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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
{X} ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
{ } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number 0-15846
First Health Group Corp.
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(Formerly HealthCare COMPARE Corp.)
(Exact name of registrant as specified in its charter)
Delaware 36-3307583
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3200 Highland Avenue
Downers Grove, Illinois 60515
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (630) 737-7900
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.01 par value
(Title of Class)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of
the registrant on March 13, 2000, was approximately $802,479,496. For
the purposes of the foregoing calculation only, all directors,
executive officers and five percent stockholders of the registrant have
been deemed to be affiliates. On that date, there were 47,348,374
shares of Common Stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
1999 Annual Report to Stockholders..................Parts I, II and IV
Proxy Statement for the Annual Meeting of
Stockholders scheduled to be held on
May 16, 2000...........................................Parts I and III
PART I
Item 1. Business
General
First Health Group Corp., together with its subsidiaries hereinafter
collectively referred to as the "Company" or "First Health", is a full-
service national health benefits company. The Company specializes in
serving large, national employers and payers with a single source for
their group health programs -- providing comprehensive, cost-effective
and innovative solutions for all the health benefits needs of their
employees nationwide. Through its workers' compensation service line,
the Company provides a full range of auto managed care and workers'
compensation services for insurance carriers, state insurance funds,
third party administrators and large, self-insured national employers.
Through its First Health Services service line, the Company provides
services to various state Medicaid and entitlement programs for claims
administration, pharmacy benefit management programs and medical
management and quality review services.
The Company, which is a Delaware corporation, was organized in 1982.
The Company's principal executive offices are located at 3200 Highland
Avenue, Downers Grove, Illinois 60515, and its telephone number is
(630) 737-7900.
Recent Developments
On July 20, 1999, the Company announced that it had entered into a
contract with CNA to provide PPO services to the Mail Handlers Benefit
Plan (Mail Handlers), one of the largest federal employee health
benefit plans with over 400,000 members and 1 million participants.
When fully implemented, the contract will represent one of the
Company's largest. The implementation of the contract took place over
the latter half of 1999 and was fully implemented effective January 1,
2000.
Strategy
First Health assists its group clients through an integrated health
plan offering that promotes the well-being and satisfaction of
participants while positively impacting an organization's medical cost
trends through:
* Single source accountability and availability;0
* 24-hours-a-day, 7 days-a-week availability to help participants
with all benefits-related issues;
* A broad national network of quality, cost-effective health care
providers--wherever care is needed;
* Non-network negotiations;
* Clinical and case support programs and medical claims
administration;
* Pharmacy Benefit Management (PBM).
Its various medical review programs help First Health's clients
manage the number of units of medical services (volume) while its PPO
products help First Health's clients manage the cost of those units of
service (price). Through its Bill Review capabilities, the Company
provides workers' compensation bill review services nationally. These
services are coupled with the Company's medical review programs and PPO
networks in order to provide a comprehensive product offering in the
workers' compensation arena where, in recent years, medical costs have
been rising faster than in the group health arena. Through First
Health Services, the Company provides claims administration, pharmacy
benefits management and medical management and quality review services
to public sector payors such as state Medicaid and state entitlement
programs.
First Health seeks to develop clinical and care support programs
designed to control the number of health care units, manage costly
diseases and increase compliance with prescribed treatment. These
programs include a full range of medical and mental health care and
integrate PBM to manage the full range of benefits. First Health's
management believes that the continuous offering of new and improved
programs is important to the expansion of its business.
Through The First Health Network, First Health also offers its
clients services designed to control the price of a health care unit of
service. First Health specializes in the development of PPOs and the
collection and analysis of health care cost data. First Health's
capability to analyze health care cost data allows it to use a client's
actual history of health care usage to structure networks of providers
tailored to client needs.
The Company's acquisition of small indemnity insurance companies in
1996 and 1997 has enabled the Company to expand its product offering to
leverage its managed care assets of The First Health Network and its
clinical management services. The introduction of new products has
allowed the Company to provide a national HMO-like product for self-
insured ERISA plans and stop-loss insurance products.
Through the acquisition of First Health in July 1997, the Company
believes it has rounded out the range of services necessary to offer a
full spectrum of integrated health benefits products to clients and
prospective clients such as PPO, risk and medical management services.
Health Care Reform, Expenditures and Managed Care
In recent years, political, economic and regulatory influences have
subjected the health care industry to fundamental change and
consolidation. Since 1993, the Clinton Administration has proposed
various programs to reform the health care system and expressed its
commitment to (I) increasing health care coverage for the uninsured,
(II) controlling the continued escalation of health care expenditures,
and (III) using health care reimbursement policy to help control the
federal deficit and (IV) allowing insureds to sue their ERISA or
HMO health plan. Even though Congress rejected the Clinton
Administration's proposals, several potential approaches remain under
consideration, including broad insurance reform proposals, tax
incentives for individuals and the self-employed to purchase insurance,
controls on the growth of Medicare and Medicaid spending, the creation
of insurance purchasing groups for small businesses and individuals,
and market-based changes to the health care delivery system. Proposals
under consideration at the federal level also would provide incentives
for the provision of cost-effective, quality health care through
encouraging managed care systems. In addition, many states are
considering various health care reform proposals. At both the federal
and state level, there is growing interest in legislation to regulate
how managed care companies interact with providers and health plan
members. The Company anticipates that Congress and state legislatures
will continue to review and assess alternative health care delivery
systems and payment methodologies, and that the public debate of these
issues will likely continue in the future. Although the Company
believes it is well-positioned to respond to the stated concerns, the
Company cannot predict what impact the proposed measures may have on
its business. Concern about the proposed reform measures and their
potential effect has been reflected in the volatility of the stock
prices of companies in health care and related industries, including
the Company.
The Company is monitoring developments concerning health care reform
and preparing strategic responses to the different reform scenarios.
In response to pending legislation and market pressures and in
anticipation of future health care reform, the Company is broadening
and diversifying its services so it will be less affected if health
care reform proposals are enacted.
First Health offers numerous programs designed to help payers of
health care control their medical costs. Unlike HMOs, PPO companies
typically do not underwrite health insurance or assume related risks.
Clinical management and PPO services have been offered on a
commercially significant scale for the last ten years by firms which
are engaged in providing these types of services. The industry is
currently highly fragmented with numerous independent firms providing
medical utilization review and PPO services, primarily on a regional or
local level but the rate of consolidation is accelerating. In
addition, a growing number of health insurance carriers, HMOs and third
party administrators have established internal clinical management and
PPO departments.
In workers' compensation, medical costs are rising at almost twice
the rate of general medical inflation. Though such medical costs
represent only about 5% of total health care expenditures, the increase
in costs is significant for employers and insurance carriers and have
risen more than 1000% since 1970. First Health and certain other cost
management firms offer programs designed to control escalating medical
expenses and indemnity payments for lost time, reduce litigation and
allow injured employees to return to work as soon as possible. Many of
the services used in group health are also applied to the workers'
compensation market. PPOs are utilized to manage price. Clinical
management services are targeted toward managing the number of units of
service and the quality of that service, and helping the employee
return to productive employment. In addition, bill review services are
applied on a national basis in the nearly 40 states that have a medical
fee schedule and in the remaining states which allow a usual and
customary review. Additionally, at least 30 states have adopted
legislation that enables workers' compensation managed care services,
and legislation has been proposed in other states. The combination of
these services offers workers' compensation insurance carriers and
employers significant cost savings.
PPO Services - The First Health Network
Established in 1983, The First Health Network, previously known as
The AFFORDABLE Medical Network, develops and manages payer-based PPO
networks throughout the country that incorporate both group health and
workers' compensation medical providers. This is the largest area of
the Company's business. The networks consist of hospitals, physicians
and other health care providers who offer their services to clients at
negotiated rates in order to gain access to a growing national client
base.
The Company's hospital network, as of March 2000, includes
approximately 3,600 hospitals in 49 states, the District of Columbia
and Puerto Rico. In each case, rates are individually negotiated for
the full range of hospital services, including hospital inpatient
and outpatient services. In addition, the Company has established
an outpatient care network (OCN) comprising approximately 330,000
physicians, clinical laboratories, surgery centers, radiology
facilities and other providers in 49 states, the District of Columbia
and Puerto Rico.
During the last 10 years, the Company incurred substantial expense
in expanding its PPO networks. The expansion has occurred in the number
of health care providers within existing areas and in the number of
networks throughout the country. The Company has expanded the number
of hospital networks not only in major metropolitan markets, but also
in targeted secondary and tertiary markets; many of the hospital and
OCN providers that have been added during the past few years have been
in these areas. Management expects to continue to incur significant
expenses to further expand its hospital and outpatient care networks,
particularly in secondary and tertiary markets and believes that its
investment in developing these markets significantly differentiates it
from competitors.
The following table sets forth information with respect to the
approximate number of participating providers in The First Health
Network at the end of each of the past five years:
December 31,
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1995 1996 1997 1998 1999
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Number of Hospitals in Network 2,100 2,320 2,650 3,220 3,510
Outpatient Care Network Providers 181,000 207,000 231,000 288,000 321,000
The First Health Network was developed in response to the needs of
the Company's national client base. These clients provide the leverage
necessary to enable First Health to negotiate favorable rates with
providers throughout the country. The First Health client base
includes a diverse group of health care payers, such as group
health and workers' compensation insurance carriers, third party
administrators, HMOs, self-insured employers, union trusts and
government employee plans. The Company believes the amalgamated buying
leverage of these clients provides it with strength in negotiating PPO
contracts with current and prospective health care providers.
Compensation. As a fee for developing and managing its expansive
PPO network, the Company generally charges a percentage of savings
realized by its clients. The amount of this fee varies depending on a
number of factors including number of enrollees, networks selected,
length of contract and out-of-pocket benefit copayments and amount of
savings realized by its clients.
The Company competes with national and local firms which develop
PPOs and with major insurance carriers, third party administrators and
utilization review firms which have implemented their own preferred
provider network as well as with firms which specialize in the
collection and analysis of health care cost data.
Approach to Network Development
The strategy of The First Health Network is to create a selective
network of individual providers which will meet the medical, financial,
geographic and quality needs of its clients and their beneficiaries.
First Health contracts directly with each hospital and generally does
not contract with groups of hospitals or provider networks established
by other organizations. Management believes this provides the maximum
control over the composition and rates in the network and ensures
provider stability in The First Health Network. To further promote
stability and savings in the network, when possible, First Health
enters into multi-year agreements with its providers with nominal
annual rate increases.
The selected providers benefit from their participation in The First
Health Network through increased patient volume as patients are
directed to them through health benefit plans maintained by First
Health's clients and other channeling mechanisms, such as the Company's
clinical and care services and electronic and internet provider
directory applications.
The network consists of a full array of providers, including
hospitals and outpatient providers (physicians, laboratories,
radiological facilities, outpatient surgical centers, mental health
providers, physical therapists, chiropractors, and other ancillary
providers). By establishing contractual relationships with the
complete range of providers, First Health is able to impact the vast
majority of the client's health costs and to facilitate referrals
within the network for all needed care.
The rate structure negotiated by First Health maximizes the savings
for the client and gives incentives to providers to deliver cost
effective care. Unlike many other PPOs which negotiate price discounts
or separate rates for intensive care and other specialty units, First
Health strives to negotiate a single all inclusive per diem for
medical/surgical and intensive care unit days in hospitals. The
majority of the Company's hospital PPO contracts are negotiated with an
all-inclusive rate structure. The charges for hospital outpatient care
are controlled as well through reimbursement caps. Fees for physicians
and other outpatient providers are set by fee schedules established by
First Health. The negotiated rates have resulted in typical savings of
more than 40% on inpatient hospital costs and 20-30% for physician and
outpatient costs.
After a network has been established, First Health provides ongoing
consulting services to clients, re-negotiates contracts with providers
and prepares annual evaluations which profile for its clients the
effectiveness of the network. The networks are continuously undergoing
refinements with active redevelopment activity to expand geographic
coverage and to improve rate structure as care continues to shift to
outpatient settings.
In order to promote an ongoing and long term positive business
relationship with network providers, First Health has established an
extensive provider relations program. Dedicated staff perform a
variety of activities including responding to hospital claims
inquiries, conducting site visits, preparing provider newsletters and
participating in joint hospital/First Health functions which are
intended to promote goodwill and increased utilization of network
providers. The Company's retention rate for hospitals has been more
than 99% and more than 97% for physicians and other outpatient
providers.
PPO Quality Assessment
Quality assessment of network providers is a critical component in
the selection and retention process. The Company has established an
intensive program which evaluates each individual provider against
standards set for various quality indicators. Provider evaluation
occurs prior to the selection of the provider and continues while they
are in the network.
Information Systems
Management of First Health believes its interactive, on-line
computer-based information systems have been a major factor in its
ability to provide clients with comprehensive cost effective healthcare
information.
First Health utilizes a broad range of proprietary information
systems applications to support its PPO business. Present information
systems support management of all aspects of provider recruitment,
including maintenance of a comprehensive data base of information about
members utilization of PPO providers. Additional information systems
are utilized to develop rate and fee objectives and strategies prior to
initiating contract negotiations with providers. The Company has
generally invested 10% to 12% of revenue in its information systems and
anticipates continuing these investments in the future. Currently the
Company has major upgrades underway in several areas with particular
emphasis within its claims processing system. First Health also
maintains a proprietary system to re-price health care claims to the
contracted rate for its clients.
In addition, health care cost data analysis services are available
to the Company's clients. These services provide clients with in-depth
customized information concerning their health care cost and
utilization experience. Using its internally developed proprietary
software, the Company analyzes its clients' health care claims
information and benefit plans in order to provide each client's
specific health care cost profile and evaluate appropriate cost
management programs. This software also allows the Company to simulate
how changes in a benefit plan's structure will change the overall cost
of a benefit program.
Internet Application
Internally developed Internet channeling tools are available for
both group health and workers' compensation clients. Currently there
are three channeling tools available: electronic directory, directory
maker and worksite poster. Each tool contains the same information
that is made available through First Health's toll-free telephonic
provider directory -- data for hospital and outpatient care providers
in The First HealthO Network. Provider information is updated on a
weekly basis. First Health's Internet channeling tools are currently
for business-to-business use and are password-protected.
Electronic Directory
Electronic directory is easy to use and allows clients, their
employer groups or participants to search for a hospital, physician or
clinic in The First HealthO Network. Electronic directory can search
for a provider by zip code within a 5-mile default radius, county, city
or provider name. It also provides a map with directions to the
provider. Electronic directory requires only basic Internet access.
Directory Maker
Directory maker is designed to allow clients to create and print
custom directories of The First HealthO Network providers at the client
site. Directories can be created on an as-needed basis and will
contain the most up-to-date information. By creating a directory
profile, clients can pick specific cities, counties or even zip codes
that will be included in a directory, as well as determine the way the
data will be sorted. Directories are typically created in 24 hours or
less. To use directory maker, clients need only Internet access, a
JavaScripta and an enabled browser.
Worksite Poster Application (for workers' compensation use only)
The worksite poster application is designed to assist clients by
producing posters that list hospitals, clinics/facilities and
physicians closest to their site(s). Clients can search by zip code
within a 5-mile radius default to find providers in The First HealthO
Network. In addition, clients can specify physicians, clinics and
hospitals or any combination of the three to print on a poster. This
application requires basic Internet access.
Additional Internet Services
Client and Member Site
In addition, First Health intends to offer a member services
Internet application to assist participants in utilizing our services.
Currently in a pilot phase, the application will allow members to:
* Access general information about First Health;
* Print commonly used health benefits forms, including
claims forms;
* Locate a provider in The First HealthO Network;
* Obtain answers to frequently asked questions about The
First HealthO Network;
* Send First Health an e-mail with health plan questions.
We are evaluating additional services for this site, with the intent
of having them available in the year 2000, including:
* Electronic EOBs;
* Claims status (i.e. status of a particular claim, claims
history of an individual, date of service, benefit
category, etc.);
* Language choice;
* Enrollment/eligibility;
* ID cards;
* Client Reports; and
* Survey tool for customer satisfaction.
Provider Site
We currently offer providers in The First HealthO Network access to
a provider Internet site. This site allows providers access to a
complete client listing along with a payor list. This site is being
further developed in 2000. At that time, we plan to expand the
provider Internet site to include the following:
* Payer information (eligibility);
* Claims status;
* Referral directory;
* Precertification;
* Provider demographics;
* Clients' Summary Plan Documents;
* Electronic payment/EOBs;
* Information about First Health; and
* Survey tool for provider satisfaction.
Claims Administration Capabilities
The Company provides "one-stop shopping" for employers offering
indemnity, PPO and point of service plans through its core competency
of claims administration and customer service. The Company provides
clients with an integrated package of health care benefits
administration including:
* availability 24 hours, seven days a week
* medical, disability, dental and vision claims processing
* prescription drug plan administration and network
management
* managed care administration
Additionally, they can utilize, if they so desire:
* COBRA administration
* Flexible Spending Account administration
* stop-loss brokerage
* data analysis
The Company's claims administration product is a sophisticated,
technologically advanced claims processing, tracking and reporting
system. A majority of this processing is performed by the Company's
fully integrated and proprietary system ("First Claim"). The system
was developed completely in-house by First Health through its
acquisition in July, 1997 and is owned entirely by the Company. The
system supports a broad range of benefit programs, including medical
care, prescription drugs, FLEX accounts, vision care and dental care.
Additionally, in order to further enhance the Company's claims
processing capabilities, the Company is in the process of expanding its
offering by adding new and advanced features including imaging and
artificial intelligence. The Company currently estimates that these
development efforts will significantly enhance and improve upon the
capabilities of First Claim. Such modifications are expected to be
ongoing over the next two years or so.
The system helps clients increase the cost effectiveness of their
benefit plans by offering such features as on-line reporting
capability, Electronic Data Interchange ("EDI"), rapid and responsive
customer service, automatic tracking of annual, lifetime, per-case, and
floating maximums, and full integration with all other First Health
departments and services. This integration benefits clients since the
Company can analyze claims data as well as clinical management,
pharmacy and network usage data. This analysis enables the Company to
provide comprehensive management reports that can impact medical costs.
In addition, because First Health's claims system is an on-line, "real
time," interactive system, clients can expect member issues to be
minimized because claims can be paid promptly and accurately.
This single-vendor environment is a benefit for participants as
well. They have just one number to call for all health care benefit
information. The round-the-clock, toll-free number they call to locate
a network provider or to obtain general health information is the same
number they call with claims and eligibility inquiries. Additionally,
First Health's claims process can be virtually paperless for the
participant, especially when a network provider is used - which is a
critical step to enhancing participant satisfaction. This system
automatically calculates benefits and issues checks, letters, and
explanation of benefits (EOBs) to plan participants and providers.
The system incorporates advanced technologies available, including:
* Online reporting and data retrieval capabilities
After a claim is entered into the system, it verifies
eligibility, applies appropriate deductibles, adjudicates the
claims against predetermined negotiated or usual and customer
guidelines, matches precertification, searches for previous
history of coordination of benefits, and presents final
adjudication information to the benefit examiner for his or her
approval. Once the benefit examiner has reviewed and approved
the information on the screen, the system generates a check and
explanation of benefits that evening, which are mailed the next
day.
* Electronic Data Interchange (EDI)
First Health contracts with several commercial claims
clearinghouses to gather EDI claims from providers. Providers
transmit claims to one of these clearinghouses. The
clearinghouses then batch claims destined for First Health and
forwards them to the Company each day. Performing these
functions electronically enhances efficiency and accuracy.
* Tracking of annual, lifetime and floating maximums
When a new client is loaded onto the system, the Company will
transfer claims history from the previous administrator. The
system tracks benefit maximums on-line for every participant.
When an individual has reached a specified maximum, the system
will automatically reduce the benefit payment as specified in
each client's plan document.
* Responsive and comprehensive customer service capabilities
Integration of First Health's managed care and claims systems
enable the participant to access all health benefits
information including claims history, eligibility, deductibles
and maximum accumulations, as well as Explanation of Benefit
(EOB) information through a single, round-the-clock, toll-free
number.
These advanced technologies enable First Health's system to support
a broad range of benefit programs, including medical, dental and vision
care, Medicare, prescription drugs, Consolidated Omnibus Budget
Reconciliation Act (COBRA), Health Insurance Portability and
Accountability Act (HIPAA), long- and short-term disability, and
flexible spending accounts.
Clinical Management Services
First Health provides centralized clinical and care programs
(utilization review, medical case management and disease management
services) from its headquarters in Downers Grove, Illinois, and
Scottsdale, Arizona, through an internal staff consisting primarily of
allied health professionals, licensed practical and registered nurses
and physicians. First Health also has a nationwide network of
consulting physicians in various specialties. The Company's clinical
and care services are coupled with the Company's PPO and claims
processing services to provide an integrated service offering.
First Health's clinical and care programs advise their participants
and dependents of review requirements. A participant, or his or her
attending physician, utilizes the program by calling one of First
Health's toll-free numbers prior to the proposed hospitalization or
outpatient service or within two business days of an emergency
admission or outpatient service. From these calls, First Health's
clinical management staff gathers the demographic and medical
information necessary to enable it to perform a review and enters this
information into First Health's proprietary review system. Based on
this information, and using First Health's clinically valid and
proprietary review criteria, First Health determines whether it can
recommend certification for the proposed hospitalization or outpatient
service as medically necessary under the participant's health care
plan.
Upon completion of the review, First Health notifies the
participant, the attending physician and other affected providers of
the outcome of the review. First Health also notifies its client as to
whether the proposed hospitalization and length of stay or outpatient
service can be certified as medically necessary and appropriate under
the terms of the client's benefit plan. It also uses the review
outcome to pay claims in accordance with the client's benefit plan.
First Health does not practice medicine and its services are advisory
in nature. All decisions regarding the patient's medical treatment are
made by the patient and the patient's attending physician, not by First
Health. Participants can call First Health on a toll-free line if
they have questions regarding its services. Clients and their claim
administrators also can obtain additional information from the Client
Services staff.
The following is a summary of the Company's current principal
programs.
Case Management. First Health reduces a client's hospitalization
costs by identifying (for the purposes of benefit plan coverage only)
hospital admissions and lengths of stay which are medically unnecessary
or excessive compared to established national criteria. Additionally,
First Health remains actively involved during the hospitalization in
reviewing and monitoring the patient's length of stay. This same
process is applied to workers' compensation admissions.
The program is also designed to provide clients with a careful
review of all cases which involve complex high cost or chronic
diseases, conditions or catastrophic illnesses. Through periodic
reviews, First Health's nurse case managers and physicians identify
potentially large claim cases. These services consist primarily of
conferring with the attending physician and other providers to identify
cost-effective treatment alternatives. Such alternatives may include
moving a patient from an acute care hospital to less expensive settings
-- often the home -- as soon as the patient's physician determines that
it is safe and medically feasible. If such a move requires a home
nursing service or medical equipment, First Health serves as a referral
for alternative available services, provides recommendations regarding
continued usage of these services and negotiates discounts with the
providers where network providers are not appropriate or not available.
In all cases, the decision to proceed with the course of treatment
initially prescribed by the attending physician or a more cost-
efficient alternative identified by First Health is made by the patient
and his physician. Clients which select stand-alone case management
independently identify those cases which involve potentially high cost
diseases, conditions or procedures and refer such cases to First Health
to identify cost-effective treatment alternatives.
The Care Support Program is a patient-focused program that enables
us to identify high-risk members who account for the majority of health
care dollar expenditures. The Care Support Program is a comprehensive
approach which starts with predictive modeling of a client's specific
population. The program is centered around the member to include
highly-personalized patient education and support initiatives, network
channeling, medication support and other activities aimed at increasing
patient compliance, as well as inpatient monitoring, discharge
planning, and intensive case management. This approach allows for
coordination of information for members with a series of needs which
may overlap among many diseases.
The medical management process for Workers' Compensation monitors an
injured worker's care and identifies opportunities for cost-effective
alternative care and treatment with the goal of returning the worker to
the client's work force or to reach Maximum Medical Improvement (MMI),
as soon as medically feasible. The case manager is responsible for the
overall coordination of the many comprehensive services that may be
needed, such as review of rehabilitation and chiropractic care, home
health services and others, with a constant focus on the injured
worker's ability to return to productivity.
PPO Redirection and Telephonic Provider Directory. The Company will
attempt to redirect the patient to a PPO hospital or outpatient
provider located near the patient. Additionally, the clients'
participants can access the website or call the Company's telephonic
provider directory line to determine whether a network provider of
their choosing within a reasonable proximity to their residence or
place of work. By utilizing a PPO network hospital or outpatient
provider, the payer and the patient will achieve savings from what the
billed charges would otherwise be.
24/7 Health Information Line. This is a 24-hour-a-day, 7-day-a-week
service that ties together the full range of First Health's programs by
providing participants with a single source for guidance through the
health care delivery system. The services of this program include:
* Helping members obtain answers to general medical questions;
* Assisting members to make informed health care decisions;
* Locating appropriate network providers;
* Facilitating communication between providers and members;
* Identifying patient situations that may be appropriate for
referral to clinical management services;
* Initiating pre-certification for medical and mental health care;
* Answering claims questions and inquiries; and
* Answering pharmacy program questions or referrals.
This service is offered to clients who participate in the full range
of network and clinical management programs.
Physician Resources
First Health believes that its in-house physician staff is an
invaluable resource in its clinical and care programs and in developing
clinical policy and guidelines. The staff includes approximately 25
experienced board certified physicians in such specialties as family
practice, internal medicine, cardiology, gynecology, urology,
orthopedics, psychiatry, pediatrics, and surgery as well as other
doctoral level practitioners such as clinical psychology and
chiropractic medicine. In addition, First Health has a nationwide
network of consulting physicians in the significant specialties. This
physician staff is crucial to the development and maintenance of up-to-
date clinically valid review criteria and protocols and the network
quality assessment efforts.
Benefit Plan Recommendations
Clients can take various steps in benefit plan design that will
help accomplish the goal of managing long-term health care costs.
The client's ability to accomplish this goal through First Health is
contingent on:
* Reasonable incentives or disincentives for plan participants to
comply with the notification procedures and clinical management
recommendations of First Health. Because early notification is
essential to effective case management, these incentives help
ensure not only cost effectiveness but quality outcomes.
* An effective benefit differential between in-network and out-of-
network services of at least 10% for inpatient and outpatient
services, to include annual stop-loss provisions sufficiently
large so as to reinforce copayment/coinsurance differentials.
* Coverage for travel and organ-donor costs for services at network
transplant providers, and coverage of well-baby care for
participation in the maternity screening services.
* Distribution to all plan participants of a First Health
identification card, including the toll-free health information
line, prior to the implementation date. Because the toll-free
number is such an integral part of the program, the more familiar
the participant is with the number, the more likely he or she is
to use it -- and the sooner the client will begin realizing cost
savings.
* A program of effective communication to plan participants about
First Health programs at least semi-annually. Well-planned,
timely communication increases participant satisfaction and
compliance significantly.
Workers' Compensation Services
Bill Review System. The Company provides comprehensive workers'
compensation medical bill review services through a sophisticated
computer system that enforces administration policies, applies state-
specific workers' compensation fee schedules, checks for billing
infractions and applies provider contract rates. Since all of these
functions are consolidated and automated, they reduce paperwork and
costs associated with claims processing and are highly cost effective
for larger workers' compensation entities who generally process in
excess of 500,000 bills annually. The Company currently is in the
process of developing a system for organizations that process less than
500,000 bills annually. It is estimated that it will be implemented in
mid to late 2000. Since these system capabilities are integrated with
its medical management and PPO services, the Company believes it offers
one of the most comprehensive workers' compensation medical cost
management programs in the industry. This workers' compensation
program was introduced in California in 1986.
Marketing. First Health markets the workers' compensation programs
to insurance carriers, third party administrators, state workers'
compensation funds, and self-insured, self-administered companies. The
Company's payer clients include at least some offices of six of the ten
largest workers' compensation insurers and the largest industrial
company in the world. Worksite posters, provider directories (either
paper or electronic) and other materials provided by its payer clients
encourage injured employees to utilize First Health's provider network.
Bill Review. Services offered by the Company include a computer
assisted review of medical provider billings to ensure accuracy and
adherence to established rates and billing rules. In 40 states,
including California, Texas, Arizona, Michigan, Ohio and Florida, a
schedule of presumed maximum fees has been established for workers'
compensation medical claims. The review process identifies and
corrects inappropriate bill practices and applies state fee schedules.
Provider network discounts are applied as well during the review.
Additionally, through the system, the Company is able to go beyond
"traditional" bill review services to provide enhanced systems savings
by reorganizing non-related services, upcoding and unbundling of
charges and other features. Finally, bill review data is integrated
with medical management and quality assessment activities.
The Company has an agreement with Electronic Data Systems
Corporation ("EDS") which enables it to utilize EDS' extensive data
processing and communications networks. EDS modified its comprehensive
bill review and audit processing system to handle workers' compensation
claims and integrated the system with First Health's medical management
programs.
Bill review decreases workers' compensation payers' administrative
costs because First Health maintains virtually all aspects of the
program.
First Health offers two variations of the bill review program:
* Systems Lease: The systems technology is brought to the client's
office where their staff performs bill review.
* Service Bureau: Bills are sent to First Health's processing
centers and First Health keys the bills and performs bill review.
Compensation. The Company generally receives an agreed upon
percentage of total savings generated for clients through bill review
plus a per-bill fee, including provider network discounts, adjustments
to applicable billing rules and regulations and utilization reviews.
Savings are generally calculated as the difference between the amount
medical providers bill the payer clients and the amount First Health
recommends for payment.
Customers and Marketing
First Health primarily markets its services to national multi-sited
direct accounts, including self-insured employers, government employee
groups and multi-employer trusts. In addition, First Health markets
its services to and through group health and workers' compensation
insurance carriers. The following are representative customers of
First Health:
Agilent Technology, Inc. Liberty Mutual Insurance Company
American International Group McDonald's Corporation
Boilermakers National Health and NALCO Chemical Company
Welfare Fund National Association of Letter
CNA Carriers
ConAgra, Inc. The Pillsbury Company
Crawford and Company State Farm Mutual Automobile
Delphi Automotive Systems Insurance Company
Eaton Corporation Tandy Corporation
General Motors Corporation Texas Instruments Employees'
Hartford Financial Services, Inc. Health Benefits Trust
Hewlett-Packard Company The RETA Trust
Kemper National Services The Sherwin-Williams Company
Travelers Property Casualty
The Company presently has approximately 50 group health and workers'
compensation insurance carrier clients. Typically, First Health enters
into a master service agreement with an insurance carrier under which
First Health agrees to provide its cost management services to health
care plans maintained by the carrier's policyholders. First Health's
services are offered not only to new policyholders, but also to
existing policyholders at the time their policies are renewed. The
insurance carrier's sales and marketing staff ordinarily has the
responsibility for offering First Health's services to its
policyholders, thus relieving the Company of a significant marketing
expense.
First Health typically enters into standardized service contracts
with its direct accounts and master service agreements with its
insurance carrier and third party administrator clients. These
contracts and agreements have automatically renewable successive terms
of between one and three years, and are generally terminable upon one
to six months' notice prior to their expiration. These contracts are
generally non-exclusive and permit the client to provide medical review
services on an in-house basis; however, these contracts are generally
exclusive as to the client's ability to use other PPO firms during
their term.
Risk Products and Insurance Company Acquisitions
The Company's experience with its HMO-like health plans for self-
funded ERISA did not prove to be as commercially accepted in 1998 and
1999 as the Company anticipated; thus, it was significantly scaled back
for 2000. As an extension of the Company's cost management services,
in February 1996 the Company acquired American Life and Health
Insurance Company and a subsidiary insurance company (collectively
"American"). American is a small medical indemnity insurer with
licenses in 26 states and approximately $8 million in annual premiums.
In September 1997, the Company acquired Loyalty Life Insurance Company
("Loyalty"), a 49-state insurance shell.
The Company acquired American and Loyalty in order to obtain the
infrastructure and licenses to enable the Company to leverage its
managed care assets into various products for multi-sited employers.
The Company's product promotes the continuity of care through a
single point of entry into the health care delivery system. By
calling, employees can obtain information on all aspects of their
health benefit program. This includes information ranging from
preventive care and claims status, to inquiries regarding network
providers and benefit plan coverage.
The program integrates the Company's PPO network of providers, The
First Health Network, with clinical management programs and claims
administration. Access to First Health's national network of providers,
including specialty and sub-specialty care such as transplant, gives
unparalleled provider coverage not only locally but throughout the
country.
Claims administration is provided through the Company's internal
capabilities, which have been developed since the time of the American
acquisition, and is integrated throughout the entire process so as to
take advantage of the potential synergies and competencies.
For a single guaranteed cost, the Company's clients can be assured
of a comprehensive health care benefit plan that ensures the earliest
possible impact on patient care which provides a higher quality of
employee healthcare at a lesser cost.
Stop-Loss Insurance
The Company's stop-loss insurance capabilities through its wholly-
owned insurance companies allow another dimension to First Health's
ability to serve as an integrated single source for managed care needs.
Because First Health's stop-loss rates are based on the savings and
value generated through the Company's various services, First Health is
able to offer competitive rates and policies. The Company can offer
multiple-year rate guarantees that include fixed-percent increases and
that are based upon loss results. Stop-loss policies are written
through the Company's wholly-owned insurance subsidiaries. Policies
can be written for either specific or aggregate stop-loss insurance.
This is the primary insurance product the Company is emphasizing in its
sales efforts currently.
First Health Services Overview
First Health Services ("Services") provides value-added automation,
administration, payment, and health care management services for public
sector clients. Services provides: 1) Pharmacy Benefit Management,
which manages pharmacy benefit plans for managed care organizations,
HMOs, Insurers, Specialty & Elderly Rx programs, Medicaid programs,
state-funded specialty programs, and self-funded employers; 2) First
Mental Health, which provides psychiatric utilization review, long-term
care review and quality of care evaluation services for state
government clients; and 3) Fiscal Agent, which administers state
Medicaid health plans and other state funded health care programs.
First Health has been able to leverage its Medicaid fiscal agent
expertise, its base of experience in the public sector and its client
relationships with over 20 state governments, to provide new products
and services as the public sector health programs (including Medicare
and Medicaid) move toward managed care.
Pharmacy Benefit Management (PBM)
Services' PBM service line is one of the largest PBMs in the
country. Services' PBM business provides a full range of services,
including: pharmacy point-of-sale ("POS") eligibility verification and
claims processing; provider network development and management; disease
state management programs; prospective and retrospective drug
utilization reviews ("DUR"); provider profiling; formulary development;
manufacturers' rebate administration; and RxPert, a proprietary
database and decision support system for pharmacy utilization
monitoring and plan management.
PBM services are increasingly required by both public and private
third-party payers as prescription drug expenses grow. Services' PBM
program is one of the few large-scale participants in the market not
aligned with or controlled by a drug manufacturer. Management believes
that Services' role as an objective provider is a distinct competitive
advantage in the growing sectors of managed care organizations and
state government plans, where clinical autonomy is often a requirement.
Furthermore, Services is the national leader with substantial
experience managing pharmacy plans for Medicaid and elderly
populations. This clinical and management expertise gives Services a
competitive advantage in the rapidly growing market of managed care
organizations serving capitated public sector lives (Medicare and
Medicaid).
Services also offers Disease Management Programs ("DMP") to assist
physicians and network pharmacies in the treatment of prevalent, high-
cost disease states. This program provides physicians with diagnosis,
treatment, and formulary guidelines which have been developed by
nationally recognized clinicians and medical academicians. Services'
DMP focuses on that percentage of patients who experience preventable
therapeutic problems (i.e., non-compliance, inappropriate therapy,
adverse drug reactions, etc.). The program includes prior
authorization initiatives, prospective DUR, retrospective DUR, and
educational intervention initiatives (concurrent DUR).
First Mental Health
First Mental Health provides an array of quality evaluation and
utilization review services to Medicaid programs, state mental health
agencies, HMOs, managed care organizations, and other health care
programs desiring to improve quality of care, contain costs, ensure
appropriate care, and measure outcomes. Products include: 1) External
Quality Reviews; 2) Utilization Review; and 3) Long Term Care
Reviews.
The External Quality Review encompasses the entire medical delivery
mechanism, not just the mental health portion. There is a new market
rapidly developing as various states implement this type of program to
move Medicaid recipients into Managed Care Organizations.
First Mental Health provides Utilization Review Services for a
variety of behavioral health programs, including Medicaid Under 21
acute psychiatric treatment, adult and geriatric acute psychiatric
treatment, residential services, and other alternative services. First
Mental Health also provides on-site quality reviews and inspection of
care for community mental health centers, residential treatment centers
and inpatient psychiatric programs. As state Medicaid programs and
state departments of mental health spend increasing proportions of
public funds on the treatment of mental and substance abuse illnesses,
the need for utilization review services is increasing. Some states
are moving toward capitated contracts with private sector firms to help
manage this problem; however, many states are opting to contract for
utilization review services to ensure appropriate mental health care
while containing costs.
Under the Long Term Care Review program, First Mental Health
provides level-of-care determinations as well as preadmission
screenings and annual resident reviews ("PASARRs") to determine the
need for specialized services for mental illness, mental retardation or
related conditions.
Fiscal Agent
Services' Fiscal Agent service line provides customers with full
fiscal agent operations and systems maintenance and enhancement. Under
this product line, Services provides eligibility verification and ID
card issuance, health care claims receipt, resolution, processing and
payment, provider relations, third party liability processing,
financial reconciliation functions and client reporting. Customers of
Services include state Medicaid agencies, state departments of human
services, departments of health and managed care organizations serving
Medicaid populations. Fiscal Agent administrative services may also be
procured to support other government programs, such as state employee
benefit plans, early intervention programs, or other health care
initiatives. Typically, Fiscal Agent systems are modified to meet
specific states' program policy and administration requirements, and
services are offered for all claim types.
Services is one of four major competitors in the Medicaid fiscal
agent field. Services has developed and operates a HCFA-approved
information system for each of these contracts. These systems are
utilized to process and adjudicate eligibility, health care claims and
encounters, pay providers under a full range of reimbursement methods
and to generate reports for use in managing the program.
Services management believes there are significant future
opportunities in this market and has been recently awarded significant
additional business from the Commonwealth of Virginia. In addition,
there are several benefits that Services receives from operating the
Fiscal Agent business: 1) the contracts are profitable, with very
little new capital investment in the business required; 2) the
expertise, capabilities and systems developed from these contracts have
provided a platform for expansion into other products, services and
customer segments; and 3) customer relationships with the states have
proven valuable to First Health Services in developing other business
in PBM and First Mental Health.
Other Services
First Health National Transplant Program. As medical technology
advances, new and more complicated procedures, such as transplants,
have evolved. In an attempt to assist the Company's clients in meeting
these technological advances and their related costs, First Health has
developed The National Transplant Program.
This program has been designed to facilitate the cost-effective use
of high quality transplant services through an integrated system
whereby case management staff assists in the coordination of the
process from the determination of the need for a transplant through
follow up care for one year after the transplant is performed.
The goals of The National Transplant Program include:
* Enhancing quality of care and favorable outcomes through case
management and direction of patients to a selected number of
transplant programs that meet stringent quality and performance
standards;
* Reducing health care costs by contracting a cost-effective
package rate with high quality transplant centers that have a
proven performance record of desirable outcomes;
* Improving predictability of transplant costs by establishing
fixed fees that share risk with the providers and spread
payment out over a one-year period.
Transplants included in the program include: heart, lung,
heart/lung, liver, kidney, kidney/pancreas and bone marrow (both
allogenic and autologous).
Year 2000 Matters
See Management's Discussion and Analysis of Financial Condition
and Results of Operations in the Company's 1999 Annual Report to
Stockholders. Such information is incorporated herein by reference.
Competition
First Health competes in a highly fragmented market with national
and local firms specializing in utilization review and PPO cost
management services and with major insurance carriers and third party
administrators which have implemented their own internal cost
management services. In addition, other health care programs, such as
HMOs, compete for the enrollment of benefit plan participants. First
Health is subject to intense competition in each market segment in
which it competes. Many of First Health's competitors are
significantly larger and have greater financial and marketing resources
than First Health.
First Health competes on the basis of the quality and cost-
effectiveness of its programs, its proprietary computer-based
integrated information system and its emphasis on commitment to service
and high degree of physician involvement. Due to the quality of the
services offered, First Health tends to charge more for its services
than many of its competitors.
The insurer market for workers' compensation programs is somewhat
concentrated with the top ten insurers controlling over 50% of the
insured market. The loss or addition of any one of these insurers
could have a material impact on revenues. First Health currently has
as clients at least some offices of six of the top ten insurers. While
experience differs with various clients, obtaining a new client
requires extended discussions and significant time.
Over the last few years, the Company believes a major competitive
threat has arisen as a result of the so-called "Silent" Preferred
Provider Organizations (PPO) or non-directed networks. In this
situation, medical reimbursement payers lay claim to PPO discounts
without providing any patient channeling mechanisms. These "networks"
use the camouflage of directed networks to secure rewards of managed
care discounts from medical providers without the responsibilities.
These organizations betray the trust of providers who offer preferred
rates to networks anticipating active patient directing programs, thus
undercutting the integrity of managed care business relationships,
threatening the viability of legitimate networks, such as the
Company's, and jeopardizing provider finances.
Since managed care is fundamentally a bargain between a managed care
organization and a medical provider in which the managed care
organization channels patients to the provider in exchange for
favorable price consideration and the adherence to managed care
guidelines, the "silent" PPO networks can and do undermine that
bargain. To the extent that providers are defrauded in that price for
volume trade-off, the ability of legitimate managed care companies to
obtain appropriate priced considerations will be diminished.
Employees
As of December 31, 1999, First Health had approximately 3,600
employees, including approximately 1,450 employees involved in claims
processing and related activities; 630 employees in information
systems; 500 employees in various clinical management and quality
assessment activities; 350 employees in PPO development and operations,
220 employees in sales and marketing; 200 involved in member and client
service activities and the remainder involved with accounting, legal,
human resources, facilities, and other administrative, support and
executive functions. First Health also has a nationwide network of
conferring physicians in various specialties, most of whom are
compensated on an hourly or per visit basis when requested by First
Health to render consulting services. None of the Company's employees
are presently covered by a collective bargaining agreement. The
Company considers its relations with its employees to be good.
Government Regulations and Risk Management
The Company believes that its methods of operation are in material
compliance with all applicable laws, including statutes and regulations
relating to PPO and clinical management operations.
Item 2. Properties
First Health owns four office buildings consisting of an aggregate
of approximately 465,000 square feet of space. The Company's
headquarters are located in Downers Grove, Illinois and the other three
are located in West Sacramento, California; Houston, Texas and
Scottsdale, Arizona. Additionally, the Company leases significant
office space in the Salt Lake City, Utah; Milwaukee, Wisconsin;
Richmond, Virginia; Pittsburgh, Pennsylvania; Boise, Idaho; and the Los
Angeles, California area. The Company also has numerous smaller leased
facilities throughout the nation.
All of the Company's buildings and equipment are being utilized,
have been maintained adequately and are in good operating condition.
These assets, together with planned capital expenditures, are expected
to meet the Company's operating needs in the foreseeable future.
Item 3. Legal Proceedings
First Health is subject to various legal proceedings arising in the
ordinary course of business. In the opinion of management, the
ultimate resolution of these pending suits will not have a material
adverse effect on the business or financial condition of First Health.
See Notes to Consolidated Financial Statements in the Company's 1999
Annual Reports to Stockholders, incorporated herein by reference, for
further information.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's security
holders during the fourth quarter of the year ended December 31, 1999.
Executive Officers of the Company
Name Age Position
------------------- --- -------------------------------------
James C. Smith 59 President and Chief Executive Officer
Daniel Brunner 56 Executive Vice President,
Government Affairs
Mary Anne Carpenter 54 Executive Vice President, Service
Products
A. Lee Dickerson 50 Executive Vice President, Provider
Networks
Patrick G. Dills 46 Executive Vice President, Sales
Ronald H. Galowich 64 Secretary
Lottie A. Kurcz 45 Senior Vice President, Strategic
Business Development
Jerry L. Seiler 59 Controller
Susan T. Smith 49 General Counsel, Assistant Secretary
Joseph E. Whitters 41 Vice President, Finance and
Chief Financial Officer
Edward L. Wristen 48 Executive Vice President, Chief
Operating Officer
James C. Smith has served as President and Chief Executive Officer
and director of First Health since January, 1984.
Daniel Brunner, a director of the Company, has been Executive Vice
President, Government Affairs since January 1994. Prior to that, he
was Corporate Operating Officer in charge of government affairs since
February 1992. Mr. Brunner has served as President of AFFORDABLE since
April 1983.
Mary Anne Carpenter has held various senior management positions in
the Company since joining the Company in 1983. In June 1997, Ms.
Carpenter was promoted to Executive Vice President, Service Products.
Prior to that, from March 1994 to May 1997, she was Executive Vice
President, Clinical Operations and Claims Repricing. Prior to joining
the Company, Ms. Carpenter held various positions in the health care
industry.
A. Lee Dickerson joined First Health in 1988 as Regional Director,
Hospital Contracting. Mr. Dickerson was promoted into his current
position in November 1995. Previously he held various senior level
positions in the Company's Provider Networks area. Mr. Dickerson has
over 20 years experience in the health care industry.
Patrick G. Dills joined First Health in 1988 as Senior National
Director, Sales and Marketing. Mr. Dills was promoted to Executive
Vice President, Managed Care Sales in January 1994 and to Executive
Vice President, Sales in 1998. Prior to joining First Health, Mr.
Dills held various senior sales positions at M&M/Mars, and various
divisions of Mars, Inc. for the prior six years.
Ronald H. Galowich has served as Secretary of the Company since
1983, General Counsel from 1983 to March 1997, Executive Vice President
of the Company from 1983 to May 1994 and Chairman of the Board of
Madison Group Holdings, Inc., a multi-purpose business and investment
company, since 1990.
Lottie A. Kurcz joined First Health in 1986 as Manager of National
Accounts. Since joining First Health, Ms. Kurcz has held various
senior sales and marketing positions. Ms. Kurcz was promoted in 1998
to Senior Vice President, Strategic Business Development. Prior to her
promotion, Ms. Kurcz was Senior Vice President, Risk Products. Prior
to joining First Health, Ms. Kurcz held various senior positions in
private industry.
Jerry L. Seiler joined the Company in May 1989 as Accounting Manager
and was promoted to Corporate Controller in 1990 and has served in that
capacity since.
Susan T. Smith has served as General Counsel of the Company since
March 1997. She was Associate General Counsel from September 1994 and
joined the Company in July 1992. Prior to joining First Health, Ms.
Smith was a partner at Pryor, Carney and Johnson, a large Denver law
firm where she headed the firm's healthcare law practice.
Joseph E. Whitters joined the Company as Controller in October 1986
and has served as its Vice President, Finance since August 1987 and its
Chief Financial Officer since March 1988.
Edward L. Wristen joined First Health in November 1990 as Director
of Strategic Planning and was promoted to Vice President, Managed
Outpatient Care Programs, in April 1991. In February 1992, he became
Executive Vice President and Corporate Operating Officer in charge of
Provider Networks. In January 1995, Mr. Wristen became Executive Vice
President, Risk Products. In September 1998, Mr. Wristen became Chief
Operating Officer. Prior to joining First Health, Mr. Wristen was
President of Parkside Data Services, a subsidiary of Parkside Health
Management Corporation, a firm engaged in data and analytic services,
from March 1989 to November 1990. From February 1987 to February 1989
Mr. Wristen was Chief Operating Officer and Executive Vice President of
Addiction Recovery Corporation, a regional chain of chemical dependency
hospitals. Mr. Wristen has over 18 years experience in the health care
industry.
The Company's officers serve at the discretion of the Board of
Directors.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
The Company's Common Stock has been quoted on the Nasdaq National
Market under the symbol "FHCC" since the Company's corporate name
change on January 1, 1998 and prior to that was quoted under the symbol
"HCCC". Information concerning the range of high and low sales prices
of the Company's Common Stock on the Nasdaq National Market and the
approximate number of holders of record of the Common Stock is set
forth under "Common Stock" in the Company's 1999 Annual Report to
Stockholders. Information concerning the Company's dividend policy is
set forth under "Dividend Policy" in the Company's 1999 Annual Report
to Stockholders. All such information is incorporated herein by
reference.
Item 6. Selected Financial Data.
Selected financial data of the Company for each of its last five
fiscal years is set forth under "Selected Financial Data" in the
Company's 1999 Annual Report to Stockholders. Such information is
incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation.
The information required by this item is set forth under
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" in the Company's 1999 Annual Report to
Stockholders and is incorporated herein by reference.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk.
The disclosures about Market Risk required by this item are
contained in the Company's 1999 Annual Report on page 29 and are
incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data.
The financial statements required by this item are contained in the
Company's 1999 Annual Report to Stockholders on the pages indicated
below and are incorporated herein by reference.
Financial Statements: Page No.
--------------------- --------
Report of Independent Auditors 31
Consolidated Balance Sheets as of
December 31, 1998 and 1999 32
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1998 and 1999 33
Consolidated Statements of Comprehensive Income for the Years
Ended December 31, 1997, 1998 and 1999 33
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1997, 1998 and 1999 34-35
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1997, 1998 and 1999 36-37
Notes to Consolidated Financial Statements 38-45
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Certain information regarding the Company's executive officers is
set forth under the caption "Executive Officers of the Company" in Part
I. Other information regarding the Company's executive officers, as
well as certain information regarding First Health's directors, will be
included in the Proxy Statement for the Company's Annual meeting of
Stockholders to be held on May 16, 2000 (the "Proxy Statement"), and
such information is incorporated herein by reference.
Item 11. Executive Compensation.
The information required by this Item will be included in the Proxy
Statement and is incorporated herein by reference. However, neither
the Report of the Compensation Committee of the Board of Directors on
Executive Compensation nor the Performance Graph contained in the Proxy
Statement is incorporated by reference herein, in any of the Company's
previous filings under either the Securities Act of 1933, as amended,
or the Securities Exchange Act of 1934, as amended, or in any of the
Company's future filings.
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
The information required by this Item will be included in the Proxy
Statement and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
The information required by this Item will be included in the Proxy
Statement and is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form
8-K.
(a) The following documents are filed as part of this report:
(1) The Index to Financial Statements is set forth on pages
25 and 26 of this report.
(2) Financial Statements Schedules:
Schedule II - Valuation and Qualifying Accounts and
Reserves.
Schedule IV - Reinsurance
(3) Exhibits
(b) Report on Form 8-K:
The Company did not file a current report on Form 8-K during the
fourth quarter of fiscal 1999.
First Health Group Corp.
Schedule II - Valuation and Qualifying Accounts and Reserves
Years Ended December 31, 1999, 1998, and 1997
Balance at Additions Charged Adjustments Balance at
Beginning of to Costs and End of
Description Period and Expenses Charges-offs Period
------------ ---------- ---------- ----------- ----------
Year Ended December 31, 1999
Allowance for Doubtful Accounts $11,151,000 $ -- $ (307,000) $10,844,000
========== ========== =========== ==========
Accrued Restructuring Expenses $15,303,000 $ -- $(10,154,000) $ 5,149,000
========== ========== =========== ==========
Year Ended December 31, 1998
Allowance for Doubtful Accounts $10,064,000 $ 897,000 $ 190,000 $11,151,000
========== ========== =========== ==========
Accrued Restructuring Expenses $28,166,000 $ -- $(12,863,000) $15,303,000
========== ========== =========== ==========
Year Ended December 31, 1997
Allowance for Doubtful Accounts $ 2,573,000 $ 9,799,000(1) $ (2,308,000) $10,064,000
========== ========== =========== ==========
Accrued Restructuring Expenses $ 1,141,000 $26,036,000(2) $ 989,000 $28,166,000
========== ========== =========== ==========
(1) Additions include $5,453,000 of allowance for doubtful
accounts which were included in the purchase accounting
adjustments related to the acquisition of FHC, not charged to
expenses.
(2) Additions include $26,036,000 of accrued restructuring
expenses which were included in the purchase accounting
adjustments related to the acquisition of FHC, not charged to
expenses.
First Health Group Corp.
Schedule IV - Reinsurance
Years Ended December 31, 1999, 1998 and 1997
Percentage
Ceded Assumed of Amount
Gross to Other from Other Net Assumed
Amount Companies Companies Amount to Net
----------- -------------- --------- ---------- ---
Year ended 12/31/99:
Life insurance in force: $448,134,000 $ (437,183,000) $ -- $10,951,000 --%
=========== ============== ========= ========== ===
Premiums:
Life insurance 6,086,000 (5,901,000) 41,000 226,000 18%
Accident and health
insurance 9,502,000 (3,497,000) 1,442,000 7,447,000 19%
----------- -------------- --------- ---------- ---
Total premiums $ 15,588,000 $ (9,398,000) $1,483,000 $ 7,673,000 19%
=========== ============== ========= ========== ===
Year ended 12/31/98:
Life insurance in force: $585,037,000 $ (545,305,000) $ -- $39,732,000 --%
=========== ============== ========= ========== ===
Premiums:
Life insurance 8,845,000 (8,442,000) 54,000 457,000 12%
Accident and health
insurance 19,539,000 (3,044,000) 2,039,000 18,534,000 11%
----------- -------------- --------- ---------- ---
Total premiums $ 28,384,000 $ (11,486,000) $2,093,000 $18,991,000 11%
=========== ============== ========= ========== ===
Year ended 12/31/97:
Life insurance in force: $1,507,194,000 $(1,470,903,000) $ 1,151,000 $37,442,000 3%
============= ============== ========= ========== ===
Premiums:
Life insurance 7,424,000 (7,104,000) 94,000 414,000 23%
Accident and health
insurance 11,046,000 (2,859,000) 2,147,000 10,334,000 21%
----------- -------------- --------- ---------- ---
Total premiums $ 18,470,000 $ (9,963,000) $2,241,000 $10,748,000 21%
=========== ============== ========= ========== ===
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
FIRST HEALTH GROUP CORP.
By: /s/ James C. Smith
-------------------------
James C. Smith, President
and Chief Executive Officer
Date: March 23, 2000
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities indicated on March 27,
2000:
Signature Title
--------------------- ----------------------------
/s/Thomas J. Pritzker * Chairman of the Board
Thomas J. Pritzker
/s/James C. Smith * President, Chief Executive
James C. Smith Officer, Director
(Principal Executive)
/s/Joseph E. Whitters Chief Financial Officer
Joseph E. Whitters (Principal Financial Officer)
/s/Jerry L. Seiler Controller
Jerry L. Seiler (Principal Accounting Officer)
/s/Ronald H. Galowich * Secretary
Ronald H. Galowich Director
/s/Michael J. Boskin * Director
Michael J. Boskin
/s/Burton W. Kanter * Director
Burton W. Kanter
/s/David Simon * Director
David Simon
/s/Daniel Brunner * Executive Vice President,
Daniel Brunner Government Affairs,
Director
/s/Robert S. Colman * Director
Robert S. Colman
/s/Harold S. Handelsman * Director
Harold S. Handelsman
/s/Don Logan * Director
Don Logan
* By: /s/ Joseph E. Whitters
Joseph E. Whitters, Attorney in Fact
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
First Health Group Corp.
Downers Grove, IL 60515
We have audited the consolidated financial statements of First Health
Group Corp as of December 31, 1999 and 1998, and for each of the three
years in the period ended December 31, 1999 and have issued our report
thereon, dated February 18, 2000; such consolidated financial
statements and report are included in your 1999 Annual Report to
Stockholders and are incorporated herein by reference. Our audits also
included the consolidated financial statement schedules of First Health
Group Corp. listed in Item 14. These consolidated financial statement
schedules are the responsibility of the Corporation's management. Our
responsibility is to express an opinion based upon our audits. In our
opinion, such consolidated financial statement schedules, when
considered in relation to the basic consolidated financial statements
taken as a whole, present fairly in all material respects the
information set forth therein.
DELOITTE & TOUCHE LLP
Chicago, Illinois
February 18, 2000
INDEX TO EXHIBITS
Exhibit No. Description
------------------------------------------------------------------------
2.1. Omitted
3.1. Restated Certificate of Incorporation of the Company.
{3.1} (1)
3.2. Amendment to Restated Certificate of Incorporation of
the Company. {3.2} (9)
3.3. Restated Certificate of Designation of Preferences,
Rights and Limitations. {3.2} (1)
3.4. Amended and Restated By-Laws of the Company. {3.3}
(1)
3.5. Amendment, dated as of May 20, 1987, to Amended and
Restated By-Laws of the Company {3.4} (2)
3.6. Amendment to Amended and Restated By-Laws of the
Company.{3.5} (6)
3.7. Amendment to Amended and Restated By-Laws of the
Company.{3.6} (6)
4. Specimen of Stock Certificate for Common Stock. {4}
(2)
9. Omitted
9.1. Omitted
9.2. Omitted
10.1 - 10.24. Omitted
10.25. Form of Consulting Physician Agreement, {10.20} (2)
10.26. Form of Consulting Specialist Agreement. {10.21} (2)
10.27-10.53. Omitted
10.54. Form of Indemnification Agreement entered dated June
19, 1989 between OUCH and executive officers and
directors of OUCH (Incorporated by reference to
Exhibit B of definitive proxy materials filed by OUCH
with the SEC on April 7, 1989) {10.54} (11)
Exhibit No. Description
------------------------------------------------------------------------
10.55-10.68. Omitted
10.69. Second Restatement of the HealthCare COMPARE Corp.
Retirement Savings Plan. {10.69} (14)
10.70. HealthCare COMPARE Corp. Director's Option Plan dated
May 23, 1991. {10.70} (14)
10.71. HealthCare COMPARE Corp. Stock Option Plan (for
employees of OUCH). {10.71} (14)
10.72. - 10.75. Omitted
10.76. Employment Agreement dated as of July 1, 1993 by and
between COMPARE and Daniel S. Brunner. {10.76} (15)
10.77.- 10.89. Omitted
10.90. Retainer Agreement dated January 1, 1994 between
HealthCare COMPARE Corp. and Ronald H. Galowich.
{10.90}
10.91-10.93. Omitted.
10.94. HealthCare COMPARE Corp. 1995 Employee Stock Option
Plan. (4.1) {18}
10.95. Omitted
10.96. Option Agreement dated as of January 1, 1997 by and
between The Company and James C. Smith. {10.96} (20)
10.97. Option Agreement dated as of January 1, 1997 by and
between The Company and James C. Smith. {10.97} (20)
10.98. Option Agreement dated as of January 1, 1997 by and
between The Company and James C. Smith. {10.98} (20)
10.99. Agreement dated as of September 1, 1995 between
HealthCare COMPARE Corp. and Electronic Data Systems.
{10.99} (20)
10.100. - 10.105 Omitted.
Exhibit No. Description
------------------------------------------------------------------------
10.106. Employment Agreement dated April 29, 1997 between
HealthCare COMPARE Corp. and Patrick G. Dills.
{10.106} (22)
10.107. Omitted.
10.108. Stock Purchase Agreement among HealthCare COMPARE
Corp., First Financial Management Corporation and
First Data Corporation dated as of May 22, 1997,
incorporated by reference from the Company's Second
Quarter 1997 Form 10-Q dated August 13, 1997.
{10.108} (22)
10.109. Amended and Restated Credit Agreement dated as of
October 22, 1997 by and among HealthCare COMPARE
Corp. as borrowers; LaSalle National Bank as
administrative agent, issuing bank and lender; First
Chicago Capital Markets, Inc., as syndication agent;
and the other financial institutions party hereto as
lenders. {10.109} (22)
10.110. First Amendment to Amended and Restated Credit
Agreement dated as of October 22, 1997, by and among
First Health Group Corp. (f/k/a HealthCare COMPARE
Corp.), as Borrower, LaSalle National Bank, as
Administrative Agent, and the other parties thereto
(the "Amendment") . {10.110} (25)
10.111. 1998 Stock Option Plan {4} (23)
10.112. 1998 Directors Stock Option Plan {4} (24)
10.113. Employment Agreement dated May 18, 1999 between First
Health Group Corp. and James C. Smith.
10.114. Employment Agreement dated May 1, 1999 between First
Health Group Corp. and Ed Wristen.
10.115. Employment Agreement dated May 1, 1999 between First
Health Group Corp. and Mary Anne Carpenter.
10.116. Employment Agreement dated May 1, 1999 between First
Health Group Corp. and Lottie Kurcz.
10.117. Employment Agreement dated May 1, 1999 between First
Health Group Corp. and Susan T. Smith.
10.118. Employment Agreement dated May 1, 1999 between First
Health Group Corp. and A. Lee Dickerson.
10.119. Employment Agreement dated May 1, 1999 between First
Health Group Corp. and Jerry L. Seiler.
Exhibit No. Description
------------------------------------------------------------------------
10.120. Employment Agreement dated May 1, 1999 between First
Health Group Corp. and Joseph E. Whitters.
10.121. Employment Agreement dated May 1, 1999 between First
Health Group Corp. and Patrick G. Dills.
11. Computation of Basic and Diluted Earnings Per Share.
13. 1999 Annual Report to Stockholders.
21. Subsidiaries of the Company.
23. Consent of Deloitte & Touche LLP
24. Powers of Attorney
Exhibit No. Description
------------------------------------------------------------------------
27. Financial data schedules of the Company.
{ } Exhibits so marked have been previously filed with
the Securities and Exchange Commission as exhibits to
the filings shown below under the exhibit number
indicated following the respective document
description and are incorporated herein by reference.
(1) Registration Statement on Form S-1 ("Registration
Statement"), as filed with the Securities and
Exchange Commission on April 17, 1987.
(2) Amendment No. 2 to Registration Statement, as filed
with the Securities and Exchange Commission on May
22, 1987.
(3) Amendment No. 3 to Registration Statement, as filed
with the Securities and Exchange Commission on May
29, 1987.
(4) Annual Report on Form 10-K for the fiscal year ended
August 31, 1987, as filed with the Securities and
Exchange Commission on November 27, 1987.
(5) Registration Statement on Form S-8, as filed with the
Securities and Exchange Commission on January 12,
1988.
(6) Registration Statement on Form S-1, as filed with the
Securities and Exchange Commission on July 12, 1988.
(7) Registration Statement on Form S-8, as filed with the
Securities and Exchange Commission on January 18,
1989.
(8) Annual Report on Form 10-K for the year ended August
31, 1989, as filed with the Securities and Exchange
Commission on November 28, 1989.
(9) Annual Report on Form 10-K for the year ended
December 31, 1990, as filed with the Securities and
Exchange Commission on March 30, 1991.
(10) Registration Statement on Form S-8, as filed with the
Securities and Exchange Commission on November 1,
1991.
(11) Registration Statement of Form S-4, as filed with the
Securities and Exchange Commission on January 27,
1992.
(12) Registration Statement on Form S-8, as filed with the
Securities and Exchange Commission on March 4, 1992.
(13) Annual Report on Form 10-K for the year ended
December 31, 1991 as filed with the Securities and
Exchange Commission on March 27, 1992.
Exhibit No. Description
------------------------------------------------------------------------
(14) Annual Report on Form 10-K for the year ended
December 31, 1992 as filed with the Securities and
Exchange Commission on March 26, 1993.
(15) Annual Report on Form 10-K for the year ended
December 31, 1993 as filed with the Securities and
Exchange Commission on March 25, 1994.
(16) Registration Statement on Form S-8, as filed with the
Securities and Exchange Commission on December 27,
1994.
(17) Annual Report on Form 10-K for the year ended
December 31, 1994 as filed with the Securities and
Exchange Commission on March 24, 1995.
(18) Registration Statement on Form S-8 as filed with the
Securities and Exchange Commission on September 20,
1995.
(19) Annual Report on Form 10-K for the year ended
December 31, 1995 as filed with the Securities and
Exchange Commission on March 27, 1996.
(20) Annual Report on Form 10-K for the year ended
December 31, 1996 as filed with the Securities and
Exchange Commission on March 27, 1997.
(21) Registration Statement on Form S-8 as filed with the
Securities Exchange Commission on July 23, 1997.
(22) Annual Report on Form 10K for the year ended December
31, 1997 and filed with the Securities and Exchange
Commission on March 25, 1998.
(23) Registration Statement on Form S-8 as filed with the
Securities and Exchange Commission on December 15,
1998.
(24) Registration Statement on Form S-8 as filed with the
Securities and Exchange Commission on December 15,
1998.
(25) Annual Report on Form 10K for the year ended December
31, 1998 and filed with the Securities and Exchange
Commission on March 29, 1999.