|
1,743 |
|
Net
cash provided by operating activities
|
|
|
62,119 |
|
|
|
86,676 |
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
(29,833
|
) |
|
|
(34,581
|
) |
|
|
|
(415,052
|
) |
|
|
(172,873
|
) |
Sales
and maturities of investments
|
|
|
377,320 |
|
|
|
210,277 |
|
Investments
in acquisitions, net of cash acquired, and investment in equity
method investee
|
|
|
(7,621
|
) |
|
|
(7,818
|
) |
Net
cash used in investing activities
|
|
|
(75,186
|
) |
|
|
(4,995
|
) |
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from exercise of stock options
|
|
|
1,109 |
|
|
|
3,029 |
|
|
|
|
288,000 |
|
|
|
56,005 |
|
Payment
of long-term debt
|
|
|
(264,135
|
) |
|
|
(41,287
|
) |
Dividend
to noncontrolling interest
|
|
|
(1,749
|
) |
|
|
― |
|
Contribution
from noncontrolling interest
|
|
|
1,042 |
|
|
|
― |
|
Excess
tax benefits from stock compensation
|
|
|
15 |
|
|
|
2,792 |
|
|
|
|
(5,447
|
) |
|
|
(13,316
|
) |
|
|
|
(368
|
) |
|
|
― |
|
Net
cash provided by financing activities
|
|
|
18,467 |
|
|
|
7,223 |
|
Net
increase in cash and cash equivalents
|
|
|
5,400 |
|
|
|
88,904 |
|
Cash and cash
equivalents, beginning of period
|
|
|
379,099 |
|
|
|
268,584 |
|
Cash and cash
equivalents, end of period
|
|
$ |
384,499 |
|
|
$ |
357,488 |
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
$ |
7,658 |
|
|
$ |
7,590 |
|
|
|
$ |
31,512 |
|
|
$ |
15,966 |
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of non-cash investing and financing
activities:
|
|
|
|
|
|
|
|
|
Contribution
from noncontrolling interest
|
|
$ |
5,107 |
|
|
$ |
― |
|
The
accompanying notes to the consolidated financial statements are an integral part
of these statements.
CENTENE
CORPORATION AND SUBSIDIARIES
(Dollars
in thousands, except share data)
(Unaudited)
1. Organization
and Operations
|
Centene
Corporation, or the Company, is a multi-line healthcare enterprise operating in
two segments: Medicaid Managed Care and Specialty Services. The
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 CHIP, Foster Care,
Medicare Special Needs Plans and the Supplemental Security Income Program, also
known as the Aged, Blind or Disabled program, or ABD. The Specialty
Services segment provides related services, including behavioral
health, life and health management, long-term care programs, managed
vision, telehealth services, 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 Specialty Services segment also provides
a full range of healthcare solutions for individuals and the rising number of
uninsured Americans.
The
unaudited interim financial statements herein have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission, or SEC.
The accompanying interim financial statements have been prepared under the
presumption that users of the interim financial information have either read or
have access to the audited financial statements for the fiscal year ended
December 31, 2008. Accordingly, footnote disclosures, which would
substantially duplicate the disclosures contained in the December 31, 2008
audited financial statements, have been omitted from these interim financial
statements where appropriate. In the opinion of management, these
financial statements reflect all adjustments, consisting only of normal
recurring adjustments, which are necessary for a fair presentation of the
results of the interim periods presented.
Beginning
January 1, 2009, the Company has presented the investment in Access Health
Solutions LLC, or Access, as a consolidated subsidiary in its financial
statements. Prior to January 1, 2009, Access had been recorded under
the equity method of accounting. We recently determined that we
should have accounted for our investment in Access as a consolidated subsidiary
since July 1, 2007. The impact of the difference in presentation is
not material to our financial statements for any prior period. As a
result of the presentation of Access as a consolidated subsidiary beginning
January 1, 2009, cash flows from investing activities increased by by $4,839 to
reflect the cash held by Access on January 1, 2009. In accordance
with Financial Accounting Standards Board, or FASB, Statement No. 160, Noncontrolling Interests in
Consolidated Financial Statements (Accounting Standards Codification, or
ASC, subtopic 810-10, Consolidation), the noncontrolling
interest of Access is presented within stockholders’ equity.
Certain
2008 amounts in the consolidated financial statements have been reclassified to
conform to the 2009 presentation. These reclassifications have no effect on net
earnings or stockholders’ equity as previously reported. Any material
subsequent events have been considered for disclosure through the filing date of
this Form 10-Q.
3.
Recent Accounting Pronouncements
Effective January 1, 2009,
the Company adopted FASB Statement No.141 (revised 2007), Business
Combinations (ASC 805-10, Business Combinations).
The changes from the previous guidance include, but are not limited to:
(1) acquisition costs are recognized separately from the acquisition;
(2) known contractual contingencies at the time of the acquisition are
considered part of the liabilities acquired and and measured at their fair
value; all other contingencies are 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 is recognized and measured at the time of the
acquisition; and (4) business combinations achieved in stages (step
acquisitions) recognize the identifiable assets and liabilities, as well as
noncontrolling interests, in the acquiree, at the full amounts of their fair
values. The adoption of FASB Statement No. 141 (revised 2007) had an
immaterial impact on the Company.
Effective
January 1, 2009, the Company adopted FASB Statement No. 160, Noncontrolling Interests in
Consolidated Financial Statements (ASC 810-10, Consolidation), 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 existed in accounting
by requiring transactions between an entity and noncontrolling interests be
treated as equity transactions. As discussed in Note 2, Basis of Presentation, and
Note 7, Centene Center
LLC, the noncontrolling interest in Access and Centene Center LLC is
presented within stockholders’ equity.
In April
2009, FASB issued Staff Position, or FSP, No. FAS 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments, or the FSP (ASC 320-10, Investments – Debt and Equity
Securities). The FSP applies to fixed maturity securities only
and requires separate display of losses related to credit deterioration and
losses related to other market factors. When an entity does not
intend to sell the security and it is more likely than not that an entity will
not have to sell the security before recovery of its cost basis, it must
recognize the credit component of an other-than-temporary impairment in earnings
and the remaining portion in other comprehensive income. The adoption
of the FSP did not have a material effect on the Company’s financial
statements.
In June
2009, the FASB issued FASB Statement No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles
(ASC 105-10), which approves the Accounting Standards
Codification, or ASC, as the single source of authoritative United States
accounting and reporting standards applicable for all non-governmental entities.
The ASC, which changes the referencing of financial standards, is effective for
interim or annual financial periods ending after September 15, 2009. To
facilitate the transition to the new ASC references, the Company has included
the new codification references in addition to the original GAAP reference
throughout this filing. As the ASC is not intended to change or alter
existing US GAAP, it is not expected to have any impact on the Company’s
consolidated financial position or results of operations.
In
June 2009, the FASB issued FASB Statement No. 167, Amendments to FASB Interpretation
No. 46R, which amends FASB Interpretation No. 46 (revised
December 2003), Consolidation of Variable Interest
Entities, to require an analysis to determine whether a variable interest
gives the entity a controlling financial interest in a variable interest entity.
This statement requires an ongoing reassessment and eliminates the quantitative
approach previously required for determining whether an entity is the primary
beneficiary. This statement is effective for fiscal years beginning after
November 15, 2009 and early adoption is prohibited. The Company is
currently evaluating the impact of adopting this standard on the consolidated
financial statements and related 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.
4.
Discontinued Operations: University Health Plans, Inc.
In
November 2008, the Company announced its intention to sell certain assets of its
New Jersey health plan, University Health Plans, Inc., or UHP. 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. The total revenue associated with UHP included in results
from discontinued operations was $35.1 million and $36.1 million for the three
months ended June 30, 2009 and 2008, respectively, and $72.1 million and $73.5
million for the six months ended June 30, 2009 and 2008,
respectively. Additional information regarding the sale of UHP is
included in Note 13, Contingencies.
In 2008,
the Company conducted an impairment analysis of the assets of
UHP. The impairment analysis resulted in an impairment charge
associated with property, software and equipment of $2,546. During
the six months ending June 30, 2009, the Company incurred additional
restructuring costs primarily related to employee retention
programs. In total, the Company has incurred $2,464 of restructuring
costs. The change in the restructuring cost liability for UHP is
summarized as follows:
Balance,
December 31, 2008
|
$
|
1,110
|
Incurred
|
|
1,354
|
Paid
|
|
(200)
|
Balance,
June 30, 2009
|
$
|
2,264
|
5.
Acquisitions
2009
Acquisitions
·
|
Access. In
July 2007, the Company acquired a 49% ownership interest in Access, a
Medicaid managed care entity in Florida. The Company accounted
for its investment in Access using the equity method of accounting through
December 31, 2008. During the quarter ended March 31, 2009, the
Company began presenting its investment in Access as a consolidated
subsidiary in our financial statements. The consolidation of Access
resulted in goodwill of approximately $44,600, and other identified
intangible assets of approximately $5,400. In 2009, the
Company paid an additional $5,428 conversion fee for the transfer of
membership from Access to the Company’s wholly-owned subsidiary, Sunshine
State Health Plan, Inc.
|
·
|
Additional 2009
Acquisitions. The Company acquired assets
of the following entities: Pediatric Associates LLC, effective
February 2009, and AMERIGROUP Community Care of South Carolina, Inc.,
effective March 2009. The Company paid a total of
approximately $10,000 in cash for these acquisitions. Goodwill
of approximately $8,500 and other identifiable intangible assets of
approximately $1,500 were included in the Medicaid Managed Care
segment, all of which is deductible for income tax
purposes.
|
2008
Acquisitions
·
|
Celtic Insurance
Company. On July 1, 2008, the Company acquired Celtic
Insurance Company, or Celtic. 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. Goodwill of $24,300 and other identifiable intangible assets
of $8,600 were included in the Specialty Services
segment.
|
6.
Goodwill
The
following table summarizes the changes in goodwill by operating
segment:
|
|
Medicaid
Managed Care
|
|
|
Specialty
Services
|
|
|
Total
|
|
Balance
as of December 31, 2008
|
|
$ |
51,548 |
|
|
$ |
111,832 |
|
|
$ |
163,380 |
|
Acquisitions
|
|
|
53,049 |
|
|
|
1,692 |
|
|
|
54,741 |
|
Balance
as of June 30, 2009
|
|
$ |
104,597 |
|
|
$ |
113,524 |
|
|
$ |
218,121 |
|
Increases
to goodwill in 2009 were related to the presentation of Access as a consolidated
subsidiary and the acquisitions discussed in Note 5, Acquisitions.
7.
Centene Center LLC
In June
2009, the Company executed an agreement as a 50% joint venture partner in a real
estate development entity, Centene Center LLC, related to the construction of a
new corporate headquarters facility. Centene Center LLC is a variable
interest entity, or VIE, as defined by FIN 46R (ASC 810-10, Consolidation). When
evaluating whether the Company is the primary beneficiary of a VIE and must
therefore consolidate the entity, the Company performs a qualitative analysis
that considers the design of the VIE, the nature of our involvement and the
variable interest held by other parties. The Company concluded it was
the primary beneficiary and, accordingly, the Company’s consolidated financial
statements include the accounts of Centene Center LLC. The Company’s
variable interest in Centene Center LLC includes an equity investment of
$17,400. Centene Center LLC has posted a $1,750 letter of credit to a
tenant of the development, collateralized by a portion of the entity’s cash
balances. The assets and liabilities of Centene Center LLC as of June
30, 2009 are as follows (on a 100% basis):
|
|
Centene
Center LLC
|
|
Total
Assets
|
|
$ |
57,705 |
|
Total
Liabilities
|
|
|
22,905 |
|
|
|
|
|
|
Equity
|
|
|
|
|
Centene
Corporation (50% ownership)
|
|
$ |
17,400 |
|
Joint
venture partners (50% ownership)
|
|
|
17,400 |
|
Total
equity
|
|
$ |
34,800 |
|
As part
of financing the real estate development, the joint venture executed a $95,000
construction loan due June 1, 2011. The Company and its development
partners have guaranteed up to $65,000 each associated with this construction
loan. As of June 30, 2009, there were no amounts outstanding under
this loan. Additional information regarding the construction loan is
included in Note 10, Debt.
8. Short-term and Long-term
Investments and Restricted Deposits
Short-term
and long-term investments and restricted deposits available for sale by
investment type consist of the following:
|
|
June
30, 2009
|
|
|
December
31, 2008
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
U.S.
Treasury securities
|
|
$ |
7,290 |
|
|
$ |
96 |
|
|
$ |
(1 |
) |
|
$ |
7,385 |
|
|
$ |
4,054 |
|
|
$ |
130 |
|
|
$ |
— |
|
|
$ |
4,184 |
|
Corporate
securities
|
|
|
34,867 |
|
|
|
427 |
|
|
|
(242
|
) |
|
|
35,052 |
|
|
|
47,733 |
|
|
|
74 |
|
|
|
(1,154
|
) |
|
|
46,653 |
|
State
and municipal securities
|
|
|
392,160 |
|
|
|
8,222 |
|
|
|
(480
|
) |
|
|
399,902 |
|
|
|
360,638 |
|
|
|
5,964 |
|
|
|
(11
|
) |
|
|
366,591 |
|
Equity
securities
|
|
|
9,521 |
|
|
|
192 |
|
|
|
(427
|
) |
|
|
9,286 |
|
|
|
7,183 |
|
|
|
17 |
|
|
|
(885
|
) |
|
|
6,315 |
|
Money
market funds
|
|
|
4,018 |
|
|
|
— |
|
|
|
— |
|
|
|
4,018 |
|
|
|
12,988 |
|
|
|
— |
|
|
|
— |
|
|
|
12,988 |
|
Life
insurance contracts
|
|
|
14,495 |
|
|
|
— |
|
|
|
— |
|
|
|
14,495 |
|
|
|
14,327 |
|
|
|
— |
|
|
|
— |
|
|
|
14,327 |
|
Total
|
|
$ |
462,351 |
|
|
$ |
8,937 |
|
|
$ |
(1,150 |
) |
|
$ |
470,138 |
|
|
$ |
446,923 |
|
|
$ |
6,185 |
|
|
$ |
(2,050 |
) |
|
$ |
451,058 |
|
The
Company monitors investments for other than temporary
impairment. Certain investments have experienced a decline in fair
value due to changes in credit quality, market interest rates and/or general
economic conditions. Based on management’s intent and ability to not
sell these investments prior to their anticipated recovery, no other than
temporary impairment has been recorded in the six months ended June 30,
2009. Investments in a gross unrealized loss position at June 30,
2009 and December 31, 2008 are as follows:
|
June
30, 2009
|
|
December
31, 2008
|
|
|
Less
Than 12 Months
|
|
12
Months or More
|
|
Less
Than 12 Months
|
|
12
Months or More
|
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
U.S.
Treasury securities
|
|
$ |
(1 |
) |
|
$ |
540 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
314 |
|
|
$ |
— |
|
|
$ |
— |
|
Corporate
securities
|
|
|
(235 |
) |
|
|
2,206 |
|
|
|
(7 |
) |
|
|
125 |
|
|
|
(1,071 |
) |
|
|
20,898 |
|
|
|
(83 |
) |
|
|
2,072 |
|
State
and municipal securities
|
|
|
(479 |
) |
|
|
79,495 |
|
|
|
(1 |
) |
|
|
100 |
|
|
|
(9 |
) |
|
|
3,798 |
|
|
|
(2 |
) |
|
|
101 |
|
Equity
securities
|
|
|
(427 |
) |
|
|
2,313 |
|
|
|
— |
|
|
|
— |
|
|
|
(885 |
) |
|
|
2,658 |
|
|
|
— |
|
|
|
— |
|
Total
|
|
$ |
(1,142 |
) |
|
$ |
84,554 |
|
|
$ |
(8 |
) |
|
$ |
225 |
|
|
$ |
(1,965 |
) |
|
$ |
27,668 |
|
|
$ |
(85 |
) |
|
$ |
2,173 |
|
The
contractual maturities of short-term and long-term investments and restricted
deposits as of June 30, 2009, are as follows:
|
|
Investments
|
|
|
Restricted
Deposits
|
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
One
year or less
|
|
$ |
60,749 |
|
|
$ |
61,217 |
|
|
$ |
7,549 |
|
|
$ |
7,552 |
|
One
year through five years
|
|
|
287,668 |
|
|
|
294,969 |
|
|
|
6,887 |
|
|
|
6,974 |
|
Five
years through ten years
|
|
|
46,351 |
|
|
|
46,482 |
|
|
|
— |
|
|
|
— |
|
Greater
than ten years
|
|
|
53,147 |
|
|
|
52,944 |
|
|
|
— |
|
|
|
— |
|
Total
|
|
$ |
447,915 |
|
|
$ |
455,612 |
|
|
$ |
14,436 |
|
|
$ |
14,526 |
|
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 |
|
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’s gross recorded realized gains and losses on investments were as
follows:
|
Three
Months Ended June 30,
|
|
Six
Months Ended June 30,
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Gains
|
|
$ |
173 |
|
|
$ |
355 |
|
|
$ |
553 |
|
|
$ |
572 |
|
Losses
|
|
|
(164 |
) |
|
|
(182 |
) |
|
|
(983 |
) |
|
|
(371 |
) |
Additional
information regarding investments is included in Note 9, Fair Value
Measurements.
9.
Fair Value Measurements
|
The
Company adopted FASB Statement No. 157, Fair Value Measurements (ASC 820-10, Fair Value Measurements and
Disclosures), for financial assets and liabilities on January 1,
2008. Under FASB Statement No. 157, 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 June 30, 2009 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
|
|
$ |
7,385 |
|
|
$ |
― |
|
|
$ |
― |
|
|
$ |
7,385 |
|
Corporate
securities
|
|
|
32,858 |
|
|
|
― |
|
|
|
― |
|
|
|
32,858 |
|
State
and municipal securities
|
|
|
399,901 |
|
|
|
― |
|
|
|
― |
|
|
|
399,901 |
|
Equity
securities
|
|
|
3,372 |
|
|
|
― |
|
|
|
― |
|
|
|
3,372 |
|
Total
|
|
$ |
443,516 |
|
|
$ |
― |
|
|
$ |
― |
|
|
$ |
443,516 |
|
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 was $26,622 as of June 30, 2009.
10.
Debt
Debt
consists of the following:
|
|
June
30, 2009
|
|
|
December
31, 2008
|
|
$175,000
senior notes
|
|
$ |
175,000 |
|
|
$ |
175,000 |
|
$300,000
revolving credit agreement
|
|
|
87,000 |
|
|
|
63,000 |
|
$20,500
revolving loan agreement
|
|
|
20,364 |
|
|
|
20,364 |
|
Capital
leases
|
|
|
6,392 |
|
|
|
6,528 |
|
Joint
venture construction loan
|
|
|
― |
|
|
|
― |
|
Total
debt
|
|
|
288,756 |
|
|
|
264,892 |
|
Less
current maturities
|
|
|
(243
|
) |
|
|
(255
|
) |
Long-term
debt
|
|
$ |
288,513 |
|
|
$ |
264,637 |
|
$20,500
Revolving Loan Agreement
In July
2009, the Company paid off the $20,364 balance of this loan agreement and
refinanced the balance with another bank. As a result of this
refinancing subsequent to June 30, 2009, the entire $20,364 is classified as
long-term debt.
Joint
Venture Construction Loan
In June
2009, the Company and its development partners executed a $95,000 construction
loan associated with the construction of a real estate development to include
the Company’s corporate headquarters. The construction loan is due
June 1, 2011 and bears interest at the LIBOR rate plus 4%. The loan
may be extended for two additional one year terms. The Company and
its development partners have each guaranteed up to $65,000 associated with the
construction loan. The agreement contains non-financial and financial
covenants, including requirements for the Company to maintain a specified net
worth. As of June 30, 2009, there were no amounts outstanding under
the construction loan.
11. Earnings
Per Share
The
following table sets forth the calculation of basic and diluted net earnings per
common share:
|
|
Three
Months Ended June
30,
|
|
Six
Months Ended June
30,
|
|
|
|
2009
|
|
|
2008
|
|
2009
|
|
|
2008
|
|
Earnings
(loss) attributable to Centene Corporation common
shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
from continuing operations, net of tax
|
|
$
|
20,715
|
|
|
$
|
17,883
|
|
$
|
39,622
|
|
|
$
|
42,816
|
|
Discontinued
operations, net of tax
|
|
|
|
)
|
|
|
320
|
|
|
|
)
|
|
|
1,010
|
|
Net
earnings
|
|
$
|
20,230
|
|
|
$
|
18,203
|
|
$
|
38,688
|
|
|
$
|
43,826
|
|
Shares
used in computing per share amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding
|
|
|
43,001,157
|
|
|
|
43,375,944
|
|
|
43,034,390
|
|
|
|
43,457,076
|
|
Common
stock equivalents (as determined by applying the treasury stock
method)
|
|
|
1,241,182
|
|
|
|
899,657
|
|
|
1,205,681
|
|
|
|
1,059,814
|
|
Weighted
average number of common shares and potential dilutive common shares
outstanding
|
|
|
44,242,339
|
|
|
|
44,275,601
|
|
|
44,240,071
|
|
|
|
44,516,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings (loss) per share attributable to Centene
Corporation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.48
|
|
|
|
0.41
|
|
|
0.92
|
|
|
|
0.99
|
|
|
|
|
(0.01
|
|
|
|
0.01
|
|
|
(0.02
|
|
|
|
0.02
|
|
Earnings
per common share
|
|
|
0.47
|
|
|
|
0.42
|
|
|
0.90
|
|
|
|
1.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.47
|
|
|
|
0.40
|
|
|
0.90
|
|
|
|
0.96
|
|
|
|
|
(0.01
|
|
|
|
0.01
|
|
|
(0.02
|
|
|
|
0.02
|
|
Earnings
per common share
|
|
|
0.46
|
|
|
|
0.41
|
|
|
0.88
|
|
|
|
0.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
calculation of diluted earnings per common share for the three and six months
ended June 30, 2009 excludes the impact of 2,538,599 and 2,537,990 shares,
respectively, related to anti-dilutive stock options, restricted stock and
restricted stock units. The calculation of diluted earnings per
common share for the three and six months ended June 30, 2008 excludes the
impact of 3,127,400 and 2,824,000 shares, respectively, related to anti-dilutive
stock options, restricted stock and restricted stock units.
12. Stockholders’
Equity
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 six months ended June 30, 2009, the Company
repurchased 287,718 shares at an average price of $18.93 and an aggregate cost
of $5,447.
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 tortious 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.
On April
20, 2009, AMERIGROUP Corporation and AGPNJ answered the complaint and filed a
counterclaim alleging that there had been misrepresentations and/or omissions of
material fact made by or on behalf of UHP and the Company. The
Company believes that the counterclaim is without merit. While the
results of litigation cannot be predicted with certainty, the Company believes
that the final outcome of the counterclaim will not have a material adverse
effect on its financial condition, results of operation or
liquidity.
In May
2008, the Internal Revenue Services began an audit of the Company’s 2006 and
2007 tax returns. As a result of this audit, the IRS has initially
denied the $34,856 tax benefit the Company recognized for the abandonment of the
FirstGuard stock in 2007. The Company is proceeding with the appeals
process and believes that it is more likely than not that the Company’s tax
position will be upheld. Accordingly, the Company has not made
any adjustments to the reserve for this position.
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.
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, telehealth services and pharmacy
benefits management functions.
Factors
used in determining the reportable business segments include the nature of
operating activities, existence of separate senior management teams, and the
type of information presented to the Company’s chief operating decision maker to
evaluate all results of operations.
Segment
information for the three months ended June 30, 2009, follows:
|
|
Medicaid
Managed Care
|
|
|
Specialty
Services
|
|
|
Eliminations
|
|
|
Consolidated
Total
|
|
Revenue
from external customers
|
|
$ |
923,109 |
|
|
$ |
116,360 |
|
|
$ |
— |
|
|
$ |
1,039,469 |
|
Revenue
from internal customers
|
|
|
16,450 |
|
|
|
132,096 |
|
|
|
(148,546
|
) |
|
|
— |
|
|
|
$ |
939,559 |
|
|
$ |
248,456 |
|
|
$ |
(148,546 |
) |
|
$ |
1,039,469 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
21,347 |
|
|
$ |
10,088 |
|
|
$ |
— |
|
|
$ |
31,435 |
|
Segment
information for the three months ended June 30, 2008, follows:
|
|
Medicaid
Managed Care
|
|
|
Specialty
Services
|
|
|
Eliminations
|
|
|
Consolidated
Total
|
|
Revenue
from external customers
|
|
$ |
753,006 |
|
|
$ |
70,924 |
|
|
$ |
— |
|
|
$ |
823,930 |
|
Revenue
from internal customers
|
|
|
15,026 |
|
|
|
122,042 |
|
|
|
(137,068
|
) |
|
|
— |
|
|
|
$ |
768,032 |
|
|
$ |
192,966 |
|
|
$ |
(137,068 |
) |
|
$ |
823,930 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
23,967 |
|
|
$ |
3,910 |
|
|
$ |
— |
|
|
$ |
27,877 |
|
Segment
information for the six months ended June 30, 2009, follows:
|
|
Medicaid
Managed Care
|
|
|
Specialty
Services
|
|
|
Eliminations
|
|
|
Consolidated
Total
|
|
Revenue
from external customers
|
|
$ |
1,741,776 |
|
|
$ |
230,128 |
|
|
$ |
— |
|
|
$ |
1,971,904 |
|
Revenue
from internal customers
|
|
|
32,124 |
|
|
|
266,172 |
|
|
|
(298,296
|
) |
|
|
— |
|
|
|
$ |
1,773,900 |
|
|
$ |
496,300 |
|
|
$ |
(298,296 |
) |
|
$ |
1,971,904 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
38,090 |
|
|
$ |
24,257 |
|
|
$ |
— |
|
|
$ |
62,347 |
|
Segment
information for the six months ended June 30, 2008, follows:
|
|
Medicaid
Managed Care
|
|
|
Specialty
Services
|
|
|
Eliminations
|
|
|
Consolidated
Total
|
|
Revenue
from external customers
|
|
$ |
1,461,685 |
|
|
$ |
141,473 |
|
|
$ |
— |
|
|
$ |
1,603,158 |
|
Revenue
from internal customers
|
|
|
29,704 |
|
|
|
228,678 |
|
|
|
(258,382
|
) |
|
|
— |
|
|
|
$ |
1,491,389 |
|
|
$ |
370,151 |
|
|
$ |
(258,382 |
) |
|
$ |
1,603,158 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
54,204 |
|
|
$ |
9,974 |
|
|
$ |
— |
|
|
$ |
64,178 |
|
15.
Comprehensive Earnings
Differences
between net earnings and total comprehensive earnings resulted from changes in
unrealized gains (losses) on investments available for sale, as
follows:
|
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Net
earnings
|
|
$ |
19,419 |
|
|
$ |
18,203 |
|
|
$ |
38,664 |
|
|
$ |
43,826 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification
adjustment, net of tax
|
|
|
(76
|
) |
|
|
126 |
|
|
|
(138
|
) |
|
|
151 |
|
Change
in unrealized gains (losses) on investments, net of tax
|
|
|
21 |
|
|
|
(1,514
|
) |
|
|
2,067 |
|
|
|
— |
|
Total
change
|
|
|
(55
|
) |
|
|
(1,388
|
) |
|
|
1,929 |
|
|
|
151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
earnings
|
|
|
19,364 |
|
|
|
16,815 |
|
|
|
40,593 |
|
|
|
43,977 |
|
Comprehensive
(loss) attributable to the noncontrolling interest
|
|
|
(811
|
) |
|
|
— |
|
|
|
(24
|
) |
|
|
— |
|
Comprehensive
earnings attributable to Centene Corporation
|
|
$ |
20,175 |
|
|
$ |
16,815 |
|
|
$ |
40,617 |
|
|
$ |
43,977 |
|
The
following discussion of our financial condition and results of operations should
be read in conjunction with our consolidated financial statements and the
related notes included elsewhere in this filing, and in our annual report on
Form 10-K for the year ended December 31, 2008.
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 II, Item
1A. “Risk Factors,” and Part I, Item 1 “Legal
Proceedings.” Readers are cautioned that matters subject to
forward-looking statements involve known and unknown risks and uncertainties,
including economic, regulatory, competitive and other factors that may cause our
or our industry’s actual results, levels of activity, performance or
achievements to be materially different from any future results, levels of
activity, performance or achievements expressed or implied by these
forward-looking statements. These statements are not guarantees of
future performance and are subject to risks, uncertainties and
assumptions.
All
forward-looking statements included in this filing are based on information
available to us on the date of this filing. Actual results may differ
from projections or estimates due to a variety of important factors,
including:
·
|
our
ability to accurately predict and effectively manage health benefits and
other operating expenses;
|
·
|
changes
in healthcare practices;
|
·
|
changes
in federal or state laws or
regulations;
|
·
|
provider
contract changes;
|
·
|
reduction
in provider payments by governmental
payors;
|
·
|
disasters
and numerous other factors affecting the delivery and cost of
healthcare;
|
·
|
the
expiration, cancellation or suspension of our Medicaid managed care
contracts by state governments;
|
·
|
availability
of debt and equity financing, on terms that are favorable to us;
and
|
·
|
general
economic and market conditions.
|
Item 1A
“Risk Factors” of Part II 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.
OVERVIEW
We are a
multi-line healthcare enterprise operating in two segments. The
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 CHIP, and,
Supplemental Security Income including Aged, Blind or Disabled programs, or ABD.
The Specialty Services segment provides specialty services, including behavioral
health, life and health management, long-term care programs, managed vision,
telehealth services 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 individuals and 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. Unless specifically
noted, with the exception of cash flow information, the discussions below are in
the context of continuing operations, and therefore, exclude our New Jersey
health plan, UHP. The results of operations for UHP are classified as
discontinued operations for all periods presented.
The first
quarter of 2008 included $20.8 million of premium revenue for the Georgia
premium rate increase for July 1, 2007 through December 31, 2007. All
2008 ratios and year over year changes discussed below are inclusive of this
revenue. Our second quarter performance for 2009 is summarized as
follows:
|
—
|
Quarter-end
at-risk managed care membership of
1,289,000.
|
|
—
|
Total
revenues of $1,039.5 million.
|
|
—
|
Health
Benefits Ratio, or HBR, of 83.1%.
|
|
—
|
General
and Administrative, or G&A, expense ratio of
13.9%.
|
|
—
|
Operating
earnings of $31.4 million.
|
|
—
|
Diluted
earnings per share of $0.47.
|
|
—
|
Operating
cash flows of $38.7 million.
|
The
following new contracts and acquisitions contributed to our growth over the last
year:
|
—
|
In
March 2009, we completed the acquisition of certain assets of AMERIGROUP
Community Care of South Carolina, Inc. We now serve 46,000
at-risk members in South Carolina at June 30,
2009.
|
|
—
|
In
February 2009, we began converting non-risk managed care membership in
Florida from Access Health Solutions LLC, or Access, to our new
subsidiary, Sunshine State Health Plan on an at-risk basis. We previously
acquired a 49% ownership interest in Access in July
2007. At June 30, 2009, we served 22,300 members on an at-risk
basis while Access served 110,100 members on a non-risk
basis. Beginning January 1, 2009, we have presented our
investment in Access as a consolidated
subsidiary.
|
|
—
|
In
October 2008, we began operating under our contract in Arizona to provide
Acute Care services in Yavapai county, with 16,200 members at June 30,
2009.
|
|
—
|
Effective
July 1, 2008, we completed the acquisition of Celtic, a health insurance
carrier focused on the individual health insurance
market.
|
We have a
new opportunity to continue our growth through the following:
|
—
|
In
March 2009, we were awarded a contract to manage health care services for
Massachusetts residents who lack access to traditional public or private
health insurance. Effective July 1, 2009, we began serving the
Central, Northern, Boston and Southern regions operating as CeltiCare
Health Plan of Massachusetts.
|
RESULTS
OF OPERATIONS AND KEY METRICS
Summarized
comparative financial data are as follows ($ in millions, except share
data):
|
|
Three
Months Ended June 30,
|
|
|
Six
months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
%
Change
2008-2009
|
|
|
2009
|
|
|
2008
|
|
|
%
Change
2008-2009
|
|
Premium
|
|
$ |
909.7 |
|
|
$ |
784.0 |
|
|
|
16.0
|
% |
|
$ |
1,794.7 |
|
|
$ |
1,520.8 |
|
|
|
18.0
|
% |
Service
|
|
|
21.6 |
|
|
|
18.5 |
|
|
|
16.9
|
% |
|
|
45.4 |
|
|
|
39.0 |
|
|
|
16.5
|
% |
Total
premium and service revenues
|
|
|
931.3 |
|
|
|
802.5 |
|
|
|
16.1
|
% |
|
|
1,840.1 |
|
|
|
1,559.8 |
|
|
|
18.0
|
% |
Premium
tax
|
|
|
108.2 |
|
|
|
21.5 |
|
|
|
403.9
|
% |
|
|
131.8 |
|
|
|
43.4 |
|
|
|
203.9
|
% |
Total
revenues
|
|
|
1,039.5 |
|
|
|
824.0 |
|
|
|
26.2
|
% |
|
|
1,971.9 |
|
|
|
1,603.2 |
|
|
|
23.0
|
% |
Medical
costs
|
|
|
755.7 |
|
|
|
650.9 |
|
|
|
16.1
|
% |
|
|
1,495.1 |
|
|
|
1,260.3 |
|
|
|
18.6
|
% |
Cost
of services
|
|
|
14.6 |
|
|
|
14.4 |
|
|
|
0.8
|
% |
|
|
30.5 |
|
|
|
30.6 |
|
|
|
(0.3
|
)% |
General
and administrative expenses
|
|
|
129.2 |
|
|
|
109.3 |
|
|
|
18.3
|
% |
|
|
251.5 |
|
|
|
204.8 |
|
|
|
22.8
|
% |
Premium
tax expense
|
|
|
108.5 |
|
|
|
21.5 |
|
|
|
405.6
|
% |
|
|
132.5 |
|
|
|
43.4 |
|
|
|
205.6
|
% |
Earnings
from operations
|
|
|
31.5 |
|
|
|
27.9 |
|
|
|
12.8
|
% |
|
|
62.3 |
|
|
|
64.1 |
|
|
|
(2.9
|
)% |
Investment
and other income, net
|
|
|
0.2 |
|
|
|
1.4 |
|
|
|
(81.2
|
)% |
|
|
(0.1 |
) |
|
|
5.0 |
|
|
|
(102.3
|
)% |
Earnings
from continuing operations, before income tax expense
|
|
|
31.7 |
|
|
|
29.3 |
|
|
|
8.4
|
% |
|
|
62.2 |
|
|
|
69.1 |
|
|
|
(10.0
|
)% |
Income
tax expense
|
|
|
11.8 |
|
|
|
11.4 |
|
|
|
3.7
|
% |
|
|
22.6 |
|
|
|
26.3 |
|
|
|
(14.0
|
)% |
Earnings
from continuing operations, net of income tax expense
|
|
|
19.9 |
|
|
|
17.9 |
|
|
|
11.3
|
% |
|
|
39.6 |
|
|
|
42.8 |
|
|
|
(7.5
|
)% |
Discontinued
operations, net of income tax (benefit) expense of $(0.2), $(0.1), $(0.4)
and $0.1 respectively
|
|
|
(0.5 |
) |
|
|
0.3 |
|
|
|
―
|
% |
|
|
(0.9 |
) |
|
|
1.0 |
|
|
|
―
|
% |
Net
earnings
|
|
|
19.4 |
|
|
|
18.2 |
|
|
|
6.7
|
% |
|
|
38.7 |
|
|
|
43.8 |
|
|
|
(11.8
|
)% |
Noncontrolling
interest (loss)
|
|
|
(0.8 |
) |
|
|
― |
|
|
|
―
|
% |
|
|
― |
|
|
|
― |
|
|
|
―
|
% |
Net
earnings attributable to Centene Corporation
|
|
$ |
20.2 |
|
|
$ |
18.2 |
|
|
|
11.1
|
% |
|
$ |
38.7 |
|
|
$ |
43.8 |
|
|
|
(11.7
|
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per common share attributable to Centene
Corporation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
0.47 |
|
|
$ |
0.40 |
|
|
|
17.5
|
% |
|
$ |
0.90 |
|
|
$ |
0.96 |
|
|
|
(6.3
|
)% |
Discontinued
operations
|
|
|
(0.01 |
) |
|
|
0.01 |
|
|
|
(200.0
|
)% |
|
|
(0.02 |
) |
|
|
0.02 |
|
|
|
(200.0
|
)% |
Total
diluted earnings per common share
|
|
$ |
0.46 |
|
|
$ |
0.41 |
|
|
|
12.2
|
% |
|
$ |
0.88 |
|
|
$ |
0.98 |
|
|
|
(10.2
|
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
and Revenue Recognition
Our
Medicaid Managed Care segment generates revenues primarily from premiums we
receive from the states in which we operate health plans. We receive
a fixed premium per member per month pursuant to our state
contracts. We generally receive premium payments during the month we
provide services and recognize premium revenue during the period in which we are
obligated to provide services to our members. 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. During the second quarter of
2009, one of the states in which we operate increased their premium which was
required to be passed through to hospitals in the state. This $84.7
million increase was recorded as premium tax revenue and
expense. 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 collectability 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 three and six months ended June 30, 2009 over the
previous year primarily through 1) membership growth, 2) premium rate increases,
and 3) growth in our Specialty Services segment.
From June
30, 2008 to June 30, 2009, we increased our at-risk managed care membership by
12.2%. The following table sets forth our membership by state for our
managed care organizations:
|
|
June
30,
|
|
|
|
2009
|
|
|
2008
|
|
Arizona
|
|
|
16,200 |
|
|
|
— |
|
Florida
|
|
|
22,300 |
|
|
|
— |
|
Georgia
|
|
|
292,800 |
|
|
|
278,800 |
|
Indiana
|
|
|
196,100 |
|
|
|
161,700 |
|
Ohio
|
|
|
141,200 |
|
|
|
137,300 |
|
South
Carolina
|
|
|
46,000 |
|
|
|
22,500 |
|
Texas
|
|
|
443,200 |
|
|
|
423,700 |
|
Wisconsin
|
|
|
131,200 |
|
|
|
124,800 |
|
Total
at-risk membership
|
|
|
1,289,000 |
|
|
|
1,148,800 |
|
Non-risk
membership
|
|
|
114,000 |
|
|
|
3,500 |
|
Total
|
|
|
1,403,000 |
|
|
|
1,152,300 |
|
The
following table sets forth our membership by line of business:
|
|
June
30,
|
|
|
|
2009
|
|
|
2008
|
|
Medicaid
|
|
|
958,600 |
|
|
|
828,700 |
|
CHIP
& Foster Care
|
|
|
261,400 |
|
|
|
256,900 |
|
ABD
& Medicare
|
|
|
69,000 |
|
|
|
63,200 |
|
Total
at-risk membership
|
|
|
1,289,000 |
|
|
|
1,148,800 |
|
Non-risk
membership
|
|
|
114,000 |
|
|
|
3,500 |
|
Total
|
|
|
1,403,000 |
|
|
|
1,152,300 |
|
From June
30, 2008 to June 30, 2009, our membership increased as a result of growth in all
of our states. We increased our membership in Indiana through temporary
eligibility determinations and network expansions. In South Carolina, our
membership increased as a result of our acquisition of AMERIGROUP South Carolina
and the conversion of the state’s fee-for-service members into managed
care. In February 2009, we began converting Access members in
Florida to at-risk under our Sunshine State Health
Plan. At June 30, 2009, we had 22,300 at-risk members,
while Access continued to serve 110,100 members on a non-risk
basis. We expect to convert a substantial portion of Access
membership to at-risk during the third quarter of 2009. In Texas, we
increased our membership through organic growth of the TANF
market. In Arizona, we began providing Acute Care services in Yavapai
county during October 2008. Our membership in Georgia increased as a
result of organic growth in the Medicaid market.
|
2.
|
Premium
rate increases
|
During
the six months ended June 30, 2009, we received premium rate increases in
certain markets which yield a 1.2% composite increase across all of our
markets. During the six months ended June 30, 2008, we received
premium rate increases in certain markets which yield a 2.2% 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. The 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 a calculated 3.8% increase.
|
3.
|
Specialty
Services segment growth
|
For the
three and six months ended June 30, 2009, Specialty Services segment
revenue from external customers was $116.4 million and $230.1 million, compared
to $70.9 million and $141.5 million for the same prior year
periods. The increase is primarily attributable to the commencement
of our acute care business under Bridgeway, the acquisition of Celtic as well as
increased membership in our behavioral health company,
Cenpatico.
4. The
following table provides supplemental information of other membership
categories:
|
|
June
30,
|
|
|
|
2009
|
|
|
2008
|
|
Cenpatico
Behavioral Health:
|
|
|
|
|
|
|
Arizona
|
|
|
110,500 |
|
|
|
99,400 |
|
Kansas
|
|
|
41,100 |
|
|
|
40,000 |
|
Bridgeway:
|
|
|
|
|
|
|
|
|
Long-term
Care
|
|
|
2,400 |
|
|
|
1,800 |
|
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:
|
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Medicaid
and CHIP
|
|
|
83.7
|
% |
|
|
81.6
|
% |
|
|
84.2
|
% |
|
|
80.4
|
% |
ABD
and Medicare
|
|
|
82.6 |
|
|
|
88.5 |
|
|
|
82.0 |
|
|
|
93.0 |
|
Specialty
Services
|
|
|
79.8 |
|
|
|
86.2 |
|
|
|
79.0 |
|
|
|
85.2 |
|
Total
|
|
|
83.1 |
|
|
|
83.0 |
|
|
|
83.3 |
|
|
|
82.9 |
|
Our
consolidated HBR for the three and six months ended June 30, 2009 was 83.1%
and 83.3%, respectively. While the change for the three month period
as compared to 2008 is relatively flat, the change for the six month ended
period as compared to 2008 is an increase of 0.4%. The increase for
the six months ended June 30, 2009 as compared to 2008 is due to the effect of
recording the Georgia premium rate increase retroactive to July 1, 2007 during
the first quarter of 2008. The retroactive Georgia premium rate increase
in the first quarter of 2008 had the effect of decreasing the HBR for this
period by 1.1%. Adjusting for the impact due to the Georgia rate
increase, our HBR decreased from 84.0% in 2008 to 83.3% in
2009. Sequentially, our consolidated HBR decreased from 83.5% in the
2009 first quarter to 83.1% as a result of normal seasonality.
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
costs associated with providing service to our non-risk members as well as 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.
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 three and six months ended June
30, 2009 were 13.9% and 13.7%, respectively, compared to 13.6% and 13.1%
for the same prior year periods. The six months ended June 30, 2008
ratio reflects a 0.2% decrease due to the effect of recording the Georgia
premium rate increase retroactive to July 1, 2007 during the first quarter of
2008. The G&A expense ratio increased as a result of new business
initiatives including the acquisition of Celtic, the consolidation of Access and
the start up of the CeltiCare health plan in Massachusetts.
Other
Income (Expense)
The
following table summarizes the components of other income (expense), net (in
millions):
|
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Investment
income
|
|
$ |
4.4 |
|
|
$ |
4.7 |
|
|
$ |
8.0 |
|
|
$ |
9.9 |
|
Earnings
from equity method investee
|
|
|
— |
|
|
|
0.7 |
|
|
|
— |
|
|
|
3.1 |
|
Interest
expense
|
|
|
(4.2 |
) |
|
|
(4.0 |
) |
|
|
(8.1 |
) |
|
|
(8.0 |
) |
Other
income (expense), net
|
|
$ |
0.2 |
|
|
$ |
1.4 |
|
|
$ |
(0.1 |
) |
|
$ |
5.0 |
|
Investment
income decreased $0.3 million and $1.9 million in the three and six months ended
June 30, 2009, over the comparable period in 2008. The decreases are
due to the decline in market interest rates. Earnings from equity
method investee decreased due to the presentation of our investment in Access as
a consolidated subsidiary beginning in 2009.
Income
Tax Expense
Our
effective tax rate for the three and six months ended June 30, 2009 was 37.2%
and 36.4%, respectively, compared to 38.9% and 38.1% in the comparable periods
in 2008. The decrease was primarily due to lower state taxes and the
effect of consolidating Access which is taxed as a partnership and does not
provide for income taxes.
Discontinued
Operations
In
November 2008, we announced our intention to sell certain assets of 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 1. Legal Proceedings” included elsewhere in this Quarterly
Report on Form 10-Q.
Net
earnings (losses) from discontinued operations were a net loss of $0.5 million
for the three months ended June 30, 2009 compared to earnings of $0.3 million in
the same period of 2008. Net earnings (losses) from discontinued
operations were a net loss of $0.9 million for the six months ended June 30,
2009 compared to earnings of $1.0 million in the same period of 2008. The
assets and liabilities of the discontinued business are segregated in the
consolidated balance sheet.
LIQUIDITY
AND CAPITAL RESOURCES
Shown
below is a condensed schedule of cash flows for the six months ended June 30,
2009 and 2008, that we use throughout the discussion of liquidity and capital
resources (in millions).
|
|
Six
Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
Net
cash provided by operating activities
|
|
$
|
62.1
|
|
|
$
|
86.7
|
|
Net
cash used in investing activities
|
|
|
(75.2
|
)
|
|
|
(5.0
|
)
|
Net
cash provided by financing activities
|
|
|
18.5
|
|
|
|
7.2
|
|
Net
increase in cash and cash equivalents
|
|
$
|
5.4
|
|
|
$
|
88.9
|
|
We
finance our activities primarily through operating cash flows and borrowings
under our revolving credit facility. Our total operating activities
provided cash of $62.1 million in the six months ended June 30, 2009 compared to
$86.7 million in the comparable period in 2008. The decrease was
primarily due to the recognition and receipt of the $20.8 million Georgia
premium rate increase effective July 1, 2007 during the first quarter of
2008. Additionally, consistent with prior years, both periods reflect
an increase in premium and related receivables related to the June capitation
payment from the State of Wisconsin. The State holds this payment
over their fiscal year-end and it was received in July along with the July
capitation payment in both years.
Our
investing activities used cash of $75.2 million in the six months ended June 30,
2009 compared to $5.0 million in the comparable period in 2008. 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. Our
investment policies are designed to provide liquidity, preserve capital and
maximize total return on invested assets within our investment guidelines.
As of June 30, 2009, our investment portfolio consisted primarily of
fixed-income securities with an average duration of 3.0 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
$29.8 million and $34.6 million in the six months ended June 30, 2009 and 2008,
respectively, on capital assets consisting primarily of building construction,
software and hardware upgrades, furniture, equipment, and leasehold improvements
associated with office and market expansions. Exclusive of our real
estate development discussed below, we anticipate spending an additional $13
million on capital expenditures in 2009 primarily associated with system
enhancements and market expansions.
In 2009,
our capital expenditures included $14.7 million for costs 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. The expenditures in 2008 included the cost of property
purchased contiguous to our corporate headquarters. We anticipate
spending an additional $40 million on capital expenditures related to the real
estate construction in 2009. During the second quarter of 2009, we
executed an arrangement as a joint venture partner in an entity that will
develop the properties.
In June
2009, this joint venture executed a $95 million construction loan associated
with the construction of a real estate development to include the corporate
headquarters. The construction loan is due June 1, 2011 and bears
interest at the LIBOR rate plus 4%. The loan may be extended for two
additional one year terms. We and our development partners have each
guaranteed up to $65 million associated with the construction
loan. The agreement contains non-financial and financial covenants,
including requirements for us to maintain a specified net worth. As
of June 30, 2009, there were no amounts outstanding under the construction
loan. Additionally, the joint venture has posted a $1.75 million letter of
credit to a tenant of the development, collateralized by a portion of the
entity’s cash balances.
Our
financing activities provided cash of $18.5 million and $7.2 million in the six
months ended June 30, 2009 and 2008, respectively. During 2009 and
2008, our financing activities primarily related to proceeds from borrowings
under our $300 million credit facility and stock repurchases.
At June
30, 2009, we had working capital, defined as current assets less current
liabilities, of $22.3 million, as compared to $25.4 million at December 31,
2008. We manage our short-term and long-term investments with the
goal of ensuring that a sufficient portion is held in investments that are
highly liquid and can be sold to fund short-term requirements as needed.
Cash,
cash equivalents and short-term investments were $443.9 million at June 30, 2009
and $480.4 million at December 31, 2008. Long-term investments were
$408.9 million at June 30, 2009 and $341.7 million at December 31, 2008,
including restricted deposits of $14.5 million and $9.3 million,
respectively. At June 30, 2009, cash and investments held by our
unregulated entities totaled $27.0 million while cash and investments held by
our regulated entities totaled $825.8 million. Additionally, we held
regulated cash and investments of $23.9 million from discontinued
operations. Upon completion of the sale of assets of UHP and the
subsequent payment of medical claims liabilities and other liabilities at the
closing date, substantially all of 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 June 30, 2009, we had $87.0 million in
borrowings outstanding under the agreement and $24.1 million in letters of
credit outstanding, leaving availability of $188.9 million. As of
June 30, 2009, 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 June 30, 2009, 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 six months ended June
30, 2009, we repurchased 287,718 shares at an average price of
$18.93.
There
were no other material changes outside the ordinary course of business in lease
obligations or other contractual obligations in the six months ended June 30,
2009. Based on our operating plan, we expect that our available cash, cash
equivalents and investments, cash from our operations and cash available under
our credit facility will be sufficient to finance our operations and capital
expenditures for at least 12 months from the date of this filing.
REGULATORY
CAPITAL AND DIVIDEND RESTRICTIONS
Our
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.
As of
June 30, 2009, our subsidiaries, including UHP, had aggregate statutory capital
and surplus of $431.0 million, compared with the required minimum aggregate
statutory capital and surplus requirements of $267.4 million and we estimate our
Risk Based Capital, or RBC, percentage to be 362% 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 June 30, 2009, each of our health plans were in
compliance with the risk-based capital requirements enacted in those
states.
RECENT
ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2009,
we adopted FASB Statement No.141 (revised 2007), Business Combinations (ASC
805-10). The changes from the previous guidance include, but are not
limited to: (1) acquisition costs are recognized separately from the
acquisition; (2) known contractual contingencies at the time of the
acquisition are considered part of the liabilities acquired and and measured at
their fair value; all other contingencies are 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 is recognized and measured at the time of the
acquisition; and (4) business combinations achieved in stages (step
acquisitions) recognize the identifiable assets and liabilities, as well as
noncontrolling interests, in the acquiree, at the full amounts of their fair
values. The adoption of FASB Statement No. 141 (revised 2007) had an
immaterial impact.
Effective
January 1, 2009, we adopted FASB Statement No. 160, Noncontrolling Interests in
Consolidated Financial Statements (ASC 810-10), 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 existed in accounting by requiring transactions
between an entity and noncontrolling interests be treated as equity
transactions. As discussed in Part I, Item 1. Financial Statements,
Note 2, Basis of
Presentation, the noncontrolling interest in Access is presented within
stockholders’ equity.
In April
2009, the FASB issued Staff Position, or FSP, No. FAS 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments, or the FSP (ASC 320-10). The
FSP applies to fixed maturity securities only and requires separate display of
losses related to credit deterioration and losses related to other market
factors. When an entity does not intend to sell the security and it
is more likely than not that an entity will not have to sell the security before
recovery of its cost basis, it must recognize the credit component of an
other-than-temporary impairment in earnings and the remaining portion in other
comprehensive income. The adoption of the FSP did not have a material
effect on our financial statements.
In June
2009, the FASB issued FASB Statement No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles
(ASC 105-10), which approves the Accounting Standards
Codification, or ASC, as the single source of authoritative United States
accounting and reporting standards applicable for all non-governmental entities.
The ASC, which changes the referencing of financial standards, is effective for
interim or annual financial periods ending after September 15,
2009. As the ASC is not intended to change or alter existing US GAAP,
it is not expected to have any impact on our consolidated financial position or
results of operations.
In
June 2009, the FASB issued FASB Statement No. 167, Amendments to FASB Interpretation
No. 46R, which amends FASB Interpretation No. 46 (revised
December 2003), Consolidation of Variable Interest
Entities, to require an analysis to determine whether a variable interest
gives the entity a controlling financial interest in a variable interest entity.
This statement requires an ongoing reassessment and eliminates the quantitative
approach previously required for determining whether an entity is the primary
beneficiary. This statement is effective for fiscal years beginning after
November 15, 2009 and early adoption is prohibited. We are currently
evaluating the impact of adopting this standard on the consolidated financial
statements and related disclosures.
ITEM 3. Quantitative and Qualitative
Disclosures About Market Risk.
INVESTMENTS
As of
June 30, 2009, we had short-term investments of $61.2 million and long-term
investments of $408.9 million, including restricted deposits of $14.5
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 June 30,
2009, the fair value of our fixed income investments would decrease by
approximately $10.8 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.
Evaluation of Disclosure Controls and
Procedures - Our management,
with the participation of our Chief Executive Officer and Chief Financial
Officer, evaluated the effectiveness of our disclosure controls and procedures
as of June 30, 2009. The term “disclosure controls and procedures,”
as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means
controls and other procedures of a company that are designed to ensure that
information required to be disclosed by a company in the reports that it files
or submits under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the SEC's rules and
forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed by a company in the reports that it files or submits under the
Exchange Act is accumulated and communicated to the company’s management,
including its principal executive and principal financial officers, as
appropriate to allow timely decisions regarding required
disclosure. Management recognizes that any controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance
of achieving their objectives and management necessarily applies its judgment in
evaluating the cost-benefit relationship of possible controls and
procedures. Based on the evaluation of our disclosure controls and
procedures as of June 30, 2009, our Chief Executive Officer and Chief Financial
Officer concluded that, as of such date, our disclosure controls and procedures
were effective at the reasonable assurance level.
Changes in Internal Control Over
Financial Reporting - No change in our internal
control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) occurred during the quarter ended June 30, 2009 that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
PART
II
OTHER
INFORMATION
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 tortious 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 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.
On April
20, 2009, AMERIGROUP Corporation and AGPNJ answered the complaint and filed a
counterclaim alleging that there had been misrepresentations and/or omissions of
material fact made by or on behalf of UHP and us. We believe that the
counterclaim is without merit. While the results of litigation cannot
be predicted with certainty, we believe that the final outcome of the
counterclaim will not have a material adverse effect on our financial condition,
results of operations or liquidity.
In May
2008, the Internal Revenue Services, or IRS, began an audit of our 2006 and 2007
tax returns. As a result of this audit, the IRS has initially denied
the $34,856 tax benefit we recognized for the abandonment of the FirstGuard
stock in 2007. We are proceeding with the appeals process and believe
that it is more likely than not that our tax position will be
upheld. Accordingly, we have not made any adjustments to our
FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, or FIN 48, reserve for this position.
We
routinely are subjected to legal proceedings in the normal course of business.
While the ultimate resolution of such matters is uncertain, we do not expect the
results of any of these matters individually, or in the aggregate, to have a
material effect on our financial position or results of operations.
FACTORS
THAT MAY AFFECT FUTURE RESULTS AND THE
TRADING
PRICE OF OUR COMMON STOCK
You
should carefully consider the risks described below before making an investment
decision. The trading price of our common stock could decline due to
any of these risks, in which case you could lose all or part of your
investment. You should also refer to the other information in this
filing, including our consolidated financial statements and related
notes. The risks and uncertainties described below are those that we
currently believe may materially affect our Company. Additional risks
and uncertainties that we are unaware of or that we currently deem immaterial
also may become important factors that affect our Company.
Risks
Related to Being a Regulated Entity
Reduction
in Medicaid, CHIP and ABD funding could substantially reduce our
profitability.
Most of
our revenues come from Medicaid, CHIP 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, CHIP 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 CHIP. This rule requires a
CMS contractor to sample selected states each year to estimate improper payments
in Medicaid and CHIP and create national and state specific error
rates. States must provide information to measure improper payments
in Medicaid and CHIP 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. CMS published a proposed rule on July 15,
2009 that would make certain changes to the previously published
rule. Among other things, the proposed changes establish a process
for appealing error determinations. The changes will not become
effective until the final rule is published. We cannot predict
whether a final rule will become effective and if it does, what impact it will
have on the states with which we have contracts.
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, CHIP, Foster Care and ABD. The current adverse
economic conditions have, and are expected to continue to, put pressures on
state budgets as tax and other state revenues decrease while the Medicaid
eligible population increases, creating more need for funding. We
anticipate this will require government agencies with whom we contract to find
funding alternatives, which may result in reductions in funding for current
programs and program expansions, contraction of covered benefits, limited or no
premium rate increases or premium decreases. In recent years, the majority of
states have implemented measures to restrict Medicaid, CHIP, Foster Care and ABD
costs and eligibility. If any state in which we operate were to
decrease premiums paid to us, or pay us less than the amount necessary to keep
pace with our cost trends, it could have a material adverse effect on our
revenues and operating results.
Changes
to Medicaid, CHIP, 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, CHIP, 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
CHIP is not reauthorized or states face shortfalls, our business could
suffer.
Federal
support for CHIP has been authorized through 2013. We cannot be
certain that CHIP 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 CHIP
programs, which matching funds have a per state annual cap. Because
of funding caps, there is a risk that 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 CHIP 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, CHIP 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
August 31, 2009 and September 30, 2011. When our contracts expire,
they may be opened for bidding by competing healthcare
providers. There is no guarantee that our contracts will be renewed
or extended. For example, on August 25, 2006, we received
notification from the Kansas Health Policy Authority that FirstGuard Health Plan
Kansas, Inc.’s contract with the State would not be renewed or extended, and as
a result, our contract ended on December 31, 2006. Further, our
contracts with the states are subject to cancellation by the state after a short
notice period in the event of unavailability of state funds. 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 CHIP programs, our growth rate may be
limited.
CHIP 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
CHIP 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 is currently considering health care reform
legislation. We cannot predict the impact of any such legislation, if
adopted, on our business.
The
pending health care reform legislation could harm our business.
Congress
is currently considering legislation that could significantly reform the U.S.
health care system. We cannot predict whether any legislation will be
passed and if it is, what impact it will have on our business. For
example, the version of the legislation introduced by Democratic leaders of the
House of Representatives contains payment reforms to Medicare and Medicaid that
are designed to improve payment accuracy and slow the rate of growth of health
care spending. If any reforms are implemented that reduce Medicaid or
CHIP spending or the payments we receive from states, our business could
suffer.
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,
CHIP, 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 and will have to expend additional time and financial resources to comply
with the HIPAA provisions contained in the American Recovery and Reinvestment
Act of 2009. 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.
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.
Changes
in funding for Medicaid may affect our business. For example, 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 23,
2008, the United States District Court for the District of Columbia vacated the
final rule as improperly promulgated. The American Recovery and
Reinvestment Tax Act of 2009 indicates Congressional intent is that final
regulations should not be promulgated. We cannot predict whether the
rule will ever be finalized or otherwise implemented and if it is, what impact
it will have on our business.
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 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 or
uncontrollable epidemic or pandemic 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 or pandemics, 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
June 30, 2009, we had $443.9 million in cash, cash equivalents and short-term
investments and $408.9 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.
Our
investments in state and municipal securities are not guaranteed by the United
States government which could materially and adversely affect our results of
operations or liquidity.
As of
June 30, 2009, we had $399.9 million of investments in state and municipal
securities. These securities are not guaranteed by the United States
government. State and municipal securities are subject to additional
credit risk based upon each local municipality’s tax revenues and financial
stability. 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.
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.
Adverse
credit market conditions may have a material adverse affect on our liquidity or
our ability to obtain credit on acceptable terms.
The
securities and credit markets have been experiencing extreme volatility and
disruption over the past year. The availability of credit, from
virtually all types of lenders, has been severely restricted. Such
conditions may persist throughout 2009 and beyond. In the event we
need access to additional capital to pay our operating expenses, make payments
on our indebtedness, pay capital expenditures, including costs related to our
corporate headquarters’ project, or fund acquisitions, our ability to obtain
such capital may be limited and the cost of any such capital may be significant,
particularly if we are unable to access our existing credit
facility.
Our
access to additional financing will depend on a variety of factors such as
prevailing economic and credit market conditions, the general availability of
credit, the overall availability of credit to our industry, our credit ratings
and credit capacity, and perceptions of our financial
prospects. Similarly, our access to funds may be impaired if
regulatory authorities or rating agencies take negative actions against
us. If a combination of these factors were to occur, our internal
sources of liquidity may prove to be insufficient, and in such case, we may not
be able to successfully obtain additional financing on favorable terms or at
all. We believe that if credit could be obtained, the terms and costs
of such credit could be significantly less favorable to us than what was
obtained in our most recent financings.
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.
An
unauthorized disclosure of sensitive or confidential member information could
have an adverse effect on our business.
As part
of our normal operations, we collect, process and retain confidential member
information. We are subject to various federal and state laws and
rules regarding the use and disclosure of confidential member information,
including HIPAA and the Gramm-Leach-Bliley Act. The American Recovery
and Reinvestment Act of 2009 further expands the coverage of HIPAA by, among
other things, extending the privacy and security provisions, requiring new
disclosures if a data breach occurs, mandating new regulations around electronic
medical records, expanding enforcement mechanisms, allowing the state Attorneys
General to bring enforcement actions and increasing penalties for
violations. Despite the security measures we have in place to ensure
compliance with applicable laws and rules, our facilities and systems, and those
of our third party service providers, may be vulnerable to security breaches,
acts of vandalism, computer viruses, misplaced or lost data, programming and/or
human errors or other similar events. Any security breach involving
the misappropriation, loss or other unauthorized disclosure or use of
confidential member information, whether by us or a third party, could have a
material adverse effect on our business, financial condition, cash flows, or
results of operations.
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 Plans, 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 a joint venture partner in an entity that
is developing the properties. If the entity is unable to complete the
development or if the entity 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.
Issuer
Purchases of Equity Securities 1
Second
Quarter 2009
|
Period
|
|
Total
Number of Shares
Purchased
|
|
Average
Price Paid
per Share
|
|
Total
Number of
Shares Purchased
as Part
of Publicly Announced
Plans or
Programs
|
|
Maximum
Number
of Shares that
May Yet Be Purchased
Under the
Plans or Programs
|
April
1 – April 30, 2009
|
|
|
218,210
|
2
|
$
|
18.88
|
|
|
216,925
|
|
|
1,716,956
|
May
1 – May 31, 2009
|
|
|
49,232
|
|
|
18.39
|
|
|
49,232
|
|
|
1,667,724
|
June
1 – June 30, 2009
|
|
|
791
|
2
|
|
18.62
|
|
|
—
|
|
|
1,667,724
|
Total
|
|
|
268,233
|
|
$
|
18.79
|
|
|
266,157
|
|
|
1,667,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Our
Board of Directors adopted a stock repurchase program of up to 4,000,000
shares, which extends through October 31, 2009.
(2) 1,285
shares acquired in April 2009 and 791 shares acquired in June 2009
represent shares relinquished to the Company by certain employees for
payment of taxes upon vesting of restricted stock
units.
|
In May
2009, we entered into a Cooperation and Naming Rights Agreement with another
entity, as part of which, we agreed, among other things, to issue 2,000 shares
of our common stock, par value $0.001 per share, or the Shares. The
Shares were issued in a private placement exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933.
We held
our annual meeting of stockholders on April 28, 2009. At the meeting,
Robert K. Ditmore, Fredrick H. Eppinger, and David L. Steward were re-elected as
Class II Directors. The votes with respect to each nominee are set
forth below:
|
|
Total
Vote For Each
Director
|
|
Total
Vote Withheld From Each Director
|
Mr.
Ditmore
|
|
35,303,235
|
|
4,865,633
|
Mr.
Eppinger
|
|
35,497,570
|
|
4,671,298
|
Mr.
Steward
|
|
35,487,990
|
|
4,680,878
|
Additional
directors of the Company whose terms of office continued after the meeting are
Steve Bartlett, Richard A. Gephardt, Pamela A. Joseph, Michael F. Neidorff, John
R. Roberts and Tommy G. Thompson.
Also at
the meeting, the selection of KPMG LLP as the Company’s independent registered
public accounting firm for the fiscal year ending December 31, 2009 was
ratified. The votes are set forth below:
|
|
Total
Vote For
|
|
Total
Vote Against
|
|
Total
Vote Abstain
|
KPMG
LLP
|
|
39,981,036
|
|
175,996
|
|
11,835
|
EXHIBIT NUMBER
|
|
DESCRIPTION
|
|
|
|
10.1
|
|
Amendment
No. 7 to Credit Agreement dated as of September 14, 2004 among Centene
Corporation, the various financial institutions party hereto and LaSalle
Bank National Association.
|
|
|
|
10.2
|
|
Notice
of Renewal for fiscal year 2010 between Peach State Health Plan, Inc. and
Georgia Department of Community Health.
|
|
|
|
12.1
|
|
Computation
of ratio of earnings to fixed charges.
|
|
|
|
31.1
|
|
Certification
of Chairman, President and Chief Executive Officer pursuant to Rule
13(a)-14(a) under the Securities Exchange Act of 1934, as
amended.
|
|
|
|
31.2
|
|
Certification
of Executive Vice President and Chief Financial Officer pursuant to Rule
13(a)-14(a) under the Securities Exchange Act of 1934, as
amended.
|
|
|
|
32.1
|
|
Certification
of Chairman, President and Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
|
|
|
|
32.2
|
|
Certification
of Executive Vice President and Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized as of July 28, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
Chairman,
President and Chief Executive Officer
(principal
executive officer)
|
|
|
|
|
|
|
|
Executive Vice
President and Chief Financial Officer
(principal financial
officer)
|
|
|
|
|
|
|
|
Vice
President, Corporate Controller and Chief Accounting
Officer
(principal
accounting officer)
|