form10-q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 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 September 30, 2009
or
o
|
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
For
the transition period from
to
Commission
file number: 001-32209
WELLCARE
HEALTH PLANS, INC.
(Exact
name of registrant as specified in its charter)
Delaware
|
|
47-0937650
|
(State
or other jurisdiction of
|
|
(I.R.S.
Employer
|
incorporation
or organization)
|
|
Identification
No.)
|
8725
Henderson Road, Renaissance One
Tampa,
Florida
|
|
33634
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
(813)
290-6200
|
(Registrant’s
telephone number, including area
code)
|
Indicate
by check mark whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No o
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 during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).
Yes o No o
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
“smaller reporting company” in Rule 12b-2 of the Exchange Act
Large
Accelerated Filer
|
x
|
Accelerated
Filer
|
o
|
|
Non-Accelerated
Filer
|
o
|
|
|
Smaller
Reporting Company
|
o
|
(Do
not check if a 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 o No x
As of
November
2, 2009 there were 42,318,927
shares of the registrant’s common stock, par value $.01 per share,
outstanding.
TABLE
OF CONTENTS
|
Page
|
Part I
— FINANCIAL INFORMATION
|
|
|
|
|
|
Item
1.
|
Financial
Statements (unaudited)
|
|
|
|
|
|
Condensed
Consolidated Balance Sheets at September 30, 2009 and December 31,
2008
|
3
|
|
Condensed
Consolidated Statements of Operations for the three and nine months ended
September 30, 2009 and 2008
|
4
|
|
Condensed
Consolidated Statements of Cash Flows for the nine months ended September
30, 2009 and 2008
|
5
|
|
Notes
to Condensed Consolidated Financial Statements
|
6
|
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
16
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
30
|
|
|
|
Item
4.
|
Controls
and Procedures
|
30
|
|
|
|
Part II
— OTHER INFORMATION
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
32
|
|
|
|
Item
1A.
|
Risk
Factors
|
34
|
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
37
|
|
|
|
Item
3.
|
Defaults
upon Senior Securities
|
38
|
|
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
38
|
|
|
|
Item
5.
|
Other
Information
|
39
|
|
|
|
Item
6.
|
Exhibits
|
39
|
|
|
|
Signatures
|
|
41 |
Part I — FINANCIAL INFORMATION
Item
1. Financial Statements.
WELLCARE
HEALTH PLANS, INC.
(Unaudited,
in thousands, except share data)
|
|
September
30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Assets
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
1,171,218 |
|
|
$ |
1,181,922 |
|
Investments
|
|
|
59,356 |
|
|
|
70,112 |
|
Premium
and other receivables, net
|
|
|
205,414 |
|
|
|
215,525 |
|
Other
receivables from government partners, net
|
|
|
40,898 |
|
|
|
825 |
|
Funds
receivable for the benefit of members
|
|
|
86,883 |
|
|
|
86,542 |
|
Prepaid
expenses and other current assets, net
|
|
|
114,189 |
|
|
|
129,490 |
|
Deferred
income taxes
|
|
|
15,596 |
|
|
|
20,154 |
|
Total
current assets
|
|
|
1,693,554 |
|
|
|
1,704,570 |
|
Property,
equipment and capitalized software, net
|
|
|
60,098 |
|
|
|
66,588 |
|
Goodwill
|
|
|
111,131 |
|
|
|
111,131 |
|
Other
intangible assets, net
|
|
|
13,344 |
|
|
|
14,493 |
|
Long-term
investments
|
|
|
53,301 |
|
|
|
54,972 |
|
Restricted
investments
|
|
|
131,321 |
|
|
|
199,339 |
|
Deferred
tax asset
|
|
|
21,105 |
|
|
|
23,263 |
|
Other
assets
|
|
|
20,939 |
|
|
|
29,105 |
|
Total
Assets
|
|
$ |
2,104,793 |
|
|
$ |
2,203,461 |
|
Liabilities
and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Medical
benefits payable
|
|
$ |
857,887 |
|
|
$ |
766,179 |
|
Unearned
premiums
|
|
|
20,708 |
|
|
|
81,197 |
|
Accounts
payable
|
|
|
7,157 |
|
|
|
5,138 |
|
Other
accrued expenses and liabilities
|
|
|
221,856 |
|
|
|
288,340 |
|
Current
portion of amounts accrued related to investigation
resolution
|
|
|
34,767 |
|
|
|
50,000 |
|
Other
payables to government partners
|
|
|
26,497 |
|
|
|
8,100 |
|
Taxes
payable
|
|
|
6,737 |
|
|
|
12,187 |
|
Debt
|
|
|
|
|
|
152,741 |
|
Other
current liabilities
|
|
|
869 |
|
|
|
674 |
|
Total
current liabilities
|
|
|
1,176,478 |
|
|
|
1,364,556 |
|
Amounts
accrued related to investigation resolution
|
|
|
45,482 |
|
|
|
|
Other
liabilities
|
|
|
23,879 |
|
|
|
33,076 |
|
Total
liabilities
|
|
|
1,245,839 |
|
|
|
1,397,632 |
|
Commitments
and contingencies (see Note 7)
|
|
|
|
|
|
|
Stockholders’
Equity:
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.01 par value (20,000,000 authorized, no shares issued or
outstanding)
|
|
|
|
|
|
|
Common
stock, $0.01 par value (100,000,000 authorized,
42,336,016 and 42,261,345 shares issued and outstanding at
September 30, 2009 and December 31, 2008,
respectively)
|
|
|
423 |
|
|
|
423 |
|
Paid-in
capital
|
|
|
413,214 |
|
|
|
390,526 |
|
Retained
earnings
|
|
|
447,373 |
|
|
|
418,641 |
|
Accumulated
other comprehensive loss
|
|
|
(2,056 |
) |
|
|
(3,761 |
) |
Total
stockholders’ equity
|
|
|
858,954 |
|
|
|
805,829 |
|
Total
Liabilities and Stockholders’ Equity
|
|
$ |
2,104,793 |
|
|
$ |
2,203,461 |
|
See
notes to unaudited condensed consolidated financial statements.
WELLCARE
HEALTH PLANS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited,
in thousands, except per share data)
|
|
Three Months
Ended September 30,
|
|
|
Nine Months
Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium
|
|
$ |
1,666,031 |
|
|
$ |
1,629,306 |
|
|
$ |
5,245,809 |
|
|
$ |
4,886,699 |
|
Investment
and other income
|
|
|
1,614 |
|
|
|
8,126 |
|
|
|
8,375 |
|
|
|
33,072 |
|
Total
revenues
|
|
|
1,667,645 |
|
|
|
1,637,432 |
|
|
|
5,254,184 |
|
|
|
4,919,771 |
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical
benefits
|
|
|
1,420,193 |
|
|
|
1,443,742 |
|
|
|
4,477,210 |
|
|
|
4,218,254 |
|
Selling,
general and administrative
|
|
|
195,303 |
|
|
|
228,811 |
|
|
|
681,730 |
|
|
|
690,330 |
|
Depreciation
and amortization
|
|
|
5,851 |
|
|
|
5,385 |
|
|
|
17,547 |
|
|
|
15,763 |
|
Interest
|
|
|
366 |
|
|
|
2,962 |
|
|
|
3,845 |
|
|
|
9,170 |
|
Total
expenses
|
|
|
1,621,713 |
|
|
|
1,680,900 |
|
|
|
5,180,332 |
|
|
|
4,933,517 |
|
Income
(loss) before income taxes
|
|
|
45,932 |
|
|
|
(43,468 |
) |
|
|
73,852 |
|
|
|
(13,746 |
) |
Income
tax expense (benefit)
|
|
|
17,272 |
|
|
|
(25,299 |
) |
|
|
45,120 |
|
|
|
(8,002 |
) |
Net
income (loss)
|
|
$ |
28,660 |
|
|
$ |
(18,169 |
) |
|
$ |
28,732 |
|
|
$ |
(5,744 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per common share (see Note 1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.68 |
|
|
$ |
(0.44 |
) |
|
$ |
0.69 |
|
|
$ |
(0.14 |
) |
Diluted
|
|
$ |
0.68 |
|
|
$ |
(0.44 |
) |
|
$ |
0.68 |
|
|
$ |
(0.14 |
) |
See
notes to unaudited condensed consolidated financial statements.
WELLCARE HEALTH PLANS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited,
in thousands)
|
|
Nine Months Ended
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
Cash
from (used in) operating activities:
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
28,732 |
|
|
$ |
(5,744 |
) |
Adjustments
to reconcile net income (loss) to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
17,547 |
|
|
|
15,764 |
|
Equity-based
compensation expense
|
|
|
29,776 |
|
|
|
28,309 |
|
Incremental
tax benefit from stock-based compensation
|
|
|
|
|
|
|
(2,162 |
) |
Deferred
taxes, net
|
|
|
197 |
|
|
|
(4,095 |
) |
Changes
in operating accounts:
|
|
|
|
|
|
|
|
|
Premium
and other receivables, net
|
|
|
10,111 |
|
|
|
73,073 |
|
Other
receivables from government partners, net
|
|
|
(40,073 |
) |
|
|
(3,361 |
) |
Prepaid
expenses and other, net
|
|
|
15,301 |
|
|
|
(12,102 |
) |
Medical
benefits payable
|
|
|
91,708 |
|
|
|
231,430 |
|
Unearned
premiums
|
|
|
(60,489 |
) |
|
|
(19,325 |
) |
Accounts
payable
|
|
|
2,019 |
|
|
|
922 |
|
Other
accrued expenses
|
|
|
(66,484 |
) |
|
|
15,641 |
|
Other
payables to government partners
|
|
|
18,397 |
|
|
|
(100,984 |
) |
Amounts
accrued related to investigation resolution
|
|
|
30,249 |
|
|
|
|
|
Taxes,
net
|
|
|
(5,450 |
) |
|
|
(10,583 |
) |
Other,
net
|
|
|
(1,999 |
) |
|
|
(36,774 |
) |
Net
cash provided by operating activities
|
|
|
69,542 |
|
|
|
170,009 |
|
Cash
from (used in) investing activities:
|
|
|
|
|
|
|
|
|
Purchases
of investments
|
|
|
(19,295 |
) |
|
|
(157,947 |
) |
Proceeds
from sale and maturities of investments
|
|
|
34,012 |
|
|
|
273,156 |
|
Purchases
of restricted investments
|
|
|
(64,039 |
) |
|
|
(119,572 |
) |
Proceeds
from maturities of restricted investments
|
|
|
131,707 |
|
|
|
8,945 |
|
Additions
to property and equipment, and capitalized software, net
|
|
|
(9,908 |
) |
|
|
(13,412 |
) |
Net
cash provided by (used in) investing activities
|
|
|
72,477 |
|
|
|
(8,830 |
) |
Cash
from (used in) financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from option exercises and other
|
|
|
418 |
|
|
|
1,039 |
|
Purchase
of treasury stock
|
|
|
|
|
|
|
(2,400 |
) |
Incremental
tax benefit received for stock based compensation
|
|
|
|
|
|
|
2,162 |
|
Payments
on debt
|
|
|
(152,800 |
) |
|
|
(1,200 |
) |
Funds
received for the benefits of members, net of disbursements
|
|
|
(341 |
) |
|
|
7,094 |
|
Net
cash (used in) provided by financing activities
|
|
|
(152,723 |
) |
|
|
6,695 |
|
Cash
and cash equivalents:
|
|
|
|
|
|
|
|
|
(Decrease)
increase during the period
|
|
|
(10,704 |
) |
|
|
167,874 |
|
Balance
at beginning of year
|
|
|
1,181,922 |
|
|
|
1,008,409 |
|
Balance
at end of year
|
|
$ |
1,171,218 |
|
|
$ |
1,176,283 |
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
Cash
paid for taxes
|
|
$ |
58,489 |
|
|
$ |
44,223 |
|
Cash
paid for interest
|
|
$ |
2,642 |
|
|
$ |
8,001 |
|
See
notes to unaudited condensed consolidated financial statements.
WELLCARE
HEALTH PLANS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited,
in thousands, except member, share and per share data)
1.
ORGANIZATION AND BASIS OF
PRESENTATION
|
WellCare
Health Plans, Inc., a Delaware corporation (the “Company,” “we,” “us,” or
“our”), provides managed care services exclusively to government-sponsored
health care programs, focusing on Medicaid and Medicare, including health plans
for families, children, the aged, blind and disabled and prescription drug
plans, serving approximately 2,330,000 members nationwide as of September 30,
2009. Our Medicaid plans include plans for recipients of the
Temporary Assistance for Needy Families (“TANF”) programs, Supplemental Security
Income (“SSI”) programs, Aged Blind and Disabled (“ABD”) programs, Children’s
Health Insurance Programs (“CHIP”) and the Family Health Plus (“FHP”)
programs. Through our licensed subsidiaries, as of September 30,
2009, we operated our Medicaid health plans in Florida, Georgia, Hawaii,
Illinois, Missouri, New York and Ohio. Our Medicare plans include
stand-alone prescription drug plans (“PDP”) and Medicare Advantage (“MA”) plans,
which include both Medicare coordinated care plans (“CCP”) and Medicare private
fee-for-service (“PFFS”) plans. As of September 30, 2009, we offered
our CCP plans in Connecticut, Florida, Georgia, Hawaii, Illinois, Indiana,
Louisiana, Missouri, New Jersey, New York, Ohio and Texas, our PDP plans in 50
states and the District of Columbia and our PFFS plans in 40 states and the
District of Columbia.
Basis
of Presentation
The
accompanying unaudited condensed consolidated interim financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto included in our Annual Report on Form 10-K for the fiscal year
ended December 31, 2008 (the “2008 10-K”), filed with the U.S. Securities and
Exchange Commission (the “SEC”) in March 2009. In the opinion of our
management, the interim financial statements reflect all normal recurring
adjustments that we consider necessary for the fair presentation of our
financial position and results of operations and cash flows for the interim
periods presented. The interim financial statements included herein
have been prepared in accordance with accounting principles generally accepted
in the United States of America (“GAAP”) and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly,
certain information and footnote disclosures normally included in financial
statements prepared in accordance with GAAP have been condensed or
omitted. Results for the interim periods presented are not
necessarily indicative of results that may be expected for the entire year or
any other interim period. We have evaluated all material events
subsequent to the date of our financial statements through the filing date of
this quarterly report.
Net
Income (Loss) per Share
We compute
basic net income (loss) per common share on the basis of the weighted-average
number of unrestricted common shares outstanding. Diluted net income
(loss) per common share is computed on the basis of the weighted-average number
of unrestricted common shares outstanding plus the dilutive effect of
outstanding restricted shares, restricted stock units and stock options using
the treasury stock method. The following table presents the
calculation of net income (loss) per common share — basic and
diluted:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) — basic and diluted
|
|
$ |
28,660 |
|
|
$ |
(18,169 |
) |
|
$ |
28,732 |
|
|
$ |
(5,744 |
) |
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
common shares outstanding — basic
|
|
|
41,849,749 |
|
|
|
41,538,055 |
|
|
|
41,771,713 |
|
|
|
41,321,526 |
|
Dilutive
effect of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested
restricted common shares and units
|
|
|
348,539 |
|
|
|
— |
|
|
|
175,149 |
|
|
|
— |
|
Stock
options
|
|
|
81,747 |
|
|
|
— |
|
|
|
60,440 |
|
|
|
— |
|
Weighted-average
common shares outstanding — diluted
|
|
|
42,280,035 |
|
|
|
41,538,055 |
|
|
|
42,007,302 |
|
|
|
41,321,526 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.68 |
|
|
$ |
(0.44 |
) |
|
$ |
0.69 |
|
|
$ |
(0.14 |
) |
Diluted
|
|
$ |
0.68 |
|
|
$ |
(0.44 |
) |
|
$ |
0.68 |
|
|
$ |
(0.14 |
) |
Certain options to purchase common stock were not included in the calculation of
diluted net income (loss) per common share because their exercise prices were
greater than the average market price of our common stock for the period and,
therefore, the effect would be anti-dilutive. For the three and nine
months ended September 30, 2009, approximately 1,200,422 and 1,580,570
restricted equity awards as well as 2,133,215 options with exercise prices
ranging from $19.38 to $105.37 per share and 2,212,824 options with exercise
prices ranging from $13.13 to $105.37 per share were excluded from diluted
weighted-average common shares outstanding, respectively. Due to the net loss
for the three and nine months ended September 30, 2008, the assumed
exercise of 5,692,115 equity awards had an antidilutive effect and was therefore
excluded from the computation of diluted loss per share.
Recently Issued
Accounting Standards
In August
2009, the Financial Accounting Standards Board (“FASB”) issued authoritative
guidance surrounding the fair value measurements and disclosures of
liabilities. This guidance provides clarification in circumstances
where a quoted market price in an active market for an identical liability is
not available, a reporting entity is required to measure the fair value of the
liability using either: (1) the quoted price of the identical liability when
traded as an asset; (2) the quoted prices for similar liabilities or
similar liabilities when traded as assets; or (3) another valuation technique,
such as a present value calculation or the amount that the reporting entity
would pay to transfer the identical liability or would receive to enter into the
identical liability. This statement becomes effective for the first reporting
period (including interim periods) beginning after issuance. We adopted this
guidance during the third quarter of 2009, as required. The adoption
did not have a material impact on our financial statements.
In June
2009, the FASB issued authoritative guidance serving as the single source of
authoritative non-governmental U.S. GAAP (the “Codification”), superseding
various existing authoritative accounting pronouncements. The Codification now
establishes one level of authoritative GAAP. All other literature is considered
non-authoritative. This Codification was launched on July 1, 2009 and is
effective for financial statements issued for interim and annual periods ending
after September 15, 2009. We have adopted the Codification during the third
quarter of 2009. However, there will be no change to our consolidated financial
statements due to the implementation of the Codification other than changes in
reference to various authoritative accounting pronouncements in our consolidated
financial statements.
In June
2009, the FASB issued authoritative guidance to modify financial reporting by
enterprises involved with variable interest entities by addressing the effects
on certain provisions of previously issued guidance on the consolidation of
variable interest entities (“VIE”), as a result of eliminating the qualifying
special-purpose entity (“SPE”) concept in accounting for transfers of financial
assets, and (2) constituent concerns about the application of certain key
provisions of previously issued guidance on VIEs, including those in which the
accounting and disclosures do not always provide timely and useful information
about an enterprise’s involvement in a VIE. This guidance shall be effective as
of January 1, 2010, our first annual reporting period beginning after November
15, 2009. Earlier application is prohibited. The adoption of
this guidance is not currently expected to have a material effect on our
financial statements.
In June
2009, the FASB issued authoritative guidance modifying the relevance,
representational faithfulness and comparability of the information that a
reporting entity provides in its financial statements about a transfer of
financial assets; the effects of a transfer on its financial position, financial
performance, and cash flows; and a transferor’s continuing involvement, if any,
in transferred financial assets. The FASB undertook this project to
address: (1) practices that have developed since the issuance of previous
guidance concerning the accounting for transfers and servicing of financial
assets and extinguishments of liabilities, that are not consistent with the
original intent and key requirements of that statement and (2) concerns of
financial statement users that many of the financial assets (and related
obligations) that have been derecognized should continue to be reported in the
financial statements of transferors. This guidance must be applied as of
January 1, 2010, the beginning of our first annual reporting period after
November 15, 2009. Earlier application is prohibited. This guidance must
also be applied to transfers occurring on or after the effective
date. Additionally, on and after the effective date, the concept of a
qualifying SPE is no longer relevant for accounting purposes. Therefore, a
formerly qualifying SPE should be evaluated for consolidation by reporting
entities on and after the effective date in accordance with the applicable
consolidation guidance. If the evaluation on the effective date results in
consolidation, the reporting entity should apply the transition guidance
provided in the pronouncement that requires consolidation. The disclosure
provisions of this guidance should be applied to transfers that occurred both
before and after the effective date of this statement. The adoption is not
currently expected to have a material effect on our financial
statements.
In May
2009, the FASB issued authoritative guidance that provides general standards of
accounting for and disclosure of events that occur after the balance sheet date
but before financial statements are issued or are available to be issued. The
guidance sets forth the period after the balance sheet date during which
management of a reporting entity should evaluate events or transactions that may
occur for potential recognition or disclosure in the financial statements. The
guidance also sets forth the circumstances under which an entity should
recognize events or transactions occurring after the balance sheet date in its
financial statements. Furthermore, this guidance identifies the
disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. We adopted this guidance, as required in
the second quarter of 2009.
In April
2009, the FASB issued authoritative guidance on the recognition and presentation
of other-than-temporary impairments (“OTTI”) modifying previous OTTI guidance
for debt securities through increased consistency in the timing of impairment
recognition and enhanced disclosures related to the credit and noncredit
components of impaired debt securities that are not expected to be
sold. In addition, increased disclosures are required for both debt
and equity securities regarding expected cash flows, credit losses, and an aging
of securities with unrealized losses. We adopted this guidance during
the second quarter of 2009, as required. The adoption did not have a
material impact on our financial statements.
In April
2009, the FASB issued authoritative guidance that requires fair value
disclosures for financial instruments that are not reflected in the Condensed
Consolidated Balance Sheets at fair value. Prior to the issuance of
this guidance, the fair values of those assets and liabilities were disclosed
only once each year. We now disclose this information on a quarterly
basis, providing quantitative and qualitative information about fair value
estimates for all financial instruments not measured in the Condensed
Consolidated Balance Sheets at fair value. We adopted this guidance
during the second quarter of 2009, as required. The adoption did not
have a material impact on our financial statements.
In April
2009, the FASB issued authoritative guidance in regard to (1) determining fair
value when the volume and level of activity for the asset or liability has
significantly decreased and (2) identifying transactions that are considered not
orderly. This guidance specifically clarifies the methodology used to
determine fair value when there is no active market or where the price inputs
being used represent distressed sales. The guidance also reaffirms
the objective of a fair value measurement, which is to reflect how much an asset
would be sold for in an orderly transaction. It also reaffirms the
need to use judgment to determine if a formerly active market has become
inactive, as well as to determine fair values when markets have become
inactive. This guidance was adopted and applied prospectively during
the second quarter of 2009, as required. The adoption did not have a
material impact on our financial statements.
2. SEGMENT REPORTING
Reportable
segments are defined as components of an enterprise for which discrete financial
information is available and evaluated on a regular basis, by the chief
operating decision-maker or decision-making groups, to determine how resources
should be allocated to an individual segment and assessing performance of those
segments. Accordingly, our operations are bifurcated into two
reportable segments: Medicaid and Medicare. The segments were
determined based upon the type of governmental administration and funding of the
health plans.
Our
Medicaid segment includes plans for beneficiaries of TANF, SSI, ABD, CHIP and
FHP. TANF generally provides assistance to low-income families with
children and SSI generally provides assistance to low-income aged, blind or
disabled individuals. Our Medicaid segment also includes other
programs which are not part of the Medicaid program, such as CHIP and FHP for
qualifying families who are not eligible for Medicaid because they exceed the
applicable income thresholds.
Our
Medicare segment includes stand-alone PDP and MA plans, which include CCP and
PFFS plans.
Balance
sheet, investment and other income, and other expense details by segment have
not been disclosed, as they are not reported internally by us.
|
|
Three Months
Ended
September 30,
|
|
|
Nine Months
Ended
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medicaid
premium revenue
|
|
$ |
814,111 |
|
|
$ |
771,035 |
|
|
$ |
2,437,048 |
|
|
$ |
2,252,681 |
|
Medicare
premium revenue
|
|
|
851,920 |
|
|
|
858,271 |
|
|
|
2,808,761 |
|
|
|
2,634,018 |
|
Total
premium revenue
|
|
|
1,666,031 |
|
|
|
1,629,306 |
|
|
|
5,245,809 |
|
|
|
4,886,699 |
|
Investment
and other income
|
|
|
1,614 |
|
|
|
8,126 |
|
|
|
8,375 |
|
|
|
33,072 |
|
Total
revenues
|
|
|
1,667,645 |
|
|
|
1,637,432 |
|
|
|
5,254,184 |
|
|
|
4,919,771 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medicaid
medical benefits expense
|
|
|
710,310 |
|
|
|
686,885 |
|
|
|
2,091,908 |
|
|
|
1,919,549 |
|
Medicare
medical benefits expense
|
|
|
709,883 |
|
|
|
756,857 |
|
|
|
2,385,302 |
|
|
|
2,298,705 |
|
Total
medical benefits expense
|
|
|
1,420,193 |
|
|
|
1,443,742 |
|
|
|
4,477,210 |
|
|
|
4,218,254 |
|
Other
expenses
|
|
|
201,520 |
|
|
|
237,158 |
|
|
|
703,122 |
|
|
|
715,263 |
|
Total
expenses
|
|
|
1,621,713 |
|
|
|
1,680,900 |
|
|
|
5,180,332 |
|
|
|
4,933,517 |
|
Income
(loss) before income taxes
|
|
$ |
45,932 |
|
|
$ |
(43,468 |
) |
|
$ |
73,852 |
|
|
$ |
(13,746 |
) |
3.
EQUITY-BASED COMPENSATION
The
compensation expense recorded, which correspondingly also increased
Paid-in-capital, related to our equity-based compensation awards for the three
months ended September 30, 2009 and 2008 was $10,534 and $10,440,
respectively, and $29,776 and $28,309 for the nine months ended
September 30, 2009 and 2008, respectively. A summary of our
restricted stock, restricted stock unit (“RSU”) and option activity for the nine
months ended September 30, 2009 is presented in the table below.
|
|
Restricted
Stock and RSU
|
|
|
Weighted
Average Grant-Date Fair Value
|
|
|
Options
|
|
|
Weighted
Average Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
as of January 1, 2009
|
|
|
1,165,816 |
|
|
$ |
50.53 |
|
|
|
4,278,118 |
|
|
$ |
42.75 |
|
Granted
|
|
|
813,119 |
|
|
|
21.04 |
|
|
|
373,000 |
|
|
|
22.41 |
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
(43,157 |
) |
|
|
9.52 |
|
Vested
|
|
|
(260,375 |
) |
|
|
48.94 |
|
|
|
|
|
|
|
|
|
Forfeited
and expired
|
|
|
(178,813 |
) |
|
|
55.52 |
|
|
|
(1,159,379 |
) |
|
|
45.30 |
|
Option
exchange (1)
|
|
|
269,262 |
|
|
|
26.55 |
|
|
|
(1,077,960 |
) |
|
|
48.59 |
|
Outstanding
at September 30, 2009
|
|
|
1,809,009 |
|
|
|
39.67 |
|
|
|
2,370,622 |
|
|
|
36.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at September 30, 2009
|
|
|
n/a |
|
|
|
n/a |
|
|
|
1,162,925 |
|
|
|
37.42 |
|
|
(1)
|
Certain
eligible employees were offered the opportunity to voluntarily exchange
any vested or unvested outstanding options with an exercise price of
greater than $40.00 per share, for a number of RSUs, which are subject to
a new vesting schedule, based on the exchange ratios set forth on Schedule
TO, filed on August 17, 2009 with the SEC. This option exchange
was a value-for-value modification and accordingly, incremental
compensation expense was not
incurred.
|
As of
September 30, 2009, there was $55,504 of unrecognized compensation costs related
to non-vested equity-based compensation arrangements that is expected to be
recognized over a weighted-average period of 2.0 years.
4.
FAIR VALUE MEASUREMENTS
Fair
value measurements apply to all financial assets and liabilities that are being
measured and reported on a fair value basis. Accounting standards
require that fair value measurements be classified and disclosed in one of the
following three categories: Level 1, defined as observable inputs
such as quoted prices in active markets; Level 2, defined as inputs other than
quoted prices in active markets that are either directly or indirectly
observable; and Level 3, defined as unobservable inputs in which little or no
market data exists, therefore requiring an entity to develop its own
assumptions.
Our
Condensed Consolidated Balance Sheets include the following financial
instruments: cash and cash equivalents, investments, receivables, accounts
payable, medical benefits payable, amounts accrued related to the investigation
resolution and
debt. The carrying amounts of current assets and liabilities approximate
their fair value because of the relatively short period of time between the
origination of these instruments and their expected
realization.
As of
September 30, 2009, our investments included municipal note investments with an
auction reset feature (“auction rate securities”) that had an aggregate par
value of $57,000. These auction rate securities had auctions that
failed during the nine months ended September 30, 2009. As a result,
our ability to liquidate and fully recover the carrying value of our remaining
auction rate securities in the near term may be limited or
non-existent. We do not believe our auction rate securities are
impaired, primarily due to government guarantees or municipal bond insurance
and, as a result, did not record any impairment losses for our auction rate
securities for the three or nine months ended September 30, 2009. We
have the ability and the present intent to hold the securities until market
stability is restored, but as these securities are believed to be in an inactive
market, we have estimated the fair value of these securities using a discounted
cash flow model. This model considered, among other things, the
collateralization underlying the securities, the creditworthiness of the
counterparty, the timing of expected future cash flows, and the expectation of
the next time the security would be expected to have a successful auction. The
estimated values of these securities were also compared, when possible, to
valuation data with respect to similar securities held by other parties. Prior
to January 1, 2008, these securities were recorded at fair value based on
quoted prices in active markets (i.e., Level 1 data).
The
following table includes our assets and liabilities measured at fair value on a
recurring basis:
|
|
|
|
|
Fair
Value Measurements at September 30, 2009 Using:
|
|
|
|
|
|
|
Quoted
Prices in Active Markets for
Identical Assets
|
|
|
Significant
Other
Observable
Inputs
|
|
|
Significant Unobservable Inputs
|
|
Description
|
|
September
30, 2009
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
and Long-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates
of deposit
|
|
$ |
55,541 |
|
|
$ |
55,541 |
|
|
$ |
|
|
|
$ |
|
|
Auction
rate securities
|
|
|
53,301 |
|
|
|
|
|
|
|
|
|
|
|
53,301 |
|
Other
municipal variable rate bonds
|
|
|
3,815 |
|
|
|
3,815 |
|
|
|
|
|
|
|
|
|
Total
Investments and Long-term investments:
|
|
$ |
112,657 |
|
|
$ |
59,356 |
|
|
$ |
|
|
|
$ |
53,301 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$ |
4,375 |
|
|
$ |
4,375 |
|
|
$ |
|
|
|
$ |
|
|
Certificates
of deposit
|
|
|
1,721 |
|
|
|
1,721 |
|
|
|
|
|
|
|
|
|
U.S.
Government securities
|
|
|
20,848 |
|
|
|
20,848 |
|
|
|
|
|
|
|
|
|
Money
market funds
|
|
|
104,377 |
|
|
|
104,377 |
|
|
|
|
|
|
|
|
|
Total
Restricted investments
|
|
$ |
131,321 |
|
|
$ |
131,321 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
accrued related to investigation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
resolution(1)
|
|
$ |
55,448 |
|
|
$ |
|
|
|
$ |
55,448 |
|
|
$ |
|
|
|
(1)
|
These
amounts are included in the short- and long-term portions of amounts
accrued related to investigation resolution line items in our Condensed
Consolidated Balance Sheet as of September 30,
2009.
|
|
|
|
|
|
Fair
Value Measurements at December 31, 2008 Using:
|
|
|
|
|
|
|
Quoted
Prices in
|
|
|
|
|
|
Significant
|
|
|
|
|
|
|
Active
Markets for
|
|
|
Significant
Other
|
|
|
Unobservable
|
|
|
|
|
|
|
Identical
Assets
|
|
|
Observable
Inputs
|
|
|
Inputs
|
|
Description
|
|
December
31, 2008
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
and Long-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates
of deposit
|
|
$ |
66,187 |
|
|
$ |
66,187 |
|
|
$ |
|
|
|
$ |
|
|
Auction
rate securities
|
|
|
54,972 |
|
|
|
|
|
|
|
|
|
|
|
54,972 |
|
Other
municipal variable rate bonds
|
|
|
3,925 |
|
|
|
3,925 |
|
|
|
|
|
|
|
|
|
Total
Investments and Long-term investments:
|
|
$ |
125,084 |
|
|
$ |
70,112 |
|
|
$ |
|
|
|
$ |
54,972 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$ |
5,894 |
|
|
$ |
5,894 |
|
|
$ |
|
|
|
$ |
|
|
Certificates
of deposit
|
|
|
1,713 |
|
|
|
1,713 |
|
|
|
|
|
|
|
|
|
U.S.
Government securities
|
|
|
19,765 |
|
|
|
19,765 |
|
|
|
|
|
|
|
|
|
Money
market funds
|
|
|
171,967 |
|
|
|
171,967 |
|
|
|
|
|
|
|
|
|
Total
Restricted investments
|
|
$ |
199,339 |
|
|
$ |
199,339 |
|
|
$ |
|
|
|
$ |
|
|
The
following table represents our auction rate securities measured at fair value on
a recurring basis using significant unobservable inputs (Level 3):
|
|
Fair
Value Measurements
|
|
|
|
Using
Significant
|
|
|
|
Unobservable
Inputs
|
|
|
|
(Level
3)
|
|
|
|
Three
months ended September 30,
2009
|
|
|
Nine
months ended September 30,
2009
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$ |
51,488 |
|
|
$ |
54,972 |
|
Realized
gains (losses) in earnings (or changes in net assets)
|
|
|
|
|
|
|
|
|
Unrealized
gains (losses) in other comprehensive income (a)
|
|
|
1,813 |
|
|
|
2,729 |
|
Purchases,
issuances and settlements
|
|
|
|
|
|
|
|
|
Transfers
in and/or out of Level 3 (b)
|
|
|
|
|
|
|
(4,400 |
) |
Ending
balance at September 30, 2009
|
|
$ |
53,301 |
|
|
$ |
53,301 |
|
|
(a)
|
As
a result of the increase in the fair value of our investments in auction
rate securities, we recorded a net unrealized gain of $1,813 to
Accumulated other comprehensive loss for the three months ended September
30, 2009. For the nine months ended September 30, 2009, the net
result is an unrealized gain of $2,729 to Accumulated other comprehensive
loss. The increase in unrealized gain was driven by the
stabilization and improvement within the municipal bond market during the
third quarter of the 2009.
|
|
(b)
|
A
$4,400 auction rate security tranche was redeemed by the issuer at par in
February 2009. Accordingly, we recorded an adjustment to the fair market
valuation of the issuer’s auction rate securities during the first quarter
of 2009.
|
|
|
Fair
Value Measurements
|
|
|
|
Using
Significant
|
|
|
|
Unobservable
Inputs
|
|
|
|
(Level
3)
|
|
|
|
Three
months ended
|
|
Nine
months ended
|
|
|
|
September
30, 2008
|
|
September
30, 2008
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$ 63,030
|
|
$
|
|
Realized
gains (losses) in earning (or changes in net assets)
|
|
|
|
|
|
Unrealized
gains (losses) in other comprehensive income
|
|
(1,549
|
)
|
(5,368
|
)
|
Purchases,
issuances and settlements
|
|
(5,450
|
)
|
(52,475
|
)
|
Transfers
in and/or out of Level 3
|
|
|
|
113,874
|
|
Ending
balance at September 30, 2008
|
|
$ 56,031
|
|
$ 56,031
|
|
5.
INCOME TAXES
As of
September 30, 2009, we have $18,318 of unrecognized tax benefits, a net
decrease of $8,329 from $26,647 as of December 31, 2008. This decrease,
which relates primarily to the recognition of tax benefits as a result of filing
an accounting method change, had no impact on the effective tax rate for the
nine months ended September 30, 2009.
Our
remaining unrecognized tax benefits at September 30, 2009, of approximately
$1,093 and related interest and penalties would favorably impact the effective
tax rate if ultimately realized. We believe it is reasonably possible that
our unrecognized tax benefits will not significantly increase or decrease during
the next twelve months as a result of audit settlements and the expiration of
statutes of limitations in certain major jurisdictions.
We
currently file income tax returns in the U.S. federal jurisdiction and various
states. We are currently under examination by the U.S. Internal Revenue Service
(“IRS”) for tax year 2007 and to date, no changes have been proposed. The IRS
completed its exams on the consolidated income tax returns for the 2004 through
2006 tax years in March 2009. As a result, our total tax liability
decreased $6,414 during the first quarter of 2009.
6.
DEBT
We and
certain of our subsidiaries were parties to a credit agreement, which was repaid
in full in May 2009.
7.
COMMITMENTS AND CONTINGENCIES
Government
Investigations
As previously
disclosed, on May 5, 2009, we entered into a Deferred Prosecution Agreement
(the “DPA”) with the United States Attorney’s Office for the Middle District of
Florida (the “USAO”) and the Florida Attorney General’s Office. The DPA
has resolved previously disclosed investigations by the USAO and the Florida
Attorney General’s Office.
Pursuant to
the DPA, the USAO filed a one-count criminal information (the “Information”) in
the United States District Court for the Middle District of Florida, Tampa
Division (the “Court”), charging us with conspiracy to commit health care fraud
against the Florida Medicaid Program in connection with reporting of
expenditures under certain community behavioral health contracts, and against
the Florida Healthy Kids programs, under certain contracts, in violation of 18
U.S.C. Section 1349. The USAO recommended to the Court that the
prosecution of us be deferred during the duration of the DPA. If we have
complied with the DPA, within five days of its expiration, the USAO will
seek dismissal with prejudice of the Information.
The term of
the DPA is thirty-six months, but such term may be reduced by the USAO to
twenty-four months upon consideration of certain factors set forth in the DPA,
including our continued remedial actions and compliance with all federal and
state health care laws and regulations.
In accordance
with the DPA, the USAO has filed a statement of facts relating to this matter.
As a part of the DPA, we have retained, at our expense, an outside independent
monitor (the “Monitor”), for a period of 18 months from his retention in August
2009. The Monitor was selected by the USAO after consultation with
us. In addition, we agreed to continue undertaking remedial measures to
ensure full compliance with all federal and state health care
laws. Among other things, the Monitor will review our compliance with
the DPA and all applicable federal and state health care laws, regulations and
programs. The Monitor also will review, evaluate and, as necessary,
make written recommendations concerning certain of our policies and
procedures. The DPA provides that the Monitor will undertake to avoid
the disruption of our ordinary business operations or the imposition of
unnecessary costs or expenses.
The DPA does
not, nor should it be construed to, operate as a settlement or release of any
civil or administrative claims for monetary, injunctive or other relief against
us, whether under federal, state or local statutes, regulations or common
law. Furthermore, the DPA does not operate, nor should it be
construed, as a concession that we are entitled to any limitation of our
potential federal, state or local civil or administrative
liability.
Pursuant to
the terms of the DPA, we agreed to pay to the USAO a total of $80,000, comprised
of (a) $35,200 that we paid in August 2008, (b) a payment of
$25,000 that we paid in May 2009 and (c) a payment of $19,800 to be made no
later than December 31, 2009. These amounts were previously
accrued in our financial statements for the year ended December 31, 2007;
accordingly, there was no incremental expense recorded in association with these
matters during the three and nine months ended September 30,
2009. Accordingly, $19,800 remains accrued within the Current portion
of amounts accrued related to investigation resolution line item in our
Condensed Consolidated Balance Sheet as of September 30, 2009 for amounts
payable under the DPA.
On
May 18, 2009, we resolved the previously disclosed investigation by the
SEC. Under the terms of the Consent and Final Judgment, without
admitting or denying the allegations in the complaint filed by the SEC, we
consented to the entry of a permanent injunction against any future violations
of certain specified provisions of the federal securities laws. In
addition, we agreed to pay, in four quarterly installments, a civil penalty in
the aggregate amount of $10,000 and disgorgement in the amount of one dollar
plus post-judgment interest, of which the first two payments have been
made. If we fail to pay timely, in full, any amount due under the Consent
and Final Judgment, all outstanding amounts (including post-judgment interest),
minus any payments already made, will immediately become due and payable. These
amounts were previously included in the range of probable losses determined by
management’s best estimate and recorded in our March 31, 2009 financial
statements. Accordingly, there was no incremental expense recorded in
our Condensed Consolidated Statements of Operations for the three months ended
September 30, 2009. As of September 30, 2009, $5,000 remains accrued within the
Current portion of amounts accrued related to investigation resolution line item
in our Condensed Consolidated Balance Sheets related to the Consent and Final
Judgment.
As
previously disclosed, we remain engaged in resolution discussions as to matters
under review with the Civil Division of the United States Department of Justice
(the “Civil Division”) and the Office of Inspector General of the U.S.
Department of Health and Human Services. Management currently estimates that the
remaining liability associated with these matters is approximately $60,000, plus
interest. We anticipate these amounts will be payable in installments over a
54-month period. In accordance with fair value accounting guidance,
we discounted the liability and recorded it at its fair value of approximately
$55,448. This amount remains accrued in our Condensed Consolidated
Balance Sheet as of September 30, 2009 within the short and long term portions
of Amounts accrued related to investigation resolution line
items. The final timing, terms and conditions of a civil resolution
may differ from those currently anticipated, which may result in an adjustment
to our recorded amounts. These adjustments may be
material.
In addition,
we are responding to subpoenas issued by the State of Connecticut Attorney
General’s Office involving transactions between us and our affiliates and their
potential impact on the costs of Connecticut’s Medicaid program. We
have communicated with regulators in states in which our health maintenance
organization and insurance operating subsidiaries are domiciled regarding the
investigations, and we are cooperating with federal and state regulators and
enforcement officials in all of these matters. We do not know
whether, or the extent to which, any pending investigations might lead to the
payment of fines or penalties, the imposition of injunctive relief and/or
operating restrictions.
In a
letter dated October 15, 2008, the Civil Division informed us that as part
of the pending civil inquiry, the Civil Division is investigating a number of
qui tam complaints
filed by relators against us under the whistleblower provisions of the False
Claims Act, 31 U.S.C. sections 3729-3733. The seal in those cases has
been partially lifted for the purpose of authorizing the Civil Division to
disclose to us the existence of the qui tam
complaints. The complaints otherwise remain under seal as
required by 31 U.S.C. section 3730(b)(3). In connection with the
ongoing resolution discussions with the Civil Division, we are undertaking to
address the allegations by the qui tam
relators.
We also
learned from a docket search that a former employee filed a qui tam action on
October 25, 2007 in state court for Leon County, Florida against several
defendants, including us and one of our subsidiaries. Because qui tam actions brought under
federal and state false claims acts are sealed by the court at the time of
filing, we are unable to determine the nature of the allegations and, therefore,
we do not know at this time whether this action relates to the subject matter of
the federal investigations. It is possible that additional qui tam actions have been
filed against us and are under seal. Thus, it is possible that we are
subject to liability exposure under the False Claims Act, or similar state
statutes, based on qui tam
actions other than those discussed in this Quarterly Report on Form 10-Q
or the Annual Report on Form 10-K.
Class Action
and Derivative Lawsuits
Putative
class action complaints were filed on October 26, 2007 and on
November 2, 2007. These putative class actions, entitled
Eastwood Enterprises, L.L.C. v. Farha, et al. and Hutton v. WellCare Health
Plans, Inc. et al., respectively, were filed in the United States District Court
for the Middle District of Florida against us, Todd Farha, our former chairman
and
chief
executive officer, and Paul Behrens, our former senior vice president and chief
financial officer. Messrs. Farha and Behrens were also officers
of various subsidiaries of ours. The Eastwood Enterprises complaint
alleges that the defendants materially misstated our reported financial
condition by, among other things, purportedly overstating revenue and
understating expenses in amounts unspecified in the pleading in violation of the
Securities Exchange Act of 1934 (“Exchange Act”), as amended. The
Hutton complaint alleges that various public statements supposedly issued by
defendants were materially misleading because they failed to disclose that we
were purportedly operating our business in a potentially illegal and improper
manner in violation of applicable federal guidelines and
regulations. The complaint asserts claims under the Exchange Act, as
amended. Both complaints seek, among other things, certification as a
class action and damages. The two actions were consolidated, and
various parties and law firms filed motions seeking to be designated as Lead
Plaintiff and Lead Counsel. In an Order issued on March 11,
2008, the Court appointed a group of five public pension funds from New Mexico,
Louisiana and Chicago (the “Public Pension Fund Group”) as Lead
Plaintiffs. On October 31, 2008, an amended consolidated
complaint was filed in this class action against us, Messrs. Farha and
Behrens, and adding Thaddeus Bereday, our former senior vice president and
general counsel, as a defendant. On January 23, 2009, we and
certain other defendants filed a joint motion to dismiss the amended
consolidated complaint, arguing, among other things, that the complaint failed
to allege a material misstatement by defendants with respect to our compliance
with marketing and other health care regulations and failed to plead facts
raising a strong inference of scienter with respect to all aspects of the
purported fraud claim. The court denied the motion on September 28,
2009 and we and the other defendants have until November 13, 2009 to file our
answer to the amended consolidated complaint. Separately, on October
27, 2009, an action was filed against us in the Court of Chancery of the State
of Delaware entitled Behrens, et al. v. WellCare Health Plans, Inc. in which the
plaintiffs, Messrs. Behrens, Bereday, and Farha, seek an order requiring us to
pay their respective expenses, including attorney fees, in connection with
litigation and investigations in which the plaintiffs are involved by reason of
their service as our directors and officers. Plaintiffs further seek an order to
compel the advancement by us for expenses incurred by the plaintiffs in the
proceedings against them without us being permitted to impose the requirement on
the plaintiffs of first submitting their expense invoices for review and payment
by our directors’ and officers’ insurance carrier for its preliminary review and
evaluation. We intend to defend ourselves vigorously against these
claims. At this time, neither we nor any of our subsidiaries can
predict the probable outcome of these claims. Accordingly, no amounts
have been accrued in our consolidated financial statements.
Five
putative shareholder derivative actions were filed between October 29, 2007
and November 15, 2007. The first two of these putative
shareholder derivative actions, entitled Rosky v. Farha, et al. and Rooney v.
Farha, et al., respectively, are supposedly brought on behalf of us and were
filed in the United States District Court for the Middle District of
Florida. Two additional actions, entitled Intermountain Ironworkers
Trust Fund v. Farha, et al., and Myra Kahn Trust v. Farha, et al., were filed in
Circuit Court for Hillsborough County, Florida. All four of these
actions are asserted against all of our directors (and former director Todd
Farha) except for Glenn D. Steele, Jr., David Gallitano, D. Robert Graham, Heath
Schiesser and Charles Berg and also name us as a nominal defendant. A
fifth action, entitled Irvin v. Behrens, et al., was filed in the United States
District Court for the Middle District of Florida and asserts claims against all
of our directors (and former director Todd Farha) except Glenn D. Steele, Jr.,
Heath Schiesser, David Gallitano and Charles Berg and against two of our former
officers, Paul Behrens and Thaddeus Bereday. All five actions
contend, among other things, that the defendants allegedly allowed or caused us
to misrepresent our reported financial results, in amounts unspecified in the
pleadings, and seek damages and equitable relief for, among other things, the
defendants’ supposed breach of fiduciary duty, waste and unjust
enrichment. The three actions in federal court have been
consolidated. Subsequent to that consolidation, an additional
derivative complaint entitled City of Philadelphia Board of Pensions and
Retirement Fund v. Farha, et al. was filed in the same federal court, but
thereafter was consolidated with the existing consolidated action. A
motion to consolidate the two state court actions, to which all parties
consented, was granted, and plaintiffs filed a consolidated complaint on
April 7, 2008. On October 31, 2008, amended complaints were
filed in the federal court and the state court derivative actions. On
December 30, 2008, we filed substantially similar motions to dismiss both
actions, contesting, among other things, the standing of the plaintiffs in each
of these derivative actions to prosecute the purported claims in our
name. In an Order entered on March 30, 2009 in the consolidated
federal action, the court denied the motions to dismiss the Second Amended
Consolidated Complaint. On April 28, 2009, in the consolidated state
action, the court denied the motion to dismiss the Second Amended Consolidated
Complaint. On April 29, 2009, upon the recommendation of the Nominating
and Corporate Governance Committee of our Board of Directors, the Board adopted
a resolution forming a Special Litigation Committee, comprised of a
newly-appointed independent director to investigate the facts and circumstances
underlying the claims asserted in the federal and state derivative cases and to
take such action with respect to such claims as the Special Litigation Committee
determines to be in our best interests. On May 1, 2009, the
Special Litigation Committee filed in the consolidated federal action a motion
to stay the matter until November 2009 to allow the Special Litigation
Committee to complete its investigation, and following a hearing on May 14,
2009, the court granted that motion and stayed the federal action. The Special
Litigation Committee filed a substantially identical motion in the consolidated
state action, and the plaintiffs in that action withdrew their request for a
hearing to contest that motion. Also, on October 28, 2009, the judge
overseeing the consolidated federal action granted a motion that had been filed
by several of the individual defendants to transfer responsibility for the case
to the judge within the same Court who is overseeing the class action case
described in the preceding paragraph. At this time, neither we nor any of our
subsidiaries can predict the probable outcome of these claims.
In
addition, derivative actions, by their nature, do not seek to recover damages
from the companies on whose behalf the plaintiff shareholders are purporting to
act. Accordingly, no amounts have been accrued in our consolidated
financial statements for these claims.
Other Lawsuits
and Claims
Separate and
apart from the legal matters described above, we are also involved in other
legal actions that are in the normal course of our business, some of which seek
monetary damages, including claims for punitive damages, which are not covered
by insurance. We currently believe that none of these actions, when
finally concluded and determined, will have a material adverse effect on our
financial position, results of operations or cash flows.
Item
2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations.
Forward
Looking Statements
Statements
contained in this Quarterly Report on Form 10-Q which are not historical
fact may be forward-looking statements within the meaning of Section 21E of
the Securities Exchange Act of 1934 as amended (“Exchange Act”). We
intend such statements to be covered by the safe harbor provisions for
forward-looking statements contained in Section 21E of the Exchange
Act. Such statements, which may address, among other things, market
acceptance of our products and services, expansion into new targeted markets,
product development, our ability to finance growth opportunities, our ability to
respond to changes in government regulations, sales and marketing strategies,
projected capital expenditures, liquidity and the availability of additional
funding sources may be found in the sections of this Quarterly Report on Form
10-Q entitled “Business,” “Risk Factors,” “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” and elsewhere in this
Quarterly Report on Form 10-Q generally. In some cases, you can identify
forward-looking statements by terminology such as “may,” “will,” “should,”
“expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,”
“potential,” “continues” or the negative of such terms or other comparable
terminology. You are cautioned that matters subject to
forward-looking statements involve risks and uncertainties, including economic,
regulatory, competitive and other factors that may affect our
business. These forward-looking statements are inherently susceptible
to uncertainty and changes in circumstances, as they are based on management’s
current expectations and beliefs about future events and
circumstances. We undertake no obligation beyond that required by law
to update publicly any forward-looking statements for any reason, even if new
information becomes available or other events occur in the future.
Our actual
results may differ materially from those indicated by forward-looking statements
as a result of various important factors including the expiration, cancellation
or suspension of our state and federal contracts. In addition, our
results of operations and projections of future earnings depend, in large part,
on accurately predicting and effectively managing health benefits and other
operating and non-operating expenses. A variety of factors may in the
future affect our ability to control our medical costs and other operating and
non-operating expenses. These factors include: competition; changes
in health care practices; changes in federal or state laws and regulations or
their interpretations; inflation; provider contract changes; changes in or
terminations of our contracts with government agencies; new technologies;
government-imposed surcharges; taxes or assessments; reduction in provider
payments by governmental payors; major epidemics; pandemics; disasters; general
economic conditions; the cost and availability of financing; and numerous other
factors affecting the delivery and cost of health care, such as major health
care providers’ inability to maintain their operations. Governmental
action or business conditions could result in premium revenues not increasing to
offset any increase in medical costs and other operating
expenses. Once set, premiums are generally fixed for one-year periods
and, accordingly, unanticipated costs during such periods cannot be recovered
through higher premiums. Furthermore, if we are unable to accurately
estimate incurred but not reported (“IBNR”) medical costs in the current period,
our future profitability may be affected. Due to these factors and
risks, we cannot provide any assurance regarding our future premium levels or
our ability to control our future medical costs.
From time to
time, at the federal and state government levels, legislative and regulatory
proposals have been made related to, or potentially affecting, the health care
industry, including but not limited to limitations on managed care
organizations, including benefit mandates, and reform of the Medicaid and
Medicare programs. Any such legislative and regulatory action,
including benefit mandates and reform of the Medicaid and Medicare programs,
could have the effect of reducing the premiums paid to us by governmental
programs, increasing our medical or administrative costs or requiring us to
materially alter the manner in which we operate. We are unable to
predict the specific content of any future legislation, action or regulation
that may be enacted or when any such future legislation or regulation will be
adopted. Therefore, we cannot predict accurately the effect or
ramifications of such future legislation, action or regulation on our
business.
Overview
Current
Financial Condition
Current Cash
Outlook
We refer
collectively to the cash and investment balances available in our non-regulated
subsidiaries as “unregulated cash” and “unregulated investments,” respectively;
and to cash and investment balances available in our regulated subsidiaries as
“regulated cash” and “regulated investments,” respectively. On
September 30, 2009, our total cash and investment balance was $1,171.2 million
as compared to a total cash and investment balance of $1,181.9 million as of
December 31, 2008. Of these amounts, $92.7 million and $152.6 million
were unregulated cash and investments as of September 30, 2009 and December 31,
2008, respectively, with the balance being comprised of regulated cash and
investments. The primary reasons for the changes in our unregulated
cash and investment position from December 31, 2008 to September 30, 2009 was
the repayment in full of amounts outstanding under our credit facility, as well
as the payment of resolution amounts to the United States Attorney’s Office for
the Middle District of Florida (the “USAO”) and the U.S. Securities and Exchange
Commission (the “SEC”), partially offset by dividends received from three of our
regulated subsidiaries.
We
continue to consider additional dividends from certain of our regulated
subsidiaries to increase our unregulated cash balance. However, we
cannot provide any assurances that if we decide to request approval from the
applicable state regulatory authorities, to the extent such approvals are
required, that the state regulatory authorities will approve the payment of
dividends to our non-regulated subsidiaries by our regulated subsidiaries. We
currently believe that we will be able to meet our known near-term monetary
obligations and maintain sufficient liquidity to operate our
business. However, we cannot provide any assurances that adverse
developments will not impede our ability to do so.
Repayment in
Full of Outstanding Balance Under Credit Facility
In May
2009, we repaid in full the outstanding balance of approximately $152.4 million
under our senior secured credit facility.
Financial
Impact of the DPA and SEC Settlement
As previously
disclosed, on May 5, 2009, we entered into a Deferred Prosecution Agreement
(the “DPA”) with USAO and the Florida Attorney General’s Office. The DPA
has resolved previously disclosed investigations by the USAO and the Florida
Attorney General’s Office. Pursuant to the terms of the DPA, we agreed to pay to
the USAO a total of $80.0 million, comprised of (a) $35.2 million that we paid
in August 2008, (b) a payment of $25.0 million that we paid in May 2009 and (c)
a payment of $19.8 million to be made no later than December 31,
2009. These amounts were previously accrued in our financial
statements for the year ended December 31, 2007; accordingly, there was no
incremental expense recorded in association with these matters during the three
or nine months ended September 30, 2009. Therefore, $19.8 million
remains accrued within the Current portion of amounts accrued related to
investigation resolution line item in our Condensed Consolidated Balance Sheet
as of September 30, 2009 for amounts payable under the DPA.
As part of
the DPA, we also retained, at our expense, an outside independent monitor (the
“Monitor”) for a period of 18 months from his retention in August
2009. The Monitor was selected by the USAO after consultation with
us. At this time we cannot estimate the costs that we will incur in
connection with the implementation of any remedial measures recommended by the
Monitor; such costs, if any, could be significant. The DPA provides
that the Monitor will undertake to avoid the disruption of our ordinary business
operations or the imposition of unnecessary costs or expenses.
On
May 18, 2009, we resolved the previously disclosed investigation by the
SEC. Under the terms of the Consent and Final Judgment, without
admitting or denying the allegations in the complaint filed by the SEC, we
consented to the entry of a permanent injunction against any future violations
of certain specified provisions of the federal securities laws. In
addition, we agreed to pay, in four quarterly installments, a civil penalty in
the aggregate amount of $10.0 million and disgorgement in the amount of one
dollar plus post-judgment interest, of which the first two installments have
been made. If we fail to pay timely, in full, any amount due under the
Consent and Final Judgment, all outstanding amounts (including post-judgment
interest), minus any payments already made, will immediately become due and
payable. These amounts were previously included in the range of probable losses
determined by management’s best estimate and recorded in our March 31, 2009
financial statements. Accordingly, there was no incremental expense
recorded in our Condensed Consolidated Statement of Operation for the three
months ended September 30, 2009. As of September 30, 2009, $5.0 million remains
accrued within the Current portion of amounts accrued related to investigation
resolution line item in our Condensed Consolidated Balance Sheet related to the
Consent and Final Judgment.
Remaining
Civil Division and OIG Investigations
As
previously disclosed, we remain engaged in resolution discussions as to matters
under review with the Civil Division of the United States Department of Justice
(“the “Civil Division”) and the Office of Inspector General of the U.S.
Department of Health and Human Services (the “OIG”). Management
currently estimates that the remaining liability associated with these matters
is approximately $60.0 million, plus interest. We anticipate these amounts will
be payable in installments over a 54-month period. In accordance with
fair value accounting guidance, we discounted the liability and recorded it at
its fair value of approximately $55.4 million. This amount remains
accrued in our Condensed Consolidated Balance Sheet as of September 30, 2009
within the short and long term portions of Amounts accrued related to
investigation resolution line items.
The final
timing, terms and conditions of a civil resolution may differ from those
currently anticipated, which may result in an adjustment to our recorded
amounts. These adjustments may be material.
Investigation
Related Costs
As
previously disclosed, we have expended significant financial resources in
connection with the investigations and related matters. Since the
inception of these investigations through September 30, 2009, we have spent a
total of approximately $157.0 million for administrative expenses associated
with, or consequential to, these governmental and Company investigations for
legal fees, accounting fees, consulting fees, employee recruitment and retention
costs and other similar expenses. Approximately $9.0 million and
$32.9 million were incurred in the three months and nine months ended September
30, 2009, respectively.
We expect
to continue incurring additional costs in connection with the governmental and
Company investigations, compliance with the DPA and related matters during the
remainder of 2009 and into 2010. Although investigation related costs
overall have gradually declined, we can provide no assurance that such costs
will not be significant or increase in the future. These include,
among others, anticipated costs associated with the retention of the Monitor and
implementation of any recommendations, as discussed above, as well as
anticipated costs related to the class action lawsuit and efforts of the Special
Litigation Committee in connection with the ongoing shareholder derivative
actions.
Business and
Financial Outlook
In April
2009, the federal Centers for Medicare & Medicaid Services (“CMS”) announced
final 2010 Medicare Advantage (“MA”) payment rates which are approximately 4.5%
below 2009 rates. Although these rates reflect approximately a
21% physician rate cut based upon the sustainable growth rate formula as enacted
in the Balanced Budget Act of 1997, historically, Congress has postponed the
physician rate cuts implicit in MA rates. Our 2010 product offerings
assume the physician rate cut is postponed. We continue to closely
monitor potential CMS and congressional actions that may impact the physician
rate cut and our MA rates.
For 2010 and
thereafter, CMS has changed the process, known as the Medicare Secondary Payer
process, used by MA organizations for members with secondary health care
coverage and coordination of benefits. Overall, these changes may result
in a reduction in Medicare revenues to MA health plans that are not entirely
offset by reductions in medical expense. Incremental administrative costs
will be incurred as MA health plans will need to enhance the third-party
liability processes, data collection upon initial enrollment, enrollment
reconciliation, customer service, claims payment, provider relations, and other
activities to preserve revenue and not pay claims out of turn where another
carrier has a primary liability. We are continuing to evaluate the impact
of this new process on our operations.
In
February 2009, CMS notified us that, effective March 7, 2009, we were
sanctioned through a suspension of marketing of, and enrollment into, all lines
of our Medicare business. CMS’s determination was based on findings
of deficiencies in our compliance with Medicare regulations related to marketing
activities, enrollment and disenrollment operations, appeals and grievances,
timely and proper responses to beneficiary complaints and requests for
assistance and marketing and agent/broker oversight activities. In
response to the CMS suspension, we made certain changes to our Medicare
marketing sales force and launched a company-wide initiative to analyze the
processes and procedures for each of the issues identified by CMS in an effort
to comply fully with CMS requirements going forward. In late June
2009, we submitted to CMS a report on our remediation efforts and the results of
third-party validations of our remediation efforts. During September and
October, 2009, we responded to a further request from CMS for additional
information and continued to work with CMS to provide all requested
information.
On November
3, 2009, we received written notification from CMS that it had determined that
we had satisfactorily addressed the deficiencies that formed the basis for the
CMS sanction, and that CMS released us from its marketing and enrollment
sanction. Effective November 3, 2009, we may begin marketing
our Medicare plans for the 2010 contract year and we may begin enrolling
beneficiaries on November 15, 2009 for the 2010 contract year. CMS
also notified us that it will subject us to targeted monitoring and heightened
surveillance and oversight of all of our operational areas during the upcoming
enrollment periods. Even though CMS lifted the sanction against us,
we currently expect that our inability to perform marketing activities to
Medicare beneficiaries or enroll new Medicare beneficiaries during the sanction
will have a material adverse impact on our Medicare premium revenue for the
remainder of 2009, 2010 and potentially beyond. See "Risk Factors – CMS
will subject us to targeted monitoring and heightened surveillance and oversight
of all of our operational areas during the upcoming open enrollment periods" in
this Form 10-Q for additional information regarding the risks associated with
CMS’ targeted monitoring and heightened surveillance of us.
On June 1,
2009, we notified CMS that we do not intend to renew our contracts to
participate in the MA private fee-for-service (“PFFS”) program in 2010 or
beyond. Our PFFS business represents approximately 31% of our
Medicare segment revenue for the nine months ended September 30, 2009;
accordingly our exit of this line of business will cause our Medicare revenue to
decline in 2010. We
anticipate that the withdrawal from the PFFS business may provide approximately
$40.0 million to $60.0 million in unregulated cash from the dividend of surplus
capital that we currently believe we will benefit from no sooner than
2011. The dividend of surplus capital by the applicable insurance entities,
including the timing and amount, is subject to a variety of factors. Those
factors include the ultimate financial performance of the PFFS business as well
as the financial performance of other lines of business that operate in those
insurance entities, approval from regulatory agencies and potential changes in
regulatory capital requirements. For example, our current estimate of $40.0
million to $60.0 million has declined from previous estimates because the
financial performance of the insurance entities that underwrite the PFFS
business has worsened during the year.
In 2010, we
will continue to serve our current members in our PDP program in 49 states and
the District of Columbia, and our MA Coordinated Care Plans (“CCP”) in 12
states. For 2010, we will be below the CMS benchmarks in 19 regions, including
the following eight new regions: Arizona, Central New England (Connecticut,
Massachusetts, Rhode Island and Vermont), Louisiana, Mississippi, Missouri, New
York, Oklahoma and Virginia. As
mentioned previously, the CMS sanctions precluded us from marketing our
plans and enrolling new members, including low income subsidy auto-assignments,
into our stand-alone PDP. Accordingly, our revenues generated from our
stand-alone PDP may
decrease significantly in 2010. With respect to our PDP plans, as a
result of the sanction we are not eligible to be auto-assigned low income
subsidy dual eligible beneficiaries for January 2010 membership. With the
sanctions resolved, we are eligible for new voluntary enrollment for January 1,
2010 and we are eligible for low income subsidy auto-assigned membership
beginning in February 2010. Unrelated to the CMS sanctions, we have
decided to exit the Medicare PDP program in Wisconsin for 2010, and
auto-assigned PDP membership in Wisconsin will be re-assigned to other
plans.
Currently,
the Obama Administration and the U.S. Congress are debating various alternatives
for reforming the American health care system, including the reduction of
payments under MA. As part of this debate they are reviewing alternative
structures for MA payments. While the legislative and regulatory process
is continuing to progress and new as well as modified proposals are being
presented in Congress, we expect revisions to the current system to put pressure
on operating results, decrease benefits and/or increase member
premiums.
Additionally,
health reforms proposed by the Obama Administration and being considered by the
U.S. Congress could contain several challenges as well as opportunities for our
Medicaid business. We anticipate the reforms, if ultimately adopted by the
U.S. Congress, could significantly increase the number of citizens who are
eligible to enroll in our Medicaid products. However, state budgets are strained
due to economic conditions and existing federal financing for current
populations. As a result, the effects of any potential future
expansions are uncertain, making it difficult to determine whether these reform
efforts will have a positive or negative impact on our Medicaid
profitability.
Stimulus
funds for Medicaid in the American Recovery and Reinvestment Act of 2009 are
anticipated to end in 2010 leaving certain states with sizable projected budget
gaps in their Medicaid programs. Absent additional federal
assistance, these states may be under pressure to raise revenue, reduce provider
payments, reduce benefits or a combination of the above. We continue
to evaluate the impact proposed alternatives could have on our business and will
take action as appropriate. For example, one state that might be
affected is Florida. According to the State of Florida’s Long Range Financial Outlook
Fiscal Year 2010-2011 through 2012-2013 report, the state anticipates a
number of budget challenges in the coming years. This report notes
that, “Overall, the General Revenue Fund is solvent for Fiscal Year 2009-10, but
has projected shortfalls in each of the three planning years despite the
significant revenue growth projected for those years.”
General Economic,
Political and Financial Market Conditions
As previously
disclosed, government funding continues to be a significant challenge to our
business, particularly in light of the current economic
conditions. Many of our products received a rate increase less than
the medical cost trend for 2009 and we expect this may continue in
2010.
Business Rationalization and
Organizational Realignment
Our
fundamental objective is to provide our members with efficient and effective
access to health care to promote their long-term health and well-being, while
maintaining a sustainable rate of return. We continue to evaluate
various strategic alternatives to address the ongoing challenges to, and changes
in, our business and regulatory environment, competitive position and financial
resources, including, reducing enrollment levels, exiting existing lines of
business, service areas, or markets and/or disposing of assets. For
example, we have withdrawn from the Florida Medicaid reform programs effective
July 1, 2009, after Florida notified us that it was reducing our reimbursement
rates. In addition, in May 2009 we announced a realignment of our
organization to respond to changing business conditions and to strengthen our
position in government-sponsored health care programs. As part of this
realignment, we announced workforce reductions related to the streamlining of
reporting relationships, consolidation of an operating division, reorganization
of some activities, and our withdrawal in 2010 from MA PFFS plans, as discussed
above. These changes affected approximately 360 associates. These efforts
reflect our focus on achieving administrative efficiencies and maintaining a
competitive cost structure. Each associate affected by this action received
severance pay and outplacement support.
Further, we
have taken certain steps to reduce our administrative costs by implementing
certain cost-cutting measures, including a freeze on merit-based salary
increases, management bonus reductions and the suspension of the 401(k)
retirement plan matching contributions. We continue to evaluate and rationalize
our operations, management structure and staffing needs which may result in
further consolidations in our operations, exits of business and reductions in
our workforce.
Basis of
Presentation
Segments
We have two
reportable business segments: Medicaid and Medicare.
Medicaid was
established to provide medical assistance to low-income and disabled
persons. It is state operated and implemented, although it is funded
and regulated by both the state and federal governments. Our Medicaid
segment includes plans for beneficiaries of the Temporary Assistance for Needy
Families (“TANF”) programs, Supplemental Security Income (“SSI”) programs, Aged
Blind and Disabled (“ABD”) programs, Children’s Health Insurance Programs
(“CHIP”) and Family Health Plus (“FHP”) programs. TANF generally
provides assistance to low-income families with children and SSI generally
provides assistance to low-income ABD individuals. Our Medicaid
segment also includes other programs that are not part of the Medicaid program,
such as CHIP and FHP, for qualifying families who are not eligible for Medicaid
because they exceed the applicable income thresholds.
Medicare
Medicare is a
federal program that provides eligible persons age 65 and over and some disabled
persons a variety of hospital, medical insurance and prescription drug
benefits. Medicare is administered and funded by CMS. Our
Medicare segment includes stand-alone PDP and MA plans, which includes
coordinated care plans (“CCP”) and PFFS. MA is Medicare’s managed
care alternative to original Medicare fee-for-service (“Original Medicare”),
which provides individuals standard Medicare benefits directly through CMS. CCPs
are administered through a health maintenance organization (“HMO”) and generally
require members to seek health care services from a network of health care
providers. PFFS plans are offered by insurance companies and are
open-access plans that allow members to be seen by any physician or facility
that participates in the Original Medicare program and agrees to bill, and
otherwise accepts the terms and conditions of, the sponsoring insurance
company.
Membership
The following
table summarizes our membership by segment and line of business.
|
|
As
of September 30,
|
|
|
|
2009
|
|
2008
|
|
Medicaid
|
|
|
|
|
|
TANF
|
|
1,072,000
|
|
1,031,000
|
|
CHIP
|
|
158,000
|
|
180,000
|
|
SSI
and ABD
|
|
78,000
|
|
64,000
|
|
FHP
|
|
14,000
|
|
26,000
|
|
|
|
1,322,000
|
|
1,301,000
|
|
|
|
|
|
|
|
Medicare
|
|
|
|
|
|
MA
|
|
240,000
|
|
240,000
|
|
PDP
|
|
768,000
|
|
989,000
|
|
|
|
1,008,000
|
|
1,229,000
|
|
Total
|
|
2,330,000
|
|
2,530,000
|
|
We enter into
contracts with government agencies that administer health benefits
programs. These contracts generally are subject to renewal every one
to four years. We receive premiums from state and federal agencies
for the members that are assigned to or have selected us to provide health care
services under each benefit program. The amount of premiums we
receive for each member varies according to the government program, the member’s
health status, age, gender and geographic location. The premiums are
subject to periodic adjustments and, in some cases, minimum health care spending
requirements.
Medical
Benefits Expense
Our largest
expense is the cost of medical benefits that we provide, which is based
primarily on our arrangements with health care providers and utilization of
health care services by our members. As our profits are a small
fraction of the revenue we receive, relatively small changes in our medical
benefits ratio (“MBR”), the ratio of our medical benefits expense to the
premiums we receive, can create significant changes in our financial
results. Our profitability depends on our ability to predict and
effectively manage medical benefits expense relative to the primarily fixed
premiums we receive. Our arrangements with providers primarily fall
into three broad categories: capitation arrangements, pursuant to which we pay
the capitated providers a fixed fee per member; risk-based arrangements,
pursuant to which we assume a portion of the risk for the cost of health care
provided; and fee-for-service, where we pay the provider for medical services
performed. Other components of medical benefits expense are variable
and require estimation and ongoing cost management.
Estimation of
medical benefits payable is our most significant critical accounting
estimate. See “Critical Accounting Policies” below.
We use a
variety of techniques to manage our medical benefits expense, including payment
methods to providers, referral requirements, case and disease management
programs, reinsurance and member co-payments. National health care
costs have been increasing at a higher rate than the general inflation rate.
Changes in health care laws, regulations and practices, levels of use of health
care services, competitive pressures, hospital costs, major epidemics, terrorism
or bio-terrorism, new medical technologies and other external factors could
reduce our ability to manage our medical benefits expense
effectively.
One of our
primary tools for measuring profitability is our MBR. Changes in the
MBR from period to period result from, among other things, changes in Medicaid
and Medicare funding, changes in the mix of Medicaid and Medicare membership,
our ability to manage medical costs and changes in accounting estimates related
to IBNR claims. We use MBRs both to monitor our management of medical
benefits expense and to make various business decisions, including what health
care plans to offer, what geographic areas to enter or exit and the selection of
health care providers. Although MBR plays an important role in our
business strategy, we may, for example, be willing to enter into new markets
and/or enter into provider arrangements that might produce a less favorable MBR
if those arrangements, such as capitation or risk-sharing, would likely lower
our exposure to variability in medical costs or for other reasons.
Critical
Accounting Policies
In the
ordinary course of business, we make a number of estimates and assumptions
relating to the reporting of our results of operations and financial condition
in conformity with accounting principles generally accepted in the United
States. We base our estimates on historical experience and on various
other assumptions that we believe to be reasonable under the
circumstances. Actual results could differ significantly from those
estimates under different assumptions and conditions. We believe that
the accounting policies discussed below are those that are most important to the
portrayal of our financial condition and results and require management’s most
difficult, subjective and complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain and
beyond our control.
Revenue
recognition. Our Medicaid contracts with state governments are
generally multi-year contracts subject to annual renewal
provisions. Our MA and PDP contracts with CMS generally have terms of
one year. We recognize premium revenues in the period in which we are
obligated to provide services to our members. We estimate, on an ongoing
basis,
the amount of
member billings that may not be fully collectible or that will be returned based
on historical trends, anticipated or actual MBRs, and other
factors. An allowance is established for the estimated amount that
may not be collectible and a liability for premium expected to be
returned. The allowance has not been significant to premium
revenue. The payment we receive monthly from CMS for our PDP program
generally represents our bid amount for providing prescription drug insurance
coverage. We recognize premium revenue for providing this insurance
coverage ratably over the term of our annual contract. Premiums
collected in advance are deferred and reported as unearned premiums in the
accompanying condensed consolidated balance sheets and amounts that have not
been received by the end of the period remain on the balance sheet classified as
premium receivables.
Premium
payments that we receive are based upon eligibility lists produced by our
government clients. From time to time, our client may require us to
reimburse it for premiums that we received based on an eligibility list that the
client later discovers contains individuals who were not eligible for any
government-sponsored program or are eligible for a different premium category,
different program, or belong to a different plan other than
ours. These adjustments reflect changes in the number and eligibility
status of enrollees subsequent to when revenue was received. We
estimate the amount of outstanding retroactivity each period and adjust premium
revenue accordingly; if appropriate, the estimates of retroactive adjustments
are based on historical trends, premiums billed, the volume of member and
contract renewal activity and other information. Our
government contracts establish monthly rates per member, but may have additional
amounts due to us based on items such as age, working status or medical
history. For example, CMS employs a risk-adjustment model that
apportions premiums paid to all Medicare plans according to the health status of
each beneficiary enrolled. The CMS risk-adjustment model pays more
for Medicare members with predictably higher costs. Under this
risk-adjustment methodology, diagnosis data from medical services are used to
calculate the risk-adjusted premium payment to us. We collect claims
and encounter data and submit the necessary diagnosis data to CMS within
prescribed deadlines. We continually estimate risk-adjusted revenues
based upon membership claim activity and the diagnosis data submitted to, and
that which is ultimately accepted by, CMS and record such adjustments in our
results of operations. However, due to the variability of the
assumptions that we use in our estimates, our actual results may differ from the
amounts that we have estimated. If our estimates are materially
incorrect, there may be a favorable or an adverse effect on our results of
operations in future periods. CMS also has the authority to review diagnosis
data subsequent to acceptance and retroactively adjust premiums based on their
review. Historically, we have not experienced significant differences between
the amounts that we have recorded and the revenues that we actually
received.
We
estimate the amounts due to or from CMS for risk protection under the risk
corridor provisions of our contract with CMS each period based on pharmacy
claims experience and such amounts are included in our results of operations as
adjustments to premium revenues. Risk corridor estimates may result in CMS
making additional payments to us or require us to refund to CMS a portion of the
premiums we received. In addition, certain of our Medicaid contracts
require us to expend a minimum percentage of premiums on eligible medical
expense, and to the extent that we expend less than the minimum percentage of
the premiums on eligible medical expense, we are required to refund all or some
portion of the difference between the minimum and our actual allowable medical
expense. We estimate the amounts due to the state as a return of premium each
period based on the terms of our contract with the applicable state agency and
such amounts are also included in our results of operations as reduction to
premium revenue.
Estimating medical
benefits expense and medical benefits payable. The cost of
medical benefits is recognized in the period in which services are provided and
includes an estimate of the cost of IBNR medical benefits. We
contract with various health care providers for the provision of certain medical
care services to our members and generally compensate those providers on a
fee-for-service or capitated basis or pursuant to certain risk-sharing
arrangements. Capitation represents fixed payments generally on a
per-member-per-month (“PMPM”) basis to participating physicians and other
medical specialists as compensation for providing comprehensive health care
services. Generally, by the terms of most of our capitation
agreements, capitation payments we make to capitated providers obviate any
further obligation we have to pay the capitated provider for the actual medical
expenses of the member.
Medical
benefits expense has two main components: direct medical expenses and medically
related administrative costs. Direct medical expenses include amounts
paid to hospitals, physicians and providers of ancillary services, such as
laboratory and pharmacy. Medically related administrative costs
include items such as case and disease management, utilization review services,
quality assurance and on-call nurses. Medical benefits payable
represents amounts for claims fully adjudicated awaiting payment disbursement
and IBNR estimates.
The medical benefits payable estimate has been, and continues to be, the most
significant estimate included in our financial statements. We
historically have used, and continue to use, a consistent methodology for
estimating our medical benefits expense and medical benefits
payable. Our policy is to record management’s best estimate of
medical benefits payable based on the experience and information available to us
at the time. This estimate is determined utilizing standard actuarial
methodologies based upon historical experience and key assumptions consisting of
trend factors and completion factors using an assumption of moderately adverse
conditions, which vary by business segment. These standard actuarial
methodologies include using, among other factors, contractual requirements,
historic utilization trends, the interval between the date services are rendered
and the date claims are paid, denied claims activity, disputed claims activity,
benefits changes, expected health care cost inflation, seasonality patterns,
maturity of lines of business and changes in membership.
The factors
and assumptions described above that are used to develop our estimate of medical
benefits expense and medical benefits payable inherently are subject to greater
variability when there is more limited experience or information available to
us. For example, from 2004 to 2008, we grew at a rapid pace, through
the expansion of existing products and introduction of new products, such as
Part D and PFFS, and entry into new geographic areas, such as
Georgia. The ultimate claims payment amounts, patterns and trends for
new products and geographic areas cannot be precisely predicted at their onset,
since we, the providers and the members do not have experience in these products
or geographic areas. Standard accepted actuarial methodologies
require the use of key assumptions consisting of trend and completion factors
using an assumption of moderately adverse conditions that would allow for this
inherent variability. This can result in larger differences between
the originally estimated medical benefits payable and the actual claims amounts
paid. Conversely, during periods where our products and geographies
are more stable and mature, we have more reliable claims payment patterns and
trend experience. With more reliable data, we should be able to
estimate more closely the ultimate claims payment amounts; therefore during such
periods, we may experience smaller differences between our original estimate of
medical benefits payable and the actual claim amounts paid.
Medical cost
trends can be volatile and management is required to use considerable judgment
in the selection of medical benefits expense trends and other actuarial model
inputs. In developing the estimate, we also apply different
estimation methods depending on the month for which incurred claims are being
estimated. For the more recent months, which constitute the majority
of the amount of the medical benefits payable, we estimate claims incurred by
applying observed trend factors to the PMPM costs for prior months, which costs
have been estimated using completion factors, in order to estimate the PMPM
costs for the most recent months. We validate the estimates of the
most recent PMPM costs by comparing the most recent months’ utilization levels
to the utilization levels in older months and actuarial techniques that
incorporate a historical analysis of claim payments, including trends in cost of
care provided and timeliness of submission and processing of
claims.
Many aspects
of the managed care business are not predictable. These aspects
include the incidences of illness or disease state (such as cardiac heart
failure cases, cases of upper respiratory illness, the length and severity of
the flu season, diabetes, the number of full-term versus premature births and
the number of neonatal intensive care babies). Therefore, we must
rely upon historical experience, as continually monitored, to reflect the
ever-changing member mix and utilization in our trend
assumptions. Among the factors considered by management are changes
in the level of benefits provided to members, seasonal variations in
utilization, identified industry trends and changes in provider reimbursement
arrangements, including changes in the percentage of reimbursements made on a
capitation as opposed to a fee-for-service basis. These
considerations are aggregated in the trend in medical benefits
expense. Other external factors such as government-mandated benefits
or other regulatory changes, catastrophes, epidemics and pandemics may affect
medical cost trends. Other internal factors such as system
conversions and claims processing interruptions may affect our ability to
accurately estimate historical completion factors or medical cost
trends. Medical cost trends potentially are more volatile than other
segments of the economy. Management is required to use considerable
judgment in the selection of medical benefits expense trends and other actuarial
model inputs.
Also included
in medical benefits payable are estimates for provider settlements due to
clarification of contract terms, out-of-network reimbursement, claims payment
differences as well as amounts due to contracted providers under risk-sharing
arrangements. We record reserves for estimated referral claims
related to health care providers under contract with us who are financially
troubled or insolvent and who may not be able to honor their obligations for the
costs of medical services provided by other providers. In these
instances, we may be required to honor these obligations for legal or business
reasons. Such losses have not been significant, and based on our
current assessment of providers under contract with us, are not expected to be
significant.
Changes in
medical benefits payable estimates are primarily the result of obtaining more
complete claims information and medical expense trend data over
time. Volatility in members’ needs for medical services, provider
claims submissions and our payment processes result in identifiable patterns
emerging several months after the causes of deviations from assumed trends
occur. Since our estimates are based upon PMPM claims
experience, changes cannot typically be explained by any single factor, but are
the result of a number of interrelated variables, all influencing the resulting
experienced medical cost trend. Differences, or prior period
developments, included in our financial statements, whether positive or
negative, between actual experience and estimates used to establish the
liability are recorded in the period when such differences become known, and
have the effect of increasing or decreasing the reported medical benefits
expense and resulting MBR in such periods.
Goodwill and
intangible assets. We obtained goodwill and intangible assets
as a result of the acquisitions of our subsidiaries. Goodwill
represents the excess of the cost over the fair market value of net assets
acquired. Intangible assets include provider networks, membership
contracts, trademarks, non-compete agreements, government contracts, licenses
and permits. Our intangible assets are amortized over their estimated
useful lives ranging from one to 26 years.
We evaluate
whether events or circumstances have occurred that may affect the estimated
useful life or the recoverability of the remaining balance of goodwill and other
identifiable intangible assets. We must make assumptions and
estimates, such as the discount factor, in determining the estimated fair
values. While we believe these assumptions and estimates are
appropriate, other assumptions and estimates could be applied and might produce
significantly different results.
We review
goodwill and intangible assets for impairment at least annually, or more
frequently if events or changes in circumstances occur that may affect the
estimated useful life or the recoverability of the remaining balance of goodwill
or intangible assets. Events or changes in circumstances would
include significant changes in membership, state funding, medical contracts and
provider networks. We have selected the second quarter of each year
for our annual impairment test, which generally coincides with the finalization
of state and federal contract negotiations and our initial budgeting
process. We have assessed the book value of goodwill and other
intangible assets and believe that such assets have not been impaired as of
September 30, 2009.
Amounts accrued
related to investigation resolution. Amounts accrued related
to the resolution of certain of the governmental investigations represent
amounts agreed to and estimated for the ultimate resolution of matters
under review by certain government agencies. The recorded
amounts are determined based on the current status of the particular
agency’s investigation and include the remaining unpaid balance of resolved
matters, as well as Management’s best estimate of the remaining probable
losses associated with matters in which we are still engaged in resolution
discussions. The entire amount payable related to the investigation
resolution has been recorded at fair value. Amounts payable within one
year are classified as current and the remaining balance is classified as
long-term in our Condensed Consolidated Balance Sheets.
Results
of Operations
The
following table sets forth the Condensed Consolidated Statements of Operations
data, expressed as a percentage of total revenues for each period
indicated. The historical results are not necessarily indicative of
results to be expected for any future period.
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
Statement
of Operations Data:
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Premium
|
|
99.9
|
%
|
99.5
|
%
|
99.8
|
%
|
99.3
|
%
|
Investment
and other income
|
|
0.1
|
%
|
0.5
|
%
|
0.2
|
%
|
0.7
|
%
|
Total
revenues
|
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
Expenses:
|
|
|
|
|
|
|
|
|
|
Medical
benefits
|
|
85.2
|
%
|
88.2
|
%
|
85.2
|
%
|
85.7
|
%
|
Selling,
general and administrative
|
|
11.7
|
%
|
14.0
|
%
|
13.0
|
%
|
14.0
|
%
|
Depreciation
and amortization
|
|
0.4
|
%
|
0.3
|
%
|
0.3
|
%
|
0.3
|
%
|
Interest
|
|
0.0
|
%
|
0.2
|
%
|
0.1
|
%
|
0.2
|
%
|
Total
expenses
|
|
97.3
|
%
|
102.7
|
%
|
98.6
|
%
|
100.3
|
%
|
Income
(loss) before income taxes
|
|
2.7
|
%
|
(2.7
|
)%
|
1.4
|
%
|
(0.3
|
)%
|
Income
tax expense (benefit)
|
|
1.0
|
%
|
(1.5
|
)%
|
0.9
|
%
|
(0.2
|
)%
|
Net
income (loss)
|
|
1.7
|
%
|
(1.2
|
)%
|
0.5
|
%
|
(0.1
|
)%
|
Three-
and Nine-Month Periods Ended September 30, 2009 Compared to the Three- and
Nine-Month Periods Ended September 30, 2008
Premium
revenue. Premium revenue for the three months ended September
30, 2009 increased $36.7 million, or 2.3%, to $1,666.0 million from $1,629.3
million for the same period in the prior year. For the nine months
ended September 30, 2009, premium revenues increased $359.1 million, or
7.3%, to approximately $5,245.8 million from approximately $4,886.7 million for
the same period in the prior year. Total membership decreased by
approximately 200,000 members from 2,530,000 as of September 30, 2008 to
2,330,000 as of September 30, 2009.
The
Medicaid segment premium revenue for the three months ended September 30, 2009
increased $43.1 million, or 5.6%, to $814.1 million from $771.0 million for the
same period in the prior year. For the nine months ended
September 30, 2009, Medicaid segment premium revenue increased $184.4
million, or 8.2%, to $2,437.0 million from $2,252.7 million for the same period
in the prior year. The increase in Medicaid segment revenue is
primarily due to the inclusion of operations for the Hawaii ABD program during
the three and nine months ended September 30, 2009, which was not present for
the same periods in the prior year. This increase was partially
offset by a loss of membership in Florida and the Ohio ABD program, with the
remaining change due to the demographic mix of our members. Aggregate membership
in our Medicaid segment grew by approximately 21,000 members, or 1.7%, from
1,301,000 as of September 30, 2008 to 1,322,000 as of September 30,
2009.
|
|
Medicaid Revenues and Membership
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
(Dollars
in millions)
|
Revenues
|
|
$ |
814.1 |
|
|
$ |
771.0 |
|
|
$ |
2,437.0 |
|
|
$ |
2,252.7 |
|
%
of Total Premium Revenues
|
|
|
48.9 |
% |
|
|
47.3 |
% |
|
|
46.5 |
% |
|
|
46.1 |
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership
|
|
|
1,322,000 |
|
|
|
1,301,000 |
|
|
|
1,322,000 |
|
|
|
1,301,000 |
|
%
of Total Membership
|
|
|
56.7 |
% |
|
|
51.4 |
% |
|
|
56.7 |
% |
|
|
51.4 |
%
|
The
Medicare segment premium revenue for the three months ended September 30, 2009
decreased $6.4 million, or 0.7%, to $851.9 million from $858.3 million for the
same period in the prior year. For the nine months ended
September 30, 2009, Medicare segment premium revenue increased $174.8
million, or 6.6%, to $2,808.8 million from $2,634.0 million for the same period
in the prior year. The increase in Medicare segment revenue is
primarily due to the demographic mix of our members as well as growth in our MA
CCP and PFFS plans, partially offset by a loss in PDP membership of
approximately 221,000 members. Membership within the Medicare segment
decreased by approximately 221,000 members, or 18.0%, from 1,229,000 as of
September 30, 2008 to 1,008,000 as of September 30, 2009.
|
|
Medicare Revenues and Membership
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
(Dollars
in millions)
|
Revenues
|
|
$ |
851.9 |
|
|
$ |
858.3 |
|
|
$ |
2,808.8 |
|
|
$ |
2,634.0 |
|
%
of Total Premium Revenues
|
|
|
51.1 |
% |
|
|
52.7 |
% |
|
|
53.5 |
% |
|
|
53.9 |
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership
|
|
|
1,008,000 |
|
|
|
1,229,000 |
|
|
|
1,008,000 |
|
|
|
1,229,000 |
|
%
of Total Membership
|
|
|
43.3 |
% |
|
|
48.6 |
% |
|
|
43.3 |
% |
|
|
48.6 |
%
|
Investment and other
income. Investment and other income for the three months ended
September 30, 2009 decreased $6.5 million, or 80.1 %, to $1.6 million from $8.1
million for the same period in the prior year. For the nine months
ended September 30, 2009, Investment and other income decreased $24.7
million, or 74.7%, to $8.4 million from $33.1 million for the same period in the
prior year. The decrease was primarily due to reduced market rates on
lower average investment and cash balances.
Medical benefits
expense. Medical benefits expense for the three months ended
September 30, 2009 decreased $23.5 million, or 1.6 %, to $1,420.2 million from
$1,443.7 million for the same period in the prior year. For the nine
months ended September 30, 2009, medical benefits expense increased $259.0
million, or 6.1%, to approximately $4,477.2 million from $4,218.3 million for
the same period in the prior year. The MBR was 85.2% and 88.6% for
the three months ended September 30, 2009 and 2008, respectively. For
the nine months ended September 30, 2009, the MBR was 85.3% compared to
86.3% for the same period in the prior year.
|
|
Medical Benefits Expense
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
(Dollars
in millions)
|
|
Medical
Benefits Expense
|
|
$
|
1,420.2
|
|
$
|
1,443.7
|
|
$
|
4,477.2
|
|
$
|
4,218.3
|
|
IBNR
adjustment
|
|
|
|
(92.8
|
)(1)
|
|
|
(92.8
|
)(1)
|
Medical
Benefits Expense as adjusted
|
|
|
|
|
$
|
1,350.9
|
|
|
|
|
$
|
4,125.5
|
|
MBR
as reported
|
|
85.2
|
%
|
88.6
|
%
|
85.3
|
%
|
86.3
|
%
|
MBR
as adjusted
|
|
|
|
82.9
|
%
|
|
|
84.4
|
%
|
|
(1)
|
We
believe that Medical Benefits Expense as adjusted for the quarter ended
September 30, 2008 is a non-GAAP financial measure because it
reflects the favorable development that otherwise would have been
recognized in the three and nine months ended September 30, 2008 if
we had timely filed our Annual Report on Form 10-K for the fiscal year
ended December 31, 2007 (“2007 10-K”). Due to the delay in filing our 2007
10-K, we were able to review substantially complete claims information
that had become available due to the substantial lapse in time between
December 31, 2007 and the date we filed our 2007 10-K; therefore, the
favorable development was reported in 2007 instead of 2008 as it would
have normally. The most directly comparable GAAP measure is Medical
Benefits Expense, which has been determined based on the actuarially
determined methods. Thus, our recorded amounts for Medical Benefits
Expense for the three and nine months ended September 30, 2008 is
approximately $92.8 million higher than it would have otherwise been
if we had filed our 2007 10-K on time, which resulted in an unfavorable
impact on MBR. Consequently, we believe that Medical Benefits Expense as
adjusted for the three and nine months ended September 30, 2008 will
better facilitate a year over year comparison of our Medical Benefits
Expense.
|
The
Medicaid segment medical benefits expense for the three months ended September
30, 2009 increased $23.4 million, or 3.4%, to $710.3 million from $686.9 million
for the same period in the prior year. For the nine months ended
September 30, 2009, Medicaid medical benefits expense increased $172.4
million, or 9.0%, to $2,091.9 million from $1,919.5 million for the same period
in the prior year. The Medicaid MBR for the three months ended
September 30, 2009 was 87.2% compared to 89.1% for the same period in the
prior year. For the nine months ended September 30, 2009, the
Medicaid MBR was 85.8% compared to 85.2% for the same period in the prior
year.
|
|
Medicaid
Medical Benefits Expense
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
(Dollars
in millions)
|
|
Medicaid
Medical Benefits Expense
|
|
$
|
710.3
|
|
$
|
686.9
|
|
$
|
2,091.9
|
|
$
|
1,919.5
|
|
IBNR
adjustment
|
|
|
|
(39.5
|
)(1)
|
|
|
(39.5
|
)(1)
|
Medicaid
Medical Benefits Expense as adjusted
|
|
|
|
|
$
|
647.4
|
|
|
|
|
$
|
1,880.0
|
|
MBR
as reported
|
|
87.2
|
%
|
89.1
|
%
|
85.8
|
%
|
85.2
|
%
|
MBR
as adjusted
|
|
|
|
84.0
|
%
|
|
|
83.5
|
%
|
|
(1)
|
We
believe that Medicaid Medical Benefits Expense as adjusted for the quarter
ended September 30, 2008 is a non-GAAP financial measure because it
reflects the favorable development that otherwise would have been
recognized in the three and nine months ended September 30, 2008 if
we had timely filed our 2007 10-K. Due to the delay in filing our 2007
10-K, we were able to review substantially complete claims information
that had become available due to the substantial lapse in time between
December 31, 2007 and the date we filed our 2007 10-K; therefore, the
favorable development was reported in 2007 instead of 2008 as it would
have normally. The most directly comparable GAAP measure is Medicaid
Medical Benefits Expense, which has been determined based on the
actuarially determined methods. Thus, our recorded amounts for Medicaid
Medical Benefits Expense for the three and nine months ended
September 30, 2008 is approximately $39.5 million higher than it
would have otherwise been if we had filed our 2007 10-K on time and
utilized our actuarially determined estimates versus actual claims paid
that subsequently became available, which resulted in an unfavorable
impact on MBR. Consequently, we believe that Medicaid Medical Benefits
Expense as adjusted for the three and nine months ended September 30,
2008, which is based on our actuarially-determined estimate, will better
facilitate a year over year comparison of our Medicaid Medical Benefits
Expense.
|
The
Medicaid segment medical benefits expense for the three months ended September
30, 2009 increased $62.9 million, or 9.7%, to $710.3 million from
$647.4 million as adjusted for the same period in the prior year. For the
nine months ended September 30, 2009, Medicaid medical benefits expense
increased $211.8 million, or 11.3%, to approximately $2,091.9 million from
approximately $1,880.0 million as adjusted for the same period in the prior
year. This increase was due to the growth in membership primarily in the Hawaii
ABD program,
which
accounted for approximately $76.0 million and $199.7 million for the three and
nine months ended September 30, 2009, respectively. The changes in
the utilization patterns of our members in our other markets accounted for the
remaining change. The Medicaid MBR for the three months ended September 30,
2009 was 87.2% compared to 84.0% as adjusted for the same period in the prior
year. For the nine months ended September 30, 2009, the Medicaid
MBR was 85.8% compared to 83.5% as adjusted for the same period in the prior
year. The increase in MBR is primarily the result of higher costs associated
with the Hawaii business as well as premium rate increases during the past year
that were below our medical cost trend, or in some cases, rate
decreases.
The
Medicare segment medical benefits expense for the three months ended September
30, 2009 decreased $47.0 million, or 6.2%, to $709.9 million, from $756.9
million for the same period in the prior year. For the nine months
ended September 30, 2009, Medicare medical benefits expense increased $86.6
million, or 3.8%, to $2,385.3 million from $2,298.7 million for the same period
in the prior year. The Medicare MBR for the three months ended
September 30, 2009 was 83.3% compared to 88.2% for the same period in the prior
year. For the nine months ended September 30, 2009, the Medicare
MBR was 84.9% compared to 87.3% for the same period in the prior
year.
|
|
Medicare
Medical Benefits Expense
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
(Dollars
in millions)
|
|
Medicare
Medical Benefits Expense
|
|
$
|
709.9
|
|
$
|
756.9
|
|
$
|
2,385.3
|
|
$
|
2,298.7
|
|
IBNR
adjustment
|
|
|
|
(53.4
|
)(1)
|
|
|
(53.4
|
)(1)
|
Medicare
Medical Benefits Expense as adjusted
|
|
|
|
|
$
|
703.5
|
|
|
|
|
$
|
2,245.3
|
|
MBR
as reported
|
|
83.3
|
%
|
88.2
|
%
|
84.9
|
%
|
87.3
|
%
|
MBR
as adjusted
|
|
|
|
82.0
|
%
|
|
|
85.2
|
%
|
|
(1)
|
We
believe that Medicare Medical Benefits Expense as adjusted for the quarter
ended September 30, 2008 is a non-GAAP financial measure because it
reflects the favorable development that otherwise would have been
recognized in the three and nine months ended September 30, 2008 if
we had timely filed our 2007 10-K. Due to the delay in filing our 2007
10-K, we were able to review substantially complete claims information
that had become available due to the substantial lapse in time between
December 31, 2007 and the date we filed our 2007 10-K; therefore, the
favorable development was reported in 2007 instead of 2008 as it would
have normally. The most directly comparable GAAP measure is Medicare
Medical Benefits Expense, which has been determined based on the
actuarially determined methods. Thus, our recorded amounts for Medicare
Medical Benefits Expense for the three and nine months ended
September 30, 2008 is approximately $53.4 million higher than it
would have otherwise been if we had filed our 2007 10-K on time and
utilized our actuarially determined estimates versus actual claims paid
that subsequently became available, which resulted in an unfavorable
impact on MBR. Consequently, we believe that Medicare Medical Benefits
Expense as adjusted for the three and nine months ended September 30,
2008, which is based on our actuarially-determined estimate, will better
facilitate a year over year comparison of our Medicare Medical Benefits
Expense.
|
Medicare
segment medical benefits expense as adjusted for the three months ended
September 30, 2009 increased $6.4 million, or 0.9%, to
$709.9 million from $703.5 million for the same period in the prior year.
Medicare segment medical benefits expense as adjusted for the nine months ended
September 30, 2009 increased $140.0 million, or 6.2%, to $2,385.3
million from $2,245.3 million for the same period in the prior year. The
Medicare MBR for the three months ended September 30, 2009 was 83.3 %
compared to the 82.0% Medicare MBR as adjusted for the same period in the prior
year. The Medicare MBR for the nine months ended September 30, 2009 was
84.9% compared to the 85.2% Medicare MBR as adjusted for the same period in the
prior year. The decrease was driven by an unfavorable variance in PDP
MBR and unfavorable MA PFFS plan performance. As previously
discussed, we are withdrawing from offering PFFS plans at the end of this
year. The overall decrease was partially offset by the demographic
mix of our members.
Selling, general and administrative
expense. SG&A expense for the three months ended September
30, 2009 decreased $33.5 million, or 14.6%, to $195.3 million from $228.8
million for the same period in the prior year. For the nine months
ended September 30, 2009, SG&A expense decreased $8.6 million, or 1.2%,
to $681.7 million from $690.3 million for the same period in the prior
year. Our SG&A expense to revenue ratio (“SG&A ratio”) was
11.7% for the three months ended September 30, 2009 compared to 14.0% for the
same period in the prior year. For the nine months ended
September 30, 2009, our SG&A ratio was 13.0% compared to 14.0% for the
same period in the prior year. The reduction in SG&A expense for
the three and nine months ended September 30, 2009 compared to same period in
2008 was driven by decreased legal, professional, and retention expenses
consequential to the governmental and Company investigations of $14.0 and $54.1
million, respectively, lower sales and marketing costs caused by the CMS
sanction and reduced Florida Medicaid sales costs. Since the CMS sanction
was lifted on November 3, 2009, our usual marketing time frame has been
condensed. Accordingly, we believe our sales and marketing costs
related to the CMS enrollment periods will be more concentrated in the fourth
quarter of 2009. For the
three and nine months ended, September 30, 2009, the lower SG&A was
partially offset by an increase in expense related to the resolution of certain
of the government investigations in the amount of approximately $0.5 million and
$60.2 million, respectively, as well as investments to improve operating
efficiency and effectiveness and to remediate issues in conjunction with the CMS
sanction.
|
|
Selling, General and Administrative Expense
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
2009
|
|
|
2008
|
|
|
|
|
(Dollars
in millions)
|
|
|
SG&A
|
|
$ |
195.3 |
|
|
$ |
228.8 |
|
$ |
681.7 |
|
|
$ |
690.3 |
|
|
SG&A
expense to total revenue ratio
|
|
|
11.7 |
% |
|
|
14.0 |
% |
|
13.0 |
% |
|
|
14.0 |
%
|
|
Depreciation and amortization
expense. Depreciation and amortization expense for the three
months ended September 30, 2009 increased $0.5 million, or 8.7%, to $5.9 million
from $5.4 million for the same period in the prior year. For the nine
months ended September 30, 2009, depreciation and amortization expense
increased $1.8 million, or 11.3%, to $17.5 million from $15.8 million for the
same period in the prior year.
Interest
expense. Interest expense was $0.4 million and $3.0 million
for the three months ended September 30, 2009 and 2008, respectively, and
$3.8 million and $9.2 million for the nine months ended September 30, 2009
and 2008, respectively. The decrease resulted from our repayment in
full of the outstanding balance under our senior secured credit
facility.
Income tax expense
(benefit). Income tax expense for the three months ended
September 30, 2009 was $17.3 million compared to $25.3 million income tax
benefit for the same period in the prior year, with an effective tax rate of
37.6% and 58.2% at September 30, 2009 and 2008, respectively. The change in the
effective tax rate is attributed to certain non-deductible compensation costs
incurred in 2008, that were not incurred again in 2009. Income tax expense for
the nine months ended September 30, 2009 was $45.1 million with an
effective tax rate of 61.1% as compared to $8.0 million income tax benefit for
the same period in the prior year with an effective tax rate of
58.2%. The effective tax rate for the nine month period remained
relatively stable and was higher than the statutory rate due primarily to
non-deductible amounts accrued in both periods related to certain investigation
related matters.
|
|
Income Tax Expense
(Benefit)
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars
in millions)
|
|
Income
tax expense (benefit)
|
|
$ |
17.3 |
|
|
$ |
(25.3 |
) |
$ |
45.1 |
|
|
$ |
(8.0 |
) |
Effective
tax rate
|
|
|
37.6 |
% |
|
|
58.2 |
% |
|
61.1 |
% |
|
|
58.2 |
% |
Net income
(loss). Net income for the three months ended September 30,
2009 was $28.7 million, compared to $18.2 million of net loss for the same
period in the prior year. For the nine months ended
September 30, 2009, net income was $28.7 million compared to $5.7 million
of net loss for the same period in the prior year. The increase in
net income when comparing the three and nine months ended September 30, 2009 and
2008 is due primarily to premium revenue growth, a slight improvement in our
MBR, as well as decreased SG&A expenses as discussed above.
|
|
Net Income
(Loss)
|
|
|
|
Three Months Ended
September
30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars
in millions, except share data)
|
|
Net
income (loss)
|
|
$ |
28.7 |
|
|
$ |
(18.2 |
) |
$ |
28.7 |
|
|
$ |
(5.7 |
) |
Net
income (loss) per diluted share
|
|
$ |
0.68 |
|
|
$ |
(0.44 |
) |
$ |
0.68 |
|
|
$ |
(0.14 |
) |
Liquidity
and Capital Resources
Cash Generating
Activities
Our business
consists of operations conducted by our regulated subsidiaries, including HMOs
and insurance subsidiaries, and our non-regulated subsidiaries. The
primary sources of cash for our regulated subsidiaries include premium revenue,
investment income and capital contributions made by us to our regulated
subsidiaries. Our regulated subsidiaries are each subject to
applicable state regulations that, among other things, require the maintenance
of minimum levels of capital and surplus. Our regulated subsidiaries’
primary uses of cash include payment of medical expenses, management fees to our
non-regulated third-party administrator subsidiary (the “TPA”) and direct
administrative costs, which are not covered by the agreement with the TPA, such
as selling expenses and legal costs.
The primary
sources of cash for our non-regulated subsidiaries are management fees received
from our regulated subsidiaries, investment income and dividends from our
regulated subsidiaries. Our non-regulated subsidiaries’ primary uses
of cash include payment of administrative costs not charged to our regulated
subsidiaries for corporate functions, including administrative services related
to claims payment, member and provider services and information
technology. Other primary uses include capital contributions made by
our non-regulated subsidiaries to our regulated subsidiaries and the repayment
of our credit facility.
Cash
Positions
At
September 30, 2009, we had an unregulated cash and investment balance of
approximately $92.7 million and a working capital position of approximately
$517.1 million, which represents total current assets less total current
liabilities. During the nine months ended September 30, 2009, we
received $109.4 million in dividends from three of our regulated
subsidiaries. We currently believe that we will be able to meet our
known near-term monetary obligations and maintain sufficient liquidity to
operate our business. However, one or more of our regulators could
require one or more of our subsidiaries to maintain minimum levels of statutory
net worth in excess of the amount required under the applicable state laws if
the regulators were to determine that such a requirement were in the interest of
our members. Further, there may be other potential adverse
developments that could impede our ability to meet our obligations.
We
continue to consider additional dividends from certain of our regulated
subsidiaries to the extent that we are able to access available excess
capital. Refer to our Annual Report on Form 10-K for the fiscal year
ended December 31, 2008 (the “2008 10-K”) for further discussion of such items
in “Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Liquidity and Capital Resources – Regulatory Capital and
Restrictions on Dividends and Management Fees.”
Our
ability to obtain financing has been, and continues to be, materially and
negatively affected by a number of factors. The turmoil in the credit
markets, market volatility, the deterioration in the soundness of certain
financial institutions and general adverse economic conditions have caused the
cost of prospective debt financings to increase considerably. These
circumstances have materially adversely affected liquidity in the financial
markets, making terms for certain financings unattractive, and in some cases
have resulted in the unavailability of financing. We also believe the
uncertainty created by our remaining ongoing governmental investigations, and
the related pending litigation, continues to negatively impact our ability to
obtain financing. In light of the current
and evolving credit market crisis and the uncertainty created by the ongoing
investigations, we may not be able to obtain financing. Even if we
are able to obtain financing under these circumstances, the cost to us likely
will be high and the terms and conditions likely will be onerous. Our
unregulated cash would also be reduced materially if Florida regulators were to
require certain of our intercompany loan arrangements, which total approximately
$50.0 million, to be repaid. We may seek credit financing if and
when it becomes available at reasonable terms.
Auction Rate
Securities
As of
September 30, 2009, all of our long-term investments were comprised of municipal
note investments with an auction reset feature. These notes are issued by
various state and local municipal entities for the purpose of financing student
loans, public projects and other activities; they carry an investment grade
credit rating.
Each of our
existing and anticipated sources of cash is impacted by operational and
financial risks that influence the overall amount of cash generated and the
capital available to us. For a further discussion of risks that can
affect our liquidity, see “Part I – Item 1A: Risk Factors – Risks Related to Our
Financial Condition” included in our 2008 10-K.
Overview of Cash Flow
Activities
Cash and cash
equivalents decreased to $1,171.2 million at September 30, 2009 from
$1,176.3 million at September 30, 2008. For the nine months ended
September 30, 2009 and 2008 our cash flows are summarized as
follows:
|
|
Nine Months Ended September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In millions)
|
|
Net
cash provided by operating activities
|
|
$ |
69.5 |
|
|
$ |
170.0 |
|
Net
cash provided by (used in) investing activities
|
|
|
72.5 |
|
|
|
(8.8 |
) |
Net
cash (used in) provided by financing activities
|
|
|
(152.7 |
) |
|
|
6.7 |
|
Cash provided by
Operating Activities: Because we generally receive premiums in
advance of payments of claims for health care services, we maintain balances of
cash and cash equivalents pending payment of claims. Cash used in
operations primarily consisted of an increase in Premiums and other receivables
of $10.1 million, a decrease in Unearned premiums of $60.5 million and a
decrease in Other accrued expenses of $66.5 million. Cash provided by
operations consisted primarily of an increase in medical benefits payable of
$91.7 million, an increase in amounts accrued related to the investigation
resolution of $30.2 million and a decrease in Other receivables from government
partners of $40.1 million,.
Cash provided by
(used in) Investing Activities: During the nine months ended
September 30, 2009, investing activities consisted primarily of the net proceeds
from the maturity of restricted investments totaling approximately $67.7 million
and the net proceeds from the sale and maturities of investments totaling
approximately $14.7 million, partially offset by the purchases of additions to
property and equipment totaling approximately $9.9 million.
Cash (used in)
provided by Financing Activities: Included in financing
activities is primarily the outstanding amount of $152.8 million that was repaid
in full under the credit facility on its due date.
Item
3. Quantitative and Qualitative Disclosures about
Market Risk.
As of
September 30, 2009, we had short-term investments classified as current assets
of $59.4 million, long-term investments of $53.3 million and restricted
investments on deposit for licensure and collateralizing performance bonds of
$131.3 million. The short-term investments classified as current
assets consist of highly liquid securities with maturities between three and
twelve months and longer term bonds with floating interest rates that are
considered available for sale. Long-term assets consist of municipal
note investments with an auction reset feature that are not currently redeemable
at par. Long-term restricted assets consist of cash and cash
equivalents deposited or pledged to state agencies in accordance with state
rules and regulations. These restricted assets are classified as
long term regardless of the contractual maturity date due to the long-term
nature of the states’ requirements. The restricted investments
classified as long term are subject to interest rate risk and will decrease in
value if market rates increase. Because of their short-term pricing
nature, however, we would not expect the value of these investments to decline
significantly as a result of a sudden change in market interest rates.
Assuming a hypothetical and immediate 1.0% increase in market interest rates at
September 30, 2009 the fair value of our fixed income short term investments
would decrease by less than $0.1 million. Similarly, a 1.0% decrease
in market interest rates at September 30, 2009 would result in an increase of
the fair value of our short term investments of less than $0.6
million.
Item
4. Controls and Procedures.
Evaluation of
Disclosure Controls and Procedures
Our
management carried out an evaluation required by Rule 13a-15 under the
Exchange Act, under the leadership and with the participation of our President
and Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the
effectiveness of our disclosure controls and procedures as defined in
Rule 13a-15 under the Exchange Act (“Disclosure
Controls”). Based on the evaluation, our CEO and CFO concluded that,
as of September 30, 2009, our Disclosure Controls were effective in timely
alerting them to material information required to be included in our reports
filed with the SEC.
Changes
in Internal Control Over Financial Reporting
There has
not been any change in our internal control over financial reporting (as defined
in Rule 13a-15(f) of the Exchange Act) identified in connection with the
evaluation required by Rule 13a-15(d) under the Exchange Act during the quarter
ended September 30, 2009 that has materially affected, or is reasonably likely
to materially affect, our internal control over financial
reporting.
Limitations on
the Effectiveness of Controls
Our
management, including our CEO and CFO, does not expect that our Disclosure
Controls and internal controls over financial reporting will prevent all errors
and fraud. A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a
control system must reflect the fact that there are resource constraints, and
the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, have been detected. These inherent
limitations include the realities that judgments in decision-making can be
faulty and that breakdowns can occur because of simple error or
mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people or by management
override of the controls.
The design of
any system of control also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions;
over time, a control may become inadequate because of changes in conditions or
the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective
control system, misstatements due to error or fraud may occur and may not be
detected.
Part II
– OTHER INFORMATION
Item
1. Legal Proceedings.
Set forth
below is information relating to pending legal proceedings, including a
description of the current status of the ongoing investigations, actions and
lawsuits arising from or consequential to these
investigations:
Government
Investigations
As previously
disclosed, on May 5, 2009, we entered into a Deferred Prosecution Agreement
(the “DPA”) with the United States Attorney’s Office for the Middle District of
Florida (the “USAO”) and the Florida Attorney General’s Office. The DPA
has resolved previously disclosed investigations by the USAO and the Florida
Attorney General’s Office.
Pursuant to
the DPA, the USAO filed a one-count criminal information (the “Information”) in
the United States District Court for the Middle District of Florida, Tampa
Division (the “Court”), charging us with conspiracy to commit health care fraud
against the Florida Medicaid Program in connection with reporting of
expenditures under certain community behavioral health contracts, and against
the Florida Healthy Kids programs, under certain contracts, in violation of 18
U.S.C. Section 1349. The USAO recommended to the Court that the
prosecution of us be deferred during the duration of the DPA. If we have
complied with the DPA, within five days of its expiration, the USAO will
seek dismissal with prejudice of the Information.
The term of
the DPA is thirty-six months, but such term may be reduced by the USAO to
twenty-four months upon consideration of certain factors set forth in the DPA,
including our continued remedial actions and compliance with all federal and
state health care laws and regulations.
In accordance with
the DPA, the USAO has filed a statement of facts relating to this
matter. As a part of the DPA, we have retained, at our expense, an
outside independent monitor (the “Monitor”), for a period of 18 months from his
retention in August 2009. The Monitor was selected by the USAO after
consultation with us. In addition, we agreed to continue undertaking
remedial measures to ensure full compliance with all federal and state health
care laws. Among other things, the Monitor will review our compliance
with the DPA and all applicable federal and state health care laws, regulations
and programs. The Monitor also will review, evaluate and, as
necessary, make written recommendations concerning certain of our policies and
procedures. The DPA provides that the Monitor will undertake to avoid
the disruption of our ordinary business operations or the imposition of
unnecessary costs or expenses.
The DPA does
not, nor should it be construed to, operate as a settlement or release of any
civil or administrative claims for monetary, injunctive or other relief against
us, whether under federal, state or local statutes, regulations or common
law. Furthermore, the DPA does not operate, nor should it be
construed, as a concession that we are entitled to any limitation of our
potential federal, state or local civil or administrative
liability.
Pursuant to
the terms of the DPA, we agreed to pay to the USAO a total of $80.0 million,
comprised of (a) $35.2 million that we paid in August 2008, (b) a
payment of $25.0 million that we paid in May 2009 and (c) a payment of
$19.8 million to be made no later than December 31, 2009. These
amounts were previously accrued in our financial statements for the year ended
December 31, 2007; accordingly, there was no incremental expense recorded in
association with these matters during the three and nine months ended September
30, 2009. Accordingly, $19.8 million remains accrued within the
Current portion of amounts accrued related to investigation resolution line item
in our Condensed Consolidated Balance Sheet as of September 30, 2009 for amounts
payable under the DPA.
On
May 18, 2009, we resolved the previously disclosed investigation by the
SEC. Under the terms of the Consent and Final Judgment, without
admitting or denying the allegations in the complaint filed by the SEC, we
consented to the entry of a permanent injunction against any future violations
of certain specified provisions of the federal securities laws. In
addition, we agreed to pay, in four quarterly installments, a civil penalty in
the aggregate amount of $10.0 million and disgorgement in the amount of one
dollar plus post-judgment interest, of which the first two payments have been
made. If we fail to pay timely, in full, any amount due under the Consent
and Final Judgment, all outstanding amounts (including post-judgment interest),
minus any payments already made, will immediately become due and payable. These
amounts were previously included in the range of probable losses determined by
management’s best estimate and recorded in our March 31, 2009 financial
statements. Accordingly, there was no incremental expense recorded in
our Condensed Consolidated Statements of Operations for the three months ended
September 30, 2009. As of September 30, 2009, $5.0 million remains accrued
within the Current portion of amounts accrued related to investigation
resolution line item in our Condensed Consolidated Balance Sheets related to the
Consent and Final Judgment.
As previously
disclosed, we remain engaged in resolution discussions as to matters under
review with the Civil Division the OIG. Management currently
estimates that the remaining liability associated with these matters is
approximately $60.0 million plus interest. We anticipate these amounts will be
payable in installments over a 54-month period. In accordance
with fair value accounting guidance, we discounted the liability and recorded it
at its fair value of approximately $55.4 million. The final timing,
terms and conditions of a civil resolution may differ from those currently
anticipated, which may result in an adjustment to our recorded
amounts. These adjustments may be material.
In addition,
we are responding to subpoenas issued by the State of Connecticut Attorney
General’s Office involving transactions between us and our affiliates and their
potential impact on the costs of Connecticut’s Medicaid program. We
have communicated with regulators in states in which our health maintenance
organization and insurance operating subsidiaries are domiciled regarding the
investigations, and we are cooperating with federal and state regulators and
enforcement officials in all of these matters. We do not know
whether, or the extent to which, any pending investigations might lead to the
payment of fines or penalties, the imposition of injunctive relief and/or
operating restrictions.
In a
letter dated October 15, 2008, the Civil Division informed us that as part
of the pending civil inquiry, the Civil Division is investigating a number of
qui tam complaints
filed by relators against us under the whistleblower provisions of the False
Claims Act, 31 U.S.C. sections 3729-3733. The seal in those cases has
been partially lifted for the purpose of authorizing the Civil Division to
disclose to us the existence of the qui tam
complaints. The complaints otherwise remain under seal as
required by 31 U.S.C. section 3730(b)(3). In connection with the
ongoing resolution discussions with the Civil Division, we are undertaking to
address the allegations by the qui tam
relators.
We also
learned from a docket search that a former employee filed a qui tam action on
October 25, 2007 in state court for Leon County, Florida against several
defendants, including us and one of our subsidiaries. Because qui tam actions brought under
federal and state false claims acts are sealed by the court at the time of
filing, we are unable to determine the nature of the allegations and, therefore,
we do not know at this time whether this action relates to the subject matter of
the federal investigations. It is possible that additional qui tam actions have been
filed against us and are under seal. Thus, it is possible that we are
subject to liability exposure under the False Claims Act, or similar state
statutes, based on qui tam
actions other than those discussed in this Quarterly Report on Form 10-Q
or the Annual Report on Form 10-K.
Class Action
and Derivative Lawsuits
Putative
class action complaints were filed on October 26, 2007 and on
November 2, 2007. These putative class actions, entitled
Eastwood Enterprises, L.L.C. v. Farha, et al. and Hutton v. WellCare Health
Plans, Inc. et al., respectively, were filed in the United States District Court
for the Middle District of Florida against us, Todd Farha, our former chairman
and chief executive officer, and Paul Behrens, our former senior vice president
and chief financial officer. Messrs. Farha and Behrens were also
officers of various subsidiaries of ours. The Eastwood Enterprises
complaint alleges that the defendants materially misstated our reported
financial condition by, among other things, purportedly overstating revenue and
understating expenses in amounts unspecified in the pleading in violation of the
Securities Exchange Act of 1934 (“Exchange Act”), as amended. The
Hutton complaint alleges that various public statements supposedly issued by
defendants were materially misleading because they failed to disclose that we
were purportedly operating our business in a potentially illegal and improper
manner in violation of applicable federal guidelines and
regulations. The complaint asserts claims under the Exchange Act, as
amended. Both complaints seek, among other things, certification as a
class action and damages. The two actions were consolidated, and
various parties and law firms filed motions seeking to be designated as Lead
Plaintiff and Lead Counsel. In an Order issued on March 11,
2008, the Court appointed a group of five public pension funds from New Mexico,
Louisiana and Chicago (the “Public Pension Fund Group”) as Lead
Plaintiffs. On October 31, 2008, an amended consolidated
complaint was filed in this class action against us, Messrs. Farha and
Behrens, and adding Thaddeus Bereday, our former senior vice president and
general counsel, as a defendant. On January 23, 2009, we and
certain other defendants filed a joint motion to dismiss the amended
consolidated complaint, arguing, among other things, that the complaint failed
to allege a material misstatement by defendants with respect to our compliance
with marketing and other health care regulations and failed to plead facts
raising a strong inference of scienter with respect to all aspects of the
purported fraud claim. The court denied the motion on September 28,
2009 and we and the other defendants have until November 13, 2009 to file our
answer to the amended consolidated complaint. Separately, on October
27, 2009, an action was filed against us in the Court of Chancery of the State
of Delaware entitled Behrens, et al. v. WellCare Health Plans, Inc. in which the
plaintiffs, Messrs. Behrens, Bereday, and Farha, seek an order requiring us to
pay their respective expenses, including attorney fees, in connection with
litigation and investigations in which the plaintiffs are involved by reason of
their service as our directors and officers. Plaintiffs further seek an order to
compel the advancement by us for expenses incurred by the plaintiffs in the
proceedings against them without us being permitted to impose the requirement on
the plaintiffs of first submitting their expense invoices for review and payment
by our directors’ and officers’ insurance carrier for its preliminary review and
evaluation. We intend to defend ourselves vigorously against these
claims. At this time, neither we nor any of our subsidiaries can
predict the probable outcome of these claims. Accordingly, no amounts
have been accrued in our consolidated financial statements.
Five
putative shareholder derivative actions were filed between October 29, 2007
and November 15, 2007. The first two of these putative
shareholder derivative actions, entitled Rosky v. Farha, et al. and Rooney v.
Farha, et al., respectively, are supposedly brought on behalf of us and were
filed in the United States District Court for the Middle District of
Florida. Two additional actions, entitled Intermountain Ironworkers
Trust Fund v. Farha, et al., and Myra Kahn Trust v. Farha, et al., were filed in
Circuit Court for Hillsborough County, Florida. All four of these
actions are asserted against all of our directors (and former director Todd
Farha) except for Glenn D. Steele, Jr., David Gallitano, D. Robert Graham, Heath
Schiesser and Charles Berg and also name us as a nominal defendant. A
fifth action, entitled Irvin v. Behrens, et al., was filed in the United States
District Court for the Middle District of Florida and asserts claims against all
of our directors (and former director Todd Farha) except Glenn D. Steele, Jr.,
Heath Schiesser, David Gallitano and Charles Berg and against two of our former
officers, Paul Behrens and Thaddeus Bereday. All five actions
contend, among other things, that the defendants allegedly allowed or caused us
to misrepresent our reported financial results, in amounts unspecified in the
pleadings, and seek damages and equitable relief for, among other things, the
defendants’ supposed breach of fiduciary duty, waste and unjust
enrichment. The three actions in federal court have been
consolidated. Subsequent to that consolidation, an additional
derivative complaint entitled City of Philadelphia Board of Pensions and
Retirement Fund v. Farha, et al. was filed in the same federal court, but
thereafter was consolidated with the existing consolidated action. A
motion to consolidate the two state court actions, to which all parties
consented, was granted, and plaintiffs filed a consolidated complaint on
April 7, 2008. On October 31, 2008, amended complaints were
filed in the federal court and the state court derivative actions. On
December 30, 2008, we filed substantially similar motions to dismiss both
actions, contesting, among other things, the standing of the plaintiffs in each
of these derivative actions to prosecute the purported claims in our
name. In an Order entered on March 30, 2009 in the consolidated
federal action, the court denied the motions to dismiss the Second Amended
Consolidated Complaint. On April 28, 2009, in the consolidated state
action, the court denied the motion to dismiss the Second Amended Consolidated
Complaint. On April 29, 2009, upon the recommendation of the Nominating
and Corporate Governance Committee of our Board of Directors, the Board adopted
a resolution forming a Special Litigation Committee, comprised of a
newly-appointed independent director to investigate the facts and circumstances
underlying the claims asserted in the federal and state derivative cases and to
take such action with respect to such claims as the Special Litigation Committee
determines to be in our best interests. On May 1, 2009, the
Special Litigation Committee filed in the consolidated federal action a motion
to stay the matter until November 2009 to allow the Special Litigation
Committee to complete its investigation, and following a hearing on May 14,
2009, the court granted that motion and stayed the federal action. The Special
Litigation Committee filed a substantially identical motion in the consolidated
state action, and the plaintiffs in that action withdrew their request for a
hearing to contest that motion. Also, on October 28, 2009, the judge
overseeing the consolidated federal action granted a motion that had been filed
by several of the individual defendants to transfer responsibility for the case
to the judge within the same Court who is overseeing the class action case
described in the preceding paragraph. At this time, neither we nor any of our
subsidiaries can predict the probable outcome of these claims.
In
addition, derivative actions, by their nature, do not seek to recover damages
from the companies on whose behalf the plaintiff shareholders are purporting to
act. Accordingly, no amounts have been accrued in our consolidated
financial statements for these claims.
Other Lawsuits
and Claims
Separate and
apart from the legal matters described above, we are also involved in other
legal actions that are in the normal course of our business, some of which seek
monetary damages, including claims for punitive damages, which are not covered
by insurance. We currently believe that none of these actions, when
finally concluded and determined, will have a material adverse effect on our
financial position, results of operations or cash flows.
Item 1A.
Risk Factors.
Set forth
below are material updates to the risk factors disclosed in “Part I – Item 1A –
Risk Factors” of our 2008 10-K.
The
DPA requires us to retain an independent monitor at our expense for a period of
18 months which could divert management’s time from the operation of our
business and which could materially adversely affect our results of
operations.
We have
retained an independent monitor (the “Monitor”) for a period of 18 months
from his retention in August 2009, at our expense. The Monitor was selected by
the USAO after consultation with us. Operating under the oversight of the
Monitor may result in substantial burdens on our management, as well as hinder
our ability to attract and retain qualified associates. We currently cannot
estimate the costs that we are likely to incur in connection with the retention
of the Monitor, including costs related to implementing any remedial measures
recommended by the Monitor. In addition, the Monitor may recommend significant
changes to our policies and procedures, the consequences of which we are unable
to predict. Our business and results of operations could be materially adversely
affected by any such costs, remedial measures and/or changes to our policies and
procedures.
If
we commit a material breach of the DPA, we will likely be convicted of one or
more criminal offenses, including health care fraud, which would cause us to be
excluded from certain programs and would result in the revocation or termination
of contracts and/or licenses potentially having a material adverse affect on our
results of operations.
In the event
of a knowing and willful material breach of a provision of the DPA, the USAO has
broad discretion to prosecute us through the filed Information or otherwise. We
could also be prosecuted by the Florida Attorney General’s office under such
circumstances. In light of the provisions of the DPA, any such proceeding would
likely result in one or more criminal convictions, including for health care
fraud, which, in turn, would cause us to be excluded from certain programs and
could result in the revocation or termination of contracts and/or licenses
potentially having a material adverse affect on our results of
operations.
CMS
will subject us to targeted monitoring and heightened surveillance and oversight
of all of our operational areas during the upcoming open enrollment
periods.
In connection
with its removal of the marketing and enrollment sanction CMS informed us that
it will subject us to targeted monitoring and heightened surveillance and
oversight of all of our operational areas during the upcoming open enrollment
periods (i.e., the Annual Open Election Period (AEP) and the Medicare Advantage
Open Enrollment Period (OEP)). In addition, CMS stated that it will be
frequently asking us for specific data to provide CMS with assurance that the
deficiencies that were the basis for the sanction are not likely to recur.
These
requests may impose additional administrative burdens on us to provide the
information necessary to allow CMS to evaluate our ongoing compliance, which
could ultimately increase our SG&A expenses. If any of
the underlying deficiencies that formed the basis for the CMS sanction recur,
including if we fail to be responsive to CMS or to comply with CMS timeliness
requirements for responding to beneficiary complaints, we will be subject to the
remedies available to CMS under law, including the imposition of additional
sanctions or penalties, contract nonrenewal or termination, as described in 42
C.F.R. Parts 422 and 423, Subparts K and O, which could have a material adverse
effect on us.
We
may not be able to retain or effectively replace our executive officers, other
members of management or associates, and the loss of any one or more members of
management and their managed care expertise, or large numbers of associates,
could have a material adverse effect on our business.
Although some
of our executive officers have entered into employment agreements with us, these
agreements may not provide sufficient incentives for those officers to continue
their employment with us. The loss of the leadership, knowledge and experience
of our management team could have a material adverse effect on our business.
Replacing one or more of the members of our management team might be difficult
or take an extended period of time.
For example,
on September 17, 2009, Heath G. Schiesser, our President and Chief Executive
Officer, entered into a transition and separation agreement with us, pursuant to
which, Mr. Schiesser will serve in his current roles through December 28, 2009,
the date at which his employment will terminate. The Board has formed
a Committee on Leadership and Executive Succession to focus on leadership
transition at our Company. There can be no assurance that we will be
able to effectively replace Mr. Schiesser with a suitable candidate in a timely
fashion.
In addition,
we may not be able to hire and retain our executive officers, other members of
management or associates for a number of reasons, including, but not limited to
the:
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·
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uncertainty
about government health care policies and funding and the potential impact
on the organization;
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·
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uncertainty
about potential future regulatory actions similar to the CMS
sanction;
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|
·
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uncertainty
surrounding ongoing governmental and Company investigations and
litigation;
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·
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leadership
transition underway;
|
|
·
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expiration
of certain severance and retention programs;
and
|
|
·
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decline
of our stock price in light of the importance of equity in many of our
compensation packages.
|
Accordingly,
all of these factors may impair our ability to recruit and retain qualified
personnel, which could have a material adverse effect on our
business.
Our
encounter data may be inaccurate or incomplete, which could have a material
adverse effect on our results of operations, cash flows and ability to bid for,
and continue to participate in, certain programs.
To the
extent that our encounter data is inaccurate or incomplete, we have expended and
may continue to expend additional effort and incur significant additional costs
to collect or correct this data and have been and could be exposed to operating
sanctions and financial fines and penalties potentially including regulatory
risk for noncompliance. The accurate and timely reporting of
encounter data is increasingly important to the success of our programs because
more states are using encounter data to determine compliance with performance
standards, which are partly used by states to set premium rates. In some
instances, our government clients have established retroactive requirements for
the encounter data we must submit. On other occasions, there may be a
period of time in which we are unable to meet existing
requirements. In either case, it may be prohibitively expensive or
impossible for us to collect or reconstruct this historical data. For
example, the Georgia Department of Community Health (“DCH”) requires all plans
to satisfy specific requirements regarding the quality and volume of encounter
data, including a requirement that all plans submit at least 98% of their
encounters based on value of claims paid. Failure to satisfy these
requirements could result in the imposition of fines, penalties or other
operating restrictions until such time all requirements have been
met. DCH has engaged a third party to conduct an audit and
reconciliation of
our encounter submissions to determine our current and on-going level of
compliance with contractual encounter submission requirements. In
May, 2009, DCH fined our Georgia plan $0.2 million due to our failure to submit
encounter data as required. In October, 2009, DCH levied additional
fines of $0.5 million against our Georgia plan due to our continued failure to
meet encounter submission requirements. It is likely that our
compliance will take additional time during which regulators may impose
additional fines or penalties or take other action against us as a result of our
lack of encounter data submission compliance.
As states
increase their reliance on encounter data, challenges in obtaining complete and
accurate encounter data could affect the premium rates we receive and how
membership is assigned to us, which could have a material adverse effect on our
results of operations, cash flows and our ability to bid for, and continue to
participate in, certain programs.
Our contracts with the states in
which we operate are subject to cancellation by the state, including in the
event of inadequate program funding contained within such state’s budget, and
are also subject to decreases or limited increases in premiums, all of which
could have a material adverse effect on our profitability, cash available for
operations and compliance with capital reserve requirements.
Our contracts
with the states in which we operate are subject to cancellation by the state,
including in the event of inadequate program funding contained within such
state’s budget. This risk is heightened during economic environments
such as we are now experiencing as state governments generally are experiencing
tight budgetary conditions within their Medicaid programs. Budget
problems in the states in which we operate could result in decreases or limited
increases in the premiums paid to us by the states or may also result in the
postponement of payment until additional funding sources are
available. In some jurisdictions cancellation may be immediate and in
other jurisdictions a notice period is required.
In addition
to cancellation, states could revise the terms of our contracts to impose
additional requirements on us and otherwise impact the economic feasibility of
the contract. In such cases, we may determine to terminate the
contract. For example, in February 2009, we determined that it
was economically infeasible for us to continue participating in the Medicaid
reform program after Florida notified us that it was reducing our reimbursement
rates. Consequently, we withdrew from the Medicaid Reform program
effective July 1, 2009, which resulted in a loss of approximately 80,000
members. If any state in which we operate were to decrease premiums
paid to us, pay us less than the amount necessary to keep pace with our cost
trends, or amend the contract to our detriment, it could have a material adverse
effect on our profitability, cash available for operations and compliance with
capital reserve requirements.
If
the contracts with the states in which we operate are unprofitable or are
amended to our detriment, we may not be able to terminate the contract without a
lengthy notice period, which could have a material adverse effect on our
profitability, cash available for operations and compliance with capital reserve
requirements
We may not be
able to terminate our state contracts without a lengthy notice
period. Some of the states in which we operate have extended the
period in which we are obligated to serve our members after notifying the state
that we intend to exit. For example, Ohio has recently extended the
required exit period in our contract from 120 days to 240 days. If
the contracts with the states in which we operate have proven to be unprofitable
or are amended to our detriment and we are unable to exit the program in a
timely manner, our profitability, cash available for operations and compliance
with capital reserve requirements could be materially adversely
affected.
We
are required to comply with laws governing the transmission, security and
privacy of health information, and we have not yet determined what our total
compliance costs will be; however, such costs, when determined, could be more
than anticipated, which could have a material adverse effect on our results of
operations.
Enacted into
law in February 2009, the American Recovery and Reinvestment Act of 2009
("ARRA"), expanded and strengthened privacy and security requirements under the
Health Insurance Portability and Accountability Act of 1996 and its implementing
regulations ("HIPAA"), which applies to us.
ARRA imposes
many HIPAA security and privacy requirements directly on business associates
that were previously only directly applicable to health plans, certain providers
and healthcare clearinghouses. In addition, ARRA further limits our use and
disclosure of protected health information, or PHI. Among other things, these
limitations include prohibitions on exchanging protected health information
(“PHI”) for remuneration, restrictions on marketing to individuals, and the
promise of new standards for the de-identification of data. ARRA also imposed
new obligations on us to provide individuals with electronic copies of their
health information, to agree to certain restrictions requested by individuals
and eventually to provide individuals an accounting of virtually all disclosures
of their health information. Most of these provisions will become effective in
February 2010 and many will be further clarified by regulations promulgated
by the Department of Health and Human Services (“HHS”). The earliest compliance
date for limitations on exchanging PHI for remuneration and providing expanded
accounting to individuals is in 2011.
Civil
penalties for violations by either covered entities or business associates are
increased up to an annual maximum of $1.5 million for uncorrected
violations based on willful neglect. Imposition of these penalties is more
likely because ARRA strengthens enforcement. For example, beginning in
February 2010, HHS is required to conduct periodic audits to confirm
compliance. Investigations of violations that indicate willful neglect, for
which penalties are mandatory beginning in February 2011, are statutorily
required. In addition, state attorneys general are authorized to bring civil
actions seeking either injunctions or damages in responses to violations of
HIPAA privacy and security regulations that threaten the privacy of state
residents. Initially monies collected will be transferred to a division of HHS
for further enforcement, and within three years, a methodology will be adopted
for distributing a percentage of those monies to affected individuals to fund
enforcement and provide incentive for individuals to report
violations.
In addition,
beginning September 2009, ARRA requires us to notify affected individuals,
HHS, and in some cases the media when unsecured personal health information is
subject to a security breach.
ARRA also
contains a number of provisions that provide incentives for states to initiate
certain programs related to health care and health care technology, such as
electronic health records. While provisions such as these do not apply to us
directly, states wishing to apply for grants under ARRA, or otherwise
participating in such programs, may impose new health care technology
requirements on us through our contracts with state Medicaid agencies. ARRA is
too recent for us to be able to predict what such requirements may entail or
what their effect on our business may be.
We are
currently evaluating ARRA for its specific impact on us and our customers. We
will continue to assess our compliance obligations as regulations under ARRA are
promulgated and more information becomes available from HHS and other federal
agencies. The new privacy and security requirements, however, may require
substantial operational and systems changes, employee education and resources
and there is no guarantee that we be able to implement them adequately or prior
to their compliance date. Given HIPAA’s complexity and the anticipated new
regulations, which may be subject to changing and perhaps conflicting
interpretation, our ongoing ability to comply with any of the HIPAA requirement
is uncertain, which may expose us to the criminal and increased civil penalties
provided under ARRA and may require us to incur significant costs in order to
seek to comply with its requirements.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds.
Recent
Sales of Unregistered Securities
We did not
sell any securities in the three months ended September 30, 2009 that were not
registered under the Securities Act of 1933, as amended.
Issuer Purchases of Equity
Securities
We do not
have a stock repurchase program. However, during the quarter ended
September 30, 2009, certain of our employees were deemed to have surrendered
shares of our common stock to satisfy their withholding tax obligations
associated with the vesting of shares of restricted common stock. The
following table summarizes these repurchases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Number
|
|
Maximum
|
|
|
|
|
|
|
|
|
|
|
of
Shares
|
|
Number
of
|
|
|
|
|
|
|
|
|
|
|
Purchased
as
|
|
Shares
that
|
|
|
|
|
|
|
|
|
|
|
Part
of
|
|
May
Yet Be
|
|
|
|
|
|
|
|
|
|
|
Publicly
|
|
Purchased
|
|
|
Total
Number
|
|
Average
|
|
Announced
|
|
Under
the
|
|
|
of
Shares
|
|
Price
Paid
|
|
Plans
or
|
|
Plans
or
|
Period
|
|
Purchased(1)
|
|
Per
Share(1)
|
|
Programs
|
|
Programs
|
July 1,
2009 through July 31, 2009
|
|
|
13,625
|
|
|
|
18.85
|
(2)
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 1,
2009 through August 31, 2009
|
|
|
4,150
|
|
|
|
24.14
|
(3)
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 1,
2009 through September 30, 2009
|
|
|
5,314
|
|
|
|
26.12
|
(4)
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
during quarter ended September 30, 2009
|
|
|
23,089
|
|
|
|
23.01
|
(5)
|
|
|
N/A
|
|
|
|
N/A
|
|
(1 |
) |
The
number of shares purchased represents the number of shares of our common
stock deemed surrendered by our employees to satisfy their withholding
tax |
|
|
obligations
due to the vesting of shares of restricted common stock. For
the purposes of this table, we determined the average price paid per share
based on the closing price of our common stock as of the date of the
determination of the withholding tax amounts (i.e., the date that the
shares of restricted stock vested). We do not currently have a
stock repurchase program. We did not pay any cash consideration
to repurchase these shares.
|
(2 |
) |
The
weighted average price paid per share during the period was
$18.65.
|
(3 |
) |
The
weighted average price paid per share during the period was
$23.84.
|
(4 |
) |
The
weighted average price paid per share during the period was
$24.35.
|
(5 |
) |
The
weighted average price paid per share during the period was
$20.72.
|
Item
3. Defaults upon Senior Securities.
Item
4. Submission of Matters to a Vote of Security
Holders.
Our
Annual Meeting of Stockholders was held on July 30, 2009. 37,933,437
shares or 89.83% of eligible voting shares, were represented at the meeting;
there was no solicitation in opposition to management’s nominees as listed in
the proxy statements and all such nominees were elected. At the meeting,
the matters listed below were submitted to a vote of our
stockholders.
Proposal One: Election of
Directors
As a
result of Proposal Two and Proposal Three being approved, seven directors were
elected to serve a one-year term set to expire at our 2010 Annual Meeting of
Stockholders. The vote with respect to each nominee was as
follows:
|
(a)
|
27,160,649
votes were cast for the election of Kevin Hickey as a director; 10,772,788
were withheld.
|
|
(b)
|
25,873,692
votes were cast for the election of Regina Herzlinger as a director;
12,059,745 were withheld.
|
|
(c)
|
27,654,686
votes were cast for the election of Heath Schiesser as a director;
10,278,751 were withheld.
|
|
(d)
|
34,472,211
votes were cast for the election of David Gallitano as a director;
3,461,226 were withheld.
|
|
(e)
|
25,884,940
votes were cast for the election of Christian Michalik as a director;
12,048,497 were withheld.
|
|
(f)
|
26,440,976
votes were cast for the election of Ruben Jose King-Shaw, Jr.; 11,492,461
were withheld.
|
|
(g)
|
27,928,270
votes were cast for the election of D. Robert Graham; 10,005,167 were
withheld.
|
|
Proposal Two: Amendment of the
Certificate of Incorporation to provide for annual election of all
Directors*
|
37,833,123
votes were cast for the approval and adoption of an amendment to our Certificate
of Incorporation to declassify our Board of Directors, 69,324 were against and
30,990 abstained.
Proposal Three: Amendment of the
Certificate of Incorporation to provide that Directors may be removed with or
without cause*
37,824,999
votes were cast for the approval and adoption of an amendment to our Certificate
of Incorporation to provide that Directors may be removed with or without cause
(except for Class III Directors serving the remaining portion of a multi-year
term, who, upon approval, could not be removed prior to the end of such current
multi-year term), 99,495 were against and 8,943 abstained.
Proposal
Four: Ratification of appointment of independent registered public accounting
firm
37,732,466
votes were cast for the ratification of the appointment of Deloitte &
Touche, LLP as our independent registered public accounting firm for 2009,
192,543 were against and 8,428 abstained.
_______
*
|
Both
Proposals Two and Three were cross-conditioned on each
other. By approving Proposals Two and Three, shareholders
approved and adopted the proposed Amended and Restated Certificate of
Incorporation. If either Proposal Two or Three were not
approved, then neither Proposal Two nor Three could have been
approved.
|
Item 5.
Other Information.
None.
|
incorporated
by reference
|
Exhibit
Number
|
Description
|
Form
|
Filing
Date
with SEC
|
Exhibit Number
|
2.1
|
Agreement
and Plan of Merger, dated as of February 12, 2004, between WellCare
Holdings, LLC and WellCare Group, Inc.
|
S-1/A
|
June
8, 2004
|
2.1
|
3.1
|
Amended
and Restated Certificate of Incorporation
|
10-Q
|
August
13, 2004
|
3.1
|
3.1.1
|
Amendment
to Amended and Restated Certificate of Incorporation*
|
|
|
|
3.2
|
Amended
and Restated Bylaws of WellCare Health Plans, Inc.
|
10-Q
|
August
13, 2004
|
3.2
|
3.2.1
|
Amendment
No. 1 to the Amended and Restated Bylaws of WellCare Health Plans,
Inc.
|
8-K
|
January
31, 2008
|
3.2
|
4.1
|
Specimen
common stock certificate
|
S-1/A
|
June
29, 2004
|
4.1
|
10.1
|
Severance
Agreement between WellCare Health Plans, Inc. and its
wholly-owned subsidiary Comprehensive Health Management, Inc. and Adam
Miller †
|
8-K
|
August
3, 2009
|
10.1
&
10.2
|
10.2
|
Amended
and Restated Letter Agreement among Charles Berg, WellCare Health Plans,
Inc. and Comprehensive Health Management, Inc. †*
|
|
|
|
10.3
|
Amended
and Restated Non-Qualified Stock Option Agreement between Charles Berg and
WellCare Health Plans, Inc. †*
|
|
|
|
10.4
|
Restricted
Stock Agreement between Charles Berg and WellCare Health Plans, Inc.
†*
|
|
|
|
10.5
|
Transition
and Separation Agreement among Heath Schiesser, WellCare Health Plans,
Inc. and Comprehensive Health Management, Inc. †
|
8-K
|
September
23, 2009
|
10.1
|
10.6
|
Amendment
No. 1 to Employment Agreement by and among Rex M. Adams, WellCare Health
Plans, Inc. and Comprehensive Health Management, Inc. †*
|
|
|
|
10.7
|
Amendment
11 to Contract No. FA615 between the Agency for Health Care Administration
(“AHCA”) and WellCare of Florida, Inc. (d/b/a Staywell Health Plan of
Florida)
|
8-K
|
July
15, 2009
|
10.1
|
10.8
|
Amendment
9 to Contract No. FA619 between AHCA and HealthEase of Florida,
Inc.
|
8-K
|
July
15, 2009
|
10.2
|
10.9
|
Renewal
Notice regarding Contract S5967 between the Centers for Medicare &
Medicaid Services and WellCare Prescription Insurance, Inc. and related
benefit attestation
|
8-K
|
September
16, 2009
|
10.1
|
10.10
|
Contract
No. FA904 between the Agency for Health Care Administration and WellCare
of Florida, Inc. (d/b/a Staywell Health Plan of Florida)
|
8-K
|
September
16, 2009
|
10.2
|
10.11
|
Contract
No. FA905 between the Agency for Health Care Administration and HealthEase
of Florida, Inc.
|
8-K
|
September
16, 2009
|
10.3
|
10.12
|
Contract
to Provide Comprehensive Medical Services among HealthEase of Florida,
Inc., WellCare of Florida, Inc., and the Florida Healthy Kids
Corporation
|
8-K
|
October
5, 2009
|
10.1
|
10.13
|
Form
of Severance Agreement†*
|
|
|
|
31.1
|
Certification
of President and Chief Executive Officer pursuant to Section 302 of
Sarbanes-Oxley Act of 2002*
|
|
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act
of 2002*
|
|
|
|
32.1
|
Certification
of President and Chief Executive Officer pursuant to Section 906 of
Sarbanes-Oxley Act of 2002*
|
|
|
|
32.2
|
Certification
of Chief Financial Officer pursuant to Section 906 of Sarbanes-Oxley Act
of 2002*
|
|
|
|
|
*
Filed herewith
|
|
†
Denotes a management contract or compensatory plan, contract or
arrangement
|
SIGNATURES
Pursuant
to the requirements of the Securities and Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized in Tampa, Florida on November
4, 2009.
|
WELLCARE
HEALTH PLANS, INC.
|
|
|
|
|
|
|
|
By:
|
/s/
Heath
Schiesser
|
|
|
Heath
Schiesser
|
|
|
President
and Chief Executive Officer
|
|
|
|
|
By:
|
/s/
Thomas L.
Tran
|
|
|
Thomas
L. Tran
|
|
|
Senior
Vice President and Chief Financial
Officer
|
Exhibit
Index
|
incorporated
by reference
|
Exhibit
Number
|
Description
|
Form
|
Filing
Date
with SEC
|
Exhibit Number
|
2.1
|
Agreement
and Plan of Merger, dated as of February 12, 2004, between WellCare
Holdings, LLC and WellCare Group, Inc.
|
S-1/A
|
June
8, 2004
|
2.1
|
3.1
|
Amended
and Restated Certificate of Incorporation
|
10-Q
|
August
13, 2004
|
3.1
|
3.1.1
|
Amendment
to Amended and Restated Certificate of Incorporation*
|
|
|
|
3.2
|
Amended
and Restated Bylaws of WellCare Health Plans, Inc.
|
10-Q
|
August
13, 2004
|
3.2
|
3.2.1
|
Amendment
No. 1 to the Amended and Restated Bylaws of WellCare Health Plans,
Inc.
|
8-K
|
January
31, 2008
|
3.2
|
4.1
|
Specimen
common stock certificate
|
S-1/A
|
June
29, 2004
|
4.1
|
10.1
|
Severance
Agreement between WellCare Health Plans, Inc. and its
wholly-owned subsidiary Comprehensive Health Management, Inc. and Adam
Miller †
|
8-K
|
August
3, 2009
|
10.1
&
10.2
|
10.2
|
Amended
and Restated Letter Agreement among Charles Berg, WellCare Health Plans,
Inc. and Comprehensive Health Management, Inc. †*
|
|
|
|
10.3
|
Amended
and Restated Non-Qualified Stock Option Agreement between Charles Berg and
WellCare Health Plans, Inc. †*
|
|
|
|
10.4
|
Restricted
Stock Agreement between Charles Berg and WellCare Health Plans, Inc.
†*
|
|
|
|
10.5
|
Transition
and Separation Agreement among Heath Schiesser, WellCare Health Plans,
Inc. and Comprehensive Health Management, Inc. †
|
8-K
|
September
23, 2009
|
10.1
|
10.6
|
Amendment
No. 1 to Employment Agreement by and among Rex M. Adams, WellCare Health
Plans, Inc. and Comprehensive Health Management, Inc. †*
|
|
|
|
10.7
|
Amendment
11 to Contract No. FA615 between the Agency for Health Care Administration
(“AHCA”) and WellCare of Florida, Inc. (d/b/a Staywell Health Plan of
Florida)
|
8-K
|
July
15, 2009
|
10.1
|
10.8
|
Amendment
9 to Contract No. FA619 between AHCA and HealthEase of Florida,
Inc.
|
8-K
|
July
15, 2009
|
10.2
|
10.9
|
Renewal
Notice regarding Contract S5967 between the Centers for Medicare &
Medicaid Services and WellCare Prescription Insurance, Inc. and related
benefit attestation
|
8-K
|
September
16, 2009
|
10.1
|
10.10
|
Contract
No. FA904 between the Agency for Health Care Administration and WellCare
of Florida, Inc. (d/b/a Staywell Health Plan of Florida)
|
8-K
|
September
16, 2009
|
10.2
|
10.11
|
Contract
No. FA905 between the Agency for Health Care Administration and HealthEase
of Florida, Inc.
|
8-K
|
September
16, 2009
|
10.3
|
10.12
|
Contract
to Provide Comprehensive Medical Services among HealthEase of Florida,
Inc., WellCare of Florida, Inc., and the Florida Healthy Kids
Corporation
|
8-K
|
October
5, 2009
|
10.1
|
10.13
|
Form
of Severance Agreement†*
|
|
|
|
31.1
|
Certification
of President and Chief Executive Officer pursuant to Section 302 of
Sarbanes-Oxley Act of 2002*
|
|
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act
of 2002*
|
|
|
|
32.1
|
Certification
of President and Chief Executive Officer pursuant to Section 906 of
Sarbanes-Oxley Act of 2002*
|
|
|
|
32.2
|
Certification
of Chief Financial Officer pursuant to Section 906 of Sarbanes-Oxley Act
of 2002*
|
|
|
|
|
*
Filed herewith
|
|
†
Denotes a management contract or compensatory plan, contract or
arrangement
|
43